SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1999
Commission File No. 1-3660
Owens Corning
One Owens Corning Parkway
Toledo, Ohio 43659
Area Code (419) 248-8000
A Delaware Corporation
I.R.S. Employer Identification No. 34-4323452
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 / /
Shares of common stock, par value $.10 per share, outstanding at September 30,
1999
54,812,028
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars, except
share data)
NET SALES $ 1,333 $ 1,324 $ 3,773 $ 3,747
COST OF SALES (Note 3) 986 1,060 2,844 2,983
------- ------- ------- --------
Gross margin 347 264 929 764
------- ------- ------- --------
OPERATING EXPENSES (Note 3)
Marketing and administrative
expenses 153 138 441 419
Science and technology expenses 14 14 42 43
Restructure costs - 30 - 117
Other (3) 67 (2) 81
------- ------ ------ -------
Total operating expenses 164 249 481 660
------- ------ ------ -------
Gain on sale of assets (Note 4) - 292 - 376
INCOME FROM OPERATIONS 183 307 448 480
Cost of borrowed funds 40 37 112 110
------ ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES 143 270 336 370
Provision for income taxes
(Note 6) 50 132 118 159
------ ------- ------- -------
INCOME BEFORE MINORITY INTEREST
AND EQUITY IN NET INCOME
(LOSS) OF AFFILIATES 93 138 218 211
Minority Interest (2) (4) (5) (14)
Equity in net income (loss) of
affiliates (2) 1 (4) 5
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY
ITEM 89 135 209 202
Extraordinary loss - (39) - (39)
------- ------ ------- -------
NET INCOME $ 89 $ 96 $ 209 $ 163
======= ======= ======= =======
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (continued)
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars, except share data)
NET INCOME (LOSS) PER
COMMON SHARE (Note 10)
Basic:
Income before extraordinary item $ 1.64 $ 2.51 $ 3.87 $ 3.76
Extraordinary loss - (.72) - (.72)
--------- --------- -------- ----------
Net income per share $ 1.64 $ 1.79 $ 3.87 $ 3.04
========= ========= ======== ==========
Diluted:
Income before extraordinary item $ 1.53 $ 2.32 $ 3.62 $ 3.53
Extraordinary loss - (.66) - (.66)
-------- --------- -------- ----------
Net income per share $ 1.53 $ 1.66 $ 3.62 $ 2.87
======== ========= ======== ==========
Weighted average number of
common shares outstanding and
common equivalent shares during
the period (in millions)
Basic 54.3 53.8 54.1 53.6
Diluted 59.5 59.2 59.5 58.8
- 4 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1999 1998
---- ----
(In millions of dollars)
ASSETS
- ------
CURRENT
Cash and cash equivalents $ 99 $ 54
Receivables 584 451
Inventories (Note 7) 532 437
Insurance for asbestos litigation
claims - current portion (Note 11) 25 150
Deferred income taxes 264 293
Income tax receivable - 117
Other current assets 28 27
---------- -----------
Total current 1,532 1,529
---------- -----------
OTHER
Insurance for asbestos litigation
claims (Note 11) 206 260
Asbestos costs to be reimbursed -
Fibreboard (Note 11) 41 74
Deferred income taxes 551 608
Goodwill 747 762
Investments in affiliates (Note 4) 50 45
Other noncurrent assets 243 205
----------- -----------
Total other 1,838 1,954
----------- -----------
PLANT AND EQUIPMENT, at cost
Land 70 64
Buildings and leasehold improvements 719 701
Machinery and equipment 2,620 2,476
Construction in progress 233 257
----------- -----------
3,642 3,498
Less-accumulated depreciation (1,962) (1,880)
----------- -----------
Net plant and equipment 1,680 1,618
------------ -----------
TOTAL ASSETS $ 5,050 $ 5,101
============= ===========
- 5 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
September 30, December 31,
1999 1998
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 784 $ 942
Reserve for asbestos litigation claims -
current portion (Note 11) 1,050 850
Short-term debt 103 69
Long-term debt - current portion 84 22
---------- -------
Total current 2,021 1,883
---------- -------
LONG-TERM DEBT 1,994 1,535
---------- -------
OTHER
Reserve for asbestos litigation claims
(Note 11) $ 958 $ 1,780
Asbestos-related liabilities - Fibreboard
(Note 11) 67 79
Other employee benefits liability 324 326
Pension plan liability 46 55
Other 331 364
--------- --------
Total other 1,726 2,604
--------- --------
COMPANY OBLIGATED SECURITIES OF
ENTITIES HOLDING SOLELY PARENT
DEBENTURES 195 194
--------- -------
MINORITY INTEREST 43 19
--------- -------
STOCKHOLDERS' EQUITY
Common stock 698 679
Deficit (1,565) (1,762)
Accumulated other comprehensive income
(Note 9) (41) (37)
Other (21) (14)
--------- -------
Total stockholders' equity (929) (1,134)
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 5,050 $ 5,101
EQUITY ========= ========
- 6 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income $ 89 $ 96 $ 209 $ 163
Reconciliation of net cash provided by
operating activities
Noncash items:
Provision for depreciation and
amortization 55 48 160 147
Provision (credit) for deferred
income taxes 44 90 83 85
Extraordinary loss from early
retirement of debt - 39 - 39
Gain on sale of assets (Note 4) - (292) - (376)
Other 6 115 11 112
(Increase) decrease in receivables 29 18 (113) (151)
(Increase) decrease in inventories (29) 10 (89) (30)
Increase (decrease) in accounts
payable and accrued liabilities 65 40 (161) 16
(Increase) decrease in income tax
receivable - (65) 104 10
Proceeds from insurance for
asbestos Litigation claims,
excluding Fibreboard 147 24 179 46
Payments for asbestos litigation
claims, excluding Fibreboard (252) (70) (622) (294)
Other (15) 86 (25) 97
-------- --------- --------- ----------
Net cash flow from operations 139 139 (264) (136)
----------- ---------- ----------- -----------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment (39) (59) (138) (180)
Proceeds from the sale of
affiliate or business (Note 4) - 528 - 662
Other 14 - (13) (19)
---------- ---------- ---------- ----------
Net cash flow from investing $ (25) $ 469 $ (151) $ 463
----------- ---------- ----------- -----------
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Net additions (reductions) to
long-term credit facilities $ (14) $ 365 $ 247 $ (9)
Other additions to long-term debt 2 423 253 993
Other reductions to long-term
debt (4) (480) (37) (493)
Net increase (decrease) in short-
term debt (18) (48) 10 48
Repurchase of Trust Preferred
Hybrid Securities - (309) - (309)
Premium payments on early
retirement of debt - (62) - (62)
Dividends paid (4) (4) (12) (12)
Other (1) 5 (1) (1)
----------- ------------ ---------- ----------
Net cash flow from financing (39) (110) 460 155
------------ ------------ ---------- ----------
Effect of exchange rate changes on
cash (2) - - -
------------ ----------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents 73 498 45 482
Cash and cash equivalents at
beginning of period 26 42 54 58
----------- ----------- ----------- ----------
Cash and cash equivalents at end
of period $ 99 $ 540 $ 99 $ 540
=========== =========== ========== ==========
- 8 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter Ended Nine Months Ended
September 30, September 30,
1. SEGMENT DATA 1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars)
NET SALES
Reportable Operating Segments
- ------------------------------
Building Materials
United States $ 989 $ 942 $ 2,749 $ 2,553
Europe 54 63 175 198
Canada and other 64 55 175 160
------------ ---------- ---------- ----------
Total Building Materials 1,107 1,060 3,099 2,911
------------ ----------- ---------- ----------
Composite Materials
United States 145 172 423 536
Europe 75 85 243 282
Canada and other 36 36 99 105
------------ ----------- ----------- ----------
Total Composite Materials 256 293 765 923
------------ ----------- ----------- ----------
Total Reportable Operating
Segments $ 1,363 $ 1,353 $ 3,864 $ 3,834
Reconciliation to Consolidated Net
Sales
- ----------------------------------
Composite Materials U.S. Sales to
Building Materials U.S. (30) (29) (91) (87)
------------ ----------- ----------- -----------
Net sales $ 1,333 $ 1,324 $ 3,773 $ 3,747
============ =========== =========== ==========
External Customer Sales by
Geographic Region
- ---------------------------
United States $ 1,104 $ 1,085 $ 3,081 $ 3,002
Europe 129 148 418 480
Canada and other 100 91 274 265
------------ ---------- ----------- ----------
Net Sales $ 1,333 $ 1,324 $ 3,773 $ 3,747
============ ========== ========== ==========
- 9 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Quarter Ended Nine Months Ended
September 30, September 30,
1. SEGMENT DATA (continued) 1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars)
INCOME (LOSS) FROM OPERATIONS
Reportable Operating Segments
- -----------------------------
Building Materials
United States $ 136 $ 98 $ 322 $ 158
Europe 1 4 5 2
Canada and other 8 5 24 6
----------- ---------- ---------- ----------
Total Building Materials 145 107 351 166
----------- ---------- ---------- -----------
Composite Materials
United States 39 33 100 126
Europe (4) 6 (8) 22
Canada and other 4 5 11 10
----------- ---------- ---------- -----------
Total Composite Materials 39 44 103 158
----------- ---------- ---------- -----------
Total Reportable Operating
Segments $ 184 $ 151 $ 454 $ 324
=========== ========== ========== ===========
Geographic Regions
United States $ 175 $ 131 $ 422 $ 284
Europe (3) 10 (3) 24
Canada and other 12 10 35 16
----------- ---------- ------------ ------------
Total Reportable Operating $ 184 $ 151 $ 454 $ 324
Segments
Reconciliation to Consolidated Income
Before Provision for Income Taxes
- --------------------------------------
Restructuring and other charges - (148) - (243)
Gain on sale of affiliate or
business - 292 - 376
General corporate income (expense) (1) 12 (6) 23
Cost of borrowed funds (40) (37) (112) (110)
----------- ---------- ----------- -----------
Consolidated Income Before
Provision for Income Taxes $ 143 $ 270 $ 336 $ 370
=========== ========== ============ ===========
- 10 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. GENERAL
The financial statements included in this Report are condensed and unaudited,
pursuant to certain Rules and Regulations of the Securities and Exchange
Commission, but include, in the opinion of the Company, adjustments necessary
for a fair statement of the results for the periods indicated, which, however,
are not necessarily indicative of results which may be expected for the full
year.
