UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8864
USG CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3329400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes 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 No 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 number of shares of the registrant's common stock outstanding as of August
2, 2006 was 89,849,117.
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings:
Three Months and Six Months Ended June 30, 2006 and 2005 3
Consolidated Balance Sheets:
As of June 30, 2006 and December 31, 2005 4
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 2006 and 2005 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 30
Item 4. Controls and Procedures 50
Report of Independent Registered Public Accounting Firm 51
PART II OTHER INFORMATION
Item 1. Legal Proceedings 52
Item 1a. Risk Factors 52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
Item 4. Submission of Matters to a Vote of Security Holders 54
Item 5. Other Information 55
Item 6. Exhibits 56
Signatures 58
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER-SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net sales $ 1,573 $ 1,287 $ 3,038 $ 2,460
Cost of products sold 1,173 1,020 2,281 1,979
----------- ----------- ----------- -----------
Gross profit 400 267 757 481
Selling and administrative expenses 103 87 202 176
Reversal of asbestos claims reserve (27) -- (27) --
Chapter 11 reorganization expenses 6 (1) 8 --
----------- ----------- ----------- -----------
Operating profit 318 181 574 305
Interest expense 37 2 523 3
Interest income (4) (2) (7) (4)
Other expense, net -- 1 -- 1
----------- ----------- ----------- -----------
Earnings before income taxes 285 180 58 305
Income taxes 109 70 23 118
----------- ----------- ----------- -----------
Net earnings 176 110 35 187
=========== =========== =========== ===========
Earnings per Common Share:
Basic 3.03 1.97 0.60 3.35
Diluted 3.03 1.96 0.60 3.33
Average common shares 57,940,444 56,164,457 57,830,385 56,021,993
Average diluted common shares 58,036,034 56,454,686 57,933,191 56,263,843
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 587 $ 936
Short-term marketable securities 69 234
Restricted cash 7 78
Receivables (net of reserves - $16 and $14) 579 453
Inventories 361 315
Income taxes receivable 329 6
Deferred income taxes 1,247 2
Other current assets 156 155
------ ------
Total current assets 3,335 2,179
Long-term marketable securities -- 329
Property, plant and equipment (net of accumulated
depreciation and depletion - $1,054 and $982) 2,035 1,946
Deferred income taxes -- 1,423
Goodwill 105 64
Other assets 182 201
------ ------
Total Assets 5,657 6,142
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable 368 281
Accrued expenses 868 275
Note payable to Section 524(g) asbestos trust 10 --
Contingent note payable to Section 524(g) asbestos trust 3,050 --
Short-term debt 749 --
Deferred income taxes -- 6
Income taxes payable 53 38
------ ------
Total current liabilities 5,098 600
Long-term debt 239 --
Deferred income taxes 137 28
Other liabilities 496 476
Liabilities subject to compromise -- 5,340
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred stock -- --
Common stock 5 5
Treasury stock (209) (219)
Capital received in excess of par value 444 435
Accumulated other comprehensive income 7 72
Retained earnings (deficit) (560) (595)
------ ------
Total stockholders' equity (deficit) (313) (302)
------ ------
Total Liabilities and Stockholders' Equity (Deficit) 5,657 6,142
====== ======
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
--------------
2006 2005
----- -----
OPERATING ACTIVITIES:
Net earnings $ 35 $ 187
Adjustments to reconcile net earnings to net cash:
Reversal of asbestos claims reserve (27) --
Depreciation, depletion and amortization 66 60
Deferred income taxes 326 (89)
(Increase) decrease in working capital:
Receivables (149) (90)
Income taxes receivable (324) (10)
Inventories (36) 4
Payables 52 104
Accrued expenses (35) (3)
Increase in other assets (11) (23)
Increase in other liabilities 17 9
Payment to Section 524(g) asbestos trust (890) --
Reorganization distribution - other (177) --
Liabilities subject to compromise 521 --
Other, net 1 (8)
----- -----
Net cash (used for) provided by operating activities (631) 141
----- -----
INVESTING ACTIVITIES:
Capital expenditures (150) (76)
Purchases of marketable securities (112) (388)
Sales or maturities of marketable securities 608 303
Net proceeds from asset dispositions 1 --
Acquisitions of businesses, net of cash acquired (74) (29)
Return (deposit) of restricted cash 71 (28)
----- -----
Net cash provided by (used for) investing activities 344 (218)
----- -----
FINANCING ACTIVITIES:
Reorganization distribution - debt principal (16) --
Payment of rights offering fees (68) --
Issuances of common stock upon exercise of stock options 13 6
Tax benefit of share-based payments 6 --
----- -----
Net cash (used for) provided by financing activities (65) 6
----- -----
Effect of exchange rate changes on cash 3 (3)
Net decrease in cash and cash equivalents (349) (74)
Cash and cash equivalents at beginning of period 936 756
----- -----
Cash and cash equivalents at end of period 587 682
===== =====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 109 1
Income taxes paid, net 28 115
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PREPARATION OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of USG
Corporation ("the Corporation") have been prepared in accordance with
applicable United States Securities and Exchange Commission guidelines
pertaining to interim financial information. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those estimates. In
the opinion of management, the financial statements reflect all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the Corporation's financial results for the interim
periods. Earnings-per-share data for all periods have been adjusted to
reflect the effect of the Rights Offering described in Notes 2 and 4 below.
