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 SEPTEMBER 30, 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 November 14, 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 November 14, 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 November 14, 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)
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPT. 30, OCT. 1, SEPT. 30, OCT. 1,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net sales ....................... $ 680,741 $ 530,349 $ 1,874,002 $ 1,571,213
----------- ----------- ----------- -----------
Costs and expenses, net:
Cost of products sold ......... 493,434 372,250 1,372,316 1,100,842
Selling, general and
administrative................ 134,078 114,682 383,067 347,562
Amortization of intangible
assets ....................... 3,938 -- 3,938 --
Restructuring and other
expenses ..................... 24,628 -- 79,622 --
Other (income) expense, net ... (982) 132 (1,359) (386)
----------- ----------- ----------- -----------
Total costs and expenses, net. 655,096 487,064 1,837,584 1,448,018
----------- ----------- ----------- -----------
Income before interest expense
and income taxes ............... 25,645 43,285 36,418 123,195
Interest expense ................ (44,289) (15,771) (139,237) (46,352)
----------- ----------- ----------- -----------
Income (loss) before income
taxes .......................... (18,644) 27,514 (102,819) 76,843
Income tax (expense) benefit .... 7,463 (10,455) 31,874 (29,200)
----------- ----------- ----------- -----------
Net income (loss) ............... $ (11,181) $ 17,059 $ (70,945) $ 47,643
=========== =========== =========== ===========
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)
SEPT. 30, 2007 DEC. 31,
(UNAUDITED) 2006
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ........................................ $ 34,500 $ 7,777
Accounts receivable, trade, less allowance of $4,162 and $1,319 in
2007 and 2006, respectively ..................................... 424,286 190,859
Accounts receivable, other ....................................... 12,309 5,599
Income tax receivable ............................................ 11,968 --
Income tax receivable from parent corporation .................... 10,016 9,132
Inventories, net ................................................. 262,025 238,709
Deferred income tax assets ....................................... 37,073 21,710
Other current assets ............................................. 16,897 12,209
Discontinued operations - current assets ......................... 2,844 --
----------- -----------
Total Current Assets ........................................... 811,918 485,995
Property, plant and equipment, net ................................. 685,148 411,729
Goodwill ........................................................... 635,303 64,794
Intangible assets .................................................. 235,632 --
Other noncurrent assets ............................................ 125,393 67,323
Discontinued operations - noncurrent assets ........................ 1,355 --
----------- -----------
Total Assets ....................................................... $ 2,494,749 $ 1,029,841
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt ............................. $ 16,770 $ 102,918
Accounts payable ................................................. 143,078 90,951
Payable to related parties ....................................... 17,322 5,952
Loans payable to parent corporation .............................. 52,840 52,840
Accrued liabilities .............................................. 169,903 101,382
Product warranty claims .......................................... 13,500 9,000
Discontinued operations - current liabilities .................... 931 --
----------- -----------
Total Current Liabilities ...................................... 414,344 363,043
----------- -----------
Long-term debt ..................................................... 1,840,523 484,406
----------- -----------
Product warranty claims ............................................ 28,319 17,972
----------- -----------
Deferred income tax liabilities .................................... 134,807 39,551
----------- -----------
Other liabilities .................................................. 89,929 62,664
----------- -----------
Commitments and Contingencies - Note 14
Stockholders' Equity (Deficit):
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 ......................... (56,179) (56,031)
Retained earnings ................................................ 47,084 118,201
Accumulated other comprehensive income (loss) .................... (4,079) 34
----------- -----------
Total Stockholders' Equity (Deficit) ........................... (13,173) 62,205
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) ............... $ 2,494,749 $ 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)
NINE MONTHS ENDED
----------------------------
SEPT. 30, OCT. 1,
2007 2006
----------- -----------
Cash and cash equivalents, beginning of period ........ $ 7,777 $ 6,882
----------- -----------
Cash provided by (used in) operating activities:
Net income (loss) ................................... (70,945) 47,643
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation .................................... 50,655 36,582
Amortization .................................... 6,495 2,161
Restructuring and other expenses ................ 97,647 --
Deferred income taxes ........................... (36,141) (2,422)
Noncash interest charges ........................ 7,858 3,926
Increase in working capital items ................... (57,804) (179,648)
Increase in product warranty claims ................. 1,172 3,646
Increase in other assets ............................ (5,187) (1,164)
Increase (decrease) in other liabilities ............ 4,760 (116)
Change in net receivable from/payable to related
parties/parent corporations ....................... 10,486 3,070
Other, net .......................................... 577 629
----------- -----------
Net cash provided by (used in) operating activities ... 9,573 (85,693)
----------- -----------
Cash used in investing activities:
Acquisition of ElkCorp, net of cash acquired of
$0.1 million ....................................... (944,838) --
Capital expenditures and acquisitions ............... (67,113) (54,830)
----------- -----------
Net cash used in investing activities ................. (1,011,951) (54,830)
----------- -----------
Cash provided by financing activities:
Proceeds from issuance of long-term debt ............ 2,318,749 684,000
Purchase of industrial development revenue bond
certificates issued by the Company ................. -- (6,325)
Repayments of long-term debt ........................ (1,254,005) (535,256)
Distributions to parent corporation ................. (171) (521)
Loan to parent corporation .......................... (148) (141)
Financing fees and expenses ......................... (35,324) (1,990)
----------- -----------
Net cash provided by financing activities ............. 1,029,101 139,767
----------- -----------
Net change in cash and cash equivalents ............... 26,723 (756)
----------- -----------
Cash and cash equivalents, end of period .............. $ 34,500 $ 6,126
=========== ===========
-continued-
5
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
------------------------
SEPT. 30, OCT. 1,
2007 2006
--------- ---------
Supplemental Cash Flow Information:
Effect on cash from changes in working capital items:
Increase in accounts receivable trade and accounts
receivable other ....................................... (143,409) (68,934)
Increase in income tax receivable ....................... (4,623) --
(Increase) decrease in inventories, net ................. 93,545 (76,363)
(Increase) decrease in other current assets ............. 6,163 (341)
Increase (decrease) in accounts payable ................. 13,731 (29,205)
Increase (decrease) in accrued liabilities .............. 7,616 (4,805)
Payments for restructuring and other expenses ........... (30,827) --
--------- ---------
Net effect on cash from increase in working capital items $ (57,804) $(179,648)
========= =========
Cash paid during the period for:
Interest (net of amount capitalized of $2,167 and
$1,801 in 2007 and 2006, respectively) .............. $ 104,284 $ 45,822
Income taxes (including federal income taxes paid
to parent corporation pursuant to a tax sharing
agreement of $0 and $24,101 in 2007 and 2006,
respectively) ....................................... 1,658 25,029
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, ("date of acquisition") a subsidiary of BMCA acquired
approximately 90% of the outstanding common shares of ElkCorp ("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 Note 2 for a
description of the acquisition. 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 September 30, 2007, and
the results of its operations and its cash flows for the third quarter and nine
months ended September 30, 2007 and October 1, 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 and third
quarter ended September 30, 2007 due to the acquisition of Elk. Net sales of
roofing products and specialty building products and accessories are generally
seasonal in nature. Accordingly, the results of operations and cash flows 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 13.
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 $944.8 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 6.
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
it 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
date of acquisition, with amounts exceeding their fair value being recorded as
goodwill. The allocation process required 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 estimated 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
1 to 25 years for intangible assets.
In valuing acquired assets and assumed liabilities, fair values were
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 performed a valuation analysis of the assets and liabilities acquired
from Elk, which was substantially completed during the three-month period ended
September 30, 2007, and the Company expects to finalize its purchase price
allocation during the fourth quarter of 2007. At September 30, 2007, the Company
recorded $570.5 million of goodwill and $235.6 million of intangible assets, net
of amortization of $3.9 million (see Note 5), related to the acquisition of Elk
based on the completion of its valuation analysis. 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 nine-month periods presented below:
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------- ------------------------
SEPT. 30, OCT. 1, SEPT. 30, OCT. 1,
2007 2006 2007 2006
-------- -------- ---------- ----------
(MILLIONS)
Net sales ................ $ 680.7 $ 748.5 $ 1,947.7 $ 2,274.3
-------- -------- ---------- ----------
Income before interest and
income taxes ............ 23.8 61.4 6.7 184.4
-------- -------- ---------- ----------
Net income (loss) ........ $ (13.9) $ 14.0 $ (100.1) $ 43.7
======== ======== ========== ==========
The unaudited pro-forma consolidated results of operations for the
three-month and nine-month periods ended September 30, 2007 include $31.8 and
$97.6 million pre-tax ($21.9 and $67.3 million after-tax) of restructuring and
other expenses, respectively, of which $7.2 and $18.0 million pre-tax ($5.0 and
$12.4 million after-tax) was included in cost of products sold, respectively,
related to the acquisition of Elk. In addition, the unaudited pro-forma
consolidated results of operations for the nine-month period ended September 30,
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 $1.2 and $3.1 million for the three-month periods ended September 30,
2007 and October 1, 2006, respectively and $6.0 and $9.2 million for the
nine-month periods ended September 30, 2007 and October 1, 2006, respectively.
