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 June 30, 1999
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
June 30, 1999
54,835,397
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars, except
share data)
NET SALES $ 1,310 $ 1,286 $ 2,440 $ 2,423
COST OF SALES 987 985 1,858 1,923
------- ------- ------- --------
Gross margin 323 301 582 500
------- ------- ------- --------
OPERATING EXPENSES
Marketing and
administrative expenses 152 152 288 281
Science and technology
expenses 14 14 28 29
Restructure costs (Note 3) - - - 87
Other 2 1 1 14
------- ------- ------- --------
Total operating expenses 168 167 317 411
------- ------- ------- --------
Gain on sale of assets
(Note 4) - - - 84
INCOME FROM OPERATIONS 155 134 265 173
Cost of borrowed funds 39 36 72 73
------- ------- ------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES 116 98 193 100
Provision for income taxes
(Note 6) 41 34 68 27
------- ------- ------- --------
INCOME BEFORE MINORITY
INTEREST AND EQUITY IN
NET INCOME (LOSS)
OF AFFILIATES 75 64 125 73
Minority Interest (1) (5) (3) (10)
Equity in net income
(loss) of affiliates 2 - (2) 4
------- ------- ------- --------
NET INCOME $ 76 $ 59 $ 120 $ 67
======= ======= ======= ========
NET INCOME PER COMMON SHARE
Basic net income per share $ 1.41 $ 1.09 $ 2.22 $ 1.25
------ ------- ------- --------
Diluted net income per share $ 1.31 $ 1.02 $ 2.08 $ 1.20
------ ------- ------- --------
Weighted average number of
common shares outstanding
and common equivalent
shares during the period
(in millions)
Basic 54.1 53.6 54.0 53.5
Diluted 59.7 58.9 59.5 58.7
</TABLE>
- 3 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C> <C>
June 30, December 31, June 30,
1999 1998 1998
-------- ------------ ---------
(In millions of dollars)
ASSETS
- ------
CURRENT
Cash and cash equivalents $ 26 $ 54 $ 42
Receivables 611 451 597
Inventories (Note 7) 502 437 535
Insurance for asbestos
litigation claims -
current portion (Note 11) 150 150 125
Deferred income taxes 366 293 137
Income tax receivable 3 117 27
Other current assets 24 27 64
-------- ----------- ---------
Total current 1,682 1,529 1,527
-------- ----------- ---------
OTHER
Insurance for asbestos
litigation claims (Note 11) 228 260 310
Asbestos costs to be
reimbursed -
Fibreboard (Note 11) 62 74 89
Deferred income taxes 493 608 356
Goodwill 750 762 788
Investments in affiliates
(Note 4) 51 45 50
Other noncurrent assets 243 205 181
-------- ----------- ---------
Total other 1,827 1,954 1,774
-------- ----------- ---------
PLANT AND EQUIPMENT, at cost
Land 70 64 65
Buildings and leasehold
improvements 810 701 683
Machinery and equipment 2,502 2,476 2,677
Construction in progress 244 257 222
-------- ----------- --------
3,626 3,498 3,647
Less-accumulated
depreciation (1,944) (1,880) (1,888)
-------- ----------- --------
Net plant and equipment 1,682 1,618 1,759
-------- ----------- ---------
TOTAL ASSETS $ 5,191 $ 5,101 $ 5,060
======== =========== =========
</TABLE>
- 4 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
<TABLE>
<S> <C> <C> <C>
June 30, December 31, June 30,
1999 1998 1998
----- ------ -------
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued $ 708 $ 942 $ 793
liabilities
Reserve for asbestos litigation
claims - current portion
(Note 11) 1,050 850 325
Short-term debt 121 69 119
Long-term debt -
current portion 27 22 128
--------- -------- ---------
Total current 1,906 1,883 1,365
--------- -------- ---------
LONG-TERM DEBT 2,068 1,535 1,761
OTHER
Reserve for asbestos litigation
claims (Note 11) $ 1,210 $ 1,780 $ 1,121
Asbestos-related liabilities -
Fibreboard (Note 11) 67 79 96
Other employee benefits liability 325 326 340
Pension plan liability 52 55 61
Other 345 364 174
--------- -------- ---------
Total other 1,999 2,604 1,792
--------- -------- ---------
COMPANY OBLIGATED SECURITIES OF
ENTITIES HOLDING SOLELY PARENT
DEBENTURES 195 194 503
--------- -------- ---------
MINORITY INTEREST 45 19 21
--------- -------- ---------
STOCKHOLDERS' EQUITY
Common stock 698 679 669
Deficit (1,650) (1,762) (987)
Accumulated other comprehensive
income (Note 9) (48) (37) (48)
Other (22) (14) (16)
--------- --------- ----------
Total stockholders' equity (1,022) (1,134) (382)
--------- -------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,191 $ 5,101 $ 5,060
========= ========= ==========
</TABLE>
- 5 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income $ 76 $ 59 $ 120 $ 67
Reconciliation of net cash
provided by operating
activities
Noncash items:
Provision for
depreciation and
amortization 52 47 105 99
Provision (credit) for
deferred income taxes 16 40 39 (5)
Gain on sale of assets
(Note 4) - - - (84)
Other - 4 5 (3)
(Increase) decrease in
receivables (56) (40) (142) (169)
(Increase) decrease in
inventories (7) (4) (60) (40)
Increase (decrease) in
accounts payable and
accrued liabilities (45) (12) (226) (24)
(Increase) decrease in
income tax receivable 24 77 104 75
Proceeds from insurance
for asbestos
litigation claims,
excluding Fibreboard 13 5 32 22
Payments for asbestos
litigation claims,
excluding Fibreboard (175) (95) (370) (224)
Other 3 (26) (10) 11
------- ------- ------ --------
Net cash flow from
operations $ (99) $ 55 $(403) $ (275)
------- ------- ------ --------
NET CASH FLOW FROM INVESTING
Additions to plant and
equipment (59) (74) (99) (121)
Proceeds from the sale
of affiliate or
business (Note 4) - - - 134
Other (16) - (27) (19)
------ ------ ------ -------
Net cash flow $ (75) $ (74) $(126) $ (6)
from investing ------ ------ ------ ------
</TABLE>
- 6 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Net additions (reductions)
to long-term credit $ 170 $ (659) $ 261 $ (374)
facilities
Other additions to long-
term debt 1 565 251 570
Other reductions to long-
term debt (33) (11) (33) (13)
Net increase in short-term
debt 10 60 28 96
Dividends paid (4) (4) (8) (8)
Other 3 (6) - (6)
------ ------ ------ -------
Net cash flow from
financing 147 (55) 499 265
------- ------- ------ ------
Effect of exchange rate
changes on cash 2 1 2 -
------- ------ ------ ------
Net increase (decrease)
in cash and cash
equivalents (25) (73) (28) (16)
Cash and cash equivalents
at beginning of period 51 115 54 58
------- ------ ------ ------
Cash and cash equivalents
at end of period $ 26 $ 42 $ 26 $ 42
======= ====== ===== ======
</TABLE>
- 7 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Six Months Ended
June 30, June 30,
1. SEGMENT DATA 1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars)
NET SALES
Reportable Operating Segments
- -----------------------------
Building Materials
United States $ 946 $ 872 $ 1,760 $ 1,611
Europe 58 70 121 135
Canada and other 63 53 111 105
------ ----- ------ ------
Total Building Materials $ 1,067 $ 995 $ 1,992 $ 1,851
------ ----- ------- -------
Composite Materials
United States 150 182 278 364
Europe 86 100 168 197
Canada and other 37 36 63 69
----- ----- ----- -----
Total Composite Materials 273 318 509 630
----- ----- ----- -----
Total Reportable
Operating Segments $ 1,340 $1,313 $ 2,501 $ 2,481
Reconciliation to
Consolidated Net Sales
- -------------------------
Composite Materials U.S.
Sales to Building
Materials U.S. (30) (27) (61) (58)
------- ------ ------- -------
Net sales $ 1,310 $1,286 $ 2,440 $ 2,423
====== ====== ======= ========
External Customer Sales by
Geographic Region
- ---------------------------
United States $ 1,066 $1,027 $ 1,977 $ 1,917
Europe 144 170 289 332
Canada and other 100 89 174 174
------- ------ ------ --------
Net Sales $ 1,310 $1,286 $ 2,440 $ 2,423
======= ======= ======= =======
</TABLE>
- 8 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Six Months Ended
June 30, June 30,
1. SEGMENT DATA (continued) 1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars)
INCOME (LOSS) FROM OPERATIONS
Reportable Operating Segments
- -----------------------------
Building Materials
United States $ 110 $ 66 $ 177 $ 60
Europe 1 2 4 (2)
Canada and other 19 1 25 1
------ ------ ------ ------
Total Building Materials 130 69 206 59
------ ------ ------- -------
Composite Materials
United States 33 51 61 93
Europe (4) 7 (4) 16
Canada and other 4 4 7 5
------ ------ ------ -------
Total Composite Materials 33 62 64 114
------ ------ ------ -------
Total Reportable
Operating Segments $ 163 $ 131 $ 270 $ 173
------- ----- ------- ------
Geographic Regions
- ------------------
United States $ 143 $ 117 $ 238 $ 153
Europe (3) 9 - 14
Canada and other 23 5 32 6
------- ------ ------- -------
Total Reportable $ 163 $ 131 $ 270 $ 173
Operating Segments ======= ====== ======= ======
Reconciliation to
Consolidated Income
Before Provision for Income
Taxes
- ----------------------------
Restructuring and other
charges - - - (95)
Gain on sale of affiliate or
business - - - 84
General corporate income
(expense) (8) 3 (5) 11
Cost of borrowed funds (39) (36) (72) (73)
------- ------ ------ ------
Consolidated Income Before
Provision for Income
Taxes $ 116 $ 98 $ 193 $ 100
------- ----- ----- -------
</TABLE>
- 9 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 1998
Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission.
