UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
or
r | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-33100
Owens Corning
(Exact name of registrant as specified in its charter)
Delaware | 43-2109021 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
One Owens Corning Parkway, Toledo, OH | 43659 | |
(Address of principal executive offices) | (Zip Code) | |
(419) 248-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No r
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes r No þ
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 r
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 r
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. r
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer r Non-accelerated filer r Smaller reporting company r
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes r No þ
On June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of $0.01 par value common stock (the voting stock of the registrant) held by non-affiliates (assuming for purposes of this computation only that the registrant had no affiliates) was approximately $5,917,854,524.
As of January 31, 2017, 112,389,347 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Owens Corning’s proxy statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on or about April 20, 2017 (the “2017 Proxy Statement”) are incorporated by reference into Part III hereof.
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PART I
ITEM 1. | BUSINESS |
OVERVIEW
Owens Corning was founded in 1938. Since then, the Company has continued to grow as a market-leading innovator of glass fiber technology. Owens Corning is a world leader in composite and building materials systems, delivering a broad range of high-quality products and services. Our products range from glass fiber used to reinforce composite materials for transportation, electronics, marine, infrastructure, wind-energy and other high-performance markets to insulation and roofing for residential, commercial and industrial applications.
Unless the context indicates otherwise, the terms “Owens Corning,” “Company,” “we” and “our” in this report refer to Owens Corning and its subsidiaries. References to a particular year mean the Company’s year commencing on January 1 and ending on December 31 of that year.
SEGMENT OVERVIEW
The Company has three reporting segments: Composites, Insulation and Roofing. Our Composites, Insulation and Roofing reportable segments accounted for approximately 33%, 30% and 37% of our total reportable segment net sales, respectively, in 2016.
Note 2 to the Consolidated Financial Statements contains information regarding net sales to external customers and total assets attributable to each of Owens Corning’s reportable segments and geographic regions, earnings before interest and taxes for each of Owens Corning’s reportable segments, and information concerning the dependence of our reportable segments on foreign operations, for each of the years 2016, 2015 and 2014.
Composites
Owens Corning glass fiber materials can be found in over 40,000 end-use applications within five primary markets: building and construction, transportation, consumer, industrial, and power and energy. Such end-use applications include pipe, roofing shingles, sporting goods, consumer electronics, telecommunications cables, boats, aviation, defense, automotive, industrial containers and wind-energy. Our products are manufactured and sold worldwide. We primarily sell our products directly to parts molders and fabricators. Within the building and construction market, our Composites segment sells glass fiber and/or glass mat directly to a small number of major shingle manufacturers, including our own Roofing segment.
Our Composites segment includes vertically integrated downstream activities. The Company manufactures, fabricates and sells glass reinforcements in the form of fiber. Glass reinforcement materials are also used downstream by the Composites segment to manufacture and sell glass fiber products in the form of fabrics, non-wovens and other specialized products.
Demand for composites is driven by general global economic activity and, more specifically, by the increasing replacement of traditional materials such as aluminum, wood and steel with composites that offer lighter weight, improved strength, lack of conductivity and corrosion resistance. We estimate that over the last 30 years, on average, annual global demand for composite materials grew at about 1.6 times global industrial production growth.
We compete with composite manufacturers worldwide. According to various industry reports and Company estimates, our Composites segment is a world leader in the production of glass fiber reinforcement materials. Primary methods of competition include innovation, quality, customer service and global geographic reach. For our commodity products, price is also a method of competition. Significant competitors to the Composites segment include China Jushi Group Co., Ltd., Chongqing Polycom International Corporation Ltd ("CPIC"), Johns Manville, Nippon Electric Glass Co. Ltd. ("NEG"), PPG Industries and Taishan Glass Fiber Co., Ltd.
Typically, our composites plants run continuously throughout the year, and we warehouse much of our production prior to sale since we operate primarily with short delivery cycles.
Insulation
Our insulating products help customers conserve energy, provide improved acoustical performance and offer convenience of installation and use, making them a preferred insulating product for new home construction and remodeling. These products include thermal and acoustical batts, loosefill insulation, foam sheathing and accessories, and are sold under well-recognized brand names and trademarks such as Owens Corning PINK® FIBERGLAS™ Insulation. Our Insulation segment also manufactures and sells glass fiber pipe insulation, energy efficient flexible duct media, bonded and granulated mineral fiber
insulation and foam insulation used in above- and below-grade construction applications. We sell our insulation products primarily to insulation installers, home centers, lumberyards, retailers and distributors in the United States and Canada.
Demand for Owens Corning’s insulating products is driven by new residential construction, remodeling and repair activity, commercial and industrial construction activity, increasingly stringent building codes and the growing need for energy efficiency. Sales in this segment typically follow seasonal home improvement, remodeling and renovation and new construction industry patterns. Demand for new residential construction typically follows housing starts on a three-month lagged basis, although the new residential construction cycle can elongate due to labor availability and other factors beyond our control. The peak season for home construction and remodeling in our geographic markets generally corresponds with the second and third calendar quarters and, therefore, our sales levels are typically higher during the second half of the year.
Our Insulation segment competes primarily with manufacturers in the United States. According to various industry reports and Company estimates, Owens Corning is North America’s largest producer of residential, commercial and industrial insulation, and the second-largest producer of extruded polystyrene foam insulation. Principal methods of competition include innovation and product design, service, location, quality, price and compatibility of systems solutions. Significant competitors in this segment include CertainTeed Corporation, Dow Chemical, Johns Manville, and Knauf Insulation.
Our Insulation segment includes a diverse portfolio with a geographic mix of United States, Canada, Asia-Pacific, and Latin America, a market mix of residential, commercial, industrial and other markets, and a channel mix of retail, contractor and distribution.
Working capital practices for this segment historically have followed a seasonal cycle. Typically, our insulation plants run continuously throughout the year. This production plan, along with the seasonal nature of the segment, generally results in higher finished goods inventory balances in the first half of the year. Since sales increase during the second half of the year, our accounts receivable balances are typically higher during this period.
Roofing
Our primary products in the Roofing segment are laminate and strip asphalt roofing shingles. Other products include oxidized asphalt, roofing components and synthetic packaging materials. We have been able to meet the growing demand for longer lasting, aesthetically attractive laminate products with modest capital investment.
We sell shingles and roofing components primarily through home centers, lumberyards, retailers, distributors and contractors in the United States. Our synthetic packaging materials are used primarily in the construction industry for lumber and metal packaging. Oxidized asphalt is a significant input used in the production of our asphalt roofing shingles. We are vertically integrated and have manufacturing facilities that process asphalt for use in our roofing shingles manufacturing process. In addition, we sell asphalt to other shingle manufacturers, to roofing contractors for built-up roofing asphalt systems and to manufacturers in a variety of other industries, including automotive, chemical, rubber and construction. Asphalt input costs and third-party asphalt sales prices are correlated to crude oil prices. As a result, third-party asphalt sales are largely a cost-plus business.
Demand for products in our Roofing segment is generally driven by both residential repair and remodeling activity and by new residential construction. Roofing damage from major storms can significantly increase demand in this segment. As a result, sales in this segment do not always follow seasonal home improvement, remodeling and new construction industry patterns as closely as our Insulation segment.
Our Roofing segment competes primarily with manufacturers in the United States. According to various industry reports and Company estimates, Owens Corning’s Roofing segment is the second largest producer of asphalt roofing shingles in the United States. Principal methods of competition include innovation and product design, proximity to customers, quality and price. Significant competitors in the Roofing segment include CertainTeed Corporation, GAF and TAMKO.
Our manufacturing operations are generally continuous in nature, and we warehouse much of our production prior to sale since we operate with relatively short delivery cycles. One of the raw materials important to this segment is sourced from a sole supplier. We have a long-term supply contract for this material, and have no reason to believe that any availability issues will exist. If this supply was to become unavailable, our production could be interrupted until such time as the supplies again became available or the Company reformulated its products. Additionally, the supply of asphalt, another significant raw material in this segment, has been constricted at times. Although this has not caused an interruption of our production in the past, prolonged asphalt shortages would restrict our ability to produce products in this segment.
GENERAL
Major Customers
No one customer accounted for more than 10% of our consolidated net sales for 2016, 2015 or 2014. A significant portion of the net sales in our Insulation and Roofing segments are generated from large United States home improvement retailers.
Intellectual Property
The Company relies on a combination of intellectual property laws, as well as confidentiality procedures and contractual provisions, to protect our intellectual property, proprietary technology and our brands. Through continuous and extensive use of the color PINK since 1956, Owens Corning became the first owner of a single color trademark registration. In addition to our Owens Corning and PINK brands, the Company has registered, and applied for the registration of, U.S. and international trademarks, service marks, and domain names. Additionally, the Company has filed U.S. and international patent applications, including numerous issued patents, covering certain of our proprietary technology resulting from research and development efforts. Over time, the Company has assembled a portfolio of intellectual property rights including patents, trademarks, service marks, copyrights, domain names, know-how and trade secrets covering our products, services and manufacturing processes. Our proprietary technology is not dependent on any single or group of intellectual property rights and the Company does not expect the expiration of existing intellectual property to have a material adverse affect on the business as a whole. The Company believes the duration of our patents is adequate relative to the expected lives of our products. Although the Company protects its intellectual property and proprietary technology, any significant impairment of, or third-party claim against, our intellectual property rights could harm our business or our ability to compete.
Backlog
Our customer volume commitments are generally short-term, and the Company does not have a significant backlog of orders.
Research and Development
The Company’s research and development expense during each of the last three years is presented in the table below (in millions):
Period | Research and Development Expense | ||
Twelve Months Ended December 31, 2016 | $ | 82 | |
Twelve Months Ended December 31, 2015 | $ | 73 | |
Twelve Months Ended December 31, 2014 | $ | 76 | |
Environmental Control
Owens Corning has established policies and procedures 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, emissions of greenhouse gases, fine particulate matter and toxic air emissions. The Company is dedicated to continuous improvement in our environmental, health and safety performance and to achieving its 2020 Sustainability goals.
The Company has not experienced a material adverse effect upon our capital expenditures or competitive position as a result of environmental control legislation and regulations. Operating costs associated with environmental compliance were approximately $29 million in 2016. The Company continues to invest in equipment and process modifications to remain in compliance with applicable environmental laws and regulations worldwide.
Our manufacturing facilities are subject to numerous national, state and local environmental protection laws and regulations. Regulatory activities of particular importance to our operations include those addressing air pollution, water pollution, waste disposal and chemical control. The Company expects passage and implementation of new laws and regulations specifically
addressing climate change, toxic air emissions, ozone forming emissions and fine particulate matter during the next two to five years. New air pollution regulations could impact our ability to expand production or construct new facilities in certain regions of North America. However, based on information known to the Company, including the nature of our manufacturing operations and associated air emissions, at this time we do not expect any of these new laws, regulations or activities to have a material adverse effect on our results of current operations, financial condition or long-term liquidity.
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 United States 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. At the end of 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 December 31, 2016, the Company had an accrual totaling $4 million for these costs. Changes in required remediation procedures or timing of those procedures at existing legacy sites, or discovery of contamination at additional sites, could result in material increases to the Company’s environmental obligations.
Number of Employees
As of December 31, 2016, Owens Corning had approximately 16,000 employees. Approximately 6,000 of such employees are subject to collective bargaining agreements. The Company believes that its relations with employees are good.
AVAILABILITY OF INFORMATION
Owens Corning makes available, free of charge, through its website the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. These documents are available through the Investor Relations page of the Company’s website at www.owenscorning.com.
ITEM 1A. | RISK FACTORS |
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
Low levels of residential or commercial construction activity can have a material adverse impact on our business and results of operations.
A large portion of our products are used in the markets for residential and commercial construction, repair and improvement, and demand for certain of our products is affected in part by the level of new residential construction in the United States, although typically not until a number of months after the change in the level of construction. Lower demand in the regions and markets where our products are sold could result in lower revenues and lower profitability. Historically, construction activity has been cyclical and is influenced by prevailing economic conditions, including the level of interest rates and availability of financing, inflation, employment levels, consumer spending habits, consumer confidence and other macroeconomic factors outside our control.
We face significant competition in the markets we serve and we may not be able to compete successfully.
All of the markets we serve are highly competitive. We compete with manufacturers and distributors, both within and outside the United States, in the sale of building products and composite products. Some of our competitors may have superior financial, technical, marketing and other resources than we do. In some cases, we face competition from manufacturers in countries able to produce similar products at lower costs. We also face competition from the introduction by competitors of new products or technologies that may address our customers’ needs in a better manner, whether based on considerations of pricing, usability, effectiveness, sustainability, quality or other features or benefits. If we are not able to successfully commercialize our innovation efforts, we may lose market share. Price competition or overcapacity may limit our ability to raise prices for our products when necessary, may force us to reduce prices and may also result in reduced levels of demand for our products and cause us to lose market share. In addition, in order to effectively compete, we must continue to develop new products that meet changing consumer preferences and successfully develop, manufacture and market these new products. Our inability to effectively compete could result in the loss of customers and reduce the sales of our products, which could have a material adverse impact on our business, financial condition and results of operations.
Our sales may fall rapidly in response to declines in demand because we do not operate under long-term volume agreements to supply our customers and because of customer concentration in certain segments.
Many of our customer volume commitments are short-term; therefore, we do not have a significant manufacturing backlog. As a result, we do not benefit from the hedge provided by long-term volume contracts against downturns in customer demand and sales. Further, we are not able to immediately adjust our costs in response to declines in sales. In addition, although no single customer represents more than 10% of our annual sales, our ability to sell some of the products in Insulation and Roofing are dependent on a limited number of customers, who account for a significant portion of such sales. The loss of key customers for these products, a consolidation of key customers or a significant reduction in sales to those customers, could significantly reduce our revenues from these products. In addition, if key customers experience financial pressure or consolidate, they could attempt to demand more favorable contractual terms, which would place additional pressure on our margins and cash flows. Lower demand for our products, loss of key customers and material changes to contractual terms could materially and adversely impact our business, financial condition and results of operations.
Worldwide economic conditions and credit tightening could have a material adverse impact on the Company.
