UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended SEPTEMBER 30, 2007 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 33-81808 BUILDING MATERIALS CORPORATION OF AMERICA (Exact name of registrant as specified in its charter) DELAWARE 22-3276290 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 1361 ALPS ROAD, WAYNE, NEW JERSEY 07470 (Address of Principal Executive Offices) (Zip Code)
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period EndedSeptember 28, 2008
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number33-81808
BUILDING MATERIALS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
Delaware
22-3276290
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
1361 Alps Road, Wayne, New Jersey
07470
(Address of Principal Executive Offices)
(Zip Code)
(973) 628-3000
(Registrant's(Registrant’s telephone number, including area code)
NONE (FormerNone
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
See Table of Additional Registrants Below.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES /X/ NO / /YesxNooIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
non-accelerated filer.smaller reporting company. See definition of"accelerated“large accelerated filer,” “accelerated filer,” andlarge accelerated filer"“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Large accelerated filero
Accelerated filero
Non-accelerated filerx
(Do not check if a smaller reporting company)
Smaller reporting companyo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
|_|oNo|X|xAs of November
14, 2007,12, 2008, 1,015,010 shares of Class A Common Stock, $.001 par value of the registrant were outstanding. There is no trading market for the common stock of the registrant. As of November14, 2007,12, 2008, the additional registrant had the number of shares outstanding which is shown on the table below. There is no trading market for the common stock of the additional registrant. As of November14, 2007,12, 2008, no shares of the registrant or the additional registrant were held by non-affiliates.ADDITIONAL REGISTRANTS
Address, including zipExact name of registrant as specified in its charter
State or other jurisdiction of incorporation or organization
No. of Shares Outstanding
Commission File No./I.R.S. Employer Identification No.
Address, including zip code and telephone number,
registrant as jurisdiction of No. of No./I.R.S.including area code, ofspecified in its incorporation or Shares Employer registrant'sregistrant’s principalcharter organization Outstanding Identification No.executive offices- ------- ------------ ----------- ------------------ -----------------Building Materials
Manufacturing Corporation
Delaware
10
333-69749-01/
22-3626208
1361 Alps Road
Manufacturing Corporation 22-3626208Wayne, NJ 07470
(973) 628-3000
2PARTPart I - FINANCIAL INFORMATION
ITEMItem 1 - FINANCIAL STATEMENTS
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (DOLLARS IN THOUSANDS)(Unaudited)
THIRD QUARTER ENDED NINE MONTHS ENDED ---------------------------- ---------------------------- SEPT. 30, OCT. 1, SEPT. 30, OCT. 1, 2007 2006 2007 2006 ----------- ----------- ----------- -----------Net sales ....................... $ 680,741 $ 530,349 $ 1,874,002 $ 1,571,213 ----------- ----------- ----------- ----------- Costs and expenses, net: Cost of products sold ......... 493,434 372,250 1,372,316 1,100,842 Selling, general and administrative................ 134,078 114,682 383,067 347,562 Amortization of intangible assets ....................... 3,938 -- 3,938 -- Restructuring and other expenses ..................... 24,628 -- 79,622 -- Other (income) expense, net ... (982) 132 (1,359) (386) ----------- ----------- ----------- ----------- Total costs and expenses, net. 655,096 487,064 1,837,584 1,448,018 ----------- ----------- ----------- ----------- Income before interest expense and income taxes ............... 25,645 43,285 36,418 123,195 Interest expense ................ (44,289) (15,771) (139,237) (46,352) ----------- ----------- ----------- ----------- Income (loss) before income taxes .......................... (18,644) 27,514 (102,819) 76,843 Income tax (expense) benefit .... 7,463 (10,455) 31,874 (29,200) ----------- ----------- ----------- ----------- Net income (loss) ............... $ (11,181) $ 17,059 $ (70,945) $ 47,643 =========== =========== =========== ===========(Dollars in Thousands)
Third Quarter Ended
Nine Months Ended
Sept. 28, 2008
Sept. 30, 2007
Sept. 28, 2008
Sept. 30, 2007
Net sales
$
852,826
$
680,741
$
2,160,181
$
1,874,002
Costs and expenses:
Cost of products sold
602,459
493,434
1,543,252
1,372,316
Selling, general and administrative
144,617
134,078
376,116
383,067
Amortization of intangible assets
2,846
3,938
8,539
3,938
Restructuring and other expenses
6,606
24,628
33,794
79,622
Other (income) expense, net
1,758
(982
)
3,166
(1,359
)
Total costs and expenses, net
758,286
655,096
��
1,964,867
1,837,584
Income before interest expense and income taxes
94,540
25,645
195,314
36,418
Interest expense
(39,541
)
(44,289
)
(119,404
)
(139,237
)
Income (loss) before income taxes
54,999
(18,644
)
75,910
(102,819
)
Income tax (expense) benefit
(20,326
)
7,463
(28,481
)
31,874
Net income (loss)
$
34,673
$
(11,181
)
$
47,429
$
(70,945
)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPT. 30, 2007 DEC. 31, (UNAUDITED) 2006 ----------- -----------ASSETS Current Assets: Cash and cash equivalents ........................................ $ 34,500 $ 7,777 Accounts receivable, trade, less allowance of $4,162 and $1,319 in 2007 and 2006, respectively ..................................... 424,286 190,859 Accounts receivable, other ....................................... 12,309 5,599 Income tax receivable ............................................ 11,968 -- Income tax receivable from parent corporation .................... 10,016 9,132 Inventories, net ................................................. 262,025 238,709 Deferred income tax assets ....................................... 37,073 21,710 Other current assets ............................................. 16,897 12,209 Discontinued operations - current assets ......................... 2,844 -- ----------- ----------- Total Current Assets ........................................... 811,918 485,995 Property, plant and equipment, net ................................. 685,148 411,729 Goodwill ........................................................... 635,303 64,794 Intangible assets .................................................. 235,632 -- Other noncurrent assets ............................................ 125,393 67,323 Discontinued operations - noncurrent assets ........................ 1,355 -- ----------- ----------- Total Assets ....................................................... $ 2,494,749 $ 1,029,841 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current maturities of long-term debt ............................. $ 16,770 $ 102,918 Accounts payable ................................................. 143,078 90,951 Payable to related parties ....................................... 17,322 5,952 Loans payable to parent corporation .............................. 52,840 52,840 Accrued liabilities .............................................. 169,903 101,382 Product warranty claims .......................................... 13,500 9,000 Discontinued operations - current liabilities .................... 931 -- ----------- ----------- Total Current Liabilities ...................................... 414,344 363,043 ----------- ----------- Long-term debt ..................................................... 1,840,523 484,406 ----------- ----------- Product warranty claims ............................................ 28,319 17,972 ----------- ----------- Deferred income tax liabilities .................................... 134,807 39,551 ----------- ----------- Other liabilities .................................................. 89,929 62,664 ----------- ----------- Commitments and Contingencies - Note 14 Stockholders' Equity (Deficit): Series A Cumulative Redeemable Convertible Preferred Stock, $.01 par value per share; 400,000 shares authorized; no shares issued ................................... -- -- Class A Common Stock, $.001 par value per share; 1,300,000 shares authorized; 1,015,010 shares issued and outstanding ......................................... 1 1 Class B Common Stock, $.001 par value per share; 100,000 shares authorized; 0 shares issued and outstanding in 2007 and 2006 ................................... -- -- Loans receivable from parent corporation ......................... (56,179) (56,031) Retained earnings ................................................ 47,084 118,201 Accumulated other comprehensive income (loss) .................... (4,079) 34 ----------- ----------- Total Stockholders' Equity (Deficit) ........................... (13,173) 62,205 ----------- ----------- Total Liabilities and Stockholders' Equity (Deficit) ............... $ 2,494,749 $ 1,029,841 =========== ===========(Dollars in thousands, except per share amounts)
ASSETS
September 28, 2008 (Unaudited)
December 31, 2007
Current Assets:
Cash and cash equivalents
$
157,809
$
6,324
Accounts receivable, trade, net
539,864
210,857
Accounts receivable, other
11,749
10,792
Income tax receivable
-
11,968
Inventories, net
315,769
316,912
Deferred income tax assets
42,564
38,017
Other current assets
18,249
13,698
Total Current Assets
1,086,004
608,568
Property, plant and equipment, net
643,948
672,813
Goodwill
653,514
655,200
Intangible assets, net
199,096
207,635
Income tax receivable from parent corporation
10,016
10,016
Other noncurrent assets
122,728
120,159
Total Assets
$
2,715,306
$
2,274,391
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Current maturities of long-term debt
$
25,386
$
24,630
Accounts payable
219,990
142,250
Payable to related parties
39,357
16,133
Loans payable to parent corporation
52,840
52,840
Accrued liabilities
151,768
135,976
Product warranty claims
16,200
13,500
Discontinued operations – current liabilities
560
560
Total Current Liabilities
506,101
385,889
Long-term debt
1,974,751
1,729,395
Product warranty claims
31,225
31,224
Deferred income tax liabilities
94,019
60,869
Other liabilities
160,699
163,332
Commitments and Contingencies – Note 13
Stockholders’ Deficit:
Series A Cumulative Redeemable Convertible Preferred Stock, $.01 par value per share; 400,000 shares authorized; no shares issued
-
-
Class A Common Stock, $.001 par value per share; 1,300,000 shares authorized; 1,015,010 shares issued and outstanding
1
1
Class B Common Stock, $.001 par value per share; 100,000 shares authorized; no shares issued
-
-
Loans receivable from parent corporation
(56,323
)
(56,224
)
Retained earnings (accumulated deficit)
28,368
(16,496
)
Accumulated other comprehensive loss
(23,535
)
(23,599
)
Total Stockholders’ Deficit
(51,489
)
(96,318
)
Total Liabilities and Stockholders’ Deficit
$
2,715,306
$
2,274,391
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED ---------------------------- SEPT. 30, OCT. 1, 2007 2006 ----------- -----------Cash and cash equivalents, beginning of period ........ $ 7,777 $ 6,882 ----------- ----------- Cash provided by (used in) operating activities: Net income (loss) ................................... (70,945) 47,643 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation .................................... 50,655 36,582 Amortization .................................... 6,495 2,161 Restructuring and other expenses ................ 97,647 -- Deferred income taxes ........................... (36,141) (2,422) Noncash interest charges ........................ 7,858 3,926 Increase in working capital items ................... (57,804) (179,648) Increase in product warranty claims ................. 1,172 3,646 Increase in other assets ............................ (5,187) (1,164) Increase (decrease) in other liabilities ............ 4,760 (116) Change in net receivable from/payable to related parties/parent corporations ....................... 10,486 3,070 Other, net .......................................... 577 629 ----------- ----------- Net cash provided by (used in) operating activities ... 9,573 (85,693) ----------- ----------- Cash used in investing activities: Acquisition of ElkCorp, net of cash acquired of $0.1 million ....................................... (944,838) -- Capital expenditures and acquisitions ............... (67,113) (54,830) ----------- ----------- Net cash used in investing activities ................. (1,011,951) (54,830) ----------- ----------- Cash provided by financing activities: Proceeds from issuance of long-term debt ............ 2,318,749 684,000 Purchase of industrial development revenue bond certificates issued by the Company ................. -- (6,325) Repayments of long-term debt ........................ (1,254,005) (535,256) Distributions to parent corporation ................. (171) (521) Loan to parent corporation .......................... (148) (141) Financing fees and expenses ......................... (35,324) (1,990) ----------- ----------- Net cash provided by financing activities ............. 1,029,101 139,767 ----------- ----------- Net change in cash and cash equivalents ............... 26,723 (756) ----------- ----------- Cash and cash equivalents, end of period .............. $ 34,500 $ 6,126 =========== ===========-continued- 5BUILDING MATERIALS CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED) (DOLLARS IN THOUSANDS)(Unaudited)
NINE MONTHS ENDED ------------------------ SEPT. 30, OCT. 1, 2007 2006 --------- ---------Supplemental Cash Flow Information: Effect on cash from changes in working capital items: Increase in accounts receivable trade and accounts receivable other ....................................... (143,409) (68,934) Increase in income tax receivable ....................... (4,623) -- (Increase) decrease in inventories, net ................. 93,545 (76,363) (Increase) decrease in other current assets ............. 6,163 (341) Increase (decrease) in accounts payable ................. 13,731 (29,205) Increase (decrease) in accrued liabilities .............. 7,616 (4,805) Payments for restructuring and other expenses ........... (30,827) -- --------- --------- Net effect on cash from increase in working capital items $ (57,804) $(179,648) ========= ========= Cash paid during the period for: Interest (net of amount capitalized of $2,167 and $1,801 in 2007 and 2006, respectively) .............. $ 104,284 $ 45,822 Income taxes (including federal income taxes paid to parent corporation pursuant to a tax sharing agreement of $0 and $24,101 in 2007 and 2006, respectively) ....................................... 1,658 25,029(Dollars in thousands)
Nine Months Ended
September 28,
2008
September 30,
2007
Cash and cash equivalents, beginning of period
$
6,324
$
7,777
Cash provided by (used in) operating activities:
Net income (loss)
47,429
(70,945
)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation
53,763
50,655
Amortization of intangible and other assets
11,516
6,495
Restructuring and other expenses
60,731
97,647
Deferred income taxes
28,213
(36,141
)
Noncash interest charges
6,748
7,858
Increase in working capital items
(292,774
)
(57,804
)
Increase in product warranty claims
2,701
1,172
Increase in other assets
(11,615
)
(5,187
)
Increase in other liabilities
267
4,760
Increase in net payable to related parties/parent
corporations
23,224
10,486
Other, net
(14,218
)
577
Net cash provided by (used in) operating activities
(84,015
)
9,573
Cash used in investing activities:
Acquisition of ElkCorp
-
(944,838
)
Capital expenditures and 2007 acquisitions
(28,639
)
(67,113
)
Proceeds from sale of assets
21,443
-
Net cash used in investing activities
(7,196
)
(1,011,951
)
Cash provided by financing activities:
Proceeds from issuance of long-term debt
830,000
2,318,749
Repayments of long-term debt
(574,002
)
(1,254,005
)
Purchase of industrial development revenue bond certificates issued by the Company
(4,800
)
-
Principal repayments of capital leases
(5,262
)
-
Distribution to parent corporation
(65
)
(171
)
Dividend to parent corporation
(2,500
)
-
Loan to parent corporation
(99
)
(148
)
Financing fees and expenses
(576
)
(35,324
)
Net cash provided by financing activities
242,696
1,029,101
Net change in cash and cash equivalents
151,485
26,723
Cash and cash equivalents, end of period
$
157,809
$
34,500
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6(Continued on the following page)
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - (Continued)
(Dollars in thousands)
Nine Months Ended
September 28,
September 30,
2008
2007
Supplemental Cash Flow Information:
Effect on cash from changes in working capital items:
Increase in accounts receivable trade and accounts
receivable other
$
(330,240
)
$
(143,409
)
(Increase) decrease in income tax receivable
11,837
(4,623
)
(Increase) decrease in inventories, net
(6,850
)
93,545
(Increase) decrease in other current assets
(4,551
)
6,163
Increase in accounts payable
79,327
13,731
Increase in accrued liabilities
22,181
7,616
Payments for restructuring and other expenses
(64,478
)
(30,827
)
Net effect on cash from increase in working capital items
$
(292,774
)
$
(57,804
)
Cash paid during the period for:
Interest (net of amount capitalized of $415 and $2,167
in 2008 and 2007, respectively)
$
95,132
$
104,284
Income taxes
$
4,505
$
1,658
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)(Unaudited)
Note 1.
Formation of the Company
Building Materials Corporation of America
("BMCA"(“BMCA” or the"Company"“Company”) was formed on January 31, 1994 and is a wholly-owned subsidiary of BMCA Holdings Corporation("BHC"(“BHC”), which is a wholly-owned subsidiary of G-I Holdings Inc.("(“G-IHoldings"Holdings”). G-I Holdings is a wholly-owned subsidiary of G Holdings Inc. On February 22, 2007("(“date ofacquisition"acquisition”), a subsidiary of BMCA acquired approximately 90% of the outstanding common shares of ElkCorp("Elk"(“Elk”), a Dallas, Texas-based manufacturer of roofing products and building materials. The remaining common shares of Elk were acquired on March 26, 2007, resulting in Elk becoming an indirect wholly-owned subsidiary of BMCA. See Note23 for a description of the acquisition.The consolidated financial statements of the Company reflect, in the opinion of management, all adjustments necessary to present fairly the financial position of the Company at September
30, 2007,28, 2008, and the results of its operations for the third quarter and nine-month periods ended and its cash flows for thethird quarter and nine monthsnine-month periods ended September 28, 2008 and September 30, 2007,and October 1, 2006,respectively. All adjustments are of a normal recurring nature, except for the restructuring and other expenses and debt restructuring costs recorded in theCompany's second quarterCompany’s statement of operations for the nine-month periods endedJuly 1, 2007September 28, 2008 andthird quarter endedSeptember 30, 2007,due to the acquisition of Elk.respectively. Net sales of roofing products and specialty building products and accessories are generally seasonal in nature. Accordingly, the results of operations and cash flows in the respective quarterly ended periods will vary depending on the time of the year. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto, included in theCompany'sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2006,2007, which was filed with the Securities and Exchange Commission (the"SEC"“SEC”) onFebruary 16, 2007March 28, 2008 (the"2006“2007 Form10-K"10-K”).NOTE 1. NEW ACCOUNTING PRONOUNCEMENTSReclassifications
Certain reclassifications have been made to conform to current year presentation.
Note 2.
New Accounting Pronouncements
In
JulySeptember 2006, the Financial Accounting Standards Board("FASB"(“FASB”)issued FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. A reporting entity must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 became effective for fiscal years beginning after December 15, 2006. In May 2007, the FASB issued FASB Staff Position ("FSP") FIN 48-1 "Definition of Settlement in FASB Interpretation No. 48" ("FSP FIN 48-1"), which amended FIN 48 to provide guidance on how a reporting entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax position will be considered effectively settled and any previously unrecognized tax benefits should be recognized based on the terms of settlement if (a) the taxing authority has completed its examination, including all appeals, (b) the reporting entity does not intend to appeal 7BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED) or litigate any aspect of the tax position; and (c) based on the taxing authority's policies and practices, the reporting entity considers it remote that the taxing authority will re-examine the tax position. The Company adopted FIN 48 as of January 1, 2007 in a manner that is consistent with the provisions of FSP FIN 48-1, and as a result of the adoption, the Company reviewed certain tax positions and did not recognize any material adjustment to its accruals for uncertain tax positions. See Note 13. In September 2006, the FASBissued Statement of Financial Accounting Standards("SFAS"(“SFAS”) No. 157,"Fair“Fair ValueMeasurements" ("Measurements” (“SFAS No.157"157”), which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair valuemeasurements. SFAS No. 157measurements, which is effective for fiscal years beginning after November 15, 2007.The Company will adopt the provisions of SFAS No. 157 beginning in its first quarter ofIn February 2008,and, therefore, has not yet determined the effect, if any, the adoption of SFAS No. 157 will have on its results of operations or financial position. In September 2006,the FASB issued FASB Staff Position (“FSP”) No. 157-2 “Partial Deferral to the Effective Date of Statement 157” (“FSPAUG AIR-1 "Accounting for Planned Major Maintenance Activities" ("FSP AUG AIR-1"No. 157-2”), whichprohibits the use of the accrue-in-advance method of accounting in annual and interim financial reporting periods for planned major maintenance activities. FSP AUG AIR-1 had previously allowed companies the right to recognize planned major maintenance costs by accruing a liability over several reporting periods before the maintenance was performed. FSP AUG AIR-1 still allows the direct expense, built-in-overhaul and deferral methods of accounting as acceptable, however it mandates that companies apply the same method of accounting in both interim and annual financial reporting periods and that the method be retrospectively applied if applicable. FSP AUG AIR-1is effective for fiscal years beginning afterDecemberNovember 15,2006.2008 and excludes SFAS No. 13, “Accounting for Leases,” defers certain non-financial assets and non-financial liabilities and further clarifies the principles in SFAS No. 157 on the fair value measurement of liabilities. TheCompany adoptedCompany’s adoption of the provisions of SFAS No. 157 for all other items not deferred by FSPAUG AIR-1No. 157-2 in its first quarter of2007. FSP AUG AIR-1 has2008 did nothadhave a material effect onthe Company'sits consolidated financial statements. The Company is currently evaluating the provisions of FSP No. 157-2, which the Company will adopt in its first quarter beginning January 1, 2009 and does not expect that the adoption will have a material effect on its consolidated financial statements.BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 2.
New Accounting Pronouncements – (Continued)
In February 2007, the FASB issued SFAS No. 159,
"The“The Fair Value Option for Financial Assets and Financial Liabilities-– Including an amendment of FASB Statement No.115" ("115” (“SFAS No.159"159”). SFAS No. 159, which permits entities to elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the"fair“fair value option,"” will enable some companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities differently, anditis simpler than using the complex hedge-accounting8BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) to achieve similar results. SFAS No. 159 applies to all entities and contains financial statement presentation and disclosure requirements for assets and liabilities reported at fair value as a consequence of the election. SFAS No. 159 is expected to expand the use of fair value measurements for financialinstruments. SFAS No. 159 isinstruments and was effectiveas of thefor fiscal years beginningof a company's first fiscal year that beginsafter November 15, 2007.Retrospective applicationThe Company adopted SFAS No. 159 for its fiscal year beginning January 1, 2008 and upon adoption did not elect the fair value option for any items within the scope of SFAS No. 159. Therefore, SFAS No. 159 did not have any impact on the Company’s consolidated financial statements.In December 2007, the FASB issued SFAS No. 141 (revised in 2007) “Business Combinations” (“SFAS No. 141R”), which provides revised guidance on how an acquiring company should recognize and measure the identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. SFAS No. 141R also expands the required disclosures related to the nature and financial statement impact of business combinations and is
not permitted.effective, on a prospective basis, for business combinations completed in fiscal years beginning after December 15, 2008. The Company will adopt SFAS No. 141R for its fiscal year beginning January 1, 2009 and, therefore, will apply SFAS No. 141R prospectively to any business combinations subsequent to that date.In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), which establishes requirements for ownership interests in subsidiaries held by parties other than the Company (minority interests) to be clearly identified and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. Any changes in the parent’s
ownership interests are required to be accounted for in a consistent manner as equity transactions, and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008; however, the presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The Company will adopt the provisions of SFAS No.
159160 for its fiscal year beginningin its first quarter of 2008January 1, 2009 andtherefore, hasdoes notyet determined the effect, if any,expect the adoptionof SFAS No. 159 willto have any impact on its results of operations or financialposition. NOTE 2. ACQUISITIONS On February 9, 2007, BMCA Acquisition Sub Inc. ("BMCA Acquisition Sub")position as the Company does not have any noncontrolling interests.In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
BMCA Acquisition Inc. (collectivelyHedging Activities” (“SFAS No. 161”), which amends SFAS No. 133 and is intended to improve financial reporting related to derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective on a prospective basis for fiscal years beginning on or after November 15, 2008. The Company will adopt the"Purchasers"disclosure provisions of SFAS No. 161 for its fiscal year beginning January 1, 2009.BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 2.New Accounting Pronouncements – (Continued)
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”),
both wholly-owned subsidiarieswhich identifies the sources ofBMCA, entered into a merger agreementaccounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance withElk (the "Merger Agreement").United States generally accepted accounting principles. SFAS No. 162 will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s amendments to Interim Audit Standards Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not expect the adoption of SFAS No. 162 to have any impact on its results of operations or financial position.
Note 3.
