Document Dg02QyLjLOO0g8Ox5k3ego5B

Owens Corning 1998 First Quarter Report Form 10-Q WV-05133 u> INDEX Page Cover Page........... ..................................................................................................................................................... 1 PARTI Item 2. Financial Statements Consolidated Statement of Income........................................................ Consolidated Balance Sheet................................................ Consolidated Statement of Cash Rows............................ 2 3-4 5-6 Notes to Consolidated Financial Statements Segments....................................................................................................................................7-8 General......................................................................................................................................... 9 Restructuring of Operations and Other Actions............................................................... 9-10 Acquisitions and Divestitures of Business........................................................................10-11 Long-Term Debt..,....................................................................................................................1J Income Taxes............................................................................................................................ 12 Inventories................................................................................................................................. 12 Consolidated Statement of Cash Rows............................................................................12-13 Comprehensive Income............................................................................. 13 Earnings Per Share....................................................................................................................13 Contingent Liabilities.................................. ;.......................................................... ......... 14-20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 21-27 PARTC Item 2. Legal Proceedings................................................................................................................................. 28 Item 2. Changes in Securities............................ 28 Item 3. Defaults Upon Senior Securities....................................................................................................... 28 Item 4. Submission of Matters to a Vote of Security Holders.................................................................... 28 Item 5. Other Information...................................................................... 28 Item 6. Exhibits and Reports on Form 8-K ......................................................................... 28 Signatures.......................................................................................................................................... 29 Exhibits ............................................................................................................................................30 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 1042 Quarterly Report Pursuant to Sedion 13 or 15(d) of the Securities Exchange Act of 1934 Forth Quarts Ended March31,1998 Commission File No. 1-3660 Owens Coming One Owens Coming Parkway Toledo, Ohio 43659 Area Code (419) 248-8000 A Delaware Corporation I.R.S. Employer Identification No. 34-4323452 Indicate by check marie whether the Registrant (1) has riled all reports required to be riled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period feat the Registrant was required to file such reports), and (2) has been subject to such filing requirements for fee past 90 days. Yes/X/ No/ / Shares of common sock, par value $.10 per share, outstanding at April 30,1998 S3,976,2Si -2- ITEMI. FINANCIAL STATEMENTS OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Quarter Ended ......... Mm. Jii 1998 -ML. (In millions of dollar?, except share data) NET SALES COST OF SALES Gross ros|,jfa S 1.137 03* 100 $ 875 652 ___ m OPERATING EXPENSES Marketing and administrative expenses Science and technology expenses Restructure costs (Note 3) Other (Note 4) Total operating expenses 129 IS 87 21) __ m 122 17 - 4 142 INCOME FROM OPERATIONS 39 80 Cost ofborrowed funds _____ 22 12 INCOME BEFORE PROVISION FOR INCOME TAXES Provision (credit) for income taxes (Note 6) 2 61 CD _____ 20 INCOME BEFORE MINORITY INTEREST AND EQUITY IN NET INCOME OF AFFILIATES 9 41 Minority interest Equity in net income of affiliates NET INCOME <s> (2) 42 * R i____52 NET INCOME PER COMMON SHARE (Note 10) Basic net income per share Diluted net income per share S___J $___ J3 2......*1$ S___ 36 Weighted average number of common shares outstanding and common equivalent shares during the period (in millions} Baric Diluted S3.4 53.8 . 52.4 57.8 The accompanying notes are an integral part of this statement. OWENS COtoliSiU AJsu iiKtriw CONSOLIDATED BALANCE SHEET ASSETS CURRENT Cash and cash equivalents Receivables Inventories (Note 7) Insurance for asbestos litigation claims - carrere portion (Note 11) Deferred income taxes Assets held for sale (Note 4) Income tax receivable Other current assets Total current March 31, December 31, ..... im... .. 1997 (la mfflions of dollars) $ 115 560 533 100 140 . 108 SI 1 *07 $ 58 432 503 100 160 41 96 _____ U 1.428 OTHER Insurance for asbestos litigation claims (Note 11) Asbestos costs to be reimbursed - Fibreboard (Note II) Deferred income taxes Goodwill Investments in affiliates (Note 4) Other noncurreat assets 340 357 117 116 394 328 792 778 53 52 124 184 Total other >870 1.81$ PLANT AND EQUIPMENT, at cost Land Buildings and leasehold improvements Machinery and equipment Construction in progress ...Less: Accumulated depredation 66 685 2,658 194 3f603 (1.858) 66 676 2,629 ____ 214 3,585 (1,832) Net plant aid equipment L745 1.753 TOTAL ASSETS ljua * 4Q96 The accompanying notes are an integral part of this statement. OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Ccatffawrf) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT Accounts payable and accrued liabilities Reserve for asbestos litigation claims - current portion (Note I!) Short-term debt Long-term debt - current portion Tool currenf LONG-TERM DEBT (Note 5) March 31, December 31, .... im..- ____ 1222------(In millions of dollars) $ 812 300 59 J22 LM 1.874 $ $14 350 23 J2S im ... OTHER Reserve for asbestos litigation claims (Note 11) Asbestos-related liabilities - Fibreboard (Note 11) Other employee benefits liability Pension plan liability Other Total other 1.241 124 332 63 tR6 t 046 1.320 123 335 65 _____ us 2-008 COMPANY OBLIGATED SECURITIES OF ENTITIES HOLDING SOLELY PARENT DEBENTURES MINORITY INTEREST STOCKHOLDERS' EQUITY Common stock Deficit Accumulated other comprehensive income (Note 9) Ofher Total stockholders' equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 521 _____ & -2ft ____ 2ft 662 (1,035) (33) <m 22) S- 5-2a - 657 (1.041) (40) :,i,m ..... (Ml) The accompanying notes are an integral part of this statement. OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) NET CASH FLOW FROM OPERATIONS Net income Reconciliation ofset cash provided by operating activities: Noncash hems: Provision for depredation and amortisation Provision (credit) for deferred income taxes Other (Increase) decrease In receivables (Increase) decrease in inventories Increase (decrease) in accounts payable and accrued liabilities Increase (decrease) in accrued income taxes Proceeds from insurance for asbestos litigation claims, excluding Rbieboard Payments for asbestos litigation claims, excluding Fibreboard Other Net cash flow floor operations NET CASH FLOW FROM INVESTING Additions to plant and equipment hrvesmen! in subsidiaries, net of cash acquired Proceeds from the sale of affiliate or business (Note 4) Other Net cash flow from investing Quarter Ended March 31. l&g mi (In millions of dollars) $ 8 $ 42 52 (45) (91) (129) m (12) <2> 17 37 (330) 37 17 (1) 007) m (59) OD 40 (95) 12) -- 047) (47) . 134 ____ 02) s____ m (74) (20) . (5) 1-...(99) The accompanying notes are an integral part of this statement. OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) NET CASH FLOW FROM FINANCING Quarter Ended March 1228 122L (In millions of dollars) Net additions to long-term credit facilities Other additions to long-term debt Net increase in short-term debt Dividends paid Other Net cash flow from financing 5 235 3 36 (4) m_____ $ 25276 17 (3) 19 __m Effect ofexchange rate changes on cash ______ O) ______0) Net Increase (decrease) in cash and cash equivalents 57 (32) Cash and cash equivalents a: beginning of period 5 45 Cash and cash equivalents at end ofperiod % 115 3____ 13 The accompanying notes are an integral pan of this statement. OWmS_COmmGJ^DSUBSXDlAMmS bLOTESTO CONSOLIDATED FINANCIAL STATEMENTS X. SEGMENT DATA Quarter Ended NET SALES 1998 IS2Z (to millions of dolla fedtistrv Segments Building Materials United States Europe Canada and other Total Building Materials Composite Materials United States Europe Canada and other Total Composite Materials $ 739 65 _ 52 $ 500 74 31 ____ S2S JUL m 97 33 ____ m 138 97 35 _2ZQ Building Materials Composite Materials Eliminations Net sales Geographic Segments United States Europe . Canada jinrf other Total Intersegment sales United States Europe Canada and other Net sales 31 ____ HD 27 (27) S 1.137 $ 875 $ 890 162 ____ JS $ 638 m $ 1.137 S_ 875 32 9 12 ____ 2) 29 9 22 s .1.137 Lm OWENS CORNING AND SUBSIDIARIES QUARTERLY INFORMATION ON INDUSTRY AND GEOGRAPHIC SEGMENTS (Cootiflited) 1. SEGMENT DATA (Continued) INCOME (LOSS) FROM OPERATIONS !r*torv Seemems Quarter Ended March 31, m 1222 (In millions of dollars) Building Materials United States Europe Canada and other Total Building Materials $2 (IS) ____fl) $ (16) 37 5 % 44 Composite Materials United States Europe Canada and other 37 (17) ____ 0) 42 7 1 Total Composite Materials General corporate income (expense) Income from operations Cost of borrowed funds Income before provision for income taxes ___ 12 SI _3fi 39 _____ 05) 80 ~ (37) -(19) L 2 $ fil Onprsnhk Segments United Slates Europe Canada and other Genera! corporate income (expense) Income from operations % 39 (32) (4) ____ 3 $ 79 12 4 ____ OS 39 80 Cost of borrowed funds -fl?) _____ m Income before provision for income taxes L 7 S *1 Income from operations for the quarter coded March 31.1998 includes a pretax charge of S9S million for restructuring and other actions. The impact of this special charge was to reduce income from operations for Building Materials in the United States, Europe, and Canada and other by $1? million, $11 million and $1 mflUon, respectively; Composite Materials In the United States, Europe, and Canada and other by $8 million, $27 million and $1 million, respectively; and to increase general corporate expense by $30 million. Income from operations for foe quarter ended March 31, 1998 also includes a pretax gain of $84 million from foe sale of foe Company's 50% ownership interest in Alpha/Owcns-Commg, LLC. The impact of this gain was to decrease general corporate expense by S84 million. Please see notes 3 and 4. -9- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. GENERAL The financial statements included in this Report are ccndensed and unaudited, pursuant to certain Rules and Regulations of the Securities and Exchange Commission, Ins include, in die opinion of die Company, adjustments necessary for a fair statement of the results for the periods indicated, which, however, are not necessarily indicative of results which may be expected for the full year. In connection with foe condensed financial statements and notes included in this Report, reference is made to the financial statements and notes thereto contained in foe Company's 1997 Annual Repott on Form 10-K, as filed with foe Securities and Exchange Commission. 3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS During foe first quarter of 1998, foe Company recorded a S95 million pretax charge for restructuring and other actions to enhance manufacturing productivity and reduce overhead. This charge represents foe second phase of foe Company's strategic restructuring program announced in January 1998. Of foe Company's estimated $250 tnlliinn total pretax charge for this strategic program, $238 million has been charged on a cumulative basis since foe fourth quarter of 1997 and the Company expects additional charges of approximately 512 million as further actions are finalized. The $95 million pretax charge in foe first quarter of 1998 was comprised of an $87 million charge associated with foe restructuring of foe Company's business segments and an $8 million charge associated with otto actions. The $8? million restructure charge has been classified as a separate component of operating expenses on the Company's consolidated statement of income while foe $8 million charge for otto actions is comprised of a $5 million charge to cost of sales and a $3 million charge to marketing and administrative expenses. The components of foe restructure charge include $81 million for personnel reductions ami $6 million for the divestiture of non-strategic businesses and facilities, of which $2 million represents exit cost liabilities, comprised primarily of lease commitments. The $81 million for personnel reductions represents severance costs associated with the elimination of approximately 1,500 positions worldwide. The primary employee groups affected include manufacturing and corporate administrative personnel. As of March 31,1998, approximately $14 million has been paid and charged against foe reserve , for .personnel, .reductions, representing .foe . elimination of approximately 1,500 employees, the majority of whose severance payments will be made over the next M months, and less than $1 million has been charged against exit cost liabilities. No adjustments have been made to foe liability. During foe fourth quarter of 1997, foe Company recorded a $143 na&on pretax charge for restructuring and other actions to close masufecturing facilities, enhance manufacturing productivity and reduce overhead. The $143 million pretax charge represeras foe first phase of the Company's strategic restructuring program and was comprised ofa $68 million charge associated with foe restructuring of foe Company's business segments and a $75 million charge associated with asset impairments, including investments in certain affiliates. The components of foe restructure charge include $25 miHbn for personnel reductions; $41 million for divestiture of nonstretegic businesses and fertilities, of which $13 million represents exit cost iiabiltties. primarily for leased warehouse and office facilities to be vacated, and $28 million represents non-cash asset revaluations; and $2 million for other actions. The divestiture of non-strategic businesses and facilities includes the closure of the Candiac, Quebec manufacturing facility to be completed in 1998. OWENS CORNING AKn^TRSTTOARffiS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (Continued) The $25 million for personnel reductions during die fourth quarter of 1997 represents severance costs associated with die elimination of nearly 550 positions worldwide. The primary employee groups affected include manufacturing and corporate administrative personnel. As of March 31, 1998, approximately $14 million has been charged against the reserve of which $5 million was for exit costs and $9 million was for severance costs, representing the eiimination of approximately 550 employees, the majority of whose severance payments will be made over the next 12 months. No adjustments lave been made to foe liability. The components of foe $75 million of other actions during foe fourth quarter of 1997 and their classification on foe Company's 1997 consolidated statement of income are as follows: $17 million for foe write off of certain assets and investments associated with unconsolidated joint ventures In Spain and Argentina due primarily to poor current and projected financial results and foe expected loss of local partners, recorded as other operating expenses; $12 million for the write-down of certain investments in mainland Q\\ns to reflect the current business outlook aid the Stir market value of the investments, recorded as cost of sates; $24 million to write down to net realizable value obsolete equipment and inventory made obsolete by changes in foe Company's manufacturing and marketing strategies, recorded as cost of sales; $8 million for a supplemental employee retirement plan approved by the Board of Directors in December 1997, recorded as marketing and administrative exposes; $5 million for foe write-off of an insurance receivable that was determined to be uncoUectable after judicial rejection of foe Company's claim, recorded as other operating expenses; and $9 million for several other actions recorded as cost of sales, marketing and administrative expenses, and other operating expenses. The Company plans to hold and use foe investments but plans to dispose ofthe equipmeia in 1998. A ACQUISITIONS AND DIVEOTTURES OF BUSINESSES During 1997, the Company several acquisitions, foe largest of which were the acquisitions of Fibreboard Corporation (*Fibreboard") and AmeriMark Building Products, Inc. ("AmeriMark"). The purchase price of Rbreboaid, a North American manufacturer of vinyl riding and accessories, as well as manufactured stone, was $660 Bullion, including debt assumed of $13$ million, and was consummated by foe exchange of cash for ail of the outstanding common shares of Fibreboard at a price of $55 per share. The purchase price of AmeriMark, a specialty building products company serving foe exterior residential housing Industry, was $317 million and was consummated by foe exchange of $309 million in trust preferred hybrid securities and $8 million in cash for foe net assets of AmeriMark. The following unaudited table presents the pro forma results of operations for foe quarter ended March 31,1997, assuming foe acquisitions of Fibreboard and AmeriMark occurred at the beginning of foe period presented. The pro forma impact of all other acquisitions during 1997, excluding Ebreboard and AmeriMark, was not material to foe Company's results of operations for the quarter ended March 31, 1997. These results inefode certain adjustments, primarily for depreciation and amortization,. interest and ocher expenses directly attributable to foe acquisition and are not necessarily indicative of what the results would have been had the transactions actually occurred at foe beginning of foe period presented. The pro forma results do not include operations that were discontinued by Fibreboard prior to the acquisition, or Pabco. -11- ovm^coT^GMmsvBmiARm NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. ACQUISITIONS AND DIVESTITURE OF BUSINESSES (Ccotianed) Quarter Ended Her sales Income from continuing operations Diluted earnings per share from continuing operations (In millions ofdollars, except share data) $ 1,108 33 S .60 During the first quarter of 1998, the Company completed the sale of die assets of Pabco, a producer of molded cakimn silicate insulation, fireproofing board and metal jacketing, acquired as pan of die fibreboaiti acquisition in 1997. The Company sold Pabco for $31 million in cash and $6 million in notes receivable. Late In die first quarter of 1998. the Company sold its 50% ownership interest In Alpha/OwensComing, LLC. With cadi proceeds of approximately $103 millkm, the Company recorded a pretax gain of approximately $84 million as other income on die Con?say's consolidated statement of On April 17, 1998, the Company announced that it is considering the possible sale of the glass fiber yams and specialty matAriak portion of its Composite Materials segment. 