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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 June 30, 2000
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 June 30, 2000, 44,443,213 shares of USG common stock were outstanding.
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TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three months and Six Months Ended
June 30, 2000 and 1999 3
Consolidated Balance Sheet:
As of June 30, 2000 and December 31, 1999 4
Consolidated Statement of Cash Flows:
Six Months Ended June 30, 2000 and 1999 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 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
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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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 939 $ 895 $ 1,877 $ 1,718
Cost of products sold 695 630 1,365 1,222
--------- --------- --------- --------
Gross profit 244 265 512 496
Selling and administrative expenses 79 82 163 159
--------- --------- --------- --------
Operating profit 165 183 349 337
Interest expense 13 14 25 27
Interest income (1) (2) (3) (3)
Other expense, net - - 1 1
--------- --------- --------- --------
Earnings before income taxes 153 171 326 312
Income taxes 60 67 127 122
--------- --------- --------- --------
Net earnings 93 104 199 190
========= ========= ========= ========
Basic earnings per common share 2.06 2.09 4.22 3.83
Diluted earnings per common share 2.04 2.07 4.19 3.78
Dividends paid per common share 0.15 0.10 0.30 0.20
Average common shares 45,531,863 49,882,374 47,251,951 49,772,283
Average diluted common shares 45,835,053 50,494,668 47,540,056 50,419,721
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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USG CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 18 $ 197
Receivables (net of reserves - $19 and $18) 395 361
Inventories 279 256
Current and deferred income taxes 100 59
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Total current assets 792 873
Property, plant and equipment (net of reserves
for depreciation and depletion - $403 and $373) 1,744 1,568
Other assets 314 332
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Total Assets 2,850 2,773
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 199 172
Accrued expenses 267 303
Notes payable 15 16
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Total current liabilities 481 491
Long-term debt 686 577
Deferred income taxes 113 138
Other liabilities 703 700
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (225) (56)
Capital received in excess of par value 309 316
Deferred currency translation (42) (33)
Reinvested earnings 820 635
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Total stockholders' equity 867 867
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Total Liabilities and Stockholders' Equity 2,850 2,773
============ ===========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
---------------------
2000 1999
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OPERATING ACTIVITIES:
Net earnings $ 199 $ 190
Adjustments to reconcile net earnings to net cash:
Depreciation, depletion and amortization 51 45
Current and deferred income taxes (66) (9)
Gain on asset dispositions (1) -
(Increase) decrease in working capital:
Receivables (34) (50)
Inventories (23) 4
Payables 28 13
Accrued expenses (36) (5)
Increase in other assets (18) (22)
Increase in other liabilities 36 60
Other, net (4) (7)
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Net cash from operating activities 132 219
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INVESTING ACTIVITIES:
Capital expenditures (232) (179)
Net proceeds from asset dispositions 2 1
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Net cash to investing activities (230) (178)
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FINANCING ACTIVITIES:
Issuance of debt 129 46
Repayment of debt (105) (49)
Short-term borrowings, net 84 3
Cash dividends paid (14) (10)
Issuances of common stock - 11
Purchases of common stock (175) (26)
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Net cash to financing activities (81) (25)
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Net increase/(decrease) in cash and cash equivalents (179) 16
Cash and cash equivalents at beginning of period 197 152
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Cash and cash equivalents at end of period 18 168
======== =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 25 30
Income taxes paid 187 130
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The consolidated financial statements of USG Corporation and its
subsidiaries ("USG" or the "Corporation") included herein have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates. In the opinion of management, the statements reflect all
adjustments, which are of a normal recurring nature, necessary to present
fairly the Corporation's financial position as of June 30, 2000, and
December 31, 1999, results of operations for the three months and six
months ended June 30, 2000 and 1999 and cash flows for the six months ended
June 30, 2000 and 1999. 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 1999 Annual
Report on Form 10-K dated February 29, 2000.
(2) Total comprehensive income, consisting of net earnings and foreign currency
translation adjustments, amounted to $87 million and $190 million in the
three months and six months ended June 30, 2000, respectively. For the
respective 1999 periods, total comprehensive income amounted to $104
million and $186 million. There was no tax impact on the foreign currency
translation adjustments.
