SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 28, 1997
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 (973) 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 November 11, 1997, 1,000,010 shares of the Registrant's common stock were
outstanding. All of the voting stock of the Registrant is held by GAF Building
Materials Corporation.
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
Third Quarter Ended Nine Months Ended
-------------------- --------------------
Sept. 29, Sept. 28, Sept. 29, Sept. 28,
1996 1997 1996 1997
--------- --------- --------- ---------
(Thousands)
Net sales ........................ $251,592 $274,356 $648,426 $723,614
-------- -------- -------- --------
Costs and expenses:
Cost of products sold .......... 180,928 197,934 470,678 521,291
Selling, general and
administrative ............... 47,818 50,845 126,561 142,521
-------- -------- -------- --------
Total costs and expenses...... 228,746 248,779 597,239 663,812
-------- -------- -------- --------
Operating income ................. 22,846 25,577 51,187 59,802
Interest expense ................. (7,926) (10,395) (23,741) (30,494)
Other income (expense), net ...... (15) 3,504 (490) 8,864
-------- -------- -------- --------
Income before income taxes ....... 14,905 18,686 26,956 38,172
Income taxes ..................... (5,754) (7,287) (10,474) (14,887)
-------- -------- -------- --------
Net income ....................... $ 9,151 $ 11,399 $ 16,482 $ 23,285
======== ======== ======== ========
See Notes to Consolidated Financial Statements
1
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
December 31, Sept. 28,
1996 1997
------------ ----------
ASSETS (Thousands)
Current Assets:
Cash and cash equivalents..................... $ 124,560 $ 44,114
Investments in trading securities............. 1,065 18,470
Investments in available-for-sale securities.. 82,016 56,206
Investments in held-to-maturity securities.... 7,169 1,202
Other short-term investments ................. 15,944 16,837
Accounts receivable, trade, net .............. 9,870 28,277
Accounts receivable, other.................... 23,235 50,659
Inventories................................... 77,196 89,349
Other current assets.......................... 3,751 4,145
--------- ---------
Total Current Assets........................ 344,806 309,259
Property, plant and equipment, net.............. 220,500 227,776
Goodwill, net................................... 60,469 70,330
Deferred income tax benefits.................... 59,053 43,798
Receivable from related parties ................ - 27,179
Other assets.................................... 16,755 16,374
--------- ---------
Total Assets.................................... $ 701,583 $ 694,716
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt.......... $ 3,412 $ 3,728
Accounts payable.............................. 47,879 52,242
Payable to related parties, net............... 2,287 7,184
Accrued liabilities........................... 27,938 39,823
Reserve for asbestos claims................... 3,062 -
Reserve for product warranty claims........... 12,914 10,700
--------- ---------
Total Current Liabilities................... 97,492 113,677
--------- ---------
Long-term debt less current maturities.......... 405,690 415,902
--------- ---------
Reserve for product warranty claims............. 30,755 25,925
--------- ---------
Other liabilities............................... 24,409 22,668
--------- ---------
Stockholder's Equity:
Series A Cumulative Redeemable Convertible
Preferred Stock, $.01 par value per share;
100,000 shares authorized; 0 shares issued - -
Common stock, $.001 par value per share;
1,050,000 shares authorized;
1,000,010 shares issued and outstanding .... 1 1
Additional paid-in capital.................... 182,699 131,910
Accumulated deficit........................... (40,174) (16,889)
Other......................................... 711 1,522
--------- ---------
Stockholder's Equity ....................... 143,237 116,544
--------- ---------
Total Liabilities and Stockholder's Equity ..... $ 701,583 $ 694,716
========= =========
See Notes to Consolidated Financial Statements
2
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
--------------------
Sept. 29, Sept. 28,
1996 1997
--------- ---------
(Thousands)
Cash and cash equivalents, beginning of period........... $ 45,989 $ 124,560
-------- ---------
Cash provided by (used in) operating activities:
Net income ............................................ 16,482 23,285
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation ...................................... 18,072 16,796
Goodwill amortization ............................. 1,201 1,421
Deferred income taxes.. ........................... 10,260 14,736
Noncash interest charges.. ........................ 17,661 20,125
(Increase) decrease in working capital items........... (46,182) (52,316)
Purchases of trading securities ...................... (28,726) (60,470)
Proceeds from sales of trading securities ............ 25,868 46,217
Change in net receivable from/payable to related
parties............................................ 4,831 (22,282)
Other, net............................................ (1,287) (3,364)
-------- --------
