EXHIBIT 13
USG CORPORATION
FINANCIAL REVIEW
Page
MANAGEMENT'S DISCUSSION AND ANALYSIS 65
CONSOLIDATED FINANCIAL STATEMENTS
Statement of Earnings 70
Balance Sheet 71
Statement of Cash Flows 72
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies 73
2. Earnings Per Share 74
3. Financing Arrangements 74
4. Debt 75
5. Financial Instruments and Risk Management 76
6. Purchase of Subsidiary Minority Interest 77
7. Writedown of Assets 77
8. Income Taxes 77
9. Inventories 78
10. Property, Plant and Equipment 78
11. Leases 78
12. Employee Retirement Plans 78
13. Stock-Based Compensation 79
14. Stockholders' Equity 80
15. Industry and Geographic Segments 81
16. Litigation 83
REPORT OF MANAGEMENT 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 87
SELECTED QUARTERLY FINANCIAL DATA 88
FIVE-YEAR SUMMARY 89
USG CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Overview
1997 was an excellent year for USG Corporation. Strong operating results were
realized by all of USG's businesses. Increased demand led to record levels of
shipments for all major product lines. In pursuit of its goal of improving
financial flexibility, USG achieved its debt reduction objective and was awarded
an investment grade BBB rating by Standard & Poor's. Significant progress also
was made toward the Corporation's strategic objectives of investing for growth
and maintaining operational excellence.
USG continues to report EBITDA (earnings before interest, taxes, depreciation,
depletion, amortization and certain other income and expense items) as a result
of its financial restructuring in 1993 and the restructuring's effect (i.e.,
fresh start accounting charges) on financial reporting through September 30,
1997. While EBITDA is primarily used to facilitate comparisons of current and
historical results, it can also be helpful in understanding cash flow generated
from operations that is available for taxes, debt service and capital
expenditures. However, 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 19 of the Annual Report to Stockholders shows that for the years 1995, 1996
and 1997 (shown on the x-axis) the Corporation had net sales (shown on the
y-axis) of $2,444 million, $2,590 million and $2,874 million, respectively. A
bar chart entitled "EBITDA (millions of dollars)" on page 19 of the Annual
Report to Stockholders shows that for the years 1995, 1996 and 1997 (shown on
the x-axis) the Corporation had EBITDA (shown on the y-axis) of $417 million,
$437 million and $572 million, respectively.
Net sales of $2,874 million in 1997 represented the sixth consecutive year of
improved sales and an increase of $284 million, or 11%, over 1996. EBITDA
increased for the fifth consecutive year, amounting to $572 million, up $135
million, or 31%, from 1996. The strong results in 1997 were attributable to (i)
records for average selling price and shipments of SHEETROCK brand gypsum
wallboard (ii) record sales of ceiling tile and DONN ceiling grid and (iii)
record shipments of SHEETROCK joint compound and DUROCK cement board. In 1996,
net sales were up 6%, while EBITDA increased 5% versus 1995.
Gross profit as a percentage of net sales was 27.4% in 1997, compared with 24.9%
in 1996, and 24.7% in 1995. 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.
In 1997, USG began modifying its computer-based systems that are affected by the
year 2000 date change. Anticipated spending for this modification is not
expected to have a material impact on the Corporation's ongoing results of
operations.
Selling and administrative expenses of $281 million in 1997 increased $13
million, or 5%, over 1996. Expenses of $268 million in 1996 were up $24 million,
or 10%, compared with 1995. The increase for each year primarily reflects higher
levels of expenses related to incentive compensation and benefits as well as
costs to consolidate and upgrade customer service functions for the gypsum and
ceilings businesses. As a percent of net sales, selling and administrative
expenses were 9.8% in 1997, 10.3% in 1996 and 10.0% in 1995.
The noncash, no-tax-impact amortization of excess reorganization value reduced
operating profit by $127 million in 1997 and by $169 million in each of 1996 and
1995. Excess reorganization value was established in connection with USG's 1993
financial restructuring that was accounted for using the principles of fresh
start accounting. Excess reorganization value was scheduled to be amortized over
a five-year period through April 1998. However, as of September 30, 1997, the
remaining balance of $83 million was offset by the elimination of a valuation
allowance. See "Note 8. Income Taxes" for additional information.
Interest expense continued to decline in 1997 as a result of debt reduction.
Interest expense of $60 million in 1997 was down 20% from 1996. Interest expense
of $75 million in 1996 declined 24% from the 1995 level of $99 million.
In 1995, the Corporation recorded a $30 million pretax ($24 million after-tax)
charge in connection with the disposal of its insulation manufacturing business.
This charge is reflected in other expense, net in the Consolidated Statement of
Earnings. See "Note 7. Writedown of Assets" for additional information.
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 1997, income tax expense amounted
to $172 million, compared with $117 million in 1996 and $97 million in 1995. The
Corporation's effective tax rates for 1997, 1996 and 1995 were 53.9%, 88.9% and
149.0%, respectively. Excluding the amortization of excess reorganization value
and, in 1995, a $15 million write-off of excess reorganization value associated
with the writedown of the insulation business, the Corporation's 1997, 1996 and
1995 effective tax rates were 38.6%, 38.9% and 39.0%, respectively. See "Note 8.
Income Taxes" for additional information.
USG's reported net earnings in 1997 were $148 million, and diluted earnings per
share were $3.03. These earnings were net of the noncash amortization of excess
reorganization value of $127 million, or $2.60 per diluted share.
In 1996, reported net earnings amounted to $15 million, and diluted earnings per
share were $0.31. These earnings were net of (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
diluted share.
In 1995, USG reported a net loss of $32 million and a loss per share of $0.71.
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 $4.37 per share.
Market Conditions and Outlook. Based on preliminary data issued by the U.S.
Bureau of the Census, U.S. housing starts were an estimated 1.474 million units
in 1997. Housing starts totaled 1.477 million units in 1996 and 1.354 million
units in 1995. Despite the virtually unchanged level of housing starts in 1997
as compared with 1996, the U.S. wallboard market continued to grow in 1997.
Record U.S. industry shipments of wallboard were up 3% versus 1996, due in part
to very strong demand from remodeling and nonresidential markets. Repair and
remodel activity continued its upward trend in 1997. As for new nonresidential
construction, the finishing of nonresidential interiors follows contract awards
by as much as a year. As a result, demand from this market improved in 1997 due
to a 1% increase in U.S. nonresidential construction in 1996 versus 1995 as
measured in floor space for which contracts were awarded.
Barring any major change in the U.S. economy, new residential construction
should continue at a relatively high level in 1998. Demand for USG products from
both residential and nonresidential repair and remodeling is expected to
continue its upward trend in 1998. Nonresidential construction rose 10% in 1997
as compared with 1996. This increase should be beneficial to USG in 1998 due to
the lag in the finishing of nonresidential interiors of roughly one year.
Construction activity in Canada and Mexico is expected to maintain the recovery
begun in 1997. USG's exposure to markets outside North America is primarily
concentrated in Europe but also includes sales to Asia and Latin America. We
anticipate that demand in Eastern Europe and Latin America will continue to
grow, while conditions in Western Europe will remain stable. The prospects for
Asian construction markets are not good, but USG's presence there is relatively
minor.
