FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-8864
USG CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3329400
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
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As of March 31, 1998, 47,395,284 shares of USG common stock were outstanding.
Table of Contents
Page
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PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months Ended March 31, 1998 and 1997 3
Consolidated Balance Sheet:
As of March 31, 1998 and December 31, 1997 4
Consolidated Statement of Cash Flows:
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Report of Independent Public Accountants 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 24
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(dollars in millions except per share data)
(Unaudited)
Three Months
Ended March 31,
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1998 1997
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Net sales $ 735 $ 673
Cost of products sold 539 496
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Gross profit 196 177
Selling and administrative expenses 72 66
Amortization of excess reorganization value - 42
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Operating profit 124 69
Interest expense 13 17
Interest income (1) -
Other expense, net 2 -
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Earnings before income taxes 110 52
Income taxes 43 37
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Net earnings 67 15
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Basic earnings per common share 1.42 0.33
Diluted earnings per common share 1.35 0.32
Dividends paid per common share - -
Average number of common shares 47,125,604 45,946,213
Average diluted number of common shares 49,717,163 48,216,915
See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(dollars in millions)
(Unaudited)
As of As of
March 31, December 31,
1998 1997
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Assets
Current Assets:
Cash and cash equivalents $ 66 $ 72
Receivables (net of reserves - $18 and $17) 339 297
Inventories 217 208
Current and deferred income taxes 29 63
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Total current assets 651 640
Property, plant and equipment (net of reserves
for depreciation and depletion - $249 and $236) 1,021 982
Other assets 301 304
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Total Assets 1,973 1,926
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 163 146
Accrued expenses 186 220
Debt maturing within one year 16 10
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Total current liabilities 365 376
Long-term debt 597 610
Deferred income taxes 161 163
Other liabilities 627 630
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Capital received in excess of par value 270 258
Deferred currency translation (28) (25)
Reinvested earnings (deficit) (24) (91)
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Total stockholders' equity 223 147
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Total Liabilities and Stockholders' Equity 1,973 1,926
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See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in millions)
(Unaudited)
Three Months
Ended March 31,
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1998 1997
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Operating Activities:
Net earnings $ 67 $ 15
Adjustments to reconcile net earnings to net cash:
Amortization of excess reorganization value - 42
Depreciation, depletion and other amortization 20 17
Current and deferred income taxes 32 23
(Increase) decrease in working capital:
Receivables (42) (27)
Inventories (9) (9)
Payables 17 7
Accrued expenses (34) (35)
(Increase) decrease in other assets 3 (7)
Increase (decrease) in other liabilities (3) 20
Other, net (3) (4)
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Net cash from operating activities 48 42
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Investing Activities:
Capital expenditures (58) (24)
Net proceeds from asset dispositions 1 -
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Net cash to investing activities (57) (24)
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Financing Activities:
Issuance of debt 48 41
Repayment of debt (67) (61)
Short-term borrowings, net 12 -
Issuances of common stock 10 3
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Net cash from (to) financing activities 3 (17)
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Net increase (decrease) in cash & cash equivalents (6) 1
Cash & cash equivalents at beginning of period 72 44
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Cash & cash equivalents at end of period 66 45
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Supplemental Cash Flow Disclosures:
Interest paid 22 26
Income taxes paid 10 16
See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(1) The consolidated financial statements of USG Corporation and its
subsidiaries ("USG" or the "Corporation") included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. In the opinion of management,
the statements reflect all adjustments, which are of a normal recurring nature,
necessary to present fairly the Corporation's financial position as of March 31,
1998, and December 31, 1997, and results of operations and cash flows for the
three months ended March 31, 1998 and 1997. Certain amounts in the prior years'
financial statements have been reclassified to conform with the 1998
presentation. While these interim financial statements and accompanying notes
are unaudited, they have been reviewed by Arthur Andersen LLP, the Corporation's
independent public accountants. These financial statements and notes are to be
read in conjunction with the financial statements and notes included in the
Corporation's 1997 Annual Report on Form 10-K dated February 20, 1998.
