SecProbe.io

CORRESP
1
filename1.htm

    commentletteraugust8.htm

August 8, 2014

Securities and Exchange Commission

100 F Street, N.E., Stop 4631

Washington, D.C.  20549

Re:

Corning Incorporated

Form 10-K for the Year Ended December 31, 2013

Filed February 10, 2014

Form 10-Q for the Period Ended March 31, 2014

Filed April 28, 2014

File No. 1-3247

Ladies and Gentlemen:

We are responding to the comments in the Securities and Exchange Commission (the “Staff”) letter dated July 14, 2014 to Mr. James B. Flaws of Corning Incorporated (“Corning”).  For your convenience, we have included the Staff’s comments below (italicized and in bold) followed by our related response.  Additional disclosure or other revisions included since our last response are bolded for your ease of review.

Form 10-K for the Year Ended December 31, 2013

General

1.

Where a comment below requests additional disclosures or other revisions to be made, please show us in your supplemental response what the revisions will look like.  These revisions should be included in your future filings, including your interim filings.

Corning will comply with this comment, and will include revisions made pursuant to this letter in future filings, as indicated in our responses below.

Financial Statements

Notes to the Financial Statements

Note 13.  Employee Retirement Plans, page 112

2.

We note your response to comment 11 of our letter dated May 22, 2014.  For the same reasons noted that you provide weighted average assumptions separately for U.S. and foreign plans, it remains unclear why you did not provide the remaining plan disclosures required by ASC 715-20-50-1 for your foreign plans.  In this regard, we note that the benefit obligation of the foreign pension plans constitutes 22% of your total benefit obligation.  Refer to ASC 715-20-50-4.

1

In future filings, we will expand our disclosures within Note 13, Employee Retirement Plans, to report domestic and international plan disclosures separately pursuant to ASC 715-20-50-1 and ASC 715-20-50-4.

Form 10-Q for the Period Ended March 31, 2014

Note 5.  Income Taxes, page 12

3.

We note your response to comment 12 of our letter dated May 22, 2014.  Please tell us the expected terms of the loan agreement that you will enter into with a foreign affiliate.  Your response should include the amount of the expected loan in relation to the total amount of foreign earnings indefinitely reinvested in the particular country as well as the repayment terms.  Please tell us how you determined that this loan would not have any impact on your conclusion that these foreign earnings will be indefinitely reinvested pursuant to ASC 740-30-25-17.

It is expected that the amount of the loan will be approximately $750 million – $900 million.  The loan is expected to be payable on demand with no pre-payment penalty, although it is expected to remain outstanding past December 31, 2014.  The loan will be at a market rate of interest to comply with all relevant transfer pricing requirements.  The loan is not being made pursuant to any third party creditor request or as a result of any event outside the Corning consolidated group’s control.  The loaned funds represent excess liquidity whether they remain in our foreign locations or are loaned to the U.S. and thus, will continue to be invested consistent with our overall investment policies governing excess cash balances.  The amount of foreign earnings indefinitely reinvested in the country is approximately $7 billion.

Please note that Corning has included the tax consequences of the expected loan in our effective tax rate and we have disclosed it as a tax benefit in our rate reconciliation as follows: “Rate differences on income/(losses) of consolidated foreign companies, including the benefit of excess foreign tax credits attributable to a deemed distribution to the U.S. of a portion of foreign current year earnings”.  This is because such loan is considered an Investment In U.S. Property under the Internal Revenue Code, and thus is includable in U.S. taxable income prior to the related book or tax earnings actually being distributed (hereinafter broadly referred to as “Subpart F”).

Additionally, in our Form 10-K filings, we deduct Subpart F amounts from the total amount we disclose as “accumulated foreign unremitted earnings on which taxes have not been provided because we expect that total amount to remain invested indefinitely.”

Beginning in 2013, Corning began separately describing the amount of unremitted earnings that are no longer indefinitely reinvested at such time as the book earnings are actually distributed (or we do not plan to indefinitely reinvest them).  At this same time, we record any taxes related to cumulative translation adjustment and withholding not previously booked.  Consistent with this policy, at such time as we distribute (or no longer plan to indefinitely reinvest) the book earnings represented by the loan described above, we intend to include it in our disclosure as follows:  “Corning continues to indefinitely reinvest substantially all of its foreign earnings, with the exception of approximately $___ million of [current] earnings in 20xx that have been or are expected to be repatriated with very low or no tax impact.”

With respect to our indefinitely reinvested conclusion on the remainder of our foreign earnings, under ASC 740-30-25-17, we do not believe this loan impacts such representation because it is expected to be repaid, over 80% of our foreign unremitted earnings as of December 31, 2013 has either been or is planned to be invested in our foreign operations and our current analysis indicates that we have sufficient U.S. liquidity, including borrowing capacity, to otherwise fund foreseeable U.S. cash needs.

2

Note 10.  Acquisition, page 15

Acquisition of remaining interests in Samsung Corning Precision Materials (page 15)

4.

We note your response to comment 13 of our letter dated May 22, 2014.  Please address the following:

Please note that in our response below, we have responded to the Staff’s comments related to the Acquisition of the remaining interests in Samsung Corning Precision Materials (page 15) contained in their letter to James B. Flaws dated July 14, 2014 in a different order than originally presented.  We did so to facilitate the explanation of our response in a logical manner.

