Document
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)
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| | |
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):
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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.
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 5. | | |
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| Item 6. | | |
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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.
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.
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 |
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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 |
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| | |
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 |
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(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.
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.
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
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.
- 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.
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| | | | | | | | | | | | |
| 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 |
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- 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):
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| | | | | | | | | | | | |
| 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 |
|
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 |
|
- 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.
- 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 |
| | $ | — |
|
- 12 -
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. |
- 13 -
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.
- 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 |
|
- 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.
- 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 |
|
- 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.
- 18 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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.
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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.
- 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.
- 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.
- 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.
- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 |
|
- 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
- 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.
- 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.
- 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 |
| $ | — |
|
- 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.
- 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.
- 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. |
- 32 -
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.
- 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.
- 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 |
|
- 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 | |