<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, 2000
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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, 2000, 43,388,552 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 Nine Months Ended
September 30, 2000 and 1999 3
Consolidated Balance Sheet:
As of September 30, 2000 and December 31, 1999 4
Consolidated Statement of Cash Flows:
Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net sales $ 895 $ 952 $ 2,772 $ 2,670
Cost of products sold 700 669 2,065 1,891
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Gross profit 195 283 707 779
Selling and administrative expenses 73 85 236 244
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Operating profit 122 198 471 535
Interest expense 13 13 38 40
Interest income (1) (3) (4) (6)
Other expense, net 3 1 4 2
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Earnings before income taxes 107 187 433 499
Income taxes 42 71 169 193
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Net earnings 65 116 264 306
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Basic earnings per common share 1.48 2.34 5.68 6.16
Diluted earnings per common share 1.48 2.32 5.66 6.09
Dividends paid per common share 0.15 0.10 0.45 0.30
Average common shares 43,948,520 49,623,637 46,524,166 49,764,386
Average diluted common shares 44,086,452 50,165,592 46,716,812 50,352,316
</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,
2000 1999
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 21 $ 197
Receivables (net of reserves - $18 and $18) 362 361
Inventories 282 256
Deferred income taxes 76 80
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Total current assets 741 894
Property, plant and equipment (net of reserves
for depreciation and depletion - $416 and $373) 1,796 1,568
Other assets 300 332
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Total Assets 2,837 2,794
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 211 172
Accrued expenses 255 303
Taxes on income 21 21
Notes payable 12 16
Current portion of long-term debt 150 --
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Total current liabilities 649 512
Long-term debt 505 577
Deferred income taxes -- 138
Other liabilities 692 700
Stockholders' Equity:
Preferred stock -- --
Common stock 5 5
Treasury stock (257) (56)
Capital received in excess of par value 410 316
Deferred currency translation (46) (33)
Reinvested earnings 879 635
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Total stockholders' equity 991 867
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Total Liabilities and Stockholders' Equity 2,837 2,794
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See accompanying Notes to Consolidated Financial Statements
</TABLE>
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USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
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2000 1999
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OPERATING ACTIVITIES:
Net earnings $ 264 $ 306
Adjustments to reconcile net earnings to net cash:
Depreciation, depletion and amortization 74 68
Current and deferred income taxes 10 4
Gain on asset dispositions (1) --
(Increase) decrease in working capital:
Receivables (1) (44)
Inventories (26) (4)
Payables 28 21
Accrued expenses (48) 44
Increase in other assets (50) (32)
Increase in other liabilities 39 92
Other, net (6) (6)
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Net cash from operating activities 283 449
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INVESTING ACTIVITIES:
Capital expenditures (310) (273)
Net proceeds from asset dispositions 2 2
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Net cash to investing activities (308) (271)
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FINANCING ACTIVITIES:
Issuance of debt 137 56
Repayment of debt (105) (49)
Short-term borrowings, net 44 (15)
Cash dividends paid (20) (15)
Issuances of common stock -- 11
Purchases of common stock (207) (45)
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Net cash to financing activities (151) (57)
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Net increase/(decrease) in cash and cash equivalents (176) 121
Cash and cash equivalents at beginning of period 197 152
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Cash and cash equivalents at end of period 21 273
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 45 50
Income taxes paid 206 192
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, 2000, and December 31, 1999, results of
operations for the three months and nine months ended September 30,
2000 and 1999 and cash flows for the nine months ended September 30,
2000 and 1999. Certain amounts in the prior year financial statements
have been reclassified to conform with the 2000 presentation. While
these interim financial statements and accompanying notes are
unaudited, they have been reviewed by Arthur Andersen LLP, the
Corporation's independent public accountants. These financial
statements and notes are to be read in conjunction with the financial
statements and notes included in the Corporation's 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 $61 million and $251
million in the three months and nine months ended September 30, 2000,
respectively. For the respective 1999 periods, total comprehensive
income amounted to $119 million and $305 million. There was no tax
impact on the foreign currency translation adjustments.
