<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 1-8247
JOHNS MANVILLE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-0856796
- ---------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 17th Street
Denver, Colorado 80202
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 978-2000
--------------
(Registrant's telephone number, including area code)
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 |_|
At May 10, 1999, there were 159,370,877 shares of the registrant's common
stock outstanding.
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*PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
* "Johns Manville", the "Company," "JM," "we," "us" and "our" when
used in this report refers to Johns Manville Corporation,
incorporated in the State of Delaware in 1991, and includes, where
applicable, its consolidated subsidiaries.
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JOHNS MANVILLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and equivalents $ 36,785 $ 12,350
Marketable securities, at cost,
which approximates market 3,162 4,168
Receivables 309,454 264,407
Inventories 158,325 131,709
Prepaid expenses 11,646 12,560
Deferred tax assets 36,637 36,648
-------------------------------
Total Current Assets 556,009 461,842
Property, Plant and Equipment,
net of accumulated depreciation
of $704,458 and $691,335, respectively 997,003 864,158
Deferred Tax Assets 159,885 164,024
Goodwill, net of accumulated amortization
of $31,038 and $27,166, respectively 289,460 248,692
Acquisition Deposit (Note 6) 227,300
Other Assets 251,736 241,169
-------------------------------
$2,254,093 $2,207,185
===============================
LIABILITIES
- --------------------------------------------------------------------------------------------------
Current Liabilities
Short-term debt $ 11,140 $ 4,641
Accounts payable 142,743 128,688
Compensation and employee benefits 88,643 99,320
Income taxes 18,874 16,539
Other accrued liabilities 90,450 68,781
-------------------------------
Total Current Liabilities 351,850 317,969
Long-Term Debt, less current portion 560,738 587,276
Postretirement Benefits Other Than Pensions 189,144 186,949
Deferred Income Taxes and Other
Noncurrent Liabilities 321,892 324,883
-------------------------------
1,423,624 1,417,077
-------------------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
Common Stock 1,641 1,638
Capital in Excess of Par Value 548,945 544,667
Treasury Stock, at cost (63,067) (63,067)
Unearned Stock Compensation (4,113) (4,836)
Retained Earnings 342,740 314,605
Accumulated Other Comprehensive Income 4,323 (2,899)
-------------------------------
830,469 790,108
-------------------------------
$2,254,093 $2,207,185
==================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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JOHNS MANVILLE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------------------
1999 1998
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<S> <C> <C>
Net Sales $495,758 $389,336
Cost of Sales 359,929 293,588
Selling, General and Administrative 53,751 42,900
Research, Development and Engineering 9,714 7,615
Other Income (Expense), net (7,357) (103)
-------------------------------------
Income from Operations 65,007 45,130
Interest Income 628 1,865
Interest Expense 7,644 12,058
-------------------------------------
Income before Income Taxes and
Cumulative Effect of Accounting Change 57,991 34,937
Income Tax Expense (Note 2) 20,297 8,907
-------------------------------------
Income before Cumulative Effect of
Accounting Change 37,694 26,030
Cumulative Effect of a Change in
Accounting for Furnace Rebuilds,
net of tax (Note 4) 27,409
-------------------------------------
Net Income $ 37,694 $ 53,439
======================================================================================================
Comprehensive Income $ 44,916 $ 51,734
=====================================
<CAPTION>
Three Months
Ended March 31,
-------------------------------------
EARNINGS PER COMMON SHARE 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic:
Income before Cumulative Effect of
Accounting Change $.24 $.16
Cumulative Effect of a Change in
Accounting for Furnace Rebuilds,
net of tax (Note 4) .17
-------------------------------------
Net Income $.24 $.33
======================================================================================================
Diluted:
Income before Cumulative Effect of
Accounting Change $.23 $.16
Cumulative Effect of a Change in
Accounting for Furnace Rebuilds,
net of tax (Note 4) .17
-------------------------------------
Net Income $.23 $.33
======================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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JOHNS MANVILLE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 37,694 $ 53,439
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 28,421 23,257
Deferred taxes 5,604 3,132
