康寧 (GLW) 2002 Q4 法說會逐字稿

Hello and welcome to the Corning fourth quarter earnings release.

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

If anyone has any objections, you may disconnect at this time.

I would now like to introduce today's conference host, the Manager of Investor Relations, Mr. Ken Sofio.

Sir, you may begin.

Thank you.

Good morning, and welcome to Corning's fourth quarter conference call.

This is also being audiocast on our website.

James Flaws, Vice Chairman and Chief Financial Officer will lead the discussion.

Wendell Weeks, President and Chief Operating Officer will join for the Q&A.

Before I turn the call over to Jim, I should mention except for the published results and its [INAUDIBLE] comparisons, today's remarks constitute forward-looking statements in the meaning of the Private Securities Litigation Reform Act of 1995.

These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially.

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

Jim?

Thanks, Ken.

Good morning, everyone.

This will be a slightly longer than normal call due to our complicated results, due to the accounting for our sales of Precision Lens and also the special charges we took.

But to simplify to the chase, we think we did fine versus our overall guidance.

Last night we released our results for the fourth quarter, as well as restated historical results reflecting the sale of our Precision Lens business.

As many of you know, we completed the sale of Precision Lens business on December 13, which means that our fourth quarter results include about 2 1/2 months of sales and earnings from that business.

Current accounting rules require us to restate our historical results to reflect the Precision Lens business as a discontinued operation.

As a result, I'll be excluding the impact of Precision Lens from the majority of my comments during this mornings conference call.

But before I talk about our results on a restated basis, let me first tell you how we performed in comparison to our fourth quarter guidance, which had included Precision Lens.

Sales for the fourth quarter including Precision Lens were about $801 million, lower than the third quarter but well within our guidance range.

We had a net loss of 9 cents per share compared to 6 cents per share in the third quarter.

Please note that both of those numbers exclude special items such as our restructuring and impairment charges.

I'll go into more detail about these special charges in a moment.

Clearly, we're very pleased we're able to meet the guidance that we had given back in October.

Now just a few brief comments on the sale before I move on to the restated numbers.

Back in April we said we would explore the possible divestiture of certain assets to raise cash and help strengthen our balance sheet.

Clearly, we believe we have met that objective with the sale of Precision Lens business.

Proceeds from the sale were $850 million.

We received approximately $800 million of this in cash when the sale was completed on December 13th.

An additional $50 million was placed in escrow until the fourth quarter of 2003.

We expect to receive that amount in full by that time, but that is obviously subject to any outstanding [INAUDIBLE] warranty clients.

We'll be using the proceeds to repurchase debt and improve our balance sheet.

Also as we said in announcing the sale, we have used some of the proceeds in the fourth quarter to make an additional contribution to our pension plan, which I will discuss later.

The net gain recognized on the sale was $415 million after-tax, or 35 cents per share in the quarter.

We're happy to tell you that from a cash flow perspective, we will not pay tax on this transaction as it was offset by our net operating tax carrying forwards.

The sale of the Precision Lens business was somewhat bittersweet.

This business has been part of the Corning family since we purchased it in 1986, and it has been a key contributor to our sales and earnings for some time.

Particularly the last several quarters.

While we're saddened by the departure of those employees, we know they're going to another great company, 3M, and we have no doubt they'll continue to thrive as part of 3M's corporate family.

Many of you have asked if we're considering the sale of other large businesses.

The answer is no.

Although we may consider to sell some smaller non-strategic assets, we have no plans at this time for any other significant divestitures.

Now let me walk you through our results of on a restated basis with Precision Lens having moved to discontinued operations.

You should note that we have also given you the earlier quarters of 2002 on a restated basis in our press release.

Sales from continuing operations for the fourth quarter were $736 million compared to $762 million in the third quarter.

The net loss from continuing operations for the fourth quarter excluding special items was 10 cents a share compared to 8 cents per share as restated in the third quarter.

Before I go through the details behind the various restructuring and impairment charges that took place during the quarter, let me finish walking you through the income statement.

Gross margins for the fourth quarter were 14.2%, compared to 16.9% in the third quarter.

The decline in gross margin was driven primarily by lower sales volume at our conventional television business and writeoffs of fiber and cable and hardware and equipment inventory.

SG&A was $183 million in the fourth quarter compared to $157 million in the third quarter.

As a reminder, the third quarter had included a one-time benefit of $20 million from reduction in compensation benefit rules and property tax refunds.

In addition, you should remember that the cost savings from restructuring actions announced during the fourth quarter were not expected to benefit us completely until the first quarter.

Research development and engineering came in at $113 million in the fourth quarter, which was consistent with the third quarter as we continue to hold the line of spending in this area.

Other expense in the fourth quarter did increase over the third quarter due to an increase in legal reserves.

Our tax benefit rate excluding special items, was 30%, an increase from 28% in the third quarter.

The change in the rate was primarily due to a shift in the expected mix in domestic and international earnings and resulted in net $20 million benefit in the quarter.

Now, let me summarize for you the various restructuring impairment charges we announced during the fourth quarter.

Please remember these are not new charges and were within our previous estimates.

