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Owens Corning 10-Q Summary: Quarter Ended March 31, 2010

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010, for Owens Corning, a leading global producer of glass fiber reinforcements and building materials. The company operates through two reportable segments: Composites (Reinforcements and Downstream) and Building Materials (Insulation, Roofing, and Other). The filing reflects a return to profitability driven by improved demand in the Composites segment and record performance in the Roofing business, despite continued weakness in the U.S. housing market.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 18% year-over-year, driven by a 34% surge in Composites sales and a 16% increase in Roofing sales due to higher volumes and improved capacity utilization.
• Profitability Turnaround: The company returned to profitability with $48 million in net earnings, compared to a $28 million loss in Q1 2009. EBIT improved by $101 million.
• Cost Reduction Charges: Charges related to cost reduction actions decreased significantly to $6 million in 2010 from $22 million in 2009. The 2010 charges relate to downsizing underutilized Composites facilities in Europe.
• Segment Performance:
  • Composites: EBIT turned positive ($31 million) from a loss ($18 million) due to higher sales volumes and favorable foreign currency translation.
  • Building Materials: EBIT rose to $87 million from $53 million. The Roofing business achieved record Q1 results, while the Insulation business narrowed its losses despite a 19% decline in lagged U.S. housing starts.
• Cash Flow: Operating cash flow usage improved dramatically to $27 million from $288 million in the prior year, attributed to better working capital management and higher earnings.

Guidance, Outlook, and Risks

• Outlook: Management expects demand in the Composites segment to trend upward as global industrial demand improves. In Building Materials, continued weakness in the U.S. housing industry is expected to depress residential construction demand through the remainder of 2010. However, the Roofing business is expected to maintain margin improvements.
• Capital Expenditures: Expected to be greater than in 2009 but less than depreciation and amortization expense.
• Liquidity: The company maintains ample liquidity with $463 million in cash and $948 million available on its senior revolving credit facility. No significant debt maturities are due until Q4 2011.
• Risks and Contingencies:
  • Valuation Allowance: A valuation allowance exists against U.S. deferred tax assets due to prior losses. Management believes it is reasonably possible this will be reversed if U.S. earnings continue to improve.
  • Environmental: The company is a Potentially Responsible Party (PRP) at 18 sites with a reserve of $10 million.
  • Legal: An ERISA lawsuit regarding predecessor company pension investments is on appeal; oral arguments were held in March 2010.

Investor Verification Checklist

• Verify the sustainability of the 34% sales growth in the Composites segment against global industrial demand trends.
• Monitor the impact of the $13 million in cost reduction charges (including $7 million in accelerated depreciation) on future operating margins.
• Assess the timeline for the potential reversal of the U.S. deferred tax asset valuation allowance and its impact on future effective tax rates.
• Review the status of the pending ERISA litigation appeal and potential indemnification obligations.
• Track U.S. housing starts data to gauge the lagged impact on the Insulation business performance.