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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-8864
USG CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3329400
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
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 [ ]
As of September 30, 2003, 43,052,119 shares of USG common stock were
outstanding.
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings:
Three Months and Nine Months
Ended September 30, 2003 and 2002 3
Consolidated Balance Sheets:
As of September 30, 2003 and December 31, 2002 4
Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 42
Item 4. Controls and Procedures 57
Report of Independent Public Accountants 58
PART II OTHER INFORMATION
Item 1. Legal Proceedings 60
Item 6. Exhibits and Reports on Form 8-K 60
SIGNATURES 61
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 963 $ 903 $ 2,739 $ 2,617
Cost of products sold 816 749 2,341 2,164
Selling and administrative expenses 78 76 239 238
Chapter 11 reorganization expenses 2 3 7 12
------------ ------------ ------------ ------------
Operating profit 67 75 152 203
Interest expense 2 1 5 4
Interest income (1) (1) (3) (3)
Other income, net - - (5) (1)
------------ ------------ ------------ ------------
Earnings before income taxes and
cumulative effect of accounting
change 66 75 155 203
Income taxes 27 31 63 85
------------ ------------ ------------ ------------
Earnings before cumulative effect
of accounting change 39 44 92 118
------------ ------------ ------------ ------------
Cumulative effect of accounting
change, net of tax - - (16) (96)
------------ ------------ ------------ ------------
Net earnings 39 44 76 22
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic and diluted before
cumulative effect of accounting
change 0.89 1.03 2.13 2.73
Cumulative effect of accounting
change - - (0.37) (2.22)
------------ ------------ ------------ ------------
Basic and diluted 0.89 1.03 1.75 0.51
============ ============ ============ ============
Dividends paid per common share - - - -
Average common shares 43,053,106 43,251,295 43,082,925 43,292,083
Average diluted common shares 43,054,141 43,251,295 43,082,925 43,292,083
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2003 2002
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ASSETS
Current Assets:
Cash and cash equivalents $ 660 $ 649
Short-term marketable securities 64 50
Restricted cash 6 -
Receivables (net of reserves - $14 and $17) 370 284
Inventories 281 270
Income taxes receivable 18 14
Deferred income taxes 56 49
Other current assets 60 77
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Total current assets 1,515 1,393
Long-term marketable securities 171 131
Property, plant and equipment (net of accumulated
depreciation and depletion - $784 and $701) 1,790 1,788
Deferred income taxes 168 199
Other assets 109 106
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Total Assets 3,753 3,617
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 228 170
Accrued expenses 204 243
Income taxes payable 7 25
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Total current liabilities 439 438
Long-term debt 2 2
Other liabilities 440 370
Liabilities subject to compromise 2,252 2,272
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (258) (257)
Capital received in excess of par value 414 412
Accumulated other comprehensive loss (24) (32)
Retained earnings 483 407
------- -------
Total stockholders' equity 620 535
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Total Liabilities and Stockholders' Equity 3,753 3,617
======= =======
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
------------------
2003 2002
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OPERATING ACTIVITIES:
Net earnings $ 76 $ 22
Adjustments to reconcile net earnings to net cash:
Cumulative effect of accounting change 16 96
Depreciation, depletion and amortization 80 77
Deferred income taxes 43 45
(Increase) decrease in working capital:
Receivables (86) (52)
Income taxes receivable (4) 76
Inventories (9) (37)
Payables 40 59
Accrued expenses (44) 53
Increase in other assets (11) (2)
Increase (decrease) in other liabilities 38 (5)
Decrease in asbestos receivables 19 22
Decrease in liabilities subject to compromise (20) (35)
Other, net (2) (2)
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Net cash provided by operating activities 136 317
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INVESTING ACTIVITIES:
Capital expenditures (61) (64)
Purchases of marketable securities (197) (177)
Sales or maturities of marketable securities 141 25
Net proceeds from asset dispositions 1 2
Acquisition of businesses (3) -
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Net cash used for investing activities (119) (214)
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FINANCING ACTIVITIES:
Deposit of restricted cash (6) -
----- -----
Net cash used for financing activities (6) -
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Net increase in cash and cash equivalents 11 103
Cash and cash equivalents at beginning of period 649 493
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Cash and cash equivalents at end of period 660 596
===== =====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 1 1
Income taxes paid, net 12 (41)
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PREPARATION OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of USG
Corporation and its subsidiaries ("the Corporation") have been prepared
in accordance with applicable United States Securities and Exchange
Commission guidelines pertaining to interim financial information. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Actual results
could differ from those estimates. In the opinion of management, the
financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of the
Corporation's financial results for the interim periods. These
financial statements and notes are to be read in conjunction with the
financial statements and notes included in the Corporation's 2002
Annual Report on Form 10-K which was filed on February 27, 2003.
(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")
are being jointly administered 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 ("U.S. Gypsum"); USG
Interiors, Inc. ("USG Interiors"); USG Interiors International, Inc.;
L&W Supply Corporation ("L&W Supply"); 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 claims in a fair and
equitable manner, to protect the long-term value of the Debtors'
businesses, and to maintain the Debtors' leadership positions in their
markets.
CONSEQUENCES OF THE FILING
The Debtors are operating their businesses without interruption as
debtors-in-possession subject to the provisions of the Bankruptcy Code.
All vendors are being paid for all goods furnished and services
provided after the Filing. However, as a consequence of the Filing,
pending
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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 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 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.
Debtors intend to address all pending and future asbestos personal
injury claims as well as all other pre-petition claims in a plan or
plans of reorganization confirmed by the Bankruptcy Court. The plan may
include the creation of one or more independently administered trusts
under Section 524(g) of the Bankruptcy Code, which may be funded by
Debtors to allow payment of present and future asbestos personal injury
claims and demands. If the confirmed plan of reorganization includes
the creation and funding of a Section 524(g) trust(s), the Bankruptcy
Court will issue a permanent injunction barring the assertion of
present and future asbestos claims against Debtors, their successors,
and their affiliates, and channeling those claims to the trust(s) for
payment in whole or in part. Section 524(g) contains specific
requirements for issuance of such a permanent injunction, including the
requirement that 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. Section
524(g) also requires that the plan be approved by 75% of the voting
asbestos claimants whose claims are addressed by the trust. Debtors
expect that the plan of reorganization ultimately confirmed by the
Bankruptcy Court will also address Debtors' liability for asbestos
property damage claims, whether by including those liabilities in a
Section 524(g) trust or by other means.
Similar plans of reorganization containing Section 524(g) trusts for
asbestos personal injury and property damage claims have been confirmed
in the chapter 11 cases of other companies, but there is no guarantee
that the Bankruptcy Court in Debtors' Chapter 11 Cases will approve
creation of a Section 524(g) trust or issue a permanent injunction
channeling to the trust all asbestos claims against Debtors, and/or
their successors and affiliates. In addition, if federal legislation
addressing asbestos personal injury claims is passed, which is
extremely speculative at this time, such legislation may affect the
manner in which asbestos personal injury claims are to be addressed in
Debtors' Chapter 11 Cases and may affect whether the Debtors establish
a trust under Section 524(g). See
-7-
Potential Federal Legislation Regarding Asbestos Personal Injury
Claims, below.
Pursuant to the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for 120 days following the Petition
Date, unless extended. The Bankruptcy Court has granted requests by the
Debtors to extend the period of exclusivity, which currently runs
through March 1, 2004. The Debtors intend to seek one or more
additional extensions depending upon 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.
While it is the Debtors' intention to seek a full recovery for their
creditors, it is not possible to predict how the plan of reorganization
will treat asbestos and other pre-petition claims and what impact any
plan may have on the value of the shares of the Corporation's common
stock and other outstanding securities. Under the Bankruptcy Code, a
plan of reorganization, including a plan creating a Section 524(g)
trust, may be confirmed without the consent of non-asbestos creditors
and equity security holders if certain requirements of the Code are
met. 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
from the pre-petition creditors of other Debtors. 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. Pre-petition creditors may receive
under the plan of reorganization 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.
It is also not possible to predict at this time how the plan of
reorganization will treat intercompany indebtedness, licenses,
transfers of goods and services and other intercompany arrangements,
transactions, and relationships that were entered into before 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 any plan of reorganization.
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, that must be funded under
the plan. 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
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11 Cases that they believe Debtors' asbestos liabilities exceed the
value of Debtors' assets and that Debtors are insolvent. The Debtors
have advised the court that they believe they are solvent if their
asbestos liabilities are fairly and appropriately valued. Toward that
end, the Debtors filed a motion with the court requesting the court to
begin proceedings to estimate the value of Debtors' asbestos personal
injury liabilities.
In response to the Debtors' motion requesting an estimation of asbestos
personal injury liabilities, the court issued an order and memorandum
opinion on February 19, 2003, setting forth a procedure for estimating
Debtors' liability for asbestos personal injury claims alleging cancer.
(See Note 12. Litigation, for additional information on this
procedure.) The court has not set a timetable for this process. Thus,
Debtors do not know when estimation of Debtors' liability for these
cancer claims will occur, what the outcome of that proceeding will be,
what impact that proceeding will have on estimating Debtors' liability
for asbestos personal injury claims alleging other diseases, and
whether the estimation proceeding will lead to a negotiated resolution
of Debtors' asbestos personal injury liabilities. Debtors also cannot
predict at this time the estimated cost of resolving asbestos property
damage claims. See Note 12, Litigation, for additional information. If
the amount of the Debtors' asbestos liabilities cannot be resolved
through negotiation or is not addressed by legislation (see Potential
Federal Legislation Regarding Asbestos Personal Injury Claims, below),
the outcome of the estimation proceedings regarding Debtors' liability
for cancer claims, as provided in the Court's order, likely will be a
significant component of determining Debtors' asbestos personal injury
liability, Debtors' solvency, and the recovery of Debtors' pre-petition
creditors and equity security holders under any plan or plans of
reorganization.
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 12.
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 semi-annual payments that began in January 2002.
