Document GmoeZe91Kw1Z2MbaKpVzJvErm

CertainTeedlH CertainTeed Corporation Valley Forge, PA 19482-0101 Code No. 10-10-24 2/90 1990. CerlainTeed Corporation - CertainTeedlH CTD036561 Januarx 30. 1990 TABLE OF CONTENTS President's letter l Company Profile 2 Significant Events 3 Management's Discussion and Analysis 8 Audited Consolidated Financial Statements Consolidated Statements ofIncome 13 Consolidated Balance Sheets 14 Consolidated Statements ofCash Flows 16 Notes to Consolidated Financial Statements 18 Report ofIndependent Auditors 26 Board ofDirectors 27. Executive Officers 28 CertainTeed s 1989financial statements are presented in this i booklet along with a summary of significant events that occurred throughout the year in each of our businesses. While our company is privately held, wefeel it is important to continue to share information on our activities andfinancial results with our employees, customers, suppliers and other business associates. ' Net sales in 1989 totaled $1.4 billion, up from $1.3 billion the prior year. Net income iiw $30,4 million, including a ) $7.1 million after-tax charge relating to restructuring costs, compared to $56.8 million in 1988, which includes a $10.6 mil lion gain resultingfrom an accounting change (See Note 6 on page 20). Softness in key markers for fiber glass reinforce ments, and deteriorating margins resulting from lower PVC \ pipe prices, primarily accountfor the profitability decline in 1989. Further details relating to 1989 s results are included in the Management's Discussion beginning on page 8. Investments last year to improve CertainTeed s competitive position over the long term were evident in all business areas. Highlights of these programs, including plant expansions, process improvements, new product introductions, and the acquisition ofLudowici-Celadon, a leading producer of clay roofing tiles, are described on the following pages. While such activities had an unfavorable impact on short-term results, they are directed at ensuring the Company's future growth. Toward this end also, CertainTeed employees | throughout the organization continue tofocus on improvement by emphasizing quality, safety, effectiveness and innovation. I /tudu/ Michel L. Besson President and ChiefExecutive Officer CTD036562 / A CERTAINTEED PROFILE SIGNIFICANT EVENTS IN 1989 CertainTeed, head quartered in Valley Forge, Pa., ranks among the top 300 industrial companies in the United States. It is a subsidiary of Compagnie de Saint-Gobain, Paris, France, a publicly held international industrial group. More than 8,000 CertainTeed people throughout North America partici pate in providing a wide range of building products, fiber glass products and piping products to customers servicing the residential construction, U & v| * remodeling and repair, non-residential construction, automotive, and water and sewer markets, as well as various outlets for reinforcement products. Product innovations, manufacturing improvements, customer service emphasis, employee safety performance gains and a continuing commit ment to community involvement were evident throughout CertainTeed in 1989. Highlights are summarized below. FIBER GLASS INSULATION Attention to customer needs, product quality, product design enhance ments and manufacturing cost reductions were areas of emphasis in insulation.. i A new Batt Pak'" packaging system, offering customers time and space savings, was made available for residential insulation products. Consisting of four compression- packed batt packages tightly bundled together with four poly straps, the new system makes CertainTeed packages easier to handle and store, and results in less trash for disposal at the job site or warehouse. V-, Advancements in fiber glass technology led to the introduction of a new, improved Insul-Safe III fiber glass blown-in insulation designed for today's higher machine speeds, contributing to greater productivity at the job site. Construction began for a new warehouse at the Mountaintop, Pa., plant. Scheduled for completion the summer of 1990, the 150,000 square-foot facility will enable CertainTeed to provide better service to customers in the northeastern United States. The plant at Berlin, N.J., was converted from a residential insulation manufacturing facility to a service center effective December 31,1989. This conversion was made because modernizations and process improvements at the Company's insulation facilities nationwide have increased production capacity so that current and projected customer requirements can be met from the other insulation plant locations. The National Safety Council recognized the employees at the Athens, Ga., facility with an Award of Honor for having the best safety record in the mineral wool industry. CTD036563 23 SIGNIFICANT EVENTS IN 1989 fiber glass reinforcements During 1989, CertainTeed's Fiber Glass Reinforcements Division boosted its presence in the automotive market and began preparations for future capacity expansion. Preliminary engineering work was initiated for an expansion at the Wichita Fails, Texas, manufacturing facility. A new applications development facility was opened in Toledo, Ohio, to provide support for Unifilo customers. Imported from Saint-Gobain in Italy, Unifilo is a fiber glass mat product, which is receiving increased acceptance in the automotive market. BAY MILLS UMITED Expansion activities, reorganization strategies and government research support enhanced the prospects for growth of CertainTeed's most diversi fied business group. Bay Mills Limited, in 1989. Expansion of the Wichita Falls, Texas, CerBay facility, which produces woven fiber