-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HpocETskA8XO1X17godDgQf+7spUojVB7X8Rrb940//LT+RofSBllL3/wzL6qPuK SuUGnEo/wr6JExkFwZ+FkQ== 0000950137-99-003817.txt : 19991108 0000950137-99-003817.hdr.sgml : 19991108 ACCESSION NUMBER: 0000950137-99-003817 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USG CORP CENTRAL INDEX KEY: 0000757011 STANDARD INDUSTRIAL CLASSIFICATION: 3270 IRS NUMBER: 363329400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08864 FILM NUMBER: 99737069 BUSINESS ADDRESS: STREET 1: 125 S FRANKLIN ST STREET 2: DEPT. 188 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126064000 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ----------- Commission File Number 1-8864 USG CORPORATION - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3329400 - - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 125 South Franklin Street, Chicago, Illinois 60606-4678 - - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (312) 606-4000 ----------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ----- ----- As of September 30, 1999, 49,440,579 shares of USG common stock were outstanding. 2 TABLE OF CONTENTS Page ---- PART I FINANCIAL STATEMENTS Item 1. Financial Statements: Consolidated Statement of Earnings: Three Months and Nine Months Ended September 30, 1999 and 1998 3 Consolidated Balance Sheet: As of September 30, 1999 and December 31, 1998 4 Consolidated Statement of Cash Flows: Nine Months Ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Report of Independent Public Accountants 22 PART II OTHER INFORMATION Item 1. Legal Proceedings 23 Item 6. Exhibits and Reports on Form 8-K 27 SIGNATURES 28 -2- 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS USG CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------------ ---------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net sales $ 952 $ 814 $ 2,670 $ 2,324 Cost of products sold 669 581 1,891 1,674 ---------- ---------- ---------- ---------- Gross profit 283 233 779 650 Selling and administrative expenses 85 75 244 221 ---------- ---------- ---------- ---------- Operating profit 198 158 535 429 Interest expense 13 13 40 39 Interest income (3) (1) (6) (3) Other expense, net 1 - 2 3 ---------- ---------- ---------- ---------- Earnings before income taxes 187 146 499 390 Income taxes 71 55 193 150 ---------- ---------- ---------- ---------- Net earnings 116 91 306 240 ========== ========== ========== ========== Basic earnings per common share 2.34 1.83 6.16 4.95 Diluted earnings per common share 2.32 1.80 6.09 4.78 Dividends paid per common share 0.10 - 0.30 - Average common shares 49,623,637 49,679,544 49,764,386 48,457,527 Average diluted common shares 50,165,592 50,534,500 50,352,316 50,157,495
See accompanying Notes to Consolidated Financial Statements. -3- 4 USG CORPORATION CONSOLIDATED BALANCE SHEET (DOLLARS IN MILLIONS) (UNAUDITED)
AS OF AS OF SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- -------------- ASSETS Current Assets: Cash and cash equivalents $ 273 $ 152 Receivables (net of reserves - $19 and $18) 393 349 Inventories 238 234 Current and deferred income taxes 68 62 ------------- -------------- Total current assets 972 797 Property, plant and equipment (net of reserves for depreciation and depletion - $353 and $298) 1,425 1,214 Other assets 297 346 ------------- -------------- Total Assets 2,694 2,357 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable 184 157 Accrued expenses 281 237 Notes payable 11 10 Current portion of long-term debt - 25 ------------- -------------- Total current liabilities 476 429 Long-term debt 577 561 Deferred income taxes 173 169 Other liabilities 690 680 Stockholders' Equity: Preferred stock - - Common stock 5 5 Treasury stock (29) (10) Capital received in excess of par value 306 317 Deferred currency translation (31) (30) Reinvested earnings 527 236 ------------- -------------- Total stockholders' equity 778 518 ------------- -------------- Total Liabilities and Stockholders' Equity 2,694 2,357 ============= ==============
See accompanying Notes to Consolidated Financial Statements. -4- 5 USG CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 1999 1998 ------------- ------------- OPERATING ACTIVITIES: Net earnings $ 306 $ 240 Adjustments to reconcile net earnings to net cash: Depreciation, depletion and amortization 68 60 Current and deferred income taxes (2) 11 (Increase) decrease in working capital: Receivables (44) (75) Inventories (4) (33) Payables 27 35 Accrued expenses 44 9 (Increase) decrease in other assets (32) 1 Increase (decrease) in other liabilities 92 (6) Other, net (6) - ------------- ------------- Net cash from operating activities 449 242 ------------- ------------- INVESTING ACTIVITIES: Capital expenditures (273) (214) Net proceeds from asset dispositions 2 2 ------------- ------------- Net cash to investing activities (271) (212) ------------- ------------- FINANCING ACTIVITIES: Issuance of debt 56 60 Repayment of debt (49) (107) Short-term borrowings, net (15) 4 Cash dividends paid (15) (5) Issuances of common stock 11 48 Purchases of common stock (45) - ------------- ------------- Net cash (to) from financing activities (57) - ------------- ------------- Net increase in cash and cash equivalents 121 30 Cash and cash equivalents at beginning of period 152 72 ------------- ------------- Cash and cash equivalents at end of period 273 102 ============= ============= SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid 50 49 Income taxes paid 192 134
See accompanying Notes to Consolidated Financial Statements. -5- 6 USG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) The consolidated financial statements of USG Corporation and its subsidiaries ("USG" or the "Corporation") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Corporation's financial position as of September 30, 1999, and December 31, 1998, results of operations for the three months and nine months ended September 30, 1999 and 1998, and cash flows for the nine months ended September 30, 1999 and 1998. While these interim financial statements and accompanying notes are unaudited, they have been reviewed by Arthur Andersen LLP, the Corporation's independent public accountants. These financial statements and notes are to be read in conjunction with the financial statements and notes included in the Corporation's 1998 Annual Report on Form 10-K dated February 26, 1999. (2) Total comprehensive income, consisting of net earnings and foreign currency translation adjustments, amounted to $119 million and $305 million in the three months and nine months ended September 30, 1999, respectively. For the respective 1998 periods, total comprehensive income amounted to $93 million and $236 million. There was no tax impact on the foreign currency translation adjustments. (3) As of September 30, 1999, common shares totaling 1,797,850 were reserved for future issuance in conjunction with existing stock option grants. In addition, 551,311 common shares were reserved for future grants. Shares issued in option exercises may be from original issue or available treasury shares. -6- 7 (4) Basic earnings per share were computed by dividing net earnings by the weighted average number of common shares outstanding for the period. The dilutive effect of the potential exercise of outstanding options and warrants to purchase shares of common stock is calculated using the treasury stock method. The reconciliation of basic earnings per share to diluted earnings per share is shown in the following table (dollars in