The Company's pro-forma results also include a reduction in lease
expense for excess lease capacity at two Elk facilities. The reduction in lease
expense was computed based on the remaining lease payments discounted on a
present value basis, straight-lined over the applicable pro-forma period with
the present value offset being recorded in interest expense. For the three-month
periods ended September 30, 2007 and October 1, 2006, the Company
11
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. ACQUISITIONS - (CONTINUED)
recorded an increase/(decrease) in lease expense of $0.5 and $(0.5) million,
respectively and an (increase)/decrease to interest expense of $0.3 and $(0.3)
million, respectively. For the nine-month periods ended September 30, 2007 and
October 1, 2006, the Company recorded a reduction in lease expense of $0.5 and
$1.6 million, respectively and an increase to interest expense of $0.3 and $0.9
million, respectively.
In addition, the Company's pro-forma results for the three-month period
ended October 1, 2006 and the nine-month periods ended September 30, 2007 and
October 1, 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 October 1, 2006 and a plus or minus $0.3 and $1.4 million in interest
expense for the nine-month periods ended September 30, 2007 and October 1, 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.
During the second quarter of 2007, the Company initiated the
implementation of a restructuring plan (the "2007 Restructuring Plan"), which
was formulated in connection with the February 22, 2007 acquisition of Elk (see
Note 3). In connection with the acquisition of Elk, the Company currently
identified $69.6 million in purchase accounting adjustments, which primarily
relate to the establishment of a change of control accrual, employee severance
payments to former Elk employees and integration-related expenses, which include
Elk inventory-related valuation write-downs, lease termination expenses and
other integration-related expenses. Furthermore, the Company substantially
completed its valuation analysis of property, plant and equipment and intangible
assets acquired from Elk during its three-month period ended September 30, 2007.
The Company accounts for its purchase accounting adjustments in accordance with
the provisions of SFAS No. 141. The Company has incurred $64.0 million of the
aforementioned purchase accounting adjustments as of September 30, 2007, of
which $3.2 million was
12
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. ACQUISITIONS - (CONTINUED)
incurred in the third quarter of 2007, $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), and which are included in the purchase price allocation. The
Company expects to accrue the remaining $5.6 million of identified purchase
accounting adjustments as incurred and make the remaining cash payments related
to its accrual by its first quarter ending 2008.
The Company's employee severance payments included the termination of
approximately 125 Elk employees, including certain management positions, in the
manufacturing and selling and administrative functional areas.
EMPLOYEE DISCONTINUED
INTEGRATION SEVERANCE OPERATIONS CHANGE 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)
-------- -------- -------- -------- --------
Balance, as of July 1, 2007 21,114 627 415 23,685 45,841
Additional accrued costs incurred due
to the acquisition of Elk 3,250 -- -- -- 3,250
Cash payments (2,446) (577) -- -- (3,023)
Amount charged to directly write-off
inventory (517) -- -- -- (517)
Non-cash items -- -- -- (7,456) (7,456)
-------- -------- -------- -------- --------
Ending Balance, as of September 30, 2007 $ 21,401 $ 50 $ 415 $ 16,229 $ 38,095
======== ======== ======== ======== ========
13
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. RESTRUCTURING AND OTHER EXPENSES
During the second quarter of 2007, the Company initiated its 2007
Restructuring Plan, which was formulated in connection with 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
approximately $114.6 million in restructuring and other expenses, of which $49.8
million relates to property, plant and equipment write-downs at certain of its
existing manufacturing facilities and $18.4 million of plant closing expenses.
The plants included in restructuring and other expenses reflected above were
Erie, Pennsylvania; Stockton, California; Millis, Massachusetts; Mobile,
Alabama; Dallas, Texas and Hollister, California. Restructuring and other
expenses also include $2.0 million in employee severance payments and $44.4
million in integration-related expenses, which primarily consist of $18.0
million of inventory-related valuation write-downs, $1.4 million of lease
termination expenses and $25.0 million of other integration expenses. The
Company recorded $97.6 million of the aforementioned restructuring and other
expenses as of September 30, 2007, $31.8 million of which was recorded in the
third quarter of 2007, of which $7.2 million was charged to cost of products
sold and $24.6 million was charged to restructuring and other expenses in the
Company's statement of operations. In the second quarter of 2007 the Company
recorded $65.8 million of restructuring and other expenses, 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 $17.0 million of identified restructuring
and other expenses and make the remaining cash payments related to its accrual
by its first quarter ending 2008.
The Company's employee severance payments included the termination of
approximately 70 BMCA employees, including certain management positions, in the
manufacturing and selling and administrative functional areas.
14
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. RESTRUCTURING AND OTHER EXPENSES - (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)
-------- -------- -------- -------- --------
Balance, as of July 1, 2007 -- 4,450 1,200 12,840 18,490
Additional accrued costs incurred due to the
acquisition of Elk 7,888 4,475 -- 19,491 31,854
Cash payments -- (4,475) (1,200) (19,768) (25,443)
Amount charged to property, plant and equipment
for asset write-down (7,888) -- -- -- (7,888)
Amount charged to write-off inventory -- (1,545) -- (31) (1,576)
Non-cash items -- -- -- (488) (488)
-------- -------- -------- -------- --------
Ending Balance, as of September 30, 2007 $ -- $ 2,905 $ -- $ 12,044 $ 14,949
======== ======== ======== ======== ========
15
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4. INVENTORIES
Inventories consisted of the following as of September 30, 2007 and
December 31, 2006, respectively. Inventories as of September 30, 2007, include
Elk from the date of acquisition.
SEPTEMBER 30, DECEMBER 31,
2007 2006
--------- ---------
(THOUSANDS)
Finished goods $ 181,724 $ 173,338
Work-in process 24,352 25,930
Raw materials and supplies 77,851 64,686
--------- ---------
Total 283,927 263,954
Less LIFO reserve (21,902) (25,245)
--------- ---------
Inventories $ 262,025 $ 238,709
========= =========
NOTE 5. INTANGIBLE ASSETS
The Company accounts for its intangible assets acquired in connection
with the acquisition of Elk in accordance with the provisions of SFAS No. 142
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 requires
disclosure of information relating to intangible assets subsequent to their
acquisition that was not previously reported, which includes disclosure
concerning the changes in the carrying amount of intangible assets by major
intangible asset class for those assets subject to amortization and for those
not subject to amortization. SFAS No. 142 also requires disclosure about actual
year-to-date intangible asset amortization expense and the estimated intangible
asset amortization expense for each of the next five years. As of September 30,
2007, the Company has not recorded any impairment losses related to its
intangible assets and has not written-off any acquired research and development
assets.
16
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. INTANGIBLE ASSETS - (CONTINUED)
Intangible assets, all of which were acquired from Elk, consisted of
the following as of September 30, 2007.
SEPTEMBER 30, 2007
--------------------------------------------------
GROSS
AMORTIZATION CARRYING ACCUMULATED NET
PERIOD AMOUNT AMORTIZATION AMOUNT
------------ -------- ----------- --------
(THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
- ----------------------------
Customer Relationships 20 yrs. $152,300 $ 1,904 $150,396
Trademark/Trade Names 15-25 yrs. 59,500 605 58,895
Core Technology 10 yrs. 25,000 625 24,375
Roofing Backlog - Current 1 yr 780 780 --
Computer Software 2 yrs. 190 24 166
-------- -------- --------
Amortized Intangible
Assets $237,770 $ 3,938 $233,832
-------- -------- --------
NON-AMORTIZED INTANGIBLE ASSETS:
- --------------------------------
Regulatory Permits Indefinite 1,800 -- 1,800
-------- -------- --------
Non-Amortized Intangible Assets $ 1,800 $ -- $ 1,800
-------- -------- --------
Intangible Assets, net $239,570 $ 3,938 $235,632
======== ======== ========
At the completion of its valuation analysis of the assets and
liabilities acquired from Elk during the three-month period ended September 30,
2007, the Company recorded $235.6 million of intangible assets, net of
amortization of $3.9 million. The following table illustrates, as of September
30, 2007, the amount of estimated amortization expense the Company expects to
record in its statement of operations related to intangible assets for each of
the next five years and thereafter.