Cumulative effect of accounting change (27,409)
Other, net 8,833 3,809
(Increase) decrease in current assets:
Receivables (5,838) (23,230)
Inventories (16) (5,381)
Prepaid expenses 1,016 165
Increase (decrease) in current liabilities:
Accounts payable 5,188 (13,422)
Compensation and employee benefits (13,706) (10,058)
Income taxes 2,518 3,499
Other accrued liabilities 1,191 9,314
Change in other noncurrent liabilities 257 (2,931)
--------------------------
Net cash provided by operating activities 71,162 14,184
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------
Purchases of property, plant and equipment (34,910) (22,421)
Acquisitions (23,047)
Purchases of available-for-sale securities (318)
Proceeds from maturities of held-to-maturity
securities 1,679 13,553
Proceeds from sales or maturities of
available-for-sale securities 9,228
(Increase) decrease in other assets (10,480) (7,579)
--------------------------
Net cash used in investing activities (43,711) (30,584)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------
Issuances of debt 9,624
Payments on debt (6,294) (13,225)
Dividends on common stock (9,520) (6,462)
Stock compensation transactions 3,501 (75)
--------------------------
Net cash used in financing activities (2,689) (19,762)
--------------------------
Effect of Exchange Rate Changes on Cash (327) (220)
--------------------------
Net Increase (Decrease) in Cash and Equivalents 24,435 (36,382)
Cash and Equivalents at Beginning of Period 12,350 132,137
--------------------------
Cash and Equivalents at End of Period $ 36,785 $ 95,755
=====================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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JOHNS MANVILLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The condensed consolidated financial statements of Johns Manville Corporation as
of March 31, 1999 and December 31, 1998 and for the three months ended March 31,
1999 and 1998 reflect all normal, recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
condition and the results of operations for the periods presented. The year-end
condensed consolidated balance sheet was derived from audited financial
statements, and as presented does not include all disclosures required by
generally accepted accounting principles. The Company has reclassified the
presentation of certain prior period information to conform with the current
presentation format. Additional information regarding the Company's accounting
policies, operations and financial position is contained or incorporated in the
Company's Form 10-K for the year ended December 31, 1998 filed with the
Securities and Exchange Commission.
Note 1 - Inventories
The major classes of inventories were as follows:
(Thousands of dollars)
March 31, December 31,
1999 1998
----------------------------------
Finished goods $108,390 $ 84,393
Raw materials and supplies 37,017 33,371
Work-in-process 12,918 13,945
----------------------------------
$158,325 $131,709
==================================
Note 2 - Income Taxes
The Company's effective tax rates were approximately 35 percent and 26 percent
in 1999 and 1998, respectively. The Company receives a tax deduction and a
related reduction in its effective tax rate for all payments the Company makes
to the Manville Personal Injury Settlement Trust (the "Trust") and for all
proceeds the Trust receives from sales of the Company's common stock, at the
time such payments or proceeds are transferred to a special designated
settlement fund of the Trust or paid to claimants. The Company benefited from
such payment of dividends during both years and stock sale proceeds during 1998.
Note 3 - Financial Instruments
In order to fix a portion of the Company's variable interest rate debt and
reduce the aggregate risk to movements in interest rates, the Company has
interest rate swaps with notional values totaling approximately $230 million. At
March 31, 1999, the fair market value of these instruments reflected
unrecognized losses of approximately $5.8 million.
Note 4 - Cumulative Effect of Accounting Change
Effective January 1, 1998, the Company changed its method of accounting for
glass furnace rebuild costs to the capitalization method from the allowance
method. Under the capitalization method, costs to periodically rebuild the
refractory components of the glass furnaces are capitalized when incurred and
depreciated on a straight-line basis over the estimated useful life of the
rebuild. The capitalization method provides an improved measure of the Company's
capital
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investment and is consistent with industry practice. Previously, estimated costs
to rebuild furnaces were credited to an allowance and charged to operations over
the estimated period to the next rebuild date. The cumulative effect of this
change in accounting principle increased 1998 earnings by $27.4 million, net of
taxes of $17.9 million.
