Item 1. BUSINESS
General
United States Gypsum Company ("U.S. Gypsum") was incorporated in 1901. USG Corporation (together with its subsidiaries, called "USG" or the "Corporation") was incorporated in Delaware on October 22, 1984. By a vote of stockholders on December 19, 1984, U.S. Gypsum became a wholly owned subsidiary of the Corporation, and the stockholders of U.S. Gypsum became the stockholders of the Corporation, all effective January 1, 1985.
Through its subsidiaries, USG is a leading manufacturer and distributor of building materials producing a wide range of products for use in new residential, new nonresidential and repair and remodel construction, as well as products used in certain industrial processes.
Following the completion of a financial restructuring in 1993, USG was engaged in a financial strategy of reducing debt and growing its gypsum, ceilings and distribution businesses through a balanced application of free cash flow between debt reduction and capital expenditures. This strategy had the dual objective of reaching a target debt level of $650 million and achieving investment grade status with respect to its senior public debt issues within five years. These objectives were achieved when USG reached its target debt level in October 1997, Standard & Poor's raised its rating of USG's debt to BBB in December 1997, and Moody's raised its rating of USG's debt to Baa3 in March 1998.
USG is currently focused on building long-term stockholder value through a plan designed to provide immediate returns to investors through dividends and share repurchases and future returns from earnings growth. In 1998, USG paid its first quarterly cash dividend in 10 years. USG also initiated a share repurchase plan that contemplates buying back up to 5 million shares, which is about 10% of its current shares outstanding, over the next several years. 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. These initiatives are supported by the financial flexibility of an investment grade capital structure.
USG's operations are organized into two operating segments: North American Gypsum and Worldwide Ceilings.
North American Gypsum
Business
North American Gypsum, which manufactures and markets gypsum and related products in the United States, Canada and Mexico, includes U.S. Gypsum and L&W Supply Corporation ("L&W Supply") in the United States, the gypsum business of CGC Inc. ("CGC") in Canada, and Yeso Panamericano S.A. de C.V. in Mexico. U.S. Gypsum is the largest producer of gypsum wallboard in the United States and accounted for nearly one-third of total domestic gypsum wallboard sales in 1998. L&W Supply is the country's largest distributor of wallboard and related products and in 1998 distributed approximately 10% of all gypsum wallboard in the United States (including approximately 27% of U.S. Gypsum's wallboard production). CGC is the largest producer of gypsum wallboard in eastern Canada.
Products
North American Gypsum manufactures and markets building and industrial products used in a variety of applications. Gypsum panel products are used to finish the interior walls and ceilings in residential, commercial and institutional construction. These products provide aesthetic as well as sound-dampening and fire-retarding value. The majority of these products are sold under the SHEETROCK brand name. Also sold under the SHEETROCK brand name is a line of joint compounds used for finishing wallboard joints. The DUROCK line of cement board and accessories provides fire-resistant and water-damage-resistant assemblies for both interior and exterior construction. In 1998, USG launched a new product platform: FIBEROCK brand gypsum fiber panels. This product line currently includes abuse- resistant wall panels and floor underlayment. The Corporation produces a variety of plaster products used to provide a custom finish for residential and commercial interiors. Like SHEETROCK brand wallboard, these products provide aesthetic, sound-dampening and fire-retarding value. Plaster products are sold under the trade names of RED TOP, IMPERIAL and DIAMOND. The Corporation also produces gypsum-based products for agricultural and industrial customers to use in a number of applications, including soil conditioning, road repair, fireproofing and ceramics.
Manufacturing
North American Gypsum's products are manufactured at 45 plants located throughout the United States and Canada and in central Mexico. As a major part of USG's earnings growth strategy, U.S. Gypsum is replacing high-cost wallboard capacity with new, low-cost plants. These projects also will add a net 2 billion square feet of capacity to serve growing markets and customers in five regions of the United States. In the Southeast, U.S. Gypsum is building a new wallboard and joint compound plant in Bridgeport, Ala., that is scheduled for startup in the second quarter of 1999. In the Midwest, the company is building a new wallboard production line at its East Chicago, Ind., plant, that is scheduled for startup in the fourth quarter of 1999. In the Northeast, U.S. Gypsum broke ground in 1998 on a new wallboard plant in Aliquippa, Pa., which is scheduled for startup in 2000. In September 1998, the company announced two projects, one in the Northwest, a new wallboard plant in Ranier, Ore., and one in the Southwest, a modernization of its Plaster City, Calif., plant. The latter two facilities are expected to be fully operational in 2001. Construction also continues on a facility to manufacture FIBEROCK brand gypsum fiber panels at the Gypsum, Ohio, wallboard plant. This new production line is scheduled for startup in the third quarter of 1999 and will complement the gypsum fiber panel plant in Port Hawkesbury, Nova Scotia, which was acquired in 1997.
