<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1999
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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, 1999, 49,440,579 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, 1999 and 1998 3
Consolidated Balance Sheet:
As of September 30, 1999 and December 31, 1998 4
Consolidated Statement of Cash Flows:
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
Report of Independent Public Accountants 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
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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,
------------------------------ ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 952 $ 814 $ 2,670 $ 2,324
Cost of products sold 669 581 1,891 1,674
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Gross profit 283 233 779 650
Selling and administrative expenses 85 75 244 221
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Operating profit 198 158 535 429
Interest expense 13 13 40 39
Interest income (3) (1) (6) (3)
Other expense, net 1 - 2 3
---------- ---------- ---------- ----------
Earnings before income taxes 187 146 499 390
Income taxes 71 55 193 150
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Net earnings 116 91 306 240
========== ========== ========== ==========
Basic earnings per common share 2.34 1.83 6.16 4.95
Diluted earnings per common share 2.32 1.80 6.09 4.78
Dividends paid per common share 0.10 - 0.30 -
Average common shares 49,623,637 49,679,544 49,764,386 48,457,527
Average diluted common shares 50,165,592 50,534,500 50,352,316 50,157,495
</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,
1999 1998
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 273 $ 152
Receivables (net of reserves - $19 and $18) 393 349
Inventories 238 234
Current and deferred income taxes 68 62
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Total current assets 972 797
Property, plant and equipment (net of reserves
for depreciation and depletion - $353 and $298) 1,425 1,214
Other assets 297 346
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Total Assets 2,694 2,357
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 184 157
Accrued expenses 281 237
Notes payable 11 10
Current portion of long-term debt - 25
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Total current liabilities 476 429
Long-term debt 577 561
Deferred income taxes 173 169
Other liabilities 690 680
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (29) (10)
Capital received in excess of par value 306 317
Deferred currency translation (31) (30)
Reinvested earnings 527 236
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Total stockholders' equity 778 518
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Total Liabilities and Stockholders' Equity 2,694 2,357
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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,
------------------------------
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 306 $ 240
Adjustments to reconcile net earnings to net cash:
Depreciation, depletion and amortization 68 60
Current and deferred income taxes (2) 11
(Increase) decrease in working capital:
Receivables (44) (75)
Inventories (4) (33)
Payables 27 35
Accrued expenses 44 9
(Increase) decrease in other assets (32) 1
Increase (decrease) in other liabilities 92 (6)
Other, net (6) -
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Net cash from operating activities 449 242
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INVESTING ACTIVITIES:
Capital expenditures (273) (214)
Net proceeds from asset dispositions 2 2
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Net cash to investing activities (271) (212)
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FINANCING ACTIVITIES:
Issuance of debt 56 60
Repayment of debt (49) (107)
Short-term borrowings, net (15) 4
Cash dividends paid (15) (5)
Issuances of common stock 11 48
Purchases of common stock (45) -
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Net cash (to) from financing activities (57) -
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Net increase in cash and cash equivalents 121 30
Cash and cash equivalents at beginning of period 152 72
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Cash and cash equivalents at end of period 273 102
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 50 49
Income taxes paid 192 134
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The consolidated financial statements of USG Corporation and its
subsidiaries ("USG" or the "Corporation") included herein have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Actual results
could differ from those estimates. In the opinion of management, the
statements reflect all adjustments, which are of a normal recurring
nature, necessary to present fairly the Corporation's financial
position as of September 30, 1999, and December 31, 1998, results of
operations for the three months and nine months ended September 30,
1999 and 1998, and cash flows for the nine months ended September 30,
1999 and 1998. 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 1998
Annual Report on Form 10-K dated February 26, 1999.
(2) Total comprehensive income, consisting of net earnings and foreign
currency translation adjustments, amounted to $119 million and $305
million in the three months and nine months ended September 30, 1999,
respectively. For the respective 1998 periods, total comprehensive
income amounted to $93 million and $236 million. There was no tax
impact on the foreign currency translation adjustments.
(3) As of September 30, 1999, common shares totaling 1,797,850 were
reserved for future issuance in conjunction with existing stock option
grants. In addition, 551,311 common shares were reserved for future
grants. Shares issued in option exercises may be from original issue or
available treasury shares.
