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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2010 | ||
| 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 (State or Other Jurisdiction of Incorporation or Organization) |
36-3329400 (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:
Securities Registered Pursuant to Section 12(b) of the Act:
| Name of Exchange on | ||||
| Title of Each Class | Which Registered | |||
| New York Stock Exchange | ||||
| Common Stock, $0.10 par value | Chicago Stock Exchange | |||
| 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 whether 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
| Large accelerated filer x | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes o No x
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 o No o Not applicable. Although the registrant was involved in bankruptcy proceedings during
the preceding five years, it did not distribute securities under its confirmed plan of
reorganization.
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, 2010 (the last business day of
the registrant’s most recently completed second fiscal quarter) was approximately $1,236,646,720.
The number of shares of the registrant’s common stock outstanding as of January 31, 2011 was
102,875,612.
Documents Incorporated By Reference: Certain sections of USG Corporation’s definitive Proxy
Statement for use in connection with its 2011 annual meeting of stockholders, to be filed
subsequently, are incorporated by reference into Part III of this Form 10-K Report where indicated.
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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 its subsidiaries, is a leading manufacturer and distributor of building materials. 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,
which are our most significant markets. Housing starts in the United States, which are a major
source of demand for our products and services, increased slightly in 2010 after declining in each
of the previous three years but remain near the lowest levels recorded in the last 50 years. Based
on preliminary data issued by the U.S. Census Bureau, the rate of new home construction in the
United States increased by approximately 6% in 2010 compared with 2009. This followed a 39%
decrease in 2009 compared with 2008 and a 33% decrease in 2008 compared with 2007. Most industry
analysts have forecast improvement in the level of new home construction in 2011, but new home
construction may not improve much, if at all, from the 2010 level if high unemployment continues,
the inventory of unsold homes and foreclosures remain at their current levels, tight mortgage
lending policies continue or mortgage interest rates continue to increase in 2011.
The repair and remodel market includes renovation of both residential and nonresidential
buildings. As a result of the low levels of new home construction in recent years, this market
currently accounts for the largest portion of our sales. Many buyers begin to remodel an existing
home within two years of purchase. According to the National Association of Realtors, sales of
existing homes in the United States decreased to approximately 4.9 million units in 2010, the
lowest level since 1997 and a 4.8% decrease from the 2009 level of 5.2 million units. Sales of
existing homes had increased in 2009 after decreasing in each of the previous two years from a high
of 6.5 million units in 2006. The low levels of existing home sales in recent years, continued
concerns regarding the job market and home resale values and tight lending standards contributed to
a decrease in demand for our products from the residential repair and remodel market in 2010.
Nonresidential repair and remodel activity is driven by factors including lease turnover rates,
discretionary business investment, job growth and governmental building-related expenditures. We
currently estimate that overall repair and remodel spending in 2010 increased approximately 1%
above the 2009 level and that overall repair and remodel spending in 2011 will be approximately 3%
above the 2010 level.
Demand for our products from new nonresidential construction is determined by floor space for
which contracts are signed. Installation of gypsum and ceilings products typically follows signing
of construction contracts by about a year. According to McGraw-Hill Construction, total floor space
for which new nonresidential construction contracts in the United States were signed declined 18%
in 2010 compared with 2009. This followed a 44% decrease in 2009 compared with 2008. McGraw-Hill
Construction forecasts that total floor space for which new nonresidential construction contracts
in the United States are signed will increase approximately 8% in 2011 from the 2010 level.
We have been scaling back our operations in response to market conditions since the downturn
began in 2006. Since mid-2006, we have temporarily idled or permanently closed approximately 3.8
billion square feet of our highest-cost wallboard manufacturing capacity. During 2010, we (1)
permanently closed our gypsum wallboard production facility in Southard, Okla., (2) temporarily
idled a gypsum wallboard production facility in Stony Point, N.Y., and gypsum wallboard and plaster
production facilities and a gypsum quarry in Empire, Nev., and
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(3) permanently closed gypsum wallboard production facilities in Fort Dodge, Iowa, and
Jacksonville, Fla., and paper production facilities in Clark, N.J., and South Gate, Calif., that
had been idled in 2008 and 2009. In the first quarter of 2011, we will temporarily idle our gypsum
quarry and ship loading facility in Windsor, Nova Scotia, Canada. During 2010, we also eliminated
approximately 650 salaried and hourly positions and closed five distribution centers. Since January
1, 2007, we have eliminated approximately 4,500 salaried and hourly positions and closed a total of
103 distribution centers. Our focus on costs and efficiencies, including capacity closures and
overhead reductions, has helped to mitigate the effects of the downturn in all of our markets. If
conditions in our markets and the broader economy do not improve significantly, we will evaluate
plans to further reduce costs, further improve operational efficiency and maintain adequate
liquidity.
The effects of recent market conditions on our operations are discussed in this Item 1 and in
Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
SEGMENTS
Our operations are organized into three reportable segments: North American Gypsum, Building
Products Distribution and Worldwide Ceilings, the net sales of which accounted for approximately
49%, 31% and 20%, respectively, of our 2010 consolidated net sales.
North American Gypsum
BUSINESS
North American Gypsum manufactures and markets gypsum and related products in the United
States, Canada and Mexico. It includes United States Gypsum Company, or U.S. Gypsum, in the United
States, the gypsum business of CGC Inc., or CGC, in Canada, and USG Mexico, S.A. de C.V., or USG
Mexico, in Mexico. U.S. Gypsum is the largest manufacturer of gypsum wallboard in the United States
and accounted for approximately 24% of total domestic gypsum wallboard sales in 2010. CGC is the
largest manufacturer of gypsum wallboard in eastern Canada. USG Mexico is the largest manufacturer
of gypsum wallboard in Mexico with a more than 55% market share in 2010.
PRODUCTS
North American Gypsum’s products are used in a variety of building applications to finish the
interior walls, ceilings and floors in residential, commercial and institutional construction and
in certain industrial applications. These products provide aesthetic as well as sound-dampening,
fire-retarding, abuse-resistance and moisture-control value. The majority of these products are
sold under the SHEETROCK® brand name. A line of joint compounds used for finishing
wallboard joints is also sold under the SHEETROCK® brand name. The DUROCK®
line of cement board and accessories provides water-damage-resistant and fire-resistant assemblies
for both interior and exterior construction. The FIBEROCK® line of gypsum fiber panels
includes abuse-resistant wall panels and floor underlayment as well as sheathing panels usable as a
substrate for most exterior systems. The SECUROCK® line of products includes glass mat
sheathing used for building exteriors and gypsum fiber panels used as roof cover board. The
LEVELROCK® line of poured gypsum underlayments provides surface leveling and enhanced
sound performance for residential and commercial installations. We also produce a variety of
construction plaster products used to provide a custom finish for residential and commercial
interiors. These products provide aesthetic, sound-dampening, fire-retarding and abuse-resistance
value. Construction plaster products are sold under the brand names RED TOP®,
IMPERIAL®, DIAMOND® and SUPREMO®. We also produce gypsum-based
products for agricultural and industrial customers to use in a number of applications, including
soil conditioning, road repair, fireproofing and ceramics.
In 2010, U.S. Gypsum introduced SHEETROCK® Brand UltraLight Panels. This new,
lightweight gypsum wallboard product is up to 30% lighter than competing brands. It is currently
being sold in more than 300 The Home Depot, Inc. stores and by more than 100 gypsum specialty
dealers throughout the Midwest, Northeast and Southeast regions. We expect this innovative new
product to be available nationwide by the end of 2011.
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MANUFACTURING
North American Gypsum manufactures products at 39 plants. North American Gypsum’s plants are
located throughout the United States, Canada and Mexico.
Gypsum rock is mined or quarried at 13 company-owned locations in North America. As a result
of the current market environment, two other quarries were temporarily idled in 2010. Our mines and
quarries provided approximately 60% of the gypsum used by our plants in North America in 2010. As
of December 31, 2010, our geologists estimated that our recoverable rock reserves are sufficient
for more than 35 years of operation based on our average annual production of crude gypsum during
the past five years of 6.5 million tons. Proven reserves contain approximately 229 million tons.
Additional reserves of approximately 157 million tons are found on four properties not in
operation.
Some of our manufacturing plants purchase or acquire synthetic gypsum and natural gypsum rock
from outside sources. In 2010, outside purchases or acquisitions of synthetic gypsum and natural
gypsum rock accounted for approximately 36% and 4%, respectively, of the gypsum used in our 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. We generally take possession of the gypsum
at the producer’s facility and transport it to our wallboard plants by ship, river barge, railcar
or truck. The supply of synthetic gypsum continues to increase as more power generation plants are
fitted with desulphurization equipment. Seven of our 19 gypsum wallboard plants in operation use
synthetic gypsum for all of their needs, while another five use it for some of their needs. The
U.S. Environmental Protection Agency, or U.S. EPA, classifies synthetic gypsum as a non-hazardous
waste. However, the U.S. EPA is considering a regulation that could affect the use, storage and
disposal of synthetic gypsum. See Item 1A, Risk Factors.
We own eight paper production facilities located across the United States. As a result of the
current market environment, we have idled two of these facilities and, during 2010, we permanently
closed two others. 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. Less than 1% of our paper
supply was purchased from outside suppliers during 2010.
MARKETING AND DISTRIBUTION
Our gypsum products are distributed through our wholly owned subsidiary, L&W Supply
Corporation, and its subsidiaries, or L&W Supply, other specialty wallboard distributors, building
materials dealers, home improvement centers and other retailers, and contractors. Sales of gypsum
products are seasonal in the sense that sales are generally greater from spring through the middle
of autumn than during the remaining part of the year.
Based on our estimates using publicly available data, internal surveys and gypsum wallboard
shipment data from the Gypsum Association, we estimate that during 2010
| • | residential and nonresidential repair and remodel activity generated about 58% of volume demand for gypsum wallboard, | |
| • | new residential construction generated about 29% of volume demand, | |
| • | new nonresidential construction generated about 9% of volume demand, and | |
| • | other activities, such as exports and temporary construction, generated the remaining 4% of volume demand. |
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COMPETITION
The Gypsum Association estimates that United States industry shipments of gypsum wallboard
(including imports) in 2010 were 17.3 billion square feet. U.S. Gypsum shipped 4.19 billion square
feet of wallboard in 2010, or approximately 24% of the total industry shipments of gypsum wallboard
in the United States.
Our competitors in the United States are: National Gypsum Company, CertainTeed Corporation (a
subsidiary of Compagnie de Saint-Gobain SA), Georgia-Pacific (a subsidiary of Koch Industries,
Inc.), American Gypsum (a unit of Eagle Materials Inc.), Temple-Inland Forest Products Corporation,
Lafarge North America Inc. and PABCO Gypsum. Our competitors in Canada include CertainTeed
Corporation, Georgia-Pacific and Lafarge North America Inc. Our major competitors in Mexico are
Panel Rey, S.A. and Comex-Lafarge. The principal methods of competition are quality of products,
service, pricing, compatibility of systems and product design features.
Building Products Distribution
BUSINESS
Building Products Distribution consists of L&W Supply, the leading distributor of gypsum
wallboard and other building materials in the United States. In 2010, L&W Supply distributed
approximately 9% of all gypsum wallboard in the United States, including approximately 33% of U.S.
Gypsum’s wallboard production. During 2010, approximately 30% of L&W Supply’s net sales were from
new nonresidential construction.
MARKETING AND DISTRIBUTION
L&W Supply is a service-oriented business that stocks a wide range of construction materials.
It delivers less-than-truckload quantities of construction materials to job sites and places them
in areas where work is being done, thereby reducing the need for handling by contractors. L&W
Supply specializes in the distribution of gypsum wallboard (which accounted for 32% of its 2010 net
sales), joint compound and other gypsum products manufactured by U.S. Gypsum and others. It also
distributes products manufactured by USG Interiors, Inc., 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 90% of its facilities from third parties. Typical
leases have terms of five years and include renewal options.
In the current market environment, L&W Supply is primarily focused on reducing its
cost structure and optimizing its asset utilization. L&W Supply closed five and opened four
distribution centers in 2010. It closed 37 distribution centers in 2009 and 54 centers in 2008. The
closures have been widely dispersed throughout the markets that L&W Supply serves. As of December
31, 2010, L&W Supply continued to serve its customers from 163 centers in the United States. It
operated 164 centers as of December 31, 2009 and 198 centers as of December 31, 2008. L&W Supply
from time to time evaluates opportunities to grow its specialty distribution business taking into
account the current market environment.
COMPETITION
L&W Supply competes with a number of specialty wallboard distributors, lumber dealers,
hardware stores, home improvement centers and acoustical ceiling tile distributors. Its principal
competitors include ProBuild Holdings Inc., a national supplier of building materials, Gypsum
Management Supply with locations in the southern, central and western United States, KCG, Inc. in
the southwestern and central United States, and Allied Building Products Corporation in the
northeastern, central and western United States. Principal methods of competition are location,
service, range of products and pricing.
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Worldwide Ceilings
BUSINESS
Worldwide Ceilings manufactures and markets interior systems products worldwide. It includes
USG Interiors, Inc., or 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. We estimate that we are the
largest manufacturer of ceiling grid and the second-largest manufacturer and marketer of acoustical
ceiling tile in the world.
PRODUCTS
Worldwide Ceilings manufactures ceiling tile in the United States and ceiling grid in the
United States, Canada, Europe and the Asia-Pacific region. It markets ceiling tile and ceiling grid
in the United States, Canada, Mexico, Europe, Latin America and the Asia-Pacific region. Our
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 brand names include the
AURATONE® and ACOUSTONE® brands of ceiling tile and the DONN®,
DX®, FINELINE®, CENTRICITEE™, CURVATURA™ and
COMPASSO™ brands of ceiling grid.
MANUFACTURING
Worldwide Ceilings manufactures products at 16 plants located in North America, Europe and the
Asia-Pacific region. Principal raw materials used to produce Worldwide Ceilings’ products include
mineral fiber, steel, perlite, starch and high-pressure laminates. We produce some of these raw
materials and obtain others from outside suppliers.
MARKETING AND DISTRIBUTION
Worldwide Ceilings sells products primarily in markets related to the construction and
renovation of nonresidential buildings. During 2010, approximately 34% of Worldwide Ceilings’ net
sales were from new nonresidential construction. Products are marketed and distributed through a
network of distributors, installation contractors, L&W Supply locations and home improvement
centers.
COMPETITION
Our principal competitors in ceiling grid include WAVE (a joint venture between Armstrong
World Industries, Inc. and Worthington Industries) and Chicago Metallic Corporation. Our principal
competitors in acoustical ceiling tile include Armstrong World Industries, Inc., OWA
Faserplattenwerk GmbH (Odenwald), CertainTeed Corporation and AMF Mineralplatten GmbH Betriebs KG
(owned by Gebr. Knauf Verwaltungsgellschaft KG). Principal methods of competition are quality of
products, service, pricing, compatibility of systems and product design features.
Executive Officers of the Registrant
See
Part III, Item 10, Directors, Executive Officers and
Corporate Governance - Executive Officers
of the Registrant (as of February 11, 2011).
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,
Ill. Research team members collaborate with suppliers, universities and national research
laboratories to provide product support and to develop new products and technologies for our
operating units. With unique 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.
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We also conduct research at a satellite location where industrial designers and fabricators work on
new ceiling grid concepts and prototypes. Research and development activities were scaled back
during the past three years in response to market conditions. We charge research and development
expenditures to earnings as incurred. These expenditures amounted to $13 million in 2010, $13
million in 2009 and $19 million in 2008.
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 are continuing to develop new products, systems and services 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, systems and services 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 and option contracts to hedge a significant
portion of our anticipated purchases of natural gas to be used in our manufacturing operations.
Generally, we hedge the cost of a majority of our anticipated purchases of natural gas over the
next 12 months. However, we review our positions regularly and make adjustments as market
conditions warrant.
SIGNIFICANT CUSTOMER
On a worldwide basis, The Home Depot, Inc. accounted for approximately 15% of our consolidated
net sales in 2010, approximately 14% in 2009 and approximately 10% in 2008.
OTHER
Because we fill orders upon receipt, no segment has any significant order backlog.
None of our segments has any special working capital requirements.
Loss of one or more of our patents or licenses would not have a material impact on our business or
our ability to continue operations.
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, 2010, we had approximately 9,250 employees worldwide.
See Note 13 to the Consolidated Financial Statements for financial information pertaining to our
segments and Item 1A, Risk Factors, for information regarding the possible effects that compliance
with environmental laws and regulations and climate change may have on our businesses and operating
results.
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Available Information
We maintain a Web site at www.usg.com and make available at this Web site 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. 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.
Item 1A. RISK FACTORS
Our business, operations and financial condition are subject to various risks and uncertainties. We
have described below significant factors that may adversely affect our business, operations,
financial performance and condition or 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.
Adverse developments or changes related to any of the factors listed below could affect our
business, financial condition, results of operations and growth.
Our businesses can be adversely affected by economic and financial conditions, including
restrictive lending practices, and are cyclical in nature. Prolonged periods of weak product demand
or excess product supply may have a material adverse effect on our business, financial condition
and operating results.
The markets that we serve, including, in particular, the housing and construction-based markets,
are affected by economic conditions, the availability of credit, lending practices, interest rates,
the unemployment rate and consumer confidence. An increase in interest rates, continued high levels
of unemployment, continued restrictive lending practices, a decrease in consumer confidence or
other adverse economic conditions could have a material adverse effect on our business, financial
condition and results of operations. Our businesses are also affected by a variety of other factors
beyond our control, including the inventory of unsold homes, which remains at an historically high
level, the level of foreclosures, home resale rates, housing affordability, office and retail
vacancy rates and foreign currency exchange rates.
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,
which are our most significant markets. Housing starts in the United States, which are a major
source of demand for our products and services, increased 6% in 2010 after declining in each
of the previous three years but remain near the lowest levels recorded in the last 50 years. Most
industry analysts have forecast improvement in the level of new home construction in 2011, but new
home construction may not improve much, if at all, from the 2010 level if high unemployment
continues, the inventory of unsold homes and foreclosures remain at their current levels, tight
mortgage lending policies continue or mortgage interest rates continue to increase in 2011. In
December 2010, the annualized rate of housing starts was reported by the U.S. Census Bureau to be
529,000 units. Industry analysts’ forecasts for new home construction in the United States in 2011
are for a range of from 590,000 to 770,000 units. We currently estimate that 2011 housing starts
will be approximately 680,000 units.
The repair and remodel market includes renovation of both residential and nonresidential
buildings. As a result of the low levels of new home construction in recent years, this market
currently accounts for the largest portion of our sales. Many buyers begin to remodel an existing
home within two years of purchase. According to the National Association of Realtors, sales of
existing homes in the United States decreased to approximately 4.9 million units in 2010, the
lowest level since 1997 and a 4.8% decrease from the 2009 level of 5.2 million units. Sales of
existing homes had increased in 2009 after decreasing in each of the previous two years from a high
of 6.5 million units in 2006. The low levels of existing home sales in recent years, continued
concerns regarding the job market and home resale values and tight lending standards contributed to
a decrease in demand for our products from the residential repair and remodel market in 2010.
Nonresidential repair and remodel activity is driven by factors including lease
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turnover rates, discretionary business investment, job growth and governmental building-related
expenditures. We currently estimate that overall repair and remodel spending in 2010 increased
approximately 1% above the 2009 level and that overall repair and remodel spending in 2011 will be
approximately 3% above the 2010 level.
Demand for our products from new nonresidential construction is determined by floor space for
which contracts are signed. Installation of gypsum and ceilings products typically follows signing
of construction contracts by about a year. According to McGraw-Hill Construction, total floor space
for which new nonresidential construction contracts in the United States were signed declined 18%
in 2010 compared with 2009. This followed a 44% decrease in 2009 compared with 2008. McGraw-Hill
Construction forecasts that total floor space for which new nonresidential construction contracts
in the United States are signed will increase approximately 8% in 2011 from the 2010 level.
Prices for our products are affected by overall supply and demand in the markets for our
products and our competitors’ products. Market prices of building products historically have been
volatile and cyclical. Currently, there is significant excess wallboard production capacity
industry wide in the United States. Industry capacity in the United States was approximately 32.9
billion square feet as of December 31, 2010. Industry shipments of wallboard in the United States
(including imports) were an estimated 17.3 billion square feet in 2010 compared with 18.4 billion
square feet in 2009. Prolonged continuation of weak demand or excess supply in any of our
businesses may have a material adverse effect on our business, financial condition and operating
results.
We cannot predict the duration of the current market conditions, or the timing or strength of
any future recovery of the North American housing and construction-based markets. We also cannot
provide any assurances that those markets will not weaken further, or that further operational
adjustments will not be required to address market conditions. Continued weakness in these markets
and the homebuilding industry may have a material adverse effect on our business, financial
condition and operating results.
Because we operate in a variety of geographic markets, our businesses are subject to the
economic conditions in each of these geographic markets. Those conditions vary regionally, with
emerging markets generally recovering from the economic downturn more rapidly than developed
regions. General economic downturns or localized downturns in the regions where we have operations
may have a material adverse effect on our business, financial condition and operating results.
Our customers and suppliers are exposed to risks associated with the economic downturn and
financial conditions that could adversely affect their payment of our invoices or the continuation
of their businesses at the same level.
The businesses of many of our customers and suppliers are exposed to risks related to the current
economic environment. A number of our customers and suppliers have been and may continue to be
adversely affected by unsettled financial conditions in their markets, disruptions to the capital
and credit markets and decreased demand for their products and services. In the event that any of
our large customers or suppliers, or a significant number of smaller customers and suppliers, are
adversely affected by these risks, we may face disruptions in supply, further reductions in demand
for our products and services, failure of customers to pay invoices when due and other adverse
effects that may have a material adverse effect on our business, financial condition and operating
results.
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Our substantial indebtedness may adversely affect our business, financial condition and operating
results.
As of December 31, 2010, we had $2.331 billion
($2.308 billion, net of debt discount of $23 million) of indebtedness. Our substantial indebtedness may
have material adverse effects on our business, financial condition and operating results, including
to
| • | make it more difficult for us to satisfy our debt service obligations, | |
| • | require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures and other general operating requirements, | |
| • | limit our ability to obtain additional financing to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service obligations and other general corporate requirements, | |
| • | restrict us from making strategic acquisitions or taking advantage of favorable business opportunities, | |
| • | place us at a relative competitive disadvantage compared to our competitors that have proportionately less debt, | |
| • | limit our flexibility to plan for, or react to, changes in our businesses and the industries in which we operate, which may adversely affect our operating results and ability to meet our debt service obligations, | |
| • | increase our vulnerability to the current and potentially more severe adverse general economic and industry conditions, and | |
| • | limit our ability, or increase the cost, to refinance our indebtedness. |
If we incur additional indebtedness, the risks related to our substantial indebtedness may
intensify.
We require a significant amount of liquidity to service our indebtedness and fund operations,
capital expenditures, research and development efforts, acquisitions and other corporate
expenditures.
Our ability to fund operations, capital expenditures, research and development efforts,
acquisitions and other corporate expenditures, including repayment of our indebtedness, depends on
our ability to generate cash through future operating performance, which is subject to economic,
financial, competitive, legislative, regulatory and other factors. Many of these factors are beyond
our control. We cannot ensure that our businesses will generate sufficient cash flow from
operations or that future borrowings or other financing will be available to us in an amount
sufficient to pay our indebtedness or to fund our other needs.
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.
If we are unable to generate sufficient cash flow to fund our needs, we may need to pursue one
or more alternatives, such as to
| • | curtail operations further, | |
| • | reduce or delay planned capital expenditures, research and development or acquisitions, | |
| • | seek additional financing or restructure or refinance all or a portion of our indebtedness at or before maturity, |
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| • | sell assets or businesses, and | |
| • | sell additional equity. |
Any curtailment of operations, reduction or delay in planned capital expenditures, research and
development or acquisitions, or any sales of assets or businesses, may materially and adversely
affect our future revenue prospects. In addition, we cannot ensure that we will be able to raise
additional equity capital, restructure or refinance any of our indebtedness or obtain additional
financing on commercially reasonable terms or at all.
Covenant restrictions under the agreements governing our indebtedness may limit our ability to
pursue business activities or otherwise operate our business.
The agreements governing our indebtedness contain covenants that may limit our ability to finance
future operations or capital needs or to engage in other business activities, including, among
other things, our ability to
| • | incur additional indebtedness, | |
| • | make guarantees, | |
| • | sell assets or make other fundamental changes, | |
| • | engage in mergers and acquisitions, | |
| • | make investments, | |
| • | enter into transactions with affiliates, | |
| • | change our business purposes, and | |
| • | enter into sale and lease-back transactions. |
In addition, we are subject to agreements that may require us to meet and maintain certain
financial ratios and tests, which may require that we take action to reduce our debt or to act in a
manner contrary to our current or future business plans. General business and economic conditions
may affect our ability to comply with these covenants or meet those financial ratios and tests.
A breach of any of our credit agreement or indenture covenants or failure to maintain a
required ratio or meet a required test may result in an event of default under those agreements.
This may allow the counterparties to those agreements to declare all amounts outstanding
thereunder, together with accrued interest, to be immediately due and payable. If this occurs, we
may not be able to refinance the accelerated indebtedness on favorable terms, or at all, or repay
the accelerated indebtedness.
The loss of sales to one or more of our major customers may have a material adverse effect on our
business, financial condition and operating results.
We face strong competition for our major customers. If one or more of our major customers reduces,
delays or cancels substantial orders, our business, financial condition and operating results may
be materially and adversely affected, particularly for the period in which the reduction, delay or
cancellation occurs and also possibly for subsequent periods.
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We face competition in each of our businesses. If we cannot successfully compete in the
marketplace, our business, financial condition and operating results may be materially and
adversely affected.
We face competition in each of our businesses. Principal methods of competition include quality and
range of products, service, location, pricing, compatibility of systems and product design
features. Actions of our competitors, or the entry of new competitors in our markets, could lead to
lower pricing by us in an effort to maintain market share and could also lead to lower sales
volumes. To achieve and/or maintain leadership positions in key product categories, we must
continue to develop brand recognition and loyalty, enhance product quality and performance,
introduce new products and develop our manufacturing and distribution capabilities.
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 using state-of-the-art systems. 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,
particularly during any prolonged period of disruption.
We intend to continue making investments in research and development to develop new and
improved products and more efficient production 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 could be adversely affected. In addition, there can be no
assurance that revenue from new products or enhancements will be sufficient to recover the research
and development expenses associated with their development.
If costs of key raw materials, energy, fuel or employee benefits increase, or the availability of
key raw materials and energy decreases, our cost of products sold will increase and our operating
results may be materially and adversely affected.
The cost and availability of raw materials and energy are critical to our operations. For example,
we use substantial quantities of gypsum, wastepaper, mineral fiber, steel, perlite, starch and
high-pressure laminates. 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, which
increases the risk of unavailability. We may not be able to pass increased raw material prices on
to our customers in the future 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 prices or if we cannot effectively hedge against
price increases, our operating results may be materially and adversely affected.
Wastepaper prices are affected by market conditions, principally supply. 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.
Steel is used as the primary raw material in ceiling grid. Steel prices have been volatile,
and there is no guarantee that we can pass on higher steel costs to our customers in the form of
higher ceiling grid prices.
Approximately one-third of the gypsum used in our plants is synthetic gypsum, which is a
coal-combustion byproduct, or CCB, resulting primarily from flue gas desulphurization carried out
by electric generation or industrial plants burning coal as a fuel. Seven of our 19 gypsum
wallboard plants in operation use synthetic gypsum for all of their needs, while another five use
it for some of their needs. The suppliers of synthetic gypsum are primarily power companies, which
are required under federal environmental regulations to operate scrubbing equipment for their
coal-fired generating plants.
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Environmental regulatory changes or changes in methods used to comply with environmental
regulations could adversely affect the price and availability of synthetic gypsum. The U.S. EPA
currently classifies synthetic gypsum as a non-hazardous waste. In June 2010, in the wake of a
December 2008 coal ash spill from a surface impoundment in Kingston, Tenn. (operated by an
unrelated third party), the U.S. EPA proposed two alternative regulations that would address the
storage and disposal of all CCBs, including synthetic gypsum. One of the proposed regulations would
regulate the transportation, storage and disposal of CCBs as “special” waste, except when they are
“beneficially used.” The U.S. EPA has stated that synthetic gypsum used in wallboard is considered
a “beneficial use,” although the proposed regulation does not specifically address the regulatory
status of synthetic gypsum prior to its incorporation into wallboard or at the time such wallboard
ultimately is disposed. The comment period on the U.S. EPA’s proposed rules ended on November 19,
2010. If the U.S. EPA adopts a final regulation that affects the use, storage or disposal of
synthetic gypsum, it could have a material adverse effect on our results of operations, financial
position or cash flows. This effect would depend on, among other things, the regulation’s impact,
if any, on the cost or supply of synthetic gypsum used in manufacturing wallboard and the demand
for wallboard made with synthetic gypsum.
Energy costs also are affected by various market factors, including the availability of
supplies of particular forms of energy, energy prices and local and national regulatory decisions.
Prices for natural gas and electrical power, which are significant components of the costs
associated with production of our gypsum and interior systems products, have both become more
volatile in recent years. There may be substantial increases in the price, or a decline in the
availability, of energy in the future, especially in light of instability or possible dislocations
in some energy markets. In addition, significant increases in the cost of fuel can result in
material increases in the cost of transportation, which could materially and adversely affect our
operating profits. As is the case with raw materials, we may not be able to pass on increased costs
through increases in the prices of our products.
In addition, our profit margins are affected by costs related to maintaining our employee
benefit plans (pension and medical insurance for active employees and retirees). The recognition of
costs and liabilities associated with these plans for financial reporting purposes is affected by
the level of interest rates and assumptions made by management and used by actuaries engaged by us
to calculate the projected and accumulated benefit obligations and the annual expense recognized
for these plans. The assumptions used in developing the required estimates primarily include
discount rates, expected return on plan assets for the funded plans, compensation increase rates,
retirement rates, mortality rates and, for postretirement benefits, health care cost trend rates.
Economic and market factors and conditions could affect any of these assumptions and may affect our
estimated and actual employee benefit plan costs and our business, financial condition and
operating results.
Fluctuations in the market price of natural gas may have a material adverse effect on our business,
financial condition and operating results.
We use natural gas extensively in the production of gypsum and interior systems products in the
United States, Canada and Mexico. As a result, our profitability, operating cash flows and future
rate of growth are highly dependent on the price of natural gas, which historically has been very
volatile and is affected by numerous factors beyond our control. We are not always able to pass on
increases in energy costs to our customers through increases in product prices. In an attempt to
reduce our price risk related to fluctuations in natural gas prices, we periodically enter into
hedging agreements. We benefit from the hedge agreements when spot prices exceed contractually
specified prices. During 2009 and 2010, however, the market price for natural gas declined, and we
were more limited in our ability to take advantage of decreasing market prices than some of our
competitors. We include options as part of our hedging strategy to provide protection if gas prices
increase significantly while allowing us to take advantage of lower gas prices. Any substantial or
extended decline in prices of, or demand for, natural gas could cause our production costs to be
greater than those of our competitors. Similarly, our increased use of options could cause our
production costs to be greater than those of our competitors if the strike price of the option is
set above the market. A significant production cost differential could have a material adverse
effect on our business, financial condition and operating results.
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In addition, the results of our hedging agreements could be positive, neutral or negative in
any period depending on price changes in the hedged exposures. Further, changes to the price of
natural gas could result in changes to the value of our hedging contracts, which could impact our
results of operations for a particular period. Our hedging activities are not designed to mitigate
long-term natural gas price fluctuations and, therefore, will not protect us from long-term natural
gas price increases.
Certain of our customers have been expanding and may continue to expand through consolidation and
internal growth, thereby possibly developing increased buying power, which may materially and
adversely affect our revenues, results of operations and financial position.
Certain of our important customers are large companies with significant buying power. In addition,
potential further consolidation in our distribution channels could 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 be
limited, including during periods of raw material and other cost increases. 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 revenues, operating results and financial
position may be materially and adversely affected.
We are subject to environmental and safety laws and regulations that may change. These laws and
regulations could cause us to make modifications to how we manufacture and price our products. They
and the effects of climate change could also require that we make significant capital investments
or otherwise increase our costs.
We are subject to 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. In addition, we 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. We cannot completely eliminate the risk of contamination or
injury resulting from hazardous materials. Environmental laws and regulations tend to become more
stringent over time, and we could incur material expenses relating to compliance with future
environmental laws. As noted above, the U.S. EPA is considering a regulation that could affect the
classification, use, storage and disposal of synthetic gypsum.
In addition, the price and availability of certain of the raw materials that we use may vary
in the future as a result of environmental laws and regulations affecting our suppliers. An
increase in the price of our raw materials, a decline in their availability or future costs
relating to our compliance with environmental laws and regulations may materially and adversely
affect our operating margins or result in reduced demand for our products.
The U.S. Congress and several states are considering proposed legislation to reduce emission
of “greenhouse gases,” including carbon dioxide and methane. Some states have already adopted
greenhouse gas regulation or legislation. In December 2009, the U.S. EPA issued its findings that
certain greenhouse gases, including carbon dioxide, endanger the public health and welfare.
Subsequently, the U.S. EPA issued two rules that will make greenhouse gas emissions from both
stationary and mobile sources subject to regulation under the existing federal Clean Air Act. In
April 2010, the U.S. EPA, jointly with the U.S. Department of Transportation’s National Highway
Traffic Safety Administration, issued a rule that will regulate tailpipe greenhouse gas emissions
by light-duty vehicles in the model years 2012 to 2016. In May 2010, the U.S. EPA adopted rules to
phase in requirements for all new or modified “stationary sources” that emit 100,000 tons of
greenhouse gases per year, or modified sources that increase emissions by 75,000 tons per year, to
annually obtain permits demonstrating that they are incorporating the “best available control
technology” to minimize greenhouse gas emissions. These rules would affect all of our U.S.
wallboard and ceiling tile plants and paper mills and are the subject of pending legal challenges
that have been filed by certain interested parties, including states, industry groups and
environmental organizations, in the U.S. Court of
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Appeals for the D.C. Circuit. If these rules withstand challenge, they could require that we incur
significant costs to satisfy permitting requirements. In addition, enactment of new climate control
legislation or other regulatory initiatives by Congress or various states, or the adoption of
additional regulations by the U.S. EPA and analogous state or foreign governmental agencies that
restrict emissions of greenhouse gases in areas in which we conduct business, could have an adverse
effect on our operations and demand for our services or products. For example, our manufacturing
processes, particularly the manufacturing process for wallboard, use a significant amount of
energy, especially natural gas. Increased regulation of energy use to address the possible emission
of greenhouse gases and climate change could materially increase our manufacturing costs. From time
to time, legislation has been introduced proposing a “carbon tax” on energy use or establishing a
so-called “cap and trade” system. Such legislation would almost certainly increase the cost of
energy used in our manufacturing processes. If energy becomes more expensive, we may not be able to
pass these increased costs on to purchasers of our products.
It is difficult to accurately predict if or when currently proposed or additional laws and
regulations regarding emissions and other environmental concerns will be enacted or what capital
expenditures might be required as a result of them. Stricter regulation of emissions might require
us to install emissions control or other equipment at some or all of our manufacturing facilities,
requiring significant additional capital investments.
Some of our manufacturing plants are located in coastal areas to receive ocean shipments of
gypsum rock. If sea levels rise or storm severity increases significantly because of climate
change, significant capital investments could be required to structurally reinforce some of these
plants and/or to upgrade their dock facilities. Also, climate change could cause drought conditions
and increase the cost of securing water for use in our manufacturing processes, although the
increase, if any, likely would vary significantly from location to location.
If the downturn in the markets for our businesses does not significantly reverse or is
significantly extended, we may incur material impairment charges.
We have been scaling back our operations in response to market conditions since the downturn began
in 2006. Since mid-2006, we have temporarily idled or permanently closed approximately 3.8 billion
square feet of our highest-cost wallboard manufacturing capacity. As a result, during the four-year
period ended December 31, 2010, we recorded long-lived asset impairment charges aggregating $67
million for six permanently closed and four temporarily idled gypsum wallboard production
facilities and two permanently closed and two temporarily idled paper production facilities.
Historically, the housing and other construction markets that we serve have been deeply
cyclical. Downturns in demand are typically steep and last several years, but they have typically
been followed by periods of strong recovery. If the recovery from this cycle results in increases
in demand similar to those realized in recoveries from past cycles, we believe we will generate
significant cash flows when our markets recover. We regularly monitor forecasts prepared by
external economic forecasters and review our facilities and other assets to determine which of
them, if any, are impaired under applicable accounting rules. In 2010, we recorded long-lived asset
impairment charges of $58 million related to (1) a gypsum wallboard production facility in
Southard, Okla., that was permanently closed, (2) the carrying values of machinery, equipment and
buildings at our previously idled and now permanently closed gypsum wallboard production facilities
in Fort Dodge, Iowa, and Jacksonville, Fla., and paper production facilities in Clark, N.J., and
South Gate, Calif., and (3) the carrying values of machinery, equipment and buildings at our
temporarily idled gypsum wallboard production facilities in Stony Point, N.Y., Baltimore, Md., and
Jacksonville, Fla., and our temporarily idled paper production facility in Jacksonville, Fla. The
carrying values of the machinery, equipment and buildings at these temporarily idled production
facilities exceeded the estimated future undiscounted cash flows for their remaining useful lives
due to the extended downturn in our markets and our forecasts regarding the timing and rate of
recovery in those markets. Because we believe that a significant recovery in the housing and other
construction markets we serve is likely to begin in the next two to three years, we determined that
there were no other impairments of our long-lived assets during 2010.
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However, if the downturn in our markets does not significantly reverse or the downturn is
significantly further extended, material write-downs or impairment charges may be required in the
future. If these conditions were to materialize or worsen, or if there is a fundamental change in
the housing and other construction markets we serve, which individually or collectively lead to a
significantly extended downturn or decrease in demand, we may permanently close additional
production and distribution facilities and material restructuring and impairment charges may be
necessary. The magnitude and timing of those possible charges would be dependent on the severity
and duration of the extended downturn, should it materialize, and cannot be determined at this
time. Any material cash or noncash restructuring or impairment charges, including write-downs of
property, plant and equipment, would have a material adverse effect on our results of operations
and financial condition. We will continue to monitor economic forecasts and their effect on our
facilities to determine whether any of our assets are impaired.
A small number of our stockholders could significantly influence our business and affairs.
Based on filings made with the SEC and other information available to us, we believe that, as of
January 31, 2011, seven organizations collectively controlled over 50% of our common stock. Also,
all of our 10% convertible senior notes are currently held by two of our largest stockholders. At
the current conversion price of $11.40 per share, the notes are convertible into approximately 35.1
million shares of our common stock, or approximately 25% of the shares that would be outstanding if
all of the notes were converted at that price. 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.
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.
The Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs to reduce
its federal income taxes if it experiences an “ownership change.” In general terms, an ownership
change may result from transactions increasing the ownership of certain stockholders in the stock
of a corporation by more than 50 percentage points over a three-year period. If we were to
experience an ownership change, utilization of our NOLs would be subject to an annual limitation
determined by multiplying the market value of our outstanding shares of stock at the time of the
ownership change by the applicable long-term tax-exempt rate (which was 3.67% for December 2010).
Any unused annual limitation may be carried over to later years within the allowed NOL carryforward
period. The amount of the limitation may, under certain circumstances, be increased or decreased by
built-in gains or losses held by us at the time of the change that are recognized in the five-year
period after the change. Many states have similar limitations. If an ownership change had occurred
as of December 31, 2010, our annual U.S. federal NOL utilization would have been limited to
approximately $64 million per year.
We may pursue acquisitions, joint ventures and other transactions that complement or expand our
businesses. We may not be able to complete proposed transactions, and even if completed, the
transactions may involve a number of risks that may result in a material adverse effect on our
business, financial condition and operating results.
