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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the fiscal year ended December 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 ____________.
Commission File Number 1-8864
USG CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 36-3329400
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
125 S. FRANKLIN STREET, CHICAGO, ILLINOIS 60606-4678
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (312) 606-4000
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
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New York Stock Exchange
Common Stock, $0.10 par value Chicago Stock Exchange
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New York Stock Exchange
Preferred Share Purchase Rights Chicago Stock Exchange
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8.5% Senior Notes, Due 2005 New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the Act:
None
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(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) 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 June 28, 2002 (the last business day of the registrant's most
recently completed second fiscal quarter), the aggregate market value of USG
Corporation common stock held by non-affiliates based upon the New York Stock
Exchange closing prices was approximately $305,125,000.
As of January 31, 2003, 43,238,341 shares of common stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Corporation's definitive Proxy Statement for use in
connection with the annual meeting of stockholders to be held on May 14, 2003,
are incorporated by reference into Part III of this Form 10-K Report where
indicated.
TABLE OF CONTENTS
PART I Page
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Item 1. Business........................................................................................ 3
Item 2. Properties ..................................................................................... 7
Item 3. Legal Proceedings............................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............................................. 9
PART II
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Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ....................... 10
Item 6. Selected Financial Data ........................................................................ 10
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition .......... 10
Item 7a. Quantitative and Qualitative Disclosures About Market Risks..................................... 24
Item 8. Financial Statements and Supplementary Data .................................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........... 65
PART III
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Item 10. Directors and Executive Officers of the Registrant ............................................. 65
Item 11. Executive Compensation ......................................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ......................................................................... 67
Item 13. Certain Relationships and Related Transactions ................................................. 67
Item 14. Controls and Procedures......................................................................... 68
PART IV
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Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 68
Signatures.................................................................................................... 73
Certifications ............................................................................................... 74
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PART I
ITEM 1. BUSINESS
GENERAL
United States Gypsum Company ("U.S. Gypsum") was incorporated in 1901. USG
Corporation (together with its subsidiaries, called the "Corporation") was
incorporated in Delaware on October 22, 1984. By a vote of stockholders on
December 19, 1984, U.S. Gypsum became a wholly owned subsidiary of the
Corporation, and the stockholders of U.S. Gypsum became the stockholders of the
Corporation, all effective January 1, 1985.
Through its subsidiaries, the Corporation is a leading manufacturer and
distributor of building materials producing a wide range of products for use in
new residential, new nonresidential, and repair and remodel construction, as
well as products used in certain industrial processes.
On June 25, 2001, the parent company of the Corporation and 10 of its
United States subsidiaries (collectively, the "Debtors") filed voluntary
petitions for reorganization (the "Filing") under chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The chapter 11 cases of the Debtors have been consolidated for
purposes of joint administration as In re: USG Corporation et al. (Case No.
01-2094). 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. The Debtors are
operating their businesses as debtors-in-possession subject to the provisions of
the United States Bankruptcy Code. These cases do not include any of the
Corporation's non-U.S. subsidiaries. See Part II, Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition and
Part II, Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 2. Voluntary Reorganization Under
Chapter 11 and Note 18. Litigation for additional information on the bankruptcy
proceedings and asbestos litigation.
The Corporation's operations are organized into three operating segments:
North American Gypsum, Worldwide Ceilings and Building Products Distribution.
NORTH AMERICAN GYPSUM
Business
North American Gypsum, which manufactures and markets gypsum and related
products in the United States, Canada and Mexico, includes U.S. Gypsum in the
United States, the gypsum business of CGC Inc. ("CGC") in Canada, and USG
Mexico, S.A. de C.V. ("USG Mexico") in Mexico. U.S. Gypsum is the largest
manufacturer of gypsum wallboard in the United States and accounted for
approximately one-third of total domestic gypsum wallboard sales in 2002. CGC is
the largest manufacturer of gypsum wallboard in eastern Canada. USG Mexico is
the largest manufacturer of gypsum wallboard in Mexico.
Products
North American Gypsum's products are used in a variety of building and
industrial applications. Gypsum panel products are used to finish the interior
walls and ceilings in residential, commercial and institutional construction.
These products provide aesthetic as well as sound-dampening and fire-retarding
value. The majority of these products are sold under the SHEETROCK brand name.
Also sold under the SHEETROCK brand name is a line of joint compounds used for
finishing wallboard joints. The DUROCK line of cement board and accessories
provides fire-resistant and water-damage-resistant assemblies for both interior
and exterior construction. The FIBEROCK line of gypsum fiber panels includes
abuse-resistant wall panels and floor underlayment, as well as sheathing panels
used as a substrate for most
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exterior systems. The Corporation produces a variety of plaster products used to
provide a custom finish for residential and commercial interiors. Like SHEETROCK
brand gypsum wallboard, these products provide aesthetic, sound-dampening and
fire-retarding value. Plaster products are sold under the trade names RED TOP,
IMPERIAL and DIAMOND. The Corporation also produces gypsum-based products for
agricultural and industrial customers to use in a number of applications,
including soil conditioning, road repair, fireproofing and ceramics.
Manufacturing
North American Gypsum's products are manufactured at 46 plants located
throughout the United States, Canada and Mexico.
Gypsum rock is mined or quarried at 15 company-owned locations in North
America. In 2002, these locations provided approximately 71% of the gypsum used
by the Corporation's plants in North America. Certain plants purchase or acquire
synthetic gypsum and natural gypsum rock from various outside sources. Outside
purchases or acquisitions accounted for 29% of the gypsum used in the
Corporation's plants. The Corporation's geologists estimate that its recoverable
rock reserves are sufficient for more than 26 years of operation based on the
Corporation's average annual production of crude gypsum during the past five
years. Proven reserves contain approximately 265 million tons. Additional
reserves of approximately 148 million tons are found on four properties not in
operation. The Corporation's total average annual production of crude gypsum
during the past five years was 10 million tons.
The Corporation owns and operates seven paper mills located across the
United States. Vertical integration in paper ensures a continuous supply of
high-quality paper that is tailored to the specific needs of the Corporation's
wallboard production processes.
Marketing and Distribution
Distribution is carried out through L&W Supply Corporation ("L&W Supply"),
a wholly owned subsidiary of the Corporation, building materials dealers, home
improvement centers and other retailers, contractors and specialty wallboard
distributors. Sales of gypsum products are seasonal in the sense that sales are
generally greater from spring through the middle of autumn than during the
remaining part of the year. Based on the Corporation's estimates using publicly
available data, internal surveys and gypsum wallboard shipment data from the
Gypsum Association, management estimates that during 2002, about 45% of total
industry volume demand for gypsum wallboard was generated by new residential
construction activity, 38% of volume demand was generated by residential and
nonresidential repair and remodel activity, 10% of volume demand was generated
by new nonresidential construction activity, and the remaining 7% of volume
demand was generated by other activities such as exports and temporary
construction.
Competition
The Corporation competes in North America as the largest of 10 producers of
gypsum wallboard products and in 2002 accounted for approximately one-third of
total gypsum wallboard sales in the United States. In 2002, U.S. Gypsum shipped
10.1 billion square feet of wallboard, the highest level in the Corporation's
history, out of total U.S. industry shipments (including imports) estimated by
the Gypsum Association at 30.7 billion square feet, the second highest level on
record. Competitors in the United States are: National Gypsum Company, BPB,
through its subsidiaries BPB Gypsum, Inc. (formerly James Hardie Gypsum) and BPB
America Inc. (formerly BPB Celotex), Georgia-Pacific Corporation, American
Gypsum, Temple-Inland Forest Products Corporation, Lafarge North America, Inc.
and PABCO Gypsum. Competitors in Canada include BPB Westroc Inc.,
Georgia-Pacific Corporation and Lafarge North America, Inc. In Mexico, the
Corporation's major competitor is Panel Rey, S.A.
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WORLDWIDE CEILINGS
Business
Worldwide Ceilings, which manufactures and markets interior systems
products worldwide, includes USG Interiors, Inc. ("USG Interiors"), the
international interior systems business managed as USG International, and the
ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior
ceilings products used primarily in commercial applications. In 2002, Worldwide
Ceilings was estimated to be the largest manufacturer of ceiling grid and the
second-largest manufacturer of ceiling tile in the world.
Products
Worldwide Ceilings manufactures ceiling tile in the United States and
ceiling grid in the United States, Canada, Europe and the Asia-Pacific region.
It markets both ceiling tile and ceiling grid in the United States, Canada,
Mexico, Europe and the Asia-Pacific region. Its integrated line of ceilings
products provides qualities such as sound absorption, fire retardation and
convenient access to the space above the ceiling for electrical and mechanical
systems, air distribution and maintenance. USG Interiors' significant trade
names include the AURATONE and ACOUSTONE brands of ceiling tile and the DX,
FINELINE, CENTRICITEE, CURVATURA and DONN brands of ceiling grid.
Manufacturing
Worldwide Ceilings' products are manufactured at 15 plants located in North
America, Europe and the Asia-Pacific region. These include 9 ceiling grid
plants, 3 ceiling tile plants and 3 plants that either produce other interior
systems products or prepare raw materials for ceiling tile and grid. Principal
raw materials used in the production of Worldwide Ceilings' products include
mineral fiber, steel, perlite, starch and high-pressure laminates. Certain of
these raw materials are produced internally, while others are obtained from
various outside suppliers. Due to the implementation of steel trade relief under
Section 201 of the U.S. trade law in 2002 and the economic instability of the
U.S. steel industry, there is a potential for severe steel shortages and a
resumption of rising steel prices in 2003. Shortages of other raw materials used
in this segment are not expected.
Marketing and Distribution
Worldwide Ceilings' products are sold primarily in markets related to the
new construction and renovation of commercial buildings. Marketing and
distribution are conducted through a network of distributors, installation
contractors, L&W Supply and home improvement centers.
Competition
The Corporation estimates that it is the world's largest manufacturer of
ceiling grid. Principal competitors in ceiling grid include WAVE (a joint
venture between Armstrong World Industries, Inc. and Worthington Industries) and
Chicago Metallic Corporation. The Corporation estimates that it is the
second-largest manufacturer/marketer of acoustical ceiling tile in the world.
Principal global competitors include Armstrong World Industries, Inc., OWA
Faserplattenwerk GmbH (Odenwald), BPB America Inc. and AMF Mineralplatten GmbH
Betriebs KG.
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BUILDING PRODUCTS DISTRIBUTION
Business
Building Products Distribution consists of L&W Supply, the leading
distributor of wallboard and complementary building products in the United
States. In 2002, L&W Supply distributed approximately 10% of all gypsum
wallboard in the United States, including approximately 27% of U.S. Gypsum's
wallboard production.
Marketing and Distribution
L&W Supply was organized in 1971 by U.S. Gypsum. As of December 31, 2002,
L&W operated 181 distribution locations in 37 states. It is a service-oriented
organization that stocks a wide range of construction materials and delivers
less-than-truckload quantities of construction materials to job sites and places
them in areas where work is being done, thereby reducing or eliminating the need
for handling by contractors. L&W Supply specializes in the distribution of
gypsum wallboard (which accounted for 47% of 2002 net sales), joint compound and
other products manufactured primarily by U.S. Gypsum. It also distributes
products manufactured by USG Interiors such as acoustical ceiling tile and grid,
as well as products of other manufacturers including drywall metal, insulation,
roofing products and accessories. L&W Supply leases approximately 87% of its
facilities from third parties. Usually, initial leases run from three to five
years with a five-year renewal option.
Competition
L&W Supply has a number of competitors, including Gypsum Management Supply,
an independent distributor with locations in the southern, central and western
United States. There are several regional competitors such as CSR Rinker in the
Southeast (primarily in Florida) and Strober Building Supply in the Northeast.
L&W Supply's many local competitors include lumber dealers, hardware stores,
home improvement centers and acoustical ceiling tile distributors.
OTHER INFORMATION
The Corporation performs research and development at the USG Research and
Technology Center in Libertyville, Ill. (the "Research Center") and at a
facility in Avon, Ohio. The staff at the Research Center provides specialized
technical services to the operating units and does product and process research
and development. The Research Center is especially well-equipped for carrying
out fire, acoustical, structural and environmental testing of products and
building assemblies. It also has an analytical laboratory for chemical analysis
and characterization of materials. Development activities can be taken to an
on-site pilot-plant level before being transferred to a full-size plant. The
Research Center also is responsible for an industrial design group located at
the USG Solutions Center(SM) in Chicago, Ill. The Avon facility houses staff
and equipment for product development in support of suspension grid for
acoustical ceiling tile.
Primary supplies of energy have been adequate, and no curtailment of plant
operations has resulted from insufficient supplies. Supplies are likely to
remain sufficient for projected requirements. Energy price swap agreements are
used by the Corporation to hedge the cost of certain purchased natural gas.
None of the operating segments has any special working capital requirements
or is materially dependent on a single customer or a few customers on a regular
basis. No single customer of the Corporation accounted for 10% or more of the
Corporation's 2002, 2001 or 2000 consolidated net sales. Because orders are
filled upon receipt, no operating segment has any significant backlog.
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Loss of one or more of the patents or licenses held by the Corporation
would not have a major impact on the Corporation's business or its ability to
continue operations. No material part of any of the Corporation's business is
subject to renegotiation of profits or termination of contracts or subcontracts
at the election of the government.
All of the Corporation's products regularly require improvement to remain
competitive. The Corporation also develops and produces comprehensive systems
employing several of its products. In order to maintain its high standards and
remain a leader in the building materials industry, the Corporation performs
ongoing extensive research and development activities and makes the necessary
capital expenditures to maintain production facilities in good operating
condition.
U.S. Gypsum is a defendant in asbestos lawsuits alleging both property
damage and personal injury. Other subsidiaries of the Corporation also have been
named as defendants in a small number of asbestos-related personal injury
lawsuits. As a result of the Filing, all pending asbestos lawsuits against U.S.
Gypsum and other subsidiaries are stayed, and no party may take any action to
pursue or collect on such asbestos claims absent specific authorization of the
Bankruptcy Court. Since the Filing, U.S. Gypsum has ceased making payments with
respect to asbestos lawsuits, including payments pursuant to settlements of
asbestos lawsuits. See Part II, Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition and Part II, Item 8. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements,
Note 2. Voluntary Reorganization Under Chapter 11 and Note 18. Litigation for
additional information on the bankruptcy proceedings and asbestos litigation.
See Part II, Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 17. Segments for financial information
pertaining to operating segments, foreign and domestic operations and export
sales.
AVAILABLE INFORMATION
Financial and other information of the Corporation can be accessed at its
website www.usg.com. The Corporation has made available at its website,
throughout the period covered by this report, its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments
to those reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission. If you wish to receive a hard copy of any exhibit to the
Corporation's reports filed with or furnished to the Securities and Exchange
Commission, such exhibit may be obtained, upon payment of reasonable expenses,
by writing to: J. Eric Schaal, Corporate Secretary and Associate General
Counsel, USG Corporation, P.O. Box 6721, Chicago, IL 60680-6721.
ITEM 2. PROPERTIES
The Corporation's plants, mines, quarries, transport ships and other
facilities are located in North America, Europe and the Asia-Pacific region. In
2002, the Corporation's major facilities in the United States operated above 85%
of capacity. The locations of the production properties of the Corporation's
subsidiaries, grouped by operating segment, are as follows (plants are owned
unless otherwise indicated):
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NORTH AMERICAN GYPSUM
Gypsum Wallboard and Other Gypsum Products
Aliquippa, Pa. Jacksonville, Fla. Sperry, Iowa
Baltimore, Md. New Orleans, La. Stony Point, N.Y.
Boston (Charlestown), Mass. Norfolk, Va. Sweetwater, Texas
Bridgeport, Ala. Plaster City, Calif. Hagersville, Ontario, Canada
Detroit (River Rouge), Mich. Rainier, Ore. Montreal, Quebec, Canada
East Chicago, Ind. Santa Fe Springs, Calif. Monterrey, Nuevo Leon, Mexico
Empire, Nev. Shoals, Ind. Puebla, Puebla, Mexico
Fort Dodge, Iowa Sigurd, Utah
Galena Park, Texas Southard, Okla.
Joint Compound (surface preparation and joint treatment products)
Auburn, Wash. Gypsum, Ohio Calgary, Alberta, Canada
Bridgeport, Ala. Jacksonville, Fla. Edmonton, Alberta, Canada
Chamblee, Ga. Phoenix (Glendale), Ariz. Hagersville, Ontario, Canada
Dallas, Texas Port Reading, N.J. Montreal, Quebec, Canada
East Chicago, Ind. Sigurd, Utah Surrey, British Columbia, Canada
Fort Dodge, Iowa Tacoma, Wash. Puebla, Puebla, Mexico
Galena Park, Texas Torrance, Calif. Port Klang, Malaysia (leased)
Cement Board
Baltimore, Md. New Orleans, La. Santa Fe Springs, Calif.
Detroit (River Rouge), Mich.
Gypsum Rock (mines and quarries)
Alabaster (Tawas City), Mich. Sigurd, Utah Little Narrows, Nova Scotia, Canada
Empire, Nev. Southard, Okla. Windsor, Nova Scotia, Canada
Fort Dodge, Iowa Sperry, Iowa Manzanillo, Colima, Mexico
Plaster City, Calif. Sweetwater, Texas Monterrey, Nuevo Leon, Mexico
Shoals, Ind. Hagersville, Ontario, Canada Saltillo, Coahuila, Mexico
Paper for Gypsum Wallboard
Clark, N.J. Jacksonville, Fla. South Gate, Calif.
Galena Park, Texas North Kansas City, Mo.
Gypsum, Ohio Oakfield, N.Y.
Other Products
Synthetic gypsum is processed at Belledune, New Brunswick, Canada. A
mica-processing plant is located at Spruce Pine, N.C. Metal lath, plaster and
drywall accessories and light gauge steel framing products are manufactured at
Puebla, Puebla, Mexico and Saltillo, Coahuila, Mexico. Gypsum fiber panel
products are produced at Gypsum, Ohio. Paper-faced metal corner bead is
manufactured at Auburn, Wash., and Weirton, W.Va. Various other products are
manufactured at La Mirada, Calif. (adhesives and finishes), and New Orleans, La.
(lime products).
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Plant Closure
The gypsum fiber panel plant at Port Hawkesbury, Nova Scotia, Canada, was
closed in the fourth quarter of 2002.
Ocean Vessels
Gypsum Transportation Limited, a wholly owned subsidiary of the Corporation
and headquartered in Bermuda, owns and operates a fleet of three self-unloading
ocean vessels. Under a contract of affreightment, these vessels transport gypsum
rock from Nova Scotia to the East Coast plants of U.S. Gypsum. Excess ship time,
when available, is offered for charter on the open market.
WORLDWIDE CEILINGS
Ceiling Grid
Cartersville, Ga. Auckland, New Zealand (leased) Peterlee, England (leased)
Stockton, Calif. Dreux, France (leased) Shenzhen, China (leased)
Westlake, Ohio Oakville, Ontario, Canada Viersen, Germany
A coil coater and slitter plant used in the production of ceiling grid also
is located in Westlake, Ohio. Slitter plants also are located in Stockton,
Calif. (leased) and Antwerp, Belgium (leased).
Ceiling Tile
Ceiling tile products are manufactured at Cloquet, Minn., Greenville, Miss.
and Walworth, Wis.
Other Products
Mineral fiber products are manufactured at Red Wing, Minn., and Walworth,
Wis.