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(4) 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):
NET SHARES PER SHARE
THREE MONTHS ENDED SEPTEMBER 30, EARNINGS (000) AMOUNT
-----------------------------------------------------------------------
1999
Basic earnings $ 116 49,624 $ 2.34
Effect of Dilutive Securities:
Options 542
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Diluted Earnings 116 50,166 2.32
=======================================================================
1998
Basic earnings 91 49,680 1.83
Effect of Dilutive Securities:
Options 831
Warrants 24
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Diluted Earnings 91 50,535 1.80
=======================================================================
NINE MONTHS ENDED SEPTEMBER 30,
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1999
Basic earnings $ 306 49,764 $ 6.16
Effect of Dilutive Securities:
Options 588
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Diluted Earnings 306 50,352 6.09
=======================================================================
1998
Basic earnings 240 48,458 4.95
Effect of Dilutive Securities:
Options 897
Warrants 802
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Diluted Earnings 240 50,157 4.78
=======================================================================
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(5) USG's operations are organized into two operating segments: North
American Gypsum, which manufactures, markets and distributes gypsum
wallboard and related products in the United States, Canada and Mexico,
and Worldwide Ceilings, which manufactures and markets ceiling tile,
ceiling grid and other interior systems products worldwide. Operating
segment results for the third quarter and first nine months of 1999 and
1998 were as follows (dollars in millions):
NET SALES OPERATING PROFIT
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THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 1999 1998
-----------------------------------------------------------------------
North American Gypsum $ 815 $ 669 $ 196 $ 154
Worldwide Ceilings 172 172 18 18
Corporate - - (16) (14)
Eliminations (35) (27) - -
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Total 952 814 198 158
=======================================================================
NINE MONTHS ENDED SEPTEMBER 30,
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North American Gypsum $ 2,265 $ 1,905 $ 532 $ 417
Worldwide Ceilings 490 495 48 51
Corporate - - (45) (39)
Eliminations (85) (76) - -
-----------------------------------------------------------------------
Total 2,670 2,324 535 429
=======================================================================
(6) On September 30, 1999, USG announced the successful start-up of more
than 700 million square feet of SHEETROCK brand wallboard manufacturing
capacity at its new state-of-the-art plant in Bridgeport, Ala. In
conjunction with USG's strategy of reducing costs by replacing old,
high-cost capacity with new, low-cost capacity, USG is proceeding with
its previously announced plan to close down 350 million square feet of
high-cost manufacturing capacity at its 90-year-old Plasterco, Va.,
plant on January 14, 2000. In the third quarter of 1999, USG recorded a
$22 million pretax ($14 million after-tax; $0.27 per share) charge to
cost of products sold for expenses related to the closing of the plant
and adjacent gypsum mine.
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<PAGE> 9
(7) 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 in which the agreement is terminated.
Energy 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 Exchange 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
these exposures on a consolidated basis, which allows netting of
certain exposures to take advantage of any natural offsets. To the
extent the net exposures are hedged, forward contracts are used. Gains
and/or losses on these foreign currency hedges are included in net
earnings in the period in which the exchange rates change.
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(8) 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 results of operations or financial
position. See Part II, Item 1. "Legal Proceedings" for additional
information on environmental litigation.
(9) Under a revolving accounts receivable facility, the trade receivables
of U.S. Gypsum and USG Interiors, Inc. are being purchased by USG
Funding Corporation 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 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
CONSOLIDATED RESULTS
NET SALES
USG's third quarter 1999 net sales were a record $952 million, up 17% from $814
million in the comparable 1998 period. Construction activity in North America
remained strong during the third quarter resulting in record quarterly demand
and selling prices for USG's SHEETROCK brand gypsum wallboard. For the first
nine months of 1999, net sales totaled $2,670 million, up 15% from $2,324
million in the comparable 1998 period.
GROSS PROFIT
Gross profit as a percent of net sales was 29.7% and 29.2% in the third quarter
and first nine months of 1999, respectively, up from 28.6% and 28.0% in the
respective 1998 periods. The improved margins in 1999 primarily reflect the
higher selling prices for SHEETROCK brand wallboard, which more than offset
higher asbestos-related costs and a third quarter $22 million pretax ($14
million after-tax) charge related to a plant closing.
SELLING AND ADMINISTRATIVE EXPENSES
Third quarter and first nine months 1999 selling and administrative expenses
increased 13% and 10%, respectively, over the prior-year periods. However, as a
percentage of net sales, these expenses were 8.9% in the third quarter and 9.1%
in the first nine months of 1999, down from 9.2% and 9.5% in the comparable 1998
periods. The higher levels of expense dollars in the 1999 periods primarily
reflect increases for incentive compensation and information technology.
INTEREST EXPENSE
Interest expense remained flat at $13 million in the third quarter compared to
last year. For the first nine months of 1999, interest expense was $40 million,
up $1 million from the corresponding 1998 period.