The Company’s business may be materially and adversely impacted by changes in United States or global economic conditions, including global industrial production rates, inflation, deflation, interest rates, availability of capital, consumer spending rates, energy availability and commodity prices, trade laws, and the effects of governmental initiatives to manage economic conditions. Changes in and/or new laws, regulations and policies that may be enacted by the new U.S. presidential administration and Congress could also materially impact economic conditions and the Company's business and results of operations. Volatility in financial markets and the deterioration of national and global economic conditions could materially adversely impact the Company’s operations, financial results and/or liquidity including as follows:
• | the financial stability of our customers or suppliers may be compromised, which could result in reduced demand for our products, additional bad debts for the Company or non-performance by suppliers; |
• | one or more of the financial institutions syndicated under the credit agreement governing our revolving credit facility may cease to be able to fulfill their funding obligations, which could materially adversely impact our liquidity; |
• | it may become more costly or difficult to obtain financing or refinance the Company’s debt in the future; |
• | the value of the Company’s assets held in pension plans may decline; and/or |
• | the Company’s assets may be impaired or subject to write-down or write-off. |
Uncertainty about global economic conditions may cause consumers of our products to postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values. This could have a material adverse impact on the demand for our products and on our financial condition and operating results. A deterioration of economic conditions would likely exacerbate these adverse effects and could result in a wide-ranging and prolonged impact on general business conditions, thereby negatively impacting our operations, financial results and/or liquidity.
Our level of indebtedness could adversely impact our business, financial condition or results of operations.
Our debt level and degree of leverage could have important consequences, including the following:
• | our ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes may be limited; |
• | a substantial portion of our cash flow from operations could be required for the payment of principal and interest on our indebtedness, and may not be available for other business purposes; |
• | certain of our borrowings are at variable rates of interest, exposing us to the risk of increased interest rates; |
• | if due to liquidity needs we must replace any indebtedness upon maturity, we would be exposed to the risk that we may not be able to refinance such indebtedness; |
• | our ability to adjust to changing market conditions may be limited and place us at a competitive disadvantage compared to our competitors that have less debt; and |
• | we may be vulnerable in a downturn in general economic conditions or in our business, or we may be unable to carry out important capital spending. |
In addition, the credit agreement governing our senior credit facility, the indentures governing our senior notes and the receivables purchase agreement governing our receivables securitization facility contain various covenants that impose operating and financial restrictions on us and/or our subsidiaries. Additionally, instruments and agreements governing our future indebtedness may impose other restrictive conditions or covenants that could restrict our ability to conduct our business operations or pursue growth strategies.
Adverse weather conditions and the level of severe storms could have a material adverse impact on our results of operations.
Weather conditions and the level of severe storms can have a significant impact on the markets for residential and commercial construction, repair and improvement, which can in turn impact our business as follows:
• | generally, any weather conditions that slow or limit residential or commercial construction activity can adversely impact demand for our products; and |
• | a portion of our annual product demand is attributable to the repair of damage caused by severe storms. In periods with below average levels of severe storms, demand for such products could be reduced. |
Lower demand for our products as a result of either of these scenarios could adversely impact our business, financial condition and results of operations. Additionally, severely low temperatures may lead to significant and immediate spikes in costs of natural gas, electricity and other commodities that could negatively affect our results of operation.
Our operations require substantial capital, leading to high levels of fixed costs that will be incurred regardless of our level of business activity.
Our businesses are capital intensive, and regularly require capital expenditures to expand operations, maintain equipment, increase operating efficiency and comply with applicable laws and regulations, leading to high fixed costs, including depreciation expense. Also, increased regulatory focus could lead to additional or higher costs in the future. We are limited in our ability to reduce fixed costs quickly in response to reduced demand for our products and these fixed costs may not be fully absorbed, resulting in higher average unit costs and lower gross margins if we are not able to offset this higher unit cost with price increases. Alternatively, we may be limited in our ability to quickly respond to unanticipated increased demand for our products, which could result in an inability to satisfy demand for our products and loss of market share.
We may be exposed to increases in costs of energy, materials and transportation or reductions in availability of materials and transportation, which could reduce our margins and have a material adverse impact on our business, financial condition and results of operations.
Our business relies heavily on certain commodities and raw materials used in our manufacturing processes. Additionally, we spend a significant amount on natural gas inputs and services that are influenced by energy prices, such as asphalt, a large number of chemicals and resins and transportation costs. Price increases for these inputs could raise costs and reduce our margins if we are not able to offset them by increasing the prices of our products, improving productivity or hedging where
appropriate. In particular, energy prices could increase as a result of climate change legislation or other environmental mandates. Availability of certain of the raw materials we use has, from time to time, been limited, and our sourcing of some of these raw materials from a limited number of suppliers, and in some cases a sole supplier, increases the risk of unavailability. For example, one of the raw materials important to our roofing segment is sourced from a sole supplier, and although we have a long-term supply contract for this material, our production could be interrupted until such time as the supplies again became available or we reformulated our products. Despite our contractual supply agreements with many of our suppliers, it is possible that we could experience a lack of certain raw materials which could limit our ability to produce our products, thereby materially and adversely impact our business, financial condition and results of operations.
Our results of operations in a given period may be impacted by price volatility in certain wind-generated energy markets in the United States.
In connection with our sustainability goals to reduce greenhouse gas and toxic air emissions, we have recently entered into contracts in the United States, pursuant to which we have agreed to purchase wind-generated electricity from third parties. Under these contracts, we do not take physical delivery of wind-generated electricity. The generated electricity is instead sold by our counterparties to local grid operators at the prevailing market price and we obtain the associated non-tax renewable energy credits. The prevailing market pricing for wind-generated electricity can be affected by factors beyond our control and is subject to significant period over period volatility. For example, wind-generated energy output fluctuates due to climactic and other factors beyond our control and can be constrained by available transmission capacity, thereby significantly impacting pricing. Due to this potential volatility, it is possible that these contracts could have an impact on our results of operations in a given reporting period.
We are subject to risks relating to our information technology systems, and any failure to adequately protect our critical information technology systems could materially affect our operations.
We rely on information technology systems across our operations, including for management, supply chain and financial information and various other processes and transactions. Our ability to effectively manage our business depends on the security, reliability and capacity of these systems. Information technology system failures, network disruptions or breaches of security could disrupt our operations, causing delays or cancellation of customer orders or impeding the manufacture or shipment of products, processing of transactions or reporting of financial results. An attack or other problem with our systems could also result in the disclosure of proprietary information about our business or confidential information concerning our customers or employees, which could result in significant damage to our business and our reputation.
We have put in place security measures designed to protect against the misappropriation or corruption of our systems, intentional or unintentional disclosure of confidential information, or disruption of our operations. However, advanced cyber-security threats, such as computer viruses, attempts to access information, and other security breaches, are persistent and continue to evolve making them increasingly difficult to identify and prevent. Protecting against these threats may require significant resources, and we may not be able to implement measures that will protect against all of the significant risks to our information technology systems. In addition, we rely on a number of third party service providers to execute certain business processes and maintain certain information technology systems and infrastructure, any breach of security on their part could impair our ability to effectively operate. Moreover, our operations in certain geographic locations may be particularly vulnerable to security attacks or other problems. Any breach of our security measures could result in unauthorized access to and misappropriation of our information, corruption of data or disruption of operations or transactions, any of which could have a material adverse effect on our business.
We are subject to risks associated with our international operations.
We sell products and operate plants throughout the world. Our international sales and operations are subject to risks and uncertainties, including:
• | difficulties and costs associated with complying with a wide variety of complex and changing laws, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, and laws governing improper business practices, treaties and regulations; |
• | limitations on our ability to enforce legal rights and remedies; |
• | adverse economic and political conditions, business interruption, war and civil disturbance; |
• | tax inefficiencies and currency exchange controls that may adversely impact our ability to repatriate cash from non-United States subsidiaries; |
• | the imposition of tariffs or other import or export restrictions; |
• | costs and availability of shipping and transportation; |
• | nationalization of properties by foreign governments; |
• | currency exchange rate fluctuations between the United States dollar and foreign currencies; and |
• | uncertainty with respect to the new U.S. presidential administration and Congress and potential changes that may be made in laws, regulations and policies that could exacerbate the risks described above. |
As we continue to expand our business globally, we may have difficulty anticipating and effectively managing these and other risks that our international operations may face, which may adversely impact our business outside the United States and our business, financial condition and results of operations.
In addition, we operate in many parts of the world that have experienced governmental corruption and we could be adversely affected by violations of the Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-corruption laws. The FCPA and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. Although we mandate compliance with these anti-corruption laws and maintain an anti-corruption compliance program, we cannot provide assurance that these measures will necessarily prevent violations of these laws by our employees or agents. If we were found to be liable for violations of anti-corruption laws, we could be liable for criminal or civil penalties or other sanctions, which could have a material adverse impact on our business, financial condition and results of operations.
The Company’s income tax net operating loss carryforwards may be limited and our results of operations may be adversely impacted.
The Company has substantial deferred tax assets related to net operating losses (“NOLs”) for United States federal and state income tax purposes, which the Company expects are available to offset future taxable income. However, the Company’s ability to utilize or realize the current carrying value of the NOLs may be impacted by certain events, such as changes in tax legislation or the interpretation thereof, or insufficient future taxable income prior to expiration of the NOLs or annual limits imposed under Section 382 of the Internal Revenue Code, or by state law, as a result of a change in control. A change in control is generally defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three year period. Changes in the ownership positions of certain stockholders could occur as the result of stock transactions by such stockholders and/or by the issuance of stock by the Company. Such limitations may cause the Company to pay income taxes earlier and in greater amounts than would be the case if the NOLs were not subject to such limitations. Additionally, uncertainty exists with respect to tax reform that could potentially be enacted by the new U.S. presidential administration and Congress that could have an impact on the company's NOL.
Should the Company determine that it is likely that its recorded NOL benefits are not realizable, the Company would be required to reduce the NOL tax benefit reflected on its financial statements to the net realizable amount either by a direct adjustment to the NOL tax benefit or by establishing a valuation reserve and recording a corresponding charge to current earnings. The corresponding charge to current earnings would have an adverse effect on the Company’s financial condition and results of operations in the period in which it is recorded. Conversely, if the Company is required to increase its NOL tax benefit either by a direct adjustment or reversing any portion of the accounting valuation against its deferred tax assets related
to its NOLs, such credit to current earnings could have a positive effect on the Company’s business, financial condition and results of operations in the period in which it is recorded.
Our intellectual property rights may not provide meaningful commercial protection for our products or brands and third parties may assert that we violate their intellectual property rights, which could adversely impact our business, financial condition and results of operations.
Owens Corning relies on its intellectual property, including numerous patents, registered trademarks, trade secrets, confidential information, as well as its licensed intellectual property. We monitor and protect against activities that might infringe, dilute, or otherwise harm our patents, trademarks and other intellectual property and rely on the patent, trademark and other laws of the United States and other countries. However, we may be unable to prevent third parties from using our intellectual property without our authorization. To the extent we cannot protect our intellectual property, unauthorized use and misuse of our intellectual property could harm our competitive position and have a material adverse impact on our business, financial condition and results of operations. In addition, the laws of some non-United States jurisdictions provide less protection for our proprietary rights than the laws of the United States and we therefore may not be able to effectively enforce our intellectual property rights in these jurisdictions. If we are unable to maintain certain exclusive licenses, our brand recognition and sales could be adversely impacted. Current employees, contractors and suppliers have, and former employees, contractors and suppliers may have, access to trade secrets and confidential information regarding our operations which could be disclosed improperly and in breach of contract to our competitors or otherwise used to harm us.
Third parties may also claim that we are infringing upon their intellectual property rights. If we are unable to successfully defend or license such alleged infringing intellectual property or if we are required to substitute similar technology from another source, our operations could be adversely affected. Even if we believe that such intellectual property claims are without merit, defending such claims can be costly, time consuming and require significant resources. Claims of intellectual property infringement also might require us to redesign affected products, pay costly damage awards, or face injunctions prohibiting us from manufacturing, importing, marketing or selling certain of our products. Even if we have agreements to indemnify us, indemnifying parties may be unable or unwilling to do so.
Our hedging activities to address energy price fluctuations may not be successful in offsetting increases in those costs or may reduce or eliminate the benefits of any decreases in those costs.
In order to mitigate short-term variation in our operating results due to commodity price fluctuations, we hedge a portion of our near-term exposure to the cost of energy, primarily natural gas. The results of our hedging practices could be positive, neutral or negative in any period depending on price changes of the hedged exposures.
Our hedging activities are not designed to mitigate long-term commodity price fluctuations and, therefore, will not protect us from long-term commodity price increases. In addition, in the future, our hedging positions may not correlate to our actual energy costs, which would cause acceleration in the recognition of unrealized gains and losses on our hedging positions in our operating results.
Downgrades of our credit ratings could adversely impact us.
Our credit ratings are important to our cost of capital. The major debt rating agencies routinely evaluate our debt based on a number of factors, which include financial strength and business risk as well as transparency with rating agencies and timeliness of financial reporting. A downgrade in our debt rating could result in increased interest and other expenses on our existing variable interest rate debt, and could result in increased interest and other financing expenses on future borrowings. Downgrades in our debt rating could also restrict our access to capital markets and affect the value and marketability of our outstanding notes.
Increases in the cost of labor, union organizing activity, labor disputes and work stoppages at our facilities could delay or impede our production, reduce sales of our products and increase our costs.
The costs of labor are generally increasing, including the costs of employee benefit plans. We are subject to the risk that strikes or other types of conflicts with personnel may arise or that we may become the subject of union organizing activity at additional facilities. In particular, renewal of collective bargaining agreements typically involves negotiation, with the potential for work stoppages or increased costs at affected facilities.
We could face potential product liability and warranty claims, we may not accurately estimate costs related to such claims, and we may not have sufficient insurance coverage available to cover such claims.
Our products are used and have been used in a wide variety of residential and commercial applications. We face an inherent business risk of exposure to product liability or other claims in the event our products are alleged to be defective or that the use of our products is alleged to have resulted in harm to others or to property. We may in the future incur liability if product liability lawsuits against us are successful. Moreover, any such lawsuits, whether or not successful, could result in adverse publicity to us, which could cause our sales to decline.
