NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Unless the context requires otherwise, the terms “Owens Corning,” “Company,” “we” and “our” in this report refer to Owens Corning, a Delaware corporation, and its subsidiaries.
The Consolidated Financial Statements included in this report are unaudited, pursuant to certain rules and regulations of the Securities and Exchange Commission, and include, in the opinion of the Company, normal recurring adjustments necessary for a fair statement of the results for the periods indicated, which, however, are not necessarily indicative of results which may be expected for the full year. The
December 31, 2016
balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (U.S.). In connection with the Consolidated Financial Statements and Notes included in this report, reference is made to the Consolidated Financial Statements and Notes contained in the Company’s Form 10-K for the year ended December 31, 2016. Certain reclassifications have been made to the periods presented for
2016
to conform to the classifications used in the periods presented for 2017.
Cash, Cash Equivalents and Restricted Cash
The Company defines cash and cash equivalents as cash and time deposits with maturities of three months or less when purchased. On the Consolidated Statements of Cash Flows, the total of Cash, cash equivalents and restricted cash includes restricted cash of
$6 million
as of March 31, 2017 and December 31, 2016. On the Consolidated Balance Sheets, restricted cash is included in Other current assets. There were
no
restricted cash amounts for the previous time periods presented in the Consolidated Financial Statements. Restricted cash represents amounts received from a counterparty related to its performance assurance on an executory contract. These amounts are contractually required to be set aside, and the counterparty can exchange the cash for another form of performance assurance at its discretion.
The Company has
three
reportable segments: Composites, Insulation and Roofing. Accounting policies for the segments are the same as those for the Company. The Company’s
three
reportable segments are defined as follows:
Composites –
The Composites segment includes vertically integrated downstream activities. The Company manufactures, fabricates and sells glass reinforcements in the form of fiber. Glass reinforcement materials are also used downstream by the Composites segment to manufacture and sell glass fiber products in the form of fabrics, non-wovens and other specialized products.
Insulation –
Within our Insulation segment, the Company manufactures and sells fiberglass insulation into residential, commercial, industrial and other markets for both thermal and acoustical applications. It also manufactures and sells glass fiber pipe insulation, energy efficient flexible duct media, bonded and granulated mineral fiber insulation and foam insulation used in above- and below-grade construction applications.
Roofing –
Within our Roofing segment, the Company manufactures and sells residential roofing shingles, oxidized asphalt materials, roofing components used in residential and commercial construction and specialty applications, and synthetic packaging materials.
-
8
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
2.
|
SEGMENT INFORMATION (continued)
|
NET SALES
The following table summarizes our net sales by segment and geographic region (in millions). Corporate eliminations (shown below) largely reflect intercompany sales from Composites to Roofing. External customer sales are attributed to geographic region based upon the location from which the product is shipped to the external customer.
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
2016
|
Reportable Segments
|
|
|
Composites
|
$
|
511
|
|
$
|
473
|
|
Insulation
|
399
|
|
385
|
|
Roofing
|
627
|
|
429
|
|
Total reportable segments
|
1,537
|
|
1,287
|
|
Corporate eliminations
|
(59
|
)
|
(56
|
)
|
NET SALES
|
$
|
1,478
|
|
$
|
1,231
|
|
|
|
|
|
|
|
|
|
External Customer Sales by Geographic Region
|
|
|
United States
|
$
|
1,051
|
|
$
|
845
|
|
Europe
|
140
|
|
134
|
|
Asia Pacific
|
153
|
|
145
|
|
Other
|
134
|
|
107
|
|
NET SALES
|
$
|
1,478
|
|
$
|
1,231
|
|
EARNINGS BEFORE INTEREST AND TAXES
Earnings before interest and taxes (“EBIT”) by segment consist of net sales less related costs and expenses and are presented on a basis that is used internally for evaluating segment performance. Certain items, such as general corporate expenses or income and certain other expense or income items, are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in EBIT for our reportable segments and are included in the Corporate, Other and Eliminations category.
The following table summarizes EBIT by segment (in millions):
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
2016
|
Reportable Segments
|
|
|
Composites
|
$
|
71
|
|
$
|
64
|
|
Insulation
|
5
|
|
13
|
|
Roofing
|
125
|
|
73
|
|
Total reportable segments
|
201
|
|
150
|
|
Acquisition-related costs
|
(1
|
)
|
(2
|
)
|
General corporate expense and other
|
(30
|
)
|
(32
|
)
|
EBIT
|
$
|
170
|
|
$
|
116
|
|
-
9
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Inventories consist of the following (in millions):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
December 31, 2016
|
Finished goods
|
$
|
478
|
|
$
|
482
|
|
Materials and supplies
|
248
|
|
228
|
|
Total inventories
|
$
|
726
|
|
$
|
710
|
|
|
|
4.
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
The Company is exposed to, among other risks, the impact of changes in commodity prices, foreign currency exchange rates, and interest rates in the normal course of business. The Company’s risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments to offset a portion of these risks. The Company uses derivative financial instruments only to the extent necessary to hedge identified business risks, and does not enter into such transactions for trading purposes.
The Company generally does not require collateral or other security with counterparties to these financial instruments and is therefore subject to credit risk in the event of nonperformance; however, the Company monitors credit risk and currently does not anticipate nonperformance by other parties. Contracts with counterparties generally contain right of offset provisions. These provisions effectively reduce the Company’s exposure to credit risk in situations where the Company has gain and loss positions outstanding with a single counterparty. It is the Company’s policy to offset on the Consolidated Balance Sheets the amounts recognized for derivative instruments with any cash collateral arising from derivative instruments executed with the same counterparty under a master netting agreement. As of
March 31, 2017
, and
December 31, 2016
, the Company did not have any amounts on deposit with any of its counterparties, nor did any of its counterparties have any amounts on deposit with the Company.
