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 JULY 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 August 16, 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 August 16, 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 August
16, 2006, no shares of the registrant or the additional registrant were held by
non-affiliates.
ADDITIONAL REGISTRANTS
Address, including zip
code and telephone number,
State or other including area code, of
jurisdiction of No. of Commission File No. registrant's principal
Exact name of registrant as incorporation or Shares /I.R.S. Employer executive offices
specified in its charter organization Outstanding Identification No.
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)
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JULY 2, JULY 3, JULY 2, JULY 3,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net Sales .......................... $ 535,888 $ 497,637 $ 1,040,863 $ 976,435
----------- ----------- ----------- -----------
Costs and expenses, net:
Cost of products sold ............ 369,110 341,511 728,590 677,228
Selling, general and
administrative .................. 118,283 107,656 232,881 212,941
Other (income) expense, net ...... (191) 2,163 (517) 3,162
----------- ----------- ----------- -----------
Total costs and expenses, net . 487,202 451,330 960,954 893,331
----------- ----------- ----------- -----------
Income before interest expense and
income taxes ...................... 48,686 46,307 79,909 83,104
Interest expense ................... (16,054) (16,415) (30,580) (32,519)
----------- ----------- ----------- -----------
Income before income taxes ......... 32,632 29,892 49,329 50,585
Income tax expense ................. (12,400) (11,360) (18,745) (19,223)
----------- ----------- ----------- -----------
Net income ......................... $ 20,232 $ 18,532 $ 30,584 $ 31,362
=========== =========== =========== ===========
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)
JULY 2, DECEMBER 31,
ASSETS 2006 2005
Current Assets: ----------- -----------
Cash and cash equivalents .................................................... $ 11,988 $ 6,882
Accounts receivable, trade, less allowance
of $2,121 and $2,310 in 2006 and 2005, respectively...................... 355,371 269,964
Accounts receivable, other ................................................... 4,968 6,480
Tax receivable from parent corporation ....................................... -- 804
Inventories, net ............................................................. 263,625 202,698
Deferred income tax assets, net .............................................. 33,947 31,842
Other current assets ......................................................... 11,498 13,575
----------- -----------
Total Current Assets ....................................................... 681,397 532,245
Property, plant and equipment, net ............................................. 383,794 374,397
Goodwill, net of accumulated amortization
of $16,370 in 2006 and 2005, respectively .................................... 67,145 67,134
Other noncurrent assets ........................................................ 34,304 30,549
----------- -----------
Total Assets ................................................................... $ 1,166,640 $ 1,004,325
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ......................................... $ 152,873 $ 19,768
Accounts payable ............................................................. 108,771 124,921
Payable to related parties ................................................... 19,271 12,087
Loans payable to parent corporation .......................................... 52,840 52,840
Accrued liabilities .......................................................... 122,177 115,985
Reserve for product warranty claims .......................................... 14,900 14,900
----------- -----------
Total Current Liabilities .................................................... 470,832 340,501
----------- -----------
Long-term debt less current maturities ......................................... 532,024 533,467
----------- -----------
Reserve for product warranty claims ............................................ 19,040 16,302
----------- -----------
Deferred income tax liabilities ................................................ 50,229 49,416
----------- -----------
Other liabilities .............................................................. 21,474 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 ..................................... (55,932) (55,840)
Retained earnings ............................................................ 134,382 104,275
Accumulated other comprehensive loss ......................................... (5,410) (5,410)
----------- -----------
Total Stockholders' Equity ................................................. 73,041 43,026
----------- -----------
Total Liabilities and Stockholders' Equity ..................................... $ 1,166,640 $ 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)
SIX MONTHS ENDED
----------------------
JULY 2, JULY 3,
2006 2005
--------- ---------
Cash and cash equivalents, beginning of period ................... $ 6,882 $ 129,482
--------- ---------
Cash provided by (used in) operating activities:
Net income ..................................................... 30,584 31,362
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation ............................................... 24,026 22,019
Amortization ............................................... 1,355 1,174
Deferred income taxes ...................................... (1,293) 571
Noncash interest charges, net .............................. 2,619 2,850
Increase in working capital items .............................. (152,789) (105,128)
Increase (decrease) in long-term reserve for
product warranty claims........................................ 2,738 (874)
Increase in other assets ....................................... (1,247) (4,918)
Increase (decrease) in other liabilities ....................... (118) 2,661
Change in net receivable from/payable to related
parties/parent corporations .................................. 7,988 (2,214)
Other, net ..................................................... 382 200
--------- ---------
Net cash used in operating activities ............................ (85,755) (52,297)
--------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition of a manufacturing facility
in 2006 ...................................................... (33,729) (22,877)
Proceeds from sale of assets ................................... -- 4,717
--------- ---------
Net cash used in investing activities ............................ (33,729) (18,160)
--------- ---------
Cash provided by (used in) financing activities:
Proceeds from Senior Secured Revolving Credit Facility ......... 472,000 127,000
Purchase of industrial development revenue bond certificates
issued by the Company.......................................... (6,325) --
Repayments of long-term debt ................................... (340,516) (128,374)
Distribution to parent corporation ............................. (477) (10)
Loan to parent corporation ..................................... (92) (68)
Financing fees and expenses .................................... -- (446)
--------- ---------
Net cash provided by (used in) financing activities .............. 124,590 (1,898)
--------- ---------
Net change in cash and cash equivalents .......................... 5,106 (72,355)
--------- ---------
Cash and cash equivalents, end of period ......................... $ 11,988 $ 57,127
========= =========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized of $1,055 and $358
in 2006 and 2005, respectively) ............................. $ 25,678 $ 28,150
Income taxes (including federal income taxes paid pursuant
to a tax sharing agreement of $13,801 and $21,953 in
2006 and 2005, respectively) ................................ 14,414 22,171
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 July 2, 2006, and the results of operations for the second
quarter and six months ended July 2, 2006 and July 3, 2005 and cash flows for
the six months ended July 2, 2006 and July 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 beginning January 1, 2006. The Company's adoption of the
provisions of SFAS No. 151 did not have a material effect on its consolidated
financial statements.
