1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1998
Commission File No. 1-3660
Owens Corning
One Owens Corning Parkway
Toledo, Ohio 43659
Area Code (419) 248-8000
A Delaware Corporation
I.R.S. Employer Identification No. 34-4323452
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 / /
Shares of common stock, par value $.10 per share,
outstanding at April 30, 1998
53,976,251
<PAGE> -2-
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Quarter Ended
March 31,
1998 1997
(In millions of dollars,
except share data)
<TABLE>
<S> <C> <C>
NET SALES $1,137 $ 875
COST OF SALES 938 652
Gross margin 199 223
OPERATING EXPENSES
Marketing and administrative expenses 129 122
Science and technology expenses 15 17
Restructure costs (Note 3) 87 -
Other (Note 4) (71) 4
Total operating expenses 160 143
INCOME FROM OPERATIONS 39 80
Cost of borrowed funds 37 19
INCOME BEFORE PROVISION
FOR INCOME TAXES 2 61
Provision (credit) for income taxes (Note 6) (7) 20
INCOME BEFORE MINORITY INTEREST
AND EQUITY IN NET INCOME OF AFFILIATES 9 41
Minority interest (5) (2)
Equity in net income of affiliates 4 3
NET INCOME $ 8 $ 42
NET INCOME PER COMMON SHARE (Note 10)
Basic net income per share $ .16 $ .80
Diluted net income per share $ .16 $ .76
Weighted average number of common shares
outstanding and common equivalent shares
during the period (in millions)
Basic 53.4 52.4
Diluted 53.8 57.8
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> -3-
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C>
March 31, December 31,
ASSETS 1998 1997
(In millions of dollars)
CURRENT
Cash and cash equivalents $ 115 $ 58
Receivables 560 432
Inventories (Note 7) 533 503
Insurance for asbestos litigation claims -
current portion (Note 11) 100 100
Deferred income taxes 140 160
Assets held for sale (Note 4) - 41
Income tax receivable 108 96
Other current assets 51 38
Total current 1,607 1,428
OTHER
Insurance for asbestos litigation
claims (Note 11) 340 357
Asbestos costs to be
reimbursed - Fibreboard (Note 11) 117 116
Deferred income taxes 394 328
Goodwill 792 778
Investments in affiliates (Note 4) 53 52
Other noncurrent assets 174 184
Total other 1,870 1,815
PLANT AND EQUIPMENT, at cost
Land 66 66
Buildings and leasehold improvements 685 676
Machinery and equipment 2,658 2,629
Construction in progress 194 214
3,603 3,585
Less: Accumulated depreciation (1,858) (1,832)
Net plant and equipment 1,745 1,753
TOTAL ASSETS $5,222 $4,996
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> -4-
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Continued)
<TABLE>
<S> <C> <C>
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
(In millions of dollars)
CURRENT
Accounts payable and accrued liabilities $ 812 $ 814
Reserve for asbestos litigation claims -
current portion (Note 11) 300 350
Short-term debt 59 23
Long-term debt - current portion 127 120
Total current 1,298 1,307
LONG-TERM DEBT (Note 5) 1,874 1,595
OTHER
Reserve for asbestos litigation claims
(Note 11) 1,241 1,320
Asbestos-related liabilities - Fibreboard
(Note 11) 124 123
Other employee benefits liability 332 335
Pension plan liability 63 65
Other 186 165
Total other 1,946 2,008
COMPANY OBLIGATED SECURITIES
OF ENTITIES HOLDING SOLELY
PARENT DEBENTURES 503 503
MINORITY INTEREST 24 24
STOCKHOLDERS' EQUITY
Common stock 662 657
Deficit (1,035) (1,041)
Accumulated other comprehensive income
(Note 9) (33) (40)
Other (17) (17)
Total stockholders' equity (423) (441)
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $5,222 $4,996
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> -5-
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<S> <C> <C>
Quarter Ended
March 31,
1998 1997
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income $ 8 $ 42
Reconciliation of net cash provided
by operating activities:
Noncash items:
Provision for depreciation and amortization 52 37
Provision (credit) for deferred income taxes (45) 17
Other (91) (1)
(Increase) decrease in receivables (129) (107)
(Increase) decrease in inventories (36) (91)
Increase (decrease) in accounts
payable and accrued liabilities (12) (59)
Increase (decrease) in accrued income taxes (2) (11)
Proceeds from insurance for asbestos
litigation claims, excluding Fibreboard 17 40
Payments for asbestos litigation claims,
excluding Fibreboard (129) (95)
Other 37 (19)
Net cash flow from operations (330) (247)
NET CASH FLOW FROM INVESTING
Additions to plant and equipment (47) (74)
Investment in subsidiaries, net of
cash acquired - (20)
Proceeds from the sale of affiliate
or business (Note 4) 134 -
Other (19) (5)
Net cash flow from investing $ 68 $ (99)
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> -6-
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<S> <C> <C>
Quarter Ended
March 31,
1998 1997
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Net additions to long-term
credit facilities $ 285 $ 257
Other additions to long-term debt 3 26
Net increase in short-term debt 36 17
Dividends paid (4) (3)
Other - 19
Net cash flow from financing 320 316
Effect of exchange rate changes on cash (1) (2)
Net increase (decrease) in cash
and cash equivalents 57 (32)
Cash and cash equivalents at
beginning of period 58 45
Cash and cash equivalents at end
of period $ 115 $ 13
The accompanying notes are an integral part of this statement.
<PAGE> -7-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<S> <C> <C>
1. SEGMENT DATA Quarter Ended
March 31,
1998 1997
(In millions of dollars)
NET SALES
Industry Segments
Building Materials
United States $ 739 $ 500
Europe 65 74
Canada and other 52 31
Total Building Materials 856 605
Composite Materials
United States 151 138
Europe 97 97
Canada and other 33 35
Total Composite Materials 281 270
Intersegment sales
Building Materials - -
Composite Materials 31 27
Eliminations (31) (27)
Net sales $ 1,137 $ 875
Geographic Segments
United States $ 890 $ 638
Europe 162 171
Canada and other 85 66
Total $ 1,137 $ 875
Intersegment sales
United States 32 29
Europe 9 9
Canada and other 12 22
Eliminations (53) (60)
Net sales $ 1,137 $ 875
</TABLE>
<PAGE> -8-
OWENS CORNING AND SUBSIDIARIES
QUARTERLY INFORMATION ON INDUSTRY AND GEOGRAPHIC SEGMENTS
(Continued)
<TABLE>
<S> <C> <C>
1. SEGMENT DATA (Continued) Quarter Ended
March 31,
1998 1997
(In millions of dollars)
INCOME (LOSS) FROM OPERATIONS
Industry Segments
Building Materials
United States $ 2 $ 37
Europe (15) 5
Canada and other (3) 2
Total Building Materials (16) 44
Composite Materials
United States 37 42
Europe (17) 7
Canada and other (1) 2
Total Composite Materials 19 51
General corporate income (expense) 36 (15)
Income from operations 39 80
Cost of borrowed funds (37) (19)
Income before provision
for income taxes $ 2 $ 61
Geographic Segments
United States $ 39 $ 79
Europe (32) 12
Canada and other (4) 4
General corporate income (expense) 36 (15)
Income from operations 39 80
Cost of borrowed funds (37) (19)
Income before provision
for income taxes $ 2 $ 61
</TABLE>
Income from operations for the quarter ended March 31,
1998 includes a pretax charge of $95 million for
restructuring and other actions. The impact of this
special charge was to reduce income from operations for
Building Materials in the United States, Europe, and
Canada and other by $17 million, $11 million and $1
million, respectively; Composite Materials in the United
States, Europe, and Canada and other by $8 million, $27
million and $1 million, respectively; and to increase
general corporate expense by $30 million. Income from
operations for the quarter ended March 31, 1998 also
includes a pretax gain of $84 million from the sale of the
Company's 50% ownership interest in Alpha/Owens-Corning,
LLC. The impact of this gain was to decrease general
corporate expense by $84 million. Please see notes 3 and 4.
<PAGE> -9-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. GENERAL
The financial statements included in this Report are
condensed and unaudited, pursuant to certain Rules and
Regulations of the Securities and Exchange Commission, but
include, in the opinion of the Company, adjustments
necessary for a fair statement of the results for the
periods indicated, which, however, are not necessarily
indicative of results which may be expected for the full
year.
In connection with the condensed financial statements and
notes included in this Report, reference is made to the
financial statements and notes thereto contained in the
Company's 1997 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS
During the first quarter of 1998, the Company recorded a $95
million pretax charge for restructuring and other actions to
enhance manufacturing productivity and reduce overhead. This
charge represents the second phase of the Company's
strategic restructuring program announced in January 1998.
