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 June 29, 2008
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, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |X| Smaller reporting company |_|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of August 13, 2008, 1,015,010 shares of Class A Common Stock, $.001 par value
of the registrant were outstanding. There is no trading market for the common
stock of the registrant. As of August 13, 2008, the additional registrant had
the number of shares outstanding which is shown on the table below. There is no
trading market for the common stock of the additional registrant. As of August
13, 2008, no shares of the registrant or the additional registrant were held by
non-affiliates.
ADDITIONAL REGISTRANTS
Address, including zip
Exact name of State or other Commission File code and telephone number,
registrant as jurisdiction of No. of No./I.R.S. including area code, of
specified in its incorporation or Shares Employer registrant's principal
charter organization Outstanding Identification No. executive offices
- ------- ------------ ----------- ------------------ -----------------
Building Materials Delaware 10 333-69749-01/ 1361 Alps Road
Manufacturing Corporation 22-3626208 Wayne, NJ 07470
(973) 628-3000
2
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in Thousands)
Second Quarter Ended Six Months Ended
------------------------ ---------------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
--------- --------- ----------- -----------
Net sales........................... $ 737,078 $ 663,270 $ 1,307,354 $ 1,193,261
--------- --------- ----------- -----------
Costs and expenses:
Cost of products sold............. 515,877 485,945 940,792 878,883
Selling, general and
administrative................... 125,689 137,830 231,498 248,990
Amortization of intangible assets. 2,847 - 5,693 -
Restructuring and other expenses.. 6,364 54,993 27,189 54,993
Other (income) expense, net....... 400 (797) 1,408 (378)
--------- --------- ----------- -----------
Total costs and expenses, net.. 651,177 677,971 1,206,580 1,182,488
--------- --------- ----------- -----------
Income (loss) before interest
expense and income taxes........... 85,901 (14,701) 100,774 10,773
Interest expense.................... (39,997) (45,670) (79,862) (94,948)
--------- --------- ----------- -----------
Income (loss) before income taxes... 45,904 (60,371) 20,912 (84,175)
Income tax (expense) benefit........ (18,103) 15,889 (8,156) 24,410
--------- --------- ----------- -----------
Net income (loss)................... $ 27,801 $ (44,482) $ 12,756 $ (59,765)
========= ========= =========== ===========
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)
June 29,
2008 December 31,
ASSETS (Unaudited) 2007
Current Assets: ------------ ------------
Cash and cash equivalents................................................. $ 116,989 $ 6,324
Accounts receivable, trade, net........................................... 516,142 210,857
Accounts receivable, other................................................ 9,258 10,792
Income tax receivable..................................................... - 11,968
Inventories, net.......................................................... 278,241 316,912
Deferred income tax assets................................................ 37,494 38,017
Other current assets...................................................... 22,215 13,698
------------ ------------
Total Current Assets.................................................... 980,339 608,568
Property, plant and equipment, net.......................................... 660,287 672,813
Goodwill.................................................................... 654,087 655,200
Intangible assets, net...................................................... 201,942 207,635
Income tax receivable from parent corporation............................... 10,016 10,016
Other noncurrent assets..................................................... 125,327 120,159
------------ ------------
Total Assets................................................................ $ 2,631,998 $ 2,274,391
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt...................................... $ 25,186 $ 24,630
Accounts payable.......................................................... 205,141 142,250
Payable to related parties................................................ 40,235 16,133
Loans payable to parent corporation....................................... 52,840 52,840
Accrued liabilities....................................................... 145,272 135,976
Product warranty claims................................................... 16,200 13,500
Discontinued operations - current liabilities............................. 560 560
------------ ------------
Total Current Liabilities................................................. 485,434 385,889
------------ ------------
Long-term debt.............................................................. 1,965,454 1,729,395
------------ ------------
Product warranty claims..................................................... 30,828 31,224
------------ ------------
Deferred income tax liabilities............................................. 69,295 60,869
------------ ------------
Other liabilities........................................................... 162,128 163,332
------------ ------------
Commitments and Contingencies - Note 13
Stockholders' 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; no shares issued............................. - -
Loans receivable from parent corporation.................................. (56,293) (56,224)
Accumulated deficit....................................................... (3,740) (16,496)
Accumulated other comprehensive loss...................................... (21,109) (23,599)
------------ ------------
Total Stockholders' Deficit............................................. (81,141) (96,318)
------------ ------------
Total Liabilities and Stockholders' Deficit................................. $ 2,631,998 $ 2,274,391
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
Six Months Ended
-------------------------------
June 29, July 1,
2008 2007
------------ -------------
Cash and cash equivalents, beginning of period.................................. $ 6,324 $ 7,777
------------ -------------
Cash used in operating activities:
Net income (loss)............................................................. 12,756 (59,765)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation.............................................................. 35,690 33,632
Amortization of intangible and other assets............................... 7,616 2,057
Restructuring and other expenses.......................................... 44,119 65,793
Deferred income taxes..................................................... 7,423 (33,163)
Noncash interest charges.................................................. 4,505 6,093
Increase in working capital items............................................. (237,736) (116,110)
Increase in product warranty claims........................................... 2,304 526
Increase in other assets...................................................... (10,352) (1,650)
Increase in other liabilities................................................. 3,252 2,136
Increase in net payable to related parties/parent corporations................ 24,102 8,102
Other, net.................................................................... (6,728) 867
------------ -------------
Net cash used in operating activities........................................... (113,049) (91,482)
------------ -------------
Cash used in investing activities:
Acquisition of ElkCorp........................................................ - (945,643)
Capital expenditures and 2007 acquisitions.................................... (18,790) (55,520)
Proceeds from sale of assets.................................................. 6,651 -
------------ -------------
Net cash used in investing activities........................................... (12,139) (1,001,163)
------------ -------------
Cash provided by financing activities:
Proceeds from issuance of long-term debt...................................... 531,000 2,188,749
Purchase of industrial development revenue bond certificates
issued by the Company...................................................... (4,800) -
Principal repayments of capital leases........................................ (4,194) -
Repayments of long-term debt.................................................. (285,508) (1,018,013)
Distribution to parent corporation............................................ - (171)
Loan to parent corporation.................................................... (69) (98)
Financing fees and expenses................................................... (576) (33,822)
------------ -------------
Net cash provided by financing activities....................................... 235,853 1,136,645
------------ -------------
Net change in cash and cash equivalents......................................... 110,665 44,000
------------ -------------
Cash and cash equivalents, end of period........................................ $ 116,989 $ 51,777
============ =============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
(continued on the following page)
5
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - (Continued)
(Dollars in Thousands)
Six Months Ended
-------------------------------
June 29, July 1,
2008 2007
------------ -------------
Supplemental Cash Flow Information:
Effect on cash from changes in working capital items:
Increase in accounts receivable trade and accounts
receivable other............................................................ $ (303,996) $ (177,813)
Decrease in income tax receivable............................................. 11,837 -
Decrease in inventories, net.................................................. 33,395 45,559
Increase in other current assets.............................................. (8,517) (4,095)
Increase in accounts payable.................................................. 64,478 5,582
Increase in accrued liabilities............................................... 13,375 20,041
Payments for restructuring and other expenses................................. (48,308) (5,384)
------------ -------------
Net effect on cash from increase in working capital items..................... $ (237,736) $ (116,110)
============ =============
Cash paid during the period for:
Interest (net of amount capitalized of $313 and $1,727
in 2008 and 2007, respectively)............................................ $ 71,001 $ 58,050
Income taxes ................................................................ $ 660 $ 1,542
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)
Note 1. Formation of the Company
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 common shares of Elk were acquired on March 26, 2007, resulting in Elk
becoming an indirect wholly-owned subsidiary of BMCA. See Note 3 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 June 29, 2008, and the
results of its operations for the second quarter and six-month periods ended and
its cash flows for the six-month periods ended June 29, 2008 and July 1, 2007,
respectively. All adjustments are of a normal recurring nature, except for the
restructuring and other expenses and debt restructuring costs recorded in the
Company's statement of operations for the six-month periods ended June 29, 2008
and July 1, 2007, respectively. 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, 2007, which was filed with the Securities and
Exchange Commission (the "SEC") on March 28, 2008 (the "2007 Form 10-K").
Reclassifications
Certain reclassifications have been made to conform to current year
presentation.
Note 2. New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("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, which is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FASB Staff Position ("FSP")
No. 157-2 "Partial Deferral to the Effective Date of Statement 157" ("FSP No.
157-2"), which is effective for fiscal years beginning after November 15, 2008
and excludes SFAS No. 13, "Accounting for Leases," defers certain non-financial
assets and non-financial liabilities and further clarifies the principles in
SFAS No. 157 on the fair value measurement of liabilities. The Company's
adoption of the provisions of SFAS No. 157 for all other items not deferred by
FSP No. 157-2 in its first quarter of 2008 did not have a material effect on its
7
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 2. New Accounting Pronouncements - (Continued)
consolidated financial statements. The Company is currently evaluating the
provisions of FSP No. 157-2 and does not expect that the adoption will have a
material effect on its 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"), which permits entities to elect to measure
specified financial instruments and warranty and insurance contracts at fair
value on a contract-by-contract basis, with changes in fair value recognized in
earnings each reporting period. The election, called the "fair value option,"
will enable some companies to reduce the volatility in reported earnings caused
by measuring related assets and liabilities differently, and it is simpler than
using the complex hedge-accounting provisions of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("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
and was effective for fiscal years beginning after November 15, 2007. In the
first quarter of 2008, the Company exercised its option to decline its adoption
of SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141 (revised in 2007)
"Business Combinations" ("SFAS No. 141R"), which provides revised guidance on
how an acquiring company should recognize and measure the identifiable assets
acquired, liabilities assumed, noncontrolling interests, and goodwill acquired
in a business combination. SFAS No. 141R also expands the required disclosures
related to the nature and financial statement impact of business combinations
and is effective, on a prospective basis, for business combinations completed in
fiscal years beginning after December 15, 2008. The Company will adopt SFAS No.
141R during its fiscal year ending December 31, 2009 and therefore has not
determined the effect, if any, the adoption of SFAS No. 141R will have on its
results of operations or financial position.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements" ("SFAS No. 160"), which
establishes requirements for ownership interests in subsidiaries held by parties
other than the Company (minority interests) to be clearly identified and
disclosed in the consolidated statement of financial position within equity, but
separate from the parent's equity. Any changes in the parent's ownership
interests are required to be accounted for in a consistent manner as equity
transactions and any noncontrolling equity investments in deconsolidated
subsidiaries must be measured initially at fair value. SFAS No. 160 is
8
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 2. New Accounting Pronouncements - (Continued)
effective, on a prospective basis, for fiscal years beginning after December 15,
2008; however, the presentation and disclosure requirements must be
retrospectively applied to comparative financial statements. The Company will
adopt the provisions of SFAS No. 160 during its fiscal year ending December 31,
2009 and does not expect the adoption to have any impact on its results of
operations or financial position as the Company does not have any noncontrolling
interests.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities" ("SFAS No. 161"), which amends
SFAS No. 133 and is intended to improve financial reporting related to
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. The provisions of SFAS No. 161
are effective on a prospective basis for fiscal years beginning on or after
November 15, 2008. The Company will adopt the disclosure provisions of SFAS No.
