EUR 850.00 For Business Accounts Only

Morningstar | USG Releases 2Q Results; Knauf's Acquisition of USG Still Expected to Close in Early 2019

USG's second-quarter results were mixed, in our view. While the no-moat manufacturer of wallboard, ceiling products, and other performance materials reported strong revenue growth, profit margin was down significantly versus the year-ago quarter as the company struggled to mitigate rising input costs. Because USG is in the process of being acquired by Knauf, a German-based building materials manufacturer, the company declined to hold a conference call to discuss its second-quarter results with the investment community. USG's press release noted that it still expects the acquisition to close in early 2019. USG's stock price didn't react to the earnings release because Knauf's $44 per share purchase price is acting as backstop on the stock. We've maintained our $44 per share fair value estimate.

Wallboard revenue grew 6% year over year to $512 million. Wallboard price was up 2%, but that price increase was not enough to offset rising input and freight costs, and wallboard adjusted operating margin declined 290 basis points to 13.3%. Ceilings revenue grew a robust 18% year over year to $139 million, but the segment's adjusted operating margin contracted 50 basis points to 19%. Performance materials sales increased 5% year over year to $105 million; however, segment operating costs grew 12% due to input cost inflation and investment spending, which caused performance materials adjusted operating margin to fall 610 basis points year over year to 1.9%. On a consolidated basis, USG's adjusted operating margin declined 260 basis points to 10.9%. Still, USG's adjusted EPS increased $0.06 year over year to $0.50, but this improvement was due to a combination of lower interest expense, a lower effective tax rate, and a reduced share count versus the year-ago quarter.