-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M+ZKrRxLB6l9Te4YEzFjwhAAhkNDnpoaq2AmD0GpkVrnaura6e3zwu+u1M8rZFD7 UgDV78lhdQUVBb/SkhjTXg== 0000075234-96-000038.txt : 19961224 0000075234-96-000038.hdr.sgml : 19961224 ACCESSION NUMBER: 0000075234-96-000038 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OWENS CORNING CENTRAL INDEX KEY: 0000075234 STANDARD INDUSTRIAL CLASSIFICATION: ABRASIVE ASBESTOS & MISC NONMETALLIC MINERAL PRODUCTS [3290] IRS NUMBER: 344323452 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-03660 FILM NUMBER: 96684938 BUSINESS ADDRESS: STREET 1: OWENS CORNING WORLD HEADQUARTERS STREET 2: ONE OWENS CORNING PARKWAY CITY: TOLEDO STATE: OH ZIP: 43659 BUSINESS PHONE: 4192488000 MAIL ADDRESS: STREET 1: OWENS CORNING WORLD HEADQUARTERS STREET 2: ONE OWENS CORNING PARKWAY CITY: TOLEDO STATE: OH ZIP: 43659 FORMER COMPANY: FORMER CONFORMED NAME: OWENS CORNING FIBERGLAS CORP DATE OF NAME CHANGE: 19920703 10-Q/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q/A Amendment No. 1 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 1996 Commission File No. 1-3660 Owens Corning One Owens Corning Parkway, Toledo, Ohio 43659 Telephone No. (419) 248-8000 A Delaware Corporation I.R.S. Employer Identification No. 34-4323452 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 [ X ] No [ ] Shares of common stock, par value $.10 per share, outstanding at September 30, 1996 52,048,661 Owens Corning's Form 10-Q for the quarter ended September 30, 1996, filed on October 28, 1996, is hereby amended by amending Item 1 "Financial Statements" and Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part I, to read as set forth below: - 2 - PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Quarter Nine Months Ended Ended September 30, September 30, 1996 1995 1996 1995 (In millions of dollars, except share data) NET SALES $1,025 $ 927 $2,830 $2,648 COST OF SALES 752 684 2,084 1,953 Gross margin 273 243 746 695 OPERATING EXPENSES Marketing and administrative expenses 128 106 372 321 Science and technology expenses 22 19 63 56 Provision for asbestos litigation claims (Note 8) - - 875 - Other (5) (4) (2) 9 Total operating expenses 145 121 1,308 386 INCOME (LOSS) FROM OPERATIONS 128 122 (562) 309 Cost of borrowed funds 20 20 56 69 INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 108 102 (618) 240 Provision (credit) for income taxes (Note 3) 31 35 (257) 85 INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF AFFILIATES 77 67 (361) 155 Equity in net income of affiliates 3 3 7 10 NET INCOME (LOSS) $ 80 $ 70 $ (354) $165 NET INCOME (LOSS) PER COMMON SHARE Primary net income (loss) per share $1.53 $1.35 $(6.86) $ 3.36 Fully diluted net income (loss) per share $1.44 $1.28 $(6.86) $ 3.18 Weighted average number of common shares outstanding (in millions) Primary 52.4 51.4 51.6 49.1 Assuming full dilution 57.0 56.0 51.6 53.4
The accompanying notes are an integral part of this statement. - 3 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET Sept. 30, Dec. 31, 1996 1995 ASSETS (In millions of dollars) CURRENT Cash and cash equivalents $ 31 $ 18 Receivables 475 314 Inventories (Note 4) 350 253 Insurance for asbestos litigation claims - current portion (Note 8) 100 100 Deferred income taxes 87 70 VEBA trust 38 51 Income tax receivable 16 50 Investment in affiliate held for sale - 36 Other current assets 30 35 Total current 1,127 927 OTHER Insurance for asbestos litigation claims (Note 8) 493 330 Deferred income taxes 519 252 Goodwill (Note 6) 276 249 Investments in affiliates 61 50 Other noncurrent assets 158 147 Total other 1,507 1,028 PLANT AND EQUIPMENT, at cost 3,258 3,067 Less--Accumulated depreciation (1,821) (1,761) Net plant and equipment 1,437 1,306 TOTAL ASSETS $ 4,071 $3,261
The accompanying notes are an integral part of this statement. - 4 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) Sept. 30, Dec. 31, 1996 1995 (In millions of dollars) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT Accounts payable and accrued liabilities $ 586 $ 587 Reserve for asbestos litigation claims - current portion (Note 8) 325 250 Short-term debt 164 64 Long-term debt - current portion 18 35 Total current 1,093 936 LONG-TERM DEBT 965 794 OTHER Reserve for asbestos litigation claims (Note 8) 1,735 887 Other employee benefits liability 355 367 Pension plan liability 67 75 Other 230 220 Total other 2,387 1,549 COMPANY OBLIGATED CONVERTIBLE SECURITY OF SUBSIDIARY HOLDING SOLELY PARENT DEBENTURES (MIPS) 194 194 STOCKHOLDERS' EQUITY Common stock 597 579 Deficit (Note 7) (1,138) (781) Foreign currency translation adjustments (8) 9 Other (19) (19) Total stockholders' equity (568) (212) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,071 $ 3,261
