UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20192020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-33100
Owens Corning
(Exact name of registrant as specified in its charter)
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Delaware | | | | 43-2109021 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
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One Owens Corning Parkway, | Toledo, | OH | | 43659 |
(Address of principal executive offices) | | | | (Zip Code) |
(419) 248-8000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | OC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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Large Accelerated Filer | þ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No þ
As of October 18, 2019, 108,787,46523, 2020, 108,233,247 shares of registrant’s common stock, par value $0.01 per share, were outstanding.
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| Item 1. | | |
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| Item 1A. | | |
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PART I
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(unaudited)
(in millions, except per share amounts)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | | Three Months Ended September 30, | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
NET SALES | NET SALES | $ | 1,883 | | $ | 1,818 | | $ | 5,468 | | $ | 5,333 | | NET SALES | $ | 1,904 | | $ | 1,883 | | $ | 5,130 | | $ | 5,468 | |
COST OF SALES | COST OF SALES | 1,422 | | 1,370 | | 4,242 | | 4,112 | | COST OF SALES | 1,427 | | 1,422 | | 4,004 | | 4,242 | |
Gross margin | Gross margin | 461 | | 448 | | 1,226 | | 1,221 | | Gross margin | 477 | | 461 | | 1,126 | | 1,226 | |
OPERATING EXPENSES | OPERATING EXPENSES | | OPERATING EXPENSES | |
Marketing and administrative expenses | Marketing and administrative expenses | 164 | | 159 | | 527 | | 531 | | Marketing and administrative expenses | 163 | | 164 | | 493 | | 527 | |
Science and technology expenses | Science and technology expenses | 21 | | 21 | | 65 | | 66 | | Science and technology expenses | 20 | | 21 | | 59 | | 65 | |
| Goodwill impairment charge | | Goodwill impairment charge | 0 | | 0 | | 944 | | 0 | |
Other expenses, net | Other expenses, net | 1 | | 13 | | 16 | | 39 | | Other expenses, net | 2 | | 1 | | 40 | | 16 | |
Total operating expenses | Total operating expenses | 186 | | 193 | | 608 | | 636 | | Total operating expenses | 185 | | 186 | | 1,536 | | 608 | |
OPERATING INCOME | 275 | | 255 | | 618 | | 585 | | |
OPERATING INCOME (LOSS) | | OPERATING INCOME (LOSS) | 292 | | 275 | | (410) | | 618 | |
Non-operating income | Non-operating income | (2) | | (4) | | (7) | | (11) | | Non-operating income | (4) | | (2) | | (11) | | (7) | |
EARNINGS BEFORE INTEREST AND TAXES | 277 | | 259 | | 625 | | 596 | | |
EARNINGS (LOSS) BEFORE INTEREST AND TAXES | | EARNINGS (LOSS) BEFORE INTEREST AND TAXES | 296 | | 277 | | (399) | | 625 | |
Interest expense, net | Interest expense, net | 33 | | 31 | | 101 | | 92 | | Interest expense, net | 35 | | 33 | | 98 | | 101 | |
Loss on extinguishment of debt | Loss on extinguishment of debt | 32 | | — | | 32 | | — | | Loss on extinguishment of debt | 0 | | 32 | | 0 | | 32 | |
EARNINGS BEFORE TAXES | 212 | | 228 | | 492 | | 504 | | |
EARNINGS (LOSS) BEFORE TAXES | | EARNINGS (LOSS) BEFORE TAXES | 261 | | 212 | | (497) | | 492 | |
Income tax expense | Income tax expense | 61 | | 67 | | 159 | | 127 | | Income tax expense | 56 | | 61 | | 119 | | 159 | |
Equity in net earnings / (loss) of affiliates | — | | 1 | | — | | (1) | | |
NET EARNINGS | 151 | | 162 | | 333 | | 376 | | |
Equity in net earnings of affiliates | | Equity in net earnings of affiliates | 1 | | 0 | | 1 | | 0 | |
NET EARNINGS (LOSS) | | NET EARNINGS (LOSS) | 206 | | 151 | | (615) | | 333 | |
Net earnings attributable to noncontrolling interests | Net earnings attributable to noncontrolling interests | 1 | | 1 | | 1 | | 2 | | Net earnings attributable to noncontrolling interests | 0 | | 1 | | 0 | | 1 | |
NET EARNINGS ATTRIBUTABLE TO OWENS CORNING | $ | 150 | | $ | 161 | | $ | 332 | | $ | 374 | | |
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO OWENS CORNING COMMON STOCKHOLDERS | | |
NET EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING | | NET EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING | $ | 206 | | $ | 150 | | $ | (615) | | $ | 332 | |
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO OWENS CORNING COMMON STOCKHOLDERS | | EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO OWENS CORNING COMMON STOCKHOLDERS | |
Basic | Basic | $ | 1.37 | | $ | 1.46 | | $ | 3.04 | | $ | 3.38 | | Basic | $ | 1.89 | | $ | 1.37 | | $ | (5.66) | | $ | 3.04 | |
Diluted | Diluted | $ | 1.36 | | $ | 1.45 | | $ | 3.02 | | $ | 3.35 | | Diluted | $ | 1.88 | | $ | 1.36 | | $ | (5.66) | | $ | 3.02 | |
| WEIGHTED AVERAGE COMMON SHARES | WEIGHTED AVERAGE COMMON SHARES | | WEIGHTED AVERAGE COMMON SHARES | |
Basic | Basic | 109.2 | | 110.0 | | 109.2 | | 110.8 | | Basic | 108.8 | | 109.2 | | 108.7 | | 109.2 | |
Diluted | Diluted | 110.0 | | 110.9 | | 110.0 | | 111.7 | | Diluted | 109.5 | | 110.0 | | 108.7 | | 110.0 | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(unaudited)
(in millions)
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| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2019 | 2018 | 2019 | 2018 |
NET EARNINGS | $ | 151 | | $ | 162 | | $ | 333 | | $ | 376 | |
Currency translation adjustment (net of tax of $(6) and $0 for the three months ended September 30, 2019 and 2018, respectively, and $(7) and $(1) for the nine months ended September 30, 2019 and 2018, respectively) | (57) | | (12) | | (36) | | (101) | |
Pension and other postretirement adjustment (net of tax of $0 and $(1) for the three months ended September 30, 2019 and 2018, respectively, and $0 and $(3) for the nine months ended September 30, 2019 and 2018, respectively) | (2) | | 1 | | (1) | | 3 | |
Hedging adjustment (net of tax of $(1) and $0 for the three months ended September 30, 2019 and 2018, and $0 for both the nine months ended September 30, 2019 and 2018, respectively) | 1 | | 1 | | — | | 2 | |
COMPREHENSIVE EARNINGS | 93 | | 152 | | 296 | | 280 | |
Comprehensive earnings attributable to noncontrolling interests | 1 | | 1 | | 1 | | 2 | |
COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING | $ | 92 | | $ | 151 | | $ | 295 | | $ | 278 | |
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| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2020 | 2019 | 2020 | 2019 |
NET EARNINGS (LOSS) | $ | 206 | | $ | 151 | | $ | (615) | | $ | 333 | |
Currency translation adjustment (net of tax of $3 and $(6) for the three months ended September 30, 2020 and 2019, respectively, and $(7) for both the nine months ended September 30, 2020 and 2019) | 37 | | (57) | | (32) | | (36) | |
Pension and other postretirement adjustment (net of tax of $0 for both the three months ended September 30, 2020 and 2019, and $0 for both the nine months ended September 30, 2020 and 2019) | (3) | | (2) | | 2 | | (1) | |
Hedging adjustment (net of tax of $(1) for both the three months ended September 30, 2020 and 2019, and $(1) and $0 for the nine months ended September 30, 2020 and 2019, respectively) | 3 | | 1 | | 2 | | 0 | |
COMPREHENSIVE EARNINGS (LOSS) | 243 | | 93 | | (643) | | 296 | |
Comprehensive earnings attributable to noncontrolling interests | 0 | | 1 | | 0 | | 1 | |
COMPREHENSIVE EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING | $ | 243 | | $ | 92 | | $ | (643) | | $ | 295 | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except per share amounts)
| ASSETS | ASSETS | September 30, 2019 | December 31, 2018 | ASSETS | September 30, 2020 | December 31, 2019 |
CURRENT ASSETS | CURRENT ASSETS | | CURRENT ASSETS | |
Cash and cash equivalents | Cash and cash equivalents | $ | 35 | | $ | 78 | | Cash and cash equivalents | $ | 647 | | $ | 172 | |
Receivables, less allowances of $10 at September 30, 2019 and $16 at December 31, 2018 | 977 | | 794 | | |
Receivables, less allowances of $10 at September 30, 2020 and $11 at December 31, 2019 | | Receivables, less allowances of $10 at September 30, 2020 and $11 at December 31, 2019 | 1,016 | | 770 | |
Inventories | Inventories | 1,031 | | 1,072 | | Inventories | 886 | | 1,033 | |
| Other current assets | Other current assets | 87 | | 76 | | Other current assets | 84 | | 86 | |
Total current assets | Total current assets | 2,130 | | 2,020 | | Total current assets | 2,633 | | 2,061 | |
Property, plant and equipment, net | Property, plant and equipment, net | 3,759 | | 3,811 | | Property, plant and equipment, net | 3,717 | | 3,855 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 207 | | — | | Operating lease right-of-use assets | 160 | | 203 | |
Goodwill | Goodwill | 1,909 | | 1,949 | | Goodwill | 976 | | 1,932 | |
Intangible assets | Intangible assets | 1,716 | | 1,779 | | Intangible assets | 1,655 | | 1,721 | |
Deferred income taxes | Deferred income taxes | 36 | | 43 | | Deferred income taxes | 33 | | 46 | |
Other non-current assets | Other non-current assets | 198 | | 169 | | Other non-current assets | 224 | | 188 | |
TOTAL ASSETS | TOTAL ASSETS | $ | 9,955 | | $ | 9,771 | | TOTAL ASSETS | $ | 9,398 | | $ | 10,006 | |
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY | |
| Current liabilities | Current liabilities | $ | 1,261 | | $ | 1,278 | | Current liabilities | $ | 1,351 | | $ | 1,329 | |
Long-term debt, net of current portion | Long-term debt, net of current portion | 3,180 | | 3,362 | | Long-term debt, net of current portion | 3,126 | | 2,986 | |
Pension plan liability | Pension plan liability | 222 | | 268 | | Pension plan liability | 200 | | 231 | |
Other employee benefits liability | Other employee benefits liability | 185 | | 190 | | Other employee benefits liability | 173 | | 179 | |
Non-current operating lease liabilities | Non-current operating lease liabilities | 143 | | — | | Non-current operating lease liabilities | 106 | | 138 | |
Deferred income taxes | Deferred income taxes | 247 | | 141 | | Deferred income taxes | 342 | | 272 | |
Other liabilities | Other liabilities | 195 | | 208 | | Other liabilities | 208 | | 200 | |
| OWENS CORNING STOCKHOLDERS’ EQUITY | OWENS CORNING STOCKHOLDERS’ EQUITY | | OWENS CORNING STOCKHOLDERS’ EQUITY | |
Preferred stock, par value $0.01 per share (a) | Preferred stock, par value $0.01 per share (a) | — | | — | | Preferred stock, par value $0.01 per share (a) | 0 | | 0 | |
Common stock, par value $0.01 per share (b) | Common stock, par value $0.01 per share (b) | 1 | | 1 | | Common stock, par value $0.01 per share (b) | 1 | | 1 | |
Additional paid in capital | Additional paid in capital | 4,043 | | 4,028 | | Additional paid in capital | 4,064 | | 4,051 | |
Accumulated earnings | Accumulated earnings | 2,272 | | 2,013 | | Accumulated earnings | 1,625 | | 2,319 | |
Accumulated other comprehensive deficit | Accumulated other comprehensive deficit | (693) | | (656) | | Accumulated other comprehensive deficit | (638) | | (610) | |
Cost of common stock in treasury (c) | Cost of common stock in treasury (c) | (1,140) | | (1,103) | | Cost of common stock in treasury (c) | (1,200) | | (1,130) | |
Total Owens Corning stockholders’ equity | Total Owens Corning stockholders’ equity | 4,483 | | 4,283 | | Total Owens Corning stockholders’ equity | 3,852 | | 4,631 | |
Noncontrolling interests | Noncontrolling interests | 39 | | 41 | | Noncontrolling interests | 40 | | 40 | |
Total equity | Total equity | 4,522 | | 4,324 | | Total equity | 3,892 | | 4,671 | |
TOTAL LIABILITIES AND EQUITY | TOTAL LIABILITIES AND EQUITY | $ | 9,955 | | $ | 9,771 | | TOTAL LIABILITIES AND EQUITY | $ | 9,398 | | $ | 10,006 | |
(a)10 shares authorized; none issued or outstanding at September 30, 20192020 and December 31, 20182019
(b)400 shares authorized; 135.5 issued and 108.8108.0 outstanding at September 30, 2019;2020; 135.5 issued and 109.5109.0 outstanding at December 31, 20182019
(c)26.727.5 shares at September 30, 20192020 and 26.026.5 shares at December 31, 20182019
The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(in millions)
| | | Common Stock Outstanding | | | Treasury Stock | | | APIC (a) | | Accumulated Earnings | | AOCI (b) | | NCI (c) | | Total | | Common Stock Outstanding | | | Treasury Stock | | | APIC (a) | | Accumulated Earnings | | AOCI (b) | | NCI (c) | | Total |
| | Shares | | Par Value | | Shares | | Cost | | | | Shares | | Par Value | | Shares | | Cost | AOCI (b) | | NCI (c) | | Total | |
Balance at December 31, 2018 | 109.5 | | | $ | 1 | | | 26.0 | | | $ | (1,103) | | | $ | 4,028 | | | $ | 2,013 | | | $ | (656) | | | $ | 41 | | | $ | 4,324 | | |
Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 44 | | | — | | | — | | | 44 | | |
| Balance at December 31, 2019 | | Balance at December 31, 2019 | 109.0 | | | $ | 1 | | | 26.5 | | | $ | (1,130) | | | $ | 4,051 | | | $ | 2,319 | | | $ | (610) | | | $ | 40 | | | $ | 4,671 | |
Net loss attributable to Owens Corning | | Net loss attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | (917) | | | — | | | 0 | | | (917) | |
Net earnings attributable to noncontrolling interests | | Net earnings attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Currency translation adjustment | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 11 | | | (1) | | | 10 | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (122) | | | (2) | | | (124) | |
Pension and other postretirement adjustment (net of tax) | Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | | Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | 7 | | | — | | | 7 | |
Deferred loss on hedging transactions (net of tax) | Deferred loss on hedging transactions (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | | Deferred loss on hedging transactions (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| Issuance of common stock under share-based payment plans | Issuance of common stock under share-based payment plans | 0.4 | | | — | | | (0.4) | | | 14 | | | (14) | | | — | | | — | | | — | | | — | | Issuance of common stock under share-based payment plans | 0.4 | | | — | | | (0.4) | | | 16 | | | (16) | | | — | | | — | | | — | | | 0 | |
Purchases of treasury stock | Purchases of treasury stock | (1.3) | | | — | | | 1.3 | | | (61) | | | — | | | — | | | — | | | — | | | (61) | | Purchases of treasury stock | (1.6) | | | — | | | 1.6 | | | (96) | | | — | | | — | | | — | | | — | | | (96) | |
Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | — | | | — | | | 11 | | | — | | | — | | | — | | | 11 | | Stock-based compensation expense | — | | | — | | | — | | | — | | | 11 | | | — | | | — | | | — | | | 11 | |
| Dividends declared (d) | Dividends declared (d) | — | | | — | | | — | | | — | | | — | | | (24) | | | — | | | — | | | (24) | | Dividends declared (d) | — | | | — | | | — | | | — | | | — | | | (26) | | | — | | | — | | | (26) | |
Balance at March 31, 2019 | 108.6 | | | $ | 1 | | | 26.9 | | | $ | (1,150) | | | $ | 4,025 | | | $ | 2,033 | | | $ | (647) | | | $ | 40 | | | $ | 4,302 | | |
Balance at March 31, 2020 | | Balance at March 31, 2020 | 107.8 | | | $ | 1 | | | 27.7 | | | $ | (1,210) | | | $ | 4,046 | | | $ | 1,376 | | | $ | (726) | | | $ | 39 | | | $ | 3,526 | |
Net earnings attributable to Owens Corning | Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 138 | | | — | | | — | | | 138 | | Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 96 | | | — | | | 0 | | | 96 | |
| Net loss attributable to noncontrolling interests | | Net loss attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Currency translation adjustment | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 10 | | | — | | | 10 | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 53 | | | 1 | | | 54 | |
Pension and other postretirement adjustment (net of tax) | Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | | Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
| Issuance of common stock under share-based payment plans | Issuance of common stock under share-based payment plans | 0.2 | | | — | | | (0.2) | | | 9 | | | (1) | | | — | | | — | | | — | | | 8 | | Issuance of common stock under share-based payment plans | 0.2 | | | — | | | (0.2) | | | 9 | | | (1) | | | — | | | — | | | — | | | 8 | |
| Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | — | | | — | | | 10 | | | — | | | — | | | — | | | 10 | | Stock-based compensation expense | — | | | — | | | — | | | — | | | 9 | | | — | | | — | | | — | | | 9 | |
| Dividends declared (d) | Dividends declared (d) | — | | | — | | | — | | | — | | | — | | | (25) | | | — | | | — | | | (25) | | Dividends declared (d) | — | | | — | | | — | | | — | | | — | | | (27) | | | — | | | — | | | (27) | |
Balance at June 30, 2019 | 108.8 | | | $ | 1 | | | 26.7 | | | $ | (1,141) | | | $ | 4,034 | | | $ | 2,146 | | | $ | (635) | | | $ | 40 | | | $ | 4,445 | | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | 108.0 | | | $ | 1 | | | 27.5 | | | $ | (1,201) | | | $ | 4,054 | | | $ | 1,445 | | | $ | (675) | | | $ | 39 | | | $ | 3,663 | |
Net earnings attributable to Owens Corning | Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 150 | | | — | | | — | | | 150 | | Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 206 | | | — | | | 0 | | | 206 | |
Net earnings attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | |
| Currency translation adjustment | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (57) | | | (2) | | | (59) | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 37 | | | 1 | | | 38 | |
Pension and other postretirement adjustment (net of tax) | Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | | Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | |
Deferred loss on hedging transactions (net of tax) | Deferred loss on hedging transactions (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | | Deferred loss on hedging transactions (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
| Issuance of common stock under share-based payment plans | Issuance of common stock under share-based payment plans | — | | | — | | | — | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | Issuance of common stock under share-based payment plans | 0 | | | — | | | 0 | | | 1 | | | (1) | | | — | | | — | | | — | | | 0 | |
| Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | — | | | — | | | 10 | | | — | | | — | | | — | | | 10 | | Stock-based compensation expense | — | | | — | | | — | | | — | | | 11 | | | — | | | — | | | — | | | 11 | |
| Dividends declared (d) | Dividends declared (d) | — | | | — | | | — | | | — | | | — | | | (24) | | | — | | | — | | | (24) | | Dividends declared (d) | — | | | — | | | — | | | — | | | — | | | (26) | | | — | | | — | | | (26) | |
Balance at September 30, 2019 | 108.8 | | | $ | 1 | | | 26.7 | | | $ | (1,140) | | | $ | 4,043 | | | $ | 2,272 | | | $ | (693) | | | $ | 39 | | | $ | 4,522 | | |
Balance at September 30, 2020 | | Balance at September 30, 2020 | 108.0 | | | $ | 1 | | | 27.5 | | | $ | (1,200) | | | $ | 4,064 | | | $ | 1,625 | | | $ | (638) | | | $ | 40 | | | $ | 3,892 | |
(a)Additional Paid in Capital (APIC)
(b)Accumulated Other Comprehensive Earnings (Deficit) (“AOCI”)
(c)Noncontrolling Interest (“NCI”)
(d)Quarterly dividend declarations of $0.24 per share as of September 30, 2020, June 30, 2020 and March 31, 2020
The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock Outstanding | | | | Treasury Stock | | | | APIC (a) | | Accumulated Earnings | | AOCI (b) | | NCI (c) | | Total |
| Shares | | Par Value | | Shares | | Cost | | | | | | | | | | |
Balance at December 31, 2018 | 109.5 | | | $ | 1 | | | 26.0 | | | $ | (1,103) | | | $ | 4,028 | | | $ | 2,013 | | | $ | (656) | | | $ | 41 | | | $ | 4,324 | |
Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 44 | | | — | | | — | | | 44 | |
| | | | | | | | | | | | | | | | | |
Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 11 | | | (1) | | | 10 | |
Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Deferred loss on hedging transactions (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under share-based payment plans | 0.4 | | | — | | | (0.4) | | | 14 | | | (14) | | | — | | | — | | | — | | | 0 | |
Purchases of treasury stock | (1.3) | | | — | | | 1.3 | | | (61) | | | — | | | — | | | — | | | — | | | (61) | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 11 | | | — | | | — | | | — | | | 11 | |
| | | | | | | | | | | | | | | | | |
Dividends declared (d) | — | | | — | | | — | | | — | | | — | | | (24) | | | — | | | — | | | (24) | |
Balance at March 31, 2019 | 108.6 | | | $ | 1 | | | 26.9 | | | $ | (1,150) | | | $ | 4,025 | | | $ | 2,033 | | | $ | (647) | | | $ | 40 | | | $ | 4,302 | |
Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 138 | | | — | | | — | | | 138 | |
| | | | | | | | | | | | | | | | | |
Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 10 | | | 0 | | | 10 | |
Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under share-based payment plans | 0.2 | | | — | | | (0.2) | | | 9 | | | (1) | | | — | | | — | | | — | | | 8 | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 10 | | | — | | | — | | | — | | | 10 | |
| | | | | | | | | | | | | | | | | |
Dividends declared (d) | — | | | — | | | — | | | — | | | — | | | (25) | | | — | | | 0 | | | (25) | |
Balance at June 30, 2019 | 108.8 | | | $ | 1 | | | 26.7 | | | $ | (1,141) | | | $ | 4,034 | | | $ | 2,146 | | | $ | (635) | | | $ | 40 | | | $ | 4,445 | |
Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 150 | | | — | | | — | | | 150 | |
Net earnings attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (57) | | | (2) | | | (59) | |
Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
Deferred loss on hedging transactions (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under share-based payment plans | 0 | | | — | | | 0 | | | 1 | | | (1) | | | — | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 10 | | | — | | | — | | | — | | | 10 | |
| | | | | | | | | | | | | | | | | |
Dividends declared (d) | — | | | — | | | — | | | — | | | — | | | (24) | | | — | | | | | (24) | |
Balance at September 30, 2019 | 108.8 | | | $ | 1 | | | 26.7 | | | $ | (1,140) | | | $ | 4,043 | | | $ | 2,272 | | | $ | (693) | | | $ | 39 | | | $ | 4,522 | |
(a)Additional Paid in Capital (APIC)
(b)Accumulated Other Comprehensive Earnings (Deficit) (“AOCI”)
(c)Noncontrolling Interest (“NCI”)
(d)Quarterly dividend declarations of $0.22 per share as of September 30, 2019, June 30, 2019 and March 31, 2019
The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock Outstanding | | | | Treasury Stock | | | | APIC (a) | | Accumulated Earnings | | AOCI (b) | | NCI (c) | | Total |
| Shares | | Par Value | | Shares | | Cost | | | | | | | | | | |
Balance at December 31, 2017 | 111.5 | | | $ | 1 | | | 24.0 | | | $ | (911) | | | $ | 4,011 | | | $ | 1,575 | | | $ | (514) | | | $ | 42 | | | $ | 4,204 | |
Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 92 | | | — | | | — | | | 92 | |
| | | | | | | | | | | | | | | | | |
Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (15) | | | 1 | | | (14) | |
Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
Deferred loss on hedging transactions (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under share-based payment plans | 0.6 | | | — | | | (0.6) | | | 21 | | | (21) | | | — | | | — | | | — | | | — | |
Purchases of treasury stock | (1.1) | | | — | | | 1.1 | | | (113) | | | — | | | — | | | — | | | — | | | (113) | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 9 | | | — | | | — | | | — | | | 9 | |
Cumulative effect of accounting change (d) | — | | | — | | | — | | | — | | | — | | | (12) | | | — | | | — | | | (12) | |
Dividends declared (e) | — | | | — | | | — | | | — | | | — | | | (24) | | | — | | | — | | | (24) | |
Balance at March 31, 2018 | 111.0 | | | $ | 1 | | | 24.5 | | | $ | (1,003) | | | $ | 3,999 | | | $ | 1,631 | | | $ | (530) | | | $ | 43 | | | $ | 4,141 | |
Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 121 | | | — | | | — | | | 121 | |
Net earnings attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (74) | | | (2) | | | (76) | |
Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | 4 | | | — | | | 4 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under share-based payment plans | 0.2 | | | — | | | (0.2) | | | 13 | | | (3) | | | — | | | — | | | — | | | 10 | |
Purchases of treasury stock | (0.3) | | | — | | | 0.3 | | | (23) | | | — | | | — | | | — | | | — | | | (23) | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 13 | | | — | | | — | | | — | | | 13 | |
| | | | | | | | | | | | | | | | | |
Dividends declared (e) | — | | | — | | | — | | | — | | | — | | | (23) | | | — | | | (1) | | | (24) | |
Balance at June 30, 2018 | 110.9 | | | $ | 1 | | | 24.6 | | | $ | (1,013) | | | $ | 4,009 | | | $ | 1,729 | | | $ | (600) | | | $ | 41 | | | $ | 4,167 | |
Net earnings attributable to Owens Corning | — | | | — | | | — | | | — | | | — | | | 161 | | | — | | | — | | | 161 | |
Net earnings attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (12) | | | (1) | | | (13) | |
Pension and other postretirement adjustment (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Deferred loss on hedging transactions (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under share-based payment plans | 0.1 | | | — | | | (0.1) | | | 4.0 | | | (4.0) | | | — | | | — | | | — | | | — | |
Purchases of treasury stock | (1.7) | | | — | | | 1.7 | | | (101.0) | | | — | | | — | | | — | | | — | | | (101) | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 12.0 | | | — | | | — | | | — | | | 12 | |
| | | | | | | | | | | | | | | | | |
Dividends declared (e) | — | | | — | | | — | | | — | | | — | | | (23.0) | | | — | | | | | (23) | |
Balance at September 30, 2018 | 109.3 | | | $ | 1 | | | 26.2 | | | $ | (1,110) | | | $ | 4,017 | | | $ | 1,867 | | | $ | (610) | | | $ | 41 | | | $ | 4,206 | |
(a)Additional Paid in Capital (APIC)
(b)Accumulated Other Comprehensive Earnings (Deficit) (“AOCI”)
(c)Noncontrolling Interest (“NCI”)
(d)Cumulative effect of accounting change relates to our adoption of accounting standard updates (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)," and ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory (Topic 740)."
