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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-8864
USG CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3329400
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes (X) No ( )
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes (X) No ( )
As of March 31, 2004, 43,017,397 shares of USG common stock were outstanding.
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings:
Three Months Ended March 31, 2004 and 2003 3
Consolidated Balance Sheets:
As of March 31, 2004 and December 31, 2003 4
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 37
Item 4. Controls and Procedures 48
Report of Independent Public Accountants 49
PART II OTHER INFORMATION
Item 1. Legal Proceedings 51
Item 6. Exhibits and Reports on Form 8-K 51
SIGNATURES 52
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER-SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-------------------------------
2004 2003
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Net sales $ 1,020 $ 862
Cost of products sold 849 745
Selling and administrative expenses 77 80
Chapter 11 reorganization expenses 2 2
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Operating profit 92 35
Interest expense 1 1
Interest income (1) (1)
Other expense, net 2 -
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Earnings before income taxes and cumulative
effect of accounting change 90 35
Income taxes 33 13
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Earnings before cumulative effect of accounting change 57 22
Cumulative effect of accounting change, net of tax - (16)
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Net earnings 57 6
============ ============
EARNINGS PER COMMON SHARE:
Basic and diluted before cumulative effect
of accounting change 1.33 0.50
Cumulative effect of accounting change - (0.37)
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Basic and diluted 1.33 0.13
============ ============
Dividends paid per common share - -
Average common shares 43,022,719 43,137,883
Average diluted common shares 43,023,995 43,137,883
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
MARCH 31, DECEMBER 31,
2004 2003
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ASSETS
Current Assets:
Cash and cash equivalents $ 629 $ 700
Short-term marketable securities 41 64
Restricted cash 19 7
Receivables (net of reserves - $16 and $15) 451 321
Inventories 304 280
Income taxes receivable 25 26
Deferred income taxes 42 43
Other current assets 61 57
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Total current assets 1,572 1,498
Long-term marketable securities 236 176
Property, plant and equipment (net of accumulated
depreciation and depletion - $839 and $816) 1,804 1,818
Deferred income taxes 162 178
Goodwill 41 39
Other assets 83 90
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Total Assets 3,898 3,799
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 256 202
Accrued expenses 179 206
Current portion of long-term debt 1 1
Income taxes payable 13 5
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Total current liabilities 449 414
Long-term debt 1 1
Deferred income taxes 23 23
Other liabilities 431 429
Liabilities subject to compromise 2,242 2,243
Commitments and contingencies
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (258) (258)
Capital received in excess of par value 414 414
Accumulated other comprehensive income (loss) 5 (1)
Retained earnings 586 529
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Total stockholders' equity 752 689
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Total Liabilities and Stockholders' Equity 3,898 3,799
========= ========
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-----------------------
2004 2003
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OPERATING ACTIVITIES:
Net earnings $ 57 $ 6
Adjustments to reconcile net earnings to net cash:
Cumulative effect of accounting change - 16
Depreciation, depletion and amortization 28 25
Deferred income taxes 12 12
(Increase) decrease in working capital:
Receivables (130) (71)
Income taxes receivable 1 -
Inventories (24) (16)
Payables 62 27
Accrued expenses (26) (53)
(Increase) decrease in other assets 6 (3)
Increase (decrease) in other liabilities 2 (3)
Change in asbestos receivable 10 15
Decrease in liabilities subject to compromise (1) (1)
Other, net (1) 1
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Net cash used for operating activities (4) (45)
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INVESTING ACTIVITIES:
Capital expenditures (20) (17)
Purchases of marketable securities (115) (32)
Sales or maturities of marketable securities 78 37
Net proceeds from asset dispositions 6 -
Acquisition of business (4) -
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Net cash used for investing activities (55) (12)
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FINANCING ACTIVITIES:
Deposit of restricted cash (12) -
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Net cash used for financing activities (12) -
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Net decrease in cash and cash equivalents (71) (57)
Cash and cash equivalents at beginning of period 700 649
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Cash and cash equivalents at end of period 629 592
========= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid - -
Income taxes paid, net 8 4
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PREPARATION OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of USG
Corporation ("the Corporation") have been prepared in accordance with
applicable United States Securities and Exchange Commission guidelines
pertaining to interim financial information. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from
those estimates. In the opinion of management, the financial statements
reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of the Corporation's financial
results for the interim periods. These financial statements and notes
are to be read in conjunction with the financial statements and notes
included in the Corporation's 2003 Annual Report on Form 10-K which was
filed on February 24, 2004.
(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 13. Litigation.
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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 currently have the exclusive right to propose a plan of
reorganization and have filed a motion with the Bankruptcy Court
requesting that the exclusive period be extended to September 1, 2004.
The committee representing asbestos personal injury claimants and the
legal representative for future asbestos claimants oppose this
extension of exclusivity. The Court is expected to rule on the motion
on May 24, 2004. By operation of bankruptcy law, the Debtors continue
to have the exclusive right to propose a plan at least until such time
as the Court rules on the Debtors' motion. The Debtors may seek one or
more additional exclusivity 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 Judge 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 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
Mr. 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 filed
motions in November 2003 to remove Judge Wolin from the Chapter 11
Cases. The committee representing asbestos personal injury claimants
and the
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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 have appealed Judge
Wolin's decision to the Third Circuit Court of Appeals. Additional
information regarding these proceedings is discussed in Note 13.
Litigation, under Developments in the Reorganization Proceeding.
The plan of reorganization ultimately approved by the Bankruptcy Court
in the Chapter 11 Cases 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, 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 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 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
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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 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 $2.7 million and $5.6
million in the first quarter of 2004 and 2003, respectively. The
Corporation expects to propose a form of extension to the key employee
retention plan beyond the current expiration date of June 30, 2004. Any
such extension is subject to Bankruptcy Court approval.
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
April 7, 2004, the Fairness in Asbestos Injury Resolution Act of 2004
(Senate
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Bill 2290, the "FAIR Bill") was introduced in the United States Senate.
