Document z1309xvZL1dnxrZKxkg6GYJg

1987 Annual Report CertainTeedH CTD036625 i Table of Contents Letter to Shareholders Products and Markets Investing for the Future Key Statistics Management's Discussion and Analysis Audited Consolidated Financial Statements Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements i Reports on Financial Statements 2 On the Cover CcrtainTeed's emphasis on 5 activities aimed at assuring long term growth was apparent throughout 1987. A major event 6 was tire acquisition of Bay Mills Limited, a Canadian-based producer of engineered fiber/ 8 polymer composite materials. Bay Mills' woven and non-woven products depicted on the cover 10 are used to reinforce a variety of products such as roofing, carpet tiles, packaging, surfboards and car seats. A special section of this report (pages 6 and 7) presents 13 additional examples of invest 14 ments during 1987 geared toward 16 achieving future earnings growth 17 24 CTD036626 Selected Financial Data (xrtainTccil Coipomtion (Dollars in Millions. Except foi Per Sliitrc Amounts) 1987 As Reported for Years Ended December 31, 1986 1985 1984 1983 Net sales Income from continuing operations Total assets at year-end Long-term obligations and redeemable preferred stock at year-end Income from continuing operations per common share Cash dividends declared per common share $1,158.4 61.4(a) 856.0 91.6 3.23(a) .975 $1,114.2 57.3 812.7 107.1 3.02 .90 $1,109.7 53.4 762.8 113.5 2.73 .70 $1,189.6 $1,041.1 43.5(b) 760.5 33.2 744.7 152.1 161.2 2.17(b) .45 1.73 -0 (a) Costs associated with phasing out operations at a roofing and an A/C pipe manufacturing facility reduced 1987 income from continuing operations by $6.4 million, equivalent to $.34 per share. For further information see Note 4 on page 19. (b) Costs associated with restructuring roofing operations reduced 1984 income from continuing operations by $18 million, equivalent to $.95 per share. 1 Eamings/Dividends Per Common Share $ Book Value Per Common Share (Year-End) $ n----------------------------------------- 34 16 8 0 --------------" * " * " 83 84 85 86 87 CTD036627 i To Our Shareholders v r Mhitfi l ineteen hundred projects that meet corporate eighty-seven was a good investment criteria; year for CertairiTeed. streamlining operations to For the sixth consecutive improve productivity and dis year, net income improved continuing those operations with and progress was made toward unfavorable long-term prospects; the achievement of goals process development directed aimed at assuring long-term : at quality and productivity earnings growth. improvement; and Financial Overview utilizing current expertise and know-how to add new Sales for the year were $1.2 billion, product lines by applying up 4 percent from 1986, and net existing technology or income rose 7 percent to $61.4 acquiring new businesses. million, equivalent to $3.23 per share. Financial results for 1987 Much was accomplished in i this regard in 1987. include a $10.7 million pretax, ; Investments in existing non-recurring charge related to | businesses focused on projects two plant closures. After tax, this j with high potential return. The charge reduced net income by benefits of some of these $6.4 million, or $.34 per share. activities will not begin to be The board of directors voted realized until 1989. in April 1987 to increase the For example, to meet common stock dividend from an customer demand and further annual rate of $.90 to $1.00 strengthen the roofrng business per share. in the North Central region, a Corporate Commitment Corporate programs aimed at increasing shareholder value continued to focus on the following: strengthening existing businesses by undertaking j second shingle production line is being installed at Shakopee, Minn., which will be completed later this year. This followed a roofing expansion project at Oxford, N.C., that tripled capacity for non-commodity improvement and expansion CTD036628 shingles and increased overall shingle capacity at that plant by 75 percent in 1987. The Georgia and Florida market, which had been serviced by CertainTeed's oldest roofing plant at Savannah, Ga., is now being supplied from Oxford. The Savannah plant was phased out last year. Also in 1987, a project was initiated to expand PVC polymer capacity at the Lake Charles, La., plant, which is scheduled for completion mid-1989. CertainTeed's demand for this raw material is increasing, primarily because of growth in 1 the Company's vinyl building ! products business. An A/C pipe plant at Hillsboro, Texas, was closed during the latter part of 1987 because the long-term oudook was unsatisfactory. While the Company has withdrawn from the A/C pipe market in Texas, it continues to serve the A/C pipe market in California and Arizona from its plant at Riverside, Calif. Pursuit of new business opportunities resulted in CertainTeed's acquisition of Bay Mills Limited, a Canadian-based producer of a wide range of composite materials for the construction and fiber reinforced industries, in August 1987. Bay Mills' current businesses are forecast to experience continued growth. In addition, the company has a proprietary technology that will enable it to penetrate the thermoplastic composites market. Bay Mills' success in developing product applications, combined with CertainTeed's marketing and technical expertise, and the research and development capabilities we share with our French associate, Saint-Gobain, also will open additional avenues for expansion. Air Vent Inc., purchased in December 1986, introduced a new, unique roof ventilation product, ShingleVent", which blends with the roof providing a finished look. These and other activities discussed on pages 6 and 7 of this report exemplify our commitment to achieving future earnings growth. Market Condition1; Throughout the year, demand was strong in most major markets in which the Company participates. New residential construction, while down 10 percent compared to 1986, remained at a good level. Construction was started on 1.6 