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 September 30, 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 September 30, 2001, 43,460,145 shares of USG common stock were
outstanding.
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings:
Three Months and Nine Months
Ended September 30, 2001 and 2000 3
Consolidated Balance Sheets:
As of September 30, 2001 and December 31, 2000 4
Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 23
Report of Independent Public Accountants 35
PART II OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 3. Defaults Upon Senior Securities 43
Item 6. Exhibits and Reports on Form 8-K 43
SIGNATURES 44
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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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 842 $ 956 $ 2,474 $ 2,940
Cost of products sold 734 761 2,196 2,233
Selling and administrative expenses 69 73 202 236
Chapter 11 reorganization expenses (1) - 9 -
Provision for restructuring expenses (9) - (9) -
------------ ------------ ------------ ------------
Operating profit 49 122 76 471
Interest expense 1 13 31 38
Interest income (1) (1) (4) (4)
Other expense, net 2 3 2 4
------------ ------------ ------------ ------------
Earnings before income taxes 47 107 47 433
Income taxes 20 42 22 169
------------ ------------ ------------ ------------
Net earnings 27 65 25 264
============ ============ ============ ============
Earnings per common share:
Basic 0.61 1.48 0.57 5.68
Diluted 0.61 1.48 0.57 5.66
Dividends paid per common share - 0.15 0.025 0.45
Average common shares 43,460,145 43,948,520 43,423,602 46,524,166
Average diluted common shares 43,460,145 44,086,452 43,423,602 46,716,812
</Table>
See accompanying Notes to Consolidated Financial Statements.
-3-
USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 395 $ 70
Receivables (net of reserves - $16 and $18) 328 305
Inventories 267 271
Income taxes receivable 71 -
Deferred income taxes 82 194
Other current assets 43 36
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Total current assets 1,186 876
Property, plant and equipment (net of reserves
for depreciation and depletion - $540 and $470) 1,820 1,830
Deferred income taxes 256 257
Other assets 237 251
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Total Assets 3,499 3,214
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 160 200
Accrued expenses 184 280
Taxes on income - 19
Notes payable - 6
Current portion of long-term debt - 141
Current portion of asbestos reserve - 250
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Total current liabilities 344 896
Long-term debt 3 564
Long-term asbestos reserve - 935
Other liabilities 336 355
Liabilities subject to compromise 2,322 -
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (255) (256)
Capital received in excess of par value 409 411
Accumulated other comprehensive loss (38) (45)
Retained earnings 373 349
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Total stockholders' equity 494 464
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Total Liabilities and Stockholders' Equity 3,499 3,214
======= =======
See accompanying Notes to Consolidated Financial Statements.
-4-
USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
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2001 2000
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OPERATING ACTIVITIES:
Net earnings $ 25 $ 264
Adjustments to reconcile net earnings to net cash:
Depreciation, depletion and amortization 80 74
Deferred income taxes 106 (32)
Gain on asset dispositions - (1)
(Increase) decrease in working capital:
Receivables (93) (1)
Inventories 4 (26)
Payables 102 28
Accrued expenses 7 (48)
Increase in other assets (20) (8)
Increase in other liabilities 9 6
Asbestos reserve, net of receivables (102) 33
Liabilities subject to compromise (46) -
Other, net 32 (6)
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Net cash from operating activities 104 283
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INVESTING ACTIVITIES:
Capital expenditures (75) (310)
Net proceeds from asset dispositions 1 2
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Net cash to investing activities (74) (308)
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FINANCING ACTIVITIES:
Issuance of debt 262 137
Repayment of debt (131) (105)
Short-term borrowings, net 165 44
Cash dividends paid (1) (20)
Purchases of common stock - (207)
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Net cash from (to) financing activities 295 (151)
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Net increase (decrease) in cash and cash equivalents 325 (176)
Cash and cash equivalents at beginning of period 70 197
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Cash and cash equivalents at end of period 395 21
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 31 45
Income taxes (refunded) paid, net (4) 206
See accompanying Notes to Consolidated Financial Statements.
-5-
USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements of USG Corporation ("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
September 30, 2001, and December 31, 2000, results of operations for
the three months and nine months ended September 30, 2001 and 2000 and
cash flows for the nine months ended September 30, 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) VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), the Corporation and the ten
United States subsidiaries listed below (collectively, the "Debtors"),
filed voluntary petitions for reorganization (the "Filing") under
chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code")
in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The chapter 11 cases of the Debtors (collectively,
the "Chapter 11 Cases") have been consolidated for purposes of joint
administration as In re: USG Corporation et al. (case no. 01-2094). The
Chapter 11 Cases do not include any of USG's non-U.S. subsidiaries. The
following subsidiaries filed chapter 11 petitions:
United States Gypsum Company
USG Interiors, Inc.
USG Interiors International, Inc.
L&W Supply Corporation
Beadex Manufacturing, LLC
B-R Pipeline Company
La Mirada Products Co., Inc.
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Stocking Specialists, Inc.
USG Industries, Inc.
USG Pipeline Company
This action was taken to resolve asbestos-related claims in a fair and
equitable manner, to protect the long-term value of the Debtors'
businesses, and to maintain the Debtors' leadership positions in their
markets.
CONSEQUENCES OF THE FILING
The Debtors are operating their businesses without interruption as
debtors-in-possession subject to the provisions of the Bankruptcy Code.
All vendors are being paid for all goods furnished and services
provided after the Filing. However, as a consequence of the Filing, all
pending litigation against the Debtors as of the Petition Date is
stayed, and no party may take any action to pursue or collect
pre-petition claims except pursuant to an order of the Bankruptcy
Court. It is the Debtors' intention to address all pending and future
asbestos-related claims and all other pre-petition claims in a plan of
reorganization. However, it is currently impossible to predict with any
degree of certainty how the plan will treat asbestos and other
pre-petition claims and what impact the Filing and any reorganization
plan may have on the shares of the Corporation's common stock. The
formulation and implementation of the plan of reorganization could take
a significant period of time.
Three creditors' committees, one representing asbestos personal injury
claimants, another representing asbestos property damage claimants and
a third representing general unsecured creditors, have been appointed
as official committees in the Chapter 11 Cases and, in accordance with
the provisions of the Bankruptcy Code, will have the right to be heard
on all matters that come before the Bankruptcy Court. The Corporation
expects that the appointed committees, together with a legal
representative of future asbestos claimants to be appointed by the
Bankruptcy Court, will play important roles in the Chapter 11 Cases and
the negotiation of the terms of any plan of reorganization.
Pursuant to the Bankruptcy Code, the Debtors initially had the
exclusive right to propose a plan of reorganization for 120 days
following the Petition Date, until October 23, 2001, unless extended.
The Debtors are requesting that the Bankruptcy Court extend the period
of exclusivity until May 1, 2002, and expect this request to be
granted. The Debtors are likely to seek one or more additional
extensions of the exclusivity period depending on developments in the
Chapter 11 Cases. If the Debtors fail to file a plan of reorganization
during such extension period, or if such plan is not accepted by the
requisite numbers of creditors and equity holders entitled to vote on
the plan, other parties in interest in the Chapter 11 Cases may be
permitted to propose their own plan(s) of reorganization for the
Debtors.
-7-
The Corporation is unable to predict at this time what the
treatment of creditors and equity security holders of the respective
Debtors will be under any proposed plan or plans of reorganization.
Such plan or plans may provide, among other things, that all present
and future asbestos-related liabilities of the Debtors will be
discharged and assumed and resolved by one or more independently
administered trusts established in compliance with Section 524(g) of
the Bankruptcy Code. Such plan or plans may also provide for the
issuance of an injunction by the Bankruptcy Court pursuant to Section
524(g) of the Bankruptcy Code that will enjoin actions against the
reorganized Debtors alleging asbestos-related claims, which claims will
be paid in whole or in part by one or more Section 524(g) trusts.
Similar plans of reorganization have been confirmed in chapter 11 cases
of other companies involved in asbestos-related litigation. Section
524(g) of the Bankruptcy Code provides that, if certain specified
conditions are satisfied, a court may issue a supplemental permanent
injunction barring the assertion of asbestos-related claims against the
reorganized company and channeling those claims to an independent
trust.
The Corporation is unable to predict at this time what treatment will
be accorded under any such reorganization plan or plans to intercompany
indebtedness, licenses, transfers of goods and services, and other
intercompany arrangements, transactions and relationships that were
entered into prior to the Petition Date. These arrangements,
transactions, and relationships may be challenged by various parties in
the Chapter 11 Cases, and the outcome of those challenges, if any, may
have an impact on the treatment of various claims under such plan or
plans.
