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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001
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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, 2001, 43,409,119 shares of USG common stock were outstanding.
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TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings:
Three Months Ended March 31, 2001 and 2000 3
Consolidated Balance Sheets:
As of March 31, 2001 and December 31, 2000 4
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2001 and 2000 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 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
--------------------------
2001 2000
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Net sales $ 826 $ 989
Cost of products sold 726 721
Selling and administrative expenses 68 84
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Operating profit 32 184
Interest expense 14 12
Interest income (1) (2)
Other expense, net 1 1
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Earnings before income taxes 18 173
Income taxes 7 67
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Net earnings 11 106
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Basic earnings per common share 0.25 2.19
Diluted earnings per common share 0.25 2.18
Dividends paid per common share 0.025 0.15
Average common shares 43,406,202 48,137,789
Average diluted common shares 43,459,017 48,388,042
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
MARCH 31, DECEMBER 31,
2001 2000
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ASSETS
Current Assets:
Cash and cash equivalents $ 35 $ 70
Receivables (net of reserves - $18 and $18) 350 305
Inventories 267 271
Income taxes receivable 33 -
Deferred income taxes 168 194
Other current assets 75 36
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Total current assets 928 876
Property, plant and equipment (net of reserves
for depreciation and depletion - $489 and $470) 1,826 1,830
Deferred income taxes 189 257
Other assets 309 251
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Total Assets 3,252 3,214
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 193 200
Accrued expenses 260 280
Taxes on income - 19
Notes payable 8 6
Current portion of long-term debt 131 141
Current portion of asbestos reserve 275 250
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Total current liabilities 867 896
Long-term debt 647 564
Long-term asbestos reserve 855 935
Other liabilities 370 355
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (256) (256)
Capital received in excess of par value 411 411
Accumulated other comprehensive loss (6) (45)
Retained earnings 359 349
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Total stockholders' equity 513 464
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Total Liabilities and Stockholders' Equity 3,252 3,214
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See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
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2001 2000
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OPERATING ACTIVITIES:
Net earnings $ 11 $ 106
Adjustments to reconcile net earnings to net cash:
Depreciation, depletion and amortization 27 26
Deferred income taxes 63 (14)
Gain on asset dispositions - (1)
(Increase) decrease in working capital:
Receivables (78) (64)
Inventories 4 (8)
Payables (26) 49
Accrued expenses (25) (54)
Increase in other assets (10) (8)
Increase in other liabilities 6 8
Asbestos reserve, net of receivables (52) 16
Other, net (1) (3)
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Net cash (to) from operating activities (81) 53
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INVESTING ACTIVITIES:
Capital expenditures (29) (116)
Net proceeds from asset dispositions 1 2
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Net cash to investing activities (28) (114)
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FINANCING ACTIVITIES:
Issuance of debt 95 117
Repayment of debt (41) (105)
Short-term borrowings, net 21 -
Cash dividends paid (1) (7)
Purchases of common stock - (80)
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Net cash from (to) financing activities 74 (75)
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Net decrease in cash and cash equivalents (35) (136)
Cash and cash equivalents at beginning of period 70 197
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Cash and cash equivalents at end of period 35 61
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 20 20
Income taxes (refunded) paid, net (11) 46
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The consolidated financial statements of USG Corporation and its
subsidiaries ("USG" or "the Corporation") included herein have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States
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, 2001, and December 31, 2000, results of operations for the
three months ended March 31, 2001 and 2000 and cash flows for the three
months ended March 31, 2001 and 2000. Certain amounts in the prior year
financial statements have been reclassified to conform with the 2001
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 2000 Annual Report on Form 10-K dated
March 5, 2001.
(2) Total comprehensive income for the first quarter of 2001 amounted to $50
million, consisting of net earnings of $11 million and accumulated other
comprehensive income of $39 million. Accumulated other comprehensive
income consisted of a net after-tax gain of $49 million ($80 million
pretax) on designated derivative instruments less $10 million related to
foreign currency translation adjustments. For the respective 2000 period,
total comprehensive income amounted to $103 million (net earnings of $106
million less $3 million related to foreign currency translation
adjustments). There was no tax impact on the foreign currency translation
adjustments.
(3) As of March 31, 2001, common shares totaling 2,804,600 were reserved for
future issuance in conjunction with existing stock option grants. In
addition, 1,718,311 common shares were reserved for future grants. Shares
issued in option exercises may be from original issue or available
treasury shares.
(4) Basic earnings per share were computed by dividing net earnings by the
weighted average number of common shares outstanding for the period. The
dilutive effect of the potential exercise of outstanding options to
purchase shares of common stock is calculated using the treasury stock
method. The reconciliation of basic earnings per share to diluted earnings
per share is shown in the following table (dollars in millions except
share data):
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NET SHARES PER SHARE
THREE MONTHS ENDED MARCH 31, EARNINGS (000) AMOUNT
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2001
Basic earnings $ 11 43,406 $ 0.25
Dilutive effect of stock options 53
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Diluted earnings 11 43,459 0.25
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2000
Basic earnings $ 106 48,138 $ 2.19
Dilutive effect of stock options 250
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Diluted earnings 106 48,388 2.18
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(5) USG's operations are organized into three operating segments: North
American Gypsum, which manufactures and markets gypsum wallboard and
related products in the United States, Canada and Mexico; Worldwide
Ceilings, which manufactures and markets ceiling tile, ceiling grid and
other interior systems products worldwide; and Building Products
Distribution, which distributes gypsum wallboard, drywall metal, ceiling
products, joint compound and other building products throughout the United
States. Operating segment results were as follows (dollars in millions):
NET SALES OPERATING PROFIT
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THREE MONTHS ENDED MARCH 31, 2001 2000 2001 2000
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North American Gypsum $ 483 $ 610 $ 15 $ 154
Worldwide Ceilings 173 178 9 17
Building Products Distribution 286 356 15 27
Corporate - - (8) (16)
Eliminations (116) (155) 1 2
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Total 826 989 32 184
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(6) Effective January 1, 2001, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138.
