-----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, WSsIMnD6RxuJLNoL+0MQ4bgKXl9o0jqd541+Doxls/Ah32vNW8OwPxRCc+N9s0ZB jYpg4I8NQIc2zyIfdpxFHQ== 0000075234-99-000022.txt : 19990817 0000075234-99-000022.hdr.sgml : 19990817 ACCESSION NUMBER: 0000075234-99-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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 SEC ACT: SEC FILE NUMBER: 001-03660 FILM NUMBER: 99692842 BUSINESS ADDRESS: STREET 1: OWENS CORNING WORLD HEADQUARTERS STREET 2: ONE OWENS CORNING PKWY 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 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended June 30, 1999 Commission File No. 1-3660 Owens Corning One Owens Corning Parkway Toledo, Ohio 43659 Area Code (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 June 30, 1999 54,835,397 - 2 - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Quarter Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (In millions of dollars, except share data) NET SALES $ 1,310 $ 1,286 $ 2,440 $ 2,423 COST OF SALES 987 985 1,858 1,923 ------- ------- ------- -------- Gross margin 323 301 582 500 ------- ------- ------- -------- OPERATING EXPENSES Marketing and administrative expenses 152 152 288 281 Science and technology expenses 14 14 28 29 Restructure costs (Note 3) - - - 87 Other 2 1 1 14 ------- ------- ------- -------- Total operating expenses 168 167 317 411 ------- ------- ------- -------- Gain on sale of assets (Note 4) - - - 84 INCOME FROM OPERATIONS 155 134 265 173 Cost of borrowed funds 39 36 72 73 ------- ------- ------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 116 98 193 100 Provision for income taxes (Note 6) 41 34 68 27 ------- ------- ------- -------- INCOME BEFORE MINORITY INTEREST AND EQUITY IN NET INCOME (LOSS) OF AFFILIATES 75 64 125 73 Minority Interest (1) (5) (3) (10) Equity in net income (loss) of affiliates 2 - (2) 4 ------- ------- ------- -------- NET INCOME $ 76 $ 59 $ 120 $ 67 ======= ======= ======= ======== NET INCOME PER COMMON SHARE Basic net income per share $ 1.41 $ 1.09 $ 2.22 $ 1.25 ------ ------- ------- -------- Diluted net income per share $ 1.31 $ 1.02 $ 2.08 $ 1.20 ------ ------- ------- -------- Weighted average number of common shares outstanding and common equivalent shares during the period (in millions) Basic 54.1 53.6 54.0 53.5 Diluted 59.7 58.9 59.5 58.7
- 3 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, December 31, June 30, 1999 1998 1998 -------- ------------ --------- (In millions of dollars) ASSETS - ------ CURRENT Cash and cash equivalents $ 26 $ 54 $ 42 Receivables 611 451 597 Inventories (Note 7) 502 437 535 Insurance for asbestos litigation claims - current portion (Note 11) 150 150 125 Deferred income taxes 366 293 137 Income tax receivable 3 117 27 Other current assets 24 27 64 -------- ----------- --------- Total current 1,682 1,529 1,527 -------- ----------- --------- OTHER Insurance for asbestos litigation claims (Note 11) 228 260 310 Asbestos costs to be reimbursed - Fibreboard (Note 11) 62 74 89 Deferred income taxes 493 608 356 Goodwill 750 762 788 Investments in affiliates (Note 4) 51 45 50 Other noncurrent assets 243 205 181 -------- ----------- --------- Total other 1,827 1,954 1,774 -------- ----------- --------- PLANT AND EQUIPMENT, at cost Land 70 64 65 Buildings and leasehold improvements 810 701 683 Machinery and equipment 2,502 2,476 2,677 Construction in progress 244 257 222 -------- ----------- -------- 3,626 3,498 3,647 Less-accumulated depreciation (1,944) (1,880) (1,888) -------- ----------- -------- Net plant and equipment 1,682 1,618 1,759 -------- ----------- --------- TOTAL ASSETS $ 5,191 $ 5,101 $ 5,060 ======== =========== =========
- 4 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (continued) June 30, December 31, June 30, 1999 1998 1998 ----- ------ ------- LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars) - ------------------------------------ CURRENT Accounts payable and accrued $ 708 $ 942 $ 793 liabilities Reserve for asbestos litigation claims - current portion (Note 11) 1,050 850 325 Short-term debt 121 69 119 Long-term debt - current portion 27 22 128 --------- -------- --------- Total current 1,906 1,883 1,365 --------- -------- --------- LONG-TERM DEBT 2,068 1,535 1,761 OTHER Reserve for asbestos litigation claims (Note 11) $ 1,210 $ 1,780 $ 1,121 Asbestos-related liabilities - Fibreboard (Note 11) 67 79 96 Other employee benefits liability 325 326 340 Pension plan liability 52 55 61 Other 345 364 174 --------- -------- --------- Total other 1,999 2,604 1,792 --------- -------- --------- COMPANY OBLIGATED SECURITIES OF ENTITIES HOLDING SOLELY PARENT DEBENTURES 195 194 503 --------- -------- --------- MINORITY INTEREST 45 19 21 --------- -------- --------- STOCKHOLDERS' EQUITY Common stock 698 679 669 Deficit (1,650) (1,762) (987) Accumulated other comprehensive income (Note 9) (48) (37) (48) Other (22) (14) (16) --------- --------- ---------- Total stockholders' equity (1,022) (1,134) (382) --------- -------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,191 $ 5,101 $ 5,060 ========= ========= ==========
- 5 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Quarter Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (In millions of dollars) NET CASH FLOW FROM OPERATIONS Net income $ 76 $ 59 $ 120 $ 67 Reconciliation of net cash provided by operating activities Noncash items: Provision for depreciation and amortization 52 47 105 99 Provision (credit) for deferred income taxes 16 40 39 (5) Gain on sale of assets (Note 4) - - - (84) Other - 4 5 (3) (Increase) decrease in receivables (56) (40) (142) (169) (Increase) decrease in inventories (7) (4) (60) (40) Increase (decrease) in accounts payable and accrued liabilities (45) (12) (226) (24) (Increase) decrease in income tax receivable 24 77 104 75 Proceeds from insurance for asbestos litigation claims, excluding Fibreboard 13 5 32 22 Payments for asbestos litigation claims, excluding Fibreboard (175) (95) (370) (224) Other 3 (26) (10) 11 ------- ------- ------ -------- Net cash flow from operations $ (99) $ 55 $(403) $ (275) ------- ------- ------ -------- NET CASH FLOW FROM INVESTING Additions to plant and equipment (59) (74) (99) (121) Proceeds from the sale of affiliate or business (Note 4) - - - 134 Other (16) - (27) (19) ------ ------ ------ ------- Net cash flow $ (75) $ (74) $(126) $ (6) from investing ------ ------ ------ ------
- 6 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (continued) Quarter Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (In millions of dollars) NET CASH FLOW FROM FINANCING Net additions (reductions) to long-term credit $ 170 $ (659) $ 261 $ (374) facilities Other additions to long- term debt 1 565 251 570 Other reductions to long- term debt (33) (11) (33) (13) Net increase in short-term debt 10 60 28 96 Dividends paid (4) (4) (8) (8) Other 3 (6) - (6) ------ ------ ------ ------- Net cash flow from financing 147 (55) 499 265 ------- ------- ------ ------ Effect of exchange rate changes on cash 2 1 2 - ------- ------ ------ ------ Net increase (decrease) in cash and cash equivalents (25) (73) (28) (16) Cash and cash equivalents at beginning of period 51 115 54 58 ------- ------ ------ ------ Cash and cash equivalents at end of period $ 26 $ 42 $ 26 $ 42 ======= ====== ===== ======
- 7 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quarter Ended Six Months Ended June 30, June 30, 1. SEGMENT DATA 1999 1998 1999 1998 ---- ---- ---- ---- (In millions of dollars) NET SALES Reportable Operating Segments - ----------------------------- Building Materials United States $ 946 $ 872 $ 1,760 $ 1,611 Europe 58 70 121 135 Canada and other 63 53 111 105 ------ ----- ------ ------ Total Building Materials $ 1,067 $ 995 $ 1,992 $ 1,851 ------ ----- ------- ------- Composite Materials United States 150 182 278 364 Europe 86 100 168 197 Canada and other 37 36 63 69 ----- ----- ----- ----- Total Composite Materials 273 318 509 630 ----- ----- ----- ----- Total Reportable Operating Segments $ 1,340 $1,313 $ 2,501 $ 2,481 Reconciliation to Consolidated Net Sales - ------------------------- Composite Materials U.S. Sales to Building Materials U.S. (30) (27) (61) (58) ------- ------ ------- ------- Net sales $ 1,310 $1,286 $ 2,440 $ 2,423 ====== ====== ======= ======== External Customer Sales by Geographic Region - --------------------------- United States $ 1,066 $1,027 $ 1,977 $ 1,917 Europe 144 170 289 332 Canada and other 100 89 174 174 ------- ------ ------ -------- Net Sales $ 1,310 $1,286 $ 2,440 $ 2,423 ======= ======= ======= =======
- 8 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Quarter Ended Six Months Ended June 30, June 30, 1. SEGMENT DATA (continued) 1999 1998 1999 1998 ---- ---- ---- ---- (In millions of dollars) INCOME (LOSS) FROM OPERATIONS Reportable Operating Segments - ----------------------------- Building Materials United States $ 110 $ 66 $ 177 $ 60 Europe 1 2 4 (2) Canada and other 19 1 25 1 ------ ------ ------ ------ Total Building Materials 130 69 206 59 ------ ------ ------- ------- Composite Materials United States 33 51 61 93 Europe (4) 7 (4) 16 Canada and other 4 4 7 5 ------ ------ ------ ------- Total Composite Materials 33 62 64 114 ------ ------ ------ ------- Total Reportable Operating Segments $ 163 $ 131 $ 270 $ 173 ------- ----- ------- ------ Geographic Regions - ------------------ United States $ 143 $ 117 $ 238 $ 153 Europe (3) 9 - 14 Canada and other 23 5 32 6 ------- ------ ------- ------- Total Reportable $ 163 $ 131 $ 270 $ 173 Operating Segments ======= ====== ======= ====== Reconciliation to Consolidated Income Before Provision for Income Taxes - ---------------------------- Restructuring and other charges - - - (95) Gain on sale of affiliate or business - - - 84 General corporate income (expense) (8) 3 (5) 11 Cost of borrowed funds (39) (36) (72) (73) ------- ------ ------ ------ Consolidated Income Before Provision for Income Taxes $ 116 $ 98 $ 193 $ 100 ------- ----- ----- -------
- 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 1998 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. 3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS During the third quarter of 1998, the Company recorded a $148 million pretax charge for restructuring and other actions as the final phase of the Company's previously announced program to close manufacturing facilities, enhance manufacturing productivity and reduce overhead. On a cumulative basis since the fourth quarter of 1997, the Company has recorded a total pretax charge of $386 million, of which $143 million was recorded in the fourth quarter of 1997, $95 million was recorded in the first quarter of 1998, and $148 million was recorded in the third quarter of 1998. The $148 million pretax charge in the third quarter of 1998 was comprised of a $30 million charge associated with the restructuring of the Company's business segments and a $118 million charge associated with other actions, the majority of which represent asset impairments. The $30 million restructure charge has been classified as a separate component of operating expenses on the Company's consolidated statement of income while the $118 million charge for other actions is comprised of a $60 million charge to cost of sales, a $4 million charge to marketing and administrative expenses, and a $54 million charge to other operating expenses. The components of the restructure charge include $9 million for personnel reductions and $21 million for the divestiture of non-strategic businesses and facilities, of which $20 million represents non-cash asset write-downs to estimated fair value and $1 million represents exit cost liabilities, comprised primarily of lease commitments. The $9 million for personnel reductions represents severance costs associated with the elimination of approximately 400 positions, primarily in the U.S. and Asia. The primary groups affected include manufacturing and administrative personnel. As of June 30, 1999, approximately $7 million has been paid and charged against the reserve for personnel reductions, representing the elimination of approximately 400 positions, the majority of whose severance payments will be made over the course of 1999. Charges of less than $1 million have been made against exit cost liabilities. No adjustments have been made