President of Investor Relations. Please go ahead.
Thank you, Roxanne. Good morning. Welcome to Corning's 3rd quarter conference call. With me today is Wendell Weeks, Chairman, Chief Executive Officer Tony Tripeny, Senior Vice President and Chief Financial Officer and Jeff Evenson, Senior Vice President and Chief Strategy 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, and our results are presented in core performance measures. A reconciliation can be found on our website. We have slides posting live on our webcast that are accompanying our formal comments, and they will be available on our website later this morning.
Now I'll turn the call over to Wendell.
Thank you, Anne. Good morning, everyone. I'd like to begin by welcoming Tony Tripeny, our new CFO and Jeff Evenson, our new Chief Strategy Officer. Welcome, Tony and Jeff. As we reported in this morning's press release, macroeconomic headwinds are affecting our performance in the near term.
Our businesses were slowed by the weakening global economy, the unexpected devaluation of the Chinese currency and the softening in the television and IT retail markets. Consequently, our 3rd quarter results were lower than implied by our first half performance. We expect these headwinds to continue into the Q4. Now despite these temporary challenges, we like our long term opportunities. Consumers want bigger screens and more bandwidth and touch everywhere.
The demand for cleaner air is accelerating. And our innovation portfolio is rich with opportunities. Given that, I'd like to use my time with you today to introduce our new strategy and capital allocation framework. We believe that the framework provides clearer guidelines to define our portfolio and our commitment to excellent capital stewardship. Tony will then review our Q3 results, and we'll conclude by taking your questions.
First, it's useful to review our current position. We have delivered outstanding industrial performance. Over the past decade, we have grown sales, NPAT, EPS and operating cash flow at double digit rates. We've beaten the competition on growth in each of our segments. We've innovated to achieve the lowest cost position in key our heavy duty diesel substrates and filters and our customized fiber to the home solutions.
And as we look forward, our innovation pipeline is full. Taken as a whole, our performance gives us a foundation for sustained cash flow and a tremendous opportunity set. Our leadership priorities for the next 4 years are simple. We will focus our portfolio and utilize our financial strength. We expect to deploy more than $20,000,000,000 through 2019.
We plan to distribute at least $10,000,000,000 to our shareholders, which is roughly half of our current market cap. We will also invest $10,000,000,000 in growth and sustained leadership. Today, we are announcing the first steps to deliver our plan. Our Board of Directors has increased our share repurchase authorization by $4,000,000,000 We will execute a $1,250,000,000 accelerated share repurchase program. And we intend to increase our dividend per share by at least 10% annually to 2019.
Now let's turn to how we will focus our portfolio to deliver strong financial performance and capital stewardship. Our framework focuses our portfolio on a set of reinforcing capabilities with strong interconnections. The core of what we do is invent, make and sell. We create value by inventing category defining products using transformative manufacturing platforms and building strong trust based relationships with the world's leading customers. That process has served us well not only for the last decade of outstanding industrial performance, but for more than 160 years.
With our new framework, we're seeking to augment that value creation through a more focused and cohesive portfolio that increases our return on innovation. A moment ago, I said that we have tremendous opportunities. From a shareholder value perspective, the challenge is to select the right opportunities. We applied both financial and strategic criteria to making our selections. Our financial hurdles include market size, return on invested capital and sustainability of margins.
Our strategic criteria are about increasing our probability of success and reducing the cost of innovation. We are the best in the world in 3 core technologies, 4 manufacturing and engineering platforms and 5 market access platforms. Our probability of success increases as we apply more of these best in the world capabilities. Our cost of innovation declines as we reapply our talent and repurpose our assets. Additionally, by combining multiple capabilities, we create higher and more sustainable competitive barriers.
Focusing our portfolio means that 80% or more of our resources go to opportunities that use at least 2 of these 3 columns. Our framework allows us to direct up to 20% of our resources at opportunities that leverage a single capability. But when we do that, the potential payoff must be dramatically higher, because we know the chance of success will be lower. The framework also means that we will consider removing assets falling outside our core capabilities. While we operate these assets well and they return more than their cost of capital, We recognize that others may find them more synergistic and we will consider transactions to create value for our shareholders.
For example, Dow Corning is a great company that lies outside our core focus, and we are currently in discussions with Dow regarding a potential transaction. One of the ways that we maximize our return on innovation is by reapplying our talent and repurposing our manufacturing and market access platforms. Gorilla Glass is a great example. When we developed Gorilla, we reapplied our world class experts in glass science and optical physics to deliver a new to the world product faster and at lower cost than anyone else in the world could have done. To manufacture Gorilla, we repurposed Fusion assets built for our display business.
That saved us about $800,000,000 in capital, greatly enhancing Gorilla's ROIC. We were able to reuse technology and manufacturing capabilities. However, at the time Gorilla started, we didn't have a mobile consumer electronics market access platform. Our confidence in our ability to win with Gorilla convinced us to build that platform. It was a smart decision.
