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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number 1-8864
USG CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 36-3329400
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
125 S. FRANKLIN STREET, CHICAGO, ILLINOIS 60606-4678
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (312) 606-4000
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
New York Stock Exchange
Common Stock, $0.10 par value Chicago Stock Exchange
New York Stock Exchange
Preferred Share Purchase Rights Chicago Stock Exchange
8.5% Senior Notes, Due 2005 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 June 30, 2003 (the last business day of the registrant's most
recently completed second fiscal quarter), the aggregate market value of USG
Corporation common stock held by non-affiliates based upon the New York Stock
Exchange closing prices was approximately $810,409,527.
As of January 30, 2004, 43,028,040 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of USG Corporation's definitive Proxy Statement for use in
connection with the annual meeting of stockholders to be held on May 12, 2004,
are incorporated by reference into Part III of this Form 10-K Report where
indicated.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business........................................................................................... 3
Item 2. Properties......................................................................................... 7
Item 3. Legal Proceedings.................................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders................................................ 9
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters........................... 9
Item 6. Selected Financial Data............................................................................ 9
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 10
Item 7a. Quantitative and Qualitative Disclosures About Market Risks........................................ 24
Item 8. Financial Statements and Supplementary Data........................................................ 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 67
Item 9a. Controls and Procedures............................................................................ 67
PART III
Item 10. Directors and Executive Officers of the Registrant................................................. 67
Item 11. Executive Compensation............................................................................. 69
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..... 69
Item 13. Certain Relationships and Related Transactions..................................................... 70
Item 14. Principal Accounting Fees and Services............................................................. 70
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 70
Signatures..................................................................................................... 75
2
PART I
ITEM 1. BUSINESS
GENERAL
United States Gypsum Company ("U.S. Gypsum") was incorporated in 1901. USG
Corporation (the "Corporation") was incorporated in Delaware on October 22,
1984. By a vote of stockholders on December 19, 1984, U.S. Gypsum became a
wholly owned subsidiary of the Corporation, and the stockholders of U.S. Gypsum
became the stockholders of the Corporation, all effective January 1, 1985.
Through its subsidiaries, the Corporation is a leading manufacturer and
distributor of building materials, producing a wide range of products for use in
new residential, new nonresidential, and repair and remodel construction as well
as products used in certain industrial processes.
On June 25, 2001, the Corporation and 10 of its United States subsidiaries
(collectively, the "Debtors") filed voluntary petitions for reorganization (the
"Filing") under chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
The chapter 11 cases of the Debtors have been consolidated for purposes of joint
administration as In re: USG Corporation et al. (Case No. 01-2094). This action
was taken to resolve asbestos claims in a fair and equitable manner, to protect
the long-term value of the Debtors' businesses, and to maintain the Debtors'
leadership positions in their markets. The Debtors are operating their
businesses as debtors-in-possession subject to the provisions of the United
States Bankruptcy Code. These cases do not include any of the Corporation's
non-U.S. subsidiaries.
U.S. Gypsum is a defendant in asbestos lawsuits alleging both property
damage and personal injury. Other subsidiaries of the Corporation also have been
named as defendants in a small number of asbestos personal injury lawsuits. As a
result of the Filing, all pending asbestos lawsuits against U.S. Gypsum and
other subsidiaries are stayed, and no party may take any action to pursue or
collect on such asbestos claims absent specific authorization of the Bankruptcy
Court. Since the Filing, U.S. Gypsum has ceased making payments with respect to
asbestos lawsuits, including payments pursuant to settlements of asbestos
lawsuits. See Part II, Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition and Part II, Item 8. Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements, Note 2.
Voluntary Reorganization Under Chapter 11 and Note 20. Litigation for additional
information on the bankruptcy proceeding and asbestos litigation.
The Corporation's operations are organized into three operating segments:
North American Gypsum, Worldwide Ceilings and Building Products Distribution.
NORTH AMERICAN GYPSUM
BUSINESS
North American Gypsum, which manufactures and markets gypsum and related
products in the United States, Canada and Mexico, includes U.S. Gypsum in the
United States, the gypsum business of CGC Inc. ("CGC") in Canada, and USG
Mexico, S.A. de C.V. ("USG Mexico") in Mexico. U.S. Gypsum is the largest
manufacturer of gypsum wallboard in the United States and accounted for
approximately one-third of total domestic gypsum wallboard sales in 2003. CGC is
the largest manufacturer of gypsum wallboard in eastern Canada. USG Mexico is
the largest manufacturer of gypsum wallboard in Mexico.
PRODUCTS
North American Gypsum's products are used in a variety of building applications
to finish the interior walls and ceilings in residential, commercial and
institutional construction and in certain industrial applications. These
products provide aesthetic as well as sound-dampening, fire-retarding,
abuse-resistance and moisture-control value. The majority of these products are
sold under the SHEETROCK(R) brand name. Also sold under the SHEETROCK(R) brand
name is a line of joint compounds used for finishing wallboard joints. The
DUROCK(R) line of cement board and accessories provides water-damage-resistant
and fire-resistant assemblies for both interior and exterior construction. The
FIBEROCK(R) line of gypsum fiber panels includes abuse-resistant wall panels and
floor underlayment as well as sheathing panels usable as a substrate for most
exterior systems. The Corporation
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produces a variety of construction plaster products used to provide a custom
finish for residential and commercial interiors. Like SHEETROCK(R) brand gypsum
wallboard, these products provide aesthetic, sound-dampening, fire-retarding and
abuse-resistance value. Construction plaster products are sold under the trade
names RED TOP(R), IMPERIAL(R) and DIAMOND(R). The Corporation also produces
gypsum-based products for agricultural and industrial customers to use in a
number of applications, including soil conditioning, road repair, fireproofing
and ceramics.
MANUFACTURING
North American Gypsum's products are manufactured at 45 plants located
throughout the United States, Canada and Mexico.
Gypsum rock is mined or quarried at 14 company-owned locations in North
America. In 2003, these locations provided approximately 70% of the gypsum used
by the Corporation's plants in North America. Certain plants purchase or acquire
synthetic gypsum and natural gypsum rock from various outside sources. Outside
purchases or acquisitions accounted for 30% of the gypsum used in the
Corporation's plants. The Corporation's geologists estimate that its recoverable
rock reserves are sufficient for more than 26 years of operation based on the
Corporation's average annual production of crude gypsum during the past five
years of 9.7 million tons. Proven reserves contain approximately 258 million
tons. Additional reserves of approximately 148 million tons are found on four
properties not in operation.
The Corporation owns and operates seven paper mills located across the
United States. Vertical integration in paper ensures a continuous supply of
high-quality paper that is tailored to the specific needs of the Corporation's
wallboard production processes.
MARKETING AND DISTRIBUTION
Distribution is carried out through L&W Supply Corporation ("L&W Supply"), a
wholly owned subsidiary of the Corporation, other specialty wallboard
distributors, building materials dealers, home improvement centers and other
retailers, and contractors. Sales of gypsum products are seasonal in the sense
that sales are generally greater from spring through the middle of autumn than
during the remaining part of the year. Based on the Corporation's estimates
using publicly available data, internal surveys and gypsum wallboard shipment
data from the Gypsum Association, management estimates that during 2003, about
46% of total industry volume demand for gypsum wallboard was generated by new
residential construction, 39% of volume demand was generated by residential and
nonresidential repair and remodel activity, 9% of volume demand was generated by
new nonresidential construction, and the remaining 6% of volume demand was
generated by other activities such as exports and temporary construction.
COMPETITION
The Corporation accounts for approximately one-third of the total gypsum
wallboard sales in the United States. In 2003, U.S. Gypsum shipped 10.4 billion
square feet of wallboard, the highest level in its history, out of total U.S.
industry shipments (including imports) estimated by the Gypsum Association at
32.5 billion square feet, the highest level on record. Competitors in the United
States are: National Gypsum Company, BPB (through its subsidiaries BPB Gypsum,
Inc. and BPB America Inc.), Georgia-Pacific Corporation, American Gypsum,
Temple-Inland Forest Products Corporation, Lafarge North America, Inc. and PABCO
Gypsum. Competitors in Canada include BPB Canada Inc., Georgia-Pacific
Corporation and Lafarge North America, Inc. The major competitor in Mexico is
Panel Rey, S.A.
WORLDWIDE CEILINGS
BUSINESS
Worldwide Ceilings, which manufactures and markets interior systems products
worldwide, includes USG Interiors, Inc. ("USG Interiors"), the international
interior systems business managed as USG International, and the ceilings
business of CGC. Worldwide Ceilings is a leading supplier of interior ceilings
products used primarily in commercial applications. The Corporation estimates
that it is the largest manufacturer of ceiling grid and the second-largest
manufacturer/marketer of acoustical ceiling tile in the world.
PRODUCTS
Worldwide Ceilings manufactures ceiling tile in the United States and ceiling
grid in the United States, Canada, Europe and the Asia-Pacific region. It
markets both ceiling tile and ceiling grid in the United States, Canada, Mexico,
Europe and the Asia-Pacific region. Its integrated line of ceilings products
provides qualities
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such as sound absorption, fire retardation and convenient access to the space
above the ceiling for electrical and mechanical systems, air distribution and
maintenance. USG Interiors' significant trade names include the AURATONE(R) and
ACOUSTONE(R) brands of ceiling tile and the DONN(R), DX(R), FINELINE(R),
CENTRICITEE(R), CURVATURA(R) and COMPASSO(R) brands of ceiling grid.
MANUFACTURING
Worldwide Ceilings' products are manufactured at 14 plants located in North
America, Europe and the Asia-Pacific region. These include 9 ceiling grid
plants, 3 ceiling tile plants and 2 plants that either produce other interior
systems products or prepare raw materials for ceiling tile and grid. Principal
raw materials used in the production of Worldwide Ceilings' products include
mineral fiber, steel, perlite, starch and high-pressure laminates. Certain of
these raw materials are produced internally, while others are obtained from
various outside suppliers. Due to strong demand for steel in China, Japan and
other non-U.S. markets, reduced production of steel in North America and Europe,
and a severe shortage of raw material used in the production of pig iron, it is
possible that the Corporation could experience shortages of steel used for the
manufacture of ceiling grid in 2004.
MARKETING AND DISTRIBUTION
Worldwide Ceilings' products are sold primarily in markets related to the new
construction and renovation of commercial buildings. Marketing and distribution
are conducted through a network of distributors, installation contractors, L&W
Supply and home improvement centers.
COMPETITION
The Corporation estimates that it is the world's largest manufacturer of ceiling
grid. Principal competitors in ceiling grid include WAVE (a joint venture
between Armstrong World Industries, Inc. and Worthington Industries) and Chicago
Metallic Corporation. The Corporation estimates that it is the second largest
manufacturer/marketer of acoustical ceiling tile in the world. Principal global
competitors include Armstrong World Industries, Inc., OWA Faserplattenwerk GmbH
(Odenwald), BPB America Inc. and AMF Mineralplatten GmbH Betriebs KG.
BUILDING PRODUCTS DISTRIBUTION
BUSINESS
Building Products Distribution consists of L&W Supply, the leading specialty
building products distribution business in the United States. In 2003, L&W
Supply distributed approximately 11% of all gypsum wallboard in the United
States, including approximately 28% of U.S. Gypsum's wallboard production.
MARKETING AND DISTRIBUTION
L&W Supply was organized in 1971 by U.S. Gypsum. It is a service-oriented
organization that stocks a wide range of construction materials and delivers
less-than-truckload quantities of construction materials to job sites and places
them in areas where work is being done, thereby reducing the need for handling
by contractors. L&W Supply specializes in the distribution of gypsum wallboard
(which accounted for 47% of 2003 net sales), joint compound and other gypsum
products manufactured by U.S. Gypsum and others. It also distributes products
manufactured by USG Interiors such as acoustical ceiling tile and grid, as well
as products of other manufacturers, including drywall metal, insulation, roofing
products and accessories. L&W Supply leases approximately 87% of its facilities
from third parties. Usually, initial leases run from three to five years with a
five-year renewal option.
L&W Supply remains focused on opportunities to profitably grow its
specialty business, as well as opportunities to reduce costs and optimize asset
utilization. As part of its plan, L&W Supply opened or acquired eight locations
and closed or consolidated six locations during 2003, leaving a total of 183
locations in 36 states as of December 31, 2003, compared with 181 locations and
180 locations as of December 31, 2002 and 2001, respectively.
COMPETITION
L&W Supply has a number of competitors, including Gypsum Management Supply, an
independent distributor with locations in the southern, central and western
United States. There are several regional competitors such as Rinker Materials
Corporation in the Southeast (primarily in Florida), KCG, Inc., which is
primarily in the southwestern and central United States, and The Strober
Organization, Inc. in the northeastern and mid-Atlantic states. L&W Supply's
many local competitors include specialty wallboard distributors,
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lumber dealers, hardware stores, home improvement centers and acoustical ceiling
tile distributors.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Part III, Item 10. Directors and Executive Officers of the Registrant -
Executive Officers of the Registrant (as of February 24, 2004).
OTHER INFORMATION
The Corporation performs research and development at the USG Research and
Technology Center in Libertyville, Ill. (the "Research Center") and at a
facility in Avon, Ohio. The staff at the Research Center provides specialized
technical services to the operating units and does product and process research
and development. The Research Center is especially well-equipped for carrying
out fire, acoustical, structural and environmental testing of products and
building assemblies. It also has an analytical laboratory for chemical analysis
and characterization of materials. Development activities can be taken to an
on-site pilot-plant level before being transferred to a full-size plant. The
Research Center also is responsible for an industrial design group located at
the USG Solutions Center(SM) in Chicago, Ill. The Avon facility houses staff and
equipment for product development in support of suspension grid for acoustical
ceiling tile.
Primary supplies of energy have been adequate, and no curtailment of plant
operations has resulted from insufficient supplies. Supplies are likely to
remain sufficient for projected requirements. Energy price swap agreements are
used by the Corporation to hedge the cost of certain purchased natural gas.
None of the operating segments has any special working capital requirements
or is materially dependent on a single customer or a few customers on a regular
basis. No single customer of the Corporation accounted for 10% or more of the
Corporation's 2003, 2002 or 2001 consolidated net sales. Because orders are
filled upon receipt, no operating segment has any significant order backlog.
Loss of one or more of the patents or licenses held by the Corporation
would not have a major impact on the Corporation's business or its ability to
continue operations. No material part of any of the Corporation's business is
subject to renegotiation of profits or termination of contracts or subcontracts
at the election of the government.
All of the Corporation's products regularly require improvement to remain
competitive. The Corporation also develops and produces comprehensive systems
employing several of its products. In order to maintain its high standards and
remain a leader in the building materials industry, the Corporation performs
ongoing extensive research and development activities and makes the necessary
capital expenditures to maintain production facilities in good operating
condition.
See Part II, Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 18. Segments for financial information
pertaining to operating segments, foreign and domestic operations and export
sales.
AVAILABLE INFORMATION
The Corporation maintains a website at www.usg.com and makes available at this
website its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to the
Securities and Exchange Commission. If you wish to receive a hard copy of any
exhibit to the Corporation's reports filed with or furnished to the Securities
and Exchange Commission, such exhibit may be obtained, upon payment of
reasonable expenses, by writing to: J. Eric Schaal, Corporate Secretary and
Associate General Counsel, USG Corporation, P.O. Box 6721, Chicago, IL
60680-6721.
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ITEM 2. PROPERTIES
The Corporation's plants, mines, quarries, transport ships and other facilities
are located in North America, Europe and the Asia-Pacific region. In 2003, U.S.
Gypsum's SHEETROCK(R) brand gypsum wallboard plants operated at 92% of capacity.
USG Interiors' AURATONE(R) brand ceiling tile plants operated at 84%. The
locations of the production properties of the Corporation's subsidiaries,
grouped by operating segment, are as follows (plants are owned unless otherwise
indicated):
NORTH AMERICAN GYPSUM
GYPSUM WALLBOARD AND OTHER GYPSUM PRODUCTS
Aliquippa, Pa. Jacksonville, Fla. Sperry, Iowa
Baltimore, Md. New Orleans, La. Stony Point, N.Y.
Boston (Charlestown), Mass. Norfolk, Va. Sweetwater, Texas
Bridgeport, Ala. Plaster City, Calif. Hagersville, Ontario, Canada
Detroit (River Rouge), Mich. Rainier, Ore. Montreal, Quebec, Canada
East Chicago, Ind. Santa Fe Springs, Calif. Monterrey, Nuevo Leon, Mexico
Empire, Nev. Shoals, Ind. Puebla, Puebla, Mexico
Fort Dodge, Iowa Sigurd, Utah
Galena Park, Texas Southard, Okla.
JOINT COMPOUND (SURFACE PREPARATION AND JOINT TREATMENT PRODUCTS)
Auburn, Wash. Gypsum, Ohio Edmonton, Alberta, Canada
Bridgeport, Ala. Jacksonville, Fla. Hagersville, Ontario, Canada
Chamblee, Ga. Phoenix (Glendale), Ariz. (leased) Montreal, Quebec, Canada
Dallas, Texas Port Reading, N.J. Surrey, British Columbia, Canada
East Chicago, Ind. Sigurd, Utah Monterrey, Nuevo Leon, Mexico
Fort Dodge, Iowa Torrance, Calif. Puebla, Puebla, Mexico
Galena Park, Texas Calgary, Alberta, Canada (leased) Port Klang, Malaysia (leased)
CEMENT BOARD
Baltimore, Md. New Orleans, La. Santa Fe Springs, Calif.
Detroit (River Rouge), Mich.
GYPSUM ROCK (MINES AND QUARRIES)
Alabaster (Tawas City), Mich. Sigurd, Utah Little Narrows, Nova Scotia, Canada
Empire, Nev. Southard, Okla. Windsor, Nova Scotia, Canada
Fort Dodge, Iowa Sperry, Iowa Manzanillo, Colima, Mexico
Plaster City, Calif. Sweetwater, Texas Monterrey, Nuevo Leon, Mexico
Shoals, Ind. Hagersville, Ontario, Canada
PAPER FOR GYPSUM WALLBOARD
Clark, N.J. Jacksonville, Fla. South Gate, Calif.
Galena Park, Texas North Kansas City, Mo.
Gypsum, Ohio Oakfield, N.Y.
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OTHER PRODUCTS
Synthetic gypsum is processed at Belledune, New Brunswick, Canada. A
mica-processing plant is located at Spruce Pine, N.C. Metal lath, plaster and
drywall accessories and light gauge steel framing products are manufactured at
Puebla, Puebla, Mexico, and Saltillo, Coahuila, Mexico. Gypsum fiber panel
products are produced at Gypsum, Ohio. Paper-faced metal corner bead is
manufactured at Auburn, Wash., and Weirton, W.Va. Various other products are
manufactured at La Mirada, Calif. (adhesives and finishes), and New Orleans, La.
(lime products).
PLANT CLOSURE
The joint compound plant at Tacoma, Wash., was closed in the second quarter of
2003.
OCEAN VESSELS
Gypsum Transportation Limited, a wholly owned subsidiary of the Corporation and
headquartered in Bermuda, owns and operates a fleet of three self-unloading
ocean vessels. Under a contract of affreightment, these vessels transport gypsum
rock from Nova Scotia to the East Coast plants of U.S. Gypsum. Excess ship time,
when available, is offered for charter on the open market.
WORLDWIDE CEILINGS
CEILING GRID
Cartersville, Ga. Auckland, New Zealand (leased) Peterlee, England (leased)
Stockton, Calif. Dreux, France (leased) Shenzhen, China (leased)
Westlake, Ohio Oakville, Ontario, Canada Viersen, Germany
A coil coater and slitter plant used in the production of ceiling grid also is
located in Westlake, Ohio. Slitter plants are located in Stockton, Calif.
(leased) and Antwerp, Belgium (leased).
CEILING TILE
Ceiling tile products are manufactured at Cloquet, Minn., Greenville, Miss., and
Walworth, Wis.
OTHER PRODUCTS
Mineral fiber products are manufactured at Red Wing, Minn., and Walworth, Wis.
Metal specialty systems are manufactured at Oakville, Ontario, Canada.
PLANT CLOSURES
The access floor systems business at Peterlee, England, was sold in the first
quarter of 2003. The plant at Medina, Ohio, that manufactured wall systems and
drywall metal products was closed during the second quarter of 2003. The ceiling
grid and access floor systems production lines at Port Klang, Malaysia, were
shut down in the third quarter of 2003.
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ITEM 3. LEGAL PROCEEDINGS
See Part II, Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 2. Voluntary Reorganization Under
Chapter 11 and Note 20. Litigation for information on legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 2003.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
See Part II, Item 8. Financial Statements and Supplementary Data - Selected
Quarterly Financial Data for information with respect to the principal market on
which the Corporation's common stock is traded, the range of high and low market
prices, the number of stockholders of record and the amount of quarterly cash
dividends. No dividends are being paid on the Corporation's common stock.