Net cash provided by (used in) operating
activities......................................... 18,180 (15,852)
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions.................. (15,726) (56,713)
Purchases of available-for-sale securities............. (106,452) (103,427)
Purchases of held-to-maturity securities .............. - (4,591)
Proceeds from sales of available-for-sale securities... 120,305 125,445
Proceeds from held-to-maturity securities.............. - 10,558
-------- --------
Net cash used in investing activities.................... (1,873) (28,728)
-------- --------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable.............. 16,378 15,574
Increase in short-term debt............................ 256 -
Proceeds from issuance of debt......................... - 662
Repayments of long-term debt........................... (11,880) (2,610)
Decrease in loan payable to related party.............. (21,953) -
Capital contribution from (distribution to)
parent company....................................... 11,627 (46,000)
Payments of asbestos claims............................ (43,716) (3,062)
Financing fees and expenses............................ (56) (430)
-------- --------
Net cash used in financing activities................ (49,344) (35,866)
-------- --------
Net change in cash and cash equivalents.................. (33,037) (80,446)
-------- --------
Cash and cash equivalents, end of period................. $ 12,952 $ 44,114
======== ========
3
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Nine Months Ended
------------------
Sept. 29, Sept. 28,
1996 1997
--------- ---------
(Thousands)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............. $ 4,632 $ 8,193
Income taxes..................................... 143 130
Acquisition of Leatherback Industries business,
net of $8 cash acquired:
Fair market value of assets acquired............. $ 27,037
Purchase price of acquisition.................... 25,231
--------
Liabilities assumed.............................. $ 1,806
========
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Building Materials Corporation of America (the "Company") is a wholly
owned subsidiary of GAF Building Materials Corporation ("GAFBMC"), which is an
indirect, wholly owned subsidiary of G-I Holdings Inc. ("G-I Holdings"). G-I
Holdings is a wholly owned subsidiary of GAF Corporation ("GAF"). 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 December 31, 1996 and September 28, 1997, and the results of
operations and cash flows for the periods ended September 29, 1996 and
September 28, 1997. 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, 1996 (the "Form 10-K").
NOTE A: In October 1995, G-I Holdings acquired all of the outstanding
shares of U.S. Intec, Inc. ("USI"), which manufactures commercial
roofing products. As of January 1, 1997, USI became a wholly owned
subsidiary of the Company through a capital contribution to the
Company by G-I Holdings. Accordingly, the Company's Consolidated
Financial Statements include the results of USI for the third
quarter and the first nine months of 1997 and have been restated for
the third quarter and the first nine months of 1996 to include USI's
results of operations, including sales of $28.8 and $76.3 million,
respectively, and net income of $1.2 and $0.8 million, respectively.
NOTE B: Inventories consist of the following:
December 31, Sept. 28,
1996 1997
------------ ---------
(Thousands)
Finished goods..................... $ 41,201 $ 51,026
Work in process.................... 10,844 10,578
Raw materials and supplies......... 26,206 28,800
-------- --------
Total.............................. 78,251 90,404
Less LIFO reserve.................. (1,055) (1,055)
-------- --------
Inventories........................ $ 77,196 $ 89,349
======== ========
NOTE C: The Company's bank credit facilities were replaced on August 29,
1997 with a new three-year, $75 million facility (the "Credit
Agreement"). The terms of the Credit Agreement provide for a $75
million revolving credit facility, the full amount of which is
available for letters of credit, provided that total borrowings and
outstanding letters of credit may not exceed $75 million in the
aggregate.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C: (Continued)
In June and September 1997, the Company terminated interest rate
swap agreements relating to its 11 3/4% Senior Deferred Coupon Notes
due 2004 (the "Deferred Coupon Notes"), each with an aggregate ending
notional principal amount of $31 million, resulting in gains of $0.4
and $1.4 million, respectively. The gains have been deferred and
will be amortized as a reduction of interest expense.
NOTE D: Contingencies
Asbestos Claims Filed Against GAF
In connection with its formation, the Company contractually
assumed and agreed to pay a portion of the liabilities for asbestos-
related bodily injury claims relating to the inhalation of asbestos
fiber ("Asbestos Claims") (whether for indemnity or defense) of its
parent, GAFBMC, relating to pending cases and previously settled, but
not paid, cases as of January 31, 1994, and no other asbestos
liabilities of GAFBMC. As of March 30, 1997, the Company had paid
all of its assumed asbestos-related liability.
