康寧 (GLW) 2002 Q3 法說會逐字稿

Hello and welcome to the Corning Inc. third quarter earnings release.

Today's call is being recorded at the request of the company.

If anyone has objections, please disconnect at this time.

I would like to introduce the manager of investor relations, Mr. Ken Sofield.

Good morning to the conference call.

This is being webcast on the Web site.

Jim Flaws will lead the construction.

Wendell Weeks will join for the Q & A. Before I turn the call over to Jim, I should mention today's remarks constitute forward-looking statements within the meaning of the private securities private litigation act of 1995.

These involve risks and uncertainties and other factors that could cause actual results to differ materially.

These risks are detailed in the company's SEC reports.

Jim?

Good morning.

We released our earnings for the third quarter, sales were 837 million, lower than second quarter, but they were in line with our expectations.

We had a net loss of 25 cents a share in the third quarter which included eight cents a share impairment and restructuring charges and 12 cents from the declaration of dividends on Corning's 7% series C mandatory convertible preferable stock offering that was completed earlier this quarter.

Lastly, we recognized a gain from debt repurchases of one cent per share.

I'll go into more detail about these in a minute.

Excluding these special items, our net loss in the third quarter was six cents a share, compared to a net loss of seven cents per share in the second quarter.

Obviously we are very pleased we could meet the guidance we gave back in July.

However, we are not satisfied with our loss position.

We told you back in July, if our telecommunications business continued to weaken, further restructuring would be necessary.

That has clearly happened.

Before I go through the details of the restructuring plan, let me finish walking you through the income statement.

Gross margins for the third quarter were 19.5%, compared to 23.8 percent in the second quarter.

The decline was driven primarily by fiber and cable business due to continued pricing pressure and lowered sales volume.

SG&A was 157 million in the third quarter, compared to 191 million in the second quarter.

The significant reduction was due to cost reduction efforts but also reflected 20 million in benefit from the reduction compensation benefit and accruals appeared some property tax refunds.

This one time impact from these items is not expected to recur in the fourth quarter.

Our D and E came in at 115 million in the third quarter, 17 million less than the second quarter, as we continued to closely monitor the programs that receive funding.

Our tax benefit rate, excluding restructuring impairment charges an the gain on the repurchase of debt was 27%.In addition to the restructuring and impairment charges in the third quarter, we recognized a one cent per share gain on the repurchase of debt.

In the third quarter, we repurchased approximately 58 million in accretive value of our zero coupon debentures for 35 million in cash and a series of open market transactions.

One overall point on the third quarter results.

Cash and short-term investment balance was over 1.6 billion at the end of September versus 1.3 billion last quarter.

This increase in cash was due to the combination of our preferred stock offering at the beginning of the quarter, less cash paid for severance payments, and the Lucent transaction and debt repurchases.

Now, regarding the Lucent transaction, its impact on the reported cash.

The cash paid directly to Lucent was 123 million.

However, since the ventures we purchased contained 100 million in cash, the net impact to Corning in the third quarter was cash outflow of only 23 million.

We will owe Lucent an additional 25 million if certain revenue targets are met in the fourth quarter, but we believe it is highly unlikely those targets will be reached.

In addition, the fourth quarter we will pay a note due of 27 million and shareholders dividends of 15 million (ph).

As a result, we estimate the final net impact of this transaction to be about 65 million at the end of the fourth quarter.

We believe we have done a good job so far of managing cash flow.

Excluding the impact of financing activities and related investments Corning used 111 million of cash and short-term investments in the third quarter.

Included in the number is 77 million for restructuring and the previously mentioned 23 million net for the Lucent transaction.

Let me take time to walk you through the third quarter restructuring actions.

Then the specifics behind our recent fourth quarter restructuring announcements.

The total charge included in the third quarter was125 million, 85 million after tax, and include the following on a pre-tax basis. 47 million in employee related costs from work force reductions. 67 million in charges pertaining to facility closures and fixed asset impairments. 11 million in other exit costs including lease terminations.

As part of our third quarter work force reduction we eliminated approximately 1,000 positions.

Approximately 350 of these positions were salaried and almost all were spread across the telecommunications segment, corporate research and administrative functions.

This brought our total reductions this year to 4400 positions in total.

Of this amount, approximately 3,000 have left the company as of September 30th.We expect the remainder to be out of our cost structure in the next three months.

