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 March 31, 1997
---------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission File Number 1-8864
USG CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3329400
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
--------------------------
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
----- -----
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 ----- -----
As of April 30, 1997, 46,089,188 shares of USG common stock were outstanding.
<PAGE>
<TABLE>
Table of Contents
Page
--------
<CAPTION>
<S> <C> <C>
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months Ended March 31, 1997 and 1996 3
Consolidated Balance Sheet:
As of March 31, 1997 and December 31, 1996 4
Consolidated Statement of Cash Flows:
Three Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
Report of Independent Public Accountants 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
(Unaudited)
<CAPTION>
Three Months ended
March 31,
----------------------------
1997 1996
------------- ------------
<S> <C> <C>
Net sales $ 673 $ 602
Cost of products sold 496 471
------------ ------------
Gross profit 177 131
Selling and administrative expenses 66 67
Amortization of excess reorganization value 42 42
------------ ------------
Operating profit 69 22
Interest expense 17 19
------------ ------------
Earnings before taxes on income 52 3
Taxes on income 37 18
------------ ------------
Net earnings/(loss) 15 (15)
============ ============
Net earnings/(loss) per common share 0.32 (0.32)
============ ============
Dividends paid per common share -- --
Average number of common shares 45,946,213 45,435,757
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<CAPTION>
As of As of
March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 45 $ 44
Receivables (net of reserves - $17 and $17) 301 274
Inventories 194 185
----------- ------------
Total current assets 540 503
Property, plant and equipment (net of reserves
for depreciation and depletion - $191 and $177) 890 887
Excess reorganization value (net of accumulated
amortization - $677 and $635) 168 210
Other assets 225 218
----------- ------------
Total Assets 1,823 1,818
=========== ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 147 141
Accrued expenses 165 200
Notes payable 8 7
Current portion of long-term debt -- 42
Taxes on income 28 5
----------- ------------
Total current liabilities 348 395
Long-term debt 727 706
Deferred income taxes 193 192
Other liabilities 568 548
Stockholders' Equity/(Deficit):
Preferred stock -- --
Common stock 5 5
Capital received in excess of par value 234 231
Deferred currency translation (19) (10)
Reinvested earnings/(deficit) (233) (249)
------------ -----------
Total stockholders' equity/(deficit) (13) (23)
------------ -----------
Total Liabilities and Stockholders' Equity 1,823 1,818
============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<CAPTION>
Three Months ended
March 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Operating Activities:
Net earnings/(loss) $ 15 $(15)
Adjustments to reconcile net earnings/(loss) to net cash:
Amortization of excess reorganization value 42 42
Depreciation, depletion and other amortization 17 16
Deferred income taxes 1 11
(Increase)/decrease in working capital:
Receivables (27) (42)
Inventories (9) (5)
Payables 29 30
Accrued expenses (35) (27)
Increase in other assets (7) (3)
Increase in other liabilities 20 10
Other, net (1) 2
-------- --------
Net cash flows from operating activities 45 19
-------- --------
Investing Activities:
Capital expenditures (24) (42)
Net proceeds from asset dispositions -- 1
-------- --------
Net cash flows to investing activities (24) (41)
-------- --------
Financing Activities:
Issuance of debt 41 --
Repayment of debt (61) (26)
Short-term borrowings/(repayments), net -- 6
-------- --------
Net cash flows to financing activities (20) (20)
-------- --------
Net increase/(decrease) in cash & cash equivalents 1 (42)
Cash & cash equivalents at beginning of period 44 70
-------- --------
Cash & cash equivalents at end of period 45 28
======== ========
Supplemental Cash Flow Disclosures:
Interest paid 26 29
Income taxes paid 16 6
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
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 March 31, 1997 and December 31, 1996; and results of
operations and cash flows for the three months ended March 31, 1997 and
1996. Certain amounts in the prior years' financial statements have
been reclassified to conform with the 1997 presentation. 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
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, it will require restatement
of prior years' earnings per share. As of the date of this report, the
Corporation has not quantified the effect of applying SFAS No. 128.
(3) Income tax expense amounted to $37 million and $18 million for the
three months ended March 31, 1997 and 1996, respectively. 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.
(4) As of March 31, 1997, 2,657,465 common shares were reserved for future
issuance in conjunction with existing stock option grants. An
additional 6,495 common shares were reserved for future grants under
the Long-Term Equity Plan approved by the stockholders of the
Corporation in 1995.
(5) 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.
(6) 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.
