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USG Corporation (USG), Pitney Bowes Inc. (PBI), The Goodyear Tire & Rubber Company (GT): Is Debt a Concern at These Three Companies?

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Debt can be a terrible problem for some companies and can drag down even the best businesses. So is debt manageable or a major concern at these three companies that would otherwise appear to be good opportunities for investment?

Victim of the housing bubble

USG Corporation (NYSE:USG)

First up is USG Corporation (NYSE:USG). USG has attracted some big-name investors, including Warren Buffett. However, this holding is almost a nonexistent share of Buffett’s portfolio ($200 million) and is left over from an acquisition many years ago, so I wouldn’t place to much weight on this. However, Buffett also controls a significant portion of USG’s debt.

Metric Value
Total debt $2.3 billion
Net debt $1.8 billion
Net debt to equity 128
Net debt to EBITDA 56
Largest debt issue $500 million
Average maturity 2017
Average interest rate 8%
Interest expense, Q2 2013 $50 million
Interest cover Q2 2013 by EBITDA 2.3

Source: Morningstar.

USG Corporation (NYSE:USG)’s debt position is improving after it struggled through the majority of the last five years as orders slumped during the housing crisis. Indeed, in the first two quarters of this year the company reported a positive net income for the first time since 2008. EBIT interest cover on debt rose from 0.9 times during Q4 2012 to 1.7 times during the first quarter of this year.

In addition, the company’s cash flow is improving, with free cash flow positive for three of the last four quarters (the negative quarter was due to a fall in accounts receivable).

USG Corporation (NYSE:USG) has $500 million in cash on its balance sheet, so debt repayments should be manageable. That said, with an average debt maturity of 2017, the company could be exposed to interest rate changes, which would place pressure on income and the company’s ability to refinance. Moreover, with a net debt-to-EBITDA ratio of 56, the company will not be able to pay down debt anytime soon and will have to roll over most of the issues.

All in all, USG Corporation (NYSE:USG)’s debt is manageable for the time being, so long as the housing recovery continues. However, the company could be sailing into stormy waters when the majority of its huge debt pile matures in 2017. That said, Buffett’s $300 million loan is convertible into stock and will not need to be paid back.

Don’t discount this old dog just yet

Next up is Pitney Bowes Inc. (NYSE:PBI) with a debt-to-EBITDA ratio of three.

Pitney Bowes Inc. (NYSE:PBI)’s outlook is brighter than that of USG Corporation (NYSE:USG), as the company is cash-flow positive, has a longer average maturity and the average interest rate is almost half of what USG is having to pay.

Metric Value
Debt $3.6 billion
Net debt $3 billion
Net debt to equity 30
Net debt to EBITDA 3
Largest debt issue $500 million
Average maturity 2018
Average interest rate 5%
Interest expense, Q2 2013 $31 million
Interest cover Q2 2013 by EBITDA (ex ex) 4.8

Source: Morningstar.

In addition, Pitney Bowes Inc. (NYSE:PBI) paid down $300 million in debt earlier this year from cash on hand, and the next maturity is in August 2014 — a $300 million issue easily payable from $600 million in cash the company has in the bank. The next maturity is in March 2015 — another $300 million debt issue again, easily payable from cash currently on hand.

Moreover, Pitney Bowes Inc. (NYSE:PBI)’s longest-dated maturity is 2037 — a $500 million issue locked in at 5.25%, which gives the company plenty of time to pay back the issue. (It is probable that before the issue reaches maturity, interest rates will rise, so Pitney has done well to lock in this low interest rate, which is below what many sovereigns are paying for borrowing over a similar period.)

Pitney Bowes Inc. (NYSE:PBI)’s debt currently seems controllable, and the company’s outlook is improving all around.

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