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, 2021 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, 2021 (the "2021 Form 10-K"). Certain reclassifications have been made to the periods presented for 2021 to conform to the classifications used in the periods presented for 2022.
Revenue Recognition
As of December 31, 2021, our contract liability balances (for extended warranties, down payments and deposits, collectively) totaled $76 million, of which $13 million was recognized as revenue in the first three months of 2022. As of March 31, 2022, our contract liability balances totaled $78 million.
As of December 31, 2020, our contract liability balances totaled $66 million, of which $13 million was recognized as revenue in the first three months of 2021. As of March 31, 2021, our contract liability balances totaled $77 million.
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 as of March 31, 2022, December 31, 2021, March 31, 2021 and December 31, 2020. 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.
Related Party Transactions
In the first quarter of 2021, a related party relationship was established as a result of a member of the Company’s Board of Directors being named an executive officer of one of the Company’s preexisting suppliers. The related party transactions with this supplier consist of the purchase of raw materials. Purchases from the related party supplier were $21 million and $20 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and December 31, 2021, amounts due to the related party supplier were $8 million and $1 million, respectively.
Leases
During the first quarter of 2021, the Company entered into a lease for a warehouse located near our manufacturing facility in Fort Smith, Arkansas that is expected to commence in the second quarter of 2022. The lease is for a to-be-constructed warehouse where the Company will serve as the construction agent for the landlord. At no point during the construction period will the Company control the underlying asset as defined in Accounting Standards Codification (ASC) 842 (Leases). This lease will result in finance lease right-of-use assets and corresponding lease liabilities of approximately $35 million at the time of lease commencement.
- 10 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
1. GENERAL (continued)
Accounting Pronouncements
The following table summarizes recent Accounting Standards Updates (ASU's) issued by the Financial Accounting Standards Board (FASB) that had an impact on the Company's Consolidated Financial Statements:
| | | | | | | | | | | |
| Standard | Description | Effective Date for Company | Effect on the
Consolidated Financial Statements |
| | | |
| | | |
| | | |
| | | |
| Recently issued standards: | | | |
| ASU 2021-10 "Government Assistance (Topic 832)" | This standard modifies the annual disclosure requirements for business entities that receive government assistance and use a grant or contribution accounting model by analogy to other account guidance. | January 1, 2022 | We are currently assessing the impact of adopting this standard will have on our Consolidated Financial Statements. The Company will adopt ASU 2021-10 for the year ending December 31, 2022 and will provide the required disclosures, if material. |
| | | |
| | | |
| | | |
Table of Contents
- 11 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. SEGMENT INFORMATION
The Company has three reportable segments: Composites, Insulation and Roofing. Accounting policies for the segments are the same as those for the Company. The Company’s three 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 by the Composites segment to manufacture and sell high value applications in the form of fabrics, non-wovens and other specialized products.
Insulation – Within our Insulation segment, the Company manufactures and sells thermal and acoustical batts, loosefill insulation, foam sheathing and accessories. It also manufactures and sells glass fiber pipe insulation, energy efficient 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 tables show a disaggregation of 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.
| | | | | | | | | | | | | | | | | |
| For the three months ended March 31, 2022 |
| Reportable Segments | Composites | Insulation | Roofing | Eliminations | Consolidated |
| Disaggregation Categories | | | | | |
| U.S. residential | $ | 87 | | $ | 351 | | $ | 776 | | $ | (60) | | $ | 1,154 | |
| U.S. commercial and industrial | 210 | | 179 | | 27 | | (3) | | 413 | |
| Total United States | 297 | | 530 | | 803 | | (63) | | 1,567 | |
| Europe | 205 | | 197 | | 6 | | (2) | | 406 | |
| Asia-Pacific | 151 | | 35 | | 2 | | — | | 188 | |
| Rest of world | 61 | | 97 | | 27 | | — | | 185 | |
| NET SALES | $ | 714 | | $ | 859 | | $ | 838 | | $ | (65) | | $ | 2,346 | |
| | | | | | | | | | | | | | | | | |
| For the three months ended March 31, 2021 |
| Reportable Segments | Composites | Insulation | Roofing | Eliminations | Consolidated |
| Disaggregation Categories | | | | | |
| U.S. residential | $ | 75 | | $ | 263 | | $ | 659 | | $ | (55) | | $ | 942 | |
| U.S. commercial and industrial | 146 | | 162 | | 22 | | — | | 330 | |
| Total United States | 221 | | 425 | | 681 | | (55) | | 1,272 | |
| Europe | 159 | | 153 | | 3 | | — | | 315 | |
| Asia-Pacific | 138 | | 36 | | 3 | | — | | 177 | |
| Rest of world | 41 | | 86 | | 24 | | — | | 151 | |
| NET SALES | $ | 559 | | $ | 700 | | $ | 711 | | $ | (55) | | $ | 1,915 | |
- 12 -
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
March 31, | |
| 2022 | 2021 | | |
| Reportable Segments | | | | |
| Composites | $ | 154 | | $ | 79 | | | |
| Insulation | 129 | | 82 | | | |
| Roofing | 176 | | 156 | | | |
| Total reportable segments | 459 | | 317 | | | |
| Restructuring costs | (6) | | (1) | | | |
| Gain on sale of Shanghai, China facility | 27 | | — | | | |
| | | | |
| Gains on sale of certain precious metals | 4 | | 20 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| General corporate expense and other | (42) | | (35) | | | |
| Total corporate, other and eliminations | (17) | | (16) | | | |
| EBIT | $ | 442 | | $ | 301 | | | |
3. INVENTORIES
Inventories consist of the following (in millions): | | | | | | | | |
| March 31, 2022 | December 31, 2021 |
| Finished goods | $ | 715 | | $ | 672 | |
| Materials and supplies | 432 | | 406 | |
| Total inventories | $ | 1,147 | | $ | 1,078 | |
- 13 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. 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 March 31, 2022 and December 31, 2021, 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, 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 | | March 31, 2022 | | December 31, 2021 |
| Derivative assets designated as hedging instruments: | | | | | |
| Net investment hedges: | | | | | |
| Cross-currency swaps | Other current assets | | $ | 5 | | | $ | 5 | |
| Cross-currency swaps | Other non-current assets | | $ | 2 | | | $ | 1 | |
| | | | | |
| | | | | |
| | | | | |
| Cash flow hedges: | | | | | |
| Natural gas forward swaps | Other current assets | | $ | 35 | | | $ | 16 | |
| | | | | |
| Treasury interest rate lock | Other current assets | | $ | 21 | | | $ | 11 | |
| Derivative liabilities designated as hedging instruments: | | | | | |
| Net investment hedges: | | | | | |
| | | | | |
| Cross-currency swaps | Other liabilities | | $ | — | | | $ | 1 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Cash flow hedges: | | | | | |
| Natural gas forward swaps | Other current liabilities | | $ | — | | | $ | 5 | |
| | | | | |
| Foreign exchange forward contracts | Other current liabilities | | $ | 1 | | | $ | 2 | |
| Derivative assets not designated as hedging instruments: | | | | | |
| | | | | |
| Foreign exchange forward contracts | Other current assets | | $ | 1 | | | $ | 1 | |
| Derivative liabilities not designated as hedging instruments: | | | | | |
| | | | | |
| Foreign exchange forward contracts | Other current liabilities | | $ | 8 | | | $ | 6 | |
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
Consolidated Statements of Earnings Activity
The following table presents the impact and respective location of derivative activities on the Consolidated Statements of Earnings (in millions):
| | | | | | | | | | | | | |
| | Three Months Ended
March 31, | |
| Location | 2022 | 2021 | | |
Derivative activity designated as hedging instruments: | | | | | |
| Natural gas cash flow hedges: | | | | | |
| Amount of gain reclassified from AOCI (as defined below) into earnings (a) | Cost of sales | $ | (10) | | $ | (1) | | | |
| | | | | |
| | | | | |
| Cross-currency swap net investment hedges: | | | | | |
| Amount of gain recognized in earnings on derivative amounts excluded from effectiveness testing | Interest expense, net | $ | (1) | | $ | (1) | | | |
| | | | | |
| | | | | |
Derivative activity not designated as hedging instruments: | | | | | |
| | | | | |
| | | | | |
| Foreign currency: | | | | | |
| Amount of gain recognized in earnings (b) | Other income, net | $ | (5) | | $ | (20) | | | |
(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 income, net. Please refer to the "Other Derivatives" section below for additional detail.
