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EX-24 - POWER OF ATTORNEY - USG CORPusg_ex24x1231201710-k.htm
EX-21 - SUBSIDIARIES - USG CORPusg_ex21x1231201710-k.htm
EX-95 - MINE SAFETY DISCLOSURES - USG CORPusg_ex95x1231201710-k.htm
EX-32.2 - SECTION 1350 CERTIFICATION OF USG CORPORATION'S CHIEF FINANCIAL OFFICER - USG CORPusg_ex322x1231201710-k.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF USG CORPORATION'S CHIEF EXECUTIVE OFFICER - USG CORPusg_ex321x1231201710-k.htm
EX-31.2 - RULE 13A - 14(A) CERTIFICATION OF USG CORPORATION'S CHIEF FINANCIAL OFFICER - USG CORPusg_ex312x1231201710-k.htm
EX-31.1 - RULE 13A - 14(A) CERTIFICATION OF USG CORPORATION'S CHIEF EXECUTIVE OFFICER - USG CORPusg_ex311x1231201710-k.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, DELOITTE & TOUCHE LLP - USG CORPusg_ex231x1231201710-k.htm
EX-10.29 - 2018 ANNUAL MANAGEMENT INCENTIVE PROGRAM OF USG CORPORATION - USG CORPusg_ex1029x1231201710-k.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission File Number 1-8864
USG CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware
 
36-3329400
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
550 W. Adams Street, Chicago, Illinois
 
60661-3676
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (312) 436-4000
 
 
 
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, $0.10 par value
 
New York Stock Exchange
 
Chicago Stock Exchange
 
 
Preferred Stock Purchase Rights (subject to Rights
 
New York Stock Exchange
Agreement dated December 21, 2006, as amended)
 
Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    Yes   o    No  x
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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x   No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
o
Non-accelerated filer
 
o
 
(Do not check if smaller reporting company)
 
 
 
 
 
 
Smaller reporting company
 
o
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  o    No  x
The aggregate market value of the registrant’s common stock held by non-affiliates computed by reference to the New York Stock Exchange closing price on June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $2,461,833,172. Solely for this purpose, directors, executive officers and greater than 10% record shareholders are considered the affiliates of the registrant.
The number of shares of the registrant’s common stock outstanding as of January 31, 2018 was 141,056,498.
 
Documents Incorporated By Reference: Certain sections of USG Corporation’s definitive Proxy Statement for use in connection with its 2018 annual meeting of stockholders, to be filed subsequently, are incorporated by reference into Part III of this Form 10-K Report where indicated.
 



TABLE OF CONTENTS
 
 
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Item 15.
Item 16.
 
 



PART I
 
Item 1.
BUSINESS
In this annual report on Form 10-K, “USG,” “we,” “our” and “us” refer to USG Corporation, a Delaware corporation, and its subsidiaries included in the consolidated financial statements, except as otherwise indicated or as the context otherwise requires.
General
USG, through our subsidiaries and joint ventures, is a leading manufacturer of building materials and innovative solutions that was originally formed in 1902. We produce a wide range of products for use in new residential, new nonresidential, and residential and nonresidential repair and remodel construction as well as products used in certain industrial processes. Our businesses are cyclical in nature and sensitive to changes in general economic conditions, including, in particular, conditions in the North American housing and construction-based markets. Our expansion through two 50/50 joint ventures we formed in 2014 with Boral Limited, referred to as USG Boral Building Products, or UBBP, into the markets of Asia, Australasia, and the Middle East has significantly increased our exposure to the economic conditions in those areas.
The effects of market conditions on our operations are discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Segments
During the fourth quarter of 2017, we realigned our operating structure to reflect changes in our organizational structure and management's operation and view of our businesses. Our realigned operating structure is generally aligned by product type and consists of three divisions, in addition to UBBP: Gypsum, Performance Materials and Ceilings. The operations of the divisions are similar throughout North America.
As a result of our realigned operating structure, we changed the composition of our reportable segments effective for the quarter ended December 31, 2017 to align with how we manage our businesses, review operating performance and allocate resources considering the discrete information available for the geographies within those divisions. We now have five reportable segments: U.S. Wallboard and Surfaces, U.S. Performance Materials, U.S. Ceilings, Canada, and UBBP. Our prior period results have been recast to reflect these changes and present comparative year over year information by segment. See Note 14, Segments, to the consolidated financial statements in Part II, Item 8 of this report for financial information regarding our reportable segments.
Our reportable segments are determined considering both qualitative and quantitative metrics for aggregation of the product type within geographies for which discrete financial information is available. Our U.S. Wallboard and Surfaces, U.S. Performance Materials and U.S. Ceilings reportable segments were identified based on products manufactured and marketed as discussed below. Our Canada segment is a separately reportable segment, as while it has similar qualitative factors to U.S. operations, it has different quantitative metrics and, therefore, cannot be aggregated. Our operating segments in Mexico and Latin America, as well as our mining operation in Little Narrows, Nova Scotia, Canada, which we indefinitely idled in 2016, and our shipping company, which we exited in 2015, are now included in Other as reconciling items to our consolidated segments. There has been no change to our UBBP segment.

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The following graph reflects the breakdown by segment of our 2017 consolidated net sales of $3.2 billion.
chart-99a6a381fd737224af3.jpg
Net sales of UBBP of $1.2 billion are excluded from the graph above as the joint ventures are accounted for as equity method investments.
Gypsum
BUSINESS
Our Gypsum division manufactures and markets gypsum and related products in the United States, Canada and Mexico. It is composed of our U.S. Wallboard and Surfaces segment and the Gypsum operations of our Canada segment. Our Gypsum operations in Mexico do not rise to the level of a reportable segment and thus are included in Other. We are the largest manufacturer of gypsum wallboard in the United States and accounted for approximately 25.4% of total industry shipments of gypsum board in 2017. The gypsum board market, as determined by the Gypsum Association, includes gypsum wallboard, other gypsum-related paneling products and imports. As such, we've included the Gypsum products of USG Sheetrock® brand gypsum wallboard and Securock® brand glass mat sheathing and the Performance Materials product of Fiberock® brand gypsum fiber panels in our estimate of our market share of the gypsum board market. In Canada, we accounted for approximately 42% of Canadian domestic shipments of gypsum wallboard in 2017 and are the largest manufacturer of gypsum wallboard in Canada.
PRODUCTS
Gypsum's products are used in a variety of building applications to construct walls and ceilings of residential, nonresidential and institutional buildings, as well as in certain industrial applications. We also produce gypsum-based products for agricultural and industrial customers to use in a wide variety of applications, including soil conditioning, road repair, fireproofing and ceramics. The major product lines within the Gypsum division are:
WALLBOARD
USG Sheetrock® brand gypsum wallboard and Securock® brand glass mat sheathing portfolios
Gypsum panels that provide aesthetic as well as sound-dampening, fire-retarding, abuse-resistance and moisture-control value
SURFACES
USG Sheetrock® brand joint compound portfolio, as well as corner bead, joint tape, and plaster
Used for finishing wallboard joints
Construction plaster products, sold under the brand names Red Top®, Imperial®, Diamond® and Supremo™ and industrial gypsum
Used to provide a custom finish for residential and commercial interiors and provide aesthetic, sound-dampening, fire-retarding and abuse-resistance value
As the leader in lightweight innovation, we offer the industry's broadest portfolio of lightweight gypsum panels for use in interior wall and ceiling applications including our USG Sheetrock® Brand UltraLight Panels and our newly launched USG Sheetrock® Brand EcoSmart Panels.

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MANUFACTURING
Our Gypsum division manufactures products at 41 plants located throughout the United States, Canada, and Mexico, some of which are shared with the Performance Materials division.
Gypsum rock is mined or quarried at 12 company-owned locations in North America. Our mines and quarries provided approximately 50% of the gypsum used by our plants in North America in 2017. Some of our manufacturing plants purchase or acquire synthetic gypsum and natural gypsum rock from outside sources. In 2017, outside sources of synthetic gypsum and natural gypsum rock accounted for approximately 43% and 7%, respectively, of the gypsum used in our North American plants.
Synthetic gypsum is a byproduct of flue gas desulphurization carried out by electric generation or industrial plants that burn coal as a fuel. The suppliers of this kind of gypsum are primarily power companies, which are required to operate scrubbing equipment for their coal-fired generating plants under federal environmental regulations. We have entered into a number of long-term supply agreements to acquire synthetic gypsum. Certain power companies have switched to using natural gas instead of coal for their electric generation needs. In the event more power companies switch to using natural gas instead of coal, the availability of synthetic gypsum may decrease which could result in an increase to our cost. See Item 1A, Risk Factors.
We produce wallboard paper at four company-owned production facilities located in the United States. Vertical integration in paper helps to ensure a continuous supply of high-quality paper that is tailored to the specific needs of our production processes. We augment our paper needs through purchases from outside suppliers when necessary. We did not make any material purchases of paper from outside suppliers in 2017.
MARKETING AND DISTRIBUTION
Our Gypsum products are marketed and distributed through specialty wallboard distributors, building materials dealers, home improvement centers and other retailers and contractors. Sales of Gypsum products are seasonal in the sense that sales are generally greater from spring through autumn than during the remaining part of the year.
Based on our estimates using publicly available data, internal surveys and industry shipment data for gypsum board, as reported by the Gypsum Association, we estimate that during 2017 volume demand for gypsum board was generated by:
residential and nonresidential repair and remodel activity of about 51%,
new residential construction of about 39%,
new nonresidential construction of about 7%, and
other activities, such as exports and temporary construction, of about 3%.
COMPETITION
Industry shipments of gypsum board in the United States (including gypsum wallboard, other gypsum-related paneling products and imports), as reported by the Gypsum Association, were an estimated 25.7 billion square feet in 2017, up approximately 3% from 25.0 billion square feet in 2016. Our share of the gypsum board market in the United States, which includes for comparability shipments of USG Sheetrock® brand gypsum wallboard, Fiberock® brand gypsum fiber panels and Securock® brand glass mat sheathing, increased to 25.4% in 2017 from 24.6% in 2016.
The principal methods of competition are quality and range of products, including introduction of new products, product availability, pricing, compatibility of systems and product design features. Our principal competitors include
 
United States
 
Canada
 
Mexico
National Gypsum Company
x
 
 
 
 
Continental Building Products, Inc.
x
 
x
 
 
American Gypsum Company LLC (a unit of Eagle Materials Inc.)
x
 
 
 
 
PABCO Gypsum (a division of PABCO Building Products)
x
 
 
 
 
CertainTeed Corporation (a subsidiary of Compagnie de Saint-Gobain SA)
x
 
x
 
 
Georgia-Pacific (a subsidiary of Koch Industries, Inc.)
x
 
x
 
 
Cabot Gypsum Company
 
 
x
 
 
Panel Rey, S.A. (a Grupo Promax Company)
x
 
 
 
x
Plaka (a unit of Knauf International GmbH)
 
 
 
 
x

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Performance Materials
BUSINESS
Our Performance Materials division manufactures and markets a series of innovative products in the United States that provide solutions to our customers to help close the skilled labor gap and increase job site efficiency. It consists solely of our U.S. Performance Materials segment.
PRODUCTS
Performance Materials products are used in a variety of interior and exterior building applications of residential and nonresidential buildings, as well as in certain industrial applications. These products can be grouped under three product categories of underlayment, building envelope and structural. The major products within these three categories are as follows:
UNDERLAYMENT
USG Durock® brand cement board
Provides water and fire-resistant assemblies for both interior and exterior applications
Fiberock® brand backerboard
Includes abuse-resistant interior wall panels, tile backer boards, and flooring underlayments
USG Durock™ brand shower systems
A fully bonded waterproofing system for tiled shower installations
Levelrock® brand systems of poured gypsum flooring
Provides surface leveling, enhanced sound-dampening and fire-resistant performance for residential and commercial flooring applications
BUILDING ENVELOPE
Securock® ExoAir® 430 air barrier system
Integrated gypsum sheathing panels with pre-applied fluid air barrier membrane that provides structural performance and moisture, mold and air control

Securock® brand roof board portfolios
Roof boards for use in low-slope commercial roofing systems that provides moisture, mold and fire resistant value

STRUCTURAL
USG Structural Panels
High-strength, reinforced factory made concrete panels for use in subfloor, roof deck, foundation walls and other noncombustible applications
MANUFACTURING
Our Performance Materials division manufactures products at 11 plants located throughout the United States, most of which are shared with our Gypsum division.
MARKETING AND DISTRIBUTION
Our Performance Materials products are marketed and distributed through specialty distributors, home improvement centers, contractors and other retailers. Sales of Performance Materials products are generally greater from spring through autumn than during the remaining part of the year. Based on our estimates using internal surveys, we estimate that during 2017 volume demand was generated by:
new nonresidential construction of about 35%
new residential construction of about 35%, and
residential and nonresidential repair and remodel activity of about 30%.
COMPETITION
The principal methods of competition are quality and range of products, including introduction of new products, product availability, pricing, compatibility of systems and product design features. Our principal competitors include National Gypsum Company, Georgia Pacific, James Hardie Building Products, Schluter Systems, the ARDEX Group and Laticrete.
Ceilings
BUSINESS
Our Ceilings division manufactures and markets ceiling interior systems products in the United States, Canada and Mexico. It consists of our U.S. Ceilings segment and the ceilings operations of our Canada segment. Our ceilings operations in Mexico do not rise to the level of a reportable segment and thus are included in Other. We are a leading manufacturer and supplier of interior ceilings products including ceiling tile, ceiling grid, and specialty ceilings used primarily in nonresidential applications.

