UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended APRIL 2, 2006
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-81808
BUILDING MATERIALS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
DELAWARE 22-3276290
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1361 ALPS ROAD, WAYNE, NEW JERSEY 07470
(Address of Principal Executive Offices) (Zip Code)
(973) 628-3000
(Registrant's telephone number, including area code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
See Table of Additional Registrants Below.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of May 12, 2006, 1,015,010 shares of Class A Common Stock, $.001 par value of
the registrant were outstanding. There is no trading market for the common stock
of the registrant. As of May 12, 2006, the additional registrant had the number
of shares outstanding which is shown on the table below. There is no trading
market for the common stock of the additional registrant. As of May 12, 2006, no
shares of the registrant or the additional registrant were held by
non-affiliates.
ADDITIONAL REGISTRANTS
Address, including zip
code and telephone
State or other number, including area
jurisdiction of No. of code, of registrant's
Exact name of registrant incorporation or Shares Registration No./I.R.S. principal
as specified in its charter organization Outstanding Employer Identification No. executive offices
- --------------------------- ------------ ----------- --------------------------- -----------------
Building Materials Delaware 10 333-69749-01/ 1361 Alps Road
Manufacturing Corporation 22-3626208 Wayne, NJ 07470
(973) 628-3000
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
FIRST QUARTER ENDED
--------------------------------
APRIL 2, APRIL 3,
2006 2005
-------- --------
Net sales...................................... $504,975 $478,798
-------- --------
Costs and expenses, net:
Cost of products sold........................ 359,480 335,717
Selling, general and administrative.......... 114,598 105,284
Other (income) expense, net.................. (326) 999
-------- --------
Total costs and expenses, net.............. 473,752 442,000
-------- --------
Income before interest expense and income
taxes........................................ 31,223 36,798
Interest expense............................... (14,526) (16,104)
-------- --------
Income before income taxes..................... 16,697 20,694
Income tax expense............................. (6,345) (7,864)
-------- --------
Net income..................................... $ 10,352 $ 12,830
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APRIL 2, DECEMBER 31,
ASSETS 2006 2005
Current Assets: ---------- ----------
Cash and cash equivalents........................ $ 8,109 $ 6,882
Accounts receivable, trade, less allowance
of $1,965 and $2,310 in 2006 and 2005,
respectively................................ 367,820 269,964
Accounts receivable, other....................... 4,765 6,480
Tax receivable from parent corporation........... - 804
Inventories, net................................. 226,821 202,698
Deferred income tax assets, net.................. 33,916 31,842
Other current assets............................. 13,668 13,575
---------- ----------
Total Current Assets........................... 655,099 532,245
Property, plant and equipment, net................. 373,574 374,397
Goodwill, net of accumulated amortization
of $16,370 in 2006 and 2005, respectively........ 67,145 67,134
Other noncurrent assets............................ 34,315 30,549
---------- ----------
Total Assets....................................... $1,130,133 $1,004,325
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt............. $ 154,822 $ 19,768
Accounts payable................................. 99,457 124,921
Payable to related parties....................... 18,701 12,087
Loans payable to parent corporation.............. 52,840 52,840
Accrued liabilities.............................. 113,095 115,985
Reserve for product warranty claims.............. 14,900 14,900
---------- ----------
Total Current Liabilities........................ 453,815 340,501
---------- ----------
Long-term debt less current maturities............. 532,732 533,467
---------- ----------
Reserve for product warranty claims................ 18,114 16,302
---------- ----------
Deferred income tax liabilities.................... 50,594 49,416
---------- ----------
Other liabilities.................................. 21,545 21,613
---------- ----------
Stockholders' Equity:
Series A Cumulative Redeemable Convertible
Preferred Stock, $.01 par value per share;
400,000 shares authorized; no shares issued.... - -
Class A Common Stock, $.001 par value per share;
1,300,000 shares authorized; 1,015,010 shares
issued and outstanding......................... 1 1
Class B Common Stock, $.001 par value per share;
100,000 shares authorized; 0 shares issued and
outstanding in 2006 and 2005................... - -
Loans receivable from parent corporation......... (55,884) (55,840)
Retained earnings................................ 114,626 104,275
Accumulated other comprehensive loss............. (5,410) (5,410)
---------- ----------
Total Stockholders' Equity..................... 53,333 43,026
---------- ----------
Total Liabilities and Stockholders' Equity......... $1,130,133 $1,004,325
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
FIRST QUARTER ENDED
-----------------------------
APRIL 2, APRIL 3,
2006 2005
--------- ---------
Cash and cash equivalents, beginning of period......... $ 6,882 $ 129,482
--------- ---------
Cash provided by (used in) operating activities:
Net income........................................... 10,352 12,830
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation..................................... 11,787 10,890
Amortization..................................... 684 574
Deferred income taxes............................ (896) 1,177
Noncash interest charges, net.................... 1,310 1,422
Increase in working capital items.................... (148,711) (113,038)
Increase (decrease) in long-term reserve for product
warranty claims..................................... 1,812 (262)
(Increase) decrease in other assets.................. 644 (5,158)
Increase (decrease) in other liabilities............. (58) 119
Change in net receivable from/payable to related
parties/parent corporations........................ 7,418 1,851
Other, net........................................... 309 100
--------- ---------
Net cash used in operating activities.................. (115,349) (89,495)
--------- ---------
Cash provided by (used in) investing activities:
Capital expenditures................................. (11,285) (9,725)
--------- ---------
Net cash used in investing activities.................. (11,285) (9,725)
--------- ---------
Cash provided by (used in) financing activities:
Proceeds from Senior Secured Revolving Credit
Facility........................................... 290,000 11,000
Purchase of industrial development revenue bond
certificates....................................... (6,325) -
Repayments of long-term debt......................... (155,770) (11,607)
Distribution to parent corporation................... - (10)
Loan to parent corporation........................... (44) (32)
Financing fees and expenses.......................... - (106)
--------- ---------
Net cash provided by (used in) financing activities.... 127,861 (755)
--------- ---------
Net change in cash and cash equivalents................ 1,227 (99,975)
--------- ---------
Cash and cash equivalents, end of period............... $ 8,109 $ 29,507
========= =========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized of $510
and $131 in 2006 and 2005, respectively).......... $ 16,684 $ 18,961
Income taxes (including federal income taxes paid
pursuant to a tax sharing agreement of $0
and $3,826 in 2006 and 2005, respectively)........ 136 3,897
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Building Materials Corporation of America ("BMCA" or the "Company") was
formed on January 31, 1994 and is a wholly-owned subsidiary of BMCA Holdings
Corporation ("BHC"), which is a wholly-owned subsidiary of G-I Holdings Inc.
("G-I Holdings"). G-I Holdings is a wholly-owned subsidiary of G Holdings Inc.
The consolidated financial statements of the Company reflect, in the opinion of
management, all adjustments necessary to present fairly the financial position
of the Company at April 2, 2006, and the results of operations and cash flows
for the first quarter ended April 2, 2006 and April 3, 2005, respectively. All
adjustments are of a normal recurring nature. These financial statements should
be read in conjunction with the annual financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 2005, which was filed with the Securities and Exchange Commission
on March 30, 2006, (the "2005 Form 10-K").
Certain reclassifications have been made to conform to current year
presentation.
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 151 "Inventory
Costs" ("SFAS No. 151") which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage).
