FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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 30, 1996
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 of Incorporation) (I. R. S. Employer
Identification No.)
1361 Alps Road, Wayne, New Jersey 07470
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 628-3000
(Not applicable)
(Former name, former address and former fiscal year, if changed since last
report.)
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 / /
As of August 12, 1996, the Registrant had 10 shares of common stock, $.001 par
value, outstanding.
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
Second Quarter Ended Six Months Ended
-------------------- ------------------
July 2, June 30, July 2, June 30,
1995 1996 1995 1996
-------- -------- -------- --------
(Thousands)
Net sales.......................... $177,118 $208,071 $315,708 $354,336
-------- -------- -------- --------
Costs and expenses:
Cost of products sold............ 127,022 148,850 229,929 256,439
Selling, general and
administrative................. 34,295 39,574 63,019 70,171
-------- -------- -------- --------
Total costs and expenses....... 161,317 188,424 292,948 326,610
-------- -------- -------- --------
Operating income................... 15,801 19,647 22,760 27,726
Interest expense................... (6,029) (7,407) (12,009) (14,540)
Other expense, net................. (1,820) (305) (2,153) (475)
-------- -------- -------- --------
Income before income taxes......... 7,952 11,935 8,598 12,711
Income taxes....................... (3,156) (4,655) (3,414) (4,958)
-------- -------- -------- --------
Net income......................... $ 4,796 $ 7,280 $ 5,184 $ 7,753
======== ======== ======== ========
See Notes to Consolidated Financial Statements
1
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1995 1996
------------ ----------
ASSETS (Thousands)
Current Assets:
Cash.......................................... $ 45,767 $ 6,023
Investments in trading securities............. 6,095 3,016
Investments in available-for-sale securities.. 34,020 34,656
Accounts receivable, net...................... 24,247 63,480
Inventories................................... 55,643 69,807
Deferred income tax benefits.................. 3,845 3,845
Other current assets.......................... 3,083 2,586
--------- ---------
Total Current Assets........................ 172,700 183,413
Property, plant and equipment, net.............. 180,059 177,339
Goodwill, net................................... 38,123 37,597
Deferred income tax benefits.................... 62,318 57,227
Other assets.................................... 11,066 11,384
--------- ---------
Total Assets.................................... $ 464,266 $ 466,960
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Short-term debt............................... $ - $ 4,582
Current maturities of long-term debt.......... 8,823 3,302
Loan payable to related party................. - 2,447
Accounts payable.............................. 39,532 41,089
Payable to related parties, net............... 1,713 10,869
Accrued liabilities........................... 27,019 34,371
Reserve for asbestos claims................... 48,176 24,508
--------- ---------
Total Current Liabilities................... 125,263 121,168
--------- ---------
Long-term debt less current maturities.......... 284,394 294,992
--------- ---------
Reserve for asbestos claims..................... 21,110 11,039
--------- ---------
Reserve for product warranty claims............. 28,700 26,971
--------- ---------
Other liabilities............................... 22,865 22,737
--------- ---------
Stockholder's Equity (Deficit):
Common stock, $.001 par value per share;
1,000 shares authorized; 10 shares issued
and outstanding............................. - -
Additional paid-in capital.................... 46,936 46,936
Excess of purchase price over the adjusted
historical cost of the predecessor company
shares owned by GAF's stockholders.......... (7,874) (7,874)
Accumulated deficit........................... (56,765) (49,012)
Unfunded pension liability and other.......... (363) 3
--------- ---------
Stockholder's Equity (Deficit).............. (18,066) (9,947)
--------- ---------
Total Liabilities and Stockholder's Equity
(Deficit)..................................... $ 464,266 $ 466,960
========= =========
See Notes to Consolidated Financial Statements
2
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
--------------------
July 2, June 30,
1995 1996
-------- --------
(Thousands)
Cash and cash equivalents, beginning of period......... $ 29,015 $ 51,862
-------- --------
Cash provided by (used in) operating activities:
Net income........................................... 5,184 7,753
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and goodwill amortization........... 10,109 10,733
Deferred income taxes............................ 3,312 4,858
Non-cash interest charges........................ 10,623 11,560
(Increase) decrease in working capital items......... (47,763) (60,365)
Increase in payable to related parties............... 4,948 9,156
Other, net........................................... (3,243) (1,283)