The accompanying notes are an integral part of this statement. - 5 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Quarter Nine Months Ended Ended September 30, September 30, 1996 1995 1996 1995 (In millions of dollars) NET CASH FLOW FROM OPERATIONS Net income (loss) $ 80 $ 70 $(354) $165 Reconciliation of net cash provided by operating activities: Noncash items: Provision for asbestos litigation claims (Note 8) - - 875 - Provision for depreciation and amortization 37 31 100 92 Provision (credit) for deferred income taxes 60 38 (285) 79 Other 1 3 8 15 (Increase) decrease in receivables (48) (28) (149) (46) (Increase) decrease in inventories (18) 32 (87) (52) Increase (decrease) in accounts payable and accrued liabilities 50 10 (16) (89) Increase (decrease) in accrued income taxes (25) 28 30 43 Proceeds from insurance for asbestos litigation claims - 140 63 221 Payments for asbestos litigation claims (57) (68) (178) (223) Other (23) (49) (37) (126) Net cash flow from operations 57 207 (30) 79 NET CASH FLOW FROM INVESTING Additions to plant and equipment (57) (69) (224) (183) Investment in subsidiaries, net of cash acquired (Note 6) - (34) (39) (34) Proceeds from the sale of affiliate - - 55 - Other (2) - (14) - Net cash flow from investing $ (59) $(103) $(222) $ (217)
The accompanying notes are an integral part of this statement. - 6 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) Quarter Nine Months Ended Ended September 30, September 30, 1996 1995 1996 1995 (In millions of dollars) NET CASH FLOW FROM FINANCING Net additions (reductions) to long-term credit facilities $ (5) $(75) $179 $ (5) Other additions to long-term debt 5 5 18 56 Other reductions to long-term debt (1) (13) (33) (115) Net increase (decrease) in short-term debt 12 (9) 100 (28) Issuance of preferred stock of subsidiary, net of fees - - - 194 Other (2) 3 - (4) Net cash flow from financing 9 (89) 264 98 Effect of exchange rate changes on cash - (2) 1 1 Net increase (decrease) in cash and cash equivalents 7 13 13 (39) Cash and cash equivalents at beginning of period 24 7 18 59 Cash and cash equivalents at end of period $ 31 $ 20 $ 31 $ 20
The accompanying notes are an integral part of this statement. - 7 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Quarter Nine Months Ended Ended September 30, September 30, (1) SEGMENT DATA 1996 1995 1996 1995 (In millions of dollars) NET SALES Industry Segments Building Materials United States $ 638 $ 548 $1,677 $1,497 Europe 76 66 203 193 Canada and other 37 26 89 77 Total Building Materials 751 640 1,969 1,767 Composite Materials United States 151 141 446 444 Europe 87 111 302 331 Canada and other 36 35 113 106 Total Composite Materials 274 287 861 881 Intersegment sales Building Materials - - - - Composite Materials 30 25 84 77 Eliminations (30) (25) (84) (77) Net sales $ 1,025 $ 927 $2,830 $2,648 Geographic Segments United States $ 789 $ 689 $2,123 $1,941 Europe 163 177 505 524 Canada and other 73 61 202 183 1,025 927 2,830 2,648 Intersegment sales United States 17 14 46 41 Europe 8 4 29 11 Canada and other 19 28 59 73 Eliminations (44) (46) (134) (125) Net sales $ 1,025 $ 927 $2,830 $2,648
- 8 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Quarter Nine Months Ended Ended September 30, September 30, (1) SEGMENT DATA (Continued) 1996 1995 1996 1995 (In millions of dollars) INCOME FROM OPERATIONS Industry Segments Building Materials United States $ 75 $ 62 $ 161 $ 150 Europe 7 7 15 20 Canada and other 9 5 5 13 Total Building Materials 91 74 181 183 Composite Materials United States 53 24 116 99 Europe 7 23 46 46 Canada and other - 8 14 17 Total Composite Materials 60 55 176 162 General corporate expense (23) (7) (919) (36) Income from operation 128 122 (562) 309 Cost of borrowed funds (20) (20) (56) (69) Income before provision for income taxes $ 108 $ 102 $ (618) $ 240 Geographic Segments United States $ 128 $ 86 $ 277 $ 249 Europe 14 30 61 66 Canada and other 9 13 19 30 General corporate expense (23) (7) (919) (36) Income from operations 128 122 (562) 309 Cost of borrowed funds (20) (20) (56) (69) Income before provision for income taxes $ 108 $ 102 $(618) $ 240
(1) Income from operations for the nine months ended September 30, 1996 includes the Company's net pretax charge of $875 million for asbestos litigation claims that may be received after 1999 and probable additional insurance recovery, all of which was recorded as an increase in general corporate expense. Income from operations for the nine months ended September 30, 1996 also includes the Company's pretax gain of $37 million from the sale of its ownership interest in its Japanese affiliate Asahi Fiber Glass Co. Ltd., all of which was recorded as a reduction in general corporate expense. Also included are special charges totaling $42 million including valuation adjustments associated with prior divestitures, major product line