Owens Corning 10-Q Summary: Quarter Ended September 30, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Owens Corning, a leading global producer of glass fiber for building materials and composite systems. The report covers the three and nine months ended September 30, 2008. The company operates four reportable segments: Composite Solutions, Insulating Systems, Roofing and Asphalt, and Other Building Materials and Services. The company emerged from Chapter 11 bankruptcy in October 2006.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2008 |
|---|---|---|
| Net Sales | $1,629 | $4,556 |
| Gross Margin | $256 (16% of sales) | $695 (15% of sales) |
| Net Earnings (Loss) | $(810) | $(794) |
| Diluted EPS (Loss) | $(6.36) | $(6.17) |
| Adjusted EBIT | $111 | $242 |
| Cash and Cash Equivalents | $76 | $76 (Ending Balance) |
| Total Debt (Short + Long Term) | $2,090 | $2,090 (Ending Balance) |
| Unused Credit Lines | $754 | $754 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 28% year-over-year for the quarter and 24% for the nine-month period. Growth was driven by the 2007 acquisition of Saint-Gobain's composite businesses and higher selling prices in the Roofing and Asphalt segment, partially offset by volume declines in Insulating Systems due to the U.S. housing downturn.
- Significant Loss: The company reported a net loss of $810 million for the quarter and $794 million for the nine months, compared to net earnings of $112 million and $142 million in the prior year periods. This was primarily due to a non-cash income tax charge of $899 million recorded in Q3 2008 to establish a valuation allowance against U.S. deferred tax assets.
- Segment Performance:
- Roofing and Asphalt: EBIT surged to $95 million (from $15 million prior year) due to price increases and storm-related demand.
- Insulating Systems: EBIT dropped to zero (from $42 million prior year) due to volume declines and raw material inflation.
- Composite Solutions: EBIT increased to $54 million (from $26 million prior year) driven by the acquisition.
- Divestitures: The company completed the sale of two composite plants in Europe in May 2008 for $192 million in net cash proceeds.
Guidance, Outlook, and Risks
- Housing Market Outlook: Management anticipates continued weakness in U.S. new residential construction into 2009, citing housing starts down 35% from 2007 levels. This negatively impacts Insulating Systems and Other Building Materials segments.
- Liquidity: Despite volatile credit markets, the company maintains sufficient liquidity with $76 million in cash and $754 million in unused committed credit lines. The company is in compliance with all debt covenants.
- Capital Allocation: The company repurchased approximately 1.9 million shares in Q3 2008. Capital expenditures for 2008 are projected to exceed $350 million.
- Risks: Key risks include the severity of the U.S. housing downturn, inflation in energy and raw material costs (specifically asphalt and natural gas), and the ability to utilize net operating loss carryforwards.
- Legal/Contingencies: The company faces ongoing litigation regarding pension fund investments (Brown v. Owens Corning) and environmental remediation liabilities at 38 sites, with a reserve of $9 million.
Investor Verification Checklist
- Valuation Allowance Impact: Verify the long-term implications of the $899 million non-cash tax charge and the company's ability to reverse it if profitability improves.
- Housing Starts Correlation: Monitor U.S. Census Bureau housing starts data to gauge the trajectory of the Insulating Systems segment.
- Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios given the negative outlook on credit ratings (BBB- negative / Ba1 negative).
- Acquisition Synergies: Assess the realization of cost synergies from the Saint-Gobain acquisition against rising integration costs ($52 million YTD 2008).
- Share Repurchases: Track the remaining $3.6 million shares available under the buyback program and the company's cash flow capacity to fund further repurchases.