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 OCTOBER 1, 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 November 15, 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 November 15, 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 November 15, 2006, no shares of the registrant or the
additional registrant were held by non-affiliates.
ADDITIONAL REGISTRANTS
Address, including zip
Exact name of State or other Commission File code and telephone number,
registrant as jurisdiction of No. of No./I.R.S. including area code, of
specified in its incorporation or Shares Employer registrant's principal
charter organization Outstanding Identification No. executive offices
- ------- ------------ ----------- ------------------ -----------------
Building Materials Delaware 10 333-69749-01/ 1361 Alps Road
Manufacturing Corporation 22-3626208 Wayne, NJ 07470
(973) 628-3000
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------- -----------------
OCT. 1, OCT. 2, OCT. 1, OCT. 2,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net Sales ........................ $ 530,349 $ 496,325 $ 1,571,213 $ 1,472,760
----------- ----------- ----------- -----------
Costs and expenses, net:
Cost of products sold .......... 372,250 342,252 1,100,842 1,019,480
Selling, general and
administrative ................ 114,682 104,560 347,562 317,500
Other (income) expense, net .... 132 604 (386) 3,767
----------- ----------- ----------- -----------
Total costs and expenses, net . 487,064 447,416 1,448,018 1,340,747
----------- ----------- ----------- -----------
Income before interest expense and
income taxes ..................... 43,285 48,909 123,195 132,013
Interest expense ................. (15,771) (14,989) (46,352) (47,508)
----------- ----------- ----------- -----------
Income before income taxes ....... 27,514 33,920 76,843 84,505
Income tax expense ............... (10,455) (12,889) (29,200) (32,112)
----------- ----------- ----------- -----------
Net income ....................... $ 17,059 $ 21,031 $ 47,643 $ 52,393
=========== =========== =========== ===========
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)
OCTOBER 1, DECEMBER 31,
ASSETS 2006 2005
Current Assets: ----------- -----------
Cash and cash equivalents .................................................... $ 6,126 $ 6,882
Accounts receivable, trade, less allowance
of $2,250 and $2,310 in 2006 and 2005, respectively........................ 340,398 269,964
Accounts receivable, other ................................................... 4,980 6,480
Tax receivable from parent corporation ....................................... -- 804
Inventories, net ............................................................. 279,061 202,698
Deferred income tax assets, net .............................................. 30,946 31,842
Other current assets ......................................................... 13,927 13,575
----------- -----------
Total Current Assets ....................................................... 675,438 532,245
Property, plant and equipment, net ............................................. 392,090 374,397
Goodwill, net of accumulated amortization
of $16,370 in 2006 and 2005, respectively .................................... 67,145 67,134
Other noncurrent assets ........................................................ 34,175 30,549
----------- -----------
Total Assets ................................................................... $ 1,168,848 $ 1,004,325
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ......................................... $ 2,925 $ 19,768
Accounts payable ............................................................. 95,716 124,921
Payable to related parties ................................................... 14,353 12,087
Loans payable to parent corporation .......................................... 52,840 52,840
Accrued liabilities .......................................................... 111,277 115,985
Reserve for product warranty claims .......................................... 14,900 14,900
----------- -----------
Total Current Liabilities .................................................... 292,011 340,501
----------- -----------
Long-term debt less current maturities ......................................... 699,319 533,467
----------- -----------
Reserve for product warranty claims ............................................ 19,948 16,302
----------- -----------
Deferred income tax liabilities ................................................ 46,098 49,416
----------- -----------
Other liabilities .............................................................. 21,466 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 ..................................... (55,981) (55,840)
Retained earnings ............................................................ 151,396 104,275
Accumulated other comprehensive loss ......................................... (5,410) (5,410)
----------- -----------
Total Stockholders' Equity ................................................. 90,006 43,026
----------- -----------
Total Liabilities and Stockholders' Equity ..................................... $ 1,168,848 $ 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)
NINE MONTHS ENDED
----------------------
OCT. 1, OCT. 2,
2006 2005
--------- ---------
Cash and cash equivalents, beginning of period ......... $ 6,882 $ 129,482
--------- ---------
Cash provided by (used in) operating activities:
Net income ........................................... 47,643 52,393
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation ..................................... 36,582 33,354
Amortization ..................................... 2,161 1,875
Deferred income taxes ............................ (2,422) 17,867
Noncash interest charges, net .................... 3,926 4,182
Increase in working capital items .................... (179,648) (127,014)
Increase (decrease) in long-term reserve for product
warranty claims ..................................... 3,646 (676)
Increase in other assets ............................. (1,164) (7,924)
Increase (decrease) in other liabilities ............. (116) 3,141
Change in net receivable from/payable to related
parties/parent corporations ........................ 3,070 (9,697)
Other, net ........................................... 629 225
--------- ---------
Net cash used in operating activities .................. (85,693) (32,274)
--------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition of manufacturing
facility ........................................... (54,830) (34,606)
Proceeds from sale of assets ......................... -- 4,717
--------- ---------
Net cash used in investing activities .................. (54,830) (29,889)
--------- ---------
Cash provided by (used in) financing activities:
Proceeds from Senior Secured Revolving Credit
Facility ........................................... 684,000 382,000
Purchase of industrial development revenue bond
certificates issued by the Company ................. (6,325) --
Repayments of long-term debt ......................... (535,256) (439,009)
Distributions to parent corporation .................. (521) (40)
Loan to parent corporation ........................... (141) (107)
Financing fees and expenses .......................... (1,990) (620)
--------- ---------
Net cash provided by (used in) financing activities .... 139,767 (57,776)
--------- ---------
Net change in cash and cash equivalents ................ (756) (119,939)
--------- ---------
Cash and cash equivalents, end of period ............... $ 6,126 $ 9,543
========= =========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized of $1,801 and
$678 in 2006 and 2005, respectively) ............. $ 45,822 $ 47,842
Income taxes (including federal income taxes paid
pursuant to a tax sharing agreement of $24,101 and
$21,953 in 2006 and 2005, respectively) .......... 25,029 22,322
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 October 1, 2006, and the results of operations for the third
quarter and nine months ended October 1, 2006 and October 2, 2005 and cash flows
for the nine months ended October 1, 2006 and October 2, 2005, respectively. All
adjustments are of a normal recurring nature. Net sales of roofing products and
specialty business products and accessories are generally seasonal in nature.