Of the Company's estimated $250 million total pretax charge
for this strategic program, $238 million has been charged on
a cumulative basis since the fourth quarter of 1997 and the
Company expects additional charges of approximately $12
million as further actions are finalized.
The $95 million pretax charge in the first quarter of 1998
was comprised of an $87 million charge associated with the
restructuring of the Company's business segments and an $8
million charge associated with other actions. The $87
million restructure charge has been classified as a separate
component of operating expenses on the Company's
consolidated statement of income while the $8 million charge
for other actions is comprised of a $5 million charge to
cost of sales and a $3 million charge to marketing and
administrative expenses. The components of the restructure
charge include $81 million for personnel reductions and $6
million for the divestiture of non-strategic businesses and
facilities, of which $2 million represents exit cost
liabilities, comprised primarily of lease commitments. The
$81 million for personnel reductions represents severance
costs associated with the elimination of approximately 1,500
positions worldwide. The primary employee groups affected
include manufacturing and corporate administrative
personnel. As of March 31, 1998, approximately $14 million
has been paid and charged against the reserve for personnel
reductions, representing the elimination of approximately
1,500 employees, the majority of whose severance payments
will be made over the next 12 months, and less than $1
million has been charged against exit cost liabilities. No
adjustments have been made to the liability.
During the fourth quarter of 1997, the Company recorded a
$143 million pretax charge for restructuring and other
actions to close manufacturing facilities, enhance
manufacturing productivity and reduce overhead. The $143
million pretax charge represents the first phase of the
Company's strategic restructuring program and was comprised
of a $68 million charge associated with the restructuring of
the Company's business segments and a $75 million charge
associated with asset impairments, including investments in
certain affiliates. The components of the restructure
charge include $25 million for personnel reductions; $41
million for divestiture of non-strategic businesses and
facilities, of which $13 million represents exit cost
liabilities, primarily for leased warehouse and office
facilities to be vacated, and $28 million represents non-
cash asset revaluations; and $2 million for other actions.
The divestiture of non-strategic businesses and facilities
includes the closure of the Candiac, Quebec manufacturing
facility to be completed in 1998.
<PAGE> -10-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (Continued)
The $25 million for personnel reductions during the fourth
quarter of 1997 represents severance costs associated with the
elimination of nearly 550 positions worldwide. The primary
employee groups affected include manufacturing and corporate
administrative personnel. As of March 31, 1998, approximately
$14 million has been charged against the reserve of which $5
million was for exit costs and $9 million was for severance
costs, representing the elimination of approximately 550
employees, the majority of whose severance payments will be
made over the next 12 months. No adjustments have been made
to the liability.
The components of the $75 million of other actions during the
fourth quarter of 1997 and their classification on the
Company's 1997 consolidated statement of income are as
follows: $17 million for the write off of certain assets and
investments associated with unconsolidated joint ventures in
Spain and Argentina due primarily to poor current and
projected financial results and the expected loss of local
partners, recorded as other operating expenses; $12 million
for the write-down of certain investments in mainland China to
reflect the current business outlook and the fair market value
of the investments, recorded as cost of sales; $24 million to
write down to net realizable value obsolete equipment and
inventory made obsolete by changes in the Company's
manufacturing and marketing strategies, recorded as cost of
sales; $8 million for a supplemental employee retirement plan
approved by the Board of Directors in December 1997, recorded
as marketing and administrative expenses; $5 million for the
write-off of an insurance receivable that was determined to be
uncollectable after judicial rejection of the Company's claim,
recorded as other operating expenses; and $9 million for
several other actions recorded as cost of sales, marketing and
administrative expenses, and other operating expenses. The
Company plans to hold and use the investments but plans to
dispose of the equipment in 1998.
4. ACQUISITIONS AND DIVESTITURES OF BUSINESSES
During 1997, the Company made several acquisitions, the
largest of which were the acquisitions of Fibreboard
Corporation ("Fibreboard") and AmeriMark Building Products,
Inc. ("AmeriMark"). The purchase price of Fibreboard, a North
American manufacturer of vinyl siding and accessories, as well
as manufactured stone, was $660 million, including debt
assumed of $138 million, and was consummated by the exchange
of cash for all of the outstanding common shares of Fibreboard
at a price of $55 per share. The purchase price of AmeriMark,
a specialty building products company serving the exterior
residential housing industry, was $317 million and was
consummated by the exchange of $309 million in trust preferred
hybrid securities and $8 million in cash for the net assets of
AmeriMark.
The following unaudited table presents the pro forma results
of operations for the quarter ended March 31, 1997, assuming
the acquisitions of Fibreboard and AmeriMark occurred at the
beginning of the period presented. The pro forma impact of
all other acquisitions during 1997, excluding Fibreboard and
AmeriMark, was not material to the Company's results of
operations for the quarter ended March 31, 1997. These
results include certain adjustments, primarily for
depreciation and amortization, interest and other expenses
directly attributable to the acquisition and are not
necessarily indicative of what the results would have been had
the transactions actually occurred at the beginning of the
period presented. The pro forma results do not include
operations that were discontinued by Fibreboard prior to the
acquisition, or Pabco.
<PAGE> -11-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACQUISITIONS AND DIVESTITURES OF BUSINESSES (Continued)
Quarter Ended
March 31, 1997
(In millions of dollars,
except share data)
<TABLE>
<S> <C>
Net sales $ 1,108
Income from continuing operations 33
Diluted earnings per share from
continuing operations $ .60
</TABLE>
During the first quarter of 1998, the Company completed the
sale of the assets of Pabco, a producer of molded calcium
silicate insulation, fireproofing board and metal jacketing,
acquired as part of the Fibreboard acquisition in 1997. The
Company sold Pabco for $31 million in cash and $6 million in
notes receivable.
Late in the first quarter of 1998, the Company sold its 50%
ownership interest in Alpha/Owens-Corning, LLC. With cash
proceeds of approximately $103 million, the Company recorded a
pretax gain of approximately $84 million as other income on
the Company's consolidated statement of income.
On April 17, 1998, the Company announced that it is
considering the possible sale of the glass fiber yarns and
specialty materials portion of its Composite Materials
segment.
5. LONG-TERM DEBT
In the first quarter of 1998, the Company amended its long-
term revolving credit agreement and reduced the maximum
commitment equivalent to $1.8 billion, of which portions can
be denominated in Canadian dollars, Belgian francs or British
pounds subject to the provisions of the agreement. The
agreement allows the Company to borrow under multiple options,
which provide for varying terms and interest rates. The
commitment fee, charged on the entire commitment, is a sliding
scale based on credit ratings and was .15% at March 31, 1998.
As of March 31, 1998, $237 million of this facility was used
for standby letters of credit and $382 million was unused.
The average rate of interest on this facility was 6.0% at
March 31, 1998.
In early May 1998, the Company issued two series of debt
securities for an aggregate principal amount of $550 million.
The first series, representing $300 million of the securities,
is due May 1, 2005 and bears an annual rate of interest of
7.5%, payable semiannually. The second series, representing
$250 million of the securities, is due May 1, 2008 and bears
an annual rate of interest of 7.7%, payable semiannually.
Both series of securities (the "Notes") were issued as
unsecured obligations of the Company and are redeemable, in
whole or in part, at the option of the Company at any time at
a redemption price equal to the greater of (i) 100% of the
principal amount of such Notes or (ii) the sum of the present
values of the remaining scheduled payments of principal and
interest.
The proceeds from the issuance of the Notes, net of issuance
costs, were approximately $546 million. The Company used the
net proceeds to repay a portion of the outstanding borrowings
under its long-term revolving credit agreement.
<PAGE> -12-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. INCOME TAXES
The reconciliation between the U.S. federal statutory rate
and the Company's effective income tax rate is:
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended March 31,
1998 1997
In millions % of pretax In millions % of pretax
of dollars income of dollars income
U.S. federal statutory rate $ 1 35% $ 21 35%
State and local income taxes (1) (50) 1 2
Special tax election (a) (13) (650) - -
Foreign tax rate differences 3 150 - -
Adjustment of deferred tax
asset valuation allowance - - (7) (12)
Other $ 3 165 $ 5 8
Effective tax rate $ (7) (350)% $ 20 33%
</TABLE>
(a) Represents a one-time tax
benefit associated with Asia Pacific operations.