During the past several years, we have completed a number of acquisitions and joint venture
arrangements. As business conditions warrant and our financial resources permit, we may pursue
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. We may have difficulty identifying appropriate opportunities, or if
we do identify opportunities, we may not be successful in completing transactions for a number of
reasons. Any transactions that we are able to identify and complete may involve one or more of a
number of risks, including
| • | the diversion of management’s attention from our existing businesses to integrate the operations and personnel of the acquired or combined business or joint venture, |
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| • | possible adverse effects on our operating results during the integration process, | |
| • | failure of the acquired business or joint venture to achieve expected operational, profitability and investment return objectives, and | |
| • | inability to achieve other intended objectives of the transaction. |
In addition, we may not be able to successfully or profitably integrate, operate, maintain and
manage our newly acquired operations or their employees. We may not be able to maintain uniform
standards, controls, procedures and policies, which may lead to operational inefficiencies. In
addition, future acquisitions may result in dilutive issuances of equity securities or the
incurrence of additional indebtedness.
The seasonal nature of our businesses may materially and adversely affect the trading prices of our
securities.
A majority of our businesses are seasonal, with peak sales typically occurring from spring through
the middle of autumn. Quarterly results have varied significantly in the past and are likely to
vary significantly from quarter to quarter in the future. Those variations may materially and
adversely affect our financial performance and the trading prices of our securities.
We depend on our senior management team for their expertise and leadership, and the unexpected loss
of any member could adversely affect the implementation of our business strategy or our operations.
Our success depends on the management and leadership skills of our senior management team. The
unexpected loss of any of these individuals or an inability to attract and retain additional
personnel could impede or prevent the implementation of our business strategy or adversely affect
our operations. Although we have incentives for management to stay with us, we cannot ensure that
we will be able to retain all of our existing senior management personnel or attract additional
qualified personnel when needed.
We do not expect to pay cash dividends on our common stock for the foreseeable future.
We have not paid a dividend on our common stock since the first quarter of 2001 and have no plans
to do so in the foreseeable future. Further, 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 if a default exists under the
agreement. Because we do not expect to pay dividends on our common stock in the foreseeable future,
investors in our common stock will have to rely on the possibility of stock appreciation for a
return on their investment.
Item 1B. UNRESOLVED STAFF COMMENTS
None
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Item 2. PROPERTIES
We operate plants, mines, quarries, transport ships and other facilities in North America, Europe
and the Asia-Pacific region. U.S. Gypsum’s SHEETROCK® brand gypsum wallboard plants
operated at approximately 43% of capacity during 2010. USG Interiors’ AURATONE® brand
ceiling tile plants operated at approximately 90% of capacity during 2010. The locations of our
production properties in operation as of December 31, 2010, grouped by reportable segment, are as
follows (plants are owned unless otherwise indicated):
North American Gypsum
| GYPSUM WALLBOARD AND OTHER GYPSUM PRODUCTS | ||||
Aliquippa, Pa.*
|
Plaster City, Calif. | Hagersville, Ontario, Canada** | ||
Baltimore, Md.**
|
Rainier, Ore. | Montreal, Quebec, Canada * | ||
Bridgeport, Ala.*
|
Shoals, Ind.** | Monterrey, Nuevo Leon, Mexico | ||
East Chicago, Ind.*
|
Sigurd, Utah | Puebla, Puebla, Mexico | ||
Galena Park, Texas*
|
Sperry, Iowa** | Tecoman, Colima, Mexico | ||
Jacksonville, Fla.**
|
Sweetwater, Texas | |||
Norfolk, Va.*
|
Washingtonville, Pa.* | |||
| * | Plants supplied fully by synthetic gypsum | |
| ** | Plants supplied partially by synthetic gypsum |
| JOINT COMPOUND (SURFACE PREPARATION AND JOINT TREATMENT PRODUCTS) | ||||
Auburn, Wash.
|
Galena Park, Texas | Calgary, Alberta, Canada* | ||
Baltimore, Md.
|
Gypsum, Ohio | Hagersville, Ontario, Canada | ||
Bridgeport, Ala.
|
Jacksonville, Fla. | Montreal, Quebec, Canada | ||
Chamblee, Ga.
|
Phoenix (Glendale), Ariz.* | Surrey, British Columbia, Canada | ||
Dallas, Texas
|
Port Reading, N.J. | Monterrey, Nuevo Leon, Mexico | ||
East Chicago, Ind.
|
Sigurd, Utah | Puebla, Puebla, Mexico | ||
Fort Dodge, Iowa
|
Torrance, Calif. | |||
| * | Leased |
CEMENT BOARD |
||||
Baltimore, Md.
|
New Orleans, La. | Monterrey, Nuevo Leon, Mexico | ||
Detroit (River Rouge), Mich. |
||||
GYPSUM ROCK (MINES AND QUARRIES) |
||||
Alabaster (Tawas City), Mich.
|
Sigurd, Utah | Hagersville, Ontario, Canada | ||
Fort Dodge, Iowa
|
Southard, Okla. | Little Narrows, Nova Scotia, Canada | ||
Plaster City, Calif.
|
Sperry, Iowa | Monterrey, Nuevo Leon, Mexico | ||
Shoals, Ind.
|
Sweetwater, Texas | San Luis Potosi, San Luis Potosi, Mexico Tecoman, Colima, Mexico |
||
PAPER FOR
GYPSUM WALLBOARD |
||||
Galena Park, Texas
|
Oakfield, N.Y. | |||
North Kansas City, Mo.
|
Otsego, Mich. |
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OTHER PRODUCTS
We operate a mica-processing plant at Spruce Pine, N.C. We manufacture metal lath, plaster and
drywall accessories and light gauge steel framing products at Monterrey, Nuevo Leon, Mexico, and
Puebla, Puebla, Mexico. We produce plaster products at Southard, Okla., Puebla, Puebla, Mexico,
Saltillo, Coahuila, Mexico, and San Luis Potosi, San Luis Potosi, Mexico. We manufacture gypsum
fiber panel products at Gypsum, Ohio, and paper-faced metal corner bead at Auburn, Wash., and
Weirton, W.Va.
FACILITY SHUTDOWNS
During 2010, we (1) permanently closed a gypsum wallboard production facility in Southard,
Okla., (2) temporarily idled a gypsum wallboard production facility in Stony Point, N.Y., and
gypsum wallboard and plaster production facilities and a gypsum quarry in Empire, Nev., and (3)
permanently closed gypsum wallboard production facilities in Fort Dodge, Iowa, and Jacksonville,
Fla., and a paper production facility in South Gate, Calif., all of which were idled in 2008, and a
paper production facility in Clark, N.J., that was idled in 2009. In the first quarter of 2011, we
will temporarily idle our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada.
OCEAN VESSELS
Gypsum Transportation Limited, our wholly owned subsidiary headquartered in Bermuda, owns and
operates two self-unloading ocean vessels. We use these vessels to transport gypsum rock from Nova
Scotia to some of our East Coast plants. Because of the decrease in demand for our gypsum products
and the increased use of synthetic gypsum in the manufacture of wallboard at our East Coast plants,
we offer a significant portion of the ships’ time for charter on the open market to carry cargo
such as coal, aggregates and other free-flowing bulk materials.
Worldwide Ceilings
CEILING GRID |
||||
Cartersville, Ga. Stockton, Calif. Westlake, Ohio |
Oakville, Ontario, Canada Peterlee, England* Dreux, France |
Viersen, Germany St. Petersburg, Russia* Auckland, New Zealand* |
| * | Leased |
A coil coater and slitter plant used in the production of ceiling grid is located in
Westlake, Ohio. Slitter plants are located in Stockton, Calif. (leased), and Antwerp, Belgium
(leased).
CEILING TILE |
||||
Cloquet, Minn.
|
Greenville, Miss. | Walworth, Wis. |
OTHER PRODUCTS
We manufacture mineral fiber products at Red Wing, Minn., and Walworth, Wis., metal specialty
systems at Oakville, Ontario, Canada, and joint compound at Dreux, France (leased), Port Klang,
Malaysia (leased), St. Petersburg, Russia (leased), Thessaloniki, Greece (leased), Viersen,
Germany, and Lima, Peru.
FACILITY SHUTDOWN
In 2010, we permanently closed a ceiling grid plant in Shenzhen, China. Certain of that
plant’s assets are being used by our ceilings joint venture in China.
Item 3. LEGAL PROCEEDINGS
See Part II, Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial
Statements, Note 16, Litigation, for information on legal proceedings, which information is
incorporated herein by reference.
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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,
2011, there were 2,994 record holders of our common stock. We currently do not pay dividends on our
common stock.
We did not purchase any of our equity securities during the fourth quarter of 2010.
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, three of our non-employee directors deferred the $80,000 annual grant and two of our non-employee directors
deferred the quarterly retainers, they were entitled to receive on December 31, 2010 under our
Non-Employee Director Compensation, into a total of approximately 16,715 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 cash or shares of common stock, at each director’s option,
following termination of service as a director. The issuance of these deferred stock units was
effected through a private placement under Section 4(2) of the Securities Act and was exempt from
registration under Section 5 of the Securities Act.
COMMON STOCK PRICES
The high and low sales prices of our common stock in 2010 and 2009 were as follows:
| 2010 | 2009 | ||||||||||||||
| High | Low | High | Low | ||||||||||||
First quarter |
$ | 17.63 | $ | 11.21 | $ | 12.47 | $ | 4.16 | |||||||
Second quarter |
25.59 | 12.00 | 17.88 | 7.17 | |||||||||||
Third quarter |
14.42 | 11.34 | 19.88 | 8.71 | |||||||||||
Fourth quarter |
17.32 | 11.46 | 17.93 | 12.45 | |||||||||||
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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, 2010.
| Value of Investment as of December 31 | |||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||
USG |
$ | 100 | $ | 84 | $ | 64 | $ | 14 | $ | 25 | $ | 30 | |||||||||||
S&P 500 |
100 | 116 | 122 | 77 | 97 | 112 | |||||||||||||||||
DJUSCN |
100 | 117 | 144 | 83 | 94 | 114 | |||||||||||||||||
All amounts are rounded to the nearest dollar.
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Item 6. SELECTED FINANCIAL DATA
USG CORPORATION
FIVE-YEAR SUMMARY
FIVE-YEAR SUMMARY
| (dollars in millions, except per-share data) |
Years Ended December 31, |
||||||||||||||||||
| 2010 | 2009 | 2008 | 2007(a) | 2006(a) | |||||||||||||||
Statement of Operations Data: |
|||||||||||||||||||
Net sales |
$ | 2,939 | $ | 3,235 | $ | 4,608 | $ | 5,202 | $ | 5,810 | |||||||||
Cost of products sold |
2,775 | 3,090 | 4,416 | 4,601 | 4,426 | ||||||||||||||
Gross profit |
164 | 145 | 192 | 601 | 1,384 | ||||||||||||||
Selling and administrative expenses |
314 | 304 | 380 | 408 | 419 | ||||||||||||||
Litigation settlement income (b) |
- | (97) | - | - | - | ||||||||||||||
Restructuring and long-lived asset impairment charges |
110 | 80 | 98 | 26 | - | ||||||||||||||
Goodwill and other intangible asset impairment charges |
- | 43 | 226 | - | - | ||||||||||||||
Asbestos claims reversal (c) |
- | - | - | - | (44) | ||||||||||||||
Chapter 11 reorganization expenses (c) |
- | - | - | - | 10 | ||||||||||||||
Operating profit (loss) |
(260) | (185) | (512) | 167 | 999 | ||||||||||||||
Interest expense (c) |
183 | 165 | 86 | 105 | 555 | ||||||||||||||
Interest income |
(5) | (4) | (7) | (22) | (43) | ||||||||||||||
Other expense (income), net |
1 | (9) | (10) | (4) | (3) | ||||||||||||||
Income tax (benefit) expense (d) |
(34) | 450 | (118) | 11 | 193 | ||||||||||||||
Net earnings (loss) |
(405) | (787) | (463) | 77 | 297 | ||||||||||||||
Net Earnings (Loss) Per Common Share: |
|||||||||||||||||||
Basic |
(4.03) | (7.93) | (4.67) | 0.80 | 4.47 | ||||||||||||||
Diluted |
(4.03) | (7.93) | (4.67) | 0.79 | 4.46 | ||||||||||||||
Balance Sheet Data (as of the end of the year): |
|||||||||||||||||||
Working capital |
$ | 908 | $ | 939 | $ | 738 | $ | 717 | $ | 975 | |||||||||
Current ratio |
2.72 | 2.91 | 1.98 | 2.26 | 1.55 | ||||||||||||||
Cash and cash equivalents |
629 | 690 | 471 | 297 | 565 | ||||||||||||||
Property, plant and equipment, net |
2,266 | 2,427 | 2,562 | 2,596 | 2,210 | ||||||||||||||
Total assets |
4,087 | 4,097 | 4,719 | 4,654 | 5,397 | ||||||||||||||
Long-term debt |
2,301 | 1,955 | 1,642 | 1,238 | 1,439 | ||||||||||||||
Total stockholders’ equity |
619 | 930 | 1,550 | 2,226 | 1,566 | ||||||||||||||
Other Information: |
|||||||||||||||||||
Capital expenditures |
$ | 39 | $ | 44 | $ | 238 | $ | 460 | $ | 393 | |||||||||
Closing stock price per common share as of December 31 |
16.83 | 14.05 | 8.04 | 35.79 | 54.80 | ||||||||||||||
Average number of employees (e) |
9,450 | 10,800 | 13,600 | 14,650 | 14,700 | ||||||||||||||
| (a) | Financial information for 2006 and 2007 reflects adjustments for our change in 2008 from the last-in, first-out method of inventory accounting to the average cost method. These adjustments reduced cost of products sold from the amounts originally reported by $2 million in 2007 and $14 million in 2006. | |
| (b) | Reflects settlement income, net of fees, from our lawsuit against Lafarge North America Inc. and its parent, Lafarge S.A. | |
| (c) | In connection with our five-year reorganization proceeding that concluded in 2006, U.S. Gypsum recorded a pretax charge of $3.1 billion for asbestos claims in 2005, of which $44 million was reversed in 2006. Chapter 11 reorganization expenses consisted of legal and financial advisory fees, net of bankruptcy-related interest income. Interest expense in 2006 included post-petition interest and fees of $528 million related to pre-petition obligations. | |
| (d) | Income tax (benefit) expense includes noncash deferred tax asset valuation allowances of $179 million in 2010, $575 million in 2009, $71 million in 2008, $(10) million in 2007 and $(6) million in 2006. | |
| (e) | As of December 31, 2010, we had approximately 9,250 employees worldwide. |
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
SEGMENTS
Through our subsidiaries, we are a leading manufacturer and distributor of building materials.
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. We estimate that during 2010
| • | residential and nonresidential repair and remodel activity accounted for approximately 54% of our net sales, | |
| • | new residential construction accounted for approximately 22% of our net sales, | |
| • | new nonresidential construction accounted for approximately 22% of our net sales, and | |
| • | other activities accounted for approximately 2% of our net sales. |
Our operations are organized into three reportable segments: North American Gypsum, Building
Products Distribution and Worldwide Ceilings.
North American Gypsum: North American Gypsum manufactures and markets gypsum and related products
in the United States, Canada and Mexico. It includes United States Gypsum Company, or U.S. Gypsum,
in the United States, the gypsum business of CGC Inc., or CGC, in Canada, and USG Mexico, S.A. de
C.V., or USG Mexico, in Mexico. North American Gypsum’s products are used in a variety of building
applications to finish the walls, ceilings and floors in residential, commercial and institutional
construction and in certain industrial applications. Its major product lines include
SHEETROCK® brand gypsum wallboard, a line of joint compounds used for finishing
wallboard joints also sold under the SHEETROCK® brand name, DUROCK®
brand
cement board, FIBEROCK® brand gypsum fiber panels and SECUROCK® brand glass
mat sheathing used for building exteriors and gypsum fiber panels used as roof cover board.
Building Products Distribution: Building Products Distribution consists of L&W Supply Corporation
and its subsidiaries, or L&W Supply, the leading distributor of gypsum wallboard and other building
materials in the United States. It is a service-oriented business that stocks a wide range of
construction materials. It delivers less-than-truckload quantities of construction materials to job
sites and places them in areas where work is being done, thereby reducing the need for handling by
contractors.
Worldwide Ceilings: Worldwide Ceilings manufactures and markets interior systems products
worldwide. It includes USG Interiors, Inc., or 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. Worldwide
Ceilings manufactures ceiling tile in the United States and ceiling grid in the United States,
Canada, Europe and the Asia-Pacific region. It markets ceiling tile and ceiling grid in the United
States, Canada, Mexico, Europe, Latin America and the Asia-Pacific region. It also manufactures and
markets joint compound in Europe, Latin America and the Asia-Pacific region.
Geographic Information: In 2010, approximately 77% of our net sales were attributable to the
United States. Canada accounted for approximately 12% of our net sales, and other foreign countries
accounted for the remaining 11%.
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FINANCIAL INFORMATION
Consolidated net sales in 2010 were $2.939 billion, down 9% from 2009. An operating loss of
$260 million and a net loss of $405 million, or $4.03 per diluted share, were incurred in 2010.
These results compared with an operating loss of $185 million and a net loss of $787 million, or
$7.93 per diluted share, in 2009. Results for 2010 included restructuring and long-lived asset
impairment charges of $110 million.
Results for 2009 included restructuring and long-lived asset impairment charges of $80 million
and goodwill and other intangible asset impairment charges of $43 million, partially offset by the
favorable impact of income, net of fees, of $97 million from settlement of our patent and trade
secrets lawsuit against Lafarge North America Inc. and its parent, Lafarge S.A., or together
Lafarge, discussed under Legal Contingencies below. The net loss for 2009 also reflected recording
of a deferred tax asset valuation allowance of $575 million for all of our U.S. federal deferred
tax assets and virtually all of our state deferred tax assets related to 2009 and previous years.
The restructuring and long-lived asset impairment charges in 2010 and 2009 primarily related
to facility shutdowns, the closure of distribution centers and salaried workforce reductions.
We had $907 million of cash and cash equivalents and marketable securities as of December 31,
2010 compared with $690 million as of December 31, 2009. The amount as of December 31, 2010
includes the net proceeds from our sale of $350 million of 8.375% senior notes in November 2010.
Uses of cash during 2010 included $171 million for interest, $39 million for capital expenditures
and $37 million for severance and other obligations associated with restructuring activities. See
Liquidity and Capital Resources below for additional information related to our liquidity and
expected cash requirements.
MARKET CONDITIONS AND OUTLOOK
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,
which are our most significant markets. Housing starts in the United States, which are a major
source of demand for our products and services, increased slightly in 2010 after declining in each
of the previous three years but remain near the lowest levels recorded in the last 50 years. Based
on data issued by the U.S. Census Bureau, U.S. housing starts were an estimated 587,600 units in
2010 compared with housing starts of 553,900 units in 2009, 905,500 units in 2008, 1.355 million
units in 2007 and 1.801 million units in 2006. Most industry analysts have forecast improvement in
the level of new home construction in 2011, but new home construction may not improve much, if at
all, from the 2010 level if high unemployment continues, the inventory of unsold homes and
foreclosures remain at their current levels, tight mortgage lending policies continue or mortgage
interest rates continue to increase in 2011. In December 2010, the annualized rate of housing
starts was reported by the U.S. Census Bureau to be 529,000 units. Industry analysts’ forecasts for
new home construction in the United States in 2011 are for a range of from 590,000 to 770,000
units. We currently estimate that 2011 housing starts will be approximately 680,000 units.
The repair and remodel market includes renovation of both residential and nonresidential
buildings. As a result of the low levels of new home construction in recent years, this market
currently accounts for the largest portion of our sales. Many buyers begin to remodel an existing
home within two years of purchase. According to the National Association of Realtors, sales of
existing homes in the United States decreased to approximately 4.9 million units in 2010, the
lowest level since 1997 and a 4.8% decrease from the 2009 level of 5.2 million units. Sales of
existing homes had increased in 2009 after decreasing in each of the previous two years from a high
of 6.5 million units in 2006. The low levels of existing home sales in recent years, continued
concerns regarding the job market and home resale values and tight lending standards contributed to
a decrease in demand for our products from the residential repair and remodel market in 2010.
Nonresidential repair and remodel activity is driven by factors including lease turnover rates,
discretionary business investment, job growth and governmental building-related expenditures. We
currently estimate that overall repair and remodel spending in 2010 increased approximately 1%
above the 2009 level and that overall repair and remodel spending in 2011 will be approximately 3%
above the 2010 level.
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Demand for our products from new nonresidential construction is determined by floor space for
which contracts are signed. Installation of gypsum and ceilings products typically follows signing
of construction contracts by about a year. According to McGraw-Hill Construction, total floor space
for which new nonresidential construction contracts in the United States were signed declined 18%
in 2010 compared with 2009. This followed a 44% decrease in 2009 compared with 2008. McGraw-Hill
Construction forecasts that total floor space for which new nonresidential construction contracts
in the United States are signed will increase approximately 8% in 2011 from the 2010 level.
The markets that we serve, including, in particular, the housing and construction-based
markets, are affected by economic conditions, the availability of credit, lending practices,
interest rates, the unemployment rate and consumer confidence. An increase in interest rates,
continued high levels of unemployment, continued restrictive lending practices, a decrease in
consumer confidence or other adverse economic conditions could have a material adverse effect on
our business, financial condition and results of operations. Our businesses are also affected by a
variety of other factors beyond our control, including the inventory of unsold homes, which remains
at an historically high level, the level of foreclosures, home resale rates, housing affordability,
office and retail vacancy rates and foreign currency exchange rates. Since we operate in a variety
of geographic markets, our businesses are subject to the economic conditions in each of these
geographic markets. General economic downturns or localized downturns in the regions where we have
operations may have a material adverse effect on our business, results of operations and financial
condition.
Our results of operations have been adversely affected by the economic downturn and continued
uncertainty in the financial markets. During 2010, our North American Gypsum segment continued to
be adversely affected by the sharp drop in the residential housing market and other construction
activity. Our Building Products Distribution segment, which serves both the residential and
commercial markets, and our Worldwide Ceilings segment, which primarily serves the commercial
markets, have been adversely affected by lower product shipments resulting from the significant
reduction in commercial construction activity.
Industry shipments of gypsum wallboard in the United States (including imports) were an
estimated 17.3 billion square feet in 2010, down approximately 6% compared with 18.4 billion square
feet in 2009, which was down approximately 27% compared with 25.2 billion square feet in 2008. U.S.
Gypsum shipped 4.19 billion square feet of SHEETROCK® brand gypsum wallboard in 2010, an
11% decrease from 4.72 billion square feet in 2009, which was down 34% from 7.16 billion square
feet in 2008. The percentage decline of U.S. Gypsum’s wallboard shipments in each of 2010 and 2009
exceeded the declines for the industry primarily due to our continuing efforts to improve
profitability. U.S. Gypsum’s share of the gypsum wallboard market in the United States declined to
approximately 24% for 2010 from approximately 27% for 2009.
Currently, there is significant excess wallboard production capacity industry wide in the
United States. Industry capacity in the United States was approximately 32.9 billion square feet as
of December 31, 2010. We estimate that the industry capacity utilization rate was approximately 49%
during the fourth quarter of 2010 and 51% during the full year 2010. Based on current industry
trends and forecasts, demand for gypsum wallboard may increase in 2011, but the magnitude of any
increase will be dependent primarily on the levels of housing starts and repair and remodel
activity. We project that the industry capacity utilization rate will increase slightly in 2011,
but remain near an historically low level. At such a low level of capacity utilization, we expect
there to be continued pressure on gypsum wallboard selling prices and gross margins.
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RESTRUCTURING AND OTHER INITIATIVES
We have been scaling back our operations in response to market conditions since the downturn
began in 2006. Since mid-2006, we have temporarily idled or permanently closed approximately 3.8
billion square feet of our highest-cost wallboard manufacturing capacity. Since January 1, 2007, we
have eliminated approximately 4,500 salaried and hourly positions, including approximately 650
salaried and hourly positions eliminated in 2010. As part of L&W Supply’s efforts to reduce its
cost structure in light of market conditions, it has closed a total of 103 distribution centers
since January 1, 2007. It closed five and opened four distribution centers during 2010 and served
its customers from 163 centers in the United States as of December 31, 2010.
Restructuring activities in 2010 included (1) a salaried workforce reduction program, (2) the
permanent closure of three gypsum wallboard production facilities, including two that had been
temporarily idled since 2008, and two paper production facilities that were temporarily idled in
2009 and 2008, (3) the temporary idling of two gypsum wallboard production facilities, a plaster
production facility and a gypsum quarry, and (4) the closure of five distribution centers. In the
first quarter of 2011, we will temporarily idle our gypsum quarry and ship loading facility in
Windsor, Nova Scotia, Canada. We will continue to adjust our operations to the conditions in our
markets.
Historically, the housing and other construction markets that we serve have been deeply
cyclical. Downturns in demand are typically steep and last several years, but they have typically
been followed by periods of strong recovery. If the recovery from this cycle results in increases
in demand similar to those realized in recoveries from past cycles, we believe we will generate
significant cash flows when our markets recover. We regularly monitor forecasts prepared by
external economic forecasters and review our facilities and other assets to determine which of
them, if any, are impaired under applicable accounting rules. In 2010, we recorded long-lived asset
impairment charges of $58 million related to (1) a gypsum wallboard production facility in
Southard, Okla., that was permanently closed, (2) the carrying values of machinery, equipment and
buildings at our previously idled and now permanently closed gypsum wallboard production facilities
in Fort Dodge, Iowa, and Jacksonville, Fla., and paper production facilities in Clark, N.J., and
South Gate, Calif., and (3) the carrying values of machinery, equipment and buildings at our
temporarily idled gypsum wallboard production facilities in Stony Point, N.Y., Baltimore, Md., and
Jacksonville, Fla., and our temporarily idled paper production facility in Jacksonville, Fla. The
carrying values of the machinery, equipment and buildings at these temporarily idled production
facilities exceeded the estimated future undiscounted cash flows for their remaining useful lives
due to the extended downturn in our markets and our forecasts regarding the timing and rate of
recovery in those markets. Because we believe that a significant recovery in the housing and other
construction markets we serve is likely to begin in the next two to three years, we determined that
there were no other impairments of our long-lived assets during 2010.
However, if the downturn in our markets does not significantly reverse or the downturn is
significantly further extended, material write-downs or impairment charges may be required in the
future. If these conditions were to materialize or worsen, or if there is a fundamental change in
the housing and other construction markets we serve, which individually or collectively lead to a
significantly extended downturn or decrease in demand, we may permanently close additional
production and distribution facilities and material restructuring and impairment charges may be
necessary. The magnitude and timing of those possible charges would be dependent on the severity
and duration of the extended downturn, should it materialize, and cannot be determined at this
time. Any material cash or noncash restructuring or impairment charges, including write-downs of
property, plant and equipment, would have a material adverse effect on our results of operations
and financial condition. We will continue to monitor economic forecasts and their effect on our
facilities to determine whether any of our assets are impaired.
Our focus on costs and efficiencies, including capacity closures and overhead reductions, has
helped to mitigate the effects of the downturn in all of our markets. As economic and market
conditions warrant, we will evaluate alternatives to further reduce costs, improve operational
efficiency and maintain adequate liquidity. Actions to reduce costs and improve efficiencies could
require us to record additional restructuring charges. See Liquidity and Capital Resources below
for information regarding our cash position and credit facilities. See Part I, Item 1A, Risk
Factors for additional information regarding conditions affecting our businesses, the possibility
that additional
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capital investment would be required to address future environmental laws and regulations and the
effects of climate change and other risks and uncertainties that affect us.
KEY OBJECTIVES AND STRATEGIES
While adjusting our operations during this challenging business cycle, we are continuing to
focus on the following key objectives and strategic priorities:
Objectives:
| • | extend our customer satisfaction leadership; | |
| • | improve operating efficiencies and reduce costs; | |
| • | maintain financial flexibility; |
Strategic Priorities:
| • | strengthen our core businesses; | |
| • | expand internationally; | |
| • | grow product adjacencies by expanding our current product lines; and | |
| • | accelerate innovation. |
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Consolidated Results of Operations
| Increase | Increase | ||||||||||||||||||
| (Decrease) | (Decrease) | ||||||||||||||||||
| (dollars in millions, except per-share data) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||
Net sales |
$ | 2,939 | $ | 3,235 | $ | 4,608 | (9) | % | (30)% | ||||||||||
Cost of products sold |
2,775 | 3,090 | 4,416 | (10) | % | (30)% | |||||||||||||
Gross profit |
164 | 145 | 192 | 13 | % | (24)% | |||||||||||||
Selling and administrative expenses |
314 | 304 | 380 | 3 | % | (20)% | |||||||||||||
Litigation settlement income |
- | (97) | - | - | - | ||||||||||||||
Restructuring and long-lived asset impairment charges |
110 | 80 | 98 | 38 | % | (18)% | |||||||||||||
Goodwill and other intangible asset impairment charges |
- | 43 | 226 | - | (81)% | ||||||||||||||
Operating loss |
(260) | (185) | (512) | 41 | % | (64)% | |||||||||||||
Interest expense |
183 | 165 | 86 | 11 | % | 92% | |||||||||||||
Interest income |
(5) | (4) | (7) | 25 | % | (43)% | |||||||||||||
Other expense (income), net |
1 | (9) | (10) | - | (10)% | ||||||||||||||
Income tax (benefit) expense |
(34) | 450 | (118) | - | - | ||||||||||||||
Net loss |
(405) | (787) | (463) | (49) | % | 70% | |||||||||||||
Diluted loss per share |
(4.03) | (7.93) | (4.67) | (49) | % | 70% | |||||||||||||
NET SALES
Consolidated net sales were $2.939 billion in 2010, $3.235 billion in 2009 and $4.608 billion
in 2008. Net sales declined for the fourth consecutive year in 2010 primarily due to the continued
downturn in the United States residential and other construction markets.
Consolidated net sales in 2010 were down $296 million, or 9%, compared with 2009. This
decrease reflected a 6% decline in net sales for North American Gypsum, an 18% decline in net sales
for Building Products Distribution and a less than 1% decline in net sales for Worldwide Ceilings.
The lower level of net sales in 2010 for North American Gypsum was largely attributable to an 11%
decline in U.S. Gypsum’s SHEETROCK® brand gypsum wallboard volume and a 5% decrease in
average gypsum wallboard selling prices. Net sales for Building Products Distribution were down
primarily due to a 20% decrease in gypsum wallboard volume, 2% lower gypsum wallboard selling
prices and a 16% decrease in sales of other products. Net sales for Worldwide Ceilings reflected 2%
lower net sales for USG Interiors primarily due to lower volumes in the United States for ceiling
grid (down 3%) and ceiling tile (down 2%), partially offset by increased net sales for USG
International and CGC’s ceilings business.
Consolidated net sales in 2009 were down $1.373 billion, or 30%, compared with 2008. This
decrease reflected a 25% decline in net sales for North American Gypsum, a 35% decline in net sales
for Building Products Distribution and a 22% decline in net sales for Worldwide Ceilings. The lower
level of net sales in 2009 for North American Gypsum was largely attributable to a 34% decline in
U.S. Gypsum’s SHEETROCK® brand gypsum wallboard volume, partially offset by a 5%
increase in average gypsum wallboard selling prices compared with 2008. Net sales for Building
Products Distribution were down primarily due to a 33% decrease in gypsum wallboard volume and a 3%
decrease in gypsum wallboard selling prices. Net sales for Worldwide Ceilings were down primarily
due to lower volumes in the United States for ceiling grid (down 28%) and ceiling tile (down 17%)
and lower demand for ceilings and other products in the European, Asia-Pacific and Latin American
markets.
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COST OF PRODUCTS SOLD
Cost of products sold totaled $2.775 billion in 2010, $3.090 billion in 2009 and $4.416
billion in 2008.
Cost of products sold for 2010 decreased $315 million, or 10%, compared with 2009 primarily
reflecting lower product volumes. Manufacturing costs per unit for U.S. Gypsum’s
SHEETROCK® brand gypsum wallboard were down 4% in 2010 compared with 2009. A 17%
decrease in per unit costs for energy was partially offset by a 2% increase in per unit costs for
wastepaper and other raw materials and a 2% increase in per unit fixed costs due to lower gypsum
wallboard production volume. For USG Interiors, 2010 manufacturing costs per unit for ceiling grid
were favorable compared to 2009. Steel costs rose as the year progressed, but remained favorable
for the full year compared to 2009. Manufacturing costs per unit for ceiling tile were unchanged in
2010 compared to 2009 as lower per unit costs for energy offset higher per unit costs for raw
materials, primarily mineral fiber and wastepaper, and higher per unit fixed costs due to lower
ceiling tile production volume.
Cost of products sold for 2009 decreased $1.326 billion, or 30%, compared with 2008. This
decline primarily reflected lower product volumes. Manufacturing costs per unit for U.S. Gypsum’s
SHEETROCK® brand gypsum wallboard were down 2% in 2009 compared with 2008, reflecting a
13% decrease in per unit costs for wastepaper and other raw materials, which more than offset per
unit increases of 18% in fixed costs due to lower gypsum wallboard production volume and 1% in
energy costs. Cost of products sold in 2009 also reflects a $21 million reduction in start-up costs
related to U.S. Gypsum’s gypsum wallboard plants in Washingtonville, Pa., and Norfolk, Va., and its
paper mill in Otsego, Mich. For USG Interiors, manufacturing costs per unit increased for ceiling
grid, primarily due to higher steel costs, while manufacturing costs per unit for ceiling tile were
virtually unchanged, compared to 2008.
GROSS PROFIT
Gross profit was $164 million in 2010, $145 million in 2009 and $192 million in 2008. Gross
profit as a percentage of net sales was 5.6% in 2010, 4.5% in 2009 and 4.2% in 2008. The higher
percentage for 2010 compared with 2009 was primarily due to lower production costs for many product
lines that more than offset the impact of lower volume. The increase in the percentage for 2009
compared to 2008 was due principally to increased average selling prices and lower costs for gypsum
wallboard for U.S. Gypsum.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled $314 million in 2010, $304 million in 2009 and
$380 million in 2008. The increase for 2010 compared with 2009 was primarily due to higher expenses
associated with our employee retirement plans and long-term, share-based incentive compensation.
Selling and administrative expenses in 2009 decreased $76 million, or 20%, compared with 2008
primarily due to a company-wide emphasis on reducing expenses, including the impact of salaried
workforce reductions. As a percentage of net sales, selling and administrative expenses were 10.7%
in 2010, 9.4% in 2009 and 8.2% in 2008. The year-over-year increases in the percentages were
attributable to the lower levels of net sales compared to prior years.
LITIGATION SETTLEMENT INCOME
U.S. Gypsum recorded income, net of fees, of $97 million in the fourth quarter of 2009 from
the settlement of our patent and trade secrets lawsuit against Lafarge. Pursuant to the settlement
agreement, Lafarge agreed to pay U.S. Gypsum $105 million and the lawsuit was dismissed. Lafarge
paid U.S. Gypsum $25 million ($23 million net of fees) in the fourth quarter of 2010 and $80
million ($74 million net of fees) in the fourth quarter of 2009. See Legal Contingencies below for
additional information related to this settlement.
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RESTRUCTURING AND LONG-LIVED ASSET IMPAIRMENT CHARGES
In response to adverse market conditions, we implemented restructuring activities in each of
the past three years. We recorded restructuring and long-lived asset impairment charges of $110
million in 2010, $80 million in 2009 and $98 million in 2008. These charges primarily related to
the temporary idling or permanent closure of production facilities, the closure of distribution
centers and salaried workforce reductions.
Total cash payments charged against the restructuring reserve in 2010 amounted to $37 million.
We expect future payments to be approximately $34 million in 2011, $7 million in 2012 and $8
million after 2012. On a segment basis, $22 million of all expected future payments relate to
Building Products Distribution, $20 million to North American Gypsum, $1 million to Worldwide
Ceilings and $6 million to Corporate. All restructuring-related payments in 2010 were funded with
cash from operations or cash on hand. We expect that future payments also will be funded with cash
from operations or cash on hand. Annual savings from the 2010 restructuring initiatives are
estimated to be approximately $40 million beginning in 2011.
See Note 2 to the Consolidated Financial Statements for additional information related to
restructuring and long-lived asset impairment charges and restructuring reserves.
GOODWILL AND OTHER INTANGIBLE ASSET IMPAIRMENT CHARGES
In 2009, we recorded goodwill and other intangible asset impairment charges totaling $43
million. Of this amount, $29 million related to intangible assets associated with trade names of
the L&W Supply reporting unit that comprises the Building Products Distribution segment, and $12
million was L&W Supply’s remaining goodwill balance. An additional $2 million related to intangible
assets associated with trade names of the Latin America reporting unit within our Worldwide
Ceilings segment. As of December 31, 2010 and 2009, the remaining amount of intangible assets
associated with trade names was $22 million, all of which related to L&W Supply.
In 2008, we recorded impairment charges of $226 million associated with goodwill and other
intangible assets. Of the total charge for goodwill impairment, $201 million related to Building
Products Distribution, $12 million to Worldwide Ceilings and $1 million to North American Gypsum.
We also recorded an impairment charge of $12 million for the partial write-off of certain trade
names related to L&W Supply.
INTEREST EXPENSE
Interest expense was $183 million in 2010, $165 million in 2009 and $86 million in 2008.
Interest expense increased in 2010 compared with 2009 primarily due to a higher level of
borrowings. Interest expense increased in 2009 compared with 2008 primarily due to a higher level
of borrowings, a lower level of capitalized interest and a charge of $7 million to write off
deferred financing fees in connection with the first-quarter 2009 amendment and restatement of our
credit agreement.
OTHER EXPENSE (INCOME), NET
Other expense, net was $1 million in 2010. Other income, net of $9 million in 2009 included
the reversal of the remaining $10 million of the embedded derivative liability related to our $400
million of 10% convertible senior notes as a result of the approval of the conversion feature of
the notes by our stockholders in February 2009. Other income, net of $10 million in 2008 included
$11 million of income for a change in the fair value of the embedded derivative liability related
to those notes.
INCOME TAX (BENEFIT) EXPENSE
We had an income tax benefit of $34 million and an effective tax benefit rate of 7.7% in 2010.
In 2009, despite having a loss before income taxes of $337 million, we had an income tax provision
of $450 million due to the recording of a full valuation allowance of $575 million against the
federal and most states deferred tax assets. In 2008, we had an income tax benefit of $118 million
and an effective tax benefit rate of 20.4%. Since recording a full valuation allowance against the
federal and most state deferred tax assets, we do not record a tax benefit as a result of the
losses in those jurisdictions and have a provision in foreign and some state jurisdictions, and
this results in a lower than statutory effective tax rate. In addition, we recorded in 2010 a
noncash income tax benefit of $37 million,
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of which $19 million related to 2009, to satisfy the requirement to consider all items (including
items recorded in other comprehensive income) in determining the amount of income tax benefit that
results from a loss from continuing operations. This income tax benefit was offset by income tax
expense on other comprehensive income. However, while the income tax benefit is reported on the
consolidated statement of operations and reduced our loss, the income tax expense on other
comprehensive income is recorded directly to accumulated other comprehensive income (loss), or
AOCI, which is a component of stockholders’ equity. Because the income tax expense on other
comprehensive income is equal to the income tax benefit, our net deferred tax position is not
impacted.
NET LOSS
A net loss of $405 million, or $4.03 per diluted share, was recorded in 2010. These amounts
included the after-tax charge of $105 million, or $1.05 per diluted share, for restructuring and
long-lived asset impairment charges.
A net loss of $787 million, or $7.93 per diluted share, was recorded in 2009. These amounts
included the charges of $80 million, or $0.81 per diluted share, for restructuring and long-lived
asset impairment, $43 million, or $0.43 per diluted share, for goodwill and other intangible asset
impairment and $575 million, or $5.79 per diluted share, for the tax valuation allowance, partially
offset by the income, net of fees, of $97 million, or $0.98 per diluted share, from the settlement
of our lawsuit against Lafarge.
A net loss of $463 million, or $4.67 per diluted share, was recorded in 2008. These amounts
included the after-tax charges of $177 million, or $1.78 per diluted share, for goodwill and
intangible asset impairment, $61 million, or $0.62 per diluted share, for restructuring and
long-lived asset impairment and $71 million, or $0.72 per diluted share, for the tax valuation
allowance.
