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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 September 30, 1998
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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 September 30, 1998, 49,686,878 shares of USG common stock were
outstanding.
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TABLE OF CONTENTS
Page
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PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months and Nine Months Ended
September 30, 1998 and 1997 3
Consolidated Balance Sheet:
As of September 30, 1998 and December 31, 1997 4
Consolidated Statement of Cash Flows:
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 12
Report of Independent Public Accountants 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
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1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 814 $ 757 $ 2,324 $ 2,153
Cost of products sold 581 547 1,674 1,564
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Gross profit 233 210 650 589
Selling and administrative expenses 75 70 221 208
Amortization of excess
reorganization value - 43 - 127
------------ ------------ ------------ ------------
Operating profit 158 97 429 254
Interest expense 13 16 39 49
Interest income (1) (1) (3) (2)
Other expense, net - - 3 1
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Earnings before income taxes 146 82 390 206
Income taxes 55 48 150 130
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Net earnings 91 34 240 76
============ ============ ============ ============
Basic earnings per common share 1.83 0.74 4.95 1.65
Diluted earnings per common share 1.80 0.70 4.78 1.57
Dividends paid per common share - - - -
Average common shares 49,679,544 46,390,846 48,457,527 46,152,837
Average diluted common shares 50,534,500 48,910,230 50,157,495 48,513,412
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 102 $ 72
Receivables (net of reserves - $19 and $17) 372 297
Inventories 241 208
Current and deferred income taxes 50 63
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Total current assets 765 640
Property, plant and equipment (net of reserves
for depreciation and depletion - $276 and $236) 1,138 982
Other assets 362 304
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Total Assets 2,265 1,926
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 176 146
Dividends payable 5 -
Accrued expenses 229 220
Debt maturing within one year 11 10
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Total current liabilities 421 376
Long-term debt 566 610
Deferred income taxes 161 163
Other liabilities 684 630
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Capital received in excess of par value 313 258
Deferred currency translation (29) (25)
Reinvested earnings (deficit) 144 (91)
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Total stockholders' equity 433 147
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Total Liabilities and Stockholders' Equity 2,265 1,926
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</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
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1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 240 $ 76
Adjustments to reconcile net earnings to net cash:
Amortization of excess reorganization value - 127
Depreciation, depletion and other amortization 60 51
Current and deferred income taxes 11 2
(Increase) decrease in working capital:
Receivables (75) (61)
Inventories (33) (11)
Payables 35 20
Accrued expenses 9 9
(Increase) decrease in other assets 1 (2)
Increase (decrease) in other liabilities (6) 6
Other, net - (2)
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Net cash from operating activities 242 215
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INVESTING ACTIVITIES:
Capital expenditures (214) (96)
Net proceeds from asset dispositions 2 2
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Net cash to investing activities (212) (94)
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FINANCING ACTIVITIES:
Issuance of debt 60 91
Repayment of debt (107) (181)
Short-term borrowings (repayments), net 4 (2)
Dividends declared (5) -
Issuances of common stock 48 13
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Net cash to financing activities - (79)
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Net increase in cash & cash equivalents 30 42
Cash & cash equivalents at beginning of period 72 44
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Cash & cash equivalents at end of period 102 86
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 49 58
Income taxes paid 134 128
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
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 September 30, 1998, and December 31, 1997, results of
operations for the three months and nine months ended September 30,
1998 and 1997, and cash flows for the nine months ended September 30,
1998 and 1997. Certain amounts in the prior years' financial statements
have been reclassified to conform with the 1998 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 1997 Annual Report
on Form 10-K dated February 20, 1998.
2. COMPREHENSIVE INCOME
Total comprehensive income, consisting of net earnings and foreign
currency translation adjustments, amounted to $93 million and $236
million in the three months and nine months ended September 30, 1998,
respectively. For the respective 1997 periods, total comprehensive
income amounted to $32 million and $65 million. There was no tax impact
on the foreign currency translation adjustments.
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3. EARNINGS PER SHARE
Basic earnings per share were computed by dividing net earnings by the
weighted average number of common shares outstanding for the period.
The dilutive effect of the potential exercise of outstanding options
and warrants to purchase shares of common stock is calculated using the
treasury stock method. The reconciliation of basic earnings per share
to diluted earnings per share is shown in the following table (dollars
in millions except share data).
<TABLE>
<CAPTION>
PERIODS ENDED
SEPTEMBER 30 1998 1997
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NET SHARES NET SHARES
EARNINGS (000) EPS EARNINGS (000) EPS
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<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS:
Basic earnings $ 91 49,680 $ 1.83 $ 34 46,391 $ 0.74
Effect of
Dilutive Securities:
Options 831 940
Warrants 24 1,579
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Diluted Earnings 91 50,535 1.80 34 48,910 0.70
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NINE MONTHS:
Basic earnings 240 48,458 4.95 76 46,153 1.65
Effect of
Dilutive Securities:
Options 897 889
Warrants 802 1,471
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Diluted Earnings 240 50,157 4.78 76 48,513 1.57
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</TABLE>
4. STOCK OPTIONS
As of September 30, 1998, common shares totaling 2,089,325 were
reserved for future issuance in conjunction with existing stock option
grants. In addition, 1,129,145 common shares were reserved for future
grants.
