UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-8864
USG CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3329400
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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As of March 31, 2002, 43,250,738 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 Ended March 31, 2002 and 2001 3
Consolidated Balance Sheets:
As of March 31, 2002 and December 31, 2001 4
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 24
Report of Independent Public Accountants 36
PART II OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 6. Exhibits and Reports on Form 8-K 46
SIGNATURES 47
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
------------------------------
2002 2001
------------ ------------
Net sales $ 829 $ 826
Cost of products sold 697 726
Selling and administrative expenses 82 68
Chapter 11 reorganization expenses 2 -
------------ ------------
Operating profit 48 32
Interest expense 1 14
Interest income (1) (1)
Other expense, net 1 1
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Earnings before income taxes 47 18
Income taxes 21 7
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Net earnings 26 11
============ ============
Basic earnings per common share 0.60 0.25
Diluted earnings per common share 0.60 0.25
Dividends paid per common share - 0.025
Average common shares 43,354,025 43,406,202
Average diluted common shares 43,354,025 43,459,017
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
As of As of
March 31, December 31,
2002 2001
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ASSETS
Current Assets:
Cash and cash equivalents $ 523 $ 493
Receivables (net of reserves - $18 and $17) 322 274
Inventories 263 254
Income taxes receivable 82 76
Deferred income taxes 54 66
Other current assets 49 34
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Total current assets 1,293 1,197
Property, plant and equipment (net of reserves
for depreciation and depletion - $616 and $592) 1,790 1,800
Deferred income taxes 223 243
Other assets 217 224
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Total Assets 3,523 3,464
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 164 140
Accrued expenses 191 181
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Total current liabilities 355 321
Long-term debt 2 2
Other liabilities 344 339
Liabilities subject to compromise 2,295 2,311
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (256) (255)
Capital received in excess of par value 410 408
Accumulated other comprehensive loss (22) (31)
Retained earnings 390 364
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Total stockholders' equity 527 491
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Total Liabilities and Stockholders' Equity 3,523 3,464
======= =======
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
----------------
2002 2001
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OPERATING ACTIVITIES:
Net earnings $ 26 $ 11
Adjustments to reconcile net earnings to net cash:
Depreciation, depletion and amortization 26 27
Deferred income taxes 27 63
(Increase) decrease in working capital:
Receivables (48) (44)
Income taxes receivable (6) (34)
Inventories (9) 4
Payables 24 (26)
Accrued expenses 12 (25)
Decrease (increase) in other assets 1 (10)
Increase in other liabilities 5 6
Increase (decrease) in asbestos reserve, net of receivables 3 (52)
Decrease in liabilities subject to compromise (16) -
Other, net - (1)
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Net cash from (to) operating activities 45 (81)
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INVESTING ACTIVITIES:
Capital expenditures (15) (29)
Net proceeds from asset dispositions - 1
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Net cash to investing activities (15) (28)
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FINANCING ACTIVITIES:
Issuance of debt - 95
Repayment of debt - (41)
Short-term borrowings, net - 21
Cash dividends paid - (1)
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Net cash from financing activities - 74
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Net increase (decrease) in cash and cash equivalents 30 (35)
Cash and cash equivalents at beginning of period 493 70
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Cash and cash equivalents at end of period 523 35
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 1 20
Income taxes refunded, net (1) (11)
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements of USG Corporation and its
subsidiaries ("USG" or "the Corporation") included herein have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Actual results could
differ from those estimates. In the opinion of management, the statements
reflect all adjustments, which are of a normal recurring nature, necessary
to present fairly the Corporation's financial position as of March 31,
2002, and December 31, 2001, and results of operations and cash flows for
the three months ended March 31, 2002 and 2001. Certain amounts in the
prior year financial statements have been reclassified to conform with the
2002 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 2001 Annual
Report on Form 10-K dated March 1, 2002.
(2) VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), the parent company (the "Parent
Company") of the Corporation and the 10 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 the
Corporation'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
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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 impossible to predict
currently how the plan will treat asbestos and other pre-petition claims
and what impact any reorganization plan may have on the shares of the
Corporation's common stock and other outstanding securities. 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, were organized in 2001.
These committees 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 for the interests 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 Bankruptcy
Court granted the Debtors' request to extend the period of exclusivity
until May 1, 2002. The Debtors filed a motion on April 30, 2002, to seek
extension of the period of exclusivity until November 1, 2002. The motion
will be heard later in May. 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
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be permitted to propose their own plan(s) of reorganization for the
Debtors.
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. 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 for payment in whole or
in part. Similar plans of reorganization have been confirmed in chapter 11
cases of other companies involved in asbestos-related litigation. However,
there is no assurance that such creation of a trust for the Debtors under
Section 524(g), or the issuance of such a permanent injunction, will be
approved by the Bankruptcy Court.
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. While it is
the Corporation's intent to seek a full recovery for its creditors,
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. 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. Recent developments in the
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Corporation's bankruptcy proceeding are discussed in Part II, Item 1.
"Legal Proceedings."
In connection with the Filing, the Corporation implemented a
Bankruptcy-Court-approved key employee retention plan that commenced on
July 1, 2001, and continues until the date the Corporation emerges from
bankruptcy, or June 30, 2004, whichever occurs first. Under the plan,
participants receive semiannual payments which began in January 2002. Costs
associated with the plan are being accrued pro rata over the term of the
plan.
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, which matures on June 25, 2004, 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 March 31, 2002, the Corporation had the capacity
to borrow up to $330 million. There were no outstanding borrowings under
the DIP Facility as of March 31, 2002. However, $11 million of standby
letters of credit were issued, leaving $319 million of unused borrowing
capacity available as of March 31, 2002.
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 $469 million under the pre-petition bank
credit facilities and $536 million of other outstanding debt. The
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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
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 were 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 proof-of-claim process in the
Chapter 11 Cases. The Bankruptcy Court has approved a bar date by which
proofs of claim must be filed against the Debtors for all claims other than
asbestos personal injury claims. The bar date will be eight months after
the beginning of the Debtors' notice program, which is currently expected
to commence in May 2002, with a bar date of January 15, 2003. The final bar
date will be included in the notices issued by the Debtors. Accordingly,
the ultimate number and allowed amount of such claims are not presently
known.
Subsequent to the Filing, the Debtors 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, environmental obligations,
certain customer programs and warranty claims, and certain other
pre-petition claims.
For the first quarter of 2002, contractual interest expense not accrued and
recorded on pre-petition debt totaled $18 million.
The Corporation believes that cash available from operations and the DIP
Facility will provide sufficient liquidity to allow its businesses to
operate in the normal course without interruption. This includes its
ability to meet post-petition obligations of the Debtors and to meet
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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 Facility and the 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.
