Owens Corning Q1 2009 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009. Owens Corning operates as a leading global producer of glass fiber reinforcements and building materials, organized into 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 navigate a severe global economic downturn and a weak U.S. housing market.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $1,074 | $1,353 |
| Gross Margin | $158 (15% of sales) | $194 (14% of sales) |
| Operating Expenses | $176 | $173 |
| EBIT (Earnings Before Interest & Taxes) | $(18) | $21 |
| Net Loss Attributable to Owens Corning | $(28) | $(13) |
| Loss Per Share (Diluted) | $(0.23) | $(0.10) |
| Operating Cash Flow | $(288) | $(107) |
| Cash and Cash Equivalents (Ending) | $90 | $118 |
| Total Debt (Short + Long Term) | $2,398 | $2,218 |
| Available Credit Facility | $428 | $648 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 21% year-over-year, driven by a 48% drop in Composites sales due to global economic slowdown and a 24% drop in Insulation sales due to the U.S. housing market. This was partially offset by a 49% increase in Roofing sales.
- Profitability Shift: The company moved from an EBIT profit of $21 million in Q1 2008 to a loss of $18 million in Q1 2009. The Composites segment reported an EBIT loss of $18 million (down from $64 million profit), while Building Materials improved to $53 million profit (up from a $4 million loss), led by record performance in Roofing.
- Cost Reduction Charges: The company recorded $30 million in charges related to cost reduction actions (including $22 million in severance) in Q1 2009, compared to only $2 million in Q1 2008. These actions included production curtailments and headcount reductions.
- Accounting Change: The company changed its inventory accounting method from LIFO to FIFO effective January 1, 2009. This change improved reported EBIT by $1 million and reduced the net loss by $1 million for the quarter.
- Cash Flow: Operating cash flow usage increased significantly to $288 million, primarily due to working capital increases (higher receivables from Roofing sales and lower payables from reduced production) and pension contributions.
Guidance, Outlook, and Risks
- Outlook: Management expects continued weakness in the U.S. housing industry to negatively impact the Building Materials segment throughout 2009. While Roofing performance is expected to offset weakness in Insulation, the Composites segment faces uncertain demand recovery timing.
- Cost Actions: The company anticipates incurring an additional $16 million in cost reduction charges for the remainder of 2009. Total cost savings from actions taken in 2008 and 2009 are projected to be approximately $160 million.
- Liquidity: The company maintains ample liquidity with $90 million in cash and $428 million available on its senior revolving credit facility. There are no significant debt maturities until Q4 2011. Credit ratings remain investment grade (BBB- from S&P, Ba1 from Moody's) but with a negative outlook.
- Risks: Key risks include the severity of the global economic downturn, raw material costs (specifically asphalt for Roofing), competitive pricing pressures, and the ability to utilize net operating loss carryforwards.
- Unusual Items: A $6 million mark-to-market loss was recorded on an energy supply derivative contract due to capacity curtailments. Additionally, the company holds a $31 million Disputed Distribution Reserve related to its 2006 bankruptcy emergence.
Investor Verification Checklist
- Working Capital Trends: Verify the sustainability of the $121 million increase in receivables and the $170 million decrease in accounts payable, which drove the negative operating cash flow.
- Roofing Margin Sustainability: Assess whether the record EBIT margins in the Roofing business can be maintained given potential competitive pricing pressures and raw material volatility.
- Cost Reduction Execution: Monitor the realization of the projected $160 million in annual cost savings and the impact of further capacity curtailments on future revenue.
- Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios under the Senior Credit Facilities, especially given the negative credit outlook.
- Inventory Valuation: Review the impact of the LIFO-to-FIFO accounting change on future cost of sales and gross margin comparisons.