Consolidated Statements of Comprehensive Earnings Activity
The following table presents the impact of derivative activities on the Consolidated Statements of Comprehensive Earnings (in millions):
| | | | | | | | | | | | | |
| | Amount of Gain Recognized in Comprehensive Earnings |
| | Three Months Ended
March 31, | |
| Hedging Type | Derivative Financial Instrument | 2022 | 2021 | | |
| Net investment hedge | Cross-currency swaps | $ | (2) | | $ | (5) | | | |
| Cash flow hedge | Natural gas forward swaps | $ | (23) | | $ | (4) | | | |
| Cash flow hedge | Treasury interest rate lock | $ | (10) | | $ | (15) | | | |
| | | | | |
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 March 31, 2022, the notional amounts of these natural gas forward swaps was 8 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.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
In June 2021, the Company entered into five currency forward contracts with unrelated counterparties totaling $23 million to mitigate against unwanted or anticipated moves in the European Euro exchange rate against the U.S. Dollar, pertaining to forecasted Euro denominated invoices for capital expenditures. The Company has designated each of the individual contracts as cash flow hedges, with the last hedge maturing no later than December 2023.
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 portions of the net investment in foreign subsidiaries against fluctuations in foreign exchange rates. As of March 31, 2022, the notional amount of these derivative financial instruments was $218 million related to the U.S. Dollar and European Euro.
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 March 31, 2022, the Company had notional amounts of $720 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 $7 million for non-designated derivative financial instruments related to foreign currency exposures in European Euro primarily related to the Polish Złoty.
- 16 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. GOODWILL AND OTHER INTANGIBLE ASSETS
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 value.
No testing was deemed necessary in the first three months of 2022. The changes in the net carrying value of goodwill by segment are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Composites | | Insulation | | Roofing | | Total |
Gross carrying amount at December 31, 2021 | $ | 75 | | | $ | 1,481 | | | $ | 397 | | | $ | 1,953 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Foreign Currency Translation | (1) | | | (15) | | | (1) | | | (17) | |
Gross carrying amount at March 31, 2022 | 74 | | | 1,466 | | | 396 | | | 1,936 | |
| | | | | | | |
Accumulated impairment losses at December 31, 2021 | — | | | (963) | | | — | | | (963) | |
| Foreign Currency Translation | — | | | 10 | | | — | | | 10 | |
Accumulated impairment losses at March 31, 2022 | — | | | (953) | | | — | | | (953) | |
| | | | | | | |
Balance, net of impairment, at March 31, 2022 | $ | 74 | | | $ | 513 | | | $ | 396 | | | $ | 983 | |
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.
Other intangible assets consist of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Trademarks and trade names | $ | 1,091 | | | $ | — | | | $ | 1,091 | | | $ | 1,096 | | | $ | — | | | $ | 1,096 | |
| Customer relationships | 552 | | | (223) | | | 329 | | | 559 | | | (218) | | | 341 | |
| Technology | 296 | | | (172) | | | 124 | | | 298 | | | (168) | | | 130 | |
| Other (a) | 66 | | | (4) | | | 62 | | | 53 | | | (3) | | | 50 | |
| Total other intangible assets | $ | 2,005 | | | $ | (399) | | | $ | 1,606 | | | $ | 2,006 | | | $ | (389) | | | $ | 1,617 | |
(a)Other primarily includes emissions and quarry rights.
Amortization expense for intangible assets for the three months ended March 31, 2022 and 2021 was $11 million and $12 million, respectively. Amortization expense for intangible assets is estimated to be $35 million for the remainder of 2022.
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)
The estimated amortization expense for intangible assets for the next five fiscal years ended December 31 is as follows (in millions):
| | | | | |
| Period | Amortization |
| 2023 | $ | 43 | |
| 2024 | $ | 40 | |
| 2025 | $ | 40 | |
| 2026 | $ | 37 | |
| 2027 | $ | 29 | |
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in millions):
| | | | | | | | |
| March 31,
2022 | December 31, 2021 |
| Land | $ | 219 | | $ | 219 | |
| Buildings and leasehold improvements | 1,273 | | 1,265 | |
| Machinery and equipment | 5,362 | | 5,343 | |
| Construction in progress | 358 | | 387 | |
| 7,212 | | 7,214 | |
| Accumulated depreciation | (3,387) | | (3,341) | |
| Property, plant and equipment, net | $ | 3,825 | | $ | 3,873 | |
Machinery and equipment includes certain precious metals used in our production tooling, which comprise approximately 10% of total machinery and equipment as of both March 31, 2022 and December 31, 2021. 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.
