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Securities and
Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year ended January 1, 1995
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
7 3/4% Sinking Fund Debentures, New York Stock Exchange
Due 1998
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. [x]
As of February 1, 1995, shares held by non-affiliates of Corning
Incorporated had an aggregate market value of $6,311,406,079.
As of February 1, 1995, 228,348,662 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 8, 1995 relating
to the annual meeting of stockholders on April 27, 1995.
Part IV. By-Laws of Corning Incorporated as amended to and effective as
of December 31, 1994.
1
PART I
ITEM 1. BUSINESS
GENERAL
Corning traces its origins to a glass business established by the Houghton
family 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 an international corporation competing in four broadly-based
business segments: Specialty Materials, Communications, Laboratory
Services and Consumer Products. Corning is engaged principally in the
manufacture and sale of products made from specialty glasses and related
inorganic materials having special properties of chemical stability,
electrical resistance, heat resistance, light transmission and mechanical
strength. Corning and its subsidiaries annually produce some 60,000
different products at 41 plants in eight countries. In addition, Corning,
through subsidiaries and affiliates, engages in laboratory services
businesses, including clinical-laboratory testing, clinical research,
and pharmaceutical-development services, at more than 50 facilities
in ten countries.
A description 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 7 through 16 and Note 3 (Information by
Industry Segment) of the Notes to Consolidated Financial Statements
appearing on pages 31 and 32.
COMPETITION
Corning competes across all of its product lines with many large and
varied manufacturers and laboratory service providers, both domestic and
foreign.
Within the Specialty 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 within the Communications 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.
The Laboratory Services segment's clinical-laboratory business has several
major national competitors and numerous regional and local competitors,
including hospital laboratories. Pharmaceutical services has several
substantial international competitors in certain of its businesses,
as well as numerous smaller competitors around the world. Price and
quality of service are significant competitive factors. In addition,
government regulatory policy affects competition in both the clinical-
laboratory and pharmaceutical services businesses.
Competition is also intense in the Consumer Products business. Corning
competes in a broad range of products and markets with equally diverse
competitors. Primary competitive influences include price, function,
design, customer service, and the overall retail economies in which
Corning's products compete. In certain consumer product lines, Corning
has a sizeable market presence.
Given Corning's position as a leader in many of its markets, the
competition requires that Corning 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, the Company's principal manufacturing processes can now be
operated with natural gas, propane, oil or electricity - or a combination
of these energy sources.
2
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, the
Company 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, Corning Ware, Celcor, Corelle, Corguide, Pyrex, Visions and
Vycor. Subsidiaries of Corning frequently use their own trademarks, such
as Revere Ware, MetPath, and Costar.
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 were approximately $6.6 million in 1994
and are estimated to be $10.8 million in 1995.
Corning's 1994 operating results were charged with approximately $27
million for depreciation, maintenance, waste disposal, and other operating
expenses associated with pollution control. The level of these costs is
not expected to change substantially in 1995. 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 16
(International Activities) of the Notes to Consolidated Financial
Statements appearing on page 49 and Five Years in Review - Historical
Comparison appearing on pages 51 and 52.
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 41 manufacturing plants and processing
facilities, 33 of which are located in the United States. Corning also
engages in laboratory services businesses, including clinical-laboratory
testing, clinical research, and pharmaceutical-development services, at 59
facilities, 46 of which are domestic. 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. Corning leases a majority of its
clinical-laboratory testing facilities.
During the last five years, Corning has invested $1.8 billion in property,
construction, expansion, and modernization. Of the $386.9 million spent
in 1994, $57.5 million was spent on facilities outside the United States.
Manufacturing, laboratory services, and research and development
facilities at consolidated locations have an aggregate floor space of
approximately 18 million square feet. Distribution of this total area is:
(million square feet) Total Domestic Foreign
Manufacturing and laboratory services 16.0 12.7 3.3
Research and development 1.6 1.4 0.2
----- ----- ----
17.6 14.1 3.5
===== ===== ====
3
Many facilities manufacture products included in more than one industry
segment. Total assets and capital expenditures by industry segment are
included in Note 3 (Information by Industry Segment) of the Notes to
Consolidated Financial Statements appearing on pages 31 and 32.
Information concerning lease commitments is included in Note 15
(Commitments and Guarantees) of the Notes to Consolidated Financial
Statements appearing on page 48.
In the opinion of management, Corning's facilities are suitable and
adequate for production and distribution of the Company's products. At
January 1, 1995 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 annual 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 for 22 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 $30 million for its
estimated liability for environmental cleanup and litigation at January 1,
1995. This liability has not been reduced by any potential insurance
recoveries.
BREAST-IMPLANT LITIGATION. Corning continues to be a defendant in two
types of cases previously reported involving the silicone-gel breast-
implant products or materials formerly manufactured or supplied by Dow
Corning or a Dow Corning subsidiary. These cases include (1) several
purported federal securities class action lawsuits and shareholder
derivative lawsuits filed against Corning by shareholders of Corning
alleging, among other things, misrepresentations and omissions of material
facts, breach of duty to shareholders and waste of corporate assets
relative to the silicone-gel breast implant business conducted by Dow
Corning and (2) multiple lawsuits filed in various federal and state
courts against Corning and others (including Dow Corning) by persons
claiming injury from the silicone-gel breast implant products or materials
formerly manufactured by Dow Corning or a Dow Corning subsidiary. Several
of such suits have been styled as class actions and others involve
multiple plaintiffs.
As of February 20, 1995, Corning has been named in approximately 11,200
state and federal tort lawsuits. All of the more than 4,000 tort lawsuits
filed against Corning in federal courts were consolidated in the United
States District Court, Northern District of Alabama, and in early December
1993, Corning was dismissed from these cases. This decision by the
District Court is non-appealable until it becomes final and, although the
District Court noted that it was "highly unlikely" that additional
discovery would produce new evidence, the decision is subject to
reconsideration if additional information is discovered or if there is a
change in state law. On January 12, 1995, the District Court heard
plaintiffs' motion for reconsideration and Corning's motion to have the
dismissal decision made final. The District Court stated it was inclined
to grant Corning's finality motion, but has not yet issued its written
order. Certain state court tort cases against Corning have also been
consolidated for the purposes of discovery and pretrial matters. During
1994 and 1995, Corning has made several motions for summary judgment in
state courts and judges have dismissed Corning from all of the over 6,000
tort cases filed in California, Michigan, New Jersey, New York,
Pennsylvania, Dallas and Harris Counties, Texas, and Mississippi, some of
which are on appeal. Corning's motions seeking dismissal remain pending
in various other states.
The federal securities suits are all pending in the United States District
Court for the Southern District of New York. Corning's management does
not believe that the purported securities class action lawsuits or the
purported shareholder derivative lawsuits or the tort actions filed
against Corning described above will have a material adverse effect on
Corning's financial condition or the results of its operations.
Dow Corning has informed Corning that as of December 31, 1994, Dow Corning
has been named in 45 purported breast-implant product liability class
action lawsuits and approximately 19,000 breast-implant product liability
lawsuits (which number includes all or substantially all of the 11,200
lawsuits referred to above) and that Dow Corning anticipates that it will
be named as a defendant in additional breast-implant lawsuits in the
future. Dow Corning has also stated that it is vigorously defending this
litigation. Verdicts in breast-implant litigation against Dow Corning and
other defendants which have gone to judgment have varied widely, ranging
from dismissal to the award of significant compensatory and punitive
damages.
4
Dow Corning has also informed Corning that Dow Corning believes that a
substantial portion of the indemnity and defense costs related to the
breast-implant litigation brought and to be brought against it is and will
be covered by product liability insurance available to it but that the
insurance companies issuing the policies in question have reserved the
right to deny coverage under various theories and in many cases have
refused to pay defense and indemnity costs which have been incurred by Dow
Corning. In this regard, on June 30, 1993, Dow Corning instituted
litigation in California against certain insurance companies which had
issued product liability insurance policies to it from 1962 through 1985
seeking declaratory judgments that the insurance company defendants are
liable to indemnify Dow Corning for such liabilities and costs and, in the
case of certain insurance company defendants, damages including punitive
damages. In September 1993, several of Dow Corning's insurers filed a
complaint against Dow Corning and other insurers for declaratory relief in
Michigan and moved for the action brought by Dow Corning in California to
be dismissed in favor of the Michigan litigation. In October 1993, this
motion was granted. In March 1994, the Michigan court ruled that certain
of Dow Corning's primary insurers had a duty to defend Dow Corning with
respect to certain breast-implant product liability lawsuits. These
insurers were directed to reimburse Dow Corning for certain defense costs
previously incurred. In November 1994, the Court ruled in favor of Dow
Corning on allocation of defense costs. Dow Corning has informed Corning
that, notwithstanding this litigation, it is continuing negotiations with
such insurance companies to obtain an agreement on a formula for the
allocation among these insurers of payments of defense and indemnity
expenses related to breast-implant product liability lawsuits and claims.
In March 1994, Dow Corning, along with other defendants and
representatives of breast-implant litigation plaintiffs, signed a Breast-
Implant Litigation Settlement Agreement (the "Settlement Agreement").
Under the Settlement Agreement and related agreements, industry
participants (the "Funding Participants") would contribute approximately
$4.2 billion over a period of more than thirty years to establish several
special purpose funds. The Settlement Agreement, if implemented, would
provide for a claims based structured resolution of claims arising out of
silicone breast implants, define the circumstances under which payments
from the funds would be made and include a number of other provisions
related to claims and administration. The Settlement Agreement defines
periods during which breast-implant plaintiffs may elect not to settle
their claims by way of the Settlement Agreement and to continue their
individual breast-implant litigation against manufacturers and other
defendants (the "Opt Out Plaintiffs"). In certain circumstances, if Dow
Corning considers the number of Opt Out Plaintiffs to be excessive, Dow
Corning is entitled to withdraw from participation in the Settlement
Agreement. Dow Corning did not exercise its right to "opt out" of the
Settlement Agreement as a result of initial "opt outs" by plaintiffs
during the period ended July 1, 1994. The Court has offered initial Opt
Out Plaintiffs an opportunity to rejoin the settlement by March 1, 1995.
The Court is currently in the process of evaluating claims for
compensation submitted by plaintiffs and determining whether the disease
compensation settlement fund to be established under the Settlement
Agreement will be sufficient to pay validated claims. If any
insufficiency cannot be resolved, claimants may have an additional
opportunity to "opt out" of the Settlement Agreement. In this event, if
Dow Corning considered that the number of such Opt Out Plaintiffs with
claims against it was excessive, Dow Corning would have the right to
withdraw from participation in the Settlement Agreement. Corning is not a
party to the Settlement Agreement and will not make any contribution to
the settlement contemplated thereby.
In April 1994, the U.S. District Court for the Northern District of
Alabama preliminarily approved the Settlement Agreement and temporarily
stayed and suspended federal and state class action certification or
notice proceedings relative to federal or state class action lawsuits
filed by plaintiffs included in the settlement class.
On September 1, 1994, the Court granted final approval to the Settlement
Agreement, determining that it was fair, reasonable and adequate. In
large part, the settlement covers claims of breast-implant recipients
which could be litigated in the courts of U.S. federal and state
jurisdictions. The settlement does not cover claims of breast-implant
recipients who the Court has specifically excluded from the settlement
(unless these potential claimants affirmatively join the settlement) or
who have chosen not to participate in the settlement. The settlement also
does not cover the claims of breast-implant recipients which could be
litigated in jurisdictions outside the U.S. (unless payments received by
those potential claimants from the settlement fund, and related releases,
serve to preclude them from bringing legal actions in these other
jurisdictions). The Court's final approval of the Settlement Agreement
has been appealed to the U.S. Court of Appeals for the Eleventh Circuit
primarily by certain providers of health care indemnity payments or
services and by certain foreign claimants.
5
Dow Corning has previously recorded charges against earnings to reflect its
best estimate of costs as a result of its involvement in the breast-implant
litigation and Corning has recorded its share of such charges based upon
its ownership interest in Dow Corning. As the Settlement Agreement process
continues, additional developments, including the disposition of appeals
from the District Court for the Northern District of Alabama's approval of
the Settlement Agreement, additional "opt outs" from the Settlement
Agreement if the current disease compensation fund contemplated thereby is
determined to be insufficient to pay validated claims and any such
insufficiency cannot be resolved, changes in estimates of the ultimate cost
of resolving claims not covered by the Settlement Agreement and changes in
estimates of the amount and timing of insurance recoveries, may occur which
could cause Dow Corning to adjust its estimate of costs of resolving its
exposure to breast-implant litigation.
Corning does not believe that its share of any additional accounting charge
taken by Dow Corning resulting from the breast-implant litigation will have
a material adverse impact upon Corning's overall financial condition.
However, it is possible that Corning's share of any such charge taken by
Dow Corning will have a material adverse effect upon Corning's earnings in
the quarter in which any such charge is recognized by Dow Corning. The
amount of any such charge would be written off against Corning's investment
in Dow Corning.
OTHER DOW CORNING MATTERS. Dow Corning received a request dated July 9,
1993 from the Boston Regional Office of the Commission for certain
documents and information related to silicone breast implants. The
request stated that the Boston Regional Office was conducting an informal
investigation which "concerns Dow Corning, its subsidiary Dow Corning
Wright and parent corporations, Dow Chemical Co. and Corning Inc." Dow
Corning has informed Corning that Dow Corning has responded to this
request enclosing the documents and information requested along with
related information and continues to cooperate with the Boston Regional
Office.
During the first quarter of 1993, Dow Corning received two federal grand
jury subpoenas initiated by the United States Department of Justice
("DOJ") seeking documents and information related to silicone breast
implants. Dow Corning has informed Corning that it has delivered the
documents and information requested and continues to cooperate with the
DOJ as this grand jury investigation proceeds.
DEPARTMENT OF JUSTICE INVESTIGATIONS. In September 1993, MetPath and
MetWest Inc. ("MetWest"), a wholly owned subsidiary of Unilab, in which
Corning had at the time an interest of approximately 43%, entered into a
Settlement Agreement (the "MetPath Settlement Agreement") with the DOJ and
the Inspector General of the Department of Health and Human Services (the
"Inspector General"). Pursuant to the MetPath Settlement Agreement,
MetPath and MetWest paid to the United States a total of $39.8 million in
settlement of civil claims by the DOJ and the Inspector General that
MetPath and MetWest had wrongfully induced physicians to order certain
laboratory tests without realizing that such tests would be billed to
Medicare at rates higher than those the physicians believed were
applicable.
Several state and private insurers have made claims based on the practices
covered by the MetPath Settlement Agreement. Several have settled but it
is not clear at this time what, if any, additional exposure Corning may
have to these entities and to other persons which may assert claims on the
basis of these or other practices.
During August 1993, MetPath, MetWest and Damon (which was acquired by
Corning earlier that month) together with other participants in the
industry received subpoenas from the Inspector General seeking information
regarding their practices with respect to 14 enumerated tests offered in
conjunction with automatic chemical test panels. Of these 14 tests, 5
were covered by the MetPath Settlement Agreement and consequently MetPath
and MetWest are not being required to provide further information with
regard to them. MetPath, MetWest and Damon have submitted information
pursuant to these subpoenas. Corning understands that the DOJ is now
examining the methodology employed by Damon Corporation and by Nichols
Institute (which Corning acquired in August 1994) to comply with these
subpoenas. Damon has been advised by the U.S. Attorney's office in
Boston, to which its investigation has been referred, that Damon will be
required to submit additional information in response to the August 1993
subpoena served on it. Damon was also served with two additional
subpoenas in November 1994 and January 1995. The November subpoena
supplements the August 1993 subpoena and requires submission of
supplemental information. The January subpoena inquires as to
the addition of the 14 enumerated tests to organ function profiles rather
than automated multichannel chemistry profiles as in the earlier
subpoenas. Damon is responding to each of the foregoing subpoenas.
MetPath also received in May 1994 two subpoenas from the Inspector General
concerning, in one case, an investigation into billings for tests not
performed or reported for which MetPath had voluntarily made corrective
payments in 1993 and, in the other, an investigation into whether separate
billings for tests which should have been grouped together had occurred.
In addition a federal grand jury in New Jersey is investigating MetPath's
billings for tests not performed or reported. The results of these
investigations cannot currently be predicted but the U.S. Attorney's
office in Baltimore which is conducting the civil investigation has made a
settlement proposal which is currently being evaluated by Corning.
Additional claims or settlements with parties other than the DOJ and the
Inspector General cannot be excluded.
6
OTHER LEGAL PROCEEDINGS. During September 1993, two individuals filed in
the Supreme Court of the State of New York (one in New York County and one
in Suffolk County) separate purported derivative actions against Corning,
as nominal defendant, and Corning's directors and certain of its officers
seeking on behalf of Corning compensatory and punitive damages in
unspecified amounts (and plaintiffs' costs and disbursements including
attorneys' and experts' fees) by reason of the alleged responsibility of
the actual defendants for the conduct which gave rise to the settlement in
the MetPath litigation described above and their alleged failure to cause
Corning to make timely disclosure thereof. Such actions have been
consolidated into a single action before the Supreme Court of the State of
New York in New York County.
During October 1993, two individuals instituted in the United States
District Court for the Southern District of New York separate purported
class actions on behalf of purchasers of Corning securities in the open
market during the period from September 17 to October 6, 1993 against
Corning, certain of its directors and officers and the underwriters of
Corning's offering, on September 17, 1993, of $100 million of 6.75%
Debentures due on September 15, 2013. The complaints generally allege
that the defendants failed to make timely disclosures of adverse
developments in Corning's business and seek compensatory and punitive
damages in unspecified amounts (and plaintiffs' costs and expenses
including attorneys' fees and disbursements). These two actions, with
respect to which the underwriters have been dismissed, have been
consolidated.
Two nearly identical class actions filed (one in the Court of Chancery for
the State of Delaware and the other in the United States District Court
for the Southern District of New York) against Damon and certain of its
officers and directors remain outstanding. These suits allege damages
arising from Damon's failure to mention in the press release that
announced the initial merger agreement it had reached with a company other
than Corning that an unnamed bidder (Corning) had also expressed interest
in acquiring Damon. The class of plaintiffs are those who sold their
stock at the price offered by the other company, rather than the higher
amount later offered and paid by Corning.
Corning's management does not believe that the purported class action
lawsuits or the purported shareholder derivative lawsuits described above
will have a material adverse effect on Corning's financial condition or
the results of its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
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 50 through 53.
ITEM 6. SELECTED FINANCIAL DATA
This information is included in Five Years in Review - Historical
Comparison appearing on pages 51 and 52.
ITEM 7. MANAGEMENT'S DISCUSSION ADN ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated sales in 1994 advanced 19% over 1993 levels to $4.8 billion.
Growth from acquisitions accounted for approximately half of the increase
with the remaining growth led by the Communications segment and the
environmental-products business. Consolidated sales in 1993 increased 8%
from 1992 also as a result of acquisitions and strong performances from the
Laboratory Services and Communications segments.
Net income totaled $281.3 million or $1.32 per share in 1994 compared with
a net loss of $15.2 million or $0.09 per share in 1993 and a net loss of
$12.6 million or $0.08 per share in 1992. Earnings in the past three years
have been significantly impacted by special charges. Excluding the impact
of these charges, net income and earnings per share increased 31% and 19%,
respectively, in 1994 following a slight decline in 1993. Additional
information on restructuring and other special charges and accounting
changes begins on page 14.
Earnings from consolidated operations, excluding special charges, increased
29% in 1994 when compared with 1993. The increase was principally due to
strong volume gains in the Communications and Specialty Materials segments.
Earnings of the Laboratory Services segment increased principally due to
acquisitions. The Consumer Products segment achieved significant earnings
improvements. Equity earnings in 1994, excluding special charges, were up
35% over 1993 primarily as a result of improved operating performance at
Dow Corning Corporation and the elimination of losses from Vitro Corning,
S.A. de C.V., which was divested in late 1993.
In 1993, earnings from consolidated operations, excluding special charges,
declined 4% when compared with 1992 due primarily to weak performance in
the Consumer Products segment and the cyclical businesses of the Specialty
Materials segment, especially in Europe. In addition, lower prices reduced
the rate of growth in both the clinical-laboratory testing business and the
optical-fiber and optical-cable businesses. Equity earnings in 1993,
excluding special charges, were up 14% over 1992 primarily as a result of
improved performance at Samsung-Corning Company, Ltd. and Dow Corning.
INDUSTRY SEGMENTS
Corning's products and services are grouped into four industry segments:
Specialty Materials, Communications, Laboratory Services and Consumer
Products. The sales and earnings of equity affiliates are discussed in
terms of these same four industry segments. Additional information on the
acquisitions and divestitures discussed in the segment analysis is in Note
2 of the Notes to Consolidated Financial Statements.
8
SPECIALTY MATERIALS
(In millions)
1994 1993 1992
Consolidated sales $846.0 $758.7 $750.1
Income before taxes 164.3 73.6(1) 93.8
(1)Includes $26.5 million of restructuring charges.
Consolidated operations: Consolidated sales of this segment increased
significantly in 1994 over 1993 primarily resulting from increased sales in
the environmental-products and the science-products businesses. Earnings
increased substantially in all businesses in this segment as a result of
increased volumes, ongoing cost-reduction efforts, and strategic
acquisitions and divestitures. Sales in 1993 increased modestly over 1992
due primarily to the acquisition of Costar Corporation. Excluding the
impact of restructuring and other special charges, earnings in 1993
increased modestly over 1992.
Segment performance in 1994 was led by the environmental-products business.
Sales and earnings of this business were up substantially over 1993 due to
strong sales volume in North America and strong manufacturing performance.
Improvements in the U.S. auto industry and the continued worldwide focus on
the environment have driven the increase in sales of this business. Sales
in 1993 were up slightly over 1992 due primarily to strong sales in North
America offset by declines in the European markets. Earnings in 1993 were
down when compared with 1992 due to the weak European economies.
Sales and earnings of the science-products businesses were up significantly
in the past two years, reflecting improved manufacturing efficiencies,
continued strong demand for plastic science products, and the acquisition
of Costar in 1993. During 1994, Corning combined its existing plastics
science-products business with Costar. Corning Costar has successfully
realized the synergies anticipated at the time of acquisition. In May
1994, Corning sold its Parkersburg, West Virginia, glass-tubing products
plant which reduced its investment in the lower return glass science-
products business.
Sales of Corning's other Specialty Materials businesses, consisting of
optical products, lighting, and other advanced materials, declined in 1994
primarily as a result of the sale of Corning's process-systems business in
late 1993. Earnings in 1994, however, were up substantially due to
manufacturing efficiencies, cost-reduction efforts, and the elimination of
losses from the process-systems business. Sales and earnings of these
businesses declined in 1993 compared with 1992 due to weak worldwide
economies, particularly in Europe.
Equity companies:
(In millions)
1994 1993 1992
Net sales $2,556.2 $2,322.4 $2,230.6
Corning's share of net income (loss) 5.4 (139.2) 20.3(1)
(1) Before equity in changes in accounting methods.
Corning is an investor in and receives income from a number of equity
companies in the Specialty Materials segment, including Dow Corning
Corporation, Pittsburgh Corning Corporation and Pittsburgh Corning Europe,
N.V. Dow Corning's sales increased in each of the last three years.
Corning's equity in earnings of Dow Corning was reduced by $75.9 million,
$203.1 million and $24.5 million in 1994, 1993 and 1992, respectively, as a
result of charges taken by Dow Corning related to its terminated breast-
implant business and by restructuring charges totaling $13.2 million in
1992. Excluding special charges, earnings increased in 1994 and 1993 due
to cost reductions and improved operating performance at Dow Corning.