We had restructuring charges in the fourth quarter of $652 million pretax or $536 million after-tax, 45 cents per share.

On a pretax basis, we had $421 million in charges related to facility closures, $137 million of employee-related costs from workforce reductions, $47 million in impairment of cost investments from the telecommunications segments and $47 million related to other exit costs and credits.

These charges stem from our permanent closing of our fiber manufacturing plants in Noble Park, Australia and [INAUDIBLE] Germany as well as the mothballing of our fiber plant in Concord, North Carolina.

In addition, these charges included anticipated reductions and capacity at Corning cable systems cabling hardware equipment locations worldwide.

We also made the decision to permanently close our thin film filter manufacturing facility in the U.S.

We have now fundamentally completed the closing of the fiber plants in Germany and Australia as well as mothballing of Concord.

We expect to complete the remaining actions at our cable hardware equipment locations by the end of this quarter.

These actions have resulted in workforce reductions of approximately 2500 positions.

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

Approximately 50% of these positions were salaried.

For the year, we've eliminated 6800 positions.

And since we began our restructure program back in 2001, we have eliminated close to 19,000 positions.

Barring any additional material business changes, we anticipate that our employment level at the end of 2003 will be close to 22,000 employees, down from a peak employment of 42,000.

These decisions have been difficult for our employees and communities.

But unfortunately they have been necessary.

We strongly believe as a result of these actions we have been able to protect the long-term financial health of the company and move closer to our goal of returning to profitability this year.

Now, let me share with you some of the thoughts on our fiber capacity decision.

As we previously stated, we are not anticipating any growth in telecommunications market, including fiber, until the end of 2004 at the earliest.

Could we be surprised and see some growth before then?

Absolutely.

But our assumption and belief this is not likely to occur.

Based on these assumptions, we have evaluated our current fiber and cable capacity levels and compared them against a market expectations.

This is a result in our decision to reduce our fiber capacity by approximately 50%, including the decision to mothball our Concord facility.

However, I would like to remind you while these decisions do not represent a significant reduction in fiber capacity for us, we will still be operating our Wilmington, North Carolina facility, which is our largest.

With Wilmington, we will retain a very capable and cost-efficient capacity.

This facility was able to handle 50% of our fiber-making needs during our peak capacity in the of 2000, and we will also maintain the capability of producing all the various fiber types at Wilmington.

We continue to believe in the long-term viability of this business, which is why we decided to mothball the Concord facility instead of closing it permanently.

Concord facility is our second largest fiber plant and represents a large amount of future potential capacity.

Since we're not expecting growth in telecom market this year, we believe we made the right decision to mothball it.

This decision will allow us to reduce almost all our fixed and variable costs associated with the Concord plant, with the exception of depreciation.

Looking ahead when we begin to see the need for additional capacity, we will have the flexibility to bring Concord back in small increments line by line on order to match future improvements and fiber demand.

If need be, we can have the Concord facility back up and running within six to nine months of a decision to do so.

Most importantly, however, we continue to produce and ship fiber today throughout our domestic and international customers.

In fact, even before the recent restructuring actions, our fiber and cable business was cash flow positive for cash restructuring payments.

Let me quickly now switch gears and talk about our Photonics business.

Unlike our fiber business, the market demand for Photonics products has declined much more dramatically.

This has forced us to take a hard look at the ongoing viability of this market and whether we want to continue to participate in it.

As a result, over the last several months, we have taken steps to narrow our product scope down to those technologies where we have a clear competitive advantage.

Most recently, we announced the closing of our thin film manufacturing capabilities as part of our refocusing efforts.

The question now is have we done enough.

We continue to explore a number of alternatives, which range from further reducing our product scope to partnering to another company to getting out of the business altogether.

While we remain convinced there will always be demand for product that manipulate light, we're not as convinced that the level of demand over the next several years is enough to support the business as it's currently structured.

However, we're committed to supplying those products in which we currently have a technological advantage.

As a result, we'll continue to evaluate our options and determine whether further restructuring this business is necessary.

In addition to the pretax restructuring charges, you should also note that an after-tax charge includes $20 million in restructuring impairment charges recorded by Samsung Corning micro optics, as well as the impairment of two small cable equity investments.

To summarize our fourth quarter restructuring actions, approximately 25% of the charge will be in cash in the form of severance payments.

We expect the total amount of cash payment, severance payment in 2003 to be approximately $300 million.

With the outflow more heavily weighted towards the first half.

For some of our longer-term employees, their payments will have [INAUDIBLE fall into early 2004.

For those of you who do not follow Corning closely, we do not pay severance in one lump sum, but rather over a period of time depending on the length of service.

Let me turn to goodwill and other intangible impairments.

In the fourth quarter, we also completed a review of our goodwill balance.

Which resulted in an impairment charge of $400 million pretax, $295 million after-tax or 25 cents per share.

This writeoff pertains entirely to our goodwill in our telecommunications segment.

As a result, the goodwill now approximates $1.7 billion with about 1.5 of this amount related to telecom.

The size of the goodwill impairment was within our previous guidance and was based ultimately on our long-term view of the telecommunications market.

As well as estimated future cash flows from the business in our telecommunications segment.