Liabilities subject to compromise in the consolidated and DIP balance
sheets consist of the following items as of March 31, 2002 (dollars in
millions):
Accounts payable $ 159
Accrued expenses 75
Debt 1,005
Asbestos reserve 1,061
Other long-term liabilities 36
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Subtotal 2,336
Elimination of intercompany accounts payable (41)
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Total liabilities subject to compromise 2,295
=======
Chapter 11 reorganization expenses in the consolidated and DIP statements
of earnings consist of the following for the quarter ended March 31, 2002
(dollars in millions):
Legal and financial advisory fees $ 4
Interest income (2)
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Total Chapter 11 reorganization expenses 2
=======
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 the Bankruptcy
Code, they are nonetheless unconsolidated,
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unaudited and 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 Debtors consist of the
Parent Company and the following wholly owned subsidiaries: 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.; and USG Pipeline Company. On March 1, 2002, USG Funding, a non-debtor
subsidiary of USG Corporation, declared a dividend in the amount of $50
million payable to the Parent Company, which was paid in effect by
eliminating the intercompany payable from USG Corporation. This payment is
included in other (income) expense, net in the DIP statement of earnings
for the three months ended March 31, 2002. The condensed financial
statements of the Debtors are presented as follows:
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 2002
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Net sales $ 750
Cost of products sold 640
Selling and administrative expenses 71
Chapter 11 reorganization expenses 2
Interest expense 2
Other (income) expense, net (50)
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Earnings before income taxes 85
Income taxes 18
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Net earnings 67
=====
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USG CORPORATION
DEBTOR-IN-POSSESSION BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
MARCH 31, DECEMBER 31,
2002 2001
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ASSETS
Cash and cash equivalents $ 381 $ 346
Receivables (net of reserves - $14 and $13) 271 234
Inventories 224 215
Income taxes receivable 81 77
Deferred income taxes 54 66
Other current assets 49 33
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Total current assets 1,060 971
Property, plant and equipment (net of reserves
for depreciation and depletion - $501 and $481) 1,572 1,581
Deferred income taxes 238 258
Other assets 533 494
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Total Assets 3,403 3,304
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 138 112
Accrued expenses 162 153
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Total current liabilities 300 265
Other liabilities 337 333
Liabilities subject to compromise 2,295 2,311
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (256) (255)
Capital received in excess of par value 98 95
Accumulated other comprehensive income 19 12
Retained earnings 605 538
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Total stockholders' equity 471 395
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Total Liabilities and Stockholders' Equity 3,403 3,304
======= =======
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USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 2002
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OPERATING ACTIVITIES:
Net earnings $ 67
Adjustments to reconcile net earnings to net cash:
Depreciation, depletion and amortization 21
Deferred income taxes 28
(Increase) decrease in working capital:
Receivables (37)
Income tax receivable (4)
Inventories (9)
Payables 26
Accrued expenses 11
Increase in post-petition intercompany receivable (51)
Decrease in other assets 6
Increase in other liabilities 4
Increase in asbestos reserve, net of receivables 3
Decrease in liabilities subject to compromise (16)
Other, net (1)
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Net cash from operating activities 48
-----
INVESTING ACTIVITIES:
Capital expenditures (13)
-----
Net cash to investing activities (13)
-----
FINANCING ACTIVITIES:
Issuance of debt -
Repayment of debt -
Short-term borrowings, net -
-----
Net cash from financing activities -
-----
Net increase in cash and cash equivalents 35
Cash and cash equivalents at beginning of period 346
-----
Cash and cash equivalents at end of period 381
=====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 1
Income taxes refunded, net (5)
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INTERCOMPANY TRANSACTIONS
In the normal course of business, the operating subsidiaries and the Parent
Company engage in intercompany transactions. To document the relations
created by these transactions, the Parent Company and the operating
subsidiaries, from the formation of USG Corporation in 1985, have been
parties to intercompany loan agreements that evidence their obligations as
borrowers or rights as lenders arising out of intercompany cash transfers
and various allocated intercompany charges (the "Intercompany Corporate
Transactions"). During the first six months of 2001, the Parent Company
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.
The Corporation operates a consolidated cash management system under which
the cash receipts of the domestic operating subsidiaries are ultimately
concentrated in Parent Company accounts. Cash disbursements for those
operating subsidiaries originate from those Parent Company concentration
accounts. Allocated intercompany charges from the Parent Company 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. Net balances, receivables or payables of such cash
transactions are tracked on a regular basis, with interest earned or paid
on the balances. As of March 31, 2002, U.S. Gypsum's net pre-petition
payable balance to the Parent Company for Intercompany Corporate
Transactions was $314 million. USG Interiors, Inc.'s net pre-petition
payable balance to the Parent Company was $111 million. L&W Supply
Corporation had a net pre-petition receivable balance from the Parent
Company of $42 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.
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(3) EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common
shares outstanding for the period. Diluted earnings per share are based on
the weighted average number of common shares outstanding and the dilutive
effect of the potential exercise of outstanding stock options. The dilutive
effect of the potential exercise of outstanding options to purchase shares
of common stock is calculated using the treasury stock method. The
reconciliation of basic earnings per share to diluted earnings per share is
shown in the following table (dollars in millions except share data):
NET SHARES PER SHARE
THREE MONTHS ENDED MARCH 31, EARNINGS (000) AMOUNT
--------------------------------------------------------------------------
2002
Basic earnings $ 26 43,354 $ 0.60
Dilutive effect of stock options -
--------------------------------------------------------------------------
Diluted earnings 26 43,354 0.60
==========================================================================
2001
Basic earnings 11 43,406 0.25
Dilutive effect of stock options 53
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Diluted earnings 11 43,459 0.25
==========================================================================
(4) STOCK OPTION GRANTS
As of March 31, 2002, common shares totaling 2,733,025 were reserved for
future issuance in conjunction with existing stock option grants. In
addition, 1,946,887 common shares were reserved for future grants. Shares
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):
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NET SALES OPERATING PROFIT
--------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2002 2001 2002 2001
--------------------------------------------------------------------------
North American Gypsum $ 525 $ 483 $ 58 $ 15
Worldwide Ceilings 148 173 5 9
Building Products Distribution 275 286 7 15
Corporate - - (20) (8)
Chapter 11 reorganization expenses - - (2) -
Eliminations (119) (116) - 1
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Total 829 826 48 32
==========================================================================
(6) COMPREHENSIVE INCOME
The components of comprehensive income are summarized in the following
tables (dollars in millions):
THREE MONTHS
ENDED MARCH 31,
----------------
2002 2001
---- ----
TOTAL COMPREHENSIVE INCOME:
Net earnings $ 26 $ 11
Other comprehensive income 9 39
------------------------------------------------------------------------
Total 35 50
========================================================================
OTHER COMPREHENSIVE INCOME:
Net after-tax gain on derivatives 8 49
Foreign currency translation 1 (10)
------------------------------------------------------------------------
Total 9 39
========================================================================
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The tax impact on the gain on derivatives was $5 million in the first three
months of 2002, and $31 million in the first three months of 2001. There
was no tax impact on the foreign currency translation adjustments.
