Fitch Affirms Corning's IDR at 'A-'; Outlook Stable
CHICAGO -- May 14, 2013
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.
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.
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
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:
--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,
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
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Jason Pompeii, +1-312-368-3210
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
John Witt, CFA, +1-212-908-0673
Brian Bertsch, New York, +1 212-908-0549
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