The Bankruptcy Court may confirm a plan of reorganization only upon
making certain findings required by the Bankruptcy Code, and a plan may
be confirmed over the dissent of non-accepting creditors and equity
security holders if certain requirements of the Bankruptcy Code are
met. The payment rights and other entitlements of pre-petition
creditors and USG shareholders may be substantially altered by any plan
or plans of reorganization confirmed in the Chapter 11 Cases. There is
no assurance that there will be sufficient assets to satisfy the
Debtors' pre-petition liabilities in whole or in part, and the
pre-petition creditors of some Debtors may be treated differently than
those of other Debtors. Pre-petition creditors may receive under a plan
or plans less than 100% of the face value of their claims, and the
interests of the Corporation's equity security holders may be
substantially diluted or cancelled in whole or in part. As noted above,
it is not possible at this time to predict the outcome of the Chapter
11 Cases, the terms and provisions of any plan or plans of
reorganization, or the effect of the Chapter 11 reorganization process
on the claims of the pre-petition creditors of the Debtors or the
interests of the Corporation's equity security holders.
CHAPTER 11 FINANCING
A $350 million debtor-in-possession financing facility from JP Morgan
Chase
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(the "DIP Facility") was approved by the Bankruptcy Court on July
31, 2001. The DIP Facility is available to supplement liquidity and
fund operations during the reorganization process. Borrowing
availability under the DIP Facility is based primarily on accounts
receivable and inventory levels and to a lesser extent, property, plant
and equipment. As of September 30, 2001, borrowing availability under
the DIP Facility was $322 million; however, there have been no
borrowings or letters of credit issued as of that date. The Corporation
believes, based on information presently available to it, that cash
available from operations and the DIP Facility will provide sufficient
liquidity to allow its businesses to operate without interruption.
As of September 30, 2001, the Corporation had $395 million of cash and
cash equivalents, on a consolidated basis. Of this amount, $133 million
was in the possession of non-Debtor subsidiaries outside of the United
States.
FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" and on a going concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the
ordinary course of business. However, as a result of the Filing, such
realization of assets and liquidation of liabilities, without
substantial adjustments and/or changes of ownership, are subject to
uncertainty. Given this uncertainty, there is doubt about continuing
the going concern basis of presentation. While operating as
debtors-in-possession under the protection of Chapter 11 of the
Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise
as permitted in the ordinary course of business, the Debtors, or some
of them, may sell or otherwise dispose of assets and liquidate or
settle liabilities for some amounts other than those reflected in the
consolidated financial statements. Further, a plan of reorganization
could materially change the amounts and classifications in the
historical consolidated financial statements.
As of the date of this report, virtually all of the Corporation's
pre-petition debt is in default due to the Filing. As described below,
the accompanying consolidated financial statements present the Debtors'
pre-petition debt under the caption "Liabilities Subject to
Compromise." This includes debt outstanding of $467 million under the
pre-petition bank credit facilities and $537 million of other
outstanding debt. The Corporation accelerated the amortization of its
debt-related costs attributable to the Debtors and recorded a pretax
expense of $2 million during the second quarter of 2001, which was
included under the caption "Chapter 11 Reorganization Expenses."
As reflected in the consolidated financial statements, liabilities
subject to compromise refers to Debtors' liabilities incurred prior to
the
-9-
commencement of the Chapter 11 Cases. The amounts of the various
liabilities that are subject to compromise are set forth below. These
amounts represent the Corporation's estimate of known or potential
pre-petition claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments. Adjustments
may result from (i) negotiations; (ii) actions of the Bankruptcy Court;
(iii) further developments with respect to disputed claims; (iv)
rejection of executory contracts and unexpired leases; (v) the
determination as to the value of any collateral securing claims; (vi)
proofs of claim; or (vii) other events. Payment terms for these amounts
will be established in connection with the Chapter 11 Cases.
Pursuant to the Bankruptcy Code, schedules have been filed by the
Debtors with the Bankruptcy Court on October 23, 2001, setting forth
the assets and liabilities of the Debtors as of the date of the Filing.
Differences between amounts recorded by the Debtors and claims filed by
creditors will be investigated and resolved as part of the proceedings
in the Chapter 11 Cases. No bar dates have been set for the filing of
proofs of claim against the Debtors. Accordingly, the ultimate number
and allowed amount of such claims are not presently known.
The Debtors have received approval from the Bankruptcy Court to pay or
otherwise honor certain of their pre-petition obligations, including
employee wages, salaries, benefits and other employee obligations, and
from limited available funds, pre-petition claims of certain critical
vendors, real estate taxes, certain customer programs and warranty
claims and certain other pre-petition claims.
Since the Petition Date, contractual interest expense not accrued or
recorded on pre-petition debt totaled $21 million, of which $20 million
related to the three months ended September 30, 2001.
The Corporation believes, based on information presently available to
it, that cash available from operations and DIP financing will provide
sufficient liquidity to allow its businesses to operate without
interruption. This includes its ability to meet post-petition
obligations of the Debtors and to meet obligations of the non-debtor
subsidiaries. The appropriateness of using the going concern basis for
the Corporation's financial statements is dependent upon, among other
things, (i) the Corporation's ability to comply with the terms of the
DIP financing and any cash management order entered by the Bankruptcy
Court in connection with the Chapter 11 Cases; (ii) the ability of the
Corporation to maintain adequate cash on hand; (iii) the ability of the
Corporation to generate cash from operations; (iv) confirmation of a
plan or plans of reorganization under the Bankruptcy Code; and (v) the
Corporation's ability to achieve profitability following such
confirmation.
-10-
Liabilities subject to compromise in the consolidated and DIP balance
sheets consist of the following items as of September 30, 2001 (dollars
in millions):
Accounts payable $ 176
Accrued expenses 89
Debt 1,004
Asbestos reserve 1,061
Other long-term liabilities 33
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Subtotal 2,363
Elimination of intercompany accounts payable (41)
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Total liabilities subject to compromise 2,322
=======
Chapter 11 reorganization expenses in the consolidated and DIP
statements of earnings consist of the following for the quarter and
nine months ended September 30, 2001 (dollars in millions):
Three Months Nine Months
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Legal and financial advisory fees $ 1 9
Accelerated amortization of debt
issuance costs - 2
Interest income (2) (2)
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Total Chapter 11 reorganization expenses (1) 9
============ ===========
DIP FINANCIAL STATEMENTS
Under the Bankruptcy Code, the Corporation is required to file
periodically with the Bankruptcy Court various documents including
financial statements of the Debtors (the "Debtor-In-Possession" or
"DIP" Financial Statements). The Corporation cautions that these
financial statements are prepared according to requirements under the
Bankruptcy Code. While these financial statements accurately provide
information required under bankruptcy law, they are nonetheless
unconsolidated, unaudited, and are prepared in a format different from
that used in the Corporation's consolidated financial statements filed
under the securities laws. Accordingly, the Corporation believes the
substance and format do not allow meaningful comparison with the
Corporation's regular publicly disclosed consolidated financial
statements. The condensed financial statements of the Debtors are
presented as follows:
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USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS)
(UNAUDITED)
PERIODS ENDED SEPTEMBER 30, 2001 THREE MONTHS NINE MONTHS
------------ -----------
Net sales $ 750 $ 2,210
Cost of products sold 668 2,003
Selling and administrative expenses 57 168
Chapter 11 reorganization expenses (1) 9
Provision for restructuring expenses (9) (9)
Interest expense 1 27
Interest income (1) (3)
Other expense, net 1 8
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Earnings before income taxes 34 7
Income taxes 16 10
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Net earnings(loss) 18 (3)
======== =======
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USG CORPORATION
DEBTOR-IN-POSSESSION BALANCE SHEET
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF
SEPTEMBER 30,
2001
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ASSETS
Cash and cash equivalents $ 262
Receivables (net of reserve - $12) 274
Inventories 224
Income taxes receivable 72
Deferred income taxes 82
Other current assets 42
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Total current assets 956
Property, plant and equipment (net of
reserve for depreciation and depletion - $459) 1,582
Deferred income taxes 274
Other assets 504
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Total Assets 3,316
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 135
Accrued expenses 160
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Total current liabilities 295
Other liabilities 329
Liabilities subject to compromise 2,322
Stockholders' Equity:
Preferred stock -
Common stock 5
Treasury stock (255)
Capital received in excess of par value 96
Accumulated other comprehensive income 7
Retained earnings 517
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Total stockholders' equity 370
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Total Liabilities and Stockholders' Equity 3,316
=======
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USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 2001
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OPERATING ACTIVITIES:
Net loss $ (3)
Adjustments to reconcile net loss to net cash:
Depreciation, depletion and amortization 68
Deferred income taxes 108
(Increase) decrease in working capital:
Receivables (180)
Inventories (4)
Payables 107
Accrued expenses 6
Pre-Petition Intercompany receivable 7
Post-Petition Intercompany receivable (108)
Increase in other assets (41)
Increase in other liabilities 9
Asbestos reserve, net of receivables (102)
Liabilities subject to compromise (46)
Other, net 42
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Net cash to operating activities (137)
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INVESTING ACTIVITIES:
Capital expenditures (44)
Net proceeds from asset dispositions 1
-----
Net cash to investing activities (43)
-----
FINANCING ACTIVITIES:
Issuance of debt 262
Repayment of debt (56)
Short-term borrowings, net 200
Cash dividends paid (1)
-----
Net cash from financing activities 405
-----
Net increase in cash and cash equivalents 225
Cash and cash equivalents at beginning of period 37
-----
Cash and cash equivalents at end of period 262
=====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 26
Income taxes refunded, net (16)
-14-
INTERCOMPANY TRANSACTIONS
In the normal course of business, the operating subsidiaries and the
parent company of the Corporation engage in intercompany transactions.