USG CORPORATION
Core Business Results
(millions) Net Sales EBITDA
- ---------- ------------------------------- ------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
North American Gypsum:
U.S. Gypsum Company $ 1,565 $ 1,390 $ 1,309 $ 458 $ 347 $ 327
L&W Supply Corporation 981 841 753 36 29 26
CGC Inc. (gypsum) 124 114 102 20 16 11
Other subsidiaries 95 83 75 28 25 22
Eliminations (427) (361) (315) (3) - -
----- ----- ----- --- --- ---
Total 2,338 2,067 1,924 539 417 386
----- ----- ----- --- --- ---
Worldwide Ceilings:
USG Interiors, Inc. 425 398 385 65 53 58
USG International 229 228 235 13 2 5
CGC Inc. (ceilings) 34 30 28 3 3 4
Eliminations (54) (44) (39) - - -
--- --- --- -- -- --
Total 634 612 609 81 58 67
--- --- --- -- -- --
Corporate - - - (48) (38) (36)
Eliminations (98) (89) (89) - - -
--- --- --- --- --- ---
Total USG Corporation 2,874 2,590 2,444 572 437 417
===== ===== ===== === === ===
North American Gypsum. A bar chart entitled "Net Sales (millions of dollars)" on
page 21 of the Annual Report to Stockholders shows that for the years 1995, 1996
and 1997 (shown on the x-axis) North American Gypsum had net sales (shown on the
y-axis) of $1,924 million, $2,067 million and $2,338 million, respectively. A
bar chart entitled "EBITDA (millions of dollars)" on page 21 of the Annual
Report to Stockholders shows that for the years 1995, 1996 and 1997 (shown on
the x-axis) North American Gypsum had EBITDA (shown on the y-axis) of $386
million, $417 million and $539 million, respectively.
Net sales of $2,338 million in 1997 were up $271 million, or 13%, and EBITDA of
$539 million rose $122 million, or 29%, compared with 1996. For 1996, net sales
of $2,067 million increased $143 million, or 7%, while EBITDA of $417 million
increased $31 million, or 8%, over 1995.
Strong results in 1997 for United States Gypsum Company primarily reflect
records for average price and shipments of SHEETROCK gypsum wallboard. The
average selling price of SHEETROCK wallboard in 1997 was $122.65 per thousand
square feet, up 11% compared with the 1996 average price of $110.56. The average
price in 1995 was $110.44. Shipments of SHEETROCK wallboard totaled 8.4 billion
square feet, compared with 8.0 billion square feet in 1996 and 7.6 billion
square feet in 1995. In addition, shipments of SHEETROCK joint compound and
DUROCK cement board also set records in 1997. U.S. Gypsum's manufacturing costs
for SHEETROCK wallboard were down slightly in 1997 due to improved operating
efficiencies resulting from cost-reduction projects implemented in 1996 and
1997. Comparing 1996 with 1995, lower furnish prices for wastepaper, the primary
raw material of wallboard paper, resulted in a 4% decrease in manufacturing
costs. U.S. Gypsum's plants operated at 99% of capacity in 1997, compared with
the estimated average rate of 96% for the U.S. industry. In 1996, U.S. Gypsum's
plants operated at 94% of capacity.
L&W Supply Corporation, USG's building products distribution business, reported
record net sales in 1997 due to record shipments of wallboard and record sales
of complementary building materials. 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, 1997, L&W Supply
operated a total of 176 locations in the United States.
CGC Inc.'s gypsum business experienced improved net sales and EBITDA in both
1997 and 1996 primarily due to stronger domestic shipments in eastern Canada and
exports to the United States.
Worldwide Ceilings. A bar chart entitled "Net Sales (millions of dollars)" on
page 22 of the Annual Report to Stockholders shows that for the years 1995, 1996
and 1997 (shown on the x-axis) Worldwide Ceilings had net sales (shown on the
y-axis) of $609 million, $612 million and $634 million, respectively. A bar
chart entitled "EBITDA (millions of dollars)" on page 22 of the Annual Report to
Stockholders shows that for the years 1995, 1996 and 1997 (shown on the x-axis)
Worldwide Ceilings had EBITDA (shown on the y-axis) of $67 million, $58 million
and $81 million, respectively.
Net sales of $634 million in 1997 were up $22 million, or 4%, and EBITDA of $81
million increased $23 million, or 40%, compared with 1996. Adjusting for a $7
million charge taken in 1996 to improve operating efficiencies for USG's
European businesses, EBITDA in 1997 increased 25%. The increase in net sales
reflects record sales of ceiling tile and DONN ceiling grid. These records were
attributable to strong demand in the U.S. nonresidential market (both new
construction and renovation) and growing international demand. EBITDA in 1997
was favorably affected by higher volume and prices, reduced manufacturing costs
and improved international operating efficiencies. USG's international sales,
which are primarily concentrated in Europe, have not been materially affected by
recent economic events in Asia.
Net sales in 1996 for Worldwide Ceilings rose slightly to $612 million, while
EBITDA of $58 million fell $9 million, or 13%, 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 U.S. insulation
manufacturing business 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
(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.
Liquidity and Capital Resources
Following its 1993 financial restructuring, USG was engaged in a financial
strategy of reducing debt and growing its gypsum, ceilings and distribution
businesses through a balanced application of free cash flow between debt
reduction and capital expenditures. Two objectives of this strategy involved
reaching a target debt level of $650 million within five years and achieving an
investment grade rating on its capital structure.
As of December 31, 1997, total debt amounted to $620 million, reflecting a net
reduction since May 1993 of $936 million. In the fourth quarter of 1997,
Standard & Poor's raised its rating of USG's debt to investment grade BBB. As of
December 31, 1997, Moody's rating of USG debt was Ba1, one level below
investment grade. Going forward, USG's financial strategy will be to increase
the proportion of free cash flow it spends on capital projects, while reviewing
possible applications of its cash for other corporate purposes.
A bar chart entitled "Debt Principal (millions of dollars)" on page 23 of the
Annual Report to Stockholders shows that as of December 31, 1995, 1996 and 1997
(shown on the x- axis) the Corporation's principal amount of total debt (shown
on the y-axis) was $926 million, $772 million and $620 million, respectively. A
bar chart entitled "Capital Spending (millions of dollars)" on page 23 of the
Annual Report to Stockholders shows that for the years 1995, 1996 and 1997
(shown on the x-axis) the Corporation had capital spending (shown on the y-axis)
of $147 million, $120 million and $172 million, respectively.
Debt Reduction. In 1997, total debt was reduced $152 million, or 20%, from the
December 31, 1996, total of $772 million. Debt repayments during 1997 primarily
consisted of $85 million of revolving bank loans, $48 million of 8.75% senior
debentures due 2017 and $41 million of 8% senior notes due 1997. These
repayments were partially offset by increased borrowing on the Corporation's
Canadian credit facility.
Capital Expenditures. Capital expenditures amounted to $172 million in 1997,
compared with $120 million in 1996. As of December 31, 1997, the Corporation's
capital expenditure commitments for the replacement, modernization and expansion
of operations amounted to $363 million, compared with $173 million as of
December 31, 1996.