GAF and G-I Holdings have established reserves for Asbestos
Claims based on certain assumptions, one of which was the
effectiveness of a class action settlement of future Asbestos Claims
(the "Settlement"). On June 25, 1997, the United States Supreme
Court affirmed the ruling of the United States Court of Appeals for
the Third Circuit that the class in such action was not certifiable,
thus rendering the Settlement inoperable. GAF and G-I Holdings have
advised the Company that they are presently evaluating the effect of
this Supreme Court decision on the amount of their reserves for
asbestos-related liabilities, that such analysis could result in GAF
and G-I Holdings increasing their estimates of asbestos-related
liabilities, and that it is not currently possible to estimate the
range or amount, if any, of such possible additional reserves. GAF
and G-I Holdings have stated that they remain committed to
effectuating a comprehensive resolution of Asbestos Claims, that they
are presently exploring a number of options, both judicial and
legislative, to accomplish such resolution, but that there can be no
assurance that these efforts will be successful.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D: (Continued)
The Company believes that it will not sustain any additional
liability in connection with asbestos-related claims. While the
Company cannot predict whether any asbestos-related claims will be
asserted against it or its assets, or the outcome of any litigation
relating 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 GAFBMC with respect to such claims.
For further information regarding the history of the foregoing
litigation and asbestos-related matters, see "Item 3. Legal
Proceedings" and Note 3 to Consolidated Financial Statements
contained in the Company's Form 10-K and Note C to Consolidated
Financial Statements contained in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 30, 1997.
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 Environmental Claims
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 business,
liquidity, results of operations, cash flows or financial position of
the Company.
For further information regarding environmental matters and
other litigation, reference is made to "Item 3. Legal Proceedings"
contained in the Company's Form 10-K.
Tax Claim Against GAF
On September 15, 1997, GAF received a notice from the Internal
Revenue Service (the "Service") 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 a subsidiary of GAF, GAF Fiberglass Corporation
("GFC"), holds an interest. The claim of the Service for interest
and penalties, after taking into account the effect on the use of net
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D: (Continued)
operating losses and foreign tax credits, could result in GFC
incurring liabilities significantly in excess of the deferred tax
liability of $131.4 million that GAF recorded in 1990 in connection
with this matter. GAF has advised the Company that it believes that
GFC will prevail in this matter, although there can be no assurance
in this regard. The Company believes that the ultimate disposition
of this matter will not have a material adverse effect on its
financial position or results of operations. GAF, G-I Holdings and
certain subsidiaries of GAF have agreed to jointly and severally
indemnify the Company against any tax liability associated with the
surfactants partnership, which the Company would be severally liable
for, together with GAF and several current and former subsidiaries of
GAF, should GAF and certain of its subsidiaries be unable to satisfy
such indemnity.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Third Quarter 1997 Compared With
Third Quarter 1996
The Company recorded third quarter 1997 net income of $11.4 million
compared with $9.2 million in the third quarter of 1996. The 25% increase in
net income resulted from higher operating and other income, partially offset by
increased interest expense.
The Company's net sales for the third quarter of 1997 were $274.4 million,
a 9% increase over last year's sales of $251.6 million. The increase in sales
occurred in both residential and commercial products. The increase in sales of
the Company's residential roofing products reflected sales of the Leatherback
Industries business acquired in March 1997, partially offset by lower unit
volumes and selling prices of shingle and other roofing component products.
The increase in sales of the Company's commercial roofing products reflected
increased unit volumes and higher selling prices.
Gross profit margin decreased slightly to 27.9% in the third quarter of
1997 from 28.1% in the third quarter of 1996, resulting primarily from lower
average selling prices. Selling, general and administrative expenses decreased
as a percentage of net sales from 19.0% in 1996 to 18.5% in 1997, mainly due to
reduced costs of distribution.
Operating income for the third quarter was $25.6 million, a 12% increase
over the $22.8 million recorded in the third quarter of 1996, principally
reflecting the increased sales.
Interest expense increased to $10.4 million in the third quarter of 1997
from $7.9 million last year, due primarily to higher debt levels. Other
income, net, was $3.5 million compared with other expense, net, of less than
$0.1 million last year, reflecting higher investment income.
Results of Operations - Nine Months 1997 Compared With
Nine Months 1996
For the first nine months of 1997, the Company recorded net income of
$23.3 million compared with net income of $16.5 million for the first nine
months of 1996. The 41% increase in net income was attributable to higher
operating and other income, partially offset by increased interest expense.