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Core Business Results of Operations
| Net Sales | Operating Profit (Loss) | |||||||||||||||||||||||
| (millions) | 2010 | 2009 | 2008 | 2010(a) | 2009(b) | 2008(c) | ||||||||||||||||||
North American Gypsum: |
||||||||||||||||||||||||
United States Gypsum Company |
$ | 1,295 | $ | 1,432 | $ | 1,933 | $ | (160 | ) | $ | (20 | ) | $ | (261 | ) | |||||||||
CGC Inc. (gypsum) |
290 | 267 | 332 | 17 | 7 | (8 | ) | |||||||||||||||||
USG Mexico, S.A. de C.V. |
151 | 142 | 201 | 17 | 12 | 20 | ||||||||||||||||||
Other (d) |
33 | 40 | 74 | (39 | ) | (8 | ) | 8 | ||||||||||||||||
Eliminations |
(111 | ) | (111 | ) | (182 | ) | - | - | - | |||||||||||||||
Total |
1,658 | 1,770 | 2,358 | (165 | ) | (9 | ) | (241 | ) | |||||||||||||||
Building Products Distribution: |
||||||||||||||||||||||||
L&W Supply Corporation |
1,061 | 1,289 | 1,993 | (97 | ) | (172 | ) | (243 | ) | |||||||||||||||
Worldwide Ceilings: |
||||||||||||||||||||||||
USG Interiors, Inc. |
422 | 429 | 531 | 57 | 53 | 61 | ||||||||||||||||||
USG International |
224 | 222 | 304 | 7 | 2 | (4 | ) | |||||||||||||||||
CGC Inc. (ceilings) |
62 | 56 | 61 | 10 | 7 | 11 | ||||||||||||||||||
Eliminations |
(48 | ) | (44 | ) | (50 | ) | - | - | - | |||||||||||||||
Total |
660 | 663 | 846 | 74 | 62 | 68 | ||||||||||||||||||
Corporate |
- | - | - | (69 | ) | (71 | ) | (97 | ) | |||||||||||||||
Eliminations |
(440 | ) | (487 | ) | (589 | ) | (3 | ) | 5 | 1 | ||||||||||||||
Total USG Corporation |
$ | 2,939 | $ | 3,235 | $ | 4,608 | $ | (260 | ) | $ | (185 | ) | $ | (512 | ) | |||||||||
| (a) | Consolidated operating loss in 2010 included: |
| • | restructuring and long-lived asset impairment charges of $110 million, of which $93 million related to North American Gypsum, $15 million to Building Products Distribution and $1 million each to Worldwide Ceilings and Corporate. |
| (b) | Consolidated operating loss in 2009 included: |
| • | restructuring and long-lived asset impairment charges of $80 million, of which $39 million related to Building Products Distribution, $25 million to North American Gypsum, $5 million to Worldwide Ceilings and $11 million to Corporate; | ||
| • | goodwill and other intangible asset impairment charges of $43 million, of which $41 million related to Building Products Distribution and $2 million to Worldwide Ceilings; and | ||
| • | litigation settlement income, net of fees, of $97 million from our lawsuit against Lafarge, all of which related to North American Gypsum. |
| (c) | Consolidated operating loss in 2008 included: |
| • | restructuring and long-lived asset impairment charges of $98 million, of which $48 million related to North American Gypsum, $34 million to Building Products Distribution, $5 million to Worldwide Ceilings and $11 million to Corporate; and | ||
| • | goodwill and other intangible asset impairment charges of $226 million, of which $213 million related to Building Products Distribution, $12 million to Worldwide Ceilings and $1 million to North American Gypsum. |
| (d) | Includes a shipping company in Bermuda and a mining operation in Nova Scotia, Canada. |
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NORTH AMERICAN GYPSUM
Net sales for North American Gypsum were $1.658 billion in 2010, $1.770 billion in 2009 and $2.358 billion in 2008. Net sales in 2010 were down 6% from 2009 following a decline of 25% in 2009 compared with 2008. An operating loss of $165 million was incurred in 2010. This loss included restructuring and long-lived asset impairment charges of $93 million. An operating loss of $9 million in 2009 included the litigation settlement income, net of fees, of $97 million from the settlement of our lawsuit against Lafarge and restructuring and long-lived asset impairment charges of $25 million. An operating loss of $241 million in 2008 included restructuring and long-lived asset impairment charges of $48 million.
Net sales for North American Gypsum were $1.658 billion in 2010, $1.770 billion in 2009 and $2.358 billion in 2008. Net sales in 2010 were down 6% from 2009 following a decline of 25% in 2009 compared with 2008. An operating loss of $165 million was incurred in 2010. This loss included restructuring and long-lived asset impairment charges of $93 million. An operating loss of $9 million in 2009 included the litigation settlement income, net of fees, of $97 million from the settlement of our lawsuit against Lafarge and restructuring and long-lived asset impairment charges of $25 million. An operating loss of $241 million in 2008 included restructuring and long-lived asset impairment charges of $48 million.
United
States Gypsum Company - 2010 Compared With 2009: Net sales in 2010 declined $137 million,
or 10%, compared with 2009. Approximately $62 million of the decrease was attributable to an 11%
decline in SHEETROCK® brand gypsum wallboard volume, and approximately $23 million of
the decrease was attributable to a 5% decrease in average gypsum wallboard selling prices. Net
sales for SHEETROCK® brand joint treatment products declined $20 million and net sales
of other products declined $32 million compared with 2009, principally due to lower volumes.
An operating loss of $160 million was recorded in 2010 compared with an operating loss of $20
million in 2009. The $140 million unfavorable change in operating loss largely reflected the
absence in 2010 of the 2009 litigation settlement income, net of fees, of $97 million from the
settlement of our lawsuit against Lafarge. Restructuring and long-lived asset impairment charges
were $75 million in 2010 compared with $24 million in 2009. The lower gypsum wallboard shipments in
2010 adversely affected the operating loss by $5 million, and a 13% decline in gypsum wallboard
gross margin adversely affected operating profit by $5 million. Gross profit for
SHEETROCK® brand joint treatment products declined $12 million compared with 2009. These
unfavorable factors were partially offset by an aggregate $30 million improvement from increased
gross profit for other product lines, partially offset by higher selling and administrative
expenses and other expenditures.
New housing construction remained very weak in 2010, resulting in reduced demand for gypsum
wallboard, as discussed above. U.S. Gypsum shipped 4.19 billion square feet of
SHEETROCK® brand gypsum wallboard in 2010, an 11% decrease from 4.72 billion square feet
in 2009. U.S. Gypsum’s gypsum wallboard shipments declined 8% in the fourth quarter of 2010
compared to the third quarter of 2010. We estimate that industry capacity utilization rates were
approximately 51%, while U.S. Gypsum’s capacity utilization rate averaged 43%, during 2010. For the
fourth quarter of 2010, we estimate that the industry operated at 49% of capacity, while U.S.
Gypsum’s wallboard plants operated at approximately 40% of capacity.
In 2010, our nationwide average realized selling price for SHEETROCK® brand gypsum
wallboard was $111.66 per thousand square feet, down 5% from $117.16 in 2009. During the fourth
quarter of 2010, our average realized selling price for SHEETROCK® brand gypsum
wallboard was $111.95 per thousand square feet, down 2% from the third quarter of 2010 and up 2%
compared with the fourth quarter of 2009.
Manufacturing costs per unit for U.S. Gypsum’s SHEETROCK® brand gypsum wallboard
were down 4% in 2010 compared with 2009. A 17% decrease in per unit costs for energy was partially
offset by a 2% increase in per unit costs for wastepaper and other raw materials and a 2% increase
in per unit fixed costs due to lower gypsum wallboard production volume.
Net sales of SHEETROCK® brand joint treatment products declined by $20 million and
gross profit was down $12 million for 2010 compared with 2009. These results reflected 7% lower
joint compound volume partially offset by 2% higher average realized selling prices. Gross profit
for joint compound also was adversely affected by 5% higher per unit manufacturing costs. Net sales
and gross profit for DUROCK® brand cement board increased in 2010 compared with 2009 due
to 5% higher volume and 2% higher selling prices. Gross profit also benefited from 4% lower per
unit manufacturing costs. Net sales and gross profit for FIBEROCK® brand gypsum fiber
panels increased in 2010 compared with 2009 reflecting a 6% increase in volume partially offset by
5% lower selling prices. Gross profit for FIBEROCK® brand gypsum fiber panels also
benefited from 12% lower per unit manufacturing costs.
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United
States Gypsum Company - 2009 Compared With 2008: Net sales in 2009 declined $501 million,
or 26%, compared with 2008. Approximately $271 million of the decrease was attributable to a 34%
decline in SHEETROCK® brand gypsum wallboard volume, which was partially offset by a $28
million increase attributable to a 5% increase in average gypsum wallboard selling prices. Net
sales for SHEETROCK® brand joint treatment products declined $60 million and net sales
of other products declined $198 million compared with 2008, principally due to lower volumes.
An operating loss of $20 million was recorded in 2009 compared with an operating loss of $261
million in 2008. The $241 million favorable change in operating loss included the litigation
settlement income, net of fees, of $97 million from the settlement of our lawsuit against Lafarge
and a higher gypsum wallboard gross margin, which accounted for $38 million of the improvement,
partially offset by a $4 million decrease due to the lower gypsum wallboard volume. Gross profit
for SHEETROCK® brand joint treatment products increased $17 million compared with 2008.
A net gross profit increase for other product lines and lower plant start-up costs, selling and
administrative expenses and information technology, and other expenditures contributed $74 million
in operating profit improvement. Restructuring and long-lived asset impairment charges were $24
million in 2009 compared with $43 million in 2008.
New housing construction remained very weak in 2009, resulting in reduced demand for gypsum
wallboard, as discussed above. U.S. Gypsum shipped 4.72 billion square feet of
SHEETROCK® brand gypsum wallboard in 2009, a 34% decrease from 7.16 billion square feet
in 2008. U.S. Gypsum’s gypsum wallboard shipments declined 10% in the fourth quarter of 2009
compared to the third quarter of 2009 after remaining relatively stable during the second and third
quarters. We estimate that industry capacity utilization rates were approximately 52%, while U.S.
Gypsum’s capacity utilization rate averaged 47%, during 2009. For the fourth quarter of 2009, we
estimate that the industry operated at 52% of capacity, while U.S. Gypsum’s wallboard plants
operated at approximately 42% of capacity.
In 2009, our nationwide average realized selling price for SHEETROCK® brand gypsum
wallboard was $117.16 per thousand square feet, up 5% from $111.15 in 2008. During the fourth
quarter of 2009, our average realized selling price for SHEETROCK® brand gypsum
wallboard was $109.86 per thousand square feet, down 5% from the third quarter of 2009 and down 8%
compared with the fourth quarter of 2008.
Manufacturing costs per unit for U.S. Gypsum’s SHEETROCK® brand gypsum wallboard
were down 2% in 2009 compared with 2008 reflecting a 13% decrease in per unit costs for wastepaper
and other raw materials, which more than offset per unit increases of 18% in fixed costs due to
lower gypsum wallboard production volume and 1% in energy costs.
Net sales of SHEETROCK® brand joint treatment products declined by $60 million,
while gross profit increased $17 million, for 2009 compared with 2008. These results reflected 19%
lower joint compound volume, partially offset by 7% higher average realized selling prices and 4%
lower per unit manufacturing costs. Net sales for DUROCK® brand cement board were down
in 2009 compared with 2008 primarily due to a 20% decrease in volume, partially offset by 1% higher
selling prices. Manufacturing costs per unit for cement board decreased 2% in 2009 compared with
2008, but gross profit was adversely affected by the lower volume. Net sales and gross profit for
FIBEROCK® brand gypsum fiber panels declined in 2009 compared with 2008 reflecting a 35%
decrease in volume and 3% higher per unit manufacturing costs, partially offset by 4% higher
selling prices.
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CGC Inc.: Net sales increased $23 million, or 9%, in 2010 compared with 2009 primarily reflecting
the favorable effects of currency translation, which increased net sales by $28 million. Sales of
SHEETROCK®
brand gypsum wallboard declined $4 million despite a 1% increase in volume,
due to 3% lower selling prices. Sales of other products declined $1 million. Operating profit was
$17 million in 2010 compared with $7 million in 2009. This improvement primarily reflected a $5
million increase in gross profit for gypsum wallboard due to 6% lower per unit costs and an
aggregate increase of $4 million primarily due to improved gross profit for other product lines and
lower selling and administrative expenses. Restructuring charges were zero in 2010 compared with $1
million in 2009.
Comparing
2009 with 2008, net sales declined $65 million, or 20%. Sales of SHEETROCK® brand gypsum wallboard decreased $27 million, reflecting a 17% decline in volume. The
unfavorable effects of currency translation resulting from a stronger U.S. dollar reduced net sales
by $20 million, and lower sales of other products and lower outbound freight reduced net sales by
$18 million. Operating profit of $7 million was recorded in 2009 compared with an operating loss of
$8 million in 2008. This improvement in operating profit despite lower net sales primarily
reflected lower selling and administrative, information technology and other expenditures, which
contributed $14 million in operating profit improvement, partially offset by a $2 million decrease
in gross profit for gypsum wallboard and other products primarily due to lower volumes.
Restructuring charges related to salaried workforce reductions totaled $1 million in 2009 compared
with $4 million in 2008.
USG Mexico, S.A. de C.V.: Net sales in 2010 for our Mexico-based subsidiary increased $9 million,
or 6%, compared with 2009 primarily reflecting the favorable effects of currency translation, which
increased net sales by $19 million. Sales of gypsum wallboard declined $7 million primarily due to
a 12% decrease in volume. Lower volume also resulted in sales declines of $2 million for joint
treatment products and $2 million for cement board. The aggregate net sales of all other products
increased $1 million. Operating profit increased $5 million, or 42%, in 2010 compared with 2009
primarily due to a $10 million aggregate increase in gross profit for products other than gypsum
wallboard and drywall steel and reduced selling and administrative expenses and other costs.
Drywall steel gross profit decreased by $4 million and gypsum wallboard gross profit decreased by
$1 million.
Comparing 2009 with 2008, net sales for our Mexico-based subsidiary were down $59 million, or
29%. Sales of gypsum wallboard declined $19 million primarily due to a 25% decrease in volume.
Sales declined $12 million for drywall steel, while the aggregate net sales of other products were
down $17 million due to lower volumes. The unfavorable effects of currency translation resulting
from a stronger U.S. dollar reduced net sales by $11 million. Operating profit was $12 million in
2009 compared with $20 million in 2008. This decline primarily reflected a $10 million decrease in
gross profit for gypsum wallboard as a result of the lower volume. Lower levels of gross profit for
other product lines were offset by reductions in selling and administrative expenses and other
costs. There were no restructuring or goodwill impairment charges in 2009, while charges
aggregating $2 million were recorded in 2008.
BUILDING PRODUCTS DISTRIBUTION
L&W Supply’s net sales in 2010 were $1.061 billion, down $228 million, or 18%, compared with 2009. Net sales in 2010 reflected lower volumes for all major product categories as a result of weaker residential and commercial construction demand. A 20% decrease in gypsum wallboard shipments adversely affected net sales by $88 million, and a 2% decrease in average gypsum wallboard selling prices lowered net sales by $5 million. Net sales of construction metal products decreased $53 million, or 19%, and net sales of ceilings products decreased $7 million, or 3%. Net sales of all other non-wallboard products decreased $75 million, or 21%. As a result of lower product volumes, same-store net sales for 2010 were down 10% compared with 2009. L&W Supply’s gypsum wallboard volume fell 12% and average selling prices were down 2% in the fourth quarter of 2010 compared with the third quarter of 2010.
L&W Supply’s net sales in 2010 were $1.061 billion, down $228 million, or 18%, compared with 2009. Net sales in 2010 reflected lower volumes for all major product categories as a result of weaker residential and commercial construction demand. A 20% decrease in gypsum wallboard shipments adversely affected net sales by $88 million, and a 2% decrease in average gypsum wallboard selling prices lowered net sales by $5 million. Net sales of construction metal products decreased $53 million, or 19%, and net sales of ceilings products decreased $7 million, or 3%. Net sales of all other non-wallboard products decreased $75 million, or 21%. As a result of lower product volumes, same-store net sales for 2010 were down 10% compared with 2009. L&W Supply’s gypsum wallboard volume fell 12% and average selling prices were down 2% in the fourth quarter of 2010 compared with the third quarter of 2010.
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An operating loss of $97 million was incurred in 2010 compared with an operating loss of $172
million in 2009. The $75 million favorable change in operating loss reflected a $61 million
decrease in operating expenses, the absence in 2010 of $41 million of goodwill and other intangible
asset impairment charges recorded in 2009 and a $24 million decrease in restructuring and
long-lived asset impairment charges in 2010 compared with 2009. These favorable factors were
partially offset by the lower gypsum wallboard shipments in 2010, which adversely affected
operating profit by $18 million, and a decline in gypsum wallboard gross margin including the
impact of rebates which adversely affected operating profit by $2 million. Gross profit for other
product lines decreased $31 million. The decrease in L&W Supply’s operating expenses was
attributable to its cost reduction programs designed to mitigate the effects of the lower product
volumes and resultant gross profit declines. Those programs included the closure of selected
distribution centers, a fleet reduction program and decreases in discretionary spending.
Comparing 2009 with 2008, L&W Supply’s net sales of $1.289 billion were down $704 million, or
35%. Net sales in 2009 reflected lower volumes for all major product categories as a result of
weaker residential and commercial construction demand. A 33% decrease in gypsum wallboard shipments
adversely affected net sales by $218 million, and a 3% decrease in average gypsum wallboard selling
prices lowered net sales by $11 million. Net sales of construction metal products decreased $240
million, or 46%, and net sales of ceilings products decreased $57 million, or 20%. Net sales of all
other non-wallboard products decreased $178 million, or 34%. As a result of lower product volumes,
same-location net sales for 2009 were down 31% compared with 2008. L&W Supply’s gypsum wallboard
volume fell 19% and average selling prices were down 3% in the fourth quarter of 2009 compared with
the third quarter of 2009.
An operating loss of $172 million was incurred in 2009 compared with an operating loss of $243
million in 2008. The $71 million improvement was primarily due to a $172 million decrease in
goodwill and other intangible asset impairment charges in 2009 compared with 2008. The lower gypsum
wallboard shipments in 2009 adversely affected operating profit by $53 million, and a 20% decline
in gypsum wallboard gross margin, including the impact of rebates, adversely affected operating
profit by $27 million. Gross profit for other product lines decreased $133 million. These
unfavorable factors were partially offset by a $117 million decrease in operating expenses
attributable to L&W Supply’s cost reduction programs designed to mitigate the effects of the lower
product volumes and resultant gross profit declines. Those programs included the closure of
selected distribution centers, a fleet reduction program and decreases in discretionary spending.
Restructuring and long-lived asset impairment charges were $39 million in 2009 compared with $34
million in 2008.
In the current market environment, L&W Supply is primarily focused on reducing its
cost structure and optimizing its asset utilization. L&W Supply closed five and opened four
distribution centers in 2010. It closed 37 distribution centers in 2009 and 54 centers in 2008. The
closures have been widely dispersed throughout the markets that L&W Supply serves. As of December
31, 2010, L&W Supply continued to serve its customers from 163 centers in the United States. It
operated 164 centers as of December 31, 2009 and 198 centers as of December 31, 2008.
WORLDWIDE CEILINGS
Worldwide Ceilings had net sales of $660 million in 2010 compared with $663 million in 2009. Operating profit in 2010 was $74 million, an increase of $12 million, or 19%, compared with 2009. Restructuring charges were $1 million in 2010 compared with restructuring charges of $5 million and other intangible asset impairment charges of $2 million in 2009. Net sales in 2009 of $663 million represented a decrease of $183 million, or 22%, compared with 2008’s record results. Operating profit in 2009 was $62 million, a decrease of $6 million, or 9%, compared with 2008.
Worldwide Ceilings had net sales of $660 million in 2010 compared with $663 million in 2009. Operating profit in 2010 was $74 million, an increase of $12 million, or 19%, compared with 2009. Restructuring charges were $1 million in 2010 compared with restructuring charges of $5 million and other intangible asset impairment charges of $2 million in 2009. Net sales in 2009 of $663 million represented a decrease of $183 million, or 22%, compared with 2008’s record results. Operating profit in 2009 was $62 million, a decrease of $6 million, or 9%, compared with 2008.
USG
Interiors, Inc. - 2010 Compared With 2009: Net sales in 2010 for our U.S. ceilings business
were $422 million, down $7 million, or 2%, compared with 2009 primarily due to the lower level of
commercial construction. Operating profit was $57 million, an increase of $4 million, or 8%,
primarily due to an improved gross margin for ceiling grid.
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Net sales for ceiling grid declined $4 million in 2010 compared to 2009 as a result of 3%
lower volume, which adversely affected sales by $3 million, and slightly lower selling prices which
lowered sales by $1 million. Net sales for ceiling tile declined $3 million as a result of 2% lower
volume. Selling prices were virtually unchanged. Net sales for other product lines were unchanged
compared with 2009.
Gross profit for ceiling grid increased $5 million in 2010 compared with 2009. The gross
margin for ceiling grid increased due to lower per unit manufacturing costs, which favorably
affected gross profit by $6 million. Steel costs rose as 2010 progressed, but remained favorable
for the full year compared to 2009. The improvement in gross margin was partially offset by the
lower ceiling grid volume, which adversely affected gross profit by $1 million.
Gross profit for ceiling tile declined $1 million in 2010 compared with 2009 due to the lower
level of volume. The gross margin for ceiling tile was virtually unchanged. Manufacturing costs per
unit for ceiling tile were unchanged in 2010 compared to 2009 as lower per unit costs for energy
were offset by higher per unit costs for raw materials, primarily mineral fiber and wastepaper, and
higher per unit fixed costs due to lower ceiling tile production volume.
USG
Interiors, Inc. - 2009 Compared With 2008: Net sales fell to $429 million, a decrease of
$102 million, or 19%, compared with 2008 primarily due to lower volumes for ceiling grid and tile.
Operating profit declined to $53 million, a decrease of $8 million, or 13%, compared with 2008
primarily due to the lower volumes, partially offset by lower selling and administrative expenses.
Net sales in 2009 declined $44 million for ceiling grid, $25 million for ceiling tile and $33
million for other products compared with 2008 due to reduced commercial construction activity. Net
sales for ceiling grid were down as a result of 28% lower volume, which adversely affected sales by
$48 million, partially offset by 3% higher selling prices that contributed a $4 million increase in
net sales. Net sales for ceiling tile were down as a result of 17% lower volume, which adversely
affected sales by $30 million, partially offset by 4% higher selling prices that contributed a $5
million increase in net sales. Net sales for other products also were down primarily as a result of
lower volumes.
Gross profit for ceiling grid declined $16 million in 2009 compared with 2008 primarily due to
the lower volume. A slightly higher gross margin for ceiling grid reflected higher grid selling
prices, partially offset by higher per unit manufacturing costs, primarily due to higher steel
costs. Gross profit for ceiling tile declined $1 million in 2009 compared with 2008. The lower
volume for ceiling tile adversely affected gross profit by $6 million. This decline was largely
offset by the 4% increase in ceiling tile selling prices that contributed a $5 million increase in
gross profit, while per unit manufacturing costs were virtually unchanged. Lower selling and
administrative expenses, partially offset by lower gross profit for other products, resulted in a
$7 million favorable impact on operating profit. There were no restructuring charges in 2009, while
restructuring charges of $2 million were recorded in 2008.
USG International: Net sales were $224 million and operating profit was $7 million in 2010
compared with net sales of $222 million and operating profit of $2 million in 2009. The higher
levels of sales and profitability were largely due to increased demand for SHEETROCK®
brand joint compound products in Europe and increased demand for FIBEROCK® brand gypsum
fiber panels in the Asia-Pacific region offset by lower demand for ceiling grid products in Europe
and the unfavorable effects of currency translation. Operating profit in 2010 included a $1 million
charge for restructuring, while operating profit in 2009 included charges of $5 million for
restructuring and $2 million for intangible asset impairment.
Net sales of $222 million in 2009 declined $82 million, or 27%, compared with 2008 primarily
due to lower demand for ceiling grid and joint treatment in Europe, lower demand for ceiling grid
and tile in the Asia-Pacific region, lower demand for gypsum products in Latin America and the
unfavorable effects of currency translation resulting from a stronger U.S. dollar. Operating profit
was $2 million in 2009 compared with an operating loss of $4 million in 2008. Operating profit in
2009 included charges of $5 million for restructuring and $2 million for intangible asset
impairment. The operating loss in 2008 included charges of $12 million for goodwill impairment
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and $3 million for restructuring.
CGC Inc.: Net sales in 2010 were $62 million, an increase of $6 million, or 11%, compared with
2009. Operating profit was $10 million in 2010 compared with $7 million for 2009. These results
primarily reflected the favorable effects of currency translation and improved operating
efficiencies.
Net sales of $56 million in 2009 were down $5 million, or 8%, compared with 2008. Operating
profit was $7 million in 2009 compared with $11 million for 2008. These results primarily reflected
lower demand for ceiling grid and tile in Canada.
Liquidity and Capital Resources
LIQUIDITY
We had $907 million of cash and cash equivalents and marketable securities as of December 31, 2010 compared with $690 million as of December 31, 2009. The amount as of December 31, 2010 includes the net proceeds from our sale of $350 million of 8.375% senior notes in November 2010. Uses of cash during 2010 included $171 million for interest, $39 million for capital expenditures and $37 million for severance and other obligations associated with restructuring activities. Our total liquidity as of December 31, 2010 was $1.063 billion, including $156 million in borrowing availability under our revolving credit facilities.
We had $907 million of cash and cash equivalents and marketable securities as of December 31, 2010 compared with $690 million as of December 31, 2009. The amount as of December 31, 2010 includes the net proceeds from our sale of $350 million of 8.375% senior notes in November 2010. Uses of cash during 2010 included $171 million for interest, $39 million for capital expenditures and $37 million for severance and other obligations associated with restructuring activities. Our total liquidity as of December 31, 2010 was $1.063 billion, including $156 million in borrowing availability under our revolving credit facilities.
Our cash is invested in cash equivalents and marketable securities pursuant to an investment
policy that has preservation of principal as its primary objective. The policy includes provisions
regarding diversification, credit quality and maturity profile that are designed to minimize the
overall risk profile of our investment portfolio. The securities in the portfolio are subject to
normal market fluctuations. See Note 3 to the Consolidated Financial Statements for additional
information regarding our investments in cash equivalents and marketable securities.
Our credit facility, which was amended and restated in the fourth quarter of 2010, is
guaranteed by our significant domestic subsidiaries and secured by their and USG’s trade
receivables and inventory. It matures in December 2015 and allows for revolving loans and letters
of credit (up to $250 million) in an aggregate principal amount not to exceed the lesser of (a)
$400 million or (b) a borrowing base determined by reference to the trade receivables and inventory
of USG and its significant domestic subsidiaries. The maximum allowable borrowings may be increased
at our request with the agreement of the lenders providing increased or new lending commitments,
provided that the maximum allowable borrowings after giving effect to the increase may not exceed
$600 million. Availability under the credit facility will increase or decrease depending on changes
to the borrowing base over time. The facility contains a single financial covenant that would
require us to maintain a minimum fixed charge coverage ratio of 1.1-to-1.0 if and for so long as
the excess of the borrowing base over the outstanding borrowings under the credit agreement is less
than the greater of (a) $40 million and (b) 15% of the lesser of (i) the aggregate revolving
commitments at such time and (ii) the borrowing base at such time. As of December 31, 2010, our
fixed charge coverage ratio was (0.21)-to-1. Because we do not currently satisfy the required fixed
charge coverage ratio, we must maintain borrowing availability of at least $40 million under the
credit facility. We also have Can. $30 million available for borrowing under CGC’s credit facility.
The U.S. dollar equivalent of borrowings available under CGC’s credit facility as of December 31,
2010 was $30 million.
Our total capital expenditures for 2010 were $39 million compared with $44 million for 2009.
We expect that our total capital expenditures for 2011 will be approximately $50 million. Interest
payments totaled $171 million in 2010 and are expected to be $195 million in 2011. We have no term
debt maturities until 2014, other than approximately $7 million of annual debt amortization under
our ship mortgage facility.
We believe that cash on hand, including cash equivalents and marketable securities, cash
available from future operations and our credit facilities will provide sufficient liquidity to
fund our operations for at least the next 12 months. However, because of our significant interest
expense, cash flows are expected to be negative and reduce our liquidity in 2011. In addition to
interest, cash requirements include, among other things, capital expenditures,
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working capital needs, debt amortization and other contractual obligations. Additionally, we may
consider selective strategic transactions and alliances that we believe create value, including
mergers and acquisitions, joint ventures, partnerships or other business combinations,
restructurings and dispositions. Transactions of these types, if any, may result in material cash
expenditures or proceeds.
Despite our present liquidity position, some uncertainty exists as to whether we will have
sufficient cash flows to weather a significantly extended downturn or further significant decrease
in demand for our products. As discussed above, during the last several years, we took actions to
reduce costs and increase our liquidity. We will continue our efforts to maintain our financial
flexibility, but there can be no assurance that our efforts will be sufficient to withstand the
impact of extended negative economic conditions. Under those conditions, our funds from operations
and the other sources referenced above may not be sufficient to fund our operations or pursue
strategic transactions, and we may be required to seek alternative sources of financing. There is
no assurance, however, that we will be able to obtain financing on acceptable terms, or at all. See
Part I, Item 1A, Risk Factors.
CASH FLOWS
The following table presents a summary of our cash flows:
The following table presents a summary of our cash flows:
| (millions) | 2010 | 2009 | 2008 | |||||||||
Net cash provided by (used for): |
||||||||||||
Operating activities |
$ | (94 | ) | $ | 139 | $ | (165 | ) | ||||
Investing activities |
(299 | ) | (36 | ) | (252 | ) | ||||||
Financing activities |
326 | 109 | 608 | |||||||||
Effect of exchange rate changes on cash |
6 | 7 | (17 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents * |
$ | (61 | ) | $ | 219 | $ | 174 | |||||
| * | Cash and cash equivalents and marketable securities were $907 million as of December 31, 2010 compared with $690 million as of December 31, 2009. |
Operating Activities: The variation between 2010 and 2009 was primarily attributable to (1) a
$1 million increase in inventories in 2010 compared to a $113 million decrease in 2009 that
reflected our initiative to optimize inventory levels relative to business conditions, (2) a $28
million decrease in receivables in 2010 compared with a $108 million decrease in 2009 primarily
reflecting a 3% decrease in net sales in the fourth quarter of 2010 compared with the fourth
quarter of 2009 and a 27% decline in net sales in the fourth quarter of 2009 compared with the
fourth quarter of 2008 and (3) the receipt of $23 million, net of fees, in the fourth quarter of
2010 compared with $74 million, net of fees, in the fourth quarter of 2009 from the settlement of
our patent and trade secrets lawsuit against Lafarge.
Investing Activities: The variation between 2010 and 2009 primarily reflected a net increase of
$280 million in investments in marketable securities during 2010, partially offset by a $7 million
increase in proceeds from asset dispositions and a $5 million decrease in capital spending.
Financing Activities: The variation between 2010 and 2009 primarily reflected the net proceeds we
received from our sale of $350 million of 8.375% senior notes in November 2010. In 2009, we sold
$300 million of 9.75% senior notes, borrowed an additional $25 million under our ship mortgage
facility and repaid $190 million of outstanding borrowings under our revolving credit facility.
CAPITAL
EXPENDITURES
Capital spending amounted to $39 million in 2010 compared with $44 million in 2009. Because of the high level of investment that we made in our operations in 2006 through 2008 and the current market environment, we plan to limit our capital spending in 2011 to approximately $50 million. Approved capital expenditures for the replacement, modernization and expansion of operations totaled $237 million as of December 31, 2010 compared with $242 million as of December 31, 2009. Approved expenditures as of December 31, 2010 included $210 million for
Capital spending amounted to $39 million in 2010 compared with $44 million in 2009. Because of the high level of investment that we made in our operations in 2006 through 2008 and the current market environment, we plan to limit our capital spending in 2011 to approximately $50 million. Approved capital expenditures for the replacement, modernization and expansion of operations totaled $237 million as of December 31, 2010 compared with $242 million as of December 31, 2009. Approved expenditures as of December 31, 2010 included $210 million for
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construction of a new, low-cost gypsum wallboard plant in Stockton, Calif. Because of the current
market environment, commencement of construction of this plant has been delayed at least until
2012. We expect to fund our capital expenditures program with cash from operations or cash on hand
and, if determined to be appropriate and they are available, borrowings under our revolving credit
facility or other financings.
WORKING CAPITAL
As of December 31, 2010, working capital (current assets less current liabilities) amounted to $908 million, and the ratio of current assets to current liabilities was 2.72-to-1. As of December 31, 2009, working capital amounted to $939 million, and the ratio of current assets to current liabilities was 2.91-to-1.
As of December 31, 2010, working capital (current assets less current liabilities) amounted to $908 million, and the ratio of current assets to current liabilities was 2.72-to-1. As of December 31, 2009, working capital amounted to $939 million, and the ratio of current assets to current liabilities was 2.91-to-1.
Cash and Cash Equivalents and Marketable Securities: We had $907 million of cash and cash
equivalents and marketable securities as of December 31, 2010 compared with $690 million as of
December 31, 2009. The amount as of December 31, 2010 includes the net proceeds from our sale of
$350 million of 8.375% senior notes in November 2010. Uses of cash during 2010 included $171
million for interest, $39 million for capital expenditures and $37 million for severance and other
obligations associated with restructuring activities.
Receivables: As of December 31, 2010, receivables were $327 million, down $30 million, or 8%, from
$357 million as of December 31, 2009. This decrease primarily reflected the receipt of the
remaining $23 million, net of fees, from the settlement of our patent and trade secrets lawsuit
against Lafarge, a $9 million, or 3%, decrease in customer receivables primarily due to a 2%
decrease in consolidated net sales in December 2010 compared with December 2009.
Inventories: As of December 31, 2010, inventories were $290 million compared with $289 million as
of December 31, 2009. A $6 million increase in raw materials and a $2 million increase in inventory
on consignment were largely offset by a $7 million decrease in finished goods.
Accounts Payable: As of December 31, 2010, accounts payable were $218 million, up $13 million, or
6%, from $205 million as of December 31, 2009 primarily due to increased capital spending in
December 2010 compared with December 2009 and our continued efforts to extend payment terms with a
substantial number of our suppliers.
Accrued Expenses: As of December 31, 2010, accrued expenses were $294 million, up $21 million, or
8%, from $273 million as of December 31, 2009. The higher level of accrued expenses primarily
reflected a $14 million increase in short-term restructuring accruals primarily related to the
temporary idling of our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada,
and a $6 million increase in accruals related to the fair value of our outstanding natural gas and
currency hedge portfolios.
DEBT
Total debt, consisting of senior notes, convertible senior notes, industrial revenue bonds and outstanding borrowings under our ship mortgage facility, amounted to $2.331 billion ($2.308 billion, net of debt discount of $23 million) as of December 31, 2010 and $1.988 billion ($1.962 billion, net of debt discount of $26 million) as of December 31, 2009. In November 2010, we sold $350 million of 8.375% senior notes due 2018. As of December 31, 2010 and during the year then ended, there were no borrowings under our revolving credit facility or CGC’s credit facility. See Note 5 to the Consolidated Financial Statements for additional information about our debt.
Total debt, consisting of senior notes, convertible senior notes, industrial revenue bonds and outstanding borrowings under our ship mortgage facility, amounted to $2.331 billion ($2.308 billion, net of debt discount of $23 million) as of December 31, 2010 and $1.988 billion ($1.962 billion, net of debt discount of $26 million) as of December 31, 2009. In November 2010, we sold $350 million of 8.375% senior notes due 2018. As of December 31, 2010 and during the year then ended, there were no borrowings under our revolving credit facility or CGC’s credit facility. See Note 5 to the Consolidated Financial Statements for additional information about our debt.
Realization of Deferred Tax Asset
Accounting rules require a reduction of the carrying amounts of deferred tax assets by a valuation
allowance if, based on the available evidence, it is more likely than not that such assets will not
be realized. The need to establish valuation allowances for deferred tax assets is assessed
periodically. In assessing the requirement for, and amount of, a valuation allowance in accordance
with the more-likely-than-not standard, we give appropriate consideration to all positive and
negative evidence related to the realization of the deferred tax assets. Under the accounting
rules, this assessment considers, among other matters, the nature, frequency and severity of
current and cumulative losses, forecasts of future profitability, the duration of statutory
carryforward periods, our experience with operating loss
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and tax credit carryforwards not expiring unused and tax planning alternatives. A history of
cumulative losses for a certain threshold period is a significant form of negative evidence used in
the assessment, and the accounting rules require that we have a policy regarding the duration of
the threshold period. If a cumulative loss threshold is met, forecasts of future profitability may
not be used as positive evidence related to the realization of the deferred tax assets in the
assessment. Consistent with practices in the home building and related industries, we have a policy
of four years as our threshold period for cumulative losses.
As of December 31, 2010, we had federal net operating loss, or NOL, carryforwards of
approximately $1.519 billion that are available to offset future federal taxable income and will
expire in the years 2026 through 2030. In addition, as of that date, we had federal alternative
minimum tax credit carryforwards of approximately $52 million that are available to reduce future
regular federal income taxes over an indefinite period. In order to fully realize the U.S. federal
net deferred tax assets, taxable income of approximately $1.668 billion would need to be generated
during the period before their expiration. In addition, we have federal foreign tax credit
carryforwards of $6 million that will expire in 2015.
As of December 31, 2010, we had a gross deferred tax asset related to our state NOLs and tax
credit carryforwards of $274 million, of which $11 million will expire in 2011. The remainder will
expire if unused in years 2012 through 2030. To the extent that we do not generate sufficient state
taxable income within the statutory carryforward periods to utilize the NOL and tax credit
carryforwards in these states, they will expire unused.
We also had NOL and tax credit carryforwards in various foreign jurisdictions in the amount of
$6 million and $4 million as of December 31, 2010 and 2009, respectively, against a portion of
which we have historically maintained a valuation allowance.
During periods prior to 2010, we established a valuation allowance against our deferred tax
assets totaling $772 million. Based upon an evaluation of all available evidence and our losses
during 2010, we recorded an increase in the valuation allowance against our deferred tax assets of
$179 million. Our cumulative loss position over the last four years was significant evidence
supporting the recording of the additional valuation allowance. In addition to being impacted by
the $179 million increase, the valuation allowance was also impacted by changes in the components
of AOCI and other discrete adjustments, which reduced the valuation allowance by $67 million. As a
result, the net increase in the valuation allowance was $112 million in 2010, increasing our
deferred tax assets valuation allowance to $884 million as of December 31, 2010. Recording this
allowance will have no impact on our ability to utilize our U.S. federal and state NOL and tax
credit carryforwards to offset future U.S. profits. We continue to believe that we ultimately will
have sufficient U.S. profitability during the remaining NOL and tax credit carryforward periods to
realize substantially all of the economic value of the federal NOLs and some of the state NOLs
before they expire. In future periods, the valuation allowance can be reversed based on sufficient
evidence indicating that it is more likely than not that a portion of our deferred tax assets will
be realized. Our net deferred tax liabilities were $1 million and $15 million as of December 31,
2010 and 2009, respectively.
Under current accounting rules, we are required to consider all items (including items
recorded in other comprehensive income) in determining the amount of tax benefit that results from
a loss from continuing operations and that should be allocated to continuing operations. As a
result, during the fourth quarter of 2010, we recorded an $18 million noncash income tax benefit on
the loss from continuing operations for 2010. This benefit was offset by income tax expense on
other comprehensive income. However, while the income tax benefit from continuing operations is
reported on the income statement, the income tax expense on other comprehensive income is recorded
directly to AOCI, which is a component of stockholders’ equity. Because the income tax expense on
other comprehensive income is equal to the income tax benefit from continuing operations, our
year-end net deferred tax position is not impacted by this tax allocation. A similar noncash income
tax benefit of $19 million was recorded during the first quarter of 2010 relating to the fourth
quarter of 2009.
