TMCnet News
OWENS CORNING - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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 glass fiber reinforcements and other materials for composites and of residential and commercial building materials. The Company's business operations fall within two reportable segments, Composites and Building Materials. Composites includes our Reinforcements and Downstream businesses. Building Materials includes our Insulation and Roofing businesses. 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 We reported $108 million in earnings before interest and taxes ("EBIT") for the first quarter 2014. We generated $77 million in adjusted earnings before interest and taxes ("Adjusted EBIT") for the first quarter 2014. First quarter EBIT in our Building Materials segment decreased by $17 million and EBIT in our Composites segment increased by $18 million compared to the same period in 2013. In the first quarter of 2014, we have adjusted $31 million of net gains out of reported EBIT to arrive at adjusted EBIT. The closure of the previously announced sale of our Hangzhou, China Composites glass reinforcements facility resulted in a gain of $45 million (see further discussion of this action in Note 7 of the Consolidated Financial Statements). This gain was partially offset by $14 million of charges; $12 million of which related to cost reduction actions in our Composites segment and $2 million related to final clean up costs associated with the repair of our Kearny, New Jersey manufacturing facility that was damaged by the October 2012 Hurricane Sandy (see further discussion of these items in Note 10 and 13 of the Consolidated Financial Statements). See below for further information regarding adjusted EBIT, including the reconciliation to net earnings attributable to Owens Corning. In our Composites segment, EBIT in the first quarter 2014 was $27 million compared to $9 million in the same period in 2013. The increase was primarily driven by higher selling prices and improved operating performance. In our Building Materials segment, EBIT in the first quarter 2014 was $81 million, compared to $98 million in the same period in 2013. In the first quarter, our insulation business reported its 11th consecutive quarter of EBIT improvement despite challenging weather conditions in North America. In our Roofing business, EBIT decreased $39 million compared to the same period in 2013 due to lower than expected sales volumes. Our Insulation business increased EBIT $22 million compared to the same period in 2013 primarily on higher selling prices. We maintain a strong balance sheet with ample liquidity. We have access to an $800 million senior revolving credit facility with a November 2018 maturity date and a $250 million receivables securitization facility with a July 2016 maturity date. We have no significant debt maturities before 2016. Due to the normal seasonality of our business, we typically have negative cash flow from operations in the first half of the year. During the first quarter 2014, we used $272 million in cash flow from operating activities compared to $179 million over the same period of 2013. The increase in cash used for operating activities was driven by an increase in working capital. We repurchased 0.6 million shares of the Company's common stock for $26 million during the first quarter of 2014 under previously announced repurchase programs. As of March 31, 2014, 8 million shares remain available for repurchase under the authorized programs. -------------------------------------------------------------------------------- Table of Contents - 37 - 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 Mar. 31, 2014 2013 Net sales $ 1,278 $ 1,350 Gross margin $ 234 $ 213 % of net sales 18% 16% Charges related to cost reduction actions $ 12 $ 1 Earnings before interest and taxes $ 108 $ 57 Interest expense, net $ 27 $ 29 Income tax expense $ (39 ) $ 6 Net earnings attributable to Owens Corning $ 120 $ 22 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 Net sales were $72 million lower in the first quarter 2014 compared to the first quarter 2013 driven primarily by lower sales volumes in our Roofing business partially offset by higher selling prices in our Composites and Insulation businesses. GROSS MARGIN Gross margin as a percentage of sales was higher in the first quarter 2014 as compared to the first quarter 2013 due to higher contribution margins in our Composites and Insulation businesses. In addition, first quarter 2013 gross margin included $11 million of charges resulting from net losses related to Hurricane Sandy and $8 million of charges related to our 2012 restructuring actions. No charges related to Hurricane Sandy or our 2012 restructuring actions were included in gross margin in the first quarter 2014. CHARGES RELATED TO COST REDUCTION ACTIONS In the first quarter of 2014, we took actions to reduce costs throughout our global Composites network. As a result of these actions, we recognized $11 million in severance charges and $3 million in contract termination charges for the first quarter 2014. These charges were partially offset by a $2 million decrease in severance related to the divestiture of our Hangzhou, China