millions except share data): NET SHARES PER SHARE THREE MONTHS ENDED SEPTEMBER 30, EARNINGS (000) AMOUNT ----------------------------------------------------------------------- 1999 Basic earnings $ 116 49,624 $ 2.34 Effect of Dilutive Securities: Options 542 ----------------------------------------------------------------------- Diluted Earnings 116 50,166 2.32 ======================================================================= 1998 Basic earnings 91 49,680 1.83 Effect of Dilutive Securities: Options 831 Warrants 24 ----------------------------------------------------------------------- Diluted Earnings 91 50,535 1.80 ======================================================================= NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------------- 1999 Basic earnings $ 306 49,764 $ 6.16 Effect of Dilutive Securities: Options 588 ----------------------------------------------------------------------- Diluted Earnings 306 50,352 6.09 ======================================================================= 1998 Basic earnings 240 48,458 4.95 Effect of Dilutive Securities: Options 897 Warrants 802 ----------------------------------------------------------------------- Diluted Earnings 240 50,157 4.78 ======================================================================= -7- 8 (5) USG's operations are organized into two operating segments: North American Gypsum, which manufactures, markets and distributes gypsum wallboard and related products in the United States, Canada and Mexico, and Worldwide Ceilings, which manufactures and markets ceiling tile, ceiling grid and other interior systems products worldwide. Operating segment results for the third quarter and first nine months of 1999 and 1998 were as follows (dollars in millions): NET SALES OPERATING PROFIT ----------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 1999 1998 ----------------------------------------------------------------------- North American Gypsum $ 815 $ 669 $ 196 $ 154 Worldwide Ceilings 172 172 18 18 Corporate - - (16) (14) Eliminations (35) (27) - - ----------------------------------------------------------------------- Total 952 814 198 158 ======================================================================= NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------------- North American Gypsum $ 2,265 $ 1,905 $ 532 $ 417 Worldwide Ceilings 490 495 48 51 Corporate - - (45) (39) Eliminations (85) (76) - - ----------------------------------------------------------------------- Total 2,670 2,324 535 429 ======================================================================= (6) On September 30, 1999, USG announced the successful start-up of more than 700 million square feet of SHEETROCK brand wallboard manufacturing capacity at its new state-of-the-art plant in Bridgeport, Ala. In conjunction with USG's strategy of reducing costs by replacing old, high-cost capacity with new, low-cost capacity, USG is proceeding with its previously announced plan to close down 350 million square feet of high-cost manufacturing capacity at its 90-year-old Plasterco, Va., plant on January 14, 2000. In the third quarter of 1999, USG recorded a $22 million pretax ($14 million after-tax; $0.27 per share) charge to cost of products sold for expenses related to the closing of the plant and adjacent gypsum mine. -8- 9 (7) The Corporation uses derivative instruments to manage well-defined interest rate, energy cost and foreign currency exposures. The Corporation does not use derivative instruments for trading purposes. The criteria used to determine if hedge accounting treatment is appropriate are (i) the designation of the hedge to an underlying exposure (ii) whether or not overall uncertainty is being reduced and (iii) if there is a correlation between the value of the derivative instrument and the underlying obligation. Interest Rate Derivative Instruments: The Corporation utilizes interest rate swap agreements to manage the impact of interest rate changes on its underlying floating-rate debt. These agreements are designated as hedges and qualify for hedge accounting. Amounts payable or receivable under these swap agreements are accrued as an increase or decrease to interest expense on a current basis. To the extent the underlying floating-rate debt is reduced, the Corporation terminates swap agreements accordingly so as not to be in an overhedged position. In such cases, the Corporation recognizes gains and/or losses in the period in which the agreement is terminated. Energy Derivative Instruments: The Corporation uses swap agreements to hedge anticipated purchases of fuel to be utilized in the manufacturing processes for gypsum wallboard and ceiling tile. Under these swap agreements, the Corporation receives or makes payments based on the differential between a specified price and the actual closing price for the current month's energy price contract. These contracts are designated as hedges and qualify for hedge accounting. Amounts payable or receivable under these swap agreements are accrued as an increase or decrease to cost of products sold, along with the actual spot energy cost of the corresponding underlying hedge transaction, the combination of which amounts to the predetermined specified contract price. Foreign Exchange Derivative Instruments: The Corporation has operations in a number of countries and has intercompany transactions among them and, as a result, is exposed to changes in foreign currency exchange rates. The Corporation manages these exposures on a consolidated basis, which allows netting of certain exposures to take advantage of any natural offsets. To the extent the net exposures are hedged, forward contracts are used. Gains and/or losses on these foreign currency hedges are included in net earnings in the period in which the exchange rates change. -9- 10 (8) One of the Corporation's subsidiaries, United States Gypsum Company ("U.S. Gypsum"), is a defendant in asbestos lawsuits alleging both property damage and personal injury. See Part II, Item 1. "Legal Proceedings" for information concerning the asbestos litigation. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its results of operations or financial position. See Part II, Item 1. "Legal Proceedings" for additional information on environmental litigation. (9) Under a revolving accounts receivable facility, the trade receivables of U.S. Gypsum and USG Interiors, Inc. are being purchased by USG Funding Corporation and transferred to a trust administered by Chase Manhattan Bank as trustee. Certificates representing an ownership interest of up to $130 million in the trust have been issued to an affiliate of Citicorp North America, Inc. USG Funding, a special-purpose subsidiary of USG Corporation, is a separate corporate entity with its own separate creditors that will be entitled to be satisfied out of USG Funding's assets prior to any value in USG Funding becoming available to its shareholder. Receivables and debt outstanding in connection with the receivables facility remain in receivables and long-term debt, respectively, on the Corporation's consolidated balance sheet. -10- 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CONSOLIDATED RESULTS NET SALES USG's third quarter 1999 net sales were a record $952 million, up 17% from $814 million in the comparable 1998 period. Construction activity in North America remained strong during the third quarter resulting in record quarterly demand and selling prices for USG's SHEETROCK brand gypsum wallboard. For the first nine months of 