Note 5 - Earnings Per Common Share and Equity
Basic and diluted earnings per common share amounts were determined using the
reported net income and the following common equivalent shares:
1999 1998
- --------------------------------------------------------------
Basic 159,956,000 161,620,000
Diluted 162,244,000 163,593,000
The difference between the basic and diluted weighted average shares outstanding
is due to stock options and deferred stock rights. The Company paid a regular
quarterly dividend of $0.06 per common share totaling $9.5 million, and $0.04
per common share totaling $6.5 million, in the first quarters of 1999 and 1998,
respectively.
Note 6 - Acquisitions
On January 1, 1999, the Company completed the acquisition of Hoechst's
Spunbond/Monofilament operations. This acquisition expands existing product
lines of the Company's Engineered Products segment in North America and Europe.
The cash payment for this acquisition, accounted for under the purchase method,
was $227.3 million, subject to certain post-closing adjustments including
finalizations of the value of working capital acquired and ownership transfer of
a plant located in China. The acquisition was financed with borrowings from the
Company's credit facilities. The acquisition borrowings, drawn during 1998, were
shown as the acquisition deposit on the Company's December 31, 1998 balance
sheet. The allocation of the purchase price will be finalized during 1999 upon
completion of asset valuations, determination of preacquisition contingencies
and restructuring decisions. Based on preliminary estimates, the Company's March
31, 1999 balance sheet reflects the following allocation of the $227.3 million
cash payment:
(Thousands of dollars)
----------------------------------------------------------------------
Current Assets $ 74,756
Noncurrent Assets (including Goodwill) 179,295
Liabilities Assumed (26,751)
----------------------------------------------------------------------
Cash Payment $227,300
======================================================================
The consolidated results of operations on a pro forma basis as if the operations
had been acquired as of the beginning of 1998 were as follows:
(Thousands of dollars,
except per share amounts)
----------------------------------------------------------------------
Three Months Ended
March 31,1998
----------------------------------------------------------------------
Net Sales $444,743
Income before Cumulative Effect of
Accounting Change $27,355
Net Income $54,764
Diluted Earnings Per Share:
Income Before Cumulative Effect of
Accounting Change $0.17
Net Income $0.34
----------------------------------------------------------------------
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The estimated pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that would have
occurred had the acquisition been completed as of the above date, nor are they
necessarily indicative of future results of operations.
Note 7 - New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement, effective for all fiscal quarters of
fiscal years beginning after June 15, 1999, establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that the Company recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair value.
At this time, the Company cannot determine the effects, if any, adopting this
statement will have on its financial condition, liquidity or results of
operations.
Note 8 - Business Segment Information
The Company reports separately the results of the Insulation, Roofing Systems
and Engineered Products segments. The Insulation segment consists of the
Company's building, commercial/industrial and original equipment manufacturers
("OEM") insulation businesses. The Roofing Systems segment consists of the
Company's commercial/industrial roofing systems business. The Engineered
Products segment consists of the Company's mats and fibers and filtration
businesses.