-------- --------
Net cash used in operating activities.............. (16,830) (17,588)
-------- --------
Cash used in investing activities:
Capital expenditures................................. (12,032) (7,607)
Purchases of available-for-sale securities........... - (43,170)
Designation of trading securities as available-
for-sale........................................... - (8,206)
Proceeds from sales of available-for-sale securities. - 51,339
-------- --------
Net cash used in investing activities.............. (12,032) (7,644)
-------- --------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable............ 21,321 16,378
Increase in short-term debt.......................... - 4,582
Repayments of long-term debt......................... (617) (7,203)
Change in loans payable to/receivable from related
party.............................................. (3,568) 2,447
Decrease in restricted cash.......................... 24,484 -
Payments of asbestos claims.......................... (32,175) (33,739)
Other................................................ (98) (56)
-------- --------
Net cash provided by (used in) financing activities 9,347 (17,591)
-------- --------
Net change in cash and cash equivalents................ (19,515) (42,823)
-------- --------
Cash and cash equivalents, end of period............... $ 9,500 $ 9,039
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............... $ 973 $ 1,930
Income taxes....................................... - 85
See Notes to Consolidated Financial Statements
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Building Materials Corporation of America (the "Company") is a wholly
owned subsidiary of GAF Building Materials Corporation ("BMC"), which is an
indirect, wholly owned subsidiary of G-I Holdings Inc. ("G-I Holdings"), which
in turn is a wholly owned subsidiary of GAF Corporation ("GAF"). The financial
statements of the Company reflect, in the opinion of management, all
adjustments necessary to present fairly the financial position of the Company
at December 31, 1995 and June 30, 1996, and the results of operations and cash
flows for the periods ended July 2, 1995 and June 30, 1996. All adjustments
are of a normal recurring nature. These financial statements should be read in
conjunction with the annual financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995 (the "Form 10-K").
NOTE A: Inventories consist of the following:
December 31, June 30,
1995 1996
------------ --------
(Thousands)
Finished goods..................... $ 30,663 $ 44,457
Work in process.................... 7,594 8,448
Raw materials and supplies......... 17,891 17,607
-------- --------
Total.............................. 56,148 70,512
Less LIFO reserve.................. (505) (705)
-------- --------
Inventories........................ $ 55,643 $ 69,807
======== ========
NOTE B: Contingencies
Asbestos Claims Filed Against GAF
In connection with its formation, the Company contractually
assumed and agreed to pay the first $204.4 million of BMC's asbestos-
related bodily injury liabilities (whether for indemnity or defense),
relating to pending cases and previously settled, but not paid, cases
as of January 31, 1994, and no other asbestos liabilities of BMC.
Substantially all of the Company's asbestos liability is expected to
be paid by the end of 1997; $168.9 million had been paid through June
30, 1996. G-I Holdings and BMC have jointly and severally agreed to
indemnify the Company against any claims related to asbestos-related
liabilities, other than those assumed by the Company, in the event
that claims in connection with liabilities not assumed by the Company
are asserted against it.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B: (Continued)
As of June 30, 1996, GAF had been named as a defendant in
approximately 46,500 pending lawsuits involving alleged health claims
relating to the inhalation of asbestos fiber ("Asbestos Claims"),
having previously resolved approximately 220,000 Asbestos Claims.
Plaintiffs in approximately 19,500 of the pending lawsuits were
preliminarily enjoined from proceeding with their claims other than
in accordance with the pending class-action settlement of future
asbestos bodily injury claims (the "Settlement"). Since December 31,
1995, GAF has settled approximately 18,700 Asbestos Claims and
received notice of approximately 15,500 new Asbestos Claims (of which
approximately 11,900 are subject to the preliminary injunction). On
May 10, 1996, the United States Court of Appeals for the Third
Circuit (the "Third Circuit") issued an opinion, concluding that the
class action was not certifiable as a class action, thus reversing
the decision of the lower court which (i) found the Settlement fair
and reasonable and (ii) issued the preliminary injunction. GAF has
advised the Company that it intends to file a petition for a writ of
certiorari with the United States Supreme Court to pursue an appeal
of the Third Circuit's decision. GAF also has advised the Company
that it continues to believe the Settlement should ultimately be
upheld on appeal, although there can be no assurance in this regard.