These statements require that all derivative instruments be recorded on
the balance sheet at fair value. For derivatives designated as fair value
hedges, the changes in the fair values of both the derivative instrument
and the hedged item are recognized in earnings in the current period. For
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derivatives designated as cash flow hedges, the effective portion of
changes in the fair value of the derivative is recorded to accumulated
other comprehensive income and is reclassified to earnings when the
underlying transaction impacts earnings. As of January 1, 2001, and March
31, 2001, the net after-tax derivative gain in accumulated other
comprehensive income was $64 million and $49 million, respectively. During
the first quarter of 2001, $9 million of accumulated after-tax gains were
reclassified from accumulated other comprehensive income to earnings. As
of March 31, 2001, the estimated after-tax gain expected to be
reclassified within the next twelve months from accumulated other
comprehensive income into earnings is $22 million.
Commodity Risk: The Corporation uses swap contracts to hedge anticipated
purchases of natural gas, wastepaper and fuel to be used in its
manufacturing and shipping operations. These contracts, all of which
mature by December 31, 2005, are designated as cash flow hedges and
changes in fair value are recorded in accumulated other comprehensive
income until the hedged transaction occurs at which time it is
reclassified to earnings.
Foreign Exchange Risk: The Corporation has operations in a number of
countries and uses forward contracts to hedge the risk of changes in cash
flows resulting from forecasted intercompany and third party sales or
purchases in foreign currencies. These contracts are designated as cash
flow hedges and changes in fair value are recorded in accumulated other
comprehensive income until the underlying transaction impacts earnings.
All foreign currency forward contracts expire within twelve months.
Interest Rate Risk: The Corporation is exposed to interest rate changes
and uses swap agreements from time to time to manage this exposure. As of
March 31, 2001, the Corporation had no outstanding interest rate swap
agreements.
(7) In the fourth quarter of 2000, USG announced a restructuring plan that
included a salaried workforce reduction and the shutdown of three gypsum
wallboard manufacturing lines and other operations. The restructuring,
which will be completed in 2001, is designed to streamline operations and
improve business efficiency.
At the time the restructuring was announced, a reserve was established for
all severance and exit costs. First quarter payments totaling $14 million
were charged against the restructuring reserve, leaving a balance of $20
million in the reserve as of March 31, 2001. The restructuring reserve is
included in accrued expenses on the consolidated balance sheets. All
restructuring-related payments are being funded with cash from normal
operations. The following table details the restructuring reserve and
first quarter activity (dollars in millions):
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RESERVE RESERVE
BALANCE RESERVE BALANCE
12/31/00 UTILIZATION 3/31/01
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Severance (salaried) $ 15 $ 13 $ 2
Razing buildings and equipment 12 - 12
Line shutdown and removal 5 - 5
Contract cancellations
and severance (hourly) 2 1 1
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Total 34 14 20
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As of March 31, 2001, 381 salaried employees have been terminated and 179
open salaried positions have been eliminated. Also, 64 hourly employees
have been terminated and 44 open hourly positions have been eliminated. As
of March 31, 2001, the numbers of remaining participants of the workforce
reduction programs were 13 salaried employees and 9 hourly employees.
(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 results of operations or 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 and transferred to a trust administered by Chase Manhattan
Bank as trustee. Certificates representing an ownership interest of up to
$130 million in the trust have been issued to an affiliate of Citicorp
North America, Inc. USG Funding, a special-purpose subsidiary of USG
Corporation, is a separate corporate entity with its own separate
creditors that will be entitled to be satisfied out of USG Funding's
assets prior to any value in USG Funding becoming available to its
shareholder. Receivables and, when applicable, debt outstanding in
connection with the receivables facility remain in receivables and
long-term debt, respectively, on the Corporation's consolidated balance
sheet.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RECENT DEVELOPMENTS
The first quarter of 2001 for USG Corporation ("USG" or "the Corporation") was
marked by further developments relating to the impact of declining prices and
profits for gypsum wallboard in the United States and increasing costs of
asbestos-related litigation. Two more companies, WR Grace and GI Holdings
(formerly GAF), which are major defendants in many of the asbestos-related cases
in which the Corporation's United States Gypsum Company subsidiary is also a
named defendant, have filed for Chapter 11 bankruptcy protection. In early April
2001, Standard & Poors revised its credit rating for USG's senior unsecured debt
from BBB to BB- with negative outlook, citing the uncertainty of future
asbestos-related costs as the principal reason for this change.
In connection with USG's revolving credit facility, the lending syndicate agreed
to amend the five-year $400 million facility to increase the letter of credit
sub-facility from $75 million to $150 million. While the change does not
increase the overall credit available under the facility, it allows USG to have
added flexibility in obtaining surety bonds for appeals of adverse judgments in
asbestos liability trials.
USG has also begun discussions with the administrative agent of the facility
concerning the possible renewal of the 364-day facility, which expires on June
29, 2001. Under the terms of the facility, USG has the right to borrow up to
$200 million before its expiration. Money borrowed under the facility before its
expiration will have a maturity date of June 29, 2002. In its discussions with
the agent and other bank lenders, USG has been reviewing the possibility of
extending the 364-day facility beyond 2002 along with obtaining additional
liquidity. In exchange for this, the lenders may require amendments to the
existing credit agreements to reflect market pricing and to provide collateral
security to the lenders. The Corporation is reviewing this issue along with
other possible financial alternatives, such as a refinancing for the September
2001 maturity of its 9.25% senior notes, in determining its financial strategies
for the future. Some of the additional sources of liquidity for the future might
include an expansion of its accounts receivable facility to include receivables
generated by L&W Supply Corporation or entering into sales and leaseback
transactions for select assets. However, no assurance can be given that it will
be possible to conclude any of these transactions on terms acceptable to the
Corporation. USG believes that if it elects to fully utilize its available bank
lines or obtains additional liquidity by providing security, it would have
adequate liquidity to enable it to deal with its existing and presently
foreseeable cash needs, including the repayment of the 9.25% senior notes
maturing on September 15, 2001, for the reasonably foreseeable future.
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However, as discussed in Part II, Item 1. "Legal Proceedings" under "Asbestos
and Related Insurance Litigation," adverse developments in the asbestos
litigation could have a material adverse effect on the Corporation's liquidity,
particularly if combined with any significant decrease in the current
profitability of USG's operations. The Corporation continues to believe a
legislative solution would provide the best outcome to all parties involved in
the asbestos litigation. However, if the Corporation concludes that this
approach is not likely to be effective within an appropriate time frame, the
Corporation will be required to consider alternative ways to deal with the
asbestos issue.