SFAS No. 151 amends Accounting Research Bulletin ("ARB") No. 43, Chapter 4
"Inventory Pricing" ("ARB No. 43") and requires abnormal inventory costs to be
recognized as current period charges regardless of whether they meet the "so
abnormal" criterion outlined in ARB No. 43. SFAS No. 151 also introduces the
concept of "normal capacity" and requires the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. Furthermore, SFAS No. 151 requires unallocated overheads to be
recognized as an expense in the period in which they are incurred. SFAS No. 151
became effective for costs beginning January 1, 2006. As of the quarter ended
April 2, 2006, the Company adopted the provisions of SFAS No. 151 and noted no
material effect on its consolidated financial statements as a result of the
adoption of SFAS No. 151.
In December 2004, the FASB issued a revised SFAS No. 123 "Accounting
for Stock-Based Compensation," SFAS No. 123(R) "Share-Based Payments," ("SFAS
No. 123(R)") which requires compensation costs related to share-based payment
transactions to be recognized in the financial statements. SFAS No. 123(R)
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a
fair-value-based measurement method in accounting for share-based payment
6
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
transactions with employees. SFAS No. 123(R) requires that stock awards be
classified as either an equity award or a liability award. SFAS No. 123(R)
replaces the original SFAS No. 123 and supersedes Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No.
123(R) was effective January 1, 2006. The Company's adoption of SFAS No. 123(R)
did not have an impact on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets" ("SFAS No. 153") which replaces the exception from fair
value measurement in APB Opinion No. 29 "Accounting for Nonmonetary
Transactions," for nonmonetary exchanges of similar productive assets. SFAS No.
153 replaces this exception with a general exception from fair value measurement
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 became effective for nonmonetary asset exchanges beginning January 1,
2006. As of the quarter ended April 2, 2006, the Company adopted the provisions
of SFAS No. 153 and noted no nonmonetary asset exchanges existed as a result of
the adoption of SFAS No. 153.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS No. 154"), which eliminates the requirement of APB
Opinion No. 20, "Accounting Changes," to include the cumulative effect
adjustment resulting from a change in an accounting principle in the income
statement in the period of change. SFAS No. 154 requires that a change in an
accounting principle or reporting entity be retrospectively applied. Under
retrospective application, SFAS No. 154 is applied as of the beginning of the
first accounting period presented in the financial statements, and the
cumulative effect of the change is reflected in the carrying value of assets and
liabilities as of the first period presented, and the offsetting adjustments are
recorded to opening retained earnings. Each period presented is adjusted to
reflect the period-specific effects of applying the change. Changes in
accounting estimates and corrections of errors continue to be accounted for in
the same manner as prior to the issuance of SFAS No. 154. SFAS No. 154 became
effective for accounting changes and corrections of errors made beginning
January 1, 2006. As of the quarter ended April 2, 2006, the Company adopted the
provisions of SFAS No. 154 and, as a result, noted no accounting changes or
correction of errors.
7
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. INVENTORIES
Inventories consisted of the following as of April 2, 2006 and December
31, 2005, respectively:
APRIL 2, DECEMBER 31,
2006 2005
------------ -----------
(THOUSANDS)
Finished goods........................ $ 165,310 $ 149,049
Work-in process....................... 15,439 12,904
Raw materials and supplies............ 64,240 56,413
--------- ---------
Total................................. 244,989 218,366
Less LIFO reserve..................... (18,168) (15,668)
--------- ---------
Inventories........................... $ 226,821 $ 202,698
========= =========
NOTE 3. LONG-TERM DEBT
As of April 2, 2006, the Company had total outstanding consolidated
indebtedness of $740.4 million, which amount includes $52.8 million of demand
loans to our parent corporation, of which $154.8 million matures prior to the
end of the first quarter of 2007 including $152.0 million of borrowings
outstanding under its $350.0 million Senior Secured Revolving Credit Facility
("the Senior Secured Revolving Credit Facility"). The Company anticipates
funding these obligations principally from our cash and cash equivalents on
hand, cash flow from operations and/or borrowings under our Senior Secured
Revolving Credit Facility, which matures in November 2006. Although no
assurances can be provided, the Company intends to refinance the Senior Secured
Revolving Credit Facility before its maturity date.
As of April 2, 2006, the Company was in compliance with all covenants
under the Senior Secured Revolving Credit Facility and the indentures governing
the 8% Senior Notes due 2007, the 8% Senior Notes due 2008 and the 7 3/4% Senior
Notes due 2014 (collectively, the "Senior Notes"). As of April 2, 2006, the book
value of the collateral securing the Senior Notes and the Senior Secured
Revolving Credit Facility was approximately $1,117.0 million.
At April 2, 2006, the Company had outstanding letters of credit of
approximately $49.9 million under the Senior Secured Revolving Credit Facility,
which includes approximately $11.7 million of standby letters of credit related
to certain obligations of G-I Holdings.
8
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4. WARRANTY CLAIMS
The Company provides certain limited warranties covering most of its
residential roofing products for periods generally ranging from 20 to 40 years,
with lifetime limited warranties on certain premium designer shingle products.
The Company also offers certain limited warranties of varying duration covering
most of its commercial roofing products. Most of the Company's specialty
building products and accessories carry limited warranties for periods generally
ranging from 5 to 10 years, with lifetime limited warranties on certain
products.
The reserve for product warranty claims consisted of the following for
the first quarter ended April 2, 2006 and April 3, 2005, respectively:
APRIL 2, APRIL 3,
2006 2005
-------- -------
(THOUSANDS)
Beginning balance................... $ 31,202 $ 32,113
Charged to cost of products sold.... 6,741 5,889
Payments/deductions................. (4,929) (6,151)
-------- --------
Ending balance...................... $ 33,014 $ 31,851
======== ========
NOTE 5. BENEFIT PLANS
Defined Benefit Plans
The Company provides a non-contributory defined benefit retirement plan
for certain hourly and salaried employees (the "Retirement Plan"). Benefits
under this plan are based on stated amounts for each year of service. The
Company's funding policy is consistent with the minimum funding requirements of
the Employee Retirement Income Security Act of 1974.
9
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. BENEFIT PLANS - (CONTINUED)
The Company's net periodic pension cost for the Retirement Plan
included the following components for the first quarter ended April 2, 2006 and
April 3, 2005, respectively:
APRIL 2, APRIL 3,
2006 2005
---------- ----------
(THOUSANDS)
Service cost.............................. $ 370 $ 361
Interest cost............................. 523 519
Expected return on plan assets............ (748) (708)
Amortization of unrecognized prior
service cost.............................. 10 9
Amortization of net losses from
earlier periods........................... 86 77
----- -----
Net periodic pension cost................. $ 241 $ 258
===== =====
As of the quarter ended April 2, 2006 the Company does not expect to
make any pension contribution to the Retirement Plan in 2006, which is
consistent with its expectations as of December 31, 2005.
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees. Such subsidies were reduced or ended as of January 1,
1997. Effective March 1, 2005, the Company amended the plan eliminating
postretirement medical benefits affecting all current and future retirees.