Acquisition
On February 22, 2007,
an equity tender offer closed, and, asaresult thereof (and the purchasesubsidiary ofshares from one of its affiliates),BMCAAcquisition Sub ownedacquired approximately 90% ofElk'sElk common shares at a purchase price of $43.50 per common share.In accordance withOn March 26, 2007, theMerger Agreement,Company acquired the remaining Elk common shareswere convertedin a second step mergerintoin exchange for the right to receive $43.50 per share incash. On March 26, 2007, BMCA completed the merger, pursuant tocash, whichBMCA Acquisition Sub was merged with and intoresulted in Elkwhich then becamebecoming an indirect wholly-owned subsidiary of BMCA. The Company completed the acquisition of the Elk common shareswas completedat a purchase price of approximately$944.8$945.5 million,net of $0.1 million of cash acquired andnet of the repayment of $195.0 million of the then outstanding Elk senior notes, which were assumed in connection with the acquisition and repaid in March 2007.The Company financed the purchase of Elk,
andrefinanced certain ofBMCA'sBMCA’s then outstanding debt and repaid all ofElk'sElk’s then outstanding senior notes of $195.0 million with the proceeds from its new senior secured credit facilities. TheCompany'sCompany’s new senior secured credit facilities consist of a $600.0 millionfive-year senior secured revolving credit facility,Senior Secured Revolving Credit Facility (the “Senior Secured Revolving Credit Facility”), a $975.0 millionseven-year senior secured term loan facilityTerm Loan Facility (the “Term Loan”) and a $325.0 millionjunior lien term loan facility maturing on September 15, 2014.Junior Lien Term Loan Facility (the “Junior Lien Term Loan”, and collectively with the Senior Secured Revolving Credit Facility and the Term Loan, the “Senior Secured Credit Facilities”). See Note6. 9BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 2. ACQUISITIONS - (CONTINUED)7.The Company
believesaccounted for theacquisition of Elk will strategically position it for future growth in the roofing industry and other building products markets. The acquisition is expected to provide the Company with an increased market leadership position, create comprehensive market-leading product offerings, generate natural cost savings from synergies, including plant rationalization and re-alignment of distribution networks, raw material procurement, administrative and logistical efficiencies, and leverage the organizational strengths of both BMCA and Elk. TheElk acquisitionwas accounted forunder the purchase method of accounting as prescribed by SFAS No. 141"Business Combinations," ("“Business Combinations” (“SFAS No.141"141”), which requires the total purchase price to be allocated to the fair value of assets acquired and liabilities assumed based on their fair values at the date of acquisition, with amounts exceeding their fair value being recorded as goodwill.TheDuring its first quarter ended March 30, 2008, the Company completed its purchase price allocationprocess required an analysisofplant, property and equipment, inventories, customer lists and relationships, contractual commitments and brand strategies, among others, to identify and recordthefair value ofassets acquired and liabilitiesassumed. In connection with the acquisition, the Company used an estimated economic life of 5 to 40 years for land improvements, 10 to 40 years for buildings and building improvements, 3 to 30 years for machinery and equipment, which includes furniture and fixtures, and 1 to 25 years for intangible assets. In valuing acquired assets andassumedliabilities, fair values were based on, but not limited to: future expected discounted cash flows for trade names and customer relationships; current replacement costs for similar capacity and obsolescence for certain fixed assets and inventory; and comparable market rates for contractual obligations, including real estate and liabilities. The Company performed a valuation analysis of the assets and liabilities acquiredfrom Elkwhich was substantially completed during the three-month period ended September 30, 2007, and the Company expects to finalize its purchase price allocation during the fourth quarter of 2007. At September 30, 2007, the Company recorded $570.5 million of goodwill and $235.6 million of intangible assets, net of amortization of $3.9 million(seeNote 5), related to the acquisition of Elk based on the completion of its valuation analysis.table below). The operating results oftheElkacquisitionare included in theCompany'sCompany’s results of operations from the date of acquisition.10BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 2. ACQUISITIONS - (CONTINUED)The following
unaudited pro-forma consolidated resultstable represents the final fair values ofoperations assume the acquisition of Elk was completed as of January 1st for each of the three-monthassets acquired andnine-month periods presented below: THIRD QUARTER ENDED NINE MONTHS ENDED -------------------- ------------------------ SEPT. 30, OCT. 1, SEPT. 30, OCT. 1, 2007 2006 2007 2006 -------- -------- ---------- ---------- (MILLIONS) Net sales ................ $ 680.7 $ 748.5 $ 1,947.7 $ 2,274.3 -------- -------- ---------- ---------- Income before interest and income taxes ............ 23.8 61.4 6.7 184.4 -------- -------- ---------- ---------- Net income (loss) ........ $ (13.9) $ 14.0 $ (100.1) $ 43.7 ======== ======== ========== ========== The unaudited pro-forma consolidated results of operations for the three-month and nine-month periods ended September 30, 2007 include $31.8 and $97.6 million pre-tax ($21.9 and $67.3 million after-tax) of restructuring and other expenses, respectively, of which $7.2 and $18.0 million pre-tax ($5.0 and $12.4 million after-tax) was included in cost of products sold, respectively,liabilities assumed related to the acquisition ofElk. In addition,Elk as of theunaudited pro-forma consolidated resultsdate ofoperations for the nine-month period ended September 30, 2007 above includes $13.6 millionacquisition with amounts paid in excess ofmerger-related expenses of Elk and $23.2 million of debt restructuring costs of both BMCA and Elk related to the acquisition of Elk. The Company's pro-forma results include a reduction in compensation expense related to Elk employees who were terminated due to the acquisition of Elk of $1.2 and $3.1 million for the three-month periods ended September 30, 2007 and October 1, 2006, respectively and $6.0 and $9.2 million for the nine-month periods ended September 30, 2007 and October 1, 2006, respectively. The Company's pro-forma results also include a reduction in lease expense for excess lease capacity at two Elk facilities. The reduction in lease expense was computed based on the remaining lease payments discounted on a present value basis, straight-lined over the applicable pro-forma period with the present value offsettheir fair values being recordedin interest expense. For the three-month periods ended September 30, 2007 and October 1, 2006, the Company 11BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 2. ACQUISITIONS - (CONTINUED) recorded an increase/(decrease) in lease expense of $0.5 and $(0.5) million, respectively and an (increase)/decrease to interest expense of $0.3 and $(0.3) million, respectively. For the nine-month periods ended September 30, 2007 and October 1, 2006, the Company recorded a reduction in lease expense of $0.5 and $1.6 million, respectively and an increase to interest expense of $0.3 and $0.9 million, respectively. In addition, the Company's pro-forma results for the three-month period ended October 1, 2006 and the nine-month periods ended September 30, 2007 and October 1, 2006 include additional interest expense associated with variable rate debt instruments based on LIBOR plus a specified fixed margin, due to the acquisiton of Elk. A 1/8% change in these variable interest rates would result in a plus or minus $0.5 million in interest expense for the three-month period ended October 1, 2006 and a plus or minus $0.3 and $1.4 million in interest expense for the nine-month periods ended September 30, 2007 and October 1, 2006, respectively. Pro-forma data may not be indicative of the results that would have been achieved had these events actually occurred at the beginning of the periods presented, nor does it intend to be a projection of future results.as goodwill.
Goodwill
$
588,720
Total assets acquired
$
1,411,460
Total liabilities assumed
(465,941
) Net assets acquired
$
945,519
During the second quarter of 2007, the Company initiated
the implementation ofa restructuring plan (the"2007“2007 RestructuringPlan"Plan”) (see Note 4), whichwasit formulated in connection with theFebruary 22, 2007acquisition ofElk (see Note 3). InElk. Also, in connection with the Elk acquisition and pursuant to SFAS No. 141 and Emerging Issues Task Force (“EITF”) No. 95-3 “Recognition ofElk,Liabilities in Connection with a Purchase Business Combination,” the Companycurrentlyidentified$69.6$8.7 million in purchase accounting adjustments, whichprimarily relaterelated tothe establishment of a change of control accrual,employee severance payments to former Elk employees andintegration-related expenses, which include Elk inventory-related valuation write-downs,leasetermination expenses and other integration-related expenses. Furthermore, the Company substantially completed its valuation analysis of property, plant and equipment and intangible assets acquired from Elk during its three-month period ended September 30, 2007. The Company accounts for its purchase accounting adjustments in accordance with the provisions of SFAS No. 141. The Company has incurred $64.0 million of the aforementioned purchase accounting adjustments as of September 30, 2007, of which $3.2 million was 12BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED) NOTE 2. ACQUISITIONS - (CONTINUED) incurred in(Unaudited) – (Continued)Note 3.Acquisition – (Continued)
termination expenses. As of September 28, 2008, the
third quarter of 2007, $54.6Company had paid $2.9 millionwas incurred in the second quarter of 2007for severance costs and$6.2$1.3 millionwas incurred in the first quarter of 2007(see table below), and which are included in the purchase price allocation.for lease termination expenses. The Company expects toaccrue the remaining $5.6make approximately $4.5 million ofidentified purchase accounting adjustments as incurred and make the remaining cashlease termination paymentsrelated to its accrual by its first quarter ending 2008.through 2019. TheCompany'sCompany’s employee severance payments included the termination of approximately125130 Elk employees, including certain management positions, in the manufacturing and selling and administrativefunctionalareas.
EMPLOYEE DISCONTINUED INTEGRATION SEVERANCE OPERATIONS CHANGE OF PURCHASE ACCOUNTING ACCRUALS EXPENSES PAYMENTS EXPENSES CONTROL TOTAL - ---------------------------- -------- -------- -------- -------- -------- (THOUSANDS)Beginning Balance, as of December 31, 2006 $ -- $ -- $ -- $ -- $ -- Accrued costs incurred due to the acquisition of Elk 5,785 -- 415 -- 6,200 -------- -------- -------- -------- -------- Balance, as of April 1, 2007 5,785 -- 415 -- 6,200 Additional accrued costs incurred due to the acquisition of Elk 19,624 2,400 -- -- 22,024 Accrued costs incurred related to change in control escrow account -- -- -- 32,574 32,574 Cash Payments (224) (1,773) -- -- (1,997) Amount charged to directly write-off inventory (4,071) -- -- -- (4,071) Non-cash items -- -- -- (8,889) (8,889) -------- -------- -------- -------- -------- Balance, as of July 1, 2007 21,114 627 415 23,685 45,841 Additional accrued costs incurred due to the acquisition of Elk 3,250 -- -- -- 3,250 Cash payments (2,446) (577) -- -- (3,023) Amount charged to directly write-off inventory (517) -- -- -- (517) Non-cash items -- -- -- (7,456) (7,456) -------- -------- -------- -------- -------- Ending Balance, as of September 30, 2007 $ 21,401 $ 50 $ 415 $ 16,229 $ 38,095 ======== ======== ======== ======== ========Note 4.
Restructuring and Other Expenses
13BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 3. RESTRUCTURING AND OTHER EXPENSES During the second quarter of 2007, the Company initiated its 2007 Restructuring Plan, which was formulated in connection with the acquisition of Elk on February 22, 2007.The 2007 Restructuring Plan was created to eliminate cost redundancies recognized due to the acquisition of Elk and to reduce the
Company'sCompany’s current coststructure andstructure. The 2007 Restructuring Plan is expected to be fully implemented by the end of theCompany's first quarter ofCompany’s fiscal year ending December 31, 2008. The Company accounts for its restructuring activities in accordance withthe guidance ofSFAS No. 146,"Accounting“Accounting for Costs Associated with Exit or DisposalActivities" ("SFAS No. 146") andActivities,” SFAS No. 144,"Accounting“Accounting for the Impairment or Disposal of Long-LivedAssets" ("SFASAssets” and EITF No.144").96-9 “Classification of Inventory Markdowns and Other Costs Associated with Restructuring.”2007 Restructuring and Other Expenses
In connection with the acquisition of Elk, the Company
hasidentifiedapproximately $114.6$191.9 million in restructuring and other expenses in its fiscal year ended December 31, 2007, of which$49.8$97.0 millionrelatesrelated to property, plant and equipment write-downs at certain of its existing manufacturing facilities and$18.4$25.1 millionofrelated to plant closing expenses.The plants included in restructuring and other expenses reflected above were Erie, Pennsylvania; Stockton, California; Millis, Massachusetts; Mobile, Alabama; Dallas, Texas and Hollister, California.Restructuring and other expenses alsoincludeincluded $2.0 million in employee severance payments and$44.4$67.8 million in integration-related expenses, which primarilyconsistconsisted of$18.0$24.3 million of inventory-relatedvaluationwrite-downs, $15.1 million of restructuring-related sales discounts, $1.4 million of lease termination expenses and$25.0$27.0 million of other integration expenses.The Company recorded
$97.6$181.0 million of the aforementioned restructuring and other expenses in its statement of operations as ofSeptember 30, 2007, $31.8 million of which was recorded in the third quarter ofDecember 31, 2007, of which$7.2$15.1 million was reflected as a reduction in net sales due to restructuring-related sales discounts, $24.3 million was charged to cost of products sold and$24.6$141.6 million was charged to restructuring and otherexpenses in the Company's statement of operations. In the second quarter of 2007 theexpenses.Nine Months Ended September 28, 2008 Restructuring and Other Expenses
The Company
recorded $65.8identified an additional $58.4 million of restructuring and other expenses in its nine months ended September 28, 2008, which included $12.7 million of plant closing expenses, $2.9 million in employee severance payments and $42.8 million in integration-related expenses. Integration-related expenses primarily consisted of $22.3 million of inventory write-downs, $4.6 million of restructuring-related sales discounts and $15.9 million of other integration expenses.The Company recorded $60.7 million of the identified restructuring and other expenses in its statement of operations in the nine-month period ended September 28, 2008, of which
$10.8$4.6 million was reflected as a reduction in net sales due to restructuring-related sales discounts, $22.3 million was charged to cost of products sold and$55.0$33.8 million was charged to restructuring and otherexpenses in the Company's statement of operations.expenses. The Company expects to incur the remaining$17.0$8.6 million of identifiedrestructuringintegration and other expenses and to make the remaining cash payments related to its accrual,byonce all matters with the acquisition of Elk are resolved and completed.BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 4.Restructuring and Other Expenses – (Continued)
The table below details the Company’s restructuring and other expense accruals and charges made against the accrual during its
first quarter ending 2008.nine months ended September 28, 2008:
Restructuring and Other Expenses
Plant Closing Expenses
Employee Severance Payments
Integration Expenses
Total
(Thousands)
Beginning balance, as of December 31, 2007
$
2,905
$
-
$
10,945
$
13,850
Current period costs, net
14,364
2,863
43,504
60,731
Cash payments
(19,967
)
(2,863
)
(41,648
)
(64,478
)
Amount related to property, plant and equipment for asset adjustments
6,228
-
(309
)
5,919
Amount charged to write-off inventory
(63
)
-
(3,010
)
(3,073
)
Non-cash items
-
-
(445
)
(445
)
Ending balance, as of September 28, 2008
$
3,467
$
-
$
9,037
$
12,504
The
Company'sCompany’s aggregate employee severance payments included the termination of approximately70100 BMCA employees, including certain management positions, in the manufacturing and selling and administrativefunctionalareas.14
Note 5.
Comprehensive Income (Loss)
The table below reconciles the Company’s net income (loss) to comprehensive income (loss) for the third quarter and nine-month periods ended September 28, 2008 and September 30, 2007, respectively:
Third Quarter Ended
Nine Months Ended
Sept. 28, 2008
Sept. 30, 2007
Sept. 28, 2008
Sept. 30, 2007
(Thousands)
Net income (loss)
$
34,673
$
(11,181
)
$
47,429
$
(70,945
)
Other comprehensive income (loss), net of tax:
Derivative fair value adjustment - interest rate swaps, net of tax of $1,559 and $6,553 for the three-month periods ended September 28, 2008 and September 30, 2007, respectively, and $177 and $1,505 for the nine-month periods ended September 28, 2008 and September 30, 2007, respectively
(2,543
)
(10,691
)
(288)
(2,455
)
Derivative fair value adjustment - treasury locks, net of tax of ($72) and $1,016 for the three-month periods ended September 28, 2008 and September 30, 2007, respectively, and ($216) and $1,016 for the nine-month periods ended September 28, 2008 and September 30, 2007, respectively.
117
(1,658
)
352
(1,658
)
Comprehensive income (loss)
$
32,247
$
(23,530
)
$
47,493
$
(75,058
)
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED) NOTE 3. RESTRUCTURING AND OTHER EXPENSES - (CONTINUED)(Unaudited) – (Continued)
PP&E PLANT EMPLOYEE RESTRUCTURING AND WRITE- CLOSING SEVERANCE INTEGRATION OTHER EXPENSES DOWN EXPENSES PAYMENTS EXPENSES TOTAL - ----------------- -------- -------- -------- -------- -------- (THOUSANDS)Beginning Balance, as of December 31, 2006 $ -- $ -- $ -- $ -- $ -- Accrued costs incurred due to the acquisition of Elk -- -- -- -- -- -------- -------- -------- -------- -------- Balance, as of April 1, 2007 -- -- -- -- -- Additional accrued costs incurred due to the acquisition of Elk 41,919 7,234 2,000 14,640 65,793 Cash Payments -- (2,784) (800) (1,800) (5,384) Amount charged to property, plant and equipment for asset write-down (41,919) -- -- -- (41,919) -------- -------- -------- -------- -------- Balance, as of July 1, 2007 -- 4,450 1,200 12,840 18,490 Additional accrued costs incurred due to the acquisition of Elk 7,888 4,475 -- 19,491 31,854 Cash payments -- (4,475) (1,200) (19,768) (25,443) Amount charged to property, plant and equipment for asset write-down (7,888) -- -- -- (7,888) Amount charged to write-off inventory -- (1,545) -- (31) (1,576) Non-cash items -- -- -- (488) (488) -------- -------- -------- -------- -------- Ending Balance, as of September 30, 2007 $ -- $ 2,905 $ -- $ 12,044 $ 14,949 ======== ======== ======== ======== ========Note 6.
Inventories
15BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 4. INVENTORIESInventories consisted of the following as of September
30, 200728, 2008 and December 31,2006,2007, respectively.Inventories as of September 30, 2007, include Elk from the date of acquisition. SEPTEMBER 30, DECEMBER 31, 2007 2006 --------- --------- (THOUSANDS) Finished goods $ 181,724 $ 173,338 Work-in process 24,352 25,930 Raw materials and supplies 77,851 64,686 --------- --------- Total 283,927 263,954 Less LIFO reserve (21,902) (25,245) --------- --------- Inventories $ 262,025 $ 238,709 ========= ========= NOTE 5. INTANGIBLE ASSETS The Company accounts for its intangible assets acquired in connection with the acquisition of Elk in accordance with the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 requires disclosure of information relating to intangible assets subsequent to their acquisition that was not previously reported, which includes disclosure concerning the changes in the carrying amount of intangible assets by major intangible asset class for those assets subject to amortization and for those not subject to amortization. SFAS No. 142 also requires disclosure about actual year-to-date intangible asset amortization expense and the estimated intangible asset amortization expense for each of the next five years. As of September 30, 2007, the Company has not recorded any impairment losses related to its intangible assets and has not written-off any acquired research and development assets. 16BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 5. INTANGIBLE ASSETS - (CONTINUED) Intangible assets, all of which were acquired from Elk, consisted of the following as of September 30, 2007.
September 28, 2008
December 31, 2007
(Thousands)
Finished goods
$
234,333
$
241,511
Work-in process
36,699
26,291
Raw materials and supplies
92,217
72,950
Total
363,249
340,752
Less LIFO reserve
(47,480
)
(23,840
)
Inventories
$
315,769
$
316,912
SEPTEMBER 30, 2007 -------------------------------------------------- GROSS AMORTIZATION CARRYING ACCUMULATED NET PERIOD AMOUNT AMORTIZATION AMOUNT ------------ -------- ----------- -------- (THOUSANDS)AMORTIZED INTANGIBLE ASSETS: - ---------------------------- Customer Relationships 20 yrs. $152,300 $ 1,904 $150,396 Trademark/Trade Names 15-25 yrs. 59,500 605 58,895 Core Technology 10 yrs. 25,000 625 24,375 Roofing Backlog - Current 1 yr 780 780 -- Computer Software 2 yrs. 190 24 166 -------- -------- -------- Amortized Intangible Assets $237,770 $ 3,938 $233,832 -------- -------- -------- NON-AMORTIZED INTANGIBLE ASSETS: - -------------------------------- Regulatory Permits Indefinite 1,800 -- 1,800 -------- -------- -------- Non-Amortized Intangible Assets $ 1,800 $ -- $ 1,800 -------- -------- -------- Intangible Assets, net $239,570 $ 3,938 $235,632 ======== ======== ========Note 7.