(3) As of June 30, 2000, common shares totaling 2,101,500 were reserved for
future issuance in conjunction with existing stock option grants. In
addition, 2,415,578 common shares were reserved for future grants following
stockholder approval of an additional allocation of 2,400,000 shares under
the Corporation's Omnibus Management Incentive Plan at their Annual Meeting
on May 10, 2000. 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 JUNE 30, EARNINGS (000) AMOUNT
-------------------------------------------------------------------------
2000
Basic earnings $ 93 45,532 $ 2.06
Dilutive effect of stock options 303
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Diluted Earnings 93 45,835 2.04
=========================================================================
1999
Basic earnings $ 104 49,882 $ 2.09
Dilutive effect of stock options 613
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Diluted Earnings 104 50,495 2.07
=========================================================================
SIX MONTHS ENDED JUNE 30,
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2000
Basic earnings $ 199 47,252 $ 4.22
Dilutive effect of stock options 288
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Diluted Earnings 199 47,540 4.19
=========================================================================
1999
Basic earnings $ 190 49,772 $ 3.83
Dilutive effect of stock options 648
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Diluted Earnings 190 50,420 3.78
=========================================================================
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(5) USG's operations are organized into three operating segments: North
American Gypsum, which manufactures and markets gypsum wallboard and
related products in the United States, Canada and Mexico; Worldwide
Ceilings, which manufactures and markets ceiling tile, ceiling grid and
other interior systems products worldwide; and Building Products
Distribution, which distributes gypsum wallboard, drywall metal, ceiling
products, joint compound and other building products throughout the United
States. Operating segment results were as follows (dollars in millions):
<TABLE>
<CAPTION>
NET SALES OPERATING PROFIT
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THREE MONTHS ENDED JUNE 30, 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
North American Gypsum $ 552 $ 539 $ 129 $ 157
Worldwide Ceilings 167 161 18 17
Building Products Distribution 368 337 28 24
Corporate - - (10) (15)
Eliminations (148) (142) - -
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Total 939 895 165 183
========================================================================================================================
SIX MONTHS ENDED JUNE 30, 2000 1999 2000 1999
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North American Gypsum $1,105 $1,027 $ 283 $ 302
Worldwide Ceilings 334 318 35 30
Building Products Distribution 724 637 55 34
Corporate - - (26) (29)
Eliminations (286) (264) 2 -
------------------------------------------------------------------------------------------------------------------------
Total 1,877 1,718 349 337
========================================================================================================================
</TABLE>
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(6) 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 and option contracts to hedge anticipated
purchases of fuel to be utilized in the manufacturing processes for gypsum
wallboard and ceiling tile. These contracts are designated as hedges and
qualify for hedge accounting. Unrealized gains and losses and option
premiums are deferred and included in net earnings as part of the
underlying transaction.
Foreign Exchange Derivative Instruments:
----------------------------------------
The Corporation has operations in a number of countries and due to
intercompany and third-party transactions 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 and/or option 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.
(7) 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
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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.
(8) 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, when
applicable, debt outstanding in connection with the receivables facility
remain in receivables and long-term debt, respectively, on the
Corporation's consolidated balance sheet.
(9) In the second quarter of 2000, USG entered into new revolving credit
facilities totaling $600 million with a syndicate of banks. A five-year,
multi-currency revolving credit facility permits the Corporation to borrow
up to $400 million, including borrowing capacity for its Canadian
subsidiaries of up to $75 million in equivalent Canadian dollars. In
addition, a $200 million, 364-day facility was executed. These facilities
contain two financial covenants that require the Corporation to maintain a
minimum interest coverage ratio of 3.25x and a maximum leverage ratio of
3.75x. These facilities replace the $500 million U.S. and C$110 million
Canadian revolving credit facilities that were scheduled to mature in 2002.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CONSOLIDATED RESULTS
NET SALES
Net sales in the second quarter of 2000 were $939 million, up 5% from $895
million in the second quarter of 1999. For the first six months of 2000, net
sales totaled $1,877 million, up 9% from $1,718 million in the comparable 1999
period. As a result of favorable levels of demand, sales are up in 2000 for each
of USG's businesses. However, the impact of this trend has been diminished by
lower selling prices on SHEETROCK brand gypsum wallboard.