Accordingly, results of operations and liquidity in the respective quarterly
ended periods will vary depending on the time of the year. These financial
statements should be read in conjunction with the annual 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
6
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
original SFAS No. 123 and supersedes Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R) was
effective January 1, 2006. The Company's adoption of SFAS No. 123(R) did not
have an impact on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets" ("SFAS No. 153") which replaces the exception from fair value
measurement in APB Opinion No. 29 "Accounting for Nonmonetary Transactions," for
nonmonetary exchanges of similar productive assets. SFAS No. 153 replaces this
exception with a general exception from fair value measurement for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 became effective
for nonmonetary asset exchanges beginning January 1, 2006. 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 corrections 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.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"), which clarifies the definition of fair value, establishes a
framework for measuring fair value and expands the disclosures on fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company will adopt the provisions of SFAS No. 157
beginning in the first quarter of 2008 and therefore, has not yet determined the
effect, if any, the adoption of SFAS No. 157 will have on its results of
operations or financial position.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158") which requires the net
amount by which the defined-benefit or postretirement obligation plan is over or
underfunded to be reported on a company's balance sheet. SFAS No. 158 replaces
FASB Statement No. 87's requirement to report at least a minimum pension
liability, measured as the excess of the accumulated benefit obligation over the
fair value of the plan assets. The funded status amount to be recognized by SFAS
No. 158 will be measured as the difference between the fair value of plan assets
and the plan's benefit obligation, with the benefit obligation including all
actuarial gains and losses, prior service cost, and any remaining transition
amounts. SFAS No. 158 will not change the components of net periodic benefit
cost. All items currently deferred when applying FASB Statements 87 and 106 will
now be recognized as a component of accumulated other comprehensive income, net
of all applicable taxes. SFAS No. 158 will also require a fiscal-year end
measurement date of plan assets and benefit obligations, eliminating the use of
an earlier measurement date, however this aspect will not become effective until
fiscal years ending after December 15, 2008. All other aspects of SFAS No. 158
are effective as of December 31, 2006. The Company will adopt SFAS No. 158
during its fiscal year ending December 31, 2006 and is currently assessing the
impact SFAS No. 158 will have on its consolidated financial statements.
In September 2006, the FASB issued FASB Staff Position ("FSP") AUG AIR-1
"Accounting for Planned Major Maintenance Activities" ("FSP AUG AIR-1") which
addresses the accounting for planned major maintenance activities. FSP AUG AIR-1
prohibits the use of the accrue-in-advance method of accounting in annual and
interim financial reporting periods for planned major maintenance
8
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
activities, which had previously allowed companies the right to recognize
planned major maintenance costs by accruing a liability over several reporting
periods before the maintenance was performed. FSP AUG AIR-1 still allows the
direct expense, built-in-overhaul and deferral methods of accounting as
acceptable, however it does mandate that companies apply the same method of
accounting in both interim and annual financial reporting periods and that the
method be retrospectively applied if applicable. FSP AUG AIR-1 is effective for
fiscal years beginning after December 15, 2006. The Company will adopt the
provisions of FSP AUG AIR-1 beginning in the first quarter of 2007 and does not
expect FSP AUG AIR-1 to have a material effect on its consolidated financial
statements.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 108 ("SAB No. 108") which addresses how
the effects of prior-year uncorrected misstatements should be considered when
quantifying misstatements in current-year financial statements. SAB No. 108
requires companies to quantify misstatements using both the balance-sheet and
income-statement approaches and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. Upon initial adoption, if the effect of the misstatement is
determined to be material, SAB No. 108 allows companies to record that effect as
a cumulative-effect adjustment to beginning of year retained earnings. SAB
No. 108 is effective for the first fiscal year ending after November 15, 2006.
The Company will adopt the provisions of SAB No. 108 during its fourth quarter
ending December 2006 and is currently assessing the impact of SAB No. 108 on its
consolidated financial statements.
NOTE 2. INVENTORIES
Inventories consisted of the following as of October 1, 2006 and December
31, 2005:
OCTOBER 1, DECEMBER 31,
2006 2005
------------ -----------
(THOUSANDS)
Finished goods............................ $ 218,408 $ 149,049
Work-in process........................... 17,103 12,904
Raw materials and supplies................ 66,018 56,413
-------- --------
Total..................................... 301,529 218,366
Less LIFO reserve......................... (22,468) (15,668)
-------- --------
Inventories............................... $ 279,061 $ 202,698
======== ========
9
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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.
NOTE 4. LONG-TERM DEBT
On September 28, 2006, the Company entered into an Amended and Restated
$450 million Senior Secured Revolving Credit Facility (the "Senior Secured
Revolving Credit Facility"), replacing its $350 million Senior Secured Revolving
Credit Facility, which would have expired in November 2006. The Senior Secured
Revolving Credit Facility has a final maturity date of September 28, 2011 and is
secured by a first priority lien on substantially all of the Company's assets
and the assets of its subsidiaries and is guaranteed by all of the Company's
current and future subsidiaries. Availability under the Senior Secured Revolving
Credit Facility is based upon eligible Accounts Receivable, Inventory, and
Property, Plant and Equipment, as defined therein, and includes a sub-limit for
letters of credit of $100 million. The Senior Secured Revolving Credit Facility
bears interest at a floating rate based on the lenders' Base Rate, the federal
funds rate or the Eurodollar rate, each as defined therein. The Company is also
required to pay unused commitment fees associated with the Senior Secured
Revolving Credit Facility. The Senior Secured Revolving Credit Facility provides
for optional and mandatory reductions in the overall $450 million commitment,
subject to certain conditions as defined. In addition, the Senior Secured
Revolving Credit Facility also provides for optional and mandatory prepayments
of borrowings outstanding under the Senior Secured Revolving Credit Facility,
subject to certain conditions. The Senior Secured Revolving Credit Facility also
provides the Company with the ability to increase the size of the facility by up
to $200 million, depending on the ability to obtain commitments from lenders and
meet specified conditions, as defined.