Long-Term Debt
At the completion of its valuation analysis of the assets and liabilities acquired from Elk during the three-month period ended September 30, 2007, the Company recorded $235.6 million of intangible assets, net of amortization of $3.9 million. The following table illustrates, as of September 30, 2007, the amount of estimated amortization expense the Company expects to record in its statement of operations related to intangible assets for each of the next five years and thereafter. (THOUSANDS) 2008 $ 12,633 2009 12,609 2010 12,538 2011 12,538 2012 12,538 Thereafter 170,976 -------- Total $233,832 ======== 17BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 6. LONG-TERM DEBTLong-term debt consists of the following at September
30, 200728, 2008 and December 31,2006: SEPTEMBER 30, DECEMBER 31, 2007 2006 ----------- ----------- (THOUSANDS) 8% Senior Notes due 2007 $ 2,456 $ 99,940 8% Senior Notes due 2008 4,872 154,838 7 3/4% Senior Notes due 2014 250,613 250,680 Borrowings under the Old Senior Secured Revolving Credit Facility -- 60,000 Borrowings under the Senior Secured Revolving Credit Facility 281,000 -- Term Loan 967,706 -- Junior Lien Term Loan 325,000 -- Industrial development revenue bonds with various interest rates and maturity dates to 2029 7,710 7,795 Chester Loan 8,984 11,133 Other notes payable 8,952 2,938 ----------- ----------- Total 1,857,293 587,324 Less current maturities (16,770) (102,918) ----------- ----------- Long-term debt less current maturities $ 1,840,523 $ 484,406 =========== ===========2007:
September 28, 2008
December 31, 2007
(Thousands)
8% Senior Notes due 2008
$
4,876
$
4,874
7 3/4% Senior Notes due 2014
250,523
250,590
Borrowings under the Senior Secured Revolving Credit Facility
386,000
122,000
Term Loan
960,466
965,362
Junior Lien Term Loan
325,000
325,000
Obligations under capital leases
56,733
61,997
Industrial development revenue bonds
2,820
7,710
Chester Loan
5,927
8,241
Other notes payable
7,792
8,251
Total
2,000,137
1,754,025
Less current maturities
(25,386
)
(24,630
)
Long-term debt less current maturities
$
1,974,751
$
1,729,395
On February 22, 2007, BMCA
and the Purchasersentered intosenior secured credit facilitiesSenior Secured Credit Facilities consisting of anew $975$975.0 millionterm loan facility (the "Term Loan"),Term Loan, anew $600 million revolving credit facility (the "Senior Secured Revolving Credit Facility") and a $325 million bridge loan facility (the "Bridge Loan"), which was replaced by a $325 million junior lien term loan facility (the "Junior Lien Term Loan") (collectively the "Credit Facilities"). The initial borrowings under the Credit Facilities were used (i) to pay for shares tendered by Elk shareholders in an equity tender offer, (ii) to repay amounts outstanding under BMCA's old $450.0$600.0 million Senior Secured Revolving Credit Facility(the "Old Senior Secured Revolving Credit Facility"), (iii)and a $325.0 million bridge loan facility, which was subsequently replaced by a $325.0 million Junior Lien Term Loan, which collectively financed the purchase of Elk and repaid certain existing BMCA debt facilities and Elk senior note debt.On April 10, 2008, the Company repurchased and retired $4.8 million of industrial development revenue bond certificates issued by the Company with respect to
make paymentsthe Mount Vernon, Indiana Industrial Development Revenue Bond issued inconnection with the completion by BMCA and Building Materials Manufacturing Corporation ("BMMC") of the tender offer 181985. BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED) NOTE 6. LONG-TERM DEBT - (CONTINUED) and consent solicitation for their 8% Senior Notes due 2007 (the "2007 Notes"), (iv) to make payments in connection with the completion by BMCA of its previously announced tender offer and consent solicitation for its outstanding 8% Senior Notes due 2008 (the "2008 Notes"), (v) to pay for transaction fees and expenses incurred in connection with each of the foregoing transactions and (vi) to repay all of the existing Elk senior note debt. The Senior Secured Revolving Credit Facility has a maturity date of February 22, 2012. All amounts outstanding under the Senior Secured Revolving Credit Facility are secured by a first priority perfected security interest in all receivables, inventory, precious metals, deposit accounts and other current assets of BMCA and its domestic subsidiaries and all proceeds thereof (the "Senior Secured Revolving Credit Facility Collateral"). Availability under the Senior Secured Revolving Credit Facility is based upon eligible accounts receivable, inventory and precious metals used in the production of inventory, as defined, and includes a sub-limit for letters of credit of $150 million. Loans under the Senior Secured Revolving Credit Facility will bear interest at a variable rate based upon either the Base Rate or the Eurodollar Rate as defined in the Senior Secured Revolving Credit Facility, at the borrowers' option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the Base Rate or Eurodollar Rate and also based on an availability based pricing grid. The Senior Secured Revolving Credit Facility requires the Company to pay unused commitment fees. The Senior Secured Revolving Credit Facility provides for optional reductions in the overall $600 million commitment, under certain conditions. In addition, the Senior Secured Revolving Credit Facility provides for optional and mandatory pre-payments of borrowings outstanding under the Senior Secured Revolving Credit Facility, subject to certain conditions. The Senior Secured Revolving Credit Facility also provides the borrowers with the ability to increase the size of the facility by up to $350 million, depending on the ability to obtain commitments from lenders and meeting specified conditions. Under the terms of the Senior Secured Revolving Credit Facility, the borrowers are subject to an interest coverage ratio financial covenant when liquidity falls below a specified threshold. In addition, the borrowers are also required to comply with other customary covenants and various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations, and making certain investments. In the event of a change of control of BMCA, as defined, the Senior Secured Revolving Credit Facility could be accelerated by the holders of that indebtedness. On March 12, 2007, the Senior Secured Revolving Credit Facility was amended, which did not result in any material changes to the facility. 19BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 6. LONG-TERM DEBT - (CONTINUED) The Term Loan will mature on February 22, 2014. All amounts outstanding under the Term Loan are secured by (i) a first priority perfected security interest in substantially all of the assets and properties of BMCA and its domestic subsidiaries, other than the Senior Secured Revolving Credit Facility Collateral (the "Term Loan Collateral"), and (ii) a second priority perfected security interest in the Senior Secured Revolving Credit Facility Collateral. Amounts due under the Term Loan will bear interest at a variable rate based upon either the base rate or Eurodollar rate, as defined in the Term Loan, at the borrowers' option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the base rate and Eurodollar rate, if applicable. The Term Loan requires the Company to pay unused commitment fees. In addition, the Term Loan provides for optional and mandatory pre-payments under certain conditions. The Term Loan also provides the borrowers with the ability to increase the size of the facility by up to $250 million (less any increase in the Senior Secured Revolving Credit Facility in excess of $100 million), depending on the ability to obtain commitments from lenders and meeting specified conditions. Under the terms of the Term Loan, the borrowers are subject to an interest coverage ratio financial covenant, as defined, and a leverage ratio financial covenant, as defined, each of which will need to be complied with starting as of the end of BMCA's second fiscal quarter in 2008. In addition, the borrowers are also required to comply with various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations, and making certain investments. In the event of a change of control of BMCA, as defined, the maturity date of the Term Loan could be accelerated by the holders of that indebtedness. On March 15, 2007, the Term Loan was amended, which did not result in any material changes to the facility. The Bridge Loan would have converted into a term loan maturing on February 22, 2015, however it was amended and restated on March 15, 2007, and redesignated as the Junior Lien Term Loan. The Junior Lien Term Loan matures on September 15, 2014. All amounts outstanding under the Junior Lien Term Loan are secured by (i) a second priority perfected security interest in the Term Loan Collateral, and (ii) a third priority perfected security interest in the Senior Secured Revolving Credit Facility Collateral. Loans under the Junior Lien Term Loan will bear interest at a variable rate based upon either the base rate or Eurodollar rate, as defined in the Junior Lien Term Loan at the borrowers' option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the base rate or Eurodollar rate, as applicable. The Junior Lien Term Loan provides for optional and mandatory prepayments under certain conditions. 20BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 6. LONG-TERM DEBT - (CONTINUED) Under the terms of the Junior Lien Term Loan, the borrowers are subject to a leverage ratio financial covenant, as defined, which will need to be complied with starting as of the end of BMCA's second fiscal quarter in 2008. The borrowers are also required to comply with various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations and making certain investments. In the event of a change of control of BMCA, as defined, the maturity date of the Junior Lien Term Loan could be accelerated by the holders of that indebtedness. On February 22, 2007, BMCA repurchased approximately $97.5 million, or 97.5%, of the aggregate principal amount outstanding of the 2007 Notes and $150.1 million, or 96.9%, of the aggregate principal amount outstanding of the 2008 Notes. In connection with the completion of the tender offer for the 2007 Notes and the 2008 Notes in February 2007, substantially all of the covenants included in the indentures governing the 2007 Notes and 2008 Notes were eliminated. On March 26, 2007, the Company repurchased all of Elk's then outstanding $25.0 million in aggregate principal amount of 4.69% Senior Notes due 2007, $60.0 million in aggregate principal amount of 6.99% Senior Notes due 2009, $60.0 million in aggregate principal amount of 7.49% Senior Notes due 2012 and $50.0 million in aggregate principal amount of 6.28% Senior Notes due 2014.(Unaudited) – (Continued)Note 7. Long-Term Debt – (Continued)
As of September
30, 2007,28, 2008, the Company had total outstanding consolidated indebtedness of$1,910.1$2,053.0 million, whichamount includesincluded $52.8 million of demand loans to its parent corporation and$16.8$25.4 million that matures prior to the end of the third quarter of2008. The Company's total outstanding consolidated indebtedness also includes $281.0 million of borrowings outstanding under its $600.0 million Senior Secured Revolving Credit Facility.2009. The Company anticipates funding these obligations principally from its cash and cash equivalents on hand, cash flow from operations and/or borrowings under its Senior Secured Revolving Credit Facility.As of September
30, 2007,28, 2008, the Company was in compliance with all covenants under the Senior SecuredRevolvingCreditFacility, the Term Loan, the Junior Lien Term LoanFacilities and the indentures governingthe remaining 2007its 8% Senior Notesthe remainingdue 2008Notes(the “2008 Notes”) andtheits 7 3/4% Senior Notes due 2014 (the"2014 Notes") (collectively,“2014 Notes” and, together with the"Senior Notes"2008 Notes, the “Senior Notes”). As of September30, 2007,28, 2008, the net book value of the collateral securing the SeniorNotes, the Term Loan, the Junior Lien Term Loan andSecured Revolving Credit Facility Collateral (as defined in the Senior Secured Revolving CreditFacilityFacility) and the Term Loan Collateral (as defined in the Term Loan) wasapproximately $2,485.8 million. 21BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 6. LONG-TERM DEBT - (CONTINUED)$1,109.5 and $1,662.1 million, respectively.At September
30, 2007,28, 2008, the Company had outstanding letters of credit of approximately$51.2$48.4 million, whichincludesincluded approximately$10.5$10.6 million of standby letters of credit related to certain obligations of G-I Holdings.On January 3, 2006, the Company purchased and retired $6.3 million of industrial revenue bond certificates issued by the Company in 1990 with respect to the Fontana, California Industrial Revenue Development Bond, resulting in BMCA becoming the primary holder of such bond. NOTE 7. HEDGING ACTIVITY
Note 8.
Hedging Activity
In March 2007, the Company
began enteringentered into forward-starting Eurodollar rate,("LIBOR")or LIBOR, based pay fixed income interest rate swaps related tothe Company'sits Term Loan, with an effective date of April 23, 2007 and a maturity date of April 23, 2012. Inaccordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), BMCA's swaps are treated as cash flow hedges. At September 30, 2007, BMCA had no ineffectiveness related to its swaps. Therefore, for the quarter ended September 30, 2007, the Company, based on the change in the LIBOR rate, reflected in other liabilities the cumulative changes in the fair value of the derivative instrument when compared to cumulative changes in the present value of the expected future interest cash flows that are attributable to changes in the benchmark LIBOR swap rate. BMCA's offset to the related liability was reflected in other comprehensive loss, net of tax. The current period activity therefore marks the swaps to market and adjusts other comprehensive loss. On each balance sheet date, BMCA will test its fixed income interest rate swaps to determine whether the swaps contain any ineffectiveness. If BMCA's fixed income swaps contain any ineffectiveness, the Company will reflect the ineffective portion in its statement of operations. At September 30, 2007, based on changes in the closing LIBOR rate as of September 28, 2007, BMCA recorded a fair value loss on its fixed income interest rate swaps of $4.0 million to other liabilities, while the offset was recorded to other comprehensive loss, net of tax of $1.5 million. The Company has also recorded $1.4 million in year-to-date interest income as of September 30, 2007 related to its fixed income interest rate swaps. InOctober 2007, the Company entered into additional interest rate swaps related tothe Company'sits Term Loan with an effective date of October 23, 2007 and a maturity date of October 23, 2012 under terms similar to those of the Company’s swaps entered into in March 2007.In accordance with
similar termsSFAS No. 133, the Company’s swaps are treated asdicussed above. 22BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 7. HEDGING ACTIVITY - (CONTINUED)cash flow hedges. As of September 28, 2008, based on changes in the fair value of the interest rate swaps, the Company recognized a cumulative fair value loss on its interest rate swaps of $30.4 million to other liabilities, while the offset was recognized as an other comprehensive loss, net of tax of $11.6 million. Amounts may be reclassified from other comprehensive loss to interest expense if any portion of the Company’s swaps become ineffective. The Company does not anticipate that any amount recorded in other comprehensive loss related to its swaps will be reclassified during its fiscal year ending December 31, 2008.In July 2007, the Company began entering into treasury locks as additional hedging instruments
against the Company'srelated to its Term Loan.The Company's treasury locks have a settlement date of October 30, 2007 and a maturity date of July 31, 2012. The Company's treasury locks fix the U.S. treasury component, while excluding the swap component of the forward benchmark LIBOR interest rate. According to SFAS No. 133 the Company's treasury locks are also cash flow hedges, which are accounted for in the same manner as its swaps. At September 30, 2007, the Company determined through statistical analysis that its treasury locks contained 98% effectiveness. Therefore, at September 30, 2007, based on changes in the closing LIBOR rate as of September 28, 2007, BMCA recorded a fair value loss of $2.7 million to accrued liabilities, with the effective portion offset of $2.6 million being recorded to other comprehensive loss, net of tax of $1.0 million and the ineffective portion offset of $0.1 million being recorded in its statement of operations.On October 30, 2007, the Company settled its open treasury lock hedging positions,against its Term Loan,which resulted in apre-taxfair value lossof approximately $4.9 million, whichand cash settlement. Pursuant to SFAS No. 133, the Companywill amortizeis amortizing the loss into its statement of operations over theremaininglife ofitsthe Term Loan,pursuant to SFAS No. 133. NOTE 8. WARRANTY CLAIMSof which $0.2 and $0.6 million was amortized into interest expense in its third quarter and nine-month period ended September 28, 2008, respectively.
Note 9.
Warranty Claims
The Company provides certain limited warranties covering most of its residential roofing products for periods generally ranging from 20 to 50 years,
withalthough certain product lines provide for a lifetime limitedwarranties on certain premium designer shingle products.warranty. The Company also offers certain limited warranties of varying duration covering most of its commercial roofing products. Most of theCompany'sCompany’s specialty building products and accessoriesproductscarry limited warranties for periods generally ranging from 5 to 20 years, with lifetime limited warranties on certain products.BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 9.Warranty Claims – (Continued)
The accrual for product warranty claims consisted of the following for the third
quartersquarter andnine monthnine-month periods ended September 28, 2008 and September 30, 2007,which includes Elk from the date of acquisition, and October 1, 2006,respectively:23BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 8. WARRANTY CLAIMS - (CONTINUED)
THIRD QUARTER ENDED NINE MONTHS ENDED ---------------------- ---------------------- SEPT. 30, OCT. 1, SEPT. 30, OCT. 1, 2007 2006 2007 2006 -------- -------- -------- -------- (THOUSANDS)Beginning balance...................................... $ 41,173 $ 33,940 $ 26,971 $ 31,202 Charged to cost of products sold ....................................... 5,139 6,639 13,450 20,138 Payments/deductions ................................... (4,493) (5,731) (12,277) (16,492) Acquisition of Elk .................................... -- -- 13,675 -- -------- -------- -------- -------- Ending balance......................................... $ 41,819 $ 34,848 $ 41,819 $ 34,848 ======== ======== ======== ========
Third Quarter Ended
Nine Months Ended
Sept. 28,
2008
Sept. 30,
2007
Sept. 28,
2008
Sept. 30,
2007
(Thousands)
Beginning balance
$
47,028
$
41,173
$
44,724
$
26,971
Charged to cost of products sold
5,941
5,139
15,840
13,450
Payments/deductions
(5,544
)
(4,493
)
(13,139
)
(12,277
)
Acquisition of Elk
-
-
-
13,675
Ending balance
$
47,425
$
41,819
$
47,425
$
41,819
The Company
adopted, asoffers extended warranty contracts on sales ofDecember 31, 2006,its commercial roofing products. The lives of these extended commercial warranties range from 10 to 20 years. In addition, theprovisionsCompany offers enhanced warranties on certain ofStaff Accounting Bulletin ("SAB") No. 108, "Consideringits residential roofing products. These enhanced warranties are theEffects“Golden Pledge Warranty™”, “Peace ofPrior Year Misstatements when Quantifying MisstatementsMind™” and “Peak Performance®” warranty programs. All revenue for the sale of these warranty programs is deferred and amortized on a straight-line basis over the average life of such warranty programs, which is inthe Current Year Financial Statements" ("SAB No. 108") issued by the Securities and Exchange Commission ("SEC") in September 2006. Inaccordance with thetransition provisions of SAB No. 108, related to the method the Company uses to recognize revenue on sales of separately priced commercial and residential warranties in accordance withaccounting prescribed by FASB Technical BulletinNumberNo. 90-1"Accounting of“Accounting for Separately Priced Extended Warranty and Product MaintenanceContracts" ("FTB No. 90-1"),Contracts.” Incremental direct costs associated with the acquisition of the extended warranty contracts are capitalized and amortized on a straight-line basis over the average life of these warranty programs. Current costs of services performed related to claims paid under these warranty programs are expensed as incurred.At September 28, 2008 and September 30, 2007, the Company
reclassified $10.3had deferred revenue related to these agreements of $75.5 and $68.0 million, ofits commercial warranty accrual to deferred revenuewhich $8.6 andcosts. In addition,$8.2 million is included in other current liabilities and $66.9 and $59.8 million is included in other liabilities, respectively. At September 28, 2008 and September 30, 2007, the Companyrecorded an additional residential warranty accrualhad related deferred costs of$7.8$54.0 and $45.3 million,related to the accrual for future residential warranty costs related to warranties that are not separately priced,of which $5.5 and $5.1 million is included inaccordance with the transition provisions of SAB No. 108. NOTE 9. BENEFIT PLANSother current assets and $48.5 and $40.2 million is included in other assets, respectively.
Note 10.
Benefit Plans
Defined Benefit Plans
The Company provides a non-contributory defined benefit retirement plan for certain hourly and salaried employees (the
"Retirement Plan"“Retirement Plan”). Benefits under this plan are based on stated amounts for each year of service. TheCompany'sCompany’s funding policy is consistent with the minimum funding requirements of the Employee Retirement Income Security Act of 1974.In September 2006, the FASB issued SFAS No. 158 "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158"), which requires the net amount by which the defined-benefit or postretirement obligation plan is over- or underfunded to be reported on a company's balance sheet. SFAS No. 158 replaces FASB Statement No. 87's requirement to report at least a minimum pension liability, measured as the excess of the accumulated benefit obligation over the fair value of the plan assets.The
24BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 9. BENEFIT PLANS - (CONTINUED) funded status amount to be recognized by SFAS No. 158 is measured as the difference between the fair value of plan assets and the plan's benefit obligation, with the benefit obligation including all actuarial gains and losses, prior service cost, and any remaining transition amounts. SFAS No. 158 does not change the components of net periodic benefit cost. All items currently deferred when applying FASB Statement Nos. 87 and 106 are now recognized as a component of accumulated other comprehensive income, net of all applicable taxes. The Company adopted SFAS No. 158 during its fourth quarter of the fiscal year ended December 31, 2006. The Company'sCompany’s net periodic pension cost for the Retirement Plan included the following components for the thirdquartersquarter andnine monthnine-month periods ended September30, 200728, 2008 andOctober 1, 2006, respectively:
THIRD QUARTER ENDED NINE MONTHS ENDED -------------------- -------------------- SEPT. 30, OCT. 1, SEPT. 30, OCT.1, 2007 2006 2007 2006 ------- ------- ------- ------- (THOUSANDS)Service cost ..................... $ 381 $ 370 $ 1,143 $ 1,110 Interest cost .................... 567 523 1,701 1,568 Expected return on plan assets ... (826) (748) (2,478) (2,244) Amortization of unrecognized prior service cost ................... 10 10 30 29 Amortization of net losses from earlier periods ................ 41 86 124 258 ------- ------- ------- ------- Net periodic pension cost ........ $ 173 $ 241 $ 520 $ 721 ======= ======= ======= =======As of the quarter endedSeptember 30, 2007, respectively:BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 10. Benefit Plans – (Continued)
Third Quarter Ended
Nine Months Ended
Sept. 28, 2008
Sept. 30, 2007
Sept. 28, 2008
Sept. 30, 2007
(Thousands)
Service cost
$
430
$
381
$
1,290
$
1,143
Interest cost
611
567
1,832
1,701
Expected return on plan assets
(792
)
(826
)
(2,376
)
(2,478
)
Amortization of unrecognized prior service cost
3
10
10
30
Amortization of net losses from earlier periods
105
41
315
124
Net periodic pension cost
$
357
$
173
$
1,071
$
520
As of September 28, 2008, the Company
expectsexpected to makeaggregatepension contributions of$0.9$1.3 million to the Retirement Plan in2007,2008, which issimilar toconsistent with its expectations as of December 31,2006. In April, July and October 2007, the2007. The Company made2007 quarterlyRetirement Plan contributions of$0.3, $0.3 and $0.1$1.0 millionrespectively. In addition, in September 2007 the Company made a 2006 Retirement Plan contributionduring its first nine months of$0.2 million.2008.Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life insurance benefits, although it subsidizes such benefits for certain employees and certain retirees. Such subsidies were reduced or ended as of January 1, 1997. Effective March 1, 2005, the Company amended the plan
eliminatingto eliminate postretirement medical benefitsaffectingfor all current and future retirees.25BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 9. BENEFIT PLANS - (CONTINUED)Net periodic postretirement
(benefit) costbenefit included the following components for the thirdquartersquarter andnine monthnine-month periods ended September30, 200728, 2008 andOctober 1, 2006, respectively:
THIRD NINE QUARTER ENDED MONTHS ENDED ---------------- ---------------- SEPT. OCT. SEPT. OCT. 30, 1, 30, 1, 2007 2006 2007 2006 ----- ----- ----- ----- (THOUSANDS)Service cost ....................... $ 3 $ 3 $ 9 $ 10 Interest cost ...................... 30 30 90 89 Amortization of unrecognized prior service cost ..................... (143) (155) (428) (464) Amortization of net gains from earlier periods .................. (57) (61) (170) (183) ----- ----- ----- ----- Net periodic postretirement (benefit) cost ................... $(167) $(183) $(499) $(548) ===== ===== ===== =====As of the quarter endedSeptember 30, 2007, respectively:
Third Quarter Ended
Nine Months Ended
Sept. 28, 2008
Sept. 30, 2007
Sept. 28, 2008
Sept. 30, 2007
(Thousands)
Service cost
$
3
$
3
$
10
$
9
Interest cost
29
30
87
90
Amortization of unrecognized
prior service cost (143
)
(143
)
(428
)
(428
)
Amortization of net gains from
earlier periods
(56
)
(57
)
(169
)
(170
)
Net periodic postretirement benefit
$
(167
)
$
(167
)
$
(500
)
$
(499
)
As of September 28, 2008, the Company
expectsexpected to make aggregate benefit claim payments of approximately $0.2 millionin 2007,during 2008, which are related to postretirement life insurance expenses. This amount is consistent with theCompany'sCompany’s expectations as of December 31,2006. In connection with the acquisition of Elk, the Company adopted the Elk 401(k) Plan, which was established effective January 1, 1990. Under the Elk 401(k) Plan, which was amended January 1, 2007, the Company may contribute a percentage of each Elk participant's annual compensation into the Elk 401(k) Plan to be invested among various defined alternatives at the participants' direction. Employees are vested immediately in the Company's matching contributions. All full-time Elk employees, except those covered by plans established through collective bargaining agreements, are eligible for participation upon date of hire. The Company contributes a 3% basic contribution and an additional $.50 for every $1.00 of employee contributions into the Elk 401(k) Plan limited to a maximum matching Company contribution of 2% of an employee's compensation. 262007. BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED) NOTE 10. STOCK/LOAN PLAN In connection with the Company's acquisition of Elk, the Company adopted the Elk Stock/Loan(Unaudited) – (Continued)Note 11. 2001 Long-Term Incentive Plan
under which certain Elk employees wereIncentive units granted
loans for the purpose of purchasing Elk's common stock, which loans were based on a percentage of their salaries, the performance of their operating units, and also as long-term incentive compensation awards. Under the Stock/Loan Plan, a ratable portion of the loans, which are unsecured, and any accrued interest are forgiven and recognized as compensation expense over five years of continuing service with the Company. If employment is terminated for any reason except death, disability or retirement, the balance of the loan becomes due and payable. No further loans will be made under this plan. Loans outstanding at September 30, 2007 were $3.6 million and are included in other noncurrent assets. NOTE 11. 2001 LONG-TERM INCENTIVE PLAN The incentive unitsunder theCompany's2001 Long-Term Incentive Plan are valued at Book Value (as defined in the Plan) or the valuespecifiedof such incentive units specified at the date of grant.Changes, either increasesIncreases or decreases in the Book Value of those incentive unitsbetween the date of grant and the measurement dateresult in a change in the measure of compensation for the award. Compensation(income)expense for theCompany'sCompany’s incentive units was$0.8$3.6 and$(0.9)$0.8 million for the thirdquartersquarter ended September 28, 2008 and September 30, 2007,and October 1, 2006,respectively, and$1.8$4.8 and$4.7$1.8 million for the nine-month periods ended September30, 200728, 2008 andOctober 1, 2006, respectively. AtSeptember 30, 2007,and October 1, 2006, the 2001 Long-Term Incentive Plan liability amounted to $10.4 and $27.1 million, respectively, and was included in accrued liabilities.respectively.The following is a summary of activity for incentive units related to the 2001 Long-Term Incentive Plan:
SEPTEMBER 30, DECEMBER 31, 2007 2006 -------- -------- Incentive Units outstanding, beginning of period .................................... 98,633 146,814 Granted ........................................ 45,589 6,200 Exercised ...................................... (37,117) (41,087) Forfeited ...................................... (3,650) (13,294) -------- -------- Incentive Units outstanding, end of period .................................... 103,455 98,633 ======== ========
Nine Months Ended September 28, 2008
Year-to-Date December 31, 2007
Incentive Units outstanding, beginning of
period 99,120
98,633
Granted
17,000
45,589
Exercised
(18,040
)
(38,387
)
Forfeited
(6,305
)
(6,715
)
Incentive Units outstanding, end of period
91,775
99,120
Vested Units outstanding, end of period
34,462
38,750
The initial value of each of the 17,000 incentive units granted on January 1, 2008 was $592.01. The initial value of each of the 8,000 incentive units granted on July 2, 2007 and the 37,589 incentive units granted on January 1, 2007
July 1, 2006 and January 1, 2006was $589.43 and $583.08,$569.74 and $534.19,respectively.27BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 12. RELATED PARTY TRANSACTIONS
Note 12.
