XNYS:OC Owens-Corning Inc Quarterly Report 10-Q Filing - 9/30/2012

Effective Date 9/30/2012

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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 September 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 October 15, 2012, 118,169,824 shares of registrant’s common stock, par value $0.01 per share, were outstanding.


Table of Contents

Contents

 

Cover Page

     1   
PART I – FINANCIAL INFORMATION (unaudited)   
  Item 1.   

Financial Statements

  
    

Consolidated Statements of Earnings

     3   
    

Consolidated Statements of Comprehensive Earnings

     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

     13   
    

6.   Property, Plant and Equipment

     14   
    

7.   Changes in Noncontrolling Interest

     14   
    

8.   Divestitures

     14   
    

9.   Warranties

     14   
    

10. Cost Reduction Actions

     15   
    

11. Debt

     16   
    

12. Pension Plans and Other Postretirement Benefits

     17   
    

13. Contingent Liabilities and Other Matters

     19   
    

14. Stock Compensation

     19   
    

15. Earnings per Share

     23   
    

16. Fair Value Measurement

     24   
    

17. Income Taxes

     25   
    

18. Subsequent Events

     25   
    

19. Accounting Pronouncements

     25   
    

20. Condensed Consolidating Financial Statements

     26   
  Item 2.   

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

     39   
  Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     50   
  Item 4.   

Controls and Procedures

     50   
PART II – OTHER INFORMATION   
  Item 1.   

Legal Proceedings

     51   
  Item 1A.   

Risk Factors

     51   
  Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     51   
  Item 3.   

Defaults Upon Senior Securities

     52   
  Item 4.   

Mine Safety Disclosures

     52   
  Item 5.   

Other Information

     52   
  Item 6.   

Exhibits

     52   
    

Signatures

     53   
    

Exhibit Index

     54   


Table of Contents

 

- 3 -

 

PART I

ITEM 1. FINANCIAL STATEMENTS

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited)

(in millions, except per share amounts)

 

    

Three Months Ended

Sep. 30,

   

Nine Months Ended

Sep. 30,

 
         2012             2011             2012             2011      

NET SALES

  $       1,276     $       1,450     $       4,013     $       4,139  

COST OF SALES

    1,074       1,133       3,386       3,341  

 

 

Gross margin

    202       317       627       798  

OPERATING EXPENSES

       

Marketing and administrative expenses

    115       119       380       395  

Science and technology expenses

    20       20       60       58  

Charges related to cost reduction actions

    -        -        36       -   

Other (income) expenses, net

    8       1       19       (28

 

 

Total operating expenses

    143       140       495       425  

 

 

EARNINGS BEFORE INTEREST AND TAXES

    59       177       132       373  

Interest expense, net

    29       28       85       81  

 

 

EARNINGS BEFORE TAXES

    30       149       47       292  

Less: Income tax expense (benefit)

    (14     23       8       63  

Equity in net earnings of affiliates

    -        -        -        1  

 

 

NET EARNINGS

    44       126       39       230  

Less: Net earnings attributable to noncontrolling interests

    -        2       2       4  

 

 

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING

  $ 44     $ 124     $ 37     $ 226  

 

 

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO OWENS CORNING COMMON STOCKHOLDERS

       

Basic

  $ 0.37     $ 1.02     $ 0.31     $ 1.83  

Diluted

  $ 0.37     $ 1.01     $ 0.31     $ 1.82  

WEIGHTED-AVERAGE COMMON SHARES

       

Basic

    117.9       121.7       119.8       123.2  

Diluted

    118.8       122.6       120.6       124.2  

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


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- 4 -

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(unaudited)

(in millions)

 

      Three Months Ended
Sep. 30,
    Nine Months Ended
Sep. 30,
 
          2012             2011             2012             2011      

NET EARNINGS

   $        44     $        126     $        39     $        230  

Currency translation adjustment

     28       (84     9       (23

Pension and other postretirement adjustment (net of tax of $0 and $(1) for the periods ended September 30, 2012 and 2011, respectively)

     (1     2       (2     1  

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

     2       (3     3       (1

 

 

COMPREHENSIVE EARNINGS

     73       41       49       207  

Less: Comprehensive earnings attributable to noncontrolling interests

     -        2       2       4  

 

 

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING

   $ 73     $ 39     $ 47     $ 203  

 

 

 

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    Sep. 30,
2012
    Dec. 31,
2011
 

CURRENT ASSETS

    

Cash and cash equivalents

   $ 51     $ 52  

Receivables, less allowances of $19 at Sep. 30, 2012, and $15 at Dec. 31, 2011

     770       610  

Inventories

     793       795  

Other current assets

     155       179  

 

 

Total current assets

     1,769       1,636  

Property, plant and equipment, net

     2,912       2,904  

Goodwill

     1,144       1,144  

Intangible assets

     1,050       1,073  

Deferred income taxes

     564       538  

Other non-current assets

     253       232  

 

 

TOTAL ASSETS

   $       7,692     $       7,527  

 

 

LIABILITIES AND EQUITY

    

 

 

CURRENT LIABILITIES

    

Accounts payable and accrued liabilities

   $ 867     $ 876  

Short-term debt

     19       28  

Long-term debt – current portion

     6       4  

 

 

Total current liabilities

     892       908  

Long-term debt, net of current portion

     2,191       1,930  

Pension plan liability

     420       435  

Other employee benefits liability

     259       267  

Deferred income taxes

     43       51  

Other liabilities

     207       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

     3,917       3,907  

Accumulated earnings

     507       470  

Accumulated other comprehensive deficit

     (305     (315

Cost of common stock in treasury (c)