The FAIR Bill has not been approved by the Senate, has not been
introduced in the House of Representatives, and is not law.
The FAIR Bill introduced in the Senate is intended to establish a
nationally administered trust to compensate asbestos personal injury
claimants. In the FAIR Bill's current form, companies that have made
past payments for asbestos personal injury claims would be required to
contribute amounts to a national trust on a periodic basis to fund
claims filed by asbestos personal injury claimants who qualify for
payment under the FAIR Bill. The nationally administered trust would be
the exclusive remedy for asbestos personal injury claims, and such
claims could not be brought in state or federal court during the life
of the trust.
In the FAIR Bill's current form, the amounts to be paid to the national
fund are based on an allocation methodology set forth in the FAIR Bill.
The amounts that participants, including the Debtors, would be required
to pay are not dischargeable in a bankruptcy proceeding. The FAIR Bill
also provides, among other things, that the national fund would
terminate if it is determined that the money in the fund is not
sufficient to compensate eligible claimants. In such a case, under the
terms of the current FAIR Bill, the claimants and defendants would
return to the federal court system to resolve claims not paid by the
national fund. The text of the FAIR Bill as introduced in the Senate
may be found at http://thomas.loc.gov (type in bill number "S.2290").
Enactment of the FAIR Bill or similar 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 and Debtors' Chapter 11 Cases.
The outcome of the legislative process, however, is inherently
speculative, and it cannot be known whether the FAIR Bill or similar
legislation will ever be enacted or, even if enacted, what the terms of
the final legislation might be. Many labor organizations, including the
AFL-CIO, as well as some Senators, have indicated that they oppose the
FAIR Bill as introduced because, among other things, it does not
provide sufficient compensation to asbestos claimants. On April 22,
2004, the Senate defeated a motion to proceed with floor consideration
of the FAIR Bill. Discussions continue regarding possible revisions to
the FAIR Bill that would allow it to move forward, but it is unclear
whether these discussions will produce agreements on key issues. It is
likely that even if the FAIR Bill is enacted, the terms of the enacted
legislation will be different from the current FAIR Bill, and those
differences may be material to the FAIR Bill's impact on the
Corporation.
During the legislative 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
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Note 13. 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 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. Of this amount,
$5.7 billion worth of claims have been withdrawn from the case by
creditors. The Debtors have been analyzing the remaining proofs of
claim 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. To date, the
court has expunged 260 claims totaling $29.5 million as duplicates;
expunged 398 claims totaling $194.7 million as amended or superceded;
allowed the reduction of 210 claims by a total of $2.6 million; and
allowed the correction of the Debtors on 1,002 claims and the
reclassification of 186 claims to general unsecured claims. The Debtors
continue to analyze and reconcile filed claims on an ongoing basis.
The deadline to bring avoidance actions in the Chapter 11 Cases was
June 25, 2003. 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
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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 13. 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
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
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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 13. 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
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sheets as of March 31 consisted of the following items (dollars in
millions):
As of As of
March 31, December 31,
2004 2003
-----------------------------------
Accounts payable $ 163 $ 162
Accrued expenses 43 44
Debt 1,005 1,005
Asbestos reserve 1,061 1,061
Other long-term liabilities 13 14
- ----------------------------------------------------------------------------------------------------------
Subtotal 2,285 2,286
Elimination of intercompany accounts payable (43) (43)
- ----------------------------------------------------------------------------------------------------------
Total liabilities subject to compromise 2,242 2,243
==========================================================================================================
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 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 March 31, 2004, U.S. Gypsum and USG Interiors had net
pre-petition payable balances to the Parent Company for Intercompany
Corporate
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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 March 31, 2004, U.S. Gypsum and L&W Supply had net post-petition
receivable balances from the Parent Company for Intercompany Corporate
Transactions of $212 million and $178 million, respectively. USG
Interiors had a net post-petition payable balance to the Parent Company
of $16 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
(dollars in millions):
Three Months ended March 31,
-----------------------------
2004 2003
-----------------------------
Legal and financial advisory fees $ 4 $ 4
Bankruptcy-related interest income (2) (2)
- --------------------------------------------------------------------------------------------
Total chapter 11 reorganization expenses 2 2
============================================================================================
INTEREST EXPENSE
For the first quarter of 2004, contractual interest expense not accrued
or recorded on pre-petition debt totaled $17 million. From the Petition
Date through March 31, 2004, contractual interest expense not accrued
or recorded on pre-petition debt totaled $203 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
-15-
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.