Our production tooling needs in our Composites segment are changing in response to economic and technological factors. As a result, we exchanged certain precious metals used in production tooling for certain other precious metals to be used in production tooling. During the three months ended March 31, 2022 and 2021, these non-cash exchanges resulted in a net increase to Machinery and equipment of $4 million and $20 million, respectively, and gains totaling $4 million and $20 million, respectively, which are included in Other income, net on the Consolidated Statements of Earnings and are reflected in the Corporate, Other and Eliminations reporting category. These non-cash investing activities are not included in Net cash flow used for investing activities in the Consolidated Statements of Cash Flows. We do not expect these exchanges to materially impact our current or future capital expenditure requirements or rate of depletion.
- 18 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. 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 2021 Form 10-K for information about our separately-priced extended warranty contracts. A reconciliation of the warranty liability is as follows (in millions):
| | | | | | | | |
| Three Months Ended March 31, |
| 2022 | 2021 |
| Beginning balance | $ | 81 | | $ | 72 | |
| Amounts accrued for current year | 4 | | 5 | |
| Settlements of warranty claims | (2) | | (3) | |
| Ending balance | $ | 83 | | $ | 74 | |
8. 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.
Roofing Restructuring Actions
In December 2021, the Company took actions to restructure operations within the Roofing segment's components product line by relocating production assets from China to India which will allow the business to optimize its manufacturing network and support a tariff mitigation strategy. During the first three months of 2022, the Company recorded less than $1 million of charges primarily related to accelerated depreciation and severance. The Company expects to recognize $9 million of incremental charges related to these actions in 2022.
Santa Clara Insulation Site
During the third quarter of 2021, the Company entered into a purchase and sale agreement for the Company's Insulation site in Santa Clara, California. The Company expects to continue operations at this facility through the third quarter of 2022 and complete the transaction in the first quarter of 2023. This action is part of the Company's on-going strategy to operate a flexible, cost-efficient manufacturing network and geographically locate its assets to better service its customers. Cumulative cash pre-tax charges associated with the transaction are expected to be in the range of $30 million to $40 million, primarily related to severance and one-time employee termination benefits, demolition costs, and other closing costs. In addition, cumulative non-cash charges are expected to be in the range of $75 million to $85 million, primarily consisting of accelerated depreciation of property, plant and equipment and derecognition of the carrying value of land, which will offset the gross proceeds at closing.
During the first three months of 2022, the Company recorded $6 million of charges, primarily related to accelerated depreciation, associated with this agreement.
2020 Insulation Restructuring Actions
During the fourth quarter of 2020, the Company took actions to avoid future capital outlays and reduce costs in its global Insulation segment, mainly through decisions to close certain manufacturing facilities in Shanghai, China and Fresno, Texas, and optimize a facility in Parainen, Finland. During the first three months of 2022, the Company recorded less than $1 million of charges primarily related to accelerated depreciation. The Company does not expect to recognize significant incremental costs related to these actions.
In the first quarter of 2022, the Company recognized a gain of $27 million in Other income, net on the Consolidated Statements of Earnings, associated with the sale of the manufacturing facility in Shanghai, China.
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. RESTRUCTURING AND ACQUISITION-RELATED COSTS (continued)
Acquisition-Related Restructuring
Following the acquisitions of Paroc Group Oy ("Paroc") and Pittsburgh Corning Corporation and Pittsburgh Corning Europe NV (collectively, "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 related to these actions.
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 March 31, | |
| Type of cost | Location | 2022 | 2021 | | |
| Accelerated depreciation | Cost of sales | $ | 6 | | $ | 1 | | | |
| | | | | |
| | | | | |
| | | | | |
| Other exit gains | Other income, net | (27) | | — | | | |
| | | | | |
| Total restructuring (gains) costs | | $ | (21) | | $ | 1 | | | |
Summary of Unpaid Liabilities
The following table summarizes the status of the unpaid liabilities from the Company's restructuring activities (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Roofing Components Restructuring Actions | Santa Clara Insulation Site | 2020 Insulation Restructuring Actions | | Acquisition-Related Restructuring | | | | | |
| Balance at December 31, 2021 | $ | 1 | | $ | 13 | | $ | 1 | | | $ | 5 | | | | | | |
| Restructuring costs | — | | 6 | | — | | | — | | | | | | |
| Payments | — | | (1) | | — | | | — | | | | | | |
| Accelerated depreciation and other non-cash items | — | | (5) | | — | | | — | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Balance at March 31, 2022 | $ | 1 | | $ | 13 | | $ | 1 | | | $ | 5 | | | | | | |
| Cumulative charges incurred | $ | 5 | | $ | 31 | | $ | 28 | | | $ | 27 | | | | | | |
As of March 31, 2022, the remaining liability balance is comprised of $20 million of severance, inclusive of $1 million of non-current severance and $19 million of severance the Company expects to pay over the next twelve months.
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. DEBT
Details of the Company’s outstanding long-term debt, as well as the fair values, are as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Carrying Value | Fair Value | | Carrying Value | Fair Value | |
4.200% senior notes, net of discount and financing fees, due 2024 | $ | 397 | | 102 | % | | $ | 397 | | 107 | % | |
3.400% senior notes, net of discount and financing fees, due 2026 | 398 | | 100 | % | | 397 | | 106 | % | |
3.950% senior notes, net of discount and financing fees, due 2029 | 446 | | 102 | % | | 446 | | 110 | % | |
3.875% senior notes, net of discount and financing fees, due 2030 | 297 | | 101 | % | | 297 | | 109 | % | |
7.000% senior notes, net of discount and financing fees, due 2036 | 368 | | 126 | % | | 368 | | 141 | % | |
4.300% senior notes, net of discount and financing fees, due 2047 | 589 | | 99 | % | | 589 | | 115 | % | |
4.400% senior notes, net of discount and financing fees, due 2048 | 390 | | 101 | % | | 390 | | 118 | % | |
| | | | | | |
| | | | | | |
| Various finance leases, due through 2036 (a) | 98 | | 100 | % | | 99 | | 100 | % | |
| Other | 2 | | n/a | | 2 | | n/a | |
| Total long-term debt | 2,985 | | n/a | | 2,985 | | n/a | |
| Less – current portion (a) | 26 | | 100 | % | | 25 | | 100 | % | |
| Long-term debt, net of current portion | $ | 2,959 | | n/a | | $ | 2,960 | | n/a | |
(a)The Company determined that the book value of the above noted long-term debt instruments approximates fair value.
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. 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. 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 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.
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.
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. 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.
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 March 31, 2022.
Senior Revolving Credit Facility
The Company has an $800 million senior revolving credit facility (the "Senior Revolving Credit Facility") with a maturity date in July 2026 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. The current agreement also includes fallback language related to a benchmark reference rate replacement, when a LIBOR transition occurs.