As many of you know, the accounting rules here are very complex and are based on a number of assumptions regarding our long-term view of telecommunications market.

As I mentioned earlier, we do not believe there will be a significant improvement in the market until late 2004.

We will again review our goodwill balance in the fourth quarter of 2003.

We think the chance of another goodwill charge in 2003 is low.

Because of our business outlook for the telecom already assumes there will be no recovery until 2004.

In addition, I know some of you are worried that a strategic decision in our Photonics business whether to partner, narrow our product scope or exit, may cause an additional write-off to goodwill.

I can tell you that no matter what our ultimate decision in Photonics is, we believe it's unlikely we will have to adjust our goodwill balance significantly.

Remember, the goodwill value is based on the total cash flows of the segment, and the majority of this segment is currently fiber, cable, hardware and equipment.

During the quarter, we also had other impairment charges of $409 million pretax, $239 million after-tax, or 20 cents a share.

Related to the decline of certain tangible and intangible assets.

Approximately $270 million of the charge relates to our Photonics business, and is a reflection of very significant decline and prolonged expected downturn in the optical components marketplace.

The remaining charge of $140 million relates, pertains to our conventional television glass business and reflects the impact of the decline in the television tube industry in North America.

Charges in both business were noncash and primarily impacted fixed assets.

In addition to restructuring impairment charges in the fourth quarter, we recognized a gain of $86 million or 4 cents per share from the repurchase of debt.

In the fourth quarter, we repurchased $215 million in accreted value, our zero couponed debentures for $125 million in cash in a series of open-market transactions.

One another point on our fourth quarter results, our cash and short term investment balance was almost $2.1 billion at the end of December, versus $1.6 billion last quarter.

The increase in cash was primarily due to the $800 million in proceeds from the Precision Lens business offset by cash paid for debt repurchases and severance payments.

Now let me move on to our business results for the quarter.

Starting with telecommunications.

Revenues in the segment were $363 million for the fourth quarter, basically flat with the third quarter.

The segment posted a net loss in the fourth quarter of $171 million, compared to $137 million in the third quarter.

Decline in net income is due primarily to inventory reserves in fiber and hardware cable equipment and the previous mentioned legal and bad debt accruals taken in the fourth quarter.

Full year revenues for the segment were $1.6 billion, down significantly from the 2001 revenues of $4.4 billion.

The net loss in the segment for the year was $592 million compared to $81 million a year ago.

Revenues and optical fiber and cable business were $197 million and basically flat in the third quarter.

Fiber volume increased approximately 6% sequentially primarily due to higher-than anticipated demand from Japan during the quarter.

Pricing pressure as expected was not as severe as it's been the last several quarters.

For the fourth quarter pricing was down 5 to 10% sequentially.

Even though the price declines have moderated, it's too soon to tell if this is a shift in the trend.

And the mix of premium fiber in the quarter was consistent, slightly less than 10%.

Sales in the hardware and equipment business in the fourth quarter were $128 million and down about 6% from the third quarter.

The results from this business were impacted by the continued decline in capital spending in the industry, particularly from incumbent carriers and cable TV operators.

In Photonic technologies, revenue in the fourth quarter was $19 million, up slightly from the third quarter.

We were pleased by this increase.

Now, I would like to move on to what we refer to as our technology segment.

With the divesture of Precision Lens and the reduced significance of conventional video components business, we have realigned the remainder of the information display segment with the businesses previously [INAUDIBLE] in the advanced materials segment to create the technology segment.

Of course, we will still discuss the results in each business is separately as we've done in the past.

As a reminder, these results do not include the Precision Lens business.

For the fourth quarter, revenues in the technology segment were $367 million, down 6% from the third quarter.

Decline in revenues in the quarter was primarily due to a normal seasonal volume declines at our environmental and life science businesses, as well as the impact of the continued market deterioration at our conventional television business.

Net income, including equity earnings was $45 million in the fourth quarter, compared to $47 million in the third quarter.

Sales in the technology segment for the year were $1.5 billion.

About 4% less than last year.

However, keep in mind that we exited the lighting business during the first half of 2002.

Excluding the sales from the lighting business last year, revenues in the technology segment were actually flat on a year-over year basis.

Net income this year was $168 million, consistent with last year.

In our display technologies consolidated business sales for the fourth quarter were $104 million, and fairly consistent with the third quarter.

Volume gains of 6% were offset by price declines of 4% and the impact in the end 3%.

Volume at Samsung Corning Precision grew 17% sequentially in the fourth quarter.

Our entire family of LCD businesses continues to run at full capacity, and we again experienced record production shipments during the quarter.

To meet this continued surging demand, we will continue to add capacity at our consolidated business.

In addition, you may have also read the Samsung Corning Precision has recently announced an expansion at it's facility in [INAUDIBLE] Korea.

Full year revenues in the display technologies business were $405 million, up 25%.

The increase in revenues was driven by the volume increases of 45%, offset somewhat by price declines.

Family revenues, meaning consolidated sales plus Samsung Corning Precision sales were approximately $740 million, up an impressive 40% over the prior year.

Volume at Samsung Corning Precision for the year increased almost 60% compared to last year.