ITEM 6. SELECTED FINANCIAL DATA
See Part II, Item 8. Financial Statements and Supplementary Data - Five-Year
Summary for selected financial data.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
USG Corporation (the "Corporation") and 10 of its United States subsidiaries
(collectively, the "Debtors") are currently operating under chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code"), an action 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. To properly understand the Corporation and its
businesses, investors, creditors or other readers of this report should first
understand the nature of this voluntary reorganization process under chapter 11
and the potential impacts the reorganization may have on their rights and
interests in the Corporation as described in more detail below. At this point,
there is great uncertainty as to the amount of the Debtors' asbestos-related
liability and thus the value of any recovery for pre-petition creditors or
stockholders under any final plan of reorganization. No plan of reorganization
has thus far been proposed, and the Debtors have the exclusive right to propose
a plan until March 1, 2004, subject to possible further extensions of the period
of exclusivity.
The Corporation had $947 million of cash, cash equivalents, restricted cash
and marketable securities as of December 31, 2003, and management believes that
this available liquidity plus expected operating cash flows will meet the
Corporation's cash needs, including making regular capital investments to
maintain and enhance its businesses throughout the chapter 11 proceedings.
The Corporation's net sales increased 6% in 2003 as compared with 2002.
Demand for products sold by the Corporation's North American Gypsum and Building
Products Distribution operating segments was strong in 2003 due to strength in
the new housing and repair and remodel markets in the United States. However,
continued weakness in the nonresidential construction market has depressed sales
for the Corporation's Worldwide Ceilings operating segment. These trends are
expected to continue in 2004. Shipments of gypsum wallboard were at record
levels for the Corporation and the industry in 2003 and are expected to be
strong in 2004. However, excess industry capacity has resulted in only a small
increase in gypsum wallboard prices despite the strong demand.
The Corporation's gross margin was 14.9% in 2003, down from 16.8% in 2002.
Gross margin was adversely affected in 2003 by higher costs related to natural
gas, benefits for plant employees (pension and medical insurance for active
employees and retirees), other insurance, information technology, and steel used
in the manufacture of ceiling grid, which together added approximately $110
million to cost of products sold in 2003 as compared with 2002. These costs are
expected to continue to rise in 2004.
VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), the Debtors filed voluntary petitions
for reorganization (the "Filing") under the Bankruptcy Code. These bankruptcy
cases (the "Chapter 11 Cases") are pending in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). The Debtors intend to
address their liability for all present and future asbestos claims, as well as
all other pre-petition claims, in a plan or plans of reorganization approved by
the Bankruptcy Court. A key factor in determining the recovery of pre-petition
creditors or stockholders under any such plan of reorganization is the amount
that must be provided in the plan to resolve the Debtors' liability for present
and future asbestos claims. At this time, there is substantial uncertainty as to
the amount that will be required to resolve these asbestos claims and thus
whether or to what extent there will be any recovery for pre-petition creditors
or stockholders under any plan of reorganization.
BACKGROUND AND PRINCIPAL IMPACTS OF THE FILING
At the time of the Filing, United States Gypsum Company ("U.S. Gypsum"), a
subsidiary of the Corporation, was a defendant in more than 100,000 asbestos
personal injury lawsuits. U.S. Gypsum was also a defendant in 11 asbestos
lawsuits alleging property damage.
During late 2000 and in 2001, following the bankruptcy filings of other
defendants in asbestos personal injury litigation, plaintiffs substantially
10
increased their settlement demands to U.S. Gypsum. During that period, payments
to resolve asbestos personal injury lawsuits against U.S. Gypsum increased
dramatically. U.S. Gypsum's asbestos-related costs (on a cash basis and before
insurance) rose from $100 million in 1999 to $162 million in 2000 and, absent
the Filing, were expected to exceed $275 million in 2001. The Corporation
determined that voluntary protection under chapter 11 would be the best way to
resolve asbestos claims in a fair and equitable manner.
As a consequence of the Filing, all asbestos lawsuits and other lawsuits
pending against the Debtors as of the Petition Date are stayed, and no party may
take any action to pursue or collect pre-petition claims except pursuant to an
order of the Bankruptcy Court. The Debtors are operating their businesses
without interruption as debtors-in-possession subject to the provisions of the
Bankruptcy Code, and vendors are being paid for goods furnished and services
provided after the Filing.
Prior to the Filing, in the fourth quarter of 2000, U.S. Gypsum recorded a
noncash, pretax provision of $850 million, increasing to $1,185 million its
total accrued reserve for resolving in the tort system the asbestos claims
pending as of December 31, 2000, and expected to be filed through 2003. At that
time, the estimated range of U.S. Gypsum's probable liability was between $889
million and $1,281 million, including defense costs. As of December 31, 2003,
the Corporation's accrued reserve for asbestos claims totaled $1,061 million.
The Debtors' asbestos liabilities to be funded under a plan of
reorganization have not yet been determined and are subject to substantial
uncertainty. 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 the Debtors' liabilities for present and future asbestos claims exceed
the value of the Debtors' assets and, therefore, are significantly greater than
both the reserved amount and the high end of the range estimated in 2000, and
that the Debtors are insolvent. In contrast, the Debtors believe they are
solvent if their asbestos liabilities are fairly and appropriately valued.
If federal legislation addressing asbestos personal injury claims is
passed, which is extremely speculative at this time, such legislation may affect
the amount that will be required to resolve the Debtors' asbestos personal
injury liability in the Debtors' Chapter 11 Cases. See Potential Federal
Legislation Regarding Asbestos Personal Injury Claims, below.
If the amount of the Debtors' asbestos liabilities is not resolved through
negotiation in the Chapter 11 Cases or addressed by federal legislation, the
outcome of litigation proceedings in the Chapter 11 Cases may determine the
Debtors' liability for present and future asbestos claims. Because of these
uncertainties, the Corporation believes 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.
As the Chapter 11 Cases and potential legislation activities proceed, the
Debtors likely will gain more information from which a reasonable estimate of
the Debtors' probable liability for present and future asbestos claims can be
determined. If such estimate differs from the existing reserve, the reserve will
be adjusted, and it is possible that a charge to results of operations will be
necessary at that time. In such a case, the Debtors' asbestos liability could
vary significantly from the recorded estimate of liability and could be greater
than the high end of the range estimated in 2000. This difference could be
material to the Corporation's financial position, cash flows and results of
operations in the period recorded.
While it is the Debtors' intention to seek a full recovery for their
creditors, it is not possible to predict the amount that will have to be
provided in the plan of reorganization to resolve present and future asbestos
claims, how the plan of reorganization will treat other pre-petition claims,
whether there will be sufficient assets to satisfy the Debtors' pre-petition
liabilities, and what impact any plan may have on the value of the shares of the
Corporation's common stock and other outstanding securities. The payment rights
and other entitlements of pre-petition creditors and the Corporation's
shareholders may be substantially altered by any plan 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, the
pre-petition creditors of some Debtors may be treated differently from the
pre-petition creditors of other Debtors, and the interests of the Corporation's
stockholders are likely to be substantially diluted or cancelled in whole or in
part. There can be no assurance as to the value of any distributions that might
be made under any plan of reorganization with respect
11
to such pre-petition claims, equity interests, or other outstanding securities.
It is also not possible to predict 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.
See Part II, Item 8. Note 20. Litigation for additional information on the
background of asbestos litigation, developments in the Corporation's
reorganization proceeding and estimated cost.
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. The FAIR 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.
It is not possible to predict whether the FAIR Bill will be presented for a
vote or passed by the full Senate or the House of Representatives, whether the
FAIR Bill will be signed into law, the final terms or cost of any bill that
might become law, or the impact any such law might have on the Corporation or
the Chapter 11 Cases.
Enactment of the FAIR Bill or other legislation addressing the financial
contributions of the Debtors for asbestos personal injury claims would have a
material impact on the amount of the Debtors' asbestos personal injury
liability. The FAIR Bill may also affect the manner in which such liability may
be addressed in the Debtors' Chapter 11 Cases. However, it is extremely
speculative as to whether the FAIR Bill or similar legislation will be enacted
or what the terms of any such legislation might be. During this process, the
Chapter 11 Cases are expected to continue. See Part II, Item 8. Note 2.
Voluntary Reorganization Under Chapter 11 for additional information on the FAIR
Bill.
ACCOUNTING IMPACT
The Corporation is required to follow American Institute of Certified Public
Accountants ("AICPA") Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code." Pursuant to
SOP 90-7, the Corporation's pre-petition liabilities that are subject to
compromise are reported separately on the consolidated balance sheet. Virtually
all of the Corporation's pre-petition debt is currently in default and was
recorded at face value and classified within liabilities subject to compromise.
U.S. Gypsum's asbestos liability also is classified within liabilities subject
to compromise. See Part II, Item 8. Note 2. Voluntary Reorganization Under
Chapter 11, which includes information related to financial statement
presentation, the debtor-in-possession statements and detail of liabilities
subject to compromise and chapter 11 reorganization expenses.
CONSOLIDATED RESULTS OF OPERATIONS
NET SALES
Net sales in 2003 were $3,666 million, up 6% from 2002. Net sales for the
Corporation's North American Gypsum segment were up in 2003 primarily due to
record shipments of SHEETROCK(R) brand gypsum wallboard, SHEETROCK(R) brand
joint compounds and DUROCK(R) brand cement board. Net sales for the Building
Products Distribution segment rose due to record shipments of gypsum wallboard
sold by L&W Supply Corporation ("L&W Supply") and increased sales of
complementary products. However, net sales for the Worldwide Ceilings segment
were down slightly as a result of the depressed ceilings market.
In 2002, net sales of $3,468 million were up 5% from 2001. This increase
reflected higher levels of sales for North American Gypsum and Building Products
Distribution, partially offset by lower sales for Worldwide Ceilings. Net sales
for North American
12
Gypsum were up in 2002 primarily due to a 17% increase in average selling prices
for SHEETROCK(R) brand gypsum wallboard sold by U.S. Gypsum. Shipments of U.S.
Gypsum's gypsum wallboard were up 2% in 2002 versus 2001. Net sales for Building
Products Distribution were up in 2002 primarily due to increased shipments and
selling prices for gypsum wallboard sold by L&W Supply. Net sales for Worldwide
Ceilings declined in 2002 as a result of lower domestic and export shipments of
ceiling tile and lower shipments of domestic and internationally produced
ceiling grid.
COST OF PRODUCTS SOLD
Cost of products sold totaled $3,121 million in 2003, $2,884 million in 2002 and
$2,882 million in 2001. Key factors for the increase in 2003 were costs related
to natural gas, benefits for plant employees (pension and medical insurance for
active employees and retirees), other insurance, information technology and
steel used in the manufacture of ceiling grid. These costs accounted for
approximately $110 million, or 46%, of the total year-on-year increase.
Cost of products sold for 2002 included an $11 million charge recorded in
the fourth quarter related to the downsizing of operations in Europe, as
discussed below under Core Business Results - Worldwide Ceilings. However,
manufacturing costs in 2002 for SHEETROCK(R) brand gypsum wallboard declined
versus 2001 primarily due to lower energy costs, partially offset by higher
prices for wastepaper, the primary raw material of wallboard paper. In addition,
cost reductions were realized for ceiling tile as a result of lower energy and
raw materials costs and from the closure of a high-cost ceiling tile production
line in the fourth quarter of 2001.
GROSS PROFIT
Gross profit (net sales less cost of products sold) in 2003 was $545 million, a
7% decrease from $584 million in 2002. Gross margin (gross profit as a percent
of net sales) was 14.9% in 2003, down from 16.8% in 2002. These declines
primarily reflect the aforementioned margin pressures affecting cost of products
sold. Gross profit in 2001 was $414 million, which was 12.6% of net sales.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled $324 million in 2003, $312 million
in 2002 and $279 million in 2001. As a percentage of net sales, these expenses
were 8.8%, 9.0% and 8.5% in 2003, 2002 and 2001, respectively.
Increases over the three-year period reflect in part the impact of a
Bankruptcy Court-approved key employee retention plan ("KERP"), which became
effective in the third quarter of 2001. Expenses associated with this plan
amounted to $23 million, $20 million and $12 million in 2003, 2002 and 2001,
respectively.
The increase in 2003 versus 2002 also reflected higher expenses related to
benefits for non-plant employees (pension and medical insurance for active
employees and retirees), which increased $11 million year-on-year. In addition,
the Corporation recorded a fourth quarter 2003 charge of $3 million for
severance related to a salaried workforce reduction of approximately 70
employees. These increases were partially offset by a lower level of accruals
for employee incentive compensation associated with the attainment of profit and
other performance goals.
The increase in 2002 versus 2001 reflected the timing difference related to
the KERP (a full year of KERP expense in 2002, compared with one-half year in
2001) and a higher level of accruals for employee incentive compensation.
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses consisted of the following:
(millions) 2003 2002 2001
- ----------------------------------------------------------------------
Legal and financial advisory fees $19 $22 $14
Bankruptcy-related interest income (8) (8) (4)
Accelerated amortization of debt-
issuance costs - - 2
- ---------------------------------------------------------------------
Total chapter 11 reorganization expenses 11 14 12
=====================================================================
2001 PROVISIONS FOR IMPAIRMENT AND RESTRUCTURING
In the fourth quarter of 2001, the Corporation recorded impairment charges
totaling $30 million pretax ($25 million after-tax). Included in this total was
$16 million pretax related to the Aubange, Belgium, ceiling tile plant. This
impairment resulted from a decline in demand, which had been significantly
affected by a
13
worldwide slowdown in the nonresidential construction market, and from the
plant's high cost structure. The remaining $14 million pretax was related to the
Port Hawkesbury, Nova Scotia, gypsum fiber panel plant. This impairment resulted
from high delivered costs of products manufactured at Port Hawkesbury combined
with the consolidation of production of FIBEROCK(R) brand products at the
Gypsum, Ohio, plant. Estimated future cash flows related to these facilities
indicated that impairment charges were necessary to write down the assets to
their third-party appraised fair values.
Also in the fourth quarter of 2001, the Corporation recorded a charge of
$12 million pretax ($10 million after-tax) related to a restructuring plan that
included the shutdown of a gypsum wallboard plant in Fremont, Calif., a drywall
steel plant in Prestice, Czech Republic, a ceiling tile plant in San Juan
Ixhuatepec, Mexico, a ceiling tile manufacturing line in Greenville, Miss., and
other restructuring activities. Included in the $12 million pretax charge was $8
million for severance related to a workforce reduction of more than 350
positions (primarily hourly positions), $2 million for the 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.
During the third quarter of 2001, the Corporation reversed $9 million
pretax ($5 million after-tax) of a restructuring reserve recorded in the fourth
quarter of 2000 due to changes from previous estimates and to reflect a change
in the scope of restructuring activities undertaken.
See Part II, Item 8. Note 3. Exit Activities for additional information
related to restructuring payments and reserve balances.
OPERATING PROFIT
Operating profit totaled $210 million in 2003, $258 million in 2002 and $90
million in 2001. Operating profit in 2001 included charges for impairment and
restructuring, as discussed above.
INTEREST EXPENSE
Interest expense was $6 million, $8 million and $33 million in 2003, 2002 and
2001, respectively. Under SOP 90-7, virtually all of the Corporation's
outstanding debt is classified as liabilities subject to compromise, and
interest expense on this debt has not been accrued or recorded since the
Petition Date. Consequently, comparisons of interest expense for 2003 and 2002
versus 2001 are not meaningful. Contractual interest expense not accrued or
recorded on pre-petition debt totaled $71 million in 2003, $74 million in 2002
and $41 million in 2001. 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 $4 million, $4 million and $5 million
in 2003, 2002 and 2001, respectively.
OTHER (INCOME) EXPENSE, NET
Other income, net was $9 million and $2 million in 2003 and 2002, respectively,
compared with other expense, net of $10 million in 2001. For 2003, other income,
net primarily represented net realized currency gains. For 2001, other expense,
net included $7 million of net realized currency losses related to the repayment
of intercompany loans by a Belgian subsidiary that was liquidated.
INCOME TAXES
Income taxes amounted to $79 million in 2003, $117 million in 2002 and $36
million in 2001. The Corporation's effective tax rate was 36.6%, 45.6% and 70.0%
in 2003, 2002 and 2001, respectively.
The decrease in the effective tax rate in 2003 versus 2002 was primarily
attributable to a reduction of the Corporation's income tax payable during 2003.
This reduction was determined upon completion of the Corporation's 2002 federal
income tax return and resulted from an actual tax liability that was lower than
the estimate of taxes payable as of December 31, 2002. The change in the
effective tax rate in 2002 versus 2001 was primarily attributable to the impact
on the effective tax rate of the Corporation's foreign operations, which in 2001
had no net earnings before taxes yet owed taxes in certain jurisdictions.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR SFAS NO. 143
On January 1, 2003, the Corporation adopted Statement of Financial Accounting
Standard ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." A
noncash, after-tax charge of $16 million ($27 million
14
pretax) was reflected on the consolidated statement of earnings as a cumulative
effect of a change in accounting principle as of January 1, 2003. See Part II,
Item 8. Note 14. Asset Retirement Obligations for additional information related
to the adoption of SFAS No. 143.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR SFAS NO. 142
On January 1, 2002, the 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, non-tax-deductible impairment charge of $96
million. This charge, which includes a $6 million deferred currency translation
write-off, is reflected on the Corporation's consolidated statement of earnings
as a cumulative effect of a change in accounting principle as of January 1,
2002. See Part II, Item 8. Note 9. Goodwill and Other Intangible Assets for
additional information related to the adoption of SFAS No. 142.
NET EARNINGS
Net earnings amounted to $122 million, or $2.82 per share, in 2003, $43 million,
or $1.00 per share, in 2002 and $16 million, or $0.36 per share, in 2001.
CORE BUSINESS RESULTS OF OPERATIONS
(millions) Net Sales Operating Profit (Loss)
-------------------------------- ------------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ---- ---- ----
NORTH AMERICAN GYPSUM:
United States Gypsum Company $2,076 $1,962 $1,781 $157 $211 $32
CGC Inc. (gypsum) 256 217 204 33 28 24
Other subsidiaries 141 137 118 19 22 24
Eliminations (174) (165) (153) - - -
------ ------ ------ ---- ---- ---
Total 2,299 2,151 1,950 209 261 80
------ ------ ------ ---- ---- ---
WORLDWIDE CEILINGS:
USG Interiors, Inc. 446 450 475 31 37 34
USG International 168 176 210 2 (13) (6)
CGC Inc. (ceilings) 45 40 40 6 5 5
Eliminations (52) (56) (65) - - -
------ ------ ------ ---- ---- ---
Total 607 610 660 39 29 33
------ ------ ------ ---- ---- ---
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 1,295 1,200 1,152 53 51 64
------ ------ ------ ---- ---- ---
Corporate - - - (77) (71) (43)
Eliminations (535) (493) (466) (3) 2 1
Chapter 11 reorganization expenses - - - (11) (14) (12)
Provisions for impairment and restructuring - - - - - (33)
------ ------ ------ ---- ---- ---
TOTAL USG CORPORATION 3,666 3,468 3,296 210 258 90
====== ====== ====== ==== ==== ===
15
NORTH AMERICAN GYPSUM
Net sales of $2,299 million increased 7% from 2002, while operating profit of
$209 million was down 20%. Net sales and operating profit in 2002 increased 10%
and 226%, respectively, versus 2001.
Comparing 2003 with 2002, U.S. Gypsum reported a 6% increase in net sales
primarily reflecting 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 fell 26%
largely due to higher manufacturing costs.
U.S. Gypsum sold 10.4 billion square feet of SHEETROCK(R) brand gypsum
wallboard during 2003, a 3% increase from the previous record of 10.1 billion
square feet sold in 2002. U.S. Gypsum's wallboard plants operated at 92% of
capacity in 2003, compared with 93% in 2002. Industry shipments of gypsum
wallboard were up approximately 6% from 2002.
U.S. Gypsum's nationwide average realized price for gypsum wallboard was
$101.43 per thousand square feet in 2003, up 1% from $100.43 in 2002.
U.S. Gypsum's manufacturing costs for gypsum wallboard continued to be up
in 2003 primarily due to increased energy and employee benefits costs. Market
prices for natural gas, a major source of energy for the company, were up more
than 65% versus 2002. However, improved production efficiencies at the company's
gypsum wallboard plants and hedging activities offset a portion of the cost
increase. Higher energy, raw materials and employee benefits costs also had an
adverse effect on profit margins for U.S. Gypsum's other products.
Comparing 2002 with 2001, net sales for U.S. Gypsum increased 10% in 2002
primarily due to higher selling prices for SHEETROCK(R) brand gypsum wallboard.
The average selling price of $100.43 per thousand square feet was up 17% from
$85.67 in 2001. Shipments of SHEETROCK(R) brand gypsum wallboard in 2002 totaled
10.1 billion square feet, up 2% from 9.9 billion square feet in 2001. U.S.
Gypsum's plants operated at 93% of capacity in 2002, compared with 90% in 2001.
