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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number:     1-33100
Owens Corning
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
43-2109021
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Owens Corning Parkway, Toledo, OH
 
43659
(Address of principal executive offices)
 
(Zip Code)
(419) 248-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ             No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ             No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨             No þ
As of April 17, 2018, 110,703,310 shares of registrant’s common stock, par value $0.01 per share, were outstanding.



Table of Contents

 
 
 
Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 




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PART I
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(in millions, except per share amounts)
 
 
Three Months Ended
  
March 31,
  
2018
2017
NET SALES
$
1,691

$
1,478

COST OF SALES
1,336

1,136

Gross margin
355

342

OPERATING EXPENSES


Marketing and administrative expenses
185

142

Science and technology expenses
23

21

Other expenses, net
20

11

Total operating expenses
228

174

OPERATING INCOME
127

168

Non-operating income
(4
)
(2
)
EARNINGS BEFORE INTEREST AND TAXES
131

170

Interest expense, net
28

26

EARNINGS BEFORE TAXES
103

144

Income tax expense
11

43

NET EARNINGS
92

101

Net earnings attributable to noncontrolling interests


NET EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
92

$
101

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO OWENS CORNING COMMON STOCKHOLDERS
 
 
Basic
$
0.83

$
0.90

Diluted
$
0.82

$
0.89

Dividend
$
0.21

$
0.20

WEIGHTED AVERAGE COMMON SHARES
 
 
Basic
111.5

112.3

Diluted
112.8

113.5

The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.



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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(unaudited)
(in millions)
 
  
Three Months Ended 
 March 31,
  
2018
2017
NET EARNINGS
$
92

$
101

Currency translation adjustment (net of tax of $6 and $0 for the three months ended March 31, 2018 and 2017, respectively)
(15
)
36

Pension and other postretirement adjustment (net of tax of $(2) and $(1) for the three months ended March 31, 2018 and 2017, respectively)
(2
)

Hedging adjustment (net of tax of $0 and $1 for the three months ended March 31, 2018 and 2017, respectively)
1

(2
)
COMPREHENSIVE EARNINGS
76

135

Comprehensive earnings attributable to noncontrolling interests


COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
76

$
135


The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.



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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except per share amounts)
ASSETS
March 31,
2018
December 31,
2017
CURRENT ASSETS
 
 
Cash and cash equivalents
$
140

$
246

Receivables, less allowances of $21 at March 31, 2018 and $19 at December 31, 2017
1,061

806

Inventories
943

841

Assets held for sale
3

12

Other current assets
81

80

Total current assets
2,228

1,985

Property, plant and equipment, net
3,755

3,425

Goodwill
1,962

1,507

Intangible assets, net
1,872

1,360

Deferred income taxes
155

144

Other non-current assets
241

211

TOTAL ASSETS
$
10,213

$
8,632

LIABILITIES AND EQUITY
 
 
CURRENT LIABILITIES
 
 
Accounts payable and accrued liabilities
$
1,379

$
1,277

Short-term debt
1

1

Long-term debt – current portion
4

4

Total current liabilities
1,384

1,282

Long-term debt, net of current portion
3,762

2,405

Pension plan liability
260

256

Other employee benefits liability
222

225

Deferred income taxes
143

37

Other liabilities
301

223

OWENS CORNING STOCKHOLDERS’ EQUITY
 
 
Preferred stock, par value $0.01 per share (a)


Common stock, par value $0.01 per share (b)
1

1

Additional paid in capital
3,999

4,011

Accumulated earnings
1,631

1,575

Accumulated other comprehensive deficit
(530
)
(514
)
Cost of common stock in treasury (c)
(1,003
)
(911
)
Total Owens Corning stockholders’ equity
4,098

4,162

Noncontrolling interests
43

42

Total equity
4,141

4,204

TOTAL LIABILITIES AND EQUITY
$
10,213

$
8,632

 
(a)
10 shares authorized; none issued or outstanding at March 31, 2018 and December 31, 2017
(b)
400 shares authorized; 135.5 issued and 111.0 outstanding at March 31, 2018; 135.5 issued and 111.5 outstanding at December 31, 2017
(c)
24.5 shares at March 31, 2018, and 24.0 shares at December 31, 2017
The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.



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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
  
Three Months Ended 
 March 31,
  
2018
2017
NET CASH FLOW (USED FOR) PROVIDED BY OPERATING ACTIVITIES
 
 
Net earnings
$
92

$
101

Adjustments to reconcile net earnings to cash (used for) provided by operating activities:
 
 
Depreciation and amortization
109

84

Deferred income taxes
1

27

Provision for pension and other employee benefits liabilities

2

Stock-based compensation expense
9

10

Other non-cash
(1
)
6

Changes in operating assets and liabilities
(284
)
(204
)
Pension fund contributions
(6
)
(6
)
Payments for other employee benefits liabilities
(6
)
(8
)
Other
(4
)
(5
)
Net cash flow (used for) provided by operating activities
(90
)
7

NET CASH FLOW USED FOR INVESTING ACTIVITIES
 
 
Cash paid for property, plant and equipment
(101
)
(67
)
Proceeds from the sale of assets or affiliates
14


Investment in subsidiaries and affiliates, net of cash acquired
(1,121
)

Other
1


Net cash flow used for investing activities
(1,207
)
(67
)
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES
 
 
Proceeds from long-term debt
389


Proceeds from senior revolving credit and receivables securitization facilities
565

194

Proceeds from term loan borrowing
600


Payments on senior revolving credit and receivables securitization facilities
(197
)
(37
)
Dividends paid
(46
)
(45
)
Purchases of treasury stock
(111
)
(72
)
Other
1

3

Net cash flow provided by financing activities
1,201

43

Effect of exchange rate changes on cash
(10
)
6

Net decrease in cash, cash equivalents and restricted cash
(106
)
(11
)
Cash, cash equivalents and restricted cash at beginning of period
253

118

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
147

$
107

 

The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.




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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1.    GENERAL
Unless the context requires otherwise, the terms “Owens Corning,” “Company,” “we” and “our” in this report refer to Owens Corning, a Delaware corporation, and its subsidiaries.
The Consolidated Financial Statements included in this report are unaudited, pursuant to certain rules and regulations of the Securities and Exchange Commission, and include, in the opinion of the Company, normal recurring adjustments necessary for a fair statement of the results for the periods indicated, which, however, are not necessarily indicative of results which may be expected for the full year. The December 31, 2017 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, 2017 (the "2017 Form 10-K"). Certain reclassifications have been made to the periods presented for 2017 to conform to the classifications used in the periods presented for 2018.
Cash, Cash Equivalents and Restricted Cash
On the Consolidated Statements of Cash Flows, the total of Cash, cash equivalents and restricted cash includes restricted cash of $7 million, $7 million, $6 million and $6 million as of March 31, 2018, December 31, 2017, March 31, 2017 and December 31, 2016, respectively. Restricted cash primarily represents amounts received from a counterparty related to its performance assurance on an executory contract, and 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.



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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

1.    GENERAL (continued)


Accounting Pronouncements

The following table summarizes recent accounting standard updates (ASU) issued by the Financial Accounting Standards Board (FASB) that could have an impact on the Company's Consolidated Financial Statements:
Standard
Description
Effective Date for Company
Effect on the
Consolidated Financial Statements
Recently adopted standards:
 
 
 
ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)," as amended by ASU's 2015-14, 2016-08, 2016-10, 2016-11, 2016-12, 2016-20, 2017-05 and 2017-13 and 2017-14.
This standard outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Entities can adopt this standard either through a retrospective or modified-retrospective approach.
January 1, 2018
The adoption of this standard did not have a material impact on our Consolidated Financial Statements. Please refer to Note 3 of the Consolidated Financial Statements for transition disclosures, as well as other ongoing disclosure requirements.
ASU 2016-16 "Income Taxes (Topic 740)"

This standard requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.

January 1, 2018

The adoption of this standard did not have a material impact on our Consolidated Financial Statements. Please refer to Note 16 for a detailed explanation of the cumulative effect of adoption recognized on January 1, 2018.
ASU 2017-07 "Compensation - Retirement Benefits (Topic 715)"

This standard requires that the other components of net benefit cost be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Entities will adopt the presentation elements of this standard on a retrospective basis.

