FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-8864
USG CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3329400
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
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As of July 31, 1997, 46,411,860 shares of USG common stock were outstanding.
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Table of Contents
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PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months and Six Months Ended
June 30, 1997 and 1996 3
Consolidated Balance Sheet:
As of June 30, 1997 and December 31, 1996 4
Consolidated Statement of Cash Flows:
Six Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
Report of Independent Public Accountants 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
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USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
(Unaudited)
Three Months Six Months
ended June 30, ended June 30,
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1997 1996 1997 1996
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Net sales $ 723 $ 642 $ 1,396 $ 1,244
Cost of products sold 521 482 1,017 953
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Gross profit 202 160 379 291
Selling and administrative
expenses 72 65 138 132
Amortization of excess
reorganization value 42 42 84 84
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Operating profit 88 53 157 75
Interest expense 16 20 33 39
Interest income (1) (1) (1) (1)
Other expense, net 1 1 1 1
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Earnings before taxes
on income 72 33 124 36
Taxes on income 45 29 82 47
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Net earnings/(loss) 27 4 42 (11)
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Net earnings/(loss) per
common share 0.55 0.09 0.87 (0.23)
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Dividends paid per common share -- -- -- --
Average number of common shares 46,092,895 45,506,148 46,009,868 45,466,664
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See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
As of As of
June 30, December 31,
1997 1996
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Assets
Current Assets:
Cash and cash equivalents $ 42 $ 44
Receivables (net of reserves - $17 and $17) 322 274
Inventories 205 185
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Total current assets 569 503
Property, plant and equipment (net of reserves
for depreciation and depletion - $204 and $177) 903 887
Excess reorganization value (net of accumulated
amortization - $719 and $635) 125 210
Other assets 221 218
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Total Assets 1,818 1,818
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 155 141
Accrued expenses 198 200
Notes payable 3 7
Current portion of long-term debt -- 42
Taxes on income 1 5
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Total current liabilities 357 395
Long-term debt 705 706
Deferred income taxes 195 192
Other liabilities 547 548
Stockholders' Equity/(Deficit):
Preferred stock -- --
Common stock 5 5
Capital received in excess of par value 235 231
Deferred currency translation (19) (10)
Reinvested earnings/(deficit) (207) (249)
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Total stockholders' equity/(deficit) 14 (23)
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Total Liabilities and Stockholders' Equity 1,818 1,818
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See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six Months ended
June 30,
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1997 1996
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Operating Activities:
Net earnings/(loss) $ 42 $ (11)
Adjustments to reconcile net earnings/(loss) to net cash:
Amortization of excess reorganization value 84 84
Depreciation, depletion and other amortization 34 33
Deferred income taxes 3 10
Net gain/(loss) on asset dispositions -- (2)
(Increase)/decrease in working capital:
Receivables (48) (50)
Inventories (20) (1)
Payables 10 15
Accrued expenses (2) (14)
Increase in other assets (3) (19)
Increase/(decrease) in other liabilities (1) 64
Other, net 2 1
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Net cash flows from operating activities 101 110
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Investing Activities:
Capital expenditures (56) (73)
Net proceeds from asset dispositions 1 9
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Net cash flows to investing activities (55) (64)
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Financing Activities:
Issuance of Debt 91 --
Repayment of debt (141) (69)
Short-term borrowings/(repayments), net 2 7
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Net cash flows to financing activities (48) (62)
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Net decrease in cash & cash equivalents (2) (16)
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Cash & cash equivalents at beginning of period 44 70
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Cash & cash equivalents at end of period 42 54
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Supplemental Cash Flow Disclosures:
Interest paid 33 39
Income taxes paid 85 33
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See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(1) The consolidated financial statements of USG Corporation and its
subsidiaries ("USG" or the "Corporation") included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. In the opinion of management,
the statements reflect all adjustments, which are of a normal recurring nature,
necessary to present fairly the Corporation's financial position as of June 30,
1997 and December 31, 1996; and results of operations and cash flows for the six
months ended June 30, 1997 and 1996. While these interim financial statements
and accompanying notes are unaudited, they have been reviewed by Arthur Andersen
LLP, the Corporation's independent public accountants. These financial
statements and notes are to be read in conjunction with the financial statements
and notes included in the Corporation's 1996 Annual Report on Form 10-K dated
March 5, 1997.