(7) 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
Consolidated net sales of $673 million were up $71 million, or 11.8%, compared
with the first three months of 1996. EBITDA of $127 million increased $48
million, or 60.8%. These improvements reflect higher realized selling prices on,
and record first quarter shipments of, SHEETROCK brand gypsum wallboard. Record
volume was also experienced for ceiling products, joint compound and cement
board. Additionally, results in last year's first quarter were adversely
affected by severe winter weather conditions.
Gross profit as a percentage of net sales rose in the first quarter of 1997 to
26.3% from 21.8% in the prior-year period. This increase primarily reflects
improved pricing for wallboard and ceiling products. Also, gross profit in the
first quarter of 1996 was lowered by a $5 million charge to improve operating
efficiences of USG's European businesses.
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 in each first-quarter period.
Interest expense was down $2 million, or 10.5%, compared with the first quarter
of 1996 reflecting the continuation of USG's debt reduction program.
Income tax expense amounted to $37 million and $18 million for the three months
ended March 31, 1997 and 1996, respectively. 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 $15 million were reported in the first quarter of 1997, while a
net loss of $15 million was reported in the first quarter of 1996. The noncash
amortization of excess reorganization value and reorganization debt discount
(included in interest expense) reduced net earnings by $42 million, or $0.88 per
share, and $43 million, or $0.93 per share, in the respective quarters.
<PAGE>
<TABLE>
The following is an analysis of USG's results of operations by core business
(dollars in millions):
<CAPTION>
Three Months ended March 31,
------------------------------------------------------------------
Net Sales EBITDA
--------------------------- ---------------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum Company $ 375 $ 322 $ 105 $ 70
L&W Supply Corporation 221 188 6 5
CGC Inc. (gypsum) 31 23 5 2
Other subsidiaries 20 16 5 4
Eliminations (100) (76) -- --
------- ------- ------- -------
Total 547 473 121 81
------- ------- ------- -------
Worldwide Ceilings:
USG Interiors, Inc. 98 96 13 12
USG International 55 55 3 (5)
CGC Inc. (interiors) 8 8 1 1
Eliminations (13) (10) -- --
------- ------- ------- -------
Total 148 149 17 8
------- ------- ------- -------
Corporate -- -- (11) (10)
Eliminations (22) (20) -- --
------- ------- ------- -------
Total USG Corporation 673 602 127 79
======= ======= ======= =======
</TABLE>
<PAGE>
North American Gypsum
First-quarter net sales of $547 million and EBITDA of $121 million were up 15.6%
and 49.4%, respectively, over the first quarter of 1996. These improvements
reflect increased demand and the impact of a milder winter in 1997.
For U.S. Gypsum, shipments of SHEETROCK brand gypsum wallboard amounted to 2.05
billion square feet, a first quarter record and a 9.0% increase compared with
the first-quarter 1996 level of 1.88 billion square feet. Capacity utilization
at U.S. Gypsum's wallboard plants increased to approximately 97% from 89% in the
first quarter of 1996. Shipments of SHEETROCK brand joint compound and DUROCK
brand cement board were the highest levels for any quarter on record.
The average realized selling price for SHEETROCK wallboard was $120.31 per
thousand square feet, up $16.48, or 15.9%, from a year ago. Based on the strong
demand experienced during the first quarter, U.S. Gypsum announced an $8 per
thousand square foot price increase in late March.
Manufacturing unit costs for SHEETROCK wallboard were favorable compared with
the first quarter of 1996 primarily due to improved operating efficiencies
resulting from cost reduction projects implemented in 1996 and 1997.
For L&W Supply Corporation, USG's building products distribution business,
first-quarter net sales were the highest for that period in company history.
Wallboard results improved due to record first-quarter volume and all-time high
realized selling prices. Sales and gross profit improvements were also
experienced for all of L&W Supply's nonwallboard product lines. As of March 31,
1997, L&W Supply operated 164 centers, having added three new greenfield centers
during the quarter.
Results for the gypsum business of CGC Inc., USG's wholly owned Canadian
subsidiary, improved significantly due to increased wallboard shipments to both
Canadian and U.S. markets.
Worldwide Ceilings
First-quarter net sales of $148 million were about equal to last year's level.
However, excluding results for the insulation business that was sold in April
1996, first quarter net sales were up 4% as demand remained solid for ceiling
tile and grid, particularly in the United States and Latin America.
Consequently, shipments of AURATONE ceiling tile and ceiling grid set first
quarter records.
EBITDA of $17 million more than doubled from last year's first quarter level of
$8 million. Adjusting for a $5 million charge taken in the first quarter of 1996
to improve operating efficiencies for USG's European businesses, EBITDA
increased 31%.