In the North American Gypsum business, 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 mid-1999. Construction is also under way to build a $90 million facility to
manufacture gypsum wood fiber panels at the Gypsum, Ohio, plant. The new
production line is expected to begin operating by the end of 1999. Complementing
this investment in the gypsum wood fiber business was the acquisition of a
gypsum fiber panel plant in Port Hawkesbury, Nova Scotia, in late 1997. Gypsum
wood fiber products manufactured at these plants will be marketed under the
FIBEROCK brand name. In October 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 in 1997 included cost-reduction
projects such as the installation of stock cleaning equipment to utilize lower
grades of recycled paper and the 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 the ceiling tile plant in Cloquet, Minn. This
project will 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 is
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
December 31, 1997, amounted to $264 million, and the ratio of current assets to
current liabilities was 1.7 to 1. As of December 31, 1996, working capital was
$159 million, and the ratio of current assets to current liabilities was 1.4 to
1.
Cash and cash equivalents as of December 31, 1997, amounted to $72 million,
compared with $44 million as of December 31, 1996. This increase reflects 1997
net cash flows from operating activities of $332 million, partially offset by
net cash flows to investing and financing activities of $170 million and $134
million, respectively. Receivables (net of reserves) were $297 million as of
December 31, 1997, up from $274 million as of year-end 1996, while inventories
increased to $208 million from $185 million, and accounts payable rose to $146
million from $141 million. These increases reflect the greater level of business
in 1997.
Available Liquidity. The Corporation has additional liquidity available through
several financing arrangements. Revolving credit facilities in the United
States, Canada and Europe allow the Corporation to borrow up to an aggregate of
$611 million (including a $125 million letter of credit subfacility in the
United States), under which, as of December 31, 1997, outstanding revolving
loans totaled $97 million and letters of credit issued and outstanding amounted
to $84 million, leaving the Corporation with $430 million of available credit.
The Corporation had additional borrowing capacity of $50 million as of December
31, 1997, under a revolving accounts receivable facility (see "Note 3. Financing
Arrangements"). A shelf registration statement filed with the Securities and
Exchange Commission allows the Corporation to offer from time to time debt
securities, shares of preferred and common stock or warrants to purchase shares
of common stock, all having an aggregate initial offering price not to exceed
$300 million. As of the filing date of the Corporation's 1997 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 16. Litigation" 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 "Note 16. Litigation" for additional information on environmental
litigation.
Forward-Looking Statements. This Management Discussion and Analysis, "Note 16.
Litigation" and other sections of this report contain forward-looking statements
related to management's expectations about future conditions. Actual business or
other conditions may differ significantly from management's expectations and
accordingly affect the Corporation's sales and profitability or other results.
Actual results may differ due to factors over which the Corporation has no
control, including economic activity such as new housing construction, interest
rates and consumer confidence; competitive activity such as price and product
competition; increases in raw material and energy costs; and the outcome of
contested litigation. The Corporation assumes no obligation to update any
forward-looking information contained in this report.
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(millions, except per share data) Years ended December 31,
- --------------------------------- ------------------------
1997 1996 1995
---- ---- ----
Net sales....................................................... $ 2,874 $ 2,590 $ 2,444
Cost of products sold........................................... 2,087 1,945 1,841
----- ----- -----
Gross profit.................................................... 787 645 603
% of net sales............................................... 27.4 24.9 24.7
Selling and administrative expenses............................. 281 268 244
Amortization of excess reorganization value..................... 127 169 169
--- --- ---
Operating profit................................................ 379 208 190
Interest expense................................................ 60 75 99
Interest income................................................. (3) (2) (6)
Other expense, net.............................................. 2 3 32
--- --- ---
Earnings before income taxes.................................... 320 132 65
Income taxes.................................................... 172 117 97
--- --- ---
Net earnings (loss)............................................. 148 15 (32)
=== === ===
Net Earnings (Loss) Per Common Share:
Basic........................................................ 3.19 0.32 (0.71)
==== ==== =====
Diluted...................................................... 3.03 0.31 (0.71)
==== ==== =====
The notes to financial statements are an integral part of this statement.
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(millions, except share data) As of December 31,
- ----------------------------- ------------------
1997 1996
---- ----
Assets
Current assets:
Cash and cash equivalents.................................................... $ 72 $ 44
Receivables (net of reserves of $17 and $17)................................. 297 274
Inventories.................................................................. 208 185
Current and deferred income taxes............................................ 63 46
--- ---
Total current assets.................................................... 640 549
--- ---
Property, plant and equipment, net........................................... 982 887
Excess reorganization value (net of accumulated amortization as
of December 31, 1996 - $635)............................................ - 210
Other assets................................................................. 304 218
--- ---
Total assets............................................................ 1,926 1,864
===== =====
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................................. 146 141
Accrued expenses............................................................. 220 200
Debt maturing within one year................................................ 10 49
--- ---
Total current liabilities............................................... 376 390
--- ---
Long-term debt............................................................... 610 706
Deferred income taxes........................................................ 163 243
Other liabilities............................................................ 630 548
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 46,780,845 and 45,724,561 shares (after
deducting 48,919 and 31,488 shares held in treasury)....... 5 5
Capital received in excess of par value...................................... 258 231
Deferred currency translation................................................ (25) (10)
Reinvested earnings (deficit)................................................ (91) (249)
--- ----
Total stockholders' equity (deficit).................................... 147 (23)
--- ---
Total liabilities and stockholders' equity.............................. 1,926 1,864
===== =====
The notes to financial statements are an integral part of this statement.
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions) Years ended December 31,
- ---------- ------------------------
1997 1996 1995
---- ---- ----
Operating Activities:
Net earnings (loss)............................................. $ 148 $ 15 $ (32)
Adjustments to reconcile net earnings (loss) to net cash:
Amortization of excess reorganization value.................. 127 169 169
Depreciation, depletion and amortization..................... 70 65 67
Current and deferred income taxes............................ (2) (8) (8)
Net (gain) loss on asset dispositions........................ - (2) 27
(Increase) decrease in working capital:
Receivables.................................................. (23) (28) 24
Inventories.................................................. (23) (10) (2)
Payables..................................................... 5 10 8
Accrued expenses............................................. 20 14 (27)
Increase in other assets........................................ (10) (2) (10)
Increase in other liabilities................................... 19 64 30
Other, net...................................................... 1 (4) (12)
--- --- ---
Net cash flows from operating activities..................... 332 283 234
--- --- ---
Investing Activities:
Capital expenditures............................................ (172) (120) (147)
Net proceeds from asset dispositions............................ 2 10 7
Purchase of subsidiary minority interest........................ - (49) -
--- --- ---
Net cash flows to investing activities ...................... (170) (159) (140)
---- ---- ----
Financing Activities:
Issuance of debt................................................ 116 77 576
Repayment of debt............................................... (265) (231) (804)
Short-term borrowings (repayments), net......................... (3) - 5
Issuances of common stock....................................... 18 4 2
--- --- ---
Net cash flows to financing activities....................... (134) (150) (221)
---- ---- ----
Net Increase (Decrease) in Cash and Cash Equivalents............ 28 (26) (127)
Cash and cash equivalents at beginning of period................ 44 70 197
--- --- ---
Cash and cash equivalents at end of period...................... 72 44 70
=== === ===
Supplemental Cash Flow Disclosures:
Interest paid................................................... 64 74 88
Income taxes paid............................................... 168 116 108
The notes to financial statements are an integral part of this statement.