(2) In the first quarter of 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." This statement is effective for fiscal years after
December 15, 1997, and when adopted, may require restatement of prior years'
earnings per share. Under SFAS No. 128, USG's net earnings per share for each
1997 and 1996 quarter were unchanged from the amounts reported.
In the second quarter of 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." As required, the Corporation will adopt
these statements for fiscal years beginning after December 15, 1997.
(3) In accordance with Securities and Exchange Commission Release No.
33-7386, governing disclosure requirements for financial instruments, the
Corporation is providing the following description of accounting policies used
for financial instruments.
The Corporation uses derivative instruments to manage well-defined interest
rate, energy cost and foreign currency exposures. The Corporation does not use
derivative instruments for trading purposes. The criteria used to determine if
hedge accounting treatment is appropriate are: (i) the designation of the hedge
to an underlying exposure (ii) whether or not overall uncertainty is being
reduced and (iii) if there is a correlation between the value of the derivative
instrument and the underlying obligation.
Interest Rate Derivative Instruments:
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The Corporation utilizes interest rate swap agreements to manage the impact
of interest rate changes on its underlying floating rate debt. The Corporation
designates these arrangements as hedges and amounts payable or receivable under
these swap agreements are accrued as an increase or decrease to interest expense
on a current basis. To the extent the underlying floating rate debt is reduced,
the Corporation terminates swap agreements accordingly so as not to be in an
overhedged position. In such cases, the Corporation recognizes gains and/or
losses in the period the agreement is terminated.
Energy Cost Derivative Instruments:
-----------------------------------
The Corporation uses swap agreements to hedge anticipated purchases of fuel
to be utilized in the manufacturing processes for gypsum wallboard and ceiling
tile. Under these swap agreements, the Corporation receives or makes payments
based on the differential between a specified price and the actual closing price
for the current month's energy price contract. These contracts are designated as
hedges and qualify for hedge accounting. As such, gains or losses are recognized
in the period contracts are closed. Amounts payable or receivable under these
swap agreements are accrued as an increase or decrease to cost of goods sold,
along with the actual spot energy cost of the corresponding underlying hedge
transaction, the combination of which amounts to the predetermined specified
contract price.
Foreign Currency Derivative Instruments:
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The Corporation has operations in a number of countries and has
intercompany transactions among them and, as a result, is exposed to changes in
foreign currency exchange rates. The Corporation manages most of these exposures
on a consolidated basis, which allows netting of certain exposures to take
advantage of any natural offsets. To the extent the net exposures are hedged,
forward contracts are used. Gains and/or losses on these foreign currency hedges
are included in income in the period in which the exchange rates change.
(4) Income tax expense amounted to $45 million and $82 million for the
three months and six months ended June 30, 1997, respectively. For the
respective 1996 periods, income tax expense amounted to $29 million and $47
million. The Corporation's income tax expense is computed based on pre-tax
earnings excluding the noncash amortization of excess reorganization value,
which is not deductible for income tax purposes.
The Corporation used net operating loss carryforwards totaling $100 million
from 1994 through 1996 to offset U.S. taxable income in those years. Because of
the uncertainty regarding the application of the Internal Revenue Code to these
carryforwards as a result of USG's financial restructuring in May 1993, these
carryforwards could be reduced or eliminated.
(5) As of June 30, 1997, 2,641,515 common shares were reserved for future
issuance in conjunction with existing stock option grants. In addition,
1,650,000 common shares were reserved for future grants under the Omnibus
Management Incentive Plan and 6,495 common shares were reserved for future
grants under the Long-Term Equity Plan. These plans were approved by the
stockholders of the Corporation in 1997 and 1995, respectively.
(6) One of the Corporation's subsidiaries, United States Gypsum Company
("U.S. Gypsum"), is a defendant in asbestos lawsuits alleging both property
damage and personal injury. See Part II, Item 1. "Legal Proceedings" for
information concerning the asbestos litigation.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its earnings or consolidated financial
position. See Part II, Item 1. "Legal Proceedings" for additional information on
environmental litigation.
(7) Under a revolving accounts receivable facility, the trade receivables
of U.S. Gypsum and USG Interiors, Inc. are being purchased by USG Funding
Corporation ("USG Funding") and transferred to a trust administered by Chase
Manhattan Bank as trustee. Certificates representing an ownership interest of up
to $130 million in the trust have been issued to an affiliate of Citicorp North
America, Inc. USG Funding, a special purpose subsidiary of USG Corporation, is a
separate corporate entity with its own separate creditors which will be entitled
to be satisfied out of USG Funding's assets prior to any value in USG Funding
becoming available to its shareholder. Receivables and debt outstanding in
connection with the receivables facility remain in receivables and long-term
debt, respectively, on the Corporation's consolidated balance sheet.