(Thousands of dollars)
Three Months
Ended March 31,
- -------------------------------------------------------------------------------
NET SALES 1999 1998
- -------------------------------------------------------------------------------
Insulation $ 192,982 $ 164,379
Roofing Systems 121,838 105,423
Engineered Products 190,548 125,852
Eliminations (9,610) (6,318)
- -------------------------------------------------------------------------------
$ 495,758 $ 389,336
===============================================================================
INCOME FROM OPERATIONS
- --------------------------------------------------------------------------------
Insulation $ 39,105 $ 18,509
Roofing Systems 4,706 4,367
Engineered Products 21,196 22,254
- -------------------------------------------------------------------------------
$ 65,007 $ 45,130
===============================================================================
March 31, December 31,
OPERATING ASSETS 1999 1998
- -------------------------------------------------------------------------------
Insulation $ 510,083 $ 512,428
Roofing Systems 431,623 429,342
Engineered Products 817,126 591,839
Corporate (29,722) (39,216)
- -------------------------------------------------------------------------------
$1,729,110 $1,494,393
===============================================================================
Net sales included in Eliminations relate principally to intersegment sales from
the Engineered Products segment to the Roofing Systems segment at prices
approximating market. Operating assets primarily include amounts directly
assignable to each segment. These include trade receivables totaling $273.7
million and $239.9 million at March 31, 1999 and December 31, 1998,
respectively; inventory (at standard cost); goodwill; property, plant and
equipment; and capitalized software. Capitalized software included in operating
assets was
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$10.6 million at March 31, 1999, and $10 million at December 31, 1998. Corporate
operating assets relate principally to the adjustment of business segment
inventories to a LIFO basis.
I-8
<PAGE>
Item 2.
JOHNS MANVILLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales in the first quarter of 1999 increased $106.5 million, or 27.3
percent, to $495.8 million compared with $389.3 million for the same period of
1998. Gross profit increased $40.1 million to $135.8 million from $95.7 million.
The gross profit margin for the first quarter of 1999 increased to 27.4 percent
from 24.6 percent for the same period of 1998 primarily due to an improved
pricing environment in building insulation.
Selling, general and administrative and research, development and engineering
expenses, combined, increased $13 million or 25.6 percent, to $63.5 million in
1999, in part due to acquisitions completed over the last year. However, these
expenses were lower as a percentage of sales at 12.8 percent compared with 13
percent for 1998. Other expense, net, for 1999 increased to $7.4 million from
$0.1 million due to higher pension expenses, higher goodwill amortization and
expenses related to JM's exploration of strategic alternatives. Other income for
1998 included proceeds from the settlement of escrowed funds related to a
landfill site formerly used by JM. Income from operations for the first quarter
of 1999 was $65 million, up 44 percent, compared with $45.1 million for the
first quarter of 1998.
Insulation Segment
The Insulation segment's net sales increased $28.6 million, or 17.4 percent, to
$193 million from $164.4 million for the first quarter of 1998. Income from
operations more than doubled to $39.1 million from $18.5 million. These gains
were driven by higher selling prices and strong volumes in building insulation
due to the industry operating at full capacity as North American residential
construction markets remained strong. The selling price improvements, along with
productivity improvements, led to significantly higher margins for the first
quarter of 1999. In addition, net sales increased slightly and gross profit
improved moderately in 1999 for commercial and industrial insulation on higher
volumes and productivity for air handling and OEM compared with the first
quarter of 1998.
Roofing Systems Segment
Net sales for the Roofing Systems segment increased $16.4 million, or 15.6
percent, to $121.8 million for the first quarter of 1999 from $105.4 million for
the same period of 1998. This increase was driven mainly by the incremental
sales volumes from the 1998 acquisitions, partially offset by selling price
pressures in polyisocyanurate foam products. The gross margin for the first
quarter of 1999 rose slightly due to production efficiencies on the higher
volumes and lower raw material costs. The gross profit gains, offset in part by
higher acquisition-related costs, led to increased income from operations of 7.8
percent to $4.7 million.
Engineered Products Segment
The Engineered Products segment's net sales increased $64.6 million, or 51.4
percent, to $190.5 million for the first quarter of 1999 from $125.9 million for
the same period of 1998. Income from operations, however, decreased $1.1
million, or 4.8 percent, to $21.2 million for the first quarter of 1999 from
$22.3 million for the same period of 1998. The incremental impacts of JM's
January 1, 1999 acquisition of Hoechst's Spunbond/Monofilament North American
and
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European operations, and to a lesser extent, the May 1998 acquisition of Tasso
AB, produced substantial increases in net sales and operating income, which
included related one-time costs. The U.S. mats and fibers business experienced
significantly higher sales for the first quarter of 1999 on volume growth due
primarily to strength in roofing mats. Despite these volume gains, the gross
margin and operating income for this business were adversely impacted by costs
associated with a scheduled furnace rebuild during the first quarter of 1999.