GROSS PROFIT
Gross profit as a percent of net sales was 26.0% and 27.3% in the second quarter
and first six months of 2000, respectively, down from 29.6% and 28.9% in the
respective 1999 periods. The lower margins in 2000 reflect the combination of
lower selling prices and higher raw material and energy costs for SHEETROCK
brand gypsum wallboard.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased 4% versus the second quarter of
1999 due to lower charges for incentive compensation programs. For the first six
months of 2000, expenses increased 3% from the comparable 1999 period due to
increased compensation and benefits and additional overhead for Sybex Inc.,
which was acquired in the fourth quarter of 1999. Selling and administrative
expenses as a percentage of net sales were 8.4% in the second quarter and 8.7%
in the first six months of 2000, down from 9.2% and 9.3% in the respective 1999
periods.
INTEREST EXPENSE
Interest expense amounted to $13 million and $25 million in the second quarter
and first six months of 2000, down from $14 million and $27 million for the
corresponding 1999 periods.
INCOME TAXES
Income tax expense was $60 million and $127 million in the three months and six
months ended June 30, 2000, respectively, compared with $67 million and $122
million for the prior-year periods.
NET EARNINGS
Net earnings in the second quarter of 2000 were $93 million, down 11% from $104
million in the prior-year period. Diluted earnings per share decreased 1% to
$2.04 from $2.07 a year ago, reflecting the benefit of USG's stock repurchase
program.
For the first six months of 2000, net earnings were $199 million, up 5% from
$190 million in the first half of 1999, while diluted earnings per share rose to
$4.19 from $3.78.
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CORE BUSINESS RESULTS
(dollars in millions) NET SALES OPERATING PROFIT
----------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2000 1999 2000 1999
----------------------------------------------------------------------
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 508 $ 504 $ 114 $ 145
CGC Inc. (gypsum) 50 40 9 6
Other subsidiaries* 27 27 6 6
Eliminations (33) (32) - -
----------------------------------------------------------------------
Total 552 539 129 157
----------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 123 116 17 17
USG International 53 52 - -
CGC Inc. (ceilings) 11 8 1 -
Eliminations (20) (15) - -
----------------------------------------------------------------------
Total 167 161 18 17
----------------------------------------------------------------------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 368 337 28 24
----------------------------------------------------------------------
Corporate - - (10) (15)
Eliminations (148) (142) - -
----------------------------------------------------------------------
Total USG Corporation 939 895 165 183
======================================================================
NET SALES OPERATING PROFIT
----------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000 1999 2000 1999
----------------------------------------------------------------------
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 1,021 $ 964 $ 255 $ 279
CGC Inc. (gypsum) 95 74 17 11
Other subsidiaries* 51 49 11 12
Eliminations (62) (60) - -
----------------------------------------------------------------------
Total 1,105 1,027 283 302
----------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 241 224 32 29
USG International 110 104 1 -
CGC Inc. (ceilings) 21 18 2 1
Eliminations (38) (28) - -
----------------------------------------------------------------------
Total 334 318 35 30
----------------------------------------------------------------------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 724 637 55 34
----------------------------------------------------------------------
Corporate - - (26) (29)
Eliminations (286) (264) 2 -
----------------------------------------------------------------------
Total USG Corporation 1,877 1,718 349 337
======================================================================
*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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NORTH AMERICAN GYPSUM
Net sales in the second quarter of 2000 increased 2% to $552 million, but
operating profit fell 18% to $129 million as compared to the second quarter of
1999. First six months 2000 net sales of $1,105 million increased 8%, but
operating profit of $283 million was down 6% versus comparable 1999 levels.
United States Gypsum Company: U.S. Gypsum's second quarter 2000 net sales
increased slightly, while operating profit decreased 21% versus the second
quarter of 1999. This performance reflects the gypsum industry's transition from
allocation, as experienced during 1999, to excess supply in 2000. Shipments of
SHEETROCK brand gypsum wallboard totaled 2.326 billion square feet,
approximately the same level as the second quarter of 1999. However, lower
selling prices and higher production costs for SHEETROCK brand gypsum wallboard
resulted in the decline in operating profit. Realized selling prices averaged
$145.25 per thousand square feet, down 3% from the second quarter of 1999 and
down 9% from the first quarter of 2000. Unit costs are up in 2000 primarily due
to rising prices for energy and wastepaper, the primary raw material for
wallboard paper. Sales of SHEETROCK brand joint compound and DUROCK brand cement
board were favorable as a result of strong demand.