(e)Quarterly dividend declarations of $0.21 per share as of September 30, 2018, June 30, 2018 and March 31, 2018
The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2019 | 2018 | | 2020 | 2019 |
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES | NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES | | NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES | |
Net earnings | $ | 333 | | $ | 376 | | |
Adjustments to reconcile net earnings to cash provided by operating activities: | | |
Net earnings (loss) | | Net earnings (loss) | $ | (615) | | $ | 333 | |
Adjustments to reconcile net earnings (loss) to cash provided by operating activities: | | Adjustments to reconcile net earnings (loss) to cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 337 | | 323 | | Depreciation and amortization | 352 | | 337 | |
| Deferred income taxes | Deferred income taxes | 118 | | 77 | | Deferred income taxes | 95 | | 118 | |
| Provision for pension and other employee benefits liabilities | | Provision for pension and other employee benefits liabilities | (2) | | 0 | |
Stock-based compensation expense | Stock-based compensation expense | 31 | | 34 | | Stock-based compensation expense | 31 | | 31 | |
Other non-cash | 8 | | 9 | | |
Goodwill impairment charge | | Goodwill impairment charge | 944 | | 0 | |
Intangible assets impairment charge | | Intangible assets impairment charge | 43 | | 0 | |
Other adjustments to reconcile net earnings (loss) to cash provided by operating activities | | Other adjustments to reconcile net earnings (loss) to cash provided by operating activities | (41) | | 8 | |
Loss on extinguishment of debt | Loss on extinguishment of debt | 32 | | — | | Loss on extinguishment of debt | 0 | | 32 | |
Changes in operating assets and liabilities | Changes in operating assets and liabilities | (211) | | (265) | | Changes in operating assets and liabilities | (53) | | (211) | |
Pension fund contribution | Pension fund contribution | (34) | | (34) | | Pension fund contribution | (20) | | (34) | |
Payments for other employee benefits liabilities | Payments for other employee benefits liabilities | (13) | | (15) | | Payments for other employee benefits liabilities | (10) | | (13) | |
Other | Other | (5) | | 1 | | Other | (7) | | (5) | |
Net cash flow provided by operating activities | Net cash flow provided by operating activities | 596 | | 506 | | Net cash flow provided by operating activities | 717 | | 596 | |
NET CASH FLOW USED FOR INVESTING ACTIVITIES | NET CASH FLOW USED FOR INVESTING ACTIVITIES | | NET CASH FLOW USED FOR INVESTING ACTIVITIES | |
Cash paid for property, plant, and equipment | Cash paid for property, plant, and equipment | (314) | | (425) | | Cash paid for property, plant, and equipment | (203) | | (314) | |
| Proceeds from the sale of assets or affiliates | Proceeds from the sale of assets or affiliates | 1 | | 11 | | Proceeds from the sale of assets or affiliates | 50 | | 1 | |
Investment in subsidiaries and affiliates, net of cash acquired | — | | (1,143) | | |
| | Derivative settlements | Derivative settlements | 28 | | 6 | | Derivative settlements | 49 | | 28 | |
| Net cash flow used for investing activities | Net cash flow used for investing activities | (285) | | (1,551) | | Net cash flow used for investing activities | (104) | | (285) | |
NET CASH FLOW (USED FOR) PROVIDED BY FINANCING ACTIVITIES | | |
NET CASH FLOW USED FOR FINANCING ACTIVITIES | | NET CASH FLOW USED FOR FINANCING ACTIVITIES | |
Proceeds from long-term debt | Proceeds from long-term debt | 445 | | 389 | | Proceeds from long-term debt | 297 | | 445 | |
Payments on long-term debt | Payments on long-term debt | (484) | | — | | Payments on long-term debt | 0 | | (484) | |
Proceeds from senior revolving credit and receivables securitization facilities | Proceeds from senior revolving credit and receivables securitization facilities | 1,701 | | 1,534 | | Proceeds from senior revolving credit and receivables securitization facilities | 876 | | 1,701 | |
Payments on senior revolving credit and receivables securitization facilities | Payments on senior revolving credit and receivables securitization facilities | (1,683) | | (1,227) | | Payments on senior revolving credit and receivables securitization facilities | (876) | | (1,683) | |
Proceeds from term loan borrowing | — | | 600 | | |
| Payments on term loan borrowing | Payments on term loan borrowing | (200) | | (30) | | Payments on term loan borrowing | (200) | | (200) | |
Net decrease in short-term debt | Net decrease in short-term debt | (13) | | — | | Net decrease in short-term debt | (20) | | (13) | |
Dividends paid | Dividends paid | (72) | | (70) | | Dividends paid | (78) | | (72) | |
Purchases of treasury stock | Purchases of treasury stock | (61) | | (236) | | Purchases of treasury stock | (96) | | (61) | |
Other | Other | (3) | | (7) | | Other | (9) | | (3) | |
Net cash flow (used for) provided by financing activities | (370) | | 953 | | |
Net cash flow used for financing activities | | Net cash flow used for financing activities | (106) | | (370) | |
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | 16 | | (17) | | Effect of exchange rate changes on cash | (32) | | 16 | |
Net decrease in cash, cash equivalents, and restricted cash | (43) | | (109) | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | | Net increase (decrease) in cash, cash equivalents, and restricted cash | 475 | | (43) | |
Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | 85 | | 253 | | Cash, cash equivalents and restricted cash at beginning of period | 179 | | 85 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | 42 | | $ | 144 | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | 654 | | $ | 42 | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. GENERAL
Unless the context requires otherwise, the terms “Owens Corning,” “Company,” “we” and “our” in this report refer to Owens Corning, a Delaware corporation, and its subsidiaries.
The Consolidated Financial Statements included in this report are unaudited, pursuant to certain rules and regulations of the Securities and Exchange Commission, and include, in the opinion of the Company, normal recurring adjustments necessary for a fair statement of the results for the periods indicated, which, however, are not necessarily indicative of results which may be expected for the full year. The December 31, 20182019 balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States ("U.S."). In connection with the Consolidated Financial Statements and Notes included in this report, reference is made to the Consolidated Financial Statements and Notes contained in the Company’s Form 10-K for the year ended December 31, 20182019 (the "2018"2019 Form 10-K"). Certain reclassifications have been made to the periods presented for 20182019 to conform to the classifications used in the periods presented for 2019.2020.
Cash, Cash Equivalents and Restricted Cash
On the Consolidated Statements of Cash Flows, the total of Cash, cash equivalents and restricted cash includes restricted cash of $7 million $7 million, $8 million and $7 million as of September 30, 2019,2020, December 31, 2018,2019, September 30, 20182019 and December 31, 2017, respectively.2018. Restricted cash primarily represents amounts received from a counterparty related to its performance assurance on an executory contract, which is included in Other current assets on the Consolidated Balance Sheets. These amounts are contractually required to be set aside, and the counterparty can exchange the cash for another form of performance assurance at its discretion.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Consistent with the requirements of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 236)," the allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered.
- 11 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
1. GENERAL (continued)
Accounting Pronouncements
The following table summarizes recent ASU's issued by the Financial Accounting Standards Board (FASB) that could have an impact on the Company's Consolidated Financial Statements:
| | | | | | | | | | | |
Standard | Description | Effective Date for Company | Effect on the Consolidated Financial Statements |
Recently adopted standard:standards: | | | |
ASU 2016-02, "Leases (Topic 842)," as amended by ASU 2017-13, 2018-01, 2018-10, 2018-11, and 2019-01 | The standard requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. The recognition and presentation of expenses will depend on classification as a finance or operating lease. Entities may elect to apply the provisions of the new leasing standard on January 1, 2019, without adjusting the comparative periods presented by recognizing a cumulative-effect adjustment to the opening balance of retained earnings. | | January 1, 2019 | We adopted this standard using the optional transition method in the first quarter of 2019. Please refer to Note 9 of the Consolidated Financial Statements for transition disclosures as well as other ongoing disclosure requirements. | |
| | | |
| | | |
| | | |
Recently issued standard: | | | |
| | | |
ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326)," as amended by ASU 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, and 2019-052020-02 | This standard replaces the incurred loss methodology for recognizing credit losses with a current expected credit losses model and applies to all financial assets, including trade receivables. Entities will adopt the standard using a modified-retrospective approach. | | January 1, 2020 | We do not believeadopted this standard using the modified-retrospective approach in the first quarter of 2020. The adoption of this guidance willstandard did not have a material effectimpact on our consolidated financial statements. Our current accounts receivable policy (as describedConsolidated Financial Statements. Please refer to the Accounts Receivable paragraph above in Note 1 of the Consolidated Financial Statements for additional detail on our 2018 Form 10-K) uses historicalaccounting policy. |
ASU 2017-04 "Intangibles - Goodwill and forward-looking information to estimateOther (Topic 350)" | This standard simplifies the test for goodwill impairment by eliminating Step 2 of the impairment test. If the carrying amount of expected credit lossesa reporting unit exceeds its fair value, an impairment loss shall be recognized in our existing accounts receivable. We have determinedan amount equal to that our current systems, policies and procedures comply withexcess, limited to the requirementstotal amount of this standard.goodwill allocated to that reporting unit. Entities will adopt the standard using a prospective approach. | January 1, 2020 | We adopted this standard using the prospective approach for our interim impairment test conducted in the first quarter of 2020. The goodwill impairment charge of $944 million recorded for the nine months ended September 30, 2020, was calculated in accordance with this standard. Please refer to Note 6 of the Consolidated Financial Statements for additional detail on this adoption. |
| | | |
Recently issued standard: | | | |
ASU 2019-12 "Income Taxes (Topic 740)" | This standard simplifies accounting for income taxes including such topics as intraperiod tax allocations, franchise taxes and separate company financial statements. | January 1, 2021 | We are currently assessing the impact this standard will have on our Consolidated Financial Statements. |
| | | |
- 1112 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. SEGMENT INFORMATION
The Company has 3 reportable segments: Composites, Insulation and Roofing. Accounting policies for the segments are the same as those for the Company. The Company’s 3 reportable segments are defined as follows:
Composites – The Company manufactures, fabricates and sells glass reinforcements in the form of fiber. Glass reinforcement materials are also used downstream by the Composites segment to manufacture and sell glass fiber products in the form of fabrics, non-wovens and other specialized products.
Insulation – Within our Insulation segment, the Company manufactures and sells fiberglass insulation into residential, commercial, industrial and other markets for both thermal and acoustical applications. It also manufactures and sells glass fiber pipe insulation, flexible duct media, bonded and granulated mineral wool insulation, cellular glass insulation and foam insulation used in above- and below-grade construction applications.
Roofing – Within our Roofing segment, the Company manufactures and sells residential roofing shingles, oxidized asphalt materials, roofing components used in residential and commercial construction and specialty applications, and synthetic packaging materials.
NET SALES
The following table summarizes our Net sales by segment and geographic region (in millions). Corporate eliminations (shown below) largely reflect intercompany sales from Composites to Roofing. External customer sales are attributed to geographic region based upon the location from which the product is sold to the external customer.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Reportable Segments | Reportable Segments | | Reportable Segments | |
Composites | Composites | $ | 531 | | $ | 508 | | $ | 1,579 | | $ | 1,560 | | Composites | $ | 521 | | $ | 531 | | $ | 1,413 | | $ | 1,579 | |
Insulation | Insulation | 693 | | 710 | | 1,945 | | 1,988 | | Insulation | 681 | | 693 | | 1,879 | | 1,945 | |
Roofing | Roofing | 713 | | 645 | | 2,105 | | 1,946 | | Roofing | 761 | | 713 | | 1,993 | | 2,105 | |
Total reportable segments | Total reportable segments | 1,937 | | 1,863 | | 5,629 | | 5,494 | | Total reportable segments | 1,963 | | 1,937 | | 5,285 | | 5,629 | |
Corporate eliminations | Corporate eliminations | (54) | | (45) | | (161) | | (161) | | Corporate eliminations | (59) | | (54) | | (155) | | (161) | |
NET SALES | NET SALES | $ | 1,883 | | $ | 1,818 | | $ | 5,468 | | $ | 5,333 | | NET SALES | $ | 1,904 | | $ | 1,883 | | $ | 5,130 | | $ | 5,468 | |
| External Customer Sales by Geographic Region | External Customer Sales by Geographic Region | | External Customer Sales by Geographic Region | |
United States | United States | $ | 1,273 | | $ | 1,208 | | $ | 3,670 | | $ | 3,525 | | United States | $ | 1,294 | | $ | 1,273 | | $ | 3,482 | | $ | 3,670 | |
Europe | Europe | 310 | | 304 | | 920 | | 909 | | Europe | 289 | | 310 | | 832 | | 920 | |
Asia-Pacific | Asia-Pacific | 169 | | 166 | | 492 | | 484 | | Asia-Pacific | 187 | | 169 | | 461 | | 492 | |
Rest of world | Rest of world | 131 | | 140 | | 386 | | 415 | | Rest of world | 134 | | 131 | | 355 | | 386 | |
NET SALES | NET SALES | $ | 1,883 | | $ | 1,818 | | $ | 5,468 | | $ | 5,333 | | NET SALES | $ | 1,904 | | $ | 1,883 | | $ | 5,130 | | $ | 5,468 | |
- 1213 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. SEGMENT INFORMATION (continued)
EARNINGS BEFORE INTEREST AND TAXES
Earnings before interest and taxes (EBIT) by segment consist of net sales less related costs and expenses and are presented on a basis that is used internally for evaluating segment performance. Certain items, such as general corporate expenses or income and certain other expense or income items, are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in EBIT for our reportable segments and are included within Corporate, Other and Eliminations.
The following table summarizes EBIT by segment (in millions):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Reportable Segments | Reportable Segments | | Reportable Segments | |
Composites | Composites | $ | 67 | | $ | 64 | | $ | 191 | | $ | 195 | | Composites | $ | 55 | | $ | 67 | | $ | 105 | | $ | 191 | |
Insulation | Insulation | 84 | | 94 | | 141 | | 175 | | Insulation | 73 | | 84 | | 144 | | 141 | |
Roofing | Roofing | 143 | | 127 | | 368 | | 351 | | Roofing | 196 | | 143 | | 408 | | 368 | |
Total reportable segments | Total reportable segments | 294 | | 285 | | 700 | | 721 | | Total reportable segments | 324 | | 294 | | 657 | | 700 | |
Restructuring (costs) / gains | Restructuring (costs) / gains | — | | (7) | | 1 | | (19) | | Restructuring (costs) / gains | 0 | | 0 | | (10) | | 1 | |
Acquisition-related costs | — | | (1) | | — | | (16) | | |
Recognition of acquisition inventory fair value step-up | — | | — | | — | | (2) | | |
| Gains on sale of certain precious metals | | Gains on sale of certain precious metals | 7 | | 0 | | 26 | | 0 | |
Goodwill impairment charge | | Goodwill impairment charge | 0 | | 0 | | (944) | | 0 | |
Intangible assets impairment charge | | Intangible assets impairment charge | 0 | | 0 | | (43) | | 0 | |
General corporate expense and other | General corporate expense and other | (17) | | (18) | | (76) | | (88) | | General corporate expense and other | (35) | | (17) | | (85) | | (76) | |
Total corporate, other and eliminations | Total corporate, other and eliminations | (17) | | (26) | | (75) | | (125) | | Total corporate, other and eliminations | (28) | | (17) | | (1,056) | | (75) | |
EBIT | EBIT | $ | 277 | | $ | 259 | | $ | 625 | | $ | 596 | | EBIT | $ | 296 | | $ | 277 | | $ | (399) | | $ | 625 | |
TOTAL ASSETS
Total assets for the Insulation segment decreased following $987 million of non-cash impairment charges for goodwill and intangible assets in the first quarter of 2020. Please refer to Note 6, Goodwill and Other Intangible Assets, for information on these charges.
3. REVENUE
The following table shows a disaggregation of Net sales (in millions):
| | | For the three months ended September 30, 2019 | | | For the three months ended September 30, 2020 | |
Reportable Segments | Reportable Segments | Composites | Insulation | Roofing | Eliminations | Consolidated | Reportable Segments | Composites | Insulation | Roofing | Eliminations | Consolidated |
Disaggregation Categories | Disaggregation Categories | | Disaggregation Categories | |
U.S. residential | U.S. residential | $ | 75 | | $ | 237 | | $ | 641 | | $ | (53) | | $ | 900 | | U.S. residential | $ | 76 | | $ | 257 | | $ | 691 | | $ | (56) | | $ | 968 | |
U.S. commercial and industrial | U.S. commercial and industrial | 159 | | 168 | | 46 | | — | | 373 | | U.S. commercial and industrial | 136 | | 150 | | 43 | | (3) | | 326 | |
Europe | Europe | 142 | | 165 | | 3 | | — | | 310 | | Europe | 131 | | 155 | | 3 | | 0 | | 289 | |
Asia-Pacific | Asia-Pacific | 120 | | 46 | | 4 | | (1) | | 169 | | Asia-Pacific | 141 | | 43 | | 3 | | 0 | | 187 | |
Rest of world | Rest of world | 35 | | 77 | | 19 | | — | | 131 | | Rest of world | 37 | | 76 | | 21 | | 0 | | 134 | |
NET SALES | NET SALES | $ | 531 | | $ | 693 | | $ | 713 | | $ | (54) | | $ | 1,883 | | NET SALES | $ | 521 | | $ | 681 | | $ | 761 | | $ | (59) | | $ | 1,904 | |
- 1314 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. REVENUE (continued)
| | | For the three months ended September 30, 2018 | | | For the three months ended September 30, 2019 | |
Reportable Segments | Reportable Segments | Composites | Insulation | Roofing | Eliminations | Consolidated | Reportable Segments | Composites | Insulation | Roofing | Eliminations | Consolidated |
Disaggregation Categories | Disaggregation Categories | | Disaggregation Categories | |
U.S. residential | U.S. residential | $ | 62 | | $ | 260 | | $ | 560 | | $ | (40) | | $ | 842 | | U.S. residential | $ | 75 | | $ | 237 | | $ | 641 | | $ | (53) | | $ | 900 | |
U.S. commercial and industrial | U.S. commercial and industrial | 157 | | 161 | | 52 | | (4) | | 366 | | U.S. commercial and industrial | 159 | | 168 | | 46 | | 0 | | 373 | |
Europe | Europe | 142 | | 159 | | 3 | | — | | 304 | | Europe | 142 | | 165 | | 3 | | 0 | | 310 | |
Asia-Pacific | Asia-Pacific | 115 | | 47 | | 4 | | — | | 166 | | Asia-Pacific | 120 | | 46 | | 4 | | (1) | | 169 | |
Rest of world | Rest of world | 32 | | 83 | | 26 | | (1) | | 140 | | Rest of world | 35 | | 77 | | 19 | | 0 | | 131 | |
NET SALES | NET SALES | $ | 508 | | $ | 710 | | $ | 645 | | $ | (45) | | $ | 1,818 | | NET SALES | $ | 531 | | $ | 693 | | $ | 713 | | $ | (54) | | $ | 1,883 | |
| | | For the nine months ended September 30, 2019 | | | For the nine months ended September 30, 2020 | |
Reportable Segments | Reportable Segments | Composites | Insulation | Roofing | Eliminations | Consolidated | Reportable Segments | Composites | Insulation | Roofing | Eliminations | Consolidated |
Disaggregation Categories | Disaggregation Categories | | Disaggregation Categories | |
U.S. residential | U.S. residential | $ | 217 | | $ | 649 | | $ | 1,900 | | $ | (156) | | $ | 2,610 | | U.S. residential | $ | 200 | | $ | 683 | | $ | 1,798 | | $ | (151) | | $ | 2,530 | |
U.S. commercial and industrial | U.S. commercial and industrial | 472 | | 480 | | 108 | | — | | 1,060 | | U.S. commercial and industrial | 397 | | 448 | | 110 | | (3) | | 952 | |
Europe | Europe | 442 | | 469 | | 10 | | (1) | | 920 | | Europe | 379 | | 444 | | 10 | | (1) | | 832 | |
Asia-Pacific | Asia-Pacific | 351 | | 132 | | 10 | | (1) | | 492 | | Asia-Pacific | 346 | | 107 | | 8 | | 0 | | 461 | |
Rest of world | Rest of world | 97 | | 215 | | 77 | | (3) | | 386 | | Rest of world | 91 | | 197 | | 67 | | 0 | | 355 | |
NET SALES | NET SALES | $ | 1,579 | | $ | 1,945 | | $ | 2,105 | | $ | (161) | | $ | 5,468 | | NET SALES | $ | 1,413 | | $ | 1,879 | | $ | 1,993 | | $ | (155) | | $ | 5,130 | |
| | | For the nine months ended September 30, 2018 | | | For the nine months ended September 30, 2019 | |
Reportable Segments | Reportable Segments | Composites | Insulation | Roofing | Eliminations | Consolidated | Reportable Segments | Composites | Insulation | Roofing | Eliminations | Consolidated |
Disaggregation Categories | Disaggregation Categories | | Disaggregation Categories | |
U.S. residential | U.S. residential | $ | 213 | | $ | 708 | | $ | 1,696 | | $ | (146) | | $ | 2,471 | | U.S. residential | $ | 217 | | $ | 649 | | $ | 1,900 | | $ | (156) | | $ | 2,610 | |
U.S. commercial and industrial | U.S. commercial and industrial | 452 | | 469 | | 141 | | (8) | | 1,054 | | U.S. commercial and industrial | 472 | | 480 | | 108 | | 0 | | 1060 | |
Europe | Europe | 455 | | 444 | | 10 | | — | | 909 | | Europe | 442 | | 469 | | 10 | | (1) | | 920 | |
Asia-Pacific | Asia-Pacific | 343 | | 131 | | 11 | | (1) | | 484 | | Asia-Pacific | 351 | | 132 | | 10 | | (1) | | 492 | |
Rest of world | Rest of world | 97 | | 236 | | 88 | | (6) | | 415 | | Rest of world | 97 | | 215 | | 77 | | (3) | | 386 | |
NET SALES | NET SALES | $ | 1,560 | | $ | 1,988 | | $ | 1,946 | | $ | (161) | | $ | 5,333 | | NET SALES | $ | 1,579 | | $ | 1,945 | | $ | 2,105 | | $ | (161) | | $ | 5,468 | |
As of December 31, 2018,2019, our contract liability balances (for extended warranties, downpaymentsdown payments and deposits, collectively) totaled $53$60 million, of which $16which $17 million was recognized as revenue in the first nine months of 2019.2020. As of September 30, 2019,2020, our contract liability balances totaled $58$63 million.