Expenses associated with this plan amounted to $6 million and $5
million in the third quarter of 2003 and 2002, respectively. For the
first nine months of 2003 and 2002, these expenses amounted to $17
million and $16 million,
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respectively.
POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS
The Corporation has for many years actively supported proposals for
federal legislation addressing asbestos personal injury claims. On July
10, 2003, the Judiciary Committee of the United States Senate narrowly
approved the Fairness in Asbestos Injury Resolution Act of 2003 (Senate
Bill 1125, the "FAIR Bill"), which is intended to establish a
nationally administered trust to compensate asbestos personal injury
claimants. This bill has not been approved by the Senate, has not been
introduced in the House of Representatives, and is not law.
Under the terms of the FAIR Bill as approved by the Judiciary
Committee, companies that have been defendants in asbestos personal
injury litigation, as well as insurance companies, are to contribute
amounts to a national trust fund on a periodic basis to fund payment of
claims filed by asbestos personal injury claimants who qualify for
payment under the FAIR Bill. The amounts to be paid to the national
fund are based on an allocation methodology specified in the FAIR Bill.
The FAIR Bill also provides, among other things, that the national fund
would terminate if the money in the national fund is not sufficient to
compensate eligible claimants, in which case the claimants and
defendants would return to the tort system to resolve all claims not
paid by the national fund. There are many other provisions in the FAIR
Bill that would affect its impact on the Corporation and its Chapter 11
Cases.
It is not possible to determine whether the FAIR Bill will be presented
for a vote or passed by the full Senate or the House of
Representatives, or whether the FAIR Bill will be signed into law. Nor
is it possible at this time to predict the final terms or cost of any
bill that might become law or its impact on the Corporation or the
Chapter 11 Cases. The Corporation anticipates that, during the
legislative process, the terms of the FAIR Bill as approved by the
Judiciary Committee will change and that such changes may be material
to the FAIR Bill's impact on the Corporation. It is possible that the
level of funding required from defendants, including the Corporation,
would increase. Many organized labor organizations, including the
AFL-CIO, have indicated their opposition to the FAIR Bill. In light of
such opposition, as well as other factors, there is no assurance that
any legislation will be enacted.
Enactment of the FAIR Bill or other legislation addressing the
financial contributions of USG Corporation for asbestos personal injury
claims would have a material impact on the Corporation's Chapter 11
Cases. Such legislation would have a material impact on the amount of
the Corporation's asbestos personal injury liability that must be
addressed in Debtors' Chapter 11 Cases and may also affect the manner
in which such liability may be addressed in Debtors' Chapter 11 Cases.
As noted above (see Consequences of the Filing), the amount of Debtors'
asbestos personal injury liability is a principal factor in determining
the payment rights and other entitlements of the Corporation's
pre-petition creditors and its
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shareholders. At this time, however, the outcome of the legislative
process is extremely speculative, and there can be no assurance that
national legislation will be enacted or what the terms of any such
legislation might be. During this process, the Corporation anticipates
that the Chapter 11 Cases, including the proceedings regarding
estimation of the Corporation's asbestos personal injury liabilities,
will continue. See Consequences of the Filing, above, and Note 12.
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 DIP Facility was 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 and subsequently terminated the DIP Facility in June 2003.
These actions were taken at the election of the Corporation due to the
levels of cash and marketable securities on hand and to eliminate costs
associated with the DIP Facility.
The DIP Facility was used largely for the issuance of standby letters
of credit needed to support business operations. As of September 30,
2003, $1.5 million of previously-issued standby letters of credit
remained outstanding under the DIP Facility. Following the termination
of the DIP Facility, the Corporation has been required to cash
collateralize 105% of these outstanding letters of credit until the
letters of credit either expire or are returned by the beneficiary.
In June 2003, the Corporation entered a three-year, $100 million credit
agreement with LaSalle Bank to be used exclusively to support the
issuance of standby letters of credit. As of September 30, 2003, $4.5
million of standby letters of credit, which are cash collateralized at
103%, had been issued under this facility to replace those to be
surrendered by the beneficiaries in connection with the termination of
the DIP Facility.
As of September 30, 2003, a total of $6 million in cash collateral was
posted to back up letters of credit as indicated above and was reported
as restricted cash on the consolidated balance sheet.
PRE-PETITION LIABILITIES OTHER THAN ASBESTOS PERSONAL INJURY CLAIMS
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.
Pursuant to the Bankruptcy Code, schedules were filed by the Debtors
with the Bankruptcy Court on October 23, 2001, and certain of the
schedules
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were amended on May 31, 2002 and December 13, 2002, setting forth the
assets and liabilities of the Debtors as of the date of the Filing. 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-related personal injury claims as defined in
the Court's order.
Approximately 5,000 proofs of claim for general unsecured creditors
(including pre-petition debtholders), totaling approximately $8.7
billion were filed by the bar date. There was an additional
approximately $500 million of contingent claims. The Debtors are
analyzing the proofs of claim filed by the bar date. Many of them are
duplicates of other proofs of claim or of liabilities previously
scheduled by the Debtors. In addition, many claims were filed against
multiple Debtors or against an incorrect Debtor, or were incorrectly
claiming a priority level higher than general unsecured or an incorrect
dollar amount. Of these to date, the court has expunged 233 claims
totaling $24 million as duplicates and 115 claims totaling $15 million
as amended or superceded. The court has also allowed the correction of
the Debtors on 519 claims and the reclassification of 135 claims to
general unsecured claims. Of the duplicate claims, approximately $5.7
billion have been withdrawn as of the date of this report. The Debtors
continue to analyze and reconcile filed claims on an on-going basis.
On June 25, 2003, the second anniversary of the filing of the Chapter
11 Cases, the time during which the Debtors could bring avoidance
actions in the Chapter 11 Cases expired. Avoidance actions could
include claims to avoid alleged preferences made during the 90-day
period prior to the filing (or one-year period for insiders) and other
transfers made or obligations incurred which could be alleged to be
constructive or actual fraudulent conveyances under applicable law.
Effective prior to the avoidance action deadline, the Bankruptcy Court
granted the motion of the Committee representing the unsecured
creditors to file a complaint seeking to avoid and recover as
preferences certain pre-petition payments made by Debtors to 206
creditors, where such payments, in most cases, exceeded $500,000. The
Court also granted the Committee's request to extend the time by which
the summons and complaint are served upon each named defendant until 90
days after confirmation of a plan of reorganization filed in connection
with the Chapter 11 Cases.
In addition, prior to the deadline for filing avoidance actions,
certain of the Debtors entered into a Tolling Agreement pursuant to
which the Debtors voluntarily agreed to extend the time during which
actions could be brought to avoid certain intercompany transactions
that occurred during the one-year period prior to the filing of the
Chapter 11 Cases. The transactions as to which the Tolling Agreement
applies are the creation of liens on certain assets of the Debtor
subsidiaries in favor of the Parent Company in connection with
intercompany loan agreements, a transfer by U.S. Gypsum to the Parent
Company of a 9% interest in the equity of CGC Inc., the principal
Canadian subsidiary of the Parent Company, and
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transfers made by the Parent Company to USG Foreign Investments, Ltd.,
a non-Debtor subsidiary. The Bankruptcy Court approved the Tolling
Agreement in June 2003.
The Debtors expect to address claims for general unsecured creditors
through liquidation, estimation or disallowance of the claims. In
connection with this process, Debtors will make adjustments to their
schedules and financials statements as appropriate. Any such
adjustments could be material to the Company's consolidated financial
position and results of operations in any given period. At this time,
it is not possible to estimate the Debtors' liability for these claims.
However, it is likely that the Debtors' liability for these claims will
be different from the amounts now recorded by the Debtors. Proofs of
claim alleging asbestos property damage claims are discussed in Note
12. Litigation, under Developments in the Reorganization Process.
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 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.
The appropriateness of using the going-concern basis for the
Corporation's financial statements is dependent upon, among other
things, (i) the ability of the Corporation to maintain adequate cash on
hand, (ii) the ability of the Corporation to generate cash from
operations, (iii) confirmation of a plan or plans of reorganization
under the Bankruptcy Code and (iv) the Corporation's ability to achieve
profitability following such confirmation. 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
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of the Debtors and to meet obligations of the non-Debtor subsidiaries.
LIABILITIES SUBJECT TO COMPROMISE: 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 in the table 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,
(vii) effect of any legislation which may be enacted or (viii) other
events.
The amount shown below 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 12. Litigation for additional information on asbestos and
related bankruptcy litigation.
As of the date of this report, virtually all of the Corporation's
pre-petition debt is in default due to the Filing and included in
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.
Payment terms for liabilities subject to compromise will be established
as part of a plan of reorganization under the Chapter 11 Cases.
Liabilities subject to compromise in the consolidated and DIP balance
sheets consist of the following items (dollars in millions):
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------------------------------
Accounts payable $ 160 $ 157
Accrued expenses 50 56
Debt 1,005 1,005
Asbestos reserve 1,061 1,061
Other long-term liabilities 19 36
- ------------------------------------------------------------------------------------
Subtotal 2,295 2,315
Elimination of intercompany accounts payable (43) (43)
- ------------------------------------------------------------------------------------
Total liabilities subject to compromise 2,252 2,272
====================================================================================
-14-
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 reviewed on a
regular basis with interest earned or accrued 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 September 30, 2003, U.S. Gypsum and USG Interiors had net
pre-petition payable balances to the Parent Company for Intercompany
Corporate Transactions of $297 million and $109 million, respectively.
L&W Supply had a net pre-petition receivable balance from the Parent
Company of $32 million. These pre-petition balances are subject to the
provisions of the Tolling Agreement discussed above. See Pre-Petition
Liabilities Other Than Asbestos Personal Injury, above.
As of September 30, 2003, U.S. Gypsum, USG Interiors and L&W Supply had
net post-petition receivable balances from the Parent Company for
Intercompany Corporate Transactions of $205 million, $18 million and
$176 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 "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.