Under the terms of the Senior Secured Revolving Credit Facility, the
Company is subject to an interest coverage ratio financial covenant when
liquidity falls below a specified threshold, as defined. In addition, the
Company is also required to comply with other covenants, which are subject to
certain limitations as defined, including, but not limited to, the amount of
annual capital expenditures and indebtedness, restrictions on restricted
payments, including dividends and distributions to the Company's parent
corporations and on incurring liens, sales of assets, and restrictions on
investments and other payments.
10
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4. LONG-TERM DEBT - (CONTINUED)
In addition, if a change of control as defined in the Senior Secured
Revolving Credit Facility occurs, the Senior Secured Revolving Credit Facility
could be terminated and the loans under the Senior Secured Revolving Credit
Facility accelerated by the holders of that indebtedness.
As of October 1, 2006, the Company had total outstanding consolidated
indebtedness of $755.1 million, of which $2.9 million matures prior to the end
of the third quarter of 2007, $168.0 million of borrowings outstanding under its
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.
As of October 1, 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 October 1, 2006, the
book value of the collateral securing the Senior Notes and the Senior Secured
Revolving Credit Facility was approximately $1,157.0 million.
At October 1, 2006, the Company had outstanding letters of credit of
approximately $47.4 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 nine month period ended
October 1, 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.
11
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
third quarter and nine month periods ended October 1, 2006 and October 2, 2005:
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------- --------------------
OCT. 1, OCT. 2, OCT. 1, OCT. 2,
2006 2005 2006 2005
-------- -------- -------- --------
(THOUSANDS)
Beginning balance ................ $ 33,940 $ 31,239 $ 31,202 $ 32,113
Charged to cost of products
sold............................. 6,639 6,675 20,138 18,585
Payments/deductions .............. (5,731) (6,477) (16,492) (19,261)
-------- -------- -------- --------
Ending balance ................... $ 34,848 $ 31,437 $ 34,848 $ 31,437
======== ======== ======== ========
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.
12
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. BENEFIT PLANS - (CONTINUED)
The Company's net periodic pension cost for the Retirement Plan included
the following components for the third quarter and nine month periods ended
October 1, 2006 and October 2, 2005:
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------ ------------------
OCT. 1, OCT. 2, OCT. 1, OCT. 2,
2006 2005 2006 2005
------- ------- ------- -------
(THOUSANDS)
Service cost ..................... $ 370 $ 361 $ 1,110 $ 1,082
Interest cost .................... 523 519 1,568 1,558
Expected return on plan assets ... (748) (708) (2,244) (2,124)
Amortization of unrecognized prior
service cost ................... 10 9 29 27
Amortization of net losses from
earlier periods ................ 86 77 258 231
------- ------- ------- -------
Net periodic pension cost ........ $ 241 $ 258 $ 721 $ 774
======= ======= ======= =======
As of the quarter ended October 1, 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.
13
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 third quarter and nine month periods ended October 1, 2006
and October 2, 2005:
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------ ------------------
OCT. 1, OCT. 2, OCT. 1, OCT. 2,
2006 2005 2006 2005
----- ----- ----- -----
(THOUSANDS)
Service cost ..................... $ 3 $ 35 $ 10 $ 104
Interest cost .................... 30 72 89 215
Amortization of unrecognized prior
service cost ................... (155) (24) (464) (71)
Amortization of net gains from
earlier periods ................ (61) (62) (183) (185)
----- ----- ----- -----
Net periodic postretirement
(benefit) cost ................. $(183) $ 21 $(548) $ 63
===== ===== ===== =====
As of the quarter ended October 1, 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.
14
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 (income) expense for the Company's incentive units was $(0.9) and
$2.6 million for the third quarters ended October 1, 2006 and October 2, 2005,
respectively, and $4.7 and $8.4 million for the nine month periods ended October
1, 2006 and October 2, 2005, respectively. At October 1, 2006 and October 2,
2005, the 2001 Long-Term Incentive Plan liability amounted to $27.1 and $24.8
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:
OCTOBER 1, DECEMBER 31,
2006 2005
-------- --------
Incentive Units outstanding, beginning
of period .......................... 146,814 124,455
Granted .............................. 6,200 35,205
Exercised ............................ (13,561) (9,464)
Forfeited ............................ (12,714) (3,382)
-------- --------
Incentive Units outstanding, end
of period, ......................... 126,739 146,814
======== ========
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 October 1, 2006 and October 2,
2005, BMCA Holdings Corporation owed the Company $56.0 and $55.8 million,
including interest of $0.7 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 $1.3 and $1.1 million during the
third quarters ended October 1, 2006 and October 2, 2005, respectively, and $3.7
and $2.9 million during the nine month periods ended October 1, 2006 and October
2, 2005, respectively. Interest expense on the Company's loans from BMCA
Holdings Corporation amounted to $1.2 and $1.0 million during the third quarters
ended October 1, 2006 and October 2, 2005, respectively, and $3.5 and $2.8
million during the nine month periods ended October 1, 2006 and October 2, 2005,
respectively. Loans payable to/receivable from any parent corporation are due on
demand and provide each party with the
15
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS - (CONTINUED)
right of offset of its related 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
October 1, 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 October 1, 2006 and October 2, 2005. In addition, for the nine
month periods ended October 1, 2006 and October 2, 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 ISP
Minerals Inc. ("Minerals") an affiliate of BMCA and International Specialty
Products Inc., also an affiliate of BMCA, (together with its subsidiaries
"ISP"). The amount of mineral products purchased each year under the Minerals
contract is based on current demand and is not subject to minimum purchase
requirements. For the nine month period ended October 1, 2006 and October 2,
2005 and the year ended December 31, 2005, the Company purchased $84.9, $81.6
and $108.3 million, respectively, of mineral products from Minerals under this
contract.
During the nine month periods ended October 1, 2006 and October 2, 2005,
the Company paid $24.1 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.
