Financial Review
Management's Discussion and Analysis 23
Consolidated Financial Statements
Statement of Earnings 28
Balance Sheet 29
Statement of Cash Flows 30
Notes to Financial Statements
1. Significant Accounting Policies 31
2. Financing Arrangements 32
3. Debt 33
4. Financial Instruments and Risk Management 34
5. Purchase of Subsidiary Minority Interest 35
6. Writedown of Assets 35
7. Income Taxes 36
8. Inventories 37
9. Property, Plant and Equipment 37
10. Leases 37
11. Employee Retirement Plans 37
12. Stock-Based Compensation 39
13. Stockholders' Equity 40
14. Industry and Geographic Segments 41
15. Litigation 42
Report of Management 48
Report of Independent Public Accountants 49
Selected Quarterly Financial Data 50
Comparative Five-Year Summary 51
Management's Discussion and Analysis of Results of Operations and
Financial Condition
As a result of USG's financial restructuring in 1993 and the restructuring's
continuing effect on financial reporting, USG reports EBITDA (earnings before
interest, taxes, depreciation, depletion, amortization and certain other income
and expense items) to facilitate comparisons of current and historical results.
EBITDA is also helpful in understanding cash flow generated from operations that
is available for taxes, debt service and capital expenditures. EBITDA should not
be considered by investors as an alternative to net earnings as an indicator of
the Corporation's operating performance or to cash flows as a measure of its
overall liquidity.
Results of Operations
Consolidated Results
A bar chart entitled "Net Sales (millions of dollars)" on page 23 of the Annual
Report to Stockholders shows that for the years 1994, 1995 and 1996 (shown on
the x-axis) the Corporation had net sales (shown on the y-axis) of $2,290
million, $2,444 million and $2,590 million, respectively.
A bar chart entitled "EBITDA (millions of dollars)" on page 23 of the Annual
Report to Stockholders shows that for the years 1994, 1995 and 1996 (shown on
the x-axis) the Corporation had EBITDA (shown on the y-axis) of $325 million,
$417 million and $437 million, respectively.
Net sales of $2,590 million in 1996 represented the fifth consecutive year of
improved sales and an increase of $146 million, or 6.0%, over 1995. Net sales in
1995 were up 6.7% over 1994. EBITDA, which has improved for the fourth
consecutive year, amounted to $437 million in 1996, representing an increase of
$20 million, or 4.8%, over 1995. EBITDA in 1995 increased 28.3% over 1994. The
improved results in 1996 were primarily attributable to record shipments of
Sheetrock brand gypsum wallboard and other USG products, including ceiling tile,
joint compound and cement board.
Gross profit as a percentage of net sales was 24.9% in 1996 compared with 24.7%
in 1995 and 22.6% in 1994. Gross profit in 1996 was lowered by a $7 million
provision to cost of products sold associated with actions implemented to
improve the operating efficiencies of USG's European businesses by reducing
manufacturing and distribution costs. Gross profit in 1994 was adversely
affected by a $30 million pretax ($17 million after-tax) charge to cost of
products sold recorded by U.S. Gypsum primarily to cover the cash portion of two
asbestos litigation settlements.
Selling and administrative expenses of $268 million increased $24 million, or
9.8%, over 1995, reflecting higher levels of expenses related to compensation
and benefits and a joint initiative by USG's North American Gypsum and Worldwide
Ceilings units to enhance customer service systems by upgrading their order
entry and fulfillment processes. Selling and administrative expenses of $244
million in 1995 were unchanged versus 1994.
Excess reorganization value, which was established in connection with USG's
financial restructuring in May 1993, is currently being amortized over a
five-year period. This noncash amortization, which has no tax impact, reduced
operating profit by $169 million in each of 1996, 1995 and 1994.
Interest expense continued to decline in 1996 as a result of debt repayments.
Interest expense amounted to $75 million in 1996, down $24 million, or 24.2%,
from the 1995 level of $99 million, which was down $50 million, or 33.6%, from
$149 million recorded in 1994. Interest expense in 1994 included a $16 million
pretax ($9 million after-tax) noncash charge for the write-off of reorganization
debt discount primarily in conjunction with the Corporation's accelerated
payment of bank term loans.
In the fourth quarter of 1995, the Corporation recorded a $30 million pretax
($24 million after-tax) charge in connection with the sale of its insulation
manufacturing business in the United States and the closure of its insulation
plant in Canada. Included in this charge was a $15 million noncash
(no-tax-impact) write-off of excess reorganization value associated with these
businesses. The remainder of the charge primarily reflected a writedown of the
assets of these businesses to their net realizable value. The total charge is
reflected in other (income)/expense, net in the Consolidated Statement of
Earnings.
The Corporation's income tax expense is computed based on pretax earnings
excluding the noncash amortization of excess reorganization value, which is not
deductible for federal income tax purposes. In 1996, income tax expense amounted
to $117 million, compared with $97 million in 1995 and $54 million in 1994. The
Corporation's effective tax rates for 1996, 1995 and 1994 were 88.9%, 149.0% and
negative 142.1%, respectively. Excluding the amortization of excess
reorganization value and, in 1995, the aforementioned $15 million write-off of
excess reorganization value, the Corporation's 1996, 1995 and 1994 effective tax
rates were 38.9%, 39.0% and 42.1%, respectively. See "Note 7. Income Taxes" for
additional information.
The Corporation reported net earnings of $15 million, or $0.31 per common share,
in 1996. However, these earnings included: (i) the noncash amortization of
excess reorganization value of $169 million and (ii) the noncash amortization of
reorganization debt discount of $1 million included in interest expense.
Together, these items reduced 1996 net earnings by $170 million, or $3.58 per
common share.
The Corporation recorded a net loss of $32 million, or $0.71 per common share,
in 1995. However, this loss included: (i) the noncash amortization of excess
reorganization value of $169 million (ii) the noncash amortization of
reorganization debt discount of $4 million included in interest expense and
(iii) the $24 million after-tax writedown of the insulation business. Together,
these items reduced 1995 net earnings by $197 million, or $4.38 per common
share.
A net loss of $92 million, or $2.14 per common share, in 1994 included: (i)
noncash amortizations of excess reorganization value and reorganization debt
discount of $169 million and $12 million, respectively (ii) the noncash
after-tax write-off of reorganization debt discount amounting to $9 million
primarily associated with bank term loans and (iii) the after-tax charge of $17
million associated with asbestos litigation settlements. Together, these items
reduced 1994 net earnings by $207 million, or $4.81 per common share.
Construction Markets
Based on preliminary data issued by the U.S. Bureau of the Census, U.S. housing
starts were an estimated 1.475 million units in 1996, up 9% over 1995. Housing
starts of 1.354 million units in 1995 represented a 7% decline from the 1994
level of 1.457 million units. U.S. nonresidential construction grew 12% in 1995
versus 1994, as measured in floor space for which contracts were awarded. This
had a favorable impact on USG's 1996 sales, because finishing of nonresidential
interiors follows contract awards by as much as a year. Repair and remodel
activity continued its upward trend in 1996. Demand for wallboard generated by
this market increased an estimated 7%.
Core Business Results
NET SALES EBITDA
---------------------------------- -----------------------------------
1996 1995 1994 1996 1995 1994
(dollars in millions)
North American Gypsum:
U.S. Gypsum Company $ 1,390 $ 1,309 $ 1,209 $ 347 $ 327 $ 248
L&W Supply Corporation 841 753 659 29 26 15
CGC Inc. (gypsum division) 114 102 110 16 11 15
Other subsidiaries 83 75 90 25 22 28
Eliminations (361) (315) (288) -- -- (2)
- ------------------------------------------ ------- ------- ------- ------- ------- -------
Total 2,067 1,924 1,780 417 386 304
Worldwide Ceilings:
USG Interiors, Inc. 398 385 400 53 58 53
USG International 228 235 202 2 5 6
CGC Inc. (interiors division) 30 28 29 3 4 3
Eliminations (44) (39) (37) -- -- --
- ------------------------------------------ ------- ------- ------- ------- ------- -------
Total 612 609 594 58 67 62
Corporate -- -- -- (38) (36) (41)
Eliminations (89) (89) (84) -- -- --
- ------------------------------------------ ------- ------- ------- ------- ------- -------
Total USG Corporation 2,590 2,444 2,290 437 417 325
===== ===== ===== === === ===
North American Gypsum
A bar chart entitled "Net Sales (millions of dollars)" on page 25 of the Annual
Report to Stockholders shows that for the years 1994, 1995 and 1996 (shown on
the x-axis) North American Gypsum had net sales (shown on the y-axis) of $1,780
million, $1,924 million and $2,067 million, respectively.
A bar chart entitled "EBITDA (millions of dollars)" on page 25 of the Annual
Report to Stockholders shows that for the years 1994, 1995 and 1996 (shown on
the x-axis) North American Gypsum had EBITDA (shown on the y-axis) of $304
million, $386 million and $417 million, respectively.
Net sales of $2,067 million in 1996 for North American Gypsum represented an
increase of $143 million, or 7.4%, and EBITDA of $417 million improved $31
million, or 8.0%, compared with 1995. For 1995, net sales of $1,924 million
increased $144 million, or 8.1%, while EBITDA of $386 million increased $82
million, or 27.0%, over 1994 EBITDA of $304 million, which included the impact
of the aforementioned $30 million charge associated with asbestos litigation
settlements.
Results improved in 1996 for U.S. Gypsum compared with 1995 primarily due to
record shipments of Sheetrock wallboard that totaled 8.0 billion square feet
compared with 7.6 billion square feet in 1995 and 7.7 billion square feet in
1994. In addition, shipments of nonwallboard products such as Sheetrock joint
compound and Durock cement board also set records in 1996. U.S. Gypsum's average
selling price for Sheetrock wallboard in 1996 was $110.56 per thousand square
feet, a slight increase compared with the 1995 average price of $110.44, which
was up 10.4% over 1994's average price of $100.08. Manufacturing costs for
Sheetrock wallboard were down 3.9% in 1996 largely due to lower furnish prices
for wastepaper, the primary raw material of wallboard paper. Comparing 1995 with
1994, higher wastepaper furnish prices resulted in an aggregate increase of
approximately $28 million in cost of products sold. U.S. Gypsum's plants
operated at 94% of capacity in 1996, which closely approximated the estimated
average rate for the U.S. industry. In 1995, U.S. Gypsum's plants operated at
92% of capacity.
L&W Supply Corporation, USG's building products distribution business, reported
record net sales in 1996 due to record shipments of wallboard and sales of
nonwallboard products. EBITDA for L&W Supply improved significantly in each of
the past three years as a result of gross profit improvements for all of its
product lines. As of December 31, 1996, L&W Supply conducted its business out of
161 distribution centers, up from 156 centers as of year-end 1995, following the
addition of six centers and the closing of one in a consolidation during the
year.
CGC Inc.'s gypsum business experienced higher net sales and EBITDA in 1996 due
to improved wallboard demand and pricing as a result of increased housing starts
in eastern Canada and increased shipments to the United States. Results in 1995,
as compared with 1994, were adversely affected by lower demand caused by the
lowest level of housing starts in eastern Canada in 35 years and by higher unit
costs for wallboard.
Worldwide Ceilings
A bar chart entitled "Net Sales (millions of dollars)" on page 25 of the Annual
Report to Stockholders shows that for the years 1994, 1995 and 1996 (shown on
the x-axis) Worldwide Ceilings had net sales (shown on the y-axis) of $594
million, $609 million and $612 million, respectively.
A bar chart entitled "EBITDA (in millions)" on page 25 of the Annual Report to
Stockholders shows that for the years 1994, 1995 and 1996 (shown on the x-axis)
Worldwide Ceilings had EBITDA (shown on the y-axis) of $62 million, $67 million
and $58 million, respectively.
Net sales in 1996 for Worldwide Ceilings rose $3 million, or 0.5%, to $612
million, while EBITDA of $58 million declined $9 million, or 13.4%, compared
with 1995. The slightly higher sales in 1996 reflect record shipments of ceiling
tile at higher average selling prices and increased shipments of ceiling grid.
These improvements were partially offset by the absence of full-year results for
the insulation manufacturing business in the United States that was sold in
April 1996. The lower level of EBITDA was primarily attributable to: (i) a $7
million provision associated with actions implemented to improve the operating
efficiencies of USG's European businesses by reducing manufacturing and
distribution costs (ii) expenses associated with enhancing customer service
systems and (iii) start-up costs related to a new ceiling tile line placed in
service in 1996 at the Greenville, Miss., plant.
Net sales in 1995 of $609 million reflect an increase of $15 million, or 2.5%,
and EBITDA of $67 million increased $5 million, or 8.1%, compared with 1994.
Excluding results for the domestic floors unit, which was divested in December
1994, Worldwide Ceilings' 1995 net sales improved $45 million, or 8.0%, and
EBITDA increased $5 million, or 8.1%, versus 1994. The improved 1995 results
reflect increased shipments and higher average selling prices for ceiling tile.
Liquidity and Capital Resources
In 1996, the Corporation continued to pursue its strategy of reducing debt and
growing its core gypsum and ceilings businesses through a balanced application
of free cash flow between debt reduction and capital expenditures with a
near-term objective of achieving investment-grade status.
A bar chart entitled "Debt Principal (millions of dollars)" on page 26 of the
Annual Report to Stockholders shows that as of December 31, 1994, 1995 and 1996
(shown on the x-axis) the Corporation's principal amount of total debt (shown on
the y-axis) was $1,149 million, $926 million and $772 million, respectively.
A bar chart entitled "Capital Spending (millions of dollars)" on page 26 of the
Annual Report to Stockholders shows that for the years 1994, 1995 and 1996
(shown on the x-axis) the Corporation had capital spending (shown on the y-axis)
of $64 million, $147 million and $120 million, respectively.
Debt Reduction
As of December 31, 1996, the principal amount of total debt was $772 million,
reflecting a reduction of $154 million, or 16.6%, from a total of $926 million
as of December 31, 1995. The repayments of $150 million of revolving bank loans
and $28 million of outstanding 8.0% senior notes due 1996, the redemption of $22
million of outstanding 7.875% senior debentures due 2004 and short-term net
foreign repayments of $4 million were partially offset by $50 million of debt
incurred to finance the purchase of publicly held shares of CGC common stock.
(See "Note 5. Purchase of Subsidiary Minority Interest" for more information on
this transaction.)
Capital Expenditures
Capital expenditures amounted to $120 million in 1996, compared with $147
million in 1995. For North American Gypsum, capital investments in 1996 included
cost-reduction projects such as the installation of stock cleaning equipment to
utilize lower grades of recycled paper and equipment to further utilize
synthetic gypsum. In the Worldwide Ceilings business, a $35 million project was
started to replace two old production lines with one modern, high-speed line at
its ceiling tile plant in Cloquet, Minn. This project is anticipated to be
completed by mid-1998. In addition, projects completed in 1996 included a new
$45 million Auratone ceiling tile production line at the Greenville, Miss.,
plant and the installation of ceiling suspension grid manufacturing in Saudi
Arabia and Taiwan, all of which have commenced initial operations. As of
December 31, 1996, the Corporation's capital expenditure commitments for the
replacement, modernization and expansion of operations amounted to $173 million
compared with $68 million as of December 31, 1995.
The Corporation periodically evaluates possible acquisitions or combinations
involving other businesses or companies in businesses and markets related to its
current operations. The Corporation believes that its available liquidity would
be generally adequate to support most opportunities and that it has access to
additional financial resources to take advantage of other opportunities. In
November 1996, the Corporation announced a plan to build a new plant at a cost
of $110 million to manufacture Sheetrock brand wallboard in Bridgeport, Ala., to
serve growing construction markets in the southeastern United States. The
Bridgeport plant, when fully operational, will have annual capacity of 700
million square feet and will use 100% synthetic gypsum in its production of
Sheetrock wallboard. It is scheduled to begin operation in 1999 and will replace
350 million square feet of high-cost capacity at the Plasterco, Va., facility,
which will cease wallboard production at that time.
Working Capital
Working capital (current assets less current liabilities) as of December 31,
1996, amounted to $108 million, and the ratio of current assets to current
liabilities was 1.27 to 1. As of December 31, 1995, working capital was $108
million, and the ratio of current assets to current liabilities was 1.28 to 1.
Cash and cash equivalents as of December 31, 1996, amounted to $44 million
compared with $70 million as of December 31, 1995. This decrease reflects 1996
net cash flows to investing and financing activities of $159 million and $154
million, respectively, partially offset by net cash flows from operating
activities of $287 million. Receivables (net of reserves) increased to $274
million as of December 31, 1996, from $246 million as of December 31, 1995,
while inventories increased to $185 million from $175 million, and accounts
payable rose to $141 million from $130 million.
Available Liquidity
The Corporation has additional liquidity available through several financing
arrangements. These include: (i) a revolving credit facility maturing in 2002
that allows the Corporation to borrow up to $500 million, including a $125
million letter of credit subfacility, under which, as of December 31, 1996,
outstanding revolving loans totaled $110 million and letters of credit issued
and outstanding amounted to $47 million, leaving the Corporation with $343
million of unused and available credit (ii) a revolving accounts receivable
facility (see "Note 2. Financing Arrangements"), from which, as of December 31,
1996, the Corporation had additional borrowing capacity of $50 million and (iii)
a shelf registration statement filed with the Securities and Exchange Commission
allowing the Corporation to offer from time to time debt securities, shares of
preferred and common stock or warrants to purchase shares of common stock, all
having an aggregate initial offering price not to exceed $300 million. As of the
filing date of the Corporation's 1996 Annual Report on Form 10-K, no securities
had been issued pursuant to this registration.
Legal Contingencies
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. (See "Note 15.
Litigation" for information concerning the asbestos litigation.)
In April 1996, U.S. Gypsum reached a $111 million settlement with one of its
insurance carriers for past and future asbestos litigation costs. Under the
terms of the settlement, the carrier reimbursed U.S. Gypsum $62 million for past
asbestos litigation costs, while the remaining $49 million of the settlement
represents coverage in place for future settlements.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its earnings or consolidated financial
position. (See "Note 15. Litigation" for additional information on environmental
litigation.)
Consolidated Statement of Earnings
Years ended December 31,
------------------------
(dollars in millions, except per share data) 1996 1995 1994
---- ---- ----
Net sales $ 2,590 $ 2,444 $ 2,290
Cost of products sold 1,945 1,841 1,773
---- ---- ----
Gross profit 645 603 517
Selling and administrative expenses 268 244 244
Amortization of excess reorganization value 169 169 169
---- ---- ----
Operating profit 208 190 104
Interest expense 75 99 149
Interest income (2) (6) (10)
Other (income)/expense, net 3 32 3
---- ---- ----
Earnings/(loss) before income taxes 132 65 (38)
Income taxes 117 97 54
---- ---- ----
Net earnings/(loss) 15 (32) (92)
==== ==== ====
Net earnings/(loss) per common share 0.31 (0.71) (2.14)
==== ===== =====
The notes to financial statements are an integral part of this statement.
Consolidated Balance Sheet
(dollars in millions) As of December 31,
------------------
1996 1995
---- ----
Assets
Current assets:
Cash and cash equivalents (primarily time deposits) $ 44 $ 70
Receivables (net of reserves of $17 and $14) 274 246
Inventories 185 175
- ----------- ---- ----
Total current assets 503 491
- -------------------- ---- ----
Property, plant and equipment, net 887 842
Excess reorganization value (net of accumulated amortization
of $635 and $466) 210 379
Other assets 218 178
- ------------ ---- ----
Total assets 1,818 1,890
===== =====
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 141 130
Accrued expenses 200 190
Notes payable 7 7
Current portion of long-term debt 42 35
Taxes on income 5 21
- --------------- ---- ----
Total current liabilities 395 383
- ------------------------- ---- ----
Long-term debt 706 865
Deferred income taxes 192 185
Other liabilities 548 494
Stockholders' equity/(deficit):
Preferred stock
$1 par value; authorized 36,000,000 shares;
$1.80 convertible preferred stock (initial series);
outstanding-none -- --
Common stock
$0.10 par value; authorized 200,000,000 shares;
outstanding 45,724,561 and 45,262,539 shares (after
deducting 31,488 and 33,988 shares held in treasury) 5 5
Capital received in excess of par value 231 223
Deferred currency translation (10) (6)
Reinvested earnings/(deficit) (249) (259)
- ----------------------------- ---- ----
Total stockholders' equity/(deficit) (23) (37)
- ------------------------------------ ---- ----
Total liabilities and stockholders' equity 1,818 1,890
===== =====
The notes to financial statements are an integral part of this statement.
Consolidated Statement of Cash Flows
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
(dollars in millions)
Operating Activities:
Net earnings/(loss) $ 15 $ (32) $ (92)
Adjustments to reconcile net earnings/(loss) to net cash:
Amortization of excess reorganization value 169 169 169
Depreciation, depletion and amortization 65 67 84
Deferred income taxes 7 6 (1)
Net (gain)/loss on asset dispositions (2) 27 (2)
(Increase)/decrease in working capital:
Receivables (28) 24 (20)
Inventories (10) (2) (28)
Payables (5) (6) 33
Accrued expenses 14 (27) 27
(Increase)/decrease in other assets (2) (10) 1
Increase in other liabilities 64 30 30
Other, net -- (10) (3)
- ---------------------------------------- ---- ---- ----
Net cash flows from operating activities 287 236 198
- ---------------------------------------- ---- ---- ----
Investing Activities:
Capital expenditures (120) (147) (64)
Net proceeds from asset dispositions 10 7 16
Purchase of subsidiary minority interest (49) -- --
- ---------------------------------------- ---- ---- ----
Net cash flows to investing activities (159) (140) (48)
- ---------------------------------------- ---- ---- ----
Financing Activities:
Issuance of debt 77 576 171
Repayment of debt (231) (804) (558)
Short-term borrowings/(repayments), net -- 5 (1)
Proceeds from public offering of common stock -- -- 224
- --------------------------------------------- ---- ---- ----
Net cash flows to financing activities (154) (223) (164)
- --------------------------------------------- ---- ---- ----
Net Increase/(Decrease) in Cash and Cash Equivalents (26) (127) (14)
Cash and cash equivalents at beginning of period 70 197 211
- ------------------------------------------------ ---- ---- ----
Cash and cash equivalents at end of period 44 70 197
==== ==== ====
Supplemental Cash Flow Disclosures:
Interest paid 74 88 115
Income taxes paid 116 108 38
The notes to financial statements are an integral part of this statement.
Notes to Financial Statements
1. Significant Accounting Policies
Nature of Operations-Through its subsidiaries, USG Corporation (the
"Corporation") is a leading manufacturer of building materials, producing a wide
range of products for use in new residential and nonresidential construction and
repair and remodel, as well as products used in certain industrial processes.
The Corporation's operations are organized into two core businesses: North
American Gypsum, which manufactures and markets gypsum wallboard and related
products in the United States, Canada and Mexico, and Worldwide Ceilings, which
manufactures and markets ceiling tile, ceiling grid and other interior systems
products worldwide. Distribution is carried out through L&W Supply Corporation,
a wholly owned subsidiary of the Corporation; building materials dealers; home
improvement centers and other retailers; contractors; and specialty wallboard
distributors.
Consolidation-The consolidated financial statements include the accounts of the
Corporation and its subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation.
Use of Estimates-The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets, liabilities, revenues and expenses. Actual results could differ from
these estimates.
Reclassifications-Certain amounts in the prior years' financial statements have
been reclassified to conform with the 1996 presentation.
Revenue Recognition-The Corporation recognizes revenue upon the shipment of
products.
Cash and Cash Equivalents-For purposes of the Consolidated Balance Sheet and
Consolidated Statement of Cash Flows, all highly liquid investments with a
maturity of three months or less at the time of purchase are classified as cash
equivalents.
Inventory Valuation-Most of the Corporation's domestic inventories are valued
under the last-in, first-out ("LIFO") method. The remaining inventories are
stated at the lower of cost or market under the first-in, first-out ("FIFO") or
average production cost methods. Inventories include material, labor and
applicable factory overhead costs.
Property, Plant and Equipment-Property, plant and equipment are stated at cost,
except for those assets that were revalued under fresh start accounting in May
1993. Provisions for depreciation of property, plant and equipment are
determined principally on a straight-line basis over the expected average useful
lives of composite asset groups. Depletion is computed on a basis calculated to
spread the cost of gypsum and other applicable resources over the estimated
quantities of material recoverable. Interest during construction is capitalized
on major additions.
Excess Reorganization Value-Excess reorganization value, which was established
in connection with a financial restructuring and the implementation of fresh
start accounting in May 1993, is currently being amortized through April 1998.
The Corporation continues to evaluate whether events and circumstances have
occurred which indicate that the remaining estimated useful life of excess
reorganization value may warrant revision or that the remaining balances may not
be recoverable.
Foreign Currency Translation-Net currency translation gains or losses on foreign
subsidiaries are included in deferred currency translation, a component of
stockholders' equity.
Research and Development-Research and development expenditures are charged to
earnings as incurred and amounted to $19 million, $18 million and $17 million in
the years ended December 31, 1996, 1995 and 1994, respectively.
2. Financing Arrangements
Refinancings-In the third quarter of 1995, the Corporation completed a
refinancing that included: (i) the establishment of a new seven-year revolving
credit facility (the "Revolving Credit Facility") to replace an existing bank
credit agreement that was due to expire in 2000 (ii) the sale of $150 million
aggregate principal amount of 8.5% senior notes due 2005 and (iii) the
redemption of the Corporation's remaining $268 million principal amount of
10.25% senior notes due 2002 using a combination of proceeds from the sale of
the 8.5% senior notes, borrowings under the Revolving Credit Facility and cash
on hand. Under the Revolving Credit Facility, the Corporation can borrow up to
$500 million, including a $125 million letter of credit subfacility, from a
syndicate of banks, which are many of the same banks that had been lenders under
the previous credit agreement. The Revolving Credit Facility provides USG
greater financial flexibility as a result of: (i) less-restrictive covenants
(ii) the letter of credit subfacility (iii) an expiration in 2002 with no
required amortization prior to maturity and (iv) a simplification of the
Corporation's capital structure through the elimination of subsidiary guarantees
on any of its senior indebtedness.
In the first quarter of 1994, the Corporation implemented a refinancing plan
that included: (i) a public offering of 14,375,000 shares of common stock, of
which 7,900,000 shares, yielding net proceeds to the Corporation of $224
million, were issued by the Corporation and 6,475,000 were sold by Water Street
Corporate Recovery Fund I, L.P. ("Water Street"), the Corporation's largest
stockholder at that time (ii) the issuance of $150 million of senior notes due
2001 to certain institutional investors in exchange for $65 million aggregate
principal amount of its outstanding senior notes due 1996 and 1997 and $85
million in cash and (iii) an amendment of the existing bank credit agreement.
Shelf Registration-In the fourth quarter of 1995, the Corporation filed a shelf
registration statement with the Securities and Exchange Commission allowing the
Corporation to offer from time to time: (i) debt securities consisting of notes,
debentures or other evidences of indebtedness in one or more series (ii) shares
of $1.00 par value preferred stock in one or more series (iii) shares of $0.10
par value common stock or (iv) warrants to purchase shares of common stock
(collectively, the "Offered Securities"), all having an aggregate initial
offering price not to exceed $300 million. The Offered Securities may be offered
separately or as units with other Offered Securities. The debt securities may be
(i) senior or subordinated or (ii) secured or unsecured. The Corporation intends
to use the net proceeds from the sale of the Offered Securities for general
corporate purposes that may include the repayment of existing indebtedness and
the financing of capital expenditures and acquisitions. The shelf registration
was declared effective by the Securities and Exchange Commission on January 3,
1996. As of the filing date of the Corporation's 1996 Annual Report on Form
10-K, no securities had been issued pursuant to this registration.
Accounts Receivable Facility-In the fourth quarter of 1994, the Corporation
entered into an accounts receivable facility (the "Receivables Facility") in
which USG Funding Corporation, a special-purpose subsidiary of the Corporation
formed under Delaware law, entered into agreements with U.S. Gypsum and USG
Interiors. These agreements provide that USG Funding will purchase trade
receivables (excluding intercompany receivables owed by L&W Supply) of U.S.
Gypsum and USG Interiors as generated, in a transaction designed to be a "true
sale" under applicable law. USG Funding is a party to a Master Trust arrangement
(the "Master Trust") under which the purchased receivables are then transferred
to Chase Manhattan Bank as Trustee to be held for the benefit of certificate
holders in such trust. A residual interest in the Master Trust is owned by USG
Funding through subordinated certificates. Under a supplement to the Master
Trust, certificates representing an ownership interest in the Master Trust of up
to $130 million have been issued to Citicorp Securities, Inc. Debt issued under
the Receivables Facility will have a final maturity in 2004 but may be prepaid
at any time. The interest rate on such debt is fixed at 8.2% through a long-term
interest rate swap. Pursuant to the applicable reserve and eligibility
requirements, the maximum amount of debt issuable under the Receivables Facility
as of December 31, 1996 and 1995, (including $80 million outstanding as of each
date) was $105 million and $98 million, respectively. Under the foregoing
agreements and related documentation, USG Funding 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 distribution of any value to its shareholder.
As of December 31, 1996 and 1995, the outstanding balance of receivables sold to
USG Funding and held under the Master Trust was $157 million and $142 million,
respectively, and debt outstanding under the Receivables Facility was $80
million as of each date. Receivables and debt outstanding in connection with the
Receivables Facility remain in receivables and long-term debt, respectively, on
the Consolidated Balance Sheet.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." As required, the
Corporation will adopt SFAS No. 125 on January 1, 1997. The adoption of this
statement will not have any impact on the results of operations or the
consolidated financial position of the Corporation.
3. Debt
Total debt, including currently maturing debt, as of December 31 consisted of
the following:
1996 1995
(dollars in millions) ---- ----
Secured Debt:
Revolving Credit Facility due 2002 $ 110 $ 260
Receivables Facility due 2003 and 2004 80 80
Senior notes and debentures:
8% senior notes due 1996 -- 28
8% senior notes due 1997 41 41
9.25% senior notes due 2001 150 150
7.875% sinking fund debentures due 2004 -- 22
8.5% senior notes due 2005 150 150
8.75% sinking fund debentures due 2017 140 140
Unsecured Debt:
Canadian credit facility due 1997 50 --
Industrial revenue bonds, 5.9% ranging to 8.8%,
due through 2020 40 41
Other unsecured debt, average interest rate 4.6% and 7.6%,
varying payments through 2006 11 14
---- ----
Total principal amount of debt 772 926
- ------------------------------ ---- ----
Less unamortized reorganization discount (17) (19)
- ---------------------------------------- ---- ----
Total carrying amount of debt 755 907
==== ====
On July 27, 1995, the Corporation entered into a seven-year $500 million secured
Revolving Credit Facility, which includes a $125 million letter of credit
subfacility, with a syndicate of banks under a credit agreement (the "Credit
Agreement"). The Revolving Credit Facility will not require amortization prior
to maturity in 2002 and is secured by a pledge of the outstanding capital stock
of the Corporation's major domestic subsidiaries, including U.S. Gypsum, USG
Interiors, L&W Supply and USG Foreign Investments, Ltd. However, the security
will be permanently released at such time as the Corporation's senior public
debt is rated investment grade.
The Credit Agreement contains material restrictions on the operation of the
Corporation's business, including, without limitation, covenants pertaining to:
(i) investments (ii) dividends, distributions and repurchases of stock and
subordinated debt, provided that this covenant, as well as the covenant
regarding investments, would no longer apply once the Corporation's senior
public debt rating is investment grade (iii) liens (iv) sale and leaseback
transactions (v) mergers, consolidations and sales of assets with respect to the
Corporation and major subsidiaries (vi) acquisitions of businesses not related
to the building materials industry (vii) use of proceeds, provided that the use
of proceeds arising from the issuance of additional debt and equity will be at
the Corporation's discretion (viii) debt or guarantees thereof (ix) restrictions
in other agreements on the ability of subsidiaries to declare and pay dividends
and (x) financial covenants or events of default in other debt agreements that
are more restrictive than those contained in the Credit Agreement. These
negative covenants contain certain exceptions to the restrictions imposed upon
the operation of the Corporation's business.
As of December 31, 1996, outstanding revolving loans totaled $110 million, and
letters of credit issued and outstanding amounted to $47 million, leaving the
Corporation with $343 million of unused and available credit under the Revolving
Credit Facility. The revolving loans bear interest at the London Interbank
Offered Rate ("LIBOR") as determined from time to time plus an applicable spread
based on the Corporation's net debt to EBITDA ratio (as defined in the Credit
Agreement) for the preceding four quarters. As of December 31, 1996, the
applicable spread was .625%. The average rate of interest on the revolving loans
was 6.3% during the year ended December 31, 1996, and 6.8% during the period of
July 27 through December 31, 1995. The average rate of interest on bank term
loans under the former bank credit agreement was 8.2% during the period of
January 1 through July 26, 1995. (See "Note 4. Financial Instruments and Risk
Management" for information on instruments used by the Corporation to manage the
impact of interest rate changes on LIBOR-based bank debt.)
The $50 million Canadian credit facility due 1997 was classified as long-term
debt on the Consolidated Balance Sheet because it is the Corporation's intent,
and it has the ability, to replace this interim financing facility with a
long-term financing arrangement.
The weighted average interest rate on outstanding short-term borrowings was 4.2%
and 6.2% as of December 31, 1996 and 1995, respectively.
The fair market value of total debt outstanding was $777 million and $928
million as of December 31, 1996 and 1995, respectively, based on indicative bond
prices as of those dates, excluding other unsecured debt, the fair market value
of which was not practicable to estimate.
As of December 31, 1996, aggregate scheduled maturities of long-term debt,
excluding amounts classified as current liabilities, were zero for each of the
years 1998 through 2000 and $150 million for 2001.
4. Financial Instruments and Risk Management
The Corporation has limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-defined
interest rate and energy cost risks as well as occasional foreign currency
exchange exposure. The following table presents the carrying amounts and
estimated fair value of the Corporation's derivative portfolio as of December
31:
(dollars in millions) 1996 1995
---- ----
Interest Rate Contracts:
Notional amount $ 171 $ 305
Carrying amount -- 3
Fair value (10) (21)
Energy Price Swaps:
Notional amount 43 33
Carrying amount -- --
Fair value 4 2
Foreign Exchange Contract:
Notional amount 15 --
Carrying amount -- --
Fair value -- --
The amounts reported as fair value represent the market value as obtained from
broker quotations. The negative fair values are estimates of the amounts the
Corporation would need to pay as of December 31, 1996 and 1995, to cancel the
contracts or transfer them to other parties.
The Corporation is exposed to credit losses in the event of nonperformance by
the counterparties on all its derivative contracts but has no off-balance-sheet
credit risk of accounting loss. All counterparties have investment grade credit
standing; accordingly, the Corporation anticipates that these counterparties
will be able to satisfy fully their obligations under the contracts. The
Corporation does not obtain collateral or other security to support financial
instruments subject to credit risk but monitors the credit standing of
counterparties.
Interest Rate Risk Management-The Corporation enters into swap agreements and
purchases interest rate caps to manage the impact of interest rate changes on
LIBOR-based bank debt. As of December 31, 1996, the Corporation owned an
interest rate cap that capped the Corporation's expected LIBOR-based interest
payments on $25 million notional principal at 5.6% for 1997. The Corporation
also entered into various interest rate swap agreements whereby the Corporation
pays a fixed rate in exchange for LIBOR. As of December 31, 1996, the
Corporation has agreements in place to pay 7.1% in exchange for LIBOR on $50
million notional principal for the years 1997 through 2000 and on $25 million
notional principal for 2001 and 2002. In addition, the Corporation has entered
into $80 million of interest rate swap agreements to hedge its Receivables
Facility on which the interest payments are based on commercial paper rates.
Under these agreements, the Corporation pays a fixed rate of 8.2% in exchange
for the monthly commercial paper rate due on the Receivables Facility.
The Corporation also has in place an interest rate swap agreement to hedge the
anticipated long-term financing arrangement that will replace the interim
financing facility associated with the purchase of the minority interest in its
Canadian subsidiary, CGC Inc. ("CGC"). (See "Note 5. Purchase of Subsidiary
Minority Interest.") Under this agreement, the Corporation is required to pay
a fixed rate of 5.8% on a notional principal amount of $21 million Canadian ($16
million U.S.) in exchange for three-month Canadian Bankers Acceptance Rates.
This contract became effective on January 22, 1997, and matures on January 22,
2002.
As of December 31, 1995, the Corporation owned interest rate caps that capped
the Corporation's expected LIBOR-based bank debt interest payments on $100
million notional principal at 7.0% for 1996 and 6.7% for 1997. Additionally, as
of December 31, 1995, the Corporation had agreements in place to pay 7.1% in
exchange for LIBOR on $125 million notional principal for the years 1996 through
2000 and on $50 million notional principal for 2001 and 2002. Also, as of
December 31, 1995, the Corporation had $80 million of interest rate swap
agreements to hedge its Receivables Facility.
Premiums paid for purchased interest rate cap agreements are amortized to
interest expense over the term of the caps. Unamortized premiums are included in
other assets on the Consolidated Balance Sheet. Amounts receivable under cap
agreements and receivables or payables under swap agreements are accrued as an
increase or decrease to interest expense as appropriate.
Energy Cost Risk Management-The Corporation uses energy price swap agreements to
hedge anticipated purchases of fuel to be utilized in the manufacturing
processes for gypsum wallboard and ceiling tile. Under these swap agreements,
the Corporation receives or makes payments based on the differential between a
specified price and the actual closing price for the current month's energy
price contract. As of December 31, 1996 and 1995, the Corporation had
over-the-counter swap agreements to exchange monthly payments on notional
amounts of energy amounting to $43 million and $33 million, respectively, all
extending one year or less.
Upon settlement of energy price contracts, the resulting gain or loss is
included in cost of products sold, along with the actual spot energy cost of the
corresponding underlying hedged transaction, the combination of which amounts to
the predetermined specified contract price.
Foreign Exchange Risk Management-As of December 31, 1996, the Corporation had a
foreign exchange forward contract in place to hedge the refinancing of the
purchase of the minority interest in CGC. This contract was for $15 million
(U.S.) and matures in January 1997. The deferred gain on this foreign exchange
hedge was not significant as of December 31, 1996. The Corporation had no
foreign exchange contracts as of December 31, 1995.
5. Purchase of Subsidiary Minority Interest
In the fourth quarter of 1996, the Corporation purchased the minority interest
in its Canadian subsidiary, CGC. The common shares of publicly held stock
totaled approximately 6 million and were acquired at a price of $11 (Canadian)
per share. The total amount paid in U.S. dollars for the shares was $49 million.
This payment was financed initially through an interim Canadian credit facility
due 1997 and was classified as long-term debt on the Consolidated Balance Sheet
and disclosed in "Note 3. Debt." The interim financing facility will be replaced
by a long-term financing arrangement. As a result of this transaction, CGC
recorded goodwill of $41 million (U.S.), which is included in other assets on
the Consolidated Balance Sheet and will be amortized over 40 years.
6. Writedown of Assets
In the fourth quarter of 1995, the Corporation recorded a $30 million pretax
($24 million after-tax) charge in connection with the sale of its insulation
manufacturing business in the United States, which was completed in the second
quarter of 1996, and the closure of its insulation plant in Canada. Included in
this charge is a $15 million noncash (no-tax-impact) write-off of excess
reorganization value associated with these businesses. The remainder of the
charge primarily reflects a writedown of the assets of these businesses to their
net realizable value. The total charge is reflected in other (income)/expense,
net in the Consolidated Statement of Earnings.
7. Income Taxes
Earnings/(loss) before income taxes consisted of the following:
(dollars in millions) 1996 1995 1994
---- ---- ----
U.S. $ 138 $ 73 $ (42)
Foreign (6) (8) 4
---- ---- ----
Total 132 65 (38)
==== ==== ====
Income taxes consisted of the following:
(dollars in millions) 1996 1995 1994
---- ---- ----
Current:
Federal $ 90 $ 67 $ 39
Foreign 5 10 12
State 17 15 10
---- ---- ----
112 92 61
---- ---- ----
Deferred:
Federal 3 7 (7)
Foreign 1 (2) --
State 1 -- --
---- ---- ----
5 5 (7)
---- ---- ----
Total 117 97 54
==== ==== ====
Differences between actual provisions for income taxes and provisions for income
taxes at the U.S. federal statutory rate (35% for the years ended December 31,
1996, 1995 and 1994) were as follows:
(dollars in millions) 1996 1995 1994
---- ---- ----
Taxes on income at federal statutory rate $ 46 $ 23 $ (13)
Excess reorganization value amortization 59 64 59
Foreign earnings subject to different tax rates 2 2 4
State income tax, net of federal benefit 12 10 6
Percentage depletion (3) (3) (3)
Other, net 1 1 1
---- ---- ----
Provision for income taxes 117 97 54
- -------------------------- ---- ---- ----
Effective income tax rate 88.9% 149.0% (142.1%)
Significant components of deferred tax (assets)/liabilities as of December 31
were as follows:
(dollars in millions) 1996 1995
- --------------------- ---- ----
Property, plant and equipment $ 171 $ 160
Debt discount 7 8
---- ----
Deferred tax liabilities 178 168
---- ----
Pension and postretirement benefits (97) (92)
Reserves not deductible until paid (106) (86)
Other 1 3
---- ----
Deferred tax assets before valuation allowance (202) (175)
Valuation allowance 90 90
---- ----
Deferred tax assets (112) (85)
- ------------------- ---- ----
Net deferred tax liabilities 66 83
==== ====
A valuation allowance has been provided for deferred tax assets relating to
pension and retiree medical benefits due to the long-term nature of their
realization. Under fresh start accounting rules, any benefit realized from
utilizing $85 million of the valuation allowance does not impact net earnings.
The Corporation used net operating loss carryforwards of $20 million in 1996,
$30 million in 1995 and $50 million in 1994 (the "NOL Carryforwards") to offset
U.S. taxable income in those years. Under fresh start accounting rules, the
benefit realized from these carryforwards does not impact net earnings. Because
of the uncertainty regarding the application of the Internal Revenue Code to the
NOL Carryforwards as a result of USG's financial restructuring in May 1993,
these carryforwards could be reduced or eliminated.
The Corporation does not provide for U.S. income taxes on the portion of
undistributed earnings of foreign subsidiaries that are intended to be
permanently reinvested. The cumulative amount of such undistributed earnings
totaled approximately $138 million as of December 31, 1996. Any future
repatriation of undistributed earnings would not, in the opinion of management,
result in significant additional taxes.
8. Inventories
As of December 31, 1996 and 1995, the LIFO values of domestic inventories were
$141 million and $122 million, respectively, and would have been higher by $7
million each if they were valued under the FIFO and average production cost
methods. The LIFO value of U.S. domestic inventories under fresh start
accounting exceeded that computed for U.S. federal income tax purposes by $30
million as of December 31, 1996 and 1995. Inventory classifications as of
December 31 were as follows:
(dollars in millions) 1996 1995
---- ----
Finished goods and work in process $118 $107
Raw materials 58 60
Supplies 9 8
- -------- ---- ----
Total 185 175
==== ====
9. Property, Plant and Equipment
Property, plant and equipment classifications as of December 31 were as follows:
(dollars in millions) 1996 1995
---- ----
Land and mineral deposits $ 58 $ 58
Buildings and realty improvements 248 245
Machinery and equipment 758 676
---- ----
1,064 979
Reserves for depreciation and depletion (177) (137)
- --------------------------------------- ---- ----
Total 887 842
==== ====
10. Leases
The Corporation leases certain of its offices, buildings, machinery and
equipment, and autos under noncancelable operating leases. These leases have
various terms and renewal options. Lease expense amounted to $46 million, $41
million and $37 million in the years ended December 31, 1996, 1995 and 1994,
respectively. Future minimum lease payments required under operating leases with
initial or remaining noncancelable terms in excess of one year as of December
31, 1996, were $34 million in 1997, $30 million in 1998, $25 million in 1999,
$21 million in 2000 and $16 million in 2001. The aggregate obligation subsequent
to 2001 was $21 million.
11. Employee Retirement Plans
Pension Plans-The Corporation and most of its subsidiaries have defined benefit
retirement plans for all eligible employees. Benefits of the plans are generally
based on years of service and employees' compensation during the final years of
employment. The Corporation's contributions are made in accordance with
independent actuarial reports. The Corporation made special fundings of $13
million and $16 million in 1996 and 1995, respectively, to one of its plans. A
normal funding of $5 million also was made in 1995 to one of its plans. Minimal
funding was required for most plans in 1994. Net pension expense included the
following components:
(dollars in millions) 1996 1995 1994
---- ---- ----
Service cost-benefits earned during the period $ 12 $ 9 $ 11
Interest cost on projected benefit obligation 35 35 31
Actual (return)/loss on plan assets (62) (72) 1
Net amortization/(deferral) 27 38 (35)
- --------------------------- ---- ---- ----
Net pension expense 12 10 8
==== ==== ====
The pension plan assets, which consist primarily of publicly traded common
stocks and debt securities, had an estimated fair market value that was lower
than the projected benefit obligation as of December 31, 1996 and 1995. The
following table presents a reconciliation of the total assets of the pension
plans to the projected benefit obligation as of December 31:
(dollars in millions) 1996 1995
---- ----
Amount of assets available for benefits:
Funded assets of the plans at fair market value $ 464 $ 427
Accrued pension expense 26 23
---- ----
Total assets of the plans 490 450
---- ----
Present value of estimated pension obligation:
Vested benefits 349 344
Nonvested benefits 32 31
---- ----
Accumulated benefit obligation 381 375
Additional benefits based on projected future salary increases 111 110
---- ----
Projected benefit obligation 492 485
---- ----
Projected benefit obligation in excess of assets (2) (35)
==== ====
The projected benefit obligation in excess of assets consisted of an
unrecognized net loss in each period due to changes in assumptions and
differences between actual and estimated experience.
The expected long-term rate of return on plan assets was 9% for the years ended
December 31, 1996 and 1995. The assumed weighted average discount rate used in
determining the accumulated benefit obligation was 7.5% and 7.25% as of December
31, 1996 and 1995, respectively. The rate of increases in projected future
compensation levels was 5% for both years.
Postretirement Benefits-The Corporation maintains plans that provide retiree
health care and life insurance benefits for all eligible employees. Employees
generally become eligible for the retiree benefit plans when they meet minimum
retirement age and service requirements. The cost of providing most of these
benefits is shared with retirees. The following table summarizes the components
of net periodic postretirement benefit cost:
(dollars in millions) 1996 1995 1994
---- ---- ----
Service cost of benefits earned $ 6 $ 4 $ 6
Interest on accumulated postretirement benefit obligation 16 13 12
Net amortization/(deferral) -- (1) --
---- ---- ----
Net periodic postretirement benefit cost 22 16 18
==== ==== ====
The status of the Corporation's accrued postretirement benefit cost as of
December 31 was as follows:
(dollars in millions) 1996 1995
---- ----
Accumulated postretirement benefit obligation:
Retirees $119 $ 99
Fully eligible active participants 17 15
Other active participants 86 71
---- ----
222 185
Unrecognized net gain/(loss) (7) 16
---- ----
Accrued postretirement benefit cost liability recognized
on the Consolidated Balance Sheet 215 201
==== ====
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9% as of December 31, 1996 and 1995, with
a rate gradually declining to 5% by 2000 and remaining at that level thereafter.
A one-percentage-point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation by
$33 million and $20 million as of December 31, 1996 and 1995, respectively, and
would increase the net periodic postretirement benefit cost by $4 million and $2
million for the years ended December 31, 1996 and 1995, respectively. The
assumed discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% and 7.25% as of December 31, 1996 and 1995, respectively.
12. Stock-Based Compensation
The Corporation has issued stock options from two compensation plans: the 1995
Long-Term Equity Plan and the Management Performance Plan.
Under the 1995 Long-Term Equity Plan, options were granted at an exercise price
equal to the market value on the date of grant. All options granted under the
1995 Long-Term Equity Plan have 10-year terms and vest and become fully
exercisable at the end of two years. Under the Management Performance Plan,
options were granted at an exercise price equal to the market value on the date
of grant. These options become exercisable at the rate of one-third of the
aggregate grant on each of the first three anniversaries of the date of the
grant and expire on the 10th anniversary of the date of the grant, except in the
case of retirement, death or disability, in which case they expire on the
earlier of the fifth anniversary of such event or the expiration of the original
option term.
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which the Corporation adopted on January 1, 1996. As
permitted, the Corporation continued its current method of accounting for
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25.
In accordance with SFAS No. 123, the fair value of each option grant was
estimated as of the date of grant using an option pricing model. The Corporation
used the Black-Scholes option pricing model with the following weighted-average
assumptions for options granted in 1996: (i) zero dividend yield (ii) expected
volatility of 33% (iii) risk-free interest rate of 5.9% and (iv) expected option
life of 7.4 years. If the Corporation had elected to recognize compensation cost
for stock-based compensation grants consistent with the method prescribed by
SFAS No. 123, net earnings and net earnings per common share for 1996 and 1995
would not have been materially different from the amounts reported in the
Consolidated Statement of Earnings.
Stock option activity was as follows:
1996 1995 1994
----------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at beginning of period 2,560,100 $ 19.19 2,764,500 $ 18.78 1,673,000 $ 10.31
Granted 359,500 29.40 -- -- 1,161,500 30.46
Exercised (343,035) 10.75 (172,555) 10.88 (23,800) 10.31
Canceled (11,150) 28.29 (31,845) 28.33 (46,200) 10.31
- -------- --------- ----- --------- ----- --------- -----
Outstanding at end of period 2,565,415 21.71 2,560,100 19.19 2,764,500 18.78
========= ===== ========= ===== ========= =====
Exercisable at end of period 1,888,715 18.82 1,369,295 16.31 578,020 10.31
Available for grant at end of period 467,045 929,395 50
The weighted average fair value of options, calculated using the Black-Scholes
option pricing model, granted during the year ended December 31, 1996, was
$14.17. No stock options were granted in 1995. The following table summarizes
information about stock options outstanding as of December 31, 1996:
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
------ ----------- ---------------- ----- ----------- -----
$ 5 to $15 1,103,700 6.4 $ 10.31 1,103,700 $ 10.31
15 to 25 203,300 7.6 21.88 130,700 21.88
25 to 35 1,258,415 7.7 31.68 654,315 32.56
--------- --------- --- ----- ------- -----
Total 2,565,415 1,888,715
========= =========
13. Stockholders' Equity
Changes in stockholders' equity are summarized as follows:
(dollars in millions) 1996 1995 1994
---- ---- ----
Common Stock:
Beginning balance $ 5 $ 5 $ 4
Equity offering -- -- 1
- --------------- ---- ---- ----
Ending balance 5 5 5
---- ---- ----
Capital Received in Excess of Par Value:
Beginning balance 223 221 --
Equity offering -- -- 223
Other, net 8 2 (2)
---- ---- ----
Ending balance 231 223 221
---- ---- ----
Deferred Currency Translation:
Beginning balance (6) (13) (9)
Change during the period (4) 7 (4)
---- ---- ----
Ending balance (10) (6) (13)
---- ---- ----
Reinvested Earnings/(Deficit):
Beginning balance (259) (221) (129)
Net earnings/(loss) 15 (32) (92)
Other, net (5) (6) --
----- ----- -----
Ending balance (249) (259) (221)
- -------------- ----- ----- -----
Total stockholders' equity/(deficit) (23) (37) (8)
===== ===== =====
There were 31,488 and 33,988 shares of $0.10 par value common stock held in
treasury as of December 31, 1996 and 1995, respectively. These shares were
acquired through the forfeiture of restricted stock and the surrender of shares
in settlement of tax withholding obligations.
In 1994, the Corporation implemented an equity offering under which 14,375,000
shares of common stock were sold to the public, consisting of 7,900,000 shares
issued by the Corporation and 6,475,000 sold by Water Street. Net proceeds to
the Corporation from the equity offering amounted to $224 million. The
Corporation did not receive any proceeds from the sale of shares by Water
Street.
Warrants-As of December 31, 1996 and 1995, outstanding warrants amounted to
2,591,091 and 2,592,228, respectively. The warrants are exercisable, subject to
applicable securities laws, at any time prior to May 6, 1998. Each share of
common stock issued upon exercise of a warrant prior to the distribution date
(as defined in the Rights Agreement) and prior to the redemption or expiration
of the Rights will be accompanied by an attached Right issued under the terms
and subject to the conditions of the Rights Agreement as it may then be in
effect.
On May 6, 1993, a total of 2,602,566 warrants, each to purchase a share of
common stock at an exercise price of $16.14 per share, in addition to common
stock, were issued to holders of certain debt that was converted to equity in
the financial restructuring implemented on that date. Upon issuance, each of the
warrants entitled the holder to purchase one share of common stock at a purchase
price of $16.14 per share, subject to adjustment under certain events.
Stockholder Rights Plan-On May 6, 1993, a rights plan (the "Rights Agreement")
was adopted pursuant to which the Corporation declared a distribution of one
right (the "Rights") upon each share of common stock. The Rights, which are
intended to protect the Corporation and its stockholders in the event of an
unsolicited attempt to acquire the Corporation, generally become exercisable 10
days following the announcement of the acquisition of 20% or more of the
outstanding common stock by someone other than the Corporation or one of its
employee benefit plans (10% in the case of an acquisition that the Corporation's
Board of Directors determines to represent a threat of acquisition not in the
best interests of the Corporation's stockholders) or 10 business days after
commencement of a tender offer for 30% or more of the outstanding common stock.
When exercisable, each of the Rights entitles the registered holder to purchase
one-hundredth of a share of a junior participating preferred stock, series C,
$1.00 par value per share, at a price of $35.00 per one-hundredth of a preferred
share, subject to adjustment. The Rights also provide for a so-called "flip-in"
feature and an exchange feature.
In the event that the Corporation is the surviving corporation and its common
stock remains outstanding and unchanged in a merger or other business
combination with such acquiring party or the acquiring party engages in one of a
number of self-dealing transactions specified in the Rights Agreement, or in the
event that there is a 10% acquisition that the Board of Directors determines to
represent a threat of acquisition not in the best interests of the Corporation's
stockholders, each holder of a Right, other than the acquiring party, will
thereafter have the right, subject to the exchange feature, to receive upon
exercise thereof that number of shares of common stock having a market value at
the time of such transaction of two times the exercise price of the Right.
14. Industry and Geographic Segments
Transactions between industry and geographic segments are accounted for at
transfer prices that are approximately equal to market value. Intercompany
transfers between industry and geographic segments are not material.
Eliminations reflect intercompany sales between industry segments. No single
customer accounted for 10% or more of consolidated net sales. Export sales to
foreign unaffiliated customers represent less than 10% of consolidated net
sales. Segment operating profit/(loss) includes all costs and expenses directly
related to the segment involved and an allocation of expenses that benefit more
than one segment. Segment operating profit/(loss) also includes the noncash
amortization of excess reorganization value, which had the impact of reducing
operating profit and identifiable assets for North American Gypsum and Worldwide
Ceilings. The decrease in 1995 corporate identifiable assets versus 1994
primarily reflects a $127 million reduction in cash and cash equivalents
primarily because of debt repayments.
Assets for USG Funding, which was established in 1994, represent the outstanding
balance of receivables purchased from U.S. Gypsum and USG Interiors, net of
reserves, and are included in "corporate identifiable assets" in the following
table. As of December 31, 1996, 1995 and 1994, such receivables, net of
reserves, amounted to $121 million, $110 million and $123 million, respectively,
including $89 million, $78 million and $84 million purchased from U.S. Gypsum
and $32 million, $32 million and $39 million purchased from USG Interiors as of
the respective dates.
Industry Segments
North
(dollars in millions) American Worldwide
Gypsum Ceilings Corporate Eliminations Total
------ -------- --------- ------------ -----
1996
Net sales $2,067 $ 612 $ -- $ (89) $2,590
Amortization of excess reorganization value 82 87 -- -- 169
Operating profit/(loss) 291 (44) (39) -- 208
Depreciation, depletion and amortization 44 15 6 -- 65
Capital expenditures 63 56 1 -- 120
Identifiable assets 1,161 478 184 (5) 1,818
1995
Net sales 1,924 609 -- (89) 2,444
Amortization of excess reorganization value 82 87 -- -- 169
Operating profit/(loss) 262 (34) (38) -- 190
Depreciation, depletion and amortization 42 14 11 -- 67
Capital expenditures 96 49 2 -- 147
Identifiable assets 1,157 531 206 (4) 1,890
1994
Net sales 1,780 594 -- (84) 2,290
Amortization of excess reorganization value 82 87 -- -- 169
Operating profit/(loss) 184 (38) (42) -- 104
Depreciation, depletion and amortization 38 13 33 -- 84
Capital expenditures 49 15 -- -- 64
Identifiable assets 1,178 600 352 (6) 2,124
Geographic Segments
Transfers
Between
Other Geographic
(dollars in millions) United States Canada Foreign Areas Total
------------ ------- ------- ----- -----
1996
Net sales $2,319 $ 169 $ 242 $ (140) $2,590
Amortization of excess reorganization value 135 18 16 -- 169
Operating profit/(loss) 209 1 (2) -- 208
Depreciation, depletion and amortization 53 6 6 -- 65
Capital expenditures 102 13 5 -- 120
Identifiable assets 1,472 177 169 -- 1,818
1995
Net sales 2,161 155 246 (118) 2,444
Amortization of excess reorganization value 135 18 16 -- 169
Operating profit/(loss) 191 (3) 2 -- 190
Depreciation, depletion and amortization 56 6 5 -- 67
Capital expenditures 123 19 5 -- 147
Identifiable assets 1,557 146 187 -- 1,890
1994
Net sales 2,008 164 228 (110) 2,290
Amortization of excess reorganization value 135 18 16 -- 169
Operating profit 94 2 8 -- 104
Depreciation, depletion and amortization 74 5 5 -- 84
Capital expenditures 52 9 3 -- 64
Identifiable assets 1,770 153 200 1 2,124
15. Litigation
Asbestos Litigation-One of the Corporation's subsidiaries, U.S. Gypsum, is among
numerous defendants in lawsuits arising out of the manufacture and sale of
asbestos-containing building materials. U.S. Gypsum sold certain
asbestos-containing products beginning in the 1930s; in most cases the products
were discontinued or asbestos was removed from the product formula by 1972, and
no asbestos-containing products were sold after 1977. Some of these lawsuits
seek to recover compensatory and in many cases punitive damages for costs
associated with maintenance or removal and replacement of asbestos-containing
products in buildings (the "Property Damage Cases"). Other suits seek
compensatory and in many cases punitive damages for personal injury allegedly
resulting from exposure to asbestos and asbestos-containing products (the
"Personal Injury Cases"). It is anticipated that additional personal injury and
property damage cases containing similar allegations will be filed.
As discussed below, U.S. Gypsum had substantial personal injury and property
damage insurance during the years involved in the asbestos litigation. After
deducting insolvencies and amounts already received from carriers, including
approximately $133 million received during 1995 and 1996, approximately $350
million of insurance remained potentially available as of December 31, 1996, of
which approximately $130 million is no longer contested and another $145 million
is in dispute only for property damage coverage. Remaining coverage disputes
with five excess insurance carriers are being litigated in a declaratory
judgment action filed by U.S. Gypsum in the Circuit Court of Cook County, Ill.,
in 1983 (U.S. Gypsum Co. v. Admiral Insurance Co., et al.) (the "Coverage
Action"), described below.
U.S. Gypsum's aggregate expenditures for all asbestos-related matters, including
property damage, personal injury, insurance coverage litigation and related
expenses, exceeded aggregate insurance payments by $33.4 million in 1994.
However, insurance payments exceeded aggregate asbestos-related costs by
approximately $10 million in 1995 and $41 million in 1996 due to the receipt of
reimbursement for amounts expended in prior years.
Property Damage Cases-The Property Damage Cases have been brought against U.S.
Gypsum by a variety of plaintiffs, including state and local governments,
colleges and universities, and private property owners. As of December 31, 1996,
23 Property Damage Cases were pending against U.S. Gypsum; however, the number
of buildings involved is greater than the number of cases because many of these
cases, including the class actions referred to below, involve multiple
buildings. In addition, approximately 23 property damage claims have been
threatened against U.S. Gypsum. U.S. Gypsum has denied the substantive
allegations of each of the Property Damage Cases and intends to defend them
vigorously except when advantageous settlements are possible.
Class Actions: U.S. Gypsum is one of several defendants in two pending cases
that have been certified as class actions, as well as others that request such
certification. The damages claimed against U.S. Gypsum in the class actions are
unspecified. The two certified class actions are a conditionally certified class
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.),
and a class action on behalf of various public bodies in the State of Texas,
including cities, counties, hospitals, port authorities and colleges (Kirbyville
Independent School District v. U.S. Gypsum Co., et al., U.S.D.C., E.D. Texas).
During 1996, U.S. Gypsum obtained final approval of a $3.6 million settlement of
another class action involving owners of buildings leased to the federal
government (Prince George Center, Inc. v. U.S. Gypsum Co., et al., Court of
Common Pleas, Philadelphia, Pa.).
A case pending in state court in South Carolina, which has not been certified as
a class action, purports to be a class action on behalf of owners of most
buildings in South Carolina that contain certain types of asbestos-containing
products manufactured by the named defendants, including U.S. Gypsum (Anderson
County Hospital v. W.R. Grace & Co., et al., Court of Common Pleas, Hampton
Co., S.C.). In September 1996, the plaintiff voluntarily dismissed certain
fraudulent conveyance allegations against U.S. Gypsum and the Corporation
relating to the Corporation's 1988 restructuring.
Results to Date: In total, U.S. Gypsum has settled approximately 104 Property
Damage Cases, involving 235 plaintiffs, in addition to 3 class action
settlements. Twenty-four cases have been tried to verdict, 16 of which were won
by U.S. Gypsum and 5 lost; 3 other cases, 1 won at the trial level and 2 lost,
were settled during appeals. In the cases lost, compensatory damage awards
against U.S. Gypsum have totaled $11.5 million. Punitive damages totaling $5.5
million were entered against U.S. Gypsum in four trials. Two of the punitive
damage awards, totaling $1.45 million, were paid, and 2 were settled during the
appellate process.
In 1994, 5 Property Damage Cases were filed against U.S. Gypsum, 5 cases were
dismissed before trial, 19 were settled, 1 was closed following trial or appeal,
and 41 were pending at year end. U.S. Gypsum expended $40.6 million for the
defense and resolution of Property Damage Cases and received insurance payments
of $9 million in 1994. In 1995, 3 Property Damage Cases were filed against U.S.
Gypsum, 7 cases were dismissed before trial, 3 were settled, 2 were closed
following trial or appeal, and 32 were pending at year end. U.S. Gypsum expended
$36 million for the defense and resolution of Property Damage Cases and received
insurance payments of $48.6 million in 1995. During 1996, 2 Property Damage
Cases were filed against U.S. Gypsum, 3 cases were dismissed before trial, 8
were settled, and 23 were pending at year end; U.S. Gypsum expended $33.4
million for the defense and resolution of Property Damage Cases and received
insurance payments of $84 million in 1996. A substantial portion of the
insurance payments was reimbursement for amounts expended in prior years.
Estimated Cost: In the Property Damage Cases litigated to date, a defendant's
liability for compensatory damages, if any, has been limited to damages
associated with the presence and quantity of asbestos-containing products
manufactured by that defendant that are identified in the buildings at issue.
Because of the unique factors inherent in each of the Property Damage Cases,
including the lack of reliable information as to product identification and the
amount of damages claimed against U.S. Gypsum in many cases, including the class
actions described above, management is unable to make a reasonable estimate of
the cost of disposing of pending Property Damage Cases.
Personal Injury Cases-U.S. Gypsum was among numerous defendants in asbestos
Personal Injury Cases involving approximately 59,600 claimants pending as of
December 31, 1996, although approximately 13,000 of such claims are settled but
not yet closed. In addition, 27,000 of such claims are enjoined from proceeding
because they did not "opt out" of the Georgine class action referred to below;
an appellate court has ruled that the class action must be decertified and the
injunction dissolved, although the U.S. Supreme Court is now reviewing that
ruling.
Center for Claims Resolution: U.S. Gypsum is a member, together with 19 other
former producers of asbestos- containing products, of the Center for Claims
Resolution (the "Center"). The Center has assumed the handling, including the
defense and settlement, of all Personal Injury Cases pending against U.S. Gypsum
and the other members of the Center. Each member of the Center is assessed a
portion of the liability and defense costs of the Center for the Personal Injury
Cases handled by the Center, according to predetermined allocation formulas.
Virtually all of U.S. Gypsum's personal injury liability and defense costs are
paid by those of its insurance carriers that in 1985 signed an Agreement
Concerning Asbestos-Related Claims (the "Wellington Agreement"), obligating them
to provide coverage for the defense and indemnity costs incurred by U.S. Gypsum
in Personal Injury Cases. Punitive damages have never been awarded against U.S.
Gypsum in a Personal Injury Case, but whether such an award would be covered by
insurance under the Wellington Agreement would depend on state law and the terms
of the individual policies.
U.S. Gypsum's average settlement cost for Personal Injury Cases over the past
three years has been approximately $1,600 per claim, exclusive of defense costs.
Management anticipates that the average settlement cost may increase due to such
factors as the possible insolvency of co-defendants, although this increase may
be offset to some extent by other factors, including the possibility for block
settlements of large numbers of cases and the apparent increase in the
percentage of asbestos personal injury cases that appear to have been brought by
individuals with little or no physical impairment.
During 1994, approximately 14,000 Personal Injury Cases were filed against U.S.
Gypsum; U.S. Gypsum was added as a defendant in approximately 4,000 cases that
had been previously filed; and approximately 23,000 were settled or dismissed.
U.S. Gypsum incurred expenses of $38 million in 1994 with respect to Personal
Injury Cases, of which $37.3 million was paid by insurance. During 1995,
approximately 13,000 Personal Injury Cases were filed against U.S. Gypsum, and
17,600 were settled or dismissed. U.S. Gypsum incurred expenses of $32.1 million
in 1995 with respect to Personal Injury Cases, of which $30.9 million was paid
by insurance. During 1996, approximately 28,000 Personal Injury Cases were filed
against U.S. Gypsum, and approximately 20,000 were settled or dismissed. U.S.
Gypsum incurred expenses of $28.6 million in 1996 with respect to Personal
Injury Cases, of which $21.6 million was paid by insurance. (The reduction in
the portion of the cost paid by insurance in 1996 was attributable to the impact
of certain insurer insolvencies.) As of December 31, 1996, 1995, and 1994,
approximately 59,600, 50,000, and 54,000 Personal Injury Cases were outstanding
against U.S. Gypsum, respectively.
Georgine Class Action Settlement: On January 15, 1993, U.S. Gypsum and the other
members of the Center entered into a class action settlement in the U.S.
District Court for the Eastern District of Pennsylvania (Georgine et al. v.
Amchem Products Inc., et al., Case No. 93-CV-0215; hereinafter "Georgine"). As
noted below, the U.S. Supreme Court is currently reviewing a Court of Appeals
ruling that the class should be decertified and the settlement vacated. However,
the settlement, if implemented, creates an administrative compensation system
that will replace judicial claims for all persons who have been occupationally
exposed to asbestos-containing products manufactured by the defendants, unless
they filed either an asbestos personal injury suit prior to January 24, 1994, or
an "opt out" request (a request to retain the right to file suit in the court
system without regard to the provisions of Georgine). The Georgine settlement
would provide fair and adequate compensation to future claimants who can
demonstrate exposure to asbestos-containing products manufactured by the
defendants and the presence of an asbestos-related disease. Each of the
defendants committed to fund a defined portion of the settlement, up to a stated
maximum amount, over the initial 10-year period of the agreement (which is
automatically extended unless terminated by the defendants). In each year, a
limited number of class members would have certain rights to prosecute their
claims for compensatory damages in court if they reject the compensation
provided through the administrative process. In addition, approximately 85,000
individuals opted out of the settlement. (Approximately 33,000 of these
individuals had filed suit as of December 31, 1996, although not all of such
suits named U.S. Gypsum as a defendant.) Claimants who attempt to file suit in
the courts but have not opted out of Georgine, including approximately 27,000 of
the pending Personal Injury Cases, are enjoined from further proceeding against
the Center members in the courts and will be required to pursue such claims
through the Georgine administrative process unless the injunction is vacated.
Final consummation of the settlement is contingent upon, among other things,
court approval of the settlement, and a ruling that the Center members'
insurers, many of which dispute coverage for Georgine, are obligated to fund
their portion of it.
On May 10, 1996, the U.S. Court of Appeals for the Third Circuit ruled that
Georgine does not meet the requirements for class certification and ordered that
the injunction be vacated and that the district court decertify the class.
However, on November 1, 1996, the U.S. Supreme Court agreed to review the Third
Circuit decision. The Third Circuit ruling is stayed until the Supreme Court
issues its decision, which is expected during the first half of 1997. The Center
has continued to process and resolve Georgine administrative claims while the
appeal is pending. As of December 31, 1996, U.S. Gypsum was named in
approximately 5,600 open Georgine claims.
If the Third Circuit ruling is not reversed, the Georgine settlement and
injunction will be dissolved and future Personal Injury Cases will be dealt with
in the court system unless an alternative to Georgine can be negotiated. It is
also expected that plaintiffs in a substantial number of pending personal injury
suits against other companies will amend their complaints to add Center members,
including U.S. Gypsum, as defendants if the Georgine settlement is dissolved.
Filings of Personal Injury Cases increased following the Third Circuit ruling,
although most of the new filings were brought on behalf of individuals who did
not opt out of Georgine, subjecting their cases to dismissal unless the Third
Circuit ruling is affirmed by the Supreme Court.
Estimated Cost: Management has estimated U.S. Gypsum's liability for Personal
Injury Cases based upon information provided by the Center, and taking into
account the experience of U.S. Gypsum and the Center as well as a number of
uncertainties.
Management estimates U.S. Gypsum's probable cost of disposing of all Personal
Injury Cases pending on December 31, 1996, to be between $100 million and $115
million, virtually all of which is expected to be paid by insurance.
If Georgine is implemented in its current form (which would require a reversal
of the Court of Appeals ruling by the Supreme Court), management estimates U.S.
Gypsum's maximum total exposure in all Personal Injury Cases, including both
those currently pending and those filed during the next eight years (other than
cases filed in the future by persons who opted out of the Georgine class
action), to be between $190 million and $200 million, of which all but
approximately $10 million is expected to be paid by insurance. The estimated
cost of Personal Injury Cases if Georgine is implemented is based upon the
maximum number of claims eligible to be processed in each year and the total
amount potentially available to the claimants over the remaining eight years of
the initial 10-year term of Georgine. U.S. Gypsum's actual liability under
Georgine may be lower, depending upon the number and severity of claims that are
filed. As noted, these estimates do not include future opt out Personal Injury
Cases. U.S. Gypsum's additional exposure for opt out cases would depend on the
number and severity of such claims that are filed, which cannot presently be
determined.
If Georgine is not implemented, management is unable to estimate U.S. Gypsum's
liability in future Personal Injury Cases, because liability in such cases would
depend upon the number and severity of such claims that are filed, which cannot
presently be determined.
U.S. Gypsum records an accrual for currently pending Personal Injury Cases, and
separately records an asset in the amount of such liability that is expected to
be paid by uncontested insurance. As of December 31, 1996, this accrual and
asset were each in the amount of $100 million. No reserve has been recorded for
future Personal Injury Cases due to the uncertainty concerning the ultimate
implementation of Georgine and management's current inability to estimate
liability in future Personal Injury Cases if Georgine is dissolved.
Coverage Action-U.S. Gypsum has resolved its coverage disputes with twelve
carriers. Five carriers remain as defendants in the Coverage Action in
connection with coverage for future asbestos-related costs. U.S. Gypsum's only
remaining insurance claims relating to its past expenditures are
against carriers that are now insolvent. (See "Insolvent Carriers" below.)
The property damage phase of the Coverage Action was tried using eight "test"
Property Damage Cases. On November 4, 1994, the Illinois Appellate Court ruled
that the eight "test" cases were covered under all insurance policies in effect
from the date of installation to the date of removal of asbestos-containing
products (known as the "continuous trigger" of coverage). Further proceedings
will be necessary in the trial court to resolve certain other remaining issues,
some of which, if determined adversely to U.S. Gypsum, could reduce the amount
or accessibility of available coverage from carriers that have not yet settled.
No schedule has yet been established for the resolution of these issues.
The continuous trigger ruling will, subject to the resolution of the remaining
issues referred to above, allow U.S. Gypsum to access all of its available
insurance coverage for Property Damage Cases (although the same coverage must
also be used for Personal Injury Cases). Under the continuous trigger, all
Property Damage Cases would be covered by insurance unless or until such
insurance becomes exhausted.
Only three of the remaining defendants in the Coverage Action have not yet
agreed to cover Personal Injury Cases. Personal injury coverage issues as to
these carriers have been stayed while the parties attempt to reach a settlement.
If a settlement cannot be reached, a number of issues regarding personal injury
coverage will need to be litigated in the Coverage Action with respect to their
policies.
Settlements: Twelve carriers have settled U.S. Gypsum's claims for both property
damage and personal injury coverage and are no longer parties in the Coverage
Action. Several of these carriers paid all or a substantial portion of their
policy limits to U.S. Gypsum as reimbursement for past property damage costs. In
April 1996, one of those carriers, which provided $111 million of excess
coverage, paid U.S. Gypsum $62 million as reimbursement for past costs and
agreed to make its remaining $49 million of coverage available in the future for
both bodily injury and property damage costs. In total, U.S. Gypsum received
approximately $133 million from insurance settlements during 1995 and 1996.
These amounts, in addition to U.S. Gypsum's annual accrual of $18 million, have
been added to U.S. Gypsum's additional reserve with respect to asbestos costs.
