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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, 2016
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 17, 2016, 113,323,477 shares of registrant’s common stock, par value $0.01 per share, were outstanding.


Table of Contents

 
 
 
Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 



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 
September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
NET SALES
$
1,518

$
1,447

$
4,294

$
4,053

COST OF SALES
1,144

1,107

3,232

3,196

Gross margin
374

340

1,062

857

OPERATING EXPENSES


 
 
Marketing and administrative expenses
141

130

426

389

Science and technology expenses
20

18

60

53

Other expenses (income), net
6

(4
)
13

5

Total operating expenses
167

144

499

447

EARNINGS BEFORE INTEREST AND TAXES
207

196

563

410

Interest expense, net
28

28

80

80

Loss (gain) on extinguishment of debt
1

—

1

(5
)
EARNINGS BEFORE TAXES
178

168

482

335

Income tax expense
65

55

172

112

Equity in net earnings of affiliates
—

—

1

1

NET EARNINGS
113

113

311

224

Net earnings attributable to noncontrolling interests
1

1

4

3

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
112

$
112

$
307

$
221

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO OWENS CORNING COMMON STOCKHOLDERS
 
 
 
 
Basic
$
0.98

$
0.96

$
2.67

$
1.88

Diluted
$
0.97

$
0.95

$
2.65

$
1.87

Dividend
$
0.18

$
0.17

$
0.54

$
0.51

WEIGHTED AVERAGE COMMON SHARES
 
 
 
 
Basic
114.1

117.2

114.9

117.5

Diluted
115.4

118.3

116.0

118.4

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


Table of Contents
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(unaudited)
(in millions)
 
  
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
NET EARNINGS
$
113

$
113

$
311

$
224

Currency translation adjustment (net of tax of $2 and $(2) for the three months ended September 30, 2016 and 2015, respectively, and $3 and $(4) for the nine months ended September 30, 2016 and 2015, respectively)
(2
)
(38
)
19

(81
)
Pension and other postretirement adjustment (net of tax of $(1) and $(1) for the three months ended September 30, 2016 and 2015, respectively, and $2 and $(4) for the nine months ended September 30, 2016 and 2015, respectively)
4

6

14

12

Deferred gain on hedging (net of tax of $0 and $1 for the three months ended September 30, 2016 and 2015, respectively, and $(2) and $(1) for the nine months ended September 30, 2016 and 2015, respectively)
1

(1
)
5

2

COMPREHENSIVE EARNINGS
116

80

349

157

Comprehensive earnings attributable to noncontrolling interests
1

1

4

3

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
115

$
79

$
345

$
154
































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, except per share amounts)
ASSETS
September 30,
2016
December 31,
2015
CURRENT ASSETS
 
 
Cash and cash equivalents
$
110

$
96

Receivables, less allowances of $10 at September 30, 2016 and $8 at December 31, 2015
796

709

Inventories
729

644

Assets held for sale
13

12

Other current assets
54

47

Total current assets
1,702

1,508

Property, plant and equipment, net
3,090

2,956

Goodwill
1,338

1,167

Intangible assets, net
1,146

999

Deferred income taxes
369

492

Other non-current assets
231

222

TOTAL ASSETS
$
7,876

$
7,344

 
 
 
LIABILITIES AND EQUITY
 
 
CURRENT LIABILITIES
 
 
Accounts payable and accrued liabilities
$
999

$
912

Short-term debt
1

6

Long-term debt – current portion
3

163

Total current liabilities
1,003

1,081

Long-term debt, net of current portion
2,160

1,702

Pension plan liability
321

397

Other employee benefits liability
237

240

Deferred income taxes
36

8

Other liabilities
182

137

Redeemable equity
2

—

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
3,973

3,965

Accumulated earnings
1,299

1,055

Accumulated other comprehensive deficit
(632
)
(670
)
Cost of common stock in treasury (c)
(748
)
(612
)
Total Owens Corning stockholders’ equity
3,893

3,739

Noncontrolling interests
42

40

Total equity
3,935

3,779

TOTAL LIABILITIES AND EQUITY
$
7,876

$
7,344

 
(a)
10 shares authorized; none issued or outstanding at September 30, 2016 and December 31, 2015
(b)
400 shares authorized; 135.5 issued and 113.6 outstanding at September 30, 2016; 135.5 issued and 115.9 outstanding at December 31, 2015
(c)
21.9 shares at September 30, 2016, and 19.6 shares at December 31, 2015
The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.


Table of Contents
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
  
Nine Months Ended September 30,
  
2016
2015
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES
 
 
Net earnings
$
311

$
224

Adjustments to reconcile net earnings to cash provided by operating activities:
 
 
Depreciation and amortization
242

224

Gain on sale of fixed assets
—

(1
)
Deferred income taxes
127

75

Provision for pension and other employee benefits liabilities
6

10

Stock-based compensation expense
25

22

Other non-cash
(7
)
(6
)
       Loss/(gain) on extinguishment of debt
1

(5
)
Changes in operating assets and liabilities
27

(76
)
Pension fund contribution
(60
)
(59
)
Payments for other employee benefits liabilities
(14
)
(16
)
Other
21

18

Net cash flow provided by operating activities
679

410

NET CASH FLOW USED FOR INVESTING ACTIVITIES
 
 
Cash paid for property, plant and equipment
(281
)
(266
)
Proceeds from the sale of assets or affiliates
—

3

Investment in subsidiaries and affiliates, net of cash acquired
(450
)
—

Purchases of alloy
—

(8
)
Proceeds from sale of alloy
—

8

Other
2

—

Net cash flow used for investing activities
(729
)
(263
)
NET CASH FLOW PROVIDED BY (USED FOR) FINANCING ACTIVITIES
 
 
Proceeds from long-term debt
395

—

Proceeds from senior revolving credit and receivables securitization facilities
574

1,079

Proceeds from term loan borrowing
300

—

Payments on term loan borrowing
(300
)
—

Payments on senior revolving credit and receivables securitization facilities
(514
)
(1,082
)
Payments on long-term debt
(160
)
(8
)
Net decrease in short-term debt
(5
)
(10
)
Cash dividends paid
(61
)
(58
)
Purchases of treasury stock
(176
)
(86
)
Other
10

18

Net cash flow provided by (used for) financing activities
63

(147
)
Effect of exchange rate changes on cash
1

(5
)
Net increase (decrease) in cash and cash equivalents
14

(5
)
Cash and cash equivalents at beginning of period
96

67

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
110

$
62

 

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, normal recurring 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, 2015 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 Form 10-K for the year ended December 31, 2015. Certain reclassifications have been made to the periods presented for 2015 to conform to the classifications used in the periods presented for 2016.

During the first quarter of 2016, the Company discovered an error in which certain Value Added Tax ("VAT") balances were inappropriately reported gross versus net in the Consolidated and Condensed Consolidating (Non-Guarantor Subsidiaries) Balance Sheets. We revised the December 31, 2015 balance sheet in these financial statements to correctly report the related VAT balances as a net liability. As of December 31, 2015, this resulted in a decrease to the previously reported Other current assets of $30 million, Other non-current assets of $6 million and Accounts payable and accrued liabilities of $36 million. As of December 31, 2014, this resulted in a decrease to the previously reported Other current assets of $34 million, Other non-current assets of $7 million and Accounts payable and accrued liabilities of $41 million. These revisions were deemed immaterial to the current and prior periods and had no impact on the Consolidated and Condensed Consolidating Statements of Earnings or the Consolidated and Condensed Consolidating Statements of Cash Flows.

During the fourth quarter of 2015, the Company revised the Consolidated and Condensed Consolidating Statements of Cash Flows to correct an error for the presentation of non-cash capital expenditures which impacted the operating activities section and investing activities section. Please refer to Note 1 of the Notes to Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2015 for additional information about this revision. The classification error impacted the unaudited Consolidated and Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2015. For the nine months ended September 30, 2015, the impact of this revision increased cash used for Cash paid for property, plant and equipment and decreased cash used for Changes in operating assets and liabilities by $26 million. The effects of this revision did not impact the ending cash balance for any period and were not material to any previously issued financial statements.


2.
SEGMENT INFORMATION
The Company has three reportable segments: Composites, Insulation and Roofing. Accounting policies for the segments are the same as those for the Company. The Company’s three reportable segments are defined as follows:
Composites – The Composites segment is 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, non-wovens, veil and other specialized products.
Insulation – Within our 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, bonded and granulated mineral wool insulation and foam insulation used in above- and below-grade construction applications.
Roofing – Within our Roofing business, the Company manufactures and sells residential roofing shingles and oxidized asphalt materials, roofing accessories used in residential and commercial construction and specialty applications, and synthetic packaging materials.


Table of Contents
- 8 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

2.
SEGMENT INFORMATION (continued)


 NET SALES
During the fourth quarter of 2015, the Company discovered an error between Net sales and Cost of sales due to incorrect eliminations in its Composites segment. Please refer to Note 1 of the Notes to Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2015 for additional information about this revision. For the three and nine months ended September 30, 2015, the previously reported Net sales and Cost of sales were overstated by $14 million and $29 million, respectively. The effect of correcting these errors was not material to any previously issued financial statements and have been revised in the table below.
The following table summarizes our net sales by segment and geographic region (in millions). Corporate eliminations (shown below) largely reflect intercompany sales from Composites to Roofing. 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 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
Reportable Segments
 
 
 
 
Composites
$
496

$
486

$
1,486

$
1,457

Insulation
476

502

1,275

1,332

Roofing
603

502

1,711

1,398

Total reportable segments
1,575

1,490

4,472

4,187

Corporate eliminations
(57
)
(43
)
(178
)
(134
)
NET SALES
$
1,518

$
1,447

$
4,294

$
4,053


External Customer Sales by Geographic Region
 
 
 
 
United States
$
1,068

$
1,020

$
3,010

$
2,810

Europe
136

128

422

393

Asia Pacific
174

178

493

492

Other
140

121

369

358

NET SALES
$
1,518

$
1,447

$
4,294

$
4,053



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 consist 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 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
Reportable Segments
 
 
 
 
Composites
$
61

$
61

$
199

$
188

Insulation
38

58

83

90

Roofing
146

103

388

213

Total reportable segments
245

222

670

491

Restructuring costs
(5
)
(2
)
(8
)
(4
)
Acquisition-related costs for InterWrap and Ahlstrom transactions
(4
)
—

(8
)
—

Recognition of InterWrap inventory fair value step-up
(2
)
—

(10
)
—

General corporate expense and other
(27
)
(24
)
(81
)
(77
)
EBIT
$
207

$
196

$
563

$
410

 

3.
INVENTORIES
Inventories consist of the following (in millions):

September 30, 2016
December 31, 2015
Finished goods
$
495

$
436

Materials and supplies
234

208

Total inventories
$
729

$
644






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, 2016, and December 31, 2015, 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.


Table of Contents
- 11 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

4. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

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
 
September 30, 2016
 
December 31, 2015
Derivative assets designated as hedging instruments:
 
 
 
 
 
Net investment hedges
 
 
 
 
 
       Cross currency swaps
Other current assets
 
$
4

 
$
4

       Cross currency swaps
Other non-current assets
 
$
—

 
$
6

       Amount of gain recognized in OCI (effective portion)
OCI
 
$
5

 
$
14

Fair value hedges
 
 
 
 
 
        Interest rate swaps
Other non-current assets
 
$
—

 
$
4

Cash flow hedges:
 
 
 
 
 
Natural gas forward swaps
Other current assets
 
$
2

 
$
—

       Amount of gain recognized in OCI (effective portion)
OCI
 
$
1

 
$
—

Derivative liabilities designated as hedging instruments:
 
 
 
 
 
Net investment hedges
 
 
 
 
 
       Cross currency swaps
Other liabilities
 
$
4

 
$
—

Cash flow hedges:
 
 
 
 
 
Natural gas forward swaps
Accounts payable and
accrued liabilities
 
$
—

 
$
5

Amount of loss recognized in OCI related to natural gas forward swaps (effective portion)
OCI
 
$
—

 
$
5

Amount of loss recognized in OCI related to foreign exchange contracts (effective portion)
OCI
 
$
—

 
$
1

Amount of loss recognized in OCI related to treasury interest rate lock
OCI
 
$
1

 
$
—

Derivative assets not designated as hedging instruments:
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
1

 
$
—

Derivative liabilities not designated as hedging instruments:
 
 
 
 
 
Natural gas forward swaps
Accounts payable and
accrued liabilities
 
$
—

 
$
1

Foreign exchange contracts
Accounts payable and
accrued liabilities
 
$
1

 
$
—



Table of Contents
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

4. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

The following table presents the notional amount of derivatives and hedging instruments on the Consolidated Balance Sheet (in millions):
 
 
 
Notional Amount
 
Unit of Measure
 
September 30, 2016
Net investment hedges
 
 
 
       Cross currency swaps
U.S. Dollars
 
$
250

Cash flow hedges:
 
 
 
Natural gas forward swaps U.S. indices
MMBtu
 
7

Natural gas forward swaps European indices
MMBtu (equivalent)
 
1

The Company had notional amounts for derivative hedging instruments related to non-designated foreign currency exposure in U.S. Dollars primarily related to Brazilian Real, Chinese Yuan, Indian Rupee, and South Korean Won for $98 million. In addition, the Company had notional amounts for derivative hedging instruments related to non-designated foreign currency exposure in European Euro primarily related to British Pounds, Russian Rubles, and U.S. Dollars for $38 million.