Shipments of SHEETROCK(R) brand joint compounds and DUROCK(R) brand cement board
also set records in 2002 and were up 3% and 5%, respectively, from prior-year
levels. Operating profit for U.S. Gypsum increased significantly in 2002
primarily due to the higher wallboard selling prices and increased level of
shipments. Manufacturing costs in 2002 for SHEETROCK(R) brand gypsum wallboard
declined versus 2001 primarily due to lower energy costs, partially offset by
higher prices for wastepaper, the primary raw material of wallboard paper.
The gypsum business of Canada-based CGC Inc. ("CGC") reported increases of
18% in 2003 for both net sales and operating profit. These results were
primarily attributable to increased shipments of SHEETROCK(R) brand gypsum
wallboard and a stronger Canadian dollar.
Comparing 2002 with 2001, net sales and operating profit for CGC were up 6%
and 17%, respectively, primarily reflecting increased shipments of SHEETROCK(R)
brand gypsum wallboard and joint compounds and higher selling prices for joint
compounds. Operating profit in 2002 also benefited from lower raw materials
costs.
WORLDWIDE CEILINGS
Net sales of $607 million in 2003 were down slightly from $610 million in 2002,
while operating profit of $39 million increased $10 million, or 34%. However, as
explained below, operating profit in 2002 included a fourth quarter $11 million
charge for the downsizing of European operations.
Net sales for USG Interiors, Inc. ("USG Interiors"), the Corporation's
domestic ceilings business, were down 1% in 2003 versus 2002 as lower shipments
of ceiling tile and grid were offset to a large extent by improved pricing for
most of the company's ceiling product lines. A 16% decline in USG Interiors'
operating profit primarily reflected increases in the costs of natural gas,
steel and employee benefits. Due to strong demand for steel in China, Japan and
other non-U.S. markets, reduced production of steel in North America and Europe,
and a severe shortage of raw material used in the production of pig iron, it is
possible that USG Interiors could experience shortages of steel used for the
manufacture of ceiling grid in 2004. For 2004, USG Interiors is implementing new
marketing and distribution policies to improve profitability.
During 2003, improved profitability was reported for USG International
following the shutdown of the Aubange, Belgium, plant and other downsizing
activities in the fourth quarter of 2002.
Comparing 2002 with 2001, net sales of $610 million and operating profit of
$29 million for the
16
Worldwide Ceilings segment were down 8% and 12%, respectively. Net sales for USG
Interiors were down 5% from 2001 primarily due to lower industry demand for
commercial ceilings products in both the United States and Europe. As a result,
domestic shipments of ceiling tile and grid and export shipments of ceiling tile
were down in 2002. However, operating profit for USG Interiors increased to $37
million from $34 million in 2001 primarily due to lower costs. Cost reductions
resulted from lower energy and raw materials costs and from the closure of a
high-cost ceiling tile production line in the fourth quarter of 2001.
Net sales in 2002 for USG International were down 16% from 2001 primarily
due to lower demand for ceiling tile and grid in Europe. USG International
reported an operating loss of $13 million in 2002, compared with an operating
loss of $6 million in 2001. The operating loss in 2002 included an $11 million
charge recorded in the fourth quarter related to management's decision to shut
down the Aubange, Belgium, ceiling tile plant and other downsizing activities
that addressed 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 more than 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.
BUILDING PRODUCTS DISTRIBUTION
L&W Supply, the leading specialty building products distribution business in the
United States, reported net sales of $1,295 million and operating profit of $53
million, representing increases of 8% and 4%, respectively, versus 2002. These
increases reflected record shipments of gypsum wallboard and complementary
building products, primarily drywall metal, joint compound, roofing and ceilings
products. Shipments of gypsum wallboard by L&W Supply were up 8%, while selling
prices declined 1% compared with 2002.
In 2002, L&W Supply reported net sales of $1,200 million, a 4% increase
from 2001. The higher level of sales primarily reflected higher selling prices
(up 5%) and increased shipments (up 2%) for gypsum wallboard. In addition, sales
of complementary building products increased 2%. However, operating profit of
$51 million fell 20% primarily due to higher gypsum wallboard unit costs (up
11%), which more than offset the increases in prices and shipments. L&W Supply's
gypsum wallboard margin declined as gypsum manufacturers' higher selling prices
to L&W Supply were not fully passed on to its customers.
L&W Supply remains focused on opportunities to profitably grow its
specialty business, as well as opportunities to reduce costs and optimize asset
utilization. As part of its plan, L&W Supply opened or acquired eight locations
and closed or consolidated six locations during 2003, leaving a total of 183
locations in the United States as of December 31, 2003, compared with 181 and
180 locations as of December 31, 2002 and 2001, respectively.
MARKET CONDITIONS AND OUTLOOK
Industry shipments of gypsum wallboard in the United States were an estimated
32.5 billion square feet in 2003, an all-time record and a 6% increase from 30.7
billion square feet in 2002. The new housing market continued to be strong in
2003. Based on preliminary data issued by the U.S. Bureau of the Census, U.S.
housing starts in 2003 were an estimated 1.848 million units, compared with
actual housing starts of 1.705 million units in 2002 and 1.603 million units in
2001.
The repair and remodel market accounts for the second-largest portion of
the Corporation's sales, behind new housing construction. Because many buyers
begin to remodel an existing home within two years of purchase, opportunity from
the repair and remodel market in 2003 was solid, as sales of existing homes in
2003 and 2002 remained at historically high levels.
The growth in new housing and a strong level of residential remodeling
resulted in the record shipments of gypsum wallboard described above. However,
despite the favorable levels of activity in these two markets, which together
account for nearly two-thirds of all demand for gypsum wallboard, and increased
operating rates in the gypsum industry for the second half of 2003, selling
prices for gypsum wallboard remained relatively unchanged primarily due to
excess capacity.
Future demand for the Corporation's products from new nonresidential
construction is determined by floor space for which contracts are signed.
Installation of gypsum and ceilings products follows signing of construction
contracts by about a year. Current
17
information indicates that floor space for which contracts were signed was at
historically low levels in both 2003 and 2002 as commercial construction has
been affected by reduced corporate earnings, resulting in lower investments in
office and other commercial space.
The outlook for the Corporation's markets in 2004 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. Industry utilization
rates are expected to remain in the upper-80% range. Nonresidential
construction, the principal market for the Corporation's ceilings 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
margin pressures such as higher prices for natural gas and raw materials and
increased employee benefits and insurance 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
LIQUIDITY
As of December 31, 2003, the Corporation had $947 million of cash, cash
equivalents, restricted cash and marketable securities, of which $211 million of
cash and cash equivalents was held by non-Debtor subsidiaries. The total amount
of $947 million was up $117 million, or 14%, from $830 million as of December
31, 2002. These high levels of liquidity were generated by strong operating cash
flows and the absence of cash payments related to asbestos settlements and
interest on pre-petition debt since the Petition Date. Contractual interest
expense not accrued or recorded on pre-petition debt was $71 million in 2003.
In July 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. In June 2003, the Corporation
terminated the DIP Facility. This action was 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.
CASH FLOWS
As shown on the consolidated statement of cash flows, cash and cash equivalents
increased $51 million during 2003. The primary source of cash in 2003 was
earnings from operations. Primary uses of cash were capital spending of $111
million, working capital of $76 million and net purchases of marketable
securities of $59 million. An additional $20 million was used to acquire several
businesses, and $7 million was designated as restricted cash representing cash
collateral to support outstanding letters of credit.
Comparing 2003 with 2002, net cash provided by operating activities
decreased to $249 million from $445 million primarily due the absence in 2003 of
a federal income tax refund received in 2002 and the impact of a higher level of
accrued employee incentive compensation in 2002. Net cash used for investing
activities decreased to $191 million from $289 million due to lower net
purchases of marketable securities in 2003. Net cash used for financing
activities increased by $7 million due to the aforementioned designation of
restricted cash.
CAPITAL EXPENDITURES
Capital spending amounted to $111 million in 2003, compared with $100 million in
2002. As of December 31, 2003, remaining capital expenditure commitments for the
replacement, modernization and expansion of operations amounted to $95 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.
18
WORKING CAPITAL
Total working capital (current assets less current liabilities) as of December
31, 2003, amounted to $1,084 million, and the ratio of current assets to current
liabilities was 3.62-to-1. As of December 31, 2002, working capital amounted to
$939 million, and the ratio of current assets to current liabilities was
3.14-to-1.
Receivables increased to $321 million as of December 31, 2003, from $284
million as of December 31, 2002, primarily reflecting a 14% increase in net
sales for the month of December 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 $280 million from $270 million, and
accounts payable increased to $202 million from $170 million. Accrued expenses
declined to $206 million from $243 million as of December 31, 2002, primarily
due to a lower level of accruals for employee incentive compensation.
MARKETABLE SECURITIES
As of December 31, 2003, $240 million was invested in marketable securities, up
$59 million from $181 million as of December 31, 2002. Of the year-end 2003
amount, $176 million was invested 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 loss on the consolidated balance
sheet.
LETTERS OF CREDIT
In June 2003, the Corporation entered into a three-year, $100 million credit
agreement with LaSalle Bank N.A. (the "LaSalle Facility") to be used exclusively
to support the issuance of letters of credit needed to support business
operations. As of December 31, 2003, $6 million of letters of credit, which are
cash collateralized at 103%, were outstanding.
As of December 31, 2003, $1 million of standby letters of credit remained
outstanding under the DIP Facility. Following the termination of the DIP
Facility in June 2003, 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.
As of December 31, 2003, a total of $7 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.
DEBT
As of December 31, 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.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
CONTRACTUAL OBLIGATIONS
The following table summarizes the Corporation's commitments to make future
payments under certain contractual obligations as of December 31, 2003. Purchase
obligations primarily consist of contracts to purchase energy and certain raw
materials. Other long-term liabilities primarily consist of asset retirement
obligations as required under SFAS No. 143. The table excludes liabilities
related to retiree health care and life insurance benefits and $2,243 million of
liabilities subject to compromise because it is not certain when these
liabilities will become due. See Part II, Item 8. Note 2. Voluntary
Reorganization Under Chapter 11 for additional information on liabilities
subject to compromise.
Payments Due by Period
-------------------------------------
2005- 2007- There-
(millions) Total 2004 2006 2008 after
-------------------------------------
Debt obligations (a) 2 1 1 - -
Operating leases 248 67 106 47 28
Purchase obligations 502 95 263 88 56
Other long-term
liabilities (b) 283 7 8 7 261
-----------------------------------
Total 1,035 170 378 142 345
===================================
(a) The Corporation has an additional $1,005 million of debt classified under
liabilities subject to compromise.
(b) Principally, asset retirement obligations extend over a 50-year period. The
majority of associated payments are due toward the latter part of that
period
The Corporation's defined benefit pension plans have no minimum funding
requirements under the
19
Employee Retirement Income Security Act of 1974 ("ERISA"). In accordance with
the Corporation's funding policy, the Corporation expects to contribute cash of
approximately $60 million to the U.S. pension plan trust in 2004.
The Corporation voluntarily provides retiree health care and life insurance
benefits for all eligible employees and retirees. The portion of benefit claim
payments made by the Corporation in 2003 was $11 million. The Corporation
expects to experience cost trends in the future that are comparable to those of
the past few years.
As of December 31, 2003, purchase obligations, as defined by SFAS No. 47,
"Disclosure of Long-Term Obligations," were immaterial.
OFF-BALANCE-SHEET ARRANGEMENTS
With the exception of letters of credit, it is not the Corporation's general
business practice to use off-balance-sheet arrangements, such as third-party
special-purpose entities, or to issue guarantees to third parties.
As of December 31, 2003, the Corporation had outstanding letters of credit
of $6 million under the LaSalle Facility and $1 million under the DIP Facility.
The Corporation had an additional $97 million of outstanding letters of
credit under a pre-petition revolving credit facility provided by a syndicate of
lenders led by JPMorgan Chase Bank (formerly The Chase Manhattan Bank). To the
extent that any of these letters of credit are drawn, JPMorgan Chase Bank would
assert a pre-petition claim in a corresponding amount against the Corporation in
the bankruptcy proceeding.
OTHER MATTERS
LEGAL CONTINGENCIES
As a result of the Filing, all pending asbestos lawsuits against the Debtors are
stayed, and no party may take any action to pursue or collect on such asbestos
claims absent specific authorization of the Bankruptcy Court. See Part II, Item
8. Note 20. Litigation for additional information on the background of asbestos
litigation, developments in the Corporation's reorganization proceeding and
estimated cost.
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 financial position, cash flows or
results of operations. See Part II, Item 8. Note 20. Litigation for additional
information on environmental litigation.
CRITICAL ACCOUNTING POLICIES
The Corporation's consolidated financial statements are prepared in conformity
with accounting policies generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the periods presented. The following
is a summary of the accounting policies the Corporation believes are the most
important to aid in understanding its financial results.
Voluntary Reorganization Under Chapter 11: As a result of the Filing, the
Corporation's consolidated financial statements reflect the provisions of SOP
90-7 and are prepared on a going-concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. However, because of the Filing, such realization of assets
and liquidation of liabilities, without substantial adjustments and/or changes
of ownership, are subject to uncertainty. Given this uncertainty, there is
substantial doubt about the Corporation's ability to continue as a going
concern. Such doubt includes, but is not limited to, a possible change in
control of the Corporation, as well as a potential change in the composition of
the Corporation's business portfolio. While operating as debtors-in-possession
under the protection of Chapter 11 of the Bankruptcy Code and subject to
Bankruptcy Court approval or otherwise as permitted in the ordinary course of
business, the Debtors, or any of them, may sell or otherwise dispose of assets
and liquidate or settle liabilities for amounts other than those reflected in
the consolidated financial statements. Further, a plan of reorganization could
materially change the amounts and classifications in the historical consolidated
financial statements.
One of the key provisions of SOP 90-7 requires the reporting of the
Debtors' liabilities incurred prior to the
20
commencement of the Chapter 11 Cases as liabilities subject to compromise. The
various liabilities that are subject to compromise include U.S. Gypsum's
asbestos reserve and the Debtors' pre-petition debt, accounts payable, accrued
expenses and other long-term liabilities. The amounts for these items represent
the Debtors' estimate of known or potential pre-petition claims to be resolved
in connection with the Chapter 11 Cases. Such claims remain subject to future
adjustments. Adjustments may result from (i) negotiations, (ii) actions of the
Bankruptcy Court, (iii) further developments with respect to disputed claims,
(iv) rejection of executory contracts and unexpired leases, (v) the
determination as to the value of any collateral securing claims, (vi) proofs of
claim, including unaccrued and unrecorded post-petition interest expense, (vii)
effect of any legislation which may be enacted or (viii) other events. In
particular, the amount of the asbestos reserve reflects U.S. Gypsum's
pre-petition estimate of liability associated with asbestos claims to be filed
in the tort system through 2003, and this liability, including liability for
post-2003 claims, is the subject of significant legal proceedings and
negotiation in the Chapter 11 Cases.
Other provisions of SOP 90-7 involve interest expense and interest income.
Interest expense on debt classified as liabilities subject to compromise is not
accrued or recorded. Interest income on cash accumulated during the bankruptcy
process to settle claims under a plan of reorganization is netted against
chapter 11 reorganization expenses.
See Part II, Item 8. Note 2. Voluntary Reorganization Under Chapter 11 for
additional information related to the Filing.
Asbestos Liability: In evaluating U.S. Gypsum's estimated asbestos liability
prior to the Filing, the Corporation considered numerous uncertainties that made
it difficult to estimate reliably U.S. Gypsum's asbestos liability in the tort
system for both pending and future asbestos claims.
In the Property Damage Cases (as defined in Part II, Item 8. Note 20.
Litigation), such uncertainties included, but were not limited to, the
identification and volume of asbestos-containing products in the buildings at
issue in each case, which is often disputed; the claimed damages; the viability
of statute of limitations and other defenses; the amount for which such cases
can be resolved, which normally (but not uniformly) has been substantially lower
than the claimed damages; and the viability of claims for punitive and other
forms of multiple damages.
Uncertainties in the Personal Injury Cases (as defined in Part II, Item 8.
Note 20. Litigation) included, but were not limited to, the number, disease,
age, and occupational characteristics of claimants in the Personal Injury Cases;
the jurisdiction and venue in which such cases are filed; the viability of
claims for conspiracy or punitive damages; the elimination of indemnity sharing
among members of the Center for Claims Resolution (the "Center") for future
settlements and its negative impact on U.S. Gypsum's ability to continue to
resolve claims at historical or acceptable levels; the adverse impact on U.S.
Gypsum's settlement costs of 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.
In 2000, an independent actuarial study of U.S. Gypsum's current and
potential future asbestos liabilities was completed. This analysis was based on
the assumption that U.S. Gypsum's asbestos liability would continue to be
resolved in the tort system.
As part of this analysis, the Corporation reviewed, among other things, the
factors listed above as well as 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 viability of, the Long-Term
Settlements (as defined in Part II, Item 8. Note 20. Litigation); anticipated
trends in recruitment
21
by plaintiffs' law firms of non-malignant or unimpaired claimants; future
defense costs; and 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. The study
attempted to weigh relevant variables and assess the impact of likely outcomes
on future case filings and settlement costs.
Based upon the results of the actuarial study, the Corporation determined
that, although substantial uncertainty remained, it was probable that asbestos
claims 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.
These amounts are stated before tax benefit and are not discounted to present
value. Less than 10 percent of the reserve is attributable to defense and
administrative costs. The reserve as of December 31, 2003, was $1,061 million.
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 in the tort system historically have 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.
The Corporation believes that, as a result of the Filing and activities
relating to potential federal legislation addressing asbestos personal injury
claims, there is 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: (i) how
the Long-Term Settlements will be treated in the bankruptcy proceeding and plan
of reorganization and whether those settlements will be set aside; (ii) the
number of asbestos claims that will be filed or addressed in the proceeding;
(iii) the number of future claims that will be estimated in connection with
preparing a plan of reorganization; (iv) 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 or compensated; (v) the impact
historical settlement values for asbestos claims may have on the estimation of
asbestos liability in the bankruptcy proceeding; (vi) the results of any
litigation proceedings in the Chapter 11 Cases regarding the estimated value of
present and future asbestos personal injury claims alleging cancer or other
diseases; (vii) the treatment of asbestos property damage claims in the
bankruptcy proceeding; and (viii) 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. As the
Chapter 11 Cases proceed, and the issues relating to estimation of the Debtors'
asbestos liabilities are addressed, the Debtors likely will gain more
information from which a reasonable estimate of the Debtors' probable liability
for present and future asbestos claims can be determined. If such estimate
differs from the existing reserve, the reserve will be adjusted, and it is
possible that a charge to results of operations will be necessary at that time.
In such a case, the Debtors' asbestos liability could vary significantly from
the recorded estimate of liability and could be greater than the high end of the
range estimated in 2000. This difference could be material to the Corporation's
financial position, cash flows and results of operations in the period recorded.
See Part II, Item 8. Note 20. Litigation for additional information on the
background of asbestos litigation and developments in the Corporation's
reorganization proceeding.
Self-Insurance Reserves: The Corporation purchases insurance from third parties
for workers' compensation,
22
automobile, product and general liability claims that exceed certain levels.
However, the Corporation is responsible for the payment of claims up to such
levels. In estimating the obligation associated with incurred and incurred but
not reported losses, the Corporation utilizes estimates prepared by actuarial
consultants. These estimates utilize the Corporation's historical data to
project the future development of losses. The Corporation monitors and reviews
all estimates and related assumptions for reasonableness. Loss estimates are
adjusted based upon actual claims settlements and reported claims.
Revenue Recognition: Revenue is recognized upon the shipment of products to
customers, which is when title and risk of loss is transferred to customers. The
Corporation believes this is the appropriate point of revenue recognition as the
Corporation has no further performance obligations unless the customer notifies
the Corporation of shortage of products or defective products shipped within
five days after receipt of such products. The Corporation's products are shipped
free on board ("FOB") shipping point. Provisions for discounts to customers are
recorded based on the terms of sale in the same period the related sales are
recorded. The Corporation also records estimated reductions to revenue for
shortage of products or defective products, customer programs and incentive
offerings, including promotions and other volume-based incentives, based on
historical information and review of major customer activity.
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 II, Item 8. Note 14. Asset
Retirement Obligations for additional information related to the impact of this
change in accounting principle.
RECENT ACCOUNTING PRONOUNCEMENTS
See Part II, Item 8. Note 1. Significant Accounting Policies for information on
the impact of recent accounting pronouncements on the Corporation.
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, including the possible
impact of any asbestos-related legislation, may differ from management's
expectations. Actual business or other conditions may also differ 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 materials and energy costs; and the unpredictable
effects of acts of terrorism or war upon domestic and international economies
and financial markets. The Corporation assumes no obligation to update any
forward-looking information contained in this report.
23
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
In the normal course of business, the Corporation uses financial instruments,
including fixed and variable rate debt, to finance its operations. In addition,
the Corporation uses derivative instruments from time to time to manage selected
commodity price and foreign currency exposures. The Corporation does not use
derivative instruments for trading purposes.