Composites facility. The net charges related to cost reduction actions in the first quarter of 2014 were $12 million. During 2012, we took actions to improve the competitive position of our global Composites manufacturing network through the closure or optimization of certain facilities, with our most significant actions taking place in France, Spain and Italy. These actions were primarily due to market conditions that led to lower capacity requirements within the European region. As a result of these actions, in addition to the charges recorded in cost of sales discussed above, we recognized $1 million in severance charges for the first quarter 2013. The total charges related to cost reduction actions and related items in the first quarter of 2013 were $9 million. EARNINGS BEFORE INTEREST AND TAXES EBIT increased by $51 million for the first quarter 2014 compared to the same period in 2013. First quarter EBIT in our Building Materials segment decreased by $17 million and first quarter EBIT in our Composites segment increased by $18 million compared to the same period in 2013. Corporate EBIT in the first quarter increased by $50 million, due primarily to the gain on the sale of our Hangzhou, China Composites glass reinforcements facility. -------------------------------------------------------------------------------- Table of Contents - 38 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) INTEREST EXPENSE, NET Net interest expense for the first quarter 2014 was $2 million lower than in 2013 due to lower variable interest rates and higher interest income. INCOME TAX EXPENSE (BENEFIT) Income tax expense for the three months ended March 31, 2014, was a benefit of $39 million. The effective tax rate for the three months ended March 31, 2014 was (48) percent. The difference between the effective tax rate and the statutory rate of 35 percent is primarily attributable to the Company recording a tax benefit of $78 million relating to the resolution of an uncertain tax position and a valuation allowance recorded in prior years against certain European net deferred tax assets. The resolution of an uncertain tax position was the result of the Company receiving final notification from the IRS in the first quarter that it had completed its audit examination for the taxable years 2008 through 2010. The valuation allowance was reversed during the first quarter based on the weight of the first quarter earnings resulting in positive cumulative earnings in recent years and the Company's forecast which indicates that the positive earnings trend will continue. The remaining differences relate to other discrete adjustments in the quarter and the accounting treatment of various locations which are currently in a loss position in the first quarter 2014. We estimate that the effective tax rate on adjusted earnings for the full year 2014 will be in the range of 28 to 30 percent excluding the resolution of a significant uncertain tax position and the reversal of a valuation allowance recorded in prior years against certain European net deferred tax assets. The difference between the effective tax rate range of 28 to 30 percent and the statutory rate of 35 percent is primarily attributable to lower foreign tax rates and various tax planning initiatives. Adjusted Earnings Before Interest and Taxes ("Adjusted EBIT") Adjusted EBIT excludes certain items that management does not allocate to our segment results because it believes they are not a result of the Company's current 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 attributable to Owens Corning as prepared in accordance with accounting principles generally accepted in the United States. Adjusting items are shown in the table below (in millions): Three Months Ended Mar. 31, 2014 2013 Gain on sale of Hangzhou, China facility $ 45 $ - Charges related to cost reduction actions and related items (12 ) (9 ) Net loss related to Hurricane Sandy (2 ) (11 ) Total adjusting items gain (loss) $ 31 $ (20 ) -------------------------------------------------------------------------------- Table of Contents - 39 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The reconciliation from net earnings attributable to Owens Corning to Adjusted EBIT is shown in the table below (in millions): Three Months Ended Mar. 31, 2014 2013 NET EARNINGS ATTRIBUTABLE TO OWENS CORNING $ 120 $ 22 Less: Net earnings attributable to noncontrolling interests - - NET EARNINGS 120 22 Income tax expense (benefit) (39 ) 6 EARNINGS BEFORE TAXES 81 28 Interest expense, net 27 29 EARNINGS BEFORE INTEREST AND TAXES 108 57 Adjusting items from above gain (loss) 31 (20 ) ADJUSTED EBIT $ 77 $ 77 Segment Results EBIT by segment consists 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 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 Mar. 31, 2014 2013 Net sales $ 477 $ 459 % change from prior year 4 % -4 % EBIT $ 27 $ 9 EBIT as a % of net sales 6 % 2 % Depreciation and amortization expense $ 34 $ 32 NET SALES Net sales in our Composites business increased $18 million for the three months ended March 31, 2014 compared to the same period in 2013. Favorable customer mix and higher selling prices contributed about equally to the increase in net sales. Slightly higher volumes