(2) Basic earnings per share were computed by dividing net earnings by the
weighted average number of common shares outstanding for the period. The
dilutive effect of the potential exercise of outstanding options and warrants to
purchase shares of common stock is calculated using the treasury stock method.
The reconciliation of basic earnings per share to diluted earnings per share is
shown in the following table (dollars in millions except share data).
Three Months Ended Net Shares Per Share
March 31, Earnings (000) Amount
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1998
Basic earnings $ 67 47,126 $ 1.42
Effect of Dilutive Securities:
Options 949
Warrants 1,642
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Diluted Earnings 67 49,717 1.35
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1997
Basic earnings 15 45,946 0.33
Effect of Dilutive Securities:
Options 870
Warrants 1,401
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Diluted Earnings 15 48,217 0.32
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(3) In the first quarter of 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Total
comprehensive income, consisting of net earnings and foreign currency
translation adjustments, amounted to $64 million and $6 million for the three
months ended March 31, 1998 and 1997, respectively. There was no tax impact on
the foreign currency translation adjustments.
(4) The Corporation uses derivative instruments to manage well-defined interest
rate, energy cost and foreign currency exposures. The Corporation does not use
derivative instruments for trading purposes. The criteria used to determine if
hedge accounting treatment is appropriate are: (i) the designation of the hedge
to an underlying exposure (ii) whether or not overall uncertainty is being
reduced and (iii) if there is a correlation between the value of the derivative
instrument and the underlying obligation.
Interest Rate Derivative Instruments:
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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 Cost Derivative Instruments:
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The Corporation uses swap agreements to hedge anticipated purchases of fuel to
be utilized in the manufacturing processes for gypsum wallboard and ceiling
tile. Under these swap agreements, the Corporation receives or makes payments
based on the differential between a specified price and the actual closing price
for the current month's energy price contract. These contracts are designated as
hedges and qualify for hedge accounting. Amounts payable or receivable under
these swap agreements are accrued as an increase or decrease to cost of products
sold, along with the actual spot energy cost of the corresponding underlying
hedge transaction, the combination of which amounts to the predetermined
specified contract price.
Foreign Currency Derivative Instruments:
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The Corporation has operations in a number of countries and has intercompany
transactions among them and, as a result, is exposed to changes in foreign
currency exchange rates. The Corporation manages most of these exposures on a
consolidated basis, which allows netting of certain exposures to take advantage
of any natural offsets. To the extent the net exposures are hedged, option and
forward contracts are used. The foreign currency options qualify for hedge
accounting, under which the option premium is amortized over the life of the
option. The forward contracts are marked to market on a current basis with gains
and/or losses included in net earnings in the period in which the exchange rates
change.
(5) Excess reorganization value, an intangible asset totaling $851 million, was
recorded in 1993 in connection with a comprehensive restructuring of the
Corporation's debt and the implementation of fresh start accounting as required
by AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7").
As of September 30, 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 SOP 90-7. See Note 6 below for additional
information.
(6) Income tax expense amounted to $43 million and $37 million in the three
months ended March 31, 1998 and 1997, respectively. The Corporation's income tax
expense for the first quarter of 1997 was computed based on pre-tax earnings
excluding the noncash amortization of excess reorganization value, which was not
deductible for income tax purposes.
In the third quarter of 1997, 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. The elimination of this allowance reflected a change in management's
judgment regarding the realizability of these assets in future years as a result
of the Corporation's pretax earnings levels and improved capital structure over
the past three years. In accordance with SOP 90-7, the benefit realized from the
elimination of this allowance was used to reduce the balance of excess
reorganization value to zero as of September 30, 1997.
(7) As of March 31, 1998, common shares totaling 2,212,900 were reserved for
future issuance in conjunction with existing stock option grants. In addition,
1,150,645 common shares were reserved for future grants.
(8) One of the Corporation's subsidiaries, United States Gypsum Company ("U.S.