1999, net sales totaled $2,670 million, up 15% from $2,324 million in the comparable 1998 period. GROSS PROFIT Gross profit as a percent of net sales was 29.7% and 29.2% in the third quarter and first nine months of 1999, respectively, up from 28.6% and 28.0% in the respective 1998 periods. The improved margins in 1999 primarily reflect the higher selling prices for SHEETROCK brand wallboard, which more than offset higher asbestos-related costs and a third quarter $22 million pretax ($14 million after-tax) charge related to a plant closing. SELLING AND ADMINISTRATIVE EXPENSES Third quarter and first nine months 1999 selling and administrative expenses increased 13% and 10%, respectively, over the prior-year periods. However, as a percentage of net sales, these expenses were 8.9% in the third quarter and 9.1% in the first nine months of 1999, down from 9.2% and 9.5% in the comparable 1998 periods. The higher levels of expense dollars in the 1999 periods primarily reflect increases for incentive compensation and information technology. INTEREST EXPENSE Interest expense remained flat at $13 million in the third quarter compared to last year. For the first nine months of 1999, interest expense was $40 million, up $1 million from the corresponding 1998 period. INCOME TAXES As a result of higher levels of earnings in 1999, income tax expense increased to $71 million and $193 million in the three months and nine months ended September 30, 1999, respectively, up from $55 million and $150 million for the comparable prior-year periods. NET EARNINGS Net earnings in the third quarter of 1999 were $116 million, up 27% from $91 million in the prior-year period. Diluted earnings per share increased to $2.32 from $1.80 a year ago. The third quarter plant closing lowered 1999 earnings per share by $0.27. For the first nine months of 1999, net earnings were $306 million, or $6.09 per diluted share. Comparable 1998 net earnings amounted to $240 million, or $4.78 per share. -11- 12 CORE BUSINESS RESULTS
(dollars in millions) NET SALES OPERATING PROFIT - - -------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 1999 1998 - - -------------------------------------------------------------------------------------------- NORTH AMERICAN GYPSUM: U.S. Gypsum Company $ 536 $ 445 $ 149 $ 129 L&W Supply Corporation 362 293 31 13 CGC Inc. (gypsum) 41 33 8 5 Other subsidiaries* 29 26 8 7 Eliminations (153) (128) - - - - -------------------------------------------------------------------------------------------- Total 815 669 196 154 - - -------------------------------------------------------------------------------------------- WORLDWIDE CEILINGS: USG Interiors, Inc. 121 116 17 14 USG International 55 67 - 3 CGC Inc. (ceilings) 11 9 1 1 Eliminations (15) (20) - - - - -------------------------------------------------------------------------------------------- Total 172 172 18 18 - - -------------------------------------------------------------------------------------------- Corporate - - (16) (14) Eliminations (35) (27) - - - - -------------------------------------------------------------------------------------------- Total USG Corporation 952 814 198 158 ============================================================================================ NET SALES OPERATING PROFIT - - -------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 1999 1998 - - -------------------------------------------------------------------------------------------- NORTH AMERICAN GYPSUM: U.S. Gypsum Company $ 1,500 $ 1,288 $ 428 $ 359 L&W Supply Corporation 999 811 65 28 CGC Inc. (gypsum) 115 99 19 13 Other subsidiaries* 78 69 20 17 Eliminations (427) (362) - - - - -------------------------------------------------------------------------------------------- Total 2,265 1,905 532 417 - - -------------------------------------------------------------------------------------------- WORLDWIDE CEILINGS: USG Interiors, Inc. 345 337 46 40 USG International 159 180 - 8 CGC Inc. (ceilings) 29 28 2 3 Eliminations (43) (50) - - - - -------------------------------------------------------------------------------------------- Total 490 495 48 51 - - -------------------------------------------------------------------------------------------- Corporate - - (45) (39) Eliminations (85) (76) - - - - -------------------------------------------------------------------------------------------- Total USG Corporation 2,670 2,324 535 429 ============================================================================================
*Includes Yeso Panamericano, S.A. de C.V., a building products business in Mexico, Gypsum Transportation Limited, a shipping company in Bermuda, and USG Canadian Mining Ltd., a mining operation in Nova Scotia. -12- 13 NORTH AMERICAN GYPSUM Net sales in the third quarter of 1999 increased 22% to $815 million and operating profit increased 27% to $196 million as compared to the third quarter of 1998. First nine months 1999 net sales of $2,265 million and operating profit of $532 million, increased 19% and 28%, respectively, versus comparable 1998 levels. United States Gypsum Company: U.S.Gypsum's third quarter net sales and operating profit increased 20% and 16%, respectively, versus the comparable 1998 period. With its plants running at full capacity, shipments of SHEETROCK brand wallboard totaled 2.429 billion square feet, a record for any quarter and an 8% increase from 2.254 billion square feet a year ago. U.S. Gypsum also reported record shipments of SHEETROCK brand joint compound and DUROCK brand cement board. Improved profitability primarily reflected higher realized selling prices for SHEETROCK brand wallboard, which averaged $156.82 per thousand square feet during the third quarter, a new all-time high and a 20% increase over the third quarter of 1998. These favorable results were partially offset by higher wallboard production costs, asbestos-related costs and a $22 million pretax charge related to the closing of the company's wallboard plant in Plasterco, Va. Wallboard production costs were up primarily due to a rise in paper fiber prices and, to a lesser degree, disruptions caused by Hurricane Floyd at the company's eastern seaboard plants. During the third quarter, U.S. Gypsum's charge for asbestos costs was $20 million, compared with $30 million in the second quarter of 1999 and $4.5 million in the third quarter of 1998. See "Legal Contingencies" below and Part II, Item 1. "Legal Proceedings" for additional information on asbestos litigation. L&W Supply Corporation: Third quarter 1999 net sales for L&W Supply, the leading distributor of wallboard and related building products in the United States, increased 24% to a record level of $362 million. Operating profit of $31 million, also a record, more than doubled the $13 million level of a year ago. This performance reflects record shipments and prices for wallboard and record sales and margins for complementary building materials. As of September 30, 1999, L&W Supply operated 191 locations in the United States. CGC Inc.: The gypsum business of Canada-based CGC Inc., reported a 24% increase in net sales, while operating profit rose 60% versus the third quarter of 1998. As a result of growing demand for wallboard in Canada, CGC realized higher domestic wallboard shipments and prices during the quarter. WORLDWIDE CEILINGS Net sales and operating profit in the third quarter of 1999 totaled $172 million and $18 million, respectively. The same amounts were reported in the third quarter of 1998. -13- 14 First nine months 1999 net sales