Summary

• Owens Corning reports a beat on adjusted EPS, but that figure adjusts for negative one-time items and not positive one-time items. Actual EPS misses expectations.
• Despite the supposed beat in earnings for Q3, management reduces guidance on full year outlook EBIT by $15 million, leaving questions as to the impact going into 2015.
• The company has minimal cash balances to sustain the quarterly dividend or continue with the share buy back program.
• Large increases to the receivables balance puts into doubt whether the company can collect on the money it is owed.

Owens Corning (NYSE:OC ) reported Q3 results on October 22. My article from earlier this week claimed OC may be headed for a collapse. So far that prediction has not come true, but there are several warning signs when diving into the financials that show that the company could falter.

For the third quarter, OC claimed adjusted EPS to be 63 cents versus analyst consensus of 50 cents with a slight miss on revenues of $1,380 million versus consensus of $1,390 million. Actual EPS was 44 cents per share, below analyst expectations.

The adjustments allowed for positive headlines, but diving deeper into the numbers shows that OC chose to exclude negative one-time impacts in the adjusted figure while including positive one-time impacts. The one-time negative events totaled $25 million and comprised of charges related to the cost reduction program and an impairment loss.

The company chose to include in its adjusted earnings two items that appear to be extraordinary. Corporate expenses were reduced by $6 million, thanks to a gain on a Brazilian energy contract that is expected to reverse in Q4. Expenses were also reduced by an undisclosed amount, thanks to a decrease on performance-based compensation as OC’s poor performance for the first nine months and outlook for the remainder of Q4 allowed the company to reduce its accrual for bonuses to management and employees.

Had these figures been disclosed as extraordinary items the adjusted EPS would have likely been much closer to the real EPS of 44 cents than the adjusted figure of 63 cents. The manipulation of the adjusted EPS figure to exclude negative unusual items but include the positive ones raises a warning sign as the company is trying to show that it beat on earnings when in reality the factors on the revenue side that have negatively impacted earnings have not been overcome.

Luckily most analysts see through OC’s accounting tricks, as shown by an excerpt from J.P. Morgan’s alert on the morning of the release:

The J.P. Morgan report also makes note of OC’s warning for 2014 that EBIT could be $15M lower than the full year target of $416 million. The reduction in corporate expenses of about $20 to $30 million means that EBIT risks on the revenue side actually total around $40 million. Analyst consensus for the full year was $408 million in EBIT without the aggressive cost containment and reduced compensation expense so the lowered guidance should result in lowered analyst targets for 2014 and 2015. The competitive conditions that exist to drive revenue and margins lower in Q4 on the roofing business are going to exist starting in 2015 and may last for an indefinite period of time throughout the year. So the negative impact on 2015 could be significant and would be a cash flow drain on the company as it tries to maintain a dividend and follow up on an authorized stock buyback program.

As I touched on in my previous article, receivables appear to be growing at high rate for a company with flat revenue growth. Usually this is the time of year where OC collects on the balances it is owed. However, this year Q3 receivables grew when compared to Q2. The chart below shows the receivables balance for the past eight quarters with the quarter-over-quarter and year-over-year change.

Throughout 2013, the company had receivables balances that followed a consistent seasonal pattern and were $5 million to $15 million lower than 2012 balances. This year receivables are up substantially despite flat revenue and in Q3 rose $56 million from Q2 instead of the usual decline. Q3 2014 has a receivables balance that is $146 million higher than Q3 2013.

The increasing receivables despite flat revenue growth raises questions as to the quality of OC’s earnings. Price declination on the roofing business is one competitive challenge that gets scrutinized all the time. But is OC also giving more friendly credit terms to clients as another competitive mechanism? These figures suggest so. In the short term, it’s a lever the company can use that doesn’t immediately impact margins like cheaper prices do. But it exposes the company to additional credit risks and squeezes its cash balance. Perhaps OC isn’t giving more lenient credit terms and is just having trouble collecting. That would mean these accounts are at risk of being written off. OC has a very low allowance for doubtful accounts. So any receivables write down would be a direct hit to the bottom line, although it might be considered another extraordinary line item.

The drain on cash, thanks to the poor performance of the roofing business and the inability to quickly collect on the company’s receivables, is putting into doubt the longevity of the dividend and the company’s ability to continue with the stock buyback program. The company admitted on its conference call that due to limited cash resources, it was unable to purchase any shares during the quarter even when OC headed towards 52-week lows as it had other operating priorities and had to pay the dividend. The company has 7.7 million shares authorized for buyback which would cost in excess of $230 million. With the burden of having to pay out about $75 million in dividends per year, it would be next to impossible to purchase a significant amount of shares in light of the uncertain prospects on the roofing business. I predict that in 2015, the company will have to drop either the dividend or the share buyback as cash constraints won’t allow for both.

OC has attempted to prop up the stock price by making promises to the market that just aren’t sustainable. If the dividend or share buyback is cancelled, that could cause downward pressure on the stock as shareholders start to question management. While gains in the composite and insulation businesses have been encouraging for shareholders, the key focus of analysts and the company has been the faltering roofing business. With OC’s operating issues being dwelled upon by the market, most people have overlooked the sizeable increase in receivables. The inability to collect cash quickly is further limiting the company’s cash flow and if there is a downturn in the economy or housing, OC could be left with a large balance of receivables it can’t collect. With roofing revenue and receivables potentially going the wrong way for the company, it may have bigger issues to deal with than lack of dividend or share buyback — the need to refinance the debt coming due in 2016 with tight cash constraints, stagnant revenues and shrinking margins could cause the stock to collapse. Creditors are not kind to businesses with leveraged balance sheets and poor revenue growth.

Disclosure: The author is short OC. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.