4. INVENTORIES
Inventories consist of the following (in millions):
| | | September 30, 2019 | December 31, 2018 | | September 30, 2020 | December 31, 2019 |
Finished goods | Finished goods | $ | 705 | | $ | 730 | | Finished goods | $ | 559 | | $ | 715 | |
Materials and supplies | Materials and supplies | 326 | | 342 | | Materials and supplies | 327 | | 318 | |
Total inventories | Total inventories | $ | 1,031 | | $ | 1,072 | | Total inventories | $ | 886 | | $ | 1,033 | |
- 1415 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to, among other risks, the impact of changes in commodity prices, foreign currency exchange rates, and interest rates in the normal course of business. The Company’s risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments to offset a portion of these risks. The Company uses derivative financial instruments only to the extent necessary to hedge identified business risks, and does not enter into such transactions for trading purposes.
The Company generally does not require collateral or other security with counterparties to these financial instruments and is therefore subject to credit risk in the event of nonperformance; however, the Company monitors credit risk and currently does not anticipate nonperformance by other parties. Contracts with counterparties generally contain right of offset provisions. These provisions effectively reduce the Company’s exposure to credit risk in situations where the Company has gain and loss positions outstanding with a single counterparty. It is the Company’s policy to offset on the Consolidated Balance Sheets the amounts recognized for derivative instruments with any cash collateral arising from derivative instruments executed with the same counterparty under a master netting agreement. As of September 30, 20192020 and December 31, 2018,2019, the Company did not have any amounts on deposit with any of its counterparties, nor did any of its counterparties have any amounts on deposit with the Company.
Derivative Fair Values
Our derivatives consist of natural gas forward swaps, cross-currency swaps, and foreign exchange forward contracts and U.S. treasury rate lock agreements, all of which are over-the-counter and not traded through an exchange. The Company uses widely accepted valuation tools to determine fair value, such as discounting cash flows to calculate a present value for the derivatives. The models use Level 2 inputs, such as forward curves and other commonly quoted observable transactions and prices. The fair value of our derivatives and hedging instruments are all classified as Level 2 investments within the three-tier hierarchy.
The following table presents the fair value of derivatives and hedging instruments and the respective location on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | | | | | | | |
| | | Fair Value at | | |
| Location | | September 30, 2020 | | December 31, 2019 |
Derivative assets designated as hedging instruments: | | | | | |
Net investment hedges: | | | | | |
Cross-currency swaps | Other current assets | | $ | 5 | | | $ | 12 | |
Cross-currency swaps | Other non-current assets | | $ | 1 | | | $ | 1 | |
| | | | | |
| | | | | |
| | | | | |
Cash flow hedges: | | | | | |
Natural gas forward swaps | Other current assets | | $ | 1 | | | $ | — | |
| | | | | |
| | | | | |
Derivative liabilities designated as hedging instruments: | | | | | |
Net investment hedges: | | | | | |
| | | | | |
Cross-currency swaps | Other liabilities | | $ | 0 | | | $ | 4 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Cash flow hedges: | | | | | |
Natural gas forward swaps | Current liabilities | | $ | 1 | | | $ | 3 | |
Treasury interest rate lock | Other liabilities | | $ | 1 | | | $ | 0 | |
Derivative assets not designated as hedging instruments: | | | | | |
| | | | | |
Foreign exchange forward contracts | Other current assets | | $ | 3 | | | $ | 9 | |
Derivative liabilities not designated as hedging instruments: | | | | | |
| | | | | |
Foreign exchange forward contracts | Current liabilities | | $ | 24 | | | $ | 1 | |
- 1516 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The following table presents the fair value of derivatives and hedging instruments and the respective location on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | | | | | | | |
| | | Fair Value at | | |
| Location | | September 30, 2019 | | December 31, 2018 |
Derivative assets designated as hedging instruments: | | | | | |
Net investment hedges: | | | | | |
Cross-currency swaps | Other current assets | | $ | 12 | | | $ | 9 | |
Cross currency swaps | Other non-current assets | | $ | 9 | | | $ | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Derivative liabilities designated as hedging instruments: | | | | | |
Net investment hedges: | | | | | |
| | | | | |
Cross-currency swaps | Other liabilities | | $ | — | | | $ | 17 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Cash flow hedges: | | | | | |
Natural gas forward swaps | Current liabilities | | $ | 2 | | | $ | 1 | |
| | | | | |
Derivative assets not designated as hedging instruments: | | | | | |
| | | | | |
Foreign exchange forward contracts | Other current assets | | $ | 18 | | | $ | 1 | |
Derivative liabilities not designated as hedging instruments: | | | | | |
| | | | | |
Foreign exchange forward contracts | Current liabilities | | $ | — | | | $ | 8 | |
Consolidated Statements of Earnings (Loss) Activity
The following table presents the impact and respective location of derivative activities on the Consolidated Statements of Earnings (Loss) (in millions):
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | Location | 2019 | 2018 | 2019 | 2018 | | Location | 2020 | 2019 | 2020 | 2019 |
Derivative activity designated as hedging instruments: | Derivative activity designated as hedging instruments: | | Derivative activity designated as hedging instruments: | |
Natural gas cash flow hedges: | Natural gas cash flow hedges: | | Natural gas cash flow hedges: | |
Amount of loss/(gain) reclassified from AOCI (as defined below) into earnings | Cost of sales | $ | 2 | | $ | (1) | | $ | 3 | | $ | (1) | | |
Amount of loss reclassified from AOCI (as defined below) into earnings (a) | | Amount of loss reclassified from AOCI (as defined below) into earnings (a) | Cost of sales | $ | 1 | | $ | 2 | | $ | 5 | | $ | 3 | |
| Cross-currency swap net investment hedges: | Cross-currency swap net investment hedges: | | Cross-currency swap net investment hedges: | |
Amount of gain recognized in earnings on derivative amounts excluded from effectiveness testing | Amount of gain recognized in earnings on derivative amounts excluded from effectiveness testing | Interest expense, net | $ | (3) | | $ | (3) | | $ | (9) | | $ | (9) | | Amount of gain recognized in earnings on derivative amounts excluded from effectiveness testing | Interest expense, net | $ | (1) | | $ | (3) | | $ | (6) | | $ | (9) | |
| Derivative activity not designated as hedging instruments: | Derivative activity not designated as hedging instruments: | | Derivative activity not designated as hedging instruments: | |
| Foreign currency: | Foreign currency: | | Foreign currency: | |
Amount of gain recognized in earnings (a) | Other expenses, net | $ | (31) | | $ | (10) | | $ | (45) | | $ | (54) | | |
Amount of loss/(gain) recognized in earnings (b) | | Amount of loss/(gain) recognized in earnings (b) | Other expenses, net | $ | 29 | | $ | (31) | | $ | 20 | | $ | (45) | |
(a)Accumulated Other Comprehensive Earnings (Deficit) ("AOCI")
(b)Gains related to foreign currency derivatives were substantially offset by net revaluation impacts on foreign currency denominated balance sheet exposures, which were also recorded in Other expenses, net. Please refer to the "Other Derivatives" section below for additional detail.
- 16 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
Consolidated Statements of Comprehensive Earnings (Loss) Activity
The following table presents the impact of derivative activities on the Consolidated Statements of Comprehensive Earnings (Loss) (in millions):
| | | Amount of (Gain) Loss Recognized in Comprehensive Earnings | | | Amount of Loss (Gain) Recognized in Comprehensive Earnings (Loss) | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
Hedging Type | Hedging Type | Derivative Financial Instrument | 2019 | 2018 | 2019 | 2018 | Hedging Type | Derivative Financial Instrument | 2020 | 2019 | 2020 | 2019 |
Net investment hedge | Net investment hedge | Cross-currency swaps | $ | (27) | | $ | (1) | | $ | (30) | | $ | (2) | | Net investment hedge | Cross-currency swaps | $ | 11 | | $ | (27) | | $ | (27) | | $ | (30) | |
Cash flow hedge | Cash flow hedge | Natural gas forward swaps | $ | (1) | | $ | — | | $ | 1 | | $ | (2) | | Cash flow hedge | Natural gas forward swaps | $ | (3) | | $ | (1) | | $ | (3) | | $ | 1 | |
| Cash flow hedge | | Cash flow hedge | Treasury interest rate lock | $ | (1) | | $ | 0 | | $ | 1 | | $ | 0 | |
Cash Flow Hedges
The Company uses a combination of derivative financial instruments, which qualify as cash flow hedges, and physical contracts to manage forecasted exposure to electricity and natural gas prices. As of September 30, 2019,2020, the notional amounts of these natural gas forward swaps was 24 million MMBtu (or MMBtu equivalent) based on U.S. and European indices.
In March 2020, the Company entered into a $175 million forward U.S. Treasury rate lock agreement to manage the U.S. Treasury portion of its interest rate risk associated with the anticipated issuance of certain 10-year fixed rate senior notes before the end of 2022. The Company intends to cash settle this agreement upon a future issuance of certain senior notes thereby effectively locking in the U.S. Treasury fixed interest rate in effect at the time the agreement was initiated. The locked fixed rate of this agreement is 0.994%. The Company has designated this outstanding forward U.S. Treasury rate lock agreement, which expires on December 15, 2022, as a cash flow hedge.
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
Net Investment Hedges
The Company has translation exposure resulting from translating the financial statements of foreign subsidiaries into U.S. Dollars, which is recognized in Currency translation adjustment (a component of AOCI). The Company uses cross-currency forward contracts to hedge a portion of the net investment in foreign subsidiaries against fluctuations in foreign exchange rates. As of September 30, 2019,2020, the notional amount of these derivative financial instruments was $516$218 million related to the U.S. Dollar and European Euro. In the second quarter of 2020, the Company unwound certain net investment hedge contracts, resulting in cash proceeds of $30 million.
Other Derivatives
The Company uses forward currency exchange contracts to manage existing exposures to foreign exchange risk related to assets and liabilities recorded on the Consolidated Balance Sheets. As of September 30, 2019,2020, the Company had notional amounts of $688$711 million for non-designated derivative financial instruments related to foreign currency exposures in U.S. Dollars primarily related to Brazilian Real, Chinese Yuan, European Euro, Hong Kong Dollar, Indian Rupee, and South Korean Won. In addition, the Company had notional amounts of $146$137 million for non-designated derivative financial instruments related to foreign currency exposures in European Euro primarily related to the Russian Ruble,Czech Koruna, Polish Zloty, and Swedish Krona.Russian Ruble.
- 1718 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets and goodwill consist of the following (in millions):
| | | | | | | | | | | | | | | | | |
September 30, 2019 | Weighted Average Useful Life | | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
Amortizable intangible assets: | | | | | |
Customer relationships | 20 years | | $ | 541 | | $ | (158) | | $ | 383 | |
Technology | 17 years | | 317 | | (148) | | 169 | |
Other | 13 years | | 61 | | (31) | | 30 | |
Indefinite-lived intangible assets: | | | | | |
Trademarks | | | 1,134 | | | | 1,134 | |
Total intangible assets | | | $ | 2,053 | | $ | (337) | | $ | 1,716 | |
Goodwill | | | $ | 1,909 | | | |
| | | | | | | | | | | | | | | | | |
December 31, 2018 | Weighted Average Useful Life | | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
Amortizable intangible assets: | | | | | |
Customer relationships | 20 years | | $ | 554 | | $ | (138) | | $ | 416 | |
Technology | 17 years | | 321 | | (134) | | 187 | |
Other | 14 years | | 60 | | (28) | | 32 | |
Indefinite-lived intangible assets: | | | | | |
Trademarks | | | 1,144 | | — | | 1,144 | |
Total intangible assets | | | $ | 2,079 | | $ | (300) | | $ | 1,779 | |
Goodwill | | | $ | 1,949 | | | |
Goodwill
Goodwill
The Company tests goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Novalue.
First Quarter of 2020 Impairment Charge
During the first quarter of 2020, the Company’s significant share price reduction during the ongoing COVID-19 pandemic was determined to be an indicator of impairment under ASC 350. As of the end of the first quarter, the COVID-19 pandemic was expected to have a negative impact on results for the remainder of 2020 and create near-term uncertainty in our markets.
As of the most recent annual goodwill impairment testing date (October 1, 2019), testing indicated that the business enterprise value for the Insulation reporting unit exceeded its carrying value by approximately 10%. As described in our 2019 Form 10-K, there was deemed necessaryuncertainty surrounding the macroeconomic factors impacting this reporting unit and a downturn in these factors or a change in the long-term revenue growth or profitability for this reporting unit could increase the likelihood of a future impairment.
In the first quarter of 2020, the Company performed its ongoing assessment to consider whether events or circumstances had occurred that could more likely than not reduce the fair value of a reporting unit below its carrying value. The valuation limitation from the Company’s share price decline in the first nine monthsquarter of 2019. The changes in2020, the netnarrow cushion on the Insulation reporting unit and the high level of near-term macroeconomic uncertainty caused the Company to perform an interim goodwill impairment test as of March 31, 2020 over the Insulation reporting unit. After evaluating and weighing all relevant events and circumstances, and considering the substantial excess fair values for the Roofing and Composites reporting units, we concluded that it was not more likely than not that the fair values of these reporting units were less than their carrying amount of goodwill by segment are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Composites | | Insulation | | Roofing | | Total |
Balance at December 31, 2018 | $ | 57 | | | $ | 1,495 | | | $ | 397 | | | $ | 1,949 | |
| | | | | | | |
Foreign currency translation | — | | | (37) | | | (3) | | | (40) | |
Balance at September 30, 2019 | $ | 57 | | | $ | 1,458 | | | $ | 394 | | | $ | 1,909 | |
values. Consequently, we determined that it was not necessary to perform an interim impairment test for the Roofing and Composites reporting units.
Based on the results of this interim testing over the Insulation reporting unit, the Company recorded a $944 million pre-tax non-cash impairment charge in the first quarter of 2020. This charge was recorded in Goodwill impairment charge on the Consolidated Statements of Earnings (Loss), and was included in the Corporate, Other and Eliminations reporting category. Consistent with the Company’s adoption of ASU 2017-04 in the first quarter of 2020, the impairment charge was equal to the excess of the Insulation reporting unit’s carrying value over its fair value. The overall enterprise fair value of the Company was limited by the decline in our share price in the first quarter of 2020. The reduction in fair value for the Insulation reporting unit, and corresponding impairment charge, was primarily driven by an increase in the discount rate arising from higher equity risk premiums that reflect significant uncertainty surrounding the effect from the COVID-19 pandemic and a decrease in the reporting unit's forecasted near-term cash flows.
As part of our quantitative testing process for goodwill of the Insulation reporting unit, we estimated fair values using a discounted cash flow analysis, a form of the income approach, from the perspective of a market participant. Significant assumptions used in the discounted cash flow approach are revenue growth rates and EBIT margins used in estimating discrete period cash flow forecasts of the reporting unit, the discount rate, and the long-term revenue growth rate and EBIT margins used in estimating the terminal business value. The terminal business value is determined by applying the long-term growth rate to the latest year for which a forecast exists.
- 1819 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)
Ongoing 2020 Impairment Indicator Assessment
During the second and third quarters of 2020, the Company performed its quarterly assessment to identify potential indicators of impairment for each of its reporting units. Among qualitative and quantitative factors considered, management reviewed key assumptions and information, including updated macroeconomic indicators that impact the markets we serve, financial forecast information for each reporting unit, and recent performance of the Company’s share price to perform this assessment. The Company did not identify any impairment indicators for any of its reporting units during the second or third quarter of 2020 and determined that it was not more likely than not that the carrying value of any of its reporting units exceeded their respective fair values. Consequently, we determined that it was not necessary to perform an interim impairment test for goodwill. We will continue to monitor the impacts of the COVID-19 pandemic on the Company and significant changes in other key assumptions that could result in future period impairment charges.
The changes in the net carrying value of goodwill by segment are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Composites | | Insulation | | Roofing | | Total |
Balance at December 31, 2019 | $ | 57 | | | $ | 1,479 | | | $ | 396 | | | $ | 1,932 | |
Impairment charge | 0 | | | (944) | | | 0 | | | (944) | |
Divestiture | 0 | | | (4) | | | 0 | | | (4) | |
Foreign currency translation | (1) | | | (9) | | | 2 | | | (8) | |
Balance at September 30, 2020 | $ | 56 | | | $ | 522 | | | $ | 398 | | | $ | 976 | |
The remaining balance of goodwill for the Insulation reporting unit continues to be at risk for future impairment. There continues to be uncertainty surrounding the macroeconomic factors impacting this reporting unit, and a sustained downturn, significantly extended recovery, or a change in the long-term revenue growth or profitability for this reporting unit could increase the likelihood of an additional future impairment. Additionally, changes in market participant assumptions such as an increased discount rate or significant share price reductions could increase the likelihood of an additional future impairment.
Other Intangible Assets
The Company amortizes the cost of other intangible assets over their estimated useful lives which, individually, range up to 45 years. The Company's future cash flows are not materially impacted by its ability to extend or renew agreements related to its amortizable intangible assets.
First Quarter of 2020 Impairment Charge
In the first quarter of 2020, we performed an interim impairment test of certain indefinite-lived trademarks and trade names used by our Insulation segment, based on the macroeconomic conditions that precipitated the interim goodwill impairment test described above.
Based on the results of this testing, the Company recorded pre-tax non-cash impairment charges totaling $43 million in the first quarter of 2020 related to 2 of the Insulation trademarks and trade names. These charges were recorded in Other expenses, net on the Consolidated Statements of Earnings (Loss), and were included in the Corporate, Other and Eliminations reporting category.
Fair values used in testing for potential impairment of our trademarks are calculated using the relief-from-royalty method by applying an estimated market value royalty rate to the forecasted revenues of the businesses that utilize those assets. The assumed cash flows from this calculation are discounted at a rate based on a market participant discount rate.
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)
Other Intangible AssetsA pre-tax impairment charge of $34 million for a trade name used by our European building and technical insulation business was recognized in the first quarter of 2020 due to the combined effect of lower expected sales following an immaterial divestiture in the first quarter of 2020, a decrease in the forecasted near-term cash flows, and a higher discount rate associated with the economic impact and uncertainty from the COVID-19 pandemic. A pre-tax impairment charge of $9 million related to a trademark used on global cellular glass insulation products was recorded in the first quarter of 2020 due to a slightly lower sales outlook and a similarly higher discount rate associated with the economic impact and uncertainty from the COVID-19 pandemic.
Ongoing 2020 Impairment Indicator Assessment
During the second and third quarters of 2020, the Company performed its quarterly assessment to identify potential indicators of impairment for each of its indefinite-lived intangible assets. Among the qualitative and quantitative factors considered, management reviewed key assumptions and information, including updated macroeconomic indicators that impact the markets we serve and financial forecast information for each reporting unit. After evaluating and weighing all relevant events and circumstances, the Company did not identify any impairment indicators for any of its indefinite-lived intangible assets during the second or third quarter of 2020 and determined that it was not more likely than not that the carrying value of any of its indefinite-lived intangible assets exceeded their respective fair values. Consequently, we determined that it was not necessary to perform an interim impairment test for any indefinite-lived intangible assets. We will continue to monitor the impacts of the COVID-19 pandemic on the Company and significant changes in key assumptions that could result in future period impairment charges.
There are two indefinite-lived intangible assets that are at an increased risk of impairment, both of which are used by our Insulation segment and were partially impaired in the first quarter of 2020. A change in the estimated long-term revenue growth rate or increase in the discount rate assumption could increase the likelihood of a future impairment. These affected assets had an aggregate carrying value of $257 million as of September 30, 2020.
The Other category below primarily includes franchise agreementsemissions and quarry and emission rights. The changes in the gross carrying amount ofOther intangible assets by asset group are as followsconsist of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer Relationships | | Technology | | Trademarks | | Other | | Total |
Balance at December 31, 2018 | $ | 554 | | | $ | 321 | | | $ | 1,144 | | | $ | 60 | | | $ | 2,079 | |
| | | | | | | | | |
Other additions, net | — | | | — | | | — | | | 2 | | | 2 | |
Foreign currency translation | (13) | | | (4) | | | (10) | | | (1) | | | (28) | |
Balance at September 30, 2019 | $ | 541 | | | $ | 317 | | | $ | 1,134 | | | $ | 61 | | | $ | 2,053 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | | | | | December 31, 2019 | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Trademarks | $ | 1,102 | | | n/a | | $ | 1,102 | | | $ | 1,139 | | | n/a | | $ | 1,139 | |
Customer relationships | 556 | | | $ | (190) | | | 366 | | | 550 | | | $ | (167) | | | 383 | |
Technology | 323 | | | (167) | | | 156 | | | 319 | | | (152) | | | 167 | |
Other | 34 | | | (3) | | | 31 | | | 67 | | | (35) | | | 32 | |
Total other intangible assets | $ | 2,015 | | | $ | (360) | | | $ | 1,655 | | | $ | 2,075 | | | $ | (354) | | | $ | 1,721 | |
The estimated amortization expense for intangible assets for the next five years is as follows (in millions):
| Period | Period | Amortization | | Period | Amortization |
2020 | $ | 50 | | |
2021 | 2021 | $ | 50 | | 2021 | $ | 49 | |
2022 | 2022 | $ | 45 | | 2022 | $ | 46 | |
2023 | 2023 | $ | 42 | | 2023 | $ | 44 | |
2024 | 2024 | $ | 39 | | 2024 | $ | 40 | |
2025 | | 2025 | $ | 39 | |
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in millions):
| | | September 30, 2019 | December 31, 2018 | | September 30, 2020 | December 31, 2019 |
Land | Land | $ | 220 | | $ | 224 | | Land | $ | 217 | | $ | 221 | |
Buildings and leasehold improvements | Buildings and leasehold improvements | 1,114 | | 1,091 | | Buildings and leasehold improvements | 1,217 | | 1,186 | |
Machinery and equipment | Machinery and equipment | 4,857 | | 4,628 | | Machinery and equipment | 5,080 | | 4,978 | |
Construction in progress | Construction in progress | 313 | | 443 | | Construction in progress | 222 | | 310 | |
| | 6,504 | | 6,386 | | | 6,736 | | 6,695 | |
Accumulated depreciation | Accumulated depreciation | (2,745) | | (2,575) | | Accumulated depreciation | (3,019) | | (2,840) | |
Property, plant and equipment, net | Property, plant and equipment, net | $ | 3,759 | | $ | 3,811 | | Property, plant and equipment, net | $ | 3,717 | | $ | 3,855 | |
Machinery and equipment includes certain precious metals used in our production tooling, which comprise approximately 10% and 11% of total machinery and equipment as of both September 30, 20192020 and December 31, 2018.2019. Precious metals used in our production tooling are depleted as they are consumed during the production process, which typically represents an annual expense of about 3% of the outstanding carrying value.