The Senior Revolving Credit Facility contains various covenants, including a maximum allowed leverage 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 March 31, 2022. Please refer to the Credit Facility Utilization section below for liquidity information as of March 31, 2022.
Receivables Securitization Facility
The Company has a Receivables Purchase Agreement (RPA) that is 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. The current agreement also includes fallback language related to a benchmark reference rate replacement, when a LIBOR transition occurs. The RPA has been amended from time to time, with a maturity date in April of 2024.
The RPA contains various covenants, including a maximum allowed leverage ratio that the Company believes are usual and customary for a securitization facility. The Company was in compliance with these covenants as of March 31, 2022. Please refer to the Credit Facility Utilization section below for liquidity information as of March 31, 2022.
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.
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. DEBT (continued)
Credit Facility Utilization
The following table shows how the Company utilized its primary sources of liquidity (in millions):
| | | | | | | | |
| Balance at March 31, 2022 |
| Senior Revolving Credit Facility | Receivables Securitization Facility |
| Facility size or borrowing limit | $ | 800 | | $ | 280 | |
| Collateral capacity limitation on availability | n/a | — | |
| Outstanding borrowings | — | | — | |
| Outstanding letters of credit | 4 | | 1 | |
| Availability on facility | $ | 796 | | $ | 279 | |
Short-Term Debt
Short-term borrowings were less than $1 million and $6 million as of March 31, 2022 and December 31, 2021, respectively. The short-term borrowings consisted of various operating lines of credit. The weighted average interest rate on all short-term borrowings was approximately 1.1% and 1.5% as of March 31, 2022 and December 31, 2021, respectively.
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. 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 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. 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.
The following table provides information regarding pension expense recognized (in millions): | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | 2021 |
| U.S. | Non-U.S. | Total | U.S. | Non-U.S. | Total |
| Components of Net Periodic Pension Cost | | | | | | |
| Service cost | $ | 1 | | $ | 1 | | $ | 2 | | $ | 1 | | $ | 2 | | $ | 3 | |
| Interest cost | 6 | | 3 | | 9 | | 6 | | 2 | | 8 | |
| Expected return on plan assets | (9) | | (4) | | (13) | | (9) | | (5) | | (14) | |
| | | | | | |
| Amortization of actuarial loss | 3 | | — | | 3 | | 3 | | 1 | | 4 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net periodic pension cost | $ | 1 | | $ | — | | $ | 1 | | $ | 1 | | $ | — | | $ | 1 | |
The Company does not expect to contribute to the U.S. pension plans during 2022. The Company expects to contribute $25 million in cash to non-U.S. plans during 2022. The Company made cash contributions of $1 million to the non-U.S. plans during the three months ended March 31, 2022. Postemployment and Postretirement Benefits Other than Pensions ("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.
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
March 31, | |
| 2022 | 2021 | | |
| Components of Net Periodic Benefit Cost | | | | |
| Service cost | $ | 1 | | $ | — | | | |
| Interest cost | 1 | | 1 | | | |
| | | | |
| Amortization of actuarial gain | (2) | | (2) | | | |
| Net periodic benefit income | $ | — | | $ | (1) | | | |
- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES AND OTHER MATTERS
The Company may be involved in various legal and regulatory proceedings relating to employment, antitrust, tax, product liability, environmental, contracts, intellectual property 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, use of chemicals in our manufacturing processes, 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 volatile organic air emissions, and protection of biodiversity.
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 March 31, 2022, the Company was involved with a total of 22 sites worldwide, including 9 Superfund and state equivalent sites and 13 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 sediment 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 reasonably estimates the costs of remediation 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 March 31, 2022, the Company had an accrual totaling $6 million for these costs, of which the current portion is $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.
- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. STOCK COMPENSATION
Description 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 share awards. At March 31, 2022, the number of shares remaining available under the 2019 Stock Plan for all stock awards was approximately 2.7 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 is as follows (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2022 | | 2021 | | | | |
| Total stock-based compensation expense | $ | 12 | | | $ | 12 | | | | | |
| | | | | | | |
Stock Options
The Company has granted stock options 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 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 has not granted stock options since the year ended December 31, 2014. As of March 31, 2022, there was no unrecognized compensation cost related to stock options and the range of exercise prices on outstanding stock options was $37.65 - $42.16.
The following 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, 2021 | 55,900 | | | $ | 39.34 | | | 1.71 | | $ | 3 | |
| | | | | | | |
| Exercised | (4,800) | | | 41.03 | | | | | |
| | | | | | | |
| | | | | | | |
Outstanding, March 31, 2022 | 51,100 | | | $ | 39.19 | | | 1.51 | | $ | 3 | |
Exercisable, March 31, 2022 | 51,100 | | | $ | 39.19 | | | 1.51 | | $ | 3 | |
- 26 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. STOCK COMPENSATION (continued)
Restricted Stock Units
The Company has granted restricted stock units (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 RSUs granted in 2022 was $91.48.
The following table summarizes the Company’s RSU plans:
| | | | | | | | |
| |
| Number of RSUs | Weighted-Average
Fair Value |
| Balance at December 31, 2021 | 1,268,993 | | $ | 62.25 | |
| Granted | 313,715 | | 91.48 | |
| Vested | (293,795) | | 68.03 | |
| Forfeited | (20,310) | | 71.19 | |
| Balance at March 31, 2022 | 1,268,603 | | $ | 67.94 | |
As of March 31, 2022, there was $51 million of total unrecognized compensation cost related to RSUs. That cost is expected to be recognized over a weighted-average period of 2.63 years. The total grant date fair value of shares vested during the three months ended March 31, 2022 and 2021 was $20 million and $19 million, respectively.
Performance Share Units
The Company has granted performance share units (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.
In the three months ended March 31, 2022, the Company granted both internal company-based and external-based metric PSUs.
Internal Company-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 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-year period. Outstanding grants are based on the Company's total stockholder return relative to the performance of the Dow Jones U.S. Construction & Materials Index. The amount of stock distributed will vary from 0% to 200% of PSUs awarded depending on the relative stockholder return performance. The fair value of external-based metric PSUs has been estimated at the grant date using a Monte Carlo simulation that uses various assumptions.
- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. STOCK COMPENSATION (continued)
The following table provides a summary of the assumptions for units granted in 2022:
| | | | | | | | | |
| |
| | | | | |
| Expected volatility | 41.65% | | | | |
| Risk free interest rate | 1.36% | | | | |
| Expected term (in years) | 2.91 | | | | |
| Grant date fair value of units granted | $ | 122.69 | | | | |
The risk-free interest rate was based on zero coupon United States Treasury bills at the grant date. The expected term represents the period from the grant date to the end of the three-year performance period.
