Ladies and gentlemen, thank you for standing by. Welcome to the Corning Incorporated fourth quarter 2014 earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Division Vice President of Investor Relations, Ms. Ann Nicholson. Please go ahead.
Thank you, Greg, and good morning, everyone. Welcome to Corning's fourth quarter conference call. With me today is Jim Flaws, Vice Chairman and Chief Financial Officer. Before we begin our formal comments, I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that this presentation contains a number of non-GAAP measures. Reconciliations can be found on our website. Now I'll turn the call over to Jim.
Thanks, Ann. Good morning, everyone. I'm delighted to share our fourth quarter and full year results with you this morning. Corning had an outstanding quarter that wrapped up two consecutive calendar years of quarterly earnings growth. We entered 2014 with a goal to grow sales and earnings significantly. We delivered on this goal with year-over-year earnings growth in every quarter. For the full year, sales grew 29% and earnings per share grew 24%. The integration of CPM in Korea was a significant driver of the earnings increase. Additionally, in our four other non-display segments, we achieved excellent growth, which of course has been a longstanding goal. In aggregate, they grew sales and net income approximately 10%. We also delivered on our commitment to return cash to shareholders with our recent December announcement of a 20% increase in the dividend and a new share repurchase program of $1.5 billion.
We feel great about our momentum entering 2015 and expect to deliver continued sales and earnings growth in the new year. Now I'd like to turn to our Quarter 4 results, beginning with some highlights. We had a fantastic quarter that was better than we originally expected. Earnings per share were up 55% versus last year, led by the consolidation of CPM. The Optical Communications, Environmental, Dow Corning's equity earnings, and a slightly lower tax rate also contributing to growth. LCD glass volume was better than expected, driven by strong demand for larger LCD televisions. The volume up in the mid-teens year-over-year and mid-single digits sequentially. Display set a quarterly record for sales volume. LCD glass price declines were moderate again, as expected, and declined less than Q3.
LCD glass demand continues to be good entering Q1. We believe this is due to strong retail demand in Q4 for larger televisions, replenishing supply for Q1, which is also a typically good quarter for retail television sales. We launched our next generation of Corning Gorilla Glass during the quarter and is receiving very favorable reviews by customers and at the recent Consumer Electronics Show. Specialty Materials sales in the quarter exceeded our expectations, driven by demand for Corning Gorilla Glass for new product launches. CPM integration activities have gone very well. We have exceeded our synergy goal for the year. Equity earnings from Dow Corning were also ahead of expectations in Q4, driven mainly by higher sales of polysilicon. Now let's delve into the fourth quarter details. Fourth quarter sales were $2.6 billion, up 30% versus last year. Gross margin was 45%.
We improved year-over-year gross margin every quarter this year. Gross equity earnings of $116 million were more than expected by Dow Corning. I'll cover that in more detail in a few moments. Other income includes a payment for the settlement of dispute over the use of fusion technology in China. This was the final payment to Corning. Please recall, we had a similar payment in 2013 in the same quarter. It had no impact on our year-over-year gains in the quarter. EPS was $0.45, up $0.16 versus a year ago, and completes two calendar years of quarterly year-over-year earnings growth. During the quarter, we spent approximately $183 million to repurchase shares. We completed the October 2013 repurchase program in Quarter 4 and have now begun repurchasing shares under our new program in January. For the year, sales were $10.2 billion, up 29% over 2013.
Corporate gross margin was up 2.4 points. The integration of CPM and Display cost reduction drove a large portion of the year-over-year improvement. Optical Communications, Environmental also improved their profitability this year. S&A and R&D were up year-over-year in dollars due to the consolidation of CPM. As a percentage of sales, we lowered S&A and R&D. The year-over-year decline in gross equity earnings reflects the elimination of SCP equity earnings following the acquisition and its consolidation. Our effective tax rate for the year was 16.8%, slightly lower than our original expectations. It was helped by regional mix and the extenders bill, which passed in December. Earnings per share for the year were $1.53, up 24%. This year-over-year improvement is the result of additional earnings from Corning Precision Materials, earnings growth in Environmental and Optical Communications Earnings growth in Dow Corning, as well as the impact of share repurchases.
Now I'll turn to our detailed segments. I'd like to start with Display. Display sales were $1.1 billion in Q4, a 69% increase versus last year. Overall, our market share remained stable, and LCD glass price declines were again moderate. Sequentially, our LCD glass volume was up in the mid-single digits. Let me provide you more detail about LCD glass demand and retail. In Q4, we believe television retail sell-through units were up high single digits year to date. TV area growth measured in sq ft of glass sold was up approximately mid-teens, representing a strong holiday season at retail. Panel makers ran at high utilizations to meet the strong demand for large televisions over the holiday and to restock the supply chain for Q1. Supply chain inventory remained healthy, exiting the quarter with forward-looking weeks of inventory at approximately 17.5 weeks.