9
In March 1994, Dow Corning, along with other defendants and representatives
of breast-implant litigation plaintiffs, signed a Breast-Implant Litigation
Settlement Agreement (the Settlement Agreement). Under the Settlement
Agreement and related agreements, industry participants would contribute
$4.2 billion over a period of more than 30 years to establish several
special purpose funds. In September 1994, Dow Corning's Board of Directors
approved Dow Corning's continued participation in the global settlement.
Also in September, the U.S. District Court granted final approval to the
settlement, assessing it as fair, reasonable, and adequate (a ruling which
has subsequently been appealed by various parties) and afforded plaintiffs
who originally opted out of the settlement the opportunity to rejoin the
settlement in specified periods which end March 1, 1995. Corning is not a
party to the Settlement Agreement and will not make any contributions to
the settlement contemplated thereby.
Dow Corning recorded an accounting charge of $415 million after tax in the
fourth quarter of 1993. As disclosed in Dow Corning's financial
statements, this charge included the net present value of Dow Corning's
best estimate of its potential liability for breast-implant litigation
based on the status of settlement negotiations at that time, and also
included provisions for legal, administrative, and research costs related
to breast implants, for a total of $1.24 billion, less expected insurance
recoveries of $600 million and taxes of $225 million.
Dow Corning also recorded an accounting charge of $151.8 million after tax
in the fourth quarter of 1994. As disclosed in Dow Corning's financial
statements, this charge included Dow Corning's best estimate of additional
costs to resolve breast-implant litigation and claims outside of the
Settlement Agreement, and also included provisions for legal,
administrative and research costs related to breast implants, for a total
of $647 million, less expected insurance recoveries of $406 million and
taxes of $89.2 million.
Future developments, including, among other things, the ultimate number and
extent of claims not covered by the Settlement Agreement, the ultimate cost
of resolving those claims, the amount and timing of insurance recoveries
and the allocation of insurance payments among Dow Corning's insurance
carriers, may require Dow Corning to adjust these estimates.
Corning does not believe that its share of any additional accounting charge
taken by Dow Corning resulting from the breast-implant litigation will have
a material adverse impact upon Corning's overall financial condition.
However, it is possible that Corning's share of any such charge taken by
Dow Corning will have a material adverse effect upon Corning's earnings in
the quarter in which any such charge is recognized by Dow Corning. The
amount of any such charge would be written off against Corning's investment
in Dow Corning which totaled $341.8 million at January 1, 1995.
Outlook: The positive sales and earnings trends experienced in this segment
in 1994 are expected to continue in the next year but at a slower rate of
growth. Sales growth is expected to come primarily from the continued
strength of the plastics science-products business and from the
environmental-products business as new and pending environmental
regulations become effective worldwide. Consolidated earnings are expected
to keep pace with sales. Dow Corning's sales and operating earnings are
expected to increase in 1995.
COMMUNICATIONS
(In millions)
1994 1993 1992
Consolidated sales $1,458.3 $1,192.0 $1,036.6
Income before taxes 345.8 243.3(1) 230.1
(1)Includes $10.7 million of restructuring charges.
Consolidated operations: Consolidated sales and earnings in this segment
increased in 1994 primarily due to the continued growth in worldwide demand
for optical fiber and optical cable. The conventional-video components and
projection-video businesses also experienced significant sales and earnings
increases. Approximately one-third of the 1994 sales growth was due to
recent acquisitions. Sales in 1993 increased over 1992 due to increased
demand for optical fiber and optical cable, conventional-video components,
and advanced display products. Excluding restructuring charges, earnings
were up in 1993 due to volume growth and improved manufacturing performance
in the advanced-display products and the conventional-video components
businesses and a modest increase in the optical-fiber and -cable
businesses.
10
Sales of Corning's optical-fiber and optical-cable businesses increased
significantly over the past three years. Market growth continued to be led
by the increased use of fiber-optic cable in cable-television systems.
Earnings in 1994 increased significantly over 1993 driven by the strength
in sales volume. Earnings growth, however, continues to be impacted by
lower prices. In February 1994, Corning and Siecor Corporation acquired
the assets relating to the optical-fiber and optical-cable businesses of
Northern Telecom Limited. Earnings in 1993 increased only slightly over
1992 due to aggressive pricing to secure long-term optical-cable supply
contracts.
Sales and earnings of Corning's optical-hardware and equipment-components
businesses have grown significantly in 1994 and 1993 due in part to
acquisitions. In December 1994, Siecor acquired certain assets relating to
the hardware and equipment-components businesses of Northern Telecom
Limited. In 1993, Siecor acquired the telecommunications-products
businesses of GTE Control Devices Incorporated which manufactures single-
and multi-line network interface devices, solid state protection devices
for central office and building entrance terminals, and optical hardware
products. Earnings in Corning's optical-components business improved
substantially in 1994 due to greater manufacturing efficiencies and
restructuring efforts.
Sales in the conventional-video components and projection-video businesses
increased significantly in both 1994 and 1993. Market demand for larger
size video components was the primary reason for the strong sales increase
in both years. Earnings of these businesses also increased in the last two
years as a result of the higher volume and continued manufacturing
efficiency improvements. During 1994, Corning began a major capacity
expansion in its projection-video business and announced plans to form a
partnership with Sony Electronics Inc. and Asahi Glass of America to expand
capacity for conventional-video components in North America.
Sales in the advanced-display products business, which produces liquid-
crystal display glass, increased in 1994 over the prior year, although the
rate of growth was impacted by increased competition and the delay by some
customers in bringing new capacity on line. Earnings in 1994 declined due
to increased costs associated with the start-up of new melting capacity in
Japan and increased development spending for next-generation substrate
glass which has expanded capability over current product offerings in the
market. Sales and earnings in 1993 increased significantly over 1992
driven by increased volume and manufacturing gains.
In 1994, Corning decided to delay the launch of its MemCor glass-ceramic
memory disk product due to technical problems detected in the final stages
of customer testing. The product was removed from production and returned
to the developmental phase. Corning is continuing to invest significantly
in the development of this business and still anticipates a successful
product launch.
Equity companies:
(In millions) 1994 1993 1992
Net sales $788.9 $680.2 $685.8
Corning's share of net income 38.1 35.4 37.4
Samsung-Corning Company, Ltd., a South Korean-based manufacturer, produces
glass panels and funnels for entertainment television and display monitors.
Samsung-Corning's sales increased in 1994; however, earnings were down due
primarily to the impact of a major glass furnace repair and the cost of
exiting the integrated circuit packaging business. During 1994, Samsung-
Corning began a significant global expansion program by acquiring or
building manufacturing and sales facilities in Germany and Malaysia. In
addition, Corning and Samsung-Corning have agreed to begin production of
liquid-crystal display glass in Korea. Sales and earnings increased in
1993 reflecting higher volumes and share gains due to the strengthening yen
along with reduced financing costs.
Sales and earnings of Corning's optical-fiber equity companies in 1994
increased compared with 1993 due to strong European volumes offset somewhat
by lower sales and earnings due to a weakened optical-fiber market in
Australia in early 1994. Sales and earnings declined in 1993 due primarily
to a decrease in volume and pricing pressures felt most heavily in Europe.
11
Outlook: Sales and earnings of this segment are expected to continue on a
solid growth trend in 1995. Strong sales volumes in the optical-fiber and
optical-cable businesses are expected to continue and the impact of lower
prices is expected to moderate. Sales and earnings of the optical-hardware
and equipment-components businesses are expected to increase significantly
in 1995 due to internal growth and recent acquisitions. Sales in the
conventional-video components and projection-video businesses are expected
to continue their upward trend; however, earnings growth is expected to
moderate due to capacity expansions. Sales and earnings of the advanced-
display products business are expected to experience a solid growth trend.
Equity earnings of Samsung-Corning are expected to decrease somewhat as a
result of construction and start-up costs in Malaysia and Germany and
higher financing costs associated with the recent business expansions.
LABORATORY SERVICES
(In millions)
1994 1993 1992
Consolidated sales $1,687.1 $1,319.5 $1,149.8
Income before taxes 156.6(1) 125.3(2) 203.1
(1) Includes $82.3 million of restructuring and other special charges.
(2) Includes $95 million of restructuring and other special charges.
Consolidated operations: Corning operates the businesses of this segment
through its wholly owned subsidiary Corning Life Sciences, Inc. (CLSI).
Consolidated sales of CLSI achieved record levels in each of the last three
years, primarily reflecting the impact of strategic acquisitions in the
clinical-laboratory testing business and improved volume in each of CLSI's
businesses. Earnings were significantly impacted by restructuring and
other special charges in 1994 and 1993. Excluding these charges, earnings
in 1994 and 1993 increased, but at a slower pace than in prior years as a
result of significant pricing pressures and uncertainty in health care
markets worldwide.
Through strategic acquisitions, Corning Clinical Laboratories, formerly
MetPath, has continued to expand in major markets throughout the United
States. CLSI acquired Maryland Medical Laboratories Inc. in June 1994 and
Bioran Medical Laboratory in October 1994. In August 1994, CLSI acquired
Nichols Institute, a provider of esoteric-testing services. Nichols'
esoteric-testing business will operate as Corning Nichols Institute and
maintain a focus on highly specialized testing. The remaining regional
laboratory sites will be integrated into Corning Clinical Laboratories.
In 1993, CLSI acquired Damon Corporation in August, and in November
completed a transaction with Unilab Corporation which resulted in the
acquisition of Unilab's laboratories in Denver, Dallas, and Phoenix. In
April 1994, CLSI sold the clinical-laboratory testing operations of Damon
in California. As a result of these transactions, Corning Clinical
Laboratories is strategically positioned with efficient low-cost operations
throughout the United States.
Sales of Corning Clinical Laboratories increased in both 1994 and 1993
principally as a result of acquisitions. Although volume increased in the
base business, price decreases, caused by growth in managed-care business
and by reductions in Medicare reimbursement rates, offset this growth.
Excluding the impact of restructuring and other special charges, earnings
of Corning Clinical Laboratories in 1994 increased modestly due to the
integration of recent acquisitions combined with significant cost-reduction
efforts. Earnings in 1993 were up slightly due primarily to volume growth
and the acquisition of Damon. Sales and earnings growth in 1994 and 1993
were negatively impacted by competitive pricing pressures and an
increasingly higher mix of business from lower-priced managed-care clients.
In 1994, CLSI recorded a charge of $82.3 million which included $50.7
million of integration costs, $21.6 million of investment banking, legal
and accounting fees and other transaction expenses, and $10 million of
other reserves primarily related to the Nichols, Maryland Medical, and
Bioran acquisitions. In 1993, CLSI recorded restructuring and other
special charges totaling $95 million which included $40.6 million of
reserves primarily for costs of closing certain Corning clinical-laboratory
testing facilities as a result of the integration of Damon into existing
clinical-laboratory testing operations, $11.4 million of other
restructuring charges, and $43 million of other special charges.
12
The other special charges recorded in 1993 primarily included $36.5 million
to reflect the settlement and related legal expenses associated with a
compromise agreement with the Civil Division of the Department of Justice
to settle claims brought on behalf of the Inspector General, U.S.
Department of Health and Human Services. The claims related to the
marketing, sale, pricing and billing of certain blood tests provided to
Medicare patients. The settlement does not constitute an admission by
Corning with respect to any issue arising from the civil action. As a
result of continuing investigations of the laboratory testing industry,
Corning's clinical-laboratory testing business, along with Damon, Nichols
and other major clinical laboratories, have received subpoenas for
additional information relating to certain other tests. In addition, many
payors are reviewing their reimbursement practices for laboratory tests.
The results of these investigations and reviews may result in additional
settlement payments or reductions in reimbursements for certain tests.
Corning believes that any settlement payments in excess of existing
accruals will not be material to Corning's financial position or results of
operations.
Sales of the pharmaceutical-services business have increased during the
last three years, although at a lower rate in 1994. Earnings in 1994 were
level with 1993 as a result of significant changes in the pharmaceutical
industry which caused postponement of new contracts and pricing pressures.
Earnings improved significantly in 1993 compared with 1992 primarily as a
result of strong volume growth and cost-reduction actions.
In 1994, CLSI announced plans to enter into a majority-owned venture which
will offer contract manufacturing of new biological products to
pharmaceutical and biotechnology companies. The new company, which is
expected to commence operations in late 1996, will be an extension of
CLSI's existing pharmaceutical services business which provides development
services to most of the major pharmaceutical companies and over 50
biotechnology companies.
In June 1994, Corning and International Technology Corporation established
a jointly owned company named Quanterra Incorporated to which Corning
transferred the net assets of its Enseco environmental-testing laboratory
business and International Technology transferred the assets of its IT
Analytical Services business. As a result of the transaction, Corning and
International Technology each own 50% of the newly created company which
provides environmental testing and related services. Since the date of the
transaction, Quanterra has been accounted for using the equity method of
accounting for investments.
Equity companies:
(In millions)
1994 1993 1992
Net sales $64.4 $18.0 $228.4
Corning's share of net income (loss) 2.9 (0.5) (8.5)
Equity earnings of this segment in 1994 primarily reflect the formation of
Quanterra in June 1994. Equity earnings in 1992 primarily reflect Unilab
which was divested in late 1993. In contemplation of this transaction,
Corning accounted for Unilab using the cost method of accounting for
investments in 1993.
Outlook: Sales of this segment are expected to increase substantially as a
result of recent acquisitions and continued volume gains in all businesses.
Earnings are also expected to increase as a result of volume growth and
significant cost reductions in response to continuing price pressures in
the health care industry.
CONSUMER PRODUCTS
(In millions)
1994 1993 1992
Consolidated sales $779.1 $734.6 $772.2
Income (loss) before taxes 55.6 (35.4)(1) (20.3)(2)
(1)Includes $46.5 million of restructuring charges.
(2)Includes $63.3 million of restructuring charges.
13
Consolidated operations: Consolidated sales in the Consumer Products
segment increased in 1994 over 1993 due primarily to strong U.S. sales
volume. Earnings of this segment, excluding restructuring charges,
increased significantly in 1994 in comparison with 1993 due to increased
volume, manufacturing efficiencies, and cost-reduction efforts.
Consolidated sales declined in 1993 in comparison with 1992 due to the
impact of a poor worldwide retail sales environment and the exit from the
Brazilian market. Excluding restructuring charges, earnings in 1993 were
down when compared with 1992 due to increased promotion costs, reduced
manufacturing levels, lower sales volumes and reserves for certain
inventory and product claims.
In November 1994, Corning sold its European consumer products business
which had annual sales of approximately $130 million. In February 1994,
Corning and Vitro S.A. of Mexico ended their cross ownership of Corning
Vitro Corporation in the United States and Vitro Corning in Mexico. As a
result of this transaction, Corning Vitro changed its name to Corning
Consumer Products Company.
Sales of Corning Consumer Products in 1994 increased over 1993 in North
America and Mexico due to improved volume in the U.S. and strength in the
Visions Cookware product line in Mexico. All major brands had increased
sales in 1994. U.S. volume was driven primarily by strength in mass market
channels. Sales in Europe were down in comparison with 1993 due to
softness in the European retail market and the impact of unfavorable
exchange rates. Sales in the Asia Pacific market in 1994 remained level
with 1993 due primarily to the impact of reduced promotional activity.
The decline in 1993 sales was due to a decline in North America and Europe
sales offset by an increase in Asia Pacific. The 1993 performance of
Corning Consumer Products' major brands was mixed.
Restructuring charges in 1993 totaling $46.5 million in this segment
included costs of a reduction in the salaried workforce, the consolidation
of Corning Ware cookware and Visions Cookware manufacturing, and the
consolidation of North American packaging operations. In 1992, Corning
recorded a charge of $63.3 million to restructure its Brazilian operations.
Equity companies:
(In millions)
1994 1993 1992
Net sales $99.2 $285.2 $273.4
Corning's share of net income (loss) 2.3 (15.7) (5.4)
Equity in earnings in 1994 improved over the prior year reflecting the
elimination of losses by Vitro Corning, which was divested in late 1993.
Equity in earnings of the segment in 1993 were negatively impacted by
unfavorable dynamics in the Mexican economy offset somewhat by a favorable
non-recurring tax adjustment. Corning also recorded a $9.5 million
reduction in equity earnings resulting from a restructuring charge taken by
Vitro Corning in 1993.
Outlook: Excluding the impact on sales of the European consumer products
divestiture, sales and earnings of the segment are expected to continue to
improve in 1995 due to the benefits of restructuring programs, a
strengthened marketing strategy, and the introduction of new product lines.
OTHER REVENUES AND DEDUCTIONS
Non-operating gains and losses: In 1994, Corning completed several
divestitures (described in Note 2 of the Notes to Consolidated Financial
Statements) that resulted in gains which, net of losses from the exit of
several product lines, were not material. In 1993, Corning recognized a
non-operating gain of $4.2 million ($2.6 million after tax).
In 1992, Corning recognized net non-operating gains from consolidated
operations totaling $7 million ($21.7 million after tax), including a gain
of $10.1 million (before and after tax) from the sale of an additional
equity interest in Corning Japan K.K. and a pre-tax loss of $7.3 million
($9 million after-tax gain) from the formation of the consumer housewares
venture with Vitro.
These gains and losses have been included in Other, net on the Consolidated
Statements of Income.
14
Provision for restructuring and other special charges: In the third
quarter 1994, Corning recorded a charge of $82.3 million ($55.4 million
after tax) which included $50.7 million of integration costs, $21.6 million
of investment banking, legal, and accounting fees and other transaction
expenses, and $10 million of other reserves primarily related to the
Nichols, Maryland Medical and Bioran acquisitions. The costs to integrate
the Nichols, Maryland Medical and Bioran operations included the costs of
shutting down clinical laboratories in certain markets where duplicate
Corning and Nichols, Maryland Medical or Bioran facilities existed at the
time of the acquisitions. Management believes that the integration of the
Nichols, Maryland Medical and Bioran facilities should significantly reduce
operating costs of the combined companies and will be substantially
complete within a year.
In the third quarter 1993, Corning recorded a charge of $207 million
($120.5 million after tax of $79.1 million and minority interest of $7.4
million) which included $156 million of restructuring charges and $51
million of other special charges. The restructuring charges included costs
to integrate the Damon acquisition and costs of a planned company-wide
restructuring program to reduce assets and overhead costs. The other
special charges primarily included a charge of $36.5 million to reflect the
settlement and related legal expenses associated with the compromise
agreement with the Civil Division of the Department of Justice to settle
claims brought on behalf of the Inspector General, U.S. Department of
Health and Human Services, and $8 million of investment banking, legal and
accounting fees and other transaction expenses related to the Costar
acquisition.
The company is engaged in re-engineering studies which are expected to be
complete in the first half of 1995. It is possible that these studies will
result in additional employee terminations, asset write-offs and other cost-
reduction activities in 1995. It is currently not possible to estimate the
costs or benefits of these terminations, write-offs or other activities.
Corning management believes the costs of both historical and potential
future actions will be financed with cash from operations and does not
anticipate any significant impact on its liquidity as a result of the
restructuring plan.
In the fourth quarter 1992, Corning recorded a provision of $63.3 million
($32.1 million after tax of $22.9 million and minority interest of $8.3
million) as a result of the restructuring of its Brazilian operations.
A detailed discussion of the restructuring and other special charges is in
Note 7 of the Notes to Consolidated Financial Statements.
Equity earnings: In 1994, Corning recognized a $75.9 million reduction in
equity earnings as a result of an accounting charge taken by Dow Corning
related to breast-implant litigation.
In 1993, Corning recognized a $203.1 million reduction in equity earnings
as a result of an accounting charge taken by Dow Corning related to breast-
implant litigation and a $9.5 million reduction in equity earnings as a
result of a restructuring charge taken by Vitro Corning.
In 1992, Corning recognized a $37.7 million reduction in equity earnings
which included $24.5 million of accounting charges associated with Dow
Corning's terminated breast-implant business and $13.2 million of
restructuring charges associated with Dow Corning's exit from its Brazilian
operations and other cost-reduction programs.
Accounting changes: In 1992, Corning recorded an after-tax charge of
$294.8 million to reflect the cumulative effect of adoption of Financial
Accounting Standard No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions," for all consolidated and equity companies
and a gain of $8.2 million to reflect Corning's equity in the cumulative
effect of adoption of Financial Accounting Standard No. 109, "Accounting
for Income Taxes," by an equity company.
TAXES
Corning's effective tax rate varies between years due primarily to the
impact of certain non-operating gains and losses and restructuring charges.
The effective tax rate, excluding these items, was 36% in 1994, 31% in
1993, and 33% in 1992. The increase in the 1994 rate was primarily due to
an increase in non-deductible amortization of intangibles and other
expenses and lower foreign and other tax credits in 1994. The reduced 1993
rate was primarily due to tax benefits associated with the sale of the
process-systems business and the revaluation of deferred tax assets
discussed below.
15
Corning adopted Financial Accounting Standard No. 109, "Accounting for
Income Taxes," (FAS 109) at the beginning of 1993. The impact of adopting
FAS 109 was not material. On August 10, 1993, the Revenue Reconciliation
Act of 1993 (the Act) was signed into law. The Act increased the U.S.
corporate statutory tax rate from 34% to 35% for years beginning after
December 31, 1992, changed the deductibility of certain expenses and
extended certain tax credits. The increase in the statutory tax rate
resulted in a gain from the revaluation of Corning's net deferred tax
assets in the third quarter 1993 which lowered the 1993 effective tax rate.
Excluding this gain, the impact of the Act did not have a material impact
on Corning's effective tax rate.
Note 6 of the Notes to Consolidated Financial Statements reconciles the
effective tax rate to the statutory tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Corning's working capital of $652.1 million at the end of 1994 increased
from $451.4 million at the end of 1993. The ratio of current assets to
current liabilities was 1.6 at the end of 1994 compared with 1.4 at the end
of 1993. Corning's ratio of long-term debt to total capital decreased to
33% at the end of 1994 from 45% at the end of 1993. The improvement in the
ratio of long-term debt to total capital was primarily due to the repayment
of $400 million of Damon acquisition debt in 1994.
In February 1994, Corning issued 8 million shares of common stock in a
single-block transaction. The net proceeds from this offering totaled $233
million and were used to finance the acquisition of the shares of capital
stock of Corning Vitro Corporation held by Vitro and the acquisition of
assets relating to Northern Telecom's optical-fiber and optical-cable
businesses. In July 1994, Corning, through Corning Delaware L.P.,
completed a public offering of a new issue of 6% Convertible Monthly Income
Preferred Securities (MIPS) guaranteed by Corning, and convertible into
Corning common stock. The net proceeds from this offering totaled $364.4
million and were used to repay the remaining Damon acquisition debt. In
August 1994, Corning issued $100 million of 30-year debentures and used the
proceeds to repay borrowings assumed in connection with acquisitions in
1994.
In August 1993, Corning borrowed $600 million under agreements with two
banks to finance the acquisition of Damon for $405 million in cash and the
refinancing of $167 million of Damon's debt. In September 1993, Corning
issued $200 million of longer-term debt securities in public offerings and
used the proceeds of such offerings to repay a portion of the acquisition
debt.
Corning's working capital position is reinforced by available bank credit
lines of $1.2 billion ($600 million of which expire at the end of 1995) and
the ability to issue up to $500 million of medium- and long-term debt under
existing shelf-registration statements filed with the Securities and
Exchange Commission. As a result, 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 longer-term growth opportunities.
CASH FLOWS
Cash flows from operating activities decreased in 1994 from 1993 due to
higher earnings before depreciation, amortization, and special charges
offset by an increase in net current operating assets and liabilities in
1994. Cash flows from operating activities increased in 1993 compared with
1992 primarily due to a significant reduction in net current operating
assets and liabilities (excluding the impact of acquisitions) offset by the
payment by Corning to the Department of Justice and the suspension of
dividends from Dow Corning.