To document the relations created by these transactions, the parent
company ("Corporate") and the operating subsidiaries have, from the
formation of USG Corporation in 1985, been parties to intercompany loan
agreements which evidence their obligations as borrowers or rights as
lenders arising out of intercompany cash transfers and various
allocated intercompany charges (the "Intercompany Corporate
Transactions").
The Corporation operates a consolidated cash management system under
which the cash receipts of the domestic operating subsidiaries are
ultimately concentrated in accounts of Corporate and cash disbursements
for those operating subsidiaries originate from those Corporate
concentration accounts. Allocated intercompany charges from Corporate
to the operating subsidiaries primarily include expenses related to
rent, property taxes, information technology and research and
development, while allocated intercompany charges between certain
operating subsidiaries primarily include expenses for shared marketing,
sales, customer service, engineering and accounting services. Detailed
accounting records are maintained of all cash flows and intercompany
charges through the system in either direction and net balances,
receivables or payables, of such cash transactions are tracked on a
regular basis with interest earned or paid on the balances. During the
first six months of 2001, USG took steps to secure the obligations from
each of the principal operating subsidiaries under the intercompany
loan agreements when it became clear that U.S. Gypsum's asbestos
liability claims were becoming an increasingly greater burden on the
Corporation's cash resources. As of June 30, 2001, U.S. Gypsum's net
payable balance to Corporate for Intercompany Corporate Transactions
was $212 million. USG Interiors' net payable balance to Corporate was
$103 million. L&W Supply had a net receivable balance from Corporate of
$86 million.
In addition to the above transactions, the operating subsidiaries
engage in ordinary course purchase and sale of products with other
operating subsidiaries (the "Intercompany Trade Transactions").
Detailed accounting records also are maintained of all such
transactions, and settlements are made on a monthly basis.
Certain Intercompany Trade Transactions between U.S. and non-U.S.
operating subsidiaries are settled via wire transfer payments
utilizing several payment systems.
(3) EARNINGS PER SHARE
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
-15-
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):
NET SHARES PER SHARE
THREE MONTHS ENDED SEPTEMBER 30, EARNINGS (000) AMOUNT
---------------------------------------------------------------------
2001
Basic earnings $ 27 43,460 $ 0.61
Dilutive effect of stock options -
----------------------------------------------------------------------
Diluted earnings 27 43,460 0.61
======================================================================
2000
Basic earnings $ 65 43,949 $ 1.48
Dilutive effect of stock options 137
----------------------------------------------------------------------
Diluted earnings 65 44,086 1.48
======================================================================
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2001
Basic earnings $ 25 43,424 $ 0.57
Dilutive effect of stock options -
----------------------------------------------------------------------
Diluted earnings 25 43,424 0.57
======================================================================
2000
Basic earnings $ 264 46,524 $ 5.68
Dilutive effect of stock options 193
----------------------------------------------------------------------
Diluted earnings 264 46,717 5.66
======================================================================
Because of the market value of the Corporation's shares of common stock
in 2001, there were no common stock equivalents for the three months
and nine months ended September 30, 2001.
(4) STOCK OPTION GRANTS
As of September 30, 2001, common shares totaling 2,752,600 were
reserved for future issuance in conjunction with existing stock option
grants. In addition, 1,722,311 common shares were reserved for future
grants. Shares
-16-
issued in option exercises may be from original issue or available
treasury shares.
(5) OPERATING SEGMENTS
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):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------
NET SALES: 2001 2000 2001 2000
------------------- -------------------
North American Gypsum 504 575 1,445 1,800
Worldwide Ceilings 168 183 511 537
Building Products Distribution 294 346 867 1,070
Eliminations (124) (148) (349) (467)
----- ------ ------ ------
Total USG Corporation 842 956 2,474 2,940
===== ====== ====== ======
OPERATING PROFIT:
North American Gypsum 27 78 22 361
Worldwide Ceilings 10 18 28 53
Building Products Distribution 16 33 53 88
Corporate (12) (8) (27) (34)
Chapter 11 reorganization expenses 1 - (9) -
Provision for restructuring expenses 9 - 9 -
Eliminations (2) 1 - 3
----- ------ ------ ------
Total USG Corporation 49 122 76 471
===== ====== ====== ======
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(6) COMPREHENSIVE INCOME
The components of comprehensive income are summarized in the following
tables (dollars in millions):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-----------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
TOTAL COMPREHENSIVE INCOME:
Net earnings 27 65 25 264
Accumulated other comprehensive
income (loss) (8) (4) 7 (13)
---- ---- ---- ----
Total 19 61 32 251
==== ==== ==== ====
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS):
After-tax gain (loss) on derivatives (3) - 15 -
Deferred currency translation (5) (4) (8) (13)
---- ---- ---- ----
Total (8) (4) 7 (13)
==== ==== ==== ====
The tax impact on the gain (loss) on derivatives was a benefit of $2
million in the third quarter of 2001, and tax of $10 million for the
first nine months of 2001. There was no tax impact on the foreign
currency translation adjustments.
(7) FINANCIAL INSTRUMENTS
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 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 September 30, 2001, the net
after-tax derivative gain in accumulated other comprehensive income was
$64 million and $15 million, respectively. During the third quarter of
2001, $1 million of accumulated after-tax gains ($2 million pretax)
were
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reclassified from accumulated other comprehensive income to
earnings. As of September 30, 2001, the estimated after-tax gain
expected to be reclassified within the next twelve months from
accumulated other comprehensive loss into earnings is $4 million.
Commodity Risk: The Corporation uses swap contracts to hedge
anticipated purchases of wastepaper and fuel to be used in its
manufacturing and shipping operations. These contracts, all of which
mature by December 31, 2003, 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.
The Corporation also uses swap contracts from time to time to hedge
anticipated purchases of natural gas. During the second quarter of
2001, the Corporation received proceeds of $35 million ($21 million
after-tax) from the termination of all natural gas swap contracts that
were scheduled to mature through 2005. In accordance with SFAS No. 133,
the net after-tax gain resulting from the termination of these
contracts remains in accumulated other comprehensive income and is
reclassified into earnings in the same periods during which the hedged
forecasted transactions are scheduled to occur. As of September 30,
2001, the Corporation had no outstanding natural gas swap agreements
and $32 million ($20 million after-tax) of the proceeds received in the
second quarter remained in accumulated other comprehensive income.
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 (loss) 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 September 30, 2001, the Corporation had no outstanding interest rate
swap agreements.
(8) RESTRUCTURING
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 was designed to streamline operations and improve
business efficiency.
The salaried workforce reduction program was completed as of June 30,
2001, with the termination of 394 salaried employees and the
elimination of 179
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open salaried positions. In addition, 73 hourly employees were
terminated and 44 open hourly positions were eliminated. Closure of the
three gypsum wallboard manufacturing lines and other operations is
expected to be substantially completed by December 31, 2001.
During the third quarter of 2001, USG reversed $9 million of the
restructuring reserve due to changes from previous estimates and to
reflect a change in the scope of restructuring activities undertaken.
The primary change involved a decision made in September to eliminate a
portion of the closure activities originally planned at the Alabaster,
Michigan, facility.
Payments totaling $18 million during the first nine months of 2001 were
charged against the restructuring reserve. Including the third quarter
reversal, the reserve balance as of September 30, 2001, was $7 million.