to the liability. - 10 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued) The components and classification of the $118 million of other actions, of which $103 million represents non-cash asset revaluations, include: $30 million to write down to fair value certain manufacturing assets held for use in China, due primarily to poor current and projected financial results, recorded as cost of sales; $15 million to write down to net realizable value equipment and inventory made obsolete by changes in the Company's manufacturing and marketing strategies, recorded as cost of sales; $17 million for the write-down of an investment in and the write off of a receivable from a joint venture in Korea to reflect the business outlook at that time and the fair market value of the assets, recorded as other operating expenses; $12 million for the write-down of goodwill associated with the 1995 acquisition of Fiber-lite, determined to be unrecoverable due to a change in market conditions and customer demand, recorded as other operating expenses; and $9 million for the write-down of certain assets in the U.S. to fair market value, recorded as cost of sales. The Company plans to hold and use the investments, but disposed of the equipment in 1998. Also included in the $118 million charge for other actions are $13 million for the write off of certain receivables in the U.S. and Asia determined to be uncollectable, recorded as cost of sales and other operating expenses; and $22 million for other actions recorded as cost of sales, marketing and administrative expenses, and other operating expenses. During the first quarter of 1998, the Company recorded a $95 million pretax charge for restructuring and other actions as the second phase of the Company's strategic restructuring program to enhance manufacturing productivity and reduce overhead. The $95 million pretax charge in the first quarter of 1998 was comprised of an $87 million charge associated with the restructuring of the Company's business segments and an $8 million charge associated with other actions. The $87 million restructure charge has been classified as a separate component of operating expenses on the Company's consolidated statement of income while the $8 million charge for other actions is comprised of a $5 million charge to cost of sales and a $3 million charge to marketing and administrative expenses. The components of the restructure charge include $81 million for personnel reductions and $6 million for the divestiture of non-strategic businesses and facilities, of which $2 million represents exit cost liabilities, comprised primarily of lease commitments. The $81 million for personnel reductions represents severance costs associated with the elimination of approximately 1,500 positions worldwide. The primary employee groups affected include manufacturing and corporate administrative personnel. As of June 30, 1999, approximately $62 million has been paid and charged against the reserve for personnel reductions, representing the elimination of approximately 1,500 employees, the majority of whose severance payments were made over the course of 1998, and approximately $2 million has been charged against exit cost liabilities. No adjustments have been made to the liability. During the fourth quarter of 1997, the Company recorded a $143 million pretax charge for restructuring and other actions as the first phase of the program to close manufacturing facilities, enhance manufacturing productivity and reduce overhead. The $143 million pretax charge was comprised of a $68 million charge associated with the restructuring of the Company's business segments and a $75 million charge associated with asset impairments, including investments in certain affiliates. The components of the restructure charge include $25 million for personnel reductions; $41 - 11 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued) million for the divestiture of non-strategic businesses and facilities, of which $13 million represents exit cost liabilities, primarily for leased warehouse and office facilities to be vacated, and $28 million represents non-cash asset revaluations; and $2 million for other actions. The divestiture of non-strategic businesses and facilities includes the closure of the Candiac, Quebec manufacturing facility. The $25 million for personnel reductions during the fourth quarter of 1997 represents severance costs associated with the elimination of nearly 550 positions worldwide. The primary employee groups affected include manufacturing and corporate administrative personnel. As of June 30, 1999, approximately $21 million has been paid and charged against the reserve for personnel reductions, representing the elimination of approximately 550 employees, the majority of whose severance payments were over the course of 1998, and approximately $9 million has been charged against exit cost liabilities. No adjustments have been made to the liability. The components of the $75 million of other actions during the fourth quarter of 1997 and their classification on the Company's 1997 consolidated statement of income are as follows: $17 million for the write off of certain assets and investments associated with unconsolidated joint ventures in Spain and Argentina due primarily to poor current and projected financial results and the expected loss of local partners, recorded as other operating expenses; $12 million for the write-down of certain investments in mainland China to reflect the current business outlook and the fair market value of the investments, recorded as cost of sales; $24 million to write down to net realizable value equipment and inventory made obsolete by changes in the Company's manufacturing and marketing strategies, recorded as cost of sales; $8 million for a supplemental employee retirement plan approved by the Board of Directors in December 1997, recorded as marketing and administrative expenses; $5 million for the write-off of an insurance receivable that was determined to be uncollectable after judicial rejection of the Company's claim, recorded as other operating expenses; and $9 million for several other actions recorded as cost of sales, marketing and administrative expenses, and other operating expenses. The Company plans to hold and use the investments but disposed of most of the equipment in 1998. The following table summarizes the status of the liabilities from the restructure program described above, including cumulative spending and adjustments and the remaining balance as of June 30, 1999: (In millions of dollars) Beginning Total Ending Liability Payments Liability --------- -------- -------- Personnel Cost $ 115 $ (90) $ 25 Facility and Business Exit Costs 16 (12) 4 Other 2 (2) - ------- --------- -------- Total $ 133 $ (104) $ 29 ======= ========= ========
- 12 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued) The Company continually evaluates whether events and circumstances have occurred that indicate that the carrying amount of certain long-lived assets is recoverable. When factors indicate that a long-lived asset should be evaluated for possible impairment, the Company uses an estimate of the expected undiscounted cash flows to be generated by the asset to determine whether the carrying amount is recoverable or if an impairment exists. When it is determined that an impairment exists, the Company uses the fair market value of the asset, usually measured by the discounted cash flows to be generated by the asset, to determine the amount of the impairment to be recorded in the financial statements. 4. ACQUISITIONS AND DIVESTITURES OF BUSINESSES In connection with a proposal received from its Korean joint venture partner, the Company infused approximately $29 million of cash into this venture in March, 1999. As a result of this investment, along with additional investments by the other partner, the Company increased its ownership interest in Owens Corning Korea to 70%. The Company accounted for this transaction under the purchase method of accounting whereby the assets acquired and liabilities assumed, including $84 million in debt, have been recorded at their fair values and the results of operations have been consolidated since the date of acquisition. Prior to that date, the Company accounted for this joint venture under the equity method. During the first quarter of 1998, the Company completed the sale of the assets of Pabco, a producer of molded calcium silicate insulation, fireproofing board and metal jacketing, acquired as part of the Fibreboard acquisition in 1997. The Company sold Pabco for $31 million in cash and $6 million in notes receivable, all of which was collected during 1998. Late in the first quarter of 1998, the Company sold its 50% ownership interest in Alpha/Owens-Corning, LLC. With cash proceeds of approximately $103 million, the Company recorded a pretax gain of approximately $84 million as other income on the Company's consolidated statement of income. The consolidated balance sheet of the Company as of June 30, 1999 reflects the September 30, 1998 disposition of a majority interest in the Company's yarns and specialty materials business (the "yarns business"). The results of operations of the yarns business were reflected in the Company's consolidated statement of income through the period ending September 30, 1998. For the six months ended June 30, 1998, the yarns business recorded net sales of approximately $141 million and income from operations of approximately $45 million. Effective September 30, 1998, the Company accounts for its ownership interest in the yarns joint venture under the equity method. 5. LONG-TERM DEBT During the first quarter of 1999, the Company issued $250 million of senior debt securities ("the securities") as unsecured obligations of the Company. These securities, which mature in 2009, bear an annual rate of interest of 7.0%, payable semiannually. The proceeds from the issuance of these securities were used to reduce borrowings under the Company's long-term revolving credit agreement. - 13 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. INCOME TAXES The reconciliation between the U.S. federal statutory rate and the Company's effective income tax rate is: Quarter Six Months Ended Ended June 30, June 30, ------- -------- 1999 1998 1999 1998 ---- ---- ---- ---- U.S. federal statutory rate 35% 35% 35% 35% State and local income taxes 3 5 3 3 Special tax election (a) - - - (13) Foreign tax rate differences - - - 3 Other (3) (5) (3) (1) ----- ----- ----- ----- Effective tax provision and rate 35% 35% 35% 27% ===== ===== ===== ===== (a)Represents a one-time tax benefit associated with Asia Pacific operations
7. INVENTORIES June 30, December 31, 1999 1998 ------ ------ (In millions of dollars) Inventories are summarized as follows: Finished goods $ 380 $ 317 Materials and supplies 182 176 -------- ------- FIFO inventory 562 493 Less: Reduction to LIFO basis (60) (56) -------- ------- Total Inventory $ 502 $ 437 ======== =======
Approximately $300 million and $271 million of FIFO inventories were valued using the LIFO method at June 30, 1999 and December 31, 1998, respectively. - 14 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. CONSOLIDATED STATEMENT OF CASH FLOWS Cash payments for income taxes, net of refunds, and cost of borrowed funds are summarized as follows: Quarter Six Months Ended Ended June 30, June 30, ------- ------- 1999 1998 1999 1998 ----- ---- ----- ---- Income taxes $ 2 $(84) $(80) $ (81) Cost of borrowed funds 46 49 73 72