(THOUSANDS)
2008 $ 12,633
2009 12,609
2010 12,538
2011 12,538
2012 12,538
Thereafter 170,976
--------
Total $233,832
========
17
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt consists of the following at September 30, 2007 and
December 31, 2006:
SEPTEMBER 30, DECEMBER 31,
2007 2006
----------- -----------
(THOUSANDS)
8% Senior Notes due 2007 $ 2,456 $ 99,940
8% Senior Notes due 2008 4,872 154,838
7 3/4% Senior Notes due 2014 250,613 250,680
Borrowings under the Old Senior
Secured Revolving Credit Facility -- 60,000
Borrowings under the Senior Secured
Revolving Credit Facility 281,000 --
Term Loan 967,706 --
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 8,984 11,133
Other notes payable 8,952 2,938
----------- -----------
Total 1,857,293 587,324
Less current maturities (16,770) (102,918)
----------- -----------
Long-term debt less current
maturities $ 1,840,523 $ 484,406
=========== ===========
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 the 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
18
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. LONG-TERM DEBT - (CONTINUED)
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 borrowers' 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.
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.
19
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. LONG-TERM DEBT - (CONTINUED)
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 borrowers' 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 maturity date of 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 borrowers' 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.
20
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. LONG-TERM DEBT - (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 maturity date of 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.
As of September 30, 2007, the Company had total outstanding
consolidated indebtedness of $1,910.1 million, which amount includes $52.8
million of demand loans to its parent corporation and $16.8 million that matures
prior to the end of the third quarter of 2008. The Company's total outstanding
consolidated indebtedness also includes $281.0 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 September 30, 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 September 30, 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 $2,485.8
million.
21
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. LONG-TERM DEBT - (CONTINUED)
At September 30, 2007, the Company had outstanding letters of credit of
approximately $51.2 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 7. HEDGING ACTIVITY
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.
In accordance with SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), BMCA's swaps are treated as cash flow
hedges. At September 30, 2007, BMCA had no ineffectiveness related to its swaps.
Therefore, for the quarter ended September 30, 2007, the Company, based on the
change in the LIBOR rate, reflected in other liabilities 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 liability was reflected in other comprehensive loss, net of tax. The
current period activity therefore marks the swaps to market and adjusts other
comprehensive loss.
On each balance sheet date, BMCA will test its fixed income interest
rate swaps to determine whether the swaps contain any ineffectiveness. If BMCA's
fixed income swaps contain any ineffectiveness, the Company will reflect the
ineffective portion in its statement of operations.
At September 30, 2007, based on changes in the closing LIBOR rate as of
September 28, 2007, BMCA recorded a fair value loss on its fixed income interest
rate swaps of $4.0 million to other liabilities, while the offset was recorded
to other comprehensive loss, net of tax of $1.5 million. The Company has also
recorded $1.4 million in year-to-date interest income as of September 30, 2007
related to its fixed income interest rate swaps.
In October 2007, the Company entered into additional interest rate
swaps related to the Company's Term Loan with an effective date of October 23,
2007 and a maturity date of October 23, 2012 with similar terms as dicussed
above.
22
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. HEDGING ACTIVITY - (CONTINUED)
In July 2007, the Company began entering into treasury locks as
additional hedging instruments against the Company's Term Loan. The Company's
treasury locks have a settlement date of October 30, 2007 and a maturity date of
July 31, 2012. The Company's treasury locks fix the U.S. treasury component,
while excluding the swap component of the forward benchmark LIBOR interest rate.
According to SFAS No. 133 the Company's treasury locks are also cash
flow hedges, which are accounted for in the same manner as its swaps. At
September 30, 2007, the Company determined through statistical analysis that its
treasury locks contained 98% effectiveness. Therefore, at September 30, 2007,
based on changes in the closing LIBOR rate as of September 28, 2007, BMCA
recorded a fair value loss of $2.7 million to accrued liabilities, with the
effective portion offset of $2.6 million being recorded to other comprehensive
loss, net of tax of $1.0 million and the ineffective portion offset of $0.1
million being recorded in its statement of operations.
On October 30, 2007 the Company settled its open treasury lock hedging
positions against its Term Loan, which resulted in a pre-tax loss of
approximately $4.9 million, which the Company will amortize into its statement
of operations over the remaining life of its Term Loan pursuant to SFAS No. 133.
NOTE 8. 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.
The accrual for product warranty claims consisted of the following for
the third quarters and nine month periods ended September 30, 2007, which
includes Elk from the date of acquisition, and October 1, 2006, respectively:
23
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. WARRANTY CLAIMS - (CONTINUED)
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPT. 30, OCT. 1, SEPT. 30, OCT. 1,
2007 2006 2007 2006
-------- -------- -------- --------
(THOUSANDS)
Beginning balance...................................... $ 41,173 $ 33,940 $ 26,971 $ 31,202
Charged to cost of
products sold ....................................... 5,139 6,639 13,450 20,138
Payments/deductions ................................... (4,493) (5,731) (12,277) (16,492)
Acquisition of Elk .................................... -- -- 13,675 --
-------- -------- -------- --------
Ending balance......................................... $ 41,819 $ 34,848 $ 41,819 $ 34,848
======== ======== ======== ========
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.
NOTE 9. 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
24
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. BENEFIT PLANS - (CONTINUED)
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 third quarters and nine month periods
ended September 30, 2007 and October 1, 2006, respectively:
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------- --------------------
SEPT. 30, OCT. 1, SEPT. 30, OCT.1,
2007 2006 2007 2006
------- ------- ------- -------
(THOUSANDS)
Service cost ..................... $ 381 $ 370 $ 1,143 $ 1,110
Interest cost .................... 567 523 1,701 1,568
Expected return on plan assets ... (826) (748) (2,478) (2,244)
Amortization of unrecognized prior
service cost ................... 10 10 30 29
Amortization of net losses from
earlier periods ................ 41 86 124 258
------- ------- ------- -------
Net periodic pension cost ........ $ 173 $ 241 $ 520 $ 721
======= ======= ======= =======
As of the quarter ended September 30, 2007, the Company expects to make
aggregate pension contributions of $0.9 million to the Retirement Plan in 2007,
which is similar to its expectations as of December 31, 2006. In April, July and
October 2007, the Company made 2007 quarterly Retirement Plan contributions of
$0.3, $0.3 and $0.1 million, respectively. In addition, in September 2007 the
Company made a 2006 Retirement Plan contribution of $0.2 million.
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.
25
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. BENEFIT PLANS - (CONTINUED)
Net periodic postretirement (benefit) cost included the following
components for the third quarters and nine month periods ended September 30,
2007 and October 1, 2006, respectively:
THIRD NINE
QUARTER ENDED MONTHS ENDED
---------------- ----------------
SEPT. OCT. SEPT. OCT.
30, 1, 30, 1,
2007 2006 2007 2006
----- ----- ----- -----
(THOUSANDS)
Service cost ....................... $ 3 $ 3 $ 9 $ 10
Interest cost ...................... 30 30 90 89
Amortization of unrecognized prior
service cost ..................... (143) (155) (428) (464)
Amortization of net gains from
earlier periods .................. (57) (61) (170) (183)
----- ----- ----- -----
Net periodic postretirement
(benefit) cost ................... $(167) $(183) $(499) $(548)
===== ===== ===== =====
As of the quarter ended September 30, 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.
In connection with the acquisition of Elk, the Company adopted the Elk
401(k) Plan, which was established effective January 1, 1990. Under the Elk
401(k) Plan, which was amended January 1, 2007, the Company may contribute a
percentage of each Elk participant's annual compensation into the Elk 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.
26
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. STOCK/LOAN PLAN
In connection with the Company's acquisition of Elk, the Company
adopted the Elk 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
September 30, 2007 were $3.6 million and are included in other noncurrent
assets.
NOTE 11. 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 (income) expense for the Company's incentive units was $0.8
and $(0.9) million for the third quarters ended September 30, 2007 and October
1, 2006, respectively, and $1.8 and $4.7 million for the nine-month periods
ended September 30, 2007 and October 1, 2006, respectively. At September 30,
2007 and October 1, 2006, the 2001 Long-Term Incentive Plan liability amounted
to $10.4 and $27.1 million, respectively, and was included in accrued
liabilities.
