XNYS:OC Owens-Corning Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number:     1-33100

Owens Corning

(Exact name of registrant as specified in its charter)

 

Delaware   43-2109021
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
One Owens Corning Parkway, Toledo, OH   43659
(Address of principal executive offices)   (Zip Code)

(419) 248-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ             No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ             No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ    Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)    Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨             No þ

As of July 13, 2012, 118,510,793 shares of registrant’s common stock, par value $0.01 per share, were outstanding.


Table of Contents

Contents

 

Cover Page

  
PART I – FINANCIAL INFORMATION (unaudited)   
  Item 1.   

Financial Statements

  
    

Consolidated Statements of Earnings (Loss)

     3   
    

Consolidated Statements of Comprehensive Earnings (Loss)

     4   
    

Consolidated Balance Sheets

     5   
    

Consolidated Statements of Cash Flows

     6   
    

Notes to Consolidated Financial Statements

  
    

1.   General

     7   
    

2.   Segment Information

     7   
    

3.   Inventories

     9   
    

4.   Derivative Financial Instruments

     10   
    

5.   Goodwill and Other Intangible Assets

     12   
    

6.   Property, Plant and Equipment

     13   
    

7.   Divestitures

     13   
    

8.   Warranties

     14   
    

9.   Cost Reduction Actions

     14   
    

10. Debt

     15   
    

11. Pension Plans and Other Postretirement Benefits

     17   
    

12. Contingent Liabilities and Other Matters

     18   
    

13. Stock Compensation

     19   
    

14. Earnings (Loss) per Share

     22   
    

15. Fair Value Measurement

     23   
    

16. Income Taxes

     24   
    

17. Condensed Consolidating Financial Statements

     25   
  Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     38   
  Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     48   
  Item 4.   

Controls and Procedures

     48   
PART II – OTHER INFORMATION   
  Item 1.   

Legal Proceedings

     49   
  Item 1A.   

Risk Factors

     49   
  Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     49   
  Item 3.   

Defaults Upon Senior Securities

     50   
  Item 4.   

Mine Safety Disclosures

     50   
  Item 5.   

Other Information

     50   
  Item 6.   

Exhibits

     50   
    

Signatures

     51   
    

Exhibit Index

     52   


Table of Contents

 

- 3 -

PART I

ITEM 1. FINANCIAL STATEMENTS

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(unaudited)

(in millions, except per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2012             2011             2012             2011      

NET SALES

  $       1,391     $       1,451     $       2,737     $       2,689  

COST OF SALES

    1,152       1,172       2,312       2,208  

 

 

Gross margin

    239       279       425       481  

OPERATING EXPENSES

       

Marketing and administrative expenses

    128       141       265       276  

Science and technology expenses

    21       19       40       38  

Charges related to cost reduction actions

    2       -        36       -   

Other (income) expenses, net

    3       (16     11       (29

 

 

Total operating expenses

    154       144       352       285  

 

 

EARNINGS BEFORE INTEREST AND TAXES

    85       135       73       196  

Interest expense, net

    28       28       56       53  

 

 

EARNINGS BEFORE TAXES

    57       107       17       143  

Less: Income tax expense

    17       29       22       40  

Equity in net earnings of affiliates

    -        1       -        1  

 

 

NET EARNINGS (LOSS)

    40       79       (5     104  

Less: Net earnings attributable to noncontrolling interests

    1       1       2       2  

 

 

NET EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING

  $ 39     $ 78     $ (7   $ 102  

 

 

EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO OWENS CORNING COMMON STOCKHOLDERS

       

Basic

  $ 0.32     $ 0.63     $ (0.06   $ 0.82  

Diluted

  $ 0.32     $ 0.62     $ (0.06   $ 0.81  

WEIGHTED-AVERAGE COMMON SHARES

       

Basic

    120.8       124.0       120.9       124.0  

Diluted

    121.5       125.4       120.9       125.4  


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- 4 -

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS (LOSS)

(unaudited)

(in millions)

 

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
          2012             2011             2012             2011      

NET EARNINGS (LOSS)

   $        40     $        79     $ (5   $ 104  

Currency translation adjustment

     (43     22        (19     61  

Pension and other postretirement adjustment (net of tax of $0 and $0 for the periods ended June 30, 2012 and 2011, respectively)

     -        -        (1     (1

Deferred income (loss) on hedging (net of tax of $(1), and $0 for the periods ended June 30, 2012 and 2011, respectively)

     3       (1            1       2  

 

 

COMPREHENSIVE EARNINGS (LOSS)

     -        100        (24     166  

Less: Comprehensive earnings attributable to noncontrolling interests

     1       1        2       2  

 

 

COMPREHENSIVE EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING

   $ (1   $ 99     $ (26   $       164  

 

 

 

The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.


Table of Contents

 

- 5 -

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in millions)

 

ASSETS    June 30,
2012
    Dec. 31,
2011
 

CURRENT ASSETS

    

Cash and cash equivalents

   $ 54     $ 52  

Receivables, less allowances of $18 at June 30, 2012, and $15 at Dec. 31, 2011

     804       610  

Inventories

     815       795  

Other current assets

     173       179  

 

 

Total current assets

     1,846       1,636  

Property, plant and equipment, net

     2,904       2,904  

Goodwill

     1,143       1,144  

Intangible assets

     1,055       1,073  

Deferred income taxes

     525       538  

Other non-current assets

     242       232  

 

 

TOTAL ASSETS

   $ 7,715     $       7,527  

 

 

LIABILITIES AND EQUITY

    

 

 

CURRENT LIABILITIES

    

Accounts payable and accrued liabilities

   $ 900     $ 876  

Short-term debt

     24       28  

Long-term debt – current portion

     8       4  

 

 

Total current liabilities

     932       908  

Long-term debt, net of current portion

           2,205       1,930  

Pension plan liability

     421       435  

Other employee benefits liability

     261       267  

Deferred income taxes

     48       51  

Other liabilities

     197       195  

Commitments and contingencies

    

OWENS CORNING STOCKHOLDERS’ EQUITY

    

Preferred stock, par value $0.01 per share (a)

     -        -   

Common stock, par value $0.01 per share (b)

     1       1  

Additional paid in capital

     3,924       3,907  

Accumulated earnings

     463       470  

Accumulated other comprehensive deficit

     (334     (315

Cost of common stock in treasury (c)

     (444     (362

 

 

Total Owens Corning stockholders’ equity

     3,610       3,701  

Noncontrolling interests

     41       40  

 

 

Total equity

     3,651       3,741  

 

 

TOTAL LIABILITIES AND EQUITY

   $ 7,715     $ 7,527  

 

 

 

 

  (a) 10 shares authorized; none issued or outstanding at June 30, 2012, and Dec. 31, 2011
  (b) 400 shares authorized; 135.3 issued and 119.1 outstanding at June 30, 2012; 134.4 issued and 120.9 outstanding at Dec. 31, 2011
  (c) 16.2 shares at June 30, 2012, and 13.5 shares at Dec. 31, 2011

The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.


Table of Contents

 

- 6 -

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)

 

      Six Months Ended
June 30,
 
          2012             2011      

NET CASH FLOW USED FOR OPERATING ACTIVITIES

    

Net earnings (loss)

   $ (5   $ 104  

Adjustments to reconcile net earnings to cash provided by operating activities:

    

Depreciation and amortization

     180       165  

Gain on sale of businesses and fixed assets

     (3     (27

Deferred income taxes

     8       20  

Provision for pension and other employee benefits liabilities

     23       17  

Stock-based compensation expense

     13       10  

Other non-cash

     (7     (17

Change in working capital

     (209     (307

Pension fund contribution

     (30     (90

Payments for other employee benefits liabilities

     (12     (12

Other

     2       3  

 

 

Net cash flow used for operating activities

     (40     (134

 

 

NET CASH FLOW USED FOR INVESTING ACTIVITIES

    

Additions to plant and equipment

     (163     (210

Proceeds from the sale of assets or affiliates

     7       75  

 

 

Net cash flow used for investing activities

     (156     (135

 

 

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES

    

Proceeds from senior revolving credit and receivables securitization facilities

     933       887  

Payments on senior revolving credit and receivables securitization facilities

     (648     (595

Proceeds from long-term debt

     -        6  

Payments on long-term debt

     (6     (9

Net decrease in short-term debt

     (4     17  

Purchases of treasury stock

     (82     (53

Other

     6       12  

 

 

Net cash flow provided by financing activities

            199              265  

 

 

Effect of exchange rate changes on cash

     (1     3  

 

 

Net increase (decrease) in cash and cash equivalents

     2       (1

Cash and cash equivalents at beginning of period

     52       52  

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 54     $ 51  

 

 

The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.


Table of Contents

 

- 7 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. GENERAL

Unless the context requires otherwise, the terms “Owens Corning,” “Company,” “we” and “our” in this report refer to Owens Corning, a Delaware corporation, and its subsidiaries.