The condensed financial statements of the Debtors are presented as
follows:
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
---------------------
2004 2003
-------- --------
Net sales $ 918 $ 781
Cost of products sold 795 684
Selling and administrative expenses 65 69
Chapter 11 reorganization expenses 2 2
Interest expense 1 1
Interest income - -
Other income, net - (2)
-------- --------
Earnings before income taxes and cumulative effect of
accounting change 55 27
Income taxes 26 12
-------- --------
Earnings before cumulative effect of accounting change 29 15
Cumulative effect of accounting change - (13)
-------- --------
Net earnings 29 2
======== ========
-16-
USG CORPORATION
DEBTOR-IN-POSSESSION BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 419 $ 489
Short-term marketable securities 41 64
Restricted cash 19 7
Receivables (net of reserves - $12 and $11) 383 276
Inventories 255 232
Income taxes receivable 22 21
Deferred income taxes 41 41
Other current assets 50 47
-------- ----------
Total current assets 1,230 1,177
Long-term marketable securities 236 176
Property, plant and equipment (net of accumulated
depreciation and depletion - $665 and $645) 1,570 1,576
Deferred income taxes 162 178
Goodwill 41 39
Other assets 339 358
-------- ----------
Total Assets 3,578 3,504
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 223 168
Accrued expenses 159 186
Income taxes payable 13 4
-------- ----------
Total current liabilities 395 358
Other liabilities 404 403
Liabilities subject to compromise 2,242 2,243
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (258) (258)
Capital received in excess of par value 102 101
Accumulated other comprehensive income 15 8
Retained earnings 673 644
-------- ----------
Total stockholders' equity 537 500
-------- ----------
Total Liabilities and Stockholders' Equity 3,578 3,504
======== ==========
-17-
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
---------------------
2004 2003
--------- --------
OPERATING ACTIVITIES:
Net earnings $ 29 $ 2
Adjustments to reconcile net earnings to net cash:
Cumulative effect of accounting change - 13
Depreciation, depletion and amortization 23 22
Deferred income taxes 12 11
(Increase) decrease in working capital:
Receivables (107) (58)
Income taxes receivable (1) -
Inventories (23) (15)
Payables 64 33
Accrued expenses (26) (45)
(Increase) decrease in post-petition intercompany receivable 12 (7)
Decrease in other assets 7 2
Increase (decrease) increase in other liabilities 1 (5)
Change in asbestos receivables 10 15
Decrease in liabilities subject to compromise (1) (1)
Other, net (1) (1)
--------- --------
Net cash used for operating activities (1) (34)
--------- --------
INVESTING ACTIVITIES:
Capital expenditures (17) (10)
Purchases of marketable securities (115) (32)
Sale or maturities of marketable securities 78 37
Net proceeds from asset dispositions 1 -
Acquisition of business (4) -
--------- --------
Net cash used for investing activities (57) (5)
--------- --------
FINANCING ACTIVITIES:
Deposit of restricted cash (12) -
--------- --------
Net cash used for financing activities (12) -
--------- --------
Net decrease in cash and cash equivalents (70) (39)
Cash and cash equivalents at beginning of period 489 478
--------- --------
Cash and cash equivalents at end of period 419 439
========= ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid - 1
Income taxes paid, net 4 -
-18-
(3) EXIT ACTIVITIES
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 of 2003, and a reserve of $2
million was included in accrued expenses on the consolidated balance
sheet as of December 31, 2003. The remaining payments of $2 million
were made in the first quarter of 2004.
(4) EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of
common shares outstanding. Diluted earnings per share are based on the
weighted average number of common shares outstanding and the dilutive
effect of the potential exercise of outstanding stock options. Diluted
earnings per share exclude the potential exercise of outstanding stock
options for any period in which such exercise would have an
anti-dilutive effect. The reconciliation of basic earnings per share to
diluted earnings per share is shown in the following table (dollars in
millions, except share data):
Weighted
Average
Net Shares Per-Share
Three Months Ended March 31, Earnings (000) Amount
- -------------------------------------------------------------------------------------------------------
2004:
Basic earnings $ 57 43,023 $ 1.33
Dilutive effect of stock options 1
- -------------------------------------------------------------------------------------------------------
Diluted earnings 57 43,024 1.33
=======================================================================================================
2003:
Basic earnings 6 43,138 0.13
Dilutive effect of stock options -
- -------------------------------------------------------------------------------------------------------
Diluted earnings 6 43,138 0.13
=======================================================================================================
-19-
(5) MARKETABLE SECURITIES
As of March 31, 2004 and 2003, the Corporation's investments in
marketable securities consisted of the following (dollars in millions):
2004 2003
----------------------------------------
Amortized Amortized
Cost FMV Cost FMV
----------------------------------------
Asset-backed securities $ 116 $ 117 $ 72 $ 72
U.S. government and agency securities 88 88 55 55
Municipal securities 29 29 30 30
Corporate securities 43 43 6 6
Time deposits - - 13 13
- -------------------------------------------------------------------------------------------------------------
Total marketable securities 276 277 176 176
=============================================================================================================
Contractual maturities of marketable securities as of March 31, 2004,
were as follows (dollars in millions):
Fair
Amortized Market
Cost Value
---------------------------
Due in 1 year or less $ 41 $ 41
Due in 1-5 years 63 63
Due in 5-10 years 17 17
Due after 10 years 39 39
- -----------------------------------------------------------------------------------------------------------
160 160
Asset-backed securities 116 117
- -----------------------------------------------------------------------------------------------------------
Total marketable securities 276 277
===========================================================================================================
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 $40 million that were in an unrealized loss position
for less than 12 months as of March 31, 2004. These investments were in
the following types of securities: $15 million in asset-backed
securities, $6 million in government and agency securities and $19
million in corporate securities. The Corporation also had $1 million in
government and agency securities that had been in a continuous loss
position for a period greater than 12 months as of March 31, 2004. The
aggregate amounts of both types of unrealized loss positions were not
material.
-20-
(6) 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. The liability for asset
retirement obligations was $35 million as of March 31, 2004, and
December 31, 2003.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Total goodwill amounted to $41 million as of March 31, 2004, and $39
million as of December 31, 2003. Goodwill increased by $2 million
during the first quarter of 2004 as a result of a business acquisition
during the quarter.
Other intangible assets amounted to $2 million as of March 31, 2004,
and December 31, 2003. As of March 31, 2004, $1 million of this amount
was subject to amortization over a five-year life. Other intangible
assets are included in other assets on the consolidated balance sheet.
-21-
(8) DERIVATIVE INSTRUMENTS
The Corporation uses derivative instruments to manage selected
commodity price and foreign currency exposures. The Corporation does
not use derivative instruments for trading purposes. All derivative
instruments must be recorded on the balance sheet at fair value. For
derivatives designated as fair value hedges, the changes in the fair
values of both the derivative instrument and the hedged item are
recognized in earnings in the current period. For derivatives
designated as cash flow hedges, the effective portion of changes in the
fair value of the derivative is recorded to accumulated other
comprehensive income (loss) and is reclassified to earnings when the
underlying transaction has an impact on earnings. The ineffective
portion of changes in the fair value of the derivative is reported in
cost of products sold. The amount of ineffectiveness recorded in the
first quarter of 2004 amounted to income of $600,000.
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 income (loss) until the hedged
transaction occurs, at which time it is reclassified to earnings. As of
March 31, 2004, the fair value of these swap contracts, which remained
in accumulated other comprehensive income (loss), was $22 million ($14
million after-tax).