USG CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Nature of Operations. Through its subsidiaries, USG Corporation (the
"Corporation") is a leading manufacturer and distributor of building materials,
producing a wide range of products for use in new residential, new
nonresidential and repair and remodel construction, 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;
specialty wallboard distributors; and contractors.
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 and
notes thereto have been reclassified to conform with the 1997 presentation.
Revenue Recognition. The Corporation recognizes revenue upon the shipment of
products.
Cash and Cash Equivalents. Cash and cash equivalents primarily consist of time
deposits with original maturities of three months or less.
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.
Excess Reorganization Value. In the third quarter of 1997, the remaining $83
million balance of excess reorganization value was eliminated. This balance,
which would have been amortized through April 1998, was offset by the
elimination 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 8. Income Taxes" 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.
Goodwill. Goodwill is amortized on a straight-line basis over a period of 40
years. On a periodic basis, the Corporation estimates the future undiscounted
cash flows of the businesses to which goodwill relates in order to ensure that
the carrying value of goodwill has not been impaired. Goodwill is included in
other assets on the Consolidated Balance Sheet.
Financial Instruments. The Corporation uses derivative instruments to manage
well-defined interest rate, energy cost and foreign currency exposures. The
Corporation does not use derivative instruments for trading purposes. The
criteria used to determine if hedge accounting treatment is appropriate are (i)
the designation of the hedge to an underlying exposure (ii) whether or not
overall uncertainty is being reduced and (iii) if there is a correlation between
the value of the derivative instrument and the underlying obligation.
Interest Rate Derivative Instruments: The Corporation utilizes interest rate
swap agreements to manage the impact of interest rate changes on its underlying
floating-rate debt. These agreements are designated as hedges and qualify for
hedge accounting. Amounts payable or receivable under these swap agreements are
accrued as an increase or decrease to interest expense on a current basis. To
the extent the underlying floating-rate debt is reduced, the Corporation
terminates swap agreements accordingly so as not to be in an overhedged
position. In such cases, the Corporation recognizes gains and/or losses in the
period the agreement is terminated.
Energy Derivative Instruments: The Corporation uses swap agreements to hedge
anticipated purchases of fuel to be utilized in the manufacturing processes for
gypsum wallboard and ceiling tile. Under these swap agreements, the Corporation
receives or makes payments based on the differential between a specified price
and the actual closing price for the current month's energy price contract.
These contracts are designated as hedges and qualify for hedge accounting.
Amounts payable or receivable under these swap agreements are accrued as an
increase or decrease to cost of products sold, along with the actual spot energy
cost of the corresponding underlying hedge transaction, the combination of which
amounts to the predetermined specified contract price.
Foreign Exchange Derivative Instruments: The Corporation has operations in a
number of countries and has intercompany transactions among them and, as a
result, is exposed to changes in foreign currency exchange rates. The
Corporation manages these exposures on a consolidated basis, which allows
netting of certain exposures to take advantage of any natural offsets. To the
extent the net exposures are hedged, forward contracts are used. Gains and/or
losses on these foreign currency hedges are included in net earnings in the
period in which the exchange rates change.
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, $19 million and $18 million in
the years ended December 31, 1997, 1996 and 1995, respectively.
2. Earnings Per Share
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share," basic earnings per share were computed by dividing
net earnings by the weighted average number of shares of common stock
outstanding during the year. The reconciliation of basic earnings per share to
diluted earnings per share is shown in the following table. Computation of the
loss per share for 1995, on a diluted basis, is omitted because options and
warrants have an antidilutive effect.
(millions, except Net Shares Per Share
share data) Earnings (000) Amount
---------------------------------------------------------
1997
Basic earnings $ 148 46,269 $ 3.19
Effect of Dilutive
Securities:
Options 930
Warrants 1,528
- ----------------------------------------------------------
Diluted earnings 148 48,727 3.03
==========================================================
1996
Basic earnings 15 45,542 0.32
Effect of Dilutive
Securities:
Options 853
Warrants 1,115
- ----------------------------------------------------------
Diluted earnings 15 47,510 0.31
==========================================================
As a result of the adoption of SFAS No. 128, the Corporation's reported earnings
per share ("EPS") for 1996 were restated as follows:
Primary EPS as reported $ 0.31
Effect of SFAS No. 128 0.01
- -----------------------------------------------------
Basic EPS as restated 0.32
=====================================================
Fully diluted EPS as reported 0.30
Effect of SFAS No. 128 0.01
- -----------------------------------------------------
Diluted EPS as restated 0.31
=====================================================
3. Financing Arrangements
Accounts Receivable Facility. The Corporation has 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 United States Gypsum Company and USG Interiors, Inc. These
agreements provide that USG Funding purchases 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 has 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, 1997 and 1996, (including $80 million outstanding as of each date) was $107
million and $105 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, 1997 and 1996, the outstanding balance of receivables sold to
USG Funding and held under the Master Trust was $179 million and $157 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.
Shelf Registration. In 1996, the Securities and Exchange Commission declared
effective a shelf registration statement that allows the Corporation to offer
from time to time (i) debt securities (ii) shares of $1.00 par value preferred
stock (iii) shares of $0.10 par value common stock and/or (iv) 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 1997
Annual Report on Form 10-K, no securities had been issued pursuant to this
registration.
4. Debt
Total debt, including debt maturing within one year, as of
December 31 consisted of the following:
(millions) 1997 1996
- ------------------------------------------------------------
Revolving credit facility due 2002 $ 25 $ 110
Receivables Facility due 2003 and 2004 80 80
8% senior notes due 1997 - 41
9.25% senior notes due 2001 150 150
8.5% senior notes due 2005 150 150
8.75% sinking fund debentures due 2017 92 140
Canadian credit facility due 2002 72 -
Canadian credit facility due 1997 - 50
Industrial revenue bonds 46 40
Other debt 5 11
Less unamortized discount - (17)
- -------------------------------------------------------------
Total 620 755
=============================================================
The Corporation maintains a $500 million unsecured revolving credit facility,
which includes a $125 million letter of credit subfacility, with a syndicate of
banks under a credit agreement. The revolving credit facility expires in 2002
with no required amortization prior to maturity. As of December 31, 1997,
outstanding revolving loans totaled $25 million, and letters of credit issued
and outstanding amounted to $84 million, leaving the Corporation with $391
million of 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, 1997, the applicable spread was 0.4%. The average
rate of interest on the revolving loans was 6.1% and 6.3% during the years ended
December 31, 1997 and 1996, respectively. See "Note 5. 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 credit
agreement contains restrictions on the operation of the Corporation's business,
including covenants pertaining to liens, sale and leaseback transactions, and
mergers and acquisitions of businesses not related to the building industry.
On June 2, 1997, the Corporation executed through CGC Inc. a $77 million (U.S.)
($110 million Canadian), parent-guaranteed, Canadian credit facility due 2002.
This facility was later amended to increase the credit line by $14 million
(U.S.) ($20 million Canadian) for one year. As of December 31, 1997, outstanding
loans totaled $72 million (U.S.), leaving $19 million (U.S.) of available credit
under this facility. The method of calculating interest and the covenants
related to this facility are virtually the same as those for the U.S. facility
described above. The average rate of interest on the Canadian loans was 4.6%
during the period of June 2, 1997, through December 31, 1997. The average rate
of interest on a different Canadian credit facility that was in effect during
the period of January 1, 1997, through its termination on June 4, 1997, was
6.2%.