CONSOLIDATED RESULTS
NET SALES
Net sales in the first quarter of 2001 were $826 million, down 16% from $989
million in the first quarter of 2000. Conditions in the U.S. wallboard market,
USG's largest single market, continued to be difficult due to pricing pressure
and slightly lower demand. Gypsum wallboard industry capacity has increased an
estimated 10% versus the first quarter of 2000 as several competitors have added
new capacity and are seeking to grow their market share. The excess supply and
increased competition have led to significant declines in market prices for
gypsum wallboard, including U.S. Gypsum's SHEETROCK brand gypsum wallboard,
which fell 42% from the prior-year period.
Gypsum wallboard industry demand was down an estimated 2% versus the first
quarter of 2000 reflecting slightly lower housing starts in the United States,
sluggish repair and remodeling expenditures and harsh winter weather or
excessive rainfall, which was worse in many parts of the country than that
experienced in the first quarter of 2000.
Sales for USG's North American Gypsum and Building Products Distribution
segments were down primarily due to the lower selling prices on SHEETROCK brand
gypsum wallboard. Sales for Worldwide Ceilings were affected by lower volume and
pricing for domestic ceiling grid and lower demand in international markets.
COST OF PRODUCTS SOLD
Cost of products sold in the first quarter of 2001 was $726 million, up 1% from
$721 million a year ago. Production of gypsum wallboard and ceiling tile
products is energy intensive, and market prices for energy, including natural
gas and electric power, are significantly higher in 2001. It is USG's practice
to hedge its natural gas purchases, and as the Corporation entered 2001, it was
60% hedged, as it has been in previous years. By March, the hedge ratio was
increased to 75% in accordance with the Corporation's hedging policy. Higher gas
prices in January and February combined with only 60% of gas consumption being
hedged, and the impact of higher gas usage in winter, resulted in a $5 per
thousand square foot increase in manufacturing costs versus the fourth quarter
of 2000. Energy
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costs are expected to remain above those of last year for at least the next
quarter, but these costs began to abate in March with a decline in spot prices
for natural gas.
It is also noteworthy that in the first quarter of 2000, U.S. Gypsum recorded
asbestos-related charges of $22 million to cost of products sold. There were no
comparable charges in the first quarter of 2001. See "Legal Contingencies" below
and Part II, Item 1. "Legal Proceedings" for additional information on asbestos
litigation.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased 19% versus the first quarter of
2000 due to lower levels of expenses related to incentive compensation,
marketing programs and compensation and benefits. As a percent of net sales,
selling and administrative expenses were 8.2% in the first quarter of 2001, down
from 8.5% in the comparable 2000 period.
OPERATING PROFIT
Operating profit in the first quarter of 2001 was $32 million, down 83% from
$184 million in the first quarter of 2000. This decline primarily reflects the
significant drop in gypsum wallboard selling prices combined with the impact of
increased energy costs on the production of gypsum wallboard and ceiling tile.
These unfavorable factors were offset in part by lower selling and
administrative expenses, improved results in certain other product lines and the
absence in 2001 of asbestos-related charges.
INTEREST EXPENSE
Interest expense of $14 million was incurred in the first quarter of 2001,
compared with $12 million in the first quarter of 2000.
INCOME TAXES
Income tax expense amounted to $7 million and $67 million in the first quarters
of 2001 and 2000, respectively.
NET EARNINGS
Net earnings in the first quarter of 2001 were $11 million, down 90% from $106
million in the prior-year period. Diluted earnings per share decreased 89% to
$0.25 from $2.18 a year ago.
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CORE BUSINESS RESULTS
(dollars in millions) NET SALES OPERATING PROFIT
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THREE MONTHS ENDED MARCH 31, 2001 2000 2001 2000
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NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 442 $ 567 $ 5 $ 141
CGC Inc. (gypsum) 50 50 6 8
Other subsidiaries* 24 24 4 5
Eliminations (33) (31) - -
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Total 483 610 15 154
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WORLDWIDE CEILINGS:
USG Interiors, Inc. 126 127 8 15
USG International 54 59 - 1
CGC Inc. (ceilings) 11 11 1 1
Eliminations (18) (19) - -
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Total 173 178 9 17
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BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 286 356 15 27
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Corporate - - (8) (16)
Eliminations (116) (155) 1 2
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Total USG Corporation 826 989 32 184
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*Includes USG Mexico, S.A. de C.V., a building products business in Mexico,
Gypsum Transportation Limited, a shipping company in Bermuda, and USG Canadian
Mining Ltd., a mining operation in Nova Scotia.
NORTH AMERICAN GYPSUM
Net sales of $483 million and operating profit of $15 million declined 21% and
90%, respectively, from the first quarter of 2000.
Net sales for U.S. Gypsum fell 22% as its nationwide average realized price per
thousand square feet (the selling price less freight to the customer) of
wallboard was $92.31 in the first quarter of 2001. This price was down 7% from
the average realized price of $99.32 in the fourth quarter of 2000, and down 42%
from $159.80 in the first quarter of 2000. Because of excess capacity in the
industry and increased competition, wallboard selling prices remain under
pressure. Despite slightly lower shipments for the industry, U.S. Gypsum sold
2.3 billion square feet of SHEETROCK brand gypsum wallboard during the first
quarter of 2001, a first quarter record for the company and a 5% increase over
2.2 billion square feet in the first quarter of 2000.
At current shipment levels, every $10 drop in price reduces U.S. Gypsum's
operating profit by $90 to $100 million on an annualized basis. First quarter
operating profit for U.S. Gypsum was down 96% from the first quarter of 2000 due
to the lower selling prices and higher manufacturing costs for gypsum wallboard.
Costs were up primarily due to rising prices for natural gas and electric power.
U.S. Gypsum's plants operated at 83% of capacity in the first quarter of 2001
compared with the estimated average rate of 78% for the U.S. wallboard industry.
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Net sales for the gypsum business of Canada-based CGC Inc. were unchanged from a
year ago. However, operating profit fell 25% as lower selling prices for gypsum
wallboard and higher energy costs more than offset increased shipments of gypsum
wallboard in Canada.