Plant Closures
The ceiling tile plant in Aubange, Belgium, ceased operations in December
2002. The access floor systems business at Peterlee, England, was sold in the
first quarter of 2003. The plant at Medina, Ohio, that manufactures wall systems
and drywall metal products will be closed during the second quarter of 2003. The
ceiling grid and access floor systems production lines at Port Klang, Malaysia,
are expected to be shut down in the third quarter of 2003.
ITEM 3. LEGAL PROCEEDINGS
See Part II, Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 2. Voluntary Reorganization Under
Chapter 11 and Note 18. Litigation for information on legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 2002.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
See Part II, Item 8. Financial Statements and Supplementary Data - Selected
Quarterly Financial Data for information with respect to the principal market on
which the Corporation's common stock is traded, the range of high and low market
prices, the number of stockholders of record and the amount of quarterly cash
dividends. No dividends are being paid on the Corporation's common stock.
ITEM 6. SELECTED FINANCIAL DATA
See Part II, Item 8. Financial Statements and Supplementary Data -
Five-Year Summary for selected financial data.
ITEM 7. 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.; and 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
8. Note 18. Litigation 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 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, including defense
costs. In the fourth quarter of 2000, U.S. Gypsum recorded a noncash, pretax
provision
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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, according to the Center for
Claims Resolution (the "Center"), U.S. Gypsum was served with 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 a result, it is the Corporation's
view that no change should be made at this time to the previously recorded
reserve for asbestos claims, except to reflect certain minor asbestos-related
costs incurred since the Filing. However, it is possible that the cost of
resolving asbestos claims in the Chapter 11 Cases will be greater than that set
forth in the high end of the range estimated in 2000. Counsel for the Official
Committee of Asbestos Personal Injury Claimants and counsel for the legal
representative for future asbestos personal injury claimants, appointed in the
Chapter 11 Cases, have indicated that they believe that the liabilities for
pending and future asbestos claims exceed the value of Debtors' assets, and,
therefore, are significantly greater than both the reserved amount and the high
end of the range estimated in 2000. As the Chapter 11 Cases proceed, and the
court addresses the issues relating to estimation of Debtors' asbestos
liabilities, the Debtors likely will gain more information from which a
reasonable estimate of the Debtors' probable asbestos liability may be
determined. If 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. It is also possible that, in such
a case, the Debtors' asbestos liability may vary significantly from the recorded
estimate of liability and that this difference could be material to the
Corporation's financial position, results of operations and cash flows in the
period recorded.
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, 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.
Three creditors' committees, one representing asbestos personal injury
claimants (the aforementioned Official Committee of 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
Bankruptcy Court also appointed the Honorable Dean M. Trafelet as the legal
representative for future asbestos claimants in the Debtors' bankruptcy
proceeding. Mr. Trafelet was formerly a judge of the Circuit Court of Cook
County, Illinois. The Debtors expect that the appointed committees, together
with Mr. Trafelet, will play important roles in the Chapter 11 Cases and the
negotiation of the terms of any plan of reorganization.
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. While it is the Debtors' intention to seek a full recovery for
their creditors, it is not possible to predict at this time 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. 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 are likely to be substantially diluted or
cancelled in whole or in part. Whether the Corporation's equity has significant
value and Debtors' non-asbestos creditors recover the full value of their claims
depend upon the outcome of the analysis of the amount of Debtors' assets and
liabilities, especially asbestos liabilities, in the Chapter 11 Cases. Counsel
for the Official Committee of Asbestos Personal Injury Claimants and counsel for
the legal representative for future asbestos personal injury claimants have
advised the court that is presiding over the Chapter 11 Cases that they believe
that the Debtors' asbestos liabilities exceed the value of the Debtors' assets
and that the Debtors are insolvent. The Debtors have advised the court that they
believe that the Debtors are solvent if the asbestos liabilities are
11
fairly and appropriately valued, and the Debtors have requested that the court
undertake an estimation of those liabilities. On February 19, 2003, the Court
ruled on a procedure for estimating Debtors' liability for asbestos personal
injury cases alleging cancer. (See Part II, Item 8. Note 18. Litigation for
additional information on this procedure.) If the amount of the Debtors'
asbestos liabilities cannot be resolved through negotiation, as has been the
case to date, the outcome of the court proceedings regarding Debtors' asbestos
liabilities likely will be determinative of the Debtors' solvency and the
recovery of the Debtors' pre-petition creditors and equity security holders.
As a result of this uncertainty, it is not possible at this time to predict
the timing or 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 pre-petition creditors of the Debtors or the interests
of the Corporation's equity security holders. There can be no assurance as to
the value of any distributions that might be made under any plan or plans of
reorganization with respect to such pre-petition claims, equity interests, or
other outstanding securities.
Recent developments in the Corporation's reorganization proceedings are
discussed in Part II, Item 8. Note 2. Voluntary Reorganization Under Chapter 11
and Note 18. Litigation.
CHAPTER 11 FINANCING
On July 31, 2001, a $350 million debtor-in-possession financing facility
(the "DIP Facility") was approved by the Bankruptcy Court to supplement
liquidity and fund operations during the reorganization process. The facility is
provided by a syndicate of lenders led by JPMorgan Chase Bank (formerly The
Chase Manhattan Bank) as agent. In January 2003, the Corporation reduced the
size of the DIP Facility to $100 million. This action was taken at the election
of the Corporation due to the levels of cash and marketable securities on hand
and to reduce costs associated with the DIP Facility. The resulting DIP Facility
will be used largely to support the issuance of standby letters of credit needed
for the Corporation's business operations. The Corporation believes that cash
and marketable securities on hand and future cash available from operations will
provide sufficient liquidity to allow its businesses to operate in the normal
course without interruption for the duration of the chapter 11 proceedings. 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 II, Item 8. Note
2. Voluntary Reorganization Under Chapter 11, which includes information related
to financial statement presentation, the debtor-in-possession statements and
detail of the liabilities subject to compromise and chapter 11 reorganization
expenses.
CONSOLIDATED RESULTS
NET SALES
Net sales in 2002 were $3,468 million, up 5% from 2001. This increase
reflects higher levels of sales for the Corporation's North American Gypsum and
Building Products Distribution segments, partially offset by lower sales for its
Worldwide Ceilings business.
Net sales for North American Gypsum were up in 2002 primarily due to a 17%
increase in average selling prices for SHEETROCK brand gypsum wallboard sold by
U.S. Gypsum. Shipments of U.S. Gypsum's gypsum wallboard were up 2% in 2002
versus 2001. Net sales for Building Products Distribution were up in 2002
primarily due to increased shipments and selling prices for gypsum wallboard
sold by L&W Supply. Net sales for Worldwide Ceilings declined as a result of
lower domestic and export shipments of ceiling tile and lower shipments of
domestic and internationally produced ceiling grid.
In 2001, net sales of $3,296 million were down 13% from 2000. This decline
was primarily due to lower average
12
selling prices for SHEETROCK brand gypsum wallboard. By midyear 2001, selling
prices had dropped to their lowest level in nearly a decade. However, there was
some improvement in market conditions during the second half of 2001 as demand
for gypsum wallboard grew and some excess industry capacity closed, allowing
U.S. Gypsum and other wallboard manufacturers to raise prices for the first time
since the end of 1999.
COST OF PRODUCTS SOLD
Cost of products sold totaled $2,884 million in 2002, $2,882 million in
2001 and $2,941 million in 2000. Cost of products sold for 2002 included an $11
million charge recorded in the fourth quarter related to the downsizing of
operations in Europe, as discussed below under Core Business Results - Worldwide
Ceilings. However, manufacturing costs in 2002 for SHEETROCK brand gypsum
wallboard declined versus 2001 primarily due to lower energy costs, partially
offset by higher prices for wastepaper, the primary raw material of wallboard
paper. In addition, cost reductions were realized for ceiling tile as a result
of lower energy and raw material costs and from the closure of a high-cost
ceiling tile production line in the fourth quarter of 2001.
Cost of products sold for 2001 declined 2% versus 2000 primarily due to the
absence in 2001 of $77 million of asbestos-related noncash charges recorded by
U.S. Gypsum in 2000. These asbestos-related charges were in addition to the
fourth-quarter 2000 provision of $850 million for asbestos claims.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled $312 million in 2002, $279
million in 2001 and $309 million in 2000. As a percentage of net sales, these
expenses were 9.0%, 8.5% and 8.2% in 2002, 2001 and 2000, respectively.
Higher selling and administrative expenses in 2002 reflect the impact of a
Bankruptcy Court approved key employee retention plan, which became effective in
the third quarter of 2001. Expenses associated with this plan amounted to $20
million in 2002 and $12 million in 2001. Expenses for 2002 also reflect a higher
level of accruals for incentive compensation associated with the attainment of
profit and other performance goals.
Expenses were down 10% in 2001 versus 2000 because of cost-reduction
initiatives undertaken during the year that resulted in lower charges for
compensation and benefits, marketing programs and travel. These reductions were
partially offset by expenses associated with the key employee retention program.
CHAPTER 11 REORGANIZATION EXPENSES
In connection with the Filing, the Corporation recorded pretax chapter 11
reorganization expenses of $14 million in 2002. These expenses consisted of
legal and financial advisory fees of $22 million, partially offset by
bankruptcy-related interest income of $8 million. In 2001, the Corporation
recorded pretax chapter 11 reorganization expenses of $12 million, which
consisted of legal and financial advisory fees of $14 million and accelerated
amortization of debt issuance costs of $2 million, partially offset by
bankruptcy-related interest income of $4 million.
2001 PROVISIONS FOR IMPAIRMENT AND RESTRUCTURING
In the fourth quarter of 2001, the Corporation recorded impairment charges
totaling $30 million pretax ($25 million after-tax). Included in this total was
$16 million pretax related to the Aubange, Belgium, ceiling tile plant. This
impairment resulted from a decline in demand, which had been significantly
affected by a worldwide slowdown in the nonresidential construction market, and
from the plant's high cost structure. The remaining $14 million pretax related
to the Port Hawkesbury, Nova Scotia, gypsum fiber panel plant. This impairment
resulted from high delivered costs of products manufactured at Port Hawkesbury
combined with the consolidation of production of FIBEROCK products at the
Gypsum, Ohio, plant. Estimated future cash flows related to these facilities
indicated that impairment charges were necessary to write down the assets to
their third-party appraised fair values.
Also, in the fourth quarter of 2001, the Corporation recorded a charge of
$12 million pretax ($10 million after-tax) 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. Included in the $12 million pretax charge was $8
million for severance related to a workforce reduction of more than 350
positions (primarily hourly positions), $2 million for the
13
write-off of property, plant and equipment, and $2 million for line shutdown and
removal and contract cancellations. The 2001 restructuring was intended to allow
the Corporation to optimize its manufacturing operations.
As of December 31, 2002, 260 employees were terminated, 26 open positions
were eliminated, and the ceiling tile manufacturing line at Greenville, Miss.,
and the plants in San Juan Ixhuatepec, Mexico, and Prestice, Czech Republic,
were shut down. The Fremont, Calif., plant ceased production in the second
quarter of 2002, eliminating approximately 250 million square feet of old,
high-cost gypsum wallboard capacity. Annual savings from the full implementation
of the 2001 restructuring initiatives are estimated at $11 million.
The reserve for the 2001 restructuring plan was included in accrued
expenses on the consolidated balance sheets as of December 31, 2002 and 2001.
Charges against the reserve in 2001 included the $2 million write-off of
property, plant and equipment and payments totaling $2 million. An additional $3
million of payments were made and charged against the reserve in 2002. The
remaining $5 million of payments are being made and charged against the reserve
in the first quarter of 2003. All payments associated with the 2001
restructuring plan are being funded with cash from operations. See Part II, Item
8. Note 3. Exit Activities for additional information related to restructuring
payments and reserve balances.
2000 PROVISION FOR RESTRUCTURING
In the fourth quarter of 2000, the Corporation recorded a charge of $50
million pretax ($31 million after-tax) related to a restructuring plan that
included a salaried workforce reduction and the shutdown of gypsum wallboard
manufacturing lines at U.S. Gypsum's plants located at Gypsum, Ohio, Oakfield,
N.Y., and Fort Dodge, Iowa. Together, these closings eliminated approximately
700 million square feet of old, high-cost capacity. The plan also included the
shutdown of a mill and ship-loading system at Alabaster, Mich. Included in the
$50 million pretax 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 pretax ($2 million after-tax) was
included in cost of products sold for the writedown of certain inventory. This
restructuring was designed to streamline operations and improve business
efficiency.
During the third quarter of 2001, the Corporation reversed $9 million
pretax ($5 million after-tax) 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 2001 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 pretax ($2 million after-tax) to cost of
products sold because the sale or use of certain affected inventory exceeded
expectations.
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.
Annual savings from the 2000 restructuring initiatives are estimated at $40
million.
The reserve for the 2000 restructuring plan was included in liabilities
subject to compromise on the consolidated balance sheet as of December 31, 2001.
Charges against the reserve through December 31, 2001, included the $15 million
write-off of property, plant and equipment and payments totaling $22 million.
The remaining $4 million of payments were made and charged against the reserve
in 2002. All payments associated with the 2000 restructuring plan were funded
with cash from operations. See Part II, Item 8. Note 3. Exit Activities for
additional information related to restructuring payments and reserve balances.
2000 PROVISION FOR ASBESTOS CLAIMS
In the fourth quarter of 2000, based on an independent study, USG estimated
its probable liability for costs associated with asbestos cases currently
pending and expected to be filed through 2003 and recorded a noncash provision
of $850 million pretax ($524 million after-tax). This provision, combined with
the existing asbestos-related reserve of $335 million, resulted in a total
reserve of $1,185 million as of December 31, 2000. Substantially all of this
reserve
14
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. See
Part II, Item 8. Note 18. Litigation for additional information on
asbestos-related matters.
OPERATING PROFIT (LOSS)
Operating profit totaled $258 million in 2002 and $90 million in 2001. An
operating loss of $369 million was incurred in 2000. Operating profit in 2001
included the charges for impairment and restructuring, as discussed above. The
operating loss in 2000 included the charges for asbestos claims and
restructuring, as discussed above.
INTEREST EXPENSE
Interest expense was $8 million, $33 million and $52 million in 2002, 2001
and 2000, respectively. 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 or recorded since the
Petition Date. Consequently, comparisons of interest expense for 2002, 2001 and
2000 are not meaningful. Contractual interest expense not accrued or recorded on
pre-petition debt totaled $74 million in 2002 and $41 million in 2001.
INTEREST INCOME
Interest income was $4 million, $5 million and $5 million in 2002, 2001 and
2000, respectively.
OTHER (INCOME) EXPENSE, NET
Other income, net was $2 million in 2002 compared with other expense, net
of $10 million and $4 million in 2001 and 2000, respectively. For 2001, other
expense, net included $7 million of net realized currency losses related to the
repayment of intercompany loans by a Belgian subsidiary that is being
liquidated.
INCOME TAXES (BENEFIT)
Income taxes amounted to $117 million in 2002 and $36 million in 2001. An
income tax benefit of $161 million was recorded in 2000 due to the loss before
taxes resulting from the charges for asbestos claims and restructuring. The
Corporation's effective tax rates were 45.6%, 70.0% and 38.4% in 2002, 2001 and
2000, respectively.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR SFAS NO. 142
On January 1, 2002, USG Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
In accordance with the provisions of SFAS No. 142, the Corporation determined
that goodwill for its North American Gypsum segment was impaired and recorded a
noncash, nontaxable impairment charge of $96 million. This charge, which
includes a $6 million deferred currency translation write-off, is reflected on
the Corporation's consolidated statement of earnings as a cumulative effect of a
change in accounting principle as of January 1, 2002. See See Part II, Item 8.
Note 9. Accounting for Goodwill for additional information related to the
adoption of SFAS No. 142.
NET EARNINGS (LOSS)
Net earnings amounted to $43 million, or $1.00 per share, in 2002 and $16
million, or $0.36 per share, in 2001. A net loss of $259 million, or $5.62 per
share, was recorded in 2000.
15
CORE BUSINESS RESULTS
- --------------------------------------------------------------------------------------------------------------------------
(millions) Net Sales Operating Profit (Loss)
----------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000
--------- --------- ---------- -------- -------- --------
NORTH AMERICAN GYPSUM:
United States Gypsum Company $1,962 $1,781 $2,119 $211 $32 $336
CGC Inc. (gypsum) 217 204 206 28 24 34
Other subsidiaries 137 118 112 22 24 22
Eliminations (165) (153) (139) - - -
--------- --------- ---------- -------- -------- --------
Total 2,151 1,950 2,298 261 80 392
--------- --------- ---------- -------- -------- --------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 450 475 513 37 34 64
USG International 176 210 232 (13) (6) 3
CGC Inc. (ceilings) 40 40 43 5 5 3
Eliminations (56) (65) (83) - - -
--------- --------- --------- -------- -------- --------
Total 610 660 705 29 33 70
--------- --------- --------- -------- -------- --------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 1,200 1,152 1,373 51 64 110
--------- --------- ----------- -------- -------- --------
Corporate - - - (71) (43) (44)
Eliminations (493) (466) (595) 2 1 3
Chapter 11 reorganization expenses - - - (14) (12) -
Provisions for impairment and restructuring - - - - (33) (50)
Provision for asbestos claims * - - - - - (850)
--------- --------- --------- -------- -------- --------
TOTAL USG CORPORATION 3,468 3,296 3,781 258 90 (369)
========= ========= ========== ======== ========= ========
* Excludes asbestos-related charges totaling $77 million for the first nine
months of 2000 recorded by U.S. Gypsum to cost of products sold.
- --------------------------------------------------------------------------------------------------------------------------
NORTH AMERICAN GYPSUM
Net sales of $2,151 million and operating profit of $261 million in 2002
were up 10% and 226%, respectively, versus 2001. Net sales and operating profit
in 2001 decreased 15% and 80%, respectively, versus 2000.
Net sales for U.S. Gypsum increased 10% in 2002 primarily due to higher
selling prices for SHEETROCK brand gypsum wallboard. The average selling price
was $100.43 per thousand square feet, up 17% from $85.67 in 2001. Shipments of
SHEETROCK brand gypsum wallboard in 2002 totaled a record 10.1 billion square
feet, up 2% from the previous record of 9.9 billion square feet in 2001. U.S.
Gypsum's plants operated at 93% of capacity in 2002, compared with 90% in 2001.
Shipments of SHEETROCK brand joint compounds and DUROCK brand cement board also
set records in 2002 and were up 3% and 5%, respectively, from prior-year levels.
Operating profit for U.S. Gypsum increased significantly in 2002 primarily due
to the higher wallboard selling prices and increased level of shipments.
Manufacturing costs in 2002 for SHEETROCK brand gypsum wallboard declined versus
2001 primarily due to lower energy costs, partially offset by higher prices for
wastepaper, the primary raw material of wallboard paper.
Comparing 2001 with 2000, net sales for U.S. Gypsum declined in 2001 due to
lower selling prices. Selling prices for SHEETROCK brand gypsum wallboard
declined steadily during the first half of 2001 to a low of $67.67 per thousand
square feet in June, followed by a modest recovery in the second half of the
year. For the full year, the average price was down 34% from $130.61 in 2000.
The drop in wallboard prices in 2001 reflected excess supply conditions caused
by the addition of new industry capacity by U.S. Gypsum and other gypsum
wallboard manufacturers during 1999, 2000 and 2001. Shipments of SHEETROCK brand
gypsum wallboard in 2001 surpassed the previous record of 9.3 billion square
feet in 2000. Shipments of SHEETROCK brand joint compounds and DUROCK brand
cement board were up
16
3% and 7%, respectively, from prior-year levels. Operating profit for U.S.
