Note 10 - Acquisition

9 Months Ended

Sep. 30, 2014

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

10.      Acquisition

On January 15, 2014, Corning consummated a series of strategic and financial agreements pursuant to the Framework Agreement with Samsung Display, previously announced on October 22, 2013, to acquire the remaining common shares of Samsung Corning Precision Materials.  The transaction is expected to strengthen product and technology collaborations between the two companies and allow Corning to extend its leadership in specialty glass and drive earnings growth.

The Acquisition was accounted for under the purchase method of accounting in accordance with business combination accounting guidance.  Accordingly, the preliminary purchase price was allocated to the assets acquired and liabilities assumed, based on their fair value on the date of Acquisition.  The fair value was determined based on the fair value of consideration transferred for the remaining equity interest of Samsung Display’s shares.

In connection with the purchase of Samsung Display’s equity interest in Samsung Corning Precision Materials pursuant to the Framework Agreement, the Company designated a new series of its preferred stock as Fixed Rate Cumulative Convertible Preferred Stock, Series A, par value $100 per share (“Preferred Stock”).  As contemplated by the Framework Agreement, Samsung Display became the owner of 2,300 shares of Preferred Stock (with an issue price of $1 million per share), of which 1,900 shares were issued in connection with the Acquisition and 400 shares were issued for cash.

Corning issued 1,900 shares of Preferred Stock as consideration in the Acquisition of Samsung Corning Precision Materials which had a fair value of $1.9 billion on the acquisition date.  The fair value was determined using an option pricing model based on the features of the Preferred Stock.  That measure is based on Level 2 inputs observable in the market such as Corning’s common stock price and dividend yield.

The Acquisition also includes a contingent consideration arrangement that potentially requires additional consideration to be paid between the parties in 2018: one based on projections of future revenues generated by the business of Samsung Corning Precision Materials for the period between the acquisition date and December 31, 2017, which is subject to a cap of $665 million; and another based on the volumes of certain sales during the same period, which is subject to a separate cap of $100 million.  The fair value of the potential receipt of the contingent consideration in 2018 in the amount of $196 million was estimated by applying an option pricing model using the Company’s projections of Corning Precision Materials’ future revenues.  Changes in the fair value of the contingent consideration in future periods are valued using an option pricing model and are recorded in Corning’s results in the period of the change.  In the third quarter of 2014, we recorded a pre-tax adjustment in Selling, general and administrative expenses in the amount of $77 million to reflect the increase in the fair value of the potential receipt of the contingent consideration.

The following table summarizes the total fair value of Samsung Corning Precision Materials at the acquisition date including the net consideration transferred to acquire the remaining 42.5% of Samsung Corning Precision Materials, the fair value of Corning’s non-controlling interest in Samsung Corning Precision Materials pre- and post-acquisition and the amount of the implied fair value of the total entity for the purpose of allocating the purchase price to the acquired net assets.

Net consideration applied to acquired assets	Samsung Display		Corning Incorporated		Samsung Corning Precision Materials
Ownership percentage		42.5%		57.5%		100%
Fair value based on $1.9 billion consideration transferred	$	1,911	$	2,588	$	4,499
Less contingent consideration - receivable		(196)		(265)		(461)
Net fair value of consideration @ 100%		1,715		2,323		4,038
Corning’s loss on royalty contract		(136)		(184)		(320)
Fair value post-acquisition	$	1,579	$	2,139	$	3,718
Corning’s fair value 57.5% post-acquisition		2,139
Total fair value at January 15, 2014	$	3,718

The $1.9 billion fair value of consideration transferred for the remaining 42.5% interest in Samsung Corning Precision Materials plus the fair value of Corning’s pre-acquisition fair value less the contingent consideration due Corning as of the acquisition date results in a net fair value for the total entity of $4 billion.

As a result of the acquisition of Samsung Corning Precision Materials, Corning reacquired its technology license rights and effectively settled its pre-existing royalty contract with the acquired entity, Samsung Corning Precision Materials.  With regard to the reacquired right, Corning engaged a third-party specialist to assist in assessing the fair value of this right and determined that the reacquired right had a value of zero.  In addition, the Company assessed whether this royalty contract was favorable or unfavorable to Corning.  It was determined that the contractual royalty rate of 3% as compared to the then current market rate of 12% was unfavorable to Corning.  The effective settlement of the contract was valued using the Income Approach; specifically, a relief from royalty method.  The amount by which the contract was unfavorable to Corning when compared to current market transactions for similar items resulted in a loss of $320 million which was recorded on the acquisition date, representing 100% of the loss on the effective settlement of the contract.  There were no stated contractual settlement provisions or previously recorded assets or liabilities to consider when determining the value associated with the settlement.

Because the pre-existing contract was unfavorable to Corning, a portion of the consideration transferred was deemed to be applicable to the effective settlement of the royalty contract between Corning and the acquiree, Samsung Corning Precision Materials.  The $320 million loss attributable to the settlement of the pre-existing arrangement was accounted for as a separate transaction from the business combination as follows:

·   At acquisition, since the contract with Samsung Corning Precision Materials was effectively settled, Corning recognized a loss of $320 million.  Of the $320 million, $184 million effectively offset the portion of the gain on previously held equity investment attributable to Corning’s interest in the royalty contract.  As a result, the pre-acquisition fair value of Corning’s 57.5% share of $2.3 billion decreased to the fair value of $2.1 billion post-acquisition; and

·   At acquisition, since the seller, Samsung Display, was a 42.5% shareholder of Samsung Corning Precision Materials, 42.5%, or $136 million, of the $320 million loss to effectively settle the contract reduced the consideration transferred to acquire Samsung Display’s interest in Samsung Corning Precision Materials.  Accordingly, $136 million of the consideration transferred was treated separately from the purchase price, resulting in the implied consideration transferred of approximately $1.6 billion.