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. During the first six months of 1999, gross payments for asbestos litigation claims against Fibreboard were approximately $57 million, all of which was paid directly by Fibreboard's insurers or from the escrow account to claimants on Fibreboard's behalf. During the first six months of 1999, Fibreboard also reached settlement agreements with plaintiffs for amounts totaling approximately $45 million. Fibreboard settlement agreements are reflected on the Company's consolidated balance sheet as an increase to both the Fibreboard asbestos costs to be reimbursed and asbestos claims settlements when the agreements are reached. Please refer to Note 4 for disclosure of Non-Cash Investing and Financing activities. 9. COMPREHENSIVE INCOME During the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS 130 requires that the Company classify items of other comprehensive income by their nature in the financial statements and display the accumulated balance of other comprehensive income separately in the stockholders' equity section of the Company's consolidated balance sheet. The Company's comprehensive income for the quarters ended June 30, 1999 and 1998 was $76 million and $43 million, respectively. For the six months ended June 30, 1999 and 1998, comprehensive income was $109 million and $59 million, respectively. The Company's comprehensive income includes net income, currency translation adjustments, minimum pension liability adjustments, and deferred gains and losses on certain hedging transactions. - 15 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. EARNINGS PER SHARE The following table reconciles the net income and weighted average number of shares used in the basic earnings per share calculation to the net income and weighted average number of shares used to compute diluted earnings per share. Quarter Six Months Ended Ended June 30, June 30, -------- -------- 1999 1998 1999 1998 ---- ---- ---- ---- (In millions of dollars, except share data) Net income used for basic earnings per share $ 76 $ 59 $ 120 $ 67 Net income effect of assumed conversion preferred securities 2 2 4 4 ------- ----- ----- ----- Net income used for diluted earnings per share $ 78 $ 61 $ 124 $ 71 ======= ===== ===== ===== Weighted average number of shares outstanding used for basic earnings per share (thousands) 54,116 53,563 54,011 53,465 Deferred awards and stock options 1,014 762 903 621 Shares from assumed conversion of preferred securities 4,566 4,566 4,566 4,566 ------ ------ ------- ------- Weighted average number of shares outstanding and common equivalent shares used for diluted earnings per share (thousands) 59,696 58,891 59,480 58,652 ======= ======= ====== =======
- 16 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. CONTINGENT LIABILITIES Asbestos Liabilities - -------------------- ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) Owens Corning is a co-defendant with other former manufacturers, distributors and installers of products containing asbestos and with miners and suppliers of asbestos fibers in personal injury litigation. The personal injury claimants generally allege injuries to their health caused by inhalation of asbestos fibers from Owens Corning's products. Most of the claimants seek punitive damages as well as compensatory damages. Virtually all of the asbestos-related lawsuits against Owens Corning arise out of its manufacture, distribution, sale or installation of an asbestos-containing calcium silicate, high temperature insulation product, the manufacture and distribution of which was discontinued in 1972. National Settlement Program - --------------------------- In December 1998, Owens Corning announced a National Settlement Program (NSP) which settled a substantial majority of the asbestos claims then pending against the Company. The Company continues to settle claims under the NSP, and the number of participating plaintiffs' law firms has increased from 54 to approximately 100. As of June 30, 1999, approximately 225,000 asbestos personal injury claims against the Company have been settled under the NSP. The NSP also establishes procedures and fixed payments for resolving future claims brought by participating plaintiffs' law firms without litigation through at least 2008. Average payments per claim under the NSP are expected to be substantially lower than those experienced by Owens Corning for comparable claims prior to the NSP. The Company established the NSP in response to the rising cost in recent years of mesothelioma settlements and judgments, as well as significant changes in the legal environment, such as the Supreme Court's 1997 decision in GEORGINE V. AMCHEM PRODUCTS, INC., striking down an asbestos class action settlement. The NSP is designed to better manage Owens Corning's asbestos liability, and that of Fibreboard (see Item B below), and to enable the Company to better predict the timing and amount of indemnity payments for both pending and future claims. Under the NSP, each participating law firm has agreed to a long- term settlement agreement ("NSP Agreement") providing for the resolution of both present and future claims against Owens Corning and Fibreboard for settlement amounts negotiated with each participating firm. NSP Agreements may be extended beyond 2008 by mutual agreement of the parties. As to present claims, settlement amounts to each claimant vary based on a number of factors, including the type and severity of disease. All payments will be subject to satisfactory evidence of a qualifying medical condition and exposure to the Company's products, delivery of customary releases by each claimant and other conditions. The NSP allows claimants to receive prompt payment without incurring the significant delays and uncertainties of litigation. Claimants settling non-malignancy claims with the Company and/or Fibreboard are typically entitled to a pre-determined amount of additional compensation if they later develop a more severe asbestos-related medical condition (the "green card" program). Under each NSP Agreement, a participating firm also agrees (consistent with applicable legal requirements) to recommend to its future clients, based on appropriately exercised professional judgment, to resolve any - 17 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. CONTINGENT LIABILITIES Asbestos Liabilities - -------------------- ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) future asbestos personal injury claims against Owens Corning through an administrative processing arrangement, rather than litigation. Under such arrangement, no settlement payment will be made for future claims unless specified medical criteria and other requirements are met, and the amount of any such payment will be within a range of specified cash settlement values based on the disease of the claimant and other factors. In the case of future claims not involving malignancy, such criteria require medical evidence of functional impairment. Payments to claimants for both settled present and future claims are being managed by Integrex, a wholly-owned Owens Corning subsidiary that specializes in claims processing. Payments under the NSP for settled present claims (those claims, including unfiled claims, pending at the time a participating plaintiffs' firm entered into an NSP Agreement) will generally be made through 2002, with the majority of payments expected to occur in 1999 and 2000. It is anticipated that payments for a limited number of future "exigent claims" (principally those of living malignancy claimants, as such term is defined under the settlement agreements) under the administrative processing arrangement will generally begin in 2001, while payments for other qualifying future claims will begin in 2003. Payments for claims in 2003 and later years under the NSP will be subject to certain conditions designed to increase the predictability of annual cash outflows for asbestos payments. As a result of such payments, the Company's gross payments for asbestos litigation claims will increase in 1999 and 2000 over the levels experienced in recent years. However, such payments are expected to be substantially lower than historical levels in 2001 and subsequent years. Owens Corning and Fibreboard (see Item B below) each retains the right to terminate any individual NSP Agreement if in any year more than a specified number of plaintiffs represented by the plaintiffs' firm in question opt out of such agreement. Opt out procedures for future claims are specified in the settlement agreements, and provide for mediation and further negotiation before a claimant may pursue his case in the court system. Asbestos Related Payments - ------------------------- In the first two quarters of 1999, the Company made $370 million of asbestos related payments. These payments fell within four major categories: pre-NSP settlements - covering resolution of verdicts, settlements and appeals effected prior to the implementation of the NSP; NSP settlements - covering cases within the NSP; non-NSP settlements - covering cases outside the NSP; and defense and administrative expenses - including the cost of pursuing recoveries from insurance companies. The Company currently estimates that it will incur total asbestos related payments of approximately $1 billion for 1999, as follows: (in millions of dollars) Pre-NSP Settlements $200 NSP Settlements 700 Non-NSP Settlements 50 Defense and Administrative Expenses 40
- 18 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. CONTINGENT LIABILITIES Asbestos Liabilities - -------------------- ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) All amounts discussed above are before tax and application of insurance recoveries. The projected 1999 NSP Settlements amount could be less depending on how quickly NSP claims are submitted and processed, in which event the expected timing of NSP payments in 2000 and beyond may also be affected. Tobacco - ------- As previously reported, Owens Corning believes that it has spent significant amounts to resolve claims of asbestos claimants whose injuries were caused or contributed to by cigarette smoking, and that the major tobacco companies should be required to reimburse asbestos defendants, in whole or in part, for past payments made to asbestos claimants who were also smokers. The Company is pursuing this objective through both legislative lobbying efforts and litigation. In October 1998, the Circuit Court for Jefferson County, Mississippi granted leave to file an amended complaint in an existing action to add claims by Owens Corning against seven leading tobacco companies and several other tobacco industry defendants. The court has set a February 2000 trial date for this action. In addition to the Mississippi lawsuit, a lawsuit brought in December 1997 by Owens Corning and Fibreboard is pending in the Superior Court for Alameda County, California against the same major tobacco companies. In both cases, the Company seeks monetary recovery for, among other things, a portion of the payments made to persons who brought asbestos claims and were also smokers. PFT Litigation - -------------- As previously reported, in 1996 Owens Corning filed suit in federal court in New Orleans, Louisiana against the owners and operators of certain pulmonary function testing laboratories in the southeastern United States alleging that many pulmonary function tests ("PFTs") used in mass screening programs were improperly administered and manipulated by the testing laboratories or otherwise inconsistent with proper medical practice. This matter is now in active pre-trial discovery and a January 2000 trial date has been set. In January 1997, Owens Corning filed a similar suit in federal court in Jackson, Mississippi against the owner of an additional testing laboratory. The Company expects to settle this suit in a satisfactory manner in the third quarter of 1999. The Company believes that these lawsuits have been helpful in raising the standards for medical screening of asbestos claims and in developing, and gaining widespread acceptance by plaintiffs' firms of, the medical criteria included in the NSP Agreements. Insurance - --------- As of June 30, 1999, Owens Corning had approximately $378 million in unexhausted insurance coverage (net of deductibles and self- insured retentions) under its liability insurance policies applicable to asbestos personal injury claims. A portion of this amount represents unconfirmed potential non-products coverage with excess level insurance carriers, as to which Owens Corning has estimated its probable recoveries. The Company also has a significant amount of other unconfirmed potential non-products coverage with excess level carriers. The amount and timing of recoveries from excess level policies will depend on subsequent negotiations or proceedings. - 19 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. CONTINGENT LIABILITIES Asbestos Liabilities - -------------------- ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) Reserve - ------- The Company's financial statements include a reserve for the estimated cost associated with Owens Corning's asbestos personal injury claims. This reserve was established initially through a charge to income in 1991, with an additional $1.1 billion charge to income (before taking into account probable non-products insurance recoveries) recorded in 1996. Reflecting the substantial new information about now settled present and expected future claims gained in the NSP negotiations with plaintiffs' law firms and the recent changes in the legal environment referred to above, the Company in the fourth quarter of 1998 increased its asbestos reserves by $1.4 billion, resulting in an after-tax charge to 1998 earnings of $906 million. Subject to the uncertainties referred to below, Owens Corning estimates that its liabilities associated with pending and unasserted asbestos personal injury claims and its insurance recoveries in respect of such claims, at June 30, 1999, are as follows: June 30, December 31, 1999 1998 -------- ----------- (In millions of dollars) Reserve for asbestos litigation claims - -------------------------------------- Current $ 1,050 $ 850 Other 1,210 1,780 -------- -------- Total Reserve $ 2,260 $ 2,630 -------- -------- Insurance for asbestos litigation claims - ---------------------------------------- Current $ 150 $ 150 Other 228 260 ------- ------- Total Insurance $ 378 $ 410 ------- ------- Net Owens Corning Asbestos Liability $ 1,882 $ 2,220 ======= =======