Meanwhile, sales and operating income declined for our European mats and fibers
businesses during 1999, reflecting continuing softness in European markets. Net
sales and operating income declined significantly in the filtration business in
the first quarter of 1999 on lower volumes related in part to continuing
weakness in Asian markets.
Interest
Compared with the first quarter of 1998, interest income decreased $1.3 million
to $0.6 million in 1999 from $1.9 million, due to lower average cash and
marketable securities balances.
Interest expense decreased $4.5 million to $7.6 million for the first quarter of
1999 compared with $12.1 million in 1998 primarily due to the repurchase of
substantially all of JM's $400 million of 10 7/8% Senior Notes in May 1998 using
revolving credit facilities with significantly lower interest rates.
Income Taxes
JM's effective tax rates were approximately 35 percent in 1999 and 26 percent in
1998. JM receives a tax deduction and a related reduction in its effective tax
rate for all payments we make to the Trust and for all proceeds the Trust
receives from sales of JM's common stock at the time such payments or proceeds
are transferred to a special designated settlement fund of the Trust or paid to
claimants. JM benefited from such payment of dividends during both years and
stock sale proceeds during 1998.
Under Section 468B of the U.S. Internal Revenue Code, JM is responsible for
income taxes on the taxable income of the Trust's specific settlement fund at a
tax rate of 15 percent. Any such taxes paid generate a tax deduction for JM. We
cannot predict the amount of any such future tax obligations. However, related
liabilities could become material in certain situations including the Trust
monetizing, and retaining the proceeds of, a significant portion of its
investment in JM's common stock or the settlement of this obligation between JM
and the Trust.
Cumulative Effect of Accounting Change
Effective January 1, 1998, JM changed its method of accounting for glass furnace
rebuild costs to the capitalization method from the allowance method. The
cumulative effect of this change in accounting principle increased 1998 earnings
by $27.4 million ($0.17 per share), net of taxes of $17.9 million.
Net Income
Due to the factors discussed above, JM's net income for the first quarter of
1999 was $37.7 million, or $0.23 per diluted share, compared with net income for
the first quarter of 1998 of $53.4 million, or $0.33 per diluted share.
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<PAGE>
Liquidity and Capital Resources
Johns Manville Corporation's agreements with its lenders contain financial and
general covenants. These include, among other things, limitations on borrowings,
investments and asset dispositions, and maintenance of various financial ratios.
Noncompliance with these or other covenants, or the occurrence of any other
event of default, could result in the termination of existing credit agreements
and the acceleration of debt owed by JM and its subsidiaries. At March 31, 1999,
JM was in compliance with these covenants.
At March 31, 1999, JM had net working capital of $204.2 million, including cash
and marketable securities totaling $39.9 million. Total cash and marketable
securities located outside the U.S. and Canada were approximately $18.7 million.
At December 31, 1998, cash and marketable securities totaled $16.5 million. At
March 31, 1999, JM had approximately $217 million available under its $750
million unsecured multicurrency revolving credit facilities. JM's international
subsidiaries had additional borrowing and working capital facilities totaling
approximately $18 million, of which $8 million was available at March 31, 1999.
Net operating activities provided $71.2 million of cash during the first three
months of 1999. Net operating activities for the same period of 1998 provided
$14.2 million. Cash flows from operating activities are primarily influenced by
selling prices, sales volume and working capital requirements. As discussed in
"Results of Operations," JM benefited from selling price improvements,
particularly in building insulation, and overall volume increases during the
first quarter of 1999. Operating activities also included cash outlays to build
working capital for the construction season, which typically peaks during the
third quarter. Such cash usages were significantly lower in 1999 due to improved
working capital management, along with lower inventory builds resulting from
high levels of demand in building insulation and mats and fibers as these
businesses operated at full capacity. JM expects 1999 operating results to
benefit from continued strength in construction markets and housing starts,
along with continuing integration of acquisitions. Meanwhile, slower economic
activity in Europe and Asia may continue to adversely impact results in the
Engineered Products segment.