161 during its fiscal year ending December 31, 2009.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles" ("SFAS No. 162"), which identifies the sources
of accounting principles and the framework for selecting principles to be used
in the preparation and presentation of financial statements in accordance with
United States generally accepted accounting principles. SFAS No. 162 will be
effective 60 days after the SEC approves the Public Company Accounting Oversight
Board's amendments to Interim Audit Standards Section 411, "The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles." The
Company does not expect the adoption of SFAS No. 162 to have an impact on its
results of operations or financial position.
Note 3. Acquisition
On February 22, 2007, a subsidiary of BMCA acquired approximately 90%
of ElkCorp common shares at a purchase price of $43.50 per common share. On
March 26, 2007, the remaining Elk common shares were acquired in a second step
merger in exchange for the right to receive $43.50 per share in cash, which
resulted in Elk becoming an indirect wholly-owned subsidiary of BMCA. The
acquisition of the Elk common shares was completed at a purchase price of
approximately $945.5 million, net of the repayment of $195.0 million of the then
outstanding Elk senior notes, which were assumed in connection with the
acquisition and repaid in March 2007.
The Company financed the purchase of Elk, 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
Senior Secured Revolving Credit Facility (the "Senior Secured Revolving Credit
9
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 3. Acquisition - (Continued)
Facility"), a $975.0 million Term Loan Facility (the "Term Loan") and a $325.0
million Junior Lien Term Loan Facility (the "Junior Lien Term Loan", and
collectively with the Senior Secured Revolving Credit Facility and the Term
Loan, the "Senior Secured Credit Facilities"). See Note 7 for a description of
the Senior Secured Credit Facilities.
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. During its first quarter ended March 30, 2008, the Company completed
its purchase price allocation of the assets acquired and liabilities assumed
from Elk (see table below). The operating results of Elk are included in the
Company's results of operations from the date of acquisition.
The following table represents the final fair values of assets acquired
and liabilities assumed related to the acquisition of Elk as of the date of
acquisition with amounts paid in excess of their fair values being recorded as
goodwill.
Goodwill................................... $ 589,293
===========
Total assets acquired...................... $ 1,412,033
Total liabilities assumed.................. (466,514)
-----------
Net assets acquired........................ $ 945,519
===========
During the second quarter of 2007, the Company initiated a
restructuring plan (the "2007 Restructuring Plan") (see Note 4), which was
formulated in connection with the acquisition of Elk. Also, in connection with
the Elk acquisition and pursuant to SFAS No. 141 and Emerging Issues Task Force
("EITF") No. 95-3 "Recognition of Liabilities in Connection with a Purchase
Business Combination," the Company identified $8.7 million in purchase
accounting adjustments, which related to employee severance payments to former
Elk employees and lease termination expenses. As of June 29, 2008, the Company
had paid $2.9 million for severance costs and $1.1 million for lease termination
expenses. The Company expects to make approximately $4.7 million of lease
termination payments through 2019. The Company's employee severance payments
included the termination of approximately 130 Elk employees, including certain
management positions, in the manufacturing and selling and administrative areas.
10
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 4. Restructuring and Other Expenses
The 2007 Restructuring Plan was created to eliminate cost redundancies
recognized due to the acquisition of Elk and to reduce the Company's current
cost structure. The 2007 Restructuring Plan is expected to be fully implemented
by the end of the Company's fiscal year ending December 31, 2008. The Company
accounts for its restructuring activities in accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and EITF
No. 96-9 "Classification of Inventory Markdowns and Other Costs Associated with
Restructuring."
2007 Restructuring Charges
In connection with the acquisition of Elk, the Company identified
$191.9 million in restructuring and other expenses in its fiscal year ended
December 31, 2007, of which $97.0 million related to property, plant and
equipment write-downs at certain of its existing manufacturing facilities and
$25.1 million related to plant closing expenses. Restructuring and other
expenses also included $2.0 million in employee severance payments and $67.8
million in integration-related expenses, which primarily consisted of $24.3
million of inventory-related write-downs, $15.1 million of restructuring-related
sales discounts, $1.4 million of lease termination expenses and $27.0 million of
other integration expenses.
The Company recorded $181.0 million of the aforementioned restructuring
and other expenses in its statement of operations as of December 31, 2007, of
which $15.1 million was reflected as a reduction in net sales due to
restructuring-related sales discounts, $24.3 million was charged to cost of
products sold and $141.6 million was charged to restructuring and other
expenses.
Six-Months Ended June 29, 2008 Restructuring Charges
The Company identified an additional $42.0 million of restructuring and
other expenses in its six-months ended June 29, 2008, which included $8.7
million of plant closing expenses, $2.2 million in employee severance payments
and $31.1 million in integration-related expenses. Integration-related expenses
primarily consisted of $14.1 million of inventory write-downs, $2.8 million of
restructuring-related sales discounts and $14.2 million of other integration
expenses.
11
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 4. Restructuring and Other Expenses - (Continued)
The Company recorded $44.1 million of the aforementioned identified
restructuring and other expenses in its statement of operations in the six-month
period ended June 29, 2008, of which $2.8 million was reflected as a reduction
in net sales due to restructuring-related sales discounts, $14.1 million was
charged to cost of products sold and $27.2 million was charged to restructuring
and other expenses. The Company expects to incur the remaining $8.8 million of
identified restructuring and other expenses and make the remaining cash payments
related to its accrual by the end of its fiscal year ending December 31, 2008.
The table below details the Company's restructuring and other expense
accruals and charges made against the accrual during its six months ended
June 29, 2008:
Plant Employee
Restructuring and Closing Severance Integration
Other Expenses Expenses Payments Expenses Total
- ------------------ --------- --------- --------- ---------
(Thousands)
Beginning balance, as of
December 31, 2007....................................... $ 2,905 $ - $ 10,945 $ 13,850
Current period costs, net................................ 10,353 2,171 31,595 44,119
Cash payments............................................ (16,219) (2,171) (29,918) (48,308)
Amount related to property, plant and equipment for
asset adjustments....................................... 6,234 - (274) 5,960
Amount charged to write-off inventory.................... (63) - (1,713) (1,776)
Non-cash items........................................... - - (205) (205)
--------- --------- --------- ---------
Ending balance, as of June 29, 2008...................... $ 3,210 $ - $ 10,430 $ 13,640
========= ========= ========= =========
The Company's aggregate employee severance payments included the
termination of approximately 100 BMCA employees, including certain management
positions, in the manufacturing and selling and administrative areas.
12
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 5. Comprehensive Income (Loss)
The table below reconciles the Company's net income (loss) to
comprehensive income (loss) for the second quarter and six-month periods ended
June 29, 2008 and July 1, 2007, respectively:
Second Quarter Ended Six Months Ended
--------------------------- ---------------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
---------- ---------- ---------- ----------
(Thousands)
Net income (loss).................................... $ 27,801 $ (44,482) $ 12,756 $ (59,765)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net
of tax:
Derivative fair value adjustment -
interest rate swaps, net of tax of
($13,277) and ($4,982) for the
three-month periods ended June 29,
2008 and July 1, 2007, respectively,
and ($1,382) and ($5,048) for the
six-month periods ended June 29, 2008
and July 1, 2007, respectively...................... 21,661 8,130 2,255 8,236
Derivative fair value adjustment-
treasury locks, net of tax of ($72) and
$0 for the three-month periods ended
June 29, 2008 and July 1, 2007,
respectively, and ($144) and $0 for the
six-month periods ended June 29, 2008
and July 1, 2007, respectively...................... 118 - 235 -
---------- ---------- ---------- ----------
Comprehensive income (loss).......................... $ 49,580 $ (36,352) $ 15,246 $ (51,529)
========== ========== ========== ==========
Note 6. Inventories
Inventories consisted of the following as of June 29, 2008 and
December 31, 2007, respectively.
June 29, December 31,
2008 2007
------------ ------------
(Thousands)
Finished goods........................................ $ 183,859 $ 241,511
Work-in process....................................... 38,551 26,291
Raw materials and supplies............................ 82,821 72,950
--------- ---------
Total................................................. 305,231 340,752
Less LIFO reserve..................................... (26,990) (23,840)
--------- ---------
Inventories........................................... $ 278,241 $ 316,912
========= =========
13
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 7. Long-Term Debt
Long-term debt consists of the following at June 29, 2008 and
December 31, 2007:
June 29, December 31,
2008 2007
----------- -----------
(Thousands)
8% Senior Notes due 2008.................................. $ 4,875 $ 4,874
7 3/4% Senior Notes due 2014.............................. 250,545 250,590
Borrowings under the Senior Secured
Revolving Credit Facility................................ 372,000 122,000
Term Loan................................................. 962,874 965,362
Junior Lien Term Loan..................................... 325,000 325,000
Obligations under capital leases.......................... 57,804 61,997
Industrial development revenue bonds...................... 2,820 7,710
Chester Loan.............................................. 6,712 8,241
Other notes payable....................................... 8,010 8,251
----------- -----------
Total................................................. 1,990,640 1,754,025
Less current maturities................................... (25,186) (24,630)
----------- -----------
Long-term debt less current maturities.................... $ 1,965,454 $ 1,729,395
=========== ===========
On February 22, 2007, BMCA entered into Senior Secured Credit
Facilities consisting of a $975.0 million Term Loan, a $600.0 million Senior
Secured Revolving Credit Facility and a $325.0 million bridge loan facility,
which was subsequently replaced by a $325.0 million Junior Lien Term Loan, which
collectively financed the purchase of Elk and repaid certain existing BMCA debt
facilities and Elk senior note debt.
On April 10, 2008, the Company repurchased and retired $4.8 million of
industrial development revenue bond certificates issued by the Company with
respect to the Mount Vernon, Indiana Industrial Development Revenue Bond issued
in 1985.
As of June 29, 2008, the Company had total outstanding consolidated
indebtedness of $2,043.5 million, which included $52.8 million of demand loans
to its parent corporation and $25.2 million that matures prior to the end of the
second quarter of 2009. 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.
14
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 7. Long-Term Debt - (Continued)
As of June 29, 2008, the Company was in compliance with all covenants
under the Senior Secured Credit Facilities and the indentures governing its 8%
Senior Notes due 2008 (the "2008 Notes") and its 7 3/4% Senior Notes due 2014
(the "2014 Notes" and, together with the 2008 Notes, the "Senior Notes"). As of
June 29, 2008, the net book value of the collateral securing the Senior Secured
Revolving Credit Facility Collateral (as defined in the Senior Secured Revolving
Credit Facility) and the Term Loan Collateral (as defined in the Term Loan) was
$1,011.5 and $1,676.8 million, respectively.
At June 29, 2008, the Company had outstanding letters of credit of
approximately $49.7 million, which included approximately $10.7 million of
standby letters of credit related to certain obligations of G-I Holdings.
Note 8. Hedging Activity
In March 2007, the Company entered into forward-starting Eurodollar
rate, or LIBOR, based pay fixed income interest rate swaps related to its Term
Loan, with an effective date of April 23, 2007 and a maturity date of April 23,
2012. In October 2007, the Company entered into additional interest rate swaps
related to its Term Loan with an effective date of October 23, 2007 and a
maturity date of October 23, 2012 under terms similar to those of the Company's
swaps entered into in March 2007.