     (475     (362

 

 

Total Owens Corning stockholders’ equity

     3,645       3,701  

Noncontrolling interests

     35       40  

 

 

Total equity

     3,680       3,741  

 

 

TOTAL LIABILITIES AND EQUITY

   $ 7,692     $ 7,527  

 

 

 

 

  (a) 10 shares authorized; none issued or outstanding at Sep. 30, 2012, and Dec. 31, 2011
  (b) 400 shares authorized; 135.5 issued and 118.2 outstanding at Sep. 30, 2012; 134.4 issued and 120.9 outstanding at Dec. 31, 2011
  (c) 17.3 shares at Sep. 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)

 

      Nine Months Ended
Sep. 30,
 
          2012             2011      

NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES

    

Net earnings

   $ 39     $ 230  

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

  

Depreciation and amortization

     269       243  

Gain on sale of businesses and fixed assets

     (3     (30

Deferred income taxes

     (25     29  

Provision for pension and other employee benefits liabilities

     33       26  

Stock-based compensation expense

     18       16  

Other non-cash

     (9     (18

Change in working capital

     (171     (330

Pension fund contribution

     (42     (104

Payments for other employee benefits liabilities

     (17     (17

Other

     1       14  

 

 

Net cash flow provided by operating activities

     93       59  

 

 

NET CASH FLOW USED FOR INVESTING ACTIVITIES

  

Additions to plant and equipment

     (235     (303

Investment in subsidiaries and affiliates, net of cash acquired

     -        (84

Proceeds from the sale of assets or affiliates

     12       81  

 

 

Net cash flow used for investing activities

     (223     (306

 

 

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES

  

Proceeds from senior revolving credit and receivables securitization facilities

     1,205       1,007  

Payments on senior revolving credit and receivables securitization facilities

     (929     (629

Proceeds from long-term debt

     -        6  

Payments on long-term debt

     (13     (10

Net increase (decrease) in short-term debt

     (9     17  

Purchases of noncontrolling interest

     (22     -   

Purchases of treasury stock

     (113     (138

Other

     9       12  

 

 

Net cash flow provided by financing activities

            128              265  

 

 

Effect of exchange rate changes on cash

     1       (20

 

 

Net decrease in cash and cash equivalents

     (1     (2

Cash and cash equivalents at beginning of period

     52       52  

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 51     $ 50  

 

 

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 nine months ended September 30, 2012, the Company recorded additional net pre-tax expense of $7 million ($3 million after tax expense) and net pre-tax expense of $2 million ($1 million after tax income), 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
Sep. 30,
    Nine Months Ended
Sep. 30,
 
          2012             2011             2012             2011      

Reportable Segments

        

Composites

   $ 459     $ 496     $ 1,433     $ 1,517  

Building Materials

     855       1,009       2,719       2,766  

 

 

Total reportable segments

     1,314       1,505       4,152       4,283  

Corporate eliminations

     (38     (55     (139     (144

 

 

NET SALES

   $ 1,276     $ 1,450     $ 4,013     $ 4,139  

 

 

External Customer Sales by Geographic Region

        

United States

   $ 856     $ 1,008     $ 2,755     $ 2,781  

Europe

     133       147       431       487  

Asia Pacific

     165       171       477       504  

Other

     122       124       350       367  

 

 

NET SALES

   $ 1,276     $ 1,450     $ 4,013     $ 4,139  

 

 

Sales by Product Group

        

Composites

   $ 459     $ 496     $ 1,433     $ 1,517  

Insulation

     384       365       1,055       981  

Roofing

     471       644       1,664       1,785  

Corporate Eliminations

     (38     (55     (139     (144

 

 

NET SALES

   $       1,276     $       1,450     $       4,013     $       4,139  

 

 


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
Sep. 30,
    Nine Months Ended
Sep. 30,
 
          2012             2011             2012             2011      

Reportable Segments

        

Composites

   $       11     $       49     $       68     $         152  

Building Materials

     86       144       242       277  

 

 

Total reportable segments

   $ 97     $ 193     $ 310     $ 429  

 

 

Corporate, Other and Eliminations

        

Charges related to cost reduction actions and related items

   $ (22   $ -      $ (109   $ (17

Gain on sale of Capivari, Brazil, facility

     -        -        -        16  

General corporate expense and other

     (16     (16     (69     (55

 

 

EBIT

   $ 59     $ 177     $ 132     $ 373  

 

 

 

3. INVENTORIES

Inventories consist of the following (in millions):

 

      Sep. 30,
2012
     Dec. 31,
2011
 

Finished goods

   $       578      $       597  

Materials and supplies

     215        198  

 

 

Total inventories

   $ 793      $ 795  

 

 


Table of Contents

 

- 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 September 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      Sep. 30,
2012
     Dec. 31,
2011
 

Derivative assets designated as hedging instruments:

        

Cash flow hedges:

        

Natural gas

     Other current assets       $ 1      $ 1  

Amount of gain recognized in OCI (effective portion)

     OCI       $ 1      $ 1  

Derivative liabilities designated as hedging instruments:

        

Cash flow hedges:

        

Natural gas

    
 
Accounts payable and
accrued liabilities
  
  
   $ 1      $ 4  

Amount of loss recognized in OCI (effective portion)

     OCI       $ 1      $ 4  

Derivative assets not designated as hedging instruments:

        

Foreign exchange contracts

     Other current assets       $ -       $ 2  

Derivative liabilities not designated as hedging instruments:

        

Natural gas

    
 