The Consolidated Financial Statements included in this report are unaudited, pursuant to certain rules and regulations of the Securities and Exchange Commission, and 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. The December 31, 2011, balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (U.S.). In connection with the Consolidated Financial Statements and Notes included in this report, reference is made to the Consolidated Financial Statements and Notes contained in the Company’s 2011 annual report on Form 10-K. During the three and six months ended June 30, 2012, the Company recorded additional net pre-tax income of $1 million ($1 million after tax income) and net pre-tax expense of $2 million ($2 million after tax expense), respectively, related to prior periods. The effect was not material to the current or any previously issued financial statements. Certain reclassifications have been made to the periods presented for 2011 to conform to the classifications used in the periods presented for 2012.

 

2. SEGMENT INFORMATION

The Company has two reportable segments: Composites and Building Materials. Accounting policies for the segments are the same as those for the Company. The Company’s reportable segments are defined as follows:

Composites – comprised of our Reinforcements and Downstream businesses. Within the Reinforcements business, the Company manufactures, fabricates and sells glass reinforcements in the form of fiber. Within the Downstream business, the Company manufactures and sells glass fiber products in the form of fabrics, mat, veil and other specialized products.

Building Materials – comprised of our Insulation and Roofing businesses. Within the Insulation business, the Company manufactures and sells fiberglass insulation into residential, commercial, industrial and other markets for both thermal and acoustical applications. It also manufactures and sells glass fiber pipe insulation, energy efficient flexible duct media and foam insulation used in above- and below-grade construction applications. Within the Roofing business, the Company manufactures and sells residential roofing shingles and oxidized asphalt materials used in residential and commercial construction and specialty applications.


Table of Contents

 

- 8 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

2. SEGMENT INFORMATION (continued)

 

NET SALES

The following table summarizes our net sales by segment, geographic region and product group (in millions). External customer sales are attributed to geographic region based upon the location from which the product is shipped to the external customer.

 

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
          2012             2011             2012             2011      

Reportable Segments

        

Composites

   $ 498     $ 529     $ 974     $ 1,021  

Building Materials

     945       971       1,864       1,757  

 

 

Total reportable segments

     1,443       1,500       2,838       2,778  

Corporate eliminations

     (52     (49     (101     (89

 

 

NET SALES

   $ 1,391     $ 1,451     $ 2,737     $ 2,689  

 

 

External Customer Sales by Geographic Region

        

United States

   $ 954     $ 973     $ 1,899     $ 1,773  

Europe

     152       176       298       340  

Asia Pacific

     164       180       312       333  

Other

     121       122       228       243  

 

 

NET SALES

   $ 1,391     $ 1,451     $ 2,737     $ 2,689  

 

 

Sales by Product Group

        

Composites

   $ 498     $ 529     $ 974     $ 1,021  

Insulation

     340       326       671       616  

Roofing

     605       645       1,193       1,141  

Corporate Eliminations

     (52     (49     (101     (89

 

 

NET SALES

   $       1,391     $       1,451     $       2,737     $       2,689  

 

 


Table of Contents

 

- 9 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

2. SEGMENT INFORMATION (continued)

 

EARNINGS BEFORE INTEREST AND TAXES

Earnings before interest and taxes (“EBIT”) by segment consists of net sales less related costs and expenses and are presented on a basis that is used internally for evaluating segment performance. Certain items, such as general corporate expenses or income and certain other expense or income items, are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in EBIT for our reportable segments and are included in the Corporate, Other and Eliminations category.

The following table summarizes EBIT by segment (in millions):

 

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
          2012             2011             2012             2011      

Reportable Segments

        

Composites

   $       34     $       55     $       57     $ 103  

Building Materials

     107       103       156              133  

 

 

Total reportable segments

   $ 141     $ 158     $ 213     $ 236  

 

 

Corporate, Other and Eliminations

        

Charges related to cost reduction actions and related items

   $ (32   $ (17   $ (87   $ (17

Gain on sale of Capivari, Brazil, facility

     -        16       -        16  

General corporate expense and other

     (24     (22     (53     (39

 

 

EBIT

   $ 85     $ 135     $ 73     $ 196  

 

 

 

3. INVENTORIES

Inventories consist of the following (in millions):

 

      June 30,
2012
     Dec. 31,
2011
 

Finished goods

   $       584      $       597  

Materials and supplies

     231        198  

 

 

Total inventories

   $ 815      $ 795  

 

 


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- 10 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

4. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to, among other risks, the impact of changes in commodity prices, foreign currency exchange rates, and interest rates in the normal course of business. The Company’s risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments to offset a portion of these risks. The Company uses derivative financial instruments only to the extent necessary to hedge identified business risks, and does not enter into such transactions for trading purposes.

The Company generally does not require collateral or other security with counterparties to these financial instruments and is therefore subject to credit risk in the event of nonperformance; however, the Company monitors credit risk and currently does not anticipate nonperformance by other parties. Contracts with counterparties generally contain right of offset provisions. These provisions effectively reduce the Company’s exposure to credit risk in situations where the Company has gain and loss positions outstanding with a single counterparty. It is the Company’s policy to offset on the Consolidated Balance Sheets the amounts recognized for derivative instruments with any cash collateral arising from derivative instruments executed with the same counterparty under a master netting agreement. As of June 30, 2012, and December 31, 2011, the Company did not have any amounts on deposit with any of its counterparties, nor did any of its counterparties have any amounts on deposit with the Company.

The following table presents the fair value of derivatives and hedging instruments and the respective location on the Consolidated Balance Sheets (in millions):

 

              Fair Value at  
      Location      June 30,
2012
     Dec. 31,
2011
 

Derivative assets designated as hedging instruments:

        

Cash flow hedges:

        

Natural gas

     Other current assets       $ -       $ 1  

Amount of gain recognized in OCI (effective portion)

     OCI       $ -       $ 1  

Derivative liabilities designated as hedging instruments:

        

Cash flow hedges:

        

Natural gas

    
 
Accounts payable and
accrued liabilities
  
  
   $ 2      $ 4  

Amount of loss recognized in OCI (effective portion)

     OCI       $ 2      $ 4  

Derivative assets not designated as hedging instruments:

        

Foreign exchange contracts

     Other current assets       $ 1      $ 2  

Derivative liabilities not designated as hedging instruments:

        

Natural gas

    
 
Accounts payable and
accrued liabilities
  
  
   $        -       $ 1  

Foreign exchange contracts

    
 
Accounts payable and
accrued liabilities
  
  
   $ 3      $        1  

 

 


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- 11 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

4. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

 

The following table presents the impact and respective location of derivative activities on the Consolidated Statements of Earnings (in millions):

 

            Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     Location         2012             2011             2012             2011      

Derivative activity designated as hedging instruments:

         

Natural gas:

         

Amount of loss reclassified from OCI into earnings (effective portion)

    Cost of sales      $ 5     $ 1     $ 7     $ 2  

Interest rate swaps:

         

Amount of (gain) loss recognized in earnings (ineffective portion)

    Interest expense, net      $ -      $ 1     $       -      $ (1

Derivative activity not designated as hedging instruments:

         

Natural gas:

         

Amount of (gain) recognized in earnings

   
 
Other (income)
expenses, net
  
  
  $ (1   $       -      $ (2   $ (1

Energy supply contract:

         

Amount of loss recognized in earnings

   
 
Other (income)
expenses, net
  
  
  $       -      $ 1     $ -      $       -   

Foreign currency exchange contract:

         

Amount of (gain) loss recognized in earnings

   
 
Other (income)
expenses, net
  
  
  $ (2   $ 1     $ (3   $ 1  

 

 

Cash Flow Hedges

The Company uses forward and swap contracts, which qualify as cash flow hedges, to manage forecasted exposure to natural gas prices. The effective portion of the change in the fair value of cash flow hedges is deferred in accumulated OCI and is subsequently recognized in cost of sales on the Consolidated Statements of Earnings (Loss) for commodity hedges, when the hedged item impacts earnings. Changes in the fair value of derivative assets and liabilities designated as hedging instruments are shown in other within operating activities on the Consolidated Statement of Cash Flows. Any portion of the change in fair value of derivatives designated as hedging instruments that is determined to be ineffective is recorded in other (income) expenses on the Consolidated Statements of Earnings (Loss).

The Company currently has natural gas derivatives designated as hedging instruments that mature within 15 months. The Company’s policy is to hedge up to 75% of its total forecasted natural gas exposures for the next two months, up to 50% of its total forecasted natural gas exposures for the following four months, and lesser amounts for the remaining periods. Based on market conditions, approved variation from the standard policy may occur. The Company performs an analysis for effectiveness of its derivatives designated as hedging instruments at the end of each quarter based on the terms of the contract and the underlying item being hedged.

As of June 30, 2012, $2 million of losses included in accumulated OCI on the Consolidated Balance Sheets relate to contracts that will impact earnings during the next 12 months. Transactions and events that are expected to occur over the next 12 months that will necessitate recognizing these deferred amounts include the recognition of the hedged item through earnings.


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- 12 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

4. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

 

Fair Value Hedges

The Company manages its interest rate exposure by balancing the mixture of its fixed and variable rate instruments through interest rate swaps. The swaps are carried at fair value and recorded as other assets or liabilities, with the offset to long-term debt on the Consolidated Balance Sheets. Changes in the fair value of these swaps and that of the related debt are recorded in interest expense, net on the Consolidated Statements of Earnings (Loss). In the fourth quarter of 2011, the Company terminated all existing interest rate swaps.