in our downstream businesses were offset by the impact of translating sales denominated in foreign currencies into United States dollars. EBIT In our Composites business, EBIT increased $18 million for the first quarter 2014 compared to the same period in 2013. For the quarter, the increase in EBIT was driven about equally by higher selling prices and improved operating performance. Favorable mix and lower selling and administrative expenses were offset by inflation and higher plant rebuild costs. -------------------------------------------------------------------------------- Table of Contents - 40 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OUTLOOK Global glass reinforcements market demand has historically grown on average with global industrial production and we believe this relationship will continue. For the remainder of 2014, we continue to expect moderate global industrial production growth. Building Materials The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Building Materials segment and our businesses within this segment (in millions): Three Months Ended Mar. 31, 2014 2013 Net sales Insulation $ 355 $ 330 Roofing 497 607 Total Building Materials $ 852 $ 937 % change from prior year -9 % 2 % EBIT Insulation $ 1 $ (21 ) Roofing 80 119 Total Building Materials $ 81 $ 98 EBIT as a % of net sales 10 % 10 % Depreciation and amortization expense Insulation $ 25 $ 26 Roofing 9 10 Total Building Materials $ 34 $ 36 NET SALES Net sales in our Building Materials segment were $85 million lower in the first quarter 2014 compared to the same period in 2013. For the quarter, net sales decreased due primarily to lower sales volumes in our Roofing business partially offset by higher selling prices in our Insulation business. In our Roofing business, net sales in the first quarter of 2014 were $110 million lower for the three months ended March 31, 2014 compared to the same period in 2013. The decline in sales was driven by lower sales volumes. In our Insulation business, net sales were $25 million higher for the three months ended March 31, 2014 compared to the same period in 2013. Higher selling prices contributed approximately $17 million in the first quarter and the remaining increase was primarily driven by $13 million of increased sales related to our second quarter 2013 acquisition of Thermafiber Inc. partially offset by slightly lower sales volumes. EBIT EBIT for our Building Materials segment was $17 million lower in the first quarter 2014, compared to the same period in 2013. In our Roofing business, EBIT was $39 million lower for the three months ended March 31, 2014 compared to the same period in 2013. For the quarter, lower sales volumes drove the majority of the decrease with the remaining decrease being driven by inflation. -------------------------------------------------------------------------------- Table of Contents - 41 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) In our Insulation business, EBIT increased by $22 million for the three months ended March 31, 2014 compared to the same period in 2013. The increase was driven primarily by higher selling prices, including their impact on our ability to fully capitalize manufacturing costs in inventory. The benefit of higher capacity utilization was offset primarily by inflation related to energy costs. OUTLOOK The average Seasonally Adjusted Annual Rate ("SAAR") of United States housing starts was approximately 925 thousand starts, down slightly from a first quarter average of approximately 957 thousand starts in the first quarter of 2013. While the information on United States housing starts has been trending positively over the past couple of years, the timing and pace of recovery of the United States housing market remains uncertain. In our roofing business, we expect the factors that have driven strong margins in recent years will continue to deliver profitability. Our weaker than expected first quarter volumes add some additional risk to our financial outlook. Other uncertainties that may impact our Roofing margins include competitive pricing pressure and the cost and availability of raw materials, particularly asphalt. The Company expects our Insulation business to continue to benefit from an overall strengthening of the U.S. housing market, improved pricing, and higher capacity utilization. We believe the geographic, product and channel mix of our portfolio may continue to moderate the impact of any demand-driven variability associated with United States new construction. 