Accounts payable and
accrued liabilities
  
  
   $        -       $ 1  

Foreign exchange contracts

    
 
Accounts payable and
accrued liabilities
  
  
   $ 2      $        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
Sep. 30,
    Nine Months Ended
Sep. 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      $ 1     $       -      $ 6     $ 2  

Interest rate swaps:

         

Amount of loss recognized in earnings (ineffective portion)

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

Derivative activity not designated as hedging instruments:

         

Natural gas:

         

Amount of gain recognized in earnings

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

Foreign currency exchange contract:

         

Amount of (gain) loss recognized in earnings (a)

   
 
Other (income)
expenses, net
  
  
  $ 1     $ (9   $ 5     $ (14

 

 

 

(a) (Gains)/losses related to foreign currency derivatives were substantially offset by net revaluation impacts on foreign denominated balance sheet exposures, which were also recorded in Other (income) expenses, net.

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 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.

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.


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- 12 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

4. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

 

As of September 30, 2012, $1 million of gains 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.

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. 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.


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- 13 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

5. GOODWILL AND OTHER INTANGIBLE ASSETS

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

 

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

Amortizable intangible assets:

          

Customer relationships

     19      $ 169      $ (55   $ 114  

Technology

     20        197        (62     135  

Franchise and other agreements

     15        37        (13     24  

Indefinite-lived intangible assets:

          

Trademarks

        777        -        777  

 

 

Total intangible assets

      $ 1,180      $ (130   $ 1,050  

 

 

Goodwill

      $ 1,144       

 

 
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       

 

 

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 third quarter of 2012.


Table of Contents

 

- 14 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

6. PROPERTY, PLANT AND EQUIPMENT

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

 

      Sep. 30,
2012
    Dec. 31,
2011
 

Land

   $ 221     $ 221  

Buildings and leasehold improvements

     766       727  

Machinery and equipment

            3,187              2,932  

Construction in progress

     161       268  

 

 
     4,335       4,148  

Accumulated depreciation

     (1,423     (1,244

 

 

Property, plant and equipment, net

   $ 2,912     $ 2,904  

 

 

Machinery and equipment includes certain precious metals used in our production tooling, which comprise approximately 18% and 20% of total machinery and equipment as of September 30, 2012, and December 31, 2011, respectively. 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. CHANGES IN NONCONTROLLING INTERESTS

In the third quarter of 2012, the Company executed a purchase agreement for the remaining noncontrolling interest of Northern Elastomeric Incorporated (“NEI”), one of the Company’s consolidated subsidiaries. As a result of the purchase agreement, NEI became a wholly-owned subsidiary of the Company, with the Company providing $22 million in cash consideration. The transaction resulted in a $6 million decrease in Noncontrolling interests on the Consolidated Balance Sheets.

 

8. 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 in the second quarter of 2011.

 

9. 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):

 

      Nine Months Ended
Sep. 30, 2012
 

Beginning balance

   $       38  

Amounts accrued for current year

     16  

Settlements of warranty claims

     (17

 

 

Ending balance

   $ 37  

 

 


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- 15 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

10. 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 $22 million and $109 million in charges related to cost reduction actions and related items for the three and nine months ended September 30, 2012, respectively; of which, $0 and $36 million is related to severance and is included in charges related to cost reduction actions on the Consolidated Statements of Earnings. The $22 million and $73 million in other related charges, respectively, relates primarily to accelerated depreciation and is included in cost of sales on the Consolidated Statements of Earnings. 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

The Company recorded $22 million and $104 million in charges related to cost reduction actions and related items for the three and nine months ended September 30, 2012, respectively; of which $0 and $34 million is related to severance costs and $22 million and $70 million is related to other charges, respectively. The $22 million and $70 million of other charges consist of $14 million and $48 million in accelerated depreciation and $8 million and $22 million in other related charges, respectively.

The Company anticipates incurring approximately $25 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.

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.

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
Sep. 30,
2012
     Cumulative
Charges
Incurred
 

Severance

   $       -       $       36      $       2      $       34      $       36  

 

 

Total

   $ -       $ 36      $ 2      $ 34      $ 36  

 

 


Table of Contents

 

- 16 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

11. DEBT

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

 

      Sep. 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

     180        158  

Senior revolving credit facility, maturing in 2016

     390        136  

Various capital leases, due through and beyond 2050

     53        55  

Other floating rate debt, maturing through 2017

     2        3  

Other fixed rate debt, with maturities up to 2016, at rates up to 11.0%

     3        8  

Fair value adjustment to debt

     34        39  

 

 

Total long-term debt

     2,197        1,934  

Less – current portion

     6        4  

 

 

Long-term debt, net of current portion

   $       2,191      $       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 September 30, 2012.

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

In July 2011, the Company amended the Senior Revolving Credit Facility to extend the maturity to July 2016 and reduce the pricing. The available principal amount of $800 million on the Senior Revolving Credit Facility includes both borrowings and letters of credit. 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.


Table of Contents

 

- 17 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

11. DEBT (continued)

 

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 September 30, 2012.

The Company had $15 million and $42 million of letters of credit outstanding under the Senior Revolving Credit Facility at September 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 September 30, 2012, the Company utilized the full amount permitted under the terms of the receivables securitization facility. The Company had $37 million of letters of credit outstanding under the receivables securitization facility at September 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 September 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.

Short-Term Debt

At September 30, 2012 and December 31, 2011, short-term borrowings were $19 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 5.8% for September 30, 2012, and 7.4% for December 31, 2011.

 

12. 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.


