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Owens Corning Q1 2008 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2008. Owens Corning is a global producer of glass fiber reinforcements and building materials. 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 and continues to manage post-bankruptcy obligations, including a Disputed Distribution Reserve.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 20% year-over-year, driven primarily by the full-quarter impact of the November 2007 acquisition of Saint-Gobain's reinforcements and composite fabrics businesses and favorable foreign currency exchange rates.
• Profitability Decline: Despite higher sales, the company reported a net loss of $15 million compared to a $1 million profit in Q1 2007. Gross margin percentage contracted from 17% to 14% due to volume/price declines in Insulating Systems, inflationary pressures on energy/raw materials in Roofing and Asphalt, and a $10 million impairment loss on assets held for sale.
• Segment Performance:
  • Composite Solutions: Sales surged 82% and earnings before interest and taxes (EBIT) rose 156% due to the acquisition and productivity gains.
  • Insulating Systems: Sales fell 11% and EBIT dropped 70% due to the downturn in U.S. residential construction.
  • Roofing and Asphalt: Sales were flat, but the segment reported a loss of $17 million (vs. $8 million loss prior year) due to inability to pass on inflation costs.
• Cash Flow: Operating cash outflow improved significantly to $107 million from $286 million in the prior year, largely due to reduced working capital requirements stemming from lower construction activity.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued weakness in U.S. new residential construction throughout 2008. Housing starts are forecast to be down 27% from 2007 levels. Demand for roofing shingles is expected to be weaker, and asphalt prices are projected to rise due to crude oil costs.
• Cost Reduction: The company initiated cost-saving projects in late 2007 (headcount reduction, facility closures) expected to yield annualized savings of at least $100 million. Additional restructuring charges of $4 million are anticipated for the remainder of 2008.
• Capital Allocation: Capital expenditures are projected at approximately $325 million for 2008. The company has a share repurchase program but made no repurchases in Q1 2008.
• Risks: Key risks include the cyclical nature of construction activity, volatility in energy and raw material costs, competitive pressures (particularly from China in composites), and the company's level of indebtedness. A credit rating downgrade by Moody's occurred in February 2008.
• Subsequent Event: On May 1, 2008, the company completed the divestiture of composite manufacturing facilities in Belgium and Norway for net proceeds of approximately $197 million.

Investor Verification Checklist

• Asset Impairment: Verify the $10 million impairment charge related to the Battice and Birkeland facilities and the subsequent sale proceeds of $197 million.
• Construction Exposure: Assess the sensitivity of Insulating Systems and Roofing segments to the projected 27% decline in U.S. housing starts.
• Debt Covenants: Review the impact of the February 2008 credit rating downgrade on interest rates for variable debt and compliance with financial covenants.
• Acquisition Integration: Monitor the realization of synergies and cost savings from the Saint-Gobain acquisition against the $12 million in integration costs incurred in Q1.
• Bankruptcy Reserves: Confirm the status of the $33 million Disputed Distribution Reserve and the $9 million environmental liability reserve.