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS
During the third quarter of 1998, the Company recorded a $148
million pretax charge for restructuring and other actions as the
final phase of the Company's previously announced program to
close manufacturing facilities, enhance manufacturing
productivity and reduce overhead. On a cumulative basis since
the fourth quarter of 1997, the Company has recorded a total
pretax charge of $386 million, of which $143 million was recorded
in the fourth quarter of 1997, $95 million was recorded in the
first quarter of 1998, and $148 million was recorded in the third
quarter of 1998.
The $148 million pretax charge in the third quarter of 1998 was
comprised of a $30 million charge associated with the
restructuring of the Company's business segments and a $118
million charge associated with other actions, the majority of
which represent asset impairments. The $30 million restructure
charge has been classified as a separate component of operating
expenses on the Company's consolidated statement of income while
the $118 million charge for other actions is comprised of a $60
million charge to cost of sales, a $4 million charge to marketing
and administrative expenses, and a $54 million charge to other
operating expenses. The components of the restructure charge
include $9 million for personnel reductions and $21 million for
the divestiture of non-strategic businesses and facilities, of
which $20 million represents non-cash asset write-downs to
estimated fair value and $1 million represents exit cost
liabilities, comprised primarily of lease commitments. The $9
million for personnel reductions represents severance costs
associated with the elimination of approximately 400 positions,
primarily in the U.S. and Asia. The primary groups affected
include manufacturing and administrative personnel. As of June
30, 1999, approximately $7 million has been paid and charged
against the reserve for personnel reductions, representing the
elimination of approximately 400 positions, the majority of whose
severance payments will be made over the course of 1999. Charges
of less than $1 million have been made against exit cost
liabilities. No adjustments have been made to the liability.
- 10 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued)
The components and classification of the $118 million of other
actions, of which $103 million represents non-cash asset
revaluations, include: $30 million to write down to fair value
certain manufacturing assets held for use in China, due primarily
to poor current and projected financial results, recorded as cost
of sales; $15 million to write down to net realizable value
equipment and inventory made obsolete by changes in the Company's
manufacturing and marketing strategies, recorded as cost of
sales; $17 million for the write-down of an investment in and the
write off of a receivable from a joint venture in Korea to
reflect the business outlook at that time and the fair market
value of the assets, recorded as other operating expenses; $12
million for the write-down of goodwill associated with the 1995
acquisition of Fiber-lite, determined to be unrecoverable due to
a change in market conditions and customer demand, recorded as
other operating expenses; and $9 million for the write-down of
certain assets in the U.S. to fair market value, recorded as cost
of sales. The Company plans to hold and use the investments, but
disposed of the equipment in 1998. Also included in the $118
million charge for other actions are $13 million for the write
off of certain receivables in the U.S. and Asia determined to be
uncollectable, recorded as cost of sales and other operating
expenses; and $22 million for other actions recorded as cost of
sales, marketing and administrative expenses, and other operating
expenses.
During the first quarter of 1998, the Company recorded a $95
million pretax charge for restructuring and other actions as the
second phase of the Company's strategic restructuring program to
enhance manufacturing productivity and reduce overhead.
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 June
30, 1999, approximately $62 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 were made over the course of 1998, and
approximately $2 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 as the
first phase of the program to close manufacturing facilities,
enhance manufacturing productivity and reduce overhead. The $143
million pretax charge 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
- 11 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued)
million for the 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.
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 June 30, 1999, approximately $21
million has been paid and charged against the reserve for
personnel reductions, representing the elimination of
approximately 550 employees, the majority of whose severance
payments were over the course of 1998, and approximately $9
million has been charged against exit cost liabilities. 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 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 disposed of most of the
equipment in 1998.
The following table summarizes the status of the liabilities from
the restructure program described above, including cumulative
spending and adjustments and the remaining balance as of June 30,
1999:
<TABLE>
<S> <C> <C> <C>
(In millions of dollars)
Beginning Total Ending
Liability Payments Liability
--------- -------- --------
Personnel Cost $ 115 $ (90) $ 25
Facility and Business
Exit Costs 16 (12) 4
Other 2 (2) -
------- --------- --------
Total $ 133 $ (104) $ 29
======= ========= ========
</TABLE>
- 12 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued)
The Company continually evaluates whether events and
circumstances have occurred that indicate that the carrying
amount of certain long-lived assets is recoverable. When factors
indicate that a long-lived asset should be evaluated for possible
impairment, the Company uses an estimate of the expected
undiscounted cash flows to be generated by the asset to determine
whether the carrying amount is recoverable or if an impairment
exists. When it is determined that an impairment exists, the
Company uses the fair market value of the asset, usually measured
by the discounted cash flows to be generated by the asset, to
determine the amount of the impairment to be recorded in the
financial statements.
4. ACQUISITIONS AND DIVESTITURES OF BUSINESSES
In connection with a proposal received from its Korean joint
venture partner, the Company infused approximately $29 million of
cash into this venture in March, 1999. As a result of this
investment, along with additional investments by the other
partner, the Company increased its ownership interest in Owens
Corning Korea to 70%. The Company accounted for this transaction
under the purchase method of accounting whereby the assets
acquired and liabilities assumed, including $84 million in debt,
have been recorded at their fair values and the results of
operations have been consolidated since the date of acquisition.
Prior to that date, the Company accounted for this joint venture
under the equity method.
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,
all of which was collected during 1998.
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.
The consolidated balance sheet of the Company as of June 30, 1999
reflects the September 30, 1998 disposition of a majority
interest in the Company's yarns and specialty materials business
(the "yarns business"). The results of operations of the yarns
business were reflected in the Company's consolidated statement
of income through the period ending September 30, 1998. For the
six months ended June 30, 1998, the yarns business recorded net
sales of approximately $141 million and income from operations of
approximately $45 million. Effective September 30, 1998, the
Company accounts for its ownership interest in the yarns joint
venture under the equity method.
5. LONG-TERM DEBT
During the first quarter of 1999, the Company issued $250 million
of senior debt securities ("the securities") as unsecured
obligations of the Company. These securities, which mature in
2009, bear an annual rate of interest of 7.0%, payable
semiannually. The proceeds from the issuance of these securities
were used to reduce borrowings under the Company's long-term
revolving credit agreement.
- 13 -
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 Six Months
Ended Ended
June 30, June 30,
------- --------
1999 1998 1999 1998
---- ---- ---- ----
U.S. federal statutory
rate 35% 35% 35% 35%
State and local income
taxes 3 5 3 3
Special tax election
(a) - - - (13)
Foreign tax rate
differences - - - 3
Other (3) (5) (3) (1)
----- ----- ----- -----
Effective tax
provision and rate 35% 35% 35% 27%
===== ===== ===== =====
(a)Represents a one-time tax benefit associated with Asia Pacific
operations
</TABLE>
7. INVENTORIES
<TABLE>
<S> <C> <C>
June 30, December 31,
1999 1998
------ ------
(In millions of dollars)
Inventories are summarized
as follows:
Finished goods $ 380 $ 317
Materials and supplies 182 176
-------- -------
FIFO inventory 562 493
Less: Reduction to LIFO
basis (60) (56)
-------- -------
Total Inventory $ 502 $ 437
======== =======
</TABLE>
Approximately $300 million and $271 million of FIFO inventories
were valued using the LIFO method at June 30, 1999 and December
31, 1998, respectively.
- 14 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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> <C> <C>
Quarter Six Months
Ended Ended
June 30, June 30,
------- -------
1999 1998 1999 1998
----- ---- ----- ----
Income taxes $ 2 $(84) $(80) $ (81)
Cost of borrowed
funds 46 49 73 72
</TABLE>
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
During the first six months of 1999, gross payments for asbestos
litigation claims against Fibreboard were approximately $57
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 six months of 1999, Fibreboard also reached
settlement agreements with plaintiffs for amounts totaling
approximately $45 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.
Please refer to Note 4 for disclosure of Non-Cash Investing and
Financing activities.
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
non-owner 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 June
30, 1999 and 1998 was $76 million and $43 million, respectively.
For the six months ended June 30, 1999 and 1998, comprehensive
income was $109 million and $59 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.