5. LONG-TERM DEBT In the first quarter of 1998, the Company amended its long-term revolving credit agreement and reduced the maximum commitment equivalent to $1.8 billion, of which portions can be denominated in Canadian dollars, Belgian francs or British pounds subject to the provisions ofthe agreement. The agreement allows the Company to borrow under multiple options, which provide for varying terms and uaerest rates. The commitment fee, charged on the entire commitment, is a sliding scale based on credit ratings and was .15% at March 31, 1998. As of March 31, 1998, $237 million of tins facility was used for standby leasts of credit and $382 million was unused. The average rate of interest on this feeffity was 6.0% at March 31,1998. la early May 1998, tire Company issued two senes of debt securities for un-aggregate principal amount of $550 million. The firs series, representing $300 million of the securities, is due May 1, 2005 and bean an annual rate of interest of 7.5%, p&ya&e setraanraaBy. The second series, representing $250 million ofthe securities, Is due May 1,2008 and bears an annual rate of interest of 7.7%, payable semiannually. Both series of securities (the "Notes") were issued as unsecured obligations of the Con^jany and are redeemable, m whole or in partial the option of the Company at any time at a redemption price equal to the greater of(i) 100% ofthe principal amount ofsuch Notes or (ii) the sum of the present values ofthe remaining scheduled payments of principal and interest. The proceeds from the issuance of the Notes, net of issuance costs, were approximately $546 million. The Company used the net proceeds to repay a portion of the outstanding borrowings under its longterm revolving credit agreement -12- OWENS CORNINOAND SUBSTOIAR1ES NOTES TO CONSOLIDATED FINANCIAL STATEMENT'S (Continued) 6. INCOME TAXES The reconciliation between the U.S. federal statutory me and the Company's effective income tax rate is: Quarto* Ended March 31, 1993 In mffltww % ofpNiax of rfnfbirs income 1997 In millions % of pretax of dollars - income__ U.S- federal statutory rate Sate and local income taxes Special tax election (a) Foreign tax rate differences $1 (3) (33) 3 35% (50) (650) 150 $ 21 1 - 35% 2 - Adjustment of deferredtax. asset valuation allowance Otto . $__2 (7) 165 s____ i (12) 8 Effective tax rate 1-JZ> (350)% f TO 33% (a) Represents a one-time tax benefit associated with Asia Pacific operations. 7. INVENTORIES Inventories are summarized as follows: March 31, December 31, 1997 (fa millions of dollars) Finished goods $ 394 $ 363 Materials and supplies HFO inventory 211 ______ m 607 577 Less: Reduction to UFO basis ______ m <m s____ m %m Approximately $356 million and S365 million of FIFO inventories were valued using the UFO method at March 31, 1998 and December 31,1997, respectively. 8. CONSOLIDATED STATEMENT OF CASK FLOWS Cash payments for income taxes, net of refunds, and cost of borrowed funds are summarized as follows: Quarter Ended March 31. im im (In millions of dollars) Income taxes Cost ofborrowed funds $3 23 $6 U The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. OWENS CORNING AND SimfiHWARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) During the first quarter of 1998, gross payments for asbestos litigation claims against Fibreboaid were approximately $17 million, all of which was paid directly by Rbrebo&rd's insurers or from die escrow account to claimants on Fibreboard's behalf. During the first quarter, Fibreboard also reached settlement agreements with plaintiffs for amounts totaling approximately 18 million. Fibreboard settlement agrwmems are reflected on the Company's consolidated balance sheet as an increase to both the Fibreboard asbestos costs to be reimbursed and asbestos claims settlements when the agreements are reached. 9. COMPREHENSIVE INCOME During the first quarter of 1998, d Company adopted Statement of Financial Accounting Standards No. 130, `Reporting Comprehensive Income" (SFAS 130). Comprehensive income is defined as tire change in equity of a business enterprise during a period from transactions and other everts and chcumaances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS 130 requires that the Company classify hems of other comprehensive income by their nature in die financial statements and display the accumulated balance of other comprehensive income separately in the stockholders' equity section of the Company's consolidated balance sheet. The Company's comprehensive income for the quarters ended March 31, 1998 and 1997 was $16 million and $36 million, respectively. The Company's comprehensive income includes net Income, currency translation adjustments, minimum pension liability adjustments, and deferred gains and losses cm certain hedging transactions. 10. EARNINGS PER SHARE The following table reconciles the net income and weighted average number of shares used in the basic cammgs per share calculation to the net income and weighted average number of shares used to confute diluted earnings per share. Net income used for bask earnings per share Net income effect of assumed conversion ofdebt and preferred securities Net income used for diluted earnings per share Quarter Ended March 31. mi (In millions ofdollars, except share data) $ 8 $ 42 - _____ 2 _____ Z 44 Weighted average number of shares outstanding used for basic earnings per share (thousands) Deferred awards and stock options Shares from assumed conversion of debt and preferred securities Weighted average number of shares outstanding and common equivalent shares used for diluted earnings per share (thousands) 33,373 472 52,408 825 . 4.566 53 845 57.799 -14- OWEMS CORNING AM) Si usm NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) U. CONTINGENT LIABILITIES ASBESTOS LIABILITIES ITEM A- OWENS CORNING (EXCLUDING HBREBOARD) Owens Coming is a co-defendant with other former manufacturers, distributors and installers of products containing asbestos and with miners and suppliers of asbestos fibers (collectively, the Producers*) hi personal injury litigation. The personal injury claimants generally allege injuries to their fceafcfa caused by inhalation of asbestos fibers from Owens Coming's products. Most of the claimants seek punitive damages as well as compensatory damages. Virtually all of the asbestos-related lawsuits against Owens Coming arise out of its manufacture, distribution, sale or installation of an asbestos-containing calcium silicate, high temperature insulation product, the manufacture of which was discontinued in 1972. As of March 31, 1998, approximately 180,000 asbestos personal injury dams were pending against Owens Coming, of which 8,700 were received in the first quarter of 1998. The Company received approximately 35,300 such claims in 1997 and 36,300 is 1996. Many of the recent claims appear to be die product of mass screening programs and not to involve malignancies or other significant asbestos related impairment. Owens Coming believes fiat at least 40,000 of the recent claims involve plaintiffs whose pulmonary function tests ("PFTS'*) were improperly administered or manipulated by the testing laboratory or otherwise inconsistent with proper medical practice. In 1996 Owens Coming filed suU in federal court in New Orleans, Louisiana against tire owners and operators of certain pulmonary function testing laboratories in die southeastern U.S. challenging such improper resting practices. This matter Is now in active pre-trial discovery. In January 1997, Owens Coming filed a similar suit in federal court In Jackson, Mississippi against tire owner of an additional testing laboratory. Through March 31, 1998, Owens Coming had resolved (by settlement or otherwise) approximately 204,900 asbestos personal injury claims. During 1995, 1996 and 1997, Owens Coming resolved approximately 63,700 asbekos personal iiyury claims, over 99% without trial. Total indemnity payments for these 63,700 claims, induing future installment payments, are expected to be $858 million (an average of $13,500 per claim). Oweas Coming's indemnity payments have varied considerably over time and from case to case, and are affected by a multitude of factors, tliese include the type and severity of tire disease sustained by the claimant (i.e., mesothelioma, long cancer, other types of cancer, asbestosis or pleural changes); die occupation of tire claimant; the extern of the claimant's exposure to arirestos-contaioing products manufactured, sold or installed by Owens Coming; the exrent of the claimant's exposure to asbestos-containing products manufactured, sold or installed by other Producers; tire cumber and financial resources of other Producer defendants; tire jurisdiction of suit; tire presence or absence of other possible causes of tire claimant's illness; tire availability or not of legal defenses such as tire statute of limitations or state of the art; whether the claim was resolved on an individual basis or as part of a group settlement; and whether the claim proceeded to an adverse verdict or judgment OWENS CORNING AND SU^g>IAMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. CONTINGENT LIABILITIES (Continued) Owens Coming's total indemnity and defense payments (before application of insurance recoveries) for asbestos personal injury claims were $300 million in 1997 and are expected to be approximately $350 million in 1998. This high level of expenditures, and the anticipated increase in 1998, are attributable in large measure to two footers: payments associated with adverse judgments (particularly in mesothelioma cases), and significant recent increases in die cos of settlement of mesothelioma claims. The Company is addressing these developments by refocusing its defense resources upon the early identification and evaluation of mesothelioma claims and, where such claims cannot be resolved by settlement, upon more thorough preparation and wort-up of such claims for trial. The Company believes that these measures should prove effective in controlling the cost$ of resolving such claims. However, the increased cost of resolution of mesothelioma claims has added to the difficulty of estimating the Company's future asbestos liabilities. The Company cautions that if the cost of mesothelioma settlements and judgments is not controlled and if future annual expenditures for asbestos personal injury claim* are not reduced, the Company may be required to make additional provision for the anticipated costs of asbestos personal injury claims. Tobaccq The Company is dosely monitoring the