UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended JULY 1, 2007
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-81808
BUILDING MATERIALS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
DELAWARE 22-3276290
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1361 ALPS ROAD, WAYNE, NEW JERSEY 07470
(Address of Principal Executive Offices) (Zip Code)
(973) 628-3000 (Registrant's
telephone number, including area code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
See Table of Additional Registrants Below.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of August 15, 2007, 1,015,010 shares of Class A Common Stock, $.001 par value
of the registrant were outstanding. There is no trading market for the common
stock of the registrant. As of August 15, 2007, the additional registrant had
the number of shares outstanding which is shown on the table below. There is no
trading market for the common stock of the additional registrant. As of August
15, 2007, 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 OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SECOND QUARTER ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net sales ....................................... $ 663,270 $ 535,888 $ 1,193,261 $ 1,040,863
----------- ----------- ----------- -----------
Costs and expenses, net:
Cost of products sold ......................... 485,945 369,110 878,883 728,590
Selling, general and administrative............ 137,830 118,283 248,990 232,881
Restructuring and other expenses.. ............ 54,993 -- 54,993 --
Other income, net ............................. (797) (191) (378) (517)
----------- ----------- ----------- -----------
Total costs and expenses, net.. ............ 677,971 487,202 1,182,488 960,954
----------- ----------- ----------- -----------
Income (loss) before interest expense
and income taxes ............................... (14,701) 48,686 10,773 79,909
Interest expense ................................ (45,670) (16,054) (94,948) (30,580)
----------- ----------- ----------- -----------
Income (loss) before income taxes ............... (60,371) 32,632 (84,175) 49,329
Income tax (expense) benefit .................... 15,889 (12,400) 24,410 (18,745)
----------- ----------- ----------- -----------
Net income (loss) ............................... $ (44,482) $ 20,232 $ (59,765) $ 30,584
=========== =========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JULY 1, 2007 DECEMBER 31,
(UNAUDITED) 2006
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 51,777 $ 7,777
Accounts receivable, trade, less allowance of $2,669 and
$1,319 in 2007 and 2006, respectively ................... 467,459 190,859
Accounts receivable, other ................................ 4,384 5,599
Tax receivable from parent corporation .................... 9,132 9,132
Inventories, net .......................................... 316,219 238,709
Deferred income tax assets, net ........................... 75,946 21,710
Other current assets ...................................... 22,544 12,209
Discontinued operations - current assets .................. 2,844 --
----------- -----------
Total Current Assets .................................... 950,305 485,995
Property, plant and equipment, net .......................... 813,444 411,729
Goodwill .................................................... 677,658 64,794
Intangible assets ........................................... 15,887 --
Other noncurrent assets ..................................... 138,973 67,323
Discontinued operations - noncurrent assets ................. 1,355 --
----------- -----------
Total Assets ................................................ $ 2,597,622 $ 1,029,841
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ...................... $ 16,304 $ 102,918
Accounts payable .......................................... 116,987 90,951
Payable to related parties ................................ 14,054 5,952
Loans payable to parent corporation ....................... 52,840 52,840
Accrued liabilities ....................................... 179,650 101,382
Product warranty claims ................................... 13,500 9,000
Discontinued operations - current liabilities ............. 931 --
----------- -----------
Total Current Liabilities ................................. 394,266 363,043
----------- -----------
Long-term debt............................................... 1,946,925 484,406
----------- -----------
Product warranty claims ..................................... 27,673 17,972
----------- -----------
Deferred income tax liabilities ............................. 127,551 39,551
----------- -----------
Other liabilities ........................................... 90,801 62,664
----------- -----------
Commitments and Contingencies - Note 13
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 2007 and 2006 ............................ -- --
Loans receivable from parent corporation .................. (56,130) (56,031)
Retained earnings ......................................... 58,265 118,201
Accumulated other comprehensive income .................... 8,270 34
----------- -----------
Total Stockholders' Equity .............................. 10,406 62,205
----------- -----------
Total Liabilities and Stockholders' Equity .................. $ 2,597,622 $ 1,029,841
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
----------------------------
JULY 1, JULY 2,
2007 2006
----------- -----------
Cash and cash equivalents, beginning of period ..................................... $ 7,777 $ 6,882
----------- -----------
Cash used in operating activities:
Net income (loss) ................................................................ (59,765) 30,584
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation ................................................................. 33,632 24,026
Amortization ................................................................. 2,057 1,355
Restructuring and other expenses ............................................. 65,793 --
Deferred income taxes ........................................................ (33,163) (1,293)
Noncash interest charges, net ................................................ 6,093 2,619
Increase in working capital items ................................................ (116,110) (152,789)
Increase in product warranty claims .............................................. 526 2,738
Increase in other assets ......................................................... (1,650) (1,247)
Increase (decrease) in other liabilities ......................................... 2,136 (118)
Change in net receivable from/payable to related
parties/parent corporations .................................................... 8,102 7,988
Other, net ....................................................................... 867 382
----------- -----------
Net cash used in operating activities .............................................. (91,482) (85,755)
----------- -----------
Cash used in investing activities:
Acquisition of ElkCorp, net of cash acquired of $0.1 million ..................... (945,643) --
Capital expenditures and acquisitions ............................................ (55,520) (33,729)
----------- -----------
Net cash used in investing activities .............................................. (1,001,163) (33,729)
----------- -----------
Cash provided by financing activities:
Proceeds from issuance of long-term debt ......................................... 2,188,749 472,000
Purchase of industrial development revenue bond certificates
issued by the Company........................................................... -- (6,325)
Repayments of long-term debt ..................................................... (1,018,013) (340,516)
Distribution to parent corporation ............................................... (171) (477)
Loan to parent corporation ....................................................... (98) (92)
Financing fees and expenses ...................................................... (33,822) --
----------- -----------
Net cash provided by financing activities .......................................... 1,136,645 124,590
----------- -----------
Net change in cash and cash equivalents ............................................ 44,000 5,106
----------- -----------
Cash and cash equivalents, end of period ........................................... $ 51,777 $ 11,988
=========== ===========
Supplemental Cash Flow Information:
Effect on cash from changes in working capital items*:
Increase in accounts receivable trade and accounts
receivable other ............................................................... $ (177,813) $ (83,895)
(Increase) decrease in inventories, net .......................................... 45,559 (60,927)
(Increase) decrease in other current assets ...................................... (4,095) 2,088
Increase (decrease) in accounts payable .......................................... 5,582 (16,150)
Increase in accrued liabilities .................................................. 20,041 6,095
Net (payments) for restructuring and other expenses .............................. (5,384) --
----------- -----------
Net effect on cash from increase in working capital items ........................ $ (116,110) $ (152,789)
=========== ===========
5
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
-------------------
JULY 1, JULY 2,
2007 2006
------- -------
Cash paid during the period for:
Interest (net of amount capitalized of $1,727 and $1,055
in 2007 and 2006, respectively) ........................ $58,050 $25,678
Income taxes (including federal income taxes paid pursuant
to a tax sharing agreement of $0 and $13,801 in
2007 and 2006, respectively) ........................... 1,542 14,414
* Working capital items exclude cash and cash equivalents, tax receivable
from parent corporation, deferred income tax assets, net, discontinued
operations - current assets, current maturities of long-term debt, product
warranty claims, discontinued operations - current liabilities and net
receivables and loans from/payable to related parties/parent corporations.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
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.
On February 22, 2007, a subsidiary of BMCA acquired approximately 90% of the
outstanding shares of ElkCorp ("Elk"), a Dallas, Texas-based manufacturer of
roofing products and building materials, and the remaining shares of Elk were
acquired on March 26, 2007, resulting in Elk becoming an indirect wholly-owned
subsidiary of BMCA. See Note 2. The consolidated financial statements of the
Company reflect, in the opinion of management, all adjustments necessary to
present fairly the financial position of the Company at July 1, 2007, and the
results of its operations and its cash flows for the second quarter and six
months ended July 1, 2007 and July 2, 2006, respectively. All adjustments are of
a normal recurring nature, except restructuring and other expenses recorded in
the Company's second quarter ended July 1, 2007 due to the acquisition of Elk.
Net sales of roofing products and specialty business products and accessories
are generally seasonal in nature. Accordingly, the 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 audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2006, which was filed with the Securities and Exchange Commission (the "SEC") on
February 16, 2007 (the "2006 Form 10-K").
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes,
an Interpretation of FASB Statement No. 109," ("FIN 48"). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken in a tax return. A reporting
entity must determine whether it is "more-likely-than-not" that a tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. Once it
is determined that a position meets the more-likely-than-not recognition
threshold, the position is measured to determine the amount of benefit to
recognize in the financial statements. FIN 48 became effective for fiscal years
beginning after December 15, 2006. In May 2007, the FASB issued FASB Staff
Position ("FSP") FIN 48-1 "Definition of Settlement in FASB Interpretation
No. 48" ("FSP FIN 48-1"), which amended FIN 48 to provide guidance on how a
reporting entity should determine whether a tax position is effectively settled
for the purpose of recognizing previously unrecognized tax benefits. Under FSP
FIN 48-1, a tax position will be considered effectively settled and any
previously unrecognized tax benefits should be recognized based on the terms of
settlement if (a) the taxing authority has completed its examination, including
all appeals, (b) the reporting entity does not intend to appeal
7
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
or litigate any aspect of the tax position and (c) based on the taxing
authority's policies and practices, the reporting entity considers it remote
that the taxing authority will re-examine the tax position. The Company adopted
FIN 48 as of January 1, 2007 in a manner that is consistent with the provisions
of FSP FIN 48-1, and as a result of the adoption, the Company reviewed certain
tax positions and did not recognize any material adjustment to its accruals for
uncertain tax positions. See Note 12.
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("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 its 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 FSP AUG AIR-1 "Accounting for
Planned Major Maintenance Activities" ("FSP AUG AIR-1") which prohibits the use
of the accrue-in-advance method of accounting in annual and interim financial
reporting periods for planned major maintenance activities. FSP AUG AIR-1 had
previously allowed companies the right to recognize planned major maintenance
costs by accruing a liability over several reporting periods before the
maintenance was performed. FSP AUG AIR-1 still allows the direct expense,
built-in-overhaul and deferral methods of accounting as acceptable, however it
mandates that companies apply the same method of accounting in both interim and
annual financial reporting periods and that the method be retrospectively
applied if applicable. FSP AUG AIR-1 is effective for fiscal years beginning
after December 15, 2006. The Company adopted the provisions of FSP AUG AIR-1 in
its first quarter of 2007. FSP AUG AIR-1 has not had a material effect on the
Company's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to elect to
measure specified financial instruments and warranty and insurance contracts at
fair value on a contract-by-contract basis, with changes in fair value
recognized in earnings each reporting period. The election, called the "fair
value option," will enable some companies to reduce the volatility in reported
earnings caused by measuring related assets and liabilities differently, and it
is simpler than using the complex hedge-accounting
8
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
provisions of SFAS No. 133 to achieve similar results. SFAS No. 159 applies to
all entities and contains financial statement presentation and disclosure
requirements for assets and liabilities reported at fair value as a consequence
of the election. SFAS No. 159 is expected to expand the use of fair value
measurements for financial instruments. SFAS No. 159 is effective as of the
beginning of a company's first fiscal year that begins after November 15, 2007.
Retrospective application is not permitted. The Company will adopt the
provisions of SFAS No. 159 beginning in its first quarter of 2008 and,
therefore, has not yet determined the effect, if any, the adoption of SFAS No.
159 will have on its results of operations or financial position.
NOTE 2. ACQUISITIONS
On February 9, 2007, BMCA Acquisition Sub Inc. ("BMCA Acquisition Sub")
and BMCA Acquisition Inc. (collectively the "Purchasers"), both wholly-owned
subsidiaries of BMCA, entered into a merger agreement with Elk (the "Merger
Agreement"). On February 22, 2007, an equity tender offer closed and, as a
result thereof (and the purchase of shares from one of its affiliates), BMCA
Acquisition Sub owned approximately 90% of Elk's shares at a purchase price of
$43.50 per share. In accordance with the Merger Agreement, the remaining Elk
shares were converted in a second step merger into the right to receive $43.50
per share in cash. On March 26, 2007, BMCA completed the merger, pursuant to
which BMCA Acquisition Sub was merged with and into Elk, which then became an
indirect wholly-owned subsidiary of BMCA. The acquisition of the Elk shares was
completed at a purchase price of approximately $945.6 million, net of $0.1
million of cash acquired and net of the repayment of $195.0 million of the then
outstanding Elk senior notes, which were repaid in March 2007.
The Company financed the purchase of Elk and refinanced certain of
BMCA's then outstanding debt and repaid all of Elk's then outstanding senior
notes of $195.0 million with the proceeds from its new senior secured credit
facilities. The Company's new senior secured credit facilities consist of a
$600.0 million five-year senior secured revolving credit facility, a $975.0
million seven-year senior secured term loan facility and a $325.0 million junior
lien term loan facility maturing on September 15, 2014. See Note 5.
9
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. ACQUISITIONS - (CONTINUED)
The Company believes the acquisition of Elk will strategically position
the Company for future growth in the roofing industry and other building
products markets. The acquisition is expected to provide the Company with an
increased market leadership position, create comprehensive market-leading
product offerings, generate natural cost savings from synergies, including plant
rationalization and re-alignment of distribution networks, raw material
procurement, administrative and logistical efficiencies, and leverage the
organizational strengths of both BMCA and Elk.
The Elk acquisition was accounted for under the purchase method of
accounting as prescribed by SFAS No. 141 "Business Combinations," ("SFAS No.
141") which requires the total purchase price to be allocated to the fair value
of assets acquired and liabilities assumed based on their fair values at the
acquisition date, with amounts exceeding their fair value being recorded as
goodwill. The allocation process will require an analysis of plant, property and
equipment, inventories, customer lists and relationships, contractual
commitments and brand strategies, among others, to identify and record the fair
value of assets acquired and liabilities assumed. In connection with the
acquisition, the Company used an economic life of 5 to 40 years for land
improvements, 10 to 40 years for buildings and building improvements, 3 to 30
years for machinery and equipment, which includes furniture and fixtures, and 5
to 14 years for intangible assets.
In valuing acquired assets and assumed liabilities, fair values will be
based on, but not limited to: future expected discounted cash flows for trade
names and customer relationships; current replacement costs for similar capacity
and obsolescence for certain fixed assets and inventory; and comparable market
rates for contractual obligations, including real estate and liabilities. The
Company will utilize an independent valuation of the assets and liabilities
acquired from Elk and expects this valuation to be completed by the end of 2007.
At July 1, 2007, the Company recorded $612.9 million of goodwill and $15.9
million of intangible assets, net of amortization since the date of acquisition,
related to the acquisition of Elk based on its best estimate at such date. Once
the independent valuation is completed, changes to the amounts recorded at July
1, 2007 will be recorded and material adjustments to goodwill may result. The
operating results of the Elk acquisition are included in the Company's results
of operations from the date of acquisition.
10
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. ACQUISITIONS - (CONTINUED)
The following unaudited pro-forma consolidated results of operations
assume the acquisition of Elk was completed as of January 1st for each of the
three-month and six month periods presented below:
SECOND QUARTER ENDED SIX MONTHS ENDED
---------------------- ------------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2007 2006 2007 2006
--------- --------- ---------- ----------
(MILLIONS)
Net sales ....................... $ 663.3 $ 777.7 $ 1,267.0 $ 1,525.8
--------- --------- ---------- ----------
Income (loss) before interest and
income taxes ................... (13.5) 74.2 (15.7) 126.1
--------- --------- ---------- ----------
Net income (loss) ............... $ (42.0) $ 23.8 $ (87.3) $ 33.4
========= ========= ========== ==========
The unaudited pro-forma consolidated results of operations for the
three-month and six-month periods ended July 1, 2007 include $65.8 million
pre-tax ($46.7 million after-tax) of restructuring and other expenses, of which
$10.8 million pre-tax ($7.7 million after-tax) was included in cost of products
sold, related to the acquisition of Elk. In addition, the unaudited pro-forma
consolidated results of operations for the six-month period ended July 1, 2007
above includes $13.6 million of merger-related expenses of Elk and $23.2 million
of debt restructuring costs of both BMCA and Elk related to the acquisition of
Elk.