January 1, 2018

The adoption of this standard did not have a material effect on our Consolidated Financial Statements for the three months ended March 31, 2018. The standard's retrospective adoption, though, will result in a full-year $60 million reclassification of non-service costs from various financial statement lines to non-operating expense when the remaining periods of 2017 are presented again in future filings, primarily related to pension settlement losses that were recorded in the second and fourth quarters of 2017 (as described in Note 13 of our 2017 Form 10-K). Please refer to Note 12 of the Consolidated Financial Statements for additional detail on this adoption.
ASU 2017-12 "Derivatives and Hedging (Topic 815)"


This standard changes how an entity assesses effectiveness of derivative instruments, potentially resulting in less ineffectiveness and more derivatives qualifying for hedge accounting. Entities may early adopt the standard in any interim period, with the effect of adoption being applied to existing hedging relationships as of the beginning of the fiscal year of adoption.

January 1, 2018

The early-adoption of this standard did not have a material impact on our Consolidated Financial Statements. Please refer to Note 5 of the Consolidated Financial Statements for additional detail on this adoption.
Recently issued standards:
 
 
 
ASU 2016-02 "Leases (Topic 842)," as amended by ASU 2017-13 and 2018-01, and potentially subject to change through the "Targeted Improvements" Proposed ASU exposure draft released on January 5, 2018.
The standard requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. The recognition and presentation of expenses will depend on classification as a finance or operating lease. Entities will adopt this standard through a retrospective approach, the extent to which will be affected by the proposed ASU draft.
January 1, 2019
We are currently assessing the potential impact of this standard adoption on our financial reporting processes and disclosures. We believe that our adoption of the standard will likely have a material impact to our Consolidated Balance Sheets for the recognition of certain operating leases as right-of-use assets and lease liabilities. (Our operating lease obligations are described in Note 8 of our 2017 Form 10-K.) We are in the process of analyzing our lease portfolio and implementing systems to comply with the standard's retrospective adoption requirements.
ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326)"
This standard replaces the incurred loss methodology for recognizing credit losses with a current expected credit losses model and applies to all financial assets, including trade receivables. Entities will adopt the standard using a modified-retrospective approach.
January 1, 2020
We are currently assessing the impact this standard will have on our Consolidated Financial Statements. Our current accounts receivable policy (as described in Note 1 of our 2017 Form 10-K) uses historical and current information to estimate the amount of probable credit losses in our existing accounts receivable. We have not yet analyzed our current systems and methods to determine the impact of using forward-looking information to estimate expected credit losses.




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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 Composites segment includes vertically integrated downstream activities. The Company manufactures, fabricates and sells glass reinforcements in the form of fiber. Glass reinforcement materials are also used downstream by the Composites segment to manufacture and sell glass fiber products in the form of fabrics, non-wovens and other specialized products.
Insulation – Within our Insulation segment, the Company manufactures and sells fiberglass insulation into residential, commercial, industrial and other markets for both thermal and acoustical applications. It also manufactures and sells glass fiber pipe insulation, flexible duct media, bonded and granulated mineral wool insulation, cellular glass insulation and foam insulation used in above- and below-grade construction applications.
Roofing – Within our Roofing segment, the Company manufactures and sells residential roofing shingles, oxidized asphalt materials, roofing components used in residential and commercial construction and specialty applications, and synthetic packaging materials.

NET SALES
The following table summarizes our Net sales by segment and geographic region (in millions). Corporate eliminations (shown below) largely reflect intercompany sales from Composites to Roofing. External customer sales are attributed to geographic region based upon the location from which the product is shipped to the external customer.
  
Three Months Ended 
 March 31,
  
2018
2017
Reportable Segments
 
 
Composites
$
511

$
511

Insulation
596

399

Roofing
642

627

Total reportable segments
1,749

1,537

Corporate eliminations
(58
)
(59
)
NET SALES
$
1,691

$
1,478


External Customer Sales by Geographic Region
 
 
United States
$
1,128

$
1,051

Europe
279

140

Asia-Pacific
142

153

Rest of World
142

134

NET SALES
$
1,691

$
1,478





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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,
  
2018
2017
Reportable Segments
 
 
Composites
$
60

$
71

Insulation
32

5

Roofing
97

125

Total reportable segments
189

201

Restructuring costs
(5
)

Acquisition-related costs
(14
)
(1
)
Recognition of acquisition inventory fair value step-up
(2
)

General corporate expense and other
(37
)
(30
)
Total Corporate, other and eliminations
(58
)
(31
)
EBIT
$
131

$
170


3.    REVENUE

ASU 2014-09 Adoption
On January 1, 2018, we adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" and the related amendments (collectively "ASC 606"). We used the modified retrospective method of adoption, in which the cumulative effect of initially applying the new standard to existing contracts (as of January 1, 2018) was recorded as a $2 million decrease to the January 1, 2018 opening balance of Accumulated earnings. The effect of this adoption was immaterial to our Consolidated Financial Statements, and we do not expect a material effect to our Consolidated Financial Statements on an ongoing basis. Under the modified retrospective method of adoption, the comparative information in the Consolidated Financial Statements has not been revised and continues to be reported under the previously applicable revenue accounting guidance ("ASC 605"). If ASC 605 had been applied to the first quarter of 2018, Inventories and Accumulated earnings would have been $2 million higher on the Consolidated Balance Sheet with no effect to the Consolidated Statements of Earnings.
Revenue Recognition
Many of our customer volume commitments are short-term and our performance obligations are generally limited to single purchase orders. Substantially all of our revenue is recognized at a point-in-time when control of goods transfers to the customer. Control transfer typically occurs when goods are shipped from our facilities or at other predetermined control transfer points (for instance, destination terms or consignment arrangements). We have elected to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of performance obligations. We used the practical expedients to omit the disclosure of remaining performance obligations for contracts with an original expected duration of one year or less and for contracts where we have the right to invoice for performance completed to date.
We recognize revenue as the amount of consideration that we expect to receive in exchange for transferring promised goods or services to customers. We do not adjust the transaction price for the effects of a significant financing component, as the time period between control transfer of goods and services and expected payment is one year or less. At the time of sale, we estimate



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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

3.    REVENUE (continued)


provisions for different forms of variable consideration (discounts, rebates, returns and other refund liabilities) based on historical experience, current conditions and contractual obligations, as applicable. The estimated transaction price is typically not subject to significant reversals. We adjust these estimates when the most likely amount of consideration we expect to receive changes, although these changes are typically minor. During the three months ended March 31, 2018, the adjustments related to performance obligations satisfied in previous periods were immaterial. Sales, value-added and other similar taxes that we collect are excluded from revenue.
Disaggregated Revenue
The following table shows a disaggregation of Net sales (in millions):
 
For the three months ended March 31, 2018
Reportable Segments
Composites
Insulation
Roofing
Eliminations
Consolidated
Disaggregation Categories
 
 
 
 
 