The restructuring reserve was included in accrued expenses as of
December 31, 2000, and in liabilities subject to compromise as of
September 30, 2001, on the consolidated balance sheets.
All restructuring-related payments are being funded with cash from
normal operations. The remaining restructuring reserves are considered
adequate to cover committed restructuring actions. The following table
details the restructuring reserve and first nine months' activity
(dollars in millions):
RESERVE RESERVE RESERVE
BALANCE UTILI- RESERVE BALANCE
12/31/00 ZATION REVERSAL 9/30/01
---------------------------------------------------------------------------------
Severance (salaried) $ 15 $ (15) $ - $ -
Razing buildings and equipment 12 (1) (6) 5
Line shutdown and removal 5 (1) (2) 2
Contract cancellations
and severance (hourly) 2 (1) (1) -
---------------------------------------------------------------------------------
Total 34 (18) (9) 7
=================================================================================
Also, during the third quarter of 2001, the Corporation reversed
restructuring-related inventory reserves totaling $3 million to cost of
products sold because the sale or use of certain affected inventory
exceeded expectations.
(9) LITIGATION
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.
-20-
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.
(10) ACCOUNTS RECEIVABLE FACILITY
Under a revolving accounts receivable facility, the trade receivables
of U.S. Gypsum and USG Interiors, Inc. were being purchased up to June
25, 2001, 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
were originally issued to an affiliate of Citicorp North America, Inc.
and later assumed by Citibank N.A. USG Funding is a separate corporate
entity that had its own separate creditors that were entitled to be
satisfied out of USG Funding's assets prior to any value in USG Funding
becoming available to its shareholder.
On June 26, 2001, USG Funding notified the trustee that an Early
Amortization Event, as defined in the agreement, had occurred effective
with the bankruptcy filing of USG Corporation on June 25, 2001. As a
result, transfers of receivables to the trust ceased and, on July 12,
2001, all outstanding obligations under the accounts receivable
facility were repaid and the facility was terminated.
(11) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued four new
accounting standards.
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" requires all business combinations initiated after June
30, 2001, to be accounted for using the purchase method. This statement
becomes effective January 1, 2002.
SFAS No. 142, "Goodwill and Other Intangible Assets" eliminates the
amortization of goodwill (projected to be approximately $4 million for
2002) over its estimated useful life. Instead, most goodwill will be
subject to at least an annual assessment for impairment by applying a
fair-value-based test. In addition, acquired intangible assets will be
separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented or
exchanged. This statement becomes effective January 1, 2002.
-21-
SFAS No. 143, "Accounting for Asset Retirement Obligations" requires
entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This
statement becomes effective January 1, 2003.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" supersedes SFAS No. 121 and a portion of APB Opinion No. 30.
This statement establishes a single accounting model for the disposal
of long-lived assets and resolves significant implementation issues
related to SFAS No. 121. This statement becomes effective January 1,
2002.
The Corporation has not determined the impact that the adoption of
these statements will have on its financial statements.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), USG Corporation ("USG" or the
"Corporation") and the ten United States subsidiaries listed below
(collectively, the "Debtors"), filed voluntary petitions for reorganization (the
"Filing") under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The chapter 11 cases of the Debtors (collectively, the
"Chapter 11 Cases") have been consolidated for purposes of joint administration
as In re: USG Corporation et al. (case no. 01-2094). The Chapter 11 Cases do not
include any of USG's non-U.S. subsidiaries. The following subsidiaries filed
chapter 11 petitions:
United States Gypsum Company
USG Interiors, Inc.
USG Interiors International, Inc.
L&W Supply Corporation
Beadex Manufacturing, LLC
B-R Pipeline Company
La Mirada Products Co., Inc.
Stocking Specialists, Inc.
USG Industries, Inc.
USG Pipeline Company
This action was taken to resolve asbestos-related claims in a fair and equitable
manner, to protect the long-term value of the Debtors' businesses, and to
maintain the Debtors' leadership positions in their markets.
BACKGROUND OF THE FILING
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 cases. Recent chapter 11 filings by other companies subject to
asbestos litigation dramatically increased U.S. Gypsum's asbestos costs beyond
its legitimate liability. The Corporation has been committed to finding a
legislative solution to the increase in asbestos costs. However, it became
apparent that a timely resolution to the problem through legislation was not
feasible, and the Corporation determined that voluntary protection under chapter
11 would be the best alternative for obtaining a fair and final resolution of
U.S. Gypsum's asbestos liability and the best way to preserve value for
stakeholders. See Part II, Item 1. "Legal Proceedings" for additional
information on asbestos litigation.
USG was the eighth major company with a large number of asbestos claims that
filed a chapter 11 petition in the 18 months prior to the Petition Date. Since
1994, U.S. Gypsum has been named in more than 250,000 asbestos-related personal
injury
-23-
claims and paid approximately $575 million (before insurance recoveries) to
manage and resolve asbestos-related litigation. Based on an independent study
conducted in 2000 and on U.S. Gypsum's historical experience of litigating
asbestos claims in the tort system, the Corporation estimated that U.S. Gypsum's
probable liability for costs associated with asbestos cases pending as of
December 31, 2000, and expected to be filed through 2003 to be between $889
million and $1,281 million. In the fourth quarter of 2000, U.S. Gypsum recorded
a noncash, pretax provision of $850 million, increasing its total reserve for
asbestos claims to $1,185 million as of December 31, 2000. Between January 1,
2001, and the Petition Date, U.S. Gypsum has received more than 26,000 new
claims. U.S. Gypsum's asbestos-related personal injury costs (before insurance)
rose from $30 million in 1997 to $162 million in 2000, and were expected to
exceed $275 million in 2001. Because of the Filing, there is greater uncertainty
concerning the liability associated with asbestos cases, as discussed below.
CONSEQUENCES OF THE FILING
The Debtors are operating their businesses without interruption as
debtors-in-possession subject to the provisions of the Bankruptcy Code. All
vendors will be paid for all goods furnished and services provided after the
Filing. However, as a consequence of the Filing, all pending litigation against
the Debtors as of the Petition Date is stayed, and no party may take any action
to pursue or collect pre-petition claims except pursuant to order of the
Bankruptcy Court. It is the Debtors' intention to address all pending and future
asbestos-related claims and all other pre-petition claims in a plan of
reorganization. However, it is currently impossible to predict with any degree
of certainty how the plan will treat asbestos and other pre-petition claims and
what the impact of Filing and any reorganization plan may have on the shares of
the Corporation's common stock. The formulation and implementation of the plan
of reorganization could take a significant period of time.
Three creditors' committees, one representing asbestos personal injury
claimants, another representing asbestos property damage claimants and a third
representing general unsecured creditors, have been appointed as official
committees in the Chapter 11 Cases and, in accordance with the provisions of the
Bankruptcy Code, will have the right to be heard on all matters that come before
the Bankruptcy Court. The Corporation expects that the appointed committees,
together with a legal representative of future asbestos claimants to be
appointed by the Bankruptcy Court, will play important roles in the Chapter 11
Cases and the negotiation of the terms of any plan of reorganization.
CHAPTER 11 FINANCING
A $350 million debtor-in-possession financing facility from JP Morgan Chase (the
"DIP Facility") was approved by the Bankruptcy Court on July 31, 2001. The DIP
Facility is available to supplement liquidity and fund operations during the
reorganization process. The Corporation believes, based on information presently
available to it, that cash available from operations and the DIP Facility will
provide sufficient liquidity to allow its businesses to operate without
-24-
interruption. See "Available Liquidity" below for more information on the DIP
Facility.
As of September 30, 2001, the Corporation had $395 million of cash and cash
equivalents, on a consolidated basis. Of this amount, $133 million was in the
possession of non-Debtor subsidiaries outside of the United States.
ACCOUNTING IMPACT
The Corporation is required to follow AICPA Statement of Position 90-7 ("SOP
90-7"), "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code." Pursuant to SOP 90-7, the Corporation's pre-petition liabilities that are
subject to compromise are reported separately on the consolidated balance sheet.
Virtually all of the Corporation's pre-petition debt is currently in default and
was recorded at face value and classified within liabilities subject to
compromise. U.S. Gypsum's asbestos liability also is classified within
liabilities subject to compromise. See Note 2. "Voluntary Reorganization Under
Chapter 11" which includes information related to financial statement
presentation, the debtor-in-possession statements and detail of the liabilities
subject to compromise and Chapter 11 reorganization expenses.