And in the future, we can apply other capabilities such as precision forming or vapor deposition to products like Project Fire in 3 d shapes that leverage our mobile consumer electronics market access. This gives us the opportunity to further increase our return on innovation. Our approach to leveraging our optical communications market access platforms demonstrates how combining multiple capabilities creates bigger and more sustainable competitive advantages. Using glass science and optical physics, we have reinvented optical fiber multiple times, dramatically increasing its performance and lowering its cost. Ceramic Science has helped us improve connectors, a critical point of signal loss in communication systems.
We use vapor deposition to make fiber extrusion to make cabling and precision forming to make connectors. And we're also exploring the use of fusion to make key components for next generation switches and routers. As a result, our optical communications customers benefit from all three of our core technologies and all 4 of our manufacturing and engineering platforms. Ultimately, we want all of our customers to experience all of our capabilities. Now why is that important?
Few competitors can match our expertise in any of our individual focus capabilities. When our products derive value from combinations of capabilities, we build dramatically higher barriers to competition. As a result, we can enjoy market leading positions and margins. Over the next several months, we'll be out with investors to share and discuss more examples of how we will apply this framework to Corning's next set of category defining products. But for now, let's turn to our 2016 to 2019 capital allocation model.
Our plan is to generate more than $20,000,000,000 with the majority produced by our growing operating cash flow. We will invest $10,000,000,000 of the cash in RD and E, CapEx and acquisitions. We will distribute at least $10,000,000,000 to shareholders. We are committed to annually increase the dividend at a double digit rate, and we will continue to be opportunistic on share repurchases. As I mentioned earlier, potential transactions may provide upside to shareholder distributions.
So that's our new framework. It reflects the financial and industrial strengths of Corning and our ongoing commitment to create value for shareholders through thoughtful capital stewardship. We deliver value by creating life changing innovations. We are augmenting our value creation by focusing our portfolio and managing it more cohesively. Along the way, we seek to reward our shareholders with significant and consistent cash distributions.
I will now turn the call over to Tony, who will review the Q3 and provide guidance. Thank you, Wendell, and good morning. I'd like to begin by highlighting my role in executing our framework over the next 4 years. As you might expect, my emphasis will be on financial discipline, returns and ensuring we are good stewards of capital. Specifically, I look for us to deliver strong financial results and investment returns to manage an efficient balance sheet and to lower our cost of capital over time.
Currently, we use several metrics to evaluate investment returns, including net present value, internal rate of return and payback period as well as return on invested capital measured after commercialization. Our disciplined approach to capital allocation and focused on lowest cost have enabled our businesses to have excellent ROIC metrics against their respective industries and well above their cost of capital. Going forward, I will continue to emphasize returns and I expect us to improve our corporate ROIC over the next 4 years. I look forward to keeping you updated on our financial strength and focus. Now let's talk about the quarter.
As Wendell said, weakening economies, particularly in China and the stronger dollar impacted our businesses. For example, TV demand is weaker. TV growth in China has slowed. TV demand in Europe, Latin America and Middle East Africa is softer due to the effect of the stronger dollar on retail prices and continued economic uncertainty. We expect worldwide TV unit sell through to be down slightly versus last year.
IT and mobile demand is weaker, driven by lack of replacement drivers, the strong dollar and continued economic uncertainty. We expect the worldwide IT market to be down 10% this year and smartphone sales in China to be flat versus last year. China's auto and heavy duty truck production has slowed through the year. China's auto production is now expected to be flat year over year and heavy duty truck production is down 34% year to date. Finally, the growth rate at China fiber optic market is half of what it was last year.
Despite these macroeconomic headwinds, we are encouraged by several trends that support our long term success. We are pleased with the improving pricing environment in display. The market for We expect to extend our long term supply agreement with 1 of our largest LCD customers to 2025 and Optical Communications is expected to deliver another year of double digit sales growth. Now let's get into 3rd quarter financials. As a reminder, these are core results.
In total, sales in the quarter were $2,500,000,000 down 5% versus last year. As expected, the stronger dollar reduced sales in the 3rd quarter by $57,000,000 versus a year ago. Without this impact, core sales would have been down 3%. Sales in the quarter were lower than expected due to lower volume of LCD glass, lower sales of environmental products in China and lower sales in optical communications. Corporate gross margin was 42%, which is lower than we expected driven by the sales components I just described.
Most of our businesses have a relatively high fixed cost structure. Therefore, decreased sales lower our gross margin as a percent of sales. I will cover the specifics when I talk about each segment.
S and A and RD
and E were down versus last quarter and last year in absolute dollars, driven by a compensation accrual adjustment. Net income was down 15% versus last year. 1 third of the decline was driven by foreign exchange rates, including the devaluation of the RMB. EPS was $0.34 down 8% versus last year. Now let's look at the detailed segment results beginning with Display Technologies.