·

Please help us understand your basis for determining with the support of third party valuation specialists that there is no control premium associated with the acquisition;

We determined, with the support of third party valuation specialists, no control premium was associated with the Acquisition.  The basis for this conclusion is attributable to the Company’s strategy in negotiations with the seller that incorporated a desire to not pay a premium above the proportionate value of the acquiree.  In arriving at this view, the Company considered the following:

·

The transaction was initiated from a starting point of shared control.  Samsung Display and Corning operated Samsung Corning Precision Materials jointly, and all significant operating and strategic decisions were required to be made jointly and neither party could act without the other’s approval.  Given the starting point of shared control, we have no reason to believe any additional premium over and above the price paid would be appropriate since the interests are equivalent and deserve the same level of premium;

·

The transaction was negotiated based on an agreed set of forecasts between Samsung Display and Corning, representing a stand-alone view of Samsung Corning Precision Materials, without including synergies;

·

Samsung Display will continue to remain a customer of the acquired entity, representing approximately 80% of Corning Precision Materials sales, and contingent consideration may be provided to support proportionate economic returns to both parties;

·

The execution risk of the transaction associated with conducting business in an emerging market without a local partner; and

·

Aspects inherent to this industry, including the fact that there are limited competitors.

·

We note your response to comment 14 of our letter dated May 22, 2014.  Your response does not appear to address the guidance in ASC 805-10-55-20 through 55-23 as well as ASC 805-10-55-30 through 55-32 in that it does not appear that you have separately accounted for the settlement of the technology license agreement from the business combination.  Please advise.

As a result of the acquisition of Samsung Corning Precision Materials, Corning reacquired its technology license rights and effectively settled its pre-existing arrangement with the acquired entity.  First, we evaluated whether an intangible asset existed at the acquisition date for reacquiring the rights to our technology license and secondly, determined whether the contract was favorable or unfavorable to Corning.

With regard to the reacquired right, Corning engaged a third party specialist to fair value the reacquired right.  The specialist utilized the Market Participant Excess Earnings Method which is a specific application of the discounted cash flows method which assesses the value of an asset equal to the present value of the incremental after tax cash flows attributable to the subject intangible asset after deducting contributory asset charges.  Given the highly capital intensive nature of the acquired business, the charge for replacement capital and the contributory asset charges as a percentage of revenue were substantial.  When these charges were considered, the cash flow from the reacquired right was negative and, as such, the intangible was considered to have a fair value of zero.

3

We further considered the pre-existing contract to be unfavorable to Corning.  The contractual arrangement provided that Samsung Corning Precision Materials pay a 3% royalty rate to utilize Corning’s proprietary technology to manufacture and sell display glass.  As Corning could have obtained a 12% royalty rate for its technology license with a market participant, the contract was considered unfavorable to Corning.  Our third party specialist used an income approach, specifically the royalty relief method, which considered the difference between the 3% contractual rate and the 12% market participant rate, resulting in an off-market value of $320 million to Corning, before considering any previously held ownership interest that Corning had with Samsung Corning Precision Materials.  There were no stated contractual settlement provisions or previously recorded assets or liabilities to consider when determining the value associated with the settlement.

The effective cancellation of the pre-existing royalty contract was treated as a separate transaction from the business combination.  The net economic impact to Corning following the transaction was a net loss of $136 million, constituting a $320 million loss to Corning due to Corning’s unfavorable contract which was partially offset (by $184 million) due to Corning’s 57.5% pre-existing ownership interest in Samsung Corning Precision Materials.  The only relationship it had to the business combination was that as the contract was effectively settled at the acquisition date, 42.54% or $136 million of the consideration transferred to Samsung Display was deemed to be attributed to the settlement of this contract.  Additionally, since Corning was a 57.5% shareholder immediately preceding the acquisition, the fair value of its equity investment was determined using 100% of the fair value of the entity, including Corning’s 57.5% share of the favorable contract.  Valuing Corning’s previously held equity investment in Samsung Corning Precision Materials inclusive of its favorable contract with Corning resulted in an increase to the gain recognized when recognizing the previously held equity investment in Samsung Corning Precision Materials in the amount of $184 million.  This is further explained below.

·

We note the table showing the fair value of the acquired net assets.  Please explain why you have included the settlement of the pre-existing contract given the guidance in ASC 805-10-55-20 through 55-23 as well as ASC 805-10-55-30 through 55-32;

The pre-existing contract was treated as a separate transaction from the business combination in accordance with ASC 805-10-55.  In our future disclosure, we will clarify that 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 recognized by Corning attributable to the settlement of the pre-existing arrangement was accounted for as a separate transaction from the business combination as follows:

·

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;

·

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 42.54% shareholder of Samsung Corning Precision Materials, 42.54%, 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.

4

The table presented reconciled the purchase price of $1.9 billion to the fair value of the acquired assets and was included to show the amount of implied consideration transferred for the remaining 42.54% of Samsung Display’s ownership interest, the amount attributable to Corning’s share of its fair value post-acquisition and the amount available to allocate to the acquired net assets post-acquisition.

Our future disclosure will clarify the table presenting the fair value of the net assets by providing additional information as well as a description of the loss attributable to the favorable contract that Samsung Corning’s Precision Materials had with Corning pre-acquisition and describing how the unfavorable royalty contract to Corning was treated both pre- and post-acquisition.  Please see the revised disclosure below.

·

Please reconcile the table showing the fair value of the acquired net assets to your revised proposed disclosures.  For example, please address why you refer to a net consideration transferred of $1.7 billion in your proposed disclosures given total implied consideration transferred in your table on page 21 is $1.6 billion;

To clarify the table showing the fair value allocated to the assets acquired, we will revise the table to include additional information as well as revise the disclosure as provided below to clarify the components of the transaction.  Specific to this question, the net consideration transferred is