- 15 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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> <C> <C>
Quarter Six Months
Ended Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars, except share data)
Net income used for
basic earnings per
share $ 76 $ 59 $ 120 $ 67
Net income effect of
assumed conversion
preferred securities 2 2 4 4
------- ----- ----- -----
Net income used for
diluted earnings per
share $ 78 $ 61 $ 124 $ 71
======= ===== ===== =====
Weighted average number
of shares outstanding
used for basic earnings
per share (thousands) 54,116 53,563 54,011 53,465
Deferred awards and
stock options 1,014 762 903 621
Shares from assumed
conversion of
preferred securities 4,566 4,566 4,566 4,566
------ ------ ------- -------
Weighted average number
of shares outstanding and
common equivalent shares
used for diluted
earnings per share
(thousands) 59,696 58,891 59,480 58,652
======= ======= ====== =======
</TABLE>
- 16 -
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 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 and distribution of which was
discontinued in 1972.
National Settlement Program
- ---------------------------
In December 1998, Owens Corning announced a National Settlement
Program (NSP) which settled a substantial majority of the
asbestos claims then pending against the Company. The Company
continues to settle claims under the NSP, and the number of
participating plaintiffs' law firms has increased from 54 to
approximately 100. As of June 30, 1999, approximately 225,000
asbestos personal injury claims against the Company have been
settled under the NSP. The NSP also establishes procedures and
fixed payments for resolving future claims brought by
participating plaintiffs' law firms without litigation through at
least 2008. Average payments per claim under the NSP are
expected to be substantially lower than those experienced by
Owens Corning for comparable claims prior to the NSP.
The Company established the NSP in response to the rising cost in
recent years of mesothelioma settlements and judgments, as well
as significant changes in the legal environment, such as the
Supreme Court's 1997 decision in GEORGINE V. AMCHEM PRODUCTS,
INC., striking down an asbestos class action settlement. The NSP
is designed to better manage Owens Corning's asbestos liability,
and that of Fibreboard (see Item B below), and to enable the
Company to better predict the timing and amount of indemnity
payments for both pending and future claims.
Under the NSP, each participating law firm has agreed to a long-
term settlement agreement ("NSP Agreement") providing for the
resolution of both present and future claims against Owens
Corning and Fibreboard for settlement amounts negotiated with
each participating firm. NSP Agreements may be extended beyond
2008 by mutual agreement of the parties.
As to present claims, settlement amounts to each claimant vary
based on a number of factors, including the type and severity of
disease. All payments will be subject to satisfactory evidence
of a qualifying medical condition and exposure to the Company's
products, delivery of customary releases by each claimant and
other conditions. The NSP allows claimants to receive prompt
payment without incurring the significant delays and
uncertainties of litigation. Claimants settling non-malignancy
claims with the Company and/or Fibreboard are typically entitled
to a pre-determined amount of additional compensation if they
later develop a more severe asbestos-related medical condition
(the "green card" program).
Under each NSP Agreement, a participating firm also agrees
(consistent with applicable legal requirements) to recommend to
its future clients, based on appropriately exercised professional
judgment, to resolve any
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
Asbestos Liabilities
- --------------------
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
future asbestos personal injury claims against Owens Corning
through an administrative processing arrangement, rather than
litigation. Under such arrangement, no settlement payment will be
made for future claims unless specified medical criteria and
other requirements are met, and the amount of any such payment
will be within a range of specified cash settlement values based
on the disease of the claimant and other factors. In the case of
future claims not involving malignancy, such criteria require
medical evidence of functional impairment. Payments to claimants
for both settled present and future claims are being managed by
Integrex, a wholly-owned Owens Corning subsidiary that
specializes in claims processing.
Payments under the NSP for settled present claims (those claims,
including unfiled claims, pending at the time a participating
plaintiffs' firm entered into an NSP Agreement) will generally be
made through 2002, with the majority of payments expected to
occur in 1999 and 2000. It is anticipated that payments for a
limited number of future "exigent claims" (principally those of
living malignancy claimants, as such term is defined under the
settlement agreements) under the administrative processing
arrangement will generally begin in 2001, while payments for
other qualifying future claims will begin in 2003. Payments for
claims in 2003 and later years under the NSP will be subject to
certain conditions designed to increase the predictability of
annual cash outflows for asbestos payments. As a result of such
payments, the Company's gross payments for asbestos litigation
claims will increase in 1999 and 2000 over the levels experienced
in recent years. However, such payments are expected to be
substantially lower than historical levels in 2001 and subsequent
years.
Owens Corning and Fibreboard (see Item B below) each retains the
right to terminate any individual NSP Agreement if in any year
more than a specified number of plaintiffs represented by the
plaintiffs' firm in question opt out of such agreement. Opt out
procedures for future claims are specified in the settlement
agreements, and provide for mediation and further negotiation
before a claimant may pursue his case in the court system.
Asbestos Related Payments
- -------------------------
In the first two quarters of 1999, the Company made $370 million
of asbestos related payments. These payments fell within four
major categories: pre-NSP settlements - covering resolution of
verdicts, settlements and appeals effected prior to the
implementation of the NSP; NSP settlements - covering cases
within the NSP; non-NSP settlements - covering cases outside the
NSP; and defense and administrative expenses - including the cost
of pursuing recoveries from insurance companies.
The Company currently estimates that it will incur total asbestos
related payments of approximately $1 billion for 1999, as
follows:
<TABLE>
<S> <C>
(in millions of dollars)
Pre-NSP Settlements $200
NSP Settlements 700
Non-NSP Settlements 50
Defense and Administrative Expenses 40
</TABLE>
- 18 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
Asbestos Liabilities
- --------------------
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
All amounts discussed above are before tax and application of
insurance recoveries. The projected 1999 NSP Settlements amount
could be less depending on how quickly NSP claims are submitted
and processed, in which event the expected timing of NSP payments
in 2000 and beyond may also be affected.
Tobacco
- -------
As previously reported, Owens Corning believes that it has spent
significant amounts to resolve claims of asbestos claimants whose
injuries were caused or contributed to by cigarette smoking, and
that the major tobacco companies should be required to reimburse
asbestos defendants, in whole or in part, for past payments made
to asbestos claimants who were also smokers. The Company is
pursuing this objective through both legislative lobbying efforts
and litigation.
In October 1998, the Circuit Court for Jefferson County,
Mississippi granted leave to file an amended complaint in an
existing action to add claims by Owens Corning against seven
leading tobacco companies and several other tobacco industry
defendants. The court has set a February 2000 trial date for
this action. In addition to the Mississippi lawsuit, a lawsuit
brought in December 1997 by Owens Corning and Fibreboard is
pending in the Superior Court for Alameda County, California
against the same major tobacco companies. In both cases, the
Company seeks monetary recovery for, among other things, a
portion of the payments made to persons who brought asbestos
claims and were also smokers.
PFT Litigation
- --------------
As previously reported, 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 United States alleging that many pulmonary
function tests ("PFTs") used in mass screening programs were
improperly administered and manipulated by the testing
laboratories or otherwise inconsistent with proper medical
practice. This matter is now in active pre-trial discovery and a
January 2000 trial date has been set. In January 1997, Owens
Corning filed a similar suit in federal court in Jackson,
Mississippi against the owner of an additional testing
laboratory. The Company expects to settle this suit in a
satisfactory manner in the third quarter of 1999. The Company
believes that these lawsuits have been helpful in raising the
standards for medical screening of asbestos claims and in
developing, and gaining widespread acceptance by plaintiffs'
firms of, the medical criteria included in the NSP Agreements.
Insurance
- ---------
As of June 30, 1999, Owens Corning had approximately $378 million
in unexhausted insurance coverage (net of deductibles and self-
insured retentions) under its liability insurance policies
applicable to asbestos personal injury claims. A portion of this
amount represents unconfirmed potential non-products coverage
with excess level insurance carriers, as to which Owens Corning
has estimated its probable recoveries. The Company also has a
significant amount of other unconfirmed potential non-products
coverage with excess level carriers. The amount and timing of
recoveries from excess level policies will depend on subsequent
negotiations or proceedings.
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
Asbestos Liabilities
- --------------------
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
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 initially through a
charge to income in 1991, with an additional $1.1 billion charge
to income (before taking into account probable non-products
insurance recoveries) recorded in 1996. Reflecting the
substantial new information about now settled present and
expected future claims gained in the NSP negotiations with
plaintiffs' law firms and the recent changes in the legal
environment referred to above, the Company in the fourth quarter
of 1998 increased its asbestos reserves by $1.4 billion,
resulting in an after-tax charge to 1998 earnings of $906
million. Subject to the uncertainties referred to below, Owens
Corning estimates that its liabilities associated with pending
and unasserted asbestos personal injury claims and its insurance
recoveries in respect of such claims, at June 30, 1999, are as
follows:
<TABLE>
<S> <C> <C>
June 30, December 31,
1999 1998
-------- -----------
(In millions of dollars)
Reserve for asbestos litigation claims
- --------------------------------------
Current $ 1,050 $ 850
Other 1,210 1,780
-------- --------
Total Reserve $ 2,260 $ 2,630
-------- --------
Insurance for asbestos litigation claims
- ----------------------------------------
Current $ 150 $ 150
Other 228 260
------- -------
Total Insurance $ 378 $ 410
------- -------
Net Owens Corning Asbestos Liability $ 1,882 $ 2,220
======= =======
</TABLE>
The NSP has greatly improved Owens Corning's ability to quantify
the cost of resolving virtually all of the claims that were
pending (filed and unfiled) against the Company prior to the NSP.