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
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.
6
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
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. The Company's adoption of the provisions of SFAS No. 153 did not have any
effect on its consolidated financial statements as it did not have any
nonmonetary asset exchanges.
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. The Company's adoption of the provisions of SFAS No. 154 did
not have any effect on the Company's consolidated financial statements as it did
not have any accounting changes or correction of errors.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,"
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
in a tax return. A company must determine whether it is "more-likely-than-not"
that a tax position will be sustained upon examination, including resolution of
any related appeals or litigation processes, based on the technical merits of
the position. Once it is determined that a position meets the
more-likely-than-not recognition threshold, the position is measured to
determine the amount of benefit to recognize in the financial statements.
7
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company will adopt the provisions of FIN 48 beginning in the first quarter of
2007. The cumulative effect of applying the provisions of FIN 48 will be
reported as an adjustment to the opening balance of retained earnings on January
1, 2007. The Company is currently assessing the impact of FIN 48 on its
consolidated financial statements.
NOTE 2. INVENTORIES
Inventories consisted of the following as of July 2, 2006 and December
31, 2005:
JULY 2, DECEMBER 31,
2006 2005
--------- ---------
(THOUSANDS)
Finished goods ......................... $ 203,941 $ 149,049
Work-in process ........................ 14,598 12,904
Raw materials and supplies ............. 65,754 56,413
--------- ---------
Total .................................. 284,293 218,366
Less LIFO reserve ...................... (20,668) (15,668)
--------- ---------
Inventories ............................ $ 263,625 $ 202,698
========= =========
NOTE 3. ACQUISITION AND PROPERTY DISPOSITION
On June 1, 2006, the Company acquired a manufacturing facility located
in Gainesville, Texas. The purchase price was allocated to the fair value of the
identifiable assets acquired, which consisted entirely of property, plant and
equipment.
In June 2005, the Company sold property in Houston, Texas for cash
proceeds of approximately $4.1 million, which approximated carrying value.
8
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4. LONG-TERM DEBT
As of July 2, 2006, the Company had total outstanding consolidated
indebtedness of $737.7 million, of which $152.9 million matures prior to the end
of the second quarter of 2007 including $150.0 million of borrowings outstanding
under its $350.0 million Senior Secured Revolving Credit Facility ("the Senior
Secured Revolving Credit Facility") and $52.8 million of demand loans to our
parent corporation. The Company anticipates funding the aforementioned
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 July 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 July 2, 2006, the book
value of the collateral securing the Senior Notes and the Senior Secured
Revolving Credit Facility was approximately $1,154.1 million.
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, as defined in the
Senior Secured Revolving Credit Facility, then outstanding.
At July 2, 2006, the Company had outstanding letters of credit of
approximately $50.7 million under the Senior Secured Revolving Credit Facility,
which includes approximately $11.2 million of standby letters of credit related
to certain obligations of G-I Holdings. During the six month period ended July
2, 2006, the Company paid $0.5 million as a distribution to its indirect parent
corporation related to previously outstanding standby letters of credit.
On January 3, 2006, the Company purchased $6.3 million of industrial
revenue bond certificates issued by the Company in 1990 with respect to the
Fontana, California Industrial Revenue Development Bond, resulting in BMCA
becoming the primary holder of such bond.
9
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. 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 consists of the following for
the second quarter and six month periods ended July 2, 2006 and July 3, 2005:
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 2, JULY 3, JULY 2, JULY 3,
2006 2005 2006 2005
-------- -------- -------- --------
(THOUSANDS)
Beginning balance ................ $ 33,014 $ 31,851 $ 31,202 $ 32,113
Charged to cost of products sold.. 6,758 6,021 13,499 11,910
Payments/deductions .............. (5,832) (6,633) (10,761) (12,784)
-------- -------- -------- --------
Ending balance ................... $ 33,940 $ 31,239 $ 33,940 $ 31,239
======== ======== ======== ========
NOTE 6. 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.