million residential dwellings. Estimated expenditures for remodeling totaled $97 billion, a 6 percent rise over the prior year. Non-residential construction, on j the other hand, registered its | | third year of decline and i construction activity in Texas | deteriorated further. Demand for fiber glass reinforcements continued to grow at an aboveaverage rate, particularly in the recreational marine, appliance and business equipment, and automotive markets. Operations Overview Lower prices affected profitability, especially in insulation and roofing. The only product lines that experienced price appreciation were PVC pipe and fiber glass reinforcements. CTD036629 ; Shipments were up in roofing, solid vinyl siding, solid vinyl windows and fiber glass reinforcements; while volume declined in PVC pipe. In Fiber Glass Products, continued advances in operating ' results for reinforcements were ! accomplished as the plant | operated at full capacity and | achieved record shipments. | Margins in insulation were reduced because of both lower prices and increased costs. Additional programs to improve efficiencies are being implemented to reverse this performance and position CertainTeed for further growth in this business. Four months' performance of Bay Mills Limited, which continues to meet earnings projections, also is reflected in this segment's 1987 results. Sales of Building Materials rose 8 percent compared to 1986 as both roofing and solid vinyl building products (siding and windows) had higher shipments. Also, roofing continued to show improvement in product mix. Operating profit for Building Materials, however, declined versus 1986. This resulted mainly because of increased raw material costs, price erosion in commodity roofing products and expenses related to the Savannah plant closure. Another major factor was the continuing poor results of the i Company's building materials i distribution business in Texas, which remains depressed. A full J year's results of Air Vent Inc. are ! included in this segment. A significant turnaround was achieved in Piping Products despite continued unfavorable results in the utility supply distribution business. This was accomplished because of higher pricing for PVC pipe and the results of cost reduction programs in this area from which we will continue to benefit. j Regardless of near-term : economic trends, however, CertainTeed has the financial I ! resources to continue to work toward the accomplishment of long-term corporate objectives I without interruption. In 1988, new businesses will be explored, programs to develop current businesses with long-term potential will be maintained and activities that address operations i with unsatisfactory performance will be emphasized. Chairman of the Board /iU&Jtt/ /SiMnj Michel L. Besson President and Chief Executive Officer January 27, 1988 Financial Strength In the wake of the stock market collapse this past October, the short-term economic outlook is unclear. CTD036630 Products and Markets rom modem mansions being built from the ground up to Fdecades-old Victorians being revitalized from the roofs down, products manufactured by CertainTeed play a vital role in keeping America's homes comfortable and beautiful. j But, while many products are geared toward the residential j construction and remodeling markets, the Company has applied the i same technolog)' to the manufacture of products for numerous commercial and industrial applications. CertainTeed's product lines are categorized in three industry segments: I'ihcr Glass Products i i CertainTeed makes insulation for homes and commercial buildings, and j for use in industrial and automotive applications. The Company also | manufactures fiber glass reinforcements that provide lightweight strength ! j to a variety of end products. And, through Bay Mills Limited, ! CertainTeed offers a wide range of engineered materials for the I construction and fiber reinforced industries. i Building Materials Roofing, solid vinyl siding and windows, soffit and ridge vents, and aluminum doors and windows produced by CertainTeed offer building professionals a wide range of products for residential and commercial construction. The Company is also a wholesale distributor of building materials. Piping Products CertainTeed is a manufacturer of A/C and PVC pipe and fittings, as well as PVC products for electrical applications. Additionally, the Company is a wholesale distributor of pipe system components for the utility industry. 5 KESSBB'agE CTD036631 Investing for the Future nvestments. Carefully In existing businesses, new Iplanned and broadly applied, they were products were introduced and marketing strategies were CertainTeed's predominant focus redefined to address shifting during 1987. Touching on customer preferences as well as virtually all areas of operations, market opportunities. Two the Company made solid acquisitions enabled CertainTeed investments in products, people, to expand its core businesses, to facilities and new businesses -- enter new markets and to executing a long-term strategy for diversify its product line. And, continued returns in growth and while continuing efforts to prosperity. improve efficiencies, a stronger emphasis also was placed on improving the work environment of our employees, particularly in the area of health and safety. CertainTeed is investing for the future. The groundwork has been laid, and the Company is moving forward with the financial strength to accomplish its plan for long-term growth. CntainTccd, wifJi flu* broadest s/iing/c product line mdustivwide, lias icftucd its mnilret focus m cm^/ia.si^c lop-of-tlie-lme piw/urfs suc/i as the iloncon .Slinnglr' s/ioum line. Consumer demand for upscale, yet low main tenance. products led to the introduction in 1987 of Futura 2000I"1 a premium line of solid vinyl siding in natural ear/ljfone colors/or flie remodeling and new foustnution mar/teLs. CTD036632 /him i'i " n " idi r'i. i( Ml.MI >. Ii,, .rf'. mi. ,`j \n \ rin f in < n r j I<: r i* 1 , pi odiu is \:i V, >i< \ piodm {. Mangle \ .'if " ull.nv , ay dangle \ n> i /J1 p111 ,1 !i> lilt Ultl f-'i 'I. 