The following table presents the fair value of derivatives and hedging instruments and the respective location on the Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Location
|
|
March 31, 2017
|
|
December 31, 2016
|
Derivative assets designated as hedging instruments:
|
|
|
|
|
|
Net investment hedges:
|
|
|
|
|
|
Cross currency swaps
|
Other current assets
|
|
$
|
4
|
|
|
$
|
4
|
|
Cross currency swaps
|
Other non-current assets
|
|
$
|
6
|
|
|
$
|
6
|
|
Amount of gain recognized in OCI (effective portion)
|
OCI
|
|
$
|
18
|
|
|
$
|
18
|
|
Cash flow hedges:
|
|
|
|
|
|
Natural gas forward swaps
|
Other current assets
|
|
$
|
2
|
|
|
$
|
4
|
|
Amount of gain recognized in OCI (effective portion)
|
OCI
|
|
$
|
1
|
|
|
$
|
4
|
|
Derivative liabilities designated as hedging instruments:
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
Amount of loss recognized in OCI related to treasury interest rate lock (effective portion)
|
OCI
|
|
$
|
1
|
|
|
$
|
1
|
|
Derivative assets not designated as hedging instruments:
|
|
|
|
|
|
Natural gas forwards swaps
|
Other current assets
|
|
$
|
—
|
|
|
$
|
1
|
|
Foreign exchange contracts
|
Other current assets
|
|
$
|
2
|
|
|
$
|
1
|
|
Derivative liabilities not designated as hedging instruments:
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts payable and
accrued liabilities
|
|
$
|
—
|
|
|
$
|
2
|
|
-
10
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4.
DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The following table presents the notional amount of derivatives and hedging instruments on the Consolidated Balance Sheet (in millions):
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Unit of Measure
|
|
March 31, 2017
|
Net investment hedges:
|
|
|
|
Cross currency swaps
|
U.S. Dollars
|
|
$
|
250
|
|
Cash flow hedges:
|
|
|
|
Natural gas forward swaps U.S. indices
|
MMBtu
|
|
9
|
|
Natural gas forward swaps European indices
|
MMBtu (equivalent)
|
|
2
|
|
The Company had notional amounts of
$89 million
for derivative financial instruments related to non-designated foreign currency exposures in U.S. Dollars primarily related to Brazilian Real, Chinese Yuan, Indian Rupee, Japanese Yen, and South Korean Won. In addition, the Company had notional amounts of
$32 million
for derivative financial instruments related to non-designated foreign currency exposures in European Euro primarily related to Russian Rubles. Please refer to the Other Derivatives section below for more detail on these instruments.
The following table presents the impact and respective location of derivative activities on the Consolidated Statements of Earnings (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Location
|
2017
|
2016
|
Derivative activity designated as hedging instruments:
|
|
|
|
Natural gas:
|
|
|
|
Amount of (gain)/loss reclassified from OCI into earnings (effective portion)
|
Cost of sales
|
$
|
(1
|
)
|
$
|
3
|
|
Foreign currency:
|
|
|
|
Amount of loss reclassified from OCI into earnings (effective portion)
|
Other expenses, net
|
$
|
—
|
|
$
|
1
|
|
Interest rate:
|
|
|
|
Amount of loss recognized in earnings
|
Interest expense, net
|
$
|
—
|
|
$
|
1
|
|
Derivative activity not designated as hedging instruments:
|
|
|
|
Foreign currency:
|
|
|
|
Amount of loss recognized in earnings (a)
|
Other expenses, net
|
$
|
—
|
|
$
|
3
|
|
|
|
(a)
|
Losses related to foreign currency derivatives were substantially offset by net revaluation impacts on foreign currency denominated balance sheet exposures, which were also recorded in
Other expenses, net
.
|
Cash Flow Hedges
The Company uses a combination of derivative financial instruments, which qualify as cash flow hedges, and physical contracts to manage forecasted exposure to electricity and natural gas prices. The Company's policy for electricity exposure is to hedge up to
75%
of its total forecasted exposure for the current calendar year and up to
65%
of its total forecasted exposure for the first calendar year forward. The Company’s policy for natural gas exposure is to hedge up to
75%
of its total forecasted exposure for the next
two
months, up to
60%
of its total forecasted exposure for the following
four
months, and lesser amounts for the remaining periods. Based on market conditions, approved variation from these standard policies may occur. Currently, the Company is managing risk associated with electricity prices only through physical contracts and has natural gas derivatives designated as hedging instruments that mature within
15 months
.
-
11
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4.
DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The Company performs an analysis for effectiveness of its derivatives designated as hedging instruments at the end of each quarter based on the terms of the contracts and the underlying items being hedged. The effective portion of the change in the fair value of cash flow hedges is deferred in accumulated OCI and is subsequently recognized in Cost of sales on the Consolidated Statements of Earnings for commodity hedges, when the hedged item impacts earnings. Changes in the fair value of derivative assets and liabilities designated as hedging instruments are shown in the Other non-cash line within operating activities on the Consolidated Statements of Cash Flows. Any portion of the change in fair value of derivatives designated as hedging instruments that is determined to be ineffective is recorded in Other expenses, net on the Consolidated Statements of Earnings.
In June and July 2016, the Company entered into a total of
$300 million
of forward U.S. Treasury rate lock agreements to manage the U.S. Treasury portion of its interest rate risk associated with the anticipated issuance of
10
-year fixed rate senior notes in 2016. The Company designated these forward U.S. Treasury rate lock agreements as cash flow hedges, and paid
$1 million
to settle these agreements in August 2016 upon issuance of its 2026 senior notes. The
$1 million
fair value of these agreements will be amortized over the remaining life of the senior notes as a component of interest expense. Hedge ineffectiveness for these agreements was less than
$1 million
. Please refer to Note 10 of the Consolidated Financial Statements for further information on the Company's 2026 senior notes.
As of
March 31, 2017
,
$1 million
of gains included in accumulated OCI on the Consolidated Balance Sheets relate to natural gas contracts that are expected to impact earnings during the next
12
months. Transactions and events that are expected to occur over the next
12
months that will necessitate recognizing these deferred amounts include the recognition of the hedged item through earnings.
Net Investment Hedges
The Company uses cross currency forward contracts to hedge a portion of the net investment in foreign subsidiaries against fluctuations in foreign exchange rates. For derivative instruments that are designated and qualify as hedges of net investments in foreign operations, settlements and changes in fair values of the derivative instruments are recognized in Currency translation adjustment, a component of Accumulated OCI, to offset the changes in the values of the net investments being hedged. Any portion of net investment hedges that is determined to be ineffective is recorded in
Other expenses, net
on the Consolidated Statements of Earnings.