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS
The Corporation has operations in a number of countries and uses
forward contracts from time to time to hedge selected risk of changes
in cash flows resulting from forecasted intercompany and third-party
sales or purchases 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 income (loss)
until the underlying transaction has an impact on earnings. As of March
31, 2004, the Corporation had no such foreign currency contracts.
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.
-22-
(9) COMPREHENSIVE INCOME
The components of comprehensive income are summarized in the following
table (dollars in millions):
Three Months
ended March 31
------------------------
2004 2003
------------------------
Net earnings $ 57 $ 6
- ------------------------------------------------------------------------------------------------------------
Pretax gain (loss) on derivatives 13 -
Income tax benefit (expense) (5) -
- ------------------------------------------------------------------------------------------------------------
After-tax gain (loss) on derivative 8 -
- ------------------------------------------------------------------------------------------------------------
Deferred currency translation (2) 11
- ------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on marketable
securities - -
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income 63 17
============================================================================================================
There was no tax impact on the foreign currency translation
adjustments.
The components of accumulated other comprehensive income (loss)
included on the consolidated balance sheets are summarized in the
following table (dollars in millions):
As of As of
March 31, December 31,
2004 2003
-----------------------------
Gain on derivatives, net of tax $ 18 $ 10
Deferred currency translation (10) (8)
Minimum pension liability, net of tax (3) (3)
Unrealized gain (loss) on marketable securities - -
- --------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) 5 (1)
========================================================================================================
During the first quarter of 2004, accumulated net after-tax gains of $3
million ($5 million pretax) on derivatives were reclassified from
accumulated other comprehensive income (loss) to earnings. As of March
31, 2004, the estimated net after-tax gain expected to be reclassified
within the next 12 months from accumulated other comprehensive income
(loss) into earnings is $16 million.
-23-
(10) EMPLOYEE RETIREMENT PLANS
The Corporation adopted SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" in
December 2003. In accordance with the Corporation's funding policy, the
Corporation and its subsidiaries contributed cash of $8 million during
the first quarter of 2004 and expect to contribute cash of
approximately $72 million during the full year 2004 to their pension
plans.
The components of net pension and postretirement benefits costs for the
three months ended March 31, 2004 and 2003 are summarized in the
following table (dollars in millions):
Three Months
ended March 31
-------------------------
2004 2003
-------------------------
PENSION:
Service cost of benefits earned $ 7 $ 5
Interest cost on projected
benefit obligation 13 13
Expected return on plan assets (13) (13)
Net amortization 5 3
- ---------------------------------------------------------------------------------------------------------
Net cost 12 8
=========================================================================================================
POSTRETIREMENT:
Service cost of benefits earned $ 4 $ 3
Interest cost on projected
benefit obligation 5 5
- ---------------------------------------------------------------------------------------------------------
Net cost 9 8
=========================================================================================================
-24-
(11) STOCK-BASED COMPENSATION
The Corporation accounts for stock-based compensation under the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." APB No. 25 prescribes the
use of the intrinsic value method, which measures compensation cost as
the quoted market price of the stock at the date of grant less the
amount, if any, that the employee is required to pay. If the
Corporation had elected to recognize compensation cost for stock-based
compensation grants consistent with the fair value method prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," net earnings and net earnings per common share would have
changed to the following pro forma amounts (dollars in millions, except
per-share data):
Three Months
ended March 31,
-----------------------
2004 2003
-----------------------
NET EARNINGS:
Net Earnings: As reported $ 57 $ 6
Deduct: Fair value method of stock
-based employee compensation
expense, net of tax - -
- ----------------------------------------------------------------------------------------------------------
Pro forma net earnings 57 6
==========================================================================================================
BASIC AND DILUTED EARNINGS PER SHARE:
As reported 1.33 0.13
Pro forma 1.33 0.13
==========================================================================================================
Subsequent to the Filing, no stock option grants have been issued.
As of March 31, 2004, common shares totaling 2,346,500 were reserved
for future issuance in conjunction with existing stock option grants.
In addition, 2,544,720 common shares were reserved for future grants.
Shares issued in option exercises may be from original issue or
available treasury shares.
-25-
(12) OPERATING SEGMENTS
The Corporation's operations are organized into three operating
segments: North American Gypsum, which manufactures SHEETROCK(R) brand
gypsum wallboard and joint compounds, DUROCK(R) brand cement board and
other related building products in the United States, Canada and
Mexico; Worldwide Ceilings, which manufactures ceiling tile in the
United States and ceiling grid in the United States, Canada, Europe and
the Asia-Pacific region; and Building Products Distribution, which
distributes gypsum wallboard, drywall metal, ceiling products, joint
compound and other building products throughout the United States.
Operating segment results were as follows (dollars in millions):
Net Sales Operating Profit
- -------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------
North American Gypsum $ 639 $ 542 $ 81 $ 38
Worldwide Ceilings 166 147 15 8
Building Products Distribution 362 295 14 8
Eliminations (147) (122) - 1
Corporate - - (16) (18)
Chapter 11 reorganization expenses - - (2) (2)
- -----------------------------------------------------------------------------------------------------------
Total 1,020 862 92 35
===========================================================================================================
(13) 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
-26-
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, above, 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, who is presiding over the
Debtors Chapter 11 Cases, 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 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."
-27-
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 have appealed 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.
-28-
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 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. The Debtors have begun
this process by issuing written notices to claimants that failed to
provide evidence that any of the Debtors' products were ever installed
in the buildings at issue. To date, the Debtors have issued these
deficiency notices with regard to more than 1,200 buildings and expect
to issue additional notices. Because of the preliminary nature of the
objection 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
-29-
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 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,
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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 how any plan of
reorganization will address any asbestos-related liability of L&W
Supply.
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 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.
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INSURANCE COVERAGE: As of March 31, 2004, U.S. Gypsum had an $800,000
receivable relating to insurance remaining to cover asbestos-related
costs. This insurance receivable, included in other current assets on
the consolidated balance sheet, was collected in April 2004.