Net sales for the first nine months of 1997 were $723.6 million, a 12%
increase over last year's sales of $648.4 million. The increase in sales
reflected increased unit volumes of both residential and commercial roofing
products, as well as the sales of the Leatherback Industries business.
Average selling prices in the 1997 period declined slightly for residential
roofing products and were higher for commercial roofing products compared to
the 1996 period.
9
Gross profit margin increased to 28.0% for the first nine months of 1997
compared with 27.4% for the same period in 1996, resulting primarily from lower
raw materials costs and improved product mix. Selling, general and
administrative expenses increased slightly as a percentage of net sales from
19.5% to 19.7% in 1997, mainly reflecting increased costs of distribution
incurred early in the year.
Operating income for the first nine months of 1997 was $59.8 million, a
17% increase over the $51.2 million recorded last year. The increase in
operating income was attributable to the increased sales and improved margins.
Interest expense increased to $30.5 million in the first nine months of
1997 from $23.7 million last year, due primarily to higher debt levels. Other
income, net, was $8.9 million compared with other expense, net, of $0.5 million
last year. The improvement was primarily due to higher investment income.
Liquidity and Financial Condition
The Company used $15.9 million of cash in operations during the first nine
months of 1997, reinvested $56.7 million in capital programs and acquisitions,
and generated $28 million from net sales of available-for-sale and held-to-
maturity securities, for a net cash outflow of $44.6 million before financing
activities.
Cash invested in additional working capital totaled $52.3 million during
the first nine months of 1997. This amount primarily reflected an increase in
inventories of $9.1 million and a $57.6 million increase in receivables,
including a $27 million increase in the receivable from the trust which
purchases the Company's trade accounts receivable, partially offset by a $15.3
million increase in accounts payable and accrued liabilities. Cash used in
operations also reflected a $22.3 million outflow for related party
transactions and a $14.3 million cash outlay for net purchases of trading
securities.
Cash used in financing activities for the first nine months of 1997
totaled $35.9 million, principally reflecting a $46 million distribution to the
Company's parent, $3.1 million of asbestos payments and $2.6 million in
repayments of long-term debt, partially offset by $15.6 million of proceeds
from the sale of the Company's trade receivables.
As a result of the foregoing factors, cash and cash equivalents decreased
by $80.4 million during the first nine months of 1997 to $44.1 million
(excluding $92.7 million of trading, available-for-sale and held-to-maturity
securities and other short-term investments).
The Company's bank credit facilities were replaced on August 29, 1997 with
a new three-year, $75 million facility (the "Credit Agreement"). The terms of
the Credit Agreement provide for a $75 million revolving credit facility, the
full amount of which is available for letters of credit, provided that total
borrowings and outstanding letters of credit may not exceed $75 million in the
aggregate.
10
In October 1997, the Company issued in a private placement offering $100
million in aggregate principal amount at maturity of 8% Senior Notes due 2007
(the "Notes"). The Company intends to utilize a substantial amount of the net
proceeds from the sale of the Notes to fund the cost of its capital expenditure
programs. The remainder of the net proceeds will be utilized by the Company
for general corporate purposes, which may include future acquisitions and open
market purchases of the Company's 11 3/4% Senior Deferred Coupon Notes due 2004
and/or 8 5/8% Senior Notes due 2006. Pending such utilization, such cash will
be invested by the Company primarily in marketable securities.
See Note D to Consolidated Financial Statements for information regarding
contingencies.
11
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Litigation is pending between the Company and Elk Corporation of Dallas
("Elk") in the United States District Court for the Northern District of Texas
relating to certain aspects of the Company's laminated shingles, which Elk
claims infringe design and utility patents issued to it. Elk also asserts that
the Company has appropriated the trade dress of Elk's product. Elk seeks
injunctive relief, damages and attorneys' fees. The Company denies
infringement of Elk's patents or appropriation of Elk's trade dress, and has
sued for a declaration that Elk's patents are invalid and unenforceable and
that the Company's shingles do not infringe any of Elk's rights, and has sought
money damages for Elk's unfair competition. On October 10, 1997, the Court
issued an Opinion holding that Elk's design patent is unenforceable because it
was obtained through fraud and inequitable conduct. The Company believes that
it will prevail on the balance of Elk's claims as well.
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 28, 1997.
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: November 12, 1997 BY: /s/William C. Lang
----------------- ------------------
William C. Lang
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
13