'll' JiMI'i C; /inidle1./ I.'id / If)' U( .'| lu/v \f ills l l limed pun ides ( eilnin/eed uiili rurs fot g?o\wli m Imili i diisfiiK (ii'ii nnd mm-roiisn in (ion lelafrd mditsiiicN widi c/ wide wains of piod- tuts One stall piodurt is I ihafapc' (left), a new ^ilvr glass lein/oKed imnf mending tape An expansion uuda way at the Lake Charles, La., polymerplant, w/iieh will increase capacity hy 35 nii/iion pounds. will help CcrtainTccd meet a portion of its growing need for fhis important taw material for PVC pipe and fittings, and solid vinyl siding and windows. CTD036633 Key Statistics ( crtainTccd C.orjioration 1987 1986 Common Slock and Slocldioldcr Data Earnings per common share $3.23(a) Dividends per common share .975 Book value at year-end per common share 28.57 Common stock price range High 45% Low . 24% Stockholders of record at year-end 5,757 Average common shares outstanding (in thousands) 18,986 Price/earnings ratio (year-end) 7.7 $3.02 .90 26.30 38 Li 22% 5,722 18,977 10.3 Operations (Dollars in Millions) Net sales Pretax profit Net income Depreciation and amortization Cash provided by operations Capital expenditures Pretax profit margin Return on sales Return on average common stockholders' equity Return on average invested capital Number of employees at year-end Sales per average number of employees (dollars in thousands) $1,158.4 107.5(a) 61.4(a) 55.9 131.5 46.8 9.3% 5.3% 11.8% 10.8% 7,398(c) $162 $1,114.2 105.4 57.3 53.6 136.9 47.5 9.5% 5.1% 12.0% 10.6% 7,074 $157 Financial Position (Dollars in Millions) Cash and short-term investments Property, plant and equipment-net Total assets Working capital Long-term debt and redeemable preferred stock Common stockholders' equity Current ratio Long-term debt and redeemable preferred stock as a percent of total invested capital (d) $122.5 348.6 856.0 233.8 91.6 542.5 2.4 14.4% $168.2 344.7 812.7 279.9 107.1 499.3 2.8 17.7% 1985 $2.73 .70 24.19 28% 21% 6,496 18,970 9.7 $1,109.7 90.0 53.4 45.8 118.8 83.3 8.1% 4.8% 11.8% 10.4% 7,376 $150 $107.4 354.8 762.8 245.0 113.5 458.9 2.7 19.8% 1984 1983 $2.17(b) .45 22.17 im 15% ' 6,617 18,969 10.0 $1.73 -0- 20.45 25 17% 6,939 17,570 11.7 $1,189.6 76.7(b) 43.5(b) 43.6 88.9 53.2 6.4% 3.7% 10.2% 8.9% 7,832 $148 $1,041.1 56.3 33.2 46.0 80.7 38.2 5.4% 3.2% 9.0% 8.0% 8,665 $132 $121.1 320.4 760.5 266.3 152.1 420.6 2.7 26.6% $102.5 341.5 744.7 226.0 161.2 388.0 2.5 29.4% (a) During 1987, a reserve of $10.7 million was established to cover costs associated with phasing out operations at a roofing and an A/C pipe manufacturing facility. This reduced net income by $6.4 million, equivalent to $.34 a share. (b) During 1984, a reserve of $33 million was established to cover costs associated with restructuring roofing operations which, after related income tax effects, reduced net income by $18 million, equivalent to $.95 a share. (c) Includes 742 employees of Bay Mills Limited, which was acquired in 1987. (d) Invested capita] is defined as common stockholders' equity plus redeemable preferred stock and long-term debt. CTD036634 Net Sales l SvV 000 $mm | (VO uv uL 85 8-1 85 88 87 Sales per Average Number of Employees 1VV $m l - -- J1 <4 5 < 0 f- 7 Long-Term Debt and Redeemable Preferred Stock $MM Invested Capital % Capital Expenditures $mm 40--------------------------------------------- ioo----------------------------------------- HI 84 8=) 86 87 Management's Discussion and Analysis of Financial Condition and Results of Operations In the Fiber Glass Products segment, net sales rose 5% primarily reflecting the inclusion of four months' Net sales of $1,158.4 million in 1987 increased 4% over 1986 levels, with shipping volumes comparable to prior-year levels in most major product lines. However, the impact of higher shipping levels on sales was partially offset by price erosion in many product areas and continued weakness in the Texas construction market. Cost of goods sold as a percentage of sales declined slightly in 1987 as the positive effects of higher volumes and manufacturing cost reductions were reduced substantially by higher material costs. results of Bay Mills Limited, acquired by the Company in 1987. Operating profit, however, declined as record shipment volumes and product mix improve ments in reinforcements were more than offset by continued price erosion in insulation products. Building Materials segment sales increased 8% versus 1986 as shipments increased in both roofing and vinyl building products. Despite these higher volumes and an improved product mix in roofing, operating results for this segment fell $2.4 million, to $22.0 million. This was primarily the result of price erosion in commodity roofing products, increased During the year, a $10.7 million charge to pretax earnings was made for restructuring operations, reducing net income by $6.4 million, or $.34 per share. This non-recurring charge reflects the 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 of $10.7 million declined to $110 million from the prior-year level of 10 $114 million. raw material costs in both roofing and vinyl building products, and a charge to operating profit for restructuring costs of approximately $4.0 million related to the phaseout of the Savannah, Georgia, roofing plant. Another contributing factor was the continued unfavorable performance of the building materials distribution business in the depressed Texas economy. Although not significant to overall segment performance, the full-year results of Air Vent Inc., acquired in December 1986, are included in this segment in 1987. Interest expense, net of interest income, declined $3.0 million from 1986, primarily due to a higher average level of cash available for short-term invest ment during the year coupled with a reduction in average long-term debt outstanding. Other deduc tions, net, improved $3.1 million, largely the result of losses incurred in 1986 on the disposition of fixed assets (see Note 5). As a result, pretax