The following table presents the impact and respective location of derivative activities on the Consolidated Statements of Earnings (in millions):
 
  
  
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
  
Location
2016
2015
2016
2015
Derivative activity designated as hedging instruments:
 
 
 
 
 
Natural gas and electricity:
 
 
 
 
 
Amount of loss reclassified from OCI into earnings (effective portion)
Cost of sales
$
1

$
2

$
7

$
8

Foreign Currency
 
 
 
 
 
Amount of loss reclassified from OCI into earnings (effective portion)
Other expenses (income), net
$
—

$
—

$
1

$
—

Interest rate swaps:
 
 
 
 
 
Amount of loss recognized in earnings
Interest expense, net
$
—

$
—

$
1

$
—

Derivative activity not designated as hedging instruments:
 
 
 
 
 
Natural gas and electricity:
 
 
 
 
 
Amount of (gain) recognized in earnings
Other expenses (income), net
$
(1
)
$
—

$
(1
)
$
(1
)
Foreign currency exchange contract:
 
 
 
 
 
Amount of (gain)/loss recognized in earnings (a)
Other expenses (income), net
$
(1
)
$
(3
)
$
5

$
(3
)
 
(a)
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 expenses (income), net.




Table of Contents
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

4. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Cash Flow Hedges
The Company uses forward and swap contracts, which qualify as cash flow hedges, to manage forecasted exposure to natural gas and electricity 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 Statements 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 expenses (income), net 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 for natural gas exposures is to hedge up to 75% of its total forecasted exposures for the next two months, up to 60% of its total forecasted exposures for the following four months, and lesser amounts for the remaining periods. The Company's policy for electricity exposures is to hedge up to 75% of its total forecasted exposures for the current calendar year and up to 65% of its total forecasted exposures for the first calendar year forward. 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.

In June 2016, the Company entered into a $200 million forward U.S. Treasury rate lock agreement to manage the U.S. Treasury portion of its interest rate risk associated with the anticipated issuance of 10-year fixed rate senior notes in 2016. The locked fixed rate of this agreement was 1.633%. In July 2016, the Company entered into a similar forward U.S. Treasury rate lock agreement for $100 million at a locked fixed rate of 1.490%. The Company designated these outstanding forward U.S. Treasury rate lock agreements, which would have expired on September 15, 2016, as cash flow hedges. The Company paid $1 million to settle these agreements in August 2016 upon issuance of its 2026 senior notes, effectively locking in the U.S. Treasury fixed interest rate in effect at the time the agreements were initiated. The $1 million fair value of these agreements will be amortized over the remaining life of the senior notes as a component of interest expense. Hedge ineffectiveness for these agreements was less than $1 million. Please refer to Note 10 of the Consolidated Financial Statements for further information on the issuance of the 2026 senior notes.
As of September 30, 2016, $1 million of gains included in accumulated OCI on the Consolidated Balance Sheets relate to natural gas contracts that are expected to 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
In the first quarter of 2016, the Company terminated the interest rate swaps designated to hedge a portion of its 4.20% senior notes due 2022 and received net settlement proceeds totaling $8 million. The swaps were 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 were recorded in Interest expense, net on the Consolidated Statements of Earnings. These proceeds were classified as cash provided by operating activities in the Consolidated Statements of Cash Flows. The $8 million fair value adjustment to debt will be amortized through 2022 as a reduction to interest expense in conjunction with the maturity date of the Company's 4.20% senior notes due 2022.
Net Investment Hedges
The Company uses cross currency forward contracts to hedge a portion of the net investment in foreign subsidiaries against fluctuations in foreign exchange rates. For derivative instruments that are designated and qualify as hedges of net investments in foreign operations, settlements and changes in fair values of the derivative instruments are recognized in Currency translation adjustment, a component of Accumulated OCI, to offset the changes in the values of the net investments being hedged. Any portion of net investment hedges that is determined to be ineffective is recorded in Other expenses (income), net on the Consolidated Statements of Earnings.


Table of Contents
- 14 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

4. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

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 expenses (income), net on the Consolidated Statements of Earnings.

5.    GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets and goodwill consist of the following (in millions):
September 30, 2016
Weighted
Average
Useful Life
 
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Amortizable intangible assets:
 
 
 
 
 
Customer relationships
22
 
$
253

$
(91
)
$
162

Technology
19
 
216

(100
)
116

Franchise and other agreements
9
 
46

(23
)
23

Indefinite-lived intangible assets:
 
 
 
 
 
Trademarks
 
 
845

—

845

Total intangible assets
 
 
$
1,360

$
(214
)
$
1,146

Goodwill
 
 
$
1,338

 
 
 
December 31, 2015
Weighted
Average
Useful Life
 
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Amortizable intangible assets:
 
 
 
 
 
Customer relationships
18
 
$
172

$
(82
)
$
90

Technology
21
 
193

(93
)
100

Franchise and other agreements
10
 
43

(20
)
23

Indefinite-lived intangible assets:
 
 
 
 
 
Trademarks
 
 
786

—

786

Total intangible assets
 
 
$
1,194

$
(195
)
$
999

Goodwill
 
 
$
1,167

 
 

Other Intangible Assets
The Company expects the ongoing amortization expense for amortizable intangible assets to be approximately $27 million in each of the next five fiscal years. The changes in the gross carrying amount of intangible assets by asset group are as follows (in millions):
 
Customer Relationships
 
Technology
 
Franchise and Other Agreements
 
Trademarks
 
Total
Balance at December 31, 2015
$
172

 
$
193

 
$
43

 
$
786

 
$
1,194

Acquisitions (see Note 7)
81

 
23

 
—

 
59

 
163

Additional Franchises and Agreements
—

 
—

 
3

 
—

 
3

Balance at September 30, 2016
$
253

 
$
216

 
$
46

 
$
845

 
$
1,360



Table of Contents
- 15 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

5.     GOODWILL AND OTHER INTANGIBLE ASSETS (continued)


Goodwill
During the first nine months of 2016, goodwill increased by $171 million as a result of the acquisition of InterWrap Holdings, Inc. ("InterWrap"); see Note 7 for more details of this acquisition. 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 first nine months of 2016. The changes in the net carrying amount of goodwill by segment are as follows (in millions):
 
Composites
 
Insulation
 
Roofing
 
Total
Balance at December 31, 2015
$
56

 
$
888

 
$
223

 
$
1,167

Acquisitions (see Note 7)
—

 
—

 
171

 
171

Balance at September 30, 2016
$
56

 
$
888

 
$
394

 
$
1,338


6.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in millions):
 
September 30,
2016
December 31, 2015
Land
$
192

$
186

Buildings and leasehold improvements
872

788

Machinery and equipment
3,739

3,478

Construction in progress
265

359

 
5,068

4,811

Accumulated depreciation
(1,978
)
(1,855
)
Property, plant and equipment, net
$
3,090

$
2,956

Machinery and equipment includes certain precious metals used in our production tooling, which comprise approximately 14% and 15% of total machinery and equipment as of September 30, 2016 and December 31, 2015, 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.



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- 16 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)



7.     ACQUISITIONS
On April 21, 2016, the Company acquired all outstanding shares of InterWrap, a leading manufacturer of roofing underlayment and packaging materials, for approximately $450 million, net of cash acquired. This acquisition expands the Company’s position in roofing components, strengthens the Company’s capabilities to support the conversion from organic to synthetic underlayment and accelerates its growth in the roofing components market. Interwrap's operating results and a preliminary purchase price allocation have been included in the Roofing segment of the Company's Consolidated Financial Statements since the date of the acquisition. The Company is continuing to obtain information to complete its valuation of certain assets and liabilities including intangible assets and tax assets. During the quarter ended September 30, 2016, the Company recorded certain immaterial measurement period adjustments to the purchase price allocation, in addition to correcting a $9 million classification error on the Consolidated Balance Sheet that reduced both Goodwill and Accounts payable and accrued liabilities. The effect of this error was not material to any previously issued financial statements. Both of these adjustments are reflected in the value of goodwill noted below.
The Company's acquisition of InterWrap included intangible assets preliminarily valued at $163 million. These assets consist of indefinite-lived trademarks of $59 million, customer relationships of $81 million with an estimated weighted average life of 25 years, and technology, including patented technology, of $23 million with an estimated weighted average useful life of 14 years. Goodwill is preliminarily valued at approximately $171 million with $20 million expected to be tax-deductible. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the InterWrap acquisition and will support continued market growth through conversion from organic to synthetic underlayment, as well as provide growth opportunities in lumber and metal packaging. Please refer to Note 5 for further information on these intangible assets. The acquisition also included inventory valued at$72 million. During the the first nine months of 2016, the Consolidated Statements of Earnings included $121 million in Net sales attributable to the acquisition and a $10 million charge related to inventory fair value step-up in Cost of sales. The pro forma effect of this acquisition on earnings and revenue was not material.
On July 26, 2016, the Company and Ahlstrom agreed to terminate the previously announced purchase agreement of the non-wovens and fabrics business of Ahlstrom due to challenges associated with obtaining regulatory clearance in Germany. In connection with the termination of the purchase agreement, the Company paid Ahlstrom a termination fee of approximately $3 million. The expense was included within Other expenses (income), net in the Consolidated Statements of Earnings in the third quarter of 2016.

8. WARRANTIES
The Company records a liability for warranty obligations at the date the related products are sold. Adjustments are made as new information becomes available. A reconciliation of the warranty liability is as follows (in millions):
  
Nine Months Ended September 30, 2016
Beginning balance
$
43

Amounts accrued for current year
17

Settlements of warranty claims
(10
)
Ending balance
$
50





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- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)




9.     RESTRUCTURING AND ACQUISITION-RELATED COSTS

The Company may incur restructuring, transaction and integration costs related to acquisitions, and may incur restructuring costs in connection with its global cost reduction and productivity initiatives.

Acquisition-Related Costs
During the first nine months of 2016, the Company incurred $8 million of transaction and integration costs related to its announced acquisitions, including a $3 million termination fee paid in the third quarter of 2016 to terminate the Ahlstrom purchase agreement. Please refer to Note 7 of the Consolidated Financial Statements for further information on these acquisitions. These costs are recorded in the Corporate, Other and Eliminations category. See Restructuring Costs section below for detail on additional costs related to the InterWrap acquisition. The following table presents the impact and respective location of acquisition-related costs for the first nine months of 2016 on the Consolidated Statements of Earnings (in millions):
Location
Ahlstrom Acquisition
InterWrap Acquisition
Total
Marketing and administrative expenses
$
1

$
4

$
5

Other expenses (income), net
3

—

3

Total acquisition-related costs
$
4

$
4

$
8


Restructuring Costs
2014 Cost Reduction Actions
During 2014, the Company took actions to reduce costs throughout its global Composites network, mainly through the decision to close a facility in Japan and optimize a facility in Canada, in addition to other cost reduction actions. The Company also took actions in 2014 to streamline its management structure and reduce costs, resulting in the elimination of the Building Materials Group organizational structure. In the first nine months of 2016, the Company incurred $6 million of charges for this restructuring, comprised of facility optimization costs, revision of estimated severance costs and a pension-related charge.

InterWrap Acquisition-Related Restructuring Costs
Following the acquisition of InterWrap into the Company's Roofing segment, the Company took actions to realize expected synergies from the newly acquired operations. In the first nine months of 2016, the Company incurred $2 million of accelerated depreciation charges for this restructuring.

The following table summarizes the status of the unpaid liabilities from the Company's restructuring activity (in millions):
 
InterWrap Acquisition-Related Restructuring
2014 Cost Reduction Actions
Total
Balance at December 31, 2015
$
—

$
7

$
7

Restructuring costs
2

6

8

Payments
—

(7
)
(7
)
Non-cash items and reclassifications to other accounts
(2
)
(2
)
(4
)
Balance at September 30, 2016
$
—

$
4

$
4

Cumulative charges incurred
$
2

$
44

$
46


The Company expects the unpaid balance of these restructuring costs to be paid over the next year. As of September 30, 2016, the remaining liability balance is comprised of $3 million of severance and $1 million of contract termination.



