OWENS CORNING (OWC)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(All per share information in Item 2 is on a fully diluted basis.)
RESULTS OF OPERATIONS
Net sales were $1.238 billion for the quarter ended September 30, 1997, a 21% increase from the 1996 level of $1.025
billion. The third quarter 1997 growth is attributable to the benefits of acquisitions, most notably the acquisition of Fibreboard
Corporation that was completed at the end of the second quarter. Continued volume increases in composites were more than
offset by declines in worldwide composites pricing. The decline in composites pricing was most notable in Europe and
primarily reflects an overall weak economic climate. Additionally, the sales results reflect the adverse impact of a stronger U.S.
dollar on sales in foreign currencies as well as a decline in insulation prices in the U.S. and Canada. Gross margin for the
quarter ended September 30, 1997 was 23%, a decline from the third quarter 1996 level of 26%, primarily resulting from
lower prices.
Net income for the quarter ended September 30, 1997 was $59 million, or $1.04 per share, compared to net income of $80
million, or $1.44 per share, for the quarter ended September 30, 1996. The lower earnings reflect the factors discussed above
as well as increased cost of borrowed funds. The increase in cost of borrowed funds primarily reflects the financing of the
Fibreboard acquisition and working capital requirements. Net income for the quarter ended September 30, 1997 also reflects
one-time tax benefits of $13 million. Please see Note 5 to the Consolidated Financial Statements.
Net sales for the nine months ended September 30, 1997, were $3.130 billion, an 11% increase over the $2.830 billion
reported for the first nine months of 1996. This increase reflects the integration of acquisitions as well as volume increases,
offset by declines in pricing and the stronger U.S. dollar.
For the nine months ended September 30, 1997, the Company reported net income of $164 million, or $2.91 per share,
compared to a net loss of $354 million, or $6.86 per share, for the comparable period in 1996. Net income for 1997 reflects
the impact of higher volume and the tax benefits described above, offset by lower prices in composites worldwide and
insulation in North America as well as increased cost of borrowed funds. Included in the nine months ended September 30,
1996 was the net after-tax charge of $542 million for asbestos litigation claims that may be received after 1999 and probable
additional insurance recovery. Also included in the nine months ended September 30, 1996 were a $37 million pretax gain
($27 million after- tax) from the sale of the Company's minority interest in Asahi Fiber Glass Co. Ltd. in Japan and several
one-time special charges totaling approximately $42 million pretax ($27 million after-tax), including valuation adjustments
associated with prior divestitures, major product line productivity initiatives and a contribution to the Owens- Corning
Foundation.
Marketing and administrative expenses were $162 million for the quarter ended September 30, 1997, compared to $126
million in the same period in 1996. The increase is primarily the result of incremental expenses from acquisitions.
Building Materials
In the Building Materials segment, sales increased 27% for the quarter and 15% for the nine months ended September 30,
1997 compared to 1996. This growth primarily reflects the incremental sales from acquisitions. Income from operations for
Building Materials decreased 8% for the quarter but increased 10% for the nine months ended September 30, 1997 compared
to 1996. Income from operations in 1997 reflects insulation pricing pressures and lower volume in Roofing Systems. The
results for the nine months ended September 30, 1996 include $22 million of special charges recorded during the first quarter.
Please see Note 1 to the Consolidated Financial Statements.
At the end of the second quarter, the Company completed the acquisition of Fibreboard Corporation. The purchase price for
all of the outstanding stock of Fibreboard was $660 million, including $138 million of debt assumed, the majority of which was
financed through borrowings under the Company's long-term credit facility.
The consolidated results of the Company include the results of operations of Fibreboard beginning with the third quarter of
1997. To enhance comparability, certain information below is presented on a "pro forma" basis and reflects the acquisition of
Fibreboard (excluding Pabco and operations that were discontinued by Fibreboard prior to the acquisition) as though it had
occurred at the beginning of the respective periods presented.