Other Derivatives

The Company uses forward currency exchange contracts to manage existing exposures to foreign exchange risk related to assets and liabilities recorded on the Consolidated Balance Sheets. Gains and losses resulting from the changes in fair value of these instruments are recorded in other (income) expenses on the Consolidated Statements of Earnings (Loss).

As a result of first-quarter 2009 capacity curtailments taken at certain facilities, the normal purchase scope exception was no longer met for one of the Company’s energy supply contracts. The contract was required to be marked to market each quarter through its termination date of January 31, 2012.

 

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets and goodwill consist of the following (in millions):

 

June 30, 2012    Weighted
Average
Useful Life
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Amortizable intangible assets:

          

Customer relationships

     19      $ 169      $ (53   $ 116  

Technology

     20        197        (59     138  

Franchise and other agreements

     15        37        (13     24  

Indefinite-lived intangible assets:

          

Trademarks

        777        -        777  

 

 

Total intangible assets

      $ 1,180      $ (125   $ 1,055  

 

 

Goodwill

      $ 1,143       

 

 
Dec. 31, 2011    Weighted
Average
Useful Life
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Amortizable intangible assets:

          

Customer relationships

     19      $ 170      $ (48   $ 122  

Technology

     20        204        (54     150  

Franchise and other agreements

     15        36        (12     24  

Indefinite-lived intangible assets:

          

Trademarks

        777                   -        777  

 

 

Total intangible assets

      $       1,187      $ (114   $       1,073  

 

 

Goodwill

      $ 1,144       

 

 


Table of Contents

 

- 13 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

5. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

 

The changes in the net carrying amount of goodwill by segment are as follows (in millions):

 

      Composites     Building
Materials
     Total  

Balance as of December 31, 2011

   $ 57     $ 1,087      $ 1,144  

Foreign currency adjustments

     (1     -         (1

 

 

Balance as of June 30, 2012

   $        56     $       1,087      $        1,143  

 

 

Other Intangible Assets

The Company expects the ongoing amortization expense for amortizable intangible assets to be approximately $21 million in each of the next five fiscal years. The Company’s future cash flows are not materially impacted by its ability to extend or renew agreements related to our amortizable intangible assets.

Goodwill

The Company tests goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount. No testing was deemed necessary in the second quarter of 2012.

 

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following (in millions):

 

      June 30,
2012
    Dec. 31,
2011
 

Land

   $ 219     $ 221  

Buildings and leasehold improvements

     729       727  

Machinery and equipment

            3,018              2,932  

Construction in progress

     318       268  

 

 
     4,284       4,148  

Accumulated depreciation

     (1,380     (1,244

 

 

Property, plant and equipment, net

   $ 2,904     $ 2,904  

 

 

Machinery and equipment includes certain precious metals used in our production tooling, which comprise approximately 20% of total machinery and equipment as of June 30, 2012, and December 31, 2011. Precious metals used in our production tooling are depleted as they are consumed during the production process, which typically represents an annual expense of less than 3% of the outstanding carrying value.

 

7. DIVESTITURES

On May 18, 2011, the Company sold its Composites glass reinforcements facility in Capivari, Brazil, to Chongqing Polycomp International Company (“CPIC”), an unrelated third party. At closing, the Company received $55 million in cash and an additional $6 million was placed into escrow to satisfy any potential adjustments or claims. The sale resulted in a $16 million gain that is recorded in other (income) expenses on the Consolidated Statements of Earnings (Loss) in the second quarter of 2011.


Table of Contents

 

- 14 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

8. WARRANTIES

The Company records a liability for warranty obligations at the date the related products are sold. Adjustments are made as new information becomes available. A reconciliation of the warranty liability is as follows (in millions):

 

      Six Months Ended
June 30, 2012
 

Beginning balance

   $       38  

Amounts accrued for current year

     11  

Settlements of warranty claims

     (12

 

 

Ending balance

   $ 37  

 

 

 

9. COST REDUCTION ACTIONS

2012 Cost Reduction Actions

As a result of evaluating market conditions, we took actions to improve the competitive position of our global manufacturing network by closing certain facilities in Europe along with other actions that align with our objectives in the region. In conjunction with these actions, the Company recorded $32 and $87 million in charges related to cost reduction actions and related items for the three and six months ended June 30, 2012, respectively; of which, $2 and $36 million is related to severance and is included in charges related to cost reduction actions on the Consolidated Statements of Earnings (Loss). The $30 and $51 million in other related charges, respectively, relates primarily to accelerated depreciation and is included in cost of sales on the Consolidated Statements of Earnings (Loss). Cash payments related to these activities will continue through 2015. The Company will continue to evaluate its global network to ensure it has the appropriate capacity to respond to future anticipated demand around the world.

Composites

For the three and six months ended June 30, 2012, the Company’s actions resulted in $32 and $82 million in charges; of which $2 and $34 million was related to severance costs and $30 and $48 million was related to other charges, respectively. The $30 million and $48 million of other charges consist of $17 and $34 million in accelerated depreciation and $13 and $14 million in other related charges, respectively.

The Company anticipates incurring approximately $50 million in additional charges throughout 2012 and into 2013 related to these actions, of which $6 million will be presented as charges related to cost reduction actions on the Consolidated Statements of Earnings (Loss).

Building Materials

In the first quarter of 2012, the Company’s actions resulted in $5 million in charges, comprised of $2 million in severance costs and $3 million of other charges.


Table of Contents

 

- 15 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

9. COST REDUCTION ACTIONS (continued)

 

The following table summarizes the status of the unpaid liabilities from the Company’s 2012 cost reduction actions (in millions):

 

      Beginning
Balance
Dec. 31,
2011
     Costs
Incurred
     Payments      Ending
Balance
June 30,
2012
     Cumulative
Charges
Incurred
 

Severance

   $       -       $       36      $       -       $       36      $       36  

 

 

Total

   $ -       $ 36      $ -       $ 36      $ 36  

 

 

 

10. DEBT

Details of the Company’s outstanding long-term debt are as follows (in millions):

 

      June 30,
2012
     Dec. 31,
2011
 

6.50% senior notes, net of discount, due 2016

   $ 649      $ 649  

7.00% senior notes, net of discount, due 2036

     540        540  

9.00% senior notes, net of discount, due 2019

     346        346  

Accounts receivable securitization facility, maturing in 2014

     212        158  

Senior revolving credit facility, maturing in 2016

     367        136  

Various capital leases, due through and beyond 2050

     54        55  

Various floating rate debt, maturing through 2027

     2        3  

Other fixed rate debt, with maturities up to 2022, at rates up to 11.0%

     8        8  

Fair value adjustment to debt

     35        39  

 

 

Total long-term debt

     2,213        1,934  

Less – current portion

     8        4  

 

 

Long-term debt, net of current portion

   $       2,205      $       1,930  

 

 

Senior Notes

The Company issued $350 million of senior notes on June 3, 2009, and $1.2 billion of senior notes on October 31, 2006, which are collectively referred to as the “Senior Notes.” The Senior Notes are general unsecured obligations of the Company and rank pari passu with all existing and future senior unsecured indebtedness of the Company.

The Senior Notes are fully and unconditionally guaranteed by each of the Company’s current and future domestic subsidiaries that are a borrower or guarantor under the Company’s Credit Agreement (as defined below). The guarantees are unsecured and rank equally in right of payment with all other existing and future senior unsecured indebtedness of the guarantors. The guarantees are effectively subordinated to existing and future secured debt of the guarantors to the extent of the assets securing that indebtedness.

The Company has the option to redeem all or part of the Senior Notes at any time at a “make whole” redemption price. The Company is subject to certain covenants in connection with the issuance of the Senior Notes that it believes are usual and customary. The Company was in compliance with these covenants as of June 30, 2012.


Table of Contents

 

- 16 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

10. DEBT (continued)

 

In the fourth quarter of 2011, the Company terminated all existing interest rate swaps. The swaps were carried at fair value and recorded as other assets or liabilities, with a fair value adjustment to long-term debt on the Consolidated Balance Sheets. The fair value adjustment to debt will be amortized through 2016 as a reduction to interest expense in conjunction with the maturity date of the notes.

Senior Credit Facilities

On May 26, 2010, the Company entered into a credit agreement (the “Credit Agreement”) that established a new $800 million multi-currency senior revolving credit facility (the “Senior Revolving Credit Facility”). Also on May 26, 2010, the Company terminated the credit agreement dated as of October 31, 2006, which contained a $1.0 billion multi-currency senior revolving credit facility (the “Prior Revolving Credit Facility”) and a $600 million senior term loan facility.

The available principal amount of $800 million on the Senior Revolving Credit Facility includes both borrowings and letters of credit. The Company amended the Senior Revolving Credit Facility in July 2011 to extend the maturity to July 2016 and reduce the pricing. Borrowings under the Senior Revolving Credit Facility may be used for general corporate purposes and working capital. The Company has the discretion to borrow under multiple options, which provide for varying terms and interest rates including the United States prime rate or LIBOR plus a spread.