income increased 2%, to $107.5 million, from the prior-year level. In addition, the Company's effective tax rate declined from 45.6% in 1986 to 42.9% in 1987, due to the reduction in the statutory federal income tax rate. Net income, reflecting the above factors, increased 7% to $61.4 million, from the 1986 level. Sales for the Piping Products segment were compar able to 1986. Volume declined in both A/C and PVC pipe due to the closure of the Hillsboro, Texas, A/C pipe plant in 1987 and the closure of the Cameron Park, California, PVC pipe plant in late 1986. Despite a restructuring charge of approximately $6.7 million related to the closure of the Hillsboro plant, operating profit increased over five-fold in 1987, reflecting an improvement in PVC pipe pricing and the impact of the significant cost reduction programs implemented in this area. Net sales of $1.1 billion in 1986 were comparable to 1985, as the impact on sales of improved shipping volumes in most product areas was offset by continued price erosion in all product lines, as well as continued weakness in the Texas economy. CTD036636 Despite a large number of furnace rebuilds and startup costs associated with new product introduc tions, cost of goods sold declined 2%, to 78%, in 1986. This was attributed primarily to higher volumes, improved manufacturing efficiencies, and lower energy and raw material costs. In 1986, the Company adopted Financial Accounting Standards Board Statement No. 87 for pension accounting, which reduced 1986 pension expense by $5.3 million. As a result of the above, operating profit increased $23.5 million or 26% from the prior-year level. This increase in operating profit was partially offset by foreign exchange translation losses on income from affiliates and provisions for losses on disposal of fixed assets and settlements of legal judgments. Those factors, coupled with an increase of 4.9%, to 45.6%, in the Company's effective tax rate due to reduced investment tax credits, resulted in a 7% improve ment in net income from the prior-year level. Fiber Glass operating profits, reflecting the impact of higher volumes, improved efficiencies, and lower utility and material costs, increased 19% from the prior-year level, despite price erosion in most product areas. Building Materials segment operating profit increased from 1% of sales in 1985 to 7% of sales in 1986. Higher volumes in roofing and vinyl building products, continued productivity improvements, and reduced raw material costs combined to more than offset the negative impact of lower selling prices on the segment's operating results. In December 1986, the Company purchased Air Vent Inc., a manufacturer of attic and ridge ventilation products. This acquisition will not materially affect the financial statements of the Company. The Piping Products segment reported declines in both sales and operating profit from 1985 levels. Lower selling prices for most piping products and continued depressed conditions in the Texas market were the major contributing factors in the decline in operating results. Management has taken steps to improve the operating results of this segment, including the closing of an unprofitable PVC pipe plant in California, and the consolidation of the Company's utility supply distribution operations into three regions. Net sales of $1.1 billion in 1985 were down 7% from the record level of 1984. The decline in net sales reflects primarily the permanent closing of five roofing plants in 1984, as well as price erosion in many of the Company's major product lines. Operating profit, however, declined 25% from prioryear levels, the result of declining prices in both the Fiber Glass and Piping Products segments, and increased expenses associated with scheduled furnace rebuilds and new product introductions. The Building Materials segment, reflecting record shipments of vinyl building products and continued emphasis on cost reduction and productivity improvements, returned to profitability for the first time since 1980. Other income (deductions), net, increased to a positive $2.4 million from a negative $6.4 million in 1984, the result of net gains associated with the disposal of Fixed assets in 1985, versus losses in 1984, and the inclusion in 1984 of a $4.5 million charge, related to the setdement of a suit brought by a former sales agent of the Company. Net income increased 23%, to $53.4 million, from 1984. However, 1984 results included an $18 million after-tax charge for the restructuring of the Company's roofing operations. CTD036637 The Company's cash and short-term investment position at December 31, 1987, decreased $45.7 million from the prior-year level, but continues to remain strong at $122.5 million. This reduction reflects the $98.1 million purchase of 100% of the outstanding shares of Bay Mills Limited during 1987. In addition, cash requirements were impacted by a $21.4 million reduction in debt in 1987, versus a $9.3 million reduction in 1986, primarily the'result of accelerated long-term debt repayments made in 1987. The Company invests in a variety of highgrade, short-term investment instruments with the objective of maximizing after-tax yields subject to the constraints of liquidity preservation and diversification of risk. In 1987, capital expenditures for the replacement and improvement of property, plant, and equipment totaled $46.8 million, closely approximating 1986 spending levels. Throughout the 1985 to 1987 period, cash provided by operations has been more than sufficient to meet internal capital expenditure, dividend, and debt repayment requirements. During 1987, the Company established a $150 million multiple option credit facility with a syndication of banks which is available for general corporate purposes. With this facility, the Company has established committed lines of credit totaling $290 million. Management has evaluated the general effects of inflation on the Company and has determined that the operations of the Company are influenced more by movements of specific commodity prices and competitive industry conditions than by general inflationary pressures. Where significant, the effects are discussed in the "Results of Operations'' section. 