The cost savings from the third quarter charges were included in the guidance at the end of the second quarter.

As you saw this morning in our press release, we are embarking on an extensive new round of restructuring that will take place in the fourth quarter.

Clearly these were painful decisions, but ones that had to be made.

We have been reviewing all our alternatives for some time and believe that these decisions were in the best interests of our telecommunications businesses and our company as a whole.

We believe they are necessary to protect the long-term financial health of this company and, more importantly, help us meet our goal of returning to profitability in2003.We expect the total pre-tax charge to be in the range of 550 to 650 million in the fourth quarter and we will include the following actions: The permanent closure of our fiber manufacturing plants in noble park, Australia.

The proposed permanent closure of our fiber manufacturing plant in Roystaid (ph), Germany.

The Microsoft bawling of our fiber manufacturing plant in Concord, North Carolina.

Reductions in capacity at Corning cable systems, capabling (ph) hardware and equipment locations worldwide.

The permanent closure of our thin film manufacturing facility in the United States.

These items will result in work force reductions of approximately 2200 positions.

These reductions are in addition to the approximately4600 positions eliminated year to date and will bring the total to 6800 for the year.

We expect the majority of these positions to be out of our cost structure by the end of the first quarter of 2003.

Approximately 50 percent of the positions announced today will be salaried and are primarily spread across our telecommunications businesses.

Moving to the reduction in fiber capacity.

We expect the fiber plant closings to be completed in early 2003.

While this does represent a significant reduction in our current fiber capacity, we will still be operating our Wilmington, facility, our largest.

In addition we will be in a position to ramp back at Concord.

That is our second largest plant.

We have a large amount of future potential capacity to bring back on line.

In fact, we will have the flexibility of bringing it back in small increments, to better match up with the improvements in fiber demands.

If need be we could have the Concord facility backup and running in nine months of a decision to do so.

A quick comment on the inherent differences between Microsoft bawling a plant and permanently closing them.

In the case of the permanently closed facilities, all fixed and variable cash costs will be eliminated, including depreciation.

With the Concord, we will be able to reduce our fixed and variable costs, with the0 exception of the need to continue to recognize our need (ph) .Why are we doing this?

We took out a fiber plant in the UK last year.

Since then we have been running idling facilities from time to time and running at 50 percent of capacity.

The rebound in fiber which we continue to believe in will not come soon.

And as a result we are moving to decisively improve our P&L and cash flow in the fiber business.

With Wilmington we maintain capacity.

Our capacity with Wilmington will be 50 percent of peak capacity in mid 2000 (ph) so we will be responsive to our customers' needs.

Most importantly the fiber business should be profitable excluding the Concord depreciation and it's already cash flow positive position will improved dramatically.

We also proposed reducing the workforce and assets throughout the worldwide cabling, hardware and equipment operations.

We expect a majority of these actions to be completed by the end of the first quarter of 2003.

Moving to the restructuring actions involving the photonics (ph) business.

We remain commit to do this business and competing in this market, but on a smaller scale.

The closing of the worldwide thin film manufacturing capabilities is evidence of our commitment to focus our efforts on the products in which we continue to have a technological advantage over our competitors.

We will be permanently closing the facility in Marlboro, Massachusetts.

That will happen by the end of the year.

We will further evaluate further restructuring in this business and that may result in further charges in the fourth quarter.

Approximately 25 percent of the total fourth quarter restructuring charges will be cash.

As a result of these fourth quarter actions, we expect to realize annualized cost savings of approximately 165 million.

You should begin to see the benefit of these actions in the first quarter of 2003.

We will provide more detail and specifics around the cost reductions in early December.

Now let me turn to the business results for the quarter.

Starting with telecommunications.

Revenues in the segment were 366 million, a decline of 16 percent from the second quarter.

This sequential sales decline was driven primarily by continued lower demand for products across all our telecommunications businesses.

The segment posted a net loss of 137 million, which was fairly consistent with the second quarter.

Revenues in the optical fiber and cable business were 195 million, a decline of 8 percent from the second quarter.

Fiber volume this quarter declined 10 percent sequentially, and fiber prices fell between ten to 15%.The mix of premium fiber in the third quarter was consistent at slightly less than 10%.

In photonics (ph) technologies, revenue in the third quarter was 17 million, down over 15% (ph), from the second quarter.

However as a reminder we received a settlement in the second quarter of 14 million, which increased the sales number.