PSU Summary
As of March 31, 2022, there was $31 million total unrecognized compensation cost related to PSUs. That cost is expected to be recognized over a weighted-average period of 2.07 years.
The following table summarizes the Company’s PSU activity: | | | | | | | | |
| |
| Number
of PSUs | Weighted-Average
Grant-Date
Fair Value |
| Balance at December 31, 2021 | 309,971 | | $ | 74.78 | |
| Granted | 146,784 | | 98.94 | |
| | |
| Forfeited | (5,123) | | 81.39 | |
| Balance at March 31, 2022 | 451,632 | | $ | 82.54 | |
| | |
Employee Stock Purchase Plan
The Owens Corning Employee Stock Purchase Plan (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. 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 March 31, 2022, 3.8 million shares remain available for purchase.
Included in total stock-based compensation expense is $1 million of expense related to the Company's ESPP recognized during the three months ended March 31, 2022. During the three months ended March 31, 2021, the Company recognized expense of $1 million related to the Company's ESPP. As of March 31, 2022, there was $1 million of total unrecognized compensation cost related to the ESPP.
- 28 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. EARNINGS PER SHARE
The following table is a reconciliation of weighted-average shares for calculating basic and diluted earnings per-share (in millions, except per share amounts):
| | | | | | | | | | |
| Three Months Ended
March 31, | |
| 2022 | 2021 | | |
Net earnings attributable to Owens Corning | $ | 304 | | $ | 210 | | | |
Weighted-average number of shares outstanding used for basic earnings per share | 99.5 | | 105.4 | | | |
| Non-vested restricted and performance shares | 0.7 | | 0.5 | | | |
| Options to purchase common stock | — | | 0.1 | | | |
Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings per share | 100.2 | | 106.0 | | | |
Earnings per common share attributable to Owens Corning common stockholders: | | | | |
| Basic | $ | 3.06 | | $ | 1.99 | | | |
| Diluted | $ | 3.03 | | $ | 1.98 | | | |
For the three months ended March 31, 2022, there were no non-vested restricted or performance shares that had an anti-dilutive effect on earnings per share. For the three months ended March 31, 2021, there were no non-vested restricted or performance shares that had an anti-dilutive effect on earnings per share.
On February 14, 2022, the Board of Directors approved a new 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 "2022 Repurchase Authorization"). The 2022 Repurchase Authorization is in addition to the share buy-back program announced December 3, 2020 (the "2020 Repurchase Authorization" and, collectively with the 2022 Repurchase Authorization, 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 will be at the Company's discretion. The Company repurchased 2.5 million shares of its common stock for $229 million during the three months ended March 31, 2022, under the Repurchase Authorization. As of March 31, 2022, 10.9 million shares remain available for repurchase under the Repurchase Authorization.
- 29 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
14. INCOME TAXES
The following table provides the Income tax expense (in millions) and effective tax rate for the periods indicated:
| | | | | | | | | | |
| Three Months Ended March 31, | |
| 2022 | 2021 | | |
| Income tax expense | $ | 107 | | $ | 59 | | | |
| Effective tax rate | 26 | % | 22 | % | | |
The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the three months ended March 31, 2022 is primarily due to U.S. state and local income tax expense, U.S. federal taxes on foreign earnings, foreign rate differential and other discrete adjustments.
The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the three months ended March 31, 2021 is primarily due to U.S. state and local income tax expense, U.S. federal taxes on foreign earnings, adjustments to valuation allowances against certain deferred tax assets, excess tax benefits related to stock compensation, and other discrete adjustments.
The Company continues its current practice of asserting indefinite reinvestment in accordance with ASC 740 by applying current US and foreign tax legislation.
- 30 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
15. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in accumulated other comprehensive income (deficit) (in millions):
| | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| |
| 2022 | 2021 | | | |
| Currency Translation Adjustment | | | | | |
| Beginning balance | $ | (279) | | $ | (220) | | | | |
| Net investment hedge amounts classified into AOCI, net of tax | 2 | | 4 | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Loss on foreign currency translation | (29) | | (49) | | | | |
| Other comprehensive loss, net of tax | (27) | | (45) | | | | |
| Ending balance | $ | (306) | | $ | (265) | | | | |
| Pension and Other Postretirement Adjustment | | | | | |
| Beginning balance | $ | (318) | | $ | (372) | | | | |
| Amounts reclassified from AOCI to net earnings, net of tax (a) | 1 | | 2 | | | | |
| Amounts classified into AOCI, net of tax | 2 | | (1) | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Other comprehensive income, net of tax | 3 | | 1 | | | | |
| Ending balance | $ | (315) | | $ | (371) | | | | |
| Hedging Adjustment | | | | | |
| Beginning balance | $ | 16 | | $ | 4 | | | | |
| | | | | |
| | | | | |
| Amounts reclassified from AOCI to net earnings, net of tax (b) | (8) | | (1) | | | | |
| Amounts classified into AOCI, net of tax | 32 | | 13 | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Other comprehensive income, net of tax | 24 | | 12 | | | | |
| Ending balance | $ | 40 | | $ | 16 | | | | |
| Total AOCI ending balance | $ | (581) | | $ | (620) | | | | |
(a)These AOCI components are included in the computation of total Pension and Other postretirement expense and are recorded in Non-operating income. See Note 10 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 4 for additional information.
16. SUBSEQUENT EVENTS
In April 2022, Owens Corning signed an agreement with JR Plastics Corporation to acquire WearDeck®, a premium producer of composite weather-resistant decking for commercial and residential applications. The transaction is subject to regulatory approvals and other customary conditions, and is anticipated to close by the end of the second quarter of 2022.
- 31 -
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 global building and construction materials leader helping customers win in the market by providing innovative and sustainable solutions. The Company has three reporting segments: Composites, Insulation and Roofing. Through these lines of business, the Company manufactures and sells products worldwide. We maintain leading market positions in many of our major product categories.
EXECUTIVE OVERVIEW
As the Russian invasion of Ukraine evolves, we are closely monitoring the potential impact on our businesses and our people. We believe that we have taken the necessary steps to ensure compliance with applicable regulatory restrictions on international trade and financial transactions associated with our Russian businesses. In late March, we announced our intent to exit Russia through a transfer or sale of our facilities. We are working to expedite our exit, while remaining committed to the safety and security of our employees in the region. Net sales from our Russian operations and its associated assets represent approximately 1% of annual consolidated net sales and consolidated assets, respectively.