Gypsum"), is a defendant in asbestos lawsuits alleging both property damage and
personal injury. See Part II, Item 1. "Legal Proceedings" for information
concerning the asbestos litigation.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its earnings or consolidated financial
position. See Part II, Item 1. "Legal Proceedings" for additional information on
environmental litigation.
(9) Under a revolving accounts receivable facility, the trade receivables of
U.S. Gypsum and USG Interiors, Inc. are being purchased by USG Funding
Corporation ("USG Funding") and transferred to a trust administered by Chase
Manhattan Bank as trustee. Certificates representing an ownership interest of up
to $130 million in the trust have been issued to an affiliate of Citicorp North
America, Inc. USG Funding, a special-purpose subsidiary of USG Corporation, is a
separate corporate entity with its own separate creditors that will be entitled
to be satisfied out of USG Funding's assets prior to any value in USG Funding
becoming available to its shareholder. Receivables and debt outstanding in
connection with the receivables facility remain in receivables and long-term
debt, respectively, on the Corporation's consolidated balance sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
USG Corporation Consolidated Results
Net Sales - First quarter 1998 net sales totaled $735 million, a record level
for any first quarter and a 9% increase compared with net sales of $673 million
in the first quarter of 1997. This increase was attributable to record first
quarter shipments of all major product lines and higher selling prices for
SHEETROCK brand gypsum wallboard.
Gross Profit Margin - Gross profit as a percentage of net sales was 26.7% in the
first quarter of 1998, up slightly from 26.3% in the prior-year period.
Selling and Administrative Expenses - First quarter 1998 selling and
administrative expenses of $72 million increased 9% versus expenses of $66
million in the first quarter of 1997. However, as a percentage of net sales,
these expenses were unchanged at 9.8%. Expense dollars were up in the 1998
period due primarily to information technology initiatives, USG's product
branding program and accruals for USG's performance-based restricted stock
program.
Amortization of Excess Reorganization Value - The noncash amortization of excess
reorganization value reduced operating profit by $42 million in the first
quarter of 1997. As explained in Notes 5 and 6 of this report, the remaining $83
million balance of excess reorganization value, which would have been amortized
through April 1998, was offset by the elimination of a valuation allowance as of
September 30, 1997.
Interest Expense - As a result of debt reduction during the past year, interest
expense in the first quarter of 1998 was $13 million, down 24% from the $17
million incurred in the first quarter of 1997.
Income Tax - Taxes on income amounted to $43 million and $37 million in the
first quarters of 1998 and 1997, respectively. The Corporation's 1997 income tax
expense was computed based on pretax earnings excluding the noncash amortization
of excess reorganization value, which was not deductible for income tax
purposes.
Net Earnings - First quarter 1998 net earnings were $67 million, or $1.35 per
diluted share. First quarter 1997 net earnings, which amounted to $15 million,
or $0.32 per diluted share, were net of the noncash amortization of excess
reorganization value of $42 million, or $0.88 per diluted share.
EBITDA - Earnings before interest, taxes, depreciation, depletion, amortization
and certain other income and expense items ("EBITDA") amounted to $142 million
in the first quarter of 1998, up 12% compared with $127 million for the first
quarter of 1997.
As a result of the amortization of excess reorganization value through September
30, 1997, USG continues to report EBITDA to facilitate comparisons of current
and historical results. EBITDA is also helpful in understanding cash flow
generated from operations that is available for taxes, debt service and capital
expenditures. EBITDA should not be considered by investors as an alternative to
net earnings as an indicator of the Corporation's operating performance or to
cash flows as a measure of its overall liquidity.