Outlook
Housing starts in the first quarter of 1997 were strong. Based on preliminary
data issued by the U.S. Bureau of the Census, first quarter 1997 seasonally
adjusted annual housing starts averaged 1.441 million privately owned units. The
Corporation remains confident about the building industry's prospects for the
remainder of 1997 due to favorable consumer confidence and employment growth. As
such, the Corporation expects that housing activity will continue at good
levels. In addition, repair and remodeling markets are strong and commercial
construction continues to recover. As a result, industry capacity utilization
rates are expected to remain high.
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 March 31, 1997, the total principal amount of debt was $752 million, down
$20 million, or 2.6%, from a total of $772 million as of December 31, 1996. In
the first quarter of 1997, the Corporation repaid $41 million of 8.0% senior
notes due 1997, borrowed $20 million of revolving bank loans and increased notes
payable by $1 million.
Capital Expenditures
Capital expenditures amounted to $24 million in the first quarter of 1997,
compared with $42 million in the corresponding 1996 period. As of March 31,
1997, capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $291 million compared with $173 million as
of December 31, 1996. Management expects that USG's capital spending will be at
a level of about $150 million in 1997.
For North American Gypsum, a plan to invest about $90 million to build a
facility to manufacture gypsum wood fiber panels at its Gypsum, Ohio, wallboard
plant was recently announced. This new production line is expected to begin
operating by the end of 1999. Also, a plan to build a $110 million plant in
Bridgeport, Ala. to manufacture SHEETROCK brand wallboard using 100% synthetic
gypsum was announced last year. This new facility is also expected to begin
operation in 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, a $35 million project was started in 1996 to
replace 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 March 31, 1997
amounted to $192 million and the ratio of current assets to current liabilities
was 1.55 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 $301 million as of March 31, 1997
from $274 million as of December 31, 1996, while inventories increased to $194
million from $185 million, accounts payable rose to $147 million from $141
million and accrued expenses declined to $165 million from $200 million. These
variations reflect normal seasonal fluctuations.
Cash and cash equivalents as of March 31, 1997 amounted to $45 million, up
slightly from $44 million as of December 31, 1996. This increase reflects first
quarter net cash flows from operating activities of $45 million, virtually
offset by net cash flows to investing and financing activities of $24 million
and $20 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 March 31, 1997,
outstanding revolving loans totaled $130 million and letters of credit issued
and outstanding amounted to $46 million, leaving the Corporation with $324
million of unused and available credit (ii) a revolving accounts receivable
facility (see "Note 2. Financing Arrangements"), from which, as of March 31,
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 March 31, 1997, and
the related condensed consolidated statement of earnings and the condensed
consolidated statement of cash flows for the three-month periods ended March 31,
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
April 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 24 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 58,000 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 $1600 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. If a class action settlement (known
as "Georgine") that "caps" the defendants' liability through the next eight
years survives in its present form, U.S. Gypsum's liability for all Personal
Injury Cases resolved through the year 2004, including those currently pending
and those to be filed (except claims from persons who elected to be excluded
from Georgine), is estimated to be between $190 and 200 million, all but $10
million of which is expected to be paid by insurance. However, the Georgine
settlement has been overturned by a federal appellate court. The Supreme Court
is currently reviewing that ruling. U.S. Gypsum is not presently able to
estimate its liability in future Personal Injury Cases if the Georgine
settlement is not approved.
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 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; the fate of the Georgine settlement; 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 outcome of
the appeal of the Georgine settlement, 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 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 first 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
May 2, 1997 -----------------------------------
Raymond T. Belz, Vice President and
Controller, USG Corporation
Exhibit (15)
May 2, 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
33-22930, 33-52573, 33-52715, 33-63554 and 33-65383 on Form S-8 its Form 10-Q
for the quarter ended March 31, 1997, which includes our report dated April 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 318
<ALLOWANCES> 17
<INVENTORY> 194
<CURRENT-ASSETS> 540
<PP&E> 1,081
<DEPRECIATION> 191
<TOTAL-ASSETS> 1,823
<CURRENT-LIABILITIES> 348
<BONDS> 727
0
0
<COMMON> 5
<OTHER-SE> (18)
<TOTAL-LIABILITY-AND-EQUITY> 1,823
<SALES> 673
<TOTAL-REVENUES> 673
<CGS> 496
<TOTAL-COSTS> 496
<OTHER-EXPENSES> 66
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 52
<INCOME-TAX> 37
<INCOME-CONTINUING> 15
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