The NSP has greatly improved Owens Corning's ability to quantify the cost of resolving virtually all of the claims that were pending (filed and unfiled) against the Company prior to the NSP. Also, the Company believes that the NSP has improved its ability to estimate the timing and amount of indemnity payments and defense costs for non-NSP and future NSP claims. Nevertheless, the Company cautions that its estimate of its liabilities for such non-NSP and future NSP claims is influenced by numerous variables that are difficult to predict and that such estimate therefore remains subject to uncertainty. Such variables include the number of claims filed in the future and the severity of disease involved in such claims; how many of such claims are covered by an NSP Agreement; the extent, if any, to which an individual plaintiff exercises his or her right to opt out of an NSP Agreement and/or utilize other counsel that is not a participant in the NSP; the extent, if any, to which Owens Corning exercises its right to terminate one or more of the NSP Agreements due to excessive opt-outs; and Owens Corning's success in controlling the costs of resolving claims outside the NSP. - 20 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. CONTINGENT LIABILITIES Asbestos Liabilities - -------------------- ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) Management Opinion - ------------------ Although any opinion is necessarily judgmental and must be based on information now known to Owens Corning, in the opinion of management, while any additional uninsured and unreserved costs which may arise out of pending personal injury asbestos claims and additional similar asbestos claims filed in the future may be substantial over time, management believes that such additional costs will not impair the ability of the Company to meet its obligations, to reinvest in its businesses, or to pursue its growth agenda. ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) Prior to 1972, Fibreboard manufactured insulation products containing asbestos. Fibreboard has since been named as defendant in many thousands of personal injury claims for injuries allegedly caused by asbestos exposure. Status - ------ As of June 30, 1999, approximately 132,000 asbestos personal injury claims were pending against Fibreboard. Most of the pending claims were made against the Fibreboard Global Settlement Trust and have been subject to the injunction under the Global Settlement (discussed below). As a result of the United States Supreme Court's June 1999 decision (discussed below) overturning the Global Settlement, Fibreboard is expected to become entitled to an Insurance Settlement of approximately $1.9 billion (discussed below) and Fibreboard anticipates that a substantial majority of its asbestos claims will be resolved under the NSP. The funds under the Insurance Settlement will be available to pay Fibreboard's pending and future asbestos claims, including claims under the NSP. National Settlement Program - --------------------------- Fibreboard is a participant in the NSP and is a party to the NSP Agreements discussed in Item A. These agreements settle claims that were pending against Fibreboard and claims that could be filed against Fibreboard following the lifting of the injunction under the Global Settlement (discussed below). The agreements also provide for the resolution of other future asbestos personal injury claims against Fibreboard through the administrative processing arrangement described in Item A. The timing of payments for pending and future claims generally will be consistent with the timing applicable to Owens Corning claims, described in Item A. Global Settlement - ----------------- In 1993, Fibreboard, its insurers and representatives of a class of future asbestos plaintiffs who had claims arising from exposure to asbestos prior to August 27, 1993, entered into the Global Settlement. Under the Global Settlement, asbestos claims pending against Fibreboard would have been resolved through a limited-fund class action settlement. - 21 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. CONTINGENT LIABILITIES Asbestos Liabilities - -------------------- ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued) In June 1999, the Supreme Court issued its decision in ORTIZ V. FIBREBOARD overturning the Global Settlement. The Supreme Court determined that the Global Settlement had not met the requirements for approving a limited-fund class under Federal Rule of Civil Procedure 23 and returned the case to the lower courts for further proceedings. In the third quarter of 1999, the district court lifted the injunction barring the filing of asbestos claims against Fibreboard, and it is expected that the Global Settlement will be finally disapproved. At such time as the Global Settlement is finally disapproved, the Insurance Settlement (discussed below) will become effective. Insurance Settlement - -------------------- In 1993, Fibreboard and two of its insurers, Continental Casualty Company ("Continental") and Pacific Indemnity Company ("Pacific"), entered into the Insurance Settlement, which was structured as an alternative solution in the event the Global Settlement were overturned. The Insurance Settlement is final and not subject to appeal. Since 1993, Continental and Pacific have paid, either directly or through an escrow account funded by them, for substantially all settlements of asbestos claims reached prior to the initiation of the NSP. At June 30, 1999, approximately 132,000 asbestos claims remained pending against Fibreboard. Under the Insurance Settlement, Continental and Pacific will provide approximately $1.9 billion to Fibreboard to fund Fibreboard's costs of resolving these pending claims and expected future asbestos claims either under the NSP or in the tort system. Management Opinion - ------------------ The Company believes the amounts available under the Insurance Settlement will be adequate to fund Fibreboard's ongoing defense and indemnity costs associated with asbestos-related personal injury claims for the foreseeable future. - 22 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All per share information in Item 2 is on a diluted basis.) CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the statements. Some of the important factors that may influence possible differences are continued competitive factors and pricing pressures, construction activity, interest rate movements, issues involving implementation of new business systems, Year 2000 readiness, achievement of expected cost reductions, asbestos litigation, and general economic conditions. RESULTS OF OPERATIONS Business Overview - ----------------- The Company's growth agenda has focused on increasing sales and earnings by (i) acquiring businesses with products that can be sold through existing or complementary distribution channels, (ii) achieving productivity improvements and cost reductions in existing and acquired businesses and (iii) entering new growth markets. The Company is implementing two major initiatives, the System Thinking (TM) strategy and Advantage 2000, to enhance sales growth and achieve productivity improvements across all businesses. System Thinking for the Home (TM) leverages the Company's broad product offering and strong brand recognition to increase its share of the building materials and home improvement markets. This systems approach represents a shift from product- oriented selling to providing systems-driven solutions that combine the Company's insulation, roofing, exterior and acoustic systems, to provide a high performance, cost-effective building "envelope" for the home. In the Composite Materials business, the Company has partnered with the plastics industry and, with the Company's System Thinking philosophy, is taking a solution- oriented, customer-focused approach toward the continuous development of substitution opportunities for composite materials. In addition, the Company is implementing Advantage 2000, a fully integrated business technology system designed to reduce costs and improve business processes. The Company has grown its sales from nearly $3.4 billion in 1994 to $5.0 billion in 1998. Acquisitions have been a significant component of that growth. Between 1994 and 1997, the Company completed 17 acquisitions for an aggregate purchase price of over $1.2 billion. The Company's acquisitions have broadened its lines of business to include siding, accessories and other home exteriors and have diversified its materials portfolio beyond fiber glass to include polymers such as vinyl and styrene, and metal and stone. In 1997, the Company completed the two largest of these acquisitions by acquiring Fibreboard Corporation ("Fibreboard") and AmeriMark Building Products, Inc. ("AmeriMark"), making Owens Corning the leader in the U.S. vinyl siding, siding accessories and manufactured stone markets, as well as a large specialty distributor in North America through 180 Company-owned distribution centers. - 23 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Despite the benefits of its growth agenda, the Company experienced a highly competitive pricing environment during 1997 and into 1998. In order to improve its strategic position and operational efficiency, the Company implemented several profitability and productivity initiatives, including the strategic restructuring program, discussed below, which was begun in late 1997. This program, along with the realignment of the Company's Exterior Systems business, enabled the Company to benefit from cost reductions of approximately $142 million during 1998. The specific objectives of this strategic program are discussed in "Restructuring of Operations and Other Actions" below and in Note 3 to the Consolidated Financial Statements. During 1998, the pricing environment applicable to several of the Company's major products, particularly residential insulation, began to improve. By the end of 1998, the Company's average price levels of insulation products surpassed the year-end 1997 levels. Despite the successful implementation of price increases during 1998, including the restoration of residential insulation prices to their late 1996 levels, income from operations during 1998 was adversely impacted by approximately $44 million, compared to 1997, due largely to the relatively low insulation pricing base in effect at the beginning of 1998, the lag in fully realizing the 1998 price increases as the Company honored the remainder of pre-existing pricing contracts, and price declines attributable to vinyl siding products. The cost reductions, productivity improvements across the Building Materials business, and significant pricing improvements achieved during 1998 have continued into the first half of 1999. During the second quarter of 1999, the Company announced price increases applicable to certain of its vinyl