Net periodic postretirement (benefit) cost included the following
components for the first quarter ended April 2, 2006 and April 3, 2005,
respectively:
APRIL 2, APRIL 3,
2006 2005
---------- ----------
(THOUSANDS)
Service cost.............................. $ 3 $ 35
Interest cost............................. 30 72
Amortization of unrecognized prior
service cost.............................. (155) (24)
Amortization of net gains from
earlier periods........................... (61) (62)
----- -----
Net periodic postretirement (benefit)
cost...................................... $(183) $ 21
===== =====
10
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. BENEFIT PLANS - (CONTINUED)
As of the quarter ended April 2, 2006 the Company expects to make
aggregate benefit claim payments of approximately $0.2 million in 2006, which
are related to postretirement life insurance expenses. This is consistent with
the Company's expectations as of December 31, 2005.
NOTE 6. 2001 LONG-TERM INCENTIVE PLAN
The incentive units under the 2001 Long-Term Incentive Plan are valued
at Book Value (as defined in the Plan) or the value specified of such incentive
units at the date of grant. Changes, either increases or decreases, in the Book
Value of those incentive units between the date of grant and the measurement
date result in a change in the measure of compensation for the award.
Compensation expense for the Company's incentive units was $3.0 and $3.0 million
for the first quarter ended April 2, 2006 and April 3, 2005, respectively. At
April 2, 2006 and April 3, 2005, the 2001 Long-Term Incentive Plan liability
amounted to $28.2 and $21.5 million, respectively, and was included in accrued
liabilities.
The following is a summary of activity for incentive units related to
the 2001 Long-Term Incentive Plan:
APRIL 2, DECEMBER 31,
2006 2005
--------- ----------
Incentive Units outstanding, beginning
of period........................................ 146,814 124,455
Granted............................................ 5,000 35,205
Exercised.......................................... (3,598) (9,464)
Forfeited.......................................... (1,460) (3,382)
------- -------
Incentive Units outstanding, end of period......... 146,756 146,814
======= =======
11
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. RELATED PARTY TRANSACTIONS
The Company makes loans to, and borrows from, its parent corporations
from time to time at prevailing market rates. As of April 2, 2006 and April 3,
2005, BMCA Holdings Corporation owed the Company $55.9 and $55.7 million,
including interest of $0.6 and $0.4 million, respectively, and the Company owed
BMCA Holdings Corporation $52.8 and $52.8 million, with no unpaid interest
payable to BMCA Holdings Corporation, respectively. Interest income on the
Company's loans to BMCA Holdings Corporation amounted to $1.2 and $0.9 million
during the first quarter ended April 2, 2006 and April 3, 2005, respectively.
Interest expense on the Company's loans from BMCA Holdings Corporation amounted
to $1.1 and $0.9 million during the first quarter ended April 2, 2006 and April
3, 2005, respectively. Loans payable to/receivable from any parent corporation
are due on demand and provide each party with the right of offset of its related
obligation to the other party and are subject to limitations as outlined in the
Senior Secured Revolving Credit Facility and its Senior Notes. Under the terms
of the Senior Secured Revolving Credit Facility and the indentures governing the
Company's Senior Notes at April 2, 2006, the Company could repay demand loans to
its parent corporation amounting to $52.8 million, subject to certain
conditions. The Company also makes non-interest bearing advances to affiliates,
of which no balance was outstanding as of April 2, 2006 and April 3, 2005. In
addition, no loans were owed or other lending activities were entered into by
the Company to other affiliates.
The Company also has a management agreement with International
Specialty Products Inc. and its subsidiaries ("ISP"), an affiliate, (the "ISP
Management Agreement") to provide the Company with certain management services.
Based on services provided to the Company in 2006 under the ISP Management
Agreement, the aggregate amount payable to ISP under the ISP Management
Agreement for 2006, inclusive of the services provided to G-I Holdings, is not
yet available and is estimated to be approximately the same as the $5.8 million
paid in 2005.
The Company purchases all of its colored roofing granules and
algae-resistant granules under a long-term requirements contract with ISP. The
amount of mineral products purchased each year under the ISP contract is based
on current demand and is not subject to minimum purchase requirements. For the
first quarter ended April 2, 2006 and the year ended December 31, 2005, the
Company purchased $28.8 and $108.3 million, respectively, of mineral products
from ISP under this contract.
12
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. RELATED PARTY TRANSACTIONS - (CONTINUED)
During the three month period ended April 2, 2006 and April 3, 2005,
the Company paid $0 and $3.8 million, respectively, in federal income tax
payments to its parent corporation pursuant to a tax sharing agreement. These
amounts are included in the change in net receivable from/payable to related
parties/parent corporations in the consolidated statement of cash flows.
NOTE 8. CONTINGENCIES
Asbestos Litigation Against G-I Holdings
In connection with its formation, the Company contractually assumed and
agreed to pay the first $204.4 million of liabilities for asbestos-related
bodily injury claims relating to the inhalation of asbestos fiber ("Asbestos
Claims") of its indirect parent, G-I Holdings. As of March 30, 1997, the Company
paid all of its assumed asbestos-related liabilities. In January 2001, G-I
Holdings filed a voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code due to Asbestos Claims. Most asbestos claims do not specify
the amount of damages sought. This Chapter 11 proceeding remains pending.
Claimants in the G-I Holdings' bankruptcy, including judgment
creditors, might seek to satisfy their claims by asking the bankruptcy court to
require the sale of G-I Holdings' assets, including its holdings of BMCA
Holdings Corporation's common stock and its indirect holdings of the Company's
common stock. Such action could result in a change of control of the Company. In
addition, those creditors may attempt to assert Asbestos Claims against the
Company. Approximately 1,900 Asbestos Claims were filed against the Company
prior to February 2, 2001. The Company believes that it will not sustain any
liability in connection with these or any other Asbestos Claims. On February 2,
2001, the United States Bankruptcy Court for the District of New Jersey issued a
temporary restraining order enjoining any existing or future claimant from
bringing or prosecuting an Asbestos Claim against the Company. By oral opinion
on June 22, 2001, and written order entered February 22, 2002, the court
converted the temporary restraints into a preliminary injunction, prohibiting
the bringing or prosecution of any such Asbestos Claim against the Company. On
February 7, 2001, G-I Holdings filed an action in the United States Bankruptcy
Court for the District of New Jersey seeking a declaratory judgment that BMCA
has no successor liability for Asbestos Claims against G-I Holdings and that it
is not the alter ego of G-I Holdings (the "BMCA Action"). One of the parties to
this matter, the Official Committee of Asbestos Claimants (the "creditors'
committee"), subsequently filed a counterclaim against BMCA seeking a
declaration that BMCA has successor liability for Asbestos Claims against G-I
13
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. CONTINGENCIES - (CONTINUED)
Holdings and that BMCA is the alter ego of G-I Holdings. On May 13, 2003 the
United States District Court for the District of New Jersey overseeing the G-I
Holdings' Bankruptcy Court withdrew the reference of the BMCA Action from the
Bankruptcy Court, and this matter will therefore be heard by the District Court.
On July 26, 2005, one party in the BMCA Action, the legal representative of
future demand holders in the G-I bankruptcy, was dismissed from the case. The
court has recently advised the parties that they should expect to proceed to
trial during February 2007. The BMCA Action continues against the creditors'
committee in the G-I Holdings bankruptcy. It is not possible to predict the
outcome of this litigation, although the Company believes its claims are
meritorious. While the Company cannot predict whether any additional Asbestos
Claims will be asserted against it or its assets, or the outcome of any
litigation relating to those claims, the Company believes that it has
meritorious defenses to any claim that it has asbestos-related liability,
although there can be no assurances in this regard.