Investing activities for the three months ended March 31, 1999 included $34.9
million for capital expenditures, principally to increase building insulation
capacity and to complete a furnace rebuild for mats and fibers. Estimated 1999
capital expenditures total approximately $160 million excluding acquisitions, of
which approximately $59 million relate to capacity expansion projects. As of
March 31, 1999, outstanding purchase commitments for capital projects totaled
$24.7 million. Investing activities for the first quarter of 1998 included the
combined purchase prices for acquisitions of $23 million, net of cash acquired,
and capital expenditures of $22.4 million.
Financing activities for the first quarter of 1999 consisted of repayments of
debt totaling $6.3 million and net issuances of debt totaling $9.6 million. Also
during the first quarter of 1999, JM received $3.5 million from the exercise of
stock options previously granted to employees. JM paid a regular quarterly
dividend of $0.06 per common share totaling $9.5 million, and $0.04 per common
share totaling $6.5 million in the first quarter of 1999 and 1998, respectively.
During 1998, $13 million of debt related to 1997 acquisitions was repaid.
Contingent Product Liability
Between 1988 and 1992, JM manufactured phenolic roofing insulation which may,
under certain circumstances, contribute to the corrosion of metal decks on which
it is installed. Subsequently, JM began a voluntary program to inspect such
metal decks and remediate where appropriate. JM has accrued for costs relating
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to future inspections, remediation and anticipated claims. These accruals are
based on JM's historical experience regarding the incidence of corrosion and the
cost of remediation and include a number of assumptions related to the types of
roofs on which phenolic insulation has been installed as well as the assumption
that our past remediation experience will continue over the remaining lives of
roofs insulated with JM's phenolic roofing insulation.
Pursuant to reimbursement agreements with JM's liability carriers and former
owner of the phenolic roofing insulation business, we have been reimbursed for a
portion of historical costs incurred and are entitled to receive reimbursement
for a substantial portion of future costs to be incurred by JM for inspection
and remediation.
In 1996, JM and a third party were named as defendants in two class action
cases, now consolidated, filed in U.S. District Court in Boston, Massachusetts.
The plaintiffs purport to represent all building owners in the U.S. with
phenolic insulation installed on their roof decks and seek damages and
injunctive relief, including an order requiring the removal and replacement of
the phenolic insulation and remediation of any deck corrosion. JM is defending
these allegations vigorously.
JM has reviewed its historical inspection and remediation experience and the
terms and collectibility of amounts under the reimbursement agreements in light
of the contingencies described above. Based on the information available to date
and subject to the assumptions described above, if additional costs are incurred
in excess of the accrued amounts, such costs are not expected to have a material
adverse effect on JM's financial condition, liquidity or results of operations.
Environmental Contingencies
At March 31, 1999, JM had remediation activities in progress at four sites, out
of a total of 16 such sites for which we have identified environmental
conditions requiring remediation. In addition, JM has been identified as a
potentially responsible party at 14 sites JM did not own or operate under the
federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") or similar state legislation. Of these 14 sites, JM's potential
liability for ten sites will be determined pursuant to the settlement agreement
described in the following paragraph. Three of the sites may not be subject to
the settlement agreement and, accordingly, JM could be jointly and severally
liable for costs of remediating these sites. At one of the sites, only part of
the liability will be determined by the settlement agreement with the rest of
the liability being the subject of a U.S. Environmental Protection Agency
("EPA") de minimis settlement offer.