The Senior Revolving Credit Facility contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio that the Company believes are usual and customary for a senior unsecured credit agreement. The Company was well within compliance with these covenants as of June 30, 2012.

The Company had $7 million and $42 million of letters of credit outstanding under the Senior Revolving Credit Facility at June 30, 2012 and December 31, 2011, respectively.

Receivables Securitization Facility

Included in long-term debt on the Consolidated Balance Sheets are amounts outstanding under a Receivable Purchase Agreement (the “RPA”). Owens Corning Sales, LLC and Owens Corning Receivables LLC, each a subsidiary of the Company, have a $250 million RPA with certain financial institutions. The securitization facility was amended in the fourth quarter of 2011 to extend maturity to December 2014. At June 30, 2012, the Company utilized the full amount permitted under the terms of the receivables securitization facility. The Company had $38 million of letters of credit outstanding under the receivables securitization facility at June 30, 2012. There were no letters of credit outstanding under the receivables securitization facility at December 31, 2011.

The receivables securitization facility contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio that the Company believes are usual and customary for a securitization facility. The Company was well within compliance with these covenants as of June 30, 2012.

Owens Corning Receivables LLC’s sole business consists of the purchase or acceptance through capital contributions of trade receivables and related rights from Owens Corning Sales, LLC and the subsequent retransfer of or granting of a security interest in such trade receivables and related rights to certain purchasers party to the RPA. Owens Corning Receivables LLC is a separate legal entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of Owens Corning Receivables LLC’s assets prior to any assets or value in Owens Corning Receivables LLC becoming available to Owens Corning Receivables LLC’s equity holders. The assets of Owens Corning Receivables LLC are not available to pay creditors of the Company or any other affiliates of the Company or Owens Corning Sales, LLC.


Table of Contents

 

- 17 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

10. DEBT (continued)

 

Short-Term Debt

At June 30, 2012 and December 31, 2011, short-term borrowings were $24 million and $28 million, respectively. The short-term borrowings for both periods consisted of various operating lines of credit and working capital facilities. Certain of these borrowings are collateralized by receivables, inventories or property. The borrowing facilities are typically for one-year renewable terms. The weighted average interest rate on short-term borrowings was approximately 6.3% for June 30, 2012, and 7.4% for December 31, 2011.

 

11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Pension Plans

The Company sponsors defined benefit pension plans. Under the plans, pension benefits are based on an employee’s years of service and, for certain categories of employees, qualifying compensation. Company contributions to these pension plans are determined by an independent actuary to meet or exceed minimum funding requirements. The unrecognized cost of any retroactive amendments and actuarial gains and losses are amortized over the average future service period of plan participants expected to receive benefits.

The following tables provide information regarding pension expense recognized (in millions):

 

     

Three Months Ended

June 30, 2012

   

Three Months Ended

June 30, 2011

 
      U.S.     Non-U.S.     Total     U.S.     Non-U.S.     Total  

Components of Net Periodic Pension Cost

            

Service cost

   $ 1     $ 2     $ 3     $ 2     $ 2     $ 4  

Interest cost

            13              6              19              14       7              21  

Expected return on plan assets

     (15     (6     (21     (16     (7     (23

Amortization of actuarial loss

     6       1       7       3       -        3  

 

 

Net periodic pension cost

   $ 5     $ 3     $ 8     $ 3     $ 2     $ 5  

 

 

 

      Six Months Ended
June 30, 2012
    Six Months Ended
June 30, 2011
 
      U.S.     Non-U.S.     Total     U.S.     Non-U.S.     Total  

Components of Net Periodic Pension Cost

            

Service cost

   $        4     $ 4     $ 8     $ 4     $ 3     $ 7  

Interest cost

     25              12       37              27              13              40  

Expected return on plan assets

     (30     (13     (43     (32     (14     (46

Amortization of actuarial loss

     12       2              14       6       1       7  

 

 

Net periodic pension cost

   $ 11     $ 5     $ 16     $ 5     $ 3     $ 8  

 

 

During July of 2012, Congress passed the “Moving Ahead for Progress in the 21st Century Act,” which included pension funding stabilization provisions. The measure, which is designed to stabilize the discount rate used to determine funding requirements from the effects of interest rate volatility, reduces the Company’s United States Pension Plan contributions by approximately $13 million during 2012.


Table of Contents

 

- 18 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)

 

The Company now expects to contribute approximately $36 million in cash to the United States Pension Plans and another $21 million to non-United States plans during 2012. The Company made cash contributions of approximately $30 million to the plans during the six months ended June 30, 2012.

Postemployment and Postretirement Benefits Other than Pension Plans

The Company maintains healthcare and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the United States are non-funded and pay either (1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met, or (2) fixed amounts of medical expense reimbursement.

The following table provides the components of net periodic benefit cost for aggregated United States and non-United States Plans for the periods indicated (in millions):

 

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
          2012             2011             2012             2011      

Components of Net Periodic Benefit Cost

        

Service cost

   $ -      $ 1     $ 1     $ 2  

Interest cost

            3              3              6              7  

Amortization of prior service cost

     (1     -        (2     -   

Amortization of actuarial gain

     (1     (1     (1     (1

 

 

Net periodic benefit cost

   $ 1     $ 3     $ 4     $ 8  

 

 

 

12. CONTINGENT LIABILITIES AND OTHER MATTERS

Litigation

The Company is involved in various legal proceedings relating to employment, product liability and other matters. The Company regularly reviews the status of these proceedings along with legal counsel. Liabilities for such items are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s operations or financial condition taken as a whole.

Environmental Matters

We have 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. We have also been deemed a PRP under similar state or local laws and in other instances other PRPs have brought suits against us as a PRP for contribution under such federal, state, or local laws. At June 30, 2012, we had environmental remediation liabilities as a PRP at 19 sites where we have a continuing legal obligation to either complete remedial actions or contribute to the completion of remedial actions as part of a group of PRPs. For these sites we estimate a reserve to reflect environmental liabilities that have been asserted or are probable of assertion, in which liabilities are probable and reasonably estimable. At June 30, 2012, our reserve for such liabilities was $8 million.


Table of Contents

 

- 19 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

12. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)

 

Other Items

On December 17, 2010, the French tax authorities made a claim in the amount of approximately 123 million Euros against a subsidiary the Company acquired as part of the acquisition of Saint-Gobain’s reinforcement and composite fabrics business in 2007 (the “2007 Acquisition”). The claim relates to transactions that occurred prior to the closing of the 2007 Acquisition. Pursuant to the purchase agreement governing the 2007 Acquisition, Saint-Gobain is required to indemnify Owens Corning and its subsidiaries for pre-closing tax claims and related damages, attorney fees and expenses. On July 17, 2012, the Company received a communication from the French tax authorities rescinding their original claim against the subsidiary of the Company. The Company does not expect any further inquiries regarding the claim.

 

13. STOCK COMPENSATION

2010 Stock Plan

On April 22, 2010, the Company’s stockholders approved the Owens Corning 2010 Stock Plan (the “2010 Stock Plan”), which replaced the Owens Corning 2006 Stock Plan (the “2006 Stock Plan”), as amended and restated. The 2010 Stock Plan authorizes grants of stock options, stock appreciation rights, stock awards, restricted stock awards, restricted stock units, bonus stock awards and performance stock awards. Such shares of common stock include shares that were available but not granted, or which were granted but were not issued or delivered due to expiration, termination, cancellation or forfeiture of such awards. At June 30, 2012, the number of shares remaining available under the 2010 Stock Plan for all stock awards was 2.6 million.

Stock Options

The Company has granted stock options under its stockholder approved stock plans. The Company calculates a weighted-average grant-date fair value using a Black-Scholes valuation model for options granted. Compensation expense for options is measured based on the fair market value of the option on the date of grant, and is recognized on a straight-line basis over a four-year vesting period. In general, the exercise price of each option awarded was equal to the market price of the Company’s common stock on the date of grant and an option’s maximum term is 10 years. The volatility assumption was based on a benchmark study of our peers.

During the six months ended June 30, 2012, 409,700 stock options were granted with a weighted-average grant date fair value of $15.27. Assumptions used in the Company’s Black-Scholes valuation model to estimate the grant date fair value were expected volatility of 45.8%, expected dividends of 0%, expected term of 6.26 years and a risk-free interest rate of 1.1%.

During the three and six months ended June 30, 2012, the Company recognized expense of $1 million and $2 million respectively, related to the Company’s stock options. During the three and six months ended June 30, 2011, the Company recognized expense of $1 million and $2 million respectively, related to the Company’s stock options. As of June 30, 2012, there was $11 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 2.86 years. The total aggregate intrinsic value of options outstanding as of June 30, 2012 and 2011 was $11 million and $37 million.