Other Derivatives
The Company uses forward currency exchange contracts to manage existing exposures to foreign exchange risk related to assets and liabilities recorded on the Consolidated Balance Sheets. Gains and losses resulting from the changes in fair value of these instruments are recorded in
Other expenses, net
on the Consolidated Statements of Earnings.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets and goodwill consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
Weighted
Average
Useful Life
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
Amortizable intangible assets:
|
|
|
|
|
|
Customer relationships
|
22
|
|
$
|
252
|
|
$
|
(97
|
)
|
$
|
155
|
|
Technology
|
19
|
|
216
|
|
(106
|
)
|
110
|
|
Other
|
8
|
|
47
|
|
(24
|
)
|
23
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
Trademarks
|
|
|
845
|
|
—
|
|
845
|
|
Total intangible assets
|
|
|
$
|
1,360
|
|
$
|
(227
|
)
|
$
|
1,133
|
|
Goodwill
|
|
|
$
|
1,337
|
|
|
|
-
12
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Weighted
Average
Useful Life
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
Amortizable intangible assets:
|
|
|
|
|
|
Customer relationships
|
22
|
|
$
|
252
|
|
$
|
(94
|
)
|
$
|
158
|
|
Technology
|
19
|
|
216
|
|
(103
|
)
|
113
|
|
Other
|
9
|
|
45
|
|
(23
|
)
|
22
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
Trademarks
|
|
|
845
|
|
—
|
|
845
|
|
Total intangible assets
|
|
|
$
|
1,358
|
|
$
|
(220
|
)
|
$
|
1,138
|
|
Goodwill
|
|
|
$
|
1,336
|
|
|
|
Other Intangible Assets
The Company expects the ongoing amortization expense for amortizable intangible assets to be approximately
$27 million
in each of the next five fiscal years. The Other category below primarily includes franchise agreements and emission rights. The changes in the gross carrying amount of intangible assets by asset group are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
Technology
|
|
Other
|
|
Trademarks
|
|
Total
|
Balance at December 31, 2016
|
$
|
252
|
|
|
$
|
216
|
|
|
$
|
45
|
|
|
$
|
845
|
|
|
$
|
1,358
|
|
Additions
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Balance at March 31, 2017
|
$
|
252
|
|
|
$
|
216
|
|
|
$
|
47
|
|
|
$
|
845
|
|
|
$
|
1,360
|
|
Goodwill
The Company tests goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount. No testing was deemed necessary in the first three months of 2017. The changes in the net carrying amount of goodwill by segment are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composites
|
|
Insulation
|
|
Roofing
|
|
Total
|
Balance at December 31, 2016
|
$
|
55
|
|
|
$
|
888
|
|
|
$
|
393
|
|
|
$
|
1,336
|
|
Foreign currency translation
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Balance at March 31, 2017
|
$
|
56
|
|
|
$
|
888
|
|
|
$
|
393
|
|
|
$
|
1,337
|
|
-
13
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
6.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment consist of the following (in millions):
|
|
|
|
|
|
|
|
|
March 31,
2017
|
December 31, 2016
|
Land
|
$
|
191
|
|
$
|
189
|
|
Buildings and leasehold improvements
|
901
|
|
874
|
|
Machinery and equipment
|
3,879
|
|
3,818
|
|
Construction in progress
|
237
|
|
250
|
|
|
5,208
|
|
5,131
|
|
Accumulated depreciation
|
(2,091
|
)
|
(2,019
|
)
|
Property, plant and equipment, net
|
$
|
3,117
|
|
$
|
3,112
|
|
Machinery and equipment includes certain precious metals used in our production tooling, which comprise approximately
13%
and
14%
of total machinery and equipment as of
March 31, 2017
and
December 31, 2016
, respectively. Precious metals used in our production tooling are depleted as they are consumed during the production process, which typically represents an annual expense of less than
3%
of the outstanding carrying value.
7. ACQUISITIONS
On April 21, 2016, the Company acquired all outstanding shares of InterWrap Holdings, Inc. ("InterWrap"), a leading manufacturer of roofing underlayment and packaging materials, for approximately
$452 million
, net of cash acquired. This acquisition expands the Company’s position in roofing components, strengthens the Company’s capabilities to support the conversion from organic to synthetic underlayment and accelerates its growth in the roofing components market. Interwrap's operating results have been included in the Roofing segment of the Company's Consolidated Financial Statements since the date of the acquisition. During the period ending March 31, 2017, the Consolidated Statements of Earnings included
$68 million
in Net sales attributable to the acquisition. The pro forma effect of this acquisition on earnings and revenue was not material.
8. WARRANTIES
The Company records a liability for warranty obligations at the date the related products are sold. Adjustments are made as new information becomes available. A reconciliation of the warranty liability is as follows (in millions):
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
Beginning balance
|
$
|
52
|
|
Amounts accrued for current year
|
4
|
|
Settlements of warranty claims
|
(2
|
)
|
Ending balance
|
$
|
54
|
|
-
14
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. RESTRUCTURING AND ACQUISITION-RELATED COSTS
The Company may incur restructuring, transaction and integration costs related to acquisitions, and may incur restructuring costs in connection with its global cost reduction and productivity initiatives.
Acquisition-Related Costs
During the first three months of 2017, the Company incurred
$1 million
of integration costs related to its acquisition. Please refer to Note 7 of the Consolidated Financial Statements for further information on this acquisition. These costs are recorded in the Corporate, Other and Eliminations category. See Restructuring Costs section below for detail on additional costs related to the InterWrap acquisition. The following table presents the impact and respective location of acquisition-related costs for the first three months of 2017 on the Consolidated Statements of Earnings (in millions):
|
|
|
|
|
Location
|
InterWrap Acquisition
|
Marketing and administrative expenses
|
$
|
1
|
|
Total acquisition-related costs
|
$
|
1
|
|
Restructuring Costs
In the first three months of 2017, the Company did not incur any restructuring charges. During the remainder of 2017, the Company expects to incur an immaterial amount of costs related to its 2016 Cost Reduction Actions and InterWrap Acquisition-Related Restructuring. Please refer to Note 11 of our 2016 Form 10-K for more information about these restructuring actions.