Gypsum rock is mined or quarried at 13 company-owned locations in the United States and Canada. In 1998, these facilities provided approximately 88% of the gypsum used by the Corporation's plants in North America. Certain plants purchase synthetic gypsum or natural gypsum rock from various outside sources. Outside purchases accounted for 12% of the gypsum used in the Corporation's North American plants. The Corporation's geologists estimate that recoverable rock reserves are sufficient for more than 30 years of operation based on the Corporation's average annual production of crude gypsum during the past five years. Proven reserves contain approximately 194 million tons, of which approximately 66% are located in the United States and 34% in Canada. Additional reserves of approximately 153 million tons are found on three properties not in operation. The Corporation's total average annual production of crude gypsum in the United States and Canada during the past five years was 10.1 million tons.
The Corporation owns and operates seven paper mills located across the United States. Vertical integration in paper ensures a continuous supply of high-quality paper that is tailored to the specific needs of USG's wallboard production processes.
The Corporation does research and development at the USG Research and Technology Center in Libertyville, Ill. The staff at this center provides specialized technical services to the operating units and does product and process research and development. The center is especially well-equipped for carrying out fire, acoustical, structural and environmental evaluations of products and building assemblies. The center also has an analytical laboratory for chemical analysis and characterization of materials. Development activities can be taken to the pilot plant level before being transferred to a full-size plant.
Marketing and Distribution
Distribution is carried out through L&W Supply, building materials dealers, home improvement centers and other retailers, contractors and specialty wallboard distributors. Sales of gypsum products are seasonal to the extent that sales are generally greater from spring through the middle of autumn than during the remaining part of the year. Based on the Corporation's estimates using publicly available data, internal surveys, and gypsum wallboard shipment data from the Gypsum Association, management estimates that during 1998, about 45% of total industry volume demand for gypsum wallboard was generated by new residential construction activity, 38% of volume demand was generated by residential and nonresidential repair and remodel activity, 10% of volume demand was generated by new nonresidential construction activity and the remaining 7% of volume demand was generated by other activities such as exports and temporary construction.
L&W Supply, which was organized in 1971 by U.S. Gypsum, currently has 187 distribution locations in 36 states. It is a service-oriented organization that stocks a wide range of construction materials and delivers less-than-truckload quantities of construction materials to a job site and places them in areas where work is being done, thereby reducing or eliminating the need for handling by contractors. Although L&W Supply specializes in distribution of gypsum wallboard (which accounts for approximately 50% of its total net sales), joint compound and other products manufactured primarily by U.S. Gypsum, it also distributes products manufactured by USG Interiors such as acoustical ceiling tile and grid, as well as products of other manufacturers including drywall metal, insulation, roofing products and accessories. L&W Supply leases approximately 86% of its facilities from third parties. Usually, initial leases run from three to five years with a five-year renewal option.
Competition
The Corporation competes in North America as the largest of 13 producers of gypsum wallboard products and in 1998 accounted for nearly one-third of total gypsum wallboard sales in the United States. In 1998, U.S. Gypsum shipped 8.8 billion square feet of wallboard, the highest level in the Corporation's history, out of total U.S. industry shipments (including imports) estimated at 28.2 billion square feet, also a record. Principal competitors in the United States are: National Gypsum Company, Georgia-Pacific Corporation, James Hardie Gypsum, The Celotex Corporation, Temple- Inland Forest Products Corporation, American Gypsum and several smaller, regional competitors. Major competitors in Canada include BPB Westroc and Georgia-Pacific Corporation. In Mexico, the Corporation's major competitor is Panel Rey.
L&W Supply's largest competitor, Gypsum Management Supply, is an independent distributor with locations in the southern, central and western United States. There are several regional competitors, such as, GDMA/RINKER in the southeast (primarily in Florida) and Strober Building Supply in the northeastern United States. L&W Supply's many local competitors include lumber dealers, hardware stores, home improvement centers and acoustical tile distributors.
Worldwide Ceilings
Business
Worldwide Ceilings, which manufactures and markets interior systems products worldwide, includes USG Interiors, Inc., ("USG Interiors"), the international interior systems business managed as USG International and the ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior ceilings products used primarily in commercial applications. In 1998, Worldwide Ceilings was estimated to be the largest producer of ceiling grid and the second largest producer of ceiling tile in the world.