Table of Contents
- 18 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

10.
DEBT


Details of the Company’s outstanding long-term debt are as follows (in millions):
 
September 30, 2016
December 31, 2015
6.50% senior notes, net of discount and financing fees, due 2016
$
—

$
158

9.00% senior notes, net of discount and financing fees, due 2019
143

143

4.20% senior notes, net of discount and financing fees, due 2022
596

596

4.20% senior notes, net of discount and financing fees, due 2024
391

390

3.40% senior notes, net of discount and financing fees, due 2026
395

—

7.00% senior notes, net of discount and financing fees, due 2036
536

536

Accounts receivable securitization facility, maturing in 2018
60

—

Various capital leases, due through and beyond 2050
34

36

Fair value adjustment to debt
8

6

Total long-term debt
2,163

1,865

Less – current portion
3

163

Long-term debt, net of current portion
$
2,160

$
1,702

Senior Notes
The Company issued $400 million of 2026 senior notes on August 8, 2016 subject to $5 million of discounts and issuance costs. Interest on the notes is payable semiannually in arrears on February 15 and August 15 each year, beginning on February 15, 2017. A portion of the proceeds from these notes were used to redeem $158 million of our 2016 senior notes, together with a $2 million make whole call payment and $3 million of accrued interest. In connection with the redemption, the Company recognized a $1 million loss on extinguishment of debt, inclusive of the remaining unamortized financing fees, discount, and interest rate swap fair value adjustment. The remaining proceeds were used to pay down portions of our Receivables Securitization Facility and for general corporate purposes.
The Company issued $400 million of 2024 senior notes on November 12, 2014. Interest on the notes is payable semiannually in arrears on June 1 and December 1 each year, beginning on June 1, 2015. A portion of the proceeds from these notes were used to repay $242 million of our 2016 senior notes and $105 million of our 2019 senior notes. The remaining proceeds were used to pay down our Senior Revolving Credit Facility (as defined below), finance general working capital needs, and for general corporate purposes.
The Company issued $600 million of 2022 senior notes on October 17, 2012. Interest on the notes is payable semiannually in arrears on June 15 and December 15 each year, beginning on June 15, 2013. The proceeds of these notes were used to refinance $250 million of our 2016 senior notes and $100 million of our 2019 senior notes and pay down our Senior Revolving Credit Facility.
The Company issued $350 million of 2019 senior notes on June 3, 2009. On October 31, 2006, the Company issued $650 million of 2016 senior notes and $540 million of 2036 senior notes. The proceeds of these notes were used to pay certain unsecured and administrative claims, finance general working capital needs and for general corporate purposes.
As of December 31, 2015, the $158 million in outstanding principal related to our 2016 senior notes was recorded in Long-term debt - current portion on the Consolidated Balance Sheets, along with $2 million net in associated unamortized financing fees, discount, and interest rate swap basis adjustment. These senior notes were fully repaid in third quarter of 2016 in connection with the issuance of our 2026 senior notes.
Collectively, the senior notes above are 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 certain of the Company’s current and future domestic subsidiaries that are a borrower or guarantor under the Company’s credit agreement ("Credit Agreement"). The guarantees are unsecured


Table of Contents
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

10.
DEBT (continued)

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, 2016.
In the fourth quarter of 2011, the Company terminated the interest rate swaps designated to hedge a portion of the 6.50% senior notes due 2016. 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 was fully amortized in the third quarter of 2016 as a reduction to interest expense in conjunction with the extinguishment of the 2016 senior notes in the same quarter.
In the first quarter of 2016, the Company terminated the existing interest rate swaps designated to hedge a portion of the 4.20% senior notes due 2022 and received net settlement proceeds totaling $8 million. 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 proceeds are classified as cash provided by operating activities in the Consolidated Statements of Cash Flows. The $8 million fair value adjustment to debt will be amortized through 2022 as a reduction to interest expense in conjunction with the maturity date of the 2022 senior notes.
Senior Revolving Credit Facility
The Company has an $800 million multi-currency senior revolving credit facility that has been amended from time to time (the "Senior Revolving Credit Facility") with a maturity date in November 2020 and uncommitted incremental loans permitted under the facility of $600 million. The Company obtained commitments for $300 million of the $600 million of permitted incremental term loans in March 2016. As discussed further below, the Company subsequently borrowed $300 million on this commitment in April 2016 and fully repaid the $300 million of borrowings in September 2016. The Company may obtain new commitments for incremental term loans up to $600 million as permitted under the facility. No subsequent amendments had an impact on current liquidity terms. The Company removed certain subsidiaries from the list of named guarantors in May 2016. As of September 30, 2016, the Company added additional subsidiaries to the list of named guarantors. 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.
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 in compliance with these covenants as of September 30, 2016.
As of September 30, 2016, the Company had no borrowings on its Senior Revolving Credit Facility, $9 million of outstanding letters of credit, and $791 million available on this facility.
Term Loan
During the first quarter of 2016, the Company obtained a Term Loan commitment for $300 million (the "Term Loan"), as allowed under its existing Senior Revolving Credit Facility. The Term Loan was a partially amortizing loan that required quarterly principal repayments, with a balloon repayment due in November 2020 for any outstanding borrowings. The Term Loan 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 in compliance with these covenants during the third quarter of 2016.
On April 20, 2016, the Company borrowed the $300 million available on the Term Loan at LIBOR plus a spread. These borrowings were used, in addition to borrowings on the Receivables Securitization Facility, to fund the acquisition of InterWrap. Please see Note 7 of the Notes to Consolidated Financial Statements for more information on this acquisition. In the third quarter of 2016, the Company repaid all outstanding borrowings on this Term Loan.


Table of Contents
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

10.
DEBT (continued)

Receivables Securitization Facility
Included in long-term debt on the Consolidated Balance Sheets are amounts outstanding under a Receivables Purchase Agreement (the “RPA”) that are accounted for as secured borrowings in accordance with Accounting Standards Codification ("ASC") 860, Accounting for Transfers and Servicing. 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 (the "Receivables Securitization Facility") matures in January 2018. The Company has the ability to borrow at the lenders' cost of funds, which approximates A-1/P-1 commercial paper rates, plus a fixed spread.
As of September 30, 2016, the Company utilized the Receivables Securitization Facility for $60 million in borrowings and $2 million of outstanding letters of credit, and had $188 million available on this facility.
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 in compliance with these covenants as of September 30, 2016.
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, 2016 and December 31, 2015, short-term borrowings were $1 million and $6 million, respectively. The short-term borrowings 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 all short-term borrowings was approximately 6.1% for September 30, 2016 and 4.5% for December 31, 2015.


11.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
The Company sponsors defined benefit pension plans. Under the plans, pension benefits are based on an employee’s years of service and, for certain categories of employees, qualifying compensation. Company contributions to these pension plans are determined by an independent actuary to meet or exceed minimum funding requirements. In our non-U.S. plans, 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. In our U.S. plans, the unrecognized cost of any retroactive amendments and actuarial gains and losses are amortized over the average remaining life expectancy of the inactive participants as substantially all of the plan participants are inactive.
During the second quarter of 2016, the Company recorded a $6 million pension curtailment gain related to 2015. This benefit was recorded in Cost of sales on the Consolidated Statements of Earnings and reduced General corporate expense and other in our Corporate, Other and Eliminations category. The effect of this error was not material to the current or any previously issued financial statements.


Table of Contents
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

11.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)


The following tables provide information regarding pension expense recognized (in millions):
 
Three Months Ended September 30, 2016
Three Months Ended September 30, 2015
  
U.S.
Non-U.S.
Total
U.S.
Non-U.S.
Total
Components of Net Periodic Pension Cost
 
 
 
 
 
 
Service cost
$
2

$
—

$
2

$
2

$
1

$
3

Interest cost
11

4

15

11

3

14

Expected return on plan assets
(14
)
(5
)
(19
)
(15
)
(5
)
(20
)
Amortization of actuarial loss
3

—

3

4

1

5

Settlement gain
—

—

—

—

(1
)
(1
)
Curtailment gain
—

—

—

—

(1
)
(1
)
Net periodic pension cost
$
2

$
(1
)
$
1

$
2

$
(2
)
$
—

 
 
Nine Months Ended September 30, 2016
Nine Months Ended September 30, 2015
  
U.S.
Non-U.S.
Total
U.S.
Non-U.S.
Total
Components of Net Periodic Pension Cost
 
 
 
 
 
 
Service cost
$
5

$
2

$
7

$
6

$
3

$
9

Interest cost
33

13

46

33

13

46

Expected return on plan assets
(43
)
(17
)
(60
)
(44
)
(18
)
(62
)
Amortization of actuarial loss
10

2

12

11

3

14

Curtailment gain
—

(6
)
(6
)
—

(1
)
(1
)
Settlement Gain
—

—

—

—

(2
)
(2
)
Contractual termination benefit
—

2

2

—

—

—

Net periodic pension cost
$
5

$
(4
)
$
1

$
6

$
(2
)
$
4


The Company expects to contribute approximately $50 million in cash to the U.S. pension plans and another $13 million to non-U.S. plans during 2016. The Company made cash contributions of $60 million to the plans during the nine months ended September 30, 2016.


Table of Contents
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

11.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)


Postemployment and Postretirement Benefits Other than Pension Plans
The Company maintains healthcare and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the United States are non-funded and pay either (1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met, or (2) fixed amounts of medical expense reimbursement.
The following table provides the components of net periodic benefit cost for aggregated U.S. and non-U.S. Plans for the periods indicated (in millions):
  
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
Components of Net Periodic Benefit Cost
 
 
 
 
Service cost
$
—

$
1

$
1

$
2

Interest cost
3

3

7

7

Amortization of prior service cost
(1
)
(1
)
(3
)
(3
)
Net periodic benefit cost
$
2

$
3

$
5

$
6



12.
CONTINGENT LIABILITIES AND OTHER MATTERS
The Company may be involved in various legal and regulatory proceedings relating to employment, antitrust, tax, product liability, environmental and other matters (collectively, “Proceedings”). The Company regularly reviews the status of such Proceedings along with legal counsel. Liabilities for such Proceedings 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 amount of any reasonably possible losses in excess of any amounts accrued, if any, with respect to such Proceedings or any other known claim, including the matters described below under the caption Environmental Matters (the “Environmental Matters”) are not material to the Company’s financial statements. Management believes that the ultimate disposition of the Proceedings and the Environmental Matters will not have a material adverse effect on the Company’s financial condition. While the likelihood is remote, the disposition of the Proceedings and Environmental Matters could have a material impact on the results of operations, cash flows or liquidity in any given reporting period.
Litigation and Regulatory Proceedings

The Company is involved in litigation and regulatory Proceedings from time to time in the regular course of its business. The Company believes that adequate provisions for resolution of all contingencies, claims and pending matters have been made for probable losses that are reasonably estimable.
 
Environmental Matters

The Company has established policies and procedures designed to ensure that its operations are conducted in compliance with all relevant laws and regulations and that enable the Company to meet its high standards for corporate sustainability and environmental stewardship. Our manufacturing facilities are subject to numerous foreign, federal, state and local laws and regulations relating to the presence of hazardous materials, pollution and protection of the environment, including emissions to air, discharges to water, management of hazardous materials, handling and disposal of solid wastes, and remediation of contaminated sites. All Company manufacturing facilities operate using an ISO 14001 or equivalent environmental management system. The Company’s 2020 Sustainability Goals require significant global reductions in energy use, water consumption, waste to landfill, and emissions of greenhouse gases, fine particulate matter and toxic air emissions.



Table of Contents
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

12.
CONTINGENT LIABILITIES AND OTHER MATTERS (continued)


Owens Corning is involved in remedial response activities and is responsible for environmental remediation at a number of sites, including certain of its currently owned or formerly owned plants. These responsibilities arise under a number of laws, including, but not limited to, the Federal Resource Conservation and Recovery Act ("RCRA"), and similar state or local laws pertaining to the management and remediation of hazardous materials and petroleum. The Company has also been named a potentially responsible party under the U.S. Federal Superfund law, or state equivalents, at a number of disposal sites. The Company became involved in these sites as a result of government action or in connection with business acquisitions. As of September 30, 2016, the Company was involved with a total of 19 sites worldwide, including 7 Superfund sites and 12 owned or formerly owned sites. None of the liabilities for these sites are individually significant to the Company.

Remediation activities generally involve a potential range of activities and costs related to soil and groundwater contamination. This can include pre-cleanup activities such as fact finding and investigation, risk assessment, feasibility studies, remedial action design and implementation (where actions may range from monitoring to removal of contaminants, to installation of longer-term remediation systems). A number of factors affect the cost of environmental remediation, including the number of parties involved in a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, variability in clean-up standards, the need for legal action, and changes in remediation technology. Taking these factors into account, Owens Corning has predicted the costs of remediation reasonably estimated to be paid over a period of years. The Company accrues an amount on an undiscounted basis, consistent with the reasonable estimates of these costs when it is probable that a liability has been incurred. Actual cost may differ from these estimates for the reasons mentioned above. At September 30, 2016, the Company had an accrual totaling $2 million, for these costs. Changes in required remediation procedures or timing of those procedures, or discovery of contamination at additional sites, could result in material increases to the Company’s environmental obligations.




Table of Contents
- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)




13.
STOCK COMPENSATION

Stock Plans

2016 Stock Plan

On April 21, 2016, the Company’s stockholders approved the Owens Corning 2016 Stock Plan (the “2016 Stock Plan”) which replaced the Owens Corning 2013 Stock Plan (the "2013 Stock Plan"). The 2016 Stock Plan authorizes grants of stock options, stock appreciation rights, restricted stock awards, restricted stock units, bonus stock awards and performance stock awards. Under the 2016 Stock Plan, 2.5 million shares of common stock may be granted in addition to the 1.4 million shares of Company common stock that rolled over from the 2013 Stock Plan as of April 21, 2016. 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. There will be no future grants made under the 2013 Stock Plan. At September 30, 2016, the number of shares remaining available under the 2016 Stock Plan for all stock awards was 3.9 million.
Stock Options
The Company did not grant any stock options during the nine months ended September 30, 2016. 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.
During the three and nine months ended September 30, 2016, the Company recognized expense of less than $1 million and $2 million, respectively, related to the Company's stock options. During the three and nine months ended September 30, 2015 the Company recognized expense of $1 million and $3 million respectively, related to the Company's stock options. As of September 30, 2016, there was $2 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 1.24 years. The total aggregate intrinsic value of options outstanding as of September 30, 2016 was $29 million.
The following table summarizes the Company’s stock option activity:
  
Nine Months Ended 
 September 30, 2016
  
Number of
Options
Weighted-
Average
Exercise Price
Beginning Balance
1,953,320

$
31.09

Exercised
(660,270
)
31.08

Forfeited
(11,350
)
38.50

Ending Balance
1,281,700

$
31.03

The following table summarizes information about the Company’s options outstanding and exercisable:
  
Options Outstanding
Options Exercisable
 
Options
Outstanding
Weighted-Average
Number
Exercisable
at September 30, 2016
Weighted-Average
Range of Exercise Prices
Remaining
Contractual Life
Exercise
Price
Remaining
Contractual Life
Exercise
Price
$13.89-$42.16
1,281,700