Excluding this item, sequential sales declined and the third quarter was 32%.Sales in hardware and equipment in the third quarter were 153 million, down 11 percent from the second quarter.

As with our other businesses in telecommunications segment, this one continues to be impacted by the slow down in capital spending, particularly from the incumbent carriers and cable TV operators.

The turmoil in the market because of accounting controversies and customer (ph) bankruptcies continue to impact the negative capital spending by the telecommunications customers.

This impacted sales obviously in each of the segments in and is a contributing factor in incurring the loss in the third quarter.

Turning to the information display segment, third quarter revenues of 228 million were up 8 percent over the second quarter.

Led by strong gains in each of the three businesses.

Net income increased 23 percent sequentially.

Led by strong equity earnings from Samsung Corning precision and increased volume at the precision lens business.

In our display technology consolidated businesses, with service in Japan and Taiwan revenue from the third quarter were 106 million, up 4% sequentially.

Driven by movement in the end and slight volume gains.

Pricing was stable.

As a reminder we continue to operate at full capacity.

Our ability to grow square footage of glass was limited in the third quarter.

Volume at Samsung Corning precision grew 10 percent sequentially.

As a result of demand, we experience record resurgence in demand during the quarter.

In response we anticipate bringing on additional capacity in the fourth quarter.

In comparison to the third quarter of last year, revenues in the display technologies business grew 34%.

The increase in revenues was driven by year-over-year volume gains of over 50 percent in our consolidated business, offset somewhat by price declines.

Samsung Corning precision experienced volume gains of 45 percent in the third quarter, compared to last year.

Demand for our glass continues to be driven by market acceptance for flat panel desk top monitors, as well as purchases of notebook computers.

Desk top monitor sales have grown more than 70 percent over the last year alone fueled mainly by repurchases as customers upgrade.

The market penetration for LCD monitors is only four (ph) percent of the market.

Net increased 35%.

Demand was once again driven by digital television market, particularly here in the United States and in China, as consumer spending remained strong.

The inventory levels of our customers, the projection television manufacturers were at historically low levels during the third quarter.

This can be attributed to the rapid movement of product through the supply chain to meet current market demand.

The sequential improvement in net income was primarily due to manufacturing efficiencies and reduced operating costs.

In the conventional television glass business, revenues were up 15 percent sequentially as volume gains more than offset price declines.

The worldwide command for CRTs remained flat but we were able to benefit from the market demand for larger sizes.

However, despite the increase in revenues, the business posted a loss for the quarter.

Equity earnings at Samsung Corning in the third quarter were basically flat in comparison to the second quarter.

Moving to advance materials, third quarter revenues of 239 million were basically flat compared to the second quarter.

Net income fell 50 percent sequentially, primarily due to normal summer manufacturing shut downs in our environmental technologies and life sciences businesses and our yourcare (ph) equity joint venture.

These led to manufacturing efficiencies.

Environmental technologies revenues for the third quarter were 102 minimum and consistent with the second quarter, typically the strongest quarter for this business.

Continued financing incentives given by auto manufacturers helped sustain demand in North America which offset the impact of normal shut downs in the industry.

We were pleased to see the financing incentives extended to 2003 models.

We were not sure if it was for new demand or spurred demand in the fourth quarter that would occur next year.

Net income fell almost 20 percent, due to plant sellings at inventory rather than production, in response to normal shut downs in the industry.

Revenues in the life science business were 71 million in the third quarter, down slightly from the second quarter.

The lower sales are attributed to normal summer manufacturing shut downs.

In our other advanced materials business in the segment, revenues in the third quarter were 66 million, consistent with the second quarter.

Volume gains at the semiconductor business were offset by declines and the impact of exiting the lighting business.

Net income fell in the third quarter as a result of tank repairs which glass ceramic cook tops and manufacturing inefficiencies within the semiconductor business.

Let me turn to the balance sheet.

On the balance sheet for the third quarter, DSOs were 58 days, an improvement from 61 days in the second quarter.

Without the impact of receivables from the Lucent transaction, our DSOs would have been almost two days less.

Inventories were 619 million at the end of the third quarter, down from 671 in the second quarter.

We ended the third quarter with 1.6 billion in cash and short-term investments, versus1.3 billion at the end of the second quarter.

Let me take a moment to explain the increase in cash.