glass reinforcements for a wide variety of applications, was completed. Bay Mills restructured, establishing three operating divisions, to enable the businesses to better focus on customer and market needs. Canada's Industry, Science and Technology ministry agreed to support the development of Bay Mills' advanced composites products during the next five years by stimulating the growth of Bay Mills' advanced com posites technology in Canada, recognizing this technology as strategic to Canada's economic growth. ROOFING AND VENTILATION Existing plant expansion and acquisition characterized the roofing and ventilation businesses during 1989. Continued product mix improvements in roofing also were noted. Early in 1989, the asphalt roofing plant at Shakopee, Minn., completed a major expansion project, which will increase production capacity by 65 percent. 4 In June, CertainTeed acquired CSC Incorpo rated's Ludowici-Celadon Division, the premier manufacturer of clay roof ing tiles for residential, commercial and insti tutional construction, expanding CertainTeed's position in the roofing industry. CertainTeed continued to increase its sales of non commodity shingle prod ucts, which represented five percent more of the product mix in 1989 than in the prior year. VINYL BUILDING PRODUCTS CertainTeed observed its 10th anniversary in the vinyl window business by making continued strides in new product introductions. In vinyl siding, the Company capped the year by introducing a unique exterior design system. With the availability of Geometries, a new line of custom replacement windows featuring circles, triangles, trapezoids, pentagons, octagons and arcs, CertainTeed offered customers new options for redesigning a home's exterior. The Company also introduced CertainTeed Vinyl Prime Windows, solid vinyl win dows offering a variety of new decorative shapes and colors for new con struction. Fusing style and strength, CertainTeed introduced the FairViewTM window under the Wolverine brand name. The new window combines the outstanding engineering, quality and strength of Wolverine's Bradford Window line with a slimmer and sleeker look. CTD036564 5 SIGNIFICANT EVENTS IN 1989 In December, CertainTeed unveiled a totally re-engineered line of vinyl siding products named MonogramTM, which allows the full redesign of any home's exterior. Monogram pro vides siding panels and trim in a variety of colors and two finishes, along with color-coordinated paints. Also in December, a Professional Dealer Program, consisting of three training modules and including an exterior design "selling system," was introduced by Wolverine. The latter provides remodelers, as well as builders and architects, with a comprehensive package aimed at facilitating exterior home design choices involving siding styles, trim and color. BUILDING MATERIALS DISTRIBUTION This business was in a period of transition during 1989 as its strategic direction was evaluated and redefined. In December, the Company announced its plan to restructure this business to better focus on customer needs and improve performance. PIPING PRODUCTS Noteworthy events in piping included plant improvements and a safety milestone. A new, automated state-of-the-art blending facility was installed at the Eads, Tenn., PVC pipe plant, resulting in a better quality, more consistent product. On June 12, the Lake Charles plant surpassed two million work hours without a lost-time accident, establishing a CertainTeed record. The 67-employee plant has not had a lost-time accident since it began operations more than 15 years ago. The U.S. Environmental Protection Agency (EPA) announced its final rule on asbestos-containing products in July. The regulation bans all asbestos-containing products, including A/C pipe (which the Company produces in Riverside, Calif.), in the U.S. in stages over the next seven years. The Asbestos Information Association and the A/C Pipe Producers Association--both of which CertainTeed is a member--filed a petition to appeal the rule that would ban the future manufacture and use of A/C pipe on the basis that it is not supported by sound scientific evidence. With the addition of its sixth autoclave, the Lake Charles, La., polymer plant increased its production capacity by 15 percent, adding to CertainTeed's supply of an important raw material used to manufacture vinyl building products, and PVC pipe and fittings. UTILITY SUPPLY DISTRIBUTION Improved customer service and geographic expansion were the driving forces in CertainTeed's utility supply distribution network, which provides contractors and municipalities with pipe, valves, fittings and other materials needed in the construction of private and municipal water and sewer systems. Six locations (one in New Mexico, one in Louisiana, one in Texas and three in California) were added to the existing network of 40 distribution outlets throughout the Sun Belt to improve service to existing cus tomers, as well as to broaden distribution into new markets. CORPORATE RESPONSIBILITY During 1989, CertainTeed continued to support charitable, educational and community organizations through the CertainTeed Foundation. Also, a special effort was set forth to help combat the homelessness problem currently facing our nation. Major facets of this effort are presented below. CertainTeed introduced a special Homelessness Matching Gifts Program, matching employee/retiree cash donations and time volunteered to non profit organizations that deal primarily with helping the homeless. The Company cnntributed building materials for 1989 projects of the Waco, Texas, chapter of "Habitat for Humanity." Also, working through Habitat, CertainTeed donated building materials to aid the victims of t Hurricane Hugo. Habitat provides affordable home ownership oppor tunities for low-income families by building homes and renovating houses for purchase with interest-free loans. ' CertainTeed co-sponsored an Alliance to Save Energy symposium on Affordable Housing in Washington, D.C., last October. The conference was aimed at increasing awareness among industry and government officials of the need for affordable housing, as well as educating govern ment and industry attendees on how to make homes more affordable. The Company's Employee Activity Association at headquarters locations sponsored an auction and food/clothing drives to benefit the homeless. 