4.63
$
31.03

1,080,725

4.18
$
29.56






Table of Contents
- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

13.
STOCK COMPENSATION (continued)

Restricted Stock Awards and Restricted Stock Units
The Company has granted restricted stock awards and restricted stock units (collectively referred to as “restricted stock”) as a part of its long-term incentive plan. Compensation expense for restricted stock is measured based on the market price of the stock at date of grant and is recognized on a straight-line basis over the four-year vesting period. Stock restrictions are subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2020.
During the three and nine months ended September 30, 2016, the Company recognized expense of $5 million and $14 million related to the Company's restricted stock. During the three and nine months ended September 30, 2015, the Company recognized expense of $5 million and $13 million, respectively, related to the Company's restricted stock. As of September 30, 2016, there was $33 million of total unrecognized compensation cost related to restricted stock. That cost is expected to be recognized over a weighted-average period of 2.69 years. The total fair value of shares vested during the nine months ended September 30, 2016 and 2015 was $15 million and $17 million, respectively.
The following table summarizes the Company’s restricted stock activity:
  
Nine Months Ended September 30, 2016
  
Number of Shares/Units
Weighted-Average
Grant-Date
Fair Value
Beginning Balance
1,707,490

$
35.37

Granted
526,345

45.41

Vested
(388,892
)
37.60

Forfeited
(45,134
)
39.70

Ending Balance
1,799,809

$
37.66

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. All outstanding performance grants will fully settle in stock. The amount of stock ultimately distributed from all performance shares issued after the 2014 grants is contingent on meeting internal company-based metrics or an external-based stock performance metric. The amount of stock ultimately distributed from the 2014 grant is contingent on meeting an external based stock performance metric.
In the nine months ended September 30, 2016, the Company granted both internal company-based and external-based metric PSUs.
Internal based metrics
The internal company-based metrics vest after a three-year period and are based on various Company metrics. The amount of stock distributed will vary from 0% to 300% of PSUs awarded depending on performance versus the internal Company-based metrics.
The initial fair value for all internal Company-based metric PSUs assumes that the performance goals will be achieved and is based on the grant date stock price. This assumption is monitored quarterly and if it becomes probable that such goals will not be achieved or will be exceeded, compensation expense recognized will be adjusted and previous surplus compensation expense recognized will be reversed or additional expense will be recognized. The expected term represents the period from the grant date to the end of the three-year performance period. Pro-rata vesting may be utilized in the case of death, disability or approved retirement and awards if earned will be paid at the end of the three-year period.
External-based metrics
The external-based metrics vest after a three-year period. Outstanding grants issued in 2015 and thereafter are based on the Company's total stockholder return relative to the performance of the S&P Building & Construction Industry Index. Outstanding


Table of Contents
- 26 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

13.
STOCK COMPENSATION (continued)

grants issued prior to 2015 are based on the Company's total stockholder return relative to the performance of the companies in the S&P 500 Index. The amount of stock distributed will vary from 0% to 200% of PSUs awarded depending on the relative stockholder return performance.
The Company estimated the fair value of the external-based metric performance stock grants using a Monte Carlo simulation. The external-based metric performance stock granted in 2016 uses various assumptions that include expected volatility of 26.6%, and a risk free interest rate of 0.8% , both of which were based on an expected term of 2.91 years. Expected volatility was based on a benchmark study of our peers. The risk-free interest rate was based on zero coupon U.S. Treasury bills at the time of grant. The expected term represents the period from the grant date to the end of the three-year performance period. Compensation expense for external-based metric PSUs is measured based on the grant date fair value and is recognized on a straight-line basis over the vesting period. Pro-rata vesting may be utilized in the case of death, disability or approved retirement, and awards if earned will be paid at the end of the three-year period.
During the three and nine months ended September 30, 2016, the Company recognized expense of $2 million and $7 million, respectively, related to PSUs. During the three and nine months ended September 30, 2015, the Company recognized expense of $2 million and $5 million, respectively, related to the Company's PSUs. As of September 30, 2016, there was $14 million of total unrecognized compensation cost related to PSUs. That cost is expected to be recognized over a weighted-average period of 1.87 years.
The following table summarizes the Company’s PSU activity:
  
Nine Months Ended 
 September 30, 2016
  
Number
of PSUs
Weighted-Average
Grant-Date
Fair Value
Beginning Balance
431,400

$
44.52

Granted
244,250

48.74

Forfeited
(14,500
)
44.49

Ending Balance
661,150

$
46.08

Employee Stock Purchase Plan
On April 18, 2013, the Company’s stockholders approved the Owens Corning Employee Stock Purchase Plan (“ESPP”). The ESPP is a tax-qualified plan under Section 423 of the Internal Revenue Code. The purchase price of shares purchased under the ESPP is equal to 85% of the lower of the fair market value of shares of Owens Corning common stock at the beginning or ending of the offering period, which is a six-month period ending on May 31 and November 30 of each year. At the approval date, 2 million shares were available for purchase under the ESPP. As of September 30, 2016, 1.4 million shares remain available for purchase.
During the three and nine months ended September 30, 2016, the Company recognized expense of $1 million and $2 million, respectively, related to the Company's ESPP. During the three and nine months ended September 30, 2015, the Company recognized expense of less than $1 million, and $1 million respectively, related to the Company's ESPP. As of September 30, 2016, there was $1 million of total unrecognized compensation cost related to the ESPP.
 



Table of Contents
- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)




14.    EARNINGS PER SHARE
The following table is a reconciliation of weighted-average shares for calculating basic and diluted earnings per-share (in millions, except per share amounts):
  
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
Net earnings attributable to Owens Corning
$
112

$
112

$
307

$
221

Weighted-average number of shares outstanding used for basic earnings per share
114.1

117.2

114.9

117.5

Non-vested restricted and performance shares
0.9

0.7

0.8

0.5

Options to purchase common stock
0.4

0.4

0.3

0.4

Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings per share
115.4

118.3

116.0

118.4

Earnings per common share attributable to Owens Corning common stockholders:
 
 
 
 
Basic
$
0.98

$
0.96

$
2.67

$
1.88

Diluted
$
0.97

$
0.95

$
2.65

$
1.87

In 2012, the Board approved a share buy-back authorization under which the Company could repurchase up to 10 million shares of the Company’s outstanding common stock (the “ 2012 Repurchase Authorization”). The 2012 Repurchase authorization enabled the Company to repurchase shares through the open market, privately negotiated transactions or other transactions. The actual number of shares repurchased depends on timing, market conditions and other factors and is at the Company’s discretion. The Company repurchased 3.4 million shares of its common stock for $171 million during the nine months ended September 30, 2016 under the 2012 Repurchase authorization. As of September 30, 2016, 1.2 million shares remain available for repurchase under the 2012 Repurchase authorization.
On October 24, 2016, the Board approved a new share buy-back authorization under which the Company is enabled to repurchase up to 10 million shares of the Company’s outstanding common stock (the “2016 Repurchase Authorization”). The 2016 Repurchase Authorization is in addition to the share 2012 Repurchase Authorization, (the 2012 Repurchase Authorization and collectively with the 2016 Repurchase Authorization, the “Repurchase Authorization”). The Repurchase Authorization enables the Company to repurchase shares through 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.
For the three and nine months ended September 30, 2016, the number of shares used in the calculation of diluted earnings per share did not include 0.1 million non-vested performance shares due to their anti-dilutive effect.
For the three months ended September 30, 2015, the number of shares used in the calculation of diluted earnings per share did not include 0.6 million of options to purchase common stock, due to their anti-dilutive effect. For the nine months ended September 30, 2015, the number of shares used in the calculation of diluted earnings per share did not include 0.1 million non-vested restricted stock and PSU's, and 0.6 million of options to purchase common stock, due to their anti-dilutive effect.


15.    FAIR VALUE MEASUREMENT

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.


Table of Contents
- 28 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

15.    FAIR VALUE MEASUREMENT (continued)

Items Measured at Fair Value

The carrying value of cash and cash equivalents, accounts receivable and short-term debt approximate fair value because of the short-term maturity of the instruments.

Derivatives

The Company executes financial derivative contracts for the purpose of mitigating risk exposure that is generated from our normal operations. These derivatives consist of natural gas swaps, interest rate swaps, cross currency swaps, and foreign exchange forward contracts, all of which are over-the-counter and not traded through an exchange. The Company uses widely accepted valuation tools to determine fair value, such as discounting cash flows to calculate a present value for the derivatives. The models use Level 2 inputs, such as forward curves and other commonly quoted observable transactions and prices.
The following table summarizes the fair values and levels within the fair value hierarchy in which the fair value measurements fall as of September 30, 2016 (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:
 
 
 
 
Derivative assets
$
7

$
—

$
7

$
—

Liabilities:
 
 
 
 
Derivative liabilities
$
5

$
—

$
5

$
—

The following table summarizes the fair values and levels within the fair value hierarchy in which the fair value measurements fall as of December 31, 2015 (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:
 
 
 
 
Derivative assets
$
14

$
—

$
14

$
—

Liabilities:
 
 
 
 
Derivative liabilities
$
6

$
—

$
6

$
—




Table of Contents
- 29 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

15.    FAIR VALUE MEASUREMENT (continued)

Items Disclosed at Fair Value
Long-term debt
The following table shows the fair value of the Company’s long-term debt as calculated based on quoted market prices for the same or similar issues (Level 2 input), or on the current rates offered to the Company for debt of the same remaining maturities:
 
September 30, 2016
December 31, 2015
6.50% senior notes, net of discount, due 2016
—
%
103
%
9.00% senior notes, net of discount, due 2019
118
%
116
%
4.20% senior notes, net of discount, due 2022
108
%
99
%
4.20% senior notes, net of discount, due 2024
106
%
100
%
3.40% senior notes, net of discount, due 2026
103
%
—
%
7.00% senior notes, net of discount, due 2036
128
%
105
%
The Company determined that the book value of the remaining long-term debt instruments approximates market value.
 

16.    INCOME TAXES

The following table provides the Income tax expense (in millions) and effective tax rate for the periods indicated:
  
Three Months Ended September 30,
Nine Months Ended September 30,
  
2016
2015
2016
2015
Income tax expense
$
65

$
55

$
172

$
112

Effective tax rate
37
%
33
%
36
%
33
%

The difference between the effective tax rate and the U.S. federal statutory tax rate of 35% for the three and nine months ended September 30, 2016 is primarily due to an increase in unrecognized tax benefit reserves, U.S. state and local income tax expense, the benefit of lower foreign tax rates and other discrete adjustments.
Realization of deferred tax assets depends on achieving a certain minimum level of future taxable income. Management currently believes that it is at least reasonably possible that the minimum level of taxable income will be met within the next 12 months to reduce the valuation allowance of certain foreign jurisdictions by a range of $0 million to $12 million.
The difference between the effective tax rate and the U.S. federal statutory tax rate of 35% for the three and nine months ended September 30, 2015 is primarily attributable to the tax accounting treatment of various locations which are currently in a loss position, reversal of valuation allowances, the benefit of lower foreign tax rates, and other discrete tax adjustments.




Table of Contents
- 30 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

17.
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE DEFICIT


The following table summarizes the changes in accumulated other comprehensive income (deficit) (“AOCI”) (in millions):
  
Three Months Ended September 30,
Nine Months Ended September 30,
  
2016
2015
2016
2015
Currency Translation Adjustment
 
 
 
 
Beginning balance
$
(226
)
$
(176
)
$
(247
)
$
(133
)
Net investment hedge amounts classified into AOCI, net of tax
(3
)
2

(5
)
5

Gain/(loss) on foreign currency translation
1

(40
)
24

(86
)
Other comprehensive income/(loss), net of tax
(2
)
(38
)
19

(81
)
Ending balance
$
(228
)
$
(214
)
$
(228
)
$
(214
)
 
 
 
 
 
 
 
 
 
 
Pension and Other Postretirement Adjustment
 
 
 
 
Beginning balance
$
(409
)
$
(406
)
$
(419
)
$
(412
)
Amounts reclassified from AOCI to net earnings, net of tax (a)
3

2

3

6

Amounts classified into AOCI, net of tax
1

4

11

6

Other comprehensive income, net of tax
4

6

14

12

Ending balance
$
(405
)
$
(400
)
$
(405
)
$
(400
)
 
 
 
 
 
 
 
 
 
 
Deferred Gain (Loss) on Hedging
 
 
 
 
Beginning balance
$
—

$
(2
)
$
(4
)
$
(5
)
      Amounts reclassified from AOCI to net earnings, net of tax (b)
1

1

5

5

  Amounts classified into AOCI, net of tax
—

(2
)
—

(3
)
Other comprehensive income/(loss), net of tax
1

(1
)
5

2

Ending balance
$
1

$
(3
)
$
1

$
(3
)
 
 
 
 
 
 
 
 
 
 
Total AOCI ending balance
$
(632
)
$
(617
)
$
(632
)
$
(617
)

(a) These AOCI components are included in the computation of total Pension and OPEB expense and are recorded in Cost of sales and Marketing and administrative expenses. See Note 11 for additional information.
(b) Amounts reclassified from gain/(loss) on cash flow hedges are reclassified from AOCI to income when the hedged item affects earnings and are recognized in Cost of sales. See Note 4 for additional information.