INCOME TAXES
As a result of higher levels of earnings in 1999, income tax expense increased
to $71 million and $193 million in the three months and nine months ended
September 30, 1999, respectively, up from $55 million and $150 million for the
comparable prior-year periods.
NET EARNINGS
Net earnings in the third quarter of 1999 were $116 million, up 27% from $91
million in the prior-year period. Diluted earnings per share increased to $2.32
from $1.80 a year ago. The third quarter plant closing lowered 1999 earnings per
share by $0.27. For the first nine months of 1999, net earnings were $306
million, or $6.09 per diluted share. Comparable 1998 net earnings amounted to
$240 million, or $4.78 per share.
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CORE BUSINESS RESULTS
<TABLE>
<CAPTION>
(dollars in millions) NET SALES OPERATING PROFIT
- - --------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 1999 1998
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 536 $ 445 $ 149 $ 129
L&W Supply Corporation 362 293 31 13
CGC Inc. (gypsum) 41 33 8 5
Other subsidiaries* 29 26 8 7
Eliminations (153) (128) - -
- - --------------------------------------------------------------------------------------------
Total 815 669 196 154
- - --------------------------------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 121 116 17 14
USG International 55 67 - 3
CGC Inc. (ceilings) 11 9 1 1
Eliminations (15) (20) - -
- - --------------------------------------------------------------------------------------------
Total 172 172 18 18
- - --------------------------------------------------------------------------------------------
Corporate - - (16) (14)
Eliminations (35) (27) - -
- - --------------------------------------------------------------------------------------------
Total USG Corporation 952 814 198 158
============================================================================================
<CAPTION>
NET SALES OPERATING PROFIT
- - --------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 1999 1998
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 1,500 $ 1,288 $ 428 $ 359
L&W Supply Corporation 999 811 65 28
CGC Inc. (gypsum) 115 99 19 13
Other subsidiaries* 78 69 20 17
Eliminations (427) (362) - -
- - --------------------------------------------------------------------------------------------
Total 2,265 1,905 532 417
- - --------------------------------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 345 337 46 40
USG International 159 180 - 8
CGC Inc. (ceilings) 29 28 2 3
Eliminations (43) (50) - -
- - --------------------------------------------------------------------------------------------
Total 490 495 48 51
- - --------------------------------------------------------------------------------------------
Corporate - - (45) (39)
Eliminations (85) (76) - -
- - --------------------------------------------------------------------------------------------
Total USG Corporation 2,670 2,324 535 429
============================================================================================
</TABLE>
*Includes Yeso Panamericano, S.A. de C.V., a building products business in
Mexico, Gypsum Transportation Limited, a shipping company in Bermuda, and USG
Canadian Mining Ltd., a mining operation in Nova Scotia.
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<PAGE> 13
NORTH AMERICAN GYPSUM
Net sales in the third quarter of 1999 increased 22% to $815 million and
operating profit increased 27% to $196 million as compared to the third quarter
of 1998.
First nine months 1999 net sales of $2,265 million and operating profit of $532
million, increased 19% and 28%, respectively, versus comparable 1998 levels.
United States Gypsum Company: U.S.Gypsum's third quarter net sales and operating
profit increased 20% and 16%, respectively, versus the comparable 1998 period.
With its plants running at full capacity, shipments of SHEETROCK brand wallboard
totaled 2.429 billion square feet, a record for any quarter and an 8% increase
from 2.254 billion square feet a year ago. U.S. Gypsum also reported record
shipments of SHEETROCK brand joint compound and DUROCK brand cement board.
Improved profitability primarily reflected higher realized selling prices for
SHEETROCK brand wallboard, which averaged $156.82 per thousand square feet
during the third quarter, a new all-time high and a 20% increase over the third
quarter of 1998.
These favorable results were partially offset by higher wallboard production
costs, asbestos-related costs and a $22 million pretax charge related to the
closing of the company's wallboard plant in Plasterco, Va. Wallboard production
costs were up primarily due to a rise in paper fiber prices and, to a lesser
degree, disruptions caused by Hurricane Floyd at the company's eastern seaboard
plants. During the third quarter, U.S. Gypsum's charge for asbestos costs was
$20 million, compared with $30 million in the second quarter of 1999 and $4.5
million in the third quarter of 1998. See "Legal Contingencies" below and Part
II, Item 1. "Legal Proceedings" for additional information on asbestos
litigation.
L&W Supply Corporation: Third quarter 1999 net sales for L&W Supply, the leading
distributor of wallboard and related building products in the United States,
increased 24% to a record level of $362 million. Operating profit of $31
million, also a record, more than doubled the $13 million level of a year ago.