On or about February 8, 2001, the creditors' committee established in
G-I Holdings' bankruptcy case filed a complaint in the United States Bankruptcy
Court, District of New Jersey against G-I Holdings and the Company. The
complaint requests substantive consolidation of the Company with G-I Holdings or
an order directing G-I Holdings to cause the Company to file for bankruptcy
protection. The Company and G-I Holdings intend to vigorously defend the
lawsuit. The plaintiffs also filed for interim relief absent the granting of
their requested relief described above. On March 21, 2001, the bankruptcy court
denied plaintiffs' application for interim relief. In November 2002, the
creditors' committee, joined in by the legal representative of future demand
holders, filed a motion for appointment of a trustee in the G-I Holdings'
bankruptcy. In December 2002, the bankruptcy court denied the motion. The
creditors' committee appealed the ruling to the United States District Court,
which denied the appeal on June 27, 2003. The creditors' committee has appealed
the denial to the Third Circuit Court of Appeals, which denied the appeal on
September 24, 2004. The creditors' committee filed a petition with the Third
Circuit Court of Appeals for a rehearing of its denial of the creditors'
committee's appeal, which was denied by the court on October 26, 2004.
On February 27, 2004, the creditors' committee, joined in by the legal
representative, filed a motion to modify the preliminary injunction and to seek
authority by the bankruptcy court to avoid, on various grounds, certain liens
granted in connection with the financing obtained by the Company in December
2000. G-I Holdings and the Company have opposed the motion, and a hearing on the
motion was held by the bankruptcy court on March 29, 2004. By opinion dated June
8, 2004, the court granted the motion in part and denied it in part. On July 7,
2004, the creditors' committee filed a claim challenging, as a fraudulent
14
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. CONTINGENCIES - (CONTINUED)
conveyance, the transactions entered into in connection with the Company's
formation in 1994, in which G-I Holdings caused to be transferred to the Company
all of its roofing business and assets and in which the Company assumed certain
liabilities relating to those assets, including a specified amount of asbestos
liabilities (the "1994 transaction"). In addition, on July 7, 2004, the
creditors' committee filed a claim against holders of the Company's bank and
bond debt outstanding in 2000, seeking to avoid the liens granted to them, based
on the committee's theory that the 1994 transaction was a fraudulent conveyance.
On August 3, 2004, the creditors' committee filed an amended complaint adding
the names of additional alleged bondholders. On July 20, 2004, the creditors'
committee appealed the court's decision, issued on June 8, 2004, seeking the
authority to file a lawsuit against the banks and bondholders discussed above,
challenging the liens granted to them in 2000 as a fraudulent conveyance and are
appealing, among other things, certain adverse rulings relating to statute of
limitation issues. G-I Holdings, the holders of the Company's bank and bond debt
and the Company have filed cross appeals. This appeal remains pending before the
District Court.
The Company believes that the claims of the creditors' committee are
without merit. However, if the Company is not successful defending against one
or more of these claims, the Company may be forced to file for bankruptcy
protection and/or contribute all or a substantial portion of its assets to
satisfy the claims of G-I Holdings' creditors. Either of these events, or the
substantive consolidation of G-I Holdings and the Company, would weaken its
operations and cause it to divert a material amount of its cash flow to satisfy
the asbestos claims of G-I Holdings, and may render it unable to pay interest or
principal on its credit obligations.
For a further discussion with respect to the history of the foregoing
litigation, and asbestos-related matters, see Notes 5, 13 and 18 to consolidated
financial statements contained in the Company's 2005 Form 10-K.
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters under the Comprehensive
Environmental Response Compensation and Liability Act, and similar state laws,
in which recovery is sought for the cost of cleanup of contaminated sites or
remedial obligations are imposed, a number of which are in the early stages or
have been dormant for protracted periods. The Company refers to these
proceedings and lawsuits as "Environmental Claims." Most of the Environmental
Claims do not seek to recover an amount of specific damages. At most sites, the
Company anticipates that liability will be apportioned among the companies found
to be responsible for the presence of hazardous substances at the site. The
Company believes that the ultimate disposition of such matters will not,
individually or in the aggregate, have a material adverse effect on the
liquidity, financial position or results of operations of the Company.
15
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. CONTINGENCIES - (CONTINUED)
Other Litigation
On or about February 17, 2004, litigation was commenced against the
Company in the United States District Court for the Eastern District of
Pennsylvania by CertainTeed Corporation, alleging patent infringement in
connection with certain of the Company's products representing less than 5% of
the Company's net sales. No specific amount of damages have been sought in the
litigation. The parties reached a mutual settlement agreement on January 12,
2006 with respect to this matter, and the case was dismissed by the court.
For a further discussion with respect to the history of environmental
matters and other litigation, reference is made to Notes 2 and 18 to
consolidated financial statements contained in the Company's 2005 Form 10-K.
Tax Claim Against G-I Holdings
The Company and certain of its subsidiaries were members of the
consolidated group (the "G-I Holdings Group") for federal income tax purposes
that included G-I Holdings in certain prior years and, accordingly, would be
severally liable for any tax liability of the G-I Holdings Group in respect of
those prior years.
On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service (the "IRS") of a deficiency in the amount of $84.4 million
(after taking into account the use of net operating losses and foreign tax
credits otherwise available for use in later years) in connection with the
formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the
"surfactants partnership"), a partnership in which G-I Holdings held an
interest. G-I Holdings has advised the Company that it believes that it will
prevail in this tax matter arising out of the surfactants partnership, although
there can be no assurance in this regard. The Company believes that the ultimate
disposition of this matter will not have a material adverse effect on its
business, financial position or results of operations. On September 21, 2001,
the IRS filed a proof of claim with respect to such deficiency against G-I
Holdings in the G-I Holdings' bankruptcy. If such proof of claim is sustained,
the Company and/or certain of the Company's subsidiaries together with G-I
Holdings and several current and former subsidiaries of G-I Holdings would be
severally liable for a portion of those taxes and interest. G-I Holdings has
filed an objection to the proof of claim. If the IRS were to prevail for the
years in which the Company and/or certain of its subsidiaries were part of the
G-I Holdings Group, the Company would be severally liable for approximately
$40.0 million in taxes plus interest, although this calculation is subject to
uncertainty depending upon various factors including G-I Holdings' ability to
satisfy its tax liabilities and the application of tax credits and deductions.
16
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. CONTINGENCIES - (CONTINUED)
Other Contingencies
In the ordinary course of business, the Company has several supply
agreements that include minimum annual purchase requirements. In the event these
purchase requirements are not met, the Company may be required to make payments
under these supply agreements.
NOTE 9. SUBSEQUENT EVENT
On April 7, 2006 the Company amended its Senior Secured Revolving
Credit Facility to permit the expiration date of certain of its letters of
credit outstanding to occur after the November 2006 termination date of the
Senior Secured Revolving Credit Facility. In connection therewith, the Company
is required to deposit into a collateral account fourteen days prior to the
termination date of the Senior Secured Revolving Credit Facility an amount equal
to 103% of the Available Amount of all Letters of Credit then outstanding.
NOTE 10. GUARANTOR FINANCIAL INFORMATION
At April 2, 2006, all of the Company's subsidiaries, each of which is
wholly owned by the Company, are guarantors under the Company's Senior Secured
Revolving Credit Facility and the indentures governing the Senior Notes. These
guarantees are full, unconditional and joint and several. In addition, Building
Materials Manufacturing Corporation ("BMMC"), a wholly-owned subsidiary of the
Company, is a co-obligor on the 8% Senior Notes due 2007.