7. INVENTORIES
<TABLE>
<S> <C> <C>
March 31, December 31,
1998 1997
(In millions of dollars)
Inventories are summarized as follows:
Finished goods $ 394 $ 363
Materials and supplies 213 214
FIFO inventory 607 577
Less: Reduction to LIFO basis (74) (74)
$ 533 $ 503
</TABLE>
Approximately $356 million and $365 million of FIFO
inventories were valued using the LIFO method at March 31,
1998 and December 31, 1997, respectively.
8. CONSOLIDATED STATEMENT OF CASH FLOWS
Cash payments for income taxes, net of refunds, and cost of
borrowed funds are summarized as follows:
<TABLE>
<S> <C> <C>
Quarter Ended
March 31,
1998 1997
(In millions of dollars)
Income taxes $ 3 $ 6
Cost of borrowed funds 23 13
</TABLE>
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
<PAGE> -13-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
During the first quarter of 1998, gross payments for
asbestos litigation claims against Fibreboard were
approximately $17 million, all of which was paid directly by
Fibreboard's insurers or from the escrow account to
claimants on Fibreboard's behalf. During the first quarter,
Fibreboard also reached settlement agreements with
plaintiffs for amounts totaling approximately $18 million.
Fibreboard settlement agreements are reflected on the
Company's consolidated balance sheet as an increase to both
the Fibreboard asbestos costs to be reimbursed and asbestos
claims settlements when the agreements are reached.
9. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). Comprehensive
income is defined as the change in equity of a business
enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes
all changes in equity during a period except those resulting
from investments by owners and distributions to owners.
SFAS 130 requires that the Company classify items of other
comprehensive income by their nature in the financial
statements and display the accumulated balance of other
comprehensive income separately in the stockholders' equity
section of the Company's consolidated balance sheet.
The Company's comprehensive income for the quarters ended
March 31, 1998 and 1997 was $16 million and $36 million,
respectively. The Company's comprehensive income includes
net income, currency translation adjustments, minimum
pension liability adjustments, and deferred gains and losses
on certain hedging transactions.
10. EARNINGS PER SHARE
The following table reconciles the net income and weighted
average number of shares used in the basic earnings per
share calculation to the net income and weighted average
number of shares used to compute diluted earnings per share.
<TABLE>
<S> <C> <C>
Quarter Ended
March 31,
1998 1997
(In millions of dollars,
except share data)
Net income used for basic
earnings per share $ 8 $ 42
Net income effect of assumed
conversion of debt and preferred
securities - 2
Net income used for diluted earnings
per share 8 44
Weighted average number of shares
outstanding used for basic earnings
per share (thousands) 53,373 52,408
Deferred awards and stock options 472 825
Shares from assumed conversion of debt
and preferred securities - 4,566
Weighted average number of shares
outstanding and common equivalent
shares used for diluted earnings
per share (thousands) 53,845 57,799
</TABLE>
<PAGE> -14-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. CONTINGENT LIABILITIES
ASBESTOS LIABILITIES
ITEM A. OWENS CORNING (EXCLUDING FIBREBOARD)
Owens Corning is a co-defendant with other former
manufacturers, distributors and installers of products
containing asbestos and with miners and suppliers of
asbestos fibers (collectively, the "Producers") in personal
injury litigation. The personal injury claimants generally
allege injuries to their health caused by inhalation of
asbestos fibers from Owens Corning's products. Most of the
claimants seek punitive damages as well as compensatory
damages. Virtually all of the asbestos-related lawsuits
against Owens Corning arise out of its manufacture,
distribution, sale or installation of an asbestos-containing
calcium silicate, high temperature insulation product, the
manufacture of which was discontinued in 1972.
Status
As of March 31, 1998, approximately 180,000 asbestos
personal injury claims were pending against Owens Corning,
of which 8,700 were received in the first quarter of 1998.
The Company received approximately 35,300 such claims in
1997 and 36,300 in 1996.
Many of the recent claims appear to be the product of mass
screening programs and not to involve malignancies or other
significant asbestos related impairment. Owens Corning
believes that at least 40,000 of the recent claims involve
plaintiffs whose pulmonary function tests ("PFTs") were
improperly administered or manipulated by the testing
laboratory or otherwise inconsistent with proper medical
practice. In 1996 Owens Corning filed suit in federal court
in New Orleans, Louisiana against the owners and operators
of certain pulmonary function testing laboratories in the
southeastern U.S. challenging such improper testing
practices. This matter is now in active pre-trial discovery.
In January 1997, Owens Corning filed a similar suit in
federal court in Jackson, Mississippi against the owner of
an additional testing laboratory.
Through March 31, 1998, Owens Corning had resolved (by
settlement or otherwise) approximately 204,900 asbestos
personal injury claims. During 1995, 1996 and 1997, Owens
Corning resolved approximately 63,700 asbestos personal
injury claims, over 99% without trial. Total indemnity
payments for these 63,700 claims, including future
installment payments, are expected to be $858 million (an
average of $13,500 per claim).
Owens Corning's indemnity payments have varied considerably
over time and from case to case, and are affected by a
multitude of factors. These include the type and severity
of the disease sustained by the claimant (i.e.,
mesothelioma, lung cancer, other types of cancer, asbestosis
or pleural changes); the occupation of the claimant; the
extent of the claimant's exposure to asbestos-containing
products manufactured, sold or installed by Owens Corning;
the extent of the claimant's exposure to asbestos-containing
products manufactured, sold or installed by other Producers;
the number and financial resources of other Producer
defendants; the jurisdiction of suit; the presence or
absence of other possible causes of the claimant's illness;
the availability or not of legal defenses such as the
statute of limitations or state of the art; whether the
claim was resolved on an individual basis or as part of a
group settlement; and whether the claim proceeded to an
adverse verdict or judgment.
<PAGE> -15-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. CONTINGENT LIABILITIES (Continued)
Owens Corning's total indemnity and defense payments (before
application of insurance recoveries) for asbestos personal
injury claims were $300 million in 1997 and are expected to
be approximately $350 million in 1998. This high level of
expenditures, and the anticipated increase in 1998, are
attributable in large measure to two factors: payments
associated with adverse judgments (particularly in
mesothelioma cases), and significant recent increases in the
cost of settlement of mesothelioma claims. The Company is
addressing these developments by refocusing its defense
resources upon the early identification and evaluation of
mesothelioma claims and, where such claims cannot be
resolved by settlement, upon more thorough preparation and
work-up of such claims for trial. The Company believes that
these measures should prove effective in controlling the
costs of resolving such claims. However, the increased cost
of resolution of mesothelioma claims has added to the
difficulty of estimating the Company's future asbestos
liabilities. The Company cautions that if the cost of
mesothelioma settlements and judgments is not controlled and
if future annual expenditures for asbestos personal injury
claims are not reduced, the Company may be required to make
additional provision for the anticipated costs of asbestos
personal injury claims.
Tobacco
The Company is closely monitoring the proposed federal
legislation to implement a nationwide tobacco settlement.
Owens Corning, Fibreboard and other asbestos defendants have
collectively spent billions of dollars to resolve asbestos
personal injury claims to which smoking was a substantial
causal or contributing factor. The Company believes that
any federal legislation implementing the proposed tobacco
settlement must make adequate financial provision for
compensating asbestos personal injury claimants for the role
tobacco use played in their injuries and for reimbursing
asbestos defendants, in whole or in part, for past payments
that have been made to asbestos personal injury claimants
who were also smokers. The Company is directing its
legislative lobbying efforts toward achievement of this
objective.
Owens Corning and Fibreboard have filed suit in the Superior
Court for Alameda County, California against seven leading
manufacturers of tobacco products. The complaint alleges
that cigarette smoking causes or contributes to lung cancer,
a variety of other cancers and chronic obstructive pulmonary
disease. The complaint seeks to require the defendants to
reimburse Owens Corning and Fibreboard for all or part of
the amounts which they have spent in resolving the personal
injury claims of asbestos plaintiffs whose injuries were
caused or contributed to by cigarette smoking.
Fibreboard
As described in greater detail below, Fibreboard is a party
to two class action settlements relating to asbestos
personal injury claims-the Global Settlement and the
Insurance Settlement. If the Global Settlement is approved,
Fibreboard will be protected by an injunction from asbestos
personal injury claims and should have no further asbestos
personal injury liabilities. If the Global Settlement is not
approved, the Insurance Settlement, which has been approved
by the courts, will become effective. In such event,
Fibreboard will receive the payments due under the Insurance
Settlement, the injunction protecting Fibreboard from
asbestos personal injury claims will be dissolved, and
Fibreboard will return to the tort system as a defendant.