Net earnings attributable to Owens Corning were $304 million in the first quarter of 2022, compared to $210 million in the same period of 2021. The Company reported $442 million in earnings before interest and taxes (EBIT) for the first quarter of 2022 compared to $301 million in the same period of 2021. The Company generated $417 million in adjusted earnings before interest and taxes (“Adjusted EBIT”) for the first quarter of 2022 compared to $282 million in the same period of 2021. 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 attributable to Owens Corning. First quarter of 2022 EBIT performance compared to the same period of 2021 increased $75 million, $47 million, and $20 million in our Composites, Insulation, and Roofing segments, respectively. Within our Corporate, Other and Eliminations category, General corporate expense and other increased by $7 million.
Cash and cash equivalents were $748 million as of March 31, 2022, compared to $605 million as of March 31, 2021, as a result of higher earnings. In the three months ended March 31, 2022, the Company's operating activities provided $158 million of cash flow, compared to $204 million in the same period in 2021. The change was primarily driven by a larger increase in operating assets and liabilities, mainly from higher receivables, in 2022 compared to the same period of 2021.
In April 2022, Owens Corning signed an agreement with JR Plastics Corporation to acquire WearDeck®, a premium producer of composite weather-resistant decking for commercial and residential applications. The transaction is subject to regulatory approvals and other customary conditions, and is anticipated to close by the end of the second quarter of 2022.
On February 14, 2022, the Board of Directors approved a new 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 "2022 Repurchase Authorization"). The 2022 Repurchase Authorization is in addition to the 2020 Repurchase Authorization (the "2020 Repurchase Authorization" and, collectively with the 2022 Repurchase Authorization, the "Repurchase Authorization").
The Company repurchased 2.5 million shares of its common stock for $229 million in the first quarter of 2022 under the Repurchase Authorization. As of March 31, 2022, 10.9 million shares remained available for repurchase under the 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
March 31, | |
| 2022 | 2021 | | |
| Net sales | $ | 2,346 | | $ | 1,915 | | | |
| Gross margin | $ | 619 | | $ | 444 | | | |
| % of net sales | 26 | % | 23 | % | | |
| Marketing and administrative expenses | $ | 184 | | $ | 174 | | | |
| | | | |
| Other income, net | $ | (28) | | $ | (48) | | | |
| Earnings before interest and taxes | $ | 442 | | $ | 301 | | | |
| Interest expense, net | $ | 28 | | $ | 33 | | | |
| | | | |
| Income tax expense | $ | 107 | | $ | 59 | | | |
Net earnings attributable to Owens Corning | $ | 304 | | $ | 210 | | | |
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 first quarter 2022, net sales increased $431 million compared to the same period in 2021 primarily driven by the impact of higher selling prices in all three segments. Higher sales volumes in our Insulation segment and favorable customer mix in our Composites and Insulation segments were partially offset by the unfavorable impact of translating sales denominated in foreign currencies into United States dollars.
GROSS MARGIN
In the first quarter 2022, gross margin increased $175 million compared to the same period in 2021 driven by higher selling prices, partially offset by higher input cost inflation and transportation costs in all three segments.
MARKETING AND ADMINISTRATIVE EXPENSES
In the first quarter 2022, marketing and administrative expenses increased $10 million compared to the same period in 2021 driven primarily by higher general corporate expenses as business activities return to a more typical, post-pandemic level.
OTHER INCOME, NET
In the first quarter 2022, other income, net decreased $20 million compared to the same period in 2021. The decrease was driven primarily by $16 million of lower gains on sale of certain precious metals. The $27 million gain on sale of the Shanghai, China facility was offset by the comparison year-over-year to the $27 million of gains on settlements from contracts to purchase and sell wind-generated electricity in the same period in 2021.
INTEREST EXPENSE, NET
In the first quarter 2022, interest expense, net, decreased $5 million compared to the same period in 2021. The decrease was driven by an increase in interest income earned on cash balances and lower long-term debt balances.
INCOME TAX EXPENSE
Income tax expense for the three months ended March 31, 2022 was $107 million. For the first quarter of 2022, the Company's effective tax rate was 26%. The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the three months ended March 31, 2022 is primarily due to U.S. state and local income tax expense, U.S. federal taxes on foreign earnings, foreign rate differential and other discrete adjustments.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The realization of deferred tax assets depends on achieving a certain minimum level of future taxable income. Management currently believes that it is not reasonably possible that the minimum level of taxable income will be met within the next 12 months to reduce the valuation allowances of certain foreign jurisdictions.
Income tax expense for the three months ended March 31, 2021 was $59 million. For the first quarter of 2021, the Company's effective tax rate was 22%. The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the three months ended March 31, 2021 is primarily due to U.S. state and local income tax expense, U.S. federal taxes on foreign earnings, adjustments to valuation allowances against certain deferred tax assets, excess tax benefits related to stock compensation, and other discrete adjustments.
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 Note 8 of the Consolidated Financial Statements for further information on the nature of these costs.
The following table presents the impact and respective location of these income (expense) items on the Consolidated Statements of Earnings (in millions):
| | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
| Location | 2022 | 2021 | | |
| Restructuring costs | Cost of sales | $ | (6) | | $ | (1) | | | |
| | | | | |
| | | | | |
| | | | | |
| Gain on sale of Shanghai, China facility | Other income, net | 27 | | — | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total restructuring, acquisition and integration-related costs | | $ | 21 | | $ | (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 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
March 31, | |
| | 2022 | 2021 | | |
| Restructuring costs | $ | (6) | | $ | (1) | | | |
| Gain on sale of Shanghai, China facility | 27 | | $ | — | | | |
| | | | |
| Gains on sale of certain precious metals | 4 | | 20 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total adjusting items | $ | 25 | | $ | 19 | | | |
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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 EBIT and to Adjusted EBIT is shown in the table below (in millions):
| | | | | | | | | | |
| Three Months Ended
March 31, | |
| 2022 | 2021 | | |
NET EARNINGS ATTRIBUTABLE TO OWENS CORNING | $ | 304 | | $ | 210 | | | |
| Net earnings attributable to noncontrolling interests | 3 | | — | | | |
| NET EARNINGS | 307 | | 210 | | | |
| Equity in net earnings of affiliates | — | | 1 | | | |
| Income tax expense | 107 | | 59 | | | |
| EARNINGS BEFORE TAXES | 414 | | 268 | | | |
| Interest expense, net | 28 | | 33 | | | |
| | | | |
| EARNINGS BEFORE INTEREST AND TAXES | 442 | | 301 | | | |
| Adjusting items from above | 25 | | 19 | | | |
| ADJUSTED EBIT | $ | 417 | | $ | 282 | | | |
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
March 31, | |
| 2022 | 2021 | | |
| Net sales | $ | 714 | | $ | 559 | | | |
| % change from prior year | 28 | % | 13 | % | | |
| EBIT | $ | 154 | | $ | 79 | | | |
| EBIT as a % of net sales | 22 | % | 14 | % | | |
| Depreciation and amortization expense | $ | 43 | | $ | 38 | | | |
NET SALES
In our Composites segment, net sales in the first quarter of 2022 increased $155 million compared to the same period in 2021. The increase was primarily driven by higher selling prices of $130 million. Favorable customer mix of $28 million and our acquisition of vliepa GmbH in July 2021 was partially offset by the $16 million unfavorable impact of translating sales denominated in foreign currencies into United States dollars.