siding, residential insulation, and composites products, all of which became effective July, 1999. Quarter and Six Months Ended June 30, 1999 - ------------------------------------------ Sales and Profitability - ----------------------- Net sales for the quarter ended June 30, 1999 were $1.310 billion, up slightly from the second quarter 1998 level of $1.286 billion. The sales increase reflects strength in the North American Building Materials business, offset partially by weakness in the Composite Materials business and the transfer of the Company's yarns business to an unconsolidated joint venture during the third quarter of 1998. On a comparative basis, excluding the yarns and other divested businesses in 1998, sales during the second quarter of 1999 were up 9% from the second quarter of 1998. In the Building Materials business, sales during the second quarter of 1999 reflect the continued strength in the U.S. roofing and insulation markets. Volume increases in the vinyl siding market also contributed to the Building Materials strength during the second quarter of 1999. In the Composites business, sales reflect a reduction attributable to the transfer of the Company's yarns business indicated above, offset partially by volume increases in the U.S. and Europe. On a consolidated basis, the impact of currency translation on sales in foreign currencies was slightly unfavorable during the second quarter of 1999 compared to the second quarter of 1998. Please see Note 1 to the Consolidated Financial Statements. Sales outside the U.S. represented 19% of total sales during the second quarter of 1999, compared to 20% during the second quarter of 1998. The relative decline in non-U.S. sales is due to the 1999 sales increases attributable to U.S. roofing and insulation products. Gross margin for the quarter ended June 30, 1999 was 25% of net sales, compared to 23% in the second quarter of 1998. The increase in gross margin reflects the benefits of the cost reductions resulting from the Company's strategic restructuring program and price increases applicable to many of the Company's products. - 24 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) For the quarter ended June 30, 1999, the Company reported net income of $76 million, or $1.31 per share, compared to net income of $59 million, or $1.02 per share, for the quarter ended June 30, 1998. Net income in the second quarter of 1999 reflects the benefits of the cost-saving programs implemented throughout 1998 as well as the benefits of pricing improvements, particularly in U.S. residential insulation markets. Cost of borrowed funds during the second quarter of 1999 was $39 million, $3 million higher than the second quarter 1998 level, due to higher levels of average debt, offset partially by a reduction in average interest rates. The reduction in minority interest expense reflects the Company's third quarter 1998 repurchase of its Trust Preferred Hybrid Securities. Please see also Liquidity, Capital Resources and Other Related Matters below. Net sales for the six months ended June 30, 1999 were $2.440 billion, up slightly from the $2.423 billion reported for the first six months of 1998. On a comparative basis, excluding the yarns and other divested businesses in 1998, sales for the first six months of 1999 were up 8% from the prior year period, largely reflecting the strength in North American Building Materials discussed above. Net income for the six months ended June 30, 1999 was $120 million, or $2.08 per share, up from $67 million, or $1.20 per share, for the first six months of 1998. The increase reflects the benefits of the cost reduction programs as well as volume and price increases. Included in net income for the six months ended June 30, 1998 are a $95 million pretax charge ($63 million after- tax) for the Company's restructuring program and an $84 million pretax gain ($52 million after-tax) from the sale of the Company's 50% ownership interest in Alpha/Owens-Corning. Please see Notes 3 and 4 to the Consolidated Financial Statements. Restructuring of Operations and Other Actions - --------------------------------------------- Please see also Note 3 to the Consolidated Financial Statements. During the first and third quarters of 1998, the Company recorded a total pretax charge of $243 million for restructuring and other actions as part of the Company's strategic restructuring program to reduce overhead, enhance manufacturing productivity, and close manufacturing facilities, which was announced in early 1998. This charge included $117 million for restructuring and $126 million for other actions in 1998, the majority of which represented asset impairments. On a cumulative basis since the fourth quarter of 1997, the Company has recorded a total pretax charge of $386 million for this program, of which $185 million represented restructure costs and $201 million represented other actions. The $117 million restructuring charge in 1998 included approximately $90 million for costs associated with the elimination of approximately 1,900 positions worldwide and $27 million for the divestiture of non-strategic businesses and facilities. The $27 million cost is composed of $12 million for the closure of certain U.S. manufacturing facilities, $6 million for the closure of a pipe manufacturing facility in China, and $9 million for other actions, and reflects a total of $3 million of exit cost liabilities, comprised primarily of lease commitments. The primary components of the $126 million charge for other actions in 1998 and their classification on the Company's consolidated statement of income included: $30 million to write down to fair value certain manufacturing assets held for use in China, due primarily to poor current and projected financial results, recorded as cost of sales; $15 million to write down to net realizable value equipment and inventory - 25 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) made obsolete by changes in the Company's manufacturing and marketing strategies, recorded as cost of sales; $17 million for the write-down of an investment in and the write-off of a receivable from a joint venture in Korea to reflect the business outlook at that time and the fair market value of the assets, recorded as other operating expenses; $12 million for the write- down of goodwill associated with the 1995 acquisition of Fiber- lite, determined to be unrecoverable due to a change in market conditions and customer demand, recorded as other operating expenses; and $9 million for the write-down of certain assets in the U.S. to fair market value, recorded as cost of sales. The Company plans to hold and use the investments but disposed of most of the equipment in 1998. Also included in the $126 million charge for other actions were $13 million for the write-off of certain receivables in the U.S. and Asia determined to be uncollectable, recorded as cost of sales and other operating expenses; and $30 million for other actions recorded as cost of sales, marketing and administrative expenses, and other operating expenses. As indicated above, certain of the charges recorded during 1998 represent valuation adjustments associated with asset impairments. The Company continually evaluates whether events and circumstances have occurred that indicate that the carrying amount of certain long-lived assets is recoverable. When factors indicate that a long-lived asset should be evaluated for possible impairment, the Company uses an estimate of the expected undiscounted cash flows to be generated by the asset to determine whether the carrying amount is recoverable or if an impairment exists. When it is determined that an impairment exists, the Company uses the fair market value of the asset, usually measured by the discounted cash flows to be generated by the asset, to determine the amount of the impairment to be recorded in the financial statements. As a result of the strategic restructuring program, the Company realized a decrease in manufacturing and operating expenses of approximately $110 million during 1998. Based upon expected economic conditions over the next few years, including effects on matters such as labor, material and other costs, the Company is on track to achieve total annual pretax savings of approximately $175 million in 1999 and each year thereafter from this program. The expected $175 million in cost reductions, the majority of which will be cash savings, is comprised of $150 million in reduced personnel costs, $14 million in reduced facility costs, and $11 million of reductions in related program spending. The Company also expects additional cost savings during 1999 resulting from improved logistics and materials sourcing. The Company also implemented programs to gain synergies in its Exterior Systems Business during 1998. As a result of these programs, which included closing redundant facilities, integrating business systems, and improving purchasing leverage, the Company reduced costs by approximately $32 million during 1998 and is on track to save an additional $20 million per year in 1999 and beyond, the majority of which will be cash savings. Building Materials - ------------------ In the Building Materials segment, sales increased 7% in the second quarter of 1999 compared to the second quarter of 1998, reflecting increased volume and significant price improvements attributable to U.S. residential insulation products. Building Materials second quarter 1999 sales also reflect volume increases in U.S. roofing and asphalt products, continued price improvements in roofing products, and volume increases in North American vinyl siding markets and European insulation markets. The impact of sales denominated in foreign currencies was slightly unfavorable during the second quarter of 1999 compared to the second quarter of 1998. - 26 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Income from operations was $130 million during the second quarter of 1999 compared to $69 million during the comparable 1998 period. Income from operations in 1999 reflects productivity improvements and cost reductions resulting from the strategic restructuring program, as well as volume and price increases in the U.S. roofing and residential insulation markets. Please see Note 1 to the Consolidated Financial Statements. Composite Materials - ------------------- In the Composite Materials segment, sales were down 14% during the second quarter of 1999, compared to the second quarter of 1998, due largely to the disposition (discussed below) of 51% of the Company's yarns and specialty materials business (the "yarns business") late in the third quarter of 1998. Adjusted for the impact of this disposition, sales were up 7% during the second quarter of 1999 compared to 1998, due to volume increases in U.S. and European markets, particularly in thermoplastics. The translation impact of sales denominated in foreign currencies was slightly unfavorable during the second quarter of 1999. Income from operations was $33 million in the second quarter of 1999, compared to $62 million in the prior-year period, $22 million of which was attributable to the yarns business. The remaining decline is due largely to poor productivity resulting from the acceleration of furnace rebuilds and higher than planned distribution costs for servicing global customers; a difficult international business environment in engineered pipe and electrical yarns; and start-up issues at the Company's joint venture plant in India. Please see Note 1 to the Consolidated Financial Statements. During the third quarter of 1998, the Company formed a joint venture for its yarns business to which it contributed two manufacturing plants and certain proprietary technology. On September 30, 1998, the Company completed the sale of 51% of the joint venture to a U.S. subsidiary of Groupe Porcher Industries of Badinieres, France for $340 million. The Company continues to have a 49% ownership interest in the joint venture. Upon closing, the Company also received a distribution of approximately $193 million from the joint venture. By retaining a 49% ownership interest in the joint venture, the Company will continue to safeguard its proprietary technology and participate in the yarns market. Please see Note 4 to the Consolidated Financial Statements. The consolidated balance sheet of the