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Owens Corning 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-99.1
  7. Ex-99.1
Quarterly Report
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

Commission File Number: 1-33100

 


Owens Corning

(Exact name of registrant as specified in its charter)

 


 

Delaware     43-2109021
(State or other jurisdiction of incorporation or organization)     (I.R.S. Employer
Identification No.)
One Owens Corning Parkway, Toledo, OH     43659
(Address of principal executive offices)     (Zip Code)

(419) 248-8000

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨   Accelerated filer  þ   Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  þ    No  ¨

As of July 30, 2007, 130,831,013 shares of registrant’s common stock, par value $0.01 per share, were outstanding.

 

 



Table of Contents

(i)

 

INDEX

 

          Page

Cover Page

   1

PART I – FINANCIAL INFORMATION

  

        Item 1.

   Financial Statements   
  

Consolidated Statements of Earnings

   2
  

Consolidated Balance Sheets

   3 - 4
  

Consolidated Statements of Cash Flows

   5
   Notes to Consolidated Financial Statements   
  

General

   6
  

Segment Data

   6 - 9
  

Inventories

   10
  

Goodwill and Other Intangibles

   10 - 11
  

Acquisitions and Divestitures

   11
  

Warranties

   12
  

Restructuring of Operations and Other Charges (Credits)

   12
  

Debt

   13 - 14
  

Pension Plans and Other Postretirement Benefits

   15 - 16
  

Stock Compensation

   16 - 18
  

Contingent Liabilities and Other Matters

   19 - 20
  

Earnings per Share

   20
  

Comprehensive Earnings

   21
  

Income Taxes

   21
  

Accounting Pronouncements

   21
  

Emergence from Chapter 11 Proceedings

   22 - 23
  

Subsequent Events

   23
  

Condensed Consolidating Financial Statements

   23 - 31

        Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    32 - 47

        Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    47

        Item 4.

   Controls and Procedures    47

PART II – OTHER INFORMATION

  

        Item 1.

   Legal Proceedings    48

        Item 1A.

   Risk Factors    48

        Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    49

        Item 3.

   Defaults Upon Senior Securities    49

        Item 4.

   Submission of Matters to a Vote of Security Holders    49

        Item 5.

   Other Information    49

        Item 6.

   Exhibits    49
  

Signatures

   50
  

Exhibit Index

   51 - 52


Table of Contents

-2-

 

PART I

ITEM 1. FINANCIAL STATEMENTS

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited)

 

     Successor     Predecessor     Successor     Predecessor  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007     2006     2007     2006  
     (in millions, except per share data)  

NET SALES

   $ 1,534     $ 1,722     $ 2,858     $ 3,323  

COST OF SALES

     1,288       1,426       2,419       2,758  
                                

Gross margin

     246       296       439       565  
                                

OPERATING EXPENSES

        

Marketing and administrative expenses

     146       140       282       271  

Science and technology expenses

     16       15       30       31  

Restructuring credits

     —         —         (2 )  

Chapter 11 related reorganization items

     —         17       3       27  

Asbestos litigation recoveries

     —         —         —         (3 )

Employee emergence equity program

     12       —         20       —    

Gain on sale of fixed assets and other

     (6 )     (44 )     (5 )     (44 )
                                

Total operating expenses

     168       128       328       282  
                                

EARNINGS BEFORE INTEREST AND TAXES

     78       168       111       283  

Interest expense, net

     31       86       63       151  
                                

EARNINGS BEFORE TAXES

     47       82       48       132  

Income tax expense (benefit)

     16       (169 )     16       (179 )
                                

EARNINGS BEFORE MINORITY INTEREST AND EQUITY IN NET EARNINGS OF AFFILIATES

   $ 31     $ 251     $ 32     $ 311  

Minority interest and equity in net earnings (loss) of affiliates

     (2 )     —         (2 )     3  
                                

NET EARNINGS

   $ 29     $ 251     $ 30     $ 314  
                                

EARNINGS PER COMMON SHARE

        

Basic net earnings per share

   $ 0.23     $ 4.54     $ 0.23     $ 5.67  
                                

Diluted net earnings per share

   $ 0.22     $ 4.19     $ 0.23     $ 5.24  
                                

WEIGHTED AVERAGE COMMON SHARES

        

Basic

     128.1       55.3       128.1       55.3  

Diluted

     131.1       59.9       131.1       59.9  

The accompanying notes to consolidated financial statements are an integral part of this statement.


Table of Contents

-3-

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

     Successor  
    

June 30,

2007

    December 31,
2006
 
     (in millions)  

ASSETS

  

CURRENT

    

Cash and cash equivalents

   $ 135     $ 1,089  

Receivables, less allowances of $18 million in 2007 and

$26 million in 2006

     793       573  

Inventories

     833       749  

Restricted cash – disputed distribution reserve

     65       85  

Other current assets

     70       56  
                

Total current

     1,896       2,552  
                

OTHER

    

Deferred income taxes

     548       549  

Pension-related assets

     9       8  

Goodwill

     1,295       1,313  

Intangible assets

     1,277       1,298  

Investments in affiliates

     80       97  

Other noncurrent assets

     138       132  
                

Total other

     3,347       3,397  
                

PLANT AND EQUIPMENT

    

Land

     190       188  

Buildings and leasehold improvements

     494       470  

Machinery and equipment

     1,845       1,732  

Construction in progress

     172       171  
                
     2,701       2,561  

Accumulated depreciation

     (182 )     (40 )
                

Net plant and equipment

     2,519       2,521  
                

TOTAL ASSETS

   $ 7,762     $ 8,470  
                

The accompanying notes to consolidated financial statements are an integral part of this statement.


Table of Contents

-4-

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(unaudited)

 

     Successor  
    

June 30,

2007

    December 31,
2006
 
     (in millions)  

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

CURRENT

    

Accounts payable and accrued liabilities

   $ 986     $ 1,081  

Accrued interest

     22       39  

Short-term debt

     12       1,401  

Long-term debt – current portion

     15       39  
                

Total current

     1,035       2,560  
                

LONG-TERM DEBT

     2,093       1,296  

OTHER

    

Pension plan liability

     264       312  

Other employee benefits liability

     326       325  

Other

     231       247  
                

Total other

     821       884  
                

COMMITMENTS AND CONTINGENCIES
(Note 11)

    

MINORITY INTEREST

     38       44  
                

STOCKHOLDERS’ EQUITY

    

Preferred stock, par value $0.01 per share
10 million shares authorized; none issued or
outstanding at June 30, 2007, and December 31, 2006

     —         —    

Common stock, par value $0.01 per share
400 million shares authorized; 130.8 million issued and
outstanding at June 30, 2007, and December 31, 2006

     1       1  

Additional paid in capital

     3,759       3,733  

Accumulated deficit

     (35 )     (65 )

Accumulated other comprehensive earnings

     50       17  
                

Total stockholders’ equity

     3,775       3,686  
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 7,762     $ 8,470  
                

The accompanying notes to consolidated financial statements are an integral part of this statement.


Table of Contents

-5-

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     Successor     Predecessor  
     Six Months Ended
June 30,
 
     2007     2006  
     (in millions)  

NET CASH FLOW PROVIDED BY (USED FOR) OPERATING ACTIVITIES

    

Net earnings

   $ 30     $ 314  

Adjustments to reconcile net earnings to cash used for operating activities:

    

Depreciation and amortization

     158       124  

Provision for impairments

     11       2  

Gain on sale of fixed assets

     (1 )     (35 )

Change in deferred income taxes

     (8 )     (204 )

Provision for pension and other employee benefits liabilities

     21       48  

Provision for post-petition interest/fees on pre-petition obligations

     —         155  

Employee emergence equity program

     20       —    

Stock compensation expense

     6       —    

Decrease in restricted cash – disputed distribution reserve

     20       —    

Payments related to Chapter 11 filings

     (16 )     —    

Increase in receivables

     (215 )     (162 )

Increase in inventories

     (80 )     (31 )

Decrease in accrued interest

     (17 )     —    

(Increase) decrease in prepaid assets

     —         (15 )

Decrease in accounts payable and accrued liabilities

     (104 )     (95 )

Proceeds from insurance for asbestos litigation claims, excluding Fibreboard

     —         17  

Pension fund contribution

     (57 )     (5 )

Payments for other employee benefits liabilities

     (15 )     (14 )

Increase in restricted cash – asbestos and insurance related

     —         (15 )

Increase in restricted cash, securities and other – Fibreboard

     —         (9 )

Other

     5       4  
                

Net cash flow provided by (used for) operating activities

     (242 )     79  
                

NET CASH FLOW PROVIDED BY (USED FOR) INVESTING ACTIVITIES

    

Additions to plant and equipment

     (111 )     (189 )

Investment in affiliates and subsidiaries, net of cash acquired

     (29 )     (13 )

Proceeds from the sale of assets or affiliate

     12       44  
                

Net cash flow provided by (used for) investing activities

     (128 )     (158 )
                

NET CASH FLOW PROVIDED BY (USED FOR) FINANCING ACTIVITIES

    

Payments on long-term debt

     (66 )     (4 )

Proceeds from long-term debt

     609       10  

Payments on revolving credit facility

     (118 )     —    

Proceeds from revolving credit facility

     383       —    

Payment of note payable to 524(g) Trust

     (1,390 )     —    

Net increase (decrease) in short-term debt

     (4 )     2  
                

Net cash flow provided by (used for) financing activities

     (586 )     8  
                

Effect of exchange rate changes on cash

     2       5  
                

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (954 )     (66 )

Cash and cash equivalents at beginning of period

     1,089       1,559  
                

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 135     $ 1,493  
                

The accompanying notes to consolidated financial statements are an integral part of this statement.