CONSOLIDATED RESULTS
NET SALES
Net sales in the third quarter of 2001 were $842 million, down 12% from $956
million in the third quarter of 2000. For the first nine months of 2001, net
sales totaled $2,474 million, down 16% from $2,940 million in the comparable
2000 period. Net sales in 2001 continue to be unfavorable versus 2000 primarily
due to a decline in selling prices for SHEETROCK brand gypsum wallboard sold by
U.S. Gypsum. Prices have fallen considerably over the past two years as the
gypsum wallboard industry has added a significant amount of new capacity.
However, there was some improvement in market conditions during the third
quarter of 2001 as demand for gypsum wallboard grew and some excess industry
capacity closed, allowing U.S. Gypsum to raise prices for the first time since
the end of 1999. This positive trend was offset somewhat by a slowdown in
commercial construction.
COST OF PRODUCTS SOLD
Cost of products sold in the third quarter and first nine months of 2001
decreased 4% and 2% from the respective 2000 periods primarily due to the
absence in 2001 of asbestos-related charges recorded by U.S. Gypsum in 2000.
Asbestos-related charges amounted to $27 million and $77 million in the third
quarter and first nine months of 2000, respectively. In addition, during the
third quarter of 2001, USG reversed restructuring-related inventory reserves
totaling $3 million to cost of products sold because the sale or use of certain
affected inventory exceeded expectations.
-25-
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the third quarter were down 5% from a
year ago primarily due to lower expenses for marketing programs and travel. For
the first nine months, selling and administrative expenses were down 14% from
2000 largely due to lower levels of compensation and benefits. As a percent of
net sales, selling and administrative expenses for both the third quarter and
first nine months of 2001 were 8.2%, up from 7.6% and 8.0% for the comparable
2000 periods due to the lower level of net sales in 2001.
CHAPTER 11 REORGANIZATION EXPENSES
During the third quarter of 2001, USG recorded $2 million of interest income,
partially offset by an additional $1 million of legal and financial advisory
fees. Under SOP 90-7, interest income earned on cash accumulated as a result of
the Filing is recorded as an offset to chapter 11 reorganization expenses. For
the first nine months of 2001, USG incurred chapter 11 reorganization expenses
of $9 million consisting of legal and financial advisory fees of $9 million and
accelerated amortization of debt issuance costs of $2 million, partially offset
by interest income of $2 million.
PROVISION FOR RESTRUCTURING EXPENSES
During the third quarter of 2001, USG reversed $9 million of the restructuring
reserve recorded in the fourth quarter of 2000 due to changes from previous
estimates and to reflect a change in the scope of restructuring activities
undertaken. The primary change involved a decision made in September to
eliminate a portion of the closure activities originally planned at the
Alabaster, Michigan, facility.
OPERATING PROFIT
Third quarter 2001 operating profit of $49 million declined 60% from $122
million in the third quarter of 2000. Operating profit of $76 million for the
first nine months of 2001 was down 84% from $471 million for the comparable 2000
period. These declines primarily reflect lower gypsum wallboard selling prices.
INTEREST EXPENSE
Third quarter of 2001 interest expense of $1 million primarily related to the
amortization of DIP financing fees. Under SOP 90-7, virtually all of the
Corporation's outstanding debt was classified as pre-petition and included in
liabilities subject to compromise and interest expense on this debt is no longer
being accrued and recorded. Consequently, comparisons of interest expense for
2001 and 2000 are not meaningful. Since the Petition Date, contractual interest
expense not accrued or recorded on pre-petition debt totaled $21 million, of
which $20 million related to the third quarter of 2001.
-26-
INCOME TAXES
Income tax expense amounted to $20 million and $22 million in the third quarter
and first nine months of 2001, respectively, compared with $42 million and $169
million for the prior-year periods.
NET EARNINGS
Net earnings of $27 million, or $0.61 per share, were reported for the third
quarter of 2001 compared with $65 million, or $1.48 per diluted share, for the
third quarter of 2000. For the first nine months of 2001, net earnings of $25
million, or $0.57 per share, were down significantly from $264 million, or $5.66
per diluted share, a year ago.
CORE BUSINESS RESULTS
(dollars in millions) THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
NET SALES: 2001 2000 2001 2000
------ ------- -------- -------
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company 459 528 1,321 1,662
CGC Inc. (gypsum) 53 53 152 159
Other subsidiaries* 33 30 86 81
Eliminations (41) (36) (114) (102)
--- --- ----- -----
Total 504 575 1,445 1,800
--- --- ----- -----
WORLDWIDE CEILINGS:
USG Interiors, Inc. 120 133 370 391
USG International 54 59 162 174
CGC Inc. (ceilings) 10 12 31 33
Eliminations (16) (21) (52) (61)
--- --- ----- -----
Total 168 183 511 537
--- --- ----- -----
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 294 346 867 1,070
--- --- ----- -----
Eliminations (124) (148) (349) (467)
--- --- ----- -----
Total USG Corporation 842 956 2,474 2,940
=== === ===== =====
-27-
(dollars in millions) THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ -------------------
2001 2000 2001 2000
------- --------- -------- -------
OPERATING PROFIT (LOSS):
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company 13 64 (14) 319
CGC Inc. (gypsum) 6 9 17 26
Other subsidiaries* 8 5 19 16
-- --- -- ---
Total 27 78 22 361
-- --- -- ---
WORLDWIDE CEILINGS:
USG Interiors, Inc. 9 17 27 49
USG International (1) - (3) 1
CGC Inc. (ceilings) 2 1 4 3
-- --- -- ---
Total 10 18 28 53
-- --- -- ---
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 16 33 53 88
-- --- -- ---
Corporate (12) (8) (27) (34)
Chapter 11 reorganization expenses 1 - (9) -
Provision for restructuring expenses 9 - 9 -
Eliminations (2) 1 - 3
-- --- -- ---
Total USG Corporation 49 122 76 471
== === == ===
*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 in the third quarter and first nine months of 2001 declined 12% and
20% from the respective prior-year periods. Operating profit fell 65% and 94%
for the same periods.
Third quarter net sales for U.S. Gypsum were down 13% primarily due to lower
selling prices, offset in part by increased shipments of SHEETROCK brand gypsum
wallboard. The nationwide average realized price per thousand square feet (the
selling price less freight to the customer) of SHEETROCK brand gypsum wallboard
was $82.25 in the third quarter of 2001. This price was down 32% from $121.13 in
the third quarter of 2000 primarily due to the significant amount of industry
capacity added over the past two years. However, selling prices, which had
fallen for six consecutive quarters, began to rise during the third quarter of
2001. Improved market conditions enabled U.S. Gypsum to implement several price
increases during the quarter leading to a 14% increase in its average price
compared with the second quarter of 2001. For the first nine months of 2001, the
average price of SHEETROCK brand gypsum wallboard was $82.07 per thousand square
feet, down 42% from $141.38 for the comparable 2000 period. U.S. Gypsum sold 2.7
-28-
billion square feet of SHEETROCK brand gypsum wallboard during the third quarter
of 2001, a record for any quarter for the company and a 10% increase over third
quarter 2000 shipments.
Third quarter operating profit for U.S. Gypsum was down 80% primarily due to
SHEETROCK brand gypsum wallboard's lower selling prices, offset in part by
increased shipments and lower manufacturing costs. Costs were down primarily due
to lower prices for energy (natural gas and electric power) and wastepaper, the
primary raw material of wallboard paper. U.S. Gypsum's plants operated at 97% of
capacity in the third quarter of 2001 compared with the estimated average rate
of 86% for the U.S. wallboard industry.
Third quarter net sales for the gypsum business of Canada-based CGC Inc. were
unchanged from last year as increased shipments of gypsum wallboard offset the
impact of lower selling prices. Operating profit dropped to $6 million from $9
million reflecting the combination of the lower selling prices and higher
manufacturing costs.
WORLDWIDE CEILINGS
Net sales and operating profit declined 8% and 44%, respectively, from the third
quarter of 2000. For the first nine months, net sales and operating profit
declined 5% and 47%, respectively, from the comparable 2000 period. These
results reflect weakness in market conditions for ceiling products worldwide, as
the slowdown experienced previously in international markets spread to North
America. USG's domestic subsidiary, USG Interiors, reported third quarter net
sales of $120 million and operating profit of $9 million, down 10% and 47%,
respectively, from the third quarter of 2000. Lower shipments of both ceiling
tile and grid products were the primary cause of the declines. Work on many
major commercial construction projects slowed during the quarter, and some were
suspended indefinitely, as job cutbacks and a slowing economy lessened the need
for new or renovated office and retail space.