The Company's pro-forma results include a reduction in compensation
expense related to Elk employees who were terminated due to the acquisition of
Elk of $1.3 and $2.5 million for the three-month periods ended July 1, 2007 and
July 2, 2006, respectively and $3.6 and $4.9 million for the six-month periods
ended July 1, 2007 and July 2, 2006, respectively.
In addition, the Company's pro-forma results for the three-month period
ended July 2, 2006 and the six-month periods ended July 1, 2007 and July 2, 2006
include additional interest expense associated with variable rate debt
instruments based on LIBOR plus a specified fixed margin, due to the acquisiton
of Elk. A 1/8% change in these variable interest rates would result in a plus or
minus $0.5 million in interest expense for the three-month period ended July 2,
2006 and a plus or minus $0.3 and $1.0 million in interest expense for the
six-month periods ended July 1, 2007 and July 2, 2006, respectively.
Pro-forma data may not be indicative of the results that would have
been achieved had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
11
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. ACQUISITIONS - (CONTINUED)
On March 2, 2007, the Company acquired two parcels of land and
buildings located in Fresno, California. The acquisition was accounted for under
the purchase method of accounting. Accordingly, the purchase price was allocated
to the fair value of the identifiable assets acquired, which consisted almost
entirely of land and buildings. The operating results of the Fresno land and
buildings are included in the Company's results of operations from the date of
acquisition.
During the second quarter of 2007, the Company initiated the
implementation of a restructuring plan (the "2007 Restructuring Plan"), which
was formulated upon the acquisition of Elk on February 22, 2007 (see Note 3). In
connection with the acquisition of Elk, the Company has currently identified
$69.7 million in purchase accounting adjustments, which primarily relate to the
establishment of a change of control accrual, employee severance payments and
integration-related expenses, which include inventory-related valuation
write-downs, lease termination expenses and other integration-related expenses.
Furthermore, the Company plans to utilize its independent valuation of property,
plant and equipment and intangible assets acquired from Elk to complete its
purchase price allocation by the end of 2007. The Company accounts for its
purchase accounting adjustments in accordance with the guidance in FASB Emerging
Issues Task Force ("EITF") No. 95-3, "Recognition of Liabilities in Connection
with a Purchase Business Combination," ("EITF No. 95-3"). The Company has
incurred $60.8 million of the aforementioned purchase accounting adjustments as
of July 1, 2007, of which $54.6 million was incurred in the second quarter of
2007 and $6.2 million was incurred in the first quarter of 2007(see table
below), as adjustments to goodwill and is included in the purchase price of Elk.
The Company expects to accrue the remaining $8.9 million of identified purchase
accounting adjustments as incurred and effectively utilize its accrual by its
first quarter ending 2008.
The Company's employee severance payments included the termination of
approximately 100 Elk employees, including certain management positions, in the
manufacturing and selling and administrative functional areas.
12
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. ACQUISITIONS - (CONTINUED)
DISCON-
EMPLOYEE TINUED CHANGE
INTEGRATION SEVERANCE OPERATIONS OF
PURCHASE ACCOUNTING ACCRUALS EXPENSES PAYMENTS EXPENSES CONTROL TOTAL
- ---------------------------- -------- -------- -------- -------- --------
(THOUSANDS)
Beginning Balance, as of December 31,
2006 $ -- $ -- $ -- $ -- $ --
Accrued costs incurred due to the
acquisition of Elk .................... 5,785 -- 415 -- 6,200
-------- -------- -------- -------- --------
Balance, as of April 1, 2007 ........... 5,785 -- 415 -- 6,200
Additional accrued costs incurred due to
the acquisition of Elk ................ 19,624 2,400 -- -- 22,024
Accrued costs incurred related to change
in control escrow account ............. -- -- -- 32,574 32,574
Cash Payments .......................... (224) (1,773) -- -- (1,997)
Amount charged to directly write-off
inventory ............................. (4,071) -- -- -- (4,071)
Non-cash items ......................... -- -- -- (8,889) (8,889)
-------- -------- -------- -------- --------
Ending Balance, as of July 1, 2007 ..... $ 21,114 $ 627 $ 415 $ 23,685 $ 45,841
======== ======== ======== ======== ========
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.
NOTE 3. RESTRUCTURING AND OTHER EXPENSES
During the second quarter of 2007, the Company initiated its 2007
Restructuring Plan, which was formulated upon the acquisition of Elk on February
22, 2007. The 2007 Restructuring Plan was created to eliminate cost redundancies
recognized due to the acquisition of Elk, to reduce the Company's current cost
structure and is expected to be fully implemented by the end of the Company's
first quarter of 2008. The Company accounts for its restructuring activities in
accordance with the guidance of SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," ("SFAS No. 146") and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS No.
144").
In connection with the acquisition of Elk, the Company has identified
$89.2 million in restructuring and other expenses, of which $41.9 million
relates to property, plant and equipment write-downs at certain of its
manufacturing facilities and $18.0 million of plant closing expenses. The plants
included in restructuring and other expenses reflected above were Erie,
Pennsylvania, Stockton, California, Millis, Massachusetts and Hollister,
California. Restructuring and other expenses also include $2.0 million in
employee severance payments and $27.3 million in integration-related expenses,
which primarily consist of $12.2 million of inventory-related valuation
write-downs, $1.4 million of lease termination expenses and $13.7 million of
13
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. RESTRUCTURING AND OTHER EXPENSES - (CONTINUED)
other integration expenses. The Company recorded $65.8 million of the
aforementioned restructuring and other expenses as of July 1, 2007, all of which
was recorded in the second quarter of 2007 (see table below), of which $10.8
million was charged to cost of products sold and $55.0 million was charged to
restructuring and other expenses in the Company's statement of operations. The
Company expects to incur the remaining $23.4 million of identified restructuring
and other expenses and effectively utilize its accrual by its first quarter
ending 2008.
The Company's employee severance payments included the termination of
approximately 50 BMCA employees, including certain management positions, in the
manufacturing and selling and administrative functional areas.
PP&E PLANT EMPLOYEE
RESTRUCTURING AND WRITE- CLOSING SEVERANCE INTEGRATION
OTHER EXPENSES DOWN EXPENSES PAYMENTS EXPENSES TOTAL
- ----------------- -------- -------- -------- -------- --------
(THOUSANDS)
Beginning Balance, as of
December 31, 2006 ............ $ -- $ -- $ -- $ -- $ --
Accrued costs incurred due to
the acquisition of Elk ....... -- -- -- -- --
-------- -------- -------- -------- --------
Balance, as of April 1,2007 ... -- -- -- -- --
Additional accrued costs
incurred due to the
acquisition of Elk ........... 41,919 7,234 2,000 14,640 65,793
Cash Payments ................. -- (2,784) (800) (1,800) (5,384)
Amount charged to
property, plant and equipment
for asset write-down ....... (41,919) -- -- -- (41,919)
-------- -------- -------- -------- --------
Ending Balance, as of July 1, 2007 $ -- $ 4,450 $ 1,200 $ 12,840 $ 18,490
======== ======== ======== ======== ========
14
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4. INVENTORIES
Inventories consisted of the following as of July 1, 2007 and December
31, 2006, respectively. Inventories as of July 1, 2007, include Elk from the
date of acquisition.
JULY 1, DECEMBER 31,
2007 2006
--------- ---------
(THOUSANDS)
Finished goods ......................... $ 231,302 $ 173,338
Work-in process ........................ 25,955 25,930
Raw materials and supplies ............. 80,864 64,686
--------- ---------
Total .................................. 338,121 263,954
Less LIFO reserve ...................... (21,902) (25,245)
--------- ---------
Inventories ............................ $ 316,219 $ 238,709
========= =========
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following at July 1, 2007 and December
31, 2006:
JULY 1, DECEMBER 31,
2007 2006
----------- -----------
(THOUSANDS)
8% Senior Notes due 2007 ................. $ 2,455 $ 99,940
8% Senior Notes due 2008 ................. 4,872 154,838
7 3/4% Senior Notes due 2014 ............. 250,635 250,680
Borrowings under the Old Senior
Secured Revolving Credit Facility ....... -- 60,000
Borrowings under the Senior Secured
Revolving Credit Facility ............... 384,000 --
Term Loan ................................ 970,131 --
Junior Lien Term Loan .................... 325,000 --
Industrial development revenue bonds
with various interest rates and
maturity dates to 2029 .................. 7,710 7,795
Chester Loan ............................. 9,714 11,133
Other notes payable ...................... 8,712 2,938
----------- -----------
Total ................................ 1,963,229 587,324
Less current maturities .................. (16,304) (102,918)
----------- -----------
Long-term debt less current
maturities .............................. $ 1,946,925 $ 484,406
=========== ===========
15
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. LONG-TERM DEBT - (CONTINUED)
On February 22, 2007, BMCA and the Purchasers entered into senior
secured credit facilities consisting of a new $975 million term loan facility
(the "Term Loan"), a new $600 million revolving credit facility (the "Senior
Secured Revolving Credit Facility") and a $325 million bridge loan facility (the
"Bridge Loan"), which was replaced by a $325 million junior lien term loan
facility (the "Junior Lien Term Loan") collectively (the "Credit Facilities").
The initial borrowings under these Credit Facilities were used (i) to
pay for shares tendered by Elk shareholders in an equity tender offer, (ii) to
repay amounts outstanding under BMCA's old $450.0 million Senior Secured
Revolving Credit Facility (the "Old Senior Secured Revolving Credit Facility"),
(iii) to make payments in connection with the completion by BMCA and Building
Materials Manufacturing Corporation ("BMMC") of the tender offer and consent
solicitation for their 8% Senior Notes due 2007 (the "2007 Notes"), (iv) to make
payments in connection with the completion by BMCA of its previously announced
tender offer and consent solicitation for its outstanding 8% Senior Notes due
2008 (the "2008 Notes"), (v) to pay for transaction fees and expenses incurred
in connection with each of the foregoing transactions and (vi) to repay all of
the existing Elk senior note debt.
The Senior Secured Revolving Credit Facility has a maturity date of
February 22, 2012. All amounts outstanding under the Senior Secured Revolving
Credit Facility are secured by a first priority perfected security interest in
all receivables, inventory, precious metals, deposit accounts and other current
assets of BMCA and its domestic subsidiaries and all proceeds thereof (the
"Senior Secured Revolving Credit Facility Collateral").
Availability under the Senior Secured Revolving Credit Facility is
based upon eligible accounts receivable, inventory and precious metals used in
the production of inventory, as defined, and includes a sub-limit for letters of
credit of $150 million. Loans under the Senior Secured Revolving Credit Facility
will bear interest at a variable rate based upon either the Base Rate or the
Eurodollar Rate as defined in the Senior Secured Revolving Credit Facility, at
the borrower's option, plus a specified margin in each case. These interest
rates will be recalculated periodically based on changes in the Base Rate or
Eurodollar Rate and also based on an availability based pricing grid. The Senior
Secured Revolving Credit Facility requires the Company to pay unused commitment
fees. The Senior Secured Revolving Credit Facility provides for optional
reductions in the overall $600 million commitment, under certain conditions. In
addition, the Senior Secured Revolving Credit Facility provides for optional and
mandatory pre-payments of borrowings outstanding under the Senior Secured
Revolving Credit Facility, subject to certain conditions. The Senior Secured
Revolving Credit Facility also provides the borrowers with the ability to
increase the size of the facility by up to $350 million, depending on the
ability to obtain commitments from lenders and meeting specified conditions.
16
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. LONG-TERM DEBT - (CONTINUED)
Under the terms of the Senior Secured Revolving Credit Facility, the
borrowers are subject to an interest coverage ratio financial covenant when
liquidity falls below a specified threshold. In addition, the borrowers are also
required to comply with other customary covenants and various restrictive
covenants, including with respect to incurring additional indebtedness or
guarantees, creating liens or other encumbrances, making capital expenditures,
making restricted payments, including dividends and distributions to BMCA's
parent corporations, and making certain investments. In the event of a change of
control of BMCA, as defined, the Senior Secured Revolving Credit Facility could
be accelerated by the holders of that indebtedness. On March 12, 2007, the
Senior Secured Revolving Credit Facility was amended, which did not result in
any material changes to the facility.
The Term Loan will mature on February 22, 2014. All amounts outstanding
under the Term Loan are secured by (i) a first priority perfected security
interest in substantially all of the assets and properties of BMCA and its
domestic subsidiaries, other than the Senior Secured Revolving Credit Facility
Collateral (the "Term Loan Collateral"), and (ii) a second priority perfected
security interest in the Senior Secured Revolving Credit Facility Collateral.
Amounts due under the Term Loan will bear interest at a variable rate
based upon either the Base Rate or Eurodollar Rate, as defined in the Term Loan,
at the borrower's option, plus a specified margin in each case. These interest
rates will be recalculated periodically based on changes in the Base Rate and
Eurodollar Rate, if applicable. The Term Loan requires the Company to pay unused
commitment fees. In addition, the Term Loan provides for optional and mandatory
pre-payments under certain conditions. The Term Loan also provides the borrowers
with the ability to increase the size of the facility by up to $250 million
(less any increase in the Senior Secured Revolving Credit Facility in excess of
$100 million), depending on the ability to obtain commitments from lenders and
meeting specified conditions.
Under the terms of the Term Loan, the borrowers are subject to an
interest coverage ratio financial covenant, as defined, and a leverage ratio
financial covenant, as defined, each of which will need to be complied with
starting as of the end of BMCA's second fiscal quarter in 2008. In addition, the
borrowers are also required to comply with various restrictive covenants,
including with respect to incurring additional indebtedness or guarantees,
creating liens or other encumbrances, making capital expenditures, making
restricted payments, including dividends and distributions to BMCA's parent
corporations, and making certain investments. In the event of a change of
control of BMCA, as defined, the Term Loan could be accelerated by the holders
of that indebtedness. On March 15, 2007, the Term Loan was amended, which did
not result in any material changes to the facility.
17
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. LONG-TERM DEBT - (CONTINUED)
The Bridge Loan would have converted into a term loan maturing on
February 22, 2015, however it was amended and restated on March 15, 2007, and
redesignated as the Junior Lien Term Loan.
The Junior Lien Term Loan matures on September 15, 2014. All amounts
outstanding under the Junior Lien Term Loan are secured by (i) a second priority
perfected security interest in the Term Loan Collateral, and (ii) a third
priority perfected security interest in the Senior Secured Revolving Credit
Facility Collateral. Loans under the Junior Lien Term Loan will bear interest at
a variable rate based upon either the Base Rate or Eurodollar Rate, as defined
in the Junior Lien Term Loan at the borrower's option, plus a specified margin
in each case. These interest rates will be recalculated periodically based on
changes in the Base Rate or Eurodollar Rate, as applicable. The Junior Lien Term
Loan provides for optional and mandatory prepayments under certain conditions.
Under the terms of the Junior Lien Term Loan, the borrowers are subject
to a leverage ratio financial covenant, as defined, which will need to be
complied with starting as of the end of BMCA's second fiscal quarter in 2008.
The borrowers are also required to comply with various restrictive covenants,
including with respect to incurring additional indebtedness or guarantees,
creating liens or other encumbrances, making capital expenditures, making
restricted payments, including dividends and distributions to BMCA's parent
corporations and making certain investments. In the event of a change of control
of BMCA, as defined, the Junior Lien Term Loan could be accelerated by the
holders of that indebtedness.
On February 22, 2007, BMCA repurchased approximately $97.5 million, or
97.5%, of the aggregate principal amount outstanding of the 2007 Notes and
$150.1 million, or 96.9%, of the aggregate principal amount outstanding of the
2008 Notes. In connection with the completion of the tender offer for the 2007
Notes and the 2008 Notes in February 2007, substantially all of the covenants
included in the indentures governing the 2007 Notes and 2008 Notes were
eliminated.