Display sales were $936,000,000 in Q3, down 11% versus last year. Sequentially, 3rd quarter price declines were moderate as expected. We are very pleased that the LCD glass pricing environment has been improving for more than a year. We expected panel makers to adjust utilizations in the second half in response to the softer end market I already mentioned, but we weren't sure how much would be in Q3 versus Q4. The case TV and IT demand in many regions was weaker than our expectations entering the quarter.
Panel price declines accelerated during the quarter and panel makers adjusted utilizations, especially small gen sizes where prices hit cash cost. Therefore, the glass market was flat sequentially in Q3. At Corning, our volume was down slightly sequentially because of temporary share loss at one of our largest customers due to a contract The good news is that we have resolved the dispute amicably and expect to extend our long term supply agreement to 2025 and for our share levels to be in line with the first half of twenty fifteen. We also expect to make up the missed volume in the 4th quarter. Net income was down 15% year over year and reflects that the expected year over year price declines were only partially offset by volume growth, cost reductions and synergies from CPM.
Now for Optical Communications. Sales were up 7% versus last year, driven by acquisitions and moderate growth in North America Fiber to the Home and Data Centers. Even though that we saw growth in carrier sales, it was less than expected in Canada and Asia due to timing delays of certain fiber to the home projects. In addition, we had an enterprise customer adjust inventory. Net income was up only 1% versus last year, which is lower than we would normally realize with 7% sales growth.
We expected more sales in higher margin fiber to the home solutions and maintain cost structures in place to service that demand. In addition to the cost impact, a lower mix of high margin fiber to the home meant a higher percentage of our sales growth came from lower margin businesses like our newly acquired Korean operation. In environmental, Q3 sales were $257,000,000 down 9% or $25,000,000 versus last year. Foreign exchange drove $14,000,000 of the decline. Soft demand in China drove the remaining decline and the miss versus expectations.
In North America and Europe, we saw solid growth
for our light duty
substrates and continued strong demand for heavy duty diesel products. Profitability was down more than sales driven mostly by the softer demand in China for both light duty and heavy duty products. We recently built capacity for growth in China, which has added extra cost that was not covered during the quarter by demand. Moving on to Specialty Materials. We are pleased with our Gorilla Glass business.
The market for cover glass is expected to be up 10% this year and we are gaining share in China and Touch Notebooks. Gorilla Glass volume was up sequentially and consistent with last year's strong Q3 driven by demand at customers ahead of new product launches. We are pleased with the fast adoption rate of Gorilla Glass 4 by our customers and its favorable impact on our average selling price. Overall segment sales were down 12% versus last year. Advanced Optics year over year sales remain weak driven by softness at our semiconductor customers.
Year to date, AO sales are down almost 20%. Segment net income was down 17%, primarily due to the lower sales in Advanced Outfits. In Life Sciences, Q3 sales were $211,000,000 Both sales and net income were down slightly year over year driven by foreign exchange. Net income would have increased mid teens without the impact of the exchange rates. Equity earnings from Dow Corning were $53,000,000 This is down 22% versus last year due to the absence of a one time tax benefit recorded in Q3 2014 and the impact of the slowing Chinese economy.
Let's turn to our balance sheet and cash flow. We delivered free cash flow in the quarter of $566,000,000 Our pace of capital spending was down in Q3 and we now expect to spend approximately $1,300,000,000 for the full year. During the quarter, we spent $827,000,000 on share repurchases. This sequential 32% increase reflects our view that given the company's current performance and future outlook, Corning shares are a very attractive investment opportunity. As Wendell mentioned, the Board has increased our share repurchase authorization by $4,000,000,000 as part of our plan to return greater than $10,000,000,000 to shareholders over the next 4 years.
We will be in the market repurchasing shares both programmatically and opportunistically over this time period. We will execute on a $1,250,000,000 accelerated sharing purchase program during the quarter. We ended the quarter with $5,000,000,000 of cash with approximately $2,000,000,000 in the United States. Now for the outlook. We expected We expect the global economic headwinds to persist in the 4th quarter and impact most of our businesses year over year.
Let's begin our business outlook with the display market. As I mentioned a few minutes ago, softness in both TV and IT markets. This impacts full year retail growth and supply chain inventory. Given the lower end market and the level of inventory at set makers, we expect panel makers to further reduce utilization rates in Q4 and likely into Q1. Our timing on how quickly panel makers reduce utilization could be off and depends on how rapidly panel prices decline.
Lower utilization will help drawdown absolute inventory during the stronger retail season. Now for the LCD glass industry in the 4th quarter, we expect glass market volume to be down low single vintage sequentially and our sales volume to be down only slightly because we believe we will make up the Q3 share loss at one of our largest customers due to favorable resolution of the contract dispute. In July, we told investors we had levers to control our capacity to demand. We are keeping our capacity offline to match supply to demand by leaving tank repairs down tanks down after repairs and by allocating capacity for development trials. With the lower panel maker utilizations in Q4 likely to continue into Q1, we will manage the startup of tanks down scheduled repairs to match Q1 supply to demand.