U.S. residential
$
76

$
222

$
559

$
(53
)
$
804

U.S. commercial and industrial
139

147

39

(1
)
324

Europe
157

119

3


279

Asia-Pacific
106

33

3


142

Rest of World
33

75

38

(4
)
142

NET SALES
$
511

$
596

$
642

$
(58
)
$
1,691

Please refer to Note 2 and also Item 1 of our 2017 Form 10-K for further information on our three reportable segments (Composites, Insulation and Roofing). Our contracts with customers are broadly similar in nature throughout our reportable segments, but the amount, timing and uncertainty of revenue and cash flows may vary in each reportable segment due to geographic and end-market economic factors.
In the United States, sales are primarily related to the residential housing market and commercial and industrial applications. Residential market demand is driven by housing starts and repair and remodeling activity (influenced by existing home sales, seasonal home improvement and damage from major storms). Significant portions of our residential products are used interchangeably in both new construction and repair and remodeling, and our customers typically distribute (or use) the products for both applications. U.S. commercial and industrial revenues are largely driven by U.S. industrial production growth.
Outside of the United States (Europe, Asia-Pacific and Rest of World), sales are primarily related to commercial and industrial applications and, to a lesser extent, residential applications in certain countries. Throughout the international regions, demand is primarily driven by industrial production growth in each respective geographical region.
Contract Balances
We typically do not satisfy performance obligations without obtaining an unconditional right to payment from customers and, therefore, do not carry contract asset balances on the Consolidated Balance Sheets. Contract liability balances are recorded separately from receivables on the Consolidated Balance Sheets in either Accounts payable and accrued liabilities or Other liabilities, depending on the timing of performance obligation satisfaction.
We sell separately-priced warranties that extend certain product and workmanship coverages beyond our standard product warranty, which is described in Note 9. The up-front consideration on extended warranty contracts is deferred and recognized as revenue over time based on the respective coverage period, ranging from 16 to 20 years. On an annual basis, we expect to recognize approximately $2 million of revenue associated with these extended warranty contracts. Additionally, in certain limited cases, we receive consideration before goods or services are transferred to the customer. These customer down payments and deposits are deferred, and typically recognized as revenue in the following quarter when we satisfy the related performance obligations.
As of January 1, 2018, our contract liability balances (for extended warranties, down payments and deposits, collectively) totaled $46 million, of which $12 million was recognized as revenue in the first quarter of 2018. During the first quarter of 2018, the contract liability balances increased $5 million due to the acquisition of Paroc Group Oy ("Paroc"). As of March 31, 2018, our contract liability balances totaled $55 million.



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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

3.    REVENUE (continued)


As a practical expedient, we recognize incremental costs of obtaining a contract, if any, as an expense when incurred if the amortization period of the asset would have been one year or less. We do not have any costs to obtain or fulfill a contract that are capitalized under ASC 606.

4.    INVENTORIES
Inventories consist of the following (in millions):

March 31, 2018
December 31, 2017
Finished goods
$
630

$
562

Materials and supplies
313

279

Total inventories
$
943

$
841


5.    DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to, among other risks, the impact of changes in commodity prices, foreign currency exchange rates, and interest rates in the normal course of business. The Company’s risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments to offset a portion of these risks. The Company uses derivative financial instruments only to the extent necessary to hedge identified business risks, and does not enter into such transactions for trading purposes.
The Company generally does not require collateral or other security with counterparties to these financial instruments and is therefore subject to credit risk in the event of nonperformance; however, the Company monitors credit risk and currently does not anticipate nonperformance by other parties. Contracts with counterparties generally contain right of offset provisions. These provisions effectively reduce the Company’s exposure to credit risk in situations where the Company has gain and loss positions outstanding with a single counterparty. It is the Company’s policy to offset on the Consolidated Balance Sheets the amounts recognized for derivative instruments with any cash collateral arising from derivative instruments executed with the same counterparty under a master netting agreement. As of March 31, 2018 and December 31, 2017, 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.
During the first quarter of 2018, the Company early-adopted ASU 2017-12, "Derivatives and Hedging (Topic 815)," which was issued with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and to make certain targeted improvements to simplify the application of previously applicable hedge accounting guidance. This adoption did not have a material effect on our Consolidated Financial Statements, and did not result in any cumulative adjustment to equity as of the date of adoption. Please refer to the Cash Flow Hedges and Net Investment Hedges paragraphs below for further information.
Derivative Fair Values
Our derivatives consist of natural gas forward swaps, cross-currency swaps and foreign exchange forward contracts, 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.



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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

5.    DERIVATIVE FINANCIAL INSTRUMENTS (continued)


The following table presents the fair value of derivatives and hedging instruments and the respective location on the Consolidated Balance Sheets (in millions):
 
 
 
Fair Value at
 
Location
 
March 31, 2018
 
December 31, 2017
Derivative assets designated as hedging instruments:
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
       Cross-currency swaps
Other current assets
 
$
8

 
$
7

Cash flow hedges:
 
 
 
 
 
Natural gas forward swaps
Other current assets
 
$
1

 
$
1

Foreign exchange forward contracts
Other current assets
 
$
1

 
$

Derivative liabilities designated as hedging instruments:
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
       Cross-currency swaps
Other liabilities
 
$
63

 
$
38

Cash flow hedges:
 
 
 
 
 
Natural gas forward swaps
Accounts payable and
accrued liabilities
 
$

 
$
1

Derivative assets not designated as hedging instruments:
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
$
4

 
$
1

Derivative liabilities not designated as hedging instruments:
 
 
 
 
 
Foreign exchange forward contracts
Accounts payable and
accrued liabilities
 
$
1

 
$
1

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
2018
2017
Derivative activity designated as hedging instruments:
 
 
 
Natural gas cash flow hedges:
 
 
 
Amount of gain reclassified from AOCI (as defined below) into earnings
Cost of sales
$

$
(1
)
Cross-currency swap net investment hedges:
 
 
 
Amount of gain recognized in earnings on derivative amounts excluded from effectiveness testing
Interest expense, net
$
(3
)
$

Derivative activity not designated as hedging instruments:
 
 
 
Foreign currency:
 
 
 
Amount of gain recognized in earnings (a)
Other expenses, net
$
(4
)
$

 
(a)
Gains related to foreign currency derivatives were substantially offset by net revaluation impacts on foreign currency denominated balance sheet exposures, which were also recorded in Other expenses, net.






Table of Contents
- 14 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

5.    DERIVATIVE FINANCIAL INSTRUMENTS (continued)


Consolidated Statements of Comprehensive Earnings Activity

The following table presents the impact of derivative activities on the Consolidated Statements of Comprehensive Earnings (in millions):
 
 
Three Months Ended March 31, 2018
Hedging Type
Derivative Financial Instrument
Amount of Gain (Loss) Recognized in Comprehensive Earnings
Net investment hedge
Cross-currency swaps
$
(25
)
Cash flow hedge
Natural gas forward swaps
$
1

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. The Company's policy for electricity exposure is to hedge up to 75% of its total forecasted exposure for the current calendar year and up to 65% of its total forecasted exposure for the first calendar year forward. The Company’s policy for natural gas exposure is to hedge up to 75% of its total forecasted exposure for the next three months and up to 60% of its total forecasted exposure for the following three months, and lesser amounts for the remaining periods. Based on market conditions, approved variation from these standard policies may occur. Currently, the Company is managing risk associated with electricity prices only through physical contracts and has natural gas derivatives designated as hedging instruments that mature within 15 months. As of March 31, 2018, the notional amounts of these natural gas forward swaps was 5 MMBtu (or MMBtu equivalent) based on U.S. and European indices.
As of March 31, 2018, the Company had notional amounts of $22 million for derivative financial instruments designated as cash flow hedges for foreign currency exposures in Polish Zloty primarily related to British Pound and European Euro, and also $18 million for exposures in Swedish Krona primarily related to European Euro.
The Company performs an analysis for effectiveness of its derivatives designated as hedging instruments at the end of each quarter based on the terms of the contracts and the underlying items being hedged. The change in the fair value of cash flow hedges is deferred in Accumulated other comprehensive income (deficit) ("AOCI") and is subsequently recognized in Cost of sales (for commodity cash flow hedges) or Other expenses, net (for foreign currency cash flow hedges) on the Consolidated Statements of Earnings in order to mirror the location of the hedged items impacting earnings. Cash settlements for commodity and foreign currency hedges qualifying as cash flow hedges are included in Other operating activities in the Consolidated Statements of Cash Flows.
As of March 31, 2018, $1 million of gains are included in AOCI on the Consolidated Balance Sheets relate to natural gas and foreign currency forward contracts that are expected to impact earnings during the next 12 months. Transactions and events that are expected to occur over the next 12 months that will necessitate recognizing these deferred amounts include the recognition of the hedged item through earnings.
Net Investment Hedges
The Company has translation exposure resulting from translating the financial statements of foreign subsidiaries into U.S. Dollars, which is recognized in Currency translation adjustment (a component of AOCI). The Company uses cross-currency forward contracts to hedge a portion of the net investment in foreign subsidiaries against fluctuations in foreign exchange rates. As of March 31, 2018, the notional amount of these derivative financial instruments was $516 million related to the U.S Dollar and European Euro.