INTEREST RATE RISK
The Corporation has interest rate risk with respect to the fair market value of
its marketable securities portfolio. Derivative instruments are used to enhance
the liquidity of the marketable securities portfolio. The Corporation's $240
million of marketable securities consist of debt instruments that generate
interest income for the Corporation on excess cash balances generated during the
Corporation's chapter 11 bankruptcy proceeding. A portion of these instruments
contain embedded derivative features that enhance the liquidity of the portfolio
by enabling the Corporation to liquidate the instrument prior to the stated
maturity date, thus shortening the average duration of the portfolio to less
than one year. Based on results of a sensitivity analysis, which may differ from
actual results, the Corporation's exposure to interest rate fluctuations is not
material.
COMMODITY PRICE RISK
The Corporation uses swap contracts to manage its exposure to fluctuations in
commodity prices associated with anticipated purchases of natural gas. A
sensitivity analysis was prepared to estimate the potential change in the fair
value of the Corporation's natural gas swap contracts assuming a hypothetical
10% change in market prices. Based on results of this analysis, which may differ
from actual results, the potential change in the fair value of the Corporation's
natural gas swap contracts is $16 million. This analysis does not consider the
underlying exposure.
FOREIGN CURRENCY EXCHANGE RISK
The Corporation has operations in a number of countries and uses forward
contracts from time to time to hedge selected risk of changes in cash flows
resulting from forecasted intercompany and third-party sales or purchases
denominated in non-U.S. currencies. As of December 31, 2003, the Corporation had
no outstanding forward contracts.
See Part II, Item 8. Note 1. Significant Accounting Policies and Note 12.
Derivative Instruments for additional information on the Corporation's financial
exposures.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
CONSOLIDATED FINANCIAL STATEMENTS:
Statements of Earnings 26
Balance Sheets 27
Statements of Cash Flows 28
Statements of Stockholders' Equity 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
1. Significant Accounting Policies 30
2. Voluntary Reorganization Under Chapter 11 33
3. Exit Activities 42
4. Earnings Per Share 43
5. Common Stock 43
6. Marketable Securities 44
7. Inventories 44
8. Property, Plant and Equipment 44
9. Goodwill and Other Intangible Assets 45
10. Accrued Expenses 45
11. Debt 46
12. Derivative Instruments 46
13. Accumulated Other Comprehensive Loss 47
14. Asset Retirement Obligations 47
15. Employee Retirement Plans 47
16. Stock-Based Compensation 50
17. Income Taxes 51
18. Segments 52
19. Commitments and Contingencies 53
20. Litigation 53
Report of Management 60
Report of Independent Public Accountants 61
Selected Quarterly Financial Data 64
Five-Year Summary 65
Schedule II - Valuation and Qualifying Accounts 66
All other schedules have been omitted because they are not required or
applicable, or the information is included in the consolidated financial
statements or notes thereto.
25
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(millions, except per-share data) Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Net sales $3,666 $3,468 $3,296
Cost of products sold 3,121 2,884 2,882
Selling and administrative expenses 324 312 279
Chapter 11 reorganization expenses 11 14 12
Provisions for impairment and restructuring - - 33
- ---------------------------------------------------------------------------------------------------------------
Operating profit 210 258 90
Interest expense 6 8 33
Interest income (4) (4) (5)
Other (income) expense, net (9) (2) 10
- ---------------------------------------------------------------------------------------------------------------
Earnings before income taxes and cumulative
effect of accounting change 217 256 52
Income taxes 79 117 36
- ---------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change 138 139 16
Cumulative effect of accounting change (16) (96) -
- ---------------------------------------------------------------------------------------------------------------
Net earnings 122 43 16
===============================================================================================================
Net Earnings Per Common Share:
Basic and diluted before cumulative effect of accounting change 3.19 3.22 0.36
Cumulative effect of accounting change (0.37) (2.22) -
- ---------------------------------------------------------------------------------------------------------------
Basic and diluted 2.82 1.00 0.36
===============================================================================================================
The notes to consolidated financial statements are an integral part of these
statements.
26
USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions, except share data) As of December 31,
- ---------------------------------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 700 $ 649
Short-term marketable securities 64 50
Restricted cash 7 -
Receivables (net of reserves of $15 and $17) 321 284
Inventories 280 270
Income taxes receivable 26 14
Deferred income taxes 43 33
Other current assets 57 77
- ---------------------------------------------------------------------------------------------------------------
Total current assets 1,498 1,377
- ---------------------------------------------------------------------------------------------------------------
Long-term marketable securities 176 131
Property, plant and equipment, net 1,818 1,788
Deferred income taxes 178 234
Goodwill 39 30
Other assets 90 76
- ---------------------------------------------------------------------------------------------------------------
Total assets 3,799 3,636
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 202 170
Accrued expenses 206 243
Current portion of long-term debt 1 -
Income taxes payable 5 25
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 414 438
- ---------------------------------------------------------------------------------------------------------------
Long-term debt 1 2
Deferred income taxes 23 19
Other liabilities 429 370
Liabilities subject to compromise 2,243 2,272
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $1 par value; authorized 36,000,000 shares; $1.80
convertible preferred stock (initial series);
outstanding - none - -
Common stock - $0.10 par value; authorized 200,000,000 shares;
outstanding - 43,049,917 and 43,238,341 shares (after
deducting 6,935,305 and 6,746,881 shares held in treasury) 5 5
Treasury stock (258) (257)
Capital received in excess of par value 414 412
Accumulated other comprehensive loss (1) (32)
Retained earnings 529 407
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 689 535
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 3,799 3,636
===============================================================================================================
The notes to consolidated financial statements are an integral part of these
statements.
27
USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions) Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 122 $ 43 $ 16
Adjustments to Reconcile Net Earnings to Net Cash:
Cumulative effect of accounting change 16 96 -
Provisions for impairment and restructuring - - 33
Depreciation, depletion and amortization 112 106 107
Deferred income taxes 59 67 134
(Increase) Decrease in Working Capital:
Receivables (34) (9) 32
Income taxes receivable (12) 62 (76)
Inventories (5) (15) 17
Payables 12 54 82
Accrued expenses (37) 65 2
Increase in other assets (25) (7) (11)
Increase in other liabilities 53 2 16
Change in asbestos receivable and reserve 19 22 (90)
Decrease in liabilities subject to compromise (29) (39) (58)
Other, net (2) (2) 33
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 249 445 237
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (111) (100) (109)
Purchases of marketable securities (256) (237) -
Sale or maturities of marketable securities 194 56 -
Net proceeds from asset dispositions 2 2 1
Acquisitions of businesses (20) (10) -
- ---------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (191) (289) (108)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deposit of restricted cash (7) - -
Issuance of debt - - 262
Repayment of debt - - (131)
Short-term borrowings, net - - 164
Cash dividends paid - - (1)
- ---------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (7) - 294
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 51 156 423
Cash and cash equivalents at beginning of period 649 493 70
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 700 649 493
===============================================================================================================
Supplemental Cash Flow Disclosures:
Interest paid 2 2 31
Income taxes paid (refunded), net 19 (39) (17)
The notes to consolidated financial statements are an integral part of these
statements.
28
USG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital
Received Accumulated
Common Treasury in Excess Other
Shares Shares Common Treasury of Par Retained Comprehensive
(millions, except share data) (000) (000) Stock Stock Value Earnings Loss Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 43,401 (6,584) $ 5 $(256) $ 411 $ 349 $ (45) $ 464
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net earnings 16 16
Foreign currency translation (2) (2)
Gain on derivatives, net
of tax of $10 16 16
-----
Total comprehensive income 30
Cash dividends paid (1) (1)
Stock issuances 156 4 (3) 1
Other (100) (3) (3)
Net change in treasury stock 56 -
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 43,457 (6,528) 5 (255) 408 364 (31) 491
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net earnings 43 43
Foreign currency translation 8 8
Gain on derivatives, net
of tax of $1 2 2
Minimum pension liability,
net of tax benefit of $7 (11) (11)
-----
Total comprehensive income 42
Stock issuances 4 -
Other (223) (2) 4 2
Net change in treasury stock (219) -
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 43,238 (6,747) 5 (257) 412 407 (32) 535
==================================================================================================================================
Comprehensive Income:
Net earnings 122 122
Foreign currency translation 31 31
Loss on derivatives, net (8) (8)
of tax benefit of $5
Minimum pension liability,
net of tax of $6 8 8
-----
Total comprehensive income 153
Stock issuances 25 -
Other (213) (1) 2 1
Net change in treasury stock (188) -
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 43,050 (6,935) 5 (258) 414 529 (1) 689
==================================================================================================================================
The notes to consolidated financial statements are an integral part of these
statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Through its subsidiaries, USG Corporation (the "Corporation") is a leading
manufacturer and distributor of building materials, producing a wide range of
products for use in new residential, new nonresidential, and repair and remodel
construction as well as products used in certain industrial processes. The
Corporation's operations are organized into three operating segments: North
American Gypsum, which manufactures SHEETROCK(R) brand gypsum wallboard and
related products in the United States, Canada and Mexico; Worldwide Ceilings,
which manufactures ceiling tile in the United States and ceiling grid in the
United States, Canada, Europe and the Asia-Pacific region; and Building Products
Distribution, which distributes gypsum wallboard, drywall metal, ceilings
products, joint compound and other building products throughout the United
States. The Corporation's products also are distributed through building
materials dealers, home improvement centers and other retailers, specialty
wallboard distributors and contractors.
CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries. Subsidiaries in which the Corporation has
less than a 50% ownership interest are accounted for on the equity basis of
accounting. All significant intercompany balances and transactions are
eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets, liabilities, revenues and
expenses. Actual results could differ from these estimates.
FOREIGN CURRENCY TRANSLATION
Foreign-currency-denominated assets and liabilities are translated into U.S.
dollars at the exchange rates existing as of the respective balance sheet dates.
Translation adjustments resulting from fluctuations in exchange rates are
recorded to accumulated other comprehensive loss on the consolidated balance
sheets. Income and expense items are translated at the average exchange rates
during the respective periods. The aggregate transaction (gain) loss included in
other (income) expense, net was $(8) million, $(2) million and $9 million in
2003, 2002 and 2001, respectively.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements and notes
thereto have been reclassified to conform with the 2003 presentation.
REVENUE RECOGNITION
Revenue is recognized upon the shipment of products to customers, which is when
title and risk of loss is transferred to customers. Provisions for discounts to
customers are recorded based on the terms of sale in the same period the related
sales are recorded. The Corporation records estimated reductions to revenue for
customer programs and incentive offerings, including promotions and other
volume-based incentives. The Corporation's products are generally shipped free
on board ("FOB") shipping point.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of products sold.
ADVERTISING
Advertising expenses consist of media advertising and related production costs.
Advertising expenses are charged to earnings as incurred and amounted to $16
million, $14 million and $14 million in the years ended December 31, 2003, 2002
and 2001, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to earnings as incurred and
amounted to $18 million, $17 million and $15 million in the years ended December
31, 2003, 2002 and 2001, respectively.
INCOME TAXES
The Corporation accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. Tax provisions include estimates of amounts
that are currently payable, plus changes in deferred tax assets and liabilities.
30
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with original
maturities of three months or less.
MARKETABLE SECURITIES
The Corporation invests in marketable securities with maturities greater than
three months. These securities are listed as either short-term or long-term
marketable securities on the consolidated balance sheets based on their
maturities being less than or greater than one year. The securities are
classified as available-for-sale securities and reported at fair market value
with unrealized gains and losses excluded from earnings and recorded to
accumulated other comprehensive loss. Realized gains and losses were not
material in 2003.
INVENTORY VALUATION
All of the Corporation's inventories are stated at the lower of cost or market.
Most of the Corporation's inventories in the United States are valued under the
last-in, first-out ("LIFO") cost method. The remaining inventories are valued
under the first-in, first-out ("FIFO") or average production cost methods.
Inventories include material, labor and applicable factory overhead costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, except for those assets that
were revalued under fresh start accounting in May 1993. Provisions for
depreciation of property, plant and equipment are determined principally on a
straight-line basis over the expected average useful lives of composite asset
groups. Estimated useful lives are determined to be 50 years for buildings and
improvements and a range of 10 years to 25 years for machinery and equipment.
Depletion is computed on a basis calculated to spread the cost of gypsum and
other applicable resources over the estimated quantities of material
recoverable.
LONG-LIVED ASSETS
Long-lived assets include property, plant and equipment, goodwill (the excess of
cost over the fair value of net assets acquired) and other intangible assets.
The Corporation periodically reviews its long-lived assets for impairment by
comparing the carrying value of the assets with their estimated future
undiscounted cash flows or fair value, as appropriate. If impairment is
determined, the asset is written down to estimated fair value.
STOCK-BASED COMPENSATION
The Corporation accounts for stock-based compensation under the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." APB No. 25 prescribes the use of the intrinsic value method,
which measures compensation cost as the quoted market price of the stock at the
date of grant less the amount, if any, that the employee is required to pay. The
Corporation discloses the pro forma effects on net earnings and earnings per
share as if stock-based compensation had been recognized based on the estimated
fair value at the date of grant for options awarded. See Note 16. Stock-Based
Compensation for the Corporation's table on pro forma net earnings and earnings
per share assuming the fair value method of accounting for stock-based
compensation had been used.
DERIVATIVE INSTRUMENTS
The Corporation uses derivative instruments to manage selected commodity price
and foreign currency exposures. The Corporation does not use derivative
instruments for trading purposes. All derivative instruments must be recorded on
the balance sheet at fair value. For derivatives designated as fair value
hedges, the changes in the fair values of both the derivative instrument and the
hedged item are recognized in earnings in the current period. For derivatives
designated as cash flow hedges, the effective portion of changes in the fair
value of the derivative is recorded to accumulated other comprehensive loss and
is reclassified to earnings when the underlying transaction has an impact on
earnings. The ineffective portion of changes in the fair value of the derivative
is reported in cost of products sold. The amount of ineffectiveness was not
material to the financial statements.
31
Commodity Derivative Instruments: The Corporation uses swap contracts to hedge
anticipated purchases of natural gas to be used in its manufacturing 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 loss until the hedged transaction occurs, at
which time it is reclassified to earnings.
Foreign Exchange Derivative Instruments: The Corporation has operations in a
number of countries and uses forward contracts from time to time to hedge
selected risk of changes in cash flows resulting from forecasted intercompany
and third-party sales or purchases denominated in non-U.S. currencies. These
contracts are generally designated as cash flow hedges, for which changes in
fair value are recorded to accumulated other comprehensive loss until the
underlying transaction has an impact on earnings.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits," was
adopted by the Corporation in December 2003. This revised standard applies to
public entities' U.S. plans for fiscal years ending after December 15, 2003,
except for the disclosure of expected future benefits payments, which becomes
effective for fiscal years ending after June 15, 2004. Disclosure requirements
pertaining to public entities' non-U.S. plans generally become effective for
fiscal years ending after June 15, 2004. See Note 15. Employee Retirement Plans
for more information on this standard.
SFAS No. 143, "Accounting for Asset Retirement Obligations," was adopted by
the Corporation on January 1, 2003. This standard requires the accruing of the
fair value of a liability for an asset retirement obligation in the period in
which the asset is acquired. 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. See Note 14. Asset Retirement Obligations for more information
on this standard.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," requires costs associated with exit or disposal activities to be
recognized at fair value when the costs are incurred, rather than at a date of
commitment to an exit or disposal plan. This standard became effective for exit
and disposal activities initiated on or after January 1, 2003. This standard did
not have a material impact on the Corporation's financial position, cash flows
or results of operations.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," amended SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value method of accounting for stock-based compensation. This
standard also amended disclosure provisions to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Corporation adopted the disclosure provisions of SFAS No. 148 on an annual
basis effective December 31, 2002, and on an interim basis effective March 31,
2003.
SFAS No. 149, "Amendment of SFAS No. 133, Derivative Instruments and
Hedging Activities," amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133. This standard, which became effective for the
Corporation on June 30, 2003, did not have an impact on the Corporation's
financial position, cash flows or results of operations.
SFAS No. 150, "Accounting for Certain Instruments with Characteristics of
Both Liabilities and Equity," establishes how an issuer classifies and measures
certain free-standing financial instruments with characteristics of liabilities
and equity and requires that such instruments be classified as liabilities. The
standard became effective for financial instruments entered into or modified
after May 31, 2003. The adoption of SFAS No. 150 did not have an impact on the
Corporation's financial position, cash flows or results of operations.
Financial Accounting Standards Board ("FASB") Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," requires a guarantor
to recognize a liability in some instances and disclosure only in others. The
recognition and initial measurement provisions are effective for guarantees
issued or modified after December 31, 2002. The adoption of FIN 45 did not have
a material impact on the Corporation's financial position, cash flows or results
32
of operations.
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities," was issued in January 2003 and subsequently revised in December 2003.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
FIN 46 were effective for fiscal years ending after December 15, 2003. Because
the Corporation has not invested in any entities it believes are variable
interest entities, the adoption of FIN 46 did not have an impact on the
Corporation's financial position, cash flows or results of operations.
FASB Emerging Issues Task Force No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,"
requires that investors should disclose, in addition to the disclosures already
required by SFAS No. 115 and SFAS No. 124, the aggregate amount of unrealized
losses, aggregate related fair value of investments with unrealized loss and
certain qualitative disclosures. This pronouncement was required to be applied
to financial statements for fiscal years ending after December 15, 2003, and has
been adopted by the Corporation.
FASB Staff Position ("FSP") No. 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," was issued by the FASB in January 2004. This FSP
provides companies with initial guidance on recognizing the effects of the
prescription drug provisions of the Medicare Act. As allowed by the FSP, the
Corporation elected to defer recognition until further guidance is issued by the
FASB. See Note 15. Employee Retirement Plans for more information on this FSP.
2. VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), 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"). 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.
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.
The background of asbestos litigation, developments in the Corporation's
reorganization proceeding and estimated cost are discussed in Note 20.
Litigation.
CONSEQUENCES OF THE FILING
As a consequence of the Filing, all asbestos lawsuits and other lawsuits pending
against the Debtors as of the Petition Date are stayed, and no party may take
any action to pursue or collect pre-petition claims except pursuant to an order
of the Bankruptcy Court. Since the Filing, the Debtors have ceased making both
cash payments and accruals with respect to asbestos lawsuits, including cash
payments and accruals pursuant to settlements of asbestos lawsuits. The Debtors
are operating their businesses without interruption as debtors-in-possession
subject to the provisions of the Bankruptcy Code, and vendors are being paid for
goods furnished and services provided after the Filing.
The Debtors intend to address their liability for all present and future
asbestos claims, as well as all other pre-petition claims, in a plan or plans of
reorganization approved by the Bankruptcy Court. 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 Debtors' Chapter 11 Cases, along with four other asbestos-related
bankruptcy proceedings pending in the federal courts in the District of
Delaware, have been 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.
Other bankruptcy issues in the Chapter 11 Cases, including issues relating to
asbestos property damage claims, will
33
be addressed by Judge Judith K. Fitzgerald, a bankruptcy court judge sitting in
the United States Bankruptcy Court for the District of Delaware.
Three creditors' committees, one representing asbestos personal injury
claimants, another representing asbestos property damage claimants, and a third
representing unsecured creditors, were appointed as official committees in the
Chapter 11 Cases. 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 significant roles in the Chapter 11 Cases and resolution of
the terms of any plan of reorganization.
The Debtors and the committee representing unsecured creditors moved in
November 2003 to remove Judge Wolin from the Chapter 11 Cases. The committee
representing asbestos personal injury claimants and the legal representative for
future asbestos claimants opposed these motions. On February 2, 2004, Judge
Wolin denied the motions, and the Debtors and the unsecured creditors committee
are appealing. Additional information regarding these proceedings is discussed
in Note 20. Litigation under Developments in the Reorganization Proceeding.
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 the Debtors to allow payment of
present and future asbestos personal injury claims and demands. Under the
Bankruptcy Code, a plan of reorganization creating a Section 524(g) trust may be
confirmed only if 75% of the asbestos claimants who vote on the plan approve the
plan. 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 Bankruptcy Code are met.
The Debtors also expect that the plan of reorganization will address the
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
the 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 the 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 the 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 amount that will be
required to resolve the Debtors' asbestos personal injury liability in the
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.
A key factor in determining the recovery of pre-petition creditors and
stockholders under any such plan of reorganization is the amount that must be
provided in the plan to resolve the Debtors' liability for present and future
asbestos claims. 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 the Debtors' liabilities for present and future asbestos
claims exceed the value of the Debtors' assets and that the Debtors are
insolvent. The Debtors have advised the Court that they believe they are solvent
if their asbestos liabilities are fairly and appropriately valued.