Table of Contents

-6-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.    GENERAL

Owens Corning (formerly known as Owens Corning (Reorganized) Inc.) was initially formed on July 21, 2006, as a wholly-owned subsidiary of Owens Corning Sales, LLC (formerly known as Owens Corning (“OCD”) and did not conduct significant operations prior to October 31, 2006 (the “Effective Date”), when OCD and 17 of its subsidiaries (collectively, the “Debtors”) emerged from Chapter 11 bankruptcy proceedings as described more fully in Note 16 below. As part of a restructuring that was conducted in connection with OCD’s emergence from bankruptcy, on October 31, 2006, Owens Corning became a holding company and the ultimate parent company of OCD and the other Owens Corning companies.

Unless the context requires otherwise, the terms “Owens Corning”, “Company”, “we” and “our” in this report refer to Owens Corning (formerly known as Owens Corning (Reorganized) Inc.) and its subsidiaries.

In accordance with Statement of Position 90-7 (“SoP 90-7”), the Company adopted fresh-start accounting as of the Effective Date. Fresh-start accounting is required upon a substantive change in control and requires that the reporting entity allocate the reorganization value of the company to its assets and liabilities in a manner similar to that which is required under Statement of Financial Accounting Standards No. 141, “Business Combinations.” Under the provisions of fresh-start accounting, a new entity has been deemed created for financial reporting purposes. The financial information set forth in this report, unless otherwise expressly set forth or as the context otherwise indicates, reflects the consolidated results of operations and financial condition of Owens Corning and its subsidiaries for the periods following October 31, 2006 (“Successor”) and of OCD and its subsidiaries for the periods through October 31, 2006 (“Predecessor”).

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, 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 financial statements for the period ended June 30, 2006, do not reflect the effect of any changes in the Company’s capital structure or changes in fair values of assets and liabilities as a result of fresh-start accounting. The December 31, 2006, 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. Certain reclassifications have been made to the period presented for 2006 to conform to the classifications used in the period presented for 2007.

In connection with the consolidated financial statements and notes included in this Report, reference is made to the consolidated financial statements and notes thereto contained in the Company’s 2006 annual report on Form 10-K, as filed with the Securities and Exchange Commission.

2.    SEGMENT DATA

The Company discloses its segments in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). The Company’s business operations fall within two general product categories, building materials and composites. There are three reportable segments in the building materials product category: (1) Insulating Systems; (2) Roofing and Asphalt; and (3) Other Building Materials and Services and there is one reportable segment in the composites product category: Composite Solutions. Accounting policies for the segments are the same as those for the Company.

The Company has reported financial and descriptive information about each of the Company’s four reportable segments below on a basis that is used internally for evaluating segment performance and deciding how to allocate resources to those segments.


Table of Contents

-7-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2.    SEGMENT DATA (continued)

 

The Company’s four reportable segments are defined as follows:

Insulating Systems

Manufactures and sells fiberglass insulation into residential, commercial and industrial markets for both thermal and acoustical applications. Also manufactures and sells glass fiber pipe insulation, energy efficient flexible duct media and foam insulation used in above and below grade construction applications.

Roofing and Asphalt

Manufactures and sells residential roofing shingles and oxidized asphalt materials used in residential and commercial construction and specialty applications.

Other Building Materials and Services

Manufactures and sells vinyl siding and accessories and manufactured stone veneer building products. Also provides franchise opportunities for the home remodeling and new construction industries. The Company’s distribution network also sells other building material products, such as windows and doors, not manufactured by Owens Corning. The operating segments comprising this segment individually do not meet the threshold for reporting separately.

Composite Solutions

Manufactures, fabricates and sells glass fiber reinforcements, mat, veil and specialized products worldwide that are used in a wide variety of composite material systems. Primary end uses are in the transportation, building construction, telecommunications and electronics markets.

As noted in the segment financial data below, the Company records inter-segment sales from the Composite Solutions segment to the Roofing and Asphalt segment for sales of glass-reinforced mat materials used in the manufacture of residential roofing materials. All other inter-segment sales are not material to any segment.

Earnings before interest and taxes by segment consists of net sales less related costs and expenses and is presented on a basis that is used internally for evaluating segment performance. Certain categories of expenses – such as general corporate expenses or income, restructuring costs and certain other expense or income items – are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in earnings before interest and taxes for the Company’s reportable segments. Reference is made below to the reconciliation of reportable segment earnings before interest and taxes to consolidated earnings before interest and taxes.


Table of Contents

-8-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2.    SEGMENT DATA (continued)

 

External customer sales are attributed to geographic region based upon the location from which the product is shipped to the external customer.

 

     Successor     Predecessor     Successor     Predecessor  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

NET SALES

   2007     2006     2007     2006  
     (in millions)  

Reportable Segments

        

Insulating Systems

   $ 441     $ 519     $ 860     $ 1,041  

Roofing and Asphalt

     414       501       720       962  

Other Building Materials and Services

     303       346       535       639  

Composite Solutions

     425       411       828       784  
                                

Total reportable segments

     1,583       1,777       2,943       3,426  

Corporate Eliminations (1)

     (49 )     (55 )     (85 )     (103 )
                                

Consolidated

   $ 1,534     $ 1,722     $ 2,858     $ 3,323  
                                

External Customer Sales by Geographic Region

        

United States

   $ 1,180     $ 1,418     $ 2,196     $ 2,767  

Europe

     131       114       253       211  

Canada and other

     223       190       409       345  
                                

NET SALES

   $ 1,534     $ 1,722     $ 2,858     $ 3,323  
                                

 


(1) Included in corporate eliminations are inter-segment sales, primarily from the Composite Solutions segment to the Roofing and Asphalt segment. Those eliminations were approximately $32 million and $42 million in the Successor three months ended June 30, 2007, and the Predecessor three months ended June 30, 2006, respectively, and approximately $62 million and $84 million in the Successor six months ended June 30, 2007, and the Predecessor six months ended June 30, 2006, respectively. The remaining inter-segment sales eliminations are not material to any other segment.


Table of Contents

-9-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2.    SEGMENT DATA (continued)

 

     Successor     Predecessor     Successor     Predecessor  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

EARNINGS BEFORE INTEREST AND TAXES

   2007     2006     2007     2006  
     (in millions)  

Reportable Segments

        

Insulating Systems

   $ 42     $ 112     $ 95     $ 235  

Roofing and Asphalt

     29       48       21       78  

Other Building Materials and Services

     17 (a)     8       16 (a)     5  

Composite Solutions

     28       51 (b)     54       65 (b)
                                

Total reportable segments

   $ 116     $ 219     $ 186     $ 383  
                                

Reconciliation to Consolidated Earnings Before Interest and Taxes

        

Chapter 11-related reorganization items

   $ —       $ (17 )   $ (3 )   $ (27 )

Asbestos litigation recoveries

     —         —         —         3  

Restructuring credits

     —         —         2       —    

OCV Reinforcements transaction costs

     (7 )     —         (18 )     —    

Gains (losses) related to the exit of our HOMExperts service line

     1       —         (7 )     —    

Losses related to strategic reviews

     (12 )     —         (12 )     —    

Employee emergence equity program

     (12 )     —         (20 )     —    

General corporate expense

   $ (8 )   $ (34 )   $ (17 )   $ (76 )
                                

CONSOLIDATED EARNINGS BEFORE INTEREST AND TAXES

   $ 78     $ 168     $ 111     $ 283  
                                

 


(a) Includes $1 million of income and excludes $7 million of losses related to the exit of the HOMExperts service line in the three months ended June 30, 2007, and the six months ended June 30, 2007, respectively.
(b) Includes $27 million and $35 million of gains on the sale of metal which is reflected in the Consolidated Statement of Earnings under the caption gain on the sale of fixed assets and other in the three months ended June 30, 2006, and the six months ended June 30, 2006, respectively.


Table of Contents

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

3.    INVENTORIES

Inventories are summarized as follows (in millions):

 

     Successor
    

June 30,

2007

  

December 31,

2006

Finished goods

   $ 578    $ 518

Materials and supplies

     218      194
             

FIFO inventory

     796      712

LIFO adjustment

     37      37
             

Total inventories

   $ 833    $ 749
             

4.    GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets and goodwill consist of the following (in millions):

 

     Successor
     June 30, 2007
     Weighted
Average
Useful
Life
   Gross
Carrying
Amount
   Accumulated
Amortization
    Net
Carrying
Amount

Amortizable intangible assets:

          

Customer relationships

   19    $ 174    $ (6 )   $ 168

Technology

   20      198      (7 )     191

Franchise and other agreements

   15      33      (3 )     30

Non-amortizable intangible assets:

          

Trademarks

        888      —         888
                        

Total intangible assets

      $ 1,293    $ (16 )   $ 1,277
                        

Goodwill

      $ 1,295     
              
     Successor
     December 31, 2006
     Weighted
Average
Useful
Life
   Gross
Carrying
Amount
   Accumulated
Amortization
    Net
Carrying
Amount

Amortizable intangible assets:

          

Customer relationships

   19    $ 174    $ (2 )   $ 172

Technology

   20      198      (2 )     196

Franchise and other agreements

   15      33      (1 )     32

In process research and development

        21      (21 )     —  

Non-amortizable intangible assets:

          

Trademarks

        898      —         898
                        

Total intangible assets

      $ 1,324    $ (26 )   $ 1,298
                        

Goodwill

      $ 1,313     
              


Table of Contents

-11-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

4.    GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

 

Other Intangible Assets

The value assigned to the intangibles upon the adoption of fresh-start accounting represents the Company’s best estimates of fair value based on internal and external valuations. As a result, the Company expects the ongoing amortization expense for finite intangible assets to be approximately $21 million in each of the next five fiscal years.

Due to the Company’s strategic review, in the second quarter of 2007 we recorded an impairment of $10 million related to the Fabwel unit of our Composites segment, in the caption cost of sales on its Consolidated Statement of Earnings.