This performance reflects record shipments and prices for wallboard and record
sales and margins for complementary building materials. As of September 30,
1999, L&W Supply operated 191 locations in the United States.
CGC Inc.: The gypsum business of Canada-based CGC Inc., reported a 24% increase
in net sales, while operating profit rose 60% versus the third quarter of 1998.
As a result of growing demand for wallboard in Canada, CGC realized higher
domestic wallboard shipments and prices during the quarter.
WORLDWIDE CEILINGS
Net sales and operating profit in the third quarter of 1999 totaled $172 million
and $18 million, respectively. The same amounts were reported in the third
quarter of 1998.
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First nine months 1999 net sales of $490 million and operating profit of $48
million were down 1% and 6%, respectively, from comparable 1998 levels.
USG's domestic ceilings business, USG Interiors, reported operating profit of
$17 million, an increase of $3 million over the third quarter of 1998. The
ceilings division of Canada-based CGC contributed $1 million in operating
profit, the same as last year. USG International had breakeven performance in
the third quarter versus $3 million of operating profit last year.
MARKET CONDITIONS AND OUTLOOK
Based on leading indicators, such as new housing starts, existing home sales and
nonresidential construction activity, market conditions are expected to remain
favorable through the remainder of 1999 and into 2000. Key drivers of demand for
USG's products, such as consumer confidence, employment rates and interest
rates, all remain at favorable levels. Profit contributions from USG's strategic
plan (described below) should also become increasingly apparent. U.S. Gypsum's
new Bridgeport, Ala., SHEETROCK brand wallboard plant completed its successful
start-up during the third quarter of 1999 and is now operating at capacity.
Completion of the new wallboard line at the East Chicago plant is on schedule
for the fourth quarter.
Housing starts during 1999 have been running at strong levels. USG is currently
forecasting 1999 U.S. housing starts to exceed the 1.617 million units
experienced in 1998.
The repair and remodel market has been the fastest growing segment for USG,
accounting for the second-largest portion of its sales. Record 1998 sales of
existing homes of 4.8 million units is supporting residential repair and
remodeling in 1999. This, combined with strong nonresidential repair and
remodeling, is continuing to provide growth in this market segment.
Sales of USG products to the nonresidential construction market are expected to
remain strong throughout 1999. Future demand for USG products from new
nonresidential construction is gauged by floor space for which contracts are
signed. Installation of gypsum and ceilings products follows signing of
construction contracts by about a year. Floor space for which contracts were
signed rose 13% in 1998, although segments that are most relevant to USG's
business, such as offices and stores, grew at a much higher rate.
While market conditions continue to be good in North America, certain
international markets remain weak. Most of USG's sales outside of North America
come from Western Europe, Latin America and the Asia Pacific region. USG's
exposure to the economic problems of Asia and Eastern Europe is small. Business
conditions continue to be soft in Asia and parts of Europe, but have remained
solid in Latin America.
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<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL STRATEGY
USG is executing a strategy to create future earnings growth through investment
in its businesses and immediate returns to investors through dividends and share
repurchases.
Earnings Growth: USG's plan for earnings growth includes: introducing new
products and product platforms; improving service; strengthening its brands;
adding capacity to serve growing customers and markets; renovating manufacturing
capacity to make USG the undisputed low-cost producer; and expanding
distribution. USG anticipates that these initiatives will also reduce the impact
of cyclicality on its earnings.
Dividends: USG paid cash dividends of $0.10 per share in March, June, and
September of 1999.
Share Repurchases: USG purchased 429,000 shares in the third quarter and has
acquired over 1.1 million shares since its multiyear share-repurchase program
began in the fourth quarter of last year. Under the program, USG will repurchase
up to 5 million shares. Share repurchases are being made in the open market or
through privately negotiated transactions and are being funded with available
cash from operations.
CAPITAL EXPENDITURES
Capital spending amounted to $273 million in the first nine months of 1999,
compared with $214 million in the corresponding 1998 period. As of September 30,
1999, capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $304 million, compared with $481 million as
of December 31, 1998. USG's capital expenditures program includes the following
projects:
Wallboard Capacity Modernization and Expansion: As a major part of USG's
earnings growth strategy, U.S. Gypsum is replacing high-cost wallboard capacity
with new, low-cost plants and production lines. These projects also will add a
net 2 billion square feet of capacity to serve growing regional markets and
customers.