of $490 million and operating profit of $48 million were down 1% and 6%, respectively, from comparable 1998 levels. USG's domestic ceilings business, USG Interiors, reported operating profit of $17 million, an increase of $3 million over the third quarter of 1998. The ceilings division of Canada-based CGC contributed $1 million in operating profit, the same as last year. USG International had breakeven performance in the third quarter versus $3 million of operating profit last year. MARKET CONDITIONS AND OUTLOOK Based on leading indicators, such as new housing starts, existing home sales and nonresidential construction activity, market conditions are expected to remain favorable through the remainder of 1999 and into 2000. Key drivers of demand for USG's products, such as consumer confidence, employment rates and interest rates, all remain at favorable levels. Profit contributions from USG's strategic plan (described below) should also become increasingly apparent. U.S. Gypsum's new Bridgeport, Ala., SHEETROCK brand wallboard plant completed its successful start-up during the third quarter of 1999 and is now operating at capacity. Completion of the new wallboard line at the East Chicago plant is on schedule for the fourth quarter. Housing starts during 1999 have been running at strong levels. USG is currently forecasting 1999 U.S. housing starts to exceed the 1.617 million units experienced in 1998. The repair and remodel market has been the fastest growing segment for USG, accounting for the second-largest portion of its sales. Record 1998 sales of existing homes of 4.8 million units is supporting residential repair and remodeling in 1999. This, combined with strong nonresidential repair and remodeling, is continuing to provide growth in this market segment. Sales of USG products to the nonresidential construction market are expected to remain strong throughout 1999. Future demand for USG products from new nonresidential construction is gauged by floor space for which contracts are signed. Installation of gypsum and ceilings products follows signing of construction contracts by about a year. Floor space for which contracts were signed rose 13% in 1998, although segments that are most relevant to USG's business, such as offices and stores, grew at a much higher rate. While market conditions continue to be good in North America, certain international markets remain weak. Most of USG's sales outside of North America come from Western Europe, Latin America and the Asia Pacific region. USG's exposure to the economic problems of Asia and Eastern Europe is small. Business conditions continue to be soft in Asia and parts of Europe, but have remained solid in Latin America. -14- 15 LIQUIDITY AND CAPITAL RESOURCES FINANCIAL STRATEGY USG is executing a strategy to create future earnings growth through investment in its businesses and immediate returns to investors through dividends and share repurchases. Earnings Growth: USG's plan for earnings growth includes: introducing new products and product platforms; improving service; strengthening its brands; adding capacity to serve growing customers and markets; renovating manufacturing capacity to make USG the undisputed low-cost producer; and expanding distribution. USG anticipates that these initiatives will also reduce the impact of cyclicality on its earnings. Dividends: USG paid cash dividends of $0.10 per share in March, June, and September of 1999. Share Repurchases: USG purchased 429,000 shares in the third quarter and has acquired over 1.1 million shares since its multiyear share-repurchase program began in the fourth quarter of last year. Under the program, USG will repurchase up to 5 million shares. Share repurchases are being made in the open market or through privately negotiated transactions and are being funded with available cash from operations. CAPITAL EXPENDITURES Capital spending amounted to $273 million in the first nine months of 1999, compared with $214 million in the corresponding 1998 period. As of September 30, 1999, capital expenditure commitments for the replacement, modernization and expansion of operations amounted to $304 million, compared with $481 million as of December 31, 1998. USG's capital expenditures program includes the following projects: Wallboard Capacity Modernization and Expansion: As a major part of USG's earnings growth strategy, U.S. Gypsum is replacing high-cost wallboard capacity with new, low-cost plants and production lines. These projects also will add a net 2 billion square feet of capacity to serve growing regional markets and customers. In the Southeast, the construction of a new plant in Bridgeport, Ala., was successfully completed. This facility, which manufactures SHEETROCK brand wallboard, began operation in the second quarter of 1999 and is currently operating at full capacity. In the Midwest, U.S. Gypsum is near completion of a new production line for SHEETROCK brand wallboard at its East Chicago, Ind., plant. This new line is scheduled for startup in the fourth quarter of 1999. -15- 16 In the Northeast, U.S. Gypsum is building a new SHEETROCK brand wallboard plant in Aliquippa, Pa. Construction of this facility is expected to be completed in early 2000. In the Northwest, ground was broken during the second quarter of 1999 for a new wallboard plant in Rainier, Ore. A significant portion of the new capacity provided by this plant will replace existing USG shipments into the region from plants as far away as Iowa, Texas and Ontario, Canada. This facility is expected to be fully operational in 2001. In the Southwest, ground was also broken during the second quarter of 1999 for a new production line at U.S. Gypsum's plant in Plaster City, Calif., which will replace a 41-year-old, high-cost production line. This facility also is expected to be fully operational in 2001. Gypsum Fiber Project: Construction continues on a facility to manufacture FIBEROCK brand gypsum fiber panels, USG's newest product platform. This production line, which is being built at the Gypsum, Ohio, wallboard plant, is scheduled for startup before the end of the year. Cost-Reduction Projects: Additional capital investments include cost-reduction projects such as the installation of stock-cleaning equipment to utilize lower grades of recycled paper and process control upgrades to improve raw material usage and operating efficiencies. WORKING CAPITAL Working capital (current assets less current liabilities) as of September 30, 1999, amounted to $496 million, compared with $368 million as of December 31, 1998. The ratio of current assets to current liabilities was 2.0 to 1 as of September 30, 1999, compared with 1.9 to 1 as of December 31, 1998. Receivables increased to $393 million as of September 30, 1999, from $349 million as of December 31, 1998. Inventories increased to $238 million from $234 million, and accounts payable rose to $184 million from $157 million. These variations reflect an increased level of business in the third quarter of 1999 as compared to the fourth quarter of 1998. Cash and cash equivalents as of September 30, 1999, amounted to $273 million, up from $152 million as of December 31, 1998. During the first nine months of 1999, net cash flows from operating activities totaled $449 million. Net cash flows to investing activities were $271 million. This reflects capital spending of $273 million (discussed above), offset slightly by net proceeds of $2 million from asset dispositions. Net cash flows to financing activities of $57 million included $45 