ESTIMATED COST: In evaluating U.S. Gypsum's estimated asbestos
liability prior to the Filing, the Corporation considered numerous
uncertainties that made it difficult to estimate reliably U.S. Gypsum's
asbestos liability in the tort system for both pending and future
asbestos claims.
In the Property Damage Cases, such uncertainties included, but were not
limited to, the identification and volume of asbestos-containing
products in the buildings at issue in each case, which is often
disputed; the claimed damages; 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 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
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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% of the reserve was
attributable to defense and administrative costs.
At the time of recording this reserve, it was expected that the reserve
amounts would be expended over a period extending several years beyond
2003, because asbestos cases 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
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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. The reserve as of March 31, 2004, which was determined
based on claims expected to be filed against U.S. Gypsum through 2003,
was $1,061 million. As the Chapter 11 Cases and legislation process
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.
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
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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 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
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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.
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ITEM 2. 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.
The Corporation had $925 million of cash, cash equivalents, restricted cash and
marketable securities as of March 31, 2004, 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 for the first quarter of 2004 were a record level
for any quarter in its history and represented an 18% increase from the same
period in 2003. Demand for products sold by the Corporation's North American
Gypsum and Building Products Distribution operating segments was strong in the
first quarter 2004 due to strength in the new housing and repair and remodel
markets in the United States. Shipments of gypsum wallboard were at record
levels for the Corporation and the industry in the first quarter and are
expected to continue at relatively high levels throughout the remainder of 2004.
Industry utilization rates exceeded 90% in the first quarter resulting in a rise
of market selling prices for gypsum wallboard. U.S. Gypsum's nationwide average
realized selling price for SHEETROCK(R) brand gypsum wallboard was up 14% versus
the first quarter of 2003. The Corporation's Worldwide Ceilings operating
segment also reported increased first quarter sales as compared with the same
period in 2003 primarily due to increased nonresidential repair and remodel
activity in the United States, new sales and distribution policies and a surge
in sales of ceiling grid. Some grid customers increased purchases in
anticipation of reduced supply and higher grid prices associated with a global
shortage of steel and the related rise in the cost of steel.
The Corporation's gross margin was 16.8% in the first quarter of 2004, up from
13.6% in the first quarter of 2003. Gross margin improved as a result of
increased shipments and higher selling prices for all major product lines.
However, costs related to natural gas, employee benefits (pension and medical
insurance for active employees and retirees), other insurance, and wastepaper
used in the manufacture of gypsum wallboard continued to rise in the first
quarter and are expected to
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partially offset price improvement gains 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. The Debtors currently have the exclusive right to propose
a plan of reorganization and have filed a motion with the Bankruptcy Court
requesting that the exclusive period be extended to September 1, 2004. The
committee representing asbestos personal injury claimants and the legal
representative for future asbestos claimants oppose this extension of
exclusivity. The Court is expected to rule on the motion on May 24, 2004. By
operation of bankruptcy law, the Debtors continue to have the exclusive right to
propose a plan at least until such time as the Court rules on the Debtors'
motion. The Debtors may seek one or more additional exclusivity extensions
depending upon developments in the Chapter 11 Cases.
A key factor in determining the recovery of pre-petition creditors or
stockholders under any 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.
Our Annual Report on Form 10-K, filed February 24, 2004, discusses the
background and principal impacts of the Filing as well as potential federal
legislation regarding asbestos personal injury claims. During 2004, there have
been developments regarding potential federal legislation. On April 7, 2004, the
Fairness in Asbestos Injury Resolution Act of 2004 (Senate Bill 2290, the "FAIR
Bill") was introduced in the United States Senate. The FAIR Bill has not been
approved by the Senate, has not been introduced in the House of Representatives,
and is not law.
The FAIR Bill introduced in the Senate is intended to establish a nationally
administered trust to compensate asbestos personal injury claimants. In the FAIR
Bill's current form, companies that have made past payments for asbestos
personal injury claims would be required to contribute amounts to a national
trust on a periodic basis to fund claims filed by asbestos personal injury
claimants who qualify for payment under the FAIR Bill. The nationally
administered trust would be the exclusive remedy for asbestos personal injury
claims, and such claims could not be brought in state or federal court during
the life of the trust.
In the FAIR Bill's current form, the amounts to be paid to the national fund are
based on an allocation methodology set forth in the FAIR Bill. The amounts that
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participants, including the Debtors, would be required to pay are not
dischargeable in a bankruptcy proceeding. The FAIR Bill also provides, among
other things, that the national fund would terminate if it is determined that
the money in the fund is not sufficient to compensate eligible claimants. In
such a case, under the terms of the current FAIR Bill, the claimants and
defendants would return to the federal court system to resolve claims not paid
by the national fund. The text of the FAIR Bill as introduced in the Senate may
be found at http://thomas.loc.gov (type in bill number "S. 2290").
Enactment of the FAIR Bill or similar legislation addressing the financial
contributions of the Debtors for asbestos personal injury claims would have a
material impact on the amount of the Debtor's asbestos personal injury liability
and Debtors' Chapter 11 Cases.
The outcome of the legislative process, however, is inherently speculative, and
it cannot be known whether the FAIR Bill or similar legislation will ever be
enacted or, even if enacted, what the terms of the final legislation might be.
Many labor organizations, including the AFL-CIO, as well as some Senators, have
indicated that they oppose the FAIR Bill as introduced because, among other
things, it does not provide sufficient compensation to asbestos claimants. On
April 22, 2004, the Senate defeated a motion to proceed with floor consideration
of the FAIR Bill. Discussions continue regarding possible revisions to the FAIR
Bill that would allow it to move forward, but it is unclear whether these
discussions will produce agreements on key issues. It is likely that even if the
FAIR Bill is enacted, the terms of the enacted legislation will be different
from the current FAIR Bill, and those differences may be material to the FAIR
Bill's impact on the Corporation.
During the legislative 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 Item 1, Note 13. Litigation, for additional information on the
background of asbestos litigation, developments in the Corporation's
reorganization proceeding, and estimated cost.