During the third quarter, we issued convertible stock which resulted in net proceeds of 441 million.

I have excluded the dividend obligation from this amount.

Major cash outflows for the quarter were 77 million in severance payment and the net 23 million paid for the Lucent transaction.

In addition, we also used 35 million in cash to repurchase 58 million in zero coupon debentures as I mentioned earlier.

Excluding the impact of financing activities and related investments we used only 111 million in cash and short-term investments from operations during the quarter including the severance payments and the Lucent transaction.

We are clearly pleased we have been able to reduce the cash burn to these levels and believe the reductions that have been implemented have helped.

As you may have read in the press release this morning, we have made additional market purchases, primarily of our zero coupon debenture subsequent to the quarter end.

Subsequently we purchase another 204 million accretive value for 118 million in cash.

Clearly we are taking the November 2005 put very seriously by reducing the potential impact to the company.

We will continue to evaluate options leading up to the put date including debt and purchases.

I will not speculate about the potential timing, size or nature of any potential purchases.

Before my comments on cash an liquidity, I have a reminder about our ability to access additional capital.

We have access to a 2 billion credit facility and have drawn nothing from this line to date.

The credit line does not expire until August 2005 and has a covenant, debt to capital ratio that cannot exceed 60%.

We had 45 percent at the end of the second quarter, but it is now at 34.5%.Many of you expressed concern over our ability to maintain the credit ratio in light of there structuring charges or potential operating losses and the good will write off potential in the future.

Let me remind you at the current ratio it would take a combination of 2 billion after tax including the announced fourth quarter restructuring charge before we would hit 60%.

The biggest concern from investors appears to be surrounding the potential for future good will write offs.

Let me give you my thoughts on this.

First, the current good will balance is 2.2 billion.

Of that amount, approximately1.9 billion is related to our telecommunications businesses.

Corning, like most public companies, adopted a new accounting rules governing good will in January of this year.

At that time we performed an assessment of our good will value and along with our auditors determined that no portion of the good will needed to be impaired.

Our annual review of good will balance is performed each fourth quarter and this year's review is currently under way.

It is obvious that the business conditions in the telecommunications industry have deteriorated since the last review in January.

It is now apparent that the fair value of Corning'ss' telecommunications businesses may be lower, making it reasonable that we may have a charge.

Based on the currents status of our analysis, I believe it is very unlikely that the good will related to telecom will be impaired in its entirety.

I do believe it is reasonably possible that some amount may be written off, but I will not speculate on what that amount could be until the required testing has been completed, which will not be until early December.

Before I move on to outlook, I would like to address one more topic that came up recently and pertains to pension plans.

The continued downturn in the financial markets sparked concern that Corning may be required to funds the pension plan due to poor returns in the plan's assets.

Without going into the details, I can tell you for 2002and for 2003, we know there will be no required funding for Corning for its pension plans.

That being said, we have traditionally contributed to pension plan on an annual basis whether or not it is required.

In fact, we have contributed on average about 25 million a year for the last four years, even though we have not been required to.

Looking ahead to 2003, we will likely increase this voluntary contribution to approximately the $60 million range.

In light of the increase in early retirements and the possible decline of plan assets.

We are also considering lowering our earnings rate assumption which is currently 9%.

Our pension committee is currently considering the action.

However, we do not expect the change to have a material impact to the company.

To put it in perspective if we lowered the earnings rate one full percentage point, the impact to the income statement would be 14 million pre-tax.

As a reminder, we only give guidance one quarter at a time.

We are anticipating revenues in the range of 775 million to 825 million, net loss between eight to 12 cents excluding restructuring and impairment charges.

We anticipate further deterioration of the telecommunications market with a fall off in fiber demand.

We expect fiber to be down ten to 15 percent sequentially.

Pricing pressure will continue, but at a reduced level from the third quarter.

Although we believe a good portion of the drop off can be blamed on normal seasonality, the it's difficult to differentiate in this market.

Capital spending decline will be a factor.

Based on the restructuring markets will be critical to meeting profitability objective next year.

In our Corning technology businesses we anticipate further sequential growth from LCD and semiconductor businesses largely to be offset by normal seasonal declines in life sciences businesses.

Ken?

Thank you.

We are ready to take questions.

We will now begin the formal question and answer session using our electronic polling feature.

Press star one on your telephone touch pad if you wish to ask a question at this time.