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5. 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:
The Corporation utilizes interest rate swap agreements to manage the
impact of interest rate changes on its underlying floating-rate debt.
These agreements are designated as hedges and qualify for hedge
accounting. 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. Amounts payable or receivable under these swap
agreements are accrued as an increase or decrease to cost of products
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:
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, option and forward contracts are
used. The foreign currency options qualify for hedge accounting, under
which the option premium is amortized over the life of the option. The
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forward contracts are marked to market on a current basis with gains
and/or losses included in net earnings in the period in which the
exchange rates change.
6. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement 133 is effective for
fiscal years beginning after June 15, 1999 and cannot be applied
retroactively. The Statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair
value. The Statement requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. The Corporation currently plans to adopt
Statement 133 effective January 1, 2000, and will determine both the
method and impact of adoption prior to that date.
7. EXCESS REORGANIZATION VALUE
Excess reorganization value, an intangible asset totaling $851 million,
was recorded in 1993 in connection with a comprehensive restructuring
of the Corporation's debt and the implementation of fresh start
accounting as required by AICPA Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code"
("SOP 90-7").
As of September 30, 1997, the remaining $83 million balance of excess
reorganization value was eliminated. This balance, which would have
been amortized through April 1998, was offset by the elimination of a
valuation allowance in accordance with SOP 90-7. See Note 8 below for
additional information.
8. INCOME TAXES
Income tax expense amounted to $55 million and $150 million in the
three months and nine months ended September 30, 1998, respectively.
For the respective 1997 periods, income tax expense amounted to $48
million and $130 million. The Corporation's income tax expense in the
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third quarter and first nine months of 1997 was computed based on
pre-tax earnings excluding the noncash amortization of excess
reorganization value, which was not deductible for income tax purposes.
In the third quarter of 1997, a valuation allowance of $90 million,
which had been provided for deferred tax assets relating to pension and
retiree medical benefits prior to the Corporation's financial
restructuring in 1993, was eliminated. The elimination of this
allowance reflected a change in management's judgment regarding the
realizability of these assets in future years as a result of the
Corporation's pretax earnings levels and improved capital structure
over the prior three years. In accordance with SOP 90-7, the benefit
realized from the elimination of this allowance was used to reduce the
balance of excess reorganization value to zero as of September 30,
1997.
9. LITIGATION
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.
10. ACCOUNTS RECEIVABLE FACILITY
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
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Funding, a special-purpose subsidiary of USG Corporation, is a separate
corporate entity with its own separate creditors that 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
USG CORPORATION CONSOLIDATED RESULTS
NET SALES - Record shipments of all major product lines and higher selling
prices for SHEETROCK brand gypsum wallboard resulted in third quarter 1998 net
sales of $814 million, a record level for any quarter in USG's history and an 8%
increase compared with net sales of $757 million in the third quarter of 1997.
For the first nine months of 1998, net sales totaled $2,324 million, an 8%
increase compared with net sales of $2,153 million in the comparable 1997
period.
GROSS PROFIT MARGIN - Gross profit as a percentage of net sales was 28.6% and
28.0% in the third quarter and first nine months of 1998, respectively, up from
27.7% and 27.4% in the respective 1997 periods. These increases primarily
reflect a higher gross profit margin for SHEETROCK wallboard due to higher
realized selling prices and lower unit costs.
SELLING AND ADMINISTRATIVE EXPENSES - Third quarter and first nine months 1998
selling and administrative expenses increased 7% and 6%, respectively, over the
prior-year periods. However, as a percentage of net sales, these expenses were
9.2% in the third quarter and 9.5% in the first nine months of 1998, compared
with 9.2% and 9.7 % in the same 1997 periods. Expense dollars are up in 1998
largely due to marketing and information technology initiatives.
AMORTIZATION OF EXCESS REORGANIZATION VALUE - The noncash amortization of excess
reorganization value reduced operating profit by $43 million and $127 million in
the third quarter and first nine months of 1997. As explained in Notes 7 and 8
of this report, the remaining balance of excess reorganization value was
eliminated as of September 30, 1997.
INTEREST EXPENSE - As a result of debt reduction during the past year, interest
expense in the third quarter and first nine months of 1998 decreased 19% and
20%, respectively, from the corresponding 1997 periods.
INCOME TAX - Income tax expense amounted to $55 million and $150 million in the
three months and nine months ended September 30, 1998, respectively. For the
respective 1997 periods, income tax expense amounted to $48 million and $130
million. The Corporation's income tax expense in the 1997 periods was computed
based on pre-tax earnings excluding the noncash amortization of excess
reorganization value, which was not deductible for income tax purposes.