The Corporation also maintains a parent-guaranteed, multicurrency ($20 million
U.S. equivalent), European line of credit. As of December 31, 1997, there were
no outstanding loans under this facility.
The industrial revenue bonds had interest rates ranging from 3.7% to 8.8%, with
maturities through 2032. All debt classified as "other debt" had average
interest rates of 4.5% and 4.6% as of December 31, 1997 and 1996, respectively,
with varying payments due through 2006.
There were no short-term borrowings outstanding as of December 31, 1997.
Short-term borrowings outstanding as of December 31, 1996, totaled $7 million,
and the weighted average interest rate on these borrowings as of that date was
4.2%.
The fair market value of total debt outstanding was $646 million and $788
million as of December 31, 1997 and 1996, respectively, based on indicative bond
prices as of those dates.
As of December 31, 1997, aggregate scheduled maturities of long-term debt were
$10 million for each year 1998 through 2000, $160 million in 2001 and $107
million in 2002.
5. Financial Instruments and Risk Management
The following table presents the carrying amounts and estimated fair value of
the Corporation's derivative portfolio as of December 31:
(millions) 1997 1996
- --------------------------------------------------
Interest Rate Contracts:
Notional amount $ 105 $ 171
Carrying amount - -
Fair value (10) (10)
Energy Swaps:
Notional amount 30 39
Carrying amount - -
Fair value - 4
Foreign Exchange Contracts:
Notional amount 22 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, 1997 and 1996, 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. 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. As of December 31, 1997, the Corporation had a
swap agreement in place to pay 7.2% in exchange for LIBOR on $25 million
notional principal for the years 1998 through 2000. 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.
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 had swap 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. Also,
as of December 31, 1996, the Corporation had interest rate swap agreements to
hedge $80 million of its Receivables Facility.
Energy Risk Management. As of December 31, 1997 and 1996, the Corporation had
over-the-counter swap agreements to exchange monthly payments on notional
amounts of energy amounting to $30 million and $39 million, respectively, all
extending one year or less.
Foreign Exchange Risk Management. As of December 31, 1997, the Corporation had a
number of foreign currency forward contracts in place (primarily Canadian
dollars and Belgian francs) to hedge its exposure to exchange rate fluctuations
on foreign currency transactions. These foreign exchange contracts mature on the
anticipated cash requirement date of the hedged transaction, generally, within
one year. 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 matured
in January 1997. The deferred gain on this foreign exchange hedge was not
significant as of December 31, 1996.
6. 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 that was replaced in 1997 by a long-term Canadian credit facility due
2002. As a result of the transaction, CGC recorded goodwill of $41 million
(U.S.), which is included in other assets on the Consolidated Balance Sheet and
is being amortized over 40 years.
7. 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 expense, net in the
Consolidated Statement of Earnings.
8. Income Taxes
Earnings before income taxes consisted of the following:
(millions) 1997 1996 1995
- ----------------------------------------------------
U.S. $ 301 $ 138 $ 73
Foreign 19 (6) (8)
- -----------------------------------------------------
Total 320 132 65
=====================================================
Income taxes consisted of the following:
(millions) 1997 1996 1995
- ----------------------------------------------------
Current:
Federal $ 147 $ 90 $ 67
Foreign 10 5 10
State 26 17 15
- ----------------------------------------------------
183 112 92
- ----------------------------------------------------
Deferred:
Federal (12) 3 7
Foreign 2 1 (2)
State (1) 1 -
- ----------------------------------------------------
(11) 5 5
- ----------------------------------------------------
Total 172 117 97
====================================================
Differences between actual provisions for income taxes and provisions for income
taxes at the U.S. federal statutory rate (35%) were as follows:
(millions) 1997 1996 1995
- --------------------------------------------------------
Taxes on income at
federal statutory rate $ 112 $ 46 $ 23
Excess reorganization
value amortization 44 59 64
Foreign earnings subject
to different tax rates 2 2 2
State income tax, net of
federal benefit 16 12 10
Percentage depletion (3) (3) (3)
Other, net 1 1 1
- --------------------------------------------------------
Provision for income
taxes 172 117 97
========================================================
Effective income tax rate 53.9% 88.9% 149.0%
========================================================
Significant components of deferred tax (assets) liabilities as of December 31
were as follows:
(millions) 1997 1996
- ----------------------------------------------------
Property, plant and equipment $ 155 $ 171
Debt discount - 7
- ----------------------------------------------------
Deferred tax liabilities 155 178
- ----------------------------------------------------
Pension and postretirement benefits (78) (97)
Reserves not deductible until paid (126) (106)
Other 2 1
- ----------------------------------------------------
Deferred tax assets before
valuation allowance (202) (202)
Valuation allowance - 90
- ----------------------------------------------------
Deferred tax assets (202) (112)
- -----------------------------------------------------
Net deferred tax (assets) liabilities (47) 66
=====================================================
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 in the third quarter of 1997.
The Corporation used a net operating loss carryforward of $100 million to offset
U.S. taxable income in 1994 through 1996. Because of the uncertainty regarding
the application of the Internal Revenue Code to this carryforward as a result of
the Corporation's financial restructuring in 1993, the carryforward 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 $144 million as of December 31, 1997. These earnings would
become taxable in the United States upon the sale or liquidation of these
foreign subsidiaries or upon the remittance of dividends. It is not practicable
to estimate the amount of the deferred tax liability on such earnings.
9. Inventories
As of December 31, 1997 and 1996, the LIFO values of domestic inventories
were $153 million and $141 million, respectively, and would have been higher by
$4 million and $7 million, respectively, if they were valued under the FIFO and
average production cost methods. The LIFO value of U.S. domestic inventories
exceeded that computed for U.S. federal income tax purposes by $30 million as of
December 31, 1997 and 1996. Inventory classifications as of December 31 were as
follows:
(millions) 1997 1996
- --------------------------------------------------------
Finished goods and work in progress $ 132 $ 118
Raw materials 65 58
Supplies 11 9
- --------------------------------------------------------
Total 208 185
========================================================
10. Property, Plant and Equipment
Property, plant and equipment classifications as of
December 31 were as follows:
(millions) 1997 1996
- -------------------------------------------------------
Land and mineral deposits $ 61 $ 58
Buildings and realty improvements 262 248
Machinery and equipment 895 758
- -------------------------------------------------------
1,218 1,064
Reserves for depreciation and
depletion (236) (177)
- -------------------------------------------------------
Total 982 887
=======================================================
11. 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 $51 million, $46
million and $41 million in the years ended December 31, 1997, 1996 and 1995,
respectively. Future minimum lease payments required under operating leases with
initial or remaining noncancelable terms in excess of one year as of December
31, 1997, were $36 million in 1998, $31 million in 1999, $26 million in 2000,
$20 million in 2001 and $18 million in 2002. The aggregate obligation subsequent
to 2002 was $19 million.
12. 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 fundings of $25 million and
$13 million in 1997 and 1996, respectively, to one of its plans. Pension plan
assets consist primarily of publicly traded common stocks and debt securities.