During the second quarter of 2000, U.S. Gypsum incurred a $28.0 million
asbestos-related charge to cost of products sold versus a $30.0 million charge
in the second quarter of 1999. Through the first six months, asbestos-related
charges totaled $50.0 million in 2000, up from $42.5 million in 1999. See "Legal
Contingencies" below and Part II, Item 1. "Legal Proceedings" for additional
information on asbestos litigation.
CGC Inc.: The gypsum business of Canada-based CGC Inc. reported a 25% increase
in net sales and a 50% increase in operating profit compared with the second
quarter of 1999. CGC's results benefited primarily from increased domestic
shipments and selling prices for wallboard.
WORLDWIDE CEILINGS
Net sales in the second quarter of 2000 were $167 million, up 4% from the second
quarter of 1999, while operating profit rose $1 million to $18 million. First
six months 2000 net sales of $334 million and operating profit of $35 million
were up 5% and 17%, respectively, from comparable 1999 levels.
USG's domestic ceilings business, USG Interiors, Inc., reported a 6% increase in
sales, while operating profit of $17 million was unchanged from the second
quarter of 1999. Demand in North America remained healthy as second quarter
shipments of AURATONE ceiling tile set a record. The ceilings division of CGC
Inc. contributed a $1 million increase in operating profit. Results for USG
International were essentially unchanged from 1999.
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BUILDING PRODUCTS DISTRIBUTION
L&W Supply, the leading specialty building products distribution business in the
United States, reported second-quarter 2000 net sales of $368 million. This was
the highest level of sales for any quarter in the company's history and a 9%
increase versus the second quarter of 1999. Operating profit of $28 million was
the highest level for any second quarter and represented a 17% increase from a
year ago. These results were driven by record shipments of gypsum wallboard and
increased sales and profitability for L&W Supply's complementary building
materials. L&W Supply currently operates out of 194 locations in the United
States, distributing a variety of gypsum, ceilings and related building
materials.
MARKET CONDITIONS AND OUTLOOK
Housing starts during the first six months of 2000 ran at a strong level. USG is
currently forecasting U.S. housing starts in 2000 to be 1.6 million units, down
slightly from the 1.667 million units in 1999. However, this decline in new
residential construction is expected to be offset by continued strength in
repair and remodeling and new nonresidential construction.
The repair and remodel market has been the fastest growing segment for USG,
accounting for the second-largest portion of its sales. Record 1999 sales of
existing homes of 5.2 million units is supporting residential repair and
remodeling in 2000. This, combined with strong nonresidential repair and
remodeling, will continue to provide growth in this market segment.
Sales of USG products to the new nonresidential construction market have been
solid in 2000. 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 3%
in 1999.
Most of USG's sales outside of North America come from Western Europe, Latin
America and the Asia Pacific region. However, USG's exposure in these markets
represents a relatively minor share of the Corporation's total sales and
earnings.
The U.S. market for gypsum wallboard transitioned from allocation, as
experienced in 1999, to excess supply. Also, new industry capacity is being
added in 2000. As a result, management anticipates continued downward pressure
on gypsum wallboard prices during the remainder of the year. Despite higher raw
material and energy costs and lower wallboard prices, management believes USG
will have a good year in 2000, and is well-positioned for the future based on
the progress of its strategic plan to improve operating efficiencies and grow in
profitable markets.
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LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL STRATEGY
USG is focused on building long-term stockholder value through dividends, stock
repurchases and the five elements of its strategic growth plan.
Dividends: In the first and second quarters of 2000, USG paid cash dividends of
$0.15 per share. In 1999, USG paid cash dividends of $0.10 per share in the
first, second and third quarters, and $0.15 in the fourth quarter.
Stock Repurchases: USG purchased 4.6 million shares of stock in the first six
months of 2000. Since the program began in the fourth quarter of 1998, USG has
purchased 6.4 million shares, completing the initial 5-million-share
authorization and purchasing 1.4 million shares of the additional
5-million-share program authorized by USG's Board of Directors in the first
quarter of this year. Share repurchases are being made in the open market or
through privately negotiated transactions and are being funded with available
cash from operations.
Strategic Growth Plan: USG is investing in its businesses under five central
strategies - building for growth by adding capacity and lowering production
costs, leading in product innovation, expanding its building products
distribution business, enhancing customer service and promoting its brand names.