USG Corporation Core Business Results
(dollars in millions) Net Sales EBITDA
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Three Months Ended March 31, 1998 1997 1998 1997
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North American Gypsum:
U.S. Gypsum Company $ 408 $ 375 $ 117 $ 105
L&W Supply Corporation 244 221 6 6
CGC Inc. (gypsum) 37 31 7 5
Other subsidiaries 20 20 6 5
Eliminations (110) (100) - -
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Total 599 547 136 121
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Worldwide Ceilings:
USG Interiors, Inc. 107 98 14 13
USG International 57 55 3 3
CGC Inc. (ceilings) 10 8 1 1
Eliminations (14) (13) - -
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Total 160 148 18 17
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Corporate - - (12) (11)
Eliminations (24) (22) - -
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Total USG Corporation 735 673 142 127
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North American Gypsum
First quarter 1998 net sales of $599 million and EBITDA of $136 million
increased 10% and 12%, respectively, over first quarter 1997 levels.
United States Gypsum Company - U.S. Gypsum's net sales in the first quarter of
1998 were the highest ever for a first quarter. Shipments of SHEETROCK brand
gypsum wallboard totaled 2.137 billion square feet, the highest level for any
first quarter and a 4% increase over first quarter 1997 shipments of 2.050
billion square feet. Selling prices on SHEETROCK wallboard averaged $125.31 per
thousand square feet, up 4% from $120.31 for the first quarter of last year.
Manufacturing unit costs for SHEETROCK wallboard were virtually unchanged from
the prior-year period. First quarter 1998 capacity utilization at U.S. Gypsum's
wallboard plants increased to approximately 99% from 97% a year ago. First
quarter shipments of SHEETROCK brand joint compound and DUROCK brand cement
board were the highest for any quarter in the company's history.
L&W Supply Corporation - Net sales for USG's building products distribution
business were a record for any first quarter and were up 10% over the first
quarter of 1997. This performance reflects a new high for quarterly average
selling prices on wallboard and record first quarter sales of wallboard and
complementary building products. As of March 31, 1998, L&W Supply operated 179
locations in the United States after adding four greenfield locations and
consolidating two locations into one during the first quarter of 1998.
CGC Inc. - The gypsum business of CGC Inc., USG's wholly owned Canadian
subsidiary, reported increased sales and EBITDA in the first quarter of 1998.
CGC's performance reflects higher SHEETROCK wallboard volume and prices
resulting from the improving Canadian economy and a continued high level of
shipments to the eastern United States.
Worldwide Ceilings
First quarter 1998 net sales of $160 million increased 8% over the first quarter
of 1997. EBITDA was $18 million in the first quarter of 1998 compared with $17
million in the corresponding 1997 period.
Record first quarter shipments were realized for AURATONE brand ceiling tile,
CONSTELLATION brand ceiling tile and DONN brand ceiling grid. These records were
attributable to strong demand in the U.S. nonresidential construction market
(both new construction and renovation) and growing international demand.
International results reflect sales records in Europe and Latin America,
partially offset by a modest decline in Asia.
Construction Market Outlook
Based on leading indicators, such as new housing starts, existing home sales and
nonresidential construction activity, the outlook for 1998 continues to be
positive. Key drivers of demand for USG's products, such as consumer confidence,
employment rates and interest rates, all remain at favorable levels.
In the United States, we are currently forecasting 1998 housing starts to
approximate 1.450 million units, down slightly from the 1.474 million units
registered in 1997. Record 1997 sales of existing homes of more than 4 million
units will support residential repair and remodeling in 1998. This, combined
with strong nonresidential repair and remodeling, will continue to provide
growth in this market segment. New nonresidential construction in 1997, which
increased by 10% as measured in floor space for which contracts were awarded,
will support increased demand for this segment in 1998 as the finishing of an
interior follows contract awards by about a year or more.
Internationally, construction in Canada and Mexico should maintain their
recoveries. Demand continues to be strong in Eastern Europe and Latin America,
while conditions in Western Europe are showing signs of improvement. Prospects
for the Asian construction market are expected to weaken in 1998; however, this
market represents a relatively minor share of USG's total sales and earnings.
LIQUIDITY AND CAPITAL RESOURCES
Financial and Growth Strategies
At the time of the 1993 debt restructuring, USG implemented a five-year strategy
designed to improve its financial flexibility by reducing debt to a manageable
level and attaining an investment grade rating on its capital structure. The
goals of this strategy were recently achieved when the Corporation reached its
target debt level in October 1997, followed by Standard & Poor's rating increase
to BBB in December 1997 and Moody's rating increase to Baa3 in March 1998.