Should the Insurance Settlement come into effect, Owens
Corning and Fibreboard anticipate establishing a joint
<PAGE> -16-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. CONTINGENT LIABILITIES (Continued)
facility that would provide, consistent with Fibreboard's
contractual obligations under the Insurance Settlement,
for the joint defense and settlement of asbestos personal
injury claims against the two defendants. Such a joint
facility would have the potential for achieving synergistic
savings in defense and settlement costs compared to the
costs either Company would otherwise likely incur.
Insurance
As of March 31, 1998, Owens Corning had approximately $215
million in unexhausted insurance coverage (net of
deductibles and self-insured retentions and excluding
coverage issued by insolvent carriers) under its liability
insurance policies applicable to asbestos personal injury
claims. This insurance, which is substantially confirmed,
includes both products hazard coverage and primary level non-
products coverage. Portions of this coverage are not
available until 1998 and beyond under agreements with the
carriers confirming such coverage. All of Owens Corning's
liability insurance policies cover indemnity payments and
defense fees and expenses subject to applicable policy
limits.
In addition to its confirmed primary level non-products
insurance, Owens Corning has a significant amount of
unconfirmed potential non-products coverage with excess
level carriers. For purposes of calculating the amount of
insurance applicable to asbestos liabilities, Owens Corning
has estimated its probable recoveries in respect of this
additional non-products coverage at $225 million, which
amount was recorded in 1996. This coverage is unconfirmed
and the amount and timing of recoveries from these excess
level policies will depend on subsequent negotiations or
proceedings.
Reserve
The Company's financial statements include a reserve for the
estimated cost associated with Owens Corning's asbestos
personal injury claims. This reserve was established
principally through a charge to income in 1991 for the costs
of asbestos claims expected to be received through 1999 and
an additional $1.1 billion charge to income (before taking
into account the probable non-products insurance recoveries)
during 1996 for cases that may be received subsequent to
1999. In establishing the reserve, Owens Corning took into
account, among other things, the effect of federal court
decisions relating to punitive damages and the certification
of class actions in asbestos cases, the discussions with a
substantial group of plaintiffs' law firms in connection
with global settlement negotiations, the results of its
continuing investigations of medical screening practices of
the kind at issue in the federal PFT lawsuits, recent
developments as to the prospects for federal and state tort
reform, the continued rate of case filings at historically
high levels, additional information on filings received
during the 1993-1995 period and other factors. The combined
effect of the $1.1 billion charge and the $225 million
probable additional non-products insurance recovery was an
$875 million charge in the second quarter of 1996.
Owens Corning's estimated total liabilities in respect of
indemnity and defense costs associated with pending and
unasserted asbestos personal injury claims that may be
received in the future, and its estimated insurance
recoveries in respect of such claims, are reported
separately as follows:
<PAGE> -17-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. CONTINGENT LIABILITIES (Continued)
<TABLE>
<S> <C> <C>
March 31, December 31,
1998 1997
(In millions of dollars)
Reserve for asbestos
litigation claims
Current $ 300 $ 350
Other 1,241 1,320
Total Reserve 1,541 1,670
Insurance for asbestos
litigation claims
Current 100 100
Other 340 357
Total Insurance 440 457
Net Owens Corning Asbestos
Liability $ 1,101 $ 1,213
</TABLE>
Owens Corning cautions that such factors as the number of
future asbestos personal injury claims received by it, the
rate of receipt of such claims, and the indemnity and
defense costs associated with asbestos personal injury
claims, are influenced by numerous variables that are
difficult to predict, and that estimates, such as Owens
Corning's, which attempt to take account of such variables,
are subject to considerable uncertainty. Included among
these variables are Owens Corning's future success in
controlling the costs of resolving mesothelioma claims, the
outcome of the Company's litigation against the tobacco
companies and of the appellate proceedings related to the
Fibreboard Global Settlement, and federal legislative
developments concerning asbestos and/or tobacco. Owens
Corning believes that its estimate of liabilities and
insurance will be sufficient to provide for the costs of all
pending and future asbestos personal injury claims that
involve malignancies or significant asbestos-related
functional impairment. While such estimates cover
unimpaired claims, the number and cost of unimpaired claims
are much harder to predict and such estimates reflect Owens
Corning's belief that such claims have little or no value.
Owens Corning will continue to review the adequacy of its
estimate of liabilities and insurance on a periodic basis
and make such adjustments as may be appropriate.
Management Opinion
Although any opinion is necessarily judgmental and must be
based on information now known to Owens Corning, in the
opinion of management, while any additional uninsured and
unreserved costs which may arise out of pending personal
injury asbestos claims and additional similar asbestos
claims filed in the future may be substantial over time,
management believes that any such additional costs will not
impair the ability of the Company to meet its obligations,
to reinvest in its businesses or to take advantage of
attractive opportunities for growth.
<PAGE> -18-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. CONTINGENT LIABILITIES (Continued)
ITEM B. FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured insulation products
containing asbestos. Fibreboard has since been named as a
defendant in many thousands of personal injury claims for
injuries allegedly caused by asbestos exposure.
Status
As of March 31, 1998, approximately 113,800 asbestos
personal injury claims were pending against Fibreboard,
5,900 of which were received in the first quarter of 1998.
Fibreboard received approximately 33,000 such claims in 1997
and 32,900 in 1996. These claims and most of the pending
claims are made against the Fibreboard Global Settlement
Trust and are subject to the Global Settlement injunction
discussed below. During 1995, 1996 and 1997, Fibreboard
resolved approximately 20,100 asbestos personal injury
claims and incurred indemnity payments of $257 million (an
average of about $12,800 per case).
The average cost per claim has increased recently from the
historical average cost of $11,000 per claim. This is due to
the absence of group settlements, where large numbers of low
value cases are traditionally settled along with higher
value cases, and due to the fact that in 1996 and 1997 a
relatively small number of individual cases involving more
seriously injured plaintiffs were settled as exigent claims
(all of which are malignancy claims) during the pendency of
the Global Settlement injunction discussed below.
As of March 31, 1998, amounts payable under various asbestos
claim settlement agreements were $124 million. These
amounts are payable either from the Settlement Trust
discussed below or directly by the insurers. Amounts due
from insurers in payment of these or past claims paid
directly by Fibreboard, as of March 31, 1998 are $117
million.
Insurance Arrangements
Fibreboard has unique insurance arrangements for personal
injury claims. During 1993, Fibreboard and its insurers,
Continental Casualty Company (Continental) and Pacific
Indemnity Company (Pacific), entered into the Insurance
Settlement, and Fibreboard, its insurers and
representatives of a class of future asbestos plaintiffs who
have claims arising from exposure to asbestos prior to
August 27, 1993, entered into the Global Settlement. These
agreements are interrelated and require final court
approval. On July 26, 1996, the U.S. Fifth Circuit Court of
Appeals affirmed the Global Settlement by a majority
decision and the Insurance Settlement by a unanimous
decision.
The parties opposing the Global Settlement filed petitions
seeking review with the U.S. Supreme Court. On June 27,
1997, the Supreme Court granted the petition, vacated the
judgment and remanded the case to the Fifth Circuit for
further consideration in light of the Supreme Court's
decision in the Amchem Products, Inc. v. Windsor case.
Amchem involved a proposed nationwide class action
settlement of future asbestos personal injury claims against
the members of the Center for Claims Resolution. The
Supreme Court, affirming the intermediate appellate court,
disapproved and vacated the Amchem class action settlement,
determining that the Amchem class action failed to meet the
requirements of Federal Rule of Civil Procedure 23.
<PAGE> -19-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. CONTINGENT LIABILITIES (Continued)
ITEM B. FIBREBOARD (EXCLUDING OWENS CORNING)
On January 27, 1998, a panel of the Fifth Circuit reaffirmed,
by majority vote, its prior decision, and again approved
the Global Settlement. The parties opposing the Global
Settlement have filed two petitions for certiorari seeking
review by the U.S. Supreme Court. In light of this decision
by the Fifth Circuit, and the filing of the petitions for
certiorari, a final resolution of the Global Settlement may
not be known until the second half of 1998 or later.
On October 24, 1996, the statutory time period for objectors
to seek further judicial review of the Insurance Settlement
lapsed with no petition for review having been filed with
the U.S. Supreme Court. Therefore, the Insurance
Settlement is now final and not subject to further appeal.