Demand for our liquid crystal display glass continues to be driven by market penetration of flat panel desktop monitors, as well as the sales of notebook computers.

LCD monitor sales continue to grow as consumers replace and upgrade their CRTs with LCDs.

In 2002 alone, sales of LCD monitors have grown 50%.

In addition, the retail prices for 15 and 17 inch LCD monitors have now fallen to a point where they are much more affordable for the average consumer.

We also like the fact the price points have come down far enough on 17-inch monitors that the consumer now has an option of upgrading to a larger size.

We obviously like any migration of larger size monitors, it quite simply translates into demand for more glass.

Now the difference between 15 and 17 inches may not sound like a lot, but for us that translates into a 30% increase in glass.

While the demand for LCD monitors has increased dramatically this past year market penetration of the desktop market was just 30% at the end of 2002.

In the environmental technologies business, revenues for fourth quarter were $96 million, a decline of 6% from the previous quarter.

This decline was typical for this time of year as auto manufacturers work through their excess inventories and close out the year.

However, compared to the fourth quarter of last year, revenues increased 13%, driven by the continued financing incentives that have stretched into 2003.

Net income environmental technologies in the fourth quarter fell 33% sequentially, due to the lower volumes in research and development spending.

Revenues in our life science business were $65 million in the fourth quarter, down about 8% from the third quarter.

However, the lower sales are attributable to a normal seasonal decline.

As a reminder, this business sells primarily its products to pharmaceutical and academic research institutions, which are typically closed during the latter part of December.

For the year, sales in the life science business totaled $280 million, which made this the best year ever for this business in terms of revenue.

That's quite an accomplishment given the long history of this business.

Moving to conventional television business.

Revenues for the fourth quarter declined 25% from the third quarter and the business reported a loss.

This decline was the result of continued market weakness, coupled with normal holiday shutdowns in the industry, which impacted both price and volume.

Equity earnings however, at Samsung Corning doubled due to volume increases and the one-time tax benefit.

In our other technologies businesses, which included semiconductor materials, and opthalmic products, revenues in the fourth quarter were $67 million and consistent with the third quarter.

Volume gains at our semiconductor business were offset by volume declines in the ophthalmic business.

Now let me turn to the balance sheet.

On the balance sheet, DSOs for the fourth quarter were 56 days compared to 53 days in the third quarter.

As a reminder, these numbers exclude Precision Lens for both quarters.

If we had included Precision Lens, DSOs would have fallen from 58 to 54 in the fourth quarter.

Overall, we are quite pleased to continue to maintain our DSOs at these low levels.

Inventories were $559 million down from $620 in the third quarter.

We entered the fourth quarter with almost $2.1 billion in cash in short term investments, versus $1.6 billion at the end of the third quarter.

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

As I mentioned, the major in-flow of cash in the quarter was $800 million in proceeds received from the sale of Precision Lens.

The major cash outflows for the quarter included $85 million in severance, $125 million in cash to repurchase the $215 million in zero coupon debentures.

In addition as I mentioned during our last conference call, we paid off the note to Lucent of $27 million in the fourth quarter to complete the purchase of their fiber and cable assets, as well as paid $15 million in dividends to their minority shareholders.

We also made a contribution to our pension plan of $30 million, which I will discuss in a minute.

We believe we did a good job this year in managing our cash positions and strengthening the balance sheet.

With the sale of Precision Lens business, the issuance of the mandatory convertible preferred stock, we were able to raise approximately $1.4 billion in cash.

This has allowed us to maintain a significant amount of cash in the year while continuing to repurchase our debt.

For the year, were able to reduce our debt levels by almost $800 million.

We continue to be pleased with our cash flow from operations performance where other than restructuring, our usage remains very low.

As you may have read in the footnotes to our press release last night, we also have spent $158 million to make additional open-market repurchases of debt in January.

Before I end my comments on cash flow and liquidity, as a reminder, we continue to have complete access to a $2 billion line of credit and have drawn nothing on this to date.

The credit facility doesn't expire until August 2005 and has only one covenant, a debt-to-capital ratio that cannot exceed 60%.

At the end of the fourth quarter, our debt-to-capital ratio was 46.7%.

Let me talk a few minutes to give you an update on two legal issues pertaining to Corning that have been in the news lately, Dow Corning and Pittsburgh Corning.

Let me start with Dow Corning.

Last month, Judge Hood of the U.S.

District Court ruled in favor of Dow Corning's reorganization plan which includes a global settlement.

We're pleased with the court's ruling and believe it was a significant step in bringing this long, legal situation to closure.

However, we're not ready to celebrate just yet.

The sixth circuit must issue a ruling and the plaintiffs may still petition to the Supreme Court for a review, which could further prolong the process.

If the Supreme court decides to listen to their appeal, we believe Dow Corning's emergence from bankruptcy could be delayed until mid-2004.

If the Supreme court decides to not listen to their appeal and it was within their right to do that, then we believe Dow Corning could emerge from bankruptcy as early as the end of this year.

Many of you asked us when we began to recognize equity earnings from Dow Corning and what we may do with the business when it emerges from bankruptcy.