(3) As of September 30, 2000, common shares totaling 2,074,975 were
reserved for future issuance in conjunction with existing stock option
grants. In addition, 2,472,770 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
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
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2000
Basic earnings $ 65 43,949 $ 1.48
Dilutive effect of stock options 137
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Diluted earnings 65 44,086 1.48
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1999
Basic earnings $ 116 49,624 $ 2.34
Dilutive effect of stock options 542
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Diluted earnings 116 50,166 2.32
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NINE MONTHS ENDED SEPTEMBER 30,
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2000
Basic earnings $ 264 46,524 $ 5.68
Dilutive effect of stock options 193
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Diluted earnings 264 46,717 5.66
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1999
Basic earnings $ 306 49,764 $ 6.16
Dilutive effect of stock options 588
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Diluted earnings 306 50,352 6.09
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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 SEPTEMBER 30, 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
North American Gypsum $ 509 $ 575 $ 78 $ 165
Worldwide Ceilings 171 172 18 18
Building Products Distribution 346 362 33 31
Corporate - - (8) (16)
Eliminations (131) (157) 1 -
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Total 895 952 122 198
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NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999
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North American Gypsum $1,614 $1,602 $ 361 $ 467
Worldwide Ceilings 505 490 53 48
Building Products Distribution 1,070 999 88 65
Corporate - - (34) (45)
Eliminations (417) (421) 3 -
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Total 2,772 2,670 471 535
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</TABLE>
(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.
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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
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.
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(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.
(10) The Corporation's income tax reserves were reduced by $103 million in
the third quarter of 2000 to reflect the settlement of various tax
audits. The benefit realized from the reduction of these reserves was
credited to equity in accordance with AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code." The reduction of these reserves had no impact on the results of
operations or cash flows of the Corporation.
(11) Effective January 1, 2001, the Corporation will adopt Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." These statements establish accounting and reporting
standards requiring that every derivative instrument be recorded on the
balance sheet as either an asset or a liability measured at its fair
value. The statements require that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. Based upon initial review, the Corporation
has determined that the adoption of SFAS No. 133 and SFAS No. 138 will
not have a material impact on its financial statements.
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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 third quarter of 2000 were $895 million, down 6% from $952
million in the third quarter of 1999. This decrease in sales reflects the gypsum
wallboard market's continued transition from short supply to excess supply and
the resulting decline in wallboard selling prices. For the first nine months of
2000, net sales totaled $2,772 million, up 4% from $2,670 million in the
comparable 1999 period.
GROSS PROFIT
Gross profit as a percent of net sales was 21.8% and 25.5% in the third quarter
and first nine months of 2000, respectively, down from 29.7% and 29.2% in the
respective 1999 periods. The lower margins in 2000 reflect the combination of
significantly lower selling prices and higher energy and raw material costs for
USG's SHEETROCK brand gypsum wallboard.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased 14% versus the third quarter of
1999 due to lower charges for incentive compensation programs and a company-wide
emphasis on reducing expenses. For the first nine months of 2000, expenses
decreased 3% from the comparable 1999 period. As a percent of net sales, selling
and administrative expenses were 8.2% and 8.5% in the third quarter and first
nine months of 2000, respectively, down from 8.9% and 9.1% for the corresponding
1999 periods.
INTEREST EXPENSE
Interest expense of $13 million was incurred in both the third quarter of 2000
and the third quarter of 1999. Interest expense amounted to $38 million in the
first nine months of 2000, down from $40 million in the first nine months of
1999.
INCOME TAXES
Income tax expense was $42 million and $169 million in the three months and nine
months ended September 30, 2000, respectively, compared with $71 million and
$193 million for the prior-year periods.