The Debtors' asbestos liabilities to be funded under a plan of
reorganization have not yet been determined and are subject to substantial
uncertainty. While it is the Debtors' intention to seek a full recovery for
their creditors, it is not possible to predict the amount that will have to be
provided in the plan of reorganization to resolve present and future asbestos
claims, how the plan of reorganization will treat other pre-petition claims,
whether there will be sufficient assets to satisfy the Debtors' pre-petition
liabilities, and what impact any plan may have on the value of the shares of the
Corporation's common stock and other outstanding securities. The payment rights
and other entitlements of pre-petition creditors and the Corporation's
shareholders may be substantially altered by any plan 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
34
claims, the pre-petition creditors of some Debtors may be treated differently
from the pre-petition creditors of other Debtors, and the interests of the
Corporation's stockholders are likely to be substantially diluted or cancelled
in whole or in part. There can be no assurance as to the value of any
distributions that might be made under any plan of reorganization with respect
to such pre-petition claims, equity interests, or other outstanding securities.
It is also not possible to predict 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.
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 $23 million in 2003, $20 million in 2002 and $12 million in 2001.
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. The FAIR 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.
The Corporation expects 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 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 the Debtors for asbestos personal injury claims would have a
material impact on the amount of the Debtors' asbestos personal injury
liability. The Fair Bill may also affect the manner in which such liability may
be addressed in the Debtors' Chapter 11 Cases. However, it is extremely
speculative as to whether the FAIR Bill or similar legislation will be enacted
or what the terms of any such legislation might be. During this process, the
Corporation expects that the Chapter 11 Cases, including the proceedings
regarding estimation of the Corporation's asbestos personal injury liabilities,
will continue, subject to developments in those cases. See Consequences of the
Filing, above, and Note 20. Litigation.
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 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
35
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 Bankruptcy Court's
order.
Approximately 5,000 proofs of claim for general unsecured creditors
(including pre-petition debtholders and contingent claims), totaling
approximately $8.7 billion were filed by the bar date. The Debtors have been
analyzing the proofs of claims and determined that 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 256 claims totaling $29.4 million as duplicates and 333 claims totaling
$169.4 million as amended or superceded. The court has allowed the reduction of
212 claims by a total of $2.3 million. The court has also allowed the correction
of the Debtors on 703 claims and the reclassification of 185 claims to general
unsecured claims. In addition, $5.7 billion worth of claims have been withdrawn
from the case by creditors. The Debtors continue to analyze and reconcile filed
claims on an ongoing basis.
June 25, 2003, the second anniversary of the filing of the Chapter 11
Cases, was the deadline for the Debtors to bring avoidance actions in the
Chapter 11 Cases. 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 the Debtors to 206 creditors, where such payments,
in most cases, exceeded $500,000. The Bankruptcy 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 Debtor
subsidiaries in favor of the Corporation in connection with intercompany loan
agreements; a transfer by U.S. Gypsum to the Corporation of a 9% interest in the
equity of CGC Inc., the principal Canadian subsidiary of the Corporation; and
transfers made by the Corporation 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, the Debtors will make adjustments to their schedules and
financial statements as appropriate. Any such adjustments could be material to
the Corporation's consolidated financial position, cash flows 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 20. Litigation under Developments in the Reorganization
Proceeding.
FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with American Institute of Certified Public Accountants ("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
36
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 Corporation's ability to continue as a going concern 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 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 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 the 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, including unaccrued and unrecorded post-petition interest expense, (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 20. Litigation for additional
information on the background of asbestos litigation, developments in the
Corporation's reorganization proceeding and estimated cost.
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 debtor-in-possession balance sheets as of
December 31 consisted of the following items:
(millions) 2003 2002
- ---------------------------------------------------------------
Accounts payable 162 157
Accrued expenses 44 56
Debt 1,005 1,005
Asbestos reserve 1,061 1,061
Other long-term liabilities 14 36
- ---------------------------------------------------------------
Subtotal 2,286 2,315
Elimination of intercompany accounts payable (43) (43)
- ---------------------------------------------------------------
Total liabilities subject to compromise 2,243 2,272
===============================================================
INTERCOMPANY TRANSACTIONS
In the normal course of business, the Corporation (also referred to as the
"Parent Company" in the following discussion of intercompany transactions) and
the operating subsidiaries engage in intercompany transactions. To document the
relations created by these transactions, the Parent Company and the operating
subsidiaries, from the formation of the 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
37
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 December 31, 2003, U.S. Gypsum and USG Interiors had net pre-petition
payable balances to the Parent Company for Intercompany Corporate Transactions
of $295 million and $109 million, respectively. L&W Supply had a net
pre-petition receivable balance from the Parent Company of $33 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 Claims, above.
As of December 31, 2003, U.S. Gypsum and L&W Supply had net post-petition
receivable balances from the Parent Company for Intercompany Corporate
Transactions of $245 million and $169 million, respectively. USG Interiors had a
net post-petition payable balance to the Parent Company of $4 million.
In addition to the above transactions, the operating subsidiaries engage in
ordinary course purchase and sale of products with other operating subsidiaries
(the "Intercompany Trade Transactions"). Detailed accounting records also are
maintained of all such transactions, and settlements are made on a monthly
basis. Certain Intercompany Trade Transactions between U.S. and non-U.S.
operating subsidiaries are settled via wire transfer payments utilizing several
payment systems.
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses in the consolidated and debtor-in-possession
statements of earnings consisted of the following:
(millions) 2003 2002 2001
- ------------------------------------------------------------------
Legal and financial advisory fees $19 $22 $14
Bankruptcy-related interest income (8) (8) (4)
Accelerated amortization of debt-
issuance costs - - 2
- -----------------------------------------------------------------
Total chapter 11 reorganization expenses 11 14 12
=================================================================
INTEREST EXPENSE
For 2003, contractual interest expense not accrued or recorded on pre-petition
debt totaled $71 million. From the Petition Date through December 31, 2003,
contractual interest expense not accrued or recorded on pre-petition debt
totaled $186 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 Corporation and the following wholly owned
subsidiaries: United States Gypsum Company; USG Interiors, Inc.; USG Interiors
International, Inc.; L&W Supply Corporation; Beadex Manufacturing, LLC; B-R
Pipeline Company; La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG
Industries, Inc.; and USG Pipeline Company.
In the fourth quarter of 2002, USG Interiors recorded a charge of $82
million to write down the investment in its Belgian subsidiary, which ceased
operations in December 2002. Earlier in 2002, USG Funding Corporation, a
non-Debtor subsidiary of the Corporation, declared a dividend in the amount of
$30 million payable to the Corporation, which was paid in effect by eliminating
the intercompany payable from the Corporation. The net impact of these unrelated
transactions (the investment writedown of $82 million, partially offset by
dividend income of $30 million) is included in other expense, net in the DIP
statement of earnings for 2002. The condensed financial statements of the
Debtors are presented as follows:
38
DEBTOR-IN-POSSESSION STATEMENTS OF EARNINGS (UNAUDITED)
(millions) Years Ended December 31,
- -------------------------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------------------
Net sales $3,302 $3,127 $2,947
Cost of products sold 2,863 2,631 2,628
Selling and administrative expenses 278 266 232
Chapter 11 reorganization expenses 11 14 12
Provisions for impairment and restructuring - - (5)
Interest expense 5 8 29
Interest income (2) (2) (2)
Other (income) expense, net (6) 51 10
- -------------------------------------------------------------------------------------------------
Earnings before income taxes and cumulative
effect of accounting change 153 159 43
Income taxes 66 96 25
- -------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change 87 63 18
Cumulative effect of accounting change (13) (41) -
- -------------------------------------------------------------------------------------------------
Net earnings 74 22 18
=================================================================================================
39
DEBTOR-IN-POSSESSION BALANCE SHEETS (UNAUDITED)
(millions) As of December 31,
- --------------------------------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 489 $ 478
Short-term marketable securities 64 50
Restricted cash 7 -
Receivables (net of reserves of $11 and $13) 276 235
Inventories 232 227
Income taxes receivable 21 14
Deferred income taxes 41 33
Other current assets 47 67
- --------------------------------------------------------------------------------------------------------
Total current assets 1,177 1,104
- --------------------------------------------------------------------------------------------------------
Long-term marketable securities 176 131
Property, plant and equipment (net of accumulated depreciation and
depletion of $645 and $557) 1,576 1,572
Deferred income taxes 178 234
Goodwill 39 30
Other assets 358 348
- --------------------------------------------------------------------------------------------------------
Total assets 3,504 3,419
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 168 142
Accrued expenses 186 207
Income taxes payable 4 20
- --------------------------------------------------------------------------------------------------------
Total current liabilities 358 369
- --------------------------------------------------------------------------------------------------------
Other liabilities 403 362
Liabilities subject to compromise 2,243 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 income 8 4
Retained earnings 644 565
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 500 416
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 3,504 3,419
========================================================================================================
40
DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions) Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 74 $ 22 $ 18
Adjustments to Reconcile Net Earnings to Net Cash:
Cumulative effect of accounting change 13 41 -
Provision for impairment and restructuring - - (5)
Corporate service charge (1) (1) 4
Depreciation, depletion and amortization 94 85 90
Deferred income taxes 54 63 140
Gain on asset dispositions - - (1)
(Increase) Decrease in Working Capital
Receivables (37) - (69)
Income taxes receivable (7) 63 (77)
Inventories - (11) 6
Payables 10 49 71
Accrued expenses (21) 57 6
Decrease in pre-petition intercompany receivable - - 7
Increase in post-petition intercompany receivable (9) (53) (84)
(Increase) decrease in other assets (9) 104 (61)
Increase in other liabilities 45 - 16
Change in asbestos receivables and reserve 19 22 (90)
Decrease in liabilities subject to compromise (29) (39) (58)
Other, net (10) (6) 56
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 186 396 (31)
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (88) (75) (66)
Purchases of marketable securities (256) (237) -
Sale or maturities of marketable securities 194 56 -
Net proceeds from asset dispositions 2 2 1
Acquisitions of businesses (20) (10) -
- -------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (168) (264) (65)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deposit of restricted cash (7) - -
Issuance of debt - - 262
Repayment of debt - - (56)
Short-term borrowings, net - - 200
Cash dividends paid - - (1)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (7) - 405
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11 132 309
Cash and cash equivalents at beginning of period 478 346 37
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 489 478 346
===================================================================================================================
Supplemental Cash Flow Disclosures:
Interest paid 2 2 26
Income taxes paid (refunded), net 2 (52) (32)
41
3. EXIT ACTIVITIES
2003 SALARIED WORKFORCE REDUCTION
In the fourth quarter of 2003, the Corporation recorded a charge of $3 million
pretax ($2 million after-tax) for severance related to a salaried workforce
reduction of approximately 70 employees. An additional 56 open positions were
eliminated. Payments totaling $1 million were made in the fourth quarter, and a
reserve of $2 million was included in accrued expenses on the consolidated
balance sheet as of December 31, 2003. All remaining payments are expected to be
made during the first half of 2004.
2002 DOWNSIZING PLAN
In the fourth quarter of 2002, the Corporation recorded a non-tax-deductible
charge of $11 million related to the shutdown of the Aubange, Belgium, ceiling
tile plant and other downsizing activities in Europe that addressed 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 more than 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 $8 million in 2003. All payments
associated with the 2002 downsizing plan were funded with cash from operations.
An additional $1 million writedown related to the Aubange plant was recorded in
the third quarter of 2003.
2001 IMPAIRMENTS
In the fourth quarter of 2001, the Corporation recorded a pretax impairment
charge of $16 million related to the Aubange, Belgium, ceiling tile plant. This
impairment resulted from a decline in demand, which had been significantly
affected by a worldwide slowdown in the nonresidential construction market, and
from the plant's high cost structure. In addition, the Corporation recorded a
pretax impairment charge of $14 million related to the Port Hawkesbury, Nova
Scotia, gypsum fiber panel plant. This impairment resulted from high delivered
costs of products manufactured at Port Hawkesbury combined with the
consolidation of production of FIBEROCK(R) brand products at the Gypsum, Ohio,
plant. Estimated future cash flows related to these facilities indicated that
impairment charges were necessary to write down the assets to their third-party
appraised fair values.
2001 RESTRUCTURING PLAN
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.
42
RESTRUCTURING RESERVES
The following table details the reserves and activity for the 2003 salaried
workforce reduction, 2002 downsizing plan and 2001 restructuring plan:
Writedown of Reserve
Assets to Net Cash Balance
(millions) Provisions Realizable Value Payments 12/31/03
- ---------------------------------------------------------------------------------------------------------------------
2003 Salaried Workforce Reduction:
Severance $ 3 $ - $ (1) $ 2
- -------------------------------------------------------------------------------------------------------------------
2002 Downsizing:
Severance (salaried and hourly) 6 - (6) -
Equipment write-off 3 (3) - -
Other reserves 2 - (2) -
- -------------------------------------------------------------------------------------------------------------------
Subtotal 11 (3) (8) -
- -------------------------------------------------------------------------------------------------------------------
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 26 (5) (19) 2
===================================================================================================================
4. EARNINGS PER SHARE
The reconciliation of basic earnings per share to diluted earnings per share is
shown in the following table:
Weighted
Average
(millions, except Net Shares Per-Share
share data) Earnings (000) Amount
- ----------------------------------------------------------------------
2003:
Basic earnings $ 122 43,075 $2.82
Dilutive effect of stock options 1
- --------------------------------------------------------------------
Diluted earnings 122 43,076 2.82
====================================================================
2002:
Basic earnings 43 43,282 1.00
- --------------------------------------------------------------------
Diluted earnings 43 43,282 1.00
====================================================================
2001:
Basic earnings 16 43,430 0.36
Dilutive effect of stock options 5
- --------------------------------------------------------------------
Diluted earnings 16 43,435 0.36
====================================================================
Options to purchase 2.6 million, 2.7 million and 2.6 million shares of
common stock as of December 31, 2003, 2002 and 2001, respectively, were not
included in the computation of diluted earnings per share for the respective
years because the exercise price of the options was greater than the average
market price of the Corporation's common stock.
5. COMMON STOCK
DIVIDENDS
The Corporation discontinued payment of quarterly cash dividends in the second
quarter of 2001. In the first quarter of 2001, the Corporation paid a cash
dividend of $0.025 per share.
STOCKHOLDER RIGHTS PLAN
The Corporation's stockholder rights plan, which will expire on March 27, 2008,
has four basic provisions. First, if an acquirer buys 15% or more of the
Corporation's outstanding common stock, the plan allows other stockholders to
buy, with each right, additional shares of the Corporation at a 50% discount.
Second, if the Corporation is acquired in a merger or other business combination
transaction, rights holders will be entitled to buy shares of the acquiring
company at a 50% discount. Third, if an acquirer buys between 15% and 50% of the
Corporation's outstanding common stock, the Corporation can exchange part or all
of the rights of the other holders for shares of the Corporation's stock on a
one-for-one basis or shares of a new junior preferred stock on a
one-for-one-hundredth basis. Fourth, before an acquirer buys 15% or more of the
Corporation's outstanding common stock, the rights are redeemable for $0.01 per
right at the option of the Corporation's board of directors (the "Board"). This
provision permits the Board to enter into an acquisition transaction that is
determined to be
43
in the best interests of stockholders without any of the above provisions
becoming effective. The Board is authorized to reduce the 15% threshold to not
less than 10%. The Board has not exercised its authority regarding these
provisions as of the date of this report.
In November 2001, the independent members of the Board reviewed the
Corporation's stockholder rights plan in accordance with its policy, adopted in
2000, to review the rights plan every three years. The independent members of
the Board considered a variety of relevant factors, including the effect of the
Filing, and concluded that the rights plan continued to be in the best interests
of the Corporation and should be retained in its present form.
6. MARKETABLE SECURITIES
As of December 31, 2003 and 2002, the amortized cost and fair market value
("FMV") of the Corporation's investments in marketable securities were as
follows:
2003 2002
- -------------------------------------------------------------------
Amortized Amortized
(millions) Cost FMV Cost FMV
- -------------------------------------------------------------------
Asset-backed securities $101 $101 $ 58 $ 58
U.S. government and
agency securities 83 83 54 54
Municipal securities 31 32 36 36
Corporate securities 24 24 16 16
Time deposits - - 17 17
- -------------------------------------------------------------------
Total marketable securities 239 240 181 181
===================================================================
Contractual maturities of marketable securities as of December 31, 2003,
were as follows:
Amortized
(millions) Cost FMV
- -----------------------------------------------------
Due in 1 year or less $ 64 $ 64
Due in 1 - 5 years 45 45
Due in 5 - 10 years 6 6
Due after 10 years 23 24
- -----------------------------------------------------
138 139
Asset-backed securities 101 101
- -----------------------------------------------------
Total marketable securities 239 240
=====================================================
The average duration of the portfolio is less than one year because a
majority of the longer-term securities have paydown or put features and
liquidity facilities.
The Corporation had investments in marketable securities with a fair market
value of $50 million that were in an unrealized loss position for less than 12
months as of December 31, 2003. These investments were in the following types of
securities: $29 million in asset-backed securities, $13 million in government
and agency securities and $8 million in corporate securities. The aggregate
amount of these unrealized losses was less than $1 million. The Corporation did
not have any investments that had been in a continuous unrealized loss position
for a period greater than 12 months as of December 31, 2003.
7. INVENTORIES
As of December 31, 2003 and 2002, the LIFO value of U.S. inventories was $215
million and $208 million, respectively, and would have been $2 million higher
for 2003 and $1 million higher for 2002 if they were valued under the FIFO and
average production cost methods. All non-U.S. inventories are valued under FIFO
or average production cost methods. The LIFO value of U.S. inventories exceeded
that computed for U.S. federal income tax purposes by $13 million and $21
million as of December 31, 2003 and 2002, respectively. Inventories as of
December 31 consisted of the following:
(millions) 2003 2002
- -----------------------------------------------------
Finished goods and work in progress $179 $169
Raw materials 84 84
Supplies 17 17
- -----------------------------------------------------
Total 280 270
=====================================================
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consisted of the following:
(millions) 2003 2002
- -----------------------------------------------------
Land and mineral deposits $ 98 $ 90
Buildings and improvements 740 702
Machinery and equipment 1,796 1,697
- -----------------------------------------------------
2,634 2,489
Reserves for depreciation and
depletion (816) (701)
- -----------------------------------------------------
Total 1,818 1,788
=====================================================
44
9. GOODWILL AND OTHER INTANGIBLE ASSETS
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. Prior to the adoption of SFAS No. 142, goodwill was
amortized on a straight-line basis over a period of 15 years to 40 years.
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 Building Products Distribution operating segments.
The Corporation determined that goodwill for its Building Products
Distribution segment was not impaired; 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, non-tax-deductible
impairment charge of $96 million. This charge, which includes a $90 million
write-off of goodwill (net of accumulated amortization of $8 million) and a $6
million write-off of deferred currency translation, is reflected on the
Corporation's consolidated statement of earnings as a cumulative effect of a
change in accounting principle in 2002.
Total goodwill amounted to $39 million and $30 million as of December 31,
2003 and 2002, respectively. Goodwill increased by $9 million in 2003 as a
result of businesses acquired during the year. Other intangible assets as of
December 31, 2003, totaled $2 million, of which less than $1 million was subject
to amortization over a five-year life. Other intangible assets are included in
other assets on the consolidated balance sheet.
The following reconciliation of adjusted net earnings and earnings per share
presents the years 2001 to 2003 as if goodwill had not been amortized.
(millions, except
per-share data) 2003 2002 2001
- --------------------------------------------------------------------------------
Net Earnings:
Reported net earnings $ 122 $ 43 $ 16
Add back:
Goodwill amortization,
net of tax - - 3
Cumulative effect of
accounting change for
SFAS No. 142 - 96 -
- --------------------------------------------------------------------------------
Adjusted net earnings 122 139 19
================================================================================
Basic and Diluted Earnings
Per Share:
Reported basic and diluted $ 2.82 $ 1.00 $ 0.36
Add back:
Goodwill amortization - - 0.07
Cumulative effect of
accounting change for
SFAS No. 142 - 2.22 -
- --------------------------------------------------------------------------------
Adjusted basic and diluted 2.82 3.22 0.43
================================================================================
10. ACCRUED EXPENSES
Accrued expenses as of December 31 consisted of the following:
(millions) 2003 2002
- -----------------------------------------------------
Employee compensation $ 74 $ 94
Self insurance reserves 48 43
Other 84 106
- -----------------------------------------------------
Total 206 243
=====================================================
45
11. DEBT
As a result of the Filing, virtually all of the Corporation's pre-petition debt
is in default and included in liabilities subject to compromise. Any such debt
that was scheduled to mature since the Filing has not been repaid. Total debt as
of December 31 consisted of the following:
(millions) 2003 2002
- -----------------------------------------------------
Revolving credit facilities $ 469 $ 469
9.25% senior notes due 2001 131 131
8.5% senior notes due 2005 150 150
Industrial revenue bonds 255 255
- -----------------------------------------------------
Total debt included in liabilities
subject to compromise 1,005 1,005
=====================================================
Current portion of long-term debt 1 -
Long-term debt 1 2
- -----------------------------------------------------
Total debt 1,007 1,007
=====================================================
Long-term debt of $1 million and $2 million as reported on the consolidated
balance sheets as of December 31, 2003 and 2002, respectively, consisted of
Canadian notes payable.