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. ACQUISITIONS
Paroc Acquisition
On February 5, 2018, the Company acquired all the outstanding equity of Paroc Group Oy ("Paroc"), a leading producer of mineral wool insulation for building and technical applications in Europe, for $1,121 million, net of cash acquired. The acquisition of Paroc expands the Company's mineral wool technology, grows its presence in the European insulation market, provides access to a variety of new end-use markets and will increase the Insulation segment's geographic sales mix outside of the U.S. and Canada. Paroc's operating results have been included in the Company’s Insulation segment within the Consolidated Financial Statements since the date of the acquisition. During the first nine months of 2019, the Consolidated Statements of Earnings included $38 million in Net Sales attributable to the acquisition (net sales from January 1, 2019 through February 4, 2019 that were related to the one-year post-acquisition period). The pro forma effect of this acquisition on Net sales and Net earnings attributable to Owens Corning was immaterial.
9. LEASES
ASU 2016-02 Adoption
On January 1, 2019, we adopted ASU 2016-02, "Leases (Topic 842)," and the related amendments (collectively "ASC 842"). We used the optional transition method of adoption, in which the cumulative effect of initially applying the new standard to existing leases was $237 million to record the operating lease right-of-use assets and the related liabilities as of January 1, 2019. Under this method of adoption, the comparative information in the Consolidated Financial Statements has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). We elected the package of practical expedients permitted under the transition guidance, which included the carry-forward of historical lease classifications.
As of December 31, 2018, leases classified as capital leases under Accounting Standard Codification (ASC) 840 of $16 million were included in Property, plant and equipment, net. Finance lease right-of-use assets, which were previously classified as capital leases under ASC 840, are now included in Other non-current assets. As of both December 31, 2018 and September 30, 2019, liabilities associated with capital leases and finance leases are included in Long-term debt, as they represent indebtedness for bank covenant purposes.
Leases
The Company leases certain equipment and facilities under both operating and finance leases expiring on various dates through 2032. The nature of these leases generally fall into the following five categories: real estate, material handling, fleet vehicles, office equipment and energy equipment.
For leases with initial terms greater than 12 months, we consider these our right-of-use assets and record the related asset and obligation at the present value of lease payments over the term. For leases with initial terms equal to or less than 12 months, we do not consider them as right-of-use assets and instead consider them short-term lease costs that are recognized on a straight-line basis over the lease term.
Many of our leases include escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when reasonably certain. These options to extend or terminate a lease are at our discretion. We have elected to take the practical expedient and not separate lease and non-lease components of contracts. We estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. Our lease agreements do not contain any material residual value guarantees.
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. LEASES (continued)
Balance Sheet Classification
The table below presents the lease-related assets and liabilities recorded on the balance sheet (in millions):
| | | | | | | | |
Leases | Classification on Balance Sheet | September 30, 2019 |
Assets | | |
Operating lease assets | Operating lease right-of-use assets | $ | 207 | |
Finance lease assets | Other non-current assets | 22 | |
Total lease assets | | $ | 229 | |
| | |
Liabilities | | |
Current | | |
Operating | Current liabilities | $ | 65 | |
Finance | Current liabilities | 6 | |
Non-Current | | |
Operating | Non-current operating lease liabilities | 143 | |
Finance | Long-term debt, net of current portion | 20 | |
Total lease liabilities | | $ | 234 | |
Lease Costs
For the three months ended September 30, 2019, the Company recorded $20 million of operating lease expense and $3 million of short-term lease expense. The Company had an immaterial amount of finance lease expense and variable lease expense. Cash paid for operating leases approximated operating lease expense and non-cash right-of-use asset amortization for the three months ended September 30, 2019. We added $8 million of operating lease liabilities as a result of obtaining operating lease right-of-use assets in the three months ended September 30, 2019.
For the nine months ended September 30, 2019, the Company recorded $60 million of operating lease expense and $8 million of short-term lease expense. The Company had an immaterial amount of finance lease expense and variable lease expense. Cash paid for operating leases approximated operating lease expense and non-cash right-of-use asset amortization for the nine months ended September 30, 2019. We added $36 million of operating lease liabilities as a result of obtaining operating lease right-of-use assets in the nine months ended September 30, 2019.
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. LEASES (continued)
Other Information
The tables below present supplemental information related to leases as of September 30, 2019:
| | | | | |
Weighted-average remaining lease term (years) | September 30, 2019 |
Operating leases | 4.2 |
Finance leases | 4.2 |
| | | | | |
Weighted-average discount rate | September 30, 2019 |
Operating leases | 3.44 | % |
Finance leases | 6.38 | % |
Maturities of Lease Liabilities
As presented in our 2018 Form 10-K, the minimum future rental commitments under ASC 840 for non-cancelable operating leases with initial maturities greater than one year, payable over the remaining lives of the leases as of December 31, 2018 were (in millions):
| | | | | |
Period | Minimum Future Rental Commitments |
2019 | $ | 83 | |
2020 | $ | 64 | |
2021 | $ | 47 | |
2022 | $ | 31 | |
2023 | $ | 18 | |
2024 and beyond | $ | 27 | |
Total rent expense was $106 million, $87 million and $79 million in the years ended December 31, 2018, 2017 and 2016, respectively.
The table below reconciles the undiscounted cash flows for each of the first five years and the total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the balance sheet as of September 30, 2019 (in millions):
| | | | | | | | |
Period | Operating Leases | Finance Leases |
2019 (for the three months remaining in 2019) | $ | 20 | | $ | 2 | |
2020 | 70 | | 8 | |
2021 | 55 | | 8 | |
2022 | 36 | | 6 | |
2023 | 21 | | 4 | |
2024 and beyond | 28 | | 2 | |
Total minimum lease payments | 230 | | 30 | |
Less: implied interest | 22 | | 4 | |
Present value of future minimum lease payments | 208 | | 26 | |
Less: current lease obligations | 65 | | 6 | |
Long-term lease obligations | $ | 143 | | $ | 20 | |
As of September 30, 2019, we have an immaterial amount of leases that have not yet commenced.
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10.8. WARRANTIES
The Company records a liability for warranty obligations at the date the related products are sold. Adjustments are made as new information becomes available. Please refer to Note 1 of our 20182019 Form 10-K for information about our separately-priced extended warranty contracts. A reconciliation of the warranty liability is as follows (in millions):
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2019 | 2018 | | 2020 | 2019 |
Beginning balance | Beginning balance | $ | 60 | | $ | 55 | | Beginning balance | $ | 64 | | $ | 60 | |
Amounts accrued for current year | Amounts accrued for current year | 17 | | 16 | | Amounts accrued for current year | 16 | | 17 | |
Settlements of warranty claims | Settlements of warranty claims | (13) | | (11) | | Settlements of warranty claims | (10) | | (13) | |
Ending balance | Ending balance | $ | 64 | | $ | 60 | | Ending balance | $ | 70 | | $ | 64 | |
11.9. RESTRUCTURING AND ACQUISITION-RELATED COSTS
The Company may incur restructuring, transaction and integration costs related to acquisitions, and may incur restructuring costs in connection with its global cost reduction and productivity initiatives.
Restructuring Costs2020 Cost Reduction Actions
Pittsburgh Corning During the second quarter of 2020, the Company took actions to reduce costs throughout its global Composites segment primarily through global workforce reductions. As a result of these actions, the Company recorded $5 million of charges during the first nine months of 2020. The Company expects to recognize between $5 million and $10 million of incremental charges through the remainder of 2020.
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. RESTRUCTURING AND ACQUISITION-RELATED COSTS (continued)
Insulation Network Optimization Restructuring
In October 2019, the Company took actions to primarily restructure certain U.S. insulation operations and to reduce the cost structure throughout the Insulation network. Investments in productivity and process technologies enabled the Company to optimize its network and improve its cost position. During the first nine months of 2020, the Company recorded $5 million of charges. The Company does not expect to recognize significant incremental charges related to these actions.
Acquisition-Related Restructuring
On June 27, 2017,
Following the Company acquired all the outstanding equityacquisitions of Paroc Group Oy ("Paroc") and Pittsburgh Corning Corporation and Pittsburgh Corning Europe NV (collectively, "Pittsburgh Corning"), the world’s leading producer of cellular glass insulation systems for commercial and industrial markets, for $563 million, net of cash acquired.
Following the acquisition of Pittsburgh Corning into the Company's Insulation segment, the Company took actions to realize expected synergies from the newly acquired operations. The Company does not expect to recognize significant incremental costs throughout 2019.related to these actions.
2017 Cost Reduction ActionsConsolidated Statements of Earnings (Loss) Classification
During
The following table presents the second quarterimpact and respective location of 2017,total restructuring costs on the Company took actions to avoid future capital outlaysConsolidated Statements of Earnings (Loss), which are included within Corporate, Other and reduce costs in its Composites segment, mainly through decisions to close certain sub-scale manufacturing facilities in Asia Pacific (including Doudian, Peoples RepublicEliminations (in millions):
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
Type of cost | Location | 2020 | 2019 | 2020 | 2019 |
Accelerated depreciation | Cost of sales | $ | 0 | | $ | 0 | | $ | 1 | | $ | 0 | |
Other exit costs | Cost of sales | 0 | | 0 | | 3 | | 2 | |
Severance | Other expenses, net | 0 | | 0 | | 5 | | 0 | |
Other exit costs (gains) | Other expenses, net | 0 | | 0 | | 1 | | (3) | |
| | | | | |
Total restructuring costs (gains) | | $ | 0 | | $ | 0 | | $ | 10 | | $ | (1) | |
Summary of ChinaUnpaid Liabilities
The following table summarizes the status of the unpaid liabilities from the Company's restructuring activities (in millions):
| | | | | | | | | | | | | | | | |
| 2020 Cost Reduction Actions | Insulation Network Optimization Restructuring | Acquisition-Related Restructuring | | | | | |
Balance at December 31, 2019 | $ | 0 | | $ | 5 | | $ | 11 | | | | | | |
Restructuring costs | 5 | | 5 | | 0 | | | | | | |
Payments | (3) | | (8) | | (4) | | | | | | |
Non-cash items and reclassifications to other accounts | 0 | | (2) | | 2 | | | | | | |
| | | | | | | | |
| | | | | | | | |
Balance at September 30, 2020 | $ | 2 | | $ | 0 | | $ | 9 | | | | | | |
Cumulative charges incurred | $ | 5 | | $ | 29 | | $ | 30 | | | | | | |
As of September 30, 2020, the remaining liability balance is comprised of $11 million of severance, inclusive of $2 million of non-current severance and Thimmapur, India) and North America (Mexico City, Mexico and Brunswick, Maine) and to reposition assets in its Chambery, France operation. The$9 million of severance the Company expects to recognize approximately $7 million of incremental costs throughout 2019.pay over the next twelve months.
Insulation Network Optimization Restructuring
In October 2019, the Company took actions to restructure certain U.S. insulation operations and to reduce the cost structure throughout the Insulation network. Investments in productivity and process technologies enable the Company to optimize its network and improve its cost position. These actions are expected to result in cumulative incremental costs of approximately $30 million in 2019 and 2020 and generate annual savings of approximately $25 million by 2021.
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. RESTRUCTURING AND ACQUISITION-RELATED COSTS (continued)
Consolidated Statements of Earnings Classification
The following table presents the impact and respective location of total restructuring costs on the Consolidated Statements of Earnings, which are included within Corporate, Other and Eliminations (in millions):
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
Type of cost | Location | 2019 | 2018 | 2019 | 2018 |
Accelerated depreciation | Cost of sales | | $ | — | | $ | 1 | | $ | — | | $ | 9 | |
Other exit costs | Cost of sales | | — | | 2 | | 2 | | 6 | |
Severance | Other expenses, net | | — | | 1 | | — | | 3 | |
Other exit costs (gains) | Other expenses, net | | — | | 3 | | (3) | | 1 | |
Total restructuring costs (gains) | | | $ | — | | $ | 7 | | $ | (1) | | $ | 19 | |
Summary of Unpaid Liabilities
The following table summarizes the status of the unpaid liabilities from the Company's restructuring activities (in millions):
| | | | | | | | | | | | | | | |
| 2017 Cost Reduction Actions | Pittsburgh Corning Acquisition-Related Restructuring | | | | | Total |
Balance at December 31, 2018 | $ | 10 | | $ | 7 | | | | | | $ | 17 | |
Restructuring (gains) costs | (2) | | 1 | | | | | | (1) | |
Payments | (8) | | (3) | | | | | | (11) | |
Non-cash items and reclassifications to other accounts | 3 | | — | | | | | | 3 | |
| | | | | | | |
| | | | | | | |
Balance at September 30, 2019 | $ | 3 | | $ | 5 | | | | | | $ | 8 | |
Cumulative charges incurred | $ | 46 | | $ | 21 | | | | | | $ | 67 | |
As of September 30, 2019, the remaining liability balance is comprised of $8 million of severance, inclusive of $2 million of non-current severance and $6 million of severance the Company expects to pay over the next twelve months.
- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12.10. DEBT
Details of the Company’s outstanding long-term debt, as well as the fair values, are as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | | December 31, 2018 | | |
| Carrying Value | | Fair Value | | | Carrying Value | | Fair Value | | |
| | | | | | |
4.20% senior notes, net of discount and financing fees, due 2022 | $ | 183 | | 105 | % | | $ | 598 | | 99 | % | |
4.20% senior notes, net of discount and financing fees, due 2024 | 394 | | 105 | % | | 393 | | 99 | % | |
3.40% senior notes, net of discount and financing fees, due 2026 | 396 | | 100 | % | | 396 | | 90 | % | |
3.95% senior notes, net of discount and financing fees, due 2029 | 445 | | 102 | % | | — | | — | % | |
7.00% senior notes, net of discount and financing fees, due 2036 | 367 | | 124 | % | | 400 | | 112 | % | |
4.30% senior notes, net of discount and financing fees, due 2047 | 588 | | 91 | % | | 588 | | 76 | % | |
4.40% senior notes, net of discount and financing fees, due 2048 | 390 | | 92 | % | | 389 | | 77 | % | |
| | | | | | |
Accounts receivables securitization facility, maturing in 2022 (a) | 94 | | 100 | % | | 75 | | 100 | % | |
Various finance leases, due through 2032 (a) (b) | 26 | | 100 | % | | 24 | | 100 | % | |
Term loan borrowing, maturing in 2021 (a) | 300 | | 100 | % | | 500 | | 100 | % | |
Other | 4 | | n/a | | | 8 | | n/a | | |
Total long-term debt | 3,187 | | n/a | | | 3,371 | | n/a | | |
Less – current portion (a) | 7 | | 100 | % | | 9 | | 100 | % | |
Long-term debt, net of current portion | $ | 3,180 | | n/a | | | $ | 3,362 | | n/a | | |
| | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | | December 31, 2019 | | |
| Carrying Value | Fair Value | | Carrying Value | Fair Value | |
| | | | | | |
4.200% senior notes, net of discount and financing fees, due 2022 | $ | 184 | | 105 | % | | $ | 183 | | 104 | % | |
4.200% senior notes, net of discount and financing fees, due 2024 | 395 | | 111 | % | | 395 | | 106 | % | |
3.400% senior notes, net of discount and financing fees, due 2026 | 397 | | 108 | % | | 396 | | 101 | % | |
3.950% senior notes, net of discount and financing fees, due 2029 | 445 | | 114 | % | | 445 | | 104 | % | |
3.875% senior notes, net of discount and financing fees, due 2030 | 297 | | 113 | % | | — | | — | % | |
7.000% senior notes, net of discount and financing fees, due 2036 | 368 | | 134 | % | | 367 | | 126 | % | |
4.300% senior notes, net of discount and financing fees, due 2047 | 588 | | 110 | % | | 588 | | 95 | % | |
4.400% senior notes, net of discount and financing fees, due 2048 | 390 | | 113 | % | | 390 | | 97 | % | |
| | | | | | |
| | | | | | |
Various finance leases, due through 2036 (a) | 78 | | 100 | % | | 26 | | 100 | % | |
Term loan borrowing, maturing in 2021 (a) | 0 | | 0 | % | | 200 | | 100 | % | |
Other | 2 | | n/a | | 3 | | n/a | |
Total long-term debt | 3,144 | | n/a | | 2,993 | | n/a | |
Less – current portion (a) | 18 | | 100 | % | | 7 | | 100 | % | |
Long-term debt, net of current portion | $ | 3,126 | | n/a | | $ | 2,986 | | n/a | |
(a) The Company determined that the book value of the above noted long-term debt instruments approximates fair value.
(b) Amounts reflected for December 31, 2018 represent capital lease obligations as recorded under ASC 840.
The fair values of the Company's outstanding long-term debt instruments were estimated using market observable inputs, including quoted prices in active markets, market indices and interest rate measurements. Within the hierarchy of fair value measurements, these are Level 2 fair values.
Senior Notes
The Company issued $300 million of 2030 senior notes on May 12, 2020 subject to $3 million of discounts and issuance costs. Interest on the notes is payable semiannually in arrears on June 1 and December 1 each year, beginning on December 1, 2020. The proceeds from these notes were used for general corporate purposes.
The Company issued $450 million of 2029 senior notes on August 12, 2019 subject to $5 million of discounts and issuance costs.2019. Interest on the notes is payable semiannually in arrears on February 15 and August 15 each year, beginning on February 15, 2020. The proceeds from these notes were used to repay $416 million of our 2022 senior notes and $34 million of our 2036 senior notes. The Company recognized approximately $32 million of loss on extinguishment of debt in the third quarter of 2019 associated with these actions.
The Company issued $400 million of 2048 senior notes on January 25, 2018. Interest on the notes is payable semiannually in arrears on January 30 and July 30 each year, beginning on July 30, 2018. The proceeds from these notes were used, along with borrowings on a $600 million term loan commitment and borrowings on the Receivables Securitization Facility (as defined below), to fund the purchase of Paroc in the first quarter of 2018.
The Company issued $600 million of 2047 senior notes on June 26, 2017. Interest on the notes is payable semiannually in arrears on January 15 and July 15 each year, beginning on January 15, 2018. A portion of the proceeds from these notes was used to fund the purchase of Pittsburgh Corning in 2017 and for general corporate purposes. The remaining proceeds were used to repay $144 million of our 2019 senior notes and $140 million of our 2036 senior notes.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. DEBT (continued)
The Company issued $400 million of 2026 senior notes on August 8, 2016. Interest on the notes is payable semiannually in arrears on February 15 and August 15 each year, beginning on February 15, 2017. A portion of the proceeds from these notes was used to repay $158 million of our 2016 senior notes. The remaining proceeds were used to pay down portions of our Receivables Securitization Facility and for general corporate purposes.
- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. DEBT (continued)
The Company issued $400 million of 2024 senior notes on November 12, 2014. Interest on the notes is payable semiannually in arrears on June 1 and December 1 each year, beginning on June 1, 2015. A portion of the proceeds from these notes was used to repay $242 million of our 2016 senior notes and $105 million of our 2019 senior notes. The remaining proceeds were used to pay down our Senior Revolving Credit Facility (as defined below), finance general working capital needs, and for general corporate purposes.
The Company issued $600 million of 2022 senior notes on October 17, 2012. Interest on the notes is payable semiannually in arrears on June 15 and December 15 each year, beginning on June 15, 2013. The proceeds of these notes were used to repay $250 million of our 2016 senior notes and $100 million of our 2019 senior notes and pay down our Senior Revolving Credit Facility.
On October 31, 2006, the Company issued $550 million of 2036 senior notes. The proceeds of these notes were used to pay certain unsecured and administrative claims, finance general working capital needs and for general corporate purposes.
Collectively, the senior notes above are referred to as the “Senior Notes.” The Senior Notes are general unsecured obligations of the Company and rank pari passu with all existing and future senior unsecured indebtedness of the Company.
The Company has the option to redeem all or part of the Senior Notes at any time at a “make-whole” redemption price. The Company is subject to certain covenants in connection with the issuance of the Senior Notes that it believes are usual and customary. The Company was in compliance with these covenants as of September 30, 2019.
In the first quarter of 2016, the Company terminated interest rate swaps designated to hedge a portion of the 4.20% senior notes due 2022. The residual fair value of the swaps was previously recognized in Long-term debt, net of current portion on the Consolidated Balance Sheets as an unamortized interest rate swap basis adjustment and accounts for $5 million of the Other balance in the above table as of December 31, 2018. As a result of the repurchase of a portion of these notes in a tender offer in the third quarter of 2019, the remaining unamortized portion of the swaps was recognized on the Consolidated Statements of Earnings as a $4 million reduction to the loss on extinguishment of debt.2020.
Senior Revolving Credit Facility
The Company has an $800 million Seniorsenior revolving credit facility (the "Senior Revolving Credit FacilityFacility") with a maturity date in May 2024 that includes both borrowings and letters of credit. Borrowings under the Senior Revolving Credit Facility may be used for general corporate purposes and working capital. The Company has the discretion to borrow under multiple options, which provide for varying terms and interest rates including the United States prime rate, federal funds rate plus a spread or LIBOR plus a spread. In April 2019, the Company entered into an amendment to extend the maturity date of the Senior Revolving Credit Facility by one year to 2024.
The Senior Revolving Credit Facility contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio, that the Company believes are usual and customary for a senior unsecured credit agreement. The Company was in compliance with these covenants as of September 30, 2019.2020. Please refer to the Credit Facility Utilization paragraphsection below for liquidity information as of September 30, 2019.2020.
Term Loan Borrowing
The Company obtained a term loan borrowingcommitment on October 27, 2017 for $600 million (the "Term Loan"). The Company entered into the Term Loan, in part, to pay a portion of the purchase price of the Paroc acquisition. In the first quarter of 2018, the Company borrowed on the Term Loan, along with borrowings on the Receivables Securitization Facility and the proceeds of the 2048 senior notes, to fund the purchase of Paroc. The Term Loan requiresagreement contained partial quarterly principal repayments all of which have been paid as of September 30, 2019, and full repayment by February 2021. As of September 30, 2019, the Term Loan had $300 million outstanding. In March 2019, the Term Loan was amended to reduce the applicable interest rate on outstanding borrowings.
The Term Loan contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio, that the Company believes are usual and customary for a term loan. TheIn the third quarter of 2020, the Company was in compliance with these covenants as of September 30, 2019.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. DEBT (continued)
repaid all outstanding borrowings on the Term Loan.Receivables Securitization Facility
Included in long-term debt on the Consolidated Balance Sheets are borrowings outstanding underThe Company has a Receivables Purchase Agreement (RPA) that areis accounted for as secured borrowings in accordance with ASC 860, "Accounting for Transfers and Servicing." Owens Corning Sales, LLC and Owens Corning Receivables LLC, each a subsidiary of the Company, have a $280 million RPA with certain financial institutions. The Company has the ability to borrow at the lenders' cost of funds, which approximates A-1/P-1 commercial paper rates vs. LIBOR, plus a fixed spread. In April 2019, the securitization facility (the "Receivables Securitization Facility") wasThe RPA has been amended from time to extend thetime, with a maturity date toin April 2022.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. DEBT (continued)
The Receivables Securitization FacilityRPA contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio that the Company believes are usual and customary for a securitization facility. The Company was in compliance with these covenants as of September 30, 2019.2020. Please refer to the Credit Facility Utilization section below for liquidity information as of September 30, 2019.2020.
Owens Corning Receivables LLC’s sole business consists of the purchase or acceptance through capital contributions of trade receivables and related rights from Owens Corning Sales, LLC and the subsequent retransfer of or granting of a security interest in such trade receivables and related rights to certain purchasers who are party to the RPA. Owens Corning Receivables LLC is a separate legal entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of Owens Corning Receivables LLC’s assets prior to any assets or value in Owens Corning Receivables LLC becoming available to Owens Corning Receivables LLC’s equity holders. The assets of Owens Corning Receivables LLC are not available to pay creditors of the Company or any other affiliates of the Company or Owens Corning Sales, LLC.