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 Item 1. Note 2. Voluntary Reorganization Under Chapter 11,
which includes information related to financial statement presentation, the
debtor-in-possession statements and detail of liabilities subject to compromise
and chapter 11 reorganization expenses.
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CONSOLIDATED RESULTS OF OPERATIONS
NET SALES
Net sales in the first quarter of 2004 totaled $1,020 million, a record for any
quarter in the Corporation's history and an 18% increase from $862 million in
the first quarter of 2003. Net sales increased for all three of the
Corporation's operating segments primarily due to increased shipments and higher
selling prices for all major product lines. See Core Business Results of
Operations below for an explanation of product line results by segment.
COST OF PRODUCTS SOLD
Cost of products sold in the first quarter of 2004 was $849 million, up 14% from
$745 million a year ago. Key factors for this variation were increased product
volume and higher costs related to natural gas, employee benefits (pension and
medical insurance for active employees and retirees), other insurance, and
wastepaper used in the manufacture of gypsum wallboard.
GROSS PROFIT
Gross profit (net sales less cost of products sold) in the first quarter of 2004
was $171 million, a 46% increase from $117 million in the first quarter of 2003.
Gross margin (gross profit as a percent of net sales) was 16.8% in the first
quarter of 2004, up from 13.6% in the first quarter of 2003.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses in the first quarter of 2004 were $77
million, down 4% from $80 million in the first quarter of 2003. This reduction
primarily reflected a lower accrual related to the Bankruptcy Court-approved key
employee retention plan, the impact of a fourth quarter 2003 salaried workforce
reduction program and other cost-reduction initiatives that have resulted in
lower overall expenses. These favorable factors were offset in part by higher
employee benefit costs (pension and medical insurance for active employees and
retirees). As a percent of net sales, selling and administrative expenses were
7.5% in the first quarter of 2004, down from 9.3% in the comparable 2003 period.
CHAPTER 11 REORGANIZATION EXPENSES
In connection with the Filing, the Corporation recorded chapter 11
reorganization expenses of $2 million in the first quarter of 2004 and 2003. For
both periods, these expenses consisted of legal and financial advisory fees of
$4 million, partially offset by bankruptcy-related interest income of $2
million.
OPERATING PROFIT
Operating profit in the first quarter of 2004 was $92 million compared with $35
million in the first quarter of 2003.
INTEREST EXPENSE
Interest expense of $1 million was incurred in the first quarter of 2004 and
2003. 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
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been accrued or recorded since the Petition Date. For the first quarter of 2004,
contractual interest expense not accrued or recorded on pre-petition debt
totaled $17 million. From the Petition Date through March 31, 2004, contractual
interest expense not accrued or recorded on pre-petition debt totaled $203
million. Although no post-petition accruals are required to be made for such
contractual interest expense, debtholders may seek to recover such amounts in
the Chapter 11 Cases.
INTEREST INCOME
Non-bankruptcy related interest income of $1 million was recorded in the first
quarter of 2004 and 2003.
INCOME TAXES
Income tax expense amounted to $33 million and $13 million in the first quarter
of 2004 and 2003, respectively. The effective tax rates were 36.6% and 38.5% for
the respective periods. The decrease in the effective tax rate was primarily due
to a reduction in the Corporation's tax reserves resulting from the application
of recently finalized IRS regulations to the Chapter 11 reorganization expenses
incurred by the Corporation through 2003.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On January 1, 2003, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." A
non-cash, 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. See Item 1. Note 6. Asset Retirement
Obligations for additional information related to the adoption of SFAS No. 143.
NET EARNINGS
Net earnings in the first quarter of 2004 were $57 million, or $1.33 per diluted
share. First quarter of 2003 net earnings were $6 million, or $0.13 per diluted
share.
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CORE BUSINESS RESULTS OF OPERATIONS
(dollars in millions) Net Sales Operating Profit
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 574 $ 496 $ 61 $ 30
CGC Inc. (gypsum) 73 57 13 5
Other subsidiaries* 36 28 7 3
Eliminations (44) (39) - -
- -------------------------------------------------------------------------------------------------------------------
Total 639 542 81 38
- -------------------------------------------------------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 120 110 12 6
USG International 46 40 1 1
CGC Inc. (ceilings) 13 10 2 1
Eliminations (13) (13) - -
- -------------------------------------------------------------------------------------------------------------------
Total 166 147 15 8
- -------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 362 295 14 8
- -------------------------------------------------------------------------------------------------------------------
Corporate - - (16) (18)
Chapter 11 reorganization expenses - - (2) (2)
Eliminations (147) (122) - 1
- -------------------------------------------------------------------------------------------------------------------
Total USG Corporation 1,020 862 92 35
===================================================================================================================
*Includes USG Mexico, S.A. de C.V., a building products business in Mexico,
Gypsum Transportation Limited, a shipping company in Bermuda, and USG Canadian
Mining Ltd., a mining operation in Nova Scotia.
NORTH AMERICAN GYPSUM
Net sales of $639 million increased 18% from the first quarter of 2003, while
operating profit more than doubled to $81 million.
Net sales for U.S. Gypsum increased $78 million, or 16%, compared with the first
quarter of 2003, while operating profit rose $31 million, or 103%. These
increases primarily reflected record shipments of SHEETROCK(R) brand gypsum
wallboard and joint compounds and higher selling prices for SHEETROCK(R) brand
gypsum wallboard. The company also reported higher sales of DUROCK(R) brand
cement board and FIBEROCK(R) brand gypsum fiber panels compared with the first
quarter of last year.
U.S. Gypsum sold 2.7 billion square feet of SHEETROCK(R) brand gypsum wallboard
during the first quarter of 2004, a record for any quarter and an 8% increase
from 2.5 billion square feet sold in the first quarter of 2003. U.S. Gypsum's
wallboard plants operated at 93% of capacity in the first quarter of 2004
compared with 89% in the first quarter of 2003. Industry shipments of gypsum
wallboard were up approximately 10% from the first quarter of 2003.