Goodwill

The changes in the net carrying amount of goodwill by segment are as follows (in millions):

 

Successor

   Insulating
Systems
    Roofing
&
Asphalt
    Other
Building
Materials
&
Services
   Composite
Solutions
   Total  

Balance as of December 31, 2006

   $ 852     $ 261     $ 142    $ 58    $ 1,313  

Acquisitions (see Note 5)

     —         —         —        20      20  

Income tax adjustments (see Note 11)

     (29 )     (9 )     —        —        (38 )
                                      

Balance as of June 30, 2007

   $ 823     $ 252     $ 142    $ 78    $ 1,295  
                                      

The Successor has elected the fourth quarter to perform its annual testing for goodwill impairment. The Company will test goodwill for impairment as of October 1st of each fiscal year going forward, 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, as provided for in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

5.    ACQUISITIONS AND DIVESTITURES

During the second quarter of 2007, the Company increased its ownership in Owens Corning India Limited (“OCIL”) from 60% to 78.5%. The purchase price was approximately $28 million and was recorded as an increase in goodwill of approximately $20 million, an increase in plant and equipment of approximately $1 million and a decrease in minority interest of approximately $7 million on its Consolidated Balance Sheet. OCIL is a growing, profitable business with a low cost production platform that supplies Composites Solutions’ customers in India and exports to other markets.

In the first quarter of 2007, the Company sold its remaining 40% ownership interest in Owens Corning South Africa (Pty) Ltd. The Company received $12 million for the divestiture.


Table of Contents

-12-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

6.    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 liabilities is as follows (in millions):

 

     Successor  
    

For the Six
Months Ended
June 30,

2007

 

Beginning balance

   $ 50  

Amounts accrued for current year

     7  

Adjustment of preexisting accrual estimates

     4  

Settlements of warranty claims

     (18 )
        

Ending balance

   $ 43  
        

7.    RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (CREDITS)

In the second half of 2006, we substantially completed the restructuring actions taken to close facilities, exit certain product lines and reduce operating costs. During the six months ended June 30, 2007, the Company recorded a credit of $2 million related to lower estimated employee severance cost for employee separations in the 2006 restructuring actions. We do not expect to incur any additional costs related to the 2006 actions and final payments are estimated to occur within the third quarter of 2007.

The following table summarizes the status of the unpaid liabilities from the Company’s restructuring activities (in millions):

 

     Successor  
    

For the Six
Months Ended
June 30,

2007

 

Beginning balance

   $ 29  

Amounts credited in current year

     (2 )

Cash payments

     (21 )
        

Ending balance

   $ 6  
        


Table of Contents

-13-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

8.    DEBT

Details of our outstanding long-term debt at June 30, 2007, and December 31, 2006, are as follows (in millions):

 

     Successor
    

June 30,

2007

  

December 31,

2006

Senior Term Facility, maturing in 2011

   $ 600    $ —  

6.50% Senior Notes, net of discount, due 2016

     648      648

7.00% Senior Notes, net of discount, due 2036

     539      539

Revolving Credit Facility, maturing in 2011

     265      —  

Internal Revenue Service note, maturing in 2012, 8.0% (see Note 11)

     —        89

Various capital leases, due through 2050

     25      20

Other floating rate debt, maturing through 2017

     29      35

Other fixed rate debt, with maturities up to 2011, at rates from
5.0% to 11.0%

     2      4
             
     2,108      1,335

Less – current portion

     15      39
             

Total long-term debt

   $ 2,093    $ 1,296
             

Senior Notes

We issued $1.2 billion of senior notes (collectively, the “Senior Notes”) concurrently with our emergence from bankruptcy on the Effective Date. The proceeds of these notes were used to pay certain unsecured and administrative claims, finance general working capital needs and for general corporate purposes.

The senior notes were initially offered and sold to qualified institutional buyers in reliance on Rule 144A of the Securities Act. In the second quarter of 2007, we filed a registration statement with the Securities and Exchange Commission for an offering pursuant to which notes substantially identical to the original notes were offered in exchange for the then outstanding notes. Such offering was completed in late June 2007, and all of the original notes were exchanged for registered notes (collectively, the “Senior Notes”).

The Senior Notes consist of $650 million aggregate principal amount of 6.50% notes due December 1, 2016 and $550 million aggregate principal amount of 7.00% notes due December 1, 2036, with effective interest rates of 6.62% and 7.23%, respectively. Interest on each series of notes is payable on June 1 and December 1 of each year, beginning on June 1, 2007.

The Senior Notes are general unsecured obligations of the Company and rank pari passu with all existing and future unsecured senior indebtedness of the Company. The Senior Notes rank senior in right of payment to any subordinated indebtedness of the Company and are effectively subordinated to the Company’s secured indebtedness, to the extent of the value of the collateral securing such indebtedness.

The Senior Notes are also guaranteed by each of the Company’s current and future material wholly-owned United States subsidiaries that is a borrower or a guarantor under the Credit Agreement (defined below). Each guaranty of the Senior Notes is a general unsecured obligation of the guarantors and ranks pari passu with all existing and future unsecured senior indebtedness of the subsidiary guarantors. The guarantees of the Senior


Table of Contents

-14-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

8.    DEBT (continued)

 

Notes rank senior in right of payment to any subordinated indebtedness of the guarantors and are effectively subordinated to the guarantor’s secured indebtedness, to the extent of the value of the collateral securing such indebtedness.

Owens Corning has the option to redeem all or part of the Senior Notes at any time at a “make Whole” redemption price. We are subject to certain covenants in connection with the issuance of the Senior Notes.

Senior Credit Facilities

On October 31, 2006, the Company entered into a credit agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent and various lenders, which are parties thereto. The Credit Agreement created two credit facilities (the “Credit Facilities”), consisting of:

 

  a $1.0 billion multi-currency senior revolving credit facility; and

 

  a $600 million delayed-draw senior term loan facility.

The Credit Facilities each have a five-year maturity. Proceeds from the revolving credit facility are available for general working capital needs and for other general corporate purposes. The term loan was used to partially fund payments to the Owens Corning/Fibreboard Asbestos Personal Injury Trust (the “524(g) Trust”) in January of 2007 (see Note 16). The revolving credit facility is comprised of a U.S. facility, a Canadian facility and a European facility. The Credit Agreement allows the Company to borrow under multiple options, which provide for varying terms and interest rates.

Any obligations under the Credit Facilities are unconditionally and irrevocably guaranteed by the Company’s current and future material wholly-owned United States subsidiaries. The Company had $265 million of borrowings and $125 million of letters of credit outstanding under the revolving credit facility at June 30, 2007.

The Credit Agreement also requires payment to the lenders of a commitment fee based on the average daily unused commitments under the Credit Facilities at rates based upon the applicable corporate credit ratings of the Company. Voluntary prepayments of the loans and voluntary reductions of the unutilized portion of the commitments under the Credit Facilities are permissible without penalty, subject to certain conditions.

The Credit Agreement contains financial, affirmative and negative covenants that we believe are usual and customary for a senior unsecured credit agreement.

Short Term Debt

At June 30, 2007, and December 31, 2006, short-term borrowings were $12 million and $1.401 billion, respectively. The December 31, 2006, balance included a note payable to the 524(g) Trust of $1.390 billion, which was paid in January of 2007 (see Note 16). The remaining short-term borrowings for both periods consisted of various operating lines of credit and working capital facilities maintained by certain of the Company’s non-U.S. subsidiaries. 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 short-term borrowings was approximately 6.1% and 7.0% at June 30, 2007, and December 31, 2006, respectively.


Table of Contents

-15-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

9.    PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Pension Plans

The Company has several defined benefit pension plans covering most employees. 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. Contributions to the U.S. pension plan are based on amounts needed to meet or exceed minimum funding requirements. The unrecognized cost of retroactive amendments and actuarial gains and losses are amortized over the average future service period of plan participants expected to receive benefits.

The following tables provide information regarding pension expense recognized during the year (in millions):

 

     Successor      Predecessor  
     Three Months Ended
June 30, 2007
     Three Months Ended
June 30, 2006
 
     U.S.     Non-U.S.     Total      U.S.     Non-U.S.     Total  

Components of Net Periodic Pension Cost

             

Service cost

   $ 6     $ 2     $ 8      $ 6     $ 1     $ 7  

Interest cost

     14       6       20        15       5       20  

Expected return on plan assets

     (17 )     (7 )     (24 )      (15 )     (6 )     (21 )

Amortization of loss

     —         —         —          11       2       13  

Amortization of prior service cost

     —         —         —          1       —         1  
                                                 

Net periodic pension cost

   $ 3     $ 1     $ 4      $ 18     $ 2     $ 20  
                                                 
     Successor      Predecessor  
     Six Months Ended
June 30, 2007
     Six Months Ended
June 30, 2006
 
     U.S.     Non-U.S.     Total      U.S.     Non-U.S.     Total  

Components of Net Periodic Pension Cost

             

Service cost

   $ 12     $ 4     $ 16      $ 11     $ 2     $ 13  

Interest cost

     28       12       40        29       10       39  

Expected return on plan assets

     (34 )     (14 )     (48 )      (29 )     (11 )     (40 )

Amortization of loss

     —         —         —          21       4       25  

Amortization of prior service cost

     —         —         —          3       —         3  
                                                 

Net periodic pension cost

   $ 6     $ 2     $ 8      $ 35     $ 5     $ 40  
                                                 

Owens Corning expects to contribute approximately $100 million in cash to the U.S. pension plans and approximately $10 million to non-U.S. plans during 2007. The Company made cash contributions of approximately $57 million to the plans during the six months ended June 30, 2007.

Postemployment and Postretirement Benefits Other than Pension Plans

The Company and its subsidiaries maintain health care and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the U.S. 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.


Table of Contents

-16-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

9.    PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)

 

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):

 

     Successor    Predecessor     Successor    Predecessor  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007    2006     2007    2006  

Components of Net Periodic Benefit Cost

          

Service cost

   $ 1    $ 1     $ 2    $ 2  

Interest cost

     4      5       9      10  

Amortization of loss

     —        1       —        1  

Amortization of prior service cost

     —        (4 )     —        (7 )
                              

Net periodic benefit cost

   $ 5    $ 3     $ 11    $ 6  
                              

10.    STOCK COMPENSATION

On October 31, 2006, all stock and stock options of the Predecessor were extinguished in accordance with the plan of reorganization (the “Plan”) confirmed as a part of the Debtors’ emergence from Chapter 11 bankruptcy proceedings.