The following is a summary of activity for incentive units related to
the 2001 Long-Term Incentive Plan:
SEPTEMBER 30, DECEMBER 31,
2007 2006
-------- --------
Incentive Units outstanding, beginning
of period .................................... 98,633 146,814
Granted ........................................ 45,589 6,200
Exercised ...................................... (37,117) (41,087)
Forfeited ...................................... (3,650) (13,294)
-------- --------
Incentive Units outstanding, end
of period .................................... 103,455 98,633
======== ========
The initial value of the incentive units granted on July 2, 2007,
January 1, 2007, July 1, 2006 and January 1, 2006 was $589.43, $583.08, $569.74
and $534.19, respectively.
27
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. RELATED PARTY TRANSACTIONS
The Company makes loans to, and borrows from, its parent corporations
from time to time at prevailing market rates. As of September 30, 2007 and
October 1, 2006, BMCA Holdings Corporation owed the Company $56.2 and $56.0
million, including interest of $0.9 and $0.7 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 $1.5 and $1.3
million during the third quarters ended September 30, 2007 and October 1, 2006,
respectively, and $4.0 and $3.7 million during the nine month periods ended
September 30, 2007 and October 1, 2006, respectively. Interest expense on the
Company's loans from BMCA Holdings Corporation amounted to $1.4 and $1.2 million
during the third quarters ended September 30, 2007 and October 1, 2006,
respectively, and $3.9 and $3.5 million during the nine month periods ended
September 30, 2007 and October 1, 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 September 30, 2007, the Company could
repay demand loans to its parent corporation amounting to $52.8 million, subject
to certain conditions. The Company also makes non-interest bearing advances to
affiliates, of which no balance was outstanding as of September 30, 2007 and
October 1, 2006. In addition, for the nine months ended September 30, 2007 and
October 1, 2006, the Company did not owe any loans to or enter into any lending
activities with 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
currently proposed ISP Management Agreement for 2007, inclusive of the services
provided to G-I Holdings, is approximately $6.7 million, based on services
provided to the Company in 2007. The Company expects to finalize the ISP
Management Agreement during its fourth quarter of 2007.
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 third quarters and nine month periods ended September 30, 2007 and October
1, 2006, the Company purchased $29.0, $26.2, $81.1 and $84.9 million,
respectively, of mineral products from Minerals under this contract.
28
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. RELATED PARTY TRANSACTIONS - (CONTINUED)
Included in current assets as a non-interest bearing income tax
receivable from parent corporation is $10.0 and $9.1 million at September 30,
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 13. 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 September 30, 2007, the Company had approximately $13.1
and $15.6 million, respectively, of unrecognized tax benefits. All of the
unrecognized tax benefits would affect the Company's effective tax rate if
recognized with the exception of $1.4 million associated with Elk, which would
affect goodwill.
The Company and its subsidiaries are 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 September 30, 2007, the Company had $3.8 and $4.8 million,
respectively, of accrued interest and penalties.
The Company's effective tax rate changed from 38.0% for the year ended
December 31, 2006 to 31.0% for the nine month period ended September 30, 2007.
The change in the effective tax rate was primarily due to the impact of the
estimated annual restructuring and other expense charges in 2007, of which $97.6
million was included in the Company's income before interest expense and income
taxes for the nine month period ended September 30, 2007 and the establishment
of a valuation allowance related to state income taxes.
29
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. 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
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.
30
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. CONTINGENCIES - (CONTINUED)
On or about February 8, 2001, the creditors' committee filed a
complaint in the United States Bankruptcy Court, District of New Jersey against
G-I Holdings and 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 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.
31
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. CONTINGENCIES - (CONTINUED)
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 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
32
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. CONTINGENCIES - (CONTINUED)
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.
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.
33
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. CONTINGENCIES - (CONTINUED)
Other Contingencies
In the ordinary course of business, the Company has several supply
agreements that include minimum annual purchase requirements. In the event these
purchase requirements are not met, the Company may be required to make payments
under these supply agreements. There have been no material changes to these
contracts in the third quarter of 2007.
NOTE 15. SUBSEQUENT EVENT
On October 15, 2007, BMCA redeemed all of its remaining $2.5 million
outstanding 2007 Notes, including accrued and unpaid interest on such notes
through the date of redemption.
NOTE 16. GUARANTOR FINANCIAL INFORMATION
At September 30, 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.
34
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
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.
35
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THIRD QUARTER ENDED SEPTEMBER 30, 2007
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------- --------- --------- --------- ---------
Net sales ........................ $ 455,479 $ -- $ 225,262 $ -- $ 680,741
Intercompany net sales ........... -- 436,824 394,760 (831,584) --
--------- --------- --------- --------- ---------
Total net sales .............. 455,479 436,824 620,022 (831,584) 680,741
--------- --------- --------- --------- ---------
Costs and expenses, net:
Cost of products sold .......... 384,400 388,215 552,403 (831,584) 493,434
Selling, general and
administrative ............... 59,694 35,615 38,769 -- 134,078
Amortization of intangible
assets ....................... -- -- 3,938 -- 3,938
Restructuring and other
expenses ..................... 24,628 -- -- -- 24,628
Other income, net .............. (577) (54) (351) -- (982)
--------- --------- --------- --------- ---------
Total costs and expenses, net. 468,145 423,776 594,759 (831,584) 655,096
--------- --------- --------- --------- ---------
Income (loss) before equity in
earnings of subsidiaries,
interest expense and income
taxes .......................... (12,666) 13,048 25,263 -- 25,645
Equity in earnings of
subsidiaries .................... 17,923 -- -- (17,923) --
Interest expense ................. (32,161) (147) (11,981) -- (44,289)
--------- --------- --------- --------- ---------
Income (loss) before income taxes. (26,904) 12,901 13,282 (17,923) (18,644)
Income tax (expense) benefit ..... 15,723 (4,347) (3,913) -- 7,463
--------- --------- --------- --------- ---------
Net income (loss) ................ $ (11,181) $ 8,554 $ 9,369 $ (17,923) $ (11,181)
========= ========= ========= ========= =========
36
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRD QUARTER ENDED OCTOBER 1, 2006
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------- --------- --------- --------- ---------
Net sales .................................... $ 498,765 $ -- $ 31,584 $ -- $ 530,349
Intercompany net sales ....................... 103 310,258 19,933 (330,294) --
--------- --------- --------- --------- ---------
Total net sales ............................ 498,868 310,258 51,517 (330,294) 530,349
--------- --------- --------- --------- ---------
Costs and expenses, net:
Cost of products sold ...................... 376,916 276,450 49,178 (330,294) 372,250
Selling, general and
administrative............................. 86,495 19,059 9,128 -- 114,682
Intercompany licensing (income) expense,
net........................................ 19,955 7,173 (27,128) -- --
Other (income) expense, net ................ 120 16 (4) -- 132
Transition service agreement
(income) expense .......................... 25 (25) -- -- --
--------- --------- --------- --------- ---------
Total costs and expenses, net .............. 483,511 302,673 31,174 (330,294) 487,064
--------- --------- --------- --------- ---------
Income before equity in earnings of
subsidiaries, interest expense and
income taxes ................................ 15,357 7,585 20,343 -- 43,285
Equity in earnings of subsidiaries ........... 12,858 -- -- (12,858) --
Interest expense ............................. (8,581) (1,851) (5,339) -- (15,771)
--------- --------- --------- --------- ---------
Income before income taxes ................... 19,634 5,734 15,004 (12,858) 27,514
Income tax expense ........................... (2,575) (2,179) (5,701) -- (10,455)
--------- --------- --------- --------- ---------
Net income ................................... $ 17,059 $ 3,555 $ 9,303 $ (12,858) $ 17,059
========= ========= ========= ========= =========
37
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2007
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
Net sales ........................... $ 1,309,761 $ -- $ 564,241 $ -- $ 1,874,002
Intercompany net sales .............. -- 1,099,226 1,144,013 (2,243,239) --
----------- ----------- ----------- ----------- -----------
Total net sales ................... 1,309,761 1,099,226 1,708,254 (2,243,239) 1,874,002
----------- ----------- ----------- ----------- -----------
Cost and expenses, net:
Costs of products sold ............ 1,113,635 955,378 1,546,542 (2,243,239) 1,372,316
Selling, general and
administrative .................. 163,382 111,342 108,343 -- 383,067
Amortization of intangible
assets .......................... -- -- 3,938 -- 3,938
Restructuring and other
expenses ........................ 79,622 -- -- -- 79,622
Other income, net ................. (1,187) (159) (13) -- (1,359)
----------- ----------- ----------- ----------- -----------
Total costs and expenses, net ..... 1,355,452 1,066,561 1,658,810 (2,243,239) 1,837,584
----------- ----------- ----------- ----------- -----------
Income(loss) before equity in
earnings of subsidiaries,
interest expense and income
taxes ............................. (45,691) 32,665 49,444 -- 36,418
Equity in earnings of subsidiaries... 23,021 -- -- (23,021) --
Interest expense .................... (90,492) (2,371) (46,374) -- (139,237)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes ... (113,162) 30,294 3,070 (23,021) (102,819)
Income tax (expense) benefit ........ 42,217 (9,391) (952) -- 31,874
----------- ----------- ----------- ----------- -----------
Net income (loss) ................... $ (70,945) $ 20,903 $ 2,118 $ (23,021) $ (70,945)