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 Mar. 31, 2014 2013 Gain on sale of Hangzhou manufacturing facility $ 45 $ - Charges related to cost reduction actions and related items (12 ) (9 ) Net loss related to Hurricane Sandy (2 ) (11 ) General corporate expense and other (31 ) (30 ) EBIT $ - $ (50 ) Depreciation and amortization $ 8 $ 10 EBIT In Corporate, Other and Eliminations, EBIT for the three months ended March 31, 2014 was $50 million higher compared to the same period in 2013. In the first quarter, we recorded a $45 million gain related to the sale of our Hangzhou, China facility and an additional $2 million in property damage and related charges as a result of Hurricane Sandy's impact on our Roofing facility in Kearny, New Jersey. We also incurred a net $12 million in charges related to cost reduction actions, primarily related to reducing costs throughout our global Composites network. These charges consist primarily of severance and contract termination charges. Depreciation and amortization for the first quarter 2014 was $8 million compared to $10 million in the first quarter of 2013. -------------------------------------------------------------------------------- Table of Contents - 42 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS Liquidity We have an $800 million senior revolving credit facility and a $250 million receivables securitization facility, which serve as our primary sources of liquidity. Our senior revolving credit facility matures in November 2018 and our receivables securitization facility matures in July 2016. In November 2013, we amended the $800 million senior revolving credit facility to extend its maturity to November 2018 and reduce the letters of credit sublimit to $100 million. In July 2013, we amended the receivables securitization facility to extend its maturity to July 2016 and to reduce the size of the facility to $200 million during the months of November, December, and January each year. We have no significant debt maturities before 2016. As of March 31, 2014, the receivables securitization facility was fully utilized and we had $500 million available on the senior revolving credit facility. As of March 31, 2014, we had $2.4 billion of total debt and cash-on-hand of $65 million. Cash and cash equivalents held by foreign subsidiaries may be subject to U.S. income taxation upon repatriation to the U.S. We do not provide for U.S. income taxes on the undistributed earnings of these subsidiaries as earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely outside of the U.S. As of March 31, 2014, we had approximately $57 million in cash and cash equivalents in certain of our foreign subsidiaries where we consider undistributed earnings for these foreign subsidiaries to be permanently reinvested. We expect our cash on hand, coupled with future cash flows from operations and other available sources of liquidity, including our senior revolving credit facility, will provide ample liquidity to allow 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, and reducing outstanding amounts under the senior credit facility and the securitization facility. We have an outstanding share repurchase authorization 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 of liquidity or generated proceeds. We are closely monitoring changes in the operating condition of our customers for the potential impact on our operating results. To date, changes in the operating condition of our customers have not had a material adverse impact on our operating results; however, it is possible that we could experience material losses in the future if current economic conditions worsen. The credit agreements applicable to our senior revolving credit facility and the receivables securitization facility contain various covenants that we believe are usual and customary for agreements of these types. The senior revolving credit facility and the securitization facility each include a maximum allowed leverage ratio and a minimum required interest expense coverage ratio. We were in compliance with these covenants as of March 31, 2014. Cash Flows The following table presents a summary of our cash balance and cash flows (in millions): Three Months Ended Mar. 31, 2014 2013 Cash balance $ 65 $ 62 Cash used for operating activities $ (272 ) $ (179 ) Cash used for investing activities $ (54 ) $ (45 ) Cash provided by financing activities $ 335 $ 232 Unused committed credit available under the senior revolving credit facility $ 500 $ 542 -------------------------------------------------------------------------------- Table of Contents - 43 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Operating activities: For the first quarter 2014, we used $272 million of cash from operations compared to $179 million in the same period in 2013. The increased in cash used for operating activities was primarily driven by an increase in working capital. Investing activities: Cash used for investing activities was $9 million higher for the three months ended March 31, 2014 compared to the first three months in 2013. Capital spending was slightly higher than the prior year and we had $3 million closing costs related to the sale of our Hangzhou, China Composites facility. Financing activities: Cash provided by financing activities was $103 million higher for the three months ended March 31, 2014 compared to the first three months of 2013 due primarily to our cash needs for working capital and investing activities. 