We expect glass market supply and demand to remain balanced as we will continue to control our capacity to our demand. Other glass suppliers have said publicly that they have levers to take similar actions. And finally, I will outline our expectations for LCD glass prices. We expect price declines to further moderate in the Q4. This expectation is based on the customer input we have already received about the prices offered by other suppliers for this quarter.
Recall that under some of our contracts, our price movement at the customer depends on price movements that were made by comparable suppliers at that customer. These price movements by these suppliers at these customers define the price movement for a substantial portion of our sales. For Q4, because we've already been told how these other suppliers' prices moved, we are confident that our overall price decline will be even less in Q4 than it was in Q3. Additionally, we do not expect that our Q4 pricing will be affected by customers moving from thick to thin. We do not expect our pricing to be significantly affected by the weaker than anticipated glass demand.
Glass price declines have been below historic levels for the last 12 months. As we have previously explained, we expect this more favorable pricing environment to continue and maybe even improve for several reasons. First, the financial situation at our competitors indicate that they cannot continue historical price declines and remain profitable. 2nd, the significant weakening of the Japanese yen has in itself given our customers a significant economic benefit without any decline in the yen price of our glass. And 3rd, as we said before, we believe that glass supply and demand will remain balanced throughout this recent weakening in panel demand.
For these and other reasons, we continue to believe that our quarter over quarter price comparison will be better for us going forward than they have been in the past. However, as we explained, our glass price movements depend in large part on what is decided between some of our customers and our competitors. So to summarize display, we expect our volume in Q4 and likely into Q1 2016 to reflect the weaker retail market and we will manage our supply to demand. We expect the improved pricing environment to continue. We do not believe that the current economic environment reflects any fundamental change to the longer term drivers of TV demand.
We continue to expect excellent long term demand, driven by the replacement of older sets and technology innovations such as 4 ks TV. Moving to Optical Communications. For the Q4, we expect sales to be up low to mid single digits versus last year, as certain project delays continue. We expect projects to be on track next year. Looking at the full year 2015, we expect another strong growth year with sales up 10% or low teens if you exclude the impact of the stronger dollar.
These results are further confirmation of our fundamental growth outlook for our optical communications business over the next several years. Turning to environmental, we expect sales to be down mid single digits year over year, driven by the weaker euro and continued softness in China. In Specialty Materials, we expect Gorilla Glass volume to be down about sequentially and year over year, reflecting the differences in new product launch timing and supply chain builds at major brands versus last year. We expect Gorilla Glass 4 to be a significant portion of glass volume in the quarter. We are pleased with the performance of Gorilla Glass and expect double digit profit growth this year.
While Advanced OpEx sales are improving sequentially, we expect continued weakness on a year over year basis. Overall, we expect total segment sales to be down low teens year over year. In Life Sciences, we expect sales to be down mid single digits versus last year, driven by the weaker euro. Without the foreign exchange impact, sales are expected to be consistent with Q4 of last year. Now continuing with the rest of 4th quarter forecast.
We expect Q4 equity earnings from Dow Corning to be approximately $80,000,000 This is up from Q3 due to polysilicon customers meeting annual contract obligations. We expect gross margin to be approximately 42% consistent with last quarter. This is approximately 1 point 5 points lower than Q4 last year. As a reminder, corporate gross margin is really an average of 5 separate businesses. In Q4, Display is lower as a percent of the total company, which will impact the corporate average gross margin, but Display's business percent gross margin is consistent with last year's Q4.
Other drivers of the decline are in optical and environmental, where we have cost structures in place for expected growth. And as I just said, softness in demand is continuing in Q4. We do expect these businesses to grow in 2016 and if they don't, we have levers to adjust costs. SG and A and RD and E spending will be approximately 14% and 8% of sales respectively. We expect other income other expense to be a net expense of approximately $50,000,000 and we expect our effective tax rate for 2015 to be in the range of 16% to 17%.
That concludes our outlook for the Q4. Now I will hand the call over to Wendell to summarize before we go to Q and A.
Thank you, Donnie. To sum up, economic headwinds are impacting our business. But our strong opportunity set, the more stable LCD pricing environment and our ability to generate cash even in
a challenging
economy provide a foundation for continued outstanding industrial performance. As we focus our portfolio and utilize our financial strength, we expect to build on our best in the world capabilities to deliver growth and significant sustained cash distributions to our shareholders. Our framework, intent to increase the dividend at a double digit rate and accelerated share repurchase program are important steps in our 4 year plan. Over the next several months, we will be out with investors to share more details, and we really look forward to the dialogue.