2006 Stock Plan

In conjunction with the confirmation of the Plan, the Company’s 2006 Stock Plan was approved by the United States Bankruptcy Court for the District of Delaware (the “USBC”). In accordance with Section 303 of the Delaware General Corporation Law, such approval constituted stockholder approval of the 2006 Stock Plan. The 2006 Stock Plan became effective on October 31, 2006, the date that the Debtors emerged from Chapter 11 Bankruptcy.

The 2006 Stock Plan authorizes grants of stock options, stock appreciation rights, restricted stock awards, restricted stock units, bonus stock awards and performance stock awards to be made pursuant to the plan. At June 30, 2007, the maximum number of shares remaining available under the 2006 Stock Plan for all stock awards was 3,112,624 shares.

Stock Options

The Company grants stock options under its employee emergence equity program. The Company calculates a weighted-average grant date fair value, using a Black-Scholes valuation model for options granted. No stock options were granted or exercised during the six months ended June 30, 2007.

The exercise price of each option awarded under the Plan equals the market price of the Company’s common stock on the date of grant and an option’s maximum term is 10 years. Shares issued from the exercise of options are recorded in the common stock accounts at the option price. The awards and vesting periods of such awards are determined at the discretion of the Compensation Committee of the Board of Directors. The volatility assumption was based on a benchmark study of our peers.


Table of Contents

-17-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

10.    STOCK COMPENSATION (continued)

 

The following table summarizes our share option activity during the Successor six months ended June 30, 2007:

 

Successor

  

Number

of

Shares

   

Weighted-

Average

Exercise

Price

Outstanding at December 31, 2006

   2,123,100     $ 30.00

Options granted

   —         —  

Options exercised

   —         —  

Options forfeited

   (11,000 )   $ 30.00
        

Outstanding at June 30, 2007

   2,112,100     $ 30.00
        

The following table summarizes information about options outstanding and exercisable at June 30, 2007:

 

Range of

Exercise Prices

 

Options

Outstanding

  Weighted-Average   Options
Exercisable
 

Weighted-

Averaged

Exercise Price

   

Remaining

Contractual
Life

 

Exercise

Price

   
$30.00 – $30.00   2,112,100   9.33   $ 30.00   —     $ 30.00

During the six months ended June 30, 2007, the Company recognized expense of $5 million related to the Company’s stock options, which was recorded under the caption employee emergence equity program on the Consolidated Statements of Earnings. As of June 30, 2007, there was $14 million of total unrecognized compensation cost related to stock options awards. The total aggregate intrinsic value of options outstanding as of June 30, 2007, was $8 million.

Restricted Stock Awards and Restricted Stock Units

In 2006, the Company granted restricted stock awards and restricted stock units under its employee emergence equity program, Board of Director compensation plan, and its long-term incentive plan (“LTIP”). Compensation expense for restricted stock is measured based on the market price of the stock on the date of grant and is recognized on a straight-line basis over the vesting period. Stock restrictions are subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2009.

A summary of the status of the Company’s plans that had restricted stock issued as of June 30, 2007, and changes during the six months ended June 30, 2007, are presented below:

 

Successor

  

Number

of

Shares

   

Weighted-

Average

Grant-

Date Fair

Value

Outstanding at December 31, 2006

   3,030,150     $ 30.00

Granted

   252,300     $ 33.27

Vested

   (275,446 )   $ 30.48

Forfeited

   (79,900 )   $ 30.24
        

Outstanding at June 30, 2007

   2,927,104     $ 30.24
        


Table of Contents

-18-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

10.    STOCK COMPENSATION (continued)

 

During the six months ended June 30, 2007, the Company recognized expense of $17 million related to the Company’s restricted stock, of which $15 million was recorded under the caption employee emergence equity program on the Consolidated Statements of Earnings. The Company previously recorded $3 million in restricted stock expense related to its fiscal 2006 restructuring activities. As of June 30, 2007, there was $57 million of total unrecognized compensation cost related to restricted stock. That cost is expected to be recognized over a weighted average period of 2.38 years. The total fair value of shares vested during the six months ended June 30, 2007, was approximately $7 million.

Performance Stock Awards and Performance Stock Units

The Company grants performance stock awards and performance stock units as a part of its LTIP. In the second quarter of 2007, the Company granted performance stock, of which fifty percent will be settled in stock and fifty percent will be settled in cash. The amount of the performance stock is contingent on meeting various company-wide performance goals, including cumulative earnings per share. Compensation expense for performance stock settled in stock is measured based on the market price of the stock on the date of grant and is recognized on a straight-line basis over the vesting period. Compensation expense for performance stock settled in cash is measured based on the market price of the stock at the end of each quarter and is recognized on a straight-line basis over the vesting period. The initial valuation of all performance stock granted assumes that performance goals will be achieved, this assumption is monitored each quarter and if it becomes probable that such goals will not be achieved or will be exceeded, compensation cost recognized will be adjusted and previous surplus compensation cost recognized will be reversed or additional cost will be recognized. Stock restrictions are subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2009.

A summary of the status of the Company’s plans that had performance stock issued as of June 30, 2007, and changes during the six months ended June 30, 2007, are presented below. The weighted-average grant date fair value for performance stock issued in 2007 that will be settled in stock is $34.06.

 

Successor

  

Number

of

Shares

 

Outstanding at December 31, 2006

   —    

Granted

   412,226  

Vested

   (58,908 )

Forfeited

   —    
      

Outstanding at June 30, 2007

   353,318  
      

During the six months ended June 30, 2007, the Company recognized expense of $4 million related to the Company’s performance stock, of which $2 million relates to the retirement of certain employees. As of June 30, 2007, there was $9 million of total unrecognized compensation cost related to performance stock. That cost is expected to be recognized over a weighted average period of 2.5 years. The total fair value of shares vested during the six months ended June 30, 2007, was approximately $2 million.


Table of Contents

-19-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

11.    CONTINGENT LIABILITIES AND OTHER MATTERS

Bankruptcy Related-Matters

In accordance with the terms of the Plan, the Company established a Disputed Distribution Reserve (as defined in the Plan) funded in the initial amount of approximately $85 million, which is reflected as restricted cash on the Consolidated Balance Sheet as of December 31, 2006, for the potential payment of certain non-tax claims against the Debtors that were disputed as of the Effective Date. In the second quarter of 2007, approximately $20 million of the claims were settled. The remaining reserve, in the amount of $65 million at June 30, 2007, is reflected as restricted cash on the Consolidated Balance Sheet as of June 30, 2007. See Note 16 to the Consolidated Financial Statements for a discussion of certain other bankruptcy-related matters.

Tax Matters

Owens Corning’s federal income tax returns typically are audited by the IRS in multi-year audit cycles. The audit for the years 1992-1995 was completed in late 2000. Due to OCD’s Chapter 11 filing in 2000, the IRS also accelerated and completed the audit for the years 1996-1999 by March of 2001. As a result of these audits and unresolved issues from prior audit cycles, the IRS asserted claims for unpaid income taxes plus interest thereon. As a result of settlement negotiations, in the fourth quarter of 2004 the Company and the IRS reached an agreement in principle to settle such claims in return for total settlement payments by the Company of approximately $69 million, plus interest. The settlement was approved by the USBC by Order dated November 15, 2004 and by the Congressional Joint Committee on Taxation on May 17, 2005. The Company estimated the interest applicable to the settlement to be approximately $30 million. However, the IRS computed such interest to be approximately $71 million. In the second quarter of 2007, the Company and the IRS reconciled the differences between the two interest computations. The IRS substantively accepted the position of the Company and, accordingly, reduced the interest by approximately $38 million, which was recorded as a reduction to goodwill and long-term debt on the Consolidated Balance Sheets. The Company subsequently paid off the IRS Note in the second quarter of 2007.

Securities and Certain Other Litigation

On or about September 2, 2003, certain of OCD’s directors and officers were named as defendants in a lawsuit captioned Kensington International Limited, et al. v. Glen Hiner, et al. in the Supreme Court of the State of New York, County of New York. OCD is not named in the lawsuit. The suit, which was brought by Kensington International Limited and Springfield Associates, LLC, two assignees of lenders under OCD’s pre-petition credit facility, alleged causes of action (1) against all defendants for breach of fiduciary duty and (2) against certain defendants for fraud in connection with certain loans made under the pre-petition credit facility. The complaint sought an unspecified amount in damages. On February 7, 2005, all defendants filed a joint motion to dismiss. A hearing on the motion to dismiss was held on May 2, 2005 and the motion to dismiss was granted by the USBC on August 22, 2006. On October 20, 2006, the New York court entered an order and judgment dismissing the New York complaint in its entirety and on November 22, 2006, the plaintiffs filed an appeal of the order and judgment with the First Department of the New York Supreme Court, Appellate Division. On May 31, 2007, the Supreme Court, Appellate Division, dismissed Plaintiffs appeal. The Court ruled that as a result of distributions made under OCD’s plan of reorganization, the plaintiffs no longer have a claim for damages and accordingly, their claim is moot. On July 11, 2007, Plaintiffs filed a Notice of Motion For Permission To Appeal to the Court of Appeals of the State of New York. The named officer and director defendants have each filed contingent indemnification claims with respect to such litigation against OCD.

On September 1, 2006, various members of OCD’s Investment Review Committee were named as defendants in a lawsuit captioned Brown v. Owens Corning Investment Review Committee, et al., in the United States District


Table of Contents

-20-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

11.    CONTINGENT LIABILITIES AND OTHER MATTERS (continued)

 

Court for the Northern District of Ohio (Western Division). OCD is not named in the lawsuit but such individuals would have a contingent indemnification claim against OCD. The suit, brought by former employees of OCD, was brought under ERISA alleging that the defendants breached their fiduciary duties to certain pension benefit plans and to class members in connection with the investments in an OCD company common stock fund. A motion to dismiss was filed on behalf of the defendants on March 5, 2007.

