Fitch: Cornings Consolidation of SCP a Positive for Bondholders
CHICAGO -- October 24, 2013
According to Fitch Ratings, Corning Inc.'s (Corning) consolidation of Samsung
Corning Precision (SCP), its joint venture with Samsung Corporation (Samsung),
strengthens Corning's credit profile. Nonetheless, Fitch continues to believe
any positive rating action is unlikely in the absence of greater end market
The transaction should provide some lift to operating profit margins, the
potential for lower capital spending over the intermediate-term, and the full
benefit of all of SCP's cash and FCF, all without diminishing Corning's
ongoing collaboration with a global technology leader in Samsung.
Manufacturing optimization should drive Corning's operating profits higher in
the display and specialty materials segments. Not only is SCP's facility the
lowest cost provider, SCP has excess capacity to potentially absorb glass
currently produced in higher cost facilities and future demand that might
otherwise require significant incremental capital spending.
Corning estimates $460 million of cumulative manufacturing optimization and
other cost savings from the transaction over the next four years.
Profitability expansion should at least partially offset ongoing pricing
pressures for LCD glass. The company is on track to achieve Fitch's forecast
of operating profit margin in the low 20s versus previous peak levels in the
The deal could reduce capital spending over the intermediate term, given SCP's
spare capacity. The company's capital spending was due to decline meaningfully
over the intermediate-term, driven by slowing LCD growth and ample capacity
across most of Corning's businesses. Nonetheless, plans to build another LCD
facility in China could be deferred, bolstering FCF from Fitch's current
expectations for more than $1 billion annually beyond 2013.
Finally, the transaction provides Corning with full access to its share of
SCP's current cash and full benefit of its annual FCF, rather than receiving
an annual dividend. Corning's cash dividends from SCP were anticipated to
decline from previous years, driven by slowing LCD volume growth. However, the
deal provides Corning with access to approximately $1.2 billion of incremental
cash and roughly $500 million of annual FCF.
Despite these transaction benefits, Fitch believes positive rating actions are
unlikely in the absence of significant recurring FCF from the development of
technologies in emerging display markets or more significant than expected
revenue growth and market share consolidation in non-display businesses.
Display still represents roughly a third of total sales but nearly two thirds
of Fitch's estimated operating profitability. With operating earnings margin
in the mid-40s, Fitch believes substantial revenue growth and further
productivity gains in Corning's non-display businesses will drive a
strengthened and more diversified operating profile.
The transaction makes negative rating action less likely. Negative rating
actions could occur if: i) the company is unable to offset price erosion with
productivity gains and manufacturing cost optimization 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 reduce funds
from operations and FCF despite lower capital intensity.
In conjunction with and contingent upon the consummation of the transaction,
Corning will buy back an incremental $2 billion of common shares to offset
potential dilution related to Samsung's preferred shares in Corning, which is
not convertible for seven years. This is in addition to Corning's existing $2
billion share repurchase authorization announced in the second quarter of
2012, of which $1.8 remained available for repurchase as of June 30, 2013.
Aside from stock buybacks, Fitch anticipates Corning will use higher FCF for
organic growth opportunities and acquisitions, particularly in fragmented Life
Sciences markets. Acquisition targets may be limited in other segments, due to
Corning's market leadership.
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
On October 22, 2013, Corning announced it entered into an agreement with
Samsung to buy Samsung's 43% ownership stake in SCP for $1.9 billion of
preferred shares in Corning. Corning expects to pay approximately $300 million
of cash to the remaining 7% minority owners of SCP. Samsung also will purchase
additional convertible preferred shares in Corning for $400 million of cash.
The convertible preferred shares have a 4.25% coupon and roughly 35%
conversion premium. Corning entered into a 10 year glass supply agreement with
Samsung, which stipulates a minimum share level. This agreement expands
technology joint development between the two companies. The deal is expected
to close in the first quarter of 2014.
In connection with the transaction, Corning announced a $2 billion incremental
stock repurchase program, subject to the transaction closing, which would
offset potential dilution from the conversion of preferred shares after seven
In conjunction with the transaction announcement, Corning pre-announced
earnings for the third quarter of 2013. Revenues grew on a sequential and
year-over-year basis but the company guided to a seasonally lower fourth
quarter of 2013, exacerbated by lower than expected fiber sales. Operating
profit margin remained solid and on track to achieve Fitch's expectation in
the low 20s.
Fitch continues to expect total leverage (total debt to operating EBITDA) to
remain near current levels and well below 2x even in a severe downturn.
Interest coverage (operating EBITDA to interest expense) should remain greater
Fitch currently rates Corning as follows:
--Senior unsecured debt rating 'A-';
--Senior unsecured revolving credit facility (RCF) 'A-'.
The Ratings Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013.
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Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
John Witt, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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