6 CTD036565 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS , ,,v ,, fX ^ G- J) {.% v 4 -h1 tr .$ > Net sales of $1,361.8 million in 1989 increased 8% from the 1988 level, par tially due to the full-year results of Wolverine Technologies, acquired dur ing the second quarter of 1988. For the Company's other businesses, total net sales improved over the prior-year level due largely to higher shipping volumes 0f roofjng ancj viny| building products. Cost of goods sold increased from 81% of sales in 1988 to 82% of sales in 1989, reflecting inflationary cost increases, a more extensive furnace rebuild schedule in 1989 and startup costs associated with a new roofing line at the Shakopee, Minnesota, plant. Selling and administrative expenses, while increasing from the prior-year level due primarily to the full-year impact of Wolverine Technolo gies, remained at 12% of sales. Operating profit in 1989 was further impacted by charges of $10.6 million related to the conversion of the Berlin, New Jersey, insulation manufacturing plant to a distribution facility, and of $1.0 million related to planned restructuring of the building mate rials distribution operations in Texas. As a result of the above factors, operating profit declined from $92.3 million in 1988 to $69.9 million in 1989. Interest expense, net of interest income, was $8.9 million in 1989, an increase of $4.3 million over 1988. This was primarily due to a reduction in the average level of short-term investments and an increase in short-term borrowings in 1989. To a large extent, this reflected funding requirements related to an expanded capital spending program in 1989 and acquisitions in 1988 and 1989 that were financed with internal cash resources. Other deductions, net, were $8.7 million in 1989 versus $12.5 million in 1988. The reduction reflects the absence in 1989 of non-recurring merger and acquisition-related charges that were recorded in 1988. This reduction, however, was partially offset by increases in fixed asset writeoffs and amortization of intangibles. The Company's effective tax rate increased to 41.8% in 1989 from 38.9% in 1988. This was due primarily to the full-year impact of goodwill amortization expense in 1989 related to the CertainTeed/Saint-Gobain merger and the Wolverine Technologies acquisition (see Note 6), and to a reduction in pretax profits. As a result of the above factors, net income declined to $30.4 million in 1989 from the 1988 level of $56.8 million, which had included a $10.6 million favorable adjustment due to the Company's adoption of FAS8 Statement No. 96, "Accounting for Income Taxes." Operating results for fiber glass insulation products (excluding the $10.6 million restructuring charge for the Berlin facility conversion) were improved from 1988 primarily because of higher prices and the continuing impact of programs to improve productivity and reduce costs. In contrast, operating performance for fiber glass reinforcements declined from 1988 levels as the result of both reduced shipping volumes related to weakness in the marine and construction markets, and to lower operating efficien cies related to furnace rebuilds. The results of Bay Mills Limited were slightly below 1988 levels due in large part to reduced activity in the export and construction markets. Roofing product results improved from the prior year as higher shipping volumes and product mix improvements more than offset higher raw material costs and operating inefficiencies related to the startup of a new manufacturing line. While not significant to the overall performance of the roofing products business, the results of Ludowici-Celadon, acquired in June 1989, are included for the six months ended December 31,1989. Operating performance for vinyl building products showed significant improvement over 1988 as the result of improved pricing, higher siding shipments and lower resin costs. 1989 results also reflect the full-year contribution of Wolverine Technologies' operations which were acquired on April 30, 1988. Operating performance for the building materials distribution business, while improved from prior-year levels, continued to be negatively impacted by the depressed conditions in the Texas construc tion markets. In 1989, a pretax charge of $1.0 million was established for anticipated restructuring costs for this business. Operating results for piping products declined from 1988 levels largely due to price erosion for PVC pipe which more than offset the impact of lower raw material costs and higher PVC pipe shipping volumes. The operating performance of the utility supply distribution business con tinued to be adversely impacted by market softness in the Southeast and Southwest regions. i 8 CTD036566 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net sales of $1,266.6 million in 1988 increased 9% from 1987 levels, pri marily due to the acquisition of Wolverine Technologies