Table of Contents

 

- 20 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

13. STOCK COMPENSATION (continued)

 

The following table summarizes the Company’s stock option activity for the six months ended June 30, 2012:

 

        Six Months Ended June 30, 2012  
        Number of Options     

Weighted-Average

Exercise Price

 

Beginning Balance

       3,293,545      $ 26.26  

Granted

       409,700        33.73  

Exercised

       (193,100      23.86  

Forfeited

       (32,825      28.98  

 

 

Ending Balance

       3,477,320      $ 27.25  

 

 

The following table summarizes information about the Company’s options outstanding and exercisable:

 

      Options Outstanding      Options Exercisable  
            Weighted-Average      Number
Exercisable at
June 30, 2012
     Weighted-Average  
Range of Exercise Prices    Options
Outstanding
     Remaining
Contractual Life
     Exercise
Price
       

Remaining

Contractual Life

     Exercise
Price
 

 

 

$7.57- $34.94

     3,477,320        6.24      $       27.25        2,397,803         5.25      $       26.52  

 

 

Restricted Stock Awards and Restricted Stock Units

The Company has granted restricted stock awards and restricted stock units (collectively referred to as “restricted stock”) under its stockholder approved stock plans. Compensation expense for restricted stock is measured based on the market price of the stock at date of grant and is recognized on a straight-line basis over the four-year vesting period. Stock restrictions are subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2015.

During the three and six months ended June 30, 2012, the Company recognized expense of $4 million and $8 million respectively, related to the Company’s restricted stock. During the three and six months ended June 30, 2011, the Company recognized expense of $3 million and $6 million respectively. As of June 30, 2012, there was $30 million of total unrecognized compensation cost related to restricted stock. That cost is expected to be recognized over a weighted-average period of 2.96 years. The total fair value of shares vested during the six months ended June 30, 2012 and 2011 was $11 million and $8 million, respectively.

A summary of the status of the Company’s plans that had restricted stock issued as of June 30, 2012, and changes during the six months ended June 30, 2012, are presented below.


Table of Contents

 

- 21 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

13. STOCK COMPENSATION (continued)

 

      Six Months Ended June 30, 2012  
      Number of Shares     Weighted-Average Grant-Date
Fair Value
 

Beginning Balance

     1,941,742     $ 19.74  

Granted

     593,945       33.45  

Vested

     (507,597     22.14  

Forfeited

     (58,002     27.86  

 

 

Ending Balance

     1,970,088     $       23.02  

 

 

Performance Stock Awards and Performance Stock Units

The Company has granted performance stock awards and performance stock units (collectively referred to as “PSUs”) as a part of its long-term incentive plan, of which 50% will be settled in stock and 50% will be settled in cash. The number of the PSUs ultimately distributed is contingent on meeting various company or stockholder return goals.

Compensation expense for PSUs settled in stock is measured based on the grant date fair value and is recognized on a straight-line basis over the vesting period. Compensation expense for PSUs settled in cash is measured based on the fair value at the end of each quarter and is recognized on a straight-line basis over the vesting period. Vesting will be pro-rated based on the number of full months employed during the performance period in the case of death, disability, change in control or involuntary termination, and pro-rated awards earned will be paid at the end of the three-year period.

In the first six months of 2012, the Company granted PSUs. The 2012 grant vests after a three-year period based on the Company’s total stockholder return relative to the performance of the components of the S&P 500 Index for the respective three-year period. The amount of PSUs earned will vary from 0% to 200% of PSUs awarded depending on the relative stockholder return performance.

For all PSUs, respectively during the three and six months ended June 30, 2012, the Company recognized income of $2 million and expense of $6 million. During the three and six months ended June 30, 2011, the Company recognized expense of $4 million and $11 million, respectively, related to PSUs. As of June 30, 2012, there was $12 million of total unrecognized compensation cost related to PSUs. That cost is expected to be recognized over a weighted-average period of 2.02 years.

2012 Grant

For the 2012 grant, the portion of the PSUs settled in cash will be revalued every reporting period until the award is fully vested. As a result, compensation expense recognized will be adjusted and previous surplus compensation expense recognized will be reversed or additional expense will be recognized. For the six-month period ended June 30, 2012, the Company estimated the fair value of the PSUs granted using a Monte Carlo simulation that used various assumptions that include expected volatility of 38.3%, a risk free rate of 0.4% and an expected term of 2.51 years. Expected volatility was based on a benchmark study of our peers. The risk-free interest rate was based on zero coupon United States Treasury bills at the time of revaluation. The expected term represents the period beginning June 30, 2012, to the end of the three-year performance period.


Table of Contents

 

- 22 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

13. STOCK COMPENSATION (continued)

 

For the 2012 grant, the fair value of the portion of PSUs settled in stock was estimated at the grant date using a Monte Carlo simulation that used various assumptions that include expected volatility of 48.2%, a risk free interest rate of 0.3% and an expected term of 2.91 years. Expected volatility was based on a benchmark study of ourselves and our peers. The risk-free interest rate was based on zero coupon United States Treasury bills at the grant date. The expected term represents the period from the grant date to the end of the three-year performance period.

A summary of the status of the Company’s plans that had issued PSUs as of June 30, 2012, and changes during the six months ended June 30, 2012, are presented below:

 

      Six Months Ended June 30, 2012  
     

    Number of    

    PSUs    

    Weighted-Average
Grant-Date
        Fair Value         
 

Beginning Balance

     508,616     $ 42.24  

Granted

     256,400       47.97  

Forfeited

     (33,176     42.15  

 

 

Ending Balance

     731,840     $       44.25  

 

 

 

14. EARNINGS (LOSS) PER SHARE

The following table summarizes the number of shares outstanding as well as our basic and diluted earnings (loss) per-share (in millions, except per share amounts):

 

      Three Months Ended
June 30,
     Six Months Ended
June 30,
 
          2012              2011              2012             2011      

Net earnings (loss) attributable to Owens Corning

   $ 39      $ 78      $ (7   $ 102  

 

 

Weighted-average number of shares outstanding used for basic earnings per share

           120.8              124.0              120.9             124.0  

Non-vested restricted and performance shares

     0.4        0.9        -        0.9  

Options to purchase common stock

     0.3        0.5        -        0.5  

 

 

Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings per share

     121.5        125.4        120.9       125.4  

 

 

Earnings (loss) per common share attributable to Owens Corning common stockholders:

          

 

 

Basic

   $ 0.32      $ 0.63      $ (0.06   $ 0.82  

Diluted

   $ 0.32      $ 0.62      $ (0.06   $ 0.81  

 

 

Basic earnings (loss) per share is calculated by dividing earnings attributable to Owens Corning by the weighted-average number of shares of the Company’s common stock outstanding during the period. Outstanding shares consist of issued shares less treasury stock.


Table of Contents

 

- 23 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

14. EARNINGS (LOSS) PER SHARE (continued)

 

On April 19, 2012, the Company approved a new share buy-back program under which the Company is authorized to repurchase up to 10 million shares of the Company’s outstanding common stock (the “2012 Repurchase Program”). The 2012 Repurchase Program is in addition to the share buy-back program announced August 4, 2010, (the “2010 Repurchase Program” and collectively with the 2012 Repurchase Program, the “Repurchase Programs”). The Repurchase Programs authorize the Company to repurchase shares through the open market, privately negotiated, or other transactions. The actual number of shares repurchased will depend on timing, market conditions and other factors and will be at the Company’s discretion. During the six months ended June 30, 2012, 2.6 million shares were repurchased under the Repurchase Programs. As of June 30, 2012, 11.1 million shares remain available for repurchase under the Repurchase Programs.

For the three and six months ended June 30, 2012, the number of shares used in the calculation of diluted earnings per share did not include 0.0 and 0.5 million non-vested restricted shares, 0.4 and 0.7 million options to purchase common stock, 17.5 million common equivalent shares from Series A Warrants or 7.8 million common equivalent shares from Series B Warrants due to their anti-dilutive effect.

For the three and six months ended June 30, 2011, the number of shares used in the calculation of diluted earnings per share did not include 0.4 million options to purchase common stock, 17.5 million common equivalent shares from Series A Warrants or 7.8 million common equivalent shares from Series B Warrants due to their anti-dilutive effect.

 

15. FAIR VALUE MEASUREMENT

Items Measured at Fair Value

The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The following table summarizes the fair values, and levels within the fair value hierarchy in which the fair value measurements fall, for assets and liabilities measured on a recurring basis as of June 30, 2012 (in millions):

 

      Total
Measured at
Fair Value
    Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
   

Significant
Unobservable
Inputs

(Level 3)

 

Assets:

         

Cash equivalents

   $ 9     $ 9      $ -      $ -   

Term deposits

   $ 6     $ 6      $ -      $ -   

Derivative assets

   $ 1     $ -       $ 1     $ -   

 

 

Total assets

   $       16     $       15      $        1     $       -   

 

 

Liabilities:

         

Derivative liabilities

   $ (5   $ -       $ (5   $ -   

 

 

Total liabilities

   $ (5   $ -       $ (5   $ -   

 

 


Table of Contents

 

- 24 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

15. FAIR VALUE MEASUREMENT (continued)

 

Cash equivalents and term deposits, by their nature, utilize Level 1 inputs in determining fair value. The term deposits are included in other current assets on the Consolidated Balance Sheets. The Company measures the value of its natural gas hedge contracts and foreign currency forward contracts using Level 2 inputs. The fair value of the Company’s natural gas hedges is determined by a mark to market valuation based on forward curves using observable market prices and the fair value of its foreign currency forward contracts is determined using observable market transactions in over-the-counter markets.

