Oct 30 - Fitch Ratings has assigned an 'A-' rating to Corning Inc.'s
(Corning) $250 million of 1.45% senior debentures due 2017.
Corning will use net proceeds for general corporate purposes. These include the
cash tender for up to $75 million aggregate principal amount of specified series
of outstanding debt and redemption of $174 million of outstanding debentures,
announced Oct. 26, 2012.
The debentures issuance and subsequent execution of the cash tender debentures
redemption will lower annual interest expense by approximately $15 million-$20
The cash tender offer, subject to certain conditions and limits, includes the
following debt series:
--$75 million of 8.875% debentures due Aug. 15, 2021;
--$75 million of 8.875% debentures due March 15, 2016; and
--$100 million of 6.75% debentures due Sept. 15, 2013.
The tender offer will expire on Nov. 26, 2012. Corning maintains the right but
not the obligation to increase the maximum aggregate principal amount of the
The company will redeem the following outstanding debt series on Nov. 26, 2012:
--$100 million of 5.90% debentures due March 15, 2014; and
--$73.6 million of 6.20% debentures due March 15, 2016.
The Rating Outlook is Stable. Pro forma for the debentures issuance, full
participation in the tender offer and debentures redemption, Fitch's actions
affect approximately $4.4 billion of total debt, including the currently undrawn
$1 billion revolving credit facility (RCF).
The ratings and Outlook incorporate Fitch's belief that Corning's near-term
operating results will fall short of Fitch's expectations but remain solid for
the ratings. Macroeconomic headwinds, particularly weak European automotive
demand, should offset some stabilization in liquid crystal display (LCD) average
selling prices (ASP).
Fitch estimates operating EBITDA margin will remain in the high 20s to low 30s
over the near term, versus the mid-30s in each of the last two fiscal years.
Fitch believes Corning's ability to maintain current operating profit margins
will hinge upon productivity gains in LCD and the completion of modest
Fitch expects Corning's credit protection measures to remain solid with total
leverage (total debt to operating EBITDA) of less than 1.5 times (x) and
interest coverage (operating EBITDA to gross interest expense) in excess of 15x
through the business cycle. Both metrics exclude cash dividends from Corning's
equity investments, which together could exceed $500 million in 2012.
Fitch anticipates pre-dividend free cash flow (FCF) should exceed $750 million
in 2012, down from Fitch's previous forecast of more than $1 billion due to the
lower revenue and profitability outlook. Lower capital spending from maturing
revenue growth will strengthen Corning's FCF profile beyond the near term.
The ratings and Outlook reflect Fitch's expectations of: i) consistent and solid
profitability and cash from operations; ii) strong market positions enabled by
technology leadership in LCD glass, fiber for telecom applications, and ceramic
filters for automotive applications; iii) solid liquidity position and
conservative financial policies, underpinned by a net cash position and
disciplined share repurchases; and iv) substantial albeit currently pressured
cash dividends from joint ventures.
Concerns center on: i) significant R&D investments and capital spending
requirements; ii) the need to offset meaningful annual ASP reductions in LCD
with manufacturing efficiencies; iii) the potential emergence of new high
performance display technologies; 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; and v) exposure to the
As of Sept. 30, 2012, Corning's liquidity was strong and supported by:
--Approximately $6.4 billion of cash, cash equivalents, and short-term
investments, approximately 63% of which was located outside the U.S.; and
--An undrawn $1 billion unsecured RCF expiring December 2015.
Fitch's expectation for more than $750 million of pre-dividend FCF for 2012 also
supports liquidity. Beyond 2012, Fitch anticipates annual FCF approaching $1
As additional support to capital spending in China, a wholly owned subsidiary of
Corning entered into a Chinese Renminbi (RMB) credit agreement during the second
quarter of 2011 under which the subsidiary may borrow up to 4 billion RMB
(approximately $635 million when translated to U.S. dollars at March 31, 2012).
The subsidiary may request advances through the end of 2012, will repay amounts
borrowed under this agreement in six equal installments through 2016, and
borrowed approximately $120 million under this facility during 2011.
The ratings and Outlook continue to reflect Fitch's belief that the company has
the financial flexibility to use excess cash for a combination of share
repurchases and acquisitions approximating annual FCF. Through Sept. 30, 2012,
Corning has bought back approximately $1.4 billion under the $1.5 billion share
repurchase program announced Oct. 5, 2011 and expiring Dec. 31, 2013.
Fitch expects Corning's acquisitions will be technology focused and mostly small
in size, which is consistent with historical behavior. Fitch estimates the
company has spent less than $150 million annually on average over the past five
years. However, Fitch believes occasional larger deals, like Corning's pending
$730 million cash acquisition of BD's Discovery Labware business, are possible.
Pro forma for the debt issuance, cash tender and redemption, total debt was
approximately $3.4 billion as of Sept. 30, 2012 and consisted of various
tranches of senior unsecured notes and debentures with staggered maturities.
Corning's nearest debt maturity is $100 million of 6.75% senior debentures due
Sept. 15, 2013, although this series is included in Corning's debt tender offer.
Fitch currently rates Corning as follows:
--Issuer Default Rating (IDR) at 'A-';
--Senior unsecured debt rating at 'A-';
--Senior unsecured revolving credit facility (RCF) at 'A-'.
Fitch believes positive rating actions are unlikely in the absence of a more
balanced operating profile and commitment to lower total leverage.
Negative ratings actions could result from:
--Meaningfully lower than anticipated annual FCF from Corning's inability to
offset LCD glass ASP erosion via manufacturing efficiencies; or
--Significant underperformance by Corning's other businesses, exacerbating
profitability pressures and reducing the potential for a more balanced operating
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Rating Technology Companies', Aug. 9 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Technology Companies