Gross equity earnings from our equity venture in Korea, SCG, were immaterial. Net income was up 26% over the year, reflecting the impact of additional sales, earnings, and synergies from CPM. I can't emphasize enough the outstanding job the Display organization has done with cost reduction and successfully integrating CPM. For the full year, Display segment sales were $4.4 billion, up 63%, driven by the addition of CPM sales. Full-year net income was up 11%. When looking at sales and net income growth rates, remember we consolidated 100% of CPM sales in our reporting for 2014, but only the other half of the net income. Our full-year volume was up slightly more than 10%, in line with the glass industry. Our volume growth was offset by price declines, which were larger in the first half of the year.
We did achieve more moderate price declines in the second half, this is continuing into Q1. As we track the heartbeat of pricing without the impact of thick-to-thin and customer mix, we feel very good about the level of declines we've experienced for the last three quarters. Volume and synergies and cost reductions helped the business improve gross margin % for the full year. Actual synergies for the year were greater than our expectation of $100 million. We estimate the glass market at retail for 2014 was approximately 4.4 billion square feet, up approximately 10%. Our preliminary estimates of TV unit sell-through indicate year-over-year unit sales were up in the mid-single digits. All regions except Japan grew unit sales year-over-year. Average television size increased again in 2014 and drove glass market growth. We estimate TV area growth was up in the mid-teens.
50-inch-plus televisions grew greater than 50% in 2014, the average screen size increased more than an inch. In Optical Communications, Q4 sales were $676 million, up 12% versus last year and better than expected. Area sales in North America drove most of the increase versus expectations, but enterprise exceeded as well. Net income was up 64% over last year's fourth quarter. The higher volume and improved cost structure led to another strong quarter for Optical Communications. For the full year, sales were nearly $2.7 billion, up 14%. Sales in all businesses were up year-over-year, all regions except China contributed to the growth. Optical Communications annual net income in 2014 was up 18%. We are very pleased with the results and have great momentum in Optical entering 2015. In Environmental, sales grew 5% year-over-year, driven by heavy-duty diesel sales in the United States.
This is slightly less than forecast due to some changes in customer end-of-year inventory management plans. Environmental's net income in quarter four was $40 million, also up 5% year-over-year. For the year, Environmental sales were up 19%, driven primarily by a healthier U.S. Class 8 truck market and higher sales of heavy-duty diesel products for new regulations in Europe and in China. Environmental expanded gross margins and grew net income 44% for the year through additional volume and significant manufacturing efficiency improvements. We were also delighted by the performance in Environmental Technologies in 2014. Specialty Materials sales in the fourth quarter were up 12% versus Q4 2013 and better than expected due to strong Corning Gorilla Glass volume from device manufacturer new product launches. Net income in quarter four was down year-over-year by 13%. However, these results include an accounts receivable write-off.
Without that write-off, net income would have been up 8%. For the full year, Specialty sales were up 3%, net income was down 17%. Without the Q4 accounts receivable write-off, net income for the year would have been down 13%. Our Advanced Optics sales and earnings, which is embedded in Specialty, grew. The 20% of growth of Gorilla Glass volume was largely offset by the price declines that occurred mostly in Q1. The cover glass market did not grow as much as we originally expected in 2014. The most significant disappointment to us was branded tablets not growing at all versus 2013. We did have some accomplishments that are setting us up for a more successful 2015 in Specialty. First, we maintained our share against aluminosilicate glass competitors on devices.
Second, this year we made progress on increasing our share of smartphones in China. Of course, we launched Gorilla Glass 4. Drop performance of Gorilla Glass 4 is beneficial to device manufacturers, and we expect to be able to price for that added value. In Life Sciences, Q4 sales were up 2% year-over-year. Net income was consistent with last year. For the year, Life Sciences sales were $862 million, slightly. As I've mentioned throughout 2014, the market did not grow as much, with one reason being the low level of NIH spending. Net income for the year was down 5%. Moving to Dow Corning, gross equity earnings from both silicones and polysilicon segments were up versus Q4 2013. Volume for polysilicon was up for polysilicon as solar customers bought to fulfill their annual contract commitments. Additionally, manufacturing efficiency improved over last year.
The silicones business sales were consistent with Q4 of last year. A lower tax rate and lower operating expense helped profitability. Dow Corning exceeded our expectations for the quarter by $30 million, with higher sales of polysilicon and improved operational expenses. For the year, Dow Corning's equity earnings were up $142 million. Both silicone and polysilicon sales were up. Silicone sales were up in the low single digits as expected. Raw material pricing negatively impacted profitability slightly, but this was offset by a lower tax rate. Hemlock sales were up 32%, driven by higher polysilicon sales to solar customers, and cost controls helped Hemlock improve profitability over 2013. Hemlock sales and profitability overall were more stable in 2014. I'd like to take a minute to discuss Hemlock's impact on our results.
Investors will recall we had excluded Hemlock in our 2013 from our core operating results as we had expected extreme volatility due to the trade issues. That volatility did not occur. In 2014, we included Hemlock in core. In retrospect, my decision to exclude core in 2013 was one of my less brilliant ideas as CFO. I wanted to make sure you understood how much Hemlock contributed to our core earnings if we had been reporting it consistently. As you can see, even if we had included Hemlock in 2013, our 2014 results for Dow Corning would have shown significant improvement. Moving on to the balance sheet. We ended the fourth quarter with $6.1 billion in cash and short-term investments. Strong free cash flow for the year of nearly $4 billion, including the dividends from CPM as we did that transaction.