during the second quarter of 1988 and Bay Mills Limited in the third quarter of 1987. Operating profit, however, de clined from $110.0 million in 1987 to $92.3 million in 1988 reflecting increases for certain raw materials, higher costs associated with product design improve ments, and accounting adjustments related to the merger of CertainTeed and Saint-Gobain in 1988. Operating results in 1987 included a $10.7 million charge related to the phaseout of operations at the Savannah, Georgia, roofing plant and the Hillsboro, Texas, A/C pipe plant. Interest expense, net of interest income, increased $3.5 million from the 1987 level, as a reduction in long-term debt outstanding was offset by a decline in average cash availability resulting from funding requirements for the acquisition of Wolverine Technologies. Other deductions, net, increased from $1.4 million in 1987 to $12.5 million in 1988, primarily reflecting the direct expenses and additional goodwill amortization associ ated with the CertainTeed/Saint-Gobain merger. Effective January 1,1988, the Company adopted Financial Accounting Standards Board Statement No. 96, "Accounting for Income Taxes," which increased 1988 net income by $10.6 million (see Note 6). The above factors, partially offset by a reduction in the statutory federal income tax rate contributed to a 7.5% decline in net income. Operating performance for fiber glass reinforcements showed signifi cant improvement in 1988, reflecting strong market demand, improved operating efficiencies and a more favorable product mix. In comparison, operating results for fiber glass insulation products were negatively impacted both by increased costs related to product design improve ments, lower shipping volumes and pricing levels reflecting reduced residential construction activity. The results of Bay Mills Limited improved over the comparable prior-year period. Roofing product results improved from 1987 levels, as product mix improvements and reduced raw material costs more than offset lower shipping volumes. Vinyl building products sales increased substantially over 1987 levels, as a result of the acquisition of Wolverine Technologies and higher window product volumes, but profitability was adversely affected by higher raw material costs. In the building materials distribution business, financial results were comparable to prior-year levels as man agement continued to implement programs to minimize the impact of the protracted weakness in the Texas market. Operating results in the piping products business improved over prioryear levels as the impact of record pricing levels and continued cost reduction programs more than offset lower shipping volumes. In the Company's utility supply distribution operations, results were comparable to the prior-year level. Net sales of $1,158.4 million in 1987 increased 4% over the 1986 levels, par tially reflecting the acquisition of Bay Mills Limited in 1987 and Air Vent Inc. in 1986. Cost of goods sold as a per centage of sales declined slightly as the impact of substantially higher material costs was offset by the positive effects of higher volumes and manufacturing costs reductions. During the year, a non-recurring $10.7 million charge was made to pre tax earnings, for costs associated with the phaseout of operations of the Savannah, Georgia, roofing plant and the Hillsboro, Texas, A/C pipe plant. Operating profit after this restructuring charge declined to $110.0 million from $114.0 million in 1986. Pretax income increased 2% from the prior-year level as the decline in operating profit was more than offset by an improvement in other deduc tions, net, and a reduction in net interest expense. Net sales of fiber glass products increased from prior-year levels, primarily because of the inclusion of four months' results of Bay Mills Limited, acquired by the Company in 1987. Operating profit, however, declined as record shipments and product mix improvements in reinforcements were more than offset by continued price erosion in insulation products. CTD036567 10 n MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED STATEMENTS OF INCOME CERTAINTEED CORPORATION Years ended December 31,1989,1988 and 1987 (Dollars in Thousands, Exceptfor Per Share Amounts) Shipments of both roofing and vinyl building products increased in 1987, but the impact on operating profits was more than offset by price erosion in commodity roofing products, increased raw material costs and a restructuring charge of approximately $4.0 million related to the phaseout of the Savannah, Georgia, roofing plant. In addition, operating results in the building materials distribution business were negatively impacted by the depressed Texas economy. In the piping products business, operating profit increased sharply in 1987 as the impact of higher PVC prices and cost reduction programs more than offset lower shipping volumes related to the closures of the Hiiisboro, Texas, A/C pipe plant in 1987 and the Cameron Park, California, PVC pipe plant in late 1986. LIQUIDITY AND CAPITAL RESOURCES 'fy he Company's cash and short-term investment position at f f- Oecember 31,1989 declined $22.8 million from the prior- jj?; . & fp ' year level to $11.6 million. This reduction, combined with an increase in short-term borrowings, reflects funding requirements associated with an expanded capital spending program, the acquisition of Ludowici-Celadon, dividend 4. payments and a reduction in long-term debt, which together exceed net cash from operations. ^ As of December 31,1989, the Company had committed L;- lines of credit totaling $740 million. In addition, the ' Company has other