In accordance with SFAS No. 133, the Company's swaps are treated as
cash flow hedges. As of June 29, 2008, based on changes in the fair value of the
interest rate swaps, the Company recognized a cumulative fair value loss on its
interest rate swaps of $26.3 million to other liabilities, while the offset was
recognized as an other comprehensive loss, net of tax of $10.0 million. Amounts
may be reclassified from other comprehensive loss to interest expense if any
portion of the Company's swaps become ineffective. The Company does not
anticipate that any amount recorded in other comprehensive loss related to its
swaps will be reclassified during its fiscal year ending December 31, 2008.
In July 2007, the Company began entering into treasury locks as
additional hedging instruments related to its Term Loan. On October 30, 2007,
the Company settled its open treasury lock hedging positions, which resulted in
a fair value loss and cash settlement. Pursuant to SFAS No. 133, the Company is
amortizing the loss into its statement of operations over the life of the Term
Loan, of which $0.2 and $0.4 million was amortized into interest expense in its
second quarter and six-month period ended June 29, 2008, respectively.
15
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 9. Warranty Claims
The Company provides certain limited warranties covering most of its
residential roofing products for periods generally ranging from 20 to 50 years,
although certain product lines provide for a lifetime limited warranty. The
Company also offers certain limited warranties of varying duration covering most
of its commercial roofing products. Most of the Company's specialty building
products and accessories carry limited warranties for periods generally ranging
from 5 to 20 years, with lifetime limited warranties on certain products.
The accrual for product warranty claims consisted of the following for
the second quarter and six-month periods ended June 29, 2008 and July 1, 2007,
respectively:
Second Quarter Ended Six Months Ended
--------------------- ---------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
-------- -------- -------- --------
(Thousands)
Beginning balance................... $ 46,315 $ 41,609 $ 44,724 $ 26,971
Charged to cost of
products sold..................... 5,134 4,541 9,899 8,311
Payments/deductions................. (4,421) (4,977) (7,595) (7,784)
Acquisition of Elk.................. - - - 13,675
-------- -------- -------- --------
Ending balance...................... $ 47,028 $ 41,173 $ 47,028 $ 41,173
======== ======== ======== ========
The Company offers extended warranty contracts on sales of its
commercial roofing products. The lives of these extended commercial warranties
range from 10 to 20 years. In addition, the Company offers enhanced warranties
on certain of its residential roofing products. These enhanced warranties are
the "Golden Pledge Warranty(TM)", "Peace of Mind(TM)" and "Peak Performance(R)"
warranty programs. All revenue for the sale of these warranty programs is
deferred and amortized on a straight-line basis over the average life of such
warranty programs, which is in accordance with the accounting prescribed by FASB
Technical Bulletin No. 90-1 "Accounting for Separately Priced Extended Warranty
and Product Maintenance Contracts." Incremental direct costs associated with the
acquisition of the extended warranty contracts are capitalized and amortized on
a straight-line basis over the average life of these warranty programs. Current
costs of services performed related to claims paid under these warranty programs
are expensed as incurred.
16
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 9. Warranty Claims - (Continued)
At June 29, 2008 and July 1, 2007, the Company had deferred revenue
related to these agreements of $73.0 and $65.7 million, of which $8.6 and $8.3
million is included in other current liabilities and $64.4 and $57.4 million is
included in other liabilities, respectively. At June 29, 2008 and July 1, 2007,
the Company had related deferred costs of $51.5 and $42.8 million, of which $5.5
and $4.9 million is included in other current assets and $46.0 and $37.9 million
is included in other assets, respectively.
Note 10. Benefit Plans
Defined Benefit Plans
The Company provides a non-contributory defined benefit retirement plan
for certain hourly and salaried employees (the "Retirement Plan"). Benefits
under this plan are based on stated amounts for each year of service. The
Company's funding policy is consistent with the minimum funding requirements of
the Employee Retirement Income Security Act of 1974.
The Company's net periodic pension cost for the Retirement Plan
included the following components for the second quarter and six-month periods
ended June 29, 2008 and July 1, 2007, respectively:
Second Quarter Ended Six Months Ended
-------------------- --------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
-------- --------- -------- ---------
(Thousands)
Service cost....................... $ 430 $ 381 $ 860 $ 762
Interest cost...................... 610 567 1,221 1,134
Expected return on plan assets..... (792) (826) (1,584) (1,652)
Amortization of unrecognized prior
service cost..................... 4 10 7 20
Amortization of net losses from
earlier periods.................. 105 41 210 83
------ ------ ------ ------
Net periodic pension cost.......... $ 357 $ 173 $ 714 $ 347
====== ====== ====== ======
As of June 29, 2008, the Company expected to make pension contributions
of $1.3 million to the Retirement Plan in 2008, which is consistent with its
expectations as of December 31, 2007. The Company made Retirement Plan
contributions of $0.5 million during its first six months of 2008.
17
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 10. Benefit Plans - (Continued)
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees. Such subsidies were reduced or ended as of January 1,
1997. Effective March 1, 2005, the Company amended the plan to eliminate
postretirement medical benefits for all current and future retirees.
Net periodic postretirement benefit included the following components
for the second quarter and six-month periods ended June 29, 2008 and
July 1, 2007, respectively:
Second Quarter Ended Six Months Ended
---------------------- ---------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
--------- --------- --------- ---------
(Thousands)
Service cost....................... $ 4 $ 3 $ 7 $ 6
Interest cost...................... 29 30 58 60
Amortization of unrecognized prior
service cost..................... (142) (143) (285) (285)
Amortization of net gains from
earlier periods.................. (57) (56) (113) (113)
--------- --------- --------- ---------
Net periodic postretirement
benefit.......................... $ (166) $ (166) $ (333) $ (332)
========= ========= ========= =========
As of the second quarter ended June 29, 2008, the Company expected to
make aggregate benefit claim payments of approximately $0.2 million during 2008,
which are related to postretirement life insurance expenses. This is consistent
with the Company's expectations as of December 31, 2007.
Note 11. 2001 Long-Term Incentive Plan
Incentive units granted under the 2001 Long-Term Incentive Plan are
valued at Book Value (as defined in the Plan) or the value of such incentive
units specified at the date of grant. Increases or decreases in the Book Value
of those incentive units result in a change in the measure of compensation for
the award. Compensation expense for the Company's incentive units was $0.8 and
$0.8 million for the second quarter ended June 29, 2008 and July 1, 2007,
respectively, and $1.2 and $1.0 million for the six-month periods ended June 29,
2008 and July 1, 2007, respectively.
18
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 11. 2001 Long-Term Incentive Plan - (Continued)
The following is a summary of activity for incentive units related to the 2001
Long-Term Incentive Plan:
Six Months Ended Year-to-Date
June 29, December 31,
2008 2007
---------- ----------
Incentive Units outstanding, beginning
of period................................. 99,120 98,633
Granted..................................... 17,000 45,589
Exercised................................... (8,230) (38,387)
Forfeited................................... (5,635) (6,715)
-------- --------
Incentive Units outstanding, end
of period................................. 102,255 99,120
======== ========
Vested Units outstanding, end of period..... 41,886 38,750
======== ========
The initial value of each of the 17,000 incentive units granted on
January 1, 2008 was $592.01. The initial value of each of the 8,000 incentive
units granted on July 2, 2007 and the 37,589 incentive units granted on
January 1, 2007 was $589.43 and $583.08, respectively.
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 June 29, 2008 and July 1,
2007, BMCA Holdings Corporation owed the Company $56.3 and $56.1 million,
including interest of $1.0 and $0.8 million, respectively, and the Company owed
BMCA Holdings Corporation $52.8 and $52.8 million, with no unpaid interest,
respectively. Interest income on the Company's loans to BMCA Holdings
Corporation amounted to $0.8 and $1.2 million during the second quarter ended
June 29, 2008 and July 1, 2007, respectively, and $1.8 and $2.5 million during
the six-month periods ended June 29, 2008 and July 1, 2007, respectively.
Interest expense on the Company's loans from BMCA Holdings Corporation amounted
to $0.8 and $1.2 million during the second quarter ended June 29, 2008 and July
1, 2007, respectively, and $1.8 and $2.4 million during the six-month periods
ended June 29, 2008 and July 1, 2007, respectively. Loans payable to/receivable
from its parent corporations 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 the Senior Notes. Under the terms of
the Senior Secured Revolving Credit Facility and the indentures governing the
19
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 12. Related Party Transactions - (Continued)
Company's Senior Notes at June 29, 2008, 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 June 29, 2008 and July 1, 2007. In
addition, as of June 29, 2008 and July 1, 2007, the Company did not owe any
loans or enter into any lending activities with other affiliates.
The Company 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, to provide the
Company with certain management services (the "Management Agreement"). Based on
services provided to the Company in 2008 under the Management Agreement, the
aggregate amount payable to ISP Management Company, Inc. under the Management
Agreement for 2008, inclusive of the services provided to G-I Holdings, is not
yet available; however, after adjusting for inflationary factors, it is
currently estimated to be similar to the $6.7 million paid in 2007. The Company
does not expect any changes to the Management Agreement to have a material
impact on the Company's results of operations.
The Company and its subsidiaries purchase a substantial portion of
their headlap roofing granules, colored roofing granules and algae-resistant
granules, on a purchase order basis, from ISP Minerals Inc. ("ISP Minerals"), an
affiliate of BMCA and ISP. The amount of mineral products purchased each year on
this basis is based on current demand and is not subject to minimum purchase
requirements. For the second quarter ended June 29, 2008, the Company purchased
$12.3 million of roofing granules, and for the six-month period ended June 29,
2008, the Company purchased $19.5 million of roofing granules under this
arrangement.
In addition to the granules products purchased by BMCA under the above
mentioned purchase order basis, the balance of BMCA's granules requirements are
purchased under a contract expiring in 2013. The amount of mineral products
purchased each year under the contract is based on current demand and is not
subject to minimum purchase requirements. Under the contract, for the second
quarter ended June 29, 2008, the Company purchased $22.8 million of roofing
granules, and for the six-month period ended June 29, 2008, the Company
purchased $41.9 million of roofing granules.
Included in noncurrent assets as a tax receivable from parent
corporation on the Company's consolidated balance sheets is $10.0 and $10.0
million at June 29, 2008 and December 31, 2007, respectively, representing
amounts paid in excess of amounts due to G-I Holdings with respect to 2006 under
the Tax Sharing Agreement (as defined). These amounts are included in the
increase in net payable to related parties/parent corporations in the
consolidated statements of cash flows.
20
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 13. Contingencies
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 liabilities for Asbestos Claims. G-I Holdings has agreed
to indemnify the Company against any other existing or future claims related to
asbestos-related liabilities if asserted against the Company. 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, and the value of the Asbestos Claims
asserted against G-I Holdings is a contested issue in that bankruptcy which
remains pending.