The net economic effect to Corning following the transaction was a net loss of $136 million, constituting a $320 million loss due to Corning’s unfavorable contract and its share of the favorable contract in Samsung Corning Precision Materials of $184 million.

The gain on the previously held equity investment was calculated based on the fair value of the entity immediately preceding the Acquisition.  As the pre-existing contract was treated as a separate transaction, the pre-existing contract was not taken into consideration when calculating the gain on the previously held equity interest.

The net gain on previously owned equity was calculated as follows:

December 2013 Investment Balance	$	3,709
Dividend (1)		(1,574)
Other		(18)
Net investment book balance at 1/15/2014	$	2,117
Fair value Samsung Corning Precision Materials	$	4,038
57.5% of Samsung Corning Precision Materials (2)		2,323
Working capital adjustment and other		52
57.5% of the pre-acquisition fair value of assets	$	2,375
Gain on previously held equity investment (2)	$	258
Translation gain		136
Net gain	$	394

(1) In conjunction with the Framework Agreement, the parties agreed to have Samsung Corning Precision Materials distribute all cash and cash equivalents as a dividend to the shareholders of record as of December 31, 2013.  The dividend was not part of the purchase price as the agreement was to distribute cash and cash equivalents as a dividend to the shareholders as soon as practicable.  As such, at acquisition Corning did not have legal title to the cash to be distributed, although the dividend was distributed subsequent to the acquisition date.  Therefore, the portion of Corning’s share of the $1.6 billion dividend received was accounted for in Corning’s consolidated financial statements as if the dividend occurred at or immediately prior to the date of acquisition at which time Samsung Corning Precision Materials was still an equity method investment in Corning’s consolidated financial statements.

(2) As Corning was a 57.5% shareholder at the date of acquisition, immediately preceding the acquisition of Samsung Corning Precision Materials, Corning recognized an asset and respective gain as part of the calculation of its previously held equity investment which included approximately $184 million attributed to its economic interest in the royalty contract.

The following table summarizes the amounts of identified assets acquired and liabilities assumed at acquisition date.  Corning has not completed its accounting for the Acquisition and its review of deferred taxes; therefore, amounts are subject to change.

Recognized amounts of identified assets acquired and liabilities assumed (in millions):

Cash and cash equivalents (1)	$	133
Trade receivables		353
Inventory (3)		116
Property, plant and equipment (3)		3,615
Other current and non-current assets (3)		74
Debt – current		(32)
Accounts payable and accrued expenses (3)		(356)
Other current and non-current liabilities (3)		(307)
Total identified net assets (3)		3,596
Non-controlling interests		15
Fair value of Samsung Corning Precision Materials on acquisition date		(3,718)
Goodwill (2)(3)	$	107

(1) Cash and cash equivalents are presented net of the 2014 dividend distributed subsequent to the Acquisition, in the amount of $2.8 billion.

(2) The goodwill recognized is not deductible for U.S. income tax purposes.  The goodwill was allocated to the Display Technologies segment.

(3) In the second and third quarters of 2014, the company recorded total measurement period adjustments of $39 million for the Acquisition of Corning Precision Materials primarily related to accrual of contingent liabilities and employee benefit obligations.

The goodwill is primarily attributable to the workforce of the acquired business and the synergies expected to result from the integration of Corning Precision Materials. Acquisition-related costs of $92 million in the nine months ended September 30, 2014 included costs for post-Acquisition compensation expense, legal, accounting, valuation and other professional services and were included in selling, general and administrative expenses in the Consolidated Statements of Income.  Since the date of acquisition, the consolidation of Corning Precision Materials added $1,331 million to Net sales.  The impact to Net income of the consolidation of Corning Precision Materials is impracticable to calculate due to the level of integration within the Display Technologies segment and the significant amount of estimates that would be required.

Unaudited Pro Forma Financial Information

The unaudited pro forma combined consolidated statement of income for the three and nine months ended September 30, 2013, was derived from the unaudited financial statements of Corning and Samsung Corning Precision Materials for the three and nine months ended September 30, 2013, and is presented to show how Corning might have appeared had the Acquisition occurred as of January 1, 2013.

The unaudited pro forma combined consolidated financial information was prepared pursuant to the rules and regulations of the SEC.  The unaudited pro forma adjustments reflecting the Acquisition have been prepared in accordance with the business combination accounting guidance and reflect the preliminary allocation of the purchase price to the acquired assets and liabilities based upon the preliminary estimate of fair values, using the assumptions set forth above.

Unaudited Pro Forma Financial Information (in millions, except per share data):

	Three months ended September 30, 2013		Nine months ended September 30, 2013
Net sales	$	2,554	$	7,431
Net income from continuing operations – basic	$	480	$	1,837
Net income from continuing operations – diluted	$	505	$	1,910
Earnings per common share attributable to common shareholders
Basic	$	0.33	$	1.25
Diluted	$	0.32	$	1.20
Shares used in computing per share amounts
Basic	$	1,454	$	1,465
Diluted	$	1,578	$	1,589

There were no other significant acquisitions for the nine months ended September 30, 2014, and for the year ended December 31, 2013.