In connection with the condensed financial statements and notes included in this
Report, reference is made to the financial statements and notes thereto
contained in the Company's 1998 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS
During the third quarter of 1998, the Company recorded a $148 million pretax
charge for restructuring and other actions as the final phase of the Company's
previously announced program to close manufacturing facilities, enhance
manufacturing productivity and reduce overhead. On a cumulative basis since the
fourth quarter of 1997, the Company has recorded a total pretax charge of $386
million, of which $143 million was recorded in the fourth quarter of 1997, $95
million was recorded in the first quarter of 1998, and $148 million was recorded
in the third quarter of 1998.
The $148 million pretax charge in the third quarter of 1998 was comprised of a
$30 million charge associated with the restructuring of the Company's business
segments and a $118 million charge associated with other actions, the majority
of which represent asset impairments. The $30 million restructure charge has
been classified as a separate component of operating expenses on the Company's
consolidated statement of income while the $118 million charge for other actions
is comprised of a $60 million charge to cost of sales, a $4 million charge to
marketing and administrative expenses, and a $54 million charge to other
operating expenses. The components of the restructure charge include $9 million
for personnel reductions and $21 million for the divestiture of non-strategic
businesses and facilities, of which $20 million represents non-cash asset write-
downs to estimated fair value and $1 million represents exit cost liabilities,
comprised primarily of lease commitments. The $9 million for personnel
reductions represents severance costs associated with the elimination of
approximately 400 positions, primarily in the U.S. and Asia. The primary groups
affected include manufacturing and administrative personnel. As of September
30, 1999, approximately $8 million has been paid and charged against the reserve
for personnel reductions, representing the elimination of approximately 400
positions, the majority of whose severance payments will be made over the course
of 1999. Charges of approximately $1 million have been made against exit cost
liabilities. No adjustments have been made to the liability.
- 11 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued)
The components and classification of the $118 million of other actions, of which
$103 million represents non-cash asset revaluations, include: $30 million to
write down to fair value certain manufacturing assets held for use in China, due
primarily to poor current and projected financial results, recorded as cost of
sales; $15 million to write down to net realizable value equipment and inventory
made obsolete by changes in the Company's manufacturing and marketing
strategies, recorded as cost of sales; $17 million for the write-down of an
investment in and the write off of a receivable from a joint venture in Korea to
reflect the business outlook at that time and the fair market value of the
assets, recorded as other operating expenses; $12 million for the write-down of
goodwill associated with the 1995 acquisition of Fiber-lite, determined to be
unrecoverable due to a change in market conditions and customer demand, recorded
as other operating expenses; and $9 million for the write-down of certain assets
in the U.S. to fair market value, recorded as cost of sales. The Company plans
to hold and use the investments, but disposed of the equipment in 1998. Also
included in the $118 million charge for other actions are $13 million for the
write off of certain receivables in the U.S. and Asia determined to be
uncollectable, recorded as cost of sales and other operating expenses; and $22
million for other actions recorded as cost of sales, marketing and
administrative expenses, and other operating expenses.
During the first quarter of 1998, the Company recorded a $95 million pretax
charge for restructuring and other actions as the second phase of the Company's
strategic restructuring program to enhance manufacturing productivity and reduce
overhead.
The $95 million pretax charge in the first quarter of 1998 was comprised of an
$87 million charge associated with the restructuring of the Company's business
segments and an $8 million charge associated with other actions. The $87 million
restructure charge has been classified as a separate component of operating
expenses on the Company's consolidated statement of income while the $8 million
charge for other actions is comprised of a $5 million charge to cost of sales
and a $3 million charge to marketing and administrative expenses. The
components of the restructure charge include $81 million for personnel
reductions and $6 million for the divestiture of non-strategic businesses and
facilities, of which $2 million represents exit cost liabilities, comprised
primarily of lease commitments. The $81 million for personnel reductions
represents severance costs associated with the elimination of approximately
1,500 positions worldwide. The primary employee groups affected include
manufacturing and corporate administrative personnel. As of September 30, 1999,
approximately $63 million has been paid and charged against the reserve for
personnel reductions, representing the elimination of approximately 1,500
employees, the majority of whose severance payments were made over the course of
1998, and approximately $2 million has been charged against exit cost
liabilities. No adjustments have been made to the liability.
During the fourth quarter of 1997, the Company recorded a $143 million pretax
charge for restructuring and other actions as the first phase of the program to
close manufacturing facilities, enhance manufacturing productivity and reduce
overhead. The $143 million pretax charge was comprised of a $68 million charge
associated with the restructuring of the Company's business segments and a $75
million charge associated with asset impairments, including investments in
certain affiliates. The components of the restructure charge include $25 million
for personnel reductions; $41
- 12 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued)
million for the divestiture of non-strategic businesses and facilities, of which
$13 million represents exit cost liabilities, primarily for leased warehouse and
office facilities to be vacated, and $28 million represents non-cash asset
revaluations; and $2 million for other actions. The divestiture of non-
strategic businesses and facilities includes the closure of the Candiac, Quebec
manufacturing facility. During the second quarter of 1999, the Candiac
manufacturing facility was re-opened in order to meet current market demands.
The $25 million for personnel reductions during the fourth quarter of 1997
represents severance costs associated with the elimination of nearly 550
positions worldwide. The primary employee groups affected include manufacturing
and corporate administrative personnel. As of September 30, 1999, approximately
$21 million has been paid and charged against the reserve for personnel
reductions, representing the elimination of approximately 550 employees, the
majority of whose severance payments were over the course of 1998, and
approximately $9 million has been charged against exit cost liabilities. No
adjustments have been made to the liability.
The components of the $75 million of other actions during the fourth quarter of
1997 and their classification on the Company's 1997 consolidated statement of
income are as follows: $17 million for the write off of certain assets and
investments associated with unconsolidated joint ventures in Spain and Argentina
due primarily to poor current and projected financial results and the expected
loss of local partners, recorded as other operating expenses; $12 million for
the write-down of certain investments in mainland China to reflect the current
business outlook and the fair market value of the investments, recorded as cost
of sales; $24 million to write down to net realizable value equipment and
inventory made obsolete by changes in the Company's manufacturing and marketing
strategies, recorded as cost of sales; $8 million for a supplemental employee
retirement plan approved by the Board of Directors in December 1997, recorded as
marketing and administrative expenses; $5 million for the write-off of an
insurance receivable that was determined to be uncollectable after judicial
rejection of the Company's claim, recorded as other operating expenses; and $9
million for several other actions recorded as cost of sales, marketing and
administrative expenses, and other operating expenses. The Company plans to
hold and use the investments but disposed of most of the equipment in 1998.
The following table summarizes the status of the liabilities from the
restructure program described above, including cumulative spending and
adjustments and the remaining balance as of September 30, 1999:
(In millions of dollars)
Beginning Total Ending
Liability Payments Liability
---------- -------- ---------
Personnel Costs $ 115 $ (92) $ 23
Facility and
Business Exit Costs 16 (12) 4
Other 2 (2) -
---------- -------- ----------
Total $ 133 $ (106) $ 27
========== ======== ===========
- 13 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued)
The Company continually evaluates whether events and circumstances have occurred
that indicate that the carrying amount of certain long-lived assets is
recoverable. When factors indicate that a long-lived asset should be evaluated
for possible impairment, the Company uses an estimate of the expected
undiscounted cash flows to be generated by the asset to determine whether the
carrying amount is recoverable or if an impairment exists. When it is
determined that an impairment exists, the Company uses the fair market value of
the asset, usually measured by the discounted cash flows to be generated by the
asset, to determine the amount of the impairment to be recorded in the financial
statements.
4. ACQUISITIONS AND DIVESTITURES OF BUSINESSES
In connection with a proposal received from its Korean joint venture partner,
the Company infused approximately $29 million of cash into this venture in
March, 1999. As a result of this investment, along with additional investments
by the other partner, the Company increased its ownership interest in Owens
Corning Korea to 70%. The Company accounted for this transaction under the
purchase method of accounting whereby the assets acquired and liabilities
assumed, including $84 million in debt, have been recorded at their fair values
and the results of operations have been consolidated since the date of
acquisition. Prior to that date, the Company accounted for this joint venture
under the equity method.