-15-
CHAPTER 11 REORGANIZATION EXPENSES: Chapter 11 reorganization expenses
in the consolidated and DIP statements of earnings consist of the
following (dollars in millions):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002 2003 2002
--------------------------------------------
Legal and financial advisory fees $ 4 $ 5 $ 13 $ 18
Bankruptcy-related interest income (2) (2) (6) (6)
- ---------------------------------------------------------------------------------------------------
Total chapter 11 reorganization expenses 2 3 7 12
===================================================================================================
INTEREST EXPENSE: For the third quarter and first nine months of 2003,
contractual interest expense not accrued or recorded on pre-petition
debt totaled $17 and $53 million, respectively. From the Petition Date
through September 30, 2003, contractual interest expense not accrued or
recorded on pre-petition debt totaled $168 million. Although no
post-petition accruals are required to be made for such contractual
interest expense, debtholders may seek to recover such amounts in the
Chapter 11 Cases.
DIP FINANCIAL STATEMENTS: Under the Bankruptcy Code, the Corporation is
required to file periodically with the Bankruptcy Court various
documents including financial statements of the Debtors (the
"Debtor-In-Possession" or "DIP" financial statements). The Corporation
cautions that these financial statements are prepared according to
requirements under the Bankruptcy Code. While these financial
statements accurately provide information required under the Bankruptcy
Code, they are nonetheless unconsolidated, unaudited and prepared in a
format different from that used in the Corporation's consolidated
financial statements filed under the securities laws. Accordingly, the
Corporation believes the substance and format do not allow meaningful
comparison with the Corporation's regular publicly disclosed
consolidated financial statements. The Debtors consist of the Parent
Company and the following wholly owned subsidiaries: United States
Gypsum Company; USG Interiors, Inc.; USG Interiors International, Inc.;
L&W Supply Corporation; Beadex Manufacturing, LLC; B-R Pipeline
Company; La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG
Industries, Inc.; and USG Pipeline Company.
On March 1, 2002, USG Funding, a non-Debtor subsidiary of USG
Corporation, declared a dividend in the amount of $50 million
(subsequently reduced to $30 million in the second quarter) payable to
the Parent Company, which was paid in effect by eliminating the
intercompany payable from USG Corporation. This payment is included in
other (income) expense, net in the DIP statement of earnings for the
nine months ended September 30, 2002. The condensed financial
statements of the Debtors are presented as follows:
-16-
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 864 $ 813 $ 2,472 $ 2,361
Cost of products sold 748 684 2,151 1,982
Selling and administrative expenses 67 63 206 203
Chapter 11 reorganization expenses 2 3 7 12
Interest expense 1 1 4 4
Interest income - - (1) (1)
Other (income) expense, net (1) - (5) (30)
--------- --------- --------- ---------
Earnings before income taxes and
cumulative effect of accounting
change 47 62 110 191
Income taxes 21 26 50 73
--------- --------- --------- ---------
Earnings before cumulative effect
of accounting change 26 36 60 118
Cumulative effect of accounting
change - - (13) (41)
--------- --------- --------- ---------
Net earnings 26 36 47 77
========= ========= ========= =========
-17-
USG CORPORATION
DEBTOR-IN-POSSESSION BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 467 $ 478
Short-term marketable securities 64 50
Restricted cash 6 -
Receivables (net of reserves - $11 and $13) 311 235
Inventories 232 227
Income taxes receivable 18 14
Deferred income taxes 56 49
Other current assets 47 67
--------------- ---------------
Total current assets 1,201 1,120
Long-term marketable securities 171 131
Property, plant and equipment (net of accumulated
depreciation and depletion - $620 and $557) 1,555 1,572
Deferred income taxes 187 218
Other assets 388 378
--------------- ---------------
Total Assets 3,502 3,419
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 192 142
Accrued expenses 181 207
Income taxes payable 5 20
--------------- ---------------
Total current liabilities 378 369
Other liabilities 421 362
Liabilities subject to compromise 2,252 2,272
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (258) (257)
Capital received in excess of par value 101 99
Accumulated other comprehensive (loss) income (9) 4
Retained earnings 612 565
--------------- ---------------
Total stockholders' equity 451 416
--------------- ---------------
Total Liabilities and Stockholders' Equity 3,502 3,419
=============== ===============
-18-
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------
2003 2002
--------------- ---------------
OPERATING ACTIVITIES:
Net earnings $ 47 $ 77
Adjustments to reconcile net earnings to net cash:
Cumulative effect of accounting change 13 41
Depreciation, depletion and amortization 66 63
Deferred income taxes 40 46
(Increase) decrease in working capital:
Receivables (76) (39)
Income taxes receivable (4) 77
Inventories (4) (32)
Payables 35 55
Accrued expenses (32) 47
Decrease in pre-petition intercompany receivable - -
Increase in post-petition intercompany receivable (8) (44)
(Increase) decrease in other assets (5) 24
Increase (decrease) in other liabilities 34 (7)
Decrease in asbestos receivables 19 22
Decrease in liabilities subject to compromise (20) (35)
Other, net (7) (7)
--------------- ---------------
Net cash provided by operating activities 98 288
--------------- ---------------
INVESTING ACTIVITIES:
Capital expenditures (45) (50)
Purchases of marketable securities (197) (177)
Sale or maturities of marketable securities 141 25
Net proceeds from asset dispositions 1 1
Acquisition of businesses (3) -
--------------- ---------------
Net cash used for investing activities (103) (201)
--------------- ---------------
FINANCING ACTIVITIES:
Deposit of restricted cash (6) -
--------------- ---------------
Net cash used for financing activities (6) -
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (11) 87
Cash and cash equivalents at beginning of period 478 346
--------------- ---------------
Cash and cash equivalents at end of period 467 433
=============== ===============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 1 1
Income taxes paid (refunded), net (1) (50)
-19-
(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 to address the continuing weakness of the
commercial ceilings market in Europe. The charge was included in cost
of products sold for USG International and reflected severance of $6
million related to a workforce reduction of over 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.
A total of 53 employees were terminated completing the workforce
reduction. The Aubange plant ceased operations in December 2002. The
reserve for the 2002 downsizing plan was included in accrued expenses
on the consolidated balance sheets. Charges against the reserve
included the $3 million writedown of equipment in 2002 and payments
totaling $7 million in the first nine months of 2003. All payments
associated with the 2002 downsizing plan are being funded with cash
from operations. An additional $1 million writedown related to the
Aubange plant was recorded in the third quarter of 2003.
2001 RESTRUCTURING PLAN: 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.
A total of 348 employees were terminated, and 26 open positions were
eliminated, and a 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. 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 were
made and charged against the reserve in the first quarter of 2003. All
payments associated with the 2001 restructuring plan were funded with
cash from operations.
-20-
The following table details the reserves and activity for the 2002
downsizing and 2001 restructuring plan (dollars in millions):
PROVISIONS FOR WRITEDOWN OF RESERVE
DOWNSIZING/ ASSETS TO NET CASH BALANCE
RESTRUCTURING REALIZABLE VALUE PAYMENTS 9/30/03
- ----------------------------------------------------------------------------------------------------------------
2002 Downsizing:
Severance (salaried and hourly) $ 6 $ - $ (6) $ -
Equipment write-off 3 (3) - -
Other reserves 2 - (1) 1
- ----------------------------------------------------------------------------------------------------------------
Subtotal 11 (3) (7) 1
- ----------------------------------------------------------------------------------------------------------------
2001 Restructuring:
Severance (primarily hourly) 8 - (8) -
Property, plant and equipment write-off 2 (2) - -
Line shutdown/removal and contract cancellations 2 - (2) -
- ----------------------------------------------------------------------------------------------------------------
Subtotal 12 (2) (10) -
- ----------------------------------------------------------------------------------------------------------------
Total 23 (5) (17) 1
================================================================================================================
(4) 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 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. The reconciliation of basic earnings per share to
diluted earnings per share is shown in the following table (dollars in
millions except share data):
NET SHARES PER SHARE
THREE MONTHS ENDED SEPTEMBER 30, EARNINGS (000) AMOUNT
- ----------------------------------------------------------------------
2003:
Basic earnings $ 39 43,053 $ 0.89
Dilutive effect of stock options 1
- ----------------------------------------------------------------------
Diluted earnings 39 43,054 0.89
======================================================================
2002:
Basic earnings 44 43,251 1.03
Dilutive effect of stock options -
- ----------------------------------------------------------------------
Diluted earnings 44 43,251 1.03
======================================================================
-21-
NET SHARES PER SHARE
NINE MONTHS ENDED SEPTEMBER 30, EARNINGS (000) AMOUNT
- ----------------------------------------------------------------------
2003:
Basic earnings $ 76 43,083 $ 1.75
Dilutive effect of stock options -
- ----------------------------------------------------------------------
Diluted earnings 76 43,083 1.75
======================================================================
2002:
Basic earnings 22 43,292 0.51
Dilutive effect of stock options -
- ----------------------------------------------------------------------
Diluted earnings 22 43,292 0.51
======================================================================
(5) MARKETABLE SECURITIES
As of September 30, 2003, the Corporation's investments in marketable
securities consisted of the following:
FAIR
AMORTIZED MARKET
COST VALUE
---------------------
Asset-backed securities $ 107 $ 107
U.S. government and agency securities 73 74
Municipal securities 30 30
Time deposits - -
Corporate securities 24 24
- -------------------------------------------------------------
Total marketable securities 234 235
=============================================================
Contractual maturities of marketable securities as of September 30,
2003, were as follows (dollars in millions):
FAIR
AMORTIZED MARKET
COST VALUE
---------------------
Due in 1 year or less $ 60 $ 60
Due in 1-5 years 39 40
Due in 5-10 years 4 4
Due after 10 years 24 24
- ---------------------------------------------------
127 128
- ---------------------------------------------------
Asset-backed securities 107 107
- ---------------------------------------------------
Total marketable securities 234 235
===================================================
The average duration of the portfolio is less than one year because a
majority of the longer-term securities have paydown or put features.