BUILDING PRODUCTS DISTRIBUTION
Third quarter 2001 net sales and operating profit declined 15% and 52%,
respectively, from the third quarter of 2000. For the first nine months of 2001,
net sales declined 19% and operating profit fell 40%. Lower prices for wallboard
and complementary products resulted in lower revenues at USG's specialty
building products distribution subsidiary, L&W Supply Corporation. Nearly half
of L&W's revenue is generated from gypsum wallboard. During the third quarter,
the profit margin on wallboard sold by L&W declined by almost $10.00 per
thousand square feet compared to the margin experienced in the third quarter of
2000. L&W Supply currently operates 189 locations in the United States
distributing a variety of gypsum, ceilings and related building materials.
-29-
MARKET CONDITIONS AND OUTLOOK
USG is currently forecasting U.S. housing starts in 2001 to approximate the
1.569 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 has been fairly solid as sales of
existing homes in 2000 and 2001 remain at historically high levels. However,
recent sales of existing homes have shown a decline and therefore the
Corporation is cautious whether this trend will continue into 2002.
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.
Current information indicates that floor space for which contracts were signed
was up slightly in 2000 as compared to 1999.
Excess industry capacity has led to significant declines in market prices for
gypsum wallboard over the past two years. Market conditions for gypsum wallboard
improved somewhat during the third quarter of 2001 due to growth in demand and
the closure of some excess capacity in the past year by USG and other wallboard
manufacturers, but it is unclear how long this trend will last. There has been a
slowdown in commercial construction and there are signs of softness in the
housing market. Also, repair and remodel activity could be affected by a drop in
consumer confidence. Slowdowns in these markets would translate into lower
levels of demand for USG's products and cause renewed pressure on gypsum
wallboard pricing and on margins for USG's other businesses.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital (current assets less current liabilities) as of September 30,
2001, amounted to $842 million and the ratio of current assets to current
liabilities was 3.45 to 1. Working capital information as of September 30, 2001
reflects the reclassification of pre-petition current liabilities (accounts
payable, accrued expenses, notes payable and the current portions of debt and
asbestos reserves) of the Debtors to liabilities subject to compromise. As of
December 31, 2000, current liabilities exceeded current assets by $20 million
and the ratio of current assets to current liabilities was .98 to 1.
Cash and cash equivalents as of September 30, 2001, amounted to $395 million, up
from $70 million as of December 31, 2000. During the first nine months of 2001,
net cash flows from operating activities totaled $104 million. Net cash flows to
investing activities (primarily capital spending) were $74 million. Net cash
flows from financing activities (primarily increased borrowings) were $295
million.
-30-
Receivables increased to $328 million as of September 30, 2001, from $305
million as of December 31, 2000, primarily reflecting a 6% increase in net sales
for the month of September 2001 as compared to December 2000. Inventories
decreased slightly to $267 million from $271 million. Accounts payable decreased
to $160 million from $200 million due in part to the reclassification of the
Debtors' pre-petition accounts payable to liabilities subject to compromise.
AVAILABLE LIQUIDITY
A $350 million DIP Facility from JP Morgan Chase was approved by the Bankruptcy
Court on July 31, 2001. The DIP Facility is available to supplement liquidity
and fund operations during the reorganization process. Borrowing availability
under the DIP Facility is based primarily on accounts receivable and inventory
levels and to a lesser extent, property, plant and equipment. As of September
30, 2001, borrowing availability under the DIP Facility was $322 million;
however, there have been no borrowings or letters of credit issued as of that
date. The Corporation believes, based on information presently available to it,
that cash available from operations and the DIP Facility will provide sufficient
liquidity to allow its businesses to operate without interruption.
CAPITAL EXPENDITURES
Capital spending amounted to $75 million in the first nine months of 2001
compared with $310 million in the corresponding 2000 period. As of September 30,
2001, remaining capital expenditure commitments for the replacement,
modernization and expansion of operations amounted to $73 million, compared with
$58 million as of December 31, 2000.
During the bankruptcy proceeding, USG expects to have limited external sources
of capital available and finite financial resources and liquidity to fund
potential future growth opportunities such as new products, acquisitions and
joint ventures.
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 was designed to
streamline operations and improve business efficiency.
The salaried workforce reduction program was completed as of June 30, 2001, with
the termination of 394 salaried employees and the elimination of 179 open
salaried positions. In addition, 73 hourly employees were terminated and 44 open
hourly positions were eliminated. Closure of the three gypsum wallboard
manufacturing lines and other operations is expected to be substantially
completed by December 31, 2001.
During the third quarter of 2001, USG reversed $9 million of the restructuring
reserve due to changes from previous estimates and to reflect a change in the
-31-
scope of restructuring activities undertaken. The primary change involved a
decision made in September to eliminate a portion of the closure activities
originally planned at the Alabaster, Michigan, facility.
Payments totaling $18 million during the first nine months of 2001 were charged
against the restructuring reserve. Including the third quarter reversal, the
reserve balance as of September 30, 2001 was $7 million. The restructuring
reserve was included in accrued expenses as of December 31, 2000, and in
liabilities subject to compromise as of September 30, 2001, on the consolidated
balance sheets.
All restructuring-related payments are being funded with cash from normal
operations. The remaining restructuring reserves are considered adequate to
cover committed restructuring actions. The following table details the
restructuring reserve and first nine months' activity (dollars in millions):
RESERVE RESERVE RESERVE
BALANCE UTILI- RESERVE BALANCE
12/31/00 ZATION REVERSAL 9/30/01
--------------------------------------------------------------------------------
Severance (salaried) $ 15 $(15) $ - $ -
Razing buildings and equipment 12 (1) (6) 5
Line shutdown and removal 5 (1) (2) 2
Contract cancellations
and severance (hourly) 2 (1) (1) -
--------------------------------------------------------------------------------
Total 34 (18) (9) 7
================================================================================
Also, during the third quarter of 2001, the Corporation reversed
restructuring-related inventory reserves totaling $3 million to cost of products
sold because the sale or use of certain affected inventory exceeded
expectations.
DEBT
As of September 30, 2001, total debt amounted to $1,007 million, of which $1,004
million was included in liabilities subject to compromise. As of December 31,
2000, total debt amounted to $711 million. The higher level of debt as of
September 30, 2001 primarily reflects a $388 million net increase in credit
facility borrowings, partially offset by a $60 million repayment of debt
outstanding in connection with an accounts receivable facility, $15 million
repayment of a Mexican term loan, a $6 million repayment of international
short-term notes and an $11 million repurchase of 9.25% senior notes due 2001.
All of these transactions occurred prior to the Filing, except for the repayment
of debt associated with the accounts receivable facility.
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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 prepared for the conversion to the euro in two phases. The first phase
addressed 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 January 1, 1999, and will be fully converted
by January 1, 2002, the mandatory conversion date. Based on its experience
during 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
As a result of the Filing, all pending asbestos lawsuits against the Company are
stayed, and no party may take any action to pursue or collect on such asbestos
claims absent specific authorization of the Bankruptcy Court. Since the Filing,
the Company has ceased making payments with respect to asbestos lawsuits,
including payments pursuant to settlements of asbestos lawsuits. Creditors'
committees have been approved representing asbestos personal injury and property
damage claimants with pending claims against the Company, and the Bankruptcy
Court is expected to appoint a legal representative for the interests of
potential future asbestos claimants. The Bankruptcy Court likely will set a
deadline for the filing of all present asbestos-related claims, including claims
by plaintiffs who entered into settlement agreements with the Company which have
not been paid. As part of the bankruptcy proceeding, it will be determined which
asbestos claims should be allowed, or compensated, and the aggregate value of
such claims.
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.
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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. The effects of the
Filing and the conduct, outcome and costs of the Chapter 11 Cases, as well as
the ultimate costs associated with the Corporation's asbestos litigation may
differ from management's expectations. Actual results also may differ due to
other various factors, including economic activity such as construction
activity, interest rates and consumer confidence; competitive conditions such as
price and product competition; increases in raw material and energy costs; the
uncertain effects upon the global and domestic economies and the financial
markets of the terrorist attacks in New York City and Washington, D.C., on
September 11, 2001, and their aftermath; 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
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 September 30, 2001,
and the related condensed consolidated statements of earnings for the
three-month and nine-month periods ended September 30, 2001 and 2000 and the
condensed consolidated statements of cash flows for the nine-month periods ended
September 30, 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.