Also, the Company believes that the NSP has improved its ability
to estimate the timing and amount of indemnity payments and
defense costs for non-NSP and future NSP claims. Nevertheless,
the Company cautions that its estimate of its liabilities for
such non-NSP and future NSP claims is influenced by numerous
variables that are difficult to predict and that such estimate
therefore remains subject to uncertainty.
Such variables include the number of claims filed in the future
and the severity of disease involved in such claims; how many of
such claims are covered by an NSP Agreement; the extent, if any,
to which an individual plaintiff exercises his or her right to
opt out of an NSP Agreement and/or utilize other counsel that is
not a participant in the NSP; the extent, if any, to which Owens
Corning exercises its right to terminate one or more of the NSP
Agreements due to excessive opt-outs; and Owens Corning's success
in controlling the costs of resolving claims outside the NSP.
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
Asbestos Liabilities
- --------------------
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
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 such additional
costs will not impair the ability of the Company to meet its
obligations, to reinvest in its businesses, or to pursue its
growth agenda.
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured insulation products
containing asbestos. Fibreboard has since been named as defendant
in many thousands of personal injury claims for injuries
allegedly caused by asbestos exposure.
Status
- ------
As of June 30, 1999, approximately 132,000 asbestos personal
injury claims were pending against Fibreboard. Most of the
pending claims were made against the Fibreboard Global Settlement
Trust and have been subject to the injunction under the Global
Settlement (discussed below). As a result of the United States
Supreme Court's June 1999 decision (discussed below) overturning
the Global Settlement, Fibreboard is expected to become entitled
to an Insurance Settlement of approximately $1.9 billion
(discussed below) and Fibreboard anticipates that a substantial
majority of its asbestos claims will be resolved under the NSP.
The funds under the Insurance Settlement will be available to pay
Fibreboard's pending and future asbestos claims, including claims
under the NSP.
National Settlement Program
- ---------------------------
Fibreboard is a participant in the NSP and is a party to the NSP
Agreements discussed in Item A. These agreements settle claims
that were pending against Fibreboard and claims that could be
filed against Fibreboard following the lifting of the injunction
under the Global Settlement (discussed below). The agreements
also provide for the resolution of other future asbestos personal
injury claims against Fibreboard through the administrative
processing arrangement described in Item A. The timing of
payments for pending and future claims generally will be
consistent with the timing applicable to Owens Corning claims,
described in Item A.
Global Settlement
- -----------------
In 1993, Fibreboard, its insurers and representatives of a class
of future asbestos plaintiffs who had claims arising from
exposure to asbestos prior to August 27, 1993, entered into the
Global Settlement. Under the Global Settlement, asbestos claims
pending against Fibreboard would have been resolved through a
limited-fund class action settlement.
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. CONTINGENT LIABILITIES
Asbestos Liabilities
- --------------------
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued)
In June 1999, the Supreme Court issued its decision in ORTIZ V.
FIBREBOARD overturning the Global Settlement. The Supreme Court
determined that the Global Settlement had not met the
requirements for approving a limited-fund class under Federal
Rule of Civil Procedure 23 and returned the case to the lower
courts for further proceedings. In the third quarter of 1999,
the district court lifted the injunction barring the filing of
asbestos claims against Fibreboard, and it is expected that the
Global Settlement will be finally disapproved. At such time as
the Global Settlement is finally disapproved, the Insurance
Settlement (discussed below) will become effective.
Insurance Settlement
- --------------------
In 1993, Fibreboard and two of its insurers, Continental Casualty
Company ("Continental") and Pacific Indemnity Company
("Pacific"), entered into the Insurance Settlement, which was
structured as an alternative solution in the event the Global
Settlement were overturned. The Insurance Settlement is final
and not subject to appeal.
Since 1993, Continental and Pacific have paid, either directly or
through an escrow account funded by them, for substantially all
settlements of asbestos claims reached prior to the initiation of
the NSP. At June 30, 1999, approximately 132,000 asbestos claims
remained pending against Fibreboard. Under the Insurance
Settlement, Continental and Pacific will provide approximately
$1.9 billion to Fibreboard to fund Fibreboard's costs of
resolving these pending claims and expected future asbestos
claims either under the NSP or in the tort system.
Management Opinion
- ------------------
The Company believes the amounts available under the Insurance
Settlement will be adequate to fund Fibreboard's ongoing defense
and indemnity costs associated with asbestos-related personal
injury claims for the foreseeable future.
- 22 -
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.)
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ
materially from those projected in the statements. Some of the
important factors that may influence possible differences are
continued competitive factors and pricing pressures, construction
activity, interest rate movements, issues involving
implementation of new business systems, Year 2000 readiness,
achievement of expected cost reductions, asbestos litigation, and
general economic conditions.
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 and cost reductions in
existing and acquired businesses and (iii) entering new growth
markets. The Company is implementing two major initiatives, the
System Thinking (TM) strategy 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 acoustic
systems, to provide a high performance, cost-effective building
"envelope" for the home. In the Composite Materials 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 $5.0 billion in 1998. Acquisitions have been a significant
component of that growth. Between 1994 and 1997, the Company
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 manufactured stone markets, as
well as a large specialty distributor in North America through
180 Company-owned distribution centers.
- 23 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Despite the benefits of its growth agenda, the Company
experienced a highly competitive pricing environment during 1997
and into 1998. In order to improve its strategic position and
operational efficiency, the Company implemented several
profitability and productivity initiatives, including the
strategic restructuring program, discussed below, which was begun
in late 1997. This program, along with the realignment of the
Company's Exterior Systems business, enabled the Company to
benefit from cost reductions of approximately $142 million during
1998. 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.
During 1998, the pricing environment applicable to several of the
Company's major products, particularly residential insulation,
began to improve. By the end of 1998, the Company's average
price levels of insulation products surpassed the year-end 1997
levels. Despite the successful implementation of price increases
during 1998, including the restoration of residential insulation
prices to their late 1996 levels, income from operations during
1998 was adversely impacted by approximately $44 million,
compared to 1997, due largely to the relatively low insulation
pricing base in effect at the beginning of 1998, the lag in fully
realizing the 1998 price increases as the Company honored the
remainder of pre-existing pricing contracts, and price declines
attributable to vinyl siding products. The cost reductions,
productivity improvements across the Building Materials business,
and significant pricing improvements achieved during 1998 have
continued into the first half of 1999. During the second quarter
of 1999, the Company announced price increases applicable to
certain of its vinyl siding, residential insulation, and
composites products, all of which became effective July, 1999.
Quarter and Six Months Ended June 30, 1999
- ------------------------------------------
Sales and Profitability
- -----------------------
Net sales for the quarter ended June 30, 1999 were $1.310
billion, up slightly from the second quarter 1998 level of $1.286
billion. The sales increase reflects strength in the North
American Building Materials business, offset partially by
weakness in the Composite Materials business and the transfer of
the Company's yarns business to an unconsolidated joint venture
during the third quarter of 1998. On a comparative basis,
excluding the yarns and other divested businesses in 1998, sales
during the second quarter of 1999 were up 9% from the second
quarter of 1998. In the Building Materials business, sales
during the second quarter of 1999 reflect the continued strength
in the U.S. roofing and insulation markets. Volume increases in
the vinyl siding market also contributed to the Building
Materials strength during the second quarter of 1999. In the
Composites business, sales reflect a reduction attributable to
the transfer of the Company's yarns business indicated above,
offset partially by volume increases in the U.S. and Europe. On
a consolidated basis, the impact of currency translation on sales
in foreign currencies was slightly unfavorable during the second
quarter of 1999 compared to the second quarter of 1998. Please
see Note 1 to the Consolidated Financial Statements.
Sales outside the U.S. represented 19% of total sales during the
second quarter of 1999, compared to 20% during the second quarter
of 1998. The relative decline in non-U.S. sales is due to the
1999 sales increases attributable to U.S. roofing and insulation
products. Gross margin for the quarter ended June 30, 1999 was
25% of net sales, compared to 23% in the second quarter of 1998.
The increase in gross margin reflects the benefits of the cost
reductions resulting from the Company's strategic restructuring
program and price increases applicable to many of the Company's
products.