On March 26, 2007, the Company repurchased all of Elk's then
outstanding $25.0 million in aggregate principal amount of 4.69% Senior Notes
due 2007, $60.0 million in aggregate principal amount of 6.99% Senior Notes due
2009, $60.0 million in aggregate principal amount of 7.49% Senior Notes due 2012
and $50.0 million in aggregate principal amount of 6.28% Senior Notes due 2014.
18
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. LONG-TERM DEBT - (CONTINUED)
As of July 1, 2007, the Company had total outstanding consolidated
indebtedness of $2,016.0 million, which amount includes $52.8 million of demand
loans to our parent corporation and $16.3 million which matures prior to the end
of the second quarter of 2008. The Company's total outstanding consolidated
indebtedness also includes $384.0 million of borrowings outstanding under its
$600.0 million Senior Secured Revolving Credit Facility. The Company anticipates
funding these obligations principally from its cash and cash equivalents on
hand, cash flow from operations and/or borrowings under its Senior Secured
Revolving Credit Facility.
As of July 1, 2007, the Company was in compliance with all covenants
under the Senior Secured Revolving Credit Facility, the Term Loan, the Junior
Lien Term Loan and the indentures governing the remaining 2007 Notes, the
remaining 2008 Notes and the 7 3/4% Senior Notes due 2014 (the "2014 Notes")
(collectively, the "Senior Notes"). As of July 1, 2007, the book value of the
collateral securing the Senior Notes, the Term Loan, the Junior Lien Term Loan
and the Senior Secured Revolving Credit Facility was approximately $2,587.9
million.
At July 1, 2007, the Company had outstanding letters of credit of
approximately $51.3 million, which includes approximately $10.5 million of
standby letters of credit related to certain obligations of G-I Holdings.
On January 3, 2006, the Company purchased and retired $6.3 million of
industrial revenue bond certificates issued by the Company in 1990 with respect
to the Fontana, California Industrial Revenue Development Bond, resulting in
BMCA becoming the primary holder of such bond.
NOTE 6. FIXED INCOME INTEREST RATE SWAPS
In March 2007, the Company began entering into forward-starting
Eurodollar rate ("LIBOR") based pay fixed income interest rate swaps related to
the Company's Term Loan with an effective date of April 23, 2007 and a maturity
date of April 23, 2012. If forward interest rates increase during the term of
the Term Loan agreement, the swaps become assets on BMCA's consolidated balance
sheet and BMCA will receive interest payments on BMCA's quarterly interest
payment due date for its Term Loan. If forward interest rates decline, the swaps
become a liability on BMCA's consolidated balance sheet and BMCA will be
obligated to make payments on its quarterly interest payment date for its Term
Loan.
19
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. FIXED INCOME INTEREST RATE SWAPS - (CONTINUED)
According to SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"), BMCA's hedging activity is treated as cash
flow hedges. At July 1, 2007, BMCA had no ineffectiveness in its hedging
transactions. Therefore, for the quarter ended July 1, 2007, the Company, based
on the change in the LIBOR rate, reflected in other noncurrent assets the
cumulative changes in the fair value of the derivative instrument when compared
to cumulative changes in the present value of the expected future interest cash
flows that are attributable to changes in the benchmark LIBOR swap rate. BMCA's
offset to the related asset was reflected in other comprehensive income, net of
tax. The current period activity therefore marks the swaps to market or fair
value and adjusts other comprehensive income, net of tax, to the cumulative
effect change.
On each LIBOR reset date, BMCA will test its fixed income interest rate
swaps to determine if the swaps contain any ineffectiveness. If BMCA's fixed
income swaps contain any ineffectiveness as of any subsequent test date, the
Company will reflect the effective portion of the offset to its related asset or
liability as a component of other comprehensive income and the ineffective
portion will be recorded through results of operations.
At July 1, 2007, based on changes in the closing LIBOR rate as of July
1, 2007, BMCA recorded a fair value gain on its fixed income interest rate swaps
of $13.3 million to other noncurrent assets, while the offset was recorded to
other comprehensive income, net of tax of $5.0 million. The Company also
recorded $0.6 million in interest income related to its fixed income interest
rate swaps.
NOTE 7. WARRANTY CLAIMS
The Company provides certain limited warranties covering most of its
residential roofing products for periods generally ranging from 20 to 50 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 products carry limited warranties for periods
generally ranging from 5 to 20 years, with lifetime limited warranties on
certain products.
20
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. WARRANTY CLAIMS - (CONTINUED)
The accrual for product warranty claims consisted of the following for
the second quarter and six month periods ended July 1, 2007, which includes Elk
from the date of acquisition and July 2, 2006, respectively:
SECOND QUARTER ENDED SIX MONTHS ENDED
---------------------- ----------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2007 2006 2007 2006
-------- -------- -------- --------
(THOUSANDS)
Beginning balance . $ 41,609 $ 33,014 $ 26,971 $ 31,202
Charged to cost of
products sold ... 4,541 6,758 8,311 13,499
Payments/deductions (4,977) (5,832) (7,784) (10,761)
Acquisition of Elk -- -- 13,675 --
-------- -------- -------- --------
Ending balance .... $ 41,173 $ 33,940 $ 41,173 $ 33,940
======== ======== ======== ========
The Company adopted, as of December 31, 2006, the provisions of Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in the Current Year Financial
Statements" ("SAB No. 108") issued by the Securities and Exchange Commission
("SEC") in September 2006. In accordance with the transition provisions of SAB
No. 108, related to the method the Company uses to recognize revenue on sales of
separately priced commercial and residential warranties in accordance with FASB
Technical Bulletin Number 90-1 "Accounting of Separately Priced Extended
Warranty and Product Maintenance Contracts" ("FTB No. 90-1"), the Company
reclassified $10.3 million of its commercial warranty accrual to deferred
revenue and costs. In addition, the Company recorded an additional residential
warranty accrual of $7.8 million related to the accrual for future residential
warranty costs related to warranties that are not separately priced, in
accordance with the transition provisions of SAB No. 108.
21
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. 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.
In September 2006, the FASB issued SFAS No. 158 "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158"),
which requires the net amount by which the defined-benefit or postretirement
obligation plan is over- or underfunded to be reported on a company's balance
sheet. SFAS No. 158 replaces FASB Statement No. 87's requirement to report at
least a minimum pension liability, measured as the excess of the accumulated
benefit obligation over the fair value of the plan assets. The funded status
amount to be recognized by SFAS No. 158 is measured as the difference between
the fair value of plan assets and the plan's benefit obligation, with the
benefit obligation including all actuarial gains and losses, prior service cost,
and any remaining transition amounts. SFAS No. 158 does not change the
components of net periodic benefit cost. All items currently deferred when
applying FASB Statement Nos. 87 and 106 are now recognized as a component of
accumulated other comprehensive income, net of all applicable taxes. The Company
adopted SFAS No. 158 during its fourth quarter of the fiscal year ended December
31, 2006.
The Company's net periodic pension cost for the Retirement Plan
included the following components for the second quarter and six month periods
ended July 1, 2007 and July 2, 2006, respectively:
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2007 2006 2007 2006
------- ------- ------- -------
(THOUSANDS)
Service cost ..................... $ 381 $ 370 $ 762 $ 740
Interest cost .................... 567 523 1,134 1,046
Expected return on plan assets ... (826) (748) (1,652) (1,496)
Amortization of unrecognized prior
service cost ................... 10 10 20 20
Amortization of net losses from
earlier periods ................ 41 86 83 172
------- ------- ------- -------
Net periodic pension cost ........ $ 173 $ 241 $ 347 $ 482
======= ======= ======= =======
22
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. BENEFIT PLANS - (CONTINUED)
As of the quarter ended July 1, 2007, the Company expects to make
pension contributions of $1.0 million to the Retirement Plan in 2007, which is
consistent with its expectations as of December 31, 2006. In April 2007 and July
2007, the Company made Retirement Plan contributions of $0.3 million,
respectively.
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees. Such subsidies were reduced or ended as of January 1,
1997. Effective March 1, 2005, the Company amended the plan eliminating
postretirement medical benefits affecting all current and future retirees.
Net periodic postretirement (benefit) cost included the following
components for the second quarter and six month periods ended July 1, 2007 and
July 2, 2006, respectively:
SECOND QUARTER ENDED SIX MONTHS ENDED
---------------- ----------------
JULY 1, JULY 2, JULY 1, JULY 2,
2007 2006 2007 2006
----- ----- ----- -----
(THOUSANDS)
Service cost ..................... $ 3 $ 3 $ 6 $ 6
Interest cost .................... 30 29 60 59
Amortization of unrecognized prior
service cost ................... (143) (155) (285) (310)
Amortization of net gains from
earlier periods ................ (56) (61) (113) (122)
----- ----- ----- -----
Net periodic postretirement
(benefit) cost ................. $(166) $(184) $(332) $(367)
===== ===== ===== =====
As of the quarter ended July 1, 2007 the Company expects to make
aggregate benefit claim payments of approximately $0.2 million in 2007, which
are related to postretirement life insurance expenses. This is consistent with
the Company's expectations as of December 31, 2006.
23
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. BENEFIT PLANS - (CONTINUED)
In connection with the acquisition of Elk, the Company has assumed the
Elk 401(k) Plan, which was established effective January 1, 1990. Under the Elk
401(k) Plan, the Company may contribute a percentage of each Elk participant's
annual compensation into the 401(k) Plan to be invested among various defined
alternatives at the participants' direction. Employees are vested immediately in
the Company's matching contributions. All full-time Elk employees, except those
covered by plans established through collective bargaining agreements, are
eligible for participation upon date of hire.
The Company contributes a 3% basic contribution and an additional $.50
for every $1.00 of employee contributions into the Elk 401(k) Plan limited to a
maximum matching Company contribution of 2% of an employee's compensation.
NOTE 9. STOCK/LOAN PLAN
In connection with the Company's acquisition of Elk, the Company
assumed obligations of Elk's Stock/Loan Plan, under which certain Elk employees
were granted loans for the purpose of purchasing Elk's common stock, which loans
were based on a percentage of their salaries, the performance of their operating
units, and also as long-term incentive compensation awards. Under the Stock/Loan
Plan, a ratable portion of the loans, which are unsecured, and any accrued
interest are forgiven and recognized as compensation expense over five years of
continuing service with the Company. If employment is terminated for any reason
except death, disability or retirement, the balance of the loan becomes due and
payable. No further loans will be made under this plan. Loans outstanding at
July 1, 2007 were $4.1 million and are included in other noncurrent assets.
NOTE 10. 2001 LONG-TERM INCENTIVE PLAN
The incentive units under the Company's 2001 Long-Term Incentive Plan
are valued at Book Value (as defined in the Plan) or the value specified of such
incentive units at the date of grant. Changes, either increases or decreases, in
the Book Value of those incentive units between the date of grant and the
measurement date result in a change in the measure of compensation for the
award. Compensation expense for the Company's incentive units was $0.8 and $2.5
million for the second quarter ended July 1, 2007 and July 2, 2006,
respectively, and $1.0 and $5.5 million for the six-month period ended July 1,
2007 and July 2, 2006, respectively. At July 1, 2007 and July 2, 2006, the 2001
Long-Term Incentive Plan liability amounted to $12.0 and $29.4 million,
respectively, and was included in accrued liabilities.
24
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. 2001 LONG-TERM INCENTIVE PLAN - (CONTINUED)
The following is a summary of activity for incentive units related to
the 2001 Long-Term Incentive Plan:
JULY 1, DECEMBER 31,
2007 2006
-------- --------
Incentive Units outstanding, beginning
of period ................................ 98,633 146,814
Granted .................................... 37,589 6,200
Exercised .................................. (29,242) (41,087)
Forfeited .................................. (3,530) (13,294)
-------- --------
Incentive Units outstanding, end
of period ................................ 103,450 98,633
======== ========
The initial value of the incentive units granted on January 1, 2007,
July 1, 2006 and January 1, 2006 was $583.08, $569.74 and $534.19, respectively.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company makes loans to, and borrows from, its parent corporations
from time to time at prevailing market rates. As of July 1, 2007 and July 2,
2006, BMCA Holdings Corporation owed the Company $56.1 and $55.9 million,
including interest of $0.8 and $0.6 million, respectively, and the Company owed
BMCA Holdings Corporation $52.8 and $52.8 million, with no unpaid interest
payable to BMCA Holdings Corporation, respectively. Interest income on the
Company's loans to BMCA Holdings Corporation amounted to $1.2 and $1.2 million
during the second quarter ended July 1, 2007 and July 2, 2006, respectively, and
$2.5 and $2.4 million during the six month period ended July 1, 2007 and July 2,
2006, respectively. Interest expense on the Company's loans from BMCA Holdings
Corporation amounted to $1.2 and $1.2 million during the second quarter ended
July 1, 2007 and July 2, 2006, respectively, and $2.4 and $2.3 million during
the six month period ended July 1, 2007 and July 2, 2006, respectively. Loans
payable to/receivable from any parent corporation are due on demand and provide
each party with the right of offset of its related obligation to the other party
and are subject to limitations as outlined in the Senior Secured Revolving
Credit Facility, the Term Loan, the Junior Lien Term Loan and its Senior Notes.
Under the terms of the Senior Secured Revolving Credit Facility and the
indentures governing the Company's Senior Notes at July 1, 2007, the Company
could repay demand loans to its parent corporation amounting to $52.8 million,
subject to
25
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. RELATED PARTY TRANSACTIONS - (CONTINUED)
certain conditions. The Company also makes non-interest bearing advances to
affiliates, of which no balance was outstanding as of July 1, 2007 and July 2,
2006. In addition, for the six months ended July 1, 2007 and July 2, 2006, no
loans were owed or other lending activities were entered into by the Company to
other affiliates.
The Company also has a management agreement with ISP Management
Company, Inc., a subsidiary of International Specialty Products Inc. (which,
together with its subsidiaries, is referred to as "ISP"), an affiliate, (the
"ISP Management Agreement") to provide the Company with certain management
services. The aggregate amount payable to ISP Management Company, Inc. under the
ISP Management Agreement for 2007, inclusive of the services provided to G-I
Holdings, has not yet been finalized; however, based on services provided to
date in 2007 and after adjusting for inflationary factors, it is estimated to be
similar to the $6.1 million paid in 2006. The Company does not expect any
changes to the ISP Management Agreement to have a material impact on the
Company's results of operations.
The Company purchases a substantial portion of its colored roofing
granules and algae-resistant granules under a long-term requirements contract
with ISP Minerals Inc. ("Minerals"), an affiliate of the Company and of 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 second quarter ended July 1, 2007 and the year ended December 31, 2006, the
Company purchased $52.1 and $102.3 million, respectively, of mineral products
from Minerals under this contract.
Included in current assets as a tax receivable from parent corporation
is $9.1 and $9.1 million at July 1, 2007 and December 31, 2006, respectively,
representing amounts paid in excess of amounts due to G-I Holdings under the Tax
Sharing Agreement. These amounts are included in the change in net receivable
from/payable to related parties/parent corporations in the consolidated
statement of cash flows.
NOTE 12. INCOME TAXES
The Company adopted FIN 48 as of January 1, 2007 in a manner that is
consistent with the provisions of FSP FIN 48-1, and, as a result of the
adoption, the Company reviewed certain tax positions and did not need to
recognize any material adjustment to its accruals for uncertain tax positions.
At January 1, 2007 and July 1, 2007, the Company had approximately $13.1 and
$15.1 million, respectively, of unrecognized tax benefits, all of which would
affect its effective tax rate if recognized.
26
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. INCOME TAXES - (CONTINUED)
For years prior to 2007, the Company and its subsidiaries were subject
to United States federal income tax as well as the income tax of multiple state
jurisdictions. The Company has substantially concluded all United States federal
income tax matters for years through 2004. The tax years 2005 and 2006 remain
open to examination by the Internal Revenue Service ("IRS"). Substantially all
material state and local matters have been concluded for tax years through 2001.