As a reminder, free cash flow is a non-GAAP measure. Reconciliation to GAAP can be found on our website. Capital spending for the year was $1.1 billion. Now before I move on to our outlook, I'd like to update you on our core performance reporting. I'll begin with a brief retrospective on core performance measures, as we may have some new investors on the call. As a reminder, our Display Technologies sales are priced in yen. We report in US dollars, so the earnings from Display Technologies sales translate into our GAAP income statement in dollars at the actual exchange rate during the quarter. Now, following the election of the new Japanese Prime Minister in December of 2012, the yen began to weaken against the US dollar. We saw the yen weaken from JPY 82 to the dollar in November of 2012 to below JPY 90 level in early 2013.
You may recall we took immediate action in early 2013 to limit the adverse economic impact on Corning Incorporated by entering into hedges. Our hedging contracts for 2013 and 2014 had an average exchange rate of JPY 93 to the dollar. We also gave some thought as to how the potential reporting of those hedges would inform our investors. GAAP is our official reporting for the company. In GAAP reporting, we record the quarterly settlement of our yen contracts in other income, other expense on our GAAP statements. You would see the weakening of the yen in sales and gross margin, but the gain on their hedges and other income, other expense. However, GAAP also requires us to record the fair value of all of our contracts, including those outstanding beyond the current quarter in our results.
This mark-to-market of our entire hedge portfolio would also show up in other income, other expense. The result is investors would be unable to discern how much that line item was attributable to hedges for the current period versus hedges for the future periods. With the recent volatility of the yen, our GAAP results might be confusing to investors. We felt this accounting, while definitely appropriate, would not help investors see the operational impact of volume to prices easily. Our recent quarterly results show how confusing this has become. Our quarter four GAAP results include marking-to-market our cumulative hedges for 2015 to 2017. When the rate moved from JPY 110 at the end of quarter three to JPY 120 at the end of Q4, we had a mark-to-market gain of $398 million. We also had a realized gain of $112 million for the hedge contracts settled in Q4.
It is this latter gain that is important, as it is the one that makes us feel comfortable using constant yen reporting at JPY 93. Now I know this example is long, but I hope it helps you see our hedges are protecting the economics for the company. They're complicated as you look at the operational performance in a quarter. In February of 2013, we announced that in addition to our GAAP results, we would also provide our results using core performance measures, allow investors a more clear view of the company's core operating results. Our core performance results are stated at constant yen to US dollar exchange rate of JPY 93. The primary purpose of the core performance measures are to allow investors to see operating results without the volatility of the yen and hedges masking operational performance.
To summarize, beginning in 2013, we became economically protected at the JPY weaker than 93 with hedges, and we moved to core reporting to provide investors additional transparency on our operating results at a constant exchange rate of 93 JPY. Let me fast-forward to January 2015. As you know, the JPY has continued to weaken from its early 2013 level of the low 90s JPY to the upper 90s JPY at the beginning of 2014. We made the decision to extend our economic hedge protection beyond 2014. We entered into hedges for 2015 to 2017 at an average rate of 99 JPY to the dollar. Our earnings are now economically 100% hedged against the JPY in 2015, approximately 80% hedged in 2016, and 70% hedged in 2017. These new hedges show up in GAAP with the impact of mark-to-market each quarter. What about our core reporting?
With our existing hedges for 2015 to 2017 now at 99 JPY, we will move to a new constant JPY rate of 99 JPY to the dollar. This adjustment to core maintains the alignment with the intent of the hedges that limit the economic impact of the JPY weakening. We expect to keep this core JPY rate over the next three years. About 75% of the analysts covering us have already modeled 2015 at this JPY exchange rate of 99. Going forward, we'll talk about our core results at the new constant JPY rate of 99. Comparisons to 2014 will also be done at 99 JPY, and we will be providing you our 2014 results recast with the exchange rate so you can update your models and compare apples to apples. We'll be releasing this recast 2014 and also 2013 numbers later this morning in an 8-K filing.
I'll be repeating some of this in our outlook section, but I wanted to remind investors that we've been giving guidance on the value of one JPY move in our NPAT for several years. Our most recent guidance has been that a one JPY move impacts NPAT by $25 million for the year. This simple example is accurate and easy to use. However, when we recast every line in our P&L, the calculations impact certain line items differently. Clearly, our sales are affected by the JPY change. However, not all our cost moves with the JPY exchange rates. We have some JPY-based costs, but also have manufacturing costs in other currencies that do not move. As a result, in our recast, our gross margin % is affected. The impact on display gross margin is 2 percentage points. The impact on the total company gross margin is 1%.
I want to be clear, we have always had the impact of this change on gross margin embedded in our simple metric of one JPY move equals $25 million. However, it's important that you make your models reflect the line item changes accurately. Our investor relations group will be ready to explain the recasting from 93 JPY to 99 JPY. There are nuances that are important to understand. With that, I'd like to turn to displays outlook. We feel very good about the glass market as we enter 2015. Supply chain inventory levels remain healthy. Glass supply is tight relative to demand, and we expect another year of glass volume growth at retail. We finalized contracts with our customers for substantially all our volume in 2015, which we believe is a reflection of our customers' desire to lock in glass supply due to the strong market and relatively tight supply-demand situation.