Items Disclosed at Fair Value

Long-term notes receivable

The fair value has been calculated using the expected future cash flows discounted at market interest rates. The Company believes that the carrying amounts reasonably approximate the fair values of long-term notes receivable. Long-term notes receivable were $48 million as of June 30, 2012.

Long-term debt

The fair value of the Company’s long-term debt has been calculated based on quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities.

As of June 30, 2012, the Company’s 6.50% senior notes due 2016 were trading at approximately 112% of par value, the 7.00% senior notes due 2036 were trading at approximately 106% of par value and the 9.00% senior notes due 2019 were trading at approximately 127% of par value.

At June 30, 2012, the Company determined that the book value of the remaining long-term debt instruments approximates market value. This approach, using level 1 inputs and utilizing indicative market rates for a new debt issuance, approximated the fair value of the remaining long-term debt at $643 million.

 

16. INCOME TAXES

Income tax expense for the three and six months ended June 30, 2012, was $17 million and $22 million, respectively. For the second quarter and year-to-date 2012, the Company’s effective tax rate was 30% and 129%, respectively. For both periods, the difference between the effective tax rate and the statutory rate of 35% is primarily attributable to the tax accounting treatment related to various locations which are currently in a loss position and various tax planning initiatives.

Income tax expense for the three and six months ended June 30, 2011, was $29 million and $40 million, respectively. The Company’s effective tax rate for the second quarter 2011 was 27%. Excluding approximately $8 million of benefit related to the reversal of a valuation allowance in a foreign location and other discrete items during the first six months of 2011, the Company’s effective tax would have been 34%. The difference between the effective tax rate for both the quarter and the year-to-date and the statutory rate of 35% is primarily attributable to the benefit of lower foreign tax rates and various tax planning initiatives.


Table of Contents

 

- 25 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The following Condensed Consolidating Financial Statements present the financial information required with respect to those entities which guarantee certain of the Company’s debt. The Condensed Consolidating Financial Statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share of the subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investment in subsidiaries and intercompany balances and transactions.

Guarantor and Nonguarantor Financial Statements

The Senior Notes and the Senior Revolving Credit Facility are guaranteed, fully, unconditionally and jointly and severally, by each of Owens Corning’s current and future 100% owned material domestic subsidiaries that is a borrower or a guarantor under Owens Corning’s Credit Agreement, which permits changes to the named guarantors in certain situations (collectively, the “Guarantor Subsidiaries”). The remaining subsidiaries have not guaranteed the Senior Notes and the Senior Revolving Credit Facility (collectively, the “Nonguarantor Subsidiaries”).

During the fourth quarter of 2011, the Company discovered certain items were not appropriately classified between the Parent and Guarantor Subsidiaries within the Condensed Consolidating Financial Statements. The effect of correcting these classifications was not material to the consolidating financial information. The Company has revised its 2011 quarterly consolidating information for comparison with 2012.


Table of Contents

 

- 26 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(in millions)

 

      Parent     Guarantor
Subsidiaries
   

Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

NET SALES

   $ -      $ 989      $ 508      $ (106   $ 1,391   

COST OF SALES

     1        792              465        (106           1,152   

 

 

Gross margin

     (1           197        43        -        239   

OPERATING EXPENSES

          

Marketing and administrative expenses

            28        64        36        -        128   

Science and technology expenses

     -        17        4        -        21   

Charges related to cost reduction actions

     -        -        2        -        2   

Other expenses, net

     (11     2        12        -        3   

 

 

Total operating expenses

     17        83        54        -        154   

 

 

EARNINGS BEFORE INTEREST
AND TAXES

     (18     114        (11     -        85   

Interest expense, net

     24        2        2        -        28   

 

 

EARNINGS BEFORE TAXES

     (42     112        (13     -        57   

Less: Income tax expense

     (17     33        1        -        17   

Equity in net earnings of subsidiaries

     64        (15     -        (49     -   

NET EARNINGS

     39        64        (14     (49     40   

Less: Net earnings attributable to noncontrolling interest

     -        -        1        -        1   

 

 

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING

   $ 39      $ 64      $ (15   $ (49   $ 39   

 

 


Table of Contents

 

- 27 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THREE MONTHS ENDED JUNE 30, 2011

(in millions)

 

      Parent     Guarantor
Subsidiaries
   

Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

NET SALES

   $ -      $       1,010     $       532     $ (91   $       1,451  

COST OF SALES

     (5     837       431       (91     1,172  

 

 

Gross margin

     5       173       101                -        279  

OPERATING EXPENSES

          

Marketing and administrative expenses

     13       94       34       -        141  

Science and technology expenses

     -        15       4       -        19  

Other (income) expenses, net

     (30     22       (8     -        (16

 

 

Total operating expenses

     (17     131       30       -        144  

 

 

EARNINGS BEFORE INTEREST AND TAXES

     22       42       71       -        135  

Interest expense, net

     29       (3     2       -        28  

 

 

EARNINGS BEFORE TAXES

     (7     45       69       -        107  

Less: Income tax expense

     (1     12       18       -        29  

Equity in net earnings of subsidiaries

            84       51       -        (135     -   

Equity in net earnings of affiliates

     -        -        1       -        1  

 

 

NET EARNINGS

     78       84       52       (135     79  

Less: Net earnings attributable to noncontrolling interest

     -        -        1       -        1  

 

 

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING

   $ 78     $ 84     $ 51     $ (135   $ 78  

 

 


Table of Contents

 

- 28 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS (LOSS)

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(in millions)

 

      Parent     Guarantor
Subsidiaries
   

Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

NET SALES

   $ -      $ 1,951     $ 976     $ (190   $ 2,737  

COST OF SALES

     3             1,612             887       (190           2,312  

 

 

Gross margin

     (3     339       89       -        425  

OPERATING EXPENSES

          

Marketing and administrative expenses

            62       132       71       -        265  

Science and technology expenses

     -        32       8       -        40  

Charges related to cost reduction actions

     -        -        36       -        36  

Other expenses, net

     (19     10       20       -        11  

 

 

Total operating expenses

     43       174       135       -        352  

 

 

EARNINGS BEFORE INTEREST AND TAXES

     (46     165       (46     -        73  

Interest expense, net

     49       2       5       -        56  

 

 

EARNINGS BEFORE TAXES

     (95     163       (51     -        17  

Less: Income tax expense

     (36     45       13       -        22  

Equity in net earnings of subsidiaries

     52       (66     -        14       -   

NET EARNINGS (LOSS)

     (7     52       (64     14       (5

Less: Net earnings attributable to noncontrolling interest

     -        -        2       -        2  

 

 

NET EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING

   $ (7   $ 52     $ (66   $ 14     $ (7

 

 


Table of Contents

 

- 29 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(in millions)

 

      Parent     Guarantor
Subsidiaries
   

Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

NET SALES

   $ -      $ 1,837     $       1,020     $ (168   $ 2,689  

COST OF SALES

     (13           1,562       827       (168           2,208  

 

 

Gross margin

     13       275       193                -        481  

OPERATING EXPENSES

          

Marketing and administrative expenses

     26       180       70       -        276  

Science and technology expenses

     -        31       7       -        38  

Other (income) expenses, net

     (57     35       (7     -        (29

 

 

Total operating expenses

     (31     246       70       -        285  

 

 

EARNINGS BEFORE INTEREST AND TAXES

     44       29       123       -        196  

Interest expense, net

     54       (3     2       -        53  

 

 

EARNINGS BEFORE TAXES

     (10     32       121       -        143  

Less: Income tax expense

     (2     9       33       -        40  

Equity in net earnings of subsidiaries

             110       88       -        (198     -   

Equity in net earnings of affiliates

     -        (1     2       -        1  

 

 

NET EARNINGS

     102       110       90       (198     104  

Less: Net earnings attributable to noncontrolling interest

     -        -        2       -        2  

 

 

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING

   $ 102     $ 110     $ 88     $ (198   $ 102  

 

 


Table of Contents

 

- 30 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS (LOSS)

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(in millions)

 

     Parent     Guarantor
Subsidiaries
   

Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

NET EARNINGS

  $       39      $ 64     $ (14   $ (49   $       40  

Currency translation adjustment

    (43              -                 -                 -        (43

Pension and other postretirement adjustment (net of tax)

    -        -        -        -        -   

Deferred income on hedging (net of tax)

    3        -        -        -        3  

 

 

COMPREHENSIVE EARNINGS

    (1     64       (14     (49     -   

Less: Comprehensive earnings attributable to noncontrolling interest

    -        -        1       -        1  

 

 

NET EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING

  $ (1   $ 64     $ (15   $ (49   $ (1

 

 


Table of Contents

 

- 31 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS

FOR THE THREE MONTHS ENDED JUNE 30, 2011

(in millions)

 