The pro forma results include certain adjustments, primarily for depreciation and amortization, interest and other expenses
directly attributable to the acquisition, and are not necessarily indicative of the combined results that would have occurred had
the acquisition occurred at the beginning of those periods.
PRO FORMA AS REPORTED
Nine Months Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
(In millions of dollars,
except share data)
Net sales $ 3,461 $ 3,299 $ 3,130 $ 2,830
Income from continuing operations 158 (362) 164 (354)
Fully diluted earnings per share
from continuing operations $ 2.81 (7.00) $ 2.91 (6.86)
Early in the fourth quarter, Owens Corning completed the asset acquisition of AmeriMark Building Products, Inc., a specialty
building products company which serves the exterior residential housing industry. With the acquisition of AmeriMark and
Fibreboard, Owens Corning has become a leader in the vinyl siding market in North America. The acquisition was completed
for a purchase price of $309 million in trust preferred hybrid securities, plus a cash adjustment for changes in net working
capital. The securities will be recorded as minority interest on the Company's balance sheet.
During the first quarter of 1997, the Company acquired Polypan Nord S.P.A., a manufacturer of extruded polystyrene foam
(XPS) insulation products based in Italy and Falcon Manufacturing of California, Inc., a U.S. producer of expanded
polystyrene (EPS) foam insulation products.
Composites
In the Composite Materials segment, sales increased 4 percent for the quarter and were flat for the nine months ended
September 30, 1997, versus 1996. The sales results for both periods of 1997 reflect volume increases globally offset by
pricing weakness and the strength of the U.S. dollar. Composite Materials income from operations in the third quarter and the
first nine months of 1997 reflects a 43% and 23% decline, respectively, when compared to income from operations in the
same periods of 1996. The decline is primarily attributable to the pricing weakness being experienced in Europe. The results
for the nine months ended September 30, 1996 include $5 million of special charges recorded during the first quarter. Please
see Note 1 to the Consolidated Financial Statements.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Cash flow from operations, excluding asbestos-related activities, was $120 million for the third quarter of 1997, compared to
$114 million for third quarter 1996. The slight increase from 1996 to 1997 is primarily attributable to a decrease in inventories
offset by a decline in accounts payable and accrued liabilities and an increase in receivables. Inventories and receivables at
September 30, 1997, including $116 million of inventories and $99 million of receivables acquired during 1997, increased
44% and 93%, respectively, over December 31, 1996 levels. Please see Notes 6 and 7 to the Consolidated Financial
Statements.
At September 30, 1997, the Company's net working capital was $326 million and its current ratio was 1.30, compared to
negative $163 million and .85, respectively, at December 31, 1996. The increase in 1997 is the result of increased working
capital, driven by higher inventories and receivables as discussed above, as well as a decline in accounts payable and accrued
liabilities.
The Company's total borrowings at September 30, 1997 were $1.986 billion, $1.052 billion higher than at year-end 1996. At
the beginning of the third quarter of 1997, the Company borrowed approximately $660 million to finance the acquisition of
Fibreboard. The remainder of the total borrowings reflects seasonal increases in the Company's working capital.
As of September 30, 1997, the Company had unused lines of credit of $761 million available under long-term bank loan
facilities and an additional $129 million under short-term facilities, compared to $440 million and $195 million, respectively, at
year-end 1996. The net increase in available lines of credit is primarily the result of the establishment of the Company's $2
billion credit facility at the end of the second quarter. Letters of credit issued under the facility, most of which support appeals
from asbestos trials, reduce the available credit. The impact of such reduction is reflected in the unused lines of credit discussed
above.
Capital spending for property, plant and equipment, excluding acquisitions and investments in affiliates, was $44 million during
the third quarter of 1997. For the year 1997, the Company anticipates capital spending, exclusive of acquisitions and
investments in affiliates, to be approximately $220 million. The Company expects that funding for these expenditures will be
from the Company's operations and external sources as required.