Products
Worldwide Ceilings manufactures and markets ceiling grid, ceiling tile, relocatable wall systems and, in Europe and the Asia-Pacific region, access floor systems. USG's integrated line of ceilings products 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. USG Interiors' significant trade names include the AURATONE and ACOUSTONE brands of ceiling tile and the DX, FINELINE, CENTRICITEE, CURVATURA and DONN brands of ceiling grid.
Manufacturing
Worldwide Ceilings' products are manufactured at 20 plants located in North America, Europe and Asia-Pacific. These include 10 ceiling grid plants, 5 ceiling tile plants, 2 plants that produce other interior products and 3 plants that produce or prepare raw materials for ceiling tile and grid. Principal raw materials used in the production of Worldwide Ceilings' products include mineral fiber, steel, perlite, starch and high-pressure laminates. Certain of these raw materials are produced internally, while others are obtained from various outside suppliers. Shortages of raw materials used in this segment are not expected. In 1998, the replacement of two old production lines with one modern, high-speed line at USG Interiors' ceiling tile plant in Cloquet, Minn. was completed. This project will reduce manufacturing costs and add capacity to meet increasing worldwide demand.
USG Interiors' primary research and development are carried out at the Corporation's research and development center in Libertyville, Ill., and at its "Solutions Center"SM in Chicago, Ill. An additional metal forming research and development facility in Avon, Ohio, provides product design, engineering and testing services in addition to manufacturing development.
Marketing and Distribution
Worldwide Ceilings' products are sold primarily in markets related to the new construction and renovation of commercial buildings. Marketing and distribution are conducted through a network of distributors, installation contractors, L&W Supply, and home improvement centers.
Competition
The Corporation estimates that it is the second-largest producer/marketer of acoustical ceiling tile in the world. Principal global competitors include Armstrong World Industries, Inc. (the largest manufacturer), OWA Faserplattenwerk GmbH (Odenwald) and The Celotex Corporation. The Corporation estimates that it is the world's largest manufacturer of ceiling grid. Principal competitors in ceiling grid include WAVE (a joint venture between Armstrong World Industries, Inc. and Worthington Industries) and Chicago Metallic Corporation.
Other Information
The Corporation's plants are substantial users of energy. Five major fuel types are used in a mix consisting of 79% natural gas, 10% electricity, 7% oil, 2% coke and 2% purchased hot air. With few exceptions, plants that use natural gas are equipped with fuel standby systems, principally oil. Primary fuel supplies have been adequate, and no curtailment of plant operations has resulted from insufficient supplies. Supplies are likely to remain sufficient for projected requirements. Energy price swap agreements are used by the Corporation to hedge the cost of certain purchased fuel.
Neither operating segment has any special working capital requirements or is materially dependent on a single customer or a few customers on a regular basis. No single customer of the Corporation accounted for more than 10% of the Corporation's 1998 or 1997 consolidated net sales. Because orders are filled upon receipt, neither operating segment has any significant backlog.
Loss of one or more of the patents or licenses held by the Corporation would not have a major impact on the Corporation's business or its ability to continue operations. No material part of any of the Corporation's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government.
All of the Corporation's products regularly require improvement to remain competitive. The Corporation also develops and produces comprehensive systems employing several of its products. In order to maintain its high standards and remain a leader in the building materials industry, the Corporation performs ongoing extensive research and development activities and makes the necessary capital expenditures to maintain production facilities in good operating condition.
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. Information pertaining to legal proceedings is included in "Notes to Financial Statements Note 15. Litigation" of the Corporation's 1998 Annual Report to Stockholders and is incorporated herein by reference.
Financial information pertaining to operating segments, foreign and domestic operations and export sales is included in "Notes to Financial Statements - Note 14. Segments" of the Corporation's 1998 Annual Report to stockholders and is incorporated herein by reference.
Item 2.
Item 2. PROPERTIES
The Corporation's plants, mines, quarries, transport ships and other facilities are located in North America, Europe and Asia-Pacific. Many of these facilities are operating at or near full capacity. The locations of the production properties of the Corporation's subsidiaries, grouped by operating segment, are as follows (plants are owned unless otherwise indicated):
Other Products
A mica-processing plant is located at Spruce Pine, N.C.; perlite ore is produced at Grants, N.M.; and drywall metal products are manufactured at Medina, Ohio (leased). Metal lath, plaster and drywall accessories and light gauge steel framing products are manufactured at Puebla, Mexico. Various other products are manufactured at La Mirada, Calif. (adhesives and finishes); New Orleans, La. (lime products); and Port Hawkesbury, Nova Scotia, Canada (gypsum fiber panel products).