In 1994, the U.S. government and JM settled certain litigation concerning our
disposal activities prior to consummation of JM's plan of reorganization. The
settlement agreement, which was made a court order, limits JM's future liability
under both CERCLA and the Resource Conservation and Recovery Act ("RCRA") to 55
percent of its share of site-wide response costs and natural resources damages
without regard to joint and several liability for disposals made by JM prior to
consummation of our plan of reorganization. The agreement resolved JM's
liability at certain historical sites and also covers CERCLA and RCRA liability
for other disposal sites at which the EPA has incurred or may incur response
costs and which were used by JM prior to the consummation of the plan of
reorganization. The agreement provides that the amount JM will be obligated to
pay, in the aggregate, for such sites shall never exceed $850,000 during any
given year. The EPA and others from time to time commence cleanup activities at
such sites, and in the future, the EPA and others may assert claims against JM
with respect to such sites. JM believes that all such activities and claims, if
any, will be subject to the agreement.
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<PAGE>
As a result of factors such as changes in federal and state regulations, the
application and effectiveness of remedial actions, the difficulty in assessing
the extent of environmental contamination, and the allocation of costs among
potentially responsible parties, actual costs to be incurred for environmental
cleanup may vary from previous estimates. Subject to the uncertainties inherent
in evaluating environmental exposures, and based on information presently
available, including JM's historical remediation experience, currently enacted
environmental laws and regulations, and existing remediation technology, we
believe that if additional costs are incurred in excess of the accrued amounts,
such costs are not expected to have a material adverse effect on our financial
condition, liquidity or results of operations.
Year 2000 Compliance
JM is engaged in a comprehensive project to modify its systems for year 2000
compliance. JM's approach to year 2000 compliance activities may be broken down
into five general areas:
o inventory,
o analysis/planning,
o testing and repair/modification
o certification, and
o contingency plans.
As of March 31, 1999, JM has completed substantially all of the inventory and a
majority of the analysis/planning phases of the project which involved obtaining
systems inventories including:
o embedded technology,
o performing on-site audits at operating locations,
o contacting vendors to obtain compliant releases of hardware and
software,
o establishing project plans, and
o associated implementation schedules.
Testing and repair/modification work and surveys of major suppliers to determine
their level of compliance began during the second quarter of 1998 and will
continue through the second quarter of 1999. Certifications began during the
fourth quarter of 1998, and will be completed in the second quarter of 1999.
Business continuity and contingency plans, including among other things manual
equipment operations and scheduling, are currently being developed to address
high risk areas as they are identified with contingency plans in place by the
end of 1999. To date, the phases of the project currently underway have
progressed substantially as planned. Failure by JM or its vendors and customers
to achieve year 2000 compliance could result in a disruption of operations
possibly impacting our ability to:
o obtain raw materials,
o produce products, or
o collect revenues.
However, JM believes that its compliance efforts will be successful and that
significant disruptions of operations are unlikely to develop. JM has spent
approximately $2 million through the first quarter of 1999 on year 2000 projects
and activities. Based on latest estimates, total costs for year 2000 related
projects and activities, expected to be completed in 1999, are not expected to
exceed $5 million including costs arising from JM's acquisition of Hoechst's
Spunbond/Monofilament operations. However, if additional costs are incurred in
excess of the above estimates, such costs are not expected to have a material
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<PAGE>
adverse effect on JM's financial condition, liquidity, or results of operations.
All expenditures will be funded through operations and will directly impact the
reported level of future income. The above discussion regarding costs, risks and
estimated completion dates for year 2000 compliance activities is based on
estimates given information that is currently available, and is subject to
change.
Introduction of the Euro
On January 1, 1999, eleven countries of the European Union established a new
single European currency (the "Euro"). The Euro will become a currency in its
own right and will completely replace the currencies of the participating
countries by 2002. This conversion may affect, among other things, cross-border
competition among member countries, product pricing, exchange rate risk and
derivatives exposure, and information technology and systems. JM's European
businesses, primarily in the Engineered Products segment, accounted for
approximately 17 percent of total sales for the first quarter of 1999. JM is
addressing issues related to the conversion and, at this time, is not expecting
material adverse effects on its financial condition, liquidity, or results of
operations.