If you are using speaker phone, lift the hand set.

To cancel your question, press star two.

Star one if you have a question, star two to cancel or withdraw your question.

One moment while the questions register.

First question comes from Steven Fox with Merrill Lynch.

You may ask your question.

Couple of questions on the restructuring.

You said that there could be more actions taken.

I would assume that's around telecom.

Is there anything you can communicate this morning about the other telecom businesses related to what you may be considering, particularly hardware and equipment?

You mentioned there's a possibility for asset sales.

There seems to be some small plant closures.

Is there certain product lines that are keepers and others that will be considered?

Can you elaborate on that a little bit?

In the hardware and equipment area, as you have heard from Jim, a portion of the charge that he has talked about has to do with our changes potentially in cable and hardware and equipment capacity.

The bulk of what we are doing with hardware and equipment is continuing to move our production to lower wage rate countries rather than being primarily about product line exit.

And Wendell, on the fiber capacity reduction, do you feel you're the only company in the industry that is taking out capacity in such an aggressive manner?

How would you characterize the total capacity in the industry right now?

Or what you see it going to in the next six to 12months?

Well, as leaders in the industry, it is incumbent on us to take the lead as well, as far as bringing capacity closer to being in line with demand.

We fully anticipate that the other major players, albeit probably much more quietly than we are doing it, because of the relative significance of fiber to our overall operations, but we will take very similar actions going forward.

We would anticipate that that's what makes sense for them financially and that as a whole the industry will make progress towards moving capacity levels towards demands.

Great, thank you.

One last question, Jim, real quick one.

The diluted share count going forward, what type of number should that be?

After all the shares are convert -- about 1.2.

I can get you an exact number.

I think it's about 1.23, 1.24.

Next question comes from Max Chutes (ph) with Credit Suisse First Boston.

Max Chutes (ph): Two questions.

On the severance payments, could you give us, based on the previously announced restructuring an the announcement today, what the remaining cash payments you expect to have are, and how we should look at the timing of those.

Also could you give us what your sense of, what your break even revenue level would be after all of these additional restructuring measures are complete?

Thanks.

This is Jim.

We do not do breakeven for the corporation because of the different mix we have with the various businesses.

Severance payments, with the announcements that we have done to date, including the ones that will betaking place in the fourth quarter, we have about 450 million of cash obligation.

We expect it to ramp up in the fourth quarter from the 77 million in the third quarter to be in the approximately110, 120 range in Q4, stay at that level at the beginning of next year and gradually go down. 450 million is spread out a big chunk next year but some goes into 2004 also, lengthy severance payments for older employees and some of this is lease payments.

Max Chutes (ph): Okay.

And I was wondering if you can maybe give us an idea of with a break even would be by business segment.

I'm sorry, we don't give that level of detail.

Max Chutes (ph): Thanks.

Thank you.

Our next question comes from David Jackson with Morgan Stanley.

You may ask your question.

Great, thanks a lot.

Can you hear me okay?

Yes, we can.

Great.

Good morning to all of you.

Jim, a quick follow-up question please about the pension plan.

Although you stated that you don't actually have obligations to make payments into the pension plan, could you give us a little bit more explanation just as to what the situation with the pension plan is in terms of the degree to which you estimate is under funded?

And even if you are not obligated to make payments in the short-term, can you talk a little bit about what the longer term obligations are to the pension plan?

Thanks.

Yeah.

We are slightly under 51edat this point in time based on the decline in the marketplace.

And as I indicated, we have always been consistent funders in here, but probably will ramp up to about 60 million.

A lot depends on what we, obviously what happens in the marketplace, but we would say that probably that contribution level of, increased level would need to be sustained for a number of years to avoid having way out in the back half of this decade it ramp up dramatically.

That's why we tend to be more steady contributors to it.

But are planning to ramp it up, as I said.

We are in no danger of mandatory requirements over the next four or five years.

But we want, we are for a variety of reasons going to make the contribution.

That always has been in our financial planning.

Just a quick follow-up, if I may.

When you say that the pension fund is slightly under funded, is that based on your current return assumption of 9%?

And if, for example, the return assumption fell to p seven or seven and a half percent, would that trigger any mandatory payments within what you call the next four or five years?

It is based on 9%.

If the number fell to -- we are not contemplating going down a slow as you said.

Even if it did, it would not trigger mandatory payments.

Thanks a lot.

Thank you.