I can tell you we are currently evaluating the decision by the district court and are deciding if we've reached a point where we feel it is appropriate to recognize equity earnings from Dow Corning.

As I have said many times and as we have disclosed in our public filings, we would resume recognizing equity earnings from Dow Corning when we believe it's probable that the business will emerge from bankruptcy.

This is what we're currently working through and when we've made a decision, we'll let you know.

As far as what we'd do with Down Corning once it emerges from bankruptcy, right now I can only state the obvious.

Dow Corning is a very valuable franchise and a leader of its industry.

We will do what is in the best interest of the company and the shareholders at that point in time.

Let me take a moment to update you on where we stand with Pittsburgh Corning.

We have outlined this position of potential impact to us in our 10-Q filings for several quarters.

We have been having discussion with the plaintiffs.

These discussions have been difficult, and we cannot at this time predict what the outcome will be.

We're considering all options that will serve the best interest of our shareholders.

Before I move into our outlook, I would like to provide you with some specifics about our pension plan.

This has been a popular topic of late with investors, particularly at this time of the year, as companies tend to update their pension assumptions.

Let me first, however, start with your current funding status.

At the end of 2002, Corning's pension plan was underfunded by approximately $180 million.

This amount resulted in after-tax adjustment to equity of $174 million for all of 2002.

The adjustment did not impact the P&L.

We have traditionally contributed to our pension plan on an annual basis regardless of whether it's required or not.

In fact, we have contributed on average $25 million a year for the last 10 years, even though we're not required to do so.

However, due to the potential for financial markets to continue to underperform, we made the decision to increase the level of voluntary contributions.

In fact in the fourth quarter, we made a voluntary contribution of our pension plan of $40 million using the proceeds from sale of Precision Lens as I mentioned earlier.

We also plan to make an additional voluntary contribution totaling $60 million in 2003.

Going forward, our current assumption is that we'll continue to make that level of contribution to the pension plan on an annual basis until market conditions improve.

We have also decided to lower the assumed rate of return on a pension assets from 9% to 8.5%.

The change will impact our P&L by approximately $8 million pretax in 2003.

Keep in mind this rate only impacts the amount of pension expense and has no impact on funding ratios or the amount we're required to contribute.

Now, on our outlook.

We will be discussing our first quarter guidance at our annual investor meeting on Friday, February 7th at the Pierre Hotel in New York City.

At that meeting, you will be hearing from our Chairman and CEO, James Houghton about his thoughts on the company, how we performed against the priority setback in April, and how he feels about our prospects as we enter the new year.

At the meeting, I will also take a few moments to discuss corporate governance, liquidity and specific balance sheet items.

Wendell Weeks will walk you through his proposal for what he believes will drive us to profitability this year.

Pete Volanakis the President of our Corning Technology segment will talk about the exciting growth prospects inherent and those businesses and what you should expect to see from them in the near future.

There will also be ample time for a question-and-answer session with management.

Joining the four of us for the Q&A will be Joe Miller, Corning's Chief Technology Officer.

We hope to see you there.

Ken?

Thank you, Jim.

We'll take questions now.

Thank you, sir.

We will now begin the formal question-and-answer session using our Q&A polling feature.

If you wish to ask a question at this time, you'll need to press star 1 on your telephone touch pad.

If you're operating speaker equipment, you may need to left your handset prior to pressing star 1 to unmute your telephone.

To cancel or withdraw your question, press star 2.

And once again, that's star 1 of you have a question, and star 2 to cancel or withdraw your question.

One moment while the questions register.

Our first question comes from Matt Schutz with Credit Suisse First Boston.

You may ask your question.

Hi, two questions.

One, was wondering if you could give us a little bit of color on the two items that impacted the cost of goods in this quarter.

The amount that came from the inventory writedown and the amount from the conventional TV volumes and also if you're expecting and any sort of rebound in the conventional TV volumes or a decrease in the impact going forward?

Second on the Samsung Corning Precision expansion.

I was wondering if you could comment on the budget for that expansion and whether it would be funded internally by Samsung Corning or whether there was any possibility of Corning having to contribute cash there.

Thanks.

Matt, let me give you an update on our what effect the questions around gross margin for the quarter.

First of all, our gross margin I think it was a little lower than people expected.

As a reminder, the Precision Lens business was quite profitable.

Second, as I did mention, we had some inventory charges and the impact of those two items in general -- in total had an impact of about 4% on our gross margin compared to what you would have previously seen.

Conventional television probably added another percent to that drop-off from our expectations.

On conventional television, we have hopes for a little bit of a rebound, but as we said in general this business, the industry is sliding downward.

Turning your second question on Samsung Corning Precision.

This entity self funds its capital spending.

The business is very profitable, pays us a dividend and is also capable of funding the capital expansions that we see presently in line for the upcoming year.

Thank you.

We'll take the next question from Tim Anderson with Salomon Smith Barney.

You may ask your question.

Yeah, thank you.

Got two questions for you, Jim.

Was wondering if you could take a quick minute and talk about the fact that you had a big spike up in your other income line.

Typically that has been breakeven to a little bit profitable and it went to a $28 million loss.

I wanted to know what happened there and what your thoughts are going forward.