The Company and BMMC entered into license agreements, effective January
1, 1999, for the right to use intellectual property, including patents,
trademarks, know-how, and franchise rights owned by Building Materials
Investment Corporation, a wholly-owned subsidiary of the Company, for a license
fee stated as a percentage of net sales. The license agreements are for a period
of one year and are subject to automatic renewal unless either party terminates
with 60 days written notice. Also, effective January 1, 1999, BMMC sells all
finished goods to the Company at a manufacturing profit.
Presented below is condensed consolidating financial information for
the Company and the guarantor subsidiaries. This financial information should be
read in conjunction with the consolidated financial statements and other notes
related thereto. Separate financial statements for the Company and the guarantor
subsidiaries are not included herein because the guarantees are full,
unconditional and joint and several.
17
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FIRST QUARTER ENDED APRIL 2, 2006
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------
Net Sales............................... $481,612 $ 23,363 $ - $ 504,975
Intercompany net sales.................. 51 311,673 (311,724) -
-------- -------- --------- ---------
Total net sales..................... 481,663 335,036 (311,724) 504,975
-------- -------- --------- ---------
Costs and expenses, net:
Cost of products sold................. 372,807 298,397 (311,724) 359,480
Selling, general and administrative... 86,713 27,885 - 114,598
Intercompany licensing (income)
expense, net........................ 19,267 (19,267) - -
Other (income) expense, net........... (342) 16 - (326)
Transition service agreement
(income) expense.................... 25 (25) - -
-------- -------- --------- ---------
Total costs and expenses, net....... 478,470 307,006 (311,724) 473,752
-------- -------- --------- ---------
Income before equity in earnings of
subsidiaries, interest expense and
income taxes.......................... 3,193 28,030 - 31,223
Equity in earnings of subsidiaries...... 14,041 - (14,041) -
Interest expense........................ (9,143) (5,383) - (14,526)
-------- -------- --------- ---------
Income before income taxes.............. 8,091 22,647 (14,041) 16,697
Income tax (expense) benefit............ 2,261 (8,606) - (6,345)
-------- -------- --------- ---------
Net income.............................. $ 10,352 $ 14,041 $ (14,041) $ 10,352
======== ======== ========= =========
18
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FIRST QUARTER ENDED APRIL 3, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------
Net Sales................................ $453,294 $ 25,504 $ - $478,798
Intercompany net sales................... 861 325,332 (326,193) -
-------- -------- --------- --------
Total net sales...................... 454,155 350,836 (326,193) 478,798
-------- -------- --------- --------
Costs and expenses, net:
Cost of products sold.................. 351,478 310,432 (326,193) 335,717
Selling, general and administrative.... 79,549 25,735 - 105,284
Intercompany licensing (income)
expense, net......................... 18,166 (18,166) - -
Other (income) expense, net............ 1,242 (243) - 999
Transition service agreement
(income) expense..................... 25 (25) - -
-------- -------- --------- --------
Total costs and expenses, net........ 450,460 317,733 (326,193) 442,000
-------- -------- --------- --------
Income before equity in earnings of
subsidiaries, interest expense and
income taxes........................... 3,695 33,103 - 36,798
Equity in earnings of subsidiaries....... 18,353 - (18,353) -
Interest expense......................... (12,603) (3,501) - (16,104)
-------- -------- --------- --------
Income before income taxes............... 9,445 29,602 (18,353) 20,694
Income tax (expense) benefit............. 3,385 (11,249) - (7,864)
-------- -------- --------- --------
Net income............................... $ 12,830 $ 18,353 $ (18,353) $ 12,830
======== ======== ========= ========
19
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 2, 2006
(THOUSANDS)
(UNAUDITED)
Parent Guarantor Elim-
Company Subsidiaries inations Consolidated
------- ------------ -------- ------------
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 11 $ 8,098 $ - $ 8,109
Accounts receivable, trade, net........ 350,661 17,159 - 367,820
Accounts receivable, other............. 3,382 1,383 - 4,765
Inventories, net....................... 155,695 71,126 - 226,821
Deferred income tax assets, net........ 33,916 - - 33,916
Other current assets................... 7,396 6,272 - 13,668
-------- -------- --------- ----------
Total Current Assets................. 551,061 104,038 - 655,099
Investment in subsidiaries............... 589,999 - (589,999) -
Intercompany loans including accrued
interest............................... 230,614 (230,614) - -
Due from (to) subsidiaries, net.......... (613,330) 613,330 - -
Property, plant and equipment, net....... 35,149 338,425 - 373,574
Goodwill, net............................ 40,080 27,065 - 67,145
Other noncurrent assets.................. 8,792 25,523 - 34,315
-------- -------- --------- ----------
Total Assets............................. $842,365 $877,767 $(589,999) $1,130,133
======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt... $152,000 $ 2,822 $ - $ 154,822
Accounts payable....................... 36,569 62,888 - 99,457
Payable to related parties............. 7,256 11,445 - 18,701
Loans payable to parent corporation.... 52,840 - - 52,840
Accrued liabilities.................... 30,657 82,438 - 113,095
Reserve for product warranty claims.... 14,900 - - 14,900
-------- -------- --------- ----------
Total Current Liabilities............ 294,222 159,593 - 453,815
Long-term debt less current maturities... 405,522 127,210 - 532,732
Reserve for product warranty claims...... 17,329 785 - 18,114
Deferred income tax liabilities.......... 50,594 - - 50,594
Other liabilities........................ 21,365 180 - 21,545
-------- -------- --------- ----------
Total Liabilities........................ 789,032 287,768 - 1,076,800
Total Stockholders' Equity............... 53,333 589,999 (589,999) 53,333
-------- -------- --------- ----------
Total Liabilities and Stockholders'
Equity.............................. $842,365 $877,767 $(589,999) $1,130,133
======== ======== ========= ==========
20
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor Elim-
Company Subsidiaries inations Consolidated
------- ------------ -------- ------------
ASSETS
Current Assets:
Cash and cash equivalents............... $ 9 $ 6,873 $ - $ 6,882
Accounts receivable, trade, net......... 250,519 19,445 - 269,964
Accounts receivable, other.............. 5,054 1,426 - 6,480
Tax receivable from parent corporation.. 804 - - 804
Inventories, net........................ 140,136 62,562 - 202,698
Deferred income tax assets, net......... 31,842 - - 31,842
Other current assets.................... 7,015 6,560 - 13,575
-------- --------- --------- ----------
Total Current Assets.................. 435,379 96,866 - 532,245
Investment in subsidiaries................ 575,958 - (575,958) -
Intercompany loans including accrued
interest................................ 185,148 (185,148) - -
Due from (to) subsidiaries, net........... (569,763) 569,763 - -
Property, plant and equipment, net........ 35,690 338,707 - 374,397
Goodwill, net............................. 40,080 27,054 - 67,134
Other noncurrent assets................... 9,798 20,751 - 30,549
-------- --------- --------- ----------
Total Assets.............................. $712,290 $ 867,993 $(575,958) $1,004,325
======== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt.... $ 17,000 $ 2,768 $ - $ 19,768
Accounts payable........................ 49,996 74,925 - 124,921
Payable to related parties.............. 6,885 5,202 - 12,087
Loans payable to parent corporation..... 52,840 - - 52,840
Accrued liabilities..................... 35,631 80,354 - 115,985
Reserve for product warranty claims..... 14,900 - - 14,900
-------- --------- --------- ----------
Total Current Liabilities............. 177,252 163,249 - 340,501
Long-term debt less current maturities.... 405,524 127,943 - 533,467
Reserve for product warranty claims....... 15,642 660 - 16,302
Deferred income tax liabilities........... 49,416 - - 49,416
Other liabilities......................... 21,430 183 - 21,613
-------- --------- --------- ----------
Total Liabilities......................... 669,264 292,035 - 961,299
Total Stockholders' Equity................ 43,026 575,958 (575,958) 43,026
-------- --------- --------- ----------
Total Liabilities and Stockholders'
Equity............................... $712,290 $ 867,993 $(575,958) $1,004,325
======== ========= ========= ==========
21
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FIRST QUARTER ENDED APRIL 2, 2006
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Consolidated