productivity initiatives and a contribution to the Owens Corning Foundation. The impact of these special items was to reduce income from operations for Building Materials in the United States, Europe, and Canada and other by $19 million, $1 million and $2 million, respectively, Composite Materials in the United States and Europe by $3 million and $2 million, respectively, and to increase general corporate expense by $15 million. - 9 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. GENERAL The financial statements included in this Report are condensed and unaudited, pursuant to certain Rules and Regulations of the Securities and Exchange Commission, but include, in the opinion of the Company, adjustments necessary for a fair statement of the results for the periods indicated, which, however, are not necessarily indicative of results which may be expected for the full year. In connection with the condensed financial statements and notes included in this Report, reference is made to the financial statements and notes thereto contained in the Company's 1995 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. 3. INCOME TAXES The reconciliation between the U.S. federal statutory rate and the Company's effective income tax rate is: Quarter Nine Months Ended Ended Sept. 30, Sept. 30, 1996 1995 1996 1995 U.S. federal statutory rate 35% 35% (35)% 35% Operating losses of foreign subsidiaries - 1 - 1 Adjustment of deferred tax asset allowance - - (1) - State and local income taxes (7) 2 (5) 2 Other 1 (3) (1) (3) Effective tax rate 29% 35% (42)% 35%
During the first quarter of 1996, the Company reversed approximately $7 million of its valuation allowances, as management determined that the operating loss carryforwards of certain foreign subsidiaries are realizable. 4. INVENTORIES Inventories are summarized as follows: September 30, December 31, 1996 1995 (In millions of dollars) Finished goods $290 $210 Materials and supplies 148 127 FIFO inventory 438 337 Less: Reduction to LIFO basis (88) (84) Inventories $350 $253
Approximately $191 million and $175 million of FIFO inventories were valued using the LIFO method at September 30, 1996 and December 31, 1995, respectively. - 10 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. CONSOLIDATED STATEMENT OF CASH FLOWS Cash payments, net of refunds, for income taxes and cost of borrowed funds are summarized as follows: Quarter Nine Months Ended Ended Sept. 30, Sept. 30, 1996 1995 1996 1995 (In millions of dollars) Income taxes $ 3 $(17) $(6) $(39) Cost of borrowed funds 12 7 51 56
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Supplemental Disclosure of Non-cash Investing and Financing Activities Please see Note 6 to the Consolidated Financial Statements for further information. 6. ACQUISITIONS During the third quarter of 1996, the Company acquired substantially all the assets of the Canadian extruded polystyrene foam insulation business (Celfortec) of Celfort Construction Materials Inc. The purchase price of Celfortec was $22 million ($30 million Canadian), including possible subsequent contingent consideration. The acquisition of Celfortec was consummated by the exchange of 472,250 shares of the Company's common stock and less than $1 million cash for all the acquired assets and liabilities. Additionally, during the second quarter of 1996, the Company made acquisitions in the U.K. and U.S. Building Materials segment. The aggregate purchase price of the second quarter acquisitions was $39 million. These acquisitions were accounted for under the purchase method of accounting, whereby the assets acquired and liabilities assumed have been recorded at their fair values and the results of operations of the acquisitions have been included in the Company's consolidated financial statements subsequent to the acquisition dates. The purchase price allocations were based on preliminary estimates of fair market value and are subject to revision. The purchase of Celfortec and the second quarter acquisitions included goodwill of $15 million and $7 million, respectively. The goodwill is being amortized on a straight- line basis over 40 years. The pro forma effect of the acquisitions was not material to net income for the nine months ended September 30, 1996 or 1995. 