In the Southeast, the construction of a new plant in Bridgeport, Ala., was
successfully completed. This facility, which manufactures SHEETROCK brand
wallboard, began operation in the second quarter of 1999 and is currently
operating at full capacity.
In the Midwest, U.S. Gypsum is near completion of a new production line for
SHEETROCK brand wallboard at its East Chicago, Ind., plant. This new line is
scheduled for startup in the fourth quarter of 1999.
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<PAGE> 16
In the Northeast, U.S. Gypsum is building a new SHEETROCK brand wallboard plant
in Aliquippa, Pa. Construction of this facility is expected to be completed in
early 2000.
In the Northwest, ground was broken during the second quarter of 1999 for a new
wallboard plant in Rainier, Ore. A significant portion of the new capacity
provided by this plant will replace existing USG shipments into the region from
plants as far away as Iowa, Texas and Ontario, Canada. This facility is expected
to be fully operational in 2001.
In the Southwest, ground was also broken during the second quarter of 1999 for a
new production line at U.S. Gypsum's plant in Plaster City, Calif., which will
replace a 41-year-old, high-cost production line. This facility also is expected
to be fully operational in 2001.
Gypsum Fiber Project: Construction continues on a facility to manufacture
FIBEROCK brand gypsum fiber panels, USG's newest product platform. This
production line, which is being built at the Gypsum, Ohio, wallboard plant, is
scheduled for startup before the end of the year.
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 process control upgrades to improve raw material
usage and operating efficiencies.
WORKING CAPITAL
Working capital (current assets less current liabilities) as of September 30,
1999, amounted to $496 million, compared with $368 million as of December 31,
1998. The ratio of current assets to current liabilities was 2.0 to 1 as of
September 30, 1999, compared with 1.9 to 1 as of December 31, 1998.
Receivables increased to $393 million as of September 30, 1999, from $349
million as of December 31, 1998. Inventories increased to $238 million from $234
million, and accounts payable rose to $184 million from $157 million. These
variations reflect an increased level of business in the third quarter of 1999
as compared to the fourth quarter of 1998.
Cash and cash equivalents as of September 30, 1999, amounted to $273 million, up
from $152 million as of December 31, 1998. During the first nine months of 1999,
net cash flows from operating activities totaled $449 million. Net cash flows to
investing activities were $271 million. This reflects capital spending of $273
million (discussed above), offset slightly by net proceeds of $2 million from
asset dispositions. Net cash flows to financing activities of $57 million
included $45 million used for stock repurchases, $15 million used for cash
dividends, $8 million used for net repayments of debt, partially offset by $11
million received from the exercise of stock options.
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<PAGE> 17
DEBT
As of September 30, 1999, total debt amounted to $588 million, a decrease of $8
million from December 31, 1998. Primary changes in USG's debt structure since
year-end 1998 include the retirement of $25 million of 8.75% debentures due
2017, the repayment of $15 million of Canadian credit facility borrowings, a
reduction of $24 million of old higher-cost industrial revenue bonds (IRBs) and
an increase of $54 million of IRBs associated with the Gypsum, Ohio, and East
Chicago, Ind., capital projects. Foreign short-term and long-term notes payable
increased by $2 million.
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 $608 million
(including a $125 million letter of credit subfacility in the United States),
under which, as of September 30, 1999, outstanding revolving loans totaled $90
million and letters of credit issued and outstanding amounted to $15 million,
leaving the Corporation with $503 million of unused and available credit. The
Corporation had additional borrowing capacity of $50 million as of September 30,
1999, under a revolving accounts receivable facility. (See Note 8.) 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.
OTHER MATTERS
YEAR 2000 COMPLIANCE
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 was divided into five phases: identification (a basic inventory of all
systems), assessment, remediation, testing and completion. The plan encompasses
all of USG's computer systems including mainframe, midrange, client server and
desktop systems as well as all specialized control systems for plant operations
or other facilities including those that are considered embedded systems. USG's
mainframe systems are responsible for most of the information processing done by
the Corporation and have received 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, assessment, remediation and testing are essentially completed.
As of September 30, 1999, 100% of the planned modifications to USG's mainframe
systems had been completed. With respect to the midrange, client server and
desktop systems, upgrading to these systems is expected to be completed by the
end of November 1999. With respect to embedded systems, all operations have been
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<PAGE> 18
assessed and remediation plans, where necessary, are under way. All necessary
upgrades are scheduled for completion by the end of November 1999. Some of these
activities have been deferred due to the full-time operation of USG's gypsum
wallboard plants in trying to satisfy record customer demand. 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.