Anne? Thank you, Tony and Wendell. Operator, we'll now open the lines for questions.
And our first question comes from the line of Rod Hall with JPMorgan. Please go ahead.
Yes, good morning guys. Thanks for taking my question. I guess I wanted to kick off with a question about the capital program and specifically the $10,000,000,000 beyond the capital return, so the $10,000,000,000 that you're going to invest in the business. Wendell, I know you lined out these 3 core technologies for manufacturing engineering platforms, 5 market access platforms that you're going to be investing in. But can you give us any more detail on how that $10,000,000,000 or maybe a little less than $10,000,000,000 will be deployed against what strategic initiatives?
And then any other sort of background on this strategic thinking change, how it developed and so on would be helpful? Thanks. And I have one follow-up.
Great. Thanks for the question, Rod. I'll deal with the first one for a second. As far as Chang, how we'll deploy the $10,000,000,000 that we are going to invest in our growth and sustained leadership. We will be sharing more in the future about how we think about that allocation towards which of the various platforms we're going to be leaning.
But we'd like to do that as we engage with folks like you and our investors over the coming months. There'll be pieces of it, which are still in stealth that we won't be able to share. But we will be able to give you a pretty good idea of where you can expect to see us place our emphasis. Now to why now really is your question. So really, it's 3 things that are leading us to discuss this at this point in time.
The first is, as you know, we have a pretty strong engineering and scientific culture here. And that's what mean what that means is that we have hypotheses and we test them with controls. So the core of the hypothesis here is that we can increase our return on innovation through focus on our 3, 4, 5 plan. We have been running experiments to prove that hypothesis, and that also takes a control. And so we have been looking side by side.
We've analyzed the data. And what we're able to conclude is that we do see a much higher return on innovation when we use the portfolio as we just described. That increasing productivity of portfolio helps get at the next 2 items. The second reason that we're talking about it today is we had to be confident that we could sustain our cash flows even in a time when the economy wasn't going our way. And we're really confident that we can do that, Rod.
And then finally, and perhaps most importantly, when you focus on portfolio, you have to be really sure that there's enough opportunity set in that portfolio to generate a lot of growth. And where we are right now is very confident in that. The amount of pull from our customer base that makes use of our 3, 4, 5 capability sense is quite high. So really those are the three reasons you're hearing from us today. We've run the experiments, the data is in, the probability of success goes up, cost of innovation goes down and our competitive advantages go up when we apply it.
We're confident we can sustain our cash flow even in times of economic uncertainty. And our opportunity set is big enough that we could benefit from focusing.
Okay. Thanks, Wendell. And then my follow-up is on display. I mean, a little more short term. Those numbers were actually better than we expected.
Maybe we were too pessimistic, but I wanted to just see if internally the display results in Q3 were anticipating? And also if you could comment on how 4 ks demand is going at this stage, I would appreciate that. Thanks.
So Rod, no, these numbers actually were a little bit worse than what we had expected. When we began the quarter, we thought volumes would be up sequentially, and they weren't. Now some of that, of course, was the contract dispute that I talked about. But the rest of it was panel maker utilization went down a
little bit more than we expected. And the
reason it did was
market came down during the quarter. And those expectations came down as evidence came in that TV demand was going to be lower in the for the full year than we thought it was going to be and that was also true from an IT demand standpoint. I think in the call last time we talked about how we could be wrong on this and it could come down further in Q3 and that's actually what happened than what we originally anticipated.
And 4 ks?
So 4 ks continues to track in a way that we like. And now actually where we're starting to turn a hunk of our focus is what version of 4 ks can create the most compelling package for our customers and that is with the out of Quantum Dot technology as well. But we're really liking the way these sets are looking, the improvements in them from a performance standpoint. It's still too early to call the bend in the curve, right, where it's going to drive replacement cycles. And we've got an awful lot of noise in the marketplace with the really strong dollar, sort of the economic headwind.
So the data just isn't screaming at us yet that we've got that driving replacement cycle feature. But gosh, you can't help but look at these things technically and really like what you're
seeing. Okay, great. Thank you, guys.
Our next question is from Mark Hsu with RBC Capital Markets.
I look at the step function jump in cash returns in a tougher macro environment, is part of the framework to get better returns on innovation, potentially consolidating cash generating businesses and focusing on higher incremental ROIC? For example, if I look at what Corning has done in display glass, going after going to maintain share and then seeing a lift in industry profits, is that the framework we should see in the other segments such as telecom and diesel, for example? That would be helpful.
Think the short version is yes, you're going to see us use that type of tool. Especially in telecom, we think we have a lot of potential leverage that looks just like that. So that is one of the things we are going to do as we deploy that $10,000,000,000
That's helpful. And when we consider potential asset sales, how should we frame the tax implications considering the JV, I think, began before most of us were born? Is there a large capital gains tax that we should consider? And would there be major depreciation recapture in wealth as well? So maybe the framework as you potentially divest some assets that began a long time ago?