Net pension expense included the following components:
(millions) 1997 1996 1995
- ---------------------------------------------------------------
Service cost-benefits
earned during the period $ 12 $ 12 $ 9
Interest cost on projected
benefit obligation 36 35 35
Actual return on plan assets (96) (62) (72)
Net amortization 57 27 38
- --------------------------------------------------------------
Net pension expense 9 12 10
==============================================================
The following table presents a reconciliation of the funded status of the
pension plans as of December 31:
(millions) 1997 1996
- -----------------------------------------------------------------
Amount of assets available for benefits:
Funded assets of the plans at fair
market value $ 554 $ 464
Accrued pension expense 13 26
- ------------------------------------------------------------------
Total assets of the plans 567 490
- ------------------------------------------------------------------
Present value of estimated pension
obligation:
Vested benefits 369 349
Nonvested benefits 33 32
- ------------------------------------------------------------------
Accumulated benefit obligation 402 381
Additional benefits based on
projected future salary increases 126 111
- ------------------------------------------------------------------
Projected benefit obligation 528 492
- ------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 39 (2)
==================================================================
The expected long-term rate of return on plan assets was 9% for the years ended
December 31, 1997 and 1996. The assumed weighted average discount rate used in
determining the accumulated benefit obligation was 7.25% and 7.5% as of December
31, 1997 and 1996, 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:
(millions) 1997 1996 1995
- --------------------------------------------------------
Service cost of benefits
earned $ 6 $ 6 $ 4
Interest on accumulated
postretirement benefit
obligation 15 16 13
Net amortization (deferral) - - (1)
- --------------------------------------------------------
Net periodic postretirement
benefit cost 21 22 16
========================================================
The status of the Corporation's accrued postretirement benefit obligation
recognized on the Consolidated Balance Sheet as of December 31 was as follows:
(millions) 1997 1996
- -----------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $ 123 $ 119
Fully eligible active participants 14 17
Other active participants 82 86
- -----------------------------------------------------------
219 222
Unrecognized net gain (loss) 9 (7)
- -----------------------------------------------------------
Accrued postretirement benefit
obligation 228 215
===========================================================
The assumed health-care-cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8% as of December 31, 1997, and 9% as of
December 31, 1996, 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 $31 million and $33 million as of December
31, 1997 and 1996, respectively, and would increase the net periodic
postretirement benefit cost by $3 million and $4 million for the years ended
December 31, 1997 and 1996, respectively. The assumed discount rate used in
determining the accumulated postretirement benefit obligation was 7.25% and 7.5%
as of December 31, 1997 and 1996, respectively.
13. Stock-Based Compensation
The Corporation has issued stock options from three successive plans under its
long-term equity program. Under each of the plans, options were granted at an
exercise price equal to the market value on the date of grant. All options
granted under the plans have 10-year terms and vesting schedules ranging from
two to three years. The options 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 Corporation accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 and discloses such compensation under
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
The fair value of each option grant was estimated as of the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for options granted in 1997 and 1996; no options were granted in
1995:
1997 1996
- ---------------------------------------------------
Expected lives (years) 7.4 7.4
Risk-free interest rate 6.8% 5.9%
Expected volatility 29.6% 33.0%
Dividend yield - -
- ---------------------------------------------------
The weighted average fair value of options granted during the years ended
December 31, 1997 and 1996, was $15.61 and $14.17, respectively.
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 1997 and 1996 would have changed
to the following pro forma amounts:
(millions, except per share amounts) 1997 1996
- -----------------------------------------------------
Net earnings: As reported $ 148 $ 15
Pro forma 144 13
Basic EPS: As reported 3.19 0.32
Pro forma 3.12 0.29
Diluted EPS: As reported 3.03 0.31
Pro forma 2.96 0.28
- -----------------------------------------------------
Stock option activity was as follows:
(options in thousands) 1997 1996 1995
- ------------------------------------------------------------
Options:
Outstanding, January 1 2,565 2,560 2,765
Granted 378 359 -
Exercised (882) (343) (173)
Canceled (12) (11) (32)
- -------------------------------------------------------------
Outstanding, December 31 2,049 2,565 2,560
Exercisable, December 31 1,339 1,889 1,369
Available for grant, December 31 1,671 467 929
Weighted average exercise price:
Outstanding, January 1 $ 21.71 $ 19.19 $ 18.78
Granted 34.60 29.40 -
Exercised 18.20 10.75 10.88
Canceled 32.00 28.29 28.33
Outstanding, December 31 25.54 21.71 19.19
Exercisable, December 31 22.06 18.82 16.31
- ------------------------------------------------------------
The following table summarizes information about stock options outstanding as of
December 31, 1997:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Options Exercise Contractual Options Exercise
Prices (000) Price Life (yrs.) (000) Price
-----------------------------------------------------------
$ 5 - 15 545 $ 10 5.4 545 $ 10
15 - 25 181 22 6.6 181 22
25 - 35 1,323 32 7.4 613 33
- ------------------------------------------------------------
Total 2,049 1,339
============================================================
14. Stockholders' Equity
Changes in stockholders' equity as of December 31 are
summarized as follows:
(millions) 1997 1996 1995
- -----------------------------------------------------
Common Stock:
Beginning balance $ 5 $ 5 $ 5
Ending balance 5 5 5
- ----------------------------------------------------
Capital Received in Excess
of Par Value:
Beginning balance 231 223 221
Issuances of common stock 18 4 2
Other, net 9 4 -
- ----------------------------------------------------
Ending balance 258 231 223
- ----------------------------------------------------
Deferred Currency
Translation:
Beginning balance (10) (6) (13)
Change during the
period (15) (4) 7
- -----------------------------------------------------
Ending balance (25) (10) (6)
- -----------------------------------------------------
Reinvested Earnings (Deficit):
Beginning balance (249) (259) (221)
Net earnings (loss) 148 15 (32)
Other, net 10 (5) (6)
- -----------------------------------------------------
Ending balance (91) (249) (259)
- -----------------------------------------------------
Total stockholders' equity
(deficit) 147 (23) (37)
=====================================================
There were 48,919 and 31,488 shares of $0.10 par value common stock held in
treasury as of December 31, 1997 and 1996, respectively. These shares were
acquired through the forfeiture of restricted stock and the surrender of shares
in settlement of tax withholding obligations.
Warrants. As of December 31, 1997 and 1996, outstanding warrants amounted to
2,489,898 and 2,591,091, respectively. The warrants are exercisable, subject to
applicable securities laws, at any time prior to May 6, 1998, at which time they
expire. Each share of common stock issued upon exercise of a warrant prior to
the distribution date (as defined in the Rights Agreement described below) 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 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.
15. 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.
Corporate identifiable assets include the assets of USG Funding, which represent
the outstanding balances of receivables purchased from U.S. Gypsum and USG
Interiors, net of reserves. As of December 31, 1997, 1996 and 1995, such
receivables, net of reserves, amounted to $128 million, $121 million and $110
million, respectively, including $95 million, $89 million and $78 million
purchased from U.S. Gypsum and $33 million, $32 million and $32 million
purchased from USG Interiors as of the respective dates.