DIP FACILITY
On July 31, 2001, a $350 million debtor-in-possession financing facility (the
"DIP Facility") was approved by the Bankruptcy Court to supplement liquidity and
fund operations during the reorganization process. The facility was provided by
a syndicate of lenders led by JPMorgan Chase Bank (formerly The Chase Manhattan
Bank) as agent.
On December 31, 2002, the Corporation had the capacity to borrow up to $288
million. However, $16 million of standby letters of credit were issued, leaving
$272 million of unused borrowing capacity available as of December 31, 2002.
In June 2003, the Corporation terminated the DIP Facility. This action was
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 December 31, 2003, $1
million of 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.
LETTER OF CREDIT FACILITY
In June 2003, the Corporation entered into a three-year, $100 million credit
agreement with LaSalle Bank N.A. to be used exclusively to support the issuance
of letters of credit. As of December 31, 2003, $6 million of letters of credit,
which are cash collateralized at 103%, were outstanding.
As of December 31, 2003, a total of $7 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.
OTHER DEBT INFORMATION
The fair market value of total debt outstanding (including debt classified as
liabilities subject to compromise) was $928 million and $765 million as of
December 31, 2003 and 2002, respectively. The fair market values were based on
quoted market prices or, where quoted market prices were not available, on
instruments with similar terms and maturities. However, because virtually all of
the Corporation's debt is subject to compromise, the fair market value of total
debt as of December 31, 2003, is not necessarily indicative of the ultimate
settlement value that will be determined by the Bankruptcy Court.
As of December 31, 2003, long-term debt not subject to compromise of $1
million is scheduled to mature in 2005.
12. DERIVATIVE INSTRUMENTS
COMMODITY DERIVATIVE INSTRUMENTS
As of December 31, 2003, the Corporation had swap contracts to exchange monthly
payments on notional amounts of natural gas amounting to $154 million. These
contracts mature by December 31, 2005. As of December 31, 2003, the fair value
of these swap contracts, which remained in accumulated other comprehensive loss,
was $10 million ($6 million after-tax).
The Corporation had swap contracts with Enron, maturing through 2003, to
hedge the cost of wastepaper. During 2002, the Corporation paid $2 million to
terminate these contracts and reclassified deferred losses of $2 million from
accumulated other comprehensive loss into earnings.
During the second quarter of 2001, the Corporation received proceeds of $35
million ($21 million after-tax) from the termination of natural gas swap
contracts
46
scheduled to mature through 2005. The net after-tax gain resulting from the
termination of these contracts remains in accumulated other comprehensive loss
and is reclassified into earnings in the period in which the hedged forecasted
transactions are scheduled to occur. As of December 31, 2003, $7 million ($4
million after-tax) remained in accumulated other comprehensive loss.
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS
As of December 31, 2003 and 2002, the Corporation had no outstanding forward
contracts to hedge selected risk of changes in cash flows resulting from
forecasted intercompany and third-party sales or purchases denominated in
non-U.S. currencies.
COUNTERPARTY RISK
The Corporation is exposed to credit losses in the event of nonperformance by
the counterparties on its financial instruments. All counterparties have
investment grade credit standing; accordingly, the Corporation anticipates that
these counterparties will be able to satisfy fully their obligations under the
contracts. The Corporation does not generally obtain collateral or other
security to support financial instruments subject to credit risk but monitors
the credit standing of all counterparties.
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss as of December 31 consisted of the
following:
(millions) 2003 2002
- ------------------------------------------------------------
Gain on derivatives, net of tax $ 10 $ 18
Foreign currency translation (8) (39)
Minimum pension liability, net of tax (3) (11)
Unrealized gain (loss) on marketable
securities, net of tax - -
- ------------------------------------------------------------
Total accumulated other comprehensive loss (1) (32)
============================================================
During 2003, accumulated net after-tax gains of $22 million ($35 million
pretax) on derivatives were reclassified from accumulated other comprehensive
loss to earnings. As of December 31, 2003, the estimated net after-tax gain
expected to be reclassified within the next 12 months from accumulated other
comprehensive loss into earnings is $8 million.
14. ASSET RETIREMENT OBLIGATIONS
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 impact to the Corporation of adopting SFAS No. 143 was an increase in assets
of $14 million, which included a $12 million increase in deferred tax assets,
and an increase in liabilities of $30 million, which included a $1 million
increase in deferred tax liabilities. 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.
Changes in the liability for asset retirement obligations during 2003 consisted
of the following:
(millions) 2003
- -----------------------------------------------------
Balance as of January 1, 2003 $ 29
Accretion expense 3
Liabilities incurred 3
Foreign currency translation 1
Liabilities settled (1)
- -----------------------------------------------------
Balance as of December 31, 2003 35
=====================================================
15. EMPLOYEE RETIREMENT PLANS
The Corporation and its major subsidiaries generally have contributory defined
benefit pension plans for all eligible employees. Benefits of the plans are
generally based on employees' years of service and compensation during the final
years of employment.
The Corporation also maintains plans that provide retiree health care and
life insurance benefits for all eligible employees. Employees hired before
January 1, 2002, generally become eligible for the retiree health-care benefit
plans when they meet minimum retirement age and service requirements. The cost
of providing most retiree health-care benefits is shared with retirees.
On December 8, 2003, the Medicare Act was signed into law. The Medicare Act
introduced a prescription drug benefit under Medicare (Medicare Part D), as well
as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D.
47
In January 2004, the FASB issued FSP No. 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." This FSP provides companies with initial guidance on
recognizing the effects of the prescription drug provisions of the Medicare Act.
As allowed by the FSP, the Corporation elected to defer recognition until
further guidance is issued by the FASB. As such, any measurement of the
accumulated postretirement benefit obligations or net periodic postretirement
benefit cost in the 2003 financial statements and accompanying footnotes do not
reflect the effects of the Medicare Act. Upon issuance of further guidance, the
Corporation may be required to change previously reported information.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This revised
standard applies to public entities' U.S. plans for fiscal years ending after
December 15, 2003, except for the disclosure of expected future benefit
payments, which becomes effective for fiscal years ending after June 15, 2004.
Disclosure requirements pertaining to public entities' non-U.S. plans generally
become effective for fiscal years ending after June 15, 2004.
CONSOLIDATED INFORMATION
The components of net pension and postretirement benefits costs are summarized
in the following table:
(millions) 2003 2002 2001
- -------------------------------------------------------------------
Pension Benefits:
Service cost of benefits earned $ 27 $ 21 $ 19
Interest cost on projected
benefit obligation 52 49 48
Expected return on plan assets (52) (55) (56)
Net amortization 11 3 4
- -------------------------------------------------------------------
Net pension cost 38 18 15
===================================================================
Postretirement Benefits:
Service cost of benefits earned 12 7 6
Interest cost on projected
benefit obligation 21 16 16
Net amortization - (2) (1)
- -------------------------------------------------------------------
Net postretirement cost 33 21 21
===================================================================
The following tables summarize projected pension and accumulated
postretirement benefit obligations, plan assets and funded status as of December
31:
Pension Postretirement
---------------- ----------------
(millions) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation
as of January 1 $ 777 $ 702 $ 310 $ 236
Service cost 27 21 12 7
Interest cost 52 49 21 16
Employee contributions 13 12 4 3
Benefits paid (52) (38) (15) (15)
Plan amendment - 8 - -
Actuarial loss 71 22 37 63
Foreign currency translation 19 1 2 -
- ----------------------------------------------------------------------------------------
Benefit obligation
as of December 31 907 777 371 310
========================================================================================
Change in Plan Assets:
Fair value as of January 1 528 575 - -
Actual return on plan assets 117 (48) - -
Employer contributions 82 26 - -
Employee contributions 13 12 - -
Benefits paid (52) (38) - -
Foreign currency translation 16 1 - -
- ----------------------------------------------------------------------------------------
Fair value as of December 31 704 528 - -
========================================================================================
Funded Status:
As of December 31 (203) (249) (371) (310)
Unrecognized prior
service cost 22 24 (5) (6)
Unrecognized net loss 216 210 71 35
- ----------------------------------------------------------------------------------------
Net balance sheet prepaid
(liability) 35 (15) (305) (281)
========================================================================================
Components in the Consolidated Balance Sheet:
Long-term other assets 44 34 - -
Long-term other liabilities (13) (67) (305) (281)
Accumulated other
comprehensive loss 4 18 - -
- ----------------------------------------------------------------------------------------
Net balance sheet prepaid
(liability) 35 (15) (305) (281)
========================================================================================
48
The following tables reflect the assumptions used in the accounting for the
plans:
Pension Postretirement
------------ --------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------
Weighted-average assumptions used to determine benefit obligations
as of December 31:
Discount rate 6.0% 6.5% 6.0% 6.5%
Compensation increase rate 4.2% 4.7% 4.2% 4.7%
- -------------------------------------------------------------------------
Weighted-average assumptions used to determine net cost for years
ended December 31:
Discount rate 6.5% 7.25% 6.5% 7.25%
Expected return on
plan assets 8.0% 9.0% - -
Compensation increase rate 4.7% 5.0% 4.7% 5.0%
- -------------------------------------------------------------------------
The assumed health-care-cost trend rate used to measure the postretirement
plans' obligations as of December 31 were as follows:
2003 2002
- ---------------------------------------------------------------
Health-care-cost trend rate assumed for
next year 9.0% 10.0%
Rate to which the cost trend rate is
assumed to decline (the ultimate trend
rate) 5.25% 5.25%
Year that the rate reaches the ultimate
trend rate 2007 2007
- ---------------------------------------------------------------
A one-percentage-point change in the assumed health-care-cost trend rate
for the postretirement plans would have the following effects:
One-Percentage- One-Percentage-
(millions) Point Increase Point Decrease
- ----------------------------------------------------------------------
Effect on total service and
interest cost $ 6 $ (5)
Effect on postretirement
benefit obligation 61 (51)
- ----------------------------------------------------------------
INFORMATION ON U.S. PENSION PLANS
The following includes information for the Corporation's U.S. pension
plans.
The Corporation uses a December 31 measurement date for its plans.
The accumulated benefit obligation ("ABO") for the defined benefit pension
plans was $589 million and $511 million as of December 31, 2003 and 2002,
respectively.
The fair value of total plan assets as of December 31, 2003 and 2002, was
$590 million and $452 million, respectively. The expected long-term rate of
return on plan assets used to determine net pension cost was 8.0% for 2003 and
9.0% for 2002. Following a review of rates of return on plan assets, the
Corporation decreased its expected rate of return on pension plan assets to 7.5%
effective January 1, 2004.
The long-term-rate-of-return-on-assets assumption for the Corporation's
pension plans was established using a "building block" approach. In this
approach, ranges of long-term expected returns for the various asset classes in
which the plans invest are estimated. This is done primarily based upon
observations of historical asset returns and their historical volatility.
Consensus estimates of certain market and economic factors that influence
returns such as inflation, Gross Domestic Product ("GDP") growth and dividend
yields are also considered in determining expected returns. An overall range of
likely expected rates of return is then calculated by applying the expected
returns to the plans' target asset allocation. The most likely rate of return is
then determined and is adjusted for investment management fees.
Plan Assets: The pension plans' asset allocations by asset categories as of
December 31 were as follows:
Asset Categories 2003 2002
- ----------------------------------------------------
Equity securities 66.9% 58.0%
Debt securities 26.2% 33.8%
Other 6.9% 8.2%
- ----------------------------------------------------
Total 100.0% 100.0%
====================================================
The investment policies and strategies for the Corporation's pension plans'
assets have been established with a goal of maintaining fully funded plans (on
an ABO basis) and maximizing returns on the plans' assets while prudently
considering the plans' tolerance for risk. Factors influencing the level of risk
assumed include the demographics of the plans' participants, the liquidity
requirements of the plans and the financial condition of the Corporation. Based
upon these factors, it has been determined that the plans can tolerate a
moderate level of risk.
To maximize long-term returns, the plans' assets are invested primarily in
a diversified mix of equity and debt securities. The portfolio of equity
securities includes both foreign and domestic stocks representing a range of
investment styles and market capitalizations. Investments in domestic and
foreign equities are both actively and passively managed. Investments in debt
securities are actively managed. Other assets are
49
managed by investment managers utilizing strategies with returns that have a low
correlation to equities. As of December 31, 2003, the plans' target asset
allocation percentages were 60% for equity securities, 20% for debt securities
and 20% for other. The actual allocations for equity and debt securities
exceeded their targets at year end. Additional investment opportunities in the
"other" category are being identified, which are expected to bring actual
allocations closer to target allocations in 2004.
Investment risk is monitored by the Corporation on an ongoing basis, in
part through the use of quarterly investment portfolio reviews, compliance
reporting by investment managers, and periodic asset/liability studies and
reviews of the plan's funded status.
Cash Flows: The Corporation's defined benefit pension plans have no minimum
funding requirements under the Employee Retirement Income Security Act of 1974
("ERISA"). In accordance with the Corporation's funding policy, the Corporation
expects to contribute cash of approximately $60 million to the pension trust in
2004.
16. STOCK-BASED COMPENSATION
There were no stock options granted in 2003 and 2002. Prior to the Filing on
June 25, 2001, the Corporation issued stock options from three successive plans
under its long-term equity program. Under each of the plans, options were
granted at an exercise price equal to the market value on the date of grant. All
options granted under the plans have 10-year terms and vesting schedules of two
or three years. The options expire on the 10th anniversary of the date of grant,
except in the case of retirement, death or disability, in which case they expire
on the earlier of the fifth anniversary of such event or the expiration of the
original option term.
The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for options granted:
2001
- -----------------------------------------------------
Expected life (years) 7.4
Risk-free interest rate 6.8%
Expected volatility 46.2%
Dividend yield 0.12%
- ----------------------------------------------------
The weighted average fair values of options granted on May 1, 2001, and
January 2, 2001, were $6.73 and $12.31, respectively.
If the Corporation had elected to recognize compensation cost for
stock-based compensation grants consistent with the fair value method prescribed
by SFAS No. 123, net earnings and net earnings per common share would have
changed to the following pro forma amounts:
(millions, except per-share data) 2003 2002 2001
- -------------------------------------------------------------
Net Earnings: As reported $ 122 $ 43 $ 16
Deduct: Fair value method of stock-
based employee compensation
expense, net of tax - (2) (3)
- -------------------------------------------------------------
Pro forma 122 41 13
=============================================================
Basic EPS: As reported 2.82 1.00 0.36
Pro forma 2.82 0.94 0.31
Diluted EPS: As reported 2.82 1.00 0.36
Pro forma 2.82 0.94 0.31
- -------------------------------------------------------------
Stock option activity was as follows:
(options in thousands) 2003 2002 2001
- -------------------------------------------------------------------------------
Options:
Outstanding, January 1 2,699 2,738 2,051
Granted - - 800
Exercised (21) - (72)
Canceled (78) (39) (41)
- -------------------------------------------------------------------------------
Outstanding, December 31 2,600 2,699 2,738
Exercisable, December 31 2,600 1,912 1,640
Available for grant, December 31 2,188 1,985 1,737
- -------------------------------------------------------------------------------
Weighted Average Exercise Price:
Outstanding, January 1 $34.31 $34.29 $38.12
Granted - - 22.44
Exercised 10.31 - 10.31
Canceled 21.25 33.01 36.94
Outstanding, December 31 34.89 34.31 34.29
Exercisable, December 31 34.89 39.19 37.89
- -------------------------------------------------------------------------------
50
The following table summarizes information about stock options outstanding
as of December 31, 2003:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices (000) Life (yrs.) Price (000) Price
- --------------------------------------------------------------------
$ 5 - 15 4 7.3 $12 4 $12
15 - 25 897 6.2 22 897 22
25 - 35 735 1.7 32 735 32
35 - 55 964 4.9 48 964 48
- ------------------------------------------------------------------
Total 2,600 4.5 35 2,600 35
==================================================================
As of December 31, 2003, common shares totaling 2.6 million were reserved
for future issuance in conjunction with existing stock option grants. In
addition, 2.2 million common shares were reserved for future grants. Shares
issued in option exercises may be from original issue or available treasury
shares.
17. INCOME TAXES
Earnings before income taxes and cumulative effect of accounting change
consisted of the following:
(millions) 2003 2002 2001
- -----------------------------------------------------
U.S. $161 $133 $ 52
Foreign 56 123 -
- -----------------------------------------------------
Total 217 256 52
=====================================================
Income taxes consisted of the following:
(millions) 2003 2002 2001
- ------------------------------------------------------
Current:
Federal $20 $35 $(67)
Foreign 14 14 15
State 3 9 (13)
- -----------------------------------------------------
37 58 (65)
- -----------------------------------------------------
Deferred:
Federal 36 42 90
Foreign (1) 8 (5)
State 7 9 16
- -----------------------------------------------------
42 59 101
- -----------------------------------------------------
Total 79 117 36
=====================================================
Differences between actual provisions for income taxes and provisions for
income taxes at the U.S. federal statutory rate (35%) were as follows:
(millions) 2003 2002 2001
- ------------------------------------------------------------------------------
Taxes on income
at U.S. federal statutory rate $ 76 $ 90 $ 18
Chapter 11 reorganization
expenses 3 4 2
Foreign earnings subject
to different tax rates 3 6 16
State income tax, net of
federal benefit 7 11 1
Valuation allowance adjustment (1) 6 -
Reduction of income tax payable (4) - -
Other, net (5) - (1)
- ------------------------------------------------------------------------------
Provision for income
taxes 79 117 36
==============================================================================
Effective income tax rate 36.6% 45.6% 70.0%
==============================================================================
Significant components of deferred tax assets and liabilities as of
December 31 were as follows:
(millions) 2003 2002
- -------------------------------------------------------------------------------
Deferred Tax Assets:
Pension and postretirement benefits $ 112 $ 122
Reserves not deductible until paid:
Asbestos reserves 410 401
Other reserves 21 27
Other 34 38
Capitalized interest 9 11
Self insurance 25 26
- -------------------------------------------------------------------------------
Deferred tax assets before valuation
allowance 611 625
Valuation allowance (8) (6)
- -------------------------------------------------------------------------------
Total deferred tax assets 603 619
- -------------------------------------------------------------------------------
Deferred Tax Liabilities:
Property, plant and equipment 308 286
Post-petition interest expense 73 46
State taxes 11 18
Derivative instruments 8 13
Inventories 5 8
- -------------------------------------------------------------------------------
Total deferred tax liabilities 405 371
- -------------------------------------------------------------------------------
Net deferred tax assets 198 248
===============================================================================
A valuation allowance has been established for deferred tax assets relating
to certain foreign and U.S. state net operating loss carryforwards due to
uncertainty regarding their ultimate realization. The majority of the valuation
allowance relates to the foreign net operating loss carryforwards and was
originally established in 2002.
51
The income tax receivable of $26 million and $14 million recorded by the
Corporation as of December 31, 2003 and 2002, respectively, relates primarily to
the carryback of various federal and state net operating losses from 2001 and
2002 and the temporary overpayment of taxes in various jurisdictions. The amount
recorded as of December 31, 2003, is expected to be refunded to the Corporation
or utilized to satisfy a portion of its tax liabilities during 2004. During
2003, the Corporation recorded a reduction of approximately $4 million to its
income tax payable. This reduction was determined upon completion of the
Corporation's 2002 federal income tax return and resulted from an actual tax
liability that was lower than the estimate of taxes payable as of December 31,
2002.
The Corporation does not provide for U.S. income taxes on the portion of
undistributed earnings of foreign subsidiaries that is intended to be
permanently reinvested. The cumulative amount of such undistributed earnings
totaled approximately $307 million as of December 31, 2003. These earnings would
become taxable in the United States upon the sale or liquidation of these
foreign subsidiaries or upon the remittance of dividends. It is not practicable
to estimate the amount of the deferred tax liability on such earnings.