NET EARNINGS - Third quarter 1998 net earnings were $91 million, or $1.80 per
diluted share. Third quarter 1997 net earnings, which amounted to $34 million,
or $0.70 per diluted share, were net of the noncash amortization of excess
reorganization value of $43 million, or $0.87 per diluted share.
For the first nine months of 1998, net earnings were $240 million, or $4.78 per
diluted share. Comparable 1997 net earnings, which amounted to $76 million, or
$1.57 per diluted share, were net of the noncash amortization of excess
reorganization value of $127 million, or $2.61 per diluted share.
EBITDA - Earnings before interest, taxes, depreciation, depletion, amortization
and certain other income and expense items ("EBITDA") amounted to $177 million
in the third quarter and $484 million in the first nine months of 1998. Both
amounts represent increases of 13% versus the same periods last year.
As a result of the amortization of excess reorganization value through September
30, 1997, USG reports EBITDA 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.
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USG CORPORATION CORE BUSINESS RESULTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NET SALES EBITDA
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THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
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Periods ended Sept 30 1998 1997 1998 1997 1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum Company $ 441 $ 404 $ 1,279 $ 1,170 $ 139 $ 120 $ 388 $ 341
L&W Supply Corporation 293 263 811 734 14 11 31 27
CGC Inc. (gypsum) 37 31 108 92 6 6 18 15
Other subsidiaries 26 25 69 69 8 9 21 22
Eliminations (128) (108) (362) (314) - - - (1)
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Total 669 615 1,905 1,751 167 146 458 404
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WORLDWIDE CEILINGS:
USG Interiors, Inc. 116 114 337 318 18 19 50 49
USG International 67 59 180 172 4 3 11 10
CGC Inc. (ceilings) 9 9 28 25 1 1 3 3
Eliminations (20) (14) (50) (40) - - - -
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Total 172 168 495 475 23 23 64 62
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Corporate - - - - (13) (13) (38) (36)
Eliminations (27) (26) (76) (73) - - - -
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Total USG Corporation 814 757 2,324 2,153 177 156 484 430
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</TABLE>
NORTH AMERICAN GYPSUM
Third quarter 1998 net sales of $669 million and EBITDA of $167 million
increased 9% and 14%, respectively, over third quarter 1997 levels.
First nine months 1998 net sales of $1,905 million and EBITDA of $458
million increased 9% and 13%, respectively, versus comparable 1997 levels.
UNITED STATES GYPSUM COMPANY - U.S. Gypsum's net sales and EBITDA in the
third quarter of 1998 were the highest ever for any quarter. Shipments of
SHEETROCK brand gypsum wallboard totaled 2.254 billion square feet, a
record for any quarter and a 4% increase over third quarter 1997 shipments
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of 2.168 billion square feet. Selling prices on SHEETROCK wallboard
averaged $130.66 per thousand square feet, a record for any quarter and an
increase of 6% versus $123.06 for the third quarter of 1997. Manufacturing
unit costs for SHEETROCK wallboard were down from the prior-year period
largely due to lower furnish prices for wastepaper, the primary raw
material of wallboard paper. U.S. Gypsum's wallboard plants continued to
operate at 100% capacity during the third quarter. Third quarter shipments
of SHEETROCK brand joint compound and DUROCK brand cement board also
reached record levels.
L&W SUPPLY CORPORATION - Third quarter 1998 net sales and EBITDA for USG's
building products distribution business were records for any quarter and
were up 11% and 27%, respectively, from a year ago. This sales and EBITDA
performance reflects new quarterly highs for wallboard shipments and
selling prices and for sales and gross profit of complementary building
products. As of September 30, 1998, L&W Supply operated 181 locations in
the United States.
CGC INC. - The gypsum business of CGC Inc., USG's wholly owned Canadian
subsidiary, reported increased sales in the third quarter of 1998 as a
result of higher SHEETROCK wallboard volume and prices. However, EBITDA was
unchanged versus the third quarter of 1997 due in part to the declining
Canadian dollar.
WORLDWIDE CEILINGS
Third quarter 1998 net sales of $172 million increased 2% over the third
quarter of 1997, while EBITDA of $23 million was unchanged.
First nine months 1998 net sales of $495 million and EBITDA of $64 million
were up 4% and 3%, respectively, from the comparable 1997 levels.
Shipments of AURATONE brand and X-Technology ceiling tile and DONN brand
ceiling grid products continued at record levels in the third quarter of
1998 due to growing U.S. demand and steady demand in Western Europe and
Latin America. Demand in Asia and Eastern Europe slowed during the quarter
as worsening economic conditions impacted construction activity in those
regions. EBITDA was flat due in part to higher costs associated with
product enhancements, primarily for export products.