(8) In the second quarter of 1993, the Corporation completed a
comprehensive restructuring of its debt. The Corporation accounted for the
restructuring using the principles of fresh start accounting as required by
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." Pursuant to such principles,
individual assets and liabilities were adjusted to fair market value. Excess
reorganization value, the portion of the reorganization value not attributable
to specific assets, is currently being amortized over a five- year period
through April 1998.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
As a result of USG's financial restructuring in 1993 and the restructuring's
continuing effect on financial reporting, USG reports EBITDA (earnings before
interest, taxes, depreciation, depletion, amortization and certain other income
and expense items) to facilitate comparisons of current and historical results.
EBITDA is also helpful in understanding cash flow generated from operations that
is available for taxes, debt service and capital expenditures. EBITDA should not
be considered by investors as an alternative to net earnings as an indicator of
the Corporation's operating performance or to cash flows as a measure of its
overall liquidity.
Results of Operations
Consolidated Results
Strong demand led to record second quarter shipments of SHEETROCK brand gypsum
wallboard, SHEETROCK joint compound and DUROCK cement board. Second quarter
records were also achieved for sales of AURATONE ceiling tile and DONN grid
products. As a result of these records and higher realized selling prices on
SHEETROCK wallboard, USG reported second quarter net sales of $723 million, up
$81 million, or 12.6%, versus the same period last year. EBITDA of $147 million
increased $37 million, or 33.6%.
For the first six months of 1997, net sales totaled $1,396 million, up $152
million, or 12.2%, over the first six months of 1996, while EBITDA of $274
million, increased $85 million or 45.0%.
Gross profit as a percentage of net sales was 27.9% and 27.1% in the second
quarter and first six months of 1997, respectively, compared with 24.9% and
23.4% in the same 1996 periods. These increases primarily reflect improved gross
profit margins on all major product lines. Additionally, gross profit in the
first quarter of 1996 was lowered by a $5 million charge to improve operating
efficiencies of USG's European businesses.
Selling and administrative expenses in the second quarter and first six months
of 1997 increased 10.8% and 4.5%, respectively, over the prior-year periods.
These increases largely reflect higher levels of expenses related to
compensation and benefits and a joint initiative by USG's North American Gypsum
and Worldwide Ceilings units to enhance customer service by upgrading their
order fulfillment systems.
Excess reorganization value, which was established in connection with USG's
financial restructuring in 1993 is currently being amortized over a five-year
period through April 1998. This noncash amortization reduced operating profit by
$42 million and $84 million in each 1997 and 1996 second quarter and first
six-months period, respectively.
Interest expense in the second quarter and first six months of 1997 decreased
20.0% and 15.4%, respectively, versus the corresponding 1996 periods. These
declines primarily reflect the continuation of USG's debt reduction program.
Income tax expense amounted to $45 million and $82 million for the three months
and six months ended June 30, 1997, respectively. For the respective 1996
periods, income tax expense amounted to $29 million and $47 million. The
Corporation's income tax expense is computed based on pre-tax earnings excluding
the noncash amortization of excess reorganization value, which is not deductible
for income tax purposes.
Net earnings of $27 million and $4 million were reported in the second quarter
of 1997 and 1996, respectively. Noncash amortizations of excess reorganization
value and reorganization debt discount (included in interest expense) reduced
net earnings by $42 million, or $0.87 per share, and $43 million, or $0.91 per
share, in the respective quarters.
Net earnings of $42 million were reported in the first six months of 1997, while
a net loss of $11 million was reported in the first six months of 1996.
Comparable amortizations in the six-month periods amounted to $84 million, or
$1.75 per share, and $86 million, or $1.88 per share, respectively.