USG's current strategy focuses on earnings growth. The key drivers of this
strategy are USG's investments in cost-reduction and growth initiatives, which
are supported by the financial flexibility of an investment grade capital
structure. These initiatives involve replacing high-cost manufacturing capacity
with low-cost capacity; adding efficient new capacity to serve customers and
thereby increase market share; and expanding sales internationally through
exports and manufacturing overseas. USG anticipates that these initiatives also
will serve to reduce the impact of cyclicality on its earnings.
Capital Expenditures
Capital spending amounted to $58 million in the first three months of 1998,
compared with $24 million in the corresponding 1997 period. As of March 31,
1998, capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $468 million compared with $363 million as
of December 31, 1997.
North American Gypsum Projects - In April 1998, USG announced plans for a third
major wallboard capacity replacement project, a $112 million plant to be located
in Aliquippa, Pa. This new facility will provide 700 million square feet of
SHEETROCK brand gypsum wallboard capacity to replace existing high-cost capacity
in the region, improve service and accommodate anticipated strong growth in the
Northeast market. The Aliquippa plant will manufacture SHEETROCK wallboard using
100% synthetic gypsum and is expected to begin operation in early 2000. Ground
was broken in June 1997 for a new $110 million plant in Bridgeport, Ala. This
facility will also manufacture SHEETROCK brand wallboard using 100% synthetic
gypsum and is expected to begin operation in mid-1999. USG is also investing $90
million to rebuild and modernize its wallboard manufacturing line at the East
Chicago, Ind., plant. This new line is expected to begin production by the end
of 1999.
Construction is underway to build a $90 million facility to manufacture gypsum
wood fiber panels at the Gypsum, Ohio, wallboard plant. The new production line
is expected to begin operating by the end of 1999 and will complement the fourth
quarter 1997 acquisition of a gypsum fiber panel plant in Port Hawksbury, Nova
Scotia. USG's gypsum wood fiber products are marketed under the FIBEROCK brand
name.
Additional capital investments include cost-reduction projects, such as the
installation of stock cleaning equipment to utilize lower grades of recycled
paper and the additional installation of processes to accommodate the use of
synthetic gypsum at manufacturing facilities where it is more economical than
natural gypsum rock.
Worldwide Ceilings Projects - A $35 million project that included the
replacement of two old production lines with one modern, high-speed line at the
ceiling tile plant in Cloquet, Minn., was completed during the first quarter.
The start-up process of the new line is currently under way.
Working Capital
Working capital (current assets less current liabilities) as of March 31, 1998,
amounted to $286 million, and the ratio of current assets to current liabilities
was 1.8 to 1. As of December 31, 1997, working capital was $264 million, and the
ratio of current assets to current liabilities was 1.7 to 1.
Receivables increased to $339 million as of March 31, 1998, from $297 million as
of December 31, 1997, while inventories increased to $217 million from $208
million and accounts payable rose to $163 million from $146 million. These
variations reflect normal seasonal fluctuations.
Cash and cash equivalents as of March 31, 1998, amounted to $66 million, down
from $72 million as of December 31, 1997. This decrease reflects first quarter
1998 net cash flows from operating and financing activities of $48 million and
$3 million, respectively, and net cash flows to investing activities of $57
million.
Debt
As of March 31, 1998, total debt amounted to $613 million compared with $620
million as of December 31, 1997. During the first quarter, USG retired $67
million of 8.75% senior debentures, while increasing the borrowing on its U.S.
and Canadian revolving credit facilities by $40 million and $8 million,
respectively. Industrial revenue bonds and seasonal foreign borrowings increased
by a total of $12 million.