The Company's net periodic pension cost for the Retirement Plan
included the following components for the second quarter and six month periods
ended July 2, 2006 and July 3, 2005:
10
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. BENEFIT PLANS - (CONTINUED)
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
JULY 2, JULY 3, JULY 2, JULY 3,
2006 2005 2006 2005
------- ------- ------- -------
(THOUSANDS)
Service cost ..................... $ 370 $ 360 $ 740 $ 721
Interest cost .................... 523 520 1,046 1,039
Expected return on plan assets ... (748) (708) (1,496) (1,416)
Amortization of unrecognized prior
service cost ................... 10 9 20 18
Amortization of net losses from
earlier periods ................ 86 77 172 154
------- ------- ------- -------
Net periodic pension cost ........ $ 241 $ 258 $ 482 $ 516
======= ======= ======= =======
As of the quarter ended July 2, 2006, the Company does not expect to
make any pension contribution to the Retirement Plan in 2006, which is
consistent with its expectations at December 31, 2005.
11
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. BENEFIT PLANS - (CONTINUED)
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 second quarter and six month periods ended July 2, 2006 and
July 3, 2005:
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
JULY 2, JULY 3, JULY 2, JULY 3,
2006 2005 2006 2005
------- ------- ------- -------
(THOUSANDS)
Service cost ..................... $ 3 $ 34 $ 6 $ 69
Interest cost .................... 29 71 59 143
Amortization of unrecognized prior
service cost ................... (155) (23) (310) (47)
Amortization of net gains from
earlier periods ................ (61) (61) (122) (123)
------- ------- ------- -------
Net periodic postretirement
(benefit) cost ................. $ (184) $ 21 $ (367) $ 42
======= ======= ======= =======
As of the quarter ended July 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 at December 31, 2005.
12
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. 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 $2.5 and $2.8 million
for the second quarter ended July 2, 2006 and July 3, 2005, respectively, and
$5.5 and $5.8 million for the six month period ended July 2, 2006 and July 3,
2005, respectively. At July 2, 2006 and July 3, 2005, the 2001 Long-Term
Incentive Plan liability amounted to $29.4 and $23.9 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:
JULY 2, DECEMBER 31,
2006 2005
-------- --------
Incentive Units outstanding, beginning
of period .......................... 146,814 124,455
Granted .............................. 5,000 35,205
Exercised ............................ (8,071) (9,464)
Forfeited ............................ (11,039) (3,382)
-------- --------
Incentive Units outstanding, end
of period, ......................... 132,704 146,814
======== ========
NOTE 8. RELATED PARTY TRANSACTIONS
The Company makes loans to, and borrows from, its parent corporations
from time to time at prevailing market rates. As of July 2, 2006 and July 3,
2005, BMCA Holdings Corporation owed the Company $55.9 and $55.8 million,
including interest of $0.6 and $0.5 million, respectively, and the Company owed
BMCA Holdings Corporation $52.8 and $52.8 million, respectively, with no unpaid
interest payable to BMCA Holdings Corporation. Interest income on the Company's
loans to BMCA Holdings Corporation amounted to $1.2 and $0.9 million during the
second quarter ended July 2, 2006 and July 3, 2005, respectively, and $2.4 and
$1.8 million during the six month period ended July 2, 2006 and July 3, 2005,
respectively. Interest expense on the Company's loans from BMCA Holdings
Corporation amounted to $1.2 and $0.9 million during the second quarter ended
July 2, 2006 and July 3, 2005, respectively, and $2.3 and $1.8 million during
the six month period ended July 2, 2006 and July 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
13
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS - (CONTINUED)
obligation to the other party and are subject to limitations as outlined in the
Company's 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 July 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 July 2, 2006 and July 3,
2005. In addition, for the six month period ended July 2, 2006 and July 3, 2005,
no loans were owed or other lending activities were entered into by the Company
to other affiliates.
The Company purchases all of its colored roofing granules and
algae-resistant granules under a long-term requirements contract with a
subsidiary of International Specialty Products Inc., an affiliate, (together
with its subsidiaries "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 six month period ended July 2, 2006 and July 3,
2005 and the year ended December 31, 2005, the Company purchased $58.7, $54.7
and $108.3 million, respectively, of mineral products from ISP under this
contract.
During the six month period ended July 2, 2006 and July 3, 2005, the
Company paid $13.8 and $22.0 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.
In July 2006, the Company amended its management agreement with 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 approximately $6.0 million.
NOTE 9. 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.
14
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
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. 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. While the Company
cannot predict whether, if the injunction is ever lifted, any additional
Asbestos Claims will be asserted against it or its assets, or provide assurances
with regard to the outcome of any litigation relating to those claims, the
Company believes that it has meritorious defenses to, and will not sustain
liability in connection with, any Asbestos Claims.
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
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. This matter is not expected to be heard by the District Court
earlier than February 2007. It is not possible to predict the outcome of this
litigation, although the Company believes its claims are meritorious.
15
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
On or about February 8, 2001, the creditors' committee 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 July 7, 2004, the Bankruptcy Court entered an order authorizing the
creditors' committee to commence an adversary proceeding against the Company and
others challenging, as a fraudulent conveyance, certain 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").