NET EARNINGS
Net earnings in the third quarter of 2000 were $65 million, down 44% from $116
million in the prior-year period. Diluted earnings per share decreased 36% to
$1.48 from $2.32 a year ago. For the first nine months of 2000, net earnings
were $264 million, down 14% from $306 million in the first nine months of 1999,
and diluted earnings per share decreased to $5.66 from $6.09.
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CORE BUSINESS RESULTS
(dollars in millions) NET SALES OPERATING PROFIT
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THREE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999
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NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 465 $ 536 $ 64 $ 149
CGC Inc. (gypsum) 48 41 9 8
Other subsidiaries* 30 29 5 8
Eliminations (34) (31) - -
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Total 509 575 78 165
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WORLDWIDE CEILINGS:
USG Interiors, Inc. 124 121 17 17
USG International 56 55 - -
CGC Inc. (ceilings) 11 11 1 1
Eliminations (20) (15) - -
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Total 171 172 18 18
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BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 346 362 33 31
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Corporate - - (8) (16)
Eliminations (131) (157) 1 -
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Total USG Corporation 895 952 122 198
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NET SALES OPERATING PROFIT
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NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999
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NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $1,486 $1,500 $ 319 $ 428
CGC Inc. (gypsum) 143 115 26 19
Other subsidiaries* 81 78 16 20
Eliminations (96) (91) - -
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Total 1,614 1,602 361 467
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WORLDWIDE CEILINGS:
USG Interiors, Inc. 365 345 49 46
USG International 166 159 1 -
CGC Inc. (ceilings) 32 29 3 2
Eliminations (58) (43) - -
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Total 505 490 53 48
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BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 1,070 999 88 65
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Corporate - - (34) (45)
Eliminations (417) (421) 3 -
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Total USG Corporation 2,772 2,670 471 535
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*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
USG's North American gypsum business recorded net sales of $509 million and
operating profit of $78 million in the third quarter of 2000. These amounts
represent decreases of 11% and 53%, respectively, from the third quarter of
1999. First nine months 2000 net sales of $1,614 million increased 1%, but
operating profit of $361 million was down 23% versus 1999.
United States Gypsum Company's third quarter 2000 net sales and operating profit
declined 13% and 57%, respectively, from the third quarter of 1999. This
performance reflects the gypsum wallboard market's transition from short supply,
as experienced in 1999, to excess supply in 2000. Shipments of SHEETROCK brand
gypsum wallboard totaled 2.4 billion square feet during the third quarter of
2000, virtually unchanged from the record level reported for the third quarter
of 1999. However, lower net sales and operating profit primarily reflected lower
selling prices for the company's SHEETROCK brand gypsum wallboard. Realized
selling prices averaged $121.13 per thousand square feet, representing decreases
of 23% from the third quarter of 1999 and 17% from the second quarter of 2000.
The average price for the month of September 2000 fell to about $112.00 per
thousand square feet. Profitability was also affected by higher production and
asbestos-related costs. Production costs rose primarily due to rising prices for
paper fiber and energy.
Asbestos-related charges totaled $27 million during the third quarter of 2000,
an increase of $7 million from the third quarter of 1999. Through the first nine
months, asbestos-related charges totaled $77.0 million, up $14.5 million from
the same period in 1999. See "Legal Contingencies" below and Part II, Item 1.
"Legal Proceedings" for additional information on asbestos litigation.
The gypsum business of Canada-based CGC Inc. reported a 17% increase in net
sales and a 13% increase in operating profit compared with the third quarter of
1999. These increases primarily reflect additional results in 2000 for Sybex
Inc.'s Canadian facilities which were acquired on November 30, 1999.
WORLDWIDE CEILINGS
Net sales in the third quarter of 2000 were $171 million, down $1 million from
the third quarter of 1999, while operating profit was unchanged at $18 million.
First nine months 2000 net sales of $505 million and operating profit of $53
million were up 3% and 10%, respectively, from the comparable 1999 levels.