The tax years 2002 through 2006 remain open to examination by the major state
taxing jurisdictions to which the Company is subject.
The Company's continuing practice is to recognize interest and/or
penalties related to income tax matters in income tax expense. As of January 1,
2007 and July 1, 2007, the Company had $1.7 and $2.2 million, respectively of
accrued interest and $2.1 million, respectively of accrued penalties.
The Company's effective tax rate changed from 35.8% at the end of the
first quarter of 2007 to 29.0% at the end of the first six months of 2007
primarily due to the impact of the estimated annual restructuring and other
expense charges to be taken in 2007, of which $65.8 million was included in the
Company's income before interest expense and income taxes for the six month
period ended July 1, 2007. In addition, the change in the effective tax rate was
due to incremental state taxes, resulting from the application of the provisions
of FIN 48.
NOTE 13. 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, but
has been stayed (see below).
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
27
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. CONTINGENCIES - (CONTINUED)
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 Bankruptcy
Court converted the temporary restraints into a preliminary injunction,
prohibiting the bringing or prosecution of any such Asbestos Claims against the
Company.
On February 7, 2001, G-I Holdings filed an action in the United States
Bankruptcy Court for the District of New Jersey seeking a declaratory judgment
that BMCA has no successor liability for Asbestos Claims against G-I Holdings
and that it is not the alter ego of G-I Holdings (the "BMCA Action"). One of the
parties to this matter, the Official Committee of Asbestos Claimants (the
"creditors' committee"), subsequently filed a counterclaim against the Company
seeking a declaration that BMCA has successor liability for Asbestos Claims
against G-I Holdings and that it is the alter ego of G-I Holdings. On May 13,
2003 the United States District Court for the District of New Jersey overseeing
the G-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. The Company believes it will prevail on its claim for a
declaratory judgment. Although the Company believes its claims are meritorious,
and that it does not have asbestos-related liability, 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 BMCA.
On or about February 8, 2001, the creditors' committee filed a
complaint in the United States Bankruptcy Court, District of New Jersey against
G-I Holdings and BMCA. The complaint requests substantive consolidation of BMCA
with G-I Holdings or an order directing G-I Holdings to cause BMCA to file for
bankruptcy protection. The Company and G-I Holdings intend to vigorously defend
the lawsuit. The plaintiffs also filed for interim relief absent the granting of
their requested relief described above. On March 21, 2001, the Bankruptcy Court
denied plaintiffs' application for interim relief. In November 2002, the
creditors' committee, joined in by the legal representative of future demand
holders, filed a motion for appointment of a trustee in the G-I Holdings'
bankruptcy. In December 2002, the Bankruptcy Court denied the motion. The
creditors' committee appealed the ruling to the United States District Court,
which denied the appeal on June 27, 2003. The creditors' committee appealed the
denial to the Third Circuit Court of
28
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. CONTINGENCIES - (CONTINUED)
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 of
Appeals 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 Bankruptcy Court's order (and a June
8, 2004 decision upon which the order was based). G-I Holdings, the holders of
the Company's bank and bond debt and BMCA 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. The Company believes the creditors' committee's avoidance claims are
without merit and that the Bankruptcy Court should not permit the committee to
pursue such claims against the Company and the holders of its bank and bond debt
as of 2000.
In March 2007, after participating in a mediation which resulted in the
parties agreeing to an outline of the principal terms of a settlement of the G-I
Holdings bankruptcy and all related litigations, the parties agreed to a stay of
proceedings pending the completion of their negotiations. The judges presiding
over the G-I Holdings bankruptcy proceeding and the related litigations,
including the BMCA action and the fraudulent conveyance action, have each
entered stipulated orders dated March 22, 2007, March 23, 2007 and April 4,
2007, respectively, implementing the stay. There can be no assurance whether the
negotiations will result in a settlement to the G-I Holdings bankruptcy and
related proceedings.
If the stay ceases to be in effect and the Company is not successful in
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
29
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. CONTINGENCIES - (CONTINUED)
these events, or the substantive consolidation of G-I Holdings and the Company,
would weaken its operations and cause it to divert a material amount of its cash
flow to satisfy the asbestos claims of G-I Holdings and may render it unable to
pay interest or principal on its credit obligations.
Tax Claims Against G-I Holdings
On September 15, 1997, G-I Holdings received a notice from the IRS of a
deficiency in the amount of $84.4 million (after taking into account the use of
net operating losses and foreign tax credits otherwise available for use in
later years) in connection with the formation in 1990 of Rhone-Poulenc
Surfactants and Specialties, L.P. (the "surfactants partnership"), a partnership
in which G-I Holdings held an interest. 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. G-I Holdings 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 statutes of limitation purposes and denying
G-I Holdings summary judgment on its other statutes of limitation defense
(finding material issues of fact that must be tried). If the IRS were to prevail
on its claims relating to the formation of the surfactants partnership, the
Company could 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. If the IRS were to lose on
its claims relating to the formation of the surfactants partnership but prevail
on its claims relating to the 1999 distribution of U.S. Treasury bonds, the
Company could be severally liable for all or a portion of the taxes and interest
on the deficiency. In an opinion dated June 8, 2007, the District Court decided
that G-I Holdings cannot avail itself of the "binding contract" transitional
relief with respect to the 1999 distribution of U.S. Treasury Bonds to G-I
Holdings. 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.
For a further discussion with respect to the history of the foregoing
litigation, and asbestos-related matters, see Notes 5, 11, and 16 to the
consolidated financial statements contained in the Company's 2006 Form 10-K.
30
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. CONTINGENCIES - (CONTINUED)
Environmental Litigation
We, together with other companies, are 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. We refer to these proceedings and
lawsuits below 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 these matters
will not have a material adverse effect on the liquidity, results of operations,
cash flows or financial position of the Company. However, adverse decisions or
events, particularly as to increases in remedial costs, discovery of new
contamination, assertion of natural resource damages, and the liability and the
financial responsibility of our insurers and of the other parties involved at
each site and their insurers, could cause us to increase our estimate of our
liability in respect of those matters. It is not currently possible to estimate
the amount or range of any additional liability. For information relating to
other environmental compliance expenses, reference is made to Note 2,
"Environmental Liabilities" in the Company's 2006 Form 10-K and Note 12,
"Environmental Litigation" in the Company's Quarterly Report on Form 10-Q for
the first quarter ended April 1, 2007, which was filed with the SEC on May 16,
2007.
Other Contingencies
In the ordinary course of business, the Company has several supply
agreements that include minimum annual purchase requirements. In the event these
purchase requirements are not met, the Company may be required to make payments
under these supply agreements. There have been no material changes to these
contracts in the second quarter of 2007.
31
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. GUARANTOR FINANCIAL INFORMATION
At July 1, 2007, all of the Company's subsidiaries, including Elk, each
of which is wholly owned by the Company, are guarantors under the Company's
Senior Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term
Loan and the indentures governing the Senior Notes. These guarantees are full,
unconditional and joint and several. In addition, BMMC, 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 ("BMIC"), a wholly-owned subsidiary of the Company, for a
license fee stated as a percentage of net sales. The license agreements were for
a period of one year and were subject to automatic renewal unless either party
terminated with 60 days written notice. Also, effective January 1, 1999, BMMC
started selling all finished goods to the Company at a manufacturing profit.
Such agreements and the related sale of finished goods were terminated on
December 31, 2006.
Effective January 1, 2007, BMMC and BMIC entered into a new contract
manufacturing agreement allowing BMIC the right to purchase all production at
the BMMC owned plant locations at a specified transfer price. In addition,
effective January 1, 2007, BMCA and BMIC entered into a purchase agreement
granting BMCA the right to purchase production sufficient to meet required
customer demand from BMIC at a specified transfer price. Also, in connection
with entering these agreements, BMCA transferred certain employees and
operations of BMCA to BMIC.
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.
32
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SECOND QUARTER ENDED JULY 1, 2007
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------- --------- --------- --------- ---------
Net sales ............................. $ 440,350 $ -- $ 222,920 $ -- $ 663,270
Intercompany net sales ................ -- 345,762 389,925 (735,687) --
--------- --------- --------- --------- ---------
Total net sales ................... 440,350 345,762 612,845 (735,687) 663,270
--------- --------- --------- --------- ---------
Costs and expenses, net:
Cost of products sold ............... 382,730 288,577 550,325 (735,687) 485,945
Selling, general and
administrative .................... 46,611 47,155 44,064 -- 137,830
Restructuring and other
expenses .......................... 54,993 -- -- -- 54,993
Other (income) expense, net ......... (977) (53) 233 -- (797)
--------- --------- --------- --------- ---------
Total costs and expenses, net...... 483,357 335,679 594,622 (735,687) 677,971
--------- --------- --------- --------- ---------
Income (loss) before equity in
earnings of subsidiaries,
interest expense and income
taxes ............................... (43,007) 10,083 18,223 -- (14,701)
Equity in earnings of
subsidiaries ......................... 10,383 -- -- (10,383) --
Interest income (expense) ............. (32,778) 225 (13,117) -- (45,670)
--------- --------- --------- --------- ---------
Income (loss) before income taxes...... (65,402) 10,308 5,106 (10,383) (60,371)
Income tax (expense) benefit .......... 20,920 (2,508) (2,523) -- 15,889
--------- --------- --------- --------- ---------
Net income (loss) ..................... $ (44,482) $ 7,800 $ 2,583 $ (10,383) $ (44,482)
========= ========= ========= ========= =========
33
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SECOND QUARTER ENDED JULY 2, 2006
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------- --------- --------- --------- ---------
Net sales ............................. $ 503,243 $ -- $ 32,645 $ -- $ 535,888
Intercompany net sales ................ 162 310,773 22,548 (333,483) --
--------- --------- --------- --------- ---------
Total net sales ................... 503,405 310,773 55,193 (333,483) 535,888
--------- --------- --------- --------- ---------
Costs and expenses, net:
Cost of products sold ............... 379,094 274,669 48,830 (333,483) 369,110
Selling, general and administrative.. 88,263 21,331 8,689 -- 118,283
Intercompany licensing (income)
expense, net ...................... 20,136 7,064 (27,200) -- --
Other (income) expense, net ......... (195) 16 (12) -- (191)
Transition service agreement
(income) expense .................. 25 (25) -- -- --
--------- --------- --------- --------- ---------
Total costs and expenses, net ..... 487,323 303,055 30,307 (333,483) 487,202
--------- --------- --------- --------- ---------
Income before equity in earnings of
subsidiaries, interest expense and
income taxes ........................ 16,082 7,718 24,886 -- 48,686
Equity in earnings of subsidiaries .... 16,222 -- -- (16,222) --
Interest expense ...................... (9,615) (2,060) (4,379) -- (16,054)
--------- --------- --------- --------- ---------
Income before income taxes ............ 22,689 5,658 20,507 (16,222) 32,632
Income tax expense .................... (2,457) (2,150) (7,793) -- (12,400)
--------- --------- --------- --------- ---------
Net income ............................ $ 20,232 $ 3,508 $ 12,714 $ (16,222) $ 20,232
========= ========= ========= ========= =========
34
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JULY 1, 2007
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
Net sales .......................... $ 854,282 $ -- $ 338,979 $ -- $ 1,193,261
Intercompany net sales ............. -- 662,402 749,253 (1,411,655) --
----------- ----------- ----------- ----------- -----------
Total net sales .................. 854,282 662,402 1,088,232 (1,411,655) 1,193,261
----------- ----------- ----------- ----------- -----------
Cost and expenses, net:
Costs of products sold ........... 729,236 567,163 994,139 (1,411,655) 878,883
Selling, general and
administrative ................. 103,689 75,727 69,574 -- 248,990
Restructuring and other expenses . 54,993 -- -- -- 54,993
Other (income) expense, net ...... (611) (105) 338 -- (378)
----------- ----------- ----------- ----------- -----------
Total costs and expenses, net .... 887,307 642,785 1,064,051 (1,411,655) 1,182,488
----------- ----------- ----------- ----------- -----------
Income (loss) before equity in
earnings of subsidiaries, interest
expense and income taxes ......... (33,025) 19,617 24,181 -- 10,773
Equity in earnings of subsidiaries . 5,098 -- -- (5,098) --
Interest expense ................... (58,331) (2,224) (34,393) -- (94,948)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes .. (86,258) 17,393 (10,212) (5,098) (84,175)
Income tax (expense) benefit ....... 26,493 (5,044) 2,961 -- 24,410
----------- ----------- ----------- ----------- -----------
Net income (loss) .................. $ (59,765) $ 12,349 $ (7,251) $ (5,098) $ (59,765)
=========== =========== =========== =========== ===========
35
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JULY 2, 2006
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
Net sales ............................ $ 984,855 $ -- $ 56,008 $ -- $ 1,040,863
Intercompany net sales ............... 213 600,817 44,178 (645,208) --
----------- ----------- ----------- ----------- -----------
Total net sales .................. 985,068 600,817 100,186 (645,208) 1,040,863
----------- ----------- ----------- ----------- -----------
Costs and expenses, net:
Cost of products sold .............. 751,901 530,817 91,080 (645,208) 728,590
Selling, general and administrative. 174,976 41,440 16,465 -- 232,881
Intercompany licensing (income)
expense, net ..................... 39,403 13,550 (52,953) -- --
Other (income) expense, net ........ (537) 37 (17) -- (517)
Transition service agreement
(income) expense ................. 50 (50) -- -- --
----------- ----------- ----------- ----------- -----------
Total costs and expenses, net .... 965,793 585,794 54,575 (645,208) 960,954
----------- ----------- ----------- ----------- -----------
Income before equity in earnings of
subsidiaries, interest expense and
income taxes ....................... 19,275 15,023 45,611 -- 79,909
Equity in earnings of subsidiaries ... 30,263 -- -- (30,263) --
Interest expense ..................... (18,758) (4,176) (7,646) -- (30,580)
----------- ----------- ----------- ----------- -----------
Income before income taxes ........... 30,780 10,847 37,965 (30,263) 49,329
Income tax expense ................... (196) (4,122) (14,427) -- (18,745)
----------- ----------- ----------- ----------- -----------
Net income ........................... $ 30,584 $ 6,725 $ 23,538 $ (30,263) $ 30,584
=========== =========== =========== =========== ===========
36
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 1, 2007
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ............ $ -- $ 233 $ 51,544 $ -- $ 51,777
Accounts receivable, trade, net ...... 316,626 -- 150,833 -- 467,459
Accounts receivable, other ........... 3,561 553 270 -- 4,384
Tax receivable from parent
corporation ........................ 9,132 -- -- -- 9,132
Inventories, net ..................... -- 189,726 126,493 -- 316,219
Deferred income tax assets, net ...... 75,946 -- -- -- 75,946
Other current assets ................. 9,383 4,848 8,313 -- 22,544
Discontinued operations - current
assets ............................. -- -- 2,844 -- 2,844
----------- ----------- ----------- ----------- -----------
Total Current Assets ............... 414,648 195,360 340,297 -- 950,305
Investment in subsidiaries ............. 1,664,502 -- -- (1,664,502) --
Intercompany loans including accrued
interest ............................. 680,647 -- (680,647) -- --
Due from/(to) subsidiaries, net ........ (578,486) (225,840) 804,326 -- --
Property, plant and equipment, net ..... -- 243,775 569,669 -- 813,444
Goodwill, net .......................... 40,080 3,946 633,632 -- 677,658
Intangible assets ...................... -- -- 15,887 -- 15,887
Other noncurrent assets ................ 88,846 21,006 29,121 -- 138,973
Discontinued operations - non-current
assets ............................... -- -- 1,355 -- 1,355
----------- ----------- ----------- ----------- -----------
Total Assets ........................... $ 2,310,237 $ 238,247 $ 1,713,640 $(1,664,502) $ 2,597,622
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt.. $ 9,702 $ 5,735 $ 867 $ -- $ 16,304
Accounts payable ..................... 234 71,571 45,182 -- 116,987
Payable to related parties ........... 683 12,205 1,166 -- 14,054
Loans payable to parent corporation .. 52,840 -- -- -- 52,840
Accrued liabilities .................. 93,799 50,605 35,246 -- 179,650