-------- ------------ ------------
Cash and cash equivalents, beginning of period...................... $ 9 $ 6,873 $ 6,882
-------- -------- --------
Cash provided by (used in) operating activities:
Net income (loss)................................................. (3,689) 14,041 10,352
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation.................................................... 891 10,896 11,787
Amortization.................................................... - 684 684
Deferred income taxes........................................... (896) - (896)
Noncash interest charges, net................................... 978 332 1,310
Increase in working capital items................................. (132,810) (15,901) (148,711)
Increase in long-term reserve for product
warranty claims................................................. 1,687 125 1,812
Decrease in other assets.......................................... 16 628 644
Decrease in other liabilities..................................... (55) (3) (58)
Change in net receivable from/payable to
related parties/parent corporations............................. (724) 8,142 7,418
Other, net........................................................ (3) 312 309
-------- -------- --------
Net cash provided by (used in) operating
activities........................................................ (134,605) 19,256 (115,349)
-------- -------- --------
Cash provided by (used in) investing activities:
Capital expenditures.............................................. (349) (10,936) (11,285)
-------- -------- --------
Net cash used in investing activities............................... (349) (10,936) (11,285)
-------- -------- --------
Cash provided by (used in) financing activities:
Proceeds from Senior Secured Revolving
Credit Facility................................................. 290,000 - 290,000
Purchase of industrial development revenue
bond certificates............................................... - (6,325) (6,325)
Repayments of long-term debt...................................... (155,000) (770) (155,770)
Loan to parent corporation........................................ (44) - (44)
-------- -------- --------
Net cash provided by (used in) financing activities................. 134,956 (7,095) 127,861
-------- -------- --------
Net change in cash and cash equivalents............................. 2 1,225 1,227
-------- -------- --------
Cash and cash equivalents, end of period............................ $ 11 $ 8,098 $ 8,109
======== ======== ========
22
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FIRST QUARTER ENDED APRIL 3, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Consolidated
-------- ------------ ------------
Cash and cash equivalents, beginning of period....................... $ 12 $ 129,470 $ 129,482
------- --------- ---------
Cash provided by (used in) operating activities:
Net income (loss).................................................. (5,523) 18,353 12,830
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation..................................................... 889 10,001 10,890
Amortization..................................................... - 574 574
Deferred income taxes............................................ 1,177 - 1,177
Noncash interest charges, net.................................... 1,094 328 1,422
Increase in working capital items.................................. (104,299) (8,739) (113,038)
Increase (decrease) in long-term reserve for
product warranty claims.......................................... (371) 109 (262)
Increase in other assets........................................... (4,622) (536) (5,158)
Increase (decrease) in other liabilities........................... 120 (1) 119
Change in net receivable from/payable to
related parties/parent corporations.............................. 112,387 (110,536) 1,851
Other, net......................................................... (4) 104 100
------- --------- ---------
Net cash provided by (used in) operating
activities....................................................... 848 (90,343) (89,495)
------- --------- ---------
Cash provided by (used in) investing activities:
Capital expenditures............................................... (700) (9,025) (9,725)
------- --------- ---------
Net cash used in investing activities................................ (700) (9,025) (9,725)
------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from Senior Secured Revolving Credit Facility............. 11,000 - 11,000
Repayments of long-term debt....................................... (11,000) (607) (11,607)
Distribution to parent corporation................................. (10) - (10)
Loan to parent corporation......................................... (32) - (32)
Financing fees and expenses........................................ (106) - (106)
------- --------- ---------
Net cash used in financing activities................................ (148) (607) (755)
------- --------- ---------
Net change in cash and cash equivalents.............................. - (99,975) (99,975)
------- --------- ---------
Cash and cash equivalents, end of period............................. $ 12 $ 29,495 $ 29,507
======= ========= =========
23
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated by the context, "we," "us," and "our" refer
to Building Materials Corporation of America and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes to our Critical Accounting
Policies during the first quarter ended April 2, 2006. For a further discussion
on our Critical Accounting Policies, reference is made to Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Critical Accounting Policies" in our annual report on Form 10-K for the fiscal
year ended December 31, 2005, which was filed with the Securities and Exchange
Commission on March 30, 2006, which we refer to as the 2005 Form 10-K.
RESULTS OF OPERATIONS
Sales of roofing products are our dominant business, typically
accounting for approximately 95% of our consolidated net sales. The main drivers
of our roofing business include: the nation's aging housing stock; existing home
sales; new home construction; larger new homes; increased home ownership rates;
and severe weather and energy concerns. Our roofing business is also affected by
raw material costs, including asphalt and other petroleum-based raw materials,
as well as energy, and transportation and distribution costs.
First Quarter 2006 Compared With
First Quarter 2005
We recorded net income in the first quarter of 2006 of $10.4 million
compared with net income of $12.8 million in the first quarter of 2005. The
decrease in first quarter 2006 net income was primarily attributable to lower
income before interest expense and income taxes, partially offset by lower
interest expense.
Net sales for the first quarter of 2006 were $505.0 million, a 5.5%
increase over first quarter of 2005 net sales of $478.8 million, with the
increase due to higher net sales of both residential and commercial roofing
products primarily resulting from higher average selling prices.
Income before interest expense and income taxes in the first quarter of
2006 was $31.2 million compared with $36.8 million in the first quarter of 2005.
Income before interest expense and income taxes in the first quarter of 2006 was
positively affected by increased net sales of both residential and commercial
roofing products primarily resulting from higher average selling prices, which
was more than offset by higher raw material costs, including asphalt, higher
energy costs and higher selling, general and administrative expenses mostly due
to higher distribution costs, primarily resulting from a rise in fuel prices.
24
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Interest expense for the first quarter of 2006 decreased to $14.5
million from $16.1 million for the first quarter of 2005, primarily due to lower
average borrowings.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the first quarter of 2006 increased
to $489.6 million from $462.2 million for the first quarter of 2005,
representing an increase of $27.4 million or 5.9%. The increase in net sales of
roofing products was primarily attributable to higher average selling prices.
Roofing product net sales were favorably impacted by an increase in net sales of
premium laminate shingles primarily due to higher average selling prices. Net
sales of specialty building products and accessories decreased to $15.4 million
for the first quarter of 2006 as compared with $16.6 million for the first
quarter of 2005.
Gross Margin. Our overall gross margin increased to $145.5 million or 28.8% of
net sales for the first quarter of 2006 from $143.1 million or 29.9% of net
sales for the first quarter of 2005. The increase in our overall gross margin is
primarily attributable to an increase in net sales due to an improved sales mix
and higher average selling prices, partially offset by higher raw material
costs.