Related Party Transactions
The Company makes loans to, and borrows from, its parent corporations from time to time at prevailing market rates. As of September 28, 2008 and September 30, 2007,
and October 1, 2006,BMCA Holdings Corporation owed the Company$56.2$56.3 and$56.0$56.2 million, including interest of$0.9$1.0 and$0.7$0.9 million, respectively, and the Company owed BMCA Holdings Corporation $52.8 and $52.8 million, with no unpaid interest,payable to BMCA Holdings Corporation,respectively. Interest income on theCompany'sCompany’s loans to BMCA Holdings Corporation amounted to$1.5$0.9 and$1.3$1.5 million during the thirdquartersquarter ended September 28, 2008 and September 30, 2007,and October 1, 2006,respectively, and$4.0$2.7 and$3.7$4.0 million during thenine monthnine-month periods ended September 28, 2008 and September 30, 2007,and October 1, 2006,respectively. Interest expense on theCompany'sCompany’s loans from BMCA Holdings Corporation amounted to$1.4$0.8 and$1.2$1.4 million during the thirdquartersquarter ended September 28, 2008 and September 30, 2007,and October 1, 2006,respectively, and$3.9$2.6 and$3.5$3.9 million during thenine monthnine-month periods ended September 28, 2008 and September 30, 2007,and October 1, 2006,respectively. Loans payable to/receivable fromanyits parentcorporationcorporations are due on demand and provide each party with the right of offset of its related obligation to the other party and are subject to limitations as outlined in the Senior Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term Loan anditsthe Senior Notes. Under the terms of the Senior Secured Revolving Credit Facility and the indentures governing theCompany'sCompany’s Senior Notes at September30, 2007,28, 2008, the Company could repay demand loans to its parent corporation amounting to $52.8 million, subject to certain conditions. The Company also makes non-interest bearing advances to affiliates, of which no balance was outstanding as of September 28, 2008 and September 30,2007 and October 1, 2006.2007. In addition,for the nine months endedas of September 28, 2008 and September 30, 2007,and October 1, 2006,the Company did not owe any loanstoor enter into any lending activities with other affiliates.BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 12. Related Party Transactions – (Continued)
The Company
alsohas a management agreement with ISP Management Company, Inc., a subsidiary of International Specialty Products Inc. (which, together with its subsidiaries, is referred to as"ISP"“ISP”), an affiliate,(the "ISP Management Agreement")to provide the Company with certain managementservices. Theservices (the “Management Agreement”). Based on services provided to the Company in 2008 under the Management Agreement, the aggregate amount payable to ISP Management Company, Inc. under thecurrently proposed ISPManagement Agreement for2007,2008, inclusive of the services provided to G-I Holdings, isapproximatelynot yet available; however, after adjusting for inflationary factors, it is currently estimated to be similar to the $6.7 millionbased on services provided to the Companypaid in 2007. The Companyexpectsdoes not expect any changes tofinalizetheISPManagement Agreementduring its fourth quarterto have a material impact on the Company’s results of2007.operations.The Company
purchasesand its subsidiaries purchase a substantial portion ofitstheir headlap roofing granules, colored roofing granules and algae-resistant granules,underon along-term requirements contract withpurchase order basis, from ISP Minerals Inc.("Minerals"(“ISP Minerals”), an affiliate ofthe CompanyBMCA andofISP. The amount of mineral products purchased each yearunder the Minerals contracton this basis is based on current demand and is not subject to minimum purchase requirements. For the thirdquarters and nine month periodsquarter ended September30, 2007 and October 1, 2006,28, 2008, the Company purchased$29.0, $26.2, $81.1$13.7 million of roofing granules, and$84.9for the nine-month period ended September 28, 2008, the Company purchased $33.2 millionrespectively,of roofing granules under this arrangement.In addition to the granules products purchased by BMCA under the above mentioned purchase order basis, the balance of BMCA’s granules requirements are purchased under a contract expiring in 2013. The amount of mineral products
from Mineralspurchased each year underthis contract.the contract is based on current demand and is not subject to minimum purchase requirements. Under the contract, for the third quarter ended September 28,BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 12. RELATED PARTY TRANSACTIONS - (CONTINUED)2008, the Company purchased $24.2 million of roofing granules, and for the nine-month period ended September 28, 2008, the Company purchased $66.1 million of roofing granules.In August 2008 and October 2008, the Company declared and paid a cash dividend of $2.5 and $5.0 million, respectively, to its parent corporation.
Included in
currentnoncurrent assets as anon-interest bearing incometax receivable from parent corporation on the Company’s consolidated balance sheets is $10.0and $9.1million at both September30, 200728, 2008 and December 31,2006, respectively,2007, representing amounts paid in excess of amounts due to G-I Holdings with respect to 2006 under the Tax SharingAgreement.Agreement (as defined). These amounts are included in thechange innetreceivable from/payable to related parties/parent corporations in the consolidatedstatementstatements of cash flows.NOTE 13. INCOME TAXES The Company adopted FIN 48 as of January 1, 2007 in a manner that is consistent with the provisions of FSP FIN 48-1, and, as a result of the adoption, the Company reviewed certain tax positions and did not need to recognize any material adjustment to its accruals for uncertain tax positions. At January 1, 2007 and September 30, 2007, the Company had approximately $13.1 and $15.6 million, respectively, of unrecognized tax benefits. All of the unrecognized tax benefits would affect the Company's effective tax rate if recognized with the exception of $1.4 million associated with Elk, which would affect goodwill. The Company and its subsidiaries are subject to United States federal income tax as well as the income tax of multiple state jurisdictions. The Company has substantially concluded all United States federal income tax matters for years through 2004. The tax years 2005 and 2006 remain open to examination by the Internal Revenue Service ("IRS"). Substantially all material state and local matters have been concluded for tax years through 2001. The tax years 2002 through 2006 remain open to examination by the major state taxing jurisdictions to which the Company is subject. The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 1, 2007 and September 30, 2007, the Company had $3.8 and $4.8 million, respectively, of accrued interest and penalties. The Company's effective tax rate changed from 38.0% for the year ended December 31, 2006 to 31.0% for the nine month period ended September 30, 2007. The change in the effective tax rate was primarily due to the impact of the estimated annual restructuring and other expense charges in 2007, of which $97.6 million was included in the Company's income before interest expense and income taxes for the nine month period ended September 30, 2007 and the establishment of a valuation allowance related to state income taxes. 29BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. CONTINGENCIES Asbestos Litigation Against G-I Holdings
Note 13.
Contingencies
In connection with its formation, the Company contractually assumed and agreed to pay the first $204.4 million of liabilities for asbestos-related bodily injury claims relating to the inhalation of asbestos fiber
("(“AsbestosClaims"Claims”) of its indirect parent, G-I Holdings. As of March 30, 1997, the Company paid all of its assumed liabilities for Asbestos Claims. G-I Holdings has agreed to indemnify the Company against any other existing or future claims related to asbestos-relatedliabilities.liabilities if asserted against the Company. In January 2001, G-I Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to Asbestos Claims. Mostasbestos claimsAsbestos Claims do not specify the amount of damagessought. This Chapter 11 proceedingsought, and the value of the Asbestos Claims asserted against G-I Holdings is a contested issue in that bankruptcy, which remainspending, but has been stayed (see below).pending.Claimants in the G-I
Holdings'Holdings’ bankruptcy, including judgment creditors, might seek to satisfy their claims by asking the Bankruptcy Court to require the sale of G-IHoldings'Holdings’ assets, including its holdings of BMCA HoldingsCorporation'sCorporation’s common stock and its indirect holdings of theCompany'sCompany’s common stock. Such action could result in a change of control of the Company. In addition, those creditors may attempt to assert AsbestosBUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 13. Contingencies – (Continued)
Claims against the Company. (Approximately 1,900 Asbestos Claims were filed against the Company prior to February 2,
2001).2001.) The Company believes that it will not sustain any liability in connection with these or any other Asbestos Claims. On February 2, 2001, the United States Bankruptcy Court for the District of New Jersey issued a temporary restraining order enjoining any existing or future claimant from bringing or prosecuting an Asbestos Claim against the Company. By oral opinion on June 22, 2001, and written order entered February 22, 2002, the Bankruptcy Court converted the temporary restraints into a preliminary injunction, prohibiting the bringing or prosecution of any such Asbestos Claims against the Company.On February 7, 2001, G-I Holdings filed an action in the United States Bankruptcy Court for the District of New Jersey seeking a declaratory judgment that BMCA has no successor liability for Asbestos Claims against G-I Holdings and that it is not the alter ego of G-I Holdings (the
"BMCA Action"“BMCA Action”). One of the parties to this matter, the Official Committee of Asbestos Claimants (the"creditors' committee"“creditors’ committee”), subsequently filed a counterclaim against the Company seeking a declaration that BMCA has successor liability for Asbestos Claims against G-I Holdings and that it is the alter ego of G-I Holdings. On May 13, 2003, the United States District Court for the District of New Jersey overseeing the G-IHoldings'Holdings’ Bankruptcy Court withdrew the reference of the BMCA Action from the BankruptcyCourt, and this matter will therefore be heard byCourt. By order dated May 30, 2008, the DistrictCourt.Court dismissed the BMCA Action without ruling on the merits of BMCA’s position that it has no successor liability for Asbestos Claims. TheCompany believes it will prevail on its claimDistrict Court ruled that a federal court declaratory judgment action was not the proper vehicle fora declaratory judgment. Althoughresolving this issue. The District Court’s ruling did not affect the preliminary injunction enjoining the prosecution of Asbestos Claims against BMCA, and the Company believesits claims are meritorious, andthat it does not have asbestos-relatedliability,liability. Nevertheless, it is not possible to predictthe outcome of this litigation, or, if it does not prevail,the outcome of any subsequent litigation regarding the continuation of the preliminary injunction and/or prosecution of Asbestos Claims againstBMCA. 30BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. CONTINGENCIES - (CONTINUED)the Company.On or about February 8, 2001, the
creditors'creditors’ committee filed a complaint in the United States Bankruptcy Court, District of New Jersey against G-I Holdings andBMCA.the Company. The complaint requests substantive consolidation of BMCA with G-I Holdings or an order directing G-I Holdings to cause BMCA to file for bankruptcy protection. TheCompany and G-I Holdings intend to vigorously defend the lawsuit. Theplaintiffs also filed for interim relief absent the granting of their requested relief described above. On March 21, 2001, the Bankruptcy Court deniedplaintiffs'plaintiffs’ application for interim relief. In November 2002, thecreditors'creditors’ committee, joined in by the legal representative of future demand holders, filed a motion for appointment of a trustee in the G-IHoldings'Holdings’ bankruptcy. In December 2002, the Bankruptcy Court denied the motion. Thecreditors'creditors’ committee appealed the ruling to the United States District Court, which denied the appeal on June 27, 2003. Thecreditors'creditors’ committee appealed the denial to the Third Circuit Court of Appeals, which denied the appeal on September 24, 2004. Thecreditors'creditors’ committee filed a petition with the Third Circuit Court of Appeals for a rehearing of its denial of thecreditors' committee'screditors’ committee’s appeal, which was denied by the Court of Appeals on October 26, 2004.On July 7, 2004, the Bankruptcy Court entered an order authorizing the
creditors'creditors’ committee to commence an adversary proceeding against the Company and others challenging, as a fraudulent conveyance, certain transactions entered into in connection with theCompany'sCompany’s formation in 1994, in which G-I Holdings caused to be transferred to the Company all of its roofing business and assets and in which the Company assumed certain liabilities relating to those assets, including a specified amount of asbestos liabilities (the"1994 transaction"“1994 transaction”). The Bankruptcy Court also permitted thecreditors'creditors’ committee to pursue a claim against holders of theCompany'sCompany’s bank and bond debt outstanding in 2000, seeking recovery from them, based on thecreditors' committee'screditors’ committee’s theory that the 1994 transaction was a fraudulent conveyance. On July 20, 2004, thecreditors'creditors’ committee appealed certain aspects of the BankruptcyCourt'sCourt’s order (and a June 8, 2004 decision upon which the order was based). G-I Holdings, the holders of theCompany'sCompany’s bank and bond debt and BMCA cross-appealed. The District CourtBUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 13. Contingencies – (Continued)
entered an order on June 21, 2006 affirming in part and vacating in part the Bankruptcy
Court'sCourt’s July 7, 2004 order. Among other things, the District Court vacated that aspect of the BankruptcyCourt'sCourt’s order authorizing thecreditors'creditors’ committee to pursue avoidance claims against the Company and the holders of theCompany'sCompany’s bank and bond debt as of 2000. This issuehas beenwas remanded to the Bankruptcy Court for further proceedings consistent with the DistrictCourt's opinion.Court’s opinion (“Authorization Proceeding”). By order dated August 22, 2008 the Bankruptcy Court stayed the Authorization Proceeding and other adversary proceedings effective upon the filing of a co-proposed Plan of Reorganization of G-I Holdings, Inc. The Company believes thecreditors' committee'screditors’ committee’s avoidance claims are without merit and that, in the event the stay is terminated, the Bankruptcy Court should not permit the committee to pursue such claims against the Company and the holders of its bank and bond debt as of 2000.31BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. CONTINGENCIES - (CONTINUED) In March 2007, after participating inThe Company has been advised by G-I Holdings that on August 12, 2008, G-I Holdings reached an agreement with the creditors’ committee and the legal representative of present and future holders of asbestos-related claims to jointly file a
mediation which resulted inplan of reorganization with theparties agreeing to an outline of the principal terms of aBankruptcy Court that will provide for settlement ofthe G-I Holdings bankruptcyAsbestos Claims and all relatedlitigations, the parties agreedlitigation. The agreement is subject to astaynumber ofproceedings pendingcontingencies, but if thecompletionreorganization plan is filed and confirmed, all oftheir negotiations. The judges presiding overthe actions described above will be resolved. If the bankruptcy is not resolved, the Company and G-I Holdingsbankruptcy proceeding andintend to vigorously defend all litigations related thereto. Subsequent to execution of therelated litigations, including the BMCA action and the fraudulent conveyance action, have each entered stipulated orders dated March 22, 2007, March 23, 2007 and April 4, 2007, respectively, implementing the stay. There can be no assurance whether the negotiations will result interm sheet, asettlement to theJoint Plan of Reorganization of G-I Holdings,bankruptcyInc. was filed with the Bankruptcy Court on August 21, 2008, andrelated proceedings.a First Amended Joint Plan of Reorganization of G-I Holdings, Inc. was filed with the Bankruptcy Court on October 30, 2008.If the
stay ceases to be in effectreorganization plan is not confirmed and the Company is not successful in defending against one or more ofthesethe claims outlined above, the Company may be forced to file for bankruptcy protection and/or contribute all or a substantial portion of its assets to satisfy the claims of G-IHoldings'Holdings’ creditors. Either of these events, or the substantive consolidation of G-I Holdings and the Company, would weaken its operations and cause it to divert a material amount of its cash flow to satisfy the asbestos claims of G-I Holdings and may render it unable to pay interest or principal on its credit obligations.Tax Claims Against G-I Holdings
On September 15, 1997, G-I Holdings received a notice from the
IRSInternal Revenue Service (the “IRS”) of a deficiency in the amount of $84.4 million (after taking into account the use of net operating losses and foreign tax credits otherwise available for use in later years) in connection with the formation in 1990 ofRhone-PoulencRhône-Poulenc Surfactants and Specialties, L.P. (the"surfactants partnership"“surfactants partnership”), a partnership in which G-I Holdings held an interest. On September 21, 2001, the IRS filed a proof of claim with respect to such deficiency against G-I Holdings in the G-IHoldings'Holdings’ bankruptcy. If such proof of claim is sustained, the Company and/or certain of the Company’s subsidiaries together with G-I Holdings and several current and former subsidiaries of G-I Holdings could be severally liable for those taxes and interest. G-I Holdings has filed an objection to the proof of claim, which is the subject of an adversary proceeding pending in the United States District Court for the District of New Jersey. By opinion and order dated September 8, 2006, the District Court ruled on theparties'parties’ respective motions for Partial Summary Judgment, granting the government summary judgment on the issue of"adequate disclosure"“adequate disclosure” forstatutesstatute of limitation purposes and denying G-I Holdings summary judgment on its otherstatutesstatute oflimitationlimitations defense (finding material issues of fact that must be tried). If the IRS were to prevailonfor the years in which the Company and/or certain of itsclaims relating to the formationsubsidiaries were not part of thesurfactants partnership,G-I Holdings Group, the Company nevertheless could beseverallyliable for approximately $40.0 million in taxes plus interest, although this calculation is subject to uncertainty depending upon various factors including G-IHoldings'Holdings’ ability to satisfy its tax liabilities and the application of tax credits and deductions.If the IRS were to lose on its claims relating to the formation of the surfactants partnership but prevail 32BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. CONTINGENCIES - (CONTINUED) on its claims relating to the 1999 distribution of U.S. Treasury bonds, the Company could be severally liable for all or a portion of the taxes and interest on the deficiency.In an opinion dated June 8, 2007, the District Court decided that G-IBUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 13. Contingencies – (Continued)
Holdings cannot avail itself of the
"binding contract"“binding contract” transitional relief with respect to the 1999 distribution of U.S. Treasury Bonds to G-I Holdings. The Company believes that it will not be required to pay any incremental income tax to the Federal government with respect to this matter and that its ultimate dispositionof this matterwill not have a material adverse effect on its business, financial position or results of operations.For a further discussion with respect to the history of the foregoing litigation, and asbestos-related matters, see Notes
5, 11,8, 10, 13 and1620 to the consolidated financial statements contained in theCompany's 2006Company’s 2007 Form 10-K.Environmental Litigation
We,The Company, together with other companies,
areis a party to a variety of proceedings and lawsuits involving environmental matters under the U.S. Comprehensive Environmental Response Compensation and Liability Act, and similar state laws, in which recovery is sought for the cost of cleanup of contaminated sites or remedial obligations are imposed, a number of which are in the early stages or have been dormant for protracted periods.We refer to these proceedings and lawsuits below as "Environmental Claims."Most ofthe Environmental Claimsthese environmental claims do not seek to recover an amount of specific damages. At most sites, the Company anticipates that liability will be apportioned among the companies found to be responsible for the presence of hazardous substances at the site.TheWhile the Company cannot predict whether adverse decisions or events can occur in the future, the Company believes that the ultimate disposition of
thesesuch matters will not have a material adverse effect on the liquidity, results of operations, cash flows or financial position of the Company.However, adverse decisions or events, particularly asIncome Tax Contingency Payment
In August 2008, the Company paid $3.7 million in settlement of an outstanding state income tax matter related to
increases in remedial costs, discovery of new contamination, assertion of natural resource damages,tax years 1999 through 2006. In October 2008, the Company was assessed interest and penalties related to theliabilitytax matter, for which the Company had fully accrued at September 28, 2008 andthe financial responsibility of our insurers and of the other parties involved at each site and their insurers, could cause usexpects toincrease our estimate of our liability in respect of those matters. It is not currently possible to estimate the amount or range of any additional liability. For information relating to other environmental compliance expenses, reference is made to Note 2, "Environmental Liabilities" in the Company's 2006 Form 10-K and Note 12, "Environmental Litigation" in the Company's Quarterly Report on Form 10-Q for the firstpay during its fourth quarter endedApril 1, 2007, which was filed withDecember 31, 2008. The interest and penalties did not have a material effect on theSEC on May 16, 2007. 33BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. CONTINGENCIES - (CONTINUED)Company’s statement of operations.Other Contingencies
In the ordinary course of business, the Company has several supply agreements that include minimum annual purchase requirements. In the event these purchase requirements are not met, the Company may be required to make payments under these supply agreements. There have been no material changes to these contracts in the third quarter of
2007. NOTE 15. SUBSEQUENT EVENT On October 15, 2007, BMCA redeemed all of its remaining $2.5 million outstanding 2007 Notes, including accrued and unpaid interest on such notes through the date of redemption. NOTE 16. GUARANTOR FINANCIAL INFORMATION2008.
Note 14.
Guarantor Financial Information
At September
30, 2007,28, 2008, all of theCompany'sCompany’s subsidiaries,including Elk,each of which iswholly ownedwholly-owned by the Company, including Elk, are guarantors under theCompany'sCompany’s Senior Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term Loan and the indentures governing the Senior Notes. These guarantees are full, unconditional and joint and several. In addition,BMMC,Building Materials Manufacturing Corporation, a wholly-owned subsidiary of the Company,iswas a co-obligor on the 8% Senior Notes due2007. The Company and BMMC entered into license agreements, effective January 1, 1999, for the right to use intellectual property, including patents, trademarks, know-how, and franchise rights owned by Building Materials Investment Corporation ("BMIC"), a wholly-owned subsidiary of the Company, for a license fee stated as a percentage of net sales. The license agreements2007, which werefor a period of one year and were subject to automatic renewal unless either party terminated with 60 days written notice. Also, effective January 1, 1999, BMMC started selling all finished goods to the Company at a manufacturing profit. Such agreements and the related sale of finished goods were terminated on December 31, 2006. 34redeemed during BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED) NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) Effective January 1, 2007, BMMC and BMIC entered into a new contract manufacturing agreement allowing BMIC the right to purchase all production at the BMMC owned plant locations at a specified transfer price.(Unaudited) – (Continued)Note 14. Guarantor Financial Information – (Continued)
2007. In
addition, effective January 1,2007, BMCA Acquisition Inc., the direct parent of Elk, andBMIC entered intoElk, as apurchase agreement grantingresult of its merger with BMCA Acquisition Sub, became co-obligors on theright to purchase production sufficient to meet required customer demand from BMIC at a specified transfer price. Also, in connection with entering these agreements, BMCA transferred certain employeesSenior Secured Revolving Credit Facility, the Term Loan andoperations of BMCA to BMIC.the Junior Lien Term Loan.Presented below is condensed consolidating financial information for the Company, the co-obligor subsidiaries and the guarantor subsidiaries. This financial information should be read in conjunction with the consolidated financial statements and other notes related thereto. Separate financial statements for the Company and the guarantor subsidiaries are not included herein, because the guarantees are full, unconditional and joint and several.
35
Condensed Consolidating Statement of Operations
Third Quarter Ended September 28, 2008
(Thousands)
(Unaudited)
Parent Company
Co-Obligor Subsidiary
Guarantor Subsidiaries
Eliminations
Consolidated
Net sales
$
825,441
$
6,749
$
20,636
$
-
$
852,826
Intercompany net sales
-
226,308
1,271,483
(1,497,791
)
-
Total net sales
825,441
233,057
1,292,119
(1,497,791
)
852,826
Costs and expenses:
Cost of products sold
723,507
226,899
1,149,844
(1,497,791
)
602,459
Selling, general and administrative
81,197
9,285
54,135
-
144,617
Amortization of intangible assets
-
2,846
-
-
2,846
Restructuring and other expenses
-
1,324
5,282
-
6,606
Other (income) expense, net
1,399
(27
)
386
-
1,758
Total costs and expenses, net
806,103
240,327
1,209,647
(1,497,791
)
758,286
Income (loss) before equity in earnings of subsidiaries, interest expense and income taxes
19,338
(7,270
)
82,472
-
94,540
Equity in earnings of subsidiaries
36,218
-
-
(36,218
)
-
Interest expense
(21,366
)
(7,427
)
(10,748
)
-
(39,541
)
Income (loss) before income taxes
34,190
(14,697
)
71,724
(36,218
)
54,999
Income tax (expense) benefit
483
5,058
(25,867
)
-
(20,326
)
Net income (loss)
$
34,673
$
(9,639
)
$
45,857
$
(36,218
)
$
34,673
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 14. Guarantor Financial Information – (Continued)
Condensed Consolidating Statement of Operations
Third Quarter Ended September 30, 2007
(Thousands)
(Unaudited)
Parent Company
Co-Obligor Subsidiaries
Guarantor Subsidiaries
Eliminations
Consolidated
Net sales
$
455,479
$
200,774
$
24,488
$
-
$
680,741
Intercompany net sales
-
436,824
394,760
(831,584
)
-
Total net sales
455,479
637,598
419,248
(831,584
)
680,741
Costs and expenses, net:
Cost of products sold
384,400
525,990
414,628
(831,584
)
493,434
Selling, general and administrative
59,694
65,170
9,214
-
134,078
Amortization of intangible assets
-
3,938
-
-
3,938
Restructuring and other expenses
24,628
-
-
-
24,628
Other income, net
(577
)
(360
)
(45
)
-
(982
)
Total costs and expenses, net.