During the first quarter, USG issued $44 million of 5.65% fixed-rate industrial
revenue bonds due 2033 to investors, the proceeds of which were deposited into a
construction escrow account. These bonds, together with $45 million of
variable-rate industrial revenue bonds issued last year in a related offering,
will be used to finance the Gypsum, Ohio, gypsum wood fiber project. This debt
is being recorded incrementally on USG's books as funds are drawn from the
escrow accounts throughout the construction process.
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 March 31, 1998, outstanding revolving loans totaled $150
million and letters of credit issued and outstanding amounted to $80 million,
leaving the Corporation with $381 million of unused and available credit. The
Corporation had additional borrowing capacity of $50 million as of March 31,
1998, under a revolving accounts receivable facility. (See Note 9.) A shelf
registration statement filed with the Securities and Exchange Commission allows
the Corporation to offer from time to time debt securities, shares of preferred
and common stock or warrants to purchase shares of common stock, all having an
aggregate initial offering price not to exceed $300 million. As of the date of
this report, no securities had been issued pursuant to this registration.
On May 6, 1993, in connection with its debt restructuring, USG issued 2,602,566
warrants. Each warrant entitles the holder to purchase one share of USG common
stock at a price of $16.14 any time prior to May 6, 1998. Through March 31,
1998, 348,191 warrants had been exercised, generating cash proceeds to USG of
approximately $6 million. Assuming exercise of all remaining outstanding
warrants by the termination date, additional cash proceeds to USG in the second
quarter of 1998 would be approximately $36 million. The proceeds from the
exercises will be added to the cash resources of the Corporation to be used for
general corporate purposes.
Stockholder Rights Plan
On March 27, 1998, the Corporation approved the redemption of the preferred
share purchase rights declared under a 10-year rights agreement adopted in May
1993 and adopted a new share purchase rights plan that is designed to strengthen
the previous provisions assuring the fair and equal treatment for all
stockholders in the event of any unsolicited attempt to acquire the Corporation.
The new rights plan, which became effective on April 15, 1998, and will expire
on March 27, 2008, has four basic provisions. First, if an acquiror buys 15% or
more of USG's outstanding common stock, the plan allows other stockholders to
buy, with each right, additional USG shares at a 50% discount. Second, if USG is
acquired in a merger or other business combination transaction, rights holders
will be entitled to buy shares of the acquiring company at a 50% discount.
Third, if an acquiror buys between 15% and 50% of USG's outstanding common
stock, the company can exchange part or all of the rights of the other holders
for shares of the company's stock on a one-for-one basis, or shares of the new
junior preferred stock on a one-for-one-hundredth basis. Fourth, before an
acquiror buys 15% or more of USG's outstanding common stock, the rights are
redeemable for one cent per right at the option of the board of directors. This
provision permits the board to enter into an acquisition transaction that is
determined to be in the best interests of stockholders. The board is authorized
to reduce the 15% threshold to not less than 10%.
Legal Contingencies
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. See Part II, Item
1. "Legal Proceedings" for information concerning the asbestos litigation.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its earnings or consolidated financial
position. See Part II, Item 1. "Legal Proceedings" for additional information on
environmental litigation.
Year 2000
In 1997, USG developed a plan to modify 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. The Corporation intends to implement its year
2000 compliance plan within the next 12 months to allow sufficient time to test
its systems thoroughly before January 1, 2000.