Product warranty claims .............. 9,000 -- 4,500 -- 13,500
Discontinued operations - current
liabilities ........................ -- -- 931 -- 931
----------- ----------- ----------- ----------- -----------
Total Current Liabilities .......... 166,258 140,116 87,892 -- 394,266
Long-term debt.......................... 1,924,937 17,172 4,816 -- 1,946,925
Product warranty claims ................ 18,786 -- 8,887 -- 27,673
Deferred income tax liabilities ........ 127,551 -- -- -- 127,551
Other liabilities ...................... 62,299 2,015 26,487 -- 90,801
----------- ----------- ----------- ----------- -----------
Total Liabilities ...................... 2,299,831 159,303 128,082 -- 2,587,216
Total Stockholders' Equity ............. 10,406 78,944 1,585,558 (1,664,502) 10,406
----------- ----------- ----------- ----------- -----------
Total Liabilities and Stockholders'
Equity ............................ $ 2,310,237 $ 238,247 $ 1,713,640 $(1,664,502) $ 2,597,622
=========== =========== =========== =========== ===========
37
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2006
(THOUSANDS)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
---------- ---------- ---------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents .............. $ 18 $ 1,870 $ 5,889 $ -- $ 7,777
Accounts receivable, trade, net ........ 177,137 -- 13,722 -- 190,859
Accounts receivable, other ............. 4,957 537 105 -- 5,599
Tax receivable from parent corporation.. 9,132 -- -- -- 9,132
Inventories, net ....................... 165,538 49,318 23,853 -- 238,709
Deferred income tax assets, net ........ 21,710 -- -- -- 21,710
Other current assets ................... 7,753 4,235 221 -- 12,209
---------- ---------- ---------- ---------- ----------
Total Current Assets ................. 386,245 55,960 43,790 -- 485,995
Investment in subsidiaries ............... 626,836 -- -- (626,836) --
Intercompany loans including accrued
interest ............................... 378,725 16,515 (395,240) -- --
Due from (to) subsidiaries, net .......... (720,388) (68,470) 788,858 -- --
Property, plant and equipment, net ....... 45,274 250,100 116,355 -- 411,729
Goodwill, net ............................ 40,080 -- 24,714 -- 64,794
Other noncurrent assets .................. 44,723 22,543 57 -- 67,323
---------- ---------- ---------- ---------- ----------
Total Assets ............................. $ 801,495 $ 276,648 $ 578,534 $ (626,836) $1,029,841
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ... $ -- $ 102,913 $ 5 $ -- $ 102,918
Accounts payable ....................... 53,312 28,436 9,203 -- 90,951
Payable to related parties ............. 1,172 4,780 -- -- 5,952
Loans payable to parent corporation .... 52,840 -- -- -- 52,840
Accrued liabilities .................... 39,533 60,490 1,359 -- 101,382
Product warranty claims ................ 9,000 -- -- -- 9,000
---------- ---------- ---------- ---------- ----------
Total Current Liabilities ............ 155,857 196,619 10,567 -- 363,043
Long-term debt............................ 465,518 18,885 3 -- 484,406
Product warranty claims .................. 17,571 -- 401 -- 17,972
Deferred income tax liabilities .......... 39,551 -- -- -- 39,551
Other liabilities ........................ 60,793 1,694 177 -- 62,664
---------- ---------- ---------- ---------- ----------
Total Liabilities ........................ 739,290 217,198 11,148 -- 967,636
Total Stockholders' Equity ............... 62,205 59,450 567,386 (626,836) 62,205
---------- ---------- ---------- ---------- ----------
Total Liabilities and Stockholders'
Equity .............................. $ 801,495 $ 276,648 $ 578,534 $ (626,836) $1,029,841
========== ========== ========== ========== ==========
38
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 1, 2007
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Consolidated
----------- ----------- ----------- -----------
Cash and cash equivalents, beginning of period ............ $ 18 $ 1,870 $ 5,889 $ 7,777
----------- ----------- ----------- -----------
Cash provided by (used in) operating activities:
Net income (loss) ....................................... (64,863) 12,349 (7,251) (59,765)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation .......................................... -- 18,802 14,830 33,632
Amortization .......................................... -- 1,694 363 2,057
Restructuring and other expenses ...................... 65,793 -- -- 65,793
Deferred income taxes ................................. (33,163) -- -- (33,163)
Noncash interest charges, net ......................... 5,368 212 513 6,093
(Increase) decrease in working capital items ............ (157,530) 14,746 26,674 (116,110)
Increase (decrease) in product warranty claims........... 1,215 -- (689) 526
(Increase) decrease in other assets ..................... (2,286) (150) 786 (1,650)
Increase in other liabilities ........................... 1,506 321 309 2,136
Change in net receivable from/payable to
related parties/parent corporations ................... (1,250,975) 73,841 1,185,236 8,102
Other, net .............................................. 1 206 660 867
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities .............................................. (1,434,934) 122,021 1,221,431 (91,482)
----------- ----------- ----------- -----------
Cash used in investing activities:
Acquisition of ElkCorp, net of cash
acquired of $0.1 million ............................... -- -- (945,643) (945,643)
Capital expenditures and acquisitions ................... -- (24,548) (30,972) (55,520)
----------- ----------- ----------- -----------
Net cash used in investing activities ..................... -- (24,548) (976,615) (1,001,163)
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities:
Proceeds from issuance of long-term debt ................ 2,162,849 -- 25,900 2,188,749
Repayments of long-term debt ............................ (693,842) (99,110) (225,061) (1,018,013)
Distribution to parent corporation ...................... (171) -- -- (171)
Loan to parent corporation .............................. (98) -- -- (98)
Financing fees and expenses ............................. (33,822) -- -- (33,822)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities............................................... 1,434,916 (99,110) (199,161) 1,136,645
----------- ----------- ----------- -----------
Net change in cash and cash equivalents ................... (18) (1,637) 45,655 44,000
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period .................. $ -- $ 233 $ 51,544 $ 51,777
=========== =========== =========== ===========
39
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 2, 2006
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Consolidated
--------- --------- --------- ---------
Cash and cash equivalents, beginning of period .......... $ 9 $ 180 $ 6,693 $ 6,882
--------- --------- --------- ---------
Cash provided by (used in) operating activities:
Net income ............................................ 321 6,725 23,538 30,584
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation ........................................ 1,959 18,604 3,463 24,026
Amortization ........................................ -- 1,355 -- 1,355
Deferred income taxes ............................... (1,293) -- -- (1,293)
Noncash interest charges, net ....................... 1,955 663 1 2,619
Increase in working capital items ..................... (139,975) (479) (12,335) (152,789)
Increase (decrease) in long-term reserve for
product warranty claims ............................. 2,788 -- (50) 2,738
Increase (decrease) in other assets ................... 23 (1,342) 72 (1,247)
Decrease in other liabilities ......................... (114) -- (4) (118)
Change in net receivable from/payable to
related parties/parent corporations ................. 7,846 (7,020) 7,162 7,988
Other, net ............................................ (12) (33) 427 382
--------- --------- --------- ---------
Net cash provided by (used in) operating activities...... (126,502) 18,473 22,274 (85,755)
--------- --------- --------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition of a manufacturing
facility ............................................ (5,927) (10,256) (17,546) (33,729)
--------- --------- --------- ---------
Net cash used in investing activities ................... (5,927) (10,256) (17,546) (33,729)
--------- --------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from Senior Secured Revolving Credit
Facility ............................................ 472,000 -- -- 472,000
Purchase of industrial development revenue bond
certificates issued by the Company .................. -- (6,325) -- (6,325)
Repayments of long-term debt .......................... (339,000) (1,514) (2) (340,516)
Distribution to parent corporation .................... (477) -- -- (477)
Loan to parent corporation ............................ (92) -- -- (92)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities.. ... 132,431 (7,839) (2) 124,590
--------- --------- --------- ---------
Net change in cash and cash equivalents ................. 2 378 4,726 5,106
--------- --------- --------- ---------
Cash and cash equivalents, end of period ................ $ 11 $ 558 $ 11,419 $ 11,988
========= ========= ========= =========
40
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On February 22, 2007, a subsidiary of Building Materials Corporation of
America, which we refer to as BMCA, acquired approximately 90% of the
outstanding shares of ElkCorp, which we refer to as Elk, a Dallas, Texas-based
manufacturer of roofing products and building materials. The remaining shares of
Elk were acquired on March 26, 2007, resulting in Elk becoming an indirect
wholly-owned subsidiary of BMCA. See Acquisitions. Unless otherwise indicated by
the context, "we," "us," and "our" refer to Building Materials Corporation of
America and its consolidated subsidiaries, including Elk.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes to our Critical Accounting
Policies during the six month period ended July 1, 2007. 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, 2006, which was filed with the Securities and
Exchange Commission, which we refer to as the SEC, on February 16, 2007, which
we refer to as the 2006 Form 10-K.
RESULTS OF OPERATIONS
Sales of roofing products are our dominant business, typically
accounting for approximately 95% of our consolidated net sales. The main drivers
of our roofing business include: the nation's aging housing stock; existing home
sales; new home construction; larger new homes; increased home ownership rates;
and severe weather and energy concerns. Our roofing business is also affected by
raw material costs, including asphalt and other petroleum-based raw materials,
as well as energy, and transportation and distribution costs.
Second Quarter 2007 Compared With
Second Quarter 2006
We recorded a net loss of $44.5 million in the second quarter of 2007
compared to net income of $20.2 million in the second quarter of 2006. Our net
loss in the second quarter of 2007 included $46.7 million of after-tax ($65.8
million pre-tax) restructuring and other expenses, of which $7.7 million
after-tax ($10.8 million pre-tax) was included in cost of products sold related
to the integration of Elk operations. Included in restructuring and other
expenses are plant closure related expenses related to the closure of these
facilities along with the write-down of certain plant assets of the closed
facilities, integration related costs and the write-down of certain inventories.
Excluding these items, second quarter of 2007 net income was $2.2 million, which
included the results of operations of Elk. The decrease in net income for the
second quarter of 2007 was primarily attributable
41
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
to approximately $29.6 million of higher interest expense primarily due to the
acquisition of Elk and lower income before interest expense and income taxes.
Net sales for the second quarter of 2007 were $663.3 million compared
to second quarter of 2006 net sales of $535.9 million. Net sales for the second
quarter of 2007 included $194.8 million of net sales related to Elk. Excluding
net sales of Elk, our net sales for the second quarter of 2007 were $468.5
million. The decrease in second quarter of 2007 net sales was primarily due to
lower net sales of residential roofing products primarily driven by lower unit
volumes resulting from softer market demand.
We had a loss before interest expense and income taxes in the second
quarter of 2007 of $14.7 million compared to income before interest expense and
income taxes of $48.7 million in the second quarter of 2006. Our loss before
interest expense and income taxes in the second quarter of 2007 included $65.8
million of restructuring and other expenses, of which $10.8 million was included
in cost of products sold. Excluding these items, the second quarter of 2007
income before interest expense and income taxes was $51.1 million, which
included $22.1 million of income before interest expense and income taxes
resulting from Elk's operations. Excluding the impact of Elk operations, income
before interest expense and income taxes for the second quarter of 2007 was
$29.0 million. The decrease in the second quarter of 2007 income before interest
expense and income taxes was primarily due to a decrease in net sales of
residential roofing products and higher raw material costs, partially offset by
lower selling, general and administrative expenses mostly due to lower volume
related distribution costs.
Interest expense in the second quarter of 2007 increased to $45.7
million as compared to $16.1 million in the second quarter of 2006. The increase
in second quarter of 2007 interest expense was primarily due to higher average
borrowings due to the acquisition of Elk and a slightly higher average interest
rate.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the second quarter of 2007 were
$626.4 million compared to $512.5 million for the second quarter of 2006. Net
sales of roofing products for the second quarter of 2007 included $180.6 million
of net sales of roofing products related to Elk. Excluding net sales of roofing
products of Elk, we had net sales of roofing products of $445.8 million in the
second quarter of 2007. The decrease in net sales of roofing products was
primarily driven by lower unit volumes. Net sales of specialty building products
and
42
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
accessories were $36.9 million for the second quarter of 2007 as compared with
$23.4 million for the second quarter of 2006. Net sales of specialty building
products and accessories for the second quarter of 2007 included $14.3 million
of net sales of specialty building products and accessories related to Elk.
Excluding net sales of specialty business products and accessories of Elk, we
had net sales of specialty business products and accessories of $22.6 million in
the second quarter of 2007.
Gross Margin. Our overall gross margin was $177.3 million or 26.7% of net sales
for the second quarter of 2007. Included in our overall gross margin was $10.8
million of restructuring and other expenses, which were included in cost of
products sold and $57.5 million of gross margin related to Elk. Excluding these
items, our overall gross margin would have been $130.6 million or 27.9% of net
sales compared with $166.8 million or 31.1% of net sales for the second quarter
of 2006. The decrease in our overall gross margin is primarily attributable to a
decrease in net sales driven by lower unit volumes and higher raw material
costs.
Income (loss) before Interest Expense and Income Taxes. We had a loss before
interest expense and income taxes in the second quarter of 2007 of $14.7 million
or 2.2% of net sales, compared to income before interest expense and income
taxes of $48.7 million or 9.1% of net sales for the second quarter of 2006. Our
loss before interest expense and income taxes in the second quarter of 2007
included $65.8 million of restructuring and other expenses, of which $10.8
million was included in cost of products sold. Excluding these items, the second
quarter of 2007 income before interest expense and income taxes was $51.1
million or 7.7% of net sales, which includes $22.1 million of income before
interest expense and income taxes resulting from Elk's operations. Excluding the
impact of Elk operations, income before interest expense and income taxes for
the second quarter of 2007 was $29.0 million or 6.2% of net sales. The decrease
in the second quarter of 2007 income before interest expense and income taxes
was primarily due to a decrease in net sales of residential roofing products and
higher raw material costs, partially offset by lower selling, general and
administrative expenses mostly due to lower volume related distribution costs.
Six Months 2007 Compared With
Six Months 2006
We recorded a net loss of $59.8 million in the first six months of 2007
compared to net income of $30.6 million in the first six months of 2006. Our net
loss in the first six months of 2007 included $46.7 million of after-tax ($65.8
million pre-tax) restructuring and other expenses, of which $7.7 million after
tax ($10.8 million pre-tax) was included in cost of products sold related to the
integration of Elk operations and $16.5 million of after-tax ($23.2 million
pre-tax) debt restructuring costs also related to the
43
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
acquisition. Included in restructuring and other expenses are plant closure
related expenses related to the closure of these facilities along with the
write-down of certain plant assets of the closed facilities, integration-related
costs and the write-down of certain inventories. Excluding these items, the
first six months of 2007 net income was $3.4 million, which included Elk's
operations from the date of acquisition. The decrease in net income for the
first six months of 2007 was primarily attributable to approximately $64.4
million of higher interest expense primarily due to the acquisition of Elk and
lower income before interest expense and income taxes.
Net sales for the first six months of 2007 were $1,193.3 million
compared to the first six months of 2006 net sales of $1,040.9 million. Net
sales for the first six months of 2007 included $287.9 million of net sales
related to Elk from the date of acquisition. Excluding net sales of Elk, our net
sales for the first six months of 2007 were $905.4 million. The decrease in the
first six months of 2007 net sales was primarily due to lower net sales of both
residential and commercial roofing products. The decrease in net sales of
residential roofing products was primarily driven by lower unit volumes
resulting from the softer market demand, while the decrease in commercial
roofing products was primarily driven by lower unit volumes, partially offset by
a higher average selling price.