These financial statements and notes are to be read in conjunction with the
financial statements and notes included in the Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 2005, which was filed
on February 14, 2006.
(2) VOLUNTARY REORGANIZATION UNDER CHAPTER 11 AND CONFIRMATION OF THE PLAN OF
REORGANIZATION
On June 25, 2001 (the "Petition Date"), the Corporation and the 10 United
States subsidiaries listed below (collectively, the "Debtors" or
"Reorganized Debtors") filed voluntary petitions for reorganization (the
"Filing") under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court"). This action was taken to resolve
asbestos claims in a fair and equitable manner, to protect the long-term
value of the Debtors' businesses and to maintain the Debtors' leadership
positions in their markets. As described more fully below, the Debtors'
Chapter 11 proceedings have been concluded by a plan of reorganization
involving all Debtors that has been confirmed by the Bankruptcy Court and
the United States District Court for the District of Delaware (the
"District Court"). This confirmed plan provides for the resolution of all
present and future asbestos personal injury claims against the Debtors.
The following subsidiaries of the Corporation were included in the Chapter
11 proceedings and are included in the confirmed plan of reorganization:
United States Gypsum Company ("U.S. Gypsum"); USG Interiors, Inc. ("USG
Interiors"); USG Interiors International, Inc.; L&W Supply Corporation
("L&W Supply"); Beadex Manufacturing, LLC ("Beadex"); B-R Pipeline Company;
La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG Industries,
Inc.; and USG Pipeline Company. The Chapter 11 proceedings and
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the plan resolving the Debtors' asbestos personal injury liabilities do not
include any of the Corporation's non-U.S. subsidiaries or companies that
were acquired post-petition by any of the Debtors.
By order entered on June 16, 2006 (the "Confirmation Order"), the
Bankruptcy Court and the District Court confirmed the First Amended Plan of
Reorganization of USG Corporation and its Debtor Subsidiaries (the "Plan"
or "Plan of Reorganization"), filed in the Debtors' jointly administered
Chapter 11 cases captioned In re USG Corporation, et al., Case No. 01-2094.
The Plan became effective on June 20, 2006 (the "Effective Date").
Pursuant to the Plan, a trust was created under Section 524(g) of the
Bankruptcy Code (the "United States Gypsum Asbestos Trust" or "Trust") to
pay all qualifying present and future asbestos personal injury claims
against the Debtors. On the Effective Date, the Reorganized Debtors funded
the Trust as follows:
- The Reorganized Debtors paid $890 million to the Trust and issued to
the Trust an interest-bearing note in the amount of $10 million,
payable no later than December 31, 2006; and
- The Reorganized Debtors also issued to the Trust a contingent payment
note in the aggregate principal amount of $3.05 billion, which will be
payable to the Trust depending upon whether the Fairness in Asbestos
Injury Resolution Act of 2005 or substantially similar legislation
creating a national trust or similar fund (collectively, the "FAIR
Act") is enacted by the 10th day (excluding Sundays) after final
adjournment of the current term of Congress (the "Trigger Date"), as
described more fully below.
The Reorganized Debtors are co-obligors and are jointly and severally
liable under the $10 million promissory note and the $3.05 billion
contingent payment note. Each of the notes is secured by an obligation to
pledge to the Trust shares of the voting stock of the Corporation equal to
51% of the amount outstanding. The obligation to pledge those shares would
be triggered by a payment default under the applicable note.