Cash used in investing activities in 1994 decreased from 1993 primarily due
to lower capital spending and an increase in proceeds from asset
dispositions in 1994. Cash used for business acquisitions declined
slightly from 1993 levels. Cash used in investing activities increased
significantly in 1993 over 1992 primarily due to the acquisition of Damon
for $405 million. At year end 1994, Corning's capital commitments totaled
$140 million. Corning anticipates capital spending will approximate $575
million in 1995.
Cash provided by financing activities declined in comparison with 1993
primarily due to a significantly reduced level of borrowings offset by the
issuance of common stock in February 1994 and the MIPS offering in July
1994. In 1993, cash provided by financing activities increased
significantly over 1992 primarily as a result of increased borrowings to
finance the acquisition of Damon and the telecommunications-products
business of GTE Control Devices Incorporated and to finance continued
capital expansion programs.
16
Corning repurchased 1.3 million and 2.9 million shares of its common stock
in 1993 and 1992, respectively, 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. Corning
temporarily suspended its share repurchase program between May 1993 and the
end of 1994 as a result of the impact of acquisition financing on certain
lending agreements.
Dividends paid to common shareholders in 1994 totaled $150.1 million
compared with $134.1 million in 1993 and $176.7 million in 1992. The
higher 1992 payment resulted from a $0.15 per-share special dividend
declared in 1991 and paid in 1992 and the payment of the fourth quarter
1992 dividend prior to the end of fiscal 1992. Excluding these items, the
increase in dividends paid was caused by an increase in the dividend rate
of 10% and 17% in 1993 and 1992, respectively, and the increase in common
shares outstanding. In December 1994, the Board of Directors authorized an
increase in the quarterly dividend rate from $0.17 to $0.18 per common
share.
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 22 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
$30 million for its estimated liability for environmental cleanup and
litigation at January 1, 1995. This liability has not been reduced by any
potential insurance recoveries.
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 are geared to
provide funds from operations which would be sufficient along with other
sources 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.
ITEM 8. FINANCIAL STATEMENTS
See Item 14 (a) 1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
A list of Directors of the Company, appearing under the caption "Nominees
for Election as Directors" in the Proxy Statement relating to the annual
meeting of stockholders to be held on April 27, 1995, is incorporated by
reference in this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
James R. Houghton (58) Chairman of the Board and Chief Executive Officer
Mr. Houghton joined Corning in 1962. In 1965 he was appointed European
Area manager. In 1968 he was elected a vice president and appointed
general manager of the Consumer Products Division. He was elected a
director in 1969, and in 1971 was elected vice chairman with
responsibility for the company's international operations. In 1983, Mr.
Houghton was elected chairman.
Roger G. Ackerman (56) President and Chief Operating 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 1980, director of the Manufacturing
and Engineering Division in 1981, and president and chief executive
officer of MetPath Inc. in 1983. In 1985, he was elected group president
and a director. Mr. Ackerman was elected president in 1990.
Van C. Campbell (56) Vice Chairman and Chief Financial Officer
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.
Dr. David A. Duke (59) Vice Chairman and Chief Technology Officer
Dr. Duke joined Corning in 1962 and subsequently served in research and
management positions. He was elected vice president of the
Telecommunications Products Division in 1980 and elected a senior vice
president in 1984. In 1985, he was made director of research and
development, and became responsible for research, development and
engineering in 1987. Mr. Duke was elected vice chairman and a director in
1988.
Kenneth W. Freeman (44) Executive Vice President
Mr. Freeman joined Corning in 1972 and has served in a variety of key
financial and managerial positions. He was elected controller and a vice
president in 1985, senior vice president in 1987, and general manager of
the Science Products Division in 1989. He was appointed president and
chief operating officer of Corning Asahi Video Products Company in 1990.
In 1993, he was elected executive vice president.
Norman E. Garrity (53) Executive Vice President
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 1986, responsible for the Specialty Materials Group
manufacturing and engineering. In 1990, Mr. Garrity was elected executive
vice president.
E. Martin Gibson (56) Retired Chairman of the Board, Corning Life
Sciences Inc.
Mr. Gibson joined Corning in 1962 and subsequently served in a succession
of product planning, sales and management positions. He was elected a
vice president in 1973 and a senior vice president in 1980. In 1983, he
was elected a group president, responsible for Consumer Products and Life
Sciences, and a director. In 1990, Mr. Gibson was elected chairman and
chief executive officer of Corning Life Sciences, Inc. At year end 1994,
Mr. Gibson retired and resigned as a director and as chief executive
officer of Corning Life Sciences, Inc.
18
John W. Loose (52) Executive Vice President
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. In April 1990 he was elected senior vice
president. He was elected executive vice president responsible for the
Information Display Group in 1990. In 1993, Mr. Loose was elected
executive vice president and president and chief executive officer of
Corning Consumer Products Company.
James M. Ramich (49) Executive Vice President
Mr. Ramich joined Corning in 1973 and served in a variety of managerial
positions in Purchasing, Treasury, and the Electronic Components Division.
In 1988, he was appointed director of Corporate Development, vice
president in 1990 and became vice president and general manager of the
Advanced Display Products business the same year. Mr. Ramich was elected
executive vice president responsible for the Information Display Group in
1993.
Jan H. Suwinski (53) Executive Vice President
Mr. Suwinski joined Corning in 1965 and subsequently held various
managerial positions in the Technical Products and Latin America/Asia
Pacific areas. In 1985 he was appointed a vice president and general
manager of the Telecommunications Products Division, and in 1986 was
appointed a senior vice president. Mr. Suwinski was elected executive
vice president responsible for the Opto-Electronics Group in 1990.
Randy H. Thurman (45) Chairman and Chief Executive Officer, Corning Life
Sciences Inc.
Mr. Thurman joined Corning's subsidiary, Corning Life Sciences Inc.
(CLSI), in 1993 as president. He was elected chairman and chief executive
officer of CLSI in 1994. Prior to joining Corning, Mr. Thurman held
executive positions with Rhone-Poulenc Rorer Pharmaceuticals, from 1985 to
1992, most recently as president and chief executive officer.
Larry Aiello, Jr. (45) Vice President and Controller
Mr. Aiello joined Corning in 1973 and has served in various accounting and
management positions. He was appointed an assistant controller in 1989,
and division vice president and general manager of the Opto-Electronic
Components Products Division in 1990. In 1993, he was elected vice
president and controller.
Katherine A. Asbeck (38) Chief Accounting Officer
Ms. Asbeck joined Corning in 1991 as director of accounting. She was
appointed assistant controller in 1993 and designated chief accounting
officer in 1994. Prior to joining Corning, Ms. Asbeck was with Price
Waterhouse LLP for 10 years, most recently as a senior audit manager.
Peter Booth (55) 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.
Robert L. Ecklin (56) Senior 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.
Robert C. Forrest (59) Senior Vice President
Mr. Forrest joined Corning in 1960 and has subsequently held a variety of
manufacturing and engineering managerial positions. In 1986 he was
appointed vice president responsible for manufacturing and engineering for
the Telecommunications Products Division. He was appointed senior vice
president and general manager of the Telecommunications Products Division
in 1990.
Sandra L. Helton (45) Senior Vice President and Treasurer
Ms. Helton joined Corning in 1971 and served in various engineering and
financial positions. In 1986 she was appointed assistant treasurer. She
was elected a vice president and treasurer in 1991 and senior vice
president in 1994.
19
A. John Peck, Jr. (55) 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 and elected secretary in 1988.
William C. Ughetta (62) Senior Vice President and General Counsel
Mr. Ughetta joined Corning in 1968 as assistant secretary and assistant
counsel. He was elected secretary of the corporation in 1971 and vice
president in 1972. He was elected a senior vice president in 1983.
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 stockholders to be held on
April 27, 1995, 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 stockholders to be held on April 27, 1995, 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 stockholders to
be held on April 27, 1995, is incorporated by reference in this Annual
Report on Form 10-K.
20
PART IV
ITEM 14. EXHIGITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Index to financial statements, financial statement schedules, and
supplementary data, filed as part of this report:
Page
Report of Independent Accountants 24
Consolidated Statements of Income 25
Consolidated Balance Sheets 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28-49
Supplementary Data:
Quarterly Operating Results and Related
Market Data 50
Five Years in Review - Historical Comparison 51-52
Investor Information 53
Financial Statement Schedule:
II Valuation Accounts and Reserves 54
2. Exhibits filed as part of this report: see (c) below.
(b) Reports on Form 8-K filed during the last quarter of fiscal 1994:
A report on Form 8-K dated October 18, 1994, filed in connection with
the registrant's medium-term note facility, includes Corning's third
quarter earnings press release of October 18, 1994.
A report on Form 8-K dated October 24, 1994, filed in connection with
the acquisition of Bioran Medical Laboratory, includes the
acquisition agreement and related press release.
A report on Form 8-K dated December 12, 1994, filed in connection
with the acquisition of Bioran Medical Laboratory, includes Unaudited
Pro Forma Combined Financial Information as of and for the forty
weeks ended October 9, 1994.
A report on Form 8-K/A dated December 12, 1994, filed in connection
with the acquisition of Bioran Medical Laboratory, includes
historical financial statements of Bioran as of and for the nine
months ended September 30, 1994, and audited historical financial
statements as of and for the year ended December 31, 1993.
(c) Exhibits filed as part of this report:
#3. (i) Articles of Incorporation of the Registrant:
Restated Certificate of Incorporation, dated July 12, 1989, and
the Certificate of Amendment, dated September 28, 1989, of the
Restated Certificate of Incorporation of the Registrant which
appear as Exhibit 3(a) to the 1989 Annual Report on Form 10-K
are incorporated herein by reference in this Annual Report on
Form 10-K pursuant to an exemption in accordance with Section
232.102(a) of Regulation S-T.
21
Certificate of Amendment, dated April 30, 1992, of the Restated
Certificate of Incorporation of the Registrant to the 1992
Annual Report on Form 10-K is incorporated herein by reference
in this Annual Report on Form 10-K pursuant to an exemption in
accordance with Section 232.102(a) of Regulation S-T.
Certificate of Amendment of the Certificate of Incorporation of
the Registrant dated July 15, 1994, as amended by the
Certificate of Correction filed on July 26, 1994 which sets
forth the number, designation, relative rights, preferences and
limitations of Series C Preferred Stock of the Registrant.
Certificate of Amendment of the Certificate of Incorporation of
the Registrant dated October 24, 1994 which amends the number of
Series C Preferred Stock designated.
(ii) By-Laws of Corning Incorporated as amended to and
effective as of December 31, 1994, filed as an exhibit to a
current report on Form 8-K dated January 24, 1995, is
incorporated by reference in this Annual Report on Form 10-K.
#4. Instruments defining the rights of security holders are
incorporated herein by reference in this Annual Report on Form
10-K pursuant to an exemption in accordance with Section
232.102(a) of Regulation S-T.
Rights Agreement dated July 2, 1986, and the Amendment to the
Rights Agreement dated October 4, 1989, that define the
preferred share purchase rights which trade with the
Registrant's common stock, which appear as Exhibit 1 to Form 8-
K, dated July 14, 1986 and Exhibit 1 to Form 8-K, dated October
4, 1989, respectively, are incorporated herein by reference in
this Annual Report on Form 10-K pursuant to an exemption in
accordance with Section 232.102(a) of Regulation S-T.
Indenture dated May 13, 1986, between Hazleton Corporation and
Nation's Bank of Virginia, N.A., successor trustee to Sovran
Bank, N.A., defining rights of holders of Hazleton Corporation 6
1/2% convertible subordinated debentures due 2006 which appears
as Exhibit 4 to the 1987 Annual Report on Form 10-K is
incorporated herein by reference in this Annual Report on Form
10-K pursuant to an exemption in accordance with Section
232.102(a) of Regulation S-T.
#12. Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
#21. Subsidiaries of the Registrant at January 1, 1995
#23 Consent of Independent Accountants
#24 Powers of Attorney
#27 Financial Data Schedule
(d) Dow Corning Corporation:
Page
Report of Independent Accountants 55
Consolidated Balance Sheets 57-58
Consolidated Statements of Operations and Retained Earnings 59
Consolidated Statements of Cash Flow 60
Notes to Consolidated Financial Statements 61-80
Supplementary Data - Quarterly Financial Information 81
Financial statements of unconsolidated subsidiary companies and
associated companies accounted for under the equity method, other
than Dow Corning Corporation, have been omitted. Summary financial
information on Corning's equity-basis companies is presented in Note
4 (Investments) of the Notes to Consolidated Financial Statements
appearing on pages 33 and 34.
22
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/ James R. Houghton
By Chief Executive Officer March 17, 1995
(James R. Houghton)
/s/ Van C. Campbell
By Vice Chairman March 17, 1995
(Van C. Campbell) and Chief Financial Officer
/s/ Katherine A. Asbeck
By Chief Accounting Officer March 17, 1995
(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 of the Board, March 17, 1995
(James R. Houghton) Chief Executive Officer
and Director
*
Director March 17, 1995
(Roger G. Ackerman)
*
Director March 17, 1995
(Robert Barker)
*
Director March 17, 1995
(Mary L. Bundy)
*
Director March 17, 1995
(Van C. Campbell)
*
Director March 17, 1995
(Barber B. Conable, Jr.)
23
*
Director March 17, 1995
(David A. Duke)
*
Director March 17, 1995
(John H. Foster)
*
Director March 17, 1995
(Gordon Gund)
*
Director March 17, 1995
(John M. Hennessy)
*
Director March 17, 1995
(Vernon E. Jordan, Jr.)
*
Director March 17, 1995
(James W. Kinnear)
*
Director March 17, 1995
(James J. O'Connor)
*
Director March 17, 1995
(Catherine A. Rein)
*
Director March 17, 1995
(Henry Rosovsky)
*
Director March 17, 1995
(William D. Smithburg)
*
Director March 17, 1995
(Robert G. Stone, Jr.)
/s/ William C. Ughetta
*By
(William C. Ughetta, Attorney-in-fact)
24
REPORT OF INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
January 23, 1995
To the Board of Directors and Stockholders of Corning Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 20 present fairly, in all material
respects, the financial position of Corning Incorporated and its
subsidiaries at January 1, 1995, and January 2, 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended January 1, 1995, 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.
As discussed in Note 5, the Company adopted Financial Accounting Standard
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," in 1992.
/s/ Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
25
CONSOLIDATED STATEMENTS OF INCOME
Corning Incorporated and Subsidiary Companies
Years Ended January 1, 1995, January 2, 1994,
and January 3, 1993
(In millions, except per-share amounts) 1994 1993* 1992*
Revenues
Net sales $4,770.5 $4,004.8 $3,708.7
Royalty, interest and dividend income 28.7 29.9 35.3
-------- -------- --------
4,799.2 4,034.7 3,744.0
-------- -------- --------
Deductions
Cost of sales 3,060.9 2,597.0 2,411.3
Selling, general and administrative expenses 871.7 774.0 692.2
Research and development expenses 176.9 173.1 151.1
Provision for restructuring and other special
charges 82.3 207.0 63.3
Interest expense 110.4 88.2 62.6
Other, net 37.5 38.7 26.9
-------- -------- --------
Income before taxes on income 459.5 156.7 336.6
Taxes on income 170.1 35.3 92.5
-------- -------- --------
Income before minority interest and equity
earnings 289.4 121.4 244.1
Minority interest in earnings of subsidiaries (50.7) (16.6) (21.6)
Dividends on convertible preferred securities
of subsidiary (6.1)
Equity in earnings (losses) of associated
companies before cumulative effect of changes
in accounting methods in 1992 48.7 (120.0) 43.8
Income (Loss) before Extraordinary Credit and
Cumulative Effect of Changes in Accounting
Methods (per common share, $1.32/1994;
($0.09)/1993; $1.40/1992) 281.3 (15.2) 266.3
Tax benefit of loss carryforwards 7.7
Cumulative effect of changes in accounting
methods (per common share, ($1.52)/1992) (286.6)
-------- -------- --------
Net Income (Loss)
(per common share, $1.32/1994; ($0.09)/1993;
($0.08)/1992) $281.3 $(15.2) $(12.6)
======== ========= =========
*Reclassified to conform to 1994 presentation.
See Notes to Consolidated Financial Statements beginning on page 28.
The cumulative effect on prior years of changes in accounting methods in
1992, net of applicable income taxes and minority interests, consists of a
charge of $294.8 million ($1.56 per common share) from a change in
accounting method for postretirement benefits other than pensions and a
gain of $8.2 million ($0.04 per common share) from a change in accounting
method for income taxes by an equity company.
26
CONSOLIDATED BALANCE SHEETS
Corning Incorporated and Subsidiary Companies
January 1, 1995, and January 2, 1994
(In millions, except share amounts) 1994 1993
Assets
Current Assets
Cash $ 72.0 $ 80.7
Short-term investments, at cost, which
approximates market value 89.3 80.1
Accounts receivable, net of doubtful accounts
and allowances - $89.4/1994; $70.5/1993 947.1 691.1
Inventories 416.7 353.9
Deferred taxes on income and other current
assets 201.2 265.9
-------- --------
Total current assets 1,726.3 1,471.7
-------- --------
Investments
Associated companies, at equity 660.4 586.5
Others, at cost 33.4 44.2
Plant and Equipment, at Cost,
Net of Accumulated Depreciation 1,890.6 1,759.8
Goodwill and Other Intangible Assets,
Net of Accumulated Amortization - $170.8/1994;
$106.8/1993 1,408.0 1,009.1
Other Assets 304.0 360.4
-------- --------
Total Assets $6,022.7 $5,231.7
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Loans payable $ 67.6 $141.7
Accounts payable 258.3 245.1
Other accrued liabilities 748.3 633.5
-------- --------
Total current liabilities 1,074.2 1,020.3
-------- --------
Other Liabilities 643.6 668.6
Loans Payable Beyond One Year 1,405.6 1,585.6
Minority Interest in Subsidiary Companies 247.0 245.7
Convertible Preferred Securities of Subsidiary 364.4
Convertible Preferred Stock 24.9 25.7
Common Stockholders' Equity
Common stock, including excess over par value
and other capital - Par value $0.50 per share;
authorized - 500 million shares
Shares issued: 1994-255.8 million;
1993-228 million 1,031.4 626.8
Retained earnings 1,714.5 1,581.9
Less cost of 27.6 million/1994 and
27.4 million/1993 shares of common stock
in treasury (523.7) (516.5)
Cumulative translation adjustment 40.8 (6.4)
--------- --------
Total common stockholders' equity 2,263.0 1,685.8
--------- --------
Total Liabilities and Stockholders' Equity $6,022.7 $5,231.7
======== ========
See Notes to Consolidated Financial Statements beginning on page 28.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Corning Incorporated and Subsidiary Companies
Years Ended January 1, 1995, January 2, 1994,
and January 3, 1993
(In millions) 1994 1993* 1992*
Cash flows from operating activities:
Income (loss) before extraordinary credit
and cumulative effect of changes in
accounting methods $281.3 $(15.2) $266.3
Adjustments to reconcile income (loss) to net
cash provided by operations:
Depreciation and amortization 338.4 280.4 248.2
Equity in earnings of associated companies
less than (in excess of) dividends received (0.5) 167.1 36.7
Minority interest in earnings of subsidiaries
in excess of (less than) dividends paid 31.1 (0.4) 7.6
Losses (gains) on disposition of properties
and investments (11.6) 6.4 5.9
Provision for restructuring and other special
charges, net of cash paid 60.9 157.4 63.3
Deferred tax provision (benefit) 17.4 (84.4) (33.7)
Other 6.5 16.1 9.4
Changes in operating assets and liabilities:
Accounts receivable (217.6) 35.1 (49.9)
Inventories (38.3) 5.5 (29.0)
Deferred taxes and other current assets (4.2) (2.5) (17.0)
Accounts payable and other current
liabilities (61.2) 24.1 (12.7)
------- ------- -------
Net cash provided by operating activities 402.2 589.6 495.1
------- ------- -------
Cash flows from investing activities:
Additions to plant and equipment (386.9) (443.1) (377.4)
Acquisitions of businesses, net (387.1) (449.9) (124.4)
Net proceeds from disposition of properties
and investments 242.1 34.1 170.1
Net increase in long-term investments (14.1) (18.1) (53.2)
Other, net (13.8) (27.2) (33.7)
------- ------- -------
Net cash used in investing activities (559.8) (904.2) (418.6)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of loans 237.4 1,020.6 140.2
Repayments of loans (609.0) (501.1) (22.2)
Increase in minority interest due to capital
contribution 66.5
Proceeds from issuance of convertible
preferred securities of subsidiary 364.4
Proceeds from issuance of common stock 247.7 14.2 15.6
Repurchases of common stock (58.6) (100.8)
Payment of dividends (152.2) (136.2) (178.9)
------- ------- -------
Net cash provided by (used in) financing
activities 154.8 338.9 (146.1)
------- ------- -------
Effect of exchange rates on cash 3.3 3.4 (4.9)
------- ------- -------
Net change in cash and cash equivalents 0.5 27.7 (74.5)
Cash and cash equivalents at beginning of year 160.8 133.1 207.6
------- ------- -------
Cash and cash equivalents at end of year $161.3 $160.8 $133.1
======= ======= =======
* Reclassified to conform to 1994 presentation.
See Notes to Consolidated Financial Statements beginning on page 28.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per-share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Corning operates on a fiscal year ending on the Sunday nearest December
31. The three most recent fiscal years ended on January 1, 1995, January
2, 1994, and January 3, 1993. Fiscal year 1992 included 53 weeks compared
with 52 weeks in 1994 and 1993.
The consolidated financial statements include the accounts of all entities
controlled by Corning. All significant intercompany accounts and
transactions are eliminated. Major subsidiaries are consolidated at dates
up to one month earlier than the consolidated balance sheet dates.
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%.
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 stockholders' 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.
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.
INVENTORIES
Inventories are stated at the lower of cost or market. Approximately 50%
and 60% of Corning's inventories at January 1, 1995, and January 2, 1994,
respectively, are valued using the last-in, first-out (LIFO) method. The
first-in, first-out (FIFO) method is used to value the remaining
inventories which are principally at consolidated subsidiaries.
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 not
exceeding 15 years.
Corning reviews the recoverability of goodwill and other intangible assets
when business conditions arise which may indicate possible impairment of
the investment. The measurement of possible impairment is based primarily
on the company's ability to recover the balance of goodwill and other
intangible assets from expected future cash flows of the related
operations on an undiscounted basis.
29
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
TAXES ON INCOME
Corning uses the asset and liability approach to accounting for income
taxes as prescribed by Financial Accounting Standard No. 109, "Accounting
for Income Taxes" (FAS 109) which was adopted in 1993. 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.
Under FAS 109, 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.
Prior to 1993, taxes on income were provided using the deferred method
pursuant to Accounting Principles Board Opinion No. 11, "Accounting for
Income Taxes" (APB No. 11) which required a deferred income tax provision
for timing differences in the recognition of revenues and expenses for tax
and financial reporting purposes.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income less
dividends on Series B convertible preferred stock by the weighted average
number of common shares outstanding. Dividends on Series B convertible
preferred stock amounted to $2.1 million in 1994 and 1993, and $2.2
million in 1992. Weighted average shares outstanding were 211.8 million
in 1994; 192 million in 1993 and 188.6 million in 1992. The weighted
average of common shares outstanding for earnings per common share
calculations does not include approximately 2.9 million, 3.3 million and
3.5 million shares held by the Corning Stock Ownership Trust in 1994, 1993
and 1992, respectively. Common stock equivalents are not included in the
earnings per common share computation because they do not result in
material dilution.