Once again, that's star one if you have a question at this time.

Our next question comes from Tim Anderson with Salomon Smith Barney.

You may ask your question.

Good morning, guys.

A couple of quick questions.

Jim, I was hoping you could give us quickly some color on your tax line.

I think last quarter you mentioned it was going to hold steady around 25 (ph).

Are you still thinking that given the effective tax rate that came in at around 27?

We did get a little benefit of --we got about $10 million benefit this quarter from having to change the rate to 27%.

I think we are comfortable using the 27% going forward for the time being.

Okay.

One quick question also on your zero coupon, the debentures.

You have been re-purchasing those now for two quarters gradually in the market.

Can you remind us of the outstanding principal still remaining?

I think it's about 1.6 after what we have done in the fourth quarter in the month of October.

We have the ability to repurchase other debt instruments other than that one from time to time.

1.6 fully accreted?

Yes.

Last and quick question, could you give us some comment about the Concord depreciation range, since that still will be flowing through?

You mentioned that the Moth bawling will help fiber break even --

I'm sorry, we don't want to go to that level of detail at this point in time.

Thank you, fair enough.

Thank you.

Our next question comes from Arnema Perry (ph) with Redwood Capital. .

Arnema Perry (ph): Can you give us the size of the underfunded pension today?

The amount we are under funded?

Arnema Perry (ph): Yeah.

I think it's $150 million.

Arnema Perry (ph): Couple of other quick questions.

Could you tell us what your total debt outstanding is today as opposed to repurchases?

Are you giving any guidance regarding cash costs or cash costs for next year in '03?

Total restructuring, total cap ex anticipated?

At some point there was something going on regarding a tax refund you guys expected in '03.

Our total debt outstanding is about$4 billion right now.

And on the cash for next year, I think we said, did say we were expecting are fund in the beginning of the second quarter of about 180 million.

What was your other question?

Arnema Perry (ph): Cap ex and restructuring.

Restructuring you are expecting, you said 450 through '03.

I guess if it's 115 roughly in Q4, then it's 335, I guess in '03?

That is a little bit of that that flows into 2004.

I would say that we are probably around 300 next year.

And then on cap ex, we expect to finish this year in the low 400 range.

And next year we are targeting again to be in the 400 to 500 million range.

Arnema Perry (ph): Great.

Thanks a lot.

Thank you.

Our next question comes from Joseph Wolf (ph) with UBS Warburg.

You may ask your question.

Joseph Wolf (ph): Thanks.

Good morning.

I have a question about the, what went into the decision making process for the Concord and Wilmington decision.

It would be my impression, given the relative ages, that the Concord facility would be more efficient platform for producing the fiber, but from an accounting perspective the Wilmington might be a little bit more of a near term cost savings.

I'm wondering if you can go into the efficiency of the manufacturing operations at the two plants and what went into that decision.

Sure, Joseph.

As we made the decision, we are really balancing two factors.

One is cost and the other is capacity.

Of the technology that we have in Concord, we also have in the majority of our Wilmington capacity, tower five is the same technology as Concord.

I believe, Joseph, you've actually seen tower five.

So it's very similar technology background for the bulk of our production.

Probably the most important factor in the decision is the relative amount of capacity.

Wilmington has a lot more capacity potential in it than Concord.

What we were concerned about is that we felt that if we were to, for instance, Moth ball (ph) Wilmington, we would have to reopen it very quickly because demands would out strip the capacity.

We said we would take nine months to bounce back at Concord should the demand bounce back.

Joseph Wolf (ph): Is it fair to assume that Concord is a more modular facility as well in terms of a reopen in a stage process or is that not --

As Jim said in his comments, the fact that we have, we have the whole facility built and we're already, since we are only Mothbawling (ph) it, going to be handling the depreciation continuing in our P & L, from a cost effective standpoint you can't fire up one line at a time and it doesn't negatively impact our financials much.

Joseph Wolf (ph): Great, thank you.

Thank you.

Our next question comes from Kevin Slocum (ph) with SoundView.

You may ask your question.

Kevin Slocum (ph): Wendell, could you maybe give us a little bit of global color on what you are hearing from customers in the fiber business?

Yes, I will, Kevin.

Although what I must say as a disclaimer at the beginning is that our customers have not been too right on what is going to happen with their demand so far through the year.