In addition, consistent with industry practice, we provide warranties on many of our products and we may experience costs of warranty or breach of contract claims if our products have defects in manufacture or design or they do not meet contractual specifications. We estimate our future warranty costs based on historical trends and product sales, but we may fail to accurately estimate those costs and thereby fail to establish adequate warranty reserves for them. We maintain insurance coverage to protect us against product liability claims, but that coverage may not be adequate to cover all claims that may arise or we may not be able to maintain adequate insurance coverage in the future at an acceptable cost. Any liability not covered by insurance or that exceeds our established reserves could materially and adversely impact our business, financial condition and results of operations.
We may be subject to liability under and may make substantial future expenditures to comply with environmental laws and regulations.
Our manufacturing facilities are subject to numerous foreign, federal, state and local laws and regulations relating to the presence of hazardous materials, pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage and transport of hazardous materials, storage, treatment and disposal of waste, remediation of contaminated sites and protection of worker health and safety.
Liability under these laws involves inherent uncertainties. Environmental liability estimates may be affected by changing determinations of what constitutes an environmental exposure or an acceptable level of cleanup. For example, 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). “Please see Item 7 - Management Discussion and Analysis - Environmental Controls” for information on costs and accruals related to environmental remediation. To the extent that the required remediation procedures or timing of those procedures change, additional contamination is identified, or the financial condition of other potentially responsible parties is adversely affected, the estimate of our environmental liabilities may change. Change in required remediation procedures or timing of those procedures at existing legacy sites, or discovery of contamination at additional sites, could result in increases to our environmental obligations. Violations of environmental, health and safety laws are subject to civil, and, in some cases, criminal sanctions. As a result of these uncertainties, we may incur unexpected interruptions to operations, fines, penalties or other reductions in income which could adversely impact our business, financial condition and results of operations. In addition, the Company expects passage and implementation of new laws and regulations specifically addressing climate change, toxic air emissions, ozone forming emissions and fine particulate matter during the next two to five years. New air pollution regulations could impact our ability to expand production or construct new facilities in certain regions of North America. Continued and increased government and public emphasis on environmental issues is expected to result in increased future investments for environmental controls at ongoing operations, which will be charged against income from future operations. Present and future environmental laws and regulations applicable to our operations, and changes in their interpretation, may require substantial capital expenditures or may require or cause us to modify or curtail our operations, which may have a material adverse impact on our business, financial condition and results of operations.
We will not be insured against all potential losses and could be seriously harmed by natural disasters, catastrophes or sabotage.
Many of our business activities globally involve substantial investments in manufacturing facilities and many products are produced at a limited number of locations. These facilities could be materially damaged by natural disasters such as floods, tornados, hurricanes and earthquakes or by sabotage. We could incur uninsured losses and liabilities arising from such events, including damage to our reputation, and/or suffer material losses in operational capacity, which could have a material adverse impact on our business, financial condition and results of operations.
We depend on our senior management team and other skilled and experienced personnel to operate our business effectively, and the loss of any of these individuals or the failure to attract additional personnel could adversely impact our financial condition and results of operations.
We are highly dependent on the skills and experience of our senior management team and other skilled and experienced personnel. These individuals possess sales, marketing, manufacturing, logistical, financial, business strategy and administrative skills that are important to the operation of our business. We cannot assure that we will be able to retain all of our existing senior management personnel. The loss of any of these individuals or an inability to attract additional personnel could prevent us from implementing our business strategy and could adversely impact our business and our future financial condition or results of operations.
We are subject to various legal and regulatory proceedings, including litigation in the ordinary course of business, and uninsured judgments or a rise in insurance premiums may adversely impact our business, financial condition and results of operations.
In the ordinary course of business, we are subject to various legal and regulatory proceedings, which may include but are not limited to those involving antitrust, tax, environmental, intellectual property and other matters, including general commercial litigation. Any claims raised in legal and regulatory proceedings, whether with or without merit, could be time consuming and expensive to defend and could divert management’s attention and resources. Additionally, the outcome of legal and regulatory proceedings may differ from our expectations because the outcomes of these proceedings are often difficult to predict reliably. Various factors and developments can lead to changes in our estimates of liabilities and related insurance receivables, where applicable, or may require us to make additional estimates, including new or modified estimates that may be appropriate due to a judicial ruling or judgment, a settlement, regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our results of operations in any particular period.
In accordance with customary practice, we maintain insurance against some, but not all, of these potential claims. In the future, we may not be able to maintain insurance at commercially acceptable premium levels. In addition, the levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. If any significant judgment or claim is not fully insured or indemnified against, it could have a material adverse impact on our business, financial condition and results of operations.
If our efforts in acquiring and integrating other businesses, establishing joint ventures or expanding our production capacity are not successful, our business may not grow.
We have historically grown our business through acquisitions, joint ventures and the expansion of our production capacity. Our ability to grow our business through these investments depends upon our ability to identify, negotiate and finance suitable arrangements. If we cannot successfully execute on our investments on a timely basis, we may be unable to generate sufficient revenue to offset acquisition, integration or expansion costs, we may incur costs in excess of what we anticipate, and our expectations of future results of operations, including cost savings and synergies, may not be achieved. Acquisitions, joint ventures and production capacity expansions involve substantial risks, including:
• | unforeseen difficulties in operations, technologies, products, services, accounting and personnel; |
• | diversion of financial and management resources from existing operations; |
• | unforeseen difficulties related to entering geographic regions, markets or product lines where we do not have prior experience; |
• | risks relating to obtaining sufficient public or private financing; |
• | difficulty in integrating the acquired business’ standards, processes, procedures and controls with our existing operations; |
• | potential loss of key employees; |
• | potential loss of customers; and |
• | undisclosed or undiscovered liabilities or claims. |
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally. Future acquisitions and investments could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or write-offs of goodwill, any of which could have a material adverse impact on our business, financial condition and results of operations. Also, the anticipated benefits of our investments may not materialize.
Our ongoing efforts to increase productivity and reduce costs may not result in anticipated savings in operating costs.
Our cost reduction and productivity efforts, including those related to our existing operations, production capacity expansions and new manufacturing platforms, may not produce anticipated results. Our ability to achieve cost savings and other benefits within expected time frames is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business, financial condition and results of operations could be adversely impacted.
Significant changes in the factors and assumptions used to measure our defined benefit plan obligations, actual investment returns on pension assets and other factors could have a negative impact on our financial condition or liquidity.
We have certain defined benefit pension plans and other post-employment benefit (“OPEB”) plans. Our future funding requirements for defined benefit pension and OPEB plans depend upon a number of factors and assumptions, including our actual experience against assumptions with regard to interest rates used to determine funding levels; return on plan assets; benefit levels; participant experience (e.g., mortality and retirement rates); health care cost trends; and applicable regulatory changes. To the extent actual results are less favorable than our assumptions, there could be a material adverse impact on our financial condition and results of operations.
Additional risks exist due to the nature and magnitude of our investments, including the implementation of or changes to the investment policy, insufficient market capacity to absorb a particular investment strategy or high volume transactions, and the inability to quickly rebalance illiquid and long-term investments.
As of December 31, 2016 and 2015, our U.S. and worldwide defined benefit pension plans were underfunded by a total of $363 million and $392 million, respectively, and OPEB obligations were underfunded by $225 million and $243 million, respectively. If our cash flows and capital resources are insufficient to fund our pension or OPEB obligations, we could be forced to reduce or delay investments and capital expenditures, seek additional capital, or restructure or refinance our indebtedness.
If we were required to write down all or part of our goodwill or other indefinite-lived intangible assets, our results of operations or financial condition could be materially adversely affected in a particular period.
Declines in the Company’s business may result in an impairment of the Company’s tangible and intangible assets which could result in a material non-cash charge. A significant or prolonged decrease in the Company’s market capitalization, including a decline in stock price, or a negative long-term performance outlook, could result in an impairment of its tangible and intangible
assets which results when the carrying value of the Company’s assets exceed their fair value. At least annually, the Company assesses goodwill and intangible assets for impairment. Since the Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units, weak demand for a specific product line or business could result in an impairment. Accordingly, any determination requiring the write-off of a significant portion of goodwill or intangible assets could negatively impact the Company’s results of operations.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
The market price of our common stock is subject to volatility.
The market price of our common stock could be subject to wide fluctuations in response to numerous factors, many of which are beyond our control. These factors include actual or anticipated variations in our operational results and cash flow, our earnings relative to our competition, changes in financial estimates by securities analysts, trading volume, sales by holders of large amounts of our common stock, short selling, market conditions within the industries in which we operate, seasonality of our business operations, the general state of the securities markets and the market for stocks of companies in our industry, governmental legislation or regulation and currency and exchange rate fluctuations, as well as general economic and market conditions, such as recessions.
We are a holding company with no operations of our own and depend on our subsidiaries for cash.
As a holding company, most of our assets are held by our direct and indirect subsidiaries and we will primarily rely on dividends and other payments or distributions from our subsidiaries to meet our debt service and other obligations and to enable us to pay dividends. The ability of our subsidiaries to pay dividends or make other payments or distributions to us will depend on their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of dividends or other payments), agreements of those subsidiaries, agreements with any co-investors in non-wholly-owned subsidiaries, the terms of our credit facility and senior notes and the covenants of any future indebtedness we or our subsidiaries may incur.
Provisions in our amended and restated certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and therefore depress the trading price of our common stock.
Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock through provisions that may discourage, delay or prevent a change in control of our Company or changes in our management that our stockholders may deem advantageous.
Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay or prevent a change in control of our company.
Dividends on our common stock are declared at the discretion of our Board of Directors.
Since February 2014, the Board has declared a quarterly dividend on our common stock. The payment of any future cash dividends to our stockholders is not guaranteed and will depend on decisions that will be made by our Board of Directors and will depend on then existing conditions, including our operating results, financial conditions, contractual restrictions, corporate law restrictions, capital agreements, applicable laws of the State of Delaware and business prospects.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
Composites
Our Composites segment operates out of 29 manufacturing facilities. We began operations in our recently constructed Gastonia, North Carolina facility in 2016. Earlier in 2016, we announced plans to expand our operations in India, and we expect this new capacity to be available in 2018. Principal manufacturing facilities for our Composites segment, all of which are owned by the Company, include the following:
Aiken, South Carolina | Jackson, Tennessee |
Amarillo, Texas | Kimchon, Korea |
Anderson, South Carolina | L’Ardoise, France |
Besana, Italy | Rio Claro, Brazil |
Chambery, France | Taloja, India |
Gastonia, North Carolina | Tlaxcala, Mexico |
Gous, Russia | Yuhang, China |
Insulation
Our Insulation segment operates out of 29 manufacturing facilities. We are still constructing our Joplin, Missouri facility, and we expect this new capacity to be available later in 2017. Principal manufacturing facilities for our Insulation segment, all of which are owned by the Company, include the following:
Delmar, New York | Newark, Ohio |
Edmonton, Alberta, Canada | Rockford, Illinois |
Fairburn, Georgia | Santa Clara, California |
Guangzhou, Guandong, China | Tallmadge, Ohio |
Kansas City, Kansas | Toronto, Ontario, Canada |
Mexico City, Mexico | Wabash, Indiana |
Mt. Vernon, Ohio | Waxahachie, Texas |
Roofing
Our Roofing segment operates out of 35 total manufacturing facilities. This number separately counts many roofing and asphalt manufacturing facilities that are located at the same site. Principal manufacturing facilities for our Roofing segment, all of which are owned by the Company, include the following:
Brookville, Indiana | Medina, Ohio |
Compton, California | Minneapolis, Minnesota |
Denver, Colorado | Portland, Oregon |
Irving, Texas | Qingdao, China |
Jacksonville, Florida | Silvassa, India |
Kearny, New Jersey | Summit, Illinois |
We believe that these properties are in good condition and well maintained, and are suitable and adequate to carry on our business. The capacity of each plant varies depending upon product mix.
Our principal executive offices are located in the Owens Corning World Headquarters, Toledo, Ohio, an owned facility of approximately 400,000 square feet.
Our research and development activities are primarily conducted at our Science and Technology Center, located on approximately 500 acres of land owned by the Company outside of Granville, Ohio. It consists of approximately 20 structures totaling more than 650,000 square feet. In addition, we have application development and other product and market focused research and development centers in various locations.
ITEM 3. | LEGAL PROCEEDINGS |
The Company is involved in legal 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 litigation have been made for probable losses that are reasonably estimable. The Company does not believe that the ultimate outcome of these actions will have a material adverse effect on its financial condition, but could have a material adverse effect on its results of operations, cash flows, or liquidity in a given quarter or year.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
EXECUTIVE OFFICERS OF OWENS CORNING
The name, age and business experience during the past five years of Owens Corning’s executive officers as of January 1, 2017 are set forth below. Each executive officer holds office until his or her successor is elected and qualified or until his or her earlier resignation, retirement or removal. All those listed have been employees of Owens Corning during the past five years except as indicated.
Name and Age | Position* | |
Brian D. Chambers (50) | President, Roofing and Asphalt since October 2014; formerly Vice President and General Manager, Roofing and Asphalt (2013); Vice President and Managing Director, Composites Solutions Business (2011). | |
Julian Francis (50) | President, Insulation Business since October 2014; formerly Vice President and General Manager, Residential Insulation (2012); Vice President and General Manager, Glass Reinforcements (2011). | |
Arnaud Genis (52) | Group President, Composite Solutions since December 2010. | |
Ava Harter (47) | Senior Vice President, General Counsel and Secretary since May 2015; formerly General Counsel, Chief Compliance Officer and Corporate Secretary, Taleris America LLC, an operating service provider to airlines and cargo carriers (2012). | |
Michael C. McMurray (51) | Senior Vice President and Chief Financial Officer since August 2012; formerly Vice President Finance, Building Materials Group (2011). | |
Kelly J. Schmidt (51) | Vice President, Controller since April 2011. | |
Daniel T. Smith (51) | Senior Vice President, Organization and Administration since November 2014; formerly Senior Vice President, Information Technology and Human Resources (2009). | |
Michael H. Thaman (52) | President and Chief Executive Officer since December 2007 and Chairman of the Board since April 2002; Director since 2002. | |
* | Information in parentheses indicates year during the past five years in which service in position began. The last item listed for each individual represents the position held by such individual at the beginning of the five-year period. |
Part II
ITEM 5. | MARKET FOR OWENS CORNING’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Owens Corning’s common stock trades on the New York Stock Exchange under the symbol “OC.” The following table sets forth the high and low sales prices per share of, and dividends declared on, Owens Corning common stock for each quarter from January 1, 2015 through December 31, 2016:
Period | High | Low | Declared Dividend | ||||||||
First Quarter 2015 | $ | 43.67 | $ | 34.73 | $ | 0.17 | |||||
Second Quarter 2015 | $ | 45.70 | $ | 37.29 | $ | 0.17 | |||||
Third Quarter 2015 | $ | 47.90 | $ | 38.95 | $ | 0.17 | |||||
Fourth Quarter 2015 | $ | 48.50 | $ | 41.59 | $ | 0.17 | |||||
First Quarter 2016 | $ | 47.78 | $ | 38.96 | $ | 0.18 | |||||
Second Quarter 2016 | $ | 52.52 | $ | 45.46 | $ | 0.18 | |||||
Third Quarter 2016 | $ | 58.69 | $ | 50.33 | $ | 0.18 | |||||
Fourth Quarter 2016 | $ | 56.12 | $ | 46.45 | $ | 0.20 | |||||
Holders of Common Stock
The number of stockholders of record of Owens Corning’s common stock on January 31, 2017 was 475.