Table of Contents

 

- 18 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)

 

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

 

     

Three Months Ended

Sep. 30, 2012

   

Three Months Ended

Sep. 30, 2011

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

Components of Net Periodic Pension Cost

            

Service cost

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

Interest cost

     12       5       17       13       5       18  

Expected return on plan assets

         (15         (7         (22         (16         (5         (21

Amortization of actuarial loss

     6       2       8       3       -        3  

 

 

Net periodic pension cost

   $ 6     $ 1     $ 7     $ 2     $ 1     $ 3  

 

 

 

     

Nine Months Ended

Sep. 30, 2012

   

Nine Months Ended

Sep. 30, 2011

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

Components of Net Periodic Pension Cost

            

Service cost

   $ 7     $ 5     $ 12     $ 6     $ 4     $ 10  

Interest cost

     37       17       54       40       18       58  

Expected return on plan assets

         (45         (20         (65         (48         (19         (67

Amortization of actuarial loss

     18       4       22       9       1       10  

 

 

Net periodic pension cost

   $ 17     $ 6     $ 23     $ 7     $ 4     $ 11  

 

 

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 $21 million during 2012.

The Company now expects to contribute approximately $32 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 $42 million to the plans during the nine months ended September 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.


Table of Contents

 

- 19 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)

 

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

Sep. 30,

    

Nine Months Ended

Sep. 30,

 
          2012             2011              2012             2011      

Components of Net Periodic Benefit Cost

         

Service cost

   $ 1     $ -       $ 2     $ 2  

Interest cost

            2              4               8            11  

Amortization of prior service cost

     (1     -         (3     -   

Amortization of actuarial gain

     (1     -         (2     (1

 

 

Net periodic benefit cost

   $ 1     $ 4      $ 5     $ 12  

 

 

 

13. 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 September 30, 2012, we had environmental remediation liabilities as a PRP at 20 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 September 30, 2012, our reserve for such liabilities was $6 million.

 

14. 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 September 30, 2012, the number of shares remaining available under the 2010 Stock Plan for all stock awards was 2.8 million.


Table of Contents

 

- 20 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

14. STOCK COMPENSATION (continued)

 

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 nine months ended September 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 nine months ended September 30, 2012, the Company recognized expense of $1 million and $3 million respectively, related to the Company’s stock options. During the three and nine months ended September 30, 2011, the Company recognized expense of $1 million and $3 million respectively, related to the Company’s stock options. As of September 30, 2012, there was $9 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 2.68 years. The total aggregate intrinsic value of options outstanding as of September 30, 2012 and 2011 was $19 million and $6 million.

The following table summarizes the Company’s stock option activity for the nine months ended Sep. 30, 2012:

 

        Nine Months Ended Sep. 30, 2012  
        Number of Options      Weighted-Average
Exercise Price
 

Beginning Balance

       3,293,545      $ 26.26  

Granted

       409,700        33.73  

Exercised

       (397,045      22.53  

Forfeited

       (130,375      28.42  

 

 

Ending Balance

       3,175,825      $ 27.60  

 

 

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

 

      Options Outstanding      Options Exercisable  
    

Options
Outstanding

     Weighted-Average     

Number
Exercisable at
Sep. 30, 2012

     Weighted-Average  
Range of Exercise Prices       Remaining
Contractual Life
     Exercise
Price
        Remaining
Contractual Life
     Exercise
Price
 

 

 

$7.57- $34.94

     3,175,825        5.85      $       27.60        2,193,858        4.86      $       27.00  

 

 

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


Table of Contents

 

- 21 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

14. STOCK COMPENSATION (continued)

 

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 nine months ended September 30, 2012, the Company recognized expense of $3 million and $11 million respectively, related to the Company’s restricted stock. During the three and nine months ended September 30, 2011, the Company recognized expense of $4 million and $10 million respectively. As of September 30, 2012, there was $26 million of total unrecognized compensation cost related to restricted stock. That cost is expected to be recognized over a weighted-average period of 2.80 years. The total fair value of shares vested during the nine months ended September 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 September 30, 2012, and changes during the nine months ended September 30, 2012, are presented below.

 

      Nine Months Ended Sep. 30, 2012  
      Number of Shares    

Weighted-Average

Grant-Date
Fair Value

 

Beginning Balance

     1,941,742     $ 19.74  

Granted

     617,082       33.39  

Vested

     (512,409     22.13  

Forfeited

     (136,230     28.25  

 

 

Ending Balance

     1,910,185     $       22.90  

 

 

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 nine 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 nine months ended September 30, 2012, the Company recognized expense of $5 million and $11 million, respectively. During the three and nine months ended September 30, 2011, the Company recognized income of $9 million and expense of $2 million, respectively, related to PSUs. As of September 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 1.83 years.


Table of Contents

 

- 22 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

14. STOCK COMPENSATION (continued)

 

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 nine-month period ended September 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 36.9%, a risk free rate of 0.3% and an expected term of 2.27 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 September 30, 2012, to the end of the three-year performance period.

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 September 30, 2012, and changes during the nine months ended September 30, 2012, are presented below:

 

      Nine Months Ended Sep. 30, 2012  
      Number
of PSUs
   

Weighted-Average

Grant-Date

Fair Value

 

Beginning Balance

     508,616     $ 42.24  

Granted

     256,400       47.97  

Forfeited

     (79,776     43.27  

 

 

Ending Balance

     685,240     $       44.26  

 

 


Table of Contents

 

- 23 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

15. EARNINGS PER SHARE

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

 

     

Three Months Ended

Sep. 30,

    

Nine Months Ended

Sep. 30,

 
      2012      2011      2012      2011  

Net earnings attributable to Owens Corning

   $ 44      $ 124      $ 37      $ 226  

 

 

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

           117.9              121.7              119.8              123.2  

Non-vested restricted and performance shares

     0.6        0.6        0.5        0.6  

Options to purchase common stock

     0.3        0.3        0.3        0.4  

 

 

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

     118.8        122.6        120.6        124.2  

 

 

Earnings per common share attributable to Owens Corning common stockholders:

           

 

 

Basic

   $ 0.37      $ 1.02      $ 0.31      $ 1.83  

Diluted

   $ 0.37      $ 1.01      $ 0.31      $ 1.82  

 

 

Basic earnings 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.

