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Note 3 - HSG Transactions

3 Months Ended

Mar. 31, 2021

Business Combination Disclosure [Text Block]

3. HSG Transactions

In 2016, Corning realigned its ownership interest in Dow Corning Corporation, exchanging its 50% interest in the joint venture between Corning and Dow Chemical for a newly formed company that held a 49.9% interest in Hemlock Semiconductor LLC and a 40.25% interest in Hemlock Semiconductor Operations LLC which were recorded as equity method investments of Corning and are affiliated companies of HSG. DuPont de Nemours, Inc. (“DuPont”) subsequently undertook Dow Chemical Company’s ownership interest in HSG. HSG manufactures polysilicon products for the semiconductor and solar industries, and it is one of the world’s leading providers of ultra-pure polycrystalline silicon to the semiconductor industry.

2020

On September 9, 2020, HSG entered into a series of agreements with DuPont resulting in a change in control and consolidation for Corning.

HSG acquired DuPont’s TCS manufacturing assets, which was determined to be a business and recorded as a business combination (“TCS Transaction”). The fair value of the purchase price was $255 million. In conjunction with this acquisition, HSG settled the TCS Settlement for a contractual amount of $175 million, which was determined to have a fair value of $200 million. HSG will pay for the TCS Settlement over three years with equal annual payments of approximately $58 million. Corning’s share of the pre-tax loss related to the settlement was $81 million and was recorded in equity in earnings of affiliated companies in the consolidated statements of income (loss).

HSG also completed the Redemption, redeeming Dupont’s entire ownership of HSG with a value of $250 million. The Redemption was funded with HSG’s existing cash on-hand of $75 million and its newly obtained third-party debt of $175 million, maturing on September 8, 2021. Debt repayments have been recorded as a financing activity on Corning's consolidated statements of cash flows. As of March 31, 2021, the remaining third-party debt was $50 million and was classified as a current liability in Corning's consolidated financial statements.

Upon completion of the redemption, Corning obtained a 100% interest in HS LLC and 80.5% interest in HSO LLC. Corning accounted for the Redemption under the acquisition method of accounting in accordance with business combinations without the transfer of net cash consideration. The Redemption price of $250 million approximated the fair value of Corning’s equity interest in HSG immediately preceding the Redemption.

The net gain on previously owned equity was calculated as follows (in millions):

Fair value of previously held equity investment	$	250
Equity investment liability balance as of acquisition date		(248	)
Corning's gain on previously held equity investment	$	498

The following table summarizes the amounts of recorded assets acquired and liabilities assumed as of September 9, 2020, which includes the TCS assets and liabilities acquired by HSG immediately prior to the Redemption and the consolidation by Corning.

Recognized amounts of identified assets and liabilities recorded at fair value (in millions):

Inventory	$	503
Property, plant and equipment		651
Intangible assets		285
Other current and non-current assets ⁽¹⁾		173
Short-term borrowings		(178	)
Trade payables and other accrued liabilities		(329	)
Other liabilities		(1,261	)
Total identified net liabilities		(156	)
Non-controlling interests ⁽²⁾		(102	)
Total fair value of Corning's previously held equity investment ⁽²⁾		(250	)
Goodwill ⁽³⁾	$	508

⁽¹⁾	The other current and non-current assets included a contingent consideration asset of $20 million at fair value for a cost adjustment contract related to the TCS Transaction. Refer to Note 13 (Fair Value Measurements) to the consolidated financial statements for additional information.

⁽²⁾	The purchase price being used to measure the goodwill of the Redemption is $352 million, including the fair value of Corning’s previously held equity interest and non-controlling interest, in the amount of $250 million and $102 million, respectively.

⁽³⁾	The goodwill recognized is not deductible for U.S. income tax purposes. The goodwill was allocated to “All Other” within segment reporting as disclosed in Note 16 (Reportable Segments) to the consolidated financial statements.

Upon completion of the Redemption and resulting consolidation, Corning recorded the values of assets acquired and liabilities assumed from HSG, including a customer deposit liability and deferred revenue. Refer to Note 4 (Revenue) to the consolidated financial statements for additional information.

The goodwill is primarily related to other intangibles and synergies of the acquired business which do not qualify for separate recognition. Intangible assets consist primarily of $215 million of developed technologies and know-how, and $70 million of other intangibles that are amortized over the weighted average useful life of approximately 20 and 15 years, respectively.

HSG's revenue and net income have been consolidated in “All Other” in Corning’s consolidated statements of income (loss) for the three months ended March 31, 2021.