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CONSTRUCTION MARKET OUTLOOK
Based on leading indicators, such as new housing starts, existing home
sales and nonresidential construction activity, the outlook for the
remainder of 1998 continues to be positive. Favorable business trends also
are expected to continue well into 1999 as key drivers of demand for USG's
products, such as consumer confidence, employment rates and interest rates,
all remain at favorable levels.
In the United States, 1998 housing starts have been running at an annual
rate over 1.5 million units. New nonresidential construction in 1997 is
supporting increased demand for this segment in 1998 as the finishing of an
interior follows contract awards by about a year or more. Demand for USG's
products from the repair and remodel market remains strong, continuing a
long-term growth trend.
Internationally, construction in Canada is expected to remain at a
favorable level. Demand is steady in Western Europe and Latin America.
USG's exposure to Asia and Eastern Europe is limited as these markets
together represent a relatively minor share of the Corporation's total
sales and earnings. USG is currently monitoring the global financial crisis
and the influence it may eventually have on the U.S. economy and the
Corporation's base of operations in North America.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL STRATEGY
USG's financial strategy is focused on building long-term shareholder value
through a balanced plan designed to provide immediate returns to investors
through dividends and share repurchases and future returns from earnings
growth.
CASH DIVIDENDS - In September 1998, USG's Board of Directors approved the
initiation of a quarterly cash dividend. A dividend of $0.10 per share was
declared on September 18, 1998, and will be paid on December 16, 1998, to
stockholders of record as of November 27, 1998. This is USG's first cash
dividend since 1988.
SHARE REPURCHASES - In September 1998, USG's Board of Directors also
approved the initiation of a multiyear share repurchase program, under
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which up to five million shares of common stock may be repurchased. This
amount represents approximately 10% of the Corporation's total outstanding
common stock. The Corporation plans to acquire shares in a systematic
manner to satisfy obligations under USG's long-term equity compensation
plans for employees and directors. The Corporation also plans to acquire
shares from time to time that will be utilized for general corporate
purposes. The volume and timing of the latter purchases will depend on
market and business conditions. Share repurchases are being made in the
open market or through privately negotiated transactions and are being
financed with available cash from operations. As of October 31, 1998,
approximately 112,000 shares have been repurchased.
EARNINGS GROWTH - The key drivers of USG's earnings growth strategy are its
investments in cost-reduction and growth initiatives, which are supported
by the financial flexibility of an investment grade capital structure.
These initiatives involve replacing high-cost manufacturing capacity with
low-cost capacity; adding efficient new capacity to serve customers and
thereby increasing market share; and expanding sales internationally
through exports and manufacturing overseas. USG anticipates that these
initiatives also will serve to reduce the impact of cyclicality on its
earnings.
CAPITAL EXPENDITURES
Capital spending amounted to $214 million in the first nine months of 1998
compared with $96 million in the corresponding 1997 period. As of September
30, 1998, capital expenditure commitments for the replacement,
modernization and expansion of operations amounted to $608 million compared
with $363 million as of December 31, 1997.
WALLBOARD CAPACITY MODERNIZATION - In September 1998, USG announced plans
to build state-of-the-art production lines to manufacture SHEETROCK brand
gypsum wallboard in Rainier, Ore., and Plaster City, Calif. When fully
operational in 2001, these investments, together with the Aliquippa, Pa.,
Bridgeport, Ala., and East Chicago, Ind., projects discussed below, will
complete a strategic renovation of U.S. Gypsum's wallboard capacity that
began in 1996.
The new $120 million facility to be located in Rainier, Ore., will include
a 142,000-square foot manufacturing plant and a 247,000-square foot
distribution center and will serve the wallboard needs of the northwestern
United States and western Canada. The new facility will provide 700 million
square feet of SHEETROCK brand gypsum wallboard capacity. A significant
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portion of this new capacity will replace existing USG shipments into the
region from plants as far away as Iowa, Texas and Ontario, Canada.
The new $105 million production line at U.S. Gypsum's plant in Plaster
City, Calif., will provide annual capacity of 700 million square feet of
wallboard and replace a 41-year-old, high cost production line that has
approximately 200 million square feet of annual capacity.
Ground was broken in October 1998 for the new $112 million plant in
Aliquippa, Pa. The new facility will provide 700 million square feet of
SHEETROCK brand gypsum wallboard capacity to replace existing high-cost
capacity in the region, improve service and accommodate anticipated strong
growth in the Northeast market. The Aliquippa plant will manufacture
SHEETROCK wallboard using 100% synthetic gypsum. Construction of this
facility is expected to be completed in early 2000.
Construction continues on the new $110 million plant in Bridgeport, Ala.,
that will serve growing markets in the southeastern United States. This
facility will also manufacture SHEETROCK brand wallboard using 100%
synthetic gypsum and is expected to begin operation in mid-1999.