We expect our share to be stable in quarter one and throughout the year. For the end market in 2015, we believe TV retail demand is strong. Our preliminary forecast for 2015 is for good growth of LCD glass at retail and our glass demand, driven primarily by TV unit and average screen size growth. We believe the glass market at retail could be up in the high single digits in 2015. We expect ultra-high definition sales to at least double to approximately 25 million units in 2015. Of course, we're going to be saying a lot more about our outlook on February 6th at our investor relations event in New York City. As we near the end of January, we expect our glass volume outlook in quarter one to be flat to down slightly sequentially.
Fourth, the operating margins of our competitors are such they can't afford large price declines if they hope to remain profitable. As for our glass capacity, I want to reiterate that we intend to diligently manage our capacity to supply. Customer agreements stabilize our share of health manufacturing organization managed capacity and demand. We look forward to renewed agreements maintaining that stability in 2015. Turning to the Optical Communications segment, we expect Q1 sales to be up more than 10% versus Q1 of last year. Enterprise and fiber home sales are up in North America. Of course, adding to Optical Communications organic growth will be sales from the recent acquisition of TR Manufacturing. In Environmental, we expect Q1 sales to be consistent year-over-year. Volume is up versus last year in most products, but it's offset by now the much weaker EUR versus last year.
Without this FX impact, environmental sales would've been up approximately 5%. We expect Q1 sales to be up approximately 10% year-over-year in Q1. The retail market for touch devices is strong in Q4, and our Gorilla Glass shipments in quarter one are up, driven by this retail demand. Specialty sales are down sequentially due to normal seasonality of Gorilla Glass. For the full year, we expect our volume growth of Gorilla Glass to be in line with the IT handheld market and price declines to be more moderate than in 2014 due to Gorilla Glass 4. In Life Sciences, we expect sales to be consistent with last year's first quarter. Our life science business is now also being impacted by the weaker EUR. We expect sales would've been up low single digits without the FX impact.
Without this FX impact, Environmental sales would've been up approximately 5%. We expect Specialty Materials sales to be up approximately 10% year-over-year in Q1. The retail market for touch devices is strong in Q4, and our Gorilla Glass shipments in quarter one are up, driven by this retail demand. Specialty sales are down sequentially due to normal seasonality of Gorilla Glass. For the full year, we expect our volume growth of Gorilla Glass to be in line with the IT handheld market and price declines to be more moderate than in 2014 due to Gorilla Glass 4. In Life Sciences, we expect sales to be consistent with last year's first quarter. Our Life Sciences business is now also being impacted by the weaker euro. We expect sales would've been up low single digits without the FX impact.
Equity earnings from Dow Corning are expected to be approximately $69 million, up 10% year-over-year, driven by polysilicon sales. Continuing on with the rest of our Q1 forecast, we expect gross margin to be approximately 43%, which compares to 43% Q1 last year, with a JPY to USD exchange rate at 99. The move to constant yen rate of 99 does affect our LCD glass reporting, as I outlined earlier. As a reminder, we've given the guidance of one yen move changed NPAT for a long time. Embedded within that metric is this nuance on gross margin. SG&A and R&D spending will be 13% and 8% of sales, respectively and consistent with 2014. Other income and other expense is expected to be a net expense of $40 million in Q1. Our effective tax rate for 2015 should be around 18%.
Projected rate is higher than 2014, driven by the regional mix of sales, and assumes that no renewal of the tax extenders bill. We expect full year capital spending to be $1.3, maybe $1.4 billion. When you sum up our outlook for Q1, you see we expect another quarter of year-over-year earnings growth. We will be providing the recast of Q1 2014 in a few minutes for you to do your year-over-year calculation. For those investors who also like to do sequential comparisons, please remember to use the Q4 99 yen recast. When you're concentrating on sequential comparisons, other than the recasting of the yen, please remember that in Q4, we received the final payment related to the settlement technology dispute. It doesn't show up again in Q1. Q4 equity earnings from Dow Corning were very large, driven by the strong end-of-year contract fulfillment orders for polysilicon.
Expect polysilicon sales to be down seasonally in Q1. Dow Corning's tax rate will rebound to be higher in 2015. Corning's effective tax rate in 2015 will be one to two points higher than 2014. Please remember, the low rate in Q4 is not indicative of the full-year tax rate. Ann and Steven are available to help you as you update your models. In summary, we're coming off a great quarter and a great year, and we expect that momentum to deliver growth again this quarter. That concludes my opening remarks. Ann?
Thank you, Jim. Greg will now open the lines for questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then one on your touch tone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. One moment, please, for your first question. Your first question comes from the line of Mehdi Hosseini from SIG. Please go ahead.
Good morning. Thanks for taking my question. Jim, you were talking about in the Display segment, glass volumes are beginning to firm up. Can you just elaborate more? How should we think about the ASP component as volumes are getting firmed, especially as your customers are beginning to worry about supply? That's what I heard from you.