7. DIVIDENDS During the second quarter of 1996, the Board of Directors approved an annual dividend policy of 25 cents per share and declared a quarterly dividend of 6-1/4 cents per share payable on October 15, 1996 to shareholders of record as of September 30, 1996. - 11 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. CONTINGENT LIABILITIES ASBESTOS LIABILITIES The Company is a co-defendant with other former manufacturers, distributors and installers of products containing asbestos and with miners and suppliers of asbestos fibers (collectively, the "Producers") in personal injury and property damage litigation. The personal injury claimants generally allege injuries to their health caused by inhalation of asbestos fibers from the Company's products. Most of the claimants seek punitive damages as well as compensatory damages. The property damage claims generally allege property damage to school, public and commercial buildings resulting from the presence of products containing asbestos. Virtually all of the asbestos-related lawsuits against the Company arise out of its manufacture, distribution, sale or installation of an asbestos-containing calcium silicate, high temperature insulation product, the manufacture of which was discontinued in 1972. Status As of September 30, 1996, approximately 155,500 asbestos personal injury claims were pending against the Company, of which 29,700 were received in the first nine months of 1996. The Company received approximately 55,900 such claims in 1995, 29,100 in 1994, and 32,400 in 1993. Many of the recent claims appear to be the product of mass screening programs and not to involve malignancies or other significant asbestos related impairment. The Company believes that as many as 40,000 of the recent claims involve plaintiffs whose pulmonary function tests (PFTs) were improperly administered or manipulated by the testing laboratory or otherwise inconsistent with proper medical practice, and it is investigating a number of testing organizations and their methods. On June 19, 1996 the Company filed suit in federal court in New Orleans against the owners and operators of certain pulmonary function testing laboratories in the southeastern US challenging such improper testing practices. This matter is now in active pre- trial discovery. The Company is engaging in discussions with a group of approximately 30 leading plaintiffs' law firms to explore approaches toward resolution of its asbestos liability. The discussions involve the possible resolution of both pending claims and claims that may be filed in the future. While discussions are ongoing, the law firms involved in the talks have agreed to refrain from serving any further asbestos claims on the Company unless they involve malignancies. Unless extended, this agreement will expire on November 1, 1996. This agreement may have impacted the number of cases received by the Company during the second and third quarters of 1996. Through September 30, 1996, the Company had resolved (by settlement or otherwise) approximately 179,000 asbestos personal injury claims, including the dismissal in May 1996, for lack of medical proof, of approximately 15,000 maritime cases which named Owens Corning as a defendant, resulting in an 11,700 case reduction in the backlog after reduction for duplicate cases and cases previously settled. During 1993, 1994, and 1995, the Company resolved approximately 60,000 asbestos personal injury claims, over 99% without trial, and incurred total indemnity payments of $641 million (an average of about $10,700 per case). - 12 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. CONTINGENT LIABILITIES (Continued) The Company's indemnity payments have varied considerably over time and from case to case, and are affected by a multitude of factors. These include the type and severity of the disease sustained by the claimant (i.e., mesothelioma, lung cancer, other types of cancer, asbestosis or pleural changes); the occupation of the claimant; the extent of the claimant's exposure to asbestos-containing products manufactured, sold or installed by the Company; the extent of the claimant's exposure to asbestos-containing products manufactured, sold or installed by other Producers; the number and financial resources of other Producer defendants; the jurisdiction of suit; the presence or absence of other possible causes of the claimant's illness; the availability or not of legal defenses such as the statute of limitations or state of the art; whether the claim was resolved on an individual basis or as part of a group settlement; and whether the claim proceeded to an adverse verdict or judgment. Insurance As of September 30, 1996, the Company had approximately $368 million in unexhausted insurance coverage (net of deductibles and self-insured retentions and excluding coverage issued by insolvent carriers) under its liability insurance policies applicable to asbestos personal injury claims. This insurance, which is substantially confirmed, includes both products hazard coverage and primary level non-products coverage. Portions of this coverage are not available until 1997 and beyond under agreements with the carriers confirming such coverage. All of the Company's liability insurance policies cover indemnity payments and defense fees and expenses subject to applicable policy