16
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. The Company believes that it will not sustain any
liability in connection with these or any other Asbestos Claims. On February 2,
2001, the United States Bankruptcy Court for the District of New Jersey issued a
temporary restraining order enjoining any existing or future claimant from
bringing or prosecuting an Asbestos Claim against the Company. By oral opinion
on June 22, 2001, and written order entered February 22, 2002, the court
converted the temporary restraints into a preliminary injunction, prohibiting
the bringing or prosecution of any such Asbestos Claim against the Company.
On February 7, 2001, G-I Holdings filed an action in the United States
Bankruptcy Court for the District of New Jersey seeking a declaratory judgment
that BMCA has no successor liability for Asbestos Claims against G-I Holdings
and that it is not the alter ego of G-I Holdings (the "BMCA Action"). One of the
parties to this matter, the Official Committee of Asbestos Claimants (the
"creditors' committee"), subsequently filed a counterclaim against BMCA seeking
a declaration that BMCA has successor liability for Asbestos Claims against G-I
Holdings and that BMCA is the alter ego of G-I Holdings. On May 13, 2003, the
United States District Court for the District of New Jersey overseeing the G-I
Holdings' Bankruptcy Court withdrew the reference of the BMCA Action from the
Bankruptcy Court, and this matter will therefore be heard by the District Court.
In terms of scheduling, the District Court judge presiding over this matter has
not set a trial date. The Company believes that it will prevail on its claim for
a declaratory judgment. However, it is not possible to predict the outcome of
this litigation or, if it does not prevail, the outcome of any subsequent
litigation regarding the continuation of the preliminary injunction and/or
prosecution of Asbestos Claims against the Company.
Actions Relating to G-I Holdings' Bankruptcy
On or about February 8, 2001, the creditors' committee established in G-I
Holdings' bankruptcy case filed a complaint in the United States Bankruptcy
Court, District of New Jersey against G-I Holdings and the Company. The
complaint requests substantive consolidation of the Company with G-I Holdings or
an order directing G-I Holdings to cause the Company to file for bankruptcy
protection. The Company and G-I Holdings intend to vigorously defend the
lawsuit. The plaintiffs also filed for interim relief absent the granting of
their requested relief described above. On March 21, 2001, the bankruptcy court
denied plaintiffs' application for interim relief. In November 2002, the
creditors' committee, joined in by the legal representative of future demand
17
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
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 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.
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.
18
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
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.
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
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., a
partnership in which G-I Holdings held an interest. On September 21, 2001, the
IRS filed a proof of claim with respect to such deficiency against G-I Holdings
in the G-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, which is the subject of an adversary proceeding
pending in the United States District Court for the District of New Jersey. By
opinion and order dated September 8, 2006, the District Court ruled on the
parties' respective motions for Partial Summary Judgment, granting the
government summary judgment on the issue of "adequate disclosure" for statute of
limitations purposes and denying G-I summary judgment on its other statute of
limitations defense (finding material issues of fact that must be tried). On
September 22, 2006, G-I Holdings moved for reconsideration of that portion of
the District Court's decision granting the government summary judgment on the
"adequate disclosure" issue. That motion is still pending.
19
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
G-I Holdings has advised the Company that it believes that it will prevail
in this tax matter, 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. However, 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.
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. SUBSEQUENT EVENT
On November 13, 2006, the Company filed a Form 8-K disclosing its intent
in pursuing a business combination with ElkCorp. On November 6, 2006, a Schedule
13D was jointly filed by the Company and certain affiliates, disclosing the
Company's indirect beneficial ownership of 10.36% of the common stock of ElkCorp
as of November 1, 2006. In addition, by virtue of a letter dated August 28, 2006
from an affiliate to the Company, BMCA may be deemed to have beneficial
ownership of such shares for purposes of Rule 13d-3 of the Securities and
Exchange Act of 1934, as amended.
NOTE 11. GUARANTOR FINANCIAL INFORMATION
At October 1, 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.
20
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
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.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRD QUARTER ENDED OCTOBER 1, 2006
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- --------- --------- ---------
Net sales ................................ $ 498,765 $ 31,584 $ -- $ 530,349
Intercompany net sales ................... 103 330,191 (330,294) --
--------- --------- --------- ---------
Total net sales ........................ 498,868 361,775 (330,294) 530,349
--------- --------- --------- ---------
Costs and expenses, net:
Cost of products sold .................. 376,916 325,628 (330,294) 372,250
Selling, general and administrative .... 86,495 28,187 -- 114,682
Intercompany licensing (income) expense,
net ................................... 19,955 (19,955) -- --
Other expense, net ..................... 120 12 -- 132
Transition service agreement (income)
expense ............................... 25 (25) -- --
--------- --------- --------- ---------
Total costs and expenses, net .......... 483,511 333,847 (330,294) 487,064
--------- --------- --------- ---------
Income before equity in earnings of
subsidiaries, interest expense and income
taxes ................................... 15,357 27,928 -- 43,285
Equity in earnings of subsidiaries ....... 12,858 -- (12,858) --
Interest expense ......................... (8,581) (7,190) -- (15,771)
--------- --------- --------- ---------
Income before income taxes ............... 19,634 20,738 (12,858) 27,514
Income tax expense ....................... (2,575) (7,880) -- (10,455)
--------- --------- --------- ---------
Net income ............................... $ 17,059 $ 12,858 $ (12,858) $ 17,059
========= ========= ========= =========
21
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRD QUARTER ENDED OCTOBER 2, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- --------- --------- ---------
Net sales ................................ $ 462,738 $ 33,587 $ -- $ 496,325
Intercompany net sales ................... 361 296,923 (297,284) --
--------- --------- --------- ---------
Total net sales ........................ 463,099 330,510 (297,284) 496,325
--------- --------- --------- ---------