Late in the third quarter of 1998, the Company sold 51% of its interest in its
yarns and specialty materials business (the "yarns business") for $340 million.
Upon closing, the Company also received a distribution of approximately $193
million from the joint venture. The results of operations of the yarns business
were reflected in the Company's consolidated statement of income through the
period ending September 30, 1998. For the nine months ended September 30, 1998,
the yarns business recorded net sales of approximately $205 million and income
from operations of approximately $57 million. Effective September 30, 1998, the
Company accounts for its ownership interest in the yarns joint venture under the
equity method.
Late in the first quarter of 1998, the Company sold its 50% ownership interest
in Alpha/Owens-Corning, LLC. With cash proceeds of approximately $103 million,
the Company recorded a pretax gain of approximately $84 million as other income
on the Company's consolidated statement of income.
During the first quarter of 1998, the Company completed the sale of the assets
of Pabco, a producer of molded calcium silicate insulation, fireproofing board
and metal jacketing, acquired as part of the Fibreboard acquisition in 1997.
The Company sold Pabco for $31 million in cash and $6 million in notes
receivable, all of which was collected during 1998.
5. LONG-TERM DEBT
During the first quarter of 1999, the Company issued $250 million of senior debt
securities ("the securities") as unsecured obligations of the Company. These
securities, which mature in 2009, bear an annual rate of interest of 7.0%,
payable semiannually. The proceeds from the issuance of these securities were
used to reduce borrowings under the Company's long-term revolving credit
agreement.
- 14 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. INCOME TAXES
The reconciliation between the U.S. federal statutory rate and the Company's
effective income tax rate is:
Quarter Nine Months
Ended Ended
September 30, September 30,
------------- ------------
1999 1998 1999 1998
---- ---- ---- ----
U.S. federal statutory rate 35% 35% 35% 35%
State and local income taxes 2 6 3 5
Operating losses of foreign
subsidiaries 1 6 1 6
Special tax election (a) (6) - (3) (3)
Foreign tax rate differences - - - -
Other 3 2 (1) -
----- ---- ---- ----
Effective tax provision and
rate 35% 49% 35% 43%
==== === === ===
(a) Represents a one-time tax benefit associated with Asia Pacific operations
in 1998, and with UK operations in 1999.
7. INVENTORIES
September 30, December 31,
1999 1998
---- ----
(In millions of dollars)
Inventories are summarized as
follows:
Finished goods $ 406 $ 317
Materials and supplies 188 176
------- -------
FIFO inventory 594 493
Less: Reduction to LIFO basis (62) (56)
------- -------
Total Inventory $ 532 $ 437
======= =======
Approximately $387 million and $271 million of total inventories were valued
using the LIFO method at September 30, 1999 and December 31, 1998, respectively.
- 15 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. CONSOLIDATED STATEMENT OF CASH FLOWS
Cash payments for income taxes, net of refunds, and cost of borrowed funds are
summarized as follows:
Quarter Nine Months
Ended Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Income taxes $ 1 $ (1) $ (79) $ (82)
Cost of borrowed funds 34 15 107 87
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
During the first nine months of 1999, gross payments for asbestos litigation
claims against Fibreboard were approximately $85 million, all of which was paid
directly by Fibreboard's insurers or from the escrow account to claimants on
Fibreboard's behalf. During the first nine months of 1999, Fibreboard also
reached settlement agreements with plaintiffs for amounts totaling approximately
$52 million. Fibreboard settlement agreements are reflected on the Company's
consolidated balance sheet as an increase to both the Fibreboard asbestos costs
to be reimbursed and asbestos claims settlements when the agreements are
reached.
Please refer to Note 4 for disclosure of Non-Cash Investing and Financing
activities.
9. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. SFAS 130
requires that the Company classify items of other comprehensive income by their
nature in the financial statements and display the accumulated balance of other
comprehensive income separately in the stockholders' equity section of the
Company's consolidated balance sheet.
The Company's comprehensive income for the quarters ended September 30, 1999 and
1998 was $96 million and $112 million, respectively. For the nine months ended
September 30, 1999 and 1998, comprehensive income was $206 million and $171
million, respectively. The Company's comprehensive income includes net income,
currency translation adjustments, minimum pension liability adjustments, and
deferred gains and losses on certain hedging transactions.
- 16 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. EARNINGS PER SHARE
The following table reconciles the net income and weighted average number of
shares used in the basic earnings per share calculation to the net income and
weighted average number of shares used to compute diluted earnings per share.
Quarter Nine Months
Ended Ended
September 30, September 30,
------------ --------------
1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars, except share data)
Net income used for basic
earnings per share $ 89 $ 96 $ 209 $ 163
Net income effect of assumed
conversion of preferred
securities 2 2 6 6
------- ------- ------ ------
Net income used for diluted
earnings per share $ 91 $ 98 $ 215 $ 169
======= ======= ======= ======
Weighted average number of shares
outstanding used for basic
earnings per share (thousands) 54,292 53,820 54,111 53,588
Deferred awards and stock options 664 791 789 675
Shares from assumed conversion of
preferred securities 4,566 4,566 4,566 4,566
------- -------- ------- -------
Weighted average number of
shares outstanding and common
equivalent shares used for
diluted earnings per share
(thousands) 59,522 59,177 59,466 58,829
======= ======== ======== =======
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
Asbestos Liabilities
- --------------------
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD)
Numerous claims have been asserted against Owens Corning alleging personal
injury arising from inhalation of asbestos fibers. Virtually all of these claims
arise out of Owens Corning's manufacture, distribution, sale or installation of
an asbestos-containing calcium silicate, high temperature insulation product,
the manufacture and distribution of which was discontinued in 1972. The vast
majority of these claims are being resolved through the National Settlement
Program described below. As a result of this program, the number of new
lawsuits filed against Owens Corning has been sharply reduced from historical
levels.
National Settlement Program
- ---------------------------
Owens Corning has implemented a National Settlement Program (NSP), which it
continues to expand. As of September 30, 1999, the number of plaintiffs' law
firms participating in the NSP has increased to approximately 110 and the
Company has settled, through the NSP, approximately 232,000 asbestos personal
injury claims. The NSP also establishes procedures and fixed payments for
resolving future claims brought by participating plaintiffs' law firms without
litigation through at least 2008. Average payments per claim under the NSP are
expected to be substantially lower than those experienced by Owens Corning for
comparable claims prior to the NSP.
The Company established the NSP in response to the rising cost in recent years
of mesothelioma settlements and judgments, as well as significant changes in the
legal environment, such as the Supreme Court's 1997 decision in GEORGINE V.
AMCHEM PRODUCTS, INC., striking down an asbestos class action settlement. The
NSP is designed to better manage Owens Corning's asbestos liability, and that of
Fibreboard (see Item B below), and to enable the Company to better predict the
timing and amount of indemnity payments for both pending and future claims.
Under the NSP, each participating law firm has agreed to a long-term settlement
agreement ("NSP Agreement") providing for the resolution of both present claims
(those claims, including unfiled claims, pending at the time a participating
plaintiffs' firm entered into an NSP Agreement) and future claims against Owens
Corning and Fibreboard for settlement amounts negotiated with each participating
firm. NSP Agreements may be extended beyond 2008 by mutual agreement of the
parties.
As to present claims, settlement amounts to each claimant vary based on a number
of factors, including the type and severity of disease. All payments will be
subject to satisfactory evidence of a qualifying medical condition and exposure
to the Company's products, delivery of customary releases by each claimant, and
other conditions. The NSP allows claimants to receive prompt payment without
incurring the significant delays and uncertainties of litigation. Claimants
settling non-malignancy claims with the Company and/or Fibreboard have agreed to
accept as part of the settlement a pre-determined amount of additional
compensation if they later develop a more severe asbestos-related medical
condition.
- 18 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
Under each NSP Agreement, a participating firm also agrees (consistent with
applicable legal requirements) to recommend to its future clients, based on
appropriately exercised professional judgment, to resolve any future asbestos
personal injury claims against Owens Corning and Fibreboard through an
administrative processing arrangement, rather than litigation. Under such
arrangement, no settlement payment will be made for future claims unless
specified medical criteria, product exposure and other requirements are met, and
the amount of any such payment will be within a range of specified cash
settlement values based on the disease of the claimant and other factors. In
the case of future claims not involving malignancy, such criteria require
medical evidence of functional impairment. Payments to claimants for both
settled present and future claims are being managed by Integrex, a wholly-owned
Owens Corning subsidiary that specializes in, among other things, claims
processing.
Payments under the NSP for settled present claims will generally be made through
2002, with the majority of payments expected to occur in 1999 and 2000. As a
result of such payments, the Company's gross payments for asbestos litigation
claims will increase in 1999 and 2000 over the levels experienced in recent
years. It is anticipated that payments for a limited number of future "exigent
claims" (principally those of living malignancy claimants, as such term is
defined under the NSP Agreements) will generally begin in 2001. Payments for
other qualifying future claims will begin in 2003, and will be made on the
following schedule, based on when such claims are accepted by Owens Corning for
payment:
Date Accepted for Payment Year in which Claim Will be Paid
January 1, 1999 through June 30, 2000 2003
July 1, 2000 through December 31, 2001 2004
January 1, 2002 through June 30, 2003 2005
July 1, 2003 through December 31, 2004 2006
January 1, 2005 through June 30, 2006 2007
July 1, 2006 or later 60 days to one year after
acceptance
If, in any calendar year after 2002, the payment of any amounts under the NSP in
respect of future claims might cause a default under the Company's then
prevailing loan covenants, the Company will have the right to defer payment of
such amounts until February 15 of the following year. Commencing in 2003,
subject to the variables and uncertainties discussed below, Owens Corning
expects that its payments for such amounts will not exceed $150 million per
year. Additional settlement payments will be made by Fibreboard (see Item B
below).