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In 2017, we acquired Ceilings Plus, a leader in the specialty ceilings market. We estimate that we are the second-largest manufacturer of ceiling grid and acoustical ceiling tile.
PRODUCTS
The major product lines within the Ceilings division are:
CEILING TILE
Radar™, Eclipse™, Mars™ and Halcyon™
Provides qualities such as sound absorption, fire retardation and convenient access to the space above the ceiling for electrical and mechanical systems, air distribution and maintenance
CEILING GRID
Donn®, DX®, Fineline®, Centricitee™ and Identitee® DXI™
Provides qualities such as fire retardation and convenient access to the space above the ceiling for electrical and mechanical systems, air distribution and maintenance
SPECIALTY CEILINGS
Curvatura™, Compasso®, Radians®, Illusions™, Multiples™, Runways™, Barz™, Planx™, Mirra™, Corniche™,Wallforms™ and Parti™
Provides qualities such as aesthetics, sound absorption, fire retardation and convenient access to the space above the ceiling for electrical and mechanical systems, air distribution and maintenance
ENSEMBLETM
Ensemble™
Provides a monolithic drywall look with acoustical performance
MANUFACTURING
Our Ceilings division manufactures products at 10 plants located in the United States and Canada. Principal raw materials used to produce Ceilings’ products include mineral fiber, aluminum, steel, perlite and starch. We produce mineral fiber and obtain all others from outside suppliers.
MARKETING AND DISTRIBUTION
Ceilings sells products primarily in markets related to the construction and renovation of nonresidential buildings. During 2017, based on our estimates using internal surveys, approximately:
75% of its net sales were from repair and remodel activity, primarily nonresidential,
20% of its net sales were from new nonresidential construction, and
5% of its net sales were from new residential construction.
Products are marketed and distributed through a network of distributors, installation contractors and home improvement centers. Sales of Ceilings’ products are seasonal in nature and are generally lower in the fourth quarter of the calendar year as compared to the first three quarters of the year.
COMPETITION
Principal methods of competition are quality and range of products, including introduction of new products, product availability, pricing, compatibility of systems and product design features. Our principal competitors include the following:
 
United States
 
Canada
 
Mexico
Ceiling Tile
 
 
 
 
 
Armstrong World Industries, Inc.,
x
 
x
 
x
Rockfon (a subsidiary of Rockwool International A/S)
x
 
x
 
 
CertainTeed Corporation (a subsidiary of Compagnie de Saint-Gobain SA)
x
 
x
 
x
Odenwald Faserplattenwerk GmbH (OWA)
x
 
x
 
x
 
 
 
 
 
 
Ceiling Grid
 
 
 
 
 
WAVE (a joint venture between Armstrong World Industries, Inc. and Worthington Industries)
x
 
x
 
 
Chicago Metallic Corporation (a subsidiary of Rockwool International A/S)
x
 
x
 
x
CertainTeed Corporation (a subsidiary of Compagnie de Saint-Gobain SA)
x
 
x
 
x


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USG Boral Building Products
BUSINESS
In 2014, we and certain of our subsidiaries formed 50/50 joint ventures with Boral Limited, or Boral. These joint ventures are referred to as USG Boral Building Products, or UBBP. UBBP manufactures, distributes and sells certain building products, mines raw gypsum and sells natural and synthetic gypsum throughout Asia, Australasia and the Middle East. UBBP is a leader in most of the markets it serves. See Note 4 to the consolidated financial statements in Part II, Item 8 of this report for additional information related to our equity method investments.
PRODUCTS
UBBP manufactures and distributes products for wall, ceiling, floor lining and exterior systems that utilize gypsum wallboard, referred to as plasterboard in the regions in which UBBP operates, mineral fiber ceiling tiles, steel grid and joint compound. UBBP's significant brand names include USG Boral Sheetrock® premium plasterboard, USG Boral NextGen®, Elephant®, Jayaboard®, Durock® and Donn® DX®. UBBP launched USG Boral Sheetrock® products, which leverages USG technology, in Australia, South Korea, Indonesia, Vietnam, China, Thailand, India and Oman. UBBP is able to sell USG Boral Sheetrock® at a premium price in some markets and acceptance of lightweight technology continues to increase, which is led by Australia with a conversion rate above 90%.
MANUFACTURING
UBBP has 23 plasterboard lines, three gypsum mines and 36 other non-board lines for metal products, metal ceiling grid, ceiling tile, joint compound, and cornice throughout twelve countries in Asia, Australasia and the Middle East.
Executive Officers of the Registrant
See Part III, Item 10, Directors, Executive Officers and Corporate Governance - Executive Officers of the Registrant (as of February 14, 2018).
Other Information
RESEARCH AND DEVELOPMENT
To contribute to our high standards and our leadership in the building materials industry, we perform extensive research and development at the USG Corporate Innovation Center in Libertyville, Illinois, using open innovation models and outside partnerships. Research team members collaborate with suppliers, universities and national research laboratories to provide product support and to develop new products and technologies for our divisions. With fire, acoustical, structural and environmental testing capabilities, the research center allows us to conduct our own on-site evaluation of products and systems. Chemical analysis and materials characterization support product development and safety/quality assessment programs. Development activities can be taken to an on-site pilot plant before being transferred to a full-size plant. Research and development activities have been focused on customer preferred system solutions. We expense research and development expenditures as incurred. These expenditures amounted to $23 million, $24 million and $23 million in 2017, 2016 and 2015, respectively. UBBP also operates a research and development center in Thailand.
SUSTAINABILITY
The adoption of green building codes and standards such as the Leadership in Energy and Environmental Design, or LEED, rating system established by the U.S. Green Building Council to encourage the design and construction of buildings that are environmentally friendly, combined with an increase in customer preference for products that can assist in obtaining LEED credit or are otherwise environmentally preferable, has increased demand for products, systems and services that contribute to building sustainable spaces. Many of our products meet the requirements for the awarding of LEED credits, and we continue to develop new products and systems to address market demand for products that enable construction of buildings that require fewer natural resources to build, operate and maintain. Our competitors also have developed and introduced to the market more environmentally responsible products.
We expect that there will be increased demand over time for products, systems and services that meet regulatory and customer sustainability standards and preferences and decreased demand for products that produce significant greenhouse gas emissions. We also believe that our ability to continue to provide these products and systems to our customers will be necessary to maintain our competitive position in the marketplace.
ENERGY
Our primary supplies of energy have been adequate, and we have not been required to curtail operations as a result of insufficient supplies. Supplies are likely to remain sufficient for our projected requirements. Currently, we are using swap

6


contracts to hedge a significant portion of our anticipated purchases of natural gas to be used in our manufacturing operations over the next 12 months and beyond. We review our positions regularly and make adjustments as market conditions warrant.
SIGNIFICANT CUSTOMERS
On a worldwide basis, for each of the years ended December 31, 2017, 2016, and 2015, The Home Depot accounted for 23%, 23% and 23% of our net consolidated sales, respectively, and L&W Supply Corporation, or L&W, accounted for 16%, 19% and 18% of our consolidated net sales, respectively. On October 31, 2016, we completed the sale of L&W to American Builders & Contractors Supply Co., Inc., or ABC Supply, for $675 million inclusive of the final working capital adjustment. Additionally, we entered into a supply agreement with L&W that governs sales of wallboard and certain other products from USG to L&W. Our U.S. Wallboard and Surfaces, U.S. Performance Materials, U.S. Ceilings and Canada segments each had net sales to these customers in each of those years.
INTELLECTUAL PROPERTY
We consider patents, copyrights, trademarks, trade secrets, proprietary technology and similar intellectual property as critical to our success. We hold numerous patents and have registered numerous trademarks of varying duration in multiple legal jurisdictions. Further, we have filed patent applications and applications for the registration of trademarks in the United States and internationally. Although we consider our patents, licenses and trade secrets to constitute valuable assets, we do not regard any of our businesses as being materially dependent upon individual patents, trade secrets, or licenses.
OTHER
Because we generally fill orders upon receipt, no segment has any significant order backlog.
None of our segments has any special working capital requirements.
No material part of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any government.
As of December 31, 2017, we had approximately 6,800 employees worldwide in our consolidated operations.
See Note 14 to the consolidated financial statements in Part II, Item 8 of this report for financial information pertaining to net sales and long-lived assets by geographic region and net sales, operating profit and total assets by reportable segment. Our prior period results have been recast to reflect the changes to our reportable segments noted above and present comparative year over year information. See also Item 1A, Risk Factors, for information regarding the risks associated with conducting business in international locations, as well as the possible effects that compliance with environmental laws and regulations may have on our businesses and operating results.
Available Information
We maintain a website at www.usg.com and make available at this website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, or SEC. The information on our website is not, and will not be deemed to be, a part of this Annual Report on Form 10-K, or incorporated into any of our other filings with the SEC, except where we expressly incorporated such information. If you wish to receive a paper copy of any exhibit to our reports filed with or furnished to the SEC, the exhibit may be obtained, upon payment of reasonable expenses, by writing to: Corporate Secretary, USG Corporation, 550 West Adams Street, Chicago, Illinois 60661-3676.

