Morningstar | USG's Struggles Continue in 4Q; Knauf's Acquisition Still Expected to Close in Early 2019
USG's operating margins through the first three quarters of 2018 were markedly lower compared with 2017 as the firm grappled with rising input costs. That trend continued during the fourth quarter and was exacerbated by lower sales volume. The no-moat-rated manufacturer of wallboard, ceiling tiles, and other building products reported fourth-quarter sales of $819 million, down about 1% year over year. The adjusted operating margin contracted 530 basis points to 6.7%, and adjusted earnings per share declined 51% year over year to $0.26.In terms of segment performance, wallboard segment revenue declined 2% year over year to $487 million. Wallboard volume was down 8%, but price was up 5%. Still, that price increase was not enough to offset rising costs, and segment adjusted operating margin declined 450 basis points year over year to 11.1%. Ceilings revenue declined 1% year over year to $121 million, and the segment's adjusted operating margin contracted a staggering 730 basis points to 12.4% due to lower volume and higher costs. Performance materials sales declined 1% to $94 million, and the segment posted a $2 million operating loss due to rising input costs and growth investments.
USG is in the process of being acquired by Knauf, a Germany-based building materials manufacturer. USG shareholders already received a $0.50 per share special dividend when they approved the deal in October and will receive $43.50 per share when the acquisition closes, which management still expects to happen in "early 2019." In our view, Knauf's acquisition has been a blessing for USG shareholders. Given USG's subpar performance in 2018, we think the stock would be trading well below its current price if not for the Knauf backstop. We maintain our $44 fair value estimate, which is commensurate with the per-share deal value.
In a Jan. 22 press release, USG announced that CEO Jenny Scanlon, CFO Matt Hilzinger, and other key executives will leave the firm following the Knauf acquisition. This news was not surprising to us, given that the elimination of highly compensated redundant corporate-level executives was likely a key cost synergy in Knauf's business case.
USG is a manufacturer of building materials and solutions. The company's segments are: Gypsum, which manufactures and markets gypsum and related products primary used in a variety of building applications; Performance Materials, which manufactures and markets products used in a variety of interior and exterior building applications of residential, nonresidential buildings and industrial; Ceilings, which manufactures and markets ceiling interior systems products including ceiling tile, ceiling grid, and specialty ceilings; and USG Boral Building Products, which manufactures and distributes products for wall, ceiling, floor lining and exterior systems that utilize gypsum wallboard.
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