=========== =========== =========== =========== ===========
38
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED OCTOBER 1, 2006
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
Net sales ............................. $ 1,483,621 $ -- $ 87,592 $ -- $ 1,571,213
Intercompany net sales ................ 315 911,076 64,110 (975,501) --
----------- ----------- ----------- ----------- -----------
Total net sales ..................... 1,483,936 911,076 151,702 (975,501) 1,571,213
----------- ----------- ----------- ----------- -----------
Costs and expenses, net:
Cost of products sold ............... 1,128,818 807,266 140,259 (975,501) 1,100,842
Selling, general and
administrative .................... 261,470 60,500 25,592 -- 347,562
Intercompany licensing
(income) expense, net .............. 59,357 20,724 (80,081) -- --
Other (income) expense, net ......... (418) 53 (21) -- (386)
Transition service agreement (income)
expense ............................ 75 (75) -- -- --
----------- ----------- ----------- ----------- -----------
Total costs and expenses, net ....... 1,449,302 888,468 85,749 (975,501) 1,448,018
----------- ----------- ----------- ----------- -----------
Income before equity in
earnings of subsidiaries,
interest expense and income
taxes ................................ 34,634 22,608 65,953 -- 123,195
Equity in earnings of
subsidiaries ......................... 43,121 -- -- (43,121) --
Interest expense ...................... (27,341) (6,025) (12,986) -- (46,352)
----------- ----------- ----------- ----------- -----------
Income before income taxes ............ 50,414 16,583 52,967 (43,121) 76,843
Income tax expense .................... (2,771) (6,301) (20,128) -- (29,200)
----------- ----------- ----------- ----------- -----------
Net income ............................ $ 47,643 $ 10,282 $ 32,839 $ (43,121) $ 47,643
=========== =========== =========== =========== ===========
39
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2007
(THOUSANDS)
(UNAUDITED)
Parent Co-Obligor Guarantor Elim- Con-
Company Subsidiary Subsidiaries inations solidated
----------- ----------- ----------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents .................. $ -- $ 158 $ 34,342 $ -- $ 34,500
Accounts receivable, trade, net ............ 398,408 -- 25,878 -- 424,286
Accounts receivable, other ................. 1,594 3,053 7,662 -- 12,309
Income tax receivable ...................... -- -- 11,968 -- 11,968
Income tax receivable from parent
corporation .............................. 10,016 -- -- -- 10,016
Inventories, net ........................... -- 161,229 100,796 -- 262,025
Deferred income tax assets ................. 37,073 -- -- -- 37,073
Other current assets ....................... 9,830 4,798 2,269 -- 16,897
Discontinued operations - current
assets ................................... -- -- 2,844 -- 2,844
----------- ----------- ----------- ----------- -----------
Total Current Assets ..................... 456,921 169,238 185,759 -- 811,918
Investment in subsidiaries ................... 1,651,035 -- -- (1,651,035) --
Intercompany loans including accrued
interest ................................... 673,534 -- (673,534) -- --
Due from/(to) subsidiaries, net .............. (713,485) (160,336) 873,821 -- --
Property, plant and equipment, net ........... -- 230,038 455,110 -- 685,148
Goodwill, net ................................ 40,080 3,946 591,277 -- 635,303
Intangible assets ............................ -- -- 235,632 -- 235,632
Other noncurrent assets ...................... 76,931 22,172 26,290 -- 125,393
Discontinued operations - non-current
assets ..................................... -- -- 1,355 -- 1,355
----------- ----------- ----------- ----------- -----------
Total Assets ................................. $ 2,185,016 $ 265,058 $ 1,695,710 $(1,651,035) $ 2,494,749
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt........ $ 9,677 $ 5,791 $ 1,302 $ -- $ 16,770
Accounts payable ........................... 455 87,939 54,684 -- 143,078
Payable to related parties ................. 745 14,997 1,580 -- 17,322
Loans payable to parent corporation ........ 52,840 -- -- -- 52,840
Accrued liabilities ........................ 83,503 50,470 35,930 -- 169,903
Product warranty claims .................... 9,000 -- 4,500 -- 13,500
Discontinued operations - current
liabilities .............................. -- -- 931 -- 931
----------- ----------- ----------- ----------- -----------
Total Current Liabilities ................ 156,220 159,197 98,927 -- 414,344
Long-term debt ............................... 1,819,514 16,465 4,544 -- 1,840,523
Product warranty claims ...................... 19,634 -- 8,685 -- 28,319
Deferred income tax liabilities .............. 134,807 -- -- -- 134,807
Other liabilities ............................ 68,014 1,898 20,017 -- 89,929
----------- ----------- ----------- ----------- -----------
Total Liabilities ............................ 2,198,189 177,560 132,173 -- 2,507,922
Total Stockholders' Equity (Deficit) ......... (13,173) 87,498 1,563,537 (1,651,035) (13,173)
----------- ----------- ----------- ----------- -----------
Total Liabilities and Stockholders'
Equity (Deficit) ........................ $ 2,185,016 $ 265,058 $ 1,695,710 $(1,651,035) $ 2,494,749
=========== =========== =========== =========== ===========
40
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2006
(THOUSANDS)
Parent Co-Obligor Guarantor Elim- Con-
Company Subsidiary Subsidiaries inations solidated
---------- ---------- ---------- ---------- ----------
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
Income tax receivable from parent
corporation ...................... 9,132 -- -- -- 9,132
Inventories, net ................... 165,538 49,318 23,853 -- 238,709
Deferred income tax assets ......... 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
========== ========== ========== ========== ==========
41
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 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) ................................ (93,966) 20,903 2,118 (70,945)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation ................................... -- 27,715 22,940 50,655
Amortization ................................... -- 2,557 3,938 6,495
Restructuring and other expenses ............... 97,647 -- -- 97,647
Deferred income taxes .......................... (36,141) -- -- (36,141)
Noncash interest charges ....................... 6,864 290 704 7,858
(Increase) decrease in working capital items ..... (160,860) 55,450 47,606 (57,804)
Increase (decrease) in product warranty
claims........................................... 2,063 -- (891) 1,172
(Increase) decrease in other assets .............. (3,671) (2,179) 663 (5,187)
Increase in other liabilities .................... 3,261 203 1,296 4,760
Change in net receivable from/payable to
related parties/parent corporations ............ (1,143,587) 21,622 1,132,451 10,486
Other, net ....................................... -- (54) 631 577
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities........................................ (1,328,390) 126,507 1,211,456 9,573
----------- ----------- ----------- -----------
Cash used in investing activities:
Acquisition of ElkCorp, net of cash
acquired of $0.1 million ....................... -- -- (944,838) (944,838)
Capital expenditures and acquisitions ............ -- (28,380) (38,733) (67,113)
----------- ----------- ----------- -----------
Net cash used in investing activities .............. -- (28,380) (983,571) (1,011,951)
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities:
Proceeds from issuance of long-term debt ......... 2,292,849 -- 25,900 2,318,749
Repayments of long-term debt ..................... (928,834) (99,839) (225,332) (1,254,005)
Distribution to parent corporation ............... (171) -- -- (171)
Loan to parent corporation ....................... (148) -- -- (148)
Financing fees and expenses ...................... (35,324) -- -- (35,324)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities........................................ 1,328,372 (99,839) (199,432) 1,029,101
----------- ----------- ----------- -----------
Net change in cash and cash equivalents ............ (18) (1,712) 28,453 26,723
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period ........... $ -- $ 158 $ 34,342 $ 34,500
=========== =========== =========== ===========
42
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 1, 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 ................................... 4,522 10,282 32,839 47,643
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Depreciation .............................. 3,093 28,242 5,247 36,582
Amortization .............................. -- 2,161 -- 2,161
Deferred income taxes ..................... (2,422) -- -- (2,422)
Noncash interest charges .................. 2,933 993 -- 3,926
Increase in working capital items ............ (152,351) (20,536) (6,761) (179,648)
Increase in long-term reserve for
product warranty claims ................... 3,592 -- 54 3,646
(Increase) decrease in other assets .......... 40 (1,305) 101 (1,164)
Decrease in other liabilities ................ (111) -- (5) (116)
Change in net receivable
from/payable to related
parties/parent corporations ................ 83 4,550 (1,563) 3,070
Other, net ................................... (65) (31) 725 629
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities ........................ (140,686) 24,356 30,637 (85,693)
--------- --------- --------- ---------
Cash used in investing activities:
Capital expenditures and
acquisition of manufacturing
facility .................................. (7,659) (14,751) (32,420) (54,830)
--------- --------- --------- ---------
Net cash used in investing activities .......... (7,659) (14,751) (32,420) (54,830)
--------- --------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from Senior Secured
Revolving Credit Facility ................. 684,000 -- -- 684,000
Purchase of industrial development
revenue bond certificates issued
by the Company ............................ -- (6,325) -- (6,325)
Repayments of long-term debt ................. (533,000) (2,253) (3) (535,256)
Distributions to parent corporation .......... (521) -- -- (521)
Loan to parent corporation ................... (141) -- -- (141)
Financing fees and expenses .................. (1,990) -- -- (1,990)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities ........................ 148,348 (8,578) (3) 139,767
--------- --------- --------- ---------
Net change in cash and cash equivalents ........ 3 1,027 (1,786) (756)
--------- --------- --------- ---------
Cash and cash equivalents, end of
period ...................................... $ 12 $ 1,207 $ 4,907 $ 6,126
========= ========= ========= =========
43
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On February 22, 2007, which we refer to as the date of acquisition, a
subsidiary of Building Materials Corporation of America, which we refer to as
BMCA, acquired approximately 90% of the outstanding common 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 nine month period ended September 30, 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.
