Corning 2007 Annual Report

When compared to 2006, income before equity earnings for 2007 was up significantly due to higher net sales, lower manufacturing
costs, and an increase in royalty income from Samsung Corning Precision. Corning licenses certain of its patents and know-how to
Samsung Corning Precision, as well as to third parties, which generate royalty income. Refer to Note 7 (Investments) to the
consolidated financial statements for more information about related party transactions.
Equity earnings for 2007 increased by 5% when compared to 2006 due to volume gains of 39% at Samsung Corning Precision offset
by price declines of 15% and increased operating and royalty expenses. The impact of foreign exchange rate movements on equity
earnings was not material in 2007 when compared with 2006.
The Display Technologies segment has a concentrated customer base comprised of LCD panel and color filter makers primarily
located in Japan and Taiwan. For 2007, AUO, Chi Mei Optoelectronics Corporation, and Sharp Corporation, which individually
accounted for more than 10% of segment net sales, accounted for 62% of total segment sales when combined.
In addition, Samsung Corning Precision’s sales are concentrated across a small number of its customers. In 2007, sales to two LCD
panel makers located in Korea, Samsung Electronics Co., Ltd. and LG Phillips LCD Co., Ltd. accounted for approximately 93% of
total Samsung Corning Precision sales.
Corning continues to invest heavily to expand capacity to meet the demand for LCD glass substrates. In 2007 and 2006, capital
spending in this segment was $883 million and $829 million, respectively. We expect capital spending for 2008 to be in the range of
$800 million to $1.0 billion. In December 2007, we announced a 5-year capital expenditure plan of $795 million to locate a glass
manufacturing facility at Sharp Corporation’s plant in Sakai City, Japan. Production from this new facility is expected to meet Sharp
Corporation’s plan to begin production of LCD panels for large televisions by March 2010. In February 2008, we announced a $453
million expansion of our LCD manufacturing facility in Taichung, Taiwan. The range provided for 2008 segment capital spending
includes some spending for recently announced projects.
2006 vs. 2005
The net sales increase for 2006 reflected overall LCD glass market growth. During 2006, glass substrate volumes increased 52%
compared with 2005, driven by the same factors described in 2007. Sales of large-size glass substrates accounted for 69% of total
sales volumes in 2005. The growth in volume was partially offset by declines in weighted average selling prices of approximately
16%. Movements in the U.S. dollar – Japanese yen exchange rate negatively impacted 2006 sales by approximately $122 million (or
7%) when compared with 2005.
In the second quarter of 2006, the Display Technologies segment reported its first quarterly sequential decline in volume since the
third quarter of 2001. The lower volume was the result of a number of our customers, primarily in Taiwan, idling part of their
facilities and thus reducing their demand for glass, as a result of a build-up of panel inventory in the supply chain. Both volume and
sales increased in the third quarter of 2006 when our customers reduced their inventories and began ramping up LCD panel
production to meet seasonally stronger demand.
For 2006, the increase in income before equity earnings was primarily the result of higher volumes and manufacturing cost reductions,
offset somewhat by lower prices and the impact of exchange rates. Movements in currency exchange rates negatively impacted 2006
income before equity earnings by approximately 5% when compared with 2005.
The increase in our 2006 equity earnings, primarily from Samsung Corning Precision, was largely driven by the same market factors
identified for our wholly owned business. In 2006, Samsung Corning Precision’s earnings were negatively impacted by approximately
8% from movements in exchange rates compared to 2005. Equity earnings from Samsung Corning Precision are susceptible to
movements in the U.S. dollar–Japanese yen and U.S. dollar–Korean won exchange rates.
In 2005 and 2004, Corning and several customers entered into long-term purchase and supply agreements in which the Display
Technologies segment agreed to supply large-size glass substrates to the customers over periods of up to six years. As part of the
agreements, these customers agreed to make advance cash deposits to Corning for a portion of the contracted glass to be purchased. In
2007 and 2006, Corning received $105 million and $171 million, respectively, of customer deposits and issued $231 million and $126
million, respectively in credit memoranda. We do not expect to receive additional deposits related to these agreements. Refer to Note
10 (Other Liabilities) to the consolidated financial statements for additional information.
In the event customers elect not to purchase the agreed upon quantities of product, subject to specific conditions outlined in the
agreements, Corning may retain certain amounts of the customer deposits. If Corning does not deliver agreed upon product quantities,
subject to specific conditions outlined in the agreements, Corning may be required to return certain amounts of the customer deposits.
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