Accumulated other comprehensive loss was $22 million as of March 31, 2002,
and $31 million as of December 31, 2001. The net after-tax derivative gains
in accumulated other comprehensive loss were $24 million and $16 million as
of the respective dates. During the first three months of 2002, $0.6
million of accumulated net after-tax losses ($0.9 million pretax) were
reclassified from accumulated other comprehensive loss to earnings. As of
March 31, 2002, the estimated net after-tax gain expected to be
reclassified within the next 12 months from accumulated other comprehensive
loss into earnings is $14 million.
(7) FINANCIAL INSTRUMENTS
The Corporation uses derivative instruments to manage well-defined
commodity price and foreign currency exposures. The Corporation does not
use derivative instruments for trading purposes. Under SFAS No. 133, as
amended, all derivative instruments must 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 (loss) and is reclassified to earnings when the underlying
transaction has an impact on earnings.
Commodity Derivative Instruments: The Corporation uses swap contracts to
hedge anticipated purchases of natural gas to be used in its manufacturing
operations. These contracts are designated as cash flow hedges, and changes
in fair value are recorded in accumulated other comprehensive income (loss)
until the hedged transaction occurs, at which time it is reclassified to
earnings.
During the second quarter of 2001, the Corporation received proceeds of $35
million ($21 million after-tax) from the termination of natural gas swap
contracts 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 loss and is
reclassified into earnings in the period which the hedged forecasted
transactions are scheduled to occur. As of March 31, 2002, $29 million ($17
million after-tax) remained in accumulated other comprehensive loss.
During the first quarter of 2002, the Corporation entered into additional
natural gas swap contracts. The fair value of all outstanding natural gas
swap contracts was $12 million as of March 31, 2002, and all of these
contracts mature by December 31, 2003.
-18-
The Corporation also has swap agreements in place with Enron to hedge the
cost of wastepaper. As a result of Enron's bankruptcy filing in December
2001, the Corporation has discontinued hedge accounting with respect to
these swap contracts and changes in the fair value of these hedges are
being recognized in earnings during the period in which the change occurs.
The Corporation has reached an agreement with Enron, subject to Enron's
bankruptcy court's approval, to terminate all outstanding swap contracts in
exchange for a payment of $2.1 million. The fair value of these contracts
was ($2.6) million as of March 31, 2002.
Foreign Exchange Derivative Instruments: 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 has an impact on earnings. As of March 31, 2002, the
Corporation had no outstanding forward contracts.
Interest Rate Derivative Instruments: The Corporation is exposed to
interest rate changes and uses swap agreements from time to time to manage
this exposure. As of March 31, 2002, the Corporation had no outstanding
interest rate swap agreements.
(8) RESTRUCTURING
2001 Restructuring Plan: In the fourth quarter of 2001, the Corporation
recorded a pretax charge of $12 million related to a restructuring plan
that included the shutdown of a gypsum wallboard plant in Fremont, Calif.,
a drywall steel plant in Prestice, Czech Republic, a ceiling tile plant in
San Juan Ixhuatepec, Mexico, a ceiling tile manufacturing line in
Greenville, Miss., and other restructuring activities. The restructuring
plan, which is expected to be completed in 2002, is intended to allow the
Corporation to optimize its manufacturing operations.
Included in the $12 million charge was $8 million for severance related to
a workforce reduction of more than 350 positions (primarily hourly
positions), $2 million for the write-off of property, plant and equipment,
and $2 million for line shutdown and removal and contract cancellations.
The reserve for this plan was included in accrued expenses on the
consolidated balance sheets, and payments totaling $2 million and $1
million were charged against this reserve in the fourth quarter of 2001 and
first quarter of 2002, respectively. All payments for the 2001
restructuring plan are being funded with cash from normal operations.
-19-
As of March 31, 2002, the ceiling tile manufacturing line at Greenville,
Miss., and the plants in San Juan Ixhuatepec, Mexico, and Prestice, Czech
Republic, have been shutdown and 206 employees have been terminated, and 26
open positions have been eliminated. The Fremont, Calif., plant closed in
April 2002.
2000 Restructuring Plan: In the fourth quarter of 2000, the Corporation
recorded a pretax charge of $50 million related to a restructuring plan
that included a salaried workforce reduction and the shutdown of three
gypsum wallboard manufacturing lines and other operations. This
restructuring was designed to streamline operations and improve business
efficiency.
Included in the $50 million charge was $16 million for severance related to
the salaried workforce reduction of more than 500 positions, $15 million
for the write-off of property, plant and equipment, $12 million for razing
buildings and equipment, $5 million for line shutdown and removal, and $2
million for contract cancellations and severance for more than 100 hourly
positions. An additional restructuring-related charge of $4 million was
included in cost of products sold for the writedown of certain inventory.
During the third quarter of 2001, the Corporation reversed $9 million
pretax 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, Mich., facility. 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.
The reserve for the 2000 restructuring was included in liabilities subject
to compromise on the consolidated balance sheets and payments totaling $22
million were charged against this reserve through December 31, 2001. An
additional $2 million was charged against this reserve in the first quarter
of 2002. All payments for this plan are being funded with cash from normal
operations.
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 was completed by
December 31, 2001. Final payments for expenses related to these closures
are being made in the first half of 2002.
The following table details the restructuring reserves and first quarter
2002 activity (dollars in millions):
-20-
RESERVE RESERVE
BALANCE RESERVE BALANCE
12/31/01 UTILIZATION 3/31/02
-------------------------------------------------------------------------
2001 RESTRUCTURING:
Severance (primarily hourly) $ 6 $ (1) $ 5
Line shutdown/removal and
contract cancellations 2 - 2
-------------------------------------------------------------------------
Subtotal 8 (1) 7
-------------------------------------------------------------------------
2000 RESTRUCTURING:
Severance (salaried) - - -
Razing buildings and equipment 3 (2) 1
Line shutdown and removal 1 - 1
Contract cancellations
and severance (hourly) - - -
-------------------------------------------------------------------------
Subtotal 4 (2) 2
-------------------------------------------------------------------------
Total 12 (3) 9
=========================================================================
(9) NEW ACCOUNTING PRONOUNCEMENTS
The Corporation adopted three new accounting standards in the first quarter
of 2002.
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 standard, which
became effective January 1, 2002, had no impact on the Corporation's
financial statements upon adoption.
SFAS No. 142, "Goodwill and Other Intangible Assets," eliminates the
amortization of goodwill over its estimated useful life. Instead, 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 standard, which
became effective January 1, 2002, had an immaterial impact on the
Corporation's financial statements because goodwill is no longer subject to
amortization. The Corporation's annual rate of goodwill amortization was
-21-
approximately $4 million as of December 31, 2001. All of the Corporation's
goodwill, which does not include any acquired intangible assets, will be
assessed for impairment. As of the date of this report, the Corporation has
not completed its test for impairment and therefore has not determined the
full impact that the adoption of this standard will have on its financial
statements.