Owens Corning and Fibreboard (see Item B below) each retains the right to
terminate any individual NSP Agreement if in any year more than a specified
number of plaintiffs represented by the plaintiffs' firm in question opt out of
such agreement. Opt out procedures for future claims are specified in the
settlement agreements, and provide for mediation and further negotiation before
a claimant may pursue his or her case in the court system.
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
Non NSP Litigation
- ------------------
The Company expects to pay approximately $190 million in 1999 and approximately
$90 million in 2000 to resolve substantially all of the remaining pre-NSP
settlements and pending appeals in respect of verdicts incurred prior to the
implementation of the NSP.
There continues to be litigation (although at a much reduced level) involving
prior unsettled claims, as well as newly filed claims, brought by plaintiffs'
law firms that are not participating in the NSP. In the first three quarters of
1999, approximately $1 million in verdicts against Owens Corning were received
in respect of these claims. No judgment has yet been entered for any of these
verdicts, all of which Owens Corning is planning to appeal.
Asbestos Related Payments
- -------------------------
In the first three quarters of 1999, the Company made $622 million of asbestos
related payments. These payments fell within four major categories: (1) Pre-NSP
settlements described above; (2) NSP settlements; (3) Non-NSP settlements -
covering cases not resolved by the NSP; and (4) Defense and administrative
expenses.
The Company currently estimates that it will incur total asbestos related
payments of approximately $950 million for 1999, as follows:
(in millions of dollars)
Pre-NSP Settlements $190
NSP Settlements 655
Non-NSP Settlements 35
Defense and Administrative Expenses 70
All amounts discussed above are before tax and application of insurance
recoveries. The Company currently estimates that it will incur total asbestos
payments before tax and application of insurance recoveries of approximately
$900 million during 2000, and approximately $350 million in 2001 and $250
million in 2002. The actual amounts of such payments will depend on
numerous variables, including the rate at which NSP claims are submitted and
processed, the severity of disease (especially mesothelioma) involved in such
claims, the number of non-NSP claims resolved and the cost of resolving such
claims.
Asbestos Legislation
- --------------------
Both the United States Senate and House of Representatives have held hearings on
proposed legislation (S 758 and HR 1283) intended to address the problem of
asbestos litigation. The House has deferred action on the proposed legislation
until 2000.
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
Although the original House and Senate proposals were virtually identical, the
House has been active in revising HR 1283. It is likely that these revisions
will significantly alter the original bill. While details of the revised
legislation have yet to be determined, the Company believes that key members of
Congress view the NSP favorably and that, if any asbestos legislation is
considered or enacted, it will be consistent with the continued implementation
of the NSP.
Other Asbestos Related Litigation
- ---------------------------------
As previously reported, Owens Corning believes that it has spent significant
amounts to resolve claims of asbestos claimants whose injuries were caused or
contributed to by cigarette smoking. The Company is pursuing litigation against
tobacco companies (discussed below) to obtain payment of monetary damages
(including punitive damages) for payments made by Owens Corning and Fibreboard
to asbestos claimants who developed smoking related diseases. The Company is
also pursuing recovery from tobacco companies through legislative lobbying
efforts.
In October 1998, the Circuit Court for Jefferson County, Mississippi granted
leave to file an amended complaint in an existing action to add claims by Owens
Corning against seven tobacco companies and several other tobacco industry
defendants. The court has set a February 2000 trial date for this action. In
addition to the Mississippi lawsuit, a lawsuit brought in December 1997 by Owens
Corning and Fibreboard is pending in the Superior Court for Alameda County,
California against the same tobacco companies. In both cases, the Company seeks
monetary recovery for, among other things, a portion of the payments made to
persons who brought asbestos claims and were also smokers.
Owens Corning has reached agreement settling in a satisfactory manner its
lawsuits pending in federal court against the owners and operators of certain
pulmonary function testing laboratories in the southeastern United States.
Insurance
- ---------
As of September 30, 1999, Owens Corning had approximately $231 million in
unexhausted insurance coverage (net of deductibles and self-insured retentions)
under its liability insurance policies applicable to asbestos personal injury
claims. A substantial portion of this amount represents unconfirmed potential
non-products coverage with excess level insurance carriers, as to which Owens
Corning has estimated its probable recoveries. The Company also has a
significant amount of other unconfirmed potential non-products coverage with
excess level carriers. The amount and timing of recoveries from excess level
policies will depend on subsequent negotiations or proceedings.
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
Reserve
- -------
The Company's financial statements include a reserve for the estimated cost
associated with Owens Corning's asbestos personal injury claims. This reserve
was established initially through a charge to income in 1991, with an additional
$1.1 billion charge to income (before taking into account probable non-products
insurance recoveries) recorded in 1996. Reflecting the substantial new
information about now settled present and expected future claims gained in the
NSP negotiations with plaintiffs' law firms, and the recent changes in the legal
environment referred to above, the Company in the fourth quarter of 1998
increased its asbestos reserves by $1.4 billion. This resulted in an after-tax
charge to 1998 earnings of $906 million. Subject to the variables and
uncertainties referred to below, Owens Corning estimates that its liabilities
associated with pending and unasserted future asbestos personal injury
claims and its insurance recoveries in respect of such claims, at September
30, 1999, are as follows:
September 30, December 31,
1999 1998
---- ----
(In millions of dollars)
Reserve for asbestos litigation claims
- --------------------------------------
Current $ 1,050 $ 850
Other 958 1,780
-------- ---------
Total Reserve $ 2,008 $ 2,630
Insurance for asbestos litigation claims
- ----------------------------------------
Current $ 25 $ 150
Other 206 260
Total Insurance $ 231 $ 410
--------- ----------
Net Owens Corning Asbestos Liability $ 1,777 $ 2,220
========= ==========
The NSP has improved Owens Corning's ability to quantify the cost of resolving
virtually all of the claims that were pending (filed and unfiled) against the
Company prior to the NSP. Nevertheless, the Company cautions that its estimate
of its liabilities for non-NSP and future NSP claims is influenced by numerous
variables that are difficult to predict and that such estimate therefore remains
subject to considerable uncertainty. Such variables include: the severity of
disease (especially mesothelioma) involved in such claims; the number of
claims filed in the future; how many of such claims are covered by an
NSP Agreement; the extent, if any, to which an individual plaintiff
exercises his or her right to opt out of an NSP Agreement and/or utilize other
counsel that is not a participant in the NSP; the extent, if any, to which
counsel that are not bound by an NSP Agreement undertake the
representation of asbestos personal injury plaintiffs against Owens Corning;
the extent, if any, to which Owens Corning exercises its right to terminate one
or more of the NSP Agreements due to excessive opt-outs or for other reasons;
and Owens Corning's success in controlling the costs of resolving claims outside
the NSP.
Owens Corning will continue to review the adequacy of its estimates of
liabilities and insurance on a periodic basis and make such adjustments as may
be appropriate.
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
Management Opinion
- ------------------
Although any opinion is necessarily judgmental and must be based on an
assessment of the variables and uncertainties described above, in the opinion of
management, while any additional uninsured and unreserved costs which may arise
out of pending personal injury asbestos claims and additional similar asbestos
claims filed in the future may be substantial over time, management believes
that such additional costs will not impair the ability of the Company to meet
its obligations, to reinvest in its businesses, or to pursue its growth agenda.
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured insulation products containing asbestos.
Fibreboard has since been named as defendant in many thousands of personal
injury claims for injuries allegedly caused by asbestos exposure.
National Settlement Program
- ---------------------------
Fibreboard is a participant in the NSP and is a party to the NSP Agreements
discussed in Item A. These agreements settle claims that were pending against
Fibreboard and claims that could be filed against Fibreboard following the
lifting of the injunction under the Global Settlement (discussed below). The
NSP Agreements also provide for the resolution of other future asbestos personal
injury claims against Fibreboard through the administrative processing
arrangement described in Item A. The timing of payments for pending and future
Fibreboard claims will be consistent, generally, with the timing of Owens
Corning payments, described in Item A. The NSP Agreements will become effective
as to Fibreboard at such time as the Global Settlement is finally disapproved
and the Insurance Settlement (discussed below) becomes effective.
Global Settlement
- -----------------
In 1993, Fibreboard, its insurers and representatives of a class of future
asbestos plaintiffs who had claims arising from exposure to asbestos prior to
August 27, 1993, entered into the Global Settlement. Under the Global
Settlement, asbestos claims pending against Fibreboard would have been resolved
through a limited-fund class action settlement.
In June 1999, the Supreme Court issued its decision in ORTIZ V. FIBREBOARD
overturning the Global Settlement. The Supreme Court determined that the Global
Settlement had not met the requirements for approving a limited-fund class under
Federal Rule of Civil Procedure 23 and returned the case to the lower courts for
further proceedings. In the third quarter of 1999, the district court lifted
the injunction barring the filing of asbestos claims against Fibreboard. The
district court has entered an order disapproving the Global Settlement. The
time to appeal this order will expire during the fourth quarter of 1999. If no
appeal is made, the Insurance Settlement will become effective at the expiration
of the appeal period.