- 24 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
For the quarter ended June 30, 1999, the Company reported net
income of $76 million, or $1.31 per share, compared to net income
of $59 million, or $1.02 per share, for the quarter ended June
30, 1998. Net income in the second quarter of 1999 reflects the
benefits of the cost-saving programs implemented throughout 1998
as well as the benefits of pricing improvements, particularly in
U.S. residential insulation markets. Cost of borrowed funds
during the second quarter of 1999 was $39 million, $3 million
higher than the second quarter 1998 level, due to higher levels
of average debt, offset partially by a reduction in average
interest rates. The reduction in minority interest expense
reflects the Company's third quarter 1998 repurchase of its Trust
Preferred Hybrid Securities. Please see also Liquidity, Capital
Resources and Other Related Matters below.
Net sales for the six months ended June 30, 1999 were $2.440
billion, up slightly from the $2.423 billion reported for the
first six months of 1998. On a comparative basis, excluding the
yarns and other divested businesses in 1998, sales for the first
six months of 1999 were up 8% from the prior year period, largely
reflecting the strength in North American Building Materials
discussed above.
Net income for the six months ended June 30, 1999 was $120
million, or $2.08 per share, up from $67 million, or $1.20 per
share, for the first six months of 1998. The increase reflects
the benefits of the cost reduction programs as well as volume and
price increases. Included in net income for the six months ended
June 30, 1998 are a $95 million pretax charge ($63 million after-
tax) for the Company's restructuring program and an $84 million
pretax gain ($52 million after-tax) from the sale of the
Company's 50% ownership interest in Alpha/Owens-Corning. Please
see Notes 3 and 4 to the Consolidated Financial Statements.
Restructuring of Operations and Other Actions
- ---------------------------------------------
Please see also Note 3 to the Consolidated Financial Statements.
During the first and third quarters of 1998, the Company recorded
a total pretax charge of $243 million for restructuring and other
actions as part of the Company's strategic restructuring program
to reduce overhead, enhance manufacturing productivity, and close
manufacturing facilities, which was announced in early 1998.
This charge included $117 million for restructuring and $126
million for other actions in 1998, the majority of which
represented asset impairments. On a cumulative basis since the
fourth quarter of 1997, the Company has recorded a total pretax
charge of $386 million for this program, of which $185 million
represented restructure costs and $201 million represented other
actions.
The $117 million restructuring charge in 1998 included
approximately $90 million for costs associated with the
elimination of approximately 1,900 positions worldwide and $27
million for the divestiture of non-strategic businesses and
facilities. The $27 million cost is composed of $12 million for
the closure of certain U.S. manufacturing facilities, $6 million
for the closure of a pipe manufacturing facility in China, and $9
million for other actions, and reflects a total of $3 million of
exit cost liabilities, comprised primarily of lease commitments.
The primary components of the $126 million charge for other
actions in 1998 and their classification on the Company's
consolidated statement of income included: $30 million to write
down to fair value certain manufacturing assets held for use in
China, due primarily to poor current and projected financial
results, recorded as cost of sales; $15 million to write down to
net realizable value equipment and inventory
- 25 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
made obsolete by changes in the Company's manufacturing and
marketing strategies, recorded as cost of sales; $17 million for
the write-down of an investment in and the write-off of a
receivable from a joint venture in Korea to reflect the business
outlook at that time and the fair market value of the assets,
recorded as other operating expenses; $12 million for the write-
down of goodwill associated with the 1995 acquisition of Fiber-
lite, determined to be unrecoverable due to a change in market
conditions and customer demand, recorded as other operating
expenses; and $9 million for the write-down of certain assets in
the U.S. to fair market value, recorded as cost of sales. The
Company plans to hold and use the investments but disposed of
most of the equipment in 1998. Also included in the $126 million
charge for other actions were $13 million for the write-off of
certain receivables in the U.S. and Asia determined to be
uncollectable, recorded as cost of sales and other operating
expenses; and $30 million for other actions recorded as cost of
sales, marketing and administrative expenses, and other operating
expenses.
As indicated above, certain of the charges recorded during 1998
represent valuation adjustments associated with asset
impairments. The Company continually evaluates whether events
and circumstances have occurred that indicate that the carrying
amount of certain long-lived assets is recoverable. When factors
indicate that a long-lived asset should be evaluated for possible
impairment, the Company uses an estimate of the expected
undiscounted cash flows to be generated by the asset to determine
whether the carrying amount is recoverable or if an impairment
exists. When it is determined that an impairment exists, the
Company uses the fair market value of the asset, usually measured
by the discounted cash flows to be generated by the asset, to
determine the amount of the impairment to be recorded in the
financial statements.
As a result of the strategic restructuring program, the Company
realized a decrease in manufacturing and operating expenses of
approximately $110 million during 1998. Based upon expected
economic conditions over the next few years, including effects on
matters such as labor, material and other costs, the Company is
on track to achieve total annual pretax savings of approximately
$175 million in 1999 and each year thereafter from this program.
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 expects additional cost savings during 1999
resulting from improved logistics and materials sourcing.
The Company also implemented programs to gain synergies in its
Exterior Systems Business during 1998. As a result of these
programs, which included closing redundant facilities,
integrating business systems, and improving purchasing leverage,
the Company reduced costs by approximately $32 million during
1998 and is on track to save an additional $20 million per year
in 1999 and beyond, the majority of which will be cash savings.
Building Materials
- ------------------
In the Building Materials segment, sales increased 7% in the
second quarter of 1999 compared to the second quarter of 1998,
reflecting increased volume and significant price improvements
attributable to U.S. residential insulation products. Building
Materials second quarter 1999 sales also reflect volume increases
in U.S. roofing and asphalt products, continued price
improvements in roofing products, and volume increases in North
American vinyl siding markets and European insulation markets.
The impact of sales denominated in foreign currencies was
slightly unfavorable during the second quarter of 1999 compared
to the second quarter of 1998.
- 26 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Income from operations was $130 million during the second quarter
of 1999 compared to $69 million during the comparable 1998
period. Income from operations in 1999 reflects productivity
improvements and cost reductions resulting from the strategic
restructuring program, as well as volume and price increases in
the U.S. roofing and residential insulation markets. Please see
Note 1 to the Consolidated Financial Statements.
Composite Materials
- -------------------
In the Composite Materials segment, sales were down 14% during
the second quarter of 1999, compared to the second quarter of
1998, due largely to the disposition (discussed below) of 51% of
the Company's yarns and specialty materials business (the "yarns
business") late in the third quarter of 1998. Adjusted for the
impact of this disposition, sales were up 7% during the second
quarter of 1999 compared to 1998, due to volume increases in U.S.
and European markets, particularly in thermoplastics. The
translation impact of sales denominated in foreign currencies was
slightly unfavorable during the second quarter of 1999. Income
from operations was $33 million in the second quarter of 1999,
compared to $62 million in the prior-year period, $22 million of
which was attributable to the yarns business. The remaining
decline is due largely to poor productivity resulting from the
acceleration of furnace rebuilds and higher than planned
distribution costs for servicing global customers; a difficult
international business environment in engineered pipe and
electrical yarns; and start-up issues at the Company's joint
venture plant in India. Please see Note 1 to the Consolidated
Financial Statements.
During the third quarter of 1998, the Company formed a joint
venture for its yarns business to which it contributed two
manufacturing plants and certain proprietary technology. On
September 30, 1998, the Company completed the sale of 51% of the
joint venture to a U.S. subsidiary of Groupe Porcher Industries
of Badinieres, France for $340 million. The Company continues to
have a 49% ownership interest in the joint venture. Upon
closing, the Company also received a distribution of
approximately $193 million from the joint venture. By retaining
a 49% ownership interest in the joint venture, the Company will
continue to safeguard its proprietary technology and participate
in the yarns market. Please see Note 4 to the Consolidated
Financial Statements.
The consolidated balance sheet of the Company as of June 30, 1999
and December 31, 1998 reflects the third quarter 1998 disposition
of the Company's yarns business. The results of operations of
the yarns business were reflected in the Company's consolidated
statement of income through the period ending September 30, 1998.
For the six months ended June 30, 1998, the yarns business
recorded sales of approximately $141 million and income from
operations of approximately $45 million. Effective September 30,
1998, the Company accounts for its ownership interest in the
yarns joint venture under the equity method.
Accounting Changes
- ------------------
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133).
This statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded
in the balance sheet as either an asset or liability measured at
its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS 133 is effective for fiscal years
beginning after June 15, 2000, but earlier adoption is allowed.
- 27 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The Company has begun to assess the impact of SFAS 133 on its
financial statements and plans to adopt this accounting change
effective January 1, 2001. The Company has not yet fully
quantified the impact of SFAS 133 but is aware that the adoption
of SFAS 133 could increase volatility in earnings and other
comprehensive income.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Cash flow from operations was negative $99 million for the
quarter ended June 30, 1999, compared to positive $55 million for
the quarter ended June 30, 1998. The decline in cash flow from
operations in 1999 is largely attributable to an increase in
payments for asbestos litigation claims, net of insurance,
reflecting the Company's implementation of the National
Settlement Program (NSP) in the fourth quarter of 1998. Payments
for asbestos litigation claims were $175 million during the
second quarter of 1999 and proceeds from insurance were $13
million, compared to $95 million and $5 million, respectively,
during the second quarter of 1998. Also contributing to the
decline in cash flow from operations during the second quarter of
1999 compared to the second quarter of 1998 was the second
quarter 1998 collection of an $85 million federal income tax
refund. The Company received a federal income tax refund of the
same amount during the first quarter of 1999. Please see Notes 8
and 11 to the Consolidated Financial Statements. Inventories at
June 30, 1999 were $502 million, an increase of $65 million from
the December 31, 1998 level, due largely to the seasonal build of
inventories and other working capital. Receivables at June 30,
1999 were $611 million, a $160 million increase over the December
31, 1998 level, attributable to the seasonal increase in sales.