million used for stock repurchases, $15 million used for cash dividends, $8 million used for net repayments of debt, partially offset by $11 million received from the exercise of stock options. -16- 17 DEBT As of September 30, 1999, total debt amounted to $588 million, a decrease of $8 million from December 31, 1998. Primary changes in USG's debt structure since year-end 1998 include the retirement of $25 million of 8.75% debentures due 2017, the repayment of $15 million of Canadian credit facility borrowings, a reduction of $24 million of old higher-cost industrial revenue bonds (IRBs) and an increase of $54 million of IRBs associated with the Gypsum, Ohio, and East Chicago, Ind., capital projects. Foreign short-term and long-term notes payable increased by $2 million. AVAILABLE LIQUIDITY The Corporation has additional liquidity available through several financing arrangements. Revolving credit facilities in the United States, Canada and Europe allow the Corporation to borrow up to an aggregate of $608 million (including a $125 million letter of credit subfacility in the United States), under which, as of September 30, 1999, outstanding revolving loans totaled $90 million and letters of credit issued and outstanding amounted to $15 million, leaving the Corporation with $503 million of unused and available credit. The Corporation had additional borrowing capacity of $50 million as of September 30, 1999, under a revolving accounts receivable facility. (See Note 8.) A shelf registration statement filed with the Securities and Exchange Commission allows the Corporation to offer from time to time debt securities, shares of preferred and common stock or warrants to purchase shares of common stock, all having an aggregate initial offering price not to exceed $300 million. As of the date of this report, no securities had been issued pursuant to this registration. OTHER MATTERS YEAR 2000 COMPLIANCE In 1996, USG began an evaluation of its computer-based systems to determine the extent of the modifications required to make those systems year 2000 compliant and to devise a plan to complete such modifications prior to January 1, 2000. The plan was divided into five phases: identification (a basic inventory of all systems), assessment, remediation, testing and completion. The plan encompasses all of USG's computer systems including mainframe, midrange, client server and desktop systems as well as all specialized control systems for plant operations or other facilities including those that are considered embedded systems. USG's mainframe systems are responsible for most of the information processing done by the Corporation and have received a majority of the efforts dedicated to this project as well as a majority of the budget allocated to it. Of the plan phases, identification, assessment, remediation and testing are essentially completed. As of September 30, 1999, 100% of the planned modifications to USG's mainframe systems had been completed. With respect to the midrange, client server and desktop systems, upgrading to these systems is expected to be completed by the end of November 1999. With respect to embedded systems, all operations have been -17- 18 assessed and remediation plans, where necessary, are under way. All necessary upgrades are scheduled for completion by the end of November 1999. Some of these activities have been deferred due to the full-time operation of USG's gypsum wallboard plants in trying to satisfy record customer demand. For purposes of this description, embedded systems are intended to cover manufacturing plant control equipment and building information and mechanical systems such as telecommunication systems, HVAC, security systems and other monitoring equipment. Suppliers and Customers: USG's year 2000 compliance plan also includes an analysis of critical third-party suppliers of material and services to determine their year 2000 compliance status. Virtually all critical suppliers have been surveyed regarding their compliance status. Even with the level of response from these parties, there continues to be a degree of uncertainty as to whether there will be, or the extent of, any significant disruption due to third party supplier failures. Moreover, the plan contemplates that USG will be in ongoing contact with its critical suppliers through at least January 1, 2000, to assure that those suppliers either are able to continue to perform without disruption or where feasible are replaced by ones that can so perform. USG also has been in contact with most of its major customers on the status of each party's year 2000 compliance plans and expects to continue such information exchanges through January 1, 2000, in order to maintain those business relationships and to obtain updated information for its own ongoing contingency planning. Based on the responses received to date, internal review of its collection history from major customers, and the steps it will take to prepare for the critical period, USG believes that it will have adequate liquidity to continue its business operations in whatever circumstances should come about. Costs: The cost of carrying out USG's compliance plan is currently estimated at $12 million. As of September 30, 1999, about 66% of the budgeted amount has been incurred. Much of the balance may be expended in the remaining months of 1999 with a small amount projected for early 2000. Contingency Plans: It is still difficult to predict with certainty whether USG might experience significant disruptions due to year 2000 problems that affect the operating environment in which it conducts business such as disruptions to transportation, communications and electric power or other energy systems or due to other similar causes. However, the inability of USG or its critical suppliers and customers to effectuate solutions to their respective year 2000 issues on a timely and cost-effective basis may have a material adverse effect on USG. In view of the uncertainties that USG faces with respect to year 2000 issues, it has formulated a contingency plan to provide for continuation of its operations in the event of possible year 2000 disruptions. The plan will be continually evaluated and modified as required by developments and circumstances that may emerge between now and January 1, 2000. USG's contingency plan provides for the continuation of its business and -18- 19 operations through the transition period surrounding January 1, 2000. The planning process involved detailed reviews by operating personnel of all of the information that has been gathered concerning critical suppliers, customers and internal systems to determine all foreseeable risks to the continuation of business operations. Based on that review process, USG has prepared a set of operating procedures for dealing with the identified risks. These procedures are specific to each operation and provide for flexible responses to conditions, as they are perceived to develop towards the critical date of January 1, 2000. Without suggesting any decisions have been made to implement these plans or that the following list is in any way exhaustive, the kinds of responses that could be taken in the appropriate circumstances would be: building up inventories of raw materials or finished goods, replacing or supplementing existing suppliers, altering terms of shipment or payment with customers, adding backup power and communications equipment to certain facilities, and expanding communications resources by providing cellular phones and laptop computers to more