-22-
(6) ADOPTION OF SFAS NO. 143
On January 1, 2003, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement
Obligations." This standard requires the recording of the fair value of
a liability for an asset retirement obligation in the period in which
it is incurred. The Corporation's asset retirement obligations include
reclamation requirements as regulated by government authorities related
principally to assets such as the Corporation's mines, quarries,
landfills, ponds and wells. The impact of adopting SFAS No. 143 was an
increase in the Corporation's assets and liabilities of $14 million and
$30 million, respectively. A noncash, after-tax charge of $16 million
($27 million pretax) was reflected on the consolidated statement of
earnings as a cumulative effect of a change in accounting principle as
of January 1, 2003.
(7) 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. 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
included a $90 million write-off of goodwill (net of accumulated
amortization of $8 million) and a $6 million write-off of deferred
currency translation. In accordance with SFAS No. 142, the Corporation
reflected this charge in its financial statements as a cumulative
effect of a change in accounting principle as of January 1, 2002.
-23-
(8) DERIVATIVE INSTRUMENTS
The Corporation uses derivative instruments to manage selected
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 income (loss) and is reclassified to earnings when
the underlying transaction has an impact on earnings. The ineffective
portion of changes in the fair value of the derivative is reported in
cost of sales. The amount of ineffectiveness was not material to the
financial statements.
COMMODITY DERIVATIVE INSTRUMENTS: The Corporation uses swap contracts
from time to time to hedge anticipated purchases of natural gas,
wastepaper and fuel to be used in its manufacturing and shipping
operations. The current contracts, all of which mature by December 31,
2005, are generally designated as cash flow hedges, with changes in
fair value recorded to accumulated other comprehensive income (loss)
until the hedged transaction occurs, at which time it is reclassified
to earnings. As of September 30, 2003, the fair value of these swap
contracts, which remained in accumulated other comprehensive income
(loss), was $(3) million ($(2) million after-tax).
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS: The Corporation has operations
in a number of countries and uses forward contracts from time to time
to hedge selected risk of changes in cash flows resulting from
forecasted intercompany and third-party sales or purchases in foreign
currencies. These contracts are generally designated as cash flow
hedges, for which changes in fair value are recorded to accumulated
other comprehensive income (loss) until the underlying transaction has
an impact on earnings. As of September 30, 2003, the Corporation had
foreign currency contracts in place which mature on the anticipated
date of the underlying transaction, and all contracts mature by
December 31, 2003. The notional amounts of foreign currency contracts
as of September 30, 2003, was $1 million. The fair value of these
contracts as of September 30, 2003, was immaterial.
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
-24-
instruments subject to credit risk but regularly monitors the credit
standing of all counterparties.
(9) COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are summarized in the
following table (dollars in millions):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-----------------------------------------
2003 2002 2003 2002
-----------------------------------------
Net earnings $ 39 $ 44 $ 76 $ 22
- ----------------------------------------------------------------------------------
Pretax gain (loss) on derivatives (21) - (23) 5
Income tax benefit (expense) 8 - 9 (2)
- ----------------------------------------------------------------------------------
Gain (loss) on derivatives, net of tax (13) - (14) 3
- ----------------------------------------------------------------------------------
Deferred currency translation (2) (7) 22 5
- ----------------------------------------------------------------------------------
Unrealized gain (loss) on marketable
securities, net of tax - - - -
- ----------------------------------------------------------------------------------
Total comprehensive income 24 37 84 30
==================================================================================
The losses on derivatives shown above for the third quarter and first
nine months of 2003 primarily reflect changes in market value of the
Corporation's derivative portfolio. There was no tax impact on deferred
foreign currency translation adjustments. The components of accumulated
other comprehensive income (loss) included on the consolidated balance
sheet are summarized in the following table (dollars in millions):
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------------------------
Gain on derivatives, net of tax $ 4 $ 18
Deferred currency translation (17) (39)
Minimum pension liability, net of tax (11) (11)
Unrealized gain (loss) on marketable securities, net of tax - -
- ------------------------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) (24) (32)
==========================================================================================
During the third quarter of 2003, $5 million of accumulated net
after-tax gains ($8 million pretax) on derivatives was reclassified
from accumulated other comprehensive income (loss) to earnings. As of
September 30, 2003, the estimated net after-tax gain expected to be
reclassified within the next 12 months from accumulated other
comprehensive income (loss) into earnings is $2 million.
-25-
(10) 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. 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, "Accounting for Stock-Based Compensation," as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," net earnings and net earnings per common share would have
changed to the following pro forma amounts:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002 2003 2002
--------------------------------------------
NET EARNINGS:
Net Earnings: As reported $ 39 $ 44 $ 76 $ 22
Deduct: Fair value method of stock
-based employee compensation
expense, net of tax - (1) - (2)
- ---------------------------------------------------------------------------------
Pro forma net earnings 39 43 76 20
=================================================================================
BASIC AND DILUTED EARNINGS PER SHARE:
As reported 0.89 1.03 1.75 0.51
Pro forma 0.89 1.01 1.75 0.47
=================================================================================
Subsequent to the Filing, no stock option grants have been issued. The
deduction of $2 million shown above to the first nine months of 2002
net earnings reflects the vesting of options granted prior to the
Filing.
As of September 30, 2003, common shares totaling 2,600,375 were
reserved for future issuance in conjunction with existing stock option
grants. In addition, 2,263,620 common shares were reserved for future
grants. Shares issued in option exercises may be from original issue or
available treasury shares.
-26-
(11) OPERATING SEGMENTS
The Corporation's operations are organized into three operating
segments: North American Gypsum, which manufactures SHEETROCK brand
gypsum wallboard and joint compounds, DUROCK brand cement board and
other related building 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.
Operating segment results were as follows (dollars in millions):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------------------
2003 2002 2003 2002
--------- ------ -------- --------
NET SALES:
North American Gypsum $ 600 $ 552 $ 1,708 $ 1,628
Worldwide Ceilings 157 162 458 468
Building Products Distribution 341 317 961 898
Eliminations (135) (128) (388) (377)
- ---------------------------------------------------------------------------------------------
Total USG Corporation 963 903 2,739 2,617
=============================================================================================
OPERATING PROFIT (LOSS):
North American Gypsum 60 63 145 202
Worldwide Ceilings 12 15 29 31
Building Products Distribution 17 18 41 38
Corporate (20) (17) (56) (54)
Chapter 11 reorganization expenses (2) (3) (7) (12)
Eliminations - (1) - (2)
- ---------------------------------------------------------------------------------------------
Total USG Corporation 67 75 152 203
=============================================================================================
(12) 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 reorganization ("Filing")
under chapter 11 of the U.S. Bankruptcy Code to manage the growing
costs of resolving asbestos claims and to achieve a fair and final
resolution of liability for both pending and future asbestos claims.
The Debtors' chapter 11 cases ("Chapter 11 Cases") are being jointly
administered as In re: USG Corporation et al. (Case No. 01-2094) in the
United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court").
-27-
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
against U.S. Gypsum and certain other Debtors 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 these claims absent specific
authorization of the Bankruptcy Court. Since the Filing, U.S. Gypsum
has ceased making both cash payments and accruals with respect to
asbestos lawsuits, including cash payments and accruals pursuant to
settlements of asbestos lawsuits. 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.
Debtors anticipate that U.S. Gypsum's liability for asbestos personal
injury and property damage 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, 2004. The Debtors
intend to seek one or more additional extensions depending upon
developments in the Chapter 11 Cases.
The plan of reorganization ultimately approved by the Bankruptcy Court
may include one or more independently administered trusts under Section
524(g) of the Bankruptcy Code, which may be funded by Debtors to allow
payment of present and future asbestos personal injury claims and
demands. Debtors also expect that the plan of reorganization will
address Debtors' liability for asbestos property damage claims, whether
by including those liabilities in a Section 524(g) trust or by other
means. If the confirmed plan of reorganization includes the creation
and funding of a Section 524(g) trust(s), the Bankruptcy Court will
issue a permanent injunction barring the assertion of present and
future asbestos claims against Debtors, their successors, and their
affiliates, and channeling those claims to the trust(s) for payment in
whole or in part.
Similar plans of reorganization containing Section 524(g) trusts have
been confirmed in the chapter 11 cases of other companies with asbestos
liabilities, but there is no guarantee that the Bankruptcy Court in
-28-
Debtors' Chapter 11 Cases will approve creation of a Section 524(g)
trust or issue a permanent injunction channeling to the trust all
asbestos claims against Debtors and/or their successors and affiliates.
In addition, if federal legislation addressing asbestos personal injury
claims is passed, which is extremely speculative at this time, such
legislation may affect the manner in which asbestos personal injury
claims are to be addressed in Debtors' Chapter 11 Cases and may affect
whether the Debtors establish a trust under Section 524(g). See Note 2.
Voluntary Reorganization Under Chapter 11 - Potential Federal
Legislation Regarding Asbestos Personal Injury Claims.
While it is the Debtors' intention to seek a full recovery for their
creditors, it is not possible to predict how the plan of reorganization
will treat asbestos and other pre-petition claims and what impact any
plan may have on the value of the shares of the Corporation's common
stock and other outstanding securities. Under the Bankruptcy Code, a
plan of reorganization, including a plan creating a Section 524(g)
trust, may be confirmed without the consent of non-asbestos creditors
and equity security holders if certain requirements of the Code are
met. 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
from the pre-petition creditors of other Debtors. 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. Pre-petition creditors may receive
under the plan of reorganization 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, that must be funded under
the plan. 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 Debtors' asbestos
liabilities exceed the value of Debtors' assets and that Debtors are
insolvent. The Debtors have advised the court that they believe they
are solvent if their asbestos liabilities are fairly and appropriately
valued. Toward that end, the Debtors filed a motion with the court
requesting the court to begin proceedings to estimate the value of
Debtors' asbestos personal injury liabilities.
