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Owens Corning 10-Q Summary: Quarter Ended September 30, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2009, and the nine months ended on that date. Owens Corning operates in two reportable segments: Composites (Reinforcements and Downstream) and Building Materials (Insulation, Roofing, and Other). The company emerged from Chapter 11 bankruptcy in 2006 and continues to manage its post-emergence financial structure. Financial results for all periods presented have been retrospectively adjusted due to a change in inventory accounting from LIFO to FIFO effective January 1, 2009.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The company returned to profitability in Q3 2009 ($80M net earnings) compared to a significant loss in Q3 2008 ($(807)M). The 2008 loss was heavily impacted by a non-cash $901M valuation allowance charge against U.S. deferred tax assets.
• Segment Performance:
  • Building Materials: EBIT improved significantly to $156M (Q3) and $352M (9 months), driven by strong performance in the Roofing business (EBIT of $177M in Q3). This offset weakness in the Insulation business, which reported an EBIT loss of $(9)M in Q3 due to low housing starts.
  • Composites: EBIT was $2M in Q3 (vs. $54M in 2008) and $(35)M for the nine months. Demand remains weak, though the segment achieved its first profitable quarter of 2009.
• Cost Reduction: The company recorded $45M in charges related to cost reduction actions for the nine months ended Sept 30, 2009, primarily severance and accelerated depreciation, compared to $8M in the prior year. Management anticipates annual cost savings of at least $160M in 2009.
• Inventory Accounting: The shift from LIFO to FIFO improved reported gross margins and earnings comparability.

Guidance, Outlook, and Risks

• Outlook: Management expects continued weakness in the U.S. housing market to negatively impact the Building Materials segment through the remainder of 2009. However, sustained gross margins in Roofing are expected to offset Insulation weakness. Composites demand is expected to trend upward as global industrial demand improves, though the recovery rate is uncertain.
• Liquidity: The company maintains strong liquidity with $387M in cash and $947M available on its senior revolving credit facility. There are no significant debt maturities until Q4 2011.
• Pension Plan Changes: Effective January 1, 2010, the company will freeze a portion of its U.S. Pension Plan for salaried and hourly employees while enhancing its 401(k) plan. A re-measurement in August 2009 increased the pension liability by $50M due to a lower discount rate.
• Risks: Key risks include economic conditions, raw material costs (specifically asphalt for roofing), competitive pricing pressure, and the ability to utilize net operating loss carryforwards. The company remains a Potentially Responsible Party (PRP) for environmental remediation at 39 sites.

Investor Verification Checklist

• Roofing Margin Sustainability: Verify if the high unit margins in the Roofing business can be sustained given potential competitive pricing pressures and asphalt cost volatility.
• Insulation Capacity Actions: Monitor the effectiveness of capacity curtailments in the Insulation segment to align costs with depressed housing demand.
• Composites Recovery: Assess the trajectory of global industrial demand to determine if the Composites segment can return to pre-2008 profitability levels.
• Pension Liability Impact: Review the long-term cash flow implications of the $50M pension liability increase and the upcoming plan freeze.
• Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios, particularly as the company manages its $2.2B debt load.