The following table summarizes the status of the unpaid liabilities from the Company's restructuring activity (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Cost Reduction Actions
|
InterWrap Acquisition-Related Restructuring
|
2014 Cost Reduction Actions
|
Total
|
Balance at December 31, 2016
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
2
|
|
No changes
|
—
|
|
—
|
|
—
|
|
—
|
|
Balance at March 31, 2017
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
2
|
|
Cumulative charges incurred
|
$
|
18
|
|
$
|
3
|
|
$
|
45
|
|
$
|
66
|
|
The Company expects the unpaid balance of these restructuring costs to be paid over the next year. As of
March 31, 2017
, the remaining liability balance is comprised of
$2 million
of severance.
-
15
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Details of the Company’s outstanding long-term debt are as follows (in millions):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
December 31, 2016
|
9.00% senior notes, net of discount and financing fees, due 2019
|
$
|
143
|
|
$
|
143
|
|
4.20% senior notes, net of discount and financing fees, due 2022
|
597
|
|
596
|
|
4.20% senior notes, net of discount and financing fees, due 2024
|
391
|
|
391
|
|
3.40% senior notes, net of discount and financing fees, due 2026
|
395
|
|
395
|
|
7.00% senior notes, net of discount and financing fees, due 2036
|
536
|
|
536
|
|
Accounts receivable securitization facility, maturing in 2018
|
158
|
|
—
|
|
Various capital leases, due through and beyond 2050
|
32
|
|
33
|
|
Fair value adjustment to debt
|
7
|
|
8
|
|
Total long-term debt
|
2,259
|
|
2,102
|
|
Less – current portion
|
3
|
|
3
|
|
Long-term debt, net of current portion
|
$
|
2,256
|
|
$
|
2,099
|
|
Senior Notes
The Company issued
$400 million
of 2026 senior notes on August 8, 2016. Interest on the notes is payable semiannually in arrears on February 15 and August 15 each year, beginning on February 15, 2017. A portion of the proceeds from these notes was used to redeem
$158 million
of our 2016 senior notes. The remaining proceeds were used to pay down portions of our Receivables Securitization Facility (as defined below) and for general corporate purposes.
The Company issued
$400 million
of 2024 senior notes on November 12, 2014. Interest on the notes is payable semiannually in arrears on June 1 and December 1 each year, beginning on June 1, 2015. A portion of the proceeds from these notes were used to repay
$242 million
of our 2016 senior notes and
$105 million
of our 2019 senior notes. The remaining proceeds were used to pay down our Senior Revolving Credit Facility (as defined below), finance general working capital needs, and for general corporate purposes.
The Company issued
$600 million
of 2022 senior notes on October 17, 2012. Interest on the notes is payable semiannually in arrears on June 15 and December 15 each year, beginning on June 15, 2013. The proceeds of these notes were used to refinance
$250 million
of our 2016 senior notes and
$100 million
of our 2019 senior notes and pay down our Senior Revolving Credit Facility.
The Company issued
$350 million
of 2019 senior notes on June 3, 2009. On October 31, 2006, the Company issued
$650 million
of 2016 senior notes and
$540 million
of 2036 senior notes. The proceeds of these notes were used to pay certain unsecured and administrative claims, finance general working capital needs and for general corporate purposes.
Collectively, the senior notes above are referred to as the “Senior Notes.” The Senior Notes are general unsecured obligations of the Company and rank
pari passu
with all existing and future senior unsecured indebtedness of the Company.
The Senior Notes are fully and unconditionally guaranteed by certain of the Company’s current and future domestic subsidiaries that are borrowers or guarantors under the Company’s credit agreement ("Credit Agreement"). The guarantees are unsecured and rank equally in right of payment with all other existing and future senior unsecured indebtedness of the guarantors. The guarantees are effectively subordinated to existing and future secured debt of the guarantors to the extent of the assets securing that indebtedness.
The Company has the option to redeem all or part of the Senior Notes at any time at a “make whole” redemption price. The Company is subject to certain covenants in connection with the issuance of the Senior Notes that it believes are usual and customary. The Company was in compliance with these covenants as of
March 31, 2017
.
-
16
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
In the first quarter of 2016, the Company terminated the existing interest rate swaps designated to hedge a portion of the
4.20%
senior notes due 2022. The swaps were carried at fair value and recorded as other assets or liabilities, with a fair value adjustment to long-term debt on the Consolidated Balance Sheets.
Senior Credit Facilities
The Company has an
$800 million
multi-currency senior revolving credit facility that has been amended from time to time (the "Senior Revolving Credit Facility") with a maturity date in November 2020 and uncommitted incremental loans permitted under the facility of
$600 million
. The Senior Revolving Credit Facility includes both borrowings and letters of credit. Borrowings under the Senior Revolving Credit Facility may be used for general corporate purposes and working capital. The Company has the discretion to borrow under multiple options, which provide for varying terms and interest rates including the United States prime rate or LIBOR plus a spread.
The Senior Revolving Credit Facility contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio, that the Company believes are usual and customary for a senior unsecured credit agreement. The Company was in compliance with these covenants as of
March 31, 2017
.
As of
March 31, 2017
, the Company had
no
borrowings on its Senior Revolving Credit Facility,
$9 million
of outstanding letters of credit, and
$791 million
available on this facility.
Receivables Securitization Facility
Included in long-term debt on the Consolidated Balance Sheets are amounts outstanding under a Receivables Purchase Agreement (the “RPA”) that are accounted for as secured borrowings in accordance with Accounting Standards Codification ("ASC") 860, Accounting for Transfers and Servicing. Owens Corning Sales, LLC and Owens Corning Receivables LLC, each a subsidiary of the Company, have a
$250 million
RPA with certain financial institutions. The securitization facility (the "Receivables Securitization Facility") now matures in April 2018, following an amendment in March 2017 to extend its maturity. No other significant terms impacting liquidity were amended. The Company has the ability to borrow at the lenders' cost of funds, which approximates A-1/P-1 commercial paper rates, plus a fixed spread.
As of
March 31, 2017
, the Company utilized the Receivables Securitization Facility for
$158 million
in borrowings and
$2 million
of outstanding letters of credit, and had
$90 million
available on this facility.
The Receivables Securitization Facility contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio that the Company believes are usual and customary for a securitization facility. The Company was in compliance with these covenants as of
March 31, 2017
.