Claimants in the G-I Holdings' bankruptcy, including judgment
creditors, might seek to satisfy their claims by asking the Bankruptcy Court to
require the sale of G-I Holdings' assets, including its holdings of BMCA
Holdings Corporation's common stock and its indirect holdings of the Company's
common stock. Such action could result in a change of control of the Company. In
addition, those creditors may attempt to assert Asbestos Claims against the
Company. (Approximately 1,900 Asbestos Claims were filed against the Company
prior to February 2, 2001). The Company believes that it will not sustain any
liability in connection with these or any other Asbestos Claims. On February 2,
2001, the United States Bankruptcy Court for the District of New Jersey issued a
temporary restraining order enjoining any existing or future claimant from
bringing or prosecuting an Asbestos Claim against the Company. By oral opinion
on June 22, 2001, and written order entered February 22, 2002, the 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. By order dated May 30, 2008, the District Court
dismissed the BMCA Action without ruling on the merits of BMCA's position that
it has no successor liability for Asbestos Claims. The District Court ruled that
a federal court declaratory judgment action was not the proper vehicle for
resolving this issue. The District Court's ruling did not affect the preliminary
injunction enjoining the prosecution of Asbestos Claims against BMCA, and the
Company believes that it does not have asbestos-related liability. Nevertheless,
21
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 13. Contingencies - (Continued)
it is not possible to predict the outcome of any subsequent litigation regarding
the continuation of the preliminary injunction and/or prosecution of Asbestos
Claims against the Company.
On or about February 8, 2001, the creditors' committee filed a
complaint in the United States Bankruptcy Court, District of New Jersey against
G-I Holdings and the Company. The complaint requests substantive consolidation
of 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.
22
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 13. 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, each entered
stipulated orders dated March 22, 2007, March 23, 2007 and April 4, 2007,
respectively, implementing the stay. By notices dated February 1, 2008, the
creditors' committee and legal representative of present and future holders of
asbestos-related demands elected to terminate the stay of proceedings in the G-I
Holdings bankruptcy and related litigation.
The Company has been advised by G-I Holdings that on August 12, 2008,
G-I Holdings reached an agreement with the creditors' committee and the legal
representative of present and future holders of asbestos related claims to
jointly file a plan of reorganization with the Bankruptcy Court that will
provide for settlement of Asbestos Claims and all related litigation. The
agreement is subject to a number of contingencies, but if the reorganization
plan is filed and confirmed, all of the actions described above will be
resolved.
If the reorganization plan is not confirmed and the Company is not
successful in defending against one or more of the claims outlined above, 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 Internal
Revenue Service (the "IRS") of a deficiency in the amount of $84.4 million
(after taking into account the use of net operating losses and foreign tax
credits otherwise available for use in later years) in connection with the
formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the
"surfactants partnership"), a partnership in which G-I Holdings held an
interest. On September 21, 2001, the IRS filed a proof of claim with respect to
such deficiency against G-I Holdings in the G-I Holdings' bankruptcy. If such
proof of claim is sustained, the Company and/or certain of the Company's
subsidiaries together with G-I Holdings and several current and former
subsidiaries of G-I Holdings could be severally liable for those taxes and
interest. G-I Holdings has filed an objection to the proof of claim, which is
the subject of an adversary proceeding pending in the United States District
Court for the District of New Jersey. By opinion and order dated September 8,
2006, the District Court ruled on the parties' respective motions for Partial
Summary Judgment, granting the government summary judgment on the issue of
"adequate disclosure" for statute of limitation purposes and denying G-I
Holdings summary judgment on its other statute of limitations defense (finding
material issues of fact that must be tried). If the IRS were to prevail for the
years in which the Company and/or certain of its subsidiaries were not part of
23
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 13. Contingencies - (Continued)
the G-I Holdings Group, the Company nevertheless could be 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. 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 it will not be required to pay any incremental income
tax to the Federal government with respect to this matter and that its ultimate
disposition 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 8, 10, 13 and 20 to the
consolidated financial statements contained in the Company's 2007 Form 10-K.
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters under the U.S.
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. Most of these 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.
While the Company cannot predict whether adverse decisions or events
can occur in the future, the Company believes that the ultimate disposition of
such matters will not have a material adverse effect on the liquidity, results
of operations, cash flows or financial position of the Company.
Other Contingencies
In the ordinary course of business, the Company has several supply
agreements that include minimum annual purchase requirements. In the event these
purchase requirements are not met, the Company may be required to make payments
under these supply agreements. There have been no material changes to these
contracts in the second quarter of 2008.
Note 14. Guarantor Financial Information
At June 29, 2008, 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
24
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 14. Guarantor Financial Information - (Continued)
full, unconditional and joint and several. In addition, Building Materials
Manufacturing Corporation, a wholly-owned subsidiary of the Company, was a
co-obligor on the 8% Senior Notes due 2007, which were redeemed during 2007. In
2007, BMCA Acquisition Inc., the direct parent of Elk, and Elk, as a result of
its merger with BMCA Acquisition Sub, became co-obligors on the Senior Secured
Revolving Credit Facility, the Term Loan and the Junior Lien Term Loan.
Presented below is condensed consolidating financial information for
the Company, the co-obligor subsidiaries 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.
25
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 14. Guarantor Financial Information - (Continued)
Condensed Consolidating Statement of Operations
Second Quarter Ended June 29, 2008
(Thousands)
(Unaudited)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------
Net sales................................. $ 702,430 $ 11,297 $ 23,351 $ - $ 737,078
Intercompany net sales.................... - 186,126 1,078,865 (1,264,991) -
--------- ---------- ---------- ----------- -----------
Total net sales....................... 702,430 197,423 1,102,216 (1,264,991) 737,078
--------- ---------- ---------- ----------- -----------
Costs and expenses:
Cost of products sold................... 610,324 196,432 974,112 (1,264,991) 515,877
Selling, general and
administrative........................ 74,096 9,224 42,369 - 125,689
Amortization of intangible
assets................................ - 2,847 - - 2,847
Restructuring and other
expenses.............................. - 842 5,522 - 6,364
Other (income) expense, net............. 64 (1) 337 - 400
--------- ---------- ---------- ----------- -----------
Total costs and expenses, net......... 684,484 209,344 1,022,340 (1,264,991) 651,177
--------- ---------- ---------- ----------- -----------
Income (loss) before equity in
earnings of subsidiaries,
interest expense and income
taxes................................... 17,946 (11,921) 79,876 - 85,901
Equity in earnings of
subsidiaries............................ 31,957 - - (31,957) -
Interest expense.......................... (24,599) (5,143) (10,255) - (39,997)
--------- ---------- ---------- ----------- -----------
Income (loss) before income taxes......... 25,304 (17,064) 69,621 (31,957) 45,904
Income tax (expense) benefit.............. 2,497 6,545 (27,145) - (18,103)
--------- ---------- ---------- ----------- -----------
Net income (loss)......................... $ 27,801 $ (10,519) $ 42,476 $ (31,957) $ 27,801
========= ========== =========== =========== ===========
26
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 14. Guarantor Financial Information - (Continued)
Condensed Consolidating Statement of Operations
Second Quarter Ended July 1, 2007
(Thousands)
(Unaudited)
Parent Co-Obligor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Net sales................................. $ 440,350 $ 194,821 $ 28,099 $ - $ 663,270
Intercompany net sales.................... - 345,762 389,925 (735,687) -
--------- ---------- ---------- ---------- ---------
Total net sales....................... 440,350 540,583 418,024 (735,687) 663,270
--------- ---------- ---------- ---------- ---------
Costs and expenses:
Cost of products sold................... 382,730 425,871 413,031 (735,687) 485,945
Selling, general and
administrative........................ 46,611 82,410 8,809 - 137,830
Restructuring and other
expenses.............................. 54,993 - - - 54,993
Other (income) expense, net............. (977) 188 (8) - (797)
--------- ---------- ---------- ---------- ---------
Total costs and expenses, net......... 483,357 508,469 421,832 (735,687) 677,971
--------- ---------- ---------- ---------- ---------
Income (loss) before equity in
earnings of subsidiaries,
interest expense and income
taxes................................... (43,007) 32,114 (3,808) - (14,701)
Equity in earnings of
subsidiaries............................. 10,383 - - (10,383) -
Interest expense.......................... (32,778) (4,938) (7,954) - (45,670)
--------- ---------- ---------- ---------- ---------
Income (loss) before income taxes......... (65,402) 27,176 (11,762) (10,383) (60,371)
Income tax (expense) benefit.............. 20,920 (7,915) 2,884 - 15,889
--------- ---------- ---------- ---------- ---------
Net income (loss)......................... $ (44,482) $ 19,261 $ (8,878) $ (10,383) $ (44,482)
========= ========== ========== ========== =========
27
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 14. Guarantor Financial Information - (Continued)
Condensed Consolidating Statement of Operations
Six Months Ended June 29, 2008
(Thousands)
(Unaudited)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
----------- ---------- ------------ ------------ ------------
Net sales............................ $ 1,248,382 $ 21,437 $ 37,535 $ - $ 1,307,354
Intercompany net sales............... - 337,293 1,945,659 (2,282,952) -
----------- ----------- ----------- ------------ -----------
Total net sales.................. 1,248,382 358,730 1,983,194 (2,282,952) 1,307,354
----------- ----------- ----------- ------------ -----------
Costs and expenses:
Cost of products sold.............. 1,084,174 355,259 1,784,311 (2,282,952) 940,792
Selling, general and
administrative................... 132,819 16,900 81,779 - 231,498
Amortization of intangible assets.. - 5,693 - - 5,693
Restructuring and other expenses... - 2,424 24,765 - 27,189
Other expense, net................. 683 59 666 - 1,408
----------- ----------- ----------- ------------ -----------
Total costs and expenses, net.... 1,217,676 380,335 1,891,521 (2,282,952) 1,206,580
----------- ----------- ----------- ------------ -----------
Income (loss) before equity in
earnings of subsidiaries, interest
expense and income taxes............ 30,706 (21,605) 91,673 - 100,774
Equity in earnings of subsidiaries... 24,248 - - (24,248) -
Interest expense..................... (49,545) (9,199) (21,118) - (79,862)
----------- ----------- ----------- ------------ -----------
Income (loss) before income taxes.... 5,409 (30,804) 70,555 (24,248) 20,912
Income tax (expense) benefit......... 7,347 12,014 (27,517) - (8,156)
----------- ----------- ----------- ------------ -----------
Net income (loss).................... $ 12,756 $ (18,790) $ 43,038 $ (24,248) $ 12,756
=========== =========== =========== ============ ===========
28
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 14. Guarantor Financial Information - (Continued)
Condensed Consolidating Statement of Operations
Six Months Ended July 1, 2007
(Thousands)
(Unaudited)
Parent Co-Obligor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Net sales............................. $ 854,282 $ 287,903 $ 51,076 $ - $ 1,193,261
Intercompany net sales................ - 662,402 749,253 (1,411,655) -
--------- --------- ---------- ------------ -----------
Total net sales..................... 854,282 950,305 800,329 (1,411,655) 1,193,261
--------- --------- ---------- ------------ -----------
Costs and expenses:
Costs of products sold.............. 729,236 773,143 788,159 (1,411,655) 878,883
Selling, general and
administrative.................... 103,689 128,782 16,519 - 248,990
Restructuring and other expenses.... 54,993 - - - 54,993
Other (income) expense, net......... (611) 246 (13) - (378)
--------- --------- ---------- ------------ -----------