proposed federal legislation to implement a nationwide tobacco settlement. Owens Coming, Fibreboard and other asbestos defendants have coDeolvely spent billions of dollars te resolve asbestos personal injury date to which smoking was a substantial causal or contributing factor. The Company believes that any federal legislation implementing the proposed tobacco settlement must make adequate financial provision for compensating asbestos personal iqjuiy claimants for the role tobacco use played in their injuries and for reimbursing asbestos defendants, in whole or in part, for past payments that have been made to asbestos personal injury claimants who were also smokers. The Company is directing its legislative lobbying efforts toward achievement of this objective. Owens Corning and Fibreboard have filed suit in the Superior Court for Alameda County, California against seven leading manufacturers of tobacco products. The complaint alleges that cigarette smoking causes or contributes to lung cancer, a variety of other cancers and chronic obstructive pulmonary disease. The complaint seeks to require the defendants to reimburse Owens Coming and Fibreboard for all or part of the amounts which they have spent in resolving the personal injury claims of asbestos plaintiffs whose injuries were caused or contributed to by cigarette smoking. Fibreboard As described in greater detail below, Fibreboard is a party to two class action settlements relating to asbestos personal injury claims-the Global Settlement and the insurance Settlement. If the Global Settlement is approved, Fibreboard will be protected by an injunction from asbestos personal injury claims and should have no farther asbestos personal injury liabilities. If the Global Settlement is not approved, the Insurance Settlement, which has been approved by the courts, will become effective. In such event, Fibreboard will receive the payments due under the Insurance Settlement, the injunction protecting Fibreboard from asbestos personal injury claims will be dissolved, and Fibreboard will return to the ton system as a defendant. -16- OWENS rORNTNC, AND S1SSTOIAR1ES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) II. CONTINGENT UABIUTIES (CouiiWied) Should the insurance Settlement come into effect, Owens Coming and Fibrebo&rd anticipate establishing a join facility that would provide, consistent with Fibreboard's contractual obligations under the Insurance Settlement, for the joist defense and settlement of asbestos personal injury claims against the two defendants. Such ajoint facility would have the potential for achieving synergistic savings in defense and settlement costs compared to the costs either Company would otherwise likely incur. issuance As of March 31, 1998. Owens Coming had approximately $215 milium in unexhausted insurance coverage (ms of deductibles and self-insured mentions and excluding coverage issued by insolvent carriers) under Us liability insurance policies applicable to asbestos personal injury claims. This insurance, which is substantially confirmed, includes both products hazard coverage and primary level aoa-products coverage. Portions of this coverage are not available until 1998 and beyond under agreements with the carriers confirming such coverage. All of Owens Coming's liability insurance policies cover indemnity payments and defense fees and expenses subject to applicable policy limits. la addition to its confirmed primary level non-products insurance, Owens Coming baa a significant amount of unconfirmed potential non-products coverage with excess level carriers. For purposes of calculating die amount of insurance applicable to asbestos liabilities, Owens Coming has estimated its probable recoveries is tesptet of Shir additional am-pnxluctt coverage at $225 million, which amount was recorded in 1996. Tins coverage is unconfirmed and toe amount and timing of recoveries from these excess level policies w21 depend on subsequent negotiations or proceedings. BSSSEvg The Company's financial statements include a reserve for the estimated cost associated with Owens Coming's asbestos personal injury claims. This reserve was established principally through a charge to income in 1991 for the costs of asbestos claims expected to be received through-1999 and an additional SI. I hflfinn charge to income (before nrfrrpg fate account the probable non-products insurance recoveries) during 1996 for cases that may be received subsequent to 1999. In establishing foe reserve, Owens Coming took into account, among other things, the effect of federal court decisions relating to punitive damages and the certification of class actions m asbestos cases, the discussions wifo a substantial group of plaintiffs' law film in connection with global settlement negotiations, foe results of Us continuing investigations of medical screening practices of die kind at issue in the federal PFT lawsuits, recent developments as to the prospects for federal and state tort reform, tie continued rate of case filings at historically high levels, additional information o& filings received during the 1993-1995 period and other factors. Use combined effect of the $1.1 billion charge and the $225 million probable additional non-products insurance recovery was an $675 million charge in foe second quarter of 1996. Owens Coming's estimated total liabilities in respect of indemnity and defense costs associated with pending end unasserted asbestos persona) injury claims that may be received in foe future, and its estimated insurance recoveries in respect of such claims, are reported separately as follows: ffig CQEIgLANI?.mSiIAIfflS NOTES TO CONSOLIDATED FINANCIAL STA71 (Continued) NTS U. CONTINGENT LIABILITIES (Continued) Reserve for asbestos litigation claims Current Other March 31, December 31, 1998 1997 (Id millions of dollare) $ 300 .... w $ 350 _L22e Total Reserve Insurance for asbestos litigation claims Current Otoer Total Insurance Net Owens Coming Asbestos Liability - 1.541 100 340 440 * 1,101 -juga 100 ____ 257 ____ 4S1 -1-212 Owens Coming cautions that such factors as the number of future asbestos personal injury claims received by it, the rate of receipt of such claims, and the indemnity and defense costs associated with asbestos personal injury claims, are influenced by numerous variables that are difficult to predict, and that estimates, such as Owens Coming's, which attempt to take account of such variables, are subject to considerable uncertainty. Included among these variables are Owens Coming's future success in controlling the costs of resolving mesothelioma claims, the outcome of the Company's litigation against the tobacco companies and of the appellate proceedings related to the Fibreboard Global Settlement, and federal legislative developments concerning asbestos and/or tobacco. Owens Coming believes that its estimate of liabilities and insurance will be sufficient to provide for the costs of ah pending and future asbestos personal injury claims that involve malignancies or significant asbestos-related functional impairment While such estimates cover unimpaired claims, the number and cost of unimpaired claims are much harder to predict and such estimates reflect Owens Coming's belief that such claims have 'Tittle or no value. `Owens Coming wfH continue to review the adequacy of its estimate of liabilities and insurance on a periodic basis and make such adjustments as may be appropriate. Management opinion Although any opinion is necessarily judgmental and be based on information now known to Owens Coming, in the opinion of management, while any additional uninsured and unreserved costs which may arise out of pending personal injury asbestos claims and additional similar asbestos claims filed In the future may be substantial over time, itunagwnem believes that any such additional costs will not impair the ability of the Company to meet its obligations, to reinvest in its businesses or to take advantage of attractive opportunities for growth. jm* cpento grosn>iAWEs NOTES TO <X>NSOUDATED FINANCIAL STATEMENTS (Cowswed) II. COAOTVOENTUASHJTIES (Conriaue# ITEMS. FIBREBOARD {EXCLUDING OWENS CORNING) Prior to 1972, Fibreboard manufactured insulation products containing asbestos. Fibreboard has since been named as a defendant in auoy thousands of persona] injuo' claims for Injuries allegedly caused by asbestos exposure. As of March 31, 1998, approximately 113,800 asbestos personal injury claims were pending against Fibreboard, 5,900 of which were received in tht first quarter of 1998. Fibreboard received approximately' 33,000 such claims la 1997 and 32,900 in 1996. These claims and most of the pending ffjaftns arc made against die Fibreboard Global Settlement Trust and are subject to the Global Settlement injunction discussed Mow. During 1995, 1996 and 1997, Fibreboard resolved approximately 20,100 asbestos personal injury claims aid incurred indemnity payments of $257 million (an average of about $12,800 per case). The average cost par claim has increased raceoily from the historical average cost of $ii,00G per claim. Tins is due to the absence of group settlemems, where Urge numbers of low value cases are traditionally settled along with higher value cases, and due to the fact dim in 1996 and 1997 a relatively small number of individual cases involving more seriously injured plaintiffs were settled as exigent claims (ah of which are malignancy claims) during the pendency of die Global Settlement injunction discussed below. As of March 31, 1998, amounts payable under various asbestos claim settlement agreements were $124 tniilfon, These amounts are payable either from the Settlement Trust discussed below or directly by the insurers. Amounts due from insurers in payment of these or past claims paid directly by Fibreboard, as of March 31,1998 are $i 17 million. Fibreboard has unique insurance arrangements for personal iryury claims. During 1993, Fibreboard and its insureis,-Coniinaal^Caimalty Company (Continental) and Pacific Indemnity Company (Pacific), entered into the Insurance Settlement, and Fibreboard, its insurers arid representatives of a