The decrease in accounts payable and accrued liabilities from
$942 million at December 31, 1998 to $708 million at June 30,
1999 reflects typical payment patterns during the first half of
the year.
At June 30, 1999, the Company's net working capital was negative
$224 million and its current ratio was .88, compared to negative
$354 million and .81, respectively, at December 31, 1998 and $162
million and 1.12, respectively, at June 30, 1998. A $700 million
increase in the current portion of the reserve for asbestos
litigation claims, net of insurance, due to the implementation of
the Company's National Settlement Program, partially offset by
the related income tax benefit, contributed to the decrease in
net working capital at June 30, 1999 compared to June 30, 1998.
The Company's total borrowings at June 30, 1999 were $2.216
billion, $590 million higher than at year-end 1998. The Company
typically uses cash during the first half of the year as it
builds inventory and other working capital.
As of June 30, 1999, the Company had unused lines of credit of
$1.130 billion available under long-term bank credit facilities
and an additional $110 million under short-term facilities,
compared to $1.307 billion and $124 million, respectively, at
year-end 1998. The decrease in unused available lines of credit
reflects the Company's increased borrowings at June 30, 1999
compared to December 31, 1998. During the first quarter of 1999,
the Company issued $250 million of debt securities, the proceeds
of which were used to reduce borrowings under the long-term bank
credit facility. 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.
During 1998, the Company implemented a debt realignment program
intended to reduce financing costs. This program, which extended
the average length of term debt from four years to ten years,
included the issuance of a total of $950 million in new debt
securities, the repurchase of the Company's $309 million of Trust
Preferred Hybrid Securities and the retirement of $361 million of
higher-rate debt securities.
- 28 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Capital spending for property, plant and equipment, excluding
acquisitions, was $59 million in the second quarter of 1999. The
Company anticipates that 1999 capital spending, exclusive of
acquisitions and investments in affiliates, will be approximately
$200 million, most of which has been expended or is committed.
The Company expects that funding for these expenditures will be
from the Company's operations and external sources as required.
Asbestos Litigation
- -------------------
In December 1998, Owens Corning announced the NSP, which settled
a substantial majority of the asbestos claims then pending
against the Company and also established procedures and fixed
payments for resolving future claims brought by participating
plaintiffs' law firms without litigation through at least 2008.
As of June 30, 1999, approximately 225,000 asbestos personal
injury claims against Owens Corning have been settled under the
NSP. Payments under the NSP for these claims will generally be
made through 2002, with the majority of payments expected to
occur in 1999 and 2000. It is anticipated that payments for a
limited number of future "exigent claims" will generally begin in
2001, while payments for other qualifying future claims will
begin in 2003. Payments for claims in 2003 and later years under
the NSP will be subject to certain conditions designed to
increase the predictability of annual cash outflows for asbestos
payments. As a result of such payments, the Company's gross
payments for asbestos litigation claims will increase in 1999 and
2000 over the levels experienced in recent years. However, such
payments are expected to be substantially lower than historical
levels in 2001 and subsequent years. The expected schedule for
NSP payments may be affected by how quickly NSP claims are
submitted and processed. Please see Note 11 to the Consolidated
Financial Statements.
Gross payments for asbestos litigation claims during the second
quarter of 1999 by Owens Corning (excluding Fibreboard),
including payments for claims settled in prior years, were $175
million. Proceeds from insurance were $13 million, resulting in
a net pretax cash outflow of $162 million ($105 million after-
tax). Over the next twelve months, the total payments for
asbestos litigation claims by Owens Corning (excluding
Fibreboard) are expected to be approximately $1,050 million.
Proceeds from insurance of $150 million are expected to be
available to cover these costs, resulting in a net pretax cash
outflow of $900 million ($585 million after tax).
Gross payments for asbestos litigation claims against Fibreboard
during the first six months of 1999 were approximately $57
million, all of which were paid directly by Fibreboard's insurers
or from an escrow account funded by its insurers to claimants on
Fibreboard's behalf. Fibreboard is a party to the NSP Agreements
and anticipates that a substantial majority of its asbestos
claims will be resolved under the NSP. In June 1999, the United
States Supreme Court overturned a limited-fund class action
settlement of Fibreboard's asbestos claims. As a result,
Fibreboard is expected to become entitled to an Insurance
Settlement of approximately $1.9 billion, which will be available
to pay all of Fibreboard's pending and future asbestos claims,
including claims under the NSP. 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.
- 29 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Environmental Matters
- ---------------------
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 second quarter of 1999,
the Company was designated as a PRP in such federal, state, local
or private proceedings for 2 additional sites. At June 30, 1999,
a total of 41 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.
The Company has established a $30 million reserve 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. In June 1999, the EPA issued regulations for wool fiber
glass and mineral wool. The Company anticipates that its other
sources to be regulated will be wet formed fiber glass mat,
amino/phenolic resin, secondary aluminum smelting, asphalt
processing and roofing, metal coil coating, and open molded fiber-
reinforced plastics. The EPA's currently announced schedule is
to issue regulations covering wet formed fiber glass mat,
amino/phenolic resin and secondary aluminum smelting in 1999; and
asphalt processing and roofing, metal coil coating and fiber-
reinforced plastics 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 Readiness
- --------------------
This information should be considered a Year 2000 Readiness
Disclosure.
BACKGROUND
- ----------
Some of the Company's existing information technology ("IT")
systems and control systems containing embedded technology such
as processors, controllers and microchips ("Non-IT") were
originally programmed using two digits rather than four digits to
define the applicable year. As a result, such systems, if not
remediated, may experience miscalculations or disruptions when
processing information containing dates that fall after December
31, 1999 or other dates that could cause computer malfunctions
(the "Year 2000 Issue").
THE COMPANY'S STATE OF READINESS
- --------------------------------
In recognition of the significance of the Year 2000 Issue, the
Company formed a senior management team representing business
units and business process functions including information
technology, sourcing, customer relations, logistics, facilities,
and legal.
- 30 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
This team oversees the Company's efforts to assess and resolve
the Year 2000 Issue. In addition, the Company's individual
organizational units have developed, and are implementing, Year
2000 plans. These plans include assessments of all of the
Company's IT and Non-IT systems, and an evaluation of the
external environment to identify significant exposure areas and
to develop appropriate remediation or other risk management
approaches. The Company is also developing business continuity
plans to assure that all of its operations are prepared in the
case of an unexpected system, supplier or customer failure.
IT SYSTEMS
- ----------
The Company has been actively implementing new systems and
technology on a worldwide basis since 1995 as part of its
Advantage 2000 program to improve productivity and operational
efficiency. One objective of this initiative is to ensure all
business transactions are supporting requirements to process data
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 five
years.
To date 100% of the Company's IT systems have been remediated,
tested and made operational. This has been accomplished in part
through the comprehensive implementation of enterprise resource
planning software across most of the Company's business units.
Deployments of these systems, which began in May, have been
completed at 70% of the Company's operations. The remaining
deployments are on schedule and will be completed by September
30, 1999. Development of continuity plans is on schedule and
will be completed by September 30, 1999.
NON-IT SYSTEMS
- --------------
The Company completed an inventory and assessment of non-IT
systems in its operating facilities during the first quarter,
1999. Those non-IT systems that may fail as a result of the Year
2000 Issue have been identified and corrective actions such as
replacement, update, or installation of vendor supplied upgrades
are currently being performed. Concurrent with this renovation
process, the Company is continuing the testing of Year 2000
corrections to ensure that Non-IT systems will function properly
on key dates. This is in accordance with testing methodologies
that management believes are reasonable and reflective of
practices employed by comparable companies. Remediation,
replacement, and updating of Non-IT systems has been managed
within each business unit.
In accordance with the process outlined above, over fourteen
hundred systems for the Building Materials business and over
nineteen hundred systems for the Composite Materials business
have been identified, remediated, and tested. Of these, 98% are
now Year 2000 ready and have been deployed. The majority of the
remaining items, located at only 17 sites, are on schedule to be
completed by September 30, 1999, with completion at the final
four sites by November 30, 1999. Management continues to monitor
the progress of deployment to ensure the timely completion of
each project. Continuity plans addressing critical business
processes are being developed, and will be completed by September
30, 1999.