468,145
594,738
423,797
(831,584
)
655,096
Income (loss) before equity in earnings of subsidiaries, interest expense and income taxes
(12,666
)
42,860
(4,549
)
-
25,645
Equity in earnings of subsidiaries
17,923
-
-
(17,923
)
-
Interest expense
(32,161
)
(3,540
)
(8,588
)
-
(44,289
)
Income (loss) before income taxes
(26,904
)
39,320
(13,137
)
(17,923
)
(18,644
)
Income tax (expense) benefit
15,723
(12,723
)
4,463
-
7,463
Net income (loss)
$
(11,181
)
$
26,597
$
(8,674
)
$
(17,923
)
$
(11,181
)
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 14. Guarantor Financial Information – (Continued)
Condensed Consolidating Statement of Operations
Nine Months Ended September 28, 2008
(Thousands)
(Unaudited)
Parent Company
Co-Obligor Subsidiary
Guarantor Subsidiaries
Eliminations
Consolidated
Net sales
$
2,073,823
$
28,186
$
58,172
$
-
$
2,160,181
Intercompany net sales
-
563,601
3,217,142
(3,780,743
)
-
Total net sales
2,073,823
591,787
3,275,314
(3,780,743
)
2,160,181
Costs and expenses:
Cost of products sold
1,807,681
582,158
2,934,156
(3,780,743
)
1,543,252
Selling, general and administrative
214,016
26,185
135,915
-
376,116
Amortization of intangible assets
-
8,539
-
-
8,539
Restructuring and other expenses
-
3,748
30,046
-
33,794
Other expense, net
2,082
32
1,052
-
3,166
Total costs and expenses, net
2,023,779
620,662
3,101,169
(3,780,743
)
1,964,867
Income (loss) before equity in earnings of subsidiaries, interest expense and income taxes
50,044
(28,875
)
174,145
-
195,314
Equity in earnings of subsidiaries
60,466
-
-
(60,466
)
-
Interest expense
(70,911
)
(16,626
)
(31,867
)
-
(119,404
)
Income (loss) before income taxes
39,599
(45,501
)
142,278
(60,466
)
75,910
Income tax (expense) benefit
7,830
17,072
(53,383
)
-
(28,481
)
Net income (loss)
$
47,429
$
(28,429
)
$
88,895
$
(60,466
)
$
47,429
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 14. Guarantor Financial Information – (Continued)
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2007
(Thousands)
(Unaudited)
Parent Company
Co-Obligor Subsidiaries
Guarantor Subsidiaries
Eliminations
Consolidated
Net sales
$
1,309,761
$
488,677
$
75,564
$
-
$
1,874,002
Intercompany net sales
-
1,099,226
1,144,013
(2,243,239
)
-
Total net sales
1,309,761
1,587,903
1,219,577
(2,243,239
)
1,874,002
Cost and expenses, net:
Costs of products sold
1,113,635
1,299,133
1,202,787
(2,243,239
)
1,372,316
Selling, general and administrative
163,382
193,952
25,733
-
383,067
Amortization of intangible assets
-
3,938
-
-
3,938
Restructuring and other expenses
79,622
-
-
-
79,622
Other income, net
(1,187
)
(114
)
(58
)
-
(1,359
)
Total costs and expenses, net
1,355,452
1,496,909
1,228,462
(2,243,239
)
1,837,584
Income (loss) before equity in earnings of subsidiaries, interest expense and income taxes
(45,691)
90,994
(8,885
)
-
36,418
Equity in earnings of subsidiaries
23,021
-
-
(23,021
)
-
Interest expense
(90,492
)
(24,993
)
(23,752
)
-
(139,237
)
Income (loss) before income taxes
(113,162
)
66,001
(32,637
)
(23,021
)
(102,819
)
Income tax (expense) benefit
42,217
(20,460
)
10,117
-
31,874
Net income (loss)
$
(70,945
)
$
45,541
$
(22,520
)
$
(23,021
)
$
(70,945
)
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 14. Guarantor Financial Information – (Continued)
Condensed Consolidating Balance Sheet
September 28, 2008
(Thousands)
(Unaudited)
Parent Company
Co-Obligor Subsidiary
Guarantor Subsidiaries
Eliminations
Consolidated
ASSETS
Current Assets:
Cash and cash equivalents
$
157,497
$
72
$
240
$
-
$
157,809
Accounts receivable, trade, net
521,531
4,076
14,257
-
539,864
Accounts receivable, other
2,089
1,590
8,070
-
11,749
Inventories, net
-
81,289
234,480
-
315,769
Deferred income tax assets
42,564
-
-
-
42,564
Other current assets
6,845
1,353
10,051
-
18,249
Total Current Assets
730,526
88,380
267,098
-
1,086,004
Investment in subsidiaries
1,617,490
-
-
(1,617,490
)
-
Intercompany loans including accrued interest
1,372,467
(685,906
)
(686,561
)
-
-
Due from/(to) subsidiaries, net
(1,618,472
)
544,895
1,073,577
-
-
Property, plant and equipment, net
-
284,730
359,218
-
643,948
Goodwill
59,323
588,720
5,471
-
653,514
Intangible assets, net
-
199,096
-
-
199,096
Income tax receivable from parent corporation
10,016
-
-
-
10,016
Other noncurrent assets
87,856
9,533
25,339
-
122,728
Total Assets
$
2,259,206
$
1,029,448
$
1,044,142
$
(1,617,490
)
$
2,715,306
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt
$
14,480
$
669
$
10,237
$
-
$
25,386
Accounts payable
-
53,359
166,631
-
219,990
Payable to related parties
996
-
38,361
-
39,357
Loans payable to parent corporation
52,840
-
-
-
52,840
Accrued liabilities
65,121
15,389
71,258
-
151,768
Product warranty claims
12,600
3,600
-
-
16,200
Discontinued operations – current liabilities
-
560
-
-
560
Total Current Liabilities
146,037
73,577
286,487
-
506,101
Long-term debt less current maturities
1,912,384
3,833
58,534
-
1,974,751
Product warranty claims
29,808
1,317
100
-
31,225
Deferred income tax liabilities
94,019
-
-
-
94,019
Other liabilities
128,447
10,257
21,995
-
160,699
Total Liabilities
2,310,695
88,984
367,116
-
2,766,795
Total Stockholders’ Equity (Deficit)
(51,489
)
940,464
677,026
(1,617,490
)
(51,489
)
Total Liabilities and Stockholders’ Equity (Deficit)
$
2,259,206
$
1,029,448
$
1,044,142
$
(1,617,490
)
$
2,715,306
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 14. Guarantor Financial Information – (Continued)
Condensed Consolidating Balance Sheet
December 31, 2007
(Thousands)
Parent Company
Co-Obligor Subsidiary
Guarantor Subsidiaries
Eliminations
Consolidated
ASSETS
Current Assets:
Cash and cash equivalents
$
-
$
1,936
$
4,388
$
-
$
6,324
Accounts receivable, trade, net
198,781
3,753
8,323
-
210,857
Accounts receivable, other
2,229
4,651
3,912
-
10,792
Income tax receivable
-
11,968
-
-
11,968
Inventories, net
-
89,735
227,177
-
316,912
Deferred income tax assets
38,017
-
-
-
38,017
Other current assets
5,644
1,985
6,069
-
13,698
Total Current Assets
244,671
114,028
249,869
-
608,568
Investment in subsidiaries
1,557,024
-
-
(1,557,024
)
-
Intercompany loans including accrued interest
767,084
(194,715
)
(572,369
)
-
-
Due from/(to) subsidiaries, net
(787,818
)
13,469
774,349
-
-
Property, plant and equipment, net
-
297,942
374,871
-
672,813
Goodwill
40,080
590,405
24,715
-
655,200
Intangible assets, net
-
207,635
-
-
207,635
Income tax receivable from parent corporation
10,016
-
-
-
10,016
Other noncurrent assets
86,604
11,963
21,592
-
120,159
Total Assets
$
1,917,661
$
1,040,727
$
873,027
$
(1,557,024
)
$
2,274,391
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt
$
14,530
$
670
$
9,430
$
-
$
24,630
Accounts payable
21
32,026
110,203
-
142,250
Payable to related parties
992
-
15,141
-
16,133
Loans payable to parent corporation
52,840
-
-
-
52,840
Accrued liabilities
63,402
18,412
54,162
-
135,976
Product warranty claims
13,500
-
-
-
13,500
Discontinued operations – current liabilities
-
560
-
-
560
Total Current Liabilities
145,285
51,668
188,936
-
385,889
Long-term debt
1,653,298
4,400
71,697
-
1,729,395
Product warranty claims
25,755
5,369
100
-
31,224
Deferred income tax liabilities
60,869
-
-
-
60,869
Other liabilities
128,772
10,397
24,163
-
163,332
Total Liabilities
2,013,979
71,834
284,896
-
2,370,709
Total Stockholders’ Equity (Deficit)
(96,318
)
968,893
588,131
(1,557,024
)
(96,318
)
Total Liabilities and Stockholders’ Equity (Deficit)
$
1,917,661
$
1,040,727
$
873,027
$
(1,557,024
)
$
2,274,391
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 14. Guarantor Financial Information – (Continued)
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 28, 2008
(Thousands)
(Unaudited)
Parent Company
Co-Obligor Subsidiary
Guarantor Subsidiaries
Consolidated
Cash and cash equivalents, beginning of period
$
-
$
1,936
$
4,388
$
6,324
Cash provided by (used in) operating activities:
Net income (loss)
(13,037
)
(28,429
)
88,895
47,429
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation
-
20,829
32,934
53,763
Amortization of intangible and other assets
-
8,539
2,977
11,516
Restructuring and other expenses
4,643
15,737
40,351
60,731
Deferred income taxes
28,213
-
-
28,213
Noncash interest charges
5,397
888
463
6,748
(Increase) decrease in working capital items
(326,756
)
28,331
5,651
(292,774
)
Increase (decrease) in product warranty claims
3,153
(452
)
-
2,701
(Increase) decrease in other assets
(5,571
)
757
(6,801
)
(11,615
)
Increase (decrease) in other liabilities
(789
)
912
144
267
Increase (decrease) in net payable to related parties/parent corporations
206,379
(40,604
)
(142,551
)
23,224
Other, net
-
(124
)
(14,094
)
(14,218
)
Net cash provided by (used in) operating activities
(98,368
)
6,384
7,969
(84,015
)
Cash provided by (used in) investing activities:
Capital expenditures
-
(7,700
)
(20,939
)
(28,639
)
Proceeds from sale of assets
-
-
21,443
21,443
Net cash provided by (used in) investing activities
-
(7,700
)
504
(7,196
)
Cash provided by (used in) financing activities:
Proceeds from issuance of long-term debt
830,000
-
-
830,000
Repayments of long-term debt
(570,895
)
(548
)
(2,559
)
(574,002
)
Purchase of industrial development revenue bond certificates issued by the Company
-
-
(4,800
)
(4,800
)
Principal repayments of capital leases
-
-
(5,262
)
(5,262
)
Distribution to parent corporation
(65
)
-
-
(65
)
Dividend to parent corporation
(2,500
)
-
-
(2,500
)
Loan to parent corporation
(99
)
-
-
(99
)
Financing fees and expenses
(576
)
-
-
(576
)
Net cash provided by (used in) financing activities
255,865
(548
)
(12,621
)
242,696
Net change in cash and cash equivalents
157,497
(1,864
)
(4,148
)
151,485
Cash and cash equivalents, end of period
$
157,497
$
72
$
240
$
157,809
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 14. Guarantor Financial Information – (Continued)
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2007
(Thousands)
(Unaudited)
Parent Company
Co-Obligor Subsidiaries
Guarantor Subsidiaries
Consolidated
Cash and cash equivalents, beginning of period
$
18
$
1,870
$
5,889
$
7,777
Cash provided by (used in) operating activities:
Net income (loss)
(93,966
)
45,541
(22,520
)
(70,945
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation
-
43,528
7,127
50,655
Amortization
-
6,495
-
6,495
Restructuring and other expenses
97,647
-
-
97,647
Deferred income taxes
(36,141
)
-
-
(36,141
)
Noncash interest charges
6,864
290
704
7,858
(Increase) decrease in working capital items
(160,860
)
68,616
34,440
(57,804)
Increase (decrease) in product warranty claims
2,063
(590
)
(301
)
1,172
Increase in other assets
(3,671
)
(605
)
(911
)
(5,187
)
Increase (decrease) in other liabilities
3,261
1,501
(2
)
4,760
Increase (decrease) in net payable to related parties/parent corporations
(1,143,587
)
1,128,047
26,026
10,486
Other, net
-
(22
)
599
577
Net cash provided by (used in) operating activities
(1,328,390
)
1,292,801
45,162
9,573
Cash used in investing activities:
Acquisition of Elk Corp
-
(944,838
)
-
(944,838
)
Capital expenditures and acquisitions
-
(39,995
)
(27,118
)
(67,113
)
Net cash used in investing activities
-
(984,833
)
(27,118
)
(1,011,951
)
Cash provided by (used in) financing activities:
Proceeds from issuance of long-term debt
2,292,849
25,900
-
2,318,749
Repayments of long-term debt
(928,834
)
(325,171
)
-
(1,254,005
)
Distribution to parent corporation
(171
)
-
-
(171
)
Loan to parent corporation
(148
)
-
-
(148
)
Financing fees and expenses
(35,324
)
-
-
(35,324
)
Net cash provided by (used in) financing activities
1,328,372
(299,271
)
-
1,029,101
Net change in cash and cash equivalents
(18
)
8,697
18,044
26,723
Cash and cash equivalents, end of period
$
-
$
10,567
$
23,933
$
34,500
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATEDItem 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THIRD QUARTER ENDED SEPTEMBER 30, 2007 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Eliminations Consolidated --------- --------- --------- --------- ---------Net sales ........................ $ 455,479 $ -- $ 225,262 $ -- $ 680,741 Intercompany net sales ........... -- 436,824 394,760 (831,584) -- --------- --------- --------- --------- --------- Total net sales .............. 455,479 436,824 620,022 (831,584) 680,741 --------- --------- --------- --------- --------- Costs and expenses, net: Cost of products sold .......... 384,400 388,215 552,403 (831,584) 493,434 Selling, general and administrative ............... 59,694 35,615 38,769 -- 134,078 Amortization of intangible assets ....................... -- -- 3,938 -- 3,938 Restructuring and other expenses ..................... 24,628 -- -- -- 24,628 Other income, net .............. (577) (54) (351) -- (982) --------- --------- --------- --------- --------- Total costs and expenses, net. 468,145 423,776 594,759 (831,584) 655,096 --------- --------- --------- --------- --------- Income (loss) before equity in earnings of subsidiaries, interest expense and income taxes .......................... (12,666) 13,048 25,263 -- 25,645 Equity in earnings of subsidiaries .................... 17,923 -- -- (17,923) -- Interest expense ................. (32,161) (147) (11,981) -- (44,289) --------- --------- --------- --------- --------- Income (loss) before income taxes. (26,904) 12,901 13,282 (17,923) (18,644) Income tax (expense) benefit ..... 15,723 (4,347) (3,913) -- 7,463 --------- --------- --------- --------- --------- Net income (loss) ................ $ (11,181) $ 8,554 $ 9,369 $ (17,923) $ (11,181) ========= ========= ========= ========= =========36
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF INCOME THIRD QUARTER ENDED OCTOBER 1, 2006 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Eliminations Consolidated --------- --------- --------- --------- ---------Net sales .................................... $ 498,765 $ -- $ 31,584 $ -- $ 530,349 Intercompany net sales ....................... 103 310,258 19,933 (330,294) -- --------- --------- --------- --------- --------- Total net sales ............................ 498,868 310,258 51,517 (330,294) 530,349 --------- --------- --------- --------- --------- Costs and expenses, net: Cost of products sold ...................... 376,916 276,450 49,178 (330,294) 372,250 Selling, general and administrative............................. 86,495 19,059 9,128 -- 114,682 Intercompany licensing (income) expense, net........................................ 19,955 7,173 (27,128) -- -- Other (income) expense, net ................ 120 16 (4) -- 132 Transition service agreement (income) expense .......................... 25 (25) -- -- -- --------- --------- --------- --------- --------- Total costs and expenses, net .............. 483,511 302,673 31,174 (330,294) 487,064 --------- --------- --------- --------- --------- Income before equity in earnings of subsidiaries, interest expense and income taxes ................................ 15,357 7,585 20,343 -- 43,285 Equity in earnings of subsidiaries ........... 12,858 -- -- (12,858) -- Interest expense ............................. (8,581) (1,851) (5,339) -- (15,771) --------- --------- --------- --------- --------- Income before income taxes ................... 19,634 5,734 15,004 (12,858) 27,514 Income tax expense ........................... (2,575) (2,179) (5,701) -- (10,455) --------- --------- --------- --------- --------- Net income ................................... $ 17,059 $ 3,555 $ 9,303 $ (12,858) $ 17,059 ========= ========= ========= ========= =========37
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2007 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ----------- ----------- ----------- ----------- -----------Net sales ........................... $ 1,309,761 $ -- $ 564,241 $ -- $ 1,874,002 Intercompany net sales .............. -- 1,099,226 1,144,013 (2,243,239) -- ----------- ----------- ----------- ----------- ----------- Total net sales ................... 1,309,761 1,099,226 1,708,254 (2,243,239) 1,874,002 ----------- ----------- ----------- ----------- ----------- Cost and expenses, net: Costs of products sold ............ 1,113,635 955,378 1,546,542 (2,243,239) 1,372,316 Selling, general and administrative .................. 163,382 111,342 108,343 -- 383,067 Amortization of intangible assets .......................... -- -- 3,938 -- 3,938 Restructuring and other expenses ........................ 79,622 -- -- -- 79,622 Other income, net ................. (1,187) (159) (13) -- (1,359) ----------- ----------- ----------- ----------- ----------- Total costs and expenses, net ..... 1,355,452 1,066,561 1,658,810 (2,243,239) 1,837,584 ----------- ----------- ----------- ----------- ----------- Income(loss) before equity in earnings of subsidiaries, interest expense and income taxes ............................. (45,691) 32,665 49,444 -- 36,418 Equity in earnings of subsidiaries... 23,021 -- -- (23,021) -- Interest expense .................... (90,492) (2,371) (46,374) -- (139,237) ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes ... (113,162) 30,294 3,070 (23,021) (102,819) Income tax (expense) benefit ........ 42,217 (9,391) (952) -- 31,874 ----------- ----------- ----------- ----------- ----------- Net income (loss) ................... $ (70,945) $ 20,903 $ 2,118 $ (23,021) $ (70,945) =========== =========== =========== =========== ===========38
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF INCOME NINE MONTHS ENDED OCTOBER 1, 2006 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ----------- ----------- ----------- ----------- -----------Net sales ............................. $ 1,483,621 $ -- $ 87,592 $ -- $ 1,571,213 Intercompany net sales ................ 315 911,076 64,110 (975,501) -- ----------- ----------- ----------- ----------- ----------- Total net sales ..................... 1,483,936 911,076 151,702 (975,501) 1,571,213 ----------- ----------- ----------- ----------- ----------- Costs and expenses, net: Cost of products sold ............... 1,128,818 807,266 140,259 (975,501) 1,100,842 Selling, general and administrative .................... 261,470 60,500 25,592 -- 347,562 Intercompany licensing (income) expense, net .............. 59,357 20,724 (80,081) -- -- Other (income) expense, net ......... (418) 53 (21) -- (386) Transition service agreement (income) expense ............................ 75 (75) -- -- -- ----------- ----------- ----------- ----------- ----------- Total costs and expenses, net ....... 1,449,302 888,468 85,749 (975,501) 1,448,018 ----------- ----------- ----------- ----------- ----------- Income before equity in earnings of subsidiaries, interest expense and income taxes ................................ 34,634 22,608 65,953 -- 123,195 Equity in earnings of subsidiaries ......................... 43,121 -- -- (43,121) -- Interest expense ...................... (27,341) (6,025) (12,986) -- (46,352) ----------- ----------- ----------- ----------- ----------- Income before income taxes ............ 50,414 16,583 52,967 (43,121) 76,843 Income tax expense .................... (2,771) (6,301) (20,128) -- (29,200) ----------- ----------- ----------- ----------- ----------- Net income ............................ $ 47,643 $ 10,282 $ 32,839 $ (43,121) $ 47,643 =========== =========== =========== =========== ===========39
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2007 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Elim- Con- Company Subsidiary Subsidiaries inations solidated ----------- ----------- ----------- ----------- -----------ASSETS Current Assets: Cash and cash equivalents .................. $ -- $ 158 $ 34,342 $ -- $ 34,500 Accounts receivable, trade, net ............ 398,408 -- 25,878 -- 424,286 Accounts receivable, other ................. 1,594 3,053 7,662 -- 12,309 Income tax receivable ...................... -- -- 11,968 -- 11,968 Income tax receivable from parent corporation .............................. 10,016 -- -- -- 10,016 Inventories, net ........................... -- 161,229 100,796 -- 262,025 Deferred income tax assets ................. 37,073 -- -- -- 37,073 Other current assets ....................... 9,830 4,798 2,269 -- 16,897 Discontinued operations - current assets ................................... -- -- 2,844 -- 2,844 ----------- ----------- ----------- ----------- ----------- Total Current Assets ..................... 456,921 169,238 185,759 -- 811,918 Investment in subsidiaries ................... 1,651,035 -- -- (1,651,035) -- Intercompany loans including accrued interest ................................... 673,534 -- (673,534) -- -- Due from/(to) subsidiaries, net .............. (713,485) (160,336) 873,821 -- -- Property, plant and equipment, net ........... -- 230,038 455,110 -- 685,148 Goodwill, net ................................ 40,080 3,946 591,277 -- 635,303 Intangible assets ............................ -- -- 235,632 -- 235,632 Other noncurrent assets ...................... 76,931 22,172 26,290 -- 125,393 Discontinued operations - non-current assets ..................................... -- -- 1,355 -- 1,355 ----------- ----------- ----------- ----------- ----------- Total Assets ................................. $ 2,185,016 $ 265,058 $ 1,695,710 $(1,651,035) $ 2,494,749 =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current maturities of long-term debt........ $ 9,677 $ 5,791 $ 1,302 $ -- $ 16,770 Accounts payable ........................... 455 87,939 54,684 -- 143,078 Payable to related parties ................. 745 14,997 1,580 -- 17,322 Loans payable to parent corporation ........ 52,840 -- -- -- 52,840 Accrued liabilities ........................ 83,503 50,470 35,930 -- 169,903 Product warranty claims .................... 9,000 -- 4,500 -- 13,500 Discontinued operations - current liabilities .............................. -- -- 931 -- 931 ----------- ----------- ----------- ----------- ----------- Total Current Liabilities ................ 156,220 159,197 98,927 -- 414,344 Long-term debt ............................... 1,819,514 16,465 4,544 -- 1,840,523 Product warranty claims ...................... 19,634 -- 8,685 -- 28,319 Deferred income tax liabilities .............. 134,807 -- -- -- 134,807 Other liabilities ............................ 68,014 1,898 20,017 -- 89,929 ----------- ----------- ----------- ----------- ----------- Total Liabilities ............................ 2,198,189 177,560 132,173 -- 2,507,922 Total Stockholders' Equity (Deficit) ......... (13,173) 87,498 1,563,537 (1,651,035) (13,173) ----------- ----------- ----------- ----------- ----------- Total Liabilities and Stockholders' Equity (Deficit) ........................ $ 2,185,016 $ 265,058 $ 1,695,710 $(1,651,035) $ 2,494,749 =========== =========== =========== =========== ===========40
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2006 (THOUSANDS) Parent Co-Obligor Guarantor Elim- Con- Company Subsidiary Subsidiaries inations solidated ---------- ---------- ---------- ---------- ----------ASSETS Current Assets: Cash and cash equivalents .......... $ 18 $ 1,870 $ 5,889 $ -- $ 7,777 Accounts receivable, trade, net .... 177,137 -- 13,722 -- 190,859 Accounts receivable, other ......... 4,957 537 105 -- 5,599 Income tax receivable from parent corporation ...................... 9,132 -- -- -- 9,132 Inventories, net ................... 165,538 49,318 23,853 -- 238,709 Deferred income tax assets ......... 21,710 -- -- -- 21,710 Other current assets ............... 7,753 4,235 221 -- 12,209 ---------- ---------- ---------- ---------- ---------- Total Current Assets ............. 386,245 55,960 43,790 -- 485,995 Investment in subsidiaries ........... 626,836 -- -- (626,836) -- Intercompany loans including accrued interest ........................... 378,725 16,515 (395,240) -- -- Due from (to) subsidiaries, net ...... (720,388) (68,470) 788,858 -- -- Property, plant and equipment, net ... 45,274 250,100 116,355 -- 411,729 Goodwill, net ........................ 40,080 -- 24,714 -- 64,794 Other noncurrent assets .............. 44,723 22,543 57 -- 67,323 ---------- ---------- ---------- ---------- ---------- Total Assets ......................... $ 801,495 $ 276,648 $ 578,534 $ (626,836) $1,029,841 ========== ========== ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt $ -- $ 102,913 $ 5 $ -- $ 102,918 Accounts payable ................... 53,312 28,436 9,203 -- 90,951 Payable to related parties ......... 1,172 4,780 -- -- 5,952 Loans payable to parent corporation 52,840 -- -- -- 52,840 Accrued liabilities ................ 39,533 60,490 1,359 -- 101,382 Product warranty claims ............ 9,000 -- -- -- 9,000 ---------- ---------- ---------- ---------- ---------- Total Current Liabilities ........ 155,857 196,619 10,567 -- 363,043 Long-term debt ....................... 465,518 18,885 3 -- 484,406 Product warranty claims .............. 17,571 -- 401 -- 17,972 Deferred income tax liabilities ...... 39,551 -- -- -- 39,551 Other liabilities .................... 60,793 1,694 177 -- 62,664 ---------- ---------- ---------- ---------- ---------- Total Liabilities .................... 739,290 217,198 11,148 -- 967,636 Total Stockholders' Equity ........... 62,205 59,450 567,386 (626,836) 62,205 ---------- ---------- ---------- ---------- ---------- Total Liabilities and Stockholders' Equity .......................... $ 801,495 $ 276,648 $ 578,534 $ (626,836) $1,029,841 ========== ========== ========== ========== ==========41
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2007 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Consolidated ----------- ----------- ----------- -----------Cash and cash equivalents, beginning of period ........................................ $ 18 $ 1,870 $ 5,889 $ 7,777 ----------- ----------- ----------- ----------- Cash provided by (used in) operating activities: Net income (loss) ................................ (93,966) 20,903 2,118 (70,945) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation ................................... -- 27,715 22,940 50,655 Amortization ................................... -- 2,557 3,938 6,495 Restructuring and other expenses ............... 97,647 -- -- 97,647 Deferred income taxes .......................... (36,141) -- -- (36,141) Noncash interest charges ....................... 6,864 290 704 7,858 (Increase) decrease in working capital items ..... (160,860) 55,450 47,606 (57,804) Increase (decrease) in product warranty claims........................................... 2,063 -- (891) 1,172 (Increase) decrease in other assets .............. (3,671) (2,179) 663 (5,187) Increase in other liabilities .................... 3,261 203 1,296 4,760 Change in net receivable from/payable to related parties/parent corporations ............ (1,143,587) 21,622 1,132,451 10,486 Other, net ....................................... -- (54) 631 577 ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities........................................ (1,328,390) 126,507 1,211,456 9,573 ----------- ----------- ----------- ----------- Cash used in investing activities: Acquisition of ElkCorp, net of cash acquired of $0.1 million ....................... -- -- (944,838) (944,838) Capital expenditures and acquisitions ............ -- (28,380) (38,733) (67,113) ----------- ----------- ----------- ----------- Net cash used in investing activities .............. -- (28,380) (983,571) (1,011,951) ----------- ----------- ----------- ----------- Cash provided by (used in) financing activities: Proceeds from issuance of long-term debt ......... 2,292,849 -- 25,900 2,318,749 Repayments of long-term debt ..................... (928,834) (99,839) (225,332) (1,254,005) Distribution to parent corporation ............... (171) -- -- (171) Loan to parent corporation ....................... (148) -- -- (148) Financing fees and expenses ...................... (35,324) -- -- (35,324) ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities........................................ 1,328,372 (99,839) (199,432) 1,029,101 ----------- ----------- ----------- ----------- Net change in cash and cash equivalents ............ (18) (1,712) 28,453 26,723 ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period ........... $ -- $ 158 $ 34,342 $ 34,500 =========== =========== =========== ===========42