class of future asbestos plaintiffs who have claims arising from exposure to asbestos prior to August 27, 1993, entered into the Global Settlement. These agreements are interrelated and require final court approval. On fuly 26,1996, the U.S. Fifth Cscutt Court of Appeals affirmed the Global Settlement by a majority decision and me Insurance Settlement by a unanimous decision. The parries opposite the Global Settlement filed petitions seeking review with the U.S. Supreme Court. On Tune 27, 1997, die Supreme Court granted the petition, vacated the judgment and remanded Os case to the Fifth Circuit for further consideration in light of the Supreme Court's decision in the Amchem Products, Inc. v, Windsor case. Amcftem involved a proposed nationwide class action settlement of future asbestos personal injury claims against the members of the Center for Claims Resolution. The Supreme Court, affirming die intermediate appellate court, disapproved and vacated the Amchem class action settlement, determining that the Amchem class action failed to meet the requirements of Federal Rule of *Ndf -19- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. CONTINGENT LIABILITIES (Continued) ITEM B. FIBREBOARD (EXCLUDING OWENS CORNING) Civil Procedure 23. On January 27, 1998, a panel of the Fifth Circuit reaffirmed, by majority vote, is prior decision, and again approved the Global Settlement. The parties opposing the Global Settlement have filed two petitions for certiorari seeking review by the U.S. Supreme Court In light of this decision by die Fifth Circuit, and die filing of the petitions for yrfgryi, a final resolution of the Global Settlement may not be known until the second half of 1998 or later. On October 24, 1996, the statutory time period for objectors to seek further judicial review of the Insurance Settlement lapsed with no petition for review having been filed with the U.S. Supreme Court. Therefore, the Insurance Settlement is now final and not subject to further appeaL The parties will continue to seek approval of the Global Settlement. If the Global Settlement becomes effective, all asbestos-related personal injury liabilities of Fibreboard will be resolved through insurance fonds and existing corporate reserves. A permanent injunction barring the Filing of any further claims against Fibreboard or its insurers by class members is included as part of the Global Settlement. Upon final approval, FibreboanPs insurers are required to pay existing settlements and assume foil responsibility for any claims filed before August 27, 1993, tire dare the settling parties reached agreement on the terms of the Global Settlement. A courtsupervised claims processing trust ("Settlement Trust") will be responsible for resolving claims which were not filed against Fibreboard before August 27, 1993, aid any further claims that might otherwise be asserted against Fibreboard in the future by members of the class. The Settlement Trust will be funded principally by Continental and Pacific. These insurers have placed $1,525 million in an interest-bearing escrow account pending court approval of tire settlements. Fibreboard is responsible for contributing $10 million plus accrued interest toward the Settlement Trust, which it will obtain from other remaining insurance sources and existing reserves. The Home Insurance Company has already paid $9.9 million into tire escrow account oa behalf of Fibreboard, in satisfaction of an earlier settlement agreement. The balance of the escrow account was $1,689 million at March 31, 1998, afterpayment of interim expenses and exigesa claims associated with the Global Settlement. If the Global Settlement becomes effective, Fibreboard would have no on-going or future liabilities for asbestos personal injury claims in excess of the $10 million currently reserved in accrued liabilities. Hie Insurance Settlement is structured as an alternative solution in the event tire Global Settlement foils to receive final approval. Under the Insurance Settlement, Continental and Pacific will pay in Ml settlements reached as of August 27, 1993 and provide Fibreboard with tire remaining balance of the Global Settlement escrow account for claims filed after August 27, 1993, plus an additional $475 million, less amounts paid since August 27, 1993 for claims which were pending but not seeded at that date. Upon fulfillment of their obligations under tire Insurance Settlement, Continental and Pacific will be discharged from any further obligations to Fibreboard under their insurance policies and will be protected by an injunction against any claims of asbestos personal injury claimants based upon those insurance policies. Under the Insurance Settlement, Fibreboard will manage the defense and resolution of asbestos-related personal injury claims and will remain subject to suit by asbestos personal injury claimants. -20- OWENS CORNING AND SggSg>MRB3 <* NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) II. CONTINGENT IIABUTITES (Continued) ITEM E. FIBREBOARD (EXCLUDING OWENS CORNING) The Insurance Settlement will not be fully funded until such time as fee Global Settlement has been finally resolved. In the even the Global Settlement is finally approved, the Insurance Settlement will not be funded. Maaaeemem Opinion While there are various uncertainties regarding whether the Global Settlement or fee Insurance Settlement will be in effect, and these may ultimately impact Fifereboaxd's liability for asbestos personal injury claims, the Company believes the amounts available under the Insurance Seniesnem will be adequate to fund fee ongoing defense aad indemnity costs associated wife asbestos-related personal injury claims for fee foreseeable future. OTHER UABILTHES Various other lawsuits and claims arising in fee normal course of business are pending against the Company, some of which allege substantial damages. Management believes that fee outcome of these lawsuits and claims will not have a materially adverse effect on the Company's financial position or results of operadons. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (AH per share information in Item 2 is on a diluted basis.) RESULTS OF OPERATIONS Overview The Company's grow* agenda has focused on increasing sales and earnings by (i) acquiring businesses with products that can be sold through existing or complementary distribution channels, (u) achieving productivity improverseiss in existing and acquired businesses and (iiO entering new high-growth markets. The Company is implementing two major initiatives. System Thinking (TM) and Advantage 2000, to **fo**rt> sales growth and achieve productivity improvements across all businesses. System Thinking for die Home cm> leverages foe Company's toad product offering and strong brand recognition to increase its share of the building materials and home improvement markets. This systems approach represents a shift from product-oriented selling to providing systems-driven solutions that combine die Company's insulation, roofing, exterior and sound control systems, to provide a high performance, cost-effective building "envelope* for the home. In the composites business, the Company has partnered with the plastics industry and, with foe Company's System Thinking philosophy, is taking a solution-oriented, customer-focused approach toward foe continuous development of substitution opportunities for composite materials. In addition, foe Company is implementing Advantage 2000, a folly integrated business technology system designed to reduce costs and improve business processes. The Company has grown ks sales from nearly $3.4 billion in 1994 to approximately $5.0 billion on a pro forma basis giving effect to acquisitions made in 1997. Acquisitions have been a significant component ofthat growth. Since 1994, the Company has complied 17 acquisitions for an aggregate purchase price of over $1.2 billion. The Company's acquisitions have broadened its lines of business to Include siding, accessories and other home exteriors and have diversified its materials portfolio beyond fiber glass to include polymers such as vinyl and styrene, and metal and stone. In 1997, foe Company completed the two largest of these acquisitions by acquiring Fibreboard Corporation ("Fibreboard") and AmeriMaik Building Products, Inc. ("AmeriMark"), making Owens Coming foe leader m foe U.S. vinyl siding, siding accessories and cast stone markets, as well as a large specialty distributor in North America through nearly 200 companyowned distribution centers. Despise Improvements-ia-foe Company's strategic position ia 1997,-foe Company -experienced-a highly competitive pricing environment ha several of Its product markets that negatively impacted financial results. In North America, insulation pricing decreased by approximately 20 percent over foe course of 1997 and worldwide composites pricing decreased by approximately 6 percent during 2997. Income from operations for 2997 was adversely impacted by approximately $87 million as a result of price declines in insulation products and approximately $64 million as a result of price declines affecting composite materials. Offset by anal! price Increases in other businesses, the net effect of price on 2997 income from operations was approximately $142 ailSon. As a result of foe growth of foe Company's business and the significant pricing pressure experienced in 1997, the Company has implemented a strategic restructuring program designed to improve profitability, augment previously announced profitability initiatives, and improve operational efficiency. The specific objectives of this strategic program are discussed in "Restructuring of Operations and Other Actions" below and in Note 3 to the Consolidated Financial Statements. -22- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONT^ND RESULTS OF OPERATIONS (Continued) IBndedJMjanfo 3Lttg* Sdss and Profitability Net sales for the quarter ended March 31,1998 were $1,137 milliofi, reflecting a 30% increase from the first quarter 1997 level of $875 million. Growth in 1998 is mostly attributable to the acquisition of Kbreboard that was completed at the end of the second quarter of 1997 and the acquisition of AmeriMark that was completed early in the fourth quarter of 1997. Volume increases in insulation and roofing, fovoreHy influenced by strong construction activity, were largely offifit by declines in Insulation pricing, primarily in the U.S.. compared to the first quarter of 1997. Volume increases in composites in the U.S. and Europe were partially offset by declines in composites pricing is the U.S. in the first quarter of 1998, compared to the first quarter of 1997. Despite die decline in price in the first quarter of 1998 compared to die first quarter of 1997, aggregate price levels were higher in tile first quarter of 1998 compared to the fourth quarter of 1997. Additionally, sales were adversely affected by the translation impact of a stronger U.S. dollar on sales in foreign currencies. Please see Note 1 to the Consolidated Financial Satments. Sales outside the U.S. represented 22% of total sales for the quarter ended March 31. 