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 standard, which became effective January 1, 2002, had no
impact on the Corporation's financial statements upon adoption.
The Corporation will adopt SFAS No. 143, "Accounting for Asset Retirement
Obligations," in January 2003. This standard requires entities to record
the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. This standard becomes effective January 1,
2003, and is likely to have an impact on the Corporation's financial
statements. However, as of the date of this report, the Corporation has not
determined what impact the adoption of this standard may have on its
financial statements.
(10) GOODWILL - ADOPTION OF SFAS 142
The reconciliation of pro forma net earnings, basic earnings per share and
diluted earnings per share for the three months ended March 31, 2001, is
shown in the following table (dollars in millions except per-share data):
THREE MONTHS
ENDED MARCH 31,
--------------------
2002 2001
------ ------
NET EARNINGS:
Reported net earnings $ 26 $ 11
Add back: Goodwill amortization, net of tax - 1
-----------------------------------------------------------------------
Pro forma net earnings 26 12
=======================================================================
BASIC EARNINGS PER SHARE:
Reported net earnings 0.60 0.25
Add back: Goodwill amortization - 0.02
-----------------------------------------------------------------------
Pro forma net earnings 0.60 0.27
=======================================================================
DILUTED EARNINGS PER SHARE:
Reported net earnings 0.60 0.25
Add back: Goodwill amortization - 0.02
-----------------------------------------------------------------------
Pro forma net earnings 0.60 0.27
=======================================================================
-22-
(11) LITIGATION
United States Gypsum Company ("U.S. Gypsum"), is a defendant in asbestos
lawsuits alleging both property damage and personal injury. See Part II,
Item 1. "Legal Proceedings" for information concerning the asbestos
litigation.
The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as
one of numerous "potentially responsible parties" in a number of so-called
"Superfund" sites in the United States. The Corporation believes that
neither these matters nor any other known governmental proceeding regarding
environmental matters will have a material adverse effect upon its results
of operations or financial position. See Part II, Item 1. "Legal
Proceedings" for additional information on environmental litigation.
-23-
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"), the parent company (the "Parent
Company") of the Corporation and the 10 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 the Corporation'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
U.S. Gypsum is a defendant in asbestos lawsuits alleging both property damage
and personal injury. Chapter 11 filings during 2000 and early 2001 by other
companies subject to asbestos litigation dramatically increased U.S. Gypsum's
asbestos costs beyond its legitimate liability. The Corporation has been and
continues to be committed to finding a legislative solution to the increase in
asbestos costs. However, in 2001 it became apparent that a timely resolution to
the problem through legislation was not feasible. 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
-24-
claims and made cash payments of 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 accrued reserve for asbestos claims to $1,185 million as of December 31,
2000. Substantially all of this reserve related to personal injury claims and
reflected management's expectation that U.S. Gypsum's average cost per case
would increase, at least in the short term, due to distortions in the tort
system resulting from the bankruptcies of other defendants that led to increased
settlement demands from asbestos plaintiffs. Less than 10% of the reserve
related to defense and administrative costs. Between January 1, 2001, and the
Petition Date, U.S. Gypsum received more than 26,000 new claims. On a cash
basis, U.S. Gypsum's asbestos-related personal injury costs (before insurance)
rose from $30 million in 1997 to $162 million in 2000 and, absent the Filing,
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 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 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 impossible
to predict currently how the plan will treat asbestos and other pre-petition
claims and what impact any reorganization plan may have on the shares of the
Corporation's common stock and other outstanding securities. 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, were organized in 2001. These
committees 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 for the interests 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. Recent developments in
the Corporation's bankruptcy proceeding are discussed in Part II, Item 1 "Legal
Proceedings."
-25-
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 that cash available from
operations and the DIP Facility will provide sufficient liquidity to allow its
businesses to operate in the normal course without interruption. The DIP
Facility matures on June 25, 2004. See "Available Liquidity" below for more
information on the DIP Facility.
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 Part I, Item 1. 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.
OUTCOME OF THE FILING
The Corporation is unable to predict at this time what the treatment of
creditors and equity holders of the respective Debtors will be under any
proposed plan or plans of reorganization. While it is the Corporation's intent
to seek a full recovery for its creditors, 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. 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
creditors of the Debtors, or the interests of the Corporation's equity security
holders.
CONSOLIDATED RESULTS
NET SALES
Net sales in the first quarter of 2002 were $829 million, up slightly from $826
million in the first quarter of 2001.
A strong new housing market and a recovery in residential remodeling activity
led to increased net sales for the Corporation's North American Gypsum segment.
The increase in demand for gypsum wallboard from these markets resulted in
higher operating rates in the gypsum industry and higher selling prices on
gypsum wallboard. However, commercial construction, which is the major market
for the Corporation's ceilings business and also important to the distribution
business,
-26-
remains weak. Consequently, net sales declined for Worldwide Ceilings primarily
due to lower volume for domestic and international ceiling tile and grid. Net
sales for Building Products Distribution were down primarily due to lower
selling prices for its gypsum wallboard.
COST OF PRODUCTS SOLD
Cost of products sold in the first quarter of 2002 was $697 million, down 4%
from $726 million a year ago primarily due to lower energy costs.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased 21% versus the first quarter of
2001. This increase primarily reflects expenses in 2002 related to a
Bankruptcy-Court-approved key employee retention program and prior-year
reversals of accruals for incentive programs. As a percent of net sales, selling
and administrative expenses were 9.9% in the first quarter of 2002, up from 8.2%
in the comparable 2001 period.
CHAPTER 11 REORGANIZATION EXPENSES
In connection with the Filing, the Corporation recorded pretax chapter 11
reorganization expenses of $2 million in the first quarter of 2002. These
expenses consisted of legal and financial advisory fees of $4 million, partially
offset by bankruptcy-related interest income of $2 million.
OPERATING PROFIT
Operating profit in the first quarter of 2002 was $48 million, up 50% from $32
million in the first quarter of 2001. This increase primarily reflects higher
volume, increased selling prices and lower manufacturing costs for SHEETROCK
brand gypsum wallboard.
INTEREST EXPENSE
Interest expense of $1 million was incurred in the first quarter of 2002,
compared with $14 million in the first quarter of 2001. Under SOP 90-7,
virtually all of the Corporation's outstanding debt is classified as liabilities
subject to compromise, and interest expense on this debt has not been accrued
and recorded since the Petition Date. Consequently, comparisons of interest
expense for the first quarters of 2002 and 2001 are not meaningful. For the
first quarter of 2002, contractual interest expense not accrued and recorded on
pre-petition debt totaled $18 million.
INTEREST INCOME
Interest income of $1 million was recorded in the first quarter of 2002. This
amount represents interest earned on cash held by non-debtor subsidiaries.
INCOME TAXES
Income tax expense amounted to $21 million and $7 million in the first quarters
of 2002 and 2001, respectively. The effective tax rates were 44.4% and 39.0% for
the first three months of 2002 and 2001, respectively.