Owens Corning Receivables LLC’s sole business consists of the purchase or acceptance through capital contributions of trade receivables and related rights from Owens Corning Sales, LLC and the subsequent retransfer of or granting of a security interest in such trade receivables and related rights to certain purchasers party to the RPA. Owens Corning Receivables LLC is a separate legal entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of Owens Corning Receivables LLC’s assets prior to any assets or value in Owens Corning Receivables LLC becoming available to Owens Corning Receivables LLC’s equity holders. The assets of Owens Corning Receivables LLC are not available to pay creditors of the Company or any other affiliates of the Company or Owens Corning Sales, LLC.
Short-Term Debt
At both
March 31, 2017
and December 31, 2016, short-term borrowings were less than
$1 million
. The short-term borrowings consisted of various operating lines of credit and working capital facilities. Certain of these borrowings are collateralized by receivables, inventories or property. The borrowing facilities are typically for
one
-year renewable terms. The weighted average interest rate on all short-term borrowings was approximately
5.4%
for
March 31, 2017
and
December 31, 2016
.
-
17
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
11
.
|
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
|
Pension Plans
The Company sponsors defined benefit pension plans. Under the plans, pension benefits are based on an employee’s years of service and, for certain categories of employees, qualifying compensation. Company contributions to these pension plans are determined by an independent actuary to meet or exceed minimum funding requirements. In our non-U.S. plans, the unrecognized cost of any retroactive amendments and actuarial gains and losses are amortized over the average future service period of plan participants expected to receive benefits. In our U.S. plans, the unrecognized cost of any retroactive amendments and actuarial gains and losses are amortized over the average remaining life expectancy of the inactive participants as substantially all of the plan participants are inactive.
The following tables provide information regarding pension expense recognized (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
U.S.
|
Non-U.S.
|
Total
|
|
U.S.
|
Non-U.S.
|
Total
|
Components of Net Periodic Pension Cost
|
|
|
|
|
|
|
|
Service cost
|
$
|
2
|
|
$
|
1
|
|
$
|
3
|
|
|
$
|
2
|
|
$
|
1
|
|
$
|
3
|
|
Interest cost
|
10
|
|
4
|
|
14
|
|
|
11
|
|
4
|
|
15
|
|
Expected return on plan assets
|
(14
|
)
|
(6
|
)
|
(20
|
)
|
|
(14
|
)
|
(6
|
)
|
(20
|
)
|
Amortization of actuarial loss
|
3
|
|
1
|
|
4
|
|
|
3
|
|
1
|
|
4
|
|
Net periodic pension cost
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
|
$
|
2
|
|
$
|
—
|
|
$
|
2
|
|
The Company expects to contribute approximately
$50 million
in cash to the U.S. pension plans and another
$19 million
to non-U.S. plans during
2017
. The Company made cash contributions of
$6 million
to the plans during the
three
months ended
March 31, 2017
.
Postemployment and Postretirement Benefits Other than Pension Plans
The Company maintains healthcare and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the United States are non-funded and pay either (1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met, or (2) fixed amounts of medical expense reimbursement.
The following table provides the components of net periodic benefit cost for aggregated U.S. and non-U.S. plans for the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
2016
|
Components of Net Periodic Benefit Cost
|
|
|
Service cost
|
$
|
1
|
|
$
|
1
|
|
Interest cost
|
2
|
|
2
|
|
Amortization of prior service cost
|
(1
|
)
|
(1
|
)
|
Amortization of actuarial gain
|
(1
|
)
|
—
|
|
Net periodic benefit cost
|
$
|
1
|
|
$
|
2
|
|
-
18
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
12
.
|
CONTINGENT LIABILITIES AND OTHER MATTERS
|
The Company may be involved in various legal and regulatory proceedings relating to employment, antitrust, tax, product liability, environmental and other matters (collectively, “Proceedings”). The Company regularly reviews the status of such Proceedings along with legal counsel. Liabilities for such Proceedings are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the amount of any reasonably possible losses in excess of any amounts accrued, if any, with respect to such Proceedings or any other known claim, including the matters described below under the caption Environmental Matters (the “Environmental Matters”), are not material to the Company’s financial statements. Management believes that the ultimate disposition of the Proceedings and the Environmental Matters will not have a material adverse effect on the Company’s financial condition. While the likelihood is remote, the disposition of the Proceedings and Environmental Matters could have a material impact on the results of operations, cash flows or liquidity in any given reporting period.
Litigation and Regulatory Proceedings
The Company is involved in litigation and regulatory Proceedings from time to time in the regular course of its business. The Company believes that adequate provisions for resolution of all contingencies, claims and pending matters have been made for probable losses that are reasonably estimable.
Environmental Matters
The Company has established policies and procedures designed to ensure that its operations are conducted in compliance with all relevant laws and regulations and that enable the Company to meet its high standards for corporate sustainability and environmental stewardship. Our manufacturing facilities are subject to numerous foreign, federal, state and local laws and regulations relating to the presence of hazardous materials, pollution and protection of the environment, including emissions to air, discharges to water, management of hazardous materials, handling and disposal of solid wastes, and remediation of contaminated sites. All Company manufacturing facilities operate using an ISO 14001 or equivalent environmental management system. The Company’s 2020 Sustainability Goals require significant global reductions in energy use, water consumption, waste to landfill, and emissions of greenhouse gases, fine particulate matter and toxic air emissions.
Owens Corning is involved in remedial response activities and is responsible for environmental remediation at a number of sites, including certain of its currently owned or formerly owned plants. These responsibilities arise under a number of laws, including, but not limited to, the Federal Resource Conservation and Recovery Act ("RCRA"), and similar state or local laws pertaining to the management and remediation of hazardous materials and petroleum. The Company has also been named a potentially responsible party under the U.S. Federal Superfund law, or state equivalents, at a number of disposal sites. The Company became involved in these sites as a result of government action or in connection with business acquisitions. As of
March 31, 2017
, the Company was involved with a total of
19
sites worldwide, including
7
Superfund sites and
12
owned or formerly owned sites. None of the liabilities for these sites are individually significant to the Company.