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The Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it
experiences an “ownership change.” In general terms, an ownership change may result from
transactions increasing the ownership of certain stockholders in the stock of a corporation by more
than 50 percentage points over a three-year period. If we were to experience an ownership change,
utilization of our NOLs would be subject to an annual limitation determined by multiplying the
market value of our outstanding shares of stock at the time of the ownership change by the
applicable long-term tax-exempt rate, which was 3.67% for December 2010. Any unused annual
limitation may be carried over to later years within the allowed NOL carryforward period. The
amount of the limitation may, under certain circumstances, be increased or decreased by built-in
gains or losses held by us at the time of the change that are recognized in the five-year period
after the change. Many states have similar limitations. If an ownership change had occurred as of
December 31, 2010, our annual U.S. federal NOL utilization would have been limited to approximately
$64 million per year.
Contractual Obligations and Other Commitments
CONTRACTUAL OBLIGATIONS
As of December 31, 2010, our contractual obligations and commitments were as follows:
As of December 31, 2010, our contractual obligations and commitments were as follows:
| Payments Due by Period | ||||||||||||||||||||
| 2012- | 2014- | There- | ||||||||||||||||||
| (millions) | Total | 2011 | 2013 | 2015 | after | |||||||||||||||
Debt obligations (a) |
$ | 2,331 | $ | 7 | $ | 11 | $ | 308 | $ | 2,005 | ||||||||||
Other long-term liabilities (b) |
720 | 22 | 16 | 19 | 663 | |||||||||||||||
Interest payments (c) |
1,539 | 195 | 394 | 363 | 587 | |||||||||||||||
Purchase obligations (d) |
494 | 51 | 137 | 77 | 229 | |||||||||||||||
Capital expenditures (e) |
237 | 24 | 73 | 125 | 15 | |||||||||||||||
Operating leases |
361 | 75 | 109 | 60 | 117 | |||||||||||||||
Unrecognized tax benefits (f) |
32 | 24 | 1 | 5 | 2 | |||||||||||||||
Total |
$ | 5,714 | $ | 398 | $ | 741 | $ | 957 | $ | 3,618 | ||||||||||
| (a) | Excludes debt discount of $23 million. | |
| (b) | Other long-term liabilities primarily consist of asset retirement obligations that principally extend over a 50-year period. The majority of associated payments are due toward the latter part of that period. | |
| (c) | Reflects estimated interest payments on debt obligations as of December 31, 2010. | |
| (d) | Purchase obligations primarily consist of contracts to purchase energy and certain raw materials. | |
| (e) | Reflects estimates of future spending on capital projects that were approved prior to December 31, 2010 but were not completed by that date. | |
| (f) | Reflects estimated payments (if required) of gross unrecognized tax benefits. |
For 2011, our defined benefit pension plans have no minimum funding requirements under
the Employee Retirement Income Security Act of 1974. We are evaluating our level of funding for
pension plans and currently estimate that we will contribute approximately $61 million to our
pension plans in 2011.
The above table excludes liabilities related to postretirement benefits (retiree health care
and life insurance). We voluntarily provide postretirement benefits for eligible employees and
retirees. The portion of benefit claim payments we made in 2010 was $14 million. See Note 8 to the
Consolidated Financial Statements for additional information on future expected cash payments for
pension and other postretirement benefits.
OFF-BALANCE-SHEET ARRANGEMENTS
With the exception of letters of credit, it is not our business practice to use off-balance-sheet arrangements, such as third-party special-purpose entities.
With the exception of letters of credit, it is not our business practice to use off-balance-sheet arrangements, such as third-party special-purpose entities.
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GUARANTEES
USG is party to a variety of agreements under which it may be obligated to indemnify a third party with respect to certain matters. We do not consider the maximum potential amount of future payments that we could be required to make under these agreements to be material.
USG is party to a variety of agreements under which it may be obligated to indemnify a third party with respect to certain matters. We do not consider the maximum potential amount of future payments that we could be required to make under these agreements to be material.
Legal Contingencies
We are named as defendants in litigation arising from our operations, including claims and lawsuits
arising from the operation of our vehicles and claims arising from product warranties, workplace or
job site injuries, and general commercial disputes. This litigation includes multiple lawsuits,
including class actions, relating to Chinese-manufactured drywall distributed by L&W Supply
Corporation in the southeastern United States in 2006 and 2007. In those cases, the plaintiffs
allege that the Chinese-manufactured drywall is defective and emits excessive sulfur compounds
which have caused property damage to the homes in which the drywall was installed and potential
health hazards to the residents of those homes.
We have also been notified by state and federal environmental protection agencies of possible
involvement as one of numerous “potentially responsible parties” in a number of Superfund sites in
the United States. As a potentially responsible party, we may be responsible to pay for some part
of the cleanup of hazardous waste at those sites. In most of these sites, our involvement is
expected to be minimal. In addition, we are involved in environmental cleanups of other property
that we own or owned.
We believe that appropriate accruals have been established for our potential liability in
connection with these matters, taking into account the probability of liability, whether our
exposure can be reasonably estimated and, if so, our estimate of our liability or the range of our
liability. However, we continue to review these accruals as additional information becomes
available and revise them as appropriate. We do not expect the environmental matters or any other
litigation matters involving USG to have a material adverse effect upon our results of operations,
financial position or cash flows.
U.S. Gypsum was the plaintiff in a lawsuit against Lafarge. The lawsuit, filed in 2003 in the
federal district court for the Northern District of Illinois, alleged that Lafarge misappropriated
our trade secrets and other information through hiring certain U.S. Gypsum employees (a number of
whom were also defendants), and that Lafarge infringed one of our patents regarding a method for
producing gypsum wallboard. On December 4, 2009, U.S. Gypsum entered into a settlement agreement
with Lafarge to resolve the lawsuit. Pursuant to the settlement agreement, Lafarge agreed to pay
U.S. Gypsum $105 million, the lawsuit was dismissed, and U.S. Gypsum granted Lafarge a fully
paid-up license to use certain technology. Lafarge paid U.S. Gypsum $25 million ($23 million net of
fees) in November 2010 and $80 million ($74 million net of fees) in December 2009.
See Note 16 to the Consolidated Financial Statements for additional information regarding
litigation matters. See, also, Part I, Item 1A, Risk Factors, for information regarding the
possible effects of environmental laws and regulations on our businesses.
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Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with accounting policies generally
accepted in the United States of America. The preparation of these financial statements requires
management to make estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the periods presented. The following is a summary of the
accounting policies we believe are the most important to aid in understanding our financial
results.
PROPERTY, PLANT AND EQUIPMENT
We assess our property, plant and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying values of the assets may not be recoverable or a revision of remaining useful lives is necessary. Such indicators may include economic and competitive conditions, changes in our business plans or management’s intentions regarding future utilization of the assets or changes in our commodity prices. An asset impairment would be indicated if the sum of the expected future net pretax cash flows from the use of an asset (undiscounted and without interest charges) is less than the carrying amount of the asset. An impairment loss would be measured based on the difference between the fair value of the asset and its carrying value. The determination of fair value is based on an expected present value technique, in which multiple cash flow scenarios that reflect a range of possible outcomes and a risk-free rate of interest are used to estimate fair value, or on a market appraisal.
We assess our property, plant and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying values of the assets may not be recoverable or a revision of remaining useful lives is necessary. Such indicators may include economic and competitive conditions, changes in our business plans or management’s intentions regarding future utilization of the assets or changes in our commodity prices. An asset impairment would be indicated if the sum of the expected future net pretax cash flows from the use of an asset (undiscounted and without interest charges) is less than the carrying amount of the asset. An impairment loss would be measured based on the difference between the fair value of the asset and its carrying value. The determination of fair value is based on an expected present value technique, in which multiple cash flow scenarios that reflect a range of possible outcomes and a risk-free rate of interest are used to estimate fair value, or on a market appraisal.
Determination as to whether and how much an asset is impaired involves significant management
judgment involving highly uncertain matters, including estimating the future success of product
lines, future sales volumes, future selling prices and costs, alternative uses for the assets, and
estimated proceeds from disposal of the assets. However, the impairment reviews and calculations
are based on estimates and assumptions that take into account our business plans and long-term
investment decisions.
We regularly evaluate the recoverability of assets idled or at risk of being idled. In most
cases, the idled assets are relatively older and higher-cost production plants or lines, which we
refer to as facilities, that have relatively low carrying values. The last downturn during which we
idled production facilities occurred in 1981 and 1982. At that time, we idled three facilities, all
of which were restarted during the subsequent recovery. We consider idled facilities to be
unimpaired if we plan to reopen them to meet future demand and the estimated future undiscounted
cash flows exceed the carrying values of those facilities. We record impairment charges for
facilities that we permanently close if their fair value is less than their carrying value and for
temporarily idled facilities with estimated future undiscounted cash flows that do not exceed the
carrying values of those facilities. Because we believe that a recovery in the housing and other
construction markets we serve will begin in the next two to three years and result in higher demand
than today’s conditions, it is our current intention to restart all facilities that are currently
idled. As a result, estimated future undiscounted cash flows from their operations exceed their
carrying values.
In 2010, we permanently closed three gypsum wallboard production facilities, including two
that had been temporarily idled since 2008, and two paper production facilities that were
temporarily idled in 2009 and 2008. U.S. Gypsum recorded impairment charges totaling $58 million in
2010 related to these five production facilities permanently closed in 2010 and three gypsum
wallboard production facilities and one paper production facility that were temporarily idled in
2007 and 2008, all of which remain temporarily idled as of the date of this report.
In 2009, we permanently closed a gypsum wallboard production facility, a cement board
production facility and a sealants and finishes production facility, and we temporarily idled a
paper production facility. The closed gypsum wallboard and cement board production facilities had
been idled since 2007 and 2008, respectively. U.S. Gypsum recorded impairment charges totaling $10
million in 2009 related to the three production facilities permanently closed in 2009, as well as a
structural cement panel production facility that we temporarily idled in 2008 and a gypsum
wallboard production facility that we temporarily idled in 2007, both of which remain temporarily
idled as of the date of this report.
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In 2008, we permanently closed two gypsum wallboard production facilities and one plaster
production facility, and we temporarily idled four gypsum wallboard production facilities, two
paper production facilities and two facilities that produced other products. U.S. Gypsum recorded
impairment charges totaling $9 million in 2008 related to the permanent closing of one gypsum
wallboard production facility, one plaster production facility and a plant site. The impairment
charge for one of the gypsum wallboard production facilities closed in 2008 was recorded in 2007.
On a segment basis, all of the permanently closed and temporarily idled gypsum wallboard and
paper production facilities and related long-lived asset impairment charges relate to U.S. Gypsum
within the North American Gypsum segment, and U.S. Gypsum’s business is currently generating
negative cash flows. As of December 31, 2010, the total carrying value of U.S. Gypsum’s net
property, plant and equipment was $1.634 billion, including the aggregate carrying value of $71
million, after impairment charges, of its production facilities permanently closed and temporarily
idled.
Our gypsum wallboard business is cyclical in nature, and prolonged periods of weak product
demand or excess product supply may have a material adverse effect on our business, financial
condition and operating results. This business is also sensitive to changes in general economic
conditions, including, in particular, conditions in the North American housing and
construction-based markets. The rate of new home construction in the United States remains near
historically low levels. Although it increased by approximately 6% in 2010 compared with 2009, this
followed a 39% decrease in 2009 compared with 2008 and a 33% decrease in 2008 compared with 2007.
Currently, there is significant excess wallboard production capacity industry wide in the
United States. Industry capacity in the United States was approximately 32.9 billion square feet as
of December 31, 2010. We estimate that the industry capacity utilization rate was approximately 49%
during the fourth quarter of 2010 and 51% during the full year 2010. Based on current industry
trends and forecasts, demand for gypsum wallboard may increase in 2011, but the magnitude of any
increase will be dependent primarily on the levels of housing starts and repair and remodel
activity. We project that the industry capacity utilization rate will increase slightly in 2011,
but remain near an historically low level. At such a low level of capacity utilization, we expect
there to be continued pressure on gypsum wallboard selling prices and gross margins.
The markets that we serve, including, in particular, the housing and construction-based
markets, are affected by economic conditions, the availability of credit, lending practices,
interest rates, the unemployment rate and consumer confidence. An increase in interest rates,
continued high levels of unemployment, continued restrictive lending practices, a decrease in
consumer confidence or other adverse economic conditions could have a material adverse effect on
our business, financial condition and results of operations. Our businesses are also affected by a
variety of other factors beyond our control, including the inventory of unsold homes, which remains
at an historically high level, the level of foreclosures, home resale rates, housing affordability,
office and retail vacancy rates and foreign currency exchange rates. Since we operate in a variety
of geographic markets, our businesses are subject to the economic conditions in each of these
geographic markets. General economic downturns or localized downturns in the regions where we have
operations may have a material adverse effect on our business, results of operations and financial
condition.
If the downturn in our markets does not significantly reverse or the downturn is significantly
further extended, material write-downs or impairment charges may be required in the future. If
these conditions were to materialize or worsen, or if there is a fundamental change in the housing
and other construction markets we serve, which individually or collectively lead to a significantly
extended downturn or decrease in demand, we may permanently close additional production and
distribution facilities and material restructuring and impairment charges may be necessary. The
magnitude and timing of those possible charges would be dependent on the severity and duration of
the extended downturn, should it materialize, and cannot be determined at this time. Any material
cash or noncash restructuring or impairment charges, including write-downs of property, plant and
equipment, would have a material adverse effect on our results of operations and financial
condition. We will continue to monitor economic forecasts
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and their effect on our facilities to determine whether any of our assets are impaired.
INTANGIBLE ASSETS
We have indefinite and definite lived intangible assets with net values of $30 million and $48 million, respectively, as of December 31, 2010. Intangible assets determined to have indefinite useful lives, primarily comprised of trade names, are not amortized. We perform impairment tests for intangible assets with indefinite useful lives annually, or more frequently if events or circumstances indicate they might be impaired. The impairment tests consist of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. An income approach is used for valuing trade names. Assumptions used in the income approach include projected revenues and assumed royalty, long-term growth and discount rates.
We have indefinite and definite lived intangible assets with net values of $30 million and $48 million, respectively, as of December 31, 2010. Intangible assets determined to have indefinite useful lives, primarily comprised of trade names, are not amortized. We perform impairment tests for intangible assets with indefinite useful lives annually, or more frequently if events or circumstances indicate they might be impaired. The impairment tests consist of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. An income approach is used for valuing trade names. Assumptions used in the income approach include projected revenues and assumed royalty, long-term growth and discount rates.
In 2010, our impairment tests for trade names indicated that there was no impairment.
In 2009, our impairment tests for trade names resulted in $31 million of impairment charges
that were included in goodwill and other intangible asset impairment charges in the 2009
consolidated statement of operations. These charges were primarily related to our Building Products
Distribution segment. Key assumptions used in the impairment tests were (1) a pretax royalty rate
of 0.5% based on comparable royalty agreements, (2) a long-term growth rate of 2.5% based on our
historical revenue growth and (3) a discount rate of 15.0% based on our current cost of capital of
13.5% plus an adjustment of 1.5% for risk related to trade name valuation. Changes in the key
assumptions used in the impairment tests for our trade names would not have a material impact on
our results of operations in future periods.
In 2008, our impairment tests for trade names resulted in $13 million of impairment charges,
$12 million of which were included in goodwill and other intangible asset impairment charges in the
2008 consolidated statement of operations. These charges related to our Building Products
Distribution segment. Key assumptions used in the impairment tests were (1) a pretax royalty rate
of 1.25% based on comparable royalty agreements, (2) a long-term growth rate of 2.5% based on our
historical revenue growth and (3) a discount rate of 15.5% based on our then current cost of
capital of 14.0% plus an adjustment of 1.5% for risk related to trade name valuation.
Intangible assets with definite lives, primarily customer relationships, are amortized over
their useful lives. Judgment is used in assessing whether the carrying amount is not expected to be
recoverable over the assets’ estimated remaining useful lives and whether conditions exist to
warrant a revision to the remaining periods of amortization. An asset impairment would be indicated
if the sum of the expected future net pretax cash flows from the use of an asset group
(undiscounted and without interest charges) is less than the carrying amount of the asset group. An
impairment loss would be measured based on the difference between the fair value of the asset group
and its carrying value. Customer relationships are currently being amortized over 10 years using
annualized attrition rates. We periodically compare the current attrition rate with the attrition
rates assumed in the initial determination of the useful life to ensure that the useful life is
still appropriate. As of December 31, 2010, we determined that no impairment of customer
relationships existed nor was a revision to the remaining useful life necessary.
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EMPLOYEE RETIREMENT PLANS
We maintain defined benefit pension plans for most of our employees. Most of these plans require employee contributions in order to accrue benefits. We also maintain plans that provide postretirement benefits (retiree health care and life insurance) for eligible existing retirees and for eligible active employees who may qualify for coverage in the future. For accounting purposes, these plans depend on assumptions made by management, which are used by actuaries we engage to calculate the projected and accumulated benefit obligations and the annual expense recognized for these plans. The assumptions used in developing the required estimates primarily include discount rates, expected return on plan assets for the funded plans, compensation increase rates, retirement rates, mortality rates and, for postretirement benefits, health care cost trend rates.
We maintain defined benefit pension plans for most of our employees. Most of these plans require employee contributions in order to accrue benefits. We also maintain plans that provide postretirement benefits (retiree health care and life insurance) for eligible existing retirees and for eligible active employees who may qualify for coverage in the future. For accounting purposes, these plans depend on assumptions made by management, which are used by actuaries we engage to calculate the projected and accumulated benefit obligations and the annual expense recognized for these plans. The assumptions used in developing the required estimates primarily include discount rates, expected return on plan assets for the funded plans, compensation increase rates, retirement rates, mortality rates and, for postretirement benefits, health care cost trend rates.
We determined the assumed discount rate based on a hypothetical AA yield curve represented by
a series of annualized individual discount rates. Each underlying bond issue is required to have a
credit rating of Aa or better by Moody’s Investors Service or a credit rating of AA or better by
Standard & Poor’s Financial Services LLC. We consider the underlying types of bonds and our
projected cash flows of the plans in evaluating the yield curve selected. The use of a different
discount rate would impact net pension and postretirement benefit costs and benefit obligations. In
determining the expected return on plan assets, we use a “building block” approach, which
incorporates historical experience, our pension plan investment guidelines and expectations for
long-term rates of return. The use of a different rate of return would impact net pension costs. A
one-half percentage point change in the assumed discount rate and return on plan asset rate would
have the following effects (dollars in millions):
| Increase (Decrease) in | ||||||||||||
| 2010 | ||||||||||||
| 2011 | Projected | |||||||||||
| Percentage | Net Annual | Benefit | ||||||||||
| Assumptions | Change | Benefit Cost | Obligation | |||||||||
Pension Benefits: |
||||||||||||
Discount rate |
0.5% increase | $ | (7 | ) | $ | (68 | ) | |||||
Discount rate |
0.5% decrease | 7 | 75 | |||||||||
Asset return |
0.5% increase | (5 | ) | – | ||||||||
Asset return |
0.5% decrease | 5 | – | |||||||||
Postretirement Benefits: |
||||||||||||
Discount rate |
0.5% increase | $ | (1 | ) | $ | (15 | ) | |||||
Discount rate |
0.5% decrease | 1 | 16 | |||||||||
Compensation increase rates are based on historical experience and anticipated future
management actions. Retirement rates are based primarily on actual plan experience, while standard
actuarial tables are used to estimate mortality rates. We developed health care cost trend rate
assumptions based on historical cost data and an assessment of likely long-term trends. We have
modified our postretirement medical plan in response to continuing retiree health care cost
increases so that, effective January 1, 2011, the increase in the annual amount we will pay for
retiree health care coverage will be limited to no more than 3%.
Results that differ from these assumptions are accumulated and amortized over future periods
and, therefore, generally affect the net benefit cost of future periods. The sensitivity of
assumptions reflects the impact of changing one assumption at a time and is specific to conditions
at the end of 2010. Economic factors and conditions could affect multiple assumptions
simultaneously, and the effects of changes in assumptions are not necessarily linear.
See Note 8 to the Consolidated Financial Statements for additional information regarding
costs, plan obligations, plan assets and discount rate and other assumptions, including the health
care cost trend rate.
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SELF-INSURANCE RESERVES
We use a combination of insurance, self insurance and self-insured retentions for certain claims, including workers’ compensation, automobile, product and general liability claims. Our estimated liability associated with self-insured incurred and incurred-but-not-reported losses is not discounted and is estimated using our historical data related to the frequency and severity of our claims and losses and other actuarial assumptions. On an annual basis, an actuarial review is performed to ensure that our reserve for our estimated liability is appropriate. While we believe our self-insured liability estimates are reasonable based on the current information available, if actual experience differs from our estimates, our results of operations or financial position could be impacted.
We use a combination of insurance, self insurance and self-insured retentions for certain claims, including workers’ compensation, automobile, product and general liability claims. Our estimated liability associated with self-insured incurred and incurred-but-not-reported losses is not discounted and is estimated using our historical data related to the frequency and severity of our claims and losses and other actuarial assumptions. On an annual basis, an actuarial review is performed to ensure that our reserve for our estimated liability is appropriate. While we believe our self-insured liability estimates are reasonable based on the current information available, if actual experience differs from our estimates, our results of operations or financial position could be impacted.
INCOME TAXES
We record income taxes (benefit) under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the change is enacted.
We record income taxes (benefit) under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the change is enacted.
Accounting rules require a reduction of the carrying amounts of deferred tax assets by a
valuation allowance if, based on the available evidence, it is more likely than not that such
assets will not be realized. The need to establish valuation allowances for deferred tax assets is
assessed periodically. In assessing the requirement for, and amount of, a valuation allowance, in
accordance with the more-likely-than-not standard, we give appropriate consideration to all
positive and negative evidence related to the realization of the deferred tax assets. Under the
accounting rules, this assessment considers, among other matters, the nature, frequency and
severity of current and cumulative losses, forecasts of future profitability, the duration of
statutory carryforward periods, our experience with operating loss and tax credit carryforwards not
expiring unused and tax planning alternatives. A history of cumulative losses for a certain
threshold period is a significant form of negative evidence used in the assessment, and the
accounting rules require that we have a policy regarding the duration of the threshold period. If a
cumulative loss threshold is met, forecasts of future profitability may not be used as positive
evidence related to the realization of the deferred tax assets in the assessment. Consistent with
practices in the home building and related industries, we have a policy of four years as our
threshold period for cumulative losses. The 2009 and 2010 tax expense reflected the recording of a
valuation allowance against virtually all of our U.S. federal and state deferred tax assets.
We recognize the tax benefits of an uncertain tax position only if those benefits
are more likely than not to be sustained upon examination by the relevant taxing authorities.
Unrecognized tax benefits are subsequently recognized at the time the more-likely-than-not
recognition threshold is met, the tax matter is effectively settled or the statute of limitations
for the relevant taxing authority to examine and challenge the tax position has expired, whichever
is earlier.
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Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 related to management’s expectations about future conditions. Actual
business, market or other conditions may differ from management’s expectations and, accordingly,
may affect our sales and profitability or other results and liquidity. Actual results may differ
due to various other factors, including:
| • | economic conditions, such as the levels of new home and other construction activity, employment levels, the availability of mortgage, construction and other financing, mortgage and other interest rates, housing affordability and supply, the levels of foreclosures and home resales, currency exchange rates and consumer confidence; | |
| • | capital markets conditions and the availability of borrowings under our credit agreement or other financings; | |
| • | competitive conditions, such as price, service and product competition; | |
| • | shortages in raw materials; | |
| • | changes in raw material, energy, transportation and employee benefit costs; | |
| • | the loss of one or more major customers and our customers’ ability to meet their financial obligations to us; | |
| • | capacity utilization rates; | |
| • | changes in laws or regulations, including environmental and safety regulations; | |
| • | the outcome in contested litigation matters; | |
| • | the effects of acts of terrorism or war upon domestic and international economies and financial markets; and | |
| • | acts of God. |
We assume no obligation to update any forward-looking information contained in this report.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use derivative instruments to manage selected commodity price and foreign currency exposures. We
do not use derivative instruments for speculative trading purposes, and we typically do not hedge
beyond five years.
COMMODITY PRICE RISK
We use swap and option contracts to manage our exposure to fluctuations in commodity prices associated with anticipated purchases of natural gas. Currently, a portion of our anticipated purchases of natural gas are hedged for 2011 and 2012. The notional amount of these hedge contracts was $64 million as of December 31, 2010. We review our positions regularly and make adjustments as market and business conditions warrant. A sensitivity analysis was prepared to estimate the potential change in the fair value of our natural gas hedge contracts assuming a hypothetical 10% change in market prices. Based on the results of this analysis, which may differ from actual results, the potential change in the fair value of our natural gas hedge contracts as of December 31, 2010 was $3 million. This analysis does not consider the underlying exposure.
We use swap and option contracts to manage our exposure to fluctuations in commodity prices associated with anticipated purchases of natural gas. Currently, a portion of our anticipated purchases of natural gas are hedged for 2011 and 2012. The notional amount of these hedge contracts was $64 million as of December 31, 2010. We review our positions regularly and make adjustments as market and business conditions warrant. A sensitivity analysis was prepared to estimate the potential change in the fair value of our natural gas hedge contracts assuming a hypothetical 10% change in market prices. Based on the results of this analysis, which may differ from actual results, the potential change in the fair value of our natural gas hedge contracts as of December 31, 2010 was $3 million. This analysis does not consider the underlying exposure.
FOREIGN CURRENCY EXCHANGE RISK
We have foreign exchange forward contracts in place to hedge changes in the value of intercompany loans to certain foreign subsidiaries due to changes in foreign exchange rates. The notional amount of these hedges is $14 million, and they all mature by August 26, 2011. As of December 31, 2010, the fair value of these hedges was immaterial.
We have foreign exchange forward contracts in place to hedge changes in the value of intercompany loans to certain foreign subsidiaries due to changes in foreign exchange rates. The notional amount of these hedges is $14 million, and they all mature by August 26, 2011. As of December 31, 2010, the fair value of these hedges was immaterial.
We also have foreign exchange forward contracts to hedge purchases of products and services
denominated in non-functional currencies. The notional amount of these contracts is $98 million and
they mature by March 28, 2012. The fair value of these contracts was a $4 million unrealized loss
as of December 31, 2010. A sensitivity analysis was prepared to estimate the potential change in
the fair value of our foreign exchange forward contracts assuming a hypothetical 10% change in
foreign exchange rates. Based on the results of this analysis, which may differ from actual
results, the potential change in the fair value of our foreign exchange forward contracts as of
December 31, 2010 was $9 million. This analysis does not consider the underlying exposure.
INTEREST RATE RISK
As of December 31, 2010, most of our outstanding debt was fixed-rate debt. A sensitivity analysis was prepared to estimate the potential change in interest expense assuming a hypothetical 100-basis-point increase in interest rates. Based on the results of this analysis, which may differ from actual results, the potential change in interest expense would be immaterial.
As of December 31, 2010, most of our outstanding debt was fixed-rate debt. A sensitivity analysis was prepared to estimate the potential change in interest expense assuming a hypothetical 100-basis-point increase in interest rates. Based on the results of this analysis, which may differ from actual results, the potential change in interest expense would be immaterial.
See Notes 1 and 6 to the Consolidated Financial Statements for additional information regarding our
financial exposures.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All other schedules have been omitted because they are not required or applicable or the
information is included in the consolidated financial statements or notes thereto.
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USG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| (millions, except per-share data)
|
Years Ended December 31,
|
|||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Net sales |
$ | 2,939 | $ | 3,235 | $ | 4,608 | ||||||
Cost of products sold |
2,775 | 3,090 | 4,416 | |||||||||
Gross profit |
164 | 145 | 192 | |||||||||
Selling and administrative expenses |
314 | 304 | 380 | |||||||||
Litigation settlement income |
- | (97) | - | |||||||||
Restructuring and long-lived asset impairment charges |
110 | 80 | 98 | |||||||||
Goodwill and other intangible asset impairment charges |
- | 43 | 226 | |||||||||
Operating loss |
(260) | (185) | (512) | |||||||||
Interest expense |
183 | 165 | 86 | |||||||||
Interest income |
(5) | (4) | (7) | |||||||||
Other expense (income), net |
1 | (9) | (10) | |||||||||
Loss before income taxes |
(439) | (337) | (581) | |||||||||
Income tax (benefit) expense |
(34) | 450 | (118) | |||||||||
Net loss |
$ | (405) | $ | (787) | $ | (463) | ||||||
Basic loss per common share |
$ | (4.03) | $ | (7.93) | $ | (4.67) | ||||||
Diluted loss per common share |
$ | (4.03) | $ | (7.93) | $ | (4.67) | ||||||
The notes to consolidated financial statements are an integral part of these statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEETS
| (millions, except share data) |
As of December 31, |
|||||||
| 2010 | 2009 | |||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 629 | $ | 690 | ||||
Short-term marketable securities |
128 | - | ||||||
Restricted cash |
4 | 2 | ||||||
Receivables (net of reserves: 2010 - $17; 2009 - $16) |
327 | 357 | ||||||
Inventories |
290 | 289 | ||||||
Income taxes receivable |
3 | 20 | ||||||
Deferred income taxes |
6 | 2 | ||||||
Other current assets |
50 | 71 | ||||||
Total current assets |
1,437 | 1,431 | ||||||
Long-term marketable securities |
150 | - | ||||||
Property, plant and equipment, net |
2,266 | 2,427 | ||||||
Other assets |
234 | 239 | ||||||
Total assets |
$ | 4,087 | $ | 4,097 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 218 | $ | 205 | ||||
Accrued expenses |
294 | 273 | ||||||
Current portion of long-term debt |
7 | 7 | ||||||
Income taxes payable |
10 | 7 | ||||||
Total current liabilities |
529 | 492 | ||||||
Long-term debt |
2,301 | 1,955 | ||||||
Deferred income taxes |
7 | 17 | ||||||
Other liabilities |
631 | 703 | ||||||
Commitments and contingencies |
||||||||
Stockholders’ Equity: |
||||||||
Preferred
stock (000) - $1 par value, authorized 36,000 shares; outstanding - none |
- | - | ||||||
Common stock
(000) - $0.10 par value; authorized 200,000 shares; issued: 2010 - 103,972 shares; 2009 - 103,972 shares |
10 | 10 | ||||||
Treasury stock at cost (000) -2010 - 1,096 shares; 2009 - 4,672 shares |
(55) | (194) | ||||||
Capital received in excess of par value |
2,565 | 2,640 | ||||||
Accumulated other comprehensive loss |
(50) | (80) | ||||||
Retained earnings (deficit) |
(1,851) | (1,446) | ||||||
Total stockholders’ equity |
619 | 930 | ||||||
Total liabilities and stockholders’ equity |
$ | 4,087 | $ | 4,097 | ||||
The notes to consolidated financial statements are an integral part of these statements.
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USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| (millions) |
Years Ended December 31, |
|||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Operating Activities |
||||||||||||
Net loss |
$ | (405) | $ | (787) | $ | (463) | ||||||
Adjustments to Reconcile Net Loss to Net Cash: |
||||||||||||
Depreciation, depletion and amortization |
178 | 203 | 182 | |||||||||
Intangible and long-lived asset impairment charges |
58 | 43 | 226 | |||||||||
Share-based compensation expense |
23 | 21 | 24 | |||||||||
Deferred income taxes |
(9) | 453 | (111) | |||||||||
Noncash income tax benefit |
(37) | - | - | |||||||||
(Gain) loss on asset dispositions |
(2) | (10) | 1 | |||||||||
Convertible debt embedded derivative |
- | (10) | (11) | |||||||||
(Increase) Decrease in Working Capital (net of acquisitions): |
||||||||||||
Receivables |
28 | 108 | (37) | |||||||||
Income taxes receivable |
16 | (4) | 22 | |||||||||
Inventories |
(1) | 113 | 27 | |||||||||
Payables |
9 | (8) | (78) | |||||||||
Accrued expenses |
13 | (23) | 49 | |||||||||
Decrease (increase) in other assets |
5 | 25 | (23) | |||||||||
Increase in other liabilities |
32 | 2 | 25 | |||||||||
Other, net |
(2) | 13 | 2 | |||||||||
Net cash (used for) provided by operating activities |
(94) | 139 | (165) | |||||||||
Investing Activities |
||||||||||||
Purchases of marketable securities |
(354) | - | - | |||||||||
Sales or maturities of marketable securities |
74 | - | - | |||||||||
Capital expenditures |
(39) | (44) | (238) | |||||||||
Net proceeds from asset dispositions |
23 | 16 | - | |||||||||
Investment in joint ventures |
(1) | (7) | (12) | |||||||||
Deposit of restricted cash |
(2) | (1) | (1) | |||||||||
Acquisitions of businesses, net of cash acquired |
- | - | (1) | |||||||||
Net cash used for investing activities |
(299) | (36) | (252) | |||||||||
Financing Activities |
||||||||||||
Issuance of debt |
350 | 319 | 1,950 | |||||||||
Repayment of debt |
(7) | (195) | (1,331) | |||||||||
Payment of debt issuance fees |
(16) | (15) | (10) | |||||||||
Issuances of common stock |
1 | - | - | |||||||||
Repurchases of common stock |
(2) | - | - | |||||||||
Excess tax benefits from share-based compensation |
- | - | (1) | |||||||||
Net cash provided by financing activities |
326 | 109 | 608 | |||||||||
Effect of exchange rate changes on cash |
6 | 7 | (17) | |||||||||
Net (decrease) increase in cash and cash equivalents |
(61) | 219 | 174 | |||||||||
Cash and cash equivalents at beginning of period |
690 | 471 | 297 | |||||||||
Cash and cash equivalents at end of period |
$ | 629 | $ | 690 | $ | 471 | ||||||
Supplemental Cash Flow Disclosures: |
||||||||||||
Interest paid |
$ | 171 | $ | 139 | $ | 83 | ||||||
Income taxes refunded, net |
(8) | (1) | (21) | |||||||||
Amount in accounts payable for capital expenditures |
9 | 2 | 6 | |||||||||
The notes to consolidated financial statements are an integral part of these statements.
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USG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common | Capital | Accumulated | ||||||||||||||||||||||||||||||
| Shares | Treasury | Received in | Retained | Other | ||||||||||||||||||||||||||||
| Issued | Shares | Common | Treasury | Excess of | Earnings | Comprehensive | ||||||||||||||||||||||||||
| (millions, except share data) | (000) | (000) | Stock | Stock | Par Value | (Deficit) | Income (Loss) | Total | ||||||||||||||||||||||||
Balance at December 31, 2007 |
103,972 | (4,921) | $ | 10 | $ | (204) | $ | 2,607 | $ | (196) | $ | 9 | $ | 2,226 | ||||||||||||||||||
Net loss |
(463) | (463) | ||||||||||||||||||||||||||||||
Foreign currency translation,
net of tax benefit of $1 |
(100) | (100) | ||||||||||||||||||||||||||||||
Change in fair value of derivatives,
net of tax benefit of $20 |
(30) | (30) | ||||||||||||||||||||||||||||||
Change in pension and postretirement benefit plans, net of tax benefit of $49 |
(107) | (107) | ||||||||||||||||||||||||||||||
Unrealized loss on marketable securities,
net of tax of $0.1 |
1 | 1 | ||||||||||||||||||||||||||||||
Total comprehensive income (loss) |
(699) | |||||||||||||||||||||||||||||||
Share-based compensation |
24 | 24 | ||||||||||||||||||||||||||||||
Stock issuances |
128 | 5 | (5) | - | ||||||||||||||||||||||||||||
Other |
(1) | (1) | ||||||||||||||||||||||||||||||
Balance at December 31, 2008 |
103,972 | (4,793) | $ | 10 | $ | (199) | $ | 2,625 | $ | (659) | $ | (227) | $ | 1,550 | ||||||||||||||||||
Net loss |
(787) | (787) | ||||||||||||||||||||||||||||||
Foreign currency translation,
net of tax of $0.4 |
52 | 52 | ||||||||||||||||||||||||||||||
Change in fair value of derivatives,
net of tax benefit of $0.1 |
36 | 36 | ||||||||||||||||||||||||||||||
Change in pension and postretirement
benefit plans, net of tax benefit of $4 |
59 | 59 | ||||||||||||||||||||||||||||||
Total comprehensive income (loss) |
(640) | |||||||||||||||||||||||||||||||
Share-based compensation |
21 | 21 | ||||||||||||||||||||||||||||||
Stock issuances |
121 | 5 | (5) | - | ||||||||||||||||||||||||||||
Other |
(1) | (1) | ||||||||||||||||||||||||||||||
Balance at December 31, 2009 |
103,972 | (4,672) | $ | 10 | $ | (194) | $ | 2,640 | $ | (1,446) | $ | (80) | $ | 930 | ||||||||||||||||||
Net loss |
(405) | (405) | ||||||||||||||||||||||||||||||
Foreign currency translation,
net of tax of $0.3 |
19 | 19 | ||||||||||||||||||||||||||||||
Change in fair value of derivatives,
net of tax benefit of $8 |
7 | 7 | ||||||||||||||||||||||||||||||
Change in pension and postretirement
benefit plans, net of tax of $39 |
4 | 4 | ||||||||||||||||||||||||||||||
Total comprehensive income (loss) |
(375) | |||||||||||||||||||||||||||||||
Share-based compensation |
23 | 23 | ||||||||||||||||||||||||||||||
Stock issuances |
3,576 | 137 | (96) | 41 | ||||||||||||||||||||||||||||
Other |
2 | (2) | - | |||||||||||||||||||||||||||||
Balance at December 31, 2010 |
103,972 | (1,096) | $ | 10 | $ | (55) | $ | 2,565 | $ | (1,851) | $ | (50) | $ | 619 | ||||||||||||||||||
The notes to consolidated financial statements are an integral part of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the following Notes to Consolidated Financial Statements, “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.
1. Significant Accounting Policies
NATURE OF OPERATIONS
USG, through its subsidiaries, is a leading manufacturer and distributor of building
materials. 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 operations are organized into three reportable segments: North American
Gypsum, which manufactures SHEETROCK® brand gypsum wallboard and related products in the
United States, Canada and Mexico; Building Products Distribution, which distributes gypsum
wallboard, drywall metal, ceilings products, joint compound and other building products throughout
the United States; and Worldwide Ceilings, which manufactures ceiling tile in the United States and
ceiling grid in the United States, Canada, Europe and the Asia-Pacific region. Our products also
are distributed through building materials dealers, home improvement centers and other retailers,
specialty wallboard distributors, and contractors.
CONSOLIDATION
Our consolidated financial statements include the accounts of USG Corporation and its
majority-owned subsidiaries. Entities in which we have more than a 20% but not more than 50%
ownership interest are accounted for on the equity basis of accounting and are not material to
consolidated operations. All intercompany balances and transactions are eliminated in
consolidation.
USE OF ESTIMATES
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates.
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates.
REVENUE RECOGNITION
With the exception of our Building Products Distribution segment, we recognize revenue upon the shipment of products to customers, which is when title and risk of loss are transferred to customers. With the exception of Building Products Distribution, our products are generally shipped free on board, commonly called FOB, shipping point. For Building Products Distribution, revenue is recognized and title and risk of loss are transferred when customers receive products, either through delivery by company trucks or customer pickup. We record provisions for discounts to customers based on the terms of sale in the same period in which the related sales are recorded. We record estimated reductions to revenue for customer programs and incentive offerings, including promotions and other volume-based incentives.
With the exception of our Building Products Distribution segment, we recognize revenue upon the shipment of products to customers, which is when title and risk of loss are transferred to customers. With the exception of Building Products Distribution, our products are generally shipped free on board, commonly called FOB, shipping point. For Building Products Distribution, revenue is recognized and title and risk of loss are transferred when customers receive products, either through delivery by company trucks or customer pickup. We record provisions for discounts to customers based on the terms of sale in the same period in which the related sales are recorded. We record estimated reductions to revenue for customer programs and incentive offerings, including promotions and other volume-based incentives.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of products sold.
Shipping and handling costs are included in cost of products sold.
ADVERTISING
Advertising expenses consist of media advertising and related production costs and sponsorships. We charge advertising expenses to earnings as incurred. These expenses amounted to $15 million in 2010, $13 million in 2009 and $23 million in 2008.