2. BUSINESS COMBINATIONS AND DIVESTITURES
POOLINGS OF INTEREST
Corning acquired three clinical-laboratory testing companies in 1994. In
the second quarter 1994, Corning acquired the common stock of Maryland
Medical Laboratory Inc. in exchange for 4.5 million shares of Corning
common stock. In the third quarter 1994, Corning acquired Nichols
Institute. Corning issued 7.5 million shares of Corning common stock and
reserved 1.1 million shares for future issuance upon the exercise of
options issued in connection with the Nichols transaction. Also in the
third quarter 1994, Corning acquired the common stock of Bioran Medical
Laboratory in exchange for 6 million shares of Corning common stock.
In the second quarter 1993, Corning acquired DeYor Laboratories, a clinical-
testing company. Corning issued 840,000 shares of Corning common stock in
connection with this transaction. In the third quarter 1993, Corning
acquired all of the outstanding shares of common stock and options to
purchase common stock of Costar Corporation, a manufacturer of plastic
science products. Corning issued 5.5 million shares of Corning common
stock and reserved 322,000 shares for future issuance upon the exercise of
options issued in connection with the Costar transaction.
In the third quarter 1992, Corning acquired Biosym Technologies Inc., a
scientific software company. Corning issued 2.1 million shares of Corning
common stock and reserved 685,000 shares for future issuance upon the
exercise of options issued in connection with the Biosym transaction.
These transactions were accounted for as poolings of interests. Corning's
consolidated financial statements for periods prior to the acquisitions
have not been restated since the combined impact of the acquisitions was
not material to Corning's historical financial position or results of
operations. Results of operations of the acquired companies have been
included in the consolidated financial statements from the date of
acquisition.
PURCHASES
In the first quarter 1994, Corning and Siecor Corporation, a consolidated
subsidiary, acquired the assets relating to the optical-fiber and optical-
cable businesses of Northern Telecom Limited for $130 million. In the
fourth quarter 1994, Siecor acquired certain assets relating to the
optical-hardware and equipment-components businesses of Northern Telecom
Limited for $130 million. Goodwill of approximately $200 million resulted
from these transactions and is being amortized over periods not exceeding
25 years.
30
2. BUSINESS COMBINATIONS AND DIVESTITURES
(Continued)
In the first quarter 1994, Corning and Vitro S.A. completed a two-part
transaction which ended their cross-ownership in two consumer products
companies, Corning Vitro Corporation in the United States and Vitro
Corning S.A. de C.V. in Mexico. The net cost to Corning of the two
transactions was $131 million. Goodwill of approximately $70 million
resulted from the transaction and is being amortized over 40 years.
In the third quarter 1993, Corning acquired all of the outstanding shares
of common stock of Damon Corporation, a clinical-testing business, for $405
million including acquisition expenses. In addition, $167 million of
Damon's indebtedness was refinanced. Revised purchase price allocations in
1994 resulted in goodwill of approximately $600 million which is being
amortized over 40 years.
Also in the third quarter 1993, Siecor Corporation acquired the
telecommunications-products businesses of GTE Control Devices Incorporated
for approximately $45 million. Goodwill of approximately $30 million
resulted from this transaction and is being amortized over periods not
exceeding 15 years.
In the fourth quarter 1993, Corning acquired the clinical-testing
laboratories of Unilab Corporation in Denver, Dallas, and Phoenix in
exchange for a majority of the Unilab shares owned by Corning, the
assumption of approximately $70 million of Unilab debt, and Corning's
investment in J.S. Pathology PLC. Goodwill of approximately $200 million
resulted from this transaction and is being amortized over 40 years. As a
result of this transaction, Corning retained a small equity investment in
Unilab. Corning previously owned 43% of Unilab.
In the first quarter 1992, Corning acquired the U.S. clinical operations
of MDS Healthcare Ltd. and, in the third quarter 1992, Corning acquired
two clinical-laboratory businesses, J.S. Pathology PLC in the United
Kingdom and Southgate Medical Laboratory System. Corning paid a total of
$124.9 million in cash and $12 million in Corning common stock for these
and other immaterial investments.
These acquisitions were accounted for as purchases. Accordingly, the
results of operations of the acquired companies were included in the
consolidated financial statements from the date of acquisition.
The following table presents unaudited pro forma operating results for the
years ended January 1, 1995, and January 2, 1994, as if the pooling of
interest and purchase transactions and related financing transactions
completed in 1994 and 1993 had been completed on January 4, 1993:
1994 1993
Revenues $5,160.0 $5,006.4
Net income 339.5 18.8
Net income per common share 1.51 0.08
DIVESTITURES
In the second quarter 1994, Corning sold the clinical-laboratory testing
operations of Damon in California to Physicians Clinical Laboratory, Inc.
for $51 million. Also in the second quarter 1994, Corning sold its
Parkersburg, W. Va., glass-tubing products plant to Schott Corporation, a
subsidiary of the Schott Group, for $57 million. In the fourth quarter
1994, Corning sold its European consumer products business to Newell Co.
for $86 million.
QUANTERRA TRANSACTION
In the third quarter 1994, Corning and International Technology
Corporation (International Technology) created a jointly owned company
named Quanterra Incorporated to which Corning transferred the net assets
of its Enseco environmental-testing laboratory business and International
Technology transferred the assets of its IT Analytical Services business.
Corning and International Technology each own 50% of the company. Corning
is accounting for its investment in the newly created company using the
equity method of accounting for investments. Corning received $33 million
as a result of this transaction and recognized a gain on the transaction
which, net of its share of a one-time integration charge taken by the new
company, is not material and has been included in equity earnings.
31
3. INFORMATION BY INDUSTRY SEGMENT
Information about the company's operations in different segments is
summarized on the following page.
Many of Corning's administrative and staff functions are performed on a
centralized basis. Corning charges these expenses to operating segments
based on the extent to which each business uses a centralized function.
Certain staff functions and certain research and development expenses
which benefit all businesses or relate to future technologies are included
in "Other, including Corporate R&D."
In 1994, 1993, and 1992, approximately 28%, 25%, and 27%, respectively, of
the sales of the clinical laboratory businesses, which represent the
largest component of the Laboratory Services segment, were generated by
Medicare/Medicaid clients.
32
3. INFORMATION BY INDUSTRY SEGMENT
(Continued)
Other,
including
Specialty Commu- Laboratory Consumer Corporate
Operations: Materials nications Services Products R&D Total
Revenues:
1994 $846.0 $1,458.3 $1,687.1 $779.1 $ 28.7 $4,799.2
1993 758.7 1,192.0 1,319.5 734.6 29.9 4,034.7
1992 750.1 1,036.6 1,149.8 772.2 35.3 3,744.0
Income (loss) before tax:
1994 $164.3 $ 345.8 $ 156.6(1) $ 55.6 $(262.8) $ 459.5
1993 (2) 73.6 243.3 125.3 (35.4) (250.1) 156.7
1992 93.8 230.1 203.1 (20.3)(3)(170.1) 336.6
Assets:
Operating assets:
1994 $600.6 $1,437.3 $2,220.1 $580.3 $524.0 $5,362.3
1993 716.7 959.4 1,808.5 526.3 634.3 4,645.2
1992 550.6 847.9 828.8 565.6 567.2 3,360.1
Capital expenditures:
1994 $ 60.0 $ 146.3 $ 100.8 $ 43.3 $ 36.5 $ 386.9
1993 80.0 154.7 78.5 30.9 99.0 443.1
1992 72.6 131.2 71.8 29.2 72.6 377.4
Depreciation and amortization:
1994 $ 57.2 $ 109.7 $ 95.8 $ 40.5 $ 35.2 $ 338.4
1993 56.7 78.9 70.8 41.7 32.3 280.4
1992 49.6 66.2 59.2 41.8 31.4 248.2
Equity Investments:
Investment in associated companies, at equity:
1994 $427.5 $ 182.5 $ 37.4 $ 13.0 $ 660.4
1993 398.3 172.4 1.8 14.0 586.5
1992 534.9 175.4 134.1 81.8 926.2
Equity company sales:
1994 $2,556.2 $ 788.9 $ 64.4 $ 99.2 $3,508.7
1993 2,322.4 680.2 18.0 285.2 3,305.8
1992 2,230.6 685.8 228.4 273.4 3,418.2
Equity company net income (loss) before cumulative effect of changes in
accounting methods:
1994 $ 13.7 $ 88.4 $ (10.9) $ 11.5 $ 102.7
1993 (272.8) 85.2 (1.3) (30.6) (219.5)
1992 44.0 96.5 (14.8) (3.9) 121.8
Corning's share of net income (loss) before cumulative effect of changes
in accounting methods:
1994 $ 5.4 $ 38.1 $ 2.9 $ 2.3 $ 48.7
1993 (139.2) 35.4 (0.5) (15.7) (120.0)
1992 20.3 37.4 (8.5) (5.4) 43.8
(1) The 1994 restructuring and other special charges totaling $82.3
million were included in income before taxes of Laboratory Services.
(2) The 1993 restructuring and other special charges totaling $207
million were included in income before taxes of Specialty Materials
($26.5 million), Communications ($10.7 million), Laboratory Services
($95 million), Consumer Products ($46.5 million), and Other, including
Corporate R&D ($28.3 million).
(3) The 1992 restructuring charge of $63.3 million was included in
income before taxes of Consumer Products.
33
4. INVESTMENTS
Of the total investments accounted for by the equity method, Dow Corning
Corporation, a 50%-owned manufacturer of silicones, with operations
substantially in the United States and Europe, represented $341.8 million
and $326 million at year end 1994 and 1993, respectively. Samsung-Corning
Company Ltd., a 50%-owned South Korean-based manufacturer of glass panels
and funnels for cathode-ray tubes, represented $135.4 million and $123.4
million at year end 1994 and 1993, respectively.
The financial position and results of operations of Dow Corning, Samsung-
Corning and Corning's total equity companies are summarized as follows:
1994 1993 1992
Dow Samsung- Total Dow Samsung- Total Dow Samsung- Total
Corning Corning Equity Corning Corning Equity Corning Corning Equity
Corp. Co. Ltd. Companies Corp. Co. Ltd. Companies Corp. Co. Ltd. Companies
Net Sales $2,204.6 $ 601.6 $3,508.7 $2,043.7 $ 523.2 $3,305.8 $1,955.7 $ 509.9 $3,418.2
Gross Profit 734.3 147.0 1,123.0 639.8 158.7 1,009.4 612.5 145.0 1,257.5
Income (loss)
before cumulative
effect of changes
in accounting (6.8) 46.5 102.7 (287.0) 51.3 (219.5) 28.4 41.8 121.8
Net income (loss) (6.8) 46.5 102.7 (287.0) 40.5 (229.2) (72.0) 41.8 (0.4)
Corning's equity
in income (loss)
before cumulative
effect of changes
in accounting (1) (3.4) $ 22.1 $ 48.7 $ (144.5) $ 24.3 $ (120.0) $ 11.9 $ 19.1 $ 43.8
Current assets $1,635.8 $258.9 $2,196.1 $1,069.2 $167.0 $1,498.6 $ 827.7 $ 183.6 $1,456.0
Non-current
assets 2,457.4 589.2 3,387.8 2,193.1 536.2 3,028.7 1,363.0 532.1 2,460.1
Current
liabilities $1,325.0 $204.1 $1,723.1 $ 770.6 $182.3 $1,099.4 $ 568.9 $ 268.7 $1,106.0
Non-current
liabilities 1,974.1 374.1 2,513.3 1,740.5 274.7 2,127.5 604.5 219.9 1,076.4
(1) Equity in earnings of associated companies shown above and in the
Consolidated Statements of Income are net of amounts recorded for income
tax.
The following is presented for all equity companies and for investments
carried at cost:
1994 1993 1992
Equity in undistributed earnings of equity
companies included in retained earnings $441.7 $445.4 $573.9
Dividends received from equity companies 48.2 47.1 80.5
Quoted market value over (under) cost-basis
investments 0.5 (1.3) 1.3
34
4. INVESTMENTS
(Continued)
In March 1994, Dow Corning, along with other defendants and
representatives of breast-implant litigation plaintiffs, signed a Breast-
Implant Litigation Settlement Agreement (the Settlement Agreement). Under
the Settlement Agreement and related agreements, industry participants
would contribute $4.2 billion over a period of more than 30 years to
establish several special purpose funds. In September 1994, Dow Corning's
Board of Directors approved Dow Corning's continued participation in the
global settlement. Also in September, the U.S. District Court granted
final approval to the settlement, assessing it as fair, reasonable, and
adequate (a ruling which has subsequently been appealed by various
parties) and afforded plaintiffs who originally opted out of the
settlement the opportunity to rejoin the settlement in specified periods
which end March 1, 1995. Corning is not a party to the Settlement
Agreement and will not make any contributions to the settlement
contemplated thereby.
Dow Corning recorded an accounting charge of $415 million after tax in the
fourth quarter of 1993. As disclosed in Dow Corning's financial
statements, this charge included the net present value of Dow Corning's
best estimate of its potential liability for breast-implant litigation
based on current settlement negotiations, and also included provisions for
legal, administrative, and research costs related to breast implants, for
a total of $1.24 billion, less expected insurance recoveries of $600
million and taxes of $225 million.
Dow Corning also recorded an accounting charge of $151.8 million after tax
in the fourth quarter of 1994. As disclosed in Dow Corning's financial
statements, this charge included Dow Corning's best estimate of additional
costs to resolve breast-implant litigation and claims outside of the
Settlement Agreement, and also included provisions for legal,
administrative and research costs related to breast implants for a total
of $647 million, less expected insurance recoveries of $406 million and
taxes of $89.2 million.
Future developments, including among other things, the ultimate number and
extent of claims not covered by the Settlement Agreement, the ultimate
cost of resolving those claims, the amount and timing of insurance
recoveries and the allocation of insurance payments among Dow Corning's
insurance carriers, may require Dow Corning to adjust these estimates.
Corning does not believe that its share of any additional accounting
charge taken by Dow Corning resulting from the breast-implant litigation
will have a material adverse impact upon Corning's overall financial
condition. However, it is possible that Corning's share of any such
charge taken by Dow Corning will have a material adverse effect upon
Corning's earnings in the quarter in which any such charge is recognized
by Dow Corning. The amount of any such charge would be written off
against Corning's investment in Dow Corning which totaled $341.8 million
at January 1, 1995.
5. EMPLOYEE RETIREMENT PLANS
PENSION BENEFITS
Corning has defined-benefit pension plans covering approximately half of
its domestic employees and certain employees in foreign countries.
Corning's funding policy has been to contribute annually an amount
determined jointly by the company and its consulting actuaries which
provides for the current cost and amortization of prior service cost over
a 30-year period.
The funded status of Corning's pension plans as of year end is as follows:
1994 1993
Vested benefits $877.6 $922.3
Non-vested benefits 73.5 77.6
--------- ---------
Accumulated benefit obligation $951.1 $999.9
--------- ---------
Current fair market value of plan assets $1,061.6 $1,093.5
Present value of projected benefit obligation 1,018.9 1,084.5
Plan assets in excess of projected benefit --------- ---------
obligation 42.7 9.0
Unrecognized prior service cost 128.3 142.1
Unrecognized transition gain (10.9) (7.5)
Unrecognized net (gains) losses from changes
in actuarial assumptions (55.3) 79.4
Other unrecognized net experience gains (25.4) (133.9)
--------- ---------
Recorded pension asset $ 79.4 $ 89.1
========= =========
35
5. EMPLOYEE RETIREMENT PLANS
(Continued)
The projected benefit obligations for under-funded plans included in the
table totaled $65.5 million in 1994 and $49.3 million in 1993 of which
$13.5 million and $14.8 million was recorded as a liability in 1994 and
1993, respectively.
Plan assets are comprised principally of publicly traded debt and equity
securities. Corning common stock represented 6.9% and 6.3% of plan assets
at year end 1994 and 1993, respectively.
The unrecognized prior service cost, unrecognized transition gain, net
gains and losses from changes in actuarial assumptions, and net experience
gains are deferred and amortized to pension expense, if they exceed
certain limits, over the remaining service life of plan participants.
For Corning's principal defined-benefit plan, the assumed discount rate
and rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation were 8.75% and
5%, respectively, for 1994 and 7.5% and 4.5%, respectively, for 1993. The
expected long-term rate of return on plan assets was 9% for 1994 and 1993.
Assumptions of the company's other plans are not significantly different.
The components of pension expense for the company's defined-benefit
pension plans are as follows:
1994 1993 1992
Present value of benefits earned during the year $25.1 $19.8 $18.6
Interest cost on projected benefit obligation 81.5 75.4 70.6
Actual return on plan assets (8.6) (90.7) (48.3)
Net amortization and deferral (80.4) 12.1 (33.7)
------ ------ ------
Net pension expense for the year $17.6 $16.6 $ 7.2
====== ====== ======
Measurement of pension expense is based on assumptions used to value the
pension liability at the beginning of the year. Total consolidated
pension expense, including defined-contribution pension plans, was $59.5
million in 1994, $52.5 million in 1993 and $37 million in 1992.
POSTRETIREMENT AND POSTEMPLOYMENT HEALTH-CARE AND LIFE-INSURANCE BENEFITS
Corning and certain of its domestic subsidiaries have defined-benefit
postretirement plans that provide health-care and life-insurance benefits
for retirees and eligible dependents. Approximately half of the company's
employees may become eligible for such benefits upon reaching retirement
age. As a result of cost-sharing changes made in 1993, the company's
retiree medical plans require increased retiree contributions each year
equal to the excess of medical cost increases over general inflation
rates.
Effective December 30, 1991, the company and its subsidiaries adopted
Financial Accounting Standard No. 106 "Employers' Accounting for
Postretirement Benefits Other than Pensions" (FAS 106). This statement
requires employers to recognize the cost of providing these benefits over
the employees' service period. The company's previous practice was to
accrue the actuarially determined cost of retirees' future health-care
benefits at the time of retirement. The adoption of FAS 106 on the
immediate recognition basis, as of December 30, 1991, resulted in a one-
time after-tax charge of $294.8 million ($225.5 million for consolidated
operations and $69.3 million for equity companies), or $1.56 per common
share, in 1992. The charge to consolidated operations in 1992 included an
accumulated postretirement benefit obligation of approximately $486.3
million, reduced by $149.2 million of accruals recorded at year end 1991
under the company's previous accounting practice, and net of a $101.6
million deferred tax benefit and $10 million of minority interest.
Effective January 4, 1993, Corning adopted Financial Accounting Standard
No. 112, "Employers' Accounting for Postemployment Benefits" (FAS 112).
The impact of adopting FAS 112 was not material in 1993.
36
5. EMPLOYEE RETIREMENT PLANS
(Continued)
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
discount rate used in determining the accumulated postretirement benefit
obligation was 8.75% in 1994 and 7.5% in 1993. The health-care cost trend
rate for Corning's principal plan is assumed to be 9.7% in 1995 for
covered individuals under age 65 decreasing gradually to 6% in 2010 and
thereafter. For covered individuals over 65, the rate is assumed to be
8.8% in 1995 decreasing gradually to 6% in 2010 and thereafter.
Assumptions for Corning's other plans are not significantly different.
The effect of a 1% annual increase in the assumed health-care cost trend
rates would increase the accumulated postretirement benefit obligation and
the net periodic postretirement benefit cost by $46.3 million and $5.4
million, respectively.
Gains and losses from plan amendments or changes in actuarial assumptions
are deferred and amortized to postretirement benefit expense, if they
exceed certain limits, over the expected remaining service life of plan
participants.
Corning's accrued postretirement liability at January 1, 1995, and January
2, 1994, was comprised of the following:
1994 1993
Accumulated postretirement benefit obligation:
Retirees $321.2 $317.6
Fully eligible active plan participants 63.0 80.1
Other active plan participants 125.6 147.8
------- -------
509.8 545.5
------- -------
Unrecognized gain from plan amendments 18.8 21.4
Other unrecognized net experience gains (losses) 39.1 (21.8)
------- -------
Total postretirement liability 567.7 545.1
Less current portion 23.7 23.7
------- -------
Accrued postretirement liability $544.0 $521.4
======= =======
Corning has not funded these obligations.
The components of net periodic postretirement benefit expense are as
follows:
1994 1993 1992
Present value of benefits earned during
the year $ 11.3 $ 7.4 $ 11.4
Interest cost on the accumulated
postretirement benefit obligation 39.1 37.9 41.8
Net amortization (2.3) (3.6)
------- ------ -------
Postretirement benefit expense $ 48.1 $ 41.7 $ 53.2
======= ====== =======
Measurement of postretirement benefit expense is based on assumptions used
to value the postretirement liability at the beginning of the year.
37
6. TAXES ON INCOME
1994 1993 1992
Income (loss) before taxes on income:
U.S. companies $423.4 $169.8 $318.2
Non-U.S. companies 36.1 (13.1) 18.4
------- ------- -------
Income before taxes on income $459.5 $156.7 $336.6
------- ------- -------
Taxes on income $170.1 $ 35.3 $ 92.5
Effective tax rate reconciliation:
Statutory U.S. tax rate 35.0% 35.0% 34.0%
State taxes, net of federal benefit 2.5 2.1 2.0
Rate differential on net non-operating gains
and restructuring provisions 0.5 (0.8) (5.5)
Non-deductible goodwill 2.1 1.9 0.1
Foreign and other tax credits (1.8) (7.5) (2.6)
Lower taxes on subsidiary earnings (1.8) (5.6) (1.4)
Adjustment of net deferred tax assets to
reflect tax rate changes (3.5)
Other 0.5 0.9 0.9
------- ------- -------
Effective tax rate 37.0% 22.5% 27.5%
======= ======= =======
Components of net tax expense:
Taxes on income $170.1 $ 35.3 $ 92.5
Taxes on equity in earnings 10.2 6.1 12.1
Tax benefits included in common stockholders'
equity (7.2) (8.1)
Tax benefit of loss carryforwards (7.7)
Tax benefit on accounting changes (101.6)
------- ------- -------
Net tax expense (benefit) $173.1 $ 33.3 $ (4.7)
======= ======= =======
Current and deferred tax expense (benefit):
Current:
U.S. $107.2 $ 90.9 $ 92.0
State and municipal 23.5 13.7 14.1
Foreign 21.8 17.2 24.5
Deferred:
U.S. 26.2 (74.8) (113.5)
State and municipal (2.5) (6.2) (23.2)
Foreign (3.1) (1.7) 1.4
Adjustment of net deferred tax assets to
reflect tax rate changes (5.8)
------- ------- -------
Net tax expense (benefit) $173.1 $ 33.3 $ (4.7)
======= ======= =======
Effective January 4, 1993, Corning and its subsidiaries prospectively
adopted FAS 109 which requires an asset and liability approach to
accounting for income taxes. The impact of adopting FAS 109 was not
material in 1993 and prior-year statements have not been restated. In
1992, Corning recognized a gain of $8.2 million ($0.04 per common share)
to reflect its equity in the cumulative effect of the adoption of FAS 109
by an equity company.
38
6. TAXES ON INCOME
(Continued)
Under FAS 109, 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 tax effects of temporary differences and
carryforwards that gave rise to significant portions of the deferred tax
assets and liabilities at January 1, 1995, and January 2, 1994, are
presented below:
1994 1993
Other postretirement benefits $229.5 $220.7
Restructuring reserves 51.7 103.6
Other employee benefits 52.2 45.4
Loss and tax credit carryforwards 56.9 39.0
Accounts receivable reserves 21.9 23.3
Other 57.7 47.8
------- -------
Gross deferred tax assets 469.9 479.8
Deferred tax assets valuation allowance (45.7) (21.8)
------- -------
Deferred tax assets 424.2 458.0
------- -------
Fixed assets (130.1) (142.3)
Pensions (37.4) (40.1)
Other (12.3) (9.1)
------- -------
Deferred tax liabilities (179.8) (191.5)
------- -------
Net deferred tax assets $244.4 $266.5
======= =======
The net change in the total valuation allowance for the years ended
January 1, 1995, and January 2, 1994, was an increase of $23.9 million and
$4.7 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
$301.9 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.