-27-
NET EARNINGS
Net earnings in the first quarter of 2002 were $26 million, up 136% from $11
million in the prior-year period. Diluted earnings per share increased 140% to
$0.60 from $0.25 a year ago.
CORE BUSINESS RESULTS
(dollars in millions) NET SALES OPERATING PROFIT
- ---------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2002 2001 2002 2001
- ---------------------------------------------------------------------
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 483 $ 442 $ 46 $ 5
CGC Inc. (gypsum) 50 50 6 6
Other subsidiaries* 30 24 6 4
Eliminations (38) (33) - -
- ---------------------------------------------------------------------
Total 525 483 58 15
- ---------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 111 126 7 8
USG International 42 54 (3) -
CGC Inc. (ceilings) 10 11 1 1
Eliminations (15) (18) - -
- ---------------------------------------------------------------------
Total 148 173 5 9
- ---------------------------------------------------------------------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 275 286 7 15
- ---------------------------------------------------------------------
Corporate - - (20) (8)
Chapter 11 reorganization expenses - - (2) -
Eliminations (119) (116) - 1
- ---------------------------------------------------------------------
Total USG Corporation 829 826 48 32
=====================================================================
*Includes USG Mexico, S.A. de C.V., a building products business in Mexico,
Gypsum Transportation Limited, a shipping company in Bermuda, and USG Canadian
Mining Ltd., a mining operation in Nova Scotia.
NORTH AMERICAN GYPSUM
Net sales of $525 million increased 9% from the first quarter of 2001, while
operating profit rose to $58 million from $15 million.
Net sales for U.S. Gypsum increased 9% reflecting increased shipments and higher
selling prices for SHEETROCK brand gypsum wallboard. U.S. Gypsum sold 2.6
billion square feet of SHEETROCK brand gypsum wallboard during the first quarter
of 2002, a first quarter record for the company and a 13% increase over 2.3
billion square feet in the first quarter of 2001. The average realized price per
thousand square feet (selling price less freight to the customer) was $95.84 in
the first quarter of 2002. This price was up 4% from the average realized price
of $92.31 in the first quarter of 2001, but down slightly from $96.22 in the
fourth quarter of 2001.
-28-
First quarter 2002 operating profit for U.S. Gypsum increased to $46 million
from $5 million in the first quarter of 2001. Increased shipments and higher
selling prices for gypsum wallboard contributed to the increase in operating
profit, but most of the improvement resulted from lower manufacturing costs.
Manufacturing costs for gypsum wallboard were down primarily due to lower energy
and raw material costs and from improved operating efficiencies.
U.S. Gypsum's wallboard plants operated at 95% of capacity in the first quarter
of 2002 versus an estimated average rate of 86% for the U.S. wallboard industry.
This compares with operating rates for the first quarter of 2001 of 83% for U.S.
Gypsum and an estimated 78% for the industry. Industry shipments of gypsum
wallboard in the first quarter of 2002 were up approximately 10% versus the same
period in 2001.
Net sales of $50 million and operating profit of $6 million for the gypsum
business of Canada-based CGC Inc. were unchanged from a year ago.
WORLDWIDE CEILINGS
Net sales of $148 million and operating profit of $5 million declined 14% and
44%, respectively, from the first quarter of 2001.
USG's domestic ceilings business, USG Interiors, Inc., reported a 12% drop in
sales primarily due to lower volume. Shipments of domestic ceiling tile and grid
are down in 2002 as the level of commercial construction, the primary market for
USG Interiors' products, has weakened. Operating profit for USG Interiors
decreased to $7 million from $8 million a year ago reflecting the lower volume,
partially offset by cost reductions. USG Interiors became more efficient
following the closure of a high-cost ceiling production line in the fourth
quarter of 2001. Manufacturing costs also benefited from lower energy and raw
materials costs.
Sales for USG International were down primarily due to lower demand in Europe
where the market for commercial ceiling products has weakened. An operating loss
for USG International of $3 million was experienced in the first quarter of 2002
compared with breakeven results in the first quarter of 2001.
Net sales for the ceilings division of CGC Inc. declined 9%, while operating
profit was unchanged compared to the first quarter of 2001.
BUILDING PRODUCTS DISTRIBUTION
Net sales of $275 million and operating profit of $7 million were down 4% and
53%, respectively, from the first quarter of 2001. These declines primarily
reflect lower selling prices for gypsum wallboard. In addition, sales and profit
for L&W Supply's complementary building products, primarily drywall metal, joint
treatment and ceiling products, also declined from the first quarter of 2001 as
a result of competitive market conditions. L&W Supply currently operates 178
locations in the United States distributing a variety of gypsum, ceilings and
related building materials.
-29-
MARKET CONDITIONS AND OUTLOOK
During 2001, excess industry capacity led to significant declines in market
prices for gypsum wallboard. However, market conditions for gypsum wallboard
improved somewhat during the second half of 2001 due to growth in demand, the
closure of some excess capacity and reduced operations by the Corporation and
other gypsum wallboard manufacturers.
The outlook for 2002 is mixed. The new housing market has remained strong
through the first three months of 2002. Growth in new housing and a recovery in
residential remodeling resulted in a first quarter record for gypsum wallboard
shipments. The favorable levels of activity in these markets, which together
account for nearly two-thirds of all demand for gypsum wallboard, and increased
operating rates in the gypsum industry allowed selling prices to rise. Continued
strength in these markets is uncertain and will rely on favorable levels of
consumer confidence and interest rates. Commercial construction has been
affected by white-collar-job layoffs and reduced corporate spending, which have
caused office vacancy rates to increase in many markets. Commercial construction
is expected to decline in 2002.
During 2002, the Corporation will remain focused on managing the fundamentals of
its business such as customer satisfaction, costs and profitability and will
diligently continue its attempt to resolve the Chapter 11 proceedings,
consistent with the goal of achieving a fair, comprehensive and final resolution
to its asbestos liability.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital (current assets less current liabilities) as of March 31, 2002,
amounted to $938 million, and the ratio of current assets to current liabilities
was 3.64-to-1. As of December 31, 2001, working capital amounted to $876
million, and the ratio of current assets to current liabilities was 3.73-to-1.
Cash and cash equivalents as of March 31, 2002, amounted to $523 million,
compared with $493 million as of December 31, 2001. During the first quarter of
2002, net cash flows from operating activities totaled $45 million. Net cash
flows to investing activities, which represented capital spending were $15
million. There were no financing activities during the first three months of
2002.
Receivables increased to $322 million as of March 31, 2002, from $274 million as
of December 31, 2001, primarily reflecting a 21% increase in net sales for the
month of March 2002 as compared with December 2001. Inventories and payables
also were up from December 31, 2001, primarily due to the increased level of
business. Inventories increased to $263 million from $254 million, and accounts
payable increased to $164 million from $140 million.
-30-
DEBT
As of March 31, 2002, total debt amounted to $1,007 million, of which $1,005
million was included in liabilities subject to compromise. These amounts were
unchanged from the December 31, 2001, levels.