Total costs and expenses, net....... 887,307 902,171 804,665 (1,411,655) 1,182,488
--------- --------- ---------- ------------ -----------
Income (loss) before equity in
earnings of subsidiaries, interest
expense and income taxes............ (33,025) 48,134 (4,336) - 10,773
Equity in earnings of subsidiaries.... 5,098 - - (5,098) -
Interest expense...................... (58,331) (21,453) (15,164) - (94,948)
--------- --------- ---------- ------------ -----------
Income (loss) before income taxes..... (86,258) 26,681 (19,500) (5,098) (84,175)
Income tax (expense) benefit.......... 26,493 (7,737) 5,654 - 24,410
--------- --------- ---------- ------------ -----------
Net income (loss)..................... $ (59,765) $ 18,944 $ (13,846) $ (5,098) $ (59,765)
========= ========= ========== ============ ===========
29
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 14. Guarantor Financial Information - (Continued)
Condensed Consolidating Balance Sheet
June 29, 2008
(Thousands)
(Unaudited)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- --------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 116,648 $ 102 $ 239 $ - $ 116,989
Accounts receivable, trade, net................ 489,409 9,223 17,510 - 516,142
Accounts receivable, other..................... 1,777 1,498 5,983 - 9,258
Inventories, net............................... - 64,482 213,759 - 278,241
Deferred income tax assets..................... 37,494 - - - 37,494
Other current assets........................... 6,254 1,163 14,798 - 22,215
----------- ----------- ----------- ------------ -----------
Total Current Assets......................... 651,582 76,468 252,289 - 980,339
Investment in subsidiaries....................... 1,581,272 - - (1,581,272) -
Intercompany loans including accrued
interest....................................... 1,117,129 (473,267) (643,862) - -
Due from/(to) subsidiaries, net.................. (1,310,356) 334,263 976,093 - -
Property, plant and equipment, net............... - 288,559 371,728 - 660,287
Goodwill......................................... 59,323 589,293 5,471 - 654,087
Intangible assets, net........................... - 201,942 - - 201,942
Income tax receivable from parent
corporation.................................... 10,016 - - - 10,016
Other noncurrent assets.......................... 88,577 11,353 25,397 - 125,327
----------- ----------- ----------- ------------ -----------
Total Assets..................................... $ 2,197,543 $ 1,028,611 $ 987,116 $ (1,581,272) $ 2,631,998
=========== =========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt........... $ 14,504 $ 669 $ 10,013 $ - $ 25,186
Accounts payable............................... - 40,953 164,188 - 205,141
Payable to related parties..................... 827 - 39,408 - 40,235
Loans payable to parent corporation............ 52,840 - - - 52,840
Accrued liabilities............................ 71,689 14,728 58,855 - 145,272
Product warranty claims........................ 12,600 3,600 - - 16,200
Discontinued operations - current
liabilities................................... - 560 - - 560
----------- ----------- ----------- ------------ -----------
Total Current Liabilities.................... 152,460 60,510 272,464 - 485,434
Long-term debt less current maturities........... 1,900,790 4,000 60,664 - 1,965,454
Product warranty claims.......................... 28,761 1,967 100 - 30,828
Deferred income tax liabilities.................. 69,295 - - - 69,295
Other liabilities................................ 127,378 12,032 22,718 - 162,128
----------- ----------- ----------- ------------ -----------
Total Liabilities................................ 2,278,684 78,509 355,946 - 2,713,139
Total Stockholders' Equity (Deficit)............. (81,141) 950,102 631,170 (1,581,272) (81,141)
----------- ----------- ----------- ------------ -----------
Total Liabilities and Stockholders'
Equity (Deficit)............................ $ 2,197,543 $ 1,028,611 $ 987,116 $ (1,581,272) $ 2,631,998
=========== =========== =========== ============ ===========
30
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 14. Guarantor Financial Information - (Continued)
Condensed Consolidating Balance Sheet
December 31, 2007
(Thousands)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents.................... $ - $ 1,936 $ 4,388 $ - $ 6,324
Accounts receivable, trade, net.............. 198,781 3,753 8,323 - 210,857
Accounts receivable, other................... 2,229 4,651 3,912 - 10,792
Income tax receivable........................ - 11,968 - - 11,968
Inventories, net............................. - 89,735 227,177 - 316,912
Deferred income tax assets................... 38,017 - - - 38,017
Other current assets......................... 5,644 1,985 6,069 - 13,698
----------- ----------- ---------- ----------- -----------
Total Current Assets....................... 244,671 114,028 249,869 - 608,568
Investment in subsidiaries..................... 1,557,024 - - (1,557,024) -
Intercompany loans including accrued
interest..................................... 767,084 (194,715) (572,369) - -
Due from/(to) subsidiaries, net................ (787,818) 13,469 774,349 - -
Property, plant and equipment, net............. - 297,942 374,871 - 672,813
Goodwill....................................... 40,080 590,405 24,715 - 655,200
Intangible assets, net......................... - 207,635 - - 207,635
Income tax receivable from parent
corporation.................................. 10,016 - - - 10,016
Other noncurrent assets........................ 86,604 11,963 21,592 - 120,159
----------- ----------- ---------- ------------ -----------
Total Assets................................... $ 1,917,661 $ 1,040,727 $ 873,027 $(1,557,024) $ 2,274,391
=========== =========== ========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt......... $ 14,530 $ 670 $ 9,430 $ - $ 24,630
Accounts payable............................. 21 32,026 110,203 - 142,250
Payable to related parties................... 992 - 15,141 - 16,133
Loans payable to parent corporation.......... 52,840 - - - 52,840
Accrued liabilities.......................... 63,402 18,412 54,162 - 135,976
Product warranty claims...................... 13,500 - - - 13,500
Discontinued operations - current
liabilities................................. - 560 - - 560
----------- ----------- ---------- ----------- -----------
Total Current Liabilities.................. 145,285 51,668 188,936 - 385,889
Long-term debt................................. 1,653,298 4,400 71,697 - 1,729,395
Product warranty claims........................ 25,755 5,369 100 - 31,224
Deferred income tax liabilities................ 60,869 - - - 60,869
Other liabilities.............................. 128,772 10,397 24,163 - 163,332
----------- ----------- ---------- ----------- -----------
Total Liabilities.............................. 2,013,979 71,834 284,896 - 2,370,709
Total Stockholders' Equity (Deficit)........... (96,318) 968,893 588,131 (1,557,024) (96,318)
----------- ----------- ---------- ----------- -----------
Total Liabilities and Stockholders' Equity
(Deficit)...................................... $ 1,917,661 $ 1,040,727 $ 873,027 $(1,557,024) $ 2,274,391
=========== =========== ========== =========== ===========
31
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 14. Guarantor Financial Information - (Continued)
Condensed Consolidating Statement of Cash Flows
Six Months Ended June 29, 2008
(Thousands)
(Unaudited)
Parent Co-Obligor Guarantor
Company Subsidiary Subsidiaries Consolidated
--------- ---------- ------------ ------------
Cash and cash equivalents, beginning of period....... $ - $ 1,936 $ 4,388 $ 6,324
--------- -------- --------- ---------
Cash provided by (used in) operating activities:
Net income (loss).................................. (11,492) (18,790) 43,038 12,756
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation..................................... - 13,836 21,854 35,690
Amortization of intangible and other assets...... - 5,693 1,923 7,616
Restructuring and other expenses................. 2,813 9,587 31,719 44,119
Deferred income taxes............................ 7,423 - - 7,423
Noncash interest charges......................... 3,595 599 311 4,505
(Increase) decrease in working capital items....... (285,333) 33,312 14,285 (237,736)
Increase in product warranty claims................ 2,106 198 - 2,304
(Increase) decrease in other assets................ (4,658) 85 (5,779) (10,352)
Increase in other liabilities...................... 2,244 913 95 3,252
Increase (decrease) in net payable to related
parties/parent corporations..................... 153,083 (42,239) (86,742) 24,102
Other, net......................................... - (124) (6,604) (6,728)
--------- -------- --------- ---------
Net cash provided by (used in) operating activities.. (130,219) 3,070 14,100 (113,049)
--------- -------- --------- ---------
Cash used in investing activities:
Capital expenditures............................... - (4,501) (14,289) (18,790)
Proceeds from sale of assets....................... - - 6,651 6,651
--------- -------- --------- ---------
Net cash used in investing activities................ - (4,501) (7,638) (12,139)
--------- -------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from issuance of long-term debt........... 531,000 - - 531,000
Purchase of industrial development revenue bond
certificates issued by the Company............... - - (4,800) (4,800)
Principal repayments of capital leases............. - - (4,194) (4,194)
Repayments of long-term debt....................... (283,488) (403) (1,617) (285,508)
Loan to parent corporation......................... (69) - - (69)
Financing fees and expenses........................ (576) - - (576)
--------- -------- --------- ---------
Net cash provided by (used in) financing activities.. 246,867 (403) (10,611) 235,853
--------- -------- --------- ---------
Net change in cash and cash equivalents.............. 116,648 (1,834) (4,149) 110,665
--------- -------- --------- ---------
Cash and cash equivalents, end of period............. $ 116,648 $ 102 $ 239 $ 116,989
========= ======== ========= =========
32
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 14. Guarantor Financial Information - (Continued)
Condensed Consolidating Statement of Cash Flows
Six Months Ended July 1, 2007
(Thousands)
(Unaudited)
Parent Co-Obligor Guarantor
Company Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------ ------------
Cash and cash equivalents, beginning of period............... $ 18 $ 1,870 $ 5,889 $ 7,777
------------ ----------- --------- ------------
Cash provided by (used in) operating activities:
Net income (loss).......................................... (64,863) 18,944 (13,846) (59,765)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation............................................. - 28,955 4,677 33,632
Amortization............................................. - 2,057 - 2,057
Restructuring and other expenses......................... 65,793 - - 65,793
Deferred income taxes.................................... (33,163) - - (33,163)
Noncash interest charges................................. 5,368 212 513 6,093
(Increase) decrease in working capital items............... (157,530) (20,392) 61,812 (116,110)
Increase (decrease) in product warranty claims............. 1,215 (389) (300) 526
(Increase) decrease in other assets........................ (2,286) 1,158 (522) (1,650)
Increase (decrease) in other liabilities................... 1,506 632 (2) 2,136
Increase (decrease) in net payable to
related parties/parent corporations...................... (1,250,975) 1,291,744 (32,667) 8,102
Other, net................................................. 1 606 260 867
------------ ----------- --------- ------------
Net cash provided by (used in) operating
activities................................................. (1,434,934) 1,323,527 19,925 (91,482)
------------ ----------- --------- ------------
Cash used in investing activities:
Acquisition of ElkCorp..................................... - (945,643) - (945,643)
Capital expenditures and acquisitions...................... - (32,284) (23,236) (55,520)
------------ ----------- --------- ------------
Net cash used in investing activities........................ - (977,927) (23,236) (1,001,163)
------------ ----------- --------- ------------
Cash provided by (used in) financing activities:
Proceeds from issuance of long-term debt................... 2,162,849 25,900 - 2,188,749
Repayments of long-term debt............................... (693,842) (324,171) - (1,018,013)
Distribution to parent corporation......................... (171) - - (171)
Loan to parent corporation................................. (98) - - (98)
Financing fees and expenses................................ (33,822) - - (33,822)
------------ ----------- --------- ------------
Net cash provided by (used in) financing activities.......... 1,434,916 (298,271) - 1,136,645
------------ ----------- --------- ------------
Net change in cash and cash equivalents...................... (18) 47,329 (3,311) 44,000
------------ ----------- --------- ------------
Cash and cash equivalents, end of period..................... $ - $ 49,199 $ 2,578 $ 51,777
============ =========== ========= ============
33
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
We are a leading national manufacturer and marketer of a broad line of
asphalt and polymer-based roofing products and accessories for the residential
and commercial roofing markets. 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 ElkCorp, which we refer
to as Elk, a Dallas, Texas-based manufacturer of roofing products and building
materials, and the remaining common shares of Elk were acquired on March 26,
2007, resulting in Elk becoming an indirect wholly-owned subsidiary of BMCA.