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 nine months ended September 30, 2012, 3.7 million shares were repurchased under the Repurchase Programs. As of September 30, 2012, 10 million shares remain available for repurchase under the Repurchase Programs.

For the three and nine months ended September 30, 2012, the number of shares used in the calculation of diluted earnings per share did not include 0.3 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 nine months ended September 30, 2011, the number of shares used in the calculation of diluted earnings per share did not include 0.3 and 0.2 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.


Table of Contents

 

- 24 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

16. 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 September 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

   $ 10     $ 10      $ -      $ -   

Term deposits

   $ 8     $ 8      $ -      $ -   

Derivative assets

   $ 1     $ -       $ 1     $ -   

 

 

Total assets

   $       19     $       18      $        1     $       -   

 

 

Liabilities:

         

Derivative liabilities

   $ (3   $ -       $ (3   $ -   

 

 

Total liabilities

   $ (3   $ -       $ (3   $ -   

 

 

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 $51 million as of September 30, 2012.


Table of Contents

 

- 25 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

16. FAIR VALUE MEASUREMENT (continued)

 

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 September 30, 2012, the Company’s 6.50% senior notes due 2016 were trading at approximately 114% of par value, the 7.00% senior notes due 2036 were trading at approximately 110% of par value and the 9.00% senior notes due 2019 were trading at approximately 128% of par value.

At September 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 $628 million.

 

17. INCOME TAXES

Income tax expense for the three and nine months ended September 30, 2012, was a benefit of $14 million and an expense of $8 million, respectively. For the third quarter and year-to-date 2012, the Company’s effective tax rate was (47)% and 17%, respectively. The third quarter 2012 effective tax rate is reflective of a cumulative adjustment attributable to lower estimated tax expense for 2012. 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 nine months ended September 30, 2011, was $23 million and $63 million, respectively. The Company’s effective tax rate for the third quarter 2011 was 15%. Excluding the effect of discrete items related to the reversal of the valuation allowance and uncertain tax positions, in the nine months ended September 30, 2011, the Company’s adjusted effective tax would have been 28%. The difference between the adjusted 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.

 

18. SUBSEQUENT EVENTS

On October 17, 2012, the Company issued $600 million of Senior Notes to refinance portions of our 2016 Senior Notes, our 2019 Senior Notes and pay down our Senior Revolving Credit Facility. Interest on the notes is payable semiannually in arrears on June 15 and December 15 each year, beginning on June 15, 2013. The notes have a 10 year maturity.

As a result of refinancing portions of our Senior Notes, we anticipate incurring a loss from debt extinguishment of approximately $75 million in the fourth quarter of 2012.

 

19. ACCOUNTING PRONOUNCEMENTS

In July 2012, the Financial Accounting Standards Board issued updated guidance on the periodic testing of indefinite-lived intangible assets for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and, thus, whether further impairment testing is necessary. The updated accounting guidance is effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company believes there will be no impact on its Consolidated Financial Statements.


Table of Contents

 

- 26 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. 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

 

- 27 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)

 

      Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

NET SALES

   $ -      $ 895     $ 485     $ (104   $ 1,276  

COST OF SALES

     (3     741       440       (104     1,074  

 

 

Gross margin

     3        154       45       -        202  

OPERATING EXPENSES

          

Marketing and administrative expenses

     24        58       33       -        115  

Science and technology expenses

     -        15       5       -        20  

Other expenses, net

     (6     24       (10     -        8  

 

 

Total operating expenses

     18        97       28       -        143  

 

 

EARNINGS BEFORE INTEREST AND TAXES

     (15     57       17       -        59  

Interest expense, net

     27        -        2       -        29  

 

 

EARNINGS BEFORE TAXES

     (42     57       15       -        30  

Less: Income tax benefit

     (16     11       (9     -        (14

Equity in net earnings of subsidiaries

     70        25       -        (95     -   

Equity in net earnings (loss) of affiliates

     -        (1     1       -        -   

 

 

NET EARNINGS

     44        70       25       (95     44  

Less: Net earnings attributable to noncontrolling interest

     -        -        -        -        -   

 

 

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING

   $       44      $        70     $        25     $ (95   $       44  

 

 


Table of Contents

 

- 28 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011

(in millions)

 

      Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

NET SALES

   $ -      $ 1,028     $ 507     $ (85   $ 1,450  

COST OF SALES

     (6     809       415       (85     1,133  

 

 

Gross margin

     6       219       92                -        317  

OPERATING EXPENSES

          

Marketing and administrative expenses

     14       68       37       -        119  

Science and technology expenses

     -        16       4       -        20  

Other expenses, net

     (24     6       19       -        1  

 

 

Total operating expenses

     (10     90       60       -        140  

 

 

EARNINGS BEFORE INTEREST AND TAXES

     16       129       32       -        177  

Interest expense, net

     25       1       2       -        28  

 

 