Table of Contents
- 31 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

18.
ACCOUNTING PRONOUNCEMENTS


The following table summarizes recent accounting standard updates ("ASU") issued by the Financial Accounting Standards Board (the "FASB") that could have an impact on the Company's Consolidated Financial Statements:
Standard
Description
Effective Date for Company
Effect on the
Consolidated Financial Statements
Recently issued standards:
 
 
 
ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)," as amended by ASU's 2015-14, 2016-08, 2016-10, 2016-11 and 2016-12
This standard outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Entities can adopt this standard either through a retrospective or modified-retrospective approach.
January 1, 2018
We are currently assessing the impact this standard will have on our Consolidated Financial Statements.
ASU 2016-01 "Financial Instruments - Overall (Subtopic 825-10)"
This standard modifies certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The update simplifies the impairment assessment of equity investments, requires that disclosure of financial instruments be based on an exit price notion, and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset.
January 1, 2018
We are currently assessing the impact this standard will have on our Consolidated Financial Statements.
ASU 2016-02 "Leases (Topic 842)"
The standard requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. The recognition and presentation of expenses will depend on classification as a finance or operating lease. Entities will adopt this standard through a retrospective approach.
January 1, 2019
We are currently assessing the impact this standard will have on our Consolidated Financial Statements.
ASU 2016-09 "Compensation - Stock Compensation (Topic 718)"
This standard simplifies several aspects of the accounting for share-based payment transactions, but may increase volatility in income tax expense. All excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement. An entity will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period, subject to normal valuation allowance considerations.
January 1, 2017
We are currently assessing the impact this standard will have on our Consolidated Financial Statements.
ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326)"
This standard replaces the incurred loss methodology for recognizing credit losses with a current expected credit losses model and applies to all financial assets, including trade receivables. Entities will adopt the standard using a modified-retrospective approach.
January 1, 2020
We are currently assessing the impact this standard will have on our Consolidated Financial Statements.
ASU 2016-15 "Statement of Cash Flows (Topic 230)"
This standard addresses the presentation and classification of eight specific cash flow issues, including debt prepayment and extinguishment costs. Entities will adopt the standard using a retrospective method.
January 1, 2018
We do not expect the update to have a material impact on the Company's Consolidated Financial Statements.
Recently adopted standards:
 
 
 
ASU 2015-07 "Fair Value Measurement (Topic 820)"
This standard removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient.
January 1, 2016
The adoption of this standard did not have a material impact on our Consolidated Financial Statements. This standard permits us to separately present certain assets in the plan assets table of the Pension Plans Note to the Consolidated Financial Statements in future Form 10-K filings.
ASU 2015-16 "Business Combinations (Topic 805)"
This standard requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.
January 1, 2016
The adoption of this standard did not have a material impact on our Consolidated Financial Statements.


Table of Contents
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    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.
In May 2016, the Company entered into an Acknowledgment and Agreement and Second Amendment to its Credit Agreement which, among other things, removed certain subsidiaries from the list of named guarantors. This amendment had no impact on the composition of the Company’s consolidated group and had no effect on the Consolidated Financial Statements including total stockholders' equity in Guarantor Subsidiaries. The Condensed Consolidating Balance Sheet was revised to present the financial statements of the Guarantor Subsidiaries and Nonguarantor Subsidiaries for December 31, 2015, based on their composition at June 30, 2016. The related increases (decreases) from the revisions are shown in the table below (in millions):
Description
Parent
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
Due from affiliates - current
$
—

$
(287
)
$
—

$
287

$
—

Investment in subsidiaries
—

(452
)
—

452

—

Due from affiliates
—

—

(739
)
739

—

TOTAL ASSETS
$
—

$
(739
)
$
(739
)
$
1,478

$
—

 
 
 
 
 
 
Due to affiliates - current
$
—

$
—

$
(287
)
$
287

$
—

Due to affiliates
—

(739
)
—

739

—

Total equity
—

—

(452
)
452

—

TOTAL LIABILITIES AND EQUITY
$
—

$
(739
)
$
(739
)
$
1,478

$
—

During the second quarter of 2016, the Company discovered classification errors in the December 31, 2015 Condensed Consolidating Balance Sheet related to intercompany activity recorded in the Due from and Due to affiliates, Investment in subsidiary and Equity line items between and among the Parent, Guarantor Subsidiaries and Non-Guarantor Subsidiaries. These classifications errors had no effect on the Consolidated Financial Statements. The effect of correcting these classification errors was not material to the 2015 Condensed Consolidating Balance Sheet, and the related amounts presented as of December 31, 2015 have been revised. The related increases (decreases) from the revisions are shown in the table below (in millions):
Description
Parent
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
Due from affiliates - current
$
—

$
(474
)
$
—

$
474

$
—

Investment in subsidiaries
(484
)
(569
)
(559
)
1,612

—

TOTAL ASSETS
$
(484
)
$
(1,043
)
$
(559
)
$
2,086

$
—

 
 
 
 
 
 
Due to affiliates - current
$
(484
)
$
—

$
10

$
474

$
—

Total equity
—

(1,043
)
(569
)
1,612

—

TOTAL LIABILITIES AND EQUITY
$
(484
)
$
(1,043
)
$
(559
)
$
2,086

$
—

The combined impact of the changes to the guarantor list and the classification errors resulted in overstatements of Total assets and Total liabilities and equity of the Parent, Guarantor Subsidiaries and Non-Guarantor subsidiaries in the amounts of $484 million, $1,889 million and $1,354 million, respectively, at March 31, 2016 and $484 million, $1,923 million and $1,439 million, respectively, at December 31, 2014.  The combined impact of these changes on the Due from and Due to affiliates, Investment in subsidiaries and Total equity between and among the Parent, Guarantor Subsidiaries and Non-Guarantor Subsidiaries at March 31, 2016 and December 31, 2014 is similar to the impact to these accounts at December 31, 2015 illustrated in the tables above. The effect of correcting the classification errors described above was not material to the March 31, 2016 and December 31, 2014 Condensed Consolidating Balance Sheets.



Table of Contents
- 33 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

Guarantor and Nonguarantor Financial Statements
The Senior Notes and the Senior Revolving Credit Facility are guaranteed, fully, unconditionally and jointly and severally, by certain of Owens Corning’s current and future wholly-owned material domestic subsidiaries that are borrowers or guarantors under the 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”).
Additional domestic subsidiaries were added to the Credit Agreement as Guarantor Subsidiaries as of September 30, 2016. As a result, the Condensed Consolidating Financial Statements presented for previous periods were retrospectively revised based on the guarantor structure that existed as of September 30, 2016. The impact of these revisions was not material to the periods presented.



Table of Contents
- 34 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)

 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET SALES
$
—

$
1,106

$
545

$
(133
)
$
1,518

COST OF SALES
—

856

421

(133
)
1,144

Gross margin
—

250

124

—

374

OPERATING EXPENSES
 
 
 
 
 
Marketing and administrative expenses
35

76

30

—

141

Science and technology expenses
—

17

3

—

20

Other expenses (income), net
(5
)
(6
)
17

—

6

Total operating expenses
30

87

50

—

167

EARNINGS BEFORE INTEREST AND TAXES
(30
)
163

74

—

207

Interest expense, net
28

—

—

—

28

Loss (gain) on extinguishment of debt
1

—

—

—

1

EARNINGS BEFORE TAXES
(59
)
163

74

—

178

Income tax expense
(35
)
93

7

—

65

Equity in net earnings of subsidiaries
136

66

—

(202
)
—

Equity in net earnings of affiliates
—

—

—

—

—

NET EARNINGS
112

136

67

(202
)
113

Net earnings attributable to noncontrolling interests
—

—

1

—

1

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
112

$
136

$
66

$
(202
)
$
112




























Table of Contents
- 35 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)


 OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015
(in millions)

 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET SALES
$
—

$
1,050

$
494

$
(97
)
$
1,447

COST OF SALES
(1
)
829

376

(97
)
1,107

Gross margin
1

221

118

—

340

OPERATING EXPENSES
 
 
 
 
 
Marketing and administrative expenses
30

71

29

—

130

Science and technology expenses
—

15

3

—

18

Other expenses (income), net
(24
)
6

14

—

(4
)
Total operating expenses
6

92

46

—

144

EARNINGS BEFORE INTEREST AND TAXES
(5
)
129

72

—

196

Interest expense, net
25

—

3

—

28

Loss (gain) on extinguishment of debt
—

—

—

—

—

EARNINGS BEFORE TAXES
(30
)
129

69

—

168

Income tax expense
(10
)
51

14

—

55

Equity in net earnings of subsidiaries
132

54

—

(186
)
—

Equity in net earnings of affiliates
—

—

—

—

—

NET EARNINGS
112

132

55

(186
)
113

Net earnings attributable to noncontrolling interests
—

—

1

—

1

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
112

$
132

$
54

$
(186
)
$
112







Table of Contents
- 36 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)
 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET SALES
$
—

$
3,123

$
1,539

$
(368
)
$
4,294

COST OF SALES
2

2,439

1,159

(368
)
3,232

Gross margin
(2
)
684

380

—

1,062

OPERATING EXPENSES
 
 
 
 
 
Marketing and administrative expenses
103

233

90

—

426

Science and technology expenses
—

50

10

—

60

Other expenses (income), net
(8
)
31

(10
)
—

13

Total operating expenses
95

314

90

—

499

EARNINGS BEFORE INTEREST AND TAXES
(97
)
370

290

—

563

Interest expense, net
74

(1
)
7

—

80

Loss (gain) on extinguishment of debt
1

—

—

—

1

EARNINGS BEFORE TAXES
(172
)
371

283

—

482

Income tax expense
(85
)
188

69

—

172

Equity in net earnings of subsidiaries
394

211

—

(605
)
—

Equity in net earnings of affiliates
—

—

1

—

1

NET EARNINGS
307

394

215

(605
)
311

Net earnings attributable to noncontrolling interests
—

—

4

—

4

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
307

$
394

$
211

$
(605
)
$
307




Table of Contents
- 37 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(in millions)
 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET SALES
$
—

$
2,909

$
1,430

$
(286
)
$
4,053

COST OF SALES
—

2,366

1,116

(286
)
3,196

Gross margin
—

543

314

—

857

OPERATING EXPENSES
 
 
 
 
 
Marketing and administrative expenses
92

212

85

—

389

Science and technology expenses
—

44

9

—

53

Other expenses (income), net
(41
)
24

22

—

5

Total operating expenses
51

280

116

—

447

EARNINGS BEFORE INTEREST AND TAXES
(51
)
263

198

—

410

Interest expense, net
73

2

5

—

80

Loss (gain) on extinguishment of debt
(5
)
—

—

—

(5
)
EARNINGS BEFORE TAXES
(119
)
261

193

—

335

Income tax expense
(39
)
97

54

—

112

Equity in net earnings of subsidiaries
301

137

—

(438
)
—

Equity in net earnings of affiliates
—

—

1

—

1

NET EARNINGS
221

301

140

(438
)
224

Net earnings attributable to noncontrolling interests
—

—

3

—

3

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
221

$
301

$
137

$
(438
)
$
221



 







Table of Contents
- 38 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)
 
 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET EARNINGS
$
112

$
136

$
67

$
(202
)
$
113

Currency translation adjustment (net of tax)
(2
)
—

2

(2
)
(2
)
Pension and other postretirement adjustment (net of tax)
4

(1
)
3

(2
)
4

Deferred gain on hedging (net of tax)
1

—

—

—

1

COMPREHENSIVE EARNINGS
115

135

72

(206
)
116

Comprehensive earnings attributable to noncontrolling interests
—

—

1

—

1

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
115

$
135

$
71

$
(206
)
$
115


OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015
(in millions)

 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET EARNINGS
$
112

$
132

$
55

$
(186
)
$
113

Currency translation adjustment (net of tax)
(38
)
(1
)
(40
)
41

(38
)
Pension and other postretirement adjustment (net of tax)
6

(1
)
6

(5
)
6

Deferred gain on hedging (net of tax)
(1
)
—

(1
)
1

(1
)
COMPREHENSIVE EARNINGS
79

130

20

(149
)
80

Comprehensive earnings attributable to noncontrolling interests
—

—

1

—

1

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
79

$
130

$
19

$
(149
)
$
79



Table of Contents
- 39 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)
 
 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET EARNINGS
$
307

$
394

$
215

$
(605
)
$
311

Currency translation adjustment (net of tax)
19

(3
)
28

(25
)
19

Pension and other postretirement adjustment (net of tax)
14

22

4

(26
)
14

Deferred gain on hedging (net of tax)
5

1

1

(2
)
5

COMPREHENSIVE EARNINGS
345

414

248

(658
)
349

Comprehensive earnings attributable to noncontrolling interests
—

—

4

—

4

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
345

$
414

$
244

$
(658
)
$
345


OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(in millions)

 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET EARNINGS
$
221

$
301

$
140

$
(438
)
$
224

Currency translation adjustment (net of tax)
(81
)
(1
)
(86
)
87

(81
)
Pension and other postretirement adjustment (net of tax)
12

(3
)
8

(5
)
12

Deferred gain on hedging (net of tax)
2

4

—

(4
)
2

COMPREHENSIVE EARNINGS
154

301

62

(360
)
157

Comprehensive earnings attributable to noncontrolling interests
—

—

3

—

3

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
154

$
301

$
59

$
(360
)
$
154






 



 




Table of Contents
- 40 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2016
(in millions)
ASSETS
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
CURRENT ASSETS
 
 
 
 
 
Cash and cash equivalents
$
35

$
2

$
73

$
—

$
110

Receivables, less allowances
—

—

796

—

796

Due from affiliates
—

2,530

—

(2,530
)
—

Inventories
—

425

304

—

729

Assets held for sale
—

3

10

—

13

Other current assets
11

21

22

—

54

Total current assets
46

2,981

1,205

(2,530
)
1,702

Investment in subsidiaries
7,666

1,744

—

(9,410
)
—

Due from affiliates
—

—

—

—

—

Property, plant and equipment, net
467

1,533

1,090

—

3,090

Goodwill
—

1,159

179

—

1,338

Intangible assets, net
—

1,043

223

(120
)
1,146

Deferred income taxes
(23
)
341

51

—

369

Other non-current assets
13

68

150

—

231

TOTAL ASSETS
$
8,169

$
8,869

$
2,898

$
(12,060
)
$
7,876

LIABILITIES AND EQUITY
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
Accounts payable and accrued liabilities
$
83