Third Quarter 2007 Compared With
Third Quarter 2006
We recorded a net loss of $11.2 million in the third quarter of 2007
compared to net income of $17.1 million in the third quarter of 2006. Our net
loss in the third quarter of 2007 included $21.9 million of after-tax ($31.8
million pre-tax) restructuring and other expenses, of which $5.0 million
after-tax ($7.2 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 closing expenses related to the closure of several
manufacturing facilities together with the write-down of plant assets at these
facilities, integration-related costs and the write-down of selected
inventories. Excluding these items, third quarter of 2007 net income was $10.7
million, which included the results of operations of Elk. The decrease
44
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
in reported net income for the third quarter of 2007 was primarily attributable
to approximately $28.5 million of higher interest expense and restructuring and
other expenses due to the acquisition of Elk.
Net sales for the third quarter of 2007 were $680.7 million, which
included net sales related to Elk compared to third quarter of 2006 net sales of
$530.3 million. Excluding net sales of Elk, the decrease in third 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.
Income before interest expense and income taxes in the third quarter of
2007 was $25.7 million compared to income before interest expense and income
taxes of $43.3 million in the third quarter of 2006. Income before interest
expense and income taxes in the third quarter of 2007 included the results of
operations of Elk and $31.8 million of restructuring and other expenses, of
which $7.2 million was included in cost of products sold. Income before interest
expense and income taxes in the third quarter of 2007 was positively affected by
the operating results of Elk, lower raw material costs, including asphalt, and
lower selling, general and administrative expenses mostly due to a decline in
volume-related distribution costs, which was more than offset by a decrease in
net sales of residential roofing products.
Interest expense in the third quarter of 2007 increased to $44.3
million as compared to $15.8 million in the third quarter of 2006. The increase
in third quarter of 2007 interest expense was primarily due to higher average
borrowings and a slightly higher average interest rate due to the acquisition of
Elk.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the third quarter of 2007 were
$637.8 million, which included net sales of roofing products related to Elk
compared to $507.6 million for the third quarter of 2006. Excluding net sales of
roofing products of Elk, the decrease in net sales of roofing products was
primarily driven by lower unit volumes of residential roofing products resulting
from softer market demand. Net sales of specialty building products and
accessories were $42.9 million for the third quarter of 2007, which included net
sales of specialty building products and accessories related to Elk as compared
with $22.7 million for the third quarter of 2006.
45
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Gross Margin. Our overall gross margin was $187.3 million or 27.5% of net sales
for the third quarter of 2007 as compared with $158.1 million or 29.8% of net
sales for the third quarter of 2006. Included in our overall gross margin for
the third quarter of 2007 was $7.2 million of restructuring and other expenses,
which were included in cost of products sold, and gross margin related to Elk.
Our overall gross margin was positively affected by the gross margin related to
Elk and lower raw material costs, including asphalt, which was more than offset
by a decrease in residential roofing net sales driven by lower unit volumes.
Nine Months 2007 Compared With
Nine Months 2006
We recorded a net loss of $70.9 million in the first nine months of
2007 compared to net income of $47.6 million in the first nine months of 2006.
Our net loss in the first nine months of 2007 included $67.3 million of
after-tax ($97.6 million pre-tax) restructuring and other expenses, of which
$12.4 million after tax ($18.0 million pre-tax) was included in cost of products
sold related to the integration of Elk operations and $16.0 million of after-tax
($23.2 million pre-tax) debt restructuring costs also related to
46
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
the acquisition. Included in restructuring and other expenses are plant closing
expenses related to the closure of several manufacturing facilities together
with the write-down of plant assets at these facilities, integration-related
costs and the write-down of selected inventories. Excluding these items, the
first nine months of 2007 net income was $12.4 million, which included Elk's
operations from the date of acquisition. The decrease in reported net income for
the first nine months of 2007 was primarily attributable to approximately $92.8
million of higher interest expense and restructuring and other expenses due to
the acquisition of Elk.
Net sales for the first nine months of 2007 were $1,874.0 million,
which included net sales related to Elk from the date of acquisition compared to
the first nine months of 2006 net sales of $1,571.2 million. Excluding net sales
of Elk, the decrease in the first nine 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 nine
months of 2007 was $36.4 million compared to $123.2 million in the first nine
months of 2006. Our income before interest expense and income taxes in the first
nine months of 2007 included the results of operations of Elk and $97.6 million
of restructuring and other expenses, of which $18.0 million was included in cost
of products sold. Income before interest expense and income taxes in the first
nine months of 2007 was positively affected by the operating results of Elk,
lower raw material costs, including asphalt, and lower selling, general and
administrative expenses mostly due to a decline in volume-related distribution
costs, which was more than offset by a decrease in net sales of residential
roofing products and commercial roofing products.
Interest expense in the first nine months of 2007 increased to $139.2
million as compared to $46.4 million in the first nine months of 2006. Interest
expense in the first nine months of 2007 included $23.2 million of debt
restructuring costs and an additional $3.2 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
47
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 nine months of 2007 was $112.8 million. The increase in the first
nine months of 2007 interest expense was primarily due to higher average
borrowings and a slightly higher average interest rate, due to the acquisition
of Elk.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the first nine months of 2007 were
$1,773.0 million, which included net sales of roofing products related to Elk
compared to $1,509.6 million for the first nine months of 2006. Excluding net
sales of roofing products of Elk, the decrease in net sales of roofing products
was driven by a decrease in residential roofing products, which was primarily
driven by lower unit volumes resulting from softer market demand, and a decrease
in commercial roofing products, which was primarily driven by lower unit
volumes, partially offset by a higher average selling price. Net sales of
specialty building products and accessories were $101.0 million for the first
nine months of 2007, which included net sales of specialty building products and
accessories related to Elk as compared with $61.6 million for the first nine
months of 2006.
Gross Margin. Our overall gross margin was $501.7 million or 26.8% of net sales
for the first nine months of 2007 as compared with $470.4 million or 29.9% of
net sales for the first nine months of 2006. Included in our overall gross
margin for the first nine months of 2007 was $18.0 million of restructuring and
other expenses, which were included in cost of products sold, and gross margin
related to Elk. Our overall gross margin was positively affected by the gross
margin related to Elk and lower raw material costs, including asphalt, which was
more than offset by a decrease in net sales of residential and commercial
roofing products primarily driven by lower unit volumes.