Suppliers and Customers: USG'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 have been
surveyed regarding their compliance status. Even with the level of response from
these parties, there continues to be a degree of uncertainty as to whether there
will be, or the extent of, any significant disruption due to third party
supplier failures. Moreover, the plan contemplates that USG will be in ongoing
contact with its critical suppliers through at least January 1, 2000, to assure
that those suppliers either are able to continue to perform without disruption
or where feasible are replaced by ones that can so perform. USG also has 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 ongoing contingency planning. Based on the
responses received to date, internal review of its collection history from major
customers, and the steps it will take to prepare for the critical period, USG
believes that it will have adequate liquidity to continue its business
operations in whatever circumstances should come about.
Costs: The cost of carrying out USG's compliance plan is currently estimated at
$12 million. As of September 30, 1999, about 66% of the budgeted amount has been
incurred. Much of the balance may be expended in the remaining months of 1999
with a small amount projected for early 2000.
Contingency Plans: It is still difficult to predict with certainty whether USG
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 USG 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 USG.
In view of the uncertainties that USG faces with respect to year 2000 issues, it
has formulated a contingency plan to provide for continuation of its operations
in the event of possible year 2000 disruptions. The plan will be continually
evaluated and modified as required by developments and circumstances that may
emerge between now and January 1, 2000.
USG's contingency plan provides for the continuation of its business and
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<PAGE> 19
operations through the transition period surrounding January 1, 2000. The
planning process involved detailed reviews by operating personnel of all of the
information that has been gathered concerning critical suppliers, customers and
internal systems to determine all foreseeable risks to the continuation of
business operations. Based on that review process, USG has prepared a set of
operating procedures for dealing with the identified risks. These procedures are
specific to each operation and provide for flexible responses to conditions, as
they are perceived to develop towards the critical date of January 1, 2000.
Without suggesting any decisions have been made to implement these plans or that
the following list is in any way exhaustive, the kinds of responses that could
be taken in the appropriate circumstances would be: building up inventories of
raw materials or finished goods, replacing or supplementing existing suppliers,
altering terms of shipment or payment with customers, adding backup power and
communications equipment to certain facilities, and expanding communications
resources by providing cellular phones and laptop computers to more personnel.
Worst-Case Scenario: In the view of USG's year 2000 contingency planning team,
the most reasonably likely worst case scenario is that there might be a local or
regional disruption to its plant production due to temporary power outages or
similar disruption of public service suppliers. The Corporation's contingency
planning is aimed at mitigating the impact of any such disruptions by arranging
production at other facilities in the region to replace any that are impacted by
a short-term disruption.
Whether this approach will be feasible depends upon the level of operations
generally at the time of any such occurrence. If the industry continues to
operate at full capacity with production subject to allocation, it will probably
not be feasible to replace disrupted production without further impacting the
short-supply situation. Since the Corporation has gypsum wallboard plants in
many parts of the U.S. and Canada, it is better positioned to deal with
potential disruptions than most of its competitors.
A key uncertainty in contingency planning for possible disruptions is what
impact these may have upon consumers of USG products. In the context of the
worst-case scenario, some consumers will undoubtedly be impacted by the
disruptions with a resultant decrease in demand for USG products. Similarly, the
critical period for likely disruption will fall in the heart of winter (December
- - - February) when the industry typically experiences a seasonal slowing down of
building activity.
USG's contingency planning attempts to analyze the interplay of these various
factors taking advantage of years of operating experience to create a reasonable
and flexible plan to respond to a very unpredictable and largely unique set of
circumstances.
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<PAGE> 20
Conclusion: While USG will continue to fine tune its contingency planning even
beyond January 1, 2000, management believes that, in terms of the Corporation's
internal operating systems, it will be able to continue its North American
operations without material disruption. Based on management's present knowledge,
it also does not foresee any significant long-lasting disruptions to USG's
businesses in North America from external causes. Outside of North America,
management is less certain, but still believes that USG's businesses can sustain
themselves through whatever difficulties are encountered without material
adverse consequences to its overall business.
EURO CURRENCY CONVERSION
Effective January 1, 1999, 11 of the 15 countries that are members of the
European Union introduced 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.
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. The second phase covers full
conversion of these operations to the euro. The Corporation was ready for the
transition period that began on January 1, 1999, and expects to be ready for
full conversion by January 1, 2002, the mandatory conversion date. USG also is
prepared 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 adverse impact
on its business, results of operations or 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. As discussed in Part
II, Item 1. "Legal Proceedings," U.S. Gypsum accrued $20 million in the third
quarter of 1999 for asbestos-related costs.