The Bankruptcy Court also permitted the creditors' committee to pursue a claim
against holders of the Company's bank and bond debt outstanding in 2000, seeking
recovery from them based on the creditors' committee's theory that the 1994
transaction was a fraudulent conveyance. On July 20, 2004, the creditors'
committee appealed certain aspects of the court's order (and June 8, 2004
decision upon which the order was based). G-I Holdings, the holders of the
Company's bank and bond debt and the Company cross appealed. The District
16
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
Court entered an order on June 21, 2006 affirming in part and vacating in part
the Bankruptcy Court's July 7, 2004 order. Among other things, the District
Court vacated that aspect of the Bankruptcy Court's order authorizing the
creditors' committee to pursue avoidance claims against the Company and the
holders of the Company's bank and bond debt as of 2000. This issue has been
remanded to the Bankruptcy Court for further proceedings consistent with the
District Court's opinion.
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.
17
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
For a further discussion with respect to the history of environmental
matters, reference is made to Note 2 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.
18
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. 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 10. GUARANTOR FINANCIAL INFORMATION
At July 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.
19
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SECOND QUARTER ENDED JULY 2, 2006
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- --------- --------- ---------
Net sales ........................... $ 503,243 $ 32,645 $ -- $ 535,888
Intercompany net sales .............. 162 333,321 (333,483) --
--------- --------- --------- ---------
Total net sales ................. 503,405 365,966 (333,483) 535,888
--------- --------- --------- ---------
Costs and expenses, net:
Cost of products sold ............. 379,094 323,499 (333,483) 369,110
Selling, general and administrative 88,263 30,020 -- 118,283
Intercompany licensing (income)
expense, net .................... 20,136 (20,136) -- --
Other income, net ................. (195) 4 -- (191)
Transition service agreement
(income) expense ................ 25 (25) -- --
--------- --------- --------- ---------
Total costs and expenses, net ... 487,323 333,362 (333,483) 487,202
--------- --------- --------- ---------
Income before equity in earnings of
subsidiaries, interest expense and
income taxes ...................... 16,082 32,604 -- 48,686
Equity in earnings of subsidiaries .. 16,222 -- (16,222) --
Interest expense .................... (9,615) (6,439) -- (16,054)
--------- --------- --------- ---------
Income before income taxes .......... 22,689 26,165 (16,222) 32,632
Income tax expense .................. (2,457) (9,943) -- (12,400)
--------- --------- --------- ---------
Net income .......................... $ 20,232 $ 16,222 $ (16,222) $ 20,232
========= ========= ========= =========
20
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SECOND QUARTER ENDED JULY 3, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- --------- --------- ---------
Net sales ....................................... $ 464,997 $ 32,640 $ -- $ 497,637
Intercompany net sales .......................... 863 295,197 (296,060) --
--------- --------- --------- ---------
Total net sales ............................... 465,860 327,837 (296,060) 497,637
--------- --------- --------- ---------
Cost and expenses, net:
Costs of products sold ........................ 349,201 288,370 (296,060) 341,511
Selling, general and administrative ........... 81,450 26,206 -- 107,656
Intercompany licensing (income) expense, net .. 18,634 (18,634) -- --
Other (income) expense, net ................... 2,179 (16) -- 2,163
Transition service agreement (income) expense . 25 (25) -- --
--------- --------- --------- ---------
Total costs and expenses, net ................. 451,489 295,901 (296,060) 451,330
--------- --------- --------- ---------
Income before equity in earnings of subsidiaries,
interest expense and income taxes .............. 14,371 31,936 -- 46,307
Equity in earnings of subsidiaries .............. 17,068 -- (17,068) --
Interest expense ................................ (12,008) (4,407) -- (16,415)
--------- --------- --------- ---------
Income before income taxes ...................... 19,431 27,529 (17,068) 29,892
Income tax expense .............................. (899) (10,461) -- (11,360)
--------- --------- --------- ---------
Net income ...................................... $ 18,532 $ 17,068 $ (17,068) $ 18,532
========= ========= ========= =========
21
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JULY 2, 2006
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
----------- ----------- ----------- -----------
Net sales ........................... $ 984,855 $ 56,008 $ -- $ 1,040,863
Intercompany net sales .............. 213 644,995 (645,208) --
----------- ----------- ----------- -----------
Total net sales ................. 985,068 701,003 (645,208) 1,040,863
----------- ----------- ----------- -----------
Costs and expenses, net:
Cost of products sold ............. 751,901 621,897 (645,208) 728,590
Selling, general and administrative 174,976 57,905 -- 232,881
Intercompany licensing (income)
expense, net .................... 39,403 (39,403) -- --
Other (income) expense, net ....... (537) 20 -- (517)
Transition service agreement
(income) expense ................ 50 (50) -- --
----------- ----------- ----------- -----------
Total costs and expenses, net ... 965,793 640,369 (645,208) 960,954
----------- ----------- ----------- -----------
Income before equity in earnings of
subsidiaries, interest expense and
income taxes ...................... 19,275 60,634 -- 79,909
Equity in earnings of subsidiaries .. 30,263 -- (30,263) --