EARNINGS BEFORE TAXES

     (9     128       30       -        149  

Less: Income tax expense

     (2     26       (1     -        23  

Equity in net earnings of subsidiaries

     131       30       -        (161     -   

Equity in net earnings (loss) of affiliates

     -        (1     1       -        -   

 

 

NET EARNINGS

     124       131       32       (161     126  

Less: Net earnings attributable to noncontrolling interest

     -        -        2       -        2  

 

 

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING

   $       124     $       131     $       30     $ (161   $       124  

 

 


Table of Contents

 

- 29 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)

 

      Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

NET SALES

   $ -      $ 2,846     $ 1,461     $ (294   $ 4,013  

COST OF SALES

     -        2,353       1,327       (294     3,386  

 

 

Gross margin

     -        493             134       -        627  

OPERATING EXPENSES

          

Marketing and administrative expenses

     86       190       104       -        380  

Science and technology expenses

     -        47       13       -        60  

Charges related to cost reduction actions

     -        -        36       -        36  

Other expenses, net

     (25     34       10       -        19  

 

 

Total operating expenses

     61       271       163       -        495  

 

 

EARNINGS BEFORE INTEREST AND TAXES

     (61     222       (29     -        132  

Interest expense, net

     76       2       7       -        85  

 

 

EARNINGS BEFORE TAXES

     (137     220       (36     -        47  

Less: Income tax expense

     (52     56       4       -        8  

Equity in net earnings (loss) of subsidiaries

     122       (41     -        (81     -   

Equity in net earnings (loss) of affiliates

     -        (1     1       -        -   

 

 

NET EARNINGS

     37       122       (39     (81     39  

Less: Net earnings attributable to noncontrolling interest

     -        -        2       -        2  

 

 

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING

   $       37     $       122     $ (41   $ (81   $       37  

 

 


Table of Contents

 

- 30 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(in millions)

 

      Parent     Guarantor
Subsidiaries
   

Non-

Guarantor
Subsidiaries

     Eliminations     Consolidated  

NET SALES

   $ -      $ 2,865     $ 1,527      $ (253   $ 4,139  

COST OF SALES

     (19     2,371       1,242        (253     3,341  

 

 

Gross margin

     19       494       285        -        798  

OPERATING EXPENSES

           

Marketing and administrative expenses

     40       248       107        -        395  

Science and technology expenses

     -        47       11        -        58  

Other income, net

     (81     41       12        -        (28

 

 

Total operating expenses

     (41     336       130        -        425  

 

 

EARNINGS BEFORE INTEREST AND TAXES

     60       158       155        -        373  

Interest expense, net

     79       (2     4        -        81  

 

 

EARNINGS BEFORE TAXES

     (19     160       151        -        292  

Less: Income tax expense

     (4     35       32        -        63  

Equity in net earnings (loss) of subsidiaries

     241       118       -         (359     -   

Equity in net earnings of affiliates

     -        (2     3        -        1  

 

 

NET EARNINGS

            226              241              122              (359            230  

Less: Net earnings attributable to noncontrolling interest

     -        -        4        -        4  

 

 

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING

   $ 226     $ 241     $ 118      $ (359   $ 226  

 

 


Table of Contents

 

- 31 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)

 

     Parent     Guarantor
Subsidiaries
   

Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

NET EARNINGS

  $       44     $       70     $       25     $       (95   $       44  

Currency translation adjustment

    28       -        -        -        28  

Pension and other postretirement adjustment (net of tax)

    (1     -        -        -        (1

Deferred income on hedging (net of tax)

    2       -        -        -        2  

 

 

COMPREHENSIVE EARNINGS

    73       70       25       (95     73  

Less: Comprehensive earnings attributable to noncontrolling interest

    -        -        -        -        -   

 

 

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING

  $ 73     $ 70     $ 25     $ (95   $ 73  

 

 


Table of Contents

 

- 32 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011

(in millions)

 

     Parent     Guarantor
Subsidiaries
   

Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

NET EARNINGS

  $       124     $       131     $       32     $     (161   $       126  

Currency translation adjustment

    (84     -        -        -        (84

Pension and postretirement adjustment (net of tax)

    2       -        -        -        2  

Deferred loss on hedging (net of tax)

    (3     -        -        -        (3

 

 

COMPREHENSIVE EARNINGS

    39       131       32       (161     41  

Less: Comprehensive earnings attributable to noncontrolling interest

    -        -        2       -        2  

 

 

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING

  $ 39     $ 131     $ 30     $ (161   $ 39  

 

 


Table of Contents

 

- 33 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)

 

     Parent     Guarantor
Subsidiaries
   

Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

NET EARNINGS

  $       37     $       122     $       (39   $       (81   $       39  

Currency translation adjustment

    9       -        -        -        9  

Pension and other postretirement adjustment (net of tax)

    (2     -        -        -        (2

Deferred income on hedging (net of tax)

    3       -        -        -        3  

 

 

COMPREHENSIVE EARNINGS

    47       122       (39     (81     49  

Less: Comprehensive earnings attributable to noncontrolling interest

    -        -        2       -        2  

 

 

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING

  $ 47     $ 122     $ (41   $ (81   $ 47  

 

 


Table of Contents

 

- 34 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(in millions)

 

     Parent     Guarantor
Subsidiaries
   

Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

NET EARNINGS

  $       226     $       241     $       122     $       (359   $       230  

Currency translation adjustment

    (23     -        -        -        (23

Pension and postretirement adjustment (net of tax)

    1       -        -        -        1  

Deferred loss on hedging (net of tax)

    (1     -        -        -        (1

 

 