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Core Business Results
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Net Sales EBITDA
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Periods ended June 30 Three Months Six Months Three Months Six Months
(dollars in millions) ----------------------------------------- ----------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
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North American Gypsum:
U.S. Gypsum Company $ 391 $ 338 $ 766 $ 660 $ 116 $ 84 $ 221 $ 154
L&W Supply Corporation 250 212 471 400 10 7 16 12
CGC Inc. (gypsum) 30 28 61 51 4 4 9 6
Other subsidiaries 24 19 44 35 8 7 13 11
Eliminations (106) (85) (206) (161) (1) -- (1) --
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Total 589 512 1,136 985 137 102 258 183
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Worldwide Ceilings:
USG Interiors, Inc. 106 100 204 196 17 14 30 26
USG International 58 57 113 112 4 2 7 (3)
CGC Inc. (interiors) 8 7 16 15 1 1 2 2
Eliminations (13) (10) (26) (20) -- -- -- --
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Total 159 154 307 303 22 17 39 25
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Corporate -- -- -- -- (12) (9) (23) (19)
Eliminations (25) (24) (47) (44) -- -- -- --
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Total USG Corporation 723 642 1,396 1,244 147 110 274 189
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North American Gypsum
Net sales of $589 million and EBITDA of $137 million in the second quarter of
1997 were up 15.0% and 34.3%, respectively, over the second quarter of 1996. For
the first six months of 1997, net sales of $1,136 million and EBITDA of $258
million represented increases of 15.3% and 41.0% respectively, over the first
six months of 1996.
Comparing the second quarter of 1997 to the second quarter of 1996, U.S. Gypsum
shipped 2.061 billion square feet of SHEETROCK brand gypsum wallboard, a record
for any second quarter in USG's history and a 4.7% increase versus the
comparable 1996 level of 1.969 billion square feet. The average realized selling
price for SHEETROCK wallboard was $123.42 per thousand square feet, up $16.64,
or 15.6%. Manufacturing unit costs for SHEETROCK wallboard were reduced due to
improved operating efficiencies resulting from cost reduction projects
implemented in 1996 and 1997. Capacity utilization at U.S. Gypsum's wallboard
plants increased to approximately 98% from 93%. Shipments of SHEETROCK brand
joint compound and DUROCK cement board also set second quarter records.
L&W Supply Corporation, USG's building products distribution business, reported
net sales that were the highest level for any quarter in the company's history.
This achievement reflects record volume and realized selling prices for
wallboard. In addition, as a result of acquisitions and internal growth, record
sales were also reported for L&W's complementary building products. As of June
30, 1997, L&W Supply operated 169 centers, having added five centers during the
second quarter of 1997.
CGC Inc.'s second-quarter gypsum results reflect higher levels of shipments and
selling prices on wallboard exports to the United States, offset by somewhat
lower levels of Canadian wallboard shipments and prices.
Worldwide Ceilings
Net sales of $159 million in the second quarter of 1997 were up 3.2% versus the
second quarter of 1996. For the first six months of 1997, net sales of $307
million represented an increase of 1.3% over the first six months of 1996.
Excluding results for the insulation business that was sold in April 1996,
second-quarter and first-six months sales increased 5.3% and 4.1%, respectively.
EBITDA of $22 million increased 29.4% over last year's second quarter, while
EBITDA of $39 million in the first six months of 1997 increased 56.0% over the
comparable 1996 period. Adjusting for a $5 million charge taken in the first
quarter of 1996 to improve operating efficiencies for USG's European businesses,
EBITDA for the first six months of 1997 increased 30.0%.
Strong demand in the U.S. nonresidential market and growing international demand
allowed the Worldwide Ceilings business to set new sales records for AURATONE
ceiling tile and DONN grid products in the second quarter and first six months
of 1997.
EBITDA improved in the 1997 periods due to higher prices and reduced
manufacturing costs in the United States and lower operating costs in Europe as
a result of improved operating efficiencies.
Outlook
The outlook for the remainder of 1997 is positive. Based on preliminary data
issued by the U.S. Bureau of the Census, second quarter 1997 seasonally adjusted
annual housing starts averaged 1.44 million privately owned units, down about 3%
from the actual 1996 level of 1.48 million. However, the Corporation anticipates
that this decline in housing starts will be offset by a 4% increase in
nonresidential construction and a 5% rise in repair and remodel activity. As a
result, wallboard market opportunity should be virtually unchanged from 1996.
Based on expected demand levels, regional wallboard price increases recently
were announced for late July and early August.
This report contains forward-looking statements related to management's
expectations about future conditions. Actual business conditions may differ
significantly from management's expectations and adversely affect the
Corporation's sales and profitability. Actual results may differ due to factors
over which the Corporation has no control, including economic activity, such as
new housing construction, interest rates, and consumer confidence; competitive
activity such as price and product competition; and increases in raw material
and energy costs. The Corporation assumes no obligation to update any forward-
looking information contained in this report.