Interest expense .................... (18,758) (11,822) -- (30,580)
----------- ----------- ----------- -----------
Income before income taxes .......... 30,780 48,812 (30,263) 49,329
Income tax expense .................. (196) (18,549) -- (18,745)
----------- ----------- ----------- -----------
Net income .......................... $ 30,584 $ 30,263 $ (30,263) $ 30,584
=========== =========== =========== ===========
22
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JULY 3, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- --------- --------- ---------
Net sales ....................................... $ 918,292 $ 58,143 $ -- $ 976,435
Intercompany net sales .......................... 1,724 620,529 (622,253) --
--------- --------- --------- ---------
Total net sales ............................... 920,016 678,672 (622,253) 976,435
--------- --------- --------- ---------
Cost and expenses, net:
Costs of products sold ........................ 700,679 598,802 (622,253) 677,228
Selling, general and administrative ........... 161,000 51,941 -- 212,941
Intercompany licensing (income) expense, net .. 36,800 (36,800) -- --
Other (income) expense, net ................... 3,421 (259) -- 3,162
Transition service agreement (income) expense . 50 (50) -- --
--------- --------- --------- ---------
Total costs and expenses, net ................. 901,950 613,634 (622,253) 893,331
--------- --------- --------- ---------
Income before equity in earnings of subsidiaries,
interest expense and income taxes .............. 18,066 65,038 -- 83,104
Equity in earnings of subsidiaries .............. 35,421 -- (35,421) --
Interest expense ................................ (24,611) (7,908) -- (32,519)
--------- --------- --------- ---------
Income before income taxes ...................... 28,876 57,130 (35,421) 50,585
Income tax (expense) benefit .................... 2,486 (21,709) -- (19,223)
--------- --------- --------- ---------
Net income ...................................... $ 31,362 $ 35,421 $ (35,421) $ 31,362
========= ========= ========= =========
23
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 2, 2006
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
---------- ---------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents .................. $ 11 $ 11,977 $ -- $ 11,988
Accounts receivable, trade, net ............ 331,575 23,796 -- 355,371
Accounts receivable, other ................. 3,876 1,092 -- 4,968
Inventories, net ........................... 190,788 72,837 -- 263,625
Deferred income tax assets, net ............ 33,947 -- -- 33,947
Other current assets ....................... 5,146 6,352 -- 11,498
---------- ---------- ---------- ----------
Total Current Assets ..................... 565,343 116,054 -- 681,397
Investment in subsidiaries ................... 606,221 -- (606,221) --
Intercompany loans including accrued
interest ................................... 282,206 (282,206) -- --
Due from/(to) subsidiaries, net .............. (674,502) 674,502 -- --
Property, plant and equipment, net ........... 39,754 344,040 -- 383,794
Goodwill, net ................................ 40,080 27,065 -- 67,145
Other noncurrent assets ...................... 7,797 26,507 -- 34,304
---------- ---------- ---------- ----------
Total Assets ................................. $ 866,899 $ 905,962 $ (606,221) $1,166,640
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ....... $ 150,000 $ 2,873 $ -- $ 152,873
Accounts payable ........................... 39,892 68,879 -- 108,771
Payable to related parties, net ............ 6,246 13,025 -- 19,271
Loans payable to parent corporation ........ 52,840 -- -- 52,840
Accrued liabilities ........................ 34,505 87,672 -- 122,177
Reserve for product warranty claims ........ 14,900 -- -- 14,900
---------- ---------- ---------- ----------
Total Current Liabilities ................ 298,383 172,449 -- 470,832
Long-term debt less current maturities ....... 405,521 126,503 -- 532,024
Reserve for product warranty claims .......... 18,430 610 -- 19,040
Deferred income tax liabilities .............. 50,229 -- -- 50,229
Other liabilities ............................ 21,295 179 -- 21,474
---------- ---------- ---------- ----------
Total Liabilities ............................ 793,858 299,741 -- 1,093,599
Total Stockholders' Equity ................... 73,041 606,221 (606,221) 73,041
---------- ---------- ---------- ----------
Total Liabilities and Stockholders'
Equity .................................. $ 866,899 $ 905,962 $ (606,221) $1,166,640
========== ========== ========== ==========
24
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
Company Subsidiaries Eliminations 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
========== ========== ========== ==========
25
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 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 ............................................ 321 30,263 30,584
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation ........................................ 1,959 22,067 24,026
Amortization ........................................ -- 1,355 1,355
Deferred income taxes ............................... (1,293) -- (1,293)
Noncash interest charges, net ....................... 1,955 664 2,619
Increase in working capital items ..................... (139,975) (12,814) (152,789)
Increase (decrease) in long-term reserve for
product warranty claims ............................. 2,788 (50) 2,738
Increase (decrease) in other assets ................... 23 (1,270) (1,247)
Decrease in other liabilities ......................... (114) (4) (118)
Change in net receivable from/payable to
related parties/parent corporations ................. 7,846 142 7,988
Other, net ............................................ (12) 394 382
--------- --------- ---------
Net cash provided by (used in) operating activities ..... (126,502) 40,747 (85,755)
--------- --------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition of a manufacturing
