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

Fitch Ratings has affirmed the following ratings for Corning Inc. (Corning):

--Issuer Default Rating (IDR) at 'A-';

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

--Senior unsecured revolving credit facility (RCF) at 'A-'.

The Rating Outlook is Stable. Fitch's actions affect approximately $4.2 billion of total debt, including the currently undrawn $1 billion RCF.

The ratings and Outlook incorporate Fitch's belief that Corning's operating metrics will remain solid for the ratings, despite near-term headwinds for the company's Display Technologies segment and equity companies. Fitch expects low single digit revenue growth in 2012, with secular demand in Corning's Telecommunications, Environmental, Specialty Glass, and Life Sciences segments offsetting slower than anticipated volume growth in liquid crystal display (LCD) and acute pricing pressures in both LCDs and silicones.

Fitch anticipates operating EBITDA margin could contract to 30% or below over the intermediate term versus a Fitch estimated 35.3% for the latest 12 months (LTM) ended March 31, 2012. Fitch believes the degree of profit contraction will depend upon Corning's ability to offset current price declines for LCD glass with productivity gains and expand the profitability of lower gross margin non-Display Technologies businesses through scale and manufacturing efficiencies.

Fitch expects Corning's credit protection measures to remain solid with total leverage (total debt to operating EBITDA) of less than 1.5 times (x) and interest coverage (operating EBITDA to gross interest expense) in excess of 15x through the business cycle. Both metrics exclude cash dividends from Corning's equity investments in SCP and Dow Corning (DCC), which together should exceed $500 million in 2012.

While profitability may contract from the maturation of Display Technologies, Fitch believes Corning's pro forma revenue mix will be more balanced and the company less vulnerable to business cycles and technological shifts. Corning's capital intensity also will decline, which should strengthen the free cash flow (FCF) profile. Corning's capital spending represented more than 30% of revenues in certain years while the capital spending beyond the near term should be approximately 10% - 15% of revenues. As a result, Fitch anticipates FCF could approach $1 billion despite lower anticipated dividends from equity companies and Corning's raising its dividend pay-out to common shareholders by 50% beginning in the fourth quarter of 2011.

The LCD TV market is maturing but Corning should further benefit from increasing LCD TV penetration in developing economies and replacement TVs in developed markets. However, Fitch believes the potential replacement of LCD with next generation glass remains a significant longer term risk, even as Corning continues development in high performance displays.

Among technologies potentially suited to replace LCD over time are organic light emitting diode (OLED) displays, which are thinner and provide higher contrast. In addition, OLED displays already are designed into numerous smart phone models and other small form factor consumer electronics. Corning is building on its Lotus Glass substrates, which deliver the processing temperatures and dimensional stability required to produce high performance displays. On Feb. 2, 2012, Corning formed a joint venture with Samsung Mobile Display Co. Ltd. (SMD) to develop and manufacture OLED backplane glass substrates for SMD, as well as the broader Korean market.

Worldwide automotive production and diesel regulations are driving growth in the company's Environmental segment for ceramic filters, while demand for the Corning's fiber-cable for data center and public and private infrastructure projects continues fueling Corning's Telecommunications business. Robust smart phone and tablet growth are driving Specialty Materials growth, even as the demand for TV cover glass is softer than anticipated. Finally, drug research and discovery tools are driving growth in Corning's Life Sciences segment, although Corning's pending Discovery Labware acquisition will provide substantial inorganic growth to that segment.

The ratings and Outlook reflect Fitch's expectations of: i) consistent and solid profitability and cash from operations; ii) strong market positions enabled by technology leadership in LCD glass, fiber for telecom applications, and ceramic filters for automotive applications; iii) solid liquidity position and conservative financial policies, underpinned by a net cash position and disciplined share repurchases.; and iii) substantial albeit currently pressured cash dividends from joint ventures.

Concerns center on: i) significant R&D investments and capital spending requirements; ii) the need to offset meaningful annual ASP reductions in LCD with manufacturing efficiencies; iii) the potential emergence of new high performance display technologies; 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 center customers; and v) exposure to the Japanese Yen.

As of March 31, 2012, Corning's liquidity was strong and supported by:

--Approximately $6.8 billion of cash, cash equivalents, and short-term investments, approximately 66% of which was located outside the U.S.; and

--An undrawn $1 billion unsecured RCF expiring December 2015.

Fitch's expectations for pre-dividend annual FCF approaching $1 billion also support Corning's liquidity. Fitch does not anticipate Corning's 2011 50% increase in common stock dividend payments will meaningfully impact annual FCF.

As additional support to capital spending in China, a wholly owned subsidiary of Corning entered into a Chinese Renminbi (RMB) credit agreement during the second quarter of 2011 under which the subsidiary may borrow up to 4 billion RMB (approximately $635 million when translated to U.S. dollars at March 31, 2012). The subsidiary may request advances through the end of 2012, will repay amounts borrowed under this agreement in six equal installments through 2016, and borrowed approximately $120 million under this facility during 2011.

The ratings and Outlook continue to reflect Fitch's belief that the company has the financial flexibility to use excess cash for a combination of share repurchases and acquisitions approximating annual FCF. During the last two quarters, Corning repurchased 60.4 million shares for $852 million under a stock buyback plan announced Oct. 5, 2011. Corning suspended share repurchases in 2008 in connection with the 2008-2009 downturn and the ratings and Outlook incorporate Fitch's belief that Corning would do so again in the event of another recession.

Fitch expects Corning's acquisitions will be technology focused and mostly small in size, which is consistent with historical behavior. Fitch estimates the company has spent less than $150 million annually on average over the past five years. However, Fitch believes occasional larger deals, like Corning's recently announced $730 million cash acquisition of BD's Discovery Labware business, are possible, particularly in Life Sciences and Telecommunications.

Total debt as of March 31, 2012 was approximately $3.2 billion, primarily consisting of various tranches of senior unsecured notes and debentures with staggered maturities. 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 $100 million of 6.75% senior debentures due Sept. 15, 2013.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 12, 2011;

--'Rating Global Technology Companies - Sector Credit Factors', Sept. 20, 2010.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating Global Technology Companies - Specific Rating Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543285

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