uncommitted lines of credit, including informal arrangements to borrow from Saint-Gobain and its affiliates at competitive interest rates. At December 31,1989, total bor rowings of $13.7 million were outstanding against these facilities. (See Note 7) -1989 1988 1987 , . Net sales $1,361,763 $1,266,633 $1,158,366 Cost of.sales 1,114,610 1,025,126 902,791 Selling and administrative expenses 165,748 149,194 134,858 Restructuring charges 11,550 -0- 10,700 Operating profit 69,855 92,313 110,017 Interest expense ($12,078, $9,352 and $9,927), net of interest income (8,904) (4,603) (1,070) Other deductions, net of income (8,746) (12,519) (1,445) Profit before income taxes and cumulative effect of accounting change Income tax provision 52,205 21,830 75,191 29,285 107,502 46,120 Income before cumulative effect of accounting change 30,375 45,906 61,382 Cumulative effect of > accounting change -0- 10,846 -0- Net income $ 30,375 $ 56,752 $ 61,382 Earnings per common share: Income before * cumulative effect of , accounting change " Cumulative effect of accounting change Net income $ 1.60 $ 2.42 $ 3.23 -0$ 1.60 .57 $ 2.99 -0$ 3.23 The accompanying notes are an integral part of this statement 12 CTD036568 13 CONSOLIDATED BALANCE SHEETS CERTAINTEED CORPORATION December 31,1989 and 1988 (Dollars in Thousands, Exceptfor Share and Per Share Amounlsf ASSETS 1989 1988 Current Assets: Cash (including interest-bearing deposits of $10,703 and $33,406) $ 11,585 $ 34,420 Accounts and notes receivable Less: Allowances for doubtful receivables ($4,793 and $4,731) and discounts and allowances 191,544 193,950 (10,872) -tan <570 (11,352) 182,598 Inventories: Raw materials and supplies Work in process Finished goods 41,371 5,277 147,739 42,217 7,129 109,355 194,387 158,701 Total Current Assets 386,644 375,719 Other Noncurrent Assets 48,440 46,655 Property, Plant and Equipment, at cost: Land Buildings Equipment Construction in progress 14,903 197,995 778,789 30,953 14,178 193,637 737,187 30,565 1,022,640 975,567 Less: Accumulated depreciation (487,422) (450,167) Intangible Assets, principally excess of cost over net assets acquired, at amortized cost 535,218 155,301 525,400 159,740 $1,125,603 $1,10; ,514 The accompanying noles are an integral part ol this statement. LIABILITIES AND STOCKHOLDER S EQUITY - 1989 1988 Current Liabilities: Trade accounts payable $ 111,638 $ 106,281 Accrued compensation and employee benefit costs 35,652 33,605 Other accrued liabilities 30,907 29,890 Accrued federal income taxes 3,257 4,254 Deferred income taxes 6.200 7,209 Short-term borrowings Current portion of long-term debt 13,748 10,271 -017,126 Total Current Liabilities 211,673 198,365 Long-Term Debt, less current portion 61,652 68,575 Deferred Income Taxes and Other Liabilities 105,585 105,798 Stockholder's Equity: Common Stock: $1 par value, authorized 20,000,000 shares, issued and outstanding 18,991,745 shares 18,992 18,992 Capital in excess of par value 551,584 551,584 Retained earnings 176,117 164,200 Total Stockholder's Equity 746,693 734,776 $1,125,603 $1,107,514 14 CTD036569 15 ! CONSOLIDATED STATEMENTS OF CASH FLOWS CERTAINTEED CORPORATION Tears ended December 31,1989,1988 and 1987 (Dollars in Thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred taxes and other Restructuring charges Cumulative effect of accounting change Changes in assets and liabilities, net of effects from merger and acquisitions: Accounts receivable Inventory Accounts payable and accrued liabilities Other Total adjustments Net cash provided by operating activities Cash flows from investing activities: Capital expenditures Purchase of Wolverine Technologies, Inc. Purchase of Bay Mills Limited Cash and cash equivalents of acquired companies Proceeds from sale of property, plant and equipment Other intangibles Net cash used in investing activities Cash flows from financing activities: Increase in debt , Payments of debt Dividends paid Net cash used for financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The accompanying notes are an integral part ol this statement 16 1989 $ 30,375 , 1988 $ 56,752 1987 $ 61,382 75,827 (54) 11,550 -0- 71,210 1,636 -0- (10,846) 55,864 5,074 10,700 -0- 3,014 (34,654) (74) (1,480) 54,129 84,504 5,853 (4,595) 3,926 (7,197) 59,987 ' 116',739 (3,475) 8,541 267 (6,816) 70,155 131,537 (86,983) -000266 (1.600) (66,879) (80,115) -o495 762 -0- (46,792) -0- (98,072) 3,408' 4,117 -0- ' (88,317) (145,737) (137,339) 17,098 (17,128) (18,992) -0(40,061) (18,992) -0(21,422) (18,513) * (19,022) (59,053) (39,935) (22,835) (88,051) (45,737) 34,420 122,471 168,208 $ 11,585 $ 34,420 $122,471 CTD036570 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CERTAINTEED CORPORATION December 31,1989 NOTE!--BASIS OF PRESENTATION In March of 1988, Compagnie de Saint-Gobain ("CSG"), through its wholly owned subsidiary, Saint-Gobain Investments Inc. ("SGI"), purchased the remaining shares (42.9%) of the Company's stock it did not already own. SGI was the surviving corporation in the merger, referred to as the "SGI Merger," and changed its name to CertainTeed Corporation. The accompanying financial statements give effect to the adjustment of retained earnings to reflect CSG's historical ownership percentage and the allocation of CSG's investment in the Company's assets based on their fair values at the time of CSG's investment with any remainder resulting in excess . of cost over acquired assets as follows:. (Dollars in Thousands) Increase in Assets: Inventories Prepaid pensions Property, plant and equipment Excess of cost over net assets acquired (Goodwill) $ .27,765 8,309 146,536 42,817 $225,427 Increase in Liabilities/Capital: Deferred taxes Capital in excess of par value Decrease in retained earnings $ 72,426 362,442 (209,441) $225,427 The income statement effects of the allocation for the years ended December 31, 1989 and 1988 were to reduce net income by $10.3 and $11.7 million, respectively. The reduction in net income is principally due to additional depreciation. In conjunction with this merger, the Company extended the useful lives of some of its depreciable assets. The effect of this change does not have a material impact. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES Principles ofConsolidation: The accompanying financial statements include the accounts of CertainTeed Corporation and its subsidiaries. Investments in affiliates include 20%- to 50%-owned entities accounted for on the equity method. Intercompany transactions have been eliminated. Inventories: Inventories are stated at the lower of cost, principally last-in, first-out (LIFO), or market. Inventories valued al LIFO comprised 67% and 66% of consolidated inventories before the LIFO reserve at December 31, 1989 and 1988, respectively. The LIFO reserve was $11,069 and $14,831 at December 31,1989 and 1988, respectively. Intangibles: Intangible assets represent principally the excess of cost over the fair value of net assets of purchased businesses and the effect of certain merger adjust ments as described in Note 1. These intangibles are being amortized on a straight-line method over thirty years. Depreciation: Depreciation is computed principally by the straight-line method based on estimated useful lives of the assets. Earnings Per Common Share: Earnings per common share are computed on the weighted average number of common shares outstanding each year. NOTE 3--ACQUISITIONS Wolverine Technologies, Inc. During 1988, CertainTeed purchased Wolverine Technologies, Inc., a manufac turer of vinyl building products. CertainTeed used its internal cash resources to acquire Wolverine at a total cost of $80.1 million including related expenses. The excess of cost over the fair market value of net assets acquired was $46.5 million. The Company's consolidated results of operations include the operations of Wolverine from April 30,1988. Bay Milts Limited During 1987, the Company purchased Bay Mills Limited, a Canadian corpora tion which produces a wide range of engineered products for the construc tion and fiber reinforcements industries. The Company used its internal cash resources to acquire Bay Mills at a total cost of $98.1 million including related expenses. The excess of cost over the fair value of net assets acquired was $67.7 million. The Company's consolidated results of opera tions include, the results of Bay Mills from August 1987. The following unaudited pro forma information shows the results of the Company's operations as though the purchases of Wolverine and Bay Mills Limited had been made at the beginning of 1987: (Dollars in Thousands, Except for Per Share Amounts)19881987 Net sales $1,320,352 $1,316,504 Net income 55,222 58,652 Earnings per common share2S\3T)9 The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the purchase actually been made at the beginning of the respective periods. 18 CTD036571 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CERTA1NTEED CORPORATION December 31,1989 NOTE 4--RESTRUCTURING CHARGES During 1989, the Company provided an $TI.6 million pretax reserve to cover the estimated costs of converting its Berlin, New Jersey, insulation manufacturing plant to a distribution facility and for restructuring operations at its Building Materials Distribution Group in Texas. Ouring the second quarter ol 1987, CertainTeed provided a $10.7 million pretax reserve to cover the estimated costs of phasing out operations at its Savannah, Georgia, roofing plant and its Hillsboro, Texas, A/C pipe plant. NOTE 5--OTHER DEDUCTIONS, NET OF INCOME (Dollars in Thousands) Amortization of excess of cost over net assets acquired Amortization of other intangibles (Loss) gain on disposals of property, plant and equipment, net Income applicable to affiliates Exchange (losses) gains applicable to affiliates Royalty income Merger and acquisition-related costs Provision for payments of judgments in lawsuits Other, net 1989 1988 $(5,304) $ (4,192) (1,136) (906) (3,005) 1,443 (903) 2,003 (286) 251 -0- 233 406 (8,069) -0- (1,105) (709) 14, $(8,746) $(12,519) 1987 $ (796) (970) 39 1,450 (1,438) 1,306 -0- (1,502) 466 $(1,445) NOTE 6 -- INCOME TAXES The Company provides for the deferred income tax effects of transactions that are reported in different periods lor financial reporting and income tax return purposes. Through December 31,1987, deferred tax effects were computed based on the tax rates in effect during the period such differences arose. As of January 1, 1988, the Company adopted FASB Statement No. 96, "Accounting for Income Taxes." The principal effects of this change are to record deferred taxes on the balance sheet at the rates to be in effect when the underlying differences will be reported in the Company's income tax returns. The deferred income tax provision for the period is then the difference in the liabilities as of the beginning and end of the period. The effect of adopting FASB Statement No. 96 was to increase net income for 1988 by $10.6 million ($.56 per share), including $10.8 million reported as a cumulative effect of accounting change, and ($.2) million, ($.01) per share, reported as an increase in the 1988 tax provision. The primary reason for the net benefit in 1988 was the reduction in the corporate federal income tax rate as a result of the Tax Reform Act of 1986. -The provision for income