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 September 29, 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 October 28, 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
Third Quarter Ended Nine Months Ended
-------------------- -------------------
Oct. 1, Sept. 29, Oct. 1, Sept. 29,
1995 1996 1995 1996
-------- -------- -------- ---------
(Thousands)
Net sales.......................... $191,953 $226,666 $507,661 $581,002
-------- -------- -------- --------
Costs and expenses:
Cost of products sold............ 139,743 162,882 369,672 419,321
Selling, general and
administrative................. 36,586 43,456 99,605 113,627
-------- -------- -------- --------
Total costs and expenses....... 176,329 206,338 469,277 532,948
-------- -------- -------- --------
Operating income................... 15,624 20,328 38,384 48,054
Interest expense................... (6,194) (7,351) (18,203) (21,891)
Other expense, net................. (1,384) (15) (3,537) (490)
-------- -------- -------- --------
Income before income taxes......... 8,046 12,962 16,644 25,673
Income taxes....................... (3,232) (5,054) (6,646) (10,012)
-------- -------- -------- --------
Net income......................... $ 4,814 $ 7,908 $ 9,998 $ 15,661
======== ======== ======== ========
See Notes to Consolidated Financial Statements
1
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
December 31, September 29,
1995 1996
------------ -------------
ASSETS (Thousands)
Current Assets:
Cash.......................................... $ 45,767 $ 12,648
Investments in trading securities............. 6,095 436
Investments in available-for-sale securities.. 34,020 28,961
Accounts receivable, other.................... 24,247 57,739
Loan receivable from related party............ - 21,953
Inventories................................... 55,643 66,246
Deferred income tax benefits.................. 3,845 3,845
Other current assets.......................... 3,083 2,557
--------- ---------
Total Current Assets........................ 172,700 194,385
Property, plant and equipment, net.............. 180,059 192,349
Goodwill, net................................... 38,123 37,326
Deferred income tax benefits.................... 62,318 52,290
Other assets.................................... 11,066 12,700
--------- ---------
Total Assets.................................... $ 464,266 $ 489,050
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Short-term debt............................... $ - $ 256
Current maturities of long-term debt.......... 8,823 3,124
Accounts payable.............................. 39,532 47,221
Payable to related parties, net............... 1,713 8,993
Accrued liabilities........................... 27,019 39,734
Reserve for asbestos claims................... 48,176 20,581
--------- ---------
Total Current Liabilities................... 125,263 119,909
--------- ---------
Long-term debt less current maturities.......... 284,394 300,821
--------- ---------
Reserve for asbestos claims..................... 21,110 4,989
--------- ---------
Reserve for product warranty claims............. 28,700 28,782
--------- ---------
Other liabilities............................... 22,865 22,734
--------- ---------
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 60,797
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) (41,104)
Unfunded pension liability and other.......... (363) (4)
--------- ---------
Stockholder's Equity (Deficit).............. (18,066) 11,815
--------- ---------
Total Liabilities and Stockholder's Equity
(Deficit)..................................... $ 464,266 $ 489,050
========= =========
See Notes to Consolidated Financial Statements
2
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
--------------------
Oct. 1, Sept. 29,
1995 1996
-------- ---------
(Thousands)
Cash and cash equivalents, beginning of period......... $ 29,015 $ 51,862
-------- --------
Cash provided by operating activities:
Net income........................................... 9,998 15,661
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and goodwill amortization........... 15,345 16,571
Deferred income taxes.. ......................... 6,494 9,799
Non-cash interest charges........................ 16,118 17,661
(Increase) decrease in working capital items......... (36,124) (39,847)
Increase in payable to related parties............... 6,059 7,280
Other, net........................................... (3,421) (1,541)
-------- --------
Net cash provided by operating activities............. 14,469 25,584
-------- --------
Cash used in investing activities:
Capital expenditures and acquisition................. (18,930) (12,907)
Purchases of available-for-sale securities........... - (106,452)
Designation of trading securities as available-
for-sale........................................... - (8,206)
Proceeds from sales of available-for-sale securities. - 120,305
-------- --------
Net cash used in investing activities.............. (18,930) (7,260)
-------- --------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable............ 23,511 16,378
Increase in short-term debt.......................... - 256
Repayments of long-term debt......................... (1,029) (8,011)
Increase in loan receivable from related party....... (4,697) (21,953)
Decrease in restricted cash.......................... 24,484 -
Payments of asbestos claims.......................... (43,524) (43,716)
Other................................................ (295) (56)
-------- --------
Net cash used in financing activities.............. (1,550) (57,102)
-------- --------
Net change in cash and cash equivalents................ (6,011) (38,778)
-------- --------
Cash and cash equivalents, end of period............... $ 23,004 $ 13,084
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............... $ 1,739 $ 2,783
Income taxes....................................... 189 143
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"). G-I
Holdings is a wholly owned subsidiary of ISP Holdings Inc. ("ISP 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 September 29, 1996, and the results of operations and
cash flows for the periods ended October 1, 1995 and September 29, 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, Sept. 29,
1995 1996
------------ ---------
(Thousands)
Finished goods..................... $ 30,663 $ 39,844
Work in process.................... 7,594 8,858
Raw materials and supplies......... 17,891 18,449
---------- ---------
Total.............................. 56,148 67,151
Less LIFO reserve.................. (505) (905)
---------- ---------
Inventories........................ $ 55,643 $ 66,246
========== =========
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; $178.8 million had been paid through
September 29, 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 September 29, 1996, GAF had been named as a defendant in
approximately 59,300 pending lawsuits involving alleged health claims
relating to the inhalation of asbestos fiber ("Asbestos Claims"),
having previously resolved approximately 221,000 Asbestos Claims.
