OREANDA-NEWS. Fitch Ratings has downgraded Corning Incorporated's (Corning) long-term ratings, including the long-term Issuer Default Rating (IDR), to 'BBB+' from 'A-'. Fitch affirms the short-term IDR and Commercial Paper (CP) rating at 'F2'. The rating actions affect $7.3 billion of debt including the $2 billion revolving credit facility (RCF). The Rating Outlook is Stable.

KEY RATING DRIVERS

The ratings and Outlook reflect Corning's updated capital allocation strategy, under which the company will increase target total leverage (total debt to operating EBITDA) to 2 times (x) from a Fitch estimated 1.8x for the latest 12 months (LTM) ended Sept. 30, 2015, to enable the return of more than $10 billion to shareholders through 2019. Fitch previously anticipated total leverage would remain below 1.5x over the longer term.

As part of its capital allocation strategy, the company increased its share repurchase authorization by $4 billion, the intent to execute a $1.25 billion accelerated share repurchase (ASR) program to commence in the current quarter ending Dec. 31, 2015 and plans to raise per share dividends by at least 10% annually through 2019. While Corning will fund the majority of shareholder returns with pre-dividend free cash flow (FCF) and the reduction of available cash to $2 billion from $5 billion as Sept. 30, 2015, the remaining amounts will be debt financed.

Corning plans to invest $10 billion through 2019 to sustain market leadership in its businesses, including acquisitions, research, development and engineering (RD&E), and capital spending. Acquisitions will most likely be in the more fragmented optical communications markets where Corning has completed three deals in 2015, solidifying the company's positions in rapidly growing dense wavelength division multiplexing components.

In connection with the capital allocation strategy announcement, Corning reported third quarter earnings that were roughly in-line with Fitch's expectations. The top line remains challenged by slowing demand from China and currency headwinds and profitability challenged from meaningful operating leverage in most of Corning's businesses. Fitch now expects revenues for 2015 will be down slightly on a constant currency basis, versus prior expectations of low-single digit positive growth.

Fitch expects growth in non-Display segments will more than offset flat revenue growth in Display over the intermediate 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 anticipates low-single digit growth in Specialty Materials with potential upside from Gorilla Glass penetration into new applications, including automotive.

We expect profitability at the Display business will 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 should exceed 30% in the intermediate term and were a Fitch-estimated 32.3% for the latest 12-month (LTM) ended Sept. 30, 2015.

Capital intensity will remain substantial for Corning, driven by tank rebuilds and potential expansion in Optical Communications. As a result, Fitch expects annual FCF will be $500 million to $1 billion through the intermediate-term.

The ratings and Outlook are supported by Fitch's expectations for:
--Significant liquid crystal display (LCD) glass share leadership and strong market positions in fiber for telecom, and ceramic filters for automotive applications;
--Technology leadership from significant cumulative RD&E investments, resulting in strong operating EBITDA margin in the high 20s to 30s;
--Expectations for annual FCF over the longer-term.

Concerns center on Corning's:

--Potentially limited headroom for operational shortfalls or sustained macroeconomic headwinds, given commitment to more aggressive financial policies;
--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.

KEY ASSUMPTIONS

--Organic sales growth is slightly down for 2015 and flat in 2016, on a constant currency basis, followed by low-single digit growth in 2017-2018.
--Acquisition spending is $250 million to $500 million annually and adds roughly 0.5% of inorganic growth to the top line per year.
--Operating EBITDA margins remain above 30% through the forecast period.
--Capital intensity remains in the mid-teens through forecast period.
--Shareholder returns are spread evenly through the forecast period and, in addition to the $1.25 billion ASR commencing in the current quarter, exceed $10 billion.
--Debt increases to support shareholder returns beginning in 2016.

RATING SENSITIVITIES

Negative rating actions could occur if Fitch expects:
--total leverage sustained above 2.5x, from structurally lower profitability or debt issuance to pre-fund shareholder returns in conjunction with a significant macroeconomic slowdown; or
--Expectations for annual FCF sustained below $500 million.

A return to financial policies consistent with an 'A'-category rating is unexpected but could result in positive rating action.

LIQUIDITY

Corning's liquidity as of Sept. 30, 2015 was solid and consisted of:
--$5 billion of cash, cash equivalents and short-term investments, 60% of which was located outside the U.S.;
--Undrawn $2 billion RCF expiring Sept. 30, 2019. The facility includes a maximum 50% debt-to-total capital covenant (16.7% at Sept. 30, 2015).

Fitch's expectation for solid annual FCF approaching $500 million also supports liquidity.

As of Sept. 30, 2015, total debt was $5.3 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).

FULL LIST OF RATING ACTIONS

Fitch downgraded the following ratings for Corning:

--Long-term IDR to 'BBB+' from 'A-';
--Senior unsecured debt rating to 'BBB+' from 'A-';
--Senior unsecured RCF to 'BBB+' from 'A-'.

Fitch affirms the short-term IDR and CP at 'F2'.

The Rating Outlook is Stable.