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Item 1A.
RISK FACTORS
Our business, financial condition, operating results and cash flows are subject to various risks and uncertainties. We have described below significant factors that may adversely affect us and our industry. You should carefully consider these factors, together with all of the other information in this annual report on Form 10-K and in other documents that we file with the SEC, before making any investment decision about our securities.
Our businesses are cyclical, regional and seasonal in nature and subject to industry downturns.
Our businesses are cyclical and sensitive to changes in general economic conditions, including, in particular, conditions in the North American housing and construction-based markets. Housing starts in the United States were 1.202 million in 2017 and remain below the historical average of 1.44 million, while new nonresidential construction and the residential and nonresidential repair and remodel market in the United States have experienced only modest increases over the past several years. Moreover, we operate in a variety of regional markets, so our businesses are subject not only to general economic conditions, but also to localized economic conditions in each of those regions. Housing and construction-based markets are impacted by broader economic circumstances, including employment levels, the availability of skilled labor, household formation, home ownership rate, new and existing home price trends, availability of mortgage financing, interest rates, deductibility of mortgage interest and real estate taxes, consumer confidence, job growth and discretionary business investment, and these markets may experience a downturn. Adverse conditions in the markets or regions where we operate, or the failure of these markets or regions to return to historical levels, may have a material adverse effect on our business, financial condition, operating results and cash flows.
In addition, our businesses are seasonal, which has caused in the past, and will likely cause in the future, our quarterly results to vary significantly. Unfavorable weather conditions, such as snow or heavy rainfall, could reduce construction activity and adversely affect demand for our products.
We operate in highly competitive markets, and we may not be able to maintain current price levels, or achieve price increases, for our products.
The markets for our products are very competitive, and our ability to effectively compete further varies by region. Principal methods of competition include quality and range of products, including introduction of new products, product availability, pricing, compatibility of systems and product design features. Prices for our products are affected by supply and demand in the markets for our products and available production capacity. Currently, there is excess wallboard production capacity industry wide in the United States and Canada. Several of our competitors have also recently added or are in the process of adding capacity and new competitors have entered certain markets, including imports from Mexico into certain regions in the South, which could lead to our inability to implement price increases or cause us to reduce pricing in an effort to maintain or grow our sales, and could negatively affect our ability to sell higher-priced products or lead to lower demand for our products. We implemented a price increase for wallboard effective in January 2018, however it is uncertain whether we will be able to maintain any increase in our selling prices or implement additional increases in 2018, as was the case in 2017. Any of the foregoing could adversely affect our business, financial condition, operating results and cash flows.
We are dependent on sales to our major customers, and the number of our customers with significant buying power is increasing.
For the year ended December 31, 2017, our two largest customers, The Home Depot and L&W, collectively accounted for approximately 39% of our sales, while our top ten customers collectively accounted for approximately 60% of our sales. We face strong competition for these and our other major customers. As is customary in our industry, we generally do not enter into long-term contracts with our customers, who may choose to reduce or delay purchases of our products at any time. If one or more of our major customers reduces or delays substantial orders, our business, financial condition, operating results and cash flows may be materially and adversely affected, particularly for the period in which the reduction or delay occurs and also possibly for subsequent periods.
Certain of our customers are also large companies with significant buying power. In addition, consolidation currently taking place in the gypsum specialty dealer channel will likely further enhance the ability of certain of our customers to seek more favorable terms, including pricing, for the products that they purchase from us. Accordingly, our ability to maintain or raise prices in the future may continue to be limited, including during periods of raw material and other cost increases, as was the case in 2017. If we are forced to reduce prices or to maintain prices during periods of increased costs, or if we lose customers because of pricing or other methods of competition, our business, financial condition, operating results and cash flows may be materially and adversely affected.

8


L&W is currently our largest customer in the gypsum specialty dealer channel, purchasing approximately 21% of our wallboard production in 2017, among other products we manufacture. Specialty dealers often have multiple suppliers for product categories. Following the sale of L&W in 2016, L&W diversified its supplier base, resulting in a reduction in our sales to L&W in 2017 compared to 2016. We expect this reduction to continue in 2018. In connection with the closing of the sale of L&W, we entered into a supply agreement that provides for L&W to purchase minimum volumes of our wallboard and certain other products over the near term, with volume minimums generally stepping down for those products over time. To address any loss of sales to L&W both during and after the term of the supply agreement, we have made efforts to grow our business with current customers and serve new customers. However, our efforts to replace any loss of sales to L&W may not continue to be successful, and we may experience market share loss or unfavorable pricing, in which case our net sales, operating results and cash flows may be materially and adversely impacted.
Increased costs, or decreased availability, of key raw materials, energy or transportation will increase our cost of products sold.
The cost and availability of raw materials, energy and transportation are critical to our operations. For example, we use substantial quantities of gypsum, synthetic gypsum, wastepaper, mineral fiber, steel, perlite and starch. The cost of certain of these items has been volatile, and availability has sometimes been limited. We obtain some of these materials from a limited number of suppliers or sole source suppliers, which increases the risk of unavailability. As we saw in 2017, we may not be able to pass increased raw material, energy or transportation costs on to our customers if the market or existing agreements with our customers do not allow us to raise the prices of our finished products. If price adjustments for our finished products significantly trail the increase in raw material, transportation or energy costs, or if we cannot effectively hedge against cost increases, our operating results and cash flows may be materially and adversely affected.
Approximately 43% of the gypsum used in our plants is synthetic gypsum. Nine of our Gypsum plants in operation use synthetic gypsum for all of their needs, while another four use it for some of their needs. The suppliers of synthetic gypsum are primarily power companies, and certain power companies have switched to using natural gas instead of coal for their electric generation needs. In addition, existing or future changes in environmental regulations may make it more difficult or costly for power companies to burn coal, which may result in a further shift away from coal-based sources of energy. In the event more power companies switch to using natural gas instead of coal, the availability of synthetic gypsum may continue to decrease. We could incur substantial costs in connection with any significant reduction in the availability of synthetic gypsum, including costs to convert our plants to use natural gypsum or increased costs to transport synthetic gypsum to our plants from farther away, which may materially and adversely affect our business, financial condition, operating results and cash flows.
During 2017, wastepaper pricing in the old corrugated containers (OCC) markets was one of the primary drivers of increased wallboard manufacturing cost. We buy various grades of wastepaper, and shortages occur periodically in one or more grades and may vary among geographic regions. As a result, we have experienced, and expect in the future to experience, volatility in wastepaper availability and its cost, affecting the mix of products manufactured at particular locations or the cost of producing them.
We use natural gas extensively in the production of our products in the United States, Canada and Mexico. The price of natural gas can fluctuate significantly because of weather, environmental or other regulatory changes, which can materially impact our results of operations for a particular period. In an attempt to reduce our price risk related to fluctuations in natural gas prices, we enter into hedging agreements using swaps for natural gas purchases in the United States and Canada. Because we hedge the majority of our exposures, we would not be able to participate, for the portion we hedged, in substantial or extended declines in natural gas prices. As a result, our costs would remain elevated in such an environment. During periods of rising natural gas prices on the other hand, our production costs will rise to a lesser extent because of our hedging activities.
Transportation costs are also a significant portion of our variable costs. Increases in the cost of fuel, or if we are required to transport raw materials or finished products over longer distances, as was the case in 2017 in order to meet demand resulting from the hurricane in Texas, could result in material increases in the cost of transportation that could adversely affect our operating profits.
Our facilities may experience unexpected operational difficulties or catastrophic events.
Our facilities may be forced to cease operations unexpectedly due to equipment failures or events beyond our control, such as hurricanes, fires, floods, earthquakes or other environmental catastrophes. Any downtime or facility damage may hinder our ability to meet customer demand, reduce our sales or impede our ability to transport our products in an efficient and cost-effective manner, and could require that we make significant capital expenditures. Several of our plants, and production lines within our plants, are dedicated to specific products. If any of those plants or lines is unable to operate for a prolonged period, it

9


would reduce our ability to effectively compete in the markets for those products, which could materially and adversely affect our business, financial condition, operating results and cash flows.
We do not have majority control over UBBP, which involves risks not otherwise present when we operate our business through wholly-owned entities.
A substantial portion of our international operations are conducted through 50/50 joint ventures with Boral Limited, or Boral. These joint ventures are referred to as UBBP. UBBP involves risks not otherwise present when we operate our business through wholly-owned entities, including:
Certain major decisions with respect to UBBP require the majority or unanimous approval of the joint ventures’ boards or shareholders, which could result in a deadlock given the 50/50 ownership and equal board representation structure. Boral may have economic or other business interests or goals that are or become inconsistent with ours, and we may not be able to obtain approval of certain matters that would be in our or UBBP’s best interests. In addition, we may be required to spend additional resources to resolve any dispute with Boral.
A deadlock with respect to certain fundamental decisions may result in the triggering of a sale process of UBBP. In such a case, the terms of the sale may be less attractive than if we had held onto our investment.
UBBP is operated in accordance with the terms of a Shareholders Agreement that limits our ability to transfer our interest in UBBP. As a result, we may be unable to sell our interest in UBBP when we would otherwise like.
UBBP may not pay dividends if such payments are, among other things, restricted pursuant to the terms of the credit facilities maintained by UBBP, inconsistent with the then-applicable strategic plan, or illegal. Accordingly, we may not receive dividend payments from UBBP in the amounts that we currently anticipate or at all, which may adversely impact our ability to receive any economic benefit from UBBP.
If we or Boral are subject to a change of control, or if certain other events of default under the Shareholders Agreement occur with respect to us or Boral, we or Boral, as applicable, may be required to sell our or Boral's, as applicable, entire interest in UBBP at fair market value, as determined in accordance with the Shareholders Agreement. In the event we are forced to sell our interest in UBBP, it may be under terms that are not favorable to us. In the event Boral is the party that triggers the event of default we will have the right to acquire Boral’s interest in UBBP, but it may be on terms that we do not find favorable.  In this circumstance, if we do not complete the acquisition due to lack of funding or otherwise, we would remain in the joint venture with Boral, but possibly under ownership that we do not find acceptable.
In certain circumstances, a capital call may be issued to the shareholders of UBBP in order to obtain additional funding for the joint ventures' operations. If we do not provide capital and Boral does, Boral may receive additional shares in UBBP, thereby diluting our interest and diminishing our rights under the Shareholders Agreement. Further, although we intend for UBBP to be self-funding, we may nonetheless determine in the future that we need to provide additional capital in order for UBBP to continue operating.
Boral may become insolvent, refuse to make additional capital contributions or fail to meet its obligations under the Shareholders Agreement or the two share sale and subscription agreements entered into with Boral, which may result in certain liabilities to us.
In the event we exit UBBP, we may be restricted from competing in certain markets, many of which we anticipate to be high-growth markets, until the later of the third anniversary of our exit and ten years from the commencement of UBBP. In addition, in the event we exit UBBP, certain of our intellectual property will continue to be licensed to UBBP on a non-exclusive basis after our exit is completed.
UBBP relies in part on new products and technology we develop. UBBP is contractually entitled to some, but not all, of our new products. If UBBP is unable to successfully implement new products to which it has a license, or if we are unable to agree on the terms for the contribution of new technology to UBBP, the joint ventures may not be able to effectively compete or grow their businesses.
UBBP is required to protect our licensed trade secrets and confidential intellectual property in its territory, which includes countries where there is a high risk of intellectual property loss, and we also expend significant efforts to secure and enforce our intellectual property rights in UBBP’s territory. If UBBP is not diligent with its protections or our efforts are insufficient and competitors acquire our trade secrets and confidential intellectual property, then there may be a material adverse impact on our business both inside and outside of UBBP’s territory.

10


If any of these risks were to materialize, our business, financial condition, operating results and cash flows could be materially and adversely impacted.
Our international operations expose us to risks that would not otherwise be present in our U.S. operations.
Our international business operations in the countries within the territory of UBBP and in Canada and Mexico, including our ability to introduce new products into these markets, are important to our future operations, growth and prospects. Our foreign operations and our international expansion subject us to a number of risks, including:
sensitivity to general economic conditions in each of the countries in which we or UBBP operate, including, in particular, the housing and construction-based markets;
compliance with United States laws affecting operations outside of the United States, such as the Foreign Corrupt Practices Act or similar anti-bribery laws and regulations, or corruption in foreign countries;
compliance with a variety of local laws and regulations, including environmental and safety laws and regulations
changes in tax laws and the interpretation of those laws;
imposition of more or new tariffs, quotas, trade barriers, and similar restrictions on our sales outside the United States, including cross-border intercompany sales;
fluctuations in currency values and the impact on our consolidated results;
changes in foreign currency exchange controls;
discriminatory or conflicting fiscal policies;
difficulties enforcing intellectual property and contractual rights, and securing information and infrastructure, in certain jurisdictions;
greater risk of uncollectible accounts and longer collection cycles; and
nationalization of properties by foreign governments.
Moreover, political and economic changes or volatility, geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war, epidemics, public corruption and other economic or political uncertainties could interrupt and negatively affect our business operations. All of these factors could result in increased costs or decreased revenues, and could materially and adversely affect our business, financial condition, operating results and cash flows.
Our success is dependent on our ability to innovate and protect our intellectual property and other proprietary rights.
We maintain a leadership position and price premium in part because of our innovation and introduction of new products. As a result, our success also depends, in part, upon securing and enforcing our intellectual property rights. We rely on a combination of contractual rights, patent, copyright, trademark and trade secret laws to establish and protect our intellectual property. Despite our efforts to safeguard and maintain our intellectual property, the steps we have taken may be limited in their effect. Existing trade secret, patent, trademark and copyright laws offer only limited protection, and it may be expensive and time consuming to assert these protections against competitors who infringe on our rights and our patents could be invalidated or circumvented. In addition, others may develop substantially equivalent or superseding proprietary technology, or competitors may offer similar competing products that do not infringe on our intellectual property rights, thereby substantially reducing the value of our proprietary rights. Moreover, the laws of some foreign countries in which our products are or may be manufactured or sold may not protect our products or intellectual property rights to the same extent as do the laws of the United States. This risk may be heightened in connection with our investments in UBBP because it results in the use of our intellectual property in additional foreign jurisdictions, some of which lack robust or accessible intellectual property protection enforcement mechanisms.
We intend to continue making investments in research and development to develop new and improved products and more efficient manufacturing methods in order to maintain our market leadership position. If we do not make these investments, or our investments are not successful, our revenues, operating results and market share may be materially and adversely affected.