CAPITAL EXPENDITURES
Capital spending amounted to $232 million in the first six months of 2000,
compared with $179 million in the corresponding 1999 period. As of June 30,
2000, capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $158 million, compared with $260 million as
of December 31, 1999.
USG's current capital spending program includes construction of a new SHEETROCK
brand gypsum wallboard plant in Rainier, Ore., and replacement of a 41-year-old
high-cost production line with a new production line at U.S. Gypsum's Plaster
City, Calif., plant. In June 2000, U.S. Gypsum successfully opened its new
wallboard plant in Aliquippa, Pa. Startups for the new Plaster City line and new
Rainier plant are expected in the third quarter and fourth quarter of this year,
respectively.
USG also evaluates potential acquisitions of companies in the building products
industry, as well as divestitures and joint ventures, on an ongoing basis. USG
has external sources of capital available and adequate financial resources and
liquidity to fund future growth opportunities such as new products, acquisitions
and joint ventures.
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WORKING CAPITAL
Working capital (current assets less current liabilities) as of June 30, 2000,
amounted to $311 million, compared with $382 million as of December 31, 1999.
The ratio of current assets to current liabilities was 1.65 to 1 as of June 30,
2000, compared with 1.78 to 1 as of December 31, 1999.
Receivables increased to $395 million as of June 30, 2000, from $361 million as
of December 31, 1999. Inventories increased to $279 million from $256 million,
and accounts payable rose to $199 million from $172 million. These variations
reflect an increased level of business in the second quarter of 2000 as compared
to the fourth quarter of 1999.
Cash and cash equivalents as of June 30, 2000, amounted to $18 million, down
from $197 million as of December 31, 1999. During the first six months of 2000,
net cash flows from operating activities totaled $132 million. Net cash flows to
investing activities were $230 million, reflecting capital expenditures of $232
million, offset slightly by net proceeds from asset dispositions. Net cash flows
to financing activities of $81 million reflect $175 million used for stock
repurchases and $14 million used for cash dividends, partially offset by a $108
million increase in debt.
DEBT
As of June 30, 2000, total debt amounted to $701 million, up $108 million from
December 31, 1999. This increase primarily reflects $110 million of industrial
revenue bonds issued in connection with the construction of the Aliquippa, Pa.,
plant.
AVAILABLE LIQUIDITY
The Corporation has additional liquidity available through several financing
arrangements. In the second quarter of 2000, USG entered into new revolving
credit facilities totaling $600 million with a syndicate of banks. A five-year,
multi-currency revolving credit facility permits the Corporation to borrow up to
$400 million, including borrowing capacity for its Canadian subsidiaries of up
to $75 million in equivalent Canadian dollars. In addition, a $200 million,
364-day facility was executed. These facilities replace the $500 million U.S.
and C$110 million Canadian revolving credit facilities that were scheduled to
mature in 2002. USG also maintains a $20 million revolving credit facility in
Europe. As of June 30, 2000, total outstanding revolving loans amounted to $83
million and letters of credit issued and outstanding amounted to $16 million,
leaving the Corporation with $521 million of unused and available credit.
USG had additional borrowing capacity of $70 million as of June 30, 2000, 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.
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OTHER MATTERS
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 is 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. In the second
quarter of 2000, U.S. Gypsum recorded a charge of $28.0 million, reflecting new
filings during the quarter. This compares to a $30.0 million charge taken in the
second quarter of 1999. Asbestos charges for the first six months of 2000 total
$50.0 million compared with $42.5 million for the same period in 1999. Although
new Personal Injury Cases have been filed in 1999 and 2000 at a rate
significantly below the rate at which cases were filed in 1998, asbestos charges
to results of operations were higher in 1999 and 2000 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, the impact of changes in membership of
the Center for Claims Resolution (the "Center"), the continued solvency of other
defendants, changes in U.S. Gypsum's 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
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whether its probable liability for future Personal Injury Cases can be
reasonably estimated. The ability to make such an estimate will require an
assessment of the impact on future case filings and settlement values of the
uncertainties identified above, including the outcome of negotiations currently
underway between the Center and certain plaintiffs, firms concerning settlements
that would, among other things, apply medical criteria to the firm future
Personal Injury Cases. When such an estimate can be made, an additional charge
to results of operations will 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.