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED OCTOBER 1, 2006 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Consolidated --------- --------- --------- ---------Cash and cash equivalents, beginning of period .................................. $ 9 $ 180 $ 6,693 $ 6,882 --------- --------- --------- --------- Cash provided by (used in) operating activities: Net income ................................... 4,522 10,282 32,839 47,643 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation .............................. 3,093 28,242 5,247 36,582 Amortization .............................. -- 2,161 -- 2,161 Deferred income taxes ..................... (2,422) -- -- (2,422) Noncash interest charges .................. 2,933 993 -- 3,926 Increase in working capital items ............ (152,351) (20,536) (6,761) (179,648) Increase in long-term reserve for product warranty claims ................... 3,592 -- 54 3,646 (Increase) decrease in other assets .......... 40 (1,305) 101 (1,164) Decrease in other liabilities ................ (111) -- (5) (116) Change in net receivable from/payable to related parties/parent corporations ................ 83 4,550 (1,563) 3,070 Other, net ................................... (65) (31) 725 629 --------- --------- --------- --------- Net cash provided by (used in) operating activities ........................ (140,686) 24,356 30,637 (85,693) --------- --------- --------- --------- Cash used in investing activities: Capital expenditures and acquisition of manufacturing facility .................................. (7,659) (14,751) (32,420) (54,830) --------- --------- --------- --------- Net cash used in investing activities .......... (7,659) (14,751) (32,420) (54,830) --------- --------- --------- --------- Cash provided by (used in) financing activities: Proceeds from Senior Secured Revolving Credit Facility ................. 684,000 -- -- 684,000 Purchase of industrial development revenue bond certificates issued by the Company ............................ -- (6,325) -- (6,325) Repayments of long-term debt ................. (533,000) (2,253) (3) (535,256) Distributions to parent corporation .......... (521) -- -- (521) Loan to parent corporation ................... (141) -- -- (141) Financing fees and expenses .................. (1,990) -- -- (1,990) --------- --------- --------- --------- Net cash provided by (used in) financing activities ........................ 148,348 (8,578) (3) 139,767 --------- --------- --------- --------- Net change in cash and cash equivalents ........ 3 1,027 (1,786) (756) --------- --------- --------- --------- Cash and cash equivalents, end of period ...................................... $ 12 $ 1,207 $ 4,907 $ 6,126 ========= ========= ========= =========43BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
We are a leading national manufacturer and marketer of a broad line of asphalt and polymer-based roofing products and accessories for the residential and commercial roofing markets. On February 22, 2007, which we refer to as the date of acquisition, a subsidiary of Building Materials Corporation of America, which we refer to as BMCA, acquired approximately 90% of
the outstanding common shares ofElkCorp, which we refer to as Elk, a Dallas, Texas-based manufacturer of roofing products and buildingmaterials. Thematerials, and the remaining common shares of Elk were acquired on March 26, 2007, resulting in Elk becoming an indirect wholly-owned subsidiary of BMCA.We believe the Elk acquisition has strategically positioned us for future growth in the roofing industry and building products market. We also believe the acquisition of Elk has allowed us to build on our market leadership position and create comprehensive market-leading product offerings. Our principal lines of residential roofing shingles are the Timberline® series, the Sovereign® series, Premium Designer Shingles and Specialty Shingles. The Timberline® series includes the Timberline® Prestique® 30 High-Definition®, Timberline® Natural Shadow™, Timberline® Prestique® 40 High-Definition®, Timberline® Prestique® Lifetime High-Definition® and Timberline® Prestique® Grande shingles. Our premium designer shingles include the Slateline®, Grand Slate™, Grand Sequoia®, Grand Canyon™, Country Mansion®, Capstone®, and Camelot™ shingles. We sell specialty shingles under the TruSlate™ product line, which offers a slate shingle system. We supply the major components necessary to install a complete roofing system from underlayments to attic ventilation products and accessories, under the Weather Stopper® 3-Part Roof Protection System. In recent years, we have improved our sales mix of residential roofing products by increasing our emphasis on laminated shingles and accessory products (the Timberline® series, premium designer shingles and specialty shingles), which are generally sold at higher prices and more attractive profit margins than our standard asphalt strip shingle products (the Sovereign® series). See
Acquisitions.Acquisition. Unless otherwise indicated by the context,"we," "us,"“we,” “us,” and"our"“our” refer to Building Materials Corporation of America and its consolidatedsubsidiaries, including Elk. CRITICAL ACCOUNTING POLICIESsubsidiaries.Critical Accounting Policies
There have been no significant changes to our Critical Accounting Policies during the
nine monthnine-month period ended September30, 2007.28, 2008. For a further discussion on our Critical Accounting Policies, reference is made toManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations,"Critical“Critical AccountingPolicies"Policies” in ourAnnual Reportannual report on Form 10-K for the fiscal year ended December 31,2006,2007, which was filed with the Securities and Exchange Commission, which we refer to as the SEC, onFebruary 16, 2007,March 28, 2008, which we refer to as the20062007 Form 10-K.RESULTS OF OPERATIONS SalesResults of
roofingOperationsRoofing products
aresales is our dominant business, typically accounting for approximately 95% of our consolidated net sales. The main drivers of our roofing business include: thenation'snation’s aging housing stock; existing home sales; new home construction; larger new homes;increasedhome ownership rates; andsevereextreme weather and energy concerns. Our roofing business is also affected by raw material costs, including asphalt and other petroleum-based raw materials, as well as energy, and transportation and distribution costs.Third Quarter 2008 Compared With
Third Quarter 2007
Compared With Third Quarter 2006Our improved third quarter performance resulted principally from synergies from the successful integration of the Elk acquisition and higher roofing demand as a consequence of severe weather conditions in many parts of the country during the first nine months of 2008.
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
We recorded net income of $34.7 million in the third quarter of 2008 compared to a reported net loss of $11.2 million in the third quarter of
2007 compared to2007. Our reported net incomeof $17.1 millionin the third quarter of2006.2008 included $10.4 million of after-tax ($16.6 million pre-tax) restructuring and other expenses, of which $1.1 million after-tax ($1.8 million pre-tax) was included as a reduction in net sales and $5.1 million after-tax ($8.2 million pre-tax) was included in cost of products sold related to the integration of Elk operations. Our reported net loss in the third quarter of 2007 included $21.9 million of after-tax ($31.8 million pre-tax) restructuring and other expenses, of which $5.0 million after-tax ($7.2 million pre-tax) was included in cost of productssold related to the integration of Elk operations.sold. Included in restructuring and other expenses are plant closing expenses related to the closure of several manufacturing facilitiestogetheralong with the write-down of certain plant assetsat theserelated to the closed facilities in 2007, integration-related costs and the write-down of selected inventories. Excludingthese items,restructuring and other expenses, third quarter of 2008 net income was $45.1 million compared to the third quarter of 2007 net incomewasof $10.7million, which included the results of operations of Elk.million. Thedecrease 44BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)increase in reported net income for the third quarter of20072008 was primarily attributable toapproximately $28.5 million ofhigher income before interest expense andrestructuringincome taxes andother expenses due to the acquisition of Elk.lower interest expense.Net sales for the third quarter of
20072008 were$680.7$852.8 millionwhich included net sales related to Elkcompared tothird quarter of 2006 net sales of $530.3 million. Excluding net sales of Elk, the decrease inthird quarter of 2007 net sales of $680.7 million. The increase in third quarter of 2008 net sales was primarily due tolowerhigher net sales of residential roofing productsprimarily driven by lowerdue to higher average selling prices. The higher average selling prices realized in the third quarter of 2008 were implemented to mitigate significant increases in raw material costs, including asphalt and higher transportation costs. In the third quarter of 2008, there was also an increase in commercial roofing products unit volumesresulting from softer market demand.and average selling prices.Income before interest expense and income taxes in the third quarter of
20072008, as reported, was$25.7$94.5 million compared to reported income before interest expense and income taxes of$43.3$25.7 million in the third quarter of2006. Income2007. Our income before interest expense and income taxes in the third quarter of 2008, as reported, included $16.6 million of restructuring and other expenses, of which $1.8 million was included as a reduction in net sales and $8.2 million was included in cost of products sold. Our reported income before interest expense and income taxes in the third quarter of 2007 includedthe results of operations of Elk and$31.8 million of restructuring and other expenses, of which $7.2 million was included in cost of products sold.IncomeExcluding restructuring and other expenses, third quarter of 2008 income before interest expense and income taxesinwas $111.1 million compared to the third quarter of 2007 income before interest expense and income taxes of $57.5 million. The increase waspositively affectedprimarily due to synergies from the successful integration of the Elk acquisition and lower manufacturing costs, as well as higher average selling prices of both residential and commercial roofing products and higher commercial roofing unit volumes. These benefits were partially offset bythe operating results of Elk, lowerhigher raw material costs, including asphalt, andlower selling, general and administrative expenses mostly due to a decline in volume-related distribution costs, which was more than offset by a decrease in net sales of residential roofing products.higher transportation costs.Interest expense in the third quarter of
2007 increased2008 decreased to$44.3$39.5 millionascompared to$15.8$44.3 million in the third quarter of2006.2007. The decrease in third quarter of 2008 interest expense was primarily due to a slightly lower average interest rate.Business Segment Information
Net Sales.Net sales of roofing products increased to $817.5 million for the third quarter of 2008 compared to $636.9 million for the third quarter of 2007. The increase in third quarter of
2007 interest expense2008 net sales was primarily due to higheraverage borrowings and a slightlynet sales of residential roofing products due to higher averageinterest rate due to the acquisition of Elk. BUSINESS SEGMENT INFORMATION Net Sales. Net sales of roofing products forselling prices. The higher average selling prices realized in the third quarter of20072008 were$637.8 million, which included net sales of roofing products relatedimplemented toElk compared to $507.6 million formitigate significant increases in raw materialBUILDING MATERIALS CORPORATION OF AMERICA
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
costs, including asphalt, and higher transportation costs. In the third quarter of
2006. Excluding net sales of2008, there was also an increase in commercial roofing productsof Elk, the decrease in net sales of roofing products was primarily driven by lowerunit volumesof residential roofing products resulting from softer market demand.and average selling prices. Net sales of specialty building products and accessorieswere $42.9decreased to $35.3 million for the third quarter of 2008 compared with $43.8 million for the third quarter of 2007which includeddue to softer new construction and remodeling demand.Gross Margin. Our overall gross margin was $250.4 million or 29.4% of net sales
of specialty building products and accessories related to Elk as compared with $22.7 millionfor the third quarter of2006. 45BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Gross Margin. Our overall gross margin was2008 compared with $187.3 million or 27.5% of net sales for the third quarter of2007 as compared with $158.1 million or 29.8% of net sales2007. Included in our overall gross margin for the third quarter of2006.2008 were $10.0 million of restructuring and other expenses, of which $1.8 million was included as a reduction in net sales and $8.2 million was included in cost of products sold. Included in our overall gross margin for the third quarter of 2007waswere $7.2 million of restructuring and other expenses, which were included in cost of productssold, and gross margin related to Elk. Oursold. The increase in our overall gross marginwas positively affectedis primarily attributable to synergies from the successful integration of the Elk acquisition and lower manufacturing costs, as well as higher average selling prices of both residential and commercial roofing products and higher commercial unit volumes. These benefits were partially offset bythe gross margin related to Elk and lowerhigher raw material costs, includingasphalt, which was more than offset by a decrease in residential roofing net sales driven by lower unit volumes.asphalt.Nine Months 2008 Compared With
Nine Months 2007
Compared With Nine Months 2006We recorded net income of $47.4 million in the first nine months of 2008 compared to a reported net loss of $70.9 million in the first nine months of
2007 compared to2007. Our reported net incomeof $47.6 millionin the first nine months of2006.2008 included $37.9 million of after-tax ($60.7 million pre-tax) restructuring and other expenses, of which $2.9 million after-tax ($4.6 million pre-tax) was included as a reduction in net sales and $13.9 million after-tax ($22.3 million pre-tax) was included in cost of products sold related to the integration of Elk operations. Our reported net loss in the first nine months of 2007 included $67.3 million of after-tax ($97.6 million pre-tax) restructuring and other expenses, of which $12.4 millionafter taxafter-tax ($18.0 million pre-tax) was included in cost of products sold,related to the integration of Elk operationsand $16.0 million of after-tax ($23.2 million pre-tax) debt restructuring costs also related to46BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)the acquisition. Included in restructuring and other expenses are plant closing expenses related to the closure of several manufacturing facilitiestogetheralong with the write-down of certain plant assetsat theserelated to the closed facilities in 2007, integration-related costs and the write-down of selected inventories. Excludingthese items,restructuring and other expenses, the first nine months of 2008 net income was $85.3 million compared to the first nine months of 2007 net incomewasof $12.4 millionwhichafter also adjusting for the $23.2 million debt restructuring costs includedElk's operations from the date of acquisition.in interest expense. Thedecreaseincrease inreportednet income for the first nine months of20072008 was primarily attributable toapproximately $92.8 million ofhigher income before interest expense andrestructuring and other expenses due to the acquisition of Elk.income taxes.Net sales for the first nine months of
20072008 were$1,874.0$2,160.2 millionwhich included net sales related to Elk from the date of acquisitioncompared tothe first nine months of 2006 net sales of $1,571.2 million. Excluding net sales of Elk, the decrease inthe first nine months of 2007 net sales of $1,874.0 million. The increase in net sales was primarily due tolowerthe first nine months of 2008 residential roofing products net sales including a full nine months ofbothElk net sales, as compared to the first nine months of 2007 residentialand commercialroofingproducts. The decreaseproducts net sales, which only included Elk net sales since the date of acquisition. In addition, the increase in net sales of residential roofing products wasprimarily driven by lower unit volumes resulting fromdue to higher average selling prices. The higher average selling prices were implemented to mitigate significant increases in raw material costs, including asphalt, and higher transportation costs. In thesofter market demand, while the decreasefirst nine months of 2008, there was also an increase in commercial roofing productswas primarily driven by lowerunit volumespartially offset by a higherand average sellingprice.prices.BUILDING MATERIALS CORPORATION OF AMERICA
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
Income before interest expense and income taxes in the first nine months of
20072008, as reported, was$36.4$195.3 million compared to$123.2reported income before interest expense and income taxes of $36.4 million in the first nine months of2006.2007. Our reported income before interest expense and income taxes in the first nine months of 2008 included $60.7 million of restructuring and other expenses, of which $4.6 million was included as a reduction in net sales and $22.3 million was included in cost of products sold. Our reported income before interest expense and income taxes in the first nine months of 2007 includedthe results of operations of Elk and$97.6 million of restructuring and other expenses, of which $18.0 million was included in cost of products sold.IncomeExcluding restructuring and other expenses, the first nine months of 2008 income before interest expense and income taxes was $256.0 million compared to the first nine months of 2007 income before interest expense and income taxes of $134.0 million. The increase in the first nine months of20072008 income before interest expense and income taxes waspositively affectedprimarily due to synergies from the successful integration of the Elk acquisition and lower manufacturing costs, as well as higher average selling prices of both residential and commercial roofing products and higher commercial roofing unit volumes. These benefits which were partially offset bythe operating results of Elk, lowerhigher raw material costs, including asphalt, andlower selling, general and administrative expenses mostly due to a decline in volume-related distribution costs, which was more than offset by a decrease in net sales of residential roofing products and commercial roofing products.higher transportation costs.Interest expense in the first nine months of
2007 increased2008 decreased to$139.2$119.4 millionascompared to$46.4$139.2 million in the first nine months of2006. Interest expense in the first nine months of2007, which included $23.2 million of debt restructuring costsand an additional $3.2 millionrelated to the acquisition ofinterest expense of Elk from the date of acquisition. Included inElk. The debt restructuring costsare thein 2007 were comprised of tender premiums and the write-off of the remaining deferred financing fees and discounts associated with certain of the then outstanding 8% Senior Notes due 2007, which we refer to as the 2007 Notes, and the 8% Senior Notes due 2008,senior noteswhich we refer to as the 2008 Notes, of BMCA and all of the then outstanding senior notes ofElk, all of which were redeemed in the first quarter of 2007.Elk. Excluding the impact of47BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) thethese debt restructuring costs,and the additional Elk interest,interest expense for the first nine months of 2007 was$112.8$116.0 million.The increaseAfter excluding the debt restructuring costs in 2007, the first nine months of20072008 increase in interest expense was primarily due to higher average borrowings,andpartially offset by aslightlylower average interest rate. The higher average borrowings are primarily due to the 2008 interestrate, dueexpense including a full nine months of interest associated with borrowings related to the acquisition ofElk. BUSINESS SEGMENT INFORMATIONElk, while 2007 interest expense included a partial nine months of interest expense associated with these borrowings since the date of acquisition.Business Segment Information
Net Sales.Net sales of roofing products
for the first nine months of 2007 were $1,773.0 million, which included net sales of roofing products relatedincreased toElk compared to $1,509.6$2,047.7 million for the first nine months of2006. Excluding net sales2008 compared with $1,758.7 million for the first nine months ofroofing products of Elk, the decrease2007. The increase in net sales of roofing products wasdriven by a decrease inprimarily due to the first nine months of 2008 residential roofing products net sales including a full nine months of Elk net sales as compared to the first nine months of 2007 residential roofing products net sales, which only included Elk net sales since the date of acquisition. In addition, the increase in net sales of residential roofing products wasprimarily driven by lower unit volumes resulting from softer market demand,due to higher average selling prices. The higher average selling prices were implemented to mitigate significant increases in raw material costs, including asphalt, anda decreasehigher transportation costs. In the first nine months of 2008, there was also an increase in commercial roofing productswhich was primarily driven by lowerunit volumespartially offset by a higherand average sellingprice.prices. Net sales of specialty building products and accessorieswere $101.0decreased to $112.5 million for the first nine months of 2008 compared with $115.3 million for the first nine months of 2007which includeddue to softer new construction and remodeling demand.Gross Margin. Our overall gross margin was $616.9 million or 28.6% of net sales
of specialty building products and accessories related to Elk as compared with $61.6 millionfor the first nine months of2006. Gross Margin. Our overall gross margin was2008 compared with $501.7 million or 26.8% of net sales for the first nine months of2007 as compared with $470.4 million or 29.9% of net sales2007. Included in our overall gross margin for the first nine months of2006.2008 were $26.9 million of restructuring and other expenses, of which $4.6 million was included as a reduction in net sales and $22.3 million was included in cost of productsBUILDING MATERIALS CORPORATION OF AMERICA
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
sold. Included in our overall gross margin for the first nine months of 2007
waswere $18.0 million of restructuring and other expenses, which were included in cost of productssold, and gross margin related to Elk. Oursold. The increase in our overall gross marginwas positively affected byis primarily due to synergies from thegross margin related tosuccessful integration of the Elk acquisition and lowerraw materialmanufacturing costs,including asphalt, which was more than offset by a decrease in net salesas well as higher average selling prices of both residential and commercial roofing productsprimarily driven by lowerand higher commercial roofing unit volumes.48BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) LIQUIDITY AND FINANCIAL CONDITIONThese benefits were partially offset by higher raw material costs, including asphalt.Liquidity and Financial Condition
Cash Flows and Cash Position
Sales of roofing products and specialty building products and accessories in the northern regions of the United States generally decline in the late fall and winter months due to cold weather. In addition,
adverseextreme weather conditions can result in higher customer demand during our peak operating season depending on the extent and severity of the damage from thesesevereextreme weather conditions. Due to the seasonal demands of our business, together with extreme weather conditions, we generally have negative cash flows from operations during the first six months of our fiscal year. Our negative cash flows from operations are primarily driven by our cash invested in both accounts receivable and inventories to meet these seasonal operating demands. Generally, in the third and fourth quarters of our fiscal year, our cash flows from operations become positive for each quarter, as our investment in inventories and accounts receivable no longer continues to increase, as is customary in the first six months of our fiscal year. Our seasonal working capital needs, together with our debt service obligations, capital expenditure requirements and other contracted arrangements, adversely impact our liquidity during this period. We rely on our cash and cash equivalents on hand and our $600.0 million Senior Secured Revolving Credit Facility due February 2012, which we refer to as our Senior Secured Revolving Credit Facility (see Long-Term Debt), to support our overall cash flow requirements during these periods. We expect to continue to rely on our cash and cash equivalents on hand and external financings to maintain operations over the short and long-term and to continue to have access to the financing markets, subject to the then prevailing market terms and conditions.Net cash outflow from operating and investing activities was
$1,002.4$91.2 million during the first nine months of2007,2008, including$944.8 million related to the acquisition of Elk, net of $0.1$84.0 million of cashacquired,used in operations, the reinvestment of$67.1$28.6 million for capital programs,and an acquisition of land and buildings in Fresno, California and $9.5partially offset by $21.4 million ofcash provided by operations. 49BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)proceeds from the sale of assets.Cash invested in additional working capital totaled
$57.8$292.8 million during the first nine months of2007,2008, reflecting an increase in total accounts receivable of$143.4$330.2 million, due to the seasonality of our business,a $93.5an $11.8 million decreasein inventories to meet our anticipated operating demands anddue to thedeclinecollection of an income tax receivable, a $6.8 million increase inthe housing market,inventories, a $4.6 million increase infederal income taxes receivable related to Elk, a $6.1 million decrease inother current assets, a$21.4$101.5 million increase in accounts payable and accrued liabilities and an increase of$30.8$64.5 million in payments for restructuring and other expenses. The net cashprovided byused in operating activities also included a$10.5$23.2 million net increase in the payable to related parties/parent corporations, primarilyattributeddue toan $11.4 milliona seasonal increase in amounts due under our long-term granule supply agreement with an affiliatedcompany partially offset by a $0.9 million increase in federal income taxes receivable, pursuant to our Tax Sharing Agreement with our parent corporation.company. In addition, net cashprovided byused in operating activities included$97.6an $11.6 million increase in other non-current assets primarily reflecting a $7.0 million increase in deferred warranty-related program costs, net of amortization; and $60.7 million in restructuring and other expenseswhich primarily included a $49.8 million write-down of property, plant and equipment(seeRestructingRestructuring and OtherExpenses)Expenses below).Net cash provided by financing activities totaled
$1,029.1$242.7 million during the first nine months of2007,2008, including$2,318.7$830.0 million of aggregate proceeds from the issuance of long-term debt, related to the first nine months of20072008 cumulative borrowingsof $992.8 millionunder ournew $600.0Senior Secured Revolving Credit Facility. Financing activitiesBUILDING MATERIALS CORPORATION OF AMERICA
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
also included $574.0 million in aggregate repayments of long-term debt, of which $566.0 million related to the first nine months of 2008 cumulative repayments under our Senior Secured Revolving Credit Facility and