Income before Interest Expense and Income Taxes. Income before interest expense
and income taxes for the first quarter of 2006 decreased to $31.2 million or
6.2% of net sales, compared to $36.8 million or 7.7% of net sales for the first
quarter of 2005. Income before interest expense and income taxes in the first
quarter of 2006 was positively affected by increased net sales of roofing
products primarily resulting from higher average selling prices, which was more
than offset by higher raw material costs, including asphalt, higher energy costs
and higher selling, general and administrative expenses mostly due to higher
distribution costs, primarily resulting from a rise in fuel prices.
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows and Cash Position
Sales of roofing products and specialty building products and
accessories in the northern regions of the United States generally decline in
the late fall and winter months due to cold weather. In addition, adverse
weather conditions can result in higher customer demand during our peak
operating season depending on the extent and severity of the damage from these
severe weather conditions. Due to the seasonal demands of our business together
with extreme weather conditions, we generally have negative cash flows from
operations during the first six months of our fiscal year. Our negative cash
flows from operations are primarily driven by our cash invested in both accounts
receivable and inventories to meet these seasonal operating demands. Generally,
25
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
in the third and fourth quarters of our fiscal year, our cash flows from
operations become positive each quarter, as our investment in inventories and
accounts receivable no longer continues to increase, as is customary in the
first six months of our fiscal year. Our seasonal working capital needs,
together with our debt service obligations, capital expenditure requirements and
other contracted arrangements, adversely impact our liquidity during this
period. We rely on our cash and cash equivalents on hand and our $350.0 million
Senior Secured Revolving Credit Facility due November 2006, which we refer to as
our Senior Secured Revolving Credit Facility, to support our overall cash flow
requirements during these periods. We expect to continue to rely on our cash and
cash equivalents on hand and external financings to maintain operations over the
short and long-term and to continue to have access to the financing markets,
subject to the then prevailing market terms and conditions.
Net cash outflow during the first quarter of 2006 from operating and
investing activities was $126.6 million, including the use of $115.3 million of
cash from operations and the reinvestment of $11.3 million for capital programs.
Cash invested in additional working capital totaled $148.7 million
during the first quarter of 2006, reflecting an increase in total accounts
receivable of $96.1 million, due to our increased operating performance and the
seasonality of our business, a $24.1 million increase in inventories to meet our
seasonal operating demands and a $28.4 million net decrease in accounts payable
and accrued liabilities. The net cash used for operating activities also
included a $7.4 million net increase in the payable to related parties/parent
corporations, primarily attributable to a $6.4 million net increase in federal
income taxes payable pursuant to our tax sharing agreement with our parent
corporation and a $1.0 million increase in amounts due under our long-term
granule supply agreement with an affiliated company.
Net cash provided by financing activities totaled $127.9 million during
the first quarter of 2006, including $290.0 million of proceeds from the
issuance of current maturities of long-term debt related to 2006 year to date
cumulative borrowings under our Senior Secured Revolving Credit Facility.
Financing activities also included $155.8 million in aggregate repayments of
long-term debt, of which $155.0 million related to 2006 year to date cumulative
repayments under our Senior Secured Revolving Credit Facility and $0.7 million
related to our Chester, South Carolina loan obligation. In addition, financing
activities included the purchase of industrial development revenue bond
certificates issued in 1990 with respect to the Fontana, California Industrial
Development Revenue Bond, resulting in BMCA becoming the primary holder of such
bond.
26
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Long-Term Debt
As of April 2, 2006 we had total outstanding consolidated indebtedness
of $740.4 million, which amount includes $52.8 million of demand loans to our
parent corporation, of which $154.8 million matures prior to the end of the
first quarter of 2007 including $152.0 million of borrowings outstanding under
the Senior Secured Revolving Credit Facility. We anticipate funding these
obligations principally from our cash and cash equivalents on hand, cash flow
from operations and/or borrowings under our Senior Secured Revolving Credit
Facility, which matures in November 2006. Although no assurances can be
provided, we intend to refinance the Senior Secured Revolving Credit Facility
before its maturity date.
As of April 2, 2006 the Company was in compliance with all covenants
under the Senior Secured Revolving Credit Facility and the indentures governing
the 8% Senior Notes due 2007, the 8% Senior Notes due 2008 and the 7 3/4% Senior
Notes due 2014, which we refer to collectively as the Senior Notes. As of April
2, 2006, the book value of the collateral securing the Senior Notes and the
Senior Secured Revolving Credit Facility was approximately $1,117.0 million.
At April 2, 2006, we had outstanding letters of credit of approximately
$49.9 million under the Senior Secured Revolving Credit Facility, which includes
approximately $11.7 million of standby letters of credit related to certain
obligations of G-I Holdings.
Intercompany Transactions
We make loans to, and borrow from, our parent corporations from time to
time at prevailing market rates. As of April 2, 2006 and April 3, 2005, BMCA
Holdings Corporation owed us $55.9 and $55.7 million, including interest of $0.6
and $0.4 million, respectively, and we owed BMCA Holdings Corporation $52.8 and
$52.8 million, with no unpaid interest payable to BMCA Holdings Corporation,
respectively. Interest income on our loans to BMCA Holdings Corporation amounted
to $1.2 and $0.9 million during the first quarter ended April 2, 2006 and April
3, 2005, respectively. Interest expense on our loans from BMCA Holdings
Corporation amounted to $1.1 and $0.9 million during the first quarter ended
April 2, 2006 and April 3, 2005, respectively. Loans payable to/receivable from
any parent corporation are due on demand and provide each party with the right
of offset of its related obligation to the other party and are subject to
limitations as outlined in our Senior Secured Revolving Credit Facility and our
Senior Notes. Under the terms of the Senior Secured Revolving Credit Facility
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BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
and the indentures governing our Senior Notes, at April 2, 2006, we could repay
demand loans to our parent corporation amounting to $52.8 million, subject to
certain conditions. We also make non-interest bearing advances to affiliates, of
which no balance was outstanding as of April 2, 2006 and April 3, 2005. In
addition, no loans were owed or other lending activities entered into by us to
other affiliates.
During the three month period ended April 2, 2006 and April 3, 2005, we
paid $0 and $3.8 million, respectively, in federal income tax payments to our
parent corporation pursuant to a tax sharing agreement. These amounts are
included in the change in net receivable from/payable to related parties/parent
corporations in the consolidated statement of cash flows.
As a result of the foregoing factors, cash and cash equivalents
increased by $1.2 million during the first quarter of 2006 to $8.1 million.
Contingencies
See Note 8 to Consolidated Financial Statements for information
regarding contingencies.
Economic Outlook
We do not believe that inflation has had a material effect on our
results of operations during the first quarter of 2006. However, we cannot
assure you that our business will not be affected by inflation in the future, or
by increases in the cost of energy and asphalt purchases used in our
manufacturing process principally due to fluctuating oil prices.
During the first quarter of 2006, the cost of asphalt continued to be
high relative to historical levels, which reflects in large part record high
crude oil prices. Due to the strength of the Company's manufacturing operations,
which allows us to use many types of asphalt, together with our ability to
secure alternative sources of supply, we do not anticipate that any future
disruption in the supply of asphalt will have a material impact on future net
sales, although no assurances can be provided in that regard.