Gypsum declined significantly in 2001 versus 2000 due to the lower wallboard
selling prices, combined with higher manufacturing costs. Manufacturing costs
for SHEETROCK brand gypsum wallboard increased versus 2000 primarily due to
higher energy costs during the first half of 2001. However, energy costs
stabilized and began to decrease during the second half of the year. Wallboard
costs in 2001 also benefited from lower prices for wastepaper and from improved
operating efficiencies following the closure of several old facilities and
optimization of new plants. While there were no asbestos-related charges in
2001, asbestos-related charges to U.S. Gypsum's cost of products sold totaled
$77 million in 2000.
Net sales and operating profit in 2002 for the gypsum business of
Canada-based CGC Inc. were up 6% and 17%, respectively, versus 2001, primarily
reflecting increased shipments of SHEETROCK brand gypsum wallboard and joint
compounds and higher selling prices for joint compounds. Operating profit in
2002 also benefited from lower raw material costs. Comparing 2001 with 2000, net
sales and operating profit decreased 1% and 29%, respectively. The decline in
2001 net sales primarily reflected a 7% decrease in selling prices for CGC's
SHEETROCK brand gypsum wallboard, partially offset by a 10% increase in
shipments. Operating profit fell in 2001 primarily due to the lower prices and
higher manufacturing costs.
WORLDWIDE CEILINGS
Net sales of $610 million and operating profit of $29 million in 2002 were
down 8% and 12%, respectively, from 2001. Net sales for USG Interiors, Inc.,
were down 5% from 2001 primarily due to lower industry demand for commercial
ceiling products in both the United States and Europe. As a result, domestic
shipments of ceiling tile and grid and export shipments of ceiling tile were
down in 2002. However, operating profit for USG Interiors increased to $37
million from $34 million in 2001 primarily due to lower costs. Cost reductions
resulted from lower energy and raw material costs and from the closure of a
high-cost ceiling tile production line in the fourth quarter of 2001.
Net sales for USG International were down 16% from 2001 primarily due to
lower demand for ceiling tile and grid in Europe. USG International reported an
operating loss of $13 million in 2002, compared with an operating loss of $6
million in 2001. The operating loss in 2002 included an $11 million charge
recorded in the fourth quarter related to management's decision to shut down the
Aubange, Belgium, ceiling tile plant and other downsizing activities that
address the continuing weakness of the commercial ceilings market in Europe. The
charge was included in cost of products sold and reflected severance of $6
million related to a workforce reduction of approximately 50 positions (salaried
and hourly), equipment writedowns of $3 million and other reserves of $2
million. The other reserves primarily related to lease cancellations,
inventories and receivables.
Comparing 2001 with 2000, Worldwide Ceilings' net sales in 2001 were $660
million, down 6% versus 2000, while operating profit of $33 million fell 53%.
These results reflected a worldwide slowdown in the nonresidential construction
market. USG Interiors reported 2001 net sales of $475 million, down 7%, while
operating profit of $34 million dropped 47% from 2000. Domestic shipments of
ceiling grid and AURATONE brand ceiling tile declined 7% and 6%, respectively,
from their record levels of 2000 due to a significant slowdown in the commercial
construction market in the United States. Operating profit for USG Interiors
also was adversely affected by higher manufacturing costs.
USG International reported a 9% decrease in net sales and an operating loss
of $6 million in 2001 versus operating profit of $3 million in 2000. These
unfavorable results were largely attributable to lower demand for ceiling tile
and drywall steel in Europe. Lower sales also were experienced in the
Asia-Pacific region and Latin America. In response to the decline in demand in
Europe, the Corporation determined that the carrying value of the long-lived
assets at the Aubange, Belgium, ceiling tile plant was impaired. Accordingly,
the Corporation recorded a pretax impairment charge of $16 million and began
implementing certain restructuring initiatives in Europe and elsewhere in the
fourth quarter of 2001.
17
BUILDING PRODUCTS DISTRIBUTION
L&W Supply Corporation, the leading specialty building products
distribution business in the United States, reported net sales of $1,200 million
in 2002, a 4% increase from 2001. The higher level of sales primarily reflects
higher selling prices (up 5%) and increased shipments (up 2%) for gypsum
wallboard. In addition, sales of complementary building products, primarily
drywall metal, joint treatment, ceiling products, insulation and roofing,
increased 2%. However, operating profit of $51 million fell 20% primarily due to
higher gypsum wallboard unit costs (up 11%), which more than offset the
increases in prices and shipments. L&W Supply's gypsum wallboard margin declined
as gypsum manufacturers' higher selling prices to L&W Supply were not fully
passed on to its customers.
Comparing 2001 with 2000, L&W Supply reported net sales in 2001 of $1,152
million, a 16% decrease from 2000. Operating profit of $64 million declined 42%.
Average selling prices for L&W Supply's gypsum wallboard in 2001 were down 27%
from 2000. This decline was partially offset by a 33% decrease in unit costs,
which primarily reflects manufacturers' selling prices to distributors.
Shipments of L&W Supply's gypsum wallboard in 2001 were virtually unchanged from
the record level of 2000. Sales and profit for certain complementary building
products, primarily drywall metal, joint treatment and ceiling products, also
declined from 2000 as a result of competitive market conditions. However,
results for insulation and roofing products improved versus 2000.
L&W Supply remains focused on opportunities to grow in the most profitable
market locations, as well as opportunities to reduce costs and optimize asset
utilization. As part of its plan, L&W Supply opened or acquired five locations
and closed or consolidated four locations during 2002, leaving a total of 181
locations in the United States as of December 31, 2002, compared with 180
locations and 192 locations as of December 31, 2001 and 2000, respectively.
MARKET CONDITIONS AND OUTLOOK
Industry shipments of gypsum wallboard in the United States were an
estimated 30.7 billion square feet in 2002, a 2% increase from 30.2 billion
square feet in 2001. The new housing market was strong in 2002. Based on
preliminary data issued by the U.S. Bureau of the Census, U.S. housing starts in
2002 were an estimated 1.706 million units, compared with actual housing starts
of 1.603 million units in 2001 and 1.569 million units in 2000.
The repair and remodel market accounts for the second-largest portion of
the Corporation's sales. Because many buyers begin to remodel an existing home
within two years of purchase, opportunity from the repair and remodel market in
2002 was fairly solid, as sales of existing homes in 2001 and 2002 remained at
historically high levels.
Growth in new housing and a strong level of residential remodeling resulted
in first- and second-quarter records for gypsum wallboard shipments. The
favorable levels of activity in these two 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 in the first half of
2002. Prices remained relatively stable in the second half of 2002.
Future demand for the Corporation's products from new nonresidential
construction is determined by floor space for which contracts are signed.
Installation of gypsum and ceilings products follows signing of construction
contracts by about a year. Current information indicates that floor space for
which contracts were signed was down significantly in 2002 as compared with
2001. Commercial construction has been affected by reduced corporate earnings,
resulting in lower investments in office and other commercial space.
The outlook for the Corporation's markets in 2003 is mixed. Demand for
gypsum wallboard is expected to remain strong primarily due to the continued
high demand for new homes. Despite the strong demand, the gypsum wallboard
industry is expected to have a large amount of excess capacity. Nonresidential
construction, the principal market for the Corporation's ceiling products and a
major market for its distribution business, is likely to remain weak. In
addition, the Corporation, like many other companies, faces cost pressures in
areas such as employee and retiree medical expenses, raw material and energy
costs and insurance premiums. In this environment, the Corporation is focusing
its management attention and investments on improving customer service,
manufacturing costs and operating efficiencies, as well as selectively investing
to grow its businesses. In addition, the Corporation 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.
18
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital (current assets less current liabilities) as of December
31, 2002, amounted to $955 million, and the ratio of current assets to current
liabilities was 3.18-to-1. As of December 31, 2001, working capital amounted to
$914 million, and the ratio of current assets to current liabilities was
3.85-to-1.
Cash, cash equivalents and marketable securities as of December 31, 2002,
amounted to $830 million, compared with $493 million as of December 31, 2001.
During 2002, net cash flows from operating activities totaled $445 million. Net
cash flows to investing activities totaled $289 million and consisted of capital
spending of $100 million, purchases of marketable securities, net of sales and
maturities, of $181 million, acquisitions of businesses of $10 million, offset
slightly by proceeds of $2 million from asset sales. Because of the Filing,
there were no financing activities during 2002.
As of December 31, 2002, $131 million was invested in long-term marketable
securities and $50 million in short-term marketable securities. The
Corporation's marketable securities are classified as available-for-sale
securities and reported at fair market value with unrealized gains and losses
excluded from earnings and reported in accumulated other comprehensive loss on
the consolidated balance sheet.
Receivables increased to $284 million as of December 31, 2002, from $274
million as of December 31, 2001, primarily reflecting a 11% increase in net
sales for the month of December 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 $270 million from $254 million, and
accounts payable increased to $170 million from $140 million.
DEBT
As of December 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
As of December 31, 2002, the Corporation, on a consolidated basis, had $830
million of cash and marketable securities, of which $171 million was held by
non-Debtor subsidiaries. The Corporation also had a $350 million DIP Facility
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. Given these levels, as of December 31, 2002, the
Corporation had the capacity to borrow up to $288 million. There were no
outstanding borrowings under the DIP Facility as of December 31, 2002. However,
$16 million of standby letters of credit were outstanding, leaving $272 million
of unused borrowing capacity available as of December 31, 2002.
In January 2003, the Corporation reduced the size of the DIP Facility to
$100 million. This action was taken at the election of the Corporation due to
the levels of cash and marketable securities on hand and to reduce costs
associated with the DIP Facility. The resulting DIP Facility will be used
largely to support the issuance of standby letters of credit needed for the
Corporation's business operations. The Corporation believes that cash and
marketable securities on hand and future cash available from operations will
provide sufficient liquidity to allow its businesses to operate in the normal
course without interruption for the duration of the chapter 11 proceedings.
CAPITAL EXPENDITURES
Capital spending amounted to $100 million in 2002, compared with $109
million in 2001. In response to demand, construction of a new production line to
manufacture DUROCK brand cement board was completed in the third quarter of 2002
at U.S. Gypsum's Baltimore, Md., plant, and a new plant to produce SHEETROCK
brand joint compounds in Glendale, Ariz., was completed in the fourth quarter of
2002. As of December 31, 2002, remaining capital expenditure commitments for the
replacement, modernization and expansion of operations amounted to $56 million,
compared with $63 million as of December 31, 2001.
During the bankruptcy proceeding, the Corporation expects to have limited
ability to access capital other than its
19
own cash flows 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 to a total of $175 million per year. Within
such constraints, the Corporation expects to be able to maintain a program of
capital spending aimed at maintaining and enhancing its businesses.
CONTRACTUAL OBLIGATIONS AND COMMITTMENTS
As of December 31, 2002, the Corporation's lease obligations totaled $195
million, and future minimum lease payments required under operating leases with
initial or remaining noncancelable terms in excess of one year as of December
31, 2002, were $51 million in 2003, $44 million in 2004, $35 million in 2005,
$26 million in 2006 and $18 million in 2007. The aggregate lease obligation
subsequent to 2007 was $21 million. As of the date of this report, virtually all
of the Corporation's pre-petition debt is in default due to the Filing. See Part
II, Item 8. Note 11. Debt for additional information on the Corporation's
indebtedness. The Corporation's unconditional purchase obligations, as defined
by SFAS No. 47, "Disclosure of Long-Term Obligations," were immaterial.
OTHER MATTERS
LEGAL CONTINGENCIES
As a result of the Filing, all pending asbestos lawsuits against U.S.
Gypsum and other subsidiaries are stayed, and no party may take any action to
pursue or collect on such asbestos claims absent specific authorization of the
Bankruptcy Court. See Part II, Item 8. Note 2. Voluntary Reorganization Under
Chapter 11 for recent developments in the Corporation's reorganization
proceedings and Note 18. Litigation for additional information on 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 8. Note 18. Litigation for additional information on
environmental litigation.
CRITICAL ACCOUNTING POLICIES
The Corporation's consolidated financial statements are prepared in
conformity with accounting policies generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses during the periods presented. The
following is a summary of the accounting policies the Corporation believes are
the most important to aid in understanding its financial results.
Voluntary Reorganization Under Chapter 11: As a result of the Filing, the
Corporation's consolidated financial statements reflect the provisions of SOP
90-7 and are prepared on a going-concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. However, because 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
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. 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 any of them, may sell or otherwise dispose of assets
and liquidate or settle liabilities for 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.
One of the key provisions of SOP 90-7 requires the reporting of the
Debtors' liabilities incurred prior to the commencement of the Chapter 11 Cases
as liabilities subject to
20
compromise. The various liabilities that are subject to compromise include U.S.
Gypsum's asbestos reserve and the Debtors' pre-petition debt, accounts payable,
accrued expenses and other long-term liabilities. The amounts for these items
represent the Debtors' 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. In particular, the amount of the asbestos reserve reflects U.S.
Gypsum's pre-petition estimate of liability associated with asbestos claims to
be filed in the tort system through 2003, and this liability, including
liability for post-2003 claims, is the subject of significant legal proceedings
and negotiation in the Chapter 11 Cases.
Other provisions of SOP 90-7 involve interest expense and interest income.
Interest expense on debt classified as liabilities subject to compromise is not
accrued or recorded. Interest income on cash accumulated during the bankruptcy
process to settle claims under a plan of reorganization is netted against
chapter 11 reorganization expenses.
See Part II, Item 8. Note 2. Voluntary Reorganization Under Chapter 11 for
additional information related to the Filing.
Asbestos Liability: 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 (as defined in Part II, Item 8. Note 18.
Litigation), 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 (as defined in Part II, Item 8.
Note 18. Litigation) included, but were not limited to, the number, disease and
occupational characteristics, and jurisdiction of Personal Injury Cases that are
filed against U.S. Gypsum; the age and level of asbestos-related disease of
claimants; the viability of claims for conspiracy or punitive damages; the
elimination of indemnity sharing among members of the Center 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 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
would be enacted.
In 2000, an independent actuarial study of U.S. Gypsum's current and
potential future asbestos liability was completed. This analysis was based on
the assumption that U.S. Gypsum's asbestos liability would continue to be
resolved in the tort system. As part of this analysis, the Corporation reviewed,
among other things, historical case filings and increasing settlement costs; the
type of products U.S. Gypsum sold 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, long-term settlements; and anticipated trends in recruitment by
plaintiffs' law 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. Based on the results of the actuarial study, the Corporation
determined that, although substantial uncertainty remained, it was probable that
asbestos claims currently
21
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 2000, the Corporation recorded a
pretax noncash 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.
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 certain 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 disease 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 in estimating the asbestos
liability due to the Filing, no change has been made at this time to the
previously recorded reserve for asbestos claims, except to reflect certain minor
asbestos-related costs incurred since the Filing. However, it is possible that
the cost of resolving asbestos claims in the Chapter 11 Cases will be greater
than that set forth in the high end of the range estimated in 2000. Counsel for
the Official Committee of Asbestos Personal Injury Claimants and counsel for the
legal representative for future asbestos personal injury claimants, appointed in
the Chapter 11 Cases, have indicated that they believe that the liabilities for
pending and future asbestos claims exceed the value of Debtors' assets, and,
therefore, are significantly greater than both the reserved amount and the high
end of the range estimated in 2000. As the Chapter 11 Cases proceed, and the
court addresses the issues relating to estimation of Debtors' asbestos
liabilities, the Debtors likely will gain more information from which a
reasonable estimate of the Debtors' probable asbestos liability may be
determined. If 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. It is also possible that, in such
a case, the Debtors' asbestos liability may vary significantly from the recorded
estimate of liability and that this difference could be material to the
Corporation's financial position, results of operations and cash flows in the
period recorded.
See Part II, Item 8. Note 18. Litigation for additional information related
to asbestos and related bankruptcy litigation.
Self-Insurance Reserves: The Corporation purchases third-party insurance for
workers' compensation, automobile, product and general liability claims that
exceed a certain level. However, the Corporation is responsible for the payment
of claims under these insured limits. In estimating the obligation associated
with incurred losses, the Corporation utilizes loss development factors prepared
by actuarial consultants. These development factors use historical data to
project the future development of incurred losses. Loss estimates are adjusted
based upon actual claims settlements and reported claims.
Revenue Recognition: Revenue is recognized upon the shipment of products and
transfer of risk of loss to customers. The Corporation's products are shipped
FOB shipping point. Provisions for discounts to customers are recorded based on
the terms of sale in the same period the related sales are recorded. The
Corporation also records estimated reductions to revenue for customer programs
and incentive offerings, including promotions and other volume-based incentives.
Adoption of SFAS No.142: On January 1, 2002, the Corporation adopted SFAS No.
142, "Goodwill and Other Intangible Assets." Although SFAS No. 142 eliminated
the amortization of goodwill and certain other intangible assets, it initiated
an annual assessment of goodwill for impairment. The initial assessment was
completed as of the adoption date. This
22
assessment, based on discounted cash flows, was performed for each reporting
unit (as defined by SFAS No. 142) that had goodwill. The Corporation determined
that goodwill for its Building Products Distribution segment was not impaired,
but goodwill for its North American Gypsum segment was impaired. This impairment
was attributable to U.S. Gypsum's asbestos liability and related filing for
bankruptcy protection on June 25, 2001. See Part II, Item 8. Note 9. Accounting
for Goodwill for additional information related to the impact of this change in
accounting principle.
RECENT ACCOUNTING PRONOUNCEMENTS
As noted above, on January 1, 2002, the Corporation adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." Upon adoption, the Corporation recorded
a noncash, nontaxable impairment charge of $96 million. This charge, which
includes a $6 million deferred currency translation write-off, is reflected on
the Corporation's consolidated statement of earnings as a cumulative effect of a
change in accounting principle as of January 1, 2002.
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
standard 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 for the Corporation on January 1, 2002,
had no impact on the Corporation's financial statements upon adoption.
SFAS No. 143, "Accounting for Asset Retirement Obligations," requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. The Corporation has determined
that the estimated impact of adopting SFAS No. 143 on the effective date of
January 1, 2003, will be an increase in assets and liabilities of $14 million
and $30 million, respectively. A charge of $16 million (net of tax of $11
million) will be reflected on the consolidated statement of earnings as of
January 1, 2003, as a cumulative effect of a change in accounting principle.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," requires costs associated with exit or disposal activities to be
recognized at fair value when the costs are incurred, rather than at a date of
commitment to an exit or disposal plan. This standard becomes effective for exit
and disposal activities initiated on or after January 1, 2003.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value method of accounting for stock-based compensation. This
standard also amends disclosure provisions to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Corporation adopted the disclosure provisions of SFAS No. 148, which became
effective for financial statements for fiscal years ending after December 15,
2002.
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, currency exchange rates and
consumer confidence; competitive conditions such as price and product
competition; shortages in raw materials; 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.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
MARKET RISKS
In the normal course of business, the Corporation uses financial
instruments, including fixed and variable rate debt, to finance its operations.
In addition, the Corporation uses derivative instruments from time to time to
manage commodity price and foreign currency exposures. The Corporation does not
use derivative instruments for trading purposes.