In response to the Debtors' motion requesting an estimation of asbestos
personal injury liabilities, the court issued an order and memorandum
opinion on February 19, 2003, setting forth a procedure for estimating
Debtors' liability for asbestos personal injury claims alleging cancer.
See
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Developments in the Reorganization Proceeding, below. The court has not
set a timetable for this process. Thus, Debtors do not know when
estimation of Debtors' liability for these cancer claims will occur,
what the outcome of that proceeding will be, what impact that
proceeding will have on estimating Debtors' liability for asbestos
personal injury claims alleging other diseases, and whether the
estimation proceeding will lead to a negotiated resolution of Debtors'
asbestos personal injury liabilities. Debtors also cannot predict at
this time the estimated cost of resolving asbestos property damage
claims. If the amount of the Debtors' asbestos liabilities cannot be
resolved through negotiation or is not addressed by legislation (see
Note 2. Voluntary Reorganization Under Chapter 11 - Potential Federal
Legislation Regarding Asbestos Personal Injury Claims), the outcome of
the estimation proceeding regarding Debtors' liability for cancer
claims likely will be a significant component of determining Debtors'
asbestos personal injury liability, Debtors' solvency, and the recovery
of Debtors' pre-petition creditors and equity security holders under
any plan or plans of reorganization.
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 and a
more detailed discussion of the Debtors' asbestos liabilities are
addressed below.
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 a
bankruptcy court judge sitting 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
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substantively estimate the Debtors' liability for asbestos personal
injury claims. The Debtors requested that the court hear evidence and
make rulings regarding the characteristics of valid asbestos personal
injury claims against the Debtors, and 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
have objective evidence of asbestos-related disease if such claimants
are compensated in the tort system outside of bankruptcy.
In August 2002, Debtors also filed a motion with Judge Wolin requesting
a ruling 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 on this voting issue has been stayed
by order of Judge Wolin. It is expected that the Official Committee of
Asbestos Personal Injury Claimants will oppose the Debtors' motion.
In response to the Debtors' motion seeking substantive estimation of
Debtors' asbestos personal injury liability, Judge Wolin issued a
Memorandum Opinion and Order (the "Order") on February 19, 2003,
setting forth a procedure for estimating Debtors' liability for
asbestos personal injury claims alleging cancer. The Order states that
a bar date will be established for filing claims by all persons who
wish to assert an asbestos personal injury claim alleging cancer
against Debtors. The bar date will 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." Although the Order explicitly contemplates a
bar date for filing these cancer claims, the Order does not establish a
bar date or a date for the subsequent 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
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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.
Pursuant to the directions of the Court, the parties have submitted
proposed proof of claim forms for the cancer bar date proceedings, and
a plan for providing notice of the bar date. At the request of the
Official Committee of Asbestos Personal Injury Claimants, the court has
indicated that it likely will limit the bar date to cancer claimants
who filed a lawsuit against Debtors before the Petition Date, but the
Court has not yet issued any order to that effect and has not yet set a
bar date for cancer claims or a date for any hearing on estimation of
Debtors' liability for these claims.
At this stage in the proceedings, Debtors do not know when estimation
of Debtors' liability for these cancer claims will occur, what the
outcome of the estimation proceeding will be, what impact that
proceeding will have on estimating Debtors' liability for asbestos
personal injury claims alleging other diseases, and whether the
estimation proceeding will lead to a negotiated resolution of Debtors'
asbestos liabilities. Debtors also do not know whether the Court will
ultimately address the validity and voting rights of non-malignant
claims. If the amount of the Debtors' asbestos liabilities cannot be
resolved through negotiation or is not addressed by legislation (see
Note 2. Voluntary Reorganization Under Chapter 11 - Potential Federal
Legislation Regarding Asbestos Personal Injury Claims), as has been the
case to date, the outcome of the estimation proceeding regarding
Debtors' liability for cancer claims likely will be a significant
component of determining Debtors' asbestos personal injury liability,
Debtors' solvency, and the recovery of Debtors' pre-petition creditors
and equity security holders under any plan or plans of reorganization.
There have also been developments in the reorganization proceedings
regarding asbestos property damage claims. 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 have undertaken an ongoing analysis of the asbestos-related
property damage claims received as of the claims bar date.
Approximately 1,400 asbestos property damage claims were filed,
representing more than
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2,000 buildings. In contrast, as of the Petition Date, 11 Property
Damage Cases were pending against U.S. Gypsum. Approximately 500 of the
asbestos property damage claims filed by the bar date assert a specific
dollar amount of damages, and the total damages alleged in those claims
is approximately $1.6 billion. However, this amount reflects numerous
duplicate claims filed against multiple Debtors, and therefore, likely
overstates the claimed damages. Approximately 900 claims do not specify
a damage amount. Many of the filed claims do not provide any evidence
that Debtors' products were ever installed in any of the buildings at
issue, and some of the claims are duplicates of other claims. Debtors
believe that they have substantial defenses to many of these property
damage claims, including the lack of evidence that Debtors' products
were ever installed in the buildings at issue, the claims are barred by
the applicable statutes of limitation, and the claims lack evidence
that the claimants have any damages. Debtors intend to address many of
these claims through an objection and disallowance process in the
bankruptcy court. Because of the preliminary nature of this process,
Debtors' cannot predict the outcome of these proceedings or the impact
the proceedings may have on the estimated cost of resolving asbestos
property damage claims. See Estimated Cost, below.
The following is a summary of the Property Damage and Personal Injury
Cases pending against U.S. Gypsum and certain other Debtors 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, below.
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PERSONAL INJURY CASES: As reported by the Center for Claims Resolution
(the "Center"), 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,
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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, payments
to resolve Personal Injury Cases increased dramatically, primarily as a
result of the bankruptcy filings of other defendants in asbestos
personal injury lawsuits. Following these bankruptcy filings,
plaintiffs substantially increased their settlement demands to the
remaining defendants, including U.S. Gypsum. 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.
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. 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
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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 September 30, 2003, U.S. Gypsum has a $12
million receivable relating to insurance remaining to cover
asbestos-related costs. The insurance receivable is scheduled to be
collected at various times through the next six months and is included
in other current assets on the consolidated balance sheet.
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 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
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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
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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 September 30,
2003. The above amounts are stated before tax benefit and are not
discounted to present value.
As a result of the Filing and activities relating to potential national
legislation addressing asbestos personal injury claims, it is the
Corporation's view that there is even greater uncertainty in estimating
the reasonably possible range of asbestos liability for pending and
future claims as well as the most likely estimate of liability within
this range. There are significant differences in the treatment of
asbestos claims in a bankruptcy proceeding as compared to the tort
litigation system. Among other things, these uncertainties include how
the Long-Term Settlements will be treated in the bankruptcy proceeding
and plan of reorganization and whether those settlements will be set
aside; the number of asbestos-related claims that will be filed in the
proceeding; the number of future claims that will be estimated in
connection with preparing a plan of reorganization; how claims for
punitive damages and claims by persons with no objective evidence of
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; the results of the estimation proceeding regarding asbestos
personal injury claims alleging cancer; the treatment of asbestos
property damage claims in the bankruptcy proceeding; and the impact any
relevant potential federal legislation may have on the proceeding. See
Note 2. Voluntary Reorganization Under Chapter 11 - Potential Federal
Legislation Regarding Asbestos Personal Injury Claims. 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.
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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
("Chase") to Safeco. After the Filing, 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 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. 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.
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. The parties
filed cross-motions for summary judgment in the consolidated
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proceedings.
On March 28, 2003, in response to the cross-motions for summary
judgment, Judge Wolin issued an order and memorandum opinion which
granted in part and denied in part the CCR's motion for summary
judgment. Although the court ruled that Safeco is not required to remit
any surety bond proceeds to the CCR at this time, the court stated that
certain settlements that were completed before U.S. Gypsum's Petition
Date likely are covered by the surety bond but that the bond does not
cover settlement payments that were not yet completed as of the
Petition Date. The court did not rule on whether the bond covers other
disputed obligations and reserved these issues to a subsequent phase of
the litigation. As a result of the court's decision, it is likely that,
absent a settlement of this matter, some portion of the bond may be
drawn but that the amount drawn may be substantially less than the full
amount of the bond. To the extent that Safeco were to pay all or 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.
CONCLUSION: There are many uncertainties associated with the resolution
of asbestos liability in the bankruptcy proceeding. These uncertainties
include, among others, the number of asbestos-related claims that will
be filed against the Debtors in the proceeding; the number of future
claims that will be estimated in connection with preparing a plan of
reorganization; how the Long-Term Settlements will be treated in the
bankruptcy proceeding and plan of reorganization, and whether those
settlements will be set aside; how claims for punitive damages and
claims by persons with no asbestos-related physical impairment will be
treated and whether such claims will be allowed; the impact historical
settlement values for asbestos claims may have on the estimation of
asbestos liability in the bankruptcy proceeding; the results of the
estimation proceeding regarding asbestos personal injury claims
alleging cancer; the treatment of asbestos property damage claims in
the bankruptcy proceeding; and the impact any relevant potential
federal legislation may have on the proceeding. See Note 2. Voluntary
Reorganization Under Chapter 11 - Potential Federal Legislation
Regarding Asbestos Personal Injury Claims. 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.
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ENVIRONMENTAL LITIGATION
The Corporation and certain of its subsidiaries have been notified by
state and federal environmental protection agencies of possible
involvement as one of numerous "potentially responsible parties" in a
number of so-called "Superfund" sites in the United States. In most of
these sites, the involvement of the Corporation or its subsidiaries is
expected to be minimal. The Corporation believes that appropriate
reserves have been established for its potential liability in
connection with all Superfund sites but 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), the parent company (the "Parent
Company") of the Corporation and the 10 United States subsidiaries listed below
(collectively, the "Debtors") filed voluntary petitions for reorganization (the
"Filing") under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The chapter 11 cases of the Debtors (collectively, the
"Chapter 11 Cases") are being jointly administered 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 ("U.S. Gypsum"); USG Interiors, Inc.