11


Capital expenditures to maintain our market leadership position and expand our businesses may not achieve their intended results.
In order to standardize and automate production across our businesses, we are investing in capital improvement projects, including an anticipated $300 million investment in advanced manufacturing over four years, which we believe will materially improve our operating results. In addition, many of our facilities have been in operation for many years and require capital expenditures to maintain optimal efficiency. Future downturns in our industry or businesses may prevent us from having the funds necessary to make anticipated capital expenditures, and there may be delays or cost increases in completing these projects. Further, our return on investment from our advanced manufacturing investments or other capital expenditures may not be sufficient to recover the expenses associated with these initiatives and we may not achieve the expected $100 million in incremental EBITDA by the end of 2020.
A disruption in our information technology systems due to a catastrophic event or security breach could interrupt or damage our operations.
In the conduct of our business we collect, use, transmit and store data on information systems, which are vulnerable to an increasing threat of continually evolving cyber security risks. Any security breach or compromise of our information systems could significantly impact our operations, damage our reputation, cause the disclosure of confidential customer, employee, supplier or company information, including our intellectual property, and result in significant losses, litigation, fines and costs. The security measures we have implemented to protect against unauthorized access to our information systems and data may not be sufficient to prevent breaches. The regulatory environment related to information security, data collection and privacy is evolving, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.
We also compete through our use and improvement of information technology. In order to remain competitive, we need to provide customers with timely, accurate, easy-to-access information about product availability, orders and delivery status. While we have provided manual processes for short-term failures and disaster recovery capability, a prolonged disruption of systems or other failure to meet customers’ expectations regarding the capabilities and reliability of our systems may materially and adversely affect our operating results.
Compliance with environmental and safety laws and regulations or product safety concerns could cause us to make modifications to how we manufacture our products, negatively affect our results and also require that we make significant capital investments or otherwise increase our costs.
We operate 49 plants and 12 mines and quarries in North America. As a result, we are subject to numerous federal, state, local and foreign laws and regulations governing the protection of the environment and occupational health and safety, including laws regulating air emissions, wastewater discharges, the management and disposal of hazardous materials and wastes, and the health and safety of our employees. We are also required to obtain permits from governmental authorities for certain operations. If we were to fail to comply with these laws, regulations or permits, we could incur fines, penalties or other sanctions and be subject to private litigation. In addition, in the past we have been, and in the future could be, held responsible for costs and damages arising from any contamination at our past or present facilities or at third-party waste disposal sites. Further, new environmental and safety laws and regulations may cause us to incur material expenses relating to compliance, impact the availability and cost of raw materials and have a material and adverse impact on our operations and results.
While the U.S. EPA has begun the process to repeal the Clean Power Plan, under which the U.S. EPA would have set state-specific goals for greenhouse gas, or GHG, emissions reductions, certain states, provinces and foreign countries are considering measures to reduce emission of GHGs, including carbon dioxide and methane, and many have already adopted GHG regulation or legislation. Regulations requiring reductions in GHG emissions could affect future expansions or modifications at our plants, mines and quarries and may require that we incur significant costs and additional capital investment to satisfy permitting requirements. In addition, enactment of new climate change legislation, regulatory initiatives or treaties impacting the locations where we conduct business could have a material adverse effect on our operations. For example, legislation establishing a “carbon tax” on energy use or a “cap and trade,” could materially and adversely increase the cost of energy used in our manufacturing processes.
Legal challenges to the U.S. EPA’s final rule regarding the use of synthetic gypsum, or subsequent state legislation, could also result in laws or regulations that adversely affect the classification, use, storage and disposal of synthetic gypsum. Such laws or regulations may require significant capital investments to convert those plants and lines that use synthetic gypsum to natural gypsum.

12


The building materials industry has been subject to claims relating to raw materials, as well as claims for incidents of catastrophic loss, such as building fires. We have rigorous product safety and quality standards and a strong commitment to product safety and quality. However, if our products do not meet applicable safety standards or customers’ expectations regarding safety, we could experience decreased sales, increased costs and/or be exposed to legal and reputational risks. Events that give rise to actual, potential or perceived product safety concerns could expose us to government enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns could negatively affect our business and results of operations, and product liability insurance coverage may not be available or adequate in all circumstances to cover claims that may arise in the future.
Legal and governmental proceedings, including those involving antitrust, tax, environmental, intellectual property or other matters, may result in significant costs.
We are party to litigation and governmental proceedings, including, but not limited to, a federal grand jury investigation of the gypsum drywall industry. We could become subject to legal claims in the future, some of which could become material. We may also initiate legal proceedings in order to defend and enforce our proprietary rights. The outcome of legal and governmental proceedings may differ from our expectations because the outcomes of litigation and governmental proceedings are often difficult to reliably predict. Various developments can lead to changes in management’s estimates of liabilities. Those developments include judicial rulings or judgments, settlements, or regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our results of operations in any particular period, or we could be unsuccessful in protecting our intellectual property. For a more detailed discussion of certain of the legal proceedings in which we are involved, see Item 3, Legal Proceedings, below.
A small number of our stockholders could significantly influence our business, affairs and stock price.
Based on filings made with the SEC, we believe that, as of January 31, 2018, two stockholders collectively controlled approximately 41% of our common stock. Accordingly, a small number of our stockholders could affect matters requiring approval by stockholders, including the election of directors and the approval of potential business combination transactions. One or more of these stockholders may have interests that differ from other stockholders and may vote on such matters in a way that is adverse to the interests of those other stockholders. In addition, if one or more of these stockholders engage in sales of our common stock, our share price may decline.
We may pursue acquisitions, joint ventures and other transactions to complement or expand our businesses, which even if completed, may involve a number of risks.
We may pursue additional opportunities to acquire businesses or technologies and to form joint ventures that we believe could complement, enhance or expand our current businesses or product lines or that might otherwise offer us growth opportunities. Such pursuits may be costly and unsuccessful and cause diversion of management’s attention from day-to-day operations. Even if completed, potential issues associated with these activities could include, among other things, difficulty with integrating business operations, infrastructure and personnel, and our ability to realize the full extent of the expected returns, benefits, cost savings or synergies as a result of a transaction within the anticipated time frame, or at all.
Significant changes in factors and assumptions used to measure our defined benefit plan obligations, actual investment returns on pension assets and other factors could negatively impact our operating results and cash flows.
The recognition of costs and liabilities associated with the pension and postretirement plans is affected by assumptions made by management and used by actuaries engaged by us to calculate the benefit obligations and the expenses recognized for these plans. The inputs used in developing the required estimates are calculated using a number of assumptions, which represent management’s best estimate of the future. The assumptions that have the most significant impact on costs and liabilities are the discount rate, the estimated long-term return on plan assets for the funded plans, retirement rates, and mortality rates. These assumptions are generally updated annually.
As of December 31, 2017, our pension plans were underfunded by $193 million and our unfunded postretirement plan liabilities were approximately $150 million. In recent years, declining interest rates have negatively impacted the funded status of our pension and postretirement plans. Funding requirements for our pension plans may become more significant. If our cash flows and capital resources are insufficient to fund our obligations under these pension and postretirement plans, we could be forced to reduce or delay investments and capital expenditures, seek additional capital, or incur indebtedness.

13


We may not be able to fully execute our stock repurchase program and may not otherwise return capital to our stockholders in the foreseeable future.
In 2017 we announced a stock repurchase program in which we may repurchase up to $250 million of our common stock. On February 1, 2018 we announced an increase in this stock repurchase program, bringing the total size of the program to $500 million. There is no guarantee as to the exact number of shares or value that will be repurchased under the stock repurchase program and we may discontinue purchases at any time. Whether we make any further repurchases will depend on many factors, including but not limited to our business and financial performance, the business and market conditions at the time, including the price of our shares, and other factors that management considers relevant. Additionally, we expect to fund repurchases under our stock repurchase program through cash on hand, which may impact our ability to pursue potential strategic opportunities. Although our stock repurchase program is intended to enhance long-term stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness and there can be no assurance that any stock repurchases will enhance stockholder value.
Our credit agreement limits our ability to pay a dividend or repurchase our stock unless specified borrowing availability and fixed charge coverage ratio tests are met, and it prohibits payment of a dividend or repurchase of our stock if a default exists under the agreement. Accordingly, we may be required to cease repurchasing stock for periods of time in order to maintain compliance with our credit agreement terms. In addition, we have not paid a dividend on our common stock since the first quarter of 2001, and there can be no assurance that we will do so in the foreseeable future. If we do not pay dividends or continue to execute on our stock repurchase program, investors will have to rely on the possibility of stock appreciation and sell their shares to realize a return on their investment.
If we experience an “ownership change” within the meaning of the Internal Revenue Code, utilization of our net operating loss, or NOL, carryforwards would be subject to an annual limitation.
Our NOL carryforwards are a substantial asset for us. The Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it experiences an “ownership change,” which may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a rolling three-year period. If we were to experience an ownership change, utilization of our NOLs would be subject to an annual limitation that may be carried over to later years within the allowed NOL carryforward period. Over the entire carryforward period, we may not be able to use all our NOLs due to the aforementioned annual limitation. If an ownership change had occurred as of December 31, 2017, our annual U.S. federal NOL utilization would have been limited to approximately $107 million per year.
Although we have our stockholder rights plan and transfer restrictions in our Restated Certificate of Incorporation, which are intended to reduce the likelihood of an “ownership change” that could adversely affect our NOL untilization, we cannot provide assurance that these restrictions on transferability will prevent all transfers that could result in such an “ownership change.” There also can be no assurance that the transfer restrictions in our Restated Certificate of Incorporation will be enforceable against all of our stockholders absent a court determination confirming such enforceability. The transfer restrictions may be subject to challenge on legal or equitable grounds.
We may not be able to pursue certain strategic opportunities unless we increase our indebtedness and leverage ratio. Our level of indebtedness also requires us to dedicate a portion of our cash flow to debt payments and limits our ability to engage in certain business activities.
As of December 31, 2017, we had $1.1 billion of outstanding debt, consisting of senior notes and industrial revenue bonds, which is within our target leverage ratio range of 1.5x to 2.0x adjusted debt/EBITDA. We may not be able to pursue certain strategic opportunities that may otherwise be available to us without incurring additional indebtedness and thereby increasing our leverage ratio outside of our target range.
Our current debt service obligations also require us to dedicate a portion of our cash flow from operating activities to payments on our indebtedness, which reduces the availability to use our cash flow for other purposes, including capital expenditures, research and development efforts, potential acquisitions or investments. If we are unable to fund our business activities, meet our obligations under our debt agreements or are contractually restricted from pursuing activities or transactions that we believe are in our long-term best interests, our business, financial condition, results of operations and cash flows could be adversely affected. Our indebtedness also may increase our vulnerability to economic and industry downturns and changing market conditions and place us at a competitive disadvantage relative to competitors that have less debt. We are required to post letters of credit or cash as collateral primarily in connection with our hedging transactions, insurance programs and bonding activities. The amounts of collateral we are required to post may vary based on our financial position and credit ratings. Use of letters of credit as collateral reduces our borrowing availability under our domestic revolving credit agreement and, therefore, like the use of cash as collateral, reduces our overall liquidity and our ability to fund other business activities.