Income before interest expense and income taxes in the first six months
of 2007 was $10.8 million compared to $79.9 million in the first six months of
2006. Our income before interest expense and income taxes in the first six
months of 2007 included $65.8 million of restructuring and other expenses, of
which $10.8 million was included in cost of products sold. Excluding these
items, the first six months of 2007 income before interest expense and income
taxes was $76.6 million, which includes $28.5 million of income before interest
expense and income taxes resulting from Elk's operations from the date of
acquisition. Excluding the impact of Elk operations, income before interest
expense and income taxes for the first six months of 2007 was $48.1 million. The
decrease in the first six months of 2007 income before interest expense and
income taxes was primarily due to a decrease in net sales of both residential
and commercial roofing products and higher raw material costs, partially offset
by lower selling, general and administrative expenses mostly due to lower volume
related distribution costs.
Interest expense in the first six months of 2007 increased to $95.0
million as compared to $30.6 million in the first six months of 2006. Interest
expense in the first six months of 2007 included $23.2 million of debt
restructuring costs and an additional $2.6 million of interest expense of Elk
from the date of acquisition. Included in debt restructuring costs are the
tender premiums and write-off of the remaining deferred financing fees and
discounts associated with the then outstanding 2007 and 2008 senior notes of
BMCA and all of the then outstanding senior notes of Elk, all of which were
redeemed in the first quarter of 2007. Excluding the impact of
44
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
the debt restructuring costs and the additional Elk interest, interest expense
for the first six months of 2007 was $69.2 million. The increase in the first
six months of 2007 interest expense was primarily due to higher average
borrowings, due to the acquisition of Elk and a slightly higher average interest
rate.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the first six months of 2007 were
$1,135.3 million compared to $1,002.0 million for the first six months of 2006.
Net sales of roofing products for the first six months of 2007 include $269.0
million of net sales of roofing products related to Elk from the date of
acquisition. Excluding net sales of roofing products of Elk, we had net sales of
roofing products of $866.3 million in the first six months of 2007. The decrease
in net sales of residential roofing products was primarily driven by lower unit
volumes and a slightly lower average selling price, while the decrease in
commercial roofing products was primarily driven by lower unit volumes,
partially offset by a higher average selling price. Net sales of specialty
building products and accessories were $58.0 million for the first six months of
2007 as compared with $38.9 million for the first six months of 2006. Net sales
of specialty building products and accessories for the first six months of 2007
included $18.9 million of net sales of specialty building products and
accessories related to Elk from the date of acquisition. Excluding net sales of
specialty business products and accessories of Elk, we had net sales of
specialty business products and accessories of $39.1 million in the first six
months of 2007.
Gross Margin. Our overall gross margin was $314.4 million or 26.3% of net sales
for the first six months of 2007. Included in our overall gross margin was $10.8
million of restructuring and other expenses, which were included in cost of
products sold and $81.9 million of gross margin related to Elk. Excluding these
items, our overall gross margin would have been $243.3 million or 26.9% of net
sales compared with $312.3 million or 30.0% of net sales for the first six
months of 2006. The decrease in our overall gross margin is primarily
attributable to a decrease in net sales driven by lower unit volumes and higher
raw material costs.
Income before Interest Expense and Income Taxes. Income before interest expense
and income taxes in the first six months of 2007 was $10.8 million or 0.9% of
net sales, compared to income before interest expense and income taxes of $79.9
million or 7.7% of net sales in the first six months of 2006. Our income before
interest expense and income taxes in the first six months of 2007 included $65.8
million of restructuring and other expenses, of which $10.8 million was included
in cost of products sold. Excluding these items, the first six months of 2007
income before interest expense and income taxes was $76.6 million or 6.4% of net
sales, which includes $28.5 million of
45
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
income before interest expense and income taxes resulting from Elk's operations
from the date of acquisition. Excluding the impact of Elk operations, income
before interest expense and income taxes for the first six months of 2007 was
$48.1 million or 5.3% of net sales. The decrease in the first six months of 2007
income before interest expense and income taxes was primarily due to a decrease
in net sales of both residential and commercial roofing products and higher raw
material costs, partially offset by lower selling, general and administrative
expenses mostly due to lower volume related distribution costs.
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 $600.0 million
Senior Secured Revolving Credit Facility due February 2012, which we refer to as
our Senior Secured Revolving Credit Facility (see Long-Term Debt), to support
our overall cash flow requirements during these periods. We expect to continue
to rely on our cash and cash equivalents on hand and external financings to
maintain operations over the short and long-term and to continue to have access
to the financing markets, subject to the then prevailing market terms and
conditions.
Net cash outflow from operating and investing activities was $1,092.6
million during the first six months of 2007, including $945.6 million related to
the acquisition of Elk, net of $0.1 million of cash acquired, the reinvestment
of $55.5 million for capital programs and an acquisition of land and buildings
in Fresno, California and $91.5 million of cash used in operations.
46
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Cash invested in additional working capital totaled $116.1 million
during the first six months of 2007, reflecting an increase in total accounts
receivable of $177.8 million, due to the seasonality of our business, a $45.6
million decrease in inventories to meet our anticipated operating demands and
due to the decline in the housing market, a $4.1 million increase in other
current assets, a $25.6 million increase in accounts payable and accrued
liabilities and an increase in net payments of $5.4 million for restructuring
and other expenses. The net cash used in operating activities also included an
$8.1 million net increase in the payable to related parties/parent corporations,
due to an $8.1 million increase in amounts due under our long-term granule
supply agreement with an affiliated company. In addition, net cash used in
operating activities included $65.8 million in restructuring and other expenses,
which primarily included a $41.9 million write-down of property, plant and
equipment.
Net cash provided by financing activities totaled $1,136.6 million
during the first six months of 2007, including $2,188.7 million of aggregate
proceeds from the issuance of long-term debt, related to 2007 year to date
cumulative borrowings of $862.8 million under our new $600.0 million Senior
Secured Revolving Credit Facility and our old $450.0 million Senior Secured
Revolving Credit Facility, which we refer to as our Old Senior Secured Revolving
Credit Facility. In addition, proceeds from the issuance of long-term debt
included $975.0 million under our new $975.0 million Term Loan Facility, which
we refer to as the Term Loan, $325.0 million under our new $325.0 million Junior
Lien Term Loan Facility, which we refer to as the Junior Lien Term Loan and
$25.9 million of borrowings under the old Elk Revolving Credit Facility, see
(Long-Term Debt). Financing activities also included $1,018.0 million in
aggregate repayments of long-term debt, of which $538.8 million related to first
quarter of 2007 cumulative repayments under our Senior Secured Revolving Credit
Facility and our Old Senior Secured Revolving Credit Facility, $28.6 million
related to repayments under the old Elk Revolving Credit Facility and $4.9
million related to repayments under the Term Loan. In addition, repayments of
long-term debt included $97.5 million related to our outstanding 8% Senior Notes
due 2007, which we refer to as the 2007 Notes, $150.1 million related to our
outstanding 8% Senior Notes due 2008, which we refer to as the 2008 Notes, $25.0
million related to the then outstanding Elk 6.28% Senior Notes due 2007, $60.0
million related to the then outstanding Elk 6.99% Senior Notes due 2009, $60.0
million related to the then outstanding Elk 7.49% Senior Notes due 2012 and
$50.0 million related to the then outstanding Elk 6.28% Senior Notes due 2014.
In addition, financing activities also included $33.8 million in
financing fees and expenses, related to debt restructuring costs, including the
tender premiums and write-off of the remaining deferred financing fees and
discounts associated with the aforementioned senior notes and the Old Senior
Secured Revolving Credit Facility.
47
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Acquisitions
On February 9, 2007, BMCA Acquisition Sub Inc., which we refer to as
BMCA Acquisition Sub, and BMCA Acquisition Inc., which together with BMCA
Acquisition Sub, we collectively refer to as the Purchasers, both wholly-owned
subsidiaries of BMCA, entered into a merger agreement with Elk, which we refer
to as the Merger Agreement. On February 22, 2007, an equity tender offer closed
and, as a result thereof (and the purchase of shares from one of its affilates),
BMCA Acquisition Sub owned approximately 90% of Elk's shares at a purchase price
of $43.50 per share. In accordance with the Merger Agreement, the remaining Elk
shares were converted in a second step merger into the right to receive $43.50
per share in cash. On March 26, 2007, BMCA completed the merger, pursuant to
which BMCA Acquisition Sub was merged with and into Elk, which then became an
indirect wholly-owned subsidiary of BMCA. The acquisition of the Elk shares was
completed at a purchase price of approximately $945.6 million, net of $0.1
million of cash acquired and net of $195.0 million of the then outstanding Elk
senior notes which were repaid in March 2007.
We financed the purchase of Elk, and refinanced certain of BMCA's then
outstanding debt and repaid all of Elk's then outstanding senior notes of $195.0
million with the proceeds from our new senior secured credit facilities. Our new
senior secured credit facilities consist of a $600.0 million Senior Secured
Revolving Credit Facility, a $975.0 million Term Loan and a $325.0 million
Junior Lien Term Loan facility maturing on September 15, 2014. See Long-Term
Debt.
We believe the acquisition of Elk will strategically position us for
future growth in the roofing industry and other building product markets. The
acquisition is expected to provide us with an increased market leadership
position, create comprehensive market-leading product offerings, generate
natural cost savings from synergies, including plant rationalization and
re-alignment of distribution networks, raw material procurement, administrative
and logistical efficiencies, and leverage the organizational strengths of both
BMCA and Elk.
The Elk acquisition was accounted for under the purchase method of
accounting as prescribed by Statement of Financial Accounting Standards, which
we refer to as SFAS, No. 141 "Business Combinations," which we refer to as SFAS
No. 141, which requires the total purchase price to be allocated to the fair
value of assets acquired and liabilities assumed based on their fair values at
the acquisition date, with amounts exceeding their fair value being
48
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
recorded as goodwill. The allocation process will require an analysis of plant,
property and equipment, inventories, customer lists and relationships,
contractual commitments and brand strategies, among others to identify and
record the fair value of assets acquired and liabilities assumed. In connection
with the acquisition, we used an economic life of 5 to 40 years for land
improvements, 10 to 40 years for buildings and building improvements, 3 to 30
years for machinery and equipment, which includes furniture and fixtures, and 5
to 14 years for intangible assets.
In valuing acquired assets and assumed liabilities, fair values will be
based on, but not limited to: future expected discounted cash flows for trade
names and customer relationships, current replacement costs for similar capacity
and obsolescence for certain fixed assets and inventory; and comparable market
rates for contractual obligations, including real estate and liabilities. We
will utilize an independent valuation of the assets and liabilities acquired
from Elk and expect this valuation to be completed by the end of 2007. At July
1, 2007, we recorded $612.9 million of goodwill and $15.9 million of intangible
assets, net of amortization since the date of acquisition, related to the
acquisition of Elk based on our best estimate at such date. Once the independent
valuation is completed, changes to the amounts recorded at July 1, 2007 will be
recorded and material adjustments to goodwill may result. The operating results
of the Elk acquisition are included in our results of operations from the date
of acquisition.
The following unaudited pro-forma consolidated results of operations
assume the acquisition of Elk was completed as of January 1st for each of the
three month and six month periods presented below:
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2007 2006 2007 2006
---------- ---------- ---------- ----------
(MILLIONS)
Net sales ....................... $ 663.3 $ 777.7 $ 1,267.0 $ 1,525.8
---------- ---------- ---------- ----------
Income (loss) before interest and
income taxes ................... (13.5) 74.2 (15.7) 126.1
---------- ---------- ---------- ----------
Net income (loss) ............... $ (42.0) $ 23.8 $ (87.3) $ 33.4
========== ========== ========== ==========
The unaudited pro-forma consolidated results of operations for the
three-month and six-month periods ended July 1, 2007 include $65.8 million
pre-tax ($46.7 million after-tax) of restructuring and other expenses, of which
$10.8 million pre-tax ($7.7 million after-tax) was included in cost of products
sold, related to the acquisition of Elk. In addition, the unaudited
49
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
pro-forma consolidated results of operations for the six-month period ended July
1, 2007 above includes $13.6 million of merger-related expenses of Elk and $23.2
million of debt restructuring costs of both BMCA and Elk related to the
acquisition of Elk.
Our pro-forma results include a reduction in compensation expense
related to Elk employees who were terminated due to the acquisition of Elk of
$1.3 and $2.5 million for the three-month periods ended July 1, 2007 and July 2,
2006, respectively and $3.6 and $4.9 million for the six month periods ended
July 1, 2007 and July 2, 2006, respectively.
In addition, our pro-forma results for the three-month period ended
July 2, 2006 and the six-month periods ended July 1, 2007 and July 2, 2006
include additional interest expense associated with variable rate debt
instruments based on LIBOR plus a specified fixed margin, due to the acquisition
of Elk. A 1/8% change in these variable interest rates would result in a plus or
minus $0.5 million in interest expense for the three-month period ended July 2,
2006 and a plus or minus $0.3 and $1.0 million in interest expense for the
six-month periods ended July 1, 2007 and July 2, 2006, respectively.
Pro-forma data may not be indicative of the results that would have
been achieved had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
On March 2, 2007, we acquired two parcels of land and buildings located
in Fresno, California. The acquisition was accounted for under the purchase
method of accounting. Accordingly, the purchase price was allocated to the fair
value of the identifiable assets acquired, which consisted almost entirely of
land and buildings. The operating results of the Fresno land and buildings are
included in our results of operations from the date of acquisition.
During the second quarter of 2007, we initiated the implementation of a
restructuring plan, which we refer to as the 2007 Restructuring Plan, which was
formulated upon the acquisition of Elk on February 22, 2007. See Restructuring
and Other Expenses below. In connection with the acquisition of Elk, we have
currently identified $69.7 million in purchase accounting adjustments, which
primarily relate to the establishment of a change of control accrual, employee
severance payments and integration-related expenses, which include
inventory-related valuation write-downs, lease termination expenses and other
integration-related expenses. Furthermore, we plan to utilize our independent
valuation of property, plant and equipment and intangible assets acquired from
Elk to complete our purchase price allocation by the end of 2007. We
50
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
account for our purchase accounting adjustments in accordance with the guidance
in FASB Emerging Issues Task Force, which we refer to as EITF, No. 95-3
"Recognition of Liabilities in Connection with a Purchase Business Combination,"
which we refer to as EITF No. 95-3. We have incurred $60.8 million of the
aforementioned purchase accounting adjustments as of July 1, 2007, of which
$54.6 million was incurred in the second quarter of 2007 and $6.2 million was
incurred in the first quarter of 2007(see table below), as adjustments to
goodwill and is included in the purchase price of Elk. We expect to accrue the
remaining $8.9 million of identified purchase accounting adjustments as incurred
and effectively utilize our accrual by our first quarter ending 2008.
Our employee severance payments included the termination of
approximately 100 Elk employees, including certain management level positions,
in the manufacturing and selling and administrative functional areas.
DISCON-
EMPLOYEE TINUED CHANGE
INTEGRATION SEVERANCE OPERATIONS OF
PURCHASE ACCOUNTING ACCRUALS EXPENSES PAYMENTS EXPENSES CONTROL TOTAL
- ---------------------------- -------- -------- -------- -------- --------
(THOUSANDS)
Beginning Balance, as of
December 31, 2006...................... $ -- $ -- $ -- $ -- $ --
Accrued costs incurred due to the
acquisition of Elk .................... 5,785 -- 415 -- 6,200
-------- -------- -------- -------- --------
Balance, as of April 1, 2007 ........... 5,785 -- 415 -- 6,200
Additional accrued costs incurred due to
the acquisition of Elk ................ 19,624 2,400 -- -- 22,024
Accrued costs incurred related to change
in control escrow account ............. -- -- -- 32,574 32,574
Cash Payments .......................... (224) (1,773) -- -- (1,997)
Amount charged to directly write-off
inventory ............................. (4,071) -- -- -- (4,071)
Non-cash items ......................... -- -- -- (8,889) (8,889)
-------- -------- -------- -------- --------
Ending Balance, as of July 1, 2007 ..... $ 21,114 $ 627 $ 415 $ 23,685 $ 45,841
======== ======== ======== ======== ========
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.