2014 Investments Capital Expenditures: The Company will continue a balanced approach to the use of its cash flow. Operational cash flow will be used to fund the Company's growth and innovation. Capital expenditures in 2014 are expected to be approximately $400 million, including an estimated $65 million for the start of construction of a previously announced non-woven facility. The Company will also continue to evaluate projects and acquisitions that provide opportunities for growth in our businesses, and invest in them when they meet our strategic and financial criteria. Tax Net Operating Losses Upon emergence and subsequent to the distribution of contingent stock and cash in January 2007, we generated a significant United States federal tax net operating loss of approximately $3.0 billion. As of March 31, 2014 and December 31, 2013, our federal tax net operating losses remaining were $2.1 billion and $2.2 billion respectively. The federal net operating losses decreased from prior year based on our estimate of 2014 YTD taxable income. Our net operating losses are subject to the limitations imposed under section 382 of the Internal Revenue Code. These limits are triggered when a change in control occurs, and are computed based upon several variable factors including the share price of the Company's common stock on the date of the change in control. A change in control is generally defined as a cumulative change of 50 percent or more in the ownership positions of certain stockholders during a rolling three year period. Our initial three year period for measuring an ownership change started at October 31, 2006. In addition to the United States net operating losses described above, we have net operating losses in various state and foreign jurisdictions which totaled $2.4 billion and $0.9 billion as of March 31, 2014, respectively and $2.5 billion and $0.9 billion as of December 31, 2013, respectively. The state net operating losses decreased from prior year based on our estimate of 2014 YTD taxable income. The evaluation of the amount of net operating losses expected to be realized necessarily involves forecasting the amount of taxable income that will be generated in future years. In assessing the realizability of our deferred tax assets, we have not relied on any material future tax planning strategies. We have forecasted future results using estimates management believes to be reasonable, which are based on independent evidence such as expected trends resulting from certain leading economic indicators such as global industrial production and new U.S. residential housing starts. In order to fully utilize our net operating losses, we estimate that the Company will need to generate future federal, state and foreign earnings before taxes of approximately $2.7 billion, $2.8 billion and $0.9 billion, respectively. Management believes the Company will generate sufficient future taxable income within the statutory limitations in order to fully realize the carrying value of its U.S. federal net operating losses. As of March 31, 2014, a valuation allowance exsists for certain state and foreign jurisdictions' net operating loss carryforwards. The realization of deferred income tax assets is dependent on future events. Actual results inevitably will vary from management's forecasts. Should we determine that it is likely that our deferred income tax assets are not realizable, we would be required to reduce our deferred tax assets reflected on our Consolidated Financial Statements to the net realizable amount by establishing an accounting valuation allowance and recording a corresponding charge to current earnings. Such adjustments could be material to the financial statements. To date, we have recorded valuation allowances against certain of these deferred tax assets totaling $239 million as of March 31, 2014. In assessing the realizability of our deferred tax assets, we have not relied on any material future tax planning strategies. -------------------------------------------------------------------------------- Table of Contents - 44 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Pension Contributions The Company has several defined benefit pension plans. The Company made cash contributions of approximately $14 million and $12 million to the plans during the three months ended March 31, 2014 and 2013, respectively. The Company expects to contribute $55 million in cash to its global pension plans during 2014. Actual contributions to the plans may change as a result of a variety of 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 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. To mitigate some of the near-term volatility in our earnings and cash flows, we use financial and derivative instruments to hedge certain exposures, principally currency and energy-related. The Company does not enter into such transactions for trading purposes. Our current hedging practice is to hedge a variable percentage of certain energy and energy-related exposures. Going forward, the results of our hedging practice could be positive, neutral or negative in any period depending on price changes in the hedged exposures, and will tend to mitigate near-term volatility in the exposures hedged. The practice is neither intended nor expected to mitigate longer term exposures. See Note 4 to the Consolidated Financial Statements for further discussion. Our current practice is to manage our interest rate exposure by balancing the mixture of our fixed and variable rate instruments. We utilize, among other strategies, interest rate swaps to achieve this balance in interest rate exposures. Fair Value Measurement Items Measured at Fair Value