U.S. Gypsum's nationwide average realized selling price for SHEETROCK(R) brand
gypsum wallboard was $110.33 per thousand square feet in the first quarter of
2004. This price was up 14% from $97.13 in the first quarter of 2003 and up 4%
from $106.01 in the fourth quarter of 2003.
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The improved pricing and record shipments for gypsum wallboard more than offset
the unfavorable effects of higher costs for wastepaper (the primary raw material
of wallboard paper), natural gas (a major source of energy for the company) and
employee benefits. Natural gas costs for the first quarter were up over 14%
versus the prior-year period. However, improved production efficiencies at the
company's gypsum wallboard plants offset a portion of the cost increase.
Net sales for the gypsum business of Canada-based CGC Inc. increased 28% and
operating profit more than doubled to $13 million, as compared with the first
quarter of 2003. These results were primarily attributable to record shipments
and higher selling prices for SHEETROCK(R) brand gypsum wallboard and joint
compounds and a stronger Canadian dollar.
WORLDWIDE CEILINGS
Net sales of $166 million increased 13%, while operating profit of $15 million
rose 88% from the first quarter of 2003.
USG Interiors, Inc., the Corporation's domestic ceilings business, reported a
$10 million, or 9%, increase in net sales compared with the first quarter of
2003, while operating profit doubled to $12 million. Increased shipments and
higher selling prices for ceiling grid and ceiling tile reflected an increase in
repair and remodel activity within the U.S. nonresidential construction market
as well as the impact of the company's new sales and distribution policies. In
addition, concerns over the shortage of steel and related increase in steel
costs caused a surge in demand for ceiling grid during the first quarter of
2004. It is unclear how long the higher level of demand for ceiling grid will
continue, but the Corporation anticipates that such demand will moderate as the
year progresses. The Corporation also expects the cost of steel used in the
manufacture of ceiling grid to rise significantly in 2004 due to the global
shortage of steel.
Net sales for USG International improved 15% compared with the first quarter of
2003, primarily due to increased demand for ceiling grid and tile in Europe and
Latin America. However, operating profit of $1 million was unchanged. During the
first quarter of 2004, the Corporation completed the sale of the Aubange,
Belgium, ceiling tile plant. The Aubange plant was shutdown in the fourth
quarter of 2002.
The ceilings business of CGC Inc. reported a $3 million increase in net sales
and a $1 million increase in operating profit for the first quarter of 2004.
BUILDING PRODUCTS DISTRIBUTION
L&W Supply Corporation ("L&W Supply"), the leading specialty building products
distribution business in the United States, reported net sales of $362 million,
a first quarter record and a 23% increase versus the first quarter of 2003.
Operating profit for the company rose to $14 million from $8 million. These
increases reflect record first quarter shipments of gypsum wallboard and
complementary building products, such as drywall metal, ceiling products, joint
compound and roofing. Shipments of L&W Supply's gypsum wallboard were up 13%
versus the first quarter of 2003, while selling prices increased 8%.
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L&W Supply operated 184 locations in the United States as of March 31, 2004,
compared with 181 locations as of March 31, 2003.
MARKET CONDITIONS AND OUTLOOK
The gypsum industry experienced a record level of wallboard shipments in the
first quarter of 2004 attributable to continued strength in the new housing and
the residential remodeling markets. Industry utilization rates exceeded 90% in
the first quarter resulting in a rise of market selling prices for gypsum
wallboard.
However, the overall outlook for the remainder of the year is mixed. The
strength of the residential market is expected to continue, although the
exceptional strength of the first quarter may abate as the year progresses. The
level of demand will depend on the direction of demand factors such as consumer
confidence, interest rates and home affordability. Commercial construction, the
principal market for the Corporation's ceilings products, continues to be
affected by high office vacancy rates.
In addition, the Corporation, like many other companies, faces many ongoing cost
pressures such as higher prices for natural gas and raw materials and increased
employee benefits and insurance costs.
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 March 31, 2004, the Corporation had $925 million of cash, cash
equivalents, restricted cash and marketable securities, of which $210 million of
cash and cash equivalents was held by non-Debtor subsidiaries. The total amount
of $925 million was down $22 million, or 2%, from $947 million as of December
31, 2003, primarily due to payments of customer rebates and employee incentive
compensation in the first quarter and other seasonal working capital needs.
Since the Petition Date, the Corporation's level of liquidity has increased due
to strong operating cash flows and the absence of cash payments related to
asbestos settlements and interest on pre-petition debt. Contractual interest
expense not accrued or recorded on pre-petition debt was $17 million in the
first quarter of 2004 and $203 million since the Petition Date.
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CASH FLOWS
As shown on the consolidated statement of cash flows, cash and cash equivalents
decreased $71 million during the first quarter of 2004. The primary source of
cash in the first quarter of 2004 was earnings from operations. Primary uses of
cash were: (i) working capital of $117 million (primarily the aforementioned
customer rebates, employee incentive compensation and other seasonal needs),
(ii) net purchases of marketable securities of $37 million, (iii) capital
spending of $20 million, (iv) the designation of $12 million as restricted cash
representing cash collateral to support outstanding letters of credit, and (v)
the use of $4 million for an acquisition.
Comparing the first quarter of 2004 with the first quarter of 2003, net cash
used for operating activities was $4 million in the 2004 period compared with
$45 million a year ago. This variation was primarily attributable to the
increase in first quarter 2004 earnings from operations. Net cash used for
investing activities increased to $55 million from $12 million primarily due to
first quarter 2004 net purchases of marketable securities. Net cash used for
financing activities amounted to $12 million during the first quarter of 2004
due to restricted cash associated with letters of credit issued primarily in
relation to purchases of steel from foreign suppliers.
WORKING CAPITAL
Total working capital (current assets less current liabilities) as of March 31,
2004, amounted to $1,123 million, and the ratio of current assets to current
liabilities was 3.50-to-1. As of December 31, 2003, working capital amounted to
$1,084 million, and the ratio of current assets to current liabilities was
3.62-to-1.