COMPREHENSIVE EARNINGS

    203       241       122       (359     207  

Less: Comprehensive earnings attributable to noncontrolling interest

    -        -        4       -        4  

 

 

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING

  $ 203     $ 241     $ 118     $ (359   $ 203  

 

 


Table of Contents

 

- 35 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2012

(in millions)

 

ASSETS   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

CURRENT ASSETS

         

Cash and cash equivalents

  $ -      $ -      $ 51     $ -      $ 51  

Receivables, net

    -        -        871       (101     770  

Due from affiliates

    33       2,503       46       (2,582     -   

Inventories

    -        466       327       -        793  

Other current assets

    (1     60       96       -        155  

 

 

Total current assets

    32       3,029       1,391       (2,683     1,769  

Investment in subsidiaries

    6,890       2,484       533       (9,907     -   

Due from affiliates

    -        63       1,009       (1,072     -   

Property, plant and equipment, net

    395       1,290       1,227       -        2,912  

Goodwill

    -        1,068       76       -        1,144  

Intangible assets

    -        944       313       (207     1,050  

Deferred income taxes

    101       440       23       -        564  

Other non-current assets

    64       75       114       -        253  

 

 

TOTAL ASSETS

  $ 7,482     $ 9,393     $ 4,686     $ (13,869   $ 7,692  

 

 

LIABILITIES AND EQUITY

         

 

 

CURRENT LIABILITIES

         

Accounts payable and accrued liabilities

  $ 28     $ 514     $ 426     $ (101   $ 867  

Due to affiliates

    1,371       -        1,211       (2,582     -   

Short-term debt

    -        -        19       -        19  

Long-term debt – current portion

    -        2       4       -        6  

 

 

Total current liabilities

    1,399       516       1,660       (2,683     892  

Long-term debt, net of current portion

    1,958       29       204       -        2,191  

Due to affiliates

    -        1,009       63       (1,072     -   

Pension plan liability

    281       -        139       -        420  

Other employee benefits liability

    -        238       21       -        259  

Deferred income taxes

    -        -        43       -        43  

Other liabilities

    199       178       37       (207     207  

Commitments and contingencies

         

OWENS CORNING STOCKHOLDERS’ EQUITY

         

Common stock

    1       -        -        -        1  

Additional paid in capital

    3,917       6,539       2,040       (8,579     3,917  

Accumulated earnings

    507       884       444       (1,328     507  

Accumulated other comprehensive deficit

    (305     -        -        -        (305

Cost of common stock in treasury

    (475     -        -        -        (475

 

 

Total Owens Corning stockholders’ equity

    3,645       7,423       2,484       (9,907     3,645  

Noncontrolling interest

    -        -        35                       -        35  

 

 

Total equity

    3,645       7,423       2,519       (9,907     3,680  

 

 

TOTAL LIABILITIES AND EQUITY

  $       7,482     $       9,393     $       4,686     $ (13,869   $       7,692  

 

 


Table of Contents

 

- 36 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. 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

    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

 

- 37 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)

 

      Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES

   $ (64   $ 37     $ 120     $ -       $ 93  

NET CASH FLOW USED FOR INVESTING ACTIVITIES

           

Additions to plant and equipment

     (22     (123     (90     -         (235

Proceeds from the sale of assets or affiliates

     -        5       7       -         12  

 

 

Net cash flow used for investing activities

     (22     (118     (83     -         (223

 

 

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES

           

Proceeds from senior revolving credit and receivables securitization facilities

     1,089       -        116       -         1,205  

Payments on senior revolving credit and receivables securitization facilities

     (835     -        (94     -         (929

Payments on long-term debt

     (4     -        (9     -         (13

Net decrease in short-term debt

     (8     -        (1     -         (9

Purchases of noncontrolling interest

     -        (22     -        -         (22

Purchases of treasury stock

     (113     -        -        -         (113

Other intercompany loans

     (52            103       (51     -         -   

Other

     9       -        -        -         9  

 

 

Net cash flow provided by financing activities

            86       81       (39     -         128  

 

 

Effect of exchange rate changes on cash

     -        -        1       -         1  

 

 

Net decrease in cash and cash equivalents

     -        -        (1     -         (1

Cash and cash equivalents at beginning of period

     -        -               52       -                52  

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ -      $ -      $ 51     $       -       $ 51  

 

 


Table of Contents

 

- 38 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(in millions)

 

      Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES

   $ (50   $ 97     $ 12     $ -       $ 59  

NET CASH FLOW USED FOR INVESTING ACTIVITIES

           

Additions to plant and equipment

     (3     (155     (145     -         (303

Investment in subsidiaries and affiliates, net of cash acquired

     -        (84     -        -         (84

Proceeds from the sale of assets or affiliates

     -        3       78       -         81  

 

 

Net cash flow used for investing activities

     (3     (236     (67     -         (306

 

 

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES

           

Proceeds from senior revolving credit and receivables securitization facilities

            805       -        202       -         1,007  

Payments on senior revolving credit and receivables securitization facilities

     (629     -        -        -         (629

Proceeds from long-term debt

     -        -        6       -         6  

Payments on long-term debt

     -        -        (10     -         (10

Net decrease in short-term debt

     -        -        17       -         17  

Purchase of treasury stock

     (138     -        -        -         (138

Other intercompany loans

     50              139       (189     -         -   

Other

     12       -        -        -         12  

 

 

Net cash flow provided by financing activities

     100       139       26       -.                265  

 

 

Effect of exchange rate changes on cash

     -        -        (20     -         (20

 

 

Net decrease in cash and cash equivalents

     47       -        (49     -         (2

Cash and cash equivalents at beginning of period

     3       -               49       -         52  

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 50     $ -      $ -      $       -       $ 50  

 

 


Table of Contents

 

- 39 -

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 $59 million in earnings before interest and taxes (“EBIT”) for the third quarter 2012. We generated $81 million in adjusted earnings before interest and taxes (“Adjusted EBIT”) for the third-quarter 2012. Third quarter EBIT in our Building Materials segment declined by $58 million and EBIT in our Composites segment declined by $38 million compared to the same period in 2011. The repositioning of our European assets remains on track with $22 million of charges recorded during the third quarter. 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 third quarter 2012 was $11 million compared to $49 million in the same period in 2011 driven primarily by start-up costs related to our new low-cost capacity in Russia and Mexico, inflation and slightly lower selling prices.