So with that disclaimer, what we are hearing from customers is that they would anticipate next year in terms of installations to be relatively flat, maybe down a little as we go forward into next year.

However, that is in terms of installations.

Remember, they had large inventory amounts that they have been correcting and we're also hearing from them that that inventory correction will be largely complete by the end of this year.

The only region where we see continued strong demand this year is in Japan, as they are very committed to fiber into the home and they are doing it and probably going to step up their investment in that going forward.

Kevin Slocum (ph): Okay, thanks.

Thank you.

Our next question comes from Scott Kinnem (ph) with U B.S O'Connor (ph).

You may ask your question.

Scott Kinnem (ph): Just a follow-up in terms of the cash contributions.

Basically 60 million this year, 60 million next year and 60 million as you see going out to 05?

No, the first 60 million is in January of next year.

Scott Kinnem (ph): Okay.

We did 25 this year.

Scott Kinnem (ph): Twenty-five, 60 going out then?

Right.

Scott Kinnem (ph): The other is answered.

Thanks very much for your help.

Thank you.

The next question comes from Robert Weaver with Forrester.

You may ask your question.

Yes, the zero convert is cash or common put, is it not?

The zero convert is not a cash pay.

You are asking what the put could be?

Yes, is it cash or common put?

The put can be our choice.

Given the fact that there is a potential for a liquidity situations, why do you feel it's necessary to spend all this cash resources buying it back?

Well, we have announced strategy that we are going to reduce the leverage of the company and that's what we have been pursuing and we are -- part of that is working against the put.

We could choose to reduce other parts of our debt over a period of time.

Obviously, I think it's important to remember, people, that this is an 05put.

That's still three years away.

Okay, thanks a lot.

We have time for one more caller.

Thank you, sir.

Last question comes from Jean Fratory (ph) with Lazard Frair (ph).

Jean Fratory (ph): Good job in a tough environment.

I have a question, on the closures you are making, is there any anticipated reduction in R & D that would be associated with winding down some of the fiber business?

Or is your run rate going to be in line where you had it in the past on R & D side of the all in basis for the company?

For R & D, all in for the company we would still anticipate to be spending over10 percent of our sales on R & D. We have reduced the raw dollars we're spending and have reallocated amongst our portfolio dramatically, but we will continue to spend very significant portion of our sales on R & D.

But you will see the absolute dollars continue to come down as we he into next year.

Jean Fratory (ph): Is 10 percent a number you would like us to take for guidance?

No.

Jean Fratory (ph): No?

We will not give guidance in terms of percent anymore.

We will give you as we approach next year, we will tell you what the level would be in terms of dollars.

Jean Fratory (ph): One last question, if I may.

The closure of the fiber plants is going to result in a cash charge.

You have 165 million?

I'm sorry,125 million?

And then the annual savings of 165, is that likely to continue going forward?

Is that a one or two-year increase?

No, you can build that in your models as a permanent decrease.

Jean Fratory (ph): Thanks very much.

Great.

I'll pass it to Jim for closing comments.

Thank you for tuning in.

We remain committed to turning this business towards profitability.

We have had a concerted effort to right size the company in a climate continuing to deteriorate, without getting better in the near term.

We believe the restructuring actions are evidence of our commitment.

We hope you recognize the choices we made over the last several months have been difficult but necessary to reach that goal.

We are also considering further strategic decisions and may announce additional actions in the fourth quarter.

We continue to believe in the future of optical communications as evidenced by our decision to retain the fiber capacity at our world class Concord facility.

We are fortunate to have a stable of other businesses, many of which participate in growing markets.

We have been a technology company, one that relied on its dedication to research.

We remain committed to invests in the future no matter how difficult the environment is.

I said something during the last call that is important to mention again.

We have been in existence over 150 years.

You don't get to be one of the oldest companies in America by standing still an not taking action.

Facing these difficult times we did what we said we would do, make extensive decisions to bring the company back to profitability while protecting its financial health.

We believe today's announcements are proof of our commitment and evidence of our desire to maintain the proud history this company has.

To quote Jaime from earlier this year, we will succeed.

Ken?

Thanks, Jim.

Thanks everybody for joining us.

A replay will be available that runs until 5:00 p.m. on Wednesday, November 13.

To listen dial four 02 220-9812.

No password is required.

The audio cast is also available on the Web site during that period.

That concludes our call.

Please disconnect all lines.

Thank you, sir.