Insurance Settlement
- --------------------
In 1993, Fibreboard and two of its insurers, Continental Casualty Company
("Continental") and Pacific Indemnity Company ("Pacific"), entered into the
Insurance Settlement, which was structured as an alternative solution in the
event the Global Settlement were overturned. The Insurance Settlement is final
and not subject to appeal.
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued)
Since 1993, Continental and Pacific have paid, either directly or through an
escrow account funded by them, for substantially all settlements of asbestos
claims reached prior to the initiation of the NSP. At September 30, 1999,
approximately 132,000 asbestos claims remained pending against Fibreboard.
Under the Insurance Settlement, Continental and Pacific will provide
approximately $1.9 billion to Fibreboard to fund Fibreboard's costs of resolving
these pending claims and expected future asbestos claims either under the NSP or
in the tort system.
Management Opinion
- ------------------
The Company cautions that its estimate of Fibreboard's asbestos related
liabilities is influenced by the same types of variables and is subject to
similar uncertainty as in the case of Owens Corning. Although any opinion is
necessarily judgmental and must be based on an assessment of the variables and
uncertainties described above, the Company believes the amounts available under
the Insurance Settlement will be adequate to fund Fibreboard's ongoing defense
and indemnity costs associated with asbestos-related personal injury claims for
the foreseeable future.
- 24 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(All per share information in Item 2 is on a diluted basis.)
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains 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, as amended. These forward-looking statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected in the statements. Some of the important factors that may
influence possible differences are continued competitive factors and pricing
pressures, construction activity, interest rate movements, issues involving
implementation of new business systems, Year 2000 readiness, achievement of
expected cost reductions, asbestos litigation, and general economic conditions.
RESULTS OF OPERATIONS
Business Overview
- ------------------
The Company's growth agenda has focused on increasing sales and earnings by (i)
acquiring businesses with products that can be sold through existing or
complementary distribution channels, (ii) achieving productivity improvements
and cost reductions in existing and acquired businesses and (iii) entering new
growth markets. The Company is implementing two major initiatives, the System
Thinking (TM) strategy and Advantage 2000, to enhance sales growth and achieve
productivity improvements across all businesses. System Thinking for the Home
(TM) leverages the Company's broad product offering and strong brand recognition
to increase its share of the building materials and home improvement markets.
This systems approach represents a shift from product-oriented selling to
providing systems-driven solutions that combine the Company's insulation,
roofing, exterior and acoustic systems, to provide a high performance, cost-
effective building "envelope" for the home. In the Composite Materials
business, the Company has partnered with the plastics industry and, with the
Company's System Thinking philosophy, is taking a solution-oriented, customer-
focused approach toward the continuous development of substitution opportunities
for composite materials. In addition, the Company is implementing Advantage
2000, a fully integrated business technology system designed to reduce costs and
improve business processes.
The Company has grown its sales from nearly $3.4 billion in 1994 to $5.0 billion
in 1998. Acquisitions have been a significant component of that growth.
Between 1994 and 1997, the Company completed 17 acquisitions for an aggregate
purchase price of over $1.2 billion. The Company's acquisitions have broadened
its lines of business to include siding, accessories and other home exteriors
and have diversified its materials portfolio beyond fiber glass to include
polymers such as vinyl and styrene, and metal and stone. In 1997, the Company
completed the two largest of these acquisitions by acquiring Fibreboard
Corporation ("Fibreboard") and AmeriMark Building Products, Inc. ("AmeriMark"),
making Owens Corning the leader in the U.S. vinyl siding, siding accessories and
manufactured stone markets, as well as a large specialty distributor in North
America through 180 Company-owned distribution centers.
- 25 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Despite the benefits of its growth agenda, the Company experienced a highly
competitive pricing environment during 1997 and into 1998. In order to improve
its strategic position and operational efficiency, the Company implemented
several profitability and productivity initiatives, including the strategic
restructuring program, discussed below, which was begun in late 1997. This
program, along with the realignment of the Company's Exterior Systems business,
enabled the Company to benefit from cost reductions of approximately $142
million during 1998. The specific objectives of this strategic program are
discussed in "Restructuring of Operations and Other Actions" below and in Note 3
to the Consolidated Financial Statements.
During 1998, the pricing environment applicable to several of the Company's
major products, particularly residential insulation, began to improve. By the
end of 1998, the Company's average price levels of insulation products surpassed
the year-end 1997 levels. Despite the successful implementation of price
increases during 1998, including the restoration of residential insulation
prices to their late 1996 levels, income from operations during 1998 was
adversely impacted by approximately $44 million, compared to 1997, due largely
to the relatively low insulation pricing base in effect at the beginning of
1998, the lag in fully realizing the 1998 price increases as the Company honored
the remainder of pre-existing pricing contracts, and price declines attributable
to vinyl siding products.
The cost reductions and significant pricing improvements achieved during 1998
have continued into the first nine months of 1999. During the second quarter of
1999, the Company announced price increases applicable to certain of its vinyl
siding, residential insulation, and composites products, all of which became
effective July, 1999.
Quarter and Nine Months Ended September 30, 1999
- ------------------------------------------------
Sales and Profitability
- -----------------------
Net sales for the quarter ended September 30, 1999 were $1.333 billion, up
slightly from the third quarter 1998 level of $1.324 billion. The sales
increase reflects continued strength in the North American Building Materials
business; higher volume, offset partially by price weakness, in the Composite
Materials business; and the transfer of the Company's yarns business to an
unconsolidated joint venture at the end of the third quarter of 1998. On a
comparative basis, excluding the yarns and other divested businesses in 1998,
sales during the third quarter of 1999 were up 6% from the third quarter of
1998. The impact of currency translation on sales in foreign currencies was
slightly unfavorable during the third quarter of 1999, compared to the third
quarter of 1998, reflecting a stronger U.S. dollar during 1999. Please see Note
1 to the Consolidated Financial Statements.
In the Building Materials business, sales during the third quarter of 1999
reflect the continued strength in the U.S. roofing and insulation markets. The
Company continues to benefit from improved pricing of many of its products,
particularly residential insulation. Please see "Building Materials" below for
further discussion of these matters.
In the Composites business, sales reflect a reduction attributable to the
transfer of the Company's yarns business indicated above. Composites sales also
reflect volume increases in the U.S. and Europe, offset partially by the impact
of pricing pressure, particularly in Europe. Please see "Composite Materials"
below for further discussion of these matters.
- 26 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Sales outside the U.S. represented 17% of total sales during the third quarter
of 1999, compared to 18% during the third quarter of 1998. The relative decline
in non-U.S. sales is due to the 1999 sales increases attributable to U.S.
roofing and insulation products. Gross margin in the third quarter of 1999 was
26% of net sales, compared to 20% in the third quarter of 1998. Gross margin
for the third quarter of 1998 included a charge of $60 million, or 4% of sales,
for costs associated with the Company's strategic restructuring program. The
increase in gross margin also reflects price increases applicable to several of
the Company's products and the incremental benefits of the cost reductions
resulting from the Company's strategic restructuring program.
For the quarter ended September 30, 1999, the Company reported net income of $89
million, or $1.53 per share, compared to net income of $96 million, or $1.66 per
share, for the quarter ended September 30, 1998. Net income in the third
quarter of 1999 reflects the increase in gross margin, attributable to pricing
improvements, particularly in U.S. residential insulation markets, and the
incremental benefits of the cost-saving programs implemented throughout 1998.
Net income in the third quarter of 1999 also reflects a one-time tax credit of
approximately $9 million for a special tax election associated with the
Company's U.K. operations.
Net income in the third quarter of 1998 included a $148 million charge ($108
million after-tax) for restructure and other costs, a $292 million gain ($174
million after-tax) from the sale of the Company's yarns and other businesses,
and a $39 million after-tax extraordinary loss from the early retirement of
debt. The increase in marketing and administrative expenses during the third
quarter of 1999, compared to the third quarter of 1998, largely reflects costs
associated with marketing and growth programs. Cost of borrowed funds during
the third quarter of 1999 was $40 million, $3 million higher than the third
quarter 1998 level, reflecting higher average interest rates on floating rate
debt. Equity in net income of affiliates during 1999 compared to 1998 reflects
unfavorable results from the Company's yarns joint venture. The reduction in
minority interest expense reflects the Company's third quarter 1998 repurchase
of its Trust Preferred Hybrid Securities. Please see also Liquidity, Capital
Resources and Other Related Matters below.
Net sales for the nine months ended September 30, 1999 were $3.773 billion, up
slightly from the $3.747 billion reported for the first nine months of 1998. On
a comparative basis, excluding the yarns and other divested businesses in 1998,
sales for the first nine months of 1999 were up 7% from the prior year period,
largely reflecting the strength in North American Building Materials discussed
above.