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 financial position of the Corporation. 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; 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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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of June 30, 2000, and
the related condensed consolidated statements of earnings for the three-month
and six-month periods ended June 30, 2000 and 1999 and the condensed
consolidated statement of cash flows for the six-month periods ended June 30,
2000 and 1999. 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 accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 18, 2000
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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 1999 Annual Report for additional information
about the asbestos litigation.
U.S. Gypsum is a defendant in 10 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.). During the years 1997-1999, three new Property Damage Cases
were filed against U.S. Gypsum while 16 were closed; the Company spent an
average of $14 million per year on the defense and settlement of Property Damage
Cases, but received a total of $61.5 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 79,000 claimants, as well as an additional 70,000 claims that have
been settled but will be closed over time. Filings of new Personal Injury Cases
totaled approximately 48,000 claims in 1999, compared to 80,000 claims in 1998
and 23,500 claims in 1997. The Company believes that the higher rate of personal
injury case filings in 1998 resulted, at least in part, from a Supreme Court
ruling striking down a class action settlement that included an injunction
against the filing of certain Personal Injury Cases from September 1994 until
July 1997. 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.
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U.S. Gypsum's average cost to resolve Personal Injury Cases during the past
several years has been approximately $1,800 per claim, exclusive of defense
costs. Over that period, U.S. Gypsum expended an average of $64.2 million per
year on Personal Injury Cases (including $100 million in 1999), of which an
average of $52 million ($85 million in 1999) was paid by insurance.
U.S. Gypsum is a member, together with 14 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 have been paid by its insurance carriers, but future costs will be paid
largely by U.S. Gypsum. Punitive damages have never been awarded against U.S.
Gypsum in a Personal Injury Case; whether such an award would be covered by
insurance would depend on state law and the terms of the individual policies.
U.S. Gypsum and other Center members are pursing alternatives to the current
tort system, including settlements with plaintiffs, firms that include
agreements to resolve over time the firms, pending claims, as well as the firms'
agreement to recommend to their future clients that they defer filing, or accept
nominal payments on, personal injury claims that do not meet established disease
criteria. The Center reached several such agreements in 1999 and 2000 and will
continue to attempt to negotiate similar agreements in the future. These
agreements typically resolve claims for amounts consistent with historical
per-claim settlement costs. However, settlement costs for cases resolved outside
such agreements have been increasing, reflecting higher settlement demands to
all defendants for more serious cases, particularly in certain jurisdictions.
During 1999, three companies left the Center and the membership of another
company was terminated by the Center's Board. One of the former Center members
has refused to pay its share of certain settlements agreed to by the Center
while that company was a member. Although to date plaintiffs in such cases have
been successful in obtaining orders requiring the former member to pay its share
of the settlements, further defaults by the former member may significantly
increase the cost of resolving these cases for the remaining Center members,
including U.S. Gypsum. During the first four months of 2000, two defendants in
the Personal Injury Cases (not members of the Center) filed bankruptcy
petitions. In addition, an asbestos claims trust that has been a Center member
has withdrawn from the Center due to the trust's determination that it lacks
sufficient assets to commit to new settlements within the Center and the tort
system. The absence of these defendants from the litigation are likely to
increase the cost of resolving Personal Injury Cases for other defendants,
including the remaining Center members and U. S. Gypsum. The amount of such
increase, if any, cannot presently be ascertained.
U.S. Gypsum's estimated cost of resolving pending Personal Injury Cases is
discussed below. (See "Estimated Cost.")
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U.S. Gypsum sued its insurance carriers in 1983 to obtain coverage for asbestos
cases (the "Coverage Action") and has settled all disputes with its solvent
carriers. As of June 30, 2000, after deducting insolvent coverage and insurance
paid out to date, approximately $76 million of insurance remained with carriers
that have agreed, subject to certain limitations and conditions, to cover
asbestos-related costs. In addition, U.S. Gypsum is pursuing claims for
reimbursement from estates of certain insolvent carriers and may recover
additional reimbursement in amounts that are presently indeterminable but are
not expected to be material.
Insurance payments to U.S. Gypsum for all asbestos-related matters, including
property, damage, personal injury, insurance coverage litigation and related
expenses, exceeded asbestos-related expenses by $6 million for 1999 and $0.7
million in 1997 due primarily to nonrecurring reimbursement for amounts expended
in prior years. However, U.S. Gypsum's total asbestos-related expenditures
exceeded aggregate insurance payments by $24 million in 1998.