      Parent     Guarantor
Subsidiaries
    

Non-

Guarantor
Subsidiaries

     Eliminations     Consolidated  

NET EARNINGS

   $       78     $       84      $       52      $ (135   $ 79  

Currency translation adjustment

     22       -         -                 -              22  

Pension and postretirement adjustment (net of tax)

     -        -         -         -        -   

Deferred income (loss) on hedging (net of tax)

     (1     -         -         -        (1

 

 

COMPREHENSIVE EARNINGS

     99       84        52        (135     100  

Less: Comprehensive earnings attributable to noncontrolling interest

     -        -         1        -        1  

 

 

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING

   $ 99     $ 84      $ 51      $ (135   $ 99  

 

 


Table of Contents

 

- 32 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS (LOSS)

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(in millions)

 

      Parent     Guarantor
Subsidiaries
    

Non-

Guarantor
Subsidiaries

    Eliminations      Consolidated  

NET EARNINGS (LOSS)

   $ (7   $ 52      $ (64   $       14      $ (5

Currency translation adjustment

     (19              -                  -        -         (19

Pension and other postretirement adjustment (net of tax)

     (1     -         -        -         (1

Deferred income on hedging (net of tax)

            1       -         -        -                 1  

 

 

COMPREHENSIVE EARNINGS (LOSS)

     (26     52        (64     14        (24

Less: Comprehensive earnings attributable to noncontrolling interest

     -        -         2       -         2  

 

 

NET EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING

   $ (26   $ 52      $ (66   $ 14      $ (26

 

 


Table of Contents

 

- 33 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(in millions)

 

      Parent     Guarantor
Subsidiaries
    

Non-

Guarantor
Subsidiaries

     Eliminations     Consolidated  

NET EARNINGS

   $       102     $ 110       $ 90      $ (198   $       104  

Currency translation adjustment

     61                -                  -                  -        61  

Pension and postretirement adjustment
(net of tax)

     (1     -        -         -        (1

Deferred income on hedging (net of tax)

     2       -         -         -        2  

 

 

COMPREHENSIVE EARNINGS

     164       110         90        (198     166  

Less: Comprehensive earnings attributable to noncontrolling interest

     -        -         2        -        2  

 

 

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING

   $ 164     $ 110       $ 88      $ (198   $ 164  

 

 


Table of Contents

 

- 34 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2012

(in millions)

 

ASSETS   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

CURRENT ASSETS

         

Cash and cash equivalents

  $ -      $ -      $ 54     $ -      $ 54  

Receivables, net

    -        -        1,029       (225     804  

Due from affiliates

    -        2,575       -        (2,575     -   

Inventories

    -        474       341       -        815  

Other current assets

    (1     78       96       -        173  

 

 

Total current assets

    (1     3,127       1,520       (2,800     1,846  

Investment in subsidiaries

    6,759       2,406       533       (9,698     -   

Due from affiliates

    -        62       958       (1,020     -   

Property, plant and equipment, net

    385       1,296       1,223       -        2,904  

Goodwill

    -        1,068       75       -        1,143  

Intangible assets

    -        949       323       (217     1,055  

Deferred income taxes

    91       412       22       -        525  

Other non-current assets

    62       67       113       -        242  

 

 

TOTAL ASSETS

  $ 7,296     $ 9,387     $ 4,767     $ (13,735   $ 7,715  

 

 

LIABILITIES AND EQUITY

         

 

 

CURRENT LIABILITIES

         

Accounts payable and accrued liabilities

  $ 14     $ 683     $ 428     $ (225   $ 900  

Due to affiliates

    1,248       -        1,327       (2,575     -   

Short-term debt

    -        1       23       -        24  

Long-term debt – current portion

    -        2       6       -        8  

 

 

Total current liabilities

    1,262       686       1,784       (2,800     932  

Long-term debt, net of current portion

    1,937       29       239       -        2,205  

Due to affiliates

    -        958       62       (1,020     -   

Pension plan liability

    285       -        136       -        421  

Other employee benefits liability

    -        241       20       -        261  

Deferred income taxes

    -        -        48       -        48  

Other liabilities

    202       181       31       (217     197  

Commitments and contingencies

         

OWENS CORNING STOCKHOLDERS’ EQUITY

         

Common stock

    1       -        -        -        1  

Additional paid in capital

    3,924       6,477       1,985       (8,462     3,924  

Accumulated earnings (deficit)

    463       815       421       (1,236     463  

Accumulated other comprehensive deficit

    (334     -        -        -        (334

Cost of common stock in treasury

    (444     -        -        -        (444

 

 

Total Owens Corning stockholders’ equity

    3,610       7,292       2,406       (9,698     3,610  

Noncontrolling interest

    -        -        41                       -        41  

 

 

Total equity

    3,610       7,292       2,447       (9,698     3,651  

 

 

TOTAL LIABILITIES AND EQUITY

  $       7,296     $       9,387     $       4,767     $ (13,735   $       7,715  

 

 


Table of Contents

 

- 35 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2011

(in millions)

 

ASSETS   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

CURRENT ASSETS

         

Cash and cash equivalents

  $ -      $ -      $ 52     $ -      $ 52  

Receivables, net

    -        -        730       (120     610  

Due from affiliates

    529       2,369       -        (2,898     -   

Inventories

    -        447       348       -        795  

Other current assets

    1       75       103       -        179  

 

 

Total current assets

    530       2,891       1,233       (3,018     1,636  

Investment in subsidiaries

    6,587       2,374       533       (9,494     -   

Due from affiliates

    -        63       997       (1,060     -   

Property, plant and equipment, net

    384       1,278       1,242       -        2,904  

Goodwill

    -        1,069       75       -        1,144  

Intangible assets

    -        959       352       (238     1,073  

Deferred income taxes

    71       448       19       -        538  

Other non-current assets

    60       72       100       -        232  

 

 

TOTAL ASSETS

  $ 7,632     $ 9,154     $ 4,551     $ (13,810   $ 7,527  

 

 

LIABILITIES AND EQUITY

         

 

 

CURRENT LIABILITIES

         

Accounts payable and accrued liabilities

  $ 21     $ 553     $ 422     $ (120   $ 876  

Due to affiliates

    1,676       25       1,197       (2,898     -   

Short-term debt

    8       -        20       -        28  

Long-term debt – current portion

    -        1       3       -        4  

 

 

Total current liabilities

    1,705       579       1,642       (3,018     908  

Long-term debt, net of current portion

    1,709       29       192       -        1,930  

Due to affiliates

    -        997       63       (1,060     -   

Pension plan liability

    293       -        142       -        435  

Other employee benefits liability

    -        247       20       -        267  

Deferred income taxes

    -        -        51       -        51  

Other liabilities

    224       182       27       (238     195  

Commitments and contingencies

         

OWENS CORNING STOCKHOLDERS’ EQUITY

         

Preferred stock

    -        -        -        -        -   

Common stock

    1       -        -        -        1  

Additional paid in capital

    3,907       6,357       1,889       (8,246     3,907  

Accumulated earnings (deficit)

    470       763       485       (1,248     470  

Accumulated other comprehensive deficit

    (315     -        -        -        (315

Cost of common stock in treasury

    (362     -        -        -        (362

 

 

Total Owens Corning stockholders’ equity

    3,701       7,120       2,374       (9,494     3,701  

Noncontrolling interest

    -        -        40                       -        40  

 

 

Total equity

    3,701       7,120       2,414       (9,494     3,741  

 

 

TOTAL LIABILITIES AND EQUITY

  $       7,632     $       9,154     $       4,551     $ (13,810   $       7,527  

 

 


Table of Contents

 

- 36 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(in millions)

 

      Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

NET CASH FLOW USED FOR OPERATING ACTIVITIES

   $ (59   $ (72   $ 91     $ -       $ (40

NET CASH FLOW USED FOR INVESTING ACTIVITIES

           

Additions to plant and equipment

     (9     (87     (67     -         (163

Proceeds from the sale of assets or affiliates

     -        -        7       -         7  

 

 

Net cash flow used for investing activities

     (9     (87     (60     -         (156

 

 

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES

           

Proceeds from senior revolving credit and receivables securitization facilities

            826       -        107       -                933  

Payments on senior revolving credit and receivables securitization facilities

     (595     -        (53     -         (648

Payments on long-term debt

     (4     -        (2     -         (6

Net decrease in short-term debt

     (8     1       3       -         (4

Purchases of treasury stock

     (82     -        -        -         (82

Other intercompany loans

     (75     158       (83     -         -   

Other

     6       -        -        -         6  

 

 

Net cash flow provided by financing activities

     68              159       (28     -         199  

 

 

Effect of exchange rate changes on cash

     -        -        (1     -         (1

 

 

Net increase in cash and cash equivalents

     -        -        2       -         2  

Cash and cash equivalents at beginning of period

     -        -        52       -         52  

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ -      $ -      $        54     $       -       $ 54  

 

 


Table of Contents

 

- 37 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(in millions)

 

      Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

NET CASH FLOW USED FOR OPERATING ACTIVITIES

   $ (54   $ (50   $ (30   $ -       $ (134

NET CASH FLOW USED FOR INVESTING ACTIVITIES

           

Additions to plant and equipment

     -        (104     (106     -         (210

Proceeds from the sale of assets or affiliates

     -        -        75       -         75  

 

 

Net cash flow used for investing activities

     -        (104     (31     -         (135

 

 

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES

           

Proceeds from senior revolving credit facility

     685       -        202       -         887  

Payments on senior revolving credit facility

     (595     -        -        -         (595

Proceeds from long-term debt

     -        -        6       -         6  

Payments on long-term debt

     -        -        (9     -         (9

Net decrease in short-term debt

     -        -        17       -         17  

Purchase of treasury stock

     (53     -        -        -         (53

Other intercompany loans

     48       154       (202     -         -   

Other

     12       -        -        -         12  

 

 

Net cash flow provided by financing activities

              97              154       14       -         265  

 

 

Effect of exchange rate changes on cash

     -        -        3       -         3  

 

 

Net increase (decrease) in cash and cash equivalents

     43       -        (44     -         (1

Cash and cash equivalents at beginning of period

     3       -        49       -         52  

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 46     $ -      $        5     $       -       $          51  

 

 


Table of Contents

 

- 38 -

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand Owens Corning, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes thereto contained in this report. Unless the context requires otherwise, the terms “Owens Corning,” “Company,” “we” and “our” in this report refer to Owens Corning.