Interest Rate Risk: The Corporation has interest rate risk with respect to
the fair market value of its marketable securities portfolio. Derivative
instruments are used to enhance the liquidity of the marketable securities
portfolio. The Corporation's $181 million of marketable securities consist of
debt instruments that generate interest income for the Corporation on excess
cash balances generated during the Corporation's chapter 11 bankruptcy
proceeding. A portion of these instruments contain embedded derivative features
that enhance the liquidity of the portfolio by enabling the Corporation to
liquidate the instrument prior to the stated maturity date, thus shortening the
average duration of the portfolio to less than one year. Based on results of a
sensitivity analysis, which may differ from actual results, the Corporation's
exposure to interest rate fluctuations is not material.
Commodity Price Risk: The Corporation uses swap contracts from time to time
to manage its exposure to fluctuations in commodity prices associated with
anticipated purchases of natural gas, wastepaper and fuel. A sensitivity
analysis was prepared to estimate the potential change in the fair value of the
Corporation's natural gas swap contracts assuming a hypothetical 10% change in
market prices. Based on results of this analysis, which may differ from actual
results, the potential change in the fair value of the Corporation's natural gas
swap contracts is $8 million. This analysis does not consider the underlying
exposure.
Foreign Currency Exchange Risk: The Corporation has operations in a number
of countries and uses forward contracts from time to time to hedge the risk of
changes in cash flows resulting from forecasted intercompany and third-party
sales or purchases in non-U.S. currencies. As of December 31, 2002, the
Corporation had no outstanding forward contracts.
See Part II, Item 8. Note 1. Significant Accounting Policies and Note 12.
Derivative Instruments for additional information on the Corporation's financial
exposures.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
CONSOLIDATED FINANCIAL STATEMENTS:
Statements of Earnings 26
Balance Sheets 27
Statements of Cash Flows 28
Statements of Stockholders' Equity 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
1. Significant Accounting Policies 30
2. Voluntary Reorganization Under Chapter 11 32
3. Exit Activities 40
4. Earnings Per Share 42
5. Common Stock 42
6. Marketable Securities 42
7. Inventories 43
8. Property, Plant and Equipment 43
9. Accounting for Goodwill 43
10. Leases 44
11. Debt 44
12. Derivative Instruments 45
13. Accumulated Other Comprehensive Loss 46
14. Employee Retirement Plans 46
15. Stock-Based Compensation 47
16. Income Taxes 48
17. Segments 49
18. Litigation 50
Report of Management 58
Report of Independent Public Accountants 59
Selected Quarterly Financial Data 62
Five-Year Summary 63
Schedule II - Valuation and Qualifying Accounts 64
All other schedules have been omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
25
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(millions, except per-share data) Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Net sales $3,468 $3,296 $3,781
Cost of products sold 2,884 2,882 2,941
Selling and administrative expenses 312 279 309
Chapter 11 reorganization expenses 14 12 -
Provisions for impairment and restructuring - 33 50
Provision for asbestos claims - - 850
- --------------------------------------------------------------------------------------------------------------
Operating profit (loss) 258 90 (369)
Interest expense 8 33 52
Interest income (4) (5) (5)
Other (income) expense, net (2) 10 4
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and
cumulative effect of accounting change 256 52 (420)
Income taxes (benefit) 117 36 (161)
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of accounting change 139 16 (259)
Cumulative effect of accounting change for SFAS No. 142 (96) - -
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) 43 16 (259)
==============================================================================================================
Net Earnings (Loss) Per Common Share:
Basic and diluted before cumulative effect of accounting change 3.22 0.36 (5.62)
Cumulative effect of accounting change for SFAS No. 142 (2.22) - -
- --------------------------------------------------------------------------------------------------------------
Basic and diluted 1.00 0.36 (5.62)
==============================================================================================================
The notes to consolidated financial statements are an integral part of these
statements.
26
USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions, except share data) As of December 31,
- ------------------------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 649 $ 493
Short-term marketable securities 50 -
Receivables (net of reserves of $17 and $17) 284 274
Inventories 270 254
Income taxes receivable 14 76
Deferred income taxes 49 66
Other current assets 77 72
- ------------------------------------------------------------------------------------------------------------------
Total current assets 1,393 1,235
- ------------------------------------------------------------------------------------------------------------------
Long-term marketable securities 131 -
Property, plant and equipment, net 1,788 1,800
Deferred income taxes 199 243
Other assets 106 186
- ------------------------------------------------------------------------------------------------------------------
Total assets 3,617 3,464
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 170 140
Accrued expenses 243 181
Income taxes payable 25 -
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 438 321
- ------------------------------------------------------------------------------------------------------------------
Long-term debt 2 2
Other liabilities 370 339
Liabilities subject to compromise 2,272 2,311
Stockholders' Equity:
Preferred stock - $1 par value; authorized 36,000,000 shares;
$1.80 convertible preferred stock (initial series);
outstanding - none - -
Common stock - $0.10 par value; authorized 200,000,000 shares;
outstanding - 43,238,341 and 43,457,312 shares (after
deducting 6,746,881 and 6,527,910 shares held in treasury) 5 5
Treasury stock (257) (255)
Capital received in excess of par value 412 408
Accumulated other comprehensive loss (32) (31)
Retained earnings 407 364
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 535 491
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 3,617 3,464
==================================================================================================================
The notes to consolidated financial statements are an integral part of these
statements.
27
USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions) Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $ 43 $ 16 $(259)
Adjustments to Reconcile Net Earnings (Loss) to Net Cash:
Cumulative effect of accounting change 96 - -
Provisions for impairment and restructuring - 33 50
Provision for asbestos claims - - 850
Depreciation, depletion and amortization 106 107 96
Deferred income taxes 67 134 (365)
(Increase) Decrease in Working Capital:
Receivables (9) 32 55
Income taxes receivable 62 (76) -
Inventories (15) 17 (15)
Payables 54 82 15
Accrued expenses 65 2 (58)
Increase in other assets (7) (11) (2)
Increase in other liabilities 2 16 -
Increase (decrease) in asbestos reserve, net of receivables 22 (90) 2
Decrease in liabilities subject to compromise (39) (58) -
Other, net (2) 33 (5)
- --------------------------------------------------------------------------------------------------------------
Net cash from operating activities 445 237 364
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (100) (109) (380)
Purchases of marketable securities (237) - -
Sale or maturities of marketable securities 56 - -
Net proceeds from asset dispositions 2 1 3
Acquisitions of businesses (10) - -
- --------------------------------------------------------------------------------------------------------------
Net cash to investing activities (289) (108) (377)
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of debt - 262 197
Repayment of debt - (131) (114)
Short-term borrowings, net - 164 37
Cash dividends paid - (1) (27)
Purchases of common stock - - (207)
- --------------------------------------------------------------------------------------------------------------
Net cash from (to) financing activities - 294 (114)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 156 423 (127)
Cash and cash equivalents at beginning of period 493 70 197
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 649 493 70
==============================================================================================================
Supplemental Cash Flow Disclosures:
Interest paid 2 31 52
Income taxes (refunded) paid, net (39) (17) 211
The notes to consolidated financial statements are an integral part of these
statements.
28
USG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital
Received Accumulated
Common Treasury in Excess Other
Shares Shares Common Treasury of Par Retained Comprehensive
(millions, except share data) (000) (000) Stock Stock Value Earnings Loss Total
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 48,860 (1,126) $5 $(56) $316 $635 $(33) $867
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive Loss:
Net loss (259) (259)
Foreign currency translation (12) (12)
--------
Total comprehensive loss (271)
Cash dividends paid (27) (27)
Stock issuances 262 9 (11) (2)
Purchases of common stock (5,656) (207) (207)
Reduction of tax reserves 103 103
Other (1) (64) (2) 3 1
Net change in treasury stock (5,458) -
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 43,401 (6,584) 5 (256) 411 349 (45) 464
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net earnings 16 16
Foreign currency translation (2) (2)
Gain on derivatives, net of
tax of $10 16 16
--------
Total comprehensive income 30
Cash dividends paid (1) (1)
Stock issuances 156 4 (3) 1
Other (100) (3) (3)
Net change in treasury stock 56 -
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 43,457 (6,528) 5 (255) 408 364 (31) 491
===========================================================================================================================
Comprehensive Income:
Net earnings 43 43
Foreign currency translation 8 8
Gain on derivatives, net of
tax of $1 2 2
Minimum pension liability,
net of tax benefit of $7 (11) (11)
--------
Total comprehensive income 42
Stock issuances 4 -
Other (223) (2) 4 2
Net change in treasury stock (219) -
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 43,238 (6,747) 5 (257) 412 407 (32) 535
===========================================================================================================================
The notes to consolidated financial statements are an integral part of these
statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Through its subsidiaries, USG Corporation (the "Corporation") is a leading
manufacturer and distributor of building materials, producing a wide range of
products for use in new residential, new nonresidential, and repair and remodel
construction, as well as products used in certain industrial processes. The
Corporation's operations are organized into three operating segments: North
American Gypsum, which manufactures SHEETROCK brand gypsum wallboard and related
products in the United States, Canada and Mexico; Worldwide Ceilings, which
manufactures ceiling tile in the United States and ceiling grid in the United
States, Canada, Europe and the Asia-Pacific region; and Building Products
Distribution, which distributes gypsum wallboard, drywall metal, ceiling
products, joint compound and other building products throughout the United
States. The Corporation's products also are distributed through building
materials dealers, home improvement centers and other retailers, specialty
wallboard distributors and contractors.
CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets, liabilities, revenues and
expenses. Actual results could differ from these estimates.
FOREIGN CURRENCY TRANSLATION
Foreign-currency-denominated assets and liabilities are translated into U.S.
dollars at the exchange rates existing as of the respective balance sheet dates.
Translation adjustments resulting from fluctuations in exchange rates are
recorded to accumulated other comprehensive loss on the consolidated balance
sheets. Income and expense items are translated at the average exchange rates
during the respective periods.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements and notes
thereto have been reclassified to conform with the 2002 presentation.
REVENUE RECOGNITION
Revenue is recognized upon the shipment of products to customers, which is when
title and risk of loss is transferred to customers. Provisions for discounts to
customers are recorded based on the terms of sale in the same period the related
sales are recorded. The Corporation records estimated reductions to revenue for
customer programs and incentive offerings, including promotions and other
volume-based incentives. The Corporation's products are shipped FOB shipping
point.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of products sold.
ADVERTISING
Advertising expenses consist of media advertising and related production costs.
Advertising expenses are charged to earnings as incurred and amounted to $14
million in each of the years ended December 31, 2002 and 2001, and $20 million
in the year ended December 31, 2000.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to earnings as incurred and
amounted to $17 million, $15 million and $21 million in the years ended December
31, 2002, 2001 and 2000.
INCOME TAXES
The Corporation accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. Tax provisions include amounts that are
currently payable, plus changes in deferred tax assets and liabilities.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common
shares outstanding. 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
30
options. Diluted earnings per share exclude the potential exercise of
outstanding stock options for any period in which such exercise would have an
anti-dilutive effect.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with original
maturities of three months or less.
MARKETABLE SECURITIES
The Corporation invests in marketable securities with maturities greater than
three months. These securities are listed as either short-term or long-term
marketable securities on the consolidated balance sheet based on their
maturities being less than or greater than one year. The securities are
classified as available-for-sale securities and reported at fair market value
with unrealized gains and losses excluded from earnings and recorded to
accumulated other comprehensive loss. Realized gains and losses were not
material in 2002.
INVENTORY VALUATION
All of the Corporation's inventories are stated at the lower of cost or market.
Most of the Corporation's inventories in the United States are valued under the
last-in, first-out ("LIFO") method. The remaining inventories are valued under
the first-in, first-out ("FIFO") or average production cost methods. Inventories
include material, labor and applicable factory overhead costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, except for those assets that
were revalued under fresh start accounting in May 1993. Provisions for
depreciation of property, plant and equipment are determined principally on a
straight-line basis over the expected average useful lives of composite asset
groups. Estimated useful lives are determined to be 50 years for buildings and
improvements and a range of 10 years to 25 years for machinery and equipment.
Depletion is computed on a basis calculated to spread the cost of gypsum and
other applicable resources over the estimated quantities of material
recoverable.
LONG-LIVED ASSETS
Long-lived assets, which primarily include property, plant and equipment and
goodwill (the excess of cost over the fair value of net assets acquired), are
subject to the provisions of Statement of Financial Accounting Standards
("SFAS") No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets." The
Corporation periodically reviews its long-lived assets for impairment by
comparing the carrying value of the assets with their estimated future
undiscounted cash flows or fair value, as appropriate. If impairment is
determined, the asset is written down to estimated fair value.
STOCK-BASED COMPENSATION
The Corporation accounts for stock-based compensation under the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." APB No. 25 prescribes the use of the intrinsic value method,
which measures compensation cost as the quoted market price of the stock at the
date of grant less the amount, if any, that the employee is required to pay. As
required by SFAS No. 123, "Accounting for Stock-Based Compensation," which was
amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," the Corporation discloses the pro forma effects on net earnings and
earnings per share as if stock-based compensation had been recognized based on
the estimated fair value at the date of grant for options awarded. See Note 15.
Stock-Based Compensation for the Corporation's table on pro forma net earnings
and earnings per share assuming the fair value method of accounting for
stock-based compensation had been used.
DERIVATIVE INSTRUMENTS
The Corporation uses derivative instruments to manage commodity price and
foreign currency exposures. The Corporation does not use derivative instruments
for trading purposes. Under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" 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 loss and
is reclassified to earnings when the underlying transaction has an impact on
earnings. Commodity Derivative Instruments: The Corporation uses swap contracts
from time to time to hedge anticipated purchases of natural gas, wastepaper and
31
fuel to be used in its manufacturing and shipping operations. The current
contracts, most of which mature by December 31, 2003, are generally designated
as cash flow hedges, with changes in fair value recorded to accumulated other
comprehensive loss until the hedged transaction occurs, at which time it is
reclassified to earnings.
Foreign Exchange Derivative Instruments: The Corporation has operations in a
number of countries and uses forward contracts from time to time 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 to
accumulated other comprehensive loss until the underlying transaction has an
impact on earnings.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Although SFAS No. 142 eliminated the amortization of
goodwill and certain other intangible assets, it initiated an annual assessment
of goodwill for impairment. See Note 9. Accounting for Goodwill for information
regarding the adoption of this standard and the resulting impairment charge.
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
standard establishes a single accounting model for the disposal of long-lived
assets. This standard, which became effective for the Corporation on January 1,
2002, had no impact on the Corporation's financial statements upon adoption.
SFAS No. 143, "Accounting for Asset Retirement Obligations," requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. The Corporation has determined
that the estimated impact of adopting SFAS No. 143 on the effective date of
January 1, 2003, will be an increase in assets and liabilities of $14 million
and $30 million, respectively. A charge of $16 million (net of tax of $11
million) will be reflected on the consolidated statement of earnings as of
January 1, 2003, as a cumulative effect of a change in accounting principle.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," requires costs associated with exit or disposal activities to be
recognized at fair value when the costs are incurred, rather than at a date of
commitment to an exit or disposal plan. This standard becomes effective for exit
and disposal activities initiated on or after January 1, 2003.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value method of accounting for stock-based compensation. This
standard also amends disclosure provisions to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Corporation adopted the disclosure provisions of SFAS No. 148, which became
effective for financial statements for fiscal years ending after December 15,
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.; and USG Pipeline Company.
This action was taken to resolve asbestos-related claims in a fair and
equitable manner, to protect the long-term value of the Debtors' businesses and
to maintain the Debtors' leadership positions in their markets.
CONSEQUENCES OF THE FILING
The Debtors are operating their businesses without
32
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, 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.
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
Bankruptcy Court also appointed the Honorable Dean M. Trafelet as the legal
representative for future asbestos claimants in the Debtors' bankruptcy
proceeding. Mr. Trafelet was formerly a judge of the Circuit Court of Cook
County, Illinois. The Debtors expect that the appointed committees, together
with Mr. Trafelet, 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 has granted
requests by the Debtors to extend the period of exclusivity, which currently
runs through March 1, 2003. The Debtors intend to seek one or more additional
extensions depending on developments in the Chapter 11 Cases. If the Debtors
fail to file a plan of reorganization during such extension period, or if such
plan is not accepted by the requisite numbers of creditors and equity holders
entitled to vote on the plan, other parties in interest in the Chapter 11 Cases
may be permitted to propose their own plan(s) of reorganization for the Debtors.
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, in connection
with the confirmation of a plan of reorganization, a permanent injunction
barring the assertion of present and future asbestos-related claims against the
reorganized company and channeling those claims to an independent trust for
payment in whole or in part. Among other things, the trust must own, or have the
right to own upon the occurrence of contingencies specified in the plan of
reorganization, a majority of the voting shares of the debtor or its parent, and
the plan must be approved by 75% of the voting asbestos claimants whose claims
are addressed by the trust. 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 Debtors' intention to seek a full recovery for their
creditors, it is not possible 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. Pre-petition
33
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 are
likely to be substantially diluted or cancelled in whole or in part. Whether the
Corporation's equity has significant value and Debtors' non-asbestos creditors
recover the full value of their claims depend upon the outcome of the analysis
of the amount of Debtors' assets and liabilities, especially asbestos
liabilities, in the Chapter 11 Cases. Counsel for the Official Committee of
Asbestos Personal Injury Claimants and counsel for the legal representative for
future asbestos personal injury claimants have advised the court that is
presiding over the Chapter 11 Cases that they believe that the Debtors' asbestos
liabilities exceed the value of the Debtors' assets and that the Debtors are
insolvent. The Debtors have advised the court that they believe that the Debtors
are solvent if the asbestos liabilities are fairly and appropriately valued, and
the Debtors have requested that the court undertake an estimation of those
liabilities. On February 19, 2003, the Court ruled on a procedure for estimating
Debtors' liability for asbestos personal injury cases alleging cancer. (See Note
18. Litigation for additional information on this procedure.) If the amount of
the Debtors' asbestos liabilities cannot be resolved through negotiation, as has
been the case to date, the outcome of the court proceedings regarding Debtors'
asbestos liabilities likely will be determinative of the Debtors' solvency and
the recovery of the Debtors' pre-petition creditors and equity security holders.
As a result of this uncertainty, it is not possible at this time to predict
the timing or 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 pre-petition creditors of the Debtors or the interests
of the Corporation's equity security holders. There can be no assurance as to
the value of any distributions that might be made under any plan or plans of
reorganization with respect to such pre-petition claims, equity interests, or
other outstanding securities. Recent developments in the Corporation's
bankruptcy proceeding are discussed in Note 18. Litigation.
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 that began in January 2002. Expenses associated with this plan amounted
to $20 million in 2002 and $12 million in 2001.
CHAPTER 11 FINANCING
On July 31, 2001, a $350 million debtor-in-possession financing facility (the
"DIP Facility") was approved by the Bankruptcy Court to supplement liquidity and
fund operations during the reorganization process. The facility is provided by a
syndicate of lenders led by JPMorgan Chase Bank (formerly The Chase Manhattan
Bank) as agent. Borrowing availability under the DIP Facility is based primarily
on accounts receivable and inventory levels and, to a lesser extent, property,
plant and equipment. Given these levels, as of December 31, 2002, the
Corporation had the capacity to borrow up to $288 million. There were no
outstanding borrowings under the DIP Facility as of December 31, 2002. However,
$16 million of standby letters of credit were outstanding, leaving $272 million
of unused borrowing capacity available as of December 31, 2002.
In January 2003, the Corporation reduced the size of the DIP Facility to
$100 million. This action was taken at the election of the Corporation due to
the levels of cash and marketable securities on hand and to reduce costs
associated with the DIP Facility. The DIP Facility matures on June 25, 2004.