The parties will continue to seek approval of the Global
Settlement. If the Global Settlement becomes effective, all
asbestos-related personal injury liabilities of Fibreboard
will be resolved through insurance funds and existing
corporate reserves. A permanent injunction barring the
filing of any further claims against Fibreboard or its
insurers by class members is included as part of the Global
Settlement. Upon final approval, Fibreboard's insurers are
required to pay existing settlements and assume full
responsibility for any claims filed before August 27, 1993,
the date the settling parties reached agreement on the terms
of the Global Settlement. A court-supervised claims
processing trust ("Settlement Trust") will be responsible
for resolving claims which were not filed against Fibreboard
before August 27, 1993, and any further claims that might
otherwise be asserted against Fibreboard in the future by
members of the class.
The Settlement Trust will be funded principally by
Continental and Pacific. These insurers have placed $1,525
million in an interest-bearing escrow account pending court
approval of the settlements. Fibreboard is responsible for
contributing $10 million plus accrued interest toward the
Settlement Trust, which it will obtain from other remaining
insurance sources and existing reserves. The Home Insurance
Company has already paid $9.9 million into the escrow
account on behalf of Fibreboard, in satisfaction of an
earlier settlement agreement. The balance of the escrow
account was $1,689 million at March 31, 1998, after payment
of interim expenses and exigent claims associated with the
Global Settlement.
If the Global Settlement becomes effective, Fibreboard would
have no on-going or future liabilities for asbestos personal
injury claims in excess of the $10 million currently
reserved in accrued liabilities.
The Insurance Settlement is structured as an alternative
solution in the event the Global Settlement fails to receive
final approval. Under the Insurance Settlement, Continental
and Pacific will pay in full settlements reached as of
August 27, 1993 and provide Fibreboard with the remaining
balance of the Global Settlement escrow account for claims
filed after August 27, 1993, plus an additional $475
million, less amounts paid since August 27, 1993 for claims
which were pending but not settled at that date. Upon
fulfillment of their obligations under the Insurance
Settlement, Continental and Pacific will be discharged from
any further obligations to Fibreboard under their insurance
policies and will be protected by an injunction against any
claims of asbestos personal injury claimants based upon
those insurance policies. Under the Insurance Settlement,
Fibreboard will manage the defense and resolution of
asbestos-related personal injury claims and will remain
subject to suit by asbestos personal injury claimants.
<PAGE> -20-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. CONTINGENT LIABILITIES (Continued)
ITEM B. FIBREBOARD (EXCLUDING OWENS CORNING)
The Insurance Settlement will not be fully funded until such
time as the Global Settlement has been finally resolved. In
the event the Global Settlement is finally approved, the
Insurance Settlement will not be funded.
Management Opinion
While there are various uncertainties regarding whether the
Global Settlement or the Insurance Settlement will be in
effect, and these may ultimately impact Fibreboard's
liability for asbestos personal injury claims, the Company
believes the amounts available under the Insurance
Settlement will be adequate to fund the ongoing defense and
indemnity costs associated with asbestos-related personal
injury claims for the foreseeable future.
OTHER LIABILITIES
Various other lawsuits and claims arising in the normal
course of business are pending against the Company, some of
which allege substantial damages. Management believes that
the outcome of these lawsuits and claims will not have a
materially adverse effect on the Company's financial
position or results of operations.
<PAGE> -21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(All per share information in Item 2 is on a diluted basis.)
RESULTS OF OPERATIONS
Business Overview
The Company's growth agenda has focused on increasing sales
and earnings by (i) acquiring businesses with products that
can be sold through existing or complementary distribution
channels, (ii) achieving productivity improvements in
existing and acquired businesses and (iii) entering new high-
growth markets. The Company is implementing two major
initiatives, System Thinking (TM) and Advantage 2000, to
enhance sales growth and achieve productivity improvements
across all businesses. System Thinking for the Home (TM)
leverages the Company's broad product offering and strong
brand recognition to increase its share of the building
materials and home improvement markets. This systems
approach represents a shift from product-oriented selling to
providing systems-driven solutions that combine the
Company's insulation, roofing, exterior and sound control
systems, to provide a high performance, cost-effective
building "envelope" for the home. In the composites
business, the Company has partnered with the plastics
industry and, with the Company's System Thinking philosophy,
is taking a solution-oriented, customer-focused approach
toward the continuous development of substitution
opportunities for composite materials. In addition, the
Company is implementing Advantage 2000, a fully integrated
business technology system designed to reduce costs and
improve business processes.
The Company has grown its sales from nearly $3.4 billion in
1994 to approximately $5.0 billion on a pro forma basis
giving effect to acquisitions made in 1997. Acquisitions
have been a significant component of that growth. Since
1994, the Company has completed 17 acquisitions for an
aggregate purchase price of over $1.2 billion. The
Company's acquisitions have broadened its lines of business
to include siding, accessories and other home exteriors and
have diversified its materials portfolio beyond fiber glass
to include polymers such as vinyl and styrene, and metal and
stone. In 1997, the Company completed the two largest of
these acquisitions by acquiring Fibreboard Corporation
("Fibreboard") and AmeriMark Building Products, Inc.
("AmeriMark"), making Owens Corning the leader in the U.S.
vinyl siding, siding accessories and cast stone markets, as
well as a large specialty distributor in North America
through nearly 200 company-owned distribution centers.
Despite improvements in the Company's strategic position in
1997, the Company experienced a highly competitive pricing
environment in several of its product markets that
negatively impacted financial results. In North America,
insulation pricing decreased by approximately 10 percent
over the course of 1997 and worldwide composites pricing
decreased by approximately 6 percent during 1997. Income
from operations for 1997 was adversely impacted by
approximately $87 million as a result of price declines in
insulation products and approximately $64 million as a
result of price declines affecting composite materials.
Offset by small price increases in other businesses, the net
effect of price on 1997 income from operations was
approximately $142 million.
As a result of the growth of the Company's business and the
significant pricing pressure experienced in 1997, the
Company has implemented a strategic restructuring program
designed to improve profitability, augment previously
announced profitability initiatives, and improve operational
efficiency. The specific objectives of this strategic
program are discussed in "Restructuring of Operations and
Other Actions" below and in Note 3 to the Consolidated
Financial Statements.
<PAGE> -22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Quarter Ended March 31, 1998
Sales and Profitability
Net sales for the quarter ended March 31, 1998 were $1,137
million, reflecting a 30% increase from the first quarter
1997 level of $875 million. Growth in 1998 is mostly
attributable to the acquisition of Fibreboard that was
completed at the end of the second quarter of 1997 and the
acquisition of AmeriMark that was completed early in the
fourth quarter of 1997. Volume increases in insulation and
roofing, favorably influenced by strong construction
activity, were largely offset by declines in insulation
pricing, primarily in the U.S., compared to the first
quarter of 1997. Volume increases in composites in the U.S.
and Europe were partially offset by declines in composites
pricing in the U.S. in the first quarter of 1998, compared
to the first quarter of 1997. Despite the decline in price
in the first quarter of 1998 compared to the first quarter
of 1997, aggregate price levels were higher in the first
quarter of 1998 compared to the fourth quarter of 1997.
Additionally, sales were adversely affected by the
translation impact of a stronger U.S. dollar on sales in
foreign currencies. Please see Note 1 to the Consolidated
Financial Statements.
Sales outside the U.S. represented 22% of total sales for
the quarter ended March 31, 1998, compared to 27% for the
quarter ended March 31, 1997. The decline in non-U.S. sales
as a percentage of total sales is due to the 1997
acquisitions of Fibreboard and AmeriMark, which are
primarily U.S. operations. Gross margin for the quarter
ended March 31, 1998 was 18% of net sales, down from 25% in
the first quarter of 1997. The decline in the 1998 gross
margin reflects lower prices in insulation and composites
worldwide as well as the inherently lower-margin businesses
of Fibreboard and AmeriMark acquired during 1997.
In the first quarter of 1998, the Company announced price
increases effective in March 1998 applicable to its
residential insulation products of approximately 8 percent
and price increases applicable to its commercial and
industrial insulation products of approximately 4 percent.
The Company also announced price increases of 5 to 7 percent
affecting certain residential roofing products, effective in
April 1998.
For the quarter ended March 31, 1998, the Company reported
net income of $8 million, or $.16 per share, compared to net
income of $42 million, or $.76 per share, for the quarter
ended March 31, 1997. Net income for the first quarter of
1998 includes a pretax charge of $95 million ($63 million
after-tax) for restructuring and other actions; an $84
million pretax gain ($52 million after-tax) from the sale of
the Company's 50% ownership interest in Alpha/Owens-Corning,
LLC; as well as a $13 million one-time tax benefit
associated with Asia Pacific operations. The Company's cost
of borrowed funds for the quarter ended March 31, 1998 was
$37 million compared to $19 million in the first quarter of
1997. This increase reflects the Company's borrowings to
finance the acquisition of Fibreboard. Net income for the
quarter ended March 31, 1998 also reflects increased
minority interest expense, due to the financing of the
AmeriMark acquisition. Please see Notes 3, 4 and 6 to the
Consolidated Financial Statements.