Company as of June 30, 1999 and December 31, 1998 reflects the third quarter 1998 disposition of the Company's yarns business. The results of operations of the yarns business were reflected in the Company's consolidated statement of income through the period ending September 30, 1998. For the six months ended June 30, 1998, the yarns business recorded sales of approximately $141 million and income from operations of approximately $45 million. Effective September 30, 1998, the Company accounts for its ownership interest in the yarns joint venture under the equity method. Accounting Changes - ------------------ In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 2000, but earlier adoption is allowed. - 27 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company has begun to assess the impact of SFAS 133 on its financial statements and plans to adopt this accounting change effective January 1, 2001. The Company has not yet fully quantified the impact of SFAS 133 but is aware that the adoption of SFAS 133 could increase volatility in earnings and other comprehensive income. LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS Cash flow from operations was negative $99 million for the quarter ended June 30, 1999, compared to positive $55 million for the quarter ended June 30, 1998. The decline in cash flow from operations in 1999 is largely attributable to an increase in payments for asbestos litigation claims, net of insurance, reflecting the Company's implementation of the National Settlement Program (NSP) in the fourth quarter of 1998. Payments for asbestos litigation claims were $175 million during the second quarter of 1999 and proceeds from insurance were $13 million, compared to $95 million and $5 million, respectively, during the second quarter of 1998. Also contributing to the decline in cash flow from operations during the second quarter of 1999 compared to the second quarter of 1998 was the second quarter 1998 collection of an $85 million federal income tax refund. The Company received a federal income tax refund of the same amount during the first quarter of 1999. Please see Notes 8 and 11 to the Consolidated Financial Statements. Inventories at June 30, 1999 were $502 million, an increase of $65 million from the December 31, 1998 level, due largely to the seasonal build of inventories and other working capital. Receivables at June 30, 1999 were $611 million, a $160 million increase over the December 31, 1998 level, attributable to the seasonal increase in sales. The decrease in accounts payable and accrued liabilities from $942 million at December 31, 1998 to $708 million at June 30, 1999 reflects typical payment patterns during the first half of the year. At June 30, 1999, the Company's net working capital was negative $224 million and its current ratio was .88, compared to negative $354 million and .81, respectively, at December 31, 1998 and $162 million and 1.12, respectively, at June 30, 1998. A $700 million increase in the current portion of the reserve for asbestos litigation claims, net of insurance, due to the implementation of the Company's National Settlement Program, partially offset by the related income tax benefit, contributed to the decrease in net working capital at June 30, 1999 compared to June 30, 1998. The Company's total borrowings at June 30, 1999 were $2.216 billion, $590 million higher than at year-end 1998. The Company typically uses cash during the first half of the year as it builds inventory and other working capital. As of June 30, 1999, the Company had unused lines of credit of $1.130 billion available under long-term bank credit facilities and an additional $110 million under short-term facilities, compared to $1.307 billion and $124 million, respectively, at year-end 1998. The decrease in unused available lines of credit reflects the Company's increased borrowings at June 30, 1999 compared to December 31, 1998. During the first quarter of 1999, the Company issued $250 million of debt securities, the proceeds of which were used to reduce borrowings under the long-term bank credit facility. Letters of credit issued under the facility, most of which support appeals from asbestos trials, also reduce the available credit. The impact of such reduction is reflected in the unused lines of credit discussed above. Please see Note 5 to the Consolidated Financial Statements. During 1998, the Company implemented a debt realignment program intended to reduce financing costs. This program, which extended the average length of term debt from four years to ten years, included the issuance of a total of $950 million in new debt securities, the repurchase of the Company's $309 million of Trust Preferred Hybrid Securities and the retirement of $361 million of higher-rate debt securities. - 28 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Capital spending for property, plant and equipment, excluding acquisitions, was $59 million in the second quarter of 1999. The Company anticipates that 1999 capital spending, exclusive of acquisitions and investments in affiliates, will be approximately $200 million, most of which has been expended or is committed. The Company expects that funding for these expenditures will be from the Company's operations and external sources as required. Asbestos Litigation - ------------------- In December 1998, Owens Corning announced the NSP, which settled a substantial majority of the asbestos claims then pending against the Company and also established procedures and fixed payments for resolving future claims brought by participating plaintiffs' law firms without litigation through at least 2008. As of June 30, 1999, approximately 225,000 asbestos personal injury claims against Owens Corning have been settled under the NSP. Payments under the NSP for these claims will generally be made through 2002, with the majority of payments expected to occur in 1999 and 2000. It is anticipated that payments for a limited number of future "exigent claims" will generally begin in 2001, while payments for other qualifying future claims will begin in 2003. Payments for claims in 2003 and later years under the NSP will be subject to certain conditions designed to increase the predictability of annual cash outflows for asbestos payments. As a result of such payments, the Company's gross payments for asbestos litigation claims will increase in 1999 and 2000 over the levels experienced in recent years. However, such payments are expected to be substantially lower than historical levels in 2001 and subsequent years. The expected schedule for NSP payments may be affected by how quickly NSP claims are submitted and processed. Please see Note 11 to the Consolidated Financial Statements. Gross payments for asbestos litigation claims during the second quarter of 1999 by Owens Corning (excluding Fibreboard), including payments for claims settled in prior years, were $175 million. Proceeds from insurance were $13 million, resulting in a net pretax cash outflow of $162 million ($105 million after- tax). Over the next twelve months, the total payments for asbestos litigation claims by Owens Corning (excluding Fibreboard) are expected to be approximately $1,050 million. Proceeds from insurance of $150 million are expected to be available to cover these costs, resulting in a net pretax cash outflow of $900 million ($585 million after tax). Gross payments for asbestos litigation claims against Fibreboard during the first six months of 1999 were approximately $57 million, all of which were paid directly by Fibreboard's insurers or from an escrow account funded by its insurers to claimants on Fibreboard's behalf. Fibreboard is a party to the NSP Agreements and anticipates that a substantial majority of its asbestos claims will be resolved under the NSP. In June 1999, the United States Supreme Court overturned a limited-fund class action settlement of Fibreboard's asbestos claims. As a result, Fibreboard is expected to become entitled to an Insurance Settlement of approximately $1.9 billion, which will be available to pay all of Fibreboard's pending and future asbestos claims, including claims under the NSP. Please see Notes 8 and 11 to the Consolidated Financial Statements. The Company expects funds generated from operations, together with funds available under long and short term bank credit facilities, to be sufficient to satisfy its debt service obligations under its existing and anticipated indebtedness, its contingent liabilities for uninsured asbestos personal injury claims, as well as its capital expenditure programs and growth agenda. - 29 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Environmental Matters - --------------------- 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. 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 second quarter of 1999, the Company was designated as a PRP in such federal, state, local or private proceedings for 2 additional sites. At June 30, 1999, a total of 41 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 a $30 million reserve for its Superfund (and similar state, local and private action) contingent liabilities. 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 results of operations, financial condition or long-term liquidity. 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. In June 1999, the EPA issued regulations for wool fiber glass and mineral wool. The Company anticipates that its other sources to be regulated will be wet formed fiber glass mat, amino/phenolic resin, secondary aluminum smelting, asphalt processing and roofing, metal coil coating, and open molded fiber- reinforced plastics. The EPA's currently announced schedule is to issue regulations covering wet formed fiber glass mat, amino/phenolic resin and secondary aluminum smelting in 1999; and asphalt processing and roofing, metal coil coating and fiber- reinforced plastics in 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. Year 2000 Readiness - -------------------- This information should be considered a Year 2000 Readiness Disclosure. BACKGROUND - ---------- Some of the Company's existing information technology ("IT") systems and control systems containing embedded technology such as processors, controllers and microchips ("Non-IT") were originally programmed using two digits rather than four digits to define the applicable year. As a result, such systems, if not remediated, may experience miscalculations or disruptions when processing information containing dates that fall after December 31, 1999 or other dates that could cause computer malfunctions (the "Year 2000 Issue"). THE COMPANY'S STATE OF READINESS - -------------------------------- In recognition of the significance of the Year 2000 Issue, the Company formed a senior management team representing business units and business process functions including information technology, sourcing, customer relations, logistics, facilities, and legal. - 30 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) This team oversees the Company's efforts to assess and resolve the Year 2000 Issue. In addition, the Company's individual organizational units have developed, and are implementing, Year 2000 plans. These plans include assessments of all of the Company's IT and Non-IT systems, and an evaluation of the external environment to identify significant exposure areas and to develop appropriate remediation or other risk management approaches. The Company is also developing business continuity plans to assure that all of its operations are prepared in the case of an unexpected system, supplier or customer failure. IT SYSTEMS - ---------- The Company has been actively implementing new systems and technology on a worldwide basis since 1995 as part of its Advantage 2000 program to improve productivity and operational efficiency. One objective of this initiative is to ensure all business transactions are supporting requirements to process data accurately in the year 2000 and beyond. The scope of this program has been continuously expanded to include each of the seventeen acquisitions made by the Company during the past five years. To date 100% of the Company's IT systems have been remediated, tested and made operational. This has been accomplished in part through the comprehensive implementation of enterprise resource planning software across most