Environmental Liabilities

We have 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. We have also been deemed a PRP under similar state or local laws and in other instances other PRPs have brought suits against us as a PRP for contribution under such federal, state, or local laws. At June 30, 2007, we had environmental remediation liabilities as a PRP at 41 sites. Our environmental liabilities at 23 of these sites will be resolved pursuant to the terms of the Plan and will be paid out of the Non-Tax Bankruptcy Reserve. At the other 18 sites, we have a continuing legal obligation to either complete remedial actions or contribute to the completion of remedial actions as part of a group of PRPs. For these sites we estimate a reserve in accordance with accounting principles generally accepted in the United States to reflect environmental liabilities that have been asserted or are probable of assertion, in which liabilities are probable and reasonably estimable. At June 30, 2007, our reserve for such liabilities was $7 million, of which $2 million is recorded in the Non-Tax Bankruptcy Reserve as discussed in Note 16. We will continue to review our environmental reserve and make such adjustments as appropriate.

12.    EARNINGS PER SHARE

The following table reconciles the weighted average number of shares used in the basic earnings per share calculation to the weighted average number of shares used to compute diluted earnings per share (in millions, except per share amounts):

 

      Successor    Predecessor    Successor    Predecessor
      Three Months Ended
June 30,
   Six Months Ended
June 30,
      2007    2006    2007    2006

Net earnings

   $ 29    $ 251    $ 30    $ 314
                           

Weighted-average number of shares outstanding used for basic earnings per share

     128.1      55.3      128.1      55.3

Non-vested restricted shares

     2.7      —        2.7      —  

Stock options

     0.3      —        0.3      —  

Shares from assumed conversion of preferred securities

     —        4.6      —        4.6
                           

Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings per share

     131.1      59.9      131.1      59.9
                           

Net earnings per common share:

           

Basic net earnings per share

   $ 0.23    $ 4.54    $ 0.23    $ 5.67

Diluted net earnings per share

   $ 0.22    $ 4.19    $ 0.23    $ 5.24


Table of Contents

-21-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

13.    COMPREHENSIVE EARNINGS

The following table presents comprehensive earnings for the periods indicated (in millions):

 

      Successor     Predecessor     Successor    Predecessor  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007     2006     2007    2006  

Net earnings

   $ 29     $ 251     $ 30    $ 314  

Currency translation adjustment

     21       26       28      30  

Pension and other postretirement adjustment

     1       (4 )     1      (4 )

Deferred income (loss) on hedging

     (3 )     (5 )     4      (21 )
                               

Comprehensive earnings

   $ 48     $ 268     $ 63    $ 319  
                               

14.    INCOME TAXES

The Successor’s income tax expense for the six months ended June 30, 2007, was $16 million, which represents a 34% effective tax rate. The difference between the 34% effective rate and the Federal statutory tax rate of 35% was primarily due to the effect of tax savings resulting from various initiatives implemented in 2006 and 2007.

On an on-going basis, the Company records valuation allowances related to realization of certain tax assets. In light of the Predecessor’s financial position and Chapter 11 proceedings, the Predecessor decreased its valuation allowance for tax assets related to asbestos-related liabilities by $40 million during the first quarter of 2006, resulting in a $40 million tax benefit in the quarter and an effective tax rate of negative 20%. In the second quarter of 2006, the Predecessor further decreased its valuation allowance by an additional $225 million for tax assets related to asbestos-related liabilities, resulting in a $225 million tax benefit in the quarter. As a result of these items, the Predecessor had an effective tax rate of negative 136% for the first six months of 2006.

On May 18, 2006, new Texas state tax legislation, which substantially changed the state’s tax system, was enacted. The legislation impacted the Predecessor’s ability to utilize its deferred tax assets, including previously recorded state of Texas net operating loss carry forwards. As a result of this legislation, the Predecessor incurred $10 million of additional tax expense during the second quarter of 2006 to record its deferred tax assets and net operating loss carry forwards at realizable value.

15.    ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within that fiscal year. The Company is in the process of evaluating the impact of adopting this statement.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FAS 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, including interim periods within that fiscal year. The Company is in the process of evaluating the impact of adopting this statement.


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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

16.    EMERGENCE FROM CHAPTER 11 PROCEEDINGS

Background

On October 5, 2000 (the “Petition Date”), OCD and the 17 United States subsidiaries listed below (collectively with OCD, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the USBC:

 

CDC Corporation

   Integrex Testing Systems LLC

Engineered Yarns America, Inc.

   HOMExperts LLC

Falcon Foam Corporation

   Jefferson Holdings, Inc.

Integrex

   Owens-Corning Fiberglas Technology, Inc.

Fibreboard Corporation

   Owens-Corning HT, Inc.

Exterior Systems, Inc.

   Owens-Corning Overseas Holdings, Inc.

Integrex Ventures LLC

   Owens Corning Remodeling Systems, LLC

Integrex Professional Services LLC

   Soltech, Inc.

Integrex Supply Chain Solutions LLC

  

Until October 31, 2006, the date on which the Debtors emerged from bankruptcy, the Debtors operated their businesses as debtors-in-possession in accordance with the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the “Chapter 11 Cases”) were jointly administered under Case No. 00-3837 (JKF). The Debtors filed for relief under Chapter 11 of the Bankruptcy Code to address the growing demands on cash flow resulting from the multi-billion dollars of asbestos personal injury claims that had been asserted against OCD and Fibreboard Corporation.

Under the terms of the Plan and related Confirmation Order, asbestos personal injury claims against each of OCD and Fibreboard will be administered and distributions on account of such claims will be made, exclusively from the 524(g) Trust that has been established and funded pursuant to the Plan. In addition, all asbestos property damage claims against OCD or Fibreboard either (i) have been resolved, (ii) will be resolved pursuant to the Plan, along with certain other unsecured claims for an aggregate amount within the Company’s Non-Tax Bankruptcy Reserve (defined below) at June 30, 2007, or (iii) are barred pursuant to the Plan and Confirmation Order. Accordingly, other than the limited number and value of property damage claims being resolved pursuant to clause (ii) above, the Company has no further asbestos liabilities.

Pursuant to the terms of the Plan, the Company is obligated to make certain additional payments to certain creditors, including certain payments to holders of administrative expense priority claims and professional advisors in the Chapter 11 Cases. The Company had reserved approximately $79 million as of June 30, 2007, to pay remaining claims in the Bankruptcy of which approximately $76 million relate to non-tax claims (the “Non-Tax Bankruptcy Reserve”). Pursuant to the Plan, the Company has established a Disputed Distribution Reserve, funded in the amount of approximately $65 million as of June 30, 2007, which is reflected as restricted cash in the Consolidated Balance Sheet, for the potential payment of certain non-tax claims against the Debtors that were disputed as of the Effective Date.


Table of Contents

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

16.    EMERGENCE FROM CHAPTER 11 PROCEEDINGS (continued)

 

The amount for Chapter 11 related reorganization items in the Consolidated Statements of Earnings consist of the following (in millions):

 

     Successor    Predecessor     Successor    Predecessor  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007    2006     2007    2006  

Professional fees

   $ —      $ 30     $ 3    $ 50  

Payroll and compensation

     —        4       —        8  

Investment income

     —        (17 )     —        (31 )
                              

Total

   $ —      $ 17     $ 3    $ 27  
                              

17.    SUBSEQUENT EVENTS

In July of 2007, the Company reached an agreement to sell the Siding Solutions business to the Saint-Gobain Group for $371 million. The sale includes our Norandex/Reynolds distribution business with 153 U.S. distribution centers in 38 states, and three vinyl siding manufacturing facilities located in Claremont, N.C., Joplin, Mo., and London, Ontario.

In July of 2007, the Company announced that it had converted its previously announced joint venture agreement with Saint-Gobain into an acquisition, under which we will acquire Saint-Gobain’s Reinforcement and Composites business for $640 million. The acquired business is comprised of 20 plants, which includes 12 glass fiber reinforcements plants, 6 fabrics plants and 2 plants that produce both reinforcements and fabrics. Saint-Gobain will retain its facility in Wichita Falls, Texas.

The Company has announced that it plans to divest its facilities in Battice, Belgium; Birkeland, Norway; and Huntingdon, Pennsylvania. These sales are intended to address regulatory concerns associated with the acquisition of Saint Gobain’s Reinforcement and Composites business.

The acquisition advances our position as a global leader in glass reinforcements and composites. The combined business will serve customers with improved technology, an expanded product range and a strengthened presence in both developed and emerging markets.

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The following condensed consolidating financial statements present the financial information required with respect to those entities which guarantee certain of the Company’s debt. The condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share of the subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investment in subsidiaries and intercompany balances and transactions.

Guarantor and Nonguarantor Financial Statements

As described in Note 8, Owens Corning issued $1.2 billion aggregate principal amount of Senior Notes. The Senior Notes are guaranteed, fully, unconditionally and joint and severally, by each of Owens Corning’s current


Table of Contents

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

and future 100% owned material domestic subsidiaries that are a borrower or a guarantor under Owens Corning’s Credit Facilities, which permits changes to the named guarantors in certain situations (collectively, the “Guarantor Subsidiaries”). The remaining subsidiaries have not guaranteed the Senior Notes (collectively, the “Nonguarantor Subsidiaries”). As disclosed in Note 1, Owens Corning became the holding company and ultimate parent company of OCD and the other Owens Corning companies on October 31, 2006, as a part of the restructuring that was conducted in connection with OCD’s emergence from bankruptcy.