("USG Interiors"); USG Interiors International, Inc.; L&W Supply Corporation
("L&W Supply"); 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, a subsidiary of the Parent Company, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. Since 1994, U.S.
Gypsum has been named in more than 250,000 asbestos personal injury claims and
made cash payments of approximately $575 million (before insurance recoveries)
to manage and resolve asbestos-related claims. During 2000 and early 2001,
chapter 11 filings by other companies subject to asbestos litigation caused a
dramatic increase in U.S. Gypsum's asbestos costs beyond its legitimate
liabilities. Plaintiffs in asbestos lawsuits substantially increased their
settlement demands to U.S. Gypsum to replace the expected payments of the
bankruptcy defendants. Although the Corporation has been and continues to be
committed to finding a legislative solution to the increase in asbestos costs,
it became apparent in 2001 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 I, Item 1. Note 12. Litigation, for
additional information on asbestos 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 of
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$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 and activities relating to potential national legislation
addressing asbestos personal injury claims, 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, another representing asbestos property damage claimants, and a third
representing
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general unsecured creditors, were 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 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.
Debtors intend to address all pending and future asbestos personal injury claims
as well as all other pre-petition claims in a plan or plans of reorganization
confirmed by the Bankruptcy Court. The plan may include the creation of one or
more independently administered trusts under Section 524(g) of the Bankruptcy
Code, which may be funded by Debtors to allow payment of present and future
asbestos personal injury claims and demands. If the confirmed plan of
reorganization includes the creation and funding of a Section 524(g) trust(s),
the Bankruptcy Court will issue a permanent injunction barring the assertion of
present and future asbestos claims against Debtors, their successors, and their
affiliates, and channeling those claims to the trust(s) for payment in whole or
in part. Section 524(g) contains specific requirements for issuance of such a
permanent injunction, including the requirement that 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.
Section 524(g) also requires that the plan be approved by 75% of the voting
asbestos claimants whose claims are addressed by the trust. Debtors also expect
that the plan of reorganization will also address Debtors' liability for
asbestos property damage claims, whether by including those liabilities in a
Section 524(g) trust or by other means.
Similar plans of reorganization containing Section 524(g) trusts for asbestos
personal injury and property damage claims have been confirmed in the chapter 11
cases of other companies, but there is no guarantee that the Bankruptcy Court in
Debtors' Chapter 11 Cases will approve creation of a Section 524(g) trust or
issue a permanent injunction channeling to the trust all asbestos claims against
Debtors, and/or their successors and affiliates. In addition, if federal
legislation addressing asbestos personal injury claims is passed, which is
extremely speculative at this time, such legislation may affect the manner in
which asbestos personal injury claims are to be addressed in Debtors' Chapter 11
Cases and may affect whether the Debtors establish a trust under Section 524(g).
See Potential Federal Legislation Regarding Asbestos Personal Injury Claims,
below.
Pursuant to the Bankruptcy Code, the Debtors had the exclusive right to propose
a plan of reorganization for 120 days following the Petition Date, unless
extended. The Bankruptcy Court has granted requests by the Debtors to extend the
period of exclusivity, which currently runs through March 1, 2004. The Debtors
intend to seek one or more additional extensions depending upon developments in
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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.
While it is the Debtors' intention to seek a full recovery for their creditors,
it is not possible to predict how the plan of reorganization will treat asbestos
and other pre-petition claims and what impact any plan may have on the value of
the shares of the Corporation's common stock and other outstanding securities.
Under the Bankruptcy Code, a plan of reorganization, including a plan creating a
Section 524(g) trust, may be confirmed without the consent of non-asbestos
creditors and equity security holders if certain requirements of the Code are
met. 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 from the pre-petition
creditors of other Debtors. 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. Pre-petition
creditors may receive under the plan of reorganization 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.
It is also not possible to predict at this time how the plan of reorganization
will treat intercompany indebtedness, licenses, transfers of goods and services
and other intercompany arrangements, transactions, and relationships that were
entered into before 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 any plan of reorganization.
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, that must be funded under the plan. 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 Debtors'
asbestos liabilities exceed the value of Debtors' assets and that Debtors are
insolvent. The Debtors have advised the court that they believe they are solvent
if their asbestos liabilities are fairly and appropriately valued. Toward that
end, the Debtors filed a motion with the court requesting the court to begin
proceedings to estimate the value of Debtors' asbestos personal injury
liabilities.
In response to the Debtors' motion requesting an estimation of asbestos personal
injury liabilities, the court issued an order and memorandum opinion on February
19, 2003, setting forth a procedure for estimating Debtors' liability for
-45-
asbestos personal injury claims alleging cancer. See Part I, Item 1. Note 12.
Litigation, for additional information on this procedure. The court has not set
a timetable for this process. Thus, Debtors do not know when estimation of
Debtors' liability for these cancer claims will occur, what the outcome of that
proceeding will be, what impact that proceeding will have on estimating Debtors'
liability for asbestos personal injury claims alleging other diseases, and
whether the estimation proceeding will lead to a negotiated resolution of
Debtors' asbestos personal injury liabilities. Debtors also cannot predict at
this time the estimated cost of resolving asbestos property damage claims. See
Part I, Item 1. Note 12. Litigation, for additional information. If the amount
of the Debtors' asbestos liabilities cannot be resolved through negotiation or
is not addressed by legislation (see Potential Federal Legislation Regarding
Asbestos Personal Injury Claims, below), the outcome of the estimation
proceedings regarding Debtors' liability for cancer claims, as provided in the
Court's order, likely will be a significant component of determining Debtors'
asbestos personal injury liability, Debtors' solvency, and the recovery of
Debtors' pre-petition creditors and equity security holders under any plan or
plans of reorganization.
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 Part I, Item 1. Note 12. Litigation.
POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS
The Corporation has for many years actively supported proposals for federal
legislation addressing asbestos personal injury claims. On July 10, 2003, the
Judiciary Committee of the United States Senate narrowly approved the Fairness
in Asbestos Injury Resolution Act of 2003 (Senate Bill 1125, the "FAIR Bill"),
which is intended to establish a nationally administered trust to compensate
asbestos personal injury claimants. This bill has not been approved by the
Senate, has not been introduced in the House of Representatives, and is not law.
Under the terms of the FAIR Bill as approved by the Judiciary Committee,
companies that have been defendants in asbestos personal injury litigation, as
well as insurance companies, are to contribute amounts to a national trust fund
on a periodic basis to fund payment of claims filed by asbestos personal injury
claimants who qualify for payment under the FAIR Bill. The amounts to be paid to
the national fund are based on an allocation methodology specified in the FAIR
Bill. The FAIR Bill also provides, among other things, that the national fund
would terminate if the money in the national fund is not sufficient to
compensate eligible claimants, in which case the claimants and defendants would
return to the tort system on a retroactive basis. There are many other
provisions in the
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FAIR Bill that would affect its impact on the Corporation and its Chapter 11
Cases.
It is not possible to determine whether the FAIR Bill will be presented for a
vote or passed by the full Senate or the House of Representatives, or whether
the FAIR Bill will be signed into law. Nor is it possible at this time to
predict the final terms or cost of any bill that might become law or its impact
on the Corporation or the Chapter 11 Cases. The Corporation anticipates that,
during the legislative process, the terms of the FAIR Bill as approved by the
Judiciary Committee will change and that such changes may be material to the
FAIR Bill's impact on the Corporation. It is possible that the level of funding
required from defendants, including the Corporation, would increase. Many
organized labor organizations, including the AFL-CIO, have indicated their
opposition to the FAIR Bill. In light of such opposition, as well as other
factors, there is no assurance that any legislation will be enacted.
Enactment of the FAIR Bill or other legislation addressing the financial
contributions of USG Corporation for asbestos personal injury claims would have
a material impact on the Corporation's Chapter 11 Cases. Such legislation would
have a material impact on the amount of the Corporation's asbestos personal
injury liability that must be addressed in Debtors' Chapter 11 Cases. Such
legislation may also affect the manner in which such liability may be addressed
in Debtors' Chapter 11 Cases. As noted above (see Consequences of the Filing),
the amount of Debtors' asbestos personal injury liability is a principal factor
in determining the payment rights and other entitlements of the Corporation's
pre-petition creditors and its shareholders. At this time, however, the outcome
of the legislative process is extremely speculative, and there can be no
assurance that national legislation will be enacted or what the terms of any
such legislation might be. During this process, the Corporation anticipates that
the Chapter 11 Cases, including the proceedings regarding estimation of the
Corporation's asbestos personal injury liabilities, will continue. See
Consequences of the Filing, above, and Part I, Item 1. Note 12. 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 DIP Facility was 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 and subsequently terminated the DIP Facility in
June 2003. These actions were taken at the election of the Corporation due to
the levels of cash and marketable securities on hand and to eliminate costs
associated with the DIP Facility. The DIP Facility was used largely for the
issuance of standby letters of credit needed to support 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. See Available Liquidity below for additional
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information on the DIP Facility.
ACCOUNTING IMPACT
The Corporation is required to follow AICPA Statement of Position 90-7 ("SOP
90-7"), "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code." Pursuant to SOP 90-7, the Corporation's pre-petition liabilities that are
subject to compromise are reported separately on the consolidated balance sheet.
Virtually all of the Corporation's pre-petition debt is currently in default and
was recorded at face value and classified within liabilities subject to
compromise. U.S. Gypsum's asbestos liability also is classified within
liabilities subject to compromise. See Part I, Item 1. Note 2. Voluntary
Reorganization Under Chapter 11, which includes information related to financial
statement presentation, the debtor-in-possession statements and detail of
liabilities subject to compromise and chapter 11 reorganization expenses.