of the Company's business units. Deployments of these systems, which began in May, have been completed at 70% of the Company's operations. The remaining deployments are on schedule and will be completed by September 30, 1999. Development of continuity plans is on schedule and will be completed by September 30, 1999. NON-IT SYSTEMS - -------------- The Company completed an inventory and assessment of non-IT systems in its operating facilities during the first quarter, 1999. Those non-IT systems that may fail as a result of the Year 2000 Issue have been identified and corrective actions such as replacement, update, or installation of vendor supplied upgrades are currently being performed. Concurrent with this renovation process, the Company is continuing the testing of Year 2000 corrections to ensure that Non-IT systems will function properly on key dates. This is in accordance with testing methodologies that management believes are reasonable and reflective of practices employed by comparable companies. Remediation, replacement, and updating of Non-IT systems has been managed within each business unit. In accordance with the process outlined above, over fourteen hundred systems for the Building Materials business and over nineteen hundred systems for the Composite Materials business have been identified, remediated, and tested. Of these, 98% are now Year 2000 ready and have been deployed. The majority of the remaining items, located at only 17 sites, are on schedule to be completed by September 30, 1999, with completion at the final four sites by November 30, 1999. Management continues to monitor the progress of deployment to ensure the timely completion of each project. Continuity plans addressing critical business processes are being developed, and will be completed by September 30, 1999. EXTERNAL ENVIRONMENT - -------------------- The Company is working with its suppliers and customers to assess their level of Year 2000 readiness. This process includes both the receipt of confirmation documents as well as selective on- site visits. The critical suppliers have been identified, confirmations have been received, and planned on-site visits were complete in the second quarter of 1999. At the end of the second quarter of 1999, substantially all of the critical suppliers have been assessed as Year 2000 ready. The remaining suppliers are not single source suppliers nor deemed critical for production. - 31 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) During the process, where deemed necessary, alternative suppliers were identified and confirmed as year 2000 ready. The Company does not plan to build additional inventories at this time and has confirmed with suppliers their commitment to servicing existing supply agreements. Procedures are in place to monitor supplier progress through the end of the year. As a result of the confirmations and on site visits, continuity plans are being developed for both customers and suppliers to address the Company's ability to continue to function during the time period when an external Year 2000 risk exists. BUSINESS CONTINUITY PLANNING - ----------------------------- Despite its significant efforts, the Company understands that disruptions may occur due to circumstances beyond its control. As a result, the Company has identified its critical business processes and has assessed the likelihood of various Year 2000 failure scenarios. In order to minimize the effect of an external disruption on business operations, business continuity plans are being developed. In many instances, existing business continuity plans are being modified and enhanced to reflect unique aspects of the Year 2000 issue. All continuity plans will be completed by September 30, 1999. ESTIMATED COSTS - --------------- The cumulative cost of systems replacement, remediation and update from 1995 through the second quarter of 1999 has been approximately $160 million, including technology, design and development, and related training and deployment in business locations. The Company currently estimates that its remaining costs to assess and resolve the Year 2000 Issue, including the replacement and remediation at all remaining locations, are in the range of $5 million to $10 million. These cost estimates are based on currently available information, and may be subject to change. RISKS - ----- If needed modifications and upgrades of systems are not made on a timely basis by the Company or its materially significant suppliers, the Company could experience significant disruptions to one or more of its operations, financial loss, legal liability and similar risks, any of which could have a material adverse effect on the Company's results of operations or financial position. The Company believes that the most reasonably likely worst case scenario would be a short-term slowdown or cessation of manufacturing operations at one or more of the Company's facilities and a short-term inability on the part of the Company to process orders and billings in a timely manner, and to deliver product to customers. In view of the Company's Year 2000 readiness program, including continuity plans, the Company believes that significant disruptions are unlikely and that any disruptions would be both short-term and manageable. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to the impact of changes in foreign currency exchange rates and interest rates in the normal course of business. The Company manages such exposures through the use of certain financial and derivative financial instruments. The Company's objective with these instruments is to reduce exposure to fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. The Company enters into various forward contracts and options, 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 and earnings. - 32 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued) The Company also enters into certain currency and interest rate swaps to protect the carrying amount of its investments in certain foreign subsidiaries, to hedge the principal and interest payments of certain debt instruments, and to manage its exposure to fixed versus floating interest rates. The Company's policy is to use foreign currency and interest rate derivative financial instruments only to the extent necessary to manage exposures as described above. The Company does not enter into foreign currency or interest rate derivative transactions for speculative purposes. The Company uses a variance-covariance Value at Risk (VAR) computation model to estimate the potential loss in the fair value of its interest rate-sensitive financial instruments and its foreign currency-sensitive financial instruments. The VAR model uses historical foreign exchange rates and interest rates as an estimate of the volatility and correlation of these rates in future periods. It estimates a loss in fair market value using statistical modeling techniques. The amounts presented below represent the maximum potential one- day loss in fair value that the Company would expect from adverse changes in foreign currency exchange rates or interest rates assuming a 95% confidence level: June 30, December 31, Risk Category 1999 1998 ------------- ------ ------ (In millions of dollars) Foreign currency $1 $1 Interest rate $9 $8
Virtually all of the potential loss associated with interest rate risk is attributable to fixed-rate long-term debt instruments. - 33 - PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 11, Contingent Liabilities, to the Company's Consolidated Financial Statements above, which is incorporated here by reference. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) None of the constituent instruments defining the rights of the holders of any class of the Company's registered securities was materially modified in the quarter ended June 30, 1999. (b) None of the rights evidenced by any class of the Company's registered securities was materially limited or qualified in the quarter ended June 30, 1999 by the issuance or modification of any other class of securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES (a) During the quarter ended June 30, 1999, there was no material default in the payment of principal, interest, sinking or purchase fund installments, or any other material default not cured within 30 days, with respect to any indebtedness of the Company or any of its significant subsidiaries exceeding 5 percent of the total assets of the Company and its consolidated subsidiaries. (b) During the quarter ended June 30, 1999, no material arrearage in the payment of dividends occurred, and there was no other material delinquency not cured within 30 days, with respect to any class of preferred stock of the Company which is registered or which ranks prior to any class of registered securities, or with respect to any class of preferred stock of any significant subsidiary of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's annual meeting of stockholders was held April 22, 1999. (c) The matters voted upon at the meeting, and the votes with respect to each, were: 1. Election of four directors for a term expiring in 2002: Curtis H. Barnette - 46,222,520 votes cast for election and 1,432,208 votes withheld; Ann Iverson - 46,296,293 votes cast for election and 1,358,435 votes withheld; W. Walker Lewis - 46,304,427 votes cast for election and 1,350,301 votes withheld; and Furman C. Moseley, Jr. - 46,296,586 votes cast for election and 1,358,142 votes withheld. 2. Approval of amended and restated Corporate Incentive Plan Terms Applicable to Certain Executive Officers: 44,128,587 votes cast for the proposal; 3,089,313 votes cast against; and 436,828 shares abstained. 3. Approval of the action of the Board of Directors in selecting Arthur Andersen LLP as independent public accountants for the year 1999: 46,866,447 votes cast for the proposal; 579,788 votes cast against; and 208,493 shares abstained. 4. Approval of proposal concerning stockholder rights plan: 24,955,712 votes cast for the proposal; 17,128,498 votes cast against; 623,691 shares abstained; and 4,946,827 broker non-votes. ITEM 5. OTHER INFORMATION The Company does not elect to report any information under this item. - 34 - PART II. OTHER INFORMATION (continued) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Exhibit Index below, which is incorporated here by reference. (b) Reports on Form 8-K. During the quarter ended June 30, 1999, the Company filed the following current reports on Form 8-K: - Filed April 15, 1999, under Items 5 and 7. - Filed June 23, 1999, under Items 5 and 7. - 35 - 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: August 16, 1999 By: /s/ J. Thurston Roach J. Thurston Roach Senior Vice President and Chief Financial Officer (as duly authorized officer) Date: August 16, 1999 By: /s/ Steven J. Strobel Steven J. Strobel Vice President and Controller --------------------------------- - 36 - EXHIBIT INDEX Exhibit Number Document Description - ------- -------------------- (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession. LLC Interest Sale and Purchase Agreement, dated as of July 31, 1998, among Owens Corning, Advanced Glassfiber Yarns LLC and Glass Holdings Corp. (incorporated herein by reference to Exhibit 2 to the Company's current report on Form 8-K (File No. 1-3660), filed October 14, 1998). Amendment No. 1 to LLC Interest Sale and Purchase Agreement dated as of September 30, 1998 (incorporated herein by reference to Exhibit 2 to the Company's current report on Form 8-K (File No. 1-3660), filed October 14, 1998). (3) Articles of Incorporation and By-Laws. (i) Certificate of Incorporation of Owens Corning, as amended (incorporated herein by reference to Exhibit (3)(i) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended March 31, 1997). (ii) By-Laws of Owens Corning, as amended (incorporated herein by reference to Exhibit (3) to the Company's annual report on Form 10- K (File No. 1-3660) for the year 1995). (10) Material Contracts. Corporate Incentive Plan Terms Applicable to Key Employees Other Than Certain Executive Officers (filed herewith). Owens Corning Deferred Compensation Plan incorporated herein by reference to Exhibit (10) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended March 31, 1999). Corporate Incentive Plan Terms Applicable to Certain Executive Officers (incorporated herein by reference to Exhibit (10) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended March 31, 1999). (11) Statement re Computation of Per Share Earnings (filed herewith). (27) Financial Data Schedule (filed herewith). EX-10 2 Exhibit (10) ------------ OWENS CORNING Corporate Incentive Plan Terms Applicable to Key Employees Other Than Certain Executive Officers (As amended and restated, January 1, 1999) 1. Application ----------- Set forth below are the annual incentive plan terms applicable to those employees of Owens Corning Corporation (the "Company"), its subsidiaries and affiliates who, in the opinion of the Committee (as hereafter defined), are key employees, including members of the Board of Directors who are such employees, but excluding any such employees who are executive officers of the Company and whose annual incentive compensation for any taxable year of the Company commencing on or after January 1, 1995 the Committee anticipates would not be deductible by the Company in whole or in part but for compliance with section 162(m)(4)(C) of the Internal Revenue Code of 1986 as amended ("162(m) Covered Employee"). Such terms are hereafter referred to as the "Incentive Plan". 