Remediation activities generally involve a potential range of activities and costs related to soil and groundwater contamination. This can include pre-cleanup activities such as fact finding and investigation, risk assessment, feasibility studies, remedial action design and implementation (where actions may range from monitoring to removal of contaminants, to installation of longer-term remediation systems). A number of factors affect the cost of environmental remediation, including the number of parties involved in a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, variability in clean-up standards, the need for legal action, and changes in remediation technology. Taking these factors into account, Owens Corning has predicted the costs of remediation reasonably estimated to be paid over a period of years. The Company accrues an amount on an undiscounted basis, consistent with the reasonable estimates of these costs when it is probable that a liability has been incurred. Actual cost may differ from these estimates for the reasons mentioned above. At
March 31, 2017
, the Company had an accrual totaling
$3 million
for these costs. Changes in required remediation procedures or timing of those procedures, or discovery of contamination at additional sites, could result in material increases to the Company’s environmental obligations.
-
19
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Stock Plans
2016 Stock Plan
On April 21, 2016, the Company’s stockholders approved the Owens Corning 2016 Stock Plan (the “2016 Stock Plan”) which authorizes grants of stock options, stock appreciation rights, restricted stock awards, restricted stock units, bonus stock awards and performance stock awards. At
March 31, 2017
, the number of shares remaining available under the 2016 Stock Plan for all stock awards was
3.3 million
.
Stock Options
The Company did not grant any stock options during the
three
months ended
March 31, 2017
. The Company calculates a weighted-average grant-date fair value using a Black-Scholes valuation model for options granted. Compensation expense for options is measured based on the fair market value of the option on the date of grant, and is recognized on a straight-line basis over a
four
year vesting period. In general, the exercise price of each option awarded was equal to the market price of the Company’s common stock on the date of grant, and an option’s maximum term is
10
years.
During the
three
months ended
March 31, 2017
, the Company recognized expense of less than
$1 million
related to the Company's stock options. During the
three
months ended
March 31, 2016
the Company recognized expense of
$1 million
related to the Company's stock options. As of
March 31, 2017
, there was
$1 million
of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of
0.92
years. The total aggregate intrinsic value of options outstanding as of
March 31, 2017
was
$23.8 million
.
The following table summarizes the Company’s stock option activity:
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2017
|
|
Number of
Options
|
Weighted-
Average
Exercise Price
|
Beginning Balance
|
975,400
|
|
$
|
35.14
|
|
Exercised
|
(71,700
|
)
|
37.13
|
|
Forfeited
|
(2,000
|
)
|
37.65
|
|
Ending Balance
|
901,700
|
|
$
|
34.97
|
|
The following table summarizes information about the Company’s options outstanding and exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
Options Exercisable
|
|
Options
Outstanding
|
Weighted-Average
|
Number
Exercisable
at March 31, 2017
|
Weighted-Average
|
Range of Exercise Prices
|
Remaining
Contractual Life
|
Exercise
Price
|
Remaining
Contractual Life
|
Exercise
Price
|
$13.89-$42.16
|
901,700
|
|
4.96
|
$
|
34.97
|
|
832,750
|
|
4.80
|
$
|
34.75
|
|
-
20
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
13.
|
STOCK COMPENSATION (continued)
|
Restricted Stock Awards and Restricted Stock Units
The Company has granted restricted stock awards and restricted stock units (collectively referred to as “restricted stock”) as a part of its long-term incentive plan. Compensation expense for restricted stock is measured based on the market price of the stock at date of grant and is recognized on a straight-line basis over the
four
-year vesting period. Stock restrictions are subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2020.
During the
three
months ended
March 31, 2017
, the Company recognized expense of
$5 million
related to the Company's restricted stock. During the
three
months ended
March 31, 2016
, the Company recognized expense of
$4 million
related to the Company's restricted stock. As of
March 31, 2017
, there was
$45 million
of total unrecognized compensation cost related to restricted stock. That cost is expected to be recognized over a weighted-average period of
3.04
years. The total fair value of shares vested during the
three
months ended
March 31, 2017
and
2016
was
$16 million
and
$14 million
, respectively.
The following table summarizes the Company’s restricted stock activity:
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Number of Shares/Units
|
Weighted-Average
Grant-Date
Fair Value
|
Beginning Balance
|
1,800,557
|
|
$
|
37.78
|
|
Granted
|
428,348
|
|
55.25
|
|
Vested
|
(399,310
|
)
|
40.88
|
|
Forfeited
|
(19,238
|
)
|
41.00
|
|
Ending Balance
|
1,810,357
|
|
$
|
41.16
|
|
Performance Stock Awards and Performance Stock Units
The Company has granted performance stock awards and performance stock units (collectively referred to as “PSUs”) as a part of its long-term incentive plan. All outstanding performance grants will fully settle in stock. The amount of stock ultimately distributed from all performance shares issued after the 2014 grants is contingent on meeting internal company-based metrics or an external-based stock performance metric. The amount of stock ultimately distributed from the 2014 grant is contingent on meeting an external-based stock performance metric.
In the
three
months ended
March 31, 2017
, the Company granted both internal company-based and external-based metric PSUs.
Internal based metrics
The internal company-based metrics vest after a three-year period and are based on various Company metrics. The amount of stock distributed will vary from
0%
to
300%
of PSUs awarded depending on each year's award design and performance versus the internal Company-based metrics.
The initial fair value for all internal Company-based metric PSUs assumes that the performance goals will be achieved and is based on the grant date stock price. This assumption is monitored quarterly and if it becomes probable that such goals will not be achieved or will be exceeded, compensation expense recognized will be adjusted and previous surplus compensation expense recognized will be reversed or additional expense will be recognized. The expected term represents the period from the grant date to the end of the
three
-year performance period. Pro-rata vesting may be utilized in the case of death, disability or approved retirement and awards if earned will be paid at the end of the
three
-year period.
External-based metrics
The external-based metrics vest after a
three
-year period. Outstanding grants issued in 2015 and thereafter are based on the Company's total stockholder return relative to the performance of the companies constituting the former S&P Building & Construction Industry Index. Outstanding grants issued prior to 2015 are based on the Company's total stockholder return relative
-
21
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
13.
|
STOCK COMPENSATION (continued)
|
to the performance of the companies in the S&P 500 Index. The amount of stock distributed will vary from
0%
to
200%
of PSUs awarded depending on the relative stockholder return performance.