18. SEGMENTS
OPERATING SEGMENTS
(millions) 2003 2002 2001
- --------------------------------------------------------------------------------------
Net Sales:
North American Gypsum $ 2,299 $ 2,151 $ 1,950
Worldwide Ceilings 607 610 660
Building Products Distribution 1,295 1,200 1,152
Eliminations (535) (493) (466)
- --------------------------------------------------------------------------------------
Total 3,666 3,468 3,296
======================================================================================
Operating Profit:
North American Gypsum 209 261 80
Worldwide Ceilings 39 29 33
Building Products Distribution 53 51 64
Corporate (77) (71) (43)
Eliminations (3) 2 1
Chapter 11 reorganization expenses (11) (14) (12)
Provisions for impairment
and restructuring - - (33)
- --------------------------------------------------------------------------------------
Total 210 258 90
======================================================================================
(millions) 2003 2002 2001
======================================================================================
Depreciation, Depletion
and Amortization:
North American Gypsum $ 84 $ 79 $ 81
Worldwide Ceilings 19 20 19
Building Products Distribution 4 4 7
Corporate 5 3 -
- --------------------------------------------------------------------------------------
Total 112 106 107
======================================================================================
Capital Expenditures:
North American Gypsum 97 82 96
Worldwide Ceilings 12 15 11
Building Products Distribution 1 3 2
Corporate 1 - -
- --------------------------------------------------------------------------------------
Total 111 100 109
======================================================================================
Assets:
North American Gypsum 1,935 1,887 1,985
Worldwide Ceilings 409 404 408
Building Products Distribution 347 286 268
Corporate 1,226 1,148 908
Eliminations (118) (89) (105)
- --------------------------------------------------------------------------------------
Total 3,799 3,636 3,464
======================================================================================
GEOGRAPHIC SEGMENTS
(millions) 2003 2002 2001
- --------------------------------------------------------------------------------------
Net Sales:
United States $ 3,302 $ 3,127 $ 2,947
Canada 330 294 279
Other Foreign 235 243 254
Geographic transfers (201) (196) (184)
- --------------------------------------------------------------------------------------
Total 3,666 3,468 3,296
======================================================================================
Long-Lived Assets:
United States 1,661 1,648 1,758
Canada 161 119 152
Other Foreign 125 127 57
- --------------------------------------------------------------------------------------
Total 1,947 1,894 1,967
======================================================================================
L&W Supply, which comprises the Building Products Distribution segment,
completed three acquisitions during 2003. These acquisitions, which were
conducted in relation to L&W Supply's strategy to profitably grow its specialty
dealer business, consisted of five distribution locations (two in Oregon, two in
Wisconsin and one in Texas). Total cash payments for these acquisitions amounted
to $20 million. As of December 31, 2003, L&W Supply operated out of 183
locations in the United States.
52
Transactions between operating and geographic segments are accounted for at
transfer prices that are approximately equal to market value. Intercompany
transfers between operating segments (shown above as eliminations) largely
reflect intercompany sales from U.S. Gypsum to L&W Supply.
No single customer accounted for 10% or more of consolidated net sales.
Revenues are attributed to geographic areas based on the location of the assets
producing the revenues. Export sales to foreign unaffiliated customers represent
less than 10% of consolidated net sales.
Segment operating profit (loss) includes all costs and expenses directly
related to the segment involved and an allocation of expenses that benefit more
than one segment. Worldwide Ceilings' operating profit in 2002 included an $11
million charge recorded in the fourth quarter related to management's decision
to shut down the Aubange, Belgium, ceiling tile plant and other downsizing
activities that addressed the continuing weakness of the commercial ceilings
market in Europe.
19. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Corporation leases certain of its offices, buildings, machinery and
equipment, and autos under noncancelable operating leases. These leases have
various terms and renewal options. Lease expense amounted to $84 million, $77
million and $74 million in the years ended December 31, 2003, 2002 and 2001,
respectively. Future minimum lease payments required under operating leases with
initial or remaining noncancelable terms in excess of one year as of December
31, 2003, were $67 million in 2004, $59 million in 2005, $47 million in 2006,
$31 million in 2007 and $16 million in 2008. The aggregate obligation subsequent
to 2008 was $28 million.
LEGAL CONTINGENCIES
See Note 20. Litigation for information on asbestos litigation, the bankruptcy
proceeding and environmental litigation. See Note 2. Voluntary Reorganization
Under Chapter 11 for additional information on the bankruptcy proceeding.
20. LITIGATION
ASBESTOS AND RELATED BANKRUPTCY LITIGATION
One of the Corporation's subsidiaries, U.S. Gypsum, is among many defendants in
more than 100,000 asbestos lawsuits alleging personal injury or property damage
liability. Most of the asbestos lawsuits against U.S. Gypsum seek compensatory
and, in many cases, punitive damages for personal injury allegedly resulting
from exposure to asbestos-containing products (the "Personal Injury Cases").
Certain of the asbestos lawsuits seek to recover compensatory and, in many
cases, punitive damages for costs associated with the maintenance or removal and
replacement of asbestos-containing products in buildings (the "Property Damage
Cases"). A more detailed description of the Property Damage and Personal Injury
Cases against U.S. Gypsum and asbestos personal injury cases against certain
other Debtors is set forth below.
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.
If the amount of the Debtors' asbestos liabilities is not resolved through
negotiation in the Chapter 11 Cases or addressed by federal legislation, the
outcome of litigation proceedings in the Chapter 11 Cases, which is extremely
speculative, may determine the Debtors' liability for present and future
asbestos claims.
Recent developments in the Corporation's bankruptcy proceeding and a more
detailed discussion of the Debtors' asbestos liabilities are addressed below.
See also Note 2. Voluntary Reorganization Under Chapter 11 for additional
information on the voluntary reorganization proceeding and potential federal
legislation.
Developments in the Reorganization Proceeding: In 2002, the Debtors filed a
motion requesting Judge Wolin to conduct hearings to 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 the 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
53
hearings proposed by the 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 Bankruptcy 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.
The 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 the
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 the Debtors' liability for present and future asbestos personal
injury claims alleging cancer. The Order provides that the Court will set a bar
date for the filing of asbestos personal injury claims alleging cancer and that
the Court will hold an estimation hearing regarding these claims under 11 U.S.C.
Section 502(c), at which the "debtors will be permitted to present their
defenses."
The Order contemplates that after the estimation of the Debtors' liability
for present and future cancer claims, the Court will determine whether the
Debtors' liability for these claims exceeds the 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 the Debtors' liability for non-malignant asbestos
personal injury claims. The Court further notes that the 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.
Judge Wolin has not yet set a timetable for implementation of the Order or
a date for any hearing on estimation of the Debtors' liability for cancer
claims. In conferences with the parties after issuing the Order, Judge Wolin
made certain statements indicating that he may not implement the Order, and
subsequently indicated that the bar date will be limited only to claimants
alleging cancer who had filed a lawsuit against the Debtors as of the Filing.
In November 2003, the Debtors and the committee representing unsecured
creditors in the Chapter 11 Cases filed a motion to recuse, or remove, Judge
Wolin from presiding over these cases. The motion states that Judge Wolin should
remove himself from presiding over these cases because he has appointed and
relied upon advisors to assist him in resolution of these cases who have
conflicts of interest and he has had multiple private communications between or
among certain parties to these cases, the advisors, and other unidentified
persons, without all parties being present and having knowledge of these
communications. Certain creditors in other asbestos-related bankruptcies
assigned to Judge Wolin filed similar motions for removal. The motions for
removal were opposed by the Official Committee of Asbestos Personal Injury
Claimants and the legal representative for future claimants.
Judge Wolin has ordered that all matters in the Chapter 11 Cases pending
before him, including asbestos personal injury matters, be stayed until further
order of the court. This stay does not apply to matters pending before
Bankruptcy Judge Fitzgerald in the Chapter 11 Cases.
On February 2, 2004, Judge Wolin issued a decision denying the motions for
removal. The Debtors and the committee representing unsecured creditors are
appealing the decision to the Third Circuit Court of Appeals. The outcome of the
appeal is not known. If the Court of Appeals does not rule that Judge Wolin
should be removed from the Debtors' cases, it is expected that Judge Wolin will
continue to preside over the Debtors' cases and address the asbestos personal
injury issues in those cases. If the Court of Appeals rules that Judge Wolin
should be removed, it is expected that the Debtors' cases will be reassigned to
another judge. The stay of proceedings ordered by Judge Wolin has not been
lifted.
As a result of these developments, the Corporation does not know whether
estimation proceedings regarding the Debtors' liability for cancer claims will
occur, what the timing or outcome of any such proceedings would be, what impact
such proceedings would have on estimating the Debtors' liability for asbestos
personal injury claims alleging other diseases, and whether any such estimation
proceedings would
54
lead to a negotiated resolution of the Debtors' asbestos personal injury
liabilities. The Corporation also does not know whether the Court will
ultimately address the validity and voting rights of non-malignant claims where
there is no objective evidence of asbestos-related disease.
With regard to asbestos property damage claims, the Bankruptcy Court
established a bar date requiring all such claims against the Debtors to be filed
by January 15, 2003. The Debtors continue to analyze and review 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 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. Approximately 900 claims do not specify a damage amount. Most
of the filed claims do not provide any evidence that the Debtors' products were
ever installed in any of the buildings at issue, and some of the claims are
duplicates of other claims.
The Debtors believe that they have substantial defenses to many of these
property damage claims, including the lack of evidence that the 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. The 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, the Corporation 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 Personal Injury and Property Damage Cases
pending against U.S. Gypsum and certain other Debtors as of the Petition Date.
Personal Injury Cases: As reported by the Center for Claims Resolution (the
"Center"), U.S. Gypsum was a defendant in more than 100,000 pending Personal
Injury Cases as of the Petition Date, as well as an additional approximately
52,000 Personal Injury Cases that may be 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.
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. Up until the Petition
Date, 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.
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 agree to settle those claims for specified amounts.
These Long-Term Settlements typically resolve claims for amounts consistent with
historical per-claim settlement costs paid to the plaintiffs' firms involved. As
a result of the Filing, cash payments by U.S. Gypsum under these Long-Term
Settlements have ceased, and U.S. Gypsum expects that its obligations under
these settlements will be determined in the bankruptcy proceeding and plan of
reorganization.
In 2000, U.S. Gypsum closed approximately 57,000 Personal Injury Cases.
U.S. Gypsum's cash payments in 2000 to defend and resolve Personal Injury Cases
totaled $162 million, of which $90 million was paid or reimbursed by insurance.
In 2000, the average settlement per case was approximately $2,600, exclusive of
defense costs. U.S. Gypsum made cash payments of $100 million in 1999 and $61
million in 1998 to resolve Personal Injury Cases, of which $85 million and $45.5
million, respectively, were paid or
55
reimbursed by insurance.
During late 2000 and in 2001, following the bankruptcy filings of other
defendants in asbestos personal injury litigation, plaintiffs substantially
increased their settlement demands to 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 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 northwestern United
States. As of the Petition Date, Beadex was a named defendant in approximately
40 Personal Injury Cases pending primarily in the states of Washington and
Oregon. Beadex has approximately $11 million in primary or umbrella insurance
coverage available to pay asbestos-related costs, as well as $15 million in
available excess coverage. The Corporation expects that any asbestos-related
liability of Beadex will be addressed in the plan of reorganization. However,
because of the small number of Personal Injury Cases pending against Beadex to
date, the Corporation does not have sufficient information at this time to
predict as to how any plan of reorganization will address any asbestos-related
liability of Beadex.
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.). As a result of the Filing,
all Property Damage Cases are stayed against U.S. Gypsum. U.S. Gypsum's
estimated cost of resolving the Property Damage Cases is discussed in Estimated
Cost, below.
Insurance Coverage: As of December 31, 2003, U.S. Gypsum has an $11 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;
the viability of statute of limitations and other defenses; 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, age, and occupational characteristics of claimants in
the Personal Injury Cases; the jurisdiction and venue in
56
which such cases are filed; 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.
In 2000, an independent actuarial study of U.S. Gypsum's current and
potential future asbestos liabilities was completed. This analysis was based on
the assumption that U.S. Gypsum's asbestos liability would continue to be
resolved in the tort system.
As part of this analysis, the Corporation reviewed, among other things, the
factors listed above as well as 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 viability of, the Long-Term
Settlements; anticipated trends in recruitment by plaintiffs' law firms of
non-malignant or unimpaired claimants; future defense costs; and 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. The study attempted to weigh relevant
variables and assess the impact of likely outcomes on future case filings and
settlement costs.
Based upon the results of the actuarial study, the Corporation determined
that, although substantial uncertainty remained, it was probable that asbestos
claims 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.
These amounts are stated before tax benefit and are not discounted to present
value. Less than 10 percent of the reserve is attributable to defense and
administrative costs. The reserve as of December 31, 2003, was $1,061 million.
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 in the tort system historically have 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.
The Corporation believes that, as a result of the Filing and activities
relating to potential federal legislation addressing asbestos personal injury
claims, there is 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: (i) how
the Long-Term Settlements will be treated in the bankruptcy proceeding and plan
of reorganization and whether those settlements will be set aside; (ii) the
number of asbestos claims that will be filed or addressed in the proceeding;
(iii) the number of future claims that will be estimated in connection with
preparing a plan of reorganization; (iv) 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 or compensated; (v) the impact
historical settlement values for asbestos claims may have on the estimation of
asbestos liability in the bankruptcy proceeding; (vi) the results of any
litigation proceedings in the Chapter 11 Cases regarding the estimated value of
present and future asbestos personal injury claims alleging cancer or
57
other diseases; (vii) the treatment of asbestos property damage claims in the
bankruptcy proceeding; and (viii) 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. As the
Chapter 11 Cases proceed, and the issues relating to estimation of the Debtors'
asbestos liabilities are addressed, the Debtors likely will gain more
information from which a reasonable estimate of the Debtors' probable liability
for present and future asbestos claims can be determined. If such estimate
differs from the existing reserve, the reserve will be adjusted, and it is
possible that a charge to results of operations will be necessary at that time.
In such a case, the Debtors' asbestos liability could vary significantly from
the recorded estimate of liability and could be greater than the high end of the
range estimated in 2000. This difference could be material to the Corporation's
financial position, cash flows and results of operations in the period recorded.
Bond to Secure Certain Center 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
JPMorgan Chase Bank (formerly Chase Manhattan Bank) ("JPMorgan Chase") to
Safeco. After the Filing, by a letter dated November 16, 2001, the Center made a
demand to Safeco for payment of $15.7 million under the bond, and, by a 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 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 Center's motion for summary judgment. Although the court
ruled that Safeco is not required to remit any surety bond proceeds to the
Center 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 JPMorgan Chase letter of credit to
cover the bond payment and JPMorgan Chase would assert a pre-petition claim in a
corresponding amount against the Corporation in the bankruptcy proceeding. This
matter is stayed due to Judge Wolin's November 5, 2003, order.
Conclusion: There are many uncertainties associated with the resolution of the
asbestos liability in the bankruptcy proceeding. The Corporation will continue
to review its asbestos liability as the Chapter 11 Cases progress and as issues
relating to the estimation of the Debtors' asbestos liabilities are addressed.
If such
58
review results in the Debtors' estimate of the probable liability for present
and future asbestos claims being different from the existing reserve, the
reserve will be adjusted, and such adjustment could be material to the
Corporation's financial position, cash flows and results of operations in the
period recorded.
ENVIRONMENTAL LITIGATION
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. In most of these sites, the involvement of the
Corporation or its subsidiaries is expected to be minimal. The Corporation
believes that appropriate reserves have been established for its potential
liability in connection with all Superfund sites but is continuing to review its
accruals as additional information becomes available. Such reserves take into
account all known or estimated 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, cash flows or results of operations.
59
REPORT OF MANAGEMENT
Management of USG Corporation is responsible for the preparation, integrity
and fair presentation of the financial information included in this report. The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and necessarily include
certain amounts that are based on management's estimates and judgment.
Management is responsible for maintaining a system of internal accounting
controls to provide reasonable assurance as to the integrity and reliability of
the financial statements, the proper safeguarding and use of assets, and the
accurate execution and recording of transactions. Such controls are based on
established policies and procedures and are implemented by trained personnel.
The system of internal accounting controls is monitored by the Corporation's
internal auditors to confirm that the system is proper and operating
effectively. The Corporation's policies and procedures prescribe that the
Corporation and its subsidiaries are to maintain ethical standards and that its
business practices are to be consistent with those standards.
The Corporation has a Compliance Committee that focuses on disclosure
controls and procedures. The Compliance Committee is comprised of senior level
executives responsible for the identification and reporting of all significant
business activities and events to management, the Board of Directors and
stockholders of the Corporation.
The Corporation's 2003 financial statements have been audited by Deloitte &
Touche LLP, independent public accountants. Their audit was conducted in
accordance with auditing standards generally accepted in the United States of
America and included consideration of the Corporation's internal control
structure. Management has made available to Deloitte & Touche LLP all of the
Corporation's financial records and related data, as well as minutes of the
meetings of the Board of Directors. Management believes that all representations
made to Deloitte & Touche LLP were valid and appropriate.
The Board of Directors, operating through its Audit Committee composed
entirely of nonemployee directors, provides oversight to the financial reporting
process. The Audit Committee meets periodically with management, the internal
auditors and Deloitte & Touche LLP, jointly and separately, to review
accounting, auditing, internal control and financial reporting matters. Both
Deloitte & Touche LLP and the internal auditors have unrestricted access to the
Audit Committee.
William C. Foote
Chairman, Chief Executive Officer and President
Richard H. Fleming
Executive Vice President and Chief Financial Officer
D. Rick Lowes
Vice President and Controller
60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of USG Corporation:
We have audited the accompanying consolidated balance sheets of USG
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 2003
and 2002 and the related consolidated statements of earnings, cash flows and
stockholders' equity for each of the two years in the period ended December 31,
2003. Our audit also included the accompanying 2003 and 2002 financial statement
schedules, Schedule II - Valuation and Qualifying Accounts. These financial
statements and financial statement schedules are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audit. The
Corporation's consolidated statements of earnings, cash flows and stockholders'
equity for the year ended December 31, 2001, prior to the addition of the
transitional disclosures in Note 9, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
statements and included an explanatory paragraph in their report dated January
30, 2002 regarding matters that raised substantial doubt about the Corporation's
ability to continue as a going concern.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such 2003 and 2002 consolidated financial statements
present fairly, in all material respects, the financial position of USG
Corporation and subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such 2003 and
2002 financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, USG
Corporation and certain subsidiaries voluntarily filed for Chapter 11 bankruptcy
protection on June 25, 2001 (the "Filing"). The accompanying 2003 and 2002
financial statements do not purport to reflect or provide for the consequences
of the bankruptcy proceedings. In particular, such financial statements do not
purport to show (a) as to assets, their realizable value on a liquidation basis
or their availability to satisfy liabilities; (b) as to pre-petition
liabilities, the amounts that may be allowed for claims or contingencies, or the
status and priority thereof; (c) as to stockholder accounts, the effect of any
changes that may be made in the capitalization of the Corporation; or (d) as to
operations, the effect of any changes that may be made in its business.
The accompanying 2003 and 2002 consolidated financial statements have been
prepared assuming that the Corporation will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, there is
significant uncertainty as to the resolution of the Corporation's asbestos
litigation, which, among other things, may lead to possible changes in the
composition of the Corporation's business portfolio, as well as changes in the
ownership of the Corporation. This uncertainty raises substantial doubt about
the Corporation's ability to continue as a going concern. Management's plans
concerning this matter are also described in Note 2. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 14, effective January 1, 2003, the Corporation changed
its method of accounting for asset retirement obligations upon adoption of
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations."
As discussed in Note 9, effective January 1, 2002, the Corporation changed
its method of accounting for goodwill and intangible assets upon adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets."
As discussed above, the consolidated financial statements of the
Corporation as of and for the year ended December 31, 2001 were audited by other
auditors who have ceased operations. As described in Note 9, these consolidated
financial statements have been revised to include the transitional disclosures
required by SFAS No. 142, "Goodwill and Other
61
Intangible Assets." We audited the transitional disclosures in Note 9. In our
opinion, the transitional disclosures for 2001 in Note 9 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 consolidated financial statements of the Corporation other than with
respect to such transitional disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 consolidated financial
statements taken as a whole.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 10, 2004
62
INFORMATION REGARDING PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS' REPORTS
The following report is a copy of a report previously issued by Arthur Andersen
LLP ("Andersen"). The report has not been reissued by Andersen. As discussed in
Note 9. Goodwill and Other Intangible Assets, the Corporation has presented the
transitional disclosures for 2001 and 2000 required by SFAS No. 142. The
Andersen report does not extend to these changes to the 2001 and 2000
consolidated financial statements. The adjustments to the 2001 and 2000
consolidated financial statements were reported on by Deloitte & Touche LLP as
stated in their report appearing herein.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of USG Corporation:
We have audited the accompanying consolidated balance sheets of USG
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of earnings, cash flows and
stockholders' equity for the years ended December 31, 2001, 2000 and 1999. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of USG
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for the years ended December 31, 2001,
2000 and 1999, in conformity with accounting principles generally accepted in
the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Corporation will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Corporation voluntarily
filed for Chapter 11 bankruptcy protection on June 25, 2001. Management's plans
in regard to these matters are also described in Note 2. This action, which was
taken primarily as a result of asbestos litigation as discussed in Note 20 to
the consolidated financial statements, raises substantial doubt about the
Corporation's ability to continue as a going concern. Such doubt includes, but
is not limited to, a possible change in control of the Corporation as well as a
potential change in the composition of the Corporation's business portfolio. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 30, 2002
63
USG CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Total
(millions, except per-share data) Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------
2003
Net sales $ 862 $ 914 $ 963 $ 927 $ 3,666
Operating profit 35 50 67 58 210
Net earnings 6 (a) 31 39 46 122
Per Common Share:
Net earnings - basic 0.13 0.73 0.89 1.07 2.82
- diluted 0.13 0.73 0.89 1.07 2.82
Price range (c) - high 9.04 22.33 23.72 18.86 23.72
- low 3.78 4.16 13.05 14.20 3.78
- ------------------------------------------------------------------------------------------------------------------
2002
Net sales 829 885 903 851 3,468
Operating profit 48 80 75 55 258
Net earnings (loss) (70) (d) 48 44 21 43
Per Common Share:
Net earnings (loss) (b) - basic (1.62) 1.11 1.03 0.49 1.00
- diluted (1.62) 1.11 1.03 0.49 1.00
Price range (c) - high 9.13 8.00 7.00 9.00 9.13
- low 5.71 5.50 3.85 3.30 3.30
- ------------------------------------------------------------------------------------------------------------------
(a) Includes a noncash, after-tax charge for asset retirement obligations of
$16 million related to the adoption of SFAS No. 143. Earnings before
cumulative effect of accounting change were $22 million, and basic and
diluted net earnings per share were $0.50.