CONSOLIDATED RESULTS
NET SALES
Net sales in the third quarter of 2003 were $963 million, up 7% from $903
million in the third quarter of 2002. For the first nine months of 2003, net
sales totaled $2,739 million, up 5% from $2,617 million in the comparable 2002
period. North American Gypsum and Building Products Distribution reported
increased net sales in the third quarter and first nine months of 2003, while
net sales for Worldwide Ceilings were down slightly for each period.
COST OF PRODUCTS SOLD
Cost of products sold in the third quarter and first nine months of 2003 were up
9% and 8%, respectively, versus the respective 2002 periods. Key factors for
these increases were rising costs related to energy, raw materials and employee
benefits.
SELLING AND ADMINISTRATIVE EXPENSES
For the third quarter, selling and administrative expenses amounted to $78
million (8.1% of net sales), compared with $76 million (8.4% of net sales) in
2002. For the first nine months, these expenses were $239 million (8.7% of net
sales), versus $238 million (9.1% of net sales) a year ago. The increases in
expense dollars in 2003 were largely attributable to employee benefit expense.
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses consist of the following (dollars in
millions):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------------------------
2003 2002 2003 2002
-------------------------------------------
Legal and financial advisory fees $ 4 $ 5 $ 13 $ 18
Bankruptcy-related interest income (2) (2) (6) (6)
- --------------------------------------------------------------------------------------
Total chapter 11 reorganization expenses 2 3 7 12
======================================================================================
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OPERATING PROFIT
Operating profit declined 11% to $67 million in the third quarter of 2003 and
was down 25% to $152 million for first nine months of 2003 versus the respective
2002 periods primarily due to the increased levels of cost of products sold.
INTEREST EXPENSE
Interest expense of $2 million and $5 million was incurred in the third quarter
and first nine months of 2003, 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. For the third quarter and first nine months of 2003,
contractual interest expense not accrued or recorded on pre-petition debt
totaled $17 million and $53 million, respectively. From the Petition Date
through September 30, 2003, contractual interest expense not accrued or recorded
on pre-petition debt totaled $168 million. Although no post-petition accruals
are required to be made for such contractual interest expense, debtholders may
seek to recover such amounts in the Chapter 11 Cases.
INTEREST INCOME
Non-bankruptcy related interest income was $1 million in the third quarter and
$3 million in the first nine months of 2003.
INCOME TAXES
Income taxes amounted to $27 million and $63 million in the third quarter and
first nine months of 2003, respectively, compared with $31 million and $85
million in the corresponding 2002 periods. The effective tax rates were 40.8%
and 41.7% for the first nine months of 2003 and 2002, respectively. The decrease
in the effective tax rate was primarily due to the benefit of a tax rate change
applicable to one of the Corporation's foreign subsidiaries.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
On January 1, 2003, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." This
standard requires the recording of the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The Corporation's
asset retirement obligations include reclamation requirements as regulated by
government authorities related principally to assets such as the Corporation's
mines, quarries, landfills, ponds and wells. The impact of adopting SFAS No. 143
was an increase in the Corporation's assets and liabilities of $14 million and
$30 million, respectively. A noncash, after-tax charge of $16 million ($27
million pretax) was reflected on the consolidated statement of earnings as a
cumulative effect of a change in accounting principle as of January 1, 2003.
On January 1, 2002, USG Corporation adopted 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,
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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.
NET EARNINGS
Net earnings of $39 million, or $0.89 per share, were reported for the third
quarter of 2003 compared with $44 million, or $1.03 per share, for the third
quarter of 2002. For the first nine months of 2003, net earnings totaled $76
million, or $1.75 per share, compared with $22 million, or $0.51 per share, for
the first nine months of 2002.
CORE BUSINESS RESULTS
(dollars in millions)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------
NET SALES:
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 540 $ 502 $ 1,548 $ 1,488
CGC Inc. (gypsum) 69 56 188 162
Other subsidiaries* 39 36 102 100
Eliminations (48) (42) (130) (122)
- --------------------------------------------------------------------------------------------------------
Total 600 552 1,708 1,628
- --------------------------------------------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 113 120 337 348
USG International 45 46 127 132
CGC Inc. (ceilings) 11 9 33 30
Eliminations (12) (13) (39) (42)
- --------------------------------------------------------------------------------------------------------
Total 157 162 458 468
- --------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 341 317 961 898
- --------------------------------------------------------------------------------------------------------
Eliminations (135) (128) (388) (377)
- --------------------------------------------------------------------------------------------------------
Total USG Corporation 963 903 2,739 2,617
========================================================================================================
OPERATING PROFIT (LOSS):
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company 43 50 109 164
CGC Inc. (gypsum) 11 7 23 20
Other subsidiaries* 6 6 13 18
- --------------------------------------------------------------------------------------------------------
Total 60 63 145 202
- --------------------------------------------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 10 13 23 31
USG International - 1 2 (4)
CGC Inc. (ceilings) 2 1 4 4
- --------------------------------------------------------------------------------------------------------
Total 12 15 29 31
- --------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 17 18 41 38
- --------------------------------------------------------------------------------------------------------
Corporate (20) (17) (56) (54)
Chapter 11 reorganization expenses (2) (3) (7) (12)
Eliminations - (1) - (2)
- --------------------------------------------------------------------------------------------------------
Total USG Corporation 67 75 152 203
========================================================================================================
*Includes USG Mexico, S.A. de C.V., a building products business in Mexico,
Gypsum Transportation Limited, a shipping company in Bermuda, and USG Canadian
Mining Ltd., a mining operation in Nova Scotia.
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NORTH AMERICAN GYPSUM
Net sales of $600 million increased 9% from the third quarter of 2002, while
operating profit of $60 million was down 5%. First nine months net sales of
$1,708 million reflect an increase of 5% from a year ago, while operating profit
of $145 million fell 28%.
For the third quarter of 2003, U.S. Gypsum reported a $38 million, or 8%,
increase in net sales compared with the third quarter of 2002. This increase
primarily reflected record shipments of SHEETROCK(R) brand gypsum wallboard,
SHEETROCK(R) brand joint compounds and DUROCK(R) brand cement board. Slightly
higher selling prices for SHEETROCK(R) brand gypsum wallboard also contributed
to the higher level of sales. However, operating profit for U.S. Gypsum declined
$7 million, or 14%, largely due to a lower profit margin on gypsum wallboard.
U.S. Gypsum sold 2.7 billion square feet of SHEETROCK(R) brand gypsum wallboard
during the third quarter of 2003, a 4% increase from 2.6 billion square feet
sold in the third quarter of 2002. U.S. Gypsum's wallboard plants operated at
94% of capacity in the third quarter of 2003 and the third quarter of 2002.
Industry shipments of gypsum wallboard were up approximately 9% from the third
quarter of 2002.
U.S. Gypsum's nationwide average realized price for gypsum wallboard was $101.83
per thousand square feet in the third quarter of 2003 compared with $101.03 in
the third quarter of 2002 and $100.47 in the second quarter of 2003.
U.S. Gypsum's manufacturing costs for gypsum wallboard continue to be up in 2003
primarily due to increased energy and employee benefit costs. Market prices for
natural gas, a major source of energy for the company, were up over 50% versus
the prior-year period. However, improved production efficiencies at the
company's gypsum wallboard plants and hedging activities offset a portion of the
cost increase. Higher energy, raw material and employee benefit costs also had
an adverse affect on profit margins for U.S. Gypsum's complementary products.
The gypsum business of Canada-based CGC Inc. reported third quarter increases in
net sales and operating profit of 23% and 57%, respectively, as compared to the
third quarter of 2002. These results were primarily attributable to increased
shipments of SHEETROCK(R) brand gypsum wallboard products and a stronger
Canadian dollar.
WORLDWIDE CEILINGS
Third quarter 2003 net sales of $157 million fell 3%, while operating profit
declined to $12 million from $15 million for the third quarter of 2002. For the
first nine months of 2003, net sales of $458 million and operating profit of $29
million were down 2% and 6%, respectively, compared to 2002.
USG Interiors, Inc., the Corporation's domestic ceilings business, reported
third quarter declines in net sales and operating profit. Net sales were down
primarily due to continued lower levels of demand for commercial ceiling
products. The
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decline in profitability was primarily due to lower shipments of ceiling grid
and tile and increases in the cost of steel, energy and employee benefits.
Profit margins for USG Interiors remain under pressure due to these cost
increases, which more than offset the benefit of improved pricing for most of
the company's ceiling product lines.
Modest third quarter declines in net sales and operating profit were also
reported for USG International. Net sales were down $1 million versus the third
quarter of 2002, while operating profit was breakeven for the 2003 period
compared with $1 million for the third quarter of 2002. Third quarter 2003
breakeven results included a $1 million writedown related to the Aubange,
Belgium, ceiling tile plant. Through the first nine months of 2003,
profitability for USG International has improved versus 2002 following the
shutdown of the Aubange plant and other downsizing activities in the fourth
quarter of 2002.
The ceilings business of CGC Inc. reported a $2 million increase in net sales
and a $1 million increase in operating profit for the third quarter of 2003.
BUILDING PRODUCTS DISTRIBUTION
L&W Supply Corporation, the leading specialty building products distribution
business in the United States, reported third quarter net sales of $341 million,
an increase of 8% versus the third quarter of 2002. This increase reflected
record shipments of gypsum wallboard and complementary building products,
primarily drywall metal, joint treatment and roofing. Shipments of L&W Supply's
gypsum wallboard were up 9% versus the third quarter of 2002. However, operating
profit of $17 million for the company declined 6% mainly due to higher product
and employee benefit costs.
For the first nine months of 2003, net sales of $961 million and operating
profit of $41 million increased 7% and 8%, respectively, versus the first nine
months of 2002.
As of September 30, 2003, L&W Supply operated 185 locations in the United States
distributing a variety of gypsum, ceilings and related building materials.