EBIT
In our Composites segment, EBIT in the first quarter of 2022 increased $75 million compared to the same period in 2021. Higher selling prices of $130 million, improved production leverage, and favorable customer mix more than offset $53 million of input cost inflation and $10 million in higher transportation costs.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
OUTLOOK
Global glass reinforcements market demand has several economic indicators including residential, non-residential construction and manufacturing production indices, as well as global wind installations. The Company anticipates continued strong market conditions, input cost inflation, supply chain uncertainties and primary labor availability. The Russian invasion of Ukraine is creating uncertainty in global markets and putting further pressure on already-fragile global supply chains. The Company is closely monitoring the evolving situation and remains focused 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
March 31, | |
| | 2022 | 2021 | | |
| Net sales | $ | 859 | | $ | 700 | | | |
| % change from prior year | 23 | % | 16 | % | | |
| EBIT | $ | 129 | | $ | 82 | | | |
| EBIT as a % of net sales | 15 | % | 12 | % | | |
| Depreciation and amortization expense | $ | 53 | | $ | 51 | | | |
NET SALES
In our Insulation segment, net sales in the first quarter of 2022 increased $159 million compared to the same period in 2021. The increase was primarily driven by higher selling prices of $117 million. Higher sales volumes of approximately 5% and favorable customer mix were partially offset by $15 million unfavorable impact of translating sales denominated in foreign currencies into United States dollars.
EBIT
In our Insulation segment, EBIT in the first quarter of 2022 increased $47 million compared to the same period in 2021. Higher selling prices of $117 million, higher sales volumes and favorable customer mix more than offset $75 million of input cost inflation and $14 million in higher transportation costs.
OUTLOOK
The outlook for Insulation demand is driven by North American new residential construction, remodeling and repair activity, as well as commercial and industrial construction activity in the United States, Canada, Europe, Asia-Pacific and Latin America. Demand in 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.
During the first quarter of 2022, the average Seasonally Adjusted Annual Rate (SAAR) of U.S. housing starts was approximately 1.753 million, up from an annual average of approximately 1.613 million starts in the first quarter of 2021.
The Company expects continued strength in both the North American new residential construction market and global commercial and industrial construction markets, while monitoring economic factors such as input cost inflation, supply chain uncertainties and primary labor availability. The Russian invasion of Ukraine is creating uncertainty in global markets and putting further pressure on already-fragile global supply chains. The Company is closely monitoring the evolving situation and remains focused on managing costs, capital expenditures, and working capital.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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
March 31, | |
| | 2022 | 2021 | | |
| Net sales | $ | 838 | | $ | 711 | | | |
| % change from prior year | 18 | % | 28 | % | | |
| EBIT | $ | 176 | | $ | 156 | | | |
| EBIT as a % of net sales | 21 | % | 22 | % | | |
| Depreciation and amortization expense | $ | 14 | | $ | 15 | | | |
NET SALES
In our Roofing segment, net sales in the first quarter of 2022 increased $127 million compared to the same period in 2021. The increase was driven by higher selling prices of $120 million and higher-third party asphalt sales.
EBIT
In our Roofing segment, EBIT in the first quarter of 2022 increased $20 million compared to the same period in 2021. Higher selling prices of $120 million more than offset input cost inflation, primarily asphalt, of $68 million and $8 million of higher transportation costs. The impact of selling higher cost inventory, resulting from planned maintenance downtime taken in the fourth quarter of 2021, negatively impacted EBIT by approximately $17 million compared to the same period last year, as significantly less downtime was taken in the fourth quarter of 2020. The remaining variance was driven by higher selling, general and administrative expenses due to the timing of marketing spend, as the business returns to more normal post-COVID activities.
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 strength in the U.S. asphalt shingle market, the Company will continue to monitor economic factors such as input cost inflation, supply chain uncertainties and primary labor availability. The Company will continue 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
March 31, | |
| | 2022 | 2021 | | |
| Restructuring costs | $ | (6) | | $ | (1) | | | |
| | | | |
| Gain on sale of Shanghai, China facility | 27 | | — | | | |
| Gains on sale of certain precious metals | 4 | | 20 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| General corporate expense and other | (42) | | (35) | | | |
| EBIT | $ | (17) | | $ | (16) | | | |
| Depreciation and amortization | $ | 22 | | $ | 15 | | | |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
EBIT
In Corporate, Other and Eliminations, EBIT expenses for the first quarter of 2022 were higher by $1 million compared to the same period in 2021.
General corporate expense and other for the first quarter 2022 were higher by $7 million compared to the same period in 2021, driven primarily by higher general corporate expenses as business activities return to a more typical, post-pandemic level and foreign currency impacts. In addition, the benefit from the resolution of a liability in the first quarter of 2021 unfavorably impacted comparability of EBIT on a quarter-over-quarter basis.
OUTLOOK
In 2022, we estimate general corporate expenses to be in the range of $160 million and $170 million.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Liquidity
The Company's primary sources of liquidity are its balance of Cash and cash equivalents of $748 million as of March 31, 2022, 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, which matures in July 2026.
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 2024.
The following table shows how the Company utilized its primary sources of liquidity (in millions):
| | | | | | | | |
| |
| Senior Revolving Credit Facility | Receivables Securitization Facility |
| Facility size or borrowing limit | $ | 800 | | $ | 280 | |
| Collateral capacity limitation on availability | n/a | — | |
| Outstanding borrowings | — | | — | |
| Outstanding letters of credit | 4 | | 1 | |
| Availability on facility | $ | 796 | | $ | 279 | |
The Receivables Securitization Facility and Senior Revolving Credit Facility mature in 2024 and 2026, respectively. The Company has no significant debt maturities of senior notes before the fourth quarter of 2024. As of March 31, 2022, the Company had $3.0 billion of total debt and cash and cash equivalents of $748 million. The agreements governing our Senior Revolving Credit Facility and Receivables Securitization Facility contain various covenants that we believe are usual and customary. These covenants include a maximum allowed leverage ratio. We were in compliance with these covenants as of March 31, 2022.