The accompanying condensed consolidated financial statements have been prepared
assuming that the Corporation will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Corporation voluntarily
filed for Chapter 11 bankruptcy protection on June 25, 2001. Management's plans
in regard to these matters are also described in Note 2. This action, which was
taken primarily as a result of asbestos litigation as discussed in Note 9 to the
condensed consolidated financial statements, raises substantial doubt about the
Corporation's ability to continue as a going concern. Such doubt includes, but
is not limited to, a possible change in control of the Corporation as well as a
potential change in the composition of the Corporation's business portfolio. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 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, United States Gypsum Company ("U.S.
Gypsum"), is among many defendants in lawsuits arising out of the manufacture
and sale of asbestos-containing materials. On June 25, 2001, U. S. Gypsum, the
Corporation, and other domestic subsidiaries ("the Debtors"), filed voluntary
petitions for relief (the "Filing") under chapter 11 of the U.S. Bankruptcy Code
to manage the growing costs of resolving asbestos claims and to achieve a fair
and final resolution of liability for both pending and future asbestos claims.
The chapter 11 cases are being jointly administered under Case No. 01-02094 in
the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). U.S. Gypsum's asbestos claims liability derives from its sale of
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. Certain of the
asbestos lawsuits against U.S. Gypsum 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"). Other asbestos lawsuits seek compensatory and, in many cases, punitive
damages for personal injury allegedly resulting from exposure to
asbestos-containing products (the "Personal Injury Cases").
As a result of the Filing, all pending asbestos lawsuits against U.S. Gypsum are
stayed, and no party may take any action to pursue or collect on such asbestos
claims absent specific authorization of the Bankruptcy Court. Since the Filing,
U.S. Gypsum has ceased making payments with respect to asbestos lawsuits,
including payments pursuant to settlements of asbestos lawsuits. Creditors'
committees have been approved representing asbestos personal injury and property
damage claimants with pending claims against U.S. Gypsum, and the Bankruptcy
Court is expected to appoint a legal representative for the interests of
potential future asbestos claimants. The Bankruptcy Court likely will set a
deadline for the filing of all present asbestos-related claims, including claims
by plaintiffs who entered into settlement agreements with U.S. Gypsum which have
not been paid. As part of the bankruptcy proceeding, it will be determined which
asbestos claims should be allowed, or compensated, and the aggregate value of
such claims.
U.S. Gypsum anticipates that its liability for pending and future asbestos
claims will be addressed in a plan of reorganization developed and approved in
the bankruptcy proceeding. Pursuant to the Bankruptcy Code, the Debtors had the
exclusive right to propose a plan of reorganization up to 120 days after the
Petition Date, or October 23, 2001, unless extended. The Debtors are requesting
that the Court extend the exclusivity period until May 1, 2002, and expect this
request to be granted. The Debtors are likely to seek one or more additional
extensions of the exclusivity period depending on developments in the bankruptcy
case. It is the Debtor's intention that the plan of reorganization will include
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the creation of a trust under Section 524(g) of the Bankruptcy Code which will
be funded to allow payment of asbestos claims and that, as a result of creation
of the trust, the bankruptcy court will issue a permanent injunction channeling
all asbestos-related claims to the trust and barring the assertion of pending or
future asbestos-related claims against the reorganized companies. It is
anticipated that the plan or plans of reorganization ultimately approved will
include all Debtors in the final resolution of asbestos-related claims that are
or might be asserted against U.S. Gypsum, the Corporation, and all other Debtor
affiliates.
In addition to the asbestos Personal Injury Cases pending against U.S. Gypsum,
one of the Corporation's subsidiaries and a Debtor in the bankruptcy proceeding,
L&W Supply Corporation, was named as a defendant in approximately 21 pending
Personal Injury Cases as of the Petition Date. L&W, a distributor of building
products manufactured by U.S. Gypsum and other building products manufacturers,
has not made any payments in the past to resolve Personal Injury Cases. It is
believed that L&W has been named as a defendant in Personal Injury Cases in its
role as a distributor of U.S. Gypsum products. Therefore, the Corporation
expects that any asbestos-related liability of L&W would be derivative of the
liability of U.S. Gypsum, and that any plan or plans of reorganization would
reflect that L&W's liability, if any, rests with U.S. Gypsum as the
manufacturer. However, because of the small number of Personal Injury Cases
against L&W and the lack of development of the cases against L&W, the
Corporation does not have sufficient information at this time to opine as to how
any plan or plans of reorganization will address any asbestos-related liability
of L&W and whether any such liability will be limited to L&W's role as a
distributor of U.S. Gypsum products.
The following is a summary of the Property Damage and Personal Injury Cases
pending against U.S. Gypsum as of the Petition Date. For a more comprehensive
discussion of these cases, see Note 17 to the financial statements in the
Corporation's 10-K for the year ended December 31, 2000.
Property Damage Cases: As of the Petition Date, U.S. Gypsum was a defendant in
eleven Property Damage Cases, most of which involved 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.). On June 15, 2001, a
Property Damage Case was filed by The County of Orange, Texas, in the district
court of Orange County, Texas, naming as defendants U.S. Gypsum and other
manufacturers of asbestos-containing materials. This was the first Property
Damage case filed against U.S. Gypsum since June 1998. The Orange County case is
a putative class action brought by The County of Orange on behalf of an alleged
class comprising the State of Texas, its public colleges and universities, and
all political subdivisions of the State of Texas. As to U.S. Gypsum, the
putative class also includes all private and/or non-public colleges,
universities, junior colleges, community colleges, and elementary and secondary
schools in the State of Texas. The Orange County action seeks recovery of the
costs of removing and replacing asbestos-containing materials in buildings at
issue as well as punitive damages.
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The complaint does not specify how many buildings are at issue. As a result of
the Filing, all Property Damage Cases, including the Central Wesleyan and Orange
County cases, are stayed against U.S. Gypsum. U.S. Gypsum's estimated cost of
resolving the Property Damage Cases is discussed below (see "Estimated Cost").
Personal Injury Cases: U.S. Gypsum is also a defendant in approximately 106,000
Personal Injury Cases pending as of the Petition Date (the date of the Filing),
as well as an additional approximately 52,000 Personal Injury Cases that are the
subject of settlement agreements. In the second quarter of 2001 (up to the
Petition Date), approximately 13,200 new Personal Injury Cases were filed
against U.S. Gypsum, as compared to 15,800 new filings in the second 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. As a result of the Filing, all Personal Injury Cases are stayed against U.
S. Gypsum, and new cases may not be filed due to the automatic stay.
Prior to the filing for relief under the U.S. Bankruptcy Code, U.S. Gypsum
managed the handling and settlement of Personal Injury Cases through its
membership in the Center for Claims Resolution (the "Center"). From 1988 up to
February 1, 2001, costs of defense and settlement of Personal Injury Cases were
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, was responsible for negotiating and paying its own
settlements separately. Effective July 31, 2001, the Center no longer provides
for the negotiation and defense of asbestos lawsuits, but the Center continues
to perform certain claims administration functions for its remaining members. As
of the Petition Date and as a result of the stay of asbestos lawsuits against
U.S. Gypsum, U.S. Gypsum no longer negotiates or pays settlements of Personal
Injury Cases and no longer requires the services of the Center in negotiating or
defending Personal Injury Cases. U.S. Gypsum may, however, continue to use the
Center to provide data regarding Personal Injury Cases as needed in the
bankruptcy proceeding.
In 2000 and years prior, U.S. Gypsum and other Center members negotiated a
number of settlements with plaintiffs' firms that included agreements to resolve
over time the firms' pending Personal Injury Cases as well as certain future
claims ("Long-Term Settlements"). With regard to future claims, these Long-Term
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 Long-Term Settlements
typically resolve claims for amounts consistent with historical per claim
settlement costs paid to the plaintiffs' firms involved. As a result of the
Filing, payments by U.S. Gypsum under these Long-Term Settlements have ceased,
and U. S. Gypsum expects that its obligations under these settlements will be
determined in the bankruptcy proceeding and plan of reorganization.
In 2000, U.S. Gypsum's payments to defend and resolve Personal Injury Cases
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totaled $162 million, of which $90 million was paid or reimbursed by insurance.
In 2000, the average settlement per case was approximately $2,600, exclusive of
defense costs. U. S. Gypsum paid $100 million in 1999 and $61 million in 1998 to
resolve Personal Injury Cases, compared to insurance payments totaling $85
million and $45.5 million, respectively.