USG is also investing $90 million to rebuild and modernize its wallboard
manufacturing line at the East Chicago, Ind., plant. This new line is
expected to begin production by the end of 1999.
GYPSUM WOOD FIBER PROJECT - Construction is underway to build a $90 million
facility to manufacture FIBEROCK brand gypsum wood fiber panels at the
Gypsum, Ohio, wallboard plant. The new production line is expected to begin
operating by the end of 1999 and will complement the fourth quarter 1997
acquisition of a gypsum fiber panel plant in Port Hawksbury, Nova Scotia.
COST REDUCTION PROJECTS - 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 where it is more economical than natural gypsum
rock.
CEILING TILE CAPACITY MODERNIZATION - A $35 million project that included
the replacement of two old production lines with one modern, high-speed
line at the ceiling tile plant in Cloquet, Minn., was completed during the
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first quarter of 1998. The start-up process of the new line occurred during
the second quarter and the new line is now fully operational.
WORKING CAPITAL
Working capital (current assets less current liabilities) as of September
30, 1998, amounted to $344 million, and the ratio of current assets to
current liabilities was 1.8 to 1. As of December 31, 1997, working capital
was $264 million, and the ratio of current assets to current liabilities
was 1.7 to 1. Receivables increased to $372 million as of September 30,
1998, from $297 million as of December 31, 1997, while inventories
increased to $241 million from $208 million and accounts payable rose to
$176 million from $146 million. These variations reflect normal seasonal
fluctuations as well as an increased level of business in 1998. Current
liabilities as of September 30, 1998, also include $5 million of dividends
payable in December 1998.
Cash and cash equivalents as of September 30, 1998, amounted to $102
million, an increase of $30 million from the December 31, 1997 level.
During the first nine months of 1998, net cash flows from operating
activities totaled $242 million, while net cash flows to investing
activities were $212 million. Net cash flows related to financing
activities during that period netted to zero.
Net cash flows related to financing activities included cash proceeds of
$40 million from the exercise approximately 2.45 million warrants issued on
May 6, 1993, in connection with a debt restructuring. Each warrant entitled
the holder to purchase one share of USG common stock at a price of $16.14
any time prior to May 6, 1998. The proceeds from the exercises were added
to the cash resources of the Corporation and are being used for general
corporate purposes.
DEBT
As of September 30, 1998, total debt amounted to $577 million compared with
$620 million as of December 31, 1997. During the first nine months of 1998,
USG retired $67 million of 8.75% senior debentures, and reduced seasonal
foreign borrowings by $1 million, while increasing industrial revenue bonds
by $22 million and borrowings on its Canadian revolving credit facility by
$3 million.
During the first quarter of 1998, USG issued $44 million of 5.65%
fixed-rate industrial revenue bonds due 2033 to investors, the proceeds of
which were deposited into a construction escrow account. These bonds,
together with $45 million of variable-rate industrial revenue bonds due
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<PAGE> 19
2032, issued last year in a related offering, will be used to finance the
gypsum wood fiber project. This debt is being recorded incrementally on
USG's books as funds are drawn from the escrow accounts throughout the
construction process. The variable-rate bonds were converted to 5.60%
fixed-rate bonds in the third quarter of 1998.
AVAILABLE LIQUIDITY
The Corporation has additional liquidity available through several
financing arrangements. Revolving credit facilities in the United States,
Canada and Europe allow the Corporation to borrow up to an aggregate of
$605 million (including a $125 million letter of credit subfacility in the
United States), under which, as of September 30, 1998, outstanding
revolving loans totaled $99 million and letters of credit issued and
outstanding amounted to $21 million, leaving the Corporation with $485
million of unused and available credit. The Corporation had additional
borrowing capacity of $50 million as of September 30, 1998, under a
revolving accounts receivable facility. (See Note 10.) A shelf registration
statement filed with the Securities and Exchange Commission allows 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.
STOCKHOLDER RIGHTS PLAN
On March 27, 1998, the Corporation approved the redemption of the preferred
share purchase rights declared under a 10-year rights agreement adopted in
May 1993 and adopted a new share purchase rights plan. The new plan is
designed to strengthen the previous provisions assuring the fair and equal
treatment for all stockholders in the event of any unsolicited attempt to
acquire the Corporation. The new rights plan, which became effective on
April 15, 1998, and will expire on March 27, 2008, has four basic
provisions. First, if an acquirer buys 15% or more of USG's outstanding
common stock, the plan allows other stockholders to buy, with each right,
additional USG shares at a 50% discount. Second, if USG is acquired in a
merger or other business combination transaction, rights holders will be
entitled to buy shares of the acquiring company at a 50% discount. Third,
if an acquirer buys between 15% and 50% of USG's outstanding common stock,
the company can exchange part or all of the rights of the other holders for
shares of the company's stock on a one-for-one basis, or shares of the new
junior preferred stock on a one-for-one-hundredth basis. Fourth, before an
acquirer buys 15% or more of USG's outstanding common stock, the rights are
redeemable for one cent per right at the option of the board of directors.