Table of Contents
- 15 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

5.    DERIVATIVE FINANCIAL INSTRUMENTS (continued)


In the first quarter of 2018, we redesignated these derivative financial instruments that qualify as hedges of net investments in foreign operations using the spot method. The changes in fair values of these derivative instruments are recognized in Currency translation adjustment (a component of AOCI), with recognition of the excluded components amortized to Interest expense, net on the Consolidated Statements of Earnings. For the first quarter of 2018, the difference between the change in fair value of the excluded components and the amounts recognized to earnings was a $13 million increase to the net fair value liability. Prior to our first quarter 2018 adoption of ASU 2017-12, all settlements and changes in fair values of these derivative instruments were recognized in Currency translation adjustment (a component of AOCI), and there had been no ineffectiveness on these hedging relationships. Cash settlements are included in Other investing activities in the Consolidated Statements of Cash Flows.
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, 2018, the Company had notional amounts of $707 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, Indian Rupee, Japanese Yen, and South Korean Won. The growth in notional amounts (as compared to $109 million at December 31, 2017) was primarily related to new derivative financial instruments used to hedge increased European Euro balance sheet exposures following our acquisition of Paroc. In addition, the Company had notional amounts of $93 million for non-designated derivative financial instruments related to foreign currency exposures in European Euro primarily related to the Russian Ruble and Swedish Krona.
Gains and losses resulting from the changes in fair value of these instruments are recorded in Other expenses, net on the Consolidated Statements of Earnings, and are substantially offset by net revaluation impacts on foreign currency denominated balance sheet exposures (which are also recorded in Other expenses, net).

6.     GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets and goodwill consist of the following (in millions):
March 31, 2018
Weighted
Average
Useful Life
 
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Amortizable intangible assets:
 
 
 
 
 
Customer relationships
20
 
$
588

$
(116
)
$
472

Technology
17
 
328

(120
)
208

Other
14
 
61

(27
)
34

Indefinite-lived intangible assets:
 
 
 
 
 
Trademarks
 
 
1,158


1,158

Total intangible assets
 
 
$
2,135

$
(263
)
$
1,872

Goodwill
 
 
$
1,962

 
 
 



Table of Contents
- 16 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

6.     GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

December 31, 2017
Weighted
Average
Useful Life
 
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Amortizable intangible assets:
 
 
 
 
 
Customer relationships
20
 
$
363

$
(109
)
$
254

Technology
18
 
255

(116
)
139

Other
8
 
47

(26
)
21

Indefinite-lived intangible assets:
 
 
 
 
 
Trademarks
 
 
946


946

Total intangible assets
 
 
$
1,611

$
(251
)
$
1,360

Goodwill
 
 
$
1,507

 
 
Goodwill
The Company tests goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount. No testing was deemed necessary in the first three months of 2018. The changes in the net carrying amount of goodwill by segment are as follows (in millions):
 
Composites
 
Insulation
 
Roofing
 
Total
Balance at December 31, 2017
$
58

 
$
1,049

 
$
400

 
$
1,507

Acquisitions (see Note 8)

 
452

 

 
452

Foreign currency translation

 
2

 
1

 
3

Balance at March 31, 2018
$
58

 
$
1,503

 
$
401

 
$
1,962


Other Intangible Assets
The Other category below primarily includes franchise agreements and quarry and emission rights. The changes in the gross carrying amount of intangible assets by asset group are as follows (in millions):
 
Customer Relationships
 
Technology
 
Trademarks
 
Other
 
Total
Balance at December 31, 2017
$
363

 
$
255

 
$
946

 
$
47

 
$
1,611

Acquisitions (see Note 8)
225

 
73

 
213

 
7

 
518

Other additions, net

 

 

 
7

 
7

Foreign currency translation

 

 
(1
)
 

 
(1
)
Balance at March 31, 2018
$
588

 
$
328

 
$
1,158

 
$
61

 
$
2,135




Table of Contents
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

6.     GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

The estimated amortization expense for intangible assets for the next five years is as follows (in millions):
Period
Amortization (a)
2019
$
53

2020
$
53

2021
$
52

2022
$
48

2023
$
45


(a)
The yearly amortization amounts in the table above include approximately $26 million of aggregate amortization expense related to the preliminary purchase price allocations of the acquisitions of Pittsburgh Corning Corporation and Pittsburgh Corning Europe NV (collectively, "Pittsburgh Corning") and Paroc. See Note 8 for more details of these acquisitions.

7.    PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in millions):
 
March 31,
2018
December 31, 2017
Land
$
277

$
251

Buildings and leasehold improvements
1,023

944

Machinery and equipment
4,460

4,211

Construction in progress
402

350

 
6,162

5,756

Accumulated depreciation
(2,407
)
(2,331
)
Property, plant and equipment, net
$
3,755

$
3,425

Machinery and equipment includes certain precious metals used in our production tooling, which comprise approximately 12% of total machinery and equipment as of March 31, 2018 and December 31, 2017, respectively. Precious metals used in our production tooling are depleted as they are consumed during the production process, which typically represents an annual expense of less than 3% of the outstanding carrying value.

8.    ACQUISITIONS

Paroc Acquisition

On February 5, 2018, the Company acquired all the outstanding equity of Paroc, a leading producer of mineral wool insulation for building and technical applications in Europe, for approximately $1,121 million (approximately 900 million Euro), net of cash acquired. The acquisition of Paroc expands the Company's mineral wool technology, grows its presence in the European insulation market, provides access to a variety of new end-use markets and will increase the Insulation segment's geographic sales mix outside of the U.S. and Canada. Paroc's operating results and a preliminary purchase price allocation have been included in the Company’s Insulation segment within the Consolidated Financial Statements. The Company is continuing to obtain information to complete its valuation of certain assets and liabilities.




Table of Contents
- 18 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

8.
ACQUISITIONS (continued)


The following table details the identifiable indefinite and definite-lived intangible assets acquired, their preliminary fair values and estimated weighted average useful lives (in millions):
Type of Intangible Asset
Preliminary Fair Value
Weighted Average Useful Life
Customer relationships
$
225

20
Technology - Know-how
63

15
Technology - Patented
10

5
Quarry Rights
7

45
Trademarks
213

Indefinite
Total
$
518


During the first three months of 2018, the Consolidated Statements of Earnings included $85 million in Net sales attributable to the acquisition and a $2 million charge related to inventory fair value step-up in Cost of Sales. The acquisition also included Property, plant and equipment, net with a fair value of approximately $315 million. Goodwill has been initially valued at approximately $454 million, with none of the amount expected to be tax-deductible. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the acquisition and are expected to accelerate making the Company the leading provider of insulation solutions by building on mineral wool technologies. The Company has not yet assigned the goodwill acquired to a reporting unit. The acquisition also included cash of approximately $17 million. The Company expects to complete its valuations no later than one year from the acquisition date and adjustments will continue to be made to the fair value of the identifiable assets acquired and liabilities assumed. Those adjustments may or may not be material. The pro forma effect of this acquisition on Net sales and Net earnings attributable to Owens Corning was not material. 

Pittsburgh Corning Acquisition
On June 27, 2017, the Company acquired all the outstanding equity of Pittsburgh Corning, the world’s leading producer of cellular glass insulation systems for commercial and industrial markets, for approximately $563 million, net of cash acquired. This acquisition expands the Company’s position in commercial and industrial product offerings and grows its presence in Europe and Asia. Pittsburgh Corning's operating results since the date of acquisition and a preliminary purchase price allocation have been included in the Company's Insulation segment in the Consolidated Financial Statements. The Company is continuing to obtain information to complete its valuation of certain assets and liabilities. During the quarter ended March 31, 2018, the Company recorded immaterial measurement period adjustments to the purchase price allocation.

The following table details the identifiable indefinite and definite-lived intangible assets, their preliminary fair values and estimated weighted average useful lives (in millions):
Type of Intangible Asset
Preliminary Fair Value
Weighted Average Useful Life
Customer relationships
$
107

19
Technology
37

15
Trademarks
101

Indefinite
Total
$
245

 



Table of Contents
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

8.
ACQUISITIONS (continued)


During the three months ended March 31, 2018, the Consolidated Statements of Earnings included $60 million in Net sales attributable to the Pittsburgh Corning acquisition (related to the one-year post-acquisition period). Goodwill has been initially valued at approximately $154 million, with none of the amount expected to be tax-deductible. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the acquisition and are expected to accelerate making the Company the leading provider of insulation solutions by building on core glass technologies. The acquisition also included cash of approximately $52 million. The Company expects to complete its valuations no later than one year from the acquisition date and adjustments will continue to be made to the fair value of the identifiable assets acquired and liabilities assumed. We do not expect those adjustments to be material. The pro forma effect of this acquisition on Net sales and Net earnings attributable to Owens Corning was not material. 
9. 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 3 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, 2018
Beginning balance
$
55

Amounts accrued for current year
5

Settlements of warranty claims
(2
)
Ending balance
$
58


10.    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.