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

FOR THE SUCCESSOR THREE MONTHS ENDED JUNE 30, 2007

(in millions)

 

     Parent    

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

    Eliminations     Consolidated  

NET SALES

   $ —       $ 1,199     $ 401     $ (66 )   $ 1,534  

COST OF SALES

     —         1,040       314       (66 )     1,288  
                                        

Gross Margin

     —         159       87       —         246  
                                        

OPERATING EXPENSES

          

Marketing and administrative expenses

     33       88       25       —         146  

Science and technology expenses

     —         15       1       —         16  

Chapter 11 related reorganization items

     —         (1 )     1       —         —    

Employee emergence equity program

     3       7       2       —         12  

Other

     (53 )     32       15       —         (6 )
                                        

Total operating expenses

     (17 )     141       44       —         168  
                                        

EARNINGS BEFORE INTEREST AND TAXES

     17       18       43       —         78  

Interest (income) expense, net

     32       (2 )     1       —         31  
                                        

EARNINGS (LOSS) BEFORE TAXES

     (15 )     20       42       —         47  

Income tax expense

     1       3       12       —         16  
                                        

EARNINGS (LOSS) BEFORE MINORITY INTEREST AND EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES

     (16 )     17       30       —         31  
                                        

Equity in net earnings (loss) of subsidiaries

     45       29       —         (74 )     —    

Minority interest and equity in net earnings (loss) of affiliates

     —         (1 )     (1 )     —         (2 )
                                        

NET EARNINGS (LOSS)

   $ 29     $ 45     $ 29     $ (74 )   $ 29  
                                        


Table of Contents

-25-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

FOR THE PREDECESSOR THREE MONTHS ENDED JUNE 30, 2006

(in millions)

 

     Parent   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

    Eliminations     Consolidated  

NET SALES

   $ —      $ 1,440     $ 370     $ (88 )   $ 1,722  

COST OF SALES

     —        1,204       310       (88 )     1,426  
                                       

Gross Margin

     —        236       60       —         296  
                                       

OPERATING EXPENSES

           

Marketing and administrative expenses

     —        117       23       —         140  

Science and technology expenses

     —        13       2       —         15  

Chapter 11 related reorganization items

     —        17       —         —         17  

Other

     —        (53 )     9       —         (44 )
                                       

Total operating expenses

     —        94       34       —         128  
                                       

EARNINGS BEFORE INTEREST AND TAXES

     —        142       26       —         168  

Interest expense, net

     —        85       1       —         86  
                                       

EARNINGS BEFORE TAXES

     —        57       25       —         82  

Income tax expense (benefit)

     —        (180 )     11       —         (169 )
                                       

EARNINGS BEFORE MINORITY INTEREST AND EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES

     —        237       14       —         251  
                                       

Equity in net earnings (loss) of subsidiaries

     —        12       —         (12 )     —    

Minority interest and equity in net earnings (loss) of affiliates

     —        2       (2 )     —         —    
                                       

NET EARNINGS (LOSS)

   $ —      $ 251     $ 12     $ (12 )   $ 251  
                                       


Table of Contents

-26-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

FOR THE SUCCESSOR SIX MONTHS ENDED JUNE 30, 2007

(in millions)

 

     Parent    

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

    Eliminations     Consolidated  

NET SALES

   $ —       $ 2,227     $ 763     $ (132 )   $ 2,858  

COST OF SALES

     —         1,948       603       (132 )     2,419  
                                        

Gross Margin

     —         279       160       —         439  

OPERATING EXPENSES

          

Marketing and administrative expenses

     69       173       40       —         282  

Science and technology expenses

     —         27       3       —         30  

Restructuring credits

     —         (2 )     —         —         (2 )

Chapter 11 related reorganization items

     —         2       1       —         3  

Employee emergence equity program

     3       13       4       —         20  

Other

     (91 )     52       34       —         (5 )
                                        

Total operating expenses

     (19 )     265       82       —         328  
                                        

EARNINGS BEFORE INTEREST AND TAXES

     19       14       78       —         111  

Interest (income) expense, net

     64       (3 )     2       —         63  
                                        

EARNINGS (LOSS) BEFORE TAXES

     (45 )     17       76       —         48  

Income tax expense (benefit)

     (7 )     2       21       —         16  
                                        

EARNINGS (LOSS) BEFORE MINORITY INTEREST AND EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES

     (38 )     15       55       —         32  
                                        

Equity in net earnings (loss) of subsidiaries

     68       54       —         (122 )     —    

Minority interest and equity in net earnings (loss) of affiliates

     —         (1 )     (1 )     —         (2 )
                                        

NET EARNINGS (LOSS)

   $ 30     $ 68     $ 54     $ (122 )   $ 30  
                                        


Table of Contents

-27-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

FOR THE PREDECESSOR SIX MONTHS ENDED JUNE 30, 2006

(in millions)

 

     Parent   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

   Eliminations     Consolidated  

NET SALES

   $ —      $ 2,812     $ 694    $ (183 )   $ 3,323  

COST OF SALES

     —        2,374       567      (183 )     2,758  
                                      

Gross Margin

     —        438       127      —         565  

OPERATING EXPENSES

            

Marketing and administrative expenses

     —        226       45      —         271  

Science and technology expenses

        27       4      —         31  

Chapter 11 related reorganization items

     —        27       —        —         27  

Credit for asbestos litigation recoveries

     —        (3 )     —        —         (3 )

Other

     —        (76 )     32      —         (44 )
                                      

Total operating expenses

     —        201       81      —         282  

EARNINGS BEFORE INTEREST AND TAXES

     —        237       46      —         283  

Interest expense, net

     —        149       2      —         151  
                                      

EARNINGS BEFORE TAXES

     —        88       44      —         132  

Income tax expense (benefit)

     —        (210 )     31      —         (179 )
                                      

EARNINGS BEFORE MINORITY INTEREST AND EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES

     —        298       13      —         311  
                                      

Equity in net earnings (loss) of subsidiaries

     —        14       —        (14 )     —    

Minority interest and equity in net earnings of affiliates

     —        2       1      —         3  
                                      

NET EARNINGS (LOSS)

   $ —      $ 314     $ 14    $ (14 )   $ 314  
                                      


Table of Contents

-28-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF THE SUCCESSOR JUNE 30, 2007

(in millions)

 

    Parent    

Guarantor

Subsidiaries

 

Non-Guarantor

Subsidiaries

    Eliminations     Consolidated  

ASSETS

         

CURRENT

         

Cash and cash equivalents

  $ —       $ 26   $ 109     $ —       $ 135  

Receivables, net

    —         513     280       —         793  

Due from affiliates

    95       266     236       (597 )     —    

Inventories

    —         650     183       —         833  

Restricted cash – disputed claims reserve

    —         65     —         —         65  

Other current assets

    —         28     42       —         70  
                                     

Total current

    95       1,548     850       (597 )     1,896  
                                     

OTHER

         

Deferred income taxes

    10       556     (18 )     —         548  

Pension-related assets

    —         —       9       —         9  

Goodwill

    —         1,264     31       —         1,295  

Intangible assets

    —         1,170     107       —         1,277  

Investment in affiliates

    —         34     46       —         80  

Investment in subsidiaries

    5,261       976     —         (6,237 )     —    

Due from affiliates

    —         28     —         (28 )     —    

Other noncurrent assets

    24       54     60       —         138  
                                     

Total other

    5,295       4,082     235       (6,265 )     3,347  
                                     

NET PLANT AND EQUIPMENT

    475       1,325     719       —         2,519  
                                     

TOTAL ASSETS

  $ 5,865     $ 6,955   $ 1,804     $ (6,862 )   $ 7,762  
                                     

LIABILITIES AND STOCKHOLDERS’ EQUITY

         

CURRENT

         

Accounts payable and accrued liabilities

  $ (48 )   $ 699   $ 335     $ —       $ 986  

Due from affiliates

    69       303     225       (597 )     —    

Accrued interest

    16       5     1       —         22  

Short-term debt

    —         —       12       —         12  

Long-term debt – current portion

    —         2     13       —         15  
                                     

Total current

    37       1,009     586       (597 )     1,035  

LONG-TERM DEBT

    2,053       20     20       —         2,093  

DUE FROM AFFILIATES

    —         —       28       (28 )     —    
                                     

OTHER

         

Pension plan liability

    —         151     113       —         264  

Other employee benefits liability

    —         299     27       —         326  

Other

    —         215     16       —         231  
                                     

Total other

    —         665     156       —         821  
                                     

MINORITY INTEREST

    —         —       38         38  

STOCKHOLDERS’ EQUITY

         

Successor preferred stock

         

Successor common stock

    1       —       —         —         1  

Additional paid in capital

    3,759       5,249     905       (6,154 )     3,759  

Retained earnings (accumulated deficit)

    (35 )     12     71       (83 )     (35 )

Accumulated other comprehensive earnings

    50       —       —         —         50  
                                     

Total stockholders’ equity

    3,775       5,261     976       (6,237 )     3,775  
                                     

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 5,865     $ 6,955   $ 1,804     $ (6,862 )   $ 7,762  
                                     


Table of Contents

-29-

 

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF THE SUCCESSOR December 31, 2006

(in millions)

 

    Parent    

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

    Eliminations     Consolidated  

ASSETS

         

CURRENT

         

Cash and cash equivalents

  $ —       $ 906     $ 183     $ —       $ 1,089  

Receivables, net

    —         328       245       —         573  

Due from affiliates

    6       192       155       (353 )     —    

Inventories

    —         579       170       —         749  

Restricted cash – disputed claims reserve

    —         85       —         —         85  

Other current assets

    —         27       29       —         56  
                                       

Total current

    6       2,117       782       (353 )     2,552  
                                       

OTHER

         

Deferred income taxes

    —         555       (6 )     —         549  

Pension-related assets

    —         —         8       —         8  

Goodwill

    —         1,307       6       —         1,313  

Intangible assets

    —         1,191       107       —         1,298  

Investment in affiliates

    —         48       49       —         97  

Investment in subsidiaries

    4,948       884       —         (5,832 )     —    

Due from affiliates

    —         28       —         (28 )     —    

Other noncurrent assets

    18       55       59       —         132  
                                       

Total other

    4,966       4,068       223       (5,860 )     3,397  
                                       

NET PLANT AND EQUIPMENT

    —         1,816       705       —         2,521  
                                       

TOTAL ASSETS

  $ 4,972     $ 8,001     $ 1,710     $ (6,213 )     8,470  
                                       

LIABILITIES AND STOCKHOLDERS’ EQUITY

         