The Company estimated the fair value of the external-based metric performance stock grants using a Monte Carlo simulation. The external-based metric performance stock granted in 2016 uses various assumptions that include expected volatility of
26.1%
, and a risk free interest rate of
1.4%
, both of which were based on an expected term of
2.92
years. Expected volatility was based on a benchmark study of our peers. The risk-free interest rate was based on zero coupon U.S. Treasury bills at the time of grant. The expected term represents the period from the grant date to the end of the
three
-year performance period. Compensation expense for external-based metric PSUs is measured based on the grant date fair value and is recognized on a straight-line basis over the vesting period. Pro-rata vesting may be utilized in the case of death, disability or approved retirement, and awards if earned will be paid at the end of the
three
-year period.
During the
three
months ended
March 31, 2017
, the Company recognized expense of
$3 million
related to PSUs. During the
three
months ended
March 31, 2016
, the Company recognized expense of
$2 million
related to the Company's PSUs. As of
March 31, 2017
, there was
$26 million
of total unrecognized compensation cost related to PSUs. That cost is expected to be recognized over a weighted-average period of
2.06
years.
The following table summarizes the Company’s PSU activity:
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2017
|
|
Number
of PSUs
|
Weighted-Average
Grant-Date
Fair Value
|
Beginning Balance
|
472,300
|
|
$
|
47.19
|
|
Granted
|
221,050
|
|
59.71
|
|
Forfeited
|
(8,052
|
)
|
45.93
|
|
Ending Balance
|
685,298
|
|
$
|
51.24
|
|
Employee Stock Purchase Plan
On April 18, 2013, the Company’s stockholders approved the Owens Corning Employee Stock Purchase Plan (“ESPP”). The ESPP is a tax-qualified plan under Section 423 of the Internal Revenue Code. The purchase price of shares purchased under the ESPP is equal to
85%
of the lower of the fair market value of shares of Owens Corning common stock at the beginning or ending of the offering period, which is a six-month period ending on May 31 and November 30 of each year. At the approval date,
2 million
shares were available for purchase under the ESPP. As of
March 31, 2017
,
1.2 million
shares remain available for purchase.
During both the
three
months ended
March 31, 2017
and March 31, 2016, the Company recognized expense of
$1 million
related to the Company's ESPP. As of
March 31, 2017
, there was
$1 million
of total unrecognized compensation cost related to the ESPP.
-
22
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
14. EARNINGS PER SHARE
The following table is a reconciliation of weighted-average shares for calculating basic and diluted earnings per-share (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
2016
|
Net earnings attributable to Owens Corning
|
$
|
101
|
|
$
|
57
|
|
Weighted-average number of shares outstanding used for basic earnings per share
|
112.3
|
|
115.5
|
|
Non-vested restricted and performance shares
|
0.9
|
|
0.6
|
|
Options to purchase common stock
|
0.3
|
|
0.4
|
|
Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings per share
|
113.5
|
|
116.5
|
|
Earnings per common share attributable to Owens Corning common stockholders:
|
|
|
Basic
|
$
|
0.90
|
|
$
|
0.49
|
|
Diluted
|
$
|
0.89
|
|
$
|
0.49
|
|
On October 24, 2016, the Board of Directors approved a share buy-back program under which the Company is authorized to repurchase up to
10 million
shares of the Company’s outstanding common stock (the “Repurchase Authorization”). The Repurchase Authorization enables the Company to repurchase shares through the open market, privately negotiated, or other transactions. The actual number of shares repurchased will depend on timing, market conditions and other factors and is at the Company’s discretion. The Company repurchased
1.0 million
shares of its common stock for
$60 million
during the
three
months ended
March 31, 2017
under the Repurchase Authorization. As of
March 31, 2017
,
8.8 million
shares remain available for repurchase under the Repurchase Authorization.
For the
three
months ended
March 31, 2017
, the number of shares used in the calculation of diluted earnings per share did not include
0.1 million
non-vested performance shares due to their anti-dilutive effect.
For the three months ended
March 31, 2016
, the number of shares used in the calculation of diluted earnings per share did not include
0.5 million
non-vested restricted shares,
0.1 million
non-vested performance shares and
0.5 million
of options to purchase common stock, due to their anti-dilutive effect.
-
23
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
15
. FAIR VALUE MEASUREMENT
The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Items Measured at Fair Value
The carrying value of cash and cash equivalents, accounts receivable and short-term debt approximate fair value because of the short-term maturity of the instruments.
Derivatives
The Company executes financial derivative contracts for the purpose of mitigating risk exposure that is generated from our normal operations. These derivatives consist of natural gas swaps, cross currency swaps and foreign exchange forward contracts, all of which are over-the-counter and not traded through an exchange. The Company uses widely accepted valuation tools to determine fair value, such as discounting cash flows to calculate a present value for the derivatives. The models use Level 2 inputs, such as forward curves and other commonly quoted observable transactions and prices.
The following table summarizes the fair values and levels within the fair value hierarchy in which the fair value measurements fall as of
March 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Measured at
Fair Value
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
Derivative assets
|
$
|
14
|
|
$
|
—
|
|
$
|
14
|
|
$
|
—
|
|
The following table summarizes the fair values and levels within the fair value hierarchy in which the fair value measurements fall as of
December 31, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Measured at
Fair Value
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
Derivative assets
|
$
|
16
|
|
$
|
—
|
|
$
|
16
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Derivative liabilities
|
$
|
2
|
|
$
|
—
|
|
$
|
2
|
|
$
|
—
|
|
-
24
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
15. FAIR VALUE MEASUREMENT (continued)
Items Disclosed at Fair Value
Long-term debt
The following table shows the fair value of the Company’s long-term debt as calculated based on quoted market prices for the same or similar issues (Level 2 input), or on the current rates offered to the Company for debt of the same remaining maturities:
|
|
|
|
|
|
|
March 31, 2017
|
December 31, 2016
|
9.00% senior notes, net of discount, due 2019
|
113
|
%
|
114
|
%
|
4.20% senior notes, net of discount, due 2022
|
104
|
%
|
104
|
%
|
4.20% senior notes, net of discount, due 2024
|
103
|
%
|
102
|
%
|
3.40% senior notes, net of discount, due 2026
|
97
|
%
|
95
|
%
|
7.00% senior notes, net of discount, due 2036
|
123
|
%
|
118
|
%
|
The Company determined that the book value of the remaining long-term debt instruments approximates fair value.