The reserves of GAF and G-I Holdings for asbestos bodily injury
claims, as of June 30, 1996, were approximately $341.5 million
(before estimated present value of recoveries from products liability
insurance policies of approximately $188.1 million and related
deferred tax benefits of approximately $54.9 million). GAF and G-I
Holdings have advised the Company that certain components of the
asbestos-related liability and related insurance recoveries have been
reflected on a discounted basis in their financial statements, and
that the aggregate undiscounted liability, as of June 30, 1996,
before estimated recoveries from products liability insurance
policies, was $380.9 million. The estimate of liability for Asbestos
Claims is based on the Settlement becoming effective and on
assumptions which relate, among other things, to the number of new
cases filed, the cost of resolving (either by settlement or
litigation or through the mechanism established by the Settlement)
pending and future claims, the realization of related tax benefits,
the favorable resolution of pending litigation against certain
insurance companies and the amount of GAF's recoveries from various
insurance companies.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B: (Continued)
GAF believes that the reserves established on its books (which
reflect the discounting of a portion of the liabilities), together
with anticipated available insurance proceeds, will be sufficient to
satisfy all pending Asbestos Claims and all claims anticipated to be
resolved during the ten-year period of the Settlement. There can be
no assurance, however, that the assumptions referred to above are
correct.
Although any opinion is necessarily judgmental and must be based
on information currently known, it is the opinion of GAF and G-I
Holdings, based on the assumptions referred to above and their
analysis of their future business, financial prospects and cash
flows, that asbestos-related bodily injury claims will not,
individually or in the aggregate, have a materially adverse effect on
the respective financial positions, results of operations or
liquidity of GAF and G-I Holdings, after giving effect to the
aforementioned reserves. In the event that the Third Circuit's
decision is not reversed and the Settlement is not upheld, or the
conditions to the effectiveness of the Settlement are not satisfied,
GAF and G-I Holdings could be required to increase their estimates of
the asbestos-related liabilities and adjust any related discounts,
and it is not currently possible to estimate the range or amount of
such possible additional liability.
The Company believes that it will not sustain any liability in
connection with asbestos-related claims in excess of the $204.4
million that it has contractually assumed. While the Company cannot
predict whether any asbestos-related claims above the $204.4 million
will be asserted against it or its assets, or the outcome of any
litigation relative to such claims, it believes that it has
meritorious defenses to such claims. Moreover, it has been jointly
and severally indemnified by G-I Holdings and BMC with respect to
such claims, and GAF and G-I Holdings have advised the Company that,
based on the assumptions referred to above, they believe they have
and will have sufficient resources to enable them to satisfy their
asbestos-related liabilities. Should GAF or BMC be unable to satisfy
judgments against it in asbestos-related lawsuits, its judgment
creditors might seek to enforce their judgments against the assets of
GAF or BMC, including its holdings of common stock of the Company,
and such enforcement could result in a change of control with respect
to the Company.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B: (Continued)
GAF has also been named as a co-defendant in asbestos-in-
buildings cases for economic and property damage or other injuries
based upon an alleged present or future need to remove asbestos-
containing materials from public and private buildings. Since these
actions were first initiated 13 years ago, GAF has not only
successfully disposed of approximately 140 such cases at an average
cost (including cases disposed of at no cost to GAF) of approximately
$15,000 per case (all of which have been paid by insurance under
reservation of rights), but is a co-defendant in only 8 remaining
lawsuits.
Environmental Litigation
The Company, together with other companies, is a party to a
variety of proceedings and lawsuits involving environmental matters
("Environmental Claims"), in which recovery is sought for the cost of
cleanup of contaminated sites, a number of which are in the early
stages or have been dormant for protracted periods.
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. Although it is
difficult to predict the ultimate resolution of these claims, based
on the Company's evaluation of the financial responsibility of the
parties involved and their insurers, relevant legal issues and cost
sharing arrangements now in place, the Company estimates that its
liability in respect of all Environmental Claims, including certain
environmental compliance expenses, as of June 30, 1996, will be
approximately $1.4 million, before insurance recoveries reflected on
its balance sheet of $.5 million ("estimated recoveries"). The
Company believes that the ultimate disposition of such matters will
not, individually or in the aggregate, have a material adverse effect
on the results of operations, liquidity or financial position of the
Company.
After considering the relevant legal issues and other pertinent
factors, the Company believes that it will receive the estimated
recoveries and it may receive amounts substantially in excess
thereof. The Company believes it is entitled to substantially full
defense and indemnity under its insurance policies for most
Environmental Claims, although the Company's insurers have not
affirmed a legal obligation under the policies to provide indemnity
for such claims.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B: (Continued)
The estimated recoveries are based in part upon interim
agreements with certain insurers. The Company terminated these
agreements in 1995, and GAF commenced litigation on behalf of itself
and its subsidiaries seeking amounts substantially in excess of the
estimated recoveries. While the Company believes that its claims are
meritorious, there can be no assurance that the Company will prevail
in its efforts to obtain amounts equal to, or in excess of, the
estimated recoveries.