In our Building Materials segment, EBIT in the third quarter 2012 was $86 million, compared to $144 million in the same period in 2011. In our Roofing business, EBIT declined $73 million on lower sales volumes driven by weakness in the U.S. roofing shingle market. Our Insulation business delivered EBIT of $3 million in the third quarter 2012 compared to a loss of $12 million in the same period in 2011, on the strength of higher sales volumes, 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 1.1 million shares of the Company’s common stock for $31 million during the third quarter of 2012 under previously announced repurchase programs. As of September 30, 2012, 10 million shares remain available for repurchase under the authorized programs.

RECENT DEVELOPMENTS

On October 17, 2012, the Company issued $600 million of Senior Notes to refinance portions of our 2016 Senior Notes, our 2019 Senior Notes and pay down our Senior Revolving Credit Facility. Interest on the notes is payable semiannually in arrears on June 15 and December 15 each year, beginning on June 15, 2013. The notes have a 10 year maturity.

As a result of refinancing portions of our Senior Notes, we anticipate incurring a loss from debt extinguishment of approximately $75 million in the fourth quarter of 2012.


Table of Contents

 

- 40 -

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

 

RESULTS OF OPERATIONS

Consolidated Results (in millions)

 

      Three Months Ended
Sep. 30,
    Nine Months Ended
Sep. 30,
 
          2012             2011             2012             2011      

Net sales

   $       1,276     $       1,450     $       4,013     $       4,139  

Gross margin

   $ 202     $ 317     $ 627     $ 798  

% of net sales

     16     22     16     19

Charges related to cost reduction actions

   $ -      $ -      $ 36     $ -   

Earnings before interest and taxes

   $ 59     $ 177     $ 132     $ 373  

Interest expense, net

   $ 29     $ 28     $ 85     $ 81  

Income tax (income) expense

   $ (14   $ 23     $ 8     $ 63  

Net earnings attributable to Owens Corning

   $ 44     $ 124     $ 37     $ 226  

 

 

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

Third quarter and year-to-date net sales decreased $174 million and $126 million, respectively, compared to the same periods in 2011. For both the third quarter and year-to-date comparisons, the decline in net sales was mainly due to lower sales volumes in our Roofing business, which were partially offset by higher sales volumes in our Insulation business, and the unfavorable impact of translating sales denominated in foreign currencies into United States dollars in our Composites segment.

GROSS MARGIN

Gross margin in both the third-quarter and year-to-date included a $22 million and $73 million charge resulting from our European restructuring actions, respectively, both of which are reflected in cost of sales. The primary contributors to the remaining change in gross margin for both periods was a decrease in gross margin in our Roofing business, partially offset by an increase in Insulation gross margin, and a decrease in gross margin in our Composites segment.

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 $36 million in severance charges year-to-date in 2012, none of which occurred in the third quarter. The total charges related to cost reduction actions and related items for the three and nine months ended September 30, 2012, were $22 million and $109 million, respectively. No charges were taken in 2011 as a result of cost reduction actions.

EARNINGS BEFORE INTEREST AND TAXES

EBIT decreased by $118 million and $241 million, respectively, for the third quarter and year-to-date 2012 compared to the same periods in 2011. Third quarter and year-to-date EBIT in our Composites segment decreased by $38 million and $84 million, respectively, and EBIT in our Building Materials segment decreased by $58 million and $35 million, respectively, compared to the same periods in 2011. Corporate EBIT losses for the third quarter and year-to-date 2012 increased by $22 million and $122 million, respectively, compared to the same periods in 2011.

INTEREST EXPENSE, NET

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


Table of Contents

 

- 41 -

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

 

INCOME TAX EXPENSE

The effective tax rate for the third quarter 2012 was negative 47 percent. The third quarter 2012 effective tax rate is reflective of a cumulative adjustment attributable to lower estimated tax expense for 2012. 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 restructuring actions:

 

      Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
          2012              2011              2012              2011      

Charges related to cost reduction actions and related items

   $       (22)       $       -       $       (109)       $       -   

 

 

Total adjusting items

   $ (22)       $ -       $ (109)       $ -   

 

 

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

 

      Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
          2012             2011              2012             2011      

NET EARNINGS ATTRIBUTABLE TO

         

OWENS CORNING

   $       44     $       124      $       37     $       226  

Less: Net earnings attributable to noncontrolling interests

     —          2        2       4  

 

 

NET EARNINGS

     44       126        39       230  

Equity in net earnings of affiliates

     -        -         -        1  

Income tax expense (benefit)

     (14     23        8       63  

 

 

EARNINGS BEFORE TAXES

     30       149        47       292  

Interest expense, net

     29       28        85       81  

 

 

EARNINGS BEFORE INTEREST AND TAXES

     59       177        132       373  

Less: adjusting items from above

     (22     -         (109   &nbs