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 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. 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 any of
34
them, may sell or otherwise dispose of assets and liquidate or settle
liabilities for 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 as 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 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 in 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 Debtors' 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. In
particular, the amount shown for the asbestos reserve reflects the Corporation's
pre-petition estimate of liability associated with asbestos claims to be filed
in the tort system through 2003, and this liability, including liability for
post-2003 claims, is the subject of significant legal proceedings and
negotiation in the Chapter 11 Cases. See Note 18. Litigation for additional
information on asbestos and related bankruptcy litigation. 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, and certain of the schedules were
amended and filed with the Bankruptcy Court on May 31, 2002, 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 established a bar date of January 15, 2003, by
which proofs of claim were required to be filed against the Debtors for all
claims other than asbestos personal injury claims. The Debtors, with Bankruptcy
Court approval, have begun a process of liquidating or estimating claims filed
prior to the bar date.
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 2002, contractual interest expense not accrued or recorded on
pre-petition debt totaled $74 million. From the Petition Date through December
31, 2002, contractual interest expense not accrued or recorded on pre-petition
debt totaled $115 million.
The Corporation believes that cash and marketable securities on hand and
future cash available from operations will provide sufficient liquidity to allow
its businesses to operate in the normal course without interruption for the
duration of the chapter 11 proceedings. This includes its ability to meet
post-petition obligations of the Debtors and to meet obligations of the
non-Debtor subsidiaries. The appropriateness of using the going-concern basis
for the Corporation's financial statements is dependent upon, among other
things, (i) the Corporation's ability to comply with the terms of the DIP
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.
35
Liabilities subject to compromise in the consolidated and DIP balance sheets
consist of the following items:
(millions) As of December 31,
- --------------------------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Accounts payable $ 157 $ 162
Accrued expenses 56 86
Debt 1,005 1,005
Asbestos reserve 1,061 1,061
Other long-term liabilities 36 38
- --------------------------------------------------------------------------------------------------------------------------
Subtotal 2,315 2,352
Elimination of intercompany accounts payable (43) (41)
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities subject to compromise 2,272 2,311
==========================================================================================================================
Chapter 11 reorganization expenses in the consolidated and DIP statements of
earnings consist of the following:
(millions) Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Legal and financial advisory fees $22 $14
Bankruptcy-related interest income (8) (4)
Accelerated amortization of debt issuance costs - 2
- --------------------------------------------------------------------------------------------------------------------------
Total chapter 11 reorganization expenses 14 12
==========================================================================================================================
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").
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. During the first
six months of 2001, the Corporation took steps to secure the obligations from
each of the principal domestic operating subsidiaries under the intercompany
loan agreements when it became clear that the asbestos liability claims of U.S.
Gypsum were becoming an increasingly greater burden on the Corporation's cash
resources.
As of December 31, 2002, U.S. Gypsum and USG Interiors had net pre-petition
payable balances to the Parent Company for Intercompany Corporate Transactions
of $294 million and $109 million, respectively. L&W Supply had a net
pre-petition receivable balance from the Parent Company of $33 million. On a
post-petition basis, U.S. Gypsum, USG Interiors and L&W Supply had net
receivable balances from the Parent Company for Intercompany Corporate
Transactions of $182 million, $6 million, and $157 million, respectively.
In addition to the above transactions, the operating subsidiaries engage in
ordinary course purchase and sale of products with other operating subsidiaries
(the
36
"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.
DIP FINANCIAL STATEMENTS (unaudited)
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, 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.
In the fourth quarter of 2002, USG Interiors recorded a charge of $82 million
to write down the investment in its Belgian subsidiary, which ceased operations
in December 2002. Earlier in 2002, USG Funding Corporation, a non-Debtor
subsidiary of USG Corporation, declared a dividend in the amount of $30 million
payable to the Parent Company, which was paid in effect by eliminating the
intercompany payable from USG Corporation. The net impact of these unrelated
transactions (the investment writedown of $82 million, partially offset by
dividend income of $30 million) is included in other expense, net in the DIP
statement of earnings for 2002.
DEBTOR-IN-POSSESSION STATEMENTS OF EARNINGS (UNAUDITED)
(millions) Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Net sales $3,127 $2,947
Cost of products sold 2,631 2,628
Selling and administrative expenses 266 232
Chapter 11 reorganization expenses 14 12
Provisions for impairment and restructuring - (5)
Interest expense 8 29
Interest income (2) (2)
Other expense, net 51 10
- --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and cumulative effect of accounting change 159 43
Income taxes 96 25
- --------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change 63 18
Cumulative effect of accounting change for SFAS No. 142 (41) -
- --------------------------------------------------------------------------------------------------------------------------
Net earnings 22 18
==========================================================================================================================
37
DEBTOR-IN-POSSESSION BALANCE SHEETS (UNAUDITED)
(millions) As of December 31,
- --------------------------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 478 $ 346
Short-term marketable securities 50 -
Receivables (net of reserves of $13 and $13) 235 234
Inventories 227 215
Income taxes receivable 14 77
Deferred income taxes 49 66
Other current assets 67 63
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 1,120 1,001
- --------------------------------------------------------------------------------------------------------------------------
Long-term marketable securities 131 -
Property, plant and equipment (net of accumulated depreciation and
depletion of $557 and $481) 1,572 1,581
Deferred income taxes 218 258
Other assets 378 464
- --------------------------------------------------------------------------------------------------------------------------
Total assets 3,419 3,304
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 142 112
Accrued expenses 207 153
Income taxes payable 20 -
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 369 265
- --------------------------------------------------------------------------------------------------------------------------
Other liabilities 362 333
Liabilities subject to compromise 2,272 2,311
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (257) (255)
Capital received in excess of par value 99 95
Accumulated other comprehensive income 4 12
Retained earnings 565 538
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 416 395
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 3,419 3,304
==========================================================================================================================
38
DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions) Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 22 $ 18
Adjustments to Reconcile Net Earnings to Net Cash:
Cumulative effect of accounting change 41 -
Provisions for impairment and restructuring - (5)
Corporate service charge (1) 4
Depreciation, depletion and amortization 85 90
Deferred income taxes 63 140
Gain on asset dispositions - (1)
(Increase) Decrease in Working Capital
Receivables - (69)
Income taxes receivable 63 (77)
Inventories (11) 6
Payables 49 71
Accrued expenses 57 6
Pre-petition intercompany receivable - 7
Post-petition intercompany receivable (53) (84)
Increase in other assets 104 (61)
Increase in other liabilities - 16
Increase (decrease) in asbestos reserve, net of receivables 22 (90)
Decrease in liabilities subject to compromise (39) (58)
Other, net (6) 56
- ----------------------------------------------------------------------------------------------------------
Net cash from (to) operating activities 396 (31)
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (75) (66)
Purchases of marketable securities (237) -
Sale or maturities of marketable securities 56 -
Net proceeds from asset dispositions 2 1
Acquisitions of businesses (10) -
- ----------------------------------------------------------------------------------------------------------
Net cash to investing activities (264) (65)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of debt - 262
Repayment of debt - (56)
Short-term borrowings, net - 200
Cash dividends paid - (1)
- ----------------------------------------------------------------------------------------------------------
Net cash from financing activities - 405
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 132 309
Cash and cash equivalents at beginning of period 346 37
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 478 346
==========================================================================================================
Supplemental Cash Flow Disclosures:
Interest paid 2 26
Income taxes refunded, net (52) (32)
39
3. EXIT ACTIVITIES
2002 DOWNSIZING PLAN
In the fourth quarter of 2002, the Corporation recorded a nontaxable charge of
$11 million related to the shutdown of the Aubange, Belgium, ceiling tile plant
and other downsizing activities in Europe that address the continuing weakness
of the commercial ceilings market in Europe. The charge was included in cost of
products sold and reflected severance of $6 million related to a workforce
reduction of approximately 50 positions (salaried and hourly), equipment
writedowns of $3 million and other reserves of $2 million. The other reserves
primarily related to lease cancellations, inventories and receivables.
The reserve for the 2002 downsizing plan was included in accrued expenses
on the consolidated balance sheet as of December 31, 2002. The $3 million
write-off of equipment was charged against the reserve in 2002. All payments
associated with the 2002 downsizing plan are being funded with cash from
operations.
2001 IMPAIRMENTS
In the fourth quarter of 2001, the Corporation recorded a pretax impairment
charge of $16 million related to the Aubange, Belgium, ceiling tile plant. This
impairment resulted from a decline in demand, which had been significantly
affected by a worldwide slowdown in the nonresidential construction market, and
from the plant's high cost structure. In addition, the Corporation recorded a
pretax impairment charge of $14 million related to the Port Hawkesbury, Nova
Scotia, gypsum fiber panel plant. This impairment resulted from high delivered
costs of products manufactured at Port Hawkesbury combined with the
consolidation of production of FIBEROCK products at the Gypsum, Ohio, plant.
Estimated future cash flows related to these facilities indicated that
impairment charges were necessary to write down the assets to their third-party
appraised fair values.
2001 RESTRUCTURING PLAN
Also, in the fourth quarter of 2001, the Corporation recorded a charge of $12
million pretax ($10 million after-tax) 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. Included in the $12 million pretax 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 2001 restructuring was intended to allow the
Corporation to optimize its manufacturing operations.
As of December 31, 2002, 260 employees were terminated, and 26 open
positions were eliminated, and the ceiling tile manufacturing line at
Greenville, Miss., and the plants in San Juan Ixhuatepec, Mexico, and Prestice,
Czech Republic, were shut down. The Fremont, Calif., plant ceased production in
the second quarter of 2002.
The reserve for the 2001 restructuring plan was included in accrued
expenses on the consolidated balance sheets as of December 31, 2002 and 2001.
Charges against the reserve in 2001 included the $2 million write-off of
property, plant and equipment and payments totaling $2 million. An additional $3
million of payments were made and charged against the reserve in 2002. The
remaining $5 million of payments are being made and charged against the reserve
in the first quarter of 2003. All payments associated with the 2001
restructuring plan are being funded with cash from operations.
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
40
2001 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 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.
The reserve for the 2000 restructuring plan was included in liabilities
subject to compromise on the consolidated balance sheet as of December 31, 2001.
Charges against the reserve through December 31, 2001, included the $15 million
write-off of property, plant and equipment and payments totaling $22 million.
The remaining $4 million of payments were made and charged against the reserve
in 2002. All payments associated with the 2000 restructuring plan were funded
with cash from operations.
RESTRUCTURING RESERVES
The following table details the reserves and activity for the 2002 downsizing,
2001 restructuring plan and 2000 restructuring plan:
Writedown of Reversal Reserve
Provisions for Assets to Net Cash of Balance
(millions) Restructuring Realizable Value Payments Reserve 12/31/02
- ------------------------------------------------------------------------------------------------------------------------------------
2002 Downsizing:
Severance (salaried and hourly) $ 6 $ - $ - $ - $ 6
Equipment write-off 3 (3) - - -
Other reserves 2 - - - 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total 11 (3) - - 8
- ------------------------------------------------------------------------------------------------------------------------------------
2001 Restructuring:
Severance (primarily hourly) 8 - (3) - 5
Property, plant and equipment write-off 2 (2) - - -
Line shutdown/removal and contract cancellations 2 - (2) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 12 (2) (5) - 5
- ------------------------------------------------------------------------------------------------------------------------------------
2000 Restructuring:
Severance (salaried) 16 - (16) - -
Property, plant and equipment write-off 15 (15) - - -
Razing buildings and equipment 12 - (6) (6) -
Line shutdown/removal 5 - (3) (2) -
Contract cancellations and severance (hourly) 2 - (1) (1) -
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 50 (15) (26) (9) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 73 (20) (31) (9) 13
====================================================================================================================================
41
4. EARNINGS PER SHARE
The reconciliation of basic earnings per share to diluted earnings per share is
shown in the following table:
Weighted
Net Average
(millions, except Earnings Shares Per-Share
share data) (Loss) (000) Amount
- ----------------------------------------------------------------
2002:
Basic earnings $43 43,282 $1.00
- ----------------------------------------------------------------
Diluted earnings 43 43,282 1.00
================================================================
2001:
Basic earnings 16 43,430 0.36
Dilutive effect of stock options 5
- ----------------------------------------------------------------
Diluted earnings 16 43,435 0.36
================================================================
2000:
Basic loss (259) 45,972 (5.62)
- ----------------------------------------------------------------
Diluted loss (259) 45,972 (5.62)
================================================================
Options to purchase 2.7 million and 2.6 million shares of common stock as
of December 31, 2002 and 2001, respectively, were not included in the
computation of diluted earnings per share for 2002 and 2001 because the exercise
price of the options was greater than the average market price of the
Corporation's common stock. Options to purchase 2.1 million shares of common
stock as of December 31, 2000, were not included in the computation of diluted
earnings per share for 2000 because the options were antidilutive.
5. COMMON STOCK
DIVIDENDS
The Corporation discontinued payment of quarterly cash dividends in the second
quarter of 2001. In the first quarter of 2001, the Corporation paid a cash
dividend of $0.025 per share.
SHARE REPURCHASES
The Corporation concluded a share repurchase program in the third quarter of
2000. Under the program, which began in 1998, the Corporation purchased a total
of 7.3 million shares. Share repurchases by year amounted to 5.7 million shares
in 2000, 1.4 million shares in 1999 and 0.2 million shares in 1998.
STOCKHOLDER RIGHTS PLAN
The Corporation's stockholder rights plan, which will expire on March 27, 2008,
has four basic provisions. First, if an acquirer buys 15% or more of the
Corporation's outstanding common stock, the plan allows other stockholders to
buy, with each right, additional shares of the Corporation at a 50% discount.
Second, if the Corporation is acquired in a merger or other business combination
transaction, rights holders will be entitled to buy shares of the acquiring
company at a 50% discount. Third, if an acquirer buys between 15% and 50% of the
Corporation's outstanding common stock, the Corporation can exchange part or all
of the rights of the other holders for shares of the Corporation's stock on a
one-for-one basis or shares of a new junior preferred stock on a
one-for-one-hundredth basis. Fourth, before an acquirer buys 15% or more of the
Corporation's outstanding common stock, the rights are redeemable for $0.01 per
right at the option of the Corporation's board of directors (the "Board"). This
provision permits the Board to enter into an acquisition transaction that is
determined to be in the best interests of stockholders. The Board is authorized
to reduce the 15% threshold to not less than 10%.
In November 2001, the independent members of the Board reviewed the
Corporation's stockholder rights plan in accordance with its policy, adopted in
2000, to review the rights plan every three years. The independent members of
the Board considered a variety of relevant factors, including the effect of the
Filing, and concluded that the rights plan continued to be in the best interests
of the Corporation and should be retained in its present form.
6. MARKETABLE SECURITIES
As of December 31, 2002, the Corporation's investments in marketable securities
consisted of the following:
Fair
Amortized Market
(millions) Cost Value
- -------------------------------------------------------------
Asset-backed securities $ 58 $ 58
U.S. government and agency securities 54 54
Municipal securities 36 36
Time deposits 17 17
Corporate securities 16 16
- -------------------------------------------------------------
Total marketable securities 181 181
=============================================================
42
Contractual maturities of marketable securities as of December 31, 2002,
were as follows:
Fair
Amortized Market
(millions) Cost Value
- -------------------------------------------------------------
Due in 1 year or less $ 50 $ 50
Due in 1 - 5 years 47 47
Due in 5 - 10 years 6 6
Due after 10 years 20 20
- -------------------------------------------------------------
123 123
Asset-backed securities 58 58
- -------------------------------------------------------------
Total marketable securities 181 181
=============================================================
The average duration of the portfolio is less than one year because a
majority of the longer-term securities have paydown or put features and
liquidity facilities.
7. INVENTORIES
As of December 31, 2002 and 2001, the LIFO values of domestic inventories were
$208 million and $198 million, respectively, and would have been $1 million
higher for 2002 and $5 million higher for 2001 if they were valued under the
FIFO and average production cost methods. All non-U.S. inventory is valued under
FIFO or average production cost methods. The LIFO value of U.S. domestic
inventories exceeded that computed for U.S. federal income tax purposes by $30
million as of December 31, 2002 and 2001. Inventories as of December 31
consisted of the following:
(millions) 2002 2001
- -------------------------------------------------------------
Finished goods and work in progress $169 $164
Raw materials 84 75
Supplies 17 15
- -------------------------------------------------------------
Total 270 254
=============================================================
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consisted of the following:
(millions) 2002 2001
- -------------------------------------------------------------
Land and mineral deposits $ 90 $ 90
Buildings and improvements 621 600
Machinery and equipment 1,778 1,702
- -------------------------------------------------------------
2,489 2,392
Reserves for depreciation and depletion (701) (592)
- -------------------------------------------------------------
Total 1,788 1,800
=============================================================
9. ACCOUNTING FOR GOODWILL
On January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Although SFAS No. 142 eliminated the amortization of
goodwill and certain other intangible assets, it initiated an annual assessment
of goodwill for impairment.
The initial assessment was completed as of the adoption date. The
assessment was performed for each reporting unit (as defined by SFAS No. 142)
that had goodwill. For the Corporation, the reporting units with goodwill were
the North American Gypsum and the Building Products Distribution operating
segments.
The Corporation determined that goodwill for its Building Products
Distribution segment was not impaired, but will be reviewed at least annually
for impairment. However, goodwill for its North American Gypsum segment was
impaired. This impairment was attributable to U.S. Gypsum's asbestos liability
and related filing for bankruptcy protection on June 25, 2001. As a result, the
Corporation recorded a noncash, nontaxable impairment charge of $96 million.
This charge, which includes a $90 million write-off of goodwill (net of
accumulated amortization of $8 million) and a $6 million write-off of deferred
currency translation, is reflected on the Corporation's consolidated statement
of earnings as a cumulative effect of a change in accounting principle as of
January 1, 2002. In accordance with SFAS No. 142, the Corporation reflected this
charge in its financial statements as of January 1, 2002.
After the impairment charge described above and the addition of $8 million
of goodwill associated with businesses acquired in 2002, total goodwill, as of
December 31, 2002, amounted to $30 million (net of accumulated amortization of
$6 million). As of December 31, 2001, goodwill amounted to $112 million (net of
accumulated amortization of $14 million). Goodwill is included in other assets
on the consolidated balance sheet. Prior to the adoption of SFAS No. 142,
goodwill was amortized on a straight-line basis over a period of 15 years to 40
years.
A reconciliation of adjusted net earnings and earnings per share is shown
in the following table:
43
(millions except
per-share data) 2002 2001 2000
- ---------------------------------------------------------------
Net Earnings (Loss):
Reported net earnings (loss) $ 43 $16 $(259)
Add back:
Goodwill amortization,
net of tax - 3 3
Cumulative effect of
accounting change for
SFAS No. 142 96 - -
- ---------------------------------------------------------------
Adjusted net earnings (loss) 139 19 (256)
===============================================================
Basic and Diluted Earnings
(Loss) Per Share:
Reported basic and diluted $1.00 $0.36 $(5.62)
Add back:
Goodwill amortization - 0.07 0.05
Cumulative effect of
accounting change for
SFAS No. 142 2.22 - -
- ---------------------------------------------------------------
Adjusted basic and diluted 3.22 0.43 (5.57)
===============================================================
10. LEASES
The Corporation leases certain of its offices, buildings, machinery and
equipment, and autos under noncancelable operating leases. These leases have
various terms and renewal options. Lease expense amounted to $77 million, $74
million and $70 million in the years ended December 31, 2002, 2001 and 2000,
respectively. Future minimum lease payments required under operating leases with
initial or remaining noncancelable terms in excess of one year as of December
31, 2002, were $51 million in 2003, $44 million in 2004, $35 million in 2005,
$26 million in 2006 and $18 million in 2007. The aggregate obligation subsequent
to 2007 was $21 million.