personnel. Worst-Case Scenario: In the view of USG's year 2000 contingency planning team, the most reasonably likely worst case scenario is that there might be a local or regional disruption to its plant production due to temporary power outages or similar disruption of public service suppliers. The Corporation's contingency planning is aimed at mitigating the impact of any such disruptions by arranging production at other facilities in the region to replace any that are impacted by a short-term disruption. Whether this approach will be feasible depends upon the level of operations generally at the time of any such occurrence. If the industry continues to operate at full capacity with production subject to allocation, it will probably not be feasible to replace disrupted production without further impacting the short-supply situation. Since the Corporation has gypsum wallboard plants in many parts of the U.S. and Canada, it is better positioned to deal with potential disruptions than most of its competitors. A key uncertainty in contingency planning for possible disruptions is what impact these may have upon consumers of USG products. In the context of the worst-case scenario, some consumers will undoubtedly be impacted by the disruptions with a resultant decrease in demand for USG products. Similarly, the critical period for likely disruption will fall in the heart of winter (December - - - February) when the industry typically experiences a seasonal slowing down of building activity. USG's contingency planning attempts to analyze the interplay of these various factors taking advantage of years of operating experience to create a reasonable and flexible plan to respond to a very unpredictable and largely unique set of circumstances. -19- 20 Conclusion: While USG will continue to fine tune its contingency planning even beyond January 1, 2000, management believes that, in terms of the Corporation's internal operating systems, it will be able to continue its North American operations without material disruption. Based on management's present knowledge, it also does not foresee any significant long-lasting disruptions to USG's businesses in North America from external causes. Outside of North America, management is less certain, but still believes that USG's businesses can sustain themselves through whatever difficulties are encountered without material adverse consequences to its overall business. EURO CURRENCY CONVERSION Effective January 1, 1999, 11 of the 15 countries that are members of the European Union introduced a new, single currency unit, the euro. Prior to full implementation of the new currency for the participating countries on January 1, 2002, there will be a three-year transition period during which parties may use either the existing currencies or the euro. However, during the transition period, all exchanges between currencies of the participating countries are required to be first converted through the euro. USG has conducted a comprehensive analysis to address the euro currency issue. USG's efforts are focused on two phases. The first phase addresses USG's European operations during the transition period. The second phase covers full conversion of these operations to the euro. The Corporation was ready for the transition period that began on January 1, 1999, and expects to be ready for full conversion by January 1, 2002, the mandatory conversion date. USG also is prepared to deal with its critical suppliers and customers during the transition period and will communicate with them as appropriate. The Corporation does not expect the introduction of the euro currency to have a material adverse impact on its business, results of operations or financial position. LEGAL CONTINGENCIES One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. As discussed in Part II, Item 1. "Legal Proceedings," U.S. Gypsum accrued $20 million in the third quarter of 1999 for asbestos-related costs. Asbestos charges for the first nine months of 1999 totaled $62.5 million compared with $13.5 million for the same 1998 period. Although new Personal Injury Cases were filed in the first nine months of 1999 at significantly below the rate at which cases were filed in the first nine months of 1998, asbestos charges to results of operations have been higher in 1999 because the estimated cost of resolving cases pending during 1998 will, when expended, consume all of U.S. Gypsum's remaining insurance; as a result, the estimated liability from new case filings is currently being charged against reported earnings. U.S. Gypsum expects that periodic charges will continue to be necessary in the -20- 21 future in amounts that could be higher or lower than recent quarters, and which could be material to the period in which they are taken. The amount of future periodic charges will depend upon factors that include, but may not be limited to, the rate at which new asbestos-related claims are filed, the potential imposition of medical criteria, U.S. Gypsum's average settlement cost and the estimated cost of resolving pending claims, and the necessity of higher-cost settlements in particular jurisdictions. In addition, U.S. Gypsum will continue to evaluate whether its probable liability for future personal injury cases can be reasonably estimated. If such an estimate can be made, it is probable that an additional charge to results of operations would be necessary. Although the timing and amount of the resulting charge to results of operations cannot presently be determined, the amount is expected to be material to results of operations in the period in which it is taken. The asbestos litigation is not expected to have a significant impact on the Corporation's liquidity or cash flows during 1999. See Part II, Item 1. "Legal Proceedings" for additional information on asbestos litigation. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its results of operations or financial position. See Part II, Item 1. "Legal Proceedings" for additional information on environmental litigation. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements related to management's expectations about future conditions. Actual business or other conditions may differ significantly from management's expectations and accordingly affect the Corporation's sales and profitability or other results. Actual results may differ due to factors over which the Corporation has no control, including economic activity such as new housing construction, interest rates and consumer confidence; competitive activity such as price and product competition; increases in raw material and energy costs; risk of disruption due to year 2000 issues such as those described above; euro currency issues such as the ability and willingness of third parties to convert affected systems in a timely manner and the actions of governmental agencies or other third parties; and the outcome of contested asbestos-related litigation, the rate of new asbestos-related filings and the other factors described herein. The Corporation assumes no obligation to update any forward-looking information contained in this report. -21- 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of USG Corporation: We have reviewed the accompanying condensed consolidated balance sheet of USG CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of September 30, 1999, and the related condensed consolidated statement of earnings for the three-month and nine-month periods ended September 30, 1999 and 1998, and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 