So Mark, first, thank you for not making me feel old today. Usually, I feel a little bit old, but you're right. We've got some stuff that we started before I was born, which is like nice. All I do is work with young people these days. So I don't really feel old.
But anyway, I digress. So as far as Dow Corning goes, we're not going to discuss any further than that we have a a potential transaction under discussion with our good friends at Dow. Shifting gears and talking about transactions in general and what happens to our out of focus assets. So our out of focus assets, as I said, we're running them pretty well and they're generating higher than their cost of capital in terms of returns. But we think that some of these assets may offer more synergy to others.
If we can realize that synergy, including any friction costs that may be involved one way or the other for our shareholders, those are the transactions we're willing to consider. As you take a look at the overall framework of being able to deploy $20,000,000,000 right, dollars 10, investing in our growth, dollars 10, back to our shareholders, any transactions in any of the areas we're talking about will represent upside to that deployment. So thanks, Mark, for making me feel younger.
That's helpful. One last question. If we look at the cost of debt, which is at low levels at the moment, any thoughts on the framework for adding more debt to the balance sheet considering that you still want to maintain your credit rating?
So clearly, I think over the next 3 or 4 years, we will be adding debt to the balance sheet. We're not prepared now to talk about what the timing of that is in terms of when we need to do it. Right now, we have good cash balances, dollars 5,000,000,000 including $2,000,000,000 offshore. And so we're currently working to try to determine what that is. But keep in mind that our objective is to have debt balances of 2x our EBITDA.
And over the next few years, we will be putting debt on to do
That's helpful. Thank you and good luck.
Thanks, Mark.
Our next question comes from the line of Vijay Bhagavath with Deutsche Bank. Please go ahead.
Yes. Hey, thanks. Good morning. A bigger picture question for you, Wendell, which is what gets you impatient about the business? Are there any areas or parts of the business that you'd see you'd like to see progress quicker or in a different way than you're seeing now?
Be in a very helpful to hear your points and then a quick follow on for Tony.
Well, the short answer to your first question is, yes, there are many things that make me feel impatient, right, about making progress. But in general, I think that the most significant source of frustration these days is that as we use our 3, 4, 5 plan and we apply our core technology sets in our manufacturing and engineering platforms and our market access platforms. When we try to introduce a new product to a customer who knows us well in other areas, sometimes we forget that different industries move at different speeds. So not everything moves like tech, not everything moves like consumer electronics and mobile consumer electronics. Matter of fact, few things do.
So for instance, it is frustrating how long it's taking us to get widespread adoption of lightweight glazing in automotive. It's a heck of a good idea, good for consumers, it's good for the environment, it's good for safety, it's good for almost everything. But the industry, even when you're a highly valued supplier as we are, it just takes time. So I think the degree of speed with which our innovation can make a difference to our top line is a little frustrating.
Yes, excellent. And then a quick follow on for Tony. Give us kind of your view on where do you see the acquisition strategy trending, any particular product areas, technologies, market transitions? Thanks.
Sure. Thanks, P. J. I think Wendell said before that we feel like there's big opportunities in the optical communications business, both with our internal growth opportunities and applying our 3, 4, 5 strategy, but also from an acquisition standpoint. And I would expect that most of our focus as we go forward the next couple of years from M and A would be looking in the optical communications area.
We think we can generate good synergies there. We've got a big powerhouse machine that's there today with $3,000,000,000 of sales. And I think it gives us really good opportunities to bring in companies and make them better. We've done 3 acquisitions this year. And in those acquisitions, we're really happy with our results.
And we've been able to prove out, I think, our ability to really drive value with those acquisitions. So I'd expect more of the same.
Excellent. Thank you.
We have a question from the line of Doug Clark with Goldman Sachs. Please go ahead.
Great. Thank you very much. I wanted to touch on LCD glass pricing a little bit. I understand kind of the three key points that you make about why glass prices could remain stable. On the other side of that and what isn't addressed is kind of the panel maker dynamic, especially as their profit margins continue to erode.
Do you see that as a possible area of pressure on your glass pricing going forward to the extent that demand doesn't firm up and remain soft?
For sure, we think that there that's always a possibility and that could put pricing pressure on us. But I think what we really expect to see is those panel makers go closer to cash cost that they will cut back their utilizations. We saw that in the Q3 in the small gin sizes. And we think we'll see that over the next couple of quarters in the larger gen sizes. And so the reason that we're confident are the three things that I talked about relative to the financial situation with our competitors.
The benefit that has happened with the significant weakening of the Japanese yen and then our ability to keep glass supply and demand balanced by taking capacity offline.
