Fitch Affirms Corning's IDR at 'A-'; Outlook Stable

Tue May 14, 2013 5:15pm EDT

(The following statement was released by the rating agency) CHICAGO, May 14 (Fitch) Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Corning Inc. (Corning) at 'A-'. The Rating Outlook is Stable. A full description of Corning's ratings follows at the end of this release. The ratings and Outlook reflect Fitch's expectation that operating results will remain solid over the intermediate term, due to Corning's increasing sales diversification and lower capital spending. In addition to revenues from Corning's acquisition of Discovery Labware at the end of 2012, solid growth in Telecommunications and Specialty Materials should offset weaker than expected end demand in diesel and currency headwinds in the Display segment. Free cash flow (FCF) should strengthen meaningfully from lower capital spending in Display, despite some uptick in spending anticipated for Environmental and lower dividends from equity companies. Fitch estimates capital spending as a percentage of sales will decline to the mid-teens in 2013 from 23% and 31% in 2012 and 2011, respectively. Fitch estimates flat FCF for 2013 and more than $1 billion annually beyond the near term. Profitability expansion is expected from productivity gains, mostly greater scale across non-Display businesses. As a result, Fitch anticipates operating EBITDA margin to drift toward the mid-30% range through the intermediate term. With debt levels anticipated to remain in step with profitability growth, Fitch expects total leverage (total debt to operating EBITDA) will remain near current levels and well below 2x even in a severe downturn. Interest coverage (operating EBITDA to interest expense) should remain greater than 20x. Dividends from equity companies will decline over the intermediate term, due to lower sales at the company's joint venture (JV) with Samsung and a weak operating environment for the silicone and polysilicon businesses with Dow Corning Corp. (DCC). Corning received approximately $1.1 billion of dividends from equity companies in 2012 and Fitch estimates dividends will be less than half that for 2013. Nonetheless, Corning continues expanding its partnership with Samsung on next-generation high performance display (HPD) technologies, while long-term demand for DCC's polysilicon and silicones remains positive. Fitch expects Corning to use higher FCF for acquisitions, particularly in fragmented Life Sciences markets. Acquisition targets may be limited in other segments, due to Corning's market leadership. In the absence of significant acquisition spending, Corning likely will increase dividends and accelerate share repurchases over the intermediate term. However, Fitch believes Corning would moderate stock buybacks were FCF to become pressured, as it did during the 2008-2009 recession. RATINGS SENSITIVITIES: Fitch believes positive rating actions are unlikely in the absence of significant recurring FCF, likely from the development of technologies in emerging Display markets or more significant than expected revenue growth and market share consolidation in non-Display businesses. Negative rating actions could occur if: i) the company is unable to offset price erosion with productivity gains in LCD, thereby resulting in meaningful profitability contractions and signaling secular changes in the LCD market, or ii) Corning is unable to drive gross margin expansion in its non-Display Technologies business, which could meaningfully reduce funds from operations in the absence of significant revenue growth. The result would be that FCF would remain modest despite meaningfully lower capital intensity. RATINGS DRIVERS: The ratings and Outlook are supported by Fitch's expectations of: i) solid profitability and strengthening annual FCF; ii) substantial albeit currently pressured cash dividends from joint ventures; iii) leading market positions in several key end markets, including LCD glass, fiber for telecom applications, and ceramic filters for automotive applications; and iv) solid liquidity position and conservative financial policies, underpinned by a net cash position and disciplined share repurchases. Concerns center on: i) significant ongoing investments in R&D and capital spending requirements; ii) Corning's need to offset meaningful annual ASP reductions in LCD with manufacturing efficiencies; iii) the potential emergence of new high performance display technologies; and iv) limited revenue growth visibility in fiber-optic cables sales, driven by uneven capital spending by carrier customers and the project-oriented nature of data center customers. As of March 31, 2013, Corning's liquidity was strong and supported by: --Approximately $5.8 billion of cash, cash equivalents, and short-term investments, approximately 79% of which was located outside the U.S.; --An undrawn $1 billion unsecured revolving credit facility expiring March 2018. The facility includes a maximum 50% debt to total capital. --Solid annual FCF also supports Corning's liquidity. Total debt as of March 31, 2013 was approximately $3 billion, primarily consisting of various tranches of senior unsecured notes and debentures with staggered maturities. The ratings and Outlook reflect Corning's capacity to continue its historical practice of incurring modest incremental debt to pre-fund debt maturities. Corning's nearest debt maturity is $100 million of 6.75% senior debentures due Sept. 15, 2013. Fitch affirms the following ratings: Corning, Inc. --IDR at 'A-'; --Senior unsecured debt rating at 'A-'; --Senior unsecured revolving credit facility (RCF) at 'A-'. The ratings affect approximately $2.9 billion of debt outstanding at March 31, 2013. Contact: Primary Analyst Jason Pompeii Senior Director +1-312-368-3210 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst John Witt, CFA Director +1-212-908-0673 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. Applicable Criteria and Related Research: --'Corporate Rating Methodology', Aug. 8, 2012. Applicable Criteria and Related Research Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.