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Owens Corning 10-Q Summary: Period Ended June 30, 2009

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Owens Corning, a global producer of glass fiber reinforcements and building materials, for the period ended June 30, 2009. The company operates through two reportable segments: Composites (Reinforcements and Downstream) and Building Materials (Insulation, Roofing, and Other). The financial results reflect a challenging economic environment characterized by a downturn in the U.S. housing market and global economic weakness.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 23% year-over-year for the quarter and 22% for the six-month period. This was driven by significant volume declines in the Composites segment (-41% Q/Q) and Insulation business, partially offset by a 14% increase in Roofing sales due to higher selling prices.
• Profitability: While GAAP Net Earnings declined, Adjusted EBIT (a non-GAAP measure excluding restructuring and other items) increased to $108 million for the quarter and $140 million for the six months, compared to $87 million and $143 million in the prior year periods, respectively. This improvement was primarily driven by the Roofing business.
• Cost Reduction Charges: The company recorded $11 million in cost reduction charges for the quarter and $41 million for the six months, compared to $4 million and $6 million in the prior year. These charges relate to severance and production curtailments.
• Accounting Change: The company changed its inventory accounting method from LIFO to FIFO effective January 1, 2009. This change increased reported EBIT by $5 million for the quarter and $6 million for the six months compared to the prior method.

Guidance, Outlook, and Risks

• Outlook: Management expects continued weakness in the U.S. housing industry to negatively impact demand in the Building Materials segment throughout 2009. However, they anticipate incremental demand improvement in the Reinforcements business for the third and fourth quarters. Roofing performance is expected to continue offsetting weakness in Insulation and Other businesses.
• Liquidity: The company strengthened its liquidity position by issuing $350 million of 9.0% senior notes due in 2019, using proceeds to reduce borrowings under its senior revolving credit facility. As of June 30, 2009, the company had $889 million available on its credit facility and $110 million in cash. No significant debt maturities are due until the fourth quarter of 2011.
• Cost Actions: The company anticipates annual cost savings of approximately $160 million in 2009 compared to 2008 due to capacity curtailments, furnace downtime, and headcount reductions. An additional $8 million in cost reduction charges is expected for the remainder of 2009.
• Risks: Key risks include the pace of demand recovery, competitive pricing pressures, raw material costs (particularly asphalt), and foreign exchange fluctuations. The company also faces contingent liabilities related to environmental remediation at 39 sites, with a reserve of $10 million.

Investor Verification Checklist

• Roofing Margin Sustainability: Verify if the significant EBIT improvement in the Roofing segment is sustainable given potential competitive pricing pressures and raw material cost volatility.
• Composites Recovery: Monitor the pace of demand recovery in the Reinforcements business to validate management's outlook for the second half of 2009.
• Cost Reduction Execution: Track the realization of the projected $160 million in annual cost savings and the timing of the remaining $8 million in restructuring charges.
• Liquidity Position: Confirm the company's ability to maintain covenant compliance and manage debt maturities in the event of prolonged economic weakness.
• Inventory Valuation: Assess the long-term impact of the LIFO-to-FIFO accounting change on future cost of sales and gross margins.