Costs and expenses, net:
Cost of products sold .................. 347,183 292,353 (297,284) 342,252
Selling, general and administrative .... 78,246 26,314 -- 104,560
Intercompany licensing (income) expense,
net .................................. 18,524 (18,524) -- --
Other (income) expense, net ............ 620 (16) -- 604
Transition service agreement (income)
expense .............................. 25 (25) -- --
--------- --------- --------- ---------
Total costs and expenses, net .......... 444,598 300,102 (297,284) 447,416
--------- --------- --------- ---------
Income before equity in earnings of
subsidiaries, interest expense and
income taxes ............................. 18,501 30,408 -- 48,909
Equity in earnings of subsidiaries ....... 15,981 -- (15,981) --
Interest expense ......................... (10,357) (4,632) -- (14,989)
--------- --------- --------- ---------
Income before income taxes ............... 24,125 25,776 (15,981) 33,920
Income tax expense ....................... (3,094) (9,795) -- (12,889)
--------- --------- --------- ---------
Net income ............................... $ 21,031 $ 15,981 $ (15,981) $ 21,031
========= ========= ========= =========
22
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED OCTOBER 1, 2006
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
----------- ----------- ----------- -----------
Net sales ....................................... $ 1,483,621 $ 87,592 $ -- $ 1,571,213
Intercompany net sales .......................... 315 975,186 (975,501) --
----------- ----------- ----------- -----------
Total net sales ............................... 1,483,936 1,062,778 (975,501) 1,571,213
----------- ----------- ----------- -----------
Costs and expenses, net:
Cost of products sold ......................... 1,128,818 947,525 (975,501) 1,100,842
Selling, general and administrative ........... 261,470 86,092 -- 347,562
Intercompany licensing (income) expense, net .. 59,357 (59,357) -- --
Other (income) expense, net ................... (418) 32 -- (386)
Transition service agreement (income) expense . 75 (75) -- --
----------- ----------- ----------- -----------
Total costs and expenses, net ................. 1,449,302 974,217 (975,501) 1,448,018
----------- ----------- ----------- -----------
Income before equity in earnings of subsidiaries,
interest expense and income taxes ............... 34,634 88,561 -- 123,195
Equity in earnings of subsidiaries .............. 43,121 -- (43,121) --
Interest expense ................................ (27,341) (19,011) -- (46,352)
----------- ----------- ----------- -----------
Income before income taxes ...................... 50,414 69,550 (43,121) 76,843
Income tax expense .............................. (2,771) (26,429) -- (29,200)
----------- ----------- ----------- -----------
Net income ...................................... $ 47,643 $ 43,121 $ (43,121) $ 47,643
=========== =========== =========== ===========
23
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED OCTOBER 2, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
----------- ----------- ----------- -----------
Net sales ....................................... $ 1,381,031 $ 91,729 $ -- $ 1,472,760
Intercompany net sales .......................... 2,084 917,453 (919,537) --
----------- ----------- ----------- -----------
Total net sales ............................... 1,383,115 1,009,182 (919,537) 1,472,760
----------- ----------- ----------- -----------
Costs and expenses, net:
Cost of products sold ......................... 1,047,862 891,155 (919,537) 1,019,480
Selling, general and administrative ........... 239,245 78,255 -- 317,500
Intercompany licensing (income) expense, net .. 55,324 (55,324) -- --
Other (income) expense, net ................... 4,041 (274) -- 3,767
Transition service agreement (income) expense . 75 (75) -- --
----------- ----------- ----------- -----------
Total costs and expenses, net ................. 1,346,547 913,737 (919,537) 1,340,747
----------- ----------- ----------- -----------
Income before equity in earnings of subsidiaries,
interest expense and income taxes ............... 36,568 95,445 -- 132,013
Equity in earnings of subsidiaries .............. 51,402 -- (51,402) --
Interest expense ................................ (34,968) (12,540) -- (47,508)
----------- ----------- ----------- -----------
Income before income taxes ...................... 53,002 82,905 (51,402) 84,505
Income tax expense .............................. (609) (31,503) -- (32,112)
----------- ----------- ----------- -----------
Net income ...................................... $ 52,393 $ 51,402 $ (51,402) $ 52,393
=========== =========== =========== ===========
24
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 1, 2006
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
---------- ---------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents ............. $ 12 $ 6,114 $ -- $ 6,126
Accounts receivable, trade, net ....... 317,855 22,543 -- 340,398
Accounts receivable, other ............ 4,176 804 -- 4,980
Inventories, net ...................... 203,829 75,232 -- 279,061
Deferred income tax assets, net ....... 30,946 -- -- 30,946
Other current assets .................. 4,622 9,305 -- 13,927
---------- ---------- ---------- ----------
Total Current Assets ................ 561,440 113,998 -- 675,438
Investment in subsidiaries .............. 619,079 -- (619,079) --
Intercompany loans including accrued
interest .............................. 334,807 (334,807) -- --
Due from/(to) subsidiaries, net ......... (719,645) 719,645 -- --
Property, plant and equipment, net ...... 40,404 351,686 -- 392,090
Goodwill, net ........................... 40,080 27,065 -- 67,145
Other noncurrent assets ................. 8,781 25,394 -- 34,175
---------- ---------- ---------- ----------
Total Assets ............................ $ 884,946 $ 902,981 $ (619,079) $1,168,848
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt .. $ -- $ 2,925 $ -- $ 2,925
Accounts payable ...................... 36,252 59,464 -- 95,716
Payable to related parties, net ....... 5,941 8,412 -- 14,353
Loans payable to parent corporation ... 52,840 -- -- 52,840
Accrued liabilities ................... 24,868 86,409 -- 111,277
Reserve for product warranty claims ... 14,900 -- -- 14,900
---------- ---------- ---------- ----------
Total Current Liabilities ........... 134,801 157,210 -- 292,011
Long-term debt less current maturities... 573,520 125,799 -- 699,319
Reserve for product warranty claims ..... 19,234 714 -- 19,948
Deferred income tax liabilities ......... 46,098 -- -- 46,098
Other liabilities ....................... 21,287 179 -- 21,466
---------- ---------- ---------- ----------
Total Liabilities ....................... 794,940 283,902 -- 1,078,842
Total Stockholders' Equity .............. 90,006 619,079 (619,079) 90,006
---------- ---------- ---------- ----------
Total Liabilities and Stockholders'
Equity ............................. $ 884,946 $ 902,981 $ (619,079) $1,168,848
========== ========== ========== ==========
25
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. 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, net ........ 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
========== ========== ========== ==========
26
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 1, 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 ................................... 4,522 43,121 47,643