The company has, 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. The company 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 the company. The company expects these earnings to be
reinvested indefinitely.
Total payments for taxes on income were $136.7 million, $143.6 million,
and $138.2 million during 1994, 1993, and 1992, respectively. Deferred
income tax benefits totaling $133.2 million and $129.4 million were
included in other current assets at year end 1994 and 1993, respectively.
At January 1, 1995, Corning had tax benefits attributable to loss
carryforwards and credits aggregating $56.9 million that expire at various
dates through 2008.
39
6. TAXES ON INCOME
(Continued)
Prior to 1993, taxes on income were provided using the deferred method
pursuant to APB No. 11 which required a deferred income tax provision for
timing differences in the recognition of revenues and expenses for tax and
financial reporting purposes. Under APB No. 11, deferred income taxes for
the year ended January 3, 1993, were provided as follows:
1992
Pensions $ 9.6
Other postretirement benefits (106.9)
Other employee benefits 9.7
Investments (17.7)
Depreciation (16.2)
Other (13.8)
--------
Deferred tax benefit $(135.3)
========
7. SUPPLEMENTAL INCOME STATEMENT DATA
1994 1993 1992
Depreciation expense $275.5 $241.3 $222.6
Amortization of goodwill and other
intangible assets 62.9 39.1 25.6
------- ------- -------
Interest expense incurred $122.3 $102.4 $ 76.5
Interest capitalized (11.9) (14.2) (13.9)
------- ------- -------
Interest expense, net $110.4 $ 88.2 $ 62.6
------- ------- -------
Interest paid $105.4 $ 88.7 $ 67.9
------- ------- -------
OTHER REVENUES AND DEDUCTIONS
Non-operating gains and losses: In 1994, Corning completed several
divestitures (described in Note 2) that resulted in gains which, net of
losses from the exit of several product lines, were not material. In the
first quarter 1993, Corning recognized a non-operating gain of $4.2 million
($2.6 million after tax).
In the first quarter 1992, Corning recognized net non-operating gains from
consolidated operations totaling $7 million ($21.7 million after tax),
including a gain of $10.1 million (before and after tax) from the sale of
an additional equity interest in Corning Japan K.K. and a pre-tax loss of
$7.3 million ($9 million after-tax gain) from the formation of the
consumer housewares venture with Vitro.
These gains and losses have been included in Other, net on the
Consolidated Statements of Income.
Provisions for restructuring and other special charges: In the third
quarter 1994, Corning recorded a charge of $82.3 million ($55.4 million
after tax) which included $50.7 million of integration costs, $21.6 million
of investment banking, legal, and accounting fees and other transaction
expenses, and $10 million of other reserves primarily related to the
Nichols, Maryland Medical and Bioran acquisitions.
40
7. SUPPLEMENTAL INCOME STATEMENT DATA
(Continued)
The costs to integrate the Nichols, Maryland Medical and Bioran operations
included the costs of shutting down clinical laboratories in certain
markets where duplicate Corning and Nichols, Maryland Medical or Bioran
facilities existed at the time of the acquisitions. Management believes
that the integration of the Nichols, Maryland Medical and Bioran facilities
should significantly reduce operating costs of the combined companies and
will be substantially complete within a year. The integration charge
included severance related to approximately 2,000 employees of which 350
had been terminated or notified of their termination at January 1, 1995. A
summary of the integration reserves established in 1994 is as follows:
Charges
through Balance at
Original January 1, January 1,
Reserve 1995 1995
Employee termination costs $23.8 $1.2 $22.6
Write-off of fixed assets 15.9 0.5 15.4
Costs of exiting leased facilities 4.9 0.1 4.8
Contractual obligations 5.1 5.1
Other 1.0 1.0
------ ----- ------
Total $50.7 $1.8 $48.9
====== ===== ======
Current $47.1
Non-current 1.8
------
Total $48.9
======
In the third quarter 1993, Corning recorded a charge of $207 million
($120.5 million after tax of $79.1 million and minority interest of $7.4
million) which included $156 million of restructuring charges and $51
million of other special charges. The restructuring charges included
costs to integrate the Damon acquisition and costs of a planned company-
wide restructuring program to reduce assets and overhead costs during
1994. The other special charges primarily included a charge of $36.5
million to reflect the settlement and related legal expenses associated
with its compromise agreement with the Civil Division of the Department of
Justice to settle claims brought on behalf of the Inspector General, U.S.
Department of Health and Human Services, and $8 million of investment
banking, legal and accounting fees and other transaction expenses related
to the Costar acquisition.
The costs to integrate the Damon acquisition totaled $40.6 million and
included the costs of shutting down Corning clinical-laboratory testing
facilities in certain markets where duplicate Corning and Damon facilities
existed at the time of the transaction. The costs incurred in the company-
wide restructuring program totaled $115.4 million and included, among
other items, severance and other employee termination benefits related to
a company-wide program to reduce employment levels (and thus operating
costs), facility closure and relocation costs, asset write-offs and costs
associated with contractual obligations to consolidate the North American
packaging and worldwide Pyroceram manufacturing operations in the Consumer
Products segment.
The 1993 restructuring and integration charges included severance and
other termination benefits related to approximately 1,600 employees.
Employee reductions primarily included employees at various clinical-
laboratory testing locations, salaried employees at Corning Consumer
Products Company and salaried employees in various line, research and
staff organizations throughout the company where business conditions
require reduced staff levels. At the end of 1994, approximately 1,325
employees across the company had been terminated or notified of their
termination. The remaining terminations are expected to occur in the
first half of 1995. A summary of the integration and restructuring
reserves established in 1993 is as follows:
41
7. SUPPLEMENTAL INCOME STATEMENT DATA
(Continued)
Charges
through Balance at
Original January 1, January 1,
Reserve 1995 1995
Employee termination costs $ 74.2 $ 44.3 $29.9
Write-off of fixed assets 29.3 22.8 6.5
Costs of exiting leased facilities 15.1 9.5 5.6
Contractual obligations 11.0 5.4 5.6
Consulting fees 11.8 11.1 0.7
Continuing employee costs 6.7 4.5 2.2
Other 7.9 7.9
------- ------- ------
Total $156.0 $105.5 $50.5
======= ======= ======
Current $41.2
Non-current 9.3
------
Total $50.5
======
The consulting fees are associated with the company-wide in-depth study
aimed at re-engineering the organization and operating practices of the
company. The company's re-engineering studies are expected to be complete
in the first half of 1995. It is possible that these studies will result
in additional employee terminations, asset write-offs and other cost-
reduction activities in 1995. It is currently not possible to estimate
the costs or benefits of these terminations, write-offs or other
activities.
In the fourth quarter 1992, Corning recorded a provision of $63.3 million
($32.1 million after tax of $22.9 million and minority interest of $8.3
million) as a result of Corning Vitro's decision to restructure its
Brazilian operations.
Equity earnings: In the fourth quarter 1994, Corning recognized a $75.9
million reduction in equity earnings as a result of an accounting charge
taken by Dow Corning related to breast-implant litigation.
In the third quarter 1993, Corning recognized a reduction in equity
earnings of $9.5 million as a result of a restructuring charge taken by
Vitro Corning. In the fourth quarter 1993, Corning recognized a $203.1
million reduction in equity earnings as a result of an accounting charge
taken by Dow Corning related to breast-implant litigation.
In 1992, Corning recognized a $37.7 million reduction in equity earnings
which included $16.3 million and $8.2 million in the second and fourth
quarters, respectively, of accounting charges associated with Dow
Corning's terminated breast-implant business and $13.2 million of
restructuring charges associated with Dow Corning's exit from its
Brazilian operations and other cost-reduction programs in the fourth
quarter.
42
8. SUPPLEMENTAL BALANCE SHEET DATA
Inventories 1994 1993
Finished goods $210.1 $ 216.1
Work in process 115.7 93.6
Raw materials and accessories 66.1 68.0
Supplies and packing materials 83.7 75.6
------- --------
Total inventories valued at current cost 475.6 453.3
Reduction to LIFO valuation (58.9) (99.4)
------- --------
$416.7 $ 353.9
======= ========
Plant and Equipment 1994 1993
Land $ 60.7 $ 51.6
Buildings 892.7 742.5
Equipment 2,664.9 2,567.7
--------- ---------
3,618.3 3,361.8
Accumulated depreciation (1,727.7) (1,602.0)
--------- ---------
$1,890.6 $1,759.8
========= =========
Other Accrued Liabilities 1994 1993
Taxes on income $ 40.0 $ 17.8
Restructuring reserves 102.4 155.0
Wages and employee benefits 295.3 231.5
Other liabilities 310.6 229.2
------- --------
$748.3 $ 633.5
======= ========
Restructuring reserves include reserves related to acquisitions and
divestitures.
43
9. LOANS PAYABLE
1994 1993
Loans Payable:
Current maturities of loans payable
beyond one year $ 43.6 $ 36.2
Other short-term borrowings, principally
commercial
paper at current interest rates 24.0 105.5
-------- -------
$ 67.6 $141.7
======== =======
Loans Payable Beyond One Year:
Acquisition credit lines $400.0
Notes, 8.375%, due 1996 $ 75.0 75.0
Sinking fund debentures, 7.75%, due 1998 17.3 21.5
Notes, 7.78%, due 1998 22.0 27.2
Notes, 8.75%, due 1999 99.9 99.9
Series A senior notes, 7.84%, due 1999 60.0 60.0
Series B senior notes, 8.25%, due 2002 50.0 50.0
Debentures, 8.25%, due 2002 75.0 75.0
Debentures, 6%, due 2003 99.4 99.3
Convertible subordinated debentures, 6.5%,
due 2006 7.1 8.9
Debentures, 7%, due 2007, net of unamortized
discount of $44.3 million 55.7 54.5
Industrial revenue bonds, average rate 6.9%,
due through 2008 39.3 40.9
Debentures, 6.75%, due 2013 99.5 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
Medium-term notes, average rate 7.3%, due
through 2023 145.0 145.0
Other notes payable, average rate 6.4%, due
through 2031 354.9 215.7
--------- ---------
1,449.2 1,621.8
Less current maturities 43.6 36.2
--------- ---------
$1,405.6 $1,585.6
========= =========
At January 1, 1995, and January 2, 1994, the weighted average interest on
short-term borrowings was 6% and 4.9%, respectively.
The 6.5% convertible subordinated debentures are convertible into Corning
common stock at any time at a conversion rate of 79.4616 shares of common
stock for each $1,000 principal amount of debentures, subject to
adjustment for certain events. The debentures are redeemable through a
sinking fund, requiring mandatory annual payments of $2.25 million
commencing in 1996.
At January 1, 1995, loans payable beyond one year become payable:
1996 1997 1998 1999 2000-2031
$158.6 $75.8 $76.4 $168.2 $926.6
Based on borrowing rates currently available to the company for loans with
similar terms and maturities, the fair value of loans payable beyond one
year was $1.4 billion at year end 1994.
In 1994, Corning repaid the $400 million of debt outstanding under its
acquisition credit lines at January 2, 1994, primarily with the proceeds
from the Convertible Monthly Income Preferred Securities offering.
44
9. LOANS PAYABLE
(Continued)
Unused bank revolving-credit agreements in effect at January 1, 1995,
provide for Corning to borrow up to $1.2 billion. 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 $500 million
of medium- and long-term debt through public offerings under existing
shelf-registration statements filed with the Securities and Exchange
Commission.
10. 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), guaranteed by Corning and convertible into
Corning common stock at the rate of 1.2821 shares of Corning common stock
for each preferred security (equivalent to a conversion price of $39 per
share). Dividends on the preferred securities are payable by Corning
Delaware at the annual rate of 6% of the liquidation preference of $50 per
preferred security. The proceeds, which totaled $364.4 million (net of
$9.4 million of underwriting commissions and expense) were used to retire
the remaining debt incurred in the 1993 acquisition of Damon.
After August 5, 1998, the preferred securities will be redeemable, at the
option of Corning Delaware, for $51.80 per preferred security reduced
annually by $0.30 to a minimum of $50 per preferred security. The
preferred securities are subject to mandatory redemption on July 21, 2024,
at a redemption price of $50 per preferred security.
Corning may cause Corning Delaware to delay the payment of dividends for
up to 60 months. During such period, dividends on the MIPS will compound
monthly and Corning may not declare or pay dividends on its common stock.
If Corning Delaware fails to pay dividends on the MIPS for 15 consecutive
months or upon the occurrence of certain other events, the preferred
securities may convert, at the option of the holders, to Corning Series C
convertible preferred stock, par value $100 per share. The Series C
convertible preferred sock will have dividend, conversion, optional
redemption, and other terms substantially similar to the terms of the
MIPS, except that, among other things, the holders of Series C preferred
stock will have the right to elect two additional directors of Corning
whenever dividends are in arrears for 18 months and the Series C preferred
stock will not be subject to mandatory redemption.
11. CONVERTIBLE PREFERRED STOCK
Corning has 10 million authorized shares of Series Preferred Stock, par
value $100 per share. Of the authorized shares, 600,000 shares have been
designated Series A Junior Participating Preferred Stock of which no
shares have been issued.
At year end 1994, 1993 and 1992, 249,000; 257,000 and 269,000 shares of
Series B Convertible Preferred Stock were outstanding, respectively. Each
Series B share is convertible into four shares of Corning common stock and
has voting rights equivalent to four common shares. Cumulative cash
dividends are paid at the rate of 8% per annum. 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 $108
per share reduced annually on October 1, commencing in 1990, by $1 per
share to a minimum of $100 per share.
45
12. COMMON STOCKHOLDERS' EQUITY
1994 1993 1992
Common stock at par value:
Balance at beginning of year $114.0 $ 110.0 $216.3
Shares issued 13.9 4.0 1.9
Adjustment for decrease in par value (108.2)
------- -------- -------
Balance at end of year 127.9 114.0 110.0
------- -------- -------
Capital in excess of par value:
Balance at beginning of year $ 673.5 $ 656.5 $506.8
Shares issued 369.4 17.0 41.5
Adjustment for decrease in par value 108.2
--------- -------- -------
Balance at end of year 1,042.9 673.5 656.5
--------- -------- -------
Unearned compensation:
Balance at beginning of year $(160.7) $(198.6) $(234.3)
Corning Stock Ownership Trust 4.6 44.2 20.4
Other, net 16.7 (6.3) 15.3
-------- -------- --------
Balance at end of year (139.4) (160.7) (198.6)
-------- -------- --------
Retained earnings:
Balance at beginning of year $1,581.9 $1,704.1 $1,845.7
Net income (loss) 281.3 (15.2) (12.6)
Dividends declared ($0.69 per share
in 1994, $0.68 per share in 1993,
and $0.62 per share in 1992) (152.2) (136.2) (122.4)
Other, net 3.5 29.2 (6.6)
--------- --------- ---------
Balance at end of year 1,714.5 1,581.9 1,704.1
--------- --------- ---------
Treasury stock:
Balance at beginning of year $(516.5) $(473.6) $(361.5)
Repurchases of shares, net (7.2) (42.9) (112.1)
-------- -------- --------
Balance at end of year (523.7) (516.5) (473.6)
-------- -------- --------
Cumulative translation adjustment:
Balance at beginning of year $ (6.4) $ 5.4 $ 45.8
Translation adjustment 47.2 (11.8) (40.4)
------- -------- -------
Balance at end of year 40.8 (6.4) 5.4
------- -------- -------
Common stockholders' equity $2,263.0 $1,685.8 $1,803.8
========= ========= =========
46
12. COMMON STOCKHOLDERS' EQUITY
(Continued)
In 1994, Corning issued 8 million shares of common stock in a single-block
transaction. The net proceeds from this offering totaled $233 million and
were used to finance the acquisition of the shares of capital stock of
Corning Vitro Corporation held by Vitro and the acquisition of Northern
Telecom Limited's optical-fiber and optical-cable businesses. Corning
issued 18 million, 6.3 million and 2.1 million shares of common stock for
pooling-of-interests business combinations in 1994, 1993, and 1992,
respectively.
In 1992, the stockholders approved an amendment to the Restated
Certificate of Incorporation to increase the number of authorized shares
of common stock from 300 million to 500 million and to decrease the par
value of common stock from $1 to $0.50 per share. An amount equal to
$0.50 per share was transferred from the common stock account to capital
in excess of par value to reflect the reduced par value.
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. Corning sold 4
million treasury shares to the CSOT. At January 1, 1995, 2.8 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.
Each share of Corning common stock trades with a preferred share purchase
right 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% discount in the event a person or group
acquires 20% or more of Corning's outstanding common stock. The preferred
share purchase rights expire July 15, 1996.
13. STOCK COMPENSATION PLANS
Stock compensation plans include the 1994 Employee Equity Participation
Program, which covers 9 million shares and the 1991 Divisional Incentive
Stock Plan, which covers 400,000 shares. These and predecessor plans
provide the authorization for Corning's three common stock plans discussed
below. No future awards or grants may be made under the predecessor plans
except for currently outstanding rights. At January 1, 1995, 6.4 million
shares were available for sale or grant under these plans.
Proceeds from the sale of stock under these plans are added to capital
stock accounts. Compensation expense is recorded for awards of shares or
share rights over the period earned. These plans resulted in expense of
$16.5 million in 1994, $3.1 million in 1993, and $23.4 million in 1992.
These plans do not include stock options granted in substitution for stock
options assumed in connection with Corning's acquisition of certain
companies. Accordingly, these grants do not reduce shares available under
the stock compensation plans.
STOCK OPTION PLAN
Non-qualified and incentive stock options to purchase unissued shares at
the market price on the grant date generally become exercisable in
installments from one to two years from the grant date; non-qualified and
incentive stock options are generally exercisable for 10 years from the
grant date.
In connection with the Nichols acquisition in 1994, the Costar acquisition
in 1993, and the Biosym acquisition in 1992, Corning issued options to
purchase 1.1 million shares, 322,000 shares and 685,000 shares,
respectively, of Corning common stock in substitution for stock options
assumed.
47
13. STOCK COMPENSATION PLANS
(Continued)
Transactions for the three years ended January 1, 1995, were:
Weighted
Number Average
of Shares Exercise
in Thousands Price
Options outstanding
December 29, 1991 6,145 $19.75
Options granted under Plan 621 $38.50
Options granted in Biosym
transaction 685 $ 6.47
Options exercised (1,049) $12.52
Options terminated (48) $16.43
------- -------
Options outstanding January 3, 1993 6,354 $21.36
Options granted under Plan 1,244 $29.72
Options granted in Costar
transaction 322 $ 9.11
Options exercised (656) $12.21
Options terminated (42) $14.43
------- -------
Options outstanding January 2, 1994 7,222 $23.13
Options granted under Plan 2,511 $31.03
Options granted in Nichols
transaction 1,050 $14.33
Options exercised (824) $12.34
Options terminated (126) $26.23
------- -------
Options outstanding January 1, 1995 9,833 $25.07
======= =======
Options covering 5.2 million shares were exercisable at January 1, 1995.
EQUITY PURCHASE PLAN
Under the Equity Purchase Plan, shares were sold to certain employees at
book value and must be repurchased by the company at book value or
converted to equivalent unrestricted shares. At January 1, 1995, a total
of 1.7 million shares were outstanding under this plan. No shares will be
sold under this plan in the future.
INCENTIVE STOCK PLANS
The Incentive Stock Plan and the Divisional Incentive Stock Plan permit
stock grants, either determined by specific performance goals or issued
directly, in most instances subject to the possibility of forfeiture and
without cash consideration. The Divisional Incentive Stock Plan is not
available to officers of the company.
In 1994 and 1993, grants of 576,000 and 681,000 shares, respectively, were
made under these plans. At January 1, 1995, there were outstanding
incentive rights covering 43,000 shares which may be issued in future
years depending on the achievement of specific measurable performance
goals. A total of 4.3 million shares issued in prior years remain subject
to forfeiture at January 1, 1995.
14. 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. Corning's receivable
from the ESOP was $22 million and $27.3 million at the end of 1994 and
1993, respectively, and is classified as unearned compensation in common
stockholders' equity.
48
14. EMPLOYEE STOCK OWNERSHIP PLAN
(Continued)
Corning is obligated to make monthly contributions to the plan sufficient
to enable the ESOP to pay its loan, including interest. These
contributions are classified as expense at the time they are made.
Contributions to the ESOP were $6.2 million in 1994, $5.9 million in 1993,
and $5 million in 1992. Dividends on unallocated shares reduced
contribution requirements by $1 million in 1994, $1.3 million in 1993, and
$2.2 million in 1992. Shares held by the ESOP are included in weighted
average shares for earnings per share calculations.
15. COMMITMENTS AND GUARANTEES
Minimum rental commitments under leases outstanding at January 1, 1995,
are:
1995 1996 1997 1998 1999 2000-2015
$81.1 $65.3 $48.8 $36.4 $27.0 $91.7
Rental expense was $108.6 million in 1994, $90.2 million in 1993 and $82.9
million in 1992.
The ability of certain subsidiaries and associated companies to transfer
funds is limited by provisions of certain loan agreements and foreign
government regulations. At January 1, 1995, the amount of equity subject
to such restrictions for consolidated subsidiaries totaled $73.5 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 January 1,
1995, loans of equity affiliates guaranteed by Corning totaled $29.1
million.
At January 1, 1995, Corning had forward foreign currency contracts
designated as hedges to purchase $55.4 million U.S. dollars. These
contracts are held by Corning and its subsidiaries and will mature at
various dates in 1995. Corning management does not believe that its
foreign exchange exposure or its hedging program are material to Corning's
financial position or results of operations.
49
16. INTERNATIONAL ACTIVITIES
Information by geographic area is presented below on a source basis, with
exports shown in their area of origin, and research and development
expenses shown in the area where the activity was performed. Other
revenues, interest expense and miscellaneous income and expense are
included with other unallocated amounts to allow a reconciliation to
amounts reported in the Consolidated Statements of Income. Transfers
between areas are accounted for at prices approximating prices to
unaffiliated customers.
Eliminations
Latin America, and
United Asia-Pacific Unallocated
1994 States Europe and Canada Amounts Consolidated
Revenues $4,429.4(1) $215.8 $125.3 $ 28.7 $ 4,799.2
Transfers
between
areas 93.5 20.9 0.8 (115.2)
Total -------- ------ ------ ------- ---------
revenues $4,522.9 $236.7 $126.1 $ (86.5) $ 4,799.2
Income before
tax 500.9(2) 47.2 30.6 (119.2) 459.5
Identifiable
assets at
year end 4,960.8 339.2 319.1 403.6 6,022.7
R&D
expenditures 162.9 10.3 3.7 176.9
1993
Revenues $3,659.9(1) $242.8 $102.1 $ 29.9 $ 4,034.7
Transfers
between
areas 53.8 9.9 (63.7)
-------- ------ ------ ------- ---------
Total
revenues $3,713.7 $252.7 $102.1 $(33.8) $ 4,034.7
Income before
tax (3) 224.0 6.2 23.6 (97.1) 156.7
Identifiable
assets at
year end 4,319.8 393.7 298.9 219.3 5,231.7
R&D
expenditures 157.1 10.9 5.1 173.1
1992
Revenues $3,333.4(1) $289.7 $ 85.6 $ 35.3 $ 3,744.0
Transfers
between
areas 49.7 14.4 (64.1)
-------- ------ ------ ------ ---------
Total
revenues $3,383.1 $304.1 $ 85.6 $(28.8) $ 3,744.0
Income (loss)
before tax 440.9 36.2 (48.0)(4) (92.5) 336.6
Identifiable
assets at
year end 2,894.0 523.1 262.0 607.2 4,286.3
R&D
expenditures 135.2 12.0 3.9 151.1
(1) 1994, 1993, and 1992 U.S. sales to unaffiliated customers include
$518.2 million, $424.8 million, and $403.1 million of export sales;
$184 million , $162.7 million, and $188.7 million to Europe; and
$334.2 million, $262.1 million, and $214.4 million to Latin America,
Asia-Pacific and Canada.