EXTERNAL ENVIRONMENT
- --------------------
The Company is working with its suppliers and customers to assess
their level of Year 2000 readiness. This process includes both
the receipt of confirmation documents as well as selective on-
site visits. The critical suppliers have been identified,
confirmations have been received, and planned on-site visits were
complete in the second quarter of 1999. At the end of the second
quarter of 1999, substantially all of the critical suppliers have
been assessed as Year 2000 ready. The remaining suppliers are
not single source suppliers nor deemed critical for production.
- 31 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
During the process, where deemed necessary, alternative suppliers
were identified and confirmed as year 2000 ready. The Company
does not plan to build additional inventories at this time and
has confirmed with suppliers their commitment to servicing
existing supply agreements. Procedures are in place to monitor
supplier progress through the end of the year.
As a result of the confirmations and on site visits, continuity
plans are being developed for both customers and suppliers to
address the Company's ability to continue to function during the
time period when an external Year 2000 risk exists.
BUSINESS CONTINUITY PLANNING
- -----------------------------
Despite its significant efforts, the Company understands that
disruptions may occur due to circumstances beyond its control.
As a result, the Company has identified its critical business
processes and has assessed the likelihood of various Year 2000
failure scenarios. In order to minimize the effect of an
external disruption on business operations, business continuity
plans are being developed. In many instances, existing business
continuity plans are being modified and enhanced to reflect
unique aspects of the Year 2000 issue. All continuity plans will
be completed by September 30, 1999.
ESTIMATED COSTS
- ---------------
The cumulative cost of systems replacement, remediation and
update from 1995 through the second quarter of 1999 has been
approximately $160 million, including technology, design and
development, and related training and deployment in business
locations. The Company currently estimates that its remaining
costs to assess and resolve the Year 2000 Issue, including the
replacement and remediation at all remaining locations, are in
the range of $5 million to $10 million. These cost estimates are
based on currently available information, and may be subject to
change.
RISKS
- -----
If needed modifications and upgrades of systems are not made on a
timely basis by the Company or its materially significant
suppliers, the Company could experience significant disruptions
to one or more of its operations, financial loss, legal liability
and similar risks, any of which could have a material adverse
effect on the Company's results of operations or financial
position. The Company believes that the most reasonably likely
worst case scenario would be a short-term slowdown or cessation
of manufacturing operations at one or more of the Company's
facilities and a short-term inability on the part of the Company
to process orders and billings in a timely manner, and to deliver
product to customers. In view of the Company's Year 2000
readiness program, including continuity plans, the Company
believes that significant disruptions are unlikely and that any
disruptions would be both short-term and manageable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to the impact of changes in foreign
currency exchange rates and interest rates in the normal course
of business. The Company manages such exposures through the use
of certain financial and derivative financial instruments. The
Company's objective with these instruments is to reduce exposure
to fluctuations in earnings and cash flows associated with
changes in foreign currency exchange rates and interest rates.
The Company enters into various forward contracts and options,
which change in value as foreign currency exchange rates change,
to preserve the carrying amount of foreign currency-denominated
assets, liabilities, commitments, and certain anticipated foreign
currency transactions and earnings.
- 32 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK (continued)
The Company also enters into certain currency and interest rate
swaps to protect the carrying amount of its investments in
certain foreign subsidiaries, to hedge the principal and interest
payments of certain debt instruments, and to manage its exposure
to fixed versus floating interest rates.
The Company's policy is to use foreign currency and interest rate
derivative financial instruments only to the extent necessary to
manage exposures as described above. The Company does not enter
into foreign currency or interest rate derivative transactions
for speculative purposes.
The Company uses a variance-covariance Value at Risk (VAR)
computation model to estimate the potential loss in the fair
value of its interest rate-sensitive financial instruments and
its foreign currency-sensitive financial instruments. The VAR
model uses historical foreign exchange rates and interest rates
as an estimate of the volatility and correlation of these rates
in future periods. It estimates a loss in fair market value
using statistical modeling techniques.
The amounts presented below represent the maximum potential one-
day loss in fair value that the Company would expect from adverse
changes in foreign currency exchange rates or interest rates
assuming a 95% confidence level:
<TABLE>
<S> <C> <C>
June 30, December 31,
Risk Category 1999 1998
------------- ------ ------
(In millions of dollars)
Foreign currency $1 $1
Interest rate $9 $8
</TABLE>
Virtually all of the potential loss associated with interest rate
risk is attributable to fixed-rate long-term debt instruments.
- 33 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 11, Contingent Liabilities, to the Company's
Consolidated Financial Statements above, which is 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 June
30, 1999.
(b) None of the rights evidenced by any class of the Company's
registered securities was materially limited or qualified in
the quarter ended June 30, 1999 by the issuance or modification
of any other class of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) During the quarter ended June 30, 1999, 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 June 30, 1999, 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
(a) The Company's annual meeting of stockholders was held April
22, 1999.
(c) The matters voted upon at the meeting, and the votes with
respect to each, were:
1. Election of four directors for a term expiring in 2002:
Curtis H. Barnette - 46,222,520 votes cast for election
and 1,432,208 votes withheld; Ann Iverson - 46,296,293
votes cast for election and 1,358,435 votes withheld; W. Walker
Lewis - 46,304,427 votes cast for election and 1,350,301 votes
withheld; and Furman C. Moseley, Jr. - 46,296,586 votes cast
for election and 1,358,142 votes withheld.
2. Approval of amended and restated Corporate Incentive Plan
Terms Applicable to Certain Executive Officers: 44,128,587
votes cast for the proposal; 3,089,313 votes cast against;
and 436,828 shares abstained.
3. Approval of the action of the Board of Directors in selecting
Arthur Andersen LLP as independent public accountants for the
year 1999: 46,866,447 votes cast for the proposal;
579,788 votes cast against; and 208,493 shares abstained.
4. Approval of proposal concerning stockholder rights plan:
24,955,712 votes cast for the proposal;
17,128,498 votes cast against; 623,691 shares abstained; and
4,946,827 broker non-votes.
ITEM 5. OTHER INFORMATION
The Company does not elect to report any information under this
item.
- 34 -
PART II. OTHER INFORMATION
(continued)
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 June 30, 1999, the Company filed the
following current reports on Form 8-K:
- Filed April 15, 1999, under Items 5 and 7.
- Filed June 23, 1999, under Items 5 and 7.
- 35 -
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: August 16, 1999 By: /s/ J. Thurston Roach
J. Thurston Roach
Senior Vice President and
Chief Financial Officer
(as duly authorized officer)
Date: August 16, 1999 By: /s/ Steven J. Strobel
Steven J. Strobel
Vice President and
Controller
---------------------------------
- 36 -
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.
LLC Interest Sale and Purchase Agreement, dated as
of July 31, 1998, among Owens Corning, Advanced
Glassfiber Yarns LLC and Glass Holdings Corp.
(incorporated herein by reference to Exhibit 2 to
the Company's current report on Form 8-K (File No.
1-3660), filed October 14, 1998).
Amendment No. 1 to LLC Interest Sale and Purchase
Agreement dated as of September 30, 1998
(incorporated herein by reference to Exhibit 2 to
the Company's current report on Form 8-K (File No.
1-3660), filed October 14, 1998).
(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 the year 1995).
(10) Material Contracts.
Corporate Incentive Plan Terms Applicable to Key
Employees Other Than Certain Executive Officers
(filed herewith).
Owens Corning Deferred Compensation Plan
incorporated herein by reference to Exhibit (10) to
the Company's quarterly report on Form 10-Q (File
No. 1-3660) for the quarter ended March 31, 1999).
Corporate Incentive Plan Terms Applicable to
Certain Executive Officers (incorporated herein by
reference to Exhibit (10) to the Company's quarterly
report on Form 10-Q (File No. 1-3660) for the quarter
ended March 31, 1999).
(11) Statement re Computation of Per Share Earnings
(filed herewith).
(27) Financial Data Schedule (filed herewith).
Exhibit (10)
------------
OWENS CORNING
Corporate Incentive Plan Terms Applicable to Key Employees Other
Than Certain Executive Officers
(As amended and restated, January 1, 1999)
1. Application
-----------
Set forth below are the annual incentive plan terms applicable to
those employees of Owens Corning Corporation (the "Company"), its
subsidiaries and affiliates who, in the opinion of the Committee
(as hereafter defined), are key employees, including members of
the Board of Directors who are such employees, but excluding any
such employees who are executive officers of the Company and
whose annual incentive compensation for any taxable year of the
Company commencing on or after January 1, 1995 the Committee
anticipates would not be deductible by the Company in whole or in
part but for compliance with section 162(m)(4)(C) of the Internal
Revenue Code of 1986 as amended ("162(m) Covered Employee").
Such terms are hereafter referred to as the "Incentive Plan".
2. Eligibility
-----------
All employees of the Company, its subsidiaries and affiliates
who, in the opinion of the Committee, are key employees,
including members of the Board of Directors who are such
employees, but excluding 162(m) Covered Employees, shall be
eligible to be selected to participate in this Incentive Plan.