facility .......................................... (5,927) (27,802) (33,729)
--------- --------- ---------
Net cash used in investing activities ................... (5,927) (27,802) (33,729)
--------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from Senior Secured Revolving Credit
Facility ............................................ 472,000 -- 472,000
Purchase of industrial development revenue bond
certificates issued by the Company ................ -- (6,325) (6,325)
Repayments of long-term debt .......................... (339,000) (1,516) (340,516)
Distribution to parent corporation .................... (477) -- (477)
Loan to parent corporation ............................ (92) -- (92)
--------- --------- ---------
Net cash provided by (used in) financing activities ..... 132,431 (7,841) 124,590
--------- --------- ---------
Net change in cash and cash equivalents ................. 2 5,104 5,106
--------- --------- ---------
Cash and cash equivalents, end of period ................ $ 11 $ 11,977 $ 11,988
========= ========= =========
26
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 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) ................................ (4,059) 35,421 31,362
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation ................................... 1,748 20,271 22,019
Amortization ................................... -- 1,174 1,174
Deferred income taxes .......................... 571 -- 571
Noncash interest charges, net .................. 2,195 655 2,850
Increase in working capital items ................ (93,979) (11,149) (105,128)
Increase (decrease) in long-term reserve for
product warranty claims ...................... (1,055) 181 (874)
Increase in other assets ......................... (4,608) (310) (4,918)
Increase in other liabilities .................... 2,569 92 2,661
Change in net receivable from/payable to
related parties/parent corporations ............ 94,419 (96,633) (2,214)
Other, net ....................................... (29) 229 200
--------- --------- ---------
Net cash used in operating activities .............. (2,228) (50,069) (52,297)
--------- --------- ---------
Cash provided by (used in) investing activities:
Capital expenditures ............................. (1,388) (21,489) (22,877)
Proceeds from sale of assets ..................... 4,132 585 4,717
--------- --------- ---------
Net cash provided by (used in) investing
activities ..................................... 2,744 (20,904) (18,160)
--------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from the issuance of long-term debt ..... 127,000 -- 127,000
Repayments of long-term debt ..................... (127,000) (1,374) (128,374)
Distribution to parent corporation ............... (10) -- (10)
Loan to parent corporation ....................... (68) -- (68)
Financing fees and expenses ...................... (446) -- (446)
--------- --------- ---------
Net cash used in financing activities .............. (524) (1,374) (1,898)
--------- --------- ---------
Net change in cash and cash equivalents ............ (8) (72,347) (72,355)
--------- --------- ---------
Cash and cash equivalents, end of period ........... $ 4 $ 57,123 $ 57,127
========= ========= =========
27
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 six month period ended July 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,
and energy, and transportation and distribution costs.
Second Quarter 2006 Compared With
Second Quarter 2005
We recorded net income in the second quarter of 2006 of $20.2 million
compared with net income of $18.5 million in the second quarter of 2005. The
increase in second quarter of 2006 net income was primarily attributable to
higher income before interest expense and income taxes and slightly lower
interest expense.
Net sales for the second quarter of 2006 were $535.9 million, a 7.7%
increase over second quarter of 2005 net sales of $497.6 million, with the
increase due to higher net sales of both residential and commercial roofing
products primarily resulting from higher average selling prices and higher unit
volumes.
Income before interest expense and income taxes in the second quarter
of 2006 was $48.7 million compared with $46.3 million in the second quarter of
2005. Income before interest expense and income taxes in the second quarter of
2006 was positively affected by increased net sales of both residential and
commercial roofing products primarily resulting from higher average selling
prices and higher unit volumes and a decline in other expense, net which was
mostly offset by higher raw material costs, including asphalt, and higher
selling, general and administrative expenses, mostly due to higher distribution
costs, primarily resulting from higher sales volume and a rise in fuel prices.
28
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Interest expense for the second quarter of 2006 decreased slightly to
$16.1 million from $16.4 million for the second quarter of 2005.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the second quarter of 2006
increased to $512.5 million from $474.7 million for the second quarter of 2005,
representing an increase of $37.8 million or 8.0%. The increase in net sales of
roofing products was primarily attributable to higher average selling prices and
higher unit volumes. Roofing product net sales were favorably impacted by an
increase in net sales of premium laminate shingles primarily due to higher
average selling prices and higher unit volumes. Net sales of specialty building
products and accessories increased to $23.4 million for the second quarter of
2006 from $22.9 million for the second quarter of 2005.
Gross Margin. Our overall gross margin increased to $166.8 million or 31.1% for
the second quarter of 2006 from $156.1 million or 31.4% for the second quarter
of 2005. The increase in our overall gross margin is primarily attributable to
an increase in net sales due to higher average selling prices and an improved
sales mix, partially offset by higher raw material costs.