12 I CTD036638 I i Consolidated Statement of Income CalainTcctl Corporation Years aided Drcanba M. 1987. 1986 and 1985 (f)allai'S in riunisoiifls'. Except for I'a Si:.uc .Amounts) Net sales Cost of goods sold Selling and administrative expenses Restructuring charge Operating profit Interest expense ($9,927, $10,762 and $11,695), net of interest income Other income (deductions), net Profit before income taxes Income tax provision Net income Earnings per common share 1987 $1,158,366 902,791 134,858 10,700 110,017 1986 1985 $1,114,242 872,913 127,346 -0- $1,109,678 885,372 133,784 -0- 113,983 : 90,522 (1,070) ; (1,445) (4,060) , (4,544) (2,870) 2,358 107,502 46,120 $ 61,382 105,379 48,105 ; 90,010 36,630 $ 57,274 ' $ 53,380 1 $3.23 $3.02 i $2.73 i i i The accompanying notes are art integral part ofthis statements CTD036639 Consolidated Balance Sheet Ccilainlecd Coloration December 31, 1987 and 1986 (Dollats in Thousands, lixcc.pt for Share and Pn Shan Amounts) . 'i.s.Si is Current Assets: Cash (including interest-bearing deposits of $120,661 and $165,798) Accounts and notes receivable Less: Allowances for doubtful receivables ($3,525 and $3,301) and disfounts and allowances Inventories at lower of first-in, first-out cost or market: Raw materials and supplies Work in process Finished goods Less: LIFO reserve Deferred income taxes Total current assets Other Noncurrent Assets Property, Plant and Equipment, at cost: Land Buildings Equipment Construction in progress Less: Accumulated depreciation Intangible Assets, principally excess of cost over net assets acquired, at amortized cost 1987 1986 $122,471 176,841 (8,331) 168,510 $168,208 161,680 (8,468) 153,212 33,095 5,203 ______________101,933 140,231 (35,555) 104,676 9,689 405,346 27,650 25,008 4,328 107,792 137,128 (3.3,469) 103,659 11,522 436,601 23,190 8,445 144,454 573,671 13,835 740,405 (391,821) 348,584 9,196 140,453 552,768 10,053 712,470 (367,725) 344,745 74,395 8,198 $855,975 ' $812,734 CTD036640 l u/i-iil/nrs iiml Stockholders hi/uiis Current Liabilities: Trade accounts payable Accrued compensation and employee benefit costs Other accrued liabilities Accrued federal income taxes Current portion of long-term debt Total current liabilities Long-Term Debt, less current portion Deferred Income Taxes and Other Liabilities Stockholders' Equity: Common Stock: $1 par value, authorized 40,000,000 shares, issued and outstanding 18,991,745 and 18,981,987 shares Capital in excess of par value Retained earnings Total stockholders' equity 1987 1986 $ 97,847 31,491 26,048 3,588 12,533 171,507 91,629 50,294 18,992 189,142 334,411 542,545 $855,975 $ 82,104 30,836 23,192 11,117 9,422 156,671 107,063 49,723 15 VBBB&WB 18,982 - 188,965 291,330 499,277 $812,734 The accompanying notes are an integral part ofhi$?statemaiL CTD036641 Consolidated Statement of Cash Flows CnlainTtrd ( oi]<oraiion Year, onlctl December i I. IL/S7. (986 ami 1985 (Dollars in Thousands ' 1987 Cash flows from operating activities: Net income $ 61,382 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Restructuring charge Deferred taxes and other 55,864 10,700 5,074 Change in assets and liabilities, net of effects from purchase of Bay Mills limited: Accounts receivable Inventory Accounts payable and accrued liabilities Other, principally insurance and pensions Total adjustments Net cash provided by operating activities (3,475) 8,541 267 (6,816) 70,155 131,537 Cash flows from investing activities: Purchase of Bay Mills Limited Cash balances of Bay Mills Limited Capital expenditures Purchase of patents and other Proceeds from sale of property, plant and equipment Net cash used in investing activities (98,072) 3,408 (46,792) -0- 4,117 (137,339) Cash flows from financing activities: Increase in debt Payments of debt Redemption of Series D preferred stock Dividends paid Net cash used for financing activities -0(21,422) -0(18,513) (39,935) Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year (45,737) 168,208 Cash and cash equivalents at end of year $122,471 1986 $ 57,274 53,621 -0- 12,870 (404) 15,263 13,055 (14,736) 79,669 136,943 -0-0(47,521) (6,826) 1,646 (52,701) 2,960 (9,346) -0(17,079) (23,465) 60,777 107,431 $168,208 1985 $ 53,380 45,796 -0- 12,553 14,335 (199) (8,399) 1,337 : 65,423 118,803 -0-0(83,277) -05,183 (78,094) 3,700 (10,986) (32,240) (14,880) (54,406) (13,697) 121,128 $107,431 i I i i ! i The accompanying notes are an in CTD036642 Notes to Consolidated Financial Statements ( aiainTmi (Ati]h>nition Po'cwhrr M. [987 Note 1 The Company's industry segments are Fiber Glass Products, Building Materials and Piping Products, "Fiber Glass Products" is comprised of the manufacture and sale of residential, industrial and automotive insulation; Fiber glass reinforcements; and a wide range of composite materials for the construction and fiber reinforced industries. "Building Materials" is comprised (Dollars in Millions) Net Sales: Fiber glass products Building materials Piping products Intersegment sales Operating Profit Fiber glass products Building materials Piping products General corporate expenses Interest expense, net of interest income Other income (deductions), net Profit before income taxes Depreciation and Amortization: Fiber glass products Building materials Piping products General corporate Capital Expenditures: Fiber glass products Building materials Piping products General corporate Identifiable Assets at End of Year Fiber glass products Building materials Piping products General corporate Classes of Products Representing More Than 10% of Consolidated Company Sales: . Thermal Insulation (Fiber C^gss Producte) ^ ; 1 Reinforcements (Fiber Gla^rodutt$)` * V* Roofing (Building Materials)' ^ PVC Pipe (Piping Products) . ^< V ' of the manufacture and sale of asphalt roofing, vinyl siding, vinyl window lineals, soffit and ridge vents, and aluminum doors and windows; and the wholesale distribution of millwork products and other materials. "Piping Products" is comprised of the manufacture and sale of PVC and A/C piping, and the jobber distribution of pipe and pipe system components. 