$
776

$
140

$
—

$
999

Due to affiliates
1,849

—

681

(2,530
)
—

Short-term debt
—

—

1

—

1

Long-term debt – current portion
—

2

1

—

3

Total current liabilities
1,932

778

823

(2,530
)
1,003

Long-term debt, net of current portion
2,069

12

79

—

2,160

Due to affiliates
—

—

—

—

—

Pension plan liability
230

—

91

—

321

Other employee benefits liability
—

223

14

—

237

Deferred income taxes
—

—

36

—

36

Other liabilities
45

190

67

(120
)
182

Redeemable equity
—

—

2

—

2

OWENS CORNING STOCKHOLDERS’ EQUITY
 
 
 
 
 
Total Owens Corning stockholders’ equity
3,893

7,666

1,744

(9,410
)
3,893

Noncontrolling interests
—

—

42

—

42

Total equity
3,893

7,666

1,786

(9,410
)
3,935

TOTAL LIABILITIES AND EQUITY
$
8,169

$
8,869

$
2,898

$
(12,060
)
$
7,876




Table of Contents
- 41 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2015
(in millions)
ASSETS
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
CURRENT ASSETS
 
 
 
 
 
Cash and cash equivalents
$
—

$
48

$
48

$
—

$
96

Receivables, less allowances
—

—

709

—

709

Due from affiliates
—

2,382

—

(2,382
)
—

Inventories
—

392

252

—

644

Assets held for sale
—

—

12

—

12

Other current assets
11

21

15

—

47

Total current assets
11

2,843

1,036

(2,382
)
1,508

Investment in subsidiaries
7,220

1,423

—

(8,643
)
—

Due from affiliates
—

—

—

—

—

Property, plant and equipment, net
463

1,451

1,042

—

2,956

Goodwill
—

1,149

18

—

1,167

Intangible assets, net
—

986

144

(131
)
999

Deferred income taxes
—

430

62

—

492

Other non-current assets
25

61

136

—

222

TOTAL ASSETS
$
7,719

$
8,343

$
2,438

$
(11,156
)
$
7,344

LIABILITIES AND EQUITY
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
Accounts payable and accrued liabilities
$
56

$
703

$
153

$
—

$
912

Due to affiliates
1,760

—

622

(2,382
)
—

Short-term debt
—

—

6

—

6

       Long-term debt – current portion
160

2

1

—

163

Total current liabilities
1,976

705

782

(2,382
)
1,081

Long-term debt, net of current portion
1,668

14

20

—

1,702

Due to affiliates
—

—

—

—

—

Pension plan liability
286

—

111

—

397

Other employee benefits liability
—

227

13

—

240

Deferred income taxes
—

—

8

—

8

Other liabilities
50

177

41

(131
)
137

Redeemable equity
—

—

—

—

—

OWENS CORNING STOCKHOLDERS’ EQUITY
 
 
 
 


Total Owens Corning stockholders’ equity
3,739

7,220

1,423

(8,643
)
3,739

Noncontrolling interests
—

—

40

—

40

Total equity
3,739

7,220

1,463

(8,643
)
3,779

TOTAL LIABILITIES AND EQUITY
$
7,719

$
8,343

$
2,438

$
(11,156
)
$
7,344




Table of Contents
- 42 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)
 
 
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES
$
(67
)
$
621

$
136

$
(11
)
$
679

NET CASH FLOW USED FOR INVESTING ACTIVITIES
 
 
 
 
 
Cash paid for property, plant and equipment
(11
)
(216
)
(54
)
—

(281
)
Proceeds from the sale of assets or affiliates
—

—

—

—

—

Investment in subsidiaries and affiliates, net of cash acquired
—

—

(450
)
—

(450
)
Purchases of alloy
—

—

—

—

—

Proceeds from sale of alloy
—

—

—

—

—

Other
2

—

—

—

2

Net cash flow used for investing activities
(9
)
(216
)
(504
)
—

(729
)
NET CASH FLOW PROVIDED BY (USED FOR) FINANCING ACTIVITIES
 
 
 
 
 
Proceeds from long-term debt
395

—

—

—

395

Proceeds from senior revolving credit and receivables securitization facilities
—

—

574

—

574

Proceeds from term loan borrowing
300

—

—

—

300

Payments on term loan borrowing
(300
)
—

—

—

(300
)
Payments on senior revolving credit and receivables securitization facilities
—

—

(514
)
—

(514
)
Payments on long-term debt
(160
)
—

—

—

(160
)
Net decrease in short-term debt
—

—

(5
)
—

(5
)
Cash dividends paid
(61
)
—

—

—

(61
)
Purchases of treasury stock
(176
)
—

—

—

(176
)
Intercompany dividends paid
—

—

(11
)
11

—

Other intercompany loans
103

(451
)
348

—

—

Other
10

—

—

—

10

Net cash flow provided by (used for) financing activities
111

(451
)
392

11

63

Effect of exchange rate changes on cash
—

—

1

—

1

Net increase (decrease) in cash and cash equivalents
35

(46
)
25

—

14

Cash and cash equivalents at beginning of period
—

48

48

—

96

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
35

$
2

$
73

$
—

$
110



Table of Contents
- 43 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

19.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)


OWENS CORNING AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(in millions)
 
 
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES
$
(54
)
$
248

$
216

$
—

$
410

NET CASH FLOW USED FOR INVESTING ACTIVITIES
 
 
 
 
 
Cash paid for property, plant and equipment
(10
)
(203
)
(53
)
—

(266
)
Proceeds from the sale of assets or affiliates
—

—

3

—

3

Investment in subsidiaries and affiliates, net of cash acquired
—

—

—

—

—

Purchases of alloy
—

—

(8
)
—

(8
)
Proceeds from sale of alloy
—

—

8

—

8

Other
—

—

—

—

—

Net cash flow used for investing activities
(10
)
(203
)
(50
)
—

(263
)
NET CASH FLOW PROVIDED BY (USED FOR) FINANCING ACTIVITIES
 
 
 
 
 
Proceeds from long-term debt
—

—

—

—

—

Proceeds from senior revolving credit and receivables securitization facilities
943

—

136

—

1,079

Proceeds from term loan borrowing
—

—

—

—

—

Payments on term loan borrowing
—

—

—

—

—

Payments on senior revolving credit and receivables securitization facilities
(942
)
—

(140
)
—

(1,082
)
Payments on long-term debt
(5
)
(1
)
(2
)
—

(8
)
Net decrease in short-term debt
—

(13
)
3

—

(10
)
Cash dividends paid
(58
)
—

—

—

(58
)
Purchase of treasury stock
(86
)
—

—

—

(86
)
Intercompany dividends paid
—

—

—

—

—

Other intercompany loans
194

(30
)
(164
)
—

—

Other
18

—

—

—

18

Net cash flow provided by (used for) financing activities
64

(44
)
(167
)
—

(147
)
Effect of exchange rate changes on cash
—

—

(5
)
—

(5
)
Net increase (decrease) in cash and cash equivalents
—

1

(6
)
—

(5
)
Cash and cash equivalents at beginning of period
—

1

66

—

67

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
—

$
2

$
60

$
—

$
62



Table of Contents
- 44 -

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 investors 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 and its subsidiaries.
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 has three reportable segments: Composites, Insulation and Roofing. 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
Net earnings attributable to Owens Corning were $112 million in the third quarter of 2016 and 2015. The Company reported $207 million in earnings before interest and taxes (“EBIT”) for the third quarter of 2016 compared to $196 million in the same period of 2015. The Company generated $218 million in adjusted earnings before interest and taxes (“Adjusted EBIT”) for the third quarter of 2016 compared to $198 million in the same period of 2015. See the Adjusted Earnings Before Interest and Taxes paragraph of the MD&A for further information regarding EBIT and Adjusted EBIT, including the reconciliation to net earnings attributable to Owens Corning. Segment EBIT performance compared to the same period of 2015 increased $43 million in our Roofing segment, was flat in our Composites segment and decreased $20 million in our Insulation segment. Within our Corporate, Other and Eliminations category, General corporate expense and other increased by $3 million.
In our Roofing segment, EBIT in the third quarter of 2016 was $146 million compared to $103 million in the same period in 2015 driven primarily by higher sales volumes and asphalt cost deflation. In our Composites segment, EBIT was $61 million in the third quarter of 2016 and 2015, as higher furnace rebuild and startup costs were offset by higher selling prices and higher sales volumes. In our Insulation segment, EBIT in the third quarter of 2016 was $38 million compared to $58 million in the same period in 2015 primarily due to the negative impact of lower production volumes.
In the nine months ended September 30, 2016, the Company's operating activities provided $679 million in cash flow, compared to $410 million in the same period in 2015. This increase in cash provided by operating activities was primarily driven by increased earnings and increased cash provided by changes in operating assets and liabilities, mainly lower receivables.
On April 21, 2016, the Company acquired all outstanding shares of InterWrap, a leading manufacturer of roofing underlayment and packaging materials, for approximately $450 million, net of cash acquired. This acquisition will expand the Company’s position in roofing components, strengthen the Company’s capabilities to support the conversion from organic to synthetic underlayment and accelerate its growth in the roofing components market. InterWrap's operating results and a preliminary purchase price allocation have been included in the Company’s Roofing segment in the Consolidated Financial Statements since the date of the acquisition.
The Company issued $400 million of 2026 senior notes on August 8, 2016 at 3.40%. The proceeds of these notes were used for general corporate purposes, to fully repay outstanding debt on our Receivables Securitization Facility and to repay all $158 million of outstanding 2016 senior notes through a make whole call redemption. In connection with this redemption, the Company recognized a $1 million loss on extinguishment of debt. During the third quarter of 2016, the remaining proceeds were used, in addition to borrowings on the Receivables Securitization Facility, to repay the Term Loan, which was drawn in the second quarter of 2016. The Term Loan was used, in addition to borrowings on the Receivables Securitization Facility, to fund the acquisition of InterWrap.
The Company repurchased 1.6 million shares of the Company's common stock for $86 million in the third quarter of 2016 under a previously announced repurchase authorization. As of September 30, 2016, 1.2 million shares remained available for repurchase under the previously announced repurchase authorization. On October 24, 2016, the Company's Board of Directors approved an additional 10 million share repurchase authorization.
On July 26, 2016, the Company and Ahlstrom agreed to terminate the previously announced purchase agreement of the non-wovens and fabrics business of Ahlstrom due to challenges associated with obtaining regulatory clearance in Germany. In connection with the termination of the purchase agreement, the Company paid Ahlstrom a termination fee of approximately $3 million in the third quarter of 2016.



Table of Contents
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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 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
Net sales
$
1,518

$
1,447

$
4,294

$
4,053

Gross margin
$
374

$
340

$
1,062

$
857

% of net sales
25
%
23
%
25
%
21
%
Marketing and administrative expenses
$
141

$
130

$
426

$
389

Earnings before interest and taxes
$
207

$
196

$
563

$
410

Interest expense, net
$
28

$
28

$
80

$
80

Loss (gain) on extinguishment of debt
$
1

$
—

$
1

$
(5
)
Income tax expense
$
65

$
55

$
172

$
112

Net earnings attributable to Owens Corning
$
112

$
112

$
307

$
221

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 2016 net sales increased $71 million and $241 million, respectively, compared to the same periods in 2015. The increase in net sales was driven by higher sales volumes in our Roofing and Composites segments, which more than offset lower sales volumes in our Insulation segment. Net sales in our Roofing segment also increased due to the acquisition of InterWrap. For the year-to-date comparison, the increase in net sales was driven by higher sales volumes in our Roofing and Composites segments and the impact of the InterWrap acquisition. This increase was partially offset by lower sales volumes in our Insulation segment and the negative impact of translating sales denominated in foreign currencies into U.S. dollars, primarily in our Composites and Insulation segments.
GROSS MARGIN
In both the third quarter and year-to-date of 2016, gross margin increased $34 million and $205 million, respectively, compared to the same periods in 2015. The improvement for both comparisons was driven by higher sales volumes and the benefit of lower input costs, primarily asphalt costs, in our Roofing segment. For both the third quarter and year-to-date, the gross margin contribution from the InterWrap acquisition was largely offset by the negative impact of production curtailments in our Insulation segment and restructuring and acquisition-related costs discussed in the section below.
RESTRUCTURING AND ACQUISITION-RELATED COSTS
The Company has incurred restructuring, transaction and integration costs related to acquisitions, along with restructuring costs in connection with its global cost reduction and productivity initiatives. These costs are recorded in the Corporate, Other and Eliminations category. Please refer to Notes 7 and 9 of the Consolidated Financial Statements for further information on the nature of these costs.