We believe our price declines will be moderate again in Q1. We have most of that done now. We're delighted by that. We think all the trends in the industry are positive for ASP. We expect moderate price declines every quarter this year.
On your comment that the volumes are beginning to firm up, is that more of a quarterly firming up? Is that for the whole year? How should we think about the timing part of it?
Well, I don't think I used the word firm up. I believe volumes were very strong, actually all of last year. They were stronger than we expected in quarter four. We think they'll be good in quarter one. If you come to our event, we'll be giving a lot more detail on full year guidance for the-
Okay
display market.
Got it. Then one follow-up on the specialty material. If I were to exclude the receivable write-off, how did the margins trend and how should we think about the margin trend into 2015?
Well, earnings would've been up in quarter four without the receivable write-off. I think the number was 8%. In terms of gross margins in specialty and Gorilla, we expect them to improve this year.
Okay. Thank you.
Your next question comes from the line of Ehud Gelblum from Citi. Please go ahead.
Hey, guys. Good morning. Thank you. A couple questions, just a quick clarification. The gross margin this quarter was below guidance. Was that due to the write-off?
No. The gross margin, there were three minor items that made it be, I think it rounded about 1% lower. There's nothing significant there.
Okay. You expect it to stay at the 44% level instead of going back up next quarter. Those issues continue? How should we read into that?
Well, as you know, our gross margin is always a mix of the various business, we expect our gross margin to be 43% with the JPY at 99.
I'll do some more math to get into that. On Gorilla, can you give us an update as to what is happening with notebooks and laptops? Are you seeing any more penetration there, or is it still primarily the tablet and smartphone market? On Gorilla Glass 4, sounds like you're getting a premium on it versus Gorilla Glass 3. Where does the price point sit versus where Gorilla Glass was prior to the large cut at the beginning of 2014? Is it around the same level or is it still below?
I don't actually have that comparison in my head of what it was before the cut. I'll think about how much we're going to disclose on that. In terms of the touch on notebook market, actually, there was some progress this past year versus 2013, we expect some continued progress as the share of it grows as part of the notebook market. We actually have improved our own share of that in 2014, we expect to improve it again in 2015. It's just not a fast-growing change.
Okay. On the hedges, in a prior conference call, I believe you may have said that you did have some hedges at 93 that extended into 2015. A, is that correct? B, if that's the case, I think you said at one point that around two-thirds of your 2015 may have been hedged at 93. How do you handle the 93 hedges when you're showing core earnings at 99? Do you show us part of the gain reflected into core revenue and the rest still sits in other income?
Let me correct. We never said we had two-thirds of 2015 at 93. We had a small proportion of 2015 at 93. What we've done is chosen, from an accounting point of view, is to select a blended rate of 99 that carries over the three years. In any given quarter, the rate may be slightly different. We are allowed to choose a blended rate, and we've done that for the three years. We never had that higher proportion of 2015 hedged at 93.
Okay. I'll have to find that reference again. Again, in any given quarter, you'll take the 99 up to the current spot, you'll reflect that in revenue, but any gains that would've come from a different actual number, let's say you're hedged at 97 for a given quarter, the difference between 97 and 99 still shows up in other income. Is that the right way to look at it?
The movement in our hedge rate around this blended rate is very tiny. In our core reporting numbers, you see it's all done at the constant 99. In our GAAP, you will see the settlement of the hedges in the current quarter, and then the mark-to-market for the entire portfolio of hedges.
Helpful. Well, finally, can you give an update on what DAS is doing in the optical department? I didn't see any optical segment. I didn't hear that that was necessarily a driver, but it had been in the past. Is it still as strong as it had been?
It's never been a big driver. It's kind of a growing business. You're going to hear more about it at our IR day in a week.
Okay. Thanks, Jim.
Your next question comes from the line of Wamsi Mohan from Bank of America Merrill Lynch. Please go ahead.
Yes, thank you. Good morning, Jim. We've not seen your 8-K yet, but directionally, can you help us think about where the 2014 Q1 Gross margin was on a JPY 99 basis, so we know operationally if the gross margin is flat, up or down year-on-year. I have a follow-up.
Directionally, it's 43%.
It's flat year-on-year. Okay, thanks. Then in equity earnings, were there any take or pay enforcement that helped in the quarter? How should we think about equity earnings in 2015? Again, if you think it should be flat, up or down in 2015. Thanks.
The take or pay contracts are, there was no enforcement action in quarter four, meaning that no one stopped taking and didn't fulfill their contract, and therefore we booked the overall revenue that was outstanding on the contract. What you saw was primarily the impact of people, in order to keep the contracts current, they have to buy a certain amount within a calendar year. What we're seeing is many people delay that until the fourth quarter. You may recall, actually, in the fourth quarter of 2013, we had this sudden rush. We actually couldn't fulfill it all. Some spilled into quarter one of 2014. We prepared for that this year, but people are living up to their contracts. There's no enforcement of a take or pay where we recognize the revenue in quarter four.
Do you expect overall equity earnings to be flat, up or down in 2015?
I'll give some more comment on equity earnings when we get to the IR day.