Advertising expenses consist of media advertising and related production costs and sponsorships. We charge advertising expenses to earnings as incurred. These expenses amounted to $15 million in 2010, $13 million in 2009 and $23 million in 2008.
RESEARCH AND DEVELOPMENT
We charge research and development expenditures to earnings as incurred. These expenditures amounted to $13 million in 2010, $13 million in 2009 and $19 million in 2008.
We charge research and development expenditures to earnings as incurred. These expenditures amounted to $13 million in 2010, $13 million in 2009 and $19 million in 2008.
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INCOME TAXES
We record income taxes (benefit) under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to net operating loss, or NOL, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the change is enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized, which can occur when a cumulative loss period is reached.
We record income taxes (benefit) under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to net operating loss, or NOL, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the change is enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized, which can occur when a cumulative loss period is reached.
INVENTORY VALUATION
All of our inventories are stated at the lower of cost or market. Virtually all of our inventories are valued under the average cost method with the remainder valued under the first-in, first-out cost method. Inventories include materials, labor and applicable factory overhead costs. Depreciation associated with manufacturing assets is excluded from inventory cost, but is included in cost of products sold.
All of our inventories are stated at the lower of cost or market. Virtually all of our inventories are valued under the average cost method with the remainder valued under the first-in, first-out cost method. Inventories include materials, labor and applicable factory overhead costs. Depreciation associated with manufacturing assets is excluded from inventory cost, but is included in cost of products sold.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common shares outstanding. Diluted earnings per share are based on the weighted average number of common shares outstanding, the dilutive effect, if any, of restricted stock units, or RSUs, and performance shares, the potential exercise of outstanding stock options and the potential conversion of our 10% convertible senior notes.
Basic earnings per share are based on the weighted average number of common shares outstanding. Diluted earnings per share are based on the weighted average number of common shares outstanding, the dilutive effect, if any, of restricted stock units, or RSUs, and performance shares, the potential exercise of outstanding stock options and the potential conversion of our 10% convertible senior notes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments, primarily money market mutual funds, with maturities of three months or less at the time of purchase.
Cash and cash equivalents include highly liquid investments, primarily money market mutual funds, with maturities of three months or less at the time of purchase.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss), or AOCI. If it is deemed that marketable securities have unrealized losses that are other than temporary, these losses will be recorded in earnings immediately. Situations in which losses may be considered other than temporary include when we have decided to sell a security or when it is more likely than not that we will be required to sell the security before we recover its amortized cost basis.
Marketable securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss), or AOCI. If it is deemed that marketable securities have unrealized losses that are other than temporary, these losses will be recorded in earnings immediately. Situations in which losses may be considered other than temporary include when we have decided to sell a security or when it is more likely than not that we will be required to sell the security before we recover its amortized cost basis.
RECEIVABLES
Trade Receivables: We include trade receivables in receivables on our consolidated balance sheets. Trade receivables are recorded at net realizable value, which includes allowances for cash discounts and doubtful accounts. We review the collectability of trade receivables on an ongoing basis. Trade receivables determined to be uncollectible are written off to the allowance for doubtful accounts. This determination is based on the delinquency of the account, the financial condition of the customer and our collection experience.
Trade Receivables: We include trade receivables in receivables on our consolidated balance sheets. Trade receivables are recorded at net realizable value, which includes allowances for cash discounts and doubtful accounts. We review the collectability of trade receivables on an ongoing basis. Trade receivables determined to be uncollectible are written off to the allowance for doubtful accounts. This determination is based on the delinquency of the account, the financial condition of the customer and our collection experience.
Financing Receivables: We include short-term financing receivables in receivables and long-term
financing receivables in other assets on our consolidated balance sheets. Financing receivables are
recorded at net realizable value which includes an allowance for credit losses. We review the
collectability of financing receivables on an ongoing basis. Financing receivables determined to be
uncollectible are written off to the allowance for credit losses. This determination is based on
the delinquency of the account and the financial condition of the other party. As of December 31,
2010, the allowance for credit losses was immaterial.
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PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. We determine provisions for depreciation of property, plant and equipment on a straight-line basis over the expected average useful lives of composite asset groups. We have determined estimated useful lives to be 50 years for buildings and improvements, a range of 10 to 25 years for machinery and equipment, and five years for computer software and systems development costs. Leasehold improvements are capitalized and amortized over the shorter of the remaining lease term or remaining economic useful life. We capitalize interest during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of those assets. Capitalized interest was zero in 2010, $3 million in 2009 and $19 million in 2008. Facility start-up costs that cannot be capitalized are expensed as incurred and recorded in cost of products sold. We compute depletion on a basis calculated to spread the cost of gypsum and other applicable resources over the estimated quantities of material recoverable. We review property, plant and equipment for impairment when indicators of a potential impairment are present by comparing the carrying values of the assets with their estimated future undiscounted cash flows. If we determine an impairment exists, the asset is written down to estimated fair value. As of December 31, 2010, $7 million of net property, plant and equipment included in other current assets on the consolidated balance sheet was classified as “assets held for sale.” Assets in this category are primarily related to our United States Gypsum Company, or U.S. Gypsum, reporting unit. These assets are anticipated to be sold in 2011.
Property, plant and equipment is recorded at cost. We determine provisions for depreciation of property, plant and equipment on a straight-line basis over the expected average useful lives of composite asset groups. We have determined estimated useful lives to be 50 years for buildings and improvements, a range of 10 to 25 years for machinery and equipment, and five years for computer software and systems development costs. Leasehold improvements are capitalized and amortized over the shorter of the remaining lease term or remaining economic useful life. We capitalize interest during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of those assets. Capitalized interest was zero in 2010, $3 million in 2009 and $19 million in 2008. Facility start-up costs that cannot be capitalized are expensed as incurred and recorded in cost of products sold. We compute depletion on a basis calculated to spread the cost of gypsum and other applicable resources over the estimated quantities of material recoverable. We review property, plant and equipment for impairment when indicators of a potential impairment are present by comparing the carrying values of the assets with their estimated future undiscounted cash flows. If we determine an impairment exists, the asset is written down to estimated fair value. As of December 31, 2010, $7 million of net property, plant and equipment included in other current assets on the consolidated balance sheet was classified as “assets held for sale.” Assets in this category are primarily related to our United States Gypsum Company, or U.S. Gypsum, reporting unit. These assets are anticipated to be sold in 2011.
INTANGIBLE ASSETS
We perform impairment tests for goodwill (when applicable) and other intangible assets with indefinite useful lives as of October 31 of each year, or more frequently if events or circumstances indicate they might be impaired. The impairment test consists of a comparison of the fair value of the asset with its carrying amount. We perform impairment tests on definite-lived intangible assets upon identification of events or circumstances that may indicate the carrying amount of the assets might be unrecoverable. See Note 3 for information related to impairment testing and impairment charges.
We perform impairment tests for goodwill (when applicable) and other intangible assets with indefinite useful lives as of October 31 of each year, or more frequently if events or circumstances indicate they might be impaired. The impairment test consists of a comparison of the fair value of the asset with its carrying amount. We perform impairment tests on definite-lived intangible assets upon identification of events or circumstances that may indicate the carrying amount of the assets might be unrecoverable. See Note 3 for information related to impairment testing and impairment charges.
SHARE-BASED COMPENSATION
We award share-based compensation to employees in the form of stock options, RSUs and performance shares. All grants under share-based payment programs are accounted for at fair value at the date of grant. The expense for these equity-based incentives is based on their fair value at date of grant. We recognize expense on all share-based awards expected to vest over the service period, which is the shorter of the period until the employees’ retirement eligibility dates or the service period of the award.
We award share-based compensation to employees in the form of stock options, RSUs and performance shares. All grants under share-based payment programs are accounted for at fair value at the date of grant. The expense for these equity-based incentives is based on their fair value at date of grant. We recognize expense on all share-based awards expected to vest over the service period, which is the shorter of the period until the employees’ retirement eligibility dates or the service period of the award.
DERIVATIVE INSTRUMENTS
We use derivative instruments to manage selected commodity price and foreign currency exposures. We do not use derivative instruments for speculative trading purposes, and we typically do not hedge beyond five years. All derivative instruments must be recorded on the balance sheet at fair value. For derivatives designated as fair value hedges, the changes in the fair values of both the derivative instrument and the hedged item are recognized in earnings in the current period. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded to AOCI, and is reclassified to earnings when the transaction underlying the derivative instrument has an impact on earnings. The ineffective portion of changes in the fair value of the derivative is reported in cost of products sold. We periodically re-assess the probability of the forecasted transaction underlying the derivative instrument occurring. For derivatives designated as net investment hedges, we record changes in value to AOCI. For derivatives not designated as hedging instruments, all changes in fair value are recorded to earnings.
We use derivative instruments to manage selected commodity price and foreign currency exposures. We do not use derivative instruments for speculative trading purposes, and we typically do not hedge beyond five years. All derivative instruments must be recorded on the balance sheet at fair value. For derivatives designated as fair value hedges, the changes in the fair values of both the derivative instrument and the hedged item are recognized in earnings in the current period. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded to AOCI, and is reclassified to earnings when the transaction underlying the derivative instrument has an impact on earnings. The ineffective portion of changes in the fair value of the derivative is reported in cost of products sold. We periodically re-assess the probability of the forecasted transaction underlying the derivative instrument occurring. For derivatives designated as net investment hedges, we record changes in value to AOCI. For derivatives not designated as hedging instruments, all changes in fair value are recorded to earnings.
Commodity Derivative Instruments: Currently, we are using swap and option contracts to hedge a
significant portion of our anticipated purchases of natural gas to be used in our manufacturing
operations. Generally, we hedge the cost of a majority of our anticipated purchases of natural gas
over the next 12 months. However, we review our positions regularly and make adjustments as market
conditions warrant. The majority of contracts currently in place are designated as cash flow
hedges, and the remainder are not designated as hedging instruments.
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Foreign Exchange Derivative Instruments: We have operations in a number of countries and use
forward contracts and cross-currency swaps from time to time to hedge selected risk of changes in
cash flows resulting from forecasted intercompany and third-party sales or purchases, as well as
intercompany loans, denominated in non-U.S. currencies, or to hedge selected risk of changes in our
net investment in foreign subsidiaries. These contracts are designated as either cash flow hedges
or hedges of net investment or are not designated as hedging instruments.
FOREIGN CURRENCY TRANSLATION
We translate foreign-currency-denominated assets and liabilities into U.S. dollars at the exchange rates existing as of the respective balance sheet dates. We translate income and expense items at the average exchange rates during the respective periods. We record translation adjustments resulting from fluctuations in exchange rates to AOCI on our consolidated balance sheets. We record transaction gains and losses to earnings. The total transaction loss was $1 million in 2010, $2 million in 2009 and $8 million in 2008.
We translate foreign-currency-denominated assets and liabilities into U.S. dollars at the exchange rates existing as of the respective balance sheet dates. We translate income and expense items at the average exchange rates during the respective periods. We record translation adjustments resulting from fluctuations in exchange rates to AOCI on our consolidated balance sheets. We record transaction gains and losses to earnings. The total transaction loss was $1 million in 2010, $2 million in 2009 and $8 million in 2008.
FAIR VALUE MEASUREMENTS
Certain assets and liabilities are required to be recorded at fair value. The estimated fair values of those assets and liabilities have been determined using market information and valuation methodologies. Changes in assumptions or estimation methods could affect the fair value estimates. However, we do not believe any such changes would have a material impact on our financial condition, results of operations or cash flows. There are three levels of inputs that may be used to measure fair value:
Certain assets and liabilities are required to be recorded at fair value. The estimated fair values of those assets and liabilities have been determined using market information and valuation methodologies. Changes in assumptions or estimation methods could affect the fair value estimates. However, we do not believe any such changes would have a material impact on our financial condition, results of operations or cash flows. There are three levels of inputs that may be used to measure fair value:
| • | Level 1 – Quoted prices for identical assets and liabilities in active markets; | |
| • | Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and |
| • | Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
Certain assets and liabilities are measured at fair value on a nonrecurring basis rather than on an
ongoing basis, but are subject to fair value adjustments in certain circumstances, such as when
there is evidence of impairment or when a new liability is being established that requires fair
value measurement.
2. Restructuring and Long-Lived Asset Impairment Charges
In response to adverse market conditions, we implemented restructuring activities in 2010, 2009 and
2008 that resulted in the charges described below.
2010
In 2010, we recorded restructuring and long-lived asset impairment charges totaling $110 million primarily associated with the temporary idling or permanent closure of production facilities, the temporary idling of two gypsum quarries and a ship loading facility, the closure of five distribution centers and a salaried workforce reduction. On a segment basis, $93 million of the total amount related to North American Gypsum, $15 million to Building Products Distribution and $1 million each to Worldwide Ceilings and Corporate.
In 2010, we recorded restructuring and long-lived asset impairment charges totaling $110 million primarily associated with the temporary idling or permanent closure of production facilities, the temporary idling of two gypsum quarries and a ship loading facility, the closure of five distribution centers and a salaried workforce reduction. On a segment basis, $93 million of the total amount related to North American Gypsum, $15 million to Building Products Distribution and $1 million each to Worldwide Ceilings and Corporate.
Long-lived asset impairment charges totaled $58 million. This amount included charges related
to (1) a gypsum wallboard production facility in Southard, Okla., that was permanently closed, (2)
the carrying values of machinery, equipment and buildings at our previously idled and now
permanently closed gypsum wallboard production facilities in Fort Dodge, Iowa, and Jacksonville,
Fla., and paper production facilities in Clark, N.J., and South Gate, Calif., and (3) the carrying
values of machinery, equipment and buildings at our temporarily idled gypsum wallboard production
facilities in Stony Point, N.Y., Baltimore, Md., and Jacksonville, Fla., and our temporarily idled
paper production facility in Jacksonville, Fla. The carrying values of the machinery, equipment and
buildings at these
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temporarily idled production facilities exceeded the estimated future undiscounted cash flows for
their remaining useful lives due to the extended downturn in our markets and our forecasts
regarding the timing and rate of recovery in those markets.
Other asset impairment charges totaled $6 million. This amount included charges primarily
related to write-offs of receivables and inventories for a gypsum quarry and ship loading facility
in Windsor, Nova Scotia, Canada, that will be temporarily idled later in the first quarter of 2011
and five distribution centers that were closed during 2010.
Severance charges totaled $22 million. This amount included $8 million for severance primarily
related to a salaried workforce reduction and $14 million for severance related to the temporary
idling of production facilities, the two gypsum quarries and ship loading facility and the closure
of distribution centers. The number of salaried employees terminated and open salaried positions
eliminated was approximately 230. The number of hourly employees terminated and open hourly
positions eliminated was approximately 420.
Lease obligation charges totaled $11 million, the majority of which related to the closure of
the distribution centers. We recorded an additional $8 million for contractual obligations and $5
million for other exit costs.
2009
In 2009, we recorded restructuring and long-lived asset impairment charges totaling $80 million primarily associated with salaried workforce reductions, the closure of 37 distribution centers and the temporary idling or permanent closure of production facilities. On a segment basis, $39 million of the total amount related to Building Products Distribution, $25 million to North American Gypsum, $5 million to Worldwide Ceilings and $11 million to Corporate. These charges included (1) $10 million for severance primarily related to salaried workforce reductions and $6 million for severance related to the closure of distribution centers and the idling or closure of production facilities, (2) $32 million for lease obligations primarily related to the closure of distribution centers and future lease obligations related to space that we no longer occupy in our corporate headquarters, (3) $24 million for the write-down of the value of machinery and equipment at production facilities that were permanently closed, equipment related to distribution center closures, leasehold improvements related to leased space we no longer occupy in our corporate headquarters and the write-off of receivables and inventory at the closed distribution centers, and (4) $8 million for costs related to production facilities that were temporarily idled or permanently closed prior to 2009 and other exit costs. The number of employees terminated and open positions eliminated during 2009 as a result of our salaried workforce reductions was approximately 360. The number of hourly employees terminated and open hourly positions eliminated during 2009 was approximately 460.
In 2009, we recorded restructuring and long-lived asset impairment charges totaling $80 million primarily associated with salaried workforce reductions, the closure of 37 distribution centers and the temporary idling or permanent closure of production facilities. On a segment basis, $39 million of the total amount related to Building Products Distribution, $25 million to North American Gypsum, $5 million to Worldwide Ceilings and $11 million to Corporate. These charges included (1) $10 million for severance primarily related to salaried workforce reductions and $6 million for severance related to the closure of distribution centers and the idling or closure of production facilities, (2) $32 million for lease obligations primarily related to the closure of distribution centers and future lease obligations related to space that we no longer occupy in our corporate headquarters, (3) $24 million for the write-down of the value of machinery and equipment at production facilities that were permanently closed, equipment related to distribution center closures, leasehold improvements related to leased space we no longer occupy in our corporate headquarters and the write-off of receivables and inventory at the closed distribution centers, and (4) $8 million for costs related to production facilities that were temporarily idled or permanently closed prior to 2009 and other exit costs. The number of employees terminated and open positions eliminated during 2009 as a result of our salaried workforce reductions was approximately 360. The number of hourly employees terminated and open hourly positions eliminated during 2009 was approximately 460.
2008
In 2008, we recorded restructuring and long-lived asset impairment charges totaling $98 million. On a segment basis, $48 million of the total amount related to North American Gypsum, $34 million to Building Products Distribution, $5 million to Worldwide Ceilings and $11 million to Corporate. These charges included (1) $39 million for severance related to salaried workforce reductions and $11 million for severance related to the idling or closure of production facilities and distribution centers, (2) $24 million for lease obligations related to the closure of production facilities and distribution centers and excess leased office space, (3) $18 million for the write-down of the value of machinery and equipment at production facilities that were permanently closed and of leasehold improvements and the write-off of receivables and inventory at the closed distribution centers, and (4) $6 million for the clean-up of closed or idled production facilities, other exit activities and additional expenses incurred in 2008 for production facilities that were closed in 2007. The number of employees terminated and open positions eliminated during 2008 as a result of our salaried workforce reductions was approximately 1,400. The number of hourly employees terminated and open hourly positions eliminated during 2008 as a result of the closing or idling of production facilities was approximately 1,000.
In 2008, we recorded restructuring and long-lived asset impairment charges totaling $98 million. On a segment basis, $48 million of the total amount related to North American Gypsum, $34 million to Building Products Distribution, $5 million to Worldwide Ceilings and $11 million to Corporate. These charges included (1) $39 million for severance related to salaried workforce reductions and $11 million for severance related to the idling or closure of production facilities and distribution centers, (2) $24 million for lease obligations related to the closure of production facilities and distribution centers and excess leased office space, (3) $18 million for the write-down of the value of machinery and equipment at production facilities that were permanently closed and of leasehold improvements and the write-off of receivables and inventory at the closed distribution centers, and (4) $6 million for the clean-up of closed or idled production facilities, other exit activities and additional expenses incurred in 2008 for production facilities that were closed in 2007. The number of employees terminated and open positions eliminated during 2008 as a result of our salaried workforce reductions was approximately 1,400. The number of hourly employees terminated and open hourly positions eliminated during 2008 as a result of the closing or idling of production facilities was approximately 1,000.
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RESTRUCTURING RESERVE
A restructuring reserve of $49 million was included in accrued expenses and long-term liabilities on the consolidated balance sheet as of December 31, 2010. We expect future payments to be approximately $34 million in 2011, $7 million in 2012 and $8 million after 2012. On a segment basis, $22 million of all expected future payments relate to Building Products Distribution, $20 million to North American Gypsum, $1 million to Worldwide Ceilings and $6 million to Corporate. All restructuring-related payments in 2010 were funded with cash from operations or cash on hand. We expect that the future payments also will be funded with cash from operations or cash on hand.
A restructuring reserve of $49 million was included in accrued expenses and long-term liabilities on the consolidated balance sheet as of December 31, 2010. We expect future payments to be approximately $34 million in 2011, $7 million in 2012 and $8 million after 2012. On a segment basis, $22 million of all expected future payments relate to Building Products Distribution, $20 million to North American Gypsum, $1 million to Worldwide Ceilings and $6 million to Corporate. All restructuring-related payments in 2010 were funded with cash from operations or cash on hand. We expect that the future payments also will be funded with cash from operations or cash on hand.
The restructuring reserve for the years ended December 31, 2010, 2009 and 2008 is summarized
as follows (dollars in millions):
| Balance | Annual Activity | Balance | ||||||||||||||||||
| as of | Cash | Asset | as of | |||||||||||||||||
| January 1 | Charges | Payments | Impairment | December 31 | ||||||||||||||||
2010 Restructuring Activities: |
||||||||||||||||||||
Severance |
$ | 4 | $ | 22 | $ | (15) | $ | - | $ | 11 | ||||||||||
Lease obligations |
34 | 11 | (16) | - | 29 | |||||||||||||||
Asset impairments |
- | 64 | - | (64) | - | |||||||||||||||
Other exit costs |
2 | 13 | (6) | - | 9 | |||||||||||||||
Total |
$ | 40 | $ | 110 | $ | (37) | $ | (64) | $ | 49 | ||||||||||
2009 Restructuring Activities: |
||||||||||||||||||||
Severance |
$ | 27 | $ | 16 | $ | (39) | $ | - | $ | 4 | ||||||||||
Lease obligations |
23 | 32 | (15) | (6) | 34 | |||||||||||||||
Asset impairments |
- | 24 | - | (24) | - | |||||||||||||||
Other exit costs |
- | 8 | (6) | - | 2 | |||||||||||||||
Total |
$ | 50 | $ | 80 | $ | (60) | $ | (30) | $ | 40 | ||||||||||
2008 Restructuring Activities: |
||||||||||||||||||||
Severance |
$ | - | $ | 50 | $ | (23) | $ | - | $ | 27 | ||||||||||
Lease obligations |
- | 24 | (1) | - | 23 | |||||||||||||||
Asset impairments |
- | 18 | - | (18) | - | |||||||||||||||
Other exit costs |
- | 6 | (6) | - | - | |||||||||||||||
Total |
$ | - | $ | 98 | $ | (30) | $ | (18) | $ | 50 | ||||||||||
3. Marketable Securities
Our investments in marketable securities as of December 31, 2010 consisted of the following:
| Amortized | Fair | |||||||
| (millions) | Cost | Value | ||||||
Corporate debt securities |
$ | 123 | $ | 123 | ||||
U.S. government and agency debt securities |
58 | 58 | ||||||
Asset-backed debt securities |
19 | 19 | ||||||
Non-U.S. government debt securities |
10 | 10 | ||||||
Certificates of deposit |
41 | 41 | ||||||
Municipal debt securities |
27 | 27 | ||||||
Total marketable securities |
$ | 278 | $ | 278 | ||||
The realized and unrealized gains and losses as of and for the year ended December 31,
2010 were immaterial. Proceeds received from sales and maturities of marketable securities were $74
million for 2010.
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Contractual maturities of marketable securities as of December 31, 2010 were as follows:
| Amortized | Fair | |||||||
| (millions) | Cost | Value | ||||||
Due in 1 year or less |
$ | 128 | $ | 128 | ||||
Due in 1-5 years |
128 | 128 | ||||||
Due in more than 5 years |
3 | 3 | ||||||
Asset-backed debt securities |
19 | 19 | ||||||
Total marketable securities |
$ | 278 | $ | 278 | ||||
4. Intangible Assets
We have both indefinite and definite lived intangible assets. We perform impairment tests on
intangible assets with indefinite useful lives including goodwill (when applicable) as of October
31 of each fiscal year, or when events occur or circumstances change that would, more likely than
not, reduce the fair value of a reporting unit or an intangible asset with an indefinite useful
life to below its carrying value. The impairment test consists of a comparison of the fair value of
an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds
its fair value, an impairment loss is recognized in an amount equal to that excess. Intangible
assets determined to have indefinite useful lives, primarily comprised of trade names, are not
amortized. An income approach is used for valuing trade names. Assumptions used in the income
approach include projected revenues and assumed royalty, long-term growth and discount rates. Based
on tests performed in 2010, we determined that our intangible assets with indefinite useful lives
were not impaired. We perform impairment tests on definite lived intangible assets, such as
customer relationships, upon identification of events or circumstances that may indicate the
carrying amount of the asset might be unrecoverable.
In 2010, there was no impairment identified for any of our customer relationship or trade name
intangible assets. We had no recorded goodwill on our consolidated balance sheet as of December 31,
2010 or during the year then ended.
In 2009, we recorded goodwill and other intangible asset impairment charges of $43 million.
Because of continuing weak economic conditions, macroeconomic factors impacting industry business
conditions, recent segment operating performance and our decision in September 2009 to close
additional distribution centers, we performed interim impairment tests on L&W Supply Corporation
and its subsidiaries, or L&W Supply, the reporting unit that comprises our Building Products
Distribution segment, as of September 30, 2009. This testing indicated that the fair value of the
L&W Supply reporting unit was less than its carrying value and, as a result, impairment existed.
Consequently, in the third quarter of 2009, we recorded impairment charges totaling $41 million, of
which $29 million related to L&W Supply’s intangible assets associated with trade names and $12
million was its remaining goodwill balance. No impairment existed for L&W Supply’s intangible
assets associated with customer relationships. During our annual impairment review in the fourth
quarter of 2009, we determined that a full impairment existed for the trade names of the Latin
America reporting unit within our Worldwide Ceilings segment. This impairment resulted in an
additional impairment charge of $2 million. We determined that no additional impairment existed for
L&W Supply’s intangible assets based on the annual review. We had no recorded goodwill on our
consolidated balance sheet as of December 31, 2009.
In 2008, we recorded goodwill and other intangible asset impairment charges of $226 million as
a result of our annual impairment testing in the fourth quarter of that year. The conditions that
contributed to that impairment included our sustained low stock price and reduced market
capitalization relative to the book value of our equity, which was adversely affected by generally
weak economic conditions, macroeconomic factors impacting industry business conditions, recent and
forecasted segment operating performance, the increased competitive environment, and continued
tightening of the credit markets, along with other factors, such as a significant decline in
housing
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starts. The total charge recorded in the fourth quarter of 2008 consisted of $201 million of
goodwill related to L&W Supply, $12 million of goodwill related to the Latin America reporting unit
within our Worldwide Ceilings segment, $1 million of goodwill related to the USG Mexico, S.A. de
C.V., or USG Mexico, reporting unit within our North American Gypsum segment and $12 million of
intangible assets associated with L&W Supply’s trade names. A portion of the charges related to
goodwill was deductible for tax purposes, resulting in a tax benefit of $49 million, or
approximately 22% of the pretax charges amount. An additional $1 million write-off of trade names
was recorded to cost of products sold earlier in 2008.
INTANGIBLE ASSETS
Intangible assets, which are included in long-term other assets on the consolidated balance sheets, are summarized as follows:
Intangible assets, which are included in long-term other assets on the consolidated balance sheets, are summarized as follows:
| As of December 31, 2010 | As of December 31, 2009 | |||||||||||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||||||||||
| Carrying | Impairment | Accumulated | Carrying | Impairment | Accumulated | |||||||||||||||||||||||||||
| (millions) | Amount | Charges | Amortization | Net | Amount | Charges | Amortization | Net | ||||||||||||||||||||||||
Intangible Assets with Definite Lives: |
||||||||||||||||||||||||||||||||
Customer relationships |
$ | 70 | $ | - | $ | (26) | $ | 44 | $ | 70 | $ | - | $ | (20) | $ | 50 | ||||||||||||||||
Other |
9 | - | (5) | 4 | 9 | - | (4) | 5 | ||||||||||||||||||||||||
Total |
79 | - | (31) | 48 | 79 | - | (24) | 55 | ||||||||||||||||||||||||
Intangible Assets with Indefinite Lives: |
||||||||||||||||||||||||||||||||
Trade names |
22 | - | - | 22 | 53 | (31) | - | 22 | ||||||||||||||||||||||||
Other |
9 | (1) | - | 8 | 9 | - | - | 9 | ||||||||||||||||||||||||
Total |
31 | (1) | - | 30 | 62 | (31) | - | 31 | ||||||||||||||||||||||||
Total Other Intangible Assets |
$ | 110 | $ | (1) | $ | (31) | $ | 78 | $ | 141 | $ | (31) | $ | (24) | $ | 86 | ||||||||||||||||
Intangible assets with definite lives are amortized. The weighted average amortization
periods are 10 years for customer relationships and 11 years for other intangible assets with
definite lives. Total amortization expense was $7 million in 2010 and $8 million in each of 2009
and 2008. Estimated annual amortization expense for intangible assets is $8 million for 2011 and $7
million for each of the years 2012 through 2015. Intangible assets with indefinite lives are not
amortized.
GOODWILL
Changes in the carrying amount of goodwill for Building Products Distribution, the only reportable segment with goodwill during the year ended December 31, 2009, are summarized as follows:
Changes in the carrying amount of goodwill for Building Products Distribution, the only reportable segment with goodwill during the year ended December 31, 2009, are summarized as follows:
| Building | ||||
| Products | ||||
| (millions) | Distribution | |||
Balance as of January 1, 2009: |
||||
Goodwill |
$ | 213 | ||
Accumulated impairment charges |
(201) | |||
| $ | 12 | |||
Impairment charges |
(12) | |||
Balance as of December 31, 2009: |
||||
Goodwill |
$ | 213 | ||
Accumulated impairment charges |
(213) | |||
| $ | - | |||
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5. Debt
Total debt as of December 31 consisted of the following:
| (millions) | 2010 | 2009 | ||||||
6.3% senior notes due 2016 |
$ | 500 | $ | 500 | ||||
7.75% senior notes due 2018, net of discount |
499 | 499 | ||||||
8.375% senior notes due 2018 |
350 | - | ||||||
9.75% senior notes due 2014, net of discount |
296 | 295 | ||||||
10% convertible senior notes due 2018, net of discount |
382 | 380 | ||||||
Ship mortgage facility (includes $7 million of current portion of long-term debt) |
42 | 49 | ||||||
Industrial revenue bonds (due 2028 through 2034) |
239 | 239 | ||||||
Total |
$ | 2,308 | $ | 1,962 | ||||
CREDIT FACILITY
In the fourth quarter of 2010, we amended and restated our credit facility. As amended and restated, the credit facility allows for revolving loans and letters of credit (up to $250 million) in an aggregate principal amount not to exceed the lesser of (a) $400 million or (b) a borrowing base determined by reference to the trade receivables and inventory of USG and its significant domestic subsidiaries. The maximum allowable borrowings may be increased at our request with the agreement of the lenders providing increased or new lending commitments, provided that the maximum allowable borrowings after giving effect to the increase may not exceed $600 million. The credit facility is guaranteed by our significant domestic subsidiaries and secured by their and USG’s trade receivables and inventory. It is available to fund working capital needs and for other general corporate purposes.
In the fourth quarter of 2010, we amended and restated our credit facility. As amended and restated, the credit facility allows for revolving loans and letters of credit (up to $250 million) in an aggregate principal amount not to exceed the lesser of (a) $400 million or (b) a borrowing base determined by reference to the trade receivables and inventory of USG and its significant domestic subsidiaries. The maximum allowable borrowings may be increased at our request with the agreement of the lenders providing increased or new lending commitments, provided that the maximum allowable borrowings after giving effect to the increase may not exceed $600 million. The credit facility is guaranteed by our significant domestic subsidiaries and secured by their and USG’s trade receivables and inventory. It is available to fund working capital needs and for other general corporate purposes.
Borrowings under the credit facility bear interest at a floating rate based on an alternate
base rate or, at our option, at adjusted LIBOR plus 3.00%. We are also required to pay annual
facility fees of 0.75% on the entire facility, whether drawn or undrawn, and fees on outstanding
letters of credit. We have the ability to repay amounts outstanding under the credit agreement at
any time without prepayment premium or penalty. The credit facility matures on December 21, 2015
unless terminated earlier in accordance with its terms, including if by May 2, 2014 our 9.75%
senior notes due in 2014 are not repaid, their payment is not provided for or their maturity has
not been extended until at least 2016 unless we then have liquidity of at least $500 million.
The credit agreement contains a single financial covenant that would require us to maintain a
minimum fixed charge coverage ratio of 1.1-to-1.0 if and for so long as the excess of the borrowing
base over the outstanding borrowings under the credit agreement is less than the greater of (a) $40
million and (b) 15% of the lesser of (i) the aggregate revolving commitments at such time and (ii)
the borrowing base at such time. As of the date of this report, our fixed charge coverage ratio was
(0.21)-to-1. Because we do not currently satisfy the required fixed charge coverage ratio, we must
maintain borrowing availability of at least $40 million under the credit facility. The credit
agreement contains other covenants and events of default that are customary for similar agreements
and may limit our ability to take various actions.
Taking into account the most recent borrowing base calculation delivered under the credit
facility, which reflects trade receivables and inventory as of December 31, 2010, outstanding
letters of credit and the current availability requirement of $40 million for the fixed charge
coverage ratio not to apply, borrowings available under the credit facility were approximately $126
million. As of December 31, 2010 and during the year then-ended, there were no borrowings under the
facility. Had there been any borrowings as of that date, the applicable interest rate would have
been 3.3%. Outstanding letters of credit totaled $81 million as of December 31, 2010.
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SENIOR NOTES
In the fourth quarter of 2010, we issued $350 million in aggregate principal amount of 8.375% senior notes due 2018. Our obligations under the notes are guaranteed on a senior unsecured basis by certain of our domestic subsidiaries.
In the fourth quarter of 2010, we issued $350 million in aggregate principal amount of 8.375% senior notes due 2018. Our obligations under the notes are guaranteed on a senior unsecured basis by certain of our domestic subsidiaries.
We have $300 million in aggregate principal amount of 9.75% senior notes due 2014 that are
recorded on the consolidated balance sheets at $296 million as of December 31, 2010 and $295
million as of December 31, 2009, which are net of debt discount of $4 million and $5 million,
respectively. Our obligations under these notes are guaranteed on a senior unsecured basis by the
same domestic subsidiaries that have guaranteed the 8.375% senior notes.
We have $500 million of 7.75% senior notes due 2018 that are recorded on the December 31, 2010
and 2009 consolidated balance sheets at $499 million, which is net of debt discount of $1 million.
The interest rate payable on these notes is subject to adjustment from time to time by up to 2% in
the aggregate if the debt ratings assigned to the notes decrease or thereafter increase. At our
current credit ratings, the interest rate on these notes is at the maximum level of 9.75%. We also
have $500 million of 6.3% senior notes due 2016.
The 9.75% senior notes, 8.375% senior notes, 7.75% senior notes and 6.3% senior notes are
senior unsecured obligations and rank equally with all of our other existing and future unsecured
senior indebtedness. The indentures governing the notes contain events of default, covenants and
restrictions that are customary for similar transactions, including a limitation on our ability and
the ability of certain of our subsidiaries to create or incur secured indebtedness.
The 9.75% and 8.375% senior notes contain a provision requiring us to offer to purchase those
notes at a premium of 101% of their principal amount (plus accrued and unpaid interest) in the
event of a change in control. The 7.75% and 6.3% senior notes contain a provision requiring us to
offer to purchase those notes at a premium of 101% of their principal amount (plus accrued and
unpaid interest) in the event of a change in control and a related downgrade of the rating on the
notes to below investment grade by both Moody’s Investors Service and Standard & Poor’s Financial
Services LLC.
The 9.75%, 7.75% and 6.3% senior notes contain a provision that allows us to redeem the notes
in whole at any time, or in part from time to time, at our option, at a redemption price equal to
the greater of (1) 100% of the principal amount of the notes being redeemed and (2) the sum of the
present value of the remaining scheduled payments of principal and interest on the notes being
redeemed discounted to the redemption date on a semi-annual basis at the applicable U.S. Treasury
rate plus a spread (as outlined in the respective indentures), plus, in each case, any accrued and
unpaid interest on the principal amount being redeemed to the redemption date. The 8.375% senior
notes contain a similar provision that allows us to redeem those notes, in whole or in part from
time to time, at our option, beginning on October 15, 2014 at stated redemption prices, plus any
accrued and unpaid interest. In addition, we may redeem the 8.375% senior notes in whole or in part
from time to time, at our option, prior to October 15, 2014 at a redemption price equal to 100% of
the principal amount of the notes redeemed plus a premium (as specified in the supplemental
indenture with respect to those notes), plus any accrued and unpaid interest.
CONVERTIBLE SENIOR NOTES
We have $400 million aggregate principal amount of 10% convertible senior notes due 2018 that are recorded on the consolidated balance sheets at $382 million as of December 31, 2010 and $380 million as of December 31, 2009, which are net of debt discount of $18 million and $20 million, respectively, as a result of an embedded derivative. The notes bear cash interest at the rate of 10% per year until maturity, redemption or conversion. The notes are initially convertible into 87.7193 shares of our common stock per $1,000 principal amount of notes which is equivalent to an initial conversion price of $11.40 per share, or a total of 35.1 million shares. The notes contain anti-dilution provisions that are customary for convertible notes issued in transactions similar to that in which the notes were issued. The notes mature on December 1, 2018 and are not callable until December 1, 2013, after which we
We have $400 million aggregate principal amount of 10% convertible senior notes due 2018 that are recorded on the consolidated balance sheets at $382 million as of December 31, 2010 and $380 million as of December 31, 2009, which are net of debt discount of $18 million and $20 million, respectively, as a result of an embedded derivative. The notes bear cash interest at the rate of 10% per year until maturity, redemption or conversion. The notes are initially convertible into 87.7193 shares of our common stock per $1,000 principal amount of notes which is equivalent to an initial conversion price of $11.40 per share, or a total of 35.1 million shares. The notes contain anti-dilution provisions that are customary for convertible notes issued in transactions similar to that in which the notes were issued. The notes mature on December 1, 2018 and are not callable until December 1, 2013, after which we
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may elect to redeem all or part of the notes at stated redemption prices, plus accrued and unpaid
interest.
The notes are senior unsecured obligations and rank equally with all of our other existing and
future unsecured senior indebtedness. The indenture governing the notes contains events of default,
covenants and restrictions that are customary for similar transactions, including a limitation on
our ability and the ability of certain of our subsidiaries to create or incur secured indebtedness.
The notes also contain a provision requiring us to offer to purchase the notes at a premium of 105%
of their principal amount (plus accrued and unpaid interest) in the event of a change in control or
the termination of trading of our common stock on a national securities exchange.
SHIP MORTGAGE FACILITY
Our subsidiary, Gypsum Transportation Limited, or GTL, has a secured loan facility agreement with DVB Bank SE, as lender, agent and security trustee. Both advances provided for under the secured loan facility have been drawn, and the total outstanding loan balances under the facility were $42 million as of December 31, 2010 and $49 million as of December 31, 2009. Of the total amounts outstanding as of December 31, 2010 and 2009, $7 million was classified as current portion of long-term debt on our consolidated balance sheets.
Our subsidiary, Gypsum Transportation Limited, or GTL, has a secured loan facility agreement with DVB Bank SE, as lender, agent and security trustee. Both advances provided for under the secured loan facility have been drawn, and the total outstanding loan balances under the facility were $42 million as of December 31, 2010 and $49 million as of December 31, 2009. Of the total amounts outstanding as of December 31, 2010 and 2009, $7 million was classified as current portion of long-term debt on our consolidated balance sheets.
The loan balance under the secured loan facility bears interest at a floating rate based on
LIBOR plus a margin of 1.65%. The interest rate was 2.27% as of December 31, 2010. Each advance is
repayable in quarterly installments in amounts determined in accordance with the secured loan
facility agreement, with the balance of each advance repayable eight years after the date it was
advanced, or October 31, 2016 and May 22, 2017. The secured loan facility agreement contains
affirmative and negative covenants affecting GTL and certain customary events of default. GTL has
granted DVB Bank SE a security interest in the Gypsum Centennial and Gypsum Integrity ships and
related insurance, contract, account and other rights as security for borrowings under the secured
loan facility. USG Corporation has guaranteed the obligations of GTL under the secured loan
facility and has agreed to maintain liquidity of at least $175 million.
CGC CREDIT FACILITY
Our Canadian subsidiary, CGC Inc., or CGC, has a Can. $30 million credit agreement with The Toronto-Dominion Bank. The credit agreement allows for revolving loans and letters of credit (up to Can. $3 million in aggregate) in an aggregate principal amount not to exceed Can. $30 million. The credit agreement is available for the general corporate purposes of CGC, excluding hostile acquisitions. The credit agreement is secured by a general security interest in substantially all of CGC’s assets other than intellectual property.