11. DEBT
As a result of the Filing, virtually all of the Corporation's pre-petition debt
is in default and included in liabilities subject to compromise. Any such debt
that was scheduled to mature since the Filing has not been repaid. Total debt as
of December 31 consisted of the following:
(millions) 2002 2001
- ------------------------------------------------------
Revolving credit facilities $469 $469
9.25% senior notes due 2001 131 131
8.5% senior notes due 2005 150 150
Industrial revenue bonds 255 255
- ------------------------------------------------------
Total debt included in liabilities
subject to compromise 1,005 1,005
======================================================
Long-term debt 2 2
- ------------------------------------------------------
Total debt 1,007 1,007
======================================================
Long-term debt of $2 million as reported on the consolidated balance sheets
as of December 31, 2002 and 2001, consisted of Canadian notes payable.
DIP FACILITY
On July 31, 2001, a $350 million DIP Facility was approved by the Bankruptcy
Court to supplement liquidity and fund operations during the reorganization
process. The facility is provided by a syndicate of lenders led by JPMorgan
Chase Bank (formerly The Chase Manhattan Bank) as agent. Any borrowings under
the facility represent a super priority claim in the bankruptcy proceeding.
Borrowing availability is based primarily on accounts receivable and inventory
levels and, to a lesser extent, property, plant and equipment. Given these
levels, as of December 31, 2002, the Corporation had the capacity to borrow up
to $288 million. There were no outstanding borrowings under the facility at year
end. However, $16 million of standby letters of credit were issued, leaving $272
million of unused borrowing capacity available as of December 31, 2002.
The interest rate for the facility was based on LIBOR plus 200 to 250 basis
points depending on the level of borrowings. The terms of the facility include,
among other requirements, limits on asset sales, dividends and capital
expenditures and minimum EBITDA levels. As of December 31, 2002, the Corporation
was in compliance with the terms and conditions of the agreement.
In January 2003, the Corporation reduced the size of the DIP Facility to
$100 million. This action was taken at the election of the Corporation due to
the levels of cash and marketable securities on hand and to reduce costs
associated with the DIP Facility. The resulting DIP Facility will be used
largely to support the issuance of standby letters of credit needed for the
Corporation's business operations. The DIP Facility matures on June 25, 2004.
44
OTHER DEBT INFORMATION
The fair market value of total debt outstanding (including debt classified as
liabilities subject to compromise) was $765 million and $729 million as of
December 31, 2002 and 2001, respectively. The fair market values were based on
quoted market prices or, where quoted market prices were not available, on
instruments with similar terms and maturities. However, because virtually all of
the Corporation's debt is subject to compromise, the fair market value of total
debt as of December 31, 2002, is not necessarily indicative of the ultimate
settlement value that will be determined by the Bankruptcy Court.
As of December 31, 2002, debt not subject to compromise of $2 million is
scheduled to mature in varying amounts through 2005.
12. DERIVATIVE INSTRUMENTS
The amounts reported below as fair values represent the market value as obtained
from broker quotations. Any negative fair values are estimates of the amounts
USG would need to pay to cancel the contracts or transfer them to other parties.
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 to accumulated other
comprehensive loss until the hedged transaction occurs, at which time it is
reclassified to earnings.
As of December 31, 2002, the Corporation had swap contracts to exchange
monthly payments on notional amounts of natural gas amounting to $66 million.
These contracts mature within one year. As of December 31, 2002, the fair value
of these swap contracts, which remained in accumulated other comprehensive loss,
was $12 million ($7 million after-tax).
The Corporation had swap contracts, maturing through 2003, with Enron to
hedge the cost of wastepaper. During the second quarter of 2002, the Corporation
paid $2 million to terminate all outstanding wastepaper swaps. In accordance
with SFAS No. 133, deferred losses of $2 million were reclassified from
accumulated other comprehensive loss into earnings in 2002.
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 in which the hedged forecasted transactions are scheduled to occur. As of
December 31, 2002, $18 million ($11 million after-tax) remained in accumulated
other comprehensive loss.
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS
The Corporation has operations in a number of countries and uses forward
contracts from time to time 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 to accumulated other comprehensive loss until the
underlying transaction has an impact on earnings. As of December 31, 2002, the
Corporation had no outstanding forward contracts.
As of December 31, 2001, the Corporation had foreign currency contracts in
place, primarily Canadian dollars, to hedge its exposure to exchange rate
fluctuations on transactions denominated in foreign currencies. These foreign
exchange contracts mature on the anticipated date of the underlying transaction,
and all contracts matured by March 31, 2002. The notional amount of foreign
currency contracts as of December 31, 2001, was $6 million. The fair value of
these contracts as of December 31, 2001 was zero.
COUNTERPARTY RISK
The Corporation is exposed to credit losses in the event of nonperformance by
the counterparties on its financial instruments. All counterparties have
investment grade credit standing; accordingly, the Corporation anticipates that
these counterparties will be able to satisfy fully their obligations under the
contracts. The Corporation does not generally obtain collateral or other
security to support financial instruments subject to credit risk but monitors
the credit standing of all counterparties.
45
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss as of December 31 consisted of the
following:
(millions) 2002 2001
- --------------------------------------------------------------------
Gain on derivatives, net of tax $ 18 $16
Deferred currency translation (39) (47)
Minimum pension liability, net of tax (11) -
Unrealized gain (loss) on marketable securities - -
- --------------------------------------------------------------------
Total accumulated other comprehensive loss (32) (31)
====================================================================
During 2002, accumulated after-tax gains of $12 million ($20 million
pretax) on derivatives were reclassified from accumulated other comprehensive
loss to earnings. As of December 31, 2002, the estimated after-tax gain on
derivatives expected to be reclassified within the next 12 months from
accumulated other comprehensive loss into earnings is $14 million.
14. EMPLOYEE RETIREMENT PLANS
The Corporation and its major subsidiaries have defined benefit pension plans
for all eligible employees. Benefits of the plans are generally based on
employees' years of service and compensation during the final years of
employment. The Corporation also maintains plans that provide retiree health
care and life insurance benefits for all eligible employees. Employees generally
become eligible for the retiree benefit plans when they meet minimum retirement
age and service requirements. The cost of providing most retiree health care
benefits is shared with retirees. The components of net pension and
postretirement benefit costs are summarized in the following table:
(millions) 2002 2001 2000
- -------------------------------------------------------------------
Pension Benefits:
Service cost of benefits earned $21 $19 $16
Interest cost on projected
benefit obligation 49 48 47
Expected return on plan assets (55) (56) (54)
Net amortization 3 4 3
- -------------------------------------------------------------------
Net pension cost 18 15 12
===================================================================
Postretirement Benefits:
Service cost of benefits earned 7 6 6
Interest cost on projected
benefit obligation 16 16 16
Net amortization (2) (1) (2)
- -------------------------------------------------------------------
Net postretirement cost 21 21 20
===================================================================
The following tables summarize pension and postretirement benefit obligations,
plan assets and funded status as of December 31:
Pension Postretirement
------------- ----------------
(millions) 2002 2001 2002 2001
- -------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation
as of January 1 $702 $670 $236 $222
Service cost 21 19 7 6
Interest cost 49 48 16 16
Employee contributions 12 11 3 3
Benefits paid (38) (80) (15) (12)
Plan amendment 8 10 - -
Actuarial loss 22 27 63 1
Foreign currency rate change 1 (3) - -
- -------------------------------------------------------------------
Benefit obligation
as of December 31 777 702 310 236
===================================================================
Change in Plan Assets:
Fair value as of January 1 575 652 - -
Actual return on plan assets (48) (17) - -
Employer contributions 26 13 - -
Employee contributions 12 11 - -
Benefits paid (38) (80) - -
Foreign currency rate change 1 (4) - -
- -------------------------------------------------------------------
Fair value as of December 31 528 575 - -
===================================================================
Funded Status:
As of December 31 (249) (127) (310) (236)
Unrecognized prior service cost 24 18 (6) (6)
Unrecognized net (gain) loss 210 86 35 (30)
- -------------------------------------------------------------------
Net balance sheet liability (15) (23) (281) (272)
===================================================================
Components in the Consolidated Balance Sheets Consist of:
Long-term other assets 34 19 - -
Long-term other liabilities (67) (42) (281) (272)
Accumulated other
comprehensive loss 18 - - -
- -------------------------------------------------------------------
Net balance sheet liability (15) (23) (281) (272)
===================================================================
Assumptions as of December 31:
Discount rate 6.50% 7.25% 6.50% 7.25%
Expected return on plan assets 9.0% 9.0% - -
Compensation increase rate 4.7% 5.0% 4.7% 5.0%
- -------------------------------------------------------------------
Following a review of rates of returns on plan assets, the Corporation
decreased its expected rate of return on pension plan assets to 8.0% effective
January 1, 2003.
The assumed health-care-cost trend rate used to
46
measure the accumulated postretirement benefit obligation will be 10.0% in 2003,
with the rate gradually declining to 5.25% in 2007 and remaining at that level
thereafter. A one-percentage-point change in the assumed health-care-cost trend
rate would have the following effects:
One Percentage One Percentage
(millions) Point Increase Point Decrease
- -------------------------------------------------------------------
Effect on total service and
interest cost components $ 4 $(3)
Effect on postretirement
benefit obligation 52 (43)
- -------------------------------------------------------------------
15. STOCK-BASED COMPENSATION
The Corporation has issued stock options from three successive plans under its
long-term equity program. Under each of the plans, options were granted at an
exercise price equal to the market value on the date of grant. All options
granted under the plans have 10-year terms and vesting schedules of two or three
years. The options expire on the 10th anniversary of the date of grant, except
in the case of retirement, death or disability, in which case they expire on the
earlier of the fifth anniversary of such event or the expiration of the original
option term.
The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for options granted:
2001 2000
- -------------------------------------------------------------------
Expected life (years) 7.4 7.4
Risk-free interest rate 6.8% 6.2%
Expected volatility 46.2% 31.3%
Dividend yield 0.12% 1.29%
- -------------------------------------------------------------------
There were no options granted in 2002. The weighted average fair values of
options granted on May 1, 2001, January 2, 2001, and January 3, 2000, were
$6.73, $12.31 and $18.84, respectively.
If the Corporation had elected to recognize compensation cost for
stock-based compensation grants consistent with the fair value method prescribed
by SFAS No. 123, net earnings (loss) and net earnings (loss) per common share
would have changed to the following pro forma amounts:
(millions, except per-share data) 2002 2001 2000
- -------------------------------------------------------------------
Net Earnings(Loss): As reported $43 $16 $(259)
Deduct: Fair value method of stock
-based employee compensation
expense, net of tax (2) (3) (3)
- -------------------------------------------------------------------
Pro forma 41 13 (262)
===================================================================
Basic EPS: As reported 1.00 0.36 (5.62)
Pro forma 0.94 0.31 (5.70)
Diluted EPS: As reported 1.00 0.36 (5.62)
Pro forma 0.94 0.31 (5.70)
- -------------------------------------------------------------------
Stock option activity was as follows:
(options in thousands) 2002 2001 2000
- -------------------------------------------------------------------
Options:
Outstanding, January 1 2,738 2,051 1,790
Granted - 800 330
Exercised - (72) (22)
Canceled (39) (41) (47)
- -------------------------------------------------------------------
Outstanding, December 31 2,699 2,738 2,051
Exercisable, December 31 1,912 1,640 1,437
Available for grant, December 31 1,985 1,737 2,488
- -------------------------------------------------------------------
Weighted Average Exercise Price:
Outstanding, January 1 $34.29 $38.12 $36.49
Granted - 22.44 46.14
Exercised - 10.31 10.31
Canceled 33.01 36.94 44.79
Outstanding, December 31 34.31 34.29 38.12
Exercisable, December 31 39.19 37.89 33.70
- -------------------------------------------------------------------
The following table summarizes information about stock options outstanding
as of December 31, 2002:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices (000) Life (yrs.) Price (000) Price
- -----------------------------------------------------------------
$ 5 - 15 67 0.9 $ 10 63 $ 10
15 - 25 905 7.1 22 122 22
25 - 35 755 2.7 32 755 32
35 - 55 972 5.9 48 972 48
- -----------------------------------------------------------------
Total 2,699 5.3 34 1,912 39
=================================================================
As of December 31, 2002, common shares totaling 2.7 million were reserved
for future issuance in conjunction with existing stock option grants. In
addition, 2.0 million common shares were reserved for future grants. Shares
issued in option exercises may be from original issue or available treasury
shares.
47
16. INCOME TAXES
Earnings (loss) before income taxes consisted of the following:
(millions) 2002 2001 2000
- -------------------------------------------------------------------
U.S. $133 $52 $(471)
Foreign 123 - 51
- -------------------------------------------------------------------
Total 256 52 (420)
===================================================================
Income tax expense (benefit) consisted of the following:
(millions) 2002 2001 2000
- -------------------------------------------------------------------
Current:
Federal $35 $(67) $154
Foreign 14 15 18
State 9 (13) 27
- -------------------------------------------------------------------
58 (65) 199
- -------------------------------------------------------------------
Deferred:
Federal 42 90 (306)
Foreign 8 (5) -
State 9 16 (54)
- -------------------------------------------------------------------
59 101 (360)
- -------------------------------------------------------------------
Total 117 36 (161)
===================================================================
Differences between actual provisions (benefits) for income taxes and
provisions (benefits) for income taxes at the U.S. federal statutory rate (35%)
were as follows:
(millions) 2002 2001 2000
- -------------------------------------------------------------------
Taxes on income (loss)
at U.S. federal statutory rate $90 $18 $(147)
Chapter 11 reorganization
expenses 4 2 -
Foreign sales benefit (1) (1) (1)
Foreign earnings subject
to different tax rates 6 16 4
State income tax, net of
federal benefit 11 1 (17)
Percentage depletion (1) (2) (4)
Non-deductible expenses 3 2 3
Valuation allowance adjustment 6 - -
Other, net (1) - 1
- -------------------------------------------------------------------
Provision (benefit) for
income taxes 117 36 (161)
===================================================================
Effective income tax rate 45.6% 70.0% 38.4%
===================================================================
Significant components of deferred tax assets and liabilities as of
December 31 were as follows:
(millions) 2002 2001
- -------------------------------------------------------------------
Deferred Tax Assets:
Pension and postretirement benefits $117 $115
Reserves not deductible until paid:
Asbestos reserves 401 403
Other reserves 41 45
Other 27 31
- -------------------------------------------------------------------
Deferred tax assets before valuation
allowance 586 594
Valuation allowance (6) -
- -------------------------------------------------------------------
Total deferred tax assets 580 594
- -------------------------------------------------------------------
Deferred Tax Liabilities:
Property, plant and equipment 286 268
Post-petition interest expense 46 17
- -------------------------------------------------------------------
Total deferred tax liabilities 332 285
- -------------------------------------------------------------------
Net deferred tax assets 248 309
===================================================================
A valuation allowance of $6 million was established in 2002 for deferred
tax assets relating to foreign net operating loss carryforwards due to
uncertainty regarding their ultimate realization. This amount was included in
foreign deferred income tax expense for 2002.
The Corporation recognized an income tax receivable of $76 million in 2001
for federal and state income taxes that it expected to be refunded as a result
of the carryback of a net operating loss incurred by the Corporation in 2001.
The federal income tax refund was received by the Corporation in 2002. The state
income tax refunds are expected to be received beginning in 2003.
The Corporation does not provide for U.S. income taxes on the portion of
undistributed earnings of foreign subsidiaries that are intended to be
permanently reinvested. The cumulative amount of such undistributed earnings
totaled approximately $236 million as of December 31, 2002. These earnings would
become taxable in the United States upon the sale or liquidation of these
foreign subsidiaries or upon the remittance of dividends. It is not practicable
to estimate the amount of the deferred tax liability on such earnings.
48
17. SEGMENTS
OPERATING SEGMENTS
(millions) 2002 2001 2000
- -------------------------------------------------------------------
Net Sales:
North American Gypsum $2,151 $1,950 $2,298
Worldwide Ceilings 610 660 705
Building Products Distribution 1,200 1,152 1,373
Eliminations (493) (466) (595)
- -------------------------------------------------------------------
Total 3,468 3,296 3,781
===================================================================
Operating Profit (Loss):
North American Gypsum 261 80 392
Worldwide Ceilings 29 33 70
Building Products Distribution 51 64 110
Corporate (71) (43) (44)
Eliminations 2 1 3
Chapter 11 reorganization
expenses (14) (12) -
Provisions for impairment
and restructuring - (33) (50)
Provision for asbestos claims - - (850)
- -------------------------------------------------------------------
Total 258 90 (369)
===================================================================
Depreciation, Depletion
and Amortization:
North American Gypsum 79 81 70
Worldwide Ceilings 20 19 18
Building Products Distribution 4 7 7
Corporate 3 - 1
- -------------------------------------------------------------------
Total 106 107 96
===================================================================
Capital Expenditures:
North American Gypsum 82 96 354
Worldwide Ceilings 15 11 16
Building Products Distribution 3 2 9
Corporate - - 1
- -------------------------------------------------------------------
Total 100 109 380
===================================================================
Assets:
North American Gypsum 1,887 1,985 1,924
Worldwide Ceilings 404 408 433
Building Products Distribution 286 268 278
Corporate 1,129 908 639
Eliminations (89) (105) (60)
- -------------------------------------------------------------------
Total 3,617 3,464 3,214
===================================================================
GEOGRAPHIC SEGMENTS
(millions) 2002 2001 2000
- -------------------------------------------------------------------
Net Sales:
United States $3,127 $2,947 $3,428
Canada 294 279 284
Other Foreign 243 254 259
Geographic transfers (196) (184) (190)
- -------------------------------------------------------------------
Total 3,468 3,296 3,781
===================================================================
Long-Lived Assets:
United States 1,647 1,758 1,696
Canada 119 152 184
Other Foreign 127 57 127
- -------------------------------------------------------------------
Total 1,893 1,967 2,007
===================================================================
Transactions between operating and geographic segments are accounted for at
transfer prices that are approximately equal to market value. Intercompany
transfers between operating segments (shown above as eliminations) largely
reflect intercompany sales from U.S. Gypsum to L&W Supply.
No single customer accounted for 10% or more of consolidated net sales.
Revenues are attributed to geographic areas based on the location of the assets
producing the revenues. Export sales to foreign unaffiliated customers represent
less than 10% of consolidated net sales.
Segment operating profit (loss) includes all costs and expenses directly
related to the segment involved and an allocation of expenses that benefit more
than one segment. Worldwide Ceilings' operating profit in 2002 included an $11
million charge recorded in the fourth quarter related to management's decision
to shut down the Aubange, Belgium, ceiling tile plant and other downsizing
activities that address the continuing weakness of the commercial ceilings
market in Europe.
Long-lived assets include property, plant and equipment, long-term prepaid
expenses, investments in other companies, goodwill and other long-term assets.