our old $450.0$4.9 millionSenior Secured Revolving Credit Facility, which we referrelated toasourOld Senior Secured Revolving Credit Facility. In addition, proceeds from the issuance of long-term debt included $975.0 million under our new$975.0 million Term Loan Facility, which we refer to as the TermLoan, $325.0 million under our new $325.0 million Junior Lien Term Loan Facility, which we refer to as the Junior Lien Term Loan and $25.9 million of borrowings under the old Elk Revolving Credit Facility, see (Long-Term Debt). Financing activities also included $1,254.0 million in aggregate repayments of long-term debt, of which $771.8 million related to the first nine months of 2007 cumulative repayments under our Senior Secured Revolving Credit Facility and our Old Senior Secured Revolving Credit Facility, $28.6 million related to repayments under the old Elk Revolving Credit Facility and $7.3 million related to repayments under the TermLoan.In addition, repayments of long-term debt included $97.5 million related to our outstanding 8% Senior Notes due 2007, which we refer to as the 2007 Notes, $150.1 million related to our outstanding 8% Senior Notes due 2008, which we refer to as the 2008 Notes, $25.0 million related to the then outstanding Elk 4.69% Senior Notes due 2007, $60.0 million related to the then outstanding Elk 6.99% Senior Notes due 2009, $60.0 million related to the then outstanding Elk 7.49% Senior Notes due 2012 and $50.0 million related to the then outstanding Elk 6.28% Senior Notes due 2014. 50BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)In addition, financing activitiesalsoincluded$35.3a $4.8 million repurchase of industrial development revenue bond certificates, aggregate principal repayments of $5.2 million on our capital leases, $2.5 million in cash dividends paid to our parent corporation, $0.2 million in distributions and loans to our parent corporation and $0.6 million in financing fees and expenses primarily related to debt restructuringcosts, including the tender premiums and write-off of the remaining deferred financing fees and discounts associated with the aforementioned senior notes and the Old Senior Secured Revolving Credit Facility. Acquisitions On February 9, 2007, BMCAcosts.Acquisition
Sub Inc., which we refer to as BMCA Acquisition Sub, and BMCA Acquisition Inc., which together with BMCA Acquisition Sub, we collectively refer to as the Purchasers, both wholly-owned subsidiaries of BMCA, entered into a merger agreement with Elk, which we refer to as the Merger Agreement.On February 22, 2007,
an equity tender offer closed, and, asaresult thereof (and the purchasesubsidiary ofshares from one of its affilates),BMCAAcquisition Sub ownedacquired approximately 90% ofElk'sElk common shares at a purchase price of $43.50 per common share.In accordance with the Merger Agreement,On March 26, 2007, we acquired the remaining Elk common shareswere convertedin a second step mergerintoin exchange for the right to receive $43.50 per share incash. On March 26, 2007, BMCA completed the merger, pursuant tocash, whichBMCA Acquisition Sub was merged with and intoresulted in Elkwhich then becamebecoming an indirect wholly-owned subsidiary of BMCA.TheWe completed the acquisition of the Elk common shareswas completedat a purchase price of approximately$944.8$945.5 million,net of $0.1 million of cash acquired andnet of the repayment of $195.0 million of the then outstanding Elk senior notes, which were assumed in connection with the acquisition and repaid in March 2007.We financed the purchase of Elk,
andrefinanced certain ofBMCA'sBMCA’s then outstanding debt and repaid all ofElk'sElk’s then outstanding senior notes of $195.0 million with the proceeds from our new senior secured credit facilities. Our new senior secured credit facilities consist of a $600.0 million Senior Secured Revolving Credit Facility, a $975.0 million Term Loan Facility and a $325.0 million Junior Lien Term Loanfacility maturing on September 15, 2014.Facility, which we refer to as the Junior Lien Term Loan, and collectively with the Senior Secured Revolving Credit Facility and the Term Loan, we refer to as the Senior Secured Credit Facilities. SeeLong-Term Debt.Note 7.We
believeaccounted for theacquisition of Elk will strategically position us for future growth in the roofing industry and other building product markets. The acquisition is expected to provide us with an increased market leadership position, create comprehensive market-leading product offerings, generate natural cost savings from synergies, including plant rationalization and re-alignment of distribution networks, raw material procurement, administrative and logistical efficiencies, and leverage the organizational strengths of both BMCA and Elk. TheElk acquisitionwas accounted forunder the purchase method of accounting as prescribed by Statement of Financial Accounting Standards, which we refer to as SFAS, No. 141"Business Combinations,"“Business Combinations”, which we refer to as SFAS No. 141, which requires the total purchase price to be allocated to the fair value of assets acquired and liabilities assumed based on their fair values at the date of acquisition, with amounts exceeding their fair value being51BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)recorded as goodwill.TheDuring the first quarter ended March 30, 2008, we completed our purchase price allocationprocess required an analysisofplant, property and equipment, inventories, customer lists and relationships, contractual commitments and brand strategies, among others to identify and recordthefair value ofassets acquired and liabilitiesassumed. In connection with the acquisition, we used an estimated economic life of 5 to 40 years for land improvements, 10 to 40 years for buildings and building improvements, 3 to 30 years for machinery and equipment, which includes furniture and fixtures, and 1 to 25 years for intangible assets. In valuing acquired assets andassumedliabilities, fair values were based on, but not limited to: future expected discounted cash flows for trade names and customer relationships, current replacement costs for similar capacity and obsolescence for certain fixed assets and inventory; and comparable market rates for contractual obligations, including real estate and liabilities. We performed a valuation analysis of the assets and liabilities acquiredfrom Elkwhich was substantially completed during the three-month period ended September 30, 2007, and we expect to finalize our purchase price allocation during the fourth quarter of 2007. At September 30, 2007, we recorded $570.5 million of goodwill and $235.6 million of intangible assets, net of amortization of $3.9 million(seeNote 5 to Consolidated Financial Statements), related to the acquisition of Elk based on the completion of our valuation analysis.table below). The operating results oftheElkacquisitionare included in our results of operations from the date of acquisition.The following
unaudited pro-forma consolidated resultstable represents the final fair values ofoperations assume the acquisition of Elk was completed as of January 1st for each of the three-monthassets acquired andnine-month periods presented below: THIRD QUARTER ENDED NINE MONTHS ENDED SEPT. 30, OCT. 1, SEPT. 30, OCT. 1, 2007 2006 2007 2006 -------- -------- ---------- ---------- (MILLIONS) Net sales ................ $ 680.7 $ 748.5 $ 1,947.7 $ 2,274.3 -------- -------- ---------- ---------- Income before interest and income taxes ............ 23.8 61.4 6.7 184.4 -------- -------- ---------- ---------- Net income (loss) ........ $ (13.9) $ 14.0 $ (100.1) $ 43.7 ======== ======== ========== ========== The unaudited pro-forma consolidated results of operations for the three-month and nine-month periods ended September 30, 2007 include $31.8 and $97.6 million pre-tax ($21.9 and $67.3 million after-tax) of restructuring and other expenses, respectively, of which $7.2 and $18.0 million pre-tax ($5.0 and $12.4 million after-tax) was included in cost of products sold, 52BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) respectively,liabilities assumed related to the acquisition ofElk. In addition,Elk as of theunaudited pro-forma consolidated resultsdate ofoperations for the nine-month period ended September 30, 2007 above includes $13.6 millionacquisition with amounts paid in excess ofmerger-related expenses of Elk and $23.2 million of debt restructuring costs of both BMCA and Elk related to the acquisition of Elk. Our pro-forma results include a reduction in compensation expense related to Elk employees who were terminated due to the acquisition of Elk of $1.2 and $3.1 million for the three-month periods ended September 30, 2007 and October 1, 2006, respectively and $6.0 and $9.2 million for the nine-month periods ended September 30, 2007 and October 1, 2006, respectively. Our pro-forma results also include a reduction in lease expense for excess lease capacity at two Elk facilities. The reduction in lease expense was computed based on the remaining lease payments discounted on a present value basis, straight-lined over the applicable pro-forma period with the present value offsettheir fair values being recordedin interest expense. For the three-month periods ended September 30, 2007 and October 1, 2006, we recorded an increase/(decrease) in lease expense of $0.5 and $(0.5) million, respectively and an (increase)/decrease to interest expense of $0.3 and $(0.3) million, respectively. For the nine-month periods ended September 30, 2007 and October 1, 2006, we recorded a reduction in lease expense of $0.5 and $1.6 million, respectively and an increase to interest expense of $0.3 and $0.9 million, respectively. In addition, our pro-forma results for the three-month period ended October 1, 2006 and the nine-month periods ended September 30, 2007 and October 1, 2006 include additional interest expense associated with variable rate debt instruments based on LIBOR plus a specified fixed margin, due to the acquisition of Elk. A 1/8% change in these variable interest rates would result in a plus or minus $0.5 million in interest expense for the three-month period ended October 1, 2006 and a plus or minus $0.3 and $1.4 million in interest expense for the nine-month periods ended September 30, 2007 and October 1, 2006, respectively. Pro-forma data may not be indicative of the results that would have been achieved had these events actually occurred at the beginning of the periods presented, nor does it intend to be a projection of future results.as goodwill.
Goodwill
$
588,720
Total assets acquired
$
1,411,460
Total liabilities assumed
(465,941
) Net assets acquired
$
945,519
During the second quarter of 2007, we initiated
the implementation ofa restructuring plan, which we refer to as the 2007 Restructuring Plan, (see Restructuring and Other Expenses), whichwaswe formulated in connection with theFebruary 22, 2007acquisition of Elk.See Restructuring and Other Expenses below. InAlso, in connection with the Elk acquisition and pursuant to SFAS No. 141 and Emerging Issues Task Force, which we refer to as EITF, No. 95-3 “Recognition ofElk,Liabilities in Connection with a Purchase Business Combination,” wecurrentlyidentified$69.6$8.7 million in purchase accounting adjustments, whichprimarily relaterelated tothe establishment of a change of control accrual,employee severance payments to former Elk53employees and lease termination expenses. As of September 28, 2008, we had BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) employees
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
paid $2.9 million for severance costs and
integration-related expenses, which include Elk inventory-related valuation write-downs,$1.3 million for lease terminationexpenses and other integration-relatedexpenses.Furthermore, we completed our valuation analysis of property, plant and equipment and intangible assets acquired from Elk during our three-month period ended September 30, 2007. We account for our purchase accounting adjustments in accordance with the provisions of SFAS No. 141. We have incurred $64.0 million of the aforementioned purchase accounting adjustments as of September 30, 2007, of which $3.2 million was incurred in the third quarter of 2007, $54.6 million was incurred in the second quarter of 2007 and $6.2 million was incurred in the first quarter of 2007, and which are included in the purchase price allocation.We expect toaccrue the remaining $5.6make approximately $4.5 million ofidentified purchase accounting adjustments as incurred and make the remaining cashlease termination paymentsrelated to our accrual by our first quarter ending 2008.through 2019. Our employee severance payments included the termination of approximately125130 Elk employees, including certain managementlevelpositions, in the manufacturing and selling and administrativefunctionalareas.54BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) EMPLOYEE DISCONTINUED INTEGRATION SEVERANCE OPERATIONS CHANGE OF PURCHASE ACCOUNTING ACCRUALS EXPENSES PAYMENTS EXPENSES CONTROL TOTAL - ---------------------------- -------- -------- -------- -------- -------- (THOUSANDS)Beginning Balance, as of December 31, 2006 $ -- $ -- $ -- $ -- $ -- Accrued costs incurred due to the acquisition of Elk 5,785 -- 415 -- 6,200 -------- -------- -------- -------- -------- Balance, as of April 1, 2007 5,785 -- 415 -- 6,200 Additional accrued costs incurred due to the acquisition of Elk 19,624 2,400 -- -- 22,024 Accrued costs incurred related to change in control escrow account -- -- -- 32,574 32,574 Cash Payments (224) (1,773) -- -- (1,997) Amount charged to directly write-off inventory (4,071) -- -- -- (4,071) Non-cash items -- -- -- (8,889) (8,889) -------- -------- -------- -------- -------- Balance, as of July 1, 2007 21,114 627 415 23,685 45,841 Additional accrued costs incurred due to the acquisition of Elk 3,250 -- -- -- 3,250 Cash payments (2,446) (577) -- -- (3,023) Amount charged to directly write-off inventory (517) -- -- -- (517) Non-cash items -- -- -- (7,456) (7,456) -------- -------- -------- -------- -------- Ending Balance, as of September 30, 2007 $ 21,401 $ 50 $ 415 $ 16,229 $ 38,095 ======== ======== ======== ======== ========Restructuring and Other Expenses
During the second quarter of 2007, we initiated our 2007 Restructuring Plan, which was formulated in connection with the acquisition of Elk on February 22, 2007.The 2007 Restructuring Plan was created to eliminate cost redundancies recognized due to the acquisition of Elk and to reduce our current cost
structure andstructure. The 2007 Restructuring Plan is expected to be fully implemented by the end of ourfirst quarter offiscal year ending December 31, 2008. We account for our restructuring activities in accordance withthe guidance ofSFAS No. 146,"Accounting“Accounting for Costs Associated with Exit or DisposalActivities" which we refer to as SFAS No. 146 andActivities,” SFAS No. 144,"Accounting“Accounting for the Impairmentandor Disposal of Long-LivedAssets" which we refer to as SFASAssets” and EITF No.144. 55BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)96-9 “Classification of Inventory Markdowns and Other Costs Associated with Restructuring.”2007 Restructuring and Other Expenses
In connection with the acquisition of Elk, we
haveidentifiedapproximately $114.6$191.9 million in restructuring and other expenses in our fiscal year ended December 31, 2007, of which$49.8$97.0 millionrelatesrelated to property, plant and equipment write-downs at certain of our existing manufacturing facilities and$18.4$25.1 millionofrelated to plant closing expenses.The plants included in restructuring and other expenses reflected above were Erie, Pennsylvania; Stockton, California; Millis, Massachusetts; Mobile, Alabama; Dallas, Texas and Hollister, California.Restructuring and other expenses alsoincludeincluded $2.0 million in employee severance payments and$44.4$67.8 million in integration-related expenses, which primarilyconsistconsisted of$18.0$24.3 million of inventory-relatedvaluationwrite-downs, $15.1 million of restructuring-related sales discounts, $1.4 million of lease termination expenses and$25.0$27.0 million of other integration expenses.We recorded
$97.6$181.0 million of the aforementioned restructuring and other expenses in our statement of operations as ofSeptember 30, 2007, $31.8 million of which was recorded in the third quarter ofDecember 31, 2007, of which$7.2$15.1 million was reflected as a reduction in net sales due to restructuring-related sales discounts, $24.3 million was charged to cost of products sold and$24.6$141.6 million was charged to restructuring and other expenses.Nine Months Ended September 28, 2008 Restructuring and Other Expenses
We identified an additional $58.4 million of restructuring and other expenses during our nine months ended September 28, 2008, which included $12.7 million of plant closing expenses, $2.9 million in employee severance payments and $42.8 million in integration-related expenses. Integration-related expenses primarily consisted of $22.3 million of inventory write-downs, $4.6 million of restructuring-related sales discounts and $15.9 million of other integration expenses.
We recorded $60.7 million of the identified restructuring and other expenses in our statement of
operations. Inoperations in thesecond quarter of 2007 we recorded $65.8 million of restructuring and other expenses,nine-month period ended September 28, 2008, of which$10.8$4.6 million was reflected as a reduction in net sales due to restructuring-related sales discounts, $22.3 million was charged to cost of products sold and$55.0$33.8 million was charged to restructuring and otherexpenses in our statement of operations.expenses. We expect to incur the remaining$17.0$8.6 million of identifiedrestructuringintegration and other expenses and to make the remaining cash payments related to our accrualbyonce all matters with the acquisition of Elk are resolved and completed.BUILDING MATERIALS CORPORATION OF AMERICA
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
The table below details our
first quarter ending 2008.restructuring and other expense accruals and charges made against the accrual during our nine months ended September 28, 2008:
Restructuring and Other Expenses
Plant Closing Expenses
Employee Severance Payments
Integration Expenses
Total
(Thousands)
Beginning balance, as of December 31, 2007
$
2,905
$
-
$
10,945
$
13,850
Current period costs, net
14,364
2,863
43,504
60,731
Cash payments
(19,967
)
(2,863
)
(41,648
)
(64,478
)
Amount related to property, plant and equipment for asset adjustments
6,228
-
(309
)
5,919
Amount charged to write-off inventory
(63
)
-
(3,010
)
(3,073
)
Non-cash items
-
-
(445
)
(445
)
Ending balance, as of September 28, 2008
$
3,467
$
-
$
9,037
$
12,504
Our aggregate employee severance payments included the termination of approximately
70100 BMCA employees, including certain management positions, in the manufacturing and selling and administrativefunctionalareas.56BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
PP&E PLANT EMPLOYEE RESTRUCTURING AND WRITE- CLOSING SEVERANCE INTEGRATION OTHER EXPENSES DOWN EXPENSES PAYMENTS EXPENSES TOTAL -------- -------- -------- -------- -------- (THOUSANDS)Beginning Balance, as of December 31, 2006 $ -- $ -- $ -- $ -- $ -- -------- -------- -------- -------- -------- Accrued costs incurred due to the acquisition of Elk -- -- -- -- -- -------- -------- -------- -------- -------- Balance, as of April 1, 2007 -- -- -- -- -- Additional accrued costs incurred due to the acquisition of Elk 41,919 7,234 2,000 14,640 65,793 Cash Payments -- (2,784) (800) (1,800) (5,384) Amount charged to property, plant and equipment for asset write-down (41,919) -- -- -- (41,919) -------- -------- -------- -------- -------- Balance, as of July 1, 2007 -- 4,450 1,200 12,840 18,490 Additional accrued costs incurred due to the acquisition of Elk 7,888 4,475 -- 19,491 31,854 Cash payments -- (4,475) (1,200) (19,768) (25,443) Amount charged to property, plant and equipment for asset write-down (7,888) -- -- -- (7,888) Amount charged to write-off inventory -- (1,545) -- (31) (1,576) Non-cash items -- -- -- (488) (488) -------- -------- -------- -------- -------- Ending Balance, as of September 30, 2007 $ -- $ 2,905 $ -- $ 12,044 $ 14,949 ======== ======== ======== ======== ========Long-Term Debt
Long-term debt consists of the following at September 28, 2008 and December 31, 2007:
September 28, 2008
December 31, 2007
(Thousands)
8% Senior Notes due 2008
$
4,876
$
4,874
7 3/4% Senior Notes due 2014
250,523
250,590
Borrowings under the Senior Secured Revolving Credit Facility
386,000
122,000
Term Loan
960,466
965,362
Junior Lien Term Loan
325,000
325,000
Obligations under capital leases
56,733
61,997
Industrial development revenue bonds
2,820
7,710
Chester Loan
5,927
8,241
Other notes payable
7,792
8,251
Total
2,000,137
1,754,025
Less current maturities
(25,386
)
(24,630
)
Long-term debt less current maturities
$
1,974,751
$
1,729,395
On February 22, 2007, BMCA
and the Purchasersentered intosenior secured credit facilitiesSenior Secured Credit Facilities consisting of anew $975$975.0 million Term Loan, anew $600$600.0 million Senior Secured Revolving Credit Facility and a$325$325.0 million bridge loan facility, whichwe refer to as the Bridge Loan, whichwas subsequently replaced by a$325$325.0 million Junior Lien Term Loan, whichwecollectivelyrefer to asfinanced theCredit Facilities. 57purchase of Elk and repaid certain existing BMCA debt facilities and Elk senior note debt. BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) The initial borrowings under these Credit Facilities were used (i) to pay for shares tendered
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
On April 10, 2008, we repurchased and retired $4.8 million of industrial development revenue bond certificates issued by
Elk shareholders in an equity tender offer, (ii) to repay amounts outstanding under BMCA's Old Senior Secured Revolving Credit Facility, (iii) to make payments in connection with the completion by BMCA and Building Materials Manufacturing Corporation, which we refer to as BMMC, of the tender offer and consent solicitation for their 2007 Notes, (iv) to make payments in connection with the completion by BMCA of its previously announced tender offer and consent solicitation for its outstanding 2008 Notes, (v) to pay for transaction fees and expenses incurred in connection with each of the foregoing transactions and (vi) to repay all of the existing Elk senior note debt. The Senior Secured Revolving Credit Facility has a maturity date of February 22, 2012. All amounts outstanding under the Senior Secured Revolving Credit Facility are secured by a first priority perfected security interest in all receivables, inventory, precious metals, deposit accounts and other current assets of BMCA and its domestic subsidiaries and all proceeds thereof, which we refer to as the Senior Secured Revolving Credit Facility Collateral. Availability under the Senior Secured Revolving Credit Facility is based upon eligible accounts receivable, inventory and precious metals used in the production of inventory, as defined, and includes a sub-limit for letters of credit of $150 million. Loans under the Senior Secured Revolving Credit Facility will bear interest at a variable rate based upon either the Base Rate or the Eurodollar Rate as defined in the Senior Secured Revolving Credit Facility, at the borrowers' option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the Base Rate or Eurodollar Rate and also based on an availability based pricing grid. The Senior Secured Revolving Credit Facility requiresusto pay unused commitment fees. The Senior Secured Revolving Credit Facility provides for optional reductions in the overall $600 million commitment, under certain conditions. In addition, the Senior Secured Revolving Credit Facility provides for optional and mandatory pre-payments of borrowings outstanding under the Senior Secured Revolving Credit Facility, subject to certain conditions. The Senior Secured Revolving Credit Facility also provides the borrowers with the ability to increase the size of the facility by up to $350 million, depending on the ability to obtain commitments from lenders and meeting specified conditions. Under the terms of the Senior Secured Revolving Credit Facility, the borrowers are subject to an interest coverage ratio financial covenant when liquidity falls below a specified threshold. In addition, the borrowers are also required to comply with other customary covenants and various restrictive covenants, includingwith respect toincurring additional 58BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations, and making certain investments. Intheevent of a change of control of BMCA, as defined, the Senior Secured Revolving Credit Facility could be accelerated by the holders of that indebtedness. On March 12, 2007, the Senior Secured Revolving Credit Facility was amended, which did not resultMount Vernon, Indiana Industrial Development Revenue Bond issued inany material changes to the facility. The Term Loan will mature on February 22, 2014. All amounts outstanding under the Term Loan are secured by (i) a first priority perfected security interest in substantially all of the assets and properties of BMCA and its domestic subsidiaries, other than the Senior Secured Revolving Credit Facility Collateral, which we refer to as the Term Loan Collateral, and (ii) a second priority perfected security interest in the Senior Secured Revolving Credit Facility Collateral. Amounts due under the Term Loan will bear interest at a variable rate based upon either the base rate or Eurodollar rate, as defined in the Term Loan, at the borrowers' option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the base rate and Eurodollar rate, if applicable. The Term Loan requires us to pay unused commitment fees. In addition, the Term Loan provides for optional and mandatory pre-payments under certain conditions. The Term Loan also provides the borrowers with the ability to increase the size of the facility by up to $250 million (less any increase in the Senior Secured Revolving Credit Facility in excess of $100 million), depending on the ability to obtain commitments from lenders and meeting specified conditions. Under the terms of the Term Loan, the borrowers are subject to an interest coverage ratio financial covenant, as defined, and a leverage ratio financial covenant, as defined, each of which will need to be complied with starting as of the end of BMCA's second fiscal quarter in 2008. In addition, the borrowers are also required to comply with various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations, and making certain investments. In the event of a change of control of BMCA, as defined, the maturity date of the Term Loan could be accelerated by the holders of that indebtedness. On March 15, 2007, the Term Loan was amended, which did not result in any material changes to the facility. The Bridge Loan would have converted into a term loan maturing on February 22, 2015, however it was amended and restated on March 15, 2007, and redesignated as the Junior Lien Term Loan. 59BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) The Junior Lien Term Loan matures on September 15, 2014. All amounts outstanding under the Junior Lien Term Loan are secured by (i) a second priority perfected security interest in the Term Loan Collateral and (ii) a third priority perfected security interest in the Senior Secured Revolving Credit Facility Collateral. Loans under the Junior Lien Term Loan will bear interest at a variable rate based upon either the base rate or Eurodollar rate, as defined in the Junior Lien Term Loan at the borrowers' option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the base rate or Eurodollar rate, as applicable. The Junior Lien Term Loan provides for optional and mandatory prepayments under certain conditions. Under the terms of the Junior Lien Term Loan, the borrowers are subject to a leverage ratio financial covenant, as defined, which will need to be complied with starting as of the end of BMCA's second fiscal quarter in 2008. The borrowers are also required to comply with various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations and making certain investments. In the event of a change of control of BMCA, as defined, the maturity date of the Junior Lien Term Loan could be accelerated by the holders of that indebtedness. On February 22, 2007, BMCA repurchased approximately $97.5 million, or 97.5%, of the aggregate principal amount outstanding of the 2007 Notes and $150.1 million, or 96.9%, of the aggregate principal amount outstanding of the 2008 Notes. In connection with the completion of the tender offer for the 2007 Notes and the 2008 Notes in February 2007, substantially all of the covenants included in the indentures governing the 2007 Notes and 2008 Notes were eliminated. On March 26, 2007, we repurchased all of Elk's then outstanding $25.0 million in aggregate principal amount of 4.69% Senior Notes due 2007, $60.0 million in aggregate principal amount of 6.99% Senior Notes due 2009, $60.0 million in aggregate principal amount of 7.49% Senior Notes due 2012 and $50.0 million in aggregate principal amount of 6.28% Senior Notes due 2014.1985.As of September