USG CORPORATION
Industry Segments
North
American Worldwide
(millions) Gypsum Ceilings Corporate Eliminations Total
- ------------------------------------------------------------------------------------------------------------
1997
- ----
Net sales................................... $ 2,338 $ 634 $ - $ (98) $ 2,874
Amortization of excess reorganization value. 62 65 - - 127
Operating profit (loss)..................... 429 (1) (49) - 379
Depreciation, depletion and amortization.... 48 17 5 - 70
Capital expenditures........................ 126 45 1 - 172
Identifiable assets......................... 1,247 398 289 (8) 1,926
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......................... 1,161 478 230 (5) 1,864
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......................... 1,157 531 243 (4) 1,927
Geographic Segments
Transfers
Between
United Other Geographic
(millions) States Canada Foreign Areas Total
- --------------------------------------------------------------------------------------------------------------
1997
- ----
Net sales................................... $ 2,570 $ 184 $ 251 $ (131) $ 2,874
Amortization of excess reorganization value. 101 14 12 - 127
Operating profit............................ 356 9 14 - 379
Depreciation, depletion and amortization.... 57 8 5 - 70
Capital expenditures........................ 136 30 6 - 172
Identifiable assets......................... 1,610 178 138 - 1,926
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......................... 1,518 177 169 - 1,864
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......................... 1,594 146 187 - 1,927
16. Litigation
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 1930s; 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").
Property Damage Cases. U.S. Gypsum is a defendant in 16 Property Damage Cases,
many of which involve multiple buildings. One of the cases is a conditionally
certified class action comprised of all colleges and universities in the United
States, which certification is presently limited to the resolution of certain
allegedly "common" liability issues (Central Wesleyan College v. W.R. Grace &
Co., et al., U.S.D.C. S.C.). Another class action, brought on behalf of various
public entities in the state of Texas, was settled in August 1997. The
settlement amount will be paid over the next 12 months and will be partially
funded by insurance. Sixteen additional property damage claims have been
threatened against U.S. Gypsum.
Results to Date: In total, U.S. Gypsum has settled approximately 110 Property
Damage Cases involving 240 plaintiffs, in addition to four class action
settlements. Twenty-four cases have been tried to verdict, 16 of which were won
by U.S. Gypsum and five lost; three other cases, one won at the trial level and
two 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 two were settled
during the appellate process.
In 1997, one Property Damage Case was filed against U.S. Gypsum, three cases
were dismissed before trial, six were settled, one closed case was reopened, and
16 were pending at year end. U.S. Gypsum expended $7.8 million for the defense
and resolution of Property Damage Cases and received insurance payments of $15.5
million in 1997. During 1996, two Property Damage Cases were filed against U.S.
Gypsum, three cases were dismissed before trial, eight 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 in 1996 and received insurance payments of
$84 million. In 1995, three Property Damage Cases were filed against U.S.
Gypsum, seven cases were dismissed before trial, three were settled, two 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. A substantial portion of
the insurance payments received during the years 1995 through 1997 constituted
reimbursement for amounts expended in connection with Property Damage Cases in
prior years.
U. S. Gypsum's estimated cost of resolving pending Property Damage Cases is
discussed below. (See "Estimated Cost.")
Personal Injury Cases. U.S. Gypsum is also a defendant in approximately 67,000
Personal Injury Cases pending at December 31, 1997, as well as an additional
approximately 7,000 cases that have been settled but will be closed over time.
Filings of new Personal Injury Cases totaled 23,500 claims in 1997, compared
with 28,000 new claims in 1996 and 14,000 in 1995. 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 does not
anticipate that the average settlement cost for currently pending claims will
vary significantly from historical amounts, due largely to opportunities for
block settlements of large numbers of claims and the apparently high percentage
of asbestos personal injury claims that appear to have been brought by
individuals with little or no physical impairment. However, other factors,
including the possible insolvency of co-defendants, could have an adverse impact
on settlement costs.
U.S. Gypsum is a member, together with 19 other former producers of
asbestos-containing products, of the Center for Claims Resolution (the
"Center"), which has assumed the handling of all Personal Injury Cases pending
against U.S. Gypsum and the other members of the Center. Costs of defense and
settlement are shared among the members of the Center pursuant to predetermined
sharing formulae. 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; 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 and the Center were parties 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 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, Case No. 96-270). Since the invalidation of
the Georgine settlement, U.S. Gypsum and the other Center members have been
named in a substantial number of additional Personal Injury Cases. The
defendants in Georgine, including U.S. Gypsum, have stated their intention to
pursue another claims-handling vehicle that would serve as an alternative to the
tort system, although there can be no assurance that such an alternative can be
found and implemented.
During 1997, approximately 23,500 Personal Injury Cases were filed against U.S.
Gypsum, approximately 5,000 claims were refiled or amended to add U.S. Gypsum as
a defendant, and approximately 14,000 were settled or dismissed. U.S. Gypsum
incurred expenses of $31.6 million in 1997 with respect to Personal Injury
Cases, of which $27.2 million is being 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.) 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. As of December 31, 1997,
1996 and 1995, approximately 74,000, 59,600 and 50,000 Personal Injury Cases,
respectively, were pending against U.S. Gypsum.
U. S. Gypsum's estimated cost of resolving the pending Personal Injury Cases is
discussed below. (See "Estimated Cost.")
Insurance Coverage Action. U.S. Gypsum sued its insurance carriers in 1983 to
obtain coverage for asbestos cases (the "Coverage Action") and has settled all
disputes with 12 of its 17 solvent carriers. As of December 31, 1997, after
deducting insolvent coverage and insurance paid out to date, approximately $325
million of potential insurance remained, including approximately $140 million of
insurance from five carriers that have agreed, subject to certain limitations
and conditions, to cover both property damage and personal injury costs; $140
million from two carriers that have agreed, subject to certain limitations and
conditions, to cover personal injury but not yet property damage; and
approximately $45 million from three carriers that have not yet agreed to cover
either. 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.
During 1995 and 1996, following an Illinois Appellate Court ruling awarding U.S.
Gypsum coverage for Property Damage Cases, several carriers paid U.S. Gypsum
approximately $133 million as reimbursement for past property damage costs.
These amounts were added to U.S. Gypsum's reserve for asbestos costs (discussed
below).
Aggregate insurance payments exceeded U.S. Gypsum's total expenditures for all
asbestos-related matters, including property damage, personal injury, insurance
coverage litigation and related expenses, by $2.3 million for 1997, $41 million
in 1996 and $10 million in 1995, due primarily to nonrecurring reimbursement for
amounts expended in prior years.
Insolvent Carriers: Four of U.S. Gypsum's domestic insurance carriers, as well
as underwriters of portions of various policies issued by Lloyds and other
London market companies, providing a total of approximately $106 million of
coverage, are insolvent. Because these policies would already have been consumed
by U.S. Gypsum's asbestos 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.
Estimated Cost. The asbestos litigation involves numerous uncertainties that
affect U.S. Gypsum's ability to estimate reliably its probable liability in the
Personal Injury and Property Damage Cases. In the Property Damage Cases, such
uncertainties include the identification and volume of asbestos-containing
products in the buildings at issue in each case, which is often disputed; the
claimed damages associated therewith; the viability of statute of limitations,
product identification and other defenses, which varies depending upon the facts
and jurisdiction of each case; the amount for which such cases can be resolved,
which has normally (but not uniformly) been substantially lower than the claimed
damages; and the viability of claims for punitive and other forms of multiple
damages. Uncertainties in the Personal Injury Cases include the number,
characteristics and venue of Personal Injury Cases that are filed against U.S.