As of December 31, 2002, goodwill, net of accumulated amortization, for the
Corporation's businesses in the United States, Canada and Other Foreign segments
was $30 million, zero and zero, respectively. As of December 31, 2001, goodwill,
net of accumulated amortization, for the Corporation's businesses in the United
States, Canada and Other Foreign segments was $63 million, $49 million and zero,
respectively. As of December 31, 2000, goodwill, net of accumulated
amortization, for the United States, Canada and Other Foreign segments was $66
million, $53 million and $1
49
million, respectively. The Corporation believes that including goodwill in
long-lived assets provides meaningful disclosure to financial statement users in
terms of geographic resource allocation, investment decisions and related risk.
See Note 9. Accounting for Goodwill for information regarding the adoption of
SFAS No. 142 and the resulting decrease in the Corporation's goodwill in 2002.
18. LITIGATION
ASBESTOS AND RELATED BANKRUPTCY 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 and, as noted below, a legal representative for future
asbestos claimants.
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 March 1, 2003.
The Debtors intend to seek one or more additional extensions depending upon
developments in the Chapter 11 Cases. 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 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.
While it is the Debtors' intention to seek a full recovery for its
creditors, it is not possible 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. 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 are likely to be substantially diluted or cancelled in
whole or in part. Whether the Corporation's equity has significant value and
Debtors' non-asbestos creditors recover the full value of their claims depend
upon the outcome of the analysis of the amount of Debtors' assets and
liabilities, especially asbestos liabilities, in the Chapter 11 Cases. Counsel
for the Official Committee of Asbestos Personal Injury Claimants and counsel for
the legal representative for future asbestos personal injury claimants have
advised the court that is presiding over the Chapter 11 Cases that they believe
that the Debtors' asbestos liabilities exceed the value of the
50
Debtors' assets and that the Debtors are insolvent. The Debtors have advised the
court that they believe that the Debtors are solvent if the asbestos liabilities
are fairly and appropriately valued, and the Debtors have requested that the
court undertake an estimation of those liabilities. If the amount of the
Debtors' asbestos liabilities cannot be resolved through negotiation, as has
been the case to date, the outcome of the court proceedings regarding Debtors'
asbestos liabilities likely will be determinative of the Debtors' solvency and
the recovery of the Debtors' pre-petition creditors and equity security holders.
As a result of this uncertainty, it is not possible at this time to predict
the timing or 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 pre-petition creditors of the Debtors or the interests
of the Corporation's equity security holders. There can be no assurance as to
the value of any distributions that might be made under any plan or plans of
reorganization with respect to such pre-petition claims, equity interests, or
other outstanding securities.
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. 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 Bankruptcy Judge Randall J. Newsome in the United States Bankruptcy
Court for the District of Delaware.
In July 2002, the Bankruptcy Court appointed the Honorable Dean M. Trafelet
as the legal representative for future asbestos claimants in the Debtors'
bankruptcy proceeding. Mr. Trafelet was formerly a judge of the Circuit Court of
Cook County, Illinois.
The Debtors filed a motion requesting Judge Wolin to conduct hearings to
substantively estimate the Debtors' liability for asbestos personal injury
claims. The Debtors proposed that, in these substantive estimation hearings, the
court will hear evidence and make rulings regarding the characteristics of valid
asbestos personal injury claims against the Debtors, and the Court will then
estimate the Debtors' liability for present and future asbestos personal injury
claims based upon these rulings. One of the key liability issues is whether
claimants who do not have objective evidence of asbestos-related disease have
valid claims and are entitled to be compensated by Debtors, or whether such
claimants are entitled to compensation only if and when they develop
asbestos-related disease.
The Official Committee of Asbestos Personal Injury Claimants opposed the
substantive estimation hearings proposed by Debtors. The committee contends that
U.S. Gypsum's liability for present and future asbestos personal injury claims
should be based on extrapolation from U.S. Gypsum's settlement history of such
claims and not on litigating liability issues in the bankruptcy proceeding. The
committee contends that the Court does not have the power to exclude claimants
who do not meet objective evidence of asbestos-related disease if such claimants
are compensated in the tort system outside of bankruptcy.
Other constituencies filed briefs with the Court indicating their views on
the estimation protocol that should be adopted by the Court. Briefs supporting
the Debtors' substantive estimation proposal were filed by the Official
Committee of Unsecured Creditors as well as the United States Chamber of
Commerce, the Coalition for Asbestos Justice (representing certain insurers),
and a group of 14 companies that are defendants in asbestos personal injury
litigation but are not in bankruptcy. An unofficial committee representing
select asbestos claimants (claimants who have cancer claims) filed a brief
endorsing Debtors' substantive estimation proposal insofar as Debtors are asking
the Court to address Debtors' liability for certain types of claims, but opposed
Debtors' proposal in certain other respects. The legal representative for future
asbestos claimants (described below) endorsed the estimation protocol requested
by the Official Committee of Asbestos Personal Injury Claimants.
In August 2002, Debtors also filed a motion with Judge Wolin requesting the
Court to issue a ruling declaring that putative claimants who cannot satisfy
objective standards of asbestos-related disease are not entitled to vote on a
Section 524(g) plan. The Debtors' motion is supported by the Official Committee
of Unsecured Creditors as well as the unofficial committee representing select
asbestos claimants and the group of 14 companies that are defendants in asbestos
personal injury litigation but are not in bankruptcy. The Debtors' motion on
this voting issue has been stayed by order of Judge Wolin. It is anticipated
that the Official Committee of Asbestos Personal Injury Claimants will
51
oppose the Debtors' motion.
In response to the Debtors' motion seeking substantive estimation of
Debtors' asbestos personal injury liability, on February 19, 2003, Judge Wolin
issued an Order setting forth a procedure for estimating Debtors' liability for
asbestos personal injury claims alleging cancer. Pursuant to the Order, a bar
date will be established for filing claims by all persons who can certify a
diagnosis of primary cancer caused by asbestos exposure based on a medical
report of a Board-certified physician. The Order provides that the Debtors must
submit to the Court by March 21, 2003, a proposed timetable for the bar date.
The proposed bar date does not apply to non-malignant claims, which the Order
states will not be addressed at this time.
The Order provides that after the claims bar date for these cancer claims
has passed, the Court will hold an estimation hearing under 11 U.S.C. Section
502(c) at which the "debtors will be permitted to present their defenses." The
Order does not establish a date for the estimation hearing. The Order
contemplates that after the estimation of Debtors' liability for present and
future cancer claims, the Court will determine whether Debtors' liability for
these claims exceeds Debtors' assets. The Court notes that the Official
Committee of Asbestos Personal Injury Claimants has asserted that the Debtors
are insolvent and do not have sufficient assets to pay cancer claimants, without
regard to Debtors' liability for non-malignant asbestos personal injury claims.
The Court further notes that Debtors dispute this contention. According to the
Order, the determination of whether the Debtors have sufficient assets to pay
legitimate cancer claimants will guide the Court in determining whether the
Debtors' resources should be spent resolving the issue of the validity of
non-malignant claims where there is no objective evidence of asbestos-related
disease.
It is not possible at this time to predict the timing or outcome of the
estimation hearings relating to cancer claimants, or whether the Court will
ultimately address the validity and voting rights of non-malignant claims. The
outcome of the estimation proceeding regarding cancer claimants, as provided in
the Order, likely will be a significant component of determining Debtors'
asbestos personal injury liability, Debtors' solvency, and the final terms of
any plan or plans of reorganization.
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 Section 524(g) trust or by other means. The
Bankruptcy Court established a bar date of January 15, 2003, by which all
entities with asbestos-related 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 mailed and published notice of the claims bar date to potential asbestos
property damage claimants as well as other claimants affected by the bar date.
The Debtors are in the process of reviewing and analyzing the asbestos-related
property damage claims and general claims received as of the claims bar date.
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
11 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,
52
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. 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 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' law firms that included agreements to
resolve over time the firms' pending Personal Injury Cases as well as certain
future claims (the "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 was paid or reimbursed by insurance. A portion of these payments were
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, if any, 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
53
Personal Injury Cases before the Filing may not be made except pursuant to an
order of the Bankruptcy Court.
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, was named as a defendant in approximately 21 pending Personal Injury
Cases as of the Petition Date. L&W Supply, 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 Supply 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 Supply would be derivative of
the liability of U.S. Gypsum, and that any plan or plans of reorganization
should reflect that L&W Supply'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 Supply to date and the lack of development of the cases against L&W
Supply, 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 Supply and whether any such liability will be
limited to L&W Supply'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 $66 million of insurance remaining to cover
asbestos-related costs. This figure is adjusted from the previously reported $76
million to reflect additional amounts received in an earlier period. After
receipt of insurance payments, $30 million remained primarily in other current
assets as of December 31, 2002. The increase of $22 million in asbestos reserve,
net of receivables, for 2002 as shown on the consolidated statement of cash
flows was attributable to changes in the asbestos insurance receivable. This
insurance is scheduled to be collected at various times through 2004.
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
asbestos-related disease 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
54
possibility that federal legislation addressing asbestos litigation would 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.
As part of this analysis, the Corporation reviewed, among other things,
historical case filings and increasing settlement costs; the type of products
U.S. Gypsum sold 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' law 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 noncash 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 June 30, 2001. The reserve
remained at $1,061 million as of December 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
55
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 disease 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, it is the Corporation's view that no change should be made at
this time to the previously recorded reserve for asbestos claims, except to
reflect certain minor asbestos-related costs incurred since the Filing. However,
it is possible that the cost of resolving asbestos claims in the Chapter 11
Cases will be greater than that set forth in the high end of the range estimated
in 2000. Counsel for the Official Committee of Asbestos Personal Injury
Claimants and counsel for the legal representative for future asbestos personal
injury claimants, appointed in the Chapter 11 Cases, have indicated that they
believe that the liabilities for pending and future asbestos claims exceed the
value of Debtors' assets, and, therefore, are significantly greater than both
the reserved amount and the high end of the range estimated in 2000. As the
Chapter 11 Cases proceed, and the court addresses the issues relating to
estimation of Debtors' asbestos liabilities, the Debtors likely will gain more
information from which a reasonable estimate of the Debtors' probable asbestos
liability may be determined. If 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. It is also
possible that, in such a case, the Debtors' asbestos liability may vary
significantly from the recorded estimate of liability and that this difference
could be material to the Corporation's financial position, results of operations
and cash flows in the period recorded.
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 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
56
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. 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
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. 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 Corporation's financial position,
results of operations and cash flows 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, undiscounted 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
Debtors have been given permission by the Bankruptcy Court to satisfy
environmental obligations up to $12 million. The Corporation believes that
neither these matters nor any other known governmental proceeding regarding
environmental matters will have a material adverse effect upon its financial
position, results of operations or cash flows.
57
REPORT OF MANAGEMENT
Management of USG Corporation is responsible for the preparation, integrity
and fair presentation of the financial information included in this report. The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and necessarily include
certain amounts that are based on management's estimates and judgment.
Management is responsible for maintaining a system of internal accounting
controls to provide reasonable assurance as to the integrity and reliability of
the financial statements, the proper safeguarding and use of assets, and the
accurate execution and recording of transactions. Such controls are based on
established policies and procedures and are implemented by trained personnel.
The system of internal accounting controls is monitored by the Corporation's
internal auditors to confirm that the system is proper and operating
effectively. The Corporation's policies and procedures prescribe that the
Corporation and its subsidiaries are to maintain ethical standards and that its
business practices are to be consistent with those standards.
The Corporation's 2002 financial statements have been audited by Deloitte &
Touche LLP, independent public accountants. Their audit was conducted in
accordance with auditing standards generally accepted in the United States of
America and included consideration of the Corporation's internal control
structure. Management has made available to Deloitte & Touche LLP all of the
Corporation's financial records and related data, as well as minutes of the
meetings of the Board of Directors. Management believes that all representations
made to Deloitte & Touche LLP were valid and appropriate.
The Board of Directors, operating through its Audit Committee composed
entirely of nonemployee directors, provides oversight to the financial reporting
process. The Audit Committee meets periodically with management, the internal
auditors and Deloitte & Touche LLP, jointly and separately, to review
accounting, auditing, internal control and financial reporting matters. Both
Deloitte & Touche LLP and the internal auditors have unrestricted access to the
Audit Committee.
William C. Foote
Chairman, Chief Executive Officer and President
Richard H. Fleming
Executive Vice President and Chief Financial Officer
D. Rick Lowes
Vice President and Controller
58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of USG Corporation:
We have audited the accompanying consolidated balance sheet of USG
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 2002
and the related consolidated statements of earnings, cash flows and
stockholders' equity for the year then ended. Our audit also included the
accompanying 2002 financial statement schedule, Schedule II - Valuation and
Qualifying Accounts. These financial statements and financial statement schedule
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audit. The consolidated balance sheet of the Corporation as of
December 31, 2001 and the related consolidated statements of earnings, cash
flows and stockholders' equity for the years ended December 31, 2001 and 2000,
prior to the addition of the transitional disclosures in Note 9, were audited by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those statements and included an explanatory paragraph in
their report dated January 30, 2002 regarding matters that raised substantial
doubt about the Corporation's ability to continue as a going concern.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 2002 consolidated financial statements present fairly,
in all material respects, the financial position of USG Corporation and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such 2002 financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, USG
Corporation and certain subsidiaries voluntarily filed for Chapter 11 bankruptcy
protection on June 25, 2001 (the "Filing"). The accompanying 2002 financial
statements do not purport to reflect or provide for the consequences of the
bankruptcy proceedings. In particular, such financial statements do not purport
to show (a) as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to pre-petition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Corporation; or (d) as to operations,
the effect of any changes that may be made in its business.
The accompanying 2002 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, there is significant
uncertainty as to the resolution of the Corporation's asbestos litigation,
which, among other things, may lead to possible changes in the composition of
the Corporation's business portfolio, as well as changes in the ownership of the
Corporation. This uncertainty raises substantial doubt about the Corporation's
ability to continue as a going concern. Management's plans concerning this
matter are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 9, effective January 1, 2002, the Corporation changed
its method of accounting for goodwill and intangible assets upon adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets.
As discussed above, the consolidated financial statements of the Corporation
as of and for the years ended December 31, 2001 and 2000 were audited by other
auditors who have ceased operations. As described in Note 9, these consolidated
financial statements have been revised to include the transitional disclosures
required by SFAS No. 142, Goodwill and Other Intangible Assets. We audited the
transitional disclosures in Note 9. In our opinion, the transitional disclosures
for 2001 and 2000 in Note 9 are appropriate. However, we were not engaged to
audit, review, or apply any procedures to the 2001 or 2000
59
consolidated financial statements of the Corporation other than with respect to
such transitional disclosures and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 or 2000 consolidated financial
statements taken as a whole.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 3, 2003 (February 19, 2003 as to paragraphs 13, 14 and 15 of Note 18)
60
INFORMATION REGARDING PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS' REPORTS
The following report is a copy of a report previously issued by Arthur Andersen
LLP ("Andersen"). The report has not been reissued by Andersen. As discussed in
Note 9. Accounting for Goodwill, the Corporation has presented the transitional
disclosures for 2001 and 2000 required by SFAS No. 142. The Arthur Andersen LLP
report does not extend to these changes to the 2001 and 2000 consolidated
financial statements. The adjustments to the 2001 and 2000 consolidated
financial statements were reported on by Deloitte & Touche LLP as stated in
their report appearing herein.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of USG Corporation:
We have audited the accompanying consolidated balance sheets of USG
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of earnings, cash flows and
stockholders' equity for the years ended December 31, 2001, 2000 and 1999. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of USG
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for the years ended December 31, 2001,
2000 and 1999, in conformity with accounting principles generally accepted in
the United States.
The accompanying 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 17 to
the 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.
Our audit was made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 30, 2002
61
USG CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Total
millions, except per-share data) Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------------------------
2002
Net sales $ 829 $ 885 $ 903 $ 851 $ 3,468
Operating profit 48 80 75 55 258
Net earnings (loss) (70) (a) 48 44 21 43
Per Common Share:
Net earnings (loss) (b)- basic (1.62) 1.11 1.03 0.49 1.00
- diluted (1.62) 1.11 1.03 0.49 1.00
Price range (c) - high 9.13 8.00 7.00 9.00 9.13
- low 5.71 5.50 3.85 3.30 3.30
Cash dividends paid - - - - -
- --------------------------------------------------------------------------------------------------
2001
Net sales 826 806 842 822 3,296
Operating profit (loss) 32 (5) 49(d) 14(e) 90
Net earnings (loss) 11 (13) 27(d) (9)(e) 16
Per Common Share:
Net earnings (loss) (b)- basic 0.25 (0.29) 0.61 (0.21) 0.36
- diluted 0.25 (0.29) 0.61 (0.21) 0.36
Price range (c) - high 24.75 15.28 6.40 6.31 24.75
- low 14.51 2.80 3.66 3.60 2.80
Cash dividends paid 0.025 - - - 0.025
- --------------------------------------------------------------------------------------------------
(a) Includes a noncash, nontaxable charge for goodwill impairment of $96
million related to the adoption of SFAS No. 142. Earnings before cumulative
effect of accounting change were $26 million, and basic and diluted net
earnings per share were $0.60.
(b) The sum of the four quarters is not necessarily the same as the total for
the year.
(c) Stock price ranges are for transactions on the New York Stock Exchange
(trading symbol USG), which is the principal market for these securities.
Stockholders of record as of January 31, 2003: Common - 4,371; Preferred -
none.
(d) Includes reversals of restructuring reserves of $9 million pretax ($5
million after-tax) and restructuring-related inventory reserves of $3
million pretax ($2 million after-tax).
(e) Includes charges for impairment of $30 million pretax ($25 million
after-tax) and restructuring of $12 million pretax ($10 million after-tax).
62
USG CORPORATION
FIVE-YEAR SUMMARY
(dollars in millions, except per-share data) Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA:
Net sales $ 3,468 $ 3,296 $ 3,781 $ 3,810 $ 3,342
Cost of products sold 2,884 2,882 2,941 2,742 2,458
Selling and administrative expenses 312 279 309 338 299
Chapter 11 reorganization expenses 14 12 - - -
Provisions for impairment and restructuring - 33 50 - -
Provision for asbestos claims - - 850 - -
Operating profit (loss) 258 90 (369) 730 585
Interest expense 8 33 52 53 53
Interest income (4) (5) (5) (10) (5)
Other (income) expense, net (2) 10 4 3 3
Income taxes (benefit) 117 36 (161) 263 202
Earnings (loss) before cumulative effect of accounting change 139 16 (259) 421 332
Cumulative effect of accounting change for SFAS No. 142 (96) - - - -
Net earnings (loss) 43 16 (259) 421 332
Net Earnings (Loss) Per Common Share:
Cumulative effect of accounting change for SFAS No. 142 (2.22) - - - -
Basic 1.00 0.36 (5.62) 8.48 6.81
Diluted 1.00 0.36 (5.62) 8.39 6.61
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (as of the end of the year):
Working capital 955 914 4 350 443
Current ratio 3.18 3.85 1.01 1.55 1.86
Property, plant and equipment, net 1,788 1,800 1,830 1,568 1,214
Total assets 3,617 3,464 3,214 2,794 2,366
Total debt (a) 1,007 1,007 711 593 596
Liabilities subject to compromise 2,272 2,311 - - -
Total stockholders' equity 535 491 464 867 518
- ------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION:
Capital expenditures 100 109 380 426 309
Stock price per common share (b) 8.45 5.72 22.50 47.13 50.94
Cash dividends per common share - 0.025 0.60 0.45 0.10
Average number of employees 14,100 14,300 14,900 14,300 13,700
- ------------------------------------------------------------------------------------------------------------------------
(a) Total debt as of December 31, 2002 and 2001, includes $1,005 million of
debt classified as liabilities subject to compromise.