Also, was hoping that you could spend a second and give us a bit of a prognosis on the LCD market.

What I would like you to react to is there does seem to be the concern in the marketplace that there might be a mild panel over supply in 2003, and I wanted to get your thoughts on what impact that might have on the LCD business.

Okay, I will let Wendell take the second.

First on the spike in other income, other expense, it really was a spike.

You may recall in my opening, I mentioned some legal reserves and that's where we booked them, about $20 million.

They related strictly to some intellectual property disputes that we've had, and also a minor claim on one of the deals we did, and we decided it was appropriate to reserve at the minimum level that we thought that we could potentially settle at, but you should not expect to see that on a going-forward basis.

Wendell, you want to talk about LCDs.

Sure.

LCDs is one of the key things we look to, to your question is what is the balance in the channel inventory levels.

As you might remember in quarter two, they had drifted up to around six weeks.

What typically happens from our customers is price, they lower price when they have too much capacity to clear that inventory that is in the channel.

Right now, we see about two weeks in the channel, so that is in very good shape.

One of the firms that tracks where a display is overall is called Busonic.

They have recently come out and said the supply demand situation looks balanced to them right now.

We would expect that to continue into the coming year.

Longer term, we expect this business to continue to grow at a compound annual growth rate of 25 to 30%.

Great.

Thank you.

Thank you.

We'll take the next question from Nicos Theodosopolus with UBS Warburg.

You may ask your question.

Yeah, thank you.

I had two, one quick question and a longer-part question.

You can comment on the minority interest that went up significantly sequentially and, the question on the fiber business.

Can you can give a sense of what the sequential trends were in volumes, excluding Japan?

Just to get a sense of what is happening and was the Japan increase somewhat seasonal or do you think the strength there continues going forward?

Thank you.

Nicos, nice to hear from you again.

On the minority interest, it's very simple.

It relates strictly to our [INAUDIBLE] Corning [INAUDIBLE] video television business where the losses there, the increased losses then turn around to reflect we shared the 49% of those with our partner [MASAHI], that's what drove that.

I will let Wendell talk about the fiber market outside of Japan.

Hi Nicos.

As we took a look at the fiber market quarter four versus quarter three, the area of strength was clearly Japan, and what that is, is that is related to NTT, a building out the west with fiber to the home.

What it really shows is the power of fiber on the home on volumes.

Japan's about the size of California and is already one of the most tele-dense countries in the world.

Yet with a decision to do fiber in the home we see a major spike in inventory and not inventory, but in demand.

Even though our market share in Japan is a lot less than what it is in other regions.

So, when we would expect Japan to continue its strength through quarter one and perhaps somewhat after that.

The rest of the markets, China was up some and North America came in pretty much as expected down slightly, which is following this typical seasonality, and Latin America continues to be troubled and continues to trend down, but that's a pretty small market for us, Nicos.

Okay, and just clarify on the minority interest.

Is that kind of one-time in nature and is it done toward the year end, or what should we expect there going forward?

It's the number that is booked every quarter.

Essentially what it is Nicos is that the operating losses at [INAUDIBLE] or if there are profits, we book there the other, the 49% of it.

So, if we get better there, the benefit of that goes down, if it stays at this level of loss which we actually hope it not be, we'll be pretty flat going forward.

So a lot depends on our performance.

Okay, thank you.

Thank you, once again, that is star 1 if you have a question at this time.

Our next question comes from John Roberts with Buckingham Research.

You may ask your question.

Morning, guys.

Good morning, John.

Could you give us what depreciation and amortization was in the quarter and whether that one a good level for the first quarter and then secondly, was the underlying equity loss in the telecom segment of $14 million equity loss there, could you make talk about the equity companies in telecom.

Yeah.

On the depreciation and amortization was 147 for the quarter, and I won't comment on this upcoming year.

We will give more guidance on cash flows on February 7th.

Embedded in the equity companies, is in fact, we talked about the telecom, the impairment at Samsung Corning micro optics and the impairment of two minor cable equity investments, that was really going on there.

We really don't have much in the way, you might recall when you covered us previously, the big telecom equity things most of those companies were bought out over the last couple of years.

So there really isn't much there other than that.

It looked like the underlying excluding the charge number was a $14 million loss there and it had been running more like 345 in previous quarters.

Let me drill the research on that and we'll be ready of you give Ken a little call later.

Okay, thank you.

Thank you, we'll take the next question from [INAUDIBLE] with CIBC World Markets.

You may ask your question.

Hi, guys. on environmental down 6%, you said it was some inventory out of the auto industry.

Any idea what March might look like?

Do you think that will clean up for March?

As we take a look at auto for the entire year next year, especially as we take a look at worldwide vehicle production, we think that next year worldwide vehicle production for light duty vehicles is going to continue to be in the range of what it was this year.

Shares between about 56 and 57 million kilometers, next year we would expect that to be down a percent to up about 2.6%.

Concerning in the North America side was that in November channel inventories, especially for domestic cars, has drifted up.

They came down some in December, but they still ended the year with about 70 days of supply with imports at slightly over 50 days.

I think if they continue to do the stimulus around sales that we have seen the auto companies do, that inventory level won't be a problem.