For further information regarding asbestos-related and
environmental matters, reference is made to "Item 3. Legal
Proceedings" and Note 3 to Consolidated Financial Statements
contained in the Company's Form 10-K.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Second Quarter 1996 Compared With
Second Quarter 1995
The Company recorded second quarter 1996 net income of $7.3 million
compared with second quarter 1995 net income of $4.8 million. The 52% increase
in net income resulted from higher operating income and lower other expense,
partially offset by increased interest expense.
The Company's net sales for the second quarter of 1996 were $208.1
million, a 17% increase over last year's sales of $177.1 million, primarily
reflecting increased unit volumes of both residential and commercial roofing
products and higher average selling prices.
Gross profit margin increased slightly to 28.5% in the second quarter of
1996 from 28.3% in the second quarter of 1995, resulting primarily from higher
average selling prices. Selling, general and administrative expenses decreased
as a percentage of net sales from 19.4% in 1995 to 19.0% in 1996.
Operating income for the second quarter was $19.6 million, a 24% increase
over the $15.8 million recorded in the second quarter of 1995, principally
reflecting the increased sales and improved margins.
Interest expense increased to $7.4 million in the second quarter of 1996
from $6 million last year, reflecting higher debt levels. Other expense, net
decreased to $.3 million from $1.8 million, primarily as a result of higher
investment and interest income (up $1.4 million).
Results of Operations - Six Months 1996 Compared With
Six Months 1995
For the first six months of 1996, the Company recorded net income of $7.8
million compared with net income of $5.2 million for the first six months of
1995. The 50% increase in net income was attributable to improved operating
income and lower other expense, partially offset by higher interest expense.
The Company's net sales for the first six months of 1996 were $354.3
million compared with $315.7 million for the same period last year. The 12%
sales growth reflected increased unit volumes of both residential and
commercial roofing products and higher average selling prices.
9
Gross profit margin improved to 27.6% for the first six months of 1996
from 27.2% last year, resulting primarily from higher average selling prices.
Selling, general and administrative expenses decreased slightly as a percentage
of net sales from 20% in 1995 to 19.8% in 1996.
Operating income for the first six months of 1996 was $27.7 million, a 22%
increase over the $22.8 million recorded in the same period of last year. The
higher operating income was attributable to the increased sales and improved
margins.
Interest expense increased to $14.5 million in the first six months of
1996 from $12 million last year, reflecting higher debt levels. Other expense,
net decreased to $.5 million from $2.2 million, primarily as a result of higher
investment and interest income (up $2.3 million).
Liquidity and Financial Condition
The Company used $17.6 million of cash in operations during the first six
months of 1996, and invested $7.6 million in capital programs and net purchases
of available-for-sale securities, for a net cash outflow of $25.2 million
before financing activities.
Cash invested in additional working capital totaled $60.4 million during
the first six months of 1996. This amount primarily reflected a seasonal
increase in inventories of $14.2 million and a $36 million increase in the
receivable from the trust which purchases the Company's trade accounts
receivable.
Cash used in financing activities for the first six months of 1996 totaled
$17.6 million, reflecting $33.7 million in payments of asbestos claims and $7.2
million in repayments of long-term debt, partially offset by $16.4 million
proceeds from the sale of receivables, $4.6 million of short-term borrowings
and a $2.4 million loan from an affiliate.
As a result of the foregoing factors, cash and cash equivalents decreased
by $42.8 million during the first six months of 1996 to $9 million (excluding
$34.7 million of available-for-sale securities).
In June 1996, the Company's bank credit facilities were extended to June
1997 on the same terms and conditions. Such facilities provide for revolving
lines of credit of up to $30 million and letters of credit facilities of up to
$39 million, provided that total borrowings and outstanding letters of credit
may not exceed $40 million. As of June 30, 1996, $33.1 million of letters of
credit were outstanding and no amounts had been borrowed thereunder.
10
As of June 30, 1996, the current portion of the reserve for asbestos
claims was $24.5 million. Substantially all of the asbestos-related
liabilities assumed by the Company are expected to be paid by the end of 1997.
The Company anticipates funding such obligations from operations, existing cash
and equivalents and/or borrowings (which may include borrowings from
affiliates).
See Note B to Consolidated Financial Statements for information regarding
contingencies.
11
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The discussion relating to legal proceedings contained in Note B to
Consolidated Financial Statements in Part I is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only.
(b) No Reports on Form 8-K were filed during the quarter ended June 30, 1996.
12
SIGNATURES
-----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Building Materials Corporation of America
DATE: August 13, 1996 BY: /s/John F. Rebele
--------------- ---------------------------
John F. Rebele
Vice President and Controller
(Principal Accounting Officer)
13