Acquisition-Related Costs
During the first three months of 2018, the Company incurred $14 million of transaction and integration costs related to its announced acquisitions. Please refer to Note 8 of the Consolidated Financial Statements for further information on these acquisitions. These costs are recorded within Corporate, Other and Eliminations. See the Restructuring Costs paragraph below for detail on additional costs related to these acquisitions. The following table presents the impact and respective location of acquisition-related costs for the first three months of 2018 on the Consolidated Statements of Earnings (in millions):
Location
Paroc Acquisition
Pittsburgh Corning Acquisition
Total
Marketing and administrative expenses
$
4

$
1

$
5

Other expenses, net
9


9

Total acquisition-related costs
$
13

$
1

$
14


Restructuring Costs

Pittsburgh Corning Acquisition-Related Restructuring
Following the acquisition of Pittsburgh Corning into the Company's Insulation segment, the Company took actions to realize expected synergies from the newly acquired operations. During the first three months of 2018, the Company recorded $1 million of accelerated depreciation related to these actions. The Company expects to incur an immaterial amount of incremental costs in the remainder of 2018 related to these actions.




Table of Contents
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

10.
RESTRUCTURING AND ACQUISITION-RELATED COSTS (continued)

2017 Cost Reduction Actions
During the second quarter of 2017, the Company took actions to avoid future capital outlays and reduce costs in its Composites segment, mainly through decisions to close certain sub-scale manufacturing facilities in Asia Pacific (including Doudian, Peoples Republic of China and Thimmapur, India) and North America (Mexico City, Mexico and Brunswick, Maine) and to reposition assets in its Chambery, France operation. During the first three months of 2018, the Company recorded $4 million of charges, comprised of $1 million of severance, $4 million of accelerated depreciation and a $1 million net benefit from exit activities associated with these actions. The Company expects to recognize approximately $19 million of incremental costs in 2018, of which about $4 million is accelerated depreciation.

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
2018
2017
Accelerated depreciation
Cost of sales
$
5

$

Other exit costs
Cost of sales
2


Severance
Other expenses, net
1


Other exit gains
Other expenses, net
(3
)

Total restructuring costs
 
$
5

$


Summary of Unpaid Liabilities
The following table summarizes the status of the unpaid liabilities from the Company's restructuring activity (in millions):
 
2017 Cost Reduction Actions
Pittsburgh Corning Acquisition-Related Restructuring
Total
Balance at December 31, 2017
$
11

$
9

$
20

Restructuring costs
4

1

5

Payments
(2
)
(2
)
(4
)
Non-cash items and reclassifications to other accounts
(1
)
(1
)
(2
)
Balance at March 31, 2018
$
12

$
7

$
19

Cumulative charges incurred
$
33

$
18

$
51


As of March 31, 2018, the remaining liability balance is comprised of $19 million of severance, inclusive of $2 million of non-current severance and $17 million of severance the Company expects to pay over the next twelve months.





Table of Contents
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)




11.    DEBT

Details of the Company’s outstanding long-term debt, as well as the fair values, are as follows (in millions):
 
March 31, 2018
 
December 31, 2017
 
Carrying Value
Fair Value
 
Carrying Value
Fair Value
4.20% senior notes, net of discount and financing fees, due 2022
$
597

103
%
 
$
597

105
%
4.20% senior notes, net of discount and financing fees, due 2024
392

102
%
 
392

105
%
3.40% senior notes, net of discount and financing fees, due 2026
395

96
%
 
395

98
%
7.00% senior notes, net of discount and financing fees, due 2036
400

127
%
 
400

132
%
4.30% senior notes, net of discount and financing fees, due 2047
588

92
%
 
588

99
%
4.40% senior notes, net of discount and financing fees, due 2048
389

92
%
 

n/a

Senior revolving credit facility, maturing in 2020 (a)
121

100
%
 

n/a

Receivables securitization facility, maturing in 2020 (a)
247

100
%
 

n/a

Various capital leases, due through and beyond 2050 (a)
31

100
%
 
31

100
%
Term loan borrowing, maturing in 2021 (a)
600

100
%
 

n/a

Unamortized interest rate swap basis adjustment
6

n/a

 
6

n/a

Total long-term debt
3,766

n/a

 
2,409

n/a

Less – current portion (a)
4

100
%
 
4

100
%
Long-term debt, net of current portion
$
3,762

n/a

 
$
2,405

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 $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 were 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 redeem $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.
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 were 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.



Table of Contents
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

11.
DEBT (continued)

The Company issued $600 million of 2022 senior notes on October 17, 2012. Interest on the notes is payable semiannually in arrears on June 15 and December 15 each year, beginning on June 15, 2013. The proceeds of these notes were used to refinance $250 million of our 2016 senior notes and $100 million of our 2019 senior notes and pay down our Senior Revolving Credit Facility.
On October 31, 2006, the Company issued $540 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 Senior Notes are fully and unconditionally guaranteed by certain of the Company’s current and future domestic subsidiaries that are borrowers or guarantors under the Company’s credit agreement (the "Credit Agreement"). The guarantees are unsecured and rank equally in right of payment with all other existing and future senior unsecured indebtedness of the guarantors. The guarantees are effectively subordinated to existing and future secured debt of the guarantors to the extent of the assets securing that indebtedness.
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, 2018.
In the first quarter of 2016, the Company terminated interest rate swaps designated to hedge a portion of the 4.20% senior notes due 2022. The residual fair value of the swaps are recognized in Long-term debt, net of current portion on the Consolidated Balance Sheets as an unamortized interest rate swap basis adjustment.
Senior Revolving Credit Facility
The Company has an $800 million multi-currency senior revolving credit facility that has been amended from time to time (the "Senior Revolving Credit Facility") with a maturity date in November 2020 and uncommitted incremental loans permitted under the facility of $600 million. The Senior Revolving Credit Facility 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 or LIBOR plus a spread.
The Senior Revolving Credit Facility contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio, that the Company believes are usual and customary for a senior unsecured credit agreement. The Company was in compliance with these covenants as of March 31, 2018. Please refer to the Credit Facility Utilization paragraph below for liquidity information as of March 31, 2018.
Term Loan Commitments
The Company obtained two term loan commitments on October 27, 2017 for $300 million and $600 million, respectively, (collectively, the "Term Loan Commitments"), separate from the $600 million of allowable incremental term loans under the Senior Revolving Credit Facility. The Company entered into the Term Loan Commitments, in part, to pay a portion of the purchase price of the Paroc acquisition. In the first quarter of 2018, the Company borrowed on the $600 million term loan commitment, along with borrowings on the Receivables Securitization Facility and the proceeds of the 2048 senior notes, to fund the purchase of Paroc. The $600 million term loan borrowing (the "Term Loan Borrowing") requires full repayment by February 2021. On February 12, 2018, the Company voluntarily reduced the entire $300 million term loan commitment, thus eliminating the availability of credit under the facility.