So, what, once again, I think sometimes we get overly fixated with North America light duty vehicle and now given the nature of our business, and our strength on a worldwide basis, you need to take a look at it at the worldwide level where we see pretty much flat performance year-over-year.

Okay, I got two quick ones for Jim, just housekeeping. '03 CAPEX, you said Samsung Corning Precision would be self-funding.

Just the '03 CAPEX number?

Or are we going to have to wait for that for New York?

You have to wait officially, but I said previously that the range would be between 4 and $500 million.

Okay, and then you did take reserves on the IP side, legal reserves but to date, no reserves on Pittsburgh Corning.

I know you didn't really have employees in that venture but do you anticipate taking reserves there is?

No, if you follow our 10-Q for the second and third quarter, you will see we have outlined what could be the potential of the settlement if one were to occur, but this is very difficult negotiations so, you know, we believe that the more likely outcome right now would be litigation.

That's why we have no reserves.

We never lost a case on this.

Okay.

But we'll see how the settlement talks go with the plaintiffs over the next few weeks.

Okay.

Great.

Thanks, guys.

Thank you, we'll take the next question from Raj [INAUDIBLE] with Deutsche Bank.

You may ask your question.

Thank you.

First question, does the fiber sales in Japan, is that premium predominantly or single mode or a combination?

It's primarily single mode giving the relatively short distances involved with fiber in the hull.

Okay, is this correct, Wendell, that I keep hearing that despite the pricing coming down that the fiber pricing for Corning is always at a premium to everybody elses'.

Is that correct?

That's correct.

The premium tends to run in about the 5 to 10% zone.

Okay.

Finally a question for Jim.

Can you sort of give us any idea in terms where of do you expect on a quarterly run rate basis your breakeven on a cash flow basis and EPS basis.

The revenue run rate?

I'm sorry, you're going to have to wait until February 7th to get a little more detail about that.

Thank you.

Thank you, and once again, that's star 1 if you have a question at this time.

And our next question comes from Steven Fox with Merrill Lynch.

You may ask your question.

Yes, good morning.

First a couple of quick financial questions, Jim.

From a cash cycle standpoint, is there anymore room for improvement in 2003 or given the nature of your business, is it going to stay at current levels?

Well our cycle in the first quarter is always slightly weaker from an operating basis, but our goal for this upcoming year is very simple in the cash area.

We intend to have our free cash flow to be positive before the tail on restructuring.

We expect that to come about from, obviously, our goal on profitability.

We expect to continue to do well in the accounts receivable area, and I think there are some opportunity in the inventory reductions.

And then looking at your R&D going forward, it looks like it's still running about 2-X, what most people would consider an average for the company historically.

Should we look at this and say that you're willing to run at a higher level as a percent of sales in this slow environment, or could there be more cuts?

No, you will see a reduction in RD&E.

We will talk about that in Wendell's presentation on February 7th, but we have noted before that we have taken some restructuring charges to close some of our international laboratories.

This question is for Wendell.

On the North American business, Wendell, could you peel the onion a bit looking at CATV versus RBOC, what demand looks like and what it looks like in the fourth quarter and your expectations, how you would benefit from an upgrade from AT&T Broadband.

Both cable TV and ILEX were down in the fourth quarter slightly.

And no great difference between the two.

We tend to see that this time of the year.

Largely because of the onset of winter.

The -- as we look forward, we see about installations in the ILEX market to be about the same as they were this year.

The demand from us to increase because they have largely burned through the cable inventory that they they had in their yards.

For cable TV, I think you're right to focus on the AT&T Broadband buildout in part of the new Comcast, that is the major build going on.

It's largely in the west.

Which is a position of strength for us in many of our product lines.

So we would anticipate to benefit from that at the fiber level and also at the connector level for cable TV.

Thank you very much.

Thank you, and our next question comes from Leon Berger with Principle Global Investors.

You may ask your question.

Morning.

First question I got was what was the balance on the zero coupon convertible at the end of '02?

I think it was about a billion six.

A billion six.

Okay, and what's the accreted value of the amount that you repurchased the first 23 days of January?

We have not outlined that.

We'll do that in our quarter one filing.

Okay.

Okay, thanks.

Thank you, our next question comes from Larry Green with Maple Row Management.

You may ask your question.

Hi, guys, looking for more color on your current LCD glass capacity and what your expectations are for that.

Well we're operating a full right now in, terms of our overall capacity so you can get a sense based on the revenue level in the fourth quarter.

We have projects of expansion underway in both our Korea for our equity companies for the, in Taiwan and also in the United States and in our Kentucky factory.

We have not given out our capacity increase for competitive reasons, but as Wendell indicated, we're expecting in this business over the upcoming year to continue to see an upward trend in volume as we have been on a good run for a couple of years there and we intend to put capacity in place to service that at a minimum and maybe perhaps a little bit more.

Do you guys have an idea of market share?

In that space?

We don't disclose market shares other than to say we're three times the size of our nearest competitor.

Thank you.

Thank you, and our next question comes from Gabriel Lowy with Credit Lyonaisse.

Thank you, good morning.

First the candor and clarity of the presentation and replies is much appreciated.