Net income for the nine months ended September 30, 1999 was $209 million, or
$3.62 per share, up from $163 million, or $2.87 per share, for the first nine
months of 1998. The increase reflects the benefits of the cost reduction
programs, volume and price increases attributable to North American Building
Materials, and volume increases attributable to North American and European
composites products. Included in net income for the nine months ended September
30, 1998 are the third quarter 1998 items mentioned above as well as the
following items from the first quarter of 1998: a $95 million pretax charge
($63 million after-tax) for the Company's restructuring program and an $84
million pretax gain ($52 million after-tax) from the sale of the Company's 50%
ownership interest in Alpha/Owens-Corning. Please see Notes 3 and 4 to the
Consolidated Financial Statements.
- 27 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Restructuring of Operations and Other Actions
- ---------------------------------------------
Please see also Note 3 to the Consolidated Financial Statements.
During the first and third quarters of 1998, the Company recorded a total pretax
charge of $243 million for restructuring and other actions as part of the
Company's strategic restructuring program to reduce overhead, enhance
manufacturing productivity, and close manufacturing facilities, which was
announced in early 1998. This charge included $117 million for restructuring
and $126 million for other actions in 1998, the majority of which represented
asset impairments. On a cumulative basis since the fourth quarter of 1997, the
Company has recorded a total pretax charge of $386 million for this program, of
which $185 million represented restructure costs and $201 million represented
other actions.
The $117 million restructuring charge in 1998 included approximately $90 million
for costs associated with the elimination of approximately 1,900 positions
worldwide and $27 million for the divestiture of non-strategic businesses and
facilities. The $27 million cost is composed of $12 million for the closure of
certain U.S. manufacturing facilities, $6 million for the closure of a pipe
manufacturing facility in China, and $9 million for other actions, and reflects
a total of $3 million of exit cost liabilities, comprised primarily of lease
commitments.
The primary components of the $126 million charge for other actions in 1998 and
their classification on the Company's consolidated statement of income included:
$30 million to write down to fair value certain manufacturing assets held for
use in China, due primarily to poor current and projected financial results,
recorded as cost of sales; $15 million to write down to net realizable value
equipment and inventory made obsolete by changes in the Company's manufacturing
and marketing strategies, recorded as cost of sales; $17 million for the write-
down of an investment in and the write-off of a receivable from a joint venture
in Korea to reflect the business outlook at that time and the fair market value
of the assets, recorded as other operating expenses; $12 million for the write-
down of goodwill associated with the 1995 acquisition of Fiber-lite, determined
to be unrecoverable due to a change in market conditions and customer demand,
recorded as other operating expenses; and $9 million for the write-down of
certain assets in the U.S. to fair market value, recorded as cost of sales. The
Company plans to hold and use the investments but disposed of most of the
equipment in 1998. Also included in the $126 million charge for other actions
were $13 million for the write-off of certain receivables in the U.S. and Asia
determined to be uncollectable, recorded as cost of sales and other operating
expenses; and $30 million for other actions recorded as cost of sales, marketing
and administrative expenses, and other operating expenses.
As indicated above, certain of the charges recorded during 1998 represent
valuation adjustments associated with asset impairments. The Company
continually evaluates whether events and circumstances have occurred that
indicate that the carrying amount of certain long-lived assets is recoverable.
When factors indicate that a long-lived asset should be evaluated for possible
impairment, the Company uses an estimate of the expected undiscounted cash flows
to be generated by the asset to determine whether the carrying amount is
recoverable or if an impairment exists. When it is determined that an
impairment exists, the Company uses the fair market value of the asset, usually
measured by the discounted cash flows to be generated by the asset, to determine
the amount of the impairment to be recorded in the financial statements.
- 28 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
As a result of the strategic restructuring program, the Company realized a
decrease in manufacturing and operating expenses of approximately $110 million
during 1998. The Company is on track to achieve total annual pretax savings of
approximately $175 million in 1999 from this program. The expected $175 million
in cost reductions, the majority of which will be cash savings, is comprised of
$150 million in reduced personnel costs, $14 million in reduced facility costs,
and $11 million of reductions in related program spending. The Company has also
realized additional cost savings during 1999 resulting from improved logistics
and materials sourcing.
The Company also implemented programs to gain synergies in its Exterior Systems
Business during 1998. As a result of these programs, which included closing
redundant facilities, integrating business systems, and improving purchasing
leverage, the Company reduced costs by approximately $32 million during 1998 and
is on track to save an additional $18 million in 1999, the majority of which
will be cash savings.
Building Materials
- ------------------
In the Building Materials segment, sales increased 4% in the third quarter of
1999, compared to the third quarter of 1998, largely reflecting volume and price
improvements attributable to U.S. residential insulation products. Price
improvements in the Company's North American roofing and vinyl siding markets
during the third quarter of 1999 were offset by volume declines in those
markets. Insulation volumes in the fourth quarter are expected to be flat to
slightly down compared to fourth quarter 1998. The impact of sales denominated
in foreign currencies was slightly unfavorable during the third quarter of
1999, compared to the third quarter of 1998, reflecting a stronger U.S. dollar
during 1999.
Income from operations was $145 million during the third quarter of 1999,
compared to $107 million during the third quarter of 1998. Income from
operations in 1999 reflects incremental cost reductions resulting from the
strategic restructuring program, as well as price increases in the U.S. roofing,
residential insulation, and vinyl siding markets. While price strength should
continue into the fourth quarter, any benefits are likely to be adversely
impacted by higher raw material and other costs as well as lower volumes. The
Company expects business conditions in Europe to remain highly competitive
during the fourth quarter of 1999. Please see Note 1 to the Consolidated
Financial Statements.
Composite Materials
- -------------------
In the Composite Materials segment, sales were down 13% during the third quarter
of 1999, compared to the third quarter of 1998, due largely to the disposition
(discussed below) of 51% of the Company's yarns and specialty materials business
(the "yarns business") late in the third quarter of 1998. Adjusted for the
impact of this disposition, sales were up 10% during the third quarter of 1999,
compared to 1998, due to volume increases in the U.S., driven by strong roofing
mat sales, and in Europe, particularly in reinforcements. The translation
impact of sales denominated in foreign currencies was slightly unfavorable
during the third quarter of 1999, reflecting a stronger U.S. dollar during 1999.
Income from operations was $39 million in the third quarter of 1999, compared to
$44 million in the prior-year period. Approximately one third of the 1998
income was attributable to the yarns business. Adjusted for the disposition of
the yarns business, income from operations increased 30% compared to 1998,
reflecting productivity improvements and the volume increases in the U.S. and
European markets indicated above, offset partially by pricing weakness,
particularly in Europe. The Company expects business conditions in Europe to
remain highly competitive during the fourth quarter of 1999. Please see
Note 1 to the Consolidated Financial Statements.
- 29 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
During the third quarter of 1998, the Company formed a joint venture for its
yarns business to which it contributed two manufacturing plants and certain
proprietary technology. On September 30, 1998, the Company completed the
disposition of 51% of the yarns business to a U.S. subsidiary of Groupe Porcher
Industries of Badinieres, France for $340 million. The Company continues to
have a 49% ownership interest in the joint venture. Upon closing, the Company
also received a distribution of approximately $193 million from the joint
venture. By retaining a 49% ownership interest in the joint venture, the
Company will continue to safeguard its proprietary technology and participate in
the yarns market. Please see Note 4 to the Consolidated Financial Statements.
The results of operations of the yarns business were reflected in the Company's
consolidated statement of income through the period ending September 30, 1998.
For the nine months ended September 30, 1998, the yarns business recorded sales
of approximately $205 million and income from operations of approximately $57
million. Effective September 30, 1998, the Company accounts for its ownership
interest in the yarns joint venture under the equity method.
Accounting Changes
- ------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS 133 is effective for fiscal
years beginning after June 15, 2000, but earlier adoption is allowed.
The Company is assessing the impact of SFAS 133 on its financial statements and
plans to adopt this accounting change effective January 1, 2001. The Company
has substantially completed an inventory of its freestanding derivatives,
including forward contracts, option contracts, currency swaps and interest rate
swaps, and has begun an inventory of derivatives which may be embedded in other
contracts. The Company plans to complete these inventories, determine the
financial impact of adoption, evaluate existing risk management activities, and
perform an information systems assessment by the end of the second quarter of
2000. The Company will review its risk management policies and modify its
business processes as needed in order to comply with SFAS 133 and to temper the
volatility in earnings and other comprehensive income.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Cash flow from operations was $139 million for the quarter ended September 30,
1999, the same as the quarter ended September 30, 1998. Compared to the third
quarter of 1998, cash flow from operations in 1999 reflects an increase in
payments for asbestos litigation claims, net of insurance, and increased
inventory levels, offset by reduced spending for the Company's restructuring
program. The increase in payments for asbestos litigation claims reflects the
Company's implementation of the National Settlement Program (NSP) in the fourth
quarter of 1998.
- 30 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
During the third quarter of 1999, payments for asbestos litigation claims were
$252 million and proceeds from insurance were $147 million, compared to $70
million and $24 million, respectively, during the third quarter of 1998. Please
see Notes 8 and 11 to the Consolidated Financial Statements.
Inventories at September 30, 1999 were $532 million, an increase of $95 million
from the December 31, 1998 level, due largely to the seasonal build of
inventories. While demand for Building Materials products and systems was
strong during the third quarter of 1999 and continued to be brisk at the end of
the quarter, the Company had not yet seen the seasonal up-tick normal for that
time of year. Receivables at September 30, 1999 were $584 million, a $133
million increase over the December 31, 1998 level, attributable to the seasonal
pattern of business activity. The decrease in accounts payable and accrued
liabilities from $942 million at December 31, 1998 to $784 million at September
30, 1999 reflects typical payment patterns as well as spending associated with
the Company's restructure liabilities during the first nine months of the year.