WORLDWIDE CEILINGS
Net sales of $173 million and operating profit of $9 million declined 3% and
47%, respectively, from the first quarter of 2000. USG's domestic ceilings
business, USG Interiors, Inc., reported slightly lower sales. However, operating
profit for USG Interiors fell 47% largely due to higher energy prices. The
ceilings division of CGC Inc. contributed sales of $11 million and operating
profit of $1 million, the same levels as last year. Sales for USG International
were down in the first quarter due to lower demand in Europe and Latin America.
Operating profit for USG International was at breakeven in the first quarter of
2001 compared with $1 million in the first quarter of 2000.
BUILDING PRODUCTS DISTRIBUTION
Net sales of $286 million and operating profit of $15 million declined 20% and
44%, respectively, from the first quarter of 2000. Fewer shipping days, severe
weather conditions in certain regions, a slight decline in demand and declining
prices for wallboard and complementary products resulted in lower revenues and
margins at USG's specialty building products distribution subsidiary, L&W Supply
Corporation. Nearly half of L&W's sales come from gypsum wallboard. Profit
margins on wallboard sold by L&W declined almost $10 per thousand square feet
compared to levels experienced in the first quarter of 2000. L&W Supply
currently operates 192 locations in the United States, same as a year ago,
distributing a variety of gypsum, ceilings and related building materials.
MARKET CONDITIONS AND OUTLOOK
As discussed above, the excess supply and increased competition have led to
significant declines in market prices for gypsum wallboard. Pressure on gypsum
wallboard pricing is likely to continue until more capacity in the industry is
closed and/or demand increases.
USG is currently forecasting U.S. housing starts in 2001 to be down slightly
from the 1.593 million units in 2000.
The repair and remodel market accounts for the second-largest portion of USG's
sales. Because many buyers remodel an existing home within two years of
purchase, opportunity from this market in 2001 is expected to decline as sales
of existing homes in 2000 were 5.030 million units, down 3% from the record
level of 5.197 in 1999.
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Sales of USG products to the new nonresidential construction market are expected
to be down slightly in 2001. Future demand for USG products from new
nonresidential construction is determined by floor space for which contracts are
signed. Installation of gypsum and ceilings products follows signing of
construction contracts by about a year. Floor space for which contracts were
signed was down 1% in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Because of current business conditions, rising energy prices and asbestos
litigation, USG's financial priorities in 2001 are focused on increasing cash
flow and optimizing operating performance. The plan includes reducing capital
expenditures, reducing costs and expenses, improving working capital performance
and seeking opportunities for the sale of surplus assets. In addition, in the
first quarter of 2001, USG reduced its quarterly cash dividend to $0.025 per
share. This action will reduce annual dividend payments by approximately $22
million.
CAPITAL EXPENDITURES
Capital spending amounted to $29 million in the first quarter of 2001 compared
with $116 million in the corresponding 2000 period. As of March 31, 2001,
remaining capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $51 million, compared with $165 million as
of March 31, 2000.
USG expects to have limited external sources of capital available and limited
financial resources and liquidity to fund potential future growth opportunities
such as new products, acquisitions and joint ventures. See "Recent Developments"
above.
WORKING CAPITAL
Working capital (current assets less current liabilities) as of March 31, 2001,
amounted to $61 million. As of December 31, 2000, current liabilities exceeded
current assets by $20 million. The ratio of current assets to current
liabilities was 1.07 to 1 as of March 31, 2001, compared with .98 to 1 as of
December 31, 2000.
Cash and cash equivalents as of March 31, 2001, amounted to $35 million, down
from $70 million as of December 31, 2000. During the first quarter of 2001, net
cash flows to operating activities totaled $81 million. Net cash flows to
investing activities (primarily capital spending) were $28 million. Net cash
flows from financing activities of $74 million primarily reflected a net
increase in borrowings of $75 million, partially offset by $1 million used for
cash dividends.
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Receivables increased to $350 million as of March 31, 2001, from $305 million as
of December 31, 2000, due to seasonality (higher level of sales in March than in
December). Inventories decreased to $267 million from $271 million, and accounts
payable fell to $193 million from $200 million.
RESTRUCTURING RESERVE
In the fourth quarter of 2000, USG announced a restructuring plan that included
a salaried workforce reduction and the shutdown of three gypsum wallboard
manufacturing lines and other operations. The restructuring, which will be
completed in 2001, is designed to streamline operations and improve business
efficiency. Annual pretax savings from the restructuring initiatives are
estimated at $40 million.
At the time the restructuring was announced, a reserve was established for all
severance and exit costs. First quarter payments totaling $14 million were
charged against the restructuring reserve, leaving a balance of $20 million in
the reserve as of March 31, 2001. All restructuring-related payments are being
funded with cash from normal operations. The restructuring reserve is included
in accrued expenses on the consolidated balance sheets. The following table
details the restructuring reserve and first quarter activity (dollars in
millions):
RESERVE RESERVE
BALANCE RESERVE BALANCE
12/31/00 UTILIZATION 3/31/01
- --------------------------------------------------------------------------
Severance (salaried) $15 $ 13 $ 2
Razing buildings and equipment 12 - 12
Line shutdown and removal 5 - 5
Contract cancellations
and severance (hourly) 2 1 1
- --------------------------------------------------------------------------
Total 34 14 20
==========================================================================
As of March 31, 2001, 381 salaried employees have been terminated and 179 open
salaried positions have been eliminated. Also, 64 hourly employees have been
terminated and 44 open hourly positions have been eliminated. As of March 31,
2001, the numbers of remaining participants of the workforce reduction programs
were 13 salaried employees and 9 hourly employees.
DEBT
As of March 31, 2001, total debt amounted to $786 million, up $75 million from
December 31, 2000. This variation primarily reflects increases in credit
facility borrowings of $73 million, accounts receivable facility borrowings of
$10 million and international short-term notes of $2 million, partially offset
by the repurchase of $10 million of 9.25% senior notes due 2001.