1987 1986 1985 $ 545.8 362.7 276.7 (26.8) $1,158.4 $ 518.1 336.7 276.6 (17.2) $1,114.2 $ 495.9 337.2 292.6 ................. (16.0) $1,109.7 $ 79.4 22.0 25.5 126.9 (16.9) 110.0 (1.1) (1.4) $ 107.5 $ 99.8 24.4 4.9 129.1 (15.1) 114.0 (4.1) (4.5) $ 105.4 $ 84.2 4.4 15.4 104.0 (13.5) 90.5 (2.9) 24 $ 90.0 $ 36.5 10.3 6.6 2.5 $ 55.9 $ 34.5 9.2 7.6 23 $ 53.6 $ 28.4 8.4 7.0 2- _ $ 45.8 $ 28.9 13.8 2.4 1.7 $ 46.8 $ 26.8 14.6 3.8 2.3 $ 47.5 $ 56.6 12.8 10.0 3.9 $ 83.3 $ 435.0 153.9 98.8 1683 $ 856.0 $ 333.6 147.5 112.4 219.2 $ 8127 $ 337.6 136.3 135.4 153.5 $ 7628 - 33.8% 1L4% 14.0% 9.5% 36.5% 8.7% 129% 10.2% ' 35.4% --. im,. r '' Jvi.f4%:' 16:9% 17 CTD036643 Note 2 Sigmfi( ant Acaumtin Policies Principles of Consolidation: 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. Accountingfor Foreign Currency Translation: The financial statements of the Company's Canadian subsidiary and its 39%-owned Mexican affiliate are translated to U.S. dollars in conformity with FAS No. 52. Since the Company's Mexican affiliate operates in a highly inflationary economy, translation adjustments are charged to income. The aggregate exchange losses (including transactions) included in the results of operations were $1.5 million for 1987, $2.1 million in 1986 and $1.4 million in 1985. Inventories: Inventories are stated at the lower of cost, principally last-in, first-out (UFO), or market. Inventories valued at UFO comprised 70% and 73% of consolidated inventories before the UFO reserve at December 31, 1987 and 1986, respectively. Intangibles: Intangible assets represent principally the excess of cost over the fair value of net assets of purchased businesses which is generally being amortized on a straight-line method over thirty years. (Dollars in Thousands) December 31, 1987 Excess of cost over net assets acquired , $68,783 Accumulated amortization (796) $67,987 December 31, 1986 $1,092 -0- $1,092 Depreciation: Depreciation on plant and equipment is computed substantially by the double-declining balance method for fiber glass insulation assets and by the straight-line method for other fixed assets 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. An adjustment for the dividend requirements on Series D preferred stock has been made until October 1, 1985, the date of redemption of the Series D preferred stock. Note 3 Acquisition During 1987, the Company acquired Bay Mills Umited, a Canadian corporation which produces a wide range of engineered products for the construction and fiber reinforced industries. The Company used its internal cash resources to acquire the common stock of Bay Mills at a total cost of $98.1 million including related expenses. The acquisition was accounted for as a purchase and the excess of the cost over the fair value of net assets acquired was $67.7 million, which is being amortized over thirty years on a straight-line method. The Company's consolidated results of operations include the operations of Bay Mills from August 1987. The following unaudited pro forma information shows, the results of the Company's operations as though the l Mui1 purchase of Bay Mills Limited had been made at the beginning of each year (in thousands, except for per share data): 1987 Net sales Net income Earnings per common share $1,205,809 59,941 $3.16 1986 $1,175,278 53,986 $2.84 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 ofthe respective periods, or of results which may occur in the future. CTD036644 Note 4 K'rs/nuluriny, ( hn-^c During the second quarter of 1987, CertainTeed provided a $10.7 million pretax reserve to cover the estimated losses on phasing out operations at its Savannah, Georgia, roofing plant and its Hillsboro, Texas, A/C pipe plant, Note 5 Other Inccmit' ! Dt'iiiwnnus i. ,\:r1 (Dollars in Thousands) Income applicable to affiliates Royalty income Gain (loss) on disposals of property, plant and equipment, net Amortization of excess of cost over net assets acquired Provision for payments of judgments in lawsuits Other, net 1987 $ 12 1,306 39 (796) (1,502) (504) $(1,445) 1986 $ (290) 954 (3,091) (53) (1,400) (664) $(4,544) 1985 $1,696 908 253 (53) -0(446) $2,358 Note 6 Income Tclxcs The provision for income taxes consists of: (Dollars in Thousands) Current federal income tax CutTent state income taxes Deferred income taxes Deferred income taxes are the tax effects related to timing differences between amounts allowed for tax purposes and those included in financial reporting, as follows: (Dollars in Thousands) Excess of tax over book depreciation Pensions Restructuring charges Provision for payments ofjudgments in lawsuits Other, net 1987 $37,361 5,988 2,771 $46,120 1986 $35,284 4,354 8,467 $48,105 1985 $21,520 3,300 li,810 $36,630 19 1987 $ 1,523 1,882 (2,962) 648 1,680 $ 2,771 1986 $ 2,634 2,530 2,004 (707) 2,006 $ 8,467 1985 $ 6,882 (1,031) 2,271 2,180 1,508 $11,810 CTD036645 A reconciliation of federal income taxes at the statutory rate to the Company's income tax provision follows: Federal income tax rate Investment tax credit, net State taxes, net of federal tax benefit Other, net Effective income tax rate Investment tax credits are applied, as available, as a reduction of income tax expense. 