taxes consists of: (Dollars in Thousands) Current federal income tax Current state income taxes Deferred income taxes 1989 $20,765 3,367 (2,302) $21,830 1988 $24,490 3,871 924 $29,285 1987 $37,361 5,988 2,771 $46,120 Deferred income taxes are the tax effects related to temporary differences between amounts allowed for tax purposes 4nd those included in financial reporting, as follows: (Dollars in Thousands) Excess of tax over book depreciation Nondeductible book depreciation associated with mergers Pensions Restructuring charges Other, net 1989 $ 3,538 1988 ' $ 3,349 (5,353) 3,047 (3,187) (347) $(2,302) (3,442) 1,507 513 (1,003) $ 924 1987 $ 1,523 -01,882 (2,962) 2,328 $ 2',771 Deferred taxes have not been provided on undistributed earnings of affiliates that are considered to be reinvested indefinitefy. Noncurrent deferred tax liabilities in the consolidated balance sheets were $98.5 and $99(8 million at December 31,1989 and 1988, respectively. These liabilities resulted principally from basis differences due to the write-up of assets required by the SGI acquisition discussed in Note 1 and accelerated tax depreciation. A reconciliation of federal income taxes at the statutory rate to the Com pany's income tax provision follows: Federal income tax rate State taxes, net of federal tax benefit Goodwill amortization Other, net Effective income tax rate 1989 .34.0% 3.8 3.5 .5 41.8% 1988 34.0% 3.5 1.9 (.5) 38.9% 1987 40.0% 3.5 .1 (7) 42,9% 20 CTD036572 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CERTAINTEED CORPORATION December 31,1989 NOTE 7 -- DEBT CertainTeed has a $600 million multiple borrowing option credit facility with a syndication of banks. This agreement, for which the Company pays a facility fee, expires August 1993. No funds were borrowed against this facility. In addition, CertainTeed maintains separate revolving credit agreements with a number of banks totaling $90 million currently expiring December 31, 1991 with the expiration date automatically extended each quarter, and a $50 million revolving credit agreement with one bank cancelable upon eleven months' notice. The Company pays commitment fees on the unused portion of these lending commitments. These credit facilities were actively utilized during the course of 1989 but there were no borrowings outstanding at December 31,1989. Total unsecured lines of credit amount to $740 million. CertainTeed has other short-term borrowing arrangements which require no compensating balance or commitment fee requirements. The interest rates are negotiated based on market conditions and the amount of borrowings out standing at December 31,1989 was $3.7 million. Also, CertainTeed has informal arrangements to borrow from Saint-Gobain and its affiliates at competitive interest rates. At December 31,1989, there were $10 million of borrowings outstanding to Saint-Gobain. Long-term debt, excluding amounts due within one year, consists of: (Dollars in Thousands) Industrial revenue bonds with average interest at 6.8% at December 31,1989, payable through 2010 Notes payable to insurance companies with average interest at 10.2% payable through 1993 Other 1989 1988 $37,008 $35,441 20,900 3,744 $61,652 29,000 4,134 $68,575 Maturities of long-term debt at December 31, 1989 for each ol the five years through 1994 are (in thousands): 1990--$10,271; 1991--$10,311; 1992--$9,062; 1993--$6,041; 1994--$1,478. Certain of the Company's loan agreements provide, among other matters, ' lor prepayment options, the maintenance of a prescribed amount of con solidated working capital, and certain limitations on the declaration of cash dividends. Pursuant to the terms of these restrictions, there were $176.1 million of retained earnings available for payment of dividends on common stock at December 31,1989. The net book value of property, plant and equipment pledged as collateral under mortgages and industrial revenue bonds approximated $23.7 million as of December 31,1989. NOTE 8 -- PENSION PLANS The Company has defined benefit retirement plans covering substantially all of its employees. Plan benefits are generally based on years of service and compensation during final years of employment. The Company's funding policy is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974 ("ERISA") or additional amounts to assure that plan assets will be adequate to provide retirement benefits. Plan assets consist primarily of common stock and fixed income investments. The total pension expense for all plans, including defined benefit and con tributory, was $2.6 million in 1989, $2.7 million in 1988 and $.2 million in 1987. 1989,1988 and 1987 net pension expense (income) included the following components for defined benefit plans: (Dollars in Thousands! Service cost--benefits earned during the year 1989 $ 4,053 Interest cost on projected benefit obligation Actual return on assets Net amortization and deferral 7,561 (19,152) 8,024 Net pension expense (income)-- defined benefit plans $ 486 1988 $ 3,422 6,989 (11,504) 216 $ (877) 1987 $4,514 5,752 (6,375) (5,063) $(1,172) 22 CTD036573 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CEKIAINTEED CORPORATION December 31,1989 The following table presents a reconciliation of the funded status of the Company's principal pension plans: December 31, December 31, (Dollars in Thousands)19891988 Actuarial present value of benefit obligations: Vested $(69,250) $(54,587) Nonvested (7.509) (9,852) Accumulated benefit obligation (76,759) (64,439) Effect of projected future salary increases (17,212) (17,507) Projected benefit obligation (93,971) (81,946) Plan assets at market value 125,800 107,000 Plan assets in