14


The terms of our debt agreements, including our credit facility, may also limit our ability to engage in certain activities and transactions that may be in our long-term interest. Among other things, unless we obtain approval, the covenants contained in our debt agreements may restrict or limit our ability to incur additional indebtedness, pay dividends or repurchase our common stock, make guarantees, sell our assets or make other fundamental changes, engage in mergers, acquisitions and dispositions, make investments, change our business purpose, or enter into certain transactions with affiliates. We may also be required to maintain specified financial ratios, which may require that we take action to reduce our debt or to act in a manner contrary to our current business plans. Our ability to comply with these covenants and financial ratios may be affected by events beyond our control, and we may not be able to continue to meet those covenants and ratios. Breach of any of the covenants or ratios contained in the agreements governing our debt, or our inability to pay interest on, or principal of, our outstanding debt as it becomes due, could result in an event of default, in which case, our lenders could declare all amounts outstanding to be immediately due and payable. If this occurs, we may not be able to refinance the accelerated debt on favorable terms, or at all, or repay the accelerated debt, and our liquidity may be adversely impacted.

Item 1B.
UNRESOLVED STAFF COMMENTS
None

15


Item 2.PROPERTIES
Our leased corporate headquarters is located in Chicago, Illinois. We operate plants, mines, quarries, and other facilities throughout North America. The locations of our production properties in operation for our consolidated segments as of December 31, 2017 are as follows (plants are owned unless otherwise indicated):
 
 
U.S. Wallboard and Surfaces
 
U.S. Performance Materials
 
U.S. Ceilings
 
 
Gypsum wallboard and other gypsum products
 
Surface preparation and joint treatment products
 
Under-layment
 
Building Envelope
 
Structural
 
Ceiling Tile
 
Ceiling Grid
 
Specialty Ceilings
Alabaster (Tawas City), Michigan
 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aliquippa, Pennsylvania*
 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Atlanta, Georgia***
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
x
Auburn, Washington
 
 
 
x
 
 
 
 
 
 
 
 
 
 
 
 
Baltimore, Maryland*
 
x
 
x
 
x
 
 
 
 
 
 
 
 
 
 
Bridgeport, Alabama*
 
x
 
x
 
 
 
 
 
 
 
 
 
 
 
 
Cartersville, Georgia
 
 
 
 
 
 
 
 
 
 
 
 
 
x
 
 
Chamblee, Georgia
 
 
 
x
 
 
 
 
 
 
 
 
 
 
 
 
Cloquet, Minnesota
 
 
 
 
 
 
 
 
 
 
 
x
 
 
 
 
Commerce, California***
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
x
Dallas, Texas
 
 
 
x
 
 
 
 
 
 
 
 
 
 
 
 
Delavan, Wisconsin
 
 
 
 
 
 
 
 
 
x
 
 
 
 
 
 
Detroit (River Rouge), Michigan
 
x
 
 
 
x
 
 
 
 
 
 
 
 
 
 
East Chicago, Indiana*
 
x
 
x
 
 
 
 
 
 
 
 
 
 
 
 
Fort Dodge, Iowa
 
x
 
x
 
x
 
 
 
 
 
 
 
 
 
 
Galena Park, Texas*
 
x
 
x
 
 
 
 
 
 
 
 
 
 
 
 
Greenville, Mississippi
 
 
 
 
 
 
 
 
 
 
 
x
 
 
 
 
Gypsum, Ohio*
 
 
 
x
 
x
 
x
 
 
 
 
 
 
 
 
Jacksonville, Florida*
 
x
 
x
 
 
 
x
 
 
 
 
 
 
 
 
New Orleans, Louisiana*
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
Norfolk, Virginia*
 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North Kansas City, Missouri
 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oakfield, New York
 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Otsego, Michigan
 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Phoenix (Glendale), Arizona***
 
 
 
x
 
 
 
 
 
 
 
 
 
 
 
 
Plaster City, California
 
x
 
 
 
 
 
x
 
 
 
 
 
 
 
 
Port Reading, New Jersey
 
 
 
x
 
 
 
 
 
 
 
 
 
 
 
 
Rainier, Oregon
 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shoals, Indiana**
 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sigurd, Utah
 
x
 
x
 
 
 
 
 
 
 
 
 
 
 
 
Southard, Oklahoma
 
x
 
 
 
x
 
 
 
 
 
 
 
 
 
 
Sperry, Iowa**
 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockton, California
 
 
 
 
 
 
 
 
 
 
 
 
 
x
 
 
Sweetwater, Texas
 
x
 
 
 
x
 
x
 
 
 
 
 
 
 
 
Torrance, California
 
 
 
x
 
x
 
 
 
 
 
 
 
 
 
 
Walworth, Wisconsin
 
 
 
 
 
 
 
 
 
 
 
x
 
 
 
 
Washingtonville, Pennsylvania*
 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Westlake, Ohio
 
 
 
 
 
 
 
 
 
 
 
 
 
x
 
x
Weirton, West Virginia***
 
 
 
x
 
 
 
 
 
 
 
 
 
 
 
 
* Plants supplied fully by synthetic gypsum
** Plants supplied partially by synthetic gypsum
*** Leased


16


 
 
Canada
 
 
Gypsum wallboard and other gypsum products
 
Surface preparation and joint treatment products
 
Ceiling Grid
 
Specialty Ceilings
Calgary, Alberta, Canada***
 
 
 
x
 
 
 
 
Hagersville, Ontario, Canada**
 
x
 
x
 
 
 
 
Montreal, Quebec, Canada**
 
x
 
x
 
 
 
 
Oakville, Ontario, Canada
 
 
 
 
 
x
 
x
Surrey, British Columbia, Canada***
 
 
 
x
 
 
 
 
** Plants supplied partially by synthetic gypsum
*** Leased
OTHER
We operate in facilities located in Monterrey, Nuevo Leon, Mexico; Puebla, Puebla, Mexico; Saltillo, Coahuila, Mexico; San Luis Potosi, San Luis Potosi, Mexico; and Tecoman, Colima, Mexico for our gypsum wallboard and other gypsum products that are not included in the above reportable segments.
We produce paper at facilities in Galena Park, Texas; North Kansas City, Missouri; Oakfield, New York; and Otsego, Michigan. We operate mines or quarries in Alabaster, Michigan; Fort Dodge, Iowa; Hagersville, Ontario, Canada; Monterrey, Nuevo Leon, Mexico; Plaster City, California; San Luis Potosi, San Luis Potosi, Mexico; Shoals, Indiana; Sigurd, Utah; Southard, Oklahoma; Sperry, Iowa; Spruce Pine, North Carolina; Sweetwater, Texas; and Tecoman, Colima, Mexico. We operate a mica-processing plant at Spruce Pine, North Carolina. We manufacture mineral fiber products at Red Wing, Minnesota, and Walworth, Wisconsin, and metal specialty systems at Oakville, Ontario, Canada.
Gypsum's Sheetrock® brand gypsum wallboard plants operated at approximately 66% of capacity during 2017.
Item 3.
LEGAL PROCEEDINGS
See Part II, Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements, Note 18, Litigation, for information on legal proceedings.
Item 4.
MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K promulgated by the SEC is included in Exhibit 95 to this report.

17


PART II
 
Item 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the New York Stock Exchange, or NYSE, and the Chicago Stock Exchange under the symbol USG. The NYSE is the principal market for our common stock. As of January 31, 2018, there were 1,742 record holders of our common stock. We currently do not pay dividends on our common stock. Our credit facility limits our ability to pay cash dividends on or repurchase our common stock unless specified borrowing availability and fixed charge ratios are met. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity, for more information regarding these restrictions.
The following table sets forth for the indicated periods the high and low intra-day sales prices per share for our common stock on the NYSE in 2017 and 2016.
 
2017
 
2016
 
High
 
Low
 
High
 
Low
First quarter
$
34.67

 
$
28.14

 
$
24.99

 
$
15.85

Second quarter
32.97

 
27.89

 
29.98

 
24.30

Third quarter
32.96

 
25.60

 
30.84

 
25.31

Fourth quarter
38.91

 
31.70

 
32.26

 
23.71

See Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for information regarding common stock authorized for issuance under equity compensation plans.
Pursuant to our Deferred Compensation Program for Non-Employee Directors, four of our non-employee directors deferred the $120,000 annual grant and one of our non-employee directors deferred a portion of the quarterly retainer payment that those non-employee directors were entitled to receive on December 31, 2017 under our Non-Employee Director Compensation Program into a total of 12,963 deferred stock units. These units will increase or decrease in value in direct proportion to the market value of our common stock and will be paid in shares of common stock following termination of service as a director. The issuance of these deferred stock units was effected through a private placement under Section 4(a)(2) of the Securities Act and was exempt from registration under Section 5 of the Securities Act.

18


PERFORMANCE GRAPH
The following graph and table compare the cumulative total stockholder return on our common stock with the Standard and Poor’s 500 Index, or S&P 500, and the Dow Jones U.S. Construction and Materials Index, or DJUSCN, in each case assuming an initial investment of $100 and full dividend reinvestment, for the five-year period ended December 31, 2017.
chart-6e02da3c7f7272bc737.jpg 
 
Value of Investment as of December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
USG
$
100

 
$
101

 
$
100

 
$
87

 
$
103

 
$
137

S&P 500
100

 
132

 
150

 
153

 
171

 
208

DJUSCN
100

 
129

 
127

 
138

 
164

 
190

All amounts are rounded to the nearest dollar.
On February 1, 2017, we announced that our Board of Directors approved a stock repurchase program of $250 million, and on February 1, 2018 we announced an increase in this stock repurchase program, bringing the total size of the program to $500 million. Under the program, we may repurchase shares from time to time in open market transactions or in privately-negotiated transactions in accordance with applicable securities laws, including under plans complying with Rule 10b5-1 under the Exchange Act. We may discontinue the program at any time, and the program has no set expiration date. The timing and amount of any repurchase of shares is determined by our management, based on its evaluation of market conditions, cash on hand, applicable legal requirements and other factors. The following table provides information about purchases of our common stock we made during the three months ended December 31, 2017:
Issuer Purchases of Equity Securities
Period
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plans or programs
 
Approximate dollar value of shares that may yet be purchased under the plans or programs
(millions)
October 1, 2017 to October 31, 2017
 
364,201

 
$
32.83

 
364,201

 
$
85

November 1, 2017 to November 30, 2017
 
356,375

 
$
34.77

 
356,375

 
$
72

December 1, 2017 to December 31, 2017 (a)
 
161,275

 
$
37.47

 
161,275

 
$
66

Total
 
881,851

 
 
 
881,851

 
 
(a)
Approximate dollar value of shares that may yet be purchased under the plans or programs as of December 31, 2017 does not include the additional $250 million approved by our Board of Directors in 2018.