Cash Dividends
The payment of any future cash dividends to our stockholders will depend on decisions that will be made by our Board of Directors and will depend on then existing conditions, including our operating results, financial conditions, contractual restrictions, corporate law restrictions, capital agreements, applicable laws of the State of Delaware and business prospects.
Under the credit agreement applicable to our senior revolving credit facility, the Company may not declare a cash dividend if a default or event of default exists or would come to exist at the time of declaration or if a dividend declaration violates the provisions of our formation documents or other material agreements.
The Company’s subsidiaries are subject to certain restrictions on their ability to pay dividends under the agreements governing our senior revolving credit facility and our receivables securitization facility.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.
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ITEM 5. | MARKET FOR OWENS CORNING’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (continued) |
Issuer Purchases of Equity Securities
The following table provides information about Owens Corning’s purchases of its common stock during the three months ended December 31, 2016:
Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs** | Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs** | |||||||||
October 1-31, 2016 | 631,447 | $ | 51.89 | 630,000 | 10,552,565 | ||||||||
November 1-30, 2016 | 501,314 | 49.79 | 500,000 | 10,052,565 | |||||||||
December 1-31, 2016 | 220,000 | 52.50 | 220,000 | 9,832,565 | |||||||||
Total | 1,352,761 | * | $ | 51.21 | 1,350,000 | 9,832,565 | |||||||
* | The Company retained 1,447, 1,314, and 0 shares surrendered to satisfy tax withholding obligations in connection with the vesting of restricted shares granted to our employees in October, November and December, respectively. |
** | On October 24, 2016, the Board of Directors approved a share buy-back program under which the Company is authorized to repurchase up to 10 million shares of Owens Corning's outstanding common stock (the “2016 Repurchase Authorization"). The 2016 Repurchase Authorization is in addition to the share buy-back program announced April 19, 2012 (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 timing and actual number of shares repurchased will depend on market conditions and other factors and will be at the Company's discretion. |
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ITEM 5. | MARKET FOR OWENS CORNING’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (continued) |
Performance Graph
The annual changes for the five-year period shown in the graph on this page are based on the assumption that $100 had been invested in Owens Corning stock ("OC"), the Standard & Poor’s 500 Stock Index ("S&P 500") and the Dow Jones U.S. Building Materials & Fixtures Index ("DJ Bld. Mat.") on December 31, 2011, and that all quarterly dividends were reinvested. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on December 31, 2016.
Performance Graph
2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||
OC | $ | 100 | $ | 129 | $ | 142 | $ | 127 | $ | 169 | $ | 188 | |||||||||||
S&P 500 | $ | 100 | $ | 116 | $ | 154 | $ | 175 | $ | 177 | $ | 198 | |||||||||||
DJ Bld. Mat. | $ | 100 | $ | 152 | $ | 195 | $ | 216 | $ | 247 | $ | 292 | |||||||||||
ITEM 6. | SELECTED FINANCIAL DATA |
Twelve Months Ended December 31, | |||||||||||||||||||
2016(a) | 2015(b) | 2014(c)(f) | 2013(d)(f) | 2012(e)(f) | |||||||||||||||
(in millions, except per share amounts) | |||||||||||||||||||
Statement of Earnings (Loss) Data | |||||||||||||||||||
Net sales | $ | 5,677 | $ | 5,350 | $ | 5,260 | $ | 5,295 | $ | 5,172 | |||||||||
Gross margin | $ | 1,381 | $ | 1,153 | $ | 976 | $ | 966 | $ | 797 | |||||||||
Marketing and administrative expenses | $ | 584 | $ | 525 | $ | 487 | $ | 530 | $ | 509 | |||||||||
Earnings before interest and taxes | $ | 699 | $ | 548 | $ | 392 | $ | 385 | $ | 148 | |||||||||
Interest expense, net | $ | 108 | $ | 100 | $ | 114 | $ | 112 | $ | 114 | |||||||||
Loss (gain) on extinguishment of debt | $ | 1 | $ | (5 | ) | $ | 46 | $ | — | $ | 74 | ||||||||
Income tax expense (benefit) | $ | 188 | $ | 120 | $ | 5 | $ | 68 | $ | (28 | ) | ||||||||
Net earnings (loss) | $ | 399 | $ | 334 | $ | 228 | $ | 205 | $ | (16 | ) | ||||||||
Net earnings (loss) attributable to Owens Corning | $ | 393 | $ | 330 | $ | 226 | $ | 204 | $ | (19 | ) | ||||||||
Earnings (loss) per common share attributable to Owens Corning common stockholders | |||||||||||||||||||
Basic | $ | 3.44 | $ | 2.82 | $ | 1.92 | $ | 1.73 | $ | (0.16 | ) | ||||||||
Diluted | $ | 3.41 | $ | 2.79 | $ | 1.91 | $ | 1.71 | $ | (0.16 | ) | ||||||||
Dividend | $ | 0.74 | $ | 0.68 | $ | 0.64 | $ | — | $ | — | |||||||||
Weighted-average common shares | |||||||||||||||||||
Basic | 114.4 | 117.2 | 117.5 | 118.2 | 119.4 | ||||||||||||||
Diluted | 115.4 | 118.2 | 118.3 | 119.1 | 119.4 | ||||||||||||||
Balance Sheet Data | |||||||||||||||||||
Total assets | $ | 7,741 | $ | 7,326 | $ | 7,483 | $ | 7,572 | $ | 7,491 | |||||||||
Long-term debt, net of current portion | $ | 2,099 | $ | 1,702 | $ | 1,978 | $ | 2,012 | $ | 2,064 | |||||||||
Total equity | $ | 3,889 | $ | 3,779 | $ | 3,730 | $ | 3,830 | $ | 3,575 | |||||||||
(a) | During 2016, the Company recorded $28 million of restructuring costs, comprised of $19 million of accelerated depreciation, $6 million of facility-related charges and $3 million of personnel-related charges. In connection with our previously announced acquisitions, mainly InterWrap Holdings, Inc. ("InterWrap"), we recognized $9 million of acquisition-related costs and a $10 million charge related to inventory fair value step-up. |
(b) | During 2015, the Company recorded $2 million of charges related to cost reduction actions and related items. This was comprised of a $(6) million benefit in charges related to cost reduction actions, mainly due to changes in severance estimates and pension-related adjustments, and $8 million in other related charges, inclusive of $3 million in accelerated depreciation and $5 million in other related charges. |
(c) | During 2014, the Company recorded $36 million of charges related to cost reduction actions and related items, comprised of $34 million of severance costs, $3 million of contract termination costs, and $(1) million of other related gains. There was also a gain of $45 million related to the sale of the Hangzhou, China facility, a $20 million loss related to the sale of the European Stone Business, $3 million related to the impairment loss on Alcala, Spain facility, and $6 million related to Hurricane Sandy costs. |
(d) | During 2013, the Company recorded $26 million of charges related to cost reduction actions and related items (comprised of $8 million of severance costs and $18 million of other costs, inclusive of $9 million of accelerated depreciation and $9 million in other related charges). There was also $20 million in accelerated depreciation related to a change in the useful life of assets and a $15 million net gain related to Hurricane Sandy insurance activity. |
(e) | During 2012, the Company recorded $136 million of charges related to cost reduction actions and related items (comprised of $51 million of severance costs and $85 million of other costs, inclusive of $55 million of accelerated depreciation and $30 million in other related charges). There was also $9 million in losses related to Hurricane Sandy insurance activity. |
(f) | As discussed in Note 1 of the Consolidated Financial Statements, we revised the December 31, 2015 Consolidated Balance Sheet to correct an error in which certain Value Added Tax balances were inappropriately reported gross versus net. Accordingly, we have also revised the previously reported figures here by decreasing Total assets for 2014, 2013 and 2012 by $59 million, $63 million and $65 million, respectively. These revisions were not material to any previously issued financial statements. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management’s Discussion and Analysis (“MD&A”) is intended to help investors understand Owens Corning, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes thereto contained in this report. Unless the context requires otherwise, the terms “Owens Corning,” “Company,” “we” and “our” in this report refer to Owens Corning and its subsidiaries.
GENERAL
Owens Corning is a leading global producer of glass fiber reinforcements and other materials for composites and of residential and commercial building materials. The Company has three reporting segments: Composites, Insulation and Roofing. Through these lines of business, the Company manufactures and sells products worldwide maintaining leading market positions in many of its major product categories.
EXECUTIVE OVERVIEW
Net earnings attributable to Owens Corning were $393 million in 2016 compared to $330 million in 2015. The Company reported $699 million in earnings before interest and taxes (“EBIT”) in 2016 compared to $548 million in 2015. The Company generated $746 million in adjusted earnings before interest and taxes (“Adjusted EBIT”) in 2016 compared to $550 million in 2015. See the Adjusted Earnings Before Interest and Taxes paragraph of MD&A for further information regarding EBIT and Adjusted EBIT, including the reconciliation to net earnings attributable to Owens Corning. Segment EBIT performance compared to 2015 increased $220 million in our Roofing segment, increased $32 million in our Composites segment and decreased $34 million in our Insulation segment. Within our Corporate, Other and Eliminations category, General corporate expenses and other increased by $22 million.
In our Roofing segment, EBIT in 2016 was $486 million compared to $266 million in 2015 driven primarily by higher sales volumes and asphalt cost deflation. In our Composites segment, EBIT in 2016 was $264 million compared to $232 million in 2015 as higher sales volumes and higher selling prices were partially offset by increased furnace rebuild and startup costs. In our Insulation segment, EBIT in 2016 was $126 million compared to $160 million in 2015 primarily due to the negative impact of lower sales and production volumes.
In 2016, the Company generated $943 million in cash flow from operating activities compared to $742 million in 2015. This improvement was primarily due to increased net earnings and the cash tax benefit provided by our net operating loss carryforwards.
On April 21, 2016, the Company acquired all outstanding shares of InterWrap, a leading manufacturer of roofing underlayment and packaging materials, for approximately $452 million, net of cash acquired. This acquisition will expand the Company’s position in roofing components, strengthen the Company’s capabilities to support the conversion from organic to synthetic underlayment and accelerate its growth in the roofing components market. InterWrap's operating results and a purchase price allocation have been included in the Company’s Roofing segment in the Consolidated Financial Statements since the date of the acquisition.
Throughout 2016, the Company had several financing activities leading up to and following the acquisition of InterWrap. The Company issued $400 million of 2026 senior notes in August 2016 with an annual interest rate of 3.40%. The proceeds of these notes were used for general corporate purposes, to fully repay outstanding debt on our Receivables Securitization Facility and to repay all $158 million of outstanding 2016 senior notes through a make whole call redemption. In connection with this redemption, the Company recognized a $1 million loss on extinguishment of debt. During the third quarter of 2016, the remaining proceeds were used, along with borrowings on the Receivables Securitization Facility, to repay the $300 million term loan (the "Term Loan"), that was drawn in the second quarter of 2016. The Term Loan was used, along with borrowings on the Receivables Securitization Facility, to fund the acquisition of InterWrap.
In October 2016, the Board of Directors approved a repurchase authorization of 10 million additional shares of the Company's outstanding common stock. In 2016, the Company repurchased 4.8 million shares of the Company’s common stock for $240 million under previously announced repurchase authorizations. As of December 31, 2016, 9.8 million shares remain available for repurchase under the Repurchase Authorization.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
RESULTS OF OPERATIONS
Consolidated Results (in millions)
Twelve Months Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net sales | $ | 5,677 | $ | 5,350 | $ | 5,260 | |||||
Gross margin | $ | 1,381 | $ | 1,153 | $ | 976 | |||||
% of net sales | 24 | % | 22 | % | 19 | % | |||||
Marketing and administrative expenses | $ | 584 | $ | 525 | $ | 487 | |||||
Earnings before interest and taxes | $ | 699 | $ | 548 | $ | 392 | |||||
Interest expense, net | $ | 108 | $ | 100 | $ | 114 | |||||
Loss (gain) on extinguishment of debt | $ | 1 | $ | (5 | ) | $ | 46 | ||||
Income tax expense | $ | 188 | $ | 120 | $ | 5 | |||||
Net earnings attributable to Owens Corning | $ | 393 | $ | 330 | $ | 226 | |||||
The Consolidated Results discussion below provides a summary of our results and the trends affecting our business, and should be read in conjunction with the more detailed Segment Results discussion that follows.
NET SALES
2016 Compared to 2015: Net sales increased by $327 million in 2016 as compared to 2015. The increase in net sales was driven by higher sales volumes in our Roofing and Composites segments and the impact of the InterWrap acquisition. This increase was partially offset by lower sales volumes in our Insulation segment and the negative impact of translating sales denominated in foreign currencies into U.S. dollars, primarily in our Composites and Insulation segments.
2015 Compared to 2014: Net sales increased by $90 million in 2015 as compared to 2014. Higher sales volumes across all three segments drove the increase in sales. This increase was partially offset by the negative impact of translating sales denominated in foreign currencies into U.S. dollars, primarily in our Composites and Insulation segments.
GROSS MARGIN
2016 Compared to 2015: Gross margin as a percentage of net sales in 2016 increased about two percentage points compared to 2015. The $228 million improvement was primarily driven by our Roofing segment's higher sales volumes and the benefit of lower input costs, primarily asphalt. The negative impact of production curtailments in our Insulation segment and restructuring and acquisition-related costs were largely offset by the gross margin contribution from the InterWrap acquisition.