(2) The 1994 restructuring and other special charges of $82.3 million
were included in income before tax of the United States.
(3) The 1993 restructuring and other special charges of $207 million
were included in income before tax of the United States ($193.9
million), Europe ($9.5 million) and Latin America, Asia-Pacific and
Canada ($3.6 million).
(4) The 1992 restructuring charge of $63.3 million related to Corning
Vitro Corporation's Brazilian operations is included in income before
tax of Latin America, Asia-Pacific, and Canada.
50
QUARTERLY OPERATING RESULTS AND RELATED MARKET DATA
(unaudited)
(In millions, except First Second Third Fourth Total
per-share amounts) Quarter Quarter Quarter Quarter Year
1994
Revenues $956.6 $1,109.2 $1,452.7 $1,280.7 $4,799.2
Gross Profit 326.8 409.6 524.5 448.7 1,709.6
Income before taxes 79.0 140.8 92.4(1) 147.3 459.5
Equity in earnings (loss)
of affiliates 16.5 34.0 42.4 (44.2)(1) 48.7
Net income 58.0 111.4 76.9 35.0 281.3
Per Common Share:
Net income $0.28 $ 0.54 $ 0.36 $0.14 $ 1.32
Dividend declared 0.17 0.17 0.17 0.18 0.69
Price range
High $33 1/8 $34 1/8 $ 34 3/8 $35 1/8
Low 27 5/8 30 1/4 29 28 7/8
1993
Revenues $823.4 $912.8 $1,207.4 $1,091.1 $4,034.7
Gross Profit 284.9 338.4 409.0 375.5 1,407.8
Income (loss) before
taxes 69.6(1) 100.9 (98.2)(1) 84.4 156.7
Equity in earnings
(loss) of affiliates 7.2 27.4 21.8(1) (176.4)(1)(120.0)
Net income (loss) 49.8 89.8 (33.9) (120.9) (15.2)
Per Common Share:
Net income (loss) $0.26 $ 0.47 $(0.18) $(0.64) $(0.09)
Dividend declared 0.17 0.17 0.17 0.17 0.68
Price range
High $38 3/4 $35 5/8 $34 7/8 $ 28
Low 30 5/8 32 1/8 27 3/8 24 1/2
(1) Includes impact of unusual item(s), which are described in Note 7
to the Consolidated Financial Statements.
51
FIVE YEARS IN REVIEW - HISTORICAL COMPARISON
(Dollar amounts in millions, except per-share amounts)
1994 1993 1992 1991 1990
Per Common Share Data
Income (loss) before extraordinary
credit and cumulative effect
of changes in accounting methods $ 1.32 $ (0.09) $ 1.40 $ 1.66 $ 1.53
Tax benefit of loss carryforwards .04 .03 .02
Cumulative effect of changes in
accounting methods (1) (1.52)
Net income (loss) $ 1.32 $ (0.09) $ (0.08) $ 1.69 $ 1.55
Dividends declared (2) $ 0.69 $ 0.68 $ 0.62 $ 0.68 $ 0.46
Weighted average shares
outstanding (millions) 211.8 192.0 188.6 186.5 186.9
Operations
Net sales $4,770.5 $4,004.8 $3,708.7 $3,259.2 $2,940.5
Research and development expenses 176.9 173.1 151.1 130.7 124.5
Non-operating gains 8.1 69.2
Provision for restructuring and
other special charges 82.3 207.0 63.3
Equity in earnings (losses) of
associated companies 48.7 (120.0) 43.8 111.7 107.5
Income (loss) before extraordinary
credit and cumulative effect
of changes in accounting methods 281.3 (15.2) 266.3 311.2 289.1
Tax benefit of loss carryforwards 7.7 5.6 2.9
Cumulative effect of changes
in accounting methods (1) (286.6)
Net Income (Loss) $ 281.3 $ (15.2) $ (12.6) $ 316.8 $ 292.0
Financial Position
Assets
Working capital $ 652.1 $ 451.4 $ 465.2 $ 521.0 $ 458.4
Investments 693.8 630.7 944.3 931.5 804.5
Plant and equipment, net 1,890.6 1,759.8 1,605.0 1,429.6 1,351.8
Total assets 6,022.7 5,231.7 4,286.3 3,852.6 3,512.0
Capitalization
Loans payable beyond one year $1,405.6 $1,585.6 $ 815.7 $ 700.0 $ 611.2
Other liabilities and deferred
credits 643.6 668.6 574.6 282.4 278.7
Minority interest in
subsidiary companies 247.0 245.7 241.2 115.1 101.6
Convertible preferred securities
of subsidiary 364.4
Convertible preferred stock 24.9 25.7 26.9 27.9 30.7
Common stockholders' equity 2,263.0 1,685.8 1,803.8 2,018.8 1,850.3
-------- -------- -------- -------- --------
Total capitalization $4,948.5 $4,211.4 $3,462.2 $3,144.2 $2,872.5
======== ======== ======== ======== =========
52
FIVE YEARS IN REVIEW - HISTORICAL COMPARISON
(Continued)
1994 1993 1992 1991 1990
Selected Data and Ratios
Common dividends declared $ 150.1 $ 134.1 $ 120.2 $ 128.2 $ 85.3
Preferred dividends declared $ 2.1 $ 2.1 $ 2.2 $ 2.4 $ 2.5
Additions to plant and equipment $ 386.9 $ 443.1 $ 377.4 $ 313.0 $ 261.4
Depreciation and amortization $ 338.4 $ 280.4 $ 248.2 $ 231.3 $ 211.2
Number of employees 43,000 39,200 31,100 30,700 28,600
Number of common stockholders 21,600 19,000 16,200 15,000 15,300
Return on average common
stockholders' equity 14.1% 16.3% 16.3%
Per-share amounts have been adjusted for the 2-for-1 stock split
effective January 13, 1992.
(1) During 1992, Corning recorded an after-tax charge of $294.8 million
($1.56 per common share) in the first quarter and increased 1992 net
postretirement benefit expense of $21.3 million ($0.11 per common
share) for both consolidated and equity companies as a result of the
adoption of FAS 106. In addition, Corning recognized an $8.2 million
gain ($0.04 per common share) from an equity company's adoption of
FAS 109.
(2) Includes a special dividend of $0.15 per common share in the fourth
quarter 1991.
53
INVESTOR INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held on Thursday, April 27,
1995, in Corning, N.Y. A formal notice of the meeting together with a
proxy statement will be mailed to shareholders on or about March 15, 1995.
A full report of the proceedings at the annual meeting will be available
without charge upon written request to Mr. A. John Peck Jr., secretary,
Corning Incorporated, HQ-E2-A14, Corning, N.Y. 14831.
ADDITIONAL INFORMATION
A copy of the company's 1994 Annual Report on Form 10-K filed with the
Securities and Exchange Commission is available upon written request to
Mr. A. John Peck Jr., secretary, Corning Incorporated, HQ-E2-A14, Corning,
N.Y. 14831.
HIGH PERFORMANCE WORKPLACE
The company has prepared a report on its progress in moving toward the
high performance workplace. The report generally follows the checklist
set forth at the conclusion of the "Road to High Performance Workplaces: A
Guide to Better Jobs and Better Business Results - 1994" prepared by the
Office of the American Workplace, U.S. Department of Labor, and as such
measures practices in the following areas - Skills and Information;
Participation, Organization and Partnership; and Compensation, Security
and Work Environment. Shareholders who wish to receive a copy of this
report should contact the Secretary at the above address.
INVESTOR INFORMATION
Investment analysts who need additional information may contact Mr.
Richard B. Klein, senior vice president, External Reporting and
Communications, HQ-E2-20-T24, Corning, N.Y. 14831; Telephone (607) 974-
8313.
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."
DIVIDEND REINVESTMENT
The company'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, Ill. 60690-0755
Telephone: (800) 255-0461
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
Price Waterhouse LLP
1177 Avenue of the Americas
New York, N.Y. 10036
54
Corning Incorporated and Subsidiary Companies
Schedule II - Valuation Accounts and Reserves
Balance at Net Deductions Balance at
Year Ended January 1, 1995 1-2-94 Additions and Other 1-1-95
Doubtful accounts and allowances $ 70.5 $ 62.6 $ 43.7 $ 89.4
LIFO valuation $ 99.4 $ 2.4 $ 42.9 $ 58.9
Deferred tax assets valuation
allowance $ 21.8 $ 24.9 $ 1.0 $ 45.7
Accumulated amortization of goodwill
and other intangible assets $106.8 $ 66.0 $ 2.0 $170.8
Reserves for accrued costs
of business restructuring $232.5 $ 69.0(A) $ 152.5 $149.0(B)
Balance at Net Deductions Balance at
Year Ended January 2, 1994 1-3-93 Additions and Other 1-2-94
Doubtful accounts and allowances $ 56.8 $ 48.9 $ 35.2 $ 70.5
LIFO valuation $105.9 $ 4.9 $ 11.4 $ 99.4
Deferred tax assets valuation
allowance -- $ 21.8 -- $ 21.8
Accumulated amortization of goodwill
and other intangible assets $ 94.7 $ 23.6 $ 11.5 $106.8
Reserves for accrued costs
of business restructuring $ 63.3 $247.8(C) $ 78.6 $232.5(B)
Balance at Net Deductions Balance at
Year Ended January 3, 1993 12-29-91 Additions and Other 1-3-93
Doubtful accounts and allowances $ 53.7 $ 39.7 $ 36.6 $ 56.8
LIFO valuation $105.3 $ 3.6 $ 3.0 $105.9
Accumulated amortization of goodwill
and other intangible assets $ 71.5 $ 23.2 -- $ 94.7
Reserves for accrued costs
of business restructuring $ 8.8 $ 63.3 $ 8.8 $ 63.3
(A) Includes $18.3 million of reserves resulting from business acquisitions
and divestitures.
(B) Includes short-term reserves of $102.4 million and $155 million in 1994
and 1993, respectively.
(C) Includes $77.3 million of reserves resulting from business
acquisitions.
55
Suite 3900 Telephone 313 259 0500
200 Renaissance Center
Detroit, MI 48243
Price Waterhouse LLP
REPORT OF INDEPENDENT ACCOUNTANTS
January 20, 1995
To the Stockholders and
Board of Directors of
Dow Corning Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Dow Corning Corporation and its subsidiaries at December 31, 1994
and 1993, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, 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.
As discussed in Note 2 to the financial statements, the Company is involved in
product liability litigation and claims related to breast implants for which
it is seeking recovery from insurance carriers. The Company has recorded a
liability for its obligations under a settlement agreement and an estimated
liability for costs not covered by the settlement agreement. Additionally,
the Company has recorded an estimated insurance receivable related to these
liabilities. The estimated amounts were recorded based upon all currently
available information. However, as additional facts and circumstances
develop, it may be necessary for the Company to revise its estimate of the
costs not covered by the settlement agreement as well as the estimate of the
insurance receivable.
In 1992, the Company changed its method of accounting for postretirement
benefits other than pensions to conform with Statement of Financial Accounting
Standards No. 106 as discussed in Note 13 and its method of accounting for
income taxes to conform with Statement of Financial Accounting Standards No.
109 as discussed in Note 15.
Price Waterhouse LLP
56
DOW CORNING CORPORATION
-----------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Consolidated balance sheets at December 31, 1994 and 1993 57-58
Consolidated statements of operations and retained earnings for
the years ended December 31, 1994, 1993 and 1992 59
Consolidated statements of cash flow for the years ended
December 31, 1994, 1993 and 1992 60
Notes to consolidated financial statements 61-80
Supplementary Data for the years ended December 31, 1994 and 1993:
Quarterly financial information 81
All other supplementary data and financial statement schedules are
omitted because they are not applicable or the required information is shown
in the consolidated financial statements or the accompanying notes.
57
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in millions of dollars)
ASSETS
------
December 31,
--------------------------
1994 1993
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 201.1 $ 263.0
-------- --------
Short-term investments 0.7 0.9
-------- --------
Accounts and notes receivable -
Trade (less allowance for doubtful accounts
of $10.2 in 1994 and $8.4 in 1993) 380.4 318.5
Anticipated implant insurance receivable 157.5 -
Other receivables 35.8 54.5
-------- --------
573.7 373.0
-------- --------
Inventories 308.4 285.6
-------- --------
Other current assets -
Deferred income taxes 252.9 118.4
Implant deposit 275.0 -
Other 24.0 28.3
-------- --------
551.9 146.7
-------- --------
Total current assets 1,635.8 1,069.2
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 150.8 130.9
Buildings 467.0 436.0
Machinery and equipment 2,181.9 2,011.3
Construction-in-progress 135.2 132.5
-------- --------
2,934.9 2,710.7
Less - Accumulated depreciation (1,743.0) (1,544.6)
-------- --------
1,191.9 1,166.1
-------- --------
OTHER ASSETS:
Anticipated implant insurance receivable 943.6 663.7
Deferred income taxes 182.7 229.6
Other 139.2 133.7
-------- --------
1,265.5 1,027.0
-------- --------
$4,093.2 $3,262.3
======== ========
The Notes to Consolidated Financial Statements are an integral part of
these financial statements.
58
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in millions of dollars except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31,
--------------------------
1994 1993
---- ----
CURRENT LIABILITIES:
Notes payable $ 404.9 $ 233.7
Current portion of long-term debt 41.9 33.5
Trade accounts payable 160.2 147.1
Income taxes payable 42.6 18.6
Accrued payrolls and employee benefits 61.8 60.4
Accrued taxes, other than income taxes 18.3 19.6
Implant reserve 475.4 158.7
Other current liabilities 119.9 99.0
-------- --------
Total current liabilities 1,325.0 770.6
-------- --------
LONG-TERM DEBT 335.1 314.7
-------- --------
OTHER LONG-TERM LIABILITIES:
Implant reserve 1,286.9 1,100.0
Deferred income taxes 3.4 14.6
Other 348.7 311.2
-------- --------
1,639.0 1,425.8
-------- --------
CONTINGENT LIABILITIES (NOTE 2)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 117.9 102.8
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value - 2,500,000 shares
authorized and outstanding 12.5 12.5
Retained earnings 597.5 604.3
Cumulative translation adjustment 66.2 31.6
-------- --------
Stockholders' equity 676.2 648.4
-------- --------
$4,093.2 $3,262.3
======== ========
The Notes to Consolidated Financial Statements are an integral part of
these financial statements.
59
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
-----------------------------------------------------------
(in millions of dollars except share data)
Year ended December 31,
----------------------------------
1994 1993 1992
---- ---- ----
NET SALES $2,204.6 $2,043.7 $1,955.7
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales 1,470.3 1,403.9 1,343.2
Marketing and administrative expenses 415.4 403.9 410.4
Implant costs 241.0 640.0 69.0
Special items - - 40.0
-------- -------- --------
2,126.7 2,447.8 1,862.6
-------- -------- --------
OPERATING INCOME (LOSS) 77.9 (404.1) 93.1
OTHER INCOME (EXPENSE):
Interest income, currency gains (losses) and other, net 7.0 15.4 (20.6)
Interest expense (70.3) (33.3) (22.5)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 14.6 (422.0) 50.0
Income tax provision (benefit) 7.9 (150.9) 10.1
Minority interests' share in income 13.5 15.9 11.5
-------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECTS OF
CHANGES IN ACCOUNTING PRINCIPLES (1994 - $(2.72) per share;
1993 - $(114.80) per share; 1992 - $11.36 per share) (6.8) (287.0) 28.4
Cumulative effect of adopting Statement of Financial Accounting
Standards No. 106 - Employers' Accounting for Postretirement
Benefits Other Than Pensions, net of applicable income taxes
($(46.72) per share) - - (116.8)
Cumulative effect of adopting Statement of Financial Accounting
Standards No. 109 - Accounting for Income Taxes ($6.56 per share) - - 16.4
-------- -------- --------
NET INCOME (LOSS) (1994 - $(2.72) per share; 1993 - $(114.80) per
share; 1992 - $(28.80) per share) (6.8) (287.0) (72.0)
Retained earnings at beginning of year 604.3 891.3 1,028.8
Cash dividends (1992 - $26.20 per share) - - (65.5)
-------- -------- --------
Retained earnings at end of year $ 597.5 $ 604.3 $ 891.3
======== ======== ========
The Notes to Consolidated Financial Statements are an integral part of these financial statements.
50
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
------------------------------------
(in millions of dollars)
Year ended December 31,
----------------------------------
1994 1993 1992
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) before cumulative effects of changes
in accounting principles $ (6.8) $(287.0) $ 28.4
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities -
Depreciation and amortization 189.7 197.1 190.6
Deferred income taxes (96.8) (211.5) (40.7)
Implant charges including imputed interest 269.3 640.0 69.0
Implant payments (240.4) (91.2) (47.8)
Implant insurance reimbursement 71.4 - -
Implant deposit (275.0) - -
Special items - - 40.0
Other 27.2 18.5 17.2
Changes in assets and liabilities -
Accounts and notes receivable (29.2) (44.8) (7.5)
Inventories (11.4) 44.0 14.8
Accounts payable 5.5 18.3 (10.3)
Income taxes payable 22.4 (24.7) 11.2
Other current liabilities 11.9 19.2 (8.4)
------- ------- -------
Cash provided by (used for) operating activities (62.2) 277.9 256.5
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (177.6) (182.3) (214.6)
Proceeds from sale of assets - 66.3 -
Business acquisitions, net of cash acquired - - (29.8)
Other (13.0) 9.6 (5.1)
------- ------- -------
Cash used for investing activities (190.6) (106.4) (249.5)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 92.3 58.8 82.5
Payments on long-term debt (69.2) (49.9) (81.9)
Payments on revolving credit agreement - (100.0) -
Proceeds from revolving credit agreement 225.0 150.0 100.0
Net change in other short-term borrowings (57.2) 25.0 (41.7)
Dividends paid to stockholders - - (65.5)
------- ------- -------
Cash provided by (used for) financing activities 190.9 83.9 (6.6)
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - (0.8) 0.1
------- ------- -------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents (61.9) 254.6 0.5
Cash and cash equivalents at beginning of year 263.0 8.4 7.9
------- ------- -------
Cash and cash equivalents at end of year $ 201.1 $ 263.0 $ 8.4
======= ======= =======
The Notes to Consolidated Financial Statements are an integral part of these financial statements.
61
DOW CORNING CORPORATION
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(in millions of dollars except where noted)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts
of Dow Corning Corporation and all of its wholly-owned and majority-owned
domestic and foreign subsidiaries (the Company). The Company's interests in
20% to 50% owned affiliates are carried on the equity basis and are included
in other assets. Intercompany transactions and balances have been eliminated
in consolidation.
Cash Equivalents and Short-Term Investments
- -------------------------------------------
Cash equivalents include all highly liquid investments purchased with an
original maturity of ninety days or less. All other temporary investments are
classified as short-term investments. The carrying amounts for cash
equivalents and short-term investments approximate their fair values.
Inventories
- -----------
Inventories are stated at the lower of cost or market. The cost of the
majority of inventories is determined using the last-in, first-out (LIFO)
method and the remainder is valued using the first-in, first-out (FIFO)
method.
Property and Depreciation
- -------------------------
Property, plant and equipment are carried at cost and are depreciated
principally using accelerated methods over estimated useful lives ranging from
10 to 20 years for land improvements, 10 to 45 years for buildings and 3 to 20
years for machinery and equipment. Upon retirement or other disposal, the
asset cost and related accumulated depreciation are removed from the accounts
and the net amount, less any proceeds, is charged or credited to income.
Expenditures for maintenance and repairs are charged against income as
incurred. Expenditures which significantly increase asset value or extend
useful asset lives are capitalized.
The Company follows the policy of capitalizing interest as a component of
the cost of capital assets constructed for its own use. Interest capitalized
was $14.3 in 1994, $12.0 in 1993, and $11.8 in 1992.
Intangibles
- -----------
Other assets include $24.8 and $27.0 of intangible assets at December 31,
1994 and 1993, respectively, representing the excess of cost over net assets
of businesses acquired. These intangible assets are being amortized on a
straight-line basis over 10 years. Other identifiable intangible assets are
amortized on a straight-line basis over their estimated useful lives.
62
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------
Deferred Investment Grants
- --------------------------
Included in other long-term liabilities are deferred investment
incentives (grants) which the Company has received related to certain capital
expansion projects in Belgium, Canada and the United Kingdom. Such grants are
deferred and recognized in income over the service lives of the related
assets. At December 31, 1994 and 1993, gross deferred investment incentives
were $89.7 and $84.6 with related accumulated amortization of $72.8 and $62.8,
respectively.
Income Taxes
- ------------
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109 (SFAS 109), Accounting for Income Taxes, effective on
January 1, 1992. SFAS 109 requires a company to recognize deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in a company's financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
Research and Development Costs
- ------------------------------
Research and development costs are charged to operations when incurred
and are included in manufacturing cost of sales. These costs totalled $174.0
in 1994, $163.9 in 1993, and $161.2 in 1992.
Currency Translation
- --------------------
Assets and liabilities of certain foreign subsidiaries are translated
into U.S. dollars at end-of-period exchange rates; translation gains and
losses, hedging activity and related tax effects from these subsidiaries are
reported as a separate component of stockholders' equity. Assets and
liabilities of other foreign subsidiaries are remeasured into U.S. dollars
using end-of-period and historical exchange rates; remeasurement gains and
losses, hedging activity and related tax effects for these subsidiaries are
recognized in the statement of operations. Revenues and expenses for all
foreign subsidiaries are translated at average exchange rates during the
period. Foreign currency transaction gains and losses are included in current
earnings.
Interest and Currency Rate Derivatives
- --------------------------------------
The Company enters into a variety of interest rate and currency swaps,
interest rate caps and floors, options and forward exchange contracts in its
management of interest rate and foreign currency exposures. The differential
to be paid or received on interest rate swaps, including interest rate
elements in combined currency and interest rate swaps, interest rate caps and
floors is recognized over the life of the agreements as an adjustment to
interest expense. Gains and losses on terminated interest rate instruments
that were entered into for the purpose of changing the nature of underlying
debt obligations are deferred and amortized to income as an adjustment to
interest expense. Currency option premiums are amortized over the option
period. Gains and losses on purchased currency options that are designated
and effective as hedges are deferred and recognized in income in the same
period as the hedged transaction. Realized and unrealized gains and losses on
currency swaps, including currency elements in combined currency and interest
rate swaps, and forward exchange contracts are recognized currently in other
income and expense, or, if such contracts are effective as net investment
hedges, in stockholders' equity.
63
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------
New Accounting Standard
- -----------------------
In January 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Post-employment Benefits." This
new standard requires, among other things, that the expected costs of benefits
paid to former or inactive employees after employment but before retirement be
recognized when the benefits are earned or become payable when certain
conditions are met rather than the previous method which recognized these
costs when they were paid. The adoption of this new standard did not
materially impact the Company's consolidated financial condition or results of
operations.
Reclassifications
- -----------------
Certain reclassifications of prior year amounts have been made to conform
to the presentation adopted in 1994.
NOTE 2 - CONTINGENCIES
- ----------------------
Breast Implant Litigation and Claims
- ------------------------------------
Prior to January 6, 1992, the Company, directly and through its
wholly-owned subsidiary, Dow Corning Wright Corporation, was engaged in the
manufacture and sale of silicone gel breast implants and the raw material
components of these products. As part of a review process initiated in 1991
by the United States Food and Drug Administration (FDA) of Premarket Approval
Applications (PMAA) for silicone gel breast implants, on January 6, 1992, the
FDA asked breast implant producers and medical practitioners to voluntarily
halt the sale and use of silicone gel breast implants pending further review
of the safety and effectiveness of such devices, and the Company complied with
the FDA's request and suspended shipments of implants. Subsequently, the
Company announced that it would not resume the production or sale of silicone
gel breast implants and that it would withdraw its PMAA for silicone gel
breast implants from consideration by the FDA.