Income before Interest Expense and Income Taxes. Income before interest expense
and income taxes for the second quarter of 2006 increased to $48.7 million or
9.1% of net sales, compared to $46.3 million or 9.3% of net sales for the second
quarter of 2005. Income before interest expense and income taxes in the second
quarter of 2006 was positively affected by increased net sales of roofing
products primarily resulting from higher average selling prices and higher unit
volumes and a decline in other expense, net, which was mostly offset by higher
raw material costs, including asphalt, and higher selling, general and
administrative expenses mostly due to higher distribution costs, primarily due
to higher sales volume and a rise in fuel prices.
Six Months 2006 Compared With
Six Months 2005
We recorded net income in the first six months of 2006 of $30.6 million
compared with net income of $31.4 million in the first six months of 2005. The
decrease in the first six months of 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 six months of 2006 were $1,040.9 million, a
6.6% increase over the first six months of 2005 net sales of $976.4 million,
with the increase primarily due to higher average selling prices of both
residential and commercial roofing products.
29
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Income before interest expense and income taxes for the first six
months of 2006 was $79.9 million compared with $83.1 million for the first six
months of 2005. Income before interest expense and income taxes for the first
six months of 2006 was positively affected by increased net sales of both
residential and commercial roofing products primarily resulting from higher
average selling prices and a decline in other expense, net, which was more than
offset by higher raw material costs, including asphalt, and higher selling,
general and administrative expenses, mostly due to higher distribution costs,
primarily resulting from a rise in fuel prices.
Interest expense for the first six months of 2006 decreased to $30.6
million from $32.5 million for the first six months of 2005, primarily due to
lower average borrowings.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the first six months of 2006
increased to $1,002.0 million from $937.0 million for the first six months of
2005, representing an increase of $65.0 million or 6.9%. 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
$38.9 million for the first six months of 2006 from $39.4 million for the first
six months of 2005.
Gross Margin. Our overall gross margin increased to $312.3 million or 30.0% for
the first six months of 2006 from $299.2 million or 30.6% for the first six
months of 2005. The increase in our overall gross margin is primarily
attributable to an increase in net sales due to higher average selling prices
and an improved sales mix, partially offset by higher raw material costs.
Income before Interest Expense and Income Taxes. Income before interest expense
and income taxes for the first six months of 2006 decreased to $79.9 million or
7.7% of net sales, compared to $83.1 million or 8.5% of net sales for the first
six months of 2005. Income before interest expense and income taxes for the
first six months of 2006 was positively affected by increased net sales of both
residential and commerical roofing products primarily resulting from higher
average selling prices and a decline in other expense, net, which was more than
offset by higher raw material costs, including asphalt, and higher selling,
general and administrative expenses mostly due to higher distribution costs,
primarily resulting from a rise in fuel prices.
30
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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,
in the third and fourth quarters of our fiscal year, our cash flows from
operations become positive for each quarter, as our investment in inventories
and accounts receivable no longer continues to increase, as is customary in the
first six months of our fiscal year. Our seasonal working capital needs,
together with our debt service obligations, capital expenditure requirements and
other contracted arrangements, adversely impact our liquidity during this
period. We rely on our cash and cash equivalents on hand and our $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 six months of 2006 from operating and
investing activities was $119.5 million, including the use of $85.8 million of
cash from operations and the reinvestment of $33.7 million for capital programs
and an acquisition of a manufacturing facility in Gainesville, Texas.
Cash invested in additional working capital totaled $152.8 million
during the first six months of 2006, reflecting an increase in total accounts
receivable of $83.9 million, due to our increased operating performance and the
seasonality of our business, a $60.9 million increase in inventories to meet our
seasonal operating demands and a $10.0 million net decrease in accounts payable
and accrued liabilities. The net cash used for operating activities also
included an $8.0 million net increase in the payable to related parties/parent
corporations, primarily attributable to a $3.8 million net increase in federal
income taxes payable pursuant to our tax sharing agreement with our parent
corporation and a $4.1 million increase in amounts due under our long-term
granule supply agreement with an affiliated company.
31
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Net cash provided by financing activities totaled $124.6 million during
the first six months of 2006, including $472.0 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 $340.5 million in aggregate repayments of
long-term debt, of which $339.0 million related to 2006 year to date cumulative
repayments under our Senior Secured Revolving Credit Facility and $1.3 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 by the Company with respect to the Fontana,
California Industrial Development Revenue Bond, resulting in BMCA becoming the
primary holder of such bond.
Acquisition and Property Disposition
On June 1, 2006, we acquired a manufacturing facility located in
Gainesville, Texas. The purchase price was allocated to the fair value of the
identifiable assets acquired, which consisted entirely of property, plant and
equipment.
In June 2005, we sold property in Houston, Texas for cash proceeds of
approximately $4.1 million, which approximated carrying value.
Long-Term Debt
As of July 2, 2006 we had total outstanding consolidated indebtedness
of $737.7 million, of which $152.9 million matures prior to the end of the
second quarter of 2007 including $150.0 million of borrowings outstanding under
the Senior Secured Revolving Credit Facility and $52.8 million of demand loans
to our parent corporation. We anticipate funding the aforementioned 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 July 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 July
2, 2006, the book value of the collateral securing the Senior Notes and the
Senior Secured Revolving Credit Facility was approximately $1,154.1 million.