19


Item 6.
SELECTED FINANCIAL DATA
(millions, except per-share and employee data)
Years Ended December 31,
 
2017
 
2016
 
2015 (a)
 
2014 (a)
 
2013 (a)
Statement of Income Data:
 
 
 
 
 
 
 
 
 
Net sales
$
3,204

 
$
3,017

 
$
2,913

 
$
2,904

 
$
2,792

Cost of products sold
2,539

 
2,312

 
2,263

 
2,279

 
2,232

Gross profit
665

 
705

 
650

 
625

 
560

Selling and administrative expenses
298

 
304

 
302

 
323

 
302

Litigation settlement charge (b)

 

 

 
48

 

Long-lived asset impairment charges (c)

 
10

 

 
90

 

Shipping operations (d)

 
(3
)
 
(7
)
 
15

 

Restructuring charges

 

 

 

 
4

Operating profit
367

 
394

 
355

 
149

 
254

Income (loss) from equity method investments
59

 
49

 
48

 
33

 
(1
)
Interest expense, net
(65
)
 
(141
)
 
(161
)
 
(178
)
 
(200
)
Income and gain from sale of equity method investment to related party (e)

 

 
13

 
2

 
2

Gain on deconsolidation of subsidiaries and consolidated joint ventures (f)

 

 

 
27

 

Loss on extinguishment of debt
(22
)
 
(37
)
 
(19
)
 

 

Other (expense) income, net
(4
)
 
9

 

 

 

Income from continuing operations before income taxes
335

 
274

 
236

 
33

 
55

Income tax (expense) benefit (g)
(238
)
 
(63
)
 
740

 
(7
)
 
(11
)
Income from continuing operations
97

 
211

 
976

 
26

 
44

(Loss) income from discontinued operations, net of tax
(9
)
 
20

 
15

 
12

 
2

Gain on sale of discontinued operations, net of tax (a)

 
279

 

 

 

Net income
88

 
510

 
991

 
38

 
46

Less: Net income (loss) attributable to noncontrolling interest

 

 

 
1

 
(1
)
Net income attributable to USG
$
88

 
$
510

 
$
991

 
$
37

 
$
47

Income from continuing operations per average common share:
 
 
 
 
 
 
 
 
 
Basic
$
0.67

 
$
1.45

 
$
6.70

 
$
0.18

 
$
0.40

Diluted
0.66

 
1.44

 
6.62

 
0.17

 
0.39

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (as of the end of the year):
 
 
 
 
 
 
 
 
 
Working capital
$
576

 
$
527

 
$
408

 
$
546

 
$
1,080

Current ratio
2.39

 
2.25

 
1.41

 
1.97

 
2.90

Cash and cash equivalents (a)
394

 
427

 
442

 
231

 
815

Property, plant and equipment, net (a)
1,762

 
1,707

 
1,771

 
1,891

 
2,088

Total assets
3,851

 
3,869

 
4,736

 
3,936

 
4,051

Long-term debt (h)
1,078

 
1,083

 
1,675

 
2,191

 
2,275

Total stockholders’ equity
1,845

 
1,886

 
1,436

 
408

 
662

(a)
Results have been adjusted from the originally reported amounts to reflect L&W, which was sold on October 31, 2016, as a discontinued operation. We recorded a gain of $279 million on the sale of the business. See Note 3 to our consolidated financial statements in Part II, Item 8 of this report.
(b)
Reflects a charge related to the settlement of the U.S. wallboard pricing class action lawsuits.
(c)
Reflects long–lived asset impairment charges on mining operations in 2016. See Note 12 to our consolidated financial statements in Part II, Item 8 of this report. The amount in 2014 reflects impairment charges on manufacturing facilities, capitalized costs for the construction of future facilities and ocean vessels.
(d)
Item relates to our shipping operations. See Note 13 to our consolidated financial statements in Part II, Item 8 of this report.
(e)
Reflects the gain recorded on the sale of our equity method investment in our Knauf-USG joint venture to our 50/50 joint venture partner in 2015 and our share of the net income from the equity method investment for all periods presented. See Note 4 to our consolidated financial statements in Part II, Item 8 of this report.
(f)
Reflects the gain recorded on the deconsolidation and contribution to UBBP of our wholly-owned subsidiaries in Singapore, Malaysia, New Zealand, and Australia and our consolidated joint ventures in Oman.
(g)
Income tax expense for 2017 includes $145 million of expense related to the Tax Cuts and Jobs Act, or the 2017 Tax Act. The 2015 benefit includes the reversal of a tax valuation allowance of $731 million. See Note 15 to our consolidated financial statements in Part II, Item 8 of this report.
(h)
Excludes currently maturing portion of long-term debt.

20


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
USG, through our subsidiaries and joint ventures, is a leading manufacturer of building materials and innovative solutions. We produce a wide range of products under recognized brand names including Sheetrock®, Durock®, Fiberock®, and Securock® serving the new residential, new nonresidential, and residential and nonresidential repair and remodel construction markets as well as products used in certain industrial processes, enabling our customers to build the outstanding spaces where people live, work and play.
KEY STRATEGIES
In 2017, we outlined our strategy which includes the following four pillars:
Profitably grow our core portfolio,
Innovate to address industry challenges,
Align and enable our organization, and
Maintain disciplined capital allocation.
In addition, in the fourth quarter of 2017 we realigned our organizational structure to reflect three divisions, in addition to UBBP: Gypsum, Performance Materials and Ceilings. As a result of our realigned operating structure, we changed the composition of our reportable segments effective for the quarter ended December 31, 2017 to align with how we manage our businesses, review operating performance and allocate resources considering the discrete information available for the geographies within those divisions. We now have five reportable segments: U.S. Wallboard and Surfaces, U.S. Performance Materials, U.S. Ceilings, Canada, and UBBP.
MARKET CONDITIONS AND OUTLOOK
Our businesses are cyclical in nature and sensitive to changes in general economic conditions, including, in particular, conditions in the housing and construction-based markets in North America. Our business in the markets of Asia, Australasia, and the Middle East also significantly exposes us to the economic conditions in those areas. However, the UBBP joint ventures have helped diversify USG’s overall exposure to changes in the North American economic conditions. The markets we serve can be broadly categorized as new residential construction, new nonresidential construction and repair and remodel activity, which includes both residential and nonresidential construction.
The following table summarizes the current market conditions and outlook for our primary end markets in North America.
End Market
Lead time
Metric
Source
Market Condition/Outlook
New
Residential
Installation of gypsum products(a) into a single family home typically follows a housing start by 90-120 days
Housing starts
(seasonally adjusted)
U.S. Census Bureau
2017 - 1.202 million
2016 - 1.174 million
Industry forecast (Blue Chip Economic Indicators)
2018 - 1.22 million to 1.35 million (b)
USG forecast
2018 estimated - 1.25 million (c)
New Nonresidential
Installation of gypsum(a) and ceilings products typically follows signing of construction contracts by about 12 to 18 months
Change in floor space for which contracts are signed
Dodge Data & Analytics
2017 from 2016 - 2% increase
Industry forecast (Dodge Data & Analytics) (d)
2018 from 2017 - 2% increase
USG forecast
2018 estimated to increase by low to mid single digits
Repair and Remodel (e)
Remodels typically begin within two years from purchase
Sales of existing homes (seasonally adjusted)
National Association of Realtors
2017 - 5.51 million
2016 - 5.45 million
Overall repair and remodel spending for gypsum products
USG forecast
2018 spending estimated to increase by low to mid single digits
(a)
Gypsum products include products manufactured and marketed by our U.S. Wallboard and Surfaces segment and Fiberock® brand gypsum fiber panels manufactured and marketed by our U.S. Performance Materials segment.
(b)
Forecast based on the average of the bottom ten and top ten forecasts included in the report, respectively.
(c)
USG estimate is based on the seasonally adjusted annual rate of housing starts.
(d)
Dodge Data & Analytics' forecast includes several building types which do not generate significant demand for our products.
(e)
The repair and remodel market includes renovation of both residential and nonresidential buildings.

21


As indicated in the table above, we expect modest improvement in the U.S. construction markets over the next twelve months. However, while sales of products in our U.S. Wallboard and Surfaces and U.S. Performance Materials segments have generally improved with the modest recovery in residential housing, the segments continue to be adversely affected by the low level of residential and other construction activity compared to historical averages. The results of our U.S. Ceilings segment, which primarily serves the nonresidential market, have shown some improvement over the longer term. However, the results also continue to be adversely affected by the low levels of new nonresidential construction activity as compared to historical averages. Our U.S. Ceilings segment is also adversely affected by changing construction preferences, such as the shift to open plenum and specialty ceilings. We acquired Ceilings Plus in 2017 to help address this trend.
We also expect modest improvement in the construction industry in Canada. Other international markets, including those that are within the UBBP territory, provide opportunities for our operations to serve the demand in these regions. Australia is expected to experience a decline in housing starts; however, these housing starts are expected to remain above the long-term average. The construction industry in South Korea has slowed, driven by increased government regulations. The construction industry in Thailand is showing slight improvement due to growth in the government infrastructure market. Several emerging markets which are within the UBBP territory are forecasted to experience growth. The international markets within the UBBP territory are beginning to adopt Western building practices, which provide more opportunities. We anticipate that the performance of the UBBP joint ventures will partially offset some of the potential cyclicality in our North American businesses.
The following table summarizes the industry information on U.S. wallboard shipments and capacity.
U.S. Industry Information
Metric
Source
Market Condition/Outlook
U.S. industry shipments of gypsum board (a)
Billion of square feet (bsf)
Gypsum Association
Twelve months 2017 - 25.7 bsf
Twelve months 2016 - 25.0 bsf
USG forecast
2018 shipments expected to increase by low single digits
U.S. wallboard capacity
Billion of square feet (bsf)
USG estimate
1/1/2018 - 34.0 bsf
U.S. industry capacity utilization rate
Annualized shipments as a percentage of industry capacity
USG estimate
Twelve months 2017 - 76%
Twelve months 2016 - 75%
(a)
The gypsum board market as determined by the Gypsum Association includes gypsum wallboard, other gypsum-related paneling products, such as glass mat sheathing and gypsum fiber boards, and imports.
We shipped 6.12 billion square feet of USG Sheetrock® brand gypsum wallboard in 2017, a 6% increase from 5.76 billion square feet in 2016. Our share of the gypsum board market in the United States, which includes, for comparability, shipments of Gypsum products of USG Sheetrock® brand gypsum wallboard and Securock® brand glass mat sheathing and Performance Materials product of Fiberock® brand gypsum fiber panels, increased to 25.4% in 2017 from 24.6% in 2016.
There is excess wallboard production capacity industry-wide in the United States. Based on current industry trends and forecasts, demand for gypsum wallboard is expected to increase in 2018, but the magnitude of any increase will depend on the levels of housing starts and repair and remodel activity, among other factors. We project that the industry capacity utilization rate will increase modestly in 2018 compared to 2017.
We could experience pressure on gypsum wallboard selling prices and our gross margins at these levels of capacity utilization. Our U.S. Wallboard and Surfaces segment implemented a price increase for wallboard in January 2018. However, it is uncertain that we will be able to maintain the increase or obtain additional price increases in our selling prices. If we are unable to maintain or implement additional price increases, our net sales, operating results and cash flows may be materially and adversely impacted.

22


GEOGRAPHIC INFORMATION
In 2017, we recorded $3.2 billion of net sales in our consolidated statement of income, and net sales for UBBP, which are not included in our consolidated statements of income, were $1.2 billion. The following charts reflect the geographic breakdown of net sales for the year ended December 31, 2017.
chart-bbaefd2c394409c74d7.jpgchart-a6055422518a7978509.jpg
CURRENCY IMPACT
The impact of currency on consolidated and segment results for 2017 and 2016 has been derived by translating current period results at the year-to-date average foreign currency rates for the period ending December 31, 2016 and December 31, 2015, respectively.
PRESENTATION OF FINANCIALS
In connection with the preparation of this report, certain adjustments related to our implementation of the Tax Cuts and Jobs Act, or the 2017 Tax Act, were recorded in our financial statements subsequent to our earnings release furnished on Form 8-K on February 1, 2018. The non-cash tax charge related to the revaluation and change in realizability of our deferred tax assets was increased from $138 million to $145 million.