Since late 1991, there has been considerable publicity associated with
the breast implant controversy, and the Company experienced a substantial
increase in the number of lawsuits against the Company relating to breast
implants. As of December 31, 1994, the Company has been named, often together
with other defendants, in approximately 19,000 pending breast implant products
liability lawsuits filed by or on behalf of individuals who claim to have or
have had silicone gel breast implants. Many of these cases involve multiple
plaintiffs. In addition, there were 45 breast implant products liability
class action lawsuits which had been filed against the Company as of December
31, 1994. It is anticipated that the Company will be named as a defendant in
additional breast implant lawsuits in the future by those breast implant
recipients not participating in the Breast Implant Litigation Settlement
Agreement (as described below). The typical alleged factual bases for these
lawsuits include allegations that the plaintiffs' breast implants caused
specified ailments, including, among other things, autoimmune disease,
scleroderma, systemic disorders, joint swelling and chronic fatigue. The
Company is sometimes named as the manufacturer of silicone gel breast
implants, and other times the Company is named as the supplier of silicone raw
materials to other breast implant manufacturers. The Company is vigorously
defending this litigation asserting, among other defenses, that there is no
causal connection between silicone breast implants and the ailments alleged by
the plaintiffs in these cases. Once the Breast Implant Litigation Settlement
Agreement (as described below) becomes final and binding, it is anticipated
that lawsuits brought by those breast implant plaintiffs participating in the
settlement will be dismissed.
64
NOTE 2 - CONTINGENCIES (Continued)
- ----------------------
Consolidation of a substantial number of breast implant lawsuits for
pretrial purposes has occurred in federal court (U.S. District Court for the
Northern District of Alabama, the "Court") and various state courts where a
substantial number of breast implant lawsuits have been filed. As of December
31, 1994, substantially more than half of all breast implant cases have been
consolidated for pretrial purposes at the federal and state levels. The
Company anticipates that breast implant lawsuit consolidations and
implementation of the Breast Implant Litigation Settlement Agreement will
result in a reduction of litigation defense costs.
On September 9, 1993, the Company announced that representatives of
plaintiffs and defendants involved with silicone breast implant litigation had
developed a "Statement of Principles for Global Resolution of Breast Implant
Claims" (the "Statement of Principles"). The Statement of Principles
summarizes a proposed claims based structured resolution of claims arising out
of breast implants which have been or could be asserted against various
implant manufacturers, suppliers, physicians and hospitals. The Company
negotiated with other potential parties to reach a Breast Implant Litigation
Settlement Agreement similar in concept to the Statement of Principles.
On March 23, 1994, the Company, along with other defendants and
representatives of breast implant litigation plaintiffs, entered into a
settlement pursuant to a Breast Implant Litigation Settlement Agreement (as
amended by the Court, the "Settlement Agreement"). The Company's
participation in this Settlement Agreement was approved by the Company's Board
of Directors on March 28, 1994. Under the Settlement Agreement, industry
participants (the "Funding Participants") agreed to contribute up to
approximately $4.2 billion over a period of more than thirty years to
establish several special purpose funds. A related funding agreement (the
"Funding Agreement") specifies the amount that each Funding Participant would
contribute to the settlement fund and the timing of those contributions. The
Settlement Agreement provides for a claims based structured resolution of
claims arising out of silicone breast implants and defines the circumstances
under which payments from the funds would be made. The Settlement Agreement
includes provisions for (a) class membership and the ability of plaintiffs to
opt out of the class, (b) the establishment of defined funds for medical
diagnostic/evaluation procedures, explantation, ruptures, compensation for
specific diseases and administration, (c) payment terms and timing and (d)
claims administration.
The settlement covers claims of most breast implant recipients, and
related claims, brought in the courts of U.S. federal and state jurisdictions.
The settlement also covers the claims of breast implant recipients brought in
jurisdictions outside of the U.S. if payments received by those potential
claimants from the settlement fund, and related releases, serve to preclude
them from bringing legal actions in these other jurisdictions. The settlement
does not cover claims of breast implant recipients who have affirmatively
chosen not to participate in the Settlement Agreement, or whom the Court has
specifically excluded from the Settlement Agreement unless these potential
claimants affirmatively join the settlement. Breast implant recipients who
reside in Ontario or Quebec, Canada, or in Australia have been specifically
excluded by the Court. The Settlement Agreement defines various periods
during which, upon the occurrence of certain events, breast implant plaintiffs
may elect not to settle their claims by way of the Settlement Agreement and
pursue their individual breast implant litigation against manufacturers and
other defendants (the "Opt Out Plaintiffs"). The Settlement Agreement also
provides the children of breast implant recipients with the right to opt out
of the settlement in certain circumstances. Under the terms of the Settlement
Agreement, in certain circumstances, if any defendant who is a Funding
Participant considers the number of Opt Out Plaintiffs to be excessive, such
defendant may decide to exercise the option to withdraw from participation in
the settlement during a number of periods specified in the Settlement
Agreement.
65
NOTE 2 - CONTINGENCIES (Continued)
- ----------------------
On April 1, 1994, the Court preliminarily approved the Settlement
Agreement. On April 18, 1994, the Court issued notice of the Settlement
Agreement to breast implant recipients and others who may be eligible to
participate in the settlement ("Settlement Class Members"). This notice began
a 60-day period, ending June 17, 1994, during which Settlement Class Members
had the ability to become initial Opt Out Plaintiffs. This period was
extended to July 1, 1994 with respect to certain Settlement Class Members
whose Court issued notice was delayed. The Court has afforded initial Opt Out
Plaintiffs an opportunity to rejoin the settlement within specified periods
which currently end no later than March 1, 1995. A Court hearing to review
the fairness of the Settlement Agreement was completed on August 22, 1994. On
September 1, 1994, the Court granted final approval to the Settlement
Agreement, determining that it is fair, reasonable and adequate, and on
September 8, 1994, the Company's Board of Directors approved the Company's
continued participation in the Settlement Agreement.
The Court's final approval of the Settlement Agreement has been appealed
to the U.S. Court of Appeals for the Eleventh Circuit primarily by certain
providers of health care indemnity payments or services and by certain foreign
claimants.
The Settlement Agreement provides that industry participants will
contribute a total of $4.2 billion, of which the Company is obligated to
contribute up to approximately $2.02 billion, over a period of more than 30
years. The Company's required contributions under the Settlement Agreement
cannot be changed without the Company's consent. Under the terms of the
Funding Agreement, the Company has made or anticipates making settlement
payments in accordance with the following schedule:
1994 $ 42.50
1995 275.00
1997 275.00
1998 275.00
1999 through 2011 51.17 per year
2012 through 2019 38.38 per year
2020 through 2026 25.57 per year
The Company's first payment of $275.0 under the Funding Agreement is due
upon the earlier of (a) a resolution of these appeals which confirms the
Court's final approval of the Settlement Agreement or (b) the completion of a
second opt out process or the determination that there will be no second opt
out process (as described below). The Company has placed $275.0 into an
escrow account and is required, among other things, to provide a letter of
credit in the amount of $275.0 to provide financial assurance to the Court of
the Company's ability to meet its obligations under the Settlement Agreement.
After the third payment of $275.0, the amount of the letter of credit will be
reduced to $51.2 or may be eliminated by order of the Court. The Company is
engaged in discussions with certain financial institutions to provide this
letter of credit.
Initial claims for specific disease compensation were required to be
filed with the Court in September 1994. After these claims and the supporting
medical records have been evaluated by the Court for validity, eligibility,
accuracy, and consistency, the Court will determine whether the disease
compensation settlement fund is sufficient to pay validated claims. If the
disease compensation settlement fund is not sufficient to pay validated
claims, and if such insufficiency cannot be resolved through other means,
claimants with validated claims may have the ability to opt out during another
period as specified in the Settlement Agreement. If any defendant who is a
Funding Participant considers the number of new Opt Out Plaintiffs against
said defendant to be excessive, such defendant may decide to exercise a second
option to withdraw from participation in the settlement.
66
NOTE 2 - CONTINGENCIES (Continued)
- ----------------------
Since July 1, 1994, many former Opt Out Plaintiffs have rejoined the
settlement. Based on preliminary information received from the Court as of
December 1994, approximately 5,000 of the initial U.S. Opt Out Plaintiffs and
approximately 2,000 potential foreign claimants (including initial foreign Opt
Out Plaintiffs and foreign claimants excluded from the settlement class) have
identified the Company as potentially responsible, in whole or in part, with
respect to their current or potential future claims. The Court is continuing
to collect information relating to the number of Opt Out Plaintiffs and as
information is received from the Court the Company will continue to evaluate
the nature and scope of its potential exposure with respect to the current or
potential future claims of these Opt Out Plaintiffs. Opt Out Plaintiffs may
continue to rejoin the settlement until the March 1, 1995 date established by
the Court.
The Settlement Agreement is in the process of being implemented. The
settlement implementation process can be affected by external factors as
described above such as the resolution of pending appeals and the number and
magnitude of claims filed in the settlement. However, based on its analysis
of the most current information, including assessments by knowledgeable third
parties who have been directly involved in the negotiation and implementation
of the Settlement Agreement, management believes that the aggregate amount of
the Company's obligation and the amount and timing of the related cash
payments under the Settlement Agreement are reliably determinable. Management
also believes that events will not occur which would lead to the Company's
withdrawal from the settlement and that the Settlement Agreement will be
implemented in the state currently envisioned.
The Company believes that a substantial portion of the indemnity,
settlement and defense costs related to breast implant lawsuits and claims
will be covered by the Company's products liability insurance. Substantially
all of the Company's insurers have reserved the right to deny coverage, in
whole or in part, due to differing theories regarding, among other things,
when coverage may attach, and their respective obligations relative to other
insurers. The Company has a substantial amount of unexhausted claims-made
insurance coverage with respect to lawsuits and claims commencing in 1986 and
thereafter. For lawsuits and claims involving implant dates prior to 1986,
substantial coverage exists under a number of primary and excess occurrence
policies having various limits. Because defense costs and disposition of
particular breast implant lawsuits and claims may be covered, in whole or in
part, both by the claims-made coverage issued from and after 1986, and one or
more of the occurrence policies issued prior to 1986, determination of
aggregate insurance coverage depends on, among other things, how defense and
indemnity costs are allocated among the various policy periods. Also, a
number of the breast implant lawsuits pending against the Company request
punitive damages and compensatory damages arising out of alleged intentional
torts. Depending on policy language, applicable law and agreements with
insurers, any such damages which may be awarded pursuant to such lawsuits may
or may not be covered, in whole or in part, by insurance.
Discussions among the Company and its primary insurers have occurred and
are continuing with a view toward reaching an agreement as to the allocation
of costs of breast implant litigation among the various insurers issuing
products liability insurance policies to the Company relative to breast
implants and other products. In 1993, the Company commenced a lawsuit against
certain of these insurers seeking, among other things, a judicial enforcement
of the obligations of the insurers under certain of these insurance policies.
Approximately 85% of the anticipated implant insurance receivable recorded in
the financial statements is currently subject to litigation. This litigation
principally involves those insurers who provided coverage on an occurrence
basis and generally does not involve insurers who provided coverage on a
claims made basis.
Management continues to believe that it is probable that the Company will
recover from its insurers a substantial amount of breast implant related
payments which have been or may be made by the Company. In reaching this
belief, the Company has analyzed its insurance policies, considered its
history of coverage and insurance reimbursement for these types of claims, and
consulted with knowledgeable
67
NOTE 2 - CONTINGENCIES (Continued)
- ----------------------
third parties with significant experience in insurance coverage matters. This
belief is further supported by the fact that the Company received insurance
recoveries of $71.4 in 1994 and entered into settlements with certain insurers
for future reimbursement. These settlements relate to only a small number of
the Company's insurers and a small portion of the Company's total insurance
program.
The Company has recorded an anticipated insurance receivable which is
less than the amount for which the Company will seek reimbursement; a
substantial portion of this anticipated insurance receivable relates to
insurers who provided coverage on an occurrence basis. The principal
uncertainties which exist with respect to the ultimate realization of this
asset include the method applied in allocating losses between insurers who
provided coverage on a claims made basis and insurers who provided coverage
on an occurrence basis, the method applied in allocating losses among the
insurers who provided coverage on an occurrence basis, potential delays in
reimbursement if the insurers fail to pay on a timely basis, and the extent to
which insurers may become insolvent in the future. The Company has taken
these factors into account when estimating the amount of insurance recovery to
record in the financial statements. Specifically, the Company selected a
reasonable and legally sound allocation theory which is one of several
generally accepted allocation theories in circumstances involving product
liability claims; the allocation theory selected is supported by recent
developments in the ongoing insurance litigation. The Company also assumed a
reasonable delay between the time the Company makes breast implant related
payments and the time the Company receives reimbursement from the insurers,
and an allowance for insolvent insurers has been provided.
The Company has made efforts in the past to reflect anticipated financial
consequences to the Company of the breast implant situation. During 1991 and
1992, the Company recorded $25.0 and $69.0, respectively, of pretax costs
related to breast implant matters. In 1993 the Company recorded a pretax
charge of $640.0. This charge included the Company's best estimate of its
potential liability for breast implant litigation based on settlement
negotiations, and also included provisions for legal, administrative, and
research costs related to breast implants, for a total of $1.24 billion, less
anticipated insurance recoveries of $600.0. As discussed below, the Company
recorded the liability attributable to the Settlement Agreement and the
related insurance receivable on a present value basis.
On January 20, 1995, the Company announced a pretax charge of $241.0
($151.8 after tax) for the fourth quarter of 1994. This charge reflects the
Company's best current estimate of additional costs to resolve breast implant
litigation and claims outside of the Settlement Agreement, and includes
provisions for legal, administrative, and research costs related to breast
implants. This pretax charge of $241.0 consists of a $647.0 liability less
anticipated insurance recoveries of $406.0. These amounts were recorded on an
undiscounted basis.
As a result of the provisions described above, as of December 31, 1994
the Company's financial statements reflect a total liability of $1,762.3 and a
total anticipated implant insurance receivable of $1,101.1. Of these amounts,
a liability of $603.6 and an anticipated implant insurance receivable of
$398.3 have been recorded to reflect costs and insurance recoveries,
respectively, relevant to breast implant liabilities not covered by the
Settlement Agreement; these amounts are recorded on an undiscounted basis.
Because the amount and timing of the liability attributable to the Settlement
Agreement is reliably determinable, the Company recorded this liability and
the related anticipated implant insurance receivable on a present-value basis
using a discount rate of 7.0% over a period of more than 30 years. This rate
approximated the interest rate on monetary assets that are risk free and that
have maturities corresponding with the scheduled cash payments. The
Settlement Agreement liability recorded in the financial statements at
December 31, 1994 is $1,158.7; this amount is $1,976.2 on an undiscounted
basis. The Settlement Agreement anticipated implant insurance receivable
recorded in the financial statements at December 31, 1994 is $702.8; this
amount is $1,156.2 on an undiscounted basis.
68
NOTE 2 - CONTINGENCIES (Continued)
- ----------------------
Differences between discounted amounts recorded in the financial statements
and undiscounted amounts represent interest to be recorded over the life of
the net liability. The net amount of imputed interest recorded in 1994 was
$28.3. Amounts recorded in the financial statements related to the Settlement
Agreement are adjusted as insurance proceeds are received, as payments are
made against reserves and as imputed interest is recorded on discounted
amounts.
Implant reserves less the anticipated implant insurance receivable
reflects management's best current estimate of the cost of ultimate resolution
of breast implant litigation and claims. The liability under the Settlement
Agreement is reliably determinable. However, additional facts and
circumstances may develop which could affect the reliability and precision of
the estimate of costs not covered by the Settlement Agreement as well as the
estimate of the anticipated implant insurance receivable. Those facts and
circumstances include, among other things, the ultimate number and extent of
claims not covered by the Settlement Agreement, the ultimate cost of resolving
those claims, the amount and timing of insurance recoveries, and the
allocation of insurance payments among the Company's insurers. Management
cannot currently estimate the impact that these factors may have on the
current estimate of costs not covered by the Settlement Agreement as well as
the estimate of the anticipated implant insurance receivable. As additional
facts and circumstances develop, the estimate may be revised, or provisions
may be necessary to reflect any additional costs of resolving breast implant
litigation and claims not covered by the settlement. Future charges resulting
from any revisions or provisions, if required, could have a material adverse
effect on Dow Corning's financial position or results of operations in the
period or periods in which such charges are recorded.
Other Litigation
- ----------------
Due to the nature of its business as a supplier of specialty materials to
a variety of industries, the Company, at any particular time, is a defendant
in a number of products liability lawsuits for injury allegedly related to the
Company's products, and, in certain instances, products manufactured by
others. Many of these lawsuits seek damages in substantial amounts. For
example, the Company has been named in products liability lawsuits pertaining
to materials previously used in connection with temporo-mandibular joint
implant applications. The Company has followed a practice of aggressively
defending all product liability claims asserted against it. Although the
Company intends to continue this practice, currently pending proceedings and
any future claims are subject to the uncertainties attendant to litigation and
the ultimate outcome of any such proceedings or claims cannot be predicted
with certainty. Nonetheless, the Company believes that these products
liability claims will not have a material adverse effect on the Company's
results of operations or financial condition.
Environmental Matters
- ---------------------
The Company has been advised by the United States Environmental
Protection Agency (EPA) or by similar state regulatory agencies that the
Company, together with others, is a Potentially Responsible Party (PRP) with
respect to a portion of the cleanup costs and other related matters involving
a number of abandoned hazardous waste disposal facilities. Management
believes that there are 13 sites at which the Company may have some liability,
although management currently expects to settle the Company's liability for a
majority of these sites for de minimis amounts. Based upon preliminary
estimates by the EPA or the PRP groups formed with respect to these sites, the
aggregate liabilities for all PRPs at these sites at which management
currently believes the Company may have more than the de minimis liability is
$106.0. Management cannot currently estimate the aggregate liability for all
PRPs at those sites at which management expects the Company has a de minimis
liability.
69
NOTE 2 - CONTINGENCIES (Continued)
- ----------------------
The Company records accruals for environmental matters when it is
probable that a liability has been incurred and the Company's costs can be
reasonably estimated. The amount accrued for environmental matters at
December 31, 1994 was $16.2, although possible costs could range up to $32.0.
While there are a number of uncertainties with respect to the Company's
estimate of its ultimate liability for cleanup costs at these sites, it is the
opinion of the Company that the possibility that costs in excess of those
accrued or disclosed will have a material adverse impact on the Company's
consolidated financial position or results of operations is remote. This
opinion is based upon the number of identified PRPs at each site, the number
of such PRPs that are believed by management to be financially capable of
paying their share of the ultimate liability, and the portion of waste sent to
the sites for which management believes the Company might be held responsible
based on available records.
DOW CORNING FIRE STOP(R)
- ------------------------
In May, 1993, the Company began communicating additional information and
test results to the owners of buildings which contain DOW CORNING FIRE STOP(R)
Intumescent Wrap Strip 2002, recommending that the owners conduct a review
with a qualified Fire Protection Engineer to determine whether remedial action
is warranted, including possible replacement of the product due to uncertainty
about its ability to perform consistently and predictably over time. DOW
CORNING FIRE STOP(R) Intumescent Wrap Strip 2002 is a non-silicone,
resin-based fire stop product which was installed in buildings as a passive
fire protection product. The Company ceased the sale of this product in 1992.
Management believes that the ultimate resolution of this issue will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
NOTE 3 - SPECIAL ITEMS
- ----------------------
Charges of $40.0 in 1992 relate to provisions for restructuring
activities, consisting largely of costs associated with the cessation of
manufacturing activities at a subsidiary in Brazil and costs involved in
global expense reduction, including elimination of low-priority activities,
redeployment of people and reduction in the value of affected facilities.
NOTE 4 - SALE OF ASSETS AND ACQUISITIONS
- ----------------------------------------
On July 1, 1993, the Company sold the metal orthopedic device assets for
approximately $66.3 in cash. The Company's investment in assets was
approximately $70.0, most of which represented current assets. The sale of
the metal orthopedic device business did not have a material effect on the
Company's consolidated net sales, financial position or results of operations.
On July 14, 1992, the Company acquired ARA - Werk Kraemer GmbH (ARA), a
German supplier of sealants, polyurethane foam products and related
application tools. The purchase price included $18.9 of cash and $19.2 in
notes to be paid within one year of the acquisition date. The acquisition was
accounted for by the purchase method of accounting, and, accordingly, the
purchase price has been allocated to the assets acquired and the liabilities
assumed based on their estimated fair values at date of acquisition. The
excess of purchase price over estimated fair values of the net assets acquired
was $25.6 and has been recorded as goodwill, which is being amortized over 10
years. The operating results of ARA are included in the Company's
consolidated results from the acquisition date. Consolidated net sales, net
income and related per share amounts for the year ended December 31, 1992,
would not have been materially different had this acquisition taken place at
the beginning of 1992.
70
NOTE 4 - SALE OF ASSETS AND ACQUISITIONS (Continued)
- ----------------------------------------
On November 2, 1992, the Company acquired for $12.8 an additional 40%
interest in Lucky-DC Silicone Co., Ltd., a company in which Dow Corning
previously had held a 50% interest. In addition, under the terms of the
agreement with the partner, Lucky Ltd., the Company will acquire for $3.2 the
remaining 10% interest by November 1995, subject to the approval by the
Government of South Korea. Consolidated net sales, net income and related per
share amounts for the year ended December 31, 1992, would not have been
materially different had this acquisition taken place at the beginning of
1992.
NOTE 5 - FOREIGN CURRENCY
- -------------------------
Following is an analysis of the changes in the cumulative translation
adjustment:
1994 1993 1992
---- ---- ----
Balance, beginning of year $31.6 $28.3 $66.2
Translation adjustments and gains (losses) from
certain hedges and intercompany balances 31.3 (0.2) (37.5)
Income tax effect of current year activity 3.3 3.5 (0.4)
----- ----- -----
Balance, end of year $66.2 $31.6 $28.3
===== ===== =====
Net foreign currency gains (losses) currently recognized in income
amounted to $(4.8) in 1994, $(8.1) in 1993, and $(35.2) in 1992.
NOTE 6 - RECEIVABLES SOLD
- -------------------------
The Company sells certain receivables with limited recourse provisions.
Dow Corning Corporation sells on an ongoing basis substantially all of its
U.S. trade receivables, with limited recourse, to Bay Asset Funding
Corporation ("BAFC"), a wholly owned but separate corporate entity of the
Company. BAFC has agreements in place with third parties whereby it may sell
on an ongoing basis fractional ownership interests in such trade receivables,
with limited recourse, for a purchase price of up to $65.0. The agreements
contemplate that (a) the trade receivables sold to BAFC by the Company are
solely the assets of BAFC, (b) the creditors of BAFC are separate from the
creditors of the Company, and (c) in the event of a liquidation of BAFC, such
creditors would be entitled to satisfy their claims from BAFC's assets prior
to any distribution to the Company.
Net of related reserves, the amount of receivables sold under third party
agreements which remained uncollected at December 31, 1994 and 1993 was $32.0
and $63.2, respectively. The sale of such receivables resulted in net
proceeds of approximately $62.6 in 1994, $74.7 in 1993, and $73.5 in 1992.