Our Canadian subsidiary, CGC Inc., or CGC, has a Can. $30 million credit agreement with The Toronto-Dominion Bank. The credit agreement allows for revolving loans and letters of credit (up to Can. $3 million in aggregate) in an aggregate principal amount not to exceed Can. $30 million. The credit agreement is available for the general corporate purposes of CGC, excluding hostile acquisitions. The credit agreement is secured by a general security interest in substantially all of CGC’s assets other than intellectual property.
Revolving loans under the agreement may be made in Canadian dollars or U.S. dollars. Revolving
loans made in Canadian dollars bear interest at a floating rate based on the prime rate plus 1.50%
or the Bankers’ Acceptance Discount Rate plus 3.00%, at the option of CGC. Revolving loans made in
U.S. dollars bear interest at a floating rate based upon a base rate plus 1.50% or the LIBOR rate
plus 3.00%, at the option of CGC. CGC may prepay the revolving loans at its discretion without
premium or penalty and may be required to repay revolving loans under certain circumstances. The
credit agreement matures on June 1, 2012, unless terminated earlier in accordance with its terms.
The credit agreement contains customary representations and warranties, affirmative and negative
covenants that may limit CGC’s ability to take certain actions and events of default. Borrowings
under the credit agreement are subject to acceleration upon the occurrence of an event of default.
As of December 31, 2010 and during the year then ended, there were no borrowings outstanding
under this credit agreement. Had there been any borrowings as of that date, the applicable interest
rate would have been 4.3%. As of December 31, 2010, outstanding letters of credit totaled Can. $0.4
million. The U.S. dollar equivalent of borrowings available under this agreement as of December 31,
2010 was $30 million.
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INDUSTRIAL REVENUE BONDS
Our $239 million of industrial revenue bonds have fixed interest rates ranging from 5.5% to 6.4%. The weighted average rate of interest on our industrial revenue bonds is 5.875%. The average maturity of these bonds is 20 years.
Our $239 million of industrial revenue bonds have fixed interest rates ranging from 5.5% to 6.4%. The weighted average rate of interest on our industrial revenue bonds is 5.875%. The average maturity of these bonds is 20 years.
OTHER INFORMATION
The fair value of our debt was $2.564 billion as of December 31, 2010 and $2.211 billion as of December 31, 2009. The fair value was based on quoted market prices of our debt or, where quoted market prices were not available, on quoted market prices of instruments with similar terms and maturities or internal valuation models. As of December 31, 2010, we were in compliance with the covenants contained in our credit facilities. The amounts of total debt outstanding as of December 31, 2010 maturing during the next five years and beyond were: $7 million in each of the years 2011 and 2012, $4 million in 2013, $304 million in 2014, $4 million in 2015 and $2.005 billion after 2015.
The fair value of our debt was $2.564 billion as of December 31, 2010 and $2.211 billion as of December 31, 2009. The fair value was based on quoted market prices of our debt or, where quoted market prices were not available, on quoted market prices of instruments with similar terms and maturities or internal valuation models. As of December 31, 2010, we were in compliance with the covenants contained in our credit facilities. The amounts of total debt outstanding as of December 31, 2010 maturing during the next five years and beyond were: $7 million in each of the years 2011 and 2012, $4 million in 2013, $304 million in 2014, $4 million in 2015 and $2.005 billion after 2015.
6. Derivative Instruments
COMMODITY DERIVATIVE INSTRUMENTS
As of December 31, 2010, we had swap and option contracts to hedge $64 million notional amounts of natural gas. All of these contracts mature by December 31, 2012. For contracts designated as cash flow hedges, the unrealized loss that remained in AOCI as of December 31, 2010 was $21 million. AOCI also includes $1 million of losses related to closed derivative contracts hedging underlying transactions that have not yet affected earnings. No ineffectiveness was recorded on contracts designated as cash flow hedges in 2010. Gains and losses on contracts designated as cash flow hedges are reclassified into earnings when the underlying forecasted transactions affect earnings. We reassess the probability of the underlying forecasted transactions occurring on a regular basis. Changes in fair value on contracts not designated as cash flow hedges are recorded to earnings. The fair value of those contracts not designated as cash flow hedges was a $1 million asset as of December 31, 2010.
As of December 31, 2010, we had swap and option contracts to hedge $64 million notional amounts of natural gas. All of these contracts mature by December 31, 2012. For contracts designated as cash flow hedges, the unrealized loss that remained in AOCI as of December 31, 2010 was $21 million. AOCI also includes $1 million of losses related to closed derivative contracts hedging underlying transactions that have not yet affected earnings. No ineffectiveness was recorded on contracts designated as cash flow hedges in 2010. Gains and losses on contracts designated as cash flow hedges are reclassified into earnings when the underlying forecasted transactions affect earnings. We reassess the probability of the underlying forecasted transactions occurring on a regular basis. Changes in fair value on contracts not designated as cash flow hedges are recorded to earnings. The fair value of those contracts not designated as cash flow hedges was a $1 million asset as of December 31, 2010.
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS
We have foreign exchange forward contracts in place to hedge changes in the value of intercompany loans to certain foreign subsidiaries due to changes in foreign exchange rates. The notional amount of these hedges was $14 million as of December 31, 2010. All of these contracts mature by August 26, 2011. We do not apply hedge accounting for these hedge contracts and all changes in their fair value are recorded to earnings. As of December 31, 2010, the fair value of these hedges was immaterial.
We have foreign exchange forward contracts in place to hedge changes in the value of intercompany loans to certain foreign subsidiaries due to changes in foreign exchange rates. The notional amount of these hedges was $14 million as of December 31, 2010. All of these contracts mature by August 26, 2011. We do not apply hedge accounting for these hedge contracts and all changes in their fair value are recorded to earnings. As of December 31, 2010, the fair value of these hedges was immaterial.
We have foreign exchange forward contracts to hedge purchases of products and services
denominated in non-functional currencies. The notional amount of these hedges was $98 million as of
December 31, 2010, and they mature by March 28, 2012. These forward contracts are designated as
cash flow hedges and no ineffectiveness was recorded in 2010. Gains and losses on the contracts are
reclassified into earnings when the underlying transactions affect earnings. The fair value of
these hedges that remained in AOCI was a $4 million unrealized loss as of December 31, 2010.
COUNTERPARTY RISK
We are exposed to credit losses in the event of nonperformance by the counterparties to our derivative instruments. All of our counterparties have investment grade credit ratings; accordingly, we anticipate that they will be able to fully satisfy their obligations under the contracts. Additionally, the derivatives are governed by master netting agreements negotiated between us and the counterparties that reduce our counterparty credit exposure. The agreements outline the conditions (such as credit ratings and net derivative fair values) upon which we, or the counterparties, are required to post collateral. As of December 31, 2010, our derivatives were in a net liability position of $24 million, and we provided $18 million of collateral to our counterparties related to our derivatives. We have not adopted an accounting policy to offset fair value amounts related to derivative contracts under our master netting arrangements. Amounts paid as cash collateral are included in receivables on our consolidated balance sheets.
We are exposed to credit losses in the event of nonperformance by the counterparties to our derivative instruments. All of our counterparties have investment grade credit ratings; accordingly, we anticipate that they will be able to fully satisfy their obligations under the contracts. Additionally, the derivatives are governed by master netting agreements negotiated between us and the counterparties that reduce our counterparty credit exposure. The agreements outline the conditions (such as credit ratings and net derivative fair values) upon which we, or the counterparties, are required to post collateral. As of December 31, 2010, our derivatives were in a net liability position of $24 million, and we provided $18 million of collateral to our counterparties related to our derivatives. We have not adopted an accounting policy to offset fair value amounts related to derivative contracts under our master netting arrangements. Amounts paid as cash collateral are included in receivables on our consolidated balance sheets.
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FINANCIAL STATEMENT INFORMATION
The following are the pretax effects of derivative instruments on the consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008 (dollars in millions):
The following are the pretax effects of derivative instruments on the consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008 (dollars in millions):
| Amount of Gain or (Loss) | ||||||||||||||||||||||||||||
| Recognized in | Location of Gain or (Loss) | Amount of Gain or (Loss) | ||||||||||||||||||||||||||
| Derivatives in | Other Comprehensive | Reclassified from | Reclassified from | |||||||||||||||||||||||||
| Cash Flow Hedging | Income on Derivatives | AOCI into Income | AOCI into Income | |||||||||||||||||||||||||
| Relationships | (Effective Portion) | (Effective Portion) | (Effective Portion) | |||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||
Commodity contracts |
$ | (18) | $ | (27) | $ | (45) | Cost of products sold | $ | (20) | $ | (64) | $ | (12) | |||||||||||||||
Foreign exchange contracts |
(3) | (2) | - | Cost of products sold | - | (1) | - | |||||||||||||||||||||
Total |
$ | (21) | $ | (29) | $ | (45) | $ | (20) | $ | (65) | $ | (12) | ||||||||||||||||
| Derivatives Not | Location of Gain or (Loss) | Amount of Gain or (Loss) | ||||||||||||||
| Designated as Hedging | Recognized in Income on | Recognized in Income on | ||||||||||||||
| Instruments | Derivatives | Derivatives | ||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||
Commodity contracts |
Cost of products sold | $ | (4) | $ | (4) | $ | - | |||||||||
Foreign exchange contracts |
Other expense (income), net | (2) | 1 | (1) | ||||||||||||
Interest rate contracts |
Interest expense | - | (1) | (2) | ||||||||||||
Interest rate contracts |
Other expense (income), net | - | 1 | 6 | ||||||||||||
Total |
$ | (6) | $ | (3) | $ | 3 | ||||||||||
As of December 31, 2010, we had no derivatives designated as net investment or fair value
hedges.
The following are the fair values of derivative instruments on the consolidated balance sheets
as of December 31, 2010 and 2009 (dollars in millions):
| Derivatives | Assets | Liabilities | ||||||||||||||||||||||
| Designated as Hedging | Balance Sheet | Fair | Balance Sheet | Fair | ||||||||||||||||||||
| Instruments | Location | Value | Location | Value | ||||||||||||||||||||
| 12/31/10 | 12/31/09 | 12/31/10 | 12/31/09 | |||||||||||||||||||||
Commodity contracts |
Other current assets | $ | - | $ | 2 | Accrued expenses | $ | 16 | $ | 13 | ||||||||||||||
Commodity contracts |
Other assets | - | 2 | Other liabilities | 5 | 13 | ||||||||||||||||||
Foreign exchange contracts |
Other current assets | - | - | Accrued expenses | 3 | - | ||||||||||||||||||
Foreign exchange contracts |
Other assets | - | - | Other liabilities | 1 | - | ||||||||||||||||||
Total |
$ | - | $ | 4 | $ | 25 | $ | 26 | ||||||||||||||||
| Derivatives Not | Assets | Liabilities | ||||||||||||||||||||||
| Designated as Hedging | Balance Sheet | Fair | Balance Sheet | Fair | ||||||||||||||||||||
| Instruments | Location | Value | Location | Value | ||||||||||||||||||||
| 12/31/10 | 12/31/09 | 12/31/10 | 12/31/09 | |||||||||||||||||||||
Commodity contracts |
Other current assets | $ | 1 | $ | 1 | Accrued expenses | $ | - | $ | - | ||||||||||||||
Total |
$ | 1 | $ | 1 | $ | - | $ | - | ||||||||||||||||
Total derivatives |
$ | 1 | $ | 5 | $ | 25 | $ | 26 | ||||||||||||||||
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7. Fair Value Measurements
Certain assets and liabilities are required to be recorded at fair value. The fair values of our
cash equivalents, marketable securities and derivatives were determined using the fair value
hierarchy of inputs described in Note 1. We began reporting cash equivalents in the fair value
measurements in 2010 because we believe it provides additional useful information. The cash
equivalents shown in the table below primarily consist of money market funds that are valued based
on quoted prices in active markets and as a result are classified as Level 1. We use quoted prices,
other readily observable market data and internally developed valuation models when valuing our
derivatives and marketable securities and have classified them as Level 2. Derivatives are valued
using the income approach including discounted-cash-flow models or a Black-Scholes option pricing
model and readily observable market data. The inputs for the valuation models are obtained from
data providers and include end-of-period spot and forward natural gas prices and foreign currency
exchange rates, natural gas price volatility and LIBOR and swap rates for discounting the cash
flows implied from the derivative contracts. Marketable securities are valued using income and
market value approaches and values are based on quoted prices or other observable market inputs
received from data providers. The valuation process may include pricing matrices, or prices based
upon yields, credit spreads or prices of securities of comparable quality, coupon, maturity and
type. Our assets and liabilities measured at fair value on a recurring basis were as follows:
| Quoted Prices | ||||||||||||||||
| in Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| (millions) | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
As of December 31, 2010: |
||||||||||||||||
Cash equivalents |
$ | 357 | $ | 59 | $ | - | $ | 416 | ||||||||
Marketable securities: |
||||||||||||||||
Corporate debt securities |
- | 123 | - | 123 | ||||||||||||
U.S. government and agency debt securities |
- | 58 | - | 58 | ||||||||||||
Asset-backed debt securities |
- | 19 | - | 19 | ||||||||||||
Non-U.S. government debt securities |
- | 10 | - | 10 | ||||||||||||
Certificates of deposit |
- | 41 | - | 41 | ||||||||||||
Municipal debt securities |
- | 27 | - | 27 | ||||||||||||
Derivative assets |
- | 1 | - | 1 | ||||||||||||
Derivative liabilities |
- | (25) | - | (25) | ||||||||||||
As of December 31, 2009: |
||||||||||||||||
Derivative assets |
- | 5 | - | 5 | ||||||||||||
Derivative liabilities |
- | (26) | - | (26) | ||||||||||||
During 2010, we reviewed our property, plant and equipment for potential impairment by
comparing the carrying values of those assets with their estimated future undiscounted cash flows
for their remaining useful lives and determined that impairment existed for machinery, equipment
and buildings at certain production facilities. We measured the fair values of that machinery and
equipment and those buildings using measurements classified as Level 3 which resulted in a full
impairment. As a result, as discussed in Note 2, we recorded long-lived asset impairment charges of
$58 million related to those production facilities. Those charges are included in restructuring and
long-lived asset impairment charges in the consolidated statement of operations for the year ended
December 31, 2010.
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8. Employee Retirement Plans
We maintain defined benefit pension plans for most of our employees. Most of these plans require
employee contributions in order to accrue benefits. Benefits payable under the plans are based on
employees’ years of service and compensation during specified years of employment. Effective
December 31, 2010, we amended the USG Corporation defined benefit pension plan to replace the final
average pay formula with a cash balance formula for employees hired after that date.
We also maintain plans that provide postretirement benefits (retiree health care and life
insurance) for eligible employees. Employees hired before January 1, 2002 generally become eligible
for the postretirement benefit plans when they meet minimum retirement age and service
requirements. The cost of providing most postretirement benefits is shared with retirees.
We currently believe that the Patient Protection and Affordable Care Act and the related
reconciliation measure, the Health Care and Education Reconciliation Act of 2010, (collectively,
the Act) will not have a material impact on our results of operations, financial position or cash
flows. However, we are continuing to evaluate the provisions of the Act and ongoing, related
regulatory activity to determine their potential impact, if any, on our health care benefit costs.
In 2010, we decided to convert our prescription drug program for retirees over the age of 65
to a group-based company sponsored Medicare Part D program, or Employer Group Waiver Plan, or EGWP.
Beginning in 2012, we will use the Part D subsidies delivered through the EGWP each year to reduce
net company retiree medical costs until net company costs are completely eliminated. When those
costs are eliminated, the Part D subsidies will be shared with retirees to reduce retiree
contributions. The amount of the subsidies shared with retirees will reflect the various subsidy
levels of our plan (subsidies vary by years of service at retirement). We have formally adopted
this change effective with the December 31, 2010 measurement of our liability for retiree medical
costs. As a result, in the fourth quarter of 2010, we reduced our accumulated postretirement
benefit obligation, or APBO, by approximately $47 million.
During 2009, we modified our postretirement medical plan in response to continuing retiree
health care cost increases. Effective January 1, 2011, the increase in the annual amount we will
pay for retiree health care coverage for eligible existing retirees and for eligible active
employees who may qualify for retiree health care coverage in the future will be limited to no more
than 3% per year. This change resulted in a remeasurement of our APBO, on May 31, 2009, which
reduced the obligation by $95 million. The assumptions used in the remeasurement of our APBO were
unchanged from our December 31, 2008 valuation, except that the discount rate changed from 6.85% to
7.35% as of May 31, 2009.
The components of net pension and postretirement benefit costs are summarized in the following table:
| (millions) | 2010 | 2009 | 2008 | |||||||||
Pension Benefits: |
||||||||||||
Service cost of benefits earned |
$ | 27 | $ | 27 | $ | 34 | ||||||
Interest cost on projected benefit obligation |
63 | 68 | 69 | |||||||||
Expected return on plan assets |
(66) | (69) | (77) | |||||||||
Net amortization |
17 | 5 | 8 | |||||||||
Net pension cost |
$ | 41 | $ | 31 | $ | 34 | ||||||
Postretirement Benefits: |
||||||||||||
Service cost of benefits earned |
$ | 7 | $ | 7 | $ | 14 | ||||||
Interest cost on projected benefit obligation |
17 | 19 | 26 | |||||||||
Net amortization |
(17) | (14) | (8) | |||||||||
Net postretirement cost |
$ | 7 | $ | 12 | $ | 32 | ||||||
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We use a December 31 measurement date for our plans. The accumulated benefit obligation,
or ABO, for the defined benefit pension plans was $1.051 billion as of December 31, 2010 and $944
million as of December 31, 2009. For defined benefit pension plans with plan assets having a fair
value in excess of the ABO, the aggregate fair value of those plans’ assets was $184 million and
the aggregate ABO was $163 million. For defined benefit plans with an ABO in excess of the fair
value of plan assets, the aggregate ABO of those plans was $888 million and the aggregate fair
value was $838 million.
The following table summarizes projected pension and accumulated postretirement benefit
obligations, plan assets and funded status as of December 31:
| Pension | Postretirement | |||||||||||||||
| (millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Change in Benefit Obligation: |
||||||||||||||||
Benefit obligation as of January 1 |
$ | 1,075 | $ | 975 | $ | 304 | $ | 351 | ||||||||
Service cost |
27 | 27 | 7 | 7 | ||||||||||||
Interest cost |
63 | 68 | 17 | 19 | ||||||||||||
Participant contributions |
10 | 10 | 8 | 6 | ||||||||||||
Benefits paid |
(60) | (98) | (22) | (22) | ||||||||||||
Medicare Part D subsidy receipts |
- | - | 2 | 1 | ||||||||||||
Plan amendment |
1 | (8) | (47) | (84) | ||||||||||||
Actuarial loss |
54 | 78 | 15 | 21 | ||||||||||||
Foreign currency translation |
10 | 23 | 2 | 5 | ||||||||||||
Benefit obligation as of December 31 |
$ | 1,180 | $ | 1,075 | $ | 286 | $ | 304 | ||||||||
Change in Plan Assets: |
||||||||||||||||
Fair value as of January 1 |
$ | 881 | $ | 750 | $ | - | $ | - | ||||||||
Actual return on plan assets |
133 | 146 | - | - | ||||||||||||
Employer contributions |
48 | 49 | 14 | 16 | ||||||||||||
Participant contributions |
10 | 10 | 8 | 6 | ||||||||||||
Benefits paid |
(60) | (98) | (22) | (22) | ||||||||||||
Foreign currency translation |
10 | 24 | - | - | ||||||||||||
Fair value as of December 31 |
$ | 1,022 | $ | 881 | $ | - | $ | - | ||||||||
Funded status |
$ | (158) | $ | (194) | $ | (286) | $ | (304) | ||||||||
Components on the Consolidated Balance Sheets: |
||||||||||||||||
Noncurrent assets |
$ | - | $ | 5 | $ | - | $ | - | ||||||||
Current liabilities |
(6) | - | (18) | (17) | ||||||||||||
Noncurrent liabilities |
(152) | (199) | (268) | (287) | ||||||||||||
Net liability as of December 31 |
$ | (158) | $ | (194) | $ | (286) | $ | (304) | ||||||||
Pretax Components in AOCI: |
||||||||||||||||
Net actuarial loss |
$ | 303 | $ | 329 | $ | 44 | $ | 29 | ||||||||
Prior service cost (credit) |
2 | 3 | (173) | (143) | ||||||||||||
Total as of December 31 |
$ | 305 | $ | 332 | $ | (129) | $ | (114) | ||||||||
For the defined benefit pension plans, we estimate that during the 2011 fiscal year we
will amortize from AOCI into net pension cost a net actuarial loss of $23 million and prior service
cost of $2 million. For the postretirement benefit plans, we estimate that during the 2011 fiscal
year we will amortize from AOCI into net postretirement cost a prior service credit of $21 million
and net actuarial loss of $1 million.
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ASSUMPTIONS
The following tables reflect the assumptions used in the accounting for our plans:
The following tables reflect the assumptions used in the accounting for our plans:
| Pension | Postretirement | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average assumptions used to determine benefit obligations as of December 31: |
||||||||||||||||
Discount rate |
5.50% | 5.95% | 5.10% | 5.85% | ||||||||||||
Compensation increase rate |
3.00% | 3.50% | - | - | ||||||||||||
Weighted average assumptions used to determine net cost for years ended December 31: |
||||||||||||||||
Discount rate |
5.95% | 6.85% | 5.85% | 6.85% | ||||||||||||
Expected return on plan assets |
7.00% | 7.00% | - | - | ||||||||||||
Compensation increase rate |
3.50% | 3.50% | - | - | ||||||||||||
For the measurement of APBO at December 31, 2010, for our principal U.S. postretirement
health care plan, the assumed health care cost trend rates start with a 7.60% increase in 2011 and
a gradual decline in increases to 5.25% for 2015 and beyond. However, the annual increase to our
contributions was limited to 3% effective January 1, 2011. For this measurement at December 31,
2009, the assumed health care cost trend rates started with an 8.1% increase in 2010 and a gradual
decline in increases to 5.25% for 2015 and beyond.
Assumed health care cost trend rates can have a significant effect on the amounts reported for
retiree health care costs. The impact will be mitigated by the 3% limit on our contributions for
the principal U.S. plan effective January 1, 2011. A one percentage point change in the assumed
health care cost trend rates would have the following effects:
| One-Percentage- | One-Percentage- | |||||||
| (millions) | Point Increase | Point Decrease | ||||||
Effect on total service and interest cost |
$ | 1 | $ | - | ||||
Effect on postretirement benefit obligation |
(5) | 12 | ||||||
RETIREMENT PLAN ASSETS
Investment Policies and Strategies: We have established investment policies and strategies for the defined benefit pension plans’ assets with a long-term objective of maintaining the plans’ assets at a level equal to or greater than that of their liabilities (as measured by a funded ratio of 100% or more of the ABO) and maximizing returns on the plans’ assets consistent with our moderate tolerance for risk. Contributions are made to the plans periodically as needed to meet funding targets or requirements. Factors influencing our determination to accept a moderate degree of risk include the timing of plan participants’ retirements and the resulting disbursement of retirement benefits, the liquidity requirements of the plans and our financial condition.
Investment Policies and Strategies: We have established investment policies and strategies for the defined benefit pension plans’ assets with a long-term objective of maintaining the plans’ assets at a level equal to or greater than that of their liabilities (as measured by a funded ratio of 100% or more of the ABO) and maximizing returns on the plans’ assets consistent with our moderate tolerance for risk. Contributions are made to the plans periodically as needed to meet funding targets or requirements. Factors influencing our determination to accept a moderate degree of risk include the timing of plan participants’ retirements and the resulting disbursement of retirement benefits, the liquidity requirements of the plans and our financial condition.
Our overall long-term objective is to achieve a 7.0% rate of return on plan assets with a
moderate level of risk as indicated by the volatility of investment returns. This rate of return
target was established using a “building block” approach. In this approach, ranges of long-term
expected returns for the various asset classes in which the plans invest are estimated. The
estimated ranges are primarily based on observations of historical asset returns and their
historical volatility. In determining the expected returns, we also consider consensus forecasts of
certain market and economic factors that influence returns, such as inflation, gross domestic
product trends and dividend yields. Any adjustment made to historical returns is minor. We then
calculate an overall range of likely expected rates of return by applying the expected asset
returns to the plans’ target asset allocation. The most likely rate of return is then determined
and is adjusted to account for investment management fees.
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Our investment strategy is to invest in a diversified mix of asset classes in accordance with
an asset allocation that we believe is likely to achieve our long-term target return while
prudently considering risk. This strategy recognizes that many investment professionals believe
that certain asset classes, such as equities, may be expected to produce the greatest return in
excess of inflation over time, but may also generate the greatest level of volatility. Conversely,
many investment professionals believe that an asset class such as fixed income securities may be
likely to be less volatile, but may also produce lower returns over time. In order to manage risk,
the plans’ pension and investment committees periodically rebalance their asset allocations and
monitor the investment performance of the individual investment managers compared to their
benchmark returns and investment guidelines on an ongoing basis, in part through the use of
quarterly investment portfolio reviews and compliance reporting by investment managers. The pension
and investment committees also evaluate risk by periodically conducting asset/liability studies to
assess the correlation of the plans’ assets and liabilities and the degree of risk in the target
asset allocations. The plans limit the use of leverage to select investment strategies where
leverage is typically employed, such as private equity and real estate. Certain investment managers
utilize derivatives, such as swaps, bond futures, and options, as part of their investment
strategies. This is done primarily to gain a desired market exposure or manage factors such as
interest rate risk or duration of a bond portfolio. The following table shows the aggregate target
asset allocation on a weighted average basis for all the plans and the acceptable ranges around the
targets as of December 31, 2010.
| Investment Policy | ||||||||
| Target | Range | |||||||
Asset Categories: |
||||||||
Equity |
61% | 55% - 65% | ||||||
Fixed income |
23% | 15% - 30% | ||||||
Limited partnerships |
12% | 7% - 17% | ||||||
Real estate |
4% | 0% - 10% | ||||||
Cash equivalents and short-term investments |
0% | 0% - 10% | ||||||
Total |
100% | |||||||
Equity investments are in institutional commingled/pooled equity funds, equity mutual
funds and direct holdings of the common stock of U.S. and non-U.S. companies. Both the equity funds
and direct holdings are invested in companies with a range of market capitalizations. This category
also includes an investment in USG Corporation shares of common stock as described below. Fixed
income securities include U.S. Treasury securities, non-U.S. government debt securities such as
Canadian federal bonds, corporate bonds of companies from diversified industries and
mortgage-backed securities. Limited partnerships include investments in funds that follow several
different strategies, including investing in distressed debt, energy development, infrastructure
and a multi-strategy hedge fund. These investments use strategies with returns normally expected to
have a reduced correlation to the return of equities as compared to other asset classes and often
provide a current income component that is a meaningful portion of the investment’s total return.
Real estate is primarily investments in large core, private real estate funds that directly own a
diverse portfolio of properties located in the United States.
During 2010, we made contributions to our pension plans that included 3,271,405 shares of our
common stock held in treasury, or the Contributed Shares. The Contributed Shares were contributed
to the USG Corporation Retirement Plan Trust, or the Trust, and were initially recorded on the
consolidated balance sheet at the September 7, 2010 closing price of $13.03 per share, or
approximately $42.6 million in the aggregate. The Contributed Shares are not reflected on the
consolidated statement of cash flows because they were treated as a noncash financing activity. The
Contributed Shares were valued for purposes of crediting the contribution to the Trust at a
discounted value of $12.38 per share ($13.03 less 5%), or approximately $40.5 million in the
aggregate, by an independent appraiser retained by Evercore Trust Company, N.A., or Evercore, an
independent fiduciary that has been appointed as investment manager with respect to the Contributed
Shares. The Contributed Shares are registered for resale, and Evercore has authority to sell some
or all of them at its discretion as fiduciary. During December 2010, Evercore sold 184,104 shares
in open market transactions. As of December 31, 2010, the Trust held 3,087,301 shares of our common
stock with an aggregate fair value of $52.0 million based on a closing price of $16.83 per share on
that date.
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Fair Values of Plan Assets: The fair values of our defined benefit plans’ consolidated assets by
asset category as of December 31 were as follows:
| (millions) | 2010 | 2009 | ||||||
Asset Categories: |
||||||||
Equity |
$ | 672 | $ | 572 | ||||
Fixed income |
207 | 191 | ||||||
Limited partnerships |
102 | 91 | ||||||
Real estate funds |
25 | 19 | ||||||
Cash equivalents and short-term investments |
67 | 8 | ||||||
Total |
$ | 1,073 | $ | 881 | ||||
Receivables |
22 | - | ||||||
Accounts payable |
(73) | - | ||||||
Total |
$ | 1,022 | $ | 881 | ||||
The fair values of our defined benefit plans’ consolidated assets were determined using
the fair value hierarchy of inputs described in Note 1. The fair values by category of inputs as of
December 31, 2010 and 2009 were as follows:
| Quoted Prices | ||||||||||||||||||||||||||||||||
| in Active | Significant | |||||||||||||||||||||||||||||||
| Markets for | Other | Significant | ||||||||||||||||||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||||||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||||||||||||||||||
| (millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
Asset Categories: |
||||||||||||||||||||||||||||||||
Equity: (a) |
||||||||||||||||||||||||||||||||
Common and preferred stock |
$ | 250 | $ | 268 | $ | - | $ | - | $ | - | $ | - | $ | 250 | $ | 268 | ||||||||||||||||
USG company stock |
52 | - | - | - | - | - | 52 | - | ||||||||||||||||||||||||
Commingled/pooled/mutual funds |
106 | 304 | 264 | - | - | - | 370 | 304 | ||||||||||||||||||||||||
Fixed income: (b) |
||||||||||||||||||||||||||||||||
U.S. government and agency debt securities |
- | 42 | 12 | - | - | - | 12 | 42 | ||||||||||||||||||||||||
Non-U.S. government and agency debt securities |
- | 14 | 14 | 1 | - | - | 14 | 15 | ||||||||||||||||||||||||
Corporate debt securities |
- | 55 | 34 | - | - | - | 34 | 55 | ||||||||||||||||||||||||
Mortgage backed and asset backed securities |
- | - | 36 | - | - | - | 36 | - | ||||||||||||||||||||||||
Commingled/pooled funds |
- | 27 | 105 | - | - | - | 105 | 27 | ||||||||||||||||||||||||
Other |
- | 52 | 5 | - | 1 | - | 6 | 52 | ||||||||||||||||||||||||
Limited partnerships (c) |
- | - | - | 42 | 102 | 49 | 102 | 91 | ||||||||||||||||||||||||
Real estate funds (d) |
- | - | - | - | 25 | 19 | 25 | 19 | ||||||||||||||||||||||||
Cash equivalents and short-term investments (e) |
- | 8 | 67 | - | - | - | 67 | 8 | ||||||||||||||||||||||||
Total |
$ | 408 | $ | 770 | $ | 537 | $ | 43 | $ | 128 | $ | 68 | $ | 1,073 | $ | 881 | ||||||||||||||||
Receivables |
22 | - | ||||||||||||||||||||||||||||||
Accounts payable |
(73) | - | ||||||||||||||||||||||||||||||
Total |
$ | 1,022 | $ | 881 | ||||||||||||||||||||||||||||
| (a) | The majority of these funds are invested with investment managers that invest in common stocks of large capitalization U.S. companies. Approximately 84% of these investments are actively managed. USG company stock represents 3,087,301 shares of New York Stock Exchange listed common stock. The plans did not hold any USG common stock at December 31, 2009. USG does not currently pay dividends on its common stock. Investments in commingled/pooled equity funds have been classified as Level 2 in 2010 because as institutional funds readily observable quoted prices are not widely available. In 2009, investments in the same or similar funds were classified as Level 1 assets and were not reclassified as Level 2 assets in this presentation. |
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| (b) | Includes investments in individual fixed income securities and in institutional funds that invest in fixed income securities. For 2010, these fixed income assets were classified as Level 2. For 2009, fixed income assets, which were substantially similar to those held in 2010, were incorrectly classified as Level 1 assets when originally reported and were not reclassified as Level 2 assets in this presentation. Mortgage backed securities, both those issued by government-sponsored entities, such as the Federal National Mortgage Association, and private issuers, are now disclosed separately. They were previously included in the U.S. government and agency securities and other categories. | |
| (c) | Limited partnerships include investments in funds that follow several different strategies, including investing in distressed debt, energy development, infrastructure and a multi-strategy hedge fund. These investments use strategies with returns normally expected to have a low correlation to the return of equities and often provide a current income component that is a meaningful portion of the investment’s total return. In 2009, a $42 million limited partnership investment with a hedge fund manager should have been classified as a Level 3 asset rather than a Level 2 asset because as of December 31, 2009 the majority of the funds could not be redeemed within three months. As of December 31, 2010, a $47 million investment with the same manager has been classified as Level 3 for the same reason. | |
| (d) | Includes investments in three different private real estate funds that invest primarily in a variety of property types in geographically diverse markets across the U.S. | |
| (e) | Cash equivalents and short-term investments are primarily held in short-term investment funds or registered money market funds with daily liquidity. |
A reconciliation of the change in the fair value measurement of the defined benefit
plans’ consolidated assets using significant unobservable inputs (Level 3) between December 31,
2008 and December 31, 2010 is as follows:
| Fixed | Real | Limited | ||||||||||||||
| (millions) | Income | Estate | Partnerships | Total | ||||||||||||
Balance as of December 31, 2008 |
$ | - | $ | 34 | $ | 50 | $ | 84 | ||||||||
Realized gains (losses) |
- | 1 | 1 | 2 | ||||||||||||
Unrealized gains (losses) |
- | (15) | (5) | (20) | ||||||||||||
Purchases, sales and settlements |
- | (1) | 3 | 2 | ||||||||||||
Balance as of December 31, 2009 |
- | $ | 19 | $ | 49 | $ | 68 | |||||||||
Realized gains (losses) |
- | 1 | 1 | 2 | ||||||||||||
Unrealized gains (losses) |
- | 3 | 8 | 11 | ||||||||||||
Purchases, sales and settlements |
- | 2 | (3) | (1) | ||||||||||||
Net transfers into (out of) of Level 3 |
1 | - | 47 | 48 | ||||||||||||
Balance as of December 31, 2010 |
$ | 1 | $ | 25 | $ | 102 | $ | 128 | ||||||||
CASH FLOWS
For 2011, our defined benefit pension plans have no minimum funding requirements under the Employee Retirement Income Security Act of 1974, or ERISA. We are evaluating our level of funding for pension plans and currently estimate that we will contribute approximately $61 million to our pension plans in 2011. We expect to receive Medicare subsidy receipts of $2 million in 2011. Total benefit payments we expect to make to participants, which include payments funded from USG’s assets as well as payments from our pension plans, are as follows (in millions):
For 2011, our defined benefit pension plans have no minimum funding requirements under the Employee Retirement Income Security Act of 1974, or ERISA. We are evaluating our level of funding for pension plans and currently estimate that we will contribute approximately $61 million to our pension plans in 2011. We expect to receive Medicare subsidy receipts of $2 million in 2011. Total benefit payments we expect to make to participants, which include payments funded from USG’s assets as well as payments from our pension plans, are as follows (in millions):
| Years ended | Pension | Postretirement | ||||||
| December 31 | Benefits | Benefits | ||||||
2011 |
$ | 83 | $ | 19 | ||||
2012 |
53 | 19 | ||||||
2013 |
58 | 19 | ||||||
2014 |
59 | 20 | ||||||
2015 |
70 | 20 | ||||||
2016-2020 |
454 | 104 | ||||||
For many years, we have had a defined contribution plan commonly known as a 401(k) plan.
The plan provides participating employees the opportunity to invest 1% to 20% of their compensation
on a pretax basis in any of nine investment options offered, subject to limitations on the amount
that may be contributed by highly compensated
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employees. Participants earned a guaranteed company match of 25% on their contributions of up
to 6% of their eligible compensation during 2010. Employees are fully vested in company matching
contributions after three years of participation in the plan. USG’s contributions are charged to
cost of products sold and selling and administrative expenses. These contributions amounted to $6
million in 2010, $5 million in 2009 and $15 million in 2008. Effective January 1, 2011, the
guaranteed company match was reduced to 10% from 25%.
9. Share-Based Compensation
We grant share-based compensation to eligible participants under our Long-Term Incentive Plan, or
LTIP. The LTIP was approved by our Board of Directors and stockholders in 2006. An amendment to
the LTIP was approved by the Board of Directors and stockholders in May 2010 to increase the number
of shares authorized for grants by 4.5 million. As of December 31, 2010, a total of 12.7 million
shares of common stock were authorized for grants under the LTIP, of which 5.4 million shares were
reserved for future grants. The LTIP authorizes the Board, or the Board’s Compensation and
Organization Committee, to provide equity-based compensation in the form of stock options, stock
appreciation rights, or SARs, restricted stock, RSUs, performance shares and units, and other cash
and share-based awards for the purpose of providing our directors, officers and other employees
incentives and rewards for performance. We may issue common shares upon option exercises and upon
the vesting or grant of other awards under the LTIP from our authorized but unissued shares or from
treasury shares.
Our expense for share-based arrangements was $23 million in 2010, $21 million in 2009 and $24
million in 2008. The income tax benefits recognized for share-based arrangements in the
consolidated statements of operations were zero in 2010 and 2009 and $9 million in 2008. We
recognize expense on all share-based awards over the service period, which is the shorter of the
period until the employees’ retirement eligibility dates or the service period of the award for
awards expected to vest. Accordingly, expense is generally reduced for estimated forfeitures.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates.
STOCK OPTIONS
We granted stock options in 2010, 2009 and 2008 at the closing price of USG common stock on
the date of grant. The stock options generally become exercisable in four equal annual installments
beginning one year from the date of grant, although they may become exercisable earlier in the
event of death, disability, retirement or a change in control, except that 46,000 of the stock
options granted in 2010 were granted as special retention awards that generally will vest 100%
after three years. The stock options generally expire 10 years from the date of grant, or earlier
in the event of death, disability or retirement.
We estimated the fair value of each stock option granted on the date of grant using a
Black-Scholes option valuation model that uses the assumptions noted in the following table. We
based expected volatility on a 50% weighting of peer volatilities and 50% weighting of implied USG
volatilities. We did not consider historical volatility of our common stock price to be an
appropriate measure of future volatility because of the impact that our Chapter 11 proceedings
completed in 2006 had on our historical stock price. The risk-free rate was based on zero-coupon
U.S. government issues at the time of grant. The expected term was developed using the simplified
method, as permitted by the Securities and Exchange Commission because there is not sufficient
historical stock option exercise experience available.
| Assumptions: | 2010 | 2009 | 2008 | |||||||||
Expected volatility |
46.90% | 62.58% | 37.59% | |||||||||
Risk-free rate |
2.97% | 2.63% | 3.20% | |||||||||
Expected term (in years) |
6.25 | 6.25 | 6.25 | |||||||||
Expected dividends |
- | - | - | |||||||||
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A summary of stock options outstanding as of December 31, 2010 and of stock option
activity during the fiscal year then ended is presented below:
| Weighted | ||||||||||||||||
| Weighted | Average | Aggregate | ||||||||||||||
| Number of | Average | Remaining | Intrinsic | |||||||||||||
| Options | Exercise | Contractual | Value | |||||||||||||
| (000) | Price | Term (years) | (millions) | |||||||||||||
Outstanding at January 1, 2010 |
3,602 | $ | 29.08 | 7.75 | $ | 10 | ||||||||||
Granted |
1,006 | 12.02 | ||||||||||||||
Exercised |
(61) | 8.10 | ||||||||||||||
Canceled |
(78) | 37.82 | ||||||||||||||
Forfeited |
(12) | 16.60 | ||||||||||||||
Outstanding at December 31, 2010 |
4,457 | $ | 25.40 | 7.35 | $ | 17 | ||||||||||
Exercisable at December 31, 2010 |
1,823 | $ | 37.47 | 6.31 | $ | 3 | ||||||||||
Vested or expected to vest at December 31, 2010 |
4,432 | $ | 25.46 | 7.44 | $ | 17 | ||||||||||
The weighted average grant date fair value was $5.92 for options granted during 2010,
$4.12 for options granted during 2009 and $14.78 for options granted during 2008.