In the first and second quarters of 2001, payments to resolve Personal Injury
Cases increased dramatically, primarily as a result of the bankruptcy filings of
other defendants in asbestos personal injury lawsuits. As a result of these
bankruptcy filings, plaintiffs substantially increased their settlement demands
to the remaining defendants, including U.S. Gypsum, to replace the expected
payments of the now-bankrupt defendants. In response to these increased
settlement demands, U.S. Gypsum attempted to manage its asbestos liability by
contesting, rather than settling, a greater number of cases that it believed to
be non-meritorious. As a result, in the first and second quarters of 2001, U.S.
Gypsum agreed to settle fewer Personal Injury Cases, but at a significantly
higher cost per case.
In the first quarter of 2001, U.S. Gypsum's total asbestos-related payments, net
of insurance recoveries, were approximately $52 million, and, in the second
quarter of 2001 (up to June 25, 2001), total asbestos-related payments, net of
insurance recoveries, were approximately $62 million. As of March 31, 2001, U.S.
Gypsum had estimated that expenditures for Personal Injury Cases in 2001 would
total approximately $275 million before insurance recoveries of approximately
$37 million.
As a result of these increasing settlement demands and the concern that federal
legislation addressing the asbestos litigation problem likely would not be
enacted within the necessary timeframe, U. S. Gypsum concluded that it would not
be able to manage and resolve its asbestos liability in the tort system, and, on
June 25, 2001, the Debtors filed a voluntary petition under Chapter 11 of the
Bankruptcy Code. U.S. Gypsum's estimated cost of resolving Personal Injury Cases
is discussed below (see "Estimated Cost").
Insurance Coverage: As of June 25, 2001, after deducting insurance used to date,
U.S. Gypsum had approximately $76.3 million of insurance remaining to cover
asbestos-related costs. After payments to U.S. Gypsum during the third quarter,
approximately $64 million remained as of September 30, 2001. This insurance is
scheduled to be paid over a period of approximately four years.
Estimated Cost: In evaluating U.S. Gypsum's estimated asbestos liability prior
to the Filing, the Corporation considered numerous uncertainties that made it
difficult to estimate reliably U.S. Gypsum's asbestos liability in the tort
system for both pending and future asbestos claims.
In the Property Damage Cases, such uncertainties included, but were not 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
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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 damages; and the
viability of claims for punitive and other forms of multiple damages.
Uncertainties in the Personal Injury Cases included, but were not 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. The Corporation reported that 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.
Prior to the fourth quarter of 2000, the Corporation, in the opinion of
management, was unable to reasonably estimate the probable cost of resolving
future asbestos claims in the tort system, although the Corporation had
estimated and reserved for costs associated with then-pending claims. However,
in 1999 and increasingly in 2000, as U.S. Gypsum entered into Long-Term
Settlements of Personal Injury Cases (discussed above), the Corporation
undertook a detailed, independent study of U.S. Gypsum's current and potential
future asbestos liability. This analysis was based on the assumption that U.S.
Gypsum's asbestos liability would continue to be resolved in the tort system.
The 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 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
Settlements 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
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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 in the tort system 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 remained, 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 in the
tort system 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. Consistent with this analysis, 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. However, at the time of recording
this reserve, it was expected that these amounts would be expended over a period
extending several years beyond 2003, because asbestos cases have historically
been resolved an average of three years after filing. The Corporation concluded
that it did not have adequate information to allow it to reasonably estimate the
number of claims to be filed after 2003, or the liability associated with such
claims.
During 2001, U.S. Gypsum's payments for asbestos claims and related legal fees
totaled approximately $124 million, reducing its reserve for asbestos claims to
$1,061 million as of September 30, 2001. Insurance recoveries during 2001 have
totaled approximately $22 million, leaving U.S. Gypsum with a receivable from
insurance carriers (the estimated portion of the reserved amount that is
expected to be paid or reimbursed by insurance) of approximately $64 million as
of September 30, 2001. The above amounts are stated before tax benefit and are
not discounted to present value.
It is the Corporation's view that, as a result of the Filing, there is even
greater uncertainty in estimating the reasonably possible range of asbestos
liability for pending and future claims as well as the most likely estimate of
liability within this range. There are significant differences in the treatment
of asbestos claims in a bankruptcy proceeding as compared to the tort litigation
system. Among other things, it is uncertain at this time how the Long-Term
Settlements will be treated in the bankruptcy proceeding and plan of
reorganization, and whether those settlements will be set aside; the number of
asbestos-related claims that will be filed in the proceeding; the number of
future claims that will be estimated in connection with preparing a plan of
reorganization; how claims for punitive damages and claims by persons with no
asbestos-related physical impairment will be treated and whether such claims
will be allowed; and the impact historical settlement values for asbestos claims
may have on the estimation of asbestos liability in the bankruptcy proceeding.
These uncertainties, as well as the uncertainties discussed above in connection
with the resolution of asbestos cases in the tort system, increase the
uncertainty of any estimate of asbestos liability.
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As a result of the increased uncertainty of estimating asbestos liability due to
the Filing, it is the Corporation's view that no change should be made to the
previously recorded reserve for asbestos claims, except in accordance with
obligations incurred prior to the Filing. However, it is possible that the cost
of resolving asbestos claims will be greater than that set forth in the recorded
reserve range. As the bankruptcy proceeding continues, it is expected that the
Corporation will obtain additional information that may provide greater
certainty to the expected range of liability.
Bond to Secure Certain CCR Obligations: In January 2001, U.S. Gypsum obtained a
performance bond from Safeco Insurance Company of America ("Safeco") in the
amount of $60.3 million to secure certain obligations of U.S. Gypsum for
extended payout settlements of Personal Injury Cases and other obligations owed
by U.S. Gypsum to the Center. The bond is secured by an irrevocable letter of
credit in the amount of $60.3 million issued by Chase Manhattan Bank to Safeco.
After the Filing, by letter dated July 6, 2001, the Center notified U.S. Gypsum
that certain amounts covered by the bond, totaling approximately $15.7 million,
were overdue from U.S. Gypsum to the Center. These amounts were for the payment
of, among other things, past settlements of Personal Injury Cases. As of
September 30, 2001, the Center had not made a demand on the bond. At present, it
is not known whether, if the Center makes a demand to Safeco under the bond,
Safeco will make payment to the Center under the performance bond and whether
Safeco will make a demand under the Chase irrevocable letter of credit. To the
extent that the letter of credit is drawn down, Chase likely will assert a
pre-petition claim in the bankruptcy proceeding against the Corporation for the
corresponding amount. The Corporation believes that it is likely that the Center
will make additional demands under the performance bond, which, in turn, may
result in further drawing down the Chase letter of credit. However, the
Corporation does not have sufficient information at this time to estimate the
amount, if any, that may be paid out under the performance bond or the amount,
if any, that may be drawn on the letter of credit.
Conclusion: There are many uncertainties associated with the resolution of
asbestos liability in the bankruptcy proceeding. These uncertainties include,
among others, the number of asbestos-related claims that will be filed against
the Debtors in the proceeding; the number of future claims that will be
estimated in connection with preparing a plan of reorganization; how the
Long-Term Settlements will be treated in the bankruptcy proceeding and plan of
reorganization, and whether those settlements will be set aside; how claims for
punitive damages and claims by persons with no asbestos-related physical
impairment will be treated and whether such claims will be allowed; the impact
historical settlement values for asbestos claims may have on the estimation of
asbestos liability in the bankruptcy proceeding; and the impact any relevant
potential federal legislation may have on the proceeding. The Corporation has
not revised its previously recorded reserve for asbestos liability, except by
reducing it in accordance with obligations incurred prior to the Filing. The
Corporation will continue to review its asbestos liability as the bankruptcy
proceeding progresses. It is possible that the Corporation's asbestos liability
may vary significantly from the recorded estimate of liability and that this
difference could be material to the results of operations in the period
recorded.
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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
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 3. DEFAULTS UPON SENIOR SECURITIES
Virtually all of the Corporation's pre-petition debt is in default due to
the Filing. See Note 2. "Voluntary Reorganization Under Chapter 11" to the
Corporation's consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Letter from Arthur Andersen LLP regarding unaudited financial
information.
(b) Reports on Form 8-K:
A Form 8-K was filed on August 27, 2001, to report under Item 5 "Other
Events and Regulation FD Disclosure" that, in accordance with
applicable bankruptcy law, the Corporation is required to file
periodically with the Bankruptcy Court various documents, including
certain financial information on an unconsolidated basis.
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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
------------------------------------
Dean H. Goossen,
Corporate Secretary,
USG Corporation
By /s/ Raymond T. Belz
------------------------------------
November 2, 2001
Raymond T. Belz,
Senior Vice President and Controller,
USG Corporation
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