limits. In addition to its confirmed primary level non-products insurance, the Company has a significant amount of unconfirmed potential non-products coverage with excess level carriers. For purposes of calculating the amount of insurance applicable to asbestos liabilities, the Company has estimated its probable recoveries in respect of this additional non-products coverage at $225 million, which amount was recorded in the second quarter of 1996. This coverage is unconfirmed and the amount and timing of recoveries from these excess level policies will depend on subsequent negotiations or proceedings. Reserve The Company's 1995 financial statements included a reserve for the estimated cost associated with asbestos personal injury claims that may be received through the year 1999. Such financial statements did not include any provision for the cost of unasserted claims which might be received in years subsequent to 1999 because management was unable to predict the number of such claims and other factors which would affect the cost of such claims. Throughout 1996, the Company continued to review the feasibility of making provision for the cost of unasserted asbestos personal injury claims with respect to claims which may be received by the Company during and after the year 2000. In conducting such review the Company took into account, among other things, the effect of recent federal court decisions relating to punitive damages and the certification of class actions in asbestos cases, the pendency of the discussions with the group of plaintiffs' law firms referred to above, the results of its continuing investigations of medical screening practices of the kind at issue in the New Orleans PFT law suit, recent developments as to the prospects for federal and state tort reform, the continued rate of case filings at historically - - 13 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. CONTINGENT LIABILITIES (Continued) high levels, additional information on filings received during the 1993-1995 period and other factors. As a result of the review, the Company took a non-recurring, noncash charge to earnings of $1.1 billion in the second quarter of 1996. This charge represented the Company's estimate of the indemnity and defense costs associated with unasserted asbestos personal injury claims that may be received by the Company in years subsequent to 1999. The combined effect of the $1.1 billion charge and the $225 million probable additional non-products insurance recovery was an $875 million charge in the second quarter of 1996. The Company's estimated total liabilities in respect of indemnity and defense costs associated with pending and unasserted asbestos personal injury claims that may be received in the future (the "Liabilities"), and its estimated insurance recoveries in respect of such claims (the "Insurance"), are reported separately as follows: September 30,December 31, 1996 1995 (In millions of dollars) Reserve for asbestos litigation claims Current $ 325 $ 250 Other 1,735 887 Total Reserve 2,060 1,137 Insurance for asbestos litigation claims Current 100 100 Other 493 330 Total Insurance 593 430 Net Asbestos Liability $1,467 $ 707
The Company cautions that such factors as the number of future asbestos personal injury claims received by it, the rate of receipt of such claims, and the indemnity and defense costs associated with asbestos personal injury claims, as well as the prospects for confirming additional insurance, including the additional $225 million in non-products coverage referenced above, are influenced by numerous variables that are difficult to predict, and that estimates, such as the Company's, which attempt to take account of such variables, are subject to considerable uncertainty. The Company believes that its estimate of Liabilities and Insurance will be sufficient to provide for the costs of all pending and future asbestos personal injury claims that involve malignancies or significant asbestos-related functional impairment. While such estimates cover unimpaired claims, the number and cost of unimpaired claims are much harder to predict and such estimates reflect the Company's belief that such claims have little or no value. The Company will continue to review the adequacy of its estimate of Liabilities and Insurance on a periodic basis and make such adjustments as may be appropriate. - 14 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. CONTINGENT LIABILITIES (Continued) Management Opinion Although any opinion is necessarily judgmental and must be based on information now known to the Company, in the opinion of management, while any additional uninsured and unreserved costs which may arise out of pending personal injury and property damage asbestos claims and additional similar asbestos claims filed in the