1998, compared to 27% for the quarter aged March 31, 1997. The decline in non-U.S. sales as a percentage of total sales is due to the 1997 acquisitions of Fibreboard and AmeriMark, which are primarily U.S. operations. Gross margin for the quarter ended March 31, 1998 was 18% of net sales, down from 25% m the first quarter of 1997, The decline m the 1998 gross margin reflects lower prices in insulation and compo$hes worldwide as well as the inherently lower-margin business ofKbrebosrri and AmeriMark acquired during 1997. In the firs quarter of 1998, the Company announced price increases effective in March 1998 applicable to its residential insulation products of approximately 8 percent and price increases applicable to its commercial and industrial insu&ikm products of approximately 4 percent. The Company also announced price increases of 5 to 7 percent affecting certain residential roofing products, effective in April 1998. for the quarter ended March 31,1998, the Company reported net income of $$ mSIioa, or $.16 per share, compared to net income of $42 million, or $.76 per share, for the quarter ended March 31,1997. Net income'for"(he first quarter eft1998 indo&s a^pretax charge of $95 million ($63 million after-tax) for restructuring and other actions; an $84 million pretax gain ($52 million after tax) from die sale of the Company's 50% ownership interest in AJ^Bt/Owetts-Coraing, ILC; as well as a $13 million one-time tax benefit associated with Asia Pacific operations. The Congiasy's cost of borrowed hands for foe quarter ended March 31, 1998 was $37 million compared to $19 mflUon in the first quarter of 1997. This increase reflects the Company's borrowings to finaneg the acquisition ofFibreboard. N income for the quarter ended March 31, 1998 also reflects increased minority interest expense, due to foe financing of foe AmeriMark acquisition. Please see Notes 3,4 and 6 to foe Consolidated Financial Statements. Marketing and administrative expenses were $129 million for the first quarter of 1998 compared to $122 million in the first quarter of 1997. The increase in marketing and administrative expenses is foie to the incremental costs from acquisitions. Excluding foe incremental costs of acquisitions, marketing and administrative expenses in the first quarter of 1998 were approximately 10 percent lower than the 1997 level, reflecting foe initial benefits of the Company's strategic restructuring program announced in early 1998 and described below. -23- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) fosaticqjr^ ofQpgrafore and Qfe,Acte The $95 minion pretax charge referred to above for restructuring and other actions was die second phase of die Company's strategic program to reduce overhead, enhance manufacturing productivity and dose manufacturing facilities. Tins charge includes $87 million for restructuring and $8 million for other actions. Of the Company's estimated $250 million total pretax charge for restructuring and ocher actions announced in early 1998, $143 million was recorded in die fourth quarter of 1997 and $95 million was recorded in the first quarter of 1998. The Company expects additional charges of approximately $12 million as further actions are finalized. The total charge recorded is comprised of approximately $155 million for the restructuring program and approximately $83 million for other actions. The restructuring program, of which $68 million was recorded in the fourth quarter of 1997 and $87 million was recorded in the first quarter of 1998. includes approximately $106 million for costs associated wifo an overall headcount reduction of approximately 2,050 at numerous locations around foe world, predominantly in foe U.S., Canada and Europe. The remaining $49 million of restructuring includes $47 million for non-strategk businesses arid facilities of which $15 mfllkm represents exit cost liabilities, and $2 million for other actions. The costs for nozHStnuegic businesses and facilities include $28 million for tire closure of the Candfac insulation manufacturing plant in Quebec, Canada and $9 million for the closure ofseveral North American distribution locations. The primary components of die $83 million charge for other actions and focir classification on the Company's consolidated statement erf income include $17 million for the write off of certain asses and investmems associated with unconsolidated joint ventures in Spain and Argentina due primarily to poor current and projected financial results and the expected loss of local partners, recorded as other operating expenses; $12 million for foe writedown of certain investments in mainland China to reflect foe current business outlook and foe fair mark** value of the investments, recorded as cost of sales; $24 million to write down to net realizable value obsolete equipmers and inventory made obsolete by changes in the Company's manufacturing and marketing strategies, recorded as cost of sales; $8 million for a supplemental employee retirement . plan approved by the Board of Directors in December 1997. recorded as marketing and administrative expenses; $5 million for the write-off of an insurance receivable that was determined to be uncollectible after judicial rejection of the Company's claim, recorded as other operating expenses; and $17 million for several other actions recorded as cost of sales, marketing and administrative expenses, and other operating expenses. The Company plans to bold and use .foe iuvea&teiffi fart plans.to4fapose of^ etpiqxnera fa 1996. Based upon expected economic conditions over tire next few years, including labor, materia! and other costs, the Company expects to be able to decrease operating costs by approximately $100 million in 1998, and, when folly implemented, $175 million per year in 1999 and beyond. The expected $175 million in cost reductions, foe majority of which will be cash ravings, is comprised of $150 million in reduced personnel costs, $14 million in reduced facility costs, and $11 million of reductions in related program spending. The Company also plans to implement programs to pin synergies fa its exterior systems business during 1998. As a result of these programs, which include closing redundant facilities and improving purchasing leverage, foe Company expects to reduce costs by an additional $30 million during 1998 and more than $50 Bullion per year in 1999 and beyond, the majority of which will be cash savings. ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDmON AND RESULTS OF OPERATIONS (Omtoed) Accounting Chfflseg During the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income* <SFAS 130). Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events And circumstances from nonowner sources. The Company's comprehensive income includes net income, currency translation adjustments, minimum pension liability adjustments, and deferred gains and losses on certain hedging transactions. Please see Note 9 to the Consolidated Financial Statements. In die Building Materials segment, sales increased 41% in die first quarter of 1998 compared to the first quarter of 1997. This growth reflects the incremental sales from acquisitions and volume increases in North America, influenced by strong construction activity during the quarter. The benefits ofacquisitions and volume growth were reduced by price declines and the advise impact of a stronger dollar, compared to the first quarter of 1997. Income from operations was a loss of $16 million in the firs quarter of 1998, down from $44 million in the first quarter of 1997. This decrease includes approximately $40 million of Insulation price declines compared to the firs quarter of 1997 and $29 mSHioc of the special charges described above. Please see Notes 1 and 3 to the Consolidated Financial Statements. The-consolidated results of the Compaq include die results of operations of Fibreboard and AmeriMark beginning with the third and fourth quarters of 1997, respectively. To enhance comparability, certam information fcefow is presented oa a "pro fonna* basis and refleas the acquisitions of Fibreboard (excluding Pabco and operations that were discontinued by Hbieboaid prior to the acquisition) and AmeriMark as though foey had occurred at tire beginning of the period presented. (The pm forma impact of all other acquisitions during 1997, excluding Fibreboard and AmeriMark, was not material to the Company's results of operations for the quarter ended March 31, 1997.) The pro forma results include certain adjustments, primarily for depredation and amortization, interest and other expenses directly attributable to the acquisitions, and arc not necessarily indicative of foe combined results that would have occurred had the acquisitions occurred at foe beginning of that period. These pro forma results do not reflect foe expected benefits from foe consolidatirTa of foe exterior systems business discussed above, PROFORMA AS REPORTED Quarter Ended Quarter Ended MasfoiL March 31. im. ml im 1222 On minions ofdollars, except share data) Net sales Income from continuing operations Diluted earnings per share from continuing operations $1,137 8 $ .16 $1,108 33 $ .60 $1,137 8 $ .16 $ 87S 42 $ .76 Early in foe first quarter of 1998, foe Company completed the sale of foe assets of Pabco, a producer of molded calcium silicate insulation, fireproofing board and metal jacketing, acquired as pan of tie Fibreboard acquisition in 1997. Please see Note 4 co the Consolidated Financial Statements. -25- ITEM 1. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In the Composite Materials segment, sales were qp 4% for the quarter ended March 21, 1998 compared to 1997. Strong volume gains, particularly in die U.S. and Europe, were largely offset by pricing pressures and die impact of a stronger dollar on sales in foreign currencies. Income from operations was $19 million in the first quarter of 1998, down from $51 million in die first quarter of 1997. This decline partially reflects the decline in price, foe impact of which was $12 million, primarily in the U.S., compared to the first quarter of 1997. Compared to foe fourth quarter of 1997, price levels were higher in the first quarter of 1998, indicating foe benefits of foe Company's previously announced price increases in foe composites business. Income from operations also includes approximately $36 mOHon of foe special charges described above. Please see Notes 1 and 3 to foe Consolidated Financial Statements. On April 17, 1998, the Company announced that it is considering the poss&e sale of foe glass fiber yams and specialty materials portion of Its Composite Materials segment. With sales of approximately $300 million in 1997, foe Company's yarn business is foe world's second larges producer of glass yams, and foe largest producer offine yams. The asset sale would include two manufacturing facilities in foe U.S. LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS Cash flow from operations was negative $320 million for the quarter ended March 31, 1998, compared to negative $247 million for foe quarter ended March 31, 1997. The decrease in cash flow from operations in 1998 is largely attributable to the Company's lower earnings as well as an increase in payments for asbestos litigation claims during the first quarter of 1998. The increase in payments is due to the riming of asbestos claim* settlements. The Company anticipates $350 mihion of total payments for asbestos litigation claims during 1998. Inventories at March 31, 1998 increased $30 million, or 6% over December 31,1997 levels due to the Company's normal seasonal inventory build in foe first half of foe year. Receivables at March 31, 1998 were $360 million, a 30% increase over foe December 31, 1997 level, due to high sales volume daring the second halfof March. At March 31.1998, foe Company's net working capital was $309 million and its current ratio was 1.24, compared to $121 million and 1.09, respectively, at December 31,1997. The increase in 1998 was primarily due to increased receivables and inventories as weU -as a reduction In foe current portion of the reserve for asbestos litigation claims. Additionally, at March 31, 1998, foe proceeds from the sale of Alpha/Owens-Coraing were included in foe Company's consolidated balance sheet as cash and cash equivalents. The Company's total borrowings at March 31, 1998, were $2,060 billion, $322 million higher than at year-end 1997. Typically, the Company reports greater cash usage daring foe first half of foe year as foe Company builds inventories and other working capital. Early in the second quarter, the Company used the proceeds from foe sale ofAJ|&aA}wens-Conting and foe collection ofan income tax receivable to reduce debt. ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Centime As of March 3!, 1998, the Company had unused lines of credit of $409 million available unto long-term bank credit &ciiitfes and an additional $192 million under short-term facilities, compared to $884 million and $224 million, respectively, at year-end 1997. The decrease in unused available lines of credit reflects the Company's increased borrowings at March $i, 1998 as wefl as an agreed $200 million reduction in the maximum availability from die Company's credit facility established in June 1997. Letters of credit issued under the facility, most ofwhich support appeals frota asbestos trials, also reduce the ava&abte credit, The impact of such reduction is reflected in the unused lines of credit discussed above, Please see Note S to tire Consolidated Financial Statements. Capital spending for property, plant and equipment, excluding acquisitions, was $47 million in the firs quarter of 1998. The Company anticipates 1998 capital speeding, exclusive of acquisitions and investments m affiliates, win be approximately $220 million, the majority of which is uncommitted. The Company expects that funding for there expeadkzrcs wffi be from the Company's operations and`externa! sources as required. Gross payments for asbestos litigation claims during the first quarter of 1998, including payments for alarms sealed in prior years and excluding amounts payable in future years, were $129 million. The first quarter 1998 a ts include $14 million in defense costs and $1 million for appeal bond and other costs. Proceeds from insurance were $17 million resulting in a net pretax cash outflow of$112 nullion, or $e7milIioa after-tax. During to first quarter ofl998, to Company received approximately 8,700 new asbestos persona! injury cases and closed approximately 2,400 cases. Over the next twelve months, the Company's total payments for asbestos litigation claims, ztoudiag defense costs, are expected to be approximately $300 million. Proceeds from insurance of $100 mflHoa are expected to be available to cover these costs, resulting in a net pretax cash outflow of $200 million, or $120 million after- tax. Please see Note 1J to the Consolidated Financial Statements. Cress payments for asbestos litigation claims against Fibreboard for foe quarter ended March 31, 1998 were approximately $17 million, all of which was paid directly by Fforeboard's insurers or from an escrow account funded by its insurers to cformates on Hbreboard's behalf. Dtrag foe first quarter, Fibreboard received approximately 5,900 new asbestos personal injury claims, and resolved approximately 600 claims. Payments for asbestos claims against Fibreboard are expected a? be pakl by Fforeboanfs insurers or from foe escrow account Please see Notes 8 and 11 to the Consolidated Financial Statements. The Company expeas funds generated from operations, together with funds available under long and short term bank credit facilities, to be sufficient satisfy its debt service obligations under its existing and anticipated indebtedness, its contingent liabilities for uninsured asbestos personal injury claims, as weD as its capital expenditure programs and growth agenda. The Company has been deemed by foe Enviroontemal Protection Agency (EPA) to be a potentially responsible party (PRP) with respect to certain sites unto foe Comprehensive Bwiroaneatal Response, Compensation and Liability Act (Superfund). The Company has also been deemed a PRP under similar gate or local Caws. In other instances, other PKPs have brought suits or claims against to Company as a PRP for contribution under such federal, sate or local laws. During foe first quarter of 1998, foe Company was designated as a PRP in such federal, state, focal or private proceedings for two additional rises. At March 3U 1998, a total of36 such PRP designations remained unresolved by foe Company, some of which designations to Company believes to be erroneous. The Company is also involved with environmental investigation or remediation ai a number of other sites at which it lias oca been designated a PRP. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS (Continued) The Company has established a $33 million reserve, of which $16 million relates to Hbreboard, for its Superfund (and similar state. local and private action) contingent liabilities. Based upon information presently available to the Company, and without regard to the application of insurance, the Company believes that, considered in the aggregate, the additional costs associated with such contingent liabilities, including any related litigation costs, will not lave a materially adverse effect on the Company's results of operations, financial condition or long-term liquidity. The 1990 Clean Air Act Amendments (Act) provide that the EPA wiS issue regulations on a number of air pollutants over a period of years. Until these regulations are developed, die Company cannot daenrise die extern to which the Act mil affect it The Ownpany anticipates that its sources to be regulated will include wool fiberglass, mineral wool, asphalt processing and roofing, and metal coil coating. The EPA's currently announced schedule is to issue regulations covering wool fiberglass and mineral wool in 1998, asphalt processing and roofing in 1999. and meal CoS coating in 2000. with implcmeraation as to existing sources up to three years thereafter. Based on information now known to the Company, including the nature and limited number of regulated materials it emits, the Company does not expect the Act to have a materially adverse effect on the Company's results ofoperations, financial condition or long-term liquidity. Year 2000 Compliance The Company has been actively implementing new systems and technology since 1995 as part of its Advantage 2000 program to improve productivity and operational efficiency. An additional objective of this initiative is to ensure all business transactions are compliant with requirements to process accurately in the year 2000 and beyond. The scope of this program has been continuously expanded to include each of the seventeen acquisitions made by the Company during the past four years. To date, over 50% of the Company's systems have been replaced and are in operation for daily business transaction processing. All remaining system updates will be implemented throughout the period ending My i, 1999. The cumulative cost of business systems replacement from 1995 through the end of die first quarter of 1998 has been $141 milkm* including $97 million for infonnation technology and $44 million for related training and deployment in various business locations. The current estimates for all remaining .locations range .from approximately S35miUkm-to.