AVAILABLE LIQUIDITY
A $350 million 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 March 31, 2002, the
Corporation had the capacity to borrow up to $330 million. There were no
outstanding borrowings under the DIP Facility as of March 31, 2002. However, $11
million of standby letters of credit were issued, leaving $319 million of unused
borrowing capacity available as of March 31, 2002. The Corporation believes that
cash available from operations and the DIP Facility will provide sufficient
liquidity to allow its businesses to operate in the normal course without
interruption. As of March 31, 2002, the Corporation had $523 million of cash and
cash equivalents on a consolidated basis. Of this amount, $142 million was in
the possession of non-Debtor subsidiaries.
CAPITAL EXPENDITURES
Capital spending amounted to $15 million in the first quarter of 2002 compared
with $29 million in the corresponding 2001 period. As of March 31, 2002,
remaining capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $79 million, compared with $63 million as of
December 31, 2001.
During the bankruptcy proceeding, the Corporation expects to have limited
ability to access capital to fund potential future growth opportunities such as
new products, acquisitions and joint ventures. In addition, one of the terms of
the DIP Facility limits capital spending.
RESTRUCTURING ACTIVITIES
2001 Restructuring Plan: In the fourth quarter of 2001, the Corporation recorded
a pretax charge of $12 million related to a restructuring plan that included the
shutdown of a gypsum wallboard plant in Fremont, Calif., a drywall steel plant
in Prestice, Czech Republic, a ceiling tile plant in San Juan Ixhuatepec,
Mexico, a ceiling tile manufacturing line in Greenville, Miss., and other
restructuring activities. The restructuring plan, which is expected to be
completed in 2002, is intended to allow the Corporation to optimize its
manufacturing operations.
Included in the $12 million charge was $8 million for severance related to a
workforce reduction of more than 350 positions (primarily hourly positions), $2
million for the write-off of property, plant and equipment, and $2 million for
line shutdown and removal and contract cancellations.
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The reserve for this plan was included in accrued expenses on the consolidated
balance sheets, and payments totaling $2 million and $1 million were charged
against this reserve in the fourth quarter of 2001 and first quarter of 2002,
respectively. All payments for the 2001 restructuring plan are being funded with
cash from normal operations.
As of March 31, 2002, the ceiling tile manufacturing line at Greenville, Miss.,
and the plants in San Juan Ixhuatepec, Mexico, and Prestice, Czech Republic,
have been shutdown and 206 employees have been terminated, and 26 open positions
have been eliminated. The Fremont, Calif., plant closed in April 2002. Annual
savings from the full implementation of the 2001 restructuring initiatives are
estimated at $11 million.
2000 Restructuring Plan: In the fourth quarter of 2000, the Corporation recorded
a pretax charge of $50 million related to a restructuring plan that included a
salaried workforce reduction and the shutdown of three gypsum wallboard
manufacturing lines and other operations. This restructuring was designed to
streamline operations and improve business efficiency.
Included in the $50 million charge was $16 million for severance related to the
salaried workforce reduction of more than 500 positions, $15 million for the
write-off of property, plant and equipment, $12 million for razing buildings and
equipment, $5 million for line shutdown and removal, and $2 million for contract
cancellations and severance for more than 100 hourly positions. An additional
restructuring-related charge of $4 million was included in cost of products sold
for the writedown of certain inventory.
During the third quarter of 2001, the Corporation reversed $9 million pretax 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, Mich., facility. 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.
The reserve for the 2000 restructuring was included in liabilities subject to
compromise on the consolidated balance sheets and payments totaling $22 million
were charged against this reserve through December 31, 2001. An additional $2
million was charged against this reserve in the first quarter of 2002. All
payments for this plan are being funded with cash from normal operations.
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 was completed by December 31, 2001.
Final payments for expenses related to these closures are being made in the
first half of 2002.
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Annual savings from the 2000 restructuring initiatives are estimated at $40
million.
The following table details the restructuring reserves and first quarter 2002
activity (dollars in millions):
RESERVE RESERVE
BALANCE RESERVE BALANCE
12/31/01 UTILIZATION 3/31/02
- ------------------------------------------------------------------
2001 RESTRUCTURING:
Severance (primarily hourly) $ 6 $(1) $ 5
Line shutdown/removal and
contract cancellations 2 - 2
- ----------------------------------------------------------------
Subtotal 8 (1) 7
- ----------------------------------------------------------------
2000 RESTRUCTURING:
Severance (salaried) - - -
Razing buildings and equipment 3 (2) 1
Line shutdown and removal 1 - 1
Contract cancellations
and severance (hourly) - - -
- ----------------------------------------------------------------
Subtotal 4 (2) 2
- ----------------------------------------------------------------
Total 12 (3) 9
================================================================
OTHER MATTERS
LEGAL CONTINGENCIES
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 both cash payments and accruals with respect to
asbestos lawsuits, including cash payments and accruals pursuant to settlements
of asbestos lawsuits. U.S. Gypsum continues to receive payments from its
insurance carriers pursuant to previous settlements. Creditors' committees have
been appointed 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. As part of the bankruptcy proceeding, it will be determined
which present and future asbestos claims should be allowed, or compensated, and
the aggregate value of such claims. The Corporation is unable to predict the
value that the court will assign to 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
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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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Corporation adopted three new accounting standards in the first quarter of
2002.
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 standard, which became
effective January 1, 2002, had no impact on the Corporation's financial
statements upon adoption.
SFAS No. 142, "Goodwill and Other Intangible Assets," eliminates the
amortization of goodwill over its estimated useful life. Instead, 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 standard, which became
effective January 1, 2002, had an immaterial impact on the Corporation's
financial statements because goodwill is no longer subject to amortization. The
Corporation's annual rate of goodwill amortization was approximately $4 million
as of December 31, 2001. All of the Corporation's goodwill, which does not
include any acquired intangible assets, will be assessed for impairment. As of
the date of this report, the Corporation has not completed its test for
impairment and therefore has not determined the full impact that the adoption of
this standard will have on its financial statements.
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
standard, which became effective January 1, 2002, had no impact on the
Corporation's financial statements upon adoption.
The Corporation will adopt SFAS No. 143, "Accounting for Asset Retirement
Obligations," in January 2003. This standard requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. This standard becomes effective January 1, 2003, and is
likely to have an impact on the Corporation's financial statements. However, as
of the date of this report, the Corporation has not determined what impact the
adoption of this standard may have on its financial statements.
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements related to management's
expectations about future conditions. 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 business or other conditions may also differ
significantly from management's expectations and accordingly affect the
Corporation's sales and profitability or other results. Actual results may
differ due to various other factors, including economic conditions such as the
levels of construction activity, interest rates and consumer confidence;
competitive conditions such as price and product competition; increases in raw
material and energy costs; and the unpredictable effects of the global war on
terrorism upon domestic and international economies and financial markets. The
Corporation assumes no obligation to update any forward-looking information
contained in this report.