To mitigate these and other petroleum-based cost increases, we
announced and implemented multiple price increases during the first quarter of
2006. We will attempt to pass on future additional unexpected cost increases
from suppliers as needed; however, no assurances can be provided that these
price increases will be accepted in the marketplace.
Contractual Obligations
In January 2006, we amended one of our contractual obligations with a
certain supplier, which reduced our minimum purchase obligation requirement with
that supplier by approximately $10.1 million.
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BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
We also have a management agreement with International Specialty
Products Inc. and its subsidiaries, which we refer to as ISP, an affiliate,
which we refer to as the ISP Management Agreement to provide us with certain
management services. Based on services provided to us in 2006 under the ISP
Management Agreement, the aggregate amount payable to ISP under the ISP
Management Agreement for 2006, inclusive of the services provided to G-I
Holdings, is not yet available and is estimated to be approximately the same as
the $5.8 million paid in 2005. For a further discussion on the ISP Management
Agreement reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations, "Intercompany Transactions" in our 2005
Form 10-K.
We purchase all of our colored roofing granules and algae-resistant
granules under a long-term requirements contract with ISP. The amount of mineral
products purchased each year under the ISP contract is based on current demand
and is not subject to minimum purchase requirements. For the first quarter ended
April 2, 2006 and the year ended December 31, 2005, we purchased $28.8 and
$108.3 million, respectively, of mineral products from ISP under this contract.
Other Matters
On April 7, 2006 we amended our Senior Secured Revolving Credit
Facility to permit the expiration date of certain of our letters of credit
outstanding to occur after the November 2006 termination date of the Senior
Secured Revolving Credit Facility. In connection therewith, we are required to
deposit into a collateral account fourteen days prior to the termination date of
the Senior Secured Revolving Credit Facility an amount equal to 103% of the
Available Amount of all Letters of Credit then outstanding.
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board, which we
refer to as FASB issued Statement of Financial Accounting Standards, which we
refer to as SFAS No. 151 "Inventory Costs," which we refer to as SFAS No. 151,
which clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material (spoilage). SFAS No. 151 amends
Accounting Research Bulletin, which we refer to as ARB No. 43, Chapter 4
"Inventory Pricing," which we refer to as ARB No. 43, and requires abnormal
inventory costs to be recognized as current period charges regardless of whether
they meet the "so abnormal" criterion outlined in ARB No. 43. SFAS No. 151 also
introduces the concept of "normal capacity" and requires the allocation of fixed
production overheads to inventory based on the normal capacity of the production
facilities. Furthermore, SFAS No. 151 requires unallocated overheads to be
recognized as an expense in the period in which they are incurred. SFAS No. 151
became effective for costs beginning January 1, 2006. As of the quarter ended
April 2, 2006 we adopted the provisions of SFAS No. 151 and noted no material
effect on our consolidated financial statements as a result of the adoption of
SFAS No. 151.
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BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
In December 2004, the FASB issued a revised SFAS No. 123 "Accounting
for Stock-Based Compensation," SFAS No. 123(R) "Share-Based Payments," which we
refer to as SFAS No. 123(R), which requires compensation costs related to
share-based payment transactions to be recognized in the financial statements.
SFAS No. 123(R) establishes fair value as the measurement objective in
accounting for share-based payment arrangements and requires all entities to
apply a fair-value-based measurement method in accounting for share-based
payment transactions with employees. SFAS No. 123(R) requires that stock awards
be classified as either an equity award or a liability award. SFAS No. 123(R)
replaces the original SFAS No. 123 and supersedes Accounting Principles Board,
which we refer to as APB, Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS No. 123(R) was effective January 1, 2006. Our adoption of SFAS
No. 123(R) did not have an impact on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets," which we refer to as SFAS No. 153, which replaces the
exception from fair value measurement in APB Opinion No. 29 "Accounting for
Nonmonetary Transactions," for nonmonetary exchanges of similar productive
assets. SFAS No. 153 replaces this exception with a general exception from fair
value measurement for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS No. 153 became effective for nonmonetary asset exchanges
beginning January 1, 2006. As of the quarter ended April 2, 2006, we adopted the
provisions of SFAS No. 153 and noted no nonmonetary asset exchanges as a result
of the adoption of SFAS No. 153.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections," which we refer to as SFAS No. 154, which eliminates the
requirement of APB Opinion No. 20, "Accounting Changes," to include the
cumulative effect adjustment resulting from a change in an accounting principle
in the income statement in the period of change. SFAS No. 154 requires that a
change in an accounting principle or reporting entity be retrospectively
applied. Under retrospective application, SFAS No. 154 is applied as of the
beginning of the first accounting period presented in the financial statements,
and the cumulative effect of the change is reflected in the carrying value of
assets and liabilities as of the first period presented, and the offsetting
adjustments are recorded to opening retained earnings. Each period presented is
adjusted to reflect the period-specific effects of applying the change. Changes
in accounting estimates and corrections of errors continue to be accounted for
in the same manner as prior to the issuance of SFAS No. 154. SFAS No. 154 became
effective for accounting changes and corrections of errors made beginning
January 1, 2006. As of the quarter ended April 2, 2006, we adopted the
provisions of SFAS No. 154 and, as a result, noted no accounting changes or
correction of errors.
* * *
30
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act and section 21E of the Securities Exchange
Act of 1934. These forward-looking statements are only predictions and generally
can be identified by use of statements that include phrases such as "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals also
are forward-looking statements. Our operations are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
contemplated by the relevant forward-looking statements. The forward-looking
statements included herein are made only as of the date of this quarterly report
on Form 10-Q and we undertake no obligation to publicly update any
forward-looking statements to reflect subsequent events or circumstances. We
cannot assure you that projected results or events will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in the 2005 Form 10-K for a discussion of
"Market-Sensitive Instruments and Risk Management." There were no material
changes in such information as of April 2, 2006 and we have no hedging
arrangements as of April 2, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: Our management, with the
participation of the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports filed, furnished or submitted
under the Exchange Act. Our Chief Executive Officer and Chief Financial Officer
also concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that we file or
submit under the Exchange Act is accummulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosures.
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BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 4. CONTROLS AND PROCEDURES - (CONTINUED)
Internal Control Over Financial Reporting: There were no significant
changes in our internal control over financial reporting identified in
management's evaluation during the first quarter of fiscal year 2006 that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of April 2, 2006, approximately 1,900 alleged asbestos-related
bodily injury claims relating to the inhalation of asbestos fiber are pending
against Building Materials Corporation of America. See Note 8 to consolidated
financial statements in Part I.
ITEM 6. EXHIBITS
Exhibit Number
10.1 Fifth Admendment, dated as of April 7, 2006, to the Credit
Agreement, dated as of July 9, 2003, among BMCA, the Grantors
party thereto, the banks, financial institutions and other
institutional lenders party thereto and Citicorp USA, Inc., as
administrative agent for the Lenders.
31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief
Executive Officer.
31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial
Officer.
32.1 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer
32
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BUILDING MATERIALS CORPORATION OF AMERICA
BUILDING MATERIALS MANUFACTURING CORPORATION
DATE: May 12, 2006 BY: /s/ John F. Rebele
----------------- -----------------------------------------
John F. Rebele
Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
DATE: May 12, 2006 BY: /s/ James T. Esposito
----------------- -----------------------------------------
James T. Esposito
Vice President and Controller
(Principal Accounting Officer)
33