future may be substantial over time, management believes that any such additional costs will not impair the ability of the Company to meet its obligations, to reinvest in its businesses or to take advantage of attractive opportunities for growth. NON-ASBESTOS LIABILITIES Various other lawsuits and claims arising in the normal course of business are pending against the Company, some of which allege substantial damages. Management believes that the outcome of these lawsuits and claims will not have a materially adverse effect on the Company's financial position or results of operations. - 15 - ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All per share information in Item 2 is on a fully diluted basis. All references to results from ongoing operations exclude the impact of special items reported for the relevant period.) RESULTS OF OPERATIONS For the third quarter of 1996, the Company reported net income of $80 million, or $1.44 per share, an increase of 14 percent from net income of $70 million, or $1.28 per share, for the quarter ended September 30, 1995. The earnings growth from operations reflects primarily the benefits of acquisitions, strong results from the roofing and foam businesses, and a favorable litigation settlement with a former supplier, partially offset by increased administrative charges resulting from the Company's continuing implementation of its global productivity initiative, Advantage 2000. Net sales were $1,025 million for the quarter ended September 30, 1996, an 11 percent increase from the 1995 level of $927 million. The growth is attributable to volume increases in the Building Materials segment worldwide, particularly in the U.S., combined with the incremental increases from acquisitions. Gross margin for the quarter ended September 30 was 27 percent of sales in 1996, compared to 26 percent in 1995. For the nine months ended September 30, 1996, the Company reported a net loss of $354 million, or $6.86 per share, compared to net income of $165 million, or $3.18 per share, for the comparable 1995 period. The net loss was the result of a $1.1 billion charge taken during the second quarter to quantify the Company's liability for asbestos claims which may be received after 1999 as well as a probable $225 million additional recovery from insurance carriers (collectively, the "asbestos charge"), having a combined impact after taxes of $542 million. Excluding the impact of the asbestos charge and the special items reported in the first quarter of 1996, net income for the first nine months of 1996 was $188 million, or $3.42 per share, an increase of 14% over the comparable prior year period. Net sales for the nine months ended September 30, 1996 were $2.830 billion, a 7% increase over the $2.648 billion reported in the first nine months of 1995. This increase reflects the incremental sales from the Company's acquisitions in combination with the improvement in the Building Materials segment, particularly in the U.S., where increased demand due to natural disasters in the East has required expansion of service territories of several roofing plants. Marketing and administrative expenses from ongoing operations for the nine months ended September 30, 1996 increased approximately 13% over the same period in 1995, primarily as a result of incremental administrative expenses from the acquisitions late in 1995 and 1996 as well as the impact of the continuing implementation of the Company's Advantage 2000 program. Advantage 2000 is a business system designed to accelerate the speed and simplify the processes of doing business globally. When fully implemented, the Advantage 2000 program will replace over 200 fragmented information systems with a fully integrated system, leading to increased productivity and cost savings. In the Building Materials segment, sales increased 17% and 11% for the quarter and nine month periods ended September 30, 1996, respectively, compared to the same periods of the prior year. This - 16 - growth reflects the incremental sales from acquisitions combined with an increase in volume worldwide, particularly in the U.S. The third quarter sales increase in the U.S. was largely driven by the roofing business which benefited from an increase in demand. Additionally, the Company continues to realize the benefits of integrating new products into its distribution systems, improving the sales of products like Foamular(R) extruded polystyrene. The Company expects further benefits from this integration combined with its newly introduced System Thinking(TM) strategy, which links the Company's growing product offering with technical expertise, to provide solution-oriented systems. Income from ongoing operations for Building Materials increased 23% for the quarter and 11% for the nine months ended September 30, 