But it's an excellent question, Doug. I mean, as our display maker customers hit they never make a lot of money, but as they hit pain, I mean, they will increase the pressure. And then the question is going to be, what do our competitors choose to do? And then the factors that Tony has laid out, which is, as they're basically approaching breakeven in one of them and the other's profit is greatly reduced. How do they react to that pressure given that the display makers are on the opposite side of the yen too and have gotten that tremendous the good news is, what you heard from Tony, the good news is, what you heard from Tony was in this next quarter, we expect our display pricing to moderate further than it did in quarter 3 and the profitability problem is already upon the display makers.
So that's encouraging data, Doug, encouraging data.
Right. That makes a lot of sense. That's very helpful. One follow-up to that more on the volume side. I think last quarter you talked about inventories coming down by about 2 weeks by the end of the year.
Wondering you can give us an update on where supply chain inventories are? And to the extent that panel makers cut utilizations between 4Q and 1Q, do you think it will be skewed more towards 1 or the other quarter?
So right now, our expectations is that there'll be some decline in Q4, but it's we expect that softness is likely to continue into Q1. Part of that is that we do know that some panel makers are bringing on capacity in China and we think that that has an impact. Of course, we don't know for sure. We were wrong in our last quarter conference call on how much was going to be in Q3 versus Q4. And of course, we could be around here.
We do think that, that is what is going to be necessary to get the supply chain inventories at a healthy level. Clearly, since demand is less than what we thought last quarter, Even though inventories are going to go down in the 4th quarter, that inventory level at the end of the 4th quarter is a little bit higher than what we would have projected last quarter. And we expect that to bleed off in the Q1.
Got it. Thank you very much.
We have a question from the line of Joseph Wolf with Barclays. Please go ahead.
Thanks. I just wanted to start giving a lot of detail on the capital deployment, but I'm and you mentioned investor input. I'm wondering if you're having some sort of internal, I don't know if we can call it contest with the engineers that you've mentioned to go after that capital projects that they're looking at? And also any pace of deployment that you're thinking about in terms of over the entire 4 years? Or could we wake up one morning and you've decided to spend half of that on one very specific and targeted project with a lot of growth opportunity?
Great questions, Joseph. So I think you should think of the deployment as fitting our culture, which is and the way our innovation model works. When you do material science, when you dig stuff out of the ground or take gases and end up converting them into highly engineered components, that takes time. Since that takes time, the bad news is that things don't turn overnight your way. The good news is that things tend not to sneak up on you.
So I think you can expect some pretty steady behavior on us. And as we go out and talk to investors, we will give clear indications on here is where our tendency is going to be as far as where we're going to invest at that 10, and we'll give you a good feel for rough ideas of timing and how that plays. The big thing that we're picking up here with this focused portfolio is increased productivity. And that increased productivity is what's behind our ability to give more to shareholders. So if you were to take a look out over the last 10 years, right, about 30% of the funds we had available, we were able to give to shareholders either in the form of dividend or share repurchase.
As we look forward over this next 4 years, because of that increased productivity, we're looking at an ability to do about 50% over that time period. And that will be a steady effort, and that's the way you should expect this to behave. Did that answer your question?
Yes. No, that was very helpful. Just a follow-up on the environmental business. If you think about if you have a view, maybe if I had a view or one had a view on the trucking business globally, how would you expect the business to go in terms of
the
So I think growth in the environmental business in total, of course, is going to be driven by both what happens with trucks and light duty vehicles. And on a global basis, as long as total production for light duty vehicles increase, you'll see some growth in the environmental business. And of course, pollution regulations make a big impact on that business too. I think from a heavy duty diesel standpoint, we've seen strong growth in North America over the last couple of years, some of it economic we driven some of it regulation driven. In Europe, the regulations in particular caused nice growth in 2014.
I think what we're faced with right now in 20 15 in China is just that the truck production is down significantly compared to what it had run at actually over the last 6 years and down about 34% on a year to date basis. And that from a very specific to China impact is impacting us both from a revenue standpoint, but also from a cost standpoint because we obviously put cost in place to be able to manufacture to meet that demand. And until those sales turn around along with the improving regulatory environment there, those I mean, that's really what we're looking for in 2016. We think there'll be some improvement in 2016, but we're still waiting to see. We certainly don't think that will improve much in Q4.
From the most macro standpoint, it's not the amount of trucks that are bought in the world that we don't need to grow. What we need is more compliant trucks. And then same thing with cars, even though cars continue to expand and grow very nicely, right? For our automotive our environmental business, it is driven by compliance. So the tighter air requirements get, the more of our components get used.
And as new countries come on board to clean up their air, that's what adds the big sort of swaths of demand. But it's really excellent question.
All right. Thank you very much.
Operator, we've got time for maybe 1 or 2 more calls.
All right. So the next question then is from Steven Fox with Cross Research. Please go ahead.