Cash and cash equivalents held by foreign subsidiaries may be subject to foreign withholding taxes upon repatriation to the U.S. As of March 31, 2022, and December 31, 2021, the Company had $155 million and $156 million, respectively, in cash and cash equivalents in certain of our foreign subsidiaries. The Company continues to assert indefinite reinvestment in accordance with Accounting Standards Codification (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 16 of the Risk Factors disclosed in Item 1A of the Company's Form 10-K for the year ended December 31, 2021 (the "2021 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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Material Cash Requirements
Our anticipated uses of cash include capital expenditures, working capital needs, share repurchases, meeting financial obligations, payments of any dividends authorized by our Board of Directors, acquisitions, restructuring actions and pension contributions. 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 our Receivables Securitization Facility, will provide ample liquidity to enable us to meet our cash requirements.
Please refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our 2021 Form 10-K for more details on these material cash requirements. During the first quarter of 2022, there have been no material changes to our expected uses of cash and contractual obligations.
Supplier Finance Programs
We review supplier terms and conditions on an ongoing basis, and have negotiated payment terms extensions in recent years in connection with our efforts to reduce working capital and improve cash flow. Separate from those terms extension actions, certain of our subsidiaries have entered into paying agency agreements with third-party administrators. These voluntary supply chain finance programs (collectively, the “Programs”) generally give participating suppliers the ability to sell, or otherwise pledge as collateral, their receivables from the Company to the participating financial institutions, at the sole discretion of both the suppliers and financial institutions. The Company is not a party to the arrangements between the suppliers and the financial institutions. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by the suppliers’ decisions to sell, or otherwise pledge as collateral, amounts under these arrangements. One of our programs includes a parent guarantee to the participating financial institution for a certain U.S. subsidiary that, at the time of the respective program’s inception in 2015, was a guarantor subsidiary of the Company’s Senior Revolving Credit Facility.
The payables associated with suppliers choosing to voluntarily participate in the Programs were presented within Accounts payable on the Consolidated Balance Sheets, and totaled $221 million and $226 million as of March 31, 2022 and December 31, 2021, respectively. The amounts paid that are associated with suppliers once they chose to voluntarily participate in the Programs for the three months ended March 31, 2022 and 2021 were $150 million, and $114 million, respectively, with all activity related to the obligations presented within operating activities on the Consolidated Statements of Cash Flows.
The desire of suppliers and financial institutions to participate in the Programs could be negatively impacted by, among other factors, the availability of capital committed by the participating financial institutions, the cost and availability of our suppliers’ capital, a credit rating downgrade or deteriorating financial performance of the Company or its participating subsidiaries, or other changes in financial markets beyond our control. We do not expect these risks, or potential long-term growth of our programs, to materially affect our overall financial condition, as we expect a significant portion of our payments to continue to be made outside of the Programs. Accordingly, we do not believe the programs have materially impacted our current period liquidity, and do not believe that the programs are reasonably likely to materially affect liquidity in the future.
Cash Flows
The following table presents a summary of our cash balance, cash flows, and availability on credit facilities (in millions): | | | | | | | | | | |
| | Three Months Ended
March 31, |
| | | 2022 | 2021 |
| Cash and cash equivalents | | | $ | 748 | | $ | 605 | |
| Net cash flow provided by operating activities | | | $ | 158 | | $ | 204 | |
| Net cash flow used for investing activities | | | $ | (88) | | $ | (121) | |
| Net cash flow used for financing activities | | | $ | (285) | | $ | (194) | |
| Availability on the Senior Revolving Credit Facility | | | $ | 796 | | $ | 796 | |
| Availability on the Receivables Securitization Facility | | | $ | 279 | | $ | 279 | |
| | | | |
Cash and cash equivalents: Cash and cash equivalents as of March 31, 2022 increased $143 million compared to March 31, 2021 primarily due to higher earnings and cash inflows from derivative settlements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Operating activities: For the three months ended March 31, 2022, the Company's operating activities provided $158 million of cash compared to $204 million provided in the same period in 2021. The change in cash provided by operating activities was due to a larger increase in operating assets and liabilities, mainly from higher receivables, in 2022 compared to the same period of 2021.
Investing activities: Net cash flow used for investing activities decreased $33 million for the three months ended March 31, 2022 compared to the same period of 2021, primarily driven by cash inflows from derivative settlements and proceeds from the sale of the Shanghai, China facility.
Financing activities: Net cash used for financing activities was $285 million for the three months ended March 31, 2022, compared to net cash used for financing activities of $194 million in the same period in 2021. The change was primarily due to higher purchases of treasury stock.
Derivatives
Please refer to Note 4 of the Consolidated Financial Statements.
Fair Value Measurement
Please refer to Notes 4, 9, and 10 of the Consolidated Financial Statements.
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, 2022, our RIR was 0.51 as compared to 0.65 in the same period a year ago.
ACCOUNTING PRONOUNCEMENTS
Please refer to Note 1 of the Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
Please refer to Note 11 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:
•regional impact of the 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, frequently 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;
•industry and economic conditions including but not limited to, supply chain disruptions, inflationary pressures and interest rate volatility, that affect the market and operating conditions of our customers, suppliers or lenders;
•availability and cost of energy and raw materials;
•issues related to acquisitions, divestitures and joint ventures or expansions, including our proposed exit from operations in Russia;
•climate change, weather conditions and storm activity;
•legislation and related regulations or interpretations, in the United States or elsewhere;
•domestic and international economic and political conditions, policies or other governmental actions, as well as war and civil disturbance (such as the conflict between Russia and Ukraine);
•changes to tariff, trade or investment policies or laws;
•uninsured losses, including those from natural disasters, catastrophes, pandemics, theft or sabotage;
•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;
•achievement of expected synergies, cost reductions and/or productivity improvements;
•the level of fixed costs required to run our business;
•foreign exchange and commodity price fluctuations;
•levels of goodwill or other indefinite-lived intangible assets;
•price volatility in certain wind energy markets in the 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 herein, and in Item 1A - Risk factors in Part I of our 2021 Form 10-K. Users of this report should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. 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 three months ended March 31, 2022. Please refer to "Quantitative and Qualitative Disclosures about Market Risk" contained in Part II, Item 7A of our 2021 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 March 31, 2022 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.