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WIKI ANALYSIS
Owens Corning (NYSE: OC) makes building materials, including fiberglass insulation, asphalt, and roofing products.[1] The company is best known for its trademarked PINK colored residential and commercial fiberglass insulation - but in 2000, the company was forced to file Chapter 11 bankruptcy after over 460,000 personal injury lawsuits filed against the company due to the use of asbestos in its insulation.[2] Owens Corning emerged from bankruptcy in October 2006,[3] and it has since regained its 50% market share in the home and industrial insulation, reinforced plastics, and roofing supplies industries.[3]
Owens Corning posted net income of just $96 million in 2007, a small profit for a company with revenues over $4 Billion.[4] A key factor in this slim margin are the high fixed costs involved in making Owens Corning's products, and that its industry is characterized by short-term contracts that don't guarantee that these costs will be recouped if demand slows.[5] Furthermore, Owens Corning's revenue is also heavily correlated to the slumping U.S. Housing Market, which contributed to an 8% year-over-year revenue drop from 2006 to 2007.[4]
Business and Financial Overview
Business Overview
Owens Corning makes building products for both residential and commercial applications. The company has four main business divisions: Insulating Systems, Roofing and Asphalt, Other Building Materials, and Composite Solutions.[6] Owens Corning's largest division by sales is Insulating Systems, followed closely by Composite Solutions and Roofing and Asphalt. The company's smallest division is Other Building Materials and Services, as seen in the charts below. The company sells its products primarily to the transportation, wind energy, consumer electronics, telecommunications, infrastructure, and consumer products markets.[1]
Owens Corning, Inc. FY2007 10-K "Selected Financial Data[4]
Financial Data
From October 5th, 2000 up until October 31, 2006, Owens Corning operated as a bankrupt company.[7] As required by Generally Accepted Accounting Principles (GAAP) in the US, upon emerging from bankruptcy, Owens Corning adopted "fresh-start accounting" effective November 1, 2006[7] A note in Owens Corning's 10K states: The financial statements for the periods ended October 31, 2006 and December 31, 2005 do not reflect the effect of any changes in the Company's capital structure or changes in fair values of assets and liabilities as a result of fresh-start accounting.[7] Because of this, when looking historically at the financial statements of Owens Corning, it is best to treat it as a company which went public on November 1, 2006.
The sharp negative net income in 2005 is due to a $4.2 Billion provision for asbestos litigation claims.[4] The strong positive net income in 2006 is due to a gain on the settlement of liabilities subject to compromise.[4] Owens Corning has maintained relatively constant operating revenue, ranging from a low of $4.06 billion in 2003 to a high of $5.4 billion in 2006. Disregarding these two extraordinary charges to the income statement, Owens Corning's net income since 2003 has been relatively constant.[4]
Business Segments
Owens Corning's business is divided into four different segments: [6]
Owens Corning, Inc. FY2007 10-K "Business Overview" pg.1[7]
- Insulating Systems (34% of Sales) Owens Corning is known best for its largest division, its trademark pink insulation. In fact, Owens Corning is the largest manufacturer of residential, commercial and industrial insulation in the United States.[9] Owens Corning uses the brand name PINK FIBERGLAS Insulation.[6] The pink colored insulation, along with the name, PINK FIBERGLAS which the Pink Panther mascot endorse for the company, were trademarked in 1985.[9] The insulation is mainly sold to insulation installers, home centers like Home Depot (HD) and Lowe's Companies (LOW), lumberyards and distributors.[6]
- Roofing and Asphalt (27% of Sales) Owens Corning is the largest manufacturer of industrial, specialty, and roofing asphalts and the second largest producer of asphalt roofing shingles in the United States.[6] There has been a recent industry shift in the roofing industry toward using a new type of laminate shingle. Owens Corning has been able to leverage this shift due to its flexible production procedures, and has been able to adapt its factories to produce more of the new type of shingle.[6]
- Other Building Materials and Services (6% of Sales) The Other Building Materials and Services division is dominated by the Masonry Products business and the Construction Services business.[6] The Masonry Products division sells stone veneer products, which provide the texture and look of natural stone with the benefits of cost efficiency, installation ease, and reduced weight. The Construction Services business offer clients both remodeling and new construction services. Owens Corning's has 32 franchised branches offering its Basement Finishing System and SunSuite Sunrooms construction services.[10]
- Composite Solutions (33% of Sales) Owens Corning's Composite Solutions is one of the world's leading manufacturers of glass fiber reinforcement material.[10] These fiberglass products are key components to the automotive, transportation, industrial, infrastructure, building products, and consumer markets. Its fiberglass products are used in shingles, tubs, showers, automotive body panels, rail cars, shipping and refrigerated containers, trailers, and commercial ships. Fiberglass products also have thousands of uses in the consumer market, such as sporting goods and the marine industry.[10]
Key Trends and Forces
The struggles of the U.S. housing market have hurt OC's revenues
Sales of Fiberglass insulation, Owens Corning's's most profitable product, dropped 15.3% compared to 2006 due to the slowing of New Home Construction, while sales for the entire company were down 8%.[11] Demand for insulation products, and building products in general in the US, is highly levered to the U.S. Housing Market and more specifically New Home Construction and new commercial construction.[12] Due to the collapse of the Subprime lending industry, housing construction has slowed, demand for building products is the US is down, and building companies are being forced to fire employees.[13] Demand for building products is also highly levered to Interest Rates. When rates are high, fewer people build new homes or choose to remodel their existing homes because of the high cost of borrowing money.[12]
Increasing Costs of Energy, Materials and Costs of Transportation Keep Owens Corning's Costs High
In 2007, gross margin as a percentage of sales decreased 3% from 18.6% to 15.6%.[14] Price increases in commodities such as natural gas, asphalt and a large number of chemicals increased Owens Corning's costs and reduced its margins.[15] Costs rose 6% in the second quarter of 2008 and despite the slumping market, building material costs continue to rise, due to the high cost of fuel to both manufacture and transport the products.[16]
Increasing Public Awareness of Energy Efficiency Forces Owens Corning to Develop Better Products
Owens Corning is investing more heavily in Research and Development, recently developing a new type of attic insulation (Atticat), and Advertising, increasing advertising expense by $11 Million from 2005 to 2007[17] , in order to keep its products ahead of the competition in the minds of environmentally conscious customers.[6] Public demand for more energy efficient and 'green' products is rising due to decreased energy costs over time, as well as the desire to decrease individual carbon footprints.