48
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows and Cash Position
Sales of roofing products and specialty building products and
accessories in the northern regions of the United States generally decline in
the late fall and winter months due to cold weather. In addition, adverse
weather conditions can result in higher customer demand during our peak
operating season depending on the extent and severity of the damage from these
severe weather conditions. Due to the seasonal demands of our business, together
with extreme weather conditions, we generally have negative cash flows from
operations during the first six months of our fiscal year. Our negative cash
flows from operations are primarily driven by our cash invested in both accounts
receivable and inventories to meet these seasonal operating demands. Generally,
in the third and fourth quarters of our fiscal year, our cash flows from
operations become positive for each quarter, as our investment in inventories
and accounts receivable no longer continues to increase, as is customary in the
first six months of our fiscal year. Our seasonal working capital needs,
together with our debt service obligations, capital expenditure requirements and
other contracted arrangements, adversely impact our liquidity during this
period. We rely on our cash and cash equivalents on hand and our $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 $1,002.4
million during the first nine months of 2007, including $944.8 million related
to the acquisition of Elk, net of $0.1 million of cash acquired, the
reinvestment of $67.1 million for capital programs and an acquisition of land
and buildings in Fresno, California and $9.5 million of cash provided by
operations.
49
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 $57.8 million
during the first nine months of 2007, reflecting an increase in total accounts
receivable of $143.4 million, due to the seasonality of our business, a $93.5
million decrease in inventories to meet our anticipated operating demands and
due to the decline in the housing market, a $4.6 million increase in federal
income taxes receivable related to Elk, a $6.1 million decrease in other current
assets, a $21.4 million increase in accounts payable and accrued liabilities and
an increase of $30.8 million in payments for restructuring and other expenses.
The net cash provided by operating activities also included a $10.5 million net
increase in the payable to related parties/parent corporations, primarily
attributed to an $11.4 million increase in amounts due under our long-term
granule supply agreement with an affiliated company partially offset by a $0.9
million increase in federal income taxes receivable, pursuant to our Tax Sharing
Agreement with our parent corporation. In addition, net cash provided by
operating activities included $97.6 million in restructuring and other expenses,
which primarily included a $49.8 million write-down of property, plant and
equipment (see Restructing and Other Expenses).
Net cash provided by financing activities totaled $1,029.1 million
during the first nine months of 2007, including $2,318.7 million of aggregate
proceeds from the issuance of long-term debt, related to the first nine months
of 2007 cumulative borrowings of $992.8 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 $1,254.0 million in
aggregate repayments of long-term debt, of which $771.8 million related to the
first nine months 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 $7.3 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 4.69% 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.
50
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
In addition, financing activities also included $35.3 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.
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 $944.8 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.
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 date of acquisition, with amounts exceeding their fair value being
51
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 required 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 estimated 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
1 to 25 years for intangible assets.
In valuing acquired assets and assumed liabilities, fair values were
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
performed a valuation analysis of the assets and liabilities acquired from Elk,
which was substantially completed during the three-month period ended September
30, 2007, and we expect to finalize our purchase price allocation during the
fourth quarter of 2007. At September 30, 2007, we recorded $570.5 million of
goodwill and $235.6 million of intangible assets, net of amortization of $3.9
million (see Note 5 to Consolidated Financial Statements), related to the
acquisition of Elk based on the completion of our valuation analysis. 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 nine-month periods presented below:
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPT. 30, OCT. 1, SEPT. 30, OCT. 1,
2007 2006 2007 2006
-------- -------- ---------- ----------
(MILLIONS)
Net sales ................ $ 680.7 $ 748.5 $ 1,947.7 $ 2,274.3
-------- -------- ---------- ----------
Income before interest and
income taxes ............ 23.8 61.4 6.7 184.4
-------- -------- ---------- ----------
Net income (loss) ........ $ (13.9) $ 14.0 $ (100.1) $ 43.7
======== ======== ========== ==========
The unaudited pro-forma consolidated results of operations for the
three-month and nine-month periods ended September 30, 2007 include $31.8 and
$97.6 million pre-tax ($21.9 and $67.3 million after-tax) of restructuring and
other expenses, respectively, of which $7.2 and $18.0 million pre-tax ($5.0 and
$12.4 million after-tax) was included in cost of products sold,
52
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
respectively, related to the acquisition of Elk. In addition, the unaudited
pro-forma consolidated results of operations for the nine-month period ended
September 30, 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
$1.2 and $3.1 million for the three-month periods ended September 30, 2007 and
October 1, 2006, respectively and $6.0 and $9.2 million for the nine-month
periods ended September 30, 2007 and October 1, 2006, respectively.
Our pro-forma results also include a reduction in lease expense for
excess lease capacity at two Elk facilities. The reduction in lease expense was
computed based on the remaining lease payments discounted on a present value
basis, straight-lined over the applicable pro-forma period with the present
value offset being recorded in interest expense. For the three-month periods
ended September 30, 2007 and October 1, 2006, we recorded an increase/(decrease)
in lease expense of $0.5 and $(0.5) million, respectively and an
(increase)/decrease to interest expense of $0.3 and $(0.3) million,
respectively. For the nine-month periods ended September 30, 2007 and October 1,
2006, we recorded a reduction in lease expense of $0.5 and $1.6 million,
respectively and an increase to interest expense of $0.3 and $0.9 million,
respectively.
In addition, our pro-forma results for the three-month period ended
October 1, 2006 and the nine-month periods ended September 30, 2007 and October
1, 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 October
1, 2006 and a plus or minus $0.3 and $1.4 million in interest expense for the
nine-month periods ended September 30, 2007 and October 1, 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.
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 in connection with the February 22, 2007 acquisition of Elk. See
Restructuring and Other Expenses below. In connection with the acquisition of
Elk, we currently identified $69.6 million in purchase accounting adjustments,
which primarily relate to the establishment of a change of control accrual,
employee severance payments to former Elk
53
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
employees and integration-related expenses, which include Elk inventory-related
valuation write-downs, lease termination expenses and other integration-related
expenses. Furthermore, we completed our valuation analysis of property, plant
and equipment and intangible assets acquired from Elk during our three-month
period ended September 30, 2007. We account for our purchase accounting
adjustments in accordance with the provisions of SFAS No. 141. We have incurred
$64.0 million of the aforementioned purchase accounting adjustments as of
September 30, 2007, of which $3.2 million was incurred in the third quarter of
2007, $54.6 million was incurred in the second quarter of 2007 and $6.2 million
was incurred in the first quarter of 2007, and which are included in the
purchase price allocation. We expect to accrue the remaining $5.6 million of
identified purchase accounting adjustments as incurred and make the remaining
cash payments related to our accrual by our first quarter ending 2008.
Our employee severance payments included the termination of
approximately 125 Elk employees, including certain management level positions,
in the manufacturing and selling and administrative functional areas.
54
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
EMPLOYEE DISCONTINUED
INTEGRATION SEVERANCE OPERATIONS CHANGE 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)
-------- -------- -------- -------- --------
Balance, as of July 1, 2007 21,114 627 415 23,685 45,841
Additional accrued costs incurred due
to the acquisition of Elk 3,250 -- -- -- 3,250
Cash payments (2,446) (577) -- -- (3,023)
Amount charged to directly write-off
inventory (517) -- -- -- (517)
Non-cash items -- -- -- (7,456) (7,456)
-------- -------- -------- -------- --------
Ending Balance, as of September 30, 2007 $ 21,401 $ 50 $ 415 $ 16,229 $ 38,095
======== ======== ======== ======== ========
Restructuring and Other Expenses
During the second quarter of 2007, we initiated our 2007 Restructuring
Plan, which was formulated in connection with 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 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.
55
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
In connection with the acquisition of Elk, we have identified
approximately $114.6 million in restructuring and other expenses, of which $49.8
million relates to property, plant and equipment write-downs at certain of our
existing manufacturing facilities and $18.4 million of plant closing expenses.