1987 40.0% -- 3.5 (.6) 42.9% 1986 46.0% (1.4) 2.6 (1.6) 45.6% 1985 46.0% (6.0) 2.8 (2.1) 40.7% Deferred taxes have not been provided on undistributed earnings of affiliates that are considered to be reinvested indefinitely. i Note 7 20 rbx&'ssms During the second quarter of 1987, CertainTeed established a $150 million multiple option credit facility with a syndication of banks. This agreement, for which the Company pays a facility fee, expires May 1992. No funds were borrowed against this facility. CertainTeed continues to have separate revolving credit agreements with a number of banks totaling $90 million currendy expiring December 31,1989, with the expiration date automatically extended each quarter, and a $50 million revolving credit agreement with one bank cancelable upon eleven months' notice. In lieu of compensating balances, the Company pays commitment fees on the unused portion of these lending commitments. No funds were borrowed against these facilities since June 1983. Total unsecured lines of credit amount to $290 million. Long-term debt, excluding amounts due within one year, consists of: (Dollars in Thousands! Notes payable to insurance companies with average interest at 10.2% payable through 1994 Industrial revenue bonds with average interest at 6.7%atDecember31,1987, payable through 2010 Other 1987 $42,500 42383 6,746 $91,629 1986 $ 57,500 42,473. 7,090 $107,063 Maturities of long-term debt at December 31, 1987, for each of the five years through 1992 are (in thousands): 1988 -- $12,533,1989 -- $16,579,1990 -- $9,757, 1991 -- $9,728,1992 -- $8,761. Certain of the Company's loan agreements provide, among other matters, for prepayment options, the maintenance of a prescribed amount of consolidated working capital, and certain limitations on the declaration of cash dividends. Pursuant to the terms of these restrictions, there were $157 million of retained earnings available for payment of dividends on common stock at December 31,1987. The net book value of property, plant and equipment pledged as collateral under mortgages and industrial revenue bonds approximated $18.5 million as of December 31,1987. CTD036646 Note 8 The Company has defined benefit retirement plans covering substantially all of its employees. Plan benefits are generally based on years of service and compensa tion 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 (income) for all plans was $.2 million in 1987, $(2.3) million in 1986 and $2.6 million in 1985. Effective January 1, 1986, the Company adopted Finan cial Accounting Standards Board Statement No. 87, "Employers' Accounting for Pensions," for its defined benefit plans. The effect of this adoption was to reduce 1986 pension expense by approximately $5.3 million. Pension expense for 1985 has not been restated. 1987 and 1986 net pension income included the fol lowing components for defined benefit plans (in thousands): Service cost -- benefits earned during the year Interest cost on projected benefit obligation Actual return on assets Net amortization and deferral Net pension income -- defined benefit plans 1987 1986 $ 4,514 5,752 (6375) (5,063) ! ! i | ; $(1,172) j $ 3,370 5,031 (9,842) : I ! | (1,444) ' $(2,885) ! The following table presents a reconciliation of the funded status of the Company's principal pension plans: (Dollars in Thousands) December31, 1987 December 31, 1986 Actuarial present value of benefit obligations: Vested Nonvested $(44,155) (9,773) $(44,488) (10,971) Accumulated benefit obligation Effect of projected future salary increases (53,928) (16,551) (55,459) (17,585) Projected benefit obligation Plan assets at market value (70,479) 96,900 (73,044) 94,000 Plan assets in excess of projected benefit obligation Unrecognized net assets at January 1, 1986, net of amortization Unrecognized net loss 26,421 (28,274) 8,369 ! 20,956 (31,359) 13,028 Net pension asset recognized in the Consolidated Balance Sheet $ 6,516 $ 2,625 21 JSBBJSB.-- Principal actuarial assumptions used were: Measurement of projected benefit obligation: Discount rate (8.25% at December 31,1986) Long-term rate of compensation increase Long-term rate of return on plan assets Amortization of gains and losses based on average remaining service life (years) 9.25% 6.50% 10.00% 11.8 Note 9 Contingencies The Company is a party to a number of legal actions arising in the ordinary course of its business. Iti 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. CTD036647 I Note 10 .S'iorrnK'f'/ oj Cush Huns In 1987, the Company adopted Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," and restated prior years. 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. Payments of income taxes were $51,204 in 1987, $35,231 in 1986 and $21,428 in 1985. Payments of interest net of amounts capitalized were $9,672 in 1987, $10,406 in 1986 and $10,399 in 1985. 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 $116,305 (98,072) Liabilides assumed $ 18,233 Note 11 (Dollars in Thousands) Balance at December 31, 1984 Net income Dividends: Common stock ($.70 per share) Series D preferred stock ($1.43 per share) Premium on redempdon of Series D preferred stock Stock options exercised Balance at December 31, 1985 Net income Common stock dividends ($.90 per share) Stock options exercised Balance at December 31, 1986 Net income Common stock dividends ($.975 per share) Stock options exercised Foreign exchange translation adjustments Balance at December 31,1987 The Company's parent, Compagnie de Saint-Gobain, owns 57% of the Company's common stock. Common Stock $18,969 2 18,971 11 18,982 10 $18,992 Capital in Excess of Par Value $188,957 (240) 34 188,751 214 188,965 177 $189,142 Retained Earnings $212,635 53,380 (13,279) (1,601) 251,135 57,274 (17,079) 291,330 61,382 (18,513) 212 $334,411 At December 31,1987, retained earnings included $8.1 million of undistributed earnings of affiliates. it-3 CTD036648 f{ Note 12 (Dollars in Thousands, Except for Per Share Amounts) Net sales Gross profit Net income Earnings per share Average common shares Dividends per share of common stock Stock price range (b): High Low March 31, 1987 $266,773 56,951 14,535 .77 18,982 $.225 38% 31% Three Months Ended June 30, 1987 September 30, 1987 $290,689 66,254 14.720(a) 77(a) 18,983 $.25 $309,192 67,864 19,578 1.03 18,987 $.25 42% 34% 45% 38% December 31, 1987 $291,712 64,506 12,549 .66 18,992 $.25 40% 24% ................... .............. Net sales Gross profit Net income Earnings per share Average common shares Dividends per share of common stock Stock price range (b): High Low March 31, 1986 $254,981 50,071 10,542 .56 18,971 $.225 34 22% Three Months Ended June 30, 1986 September 30, 