Table of Contents
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

11.
DEBT (continued)

Receivables Securitization Facility
Included in long-term debt on the Consolidated Balance Sheets are borrowings outstanding under a Receivables Purchase Agreement (RPA) that are 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 securitization facility (the "Receivables Securitization Facility") has been amended from time to time, with a maturity date of May 2020. The facility was most recently amended in April 2018 to increase the borrowing limit from $250 million to $280 million. No other significant terms impacting liquidity were amended. The Company has the ability to borrow at the lenders' cost of funds, which approximates A-1/P-1 commercial paper rates, plus a fixed spread.
The Receivables Securitization Facility contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio that the Company believes are usual and customary for a securitization facility. The Company was in compliance with these covenants as of March 31, 2018. Please refer to the Credit Facility Utilization section below for liquidity information as of March 31, 2018.
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 party to the RPA. Owens Corning Receivables LLC is a separate legal entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of Owens Corning Receivables LLC’s assets prior to any assets or value in Owens Corning Receivables LLC becoming available to Owens Corning Receivables LLC’s equity holders. The assets of Owens Corning Receivables LLC are not available to pay creditors of the Company or any other affiliates of the Company or Owens Corning Sales, LLC.
Credit Facility Utilization
The following table shows how the Company utilized its primary sources of liquidity (in millions):
 
Balance at March 31, 2018
 
Term Loan Borrowing
Senior Revolving Credit Facility
Receivables Securitization Facility
Facility size or borrowing limit
$
600

$
800

$
250

Collateral capacity limitation on availability
n/a
n/a

Outstanding borrowings
600

121

247

Outstanding letters of credit
n/a
9

3

Availability on facility
$

$
670

$

Short-Term Debt
Short-term borrowings were $1 million as of March 31, 2018 and December 31, 2017. The short-term borrowings for both periods consisted of various operating lines of credit and working capital facilities. Certain of these borrowings are collateralized by receivables, inventories or property. The borrowing facilities are typically for one-year renewable terms. The weighted average interest rate on all short-term borrowings was approximately 5.4% and 6.7% for March 31, 2018 and December 31, 2017, respectively.





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- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


12.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

ASU 2017-07 Adoption
On January 1, 2018, we adopted ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)." This standard requires that the other components of net benefit cost be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. These other components of net benefit cost are now presented in Non-operating income on the Consolidated Statements of Earnings. In accordance with the standard's retrospective adoption requirement, we used an allowable practical expedient that permits the use of amounts disclosed in previous pension and other postretirement benefit plan disclosures as the estimation basis for applying the retrospective presentation requirement. Please refer to the Accounting Pronouncements section of Note 1 for more details on the impact of this adoption.
The following table shows the location and impact of the adoption on certain periods of the Consolidated Statements of Earnings:
 
Three Months Ended March 31, 2017
Location
Before Adoption
Adoption Impact
After Adoption
Cost of sales
$
1,135

$
1

$
1,136

Other expenses, net
$
10

$
1

$
11

Non-operating income
$

$
(2
)
$
(2
)
Pension Plans
The Company sponsors defined benefit pension plans. Under the plans, pension benefits are based on an employee’s years of service and, for certain categories of employees, qualifying compensation. Company contributions to these pension plans are determined by an independent actuary to meet or exceed minimum funding requirements. In our non-U.S. plans, the unrecognized cost of any retroactive amendments and actuarial gains and losses are amortized over the average future service period of plan participants expected to receive benefits. In our U.S. plans, the unrecognized cost of any retroactive amendments and actuarial gains and losses are amortized over the average remaining life expectancy of the inactive participants as substantially all of the plan participants are inactive.
The following tables provide information regarding pension expense recognized (in millions):
 
Three Months Ended March 31,
 
2018
 
2017
  
U.S.
Non-U.S.
Total
 
U.S.
Non-U.S.
Total
Components of Net Periodic Pension Cost
 
 
 
 
 
 
 
Service cost
$
2

$
1

$
3

 
$
2

$
1

$
3

Interest cost
9

3

12

 
10

4

14

Expected return on plan assets
(14
)
(5
)
(19
)
 
(14
)
(6
)
(20
)
Amortization of actuarial loss
3

1

4

 
3

1

4

Net periodic pension cost
$

$

$

 
$
1

$

$
1

The Company expects to contribute approximately $50 million in cash to the U.S. pension plans and another $13 million to non-U.S. plans during 2018. The Company made cash contributions of $6 million to the plans during the three months ended March 31, 2018.



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- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

12.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)


Postemployment and Postretirement Benefits Other than Pension Plans ("OPEB")
The Company maintains healthcare and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the United States are non-funded and pay either (1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met, or (2) fixed amounts of medical expense reimbursement.
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,
  
2018
2017
Components of Net Periodic Benefit Cost
 
 
Service cost
$
1

$
1

Interest cost
2

2

Amortization of prior service cost
(1
)
(1
)
Amortization of actuarial loss
(2
)
(1
)
Net periodic benefit cost
$

$
1



13.
CONTINGENT LIABILITIES AND OTHER MATTERS

The Company may be involved in various legal and regulatory proceedings relating to employment, antitrust, tax, product liability, environmental and other matters (collectively, “Proceedings”). The Company regularly reviews the status of such Proceedings along with legal counsel. Liabilities for such Proceedings are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the amount of any reasonably possible losses in excess of any amounts accrued, if any, with respect to such Proceedings or any other known claim, including the matters described below under the caption Environmental Matters (the “Environmental Matters”), are not material to the Company’s financial statements. Management believes that the ultimate disposition of the Proceedings and the Environmental Matters will not have a material adverse effect on the Company’s financial condition. While the likelihood is remote, the disposition of the Proceedings and Environmental Matters could have a material impact on the results of operations, cash flows or liquidity in any given reporting period.
Litigation and Regulatory Proceedings

The Company is involved in litigation and regulatory Proceedings from time to time in the regular course of its business. The Company believes that adequate provisions for resolution of all contingencies, claims and pending matters have been made for probable losses that are reasonably estimable.

Environmental Matters

The Company has established policies and procedures designed to ensure that its operations are conducted in compliance with all relevant laws and regulations and that enable the Company to meet its high standards for corporate sustainability and environmental stewardship. Our manufacturing facilities are subject to numerous foreign, federal, state and local laws and regulations relating to the presence of hazardous materials, pollution and protection of the environment, including emissions to air, discharges to water, management of hazardous materials, handling and disposal of solid wastes, and remediation of contaminated sites. All Company manufacturing facilities operate using an ISO 14001 or equivalent environmental management system. The Company’s 2020 Sustainability Goals require significant global reductions in energy use, water consumption, waste to landfill, and emissions of greenhouse gases, fine particulate matter and toxic air emissions.




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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

13.
CONTINGENT LIABILITIES AND OTHER MATTERS (continued)

Owens Corning is involved in remedial response activities and is responsible for environmental remediation at a number of sites, including certain of its currently owned or formerly owned plants. These responsibilities arise under a number of laws, including, but not limited to, the Federal Resource Conservation and Recovery Act, and similar state or local laws pertaining to the management and remediation of hazardous materials and petroleum. The Company has also been named a potentially responsible party under the U.S. Federal Superfund law, or state equivalents, at a number of disposal sites. The Company became involved in these sites as a result of government action or in connection with business acquisitions. As of March 31, 2018, the Company was involved with a total of 22 sites worldwide, including 7 Superfund sites and 15 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 and groundwater contamination. This can include pre-cleanup activities such as fact finding and investigation, risk assessment, feasibility studies, remedial action design and implementation (where actions may range from monitoring to removal of contaminants, to installation of longer-term remediation systems). A number of factors affect the cost of environmental remediation, including the number of parties involved in a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, variability in clean-up standards, the need for legal action, and changes in remediation technology. Taking these factors into account, Owens Corning has predicted the costs of remediation reasonably estimated to be paid over a period of years. The Company accrues an amount on an undiscounted basis, consistent with the reasonable estimates of these costs when it is probable that a liability has been incurred. Actual cost may differ from these estimates for the reasons mentioned above. At March 31, 2018, the Company had an accrual totaling $17 million for these costs, of which the current portion is $11 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.