32
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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, as defined in the Senior Secured
Revolving Credit Facility, then outstanding.
At July 2, 2006, we had outstanding letters of credit of approximately
$50.7 million under the Senior Secured Revolving Credit Facility, which includes
approximately $11.2 million of standby letters of credit related to certain
obligations of G-I Holdings. During the six month period ended July 2, 2006, we
paid $0.5 million as a distribution to our indirect parent corporation related
to previously outstanding standby letters of credit.
On January 3, 2006, we purchased $6.3 million of industrial revenue
bond certificates issued by us in 1990 with respect to the Fontana, California
Industrial Revenue Development Bond, resulting in us becoming the primary holder
of such bond.
Intercompany Transactions
We make loans to, and borrow from, our parent corporations from time to
time at prevailing market rates. As of July 2, 2006 and July 3, 2005, BMCA
Holdings Corporation owed us $55.9 and $55.8 million, including interest of $0.6
and $0.5 million, respectively, and we owed BMCA Holdings Corporation $52.8 and
$52.8 million, respectively, with no unpaid interest payable to BMCA Holdings
Corporation. Interest income on our loans to BMCA Holdings Corporation amounted
to $1.2 and $0.9 million during the second quarter ended July 2, 2006 and July
3, 2005, respectively, and $2.4 and $1.8 million during the six month period
ended July 2, 2006 and July 3, 2005, respectively. Interest expense on our loans
from BMCA Holdings Corporation amounted to $1.2 and $0.9 million during the
second quarter ended July 2, 2006 and July 3, 2005, respectively, and $2.3 and
$1.8 million during the six month period ended July 2, 2006 and July 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 and the indentures governing our Senior
Notes, at July 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 July 2, 2006 and July 3, 2005. In addition, for the six month period ended
July 2, 2006 and July 3, 2005, no loans were owed or other lending activities
were entered into by us to other affiliates.
33
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
During the six month period ended July 2, 2006 and July 3, 2005, we
paid $13.8 and $22.0 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 $5.1 million during the first six months of 2006 to $12.0 million.
Contingencies
See Note 9 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 six months 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 six months 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 six months
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
We purchase all of our colored roofing granules and algae-resistant
granules under a long-term requirements contract with a subsidiary of
International Specialty Products Inc., an affiliate, which together with its
subsidiaries, we collectively refer to as ISP. The amount of mineral products
34
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
purchased each year under the ISP contract is based on current demand and is not
subject to minimum purchase requirements. For the six month period ended July 2,
2006 and July 3, 2005 and the year ended December 31, 2005, we purchased $58.7,
$54.7 and $108.3 million, respectively, of mineral products from ISP under this
contract.
In July 2006 we amended our management agreement with 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 approximately $6.0 million. 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.
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 beginning January 1, 2006. Our adoption of the provisions of
SFAS No. 151 did not have a material effect on our consolidated financial
statements.
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.
35
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 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. Our adoption of the provisions of SFAS No. 153 did
not have any effect on our consolidated financial statements as we did not have
any nonmonetary asset exchanges.
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. Our adoption of the provisions of SFAS No. 154 did not have any
effect on our consolidated financial statements as we did not have any
accounting changes or correction of errors.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,"
which we refer to as FIN 48. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken in a tax return. A company must determine whether it is
"more-likely-than-not" that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on
the technical merits of the position. Once it is determined that a position
meets the more-likely-than-not recognition threshold, the position is measured
to determine the amount of benefit to recognize in the financial statements. FIN
48 is effective for fiscal years beginning after December 15, 2006. We will
adopt the provisions of FIN 48 beginning in the first quarter of 2007. The
cumulative effect of applying the provisions of FIN 48 will be reported as an
adjustment to the opening balance of retained earnings on January 1, 2007. We
are currently assessing the impact of FIN 48 on our consolidated financial
statements.
* * *
36
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 July 2, 2006 and we have no hedging
arrangements as of July 2, 2006.
37
BUILDING MATERIALS CORPORATION OF AMERICA
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.
Internal Control Over Financial Reporting: There were no significant
changes in our internal control over financial reporting identified in
management's evaluation during the second quarter of fiscal year 2006 that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
38
BUILDING MATERIALS CORPORATION OF AMERICA
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of July 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 9 to consolidated financial
statements in Part I.
ITEM 6. EXHIBITS
Exhibit Number
10.1 Amendment No. 8 to the Amended and Restated Management
Agreement, dated as of January 1, 2006, by and among G-I
Holdings Inc., Merick Inc., International Specialty Products
Inc., International Specialty Holdings Inc., ISP Minerals
Inc., ISP Investco LLC, GAF Broadcasting Company, Inc.,
Building Materials Corporation of America and ISP Management
Company, Inc. as assignee of ISP Chemco, Inc.
31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial
Officer.
32.1 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer
39
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: August 16, 2006 BY: /s/John F. Rebele
----------------- ----------------------
John F. Rebele
Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
DATE: August 16, 2006 BY: /s/James T. Esposito
----------------- ---------------------
James T. Esposito
Vice President and Controller
(Chief Accounting Officer)
40