USG's domestic ceilings business, USG Interiors, Inc., reported a 2% increase in
net sales, while operating profit of $17 million was unchanged from the third
quarter of 1999. Domestic shipments were at near-record levels, while
international markets experienced little improvement over the past year. The
ceilings division of CGC Inc. contributed $1 million in operating profit, the
same as last year. USG International had breakeven results in the third quarter
of both 2000 and 1999.
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BUILDING PRODUCTS DISTRIBUTION
L&W Supply, the leading specialty building products distribution business in the
United States, reported third-quarter 2000 net sales of $346 million, a decrease
of 4% versus the third quarter of 1999. However, operating profit of $33 million
was the highest level for any quarter in L&W Supply's history and represented a
6% increase over a year ago. These results were driven by record shipments of
gypsum wallboard and strong sales of complementary building products. L&W Supply
currently operates out of 193 locations in the United States, up from 191
locations a year ago, distributing a variety of gypsum, ceilings and related
building materials.
MARKET CONDITIONS AND OUTLOOK
Housing starts during the first nine months of 2000 ran at a strong level. USG
is currently forecasting U.S. housing starts in 2000 to be about 1.6 million
units, down slightly from the 1.667 million units in 1999.
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, provides solid opportunity 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 determined 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.
The U.S. market for gypsum wallboard transitioned from short supply, as
experienced in 1999, to excess supply in 2000. Also, new industry capacity is
being added in 2000 and 2001. As a result, management anticipates continued
softness in its gypsum wallboard results for the remainder of 2000 and into
2001. In light of the excess supply conditions, USG recently announced the
closure of its wallboard production line in Gypsum, Ohio, the fourth old,
high-cost line that the Corporation has closed in the past year. Pressure on
gypsum wallboard pricing is likely to continue until more capacity in the
industry is closed. In the meantime, USG's management remains committed to its
strategies to improve operating efficiencies, grow in profitable markets and
manage its asbestos liability.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL STRATEGY
USG has been focused on building long-term stockholder value through dividends,
stock repurchases and the five elements of its strategic growth plan.
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<PAGE> 15
Dividends: USG paid cash dividends of $0.15 per share in the first, second and
third quarters of 2000. 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: Through September 30, 2000, USG had been allocating a
percentage of its free cash flow to stock repurchases. This percentage varied
from quarter to quarter depending on the price of USG's stock, the level of
USG's cash flow and alternate uses of cash. During the third quarter of 2000,
the Corporation purchased 1.0 million shares of its stock bringing the total for
the first nine months of 2000 to 5.6 million shares. Since the program began in
the fourth quarter of 1998, USG had purchased 7.3 million shares, completing an
initial 5-million-share authorization and purchasing 2.3 million shares of an
additional 5-million-share program authorized by USG's Board of Directors in the
first quarter of 2000. Share repurchases have been made in the open market or
through privately negotiated transactions and were funded with available cash
from operations. In light of the uncertainties involving asbestos litigation as
discussed below under Legal Contingencies and in Part II, Item 1. "Legal
Proceedings," USG does not anticipate making any further repurchases of common
stock at this time.
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 $310 million in the first nine months of 2000,
compared with $273 million in the corresponding 1999 period. As of September 30,
2000, capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $131 million, compared with $260 million as
of December 31, 1999.
In the second quarter of 2000, U.S. Gypsum successfully opened its new wallboard
plant in Aliquippa, Pa. In the third quarter of 2000, a new wallboard production
line at U.S. Gypsum's Plaster City, Calif., plant began operation. USG's current
capital spending program includes construction of new gypsum wallboard plants in
Rainier, Ore., and Monterrey, Mexico. The startup of the new Rainier plant is
expected in the fourth quarter of this year, while startup of the Monterrey
facility is anticipated to occur in the third quarter of 2001.
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.
WORKING CAPITAL
Working capital (current assets less current liabilities) as of September 30,
2000, amounted to $92 million, compared with $382 million as of December 31,
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<PAGE> 16
1999. The ratio of current assets to current liabilities was 1.14 to 1 as of
September 30, 2000, compared with 1.75 to 1 as of December 31, 1999.
Cash and cash equivalents as of September 30, 2000, amounted to $21 million
compared with $197 million as of December 31, 1999. During the first nine months
of 2000, net cash flows from operating activities totaled $283 million. Net cash
flows to investing activities were $308 million, reflecting capital expenditures
of $310 million, offset slightly by net proceeds from asset dispositions. Net
cash flows to financing activities of $151 million primarily reflect $207
million used for stock repurchases and $20 million used for cash dividends,
partially offset by a $74 million increase in debt.
Receivables increased slightly to $362 million as of September 30, 2000, from
$361 million as of December 31, 1999. Inventories increased to $282 million from
$256 million, and accounts payable rose to $211 million from $172 million. These
variations reflect normal seasonal fluctuations. In the third quarter of 2000,
$150 million of 9.25% senior notes due 2001 were reclassified from long-term
debt to current liabilities due to their maturity in less than one year.
DEBT
As of September 30, 2000, total debt amounted to $667 million, up $74 million
from December 31, 1999. This increase reflects $127 million of industrial
revenue bonds issued in connection with USG's capital spending program,
partially offset by repayments of $30 million on the accounts receivable
facility, $19 million on the credit facilities and $4 million on various notes
payable.
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 replaced 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 September 30, 2000, total outstanding revolving loans amounted to
$52 million and letters of credit issued and outstanding amounted to $16
million, leaving the Corporation with $552 million of unused and available
credit.
USG had additional borrowing capacity of $80 million as of September 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 third quarter
of 2000, U.S. Gypsum recorded a charge of $27.0 million, reflecting new filings
during the quarter. This compares to a $20.0 million charge taken in the third
quarter of 1999. Accrued asbestos charges for the first nine months of 2000
total $77.0 million compared with $62.5 million for the same period in 1999.
Asbestos charges to results of operations were higher in 1999 and 2000 than 1998
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 reductions and potential
future reductions in membership of the Center for Claims Resolution (the
"Center"), the continued solvency of other defendants and the impact of recent
and possible future bankruptcies 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 continues to evaluate whether its probable liability for future
Personal Injury Cases can be reasonably estimated. The ability to make such an
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<PAGE> 18
estimate requires an assessment of the impact on future case filings and
settlement values of the uncertainties identified above, including the outcome
and status of negotiations currently underway between the Center and certain
plaintiffs' firms concerning settlements that would, among other things, apply
medical criteria to the firm's 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 with certainty, the charge may be taken in the fourth
quarter of 2000 and the amount is expected to be material to results of
operations and stockholders' equity in the period in which it is taken.
The amount of such charges and the impact of the asbestos litigation on the
Corporation's liquidity and financial position may be affected by recent
bankruptcies of other defendants and any further bankruptcies of other
defendants, particularly current or former members of the Center. However, it is
management's opinion, taking into account 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, the solvency of co-defendants in the asbestos-related
litigation 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 September 30, 2000,
and the related condensed consolidated statements of earnings for the
three-month and nine-month periods ended September 30, 2000 and 1999 and the
condensed consolidated statement of cash flows for the nine-month periods ended
September 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
October 17, 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. No
new Property Damage Cases have been filed against U. S. Gypsum for more than two
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 83,800 claimants, as well as an additional 65,000 claims that have
been settled but will be closed over time. U. S. Gypsum was named in
approximately 15,000 new Personal Injury Cases in the third quarter of 2000,
15,300 in the second quarter and 12,300 in the first quarter. 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
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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.
During the years 1997-1999, 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 insurance, but current and future costs will be paid
largely by U.S. Gypsum due to exhaustion of most available insurance.
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, as
well as the impact of the reductions in membership of the Center described
below.