The Committee may select the eligible employees who shall
participate in this Incentive Plan in any year at any time before
or during such year. Selection to participate in this Incentive
Plan in any year does not require the Committee to, or imply that
the Committee will, select the same person to participate in the
Incentive Plan in any subsequent year.
3. Administration
--------------
The Plan shall be administered by the Compensation Committee of
the Board of Directors (the "Board"), or by another committee
appointed by the Board consisting of not less than two (2)
Directors who are not Employees (the "Committee"). To the extent
permitted by law, the Committee may delegate its administrative
authority with respect to the Incentive Plan and, in the event of
any such delegation of authority, the term "Committee" as used in
this Incentive Plan shall be deemed to refer to the Committee's
delegate as well as to the Committee. The Committee shall,
subject to the provisions herein, select employees to participate
herein; establish and administer the performance goals and the
award opportunities applicable to each participant and certify
whether the goals have been attained; construe and interpret the
Incentive Plan and any agreement or instrument entered into under
the Incentive Plan; establish, amend, or waive rules and
regulations for the Incentive Plan's administration; and make all
other determinations which may be necessary or advisable for the
administration of the Incentive Plan. Any determination by the
Committee pursuant to the Incentive Plan shall be final, binding
and conclusive on all employees and participants and anyone
claiming under or through any of them.
4. Establishment of Performance Goals and Award Opportunities
----------------------------------------------------------
At any time before or during each year, the Committee shall
establish the method for computing the amount of compensation
which will be payable under the Incentive Plan to each
participant in the Incentive Plan for such year if the
performance goals established by the Committee for such year are
attained in whole or in part and if the participant's employment
by the Company, its subsidiaries and affiliates continues without
interruption during that year. The Committee shall also establish
the performance goals for such year, which may be based on any of
the following performance criteria, either alone or in any
combination, and on either a consolidated or business unit level
as the Committee may determine, or such other criteria as the
Committee may select: sales, net asset turnover, earnings per
share, cash flow, cash flow from operations, operating profit,
net operating profit, net income, income from operations,
operating margin, net income margin, return on net assets, return
on total assets, return on common equity, return on total
capital, and shareholder value added, total shareholder return,
common stock price appreciation, total shareholder return
relative to a defined marketplace, receivables growth, debt to
equity ratios, earnings to fixed charges ratios, introduction of
new products and/or services, or developing and/or implementing
action plans or strategies. The foregoing criteria shall have
any reasonable definitions that the Committee may specify at the
time such criteria are adopted, which may include or exclude any
or all of the following items as the Committee may specify:
extraordinary, unusual or non-recurring items; effects of
accounting changes; effects of currency fluctuations; effects of
financing activities (e.g., effect on earnings per share of
issuance of convertible debt securities); expenses for
restructuring or productivity initiatives; other non-operating
items; spending for acquisitions; effects of divestitures; and
effects of asbestos activities and settlements. Any such
performance criterion or combination of such criteria may apply
to the participant's award opportunity in its entirety or to any
designated portion or portions of the award opportunity, as the
Committee may specify. Extraordinary items, such as capital
gains and losses, which affect any performance criterion
applicable to such award (including but not limited to the
criterion of net income) and which are required to be taken into
account for purposes of Owens Corning's financial statements
under Generally Accepted Accounting Principles, shall be excluded
or included in determining the extent to which the corresponding
performance goal has been achieved so that the integrity and
intent of the performance goal are maintained.
5. Awards
------
Participating employees' individual awards may vary as a
percentage of their Participating Salaries, based on both the
funding approved by the Committee and on the participant's
performance and contribution, as determined in the sole
discretion of the Company. Participating Salary is defined as
the product of the participant's total base salary paid during a
given Incentive Plan year, multiplied by the participant's
incentive pay percentage, at maximum funding. Aggregate awards
under the annually recurring Incentive Plan for any year may not
exceed 100% of the Participating Salaries of participants in the
Incentive Plan for such year, as determined by the Committee.
6. Employment Requirement
----------------------
A participant's award under this Incentive Plan for any year
shall be contingent on continued employment by the Company, its
subsidiaries and affiliates during such year. The only
exceptions to this rule apply in the event of termination of
employment by reason of death, disability, retirement or job
elimination (all as determined by the Committee), or in the event
of a change of control of Owens Corning (as determined by the
Committee), during such year, in which case the following
provisions shall apply. In the event of termination of
employment by reason of death, disability, retirement or job
elimination during a year (as determined by the Committee), an
award shall be payable under this Incentive Plan to the
participant or the participant's estate for such year, which
shall be adjusted, pro-rata, for the period of time during the
year the participant actually worked. In the event of a change
of control of Owens Corning during a year and prior to any
termination of employment, incentive awards shall be paid under
the Incentive Plan at the higher of (a) one half of Participating
Salary for such year (as determined by the Committee), or (b)
projected performance for the year, determined at the time the
change of control occurs. A participant whose employment
terminates prior to the end of a year for any reason not excepted
above shall not be entitled to any award under the Incentive Plan
for that year.
7. Payment of Awards
-----------------
Except as provided otherwise in this Incentive Plan or by the
Committee, payment of each award under this Incentive Plan for
any year shall be contingent upon a determination by the
Committee that the performance goals and employment conditions
applicable to such award have been satisfied. Unless and until
the Committee so determines, such award shall not be paid.
Unless the Committee provides otherwise, (a) earned awards shall
be paid promptly following such determination, and (b) such
payment shall be made in cash (subject to any payroll tax
withholding the Company may determine applies).
8. Amendment or Termination
------------------------
The Committee may amend, modify or terminate this Incentive Plan
at any time, provided that a termination or modification shall
only become effective 30 days after written notice thereof is
given to each participant. Each participant shall be eligible to
receive the incentive compensation to which the participant would
have been otherwise entitled but for such termination or
modification, pro-rata for the period of the year prior to the
termination or modification.
9. Interpretation and Construction
-------------------------------
Any provision of this Incentive Plan to the contrary
notwithstanding, (a) no provision of this Incentive Plan shall
apply to any 162(m) Covered Employee, and (b) any provision of
this Incentive Plan that would prevent an award to any 162(m)
Covered Employee under any plan or arrangement other than this
Incentive Plan from qualifying as performance-based compensation
under Code Section 162(m)(4)(C) shall be administered,
interpreted and construed to enable such award to so qualify and
any provision that cannot be so administered, interpreted and
construed shall to that extent be disregarded. No provision of
the Incentive Plan, nor the selection of any eligible employee to
participate in the Incentive Plan, shall constitute an employment
agreement or affect the duration of any participant's employment,
which shall remain "employment at will" unless an employment
agreement between the Company and the participant provides
otherwise. Both the participant and the Company shall remain
free to terminate employment at any time to the same extent as if
the Incentive Plan had not been adopted.
10. Governing Law
-------------
The terms of this Incentive Plan shall be governed by the laws of
the State of Delaware, without reference to the conflicts of laws
principles of that state.
Exhibit (11)
------------
OWENS CORNING AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(In millions of dollars, except share data)
Basic:
- -----
Net income $ 76 $ 59 $ 120 $ 67
====== ======= ======= ========
Basic weighted average number
of common shares
outstanding (thousands) 54,116 53,563 54,011 53,465
Basic per share amount $ 1.41 $ 1.09 $ 2.22 $ 1.25
====== ======= ======= =========
Diluted:
- -------
Net income $ 78 $ 61 $ 124 $ 71
====== ======= ======= =========
Weighted average number of
common shares outstanding
(thousands) 54,116 53,563 54,011 53,465
Weighted average common
equivalent shares
(thousands):
Deferred awards 22 16 20 16
Stock options using the
average market price
during the period 992 746 883 605
Shares from assumed
conversion of
preferred securities 4,566 4,566 4,566 4,566
------ ------- ------- --------
Diluted weighted average
number of common shares
outstanding and
common equivalent
shares (thousands) 59,696 58,891 59,480 58,652
====== ======= ======= ========
Diluted per share amount $ 1.31 $ 1.02 $ 2.08 $ 1.20
====== ======= ======= ========
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 611
<ALLOWANCES> 0
<INVENTORY> 502
<CURRENT-ASSETS> 1,682
<PP&E> 3,626
<DEPRECIATION> 1,944
<TOTAL-ASSETS> 5,191
<CURRENT-LIABILITIES> 1,906
<BONDS> 2,068
<COMMON> 698
195
0
<OTHER-SE> (1,720)
<TOTAL-LIABILITY-AND-EQUITY> 5,191
<SALES> 2,440
<TOTAL-REVENUES> 2,440
<CGS> 1,858
<TOTAL-COSTS> 1,858
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> 193
<INCOME-TAX> 68
<INCOME-CONTINUING> 125
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120
<EPS-BASIC> 2.22<F1>
<EPS-DILUTED> 2.08<F2>
<FN>
<F1>REPRESENTS BASIC EARNINGS PER SHARE AS DEFINED IN FASB STATEMENT NO. 128.
<F2>REPRESENTS DILUTED EARNINGS PER SHARE AS DEFINED IN FASB STATEMENT NO. 128.
</FN>