Asbestos charges for the first nine months of 1999 totaled $62.5 million
compared with $13.5 million for the same 1998 period. Although new Personal
Injury Cases were filed in the first nine months of 1999 at significantly below
the rate at which cases were filed in the first nine months of 1998, asbestos
charges to results of operations have been higher in 1999 because the estimated
cost of resolving cases pending during 1998 will, when expended, consume all of
U.S. Gypsum's remaining insurance; as a result, the estimated liability from new
case filings is currently being charged against reported earnings.
U.S. Gypsum expects that periodic charges will continue to be necessary in the
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<PAGE> 21
future in amounts that could be higher or lower than recent quarters, and which
could be material to the period in which they are taken. The amount of future
periodic charges will depend upon factors that include, but may not be limited
to, the rate at which new asbestos-related claims are filed, the potential
imposition of medical criteria, U.S. Gypsum's average settlement cost and the
estimated cost of resolving pending claims, and the necessity of higher-cost
settlements in particular jurisdictions. In addition, U.S. Gypsum will continue
to evaluate whether its probable liability for future personal injury cases can
be reasonably estimated. If such an estimate can be made, it is probable that an
additional charge to results of operations would be necessary. Although the
timing and amount of the resulting charge to results of operations cannot
presently be determined, the amount is expected to be material to results of
operations in the period in which it is taken. The asbestos litigation is not
expected to have a significant impact on the Corporation's liquidity or cash
flows during 1999. See Part II, Item 1. "Legal Proceedings" for additional
information on 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 results of operations or 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 asbestos-related litigation, the rate of new asbestos-related
filings and the other factors described herein. The Corporation assumes no
obligation to update any forward-looking information contained in this report.
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<PAGE> 22
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, 1999,
and the related condensed consolidated statement of earnings for the three-month
and nine-month periods ended September 30, 1999 and 1998, and the condensed
consolidated statement of cash flows for the nine-month periods ended September
30, 1999 and 1998. 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 14, 1999
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<PAGE> 23
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 15 to the financial
statements in the Corporation's 1998 Annual Report for additional information
about the asbestos litigation.
U.S. Gypsum is a defendant in 11 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.). Ten additional property damage claims have been threatened
against U.S. Gypsum. During the years 1996 -1998, 5 new Property Damage Cases
were filed against U.S. Gypsum while 26 were closed; the Company spent an
average of $23.5 million per year on the defense and settlement of Property
Damage Cases, but received a total of $154.5 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.")
U.S. Gypsum is also a defendant in Personal Injury Cases brought by
approximately 100,000 claimants, as well as an additional 54,000 claims that
have been settled but will be closed over time. Filings of new Personal Injury
Cases totaled approximately 80,000 claims in 1998, compared to 23,500 claims in
1997, 28,000 claims in 1996 and 14,000 in 1995. Filings of Personal Injury Cases
increased substantially as a result of a 1997 ruling by 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. During the first nine months of 1999, approximately 38,000 new Personal
Injury Claims were filed against U.S. Gypsum, including approximately 10,800 in
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<PAGE> 24
the third quarter. U.S. Gypsum's average cost to resolve Personal Injury Cases
during the years 1996-1998 was approximately $1,800 per claim, exclusive of
defense costs. Over that period, U.S. Gypsum expended an average of $40.4
million per year on Personal Injury Cases, of which an average of $31.4 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. Most of U.S. Gypsum's personal injury liability and defense
costs are currently being 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 most of its
solvent carriers. As of September 30, 1999, after deducting insolvent coverage
and insurance paid out to date, approximately $183 million of potential
insurance remained, including approximately $138 million of insurance from six
carriers that have agreed, subject to certain limitations and conditions, to
cover asbestos-related costs, and approximately $45 million from three carriers
that have not yet agreed to make their coverage available on acceptable terms. A
minimum of $10 million of the disputed coverage is expected to be available
regardless of the outcome of further proceedings. U.S. Gypsum is attempting to
resolve its disputes with the nonsettling carriers through either a negotiated
resolution or further litigation in the Coverage Action.
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 $24 million in 1998, but
insurance payments exceeded asbestos-related expenses by $0.7 million in 1997
and $41 million in 1996, due primarily to nonrecurring reimbursement for amounts
expended in prior years.
Four of U.S. Gypsum's domestic insurance carriers, as well as underwriters of
portions of various policies issued by Lloyds and other London market
companies, providing a total of approximately $106 million of coverage, are
insolvent. Because these policies would already have been consumed by U.S.