Credit Facility Utilization
The following table shows how the Company utilized its primary sources of liquidity (in millions):
| | | | Balance at September 30, 2019 | | | | Balance at September 30, 2020 | |
| | | Senior Revolving Credit Facility | Receivables Securitization Facility | | | Senior Revolving Credit Facility | Receivables Securitization Facility |
Facility size or borrowing limit | Facility size or borrowing limit | | $ | 800 | | $ | 280 | | Facility size or borrowing limit | | $ | 800 | | $ | 280 | |
Collateral capacity limitation on availability | Collateral capacity limitation on availability | | — | | — | | Collateral capacity limitation on availability | | n/a | 0 | |
Outstanding borrowings | Outstanding borrowings | | — | | 94 | | Outstanding borrowings | | 0 | | 0 | |
Outstanding letters of credit | Outstanding letters of credit | | 9 | | 3 | | Outstanding letters of credit | | 4 | | 1 | |
Availability on facility | Availability on facility | | $ | 791 | | $ | 183 | | Availability on facility | | $ | 796 | | $ | 279 | |
Short-Term Debt
Short-termThe Company had no short-term borrowings were $3 million and $16 million as of September 30, 2019 and2020. Short-term borrowings were $20 million as of December 31, 2018, respectively.2019. The short-term borrowings for both periods consisted of various operating lines of credit and working capital facilities. Certain of these borrowings are collateralized by receivables, inventories or property. The borrowing facilities are typically for one-year renewable terms. The weighted average interest rate on all short-term borrowings was approximately 8.2% and 3.0% for September 30, 2019 and7.8% as of December 31, 2018, respectively.2019.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13.11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
The Company sponsors defined benefit pension plans. Under the plans, pension benefits are based on an employee’s years of service and, for certain categories of employees, qualifying compensation. Company contributions to these pension plans are determined by an independent actuary to meet or exceed minimum funding requirements. In our non-U.S. plans, the unrecognized cost of any retroactive amendments and actuarial gains and losses are amortized over the average future service period of plan participants expected to receive benefits. In our U.S. plans, the unrecognized cost of any retroactive amendments and actuarial gains and losses are amortized over the average remaining life expectancy of the inactive participants as substantially all of the plan participants are inactive.
The following tables provide information regarding pension expense recognized (in millions):
| | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2019 | | 2018 | | | 2020 | | 2019 | |
| | U.S. | Non-U.S. | Total | U.S. | Non-U.S. | Total | | U.S. | Non-U.S. | Total | U.S. | Non-U.S. | Total |
Components of Net Periodic Pension Cost | Components of Net Periodic Pension Cost | | Components of Net Periodic Pension Cost | |
Service cost | Service cost | $ | 1 | | $ | 1 | | $ | 2 | | $ | 1 | | $ | 1 | | $ | 2 | | Service cost | $ | 1 | | $ | 1 | | $ | 2 | | $ | 1 | | $ | 1 | | $ | 2 | |
Interest cost | Interest cost | 9 | | 3 | | 12 | | 9 | | 3 | | 12 | | Interest cost | 7 | | 2 | | 9 | | 9 | | 3 | | 12 | |
Expected return on plan assets | Expected return on plan assets | (13) | | (4) | | (17) | | (14) | | (4) | | (18) | | Expected return on plan assets | (11) | | (4) | | (15) | | (13) | | (4) | | (17) | |
| Amortization of actuarial loss | Amortization of actuarial loss | 3 | | 1 | | 4 | | 3 | | 1 | | 4 | | Amortization of actuarial loss | 3 | | 1 | | 4 | | 3 | | 1 | | 4 | |
| Net periodic pension cost (income) | $ | — | | $ | 1 | | $ | 1 | | $ | (1) | | $ | 1 | | $ | — | | |
Net periodic pension cost | | Net periodic pension cost | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 1 | | $ | 1 | |
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2019 | | 2018 | | | 2020 | | 2019 | |
| | U.S. | Non-U.S. | Total | U.S. | Non-U.S. | Total | | U.S. | Non-U.S. | Total | U.S. | Non-U.S. | Total |
Components of Net Periodic Pension Cost | Components of Net Periodic Pension Cost | | Components of Net Periodic Pension Cost | |
Service cost | Service cost | $ | 4 | | $ | 3 | | $ | 7 | | $ | 4 | | $ | 4 | | $ | 8 | | Service cost | $ | 4 | | $ | 3 | | $ | 7 | | $ | 4 | | $ | 3 | | $ | 7 | |
Interest cost | Interest cost | 27 | | 10 | | 37 | | 26 | | 10 | | 36 | | Interest cost | 21 | | 7 | | 28 | | 27 | | 10 | | 37 | |
Expected return on plan assets | Expected return on plan assets | (39) | | (12) | | (51) | | (41) | | (14) | | (55) | | Expected return on plan assets | (34) | | (12) | | (46) | | (39) | | (12) | | (51) | |
| Amortization of actuarial loss | Amortization of actuarial loss | 7 | | 3 | | 10 | | 9 | | 2 | | 11 | | Amortization of actuarial loss | 9 | | 3 | | 12 | | 7 | | 3 | | 10 | |
| Net periodic pension (income) cost | $ | (1) | | $ | 4 | | $ | 3 | | $ | (2) | | $ | 2 | | $ | — | | |
Net periodic pension cost | | Net periodic pension cost | $ | 0 | | $ | 1 | | $ | 1 | | $ | (1) | | $ | 4 | | $ | 3 | |
The Company expects to contribute approximately $25between $50 million and $100 million in cash to the U.S. pension plans and another $14$15 million to $25 million to non-U.S. plans during 2019.2020. The Company made cash contributions of $34$20 million to the plans during the nine months ended September 30, 2019.
On September 25, 2019, the Company entered into an agreement to purchase a non-participating annuity contract from an insurance company to transfer $89 million of the Company's outstanding pension projected benefit obligations related to certain U.S. pension plans. The transaction closed on October 2, 2019 and was funded with pension plan assets of $83 million. As a result of this transaction, the Company will recognize a pre-tax settlement charge of approximately $45 million in the fourth quarter of 2019 from the accelerated recognition of a pro rata portion of plan actuarial losses. This charge will be recorded in Non-operating (income) expense on the Consolidated Statements of Earnings. The transaction is not expected to have a material impact on the plan's funded status.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)
2020.Postemployment and Postretirement Benefits Other than Pension Plans ("OPEB")
The Company maintains healthcare and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the United States are non-funded and pay either (1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met, or (2) fixed amounts of medical expense reimbursement.
- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)
The following table provides the components of net periodic benefit cost for aggregated U.S. and non-U.S. plans for the periods indicated (in millions):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Components of Net Periodic Benefit Cost | Components of Net Periodic Benefit Cost | | Components of Net Periodic Benefit Cost | |
Service cost | Service cost | $ | — | | $ | — | | $ | 1 | | $ | 1 | | Service cost | $ | 0 | | $ | 0 | | $ | 1 | | $ | 1 | |
Interest cost | Interest cost | 2 | | 3 | | 6 | | 6 | | Interest cost | 1 | | 2 | | 4 | | 6 | |
Amortization of prior service credit | Amortization of prior service credit | (1) | | (1) | | (3) | | (3) | | Amortization of prior service credit | 0 | | (1) | | (2) | | (3) | |
Amortization of actuarial gain | Amortization of actuarial gain | (2) | | (2) | | (6) | | (5) | | Amortization of actuarial gain | (2) | | (2) | | (6) | | (6) | |
Net periodic benefit income | Net periodic benefit income | $ | (1) | | $ | — | | $ | (2) | | $ | (1) | | Net periodic benefit income | $ | (1) | | $ | (1) | | $ | (3) | | $ | (2) | |
14.12. CONTINGENT LIABILITIES AND OTHER MATTERS
The Company may be involved in various legal and regulatory proceedings relating to employment, antitrust, tax, product liability, environmental and other matters (collectively, “Proceedings”). The Company regularly reviews the status of such Proceedings along with legal counsel. Liabilities for such Proceedings are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the amount of any reasonably possible losses in excess of any amounts accrued, if any, with respect to such Proceedings or any other known claim, including the matters described below under the caption Environmental Matters (the “Environmental Matters”), are not material to the Company’s financial statements. Management believes that the ultimate disposition of the Proceedings and the Environmental Matters will not have a material adverse effect on the Company’s financial condition. While the likelihood is remote, the disposition of the Proceedings and Environmental Matters could have a material impact on the results of operations, cash flows or liquidity in any given reporting period.
Litigation and Regulatory Proceedings
The Company is involved in litigation and regulatory proceedings from time to time in the regular course of its business. The Company believes that adequate provisions for resolution of all contingencies, claims and pending matters have been made for probable losses that are reasonably estimable.
Environmental Matters
The Company has established policies and procedures designed to ensure that its operations are conducted in compliance with all relevant laws and regulations and that enable the Company to meet its high standards for corporate sustainability and environmental stewardship. Our manufacturing facilities are subject to numerous foreign, federal, state and local laws and regulations relating to the presence of hazardous materials, pollution and protection of the environment, including emissions to air, reductions of greenhouse gases, discharges to water, management of hazardous materials, handling and disposal of solid wastes, and remediation of contaminated sites. All Company manufacturing facilities operate using an ISO 14001 or equivalent environmental management system. The Company’s 2030 Sustainability Goals include significant global reductions in energy use, water consumption, waste to landfill, and emissions of greenhouse gases, fine particulate matter, and toxicvolatile organic air emissions.emissions, and protection of biodiversity.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
14.12. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
Owens Corning is involved in remedial response activities and is responsible for environmental remediation at a number of sites, including certain of its currently owned or formerly owned plants. These responsibilities arise under a number of laws, including, but not limited to, the Federal Resource Conservation and Recovery Act, and similar state or local laws pertaining to the management and remediation of hazardous materials and petroleum. The Company has also been named a potentially responsible party under the U.S. Federal Superfund law, or state equivalents, at a number of disposal sites. The Company became involved in these sites as a result of government action or in connection with business acquisitions. As of September 30, 2019,2020, the Company was involved with a total of 21 sites worldwide, including 78 Superfund and state equivalent sites and 1413 owned or formerly owned sites. None of the liabilities for these sites are individually significant to the Company.
Remediation activities generally involve a potential range of activities and costs related to soil, groundwater, and groundwatersediment contamination. This can include pre-cleanup activities such as fact-finding and investigation, risk assessment, feasibility studies, remedial action design and implementation (where actions may range from monitoring to removal of contaminants, to installation of longer-term remediation systems). A number of factors affect the cost of environmental remediation, including the number of parties involved in a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, variability in clean-up standards, the need for legal action, and changes in remediation technology. Taking these factors into account, Owens Corning has predicted the costs of remediation reasonably estimated to be paid over a period of years. The Company accrues an amount on an undiscounted basis, consistent with the reasonable estimates of these costs when it is probable that a liability has been incurred. Actual cost may differ from these estimates for the reasons mentioned above. At September 30, 2019,2020, the Company had an accrual totaling $8$7 million for these costs, of which the current portion is $4$3 million. Changes in required remediation procedures or timing of those procedures, or discovery of contamination at additional sites, could result in material increases to the Company’s environmental obligations.
15.13. STOCK COMPENSATION
2019 StockDescription of the Plan
On April 18, 2019, the Company’s stockholders approved the Owens Corning 2019 Stock Plan (the “2019 Stock Plan”) which authorizes grants of stock options, stock appreciation rights, restricted stock awards, restricted stock units, bonus stock awards and performance stock awards. At September 30, 2019,2020, the number of shares remaining available under the 2019 Stock Plan for all stock awards was approximately 4.03.5 million.
Prior to 2019, employees were eligible to receive stock awards under the Owens Corning 2016 Stock Plan and the Owens Corning 2013 Stock Plan.
Total Stock-Based Compensation Expense
Stock-based compensation expense included in Marketing and administrative expenses in the accompanying Consolidated Statements of Earnings (Loss) is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Total stock-based compensation expense | $ | 11 | | | $ | 10 | | | $ | 31 | | | $ | 31 | |
| | | | | | | |
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. STOCK COMPENSATION (continued)
Stock Options
The Company did not grant anyhas granted stock options during the nine months ended September 30, 2019.under its stockholder approved stock plans. The Company calculates a weighted-average grant-date fair value using a Black-Scholes valuation model for options granted. Compensation expense for options is measured based on the fair market value of the option on the date of grant, and is recognized on a straight-line basis over a four-yearfour year vesting period. In general, the exercise price of each option awarded was equal to the closing market price of the Company’s common stock on the date of grant and an option’s maximum term is 10 years. The volatility assumption was based on a benchmark study of our peers prior to 2014. Starting with the options granted in 2014, the volatility was based on the Company’s historic volatility.
The Company didhas not recognize anygranted stock option expense duringoptions since the nine monthsyear ended September 30, 2019. During the nine months ended September 30, 2018, the Company recognized expense of less than $1 million related to the Company's stock options.December 31, 2014. As of September 30, 2019,2020, there was 0no unrecognized compensation cost related to stock options. options and the range of exercise prices on outstanding stock options was $33.73 - $42.16.
The total aggregate intrinsicfollowing table summarizes the Company’s stock option activity:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted-Average | | | | |
| Number of Options | | Exercise Price | | Remaining Contractual Life (in years) | | Intrinsic Value (in millions) |
Outstanding, December 31, 2019 | 414,800 | | | $ | 37.79 | | | 3.06 | | $ | 11 | |
| | | | | | | |
Exercised | (52,000) | | | 37.91 | | | | | |
| | | | | | | |
| | | | | | | |
Outstanding, September 30, 2020 | 362,800 | | | $ | 37.77 | | | 1.75 | | $ | 11 | |
Exercisable, September 30, 2020 | 362,800 | | | $ | 37.77 | | | 1.75 | | $ | 11 | |
Restricted Stock Awards and Restricted Stock Units
The Company has granted restricted stock awards and restricted stock units (collectively referred to as “RSUs”) under its stockholder approved stock plans. Compensation expense for RSUs is measured based on the closing market price of the stock at date of grant and is recognized on a straight-line basis over the vesting period, which is typically three or four years. The Stock Plan allows alternate vesting schedules for death, disability, and retirement. The weighted average grant date fair value of options outstanding as of September 30, 2019RSUs granted in 2020 was $11 million.$63.32.
The following table summarizes the Company’s RSU plans:
| | | | | | | | |
| | |
| Number of RSUs | Weighted-Average Fair Value |
Balance at December 31, 2019 | 1,515,706 | | $ | 51.70 | |
Granted | 454,196 | | 63.32 | |
Vested | (388,164) | | 57.51 | |
Forfeited | (70,202) | | 69.39 | |
Balance at September 30, 2020 | 1,511,536 | | $ | 52.78 | |
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
15.13. STOCK COMPENSATION (continued)
The following table summarizes the Company’s stock option activity:
| | | | | | | | |
| Nine Months Ended September 30, 2019 | |
| Number of Options | Weighted- Average Exercise Price |
Beginning Balance | 478,875 | | $ | 37.18 | |
Exercised | (34,400) | | 29.42 | |
| | |
| | |
Ending Balance | 444,475 | | $ | 37.78 | |
The following table summarizes information about the Company’s options outstanding and exercisable:
| | | | | | | | | | | | | | | | | | | | |
| Options Outstanding | | | Options Exercisable | | |
| Options Outstanding | Weighted-Average | | Number Exercisable at September 30, 2019 | Weighted-Average | |
Range of Exercise Prices | | Remaining Contractual Life | Exercise Price | | Remaining Contractual Life | Exercise Price |
$25.45- $42.16 | 444,475 | | 3.34 | $ | 37.78 | | 444,475 | | 3.34 | $ | 37.78 | |
Restricted Stock Awards and Restricted Stock Units
The Company has granted restricted stock awards and restricted stock units (collectively referred to as “restricted stock”) as a part of its long-term incentive plan. Compensation expense for restricted stock is measured based on the market price of the stock at date of grant and is recognized on a straight-line basis over the vesting period, which is typically three or four years. The Stock Plan allows alternate vesting schedules for death, disability, and retirement.
During the three and nine months ended September 30, 2019, the Company recognized expense of $7 million and $21 million, respectively, related to the Company's restricted stock. During the three and nine months ended September 30, 2018, the Company recognized expense of $6 million and $17 million, respectively, related to the Company's restricted stock. As of September 30, 2019,2020, there was $37$36 million of total unrecognized compensation cost related to restricted stock.RSUs. That cost is expected to be recognized over a weighted-average period of 2.202.32 years. The total grant date fair value of shares vested during the nine months ended September 30, 2020 and 2019 was $22 million and 2018 was $20 million, and $22 million, respectively.
The following table summarizes the Company’s restricted stock activity:
| | | | | | | | |
| Nine Months Ended September 30, 2019 | |
| Number of Shares/Units | Weighted-Average Grant-Date Fair Value |
Beginning Balance | 1,479,374 | | $ | 52.30 | |
Granted | 514,860 | | 52.64 | |
Vested | (373,225) | | 53.08 | |
Forfeited | (76,544) | | 62.24 | |
Ending Balance | 1,544,465 | | $ | 51.65 | |
Performance Stock Awards and Performance Stock Units
The Company has granted performance stock awards and performance stock units (collectively referred to as “PSUs”) as a part of its long-term incentive plan. All outstanding performance grants will fully settle in stock. The amount of stock ultimately distributed from all performance shares is contingent on meeting internal company-based metrics or an external-based stock performance metric.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
15. STOCK COMPENSATION (continued)
In the nine months ended September 30, 2019,2020, the Company granted both internal company-based and external-based metric PSUs.
Internal basedCompany-based metrics
The internal company-based metrics are based on various Company metrics and typically vest over a three-year period. The amount of stock distributed will vary from 0% to 200%300% of PSUs awarded depending on each award's design and performance versus the internal Company-based metrics.
The initial fair value for all internal Company-based metric PSUs assumes that the performance goals will be achieved and is based on the grant date stock price. This assumption is monitored quarterly and if it becomes probable that such goals will not be achieved or will be exceeded, compensation expense recognized will be adjusted and previous surplus compensation expense recognized will be reversed or additional expense will be recognized. The expected term represents the period from the grant date to the end of the vesting period. Pro-rata vesting may be utilized in the case of death, disability or approved retirement and awards, if earned, will be paid at the end of the vesting period.
External-based metrics
The external-based metrics vest after a three-yearthree-year period. Outstanding grants issued in or after 2018 are based on the Company's total stockholder return relative to the performance of the companies constituting the former S&P Building & Construction Industry Index or Dow Jones U.S. Construction and& Materials Index. The amount of stock distributed will vary from 0% to 200% of PSUs awarded depending on the relative stockholder return performance.
The Company estimated the fair value of the external-based metric performance stock grantsPSUs has been estimated at the grant date using a Monte Carlo simulation that uses various assumptions.
In the nine months ended September 30, 2020, the Company granted separate tranches of external-based metric PSU's subject to a Monte Carlo simulation. The external-based metric performance stockfollowing table provides a range of the assumptions for shares granted in 2019 uses various assumptions that include expected volatility of 26.7%, and a risk free interest rate of 2.5%, both of which were based on an expected term of 2.90 years. Expected volatility was based on a benchmark study of our peers. 2020:
| | | | | | | | | |
| | | | | |
| | | | | |
Expected volatility | 28.43% — 44.83% | | | | |
Risk free interest rate | 0.15% — 1.43% | | | | |
Expected term (in years) | 2.31 — 2.90 | | | | |
Grant date fair value of units granted | $68.60 — $76.58 | | | | |
The risk-free interest rate was based on zero coupon U.S.United States Treasury bills at the time of grant.grant date. The expected term represents the period from the grant date to the end of the three-year performance period. Compensation expense for external-based metric PSUs is measured based on the grant date fair value and is recognized on a straight-line basis over the vesting period. Pro-rata vesting may be utilized in the case of death, disability or approved retirement, and awards, if earned, will be paid at the end of the three-year period.
During the three and nine months ended September 30, 2019, the Company recognized expense of $2 million and $6 million, respectively, related to the Company's PSUs. During the three and nine months ended September 30, 2018, the Company recognized expense of $5 million and $14 million, respectively, related to the Company's PSUs. PSU Summary
As of September 30, 2019,2020, there was $13$16 million of total unrecognized compensation cost related to PSUs. That cost is expected to be recognized over a weighted-average period of 1.701.97 years.
The following table summarizestotal grant date fair value of shares vested during the Company’s PSU activity:
| | | | | | | | |
| Nine Months Ended September 30, 2019 | |
| Number of PSUs | Weighted-Average Grant-Date Fair Value |
Beginning Balance | 360,977 | | $ | 75.23 | |
Granted | 205,350 | | 58.40 | |
Forfeited | (42,750) | | 69.83 | |
Ending Balance | 523,577 | | $ | 69.07 | |
nine months ended September 30, 2020 was $1 million.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
15.13. STOCK COMPENSATION (continued)
The following table summarizes the Company’s PSU activity:
| | | | | | | | |
| | |
| Number of PSUs | Weighted-Average Grant-Date Fair Value |
Balance at December 31, 2019 | 312,725 | | $ | 69.23 | |
Granted | 169,539 | | 65.29 | |
Vested | (12,553) | | 84.46 | |
Forfeited | (30,327) | | 83.14 | |
Balance at September 30, 2020 | 439,384 | | $ | 69.20 | |
| | |
Employee Stock Purchase Plan
On April 18, 2013, the Company’s stockholders approved theThe Owens Corning Employee Stock Purchase Plan (ESPP). The ESPP is a tax-qualified plan under Section 423 of the Internal Revenue Code. The purchase price of shares purchased under the ESPP is equal to 85% of the lower of the fair market value of shares of Owens Corning common stock at the beginning or ending of the offering period, which is a six-month period ending on May 31 and November 30 of each year. AtWhen the approval date,initial plan was approved in 2013, 2.0 million shares were available for purchase under the ESPP. On April 16, 2020, the Company's stockholders approved the Amended and Restated Owens Corning Employee Stock Purchase Plan which increased the number of shares available for issuance under the plan by 4.2 million shares. As of September 30, 2019, 0.52020, 4.3 million shares remain available for purchase.
Included in total stock-based compensation expense is $1 million and $4 million of expense related to the Company's ESPP recognized during the three and nine months ended September 30, 2020, respectively. During the three and nine months ended September 30, 2019, the Company recognized expense of $1 million and $4 million, respectively, related to the Company's ESPP. During the three and nine months ended September 30, 2018, the Company recognized expense of $1 million and $3 million, respectively, related to the Company's ESPP. As of September 30, 2019,2020, there was $1 million of total unrecognized compensation cost related to the ESPP.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
16.14. EARNINGS PER SHARE
The following table is a reconciliation of weighted-average shares for calculating basic and diluted earnings (loss) per-share (in millions, except per share amounts):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Net earnings attributable to Owens Corning | $ | 150 | | $ | 161 | | $ | 332 | | $ | 374 | | |
Weighted-average number of shares outstanding used for basic earnings per share | 109.2 | | 110.0 | | 109.2 | | 110.8 | | |
Net earnings (loss) attributable to Owens Corning | | Net earnings (loss) attributable to Owens Corning | $ | 206 | | $ | 150 | | $ | (615) | | $ | 332 | |
Weighted-average number of shares outstanding used for basic earnings (loss) per share | | Weighted-average number of shares outstanding used for basic earnings (loss) per share | 108.8 | | 109.2 | | 108.7 | | 109.2 | |
Non-vested restricted and performance shares | Non-vested restricted and performance shares | 0.6 | | 0.7 | | 0.6 | | 0.7 | | Non-vested restricted and performance shares | 0.6 | | 0.6 | | 0 | | 0.6 | |
Options to purchase common stock | Options to purchase common stock | 0.2 | | 0.2 | | 0.2 | | 0.2 | | Options to purchase common stock | 0.1 | | 0.2 | | 0 | | 0.2 | |
Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings per share | 110.0 | | 110.9 | | 110.0 | | 111.7 | | |
Earnings per common share attributable to Owens Corning common stockholders: | | |
Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings (loss) per share | | Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings (loss) per share | 109.5 | | 110.0 | | 108.7 | | 110.0 | |
Earnings (loss) per common share attributable to Owens Corning common stockholders: | | Earnings (loss) per common share attributable to Owens Corning common stockholders: | |
Basic | Basic | $ | 1.37 | | $ | 1.46 | | $ | 3.04 | | $ | 3.38 | | Basic | $ | 1.89 | | $ | 1.37 | | $ | (5.66) | | $ | 3.04 | |
Diluted | Diluted | $ | 1.36 | | $ | 1.45 | | $ | 3.02 | | $ | 3.35 | | Diluted | $ | 1.88 | | $ | 1.36 | | $ | (5.66) | | $ | 3.02 | |
For the three months ended September 30, 2020, there were no non-vested restricted or performance shares that had an anti-dilutive effect on earnings per share. For the nine months ended September 30, 2020, diluted earnings per share was equal to basic earnings per share due to the net loss attributable to Owens Corning. For the three and nine months ended September 30, 2019, the number of shares used in the calculation of diluted earnings per share did not include 0.1 million non-vested performance shares, due to their anti-dilutive effect. For the three and nine months ended September 30, 2018, the number of shares used in the calculation of diluted earnings per share did not include 0.3 million non-vested restricted shares and 0.3 million non-vested performance shares, due to their anti-dilutive effect.