Gross payments for asbestos litigation claims against Owens Corning (excluding Fibreboard throughout this paragraph) during
the third quarter of 1997, including $13 million in defense costs and $2 million for appeal bond and other costs, were $62
million. Proceeds from insurance were $29 million, resulting in a net pretax cash outflow of $33 million, or $20 million
after-tax. During the third quarter of 1997, Owens Corning received approximately 11,400 new asbestos personal injury cases
and closed approximately 6,700 cases. Over the next twelve months, Owens Corning's total payments for asbestos litigation
claims, including defense costs, are expected to be approximately $300 million. Proceeds from insurance of $50 million are
expected to be available to cover Owens Corning's costs during this period, resulting in a net pretax cash outflow of $250
million, or $150 million after-tax. For all of 1998, total payments for asbestos litigation claims are expected to approximate
$350 million and it is estimated that insurance proceeds will be approximately $100 million. Please see Note 9-A to the
Consolidated Financial Statements.
Gross payments for asbestos litigation claims against Fibreboard during the third quarter of 1997 were approximately $31
million, all of which was paid directly by Fibreboard's insurers or from the escrow account to claimants on Fibreboard's behalf.
During the third quarter, Fibreboard received approximately 9,100 new asbestos personal injury claims, and resolved
approximately 500 claims. During the next twelve months, any payments for asbestos claims against Fibreboard are expected
to be paid by Fibreboard's insurers or from the escrow account. Please see Notes 7 and 9-B to the Consolidated Financial
Statements.
The Company expects funds generated from operations, together with funds available under long and short term bank loan
facilities, to be sufficient to satisfy its debt service obligations under its existing indebtedness, as well as its contingent liabilities
for uninsured asbestos personal injury claims.
The Company has been deemed by the Environmental Protection Agency (EPA) to be a potentially responsible party (PRP)
with respect to certain sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund).
The Company has also been deemed a PRP under similar state or local laws, including two state Superfund sites where the
Company is the primary generator. In other instances, other PRPs have brought suits or claims against the Company as a PRP
for contribution under such federal, state or local laws. During the third quarter of 1997, the Company was designated a PRP
in such federal, state, local or private proceedings for no additional sites. At September 30, 1997, a total of 40 such PRP
designations remained unresolved by the Company, some of which designations the Company believes to be erroneous. The
Company is also involved with environmental investigation or remediation at a number of other sites at which it has not been
designated a PRP. The Company has established a $30 million reserve, of which $15 million relates to Fibreboard, for its
Superfund (and similar state, local and private action) contingent liabilities. Based upon information presently available to the
Company, and without regard to the application of insurance, the Company believes that, considered in the aggregate, the
additional costs associated with such contingent liabilities, including any related litigation costs, will not have a materially
adverse effect on the Company's results of operations, financial condition or long-term liquidity.
The 1990 Clean Air Act Amendments (Act) provide that the EPA will issue regulations on a number of air pollutants over a
period of years. Until these regulations are developed, the Company cannot determine the extent to which the Act will affect it.
The Company anticipates that its sources to be regulated will include wool fiberglass, mineral wool, asphalt roofing and
processing, and metal coil coating. The EPA's currently announced schedule is to issue regulations covering wool fiberglass
and mineral wool in 1998, asphalt roofing and processing in 1999, and metal coil coating in 2000, with implementation as to
existing sources up to three years thereafter. Based on information now known to the Company, including the nature and
limited number of regulated materials it emits, the Company does not expect the Act to have a materially adverse effect on the
Company's results of operations, financial condition or long-term liquidity.
FUTURE REQUIRED ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128,
Earnings per Share (SFAS No.128). This statement introduces new methods for calculating earnings per share. The adoption
of this standard will not impact results from operations, financial condition, or long-term liquidity, but will require the Company
to restate earnings per share reported in prior periods to conform with this statement. The Company is required to adopt the
new standard for periods ending after December 15, 1997. The Company believes that the adoption of this standard will result
in slightly higher earnings per share when comparing the current fully diluted earnings per share calculation to the calculation of
diluted earnings per share required by SFAS No. 128. |