Restructuring and Other Expenses
During the second quarter of 2007, we initiated our 2007 Restructuring
Plan, which was formulated upon the acquisition of Elk on February 22, 2007. The
2007 Restructuring Plan was created to eliminate cost redundancies recognized
due to the acquisition of Elk, to reduce our current cost
51
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
structure and is expected to be fully implemented by the end of our first
quarter of 2008. We account for our restructuring activities in accordance with
the guidance of SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," which we refer to as SFAS No. 146 and SFAS No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets," which we
refer to as SFAS No. 144.
In connection with the acquisition of Elk, we have identified $89.2
million in restructuring and other expenses, of which $41.9 million relates to
property, plant and equipment write-downs at certain of our manufacturing
facilities and $18.0 million of plant closing expenses. The plants included in
restructuring and other expenses reflected above were Erie, Pennsylvania,
Stockton, California, Millis, Massachusetts and Hollister, California.
Restructuring and other expenses also include $2.0 million in employee severance
payments and $27.3 million in integration-related expenses, which primarily
consist of $12.2 million of inventory-related valuation write-downs, $1.4
million of lease termination expenses and $13.7 million of other integration
expenses. We recorded $65.8 million of the aforementioned restructuring and
other expenses as of July 1, 2007, all of which was recorded in the second
quarter of 2007 (see table below), of which $10.8 million was charged to cost of
products sold and $55.0 million was charged to restructuring and other expenses
in our statement of operations. We expect to incur the remaining $23.4 million
of identified restructuring and other expenses and effectively utilize our
accrual by our first quarter ending 2008.
Our employee severance payments included the termination of
approximately 50 BMCA employees, including certain management positions, in the
manufacturing and selling and administrative functional areas.
52
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
PP&E PLANT EMPLOYEE
RESTRUCTURING AND WRITE- CLOSING SEVERANCE INTEGRATION
OTHER EXPENSES DOWN EXPENSES PAYMENTS EXPENSES TOTAL
- ----------------- -------- -------- -------- -------- --------
(THOUSANDS)
Beginning Balance, as of
December 31, 2006 ............ $ -- $ -- $ -- $ -- $ --
Accrued costs incurred due to
the acquisition of Elk ....... -- -- -- -- --
-------- -------- -------- -------- --------
Balance, as of April 1, 2007... -- -- -- -- --
Additional accrued costs
incurred due to the
acquisition of Elk ........... 41,919 7,234 2,000 14,640 65,793
Cash Payments ................. -- (2,784) (800) (1,800) (5,384)
Amount charged to
property, plant and equipment
for asset write-down ........ (41,919) -- -- -- (41,919)
-------- -------- -------- -------- --------
Ending Balance, as of
July 1, 2007 ................. $ -- $ 4,450 $ 1,200 $ 12,840 $ 18,490
======== ======== ======== ======== ========
Long-Term Debt
On February 22, 2007, BMCA and the Purchasers entered into senior
secured credit facilities consisting of a new $975 million Term Loan, a new $600
million Senior Secured Revolving Credit Facility and a $325 million bridge loan
facility, which we refer to as the Bridge Loan, which was replaced by a $325
million Junior Lien Term Loan, which we collectively refer to as the Credit
Facilities.
The initial borrowings under these Credit Facilities were used (i) to
pay for shares tendered by Elk shareholders in an equity tender offer, (ii) to
repay amounts outstanding under BMCA's Old Senior Secured Revolving Credit
Facility, (iii) to make payments in connection with the completion by BMCA and
Building Materials Manufacturing Corporation, which we refer to as BMMC, of the
tender offer and consent solicitation for their 2007 Notes, (iv) to make
payments in connection with the completion by BMCA of its previously announced
tender offer and consent solicitation for its outstanding 2008 Notes, (v) to pay
for transaction fees and expenses incurred in connection with each of the
foregoing transactions and (vi) to repay all of the existing Elk senior note
debt.
53
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
The Senior Secured Revolving Credit Facility has a maturity date of
February 22, 2012. All amounts outstanding under the Senior Secured Revolving
Credit Facility are secured by a first priority perfected security interest in
all receivables, inventory, precious metals, deposit accounts and other current
assets of BMCA and its domestic subsidiaries and all proceeds thereof, which we
refer to as the Senior Secured Revolving Credit Facility Collateral.
Availability under the Senior Secured Revolving Credit Facility is
based upon eligible accounts receivable, inventory and precious metals used in
the production of inventory, as defined, and includes a sub-limit for letters of
credit of $150 million. Loans under the Senior Secured Revolving Credit Facility
will bear interest at a variable rate based upon either the Base Rate or the
Eurodollar Rate as defined in the Senior Secured Revolving Credit Facility, at
the borrower's option, plus a specified margin in each case. These interest
rates will be recalculated periodically based on changes in the Base Rate or
Eurodollar Rate and also based on an availability based pricing grid. The Senior
Secured Revolving Credit Facility requires us to pay unused commitment fees. The
Senior Secured Revolving Credit Facility provides for optional reductions in the
overall $600 million commitment, under certain conditions. In addition, the
Senior Secured Revolving Credit Facility provides for optional and mandatory
pre-payments of borrowings outstanding under the Senior Secured Revolving Credit
Facility, subject to certain conditions. The Senior Secured Revolving Credit
Facility also provides the borrowers with the ability to increase the size of
the facility by up to $350 million, depending on the ability to obtain
commitments from lenders and meeting specified conditions.
Under the terms of the Senior Secured Revolving Credit Facility, the
borrowers are subject to an interest coverage ratio financial covenant when
liquidity falls below a specified threshold. In addition, the borrowers are also
required to comply with other customary covenants and various restrictive
covenants, including with respect to incurring additional indebtedness or
guarantees, creating liens or other encumbrances, making capital expenditures,
making restricted payments, including dividends and distributions to BMCA's
parent corporations, and making certain investments. In the event of a change of
control of BMCA, as defined, the Senior Secured Revolving Credit Facility could
be accelerated by the holders of that indebtedness. On March 12, 2007, the
Senior Secured Revolving Credit Facility was amended, which did not result in
any material changes to the facility.
The Term Loan will mature on February 22, 2014. All amounts outstanding
under the Term Loan are secured by (i) a first priority perfected security
interest in substantially all of the assets and properties of BMCA and its
domestic subsidiaries, other than the Senior Secured Revolving Credit Facility
Collateral, which we refer to as the Term Loan Collateral, and (ii) a second
priority perfected security interest in the Senior Secured Revolving Credit
Facility Collateral.
54
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Amounts due under the Term Loan will bear interest at a variable rate
based upon either the Base Rate or Eurodollar Rate, as defined in the Term Loan,
at the borrower's option, plus a specified margin in each case. These interest
rates will be recalculated periodically based on changes in the Base Rate and
Eurodollar Rate, if applicable. The Term Loan requires us to pay unused
commitment fees. In addition, the Term Loan provides for optional and mandatory
pre-payments under certain conditions. The Term Loan also provides the borrowers
with the ability to increase the size of the facility by up to $250 million
(less any increase in the Senior Secured Revolving Credit Facility in excess of
$100 million), depending on the ability to obtain commitments from lenders and
meeting specified conditions.
Under the terms of the Term Loan, the borrowers are subject to an
interest coverage ratio financial covenant, as defined, and a leverage ratio
financial covenant, as defined, each of which will need to be complied with
starting as of the end of BMCA's second fiscal quarter in 2008. In addition, the
borrowers are also required to comply with various restrictive covenants,
including with respect to incurring additional indebtedness or guarantees,
creating liens or other encumbrances, making capital expenditures, making
restricted payments, including dividends and distributions to BMCA's parent
corporations, and making certain investments. In the event of a change of
control of BMCA, as defined, the Term Loan could be accelerated by the holders
of that indebtedness. On March 15, 2007, the Term Loan was amended, which did
not result in any material changes to the facility.
The Bridge Loan would have converted into a term loan maturing on
February 22, 2015, however it was amended and restated on March 15, 2007, and
redesignated as the Junior Lien Term Loan.
The Junior Lien Term Loan matures on September 15, 2014. All amounts
outstanding under the Junior Lien Term Loan are secured by (i) a second priority
perfected security interest in the Term Loan Collateral and (ii) a third
priority perfected security interest in the Senior Secured Revolving Credit
Facility Collateral. Loans under the Junior Lien Term Loan will bear interest at
a variable rate based upon either the Base Rate or Eurodollar Rate, as defined
in the Junior Lien Term Loan at the borrower's option, plus a specified margin
in each case. These interest rates will be recalculated periodically based on
changes in the Base Rate or Eurodollar Rate, as applicable. The Junior Lien Term
Loan provides for optional and mandatory prepayments under certain conditions.
55
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Under the terms of the Junior Lien Term Loan, the borrowers are subject
to a leverage ratio financial covenant, as defined, which will need to be
complied with starting as of the end of BMCA's second fiscal quarter in 2008.
The borrowers are also required to comply with various restrictive covenants,
including with respect to incurring additional indebtedness or guarantees,
creating liens or other encumbrances, making capital expenditures, making
restricted payments, including dividends and distributions to BMCA's parent
corporations and making certain investments. In the event of a change of control
of BMCA, as defined, the Junior Lien Term Loan could be accelerated by the
holders of that indebtedness.
On February 22, 2007, BMCA repurchased approximately $97.5 million, or
97.5%, of the aggregate principal amount outstanding of the 2007 Notes and
$150.1 million, or 96.9%, of the aggregate principal amount outstanding of the
2008 Notes. In connection with the completion of the tender offer for the 2007
Notes and the 2008 Notes in February 2007, substantially all of the covenants
included in the indentures governing the 2007 Notes and 2008 Notes were
eliminated.
On March 26, 2007, we repurchased all of Elk's then outstanding $25.0
million in aggregate principal amount of 4.69% Senior Notes due 2007, $60.0
million in aggregate principal amount of 6.99% Senior Notes due 2009, $60.0
million in aggregate principal amount of 7.49% Senior Notes due 2012 and $50.0
million in aggregate principal amount of 6.28% Senior Notes due 2014.
As of July 1, 2007, we had total outstanding consolidated indebtedness
of $2,016.0 million, which amount includes $52.8 million of demand loans to our
parent corporation and $16.3 million which matures prior to the end of the
second quarter of 2008. Our total outstanding consolidated indebtedness also
includes $384.0 million of borrowings outstanding under our $600.0 million
Senior Secured Revolving Credit Facility. We anticipate funding these
obligations principally from our cash and cash equivalents on hand, cash flow
from operations and/or borrowings under our Senior Secured Revolving Credit
Facility.
As of July 1, 2007, we were in compliance with all covenants under the
Senior Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term
Loan and the indentures governing the remaining 2007 Notes, the remaining 2008
Notes and the 7 3/4% Senior Notes due 2014, which we refer to as the 2014 Notes,
which together we collectively refer to as the Senior Notes. As of July 1, 2007,
the book value of the collateral securing the Senior Notes, the Term Loan, the
Junior Lien Term Loan and the Senior Secured Revolving Credit Facility was
approximately $2,587.9 million.
56
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
At July 1, 2007, we had outstanding letters of credit of approximately
$51.3 million, which includes approximately $10.5 million of standby letters of
credit related to certain obligations of G-I Holdings.
On January 3, 2006, we purchased and retired $6.3 million of industrial
revenue bond certificates issued by us in 1990 with respect to the Fontana,
California Industrial Revenue Development Bond, resulting in us becoming the
primary holder of such bond.
Fixed Income Interest Rate Swaps
In March 2007, we began entering into forward-starting Eurodollar rate
(LIBOR) based pay fixed income interest rate swaps related to our Term Loan with
an effective date of April 23, 2007 and a maturity date of April 23, 2012. If
forward interest rates increase during the term of the Term Loan agreement, the
swaps become assets on BMCA's consolidated balance sheet and BMCA will receive
interest payments on BMCA's quarterly interest payment date for its Term Loan.
If forward interest rates decline, the swaps become a liability on BMCA's
consolidated balance sheet and BMCA will be obligated to make payments on its
quarterly interest payment date for its Term Loan.
According to SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities," which we refer to as SFAS No. 133, BMCA's hedging activity
is treated as cash flow hedges. At July 1, 2007, we had no ineffectiveness in
our hedging transactions. Therefore, for the quarter ended July 1, 2007, we,
based on the change in the LIBOR rate, reflected in other noncurrent assets the
cumulative changes in the fair value of the derivative instrument when compared
to cumulative changes in the present value of the expected future interest cash
flows that are attributable to changes in the benchmark LIBOR swap rate. BMCA's
offset to the related asset was reflected in other comprehensive income, net of
tax. The current period activity therefore marks the swaps instrument to market
or fair value and adjusts other comprehensive income, net of tax to the
cumulative effect change.
On each LIBOR reset date, we will test our fixed income interest rate
swaps to determine if the swaps contain any ineffectiveness. If BMCA's fixed
income swaps contain any ineffectiveness as of any subsequent test date, we will
reflect the effective portion of the offset to our related asset or liability as
a component of other comprehensive income and the ineffective portion will be
recorded through our results of operations.
At July 1, 2007, based on changes in the closing LIBOR rate as of July
1, 2007, we recorded a fair value gain on our fixed income interest rate swaps
of $13.3 million to other noncurrent assets, while the offset was recorded to
other comprehensive income, net of tax of $5.0 million. The Company also
recorded $0.6 million in interest income related to its fixed income interest
rate swaps.
57
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Intercompany Transactions
We make loans to, and borrow from, our parent corporations from time to
time at prevailing market rates. As of July 1, 2007 and July 2, 2006, BMCA
Holdings Corporation owed us $56.1 and $55.9 million, including interest of $0.8
and $0.6 million, respectively, and we owed BMCA Holdings Corporation $52.8 and
$52.8 million, with no unpaid interest payable to BMCA Holdings Corporation,
respectively. Interest income on our loans to BMCA Holdings Corporation amounted
to $1.2 and $1.2 million during the second quarter ended July 1, 2007 and July
2, 2006, respectively and $2.5 and $2.4 million during the six month period
ended July 1, 2007 and July 2, 2006, respectively. Interest expense on our loans
from BMCA Holdings Corporation amounted to $1.2 and $1.2 million during the
second quarter ended July 1, 2007 and July 2, 2006, respectively and $2.4 and
$2.3 million during the six month period ended July 1, 2007 and July 2, 2006,
respectively. Loans payable to/receivable from any parent corporation are due on
demand and provide each party with the right of offset of its related obligation
to the other party and are subject to limitations as outlined in the Senior
Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term Loan and
our Senior Notes. Under the terms of the Senior Secured Revolving Credit
Facility and the indentures governing our Senior Notes at July 1, 2007, we could
repay demand loans to our parent corporation amounting to $52.8 million, subject
to certain conditions. We also make non-interest bearing advances to affiliates,
of which no balance was outstanding as of July 1, 2007 and July 2, 2006. In
addition, for the six months ended July 1, 2007 and July 2, 2006, no loans were
owed or other lending activities were entered into by us to other affiliates.
We also have a management agreement with ISP Management Company, Inc.,
a subsidiary of International Specialty Products Inc. (which, together with its
subsidiaries, we refer to as ISP,) an affiliate, which we refer to as the ISP
Management Agreement, to provide us with certain management services. The
aggregate amount payable to ISP Management Company, Inc. under the ISP
Management Agreement, inclusive of the services provided to G-I Holdings, has
not yet been finalized; however, based on services provided to date in 2007 and
after adjusting for inflationary factors, it is estimated to be similar to the
$6.1 million paid in 2006. We do not expect any changes to the ISP Management
Agreement to have a material impact on our results of operations.
We purchase a substantial portion 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 ours and 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 second quarter ended July 1, 2007 and the year ended December 31, 2006, we
purchased $52.1 and $102.3 million, respectively, of mineral products from
Minerals under this contract.
58
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Included in current assets as a tax receivable from parent corporation
is $9.1 and $9.1 million at July 1, 2007 and December 31, 2006, respectively,
representing amounts paid in excess of amounts due to G-I Holdings under the 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.