Acquisitions
On January 1, 1999, JM completed the acquisition of Hoechst's
Spunbond/Monofilament operations. This acquisition expands existing product
lines of the Engineered Products segment in North America and Europe. The cash
payment for this acquisition, accounted for under the purchase method, was
$227.3 million subject to certain post-closing adjustments including
finalizations of the value of working capital acquired and ownership transfer of
a plant located in China. The acquisition was financed with borrowings from
credit facilities. The acquisition borrowings, drawn during December 1998, were
shown as the acquisition deposit on the balance sheet at December 31, 1998. The
preliminary allocation of the cash payment is reflected in the March 31, 1999
balance sheet and will be finalized during 1999 upon completion of asset
valuations and determination of preacquisition contingencies and restructuring
decisions.
Johns Manville Corporation believes that its current cash position, funds
available under credit facilities, and cash generated from operations will
enable it to satisfy its debt service requirements, its ongoing capital
expansion program and its other ongoing operating costs. However, JM may need to
access capital markets to pay the principal of its credit facilities, or in
connection with possible significant future acquisitions or share repurchases.
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<PAGE>
Forward-Looking Statements
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Statements of JM contained in
this report concerning matters that are not historical facts, including, without
limitation, statements concerning:
o expected continued benefits from the integration of acquisitions,
o effect on 1999 operating results from strength in construction
markets and housing starts,
o possible earnings decline from the economic slow down in Europe and
Asia in the Engineered Products segment,
o expectations concerning levels of capital spending,
o expectations as to contingencies related to taxes, phenolic roofing
insulation and environmental liabilities,
o estimates on the ability of JM and its vendors and customers to
replace, modify or upgrade computer systems in ways that adequately
address the year 2000 issue,
o expectations regarding the Euro conversion and
o the ability to satisfy its debt service requirements, its ongoing
capital expansion program and its other ongoing operating costs
constitute such forward-looking statements. See "Liquidity and Capital
Resources."
Forward-looking statements of JM are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed in such
statements. Important factors relating to such risks and uncertainties are set
forth below.
Factors that could affect the forward-looking statements generally are related
to demand for JM's products, overall capacity levels in the industry and the
overall competitive environment in which we operate. These factors are discussed
in "Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Johns Manville Corporation's Annual Report on Form
10-K for the year ended December 31, 1998.
Factors that could affect JM's expected levels of capital spending, ability to
satisfy debt service requirements, ongoing capital expansion program and other
ongoing operating costs, include, without limitation, the general factors noted
above, the level of cash flow generated by JM and the ability of JM to otherwise
fund such commitments, which in turn could be affected by general U.S. and
international economic conditions as well as financial market conditions.
JM's ability to realize expected benefits from acquisitions depends on a number
of factors including, without limitation, successful integration of newly
acquired operations, technology, products, employees and the overall economic
factors referred to above.
Specific factors that might affect the ability of JM and its vendors and
customers to replace, modify or upgrade systems in ways that adequately address
the year 2000 issue include the ability to identify and correct all relevant
systems, unanticipated difficulties or delays in the implementation of our
remediation plans and the ability of third parties to adequately address their
own year 2000 issues, as well as those issues discussed in "Liquidity and
Capital Resources - Year 2000 Compliance."
I-15
<PAGE>
For a discussion of factors concerning contingencies related to taxes, phenolic
roofing insulation, environmental matters and the introduction of the Euro, see
"Results of Operations - Income Taxes" and "Liquidity and Capital Resources -
Contingent Product Liability, Environmental Contingencies and Introduction of
the Euro."
I-16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27.1, Financial Data Schedules.
(b) Form 8-K.
None.
II-1
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
JOHNS MANVILLE CORPORATION
--------------------------
(Registrant)
Date: May 17, 1999 By: D. D. Persson
----------------------------------
D. D. Persson
Vice President, Assistant
General Counsel and Secretary
Date: May 17, 1999 By: J. P. Murphy
----------------------------------
J. P. Murphy
Senior Vice President and
Chief Financial Officer
II-2
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This schedule contains summary financial information extracted from the March
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