CURRENT

         

Accounts payable and accrued liabilities

  $ (6 )   $ 759     $ 328     $ —       $ 1,081  

Due from affiliates

    —         137       216       (353 )     —    

Accrued interest

    15       23       1       —         39  

Short-term debt

    —         1,390       11       —         1,401  

Long-term debt – current portion

    15       19       5       —         39  
                                       

Total current

    24       2,328       561       (353 )     2,560  
                                       

LONG-TERM DEBT

    1,262       1       33       —         1,296  

DUE FROM AFFILIATES

    —         —         28       (28 )     —    

OTHER

         

Pension plan liability

    —         192       120       —         312  

Other employee benefits liability

    —         300       25       —         325  

Other

    —         232       15       —         247  
                                       

Total other

    —         724       160       —         884  
                                       

MINORITY INTEREST

    —         —         44       —         44  

STOCKHOLDERS’ EQUITY

         

Successor preferred stock

    —         —         —         —         —    

Successor common stock

    1       —         —         —         1  

Additional paid in capital

    3,733       5,004       867       (5,871 )     3,733  

Retained earnings (accumulated deficit)

    (65 )     (56 )     17       39       (65 )

Accumulated other comprehensive earnings

    17       —         —         —         17  
                                       

Total stockholders’ equity

    3,686       4,948       884       (5,832 )   $ 3,686  
                                       

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 4,972     $ 8,001     $ 1,710     $ (6,213 )   $ 8,470  
                                       


Table of Contents

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SUCCESSOR SIX MONTHS ENDED JUNE 30, 2007

(in millions)

 

     Parent    

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

    Eliminations    Consolidated  

NET CASH FLOW FROM OPERATING ACTIVITIES

   $ —       $ (226 )   $ (16 )   $ —      $ (242 )
                                       

NET CASH FLOW FROM INVESTING ACTIVITIES

     —             

Additions to plant and equipment

     —         (84 )     (27 )     —        (111 )

Investment in affiliates and subsidiaries, net of cash acquired

     —         (1 )     (28 )     —        (29 )

Proceeds from the sale of assets or affiliate

     —         12       —         —        12  
                                       

Net cash flow from investing activities

     —         (73 )     (55 )     —        (128 )
                                       

NET CASH FLOW FROM FINANCING ACTIVITIES

           

Payments on long-term debt

     —         (55 )     (11 )     —        (66 )

Proceeds from long-term debt

     600       —         9       —        609  

Payments of note payable to 524(g) Trust

     —         (1,390 )     —         —        (1,390 )

Payments on revolving credit facility

     (118 )         —        (118 )

Proceeds from revolving credit facility

     383       —         —         —        383  

Net increase (decrease) in short-term debt

     —         (1 )     (3 )     —        (4 )

Parent loans and advances

     (865 )     865       —         —        —    
                                       

Net cash flow from financing activities

     —         (581 )     (5 )     —        (586 )
                                       

Effect of exchange rate changes on cash

     —         —         2       —        2  
                                       

NET DECREASE IN CASH AND CASH EQUIVALENTS

     —         (880 )     (74 )     —        (954 )

Cash and cash equivalents at beginning of period

     —         906       183       —        1,089  
                                       

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ —       $ 26     $ 109     $ —      $ 135  
                                       


Table of Contents

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PREDECESSOR SIX MONTHS ENDED JUNE 30, 2006

(in millions)

 

     Parent   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

    Eliminations    Consolidated  

NET CASH FLOW FROM OPERATING ACTIVITIES

   $ —      $ 50     $ 29     $ —      $ 79  
                                      

NET CASH FLOW FROM INVESTING ACTIVITIES

     —            

Additions to plant and equipment

     —        (136 )     (53 )     —        (189 )

Investment in affiliates and subsidiaries, net of cash acquired

     —        (3 )     (10 )     —        (13 )

Proceeds from the sale of assets or affiliate

     —        44       —         —        44  
                                      

Net cash flow from investing activities

     —        (95 )     (63 )     —        (158 )
                                      

NET CASH FLOW FROM FINANCING ACTIVITIES

     —            —     

Payments on long-term debt

     —        —         (4 )     —        (4 )

Proceeds from long-term debt

     —        —         10       —        10  

Payments of note payable to 524(g) Trust

     —        —         —         —        —    

Proceeds from revolving credit facility

     —        —         —         —        —    

Net increase (decrease) in short-term debt

     —        —         2       —        2  

Parent loans and advances

     —        —         —         —        —    
                                      

Net cash flow from financing activities

     —        —         8       —        8  
                                      

Effect of exchange rate changes on cash

     —        —         5       —        5  
                                      

NET DECREASE IN CASH AND CASH EQUIVALENTS

     —        (45 )     (21 )     —        (66 )

Cash and cash equivalents at beginning of period

     —        1,377       182       —        1,559  
                                      

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ —      $ 1,332     $ 161     $ —      $ 1,493  
                                      


Table of Contents

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(All per share information discussed below is on a diluted basis. References in this Report to the “Consolidated Financial Statements” refer to the Consolidated Financial Statements included in this Report.)

Unless the context requires otherwise, the terms “Owens Corning”, “Company”, “we” and “our” in this report refer to Owens Corning and its subsidiaries. As a result of the application of fresh-start accounting on October 31, 2006, and in accordance with SoP 90-7, the financial results of the Company for the periods following October 31, 2006, are referred to as “Successor”, and the financial results of OCD and its subsidiaries for the periods through October 31, 2006, are referred to as “Predecessor”.

OVERVIEW

General Business Overview

Headquartered in Toledo, Ohio, Owens Corning is a leading global producer of residential and commercial building materials and glass fiber reinforcements and other materials for composite systems. We operate within two general product categories: building materials, which includes our Insulating Systems, Roofing and Asphalt, and Other Building Materials and Services reportable segments, and composites systems, which includes our Composite Solutions reportable segment. Through these lines of business, we manufacture and sell products primarily in the United States, Canada, Europe, Asia and Latin America. We maintain leading market positions in all of our major product categories.

The weakening of new residential construction in the United States that began in mid-2006 continued through the first half of 2007. As a result, demand for our building materials products was weaker during the second quarter and the first half of 2007 compared to the corresponding periods in 2006. This impact has been most noticeable in our Insulating Systems segment. The easing of demand for insulation products has also put pressure on prices. To help offset the softening in housing-start related demand, the Company has developed product offerings and marketing programs that are intended to expand the use of Owens Corning products in residential, thermal and acoustical, and commercial and industrial insulation markets. In addition, we have selectively curtailed production of some insulation products and reduced capital spending on expansion projects.

Demand for Owens Corning’s Roofing and Asphalt products is driven primarily by the repair of residential roofs, with lesser demand coming from housing starts. In 2007 we have experienced a more normal level of demand associated with storm activity compared to the first half of 2006, in which we experienced significant demand in the Southeastern United States from the hurricanes of 2005. We are also experiencing pressure on prices from competitors vying to maintain high capacity utilization in certain regions of the United States. To a lesser extent, this segment is also impacted by the slowdown in housing construction.

In our Other Building Materials and Services segment, our financial performance improved, led by our Cultured Stone business. Cultured Stone produced strong manufacturing performance which more than offset a decline in sales to the new residential construction market during the first half of 2007. Our Siding Solutions business was also impacted by the slowdown in new residential construction in the United States. Partially offsetting the effects of this slowdown was a decline in the cost of raw materials used in the manufacture of vinyl siding.

Our Composites Solutions segment increased sales volumes, particularly in our specialty mat and glass fiber wallboard covering businesses in the second quarter of 2007 compared to 2006. We were also able to generate substantial productivity savings during the second quarter and the first half of 2007. In addition, we have experienced lower energy inflation thus far in 2007 than in 2006. We believe the Composite Solutions segment will benefit from robust global demand for glass fiber materials throughout 2007.

During the second quarter of 2007 the Company increased its ownership in Owens Corning India Limited from 60% to 78.5%. Owens Corning India Limited is a growing, profitable business with a low cost production platform that supplies Composites Solutions’ customers in India and exports to other markets.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Global demand for energy-related commodities and services caused us to experience significant cost inflation during prior years. These pressures abated somewhat in the first half of 2007. However, for many of our products, we were not able to recover the inflation that we did experience through price increases. We anticipate that even with a lower level of inflation during the remainder of this year, costs may not be recovered completely through price increases. Therefore, we are focusing on generating additional productivity gains in order to avoid further margin compression. We also are committed to continuing to improve productivity in manufacturing, logistics, marketing and administration.

We will continue to place significant emphasis on proactively managing our capacity, introducing new product offerings and eliminating inefficiencies in our business and manufacturing processes to offset the effects of softening in demand and higher costs.

Based on current estimates of the National Association of Home Builders, the relative slow down in United States housing starts is expected to continue throughout 2007, which will continue to negatively impact demand for the Company’s building materials products.

While the Company has certain businesses and products, including those within its Composite Solutions segment, that are not as sensitive to new residential construction in North America, the revenue and earnings from these businesses have not mitigated the decline in our results due to the downturn in North American residential housing construction.

