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

CHICAGO--()--Fitch Ratings has affirmed the ratings for Corning Inc. (Corning), including the 'A-'long-term Issuer Default Rating (IDR). The ratings affect $4.7 billion of currently rated debt, including the revolving credit facility (RCF). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

The affirmed ratings and Outlook reflect Fitch's expectation for solid operating performance over the intermediate term, driven by secular demand growth and strengthening profitability in non-Display businesses. Capital intensity should be modestly lower through the intermediate term and, in conjunction with growing profitability, should translate into higher annual free cash flow (FCF).

In the near term, solid demand across all end markets should drive low- to mid- single-digit organic revenue growth. Solid fiber-to-the-home (FTTH) in the North American and European regions and data center build-outs are driving Optical Communications. Within Environmental, regulations in China and Europe, as well as the pick-up of diesel demand in the U.S. are driving growth.

Over the longer term, continued FTTH build-outs, increased demand for data, storage and processing, and wireless applications support growth in Optical Communications, although demand will remain less predictable due to uneven customer capital spending. In Environmental, regulations are expected to continue supporting top-line growth.

With solid longer-term growth expected for Corning's non-Display businesses, Fitch anticipates the company's operating profile will become more balanced. At the same time, profitability at the Display business should improve modestly in the intermediate term with higher gross margins, driven by higher volumes and the shift of production to more efficient Corning Precision Materials (CPM) capacity.

Fitch believes profitability for non-Display businesses will continue to lag the Display business in the intermediate term, but gross margins for non-Display businesses are expected to benefit greatly from gaining scale given their smaller size. Fitch expects operating EBITDA margin to exceed 30% in the intermediate term, versus a Fitch-estimated mid-20% for the latest 12-month (LTM) period, compared with a Fitch-estimated mid-60% for Display.

Capital intensity will remain substantial for Corning. However, the addition of Corning Precision manufacturing assets and available capacity from historical additions in Specialty Materials and Environmental should result in lower capital spending over the intermediate term. As a result, Fitch expects annual FCF will approach and approximate $1 billion over the intermediate term.

Fitch expects credit protection measures to remain solid for the rating, with total leverage (total debt-to-operating EBITDA) below 2x. Interest coverage (operating EBITDA-to-interest expense) will exceed 20x through the intermediate term. For the LTM, Fitch estimates total leverage of 1.9x (reflecting the addition of preferred shares at 50% equity credit) and interest coverage of 17.0x.

KEY RATINGS DRIVERS

The ratings and Outlook are supported by Fitch's expectations for:

--Solid profitability and annual FCF;

--Leading technology in several key end markets, translating into significant LCD glass share leadership and strong market positions in fiber for telecom, and ceramic filters for automotive applications;

--Solid liquidity position and conservative financial policies, underpinned by a net cash position and disciplined share repurchases.

Concerns center on Corning's:

--Significant ongoing investments in R&D and capital spending requirements;

--Corning's need to offset meaningful annual ASP reductions in Display and Specialty Materials with manufacturing efficiencies;

--Slower than anticipated segment diversification, driven by lower revenue growth and profitability expansion for non-Display segments.

RATINGS SENSITIVITIES

Fitch believes positive rating actions are unlikely in the absence of structurally higher recurring FCF, likely from lower capital intensity and meaningful profitability expansion in non-Display businesses, in conjunction with a commitment to more conservative financial policies.

Negative rating actions could occur if:

--Corning is unable to offset ASP erosion with productivity gains in LCD, thereby resulting in structurally lower profitability (operating margins below 30% and total debt-to-operating EBITDA sustained above 2x);

--Corning is unable to drive gross margin expansion in its non-Display businesses, resulting in annual FCF below $500 million.

As of March 31, 2014, Corning's liquidity was solid and supported by:

--$5.6 billion of cash, cash equivalents, and short-term investments, approximately 24% of which was located in the U.S.;

--An undrawn $1 billion unsecured RCF expiring March 2018. The facility includes a maximum 50% debt-to-total capital (15% at March 31, 2014).

Fitch's expectations for annual FCF of more than $1 billion through the forecast period also support Corning's liquidity. Fitch expects Corning will use FCF for share repurchases and acquisitions, particularly in fragmented Life Sciences markets. Acquisition targets may be limited in other segments, due to Corning's already strong market leadership.

Total debt as of March 31, 2014 was $4.8 billion (including the unrated $1.15 billion of Convertible Preferred Stock after applying 50% equity credit to $2.3 billion of preferred shares issued to Samsung).

The ratings and Outlook also incorporate Fitch's belief that Corning has capacity within the rating to continue its historical practice of incurring modest incremental debt to pre-fund debt maturities. Corning's nearest debt maturity is for $418 million of outstanding debt under the CP program, followed by $64 million of sr. unsecured debentures due in 2016.

Fitch currently affirms Corning as follows:

Corning, Inc.

--IDR at 'A-';

--Senior unsecured debt rating at 'A-';

--Senior unsecured RCF at 'A-'.

In addition, Fitch assigns a short-term IDR and $1 billion CP rating of 'F2'. The $1 billion senior unsecured revolving credit facility expiring March 2018 fully backs the CP program.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 5, 2013.

--'Short-Term Ratings Criteria for Non-Financial Corporates', Aug. 5, 2013.

--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis', Dec. 23, 2013.

Applicable Criteria and Related Research:

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

Short-Term Ratings Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830198

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
John Witt, CFA
Senior Director
+1-212-908-0673
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
John Witt, CFA
Senior Director
+1-212-908-0673
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com