Marketing and administrative expenses were $129 million for
the first quarter of 1998 compared to $122 million in the
first quarter of 1997. The increase in marketing and
administrative expenses is due to the incremental costs from
acquisitions. Excluding the incremental costs of
acquisitions, marketing and administrative expenses in the
first quarter of 1998 were approximately 10 percent lower
than the 1997 level, reflecting the initial benefits of the
Company's strategic restructuring program announced in early
1998 and described below.
<PAGE> -23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Restructuring of Operations and Other Actions
The $95 million pretax charge referred to above for
restructuring and other actions was the second phase of the
Company's strategic program to reduce overhead, enhance
manufacturing productivity and close manufacturing
facilities. This charge includes $87 million for
restructuring and $8 million for other actions. Of the
Company's estimated $250 million total pretax charge for
restructuring and other actions announced in early 1998,
$143 million was recorded in the fourth quarter of 1997 and
$95 million was recorded in the first quarter of 1998. The
Company expects additional charges of approximately $12
million as further actions are finalized. The total charge
recorded is comprised of approximately $155 million for the
restructuring program and approximately $83 million for
other actions. The restructuring program, of which $68
million was recorded in the fourth quarter of 1997 and $87
million was recorded in the first quarter of 1998, includes
approximately $106 million for costs associated with an
overall headcount reduction of approximately 2,050 at
numerous locations around the world, predominantly in the
U.S., Canada and Europe. The remaining $49 million of
restructuring includes $47 million for non-strategic
businesses and facilities of which $15 million represents
exit cost liabilities, and $2 million for other actions.
The costs for non-strategic businesses and facilities
include $28 million for the closure of the Candiac
insulation manufacturing plant in Quebec, Canada and $9
million for the closure of several North American
distribution locations.
The primary components of the $83 million charge for other
actions and their classification on the Company's
consolidated statement of income include $17 million for the
write off of certain assets and investments associated with
unconsolidated joint ventures in Spain and Argentina due
primarily to poor current and projected financial results
and the expected loss of local partners, recorded as other
operating expenses; $12 million for the write-down of
certain investments in mainland China to reflect the current
business outlook and the fair market value of the
investments, recorded as cost of sales; $24 million to write
down to net realizable value obsolete equipment and
inventory made obsolete by changes in the Company's
manufacturing and marketing strategies, recorded as cost of
sales; $8 million for a supplemental employee retirement
plan approved by the Board of Directors in December 1997,
recorded as marketing and administrative expenses; $5
million for the write-off of an insurance receivable that
was determined to be uncollectable after judicial rejection
of the Company's claim, recorded as other operating
expenses; and $17 million for several other actions recorded
as cost of sales, marketing and administrative expenses, and
other operating expenses. The Company plans to hold and use
the investments but plans to dispose of the equipment in
1998.
Based upon expected economic conditions over the next few
years, including labor, material and other costs, the
Company expects to be able to decrease operating costs by
approximately $100 million in 1998, and, when fully
implemented, $175 million per year in 1999 and beyond. The
expected $175 million in cost reductions, the majority of
which will be cash savings, is comprised of $150 million in
reduced personnel costs, $14 million in reduced facility
costs, and $11 million of reductions in related program
spending.
The Company also plans to implement programs to gain
synergies in its exterior systems business during 1998. As
a result of these programs, which include closing redundant
facilities and improving purchasing leverage, the Company
expects to reduce costs by an additional $30 million during
1998 and more than $50 million per year in 1999 and beyond,
the majority of which will be cash savings.
<PAGE> -24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Accounting Changes
During the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). Comprehensive
income is defined as the change in equity of a business
enterprise during a period from transactions and other
events and circumstances from nonowner sources. The
Company's comprehensive income includes net income, currency
translation adjustments, minimum pension liability
adjustments, and deferred gains and losses on certain
hedging transactions. Please see Note 9 to the Consolidated
Financial Statements.
Building Materials
In the Building Materials segment, sales increased 41% in
the first quarter of 1998 compared to the first quarter of
1997. This growth reflects the incremental sales from
acquisitions and volume increases in North America,
influenced by strong construction activity during the
quarter. The benefits of acquisitions and volume growth
were reduced by price declines and the adverse impact of a
stronger dollar, compared to the first quarter of 1997.
Income from operations was a loss of $16 million in the
first quarter of 1998, down from $44 million in the first
quarter of 1997. This decrease includes approximately $40
million of insulation price declines compared to the first
quarter of 1997 and $29 million of the special charges
described above. Please see Notes 1 and 3 to the
Consolidated Financial Statements.
The consolidated results of the Company include the results
of operations of Fibreboard and AmeriMark beginning with the
third and fourth quarters of 1997, respectively. To enhance
comparability, certain information below is presented on a
"pro forma" basis and reflects the acquisitions of
Fibreboard (excluding Pabco and operations that were
discontinued by Fibreboard prior to the acquisition) and
AmeriMark as though they had occurred at the beginning of
the period presented. (The pro forma impact of all other
acquisitions during 1997, excluding Fibreboard and
AmeriMark, was not material to the Company's results of
operations for the quarter ended March 31, 1997.) The pro
forma results include certain adjustments, primarily for
depreciation and amortization, interest and other expenses
directly attributable to the acquisitions, and are not
necessarily indicative of the combined results that would
have occurred had the acquisitions occurred at the beginning
of that period. These pro forma results do not reflect the
expected benefits from the consolidation of the exterior
systems business discussed above.
<TABLE>
<S> <C> <C> <C> <C>
PRO FORMA AS REPORTED
Quarter Ended Quarter Ended
March 31, March 31,
1998 1997 1998 1997
(In millions of dollars,
except share data)
Net sales $ 1,137 $ 1,108 $ 1,137 $ 875
Income from continuing operations 8 33 8 42
Diluted earnings per share from
continuing operations $ .16 $ .60 $ .16 $ .76
</TABLE>
Early in the first quarter of 1998, the Company completed
the sale of the assets of Pabco, a producer of molded
calcium silicate insulation, fireproofing board and metal
jacketing, acquired as part of the Fibreboard acquisition in
1997. Please see Note 4 to the Consolidated Financial
Statements.
<PAGE> -25-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Composite Materials
In the Composite Materials segment, sales were up 4% for the
quarter ended March 31, 1998 compared to 1997. Strong
volume gains, particularly in the U.S. and Europe, were
largely offset by pricing pressures and the impact of a
stronger dollar on sales in foreign currencies. Income from
operations was $19 million in the first quarter of 1998,
down from $51 million in the first quarter of 1997. This
decline partially reflects the decline in price, the impact
of which was $12 million, primarily in the U.S., compared to
the first quarter of 1997. Compared to the fourth quarter
of 1997, price levels were higher in the first quarter of
1998, indicating the benefits of the Company's previously
announced price increases in the composites business. Income
from operations also includes approximately $36 million of
the special charges described above. Please see Notes 1 and
3 to the Consolidated Financial Statements.
On April 17, 1998, the Company announced that it is
considering the possible sale of the glass fiber yarns and
specialty materials portion of its Composite Materials
segment. With sales of approximately $300 million in 1997,
the Company's yarn business is the world's second largest
producer of glass yarns, and the largest producer of fine
yarns. The asset sale would include two manufacturing
facilities in the U.S.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Cash flow from operations was negative $330 million for the
quarter ended March 31, 1998, compared to negative $247
million for the quarter ended March 31, 1997. The decrease
in cash flow from operations in 1998 is largely attributable
to the Company's lower earnings as well as an increase in
payments for asbestos litigation claims during the first
quarter of 1998. The increase in payments is due to the
timing of asbestos claims settlements. The Company
anticipates $350 million of total payments for asbestos
litigation claims during 1998. Inventories at March 31,
1998 increased $30 million, or 6% over December 31, 1997
levels due to the Company's normal seasonal inventory build
in the first half of the year. Receivables at March 31, 1998
were $560 million, a 30% increase over the December 31, 1997
level, due to high sales volume during the second half of
March.
At March 31, 1998, the Company's net working capital was
$309 million and its current ratio was 1.24, compared to
$121 million and 1.09, respectively, at December 31, 1997.