2015 Compared to 2014: Gross margin as a percentage of net sales in 2015 increased about three percentage points compared to 2014, or $177 million. The improvement was driven by higher sales volumes in all three business segments and the benefit of lower input costs, primarily asphalt, in our Roofing segment.
RESTRUCTURING AND ACQUISITION-RELATED COSTS
The Company has incurred restructuring, transaction and integration costs related to acquisitions, along with restructuring costs in connection with its global cost reduction and productivity initiatives. These costs are recorded in the Corporate, Other and Eliminations category. Please refer to Notes 7 and 11 of the Consolidated Financial Statements for further information on the nature of these costs.
During the fourth quarter of 2016, the Company took actions to reduce costs in our Insulation segment, mainly through the decision to permanently exit an idle residential fiberglass insulation facility in Canada and shut down foam insulation facilities in Brazil and India.
Following the acquisition of InterWrap by the Company's Roofing segment, the Company took actions in 2016 to realize expected synergies from the newly acquired operations.
During 2014, the Company took actions to reduce costs throughout our 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
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
also took actions in 2014 to streamline its management structure and reduce costs, resulting in the elimination of the Building Materials Group organizational structure. We recorded trailing costs for these actions in 2015 and 2016.
The following table presents the impact and respective location of these income (expense) items on the Consolidated Statements of Earnings (in millions):
Twelve Months Ended December 31, | |||||||||||||
Location | 2016 | 2015 | 2014 | ||||||||||
Restructuring costs | Cost of sales | $ | (25 | ) | $ | (10 | ) | $ | (3 | ) | |||
Restructuring costs | Other expenses, net | (3 | ) | 8 | (33 | ) | |||||||
Acquisition-related costs for InterWrap and Ahlstrom transactions | Marketing and administrative expenses | (6 | ) | — | — | ||||||||
Acquisition-related costs for Ahlstrom transaction | Other expenses, net | (3 | ) | — | — | ||||||||
Recognition of InterWrap inventory fair value step-up | Cost of sales | (10 | ) | — | — | ||||||||
Total restructuring, acquisition and integration-related costs | $ | (47 | ) | $ | (2 | ) | $ | (36 | ) | ||||
MARKETING AND ADMINISTRATIVE EXPENSES
2016 Compared to 2015: Marketing and administrative expenses increased by $59 million in 2016 compared to 2015. The increase was primarily due to higher selling, general and administrative expenses in our Roofing segment (including InterWrap marketing and administrative expenses), higher performance based compensation and acquisition-related costs.
2015 Compared to 2014: Marketing and administrative expenses increased by $38 million in 2015 compared to 2014. The increase was primarily due to higher performance based compensation.
EARNINGS BEFORE INTEREST AND TAXES
2016 Compared to 2015: EBIT increased by $151 million in 2016 compared to 2015. In our Composites segment, EBIT increased by $32 million. In our Insulation segment, EBIT decreased by $34 million. In our Roofing segment, EBIT increased by $220 million. Corporate, Other and Eliminations EBIT losses were $67 million higher year-over-year mainly due to restructuring costs, higher performance-based compensation expenses and acquisition-related expenses.
2015 Compared to 2014: EBIT increased by $156 million in 2015 compared to 2014. In our Composites segment, EBIT increased by $83 million. In our Insulation segment, EBIT increased by $52 million. In our Roofing segment, EBIT increased by $34 million. Corporate EBIT costs during 2015 increased by $13 million compared to 2014, as higher performance-based compensation expenses were offset by lower adjusting items, mainly charges related to cost reduction actions.
INTEREST EXPENSE, NET
2016 Compared to 2015: Interest expense, net in 2016 was $8 million higher than in 2015. The increase was primarily driven by increased long-term debt following the issuance of our 2026 senior notes.
2015 Compared to 2014: Interest expense, net in 2015 was $14 million lower than in 2014. The decrease was driven by reduced interest expense following the refinancing of portions of our Senior Notes due in 2016 and 2019 and lower borrowings on our Senior Revolving Credit Facility and Receivables Securitization Facility.
LOSS (GAIN) ON EXTINGUISHMENT OF DEBT
For the year ended December 31, 2016, the Company recorded a $1 million loss on extinguishment of debt in connection with the redemption of its 2016 senior notes. For the year ended December 31, 2015, the Company recorded a $5 million gain on extinguishment of debt as a result of purchasing its World Headquarters facility, which had previously been classified as a capital lease. For the year ended December 31, 2014, the Company recorded a $46 million loss on extinguishment of debt as a result of refinancing portions of our senior notes due in 2016 and 2019.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
INCOME TAX EXPENSE
Income tax expense for 2016 was $188 million compared to $120 million in 2015.
The Company’s effective tax rate for 2016 was 32% on pre-tax income of $590 million. The difference between the 32% effective tax rate and the U.S. federal statutory tax rate of 35% is primarily attributable to the reversal of valuation allowances recorded in prior years against French and Spanish deferred tax assets, changes in uncertain tax positions and lower foreign tax rates.
Realization of deferred tax assets depends on achieving a certain minimum level of future taxable income. Management currently believes that the minimum level of taxable income will not be met within the next 12 months to reduce the valuation allowances of foreign jurisdictions.
The Company’s effective tax rate for 2015 was 27% on pre-tax income of $453 million. The difference between the 27% effective tax rate and the U.S. federal statutory rate of 35% is primarily attributable to tax legislative changes impacting certain Canadian net operating losses and the reversal of a valuation allowance recorded in prior years against Canadian deferred tax assets which cumulatively totaled $27 million, other releases of valuation allowances against deferred tax asses in multiple jurisdictions and lower foreign tax rates.
Adjusted Earnings Before Interest and Taxes (“Adjusted EBIT”)
Adjusted EBIT excludes certain items that management does not allocate to our segment results because it believes they are not a result of the Company’s current operations. Adjusted EBIT is used internally by the Company for various purposes, including reporting results of operations to the Board of Directors of the Company, analysis of performance and related employee compensation measures. Although management believes that these adjustments result in a measure that provides a useful representation of our operational performance, the adjusted measure should not be considered in isolation or as a substitute for net earnings attributable to Owens Corning as prepared in accordance with accounting principles generally accepted in the United States.
Adjusting items are shown in the table below (in millions):
Twelve Months Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Restructuring costs | $ | (28 | ) | $ | (2 | ) | $ | (36 | ) | ||
Acquisition-related costs for InterWrap and Ahlstrom transactions | (9 | ) | — | — | |||||||
Recognition of InterWrap inventory fair value step-up | (10 | ) | — | — | |||||||
Net loss on sale of European Stone Business | — | — | (20 | ) | |||||||
Impairment loss on Alcala, Spain facility held for sale | — | — | (3 | ) | |||||||
Gain on sale of Hangzhou, China facility | — | — | 45 | ||||||||
Net loss related to Hurricane Sandy | — | — | (6 | ) | |||||||
Total adjusting items | $ | (47 | ) | $ | (2 | ) | $ | (20 | ) | ||
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
The reconciliation from net earnings attributable to Owens Corning to EBIT and Adjusted EBIT is shown in the table below (in millions):
Twelve Months Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
NET EARNINGS ATTRIBUTABLE TO OWENS CORNING | $ | 393 | $ | 330 | $ | 226 | |||||
Less: Net earnings attributable to noncontrolling interests | 6 | 4 | 2 | ||||||||
NET EARNINGS | 399 | 334 | 228 | ||||||||
Equity in net earnings (loss) of affiliates | (3 | ) | 1 | 1 | |||||||
Income tax expense | 188 | 120 | 5 | ||||||||
EARNINGS BEFORE TAXES | 590 | 453 | 232 | ||||||||
Interest expense, net | 108 | 100 | 114 | ||||||||
Loss (gain) on extinguishment of debt | 1 | (5 | ) | 46 | |||||||
EARNINGS BEFORE INTEREST AND TAXES | 699 | 548 | 392 | ||||||||
Less: adjusting items from above | (47 | ) | (2 | ) | (20 | ) | |||||
ADJUSTED EBIT | $ | 746 | $ | 550 | $ | 412 | |||||
Segment Results
EBIT by segment consists of net sales less related costs and expenses and are presented on a basis that is used internally for evaluating segment performance. Certain items, such as general corporate expenses or income and certain other expense or income items, are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in EBIT for our reportable segments and are included in the Corporate, Other and Eliminations category, which is presented following the discussion of our reportable segments.
Composites
The table below provides a summary of net sales, EBIT and depreciation and amortization expense for our Composites segment (in millions):
Twelve Months Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net sales | $ | 1,952 | $ | 1,902 | $ | 1,919 | |||||
% change from prior year | 3 | % | -1 | % | 4 | % | |||||
EBIT | $ | 264 | $ | 232 | $ | 149 | |||||
EBIT as a % of net sales | 14 | % | 12 | % | 8 | % | |||||
Depreciation and amortization expense | $ | 138 | $ | 125 | $ | 129 | |||||
NET SALES
2016 Compared to 2015: Net sales in our Composites segment were $50 million higher in 2016 than in 2015. The increase in sales was driven by higher sales volumes of about 6% and higher selling prices of $22 million. These benefits were partially offset by $57 million of unfavorable product mix (mainly related to the prior year's specialty glass sales and higher sales volumes into the roofing market in 2016) and the $22 million negative impact of translating sales denominated in foreign currencies into United States dollars.
2015 Compared to 2014: Net sales in our Composites business were $17 million lower in 2015 than in 2014. The year-over-year negative impact of translating sales denominated in foreign currencies into United States dollars was $182 million. Composites sales volumes grew about 4%, and higher selling prices contributed an additional $32 million to the year-over-year improvement. The remaining $56 million year-over-year improvement was driven by favorable product mix. Product mix was relatively flat in the fourth quarter of 2015 compared to the fourth quarter of 2014 as higher specialty glass sales in the fourth quarter of 2014 were largely offset by fourth quarter 2015 favorable product mix.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
EBIT
2016 Compared to 2015: EBIT in our Composites segment was $32 million higher in 2016 than in 2015. The benefit of higher sales volumes was largely offset by $24 million of unfavorable product mix, which was primarily related to the comparison against the prior year's specialty glass sales and the current year's higher sales volumes into the roofing market. Higher furnace rebuild and startup costs of $28 million were offset about equally by input cost deflation and lower manufacturing costs. The remaining change was driven by higher selling prices of $22 million and one-time benefits from our strategic supply alliances.
2015 Compared to 2014: EBIT in our Composites segment was $83 million higher in 2015 than in 2014. Higher selling prices of $32 million and the impact of favorable product mix contributed about equally to the year-over-year improvement. The remaining year-over-year improvement was driven by higher sales volumes, improved manufacturing performance and lower furnace rebuild costs, which were partially offset by the negative impact ($24 million) of translating sales denominated in foreign currencies into United States dollars. Lower selling, general and administrative expenses were offset by comparison to the benefit of the prior year's favorable contract dispute resolution.
OUTLOOK
Global glass reinforcements market demand has historically grown on average with global industrial production and the Company believes this relationship will continue. In 2017, the Company expects moderate global industrial production growth.
Insulation
The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Insulation segment (in millions):
Twelve Months Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net sales | $ | 1,748 | $ | 1,850 | $ | 1,746 | |||||
% change from prior year | -6 | % | 6 | % | 6 | % | |||||
EBIT | $ | 126 | $ | 160 | $ | 108 | |||||
EBIT as a % of net sales | 7 | % | 9 | % | 6 | % | |||||
Depreciation and amortization expense | $ | 106 | $ | 101 | $ | 101 | |||||
NET SALES
2016 Compared to 2015: In our Insulation segment, 2016 net sales were $102 million lower than in 2015. The decrease was primarily driven by lower sales volumes of about 5%, primarily due to the expiration of contract manufacturing agreements at the beginning of 2016 and a commercial dispute with a large residential insulation installer. Favorable customer mix of $35 million was largely offset by lower selling prices of $33 million. The remaining decrease of $22 million was due to the negative impact of translating sales denominated in foreign currencies into United States dollars.
2015 Compared to 2014: In our Insulation business, 2015 net sales were $104 million higher than in 2014, primarily due to higher sales volumes of about 5% and higher selling prices of $24 million. The $37 million negative impact of translating sales denominated in foreign currencies into United States dollars was partially offset by favorable customer mix.
EBIT
2016 Compared to 2015: In our Insulation segment, EBIT decreased $34 million in 2016 compared to 2015. The change was primarily driven by the $27 million negative impact of lower production volumes. Lower selling prices of $33 million were largely offset by favorable customer mix of $29 million. The $10 million benefit of input cost deflation was offset by lower sales volumes. The remaining decrease of $4 million was driven by negative foreign currency translation.
2015 Compared to 2014: In our Insulation business, EBIT increased $52 million in 2015 compared to 2014. Higher selling prices of $24 million and higher sales volumes drove substantially all of the year-over-year improvement. The $13 million negative impact of translating sales denominated in foreign currencies into United States dollars was offset about equally by favorable manufacturing performance and input cost deflation. The remaining increase in EBIT was driven by $7 million of favorable customer mix.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
OUTLOOK
During the fourth quarter of 2016, the average Seasonally Adjusted Annual Rate (“SAAR”) of United States housing starts was approximately 1.215 million starts, up from an annual average of approximately 1.135 million starts in the fourth quarter of 2015. While the trend in United States housing starts has generally been positive over the past few years, the timing and pace of recovery of the United States housing market remains uncertain.
The changes to our market share from a second quarter 2016 commercial dispute with a large residential insulation installer (which represented approximately 7% of 2015 Insulation segment net sales) and the related production curtailments could impact revenue growth and EBIT in the first half of 2017.
In the mid-term, the Company expects its Insulation segment to benefit from an overall strengthening of the United States housing market, higher capacity utilization and improved pricing. We believe the geographic, product and channel mix of our portfolio may continue to moderate the impact of any demand-driven variability associated with United States new construction.