GENERAL

Owens Corning is a leading global producer of glass fiber reinforcements and other materials for composites and of residential and commercial building materials. The Company’s business operations fall within two reportable segments, Composites and Building Materials. Composites includes our Reinforcements and Downstream businesses. Building Materials includes our Insulation and Roofing businesses. Through these lines of business, we manufacture and sell products worldwide. We maintain leading market positions in many of our major product categories.

EXECUTIVE OVERVIEW

We reported $85 million in earnings before interest and taxes (“EBIT”) for the second quarter 2012. We generated $117 million in adjusted earnings before interest and taxes (“Adjusted EBIT”) for the second-quarter 2012. Our Building Materials segment grew second quarter EBIT by $4 million, whereas EBIT in our Composites segment declined by $21 million compared to the same period in 2011. We are on track with the repositioning of our European assets and recorded $32 million of charges during the second quarter related to these actions. See below for further information regarding adjusted EBIT, including the reconciliation to net earnings attributable to Owens Corning.

In our Composites segment, EBIT in the second quarter 2012 was $34 million compared to $55 million in the same period in 2011 driven by inflation, slightly lower selling prices and lower production volumes.

In our Building Materials segment, EBIT in the second quarter 2012 was $107 million, compared to $103 million in the same period in 2011. In our Roofing business, EBIT declined $18 million on lower sales volumes. Higher selling prices were more than offset by raw material inflation, primarily asphalt. Our Insulation business narrowed EBIT losses by $22 million compared to the same period in 2011, driven by manufacturing productivity and improved capacity utilization.

We maintain a strong balance sheet with ample liquidity. We have access to an $800 million senior revolving credit facility with a July 2016 maturity date and a $250 million receivables securitization facility with a December 2014 maturity date. We have no other significant debt maturities before 2016.

We repurchased 2.6 million shares of the Company’s common stock for $76 million during the second quarter of 2012 under previously announced repurchase programs. As of June 30, 2012, 11.1 million shares remain available for repurchase under the authorized programs.

Due to the normal seasonality of our business, we typically have negative cash flow from operations for the first half of the year. Year-to-date 2012, we used $40 million in cash flow from operating activities compared to a use of $134 million in the same period of 2011. This improvement was primarily from reductions in working capital and lower contributions to our pension plans.


Table of Contents

 

- 39 -

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

Consolidated Results (in millions)

 

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
          2012             2011             2012             2011      

Net sales

   $       1,391     $       1,451     $       2,737     $       2,689  

Gross margin

   $ 239     $ 279     $ 425     $ 481  

% of net sales

     17     19     16     18

Charges related to cost reduction actions

   $ 2       -      $ 36     $ -   

Earnings before interest and taxes

   $ 85     $ 135     $ 73     $ 196  

Interest expense, net

   $ 28     $ 28     $ 56     $ 53  

Income tax expense

   $ 17     $ 29     $ 22     $ 40  

Net earnings (loss) attributable to Owens Corning

   $ 39     $ 78     $ (7   $ 102  

 

 

The Consolidated Results discussion below provides a summary of our results and the trends affecting our business, and should be read in conjunction with the more detailed Segment Results discussion that follows.

NET SALES

Net sales were $60 million lower in the second quarter of 2012 compared to the same period in 2011 mainly due to lower sales volumes in our Building Materials segment and the unfavorable impact of translating sales denominated in foreign currencies into United States dollars in our Composites segment. For the year-to-date comparison, net sales were $48 million higher mainly due to higher sales volumes in our Insulation business, which were partially offset by the unfavorable impact of translating sales denominated in foreign currencies into United States dollars in our Composites segment.

GROSS MARGIN

Gross margin as a percentage of sales was lower in both the second-quarter and year-to-date comparisons due primarily to a $30 million and $51 million charge resulting from our European restructuring actions, respectively, both of which are reflected in cost of sales. Also contributing to the change in gross margin for both periods was a decrease in gross margin in our Composites segment. In our Building Materials segment, gross margin was relatively flat compared to the same period in 2011.

CHARGES RELATED TO COST REDUCTION ACTIONS

During the first quarter of 2012, we took actions to improve the competitive position of our global manufacturing network through the closure or optimization of certain facilities in Europe. As a result of these actions, in addition to the charges recorded in cost of sales, we recognized severance charges of $2 million in the second quarter and $36 million year-to-date 2012. The total charges related to cost reduction actions and related items for the three and six months ended June 30, 2012, were $32 million and $87 million, respectively. No charges were taken in 2011 as a result of cost reduction actions.

EARNINGS BEFORE INTEREST AND TAXES

In addition to the items noted above, general corporate expense and other increased by $2 million in the second quarter of 2012, compared to the same period in 2011. For the year-to-date comparison, general corporate expense and other increased by $14 million, compared to the same period in 2011, on higher non-service pension costs and reduced foreign currency gains. We also recorded gains from the sale of precious metals during the first six months of 2011, which are reflected in other (income) expense.

INTEREST EXPENSE, NET

Year-to-date 2012 interest expense was higher than in 2011 due primarily to higher average borrowing levels.


Table of Contents

 

- 40 -

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

INCOME TAX EXPENSE

The effective tax rate for the second quarter 2012 was 30 percent. We estimate that the effective tax rate on adjusted earnings for the full year 2012 will be about 25 percent. The difference between the effective tax rate of 25 percent and the statutory rate of 35 percent is primarily attributable to lower foreign tax rates and various tax planning initiatives.

Adjusted Earnings Before Interest and Taxes (“Adjusted EBIT”)

Adjusted EBIT excludes certain significant items that management does not allocate to our segment results because it believes they are not a result of the Company’s current operations. Adjusted EBIT is used internally by the Company for various purposes, including reporting results of operations to the Board of Directors of the Company, analysis of performance and related employee compensation measures. Although management believes that these adjustments result in a measure that provides a useful representation of our operational performance, the adjusted measure should not be considered in isolation or as a substitute for net earnings attributable to Owens Corning as prepared in accordance with accounting principles generally accepted in the United States.

Adjusting items are shown in the table below (in millions), which are related to our European restrucuturing actions:

 

      Three Months Ended
June 30,
     Six Months Ended
June 30,
 
          2012              2011              2012              2011      

Charges related to cost reduction actions and related items

   $       (32)       $       -       $       (87)       $       -   

 

 

Total adjusting items

   $       (32)       $ -       $       (87)       $ -   

 

 

The reconciliation from net earnings attributable to Owens Corning to Adjusted EBIT is shown in the table below (in millions):

 

      Three Months Ended
June 30,
     Six Months Ended
June 30,
 
          2012             2011              2012             2011      

NET EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING

   $       39     $       78      $       (7   $       102  

Less: Net earnings attributable to noncontrolling interests

     1       1        2       2  

 

 

NET EARNINGS (LOSS)

     40       79        (5     104  

Equity in net earnings of affiliates

     -        1        -        1  

Income tax expense

     17       29        22       40  

 

 

EARNINGS BEFORE TAXES

     57       107        17       143  

Interest expense, net

     28       28        56       53  

 

 

EARNINGS BEFORE INTEREST AND TAXES

     85       135        73       196  

Less: adjusting items from above

     (32     -         (87     -   

 

 

ADJUSTED EBIT

   $       117     $       135      $       160     $       196  

 

 

Segment Results

Earnings before interest and taxes (“EBIT”) by segment consists of net sales less related costs and expenses and are presented on a basis that is used internally for evaluating segment performance. Certain items, such as general corporate expenses or income and certain other expense or income items, are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in EBIT for our reportable segments and are included in the Corporate, Other and Eliminations category, which is presented following the discussion of our reportable segments.


Table of Contents

 

- 41 -

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Composites

The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Composites segment (in millions):

 

      Three Months Ended
June 30,