The increase in 1998 was primarily due to increased
receivables and inventories as well as a reduction in the
current portion of the reserve for asbestos litigation
claims. Additionally, at March 31, 1998, the proceeds from
the sale of Alpha/Owens-Corning were included in the
Company's consolidated balance sheet as cash and cash
equivalents.
The Company's total borrowings at March 31, 1998, were
$2.060 billion, $322 million higher than at year-end 1997.
Typically, the Company reports greater cash usage during the
first half of the year as the Company builds inventories and
other working capital. Early in the second quarter, the
Company used the proceeds from the sale of Alpha/Owens-
Corning and the collection of an income tax receivable to
reduce debt.
<PAGE> -26-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
As of March 31, 1998, the Company had unused lines of credit
of $409 million available under long-term bank credit
facilities and an additional $192 million under short-term
facilities, compared to $884 million and $224 million,
respectively, at year-end 1997. The decrease in unused
available lines of credit reflects the Company's increased
borrowings at March 31, 1998 as well as an agreed $200
million reduction in the maximum availability from the
Company's credit facility established in June 1997. Letters
of credit issued under the facility, most of which support
appeals from asbestos trials, also reduce the available
credit. The impact of such reduction is reflected in the
unused lines of credit discussed above. Please see Note 5
to the Consolidated Financial Statements.
Capital spending for property, plant and equipment,
excluding acquisitions, was $47 million in the first quarter
of 1998. The Company anticipates 1998 capital spending,
exclusive of acquisitions and investments in affiliates,
will be approximately $220 million, the majority of which is
uncommitted. The Company expects that funding for these
expenditures will be from the Company's operations and
external sources as required.
Gross payments for asbestos litigation claims during the
first quarter of 1998, including payments for claims settled
in prior years and excluding amounts payable in future
years, were $129 million. The first quarter 1998
expenditures include $14 million in defense costs and $1
million for appeal bond and other costs. Proceeds from
insurance were $17 million resulting in a net pretax cash
outflow of $112 million, or $67 million after-tax. During
the first quarter of 1998, the Company received
approximately 8,700 new asbestos personal injury cases and
closed approximately 2,400 cases. Over the next twelve
months, the Company's total payments for asbestos litigation
claims, including defense costs, are expected to be
approximately $300 million. Proceeds from insurance of $100
million are expected to be available to cover these costs,
resulting in a net pretax cash outflow of $200 million, or
$120 million after- tax. Please see Note 11 to the
Consolidated Financial Statements.
Gross payments for asbestos litigation claims against
Fibreboard for the quarter ended March 31, 1998 were
approximately $17 million, all of which was paid directly by
Fibreboard's insurers or from an escrow account funded by
its insurers to claimants on Fibreboard's behalf. During
the first quarter, Fibreboard received approximately 5,900
new asbestos personal injury claims, and resolved
approximately 600 claims. Payments for asbestos claims
against Fibreboard are expected to be paid by Fibreboard's
insurers or from the escrow account. Please see Notes 8 and
11 to the Consolidated Financial Statements.
The Company expects funds generated from operations,
together with funds available under long and short term bank
credit facilities, to be sufficient to satisfy its debt
service obligations under its existing and anticipated
indebtedness, its contingent liabilities for uninsured
asbestos personal injury claims, as well as its capital
expenditure programs and growth agenda.
The Company has been deemed by the Environmental Protection
Agency (EPA) to be a potentially responsible party (PRP)
with respect to certain sites under the Comprehensive
Environmental Response, Compensation and Liability Act
(Superfund). The Company has also been deemed a PRP under
similar state or local laws. In other instances, other PRPs
have brought suits or claims against the Company as a PRP
for contribution under such federal, state or local laws.
During the first quarter of 1998, the Company was designated
as a PRP in such federal, state, local or private
proceedings for two additional sites. At March 31, 1998, a
total of 36 such PRP designations remained unresolved by the
Company, some of which designations the Company believes to
be erroneous. The Company is also involved with
environmental investigation or remediation at a number of
other sites at which it has not been designated a PRP.
<PAGE> -27-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS (Continued)
The Company has established a $33 million reserve, of which
$16 million relates to Fibreboard, for its Superfund (and
similar state, local and private action) contingent
liabilities. Based upon information presently available to
the Company, and without regard to the application of
insurance, the Company believes that, considered in the
aggregate, the additional costs associated with such
contingent liabilities, including any related litigation
costs, will not have a materially adverse effect on the
Company's results of operations, financial condition or long-
term liquidity.
The 1990 Clean Air Act Amendments (Act) provide that the EPA
will issue regulations on a number of air pollutants over a
period of years. Until these regulations are developed, the
Company cannot determine the extent to which the Act will
affect it. The Company anticipates that its sources to be
regulated will include wool fiberglass, mineral wool,
asphalt processing and roofing, and metal coil coating. The
EPA's currently announced schedule is to issue regulations
covering wool fiberglass and mineral wool in 1998, asphalt
processing and roofing in 1999, and metal coil coating in
2000, with implementation as to existing sources up to three
years thereafter. Based on information now known to the
Company, including the nature and limited number of
regulated materials it emits, the Company does not expect
the Act to have a materially adverse effect on the Company's
results of operations, financial condition or long-term
liquidity.
Year 2000 Compliance
The Company has been actively implementing new systems and
technology since 1995 as part of its Advantage 2000 program
to improve productivity and operational efficiency. An
additional objective of this initiative is to ensure all
business transactions are compliant with requirements to
process accurately in the year 2000 and beyond. The scope
of this program has been continuously expanded to include
each of the seventeen acquisitions made by the Company
during the past four years. To date, over 50% of the
Company's systems have been replaced and are in operation
for daily business transaction processing. All remaining
system updates will be implemented throughout the period
ending July 1, 1999.
The cumulative cost of business systems replacement from
1995 through the end of the first quarter of 1998 has been
$141 million, including $97 million for information
technology and $44 million for related training and
deployment in various business locations. The current
estimates for all remaining locations range from
approximately $35 million to $45 million for information
technology, manufacturing technology, and training and
deployment costs.
The Company is also working with all suppliers to ensure
their systems are year 2000 compliant as well. All costs
associated with supplier compliance will be borne by them.
In the event that some suppliers are unable to convert or
replace systems appropriately, the Company will switch
suppliers to those that are able to provide compliant
transaction processing.
<PAGE> -28-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the paragraphs in Note 11, Contingent Liabilities, to
the Company's Consolidated Financial Statements above, which
are incorporated here by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None of the constituent instruments defining the rights
of the holders of any class of the Company's registered
securities was materially modified in the quarter ended
March 31, 1998.
(b) None of the rights evidenced by any class of the
Company's registered securities was materially limited or
qualified in the quarter ended March 31, 1998 by the
issuance or modification of any other class of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) During the quarter ended March 31, 1998, there was no
material default in the payment of principal, interest,
sinking or purchase fund installments, or any other
material default not cured within 30 days, with respect
to any indebtedness of the Company or any of its
significant subsidiaries exceeding 5 percent of the total
assets of the Company and its consolidated subsidiaries.
(b) During the quarter ended March 31, 1998, no material
arrearage in the payment of dividends occurred, and there
was no other material delinquency not cured within 30
days, with respect to any class of preferred stock of the
Company which is registered or which ranks prior to any
class of registered securities, or with respect to any
class of preferred stock of any significant subsidiary of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during
the quarter ended March 31, 1998.
ITEM 5. OTHER INFORMATION
The Company does not elect to report any information under
this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index below, which is incorporated here by
reference.
(b) Reports on Form 8-K.
During the quarter ended March 31, 1998, the Company
filed the following current reports on Form 8-K:
- Filed January 9, 1998, under Item 5.
<PAGE> -29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
OWENS CORNING
Registrant
Date: May 11, 1998 By: /s/ Domenico Cecere
Domenico Cecere
Senior Vice President and
Chief Financial Officer
(as duly authorized officer)
Date: May 11, 1998 By: /s/ Steven J. Strobel
Steven J. Strobel
Vice President and Controller
<PAGE> -30-
EXHIBIT INDEX
Exhibit
Number Document Description
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession.
Agreement and Plan of Merger, dated as of May 27,
1997, among Owens Corning, Sierra Corp. and
Fibreboard Corporation (incorporated herein by
reference to Exhibit 2(a) to the Company's current
report on Form 8-K (File No. 1-3660), filed May 28,
1997).
(3) Articles of Incorporation and By-Laws.
(i) Certificate of Incorporation of Owens Corning, as
amended (incorporated herein by reference to
Exhibit (3)(i) to the Company's quarterly report
on Form 10-Q (File No. 1-3660) for the quarter
ended March 31, 1997).