At September 30, 1999, the Company's net working capital was negative $489
million and its current ratio was .76, compared to negative $354 million and
.81, respectively, at December 31, 1998 and positive $735 million and 1.58,
respectively, at September 30, 1998. A $700 million increase in the current
portion of the reserve for asbestos litigation claims, net of insurance, due to
the implementation of the Company's National Settlement Program, partially
offset by the related income tax benefit, contributed to the decrease in net
working capital at September 30, 1999 compared to September 30, 1998. Another
factor contributing to the decrease was the Company's unusually high cash level
of $540 million at September 30, 1998, reflecting the disposition on that date
of 51% of the Company's yarns business (discussed above). The proceeds of this
disposition were used to reduce borrowings under the Company's long-term bank
credit facility in the fourth quarter of 1998.
The Company's total borrowings at September 30, 1999 were $2.181 billion, $555
million higher than at year-end 1998. The increase reflects typical seasonal
cash usage by the Company to build inventory and other working capital during
the first nine months of the year, and compares to a $545 million increase
during the same period in 1998. This increase also reflects the increased
payments for asbestos litigation claims, net of insurance, during 1999 under the
NSP.
As of September 30, 1999, the Company had unused lines of credit of $1.120
billion available under long-term bank credit facilities and an additional $116
million under short-term facilities, compared to $1.307 billion and $124
million, respectively, at year-end 1998. The decrease in unused available lines
of credit reflects the Company's increased borrowings at September 30, 1999
compared to December 31, 1998. During the first quarter of 1999, the Company
issued $250 million of debt securities, the proceeds of which were used to
reduce borrowings under the long-term bank credit facility. Letters of credit
issued under the facility also reduce the available credit. The impact of such
reduction is reflected in the unused lines of credit discussed above. Please
see Note 5 to the Consolidated Financial Statements.
During 1998, the Company implemented a debt realignment program intended to
reduce financing costs. This program, which extended the average length of term
debt from four years to ten years, included the issuance of a total of $950
million in new debt securities, the repurchase of the Company's $309 million of
Trust Preferred Hybrid Securities and the retirement of $361 million of higher-
rate debt securities.
- 31 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Capital spending for property, plant and equipment, excluding acquisitions, was
$39 million in the third quarter of 1999. The Company anticipates that 1999
capital spending, exclusive of acquisitions and investments in affiliates, will
be approximately $220 million, most of which has been expended or is committed.
The Company expects that funding for these expenditures will be from the
Company's operations and external sources as required.
Asbestos Litigation
- -------------------
Owens Corning has implemented the NSP, which, as of September 30, 1999, has
settled approximately 232,000 asbestos personal injury claims against Owens
Corning. The NSP has also established procedures and fixed payments for
resolving future claims brought by participating plaintiffs' law firms without
litigation through at least 2008.
Payments under the NSP for settled present claims will generally be made through
2002, with the majority of payments expected to occur in 1999 and 2000. As a
result of such payments, the Company's gross payments for asbestos litigation
claims will increase in 1999 and 2000 over the levels experienced in recent
years. It is anticipated that payments for a limited number of future "exigent
claims" (principally those of living malignancy claimants, as such term is
defined under the NSP Agreements) will generally begin in 2001. Payments for
other qualifying future claims will begin in 2003, and will be made on the
following schedule, based on when such claims are accepted by Owens Corning for
payment:
Date Accepted for Payment Year in which Claim Will be Paid
------------------------- --------------------------------
January 1, 1999 through June 30, 2000 2003
July 1, 2000 through December 31, 2001 2004
January 1, 2002 through June 30, 2003 2005
July 1, 2003 through December 31, 2004 2006
January 1, 2005 through June 30, 2006 2007
July 1, 2006 or later 60 days to one year after
acceptance
If, in any calendar year after 2002, the payment of any amounts under the NSP in
respect of future claims might cause a default under the Company's then
prevailing loan covenants, the Company will have the right to defer payment of
such amounts until February 15 of the following year. Commencing in 2003,
subject to the variables and uncertainties discussed in Note 11 to the
Consolidated Financial Statements, Owens Corning expects that its
payments for such amounts will not exceed $150 million per year. Additional
settlement payments will be made by Fibreboard. Please see Note 11 to the
Consolidated Financial Statements.
Gross payments for asbestos litigation claims during the third quarter of 1999
by Owens Corning (excluding Fibreboard), including payments for claims settled
in prior years, were $252 million. Proceeds from insurance were $147 million,
resulting in a net pretax cash outflow of $105 million ($68 million after-tax).
Over the next twelve months, the total payments for asbestos litigation claims
by Owens Corning (excluding Fibreboard) are expected to be approximately $1,050
million. Proceeds from insurance of $25 million are expected to be available to
cover these costs, resulting in a net pretax cash outflow of $1,025 million
($665 million after tax).
Gross payments for asbestos litigation claims against Fibreboard during the
first nine months of 1999 were approximately $85 million, all of which were paid
directly by Fibreboard's insurers or from an escrow account funded by its
insurers to claimants on Fibreboard's behalf. Fibreboard is a party to the NSP
Agreements and anticipates that a substantial majority of its asbestos claims
will be resolved under the NSP. In June 1999, the United States Supreme Court
overturned a limited-fund class action settlement of Fibreboard's asbestos
claims.
- 32 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
As a result, Fibreboard is expected to become entitled to an Insurance
Settlement of approximately $1.9 billion, which will be available to pay
Fibreboard's pending and future asbestos claims, including claims under the NSP.
Please see Notes 8 and 11 to the Consolidated Financial Statements.
The Company expects funds generated from operations, together with funds
available under long and short term bank credit facilities, to be sufficient to
satisfy its debt service obligations under its existing and anticipated
indebtedness, its contingent liabilities for uninsured asbestos personal injury
claims, as well as its capital expenditure programs and growth agenda.
Environmental Matters
- ---------------------
The Company has been deemed by the Environmental Protection Agency (EPA) to be a
Potentially Responsible Party (PRP) with respect to certain sites under the
Comprehensive Environmental Response, Compensation and Liability Act
(Superfund). The Company has also been deemed a PRP under similar state or
local laws. In other instances, other PRPs have brought suits or claims against
the Company as a PRP for contribution under such federal, state or local laws.
During the third quarter of 1999, the Company was designated as a PRP in such
federal, state, local or private proceedings for 2 additional sites. At
September 30, 1999, a total of 45 such PRP designations remained unresolved by
the Company. The Company is also involved with environmental investigation or
remediation at a number of other sites at which it has not been designated a
PRP.
The Company has established a $28 million reserve for its Superfund (and similar
state, local and private action) contingent liabilities. Based upon information
presently available to the Company, and without regard to the application of
insurance, the Company believes that, considered in the aggregate, the
additional costs associated with such contingent liabilities, including any
related litigation costs, will not have a materially adverse effect on the
Company's results of operations, financial condition or long-term liquidity.
The 1990 Clean Air Act Amendments (Act) provide that the EPA will issue
regulations on a number of air pollutants over a period of years. In June 1999,
the EPA issued regulations for wool fiber glass and mineral wool. The Company
anticipates that its other sources to be regulated will be amino/phenolic resin,
secondary aluminum smelting, wet formed fiber glass mat, asphalt processing
and roofing, metal coil coating, and open molded fiber-reinforced plastics.
The EPA's currently announced schedule is to issue regulations
covering amino/phenolic resin and secondary aluminum smelting in 1999; and
wet formed fiber glass mat, asphalt processing and roofing, metal coil
coating and fiber-reinforced plastics in 2000, with implementation as to
existing sources up to three years thereafter. Based on information now known
to the Company, including the nature and limited number of regulated materials
it emits, the Company does not expect the Act to have a materially adverse
effect on the Company's results of operations, financial condition or long-term
liquidity.
Year 2000 Readiness
- -------------------
This information should be considered a Year 2000 Readiness Disclosure.
Background
- ----------
Some of the Company's existing information technology ("IT") systems and control
systems containing embedded technology such as processors, controllers and
microchips ("Non-IT") were originally programmed using two digits rather than
four digits to define the applicable year. As a result, such systems, if not
remediated, may experience miscalculations or disruptions when processing
information containing dates that fall after December 31, 1999 or other dates
that could cause computer malfunctions (the "Year 2000 Issue").
- 33 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company's State of Readiness
- --------------------------------
In recognition of the significance of the Year 2000 Issue, the Company formed a
senior management team representing business units and business process
functions including information technology, sourcing, customer relations,
logistics, facilities, and legal. This team oversees the Company's efforts to
assess and resolve the Year 2000 Issue. In addition, the Company's individual
organizational units have developed, and are implementing, Year 2000 plans.
These plans include assessments of all of the Company's IT and Non-IT systems,
and an evaluation of the external environment to identify significant exposure
areas and to develop appropriate remediation or other risk management
approaches. The Company has also developed business continuity plans to help
assure that all of its operations are prepared in the case of an unexpected
system, supplier or customer failure. During the third quarter, plant,
business, and corporate leadership took part in a formal review and approval
process that was designed to determine whether each business unit and process
area has completed its Year 2000 readiness efforts with regards to inventory,
remediation, testing, asset configuration management, contingency planning, and
"Day Zero" planning. With the exceptions noted throughout the remainder of this
Year 2000 discussion, all of which are not individually or collectively material
to overall Company operations, each business unit and process area has completed
its Year 2000 readiness efforts.