Okay. Thanks, Jim. Last question for me is, from a gross margin perspective, you should be seeing the benefit of CPM and the increased synergies flow through on a constant, like JPY 99 basis. As we look through the trend in 2014, shouldn't we expect the 2015 trend in gross margins to continue to trend up through the course of the year?
Assuming that we get moderate price declines every quarter, which is what our expectation is, we expect excellent cost reduction, and that will contribute to improved gross margins.
Thanks, Jim.
Your next question comes from the line of Mark Sue from RBC Capital Markets. Please go ahead.
Thank you. Jim, you seem to be recognizing the benefit of the price strategy change made a few years ago with stable share and moderate price declines. Structurally, the thought before was that your primary competitors were focused less on margins than Corning is. That seems to all have changed. Are we at a point where we can predict industry profit growth, considering all the players are actually focused on market share at this point?
I can't comment specifically on what our competition is going to do. I can tell you that what we certainly hope that the industry has moderate price declines, but I cannot predict what they are going to do.
Would you get the sense that everyone has seen the predictability and the benefit of stable decline so that the rationality is likely to prevail, at least from Corning's point of view?
Mark, I can't comment on what our competitors are seeing and doing and what their outlook is. You can read their public statements. I can only comment that for quarter three of last year, quarter four of last year, and quarter one of this year, we have seen a moderating price decline, and we expect that to continue.
That's helpful, Jim. Then on oil prices, I know it might be a stretch, but just wondering if you have some data which correlates lower gas prices and higher TV demand. Does actually lower oil prices help with input cost as well for Corning? Just how we should think about the moving dynamics of this large variable for Corning.
I have no correlation between energy prices at retail and sale of televisions. We clearly believe that consumers are getting, in their pocket, quite a bit of benefit from the lower gas prices and oil prices if you use oil. We think that could potentially show up for us in terms of strength in consumer electronics and strength in the car business. Relative to our own cost structure, energy is a very small component of our bill of materials. Actually, as I think you know, in display, our largest component by far is depreciation. Generally, we're a natural gas user, not an oil user. The days when we fired our tanks with oil are long gone. It will be a slight benefit. We do have some hedges, so we don't get the immediate benefit of that.
That's helpful. Thank you, Jim.
Your next question comes from the line of Amitabh Passi from UBS. Please go ahead.
Hi. Thank you. Jim, I apologize if you touched on this. You're starting the year at 43% gross margin. Just curious, from here on out, should we expect gross margin to ebb and flow as volumes in Display and your other segments trend, or are there other underlying structural enhancements that could meaningfully drive gross margin higher?
I think that, as always, our gross margin is the add up of all our various segments. If we get moderate price declines on Display all year long, other than Q2, which is generally the lower volume quarter, I think we have the ability to slightly improve Display's gross margins through the combination of cost reduction and moderate price decline. As I think you know, Gorilla is actually our highest gross margin product. If there is a strong market growth in phones and tablets and it flows to us, that will help us from a mix point of view. In telecom and things that are Selling well have slightly higher gross margin compared to the average segment, so that could help. Finally, in Environmental, we've made dramatic improvements in manufacturing, so our gross margins are improving there.
I think you could see a slight increase in gross margins as we go through the year.
Okay. That's very helpful. I wanted to clarify on the telecom segment, you talked about the benefit of TR manufacturing. I presume in one Q, you will also include the Samsung Fiber Optics business that you acquired in December?
The Samsung deal has not closed, that probably won't close until either the end of February or the end of March. You probably won't see much impact of that until Q2.
Got it. Just one final question. What are your expectations for the adoption of Iris, which you unveiled at CES? Theoretically, that gives you a third sheet of glass and TVs, just curious how you're thinking about adoption rates.
I'm going to have to ask you to hold that question to our investor day on February 6th, because Iris will be talked about by both Wendell Weeks and Jim Clappin.
Okay. Thank you.
Your next question comes from the line of Patrick Newton from Stifel. Please go ahead.
Yeah, good morning, Jim. Thank you for taking my question. I guess, number one is pertaining Gorilla Glass. I think you stated that volume growth should be in line with IT handheld and that price declines would be more moderate than 2014 due to Gorilla Glass 4. I would love your view on what Corning's outlook is for IT handheld in 2015. Then the price and decline commentary, 2014 was relatively aggressive. Could you help us kind of narrow the range a little bit?
I'm not going to give specific numbers on price, but the reduction for the full year of 2015 should be quite a bit lower than what it was in 2014. In terms of market growth, I think we have handheld square feet growing 15%. We're thinking media tablets could grow in the upper single digits. Of course, we will have some growth from touch on notebook. Just a reminder, we hope that all flows to us, but we have to always manage the supply chain, see how much inventory there is. We do think that those are the kind of growth rates we'll see at retail.
All right. Just one more from me is, you seem pretty confident on display demand for the industry in 2015. I want to focus on industry capacity. I know you're not going to talk about competitor plans, but there have been some public announcements about new plants that will be operational exiting 2015. As we look at the industry, do you believe that new capacity additions in areas like China are going to be matched by reductions in other geographies, which is similar to what we saw the industry do in 2014? Or do you think that the situation with tighter capacity, healthy panel prices, growth in large TVs, could result in the industry actually adding net capacity in 2015?