Competition
All of the industries which Owens Corning operates in are highly competitive. Despite its high level of brand recognition with its PINK INSULATION, the company's products are generic and compete heavily on price.[18] Owens Corning's four closest competitors[19] are:
- Johns Manvile: An American based manufacturer of insulation, roofing products, and other building materials. In 2001 conglomerate holding company Berkshire Hathaway (BRK) bought Johns Manvile which is now acting as one of its subsidiaries.[20]
- Compagnie de Saint-Gobain (EPA: SGO): The manufacturers of CertainTeed Building products. This company operates more than 1,000 companies in three different sectors: Building Distribution, Construction Products and Innovative Materials.[21]
- Guardian Industries Corporation: Listed as 41st in Forbes list of largest private companies in 2006.[22] Guardian Industries is a major manufacturer of float glass, fabricated glass products, building materials, and a small number of products used in the automotive industry.[23]
- PPG Industries (PPG) An American manufacturer of glass and chemical products. PPG has many different divisions, however, their fiberglass manufacturing division, competes most closely with Owens Corning.[24]
* Berkshire Hathaway does not break out individual financials for Johns Manville
**Guardian Industries is a private company and does not report net income
IBISWorld Industry Report[19]
Market Share
Owens Corning is primarily listed as being in the Mineral product manufacturing industry in the United States.[19] The two largest companies in the mineral product manufacturing industry are Owens Corning and Johns Manville (under Berkshire Hathaway (BRK)) which each have a 12% market share. Compagnie de Saint-Gobain, Guardian Industries Corp., and PPG Industries (PPG) are the next three largest companies by revenue, however, these five largest companies only make up 33.5% of the industry. The rest of the industry is made up of smaller competitors, none of which has more than a 1% share.[19]
References
- ↑ 1.0 1.1 Owens Corning Company Overview
- ↑ Owens Corning Chapter 11 Bankruptcy Protection from the Courts
- ↑ 3.0 3.1 Answers.com Owens Corning
- ↑ 4.0 4.1 4.2 4.3 4.4 4.5 Owens Corning, Inc. FY2007 10-K "Selected Financial Data" pg.26
- ↑ Owens Corning, Inc. FY2007 10-K "Risk Factors" pg.9
- ↑ 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 Owens Corning, Inc. FY2007 10-K "Segment Overview" pg.2
- ↑ 7.0 7.1 7.2 7.3 Owens Corning, Inc. FY2007 10-K "Business Overview" pg.1
- ↑ IBISWorld Company Report: Owens Corning, Inc "Business Segments & NAICS Codes" pg.5
- ↑ 9.0 9.1 Wikipedia: Owens Corning
- ↑ 10.0 10.1 10.2 Owens Corning, Inc. FY2007 10-K "Segment Overview" pg.3
- ↑ Owens Corning, Inc. FY2007 10-K "Management's Discussion and Analysis of Financial Condition and Results of Operations" pg.29
- ↑ 12.0 12.1 Owens Corning, Inc. FY2007 10-K "Risk Factors" pg.9
- ↑ Housing Slump Spurs U.S. Building-Products Layoffs
- ↑ Owens Corning, Inc. FY2007 10-K "Results of Operations" pg.31
- ↑ Owens Corning, Inc. FY2007 10-K "Risk Factors" pg.10
- ↑ Building Material Costs Are Still Rising
- ↑ [http://owenscorning.com/investors/sec_filingsToc.asp?compid=71581&secLink=5495839+%26+repo=tenk Owens Corning, Inc. FY2007 10-K "Marketing and Advertising Costs" pg.108.
- ↑ Owens Corning, Inc. FY2007 10-K "Competition" pg.7
- ↑ 19.0 19.1 19.2 19.3 19.4 IBISWorld US Mineral Product Manufacturing Industry Market Research Report: Key Competitors pg. 29
- ↑ Wikipedia: Johns Manvile
- ↑ Hoovers: Saint Gobain
- ↑ Forbes.com: Largest Private Companies
- ↑ Wikipedia: Guardian Industries Corp.
- ↑ Wikipedia: PPG Industries
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