(ii) By-Laws of Owens Corning, as amended
(incorporated herein by reference to Exhibit (3)
to the Company's annual report on Form 10-K (File
No. 1-3660) for 1995).
(4) Instruments Defining the Rights of Security Holders,
Including Indentures.
Credit Agreement, dated as of June 26, 1997, among
Owens Corning, other Borrowers and Guarantors, the
Banks listed on Annex A thereto, and Credit Suisse
First Boston, as Agent (filed as Exhibit (4) to the
Company's quarterly report on Form 10-Q (File No. 1-
3660) for the quarter ended June 30, 1997) as
amended by Amendment No. 1 thereto (incorporated
herein by reference to Exhibit (4) to the Company's
annual report on Form 10-K (File No. 1-3660) for the
year ended December 31, 1997).
(10) Material Contracts.
Credit Agreement, dated as of June 26, 1997, among
Owens Corning, other Borrowers and Guarantors, the
Banks listed on Annex A thereto, and Credit Suisse
First Boston, as Agent (filed as Exhibit (4) to the
Company's quarterly report on Form 10-Q (File No. 1-
3660) for the quarter ended June 30, 1997) as
amended by Amendment No. 1 thereto (incorporated by
reference to Exhibit (4) to the Company's annual
report on Form 10-K (File No. 1-3660) for the year
ended December 31, 1997.
Agreement and Plan of Merger, dated as of May 27,
1997, among Owens Corning, Sierra Corp. and
Fibreboard Corporation (incorporated herein by
reference to Exhibit 2(a) to the Company's current
report on Form 8-K (File No. 1-3660), filed May 28,
1997).
(11) Statement re Computation of Per Share Earnings
(filed herewith).
(27) Financial Data Schedule (filed herewith).
(99) Additional Exhibits.
Subsidiaries of Owens Corning, as amended (filed herewith).
<PAGE> - 31 - Exhibit (11)
OWENS CORNING AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<S> <C> <C>
Quarter Ended
March 31,
1998 1997
(In millions of dollars,
except share data)
Basic:
Net income $ 8 $ 42
Basic weighted average number of common
shares outstanding (thousands) 53,373 52,408
Basic per share amount $ .16 $ .80
Diluted:
Net income $ 8 $ 44
Weighted average number of common
shares outstanding (thousands) 53,373 52,408
Weighted average common equivalent
shares (thousands):
Deferred awards 352 353
Stock options using the average
market price during the period 120 472
Shares from assumed conversion
of preferred securities - 4,566
Diluted weighted average number
of common shares outstanding and
common equivalent shares (thousands) 53,845 57,799
Diluted per share amount $ .16 $ .76
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 115
<SECURITIES> 0
<RECEIVABLES> 560
<ALLOWANCES> 0
<INVENTORY> 533
<CURRENT-ASSETS> 1,607
<PP&E> 3,603
<DEPRECIATION> 1,858
<TOTAL-ASSETS> 5,222
<CURRENT-LIABILITIES> 1,298
<BONDS> 2,060
<COMMON> 662
503
0
<OTHER-SE> (1,085)
<TOTAL-LIABILITY-AND-EQUITY> 5,222
<SALES> 1,137
<TOTAL-REVENUES> 1,137
<CGS> 938
<TOTAL-COSTS> 938
<OTHER-EXPENSES> (71)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 2
<INCOME-TAX> (7)
<INCOME-CONTINUING> 8
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
Exhibit (99)
State or Other
Jurisdiction
Under the Laws of
Subsidiaries of Owens Corning (3/31/98) Which Organized
Accord Vinyl Siding Inc. Ontario
AmeriMark Building Products, Inc. Delaware
Carriage Hill Stone Co. Ohio
Commercial Owens Corning Chile Limitada Chile
Crown Manufacturing Inc. Canada
Deutsche Owens-Corning Glasswool GmbH Germany
Engineered Pipe Systems, Inc. Delaware
Engineered Yarns America, Inc. Massachusetts
Eric Company Delaware
European Owens-Corning Fiberglas, S.A. Belgium
Fabwel, Inc. Indiana
Falcon Foam Corporation Delaware
Faloc, Inc. Delaware
Fibreboard Corporation Delaware
Flowtite Offshore Services Ltd. Cyprus
IPM, Inc. Delaware
Kitsons Insulation Products Ltd. United Kingdom
Lmp Impianti Srl Italy
Matcorp, Inc. Delaware
Nanjing Owens Corning XPS Foam Co. Ltd. China
Norandex Inc. Delaware
N.V. Owens-Corning S.A. Belgium
OC Celfortec Inc. Canada
O/C/FIRST CORPORATION Ohio
OCFOGO, Inc. Delaware
O.C. Funding B.V. The Netherlands
O/C/SECOND CORPORATION Delaware
OCW Acquisition Corporation (dba, Delsan) Delaware
Owens Corning (Anshan) Fiberglas Co. Limited China
Owens Corning (China) Investment Company, Ltd. China
Owens Corning A/S Norway
Owens Corning Building Materials Espana S.A. Spain
Owens-Corning Building Products (U.K.) Ltd. United Kingdom
Owens Corning Canada Inc. Canada
Owens-Corning Canos, S.A. Argentina
Owens-Corning Capital Holdings I, Inc. Delaware
Owens-Corning Capital Holdings II, Inc. Delaware
Owens-Corning Capital L.L.C. Delaware
Owens Corning Cayman (China) Holdings Cayman Islands
Owens-Corning Cayman Limited Cayman Islands
Owens-Corning Changchun Guan Dao Company Ltd. China
Owens Corning Espana SA Spain
Owens-Corning Fiberglas A.S. Limitada Brazil
Owens-Corning Fiberglas Deutschland GmbH Germany
Owens-Corning Fiberglas Espana, S.A. Spain
Owens-Corning Fiberglas France S.A. France
Owens-Corning Fiberglas (G.B.) Ltd. United Kingdom
Owens-Corning Fiberglas (Italy) S.r.l. Italy
<PAGE>
State or Other
Jurisdiction
Under the Laws of
Subsidiaries of Owens Corning (3/31/98) Which Organized
Owens-Corning Fiberglas Norway A/S Norway
Owens-Corning Fiberglas S.A. Uruguay
Owens-Corning Fiberglas Sweden Inc. Delaware
Owens-Corning Fiberglas Technology Inc. Illinois
Owens-Corning Fiberglas (U.K.) Ltd. United Kingdom
Owens-Corning Fiberglas (U.K.) Pension Plan Ltd. United Kingdom
Owens-Corning Finance (U.K.) plc United Kingdom
Owens-Corning FSC, Inc. Barbados
Owens-Corning Funding Corporation Delaware
Owens-Corning (Guangzhou) Fiberglas Co., Ltd. China
Owens-Corning Holdings Limited Cayman Islands
Owens Corning HT, Inc. Delaware
Owens-Corning Isolation France S.A. France
Owens Corning (Japan) Ltd. Japan
Owens Corning Mexico, S.A. de C.V. Mexico
Owens-Corning Ontario Holdings Inc. Ontario
Owens-Corning Overseas Holdings, Inc. Delaware
Owens Corning Pipe (Africa) Pvt. Ltd. Zimbabwe
Owens Corning Polyfoam UK Ltd. United Kingdom
Owens Corning Polypan SPA Italy
Owens-Corning Real Estate Corporation Ohio
Owens Corning (Shanghai) Fiberglas Co., Ltd. China
Owens Corning (Singapore) PTE Ltd. Singapore
Owens Corning South Africa (Pty) Ltd. South Africa
Owens-Corning (Sweden) AB Sweden
Owens-Corning Tubs, S.A. Spain
Owens-Corning (UK) Holdings Limited United Kingdom
Owens-Corning Veil Netherlands B.V. The Netherlands
Owens-Corning Veil U.K. Ltd. United Kingdom
P Metals, Inc. Delaware
Palmetto Products, Inc. Delaware
Prestige Vinyl Siding Inc. Ontario
Procanpol SP.Z.O.O. Poland
Scanglas Ltd. United Kingdom
Soltech, Inc. Kentucky
Stone Products Corporation California
T Acquisition Inc. Delaware
Trumbull Asphalt Co. of Delaware Delaware
UC Industries, Inc. Delaware
Vytec Corporation Ontario
Vytec Sales Corporation Delaware
Willcorp, Inc. Delaware
Wrexham A.R. Glass Ltd. United Kingdom
10110 Newfoundland Limited Newfoundland