The plants included in restructuring and other expenses reflected above were
Erie, Pennsylvania; Stockton, California; Millis, Massachusetts; Mobile,
Alabama; Dallas, Texas and Hollister, California. Restructuring and other
expenses also include $2.0 million in employee severance payments and $44.4
million in integration-related expenses, which primarily consist of $18.0
million of inventory-related valuation write-downs, $1.4 million of lease
termination expenses and $25.0 million of other integration expenses. We
recorded $97.6 million of the aforementioned restructuring and other expenses as
of September 30, 2007, $31.8 million of which was recorded in the third quarter
of 2007, of which $7.2 million was charged to cost of products sold and $24.6
million was charged to restructuring and other expenses in our statement of
operations. In the second quarter of 2007 we recorded $65.8 million of
restructuring and other expenses, 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 $17.0 million
of identified restructuring and other expenses and make the remaining cash
payments related to our accrual by our first quarter ending 2008.
Our employee severance payments included the termination of
approximately 70 BMCA employees, including certain management positions, in the
manufacturing and selling and administrative functional areas.
56
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)
-------- -------- -------- -------- --------
Balance, as of July 1, 2007 -- 4,450 1,200 12,840 18,490
Additional accrued costs incurred due to
the acquisition of Elk 7,888 4,475 -- 19,491 31,854
Cash payments -- (4,475) (1,200) (19,768) (25,443)
Amount charged to property, plant and
equipment for asset write-down (7,888) -- -- -- (7,888)
Amount charged to write-off inventory -- (1,545) -- (31) (1,576)
Non-cash items -- -- -- (488) (488)
-------- -------- -------- -------- --------
Ending Balance, as of September 30, 2007 $ -- $ 2,905 $ -- $ 12,044 $ 14,949
======== ======== ======== ======== ========
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.
57
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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.
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 borrowers' 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
58
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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.
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 borrowers' 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 maturity date of 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.
59
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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 borrowers' 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 maturity date of 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 September 30, 2007, we had total outstanding consolidated
indebtedness of $1,910.1 million, which amount includes $52.8 million of demand
loans to our parent corporation and $16.8 million that matures prior to the end
of the third quarter of 2008. Our total outstanding consolidated indebtedness
also includes $281.0 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.
60
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
As of September 30, 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 September 30, 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 $2,485.8 million.
At September 30, 2007, we had outstanding letters of credit of
approximately $51.2 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.
Hedging Activity
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.
In accordance with SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities," which we refer to as SFAS No. 133, BMCA's swaps are
treated as cash flow hedges. At September 30, 2007, we had no ineffectiveness
related to our swaps. Therefore, for the quarter ended September 30, 2007, we,
based on the change in the LIBOR rate, reflected in other liabilities 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 liability was reflected in other comprehensive loss, net
of tax. The current period activity therefore marks the swaps instrument to
market and adjusts other comprehensive loss.
On each balance sheet date, we will test our fixed income interest rate
swaps to determine whether the swaps contain any ineffectiveness. If BMCA's
fixed income swaps contain any ineffectiveness, we will reflect the ineffective
portion in our statement of operations.
61
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
At September 30, 2007, based on changes in the closing LIBOR rate as of
September 28, 2007, we recorded a fair value loss on our fixed income interest
rate swaps of $4.0 million to other liabilities, while the offset was recorded
to other comprehensive loss, net of tax of $1.5 million. We have also recorded
$1.4 million in year-to-date interest income as of September 30, 2007 related to
our fixed income interest rate swaps.
In October 2007, we entered into additional interest rate swaps related
to our Term Loan with an effective date of October 23, 2007 and a maturity date
of October 23, 2012 with similar terms as dicussed above.
In July 2007, we began entering into treasury locks as additional
hedging instruments against our Term Loan. Our treasury locks have a settlement
date of October 30, 2007 and a maturity date of July 31, 2012. Our treasury
locks fix the U.S. treasury component, while excluding the swap component of the
forward benchmark LIBOR interest rate.
According to SFAS No. 133 our treasury locks are also cash flow hedges,
which are accounted for in the same manner as our swaps. At September 30, 2007,
we determined through statistical analysis that our treasury locks contained 98%
effectiveness. Therefore, at September 30, 2007, based on changes in the closing
LIBOR rate as of September 28, 2007, BMCA recorded a fair value loss of $2.7
million to accrued liabilities, with the effective portion offset of $2.6
million being recorded to other comprehensive loss, net of tax of $1.0 million
and the ineffective portion offset of $0.1 million being recorded in our
statement of operations.
On October 30, 2007 we settled our open treasury lock hedging positions
against our Term Loan, which resulted in a pre-tax loss of approximately $4.9
million, which we will amortize into our statement of operations over the life
of the Term Loan pursuant to SFAS No. 133.
Intercompany Transactions
We make loans to, and borrow from, our parent corporations from time to
time at prevailing market rates. As of September 30, 2007 and October 1, 2006,
BMCA Holdings Corporation owed us $56.2 and $56.0 million, including interest of
$0.9 and $0.7 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 $1.5 and $1.3 million during the third quarters ended September 30, 2007 and
October 1, 2006, respectively and $4.0 and $3.7 million during the nine month
periods ended September 30, 2007 and October 1, 2006, respectively. Interest
expense on our loans from BMCA Holdings Corporation amounted to $1.4 and $1.2
million during the third
62
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
quarters ended September 30, 2007 and October 1, 2006, respectively and $3.9 and
$3.5 million during the nine month periods ended September 30, 2007 and October
1, 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 September 30,
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 September 30,
2007 and October 1, 2006. In addition, for the nine months ended September 30,
2007 and October 1, 2006, we did not owe any loans to or enter into any lending
activities with 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 currently
proposed ISP Management Agreement, inclusive of the services provided to G-I
Holdings is approximately $6.7 million based on services provided to us in 2007.
We expect to finalize the ISP Management Agreement during our fourth quarter of
2007.
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 third quarters and nine month periods ended September 30, 2007 and October
1, 2006, we purchased $29.0, $26.2, $81.1 and $84.9 million, respectively, of
mineral products from Minerals under this contract.
Included in current assets as a non-interest bearing income tax
receivable from parent corporation is $10.0 and $9.1 million at September 30,
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.
63
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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 September 30, 2007, we had approximately $13.1
and $15.6 million, respectively, of unrecognized tax benefits. All of the
unrecognized tax benefits would affect our effective tax rate if recognized with
the exception of $1.4 million associated with Elk, which would affect goodwill.
We and our subsidiaries are 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
September 30, 2007, we had $3.8 and $4.8 million, respectively, of accrued
interest and penalties.
Our effective tax rate changed from 38.0% for the year ended December
31, 2006 to 31.0% for the nine month period ended September 30, 2007. The change
in the effective tax rate was primarily due to the impact of the estimated
annual restructuring and other expense charges in 2007, of which $97.6 million
was included in our income before interest expense and income taxes for the nine
month period ended September 30, 2007 and the establishment of a valuation
allowance related to state income taxes.
Contingencies
See Note 14 to Consolidated Financial Statements for information
regarding contingencies.
Other Matters
On October 15, 2007, we redeemed all of our remaining $2.5 million
outstanding 2007 Notes, including accrued and unpaid interest on such notes
through the date of redemption.
64
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Economic Outlook
We do not believe that inflation has had a material effect on our
results of operations during the first nine 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 third quarter of 2007, the cost of asphalt continued to be
high relative to historical levels, which reflects in large part record high
crude oil prices. Due to the strength of 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 multiple price increases in the first nine months 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 third quarter ended September 30, 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 was filed with the SEC on May 16, 2007, which we
refer to as the 2007 first quarter Form 10-Q.
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 statements. FIN 48 became effective for fiscal years
beginning after
65
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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 FSP, AUG AIR-1 "Accounting for
Planned Major Maintenance Activities" which we refer to as 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 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.
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
66
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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.
* * *
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.
67
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 and July
2007, BMCA entered into fixed income interest rate swaps and treasury locks,
respectively, to hedge against fluctuations in the variable interest rate of our
$975.0 million Term Loan. See Note 7 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 third quarter of fiscal year 2007 that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
68
BUILDING MATERIALS CORPORATION OF AMERICA
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of September 30, 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 14 to Consolidated
Financial Statements in Part I.
ITEM 6. EXHIBITS
Exhibit
Number Description
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.
69
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BUILDING MATERIALS CORPORATION OF AMERICA
BUILDING MATERIALS MANUFACTURING CORPORATION
DATE: November 14, 2007 BY: /s/John F. Rebele
----------------- --------------------------------------
John F. Rebele
Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
DATE: November 14, 2007 BY: /s/James T. Esposito
----------------- --------------------------------------
James T. Esposito
Vice President and Controller
(Principal Accounting Officer)
70