excess of projected benefit obligation Effect of SGI merger, net of amortization Unrecognized net assets at January 1,1986, net of amortization Unrecognized net loss Net pension asset recognized in the Consolidated Balance Sheets 31,829 6,446 (22,105) 4,099 $ 20,269 25,054 7,559 (25,189) 9,778 $ 17,202 Principal actuarial assumptions used were: Measurement of projected benefit obligation: Discount rate (9.25% at December 31,1988) Long-term rate of compensation increase Long-term rate of return on plan assets Amortization of gains or losses based on average remaining service life 9.00% 6.50% 10.00% 11.3 years NOTE 9 -- CONTINGENCIES The Company is a party to a number of legal actions arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses and/or insurance coverage respecting each of these actions and does not believe that they will materially affect the Company's operations or financial position. NOTE 10 -- STATEMENTS OF CASH FLOWS The Company's cash includes funds invested in a variety of liquid short-term instruments. The investment policy is to maximize after-tax yields subject to the constraints of liquidity preservation and diversification of risk. Maturities are generally less than three months. ' 24 Payments of income taxes were $24,814 in 1989, $27,084 in 1988, and $51,204 in 1987. Payments of interest net of amounts capitalized were $10,572 in 1989, $8,721 in 1988, and $9,672 in 1987. During 1988, all of the stock of Wolverine Technologies, Inc. was acquired for $80.1 million. In connection with the acquisition, liabilities were assumed as follows: (Dollars in Thousands) Fair value of assets acquired Cash paid for the capital stock Liabilities assumed $117,542 (80,115) $ 37,427 During 1987, the Company purchased all of the stock of Bay Mills Limited for $98.1 million. In connection with the acquisition, liabilities were assumed as follows: (Dollars in Thousands) Fair value of assets acquired Cash paid for the capital stock Liabilities assumed $116,305 (98,072) $ 18,233 NOTE II -- CHANGES IN STOCKHOLDER'S EQUITY (Dollars in Thousands) Common Stock Capital in Excess of Par Value Retained Earnings Balance at December 31,1986 $18,982 Net income Common stock' dividends ($.975 per share) Stock options exercised 10 Foreign exchange translation adjustments $188,965 177 $291,330 61,382 (18,513) 212 Balance at December 31,1987 18,992 Net income Common stock dividends ($1.00 per share) Merger into SGI Foreign exchange translation adjustments 189,142 362.442 334,411 56,752 (18,992) (209,441) 1,470 Balance at December 31,1988 18,992 551.584 164,200 Net income 30,375 Common stock dividends ($1.00 per share) (18,992) Foreign exchange translation adjustments 534 Balance at December 31,1989 $18,992 $551,584 $176,117 CTD036574 25 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS CERTAINTEED CORPORATION BOARD OF DIRECTORS e have audited the accompanying consolidated balance sheets ot CertainTeed Corporation as of December 31, 1989 and 1988, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1989. These financial statements are the responsibility of the Company's man agement. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluat ing the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CertainTeed Corporation at December 31,1989 and 1988, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,1989, in conformity with generally accepted account ing principles. As discussed in Note 6 to the financial statements, in 1988 the Company changed its method of accounting for income taxes. John T. Gurashf Chairman of the Board CertainTeed Corporation Michel L. BessonJ Vice Chairman of the Board President and Chief Executive Officer CertainTeed Corporation Jean-Louis Beftat Chairman and Chief Executive Officer Compagnie de Saint-Gobain Jose Bidegain Senior Vice President Emeritus Compagnie de Saint-Gobain Jacques-Henri David* President and Chief Executive Officer Banque Stern Mary Johnston Evans* Corporate Director John! FeyT* Chairman of the Board, Retired The Equitable Life Assurance Society of the United States Philippe Malet Chairman and Chief Executive Officer Compagnie des Salins du Midi Roger Martin Chairman Emeritus Compagnie de Saint-Gobain Robert E. McDonald* Vice Chairman and President, Retired Sperry Corporation Martin Meyerson* President Emeritus and University Professor University of Pennsylvania Ralphs. Saul* Former Chairman of the Board Cigna Corporation Jacques H. Wahl President and Chief Operating Officer Banque Nationale de Paris January 19,1^90 TExecutive Committee 'Audit Committee 26 CTD036575 21 EXECUTIVE OFFICERS Michel L. Besson President and Chiel Executive Otlicer Lloyd C. Ambler Vice President President. Pipe & Plastics Group William 0. Boyle Vice President Internal Audit Joseph M. Corr Vice President Human Resources Jean Michel Coulon Vice President President. Fiber Glass Reinforcements Division Peter R. Dachowski Vice President President. Shelter Materials Group and Vinyl Building Products Group Thomas A. Decker Vice President General Counsel and Secretary Dwight F. Demchik Vice President and Comptroller Rene Goutte Vice President President. Insulation Group Donald S. Huml Vice President and Chief Financial Olficer President. Building Materials Distribution Group Bradford C. Mattson Vice President Planning & Development Lawrence J. Mellon. M.D. Vice President and Corporate Medical Director Carl C. Rue Vice President President and Chiel Executive Officer. Bay Mills Limited Dale W. Sullivan Vice Presideni President. Utility Supply Group Dorothy C. Wackerman Vice President Corporate Communications Michael J. Walsh Vice President and Treasurer CTD036576