On October 24, 2016, the Board of Directors approved a share buy-back program under which the Company is authorized to repurchase up to 10 million shares of the Company’s outstanding common stock (the “Repurchase Authorization”). The Repurchase Authorization enables the Company to repurchase shares through the open market, privately negotiated, or other transactions. The actual number of shares repurchased will depend on timing, market conditions and other factors and is at the Company’s discretion. The Company repurchased 1.01.3 million shares of its common stock for $48$81 million during the nine months ended September 30, 2019,2020, under the Repurchase Authorization. As of September 30, 2019, 3.62020, 2.3 million shares remain available for repurchase under the Repurchase Authorization.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
17.15. INCOME TAXES
The following table provides the Income tax expense (in millions) and effective tax rate for the periods indicated:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Income tax expense | Income tax expense | $ | 61 | | $ | 67 | | $ | 159 | | $ | 127 | | Income tax expense | $ | 56 | | $ | 61 | | $ | 119 | | $ | 159 | |
Effective tax rate | Effective tax rate | 29 | % | 29 | % | 32 | % | 25 | % | Effective tax rate | 21 | % | 29 | % | (24) | % | 32 | % |
The effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2020 is 21%. The effective tax rate was positively impacted by final regulations on global intangible low-taxed income (GILTI), offset by the impact of taxes on foreign earnings, U.S. state and local income tax expense, and other discrete adjustments. The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the nine months ended September 30, 2020 is primarily a result of charges related to the impairment of goodwill and certain other indefinite-lived intangible assets recorded in the first quarter of 2020, which were mostly non-deductible. In addition, non-cash charges of $15 million were recorded related to adjustments to valuation allowances against certain deferred tax assets. The remaining difference between the statutory rate of 21% and the effective rate was driven by the impact of recording U.S. state and local income tax expense and U.S. federal taxes on foreign earnings.
On July 20, 2020 the Internal Revenue Service (IRS) issued final regulations under IRC Section 951A permitting a taxpayer to elect to exclude from its inclusion of GILTI items of income subject to a high effective rate of foreign tax. As a result of the final regulations, the Company recorded a net non-cash income tax benefit of $13 million in the third quarter of 2020 relating to the 2018 and 2019 tax years and an increase in the valuation allowance.
The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the three months ended September 30, 2019 is primarily due to U.S. state and local income tax expense, the impact of U.S. federal taxes on foreign earnings an increase in tax valuation allowances recorded against certain foreign deferred tax assets and other discrete adjustments. The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the nine months ended September 30, 2019 is primarily due to U.S. state and local income tax expense, the impact of U.S. federal taxes on foreign earnings, legislative changes an increase in tax valuation allowances recorded against certain foreign deferred tax assets and other discrete adjustments.
On March 6, 2019, the U.S. Treasury and the IRS proposed regulations that provide guidance on determining the amount of a domestic corporation’s deduction for the global intangible low-taxed income (GILTI)GILTI and foreign-derived intangible income (FDII) recently added by the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”"Tax Act"). The proposed regulations provide special rules in determining the deduction amount which adjusted the Company’s 2018 tax estimate resulting in an increase to tax expense of $12 million for the nine months ended September 30, 2019.
The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the three months ended September 30, 2018 is primarily due to U.S. state and local income tax expense, the impact of higher foreign tax rates, an increase in U.S. federal tax expense on foreign earnings and other discrete adjustments offset by a reversal of a valuation allowance recorded in prior years against certain European net deferred tax assets. The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the nine months ended September 30, 2018 is primarily due to U.S. state and local income tax expense, the impact of higher foreign tax rates, an increase in U.S. federal tax expense on foreign earnings, offset by excess tax benefits related to stock compensation, a reversal of a valuation allowance recorded in prior years against certain European net deferred tax assets and other discrete adjustments.
The Company continues to assert indefinite reinvestment in accordance with ASC 740 based on the laws as of enactment of the Tax Act.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
18.16. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE DEFICITINCOME
The following table summarizes the changes in accumulated other comprehensive income (deficit) (in millions):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | | Three Months Ended September 30, | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | | 2020 | 2019 | 2020 | 2019 |
Currency Translation Adjustment | Currency Translation Adjustment | | | Currency Translation Adjustment | | |
Beginning balance | Beginning balance | $ | (285) | | $ | (272) | | $ | (306) | | $ | (183) | | | Beginning balance | $ | (351) | | $ | (285) | | $ | (282) | | $ | (306) | | |
Net investment hedge amounts classified into AOCI, net of tax | Net investment hedge amounts classified into AOCI, net of tax | 22 | | 1 | | 24 | | 2 | | | Net investment hedge amounts classified into AOCI, net of tax | (9) | | 22 | | 20 | | 24 | | |
| Loss on foreign currency translation | (79) | | (13) | | (60) | | (103) | | | |
Other comprehensive loss, net of tax | (57) | | (12) | | (36) | | (101) | | | |
Gain/(loss) on foreign currency translation | | Gain/(loss) on foreign currency translation | 46 | | (79) | | (52) | | (60) | | |
Other comprehensive income/(loss), net of tax | | Other comprehensive income/(loss), net of tax | 37 | | (57) | | (32) | | (36) | | |
Ending balance | Ending balance | $ | (342) | | $ | (284) | | $ | (342) | | $ | (284) | | | Ending balance | $ | (314) | | $ | (342) | | $ | (314) | | $ | (342) | | |
Pension and Other Postretirement Adjustment | Pension and Other Postretirement Adjustment | | | Pension and Other Postretirement Adjustment | | |
Beginning balance | Beginning balance | $ | (349) | | $ | (329) | | $ | (350) | | $ | (331) | | | Beginning balance | $ | (321) | | $ | (349) | | $ | (326) | | $ | (350) | | |
Amounts reclassified from AOCI to net earnings, net of tax (a) | Amounts reclassified from AOCI to net earnings, net of tax (a) | 1 | | 1 | | 2 | | 3 | | | Amounts reclassified from AOCI to net earnings, net of tax (a) | (3) | | 1 | | 4 | | 2 | | |
Amounts classified into AOCI, net of tax | Amounts classified into AOCI, net of tax | (3) | | — | | (3) | | — | | | Amounts classified into AOCI, net of tax | 0 | | (3) | | (2) | | (3) | | |
| Other comprehensive (loss)/income, net of tax | Other comprehensive (loss)/income, net of tax | (2) | | 1 | | (1) | | 3 | | | Other comprehensive (loss)/income, net of tax | (3) | | (2) | | 2 | | (1) | | |
Ending balance | Ending balance | $ | (351) | | $ | (328) | | $ | (351) | | $ | (328) | | | Ending balance | $ | (324) | | $ | (351) | | $ | (324) | | $ | (351) | | |
Hedging Adjustment | Hedging Adjustment | | | Hedging Adjustment | | |
Beginning balance | Beginning balance | $ | (1) | | $ | 1 | | $ | — | | $ | — | | | Beginning balance | $ | (3) | | $ | (1) | | $ | (2) | | $ | 0 | | |
| Amounts classified into AOCI, net of tax | Amounts classified into AOCI, net of tax | 1 | | 1 | | — | | 2 | | | Amounts classified into AOCI, net of tax | 2 | | 1 | | (2) | | 0 | | |
| Amounts reclassified from AOCI to net earnings, net of tax (b) | | Amounts reclassified from AOCI to net earnings, net of tax (b) | 1 | | 0 | | 4 | | 0 | | |
| Other comprehensive income, net of tax | Other comprehensive income, net of tax | 1 | | 1 | | — | | 2 | | | Other comprehensive income, net of tax | 3 | | 1 | | 2 | | 0 | | |
Ending balance | Ending balance | $ | — | | $ | 2 | | $ | — | | $ | 2 | | | Ending balance | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | |
Total AOCI ending balance | Total AOCI ending balance | | $ | (693) | | $ | (610) | | $ | (693) | | $ | (610) | | | Total AOCI ending balance | $ | (638) | | $ | (693) | | $ | (638) | | $ | (693) | | |
(a)These AOCI components are included in the computation of total Pension and OPEBOther postretirement expense and are recorded in Non-operating income. See Note 1311 for additional information.
(b)Amounts reclassified from (loss)/gain on cash flow hedges are reclassified from AOCI to income when the hedged item affects earnings and is recognized in Cost of sales or Interest expense, net depending on the hedged item. See Note 5 for additional information.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis (MD&A) is intended to help investors understand Owens Corning, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes thereto contained in this report. Unless the context requires otherwise, the terms “Owens Corning,” “Company,” “we” and “our” in this report refer to Owens Corning and its subsidiaries.
GENERAL
Owens Corning is a leading global producer of residential and commercial building materials and of glass fiber reinforcements and other materials for composites. The Company has three reportable segments: Composites, Insulation and Roofing. Through these lines of business, we manufacture and sell products worldwide. We maintain leading market positions in many of our major product categories.
EXECUTIVE OVERVIEW
The spread of the COVID-19 virus in 2020 has caused an economic downturn on a global scale, with varying degrees in the pace of recovery in certain end markets and geographies served by the Company, as well as volatility in the financial markets. As of October 28, 2020, the Company’s operations have been impacted to the extent described in the paragraphs below and as discussed in our Results of Operations. The Company cannot at this time predict the impact that the COVID-19 pandemic will have on its financial condition and operations, although we are continuing to monitor our supply chain and orders from customers for COVID-19 pandemic-related changes.
In this time of uncertainty as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking significant precautions to provide a safe environment for our employees and customers. We have enacted enhanced operating protocols to assure the safety and well-being of our employees, placed restrictions on non-essential travel, and otherwise adjusted work schedules to maximize our capacity while adhering to recommended precautions such as social distancing. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.
The impact of the COVID-19 pandemic continues to unfold. The extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations.
Net earnings attributable to Owens Corning were $150$206 million in the third quarter of 2019,2020, compared to $161$150 million in the same period of 2018.2019. The Company reported $277$296 million in earnings before interest and taxes (EBIT) for the third quarter of 20192020 compared to $259$277 million in the same period of 2018.2019. The Company generated $277$289 million in adjusted earnings before interest and taxes (“Adjusted EBIT”) for the third quarter of 20192020 compared to $267$277 million in the same period of 2018.2019. See the Adjusted Earnings Before Interest and Taxes paragraph of the MD&A for further information regarding EBIT and Adjusted EBIT, including the reconciliation to net earnings (loss) attributable to Owens Corning. Third quarter of 20192020 EBIT performance compared to the same period of 20182019 increased $16 million and $3$53 million in our Roofing and Composites segments, respectively,segment and decreased $10$12 million and $11 million in our Composites and Insulation segment.segments, respectively. Within our Corporate, Other and Eliminations category, General corporate expense and other decreasedincreased by $1$18 million.
In our Insulation segment, EBIT in the third quarterCash and cash equivalents were $647 million as of 2019 was $84 millionSeptember 30, 2020, compared to $94$35 million in the same periodas of 2018. The $10September 30, 2019, as a result of strong cash flow provided by operating activities, lower cash paid for property, plant and equipment and issuance of $300 million decrease was primarily due to production curtailment actions taken in our North American residential fiberglass business. In our Composites segment, EBIT was $67 million in the third quarter of 2019 compared to $64 million in the same period of 2018, primarily due to higher sales volumes. In our Roofing segment, EBIT in the third quarter of 2019 was $143 million compared to $127 million in the same period in 2018, primarily due to higher sales volumes.
2030 senior notes on May 12, 2020. In the nine months ended September 30, 2019,2020, the Company's operating activities provided $596$717 million of cash flow, compared to $506$596 million in the same period in 2018.2019. The change was primarily driven by the lower increase in operating assets and liabilities compared to the same period a reduction in inventories from the prior year-end.
In August 2019, the Company issued $450 million of 2029 senior notes with an annual interest rate of 3.95%. The proceeds from the notes were used to repay portions of its outstanding 2022 senior notes and 2036 senior notes. The Company recognized approximately $32 million of loss on extinguishment of debt inyear ago. During the third quarter of 20192020, the Company repaid all outstanding borrowings on the term loan associated with these actions.the purchase of Paroc Group Oy, and the Senior Revolving Credit Facility (as defined below).
The Company did not repurchase any shares of its common stock during the third quarter of 20192020 under a previously announced repurchase authorization (the "Share Repurchase Authorization"). As of September 30, 2019, 3.62020, 2.3 million shares remained available for repurchase under the Share Repurchase Authorization.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
Consolidated Results (in millions)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Net sales | Net sales | $ | 1,883 | | $ | 1,818 | | $ | 5,468 | | $ | 5,333 | | Net sales | $ | 1,904 | | $ | 1,883 | | $ | 5,130 | | $ | 5,468 | |
Gross margin | Gross margin | $ | 461 | | $ | 448 | | $ | 1,226 | | $ | 1,221 | | Gross margin | $ | 477 | | $ | 461 | | $ | 1,126 | | $ | 1,226 | |
% of net sales | % of net sales | 24 | % | 25 | % | 22 | % | 23 | % | % of net sales | 25 | % | 24 | % | 22 | % | 22 | % |
Marketing and administrative expenses | Marketing and administrative expenses | $ | 164 | | $ | 159 | | $ | 527 | | $ | 531 | | Marketing and administrative expenses | $ | 163 | | $ | 164 | | $ | 493 | | $ | 527 | |
| Earnings before interest and taxes | $ | 277 | | $ | 259 | | $ | 625 | | $ | 596 | | |
Goodwill impairment charge | | Goodwill impairment charge | $ | — | | $ | — | | $ | 944 | | $ | — | |
Other expenses, net | | Other expenses, net | $ | 2 | | $ | 1 | | $ | 40 | | $ | 16 | |
Earnings (loss) before interest and taxes | | Earnings (loss) before interest and taxes | $ | 296 | | $ | 277 | | $ | (399) | | $ | 625 | |
Interest expense, net | Interest expense, net | $ | 33 | | $ | 31 | | $ | 101 | | $ | 92 | | Interest expense, net | $ | 35 | | $ | 33 | | $ | 98 | | $ | 101 | |
Loss on extinguishment of debt | Loss on extinguishment of debt | $ | 32 | | $ | — | | $ | 32 | | $ | — | | Loss on extinguishment of debt | $ | — | | $ | 32 | | $ | — | | $ | 32 | |
Income tax expense | Income tax expense | $ | 61 | | $ | 67 | | $ | 159 | | $ | 127 | | Income tax expense | $ | 56 | | $ | 61 | | $ | 119 | | $ | 159 | |
Net earnings attributable to Owens Corning | $ | 150 | | $ | 161 | | $ | 332 | | $ | 374 | | |
Net earnings (loss) attributable to Owens Corning | | Net earnings (loss) attributable to Owens Corning | $ | 206 | | $ | 150 | | $ | (615) | | $ | 332 | |
The Consolidated Results discussion below provides a summary of our results and the trends affecting our business, and should be read in conjunction with the more detailed Segment Results discussion that follows.
NET SALES
In the third quarter and year-to-date 2019,2020, net sales increased $65$21 million and $135 million, respectively, compared to the same periodsperiod in 2018.2019. Year-to-date net sales decreased $338 million compared to the same period in 2019. For the third quarter, the increase in net sales was driven by the impact of higher sales volumes in our Roofing and Composites segments,segment partially offset by the unfavorable impact of translating sales denominatedlower selling prices in foreign currencies into United States dollars.all three segments. For the year-to-date comparison, the increasedecrease in net sales was driven by the impact of higherlower sales volumes in our Roofing and Composites segments and higherlower selling prices in our Roofing and Insulation segments, partially offset by the unfavorable impact of translating sales denominated in foreign currencies into United States dollars.all three segments.
GROSS MARGIN
In the third quarter and year-to-date 2019,2020, gross margin increased $13$16 million and $5 million, respectively, compared to the same periodsperiod in 2018.2019. Year-to-date gross margin decreased $100 million compared to the same period in 2019. For the third quarter, the increase in gross margin was driven primarily by the impact offavorable manufacturing performance in all three segments and higher sales volumes in our Roofing segment. For the year-to-date comparison, the increasedecrease in gross margin was driven by higherlower selling prices in our Roofing and Insulation segments and higherlower sales volumes in all three segments, and production curtailment actions, most notably in our RoofingComposites segment.
MARKETING AND ADMINISTRATIVE EXPENSES
In the third quarter 2019,2020, marketing and administrative expenses increased $5were largely flat. For the year-to-date 2020, marketing and administrative expenses decreased $34 million compared to the same period in 2018. Year-to-date marketing and administrative2019. The decrease was primarily driven by cost control actions across the Company.
GOODWILL IMPAIRMENT CHARGE
The Company recorded a non-cash impairment charge of $944 million in the first quarter of 2020 related to the Insulation reporting unit, which was equal to the excess of the reporting unit's carrying value over its fair value.
OTHER EXPENSES, NET
In the third quarter 2020, Other expenses, decreased $4net were largely flat compared to the same period in 2019. For the year-to-date 2020, Other expenses, net increased $24 million compared to the same period in 2018. For the third quarter, the2019. The increase was driven primarily by intangible asset impairment charges of $43 million and $6 million of restructuring costs, partially offset by $26 million of gains on sale of precious metals used in marketingproduction tooling as needs changed in response to economic and administrative expenses was primarily driven by the comparison to lower performance-based compensation in the same period in the prior year. For the year-to-date comparison, the decrease in marketing and administrative expenses was primarily driven by lower general corporate expenses.
INTEREST EXPENSE, NET
In the third quarter 2019, interest expense, net was flat compared to the same period in 2018. For the year-to-date 2019, interest expense, net increased $9 million, primarily due to a decrease in interest income earned on cash balances and lower interest capitalized.
LOSS ON EXTINGUISHMENT OF DEBT
During the third quarter of 2019, the Company recognized a $32 million loss on extinguishment of debt in connection with the repurchase of a portion of its outstanding 2022 senior notes and 2036 senior notes in a tender offer.
technological factors.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
INTEREST EXPENSE, NET
In the third quarter and year-to-date 2020, interest expense, net was largely flat compared to the same periods in 2019.
INCOME TAX EXPENSE
Income tax expense for the three and nine months ended September 30, 2020 was $56 million and $119 million, respectively. For the third quarter 2020, the Company's effective tax rate was 21% and for the nine months ended September 30, 2020, the Company's effective tax rate was (24)%. The effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2020 is 21%. The effective tax rate was positively impacted by final regulations on global intangible low-taxed income (GILTI), offset by the impact of taxes on foreign earnings, U.S. state and local income tax expense, and other discrete adjustments. The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the nine months ended September 30, 2020 is primarily a result of charges related to the impairment of goodwill and certain other indefinite-lived intangible assets recorded in the first quarter of 2020, which were mostly non-deductible. Non-cash charges of $15 million were recorded related to adjustments to valuation allowances against certain deferred tax assets. The remaining difference between the statutory rate of 21% and the effective rate was driven by the impact of recording U.S. state and local income tax expense and U.S. federal taxes on foreign earnings.
On July 20, 2020 the Internal Revenue Service (IRS) issued final regulations under IRC Section 951A permitting a taxpayer to elect to exclude from its inclusion of GILTI items of income subject to a high effective rate of foreign tax. As a result of the final regulations, the Company recorded a net non-cash income tax benefit of $13 million in the third quarter of 2020 relating to the 2018 and 2019 tax years and an increase in the valuation allowance.
The realization of deferred tax assets depends on achieving a certain minimum level of future taxable income. Management currently believes that an immaterial amount of valuation allowances of certain foreign jurisdictions could be reduced within the next 12 months.
Income tax expense for the three and nine months ended September 30, 2019 was $61 million and $159 million, respectively. For the third quarter 2019, the Company's effective tax rate was 29% and for the nine months ended September 30, 2019, the Company's effective tax rate was 32%. The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the three months ended September 30, 2019 iswas primarily due to U.S. state and local income tax expense, the impact of U.S. federal taxes on foreign earnings an increase in valuation allowances recorded against certain foreign tax assets and other discrete adjustments. The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the nine months ended September 30, 2019 iswas primarily due to U.S. state and local income tax expense, the impact of U.S. federal taxes on foreign earnings, legislative changes an increase in tax valuation allowances recorded against certain foreign deferred tax assets and other discrete adjustments.
On March 6, 2019, the U.S. Treasury and the IRS proposed regulations that provide guidance on determining the amount of a domestic corporation’s deduction for the global intangible low-taxed income (GILTI)GILTI and foreign-derived intangible income (FDII) recently added by the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The proposed regulations provide special rules in determining the deduction amount which adjusted the Company’s 2018 tax estimate resulting in an increase to tax expense of $12 million for the nine months ended September 30, 2019.
Income tax expense for the three and nine months ended September 30, 2018 was $67 million and $127 million, respectively. For the third quarter 2018, the Company's effective tax rate was 29% and for the nine months ended September 30, 2018, the Company's effective tax rate was 25%.- 38 -
The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the three months ended September 30, 2018, was primarily due to U.S. state and local income tax expense, the impact of higher foreign tax rates, an increase in U.S. federal tax expense on foreign earnings and other discrete adjustments, offset by a reversal of a valuation allowance recorded in prior years against certain European net deferred tax assets. The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the nine months ended September 30, 2018 is primarily due to U.S. state and local income tax expense, the impact of higher foreign tax rates, an increase in U.S. federal tax expense on foreign earnings, offset by excess tax benefits related to stock compensation, a reversal of a valuation allowance recorded in prior years against certain European net deferred tax assets and other discrete adjustments.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Restructuring and Acquisition-Related Costs
The Company has incurred restructuring, transaction and integration costs related to acquisitions, along with restructuring costs in connection with its global cost reduction and productivity initiatives. These costs are recorded within Corporate, Other and Eliminations. Please refer to Notes 8 and 11Note 9 of the Consolidated Financial Statements for further information on the nature of these costs.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The following table presents the impact and respective location of these income (expense) items on the Consolidated Statements of Earnings (Loss) (in millions):
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | Location | 2019 | 2018 | 2019 | 2018 | | Location | 2020 | 2019 | 2020 | 2019 |
Restructuring costs | Restructuring costs | Cost of sales | | $ | — | | $ | (3) | | $ | (2) | | $ | (15) | | Restructuring costs | Cost of sales | $ | — | | $ | — | | $ | (4) | | $ | (2) | |
Restructuring (costs) / gains | Restructuring (costs) / gains | Other expenses, net | | — | | (4) | | 3 | | (4) | | Restructuring (costs) / gains | Other expenses, net | — | | — | | (6) | | 3 | |
Acquisition-related costs | Marketing and administrative expenses | | — | | (1) | | — | | (7) | | |
Acquisition-related costs | Other expenses, net | | — | | — | | — | | (9) | | |
Recognition of acquisition inventory fair value step-up | Cost of sales | | — | | — | | — | | (2) | | |
| Total restructuring, acquisition and integration-related (costs) / gains | Total restructuring, acquisition and integration-related (costs) / gains | | | $ | — | | $ | (8) | | $ | 1 | | $ | (37) | | Total restructuring, acquisition and integration-related (costs) / gains | | $ | — | | $ | — | | $ | (10) | | $ | 1 | |
Adjusted Earnings Before Interest and Taxes
Adjusted EBIT is a non-GAAP measure that excludes certain items that management does not allocate to our segment results because it believes they are not representative of the Company's ongoing operations. Adjusted EBIT is used internally by the Company for various purposes, including reporting results of operations to the Board of Directors of the Company, analysis of performance and related employee compensation measures. Although management believes that these adjustments result in a measure that provides a useful representation of our operational performance, the adjusted measure should not be considered in isolation or as a substitute for Net earnings (loss) attributable to Owens Corning as prepared in accordance with accounting principles generally accepted in the United States.