1986 $286,071 61,191 16,127 .85 18,976 $.225 $304,580 71,431 19,885 1.04 18,980 $.225 38% 31% 37 ; 24% December 31, 1986 $268,610 58,636 10.720(c) 57(c) 18,982 $.225 23 msmmss- 32% 28% ! (a) Second quarter 1987 net income was reduced $6.4 million ($.34 per share) from the phasing out of a roofing and an A/C pipe manufacturing facility. See Note 4 for additional details. (b) The New York Stock Exchange is the principal market and prices are based on the Composite Tape. The Company's common stock is also listed on the Pacific Stock Exchange. As of December 31, 1987, there were 5,757 holders of record of common stock. : (c) Fourth quarter 1986 net income was reduced by $1.5 million ($.08 per share) for the reversal of investment tax credit that was included in income of the first three quarters of 1986 but repealed in the fourth quarter by the Tax Reform Act of 1986. CTD036649 Report of CertainTeed Management and Independent Auditors Repot i oj CetiainTeeil Miweifienten; : Report oj hulepenJetu \i-:Iitors To the Shareholders Board of Directors The management of the Company has prepared the accompanying consolidated financial statements. CertainTeed Corporation Valley Forge, Pennsylvania Their consistency and objectivity are the responsibility We have examined the consolidated balance of management These statements were prepared in sheet of CertainTeed Corporation as of December 31, accordance with generally accepted accounting 1987 and 1986, and the related consolidated principles appropriate in the circumstances, based on statements of income and of cash flows for each of our best estimates and judgments and giving due the three years in the period ended December 31, consideration to materiality. 1987. Our examinations were made in accordance The Company maintains internal control systems with generally accepted auditing standards and, designed to provide reasonable assurance that the books accordingly, included such tests of accounting and records reflect the transactions of the Company records and such other auditing procedures as we and that its assets are protected from loss or unauthor considered necessary in the circumstances. ized use. A staff of internal auditors reviews the In our opinion, the financial statements referred Company's internal controls and accounting practices. to above present fairly the consolidated financial The Audit Committee of the Board of Directors, position of CertainTeed Corporation at December 31, composed solely of non-management directors, meets 1987 and 1986, and the consolidated results of its periodically with the independent auditors, manage operations and cash flows for each of the three years ment and internal auditors to review the work of each. in the period ended December 31, 1987, in con- The independent auditors have free access to this . fortuity with generally accepted accounting Committee to discuss the results of their audit work, j principles consistently applied during the period the adequacy of internal accounting controls and the \ except for the change, with which we concur, in the quality of financial reporting. \ method of computing pension expense as described in Note 8 to the financial statements. /tbujh/ Michel 1. Besson Picsident and Chief Executive Officer !^ i i Philadelphia, Pcnii-.yK.nii.i January 21. 1988 Michel j. Lccomte Senior Vice President and Chief Financial Officer Valley Forge, Pennsylvania January 21, 1988 CTD036650 Directors and Executive Officers John T. Gurasht Chairman of the Board CertainTeed Corporation Michel L Besson + Vice Chairman of the Board President and Chief Executive Officer CertainTeed Corporation Jean-Louis Beffat Chairman and Chief Executive Officer Compagnie de Saint-Gobain Jose Bidegain Senior Vice President Industrial Relations Compagnie de Saint-Gobain Jacques-Henri David President and Chief Operating Officer Compagnie de Saint-Gobain Maty Johnston Evans* Corporate Director Roger Fauroux Chairman Emeritus Compagnie de Saint-Gobain Director Ecole Nationale d'Administration John T. Feyt* Chairman of the Board, Retired The Equitable Life Assurance Society of the United States tExecutive Committee *Audil Committee 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 Ralph S. Saul* Financial Consultant Jacques H. Wahl President and Chief Operating Officer Banque Nationale de Paris Michel L Besson President and Chief Executive Officer MichelJ. Lecomte Senior Vice President Chief Financial Officer Myron P. Simmons Senior Vice President Chief Administrative Officer President, Pipe & Plastics Group Petei R Dachowshi Vice President President, Shelter Materials Group and Vinyl Building Products Division Thomas A. Decker Vice President I General Counsel and Secretary Dwight F. Demchik Vice President and Comptroller Thomas A. Dougherty Vice President Employee and Industrial Relations Rene Goutte Vice President President, Insulation Group Donald S. Huml Vice President President, Building Materials Distnbution Group and Utility Supply Group Lester F. Kaas Vice President Administration John D. Keohane Vice President Internal Audit Theodore F. Merkel Vice President Information Systems Douglas E. Potter Vice President President, Fiber Glass Reinforcements Division Carl C. Rue Vice President Planning and Development President and Chief Executive Officer Bay Mills Limited Michael J. Walsh Vice President and Treasurer CTD036651  I tilt* > -it,./ Ui `"Shat Manufacturers Hanover Trust Co. 450 West 33rd St. New York, NY 10001 New York Stock Exchange Pacific Stock Exchange The Annual Meeting of Shareholders will be held on Tuesday, April 26, 1988, at Chemical Bank (Ninth Floor), 277 Park Ave., New York, New York, beginning at 10:00 a.m. !0-i\ uii'ihilin Requests for the Company's Form 10-K filed with the Securities and Exchange Commission, and any other inquiries from individual and institutional investors, should be directed to: l .::,i i:. vJ i i : i>i.r. ii.n ii i\ i M-. ; 1 Vp.u imcni IH ' I1.. .-tin' \ ulicv i -tgi- l'\ i l>4h2 .' 2 1 ! l-MW Design: Gregg R Stirzel C7D036652