-35-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of March 31, 2002, and
the related condensed consolidated statements of earnings for the three-month
periods ended March 31, 2002 and 2001 and the condensed consolidated statements
of cash flows for the three-month periods ended March 31, 2002 and 2001. 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 11 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
April 24, 2002
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ASBESTOS AND RELATED INSURANCE LITIGATION
One of the Corporation's subsidiaries, U.S. Gypsum, is among many defendants in
lawsuits arising out of the manufacture and sale of asbestos-containing
materials. On June 25, 2001 (the "Petition Date"), U.S. Gypsum, the Parent
Company, and other domestic subsidiaries (the "Debtors") filed voluntary
petitions for relief under chapter 11 of the U.S. Bankruptcy Code (the "Filing")
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. 01-2094 in
the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court").
U.S. Gypsum's asbestos liability derives from its sale of certain
asbestos-containing products beginning in the late 1920s; in most cases, the
products were discontinued or asbestos was removed from the formula by 1972, and
no asbestos-containing products were produced after 1978. 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"). A more detailed
description of the Property Damage and Personal Injury Cases is set forth below.
As a result of the Filing, all pending Personal Injury and Property Damage Cases
against U.S. Gypsum are stayed, and no party may take any action to pursue or
collect on such asbestos lawsuits absent specific authorization of the
Bankruptcy Court. Since the Filing, U.S. Gypsum has ceased making both cash
payments and accruals with respect to asbestos lawsuits, including cash payments
and accruals pursuant to settlements of asbestos lawsuits. The Bankruptcy Court
has approved creditors' committees that represent claimants in Personal Injury
and Property Damage Cases. The Bankruptcy Court is expected to appoint a legal
representative for the interests of potential future asbestos claimants. 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. The Debtors' exclusive right to propose such a plan
of reorganization has been extended by the Bankruptcy Court to May 1, 2002. The
Debtors filed a motion on April 30, 2002, seeking to extend the period of
exclusivity until November 1, 2002. The motion will be heard later in May. The
Debtors are likely to seek one or more additional extensions of the exclusivity
period. It is the Debtors' intention that the plan of reorganization will
include the creation of a trust under Section 524(g) of the Bankruptcy Code
which will be
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funded to allow payment of present and future asbestos claims, and, 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.
However, there is no assurance that creation of a trust under Section 524(g) or
the issuance of such a permanent injunction will be approved by the Bankruptcy
Court. 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.
Recent Developments in the Reorganization Proceeding: During the fourth quarter
of 2001, the Corporation's bankruptcy proceeding, along with four other
asbestos-related bankruptcy proceedings pending in the federal courts in the
District of Delaware, were assigned to the Honorable Alfred M. Wolin of the
United States District Court for the District of New Jersey. This assignment was
accomplished through orders of the United States Court of Appeals for the Third
Circuit and the United States District Court for the District of Delaware dated
November 27 and November 29, 2001, respectively.
In orders subsequent to the reassignment, Judge Wolin has indicated that he will
handle all issues relating to asbestos personal injury claims and that other
bankruptcy claims and issues in the Chapter 11 Cases, including issues relating
to asbestos property damage claims, will remain assigned to the bankruptcy Judge
Randall J. Newsome in the United States Bankruptcy Court for the District of
Delaware. The Corporation has requested Judge Wolin, with the possible
assistance of a Special Master appointed by Judge Wolin, to conduct hearings to
address key issues relevant to the liability of U.S. Gypsum for asbestos
personal injury claims. At present, it is not known whether Judge Wolin will
conduct the hearings requested by the Corporation or when these hearings might
be held.
If the hearings on liability issues relating to asbestos personal injury claims
do not go forward, or a consensual resolution is not reached as a result of the
hearings or otherwise, the Corporation will employ other means to resolve its
asbestos personal injury liability. These other means may include, but are not
limited to, setting a bar date for filing asbestos personal injury claims and
determining which of the subsequently filed claims are entitled to vote on and
participate in an asbestos trust under 11 U.S.C. ss.524(g) of the Bankruptcy
Code. A bar date proceeding likely would lengthen the bankruptcy case
significantly.
The Corporation expects that U.S. Gypsum's liability for asbestos
property damage claims will also be resolved in the reorganization proceeding,
whether by including those liabilities in a ss.524(g) trust or by other means.
Toward that end, the bankruptcy court has set a final date in January 2003, by
which all entities with asbestos property damage claims or any other types of
claims (except asbestos personal injury claims or claims derivative thereof)
must file their claims against the Debtors in the bankruptcy proceeding. The
Debtors will mail or publish notice of the claims bar date to potential asbestos
property damage claimants as well as other claimants affected by the bar date.
The bar date will be eight
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months from the beginning of the notice program, which is currently expected to
commence in May 2002, with a bar date of January 15, 2003.
Given the current status of the Chapter 11 Cases, the Corporation is unable to
forecast with any reasonable degree of certainty the timing or substance of the
resolution of the Debtors' asbestos-related liability or the reorganization
proceeding.
The following is a summary of the Property Damage and Personal Injury Cases
pending against U.S. Gypsum as of the Petition Date.
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. 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: As reported by the Center for Claims Resolution (the
"Center"), as described below, U.S. Gypsum was a defendant in approximately
106,000 pending Personal Injury Cases as of the Petition Date, as well as an
additional approximately 52,000 Personal Injury Cases that are the subject of
settlement agreements. In the first half of 2001, up to the Petition Date,
approximately 26,200 new Personal Injury Cases were filed against U.S. Gypsum,
as reported by the Center, as compared to 27,800 new filings in the first half
of 2000. Filings of new Personal Injury Cases totaled approximately 53,000
claims in 2000, 48,000 claims in 1999, and 80,000 claims in 1998.
Prior to the Filing, U.S. Gypsum managed the handling and settlement of Personal
Injury Cases through its membership in the Center for Claims Resolution. From
1988 up to February 1, 2001, the Center administered, and arranged for the
defense and settlement of, Personal Injury cases against U.S. Gypsum and other
Center members. During that period, costs of defense and settlement of Personal
Injury Cases were
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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. The Center continued to
administer and arrange for the defense and settlement of the Personal Injury
Cases, but liability payments were not shared among the Center 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 requires the services of the Center in negotiating
or defending Personal Injury Cases.
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, cash 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 closed approximately 57,000 Personal Injury Cases. U.S.
Gypsum's cash payments in 2000 to defend and resolve Personal Injury Cases
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 made cash payments of $100 million in 1999 and $61
million in 1998 to resolve Personal Injury Cases, of which $85 million and $45.5
million, respectively, were paid or reimbursed by insurance.