The question I had is, on the progress of the diesel plant build and how and when you would see the revenues starting to to build there, both on a geographic region, product region, customer basis.

Maybe if you could give us some color on how you see that CAPEX start to turn into revenue in a marketplace perspective.

First of all, I want to thank you very much for your compliments.

Sometimes we hope to give you the direct feedback and we appreciate hearing that it helps.

Wendell, you want to talk about diesels?

Sure.

The main driver for our diesel business is the regulations that are triggering or hitting implementation dates in 2007 for the U.S. and earlier than that for Europe.

We remain confident those regulations are going to stay in place, and most of the events and court cases have been decided our way on that.

On the U.S. and the regulations in Europe remain very, very firm.

So as we take a look at that business, we would expect the growth in revenues to actually start this year.

And to grow very rapidly.

Now, it's on a small-based scale and we don't -- we're not going to see a significant sort of upswing in the capital spend there because we're carefully timing it and using our other assets.

But the short version is you expect to see the growth this year and that will continue to build on itself.

And is there -- can you size the market and is this basically like a one-time retrofit as it works its way around the different markets where the regulations in place, or is this something that is more like a sustainable recurring revenue potential?

So this will be like our automotive substraight business for gasoline.

Which is a steady business every time someone buys a car.

Of course it has catalytic converters in it.

And given both the size of the heavy-duty and the heavy-duty vehicles and the catalytic converters required, as well as we see some increasing penetration from diesel passenger cars, we actually believe this business is going to be at least as large and probably larger on a recurring basis than our automotive gasoline substraight business.

And a lot depends on exactly what technology has adopted between the combination of substraights and filters.

But we look at this as a market that is a billion dollar ongoing opportunity for us.

Thank you very much.

We have time for one more question.

Thank you, sir.

Our last question comes from Michael Goldstein with Lord Abbott.

You may ask your question.

Yes, good morning.

Two quick questions.

First of all, you made brief reference to the reasons behind the spike in SG&A in the fourth quarter verses the third quarter.

Was hoping you could walk us through that again as well as the corresponding increase in SG&A as a percentage of sales, where you might expect that to be in the first quarter given some of the recent charges taken.

Secondly, I think you made a quick reference to pricing pressures abating in certain segments of the fiber markets.

Was hoping if you could tell us if it was just in Japan related to the premium markets or if that is also evident in other markets as well.

Okay, I will take the SG&A one.

On SG&A in the third quarter we had a one-time benefit first from some property tax refunds that we had gotten, and second we had reduced some compensation accruables, principally not paying bonuses.

Those returned in this quarter back at the level the third quarter would have been.

We also took about $5 million for a bad debt reserved for some customers out of our Corning cables systems area.

We'll give more complete guidance on quarter one on February 7th, but you will see a step down here, that's where we have been working in part of the restructuring charges this quarter that we took.

Wendell, pricing.

That was really across all of our markets.

The price pressure, or the price drop was less on standard single mode than in some of the premium products.

But as of yet, I think it's too early to reach a conclusion that the price pressure is abating going forward.

It certainly is improving.

We would hope it will continue to improve.

One note, though, if you're doing any of your modeling.

As you go from quarter four to quarter one in this business, we have some contracts that are annual.

And then that just have one price year over year and we'll see some of that price move down trigger starting in quarter one as it compares to quarter four.

Thank you.

Okay.

Let me wrap up. 2002 was an extremely challenging year for the company.

A year in which we had to make very difficult decisions.

But we believe we have done what is necessary, and we believe the company will be profitable in 2003.

We think the actions taken to date have gone a long way to helping us meet the objectives that James Houghton set out for us last year, protecting the financial health of the company, getting back to profitability in 2003, and continuing to invest in the future and growth areas.

If you take into account all that is done in the past year the sale of Precision Lens, repurchasing a significant amount of debt, reductions and assets in the workforce, we frankly think we accomplished a lot.

As I said earlier, it's not been easy necessary, but necessary.

The good news is we are now beginning to see the benefits of our actions in the first quarter and believe we are on the right track to meet all of our objectives this year.

I know that we're looking forward to this upcoming year and the many growth opportunities our diversified set of businesses have to offer to us.

I would like to conclude with a personal note, I would like to share with you some news about our investor relations department.

Many of you have known Kathy Dietz has ben out on the family leave following the birth of her daughter, Grace, last fall.

After much consideration, she has decided to not return to her current position as Vice President of Investor Relations in order to stay home and raise her daughter.

I would like to recognize Kathy's contributions over the last six years to our investor relations efforts and to the corporation's success.

She played a major role in making the department the best practice in the industry.

We're going to miss her on a professional and personal level, but recognize the importance of the current time with Kathy and her brand new and beautiful daughter Grace.

Many of you on the phone know that Ken Sofio has been leading our investor relations effort during Kathy's family leave.

And I have asked him to continue in this role as the head of Investor Relations on an acting basis.

Ken.

Thanks, Jim.

Thanks everyone for joining us today.

A playback of the call will be available beginning at 10:30 eastern time today and run until 5:00 p.m. eastern time on Thursday, February 6th.

To listen, dial 402-220-4612.

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Thank you, sir.