Roofing
The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Roofing segment (in millions):
Twelve Months Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net sales | $ | 2,194 | $ | 1,766 | $ | 1,748 | |||||
% change from prior year | 24 | % | 1 | % | -11 | % | |||||
EBIT | $ | 486 | $ | 266 | $ | 232 | |||||
EBIT as a % of net sales | 22 | % | 15 | % | 13 | % | |||||
Depreciation and amortization expense | $ | 46 | $ | 39 | $ | 39 | |||||
NET SALES
2016 Compared to 2015: In our Roofing segment, net sales were $428 million higher in 2016 than in 2015. Sales volumes increased by about 20%, as higher reroof demand, driven by storm activity, and increased demand from new construction contributed to the growth of the U.S. asphalt shingle market. Our second quarter 2016 acquisition of InterWrap contributed $182 million of net sales. The impact of higher sales volumes and the InterWrap acquisition was partially offset by $51 million each of lower selling prices and lower third-party asphalt sales.
Third-party asphalt sales represent approximately 9% of our 2016 Roofing segment net sales and are largely a cost-plus business. Asphalt input costs and third-party asphalt sales prices are correlated to crude oil prices.
2015 Compared to 2014: In our Roofing business, net sales were $18 million higher in 2015 than in 2014. The increase in net sales was driven by higher sales volumes, partially offset by $114 million of lower selling prices. For the full year, third-party asphalt sales were lower by $48 million, for which $23 million of this change occurred in the fourth quarter of 2015.
EBIT
2016 Compared to 2015: In our Roofing segment, EBIT was $220 million higher in 2016 than in 2015. The increase was primarily driven by higher sales volumes. The asphalt cost deflation benefit of $108 million was partially offset by lower selling prices. Our second quarter 2016 acquisition of InterWrap contributed $40 million in EBIT for the year. Higher selling, general and administrative expenses, primarily driven by increased sales and marketing costs associated with higher sales volumes and higher performance-based compensation, offset less than half of the benefit of the InterWrap acquisition.
2015 Compared to 2014: In our Roofing business, EBIT was $34 million higher in 2015 than in 2014. Lower selling prices of $114 million negatively impacted EBIT. More than half of the remaining increase was driven by higher sales volumes and favorable product mix. The remainder of the change was driven by the $68 million benefit of asphalt cost deflation.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
OUTLOOK
In our Roofing business, we expect the factors that have driven margins in recent years, such as growth from new construction and reroof demand, to continue to deliver profitability. Uncertainties that may impact our Roofing margins include demand from storm and other weather events, competitive pricing pressure and the cost and availability of raw materials, particularly asphalt.
Corporate, Other and Eliminations
The table below provides a summary of EBIT and depreciation and amortization expense for the Corporate, Other and Eliminations category (in millions):
Twelve Months Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Restructuring costs | $ | (28 | ) | $ | (2 | ) | $ | (36 | ) | ||
Acquisition-related costs for InterWrap and Ahlstrom transactions | (9 | ) | — | — | |||||||
Recognition of InterWrap inventory fair value step-up | (10 | ) | — | — | |||||||
Net loss on sale of European Stone Business | — | — | (20 | ) | |||||||
Impairment loss on Alcala, Spain facility held for sale | — | — | (3 | ) | |||||||
Gain on sale of Hangzhou, China facility | — | — | 45 | ||||||||
Net loss related to Hurricane Sandy | — | — | (6 | ) | |||||||
General corporate expense and other | (130 | ) | (108 | ) | (77 | ) | |||||
EBIT | $ | (177 | ) | $ | (110 | ) | $ | (97 | ) | ||
Depreciation and amortization | $ | 53 | $ | 35 | $ | 35 | |||||
EBIT
2016 Compared to 2015: In Corporate, Other and Eliminations, EBIT costs in 2016 were $67 million higher compared to 2015, primarily due to restructuring costs and costs related to our previously announced acquisitions. See details of these costs in the table above and further explained in the Restructuring and Acquisition-Related Costs paragraph of MD&A. The $22 million increase in General corporate expense and other was driven about equally by higher performance-based compensation and increased general corporate expenses, partially offset by a $6 million pension-related gain.
Depreciation and amortization in 2016 was $18 million higher than in 2015, primarily due to accelerated depreciation recorded in 2016 in connection with our Insulation restructuring action and post-acquisition restructuring of InterWrap.
2015 Compared to 2014: In Corporate, Other and Eliminations, EBIT costs in 2015 were $13 million higher compared to 2014. The increase was driven by higher general corporate expense and other partially offset by higher adjusting items in the prior year, which are shown in the table above and further explained in the Adjusted Earnings Before Interest and Taxes paragraph of the MD&A. The $31 million increase in General corporate expense and other was primarily due to increased performance-based compensation.
OUTLOOK
In 2017, we expect general corporate expenses to range between $120 million and $130 million.
SAFETY
Working safely is a condition of employment at Owens Corning. The Company believes this organization-wide expectation provides for a safer work environment for employees, improves our manufacturing processes, reduces our costs and enhances our reputation. Furthermore, striving to be a world-class leader in safety provides a platform for all employees to understand and apply the resolve necessary to be a high-performing, global organization. We measure our progress on safety based on
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Recordable Incidence Rate (“RIR”) as defined by the United States Department of Labor, Bureau of Labor Statistics. For the year ended December 31, 2016, our RIR was 0.50 as compared to 0.52 in the same period a year ago.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Liquidity
The Company's primary external sources of liquidity are its Senior Revolving Credit Facility and its Receivables Securitization Facility.
The Company has an $800 million Senior Revolving Credit Facility that has been amended from time to time, which matures in November 2020 and permits incremental term loans under the facility of up to $600 million. In March 2016, the Company obtained commitments for $300 million of the $600 million of permitted incremental term loans under the Senior Revolving Credit Facility. As discussed further below, the Company subsequently borrowed $300 million on this commitment in April 2016 and fully repaid the $300 million of borrowings in September 2016. The Company may obtain new commitments for incremental term loans up to $600 million as permitted under the facility. Subsequent amendments did not impact liquidity terms. As of December 31, 2016, the Company had no borrowings on its Senior Revolving Credit Facility, $9 million of outstanding letters of credit, and had $791 million available under this facility.
During the first quarter of 2016, the Company obtained a $300 million Term Loan commitment, as allowed under its existing Senior Revolving Credit Facility. During the second quarter of 2016, the Company borrowed the $300 million available on its Term Loan commitment. The Term Loan was a partially amortizing loan that required quarterly principal repayments, with a balloon repayment due in November 2020 for any outstanding borrowings. These borrowings were used, in addition to borrowings on the Receivables Securitization Facility, to fund the acquisition of InterWrap. Please see Note 7 of the Notes to Consolidated Financial Statements for more information on this acquisition. In the third quarter of 2016, the Company repaid all outstanding borrowings on this Term Loan.
The Company has a $250 million Receivables Securitization Facility which matures in January 2018. As of December 31, 2016, the Company had no borrowings on its Receivables Securitization Facility, $2 million of outstanding letters of credit, and had $248 million available under this facility.
The Company issued $400 million of 2026 senior notes on August 8, 2016 subject to $5 million of discounts and issuance costs. Interest on the notes is payable semiannually in arrears on February 15 and August 15 each year, beginning on February 15, 2017. A portion of the proceeds from these notes were used to redeem $158 million of our 2016 senior notes, together with a $2 million make-whole call payment and $3 million of accrued interest. In connection with the redemption, the Company recognized a $1 million loss on extinguishment of debt, inclusive of the remaining unamortized financing fees, discount and interest rate swap fair value adjustment. The remaining proceeds were used to pay down portions of our Receivables Securitization Facility and for general corporate purposes.
The Company has no significant debt maturities of senior notes before 2019, and our Receivables Securitization Facility matures in 2018. Our As of December 31, 2016, the Company had $2.1 billion of total debt and cash-on-hand of $112 million.
Cash and cash equivalents held by foreign subsidiaries may be subject to U.S. income tax and foreign withholding taxes upon repatriation to the U.S. As of December 31, 2016 and December 31, 2015, the Company had $53 million and $43 million, respectively, in cash and cash equivalents in certain of its foreign subsidiaries. The Company does not provide for U.S. income taxes on the undistributed earnings of its foreign subsidiaries as earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely outside of the U.S.
As a holding company, we have no operations of our own and most of our assets are held by our direct and indirect subsidiaries. Dividends and other payments or distributions from our subsidiaries will be used to meet our debt service and other obligations and to enable us to pay dividends to our stockholders. Please refer to page 13 of the Risk Factors disclosed in Item 1A of this Form 10-K for details on the factors that could inhibit our subsidiaries' abilities to pay dividends or make other distributions to the parent company.
We expect that our cash on hand, coupled with future cash flows from operations and other available sources of liquidity, including our Senior Revolving Credit Facility and Receivables Securitization Facility, will provide ample liquidity to enable us to meet our cash requirements. Our anticipated uses of cash include capital expenditures, working capital needs, pension contributions, meeting
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
financial obligations, payments of quarterly dividends as authorized by our Board of Directors, acquisitions and reducing outstanding amounts under the Senior Revolving Credit Facility and Receivables Securitization Facility.
We have outstanding share repurchase authorizations and will evaluate and consider repurchasing shares of our common stock, as well as strategic acquisitions, divestitures, joint ventures and other transactions to create stockholder value and enhance financial performance. Such transactions may require cash expenditures beyond current sources of liquidity or generate proceeds.
The credit agreements applicable to our Senior Revolving Credit Facility and the Receivables Securitization Facility contain various covenants that we believe are usual and customary. The Senior Revolving Credit Facility and the Receivables Securitization Facility each include a maximum allowed leverage ratio and a minimum required interest expense coverage ratio. We were in compliance with these covenants as of December 31, 2016.
Cash flows
The following table presents a summary of our cash balance, cash flows, and availability on credit facilities (in millions):
Twelve Months Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Cash and cash equivalents | $ | 112 | $ | 96 | $ | 67 | |||||
Cash provided by operating activities | $ | 943 | $ | 742 | $ | 452 | |||||
Cash used for investing activities | $ | (815 | ) | $ | (369 | ) | $ | (297 | ) | ||
Cash used for financing activities | $ | (88 | ) | $ | (333 | ) | $ | (142 | ) | ||
Availability on the senior revolving credit facility | $ | 791 | $ | 791 | $ | 791 | |||||
Availability on the receivables securitization facility | $ | 248 | $ | 228 | $ | 56 | |||||
Operating activities: In 2016, the Company generated $943 million of cash from operating activities compared to $742 million in 2015. The change in cash provided by operating activities was primarily due to increased net earnings, partially offset by slightly lower cash provided by changes in operating assets and liabilities. Due to our advantaged tax position from tax net operating loss carrforwards, our cash tax rate is significantly lower than our effective tax rate. As a result, the conversion of our net earnings into operating cash flow benefits from the realization of these deferred tax assets. The year-over-year impact of lower receivables was more than offset by the comparison of a slight inventory reduction in the current year against a large inventory reduction in the prior year. Despite our net sales increase in 2016, our total working capital was relatively in line with the prior year.
Investing activities: The $446 million increase in cash used for investing activities in 2016 compared to 2015 was primarily driven by our $452 million acquisition of InterWrap in the second quarter of 2016.
Financing activities: Cash used for financing activities in 2016 was $88 million compared to $333 million in 2015. During 2016, we obtained $395 million of proceeds from the issuance of 2026 senior notes and paid $160 million to redeem our 2016 senior notes. Higher treasury stock repurchases were partially offset by the comparison to the prior year's net repayments on our Senior Revolving Credit Facility and Receivables Securitization Facility.
2017 Investments
Capital Expenditures: The Company will continue a balanced approach to the use of its cash flows. Operational cash flow will be used to fund the Company’s growth and innovation. Capital expenditures in 2017 are expected to be approximately $375 million which is roughly $30 million greater than expected depreciation and amortization. Capital spending in excess of depreciation and amortization is primarily due to the expansion of our Composites operations in India. The Company will also continue to evaluate projects and acquisitions that provide opportunities for growth in our businesses, and invest in them when they meet our strategic and financial criteria.
Tax Net Operating Losses
Upon emergence from bankruptcy and subsequent to the distribution of contingent stock and cash in January 2007, we generated a significant United States federal tax net operating loss of approximately $3.0 billion. As of December 31, 2016 and 2015, our federal tax net operating losses remaining were $1.8 billion and $2.0 billion, respectively. The decrease in U.S. federal tax net operating losses is primarily due to the impact of 2016 estimated taxable income. Our net operating losses are
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
subject to the limitations imposed under section 382 of the Internal Revenue Code. These limits are triggered when a change in control occurs, and are computed based upon several variable factors including the share price of the Company’s common stock on the date of the change in control. A change in control is generally defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three year period. Our initial three year period for measuring an ownership change started at October 31, 2006.
In addition to the United States net operating losses described above, we have net operating losses in various state and foreign jurisdictions which totaled $2.2 billion and $0.5 billion as of December 31, 2016, respectively and $2.3 billion and $0.6 billion as of December 31, 2015, respectively. The state net operating losses decreased from prior year based on our estimate of 2016 taxable income. Foreign net operating losses decreased from prior year as a result of recent tax legislative changes, changes in foreign currency exchange rates and our estimate of 2016 taxable income. The evaluation of the amount of net operating losses expected to be realized necessarily involves forecasting the amount of taxable income that will be generated in future years. In assessing the realizability of our deferred tax assets, we have not relied on any material future tax planning strategies. We have forecasted future results using estimates management believes to be reasonable, which are based on independent evidence such as expected trends resulting from certain leading economic indicators such as global industrial production and new U.S. residential housing starts. In order to fully utilize our net operating losses, we estimate that the Company will need to generate future federal, state and foreign earnings before taxes of approximately $1.9 billion, $2.3 billion and $0.5 billion, respectively. Management believes the Company will generate sufficient future taxable income within the statutory limitations in order to fully realize the carrying value of its U.S. federal net operating losses. As of December 31, 2016, a valuation allowance was established for certain state and foreign jurisdictions’ net operating loss carryforwards.
The realization of deferred income tax assets is dependent on future events. Actual results inevitably will vary from management’s forecasts. Should we determine that it is likely that our deferred income tax assets are not realizable, we would be required to reduce our deferred tax assets reflected on our Consolidated Financial Statements to the net realizable amount by establishing an accounting valuation allowance and recording a corresponding charge to current earnings. Such adjustments could be material to the financial statements. To date, we have recorded valuation allowances against certain of these deferred tax assets totaling $103 million as of December 31, 2016.