Gypsum; the Center's ability to continue to negotiate pretrial settlements at
historical or acceptable levels; the level of physical impairment of claimants;
the viability of claims for punitive damages; and the Center's ability to
develop an alternate claims-handling vehicle that retains the key benefits of
Georgine. As a result, any estimate of U.S. Gypsum's liability, while based upon
the best information currently available, may not be an accurate prediction of
actual costs and is subject to revision as additional information becomes
available and developments occur.
Currently Pending Cases: Subject to the above uncertainties and based in part on
information provided by the Center, U.S. Gypsum estimates that it is probable
that currently pending Property Damage and Personal Injury Cases can be resolved
for an amount totaling between $200 million and $265 million, including defense
costs. These amounts are expected to be expended over the next three to five
years. Significant insurance funding is available for these costs, as detailed
below.
Future Cases: U.S. Gypsum is unable to reasonably estimate the cost of resolving
Property Damage Cases and Personal Injury Cases that will be filed in the
future. The company anticipates that few additional Property Damage Cases will
be filed, as a result of the operation of statutes of limitations and the impact
of certain other factors, although it is possible that any cases that are filed
may seek substantial damages. It is anticipated that Personal Injury Cases will
continue to be filed in substantial numbers for the foreseeable future, although
the percentage of such cases filed by claimants with little or no physical
impairment is expected to remain high. However, the company does not believe
that the number and severity of future cases can be predicted with sufficient
accuracy to provide the basis for a reasonable estimate of the liability that
will be associated with such cases.
Accounting for Asbestos Liability: As of December 31, 1997, U.S. Gypsum had
reserved $200 million for liability from pending Property Damage and Personal
Injury Cases (equaling the lower end of the estimated range of costs provided
above). U.S. Gypsum had a corresponding receivable from insurance carriers of
approximately $160 million, the estimated portion of the reserved amount that is
expected to be paid or reimbursed by committed insurance. Additional amounts may
be reimbursed by insurance depending upon the outcome of litigation and
negotiations relating to insurance that is presently disputed.
U.S. Gypsum had an additional reserve of $110 million as of December 31, 1997,
that was available for future asbestos liabilities and asbestos-related
expenses. The company continues to accrue $18 million per year for asbestos
costs, and will periodically compare its estimates of liability to then-existing
reserves and available insurance assets and adjust its reserves as appropriate.
It is possible that U.S. Gypsum will determine in the future that additional
charges to results of operations are necessary, although whether additional
charges will be required and, if so, the timing and amount of such charges,
cannot presently be predicted.
Conclusion. The above estimates and reserves will be re-evaluated periodically
as additional information becomes available. It is possible that additional
charges to earnings may be necessary in the future if the amounts reflected
above prove insufficient in light of future events, and that any such charge
could be material to results of operations in the period in which it is taken.
However, it is management's opinion, taking into account all of the above
information and uncertainties, including currently available information
concerning U.S. Gypsum's liabilities, reserves and probable insurance coverage,
that the asbestos litigation will not have a material adverse effect on the
liquidity or 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.
William C. Foote
Chairman and Chief Executive Officer
Richard H. Fleming
Senior Vice President and Chief Financial Officer
Raymond T. Belz
Vice President and Controller
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, 1997 and 1996, and the related
consolidated statements of earnings and cash flows for the years ended December
31, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1997, 1996 and
1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 22 , 1998
USG CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (unaudited)
(millions, except per share data)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
1997
----
Net sales................. $ 673 $ 723 $ 757 $ 721 $ 2,874
Gross profit.............. 177 202 210 198 787
Operating profit (a)...... 69 88 97 125 379
Net earnings (a).......... 15 27 34 72 148
Per common share:
Net earnings (b) - basic 0.33 0.57 0.74 1.53 3.19
- diluted 0.32 0.55 0.70 1.45 3.03
Price range (c) - high 38.750 38.625 48.000 51.500 51.500
- low 30.000 29.875 35.750 41.375 29.875
EBITDA.................... 127 147 156 142 572
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)- basic (0.32) 0.09 0.27 0.28 0.32
- diluted (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
(a) The noncash amortization of excess reorganization value, which had no tax
impact, reduced operating profit and net earnings by approximately $42
million in each quarter during 1996 and in the first, second and third
quarters of 1997. Excess reorganization value, which was established in
connection with a financial restructuring in 1993, was scheduled to be
amortized through April 1998. However, in the third quarter of 1997, the
remaining balance of $83 million was offset by the elimination of a
valuation allowance.
(b) Basic earnings per common share were calculated using average shares
outstanding during the period. Diluted earnings per common share were
calculated using average shares and common stock equivalents outstanding
during the period. Consequently, the sum of the four quarters is not
necessarily additive to 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, 1998: Common - 4,704; Preferred -
none.
USG CORPORATION
FIVE-YEAR SUMMARY (a) (unaudited)
(dollars in millions, except per share data)
May 7 January 1
Years ended December 31, through through
------------------------ December 31 May 6,
1997 1996 1995 1994 1993 1993
---- ---- ---- ---- ---- ----
Earnings Statement Data:
Net sales........................................ $ 2,874 $ 2,590 $ 2,444 $ 2,290 $ 1,325 $ 591
Gross profit..................................... 787 645 603 517 263 109
Selling and administrative expenses.............. 281 268 244 244 149 71
Amortization of excess reorganization value...... 127 169 169 169 113 -
Operating profit................................. 379 208 190 104 1 38
Interest expense................................. 60 75 99 149 92 86
Interest income.................................. (3) (2) (6) (10) (4) (2)
Other expense (income), net...................... 2 3 32 3 (8) 6
Reorganization items............................. - - - - - (709)
Earnings (loss) before extraordinary items
and changes in accounting principles.......... 148 15 (32) (92) (108) 640
Extraordinary gain (loss), net of taxes.......... - - - - (21) 944
Cumulative effect of accounting changes.......... - - - - - (150)
Net earnings (loss).............................. 148 15 (32) (92) (129) 1,434
Net earnings (loss) per common share (b):
Basic......................................... 3.19 0.32 (0.71) (2.14) (3.46)
Diluted....................................... 3.03 0.31 (0.71) (2.14) (3.46)
Balance Sheet Data (as of the end of the period):
Working capital ................................. 264 159 167 311 185 271
Current ratio.................................... 1.70 1.41 1.46 1.83 1.41 2.02
Property, plant and equipment, net............... 982 887 842 755 754 767
Total assets..................................... 1,926 1,864 1,927 2,173 2,195 2,234
Total debt (c)................................... 620 772 926 1,149 1,531 1,556
Total stockholders' equity (deficit)............. 147 (23) (37) (8) (134) 4
Other Information:
EBITDA........................................... 572 437 417 325 155 63
Capital expenditures............................. 172 120 147 64 29 12
Gross margin %................................... 27.4 24.9 24.7 22.6 19.8 18.4
EBITDA margin %.................................. 19.9 16.9 17.1 14.2 11.7 10.7
Market value per common share (b)................ 49.00 38.88 30.00 19.50 29.25
Average number of employees...................... 13,000 12,500 12,400 12,300 11,900 11,750
(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, was
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 were $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.