We believe the Elk acquisition has strategically positioned us for
future growth in the roofing industry and building products market. We also
believe the acquisition of Elk has allowed us to build on our market leadership
position and create comprehensive market-leading product offerings. Our
principal lines of residential roofing shingles are the Timberline(R) series,
the Sovereign(R) series, Premium Designer Shingles and Specialty Shingles. The
Timberline(R) series includes the Timberline(R) Prestique(R) 30
High-Definition(R), Timberline(R) Natural Shadow(TM), Timberline(R) Prestique(R)
40 High-Definition(R), Timberline(R) Prestique(R) Lifetime High-Definition(R)
and Timberline(R) Prestique(R) Grande shingles. Our premium designer shingles
include the Slateline(R), Grand Slate(TM), Grand Sequoia(R), Grand Canyon(TM),
Country Mansion(R), Capstone(R), and Camelot(TM) shingles. We sell specialty
shingles under the TruSlate(TM) product line, which offers a slate shingle
system. We supply the major components necessary to install a complete roofing
system from underlayments to attic ventilation products and accessories, under
the Weather Stopper(R) 3-Part Roof Protection System. In recent years, we have
improved our sales mix of residential roofing products by increasing our
emphasis on laminated shingles and accessory products (the Timberline(R) series,
premium designer shingles and specialty shingles), which are generally sold at
higher prices and more attractive profit margins than our standard asphalt strip
shingle products (the Sovereign(R) series). See Acquisition. Unless otherwise
indicated by the context, "we," "us," and "our" refer to Building Materials
Corporation of America and its consolidated subsidiaries.
Critical Accounting Policies
There have been no significant changes to our Critical Accounting
Policies during the six-month period ended June 29, 2008. 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, 2007, which was filed with the Securities and
Exchange Commission, which we refer to as the SEC, on March 28, 2008, which we
refer to as the 2007 Form 10-K.
34
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
Results of Operations
Roofing products sales is 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; home ownership rates; and extreme
weather and energy concerns. Our roofing business is also affected by raw
material costs, including asphalt and other petroleum-based raw materials, as
well as energy, and transportation and distribution costs.
Second Quarter 2008 Compared With
Second Quarter 2007
Our improved second quarter performance resulted principally from, in
addition to the realization of acquisition-related synergies, higher roofing
demand as a consequence of severe weather conditions in many parts of the
country during the first six months of 2008, which in turn led to substantially
higher average selling prices and increased unit volumes.
We recorded net income of $27.8 million in the second quarter of 2008
compared to a net loss of $44.5 million in the second quarter of 2007. Our
reported net income in the second quarter of 2008 included $9.8 million of
after-tax ($16.1 million pre-tax) restructuring and other expenses, of which
$1.0 million after-tax ($1.7 million pre-tax) was included as a reduction in net
sales and $4.9 million after-tax ($8.0 million pre-tax) was included in cost of
products sold related to the integration of Elk operations. Our reported net
loss in the second quarter of 2007 included $46.7 million of after-tax ($65.8
million pre-tax) restructuring and other expenses, of which $7.7 million
after-tax ($10.8 million pre-tax) was included in cost of products sold.
Included in restructuring and other expenses are plant closing expenses related
to the closure of several manufacturing facilities along with the write-down of
certain plant assets related to the closed facilities in 2007,
integration-related costs and the write-down of selected inventories. Excluding
restructuring and other expenses, second quarter of 2008 net income was $37.6
million compared to the second quarter of 2007 net income of $2.2 million. The
increase in net income for the second quarter of 2008 was primarily attributable
to higher income before interest expense and income taxes and lower interest
expense.
Net sales for the second quarter of 2008 were $737.1 million compared
to second quarter of 2007 net sales of $663.3 million. The increase in second
quarter of 2008 net sales was primarily due to higher net sales of residential
roofing products largely due to higher average selling prices and higher unit
volumes, which were driven by severe weather-related storm demand in many parts
of the country that offset the impact of softer new construction and remodeling
demand. In addition, the higher average selling prices realized in the second
quarter of 2008 were implemented to mitigate significant increases in raw
material costs, including asphalt, and higher transportation costs. For the
second quarter of 2008, commercial roofing products unit volumes also increased.
35
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
Income before interest expense and income taxes in the second quarter
of 2008, as reported, was $85.9 million compared to a reported loss before
interest expense and income taxes of $14.7 million in the second quarter of
2007. Our income before interest expense and income taxes in the second quarter
of 2008, as reported, included $16.1 million of restructuring and other
expenses, of which $1.7 million was included as a reduction in net sales and
$8.0 million was included in cost of products sold. Our reported loss before
interest expense and income taxes in the second quarter of 2007 included $65.8
million of restructuring and other expenses, of which $10.8 million was included
in cost of products sold. Excluding restructuring and other expenses, second
quarter of 2008 income before interest expense and income taxes was $102.0
million compared to the second quarter of 2007 income before interest expense
and income taxes of $51.1 million. The increase was primarily due to the
realization of acquisition-related synergies and lower manufacturing costs, as
well as higher average selling prices and higher unit volumes, which were offset
by higher raw material costs, including asphalt, and higher transportation
costs.
Interest expense in the second quarter of 2008 decreased to $40.0
million compared to $45.7 million in the second quarter of 2007. The decrease in
second quarter of 2008 interest expense was primarily due to a slightly lower
average interest rate.
Business Segment Information
Net Sales. Net sales of roofing products increased to $692.7 million for the
second quarter of 2008 compared to $617.7 million for the second quarter of
2007. The increase in second quarter of 2008 net sales was primarily due to
higher net sales of residential roofing products largely due to higher average
selling prices and higher unit volumes, which were driven by severe
weather-related storm demand in many parts of the country that offset the impact
of softer new construction and remodeling demand. In addition, the higher
average selling prices realized in the second quarter of 2008 were implemented
to mitigate significant increases in raw material costs, including asphalt, and
higher transportation costs. For the second quarter of 2008, commercial roofing
products unit volumes also increased. Net sales of specialty building products
and accessories decreased to $44.4 million for the second quarter of 2008
compared with $45.6 million for the second quarter of 2007.
Gross Margin. Our overall gross margin was $216.1 million or 29.3% of net sales
for the second quarter of 2008 compared with $177.3 million or 26.7% of net
sales for the second quarter of 2007. Included in our overall gross margin for
the second quarter of 2008 were $9.7 million of restructuring and other
expenses, of which $1.7 million was included as a reduction in net sales and
$8.0 million was included in cost of products sold. Included in our overall
gross margin for the second quarter of 2007 were $10.8 million of restructuring
and other expenses, which were included in cost of products sold. The increase
in our overall gross margin is primarily attributable to the realization of
acquisition-related synergies and lower manufacturing costs, as well as higher
average selling prices and higher unit volumes, which were offset by higher raw
material costs, including asphalt.
36
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
Six Months 2008 Compared With
Six Months 2007
We recorded net income of $12.8 million in the first six months of 2008
compared to a net loss of $59.8 million in the first six months of 2007. Our
reported net income in the first six months of 2008 included $26.9 million of
after-tax ($44.1 million pre-tax) restructuring and other expenses, of which
$1.7 million after-tax ($2.8 million pre-tax) was included as a reduction in net
sales and $8.6 million after-tax ($14.1 million pre-tax) was included in cost of
products sold related to the integration of Elk operations. Our reported net
loss in the first six months of 2007 included $46.7 million of after-tax ($65.8
million pre-tax) restructuring and other expenses, of which $7.7 million
after-tax ($10.8 million pre-tax) was included in cost of products sold, and
$16.5 million of after-tax ($23.2 million pre-tax) debt restructuring costs also
related to the acquisition. Included in restructuring and other expenses are
plant closing expenses related to the closure of several manufacturing
facilities along with the write-down of certain plant assets related to the
closed facilities in 2007, integration-related costs and the write-down of
selected inventories. Excluding restructuring and other expenses, the first six
months of 2008 net income was $39.7 million compared to the first six months of
2007 net income of $3.4 million after also adjusting for debt restructuring
costs included in interest expense. The increase in net income for the first six
months of 2008 was primarily attributable to higher income before interest
expense and income taxes.
Net sales for the first six months of 2008 were $1,307.4 million
compared to the first six months of 2007 net sales of $1,193.3 million. The
increase in net sales was primarily due to the first six months of 2008
residential roofing products net sales including a full six months of Elk net
sales, as compared to the first six months of 2007 residential roofing products
net sales, which only included Elk net sales since the date of acquisition. In
addition, the increase in net sales was due to higher average selling prices and
higher unit volumes, which were driven by severe weather-related storm demand in
many parts of the country that offset the impact of softer new construction and
remodeling demand. The higher average selling prices were implemented to
mitigate significant increases in raw material costs, including asphalt, and
higher transportation costs. For the six months of 2008, commercial roofing
products unit volumes also increased.
Income before interest expense and income taxes in the first six months
of 2008, as reported, was $100.8 million compared to reported income before
interest expense and income taxes of $10.8 million in the first six months of
2007. Our reported income before interest expense and income taxes for the first
six months of 2008 included $44.1 million of restructuring and other expenses,
of which $2.8 million was included as a reduction in net sales and $14.1 million
was included in cost of products sold. Our reported income before interest
expense and income taxes for the first six months of 2007 included $65.8 million
of restructuring and other expenses, of which $10.8 million was included in cost
of products sold. Excluding restructuring and other expenses, the first six
months of 2008 income before interest expense and income taxes was $144.9
million compared to the first six months of 2007 income before interest expense
and income taxes of $76.6 million. The increase in the first six months of 2008
income before interest expense and income taxes was primarily due to the
realization of acquisition-related synergies and lower manufacturing costs, as
well as higher average selling prices and higher unit volumes, which were offset
by higher raw material costs, including asphalt, and higher transportation
costs.
37
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
Interest expense in the first six months of 2008 decreased to $79.9
million compared to $95.0 million in the first six months of 2007, which
included $23.2 million of debt restructuring costs related to the acquisition of
Elk. The debt restructuring costs in 2007 were comprised of tender premiums and
the write-off of the remaining deferred financing fees and discounts associated
with certain of the then outstanding 8% Senior Notes due 2007, which we refer to
as the 2007 Notes, and the 8% Senior Notes due 2008, which we refer to as the
2008 Notes, of BMCA and all of the then outstanding senior notes of Elk.
Excluding the impact of these debt restructuring costs, interest expense for the
first six months of 2007 was $71.8 million. After excluding the debt
restructuring costs in 2007, the first six months of 2008 increase in interest
expense was primarily due to higher average borrowings, partially offset by a
lower average interest rate. The higher average borrowings are primarily due to
the 2008 interest expense including a full six months of interest associated
with borrowings related to the acquisition of Elk, while 2007 interest expense
included a partial six months of interest expense associated with these
borrowings since the date of acquisition.