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<PAGE> 20
This provision permits the board to enter into an acquisition transaction
that is determined to be in the best interests of stockholders. The board
is authorized to reduce the 15% threshold to not less than 10%.
YEAR 2000 ISSUE
In 1996, USG began an evaluation of its computer-based systems to determine
the extent of the modifications required to make those systems Year 2000
compliant and to devise a plan to complete such modifications prior to
January 1, 2000. The plan that was devised is divided into five phases:
identification (a basic inventory of all systems), assessment, remediation,
testing and completion. The plan encompasses all of the Corporation's
computer systems including mainframe, mid-range, client server and desktop
systems as well as all specialized control systems for plant operations or
other facilities including those which are considered embedded systems. The
Corporation's mainframe systems are responsible for most of the information
processing done by the Corporation and will receive a majority of the
efforts dedicated to this project as well as a majority of the budget
allocated to it.
Of the plan phases, identification and assessment are essentially completed
and the process of modification encompassing the three phases of
remediation, testing and completion is substantially underway. As of
September 30, 1998, approximately 49% of the planned modifications to the
Corporation's mainframe systems had been completed. Fifty-one percent of
the modifications are currently in the process of remediation, testing and
completion of which 39% are expected to be completed by December 31, 1998,
with the remaining 12% to be completed by the second quarter of 1999. With
respect to the mid-range, client server and desktop systems, upgrading to
these systems is expected to be completed by mid-1999. With respect to
embedded systems, all U.S. and Canadian operations have been assessed and
remediation plans, where necessary, are underway. Embedded systems in other
operations are currently being assessed, with assessment scheduled to be
complete in the fourth quarter of 1998. All necessary upgrades will be
scheduled for completion by the middle of 1999. For purposes of this
description, embedded systems are intended to cover manufacturing plant
control equipment and building information and mechanical systems such as
telecommunication systems, HVAC, security systems, and other monitoring
equipment.
The Corporation's Year 2000 compliance plan also includes an analysis of
critical third-party suppliers of material and services to determine their
year 2000 compliance status. Virtually all critical suppliers to U.S. and
Canadian operations, with the exception of those to L&W Supply, have been
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<PAGE> 21
surveyed regarding their compliance status. Any remaining unsurveyed
critical suppliers and those supporting other operations, including L&W
Supply, will be contacted by early 1999. At this point, based on responses
received to date, it is not possible to forecast whether there will be, or
the extent of, any significant disruption due to third-party supplier
failures. However, the plan contemplates that the Corporation will be in
continuous contact with its critical suppliers through at least January 1,
2000, to assure that those suppliers are either able to continue to perform
without disruption or where feasible are replaced by ones which can so
perform. The Corporation has also been in contact with most of its major
customers on the status of each party's year 2000 compliance plans and
expects to continue such information exchanges through January 1, 2000, in
order to maintain those business relationships and to obtain updated
information for its own on-going contingency planning.
The cost of carrying out the Corporation's compliance plan is currently
budgeted at approximately $12 million. About 43% of this cost had been
incurred as of September 30, 1998 with another 21% to be incurred in the
fourth quarter of 1998. Most of the remainder will be spent in the first
half of 1999 with a small portion thereafter.
At this time, USG expects to be internally compliant with respect to Year
2000 issues by the middle of 1999. It is too soon to know whether it might
experience significant disruptions due to Year 2000 problems that affect
the operating environment in which it conducts business such as disruptions
to transportation, communications and electric power or other energy
systems or due to other similar causes. However, the inability of the
Corporation or its critical suppliers and customers to effectuate solutions
to their respective Year 2000 issues on a timely and cost effective basis
may have a material adverse effect on the Corporation.
In view of the uncertainties that the Corporation faces with respect to
Year 2000 issues, it has begun to formulate contingency plans to provide
for continuation of its operations in spite of possible Year 2000
disruptions. It expects to complete an initial version of its contingency
planning by mid-year 1999, but its plans will be continually evaluated and
modified as required by developments and circumstances which may emerge
between now and January 1, 2000.
EURO CURRENCY ISSUE
Effective January 1, 1999, 11 of the 15 countries that are members of the
European Union are scheduled to introduce a new, single currency unit, the
euro. Prior to full implementation of the new currency for the
participating countries on January 1, 2002, there will be a three-year
transition period during which parties may use either the existing
currencies or the euro. However, during the transition period, all
exchanges between currencies of the participating countries are required to
be first converted through the euro.
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<PAGE> 22
USG has conducted a comprehensive analysis to address the euro currency
issue. USG's efforts are focused on two phases: the first phase addresses
USG's European operations during the transition period, while the second
phase covers the full conversion of these operations to the euro. The
Corporation expects to be ready for the transition period by January 1,
1999, and for the full conversion by January 1, 2001, one year ahead of the
mandatory conversion date. USG is also preparing to deal with its critical
suppliers and customers during the transition period and will communicate
with them as appropriate. The Corporation does not expect the introduction
of the euro currency to have a material impact on its earnings or
consolidated financial position.