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 resolve claims at historical or
acceptable levels; the level of physical impairment of claimants; the viability
of claims for punitive damages; the effect of recent changes in membership in
the Center and any future changes in Center membership; the continued solvency
of other defendants; the refusal of the former Center member described above to
fund its share of existing settlement agreements; and the continued ability to
negotiate settlements or develop other mechanisms that defer or reduce claims
from unimpaired claimants. 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 June 30, 2000, can be resolved for an amount
totaling between $325 million and $490 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
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periods as long as seven years. Insurance funding is available for a portion of
these costs, as detailed below, although resolution of the pending cases will
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, although, as noted below, the Company is actively engaged in
examining the feasibility of such an estimate with the objective of providing
such information when possible.
Accounting for Asbestos Liability: As of June 30, 2000, U.S. Gypsum had reserved
$325 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 $76 million, the estimated portion of the reserved amount that is
expected to be paid or reimbursed by insurance. As of June 30, 2000, U.S. Gypsum
had an additional $33 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. U.S. Gypsum charged results of operations a total of $26 million in
1998 and $80.5 million in 1999 for asbestos-related costs, based largely on new
filings during those years. In the quarters ended March 31 and June 30, 2000,
the Company took charges of $22 million and $28 million, respectively,
reflecting new filings during those quarters. Although new Personal Injury Cases
have been filed in 1999 and 2000 at a rate significantly below the rate at which
cases were filed in 1998, asbestos charges to results of operations were higher
in 1999 and 2000 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,
the impact of changes in membership of the Center, the continued solvency of
other defendants, changes in U.S. Gypsum's 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. The
ability to make such an estimate will require an assessment of the impact on
future case filings and settlement values of the uncertainties identified above,
including the outcome of negotiations currently underway between the Center and
certain plaintiffs, firms concerning settlements that would, among other things,
apply medical criteria to the firms' future Personal Injury Cases. When such an
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<PAGE> 24
estimate can be made, an additional charge to results of operations will 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
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 continuously reviews 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 also are 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) In accordance with the Corporation's notice and proxy statement dated April
7, 2000, the matters set forth in paragraphs (b) through (d) below were
submitted to a vote of stockholders at the annual meeting of stockholders
held on May 10, 2000.
(b) The four director-nominees who received the highest vote totals, who were
each reelected to a three-year term of office, and whose terms in office
will expire in 2003 were: Keith A. Brown, James C. Cotting, W. Douglas
Ford, and John B. Schwemm. The directors whose terms of office continued
after the annual meeting of stockholders were: Robert A. Barnett, W. H.
Clark, Lawrence M. Crutcher, William C. Foote, David W. Fox, Valerie B.
Jarrett, Marvin E. Lesser, P. Jack O'Bryan, and Judith A. Sprieser.
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Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
---------------------------------------
Election of Directors:
Keith A. Brown 33,952,276 1,328,768 -
James C. Cotting 25,976,049 1,367,703 -
W. Douglas Ford 25,981,335 1,362,417 -
John B. Schwemm 25,976,120 1,367,632 -
Jay Buchbinder 7,872,937 64,355 -
Keith Ogata 7,920,937 16,355 -
Herbert Denton 7,920,937 16,355 -
(c) The following two proposals were recommended by the Corporation's Board of
Directors and were each approved by a majority of the shares voted.
Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
---------------------------------------
Approval of amendment of the Omnibus
Management Incentive Plan 29,774,281 4,754,080 752,681
Ratification of Appointment of Arthur
Andersen LLP as Independent Public
Accountants 32,588,521 2,183,185 509,338
(d) The following proposal, sponsored by a stockholder, failed to attain 80% of
all eligible voting shares, which was required for approval.
Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
---------------------------------------
Stockholder Proposal Regarding
Stockholder Rights Plan By-Laws
Amendment 22,005,087 13,088,714 187,238
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<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(10a) Five Year Credit Agreement dated as of June 30, 2000, among USG
Corporation and the banks listed on the signature pages thereto and
Chase Manhattan Bank as Administrative Agent.
(10b) 364-Day Credit Agreement dated as of June 30, 2000, among USG
Corporation and the banks listed on the signature pages thereto and
Chase Manhattan Bank as Administrative Agent.
(15) Letter from Arthur Andersen LLP regarding unaudited financial
information.
(27) Financial Data Schedule.
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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,
Senior Vice President and Controller,
USG Corporation
August 7, 2000
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