(b) The sum of the four quarters is not necessarily the same as the total for
the year.
(c) Stock price ranges are for transactions on the New York Stock Exchange
(trading symbol USG), which is the principal market for these securities.
Stockholders of record as of January 30, 2004: Common - 4,113; Preferred -
none.
(d) Includes a noncash, non-tax-deductible charge for goodwill impairment of
$96 million related to the adoption of SFAS No. 142. Earnings before
cumulative effect of accounting change were $26 million, and basic and
diluted net earnings per share were $0.60.
64
USG CORPORATION
FIVE-YEAR SUMMARY
(dollars in millions, except per-share data) Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA:
Net sales $ 3,666 $ 3,468 $ 3,296 $ 3,781 $ 3,810
Cost of products sold 3,121 2,884 2,882 2,941 2,742
Selling and administrative expenses 324 312 279 309 338
Chapter 11 reorganization expenses 11 14 12 -- --
Provisions for impairment and restructuring -- -- 33 50 --
Provision for asbestos claims -- -- -- 850 --
Operating profit (loss) 210 258 90 (369) 730
Interest expense 6 8 33 52 53
Interest income (4) (4) (5) (5) (10)
Other (income) expense, net (9) (2) 10 4 3
Income taxes (benefit) 79 117 36 (161) 263
Earnings (loss) before cumulative effect of accounting change 138 139 16 (259) 421
Cumulative effect of accounting change (16) (96) -- -- --
Net earnings (loss) 122 43 16 (259) 421
Net Earnings (Loss) Per Common Share:
Cumulative effect of accounting change (0.37) (2.22) -- -- --
Basic 2.82 1.00 0.36 (5.62) 8.48
Diluted 2.82 1.00 0.36 (5.62) 8.39
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (as of the end of the year):
Working capital 1,084 939 914 4 350
Current ratio 3.62 3.14 3.85 1.01 1.55
Property, plant and equipment, net 1,818 1,788 1,800 1,830 1,568
Total assets 3,799 3,636 3,464 3,214 2,794
Total debt (a) 1,007 1,007 1,007 711 593
Liabilities subject to compromise 2,243 2,272 2,311 -- --
Total stockholders' equity 689 535 491 464 867
- ------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION:
Capital expenditures 111 100 109 380 426
Stock price per common share (b) 16.57 8.45 5.72 22.50 47.13
Cash dividends per common share -- -- 0.025 0.60 0.45
Average number of employees 13,900 14,100 14,300 14,900 14,300
- ------------------------------------------------------------------------------------------------------------------------
(a) Total debt as of December 31, 2003, 2002 and 2001, includes $1,005 million
of debt classified as liabilities subject to compromise.
(b) Stock price per common share reflects the final closing price of the year.
65
USG CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BEGINNING ENDING
(millions) BALANCE ADDITIONS (a) DEDUCTIONS (b) BALANCE
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003:
Doubtful accounts $14 $ 2 $ (4) $12
Cash discounts 3 50 (50) 3
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002:
Doubtful accounts 13 5 (4) 14
Cash discounts 4 53 (54) 3
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001:
Doubtful accounts 14 3 (4) 13
Cash discounts 4 51 (51) 4
- --------------------------------------------------------------------------------------------------------------------
(a) Reflects provisions charged to earnings.
(b) Reflects receivables written off as related to doubtful accounts and
discounts allowed as related to cash discounts.
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9a. 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 year covered by this
report on Form 10-K, 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 fourth quarter of the
fiscal year covered by this report on Form 10-K that has materially affected, or
is reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF FEBRUARY 24, 2004, EXCEPT FOR THREE
OFFICERS WHOSE POSITION HAS CHANGED EFFECTIVE MARCH 1, 2004)
PRESENT POSITION
NAME, AGE AND PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE
- ----------------------------------------------------------------------------------------------------------------
William C. Foote, 52 Chairman and Chief Executive Officer to August 1999. August 1999
Chairman, Chief Executive Officer
and President
Edward M. Bosowski, 49 Executive Vice President - Marketing, United States March 2004
Executive Vice President, Marketing Gypsum Company, to February 1999; President and Chief
and Corporate Strategy; President, Executive Officer, United States Gypsum Company, to
USG International November 2000; President, Growth Initiatives and
International, to February 2001. Senior Vice
President, Marketing and Corporate Strategy;
President, USG International to February 2004.
Stanley L. Ferguson, 51 Associate General Counsel to May 2000; Vice President March 2004
Executive Vice President and General and General Counsel to May 2001. Senior Vice President
Counsel and General Counsel to February 2004.
Richard H. Fleming, 56 Senior Vice President and Chief Financial Officer to February 1999
Executive Vice President and Chief February 1999.
Financial Officer
67
PRESENT POSITION
NAME, AGE AND PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE
- ----------------------------------------------------------------------------------------------------------------
James S. Metcalf, 46 Senior Vice President, Sales and Marketing, USG March 2004
Executive Vice President; Interiors, Inc., to March 1999; Executive Vice
President, Building Systems President and Chief Operating Officer, L&W Supply
Corporation, to March 2000; President and Chief
Executive Officer, L&W Supply Corporation, to March
2002. Senior Vice President; President, Building
Systems to February 2004.
Raymond T. Belz, 63 Vice President and Controller, USG Corporation, from October 2002
Senior Vice President, Financial January 1994 to February 1999; Vice President,
Operations Financial Operations, North American Gypsum
and Worldwide Ceilings, from September 1996
to February 1999; Senior Vice President and
Controller, USG Corporation, from February
1999 to October 2002.
Brian W. Burrows, 64 Same position. March 1987
Vice President, Research and
Technology
Brian J. Cook, 46 Same position. December 1998
Vice President, Human Resources
Marcia S. Kaminsky, 45 Same position. October 1998
Vice President, Communications
Karen L. Leets, 47 Home Office Director, Financial Markets, McDonald's March 2003
Vice President and Treasurer Corporation, to November 1999; Assistant Treasurer,
McDonald's Corporation, to March 2003.
Michael C. Lorimer, 64 Vice President, Operations, L&W Supply Corporation, to March 2002
Vice President; President and March 2002.
Chief Operating Officer, L&W
Supply Corporation
D. Rick Lowes, 49 Vice President and Treasurer, USG Corporation, to October 2002
Vice President and Controller October 2002.
Peter K. Maitland, 62 Director, Employee Benefits and Office Management, to February 1999
Vice President, Compensation, February 1999.
Benefits and Administration
Clarence B. Owen, 55 President and Managing Director, Europe, USG January 2003
Vice President and Chief Interiors, Inc., to March 1999; Senior Vice President,
Technology Officer International, USG Interiors, Inc., to May 2001; Vice
President to May 2001; Vice President, International
and Technology, to January 2003.
John Eric Schaal, 60 Assistant General Counsel to August 2000; Associate March 2002
Corporate Secretary and Associate General Counsel to March 2002.
General Counsel
68
COMMITTEE CHARTERS AND CODE OF BUSINESS CONDUCT
The Corporation's code of business conduct and ethics (which applies to
directors, officers and employees and is known as the Code of Business Conduct),
its corporate governance guidelines, and the charters of committees of the board
of directors, including the audit committee, governance committee, and
compensation and organization committee, are available on the Corporation's
website at www.usg.com. Shareholders may request a copy of this information by
writing to: J. Eric Schaal, Corporate Secretary and Associate General Counsel,
USG Corporation, P.O. Box 6721, Chicago, IL 60680-6721. Any waivers of, or
changes to, the Corporation's Code of Business Conduct that apply to the
Corporation's executive officers, directors, or persons performing similar
functions, will be promptly disclosed on the Corporation's website in the
"Investors" section, as required by the Securities and Exchange Commission and
the New York Stock Exchange.
Other information required by Item 10 is included in the Corporation's
definitive Proxy Statement, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is included in the Corporation's definitive
Proxy Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information about the Corporation's common stock
that may be issued upon exercise of options, and rights associated with any such
option exercises, under all of the Corporation's equity compensation plans as of
December 31, 2003, including the Long-Term Incentive Plan and Omnibus Management
Incentive Plan. Each of the plans was approved by the Corporation's
stockholders.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS AND SECURITIES REPORTED IN
PLAN CATEGORY AND RIGHTS RIGHTS COLUMN ONE)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by stockholders 2,600,375 $34.89 2,187,845
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by
stockholders - - -
- ----------------------------------------------------------------------------------------------------------------------
Total 2,600,375 34.89 2,187,845
- ----------------------------------------------------------------------------------------------------------------------
Other information required by Item 12 is included in the Corporation's
definitive Proxy Statement, which is incorporated herein by reference.
69
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is included in the Corporation's definitive
Proxy Statement, which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by Item 14 is included in the Corporation's definitive
Proxy Statement, which is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. The consolidated financial statements and supplemental financial
statement schedule
See Part II, Item 8. Financial Statements and Supplementary Data for an index of
the Corporation's consolidated financial statements and supplementary data
schedule.
EXHIBIT
NUMBER 3. EXHIBITS (REG. S-K, ITEM 601)
ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Restated Certificate of Incorporation of USG Corporation (incorporated
by reference to Exhibit 3.1 of USG Corporation's Form 8-K, dated May 7,
1993).
3.2 Certificate of Designation of Junior Participating Preferred Stock,
series D, of USG Corporation (incorporated by reference to Exhibit A of
Exhibit 4 to USG Corporation's Form 8-K, dated March 27, 1998).
3.3* Amended and Restated By-Laws of USG Corporation, dated as of February
11, 2004.
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES:
4.1 Indenture dated as of October 1, 1986, between USG Corporation and
National City Bank of Indiana, successor Trustee to Bank One, which was
successor Trustee to Harris Trust and Savings Bank (incorporated by
reference to Exhibit 4(a) of USG Corporation's Registration Statement
No. 33-9294 on Form S-3, dated October 7, 1986).
4.2 Rights Agreement dated March 27, 1998, between USG Corporation and
Harris Trust and Savings Bank, as Rights Agent (incorporated by
reference to Exhibit 4 of USG Corporation's Form 8-K, dated March 27,
1998).
4.3 Form of Common Stock certificate (incorporated by reference to Exhibit
4.4 to USG Corporation's Form 8-K, dated May 7, 1993).
The Corporation and certain of its consolidated subsidiaries are
parties to long-term debt instruments under which the total amount of
securities authorized does not exceed 10% of the total assets of the
Corporation and its subsidiaries on a consolidated basis. Pursuant to
paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Corporation
agrees to furnish a copy of such instruments to the Securities and
Exchange Commission upon request.
70
MATERIAL CONTRACTS:
10.1 Management Performance Plan of USG Corporation (incorporated by
reference to Annex C of Amendment No. 8 to USG Corporation's
Registration Statement No. 33-40136 on Form S-4, dated February 3,
1993).
10.2 First Amendment to Management Performance Plan, effective November 15,
1993, and dated February 1, 1994 (incorporated by reference to Exhibit
10(aq) of Amendment No. 1 of USG Corporation's Registration Statement
No. 33-51845 on Form S-1).
10.3 Second Amendment to Management Performance Plan, dated June 27, 2000
(incorporated by reference to Exhibit 10(a) of USG Corporation's Form
10-Q, dated November 6, 2000).
10.4 Amendment and Restatement of USG Corporation Supplemental Retirement
Plan, effective July 1, 1997, and dated August 25, 1997 (incorporated
by reference to Exhibit 10(c) of USG Corporation's Annual Report on
Form 10-K, dated February 20, 1998).
10.5 First Amendment to Supplemental Retirement Plan, effective July 1, 1997
(incorporated by reference to Exhibit 10(d) of USG Corporation's Annual
Report on Form 10-K, dated February 26, 1999).
10.6 Second Amendment to Supplemental Retirement Plan, effective November 8,
2000 (incorporated by reference to Exhibit 10(f) of USG Corporation's
Annual Report on Form 10-K, dated March 5, 2001).
10.7 Third Amendment to Supplemental Retirement Plan, effective November 8,
2000 (incorporated by reference to Exhibit 10(g) of USG Corporation's
Annual Report on Form 10-K, dated March 5, 2001).
10.8 Fourth Amendment to Supplemental Retirement Plan, effective April 11,
2001 (incorporated by reference to Exhibit 10(a) of USG Corporation's
Form 10-Q, dated March 31, 2001).
10.9 Fifth Amendment to Supplemental Retirement Plan, effective December 21,
2001 (incorporated by reference to Exhibit 10(i) of USG Corporation's
Annual Report on Form 10-K, dated March 1, 2002).
10.10 Form of Termination Compensation Agreement, dated January 1, 2000
(incorporated by reference to Exhibit 10(e) of USG Corporation's Annual
Report on Form 10-K, dated February 29, 2000).
10.11 Form of Indemnification Agreement (incorporated by reference to Exhibit
10(g) of Amendment No. 1 to USG Corporation's Registration Statement
No. 33-51845 on Form S-1).
10.12 Form of Employment Agreement, dated January 1, 2000 (incorporated by
reference to Exhibit 10(g) of USG Corporation's Annual Report on Form
10-K, dated February 29, 2000).
10.13 Five-Year Credit Agreement, dated as of June 30, 2000, among USG
Corporation and the banks listed on the signature pages thereto and The
Chase Manhattan Bank, as Administrative Agent (incorporated by
reference to Exhibit 10(a) of USG Corporation's Form 10-Q, dated August
7, 2000).
10.14 364-Day Credit Agreement, dated as of June 30, 2000, among USG
Corporation and the banks listed on the signature pages thereto and The
Chase Manhattan Bank, as Administrative Agent (incorporated by
reference to Exhibit 10(b) of USG Corporation's Form 10-Q, dated August
7, 2000).
10.15 Master Letter of Credit Agreement, Rider to Master Letter of Credit
Agreement, and Related Pledge Agreement, Acknowledgement Agreement if
Collateral Held at LaSalle Bank National Association Trust Department,
LaSalle Bank National Association Trust Department Internal, Pledge
Agreement between USG Corporation
71
and LaSalle Bank National Association, dated June 11, 2003
(incorporated by reference to Exhibit 10 of USG Corporation's Form
10-Q, dated June 30, 2003).
10.16 1995 Long-Term Equity Plan of USG Corporation (incorporated by
reference to Annex A to USG Corporation's Proxy Statement and Proxy,
dated March 31, 1995).
10.17 First Amendment to 1995 Long-Term Equity Plan of USG Corporation, dated
June 27, 2000 (incorporated by reference to Exhibit 10(b) of USG
Corporation's Form 10-Q, dated November 6, 2000).
10.18* 2003 Annual Management Incentive Program - USG Corporation.
10.19 Omnibus Management Incentive Plan (incorporated by reference to Annex A
to USG Corporation's Proxy Statement and Proxy, dated March 28, 1997).
10.20 First Amendment to Omnibus Management Incentive Plan, dated November
11, 1997 (incorporated by reference to Exhibit 10(p) of USG
Corporation's Annual Report on Form 10-K, dated February 20, 1998).
10.21 Second Amendment to Omnibus Management Incentive Plan, dated as of June
27, 2000 (incorporated by reference to Exhibit 10(c) of USG
Corporation's Form 10-Q, dated November 6, 2000).
10.22 Amended and Restated Stock Compensation Program for Non-Employee
Directors of USG Corporation, dated July 1, 1997 (incorporated by
reference to Exhibit 10(q) of USG Corporation's Annual Report on Form
10-K, dated February 20, 1998).
10.23 Key Employee Retention Plan, dated May 16, 2001, as amended September
20, 2001 (incorporated by reference to Exhibit 10(v) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.24 Senior Executive Severance Plan, dated May 16, 2001, as amended
September 20, 2001 (incorporated by reference to Exhibit 10(w) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.25 Revolving Credit and Guaranty Agreement, dated as of June 25, 2001,
among USG Corporation and certain of its subsidiaries, as debtors, USG
Foreign Investments, Ltd., as guarantor, and The Chase Manhattan Bank,
as agent and lender, and the other lenders named therein (incorporated
by reference to Exhibit 10(x) of USG Corporation's Annual Report on
Form 10-K, dated March 1, 2002).
10.26 First Amendment to Revolving Credit and Guaranty Agreement, dated
August 2, 2001 (incorporated by reference to Exhibit 10(y)
of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.27 Second Amendment to Revolving Credit and Guaranty Agreement, dated
August 24, 2001 (incorporated by reference to Exhibit 10(z) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.28 Third Amendment to Revolving Credit and Guaranty Agreement, dated
December 10, 2001 (incorporated by reference to Exhibit 10(aa) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.29 Fourth Amendment to Revolving Credit and Guaranty Agreement, dated
August 9, 2002 (incorporated by reference to Exhibit 10.28 of USG
Corporation's Annual Report on Form 10-K, dated February 27, 2003).
10.30 Security and Pledge Agreement, dated June 25, 2001, among USG
Corporation and each of its direct and indirect subsidiaries party to
the Credit Agreement, other than USG Foreign Investments, Ltd., and The
Chase Manhattan Bank (incorporated by reference to Exhibit 10(ab) of
USG Corporation's Annual Report on Form 10-K, dated March 1, 2002).
72
10.31 Second Amendment of USG Corporation Retirement Plan, dated December 21,
2001 (incorporated by reference to Exhibit 10(ac) of USG Corporation's
Annual Report on Form 10-K, dated March 1, 2002).
10.32 Third Amendment of USG Corporation Retirement Plan, dated August 22,
2002 (incorporated by reference to Exhibit 10.31 of USG Corporation's
Annual Report on Form 10-K, dated February 27, 2003).
LETTER REGARDING CHANGE IN CERTIFYING ACCOUNTANT:
16.1 Letter of Arthur Andersen LLP regarding the change in certifying
accountant, dated May 13, 2002 (incorporated by reference to Exhibit
16.1 of USG Corporation's Form 8-K, dated May 13, 2002).
OTHER:
21* Subsidiaries
23* Consents of Experts and Counsel
24* Power of Attorney
31.1* Rule 13a - 14(a) Certifications of USG Corporation's Chief Executive
Officer
31.2* Rule 13a - 14(a) Certifications of USG Corporation's Chief Financial
Officer
32.1* Section 1350 Certifications of USG Corporation's Chief Executive
Officer
32.2* Section 1350 Certifications of USG Corporation's Chief Financial
Officer
- ------------------------------
* Filed or furnished herewith
(b) Reports on Form 8-K:
On October 24, 2003, USG Corporation furnished 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 third
quarter of 2003.
On November 12, 2003, USG Corporation filed with the SEC a Form 8-K for the
purpose of disclosing, under "Item 5. Other Events," that its corporate
code of business conduct adopted in response to the New York Stock Exchange
Corporate Governance Rules and the Sarbanes-Oxley Act of 2002 could be
found on its website at www.usg.com.
73
INDEX TO EXHIBITS FILED OR FURNISHED
WITH THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
EXHIBIT PAGE
- ------- ----
3.3 Amended and Restated By-Laws of USG Corporation 76
10.18 2003 Annual Management Incentive Program - USG Corporation 88
21 Subsidiaries 94
23 Consent of Experts and Counsel 95
24 Power of Attorney 96
31.1 Rule 13a - 14(a) Certifications of USG Corporation's Chief Executive Officer 97
31.2 Rule 13a - 14(a) Certifications of USG Corporation's Chief Financial Officer 98
32.1 Section 1350 Certifications of USG Corporation's Chief Executive Officer 99
32.2 Section 1350 Certifications of USG Corporation's Chief Financial Officer 100
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
USG CORPORATION
February 24, 2004
By:/s/ Richard H. Fleming
------------------------------------
Richard H. Fleming
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ William C. Foote February 24, 2004
- -----------------------------------------------
WILLIAM C. FOOTE
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
/s/ Richard H. Fleming February 24, 2004
- -----------------------------------------------
RICHARD H. FLEMING
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ D. Rick Lowes February 24, 2004
- -----------------------------------------------
D. RICK LOWES
Vice President and Controller
(Principal Accounting Officer)
ROBERT L. BARNETT, KEITH A. BROWN, ) By: /s/ Richard H. Fleming
---------------------------------
JAMES C. COTTING, LAWRENCE M. CRUTCHER, ) Richard H. Fleming
W. DOUGLAS FORD, DAVID W. FOX, ) Attorney-in-fact
VALERIE B. JARRETT, MARVIN E. LESSER, ) Pursuant to Power of Attorney
JOHN B. SCHWEMM, JUDITH A. SPRIESER ) (Exhibit 24 hereto)
Directors ) February 24, 2004
75