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AVAILABLE LIQUIDITY
As of March 31, 2001, USG had $722 million of liquidity through three financing
arrangements. First, USG has an agreement with a syndicate of banks that
includes revolving credit facilities totaling $600 million. The agreement
includes a five-year, multicurrency revolving credit facility that permits the
Corporation to borrow up to $400 million, including borrowing capacity for its
Canadian subsidiaries of up to $75 million in equivalent Canadian dollars. The
agreement also includes, effective June 30, 2000, a $200 million, 364-day
facility. Second, USG has an accounts receivable facility that allows the
Corporation to borrow up to $130 million. The maximum amount of borrowings
allowed under the accounts receivable facility is determined by applicable
reserve and eligibility requirements. As of March 31, 2001, the maximum allowed
borrowing was $102 million based on these requirements. Third, USG maintains a
$20 million multicurrency facility in Europe. As of March 31, 2001, outstanding
loans on the three arrangements totaled $231 million, and letters of credit
issued and outstanding amounted to $72 million, leaving the Corporation with
$419 million of unused and available credit. See "Recent Developments" above for
additional information related to USG's liquidity, including adequacy of current
available liquidity and considerations for additional liquidity.
In addition, a shelf registration statement on file 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 have been issued
pursuant to this registration and the Corporation does not currently expect to
raise new money in the public capital markets so long as the long-term outcome
of its asbestos litigation remains uncertain.
OTHER MATTERS
EURO CURRENCY CONVERSION
Effective January 1, 1999, 11 of the 15 countries that are members of the
European Union introduced a new, single currency unit, the euro. Prior to full
implementation of the new currency for the participating countries on January 1,
2002, there is a three-year transition period during which parties may use
either the existing currencies or the euro. However, during the transition
period, all exchanges between currencies of the participating countries are
required to be first converted through the euro.
USG has proceeded to prepare for the conversion to the euro. USG's efforts are
focused on two phases. The first phase addresses USG's European operations
during the transition period. The second phase covers full conversion of these
operations to the euro. USG was ready for the transition period that began on
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January 1, 1999, and expects to be ready for full conversion by January 1, 2002,
the mandatory conversion date. USG also is prepared to deal with its critical
suppliers and customers during the transition period and has been communicating
with them as necessary. Based on its experience during the first two years of
the transition period, USG does not expect the introduction of the euro currency
to have a material adverse impact on its business, results of operations or
financial position.
LEGAL CONTINGENCIES
One of USG Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. In the fourth
quarter of 2000, the Corporation concluded that it was possible to provide a
reasonable estimate of U.S. Gypsum's liability for asbestos cases to be filed
through 2003 as well as those currently pending. Based on an independent study,
the Corporation determined that, although substantial uncertainty remains, it
was probable that asbestos claims currently pending against U.S. Gypsum and
future asbestos claims to be filed against it through 2003 (both property damage
and personal injury) could be resolved for an amount between $889 million and
$1,281 million, including defense costs, and that within this range the most
likely estimate was $1,185 million. However, these amounts are expected to be
expended over a period extending several years beyond 2003, because asbestos
cases have historically been resolved an average of three years after filing. In
the fourth quarter of 2000, the Corporation recorded a pretax charge of $850
million to results of operations, which, combined with the previously existing
reserve, increased U.S. Gypsum's reserve for asbestos claims to $1,185 million.
During the first quarter of 2001, U.S. Gypsum's payments for asbestos claims and
related legal fees totaled $57 million, reducing its reserve for asbestos claims
to $1,128 million as of March 31, 2001. Insurance recovery during the first
quarter of 2001 amounted to $5 million, leaving U.S. Gypsum with a corresponding
receivable from insurance carriers (the estimated portion of the reserved amount
that is expected to be paid or reimbursed by insurance) of $81 million as of
March 31, 2001, down from $86 million as of December 31, 2000. The Corporation
will continue to evaluate from time to time the impact of new information and
trends on established reserves in future periods. The above amounts are stated
before tax benefit and are not discounted to present value.
U.S. Gypsum currently estimates that expenditures for personal injury cases in
2001 will total approximately $275 million, before insurance recoveries of
approximately $37 million. U.S. Gypsum's total asbestos-related payments, net of
insurance recoveries, were $62 million in 2000 and $24 million in 1998.
Insurance payments to U.S. Gypsum for asbestos-related matters exceeded
asbestos-related expenses by $6 million for 1999 due primarily to nonrecurring
reimbursement for amounts expended in prior years.
The Corporation has attempted to evaluate and weigh all relevant factors in
estimating U.S. Gypsum's liability. However, the Corporation cautions that
liability in asbestos cases is difficult to predict and involves many subjective
judgments that can be affected by various unanticipated factors that may arise.
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Many of these factors, including but not limited to bankruptcies of
co-defendants, are outside of U.S. Gypsum's control. In particular, the
long-term effect of the recent bankruptcies of other defendants (including two
in 2001) and the absence of the sharing of settlement costs with other members
of the Center for Claims Resolution is presently unknown, although settlement
demands and costs in the first quarter of 2001 have increased significantly. As
a result, it is reasonably possible that actual costs may exceed the estimate
set forth above and that this difference may be material. In addition, asbestos
claims will continue to be asserted after 2003, and it is probable that
subsequent information will allow the Corporation to estimate the costs
associated with those cases. When such events occur, additional charges to
results of operations will be necessary in amounts that cannot presently be
reasonably estimated, but which are likely to be material to the period in which
they are taken.
Recent asbestos costs and charges, combined with declines in operating results,
have adversely affected the Corporation's access to capital, results of
operations, and financial position, but the Corporation currently believes that
it will have sufficient cash flow and other capital resources to enable it to
meet its obligations and maintain its operations for the reasonably foreseeable
future. See "Recent Developments" above. However, the Corporation's liquidity
and financial position could be further negatively affected by numerous factors
affecting the asbestos litigation, including, but not limited to, the
continuation or acceleration of recent unfavorable trends in asbestos settlement
demands and costs, the continued possibility of additional bankruptcies of other
defendants, material liquidity demands based on bonding requirements, and
material decreases in cash flow and capital resources. If adverse developments
occur with respect to such factors, the asbestos litigation will have a material
adverse impact on the Corporation's results, liquidity, and financial position.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its results of operations or financial
position. See Part II, Item 1. "Legal Proceedings" for additional information on
asbestos and environmental litigation.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements related to management's
expectations about future conditions. Actual business or other conditions may
differ significantly from management's expectations and accordingly affect the
Corporation's sales and profitability or other results. Actual results may
differ due to factors over which the Corporation has no control, including
economic activity such as construction activity, interest rates and consumer
confidence; competitive conditions such as price and product competition;
increases in raw
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material and energy costs; euro currency issues such as the ability and
willingness of third parties to convert affected systems in a timely manner and
the actions of governmental agencies or other third parties. The ultimate costs
associated with the Corporation's asbestos litigation may differ as a result of
factors over which the Corporation has little or no control, including the rate
at which new asbestos-related claims are filed, the cost of claims settlements
and verdicts, the impact of recent and possible future bankruptcies of other
defendants and the recent reductions in the membership of, and operational
changes involving, the Center for Claims Resolution and other factors described
herein. The Corporation assumes no obligation to update any forward-looking
information contained in this report.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of March 31, 2001, and
the related condensed consolidated statements of earnings for the three-month
periods ended March 31, 2001 and 2000 and the condensed consolidated statements
of cash flows for the three-month periods ended March 31, 2001 and 2000. These
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 24, 2001
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ASBESTOS AND RELATED INSURANCE LITIGATION
One of the Corporation's subsidiaries, U.S. Gypsum (or "the Company"), 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").