1996 when compared to the same periods in 1995. The increase in the third quarter is primarily due to productivity improvements in the roofing business and improving profitability from Canadian operations. In the third quarter of 1996, the Company acquired substantially all the assets of the foam insulation business of Celfort Construction Materials Inc. of Canada. Renamed OC Celfortec, the Valleyfield, Quebec business, which produces FOAMULAR(R) rigid polystyrene foam insulation, is an important part of the Company's growth agenda into the foam insulation business. The acquisition of Celfortec increases the Company's foam insulation plants to six, with a seventh under construction in China. Additionally, at the end of the third quarter the Company reached an agreement to acquire a majority interest in Acoustical Fibreglass Insulation (Mnfg) (Pty) Ltd., the largest South African manufacturer of glass fiber reinforcements and glass fiber and rock wool insulation. The new company, headquartered in Johannesburg, South Africa, will be known as Owens Corning South Africa (Pty) Ltd. In the second quarter of 1996, the Company acquired certain U.S. assets of Partek Insulation, Inc., a subsidiary of Partek North America, Inc. Partek's rockwool-based insulation will help the Company extend its mechanical insulation product offering into higher-temperature applications. Additionally the Company acquired the United Kingdom-based Linpac Insulation. With production facilities in the U.K. and Spain, Linpac's extruded polystyrene (XPS) PolyFoam(R) insulation will be added to the Company's European building materials product line. In the Composite Materials segment, sales decreased slightly for the quarter and nine months ended September 30, 1996, compared to the same periods of the prior year. Gains in Latin America, an identified growth region, and in the U.S., were more than offset by declines in Europe and Canada, attributable to a softening demand, as well as a strengthening U.S. dollar. Composite Materials income from operations in the third quarter of 1996 increased 9% compared to the third quarter of 1995. For the nine months ended September 30, 1996, income from ongoing operations increased 12% compared to the same period in 1995, primarily due to an improvement in pricing combined with productivity initiatives, particularly in the U.S. LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS In June 1996 the Company announced that its Board of Directors had approved an annual dividend policy of 25 cents per share and declared a quarterly dividend of 6-1/4 cents per share payable on October 15, 1996 to shareholders of record as of September 30, 1996. Cash flow from operations, excluding asbestos-related activities, was $114 million for the third quarter of 1996, compared to $135 million for the third quarter of 1995. The decrease is attributable in part to an increase in working capital, particularly receivables, due to strong September sales, coupled with increased composites inventories, where short-term capacity is being modified as the Company's customers adjust their inventory levels. - 17 - At September 30, 1996, the Company's net working capital was $34 million and its current ratio was 1.03, compared to negative $9 million and .99, respectively, at December 31, 1995. The increase in 1996 is in part due to an increased sales volume driving receivables as well as incremental receivables from acquisitions, offset in large part by increased short term borrowings. Inventories at September 30, 1996 increased 38% over December 31, 1995 levels due to anticipated fourth quarter demand together with the incremental inventories of acquisitions as well as the item discussed in the preceding paragraph. Inventories as a percent of sales for the nine months ended September 30, 1996 and 1995 remained relatively unchanged at approximately 12%. Please see Notes 4 and 5 to the Consolidated Financial Statements. The Company's total borrowings at September 30, 1996 were $1.147 billion, $254 million higher than at year-end 1995. The Company's increased borrowings in 1996 are being driven by the build of inventories for anticipated fourth quarter demand as well as other working capital requirements. As of September 30, 1996, the Company had unused lines of credit of $231 million available under long-term bank loan facilities and an additional $137 million under short-term facilities, compared to $358 million and $239 million, respectively, at year-end 1995. The decrease in available lines of credit is primarily the result of increased borrowings. Letters of credit issued under the Company's long-term U.S. loan facility, most of which support appeals from asbestos trials, reduce credit availability of that facility. The impact of such reduction is reflected in