Adjusting income (expense) items to EBIT are shown in the table below (in millions):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Restructuring (costs) / gains | Restructuring (costs) / gains | $ | — | | $ | (7) | | $ | 1 | | $ | (19) | | Restructuring (costs) / gains | $ | — | | $ | — | | $ | (10) | | $ | 1 | |
Acquisition-related costs | — | | (1) | | — | | (16) | | |
Recognition of acquisition inventory fair value step-up | — | | — | | — | | (2) | | |
Gains on sale of certain precious metals | | Gains on sale of certain precious metals | 7 | | — | | 26 | | — | |
Goodwill impairment charge | | Goodwill impairment charge | — | | — | | (944) | | — | |
Intangible assets impairment charge | | Intangible assets impairment charge | — | | — | | (43) | | — | |
| | Total adjusting items | Total adjusting items | $ | — | | $ | (8) | | $ | 1 | | $ | (37) | | Total adjusting items | $ | 7 | | $ | — | | $ | (971) | | $ | 1 | |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The reconciliation from Net earnings (loss) attributable to Owens Corning to EBIT and to Adjusted EBIT is shown in the table below (in millions):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
NET EARNINGS ATTRIBUTABLE TO OWENS CORNING | $ | 150 | | $ | 161 | | $ | 332 | | $ | 374 | | |
NET EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING | | NET EARNINGS (LOSS) ATTRIBUTABLE TO OWENS CORNING | $ | 206 | | $ | 150 | | $ | (615) | | $ | 332 | |
Net earnings attributable to noncontrolling interests | Net earnings attributable to noncontrolling interests | 1 | | 1 | | 1 | | 2 | | Net earnings attributable to noncontrolling interests | — | | 1 | | — | | 1 | |
NET EARNINGS | 151 | | 162 | | 333 | | 376 | | |
Equity in net earnings / (loss) of affiliates | — | | 1 | | — | | (1) | | |
NET EARNINGS (LOSS) | | NET EARNINGS (LOSS) | 206 | | 151 | | (615) | | 333 | |
Equity in net earnings of affiliates | | Equity in net earnings of affiliates | 1 | | — | | 1 | | — | |
Income tax expense | Income tax expense | 61 | | 67 | | 159 | | 127 | | Income tax expense | 56 | | 61 | | 119 | | 159 | |
EARNINGS BEFORE TAXES | 212 | | 228 | | 492 | | 504 | | |
EARNINGS (LOSS) BEFORE TAXES | | EARNINGS (LOSS) BEFORE TAXES | 261 | | 212 | | (497) | | 492 | |
Interest expense, net | Interest expense, net | 33 | | 31 | | 101 | | 92 | | Interest expense, net | 35 | | 33 | | 98 | | 101 | |
Loss on extinguishment of debt | Loss on extinguishment of debt | 32 | | — | | 32 | | — | | Loss on extinguishment of debt | — | | 32 | | — | | 32 | |
EARNINGS BEFORE INTEREST AND TAXES | 277 | | 259 | | 625 | | 596 | | |
EARNINGS (LOSS) BEFORE INTEREST AND TAXES | | EARNINGS (LOSS) BEFORE INTEREST AND TAXES | 296 | | 277 | | (399) | | 625 | |
Adjusting items from above | Adjusting items from above | — | | (8) | | 1 | | (37) | | Adjusting items from above | 7 | | — | | (971) | | 1 | |
ADJUSTED EBIT | ADJUSTED EBIT | $ | 277 | | $ | 267 | | $ | 624 | | $ | 633 | | ADJUSTED EBIT | $ | 289 | | $ | 277 | | $ | 572 | | $ | 624 | |
Segment Results
EBIT by segment consists of net sales less related costs and expenses and is presented on a basis that is used internally for evaluating segment performance. Certain items, such as general corporate expenses or income and certain other expense or income items, are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in EBIT for our reportable segments and are included in the Corporate, Other and Eliminations category, which is presented following the discussion of our reportable segments.
Composites
The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Composites segment (in millions):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Net sales | Net sales | $ | 531 | | $ | 508 | | $ | 1,579 | | $ | 1,560 | | Net sales | $ | 521 | | $ | 531 | | $ | 1,413 | | $ | 1,579 | |
% change from prior year | % change from prior year | 5 | % | -1 | % | 1 | % | — | % | % change from prior year | -2 | % | 5 | % | -11 | % | 1 | % |
EBIT | EBIT | $ | 67 | | $ | 64 | | $ | 191 | | $ | 195 | | EBIT | $ | 55 | | $ | 67 | | $ | 105 | | $ | 191 | |
EBIT as a % of net sales | EBIT as a % of net sales | 13 | % | 13 | % | 12 | % | 13 | % | EBIT as a % of net sales | 11 | % | 13 | % | 7 | % | 12 | % |
Depreciation and amortization expense | Depreciation and amortization expense | $ | 37 | | $ | 36 | | $ | 114 | | $ | 109 | | Depreciation and amortization expense | $ | 40 | | $ | 37 | | $ | 117 | | $ | 114 | |
NET SALES
In our Composites segment, net sales in the third quarter 2019 increased $232020 decreased $10 million compared to the same period in 2018. The positive impact2019. Lower selling prices of higher sales volumes of about 7% was partially offset by$5 million, the negativeslightly unfavorable impact of translating sales denominated in foreign currencies into United States dollars and lower selling prices of $4 million.slightly unfavorable product mix accounted for the decline. Sales volumes were flat on a year-over-year basis.
For the year-to-date 2019, net sales in our Composites segment increased $19 million compared to the same period in 2018. The positive impact of higher sales volumes of 5% was partially offset by the $45 million negative impact of translating sales denominated in foreign currencies into United States dollars, unfavorable customer mix and slightly lower selling prices.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
For the year-to-date 2020, net sales in our Composites segment decreased $166 million compared to the same period in 2019, primarily due to lower sales volumes of approximately 6% due to the impact on demand from the COVID-19 pandemic. The unfavorable impact of $23 million from translating sales denominated in foreign currencies into United States dollars, the impact of unfavorable customer and product mix, and $21 million in lower selling prices accounted for the remaining year over year decline.
EBIT
In our Composites segment, EBIT in the third quarter of 2019 increased $32020 decreased $12 million compared to the same period in 2018.2019. The positivedecline was primarily driven by the $27 million unfavorable impact of higher sales volumesproduction curtailment actions and lower rebuild and start-up costs of $9 million wasselling prices, partially offset by lower selling prices, higher input cost inflation,favorable manufacturing performance of $19 million. Unfavorable customer mix and the unfavorable impact of translating sales and costs denominated in foreign currencies into United States dollars.dollars were largely offset by $6 million of lower selling, general and administrative expenses, input cost deflation and lower transportation costs.
For the year-to-date 2019,2020, EBIT in our Composites segment decreased $4$86 million compared to the same period in 2018.2019. The decline was driven by lower sales volumes and the $77 million unfavorable impact of higher input cost inflationproduction curtailment actions, partially offset by lower selling, general and administrative expenses. Favorable manufacturing performance of $17$35 million more than offset lower selling prices the $5and unfavorable customer mix. The $12 million unfavorable impact of translating sales and costs denominated in foreign currencies into United States dollars and unfavorable product and customer mix was partially offset by the positive impact of improved manufacturing performance, higher sales volumeslower transportation costs and lower rebuild and start-up costs.input cost deflation.
OUTLOOK
Global glass reinforcements market demand has historically grownbeen correlated with global industrial production and we believe this relationship will continue. In 2019, we expect our volume growthThe Company expects the COVID-19 pandemic will continue to exceed growthcreate uncertainty in global industrial production.its end markets. The magnitude of the impact will depend on the depth and duration of the crisis, as well as the timing of the recovery in the markets served by the Composites segment. The company continues to focus on managing costs, capital expenditures, and working capital.
Insulation
The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Insulation segment (in millions):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Net sales | Net sales | $ | 693 | | $ | 710 | | $ | 1,945 | | $ | 1,988 | | Net sales | $ | 681 | | $ | 693 | | $ | 1,879 | | $ | 1,945 | |
% change from prior year | % change from prior year | -2 | % | 25 | % | -2 | % | 41 | % | % change from prior year | -2 | % | -2 | % | -3 | % | -2 | % |
EBIT | EBIT | $ | 84 | | $ | 94 | | $ | 141 | | $ | 175 | | EBIT | $ | 73 | | $ | 84 | | $ | 144 | | $ | 141 | |
EBIT as a % of net sales | EBIT as a % of net sales | 12 | % | 13 | % | 7 | % | 9 | % | EBIT as a % of net sales | 11 | % | 12 | % | 8 | % | 7 | % |
Depreciation and amortization expense | Depreciation and amortization expense | $ | 48 | | $ | 47 | | $ | 146 | | $ | 138 | | Depreciation and amortization expense | $ | 51 | | $ | 48 | | $ | 149 | | $ | 146 | |
NET SALES
In our Insulation segment, net sales in the third quarter of 20192020 decreased $17$12 million compared to the same period in 2018. Higher2019. The decline was due to lower selling prices of $6 million were more than offset by lower sales volumes of about 2% and the $10unfavorable product mix. The $5 million unfavorable impact of translating sales denominated in foreign currencies into United States dollars.
For the year-to-date 2019, net sales in our Insulation segment decreased $43 million compared to the same period in 2018. Higher selling prices of $49 million and the $38 million impact of our acquisition of Paroc (net sales from January 1, 2019 through February 4, 2019 that were related to the one-year post-acquisition period) were largely offset by lower sales volumes of about 4%. The unfavorablefavorable impact of translating sales denominated in foreign currencies into United States dollars reducedoffset the unfavorable impact of lost sales from the divestiture of an immaterial business in the first quarter of 2020. Sales volumes were flat on a year-over-year basis, as volume growth in certain North American building insulation markets have offset volume decreases in certain international and industrial markets.
For the year-to-date 2020, net sales by $40in our Insulation segment decreased $66 million compared to the same period in 2018.
EBIT
In our Insulation segment, EBIT in the third quarter of 2019 decreased $10 million compared2019. The decrease was due to the same period in 2018. The impact of higher selling prices offset higher input cost inflation of $6 million. Production curtailment actions primarily taken in our North American residential fiberglass business in the third quarter of 2019 resulted in $16 million of lower fixed cost absorption on lower production volumes compared to the same period in 2018. The $6 million impact of favorable manufacturing performance more than offset the impact of unfavorable customer and product mix, lower sales volumes.
For the year-to-date 2019, EBIT in our Insulation segment decreased $34 million compared to the same period in 2018 primarily due to lower sales volumes. The impact of higher selling prices was more than offset by production curtailment actions primarily taken in our North American residential fiberglass business, which resulted in $52of $18 million, of lower fixed cost absorption on lower production volumes. Favorable manufacturing performance and the favorable impact of lower rebuild andunfavorable
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
start-up costsimpact of lost sales from the divestiture of an immaterial business in the first quarter of 2020, and the $11 million negative impact of translating sales denominated in foreign currencies into United States dollars. Sales volumes were flat on a year-over-year basis.
EBIT
In our Insulation segment, EBIT in the third quarter of 2020 decreased $11 million compared to the same period in 2019. The decline was primarily driven by lower selling prices of $6 million and unfavorable customer and product mix. Favorable manufacturing performance of $8 million was largely offset by the unfavorable impact of production curtailment actions and higher delivery costs.
For the year-to-date 2020, EBIT in our Insulation segment increased $3 million compared to the same period in 2019. The favorable impact of manufacturing performance and the $5 million gain on the divestiture of an immaterial business in the first quarter of 2020 was offset by lower selling prices of $18 million and the unfavorable impact of customer and product mix. The $16 million favorable impact of lower selling, general and administrative expenses was partially offset by higher input cost inflationthe unfavorable impact of $22 millionproduction curtailment actions and higher selling, general and administrativedelivery costs.
OUTLOOK
The outlook for Insulation demand is driven by new North American new residential construction, remodeling and repair activity; andactivity, as well as commercial and industrial construction activity in the United States, Canada, Europe and Asia-Pacific. Demand forin commercial and industrial insulation markets is most closely correlated to industrial production growth and overall economic activity in the global markets we serve. Demand for residential insulation is most closely correlated to U.S. housing starts, and we expect slightly negative growth in U.S. housing starts in 2019. starts.
During the third quarter of 2019,2020, the average Seasonally Adjusted Annual Rate (SAAR) of U.S. housing starts was approximately 1.2821.430 million, up from an annual average of approximately 1.2331.288 million starts in the third quarter of 2018.2019.
We believeThrough the geographic, productthird quarter of 2020, the North American new residential construction recovery has continued to accelerate, while global commercial and channel mix of our portfolio mayindustrial construction activity has recovered at a slower pace. The Company expects the COVID-19 pandemic will continue to moderatecreate uncertainty in its end markets. The magnitude of the impact will depend on the depth and duration of market demand-driven variability associated with the U.S. housing market.crisis, and the pace of recovery in the end markets and geographies served by the Insulation segment. The company continues to focus on managing costs, capital expenditures, and working capital.
Roofing
The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Roofing segment (in millions):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Net sales | Net sales | $ | 713 | | $ | 645 | | $ | 2,105 | | $ | 1,946 | | Net sales | $ | 761 | | $ | 713 | | $ | 1,993 | | $ | 2,105 | |
% change from prior year | % change from prior year | 11 | % | -5 | % | 8 | % | -2 | % | % change from prior year | 7 | % | 11 | % | -5 | % | 8 | % |
EBIT | EBIT | $ | 143 | | $ | 127 | | $ | 368 | | $ | 351 | | EBIT | $ | 196 | | $ | 143 | | $ | 408 | | $ | 368 | |
EBIT as a % of net sales | EBIT as a % of net sales | 20 | % | 20 | % | 17 | % | 18 | % | EBIT as a % of net sales | 26 | % | 20 | % | 20 | % | 17 | % |
Depreciation and amortization expense | Depreciation and amortization expense | $ | 14 | | $ | 13 | | $ | 40 | | $ | 38 | | Depreciation and amortization expense | $ | 15 | | $ | 14 | | $ | 44 | | $ | 40 | |
NET SALES
In our Roofing segment, net sales in the third quarter of 20192020 increased $68$48 million compared to the same period in 2018. The increase was primarily driven by higher sales volumes of about 12% on higher shingle volumes and higher third-party asphalt sales. Slightly lower selling prices, primarily as a result of the comparison to lower rebates associated with volume targets in the same period in the prior year, offset higher sales volumes.
For the year-to-date 2019, net sales in our Roofing segment increased $159 million compared to the same period in 2018.2019. The increase was driven by higher sales volumes of about 5%approximately 12% on both higher shingle volumes $37 million ofand higher component volumes partially offset by lower selling prices of $23 million and lower third-party asphalt sales of $20 million. The remaining difference was primarily driven by favorable product mix and higher third-party asphalt sales.mix.
EBIT
InFor the year-to-date 2020, net sales in our Roofing segment EBIT in the third quarter of 2019 increased $16decreased $112 million compared to the same period in 2018.2019. The increasedecrease was primarily driven by higher sales volumes. Slightly$50 million of lower selling prices were partially offset byand $43 million of lower transportation costs.
For the year-to-date 2019, EBIT in our Roofing segment increased $17 million comparedthird-party asphalt sales. Slightly lower sales volumes of 1% contributed to the same period in 2018. The favorable impact of higher selling prices of $37 million and higher salesdecrease, as lower shingle volumes largely offset $50 millionby higher input cost inflation and the unfavorable impact of lower first quarter production volumes compared to the same period a year ago. The favorable impact of lower transportation costs and product mix accounted for the year-over-year increase.
component volumes.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
EBIT
In our Roofing segment, EBIT in the third quarter of 2020 increased $53 million compared to the same period in 2019. The increase was primarily driven by higher sales volumes and the combined $14 million impact of favorable manufacturing performance and lower transportation costs. The unfavorable impact of lower selling prices was more than offset by $34 million of input cost deflation, primarily asphalt.
For the year-to-date 2020, EBIT in our Roofing segment increased $40 million compared to the same period in 2019. The increase was largely driven by $13 million in lower transportation costs, favorable manufacturing performance, and the $11 million benefit related to the anticipated recovery of certain tariffs paid over the past two years, following a short-term exclusion request granted by the U.S. government. The unfavorable impact of lower selling prices and lower sales volumes was more than offset by $63 million of input cost deflation, primarily asphalt.
OUTLOOK
In our Roofing segment, we expect the factors that have driven strong margins in recent years, such as growth from remodeling demand, along with higher sales of roofing components, to continue to deliver profitability. Uncertainties that may impact our Roofing margins include demand from storm and other weather events, demand from new construction, competitive pricing pressure and the cost and availability of raw materials, particularly asphalt.
Despite recent strength in the U.S. asphalt shingle market, the Company expects the COVID-19 pandemic will continue to create uncertainty in its end markets. The magnitude of the impact will depend on the depth and duration of the crisis, as well as the timing of the recovery in the markets served by the Roofing segment. The company continues to focus on managing costs, capital expenditures, and working capital.
Corporate, Other and Eliminations
The table below provides a summary of EBIT and depreciation and amortization expense for the Corporate, Other and Eliminations category (in millions):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2019 | 2018 | 2019 | 2018 | | 2020 | 2019 | 2020 | 2019 |
Restructuring (costs) / gains | Restructuring (costs) / gains | $ | — | | $ | (7) | | $ | 1 | | $ | (19) | | Restructuring (costs) / gains | $ | — | | $ | — | | $ | (10) | | $ | 1 | |
Acquisition-related costs | — | | (1) | | — | | (16) | | |
Recognition of acquisition inventory fair value step-up | — | | — | | — | | (2) | | |
Gains on sale of certain precious metals | | Gains on sale of certain precious metals | 7 | | — | | 26 | | — | |
Goodwill impairment charge | | Goodwill impairment charge | — | | — | | (944) | | — | |
Intangible assets impairment charge | | Intangible assets impairment charge | — | | — | | (43) | | — | |
| | General corporate expense and other | General corporate expense and other | (17) | | (18) | | (76) | | (88) | | General corporate expense and other | (35) | | (17) | | (85) | | (76) | |
EBIT | EBIT | $ | (17) | | $ | (26) | | $ | (75) | | $ | (125) | | EBIT | $ | (28) | | $ | (17) | | $ | (1,056) | | $ | (75) | |
Depreciation and amortization | Depreciation and amortization | $ | 13 | | $ | 11 | | $ | 37 | | $ | 38 | | Depreciation and amortization | $ | 14 | | $ | 13 | | $ | 42 | | $ | 37 | |
EBIT
In Corporate, Other and Eliminations, EBIT losses for the third quarter and year-to-date 2019of 2020 were lowerhigher by $9$11 million and $50 million, respectively, compared to the same periodsperiod in 2018. EBIT improvement in both the third quarter and year-to-date 2019, was primarily driven by lower restructuring and acquisition-related costs and lower generalhigher General corporate expense and other. Seeother, partially offset by the gains on sale of certain precious metals. For the year-to-date 2020, EBIT losses in Corporate, Other and Eliminations were higher by $981 million as a result of the $944 million goodwill impairment charge and $43 million of intangible assets impairment charge recorded in the first quarter of 2020. Additional details of these costs in the table above andthis charge are further explained in both the Restructuring and Acquisition-Related CostsCritical Accounting Estimates paragraph of MD&A and Note 116 of the Consolidated Financial Statements.
General corporate expense and other for the third quarter and year-to-date 2019 was lower2020 were higher by $1$18 million and $12$9 million, respectively, compared to the same periods in 2018,2019, driven primarily driven by lower general corporate expenses.higher performance-based compensation associated with an improved outlook for 2020, along with smaller one-time items that offset modest benefits from cost control initiatives.
DEPRECIATION
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ITEM 2. MANAGEMENT’S DISCUSSION AND AMORTIZATIONANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Depreciation and amortization in the third quarter and year-to-date 2019 was relatively flat compared to the same periods in 2018.
OUTLOOK
In 2019,2020, we expectnow estimate general corporate expenses to range between $110be approximately $125 million, and $115 million.based on an increase in performance-based compensation
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Liquidity
The Company's primary external sources of liquidity are its Senior Revolving Credit Facility and its Receivables Securitization Facility (each as defined below).
The Company has an $800 million senior revolving credit facility (the "Senior Revolving Credit Facility") that has been amended from time to time with a maturity date in May 2024.
The Company has a $280 million receivables securitization facility (the "Receivables Securitization Facility") that has been amended from time to time, which matures in April 2022.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The following table shows how the Company utilized its primary sources of liquidity (in millions):
| | | | Balance at September 30, 2019 | | | | Balance at September 30, 2020 | |
| | | Senior Revolving Credit Facility | Receivables Securitization Facility | | | Senior Revolving Credit Facility | Receivables Securitization Facility |
Facility size or borrowing limit | Facility size or borrowing limit | | $ | 800 | | $ | 280 | | Facility size or borrowing limit | | $ | 800 | | $ | 280 | |
Collateral capacity limitation on availability | Collateral capacity limitation on availability | | — | | — | | Collateral capacity limitation on availability | | n/a | — | |
Outstanding borrowings | Outstanding borrowings | | — | | 94 | | Outstanding borrowings | | — | | — | |
Outstanding letters of credit | Outstanding letters of credit | | 9 | | 3 | | Outstanding letters of credit | | 4 | | 1 | |
Availability on facility | Availability on facility | | $ | 791 | | $ | 183 | | Availability on facility | | $ | 796 | | $ | 279 | |
The Company issued $450$300 million of 20292030 senior notes on AugustMay 12, 20192020 subject to $5$3 million of discounts and issuance costs. Interest on the 2029 senior notes is payable semiannually in arrears on February 15June 1 and August 15December 1 each year, beginning on February 15,December 1, 2020. The proceeds from the 2029 seniorthese notes were used to repay portions of the 2022 senior notes and 2036 senior notes. The Company recognized approximately $32 million of loss on extinguishment of debt in the third quarter of 2019 associated with these actions.for general corporate purposes.
The Receivables Securitization Facility and Senior Revolving Credit Facility mature in 2022 and 2024, respectively. The Company also hashad a term loan (the "Term Loan"), which requiresrequired minimum quarterly principal repayments all of which have been paid as of September 30, 2019, and full repayment by February 2021. AsIn the third quarter of September 30, 2019,2020, the Company repaid all outstanding borrowings on the Term Loan had $300 million outstanding.Loan. The companyCompany has no significant debt maturities of senior notes before the fourth quarter of 2022. As of September 30, 2019,2020, the Company had $3.2$3.1 billion of total debt and cash and cash equivalents of $35$647 million.
Cash and cash equivalents held by foreign subsidiaries may be subject to foreign withholding taxes upon repatriation to the U.S. As of September 30, 2019,2020, and December 31, 2018,2019, the Company had $35$59 million and $67$30 million, respectively, in cash and cash equivalents in certain of our foreign subsidiaries. The Company continues to assert indefinite reinvestment in accordance with ASC 740 based on the laws as of enactment of the tax legislation commonly known as the U.S. Tax Cuts and Jobs Act of 2017.
As a holding company, we have no operations of our own and most of our assets are held by our direct and indirect subsidiaries. Dividends and other payments or distributions from our subsidiaries will be used to meet our debt service and other obligations and to enable us to pay dividends to our stockholders. Please refer to page 13 of the Risk Factors disclosed in Item 1A of the Company's Form 10-K for the year ended December 31, 20182019 (the "2018"2019 Form 10-K") for details on the factors that could inhibit our subsidiaries' ability to pay dividends or make other distributions to the parent company.
We expect that our cash on hand, coupled with future cash flows from operations and other available sources of liquidity, including our Senior Revolving Credit Facility and Receivables Securitization Facility, will provide ample liquidity to enable us to meet our cash requirements. Our anticipated uses of cash include capital expenditures, working capital needs, pension contributions, meeting financial obligations, payments of quarterly dividends as authorized by our Board of Directors, acquisitions and reducing outstanding amounts under the Senior Revolving Credit Facility and Receivables Securitization Facility. A sustained significant decrease in revenue in the U.S. or excessive aging of the underlying receivables, as a result of the impact of the COVID-19 pandemic, could materially affect the collateral capacity limitation on the availability under the Receivables Securitization Facility. We
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
expect that our cash on hand, coupled with future cash flows from operations and other available sources of liquidity, including our Senior Revolving Credit Facility and, to the extent available, our Receivables Securitization Facility, and Term Loan.