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Depreciation ............................ 3,093 33,489 36,582
Amortization ............................ -- 2,161 2,161
Deferred income taxes ................... (2,422) -- (2,422)
Noncash interest charges, net ........... 2,933 993 3,926
Increase in working capital items ............ (152,351) (27,297) (179,648)
Increase in long-term reserve for product
warranty claims ............................. 3,592 54 3,646
(Increase) decrease in other assets .......... 40 (1,204) (1,164)
Decrease in other liabilities ................ (111) (5) (116)
Change in net receivable from/payable to
related parties/parent corporations ......... 83 2,987 3,070
Other, net ................................... (65) 694 629
--------- --------- ---------
Net cash provided by (used in) operating
activities .................................... (140,686) 54,993 (85,693)
--------- --------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition of
manufacturing facility ...................... (7,659) (47,171) (54,830)
--------- --------- ---------
Net cash used in investing activities .......... (7,659) (47,171) (54,830)
--------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from Senior Secured Revolving Credit
Facility..................................... 684,000 -- 684,000
Purchase of industrial development revenue
bond certificates issued by the Company ..... -- (6,325) (6,325)
Repayments of long-term debt ................. (533,000) (2,256) (535,256)
Distributions to parent corporation .......... (521) -- (521)
Loan to parent corporation ................... (141) -- (141)
Financing fees and expenses .................. (1,990) -- (1,990)
--------- --------- ---------
Net cash provided by (used in) financing
activities .................................... 148,348 (8,581) 139,767
--------- --------- ---------
Net change in cash and cash equivalents ........ 3 (759) (756)
--------- --------- ---------
Cash and cash equivalents, end of period ....... $ 12 $ 6,114 $ 6,126
========= ========= =========
27
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 2, 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 ........................................ 991 51,402 52,393
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation .................................. 2,614 30,740 33,354
Amortization .................................. -- 1,875 1,875
Deferred income taxes ......................... 17,867 -- 17,867
Noncash interest charges, net ................. 3,196 986 4,182
(Increase) decrease in working capital items ...... (132,135) 5,121 (127,014)
Increase (decrease) in long-term reserve for
product warranty claims .......................... (682) 6 (676)
Increase in other assets .......................... (4,761) (3,163) (7,924)
Increase in other liabilities ..................... 3,050 91 3,141
Change in net receivable from/payable to
related parties/parent corporations .............. 162,823 (172,520) (9,697)
Other, net ........................................ (45) 270 225
--------- --------- ---------
Net cash provided by (used in) operating activities . 52,918 (85,192) (32,274)
--------- --------- ---------
Cash provided by (used in) investing activities:
Capital expenditures .............................. (1,286) (33,320) (34,606)
Proceeds from sale of assets ...................... 4,132 585 4,717
--------- --------- ---------
Net cash provided by (used in) investing activities . 2,846 (32,735) (29,889)
--------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from issuance of long-term debt .......... 382,000 -- 382,000
Repayments of long-term debt ...................... (437,000) (2,009) (439,009)
Distributions to parent corporation ............... (40) -- (40)
Loan to parent corporation ........................ (107) -- (107)
Financing fees and expenses ....................... (620) -- (620)
--------- --------- ---------
Net cash used in financing activities ............... (55,767) (2,009) (57,776)
--------- --------- ---------
Net change in cash and cash equivalents ............. (3) (119,936) (119,939)
--------- --------- ---------
Cash and cash equivalents, end of period ............ $ 9 $ 9,534 $ 9,543
========= ========= =========
28
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 nine month period ended October 1, 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,
energy, and transportation and distribution costs.
Third Quarter 2006 Compared With
Third Quarter 2005
We recorded net income in the third quarter of 2006 of $17.1 million
compared with net income of $21.0 million in the third quarter of 2005. The
decrease in third quarter of 2006 net income was primarily attributable to lower
income before interest expense and income taxes and slightly higher interest
expense.
Net sales for the third quarter of 2006 were $530.3 million, a 6.9%
increase over third quarter of 2005 net sales of $496.3 million, with the
increase due to higher net sales of both residential and commercial roofing
products. The increase in net sales of residential roofing products primarily
resulted from higher average selling prices, partially offset by lower unit
volumes, while the increase in net sales of commercial roofing products was
driven by higher unit volumes and higher average selling prices.
Income before interest expense and income taxes in the third quarter
of 2006 was $43.3 million compared with $48.9 million in the third quarter of
2005. Income before interest expense and income taxes in the third quarter of
2006 was positively affected by increased net sales of both residential and
commercial roofing products, 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.
29
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Interest expense for the third quarter of 2006 increased to $15.8
million from $15.0 million for the third quarter of 2005 primarily due to higher
aveage borrowings and a higher average interest rate.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the third quarter of 2006 increased
to $507.6 million from $473.9 million for the third quarter of 2005,
representing an increase of $33.7 million or 7.1%. The increase in net sales of
roofing products was primarily attributable to an increase in net sales of
residential roofing products driven by higher average selling prices, partially
offset by lower unit volumes whereas commercial roofing product net sales were
favorably impacted by higher unit volumes and higher average selling prices. Net
sales of specialty building products and accessories increased to $22.7 million
for the third quarter of 2006 from $22.4 million for the third quarter of 2005.
Gross Margin. Our overall gross margin increased to $158.1 million or 29.8% for
the third quarter of 2006 from $154.1 million or 31.0% for the third quarter of
2005. The increase in our overall gross margin is primarily attributable to an
increase in net sales primarily 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 third quarter of 2006 decreased to $43.3 million or
8.2% of net sales, compared to $48.9 million or 9.9% of net sales for the third
quarter of 2005. Income before interest expense and income taxes in the third
quarter of 2006 was positively affected by increased net sales of roofing
products, 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 due to a rise in fuel prices.