Receivables increased to $451 million as of March 31, 2004, from $321 million as
of December 31, 2003, primarily reflecting a 31% increase in net sales for the
month of March 2004 as compared with December 2003. Inventories and payables
also were up from December 31, 2003, primarily due to the increased level of
business. Inventories increased to $304 million from $280 million, and accounts
payable increased to $256 million from $202 million. Accrued expenses declined
to $179 million from $206 million as of December 31, 2003, primarily due to the
payment of employee incentive compensation during the first quarter.
MARKETABLE SECURITIES
As of March 31, 2004, $277 million was invested in marketable securities, up $37
million from $240 million as of December 31, 2003. Of the first quarter 2004
amount, $236 million was invested in long-term marketable securities and $41
million in short-term marketable securities. The Corporation's marketable
securities are classified as available-for-sale securities and reported at fair
market value with unrealized gains and losses excluded from earnings and
reported in accumulated other comprehensive income (loss) on the consolidated
balance sheet.
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CAPITAL EXPENDITURES
Capital spending amounted to $20 million in the first quarter of 2004, compared
with $17 million in 2003. As of March 31, 2004, remaining capital expenditure
commitments for the replacement, modernization and expansion of operations
amounted to $124 million, compared with $51 million as of March 31, 2003.
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.
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 March 31, 2004, $17 million of letters of credit, which are
cash collateralized at 103%, were outstanding.
As of March 31, 2004, $1 million of standby letters of credit remained
outstanding under a prior debtor-in-possession financing facility. Following the
termination of such financing 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 March 31, 2004, a total of $19 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 March 31, 2004, 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, 2003, levels and do not include any accruals for
post-petition contractual interest expense.
EXIT ACTIVITIES
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 of
2003, and a reserve of $2 million was included in accrued expenses on the
consolidated balance sheet as of December 31, 2003. The remaining payments of $2
million were made in the first quarter of 2004.
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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 Item 1. Note
13. 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 Item 1. Note 13. Litigation for additional
information on environmental litigation.
CRITICAL ACCOUNTING POLICIES
The preparation of the Corporation's financial statements requires management to
make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses during the periods presented. The
Corporation's 2003 Annual Report on Form 10-K, which was filed on February 24,
2004, includes a summary of the critical accounting policies the Corporation
believes are the most important to aid in understanding its financial results.
There have been no material changes to these critical accounting policies that
impacted the Corporation's reported amounts of assets, liabilities, revenues or
expenses during the first three months of 2004.
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.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Corporation's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Corporation's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934), have concluded that, as of the end of the fiscal quarter covered by this
report on Form 10-Q, the Corporation's disclosure controls and procedures were
adequate and designed to ensure that material information relating to the
Corporation and its consolidated subsidiaries would be made known to them by
others within those entities.
(b) Changes in internal control over financial reporting.
There was no change in the Corporation's "internal control over financial
reporting" (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934)
identified in connection with the evaluation required by Rule 13a-15(d) of the
Securities Exchange Act of 1934 that occurred during the fiscal quarter covered
by this report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of USG Corporation:
We have reviewed the accompanying consolidated balance sheets of USG Corporation
and subsidiaries as of March 31, 2004 and 2003 and the related consolidated
statements of earnings and cash flows for each of the three month periods ended
March 31, 2004 and 2003. These interim financial statements are the
responsibility of the Corporation's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheets of USG
Corporation and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the two years then ended (not presented herein); and in our report dated
February 10, 2004 we expressed an unqualified opinion on those consolidated
financial statements and included explanatory paragraphs concerning (i) matters
which raise substantial doubt about the Corporation's ability to continue as a
going concern; (ii) changes in methods of accounting for asset retirement
obligations and goodwill and other intangible assets due to the Corporation's
adoption of Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations" in 2003, and SFAS No. 142,
"Goodwill and Other Intangible Assets" in 2002; and (iii) the application of
proecdures relating to certain disclosures of financial statement amounts
related to the 2001 financial statements that were audited by other auditors who
have ceased operations and for which we have expressed no opinion or other form
of assurance other than with respect to such disclosures. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2003 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
As discussed in Note 2 to the consolidated financial statements, USG Corporation
and certain subsidiaries voluntarily filed for Chapter 11 bankruptcy protection
on
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June 25, 2001. The accompanying consolidated financial statements do not purport
to reflect or provide for the consequences of the bankruptcy proceedings. In
particular, such financial statements do not purport to show (a) as to assets,
their realizable value on a liquidation basis or their availability to satisfy
liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed
for claims or contingencies, or the status and priority thereof; (c) as to
stockholder accounts, the effect of any changes that may be made in the
capitalization of the Corporation; or (d) as to operations, the effect of any
changes that may be made in its business.
The accompanying consolidated financial statements have been prepared assuming
that the Corporation will continue as a going concern. As discussed in Notes 2
and 13 to the consolidated financial statements, there is significant
uncertainty as to the resolution of the Corporation's asbestos litigation,
which, among other things, may lead to possible changes in the composition of
the Corporation's business portfolio, as well as changes in the ownership of the
Corporation. This uncertainty raises substantial doubt about the Corporation's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Notes 2 and 13 to the financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Chicago, Illinois
April 28, 2004
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1. Note 13. Litigation for information concerning the asbestos
and related bankruptcy litigation and environmental litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Letter from Deloitte & Touche LLP regarding unaudited
financial information.
31.1 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
(b) Reports on Form 8-K:
On February 4, 2004, the Corporation furnished to 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 release
information for its fourth quarter of 2003.
On February 17, 2004, the Corporation furnished to the SEC a Form 8-K
for the purpose of disclosing, under "Item 5. Other Events," its
amended by-laws and the charters of its Audit, Governance and
Compensation and Organization Committees of the Board of Directors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By /s/ William C. Foote
-----------------------------------
William C. Foote,
Chairman, Chief Executive Officer and
President
By /s/ Richard H. Fleming
-----------------------------------
Richard H. Fleming,
Executive Vice President and
Chief Financial Officer
By /s/ D. Rick Lowes
-----------------------------------
D. Rick Lowes,
Vice President and Controller
May 4, 2004
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