We have outstanding share repurchase authorizations and will evaluate and consider repurchasing shares of our common stock, as well as strategic acquisitions, divestitures, joint ventures and other transactions to create stockholder value and enhance financial performance. Such transactions may require cash expenditures beyond current sources ofprovide ample liquidity to generate proceeds.enable us to meet our cash requirements.
The agreements governing our Senior Revolving Credit Facility and Receivables Securitization Facility and Term Loan contain various covenants that we believe are usual and customary. These covenants include a maximum allowed leverage ratio and a minimum required interest expense coverage ratio. We were in compliance with these covenants as of September 30, 2019.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
2020.Cash Flows
The following table presents a summary of our cash balance, cash flows, and availability on credit facilities (in millions):
| | | | Nine Months Ended September 30, | | | | Nine Months Ended September 30, | |
| | | 2019 | 2018 | | | 2020 | 2019 |
Cash and cash equivalents | Cash and cash equivalents | | $ | 35 | | $ | 136 | | Cash and cash equivalents | | $ | 647 | | $ | 35 | |
Net cash flow provided by operating activities | Net cash flow provided by operating activities | | $ | 596 | | $ | 506 | | Net cash flow provided by operating activities | | $ | 717 | | $ | 596 | |
Net cash flow used for investing activities | Net cash flow used for investing activities | | $ | (285) | | $ | (1,551) | | Net cash flow used for investing activities | | $ | (104) | | $ | (285) | |
Net cash flow (used for) provided by financing activities | | $ | (370) | | $ | 953 | | |
Net cash flow used for financing activities | | Net cash flow used for financing activities | | $ | (106) | | $ | (370) | |
Availability on the Senior Revolving Credit Facility | Availability on the Senior Revolving Credit Facility | | $ | 791 | | $ | 748 | | Availability on the Senior Revolving Credit Facility | | $ | 796 | | $ | 791 | |
Availability on the Receivables Securitization Facility | Availability on the Receivables Securitization Facility | | $ | 183 | | $ | — | | Availability on the Receivables Securitization Facility | | $ | 279 | | $ | 64 | |
|
Cash and cash equivalents Cash and cash equivalents as of September 30, 2020 increased $612 million compared to September 30, 2019 primarily due to higher cash flow provided by operating activities, lower cash paid for property, plant and equipment, and from issuance of the 2030 senior notes during the nine months ended September 30, 2020.
Operating activities: For the nine months ended September 30, 2019,2020, the Company's operating activities provided $596$717 million of cash compared to $506$596 million provided in the same period in 2018.2019. The change in cash provided by operating activities was primarily due to a larger decrease in operating assets and liabilities, (mainly a reductionprimarily inventories and accounts payable, and lower pension contributions in inventories from the prior year-end) in 20192020 compared to the same period of 2018.in 2019.
Investing activities: Net cash flow used for investing activities decreased $1,266$181 million for the nine months ended September 30, 20192020 compared to the same period of 2018,2019, primarily driven by lower spending on acquisitions and lower cash paid for property, plant and equipment and higher proceeds from the sale of assets and derivative settlements compared to the same period in the prior year.
Financing activities: Net cash used for financing activities was $370$106 million for the nine months ended September 30, 2019,2020, compared to net cash provided byused for financing activities of $953$370 million in the same period in 2018.2019. The change of $1,323 million was primarily due to higher long-term debt inflows to fundissuance of the purchase of Paroc in2030 senior notes during the firstsecond quarter of 2018 and higher payments on the Term Loan in 20192020 (see Note 1210 of the Consolidated Financial Statements and the Liquidity section above for further discussion of activities related to debt).
20192020 Investments
Capital Expenditures: The Company will continue a balanced approach to the use of its cash flows. Operational cash flow will be used to fund the Company’s growth and innovation. CapitalGiven the uncertain market environment, we are focused on reducing or postponing discretionary expenses including capital expenditures in 20192020; capital expenditures are expected to be approximately $460at the high end of the range of $250 million which is in-line with expected depreciation and amortization.to $300 million.
Tax Net Operating Losses and U.SU.S. Foreign Tax Credits
There have been no material changes to the disclosure in our 20182019 Form 10-K.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Pension Contributions
Please refer to Note 1311 of the Consolidated Financial Statements. The Company expects to contribute $39between $65 million and $125 million in cash to its global pension plans during 2019.2020. We will evaluate discretionary pension contributions as we continue to manage liquidity as the COVID-19 pandemic unfolds throughout the remainder of the year. Actual contributions to the plans may change as a result of several factors, including changes in laws that impact funding requirements. The ultimate cash flow impact to the Company, if any, of the pension plan liability and the timing of any such impact will depend on numerous variables, including future changes in actuarial assumptions, legislative changes to pension funding laws, and market conditions.
Derivatives
Please refer to Note 5 of the Consolidated Financial Statements.
Fair Value Measurement
Please refer to Notes 5 and 1210 of the Consolidated Financial Statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Contractual Obligations
In the normal course of business, we enter into contractual obligations to make payments to third parties. During the nine months ended September 30, 2019,2020, there were no material changes to such contractual obligations outside the ordinary course of our business.
SAFETY
Working safely is a condition of employment at Owens Corning. We believe this organization-wide expectation provides for a safer work environment for employees, improves our manufacturing processes, reduces our costs and enhances our reputation. Furthermore, striving to be a world-class leader in safety provides a platform for all employees to understand and apply the resolve necessary to be a high-performing global organization. We measure our progress on safety based on Recordable Incidence Rate (“RIR”) as defined by the United States Department of Labor, Bureau of Labor Statistics. For the three months ended September 30, 2019,2020, our RIR was 0.530.73 as compared to 0.430.55 in the same period a year ago. For the nine months ended September 30, 2019,2020, our RIR was 0.640.69 as compared to 0.520.67 in the same period a year ago.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
CRITICAL ACCOUNTING ESTIMATES
Impairment of Assets
The Company exercises judgment in evaluating assets for impairment. Goodwill and other indefinite-lived intangible assets are tested for impairment annually, or when circumstances arise which could more likely than not reduce the fair value of a reporting unit below its carrying value. These tests require comparing recorded values to estimated fair values for the assets under review.
Our reporting units represent a business for which discrete financial information is available and segment management regularly reviews the operating results. The Company has three reporting units: Composites, Insulation and Roofing.
First Quarter of 2020 Goodwill Impairment Charge
As of the most recent annual goodwill impairment testing date (October 1, 2019), testing indicated that the business enterprise value for the Insulation reporting unit exceeded its carrying value by approximately 10%. As described in our 2019 Form 10-K, there was uncertainty surrounding the macroeconomic factors impacting this reporting unit and a downturn in these factors or a change in the long-term revenue growth or profitability for this reporting unit could increase the likelihood of a future impairment. Accordingly, the Insulation reporting unit was the reporting unit most susceptible to an impairment during an economic downturn.
In the first quarter of 2020, the Company performed its ongoing assessment to consider whether events or circumstances had occurred that could more likely than not reduce the fair value of a reporting unit below its carrying value. The valuation limitation from the Company’s share price decline during the first quarter of 2020, the narrow cushion on the Insulation reporting unit and the high level of near-term macroeconomic uncertainty caused the Company to perform an interim goodwill impairment test as of March 31, 2020 over the Insulation reporting unit. After evaluating and weighing all relevant events and circumstances, and considering the substantial excess fair values for these reporting units, we concluded that it was not more likely than not that the fair value of the Roofing and Composites reporting units were less than their carrying values. Consequently, we determined that it was not necessary to perform an interim impairment test for the Roofing and Composites reporting units.
As part of our quantitative testing process for goodwill of the Insulation reporting unit, we estimated fair values using a discounted cash flow analysis, a form of the income approach, from the perspective of a market participant. Significant assumptions used in the discounted cash flow analysis were revenue growth rates and EBIT margins used in estimating discrete period cash flow forecasts of the reporting unit, the discount rate, and the long-term revenue growth rate and EBIT margins used in estimating the terminal business value. For our interim test, the cash flow forecasts of the reporting unit were based upon management’s near-term and long-term views of our markets and represented the forecasts used by senior management and the Board of Directors to operate the business during the COVID-19 pandemic and evaluate operating performance in the first quarter of 2020. The discount rate utilized was management’s estimate of what the market’s weighted average cost of capital is for a company with a similar debt rating and stock volatility, as measured by beta, which included an additional risk premium due to uncertainty surrounding the level and pace of economic recovery. The terminal business value was determined by applying the long-term growth rate to the latest year for which a forecast exists. At the time of the analysis, the Company asserted that the Insulation reporting unit’s long-term market-size and profitability outlook had not meaningfully deteriorated since the time of our most recent annual impairment test. The overall enterprise fair value of the Company was limited by the decline in our share price in the first quarter of 2020. The reduction in fair value of the Insulation reporting unit, and corresponding impairment charge, was primarily driven by an increase in the discount rate arising from higher equity risk premiums that reflected significant uncertainty surrounding the effect that the COVID-19 pandemic would have on the reporting unit’s near-term cash flows and a decrease in the reporting unit's forecasted near-term cash flows. As part of our goodwill quantitative testing process, the Company evaluates whether there are reasonably likely changes to management’s estimates that would have a material impact on the results of the goodwill impairment testing. Please refer to Note 6 of the Consolidated Financial Statements for additional details on the impairment charge that was recorded in the first quarter of 2020.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Ongoing 2020 Goodwill Impairment Indicator Assessment
During the second and third quarters of 2020, the Company performed its quarterly assessment to identify potential impairment indicators for each of its reporting units. Among the qualitative and quantitative factors considered, management reviewed key assumptions and information, including updated macroeconomic indicators that impact the markets we serve, financial forecast information for each reporting unit, and recent performance of the Company’s share price to perform this assessment. The Company did not identify any impairment indicators for any of its reporting units during the second or third quarter of 2020 and determined that it was not more likely than not that the carrying value of any of its reporting units exceeded their respective fair values. Consequently, we determined that it was not necessary to perform an interim impairment test for goodwill. We will continue to monitor the impacts of the COVID-19 pandemic on the Company and significant changes in key assumptions that could result in future period impairment charges.
The following table summarizes the segment allocation of recorded goodwill on our Consolidated Balance Sheets as of December 31, 2019 and, after giving effect to the first quarter 2020 impairment charge in our Insulation reporting unit, as of September 30, 2020 (in millions):
| | | | | | | | | | | | | | |
Segment | September 30, 2020 | Percent of Total | December 31, 2019 | Percent of Total |
Composites | $ | 56 | | 6 | % | $ | 57 | | 3 | % |
Insulation | 522 | | 53 | % | 1,479 | | 77 | % |
Roofing | 398 | | 41 | % | 396 | | 20 | % |
Total goodwill | $ | 976 | | 100 | % | $ | 1,932 | | 100 | % |
There continues to be uncertainty surrounding the macroeconomic factors for the Insulation reporting unit, and a sustained downturn, significantly extended recovery, or a change in the long-term revenue growth or profitability for this reporting unit could increase the likelihood of an additional future impairment. Additionally, changes in market participant assumptions such as an increased discount rate or further share price reductions could increase the likelihood of a future impairment.
First Quarter of 2020 Intangible Assets Impairment Charge
Other indefinite-lived intangible assets are the Company’s trademarks. Our most recent annual test of indefinite-lived intangibles was conducted as of October 1, 2019. The fair value of each of our indefinite-lived intangible assets was in excess of its carrying value and thus, no impairment existed. The fair value of these assets substantially exceeded the carrying value as of the date of that assessment.
During the first quarter of 2020, we performed an interim impairment test on certain trademarks and trade names used by our Insulation segment. Fair values used in testing for potential impairment of our trademarks were calculated by applying an estimated market value royalty rate to the forecasted revenues of the businesses that utilize those assets. The assumed cash flows from this calculation were discounted at a rate based on a market participant discount rate, which included a risk premium due to the near-term economic uncertainty from the COVID-19 pandemic and its impact on the projected revenue derived from the trademarks. For two assets used by our Insulation segment, the reduction in fair values, and corresponding impairment charges, were driven by a lower expected sales outlook, the compounding effect of lower expected sales following an immaterial divestiture in the first quarter of 2020 and a higher discount rate associated with the near-term economic uncertainty from the COVID-19 pandemic. Please refer to Note 6 of the Consolidated Financial Statements for additional details on the impairment charges that were recorded in the first quarter of 2020.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Ongoing 2020 Indefinite-lived Intangible Asset Impairment Indicator Assessment
During the second and third quarters of 2020, the Company performed its quarterly assessment to identify any potential impairment indicators for each of its indefinite-lived intangible assets. Among qualitative and quantitative factors considered, management reviewed key assumptions and information, including updated macroeconomic indicators that impact the markets we serve and financial forecast information for each reporting unit. After evaluating and weighing all relevant events and circumstances, the Company did not identify any impairment indicators for any of its indefinite-lived intangible assets during the second or third quarter of 2020 and determined that it was not more likely than not that the carrying value of any of its indefinite-lived intangible assets exceeded their respective fair values. Consequently, we determined that it was not necessary to perform an interim impairment test for any indefinite-lived intangible assets. We will continue to monitor the impacts of the COVID-19 pandemic on the Company and significant changes in key assumptions that could result in future period impairment charges.
There are two indefinite-lived intangible assets that are at an increased risk of impairment, both of which are used by our Insulation segment and were partially impaired in the first quarter of 2020. A change in the estimated long-term revenue growth rate or increase in the discount rate assumption could increase the likelihood of a future impairment. These affected assets had an aggregate carrying value of $257 million as of September 30, 2020.
Long-lived Asset Recoverability Assessment
There were no changes to the recoverability conclusions for our long-lived assets disclosed in our 2019 Form-10-K.
Changes in management intentions, market conditions, operating performance and other similar circumstances could affect the assumptions used in these impairment tests. Changes in the assumptions could result in impairment charges that could be material to our Consolidated Financial Statements in any given period.
ACCOUNTING PRONOUNCEMENTS
Please refer to Note 1 of the Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
Please refer to Note 1412 of the Consolidated Financial Statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Our disclosures and analysis in this report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements present our current forecasts and estimates of future events. These statements do not strictly relate to historical or current results and can be identified by words such as “anticipate,” "appear," "assume," “believe,” “estimate,” “expect,” "forecast," “intend,” “likely,” “may,” “plan,” “project,” "seek," "should," “strategy,” "will" and other terms of similar meaning or import in connection with any discussion of future operating, financial or other performance. These forward-looking statements are subject to risks, uncertainties and other factors and actual results may differ materially from those results projected in the statements. These risks, uncertainties and other factors include, without limitation:
•the severity and duration of the current COVID-19 pandemic on our operations, customers and suppliers, as well as related actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict;
•levels of residential and commercial or industrial construction activity;
•levels of global industrial production;
•competitive and pricing factors;
•demand for our products;
•relationships with key customers and customer concentration in certain areas;
•competitive and pricing factors;
•levels of global industrial production;
•demand for our products;
•industry and economic conditions that affect the market and operating conditions of our customers, suppliers or lenders;
•domestic and international economic and political conditions, policies or other governmental actions, actions;
•legislation and related regulations or interpretations, in the United States or elsewhere;
•changes to tariff, trade or investment policies or laws;
•foreign exchangeuninsured losses, including those from natural disasters, catastrophe, theft or sabotage;
•climate change, weather conditions and commodity price fluctuations;storm activity;
•availability and cost of energy and raw materials;
•environmental, product-related or other legal and regulatory liabilities, proceedings or, actions;
•research and development activities and intellectual property protection;
•issues involving implementation and protection of information technology systems;
•our level of indebtedness;
•our liquidity and the availability and cost of credit;
•levels of goodwill or other indefinite-lived intangible assets;
•achievement of expected synergies, cost reductions and/or productivity improvements;
•the level of fixed costs required to run our business;
•our ability to utilize our net operating loss carryforwards and foreign tax credits;
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
•weather conditions;
•issues involving implementation and protection of information technology systems;
•availability and cost of credit;
•the level of fixed costs required to run our business;
•availability and cost of energy and raw materials;
•labor disputes or shortages, or loss of key employees;
•environmental, product-related or other legal and regulatory liabilities, proceedings or, actions;
•our ability to utilize our net operating loss carryforwards;
•research and development activities and intellectual property protection;
•interest rate movements;
•uninsured losses;
•issues related to acquisitions, divestitures and joint ventures;ventures or expansions;
•achievement of expected synergies, cost reductions and/or productivity improvements;
•levels of goodwill or other indefinite-lived intangible assets;
•defined benefit plan funding obligations;foreign exchange and commodity price fluctuations;
•price volatility in certain wind energy markets in the U.S.U.S;
•loss of key employees, labor disputes or shortages; and
•defined benefit plan funding obligations.
All forward-looking statements in this report should be considered in the context of the risks and other factors described aboveherein, and in Item 1A - Risk factors in Part I of our 20182019 Form 10-K. Any forward-looking statements speak only as of the date the statement is made and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by federal securities laws. It is not possible to identify all of the risks, uncertainties and other factors that may affect future results. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur and actual results may differ materially from those anticipated or implied in the forward-looking statements. Accordingly, users of this report are cautioned not to place undue reliance on the forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our exposure to market risk during the nine months ended September 30, 2019.2020. Please refer to "Quantitative and Qualitative Disclosures about Market Risk" contained in Part II, Item 7A of our 20182019 Form 10-K for a discussion of our exposure to market risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains (a) disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), and (b) internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
There has been no change in the Company's internal control over financial reporting during the quarter ended September 30, 20192020 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Despite temporary work-from-home arrangements for a significant portion of our administrative employees, the changes have had a minimal effect on the Company's accounting processes and internal control over financial reporting during the quarter ended September 30, 2020.
PART II
ITEM 1. LEGAL PROCEEDINGS
Information required by this item is incorporated by reference to Note 1412 of the Consolidated Financial Statements, Contingent Liabilities and Other Matters.
ITEM 1A. RISK FACTORS
There have been no material changes to
The information set forth in this report, including without limitation, the risk factor presented below, updates and should be read in conjunction with, the risk factors and information disclosed in Part 1, Item 1A1A., "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2019. Similar risk factors were also provided in our Quarterly Report on Form 10-Q for the periods ended March 31, 2020 and June 30, 2020.
The recent COVID-19 pandemic is expected to have a significant impact on the Company's operations and results.
We have been managing matters related to the global COVID-19 pandemic, including the following impacts that we have experienced at various times since the first quarter of 2020:
•We believe that COVID-19 placed downward pressure on demand for some of our products, on at least a temporary basis and caused us to curtail some of our operations as we attempted to balance demand with inventory and output.
•Governmental authorities have implemented numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. Some of these actions resulted in temporary curtailment of some operations and increased costs to operate certain facilities.
•In the first quarter of 2020, we recorded an impairment to goodwill that was driven, at least in part, by an increase in the discount rate arising from higher equity risk premiums that reflected significant uncertainty surrounding the effect that COVID-19 would have on the Insulation reporting unit’s near-term cash flows.
•The Company has focused on managing costs, capital expenditures and working capital during the COVID-19 pandemic.
In response to the pandemic, we implemented a number of precautionary and other measures to promote business continuity. These measures have been comprehensive and included initiatives regarding employee health and safety, working conditions (including remote working), engagements with customers and suppliers, financial management, operational efficiency, internal and external communications, government relations and community outreach. While we believe that all of these measures have been necessary or appropriate, they have resulted in additional costs and may adversely impact our business and financial performance in the future or expose us to additional unknown risks.
Although it is not possible to predict the ultimate impact of COVID-19, including on our business, results of operations, financial position or cash flows, such impacts may be material and may include:
•shifting customer demand for our products in the markets that we serve around the world;
•increased credit risk, including increased failure by customers experiencing business disruptions to make timely payments;
•reduced availability and productivity of employees;
•costs associated with production curtailments that are driven by governmental actions, customer demand or other causes related to COVID-19;
•increased operational risks resulting from changes to operations and remote work arrangements, including the potential effects on internal controls and procedures, cybersecurity risks and increased vulnerability to security breaches, information technology disruptions and other similar events;
•higher costs in certain areas such as transportation and distribution, as well as incremental costs associated with health screenings, temperature checks and enhanced cleaning and sanitation protocols to protect our employees and others;
•delays and disruptions in the availability of and timely delivery of materials and equipment used in our operations, as well as increased costs for such materials and equipment;
•a negative impact on our liquidity position, as well as increased costs and less ability to access funds under our existing credit facilities and the capital markets;
ITEM 1A. RISK FACTORS (continued)
•impairment in the value of tangible or intangible assets that could be recorded as a result of weaker or more volatile economic conditions; and
•administrative proceedings, litigation or regulatory compliance matters.
The impact of the Company’s 2018COVID-19 pandemic may also exacerbate other risks discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K.10-K for the fiscal year ended December 31, 2019, any of which could have a material effect on us. The impact depends on the severity and duration of the current COVID-19 pandemic and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.
Issuer Purchases of Equity Securities
The following table provides information about Owens Corning’s purchases of its common stock for each month during the quarterly period covered by this report:
| | | | | | | | | | | | | | | | | |
Period | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs** | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs** |
July 1-31, 2019 | — | | | — | | — | | 3,581,726 | |
August 1-31, 2019 | 170 | | 56.39 | — | | 3,581,726 | |
September 1-30, 2019 | — | | | — | | — | | 3,581,726 | |
Total | 170 | | * | 56.39 | — | | 3,581,726 | |
| | | | | | | | | | | | | | | | | |
Period | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs** | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs** |
July 1-31, 2020 | 10,159 | | | $ | 59.85 | | — | | 2,286,726 | |
August 1-31, 2020 | 1,128 | | | 67.33 | | — | | 2,286,726 | |
September 1-30, 2020 | 471 | | | 69.52 | | — | | 2,286,726 | |
Total | 11,758 | | * | $ | 60.95 | | — | | 2,286,726 | |
* The Company retained an aggregate of 17011,758 shares surrendered to satisfy tax withholding obligations in connection with the vesting of restricted shares granted to our employees.
** On October 24, 2016, the Board of Directors approved a share buy-back program under which the Company is authorized to repurchase up to 10 million shares of the Company’s outstanding common stock (the “Repurchase Authorization”). The Repurchase Authorization enables the Company to repurchase shares through the open market, privately negotiated transactions, or other transactions. The actual number of shares repurchased will depend on timing, market conditions and other factors and is at the Company’s discretion. The Company did not repurchase any shares of its common stock during the three months ended September 30, 20192020 under the Repurchase Authorization. As of September 30, 2019, 3.62020, 2.3 million shares remain available for repurchase under the Repurchase Authorization.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
Ava Harter, Senior Vice President, General Counsel and Secretary of the Company, submitted her resignation to the Company on October 23, 2020, in order to pursue another professional opportunity. Ms. Harter will continue in her role through November 30, 2020.
ITEM 6. EXHIBITS
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Exhibit Number | Description |
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4.1 | | |
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4.2 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS101 | XBRL Instance Document -The following materials from the instanceQuarterly Report on Form 10-Q for Owens Corning for the period ended September 30, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Earnings (Loss), (ii) Consolidated Statements of Comprehensive Earnings (Loss); (iii) Consolidated Balance Sheets (iv) Consolidated Statements of Stockholders' Equity, (v) Consolidated Statements of Cash Flows, (vi) related notes to these financial statements and (vii) document does not appear in the Interactive Data file because its XBRL tags are embedded with the Inline XBRL document.and entity information. |
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101.SCH | XBRL Taxonomy Extension Schema |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB | XBRL Taxonomy Extension Label Linkbase |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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104 | The cover page from this Quarterly Report on Form 10-Q, formatted as Inline XBRL. |
*Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Form 10-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Owens Corning has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | | | OWENS CORNING |
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| | | | | Registrant |
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Date: | | October 23, 201928, 2020 | By: | | /s/ Michael C. McMurrayKenneth S. Parks |
| | | | | Michael C. McMurrayKenneth S. Parks |
| | | | | Senior Vice President and |
| | | | | Chief Financial Officer |
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Date: | | October 23, 201928, 2020 | By: | | /s/ Kelly J. Schmidt |
| | | | | Kelly J. Schmidt |
| | | | | Vice President and |
| | | | | Controller |