Fitch Affirms Corning at ‘A-‘; Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings has affirmed Corning Inc.’s (Corning) ratings, including the Long-Term Issuer Default Rating (IDR) at ‘A-‘. Fitch’s actions affect $7.2 billion of total debt, including the $2 billion revolving credit facility (RCF) and unrated $1.15 billion of convertible preferred stock after applying 50% equity credit to $2.3 billion of preferred shares issued to Samsung). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
The ratings and Outlook reflect Fitch’s expectation for solid near-term operating performance, driven by positive momentum across all segments, particularly Optical Communications, Gorilla Glass, and Environmental. Growing profitability in non-Display businesses and modestly lower capital expenditures will translate into higher annual free cash flow (FCF).
Over the longer term, continued fiber-to-the-home (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.
Fitch expects solid longer-term growth for Corning’s non-Display businesses will better balance the company’s operating profile. At the same time, profitability at the Display business should improve moderately 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.
Profitability for non-Display businesses will continue to lag Display but Fitch expects gross margins for non-Display businesses will benefit from increased scale. Blended operating EBITDA margin could exceed 30% in the intermediate term, versus a Fitch-estimated mid-20% for the latest 12-month (LTM) ended March 31, 2015 and 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 intermediate-term capital spending. As a result, Fitch expects annual FCF will approach and approximate $1 billion over this time frame.
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 15x through the intermediate term. Pro forma for the Corning’s recent $750 million senior notes issuance, Fitch estimates total leverage of 1.9x (including preferred shares at 50% equity credit).
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 average selling price (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.
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 which results 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, 2015, Corning’s liquidity was solid and supported by:
–$5.1 billion of cash, cash equivalents, and short-term investments, approximately 40% of which was located in the U.S.;
–An undrawn $2 billion unsecured RCF expiring Sept. 30, 2019. The facility includes a maximum 50% debt-to-total capital covenant (13% at March 31, 2015).
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 Optical Communications and fragmented Life Sciences markets.
Pro forma for the senior notes issuance, total debt as of March 31, 2015 was $5.2 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).
Fitch affirms Corning’s ratings as follows:
–Long-term Issuer Default Rating (IDR) at ‘A-‘;
–Senior unsecured debt rating at ‘A-‘;
–Senior unsecured RCF at ‘A-‘.
–Short-term IDR and commercial paper at ‘F2’.
–Low-single-digit growth in 2015, driven by solid demand for FTTH build-outs in Optical Communications, regulation-driven increased diesel purchases, and Gorilla Glass growth;
–Fitch anticipates Display growth will be flat to slightly up, driven by higher volumes and lower ASP erosion;
–Weaker demand at Hemlock will drive lower dividends from the Dow-Corning joint venture;
–Profitability will expand from operating efficiencies, given the incorporation of SCP manufacturing assets and increasing scale in non-Display businesses;
–Capital spending will remain in the $1 billion to $1.5 billion range through the intermediate term, driving more than $1 billion of annual FCF;
–Share repurchases and dividends will at least approximate and could exceed annual pre-dividend FCF over the intermediate term.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research:
–‘Corporate Rating Methodology’ (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage
Fitch Ratings, Inc.
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Elizabeth Fogerty, +1-212-908-0526
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