Ocean Vessels
Gypsum Transportation Limited, a wholly owned subsidiary of the Corporation headquartered in Bermuda, owns and operates a fleet of three self-unloading ocean vessels. Under contract of affreightment, these vessels transport gypsum rock from Nova Scotia to the East Coast plants of U.S. Gypsum. Excess ship time, when available, is offered for charter on the open market.
A coil coater and slitter plant used in the production of ceiling grid also is located in Westlake, Ohio and a slitter plant is located in Stockton, Calif. (leased).
Other Products
Access floor systems products are manufactured at Peterlee, England (leased), and Port Klang, Malaysia (leased). Mineral fiber products are manufactured at Red Wing, Minn. and Walworth, Wis. Wall system products are manufactured at Medina, Ohio (leased). Drywall metal products are manufactured at Prestice, Czech Republic (leased).
Item 3.
Item 3. LEGAL PROCEEDINGS
Information pertaining to legal proceedings is included in "Notes to Financial Statements - Note 15. Litigation" of the Corporation's 1998 Annual Report to Stockholders and is incorporated herein by reference.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 1998.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information with respect to the principal market on which the Corporation's common stock is traded, the range of high and low market prices and number of stockholders of record is included in "Selected Quarterly Financial Data" of the Corporation's 1998 Annual Report to Stockholders and is incorporated herein by reference.
On September 18, 1998, USG declared a cash dividend of $0.10 per common share that was paid on December 16, 1998, to stockholders of record as of November 27, 1998. This was USG's first quarterly cash dividend since the third quarter of 1988.
On November 22, 1996, the Corporation entered into a retention agreement with an employee, formerly the principal stockholder of a corporation certain of whose assets were purchased by the Corporation, whereby the Corporation agreed to grant shares of unregistered common stock, $0.10 par value, having an aggregate value equal to $250,000, in five separate annual installments each having a value equal to $50,000, in reliance on the private offering exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The second annual grant in the amount of 1,062 shares was made on November 24, 1997. The third annual grant in the amount of 1,021 shares was made on November 23, 1998. The unregistered common stock is restricted from transfer, resale or other disposition until November 22, 2001.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Selected financial data are included in "Comparative Five-Year Summary" of the Corporation's 1998 Annual Report to Stockholders and is incorporated herein by reference.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
"Management's Discussion and Analysis of Results of Operations and Financial Condition" of the Corporation's 1998 Annual Report to Stockholders is incorporated herein by reference.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data included in "Consolidated Statement of Earnings," "Consolidated Balance Sheet," "Consolidated Statement of Cash Flows," "Consolidated Statement of Stockholders' Equity," "Consolidated Statement of Comprehensive Income," "Notes to Financial Statements" and "Report of Independent Public Accountants" of the Corporation's 1998 Annual Report to Stockholders is incorporated herein by reference.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Information required by Item 11 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference.
If you wish to receive a copy of any exhibit, it may be obtained, upon payment of reasonable expenses, by writing to:
Dean H. Goossen, Corporate Secretary USG Corporation Department #188 P.O. Box 6721 Chicago, IL 60680-6721
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO FINANCIAL STATEMENT SCHEDULE
We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in USG Corporation's annual report to stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated January 22, 1999. Our audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The financial statement schedule on page 18 is the responsibility of the Corporation's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the consolidated financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP ---------------------- ARTHUR ANDERSEN LLP
Chicago, Illinois February 26, 1999
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
USG CORPORATION February 26, 1999
By: /s/ Richard H. Fleming -------------------------- Richard H. Fleming Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ William C. Foote February 26, 1999 - - ---------------------- WILLIAM C. FOOTE Chairman and Chief Executive Officer (Principal Executive Officer)
/s/ Richard H. Fleming February 26, 1999 - - ---------------------- RICHARD H. FLEMING Executive Vice President and Chief Financial Officer (Principal Financial Officer)
/s/ Raymond T. Belz February 26, 1999 - - ---------------------- RAYMOND T. BELZ Senior Vice President and Controller (Principal Accounting Officer)
) By:/s/ Richard H. Fleming ROBERT L. BARNETT, KEITH A. BROWN, ) ------------------------- W.H. CLARK, JAMES C. COTTING, ) Richard H. Fleming LAWRENCE M. CRUTCHER, W. DOUGLAS ) Attorney-in-fact FORD, DAVID W. FOX, PHILIP C. JACKSON, JR., ) Pursuant to Power of Attorney VALERIE B. JARRETT, MARVIN E. LESSER, ) (Exhibit 24 hereto) P. JACK O'BRYAN, JOHN B. SCHEWEMM, ) February 26, 1999 JUDITH A. SPRIESER, ) Directors )