The following is a summary. For a more comprehensive discussion of the asbestos
litigation, see Note 17 to the financial statements in the Corporation's 10-K
for the year ended December 31, 2000.
Property Damage Cases: U.S. Gypsum is a defendant in ten Property Damage Cases,
most of which involve multiple buildings. One of the cases is a conditionally
certified class action comprising 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.). No Property Damage Cases have been filed against
U.S. Gypsum since June 1998, and the Company anticipates that, as a result of
the operation of statutes of limitations and the impact of certain other
factors, few if any additional Property Damage Cases will be filed. However, if
the class action referred to above is decertified, as sought by the Company, it
is likely that some colleges and universities will file individual Property
Damage Cases against U.S. Gypsum. It is likely that any cases that are filed
will seek substantial damages.
In total, U.S. Gypsum has settled approximately 116 Property Damage Cases
involving 246 plaintiffs, in addition to four class action settlements.
Twenty-four cases have been tried to verdict, seventeen of which were won by
U.S. Gypsum and seven of which were lost. Three of the twenty-four 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 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.
During the three-year period 1998 through 2000, U.S. Gypsum expended an average
of $16 million per year for the defense and resolution of Property Damage Cases
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and received an average of $22 million in insurance payments annually, much of
which was reimbursement for costs expended in prior years.
U.S. Gypsum's estimated cost of resolving asbestos cases is discussed below (see
"Estimated Cost").
Personal Injury Cases: U.S. Gypsum is also a defendant in approximately 96,000
Personal Injury Cases pending at the end of the first quarter of 2001, as well
as an additional approximately 54,000 cases that have been settled but will be
closed over time. In the first quarter of 2001, 13,000 new Personal Injury Cases
were filed against U.S. Gypsum, as compared to 12,000 new filings in the first
quarter of 2000. Filings of new Personal Injury Cases totaled approximately
53,000 claims in 2000, 48,000 claims in 1999, 80,000 claims in 1998, and 23,500
claims in 1997. It is likely 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.
U.S. Gypsum has been a member, together with fourteen other former producers of
asbestos-containing products, of the Center for Claims Resolution (the
"Center"), which assumed the handling of all Personal Injury Cases pending
against U.S. Gypsum and the other members of the Center. Since 1988, costs of
defense and settlement of Personal Injury Cases have been shared among the
members of the Center pursuant to predetermined sharing formulae. Effective
February 1, 2001, the Center members, including U.S. Gypsum, ended their prior
settlement sharing arrangement, and each Center member, including U.S. Gypsum,
negotiates and is responsible for paying its own settlements separately. The
Center continues to perform certain claims administration, negotiation, and
defense functions for its members, the costs of which will continue to be shared
by the members. Certain other defense costs are borne separately.
In 2000 and years prior, U.S. Gypsum and other Center members negotiated a
number of settlements with plaintiffs' firms that include agreements to resolve
over time the firms' pending claims as well as certain future claims. With
regard to future claims, these settlements typically provide that the
plaintiffs' firms will recommend to their future clients that they defer filing,
or accept nominal payments on, personal injury claims that do not meet
established disease criteria, and, with regard to those claims meeting
established disease criteria, that the future clients accept specified amounts
to settle those claims. These agreements typically resolve claims for amounts
consistent with historical per claim settlement costs paid to the plaintiffs'
firms involved.
In 2000, U.S. Gypsum closed approximately 57,000 Personal Injury Claims at an
average settlement of approximately $2,600 per case, exclusive of defense costs,
and in addition agreed to settle, in future years, approximately 26,000 claims
pending as of December 31, 2000, at approximately $1,475 per claim. However, as
a result of escalating settlement demands in the first quarter of 2001, U.S.
Gypsum's average settlement costs for Personal Injury Cases increased
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dramatically in the first quarter of 2001. Because settlements are typically
paid 60 to 90 days after the agreement is reached, the cash impact of these
increased costs will not occur until the second quarter. The increase in
settlement demands and costs per case, as discussed below, is believed to be
primarily due to the bankruptcy filings of a number of major defendants in the
Personal Injury Cases and, to a lesser extent, the recent changes in the Center.
During 2000 and early 2001, eight defendants in the Personal Injury Cases
(including one member and one former member of the Center) filed bankruptcy
petitions. When such bankruptcies occur, litigation against the bankrupt
defendant is stayed and the bankrupt defendant typically ceases paying asbestos
claims for a period of years. Under principles of joint and several liability
applicable in most jurisdictions, plaintiffs have the right to recover their
entire damages from defendants that are found liable and remain outside the
protection of bankruptcy. In response to the absence of the bankrupt defendants
from the litigation, plaintiffs have substantially increased their settlement
demands to remaining defendants, including U.S. Gypsum, to replace the expected
payments of now-bankrupt defendants. Because U.S. Gypsum is named in the vast
majority of pending and newly filed Personal Injury Cases, the impact of the
recent bankruptcies on U.S. Gypsum's average settlement costs in early 2001 has
been significant and U.S. Gypsum has become one of the primary target defendants
in the asbestos litigation generally. In addition, U.S. Gypsum believes that the
termination of the Center members' sharing of settlement costs has adversely
affected U.S. Gypsum's settlement costs.