16. INCOME TAXES
The following table provides the Income tax expense (in millions) and effective tax rate for the periods indicated:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
2016
|
Income tax expense
|
$
|
43
|
|
$
|
34
|
|
Effective tax rate
|
30
|
%
|
37
|
%
|
The difference between the effective tax rate and the U.S. federal statutory tax rate of
35%
for the
three
months ended
March 31, 2017
is primarily due to the benefit of lower foreign tax rates and other discrete adjustments.
Realization of deferred tax assets depends on achieving a certain minimum level of future taxable income. Management currently believes that it is at least reasonably possible that the minimum level of taxable income will be met within the next 12 months to reduce the valuation allowance of certain foreign jurisdictions by a range of
$0 million
to
$6 million
.
The difference between the effective tax rate and the U.S. federal statutory tax rate of
35%
for the
three
months ended
March 31, 2016
is primarily attributable to the tax accounting treatment of various locations which are currently in a loss position and other discrete tax adjustments.
-
25
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
17.
|
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE DEFICIT
|
The following table summarizes the changes in accumulated other comprehensive income (deficit) (“AOCI”) (in millions):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
2016
|
Currency Translation Adjustment
|
|
|
Beginning balance
|
$
|
(284
|
)
|
$
|
(247
|
)
|
Net investment hedge amounts classified into AOCI, net of tax
|
—
|
|
(7
|
)
|
Gain on foreign currency translation
|
36
|
|
41
|
|
Other comprehensive income, net of tax
|
36
|
|
34
|
|
Ending balance
|
$
|
(248
|
)
|
$
|
(213
|
)
|
|
|
|
|
|
|
Pension and Other Postretirement Adjustment
|
|
|
Beginning balance
|
$
|
(429
|
)
|
$
|
(419
|
)
|
Amounts reclassified from AOCI to net earnings, net of tax (a)
|
1
|
|
2
|
|
Amounts classified into AOCI, net of tax
|
(1
|
)
|
8
|
|
Other comprehensive income, net of tax
|
—
|
|
10
|
|
Ending balance
|
$
|
(429
|
)
|
$
|
(409
|
)
|
|
|
|
|
|
|
Deferred Gain (Loss) on Hedging
|
|
|
Beginning balance
|
$
|
3
|
|
$
|
(4
|
)
|
Amounts reclassified from AOCI to net earnings, net of tax (b)
|
(1
|
)
|
3
|
|
Amounts classified into AOCI, net of tax
|
(1
|
)
|
(2
|
)
|
Other comprehensive (loss) income, net of tax
|
(2
|
)
|
1
|
|
Ending balance
|
$
|
1
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
Total AOCI ending balance
|
$
|
(676
|
)
|
$
|
(625
|
)
|
(a) These AOCI components are included in the computation of total Pension and OPEB expense and are recorded in Cost of sales and Marketing and administrative expenses. See Note 11 for additional information.
(b) Amounts reclassified from gain/(loss) on cash flow hedges are reclassified from AOCI to income when the hedged item affects earnings and are recognized in Cost of sales. See Note 4 for additional information.
-
26
-
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
18.
|
ACCOUNTING PRONOUNCEMENTS
|
The following table summarizes recent accounting standard updates ("ASU") issued by the Financial Accounting Standards Board (the "FASB") that could have an impact on the Company's Consolidated Financial Statements:
|
|
|
|
|
Standard
|
Description
|
Effective Date for Company
|
Effect on the
Consolidated Financial Statements
|
Recently issued standards:
|
|
|
|
ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)," as amended by ASU's 2015-14, 2016-08, 2016-10, 2016-11, 2016-12, 2016-20 and 2017-05.
|
This standard outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Entities can adopt this standard either through a retrospective or modified-retrospective approach.
|
January 1, 2018
|
We are currently assessing the impact this standard will have on our Consolidated Financial Statements. We expect to complete our assessment in the second half of 2017 and plan to use the modified-retrospective method of adoption. Many of our customer volume commitments are short-term (as explained on pg. 5 of the Risk Factors disclosed in Item 1A of our Form 10-K for the year-ended December 31, 2016) and contain single performance obligations. As a result, we do not expect many elements of this standard to be applicable to our business model.
Under our current accounting policy (as described in Note 1 of our 2016 Form 10-K), we recognize revenue when title and risk of loss pass to the customer and collectability is reasonably assured, and we estimate variable consideration based on historical experience, current conditions and contractual obligations. We believe our current variable consideration estimates are largely consistent with the new standard, but we are still analyzing potential quarterly timing differences for our consignment sales arrangements and customized products manufactured for customers. We are also still assessing the standard's new disclosure requirements, including the disaggregation of segment revenue.
|
ASU 2016-02 "Leases (Topic 842)"
|
The standard requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. The recognition and presentation of expenses will depend on classification as a finance or operating lease. Entities will adopt this standard through a retrospective approach.
|
January 1, 2019
|
We are currently assessing the potential impact of this standard adoption on our financial reporting processes and disclosures. We believe that our adoption of the standard will likely have a material impact to our Consolidated Balance Sheets for the recognition of certain operating leases as right-of-use assets and lease liabilities. (Our operating lease obligations are described in Note 8 of our 2016 Form 10-K). We are in the process of analyzing our lease portfolio and evaluating systems to comply with the standard's retrospective adoption requirements.
|
ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326)"
|
This standard replaces the incurred loss methodology for recognizing credit losses with a current expected credit losses model and applies to all financial assets, including trade receivables. Entities will adopt the standard using a modified-retrospective approach.
|
January 1, 2020
|
We are currently assessing the impact this standard will have on our Consolidated Financial Statements. Our current accounts receivable policy (as described in Note 1 of our 2016 Form 10-K) uses historical and current information to estimate the amount of probable credit losses in our existing accounts receivable. We have not yet analyzed our current systems and methods to determine the impact of using forward-looking information to estimate expected credit losses.
|
ASU 2016-16 "Income Taxes (Topic 740)"
|
This standard clarifies that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.
|
January 1, 2018
|
We are currently assessing the impact this standard will have on our Consolidated Financial Statements.
|
ASU 2017-07 "Compensation - Retirement Benefits (Topic 715)"
|
This standard requires that the other components of net benefit cost be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Entities will adopt the presentation elements of this standard on a retrospective basis.
|
January 1, 2018
|
We are currently assessing the impact this standard will have on our Consolidated Financial Statements.
|