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


The following table presents the impact and respective location of these income (expense) items on the Consolidated Statements of Earnings (in millions):
  
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
Location
2016
2015
2016
2015
Restructuring costs
Cost of sales
$
(3
)
$
(6
)
$
(6
)
$
(9
)
Restructuring costs
Other expenses (income), net
(2
)
4

(2
)
5

Acquisition-related costs for InterWrap and Ahlstrom transactions
Marketing and administrative expenses
(1
)
—

(5
)
—

Acquisition-related costs for Ahlstrom transaction
Other expenses (income), net
(3
)
—

(3
)
—

Recognition of InterWrap inventory fair value step-up
Cost of sales
(2
)
—

(10
)
—

Total restructuring, acquisition and integration-related costs
 
$
(11
)
$
(2
)
$
(26
)
$
(4
)
MARKETING AND ADMINISTRATIVE EXPENSES
Marketing and administrative expenses for the third quarter and year-to-date of 2016 increased $11 million and $37 million, respectively, compared to the same periods in 2015. For the third quarter, the increase was primarily due to higher selling, general and administrative expenses in our Roofing segment and the impact of our InterWrap acquisition. For the year-to-date, the increase was primarily due to higher selling, general and administrative expenses in our Roofing segment, acquisition-related costs and higher performance-based compensation.
EARNINGS BEFORE INTEREST AND TAXES
EBIT increased by $11 million for the third quarter of 2016 compared to the same period in 2015. Third quarter EBIT in our Composites segment was flat. In our Insulation segment, third quarter EBIT decreased by $20 million. In our Roofing segment, third quarter EBIT increased by $43 million. Corporate, Other and Eliminations EBIT costs were $12 million higher quarter-over-quarter mainly due to restructuring and acquisition-related expenses.
For the year-to-date 2016, EBIT increased by $153 million compared to the same period in 2015. Year-to-date EBIT in our Composites segment increased by $11 million. In our Insulation segment, year-to-date EBIT decreased by $7 million. In our Roofing segment, year-to-date EBIT increased by $175 million. Corporate, Other and Eliminations EBIT costs were $26 million higher year-over-year mainly due to restructuring and acquisition-related expenses.
INTEREST EXPENSE, NET
Third quarter and year-to-date interest expense, net was flat compared to the same periods in 2015.
LOSS (GAIN) ON EXTINGUISHMENT OF DEBT
During the third quarter of 2016, the Company recorded a $1 million loss on extinguishment of debt in connection with the redemption of its 2016 senior notes. During the second quarter of 2015, the Company recorded a $5 million gain on extinguishment of debt as a result of purchasing its World Headquarters facility, which had previously been classified as a capital lease.

INCOME TAX EXPENSE

Income tax expense for the three and nine months ended September 30, 2016 was $65 million and $172 million, respectively. For the third quarter and year-to date 2016, the Company’s effective tax rate was 37% and 36%, respectively. The difference between the effective tax rate and the U.S. federal statutory tax rate of 35% for the three and nine months ended September 30, 2016 is primarily due to an increase in unrecognized tax benefit reserves, U.S. state and local income tax expense, the benefit of lower foreign tax rates and other discrete adjustments.


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



Realization of deferred tax assets depends on achieving a certain minimum level of future taxable income. Management currently believes that it is at least reasonably possible that the minimum level of taxable income will be met within the next 12 months to reduce the valuation allowance of certain foreign jurisdictions by a range of $0 million to $12 million.
Income tax expense for the three and nine months ended September 30, 2015 was $55 million and $112 million, respectively. For the third quarter and year-to-date 2015, the Company’s effective tax rate was 33%. The difference between the effective tax rate and the U.S. federal statutory tax rate of 35% for the three and nine months ended September 30, 2015 is primarily attributable to the tax accounting treatment related to various locations which are currently in a loss position, reversal of valuation allowances, the benefit of lower foreign tax rates, and other discrete tax adjustments.
Adjusted Earnings Before Interest and Taxes (“Adjusted EBIT”)
Adjusted EBIT is a non-GAAP measure that excludes certain items that management does not allocate to our segment results because it believes they are not representative of the Company's ongoing 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):
  
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
Restructuring costs
$
(5
)
$
(2
)
$
(8
)
$
(4
)
Acquisition-related costs for InterWrap and Ahlstrom transactions
(4
)
—

(8
)
—

Recognition of InterWrap inventory fair value step-up
(2
)
—

(10
)
—

Total adjusting items
$
(11
)
$
(2
)
$
(26
)
$
(4
)
 

The reconciliation from net earnings attributable to Owens Corning to EBIT and to Adjusted EBIT is shown in the table below (in millions):
 
  
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
NET EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
112

$
112

$
307

$
221

Less: Net earnings attributable to noncontrolling interests
1

1

4

3

NET EARNINGS
113

113

311

224

Equity in net earnings of affiliates
—

—

1

1

Income tax expense
65

55

172

112

EARNINGS BEFORE TAXES
178

168

482

335

Interest expense, net
28

28

80

80

Loss (gain) on extinguishment of debt
1

—

1

(5
)
EARNINGS BEFORE INTEREST AND TAXES
207

196

563

410

Less: adjusting items from above
(11
)
(2
)
(26
)
(4
)
ADJUSTED EBIT
$
218

$
198

$
589

$
414



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


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

The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Composites segment (in millions):
  
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
Net sales
$
496

$
486

$
1,486

$
1,457

% change from prior year
2
%
-1
 %
2
%
-1
 %
EBIT
$
61

$
61

$
199

$
188

EBIT as a % of net sales
12
%
13
 %
13
%
13
 %
Depreciation and amortization expense
$
36

$
29

$
103

$
92


NET SALES

In our Composites segment, net sales in the third quarter of 2016 increased $10 million compared to the same period in 2015. For the third quarter, the increase was driven by higher sales volumes of about 3% and higher selling prices of $3 million. These benefits were partially offset by $6 million of unfavorable product mix related to higher sales volumes into the roofing market.

For the year-to-date, net sales in our Composites segment increased $29 million compared to the same period in 2015. The increase was driven by higher sales volumes of about 5% and higher selling prices of $21 million. These benefits were partially offset by $37 million of unfavorable product mix mainly related to the prior year's specialty glass sales and the negative impact of translating sales denominated in foreign currencies into United States dollars.

EBIT

In our Composites segment, EBIT in the third quarter of 2016 was flat compared to the same period in 2015. Higher furnace rebuild and plant startup costs of $9 million were offset about equally by higher selling prices, higher sales volumes and input cost deflation.

For the year-to-date 2016, EBIT in our Composites segment was $11 million higher compared to the same period in 2015. Higher furnace rebuild and startup costs of $25 million were partially offset by higher selling prices. Higher sales volumes were largely offset by unfavorable product mix of $16 million related to the comparison against the prior year's specialty glass sales. The remaining change was driven by input cost deflation. One-time benefits from our third-party supply agreements were offset by slightly higher selling, general and administrative expenses.

OUTLOOK

Global glass reinforcements market demand has historically grown on average with global industrial production and we believe this relationship will continue. In 2016, we expect moderate global industrial production growth.



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


Insulation
The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Insulation segment (in millions):
 
  
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
Net sales
$
476

$
502

$
1,275

$
1,332

% change from prior year
-5
 %
11
%
-4
 %
6
%
EBIT
$
38

$
58

$
83

$
90

EBIT as a % of net sales
8
 %
12
%
7
 %
7
%
Depreciation and amortization expense
$
26

$
25

$
78

$
75

NET SALES
In our Insulation segment, net sales in the third quarter of 2016 decreased $26 million compared to the same period in 2015. Sales volumes were lower by approximately 4%, primarily due to the expiration of contract manufacturing agreements at the beginning of 2016 and a commercial dispute with a large residential insulation installer. Selling prices were $12 million lower across the segment, but were largely offset by $10 million of favorable customer mix. The remaining decrease was driven by the negative impact of translating sales denominated in foreign currencies into United States dollars.
For the year-to-date 2016, net sales in our Insulation segment decreased $57 million compared to the same period in 2015. The decrease was primarily driven by lower sales volumes of about 4%, primarily due to the expiration of contract manufacturing agreements at the beginning of 2016 and a commercial dispute with a large residential insulation installer. Favorable customer mix of $24 million was partially offset by lower selling prices of $16 million. The remaining decrease of $19 million was due to negative foreign currency translation.
EBIT
In our Insulation segment, EBIT in the third quarter of 2016 decreased by $20 million compared to the same period in 2015. For the third quarter, EBIT was negatively impacted by $14 million of unfavorable manufacturing performance from production curtailments. Lower selling prices of $12 million were partially offset by $9 million of favorable customer mix. The remaining change was driven by lower sales volumes.
For the year-to-date, the EBIT in our Insulation segment decreased by $7 million compared to the same period in 2015. For the year-to-date, favorable customer mix of $18 million was largely offset by lower selling prices. Unfavorable manufacturing performance of $12 million, mainly due to production curtailments, was largely offset by the $10 million benefit on input cost deflation. The remaining change was driven about equally by the impact of lower sales volumes and negative foreign currency translation.
OUTLOOK
During the third quarter of 2016, the average Seasonally Adjusted Annual Rate (“SAAR”) of U.S. housing starts was approximately 1.140 million, down slightly from an annual average of approximately 1.155 million starts in the third quarter of 2015. While the trend in U.S. housing starts has generally been positive over the past couple of years, the timing and pace of recovery of the United States housing market remains uncertain.
The changes to our market share from a commercial dispute with a large residential insulation installer (which represented approximately 7% of 2015 Insulation segment sales) and the related production curtailments will impact revenue growth and EBIT for the remainder of 2016. We now expect that our Insulation segment net sales could be down by about 5% and EBIT margins down about 1 percentage point in 2016 compared to 2015.
In the mid-term beyond 2016, the Company expects its Insulation segment to continue to benefit from an overall strengthening of the U.S. housing market, higher capacity utilization and improved pricing. We believe the geographic, product and channel mix


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


of our portfolio may continue to moderate the impact of any demand-driven variability associated with United States new construction.
Roofing
The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Roofing segment (in millions):
  
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
Net sales
$
603

$
502

$
1,711

$
1,398

% change from prior year
20
%
6
%
22
%
-1
 %
EBIT
$
146

$
103

$
388

$
213

EBIT as a % of net sales
24
%
21
%
23
%
15
 %
Depreciation and amortization expense
$
13

$
10

$
34

$
29

NET SALES
In our Roofing segment, net sales in the third quarter of 2016 increased by $101 million compared to the same period in 2015. For the third quarter, sales volumes increased by about 10%, as higher re-roof demand, driven largely by storm activity, and increased demand from new construction contributed to the growth of the U.S. asphalt shingle market. Our second quarter 2016 acquisition of InterWrap contributed $65 million of net sales. The remaining change was driven by $9 million of lower third-party asphalt sales and slightly lower selling prices.
For the year-to-date, net sales in our Roofing segment increased $313 million compared to the same period in 2015. The increase was driven primarily by higher sales volumes of approximately 20% and the $121 million impact of our second quarter 2016 acquisition of InterWrap. The remaining change was driven by $50 million of lower selling prices and $43 million of lower third-party asphalt sales. Third-party asphalt sales represent approximately 9% of our year-to-date 2016 Roofing segment sales and are largely a cost-plus business. Asphalt input costs and third party asphalt sales prices are correlated to crude oil prices.
EBIT
In our Roofing segment, EBIT in the third quarter of 2016 increased by $43 million compared to the same period in 2015. The improvement was driven about equally by higher sales volumes and the favorable impact of asphalt cost deflation. The $14 million favorable impact of our second quarter 2016 acquisition was offset by higher selling, general and administrative expenses and slightly lower selling prices.
For the year-to-date 2016, EBIT in our Roofing segment was $175 million higher compared to the same period in 2015. The increase was primarily driven by higher sales volumes. The asphalt cost deflation benefit of $94 million was partially offset by lower selling prices. The $26 million favorable impact of our second quarter 2016 acquisition was partially offset by higher selling, general and administrative expenses, primarily driven by increased sales and marketing costs associated with higher sales volumes.
OUTLOOK
In our Roofing segment, we expect the factors that have driven strong margins in recent years will continue to deliver profitability. The overall market size will impact our financial outlook for this year. Other uncertainties that may impact our Roofing margins include competitive pricing pressure and the cost and availability of raw materials, particularly asphalt.


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


Corporate, Other and Eliminations
The table below provides a summary of EBIT and depreciation and amortization expense for the Corporate, Other and Eliminations category (in millions):
  
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
  
2016
2015
2016
2015
Restructuring costs
$
(5
)
$
(2
)
$
(8
)
$
(4
)
Acquisition-related costs for InterWrap and Ahlstrom transactions
(4
)
—

(8
)
—

Recognition of InterWrap inventory fair value step-up
(2
)
—

(10
)
—

General corporate expense and other
(27
)
(24
)
(81
)
(77
)
EBIT
$
(38
)
$
(26
)
$
(107
)
$
(81
)
Depreciation and amortization
$
9

$
9

$
27

$
28

 
EBIT
In Corporate, Other and Eliminations, EBIT losses for the third quarter and year-to-date of 2016 were higher by $12 million and $26 million, respectively, compared to the same periods in 2015, primarily due to costs related to our previously announced acquisitions for both comparisons. See details of these costs in the table above and further explained in the Adjusted Earnings Before Interest and Taxes paragraph of MD&A. General corporate expense and other in the third quarter of 2016 was $3 million higher compared to the same period in 2015, due to increased general corporate expenses. For the year-to-date, general corporate expense and other was $4 million higher compared to the same period in 2015, as higher performance-based compensation and increased general corporate expenses were largely offset by a pension-related gain.
OUTLOOK
In 2016, we expect general corporate expenses to be approximately $120 million to $130 million.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Liquidity
The Company's primary external sources of liquidity are its Senior Revolving Credit Facility and its Receivables Securitization Facility.
The Company has an $800 million Senior Revolving Credit Facility that has been amended from time to time, which matures in November 2020 and permits incremental term loans under the facility of up to $600 million. In March 2016, the Company obtained commitments for $300 million of the $600 million of permitted incremental term loans under the Senior Revolving Credit Facility. As discussed further below, the Company subsequently borrowed $300 million on this commitment in April 2016 and fully repaid the $300 million of borrowings in September 2016. The Company may obtain new commitments for incremental term loans up to $600 million as permitted under the facility. Subsequent amendments did not impact liquidity terms.
During the first quarter of 2016, the Company obtained a $300 million Term Loan commitment, as allowed under its existing Senior Revolving Credit Facility. During the second quarter of 2016, the Company borrowed the $300 million available on its Term Loan commitment. The Term Loan was a partially amortizing loan that required quarterly principal repayments, with a balloon repayment due in November 2020 for any outstanding borrowings. These borrowings were used, in addition to borrowings on the Receivables Securitization Facility, to fund the acquisition of InterWrap. Please see Note 7 of the Notes to Consolidated Financial Statements for more information on this acquisition. In the third quarter of 2016, the Company repaid all outstanding borrowings on this Term Loan.
The Company has a $250 million receivables securitization facility which matures in January 2018.
As of September 30, 2016, the Company utilized its Receivables Securitization Facility for $60 million of borrowings and $2 million of outstanding letters of credit, and had $188 million available on this facility. As of September 30, 2016, the Company had no borrowings on its Senior Revolving Credit Facility, $9 million of outstanding letters of credit, and $791 million available on this facility.