In response to these increased settlement demands, U.S. Gypsum has recently
begun to attempt to manage its asbestos liability by contesting, rather than
settling, a greater number of cases that it believes to be non-meritorious. As a
result, in the first quarter of 2001 U.S. Gypsum agreed to settle fewer Personal
Injury Cases, although at a significantly higher cost per case, than it has in
the past. It is also possible that as a result of these events, more cases will
be tried to verdict against U.S. Gypsum than has previously been the case and
that significant adverse verdicts may occur. In December 2000, a jury in Miami,
Fla., returned a verdict against U.S. Gypsum and in favor of two plaintiffs (a
husband and wife) in the amount of $14 million in compensatory damages, and may
award additional punitive damages. In February 2001, a jury in Beaumont, Texas,
returned a verdict against U.S. Gypsum and in favor of 22 plaintiffs in the
total net amount of $16.6 million in compensatory damages. No punitive damages
were awarded. Damages awarded against U.S. Gypsum's co-defendant, Flexitallic,
Inc., totaled $18.6 million. U.S. Gypsum has settled with four of the
plaintiffs in the Beaumont case and plans to appeal as to the remaining
plaintiffs. Bonding requirements as to unfavorable verdicts will adversely
affect the Corporation's liquidity.
During 2000, five members left the Center, three of which are (because of
bankruptcy or insolvency) no longer paying their share of certain settlements
agreed to by the Center while they were members. Although in the past,
plaintiffs in such cases have accepted reduced payments from the remaining
Center members
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consistent with their share of the agreed settlements, some plaintiffs now argue
that the remaining Center members are required to fund the entire settlement.
Although the Company believes that there are strong defenses to such claims,
there can be no assurance as to the outcome. In other cases, the plaintiffs have
certain rights to nullify the settlement as to any unpaid portion, and it is
possible that such settlements will be jeopardized by the unwillingness of the
remaining members to fund the absent shares. Such a development would be likely
to increase U.S. Gypsum's costs of resolving the cases.
The Corporation continues to believe a legislative solution would provide the
best outcome to all parties involved in the asbestos litigation. However, if the
Corporation concludes that this approach is not likely to be effective within an
appropriate time frame, the Corporation will be required to consider alternative
ways to deal with the asbestos issue.
U.S. Gypsum's payments to defend and resolve Personal Injury Cases totaled $162
million in 2000, $100 million in 1999, and $61 million in 1998, compared to
insurance payments totaling $90 million, $85 million, and $45.5 million,
respectively. As a result of the exhaustion of most available insurance, current
and future costs will be paid largely by U.S. Gypsum.
U.S. Gypsum's estimated cost of resolving asbestos cases is discussed below (see
"Estimated Cost").
Insurance Coverage: As of March 31, 2001, after deducting insurance paid out to
date, U.S. Gypsum had $81 million of insurance remaining to cover
asbestos-related costs. This insurance will be paid over a period of
approximately four years.
U.S. Gypsum currently estimates that expenditures for Personal Injury Cases in
2001 will total approximately $275 million, before insurance recoveries of
approximately $37 million. U.S. Gypsum's total asbestos-related payments, net of
insurance recoveries, were $62 million in 2000 and $24 million in 1998.
Insurance payments to U.S. Gypsum for asbestos-related matters exceeded
asbestos-related expenses by $6 million for 1999 due primarily to nonrecurring
reimbursement for amounts expended in prior years.
Estimated Cost: The asbestos litigation involves numerous uncertainties that
make it difficult to estimate reliably U.S. Gypsum's probable liability in the
Personal Injury and Property Damage Cases.
In the Property Damage Cases, such uncertainties include, but may not be limited
to, the identification and volume of asbestos-containing products in the
buildings at issue in each case, which is often disputed; the claimed damages
associated therewith; the viability of statute of limitations, product
identification and other defenses, which varies depending upon the facts and
jurisdiction of each case; the amount for which such cases can be resolved,
which normally (but not uniformly) has been substantially lower than the claimed
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damages; and the viability of claims for punitive and other forms of multiple
damages.
Uncertainties in the Personal Injury Cases include, but may not be limited to,
the number, disease and occupational characteristics, and venue of Personal
Injury Cases that are filed against U.S. Gypsum; the age and level of physical
impairment of claimants; the viability of claims for conspiracy or punitive
damages; the elimination of indemnity sharing among Center members for future
settlements and its negative impact on U.S. Gypsum's ability to continue to
resolve claims at historical or acceptable levels; the adverse impact on U.S.
Gypsum's settlement costs of recent bankruptcies of co-defendants; the continued
solvency of other defendants and the possibility of additional bankruptcies; the
possibility of significant adverse verdicts due to recent changes in settlement
strategies, and related effects on liquidity; the inability or refusal of former
Center members to fund their share of existing settlements and its effect on
such settlement agreements; the continued ability to negotiate settlements or
develop other mechanisms that defer or reduce claims from unimpaired claimants;
and the possibility that federal legislation addressing asbestos litigation will
be enacted. Adverse developments with respect to any of these uncertainties
could have a material impact on U.S. Gypsum's settlement costs and could
materially increase the cost above the estimated range discussed below.
As a result, U.S. Gypsum's estimate of liability, while based upon the
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, and U.S. Gypsum's liability may be materially different from
its current estimate.
Prior to the fourth quarter of 2000, the Corporation, in the opinion of
management, had been unable to reasonably estimate the probable cost of
resolving future asbestos claims, although the Corporation had estimated and
reserved for costs associated with then-pending claims. However, in 1999 and
increasingly in 2000, the Center entered into a number of long-term, broad-based
settlements with plaintiffs' law firms that provide, in addition to settlements
of pending claims brought by such firms, that the Center would have certain
rights relating to settlement of future claims brought by such firms. Generally,
under these long-term settlements, these plaintiffs' firms agree to recommend to
their future clients that they settle their claims against Center members
consistent with specified amounts, depending upon the application of disease
criteria.