Income Taxes
We adopted Financial Accounting Standards Board, which we refer to as,
FASB, Interpretation No. 48, which we refer to as FIN 48, as of January 1, 2007
in a manner that is consistent with the provisions of FSP FIN 48-1 (see below)
and, as a result of the adoption, we reviewed certain tax positions and did not
need to recognize any material adjustment to our accruals for uncertain tax
positions. At January 1, 2007 and July 1, 2007, we had approximately $13.1 and
$15.1 million, respectively, of unrecognized tax benefits, all of which would
affect our effective tax rate if recognized.
For years prior to 2007, we and our subsidiaries were subject to United
States federal income tax as well as the income tax of multiple state
jurisdictions. We have substantially concluded all United States federal income
tax matters for years through 2004. The tax years 2005 and 2006 remain open to
examination by the Internal Revenue Service (IRS). Substantially all material
state and local matters have been concluded for tax years through 2001. The tax
years 2002 through 2006 remain open to examination by the major state taxing
jurisdictions to which we are subject.
Our continuing practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. As of January 1, 2007 and
July 1, 2007, we had $1.7 and $2.2 million, respectively of accrued interest and
$2.1 million, respectively of accrued penalties.
Our effective tax rate changed from 35.8% at the end of the first
quarter of 2007 to 29.0% at the end of the first six months of 2007 primarily
due to the impact of the estimated annual restructuring and other expense
charges to be taken in 2007, of which $65.8 million was included in our income
before interest expense and income taxes for the six month period ended July 1,
2007. In addition, the change in the effective tax rate was due to incremental
state taxes, resulting from the application of the provisions of FIN 48.
59
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Contingencies
See Note 13 to Consolidated Financial Statements for information
regarding contingencies.
Economic Outlook
We do not believe that inflation has had a material effect on our
results of operations during the first six months of 2007. 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 second quarter of 2007, the cost of asphalt continued to be
high relative to historical levels, which reflects in large part high crude oil
prices. Due to the strength of our manufacturing operations, which allows us to
use many types of asphalt, together with our ability to secure alternative
sources of supply, we do not anticipate that any future disruption in the supply
of asphalt will have a material impact on future net sales, although no
assurances can be provided in that regard.
To mitigate these and other petroleum-based cost increases, we
announced a price increase in the second quarter of 2007. 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
There have been no significant changes to our contractual obligations
during the second quarter ended July 1, 2007. For further discussion on our
Contractual Obligations related to minimum purchase obligations reference is
made to Management's Discussion and Analysis of Financial Condition and Results
of Operations "Contractual Obligations" in our 2006 Form 10-K and in our 2007
first quarter Form 10-Q, which we refer to as the 2007 first quarter Form 10-Q,
which was filed with the SEC on May 16, 2007.
New Accounting Pronouncements
In July 2006, the FASB, issued FIN 48 "Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken in a tax return. A reporting
entity must determine whether it is "more-likely-than-not" that a tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. Once it
is determined that a position meets the more-likely-than-not recognition
threshold, the position is measured to determine the amount of benefit to
recognize in the financial
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BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
New Accounting Pronouncements
statements. FIN 48 became effective for fiscal years beginning after December
15, 2006. In May 2007, the FASB issued FASB Staff Position, which we refer to as
FSP, FIN 48-1 "Definition of Settlement in FASB Interpretation No. 48," which we
refer to as FSP FIN 48-1, which amended FIN 48 to provide guidance on how a
reporting entity should determine whether a tax position is effectively settled
for the purpose of recognizing previously unrecognized tax benefits. Under FSP
FIN 48-1, a tax position will be considered effectively settled and any
previously unrecognized tax benefits should be recognized based on the terms of
settlement if (a) the taxing authority has completed its examination, including
all appeals, (b) the reporting entity does not intend to appeal or litigate any
aspect of the tax position and (c) based on the taxing authority's policies and
practices, the reporting entity considers it remote that the taxing authority
will re-examine the tax position. We adopted FIN 48 as of January 1, 2007 in a
manner that is consistent with the provisions of FSP FIN 48-1, and as a result
of the adoption, we reviewed certain tax positions and did not recognize any
material adjustment to our accruals for uncertain tax positions. See Income
Taxes.
In September 2006, 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 our first quarter of 2008 and, therefore, have not yet
determined the effect, if any, the adoption of SFAS No. 157 will have on our
results of operations or financial position.
In September 2006, the FASB 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, prohibits the use of the accrue-in-advance method
of accounting in annual and interim financial reporting periods for planned
major maintenance activities. FSP AUG AIR-1 previously allowed companies the
right to recognize planned major maintenance costs by accruing a liability over
several reporting periods before the maintenance was performed. FSP AUG AIR-1
still allows the direct expense, built-in-overhaul and deferral methods of
accounting as acceptable, however it mandates that companies apply the same
method of accounting in both interim and annual financial reporting periods and
that the method be retrospectively applied if applicable. FSP AUG AIR-1 is
effective for fiscal years beginning after December 15, 2006. We adopted the
provisions of FSP AUG AIR-1 in our first quarter of 2007. FSP AUG AIR-1 has not
had a material effect 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)
allowed companies the right to recognize planned major maintenance costs by
accruing a liability over several reporting periods before the maintenance was
performed. FSP AUG AIR-1 still allows the direct expense, built-in-overhaul and
deferral methods of accounting as acceptable, however it mandates that companies
apply the same method of accounting in both interim and annual financial
reporting periods and that the method be retrospectively applied if applicable.
FSP AUG AIR-1 is effective for fiscal years beginning after December 15, 2006.
We adopted the provisions of FSP AUG AIR-1 in our first quarter of 2007. FSP AUG
AIR-1 did not have a material effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115," which we refer to as SFAS No. 159. SFAS No. 159 permits
entities to elect to measure specified financial instruments and warranty and
insurance contracts at fair value on a contract-by-contract basis, with changes
in fair value recognized in earnings each reporting period. The election, called
the "fair value option," will enable some companies to reduce the volatility in
reported earnings caused by measuring related assets and liabilities
differently, and it is simpler than using the complex hedge-accounting
provisions of SFAS No. 133 to achieve similar results. SFAS No. 159 applies to
all entities and contains financial statement presentation and disclosure
requirements for assets and liabilities reported at fair value as a consequence
of the election. SFAS No. 159 is expected to expand the use of fair value
measurements for financial instruments. SFAS No. 159 is effective as of the
beginning of a company's first fiscal year that begins after November 15, 2007.
Retrospective application is not permitted. We will adopt the provisions of SFAS
No. 159 beginning in our first quarter of 2008 and therefore, have not yet
determined the effect, if any, the adoption of SFAS No. 159 will have on our
results of operations or financial position.
* * *
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BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe," "expect," "anticipate," "intend," "plan," "foresee" or other similar
words or phrases. Similarly, statements that describe our objectives, plans or
goals also are forward-looking statements. Our operations are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those contemplated by the relevant forward-looking statements. The
forward-looking statements included herein are made only as of the date of this
quarterly report on Form 10-Q and we undertake no obligation to publicly update
any forward-looking statements to reflect subsequent events or circumstances. We
cannot assure you that projected results or events will be achieved. See also
the "Risk Factors" in our 2006 Form 10-K and the risks identified in Part II of
our 2007 first quarter Form 10-Q.
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BUILDING MATERIALS CORPORATION OF AMERICA
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 2006 Form 10-K for a discussion of
"Market-Sensitive Instruments and Risk Management." Beginning in March 2007,
BMCA entered into fixed income interest rate swaps to hedge against fluctuations
in the variable interest rate of our $975.0 million Term Loan. See Note 6 to
Consolidated Financial Statements.
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 accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures.
Internal Control Over Financial Reporting: There were no significant
changes in our internal control over financial reporting identified in
management's evaluation during the second quarter of fiscal year 2007 that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
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BUILDING MATERIALS CORPORATION OF AMERICA
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of July 1, 2007, approximately 1,900 alleged asbestos-related bodily
injury claims relating to the inhalation of asbestos fiber were pending against
Building Materials Corporation of America. See Note 13 to Consolidated Financial
Statements in Part I.
ITEM 5. OTHER INFORMATION
EMPLOYMENT AGREEMENT WITH RICHARD A. NOWAK
- ------------------------------------------
On August 9, 2007, the Company entered into an employment agreement
with Richard A. Nowak. Mr. Nowak was appointed to the position of Executive Vice
President - Chief Operating Officer of the Company on August 9, 2007. Prior to
this position, Mr. Nowak held the position of President and Chief Operating
Officer of ElkCorp for more than five years.
The terms for Mr. Nowak's employment are generally as follows, subject
in all respects to the terms and conditions of the employment agreement, which
is being filed as Exhibit 10.1.
Mr. Nowak's employment term will continue through and including June
30, 2009, after which the Company will enter into a consulting agreement with
Mr. Nowak, which will continue through and including June 30, 2010. Mr. Nowak is
entitled to a signing bonus of $1,000,000 (subject to normal payroll practices),
payable in one lump sum within 30 days after his execution of the employment
agreement.
As Executive Vice President and Chief Operating Officer, Mr. Nowak will
receive an annual base salary of $504,400. On July 1st of each year, Mr. Nowak
will receive a salary increase equal to four percent (4%) of his annual base
salary at that time. Mr. Nowak will also be eligible for a discretionary bonus
payable on or about June 30, 2008 in the amount of $450,000, provided that he
achieves certain objectives set forth in the Synergy Plan. In addition, Mr.
Nowak will receive interim stay bonuses. On the first payroll period following
February 1, 2008, June 30, 2008 and June 30, 2009, he will receive one-time
payments of $400,000, $900,000 and $400,000, respectively (subject to normal
payroll practices) in exchange for remaining an employee through those dates.
Mr. Nowak will receive employee benefits similar to those provided to
other senior executives at his level.
Mr. Nowak is eligible to receive long term incentive units under the
2001 BMCA Long Term Incentive Unit Plan, as amended. Upon his execution of the
employment agreement, the Company granted Mr. Nowak 5,000 long term incentive
units, 35% of which vest on June 30, 2008 and 65% of which vest on June 30,
2009.
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BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 5. OTHER INFORMATION - (CONTINUED)
If, during the term of his employment, Mr. Nowak's employment is
terminated for any reason, including death, disability or for cause, he shall be
eligible to receive severance payments based on the timing of his termination.
If Mr. Nowak is terminated between August 9, 2007 and January 31, 2008, he will
receive $1,654,840, representing 1.1 times his current annual compensation
including the sign-on bonus. If Mr. Nowak is terminated between February 1, 2008
and June 30, 2008, he will receive $1,311,440, representing 2.6 times his then
current annual compensation (excluding bonuses). If Mr. Nowak is terminated
between July 1, 2008 and January 31, 2009, he will receive $419,660,
representing 0.80 times his then current annual compensation (excluding
bonuses). Mr. Nowak will not be eligible for severance pay if he is terminated
after January 31, 2009. If, during the term of his employment, Mr. Nowak
voluntarily terminates his employment, then he shall not be entitled to any
continuing salary payments, severance, benefits or other payments with the
exception of his eligibility for COBRA continuation coverage.
After the termination of his employment agreement, for the period from
July 1, 2009 through and including June 30, 2010, Mr. Nowak will provide
consulting services to the Company for which the Company will pay him a
consulting fee equal to $20,000 per month.
As required by the terms of his employment agreement, Mr. Nowak has
signed the Company's Agreement Regarding Confidentiality and Competition
pursuant to which, among other things, he agrees not to compete with the Company
and its affiliates in the roofing business by accepting employment with or
providing consulting services to any manufacturer that competes with the Company
or any of its affiliates during the term of his employment and for a two-year
period commencing July 1, 2009 and ending on June 30, 2011, in consideration of
which the Company would pay Nowak $180,000 at the rate of $7,500 per month.
EMPLOYMENT AGREEMENT WITH MATTI KIIK
- ------------------------------------
On August 9, 2007, the Company entered into an employment agreement
with Matti Kiik. Mr. Kiik was appointed to the position of Senior Vice President
- - Chief Technology Officer of the Company on August 9, 2007. Prior to this
position, Mr. Kiik held the position of Senior Vice President of Research and
Development of ElkCorp for more than five years.
The terms for Mr. Kiik's employment are generally as follows, subject
in all respects to the terms and conditions of the employment agreement, which
is being filed as Exhibit 10.2.
Mr. Kiik's employment term will continue through and including June 30,
2010, after which the Company will enter into a consulting agreement with Mr.
Kiik, which will continue through and including June 30, 2012. Mr. Kiik is
entitled to a signing bonus of $300,000 (subject to normal payroll practices),
payable in one lump sum within 30 days after his execution of the employment
agreement.
As Senior Vice President - Chief Technology Officer, Mr. Kiik will
receive an annual base salary of $275,000. On July 1st of each year, Mr. Kiik
will receive a salary increase equal to three percent (3%) of his annual base
salary at that time. Mr. Kiik will also be eligible for a discretionary bonus
payable on or about June 30, 2008 in the amount of $250,000, provided that he
achieves all objectives set forth in the Synergy Plan. In addition, Mr. Kiik
will receive interim stay bonuses. On the first payroll period following June
30, 2008, June 30, 2009 and June 30, 2010, he will receive one-time payments of
$250,000, $250,000 and $100,000, respectively (subject to normal payroll
practices) in exchange for remaining an employee through those dates.
Mr. Kiik will receive employee benefits similar to those provided to
other senior executives at his level.
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BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 5. OTHER INFORMATION - (CONTINUED)
Mr. Kiik is eligible to receive long term incentive units under the
2001 BMCA Long Term Incentive Unit Plan, as amended. Upon his execution of the
employment agreement, the Company granted Mr. Kiik 3,000 long term incentive
units, which vest as follows: 25% vest on June 30, 2008, 25% vest on June 30,
2009, and 50% vest on June 30, 2010.
If, during the term of his employment, Mr. Kiik's employment is
terminated by the Company for any reason, including death, disability or for
cause, he shall be eligible to receive severance payments based on the timing of
his termination. If Mr. Kiik is terminated between August 9, 2007 and June 30,
2008, he will receive $550,000, representing two times his current annual base
compensation (excluding bonuses). If Mr. Kiik is terminated between July 1, 2008
and June 30, 2009, he will receive $283,250, representing one times his then
current annual compensation (excluding bonuses). Mr. Kiik will not be eligible
for severance pay if he is terminated on or after July 1, 2009. If, during the
term of his employment, Mr. Kiik voluntarily terminates his employment, then he
shall not be entitled to any continuing salary payments, severance, benefits or
other payments with the exception of his eligibility for COBRA continuation
coverage.
After the termination of his employment agreement, for the period from
July 1, 2010 through and including June 30, 2012, Mr. Kiik will provide
consulting services to the Company for which the Company will pay him a
consulting fee equal to $8,333.33 per month.
As required by the terms of his employment agreement, Mr. Kiik has
signed the Company's Agreement Regarding Confidentiality and Competition
pursuant to which, among other things, he agrees not to compete with the Company
and its affiliates in the roofing business by accepting employment with or
providing consulting services to any manufacturer that competes with the Company
or any of its affiliates during the term of his employment and for a two-year
period commencing July 1, 2010 and ending on June 30 2012, in consideration of
which the Company will pay Mr. Kiik $100,000 at the rate of $4,166.67 per month.
ITEM 6. EXHIBITS
Exhibit
Number Description
10.1 Employment Agreement, dated August 9, 2007, between
Richard A. Nowak and GAF Materials Corporation.
10.2 Employment Agreement, dated August 9, 2007, between
Matti Kiik and GAF Materials Corporation.
31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of the
Chief Executive Officer.
31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer
and Chief Financial Officer.
67
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BUILDING MATERIALS CORPORATION OF AMERICA
BUILDING MATERIALS MANUFACTURING CORPORATION
DATE: August 15, 2007 BY: /s/John F. Rebele
----------------- ----------------------
John F. Rebele
Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
DATE: August 15, 2007 BY: /s/James T. Esposito
----------------- --------------------
James T. Esposito
Vice President and Controller
(Principal Accounting Officer)
68