During 1999, three companies and an asbestos claims trust left the Center and
the membership of another company was terminated by the Center's Board. The
terminated member and the asbestos claims trust have refused to pay their share
of certain settlements agreed to by the Center while they were members. Although
to date plaintiffs in such cases have been successful in obtaining orders
requiring the terminated former member to pay its share of the settlements,
continued defaults may increase the cost of resolving these cases for the
remaining Center members, including U.S. Gypsum. In some cases, plaintiffs may
argue that the remaining Center members are required to fund the entire
settlement; there are strong defenses to such claims. In other cases, the
plaintiffs have certain rights to nullify the settlement as to any unpaid
portion. In addition, if one or more additional members of the Center that pay
significant shares of settlement and defense costs either withdraw, become
insolvent or file a bankruptcy petition, it is possible that the viability of
the Center and its settlement program will be jeopardized. Such a development
would be likely to increase U.S. Gypsum's costs of resolving the cases. During
2000, three defendants in the Personal Injury Cases (not members of the Center)
have filed bankruptcy petitions, and it is possible that others may also file.
The
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absence of these defendants from the litigation is likely to increase the cost
of resolving Personal Injury Cases for other defendants, including U. S. Gypsum
and the remaining Center members. The amount of the potential increased costs
and other adverse impacts that would result from the above developments cannot
presently be ascertained.
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 its solvent
carriers. As of September 30, 2000, after deducting insolvent coverage and
insurance paid out to date, approximately $66 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.
Through September 30, U. S. Gypsum's asbestos payments for the first nine months
of 2000 were approximately $125 million, or $43 million after insurance
reimbursement. 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, but may not be limited to, 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, but may not be limited to the number, characteristics and
venue of Personal Injury Cases that are filed against U.S. Gypsum; the Center's
continued viability in its present form and its ability to continue to resolve
claims at historical or acceptable levels; the level of physical impairment of
claimants; the viability of claims for conspiracy or punitive damages; the
effect of recent reductions in membership in the Center and any future
reductions in Center membership on the Center and its settlement program; the
continued solvency of other defendants and the impact of recent and possible
future bankruptcies of
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other defendants; the refusal of the former Center members described above to
fund their share of existing settlements; 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 September 30, 2000, can be resolved for an
amount totaling between $315 million and $490 million, including defense costs.
Most of these amounts are expected to be expended over the next two to five
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 September 30, 2000, U.S. Gypsum had
reserved $315 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 $66 million, the estimated portion of the reserved amount that is
expected to be paid or reimbursed by insurance. As of September 30, 2000, U.S.
Gypsum had an additional $32 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, June 30, and
September 30, 2000, the Company accrued charges of $22 million, $28 million, and
$27 million, respectively, reflecting new filings during those quarters.
Asbestos charges to results of operations were higher in 1999 and 2000 than 1998
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
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potential imposition of medical criteria, the impact of reductions 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 continues to evaluate whether its probable liability
for future Personal Injury Cases can be reasonably estimated. The ability to
make such an estimate requires an assessment of the impact on future case
filings and settlement values of the uncertainties identified above, including
the outcome and status 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
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 with certainty, the charge may be taken in the fourth
quarter of 2000, and the amount is expected to be material to the Corporation's
results of operations and stockholders' equity 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 will be necessary in light of future events, and such charges are
expected to be material to results of operations and stockholders' equity in the
period in which they are taken. The amount of such charges, and the impact of
the asbestos litigation on the Corporation's liquidity and financial position,
may be affected by recent bankruptcies of other defendants and any further
bankruptcies of other defendants, particularly current or former members of the
Center. However, it is management's opinion, taking into account 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(4a) Amended and Restated By-laws of USG Corporation, dated as of
September 22, 2000.
(10a) Second Amendment to Management Performance Plan, dated as of June
27, 2000.
(10b) First Amendment to 1995 Long-Term Equity Plan of USG Corporation,
dated as of June 27, 2000.
(10c) Second Amendment to Omnibus Management Incentive Plan of USG
Corporation, dated as of June 27, 2000.
(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
-----------------------------------
November 6, 2000
Raymond T. Belz,
Senior Vice President and Controller,
USG Corporation
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