MARKET CONDITIONS AND OUTLOOK
The outlook for the Corporation's markets for the remainder of the year is
mixed. Industry demand for gypsum wallboard is expected to remain strong due to
continued high demand for new homes and favorable levels of activity in the
residential remodeling market. Despite the strong level of demand, the gypsum
wallboard industry continues to experience a large amount of excess capacity.
Margin pressures are expected to continue while industry utilization rates are
expected to remain in the mid-80% range. Nonresidential construction, the
principal market for the Corporation's ceiling products and a major market for
its distribution business, is expected to remain weak. In addition, the
Corporation, like many other companies, faces many ongoing cost pressures such
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as higher prices for energy and raw materials and increased employee benefit
costs. In this environment, the Corporation continues to focus 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.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital (current assets less current liabilities) as of September 30,
2003, amounted to $1,076 million, and the ratio of current assets to current
liabilities was 3.45-to-1. As of December 31, 2002, working capital amounted to
$955 million, and the ratio of current assets to current liabilities was
3.18-to-1.
Cash, cash equivalents, restricted cash and marketable securities as of
September 30, 2003, amounted to $901 million, compared with $830 million as of
December 31, 2002. During the first nine months of 2003, net cash flows provided
by operating activities totaled $136 million. Net cash flows used for investing
activities totaled $119 million and consisted of $56 million for the purchases
of marketable securities, net of sales or maturities, $61 million for capital
expenditures and $3 million for the acquisition of a business, offset slightly
by proceeds of $1 million from asset sales.
During the first nine months of 2003, the Corporation increased its investments
in marketable securities to $235 million as of September 30, 2003 ($171 million
in long-term marketable securities and $64 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 income (loss) on the consolidated balance sheet.
Receivables increased to $370 million as of September 30, 2003, from $284
million as of December 31, 2002, largely reflecting a 23% increase in net sales
for the month of September 2003 as compared with December 2002. Inventories and
payables also were up from December 31, 2002, primarily due to the increased
level of business. Inventories increased to $281 million from $270 million, and
accounts payable increased to $228 million from $170 million. Accrued expenses
declined to $204 million from $243 million as of December 31, 2002, primarily
due to payments associated with accrued employee benefits and compensation.
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DEBT
As of September 30, 2003, 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, 2002 levels and do not include any accruals for
post-petition contractual interest expense. See Part I, Item 1. Note 2.
Voluntary Reorganization Under Chapter 11 - Interest Expense.
AVAILABLE LIQUIDITY
As of September 30, 2003, the Corporation had on a consolidated basis $901
million of cash (including $6 million of restricted cash as explained below) and
marketable securities, of which $193 million was held by non-Debtor
subsidiaries.
In January 2003, the Corporation reduced the size of the DIP Facility to $100
million and subsequently terminated the DIP Facility in June 2003. These actions
were taken at the election of the Corporation due to the levels of cash and
marketable securities on hand and to eliminate costs associated with the DIP
Facility.
The DIP Facility was used largely for the issuance of standby letters of credit
needed to support business operations. As of September 30, 2003, $1.5 million of
previously-issued standby letters of credit remained outstanding under the DIP
Facility. Following the termination of the DIP Facility, the Corporation has
been required to cash collateralize 105% of these outstanding letters of credit
until the letters of credit either expire or are returned by the beneficiary.
In June 2003, the Corporation entered a three-year, $100 million credit
agreement with LaSalle Bank to be used exclusively to support the issuance of
standby letters of credit. As of September 30, 2003, $4.5 million of standby
letters of credit, which are cash collateralized at 103%, had been issued under
this facility to replace those to be surrendered by the beneficiaries in
connection with the termination of the DIP Facility.
As of September 30, 2003, a total of $6 million in cash collateral was posted to
back up letters of credit as indicated above and was reported as restricted cash
on the consolidated balance sheet.
CAPITAL EXPENDITURES
Capital spending amounted to $61 million in the first nine months of 2003
compared with $64 million in the corresponding 2002 period. As of September 30,
2003, remaining capital expenditure commitments for the replacement,
modernization and expansion of operations amounted to $115 million, compared
with $56 million as of December 31, 2002. During the bankruptcy proceeding, the
Corporation expects to have limited ability to access capital other than its own
cash, marketable securities and future cash flows to fund potential future
growth opportunities such as new products, acquisitions and joint ventures.
Nonetheless, the Corporation expects to be able to maintain a program of capital
spending aimed at maintaining and enhancing its businesses.
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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 to 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 over 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.
A total of 53 employees were terminated completing the workforce reduction. The
Aubange plant ceased operations in December 2002. The reserve for the 2002
downsizing plan was included in accrued expenses on the consolidated balance
sheets. Charges against the reserve included the $3 million writedown of
equipment in 2002 and payments totaling $7 million in the first nine months of
2003. All payments associated with the 2002 downsizing plan are being funded
with cash from operations. An additional $1 million writedown related to the
Aubange plant was recorded in the third quarter of 2003.
2001 RESTRUCTURING PLAN: 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.
A total of 348 employees were terminated, and 26 open positions were eliminated,
and a 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. 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. 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 were made and charged against the reserve in the first quarter of 2003.
All payments associated with the 2001 restructuring plan were funded with cash
from operations.
See Part I, Item 1. Note 3. Exit Activities for additional information related
to payments and reserve balances.
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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 I, Item 1. Note 2. Voluntary Reorganization Under Chapter 11 and
Note 12. Litigation for recent developments in the Corporation's reorganization
proceedings. See Part I. Item 1. Note 12. 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 I, Item 1. Note 12. Litigation for additional information on
environmental litigation.
CRITICAL ACCOUNTING POLICIES
The preparation of the Corporation's 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
Corporation's 2002 Annual Report on Form 10-K, which was filed on February 27,
2003, includes a summary of the critical accounting policies the Corporation
believes are the most important to aid in understanding its financial results.
There have been no material changes to these critical accounting policies that
impacted the Corporation's reported amounts of assets, liabilities, revenues or
expenses during the first nine months of 2003. Effective in 2003, critical
accounting policies also include the following:
Adoption of SFAS No. 143: On January 1, 2003, the Corporation adopted SFAS No.
143, "Accounting for Asset Retirement Obligations." This standard requires the
recording of the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. The Corporation's asset retirement
obligations include reclamation requirements as regulated by government
authorities related principally to assets such as the Corporation's mines,
quarries, landfills, ponds and wells. The accounting for asset retirement
obligations requires a number of estimates by management as to the timing of
asset retirements, the cost of retirement obligations, discount and inflation
rates used in the determination of fair values and the methods of remediation
associated with the Corporation's asset retirement obligations. The Corporation
generally utilizes assumptions and estimates reflective of the most likely
remediation method on a site by site basis. See Part I, Item 1. Note 6. Adoption
of SFAS No. 143 for additional information related to the impact of this change
in accounting principle.
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements related to management's
expectations about future conditions. The effects of the Filing and the conduct,
outcome and costs of the Chapter 11 Cases, as well as the ultimate costs
associated with the Corporation's asbestos litigation, may differ from
management's expectations. Actual business or other conditions may also differ
significantly from management's expectations and accordingly affect the
Corporation's sales and profitability or other results. Actual results may
differ due to various other factors, including economic conditions such as the
levels of construction activity, interest rates, 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; possible impact of asbestos-related legislation; 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.
ITEM 4. 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 Rule 13a-15(e) of the Securities
Exchange Act of 1934), have concluded that, as of the end of the fiscal
quarter covered by this report on Form 10-Q, 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 control over financial reporting.
There was no change in the Corporation's "internal control over financial
reporting" (as defined in Rule 13a-15(f) of the Securities Exchange Act of
1934) identified in connection with the evaluation required by Rule
13a-15(d) of the Securities Exchange Act of 1934 that occurred during the
fiscal quarter covered by this report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of USG Corporation:
We have reviewed the accompanying consolidated balance sheet of USG Corporation
and subsidiaries as of September 30, 2003 and the related consolidated
statements of earnings for the three month and nine month periods ended
September 30, 2003 and 2002 and of cash flows for the nine month periods ended
September 30, 2003 and 2002. These financial statements are the responsibility
of the Corporation's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of USG
Corporation and subsidiaries as of December 31, 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 3, 2003
(February 19, 2003 as to paragraphs 13, 14 and 15 of Note 18), we expressed an
unqualified opinion on those consolidated financial statements and included
explanatory paragraphs concerning (i) the Corporation's Chapter 11 bankruptcy
filing, (ii) matters that raised substantial doubt about the Corporation's
ability to continue as a going concern, and (iii) transitional disclosures
related to the change in accounting for goodwill. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2002 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
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 accompanying consolidated 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
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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 consolidated financial statements have been prepared assuming
that the Corporation will continue as a going concern. As discussed in Notes 2
and 12 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 in regard to these
matters are also described in Notes 2 and 12 to the financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Chicago, Illinois
October 27, 2003
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1. Note 12. Litigation for information concerning the asbestos
and related bankruptcy litigation and environmental litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Letter from Deloitte & Touche LLP regarding unaudited
financial information.
31.1 Certifications of USG Corporation's Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of USG Corporation's Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of USG Corporation's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certifications of USG Corporation's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On July 29, 2003, USG Corporation filed with the SEC a Form 8-K for
the purpose of disclosing, under "Item 12. Results of Operations and
Financial Condition", its press release containing earnings
information for its second quarter of 2003.
On September 15, 2003, USG Corporation filed with the SEC a Form 8-K
for the purpose of disclosing, under "Item 5. Other Events," that its
corporate governance documents adopted in response to proposed New
York Stock Exchange Rules and the Sarbanes-Oxley Act of 2002 could be
found on its website www.usg.com.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By /s/ William C. Foote
-----------------------------------
William C. Foote,
Chairman, Chief Executive Officer
and President
By /s/ Richard H. Fleming
-----------------------------------
Richard H. Fleming,
Executive Vice President and
Chief Financial Officer
By /s/ D. Rick Lowes
-----------------------------------
D. Rick Lowes,
Vice President and Controller
November 3, 2003
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