Liquidity and Capital Resources
USG continues to pursue a strategy of reducing debt and growing its core gypsum
and ceilings businesses through a balanced application of free cash flow between
debt reduction and capital expenditures with the objective of achieving
investment grade status.
Debt Reduction
As of June 30, 1997, the total principal amount of debt was $724 million, down
$48 million, or 6.2%, from a total of $772 million as of December 31, 1996.
Primary changes in the debt structure during the first six months of 1997
reflect the repayment of $41 million of 8.0% senior notes due 1997 and $10
million of revolving bank loans. In June 1997, the Corporation completed a
long-term financing related to the fourth quarter 1996 purchase of CGC's
minority interest.
Capital Expenditures
Capital expenditures amounted to $56 million in the first six months of 1997,
compared with $73 million in the corresponding 1996 period. As of June 30, 1997,
capital expenditure commitments for the replacement, modernization and expansion
of operations amounted to $290 million compared with $173 million as of December
31, 1996. Management expects that USG's capital spending will be at a level of
about $125 to $150 million in 1997.
For North American Gypsum, ground was broken in June 1997 for a new $110 million
plant in Bridgeport, Ala. This facility will manufacture SHEETROCK brand
wallboard using 100% synthetic gypsum and is expected to begin operation in
1999. Construction is also underway to build a $90 million facility to
manufacture gypsum wood fiber panels at the Gypsum, Ohio, wallboard plant. This
new production line is also expected to begin operating by the end of 1999.
Additional capital investments include cost reduction projects, such as the
installation of stock cleaning equipment to utilize lower grades of recycled
paper and the additional installation of processes to accommodate the use of
synthetic gypsum at manufacturing facilities at which it is more economical than
natural sources of gypsum rock.
In the Worldwide Ceilings business, construction began in early 1997 on a $35
million project that includes the replacement of two old production lines with
one modern, high-speed line at its ceiling tile plant in Cloquet, Minn. This
project is anticipated to be completed by mid-1998.
The Corporation periodically evaluates possible acquisitions or combinations
involving other businesses or companies in businesses and markets related to its
current operations. The Corporation believes that its available liquidity would
be generally adequate to support most opportunities and that it has access to
additional financial resources to take advantage of other opportunities.
Working Capital
Working capital (current assets less current liabilities) as of June 30, 1997
amounted to $212 million and the ratio of current assets to current liabilities
was 1.59 to 1. As of December 31, 1996, working capital was $108 million and the
ratio of current assets to current liabilities was 1.27 to 1.
Receivables (net of reserves) increased to $322 million as of June 30, 1997 from
$274 million as of December 31, 1996, while inventories increased to $205
million from $185 million, and accounts payable rose to $155 million from $141
million. These variations reflect normal seasonal fluctuations.
Cash and cash equivalents as of June 30, 1997 amounted to $42 million, down
slightly from $44 million as of December 31, 1996. This decrease reflects first
six months 1997 net cash flows from operating activities of $101 million, which
were virtually offset by net cash flows to investing and financing activities of
$55 million and $48 million, respectively.
Available Liquidity
The Corporation has additional liquidity available through several financing
arrangements. These include: (i) a revolving credit facility maturing in 2002
that allows the Corporation to borrow up to $500 million, including a $125
million letter of credit subfacility, under which, as of June 30, 1997,
outstanding revolving loans totaled $100 million and letters of credit issued
and outstanding amounted to $45 million, leaving the Corporation with $355
million of unused and available credit (ii) a revolving accounts receivable
facility (see "Note 2. Financing Arrangements"), from which, as of June 30,
1997, the Corporation had additional borrowing capacity of $50 million and (iii)
a shelf registration statement filed with the Securities and Exchange Commission
allowing the Corporation to offer from time to time debt securities, shares of
preferred and common stock or warrants to purchase shares of common stock, all
having an aggregate initial offering price not to exceed $300 million. As of the
date of this report, no securities had been issued pursuant to this
registration.