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


The Company issued $400 million of 2026 senior notes on August 8, 2016 subject to $5 million of discounts and issuance costs. Interest on the notes is payable semiannually in arrears on February 15 and August 15 each year, beginning on February 15, 2017. A portion of the proceeds from these notes were used to redeem $158 million of our 2016 senior notes, together with a $2 million make whole call payment and $3 million of accrued interest. In connection with the redemption, the Company recognized a $1 million loss on extinguishment of debt, inclusive of the remaining unamortized financing fees, discount, and interest rate swap fair value adjustment. The remaining proceeds were used to pay down portions of our Receivables Securitization Facility and for general corporate purposes.
The Company has no significant debt maturities before 2018. As of September 30, 2016, the Company had $2.2 billion of total debt and cash-on-hand of $110 million.
Cash and cash equivalents held by foreign subsidiaries may be subject to U.S. income tax and foreign withholding taxes upon repatriation to the U.S. As of September 30, 2016, and December 31, 2015, the Company had $72 million and $43 million, respectively, in cash and cash equivalents in certain of our foreign subsidiaries. The Company does not provide for U.S. income taxes on the undistributed earnings of its foreign subsidiaries as earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely outside of the U.S.
As a holding company, we have no operations of our own and most of our assets are held by our direct and indirect subsidiaries. Dividends and other payments or distributions from our subsidiaries will be used to meet our debt service and other obligations and to enable us to pay dividends to our stockholders. Please refer to page 12 of the Risk Factors disclosed in Item 1A of the Company’s Form 10-K for the year ended December 31, 2015 for details on the factors that could inhibit our subsidiaries' abilities to pay dividends or make other distributions to the parent company.
We expect that our cash on hand, coupled with future cash flows from operations and other available sources of liquidity, including our Senior Revolving Credit Facility and Receivables Securitization Facility, will provide ample liquidity to enable us to meet our cash requirements. Our anticipated uses of cash include capital expenditures, working capital needs, pension contributions, meeting financial obligations, payments of quarterly dividends as authorized by our Board of Directors, acquisitions and reducing outstanding amounts under the Senior Revolving Credit Facility and Receivables Securitization Facility.
We have outstanding share repurchase authorizations and will evaluate and consider repurchasing shares of our common stock, as well as strategic acquisitions, divestitures, joint ventures and other transactions to create stockholder value and enhance financial performance. Such transactions may require cash expenditures beyond current sources of liquidity or generate proceeds.
The credit agreements applicable to our Senior Revolving Credit Facility and the Receivables Securitization Facility contain various covenants that we believe are usual and customary. The Senior Revolving Credit Facility and the Receivables Securitization Facility each include a maximum allowed leverage ratio and a minimum required interest expense coverage ratio. We were in compliance with these covenants as of September 30, 2016.
Cash Flows
The following table presents a summary of our cash balance and cash flows (in millions):
  
Nine Months Ended 
 September 30,
  
2016
2015
Cash balance
$
110

$
62

Net cash flow provided by operating activities
$
679

$
410

Net cash flow used for investing activities
$
(729
)
$
(263
)
Net cash flow provided by (used for) financing activities
$
63

$
(147
)
Availability on the senior revolving credit facility
$
791

$
791

Availability on the receivables securitization facility
$
188

$
146

Operating activities: For the nine months ended September 30, 2016, the Company's operating activities provided $679 million of cash compared to $410 million in the same period in 2015. The increase of $269 million was primarily driven by increased earnings and working capital improvement. The improvement in working capital was driven by a lower increase in receivables


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


compared to the same period in 2015, partially offset by slight growth in inventories as compared to a large inventory reduction in the prior year.
Investing activities: Net cash flow used for investing activities increased $466 million for the nine months ended September 30, 2016 compared to the same period of 2015, driven by our acquisition of InterWrap for approximately $450 million.
Financing activities: Net cash provided by financing activities was $63 million for the nine months ended September 30, 2016, compared to $147 million used in the same period in 2015. The change of $210 million was due primarily to borrowings used to finance a portion of our InterWrap acquisition. During the third quarter, we obtained $395 million of proceeds from the issuance of 2026 senior notes and paid $160 million to redeem our 2016 senior notes. Higher treasury stock repurchases were partially offset by higher net borrowings on our Senior Revolving Credit Facility and Receivables Securitization Facility.
2016 Investments
The Company will continue a balanced approach to the use of its cash flow. Operational cash flow will be used to fund the Company’s growth and innovation. Capital expenditures in 2016 are expected to be approximately $385 million, which is roughly $65 million greater than expected depreciation and amortization. Capital spending in excess of depreciation and amortization is primarily due to the construction of our mineral fiber insulation plant in Joplin, Missouri. The Company previously announced its plan to invest $110 million in the expansion of its composites operations in India. This investment is not expected to significantly impact our capital expenditures until 2017. The Company will also continue to evaluate projects and acquisitions that provide opportunities for growth in our businesses, and invest in them when they meet our strategic and financial criteria.
Tax Net Operating Losses
There have been no material changes to the disclosure in the Company’s Form 10-K for the year ended December 31, 2015.
Pension Contributions
Please refer to Note 11 of the Consolidated Financial Statements. The Company expects to contribute $63 million in cash to its global pension plans during 2016. Actual contributions to the plans may change as a result of several factors, including changes in laws that impact funding requirements. The ultimate cash flow impact to the Company, if any, of the pension plan liability and the timing of any such impact will depend on numerous variables, including future changes in actuarial assumptions, legislative changes to pension funding laws, and market conditions.
Derivatives
Please refer to Note 4 of the Consolidated Financial Statements.
Fair Value Measurement

Please refer to Note 15 of the Consolidated Financial Statements.
Contractual Obligations
In the normal course of business, we enter into contractual obligations to make payments to third parties. During the nine months ended September 30, 2016, there were no material changes to such contractual obligations outside the ordinary course of our business.
SAFETY
Working safely is a condition of employment at Owens Corning. We believe this organization-wide expectation provides for a safer work environment for employees, improves our manufacturing processes, reduces our costs and enhances our reputation. Furthermore, striving to be a world-class leader in safety provides a platform for all employees to understand and apply the resolve necessary to be a high-performing global organization. We measure our progress on safety based on Recordable Incidence Rate (“RIR”) as defined by the United States Department of Labor, Bureau of Labor Statistics. For the three months ended September 30, 2016, our RIR was 0.47 as compared to 0.42 in the same period a year ago. For the nine months ended September 30, 2016, our RIR was 0.52 as compared to 0.49 in the same period a year ago.



ACCOUNTING PRONOUNCEMENTS

Please refer to Note 18 of the Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
Please refer to Note 12 of the Consolidated Financial Statements.


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


CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Our disclosures and analysis in this report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements present our current forecasts and estimates of future events. These statements do not strictly relate to historical or current results and can be identified by words such as “anticipate,” "appear," "assume," “believe,” “estimate,” “expect,” "forecast," “intend,” “likely,” “may,” “plan,” “project,” "seek," "should," “strategy,” "will" and other terms of similar meaning or import in connection with any discussion of future operating, financial or other performance. These forward-looking statements are subject to risks, uncertainties and other factors and actual results may differ materially from those results projected in the statements. These risks, uncertainties and other factors include, without limitation:
 
•
relationships with key customers;
•
levels of residential and commercial construction activity;
•
competitive and pricing factors;
•
levels of global industrial production;
•
demand for our products;
•
industry and economic conditions that affect the market and operating conditions of our customers, suppliers or lenders;
•
domestic and international economic and political conditions, including new legislation or other governmental actions;
•
foreign exchange and commodity price fluctuations;
•
our level of indebtedness;
•
weather conditions;
•
availability and cost of credit;
•
availability and cost of energy and raw materials;
•
issues involving implementation and protection of information technology systems;
•
labor disputes;
•
legal and regulatory proceedings, including litigation and environmental actions;
•
our ability to utilize our net operating loss carryforwards;
•
research and development activities and intellectual property protection;
•
interest rate movements;
•
uninsured losses;
•
issues related to acquisitions, divestitures and joint ventures;
•
achievement of expected synergies, cost reductions and/or productivity improvements; and
•
defined benefit plan funding obligations.


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


All forward-looking statements in this report should be considered in the context of the risks and other factors described above and in Item 1A - Risk factors in Part I of our Form 10-K for the year ended December 31, 2015. Any forward-looking statements speak only as of the date the statement is made and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by federal securities laws. It is not possible to identify all of the risks, uncertainties and other factors that may affect future results. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur and actual results may differ materially from those anticipated or implied in the forward-looking statements. Accordingly, users of this report are cautioned not to place undue reliance on the forward-looking statements.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our exposure to market risk during the nine months ended September 30, 2016. Please refer to "Quantitative and Qualitative Disclosures about Market Risk" contained in Part II, Item 7A of our Form 10-K for the year ended December 31, 2015 for a discussion of our exposure to market risk.
 
ITEM 4.    CONTROLS AND PROCEDURES
The Company maintains (a) disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, (the “Exchange Act”)), and (b) internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
There has been no change in the Company's internal control over financial reporting during the quarter ended September 30, 2016 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.





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PART II
 
ITEM 1.    LEGAL PROCEEDINGS
The information required by this item is incorporated by reference to Note 12, Contingent Liabilities and Other Matters.
 
ITEM 1A.    RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A of the Company’s Form 10-K for the year ended December 31, 2015.
 
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.
Issuer Purchases of Equity Securities
The following table provides information about Owens Corning’s purchases of its common stock for each month during the quarterly period covered by this report:
 
Period
Total Number of
Shares (or
Units)
Purchased
 
Average
Price Paid
per Share
(or Unit)
Total Number of
Shares (or
Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs**
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs**
 
July 1-31, 2016
252,935

 
$
54.02

251,601

2,542,565

 
August 1-31, 2016
1,000,404

 
53.84

1,000,000

1,542,565

 
September 1-30, 2016
361,533

 
52.60

360,000

1,182,565

 
Total
1,614,872

* 
$
53.59

1,611,601

1,182,565

***
 
*
The Company retained 3,271 shares surrendered to satisfy tax withholding obligations in connection with the vesting of restricted shares granted to our employees.
**
On April 25, 2012, the Company announced a share buy-back authorization under which the Company could repurchase up to 10 million shares of Owens Corning’s outstanding common stock. Under the buy-back authorization, shares could be repurchased through open market, privately negotiated, or other transactions. The timing and actual number of shares repurchased depends on market conditions and other factors and is at the Company’s discretion.
***
The shares remaining for repurchase as of September 30, 2016 do not include a new share repurchase authorization approved on October 24, 2016, under which the Company is authorized to repurchase up to 10 million shares of the Company’s outstanding common stock (the “2016 Repurchase Authorization”). The 2016 Repurchase Authorization is in addition to the share buy-back authorization announced April 25, 2012, under which approximately 1.2 million shares remain available for repurchase as of September 30, 2016 (the “2012 Repurchase Authorization” and collectively with the 2016 Repurchase Authorization, the “Repurchase Authorizations”). The Repurchase Authorizations enable the Company to repurchase shares through 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.


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
None.
 
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.



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ITEM 5.    OTHER INFORMATION

None.

ITEM 6.    EXHIBITS
See Exhibit Index below, which is incorporated herein by reference.



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Owens Corning has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
OWENS CORNING
 
 
 
 
 
 
 
 
 
 
 
Registrant
 
 
 
 
 
 
Date:
 
October 26, 2016
By:
 
/s/ Michael C. McMurray
 
 
 
 
 
Michael C. McMurray
 
 
 
 
 
Senior Vice President and
 
 
 
 
 
Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
Date:
 
October 26, 2016
By:
 
/s/ Kelly J. Schmidt
 
 
 
 
 
Kelly J. Schmidt
 
 
 
 
 
Vice President and
 
 
 
 
 
Controller



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EXHIBIT INDEX
 
Exhibit
Number
Description
4.1
Fifth Supplemental Indenture, dated as of August 8, 2016, by and among the Company, the guarantors party thereto and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Owens Corning's Current Report on Form 8-K (File No. 001-33100), filed August 8, 2016).
 
 
4.2
Form of 3.400% Senior Note due 2026 (incorporated by reference to Exhibit 4.2 to Owens Corning's Current Report on Form 8-K (File No. 001-33100), filed August 8, 2016).
 
 
31.1
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) (filed herewith).
 
 
31.2
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) (filed herewith).
 
 
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (filed herewith).
 
 
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (filed herewith).
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase