FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-8864
USG CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3329400
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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As of October 31, 1997, 46,582,957 shares of USG common stock were outstanding.
Table of Contents
Page
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PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Balance Sheet:
As of September 30, 1997 and December 31, 1996 4
Consolidated Statement of Cash Flows:
Nine Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
Report of Independent Public Accountants 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Recent Sales of Unregistered Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 20
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
(Unaudited)
Three Months Nine Months
ended September 30, ended September 30,
----------------------------------- ----------------------------------
1997 1996 1997 1996
-------------- ------------- ------------- --------------
Net sales $ 757 $ 678 $ 2,153 $ 1,922
Cost of products sold 547 499 1,564 1,452
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Gross profit 210 179 589 470
Selling and administrative
expenses 70 69 208 201
Amortization of excess
reorganization value 43 43 127 127
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Operating profit 97 67 254 142
Interest expense 16 18 49 57
Interest income (1) (1) (2) (2)
Other expense, net -- 1 1 2
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Earnings before taxes
on income 82 49 206 85
Taxes on income 48 36 130 83
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Net earnings 34 13 76 2
============= ============= ============= ==============
Net earnings per common share 0.70 0.26 1.57 0.04
============= ============= ============= ==============
Dividends paid per common share -- -- -- --
Average number of common shares 46,390,846 45,548,584 46,152,837 45,494,731
See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
As of As of
September 30, December 31,
1997 1996
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Assets
Current Assets:
Cash and cash equivalents $ 86 $ 44
Receivables (net of reserves - $17 and $17) 335 274
Inventories 196 185
Current and deferred income taxes 49 46
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Total current assets 666 549
Property, plant and equipment (net of reserves
for depreciation and depletion - $208 and $177) 925 887
Excess reorganization value (net of accumulated
amortization - $635 as of December 31, 1996) -- 210
Other assets 219 218
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Total Assets 1,810 1,864
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 160 141
Accrued expenses 209 200
Notes payable 3 7
Current portion of long-term debt -- 42
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Total current liabilities 372 390
Long-term debt 676 706
Deferred income taxes 153 243
Other liabilities 539 548
Stockholders' Equity/(Deficit):
Preferred stock -- --
Common stock 5 5
Capital received in excess of par value 248 231
Deferred currency translation (21) (10)
Reinvested earnings/(deficit) (162) (249)
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Total stockholders' equity/(deficit) 70 (23)
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Total Liabilities and Stockholders' Equity 1,810 1,864
============ ============
See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Nine Months ended
September 30,
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1997 1996
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Operating Activities:
Net earnings $ 76 $ 2
Adjustments to reconcile net earnings to net cash:
Amortization of excess reorganization value 127 127
Depreciation, depletion and other amortization 51 49
Current and deferred income taxes 2 6
Net gain/(loss) on asset dispositions -- (2)
(Increase)/decrease in working capital:
Receivables (61) (55)
Inventories (11) (2)
Payables 20 21
Accrued expenses 9 (4)
Increase in other assets (2) (9)
Increase in other liabilities 6 57
Other, net 11 1
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Net cash flows from operating activities 228 191
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Investing Activities:
Capital expenditures (96) (95)
Net proceeds from asset dispositions 2 10
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Net cash flows to investing activities (94) (85)
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Financing Activities:
Issuance of Debt 91 -
Repayment of debt (181) (135)
Short-term borrowings/(repayments), net (2) 4
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Net cash flows to financing activities (92) (131)
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Net increase/(decrease) in cash & cash equivalents 42 (25)
Cash & cash equivalents at beginning of period 44 70
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Cash & cash equivalents at end of period 86 45
========= =========
Supplemental Cash Flow Disclosures:
Interest paid 58 67
Income taxes paid 128 75
See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(1) The consolidated financial statements of USG Corporation and its
subsidiaries ("USG" or the "Corporation") included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. In the opinion of management,
the statements reflect all adjustments, which are of a normal recurring nature,
necessary to present fairly the Corporation's financial position as of September
30, 1997 and December 31, 1996; results of operations for the three months and
nine months ended September 30, 1997 and 1996; and cash flows for the nine
months ended September 30, 1997 and 1996. Certain amounts in the prior years'
financial statements have been reclassified to conform with the 1997
presentation. While these interim financial statements and accompanying notes
are unaudited, they have been reviewed by Arthur Andersen LLP, the Corporation's
independent public accountants. These financial statements and notes are to be
read in conjunction with the financial statements and notes included in the
Corporation's 1996 Annual Report on Form 10-K dated March 5, 1997.
(2) As of September 30, 1997, the remaining balance of excess reorganization
value was eliminated. The balance of $83 million, which would have been
amortized through April 1998, was offset by the reversal of a valuation
allowance in accordance with AICPA Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").
See Note 5 for additional information.
Excess reorganization value totaling $851 million was recorded in 1993 in
connection with a comprehensive restructuring of the Corporation's debt. The
Corporation accounted for the restructuring using the principles of fresh start
accounting as required by SOP 90-7. Pursuant to these principles, individual
assets and liabilities were adjusted to fair market value. Excess reorganization
value was the portion of the reorganization value not attributable to specific
assets.
(3) In the first quarter of 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." This statement is effective for fiscal years after
December 15, 1997. When adopted, SFAS 128 will require restatement of prior
years' earnings per share ("EPS"). Under SFAS 128, the presentation of primary
EPS will be replaced with basic EPS. Basic EPS excludes dilution and is computed
by dividing net earnings by the weighted average number of common shares
outstanding for the period. Diluted EPS, which reflects potential dilution
resulting from the conversion of common stock equivalents, will also need to be
disclosed. Under SFAS No. 128, USG's diluted EPS amounts for each 1997 and 1996
quarter were unchanged from the amounts reported.
(4) The Corporation uses derivative instruments to manage well-defined interest
rate, energy cost and foreign currency exposures. The Corporation does not use
derivative instruments for trading purposes. The criteria used to determine if
hedge accounting treatment is appropriate are: (i) the designation of the hedge
to an underlying exposure (ii) whether or not overall uncertainty is being
reduced and (iii) if there is a correlation between the value of the derivative
instrument and the underlying obligation.
Interest Rate Derivative Instruments:
The Corporation utilizes interest rate swap agreements to manage the impact of
interest rate changes on its underlying floating rate debt. The Corporation
designates these arrangements as hedges and amounts payable or receivable under
these swap agreements are accrued as an increase or decrease to interest expense
on a current basis. To the extent the underlying floating rate debt is reduced,
the Corporation terminates swap agreements accordingly so as not to be in an
overhedged position. In such cases, the Corporation recognizes gains and/or
losses in the period the agreement is terminated.
Energy Cost Derivative Instruments:
The Corporation uses swap agreements to hedge anticipated purchases of fuel to
be utilized in the manufacturing processes for gypsum wallboard and ceiling
tile. Under these swap agreements, the Corporation receives or makes payments
based on the differential between a specified price and the actual closing price
for the current month's energy price contract. These contracts are designated as
hedges and qualify for hedge accounting. Amounts payable or receivable under
these swap agreements are accrued as an increase or decrease to cost of products
sold, along with the actual spot energy cost of the corresponding underlying
hedge transaction, the combination of which amounts to the predetermined
specified contract price.
Foreign Currency Derivative Instruments:
The Corporation has operations in a number of countries and has intercompany
transactions among them and, as a result, is exposed to changes in foreign
currency exchange rates. The Corporation manages most of these exposures on a
consolidated basis, which allows netting of certain exposures to take advantage
of any natural offsets. To the extent the net exposures are hedged, forward
contracts are used. Gains and/or losses on these foreign currency hedges are
included in net earnings in the period in which the exchange rates change.
(5) Income tax expense amounted to $48 million and $130 million for the three
months and nine months ended September 30, 1997, respectively. For the
respective 1996 periods, income tax expense amounted to $36 million and $83
million. The Corporation's income tax expense is computed based on pre-tax
earnings excluding the noncash amortization of excess reorganization value,
which is not deductible for income tax purposes.
A valuation allowance of $90 million, which had been provided for deferred tax
assets relating to pension and retiree medical benefits prior to the
Corporation's financial restructuring in 1993, was eliminated in the third
quarter of 1997. The elimination of this allowance reflects a change in
management's judgment regarding the realizability of these assets in future
years as a result of the Corporation's pretax earnings levels and improved
capital structure over the past three years. In accordance with SOP 90-7, the
benefit realized from the elimination of this allowance was used to reduce the
balance of excess reorganization value to zero as of September 30, 1997.
The Corporation used net operating loss carryforwards totaling $100 million from
1994 through 1996 to offset U.S. taxable income in those years. Because of the
uncertainty regarding the application of the Internal Revenue Code to these
carryforwards as a result of USG's financial restructuring in May 1993, these
carryforwards could be reduced or eliminated.
(6) As of September 30, 1997, common shares totaling 2,211,190 were reserved for
future issuance in conjunction with existing stock option grants. In addition,
1,671,495 common shares were reserved for future grants.
(7) One of the Corporation's subsidiaries, United States Gypsum Company ("U.S.
Gypsum"), is a defendant in asbestos lawsuits alleging both property damage and
personal injury. See Part II, Item 1. "Legal Proceedings" for information
concerning the asbestos litigation.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its earnings or consolidated financial
position. See Part II, Item 1. "Legal Proceedings" for additional information on
environmental litigation.
(8) Under a revolving accounts receivable facility, the trade receivables of
U.S. Gypsum and USG Interiors, Inc. are being purchased by USG Funding
Corporation ("USG Funding") and transferred to a trust administered by Chase
Manhattan Bank as trustee. Certificates representing an ownership interest of up
to $130 million in the trust have been issued to an affiliate of Citicorp North
America, Inc. USG Funding, a special purpose subsidiary of USG Corporation, is a
separate corporate entity with its own separate creditors which will be entitled
to be satisfied out of USG Funding's assets prior to any value in USG Funding
becoming available to its shareholder. Receivables and debt outstanding in
connection with the receivables facility remain in receivables and long- term
debt, respectively, on the Corporation's consolidated balance sheet.
Item 2. 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
effect on financial reporting through September 30, 1997, 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
Third-quarter 1997 net sales of $757 million were up $79 million, or 11.7%,
versus the third quarter of 1996, while EBITDA of $156 million increased $31
million, or 24.8%. These results reflect: (i) higher SHEETROCK brand wallboard
selling prices in the United States and Canada (ii) highest ever quarterly
shipments of SHEETROCK wallboard (iii) third quarter sales records for AURATONE
ceiling tile and DONN grid products and (iv) record shipments of SHEETROCK joint
compound and DUROCK cement board.
For the first nine months of 1997, net sales totaled $2,153 million, up $231
million, or 12.0%, over the first nine months of 1996, while EBITDA of $430
million, increased $116 million or 36.9%.
Gross profit as a percentage of net sales was 27.7% and 27.4% in the third
quarter and first nine months of 1997, respectively, compared with 26.4% and
24.5% in the same 1996 periods. These increases primarily reflect improved gross
profit margins on all major product lines. Additionally, gross profit in the
first nine months of 1996 was lowered by a $5 million charge to improve
operating efficiencies of USG's European businesses.
Selling and administrative expenses in the third quarter and first nine months
of 1997 increased 1.4% and 3.5%, respectively, over the prior-year periods.
These increases largely reflect higher levels of expenses related to: (i) a
joint initiative by USG's North American Gypsum and Worldwide Ceilings units to
enhance customer service by upgrading their order fulfillment systems and (ii)
compensation and benefits.
The noncash amortization of excess reorganization value reduced operating profit
by $43 million and $127 million in each 1997 and 1996 third quarter and first
nine-months period, respectively. As explained in Notes 2 and 5 of this report,
the remaining balance of excess reorganization value was eliminated as of
September 30, 1997. The balance of $83 million, which would have been amortized
through April 1998, was offset by the reversal of a valuation allowance in
accordance with SOP 90-7.
Interest expense in the third quarter and first nine months of 1997 decreased
11.1% and 14.0%, respectively, versus the corresponding 1996 periods. These
declines primarily reflect the results of USG's debt reduction program.
Income tax expense amounted to $48 million and $130 million for the three months
and nine months ended September 30, 1997, respectively. For the respective 1996
periods, income tax expense amounted to $36 million and $83 million. The
Corporation's income tax expense is computed based on pre-tax earnings excluding
the noncash amortization of excess reorganization value, which is not deductible
for income tax purposes.
Net earnings of $34 million and $13 million were reported in the third quarter
of 1997 and 1996, respectively. The noncash amortization of excess
reorganization value and reorganization debt discount (included in interest
expense) reduced net earnings by $43 million, or $0.87 per share, and $43
million, or $0.89 per share, in the respective quarters. Net earnings of $76
million were reported in the first nine months of 1997, while a net earnings of
$2 million was reported in the first nine months of 1996. Comparable noncash
amortizations in the nine-month periods amounted to $127 million, or $2.61 per
share, and $128 million, or $2.69 per share, respectively.
Core Business Results
Net Sales EBITDA
Periods ended ---------------------------------------------- --------------------------------------------
September 30 Three Months Nine Months Three Months Nine Months
(dollars in millions) ---------------------------------------------- --------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- --------- --------- -------- -------- -------- --------
North American Gypsum:
U.S. Gypsum Company $404 $ 364 $ 1,170 $ 1,024 $ 120 $ 94 $ 341 $ 248
L&W Supply Corporation 263 222 734 622 11 9 27 21
CGC Inc. (gypsum) 31 32 92 83 6 6 15 12
Other subsidiaries 25 23 69 58 9 6 22 17
Eliminations (108) (98) (314) (259) -- -- (1) --
-------- -------- --------- --------- -------- -------- -------- --------
Total 615 543 1,751 1,528 146 115 404 298
-------- -------- --------- --------- -------- -------- -------- --------
Worldwide Ceilings:
USG Interiors, Inc. 114 104 318 300 19 16 49 42
USG International 59 58 172 170 3 3 10 --
CGC Inc. (ceilings) 9 8 25 23 1 1 3 3
Eliminations (14) (12) (40) (32) -- -- -- --
--------- --------- --------- --------- --------- -------- -------- --------
Total 168 158 475 461 23 20 62 45
--------- --------- --------- --------- --------- -------- -------- --------
Corporate -- -- -- -- (13) (10) (36) (29)
Eliminations (26) (23) (73) (67) -- -- -- --
--------- --------- --------- --------- --------- -------- -------- --------
Total USG Corporation 757 678 2,153 1,922 156 125 430 314
========= ========= ========= ========= ========= ======== ======== ========
North American Gypsum
Net sales of $615 million and EBITDA of $146 million in the third quarter of
1997 were up 13.3% and 27.0%, respectively, over the third quarter of 1996. For
the first nine months of 1997, net sales of $1,751 million and EBITDA of $404
million represented increases of 14.6% and 35.6% respectively, over the first
nine months of 1996.
As a result of SHEETROCK wallboard's higher selling prices and record shipments,
U.S. Gypsum's net sales for the third quarter of 1997 were the highest ever for
a quarter. The average realized selling price for SHEETROCK wallboard was
$123.06 per thousand square feet, up $10.98, or 9.8% versus the third quarter of
1996. U.S. Gypsum shipped 2.168 billion square feet of SHEETROCK wallboard, a
record for any quarter in USG's history and a 3.3% increase versus the
comparable 1996 level of 2.099 billion square feet. Manufacturing unit costs for
SHEETROCK wallboard were down slightly due to improved operating efficiencies
resulting from cost reduction projects implemented in 1996 and 1997. Third
quarter 1997 capacity utilization at U.S. Gypsum's wallboard plants increased to
approximately 99% from 97% a year ago. Shipments of SHEETROCK joint compound
were a record for any third quarter. DUROCK cement board shipments set a record
for any quarter.
L&W Supply Corporation, USG's building products distribution business, reported
net sales that were the highest level for any quarter in the company's history.
This achievement reflects record volume and realized selling prices for
wallboard. In addition, as a result of acquisitions, greenfield expansions and
internal growth, record sales were also reported for L&W's complementary
building products. As of September 30, 1997, L&W Supply operated out of 176
locations.
CGC Inc.'s gypsum business reported strong results in the third quarters of both
1997 and 1996. Favorable results for the first nine months of 1997 versus last
year reflect the continuing improvement in market conditions in Canada.
Worldwide Ceilings
Net sales of $168 million in the third quarter of 1997 were up 6.3% versus the
third quarter of 1996. For the first nine months of 1997, net sales of $475
million represented an increase of 3.0% over the first nine months of 1996.
Excluding results for the insulation business that was sold in April 1996,
first-nine months sales increased 5.1%.
EBITDA of $23 million increased 15.0% over last year's third quarter, while
EBITDA of $62 million in the first nine months of 1997 increased 37.8% over the
comparable 1996 period. Adjusting for a $5 million charge taken in the first
quarter of 1996 to improve operating efficiencies for USG's European businesses,
EBITDA for the first nine months of 1997 increased 24.0%.
Continued strong demand in the U.S. and international nonresidential markets
contributed to third quarter sales records for AURATONE ceiling tile and DONN
grid products.
EBITDA improved over the prior year due to higher selling prices and reduced
manufacturing costs in the United States and improved international operating
costs.
Outlook
Based on preliminary data issued by the U.S. Bureau of the Census, third quarter
1997 seasonally adjusted annual housing starts averaged 1.45 million privately
owned units, down about 2% from the actual 1996 level of 1.48 million. However,
the U.S. wallboard market has continued to grow in 1997 despite the moderately
lower level of housing starts. Industry shipments for the first nine months of
1997 are expected to be up 2.5% versus last year, due in part to growth in the
remodeling and nonresidential segments of the market. Based on these favorable
market conditions, U.S. Gypsum realized wallboard price increases in most
markets during the third quarter. As a result, the outlook for the balance of
1997 remains favorable.
This report contains forward-looking statements related to management's
expectations about future conditions. Actual business conditions may differ
significantly from management's expectations and adversely affect the
Corporation's sales and profitability. Actual results may differ due to factors
over which the Corporation has no control, including economic activity, such as
new housing construction, interest rates, and consumer confidence; competitive
activity such as price and product competition; and increases in raw material
and energy costs. The Corporation assumes no obligation to update any
forward-looking information contained in this report.
Liquidity and Capital Resources
USG's debt reduction program reached its target debt level of approximately $650
million. Accordingly, USG's financial strategy going forward will be to increase
the proportion of its free cash flow it spends on capital expenditures. Pending
achievement of investment grade status, which has been a principal objective of
its financial strategy since 1993, USG will also be reviewing possible
applications of its cash for other corporate financial purposes.
Debt Reduction
As of September 30, 1997, the total principal amount of debt was $679 million,
down from a total of $772 million as of December 31, 1996. Primary changes in
the debt structure during the first nine months of 1997 reflect the repayment of
$50 million of revolving bank loans and $41 million of 8.0% senior notes due
1997. With an additional repayment of revolving bank loans early in the fourth
quarter of 1997, the Corporation achieved its target debt level of approximately
$650 million. As such, the Corporation's goal since 1993 of reducing debt by
$900 million over five years was accomplished one year ahead of plan.
Capital Expenditures
Capital expenditures amounted to $96 million in the first nine months of 1997,
compared with $95 million in the corresponding 1996 period. As of September 30,
1997, capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $412 million compared with $173 million as
of December 31, 1996. Including fourth quarter capital spending, management
expects USG's annual expenditures to be about $125 to $150 million for 1997.
For North American Gypsum, ground was broken in June 1997 for a new $110 million
plant in Bridgeport, Ala. This facility will manufacture SHEETROCK brand
wallboard using 100% synthetic gypsum and is expected to begin operation in
1999. Construction is also underway to build a $90 million facility to
manufacture gypsum wood fiber panels at the Gypsum, Ohio, wallboard plant. The
new production line is expected to begin operating by the end of 1999. On
October 1, 1997, USG announced that it will invest $90 million to rebuild and
modernize its wallboard manufacturing line at the East Chicago, Ind., plant.
This new line is also expected to begin production by the end of 1999.
Additional capital investments include cost reduction projects, such as the
installation of stock cleaning equipment to utilize lower grades of recycled
paper and the additional installation of processes to accommodate the use of
synthetic gypsum at manufacturing facilities where it is more economical than
natural sources of gypsum rock.
In the Worldwide Ceilings business, construction began in early 1997 on a $35
million project that includes the replacement of 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.
The Corporation periodically evaluates possible acquisitions or combinations
involving other businesses or companies in industries and markets related to its
current operations. The Corporation believes that its available liquidity will
be generally adequate to support most opportunities and that it has access to
additional financial resources to take advantage of other opportunities.
Working Capital
Working capital (current assets less current liabilities) as of September 30,
1997 amounted to $294 million and the ratio of current assets to current
liabilities was 1.79 to 1. As of December 31, 1996, working capital was $159
million and the ratio of current assets to current liabilities was 1.41 to 1.
Receivables (net of reserves) increased to $335 million as of September 30,1997
from $274 million as of December 31, 1996, while inventories increased to $196
million from $185 million, and accounts payable rose to $160 million from $141
million. These variations reflect normal seasonal fluctuations.
Cash and cash equivalents as of September 30, 1997 amounted to $86 million, up
from $44 million as of December 31, 1996. This increase reflects first nine
months 1997 net cash flows from operating activities of $228 million and net
cash flows to investing and financing activities of $94 million and $92 million,
respectively.
Available Liquidity
The Corporation has additional liquidity available through several financing
arrangements. These include: (i) revolving credit facilities in the United
States, Canada and Europe that allow the Corporation to borrow up to an
aggregate of $600 million, including a $125 million letter of credit subfacility
in the United States, under which, as of September 30, 1997, outstanding
revolving loans totaled $123 million and letters of credit issued and
outstanding amounted to $83 million, leaving the Corporation with $394 million
of unused and available credit (ii) a revolving accounts receivable facility
(see "Note 8"), under which, as of September 30, 1997, 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 date of
this report, 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 Part II, Item
1. "Legal Proceedings" for information concerning the asbestos litigation.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its earnings or consolidated financial
position. See Part II, Item 1. "Legal Proceedings" for additional information on
environmental litigation.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of September 30, 1997,
and the related condensed consolidated statement of earnings for the three-month
and nine-month periods ended September 30, 1997 and 1996 and the condensed
consolidated statement of cash flows for the nine months ended September 30,
1997 and 1996. These financial statements are the responsibility of the
Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 21, 1997
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Asbestos and Related Insurance Litigation. One of the Corporation's
subsidiaries, U.S. Gypsum, is among many defendants in lawsuits arising out of
the manufacture and sale of asbestos-containing materials. U.S. Gypsum sold
certain asbestos-containing products beginning in the 1930's; in most cases, the
products were discontinued or asbestos was removed from the formula by 1972, and
no asbestos-containing products were sold after 1977. Some of these lawsuits
seek to recover compensatory and in many cases punitive damages for costs
associated with the maintenance or removal and replacement of asbestos-
containing products in buildings (the "Property Damage Cases"). Others seek
compensatory and in many cases punitive damages for personal injury allegedly
resulting from exposure to asbestos-containing products ( the "Personal Injury
Cases"). It is anticipated that additional asbestos-related suits will be filed.
Summary The following is a brief summary; see Note 15 to the financial
statements in the Corporation's Annual Report for additional information on the
asbestos litigation.
U.S. Gypsum is a defendant in twenty Property Damage Cases, many of which
involve multiple buildings and two of which are certified class actions. In
August, 1997, U. S. Gypsum agreed to settle one of the class actions, which had
been brought on behalf of various public entities in the state of Texas,
including several state agencies. The settlement amount will be paid over the
next 18 months and will be partially funded by insurance. During the years
1994-96, ten new Property Damage Cases were filed against U.S. Gypsum while 71
were closed; the Company spent an average of $36 million per year on the defense
and settlement of Property Damage Cases, but received a total of $140 million
over the three year period from insurance carriers, including reimbursement for
expenditures in prior years. Due to the unique factors inherent in each of the
Property Damage Cases, U.S. Gypsum is unable to make a reasonable estimate of
its liability in the property damage litigation.
U.S. Gypsum is also a defendant in approximately 61,600 Personal Injury Cases.
Filings of new Personal Injury Cases increased to 28,000 claims in 1996,
compared to 14,000 new claims in 1995 and 13,000 in 1994. The increase in
filings in 1996 followed a federal appellate court ruling rejecting the Georgine
class action settlement referred to below. U.S. Gypsum's average cost to resolve
Personal Injury Cases during those years has been approximately $1,600 per
claim. Over the past three years, U.S. Gypsum has expended an average of $33
million per year on Personal Injury Cases, of which an average of $30 million
has been paid by insurance. U.S. Gypsum estimates that its currently pending
Personal Injury Cases can be resolved for bet $100 and $115 million, virtually
all of which is expected to be paid by insurance. U.S. Gypsum is not presently
able to estimate its liability in future Personal Injury Cases.
U.S. Gypsum was a party to a class action settlement known as "Georgine" that
would have required most future Personal Injury Cases to be resolved through an
administrative system, and provided for prescribed levels of benefits based on
the nature of the claimants' physical impairment. However, on June 25, 1997, the
Supreme Court affirmed a May 1996 ruling by a federal appellate court finding
that class certification in Georgine was improper. (Amchem Products, Inc. V.
Windsor, No. 96-270.) As a result, the Georgine settlement has been invalidated,
and pending and future Personal Injury Cases will be filed in and handled
through the courts. The defendants in Georgine, including U.S. Gypsum, have
stated their intention to continue to pursue negotiations for another
claims-handling mechanism that would serve as an alternative to the traditional
tort system, although there is no assurance that such a system can be negotiated
or implemented. It is anticipated that U.S. Gypsum will be named in a
substantial number of additional Personal Injury Cases over the next several
months as a result of the Supreme Court's ruling.
U.S. Gypsum sued its insurance carriers in 1983 to obtain coverage for asbestos
cases (the "Coverage Action") and has settled all disputes with twelve of its
seventeen solvent carriers. As of December 31, 1996, after deducting insolvent
coverage and insurance paid out to date, approximately $350 million of potential
insurance remained, including $150 million that is committed to cover both
property damage and personal injury costs; $145 million that is available for
personal injury but not yet for property damage; and approximately $55 million
that is still in dispute for both. U.S. Gypsum is attempting to negotiate a
resolution of the Coverage Action with the five remaining defendant carriers,
but may be required to litigate additional issues in its effort to secure the
contested coverage.
U.S. Gypsum's total expenditures for all asbestos-related matters, including
property damage, personal injury, insurance coverage litigation and related
expenses, exceeded aggregate insurance payments by $33.4 million in 1994, but
insurance payments exceeded asbestos-related costs by approximately $10 million
in 1995 and $41 million in 1996 due primarily to non-recurring reimbursement for
amounts expended in prior years.
Conclusion A number of uncertainties continue to exist concerning the impact of
the asbestos litigation on the Corporation, including the number and severity 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; 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 level of future Personal Injury
filings, 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.
Item 2. Recent Sales of Unregistered Securities
On July 9, 1997, the Corporation issued 13,545 shares of common stock, $0.10 par
value, to ten of its eleven non-employee directors in consideration for certain
benefits otherwise payable under five-year executive consulting arrangements
previously entered into with retiring directors with requisite years of board
service, which were discontinued. The discontinued consulting arrangements would
have provided eligible retiring directors with annual consulting retainers for
five years each equal to the then current annual retainer for board service
(currently $26,000 per annum). The consideration for termination of the
consulting arrangements was deemed to equal 10% of the present value of the
anticipated consulting retainers for each year of board service (10%
minimum/100% maximum). Each non-employee director was given the option of
receiving such consideration in the form of common stock, cash, or a combination
of common stock and cash. The value of common stock paid as such consideration
was based on the average closing prices of the Corporation's common stock on the
New York Stock Exchange composite tape for the last five trading days of June,
1997 and the first five trading days in July, 1997, resulting in a per share
value of $36.62 for the 13,545 shares so issued.
On September 25, 1997, the Corporation issued 1,540 shares of common stock,
$0.10 par value, to its eleven non-employee directors, with each of its
directors receiving 140 shares. The shares were issued under the Corporation's
Non-Employee Director Stock Compensation Plan, which provides that the third
quarter installment of the annual retainer for board service, an amount
currently equal to $6,500, be paid in common stock of the Corporation (rounded
up to the next whole share in the event of fractional shares). The number of
shares issued to each non-employee director was based on the mean of the high
and low trading prices of the Corporation's common stock on the New York Stock
Exchange composite tape on September 25, 1997, which equaled $46.69 per share.
All of the shares referred to in this item were issued in reliance on the
private offering exemption from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) (15) Letter of Arthur Andersen LLP regarding unaudited financial
information.
(27) Financial Data Schedule (electronic filing only).
(b) There were no reports on Form 8-K filed during the third quarter of
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By /s/ Dean H. Goossen
-------------------------------------
Dean H. Goossen, Corporate Secretary,
USG Corporation
By /s/ Raymond T. Belz
November 4, 1997 -------------------------------------
Raymond T. Belz, Vice President and
Controller, USG Corporation