Gypsum's asbestos
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<PAGE> 25
expenses to date if the carriers had been solvent, the insolvencies will not
adversely affect U.S. Gypsum's coverage for future asbestos-related costs.
However, U.S. Gypsum is pursuing claims for reimbursement from the insolvent
estates and other sources and expects to recover a presently indeterminable
portion of the policy amounts from these sources.
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 normally (but not uniformly) has 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 pretrial settlements at
historical or acceptable levels; the level of physical impairment of claimants;
the viability of claims for punitive damages; any changes in membership in the
Center; and the ability to develop an alternate claims-handling vehicle that
retains the key benefits of Georgine. 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.
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 pending at September 30, 1999, can be resolved for an
amount totaling between $337 million and $425 million, including defense costs.
Most of these amounts are expected to be expended over the next three to five
years, although settlements of some Personal Injury Cases will be consummated
over periods as long as seven years. Significant insurance funding is available
for these costs, as detailed below, although resolution of the pending cases is
expected to consume U.S. Gypsum's remaining insurance. At this time, U.S. Gypsum
does not believe that the number and severity of asbestos-related cases that
ultimately will be filed in the future 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 September 30, 1999, U.S. Gypsum had
reserved $337 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 $148 million, the estimated portion of the reserved amount that is
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<PAGE> 26
expected to be paid or reimbursed by insurance that is either committed or
probable of recovery. Additional amounts may be reimbursed by insurance
depending upon the outcome of litigation and negotiations relating to the $35
million of insurance that is presently disputed. As of September 30, 1999, U.S.
Gypsum had an additional $34 million reserved for asbestos liabilities and
asbestos-related expenses.
U.S. Gypsum compares its estimates of liability to then-existing reserves and
available insurance assets and from time to time adjusts its reserves as
appropriate. The Company historically has accrued $18 million annually ($4.5
million per quarter) for asbestos costs. In view of the high level of personal
injury filings that followed the termination of Georgine, U.S. Gypsum accrued an
additional $8 million (or a total of $12.5 million) in both the fourth quarter
of 1998 and the first quarter of 1999. U.S. Gypsum reserved a total of $30
million in the second quarter of 1999, largely as a result of increased filings
of Personal Injury Cases in the quarter, and reserved $20 million in the third
quarter based on new filings in the quarter. Although new Personal Injury Cases
were filed in the first nine months of 1999 at a rate significantly below the
rate at which cases were filed in the first nine months of 1998, asbestos
charges to results of operations have been higher in 1999 because the estimated
cost of resolving cases pending during 1998 will, when expended, consume all of
U.S. Gypsum's remaining insurance; as a result, the estimated liability from new
case filings is currently being charged against reported earnings. Accordingly,
the Company expects that additional periodic charges will be necessary in the
future, in amounts that could be higher or lower than recent quarters, and which
could be material to the period in which they are taken. The amount of future
periodic charges will depend upon factors that include, but may not be limited
to, the rate at which new asbestos-related claims are filed, the potential
imposition of medical criteria, changes in U.S. Gypsum's average settlement cost
and the estimated cost of resolving pending claims, and the necessity of
higher-cost settlements in particular jurisdictions. In addition, the Company
will continue to evaluate whether its probable liability for future Personal
Injury Cases can be reasonably estimated. If such an estimate can be made, it is
probable that an additional charge to results of operations would be necessary.
Although the timing and amount of the resulting charge cannot presently be
determined, the amount is expected to be material to results of operations in
the period in which it is taken.
CONCLUSION
The above estimates and reserves are re-evaluated periodically as additional
information becomes available. Additional charges to results of operations are
expected to be necessary in light of future events, and such charges could be
material to results of operations in the period in which they are 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
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<PAGE> 27
liquidity or 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 results of operations or
financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(15) Letter of Arthur Andersen LLP regarding unaudited financial
information.
(27) Financial Data Schedule.
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<PAGE> 28
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
-----------------------------------
October 29, 1999 Raymond T. Belz,
Senior Vice President and Controller,
USG Corporation
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<PAGE> 1
Exhibit (15)
October 29, 1999
USG Corporation
125 South Franklin Street
Chicago, Illinois 60606
Gentlemen:
We are aware that USG Corporation has incorporated by reference into previously
filed Registration Statement Numbers 33-40136 and 33-64217 on Form S-3 and
33-22581, as amended, 33-22930, 33-36303, 33-52573, 33-52715, 33-63554, and
33-65383 on Form S-8 its Form 10-Q for the quarter ended September 30, 1999,
which includes our report dated October 14, 1999, 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
-29-
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