Intrinsic value for stock options is defined as the difference between the current market
value of our common stock and the exercise price of the stock options. The total intrinsic value of
stock options exercised was $1 million in 2010 and less than $1 million in 2008. Cash received from
the exercise of stock options also was $1 million in 2010 and less than $1 million in 2008. There
were no stock options exercised in 2009. As a result of the net operating loss we reported for
federal tax purposes for 2010, 2009 and 2008, none of the tax benefit with respect to these
exercises has been reflected in capital received in excess of par value as of December 31, 2010.
Included in our net operating loss carryforwards is $15 million for which a tax benefit of $5
million will be recorded in capital received in excess of par value when the loss carryforward is
utilized.
As of December 31, 2010, there was $5 million of total unrecognized compensation cost related
to nonvested share-based compensation awards represented by stock options granted under the LTIP.
We expect that cost to be recognized over a weighted average period of 1.7 years. The total fair
value of stock options vested was $9 million during 2010, $11 million during 2009 and $7 million
during 2008.
RESTRICTED STOCK UNITS
We granted RSUs during 2010, 2009 and 2008. RSUs generally vest in four equal annual
installments beginning one year from the date of grant. RSUs granted as special retention awards
generally vest 100% after three to five years from the date of grant or at a specified date and
RSUs granted with performance goals vest if those goals are attained. RSUs may vest earlier in the
case of death, disability, retirement or a change in control. Each RSU is settled in a share of our
common stock after the vesting period. The fair value of each RSU granted is equal to the closing
market price of our common stock on the effective date of grant.
In 2010, we granted RSUs with respect to 872,249 shares of common stock. Of this amount,
675,893 shares generally will vest in four equal annual installments beginning one year from the
date of grant, 125,000 shares generally will vest 100% after four years from the date of grant,
25,000 shares will vest on the earlier of (i) May 1, 2013 or (ii) with approval of USG
Corporation’s Board of Directors, the retirement of the holder of the RSUs, 25,000 shares will vest
upon the satisfaction of specified associate development goals and 21,356 shares granted as special
awards generally will vest 100% after three to five years.
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RSUs outstanding as of December 31, 2010 and RSU activity during 2010 were as follows:
| Weighted | ||||||||
| Number | Average | |||||||
| of Shares | Grant Date | |||||||
| (000) | Fair Value | |||||||
Nonvested at January 1, 2010 |
1,121 | $ | 16.96 | |||||
Granted |
872 | 12.19 | ||||||
Vested |
(363) | 23.40 | ||||||
Forfeited |
(5) | 9.65 | ||||||
Nonvested at December 31, 2010 |
1,625 | $ | 12.99 | |||||
As of December 31, 2010, there was $7 million of total unrecognized compensation cost
related to nonvested share-based compensation awards represented by RSUs granted under the LTIP. We
expect that cost to be recognized over a weighted average period of 2.8 years. The total fair value
of RSUs that vested was $8 million during 2010, $7 million during 2009 and $7 million during 2008.
PERFORMANCE SHARES
We granted performance shares during 2010, 2009 and 2008. The performance shares generally
vest after a three-year period based on our total stockholder return relative to the performance of
the Dow Jones U.S. Construction and Materials Index, with adjustments to that index in certain
circumstances, for the three-year period. The number of performance shares earned will vary from 0%
to 200% of the number of performance shares awarded depending on that relative performance. Vesting
will be pro-rated based on the number of full months employed during the performance period in the
case of death, disability, retirement or a change in control, and pro-rated awards earned will be
paid at the end of the three-year period. Each performance share earned will be settled in a share
of our common stock.
We estimated the fair value of each performance share granted on the date of grant using a
Monte Carlo simulation that uses the assumptions noted in the following table. Expected volatility
is based on implied volatility of our traded options and the daily historical volatilities of our
peer group. The risk-free rate was based on zero coupon U.S. government issues at the time of
grant. The expected term represents the period from the grant date to the end of the three-year
performance period.
| Assumptions: | 2010 | 2009 | 2008 | |||||||||
Expected volatility |
73.34% | 60.84% | 35.16% | |||||||||
Risk-free rate |
1.24% | 1.40% | 2.20% | |||||||||
Expected term (in years) |
2.89 | 2.89 | 2.92 | |||||||||
Expected dividends |
- | - | - | |||||||||
Nonvested performance shares outstanding as of December 31, 2010 and performance share
activity during 2010 were as follows:
| Weighted | Weighted | |||||||
| Number | Average | |||||||
| of Shares | Grant Date | |||||||
| (000) | Fair Value | |||||||
Nonvested at January 1, 2010 |
469 | $ | 18.74 | |||||
Granted |
333 | 15.59 | ||||||
Canceled |
(130) | 44.42 | ||||||
Forfeited |
- | - | ||||||
Nonvested at December 31, 2010 |
672 | $ | 12.23 | |||||
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No performance shares granted in 2008 were earned because the threshold level of total
stockholder return relative to the performance of the Dow Jones U.S. Construction and Materials
Index for the three-year period ended December 31, 2010 was not attained.
Total unrecognized compensation cost related to nonvested share-based compensation awards
represented by performance shares granted under the LTIP was $4 million as of December 31, 2010. We
expect that cost to be recognized over a weighted average period of 1.8 years.
NON-EMPLOYEE DIRECTOR DEFERRED STOCK UNITS
Our non-employee directors may elect to receive a portion of their compensation as deferred
stock units that increase or decrease in value in direct relation to the market price of our common
stock. Deferred stock units earned through December 31, 2007 will be paid in cash upon termination
of board service. Deferred stock units earned thereafter will be paid in cash or shares of USG
common stock, at the election of the director, upon termination of board service.
The number of deferred stock units held by non-employee directors was approximately 107,239 as
of December 31, 2010, 81,347 as of December 31, 2009 and 76,877 as of December 31, 2008. We
recorded expenses related to these deferred stock units of $1 million in 2010, $1 million in 2009
and less than $1 million in 2008.
10. Supplemental Balance Sheet Information
INVENTORIES
Inventories as of December 31 consisted of the following:
| (millions) | 2010 | 2009 | ||||||
Finished goods and work in progress |
$ | 227 | $ | 232 | ||||
Raw materials |
63 | 57 | ||||||
Total |
$ | 290 | $ | 289 | ||||
|
PROPERTY, PLANT AND EQUIPMENT
| ||||||||
Property, plant and equipment as of December 31 consisted of the following:
| ||||||||
| (millions) | 2010 | 2009 | ||||||
Land and mineral deposits |
$ | 115 | $ | 114 | ||||
Buildings and improvements |
1,129 | 1,141 | ||||||
Machinery and equipment |
2,568 | 2,730 | ||||||
| 3,812 | 3,985 | |||||||
Reserves for depreciation and depletion |
(1,546) | (1,558) | ||||||
Total |
$ | 2,266 | $ | 2,427 | ||||
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ACCRUED EXPENSES
Accrued expenses as of December 31 consisted of the following:
| (millions) | 2010 | 2009 | ||||||
Self-insurance reserves |
$ | 50 | $ | 54 | ||||
Employee compensation |
39 | 48 | ||||||
Interest |
49 | 45 | ||||||
Restructuring |
35 | 21 | ||||||
Derivatives |
19 | 13 | ||||||
Other |
102 | 92 | ||||||
Total |
$ | 294 | $ | 273 | ||||
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
AOCI as of December 31 consisted of the following:
| (millions) | 2010 | 2009 | ||||||
Unrecognized loss on pension and postretirement benefit plans, net of tax |
$ | (106) | $ | (110) | ||||
Gain on derivatives, net of tax |
8 | 1 | ||||||
Foreign currency translation, net of tax |
48 | 29 | ||||||
Total |
$ | (50) | $ | (80) | ||||
Reclassifications of net after-tax gains or losses from AOCI to earnings during 2010,
2009 and 2008 consisted of the following:
| (millions) | 2010 | 2009 | 2008 | |||||||||
(Loss) gain on derivatives, net of tax |
$ | (20) | $ | (69) | $ | 7 | ||||||
Gain on unrecognized pension and postretirement benefit costs, net of tax |
2 | 9 | 1 | |||||||||
Total |
$ | (18) | $ | (60) | $ | 8 | ||||||
We estimate that we will reclassify a net $18 million after-tax loss on derivatives from
AOCI to earnings within the next 12 months.
ASSET RETIREMENT OBLIGATIONS
Changes in our liability for asset retirement obligations during 2010 and 2009 consisted of the following:
| (millions) | 2010 | 2009 | ||||||
Balance as of January 1 |
$ | 101 | $ | 89 | ||||
Accretion expense |
6 | 6 | ||||||
Liabilities incurred/adjusted |
(2) | 6 | ||||||
Liabilities settled |
(1) | - | ||||||
Asset retirements |
(2) | (2) | ||||||
Foreign currency translation |
1 | 2 | ||||||
Balance as of December 31 |
$ | 103 | $ | 101 | ||||
Our asset retirement obligations include reclamation requirements as regulated by
government authorities related principally to assets such as our mines, quarries, landfills, ponds
and wells. The accounting for asset retirement obligations requires estimates by management about
the timing of asset retirements, the cost of retirement obligations, discount and inflation rates
used in determining fair values and the methods of remediation associated with our asset retirement
obligations. We generally use assumptions and estimates that reflect the most likely remediation
method on a site-by-site basis. Asset retirement obligations are included in other liabilities on
the consolidated balance sheets.
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11. Income Taxes
Earnings (loss) before income taxes consisted of the following:
| (millions) | 2010 | 2009 | 2008 | |||||||||
U.S. |
$ | (453) | $ | (359) | $ | (618) | ||||||
Foreign |
14 | 22 | 37 | |||||||||
Total |
$ | (439) | $ | (337) | $ | (581) | ||||||
Income tax (benefit) expense consisted of the following: |
||||||||||||
| (millions) | 2010 | 2009 | 2008 | |||||||||
Current: |
||||||||||||
Federal |
$ | - | $ | 3 | $ | (4) | ||||||
Foreign |
6 | 10 | 4 | |||||||||
State |
1 | 1 | (2) | |||||||||
| 7 | 14 | (2) | ||||||||||
Deferred: |
||||||||||||
Federal |
(37) | 357 | (195) | |||||||||
Foreign |
- | 4 | 4 | |||||||||
State |
(4) | 75 | 75 | |||||||||
| (41) | 436 | (116) | ||||||||||
Total (a) |
$ | (34) | $ | 450 | $ | (118) | ||||||
(a)
Income tax (benefit) expense includes noncash deferred tax asset valuation allowances of $179
million in 2010, $575 million in 2009 and $71 million in 2008. |
||||||||||||
|
Differences between actual provisions for income taxes and provisions for income taxes at
the U.S. federal statutory rate (35%) were as follows:
| ||||||||||||
| (millions) | 2010 | 2009 | 2008 | |||||||||
Taxes on income at U.S. federal statutory rate |
$ | (153) | $ | (118) | $ | (203) | ||||||
Foreign earnings subject to different tax rates |
- | (1) | (4) | |||||||||
State income tax, net of federal benefit |
(1) | (1) | (21) | |||||||||
Change in valuation allowance |
156 | 575 | 71 | |||||||||
Goodwill impairment charges |
- | - | 34 | |||||||||
Change in unrecognized tax benefits |
(2) | (7) | 3 | |||||||||
Tax benefit resulting from other comprehensive income allocation |
(37) | - | - | |||||||||
Other, net |
1 | 2 | 2 | |||||||||
Provision for income tax (benefit) expense |
$ | (34) | $ | 450 | $ | (118) | ||||||
Effective income tax rate |
7.7% | (133.2)% | 20.4% | |||||||||
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Significant components of deferred tax assets and liabilities as of December 31 were as follows:
| (millions) | 2010 | 2009 | ||||||
Deferred Tax Assets: |
||||||||
Net operating loss and tax credit carryforwards |
$ | 859 | $ | 706 | ||||
Pension and postretirement benefits |
172 | 238 | ||||||
Goodwill and other intangible assets |
44 | 27 | ||||||
Reserves not deductible until paid |
42 | 47 | ||||||
Self insurance |
11 | 13 | ||||||
Capitalized interest |
12 | 13 | ||||||
Derivative instruments |
25 | 25 | ||||||
Share-based compensation |
29 | 24 | ||||||
Deferred tax assets before valuation allowance |
1,194 | 1,093 | ||||||
Valuation allowance |
(884) | (772) | ||||||
Total deferred tax assets |
$ | 310 | $ | 321 | ||||
Deferred Tax Liabilities: |
||||||||
Property, plant and equipment |
297 | 316 | ||||||
State taxes |
- | 2 | ||||||
Inventories |
2 | 11 | ||||||
Other |
12 | 7 | ||||||
Total deferred tax liabilities |
311 | 336 | ||||||
Net deferred tax (liabilities) assets |
$ | (1) | $ | (15) | ||||
We have established a valuation allowance in the amount of $884 million consisting of
$608 million for federal deferred tax assets, $272 million for state deferred tax assets and $4
million for foreign deferred tax assets.
Accounting rules require a reduction of the carrying amounts of deferred tax assets by a
valuation allowance if, based on the available evidence, it is more likely than not that such
assets will not be realized. The need to establish valuation allowances for deferred tax assets is
assessed periodically. In assessing the requirement for, and amount of, a valuation allowance in
accordance with the more-likely-than-not standard, we give appropriate consideration to all
positive and negative evidence related to the realization of the deferred tax assets. Under the
accounting rules, this assessment considers, among other matters, the nature, frequency and
severity of current and cumulative losses, forecasts of future profitability, the duration of
statutory carryforward periods, our experience with operating loss and tax credit carryforwards not
expiring unused and tax planning alternatives. A history of cumulative losses for a certain
threshold period is a significant form of negative evidence used in the assessment, and the
accounting rules require that we have a policy regarding the duration of the threshold period. If a
cumulative loss threshold is met, forecasts of future profitability may not be used as positive
evidence related to the realization of the deferred tax assets in the assessment. Consistent with
practices in the home building and related industries, we have a policy of four years as our
threshold period for cumulative losses.
As of December 31, 2010, we had federal NOL carryforwards of approximately $1.519 billion that
are available to offset future federal taxable income and will expire in the years 2026 through
2030. In addition, as of that date, we had federal alternative minimum tax credit carryforwards of
approximately $52 million that are available to reduce future regular federal income taxes over an
indefinite period. In order to fully realize the U.S. federal net deferred tax assets, taxable
income of approximately $1.668 billion would need to be generated during the period before their
expiration. In addition, we have federal foreign tax credit carryforwards of $6 million that will
expire in 2015.
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As of December 31, 2010, we had a gross deferred tax asset related to our state NOLs and tax
credit carryforwards of $274 million, of which $11 million will expire in 2011. The remainder will
expire if unused in years 2012 through 2030. To the extent that we do not generate sufficient state
taxable income within the statutory carryforward periods to utilize the NOL and tax credit
carryforwards in these states, they will expire unused.
We also had NOL and tax credit carryforwards in various foreign jurisdictions in the amount of
$6 million and $4 million as of December 31, 2010 and 2009, respectively, against a portion of
which we have historically maintained a valuation allowance.
During periods prior to 2010, we established a valuation allowance against our deferred tax
assets totaling $772 million. Based upon an evaluation of all available evidence and our losses
during 2010, we recorded an increase in the valuation allowance against our deferred tax assets of
$179 million. Our cumulative loss position over the last four years was significant evidence
supporting the recording of the additional valuation allowance. In addition to being impacted by
the $179 million increase, the valuation allowance was also impacted by changes in the components
of AOCI and other discrete adjustments, which reduced the valuation allowance by $67 million. As a
result, the net increase in the valuation allowance was $112 million in 2010, increasing our
deferred tax assets valuation allowance to $884 million as of December 31, 2010. In future periods,
the valuation allowance can be reversed based on sufficient evidence indicating that it is more
likely than not that a portion of our deferred tax assets will be realized. Our net deferred tax
liabilities were $1 million and $15 million as of December 31, 2010 and 2009, respectively.
Under current accounting rules, we are required to consider all items (including items
recorded in other comprehensive income) in determining the amount of tax benefit that results from
a loss from continuing operations and that should be allocated to continuing operations. As a
result, during the fourth quarter of 2010, we recorded an $18 million noncash income tax benefit on
the loss from continuing operations for 2010. This benefit was offset by income tax expense on
other comprehensive income. However, while the income tax benefit from continuing operations is
reported on the income statement, the income tax expense on other comprehensive income is recorded
directly to AOCI, which is a component of stockholders’ equity. Because the income tax expense on
other comprehensive income is equal to the income tax benefit from continuing operations, our
year-end net deferred tax position is not impacted by this tax allocation. A similar noncash income
tax benefit of $19 million was recorded during the first quarter of 2010 relating to the fourth
quarter of 2009.
The Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it
experiences an “ownership change.” In general terms, an ownership change may result from
transactions increasing the ownership of certain stockholders in the stock of a corporation by more
than 50 percentage points over a three-year period. If we were to experience an ownership change,
utilization of our NOLs would be subject to an annual limitation determined by multiplying the
market value of our outstanding shares of stock at the time of the ownership change by the
applicable long-term tax-exempt rate, which was 3.67% for December 2010. Any unused annual
limitation may be carried over to later years within the allowed NOL carryforward period. The
amount of the limitation may, under certain circumstances, be increased or decreased by built-in
gains or losses held by us at the time of the change that are recognized in the five-year period
after the change. Many states have similar limitations. If an ownership change had occurred as of
December 31, 2010, our annual U.S. federal NOL utilization would have been limited to approximately
$64 million per year.
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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| (millions) | 2010 | 2009 | 2008 | |||||||||
Balance as of January 1 |
$ | 35 | $ | 47 | $ | 56 | ||||||
Tax positions related to the current period: |
||||||||||||
Gross increase |
- | - | 4 | |||||||||
Gross decrease |
- | - | - | |||||||||
Tax positions related to prior periods: |
||||||||||||
Gross increase |
1 | 2 | 2 | |||||||||
Gross decrease |
(1) | (10) | (13) | |||||||||
Settlements |
- | (3) | (1) | |||||||||
Lapse of statutes of limitations |
(1) | (1) | (1) | |||||||||
Balance as of December 31 |
$ | 34 | $ | 35 | $ | 47 | ||||||
We classify interest expense and penalties related to unrecognized tax benefits and
interest income on tax overpayments as components of income taxes (benefit). As of December 31,
2010, the total amounts of interest expense and penalties recognized on our consolidated balance
sheet were $4 million and $1 million, respectively. The total amounts of interest and penalties
recognized in our consolidated statements of operations were zero for 2010, $(1) million for 2009
and $6 million for 2008. The total amounts of unrecognized tax benefit that, if recognized, would
affect our effective tax rate were $16 million for 2010, $33 million for 2009 and $46 million for
2008.
Our federal income tax returns for 2006 and prior years have been examined by the Internal
Revenue Service, or IRS. Our federal income tax returns for 2007 and 2008 are under examination by
the IRS. The U.S. federal statute of limitations remains open for the year 2004 and later years. We
are also under examination in various U.S. state and foreign jurisdictions. It is possible that
these examinations may be resolved within the next 12 months. Due to the potential for resolution
of the federal, state and foreign examinations and the expiration of various statutes of
limitation, it is reasonably possible that our gross unrecognized tax benefit may change within the
next 12 months by a range of $20 million to $25 million of which approximately $5 million would
affect our effective tax rate. Foreign and U.S. state jurisdictions have statutes of limitations
generally ranging from three to five years.
We do not provide for U.S. income taxes on the portion of undistributed earnings of foreign
subsidiaries that is intended to be permanently reinvested. The cumulative amount of such
undistributed earnings totaled approximately $638 million as of December 31, 2010. These earnings
would become taxable in the United States upon the sale or liquidation of these foreign
subsidiaries or upon the remittance of dividends. The estimate of the amount of the deferred tax
liability on such earnings is $29 million, consisting of foreign withholding taxes.
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12. Earnings (Loss) Per Share
The reconciliation of basic earnings (loss) per share to diluted earnings (loss) per share is shown
in the following table:
| Weighted | ||||||||||||
| Net | Average | |||||||||||
| Earnings | Shares | Per-Share | ||||||||||
| (millions, except share data) | (Loss) | (000) | Amount | |||||||||
2010: |
||||||||||||
Basic loss |
$ | (405 | ) | 100,472 | $ | (4.03 | ) | |||||
Diluted loss |
$ | (405 | ) | 100,472 | $ | (4.03 | ) | |||||
2009: |
||||||||||||
Basic loss |
$ | (787 | ) | 99,238 | $ | (7.93 | ) | |||||
Diluted loss |
$ | (787 | ) | 99,238 | $ | (7.93 | ) | |||||
2008: |
||||||||||||
Basic loss |
$ | (463 | ) | 99,100 | $ | (4.67 | ) | |||||
Diluted loss |
$ | (463 | ) | 99,100 | $ | (4.67 | ) | |||||
The diluted losses per share in 2010, 2009 and 2008 were computed using the weighted
average number of common shares outstanding during the year.
The approximately 35.1 million shares issuable upon conversion of the $400 million of 10%
convertible senior notes we issued in 2008 at the initial conversion price of $11.40 per share were
not included in the computation of the diluted loss per share for 2010, 2009 and 2008 because their
inclusion was anti-dilutive. Stock options, RSUs and performance shares with respect to 6.7 million
common shares, 5.3 million common shares and 3.3 million common shares were not included in the
computation of diluted losses per share for 2010, 2009 and 2008, respectively, because they were
anti-dilutive.
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13. Segments
| REPORTABLE SEGMENTS | ||||||||||||
| (millions) | 2010 | 2009 | 2008 | |||||||||
Net Sales: |
||||||||||||
North American Gypsum |
$ | 1,658 | $ | 1,770 | $ | 2,358 | ||||||
Building Products Distribution |
1,061 | 1,289 | 1,993 | |||||||||
Worldwide Ceilings |
660 | 663 | 846 | |||||||||
Eliminations |
(440 | ) | (487 | ) | (589 | ) | ||||||
Total |
$ | 2,939 | $ | 3,235 | $ | 4,608 | ||||||
Operating Profit (Loss): |
||||||||||||
North American Gypsum |
$ | (165 | ) | $ | (9 | ) | $ | (241 | ) | |||
Building Products Distribution |
(97 | ) | (172 | ) | (243 | ) | ||||||
Worldwide Ceilings |
74 | 62 | 68 | |||||||||
Corporate |
(69 | ) | (71 | ) | (97 | ) | ||||||
Eliminations |
(3 | ) | 5 | 1 | ||||||||
Total |
$ | (260 | ) | $ | (185 | ) | $ | (512 | ) | |||
Depreciation, Depletion and Amortization: |
||||||||||||
North American Gypsum |
$ | 133 | $ | 146 | $ | 141 | ||||||
Building Products Distribution |
12 | 13 | 13 | |||||||||
Worldwide Ceilings |
18 | 19 | 19 | |||||||||
Corporate |
15 | 25 | 9 | |||||||||
Total |
$ | 178 | $ | 203 | $ | 182 | ||||||
Capital Expenditures: |
||||||||||||
North American Gypsum |
$ | 30 | $ | 36 | $ | 213 | ||||||
Building Products Distribution |
2 | 5 | 6 | |||||||||
Worldwide Ceilings |
6 | 3 | 19 | |||||||||
Corporate |
1 | - | - | |||||||||
Total |
$ | 39 | $ | 44 | $ | 238 | ||||||
Assets: |
||||||||||||
North American Gypsum |
$ | 2,375 | $ | 2,558 | $ | 2,677 | ||||||
Building Products Distribution |
356 | 371 | 571 | |||||||||
Worldwide Ceilings |
395 | 391 | 455 | |||||||||
Corporate |
1,002 | 816 | 1,068 | |||||||||
Eliminations |
(41 | ) | (39 | ) | (52 | ) | ||||||
Total |
$ | 4,087 | $ | 4,097 | $ | 4,719 | ||||||
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| GEOGRAPHIC INFORMATION | ||||||||||||
| (millions) | 2010 | 2009 | 2008 | |||||||||
Net Sales: |
||||||||||||
United States |
$ | 2,396 | $ | 2,725 | $ | 3,942 | ||||||
Canada |
362 | 339 | 428 | |||||||||
Other Foreign |
346 | 335 | 482 | |||||||||
Geographic transfers |
(165 | ) | (164 | ) | (244 | ) | ||||||
Total |
$ | 2,939 | $ | 3,235 | $ | 4,608 | ||||||
Long-Lived Assets: |
||||||||||||
United States |
$ | 2,039 | $ | 2,192 | $ | 2,390 | ||||||
Canada |
196 | 174 | 165 | |||||||||
Other Foreign |
265 | 300 | 283 | |||||||||
Total |
$ | 2,500 | $ | 2,666 | $ | 2,838 | ||||||
OTHER SEGMENT INFORMATION
Segment operating profit (loss) includes all costs and expenses directly related to the
segment involved and an allocation of expenses that benefit more than one segment.
The consolidated operating loss in 2010 included restructuring and long-lived asset impairment
charges of $110 million. On a segment basis, $93 million of the total amount related to North
American Gypsum, $15 million to Building Products Distribution and $1 million each to Worldwide
Ceilings and Corporate.
The consolidated operating loss in 2009 included restructuring and long-lived asset impairment
charges of $80 million. On a segment basis, $39 million of the total amount related to Building
Products Distribution, $25 million to North American Gypsum, $5 million to Worldwide Ceilings and
$11 million to Corporate. The consolidated operating loss in 2009 also included goodwill and other
intangible asset impairment charges of $43 million. On a segment basis, $41 million of the total
amount related to Building Products Distribution and $2 million to Worldwide Ceilings. The
consolidated operating loss in 2009 also included litigation settlement income, net of fees, of $97
million from our lawsuit against Lafarge North America Inc. and its parent, Lafarge S.A., or
together LaFarge. The total amount of this settlement related to the North American Gypsum segment.
The consolidated operating loss in 2008 included restructuring and long-lived asset impairment
charges of $98 million. On a segment basis, $48 million of the total amount related to North
American Gypsum, $34 million to Building Products Distribution, $5 million to Worldwide Ceilings
and $11 million to Corporate. The consolidated operating loss in 2008 also included goodwill and
other intangible asset impairment charges of $226 million. On a segment basis, $213 million of the
total amount related to Building Products Distribution, $12 million to Worldwide Ceilings and $1
million to North American Gypsum.
See Note 2 for additional information regarding restructuring and long-lived asset impairment
charges. See Note 4 for additional information regarding goodwill and other intangible asset
impairment charges. See Note 16 for additional information regarding litigation settlement income
from our lawsuit against Lafarge.
Revenues are attributed to geographic areas based on the location of the assets producing the
revenues. Transactions between reportable segments and geographic areas are accounted for at
transfer prices that are approximately equal to market value. Intercompany transfers between
segments (shown above as eliminations) largely reflect intercompany sales from U.S. Gypsum to L&W
Supply. Geographic transfers largely reflect intercompany sales from U.S. Gypsum and USG Interiors,
Inc. to CGC and USG Mexico.
On a worldwide basis, The Home Depot, Inc. accounted for approximately 15% of our consolidated
net sales in 2010, approximately 14% in 2009 and approximately 10% in 2008. All three reportable
segments had net sales to The Home Depot, Inc. in each of those years.
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14. Stockholder Rights Plan
On December 21, 2006, our Board of Directors approved the adoption of a new stockholder rights
plan. The plan was amended on December 5, 2008. Under the rights plan, if any person or group
acquires beneficial ownership of 15% or more of our then-outstanding voting stock, stockholders
other than the 15% triggering stockholder will have the right to purchase additional shares of our
common stock at half the market price, thereby diluting the triggering stockholder. During a
seven-year standstill period that expires in August 2013, Berkshire Hathaway Inc. (and certain of
its affiliates) will not trigger the rights so long as Berkshire Hathaway complies with the terms
of a shareholder’s agreement we entered into with Berkshire Hathaway and, following that seven-year
standstill period, the term “Acquiring Person” will not include Berkshire Hathaway (and certain of
its affiliates) unless Berkshire Hathaway and its affiliates acquire beneficial ownership of more
than 50% of our voting stock on a fully diluted basis. Among other things, the shareholder’s
agreement limits during the standstill period Berkshire Hathaway’s acquisitions of beneficial
ownership of our voting stock to 40% of our voting stock on a fully diluted basis, except in
limited circumstances, and the manner in which it may seek to effect an acquisition or other
extraordinary transaction involving USG.
The rights issued pursuant to the stockholder rights plan will expire on January 2, 2017.
However, our Board of Directors has the power to accelerate or extend the expiration date of the
rights. In addition, a Board committee composed solely of independent directors will review the
rights plan at least once every three years to determine whether to modify the plan in light of all
relevant factors. The first of those reviews was conducted in November 2009, and no modification of
the plan was adopted. The next review is required by the end of 2012.
15. Commitments and Contingencies
We lease some of our offices, buildings, machinery and equipment, and autos under noncancelable
operating leases. These leases have various terms and renewal options. Lease expense amounted to
$90 million in 2010, $94 million in 2009 and $107 million in 2008. Future minimum lease payments
required under operating leases with initial or remaining noncancelable terms in excess of one year
as of December 31, 2010 were $75 million in 2011, $60 million in 2012, $49 million in 2013, $34
million in 2014 and $26 million in 2015. The aggregate obligation after 2015 was $117 million.
16. Litigation
CHINESE-MANUFACTURED DRYWALL LAWSUITS
L&W Supply Corporation is one of many defendants in lawsuits relating to Chinese-made
wallboard installed in homes primarily in the southeastern United States during 2006 and 2007. The
wallboard was made in China by a number of manufacturers, including Knauf Plasterboard (Tianjin)
Co., and was sold or used by hundreds of distributors, contractors, and homebuilders. Knauf Tianjin
is an affiliate or indirect subsidiary of Knauf Gips KG, a multinational manufacturer of building
materials headquartered in Germany. The plaintiffs in these lawsuits, most of whom are homeowners,
claim that the Chinese-made wallboard is defective and emits elevated levels of sulfur gases
causing a bad smell and corrosion of copper or other metal surfaces. Plaintiffs also allege that
the Chinese-made wallboard causes health problems such as respiratory problems and allergic
reactions. The plaintiffs seek damages for the costs of removing and replacing the Chinese-made
wallboard and other allegedly damaged property as well as damages for bodily injury, including
medical monitoring in some cases. Most of the lawsuits against L&W Supply are part of the
consolidated multi-district litigation titled In re Chinese-Manufactured Drywall Products Liability
Litigation, MDL No. 2047, pending in New Orleans, Louisiana. The focus of the multi-district
litigation to date has been on plaintiffs’ property damage claims and not their alleged bodily
injury claims.
L&W Supply’s sales of Knauf Tianjin wallboard, which were confined to the Florida region in
2006, were relatively limited. The amount of Knauf Tianjin wallboard potentially sold by L&W Supply
Corporation could completely furnish approximately 250-300 average-size houses; however, the actual
number of homes involved is greater because many homes contain a mixture of different brands of
wallboard. Our records contain the addresses
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of the homes and other construction sites to which L&W Supply delivered wallboard, but do not
specifically identify the manufacturer of the wallboard delivered. Therefore, where Chinese-made
wallboard is identified in a home, we can determine from our records whether L&W Supply delivered
wallboard to that home.
To date, of the claims asserted where our records indicate we delivered wallboard to the home,
we have identified approximately 225 homes where we have confirmed the presence of Knauf Tianjin
wallboard or, based on the date and location, the wallboard in the home could be Knauf Tianjin
wallboard. We have resolved the claims relating to approximately 80 of those homes by funding
remediation of the homes.
The vast majority of Chinese drywall claims made against L&W Supply Corporation relate to
Knauf Tianjin board. However, we have received a few claims relating to other Chinese-made
wallboard sold by L&W Supply Corporation. Most, but not all, of the other Chinese-made wallboard we
sold was manufactured by Knauf at two other plants in China. We are not aware of any instances in
which the wallboard from the other Knauf Chinese plants has been determined to cause odor or
corrosion problems.
We have asserted claims against Knauf, the manufacturer, for reimbursement and indemnification
of our losses in connection with our sales of Knauf Tianjin wallboard. Based on our negotiations
with Knauf, we believe that it is probable that we will resolve our claims against Knauf for past,
current, and future Knauf Tianjin homeowner claims relating to property damage. We have not reached
a final agreement with Knauf, but we believe it is probable that we will reach a final settlement
agreement in early 2011. This agreement is unlikely to address bodily injury claims.
As of December 31, 2010, we accrued $13.6 million for our estimated cost of resolving the
Chinese wallboard property damage claims pending against L&W Supply and estimated to be asserted in
the future, and, based on the terms of our anticipated settlement with Knauf, we recorded a related
receivable of $10.4 million. Our accrual does not take into account legal fees and costs, the costs
of resolving claims for bodily injury, or any set-off for potential insurance recoveries. Our
estimated liability could be higher if the other Knauf Chinese wallboard that we sold is determined
to be problematic, the number of Chinese wallboard claims exceeds our estimates, or the cost of
resolving bodily injury claims is more than nominal. Considering all factors known to date, we do
not believe that these claims and other similar claims that might be asserted will have a material
adverse effect on our results of operations, financial position or cash flows. However, there can
be no assurance that the lawsuits will not have such an effect.
DOMESTIC WALLBOARD LITIGATION
In the second quarter of 2010, two class action lawsuits were filed against United States
Gypsum Company alleging that our wallboard, which is manufactured in the United States, has the
same problems associated with some Chinese-made wallboard. Both of these lawsuits were voluntarily
dismissed by the plaintiffs in the third quarter.
ENVIRONMENTAL LITIGATION
We have been notified by state and federal environmental protection agencies of possible
involvement as one of numerous “potentially responsible parties” in a number of Superfund sites in
the United States. As a potentially responsible party, we may be responsible to pay for some part
of the cleanup of hazardous waste at those sites. In most of these sites, our involvement is
expected to be minimal. In addition, we are involved in environmental cleanups of other property
that we own or owned. We believe that we have properly accrued for our potential liability in
connection with these matters. Our accruals take into account all known or estimated undiscounted
costs associated with these sites, including site investigations and feasibility costs, site
cleanup and remediation, certain legal costs, and fines and penalties, if any. However, we continue
to review these accruals as additional information becomes available and revise them as
appropriate.
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PATENT AND TRADE SECRETS LAWSUIT
U.S. Gypsum was the plaintiff in a lawsuit against Lafarge. The lawsuit, filed in 2003 in the
federal district court for the Northern District of Illinois, alleged that Lafarge misappropriated
our trade secrets and other information through hiring certain U.S. Gypsum employees (a number of
whom were also defendants), and that Lafarge infringed one of our patents regarding a method for
producing gypsum wallboard. On December 4, 2009, U.S. Gypsum entered into a settlement agreement
with Lafarge to resolve the lawsuit. Pursuant to the settlement agreement, Lafarge agreed to pay
U.S. Gypsum $105 million, the lawsuit was dismissed, and U.S. Gypsum granted Lafarge a fully
paid-up license to use certain technology. Lafarge paid U.S. Gypsum $25 million ($23 million net of
fees) in the fourth quarter of 2010 and $80 million ($74 million net of fees) in the fourth quarter
of 2009.
OTHER LITIGATION
We are named as defendants in other claims and lawsuits arising from our operations, including
claims and lawsuits arising from the operation of our vehicles, product warranties, personal injury
and commercial disputes. We believe that we have properly accrued for our potential liability in
connection with these claims and suits, taking into account the probability of liability, whether
our exposure can be reasonably estimated and, if so, our estimate of our liability or the range of
our liability. We do not expect these or any other litigation matters involving USG to have a
material adverse effect upon our results of operations, financial position or cash flows.
17. Quarterly Financial Data (unaudited)
| Quarter | |||||||||||||||||
| (millions, except share data) | First | Second | Third | Fourth | |||||||||||||
2010: |
|||||||||||||||||
Net sales |
$ | 716 | $ | 769 | $ | 758 | $ | 696 | |||||||||
Gross profit |
14 | 55 | 51 | 44 | |||||||||||||
Operating loss |
(82) | (25) | (58) | (95) | (a) | ||||||||||||
Net loss |
(110) | (74) | (100) | (121) | (a) | ||||||||||||
Loss Per Common Share: |
|||||||||||||||||
Basic (b) |
(1.10) | (0.74) | (1.00) | (1.17) | (a) | ||||||||||||
Diluted (b) |
(1.10) | (0.74) | (1.00) | (1.17) | (a) | ||||||||||||
2009: |
|||||||||||||||||
Net sales |
$ | 864 | $ | 829 | $ | 822 | $ | 720 | |||||||||
Gross profit |
48 | 51 | 38 | 8 | |||||||||||||
Operating loss |
(42) | (40) | (92) | (c) | (11) | (d) | |||||||||||
Net loss |
(42) | (53) | (94) | (c) | (598) | (d) | |||||||||||
Loss Per Common Share: |
|||||||||||||||||
Basic |
(0.42) | (0.53) | (0.96) | (c) | (6.02) | (d) | |||||||||||
Diluted |
(0.42) | (0.53) | (0.96) | (c) | (6.02) | (d) | |||||||||||
| (a) | Operating loss and net loss for the fourth quarter of 2010 included restructuring and long-lived asset impairment charges of $56 million pretax ($52 million, or $0.52 per diluted share, after-tax). | |
| (b) | The sum of the four quarters is not necessarily the same as the total for the year. | |
| (c) | Operating loss and net loss for the third quarter of 2009 included goodwill and other intangible asset impairment charges of $41 million, or $0.41 per diluted share. | |
| (d) | Operating loss and net loss for the fourth quarter of 2009 included litigation settlement income, net of fees, of $97 million, or $0.98 per diluted share, from our lawsuit against Lafarge. Net loss for the fourth quarter of 2009 also included a tax valuation allowance charge of $548 million, or $5.52 per diluted share. |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of USG Corporation:
We have audited the accompanying consolidated balance sheets of USG Corporation and
subsidiaries (the “Corporation”) as of December 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2010. Our audits also included the financial statement schedule, Schedule
II-Valuation and Qualifying Accounts. These consolidated financial statements and financial
statement schedule are the responsibility of the Corporation’s management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of USG Corporation and subsidiaries as of December 31, 2010 and
2009, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2010, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Corporation’s internal control over financial reporting as of
December 31, 2010, based on the criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 11, 2011 expressed an unqualified opinion on the Corporation’s internal control over
financial reporting.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 11, 2011
Chicago, Illinois
February 11, 2011
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USG CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
| Beginning | Ending | |||||||||||||||
| (millions) | Balance | Additions (a) | Deductions (b) | Balance | ||||||||||||
Year ended December 31, 2010: |
||||||||||||||||
Doubtful accounts |
$ | 14 | $ | 8 | $ | (7 | ) | $ | 15 | |||||||
Cash discounts |
2 | 27 | (27 | ) | 2 | |||||||||||
Year ended December 31, 2009: |
||||||||||||||||
Doubtful accounts |
11 | 12 | (9 | ) | 14 | |||||||||||
Cash discounts |
4 | 28 | (30 | ) | 2 | |||||||||||
Year ended December 31, 2008: |
||||||||||||||||
Doubtful accounts |
12 | 6 | (7 | ) | 11 | |||||||||||
Cash discounts |
5 | 43 | (44 | ) | 4 | |||||||||||
| (a) | Reflects provisions charged to earnings | |
| (b) | Reflects receivables written off as related to doubtful accounts and discounts allowed as related to cash discounts |
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| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our
“disclosure controls and procedures” (as defined in Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, or the Act), have concluded that, as of the end of the fiscal year covered by
this report, our disclosure controls and procedures were effective to provide reasonable assurance
that information required to be disclosed by us in the reports that we file or submit under the Act
is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Act is accumulated and communicated to
the issuer’s management, including its principal executive officer or officers and principal
financial officer or officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
(a) MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to provide reasonable assurance to
management and our Board of Directors regarding the preparation and fair presentation of published
financial statements.
All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2010. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control —
Integrated Framework. Based on its assessment, management believes that, as of December 31, 2010,
our internal control over financial reporting is effective based on those criteria.