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- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


14.
STOCK COMPENSATION

Stock Plans

2016 Stock Plan

On April 21, 2016, the Company’s stockholders approved the Owens Corning 2016 Stock Plan (the “2016 Stock Plan”) which authorizes grants of stock options, stock appreciation rights, restricted stock awards, restricted stock units, bonus stock awards and performance stock awards. At March 31, 2018, the number of shares remaining available under the 2016 Stock Plan for all stock awards was 2.5 million.
Stock Options
The Company did not grant any stock options during the three months ended March 31, 2018. 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 market price of the Company’s common stock on the date of grant, and an option’s maximum term is 10 years.
During the three months ended March 31, 2018 and March 31, 2017, the Company recognized expense of less than $1 million related to the Company's stock options. As of March 31, 2018, there was no unrecognized compensation cost related to stock options. The total aggregate intrinsic value of options outstanding as of March 31, 2018 was $21 million.
The following table summarizes the Company’s stock option activity:
  
Three Months Ended 
 March 31, 2018
  
Number of
Options
Weighted-
Average
Exercise Price
Beginning Balance
518,725

$
37.17

Exercised
(26,350
)
36.20

Forfeited
(750
)
37.65

Ending Balance
491,625

$
37.23

The following table summarizes information about the Company’s options outstanding and exercisable:
  
Options Outstanding
Options Exercisable
 
Options
Outstanding
Weighted-Average
Number Exercisable at March 31, 2018
Weighted-Average
Range of Exercise Prices
Remaining
Contractual Life
Exercise
Price
Remaining
Contractual Life
Exercise
Price
$13.89 - $42.16
491,625

4.69
$
37.23

491,625

4.69
$
37.23


Restricted Stock Awards and Restricted Stock Units
The Company has granted restricted stock awards and restricted stock units (collectively referred to as “restricted stock”) as a part of its long-term incentive plan. Compensation expense for restricted stock is measured based on the market price of the stock at date of grant and is recognized on a straight-line basis over the vesting period, which is is typically three or four years. The Stock Plan allows alternate vesting schedules for death, disability, and retirement.
During the three months ended March 31, 2018, the Company recognized expense of $5 million related to the Company's restricted stock. During the three months ended March 31, 2017, the Company recognized expense of $5 million related to the Company's restricted stock. As of March 31, 2018, there was $48 million of total unrecognized compensation cost related to restricted stock.



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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

14.
STOCK COMPENSATION (continued)


That cost is expected to be recognized over a weighted-average period of 2.95 years. The total fair value of shares vested during the three months ended March 31, 2018 and 2017 was $17 million and $16 million, respectively.
The following table summarizes the Company’s restricted stock activity:
  
Three Months Ended March 31, 2018
  
Number of Shares/Units
Weighted-Average
Grant-Date
Fair Value
Beginning Balance
1,752,136

$
42.40

Granted
260,977

92.65

Vested
(395,002
)
44.20

Forfeited
(18,612
)
47.61

Ending Balance
1,599,499

$
50.09

Performance Stock Awards and Performance Stock Units
The Company has granted performance stock awards and performance stock units (collectively referred to as “PSUs”) as a part of its long-term incentive plan. All outstanding performance grants will fully settle in stock. The amount of stock ultimately distributed from all performance shares is contingent on meeting internal company-based metrics or an external-based stock performance metric.
In the three months ended March 31, 2018, the Company granted both internal company-based and external-based metric PSUs.
Internal 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 issued in 2016 and thereafter are based on the Company's total stockholder return relative to the performance of the companies constituting the former S&P Building & Construction Industry Index or Dow Jones Construction and Materials Index. The amount of stock distributed will vary from 0% to 200% of PSUs awarded depending on the relative stockholder return performance.
The Company estimated the fair value of the external-based metric performance stock grants using a Monte Carlo simulation. The external-based metric performance stock granted in 2018 uses various assumptions that include expected volatility of 24.6%, and a risk free interest rate of 2.2%, both of which were based on an expected term of 2.92 years. Expected volatility was based on a benchmark study of our peers. The risk-free interest rate was based on zero coupon U.S. Treasury bills at the time of grant. The expected term represents the period from the grant date to the end of the three-year performance period. Compensation expense for external-based metric PSUs is measured based on the grant date fair value and is recognized on a straight-line basis over the vesting period. Pro-rata vesting may be utilized in the case of death, disability or approved retirement, and awards if earned will be paid at the end of the three-year period.



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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

14.
STOCK COMPENSATION (continued)


During the three months ended March 31, 2018 and March 31, 2017, the Company recognized expense of $3 million related to the Company's PSUs. As of March 31, 2018, there was $27 million of total unrecognized compensation cost related to PSUs. That cost is expected to be recognized over a weighted-average period of 2.61 years.
The following table summarizes the Company’s PSU activity:
  
Three Months Ended 
 March 31, 2018
  
Number
of PSUs
Weighted-Average
Grant-Date
Fair Value
Beginning Balance
451,148

$
53.96

Granted
171,725

93.25

Forfeited
(3,672
)
49.52

Ending Balance
619,201

$
64.88

Employee Stock Purchase Plan
On April 18, 2013, the Company’s stockholders approved the Owens Corning Employee Stock Purchase Plan (ESPP). The ESPP is a tax-qualified plan under Section 423 of the Internal Revenue Code. The purchase price of shares purchased under the ESPP is equal to 85% of the lower of the fair market value of shares of Owens Corning common stock at the beginning or ending of the offering period, which is a six-month period ending on May 31 and November 30 of each year. At the approval date, 2.0 million shares were available for purchase under the ESPP. As of March 31, 2018, 1.0 million shares remain available for purchase.
During the three months ended March 31, 2018 and March 31, 2017, the Company recognized expense of $1 million related to the Company's ESPP. As of March 31, 2018, there was $1 million of total unrecognized compensation cost related to the ESPP.

 



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- 30 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


15.    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,
  
2018
2017
Net earnings attributable to Owens Corning
$
92

$
101

Weighted-average number of shares outstanding used for basic earnings per share
111.5

112.3

Non-vested restricted and performance shares
1.0

0.9

Options to purchase common stock
0.3

0.3

Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings per share
112.8

113.5

Earnings per common share attributable to Owens Corning common stockholders:
 
 
Basic
$
0.83

$
0.90

Diluted
$
0.82

$
0.89

On October 24, 2016, the Board of Directors approved a share buy-back program under which the Company is authorized to repurchase up to 10 million shares of the Company’s outstanding common stock (the “Repurchase Authorization”). The Repurchase Authorization enables the Company to repurchase shares through the open market, privately negotiated, or other transactions. The actual number of shares repurchased will depend on timing, market conditions and other factors and is at the Company’s discretion. The Company repurchased 1.0 million shares of its common stock for $83 million during the three months ended March 31, 2018 under the Repurchase Authorization. As of March 31, 2018, 6.5 million shares remain available for repurchase under the Repurchase Authorization.
For the three months ended March 31, 2018, the number of shares used in the calculation of diluted earnings per share did not include 0.3 million non-vested restricted shares and 0.1 million non-vested performance shares, due to their anti-dilutive effect. For the three months ended March 31, 2017, the number of shares used in the calculation of diluted earnings per share did not include 0.1 million non-vested performance shares, due to their anti-dilutive effect.

16.    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,
  
2018
2017
Income tax expense
$
11

$
43

Effective tax rate
11
%
30
%

The difference between the effective tax rate and the U.S. federal statutory tax rate of 21% for the three months ended March 31, 2018 is primarily due to excess tax benefits related to stock compensation, the impact of higher foreign tax rates and other discrete adjustments.
The difference between the effective tax rate and the U.S. federal statutory tax rate of 35% for the three months ended March 31, 2017 is primarily due to the benefit of lower foreign tax rates and other discrete adjustments.
During the first quarter of 2018, the Company adopted ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory (Topic 740).” Under this standard, the tax effects of intra-entity sales of assets other than inventory will be recognized immediately in the seller's tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer.



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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


The standard is applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the year of adoption. As of January 1, 2018, we recorded a $17 million decrease in Other non-current assets, a $7 million increase in Deferred income tax assets and a $10 million decrease to Accumulated earnings.
The U.S. government enacted tax legislation commonly known as the U.S. Tax Cuts and Jobs Act of 2017 on December 22, 2017 (the "Tax Act"). The Tax Act made broad and complex changes to the U.S. tax code, including but not limited to, a reduction to the U.S. federal corporate income tax rate from 35% to 21%; a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (the "Transition Tax”); eliminating the corporate alternative minimum tax (AMT) and changing realization of AMT credits; changing rules related to uses and limitations of net operating loss (NOL) carryforwards created in tax years after December 31, 2017; changes to the limitations on available interest expense deductions; and changes to other existing deductions and business-related exclusions.
The SEC issued Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), which provides guidance on the accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date to complete the accounting under ASC 740, "Income Taxes." The Company's accounting for the income tax effects of the Tax Act is incomplete. In accordance with SAB 118, we were able to make reasonable estimates on certain effects of the Tax Act resulting in a total provisional charge to the financial statements as of December 31, 2017. There have been no material changes to the provisional charges as disclosed in our 2017 Form 10-K. The Company was not yet able to make a reasonable estimate of the U.S. state tax effects of the Tax Act. Therefore, no provisional adjustment was recorded with respect to this item. We are continuing to evaluate the estimates used to record and disclose the effects of the Tax Act.
Effective January 1, 2018, the Tax Act creates a new requirement to include in U.S. income global intangible low-taxed income (GILTI) earned by controlled foreign corporations (CFCs). The GILTI must be included currently in the gross income of the CFCs’ U.S. shareholder. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). During the first quarter of 2018, we selected the period cost method in recording the tax effects of GILTI in our financial statements.
The Company's analysis whether to change its indefinite reinvestment assertion on account of the Tax Act is incomplete. Therefore, we continue to assert indefinite reinvestment in accordance with ASC 740 based on the laws before enactment of the Tax Act.