Concurrent with the increase in the number of these long-term settlements, the
Corporation undertook a detailed study of U.S. Gypsum's current and potential
future asbestos liability. This analysis was completed in the fourth quarter of
2000. As part of this analysis, the Corporation reviewed, among other things,
historical case filings and increasing settlement costs; the type of products
sold by U.S. Gypsum and the occupations of claimants expected to bring future
asbestos-related claims; epidemiological data concerning the incidence of past
and projected future asbestos-related diseases; trends in the propensity of
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persons alleging asbestos-related disease to sue U.S. Gypsum; the adverse
effect on settlement costs of historical reductions in the number of solvent
defendants available to pay claims, including reductions in membership of the
Center; the pre-agreed settlement recommendations in, and the continued
viability of, the long-term settlement agreements described above; and
anticipated trends in recruitment by plaintiffs' firms of non-malignant or
unimpaired claimants. The study attempted to weigh relevant variables and assess
the impact of likely outcomes on future case filings and settlement costs. In
addition, the Corporation considered future defense costs, as well as
allegations that U.S. Gypsum and the other Center members bear joint liability
for the share of certain settlement agreements that was to be paid by former
members that now have refused or are unable to pay.
In the fourth quarter of 2000 the Corporation concluded that it was possible to
provide a reasonable estimate of U.S. Gypsum's liability for asbestos cases to
be filed through 2003 as well as those currently pending. Based on an
independent study, the Corporation determined that, although substantial
uncertainly remains, it was probable that asbestos claims currently pending
against U.S. Gypsum and future asbestos claims to be filed against it through
2003 (both property damage and personal injury) could be resolved for an amount
between $889 million and $1,281 million, including defense costs, and that
within this range the most likely estimate was $1,185 million. However, these
amounts are expected to be expended over a period extending several years beyond
2003, because asbestos cases have historically been resolved an average of three
years after filing. In the fourth quarter of 2000, the Corporation recorded a
pretax charge of $850 million to results of operations, which, combined with the
previously existing reserve, increased U.S. Gypsum's reserve for asbestos claims
to $1,185 million. During the first quarter of 2001, U.S. Gypsum's payments for
asbestos claims and related legal fees totaled $57 million, reducing its reserve
for asbestos claims to $1,128 million as of March 31, 2001. Insurance recovery
during the first quarter of 2001 amounted to $5 million, leaving U.S. Gypsum
with a corresponding receivable from insurance carriers (the estimated portion
of the reserved amount that is expected to be paid or reimbursed by insurance)
of $81 million as of March 31, 2001, down from $86 million as of December 31,
2000. The Corporation will continue to evaluate from time to time the impact of
new information and trends on established reserves in future periods. The above
amounts are stated before tax benefit and are not discounted to present value.
Although the Corporation estimates the probable liability for asbestos claims to
be filed against U.S. Gypsum through 2003 to be in the range set forth above,
it is also possible that the cost of resolving claims will be greater than that
set forth in this range, which would require an additional charge to results of
operations. Further, with regard to asbestos claims that may be filed after
2003, the Corporation does not believe that adequate information currently
exists to allow it to reasonably estimate the number of claims to be filed
beyond 2003, or the liability associated with such claims. However, claims will
continue to be asserted after 2003, and it is probable that prior to the end of
2003 the Corporation will be able to reasonably estimate costs associated with
claims to be filed after 2003 and will charge results of operations for such
costs.
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The Corporation has attempted to evaluate and weigh all relevant factors in
estimating U.S. Gypsum's liability. However, the Corporation cautions that
liability in asbestos cases is difficult to predict and involves many subjective
judgments that can be affected by the uncertainties identified above, as well as
other presently unanticipated factors that may arise. Many of these factors,
including but not limited to bankruptcies of co-defendants, are outside of U.S.
Gypsum's control. In particular, the long term effect of the recent bankruptcies
of other defendants (including two in 2001) and the absence of the sharing of
settlement costs with the other Center members is presently unknown; although,
as stated above, settlement demands and costs in the first quarter 2001 have
increased significantly. As a result, it is reasonably possible that actual
costs may exceed the estimate set forth above and that this difference may be
material. In addition, asbestos claims will continue to be asserted after 2003,
and it is probable that subsequent information will allow the Corporation to
estimate the costs associated with those cases. When such events occur,
additional charges to results of operations will be necessary in amounts that
cannot presently be reasonably estimated, but which are likely to be material to
the period in which they are taken.
Conclusion: Recent asbestos costs and charges, combined with declines in
operating results, have adversely affected the Corporation's access to capital,
results of operations, and financial position, but the Corporation currently
believes that it will have sufficient cash flow and other capital resources to
enable it to meet its obligations and maintain its operations for the reasonably
foreseeable future. (See Item 2, Management's Discussion and Analysis of Results
of Operations and Financial Condition.) However, the Corporation's liquidity and
financial position could be further negatively affected by numerous factors
affecting the asbestos litigation, including, but not limited to, the
continuation or acceleration of recent unfavorable trends in asbestos settlement
demands and costs, the continued possibility of additional bankruptcies of other
defendants, material liquidity demands based on bonding requirements, and
material decreases in cash flow and capital resources. If adverse developments
occur with respect to such factors, the asbestos litigation will have a material
adverse impact on the Corporation's results, liquidity, and financial position.
ENVIRONMENTAL LITIGATION
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. In most of these sites, the involvement of the
Corporation or its subsidiaries is expected to be minimal. The Corporation
believes that appropriate reserves have been established for its potential
liability in connection with all Superfund sites but continuously reviews its
accruals as additional information becomes available. Such reserves take into
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account all known or estimated costs associated with these sites, including site
investigations and feasibility costs, site cleanup and remediation, legal costs,
and fines and penalties, if any. In addition, environmental costs connected with
site cleanups on USG-owned property also are covered by reserves established in
accordance with the foregoing. The Corporation believes that neither these
matters nor any other known governmental proceeding regarding environmental
matters will have a material adverse effect upon its results of operations or
financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(10a) Fourth Amendment to Supplemental Retirement Plan of USG
Corporation, dated as of April 11, 2001.
(15) Letter from Arthur Andersen LLP regarding unaudited financial
information.
A Form 8-K was filed on March 23, 2001, to report under Item 5
"Other Events" information related to market conditions and
asbestos liability matters.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By /s/ Dean H. Goossen
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Dean H. Goossen,
Corporate Secretary,
USG Corporation
By /s/ Raymond T. Belz
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April 27, 2001 Raymond T. Belz,
Senior Vice President and
Controller,
USG Corporation
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