Business Segment Information
Net Sales. Net sales of roofing products increased to $1,230.3 million for the
first six months of 2008 compared with $1,121.7 million for the first six months
of 2007. The increase in net sales of roofing products was primarily
attributable to the first six months of 2008 net sales of residential roofing
products including a full six months of Elk net sales as compared to the first
six months of 2007 net sales of residential roofing products, which only
included Elk net sales since the date of acquisition. In addition, the increase
in net sales was due to higher average selling prices and higher unit volumes,
which were driven by severe weather-related storm demand in many parts of the
country that offset the impact of softer new construction and remodeling demand.
The higher average selling prices were implemented to mitigate significant
increases in raw material costs, including asphalt, and higher transportation
costs. For the six months of 2008, commercial roofing products unit volumes also
increased. Net sales of specialty building products and accessories increased to
$77.1 million for the first six months of 2008 compared with $71.6 million for
the first six months of 2007. The increase in net sales of specialty building
products and accessories was primarily attributable to the inclusion of a full
six months of Elk net sales of specialty building products and accessories in
2008, as compared to 2007, which included net sales of specialty building
products of Elk since the date of acquisition.
Gross Margin. Our overall gross margin was $361.5 million or 27.7% of net sales
for the first six months of 2008 compared with $314.4 million or 26.3% of net
sales for the first six months of 2007. Included in our overall gross margin for
the first six months of 2008 were $16.9 million of restructuring and other
expenses, of which $2.8 million was included as a reduction in net sales and
$14.1 million was included in cost of products sold. Included in our overall
gross margin for the first six months of 2007 were $10.8 million of
restructuring and other expenses, which were included in cost of products sold.
The increase in our overall gross margin is primarily attributable to the
realization of acquisition-related synergies and lower manufacturing costs, as
well as higher average selling prices and higher unit volumes, which were offset
by higher raw material costs, including asphalt.
38
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, extreme
weather conditions can result in higher customer demand during our peak
operating season depending on the extent and severity of the damage from these
extreme 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 $125.2
million during the first six months of 2008, including $113.1 million of cash
used in operations, the reinvestment of $18.8 million for capital programs,
partially offset by $6.7 million of proceeds from the sale of assets.
Cash invested in additional working capital totaled $237.7 million
during the first six months of 2008, reflecting an increase in total accounts
receivable of $304.0 million, due to the seasonality of our business, an $11.8
million decrease due to the collection of an income tax receivable, a $33.4
million decrease in inventories primarily due to aggressive inventory management
and weather-related demand, an $8.5 million increase in other current assets, a
$77.9 million increase in accounts payable and accrued liabilities and an
increase of $48.3 million in payments for restructuring and other expenses. The
net cash used in operating activities also included a $24.1 million net increase
in the payable to related parties/parent corporations, primarily due to a
seasonal increase in amounts due under our long-term granule supply agreement
with an affiliated company. In addition, net cash used in operating activities
included a $10.4 million increase in other non-current assets primarily
reflecting a $4.4 million increase in deferred warranty-related program costs,
39
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
net of amortization; and $44.1 million in restructuring and other expenses (see
Restructuring and Other Expenses below).
Net cash provided by financing activities totaled $235.9 million during
the first six months of 2008, including $531.0 million of aggregate proceeds
from the issuance of long-term debt, related to the first six months of 2008
cumulative borrowings under our Senior Secured Revolving Credit Facility.
Financing activities also included $285.5 million in aggregate repayments of
long-term debt, of which $281.0 million related to the first six months of 2008
cumulative repayments under our Senior Secured Revolving Credit Facility and
$2.5 million related to our $975.0 million Term Loan Facility, which we refer to
as the Term Loan. In addition, financing activities included a $4.8 million
repurchase of industrial development revenue bond certificates, aggregate
principal repayments of $4.2 million on our capital leases and $0.6 million in
financing fees and expenses primarily related to debt restructuring costs.
Acquisition
On February 22, 2007, a subsidiary of BMCA acquired approximately 90%
of ElkCorp common shares at a purchase price of $43.50 per common share. On
March 26, 2007, the remaining Elk common shares were acquired in a second step
merger in exchange for the right to receive $43.50 per share in cash, which
resulted in Elk becoming an indirect wholly-owned subsidiary of BMCA. The
acquisition of the Elk common shares was completed at a purchase price of
approximately $945.5 million, net of the repayment of $195.0 million of the then
outstanding Elk senior notes, which were assumed in connection with the
acquisition and repaid in March 2007.
We financed the purchase of Elk, 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, which we refer to as the Junior Lien Term Loan,
and collectively with the Senior Secured Revolving Credit Facility and the Term
Loan, we refer to as the Senior Secured Credit Facilities. See Note 7 to the
Consolidated Financial Statements for a description of the Senior Secured Credit
Facilities.
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 recorded
40
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
as goodwill. During the first quarter ended March 30, 2008, we completed our
purchase price allocation of the assets acquired and liabilities assumed from
Elk (see table below). The operating results of Elk are included in our results
of operations from the date of acquisition.
The following table represents the final fair values of assets acquired
and liabilities assumed related to the acquisition of Elk as of the date of
acquisition with amounts paid in excess of their fair values being recorded as
goodwill.
Goodwill.................................... $ 589,293
===========
Total assets acquired....................... $ 1,412,033
Total liabilities assumed................... (466,514)
-----------
Net assets acquired......................... $ 945,519
===========
During the second quarter of 2007, we initiated a restructuring plan,
which we refer to as the 2007 Restructuring Plan, (see Restructuring and Other
Expenses), which was formulated in connection with the acquisition of Elk. Also,
in connection with the Elk acquisition and pursuant to SFAS No. 141 and Emerging
Issues Task Force, which we refer to as EITF, No. 95-3 "Recognition of
Liabilities in Connection with a Purchase Business Combination," we identified
$8.7 million in purchase accounting adjustments, which related to employee
severance payments to former Elk employees and lease termination expenses. As of
June 29, 2008, we had paid $2.9 million for severance costs and $1.1 million for
lease termination expenses. We expect to make approximately $4.7 million of
lease termination payments through 2019. Our employee severance payments
included the termination of approximately 130 Elk employees, including certain
management positions, in the manufacturing and selling and administrative areas.
Restructuring and Other Expenses
The 2007 Restructuring Plan was created to eliminate cost redundancies
recognized due to the acquisition of Elk and to reduce our current cost
structure. The 2007 Restructuring Plan is expected to be fully implemented by
the end of our fiscal year ending December 31, 2008. We account for our
restructuring activities in accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" and EITF No. 96-9 "Classification
of Inventory Markdowns and Other Costs Associated with Restructuring."
41
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
2007 Restructuring Charges
In connection with the acquisition of Elk, we identified $191.9 million
in restructuring and other expenses in our fiscal year ended December 31, 2007,
of which $97.0 million related to property, plant and equipment write-downs at
certain of our existing manufacturing facilities and $25.1 million related to
plant closing expenses. Restructuring and other expenses also included $2.0
million in employee severance payments and $67.8 million in integration-related
expenses, which primarily consisted of $24.3 million of inventory-related
write-downs, $15.1 million of restructuring-related sales discounts, $1.4
million of lease termination expenses and $27.0 million of other integration
expenses.
We recorded $181.0 million of the aforementioned restructuring and
other expenses in our statement of operations as of December 31, 2007, of which
$15.1 million was reflected as a reduction in net sales due to
restructuring-related sales discounts, $24.3 million was charged to cost of
products sold and $141.6 million was charged to restructuring and other
expenses.
Six-Months Ended June 29, 2008 Restructuring Charges
We identified an additional $42.0 million of restructuring and other
expenses during our six-months ended June 29, 2008, which included $8.7 million
of plant closing expenses, $2.2 million in employee severance payments and $31.1
million in integration-related expenses. Integration-related expenses primarily
consisted of $14.1 million of inventory write-downs, $2.8 million of
restructuring-related sales discounts and $14.2 million of other integration
expenses.
We recorded $44.1 million of the aforementioned identified
restructuring and other expenses in our statement of operations in the six-month
period ended June 29, 2008, of which $2.8 million was reflected as a reduction
in net sales due to restructuring-related sales discounts, $14.1 million was
charged to cost of products sold and $27.2 million was charged to restructuring
and other expenses. We expect to incur the remaining $8.8 million of identified
restructuring and other expenses and make the remaining cash payments related to
our accrual by the end of our fiscal year ending December 31, 2008.
42
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
The table below details our restructuring and other expense accruals
and charges made against the accrual during our six months ended June 29, 2008:
Plant Employee
Restructuring and Closing Severance Integration
Other Expenses Expenses Payments Expenses Total
- ------------------ -------- --------- ----------- -------
(Thousands)
Beginning balance, as of
December 31, 2007....................................... $ 2,905 $ - $ 10,945 $ 13,850
Current period costs, net................................ 10,353 2,171 31,595 44,119
Cash payments............................................ (16,219) (2,171) (29,918) (48,308)
Amount related to property, plant and equipment for
asset adjustments....................................... 6,234 - (274) 5,960
Amount charged to write-off inventory.................... (63) - (1,713) (1,776)
Non-cash items........................................... - - (205) (205)
--------- -------- --------- ---------
Ending balance, as of June 29, 2008...................... $ 3,210 $ - $ 10,430 $ 13,640
========= ======== ========= =========
Our aggregate employee severance payments included the termination of
approximately 100 BMCA employees, including certain management positions, in the
manufacturing and selling and administrative areas.
43
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
Long-Term Debt
Long-term debt consists of the following at June 29, 2008 and
December 31, 2007:
June 29, December 31,
2008 2007
----------- -----------
(Thousands)
8% Senior Notes due 2008.......................... $ 4,875 $ 4,874
7 3/4% Senior Notes due 2014...................... 250,545 250,590
Borrowings under the Senior Secured
Revolving Credit Facility........................ 372,000 122,000
Term Loan......................................... 962,874 965,362
Junior Lien Term Loan............................. 325,000 325,000
Obligations under capital leases.................. 57,804 61,997
Industrial development revenue bonds.............. 2,820 7,710
Chester Loan...................................... 6,712 8,241
Other notes payable............................... 8,010 8,251
----------- -----------
Total......................................... 1,990,640 1,754,025
Less current maturities........................... (25,186) (24,630)
----------- -----------
Long-term debt less current maturities............ $ 1,965,454 $ 1,729,395
=========== ===========
On February 22, 2007, BMCA entered into Senior Secured Credit
Facilities consisting of a $975.0 million Term Loan Facility, a $600.0 million
Senior Secured Revolving Credit Facility and a $325.0 million bridge loan
facility, which was subsequently replaced by a $325.0 million Junior Lien Term
Loan, which collectively financed the purchase of Elk and repaid certain
existing BMCA debt facilities and Elk senior note debt.