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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)




17.    CHANGES IN ACCUMULATED OTHER COMPREHENSIVE DEFICIT

The following table summarizes the changes in accumulated other comprehensive income (deficit) (in millions):
 
Three Months Ended
  
March 31,
  
2018
2017
Currency Translation Adjustment
 
 
Beginning balance
$
(183
)
$
(284
)
Net investment hedge amounts classified into AOCI, net of tax
(19
)

Gain on foreign currency translation
4

36

Other comprehensive (loss)/income, net of tax
(15
)
36

Ending balance
$
(198
)
$
(248
)
Pension and Other Postretirement Adjustment
 
 
Beginning balance
$
(331
)
$
(429
)
  Amounts reclassified from AOCI to net earnings, net of tax (a)
1

1

  Amounts classified into AOCI, net of tax
(3
)
(1
)
Other comprehensive income, net of tax
(2
)

Ending balance
$
(333
)
$
(429
)
Hedging Adjustment
 
 
Beginning balance
$

$
3

      Amounts reclassified from AOCI to net earnings, net of tax (b)

(1
)
  Amounts classified into AOCI, net of tax
1

(1
)
Other comprehensive income/(loss), net of tax
1

(2
)
Ending balance
$
1

$
1

Total AOCI ending balance
$
(530
)
$
(676
)

(a)
These AOCI components are included in the computation of total Pension and OPEB expense and are recorded in Non-operating income. See Note 12 for additional information.
(b)
Amounts reclassified from gain/(loss) on cash flow hedges are reclassified from AOCI to income when the hedged item affects earnings and are recognized in Cost of sales. See Note 5 for additional information.



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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)



18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following Condensed Consolidating Financial Statements present the financial information required with respect to those entities which guarantee certain of the Company’s debt. The Condensed Consolidating Financial Statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share of the subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investment in subsidiaries and intercompany balances and transactions.
Guarantor and Nonguarantor Financial Statements
The Senior Notes and the Senior Revolving Credit Facility are guaranteed, fully, unconditionally and jointly and severally, by certain of Owens Corning’s current and future wholly-owned material domestic subsidiaries that are borrowers or guarantors under the Credit Agreement, which permits changes to the named guarantors in certain situations (collectively, the “Guarantor Subsidiaries”). The remaining subsidiaries have not guaranteed the Senior Notes and the Senior Revolving Credit Facility (collectively, the “Non-Guarantor Subsidiaries”).





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- 34 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2018
(in millions)

 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET SALES
$

$
1,172

$
659

$
(140
)
$
1,691

COST OF SALES
2

960

514

(140
)
1,336

Gross margin
(2
)
212

145


355

OPERATING EXPENSES
 
 
 
 
 
Marketing and administrative expenses
41

86

58


185

Science and technology expenses

19

4


23

Other expenses, net
4

9

7


20

Total operating expenses
45

114

69


228

OPERATING INCOME
(47
)
98

76


127

Non-operating income
(2
)
(1
)
(1
)

(4
)
EARNINGS BEFORE INTEREST AND TAXES
(45
)
99

77


131

Interest expense, net
20

(1
)
9


28

EARNINGS BEFORE TAXES
(65
)
100

68


103

Income tax expense
(30
)
25

16


11

Equity in net earnings of subsidiaries
127

52


(179
)

Equity in net earnings of affiliates





NET EARNINGS
92

127

52

(179
)
92

Net earnings attributable to noncontrolling interests





NET EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
92

$
127

$
52

$
(179
)
$
92




























Table of Contents
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(in millions)

 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET SALES
$

$
1,094

$
511

$
(127
)
$
1,478

COST OF SALES
1

867

395

(127
)
1,136

Gross margin
(1
)
227

116


342

OPERATING EXPENSES
 
 
 
 
 
Marketing and administrative expenses
36

77

29


142

Science and technology expenses

17

4


21

Other expenses, net
(2
)
10

3


11

Total operating expenses
34

104

36


174

OPERATING INCOME
(35
)
123

80


168

Non-operating income

(2
)


(2
)
EARNINGS BEFORE INTEREST AND TAXES
(35
)
125

80


170

Interest expense, net
23


3


26

EARNINGS BEFORE TAXES
(58
)
125

77


144

Income tax expense
(28
)
50

21


43

Equity in net earnings of subsidiaries
131

56


(187
)

Equity in net earnings of affiliates





NET EARNINGS
101

131

56

(187
)
101

Net earnings attributable to noncontrolling interests





NET EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
101

$
131

$
56

$
(187
)
$
101














Table of Contents
- 36 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2018
(in millions)
 
 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET EARNINGS
$
92

$
127

$
52

$
(179
)
$
92

Currency translation adjustment (net of tax)
(15
)
1

4

(5
)
(15
)
Pension and other postretirement adjustment (net of tax)
(2
)
(4
)
(1
)
5

(2
)
Hedging adjustment (net of tax)
1




1

COMPREHENSIVE EARNINGS
76

124

55

(179
)
76

Comprehensive earnings attributable to noncontrolling interests





COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
76

$
124

$
55

$
(179
)
$
76


OWENS CORNING AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(in millions)

 
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET EARNINGS
$
101

$
131

$
56

$
(187
)
$
101

Currency translation adjustment (net of tax)
36

1

36

(37
)
36

Pension and other postretirement adjustment (net of tax)

(1
)
(2
)
3


Hedging adjustment (net of tax)
(2
)



(2
)
COMPREHENSIVE EARNINGS
135

131

90

(221
)
135

Comprehensive earnings attributable to noncontrolling interests





COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING
$
135

$
131

$
90

$
(221
)
$
135


 









 






Table of Contents
- 37 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

18.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

 OWENS CORNING AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2018
(in millions)
ASSETS
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
CURRENT ASSETS
 
 
 
 
 
Cash and cash equivalents
$

$
11

$
129

$

$
140

Receivables, net


1,061


1,061

Due from affiliates

3,089


(3,089
)

Inventories

501

442


943

Other current assets
24

27

33


84

Total current assets
24

3,628

1,665

(3,089
)
2,228

Investment in subsidiaries
8,891

2,095


(10,986
)

Property, plant and equipment, net
466

1,687

1,602


3,755

Goodwill and intangible assets, net

2,376

1,522

(64
)
3,834

Other non-current assets
(22
)
222

196


396

TOTAL ASSETS
$
9,359

$
10,008

$
4,985

$
(14,139
)
$
10,213

LIABILITIES AND EQUITY
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
Accounts and notes payable and other current liabilities
$
89

$
726

$
569

$

$
1,384

Due to affiliates
1,445


1,644

(3,089
)

Total current liabilities
1,534

726

2,213

(3,089
)
1,384

Long-term debt, net of current portion
3,489

10

263


3,762

Deferred income taxes


143


143

Other liabilities
238

381

228

(64
)
783

OWENS CORNING STOCKHOLDERS’ EQUITY
 
 
 
 
 
Total Owens Corning stockholders’ equity
4,098

8,891

2,095

(10,986
)
4,098

Noncontrolling interests


43


43

Total equity
4,098

8,891

2,138

(10,986
)
4,141

TOTAL LIABILITIES AND EQUITY
$
9,359

$
10,008

$
4,985

$
(14,139
)
$
10,213





Table of Contents
- 38 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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