Nine Months 2006 Compared With
Nine Months 2005
We recorded net income in the first nine months of 2006 of $47.6
million compared with net income of $52.4 million in the first nine months of
2005. The decrease in the first nine months of 2006 net income was primarily
attributable to lower income before interest expense and income taxes, partially
offset by lower interest expense.
30
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Net sales for the first nine months of 2006 were $1,571.2 million, a
6.7% increase over the first nine months of 2005 net sales of $1,472.8 million,
with the increase due to higher net sales of both residential and commercial
roofing products. The increase in net sales of residential roofing products
primarily resulted from higher average selling prices, and the increase in net
sales of commercial roofing products was driven by higher average selling prices
and higher unit volumes.
Income before interest expense and income taxes for the first nine
months of 2006 was $123.2 million compared with $132.0 million for the first
nine months of 2005. Income before interest expense and income taxes for the
first nine months of 2006 was positively affected by increased net sales of both
residential and commercial roofing products 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 nine months of 2006 decreased to $46.4
million from $47.5 million for the first nine months of 2005, primarily due to
lower average borrowings.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the first nine months of 2006
increased to $1,509.6 million from $1,411.0 million for the first nine months of
2005, representing an increase of $98.6 million or 7.0%. The increase in net
sales of roofing products was primarily attributable to an increase in net sales
of residential roofing products driven by higher average selling prices whereas
commerical roofing product net sales were favorably impacted by higher average
selling prices and higher unit volumes. Net sales of specialty building products
and accessories decreased to $61.6 million for the first nine months of 2006
from $61.8 million for the first nine months of 2005.
Gross Margin. Our overall gross margin increased to $470.4 million or 29.9% for
the first nine months of 2006 from $453.3 million or 30.8% for the first nine
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 nine months of 2006 decreased to $123.2 million
or 7.8% of net sales, compared to $132.0 million or 9.0% of net sales for the
first nine months of 2005. Income before interest expense and income
31
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
taxes for the first nine months of 2006 was positively affected by increased net
sales of roofing products 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.
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 $450.0 million
Senior Secured Revolving Credit Facility due September 2011, which we refer to
as our Senior Secured Revolving Credit Facility (see Long-Term Debt below), 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 nine months of 2006 from operating
and investing activities was $140.5 million, including the use of $85.7 million
of cash from operations and the reinvestment of $54.8 million for capital
programs and an acquisition of a manufacturing facility in Gainesville, Texas.
Cash invested in additional working capital totaled $179.6 million
during the first nine months of 2006, reflecting an increase in total accounts
receivable of $68.9 million, due to the seasonality of our business, a $76.4
million increase in inventories to meet our seasonal operating demands and a
$34.0 million net decrease in accounts payable and accrued liabilities. The
32
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
net cash used for operating activities also included a $3.1 million net
increase in the payable to related parties/parent corporations, primarily
attributable to a $3.7 million net increase in federal income taxes payable
pursuant to our tax sharing agreement with our parent corporation and a $0.5
million decrease in amounts due under our long-term granule supply agreement
with an affiliated company.
Net cash provided by financing activities totaled $139.8 million
during the first nine months of 2006, including $684.0 million of proceeds from
the issuance of long-term debt related to 2006 year to date cumulative
borrowings under our Senior Secured Revolving Credit Facility. Financing
activities also included $535.3 million in aggregate repayments of long-term
debt, of which $533.0 million related to 2006 year to date cumulative repayments
under our Senior Secured Revolving Credit Facility and $2.0 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
On September 28, 2006, we entered into an Amended and Restated $450
million Senior Secured Revolving Credit Facility, replacing our $350 million
Senior Secured Revolving Credit Facility, which would have expired in November
2006. The Senior Secured Revolving Credit Facility has a final maturity date of
September 28, 2011 and is secured by a first priority lien on substantially all
of our assets and the assets of our subsidiaries and is guaranteed by all of our
current and future subsidiaries. Availability under the Senior Secured Revolving
Credit Facility is based upon eligible Accounts Receivable, Inventory, and
Property, Plant and Equipment, as defined therein, and includes a sub-limit for
letters of credit of $100 million. The Senior Secured Revolving Credit Facility
bears interest at a floating rate based on the lenders' Base Rate, the federal
funds rate or the Eurodollar rate, each as defined therein. We are also required
to pay unused commitment fees associated with the Senior Secured Revolving
Credit Facility. The Senior Secured Revolving Credit Facility provides for
optional and mandatory reductions in the
33
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
overall $450 million commitment, subject to certain conditions as defined. In
addition, the Senior Secured Revolving Credit Facility also provides for
optional and mandatory prepayments of borrowings outstanding under the Senior
Secured Revolving Credit Facility, subject to certain conditions. The Senior
Secured Revolving Credit Facility also provides us with the ability to increase
the size of the facility by up to $200 million, depending on the ability to
obtain commitments from lenders and meet specified conditions, as defined.
Under the terms of the Senior Secured Revolving Credit facility, we
are subject to an interest coverage ratio financial covenant when liquidity
falls below a specified threshold, as defined. In addition, we are also required
to comply with other covenants, which are subject to certain limitations as
defined, including, but not limited to, the amount of annual capital
expenditures and indebtedness, restrictions on restricted payments, including
dividends and distributions to our parent corporations and on incurring liens,
sales of assets, and restrictions on investments and other payments.
In addition, if a change of control as defined in the Senior Secured
Revolving Credit Facility occurs, the Senior Secured Revolving Credit Facility
could be terminated and the loans under the Senior Secured Revolving Credit
Facility accelerated by the holders of that indebtedness.
As of October 1, 2006 we had total outstanding consolidated
indebtedness of $755.1 million, of which $2.9 million matures prior to the end
of the third quarter of 2007, $168.0 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.
As of October 1, 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 October 1, 2006, the book value of the collateral securing the
Senior Notes and the Senior Secured Revolving Credit Facility was approximately
$1,157.0 million.
At October 1, 2006, we had outstanding letters of credit of
approximately $47.4 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 nine month period ended
October 1, 2006, we paid $0.5 million as a distribution to our indirect parent
corporation related to previously outstanding standby letters of credit.