Pension contributions
Please refer to Note 13 of the Consolidated Financial Statements. The Company has several defined benefit pension plans. The Company made cash contributions of $63 million and $60 million to the plans during the twelve months ended December 31, 2016 and 2015, respectively. The Company expects to contribute $59 million in cash to its pension plans during 2017. Actual contributions to the plans may change as a result of a variety of factors, including changes in laws that impact funding requirements. The ultimate cash flow impact to the Company, if any, of the pension plan liability and the timing of any such impact will depend on numerous variables, including future changes in actuarial assumptions, legislative changes to pension funding laws, and market conditions.
Derivatives
Please refer to Note 4 of the Consolidated Financial Statements.
Fair Value Measurement
Please refer to Note 19 of the Consolidated Financial Statements.
OFF-BALANCE-SHEET ARRANGEMENTS
The Company has entered into limited off-balance-sheet arrangements, as defined under Securities and Exchange Commission rules, in the ordinary course of business. The Company does not believe these arrangements will have a material effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
CONTRACTUAL OBLIGATIONS
In the ordinary course of business, the Company enters into contractual obligations to make cash payments to third parties. The Company’s known contractual obligations as of December 31, 2016 are as follows (in millions):
Payments due by period | |||||||||||||||||||||||||||
2017 | 2018 | 2019 | 2020 | 2021 | 2022 and Beyond | Total | |||||||||||||||||||||
Long-term debt obligations | $ | — | $ | — | $ | 144 | $ | — | $ | — | $ | 1,950 | $ | 2,094 | |||||||||||||
Interest on variable rate debt (1), fixed rate debt, capital lease payments | 113 | 112 | 104 | 97 | 95 | 723 | 1,244 | ||||||||||||||||||||
Capital lease obligations | 4 | 4 | 4 | 5 | 5 | 11 | 33 | ||||||||||||||||||||
Operating lease obligations | 63 | 50 | 42 | 29 | 22 | 48 | 254 | ||||||||||||||||||||
Purchase obligations (2) | 239 | 95 | 56 | 51 | 50 | 104 | 595 | ||||||||||||||||||||
Deferred acquisition payments | 2 | 4 | — | — | — | — | 6 | ||||||||||||||||||||
Pension contributions (3) | 59 | — | — | — | — | — | 59 | ||||||||||||||||||||
Total (4) | $ | 480 | $ | 265 | $ | 350 | $ | 182 | $ | 172 | $ | 2,836 | $ | 4,285 | |||||||||||||
(1) | Interest on variable rate debt is calculated using the weighted-average interest rate in effect as of December 31, 2016 for all future periods. |
(2) | Purchase obligations are commitments to suppliers to purchase goods or services, and include take-or-pay arrangements, capital expenditures, and contractual commitments to purchase equipment. The Company did not include ordinary course of business purchase orders in this amount as the majority of such purchase orders may be canceled and are reflected in historical operating cash flow trends. The Company does not believe such purchase orders will adversely affect our liquidity position. |
(3) | Pension contributions include estimated contributions for our defined benefit pension plans. The Company is not presenting estimated payments in the table above beyond 2017 as funding can vary significantly from year to year based upon changes in the fair value of plan assets, funding regulations and actuarial assumptions. |
(4) | The Company has not included its accounting for uncertainty in income taxes liability in the contractual obligation table as the timing of payment, if any, cannot be reasonably estimated. The balance of this liability at December 31, 2016 was $29 million. |
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments related to these assets, liabilities, revenues and expenses. We believe these estimates to be reasonable under the circumstances. Management bases its estimates and judgments on historical experience, expected future outcomes, and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The Company believes that the following accounting estimates are critical to our financial results:
Tax Estimates. The determination of our tax provision is complex due to operations in several tax jurisdictions outside the United States. We apply a more-likely-than-not recognition threshold for all tax uncertainties. Such uncertainties include any claims by the Internal Revenue Service for income taxes, interest, and penalties attributable to audits of open tax years.
In addition, we record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. We estimate future taxable income and the effect of tax planning strategies in our consideration of whether deferred tax assets will more likely than not be realized. In the event we were to determine that we would not be able to realize
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
all or part of our net deferred tax assets in the future, an adjustment to reduce the net deferred tax assets would be charged to earnings in the period such determination was made. Conversely, if we were to determine that we would be able to realize our net deferred tax assets in the future in excess of their currently recorded amount, an adjustment to increase the net deferred tax assets would be credited to earnings in the period such determination was made.
Impairment of Assets. The Company exercises judgment in evaluating assets for impairment. Goodwill and other indefinite-lived intangible assets are tested for impairment annually, or when circumstances arise which indicate there may be an impairment. Long-lived assets are tested for impairment when economic conditions or management decisions indicate an impairment may exist. These tests require comparing recorded values to estimated fair values for the assets under review.
The Company has recorded its goodwill and conducted testing for potential goodwill impairment at a reporting unit level. Our reporting units represent a business for which discrete financial information is available and segment management regularly reviews the operating results. The Company has three reporting units; Composites, Insulation and Roofing. The following table summarizes the segment allocation of recorded goodwill on our Consolidated Balance Sheet (in millions):
Segment | December 31, 2016 | Percent of Total | |||
Composites | $ | 55 | 4 | % | |
Insulation | $ | 888 | 67 | % | |
Roofing | $ | 393 | 29 | % | |
Total goodwill | $ | 1,336 | 100 | % | |
Goodwill is an intangible asset that is not subject to amortization; however, annual tests are required to be performed to determine whether impairment exists. Prior to performing the two-step impairment process described in Accounting Standards Codification ("ASC") 350-20, the guidance permits companies to assess qualitative factors to determine if it is more likely than not that a reporting unit’s fair value is less than its carrying value. If it is more likely than not that a reporting unit’s fair value is greater than its carrying value, then no additional testing is required. If it is more likely than not that a reporting unit’s fair value is less than or close to its carrying value then step one of the impairment test must be performed to determine if impairment is required. In 2016, the Company has elected not to perform the qualitative approach, and proceeded in performing a step one analysis.
As part of our quantitative testing process for goodwill, we estimated fair values using a discounted cash flow approach from the perspective of a market participant. Significant estimates in the discounted cash flow approach are cash flow forecasts of our reporting units, the discount rate, the terminal business value and the projected income tax rate. The cash flow forecasts of the reporting units are based upon management’s long-term view of our markets and are the forecasts that are used by senior management and the Board of Directors to evaluate operating performance. The discount rate utilized is management’s estimate of what the market’s weighted average cost of capital is for a company with a similar debt rating and stock volatility, as measured by beta. The projected income tax rates utilized are the statutory tax rates for the countries where each reporting unit operates. The terminal business value is determined by applying a business growth factor to the latest year for which a forecast exists. As part of our goodwill quantitative testing process, the Company evaluates whether there are reasonably likely changes to management’s estimates that would have a material impact on the results of the goodwill impairment testing.
Our annual test of goodwill for impairment was conducted as of October 1, 2016. The fair value of each of our reporting units was in excess of its carrying value and thus, no impairment exists. The fair value of all three reporting units substantially exceeded the carrying value as of the date of our assessment.
Other indefinite-lived intangible assets are the Company’s trademarks. Fair values used in testing for potential impairment of our trademarks are calculated by applying an estimated market value royalty rate to the forecasted revenues of the businesses that utilize those assets. The assumed cash flows from this calculation are discounted using the Company’s weighted average cost of capital. Our annual test of indefinite-lived intangibles was conducted as of October 1, 2016. The fair value of each of our indefinite-lived intangible assets was in excess of its carrying value and thus, no impairment exists. The fair value of these assets substantially exceeded the carrying value as of the date of our assessment.
Fair values for long-lived asset testing are calculated by estimating the undiscounted cash flows from the use and ultimate disposition of the asset or by estimating the amount that a willing third party would pay. For impairment testing, long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The Company groups long-lived assets based on manufacturing facilities that produce similar products either globally or within a geographic region. Management tests asset groups for potential impairment whenever events or
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
changes in circumstances indicate that the carrying value may not be recoverable. Current market conditions have caused the Company to have idle capacity. We consider such temporary idled capacity to be unimpaired because there has not been a significant change in the forecasted long-term cash flows at the asset group level to indicate that the carrying values may not be recoverable. While management’s current strategy is to utilize this capacity to meet expected future demand, any significant decrease in this expectation or change in management’s strategy could result in future impairment charges related to this excess capacity. We evaluated and concluded that there are not any reasonably likely changes to management’s estimates that would indicate that the carrying value of our long-lived assets is unrecoverable.
In addition, changes in management intentions, market conditions, operating performance and other similar circumstances could affect the assumptions used in these impairment tests. Changes in the assumptions could result in impairment charges that could be material to our Consolidated Financial Statements in any given period.
Pensions and Other Postretirement Benefits, Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions about investment returns, discount rates, inflation, mortality, turnover, and medical costs. Changes in assumptions used could result in a material impact to our Consolidated Financial Statements in any given period.
Two key assumptions that could have a significant impact on the measurement of pension liabilities and pension expense are the discount rate and the expected return on plan assets. For our largest plan, the United States plan, the discount rate used for the December 31, 2016 measurement date was derived by matching projected benefit payments to bond yields obtained from the Towers Watson’s proprietary United States RATE:Link 40-90 pension discount curve developed as of the measurement date. The Towers Watson United States RATE:Link 40-90 pension discount curve is based on certain corporate bonds rated Aa whose weighted average yields lie within the 40th to 90th percentiles of the bonds considered. Corporate bonds are considered to be AA graded if they receive an AA (or equivalent) rating from either or both of the two primary rating agencies in a given geography. For this purpose, we reference the two agencies with the highest ratings coverage for bonds in each region. Those two agencies are Standard and Poor’s and Moody’s.
The result supported a discount rate of 3.95% at December 31, 2016 compared to 4.20% at December 31, 2015. A 25 basis point increase (decrease) in the discount rate would decrease (increase) the December 31, 2016 projected benefit obligation for the United States pension plans by approximately $32 million. A 25 basis point increase (decrease) in the discount rate would decrease (increase) 2017 net periodic pension cost by less than $1 million.
The expected return on plan assets in the United States was derived by taking into consideration the target plan asset allocation, historical rates of return on those assets, projected future asset class returns and net outperformance of the market by active investment managers and plan related and investment related expenses paid from the plan trust. The Company uses the target plan asset allocation because we rebalance our portfolio to target on a quarterly basis. An asset return model was used to develop an expected range of returns on plan investments over a 20 year period, with the expected rate of return selected from a best estimate range within the total range of projected results. This process resulted in the selection of an expected return of 6.75% at the December 31, 2016 measurement date, which is used to determine net periodic pension cost for the year 2017. This assumption is slightly lower than the 7.00% return selected at the December 31, 2015 measurement date. A 25 basis point increase (decrease) in return on plan assets assumption would result in a respective decrease (increase) of 2017 net periodic pension cost by approximately $2 million.
The discount rate for our United States postretirement plan was selected using the same method as described for the pension plan. The result supported a discount rate of 3.80% at December 31, 2016 compared to 4.00% at December 31, 2015. A 25 basis point increase (decrease) in the discount rate would decrease (increase) the United States postretirement benefit obligation by approximately $5 million and decrease (increase) 2017 net periodic postretirement benefit cost by less than $1 million.
The methods corresponding to those described above are used to determine the discount rate and expected return on assets for non-U.S. pension and postretirement plans, to the extent applicable.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 1 of the Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
Please refer to Note 15 of the Consolidated Financial Statements.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Our disclosures and analysis in this report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements present our current forecasts and estimates of future events. These statements do not strictly relate to historical or current results and can be identified by words such as “anticipate,” "appear," "assume," “believe,” “estimate,” “expect,” "forecast," “intend,” “likely,” “may,” “plan,” “project,” "seek," "should," “strategy,” “will” and other terms of similar meaning or import in connection with any discussion of future operating, financial or other performance. These forward-looking statements are subject to risks, uncertainties and other factors and actual results may differ materially from those results projected in the statements. These risks, uncertainties and other factors include, without limitation:
• | relationships with key customers; |
• | levels of residential and commercial construction activity; |
• | competitive and pricing factors; |
• | levels of global industrial production; |
• | demand for our products; |
• | industry and economic conditions that affect the market and operating conditions of our customers, suppliers or lenders; |
• | domestic and international economic and political conditions, including new legislation, policies or other governmental actions by the new U.S. presidential administration and Congress; |
• | foreign exchange and commodity price fluctuations; |
• | our level of indebtedness; |
• | weather conditions; |
• | availability and cost of credit; |
• | availability and cost of energy and raw materials; |
• | issues involving implementation and protection of information technology systems; |
• | labor disputes; |
• | legal and regulatory proceedings, including litigation and environmental actions; |
• | our ability to utilize our net operating loss carryforwards; |
• | research and development activities and intellectual property protection; |
• | interest rate movements; |
• | uninsured losses; |
• | issues related to acquisitions, divestitures and joint ventures; |
• | achievement of expected synergies, cost reductions and/or productivity improvements; |
• | defined benefit plan funding obligations; and |
• | price volatility in certain wind energy markets in the U.S. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
All forward-looking statements in this report should be considered in the context of the risks and other factors described above and as detailed from time to time in the Company’s filings with the U.S. Securities and Exchange Commission. Any forward-looking statements speak only as of the date the statement is made and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as required by federal securities laws. It is not possible to identify all of the risks, uncertainties and other factors that may affect future results. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur and actual results may differ materially from those anticipated or implied in the forward-looking statements. Accordingly, users of this report are cautioned not to place undue reliance on the forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of changes in foreign currency exchange rates, interest rates and the prices of various commodities used in the normal course of business. To mitigate some of the near-term volatility in our earnings and cash flows, the Company manages certain of our exposures through the use of financial contracts, contracts for physical delivery of a particular commodity, and derivative financial instruments. The Company’s objective with these instruments is to reduce exposure to near-term fluctuations in earnings and cash flows. The Company’s policy enables the use of foreign currency, interest rate and commodity derivative financial instruments only to the extent necessary to manage exposures as described above. The Company does not enter into such transactions for trading purposes.
A discussion of the Company’s accounting policies for derivative financial instruments, as well as the Company’s exposure to market risk, is included in the Notes to the Consolidated Financial Statements.