In the first and second quarters of 2001, prior to the Filing, cash 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 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 half of 2001 (up to the Petition Date), U.S. Gypsum closed
approximately 18,900 Personal Injury Cases. In the first half of 2001 (up to the
Petition Date), U.S. Gypsum's total asbestos-related cash payments, including
defense costs, were approximately $124 million, of which approximately $10
million
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was paid or reimbursed by insurance. A portion of these payments was for
settlements agreed to in prior periods. As of March 31, 2001, U.S. Gypsum had
estimated that cash 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. As a result of the Filing, all Personal Injury Cases are stayed
against U.S. Gypsum, new cases may not be filed due to the automatic stay, and
payments relating to settlements of Personal Injury Cases before the Filing may
not be made.
In addition to the 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 based on 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 should
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 to date and the lack of development of the cases against L&W, the
Corporation does not have sufficient information at this time to predict 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.
One of U.S. Gypsum's subsidiaries and a Debtor in the bankruptcy proceeding,
Beadex Manufacturing, LLC ("Beadex"), manufactured and sold joint compound
containing asbestos from 1963 through 1978 in the northwest United States. As of
the Petition Date, Beadex was a named defendant in approximately 40 Personal
Injury Cases pending primarily in the states of Washington and Oregon. Beadex
has approximately $11 million in primary or umbrella insurance coverage
available to pay asbestos-related costs, as well as $15 million in available
excess coverage. The Corporation expects that any asbestos-related liability of
Beadex will be addressed in the plan of reorganization. However, because of the
small number of Personal Injury Cases pending against Beadex to date, the
Corporation does not have sufficient information at this time to predict as to
how any plan or plans of reorganization will address any asbestos-related
liability of Beadex.
Insurance Coverage: As of the Petition Date, after deducting insurance used to
date, U.S. Gypsum had approximately $76.3 million of insurance remaining to
cover asbestos-related costs. After insurance payments to U.S. Gypsum in the
third and fourth quarters of 2001, approximately $52 million remained as of
December 31,
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2001. After insurance payments of approximately $3 million in the first quarter
of 2002, approximately $49 million remained as of March 31, 2002. This insurance
is scheduled to be paid over a period of approximately three 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 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, 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.
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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
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 non-cash 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. Substantially all of
this reserve relates to the estimated costs of resolving then-pending asbestos
personal injury claims and those expected to be filed through 2003, and the
reserve reflected management's expectation that U.S. Gypsum's average payment
per asbestos personal injury claim would increase at least in the short term due
to distortions caused by the bankruptcy filings of other asbestos personal
injury defendants discussed above. Less than 10 percent of the reserve is
attributable to defense and administrative costs.
At the time of recording this reserve, it was expected that the reserve 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 up to the Filing, U.S. Gypsum's cash payments for asbestos claims
and related legal fees totaled approximately $124 million, reducing its reserve
for asbestos claims to $1,061 million as of March 31, 2002. Insurance recoveries
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during 2001 totaled $34 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 $52 million as
of December 31, 2001. Insurance recoveries in the first quarter of 2002 totaled
approximately $3 million, leaving U.S. Gypsum with a receivable from insurance
carriers of approximately $49 million as of March 31, 2002. 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, these uncertainties include 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; 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. These factors, 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.
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 to reflect 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 high end of
the estimated 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.
When a reasonable estimate can be made of the Debtors' probable liability for
asbestos claims and such estimate differs from the existing reserve, the reserve
will be adjusted to reflect the estimate, and it is possible that a charge to
results of operations will be necessary at that time.
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 obtained by the Corporation in the amount of $60.3 million and issued by
Chase Manhattan Bank to Safeco. After the Filing, by letter dated July 6, 2001,
the Center stated that
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certain amounts allegedly covered by the bond, totaling approximately $15.7
million, were overdue from U.S. Gypsum to the Center. In subsequent letters
dated November 19, 2001, and December 11, 2001, the Center stated that
additional amounts allegedly covered by the bond totaling approximately $14
million and $113 million, respectively, were also overdue from U.S. Gypsum. The
amounts for which the Center made demand were for the payment of, among other
things, settlements of Personal Injury Cases that were entered into
pre-petition. By letter dated November 16, 2001, the Center made a demand to
Safeco for payment of $15.7 million under the bond, and by letter dated December
28, 2001, the Center made a demand to Safeco for payment of approximately $127
million under the bond. The total amount demanded by the Center under the bond,
approximately $143 million, exceeds the original penal sum of the bond, which is
$60.3 million. Safeco has not made any payment under the bond, but, to the
extent that Safeco were to pay any portion of the bond, it is likely that Safeco
would draw down the Chase letter of credit to cover the bond payment and Chase
would assert a pre-petition claim in a corresponding amount against the
Corporation in the bankruptcy proceeding.
On November 30, 2001, the Corporation and U.S. Gypsum filed an Adversary
Complaint in the Chapter 11 Cases to, among other things, enjoin the Center from
drawing on the bond and enjoin Safeco from paying on the bond during the
pendency of these bankruptcy proceedings. This Adversary Proceeding is pending
in the United States Bankruptcy Court for the District of Delaware and is
captioned USG Corporation and United States Gypsum Company v. Center for Claims
Resolution, Inc. and Safeco Insurance Company of America, No. 01-08932. Judge
Wolin has consolidated the Adversary Proceeding with similar adversary
proceedings brought by Federal-Mogul Corp., et al., and Armstrong World
Industries, Inc., et al., in their bankruptcy proceedings.
Due to the status of the Adversary Proceeding, the Corporation cannot predict
whether or when any portion of the bond proceeds will be paid, what amount, if
any, will be paid, and whether the letter of credit will be drawn.
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 the reserve in accordance with obligations incurred prior to the
Filing. The Corporation will continue to review its asbestos liability as the
Chapter 11 Cases progress. When a reasonable estimate can be made of the
Debtors' probable liability for asbestos claims, if
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such estimate differs from the existing reserve, the reserve will be adjusted,
and it is possible that a charge to results of operations will be necessary at
that time. 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.
ENVIRONMENTAL LITIGATION
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. In most of these sites, the involvement of the
Corporation or its subsidiaries is expected to be minimal. The Corporation
believes that appropriate reserves have been established for its potential
liability in connection with all Superfund sites but is continuing to review its
accruals as additional information becomes available. Such reserves take into
account all known or estimated costs associated with these sites, including site
investigations and feasibility costs, site cleanup and remediation, legal costs,
and fines and penalties, if any. In addition, environmental costs connected with
site cleanups on Corporation-owned property also are covered by reserves
established in accordance with the foregoing. The Corporation believes that
neither these matters nor any other known governmental proceeding regarding
environmental matters will have a material adverse effect upon its results of
operations or financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(15) Letter from Arthur Andersen LLP regarding unaudited financial
information.
3(ii) Amended and Restated By-Laws of USG Corporation, dated as of
March 22, 2002.
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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/ John Eric Schaal
-------------------------------
John Eric Schaal,
Associate General Counsel and
Corporate Secretary,
USG Corporation
By /s/ Raymond T. Belz
-------------------------------
May 3, 2002
Raymond T. Belz,
Senior Vice President and
Controller
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