34
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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 October 1, 2006 and October 2, 2005,
BMCA Holdings Corporation owed us $56.0 and $55.8 million, including interest of
$0.7 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 $1.3 and $1.1 million during the third quarters ended October 1,
2006 and October 2, 2005, respectively, and $3.7 and $2.9 million during the
nine month periods ended October 1, 2006 and October 2, 2005, respectively.
Interest expense on our loans from BMCA Holdings Corporation amounted to $1.2
and $1.0 million during the third quarters ended October 1, 2006 and October 2,
2005, respectively, and $3.5 and $2.8 million during the nine month periods
ended October 1, 2006 and October 2, 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 October 1,
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 October 1,
2006 and October 2, 2005. In addition, for the nine month periods ended October
1, 2006 and October 2, 2005, no loans were owed or other lending activities were
entered into by us to other affiliates.
During the nine month periods ended October 1, 2006 and October 2,
2005, we paid $24.1 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.
35
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
As a result of the foregoing factors, cash and cash equivalents
decreased by $0.8 million during the first nine months of 2006 to $6.1 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 nine 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 nine 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 nine 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 ISP Minerals Inc., which
we refer to as Minerals, an affiliate of BMCA and International Specialty
Products Inc., also an affiliate of BMCA, which together with its subsidiaries,
we collectively refer to as ISP. The amount of mineral products purchased each
year under the Minerals contract is based on current demand and is not subject
to minimum purchase requirements. For the nine month periods ended October 1,
2006 and October 2, 2005 and the year ended December 31, 2005, we purchased
$84.9, $81.6 and $108.3 million, respectively, of mineral products from Minerals
under this contract.
36
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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.
37
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 corrections 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.
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BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," which we refer to as SFAS No. 157, which clarifies the definition
of fair value, establishes a framework for measuring fair value and expands the
disclosures on fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. We will adopt the provisions of SFAS
No. 157 beginning in the first quarter of 2008 and therefore, we have not yet
determined the effect, if any, the adoption of SFAS No. 157 will have on our
results of operations or financial position.
In September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R)," which we refer to as
SFAS No. 158, which requires the net amount by which the defined-benefit or
postretirement obligation plan is over or underfunded to be reported on a
company's balance sheet. SFAS No. 158 replaces FASB Statement No. 87's
requirement to report at least a minimum pension liability, measured as the
excess of the accumulated benefit obligation over the fair value of the plan
assets. The funded status amount to be recognized by SFAS No. 158 will be
measured as the difference between the fair value of plan assets and the plan's
benefit obligation, with the benefit obligation including all actuarial gains
and losses, prior service cost, and any remaining transition amounts. SFAS
No. 158 will not change the components of net periodic benefit cost. All items
currently deferred when applying FASB Statements 87 and 106 will now be
recognized as a component of accumulated other comprehensive income, net of all
applicable taxes. SFAS No. 158 will also require a fiscal-year end measurement
date of plan assets and benefit obligations, eliminating the use of an earlier
measurement date, however this aspect will not become effective until fiscal
years ending after December 15, 2008. All other aspects of SFAS No. 158 are
effective as of December 31, 2006. We will adopt SFAS No. 158 during our fiscal
year ending December 31, 2006 and are currently assessing the impact SFAS
No. 158 will have on our consolidated financial statements.
In September 2006, the FASB issued FASB Staff Position, which we
refer to as FSP, AUG AIR-1 "Accounting for Planned Major Maintenance
Activities," which we refer to as FSP AUG AIR-1, which addresses the accounting
for planned major maintenance activities. FSP AUG AIR-1 prohibits the use of the
accrue-in-advance method of accounting in annual and interim financial reporting
periods for planned major maintenance activities, which had previously allowed
companies the right to recognize planned major maintenance costs by accruing a
liability over several reporting periods before the maintenance was performed.
FSP AUG AIR-1 still allows the direct expense, built-in-overhaul and deferral
methods of accounting as acceptable, however it does mandate that companies
apply the same method of accounting in both interim and annual financial
reporting periods and that the method be retrospectively applied if applicable.
FSP AUG AIR-1 is effective for fiscal years beginning after December 15, 2006.
We will adopt the provisions of FSP AUG AIR-1 beginning in the first quarter of
2007 and do not expect FSP AUG AIR-1 to have a material effect on our
consolidated financial statements.
39
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
In September 2006, the Securities and Exchange Commission, which we
refer to as the SEC issued Staff Accounting Bulletin, which we refer to as SAB,
No. 108, which we refer to as SAB No. 108, which addresses how the effects of
prior-year uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements. SAB No. 108 requires
companies to quantify misstatements using both the balance-sheet and
income-statement approaches and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. Upon initial adoption, if the effect of the misstatement is
determined to be material, SAB No. 108 allows companies to record that effect as
a cumulative-effect adjustment to beginning of year retained earnings. SAB No.
108 is effective for the first fiscal year ending after November 15, 2006. We
will adopt the provisions of SAB No. 108 during our fourth quarter ending
December 2006 and are currently assessing the impact of SAB No. 108 on our
consolidated financial statements.
* * *
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 October 1, 2006, and we have no
hedging arrangements as of October 1, 2006.
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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 third quarter of fiscal year 2006 that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
41
BUILDING MATERIALS CORPORATION OF AMERICA
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of October 1, 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 Amended and Restated Credit Agreement, dated as of
September 28, 2006 with Citicorp USA, Inc., as
Administrative Agent and Deutsche Bank Securities Inc.,
as Syndication Agent, and certain other lenders thereto
(the "Senior Secured Revolving Credit Facility").
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
42
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BUILDING MATERIALS CORPORATION OF AMERICA
BUILDING MATERIALS MANUFACTURING CORPORATION
DATE: November 15, 2006 BY: /s/John F. Rebele
----------------- ----------------------
John F. Rebele
Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
DATE: November 15, 2006 BY: /s/James T. Esposito
----------------- ----------------------
James T. Esposito
Vice President and Controller
(Chief Accounting Officer)
43