23


CONSOLIDATED RESULTS OF OPERATIONS
 
 
 
 
 
 
 
Favorable (Unfavorable)
 
 
 
 
 
 
 
2017 vs. 2016
 
2016 vs. 2015
(millions, except per-share data)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Net sales
$
3,204

 
$
3,017

 
$
2,913

 
$
187

 
6
 %
 
$
104

 
4
 %
Cost of products sold
2,539

 
2,312

 
2,263

 
(227
)
 
(10
)%
 
(49
)
 
(2
)%
Gross profit
665

 
705

 
650

 
(40
)
 
(6
)%
 
55

 
8
 %
Selling and administrative expenses
298

 
304

 
302

 
6

 
2
 %
 
(2
)
 
(1
)%
Long-lived asset impairment charges

 
10

 

 
10

 
100
 %
 
(10
)
 
*

Recovery of receivable

 
(3
)
 
(6
)
 
(3
)
 
(100
)%
 
(3
)
 
(50
)%
Gain on disposal of shipping operations, net

 

 
(1
)
 

 
 %
 
(1
)
 
(100
)%
Operating profit
367

 
394

 
355

 
(27
)
 
(7
)%
 
39

 
11
 %
Income from equity method investments
59

 
49

 
48

 
10

 
20
 %
 
1

 
2
 %
Interest expense
(69
)
 
(145
)
 
(163
)
 
76

 
52
 %
 
18

 
11
 %
Interest income
4

 
4

 
2

 

 
 %
 
2

 
100
 %
Income and gain on sale from equity method investment to related party

 

 
13

 

 
 %
 
(13
)
 
(100
)%
Loss on extinguishment of debt
(22
)
 
(37
)
 
(19
)
 
15

 
41
 %
 
(18
)
 
(95
)%
Other (expense) income, net
(4
)
 
9

 

 
(13
)
 
*

 
9

 
*

Income from continuing operations before income taxes
335

 
274

 
236

 
61

 
22
 %
 
38

 
16
 %
Income tax (expense) benefit
(238
)
 
(63
)
 
740

 
(175
)
 
*

 
(803
)
 
*

Income from continuing operations
97

 
211

 
976

 
(114
)
 
(54
)%
 
(765
)
 
(78
)%
(Loss) income from discontinued operations, net of tax
(9
)
 
20

 
15

 
(29
)
 
*

 
5

 
33
 %
Gain on sale of discontinued operations, net of tax

 
279

 

 
(279
)
 
*

 
279

 
*

Net income
$
88

 
$
510

 
$
991

 
$
(422
)
 
(83
)%
 
$
(481
)
 
(49
)%
Diluted earnings per share - net income
$
0.60

 
$
3.46

 
$
6.73

 
$
(2.86
)
 
 
 
$
(3.27
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
NET SALES
Consolidated net sales in 2017 increased $187 million, or 6%, compared with 2016, driven by higher net sales in all four consolidated segments. The increase reflected higher volumes of USG Sheetrock® brand gypsum wallboard, USG Sheetrock® brand joint compound, USG Durock® brand cement board, USG Durock™ brand glass-mat tile backerboard, Fiberock® brand tile backerboard and underlayment and ceiling tile offset by lower volumes of ceiling grid and lower prices for gypsum wallboard and joint compound. On a consolidated basis, foreign currency exchange rate fluctuations positively impacted our net sales by $6 million.
Consolidated net sales in 2016 increased $104 million, or 4%, compared with 2015 driven by higher net sales in all four consolidated segments. The increased sales were driven by higher volumes of USG Sheetrock® brand gypsum wallboard, USG Sheetrock® brand joint compound, USG Durock® brand cement board, Levelrock® brand gypsum underlayment, structural panels and ceiling grid offset by lower prices of gypsum wallboard, joint compound and ceiling grid. On a consolidated basis, foreign currency exchange rate fluctuations negatively impacted our net sales by $34 million.
GROSS PROFIT
Gross profit was $665 million in 2017 compared to $705 million in 2016. As a percentage of net sales, gross profit was 20.8% in 2017 and 23.4% in 2016. The decrease of $40 million in gross profit was driven by increased costs of manufacturing due primarily to higher costs of raw materials, notably waste paper and steel, a $3 million less favorable adjustment to our asset retirement obligation due to changes in cash flow estimates and an additional $3 million of pension settlement charges. Also driving the decrease was the absence of $7 million for items recorded in 2016, which included a gain of $11 million for the sale of surplus property offset by a $2 million adjustment to customer reserves and $2 million of severance and other charges related to the decision to indefinitely idle our mining operations in Little Narrows, Nova Scotia, Canada.
Gross profit increased $55 million from $650 million in 2015 to $705 in 2016. As a percentage of net sales, gross profit was 23.4% in 2016 and 22.3% in 2015. The increase reflected lower manufacturing costs driven primarily by lower natural gas prices and lower costs of steel offset by increased costs of waste paper. Also driving the improvement was a $11 million gain recorded on the sale of surplus property offset by a $2 million adjustment to customer reserves and $2 million of severance and other charges related to the decision to indefinitely idle our mining operations in Little Narrows, Nova Scotia, Canada.

24


SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled $298 million in 2017, $304 million in 2016 and $302 million in 2015. As a percentage of net sales, selling and administrative expenses decreased to 9.3% in 2017 compared to 10.1% in 2016 and 10.4% in 2015. The decrease of $6 million in selling and administrative expenses for 2017 reflected lower pension settlement expense of $11 million and the absence of $4 million for the exit of commercial office space, which reflected the remaining lease term and accelerated depreciation, offset by higher costs for marketing and services including those in support of product growth initiatives.
The increase in selling and administrative expenses from 2015 to 2016 was driven by $13 million in pension settlement charges and $4 million for the remaining lease term and accelerated depreciation associated with the exit of commercial office space. Offsetting these charges are lower net compensation costs and lower marketing expenses.
LONG-LIVED ASSET IMPAIRMENT CHARGES
We recorded long-lived asset impairment charges of $10 million in 2016. These charges resulted from the decision to indefinitely idle our mining operations in Little Narrows, Nova Scotia, Canada, after completing a review of our gypsum sourcing needs. See Note 12 to our consolidated financial statements in Part II, Item 8 of this report for additional information related to long-lived asset impairment charges.
RECOVERY ON RECEIVABLE
In 2016 and 2015, we recovered $3 million and $6 million, respectively, of a previously deemed uncollectible receivable through a settlement agreement. See Note 13 to our consolidated financial statements in Part II, Item 8 of this report for additional information.
GAIN ON DISPOSAL OF SHIPPING OPERATIONS, NET
During the second quarter of 2015, we recorded a net gain on the disposal of our shipping operations of $1 million. This reflected a gain on sale of our two self-unloading vessels of $7 million and charges to wind down our shipping operations of $6 million. See Note 13 to our consolidated financial statements in Part II, Item 8 of this report for additional information.
INCOME FROM EQUITY METHOD INVESTMENTS
Income from equity method investments was $59 million in 2017, $49 million in 2016, and $48 million in 2015. The increase from 2016 to 2017 was driven by an increase in the net income of UBBP, which was due to a favorable currency impact of $2 million and the absence of $8 million in impairment charges recorded in 2016.
The increase from 2015 to 2016 was driven by an increase in the net income of UBBP, which reflected higher sales and operating profit year over year offset by $8 million of long-lived asset impairment charges in China and Oman. Foreign currency exchange rate fluctuations due to the strengthening of the U.S. dollar negatively impacted our share of equity earnings by $1 million in 2016.
INTEREST EXPENSE
Interest expense was $69 million in 2017, $145 million in 2016 and $163 million in 2015. The decrease in interest expense for both comparative periods primarily reflected lower debt levels and lower interest rates on our outstanding debt. The decline was driven by repayments of $1.1 billion of debt in 2016 and $21 million in 2015.
INCOME AND GAIN ON SALE FROM EQUITY METHOD INVESTMENT TO RELATED PARTY
In 2015, upon the sale of our 50% share of the Knauf-USG joint venture to Knauf, we recorded a gain of $11 million, or $6 million net of tax. Our share of the income from the equity method investment in 2015 through the date of sale amounted to $2 million. See Note 4 to our consolidated financial statements in Part II, Item 8 of this report for additional information.
LOSS ON EXTINGUISHMENT OF DEBT
We recorded a loss on extinguishment of debt, including premiums and write-off of unamortized debt issuance costs, of $22 million in 2017, $37 million in 2016 and $19 million in 2015. The loss in 2017 included $21 million primarily for premiums paid as a result of a tender offer and repurchase of our 7.75% Senior Notes due 2018, referred to as our 7.75% Notes, and write-off of $1 million for deferred fees upon the amendment of our credit facility. The loss in 2016 was a result of the early redemption of our 6.3% Senior Notes due 2016 throughout 2016 and repayment in December of our 7.875% Senior Notes due 2020 and 5.875% Senior Notes due 2021. The loss in 2015 resulted from the tender offer and repurchase of our 8.375% Senior Notes due 2018.

25


OTHER (EXPENSE) INCOME, NET
In 2017, we recorded $4 million in other expense, which primarily reflected net losses on foreign currency transactions. We recorded $9 million of net other income in 2016 which included net gains on foreign currency transactions and the receipt of the remaining payments under a settlement agreement with our former trading partner of which $4 million was recorded as other income. See Note 13 to the consolidated financial statements in Part II, Item 8 of this report for additional information.
INCOME TAX EXPENSE (BENEFIT)
Our effective tax rate was 71.0% in 2017, 22.9% in 2016, and not meaningful in 2015. Our effective tax rate has historically been sensitive to the geographic mix of earnings. When the percentage of pretax earnings generated outside of the United States increased, our effective tax rate generally decreased. Conversely, when the percentage of pretax earnings generated outside of the United States decreased, our effective tax rate generally increased.
The effective tax rate for each of 2017, 2016 and 2015 was significantly impacted by the charges and credits described in detail below. Excluding the impact of these charges and credits, the effective tax rate was 27.8% in 2017, 30.7% in 2016 and 36.9% in 2015.
Income tax expense was $238 million in 2017 compared with income tax expense of $63 million in 2016. The income tax expense in 2017 included a $145 million non-cash tax charge related to the revaluation and change in realizability of our deferred tax assets due to the change in U.S. federal tax law under the Tax Cuts and Jobs Act, or the 2017 Tax Act.
Income tax expense was $63 million in 2016 compared with income tax benefit of $740 million in 2015. The income tax
expense in 2016 was related to tax expense from domestic, foreign, state and local jurisdictions. This expense was partially offset by foreign tax credits attributable to tax planning strategies to optimize foreign tax credit utilization and management’s intention to amend its tax returns for the tax years 2012-2014 in order to claim credits for previously deducted foreign tax.
The income tax benefit in 2015 primarily resulted from the reversal of a substantial portion of our deferred tax asset valuation allowance of $731 million. In addition, tax benefits of $5 million were recorded for Federal law changes in 2015 related to alternative minimum tax credit monetization, or AMT credits. These benefits recorded were offset slightly by tax expense for certain foreign, state and local jurisdictions of $7 million. Due to the effects of reversing our deferred tax asset valuation allowance, our effective tax rate for 2015 was abnormally low.
(LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
We recorded a loss from discontinued operations of $9 million for 2017 which primarily related to a pension settlement charge triggered by lump sum benefits paid to former employees of L&W. We recorded income from discontinued operations of $20 million for 2016 and $15 million for 2015 which primarily reflected the income recorded by L&W prior to the sale to ABC Supply on October 31, 2016. We also recorded losses of $1 million and $2 million in 2017 and 2016, respectively, related to our European operations which were sold in December 2012. See Note 3 to our consolidated financial statements in Part II, Item 8 of this report for additional information.
GAIN ON SALE OF DISCONTINUED OPERATIONS, NET OF TAX
On October 31, 2016, we completed the sale of L&W, our distribution business, to ABC Supply and received proceeds of $675 million, inclusive of a $6 million final working capital adjustment that was received subsequent to year end. The sale resulted in a gain on sale, net of tax, of $279 million. See Note 3 to our consolidated financial statements in Part II, Item 8 of this report for additional information.