Plaintiffs in approximately 31,200 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 19,900 Asbestos Claims and
received notice of approximately 29,500 new Asbestos Claims (of which
approximately 23,800 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
filed a petition for a writ of certiorari with the United States
Supreme Court to pursue an appeal of the Third Circuit's decision.
GAF 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 September 29, 1996, were approximately $357.8 million
(before estimated present value of recoveries from products liability
insurance policies of approximately $211 million and related deferred
tax benefits of approximately $51.4 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 September 29, 1996,
before estimated recoveries from products liability insurance
policies, was $398.1 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
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.
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.
For further information regarding asbestos-related and
environmental matters and other litigation, reference is made to
"Item 3. Legal Proceedings" and Note 3 to Consolidated Financial
Statements contained in the Company's Form 10-K.
NOTE C: Subject to certain conditions, GAF intends to effect a series of
transactions involving its subsidiaries that will result in, among
other things, (1) the capital stock of ISP Holdings (whose principal
asset will then be approximately 83% of the issued and outstanding
common stock of International Specialty Products Inc. ("ISP")) being
distributed to the stockholders of GAF, (2) the Company's
manufacturing facility in Nashville, Tennessee (and certain related
assets and liabilities) being transferred to GAF Chemicals
Corporation ("GCC"), a subsidiary of GAF, and (3) U.S. Intec Inc.
becoming a subsidiary of the Company. As a result, ISP Holdings and
ISP will no longer be direct or indirect subsidiaries of GAF, and the
Company will remain a subsidiary of GAF. In that connection, GCC
will enter into a long-term supply agreement with the Company under
which GCC will supply glass fiber to the Company.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Third Quarter 1996 Compared With
Third Quarter 1995
The Company recorded third quarter 1996 net income of $7.9 million
compared with third quarter 1995 net income of $4.8 million. The 64% 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 third quarter of 1996 were $226.7 million,
an 18% increase over last year's sales of $192 million, primarily reflecting
increased unit volumes of both residential and commercial roofing products and
higher average selling prices.
Gross profit margin increased to 28.1% in the third quarter of 1996 from
27.2% in the third quarter of 1995, resulting primarily from higher average
selling prices. Selling, general and administrative expenses increased
slightly as a percentage of net sales from 19.1% in 1995 to 19.2% in 1996.
Operating income for the third quarter was $20.3 million, a 30% increase
over the $15.6 million recorded in the third quarter of 1995, principally
reflecting the increased sales and improved margins.
Interest expense increased to $7.3 million in the third quarter of 1996
from $6.2 million last year, reflecting higher debt levels. Other expense, net
was less than $.1 million compared with $1.4 million last year, primarily
reflecting higher investment and interest income (up $1.7 million).
Results of Operations - Nine Months 1996 Compared With
Nine Months 1995
For the first nine months of 1996, the Company recorded net income of
$15.7 million compared with net income of $10 million for the first nine months
of 1995. The 57% 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 nine months of 1996 were $581
million compared with $507.7 million for the same period last year. The 14%
sales growth reflected increased unit volumes of both residential and
commercial roofing products and higher average selling prices.
Gross profit margin improved to 27.8% for the first nine months of 1996
from 27.2% last year, resulting primarily from higher average selling prices.
Selling, general and administrative expenses as a percentage of net sales were
19.6% in each period.
8
Operating income for the first nine months of 1996 was $48.1 million, a
25% increase over the $38.4 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 $21.9 million in the first nine months of
1996 from $18.2 million last year, reflecting higher debt levels. Other
expense, net decreased to $.5 million from $3.5 million, primarily as a result
of higher investment and interest income (up $4.0 million).
Liquidity and Financial Condition
The Company generated $25.6 million of cash from operations during the
first nine months of 1996, and invested $7.3 million in capital programs and
net purchases of available-for-sale securities, for a net cash outflow of $18.3
million before financing activities.
Cash invested in additional working capital totaled $39.8 million during
the first nine months of 1996. This amount primarily reflected a seasonal
increase in inventories of $10.6 million and a $33.4 million increase in the
receivable from the trust which purchases the Company's trade accounts
receivable.
Cash used in financing activities for the first nine months of 1996
totaled $57.1 million, primarily reflecting $43.7 million in payments of
asbestos claims, $8.0 million in repayments of long-term debt and a $22 million
loan to an affiliate, partially offset by $16.4 million proceeds from the sale
of receivables.
As a result of the foregoing factors, cash and cash equivalents decreased
by $38.8 million during the first nine months of 1996 to $13.1 million
(excluding $29 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 September 29, 1996, $33.1 million of letters
of credit were outstanding and no amounts had been borrowed thereunder.
As of September 29, 1996, the current portion of the reserve for asbestos
claims was $20.6 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).
9
See Note B to Consolidated Financial Statements for information regarding
contingencies.
10
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
September 29, 1996.
11
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: October 29, 1996 BY: /s/John F. Rebele
---------------- ---------------------------
John F. Rebele
Vice President and Controller
(Principal Accounting Officer)
12