Forward-Looking Statements
This report contains forward-looking statements related to management's
expectations about future conditions. Actual business or other conditions may
differ significantly from management's expectations and accordingly affect the
Corporation's sales and profitability or other results. Actual results may
differ due to factors over which the Corporation has no control, including
economic activity, such as new housing construction, interest rates, and
consumer confidence; competitive activity such as price and product competition;
increases in raw material and energy costs; and the outcome of contested
litigation. The Corporation assumes no obligation to update any forward-looking
information contained in this report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of March 31, 1998, and
the related condensed consolidated statement of earnings for the three-month
periods ended March 31, 1998 and 1997 and the condensed consolidated statement
of cash flows for the three months ended March 31, 1998 and 1997. These
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 22, 1998
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Asbestos and Related Insurance Litigation
One of the Corporation's subsidiaries, U.S. Gypsum, is among many defendants in
lawsuits arising out of the manufacture and sale of asbestos-containing
materials. U.S. Gypsum sold certain asbestos-containing products beginning in
the 1930s; in most cases, the products were discontinued or asbestos was removed
from the formula by 1972, and no asbestos-containing products were produced
after 1977. Some of these lawsuits seek to recover compensatory and in many
cases punitive damages for costs associated with the maintenance or removal and
replacement of asbestos-containing products in buildings (the "Property Damage
Cases"). Others seek compensatory and in many cases punitive damages for
personal injury allegedly resulting from exposure to asbestos-containing
products (the "Personal Injury Cases"). It is anticipated that additional
asbestos-related suits will be filed.
Summary - The following is a brief summary; see Note 16 to the financial
statements in the Corporation's 1997 Annual Report for additional information on
the asbestos litigation.
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 12 months and will be partially funded by insurance.
Fifteen additional property damage claims have been threatened against U.S.
Gypsum. During the years 1995-1997, 6 new Property Damage Cases were filed
against U.S. Gypsum while 32 were closed; the Company spent an average of $25
million per year on the defense and settlement of Property Damage Cases, but
received a total of $148 million over the three-year period from insurance
carriers, including reimbursement for expenditures in prior years.
U.S. Gypsum's estimated cost of resolving pending Property Damage Cases is
discussed below. (See "Estimated Cost.")
U.S. Gypsum is also a defendant in Personal Injury Cases brought by
approximately 85,000 claimants, as well as an additional 13,000 claims that have
been settled but will be closed over time. Filings of new Personal Injury Cases
totaled 23,500 claims in 1997, compared to 28,000 claims in 1996 and 14,000 in
1995. Filings of Personal Injury Cases have increased as a result of rulings by
a Federal appellate court and the U.S. Supreme Court rejecting the Georgine v.
Amchem class action settlement, in which U.S. Gypsum had participated as a
member of the Center for Claims Resolution, referred to below. U.S. Gypsum's
average cost to resolve Personal Injury Cases during the past three years has
been approximately $1,600 per claim. Over that period, U.S. Gypsum expended an
average of $30 million per year on Personal Injury Cases, of which an average of
$26 million was paid by insurance.
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's estimated cost of resolving pending Property Damage Cases is
discussed below. (See "Estimated Cost.")
U.S. Gypsum sued its insurance carriers in 1983 to obtain coverage for asbestos
cases (the "Coverage Action") and has settled all disputes with 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.
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.
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 pre-trial 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
the Georgine settlement. 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.
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 Property Damage and Personal Injury Cases pending on December 31, 1997, 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 reevaluated 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.
Item 6. Exhibits and Reports on Form 8-K
(a) (3) Articles of Incorporation and By-Laws:
(i) Certificate of Designations of Junior Participating
Preferred Stock, Series D, of USG Corporation
(incorporated by reference to Exhibit A of Exhibit 4
to USG Corporation's Form 8-K dated March 27, 1998).
(ii) Amended and Restated By-Laws of USG Corporation,
dated as of March 27, 1998.
(4) Rights Agreement, dated March 27, 1998, between USG
Corporation and Harris Trust and Savings Bank, as Rights Agent
(incorporated by reference to Exhibit 4 to USG Corporation's
Form 8-K dated March 27, 1998).
(15) Letter of Arthur Andersen LLP regarding unaudited financial
information.
(27) Financial Data Schedule.
(b) A report on Form 8-K was filed on March 27, 1998, relating to the
Rights Agreement, dated March 27,1998, between USG Corporation and
Harris Trust and Savings Bank, as Rights Agent.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By /s/ Dean H. Goossen
-----------------------------------
Dean H. Goossen, Corporate Secretary,
USG Corporation
By /s/ Raymond T. Belz
May 1, 1998 -----------------------------------
Raymond T. Belz, Vice President and
Controller, USG Corporation