the unused lines of credit discussed above. Capital spending for property, plant and equipment, excluding acquisitions and investments in affiliates, was $57 million and $224 million for the quarter and nine months ended September 30, 1996, respectively. For the year 1996, the Company anticipates capital spending, exclusive of acquisitions and investments in affiliates, to be approximately $285 million. The Company expects that funding for these expenditures will be from the Company's operations and external sources as required. Gross payments for asbestos litigation claims during the third quarter of 1996, including $13 million in defense costs and $3 million for appeal bond and other costs, were $57 million or $34 million after-tax. During the third quarter of 1996, the Company received approximately 5,400 new asbestos personal injury cases and closed approximately 2,100 cases. Over the next twelve months, the Company's total payments for asbestos litigation claims, including defense costs, are expected to be approximately $325 million. Proceeds from insurance of $100 million are expected to be available to cover these costs, resulting in a net pretax cash outflow of $225 million, or $135 million after-tax. Please see Note 8 to the Consolidated Financial Statements. The Company expects funds generated from operations, together with funds available under long and short term bank loan facilities, to be sufficient to satisfy its debt service obligations under its existing indebtedness, as well as its contingent liabilities for uninsured asbestos personal injury claims. In June 1996 the Company filed a lawsuit in federal court in New Orleans alleging a massive scheme to defraud the Company in connection with asbestos litigation cases. The suit alleges that medical test results in tens of thousands of asbestos claims were falsified by the owners and operators of certain pulmonary function testing laboratories. The Company believes that as many as 40,000 claims in its current backlog involve plaintiffs whose pulmonary function tests were improperly administered or manipulated by the testing laboratory or otherwise inconsistent with proper medical practice. The Company has been deemed by the Environmental Protection Agency (EPA) to be a potentially responsible party (PRP) with respect to certain sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund). The Company has also been deemed a PRP under similar state or local laws, including two state Superfund sites where the Company is the primary - 18 - generator. In other instances, other PRPs have brought suits or claims against the Company as a PRP for contribution under such federal, state or local laws. During the third quarter of 1996, the Company was designated a PRP in such federal, state, local or private proceedings for five additional sites. At September 30, 1996, a total of 43 such PRP designations remained unresolved by the Company, some of which designations the Company believes to be erroneous. The Company is also involved with environmental investigation or remediation at a number of other sites at which it has not been designated a PRP. The Company has established an $18 million reserve for its Superfund (and similar state, local and private action) contingent liabilities. In addition, based upon information presently available to the Company, and without regard to the application of insurance, the Company believes that, considered in the aggregate, the additional costs associated with such contingent liabilities, including any related litigation costs, will not have a materially adverse effect on the Company's financial position or results of operations. The 1990 Clean Air Act Amendments (Act) provide that the EPA will issue regulations on a number of air pollutants over a period of years. Until these regulations are developed, the Company cannot determine the extent to which the Act will affect it. The Company anticipates that its sources to be regulated will include glass fiber manufacturing and asphalt processing activities. The EPA's announced schedule is to issue regulations covering glass fiber manufacturing by late 1997 and asphalt processing activities by late 2000, with implementation as to existing sources up to three years thereafter. Based on information now known to the Company, including the nature and limited number of regulated materials it emits, the Company does not expect the Act to have a materially adverse effect on the Company's results of operations, financial condition or long-term liquidity. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OWENS CORNING Registrant Date: December 20, 1996 By /s/David W. Devonshire David W. Devonshire Senior Vice President and Chief Financial Officer (as duly authorized officer) -----END PRIVACY-ENHANCED MESSAGE-----