2. Eligibility ----------- All employees of the Company, its subsidiaries and affiliates who, in the opinion of the Committee, are key employees, including members of the Board of Directors who are such employees, but excluding 162(m) Covered Employees, shall be eligible to be selected to participate in this Incentive Plan. The Committee may select the eligible employees who shall participate in this Incentive Plan in any year at any time before or during such year. Selection to participate in this Incentive Plan in any year does not require the Committee to, or imply that the Committee will, select the same person to participate in the Incentive Plan in any subsequent year. 3. Administration -------------- The Plan shall be administered by the Compensation Committee of the Board of Directors (the "Board"), or by another committee appointed by the Board consisting of not less than two (2) Directors who are not Employees (the "Committee"). To the extent permitted by law, the Committee may delegate its administrative authority with respect to the Incentive Plan and, in the event of any such delegation of authority, the term "Committee" as used in this Incentive Plan shall be deemed to refer to the Committee's delegate as well as to the Committee. The Committee shall, subject to the provisions herein, select employees to participate herein; establish and administer the performance goals and the award opportunities applicable to each participant and certify whether the goals have been attained; construe and interpret the Incentive Plan and any agreement or instrument entered into under the Incentive Plan; establish, amend, or waive rules and regulations for the Incentive Plan's administration; and make all other determinations which may be necessary or advisable for the administration of the Incentive Plan. Any determination by the Committee pursuant to the Incentive Plan shall be final, binding and conclusive on all employees and participants and anyone claiming under or through any of them. 4. Establishment of Performance Goals and Award Opportunities ---------------------------------------------------------- At any time before or during each year, the Committee shall establish the method for computing the amount of compensation which will be payable under the Incentive Plan to each participant in the Incentive Plan for such year if the performance goals established by the Committee for such year are attained in whole or in part and if the participant's employment by the Company, its subsidiaries and affiliates continues without interruption during that year. The Committee shall also establish the performance goals for such year, which may be based on any of the following performance criteria, either alone or in any combination, and on either a consolidated or business unit level as the Committee may determine, or such other criteria as the Committee may select: sales, net asset turnover, earnings per share, cash flow, cash flow from operations, operating profit, net operating profit, net income, income from operations, operating margin, net income margin, return on net assets, return on total assets, return on common equity, return on total capital, and shareholder value added, total shareholder return, common stock price appreciation, total shareholder return relative to a defined marketplace, receivables growth, debt to equity ratios, earnings to fixed charges ratios, introduction of new products and/or services, or developing and/or implementing action plans or strategies. The foregoing criteria shall have any reasonable definitions that the Committee may specify at the time such criteria are adopted, which may include or exclude any or all of the following items as the Committee may specify: extraordinary, unusual or non-recurring items; effects of accounting changes; effects of currency fluctuations; effects of financing activities (e.g., effect on earnings per share of issuance of convertible debt securities); expenses for restructuring or productivity initiatives; other non-operating items; spending for acquisitions; effects of divestitures; and effects of asbestos activities and settlements. Any such performance criterion or combination of such criteria may apply to the participant's award opportunity in its entirety or to any designated portion or portions of the award opportunity, as the Committee may specify. Extraordinary items, such as capital gains and losses, which affect any performance criterion applicable to such award (including but not limited to the criterion of net income) and which are required to be taken into account for purposes of Owens Corning's financial statements under Generally Accepted Accounting Principles, shall be excluded or included in determining the extent to which the corresponding performance goal has been achieved so that the integrity and intent of the performance goal are maintained. 5. Awards ------ Participating employees' individual awards may vary as a percentage of their Participating Salaries, based on both the funding approved by the Committee and on the participant's performance and contribution, as determined in the sole discretion of the Company. Participating Salary is defined as the product of the participant's total base salary paid during a given Incentive Plan year, multiplied by the participant's incentive pay percentage, at maximum funding. Aggregate awards under the annually recurring Incentive Plan for any year may not exceed 100% of the Participating Salaries of participants in the Incentive Plan for such year, as determined by the Committee. 6. Employment Requirement ---------------------- A participant's award under this Incentive Plan for any year shall be contingent on continued employment by the Company, its subsidiaries and affiliates during such year. The only exceptions to this rule apply in the event of termination of employment by reason of death, disability, retirement or job elimination (all as determined by the Committee), or in the event of a change of control of Owens Corning (as determined by the Committee), during such year, in which case the following provisions shall apply. In the event of termination of employment by reason of death, disability, retirement or job elimination during a year (as determined by the Committee), an award shall be payable under this Incentive Plan to the participant or the participant's estate for such year, which shall be adjusted, pro-rata, for the period of time during the year the participant actually worked. In the event of a change of control of Owens Corning during a year and prior to any termination of employment, incentive awards shall be paid under the Incentive Plan at the higher of (a) one half of Participating Salary for such year (as determined by the Committee), or (b) projected performance for the year, determined at the time the change of control occurs. A participant whose employment terminates prior to the end of a year for any reason not excepted above shall not be entitled to any award under the Incentive Plan for that year. 7. Payment of Awards ----------------- Except as provided otherwise in this Incentive Plan or by the Committee, payment of each award under this Incentive Plan for any year shall be contingent upon a determination by the Committee that the performance goals and employment conditions applicable to such award have been satisfied. Unless and until the Committee so determines, such award shall not be paid. Unless the Committee provides otherwise, (a) earned awards shall be paid promptly following such determination, and (b) such payment shall be made in cash (subject to any payroll tax withholding the Company may determine applies). 8. Amendment or Termination ------------------------ The Committee may amend, modify or terminate this Incentive Plan at any time, provided that a termination or modification shall only become effective 30 days after written notice thereof is given to each participant. Each participant shall be eligible to receive the incentive compensation to which the participant would have been otherwise entitled but for such termination or modification, pro-rata for the period of the year prior to the termination or modification. 9. Interpretation and Construction ------------------------------- Any provision of this Incentive Plan to the contrary notwithstanding, (a) no provision of this Incentive Plan shall apply to any 162(m) Covered Employee, and (b) any provision of this Incentive Plan that would prevent an award to any 162(m) Covered Employee under any plan or arrangement other than this Incentive Plan from qualifying as performance-based compensation under Code Section 162(m)(4)(C) shall be administered, interpreted and construed to enable such award to so qualify and any provision that cannot be so administered, interpreted and construed shall to that extent be disregarded. No provision of the Incentive Plan, nor the selection of any eligible employee to participate in the Incentive Plan, shall constitute an employment agreement or affect the duration of any participant's employment, which shall remain "employment at will" unless an employment agreement between the Company and the participant provides otherwise. Both the participant and the Company shall remain free to terminate employment at any time to the same extent as if the Incentive Plan had not been adopted. 10. Governing Law ------------- The terms of this Incentive Plan shall be governed by the laws of the State of Delaware, without reference to the conflicts of laws principles of that state. EX-11 3 Exhibit (11) ------------ OWENS CORNING AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS Quarter Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (In millions of dollars, except share data) Basic: - ----- Net income $ 76 $ 59 $ 120 $ 67 ====== ======= ======= ======== Basic weighted average number of common shares outstanding (thousands) 54,116 53,563 54,011 53,465 Basic per share amount $ 1.41 $ 1.09 $ 2.22 $ 1.25 ====== ======= ======= ========= Diluted: - ------- Net income $ 78 $ 61 $ 124 $ 71 ====== ======= ======= ========= Weighted average number of common shares outstanding (thousands) 54,116 53,563 54,011 53,465 Weighted average common equivalent shares (thousands): Deferred awards 22 16 20 16 Stock options using the average market price during the period 992 746 883 605 Shares from assumed conversion of preferred securities 4,566 4,566 4,566 4,566 ------ ------- ------- -------- Diluted weighted average number of common shares outstanding and common equivalent shares (thousands) 59,696 58,891 59,480 58,652 ====== ======= ======= ======== Diluted per share amount $ 1.31 $ 1.02 $ 2.08 $ 1.20 ====== ======= ======= ======== EX-27 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1998 JUN-30-1999 26 0 611 0 502 1,682 3,626 1,944 5,191 1,906 2,068 698 195 0 (1,720) 5,191 2,440 2,440 1,858 1,858 1 0 72 193 68 125 0 0 0 120 2.22 2.08 REPRESENTS BASIC EARNINGS PER SHARE AS DEFINED IN FASB STATEMENT NO. 128. REPRESENTS DILUTED EARNINGS PER SHARE AS DEFINED IN FASB STATEMENT NO. 128. -----END PRIVACY-ENHANCED MESSAGE-----