All out-of-pocket asbestos expenditures are charged against this reserve, which
was approximately $130 million as of December 31, 1996. Five excess carriers
have agreed to provide future coverage for both Property Damage Cases and
Personal Injury Cases, subject to certain limitations and conditions, when and
if underlying policies are exhausted. Two other excess carriers cover Personal
Injury Cases under the Wellington Agreement but have not yet agreed to cover
Property Damage Cases.
Insolvent Carriers: Insolvency proceedings have been instituted against four of
U.S. Gypsum's domestic insurance carriers, as well as underwriters of portions
of various policies issued by Lloyds and other London market companies, that
provided a total of approximately $106 million of coverage. Because these
policies would already have been consumed by U.S. Gypsum's asbestos expenses to
date if the carriers had been solvent, the insolvencies will not adversely
affect U.S. Gypsum's coverage for future asbestos-related costs. However, U.S.
Gypsum is pursuing claims for reimbursement from the insolvent estates and other
sources and expects to recover a presently indeterminable portion of the policy
amounts from these sources. In February 1997, U.S. Gypsum was paid approximately
$11 million by the receiver for one of the insolvent carriers.
Remaining Insurance: Taking into account the above settlements, including
insurance consumption through December 31, 1996, carriers providing a total of
approximately $150 million of insurance that was unexhausted as of December 31,
1996, have agreed, subject to the terms of the various settlement agreements, to
cover both Personal Injury Cases and Property Damage Cases. Carriers providing
an additional $145 million of coverage that was unexhausted as of December 31,
1996, have agreed to cover Personal Injury Cases under the Wellington Agreement
but continue to contest coverage for Property Damage Cases and remain defendants
in the Coverage Action. An additional $55 million of insurance remains in
dispute for both personal injury and property damage coverage. U.S. Gypsum
continues to seek negotiated resolutions with its carriers in order to minimize
the expense and delays of litigation.
Conclusion-A number of uncertainties continue to exist concerning the impact of
the asbestos litigation on the Corporation, including the number of additional
asbestos-related claims that will be filed against U.S. Gypsum; U.S. Gypsum's
liability in the Property Damage Cases in which exposure information is
currently lacking; the fate of the Georgine settlement; and the outcome of
negotiations with and, if necessary, proceedings against those of U.S. Gypsum's
insurers that continue to deny coverage. Therefore, the effect of the asbestos
litigation on the Corporation will depend upon a variety of factors, including
U.S. Gypsum's ability to successfully defend or settle the Property Damage Cases
that reach trial prior to the completion of the Coverage Action, the outcome of
the appeal of the Georgine settlement, and the resolution of U.S. Gypsum's
claims against the remaining defendants in the Coverage Action. As a result,
management is unable to determine whether an adverse outcome in the asbestos
litigation will have a material adverse effect on the results of operations or
the consolidated financial position of the Corporation.
Environmental Litigation-The Corporation and certain of its subsidiaries have
been notified by state and federal environmental protection agencies of possible
involvement as one of numerous "potentially responsible parties" in a number of
so-called "Superfund" sites in the United States. In most of these sites, the
involvement of the Corporation or its subsidiaries is expected to be minimal.
The Corporation believes that appropriate reserves have been established for its
potential liability in connection with all Superfund sites but is continuing to
review its accruals as additional information becomes available. Such reserves
take into account all known or estimated costs associated with these sites,
including site investigations and feasibility costs, site cleanup and
remediation, legal costs, and fines and penalties, if any. In addition,
environmental costs connected with site cleanups on USG-owned property are also
covered by reserves established in accordance with the foregoing. The
Corporation believes that neither these matters nor any other known governmental
proceeding regarding environmental matters will have a material adverse effect
upon its earnings or consolidated financial position.
Report of Management
Management of USG Corporation is responsible for the preparation, integrity and
fair presentation of the financial information included in this report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and necessarily include certain amounts that are based on
management's estimates and judgment.
Management is responsible for maintaining a system of internal accounting
controls to provide reasonable assurance as to the integrity and reliability of
the financial statements, the proper safeguarding and use of assets, and the
accurate execution and recording of transactions. Such controls are based on
established policies and procedures and are implemented by trained personnel.
The system of internal accounting controls is monitored by the Corporation's
internal auditors to confirm that the system is proper and operating
effectively. The Corporation's policies and procedures prescribe that the
Corporation and its subsidiaries are to maintain ethical standards and that its
business practices are to be consistent with those standards.
The Corporation's financial statements have been audited by Arthur Andersen LLP,
independent public accountants. Their audit was conducted in accordance with
generally accepted auditing standards and included consideration of the
Corporation's internal control system. Management has made available to Arthur
Andersen LLP all the Corporation's financial records and related data, as well
as minutes of the meetings of the Board of Directors. Management believes that
all representations made to Arthur Andersen LLP were valid and appropriate.
The Board of Directors, operating through its Audit Committee composed entirely
of nonemployee directors, provides oversight to the financial reporting process.
The Audit Committee meets periodically with management, the internal auditors
and Arthur Andersen LLP, jointly and separately, to review financial reporting
matters, internal accounting controls and audit results to assure that all
parties are properly fulfilling their responsibilities. Both Arthur Andersen LLP
and the internal auditors have unrestricted access to the Audit Committee.
/s/ William C. Foote
- --------------------
William C. Foote
Chairman, President and Chief Executive Officer
/s/ Richard H. Fleming
- ----------------------
Richard H. Fleming
Senior Vice President and Chief Financial Officer
/s/ Raymond T. Belz
- -------------------
Raymond T. Belz
Vice President and Controller
January 27, 1997
Report of Independent Public Accountants
To the Stockholders and Board of Directors of USG Corporation:
We have audited the accompanying consolidated balance sheets of USG Corporation
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of earnings and cash flows for the years ended December 31, 1996,
1995 and 1994. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USG Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996, 1995 and
1994, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1997
Selected Quarterly Financial Data (unaudited)
(dollars in millions, First Second Third Fourth Total
except per share data) Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
1996
Net sales $ 602 $ 642 $ 678 $ 668 $ 2,590
Gross profit 131 160 179 175 645
Operating profit (a) 22 53 67 66 208
Net earnings/(loss) (a) (15) 4 13 13 15
Per common share:
Net earnings/(loss)(b) (0.32) 0.09 0.26 0.26 0.31
Price range (c) high 30.500 29.000 29.875 34.500 34.500
low 24.000 24.000 25.750 28.125 24.000
EBITDA 79 110 125 123 437
1995
Net sales 598 615 629 602 2,444
Gross profit 152 149 152 150 603
Operating profit (a) 50 47 48 45 190
Net loss (a) (2) (3) (2) (25)(d) (32)
Per common share:
Net loss (0.05) (0.07) (0.04) (0.55) (0.71)
Price range (c) high 24.125 26.875 29.625 31.375 31.375
low 19.250 21.625 23.625 26.875 19.250
EBITDA 106 103 106 102 417
(a) Excess reorganization value, which was established in connection with a
financial restructuring in May 1993, is currently being amortized over a
five-year period. This noncash amortization, which has no tax impact, reduced
operating profit and net earnings by approximately $42 million in each quarter
during 1996 and 1995.
(b) Net earnings/(loss) per common share is calculated using average shares and,
if applicable, common stock equivalents, outstanding during the period.
Consequently, for 1996, the sum of the four quarters does not equal the total
for the year.
(c) Stock price ranges are for transactions on the New York Stock Exchange
(trading symbol USG), which is the principal market for these securities.
Stockholders of record as of January 31, 1997: Common-4,508; Preferred-none.
(d) Fourth-quarter 1995 net loss includes a $30 million pretax ($24 million
after-tax) charge in connection with the sale of the Corporation's insulation
manufacturing business in the United States, which was completed in the second
quarter of 1996, and the closure of its insulation plant in Canada.
Comparative Five-Year Summary (a) (unaudited)
Years ended December 31, May 7- Jan. 1- Year ended
------------------------ Dec. 31, May 6 Dec. 31,
1996 1995 1994 1993 1993 1992
---- ---- ---- -------- ----- --------
(dollars in millions, except per share data)
Earnings Statement Data:
Net sales $ 2,590 $ 2,444 $ 2,290 $ 1,325 $ 591 $ 1,777
Gross profit 645 603 517 263 109 317
Selling and administrative expenses 268 244 244 149 71 218
Amortization of excess reorganization value 169 169 169 113 -- --
Operating profit 208 190 104 1 38 99
Interest expense 75 99 149 92 86 334
Interest income (2) (6) (10) (4) (2) (12)
Other (income)/expense, net 3 32 3 (8) 6 1
Reorganization items -- -- -- -- (709) --
Earnings/(loss) from continuing
operations before extraordinary items
and changes in accounting principles 15 (32) (92) (108) 640 (191)
Extraordinary gain/(loss), net of taxes -- -- -- (21) 944 --
Cumulative effect of accounting changes -- -- -- -- (150) --
Net earnings/(loss) 15 (32) (92) (129) 1,434 (191)
Net earnings/(loss) per common share (b) 0.31 (0.71) (2.14) (3.46)
Balance Sheet Data (as of the end of the period):
Working capital/(deficit) 108 108 228 132 218 (2,610)
Current ratio 1.27 1.28 1.55 1.28 1.78 0.20
Property, plant and equipment, net 887 842 755 754 767 800
Total assets 1,818 1,890 2,124 2,163 2,194 1,659
Total debt (c) 772 926 1,149 1,531 1,556 2,711
Total stockholders' equity/(deficit) (23) (37) (8) (134) 4 (1,880)
Other Information:
EBITDA 437 417 325 155 63 159
Capital expenditures 120 147 64 29 12 49
Gross margin % 24.9 24.7 22.6 19.8 18.4 17.8
EBITDA margin % 16.9 17.1 14.2 11.7 10.7 8.9
Market value per common share (b) 33.88 30.00 19.50 29.25
Average number of employees 12,500 12,400 12,300 11,900 11,750 11,850
(a) Due to a financial restructuring and implementation of fresh start
accounting, financial statements for periods subsequent to May 6, 1993, are not
comparable to financial statements for periods through that date. Accordingly, a
vertical line has been added to separate such information.
(b) Per share information for the period of January 1 through May 6, 1993, and
for the year ended December 31, 1992, is omitted because, as a result of the
financial restructuring and implementation of fresh start accounting, it is not
meaningful. Market value per common share reflects the closing stock price on
December 31 of the applicable year.
(c) Total debt is shown at principal amounts for all periods presented. The
carrying amounts of total debt (net of unamortized reorganization discount) as
reflected on the Corporation's balance sheets are $755 million, $907 million,
$1,122 million, $1,476 million and $1,461 million as of December 31, 1996, 1995,
1994 and 1993, and May 6, 1993, respectively.