On April 10, 2008, we repurchased and retired $4.8 million of
industrial development revenue bond certificates issued by us with respect to
the Mount Vernon, Indiana Industrial Development Revenue Bond issued in 1985.
As of June 29, 2008, we had total outstanding consolidated indebtedness
of $2,043.5 million, which included $52.8 million of demand loans to our parent
corporation and $25.2 million that matures prior to the end of the second
quarter of 2009. 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.
44
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
As of June 29, 2008, we were in compliance with all covenants under the
Senior Secured Credit Facilities, and the indentures governing our 2008 Notes
and our 7 3/4% Senior Notes due 2014, which we refer to as the 2014 Notes and,
together with the 2008 Notes, the Senior Notes. As of June 29, 2008, the net
book value of the collateral securing the Senior Secured Revolving Credit
Facility Collateral (as defined in the Senior Secured Revolving Credit Facility)
and the Term Loan Collateral (as defined in the Term Loan) was $1,011.5 and
$1,676.8 million, respectively.
At June 29, 2008, we had outstanding letters of credit of approximately
$49.7 million, which included approximately $10.7 million of standby letters of
credit related to certain obligations of G-I Holdings.
Hedging Activity
In March 2007, we entered into forward-starting Eurodollar rate, or
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
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 under terms similar to those of our swaps entered into in March 2007.
In accordance with SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities", our swaps are treated as cash flow hedges. As of June
29, 2008, based on changes in the fair value of the interest rate swaps, we
recognized a cumulative fair value loss on our interest rate swaps of $26.3
million to other liabilities, while the offset was recognized as an other
comprehensive loss, net of tax of $10.0 million. Amounts may be reclassified
from other comprehensive loss to interest expense if any portion of our swaps
become ineffective. We do not anticipate that any amount recorded in other
comprehensive loss related to our swaps will be reclassified during our fiscal
year ending December 31, 2008.
In July 2007, we began entering into treasury locks as additional
hedging instruments related to our Term Loan. On October 30, 2007, we settled
our open treasury lock hedging positions, which resulted in a fair value loss
and cash settlement. Pursuant to SFAS No. 133, we are amortizing the loss into
our statement of operations over the life of the Term Loan, of which $0.2 and
$0.4 million was amortized into interest expense in our second quarter and
six-month period ended June 29, 2008, respectively.
45
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
Intercompany Transactions
We make loans to, and borrow from, our parent corporations from time to
time at prevailing market rates. As of June 29, 2008 and July 1, 2007, BMCA
Holdings Corporation owed us $56.3 and $56.1 million, including interest of $1.0
and $0.8 million, respectively, and we owed BMCA Holdings Corporation $52.8 and
$52.8 million, with no unpaid interest, respectively. Interest income on our
loans to BMCA Holdings Corporation amounted to $0.8 and $1.2 million during the
second quarter ended June 29, 2008 and July 1, 2007, respectively, and $1.8 and
$2.5 million during the six-month periods ended June 29, 2008 and July 1, 2007,
respectively. Interest expense on our loans from BMCA Holdings Corporation
amounted to $0.8 and $1.2 million during the second quarter ended June 29, 2008
and July 1, 2007, respectively, and $1.8 and $2.4 million during the six-month
periods ended June 29, 2008 and July 1, 2007, respectively. Loans payable
to/receivable from our parent corporations 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 the Senior Notes. Under
the terms of the Senior Secured Revolving Credit Facility and the indentures
governing our Senior Notes at June 29, 2008, 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 June 29, 2008 and July 1, 2007. In addition, as of June 29,
2008 and July 1, 2007, we did not owe any loans or enter into any lending
activities with other affiliates.
We have a management agreement, which we refer to as the 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, to provide us with certain management services. Based on
services provided to us in 2008 under the Management Agreement, the aggregate
amount payable to ISP Management Company, Inc. under the Management Agreement
for 2008, inclusive of the services provided to G-I Holdings, is not yet
available; however, after adjusting for inflationary factors, it is currently
estimated to be similar to the $6.7 million paid in 2007. We do not expect any
changes to the Management Agreement to have a material impact on our results of
operations.
We and our subsidiaries purchase a substantial portion of our headlap
roofing granules, colored roofing granules and algae-resistant granules, on a
purchase order basis, from ISP Minerals Inc., which we refer to as ISP Minerals,
an affiliate of BMCA and ISP. The amount of mineral products purchased each year
on this basis is based on current demand and is not subject to minimum purchase
requirements. For the second quarter ended June 29, 2008, we purchased $12.3
million of roofing granules, and for the six-month period ended June 29, 2008,
we purchased $19.5 million of roofing granules under this arrangement.
In addition to the granules products purchased by BMCA under the above
mentioned purchase order basis, the balance of BMCA's granules requirements are
purchased under a contract expiring in 2013. The amount of mineral products
purchased each year under the contract is based on current demand and is not
subject to minimum purchase requirements. Under the contract, for the second
quarter ended June 29, 2008, we purchased $22.8 million of roofing granules, and
for the six-month period ended June 29, 2008, we purchased $41.9 million of
roofing granules.
46
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
Included in noncurrent assets as a tax receivable from parent
corporation on our consolidated balance sheets is $10.0 and $10.0 million at
June 29, 2008 and December 31, 2007, respectively, representing amounts paid in
excess of amounts due to G-I Holdings with respect to 2006 under the Tax Sharing
Agreement (as defined). These amounts are included in the increase in net
payable to related parties/parent corporations in the consolidated statements of
cash flows.
Contingencies
See Note 13 to Consolidated Financial Statements for information
regarding contingencies.
Economic Outlook
We do not believe that inflation has had a material effect on our
results of operations during the first six months of 2008. 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.
The prices of energy and crude oil continued to rise during the second
quarter of 2008 reaching record high levels. In addition, the cost of asphalt
increased during the second quarter of 2008, also reaching record high levels,
which reflects higher crude oil prices and higher asphalt demand largely driven
by the seasonal paving market. 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. We will
attempt to pass on future cost increases from suppliers as needed; however, no
assurances can be provided that these price increases will be accepted in the
marketplace.
Contractual Obligations
There have been no significant changes to our contractual obligations
during the second quarter ended June 29, 2008. For a 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 2007 Form 10-K.
47
BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, which we
refer to as 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, which is effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued FASB Staff Position, which we refer to
as FSP, No. 157-2 "Partial Deferral to the Effective Date of Statement 157",
which we refer to as FSP No. 157-2, which is effective for fiscal years
beginning after November 15, 2008 and excludes SFAS No. 13, "Accounting for
Leases," defers certain non-financial assets and non-financial liabilities and
further clarifies the principles in SFAS No. 157 on the fair value measurement
of liabilities. Our adoption of the provisions of SFAS No. 157 for all other
items not deferred by FSP No. 157-2 in our first quarter of 2008 did not have a
material effect on our consolidated financial statements. We are currently
evaluating the provisions of FSP No. 157-2 and do not expect that the adoption
will have a material effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115", which we refer to as SFAS No. 159, which permits entities to
elect to measure specified financial instruments and warranty and insurance
contracts at fair value on a contract-by-contract basis, with changes in fair
value recognized in earnings each reporting period. The election, called the
"fair value option," will enable some companies to reduce the volatility in
reported earnings caused by measuring related assets and liabilities
differently, and it is simpler than using the complex hedge-accounting
provisions of SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" 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 and was effective for fiscal years beginning after November 15,
2007. In the first quarter of 2008, we exercised our option to decline the
adoption of SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141 (revised in 2007)
"Business Combinations", which we refer to as SFAS No. 141R, which provides
revised guidance on how an acquiring company should recognize and measure the
identifiable assets acquired, liabilities assumed, noncontrolling interests, and
goodwill acquired in a business combination. SFAS No. 141R also expands the
required disclosures related to the nature and financial statement impact of
business combinations and is effective, on a prospective basis, for business
combinations completed in fiscal years beginning after December 15, 2008. We
will adopt SFAS No. 141R during our fiscal year ending December 31, 2009 and
therefore we have not determined the effect, if any, the adoption of SFAS No.
141R will have on our results of operations or financial position.
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BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements", which we refer to as SFAS No.
160. SFAS No. 160 establishes requirements for ownership interests in
subsidiaries held by parties other than us (minority interests) to be clearly
identified and disclosed in the consolidated statement of financial position
within equity, but separate from the parent's equity. Any changes in the
parent's ownership interests are required to be accounted for in a consistent
manner as equity transactions and any noncontrolling equity investments in
deconsolidated subsidiaries must be measured initially at fair value. SFAS No.
160 is effective, on a prospective basis, for fiscal years beginning after
December 15, 2008; however, the presentation and disclosure requirements must be
retrospectively applied to comparative financial statements. We will adopt SFAS
No. 160 during our fiscal year ending December 31, 2009 and we do not expect the
adoption to have any impact on our results of operations or financial position
as we do not have any noncontrolling interests.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities", which we refer to as SFAS No.
161. SFAS No. 161 amends SFAS No. 133 and is intended to improve financial
reporting related to derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. The
provisions of SFAS No. 161 are effective on a prospective basis for fiscal years
beginning on or after November 15, 2008. We will adopt the provisions of SFAS
No. 161 during our fiscal year ending December 31, 2009.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles", which we refer to as SFAS No. 162, which
identifies the sources of accounting principles and the framework for selecting
principles to be used in the preparation and presentation of financial
statements in accordance with United States generally accepted accounting
principles. SFAS No. 162 will be effective 60 days after the SEC approves the
Public Company Accounting Oversight Board's amendments to Interim Audit
Standards Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." We do not expect the adoption of SFAS
No. 162 to have an impact on our results of operations or financial position.
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BUILDING MATERIALS CORPORATION OF AMERICA
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
Forward-looking Statements
This quarterly report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933, as amended 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.
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BUILDING MATERIALS CORPORATION OF AMERICA
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in the 2007 Form 10-K for a discussion of
"Market-Sensitive Instruments and Risk Management." There were no material
changes in such information as of June 29, 2008. See Note 8 to the Consolidated
Financial Statements.
Item 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: Our management, under the
supervision and 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.
Changes in Internal Control over Financial Reporting: There were no
significant changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
identified in management's evaluation during the second quarter of fiscal year
2008 that have materially affected or are reasonably likely to materially affect
our internal control over financial reporting.
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BUILDING MATERIALS CORPORATION OF AMERICA
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As of June 29, 2008, approximately 1,900 alleged asbestos-related
bodily injury claims relating to the inhalation of asbestos fiber were pending
against Building Materials Corporation of America. See Note 13 to Consolidated
Financial Statements in Part I.
Item 6. Exhibits
Exhibit
Number Description
- ------ -----------
31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial
Officer.
32.1 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer.
52
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BUILDING MATERIALS CORPORATION OF AMERICA
BUILDING MATERIALS MANUFACTURING CORPORATION
DATE: August 13, 2008 BY: /s/John F. Rebele
--------------- ------------------------------------------
John F. Rebele
Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
DATE: August 13, 2008 BY: /s/James T. Esposito
--------------- ------------------------------------------
James T. Esposito
Vice President and Controller
(Principal Accounting Officer)
53