Thanks. Good morning. Just first question on the new plan. I guess when I think about sort of the 3, 4, 5 that you laid out, I guess the 3 and the 4 have typically outperformed historically for Corning, but the 5 has been the one where timing the products to market, etcetera, has been problematic. Under the new sort of focus, can you just sort of discuss how maybe getting products to market or matching your customers or end market needs gets better and timing more predictable?
And then I had a quick follow-up.
Yes. I think in a way, we tend to be the timing piece for us by and large, it's possible to miss timing on both ends, right? But where we tend to miss timing is we're ready earlier than our customers, which I guess beats the heck out of the other time, right? So that can lead us to have capacity out ahead of demand. That can lead us to have innovations lovely things about mobile consumer electronics is it's almost impossible to be faster than those guys.
So we continue to work on how do we get better at picking these inflection points. And actually, I commented that Jeff Evenson, our new Chief Strategic Officer is here today. A big part of his new role is to work on exactly that. And how do we get a little better at understanding not only the timing basis for our innovation sets, but also when our potential inflection points in our market sets and how should that impact the timing of our capacity decisions. I think you're quite right to note it as an area where we can improve and Hopefully more to come on that topic.
Thanks. And then just a very quick follow-up. So if we think about
a level detail?
I wouldn't make assumptions or speculate today on that matter, though I do understand why you're trying
to. Thanks. Thanks for your understanding.
Okay. One last question, Roxanne?
And that last question comes from Patrick Newton with Stifel. Please go ahead.
Yes. Thank you. Good morning, Wendell, Tony, Jeff and Anne. Thanks for sneaking me in here. I guess, on the shareholder return or capital allocation framework that you've talked about, one clarification and one question.
On the clarification, and I think Wendell you alluded to this, but is any potential transaction without Corning baked into this current outlook through 2019 or would it be additive to the current outlook? And then I guess for Tony on the global cash use being reduced to about $2,000,000,000 is that going to be focused on acquisition efforts for international targets? Or is it a repatriation part of your strategy? And then I have a follow-up.
No. I think on the first question, any potential transactions, we're not going to talk anymore about that, Corning, but any potential transactions are additive to that number. I mean, what we have very clearly stated is that we believe we deliver more than $10,000,000,000 back to shareholders based on our current plans. And anything on top of that from a transaction standpoint would be additive to that. And our bias right now based on what we know would be to have those transactions be additive.
But bottom line is, it's additive. In terms of the cash amount on the $2,000,000,000 I mean, I think clearly, it's our belief that $2,000,000,000 is an adequate amount to have from a company standpoint given our cash flow generations. And as a reminder, our goal is to have 2x EBITDA in debt. And our plans are is to have that $2,000,000,000 reduce that cash over the next couple of years. In terms of where that cash is actually located, it will depend a lot depending on where our taxing policy is in the United States as we can always add the debt in the United States and keep the cash offshore, if that makes sense.
No, that's helpful. I guess as a follow-up, I really want to dive into gross margin given some of your commentary. I think in the near term, you're talking about fixed cost absorption is what is pressuring the metric in quarter guidance. But if I step back and I look at your gross profit since 2010 and arguably when display started to mature, it's been on a negative trajectory. It increased in 2014 due to the consolidation of SCP.
And now as you're lapping that on a it seems to be re decelerating. I guess is this structurally how should we think about your gross margin profile perhaps over the next 5 years or during your capital allocation framework time period from the 42% level? Do you anticipate it will have a positive trajectory or will be sustainable or further pressure?
Yes. We do think we're going to have a positive trajectory. I mean, where we are right now, as I explained before, is driven really by a few things. The first item is in our display business. In the Q3, our volume was a little bit less than what we expected and that negatively impacted our cost.
But we can take cost out and reduce capacity to meet market demand. We are doing that. And in the Q4, our gross margins are actually consistent in the Q4 of 2015 as they were in the Q4 of 2014. So the real issues are in environmental and optical communications. And in both those businesses, we put capacity in place for new businesses that isn't showing up today.
We expect those businesses to show up in 2016. For some reason, they don't show up. We certainly will take the cost down. But the whole purpose of this framework and the integration of this is partly to drive lower as to the lowest cost producer and that definitely helps us from a gross margin standpoint. So I think over time, right now, we're certainly having seen some gross margin compression as our sales are going down.
But as our sales return, we'd expect gross margins to expand.
Great. Thank you for taking my questions. Good luck.
Thank you, Patrick, and thank you, everyone. Just as a reminder, the slides are posted on our IR web page for those for your reference. We have a couple of announcements. We will be out visiting investors during the month of November. Also, we will be at the UBS Conference on November 17 in San Francisco and the Credit Suisse Conference on December 1 in Scottsdale.
Thank you all for joining us today. A playback of the call is available beginning at 11 am Eastern and will run until 5 pm on Tuesday, November 10. To listen, dial 800-475-6701. The access code is 370, 570. The audio cast, of course, is available on our website as well during that time.
Roxanne, that concludes our call. Please disconnect all lines.