IT Systems
- ----------
The Company has been actively implementing new systems and technology on a
worldwide basis since 1995 as part of its Advantage 2000 program to improve
productivity and operational efficiency. One objective of this initiative is to
help ensure all business transactions are supporting requirements to process
data accurately in the year 2000 and beyond. The scope of this program has been
continuously expanded to include each of the seventeen acquisitions made by the
Company during the past five years.
To date 100% of the Company's IT systems have been remediated, tested and made
operational. This has been accomplished in part through the comprehensive
implementation of enterprise resource planning software across most of the
Company's business units. Deployments of these systems, which began in May, have
been completed at 97% of the Company's operations. The remaining deployments
will be completed by November 30, 1999. Development of all significant business
continuity plans is complete.
Non-IT Systems
- --------------
The Company completed an inventory and assessment of Non-IT systems in its
operating facilities during the first quarter, 1999. Those Non-IT systems that
may fail as a result of the Year 2000 Issue have been identified and corrective
actions such as replacement, update, or installation of vendor supplied upgrades
are substantially complete. Concurrent with this renovation process and on a
continuing basis as part of asset configuration management, the Company is
continuing the testing of Year 2000 corrections to ensure that Non-IT systems
will function properly on key dates. This is in accordance with testing
methodologies that management believes are reasonable and reflective of
practices employed by comparable companies. Remediation, replacement, and
updating of Non-IT systems has been managed within each business unit.
- 34 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
In accordance with the process outlined above, over fourteen hundred systems for
the Building Materials business and over nineteen hundred systems for the
Composite Materials business have been identified, remediated, and tested. Of
these, over 99% are now Year 2000 ready and have been deployed. The remaining
items, at 4 sites, are on schedule to be completed by November 30, 1999.
Management continues to monitor the progress of deployment to ensure the timely
completion of each project. Continuity plans addressing critical business
processes have been developed and integrated across the Company.
External Environment
- --------------------
The Company is working with its suppliers and customers to assess their level of
Year 2000 readiness. This process includes both the receipt of confirmation
documents as well as selective on-site visits. The critical suppliers have been
identified, confirmations have been received, and planned on-site visits were
complete in the second quarter of 1999. At the end of the third quarter of 1999,
substantially all of the critical suppliers have been assessed as Year 2000
ready. The remaining suppliers are not single source suppliers nor deemed
critical for production. During the process, where deemed necessary,
alternative suppliers were identified and confirmed as year 2000 ready. The
Company does not plan to build additional inventories at this time and has
confirmed with suppliers their commitment to servicing existing supply
agreements. Procedures are in place to monitor supplier progress through the end
of the year.
Continuity plans have been developed for critical customers and suppliers to
address the Company's ability to continue to function in the event that an
external Year 2000 issue prevents any such customer or supplier from performing
its obligations to the Company.
Business Continuity Planning
- ----------------------------
Despite its significant efforts, the Company understands that disruptions may
occur due to circumstances beyond its control. As a result, the Company has
identified its critical business processes and has assessed the likelihood of
various Year 2000 failure scenarios. In order to minimize the effect of an
external disruption on business operations, business continuity plans have been
developed and integrated across the Company. In many instances, existing
business continuity plans were modified and enhanced to reflect unique aspects
of the Year 2000 issue.
Since a significant number of the Company's facilities will be operating as the
world enters the millennium, the Company has prepared for an integrated response
on "Day Zero". This response covers the time period from late December through
early January and includes positioning key personnel at sites worldwide, and
using several layers of backup communications systems to relay status, problems,
and other events. Business units will be polling their sites for information,
and the Communication Center will be monitoring events at these sites, as well
as those reported through media channels, to help the Company protect its
people, assets, and customer service capabilities. The Company has developed
integrated Day Zero plans to manage these efforts.
Estimated Costs
- ---------------
The cumulative cost to the Company of systems replacement, Year 2000
remediation, and regular update from 1995 through 1999 has been approximately
$160 million, including technology, design and development, and related training
and deployment in business locations.
- 35 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Risks
- -----
If needed modifications and upgrades of systems are not made on a timely basis
by the Company or its materially significant suppliers, the Company could
experience significant disruptions to one or more of its operations, financial
loss, legal liability and similar risks, any of which could have a material
adverse effect on the Company's results of operations or financial position.
The Company believes that the most reasonably likely worst case scenario would
be a short-term slowdown or cessation of manufacturing operations at one or more
of the Company's facilities and a short-term inability on the part of the
Company to process orders and billings in a timely manner, and to deliver
product to customers. In view of the Company's Year 2000 readiness program,
including continuity plans, the Company believes that significant disruptions
are unlikely and that any disruptions would be both short-term and manageable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of changes in foreign currency exchange
rates and interest rates in the normal course of business. The Company manages
such exposures through the use of certain financial and derivative financial
instruments. The Company's objective with these instruments is to reduce
exposure to fluctuations in earnings and cash flows associated with changes in
foreign currency exchange rates and interest rates.
The Company enters into various forward contracts and options, which change in
value as foreign currency exchange rates change, to preserve the carrying amount
of foreign currency-denominated assets, liabilities, commitments, and certain
anticipated foreign currency transactions and earnings.
The Company also enters into certain currency and interest rate swaps to protect
the carrying amount of its investments in certain foreign subsidiaries, to hedge
the principal and interest payments of certain debt instruments, and to manage
its exposure to fixed versus floating interest rates.
The Company's policy is to use foreign currency and interest rate derivative
financial instruments only to the extent necessary to manage exposures as
described above. The Company does not enter into foreign currency or interest
rate derivative transactions for speculative purposes.
The Company uses a variance-covariance Value at Risk (VAR) computation model to
estimate the potential loss in the fair value of its interest rate-sensitive
financial instruments and its foreign currency-sensitive financial instruments.
The VAR model uses historical foreign exchange rates and interest rates as an
estimate of the volatility and correlation of these rates in future periods. It
estimates a loss in fair market value using statistical modeling techniques.
The amounts presented below represent the maximum potential one-day loss in fair
value that the Company would expect from adverse changes in foreign currency
exchange rates or interest rates assuming a 95% confidence level:
- 36 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(continued)
September 30, December 31,
Risk Category 1999 1998
------------- ---- ----
(In millions of dollars)
Foreign currency $2 $1
Interest rate $9 $8
Virtually all of the potential loss associated with interest rate risk is
attributable to fixed-rate long-term debt instruments.
- 37 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 11, Contingent Liabilities, to the Company's Consolidated Financial
Statements above, which is incorporated here by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None of the constituent instruments defining the rights of the holders of
any class of the Company's registered securities was materially
modified in the quarter ended September 30, 1999.
(b) None of the rights evidenced by any class of the Company's registered
securities was materially limited or qualified in the quarter ended
September 30, 1999 by the issuance or modification of any other class
of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) During the quarter ended September 30, 1999, there was no material default
in the payment of principal, interest, sinking or purchase fund
installments, or any other material default not cured within 30 days,
with respect to any indebtedness of the Company or any of its significant
subsidiaries exceeding 5 percent of the total assets of the Company and
its consolidated subsidiaries.
(b) During the quarter ended September 30, 1999, no material arrearage in the
payment of dividends occurred, and there was no other material
delinquency not cured within 30 days, with respect to any class of
preferred stock of the Company which is registered or which ranks
prior to any class of registered securities, or with respect
to any class of preferred stock of any significant subsidiary of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter
ended September 30, 1999.
ITEM 5. OTHER INFORMATION
The Company does not elect to report any information under this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index below, which is incorporated here by reference.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1999.
- 38 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OWENS CORNING
Registrant
Date: November 15, 1999 By: /s/ J. Thurston Roach
J. Thurston Roach
Senior Vice President and
Chief Financial Officer
(as duly authorized officer)
Date: November 15, 1999 By: /s/ Steven J. Strobel
Steven J. Strobel
Vice President and Controller
- 39 -
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession.
LLC Interest Sale and Purchase Agreement, dated
as of July 31, 1998, among Owens Corning, Advanced
Glassfiber Yarns LLC and Glass Holdings Corp. (incorporated
herein by reference to Exhibit 2 to the Company's current
report on Form 8-K (File No. 1-3660), filed October 14, 1998).
Amendment No. 1 to LLC Interest Sale and Purchase Agreement dated
as of September 30, 1998 (incorporated herein by reference to
Exhibit 2 to the Company's current report on Form 8-K (File No.
1-3660), filed October 14, 1998).
(3) Articles of Incorporation and By-Laws.
(i) Certificate of Incorporation of Owens Corning, as amended
(incorporated herein by reference to Exhibit (3)(i) to the
Company's quarterly report on Form 10-Q (File No. 1-3660)
for the quarter ended March 31, 1997).
(ii) By-Laws of Owens Corning, as amended (incorporated herein
by reference to Exhibit (3) to the Company's annual report
on Form 10-K (File No. 1-3660) for the year 1995).
(11) Statement re Computation of Per Share Earnings (filed herewith).
(27) Financial Data Schedule (filed herewith).