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.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements related to management's
expectations about future conditions. Actual business or other conditions
may differ significantly from management's expectations and accordingly
affect the Corporation's sales and profitability or other results. 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; increases in raw material and energy costs; risk
of disruption due to year 2000 issues such as those described above; euro
currency issues such as the ability and willingness of third parties to
convert affected systems in a timely manner and the actions of governmental
agencies or other third parties; and the outcome of contested litigation.
The Corporation assumes no obligation to update any forward-looking
information contained in this report.
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<PAGE> 23
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 September
30, 1998, and the related condensed consolidated statement of earnings for
the three-month and nine-month periods ended September 30, 1998 and 1997
and the condensed consolidated statement of cash flows for the nine months
ended September 30, 1998 and 1997. 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
October 19, 1998
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<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ASBESTOS AND RELATED INSURANCE 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 produced 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 16 to the financial
statements in the Corporation's 1997 Annual Report for additional
information on the asbestos litigation.
U.S. Gypsum is a defendant in 15 Property Damage Cases, many of which
involve multiple buildings. One of the cases is a conditionally certified
class action comprised of all colleges and universities in the United
States, which certification is presently limited to the resolution of
certain allegedly "common" liability issues. (Central Wesleyan College v.
W.R. Grace & Co., et al., U.S.D.C.S.C.). Fourteen additional property
damage claims have been threatened against U.S. Gypsum. During the years
1995-1997, 6 new Property Damage Cases were filed against U.S. Gypsum while
32 were closed; the Company spent an average of $25 million per year on the
defense and settlement of Property Damage Cases, but received a total of
$148 million over the three-year period from insurance carriers, including
reimbursement for expenditures in prior years.
U.S. Gypsum's estimated cost of resolving pending Property Damage Cases is
discussed below. (See "Estimated Cost.")
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<PAGE> 25
U.S. Gypsum is also a defendant in Personal Injury Cases brought by
approximately 89,000 claimants, as well as an additional 43,000 claims that
have been settled but will be closed over time. Filings of new Personal
Injury Cases totaled approximately 64,000 new claims in the first nine
months of 1998, compared to 23,500 claims in 1997, 28,000 claims in 1996
and 14,000 in 1995. Filings of Personal Injury Cases have increased
substantially as a result of rulings by a Federal appellate court and the
U.S. Supreme Court rejecting the Georgine v. Amchem class action
settlement, in which U.S. Gypsum had participated as a member of the Center
for Claims Resolution, referred to below. U.S. Gypsum's average cost to
resolve Personal Injury Cases during the years 1995-1997 was approximately
$1,600 per claim. Over that period, U.S. Gypsum expended an average of $30
million per year on Personal Injury Cases, of which an average of $26
million was paid by insurance.
U.S. Gypsum is a member, together with 19 other former producers of
asbestos-containing products, of the Center for Claims Resolution (the
"Center"), which has assumed the handling of all Personal Injury Cases
pending against U.S. Gypsum and the other members of the Center. Costs of
defense and settlement are shared among the members of the Center pursuant
to predetermined sharing formulae. Virtually all of U.S. Gypsum's personal
injury liability and defense costs are paid by its insurance carriers,
including those insurance carriers that in 1985 signed an Agreement
Concerning Asbestos-Related Claims (the "Wellington Agreement"), obligating
them to provide coverage for the defense and indemnity costs incurred by
U.S. Gypsum in Personal Injury Cases. Punitive damages have never been
awarded against U.S. Gypsum in a Personal Injury Case; whether such an
award would be covered by insurance under the Wellington Agreement would
depend on state law and the terms of the individual policies.
U.S. Gypsum's estimated cost of resolving pending Personal Injury Cases is
discussed below. (See "Estimated Cost.")
U.S. Gypsum sued its insurance carriers in 1983 to obtain coverage for
asbestos cases (the "Coverage Action") and has settled all disputes with 12
of its 17 solvent carriers. As of December 31, 1997, after deducting
insolvent coverage and insurance paid out to date, approximately $325
million of potential insurance remained, including approximately $140
million of insurance from five carriers that have agreed, subject to
certain limitations and conditions, to cover both property damage and
personal injury costs; $140 million from two carriers that have agreed,
subject to certain limitations and conditions, to cover personal injury but
not yet property damage; and approximately $45 million from three carriers
that have not yet agreed to cover either. 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
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<PAGE> 26
its effort to secure the contested coverage.
Aggregate insurance payments exceeded U.S. Gypsum's total expenditures for
all asbestos-related matters, including property damage, personal injury,
insurance coverage litigation and related expenses, by $2.3 million for
1997, $41 million in 1996 and $10 million in 1995, due primarily to
nonrecurring reimbursement for amounts expended in prior years.