Our independent registered public accounting firm has issued an attestation report on our
internal control over financial reporting. This report appears below.
February 11, 2011
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(b) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of USG Corporation:
We have audited the internal control over financial reporting of USG Corporation and
subsidiaries (the “Corporation”) as of December 31, 2010, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Corporation’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A corporation’s internal control over financial reporting is a process designed by, or under
the supervision of, the corporation’s principal executive and principal financial officers, or
persons performing similar functions, and effected by the corporation’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A corporation’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the corporation; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the corporation are being made only in
accordance with authorizations of management and directors of the corporation; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the corporation’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010, based on the criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2010 of the Corporation and our report dated
February 11, 2011 expressed an unqualified opinion on those financial statements and financial
statement schedule.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 11, 2011
Chicago, Illinois
February 11, 2011
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(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our “internal control over financial reporting” (as defined in Rule
13a-15(f) promulgated under the Act) identified in connection with the evaluation required by Rule
13a-15(d) promulgated under the Act that occurred during the fiscal quarter ended December 31, 2010
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9A(T). CONTROLS AND PROCEDURES
Not applicable
Item 9B. OTHER INFORMATION
ANNUAL MANAGEMENT INCENTIVE PROGRAM
On February 9, 2011, our Board of Directors approved our 2011 Annual Management Incentive
Program. Under the program, 50% of the par incentive award for each of our named executive officers
is based on a formula related to adjusted consolidated net earnings and 50% is based on specified
operating and financial targets.
On February 9, 2011, the Board of Directors also approved the following operating and
financial targets for our named executive officers under the 2011 Annual Management Incentive
Program: Building Systems adjusted operating profit (loss), L&W Supply adjusted operating profit
(loss), International adjusted operating profit, adjusted EBITDA, working capital (as a percentage
of net sales) and United States wallboard spread. Each named executive officer has been assigned
four or five of these targets.
No awards will be earned or paid under the 2011 Annual Management Incentive Program until we
report an adjusted operating profit for a full calendar year. Earned awards will be doubled if we
report an adjusted operating profit for 2011 and increased by 25% if we report an adjusted
operating profit in 2012 but not in 2011. No awards will be earned or paid under the 2011 Annual
Management Incentive Program if we do not report an annual adjusted operating profit until after
2013.
RESTRUCTURING CHARGES
As part of our steps to adjust operations and staffing to adapt to market conditions, at the
end of 2010, U.S. Gypsum idled its gypsum wallboard and plaster production facilities and its
gypsum quarry in Empire, Nev. We recorded restructuring charges of approximately $1 million in the
fourth quarter related to the idling of those facilities. We will incur additional, related
restructuring charges of approximately $3 million in 2011. The total charges include approximately
$2 million for termination benefits and $2 million for lease terminations and other exit costs. We
will incur cash expenditures of approximately $4 million in connection with the idling of these
facilities.
MINE SAFETY
The operation of our ten mines and quarries in the United States is subject to regulation and
inspection under the Federal Mine Safety and Health Act of 1977, or Safety Act. From time to time,
inspection of our mines and quarries and their operation results in our receipt of citations or
orders alleging violations of health or safety standards or other violations under the Safety Act.
We are usually able to resolve the matters identified in the citations or orders with little or no
assessments or penalties.
Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that
we disclose specified information about mine health and safety in our periodic reports filed with
the Securities and Exchange Commission. The disclosure requirements set forth in Section 1503 refer
to, and are based on, the safety and health requirements applicable to mines under the Safety Act
which is administered by the U.S. Labor Department’s Mine Safety and Health Administration, or
MSHA. Under the Safety Act, MSHA is required to inspect surface mines at least twice a year and
underground mines at least four times a year to determine whether there is compliance with health
and safety standards or with any citation, order or decision issued under the Safety Act and
whether an imminent danger exists. MSHA also conducts spot inspections and inspections pursuant to
miners’ complaints. If
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violations of safety or health standards are found, MSHA inspectors will issue citations to the
mine operators. Among other activities under the Safety Act, MSHA also assesses and collects civil
monetary penalties for violations of mine safety and health standards.
In addition, an independent adjudicative agency, the Federal Mine Safety and Health Review
Commission, or FMSHRC, provides administrative trial and appellate review of legal disputes arising
under the Safety Act. Most cases deal with civil penalties proposed by MSHA to be assessed against
mine operators and address whether the alleged safety and health violations occurred, as well as
the appropriateness of proposed penalties.
During the quarter and year ended December 31, 2010, we received 32 and 88 citations,
respectively, alleging health and safety violations that could significantly and substantially
contribute to the cause and effect of a mine safety or health hazard under the Safety Act. The
total dollar value of proposed assessments from MSHA with respect to those citations, $43,048 of
which have been resolved through payments of penalties aggregating $19,346 and $29,039 of which are
being contested or otherwise remain outstanding was approximately $14,009. However, no assessment
has yet been made with respect to 22 of the citations. Set forth below is information with respect
to the gypsum mines with respect to which citations were received during the quarter and year ended
December 31, 2010:
| Proposed | Outstanding | |||||||||||||||
| Number of Citations | Number of Citations | Assessments | Assessments as | |||||||||||||
| Location of Mine/Quarry | 10/1/10 - 12/31/10 | 1/1/10 - 12/31/10 | 1/1/10 to Date | of 12/31/10 | ||||||||||||
Alabaster, Mich. |
- | 2 | $ | 200 | $ | - | ||||||||||
Empire, Nev. |
14 | 17 | 2,652 | 2,027 | ||||||||||||
Fort Dodge, Iowa |
3 | 8 | 500 | - | ||||||||||||
Plaster City, Calif. |
- | 17 | 19,631 | - | ||||||||||||
Shoals, Ind. |
1 | 3 | 262 | 162 | ||||||||||||
Sigurd, Utah |
1 | 1 | 100 | - | ||||||||||||
Southard, Okla. |
- | 11 | 1,904 | - | ||||||||||||
Sperry, Iowa |
10 | 17 | 16,353 | 11,258 | ||||||||||||
Spruce Pine, N.C. |
3 | 7 | 922 | 300 | ||||||||||||
Sweetwater, Texas |
- | 5 | 524 | 262 | ||||||||||||
Totals |
32 | 88 | $ | 43,048 | $ | 14,009 | ||||||||||
We did not receive any citations for unwarrantable failure to comply with health and
safety standards under the Safety Act, any orders under the Safety Act regarding withdrawal from a
mine as a result of failure to abate in a timely manner a health and safety violation for which a
citation was issued or any imminent danger orders under the Safety Act during the year ended
December 31, 2010. Also, there were no flagrant violations and no mining-related fatalities during
2010.
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PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers of the Registrant (as of February 11, 2011):
| Name | Age | Present Position and Business Experience During the Last Five Years | ||||
William C. Foote
|
59 | Chairman of the Board of Directors since January 2011. Chairman and Chief Executive Officer prior thereto. |
||||
James S. Metcalf
|
53 | President and Chief Executive Officer since January 2011. President and Chief Operating Officer prior thereto. |
||||
Stanley L. Ferguson
|
58 | Executive Vice President and General Counsel. | ||||
Richard H. Fleming
|
63 | Executive Vice President and Chief Financial Officer. | ||||
Christopher R. Griffin
|
48 | Executive Vice President — Operations since September 2010. Senior Vice President, President, USG International and President, CGC Inc., to September 2010. Vice President to February 2010. President, CGC Inc., to January 2008. |
||||
Fareed A. Khan
|
45 | Executive Vice President, Finance and Strategy since September 2010. Senior Vice President and President, USG Building Systems, to September 2010. Vice President to February 2010. Executive Vice President, Sales and Marketing, USG Building Systems, prior thereto. |
||||
Brian J. Cook
|
53 | Senior Vice President, Human Resources. | ||||
Dominic A. Dannessa
|
54 | Senior Vice President and Chief Technology Officer since February 2010. Vice President and Chief Technology Officer to February 2010. Vice President, Supply Chain, Information Technology and Corporate Efficiency Initiatives to July 2008. Vice President; Executive Vice President, Manufacturing, USG Building Systems, to January 2008. Senior Vice President, Manufacturing, United States Gypsum Company, prior thereto. |
||||
Brendan J. Deely
|
45 | Senior Vice President since February 2010 and President and Chief Executive Officer,
L&W Supply Corporation, since May 2007.
Vice President to February 2010; President and Chief Operating Officer, L&W Supply Corporation, to May 2007. |
||||
D. Rick Lowes
|
56 | Senior Vice President, Business Development and Operational Services since September
2010. Senior Vice President, Finance to September 2010. Senior Vice President and Controller to March 2010. Vice President and Controller prior thereto. |
||||
William J. Kelley Jr.
|
46 | Vice President and Controller since March 2010. Vice President, Finance, Pepsi Beverage Company, in March 2010. Vice President, Finance — Field Sales, PepsiAmericas, Inc., to March 2010. Vice President, East Group Finance, PepsiAmericas, Inc., to December 2006. |
||||
Karen L. Leets
|
54 | Vice President and Treasurer. | ||||
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| Name | Age | Present Position and Business Experience During the Last Five Years | ||||
Mary A. Martin
|
55 | Vice President and Associate General Counsel since July 2009. Associate General Counsel prior thereto. |
||||
Ellis A. Regenbogen
|
64 | Vice President since February 2008 and Corporate Secretary and Associate General Counsel since
October 2006.
Associate General Counsel and Assistant Secretary to October 2006. Associate General Counsel — Securities and Governance, Sears Holdings Corporation, to April 2006. |
||||
Jeffrey P. Rodewald
|
56 | Vice President, Employee Benefits, Safety and Corporate Services since July 2009. Senior Director, Employee Benefits, Safety and Corporate Services to July 2009. Director, Employee Benefits, USG Corporation, and Vice President, Human Resources, USG International, to September 2007. Director, Human Resources, USG Corporation, and Vice President, Human Resources, USG International, to January 2006. |
||||
Jennifer F. Scanlon
|
44 | Vice President and President, International, since September 2010. Vice President and Chief Information Officer to September 2010. Director, Information Technology, and Chief Information Officer to February 2008. Director, CRM/SCM Strategy and Implementation, USG Building Systems, to May 2007. |
||||
Committee Charters and Code of Business Conduct
Our Corporate Code of Business Conduct (applicable to directors, officers and employees), our
Corporate Governance Guidelines and the charters of the committees of our Board of Directors,
including the Audit Committee, Governance Committee and Compensation and Organization Committee,
are available through the “Investor Relations” and “Corporate Governance” links in the “Company
Information” section of our Web site at www.usg.com.
Other information required by this Item 10 is included under the headings “Director Nominees
and Directors Continuing in Office,” “Committees of the Board of Directors,” “Audit Committee” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for our
annual meeting of stockholders scheduled to be held on May 11, 2011, which information is
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is included under the heading “Compensation of Executive
Officers and Directors” in the definitive Proxy Statement for our annual meeting of stockholders
scheduled to be held on May 11, 2011, which information is incorporated herein by reference.
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| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth information about our common stock that may be issued upon exercise
of options under all of our equity compensation plans as of December 31, 2010, including the
Long-Term Incentive and Omnibus Management Incentive Plans, both of which were approved by our
stockholders.
| Number of securities | |||||||||||||||||
| remaining available for | |||||||||||||||||
| future issuance under | |||||||||||||||||
| Number of securities to | Weighted average | equity compensation | |||||||||||||||
| be issued upon exercise | exercise price of | plans (excluding | |||||||||||||||
| of outstanding options | outstanding options and | securities reported in | |||||||||||||||
| Plan Category | and rights | rights | column one) | ||||||||||||||
Equity compensation
plans approved by
stockholders |
4,442,064 | $25.33 | 5,362,356 | ||||||||||||||
Equity compensation
plans not approved
by stockholders |
- | - | - | ||||||||||||||
Total |
4,442,064 | $25.33 | 5,362,356 | ||||||||||||||
Other information required by this Item 12 is included under the headings “Principal
Stockholders” and “Security Ownership of Directors and Executive Officers” in the definitive Proxy
Statement for our annual meeting of stockholders scheduled to be held
on May 11, 2011, which
information is incorporated herein by reference.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information required by this Item 13 is included under the heading “Certain Relationships and
Related Transactions” in the definitive Proxy Statement for our annual meeting of stockholders
scheduled to be held on May 11, 2011, which information is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item 14 is included under the heading “Independent Registered Public
Accounting Firm Fees and Services” in the definitive Proxy Statement for our annual meeting of
stockholders scheduled to be held on May 11, 2011, which information is incorporated herein by
reference.
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PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | 1 and 2. See Part II, Item 8, Financial Statements and Supplementary Data, for an index of our consolidated financial statements and supplementary data schedule. |
3. Exhibits
| Exhibit Number | Exhibit |
|
Plan of Reorganization:
| 2.1 | First Amended Joint Plan of Reorganization of USG Corporation and its Debtor Subsidiaries (incorporated by reference to Exhibit 2.01 to USG Corporation’s Current Report on Form 8-K filed June 21, 2006, or the June 2006 8-K) | |
| 2.2 | Order Confirming First Amended Joint Plan of Reorganization (incorporated by reference to Exhibit 2.02 to the June 2006 8-K) |
Articles of Incorporation and By-Laws:
| 3.1 | Restated Certificate of Incorporation of USG Corporation (incorporated by reference to Exhibit 3.01 to the June 2006 8-K) | |
| 3.2 | Certificate of Designation of Junior Participating Preferred Stock, Series D, of USG Corporation (incorporated by reference to Exhibit A of Exhibit 4 to USG Corporation’s Current Report on Form 8-K dated March 27, 1998) | |
| 3.3 | Amended and Restated By-Laws of USG Corporation, dated as of May 13, 2009 (incorporated by reference to Exhibit 3.1 to USG Corporation’s Current Report on Form 8-K dated May 19, 2009) |
Instruments Defining the Rights of Security Holders, Including Indentures:
| 4.1 | Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 to USG Corporation’s Annual Report on Form 10-K dated February 16, 2007) | |
| 4.2 | Rights Agreement, dated as of December 21, 2006, between USG Corporation and Computershare Investor Services, LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to USG Corporation’s Registration Statement on Form 8-A dated December 21, 2006) | |
| 4.3 | Amendment to Rights Agreement, dated as of December 5, 2008, to the Rights Agreement, dated as of December 21, 2006, by and between USG Corporation and Computershare Investor Services, LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to USG Corporation’s Amendment No. 1 to Form 8-A dated December 5, 2008) | |
| 4.4 | Indenture, dated as of November 1, 2006, by and between USG Corporation and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.01 to USG Corporation’s Current Report on Form 8-K dated November 20, 2006, or the November 2006 8-K) |
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| 4.5 | Supplemental Indenture No. 1, dated as of November 17, 2006, by and between USG Corporation and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.02 to the November 2006 8-K) | |
| 4.6 | Form of 7.750% Senior Note due 2018 (incorporated by reference to USG Corporation’s Current Report on Form 8-K dated September 26, 2007) | |
| 4.7 | Indenture, dated as of November 1, 2008, by and between USG Corporation and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to USG Corporation’s Current Report on Form 8-K dated November 26, 2008, or the November 2008 8-K) | |
| 4.8 | Supplemental Indenture No. 1, dated as of November 26, 2008, by and between USG Corporation and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to the November 2008 8-K) | |
| 4.9 | Agreement of Resignation, Appointment and Acceptance, dated as of February 11, 2009, by and among USG Corporation, HSBC Bank USA, National Association and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 to USG Corporation’s Quarterly Report on Form 10-Q dated May 4, 2009) | |
| 4.10 | Supplemental Indenture No. 2, dated as of August 4, 2009, between USG Corporation, each of United States Gypsum Company, L&W Supply Corporation, USG Foreign Investments, Ltd. and USG Interiors, Inc. and HSBC Bank USA, National Association, as trustee (incorporated by reference to Exhibit 4.01 to USG Corporation’s Current Report on Form 8-K dated August 4, 2009) | |
| 4.11 | Supplemental Indenture No. 3, dated as of November 9, 2010, by and among USG Corporation, each of United States Gypsum Company, L&W Supply Corporation, USG Foreign Investments, Ltd. And USG Interiors, Inc. as guarantors, and HSBC Bank USA, National Associations, as Trustee, (incorporated by reference to Exhibit 4.1 to USG Corporation’s Current Report on Form 8-K dated November 9, 2010) | |
| 4.12 | Registration Rights Agreement, dated as of September 8, 2010, between USG Corporation and Evercore Trust Company, N.A. (incorporated by reference to Exhibit 4.1 to USG Corporation’s Current Report on Form 8-K dated September 13, 2010) |
USG Corporation and certain of its consolidated subsidiaries are parties to other long-term debt
instruments under which the total amount of securities authorized does not exceed 10% of the total
assets of USG Corporation and its subsidiaries on a consolidated basis. Pursuant to paragraph
(b)(4)(iii)(A) of Item 601 of Regulation S-K, USG Corporation agrees to furnish a copy of such
instruments to the Securities and Exchange Commission upon request.
Material Contracts:
| 10.1 | Amendment and Restatement of USG Corporation Supplemental Retirement Plan, effective as of January 1, 2007 and dated December 10, 2008 (incorporated by reference to Exhibit 10.1 to USG Corporation’s Annual Report on Form 10-K dated February 20, 2009, or the 2008 10-K) * | |
| 10.2 | Form of Employment Agreement (incorporated by reference to Exhibit 10.1 to USG Corporation’s Current Report on Form 8-K dated October 2, 2008, or the First October 2008 8-K) * | |
| 10.3 | Form of Change in Control Severance Agreement (Tier 1 Benefits) (incorporated by reference to Exhibit 10.2 to the First October 2008 8-K) * | |
| 10.4 | Form of Change in Control Severance Agreement (Tier 2 Benefits) (incorporated by reference to Exhibit 10.3 to the First October 2008 8-K) * |
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| 10.5 | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.14 to USG Corporation’s Annual Report on Form 10-K dated February 15, 2008, or the 2007 10-K) * | |
| 10.6 | USG Corporation Stock Compensation Program for Non-Employee Directors (as Amended and Restated Effective as of January 1, 2005) (incorporated by reference to Exhibit 10.2 to USG Corporation’s Current Report on Form 8-K dated November 14, 2005) * | |
| 10.7 | Amendment No. 1 to the USG Corporation Stock Compensation Program for Non-Employee Directors (as Amended and Restated as of January 1, 2005) (incorporated by reference to Exhibit 10.1 to USG Corporation’s Quarterly Report on Form 10-Q dated August 3, 2006, or the second quarter 2006 10-Q) * | |
| 10.8 | Amendment No. 2 to the USG Corporation Stock Compensation Program for Non-Employee Directors (as Amended and Restated as of January 1, 2005) (incorporated by reference to Exhibit 10.8 to USG Corporation’s Quarterly Report on Form 10-Q dated April 30, 2007) * | |
| 10.9 | USG Corporation Non-Employee Director Compensation Program (Amended and Restated February 13, 2008) (incorporated by reference to Exhibit 10.18 to the 2007 10-K) * | |
| 10.10 | Amendment No. 1 to USG Corporation Non-Employer Director Compensation Program (as Amended and Restated February 13, 2008) * ** | |
| 10.11 | USG Corporation Deferred Compensation Program for Non-Employee Directors (as Amended and Restated effective December 31, 2008) (incorporated by reference to Exhibit 10.10 to the 2008 10-K) * | |
| 10.12 | Third Amendment and Restatement Agreement, dated as of December 21, 2010, among USG Corporation, as borrower, and JP Morgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to USG Corporation’s Current Report on Form 8-K dated December 23, 2010) | |
| 10.13 | Third Amended and Restated Credit Agreement, dated as of December 21, 2010, among USG Corporation, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and Bank of America, N.A. and Wells Fargo Bank, N.A., as co-syndication agents (incorporated by reference to Exhibit 10.2 to USG Corporation’s Current Report on Form 8-K dated December 23, 2010) | |
| 10.14 | Guarantee Agreement dated as of January 7, 2009 among USG Corporation, the subsidiary guarantors party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.3 to USG Corporation’s Quarterly Report on Form 10-Q dated October 29, 2010, or the 2010 10-Q) | |
| 10.15 | Pledge and Security Agreement dated as of January 7, 2009 among USG Corporation, the other grantors party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.4 to the 2010 10-Q) | |
| 10.16 | 2010 Annual Management Incentive Program of USG Corporation (Executive Officers Only) (incorporated by reference to Exhibit 10.15 to USG Corporation’s Annual Report on Form 10-K dated February 12, 2010, or the 2009 10-K) * | |
| 10.17 | 2011 Annual Management Incentive Program of USG Corporation (Executive Officers Only) * ** | |
| 10.18 | Annual Base Salaries of Named Executive Officers of USG Corporation * ** | |
| 10.19 | USG Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 10.31 to USG Corporation’s Annual Report on Form 10-K dated February 16, 2007) * |
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| 10.20 | First Amendment of USG Corporation Deferred Compensation Plan, effective as of April 1, 2007 and dated December 10, 2008 (incorporated by reference to Exhibit 10.25 to the 2008 10-K) * | |
| 10.21 | USG Corporation Long-Term Incentive Plan (as amended effective May 12, 2010) (incorporated by reference to Annex C to the Proxy Statement for the Annual Meeting of Stockholders of USG Corporation held on May 12, 2010, or the 2010 Proxy Statement) * | |
| 10.22 | Form of USG Corporation Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.9 to the second quarter 2006 10-Q) * | |
| 10.23 | Form of USG Corporation Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.1 to USG Corporation’s Current Report on Form 8-K dated March 28, 2007, or the March 2007 8-K) * | |
| 10.24 | Form of USG Corporation Restricted Stock Units Agreement (Annual Grant) (incorporated by reference to Exhibit 10.2 to the March 2007 8-K) * | |
| 10.25 | Form of USG Corporation Restricted Stock Units Agreement (Retention Grant) (incorporated by reference to Exhibit 10.3 to the March 2007 8-K) * | |
| 10.26 | Form of USG Corporation Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.36 to the 2008 10-K) * | |
| 10.27 | Form of USG Corporation Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.37 to the 2008 10-K) * | |
| 10.28 | Form of USG Corporation Performance Shares Agreement (incorporated by reference to Exhibit 10.38 to the 2008 10-K) * | |
| 10.29 | Form of USG Corporation Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.30 to the 2009 10-K) * | |
| 10.30 | Form of USG Corporation Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.31 to the 2009 10-K) * | |
| 10.31 | Form of USG Corporation Performance Shares Agreement (incorporated by reference to Exhibit 10.32 to the 2009 10-K) * | |
| 10.32 | Form of Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.7 to the 2010 10-Q) * | |
| 10.33 | Form of Performance Based Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.8 to the 2010 10-Q) * | |
| 10.34 | Changes to Equity Awards for Compliance With Section 409A (incorporated by reference to Exhibit 10.39 to the 2008 10-K) * | |
| 10.35 | USG Corporation Management Incentive Plan (incorporated by reference to Annex B to the 2010 Proxy Statement) * | |
| 10.36 | Equity Commitment Agreement, dated January 30, 2006, by and between USG Corporation and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 10.2 to USG Corporation’s Current Report on Form 8-K dated January 30, 2006, or the January 2006 8-K) |
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| 10.37 | Shareholder’s Agreement, entered into as of January 30, 2006, by and between USG Corporation and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 10.3 to the January 2006 8-K) | |
| 10.38 | Amended and Restated Registration Rights Agreement, dated as of November 26, 2008, by and between USG Corporation and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 10.1 to the November 2008 8-K) | |
| 10.39 | Secured Loan Facility Agreement, dated October 21, 2008, between Gypsum Transportation Limited and DVB Bank SE, as lender, agent and security trustee (incorporated by reference to Exhibit 10.5 to the 2010 10-Q) | |
| 10.40 | Guarantee and Indemnity Agreement, dated October 21, 2008, between USG Corporation and DVB Bank SE, as agent (incorporated by reference to Exhibit 10.2 to USG Corporation’s Current Report on Form 8-K dated October 27, 2008, or the Second October 2008 8-K) | |
| 10.41 | Form of Deed of Covenants between Gypsum Transportation Limited and DVB Bank SE, as mortgagee (incorporated by reference to Exhibit 10.3 to the Second October 2008 8-K) | |
| 10.42 | Form of Deed of Assignment between Gypsum Transportation Limited and DVB Bank SE, as assignee (incorporated by reference to Exhibit 10.4 to the Second October 2008 8-K) | |
| 10.43 | Second Supplemental Agreement, dated November 10, 2009, to Secured Loan Facility Agreement dated October 21, 2008 between Gypsum Transportation Limited, USG Corporation and DVB Bank SE, as lender, agent and security trustee (incorporated by reference to Exhibit 10.43 to the 2009 10-K) | |
| 10.44 | Credit Agreement, dated as of June 30, 2009, between CGC Inc. and The Toronto-Dominion Bank (incorporated by reference to Exhibit 10.6 to the 2010 10-Q) | |
| 10.45 | Securities Purchase Agreement, dated November 21, 2008, between USG Corporation and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 1.1 to the November 2008 8-K) | |
| 10.46 | Securities Purchase Agreement, dated November 21, 2008, between USG Corporation and Fairfax Financial Holdings Limited (incorporated by reference to Exhibit 1.2 to the November 2008 8-K) | |
| 10.47 | Registration Rights Agreement, dated as of November 26, 2008, between USG Corporation and Fairfax Financial Holdings Limited (incorporated by reference to Exhibit 10.2 to the November 2008 8-K) |
Other:
| 21 | Subsidiaries ** | |
| 23 | Consent of Independent Registered Public Accounting Firm ** | |
| 24 | Power of Attorney ** | |
| 31.1 | Rule 13a - 14(a) Certifications of USG Corporation’s Chief Executive Officer ** | |
| 31.2 | Rule 13a - 14(a) Certifications of USG Corporation’s Chief Financial Officer ** | |
| 32.1 | Section 1350 Certifications of USG Corporation’s Chief Executive Officer ** | |
| 32.2 | Section 1350 Certifications of USG Corporation’s Chief Financial Officer ** |
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| 101 | The following financial information from USG Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010, formatted in XBRL (Extensible Business Reporting Language): (1) the consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008, (2) the consolidated balance sheets as of December 31, 2010 and 2009, (3) the consolidated statements of cash flows for the years ended December 31, 2010, 2009 and 2008 and (4) notes to the consolidated financial statements, tagged as blocks of text. ** |
| * | Management contract or compensatory plan or arrangement | |
| ** | Filed or furnished herewith |
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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.
February 11, 2011 |
USG CORPORATION |
|||
| 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/ James S. Metcalf
|
February 11, 2011 | |||||||
Director, President and Chief Executive Officer
|
||||||||
(Principal Executive Officer) |
||||||||
/s/ Richard H. Fleming
|
February 11, 2011 | |||||||
Executive Vice President and |
||||||||
Chief Financial Officer |
||||||||
(Principal Financial Officer) |
||||||||
/s/ William J. Kelley Jr.
|
February 11, 2011 | |||||||
Vice President and Controller
|
||||||||
(Principal Accounting Officer)
|
||||||||
JOSE ARMARIO, ROBERT L. BARNETT,
|
) | By: | /s/ Richard H. Fleming | |||||
LAWRENCE
M. CRUTCHER, WILLIAM C. FOOTE,
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) | Richard H. Fleming | ||||||
W. DOUGLAS FORD, WILLIAM H. HERNANDEZ,
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) | Attorney-in-fact | ||||||
RICHARD P. LAVIN, STEVEN F. LEER,
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) | February 11, 2011 | ||||||
MARVIN
E. LESSER
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) | |||||||
Directors
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) | |||||||
Director
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105
Table of Contents
EXHIBIT INDEX
| Exhibit | ||
| Number | Exhibit |
|
| 2.1 | First Amended Joint Plan of Reorganization of USG Corporation and its Debtor Subsidiaries (incorporated by reference to Exhibit 2.01 to USG Corporation’s Current Report on Form 8-K filed June 21, 2006, or the June 2006 8-K) | |
| 2.2 | Order Confirming First Amended Joint Plan of Reorganization (incorporated by reference to Exhibit 2.02 to the June 2006 8-K) | |
| 3.1 | Restated Certificate of Incorporation of USG Corporation (incorporated by reference to Exhibit 3.01 to the June 2006 8-K) | |
| 3.2 | Certificate of Designation of Junior Participating Preferred Stock, Series D, of USG Corporation (incorporated by reference to Exhibit A of Exhibit 4 to USG Corporation’s Current Report on Form 8-K dated March 27, 1998) | |
| 3.3 | Amended and Restated By-Laws of USG Corporation, dated as of May 13, 2009 (incorporated by reference to Exhibit 3.1 to USG Corporation’s Current Report on Form 8-K dated May 19, 2009) | |
| 4.1 | Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 to USG Corporation’s Annual Report on Form 10-K dated February 16, 2007) | |
| 4.2 | Rights Agreement, dated as of December 21, 2006, between USG Corporation and Computershare Investor Services, LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to USG Corporation’s Registration Statement on Form 8-A dated December 21, 2006) | |
| 4.3 | Amendment to Rights Agreement, dated as of December 5, 2008, to the Rights Agreement, dated as of December 21, 2006, by and between USG Corporation and Computershare Investor Services, LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to USG Corporation’s Amendment No. 1 to Form 8-A dated December 5, 2008) | |
| 4.4 | Indenture, dated as of November 1, 2006, by and between USG Corporation and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.01 to USG Corporation’s Current Report on Form 8-K dated November 20, 2006, or the November 2006 8-K) | |
| 4.5 | Supplemental Indenture No. 1, dated as of November 17, 2006, by and between USG Corporation and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.02 to the November 2006 8-K) | |
| 4.6 | Form of 7.750% Senior Note due 2018 (incorporated by reference to USG Corporation’s Current Report on Form 8-K dated September 26, 2007) | |
| 4.7 | Indenture, dated as of November 1, 2008, by and between USG Corporation and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to USG Corporation’s Current Report on Form 8-K dated November 26, 2008, or the November 2008 8-K) | |
| 4.8 | Supplemental Indenture No. 1, dated as of November 26, 2008, by and between USG Corporation and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to the November 2008 8-K) | |
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| 4.9 | Agreement of Resignation, Appointment and Acceptance, dated as of February 11, 2009, by and among USG Corporation, HSBC Bank USA, National Association and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 to USG Corporation’s Quarterly Report on Form 10-Q dated May 4, 2009) | |
| 4.10 | Supplemental Indenture No. 2, dated as of August 4, 2009, between USG Corporation, each of United States Gypsum Company, L&W Supply Corporation, USG Foreign Investments, Ltd. and USG Interiors, Inc. and HSBC Bank USA, National Association, as trustee (incorporated by reference to Exhibit 4.01 to USG Corporation’s Current Report on Form 8-K dated August 4, 2009) | |
| 10.1 | Amendment and Restatement of USG Corporation Supplemental Retirement Plan, effective as of January 1, 2007 and dated December 10, 2008 (incorporated by reference to Exhibit 10.1 to USG Corporation’s Annual Report on Form 10-K dated February 20, 2009, or the 2008 10-K) * | |
| 10.2 | Form of Employment Agreement (incorporated by reference to Exhibit 10.1 to USG Corporation’s Current Report on Form 8-K dated October 2, 2008, or the First October 2008 8-K) * | |
| 10.3 | Form of Change in Control Severance Agreement (Tier 1 Benefits) (incorporated by reference to Exhibit 10.2 to the First October 2008 8-K) * | |
| 10.4 | Form of Change in Control Severance Agreement (Tier 2 Benefits) (incorporated by reference to Exhibit 10.3 to the First October 2008 8-K) * | |
| 10.5 | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.14 to USG Corporation’s Annual Report on Form 10-K dated February 15, 2008, or the 2007 10-K) * | |
| 10.6 | USG Corporation Stock Compensation Program for Non-Employee Directors (as Amended and Restated Effective as of January 1, 2005) (incorporated by reference to Exhibit 10.2 to USG Corporation’s Current Report on Form 8-K dated November 14, 2005) * | |
| 10.7 | Amendment No. 1 to the USG Corporation Stock Compensation Program for Non-Employee Directors (as Amended and Restated as of January 1, 2005) (incorporated by reference to Exhibit 10.1 to USG Corporation’s Quarterly Report on Form 10-Q dated August 3, 2006, or the second quarter 2006 10-Q) * | |
| 10.8 | Amendment No. 2 to the USG Corporation Stock Compensation Program for Non-Employee Directors (as Amended and Restated as of January 1, 2005) (incorporated by reference to Exhibit 10.8 to USG Corporation’s Quarterly Report on Form 10-Q dated April 30, 2007) * | |
| 10.9 | USG Corporation Non-Employee Director Compensation Program (Amended and Restated February 13, 2008) (incorporated by reference to Exhibit 10.18 to the 2007 10-K) * | |
| 10.10 | Amendment No. 1 to USG Corporation Non-Employer Director Compensation Program (as Amended and Restated February 13, 2008) * ** | |
| 10.11 | USG Corporation Deferred Compensation Program for Non-Employee Directors (as Amended and Restated effective December 31, 2008) (incorporated by reference to Exhibit 10.10 to the 2008 10-K) * | |
| 10.12 | Third Amendment and Restatement Agreement, dated as of December 21, 2010, among USG Corporation, as borrower, and JP Morgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to USG Corporation’s Current Report on Form 8-K dated December 23, 2010) |
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| 10.13 | Third Amended and Restated Credit Agreement, dated as of December 21, 2010, among USG Corporation, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and Bank of America, N.A. and Wells Fargo Bank, N.A., as co-syndication agents (incorporated by reference to Exhibit 10.2 to USG Corporation’s Current Report on Form 8-K dated December 23, 2010) | |
| 10.14 | Guarantee Agreement dated as of January 7, 2009 among USG Corporation, the subsidiary guarantors party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.3 to USG Corporation’s Quarterly Report on Form 10-Q dated October 29, 2010, or the 2010 10-Q) | |
| 10.15 | Pledge and Security Agreement dated as of January 7, 2009 among USG Corporation, the other grantors party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.4 to the 2010 10-Q) | |
| 10.16 | 2010 Annual Management Incentive Program of USG Corporation (Executive Officers Only) (incorporated by reference to Exhibit 10.15 to USG Corporation’s Annual Report on Form 10-K dated February 12, 2010, or the 2009 10-K) * | |
| 10.17 | 2011 Annual Management Incentive Program of USG Corporation (Executive Officers Only) * ** | |
| 10.18 | Annual Base Salaries of Named Executive Officers of USG Corporation * ** | |
| 10.19 | USG Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 10.31 to USG Corporation’s Annual Report on Form 10-K dated February 16, 2007) * | |
| 10.20 | First Amendment of USG Corporation Deferred Compensation Plan, effective as of April 1, 2007 and dated December 10, 2008 (incorporated by reference to Exhibit 10.25 to the 2008 10-K) * | |
| 10.21 | USG Corporation Long-Term Incentive Plan (as amended effective May 12, 2010) (incorporated by reference to Annex C to the Proxy Statement for the Annual Meeting of Stockholders of USG Corporation held on May 12, 2010, or the 2010 Proxy Statement) * | |
| 10.22 | Form of USG Corporation Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.9 to the second quarter 2006 10-Q) * | |
| 10.23 | Form of USG Corporation Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.1 to USG Corporation’s Current Report on Form 8-K dated March 28, 2007, or the March 2007 8-K) * | |
| 10.24 | Form of USG Corporation Restricted Stock Units Agreement (Annual Grant) (incorporated by reference to Exhibit 10.2 to the March 2007 8-K) * | |
| 10.25 | Form of USG Corporation Restricted Stock Units Agreement (Retention Grant) (incorporated by reference to Exhibit 10.3 to the March 2007 8-K) * | |
| 10.26 | Form of USG Corporation Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.36 to the 2008 10-K) * | |
| 10.27 | Form of USG Corporation Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.37 to the 2008 10-K) * | |
| 10.28 | Form of USG Corporation Performance Shares Agreement (incorporated by reference to Exhibit 10.38 to the 2008 10-K) * |
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| 10.29 | Form of USG Corporation Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.30 to the 2009 10-K) * | |
| 10.30 | Form of USG Corporation Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.31 to the 2009 10-K) * | |
| 10.31 | Form of USG Corporation Performance Shares Agreement (incorporated by reference to Exhibit 10.32 to the 2009 10-K) * | |
| 10.32 | Form of Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.7 to the 2010 10-Q) * | |
| 10.33 | Form of Performance Based Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.8 to the 2010 10-Q) * | |
| 10.34 | Changes to Equity Awards for Compliance With Section 409A (incorporated by reference to Exhibit 10.39 to the 2008 10-K) * | |
| 10.35 | USG Corporation Management Incentive Plan (incorporated by reference to Annex B to the 2010 Proxy Statement) * | |
| 10.36 | Equity Commitment Agreement, dated January 30, 2006, by and between USG Corporation and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 10.2 to USG Corporation’s Current Report on Form 8-K dated January 30, 2006, or the January 2006 8-K) | |
| 10.37 | Shareholder’s Agreement, entered into as of January 30, 2006, by and between USG Corporation and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 10.3 to the January 2006 8-K) | |
| 10.38 | Amended and Restated Registration Rights Agreement, dated as of November 26, 2008, by and between USG Corporation and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 10.1 to the November 2008 8-K) | |
| 10.39 | Secured Loan Facility Agreement, dated October 21, 2008, between Gypsum Transportation Limited and DVB Bank SE, as lender, agent and security trustee (incorporated by reference to Exhibit 10.5 to the 2010 10-Q) | |
| 10.40 | Guarantee and Indemnity Agreement, dated October 21, 2008, between USG Corporation and DVB Bank SE, as agent (incorporated by reference to Exhibit 10.2 to USG Corporation’s Current Report on Form 8-K dated October 27, 2008, or the Second October 2008 8-K) | |
| 10.41 | Form of Deed of Covenants between Gypsum Transportation Limited and DVB Bank SE, as mortgagee (incorporated by reference to Exhibit 10.3 to the Second October 2008 8-K) | |
| 10.42 | Form of Deed of Assignment between Gypsum Transportation Limited and DVB Bank SE, as assignee (incorporated by reference to Exhibit 10.4 to the Second October 2008 8-K) | |
| 10.43 | Second Supplemental Agreement, dated November 10, 2009, to Secured Loan Facility Agreement dated October 21, 2008 between Gypsum Transportation Limited, USG Corporation and DVB Bank SE, as lender, agent and security trustee (incorporated by reference to Exhibit 10.43 to the 2009 10-K) | |
| 10.44 | Credit Agreement, dated as of June 30, 2009, between CGC Inc. and The Toronto-Dominion Bank (incorporated by reference to Exhibit 10.6 to the 2010 10-Q) |
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| 10.45 | Securities Purchase Agreement, dated November 21, 2008, between USG Corporation and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 1.1 to the November 2008 8-K) | |
| 10.46 | Securities Purchase Agreement, dated November 21, 2008, between USG Corporation and Fairfax Financial Holdings Limited (incorporated by reference to Exhibit 1.2 to the November 2008 8-K) | |
| 10.47 | Registration Rights Agreement, dated as of November 26, 2008, between USG Corporation and Fairfax Financial Holdings Limited (incorporated by reference to Exhibit 10.2 to the November 2008 8-K) |
Other:
| 21 | Subsidiaries ** | |
| 23 | Consent of Independent Registered Public Accounting Firm ** | |
| 24 | Power of Attorney ** | |
| 31.1 | Rule 13a - 14(a) Certifications of USG Corporation’s Chief Executive Officer ** | |
| 31.2 | Rule 13a - 14(a) Certifications of USG Corporation’s Chief Financial Officer ** | |
| 32.1 | Section 1350 Certifications of USG Corporation’s Chief Executive Officer ** | |
| 32.2 | Section 1350 Certifications of USG Corporation’s Chief Financial Officer ** | |
| 101 | The following financial information from USG Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010, formatted in XBRL (Extensible Business Reporting Language): (1) the consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008, (2) the consolidated balance sheets as of December 31, 2010 and 2009, (3) the consolidated statements of cash flows for the years ended December 31, 2010, 2009 and 2008 and (4) notes to the consolidated financial statements, tagged as blocks of text. ** |
| * | Management contract or compensatory plan or arrangement | |
| ** | Filed or furnished herewith |