1999 and 1998. These financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Chicago, Illinois October 14, 1999 -22- 23 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ASBESTOS AND RELATED INSURANCE LITIGATION One of the Corporation's subsidiaries, U.S. Gypsum, is among many defendants in lawsuits arising out of the manufacture and sale of asbestos-containing materials. U.S. Gypsum sold certain asbestos-containing products beginning in the 1930's; in most cases, the products were discontinued or asbestos was removed from the formula by 1972, and no asbestos-containing products were produced after 1977. Some of these lawsuits seek to recover compensatory and in many cases punitive damages for costs associated with the maintenance or removal and replacement of asbestos-containing products in buildings (the "Property Damage Cases"). Others seek compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos-containing products (the "Personal Injury Cases"). It is anticipated that additional asbestos-related suits will be filed. SUMMARY - The following is a brief summary; see Note 15 to the financial statements in the Corporation's 1998 Annual Report for additional information about the asbestos litigation. U.S. Gypsum is a defendant in 11 Property Damage Cases, many of which involve multiple buildings. One of the cases is a conditionally certified class action comprised of all colleges and universities in the United States, which certification is presently limited to the resolution of certain allegedly "common" liability issues. (Central Wesleyan College v. W.R. Grace & Co., et al., U.S.D.C.S.C.). Ten additional property damage claims have been threatened against U.S. Gypsum. During the years 1996 -1998, 5 new Property Damage Cases were filed against U.S. Gypsum while 26 were closed; the Company spent an average of $23.5 million per year on the defense and settlement of Property Damage Cases, but received a total of $154.5 million over the three-year period from insurance carriers, including reimbursement for expenditures in prior years. U.S. Gypsum's estimated cost of resolving pending Property Damage Cases is discussed below. (See "Estimated Cost.") U.S. Gypsum is also a defendant in Personal Injury Cases brought by approximately 100,000 claimants, as well as an additional 54,000 claims that have been settled but will be closed over time. Filings of new Personal Injury Cases totaled approximately 80,000 claims in 1998, compared to 23,500 claims in 1997, 28,000 claims in 1996 and 14,000 in 1995. Filings of Personal Injury Cases increased substantially as a result of a 1997 ruling by the U.S. Supreme Court rejecting the Georgine v. Amchem class action settlement, in which U.S. Gypsum had participated as a member of the Center for Claims Resolution, referred to below. During the first nine months of 1999, approximately 38,000 new Personal Injury Claims were filed against U.S. Gypsum, including approximately 10,800 in -23- 24 the third quarter. U.S. Gypsum's average cost to resolve Personal Injury Cases during the years 1996-1998 was approximately $1,800 per claim, exclusive of defense costs. Over that period, U.S. Gypsum expended an average of $40.4 million per year on Personal Injury Cases, of which an average of $31.4 million was paid by insurance. U.S. Gypsum is a member, together with 19 other former producers of asbestos-containing products, of the Center for Claims Resolution (the "Center"), which has assumed the handling of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Costs of defense and settlement are shared among the members of the Center pursuant to predetermined sharing formulae. Most of U.S. Gypsum's personal injury liability and defense costs are currently being paid by its insurance carriers, including those insurance carriers that in 1985 signed an Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement"), obligating them to provide coverage for the defense and indemnity costs incurred by U.S. Gypsum in Personal Injury Cases. Punitive damages have never been awarded against U.S. Gypsum in a Personal Injury Case; whether such an award would be covered by insurance under the Wellington Agreement would depend on state law and the terms of the individual policies. U.S. Gypsum's estimated cost of resolving pending Personal Injury Cases is discussed below. (See "Estimated Cost.") U.S. Gypsum sued its insurance carriers in 1983 to obtain coverage for asbestos cases (the "Coverage Action") and has settled all disputes with most of its solvent carriers. As of September 30, 1999, after deducting insolvent coverage and insurance paid out to date, approximately $183 million of potential insurance remained, including approximately $138 million of insurance from six carriers that have agreed, subject to certain limitations and conditions, to cover asbestos-related costs, and approximately $45 million from three carriers that have not yet agreed to make their coverage available on acceptable terms. A minimum of $10 million of the disputed coverage is expected to be available regardless of the outcome of further proceedings. U.S. Gypsum is attempting to resolve its disputes with the nonsettling carriers through either a negotiated resolution or further litigation in the Coverage Action. U.S. Gypsum's total expenditures for all asbestos-related matters, including property damage, personal injury, insurance coverage litigation and related expenses, exceeded aggregate insurance payments by $24 million in 1998, but insurance payments exceeded asbestos-related expenses by $0.7 million in 1997 and $41 million in 1996, due primarily to nonrecurring reimbursement for amounts expended in prior years. Four of U.S. Gypsum's domestic insurance carriers, as well as underwriters of portions of various policies issued by Lloyds and other London market companies, providing a total of approximately $106 million of coverage, are insolvent. Because these policies would already have been consumed by U.S. Gypsum's asbestos -24- 25 expenses to date if the carriers had been solvent, the insolvencies will not adversely affect U.S. Gypsum's coverage for future asbestos-related costs. However, U.S. Gypsum is pursuing claims for reimbursement from the insolvent estates and other sources and expects to recover a presently indeterminable portion of the policy amounts from these sources. ESTIMATED COST The asbestos litigation involves numerous uncertainties that affect U.S. Gypsum's ability to estimate reliably its probable liability in the Personal Injury and Property Damage Cases. In the Property Damage Cases, such uncertainties include the identification and volume of asbestos-containing products in the buildings at issue in each case, which is often disputed; the claimed damages associated therewith; the viability of statute of limitations, product identification and other defenses, which varies depending upon the facts and jurisdiction of each case; the amount for which such cases can be resolved, which normally (but not uniformly) has been substantially lower than the claimed damages; and the viability of claims for punitive and other forms of multiple damages. Uncertainties in the Personal Injury Cases include the number, characteristics and venue of Personal Injury Cases that are filed against U.S. Gypsum; the Center's ability to continue to negotiate pretrial settlements at historical or acceptable levels; the level of physical impairment of claimants; the viability of claims for punitive damages; any changes in membership in the