ESTIMATED COST - The asbestos litigation involves numerous uncertainties
that affect U.S. Gypsum's ability to estimate reliably its probable
liability in the Personal Injury and Property Damage Cases. In the Property
Damage Cases, such uncertainties include the identification and volume of
asbestos-containing products in the buildings at issue in each case, which
is often disputed; the claimed damages associated therewith; the viability
of statute of limitations, product identification and other defenses, which
varies depending upon the facts and jurisdiction of each case; the amount
for which such cases can be resolved, which has normally (but not
uniformly) been substantially lower than the claimed damages; and the
viability of claims for punitive and other forms of multiple damages.
Uncertainties in the Personal Injury Cases include the number,
characteristics and venue of Personal Injury Cases that are filed against
U.S. Gypsum; the Center's ability to continue to negotiate pre-trial
settlements at historical or acceptable levels; the level of physical
impairment of claimants; the viability of claims for punitive damages; and
the Center's ability to develop an alternate claims-handling vehicle that
retains the key benefits of the Georgine settlement. As a result, any
estimate of U.S. Gypsum's liability, while based upon the best information
currently available, may not be an accurate prediction of actual costs and
is subject to revision as additional information becomes available and
developments occur.
Pending Cases: Subject to the above uncertainties, and based in part on
information provided by the Center, U.S. Gypsum estimates that it is
probable that Property Damage and Personal Injury Cases were pending on
June 30, 1998, can be resolved for an amount totaling between $265 million
and $340 million, including defense costs. These amounts are expected to be
expended over the next five years. The estimated cost of resolving pending
cases has increased since December 31, 1997, reflecting the increased
number of pending Personal Injury Cases resulting from the rejection of the
Georgine settlement referred to above. Significant insurance funding is
available for these costs, as detailed below.
Future Cases: U. S. Gypsum is unable to reasonably estimate the cost of
resolving Property Damage Cases and Personal Injury Cases that will be
filed in the future. The Company anticipates that few additional Property
Damage Cases will be filed, as a result of the operation of statutes of
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<PAGE> 27
limitations and the impact of certain other factors, although it is
possible that any cases that are filed may seek substantial damages. It is
anticipated that Personal Injury Cases will continue to be filed in
substantial numbers for the foreseeable future, although the percentage of
such cases filed by claimants with little or no physical impairment is
expected to remain high. However, the Company does not believe that the
number and severity of future cases can be predicted with sufficient
accuracy to provide the basis for a reasonable estimate of the liability
that will be associated with such cases.
Accounting for Asbestos Liability: As of June 30, 1998, U.S. Gypsum had
reserved $265 million for liability from pending Property Damage and
Personal Injury Cases (equaling the lower end of the estimated range of
costs provided above). U.S. Gypsum had a corresponding receivable from
insurance carriers of approximately $220 million, the estimated portion of
the reserved amount that is expected to be paid or reimbursed by committed
insurance. Additional amounts may be reimbursed by insurance depending upon
the outcome of litigation and negotiations relating to insurance that is
presently disputed.
U.S. Gypsum had an additional reserve of $105 million as of June 30, 1998,
that was available for future asbestos liabilities and asbestos- related
expenses. The Company continues to accrue $18 million per year for asbestos
costs and will periodically compare its estimates of liability to
then-existing reserves and available insurance assets and adjust its
reserves as appropriate. It is possible that U.S. Gypsum will determine in
the future that additional charges to results of operations are necessary,
although whether additional charges will be required and, if so, the timing
and amount of such charges, cannot presently be predicted.
CONCLUSION - The above estimates and reserves will be reevaluated
periodically as additional information becomes available. It is possible
that additional charges to earnings may be necessary in the future if the
amounts reflected above prove insufficient in light of future events, and
that any such charge could be material to results of operations in the
period in which it is taken. However, it is management's opinion, taking
into account all of the above information and uncertainties, including
currently available information concerning U.S. Gypsum's liabilities,
reserves, and probable insurance coverage, that the asbestos litigation
will not have a material adverse effect on the liquidity or consolidated
financial position of the Corporation.
ENVIRONMENTAL LITIGATION
The Corporation and certain of its subsidiaries have been notified by state
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<PAGE> 28
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 third
quarter of 1998.
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<PAGE> 29
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
-----------------------------------
Raymond T. Belz, Vice President and
Controller, USG Corporation
November 5, 1998
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<PAGE> 1
EXHIBIT (15)
November 5, 1998
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 33-60563 and 33-64217 on
Form S-3 and 33-22581, as amended, 33-22930, 33-36303, 33-52573, 33-52715,
33-63554, 33-65383, 333-34147, 333-29137 and 33-11496 on Form S-8 its Form
10-Q for the quarter ended September 30, 1998, which includes our report
dated October 19, 1998, 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
-30-
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