RESULTS OF OPERATIONS

Consolidated Results

 

     Successor     Predecessor     Successor     Predecessor  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007     2006     2007     2006  
     (in millions)  

Net sales

   $ 1,534     $ 1,722     $ 2,858     $ 3,323  

Gross margin

   $ 246     $ 296     $ 439     $ 565  

As a percent of sales

     16.0 %     17.2 %     15.4 %     17.0 %

Marketing and administrative

   $ 146     $ 140     $ 282     $ 271  

As a percent of sales

     9.5 %     8.1 %     9.9 %     8.2 %

Science and technology

   $ 16     $ 15     $ 30     $ 31  

As a percent of sales

     1.0 %     0.9 %     1.0 %     0.9 %

Employee emergence equity program

   $ 12     $ —       $ 20     $ —    

Earnings before interest and taxes

   $ 78     $ 168     $ 111     $ 283  

Interest expense, net

   $ 31     $ 86     $ 63     $ 151  

Income tax expense (benefit)

   $ 16     $ (169 )   $ 16     $ (179 )

Net earnings

   $ 29     $ 251     $ 30     $ 314  

Items Affecting Comparability

Because of the nature of certain items related to our prior Chapter 11 proceedings, restructuring activities, business impairments and the employee emergence equity program, management does not find reported earnings before interest and taxes to be the most useful and transparent financial measure of the Company’s year-over-year operational performance. These items are related primarily to the Chapter 11 process and activities


Table of Contents

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

necessitated by our emergence from bankruptcy, including the employee emergence equity program, restructuring, and dispositions that are not the result of current operations of the Company. They also include costs incurred in connection with the evaluation of strategic alternatives, and costs incurred in connection with the proposed OCV reinforcements transaction.

Our management measures operating performance by excluding the items referenced in the preceding paragraph for various purposes, including reporting results of operations to the Board of Directors of the Company, and for analysis of performance and related employee compensation measures. Although management believes that these adjustments to earnings before interest and taxes provide a more meaningful representation of the Company’s operational performance, our operating performance excluding these items should not be considered in isolation or as a substitute for earnings before interest and taxes prepared in accordance with accounting principles generally accepted in the United States.

The significant items impacting the year-over-year comparability of reported earnings before interest and taxes are noted in the table below (in millions):

 

     Successor     Predecessor     Successor     Predecessor  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007     2006     2007     2006  

Chapter 11 related reorganization items

   $ —       $ 17     $ 3     $ 27  

Asbestos litigation recoveries

     —         —         —         (3 )

Restructuring credits and other credits

     —         (27 )(a)     (2 )     (35 )(a)

OCV Reinforcements transaction costs

     7       —         18       —    

(Gain) loss resulting from exiting HOMExperts service line

     (1 )     —         7       —    

Losses related to strategic reviews

     12       —         12       —    

Employee emergence equity program

     12       —         20       —    
                                

Total items impacting comparability

   $ 30     $ (10 )   $ 58     $ (11 )
                                

 


(a) Includes $27 million and $35 million of gains on the sale of metal used in certain production tooling in the three months ended June 30, 2006 and the six months ended June 30, 2006, respectively.

Earnings before interest and taxes in the second quarter of 2007 decreased approximately $90 million compared to the second quarter of 2006. Excluding the items impacting comparability reflected in the table above, earnings before interest and taxes were $108 million for the second quarter of 2007 compared to $158 million in 2006. The decrease was primarily due to lower sales, as the decline in the North American new residential construction market impacted demand for building materials products, combined with higher material, labor and energy costs.

For the first six months of 2007, earnings before interest and taxes declined approximately $172 million compared to the first six months of 2006. Excluding the items impacting comparability, earnings before interest and taxes were $169 million in 2007 compared to $272 million in 2006. This decline was primarily the result of lower sales in our Insulating Systems segment, driven by the weakening in the North American new housing construction market, and a decline in sales in our Roofing and Asphalt segment due to the absence of storm driven demand compared to the unusually high level of 2006. Increased costs for raw materials and labor also negatively impacted results for the first six months of 2007.


Table of Contents

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Our emergence from bankruptcy also affected earnings before interest and taxes in the second quarter and the first half of 2007 due to the impact of fresh-start accounting. The effect of fresh-start accounting increased earnings before interest and taxes by approximately $3 million and $4 million for the second quarter and for the first half of 2007, respectively. The increase was primarily due to reduced pension expense, partially offset by increased depreciation and amortization, and other post-employment benefits expense.

NET SALES

New housing construction in the United States was significantly lower during the second quarter of 2007 than in 2006, resulting in reduced demand for many of our building materials products. Net sales for the three months ended June 30, 2007 decreased 11% compared to the same period in 2006. This decrease was primarily the result of volume declines in the Insulating Systems, Roofing and Asphalt and Other Building Materials and Services segments, and the impact of the exit of our HOMExperts service line.

Sales outside the United States represented 23% of total sales for the three months ended June 30, 2007, compared to 18% during 2006. This percentage increase was the result of lower sales of building materials products in the United States combined with increased sales of Composite Solutions products in Europe, Latin America and Asia and increased European sales of manufactured stone veneer products.

Net sales for the first half of 2007 declined 14% from the first half of 2006, primarily as a result of a decline in new residential construction in the United States. The slowdown in new residential construction during the first half of 2007 drove volume declines in Insulating Systems and Other Building Materials and Services. Sales of Roofing and Asphalt products were down from 2006 primarily due to a decline in storm related demand.

Sales outside the United States represented 23% of total sales for the first half of 2007, compared to 17% in 2006. The percentage increase was the result of lower sales of building materials products in the United States combined with increased sales of Composites Solutions products in Europe, Latin America and Asia and increased European sales of manufactured stone veneer products.

GROSS MARGIN

Gross margin as a percent of sales for the three months ended June 30, 2007 decreased by 1.2 percentage points compared to 2006. The decline was primarily due to lower sales volume stemming from weaker demand for our building materials products in the North American housing and remodeling markets, price declines for certain insulation products, and higher material and labor costs. Gross margin for the second quarter of 2007 was also negatively impacted by a $12 million charge related to the Company’s strategic reviews of its Siding Solutions business and its Fabwel unit, partially offset by $1 million of income resulting from exiting the HOMExperts service line. Excluding the impact of these items, gross margin would have been $257 million, and gross margin as a percent of sales would have been 16.8%.

Gross margin as a percent of sales for the first half of 2007 declined 1.6 percentage points compared to the first half of 2006. The decrease was the result of lower building materials sales volume, price declines for certain insulation products, and higher material and labor costs. Gross margin in the first half of 2007 was also negatively impacted by charges incurred as a result of implementing our decision to exit the HOMExperts service line and the $12 million charge related to the Company’s strategic reviews of its Siding Solutions business and its Fabwel unit. Excluding the impact of these items, gross margin would have been $458 million, and gross margin as a percent of sales would have been 16.0%.

MARKETING AND ADMINISTRATIVE EXPENSES

Marketing and administrative expenses for the three months ended June 30, 2007 increased 4.3% compared to 2006. As a percent of net sales, marketing and administrative expenses in the three months ended June 30, 2007


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

were 9.5%, compared to 8.1% in 2006. The increase as a percent of net sales is primarily due to decreased sales and the impact of approximately $7 million in costs associated with the proposed OCV reinforcements transaction.

For the first half of 2007 marketing and administrative expenses increased $11 million from 2006, and were 9.9% of net sales compared to 8.2% for the first half of 2006. The increase as a percent of sales in 2007 is primarily due to decreased sales and the effect of approximately $18 million in costs associated with the proposed OCV reinforcements transaction.

EMPLOYEE EMERGENCE EQUITY PROGRAM

Compensation expense related to the employee emergence equity program reduced earnings before interest and taxes by approximately $12 million in the second quarter of 2007 and approximately $20 million in the first half of 2007 and is expected to reduce earnings before interest and taxes by approximately $37 million in 2007, $28 million in 2008, and $23 million in 2009.

EARNINGS BEFORE INTEREST AND TAXES

The decrease in earnings before interest and taxes for the three months ended June 30, 2007 compared to the same period in 2006 was primarily due to lower sales, as the weakening North American new residential construction market negatively impacted demand for our building materials products, and the impact of material and labor inflation. In addition to the above items, earnings before interest and taxes for the three months ended June 30, 2007 were impacted by:

 

   

A decrease in Chapter 11-related reorganization items of $17 million compared to a year ago, primarily resulting from decreased professional fees, partially offset by lower investment income.

 

   

The plan of reorganization established a one time employee emergence equity program. The cost of this program is being amortized over the vesting period of three years beginning in November 2006. The cost of this program during the three months ended June 30, 2007 was approximately $12 million.

 

   

The adoption of fresh-start accounting improved earnings before interest and taxes for the second quarter of 2007 by approximately $3 million as compared to the Predecessor second quarter.

The decrease in earnings before interest and taxes for the first half of 2007 compared to 2006 was primarily due to lower sales combined with higher raw materials and labor costs that combined to create margin compression in our building materials businesses. In addition, earnings before interest and taxes for the first half of 2007 were impacted by:

 

   

A decrease in Chapter 11-related reorganization items of $24 million compared to a year ago, primarily resulting from decreased professional fees, partially offset by lower investment income.

 

   

The cost related to the employee emergence equity program that totaled approximately $20 million for the first half of 2007.

 

   

The adoption of fresh-start accounting improved earnings before interest and taxes for the first half of 2007 by approximately $4 million as compared to the predecessor period.

INTEREST EXPENSE

Net interest expense for the three months ended June 30, 2007 decreased $55 million compared to the three months ended June 30, 2006. The results for the three months ended June 30, 2007 primarily reflect interest


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

expense on the $1.2 billion of senior notes issued as part of our emergence from bankruptcy, the borrowing under a delayed-draw senior term loan facility during the first quarter of 2007 and borrowings under the revolving credit facility. The results for the three months ended June 30, 2006 include expenses of $59 million with respect to OCD’s pre-petition credit facility, relating to post-petition interest and certain other fees, and $30 million for interest on certain unsecured trade claims against Debtors other than OCD.

Net interest expense for the first half of 2007 decreased $88 million compared to the first half of 2006. Interest expense for the first half of 2007 is primarily due to the impact of the new financing put into place upon our emergence from bankruptcy whereas interest expense for the first half of 2006 related primarily to post petition interest and other fees on OCD’s pre-petition credit facility and interest on certain unsecured trade claims against Debtors other than OCD.