NOTE 7 - IMPLANT DEPOSIT
- ------------------------
In connection with the Settlement Agreement, the Company has entered into
an agreement whereby $275.0 in cash and cash equivalents is restricted to use
for future breast implant settlement payments. Accordingly, this amount is
included in the caption "Implant deposit" in the accompanying consolidated
balance sheet and statement of cash flows.
71
NOTE 8 - INVENTORIES
- --------------------
Following is a summary of inventories by costing method at December 31:
1994 1993
---- ----
Raw material, work-in-process and finished goods:
Valued at LIFO $204.7 $197.0
Valued at FIFO 103.7 88.6
------ ------
$308.4 $285.6
====== ======
Under the dollar value LIFO method used by the Company, it is
impracticable to separate inventory values by classifications. Inventories
valued using LIFO at December 31, 1994 and 1993 are stated at approximately
$69.5 and $70.9, respectively, less than they would have been if valued at
replacement cost.
NOTE 9 - INVESTMENTS
- --------------------
Excluding investments accounted for on the equity basis, the carrying
amount for investments at December 31, 1994 and 1993 was $27.6 and $24.6,
respectively. Carrying amounts approximate fair values. Fair values are
determined based on quoted market prices or, if quoted market prices are not
available, on market prices of comparable instruments. Investments are
included in the captions "Short-term investments" and "Other assets" in the
accompanying consolidated balance sheets.
NOTE 10 - NOTES PAYABLE AND CREDIT FACILITIES
- ---------------------------------------------
Notes payable at December 31 consisted of:
1994 1993
---- ----
Revolving Credit Agreement $375.0 $150.0
Other bank borrowings 29.9 83.7
------ ------
$404.9 $233.7
====== ======
During 1993, the Company terminated a revolving credit agreement which
was in place at December 31, 1992, and replaced it with a Revolving Credit
Agreement with 16 domestic and foreign banks which provides for borrowings on
a revolving credit basis until November, 1997, of up to $400.0. At December
31, 1994, the interest rate on amounts outstanding under the Revolving Credit
Agreement was 6.8125%. Amounts outstanding under short-term lines of credit
are described as "Other bank borrowings" in the table above. The carrying
amounts of the Company's short-term borrowings approximate their fair value.
Certain of the Company's debt agreements, including the Revolving Credit
Agreement, contain debt restrictions and provisions relating to property
liens, sale and leaseback transactions, debt to tangible capital ratio, and
funds flow. In addition, the Revolving Credit Agreement provides
participating banks the right, subject to a vote of a majority in interest, to
demand payment in the event that breast implant litigation expenditures, net
of insurance recoveries, exceed certain limits. At December 31, 1994, the
Company was in compliance with all debt restrictions and provisions.
72
NOTE 10 - NOTES PAYABLE AND CREDIT FACILITIES (Continued)
- ---------------------------------------------
Under the provisions of the Revolving Credit Agreement, the Company is
subject to certain restrictions as to the payment of dividends or distribution
of assets for other specified purposes. The amount of the restriction is
based on a formula which considers, among other things, the income before
income taxes for the most recent fiscal year. Based on the computation
completed for the year ended December 31, 1994, the Company is restricted from
issuing dividends or distributing assets for other specified purposes in
excess of $71.9 in 1995.
NOTE 11 - LONG-TERM DEBT
- ------------------------
Long-term debt at December 31 consisted of:
1994 1993
---- ----
9.625% Sinking Fund Debentures due 2005 $ - $ 4.8
9.375% Debentures due 2008 75.0 75.0
8.15% Debentures due 2029 50.0 50.0
8.125%-9.50% Medium-term Notes due 1995-2001,
8.82% average rate at December 31, 1994 36.5 54.5
5.77% Term Loans, maturing serially 1995-1999 26.6 32.1
Variable-rate Notes due 1995-1998,
5.9%-6.984% at December 31, 1994 123.3 55.2
Variable-rate Note, maturing serially 1997-1999,
6.44% at December 31, 1994 20.0 20.0
5.55%-6.5% Japanese Yen Notes due 1996-1998 33.0 33.4
Other obligations due 1995-1999 12.6 23.2
------ ------
377.0 348.2
Less - Payments due within one year 41.9 33.5
------ ------
$335.1 $314.7
====== ======
The fair value of the Company's long-term debt was approximately $7.2
higher than book value at December 31, 1994 and $45.0 higher than book value
at December 31, 1993. The fair value was based largely on interest rates
offered on U.S. Treasury obligations with comparable maturities using
discounted cash flow analysis. These rates were not adjusted to reflect the
premium that the Company might pay over U.S. Treasury rates. A one percentage
point increase in these rates would decrease the fair value by approximately
$11.1.
The Company has $400.0 of debt securities registered with the Securities
and Exchange Commission at December 31, 1994, of which $275.0 had been
designated to medium-term note programs and another $125.0 had been issued in
debentures. At December 31, 1994, $100.0 had been issued under the medium-
term note programs, of which $36.5 was still outstanding.
The 9.375% and 8.15% debentures are not redeemable by the Company prior
to their maturity; however, the holders of the 8.15% debentures may elect to
have all or a portion of their debentures repaid on October 15, 1996, at 100%
of the principal amount.
73
NOTE 11 - LONG-TERM DEBT (Continued)
- ------------------------
Aggregate annual maturities of long-term debt are: $41.9 in 1995, $27.8
in 1996, $84.0 in 1997, $71.1 in 1998, $17.9 in 1999 and $84.3 thereafter.
Excluded from such maturities are $50.0 of 8.15% debentures, due in 2029,
which are subject to early redemptions at the holders' option in 1996. Cash
paid during the year for interest, net of amounts capitalized, was $40.7 in
1994, $31.8 in 1993, and $20.8 in 1992.
NOTE 12 - INTEREST AND CURRENCY RATE DERIVATIVES
- ------------------------------------------------
The Company utilizes a variety of financial instruments, several with
off-balance sheet risks, in its management of current and future interest rate
and foreign currency exposures. These financial instruments include interest
rate swaps, interest rate caps and floors, interest rate options, currency
swaps, currency options, and forward exchange contracts.
These instruments involve, to varying degrees, elements of credit and
market risk in excess of the amount recognized in the consolidated balance
sheet. Methods used by the Company to monitor and control credit risk include
limiting counterparties to only major banks and substantial financial
institutions, and monitoring the credit-worthiness of these counterparties on
an ongoing basis. In the event of default by a counterparty, the risk in
these transactions is limited to the cost of replacing the instrument at
current market rates. The contract or notional amounts of these instruments
are used to measure the volume of these agreements and do not represent
exposure to credit loss. Methods used by the Company to monitor and control
market risk include entering into offsetting positions that essentially
counterbalance with each other, and continued monitoring of market conditions.
Although the Company may be exposed to losses in the event of nonperformance
by counterparties and interest and currency rate movements, it does not
anticipate significant losses due to these financial arrangements.
The Company enters into interest rate swaps to exchange fixed and
variable interest payment obligations without an exchange of the underlying
principal amounts in order to manage interest rate exposures. The Company
also enters into interest rate caps and floors, and interest rate options in
order to transfer, modify, or reduce interest rate risk. These instruments
are used to hedge specific elements of the Company's debt portfolio. Hedge
accounting is used to recognize the differential to be paid or received as an
adjustment to interest expense over the life of the agreements. Interest rate
swaps, interest rate caps and floors, and interest rate options are shown in
the following table.
December 31, 1994 December 31, 1993
--------------------------------- -----------------------------------
Weighted Weighted
Fair Book Notional Average Fair Book Notional Average
Value Value Amount Maturity Value Value Amount Maturity
----- ----- -------- -------- ----- ----- -------- --------
Interest rate swaps where
the Company pays fixed rates $1.8 $(1.4) $190.0 5.6 years $(24.3) $(2.4) $225.0 5.6 years
Interest rate swaps where the
Company pays variable rates (2.5) 0.2 115.0 2.5 years 5.5 0.7 115.0 3.4 years
Interest rate caps (0.2) 0.9 55.0 1.4 years - - 100.0 1.6 years
Interest rate floors (0.3) - 40.0 1.9 years 0.4 - 55.0 2.1 years
Interest rate options (1.6) - 80.0 4.4 years (4.3) - 125.0 4.7 years
At December 31, 1994, the weighted average interest rates paid and received on interest rate swaps
where the Company pays a fixed rate are 7.4% and 5.9%, respectively. At December 31, 1994, the weighted
average interest rates paid and received on interest rate swaps where the Company pays a variable rate are
6.7% and 6.7%, respectively.
74
NOTE 12 - INTEREST AND CURRENCY RATE DERIVATIVES (Continued)
- ------------------------------------------------
The Company enters into currency swaps, currency options, and forward
exchange contracts primarily to hedge working capital not denominated in
functional currencies. Gains and losses on these contracts are recognized
concurrent with the gains and losses from the associated exposures. Currency
swaps, currency options and forward exchange contracts are shown in the
following table. The book values of these instruments approximate fair
values.
December 31, 1994 December 31, 1993
------------------------------ ------------------------------
Weighted Weighted
Book Notional Average Book Notional Average
Value Amount Maturity Value Amount Maturity
----- -------- -------- ----- -------- --------
Currency swaps $(34.3) $100.0 2.0 years $(21.2) $100.0 3.0 years
Currency options - - - - 26.8
Forward exchange contracts:
-to buy British Pounds (1.1) 95.1 - - -
-to sell British Pounds 2.8 129.4 (0.4) 44.6
-to buy ECU (0.3) 15.4 - - -
-to sell ECU (0.1) 23.3 (0.2) 40.8
-to buy German Marks (0.4) 18.1 (0.1) 18.7
-to sell German Marks 0.6 33.8 - 12.4
-to buy Japanese Yen (2.8) 62.7 (3.8) 101.3
-to sell Japanese Yen 0.2 10.1 - - -
-to buy other currencies (0.2) 22.6 - 16.5
-to sell other currencies 0.4 52.3 0.2 32.1
Weighted average maturity is less than one year.
The fair value of interest rate swaps, interest rate caps and floors,
interest rate options, currency swaps, and currency options is estimated by
obtaining quoted market prices of comparable instruments, adjusted through
interpolation where necessary for maturity differences. The fair value of
forward exchange contracts is estimated by obtaining quotes from brokers. The
fair values shown above represent the amount the Company would receive (or
pay, if denoted by brackets) to terminate the agreements at the reporting
date.
NOTE 13 - POST EMPLOYMENT BENEFITS
- ----------------------------------
The Company maintains defined benefit employee retirement plans covering
most domestic and certain foreign employees. The Company also has various
defined contribution and savings plans covering certain employees. Plan
benefits for defined benefit employee retirement plans are based primarily on
years of service and compensation. The Company's funding policy is consistent
with national laws and regulations. Plan assets include marketable equity
securities, insurance contracts, corporate and government debt securities,
real estate and cash.
75
NOTE 13 - POST EMPLOYMENT BENEFITS (Continued)
- ----------------------------------
The components of pension expense for the Company's domestic and foreign
plans are set forth below.
1994 1993 1992
---- ---- ----
Defined benefit plans:
Service cost (benefits earned during the period) $ 20.9 $ 16.1 $ 14.1
Interest cost on projected benefit obligations 43.9 38.0 35.4
Actual return on plan assets 0.2 (73.4) (24.7)
Net amortization 4.7 1.6 1.2
Difference between actual and expected
return on plan assets (40.2) 35.0 (8.6)
------ ------ ------
29.5 17.3 17.4
------ ------ ------
Defined contribution and savings plans 12.0 10.1 12.6
------ ------ ------
$ 41.5 $ 27.4 $ 30.0
====== ====== ======
The following table presents reconciliations of defined benefit plans'
funded status with amounts recognized in the Company's consolidated balance
sheets as part of other assets and other long-term liabilities. Plans with
assets exceeding the accumulated benefit obligation (ABO) are segregated by
column from plans with ABO exceeding assets. Assets exceed ABO for all
domestic plans.
1994 1993
---------------- ----------------
Assets ABO Assets ABO
exceed exceeds exceed exceeds
ABO assets ABO assets
------ ------- ------ -------
Actuarial present value
of benefit obligations:
Vested $387.7 $ 35.5 $396.9 $ 32.9
Nonvested 41.9 4.4 25.2 5.3
------ ------ ------ ------
Accumulated benefit obligation 429.6 39.9 422.1 38.2
Provision for future salary increases 92.1 12.6 104.3 13.1
------ ------ ------ ------
Projected benefit obligation 521.7 52.5 526.4 51.3
Plan assets at fair value 480.3 7.2 484.9 6.4
------ ------ ------ ------
Plan assets in excess of (less than)
projected benefit obligation (41.4) (45.3) (41.5) (44.9)
Unrecognized net loss (gain) 25.1 5.7 20.2 8.9
Unrecognized (negative) prior service
costs 40.9 (7.8) 43.7 (5.3)
Unrecognized net transition obligation 5.7 1.7 6.5 1.9
------ ------ ------ ------
Prepaid (accrued) pension cost $ 30.3 $(45.7) $ 28.9 $(39.4)
====== ====== ====== ======
76
NOTE 13 - POST EMPLOYMENT BENEFITS (Continued)
- ----------------------------------
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation for defined benefit plans
was 8.1% in 1994 and 7.3% in 1993. The weighted average rate of increase in
future compensation levels was determined using an age specific salary scale
and was 5.5% in 1994 and 5.6% in 1993. The weighted average expected
long-term rate of return on plan assets was 8.5% in 1994 and 8.6% in 1993.
In addition to providing pension benefits, the Company, primarily in the
United States, provides certain health care and life insurance benefits for
most retired employees. In 1992, the Company adopted Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. The Company elected to immediately recognize
the cumulative effect of the change in accounting for postretirement benefits
of $176.9 ($116.8 net of income tax benefit) which represents the accumulated
postretirement benefit obligation existing at January 1, 1992. In addition,
the effect of adopting the new rules increased 1992 net periodic
postretirement benefit cost by $17.4 ($11.5 net of income tax benefit). Prior
to 1992, the cost of retiree health care and life insurance benefits was
recognized as an expense as benefits were paid. The cost of providing these
benefits to retirees outside the United States is not significant. Net
periodic postretirement benefit cost includes the following components:
1994 1993 1992
---- ---- ----
Service cost $ 3.4 $ 6.0 $ 6.6
Interest cost 9.3 10.3 15.6
Amortization of negative
prior service cost (13.2) (14.3) -
----- ----- -----
$(0.5) $ 2.0 $22.2
===== ===== =====
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheets as part of
other long-term liabilities:
December 31, December 31,
1994 1993
------------ ------------
Accumulated postretirement benefit obligation:
Retirees $ 66.3 $ 55.5
Fully eligible, active plan participants 36.2 52.6
Other active plan participants 25.5 37.7
------ ------
128.0 145.8
Unrecognized negative prior service cost 67.9 61.5
Unrecognized net loss (9.9) (16.8)
------ ------
Accrued postretirement benefit cost $186.0 $190.5
====== ======
In December 1992, the Company amended its retiree health care benefit
plan to require that, beginning in 1994, employees have a certain number of
years of service to be eligible for any retiree health care benefit. The
retiree health care plan provides for certain cost-sharing changes which limit
the Company's share of retiree health care costs. The Company continues to
fund benefit costs on a pay-as-you-go basis with the retiree paying a portion
of the costs.
77
NOTE 13 - POST EMPLOYMENT BENEFITS (Continued)
- ----------------------------------
The health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 10.02% in 1994 and was assumed to
decrease gradually to 5.75% in 2005 and remain at that level thereafter. For
retirees under age 65, plan features limit the health care cost trend rate
assumption to a maximum of 8% for years 1994 and later. The health care cost
trend rate assumption has a significant effect on the amounts reported.
Increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation by
4% and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for 1994 by 6%.
The discount rate used in determining the accumulated postretirement
benefit obligation was 8.25% at December 31, 1994 and 7.25% at December 31,
1993.
NOTE 14 - RELATED PARTY TRANSACTIONS
- ------------------------------------
The Company purchased raw materials and services totalling $46.8 in 1994,
$39.4 in 1993, and $43.5 in 1992 from The Dow Chemical Company and its
affiliates. The Company believes that the costs of such purchases were
competitive with alternative sources of supply. Other transactions between
the Company and related parties were not material.
NOTE 15 - INCOME TAXES
- ----------------------
The components of income (loss) before income taxes are as follows:
1994 1993 1992
---- ---- ----
U.S. companies $ (47.2) $(516.7) $(20.8)
Non-U.S. companies 61.8 94.7 70.8
------- ------- ------
$ 14.6 $(422.0) $ 50.0
======= ======= ======
The components of the income tax provision (benefit) are as follows:
1994 1993 1992
---- ---- ----
Current
U.S. $ 62.6 $ 14.3 $ 4.7
Non-U.S. 47.5 37.9 59.9
------ ------- ------
110.1 52.2 64.6
------ ------- ------
Deferred
U.S. (96.0) (205.4) (26.7)
Non-U.S. ( 6.2) 2.3 (27.8)
------ ------- ------
(102.2) (203.1) (54.5)
------ ------- ------
$ 7.9 $(150.9) $ 10.1
====== ======= ======
78
NOTE 15 - INCOME TAXES (Continued)
- ----------------------
The tax effects of the principal temporary differences giving rise to
deferred tax assets and liabilities were as follows:
December 31, December 31,
1994 1993
------------ ------------
Implant costs $288.0 $225.0
Accrued expenses 97.2 62.8
Postretirement health care and life insurance 61.7 63.0
Basis in inventories 24.9 24.8
Tax credit and net operating loss carry forwards 2.5 5.6
Other 26.4 20.9
------ ------
500.7 402.1
Valuation allowance (1.0) (3.5)
------ ------
499.7 398.6
------ ------
Property, plant and equipment (66.3) (60.1)
Other - (5.8)
------ ------
(66.3) (65.9)
------ ------
Net deferred tax asset $433.4 $332.7
====== ======
At December 31, 1994, income and remittance taxes have not been recorded
on $217.9 of undistributed earnings of foreign subsidiaries, either because
any taxes on dividends would be offset substantially by foreign tax credits or
because the Company intends to indefinitely reinvest those earnings. Cash
paid during the year for income taxes, net of refunds received, was $62.4 in
1994, $72.5 in 1993, and $68.2 in 1992.
The effective rates of 54.1% for 1994, (35.8)% for 1993, and 20.2% for
1992 differ from the U.S. federal statutory income tax rate in effect during
those years for the following reasons:
Year ended December 31,
--------------------------------
1994 1993 1992
---- ---- ----
Income tax provision (benefit)
at statutory rate $ 5.1 $(147.7) $17.0
Foreign taxes, net 10.6 0.4 (8.2)
Foreign sales corporation (3.7) (2.1) (1.0)
State income taxes (12.6) 1.7 1.6
Other, net 8.5 (3.2) 0.7
----- ------- -----
Income tax provision (benefit)
at effective rate $ 7.9 $(150.9) $10.1
===== ======= =====
In the first quarter of 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes, which
requires an asset and liability approach in the measurement of deferred taxes.
Financial statements prior to 1992 have not been restated for this change in
accounting principle. The cumulative effect of adopting SFAS 109 as of
January 1, 1992, increased 1992 net income by $16.4. Except for the
cumulative effect, the change did not have a material effect on operating
results for the periods presented.
NOTE 16 - COMMON STOCK
- ----------------------
The outstanding shares of the Company's common stock are held in equal
portions by Corning Incorporated and Dow Holdings Inc., a wholly-owned
subsidiary of The Dow Chemical Company. There were no changes in outstanding
shares during 1994, 1993 or 1992.
79
NOTE 17 - COMMITMENTS AND GUARANTEES
- ------------------------------------
The Company leases certain real and personal property under agreements
which generally require the Company to pay for maintenance, insurance and
taxes. Rental expense was $45.5 in 1994, $46.2 in 1993, and $48.4 in 1992.
The minimum future rental payments required under noncancellable operating
leases at December 31, 1994, in the aggregate are $141.8, including the
following amounts due in each of the next five years: 1995 - $39.7, 1996 -
$28.2, 1997 - $20.8, 1998 - $17.5, and 1999 - $15.1.
NOTE 18 - INDUSTRY SEGMENT AND FOREIGN OPERATIONS
- -------------------------------------------------
The Company's operations are classified as a single industry segment.
Financial data by geographic area are presented below:
1994 1993 1992
---- ---- ----
Net sales to customers:
United States $ 888.3 $ 830.6 $ 822.6
Europe 554.5 490.9 528.7
Asia 652.0 619.9 500.8
Other 109.8 102.3 103.6
-------- -------- --------
Net sales $2,204.6 $2,043.7 $1,955.7
======== ======== ========
Interarea sales:
United States $ 317.6 $ 219.6 $ 228.3
Europe 46.9 54.7 45.1
Asia 9.5 9.2 6.6
Other 0.3 0.3 1.9
-------- -------- --------
Total interarea sales $ 374.3 $ 283.8 $ 281.9
======== ======== ========
Operating profit:
United States $ 338.8 $ 192.3 $ 131.8
Europe 36.0 59.2 23.8
Asia 53.8 68.7 64.4
Other and eliminations 14.2 7.1 9.7
-------- -------- --------
442.8 327.3 229.7
General corporate expenses (401.7) (703.6) (123.4)
Unallocated income (expense), net (26.5) (45.7) (56.3)
-------- -------- --------
Income (loss) before income taxes $ 14.6 $ (422.0) $ 50.0
======== ======== ========
Identifiable assets:
United States $1,083.0 $1,071.2 $1,091.4
Europe 486.4 423.6 455.5
Asia 593.8 498.1 490.0
Other and eliminations 38.9 37.3 64.1
-------- -------- --------
2,202.1 2,030.2 2,101.0
Corporate assets 1,891.1 1,232.1 89.7
-------- -------- --------
Total assets $4,093.2 $3,262.3 $2,190.7
======== ======== ========
80
NOTE 18 - INDUSTRY SEGMENT AND FOREIGN OPERATIONS (Continued)
- -------------------------------------------------
Interarea sales are made on the basis of arm's length pricing. Interarea
sales in 1993 and 1992 for Asia have been restated to reflect the combination
of the former Japan and Pacific areas. Operating profit is total sales less
certain operating expenses. General corporate expenses, equity in earnings of
associated companies, interest income and expense, certain currency gains
(losses), minority interests' share in income, and income taxes have not been
reflected in computing operating profit.
General corporate expenses include implant costs, certain research and
development costs, and corporate administrative personnel and facilities costs
not specifically identified with a geographic area. Identifiable assets are
those operating assets identified with the operations in each geographic area.
Corporate assets are principally cash and cash equivalents, short-term
investments, anticipated implant insurance receivables, intangible assets,
investments accounted for on the equity basis, and corporate facilities.
81
DOW CORNING CORPORATION
-----------------------
SUPPLEMENTARY DATA - QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 AND 1993 (Unaudited)
--------------------------------------------------
(in millions of dollars, except per share amounts)
QUARTER ENDED: March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1994:
Net sales $509.1 $552.4 $559.7 $583.4
Gross profit 177.8 192.7 182.7 181.1
Net income (loss) 37.2 40.5 34.7 (119.2)(1)
Net income (loss) per share 14.88 16.20 13.88 (47.68)
1993:
Net sales $490.8 $519.9 $512.0 $521.0
Gross profit 161.2 166.9 162.6 149.1
Net income (loss) 30.7 36.3 30.2 (384.2)(1)
Net income (loss) per share 12.28 14.52 12.08 (153.68)
(1) Includes a pretax charge related to breast implants of $241.0 in 1994
($151.8 net of income tax benefit) and $640.0 in 1993 ($415.0 net of income
tax benefit); see Note 2 of Notes to Consolidated Financial Statements for a
discussion of this matter.
The Notes to Consolidated Financial Statements are an integral part of
these financial statements.