(b) Stock price per common share reflects the final closing price of the year.
63
USG CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
BEGINNING ENDING
BALANCE ADDITIONS (A) DEDUCTIONS (B) BALANCE
------- ------------- -------------- -------
YEAR ENDED DECEMBER 31, 2002:
Doubtful accounts ................................ $13 $ 5 $ (4) $14
Cash discounts ................................... 4 53 (54) 3
YEAR ENDED DECEMBER 31, 2001:
Doubtful accounts ................................ 14 3 (4) 13
Cash discounts ................................... 4 51 (51) 4
YEAR ENDED DECEMBER 31, 2000:
Doubtful accounts ................................ 14 4 (4) 14
Cash discounts ................................... 4 57 (57) 4
(a) Reflects provisions charged to earnings.
(b) Reflects receivables written off as related to doubtful accounts,
discounts allowed as related to cash discounts, and payments and
reversals made against the restructuring reserve.
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Audit Committee of the Board of Directors of the Corporation annually
selects the Corporation's independent public accountants. On May 7, 2002, the
Corporation's Audit Committee dismissed Arthur Andersen LLP ("Andersen") as the
Corporation's independent public accountants and engaged Deloitte & Touche LLP
to serve as the Corporation's independent public accountants for the year ending
December 31, 2002.
Andersen's reports on the Corporation's consolidated financial statements
for each of the two fiscal years ending December 31, 2001, did not contain
adverse opinions or disclaimer of opinions, nor were they qualified or modified
as to audit scope or accounting principles. Andersen's report did contain a
qualification as to the Corporation's ability to continue as a going concern
subsequent to the Corporation's filing for chapter 11 bankruptcy protection on
June 25, 2001. In connection with its audits for the Corporation's two fiscal
years ending December 31, 2001, and during the subsequent interim period through
March 31, 2002, there were no disagreements between the Corporation and Andersen
on any matter of accounting principles and practices, financial statement
disclosure or auditing scope or procedure, which disagreements, if not resolved
to Andersen's satisfaction, would have caused Andersen to make reference to the
subject matter of the disagreement in connection with its report on the
Corporation's consolidated financial statements for such years or period. During
the Corporation's two fiscal years ending December 31, 2001, and through March
31, 2002, there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K. Andersen furnished the Corporation with a letter addressed to
the Securities and Exchange Commission confirming that it agreed with the above
statements made by the Corporation. A copy of the letter, dated May 13, 2002,
was filed as Exhibit 16.1 to the Corporation's Current Report on Form 8-K, filed
with the Securities and Exchange Commission on May 13, 2002.
During the Corporation's two most recent fiscal years and through March 31,
2002, the Corporation did not consult Deloitte & Touche LLP with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Corporation's consolidated financial statements, or any other matters or
reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is included in the Corporation's definitive
Proxy Statement, which is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF FEBRUARY 27, 2003)
NAME, AGE AND BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS PRESENT POSITION
PRESENT POSITION HELD SINCE
-----------------------------------------------------------------------------------------------------------------
William C. Foote, 51 Chairman and Chief Executive Officer to August 1999. August 1999
Chairman, Chief Executive Officer
and President
Richard H. Fleming, 55 Senior Vice President and Chief Financial Officer to February 1999
Executive Vice President and February 1999.
Chief Financial Officer
Raymond T. Belz, 62 Vice President and Controller, USG Corporation, from October 2002
Senior Vice President, Financial January 1994 to February 1999; Vice President
Operations Financial Operations, North American Gypsum and
Worldwide Ceilings, from September 1996 to
February 1999; Senior Vice President and
Controller, USG Corporation, from February
1999 to October 2002.
65
NAME, AGE AND BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS PRESENT POSITION
PRESENT POSITION HELD SINCE
-----------------------------------------------------------------------------------------------------------------
Edward M. Bosowski, 48 Executive Vice President - Marketing, United States February 2001
Senior Vice President, Marketing Gypsum Company, to February 1999; President and Chief
and Corporate Strategy; President, Executive Officer, United States Gypsum Company, to
USG International November 2000; President, Growth Initiatives and
International, to February 2001.
Stanley L. Ferguson, 50 Associate General Counsel to May 2000; Vice President May 2001
Senior Vice President and General and General Counsel to May 2001.
Counsel
James S. Metcalf, 45 Vice President, Sales, USG Interiors, Inc., to June March 2002
Senior Vice President; President, 1998; Senior Vice President, Sales and Marketing, USG
Building Systems Interiors, Inc., to March 1999; Executive Vice
President and Chief Operating Officer, L&W Supply
Corporation, to March 2000; President and Chief
Executive Officer, L&W Supply Corporation, to March
2002.
Brian W. Burrows, 63 Same position. March 1987
Vice President, Research and
Technology
Brian J. Cook, 45 Director, Human Resources - Operations, to December December 1998
Vice President, Human Resources 1998.
Jean K. Holley, 43 Senior Director, Information Technology, Waste August 1998
Vice President and Chief Management Corporation, to August 1998.
Information Officer
Marcia S. Kaminsky, 44 Senior Vice President, Public Affairs, Bank of October 1998
Vice President, Communications Montreal/Harris Bank, to October 1998.
Michael C. Lorimer, 63 Vice President, Operations, L&W Supply Corporation, to March 2002
Vice President; President and March 2002.
Chief Operating Officer, L&W
Supply Corporation
D. Rick Lowes, 48 Vice President and Chief Financial Officer, CGC Inc., October 2002
Vice President and Controller to January 1999; Vice President and Treasurer, USG
Corporation, to October 2002.
Peter K. Maitland, 61 Director, Employee Benefits and Office Management, to February 1999
Vice President, Compensation, February 1999.
Benefits and Administration
Clarence B. Owen, 54 Senior Vice President, Technical Services, North January 2003
Vice President and Chief American Gypsum and Worldwide Ceilings, to April 1998;
Technology Officer President and Managing Director, Europe, USG
Interiors, Inc., to March 1999; Senior Vice President,
International, USG Interiors, Inc., to May 2001; Vice
President to May 2001; Vice President, International
and Technology, to January 2003.
66
NAME, AGE AND BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS PRESENT POSITION
PRESENT POSITION HELD SINCE
-----------------------------------------------------------------------------------------------------------------
John Eric Schaal, 59 Assistant General Counsel to August 2000; Associate March 2002
Corporate Secretary and General Counsel to March 2002.
Associate General Counsel
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is included in the Corporation's definitive
Proxy Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information about the Corporation's common
stock that may be issued upon exercise of options, and rights associated with
any such option exercises, under all of the Corporation's equity compensation
plans as of December 31, 2002, including the Long-Term Incentive Plan and
Omnibus Management Incentive Plan. Each of the plans was approved by the
Corporation's stockholders.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS AND SECURITIES REPORTED IN
PLAN CATEGORY AND RIGHTS RIGHTS COLUMN ONE)
Equity compensation plans
approved by stockholders 2,698,825 $34.31 1,984,587
Equity compensation plans
not approved by
stockholders None None None
--------- ----- ---------
Total 2,698,825 34.31 1,984,587
========= ===== =========
Other information required by Item 12 is included in the Corporation's
definitive Proxy Statement, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is included in the Corporation's definitive
Proxy Statement, which is incorporated herein by reference.
67
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Corporation's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Corporation's "disclosure controls and
procedures" (as defined in the Rules 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934) as of a date (the "Evaluation Date") within 90 days before
the filing date of this annual report, have concluded that as of the Evaluation
Date, the Corporation's disclosure controls and procedures were adequate and
designed to ensure that material information relating to the Corporation and its
consolidated subsidiaries would be made known to them by others within those
entities.
(b) Changes in internal controls.
There were no significant changes in the Corporation's internal controls or
in other factors that could significantly affect the Corporation's internal
controls subsequent to the Evaluation Date.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. The consolidated financial statements and supplemental financial
statement schedule
See Part II, Item 8. Financial Statements and Supplementary Data for an
index of the Corporation's consolidated financial statements and supplementary
data schedule.
EXHIBIT
NUMBER 3. EXHIBITS (REG. S-K, ITEM 601)
- --------------------------------------------------------------------------------
ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Restated Certificate of Incorporation of USG Corporation (incorporated
by reference to Exhibit 3.1 of USG Corporation's Form 8-K, dated May 7,
1993).
3.2 Certificate of Designation of Junior Participating Preferred Stock,
series D, of USG Corporation (incorporated by reference to Exhibit A of
Exhibit 4 to USG Corporation's Form 8-K, dated March 27, 1998).
3.3 Amended and Restated By-Laws of USG Corporation, dated as of July 17,
2002 (incorporated by reference to Exhibit 3(c) of USG Corporation's
Form 10-Q, dated November 5, 2002).
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES:
4.1 Indenture dated as of October 1, 1986, between USG Corporation and
National City Bank of Indiana, successor Trustee to Bank One, which was
successor Trustee to Harris Trust and Savings Bank (incorporated by
reference to Exhibit 4(a) of USG Corporation's Registration Statement
No. 33-9294 on Form S-3, dated October 7, 1986).
4.2 Rights Agreement dated March 27, 1998, between USG Corporation and
Harris Trust and Savings Bank, as Rights Agent (incorporated by
reference to Exhibit 4 of USG Corporation's Form 8-K, dated March 27,
1998).
4.3 Form of Common Stock certificate (incorporated by reference to Exhibit
4.4 to USG Corporation's Form 8-K, dated May 7, 1993).
68
The Corporation and certain of its consolidated subsidiaries are
parties to long-term debt instruments under which the total amount of
securities authorized does not exceed 10% of the total assets of the
Corporation and its subsidiaries on a consolidated basis. Pursuant to
paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Corporation
agrees to furnish a copy of such instruments to the Securities and
Exchange Commission upon request.
MATERIAL CONTRACTS:
10.1 Management Performance Plan of USG Corporation (incorporated by
reference to Annex C of Amendment No. 8 to USG Corporation's
Registration Statement No. 33-40136 on Form S-4, dated February 3,
1993).
10.2 First Amendment to Management Performance Plan, effective November 15,
1993, and dated February 1, 1994 (incorporated by reference to Exhibit
10(aq) of Amendment No. 1 of USG Corporation's Registration Statement
No. 33-51845 on Form S-1).
10.3 Second Amendment to Management Performance Plan, dated June 27, 2000
(incorporated by reference to Exhibit 10(a) of USG Corporation's Form
10-Q, dated November 6, 2000).
10.4 Amendment and Restatement of USG Corporation Supplemental Retirement
Plan, effective July 1, 1997, and dated August 25, 1997 (incorporated
by reference to Exhibit 10(c) of USG Corporation's Annual Report on
Form 10-K, dated February 20, 1998).
10.5 First Amendment to Supplemental Retirement Plan effective July 1, 1997
(incorporated by reference to Exhibit 10(d) of USG Corporation's Annual
Report on Form 10-K, dated February 26, 1999).
10.6 Second Amendment to Supplemental Retirement Plan, effective November 8,
2000 (incorporated by reference to Exhibit 10(f) of USG Corporation's
Annual Report on Form 10-K, dated March 5, 2001).
10.7 Third Amendment to Supplemental Retirement Plan, effective November 8,
2000 (incorporated by reference to Exhibit 10(g) of USG Corporation's
Annual Report on Form 10-K, dated March 5, 2001).
10.8 Fourth Amendment to Supplemental Retirement Plan of USG Corporation,
effective April 11, 2001 (incorporated by reference to Exhibit 10(a) of
USG Corporation's Form 10-Q, dated March 31, 2001).
10.9 Fifth Amendment of USG Corporation Supplemental Retirement Plan,
effective December 21, 2001 (incorporated by reference to Exhibit 10(i)
of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.10 Form of Termination Compensation Agreement dated January 1, 2000
(incorporated by reference to Exhibit 10(e) of USG Corporation's Annual
Report on Form 10-K, dated February 29, 2000).
10.11 Form of Indemnification Agreement (incorporated by reference to Exhibit
10(g) of Amendment No. 1 to USG Corporation's Registration Statement
No. 33-51845 on Form S-1).
10.12 Form of Employment Agreement dated January 1, 2000 (incorporated by
reference to Exhibit 10(g) of USG Corporation's Annual Report on Form
10-K, dated February 29, 2000).
10.13 Five-Year Credit Agreement dated as of June 30, 2000, among USG
Corporation and the banks listed on the signature pages thereto and The
Chase Manhattan Bank as Administrative Agent (incorporated by reference
to Exhibit 10(a) of USG Corporation's Form 10-Q, dated August 7, 2000).
69
10.14 364-Day Credit Agreement dated as of June 30, 2000, among USG
Corporation and the banks listed on the signature pages thereto and The
Chase Manhattan Bank as Administrative Agent (incorporated by reference
to Exhibit 10(b) of USG Corporation's Form 10-Q, dated August 7, 2000).
10.15 1995 Long-Term Equity Plan of USG Corporation (incorporated by
reference to Annex A to USG Corporation's Proxy Statement and Proxy,
dated March 31, 1995).
10.16 First Amendment to 1995 Long-Term Equity Plan of USG Corporation, dated
June 27, 2000 (incorporated by reference to Exhibit 10(b) of USG
Corporation's Form 10-Q, dated November 6, 2000).
10.17* 2002 Annual Management Incentive Program - USG Corporation.
10.18 Omnibus Management Incentive Plan (incorporated by reference to Annex A
to USG Corporation's Proxy Statement and Proxy, dated March 28, 1997).
10.19 First Amendment to Omnibus Management Incentive Plan, dated November
11, 1997 (incorporated by reference to Exhibit 10(p) of USG
Corporation's Annual Report on Form 10-K, dated February 20, 1998).
10.20 Second Amendment to Omnibus Management Incentive Plan, dated as of June
27, 2000 (incorporated by reference to Exhibit 10(c) of USG
Corporation's Form 10-Q, dated November 6, 2000).
10.21 Amended and Restated Stock Compensation Program for Non-Employee
Directors of USG Corporation, dated July 1, 1997 (incorporated by
reference to Exhibit 10(q) of USG Corporation's Annual Report on Form
10-K, dated February 20, 1998).
10.22 Key Employee Retention Plan, dated May 16, 2001, as amended September
20, 2001 (incorporated by reference to Exhibit 10(v) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.23 Senior Executive Severance Plan, dated May 16, 2001, as amended
September 20, 2001 (incorporated by reference to Exhibit 10(w) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.24 Revolving Credit and Guaranty Agreement, dated as of June 25, 2001,
among USG Corporation and certain of its subsidiaries, as debtors, USG
Foreign Investments, Ltd., as guarantor, and The Chase Manhattan Bank,
as agent and lender, and the other lenders named therein (incorporated
by reference to Exhibit 10(x) of USG Corporation's Annual Report on
Form 10-K, dated March 1, 2002).
10.25 First Amendment to Revolving Credit and Guaranty Agreement, dated
August 2, 2001 (incorporated by reference to Exhibit 10(y) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.26 Second Amendment to Revolving Credit and Guaranty Agreement, dated
August 24, 2001 (incorporated by reference to Exhibit 10(z) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.27 Third Amendment to Revolving Credit and Guaranty Agreement, dated
December 10, 2001 (incorporated by reference to Exhibit 10(aa) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.28* Fourth Amendment to Revolving Credit and Guaranty Agreement, dated
August 9, 2002.
10.29 Security and Pledge Agreement, dated June 25, 2001, among USG
Corporation and each of its direct and indirect subsidiaries party to
the Credit Agreement, other than USG Foreign Investments, Ltd., and The
Chase Manhattan Bank (incorporated by reference to Exhibit 10(ab) of
USG Corporation's Annual Report on Form
70
10-K, dated March 1, 2002).
10.30 Second Amendment of USG Corporation Retirement Plan, dated December 21,
2001 (incorporated by reference to Exhibit 10(ac) of USG Corporation's
Annual Report on Form 10-K, dated March 1, 2002).
10.31* Third Amendment of USG Corporation Retirement Plan, dated August 22,
2002.
LETTER REGARDING CHANGE IN CERTIFYING ACCOUNTANT:
16.1 Letter of Arthur Andersen LLP regarding the change in certifying
accountant dated May 13, 2002 (incorporated by reference to Exhibit
16.1 of USG Corporation's Form 8-K dated May 13, 2002).
OTHER:
21* Subsidiaries
23* Consents of Experts and Counsel
24* Power of Attorney
99* Certifications of USG Corporation's Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------------
* Filed herewith
(b) Reports on Form 8-K:
None.
71
INDEX TO EXHIBITS FILED
WITH THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
EXHIBIT PAGE
10.17 2002 Annual Management Incentive Program - USG Corporation 76
10.28 Fourth Amendment to Revolving Credit and Guaranty Agreement 85
10.31 Third Amendment of USG Corporation Retirement Plan 92
21 Subsidiaries 96
23 Consent of Experts and Counsel 97
24 Power of Attorney 98
99 Certifications of USG Corporation's Chief Executive Officer
and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 99
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
February 27, 2003
By: /s/ Richard H. Fleming
------------------------------------
Richard H. Fleming
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ William C. Foote February 27, 2003
- --------------------------------------------
WILLIAM C. FOOTE
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
/s/ Richard H. Fleming February 27, 2003
- --------------------------------------------
RICHARD H. FLEMING
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ D. Rick Lowes February 27, 2003
- --------------------------------------------
D. RICK LOWES
Vice President and Controller
(Principal Accounting Officer)
ROBERT L. BARNETT, KEITH A. BROWN, ) By: /s/ Richard H. Fleming
JAMES C. COTTING, LAWRENCE M. CRUTCHER, ) -----------------------------
W. DOUGLAS FORD, DAVID W. FOX, ) Richard H. Fleming
VALERIE B. JARRETT, MARVIN E. LESSER, ) Attorney-in-fact
JOHN B. SCHWEMM, JUDITH A. SPRIESER ) Pursuant to Power of Attorney
Directors ) (Exhibit 24 hereto)
February 27, 2003
73
ANNUAL AND QUARTERLY CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William C. Foote, certify that:
1. I have reviewed this annual report on Form 10-K of USG Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
USG Corporation as of, and for, the periods presented in this annual
report;
4. USG Corporation's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for USG Corporation and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to USG Corporation,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of USG Corporation's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. USG Corporation's other certifying officer and I have disclosed, based on
our most recent evaluation, to USG Corporation's auditors and the audit
committee of USG Corporation's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect USG
Corporation's ability to record, process, summarize and report
financial data and have identified for USG Corporation's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in USG
Corporation's internal controls; and
6. USG Corporation's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
February 27, 2003 /s/ William C. Foote
-----------------------------------------------
William C. Foote
Chairman, Chief Executive Officer and President
74
ANNUAL AND QUARTERLY CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard H. Fleming, certify that:
1. I have reviewed this annual report on Form 10-K of USG Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
USG Corporation as of, and for, the periods presented in this annual
report;
4. USG Corporation's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for USG Corporation and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to USG Corporation,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of USG Corporation's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. USG Corporation's other certifying officer and I have disclosed, based on
our most recent evaluation, to USG Corporation's auditors and the audit
committee of USG Corporation's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect USG
Corporation's ability to record, process, summarize and report
financial data and have identified for USG Corporation's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in USG
Corporation's internal controls; and
6. USG Corporation's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
February 27, 2003 /s/ Richard H. Fleming
-------------------------------------------------
Richard H. Fleming
Executive Vice President and Chief Financial Officer
75