For purposes of disclosing the market risk inherent in its derivative financial instruments the Company uses sensitivity analysis disclosures that express the potential loss in fair values of market rate sensitive instruments resulting from changes in interest rates, foreign currency exchange rates, and commodity prices that assume instantaneous, parallel shifts in exchange rates, interest rate yield curves, and commodity prices. The following analysis provides such quantitative information regarding market risk. There are certain shortcomings inherent in the sensitivity analysis presented, primarily due to the assumption that exchange rates change instantaneously and that interest rates change in a parallel fashion. In addition, the analyses are unable to reflect the complex market reactions that normally would arise from the market shifts modeled.
Foreign Exchange Rate Risk
The Company has transactional foreign currency exposures related to buying, selling, and financing in currencies other than the local currencies in which it operates. The Company enters into various forward contracts, which change in value as foreign currency exchange rates change, to preserve the carrying amount of foreign currency-denominated assets, liabilities, commitments, and certain anticipated foreign currency transactions. Exposures are related to the United States Dollar primarily relative to the Brazilian Real, Chinese Yuan, Indian Rupee, Japanese Yen, and South Korean Won exchange rates. Also, there are additional exposures related to the European Euro primarily versus the British Pound and Russian Ruble. These transactional risks are mitigated through the use of derivative financial instruments and balancing of cash deposits and loans. The net fair value of derivative financial instruments used to limit exposure to foreign currency risk was a liability of $1 million and an asset of less than $1 million as of December 31, 2016 and 2015, respectively. The potential change in fair value at both December 31, 2016 and 2015 for such financial instruments from an increase (decrease) of 10% in quoted foreign currency exchange rates would be an increase (decrease) of approximately $3 million and $3 million, respectively.
We have translation exposure resulting from translating the financial statements of foreign subsidiaries into United States dollars. Our most significant translation exposures are the Canadian Dollar, Chinese Yuan, European Euro, and Indian Rupee in relation to the United States Dollar. The Company has partially hedged the translation exposure for the European Euro through derivative financial instruments. The fair value of these instruments is $10 million as of December 31, 2016 and December 31, 2015. The potential change in fair value at December 31, 2016 and December 31, 2015 for such financial instruments from an increase (decrease) of 10% in quoted foreign currency exchange rate would be an increase (decrease) of approximately $27 million and $28 million, respectively.
Interest Rate Risk
The Company is subject to market risk from exposure to changes in interest rates due to its financing, investing, and cash management activities. The Company has a Senior Revolving Credit Facility, Receivables Securitization Facility, other floating rate debt and cash and cash equivalents which are exposed to floating interest rates and may impact cash flow. As of December 31, 2016, the Company had no borrowings on its Senior Revolving Credit Facility or its Receivables Securitization
Facility, with the balance of other floating rate debt of less than $1 million. As of December 31, 2015, the Company had no borrowings on its Senior Revolving Credit Facility or its Receivables Securitization Facility, with the balance of other floating rate debt of $6 million. Cash and cash equivalents were $112 million and $96 million at December 31, 2016 and 2015, respectively. A one percentage point increase (decrease) in interest rates at both December 31, 2016 and 2015 would increase (decrease) our annual net interest expense by less than $1 million in both years.
The fair market value of the Company’s senior notes are subject to interest rate risk. The following table shows how a one percentage point increase / decrease in interest rates would impact the fair market value of the senior notes:
Senior Notes Maturity Year | ||||||||||||
As of December 31, 2016: | 2016 | 2019 | 2022 | 2024 | 2026 | 2036 | ||||||
Increase in interest rates | ||||||||||||
Decrease in fair value | — | % | 2 | % | 5 | % | 6 | % | 8 | % | 11 | % |
Decrease in interest rates | ||||||||||||
Increase in fair value | — | % | 2 | % | 5 | % | 7 | % | 8 | % | 12 | % |
Senior Notes Maturity Year | ||||||||||||
As of December 31, 2015: | 2016 | 2019 | 2022 | 2024 | 2026 | 2036 | ||||||
Increase in interest rates | ||||||||||||
Decrease in fair value | 1 | % | 2 | % | 6 | % | 7 | % | — | % | 10 | % |
Decrease in interest rates | ||||||||||||
Increase in fair value | 1 | % | 5 | % | 6 | % | 8 | % | — | % | 12 | % |
In 2013, the Company entered into fixed to floating interest rate swaps totaling $100 million, designated as a fair value hedge of the senior notes due in 2022. During the first quarter of 2016, the interest rate swap was terminated. Please see Note 4 to the Consolidated Financial Statements for further detail. A one percentage point increase (decrease) in absolute interest rates at December, 31 2015 would decrease (increase) the fair value of the swaps by $7 million and increase (decrease) annual interest expense by $1 million.
Commodity Price Risk
The Company is exposed to changes in prices of commodities used in its operations, primarily associated with energy, such as natural gas, and raw materials, such as asphalt and polystyrene. The Company enters into cash-settled natural gas swap contracts to protect against changes in natural gas prices that mature within 15 months; however, no financial instruments are currently used to protect against changes in raw material costs. At December 31, 2016 and 2015, the net fair value of such swap contracts was a liability of $5 million and a liability of $6 million, respectively. The potential change in fair value at December 31, 2016 and 2015 resulting from an increase (decrease) of 10% change in the underlying commodity prices would be an increase (decrease) of approximately $3 million and $2 million, respectively. This amount excludes the offsetting impact of the price risk inherent in the physical purchase of the underlying commodities.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Pages 45 through 107 of this filing are incorporated herein by reference.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
The Company maintains (a) disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), and (b) internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
On April 21, 2016, the Company completed its acquisition of InterWrap. As a result, the Company's management excluded the operations of InterWrap from its assessment of internal control over financial reporting as of December 31, 2016. InterWrap represented 2% of the Company's consolidated Total assets as of December 31, 2016 and 3% of the Company's consolidated Net sales for the year ended December 31, 2016. SEC guidelines permit companies to omit an acquired entity's internal control over financial reporting from its management assessment during the first year of the acquisition. We plan to fully integrate InterWrap into our internal control over financial reporting in 2017.
A report of the Company’s management on the Company’s internal control over financial reporting is contained on page 46 hereof and is incorporated here by reference. PricewaterhouseCoopers LLP’s report on the effectiveness of internal control over financial reporting is included in the Report of Independent Registered Public Accounting Firm beginning on page 47 hereof.
ITEM 9B. | OTHER INFORMATION |
None.
Part III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information with respect to directors and corporate governance will be presented in the 2017 Proxy Statement in the sections titled “Information Concerning Directors,” “Governance Information” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and such information is incorporated herein by reference.
Information with respect to executive officers is included herein under Part I, “Executive Officers of Owens Corning.”
Code of Ethics for Senior Financial Officers
Owens Corning has adopted an Ethics Policy for Chief Executive and Senior Financial Officers that applies to our Chief Executive Officer, Chief Financial Officer and Controller. This policy is available on our website (www.owenscorning.com) under “Corporate Governance” located in the "Investing in Owens Corning" section and print copies will be made available free of charge upon request to the Secretary of the Company. To the extent required by applicable SEC rules or New York Stock Exchange listing standards, the Company intends to post any amendments or waivers to the above referenced codes of ethics to our website, under the tab entitled "Corporate Governance".
ITEM 11. | EXECUTIVE COMPENSATION |
Information regarding executive officer and director compensation will be presented in the 2017 Proxy Statement under the section titled “Executive Compensation,” exclusive of the subsection titled “Compensation Committee Report,” and the section titled “2016 Non-Management Director Compensation,” and such information is incorporated herein by reference.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information regarding security ownership of certain beneficial owners and management and related stockholder matters, as well as equity compensation plan information, will be presented in the 2017 Proxy Statement under the sections titled “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans,” and such information is incorporated herein by reference.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE |
Information regarding certain relationships and related transactions and director independence will be presented in the 2017 Proxy Statement under the sections titled “Certain Transactions with Related Persons,” “Review of Transactions with Related Persons,” “Director Qualifications Standards” and “Director Independence,” and such information is incorporated herein by reference.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information regarding principal accounting fees and services will be presented in the 2017 Proxy Statement under the sections titled “Principal Accountant Fees and Services,” and such information is incorporated herein by reference.
Part IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) | DOCUMENTS FILED AS PART OF THIS REPORT |
1.See Index to Consolidated Financial Statements on page 45 hereof.
2.See Index to Financial Statement Schedules on page 108 hereof.
3.See Exhibit Index beginning on page 110 hereof.
Management contracts and compensatory plans and arrangements required to be filed as an exhibit pursuant to Form 10-K are denoted in the Exhibit Index by an asterisk (“*”).
ITEM 16. | SUMMARY |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OWENS CORNING
By | /s/ Michael H. Thaman | February 8, 2017 | ||
Michael H. Thaman, | ||||
Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Michael H. Thaman | February 8, 2017 | |||
Michael H. Thaman, | ||||
Chairman of the Board, President, | ||||
Chief Executive Officer and Director | ||||
/s/ Michael C. McMurray | February 8, 2017 | |||
Michael C. McMurray, | ||||
Senior Vice President and | ||||
Chief Financial Officer | ||||
/s/ Kelly J. Schmidt | February 8, 2017 | |||
Kelly J. Schmidt, | ||||
Vice President and Controller | ||||
/s/ Cesar Conde | February 8, 2017 | |||
Cesar Conde, | ||||
Director | ||||
/s/ J. Brian Ferguson | February 8, 2017 | |||
J. Brian Ferguson, | ||||
Director | ||||
/s/ Ralph F. Hake | February 8, 2017 | |||
Ralph F. Hake, | ||||
Director | ||||
/s/ F. Philip Handy | February 8, 2017 | |||
F. Philip Handy, | ||||
Director | ||||
/s/ Ann Iverson | February 8, 2017 | |||
Ann Iverson, | ||||
Director | ||||
/s/ Edward F. Lonergan | February 8, 2017 | |||
Edward F. Lonergan, | ||||
Director | ||||
/s/ Maryann T. Mannen | February 8, 2017 | |||
Maryann T. Mannen, | ||||
Director | ||||
/s/ James J. McMonagle | February 8, 2017 | |||
James J. McMonagle, | ||||
Director | ||||
/s/ W. Howard Morris | February 8, 2017 | |||
W. Howard Morris, | ||||
Director | ||||
/s/ Suzanne P. Nimocks | February 8, 2017 | |||
Suzanne P. Nimocks, | ||||
Director | ||||
/s/ John D. Williams | February 8, 2017 | |||
John D. Williams, | ||||
Director | ||||
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM | PAGE |
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 based on criteria established in the Internal Control-Integrated Framework in 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
On April 21, 2016, the Company completed its acquisition of InterWrap. As a result, the Company's management excluded the operations of InterWrap from its assessment of internal control over financial reporting as of December 31, 2016. InterWrap represented 2% of the Company's consolidated Total assets as of December 31, 2016 and 3% of the Company's consolidated Net sales for the year ended December 31, 2016. SEC guidelines permit companies to omit an acquired entity's internal control over financial reporting from its management assessment during the first year of the acquisition. We plan to fully integrate InterWrap into our internal control over financial reporting in 2017.
PricewaterhouseCoopers LLP has audited the effectiveness of the internal controls over financial reporting as of December 31, 2016 as stated in their Report of Independent Registered Public Accounting Firm on page 47 hereof.
Based on our assessment, management determined that, as of December 31, 2016, the Company’s internal control over financial reporting was effective.
/s/ Michael H. Thaman | February 8, 2017 | |||
Michael H. Thaman, | ||||
President and Chief Executive Officer | ||||
/s/ Michael C. McMurray | February 8, 2017 | |||
Michael C. McMurray, | ||||
Senior Vice President and Chief Financial Officer | ||||
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Owens Corning:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, comprehensive earnings (loss), stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Owens Corning and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded the operations of InterWrap (as defined in Note 5) from the Company’s assessment of internal control over financial reporting as of December 31, 2016 as it was acquired by the Company in a business combination on April 21, 2016. We have also excluded InterWrap from our audit of internal control over financial reporting. InterWrap represents approximately 2% of consolidated total assets as of December 31, 2016 and 3% of net sales for the year ended December 31, 2016.
/s/ PricewaterhouseCoopers LLP |
Toledo, OH |
February 8, 2017 |
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share amounts)
Twelve Months Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
NET SALES | $ | 5,677 | $ | 5,350 | $ | 5,260 | |||||
COST OF SALES | 4,296 | 4,197 | 4,284 | ||||||||
Gross margin | 1,381 | 1,153 | 976 | ||||||||
OPERATING EXPENSES | |||||||||||
Marketing and administrative expenses | 584 | 525 | 487 | ||||||||
Science and technology expenses | 82 | 73 | 76 | ||||||||
Other expenses, net | 16 | 7 | 21 | ||||||||
Total operating expenses | 682 | 605 | 584 | ||||||||
EARNINGS BEFORE INTEREST AND TAXES | 699 | 548 | 392 | ||||||||
Interest expense, net | 108 | 100 | 114 | ||||||||
Loss (gain) on extinguishment of debt | 1 | (5 | ) | 46 | |||||||
EARNINGS BEFORE TAXES | 590 | 453 | 232 | ||||||||
Less: Income tax expense | 188 | 120 | 5 | ||||||||
Equity in net earnings (loss) of affiliates | (3 | ) | 1 | 1 | |||||||
NET EARNINGS | 399 | 334 | 228 | ||||||||
Less: Net earnings attributable to noncontrolling interests | 6 | 4 | 2 | ||||||||
NET EARNINGS ATTRIBUTABLE TO OWENS CORNING | $ | 393 | $ | 330 | $ | 226 | |||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO OWENS CORNING COMMON STOCKHOLDERS | |||||||||||
Basic | $ | 3.44 | $ | 2.82 | $ | 1.92 | |||||
Diluted | $ | 3.41 | $ | 2.79 | $ | 1.91 | |||||
Dividend | $ | 0.74 | $ | 0.68 | $ | 0.64 | |||||
WEIGHTED AVERAGE COMMON SHARES | |||||||||||
Basic | 114.4 | 117.2 | 117.5 | ||||||||
Diluted | 115.4 | 118.2 | 118.3 | ||||||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(in millions)
Twelve Months Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
NET EARNINGS | $ | 399 | $ | 334 | $ | 228 | |||||
Currency translation adjustment, including net investment hedge (net of tax of $(2), $(5), and $0, for the periods ended December 31, 2016, 2015 and 2014, respectively) | (37 | ) | (115 | ) | (134 | ) | |||||