The glass industry is adding capacity because of the continued drive to more thin. I think you know that for us in Korea, we were quite a bit lower on amount of thin. The glass industry overall is benefiting from the move to thin. Corning's benefiting from it quite a bit in Korea right now. In terms of new glass tank construction, there had been an announcement by one of our competitors. I don't think that has much impact on 2015. They did say they would do the same thing as they did in the past and shut down capacity in Japan. I just have to rely on the public statements as you do.
Okay.
I don't think you're seeing any surge of glass capacity coming on. I would say the industry continues to manage their tanks in an appropriate manner. As an example, we have tanks that remain cold that we're not lighting up.
Great. Thank you.
Your next question comes from the line of Rod Hall from JPMorgan. Please go ahead.
Yeah, thanks for taking my question, guys. I guess I've got a couple. One, Jim, I wonder if you could comment a little bit on UHD 4K price elasticity. I know your comments in Q3 were that you've seen a little bit more elasticity at that point anyway than you thought, and I think you've made positive comments on through the quarter. Just wanted to know what you think is happening with price elasticity there and whether this 1.5 times price ratio between UHD and HD still holds, or do you think it's a higher ratio than that where we see demand acceleration?
Rod, it's probably a little premature because I don't have final numbers for December. Directionally, I continue to support what you said. I think that we felt, first of all, prices came down more than we originally expected, particularly in large size, consumers are choosing 4K overwhelmingly. I just don't have final numbers. In 10 days, I'd ask you to direct that question at our display market team, which will be in New York. We may have better data there. Just speaking personally, put the CFO spin on it, I think 4K will do better than our official numbers.
Okay, thanks. I also wanted to just clarify, I think you guys are saying that pricing for TV glass moderates in Q1 further. On our calculations, that puts it at moving toward a 2% quarterly decline rate. Do you think that's kind of the bottom for the decline rate, or do you believe that we bottom out on the decline rate somewhere in the middle of 2015? Just trying to get some idea on what the 2015 decline rate might look like in terms of trajectory.
Well, we haven't given a specific number for Q1. It's, again, very moderate and continuing the trend we've had. I don't think there has to be a bottom on this. We'd love to continue to have price declines edge slightly lower every quarter. Let's see if we can make that happen. Clearly, we have high hopes of a low number.
Okay. Just one final question is on your comments on Optical Communications. You talked about North American FTTX deployments. Title II regulation seems like it might affect that. I just wonder if you could give us any thoughts you've got in terms of what the FCC regulatory changes might mean for the trajectory of those revenues in 2015, if they mean anything at all.
Rod, I think it'd be all speculation on my part because I don't know exactly what the regulations would be and how they would enforce them. I think our policy statement is pretty firm. We think that the regulation that exists today has been very beneficial for the industry, and we think people ought to be very careful about that. As to exactly what it looks like and what our customers would do, it'd just be pure speculation on my part. I do think all of this comes against the obvious trend of bandwidth demand continues to grow very rapidly, driven by video in particular. I think everybody has to keep thinking about what consumers want.
When you come to New York for our IR day, I urge you to talk to Clark Kinlin and a few of our telecom guys there, who might have an even stronger point of view about it.
Okay, great. Thanks a lot, Jim.
Your next question comes from the line of Steven Fox from Cross Research. Please go ahead.
Thanks. Good morning. Just circling back on the CPM improvements. You mentioned that again, it was greater than you anticipated, the $100 million, Jim. Can you sort of talk about what drove that in the quarter and for the year? What can we expect for this year, and what kind of projects at CPM are driving the incremental savings that you can get in 2015? Thanks.
Overall for CPM, we had the reduction in cost from reducing the number of people. We had increasing utilization. We had some standardization between what we call our wholly owned business and CPM in terms of best practices. Then, of course, as you mentioned, actually volume did help us. I'd have to say it's more of the same for 2015. I can tell you that Jim Clappin will be giving a presentation, and we'll actually unveil a new number for 2015 there. I'll give you a tease in that it will be better.
Great. That's very helpful. Then just a quick follow-up on the optical. When you look at 2015 or just in Q1 rather, how much is enterprise versus, say, carrier growth? Where do you see the better opportunity for the quarter and then for the year? Thanks so much.
I just don't have those details with me, Stephen, so I'd ask you to ask Clark Kinlin or Ann about it. I just don't have them with me.
All right. Fair enough. Thanks.
Your next question comes from the line of Joseph Wolf from Barclays. Please go ahead.
Thank you. Just a couple of questions. On the new side, we've seen, I guess, Japan, some of the large TV assembly guys cutting their capacity significantly. Our take has been that that's helpful for, I guess, the other regions in the world, I'm wondering if you could give us some perspective there. Also, if there's any chance that that means anything with regard to JPY pricing in the panel business going forward.
We obviously have seen the reports of cutbacks in Japan. I don't have any information as to whether it has anything to do with the JPY, or it may be very customer specific to that panel maker. I really don't have much detail on it. Obviously, for us, we continue to think the worldwide demand is strong regionally. China has been very good for us, so I think some of those statements attributed that cutback to less demand for China. Overall, our Chinese demand has been very strong.