Legal Contingencies
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. See Part II, Item
1. "Legal Proceedings" for information concerning the asbestos litigation.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its earnings or consolidated financial
position. See Part II, Item 1. "Legal Proceedings" for additional information on
environmental litigation.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of June 30, 1997, and
the related condensed consolidated statement of earnings for the three-month and
six-month periods ended June 30, 1997 and 1996 and the condensed consolidated
statement of cash flows for the six months ended June 30, 1997 and 1996. These
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 21, 1997
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Asbestos Litigation. One of the Corporation's subsidiaries, U.S. Gypsum, is
among many defendants in lawsuits arising out of the manufacture and sale of
asbestos-containing materials. U.S. Gypsum sold certain asbestos-containing
products beginning in the 1930's; in most cases, the products were discontinued
or asbestos was removed from the formula by 1972, and no asbestos-containing
products were sold after 1977. Some of these lawsuits seek to recover
compensatory and in many cases punitive damages for costs associated with the
maintenance or removal and replacement of asbestos-containing products in
buildings (the "Property Damage Cases"). Others seek compensatory and in many
cases punitive damages for personal injury allegedly resulting from exposure to
asbestos-containing products ( the "Personal Injury Cases"). It is anticipated
that additional asbestos-related suits will be filed.
Summary The following is a brief summary; see Note 15 to the financial
statements in the Corporation's 1996 Annual Report for additional information on
the asbestos litigation.
U.S. Gypsum is a defendant in 21 Property Damage Cases, many of which involve
multiple buildings and two of which are certified class actions. During the
years 1994-96, ten new Property Damage Cases were filed against U.S. Gypsum
while 71 were closed; the Company spent an average of $36 million per year on
the defense and settlement of Property Damage Cases, but received a total of
$140 million over the three year period from insurance carriers, including
reimbursement for expenditures in prior years. Due to the unique factors
inherent in each of the Property Damage Cases, U.S. Gypsum is unable to make a
reasonable estimate of its liability in the property damage litigation.
U.S. Gypsum is also a defendant in approximately 57,100 Personal Injury Cases.
Filings of new Personal Injury Cases increased to 28,000 claims in 1996,
compared to 14,000 new claims in 1995 and 13,000 in 1994. The increase in
filings in 1996 followed a federal appellate court ruling rejecting the Georgine
class action settlement referred to below. U.S. Gypsum's average cost to resolve
Personal Injury Cases during those years has been approximately $1,600 per
claim. Over the past three years, U.S. Gypsum has expended an average of $33
million per year on Personal Injury Cases, of which an average of $30 million
has been paid by insurance. U.S. Gypsum estimates that its currently pending
Personal Injury Cases can be resolved for between $100 and $115 million,
virtually all of which is expected to be paid by insurance. U.S. Gypsum is not
presently able to estimate its liability in future Personal Injury Cases.
U.S. Gypsum was a party to a class action settlement known as Georgine that
would have required most future Personal Injury Cases to be resolved through an
administrative system, and provided for prescribed levels of benefits based on
the nature of the claimants' physical impairment. However, on June 25, 1997, the
Supreme Court affirmed a May 1996 ruling by a federal appellate court finding
that class certification in Georgine was improper (Amchem Products v. Windsor,
No. 96-270). As a result, the Georgine settlement has been invalidated, and
pending and future Personal Injury Cases will be filed in and handled through
the courts. The defendants in Georgine, including U.S. Gypsum, have stated their
intention to continue to pursue negotiations for another claims-handling
mechanism that would serve as an alternative to the traditional tort system,
although there is no assurance that such a system can be negotiated or
implemented. It is anticipated that U.S. Gypsum will be named in a substantial
number of additional Personal Injury Cases over the next several months as a
result of the Supreme Court's ruling.
U.S. Gypsum sued its insurance carriers in 1983 to obtain coverage for asbestos
cases (the "Coverage Action") and has settled all disputes with twelve of its
seventeen solvent carriers. As of December 31, 1996, after deducting insolvent
coverage and insurance paid out to date, approximately $350 million of potential
insurance remained, including $150 million that is committed to cover both
property damage and personal injury costs; $145 million that is available for
personal injury but not yet for property damage; and approximately $55 million
that is still in dispute for both. U.S. Gypsum is attempting to negotiate a
resolution of the Coverage Action with the five remaining defendant carriers,
but may be required to litigate additional issues in its effort to secure the
contested coverage.
U.S. Gypsum's total expenditures for all asbestos-related matters, including
property damage, personal injury, insurance coverage litigation and related
expenses, exceeded aggregate insurance payments by $33.4 million in 1994, but
insurance payments exceeded asbestos-related costs by approximately $10 million
in 1995 and $41 million in 1996 due primarily to non-recurring reimbursement for
amounts expended in prior years.
