What is the potential financial exposure from the Dow Corning breast implant litigation?

Dow Corning, 50% owned by Corning, has proposed funding a settlement trust and litigation facility of up to about $3.2 billion (nominal) over 16 years under the Joint Plan. Corning and Dow Chemical have each agreed to provide up to $150 million in credit facilities. Corning's investment in Dow Corning is already fully written off, so the main risk is the cost of litigation against Corning as a shareholder and any future equity earnings or losses. Management considers the risk of a materially adverse result for Corning to be remote.

Why did Corning issue this 10-K/A amendment?

The amendment (No. 2, dated April 6, 2000) expands the disclosure on the Dow Corning breast implant litigation. It does not change the financial statements. It is intended to give investors more detail on the bankruptcy plan, the scope of shareholder releases, and the pending appeals.

How strong was Corning's 1999 operating performance?

Results were strong: sales rose 24% to $4.7 billion, and excluding non-recurring items, income from continuing operations rose 32% to $502.9 million. Growth was led by Telecommunications (optical fiber demand, photonics) and by Information Display's advanced display products, where sales grew almost 60%. Fiber prices fell 10% to 20% during the year, so volume growth drove the results.

How is Corning funding its large 2000 acquisitions and capacity expansion?

Corning raised about $2.2 billion through a common stock offering completed January 31, 2000, and about $485 million through euro-denominated securities in February 2000. These proceeds fund the $1.4 billion Siemens optical business acquisition, repay Oak Industries debt and commercial paper, and support roughly $1.2 billion in expected 2000 capital expenditures. The NetOptix acquisition (~$2 billion in stock) is expected to close in the second quarter of 2000.

What are the main risks for investors beyond litigation?

Key risks include pricing pressure in optical fiber and cable, dependence on a limited number of suppliers for certain telecom components, execution risk on large integrations and capacity builds (including start-up costs at the Concord, North Carolina plant), and foreign currency exposure, since most equity affiliate earnings come from abroad (96% of the 22% of income from continuing operations contributed by equity affiliates). Dilution from the 2000 equity raise and acquisitions also matters for per-share results.

GLW 10-K Filed Apr 7, 2000

01—Abstract

Summary

Summary of the 10-K/A filed April 7, 2000. Cited figures are marked; the original filing is the authoritative source.

This Form 10-K/A (Amendment No. 2) for fiscal 1999 from Corning Incorporated (NYSE: GLW) was filed to expand disclosure on the Dow Corning breast implant litigation, which remains the most significant contingent overhang.

Dow Corning, a 50/50 joint venture with Dow Chemical, is in Chapter 11, and a Joint Plan confirmed in November 1999 could require up to ~$3.2 billion^a (nominal, over 16 years) in funding. The December 1999 bankruptcy court opinion limited shareholder (Corning and Dow Chemical) releases to tort claimants who voted for the plan, and appeals are set for District Court argument on April 12, 2000. Corning carries Dow Corning at zero after a 1995 $365.5 million write-off, so any resolution is a contingent upside or downside rather than a balance sheet item, and management views implant-suit exposure against Corning as remote.

Operationally, 1999 was a strong year. Net sales rose 24% to $4.7 billion^b, diluted EPS from continuing operations increased 37% to $1.95 (or $1.92 excluding non-recurring items), and the Telecommunications segment grew 38% on premium LEAF fiber and photonics demand. The company is in a major growth-investment phase: the Oak Industries pooling merger closed January 28, 2000, the Siemens optical fiber business was acquired for $1.4 billion, and the pending NetOptix acquisition (~$2 billion in stock) was announced.

Capex is projected at about $1.2 billion^c for 2000. To fund this, Corning raised roughly $2.2 billion in an equity offering and about $485 million in euro-denominated securities in early 2000, which significantly strengthens liquidity but dilutes existing holders.

Key risks for investors include execution on large integrations and capacity expansions, the cyclicality of optical fiber pricing (prices fell 10%^d to 20% in 1999 even as volumes tripled), dependence on a limited number of optical component suppliers, Asian and foreign currency exposure (about 22% of income from continuing operations came from equity affiliates, 96% of which are foreign-based), and the unresolved Dow Corning proceedings. Note that this amendment restates no financial statements; it supplements the litigation disclosure in the original 10-K.

02—Key points

Key Highlights

1999 net sales rose 24% to $4.74 billion; income from continuing operations rose 44% to $511.0 million, and diluted EPS from continuing operations reached $1.95 (up 37%).
Telecommunications segment sales grew 38% to $2.96 billion, driven by premium LEAF fiber volumes (tripled year over year) and photonic technology sales up 64%.
Dow Corning breast-implant exposure: a Joint Plan could require up to ~$3.2 billion nominal funding over 16 years, with Corning and Dow Chemical each providing up to $150 million in credit facilities; Corning's investment is fully reserved (zero carrying value).
Appeals of the bankruptcy court's limitation on shareholder releases are set for District Court argument on April 12, 2000, with outcome uncertain.
Early 2000 capital raising: ~$2.2 billion common equity offering (January 31, 2000) and ~$485 million euro securities, funding the $1.4 billion Siemens acquisition and debt repayment.
2000 capex is expected to be about $1.2 billion, and a pending ~$2 billion NetOptix acquisition plus the Oak Industries merger (pooling, closed January 28, 2000) signal a major expansion phase.
Management considers the environmental (~$20 million accrual) and other litigation exposures, including the Quest Diagnostics indemnities, not materially adverse to overall financial condition.

03—Questions

Frequently Asked Questions

What is the potential financial exposure from the Dow Corning breast implant litigation?
Dow Corning, 50% owned by Corning, has proposed funding a settlement trust and litigation facility of up to about $3.2 billion (nominal) over 16 years under the Joint Plan. Corning and Dow Chemical have each agreed to provide up to $150 million in credit facilities. Corning's investment in Dow Corning is already fully written off, so the main risk is the cost of litigation against Corning as a shareholder and any future equity earnings or losses. Management considers the risk of a materially adverse result for Corning to be remote.
Why did Corning issue this 10-K/A amendment?
The amendment (No. 2, dated April 6, 2000) expands the disclosure on the Dow Corning breast implant litigation. It does not change the financial statements. It is intended to give investors more detail on the bankruptcy plan, the scope of shareholder releases, and the pending appeals.
How strong was Corning's 1999 operating performance?
Results were strong: sales rose 24% to $4.7 billion, and excluding non-recurring items, income from continuing operations rose 32% to $502.9 million. Growth was led by Telecommunications (optical fiber demand, photonics) and by Information Display's advanced display products, where sales grew almost 60%. Fiber prices fell 10% to 20% during the year, so volume growth drove the results.
How is Corning funding its large 2000 acquisitions and capacity expansion?
Corning raised about $2.2 billion through a common stock offering completed January 31, 2000, and about $485 million through euro-denominated securities in February 2000. These proceeds fund the $1.4 billion Siemens optical business acquisition, repay Oak Industries debt and commercial paper, and support roughly $1.2 billion in expected 2000 capital expenditures. The NetOptix acquisition (~$2 billion in stock) is expected to close in the second quarter of 2000.
What are the main risks for investors beyond litigation?
Key risks include pricing pressure in optical fiber and cable, dependence on a limited number of suppliers for certain telecom components, execution risk on large integrations and capacity builds (including start-up costs at the Concord, North Carolina plant), and foreign currency exposure, since most equity affiliate earnings come from abroad (96% of the 22% of income from continuing operations contributed by equity affiliates). Dilution from the 2000 equity raise and acquisitions also matters for per-share results.

04—Continue

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