The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data. Off Balance Sheet Arrangements The Company has entered into limited off balance sheet arrangements, as defined under Securities and Exchange Commission rules, in the ordinary course of business. The Company does not believe these arrangements will have a material effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations In the normal course of business, we enter into contractual obligations to make payments to third parties. During the three months ended March 31, 2014, there were no material changes to such contractual obligations outside the ordinary course of our business. -------------------------------------------------------------------------------- Table of Contents - 45 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 March 31, 2014 our RIR was 0.49 as compared to 0.64 in the same period a year ago. ACCOUNTING PRONOUNCEMENTS In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance is effective for fiscal year and interim periods beginning after December 15, 2013. The update does not have a material impact on the Company's Consolidated Condensed Financial Statements and we have prospectively adopted the standard in fiscal year 2014. In April 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". ASU No. 2014-08 changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. ASU No. 2014-08 is effective prospectively for fiscal years beginning after December 15, 2014. The Company does not expect this update to have a material impact on our Consolidated Financial Statements. In March 2013, the FASB issued ASU No. 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." ASU No. 2013-05 clarifies when companies should release the cumulative translation adjustment (CTA) into net income when a parent either sells a part of or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years beginning after December 15, 2013. The Company does not expect this update to have a material impact on our Consolidated Financial Statements. ENVIRONMENTAL MATTERS We have been deemed by the Environmental Protection Agency ("EPA") to be a Potentially Responsible Party ("PRP") with respect to certain sites under the Comprehensive Environmental Response Compensation and Liability Act. We have also been deemed a PRP under similar state or local laws and in other instances other PRPs have brought suits against us as a PRP for contribution under such federal, state, or local laws. At March 31, 2014, we had environmental remediation liabilities as a PRP at 21 sites where we have a continuing legal obligation to either complete remedial actions or contribute to the completion of remedial actions as part of a group of PRPs. For these sites we estimate a reserve to reflect environmental liabilities that have been asserted or are probable of assertion, in which liabilities are probable and reasonably estimable. At March 31, 2014, our reserve for such liabilities was $4 million. -------------------------------------------------------------------------------- Table of Contents - 46 - 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, as amended. 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," "believe," "estimate," "expect," "intend," "likely," "may," "plan," "project," "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 that could cause actual results to differ materially from those projected in the statements. These risks, uncertainties and other factors include, without limitation: • levels of residential and commercial construction activity; • competitive factors; • levels of global industrial production; • relationships with key customers; • difficulties in managing production capacity; • industry and economic conditions that affect the market and operating conditions of our customers, suppliers or lenders; • availability and cost of credit; • our level of indebtedness; • weather conditions; • pricing factors; • availability and cost of raw materials; • issues involving implementation and protection of information technology systems; • international economic and political conditions, including new legislation or other governmental actions; • our ability to utilize our net operating loss carryforwards; • research and development activities; • foreign exchange and commodity price fluctuations; • interest rate movements; • labor disputes; • issues related to acquisitions, divestitures and joint ventures; • uninsured losses; -------------------------------------------------------------------------------- Table of Contents - 47 - CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS (continued) • achievement of expected synergies, cost reductions and/or productivity improvements; and • defined benefit plan funding obligations. All forward-looking statements in this report should be considered in the context of the risk and other factors described above and as detailed from time to time in the Company's filings with the U.S. Securities and Exchange Commission filings. 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. 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 could 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. -------------------------------------------------------------------------------- Table of Contents - 48 - |