Conclusion A number of uncertainties continue to exist concerning the impact of
the asbestos litigation on the Corporation, including the number and severity of
additional asbestos-related claims that will be filed against U.S. Gypsum; U.S.
Gypsum's liability in the Property Damage Cases in which exposure information is
currently lacking; and the outcome of negotiations with and, if necessary,
proceedings against those of U.S. Gypsum's insurers that continue to deny
coverage. Therefore, the effect of the asbestos litigation on the Corporation
will depend upon a variety of factors, including U.S. Gypsum's ability to
successfully defend or settle the Property Damage Cases that reach trial prior
to the completion of the Coverage Action, the level of future Personal Injury
filings, and the resolution of U.S. Gypsum's claims against the remaining
defendants in the Coverage Action. As a result, management is unable to
determine whether an adverse outcome in the asbestos litigation will have a
material adverse effect on the results of operations or the consolidated
financial position of the Corporation.
Environmental Litigation. The Corporation and certain of its subsidiaries have
been notified by state and federal environmental protection agencies of possible
involvement as one of numerous "potentially responsible parties" in a number of
so-called "Superfund" sites in the United States. In most of these sites, the
involvement of the Corporation or its subsidiaries is expected to be minimal.
The Corporation believes that appropriate reserves have been established for its
potential liability in connection with all Superfund sites but is continuing to
review its accruals as additional information becomes available. Such reserves
take into account all known or estimated costs associated with these sites,
including site investigations and feasibility costs, site cleanup and
remediation, legal costs, and fines and penalties, if any. In addition,
environmental costs connected with site cleanups on USG-owned property are also
covered by reserves established in accordance with the foregoing. The
Corporation believes that neither these matters nor any other known governmental
proceeding regarding environmental matters will have a material adverse effect
upon its earnings or consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
(a) In accordance with the Corporation's notice and proxy statement dated March
28, 1997, the matters set forth in (c) below were submitted to a vote of
stockholders at the annual meeting of stockholders held on May 14, 1997.
(b) The directors indicated in paragraph (c) below were elected to a three-
year term to expire in 1999, and the following directors are those whose
terms of office continued after the annual meeting of stockholders
referred to in paragraph (a) above: Robert L. Barnett, David W. Fox,
Philip C. Jackson Jr., Marvin E. Lesser, W. H. Clark, Lawrence M.
Crutcher, William C. Foote, Judith A. Sprieser.
<TABLE>
(c) Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
------------ ----------- ------------
<S> <C> <C> <C>
Election of Directors:
Keith A. Brown 42,073,791 120,895 -
James C. Cotting 42,069,211 125,475 -
W. Douglas Ford 42,069,485 125,201 -
John B. Schwemm 42,072,561 122,125 -
Approval of Omnibus Management
Incentive Plan 38,429,947 3,654,999 109,740
Ratification of Appointment of Arthur
Andersen LLP as Independent Public
Accountants 42,123,588 27,107 43,991
</TABLE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) (15) Letter of Arthur Andersen LLP regarding unaudited financial
information.
(27) Financial Data Schedule (electronic filing only).
(b) There were no reports on Form 8-K filed during the second quarter of
1997.
Exhibit (27), which has been filed as part of this Form 10-Q, is not included
herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By /s/ Dean H. Goossen
-----------------------
Dean H. Goossen,
Corporate Secretary,
USG Corporation
By /s/ Raymond T. Belz
August 4, 1997 -----------------------
Raymond T. Belz,
Vice President and
Controller,
USG Corporation
August 4, 1997
USG Corporation
125 South Franklin Street
Chicago, Illinois 60606
Gentlemen:
We are aware that USG Corporation has incorporated by reference into previously
filed Registration Statement Numbers 33-40136 and 33-64217 on Form S-3 and 33-
22581, as amended, 33-22930, 33-36303, 33-52573, 33-52715, 33-63554, 33-65383,
and 333-29137 on Form S-8 its Form 10-Q for the quarter ended June 30, 1997,
which includes our report dated July 21, 1997, covering the unaudited condensed
financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, these reports are not considered a part of the
registration statement prepared or certified by our firm or reports prepared or
certified by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ ARTHUR ANDERSEN LLP
- - -----------------------
ARTHUR ANDERSEN LLP
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