$45 million for information technology, manufacturing technology, and training and deployment costs. The Company is also working with all suppliers to ensure their systems are year 2000 compliant as well. All costs associated with supplier compliance will be borne by them. In die event that some suppliers are unable to convert or replace systems appropriately, the Company will switch suppliers to those that are able to provide compliant transaction processing. PART n. OTHER INFORMATION ITEM i. LEGAL PROCEEDINGS See the paragraphs tn Note 11, Conringeffi Liabilities, to the Company's Consolidated Financial Statements above, which are incorporated here by reference. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) None of the constituent instruments defining the rights of die holders of any class of the Company's registered securities was materially modified in the quarter ended March 31, 199%. (b) None of the rights evidenced by any class of the Company's registered securities was materially limited or qualified in die quarter ended March 31. 3998 by die issuance or modification of any other class of securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES (a) During the quarter ended March 31, 1998, there was no material default in die payment of principal, interest, sinking or purchase fund installments, or any other material default not cured within 30 days, with respect to any indebtedness of the Company or any of its significant subsidiaries exceeding 5 percent of die total assets of the Company and its consolidated subsidiaries. (b) During die quarter ended March 31, 1998, no material arrearage in die payment of dividends occurred, and there was no other material delinquency not cured within 30 days, with respect to any class of preferred stock of the Company which is registered or which ranks prior to any class of registered securities, or with respect to any class of preferred stock of any significant subsidiary of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the quarter ended March 31, 1998. ITEMS. OTHER INFORMATION The Company does not elect to report any infonnatton under this hem. ITEM 6. EXHIBITS AND RETORTS ON FORM S-K (a) Exhibits, See Exhibit Index below, which is incorporated here by reference. (b) Reports on Form S-K. During the quarter ended March 31,1998, die Company filed the following current reports on Form 8-K: Filed January 9, 1998, under Item S. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on Us behalf by the undersigned, thereunto duly authorized. Pate; , May,.*,l,J99g------------------- OWENS CORNING Registrant By: /sADomenfcoXfecg?s_ Domenico Cecere Senior Vice President and Chief Financial Officer (as duly authorized officer) Pate: Musil...199& Bv: /s/ Steven J. Strobel Steven J. Strobel Vice President and Controller The exhibits filed wife this quarterly report on Form 20-Q, except for Exhibit (11), "Computation of Per Share Earnings/ and Exhibit (99), "Subsidiaries of Owens Coming/ have been omitted from this copy. The Company wOi provide a. copy of these exhibits to any person who requests one. Requests should be addressed to Customer Service, Owens Coming, Document Center 3, 801 Washington Street. Toledo, Ohio, 43624. * -30- EXBXBIT INDEX Exhibit Number Document De&cnprion (2) Flan of Acquilition, Reorganization, Arrangement, Uq.iidatk or Succession. Agreement and Kan of Merger, dated as of May 27, 1997, among Owens Coming, Siena Corp. and Fibreboaid Corporation (incorporated herein by reference to Exhibit 2(a) to the Company's current report on Form 8-K (File No. 1-3660), filed May 28, 1997). (3) Articles of Incorporation and By-Laws. (0 Certificate of Incorporation of Owens Coming, as amended (incorporated herein by reference to Exhibit (3)0) to die Company's quarterly report on Form I0-Q (File No. 1-3660) for the quartM ended March 31,1997). (it) By-Laws of Owes Coming, as amended fmcorporaxed herein by reference to Exhibit (3) to die Company's annual report on Form 1G-K (File No. 1-3660) for 1995). (4) Instruments Defining die Rights of Security Holders, Including Indentures. Credit Agreement, dated as of June 26, 1997, among Owens Coming, other Borrowers and Guarantors, the Banks listed on Annex A thereto, and Credit Suisse First Boston, as Agent (filed as Exhibit (4) to die Company's quarterly report on Form 1(M3 (File No. 1-3660) for the quarter ended June 30, 1997) as amended by Amendment No. 1 thereto (incorporated herein by reference to Exhibit (4) to the Company's annual report on Form 10-K (File No. 1-3660) for the year ended December 31,1997). (10) Material Contracts. Credit Agreement, dated as of June 26, 1997, among Owens Coming, other Borrowers and Guarantors, fee Banks listed on Annex A thereto, and Credit Suisse First Boston, as Agent (filed as Exhibit (4) to the Company's quarterly report on .FormJ-Q.(Ei!e No.. 1-3660) for.the quarter.Mated June.30..1997) as amended by Amendment. No. 1 thereto (incorporated by reference to Exhibit (4) to die Company's amaial report on Bonn 104C (File No. 1-3660) for fee year ended December 31, 1997. Agreement and Kan of Merger, dated as of May 27, 1997, among Owens Coming, Sierra Corp, and Fibreboaid Corporation (incorporated herein by reference to Exhibit 2(a) to the Company's current report on Form 8-K (File No. 1-3660), filed May 28, 1997), (11) Statement re Computation of Per Share Earnings (filed herewith). (27) Financial Data Schedule (filed herewith). (99) Additional Exhibits. Subsidiaries of Owens Coming, as amended (filed herewith). -31- Exhibit ai) OWENS CORNING AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS ftiglc: Quarter Ended . _ Marcfr ------- 1998 199? (In millions of dollars, except share data) Net income Basic weighted average number of common shares outstanding (thousands) i_____ i i____s 53.373 52,403 Basic per share amount $ M s -80 Diluted: Net income 5_____ S' $ 44 Weighted average number of common shares outstanding (thousands) Weighted average common equivalent shares (thousands): Deferred awards Stock options using the average market price during the period Shares from assumed conversion of preferred securities 53,373 52,408 352 353 120 472 4 666 Diluted weighted average number of common shares outstanding and common equivalent shares (thousands) Diluted per share amount 53.845 -2*222 % 16 S .76 SubsidiariesofOwens Coming f3/31/$& Accord Vinyl Siding Inc!* AmeriMark Building Products, Inc. Carriage Hill Stone Co. Commercial Owens Coming Chile Limitada Crown ManufacturingInc. Deutsche Owens-CortungGlasswool GmbH Engineered Pipe Systems, Inc. EngineeredYams America, Inc. Eric Company European Owens-Coming Hbetglas, S.A. Fabwel, Inc. FalconFoam Corporation Faloc.Inc. FibreboaidCorporation Flowrite Offshore Services Ltd. IPM, Inc. Kitsons InsulationProducts Ltd. Lmp Impianti Sri Matcorp, Inc. Nanjing Owens Coming XPS Foam Co. Ltd. Norandex Inc. N. V. Owens-ComingS.A. OC Celfortec Inc. O/OHRZT CORPORATION OCFOGO.Iac. O. C. Funding B.V. O/C/SECOND CORPORATION OCW ActuationCorporation (dba, Delsan) Owens Coming (Ansban) FibetglasCo. Limited Owens Coming (China) InvestmeWCompany, Ltd. Owens Coming AJS Owens Coming Building Materials Espana S.A. Owen&-CraingBuilding Products (UJC)Ltd. Owens Coming Canada hie. Owens-ComingCanos, S.A. Owens-ComingCapital Holdings I, Inc. Owens<kmingCapital Holdings 0, Inc. Owem~ConungC^>hal L.L.C. Owens Coming Cayman (Qiina) Holdings Owens-Coming Cayman limited Owens-ComingChangchun Guan Dao Company Ltd. Owens Coming Espana SA Owens-ComingFfeerglas A.S. Limitada Owens-Coming Flberglas Deutschland GmbH Owens-Coming Fiberglas Espana, S,A. Owens-ComingFiberglas France S.A. Owens-Coming Fiberglas (G.B.) Ltd. Owens-ComingFiberglas (Italy) S.t.i. State or Other Jurisdiction Under the Laws of Ontario Delaware Ohio Chile Canada Germany Delaware Massachusetts Delaware Belgium Indiana Delaware Delaware Delaware Cyprus Delaware Unted Kingdom Italy Delaware China Delaware Belgium Cgpgfla Ohio Delaware The Netherlands Delaware Delaware Quna China Norway Spain United Kingdom Canada Argentina Delaware Delaware Delaware Cayman Islands Cayman Islands China Spain Brazil Germany Spain France United Kingdom Italy SjibsiHt?rift*ofOwens Coming 0/31 /9S> Owens-Coming Fiberglas Norway A/S Owens-ComingFiberglas S.A. Owens-ComingFiberglas Sweden Inc. Owens-ComingFiberglas Technologyfee. Owens-ComingFiberglas (U.K.) Ltd. Owens-ComiflgFibergUs (U.K.) Pension Plan Ltd. Owens-ComingFinance (U.K.) pic Owens-ComingFSC, fee. Owens-ComingFunding Corporation 0wens-Ckming(Guangrhou)Fiberglas Co., Ltd. Owens-ComingHoldings Limited OvensComingHT, las. Owens-ComingIsolation France S.A. Owens Coming (Japan) Ltd. Owens Coming Mexico, S.A. de C.V. Owens-CoraingOntario Holdings Inc. Owens-ComingOverseasHoldings, fee. Owens Coming Pipe (Africa) Pvt. Ltd. Owens Coming PolyfoamUK Ltd. Owens Coming PolypanSPA Owens-ComingReal Estate Corporation Owens Coming (Shanghai) Fiberglas Co.. Ltd. Owens Coming (Singapore)PTE Ud. Owens CommgSoutkAlriesfPty) Ltd. Owens-Coming (Sweden) AB Owens-CorningTubs, S.A. Owens-Coming(UK) Holdings Limited Owens-ComingVeil Netherlands B.V. Owens-ComingVeil U.K. Ltd. P Metals, fee. PalmettoProducts, fee. Prestige Vinyl Siding fee. Procanpol SP.Z.O.O. ScangUs'Lrd. Soltech.lac. Stone Produce Corporation T AcquisitionInc. Trumbull Asphalt Co. ofDelaware UC Industries, Inc. Vytee Corporation Vytec Sales Corporation WiUcerp, fee. Wrexham A-R. Glass Ltd. 10110 NewfoundlandLimited Jurisdiction Under the Laws of Which Organized Norway Uruguay Delaware Illinois United Kingdom United Kingdom United Kingdom Barbados Delaware China Cayman Islands Delaware France Japan Mexico Ontario Delaware Zimbabwe United Kingdom Italy Ohio China Singapore SouthAfrica Sweden Spain United Kingdom The Netherlands United Kingdom Delaware Delaware Ontario Poland United Kingdom Kentucky California Delaware Delaware Delaware Ontario Delaware Delaware United Kingdom Newfoundland