30, 2007,28, 2008, we had total outstanding consolidated indebtedness of$1,910.1$2,053.0 million, whichamount includesincluded $52.8 million of demand loans to our parent corporation and$16.8$25.4 million that matures prior to the end of the third quarter of2008. Our total outstanding consolidated indebtedness also includes $281.0 million of borrowings outstanding under our $600.0 million Senior Secured Revolving Credit Facility.2009. We anticipate funding these obligations principally from our cash and cash equivalents on hand, cash flow from operations and/or borrowings under our Senior Secured Revolving Credit Facility.60BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)As of September
30, 2007,28, 2008, we were in compliance with all covenants under the Senior SecuredRevolvingCreditFacility, the Term Loan, the Junior Lien Term LoanFacilities, and the indentures governingthe remaining 2007 Notes, the remainingour 2008 Notes andtheour 7 3/4% Senior Notes due 2014, which we refer to as the 2014 Noteswhichand, togetherwe collectively refer to aswith the 2008 Notes, the Senior Notes. As of September30, 2007,28, 2008, the net book value of the collateral securing the SeniorNotes, the Term Loan, the Junior Lien Term Loan andSecured Revolving Credit Facility Collateral (as defined in the Senior Secured Revolving CreditFacilityFacility) and the Term Loan Collateral (as defined in the Term Loan) wasapproximately $2,485.8 million.$1,109.5 and $1,662.1 million, respectively.At September
30, 2007,28, 2008, we had outstanding letters of credit of approximately$51.2$48.4 million, whichincludesincluded approximately$10.5$10.6 million of standby letters of credit related to certain obligations of G-I Holdings.On January 3, 2006, we purchased and retired $6.3 million of industrial revenue bond certificates issued by us in 1990 with respect to the Fontana, California Industrial Revenue Development Bond, resulting in us becoming the primary holder of such bond.Hedging Activity
In March 2007, we
began enteringentered into forward-starting Eurodollar rate,(LIBOR)or LIBOR, based pay fixed income interest rate swaps related to our Term Loan, with an effective date of April 23, 2007 and a maturity date of April 23, 2012.In accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which we refer to as SFAS No. 133, BMCA's swaps are treated as cash flow hedges. At September 30, 2007, we had no ineffectiveness related to our swaps. Therefore, for the quarter ended September 30, 2007, we, based on the change in the LIBOR rate, reflected in other liabilities the cumulative changes in the fair value of the derivative instrument when compared to cumulative changes in the present value of the expected future interest cash flows that are attributable to changes in the benchmark LIBOR swap rate. BMCA's offset to the related liability was reflected in other comprehensive loss, net of tax. The current period activity therefore marks the swaps instrument to market and adjusts other comprehensive loss. On each balance sheet date, we will test our fixed income interest rate swaps to determine whether the swaps contain any ineffectiveness. If BMCA's fixed income swaps contain any ineffectiveness, we will reflect the ineffective portion in our statement of operations. 61BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) At September 30, 2007, based on changes in the closing LIBOR rate as of September 28, 2007, we recorded a fair value loss on our fixed income interest rate swaps of $4.0 million to other liabilities, while the offset was recorded to other comprehensive loss, net of tax of $1.5 million. We have also recorded $1.4 million in year-to-date interest income as of September 30, 2007 related to our fixed income interest rate swaps.In October 2007, we entered into additional interest rate swaps related to our Term Loan with an effective date of October 23, 2007 and a maturity date of October 23, 2012 under terms similar to those of our swaps entered into in March 2007.In accordance with
similar termsSFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, our swaps are treated asdicussed above.cash flow hedges. As of September 28, 2008, based on changes in the fair value of the interest rate swaps, we recognized a cumulative fair value loss on our interest rate swaps of $30.4 million to other liabilities, while the offset was recognized as an other comprehensive loss, net of tax of $11.6 million. Amounts may be reclassified from other comprehensive loss to interest expense if any portion of our swaps become ineffective. We do not anticipate that any amount recorded in other comprehensive loss related to our swaps will be reclassified during our fiscal year ending December 31, 2008.In July 2007, we began entering into treasury locks as additional hedging instruments
againstrelated to our Term Loan.Our treasury locks have a settlement date of October 30, 2007 and a maturity date of July 31, 2012. Our treasury locks fix the U.S. treasury component, while excluding the swap component of the forward benchmark LIBOR interest rate. According to SFAS No. 133 our treasury locks are also cash flow hedges, which are accounted for in the same manner as our swaps. At September 30, 2007, we determined through statistical analysis that our treasury locks contained 98% effectiveness. Therefore, at September 30, 2007, based on changes in the closing LIBOR rate as of September 28, 2007, BMCA recorded a fair value loss of $2.7 million to accrued liabilities, with the effective portion offset of $2.6 million being recorded to other comprehensive loss, net of tax of $1.0 million and the ineffective portion offset of $0.1 million being recorded in our statement of operations.On October 30, 2007, we settled our open treasury lock hedging positions,against our Term Loan,which resulted in apre-taxfair value lossof approximately $4.9 million, whichand cash settlement. Pursuant to SFAS No. 133, wewill amortizeare amortizing the loss into our statement of operations over the life of the Term Loan,pursuant to SFAS No. 133.of which $0.2 and $0.6 million was amortized into interest expense in our third quarter and nine-month period ended September 28, 2008, respectively.Intercompany Transactions
We make loans to, and borrow from, our parent corporations from time to time at prevailing market rates. As of September 28, 2008 and September 30, 2007,
and October 1, 2006,BMCA Holdings Corporation owed us$56.2$56.3 and$56.0$56.2 million, including interest of$0.9$1.0 and$0.7$0.9 million, respectively, and we owed BMCA Holdings Corporation $52.8 and $52.8 million, with no unpaid interest,payable to BMCA Holdings Corporation,respectively. Interest income on our loans to BMCA HoldingsBUILDING MATERIALS CORPORATION OF AMERICA
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
Corporation amounted to
$1.5$0.9 and$1.3$1.5 million during the thirdquartersquarter ended September 28, 2008 and September 30, 2007,and October 1, 2006,respectively, and$4.0$2.7 and$3.7$4.0 million during thenine monthnine-month periods ended September 28, 2008 and September 30, 2007,and October 1, 2006,respectively. Interest expense on our loans from BMCA Holdings Corporation amounted to$1.4$0.8 and$1.2$1.4 million during the third62BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) quartersquarter ended September 28, 2008 and September 30, 2007,and October 1, 2006,respectively, and$3.9$2.6 and$3.5$3.9 million during thenine monthnine-month periods ended September 28, 2008 and September 30, 2007,and October 1, 2006,respectively. Loans payable to/receivable fromanyour parentcorporationcorporations are due on demand and provide each party with the right of offset of its related obligation to the other party and are subject to limitations as outlined in the Senior Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term Loan andourthe Senior Notes. Under the terms of the Senior Secured Revolving Credit Facility and the indentures governing our Senior Notes at September30, 2007,28, 2008, we could repay demand loans to our parent corporation amounting to $52.8 million, subject to certain conditions. We also make non-interest bearing advances to affiliates, of which no balance was outstanding as of September 28, 2008 and September 30,2007 and October 1, 2006.2007. In addition,for the nine months endedas of September 28, 2008 and September 30, 2007,and October 1, 2006,we did not owe any loanstoor enter into any lending activities with other affiliates.We
alsohave a management agreement, which we refer to as the Management Agreement, with ISP Management Company, Inc., a subsidiary of International Specialty Products Inc.(which,, which, together with its subsidiaries,we referis referred to as ISP,)an affiliate,which we refer to as the ISP Management Agreement,to provide us with certain management services.TheBased on services provided to us in 2008 under the Management Agreement, the aggregate amount payable to ISP Management Company, Inc. under thecurrently proposed ISPManagement Agreement for 2008, inclusive of the services provided to G-I Holdings, isapproximatelynot yet available; however, after adjusting for inflationary factors, it is currently estimated to be similar to the $6.7 millionbased on services provided to uspaid in 2007. We do not expect any changes tofinalizetheISPManagement Agreementduringto have a material impact on ourfourth quarterresults of2007.operations.We and our subsidiaries purchase a substantial portion of our headlap roofing granules, colored roofing granules and algae-resistant granules,
underon along-term requirements contract withpurchase order basis, from ISP Minerals Inc., which we refer to as ISP Minerals, an affiliate ofoursBMCA and ISP. The amount of mineral products purchased each yearunder the Minerals contracton this basis is based on current demand and is not subject to minimum purchase requirements. For the thirdquarters and nine month periodsquarter ended September30, 2007 and October 1, 2006,28, 2008, we purchased$29.0, $26.2, $81.1$13.7 million of roofing granules, and$84.9for the nine-month period ended September 28, 2008, we purchased $33.2 millionrespectively,of roofing granules under this arrangement.In addition to the granules products purchased by BMCA under the above purchase order basis, the balance of BMCA’s granules requirements are purchased under a contract expiring in 2013. The amount of mineral products
from Mineralspurchased each year underthis contract.the contract is based on current demand and is not subject to minimum purchase requirements. Under the contract, for the third quarter ended September 28, 2008, we purchased $24.2 million of roofing granules, and for the nine-month period ended September 28, 2008, we purchased $66.1 million of roofing granules.In August 2008 and October 2008, we declared and paid a cash dividend of $2.5 and $5.0 million, respectively, to our parent corporation.
Included in
currentnoncurrent assets as anon-interest bearing incometax receivable from parent corporation on our consolidated balance sheets is $10.0and $9.1million at both September30, 200728, 2008 and December 31,2006, respectively,2007, representing amounts paid in excess of amounts due to G-I Holdings with respect to 2006 under the Tax SharingAgreement.Agreement (as defined). These amounts are included in thechange innetreceivable from/payable to related parties/parent corporations in the consolidatedstatementstatements of cash flows.63BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Income Taxes We adopted Financial Accounting Standards Board, which we refer to as, FASB, Interpretation No. 48, which we refer to as FIN 48, as of January 1, 2007 in a manner that is consistent with the provisions of FSP FIN 48-1 (see below) and, as a result of the adoption, we reviewed certain tax positions and did not need to recognize any material adjustment to our accruals for uncertain tax positions. At January 1, 2007 and September 30, 2007, we had approximately $13.1 and $15.6 million, respectively, of unrecognized tax benefits. All of the unrecognized tax benefits would affect our effective tax rate if recognized with the exception of $1.4 million associated with Elk, which would affect goodwill. We and our subsidiaries are subject to United States federal income tax as well as the income tax of multiple state jurisdictions. We have substantially concluded all United States federal income tax matters for years through 2004. The tax years 2005 and 2006 remain open to examination by the Internal Revenue Service (IRS). Substantially all material state and local matters have been concluded for tax years through 2001. The tax years 2002 through 2006 remain open to examination by the major state taxing jurisdictions to which we are subject. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 1, 2007 and September 30, 2007, we had $3.8 and $4.8 million, respectively, of accrued interest and penalties. Our effective tax rate changed from 38.0% for the year ended December 31, 2006 to 31.0% for the nine month period ended September 30, 2007. The change in the effective tax rate was primarily due to the impact of the estimated annual restructuring and other expense charges in 2007, of which $97.6 million was included in our income before interest expense and income taxes for the nine month period ended September 30, 2007 and the establishment of a valuation allowance related to state income taxes.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
Contingencies
See Note
1413 to Consolidated Financial Statements for information regarding contingencies.Other Matters On October 15, 2007, we redeemed all of our remaining $2.5 million outstanding 2007 Notes, including accrued and unpaid interest on such notes through the date of redemption. 64BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)Economic Outlook
We do not believe that inflation has had a material effect on our results of operations during the first nine months of
2007.2008. However, we cannot assure you that our business will not be affected by inflation in the future, or by increases in the cost of energy and asphalt purchases used in our manufacturing process principally due to fluctuating oil prices.DuringThe prices of energy and crude oil continued to remain at relatively high historical levels during the third quarter of
2007,2008. In addition, the cost of asphaltcontinued to beincreased during the third quarter of 2008 reaching record highrelative to historicallevels, which reflectsin large part record highhigher crude oilprices.prices and higher asphalt demand largely driven by the seasonal paving market. Due to the strength of our manufacturing operations, which allows us to use many types of asphalt, together with our ability to secure alternative sources of supply, we do not anticipate that any future disruption in the supply of asphalt will have a material impact on future net sales, although no assurances can be provided in that regard.To mitigate these and other petroleum-based cost increases, we announced multiple price increases in the first nine months of 2007.We will attempt to pass on futureadditional unexpectedcost increases from suppliers as needed; however, no assurances can be provided that these price increases will be accepted in the marketplace.Contractual Obligations
There have been no significant changes to our contractual obligations during the third quarter ended September
30, 2007.28, 2008. For a further discussion on ourContractual Obligationscontractual obligations related to minimum purchase obligations reference is made toManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations"Contractual Obligations" in our 2006 Form 10-K and“Contractual Obligations” in our 2007first quarterForm10-Q, which was filed with10-K.New Accounting Pronouncements
In September 2006, the
SEC on May 16, 2007,Financial Accounting Standards Board, which we refer to asthe 2007 first quarter Form 10-Q. New Accounting Pronouncements In July 2006, the FASB, issued FIN 48 "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. A reporting entity must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 became effective for fiscal years beginning after 65BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) December 15, 2006. In May 2007, the FASB issued FASB Staff Position, which we refer to as FSP, FIN 48-1 "Definition of Settlement in FASB Interpretation No. 48," which we refer to as FSP FIN 48-1, which amended FIN 48 to provide guidance on how a reporting entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax position will be considered effectively settled and any previously unrecognized tax benefits should be recognized based on the terms of settlement if (a) the taxing authority has completed its examination, including all appeals, (b) the reporting entity does not intend to appeal or litigate any aspect of the tax position; and (c) based on the taxing authority's policies and practices, the reporting entity considers it remote that the taxing authority will re-examine the tax position. We adopted FIN 48 as of January 1, 2007 in a manner that is consistent with the provisions of FSP FIN 48-1, and as a result of the adoption, we reviewed certain tax positions and did not recognize any material adjustment to our accruals for uncertain tax positions. See Income Taxes. In September 2006, theFASB, issued SFAS No. 157,"Fair“Fair ValueMeasurements,"Measurements”, which we refer to as SFAS No. 157, which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair valuemeasurements. SFAS No. 157measurements, which is effective for fiscal years beginning after November 15, 2007.We will adopt the provisions of SFAS No. 157 beginning in our first quarter ofIn February 2008,and, therefore, have not yet determined the effect, if any, the adoption of SFAS No. 157 will have on our results of operations or financial position. In September 2006,the FASB issuedFSP, AUG AIR-1 "Accounting for Planned Major Maintenance Activities"FASB Staff Position, which we refer to as FSP,AUG AIR-1,No. 157-2 “Partial Deferral to the Effective Date of Statement 157”, whichprohibits the use of the accrue-in-advance method of accounting in annual and interim financial reporting periods for planned major maintenance activities.we refer to as FSPAUG AIR-1 previously allowed companies the right to recognize planned major maintenance costs by accruing a liability over several reporting periods before the maintenance was performed. FSP AUG AIR-1 still allows the direct expense, built-in-overhaul and deferral methods of accounting as acceptable, however it mandates that companies apply the same method of accounting in both interim and annual financial reporting periods and that the method be retrospectively applied if applicable. FSP AUG AIR-1No. 157-2, which is effective for fiscal years beginning afterDecemberNovember 15,2006. We adopted2008 and excludes SFAS No. 13, “Accounting for Leases,” defers certain non-financial assets and non-financial liabilities and further clarifies the principles in SFAS No. 157 on the fair value measurement of liabilities. Our adoption of the provisions of SFAS No. 157 for all other items not deferred by FSPAUG AIR-1No. 157-2 in our first quarter of2007. FSP AUG AIR-1 has2008 did nothadhave a material effect on our consolidated financial statements. We are currently evaluating the provisions of FSP No. 157-2, which we will adopt in our first quarter beginning January 1, 2009 and do not expect that the adoption will have a material effect on our consolidated financial statements.In February 2007, the FASB issued SFAS No. 159,
"The“The Fair Value Option for Financial Assets and Financial Liabilities-– Including an amendment of FASB Statement No.115,"115”, which we refer to as SFAS No.159. SFAS No.159, which permits entities to elect to measure specified financial instruments and66BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the"fair“fair value option,"” will enable some companies to reduce the volatility in reportedBUILDING MATERIALS CORPORATION OF AMERICA
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
earnings caused by measuring related assets and liabilities differently, and
itis simpler than using the complex hedge-accounting provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” to achieve similar results. SFAS No. 159 applies to all entities and contains financial statement presentation and disclosure requirements for assets and liabilities reported at fair value as a consequence of the election. SFAS No. 159 is expected to expand the use of fair value measurements for financialinstruments. SFAS No. 159 isinstruments and was effectiveas of thefor fiscal years beginningof a company's first fiscal year that beginsafter November 15, 2007.Retrospective applicationWe adopted SFAS No. 159 for our fiscal year beginning January 1, 2008 and upon adoption did not elect the fair value option for any items within the scope of SFAS No. 159. Therefore, SFAS No. 159 did not have any impact on our consolidated financial statements.In December 2007, the FASB issued SFAS No. 141 (revised in 2007) “Business Combinations”, which we refer to as SFAS No. 141R, which provides revised guidance on how an acquiring company should recognize and measure the identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. SFAS No. 141R also expands the required disclosures related to the nature and financial statement impact of business combinations and is
not permitted.effective, on a prospective basis, for business combinations completed in fiscal years beginning after December 15, 2008. We will adopt SFAS No. 141R for our fiscal year beginning January 1, 2009 and, therefore, will apply SFAS No. 141R prospectively to any business combinations subsequent to that date.In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which we refer to as SFAS No. 160. SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than us (minority interests) to be clearly identified and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. Any changes in the parent’s ownership interests are required to be accounted for in a consistent manner as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008; however, the presentation and disclosure requirements must be retrospectively applied to comparative financial statements. We will adopt the provisions of SFAS No.
159160 for our fiscal year beginningin our first quarter of 2008January 1, 2009, andtherefore, havewe do notyet determined the effect, if any,expect the adoptionof SFAS No. 159 willto have any impact on our results of operations or financial position as we do not have any noncontrolling interests.In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, which we refer to as SFAS No. 161. SFAS No. 161 amends SFAS No. 133 and is intended to improve financial reporting related to derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective on a prospective basis for fiscal years beginning on or after November 15, 2008. We will adopt the disclosure provisions of SFAS No. 161 for our fiscal year beginning January 1, 2009.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”, which we refer to as SFAS No. 162, which identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with United States generally accepted accounting principles. SFAS No. 162 will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s amendments to Interim Audit Standards Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We do not expect the adoption of SFAS No. 162 to have any impact on our results of operations or financial position.
* * *
FORWARD-LOOKING STATEMENTSBUILDING MATERIALS CORPORATION OF AMERICA
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - (Continued)
Forward-looking Statements
This quarterly report on Form 10-Q contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934. These forward-looking statements are only predictions and generally can be identified by use of statements that include phrases such as
"believe," "expect," "anticipate," "intend," "plan," "foresee"“believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. Our operations are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statements. The forward-looking statements included herein are made only as of the date of this quarterly report on Form 10-Q and we undertake no obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances. We cannot assure you that projected results or events will be achieved.See also the "Risk Factors" in our 2006 Form 10-K and the risks identified in Part II of our 2007 first quarter Form 10-Q. 67BUILDING MATERIALS CORPORATION OF AMERICA
ITEMItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations in the20062007 Form 10-K for a discussion of"Market-Sensitive“Market-Sensitive Instruments and Risk Management." Beginning” There were no material changes inMarch and July 2007, BMCA entered into fixed income interest rate swaps and treasury locks, respectively, to hedge against fluctuations in the variable interest ratesuch information as ofour $975.0 million Term Loan.September 28, 2008. See Note78 to the Consolidated Financial Statements.ITEM 4.Item 4T. CONTROLS AND PROCEDURES
Disclosure Controls and
Procedures:Procedures: Our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the"Exchange Act"“Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports filed, furnished or submitted under the Exchange Act. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.Changes in Internal Control
Overover FinancialReporting:Reporting: There were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified inmanagement'smanagement’s evaluation during the third quarter of fiscal year20072008 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.68BUILDING MATERIALS CORPORATION OF AMERICA
PART II
OTHER INFORMATION
ITEMItem 1.
LEGAL PROCEEDINGSLegal ProceedingsAs of September
30, 2007,28, 2008, approximately 1,900 alleged asbestos-related bodily injury claims relating to the inhalation of asbestos fiber were pending against Building Materials Corporation of America. See Note1413 to Consolidated Financial Statements in Part I.ITEMItem 6.
EXHIBITS Exhibit Number Description 31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief Executive Officer. 31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer. 32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. 69Exhibits
Exhibit Number
Description
31.1
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
31.2
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
32.1
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
SIGNATURES
----------Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BUILDING MATERIALS CORPORATION OF AMERICA BUILDING MATERIALS MANUFACTURING CORPORATION DATE: November 14, 2007 BY: /s/John F. Rebele ----------------- -------------------------------------- John F. Rebele Senior Vice President, Chief Financial Officer and Chief Administrative Officer (Principal Financial Officer) DATE: November 14, 2007 BY: /s/James T. Esposito ----------------- -------------------------------------- James T. Esposito Vice President and Controller (Principal Accounting Officer) 70
BUILDING MATERIALS CORPORATION OF AMERICA
BUILDING MATERIALS MANUFACTURING CORPORATION DATE:
November 12, 2008
BY:
/s/John F. Rebele
John F. Rebele
Senior Vice President, Chief Financial Officer and Chief Administrative Officer (Principal Financial Officer)
DATE:
November 12, 2008
BY:
/s/James T. Esposito
James T. Esposito
Vice President and Controller
(Principal Accounting Officer)
44