Okay. Just in terms of the cash position, could you just review for us how much of that cash is outside of the United States and in what currency that's denominated in, and you're thinking about repatriation versus potential losses on holding things in EUR right now?
We will be giving our U.S. cash position in our 10-K, which will be filed in the second week of February. It has been improving. We don't hold euros, so we're not losing. Our treasurer is quite proud of himself this morning for not holding euros. We don't have that situation. We do have repatriation plans and strategies we've talked about before. When you see our 10-K, I think you'll be delighted.
Excellent. Thank you very much.
Your next question comes from the line of Simona Jankowski from Goldman Sachs. Please go ahead.
Hi. Thanks very much. Recognizing that you're going to hold off on most Iris comments to the Analyst Day, just wanted to clarify if any potential ramp into the back half of the year is included or not in the outlook you gave for high single-digit growth for the glass market this year.
It was not included.
Okay. Jim, could you expand a little bit on the three items you referenced that drove the one point delta in gross margins versus expectations?
They really were pretty minor things. I think we made an adjustment to one sales contract that would have been amortized over three years, we took it all in one quarter because of the change in terms. There was a little bit of a customer mix in one of our businesses for a lower gross margin customer. As I said, it was nothing that was of any significance, it was not an alarming trend or anything to us.
Got you. The first one you referenced, was that in the Display Technologies segment in terms of the contractual pricing adjustment?
Yes.
Okay. Got you. Just last question on Specialty Materials, where you talked about your expectation of more moderate pricing this year versus last year. Is that entirely due to the mix shift to Gorilla Glass 4, or is that also the case on a like-for-like basis? I just wanted to confirm that you have had your price negotiations for this year, or is that still ahead?
The majority of the impact is due to the mix shift with Gorilla 4 and the higher price on Gorilla 4. We do hope to have smaller price declines on Gorilla Glass 3. There's still big customers who are buying that. I think we have completed a lot of our Gorilla price negotiations. I don't think we've done them all at this stage.
Great. Terrific. Thank you very much.
Operator, we've got time for one more quick question.
Okay, that question comes from the line of James Faucette from Morgan Stanley. Please go ahead.
Thank you very much. I just had one quick follow-up question and a little bit higher level question. As you look at the growth in capacity coming from China, particularly new Chinese entrants into the glass market, and put that together with the increase in the demand out of the Chinese OEMs, et cetera, where are you seeing those new glass entrants come into the market? Are they coming in at the low end and not really having much of an impact, or are you starting to run into them on a day-to-day basis? I'm just wondering how you're thinking about from a long term. I'm sure they have ambitions to move up, where you think you need to meet them and compete with them directly going forward? Thank you.
Sure. Short term, the new entrants have not had much impact on the marketplace. We've seen them in smaller generations, in China and somewhat in Taiwan, but they really have not had much of an impact on the market at all. They clearly have higher aspirations as to everybody who's in business. We recognize over a longer term, and I emphasize longer term, we know we have to compete with them. Many of these are state-owned enterprises, in the short to medium horizon, I don't think this is an issue for our display business and our results.
Great. Jim, do you have some closing comments?
Sure. Thanks, Ann. Just a couple of investor relations comments. As I've been mentioning throughout my comments and hoping you'll attend, we have our annual investor day in New York City on February 6th. It's at a new location. It's again at Cipriani, but at Cipriani Wall Street, so downtown. We're going to have numerous hands-on demonstrations at our business exhibits, and we'll be giving you growth expectations for 2015 and talking about a lot of the new products. In addition to our CEO, Wendell Weeks, and myself, our three business group leaders will be speaking to you about their plans to continue their sales and earnings growth. It'll be very informative hands-on event, and I really hope you'll consider attending in person.
Just to summarize on the call, we finished 2014 with an outstanding quarter and achieved our goal of year-over-year earnings growth in every quarter this past year. We did an outstanding job with the CPM acquisition that's brought the company and our shareholders numerous benefits, including immediate accretion and excellent free cash flow. We're making great progress on improving manufacturing efficiencies and controlling our costs in our businesses. Ultimately, this all resulted in a 24% earnings per share growth last year. I think very important for our investors, we returned significant cash to shareholders when we completed our $2 billion share buyback program last year, also announcing a $1.5 billion share buyback program for the beginning of this year. Finally, increasing our dividend with a 20% increase that's effective in the first quarter. We're coming into 2015 with expectations for growth in sales and even more in earnings.
We intend to maintain stable display earnings with moderate price declines. We're going to diligently manage our glass capacity and continue to reduce costs. We have prospects we believe for growth in Optical Communications, Specialty Materials, Environmental Technologies, and Life Sciences. Stay tuned for more details at our annual investor meeting. Thank you again for listening. Ann?
Thank you, Jim, and thank you all for joining us today. Playback of the call is available beginning at 11:00 A.M. Eastern today and will run until 5:00 P.M. Eastern, Tuesday, February 10th. To listen, dial 800-475-6701. The access code is 349651. The audiocast, of course, is available on our website during that time. Operator, that concludes our call. Please disconnect all lines.
Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T TeleConference Services. You may now disconnect.