26


SEGMENT RESULTS OF OPERATIONS
Net sales and operating profit (loss) for our consolidated reportable segments were as follows:
 
 
 
 
 
 
 
Favorable (Unfavorable)
 
 
 
 
 
 
 
2017 vs. 2016
 
2016 vs. 2015
(millions)
2017
 
2016(a)
 
2015(b)
 
$
 
%
 
$
 
%
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Wallboard and Surfaces
$
1,916

 
$
1,778

 
$
1,720

 
$
138

 
8
 %
 
$
58

 
3
 %
U.S. Performance Materials
373

 
357

 
321

 
16

 
4
 %
 
36

 
11
 %
U.S. Ceilings
477

 
467

 
464

 
10

 
2
 %
 
3

 
1
 %
Canada
405

 
389

 
372

 
16

 
4
 %
 
17

 
5
 %
Other
245

 
220

 
239

 
25

 
11
 %
 
(19
)
 
(8
)%
Eliminations
(212
)
 
(194
)
 
(203
)
 
(18
)
 
(9
)%
 
9

 
4
 %
Total
$
3,204

 
$
3,017

 
$
2,913

 
$
187

 
6
 %
 
$
104

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Profit (Loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Wallboard and Surfaces
$
314

 
$
334

 
$
298

 
(20
)
 
(6
)%
 
$
36

 
12
 %
U.S. Performance Materials
26

 
41

 
31

 
(15
)
 
(37
)%
 
10

 
32
 %
U.S. Ceilings
95

 
101

 
80

 
(6
)
 
(6
)%
 
21

 
26
 %
Canada
12

 
26

 
10

 
(14
)
 
(54
)%
 
16

 
*

Other
11

 
(4
)
 
30

 
15

 
*

 
(34
)
 
*

Corporate
(90
)
 
(104
)
 
(94
)
 
14

 
13
 %
 
(10
)
 
(11
)%
Eliminations
(1
)
 

 

 
(1
)
 
*

 

 
*

Total
$
367

 
$
394

 
$
355

 
$
(27
)
 
(7
)%
 
$
39

 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*
Not meaningful
(a)
Operating profit in 2016 included a gain of $11 million recorded on the sale of surplus property related to U.S. Wallboard and Surfaces and $10 million of long-lived asset impairment charges, $2 million of severance and $3 million of recovery of loss on receivable in Other.
(b)
Operating profit in 2015 included $1 million for a net gain on sale of the ships and costs to wind-up our shipping business business, a $6 million recovery of a portion of the receivable deemed uncollectible in 2014 and a pre-tax gain on the sale of assets of $10 million in Other.
U.S. Wallboard and Surfaces
Our U.S. Wallboard and Surfaces segment manufactures and markets gypsum and related products in the United States. These products are used in a variety of building applications to construct walls and ceilings of residential, nonresidential and institutional buildings, as well as in certain industrial applications.
2017 COMPARED WITH 2016
Net sales for U.S. Wallboard and Surfaces in 2017 were $1.9 billion, an increase of $138 million, or 8%, compared with 2016. The net sales increase was due to the following:
 
Sales
 
Volume
 
Price
(millions)
$
%
 
$
%
 
$
%
Change to 2017 from 2016
 
 
 
 
 
 
 
 
USG Sheetrock® brand gypsum wallboard
$
52

6
%
 
$
59

6
%
 
$
(7
)
%
USG Sheetrock® brand joint compound
21

6
%
 
23

6
%
 
(2
)
%
Other
65

 
 
 
 
 
 
 
Total increase in net sales
$
138

8
%
 
 
 
 
 
 
The increase in net sales reflected higher volumes of USG Sheetrock® brand gypsum wallboard due to higher shipments to big box retailers and specialty dealers, including new customers, and higher volumes of USG Sheetrock® brand joint compound as a result of higher shipments to big box retailers. We shipped 6.12 billion square feet of USG Sheetrock® brand gypsum wallboard in 2017, a 6% increase from 5.76 square feet in 2016. Offsetting the increase in volumes were lower average selling prices in USG Sheetrock® brand gypsum wallboard and USG Sheetrock® brand joint compound primarily driven by a change in mix and regional pricing differences as we balance price and volume across the country with new customers and the continued transition under the L&W supply agreement.

27


Sales also increased by $65 million due to net sales of other products including glass-mat panels, paper and joint compound accessory products, $8 million in higher royalties and higher freight as a result of higher sales.
Operating profit for U.S. Wallboard and Surfaces was $314 million in 2017 and $334 million in 2016, or a $20 million decrease, and reflected the following:
 
Operating Profit
 
Volume
 
Price
 
Cost
(millions)
$
 
$
 
$
 
$
Change to 2017 from 2016
 
 
 
 
 
 
 
USG Sheetrock® brand gypsum wallboard
$
(16
)
 
$
26

 
$
(7
)
 
$
(35
)
USG Sheetrock® brand joint compound
(1
)
 
6

 
(2
)
 
(5
)
Other
(3
)
 
 
 
 
 
 
Total decrease in operating profit
$
(20
)
 
 
 
 
 
 
The decrease in operating profit primarily reflected higher per unit costs of USG Sheetrock® brand gypsum wallboard and USG Sheetrock® brand joint compound partially offset by higher volumes of these products as discussed above. Higher manufacturing per unit costs of USG Sheetrock® brand gypsum wallboard reflected an increase in per unit cost of 11% for raw materials, primarily due to waste paper. Offsetting the higher costs for raw materials were improved per unit costs of 3% for energy and 2% for fixed costs due to higher volumes. The increased per unit costs of USG Sheetrock® brand joint compound were also driven by increased costs of raw materials.
Further contributing to the decrease in operating profit in 2017 was a $5 million less favorable adjustment year over year to our asset retirement obligations due to changes in cash flow estimates, an incremental $1 million of pension settlement expense and the absence of $9 million for items recorded in 2016, which included a gain of $11 million for the sale of surplus property offset by a $2 million adjustment to customer reserves. Offsetting the decrease in operating profit was higher gross profit of $9 million on other products including glass-mat panels, and lower selling and administrative expenses of $3 million. As a percentage of sales, selling and administrative expenses decreased 50 basis points.
2016 COMPARED WITH 2015
Net sales for U.S. Wallboard and Surfaces in 2016 increased $58 million, or 3%, compared with 2015. The net sales increase was due to the following:
 
Sales
 
Volume
 
Price
(millions)
$
%
 
$
%
 
$
%
Change to 2016 from 2015
 
 
 
 
 
 
 
 
USG Sheetrock® brand gypsum wallboard
$
46

5
%
 
$
54

6
%
 
$
(8
)
(1
)%
USG Sheetrock® brand joint compound
16

4
%
 
18

5
%
 
(2
)
(1
)%
Other
(4
)
 
 
 
 
 
 
 
Total increase in net sales
$
58

3
%
 
 
 
 
 
 
Net sales of USG Sheetrock® brand gypsum wallboard increased $46 million, or 5%, reflecting a 6% increase in volume offset by a 1% decrease in wallboard average selling prices. The increase in volume was driven by higher shipments to the core channels of distribution which includes big box retailers, specialty dealers and pro dealers. We shipped 5.76 billion square feet of USG Sheetrock® brand gypsum wallboard in 2016, a 6% increase from 5.44 billion square feet in 2015. The decrease in average selling prices reflected changes in mix and regional pricing differences. Sales of USG Sheetrock® brand joint compound increased $16 million driven largely by increased shipments to specialty dealers, pro dealers and big box retailers offset by a 1% decrease in average selling prices due to product mix.
The decrease in Other reflected a $25 million reduction in sales for inventory sold by U.S. Wallboard and Surfaces to L&W that was included in L&W’s inventory as of October 31, 2016. This was offset by higher sales of other products, including glass mat panels, joint compound accessories, and bead and trim products, of $15 million and by an increase in freight as a result of higher product sales.

28


Operating profit for U.S. Wallboard and Surfaces was $334 million in 2016 and $298 million in 2015, or a $36 million increase, and reflected the following:
 
Operating Profit
 
Volume
 
Price
 
Cost
(millions)
$
 
$
 
$
 
$
Change to 2016 from 2015
 
 
 
 
 
 
 
USG Sheetrock® brand gypsum wallboard
$
23

 
$
24

 
$
(8
)
 
$
7

USG Sheetrock® brand joint compound
11

 
4

 
(2
)
 
9

Other
2

 
 
 
 
 
 
Total increase in operating profit
$
36

 
 
 
 
 
 
The increase in operating profit in 2016 reflected gross profit improvement for USG Sheetrock® brand gypsum wallboard and USG Sheetrock® brand joint compound. Manufacturing costs per unit improved for USG Sheetrock® brand gypsum wallboard which was reflected in $7 million of increased operating profit. The lower cost was driven by a reduction in per unit cost of 11% for energy costs as a result of lower natural gas prices and of 8% for fixed costs due to higher volumes. Offsetting some of these cost savings was a 4% increase in raw material costs driven by waste paper and synthetic gypsum and a 4% increase in conversion costs driven partially by higher labor costs. Manufacturing costs per unit for USG Sheetrock® brand joint compound decreased due to lower raw material costs, driven primarily by pails, latex, and thickener and lower fixed costs due to improved volumes.
Gross profit improvement of $5 million on other gypsum products contributed to improved operating profit driven by product mix, in addition to a gain of $11 million on the sale of surplus property, a favorable adjustment of $3 million for our asset retirement obligations and improved selling and administrative expenses of $2 million. Offsetting these improvements to operating profit was a $11 million reduction in gross profit for inventory sold by U.S. Wallboard and Surfaces to L&W that was included in L&W's inventory as of October 31, 2016, an adjustment to customer reserves of $2 million and a pension settlement of $6 million. As a percentage of net sales, selling and administrative expenses declined by 30 basis points driven primarily by lower net compensation costs.
U.S. Performance Materials
Our U.S. Performance Materials segment manufactures and markets a series of innovative products in the United States in the product categories of underlayment, building envelope and structural. These products are used in a variety of interior and exterior building applications of residential and nonresidential buildings, as well as in certain industrial applications.
2017 COMPARED WITH 2016
Net sales for U.S. Performance Materials in 2017 were $373 million, an increase of $16 million, or 4%, compared with 2016. The net sales increase was due to the following:
 
Sales
 
Volume
 
Price
(millions)
$
%
 
$
%
 
$
%
Change to 2017 from 2016
 
 
 
 
 
 
 
 
USG Durock® brand cement board
$
3

2
%
 
$
3

2
%
 
$

 %
USG Durock™ brand glass-mat tile backerboard
3

39
%
 
3

39
%
 

 %
Fiberock® brand tile backerboard and underlayment
2

7
%
 
3

12
%
 
(1
)
(5
)%
Other
8

 
 
 
 
 
 
 
Total increase in net sales
$
16

4
%
 
 
 
 
 
 
The increase in net sales in 2017 was driven by increased volumes of USG Durock® brand cement board, USG Durock™ brand glass-mat tile backerboard and Fiberock® brand tile backerboard and underlayment. The higher volumes of these products primarily reflected increased sales into the repair and remodel market with higher shipments to big box retailers and specialty dealers. Lower average selling price of Fiberock® brand tile backerboard and underlayment slightly offset the increases in volumes.
The increase in Other reflected higher sales of $8 million of other products including Securock® brand roof boards, Levelrock® brand gypsum underlayment, tile and flooring accessories and Securock® ExoAir® 430 air barrier system and higher freight due to increased shipments.

29


Operating profit for U.S. Performance Materials was $26 million in 2017 and $41 million in 2016, or a $15 million decrease, and reflected the following:
 
Operating Profit
 
Volume
 
Price
 
Cost
(millions)
$
 
$
 
$
 
$
Change to 2017 from 2016
 
 
 
 
 
 
 
USG Durock® brand cement board
$
(2
)
 
$
1

 
$

 
$
(3
)
USG Durock™ brand glass-mat tile backerboard
1

 
1

 

 

Fiberock® brand tile backerboard and underlayment
(1
)
 
1

 
(1
)
 
(1
)
Other
(13
)
 
 
 
 
 
 
Total decrease in operating profit
$
(15
)
 
 
 
 
 
 
The decrease in operating profit in 2017 reflected lower gross profit on USG Durock® brand cement board and Fiberock® brand tile backerboard and underlayment as a result of higher per unit cost offset by higher gross profit on USG Durock™ brand glass-mat tile backerboard. The increased per unit cost for Durock® brand cement board primarily reflected increased transportation costs offset by lower cost of raw materials. The higher cost per unit for Fiberock® brand tile backerboard and underlayment was driven by an increase in the cost of raw materials, primarily waste paper, and increased transportation costs offset slightly by lower energy costs.
Included in Other was lower gross profit on other products of $8 million, including Securock® brand roof boards, which reflected higher costs of raw materials and transportation costs, a $1 million increase in operational reserves and $4 million of higher selling and administrative expenses. As a percentage of sales, selling and administrative expenses increased 100 basis points which reflected increased marketing and compensation costs.
2016 COMPARED WITH 2015
Net sales for U.S. Performance Materials in 2016 increased $36 million, or 11%, compared with 2015. The net sales increase was due to the following:
 
Sales
 
Volume
 
Price
(millions)