Center; and the ability to develop an alternate claims-handling vehicle that retains the key benefits of Georgine. As a result, any estimate of U.S. Gypsum's liability, while based upon the best information currently available, may not be an accurate prediction of actual costs and is subject to revision as additional information becomes available and developments occur. Subject to the above uncertainties, and based in part on information provided by the Center, U.S. Gypsum estimates that it is probable that Property Damage and Personal Injury Cases pending at September 30, 1999, can be resolved for an amount totaling between $337 million and $425 million, including defense costs. Most of these amounts are expected to be expended over the next three to five years, although settlements of some Personal Injury Cases will be consummated over periods as long as seven years. Significant insurance funding is available for these costs, as detailed below, although resolution of the pending cases is expected to consume U.S. Gypsum's remaining insurance. At this time, U.S. Gypsum does not believe that the number and severity of asbestos-related cases that ultimately will be filed in the future can be predicted with sufficient accuracy to provide the basis for a reasonable estimate of the liability that will be associated with such cases. Accounting for Asbestos Liability: As of September 30, 1999, U.S. Gypsum had reserved $337 million for liability from pending Property Damage and Personal Injury Cases (equaling the lower end of the estimated range of costs provided above). U.S. Gypsum had a corresponding receivable from insurance carriers of approximately $148 million, the estimated portion of the reserved amount that is -25- 26 expected to be paid or reimbursed by insurance that is either committed or probable of recovery. Additional amounts may be reimbursed by insurance depending upon the outcome of litigation and negotiations relating to the $35 million of insurance that is presently disputed. As of September 30, 1999, U.S. Gypsum had an additional $34 million reserved for asbestos liabilities and asbestos-related expenses. U.S. Gypsum compares its estimates of liability to then-existing reserves and available insurance assets and from time to time adjusts its reserves as appropriate. The Company historically has accrued $18 million annually ($4.5 million per quarter) for asbestos costs. In view of the high level of personal injury filings that followed the termination of Georgine, U.S. Gypsum accrued an additional $8 million (or a total of $12.5 million) in both the fourth quarter of 1998 and the first quarter of 1999. U.S. Gypsum reserved a total of $30 million in the second quarter of 1999, largely as a result of increased filings of Personal Injury Cases in the quarter, and reserved $20 million in the third quarter based on new filings in the quarter. Although new Personal Injury Cases were filed in the first nine months of 1999 at a rate significantly below the rate at which cases were filed in the first nine months of 1998, asbestos charges to results of operations have been higher in 1999 because the estimated cost of resolving cases pending during 1998 will, when expended, consume all of U.S. Gypsum's remaining insurance; as a result, the estimated liability from new case filings is currently being charged against reported earnings. Accordingly, the Company expects that additional periodic charges will be necessary in the future, in amounts that could be higher or lower than recent quarters, and which could be material to the period in which they are taken. The amount of future periodic charges will depend upon factors that include, but may not be limited to, the rate at which new asbestos-related claims are filed, the potential imposition of medical criteria, changes in U.S. Gypsum's average settlement cost and the estimated cost of resolving pending claims, and the necessity of higher-cost settlements in particular jurisdictions. In addition, the Company will continue to evaluate whether its probable liability for future Personal Injury Cases can be reasonably estimated. If such an estimate can be made, it is probable that an additional charge to results of operations would be necessary. Although the timing and amount of the resulting charge cannot presently be determined, the amount is expected to be material to results of operations in the period in which it is taken. CONCLUSION The above estimates and reserves are re-evaluated periodically as additional information becomes available. Additional charges to results of operations are expected to be necessary in light of future events, and such charges could be material to results of operations in the period in which they are taken. However, it is management's opinion, taking into account all of the above information and uncertainties, including currently available information concerning U.S. Gypsum's liabilities, reserves and probable insurance coverage, that the asbestos litigation will not have a material adverse effect on the -26- 27 liquidity or financial position of the Corporation. ENVIRONMENTAL LITIGATION The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. In most of these sites, the involvement of the Corporation or its subsidiaries is expected to be minimal. The Corporation believes that appropriate reserves have been established for its potential liability in connection with all Superfund sites but is continuing to review its accruals as additional information becomes available. Such reserves take into account all known or estimated costs associated with these sites, including site investigations and feasibility costs, site cleanup and remediation, legal costs, and fines and penalties, if any. In addition, environmental costs connected with site cleanups on USG-owned property are also covered by reserves established in accordance with the foregoing. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its results of operations or financial position. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (15) Letter of Arthur Andersen LLP regarding unaudited financial information. (27) Financial Data Schedule. -27- 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. USG CORPORATION By /s/ Dean H. Goossen ----------------------------------- Dean H. Goossen, Corporate Secretary, USG Corporation By /s/ Raymond T. Belz ----------------------------------- October 29, 1999 Raymond T. Belz, Senior Vice President and Controller, USG Corporation -28- EX-15 2 LETTER TO ARTHUR ANDERSEN LLP 1 Exhibit (15) October 29, 1999 USG Corporation 125 South Franklin Street Chicago, Illinois 60606 Gentlemen: We are aware that USG Corporation has incorporated by reference into previously filed Registration Statement Numbers 33-40136 and 33-64217 on Form S-3 and 33-22581, as amended, 33-22930, 33-36303, 33-52573, 33-52715, 33-63554, and 33-65383 on Form S-8 its Form 10-Q for the quarter ended September 30, 1999, which includes our report dated October 14, 1999, covering the unaudited condensed financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, these reports are not considered a part of the registration statement prepared or certified by our firm or reports prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP -29- EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000,000 9-MOS DEC-31-1999 SEP-30-1999 273 0 412 19 238 972 1,778 353 2,694 476 577 0 0 5 773 2,694 2,670 2,670 1,891 1,891 244 0 40 499 193 306 0 0 0 306 6.16 6.09
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