Note 8 - Acquisitions

12 Months Ended

Dec. 31, 2015

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

8.      Acquisitions

Year ended December 31, 2015

Corning completed five acquisitions in 2015.  There have been minor adjustments during 2015 made to the preliminary allocation of the total purchase consideration related to working capital adjustments and true-up of the fair value of assets acquired for the acquisitions.  Corning has completed the purchase accounting for four acquisitions.  The purchase accounting related to one acquisition in the fourth quarter of 2015 has not been completed and amounts related to this acquisition are subject to change.  A summary of the allocation of the total purchase consideration for the five acquisitions is as follows (in millions):

Cash and cash equivalents	$	2
Trade receivables		63
Inventory		47
Property, plant and equipment		117
Other intangible assets		286
Other current and non-current assets		27
Current and non-current liabilities		(117)
Total identified net assets		425
Purchase consideration		(725)
Goodwill (1)	$	300

(1) The goodwill recognized is partially deductible for U.S. income tax purposes.  The goodwill was allocated to the Optical Communications and All Other reporting segment in the amount of $213 million and $87 million, respectively.

The total consideration related to the acquisitions primarily consisted of cash and, in two of the acquisitions, contingent consideration.  The contingent consideration arrangements may require additional amounts to be paid in 2016 and 2017 based on projections of future revenues.  The combined potential additional consideration is capped at $28 million.  The total fair value of the contingent consideration for the two acquisitions was valued at $13 million as of the acquisition date and $10 million as of December 31, 2015.  The change in fair value of contingent consideration of $3 million was recorded as an adjustment to selling, general and administrative expenses.

The goodwill generated from these acquisitions is primarily related to the value of the product portfolio and customer/distribution networks acquired, combined with Corning’s existing business segments, as well as market participant synergies and other intangibles that do not qualify for separate recognition.

The acquired amortizable intangible assets have a weighted-average useful life of approximately 10 years.

Acquisition-related costs of $11 million included in selling, general and administrative expense in the Consolidated Statements of Income for the year ended December 31, 2015 included costs for legal, accounting, valuation and other professional services.  The Consolidated Financial Statements include the operating results of each business combination from the date of acquisition.  Pro forma results of operations have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to Corning’s financial results.

Year ended December 31, 2014

On January 15, 2014, Corning completed a series of strategic and financial agreements pursuant to the Framework Agreement with Samsung Display 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 of Samsung Corning Precision Materials was accounted for under the purchase method of accounting in accordance with business combination accounting guidance.  Accordingly, the 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.

As a result of the acquisition of Samsung Corning Precision Materials in January 2014, the Company has contingent consideration that was measured using unobservable (Level 3) inputs.  This contingent consideration arrangement potentially requires additional consideration to be paid between the parties in 2018: one based on projections of future revenues generated by the business of 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 recognized on the acquisition date was estimated by applying an option pricing model using the Company’s projection of future revenues generated by Corning Precision Materials.  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.

On December 29, 2015, Corning and Samsung Display entered into an agreement pursuant to which Corning exchanged the amount of contingent consideration in excess of $300 million (net present fair value: $246 million), as consideration for the incremental fair value associated with a number of commercial agreements, including the amendment of its long-term supply agreement with Samsung Display.  As of December 29, 2015, the net present fair value of the contingent consideration receivable was $458 million.  The net present fair value of the commercial benefit associated with the amended long-term supply agreement exceeds the value exchanged by Corning pursuant to this agreement (net present fair value: $212 million).  Consequently, Corning reclassified this amount to the other asset line of the Consolidated Balance Sheet and will amortize the amount over the remaining term of the long-term supply agreement as a reduction in revenue.

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 of Samsung Corning Precision Materials.  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 and recorded measurement period adjustments.  Corning has completed its accounting for the acquisition of Samsung Corning Precision Materials and its review of deferred taxes.

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

Cash and cash equivalents (1)	$	133
Trade receivables (3)		357
Inventory (3)		105
Property, plant and equipment (3)		3,595
Other current and non-current assets (3)		71
Debt – current		(32)
Accounts payable and accrued expenses (3)		(357)
Other current and non-current liabilities (3)		(294)
Total identified net assets (3)		3,578
Non-controlling interests		15
Fair value of Samsung Corning Precision Materials on acquisition date		(3,718)
Goodwill (2)(3)	$	125

(1) Cash and cash equivalents are presented net of the 2014 dividend distributed subsequent to the acquisition of Samsung Corning Precision Materials, 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) During 2014, the Company recorded total measurement period adjustments of $60 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 $93 million in the year ended December 31, 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 $1,343 million and $1,761 million to net sales for the years ending December 31, 2015 and 2014, respectively.  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 year ended December 31, 2013, was derived from the financial statements of Corning and Samsung Corning Precision Materials for the year ended December 31, 2013, and is presented to show how Corning might have appeared had the acquisition of Samsung Corning Precision Materials 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 of Samsung Corning Precision Materials have been prepared in accordance with the business combination accounting guidance and reflect the allocation of the purchase price to the acquired assets and liabilities based upon the fair values, using the assumptions set forth above.

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

	Twelve months ended December 31, 2013
Net sales	$	9,871
Net income attributable to Corning Incorporated – basic earnings per share	$	2,327
Net income attributable to Corning Incorporated – diluted earnings per share	$	2,425
Earnings per common share attributable to common shareholders
Basic	$	1.60
Diluted	$	1.54
Shares used in computing per share amounts
Basic		1,452
Diluted		1,577

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