As provided in the Plan, if the FAIR Act is enacted and made law on or
before the Trigger Date and is not subject to, or survives, a
constitutional challenge initiated within 60 days of the Trigger Date, the
contingent payment note will be cancelled and the Reorganized Debtors will
have no further payment obligations to the Trust. In that situation, the
total amount to be paid by the Reorganized Debtors to the Trust will be the
$890 million already paid and the obligations under the $10 million
promissory note.
If the FAIR Act is not enacted and made law by the Trigger Date, the
Reorganized Debtors will be obligated to make payments under the contingent
payment note as follows: $1.9 billion will be payable to the
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Trust within 30 days after the Trigger Date, with the remaining $1.15
billion payable within 180 days after the Trigger Date. Interest will
accrue on the unpaid balance of the $3.05 billion contingent payment note
beginning on the Trigger Date. The rate of interest is the rate of the
90-day LIBOR in effect as of the Trigger Date plus 40 basis points.
If the FAIR Act is enacted by the Trigger Date but is held
unconstitutional, the Reorganized Debtors will be obligated to pay the
$3.05 billion contingent note, as described more fully below. Specifically,
if the FAIR Act is enacted by the Trigger Date and there is a
constitutional challenge to the FAIR Act initiated within 60 days of the
Trigger Date, the Debtors will be obligated to pay the $3.05 billion
contingent payment note if the constitutional challenge results in a final,
non-appealable court order that the FAIR Act is (i) unconstitutional in its
entirety or (ii) unconstitutional insofar as it applies to debtors in
Chapter 11 cases whose plans of reorganization had not yet been confirmed
and become substantially consummated as of February 1, 2006. In those
circumstances, the Debtors would be obligated to pay $1.9 billion within 30
days after the date when the court order becomes final and non-appealable
and pay the remaining $1.15 billion within 180 days after the date the
order becomes final and non-appealable. If the constitutional challenge is
resolved by a final, non-appealable court order in any manner other than as
described above, then the $3.05 billion contingent payment, including the
right of the Trust to own stock of the Corporation under the note, will be
cancelled.
The amounts that the Reorganized Debtors will be obligated to pay to the
Trust under the Plan, either $900 million or $3.95 billion, are fixed
amounts, depending only upon passage of the FAIR Act, that were determined
through settlement negotiations with the Official Committee of Asbestos
Personal Injury Claimants and the legal representative for future asbestos
personal injury cases appointed in the Debtors' Chapter 11 proceedings. The
Reorganized Debtors will not be obligated to make additional payments to
the Trust beyond the payments described above.
The Confirmation Order contains a channeling injunction which provides that
all present and future asbestos personal injury claims against the Debtors
must be brought against the Trust and no individual or entity may bring
such a claim against the Reorganized Debtors. This channeling injunction
applies to all present and future asbestos personal injury claims for which
any Debtor is alleged to be liable, including any asbestos personal injury
claims against the Debtors relating to A.P. Green Refractories Co., a
former subsidiary of U.S. Gypsum and the Corporation.
The Plan also provides for the resolution of other pre-petition claims
against the Debtors. Allowed claims of all other creditors will be, or
already have been, paid in full, with interest as provided in the Plan.
Disputed claims, including disputed asbestos property damage claims, that
have not been resolved will be resolved in the Bankruptcy Court or other
court, where appropriate. If it is ultimately determined that any amounts
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are owed on these disputed claims, they will also be paid in full, with
interest as required.
As a result of confirmation of the Plan of Reorganization, the four
official committees appointed in the Chapter 11 proceedings have been
disbanded. The legal representative for future asbestos personal injury
claimants will continue to act in the same capacity with respect to the
Trust.
Under the Plan, stockholders of the Corporation as of the Effective Date
retained their shares. In addition, on June 30, 2006 (the "Record Date"),
the Corporation issued to its stockholders one transferable right for each
share owned on the Record Date, entitling the owner to purchase one share
of common stock for $40.00 in cash for each right (the "Rights Offering").
These rights expired at 5:00 p.m., New York City time, on July 27, 2006. In
connection with the Rights Offering, Berkshire Hathaway Inc. ("Berkshire
Hathaway"), the Corporation's largest stockholder, agreed to purchase from
the Corporation, at $40.00 per share, all of the shares of common stock
offered pursuant to the Rights Offering that were not issued pursuant to
the exercise of rights (the "Backstop Commitment"). In the first quarter of
2006, the Debtors paid Berkshire Hathaway a fee of $67 million for its
Backstop Commitment. On August 2, 2006, the Corporation issued 6.97 million
shares of common stock to Berkshire Hathaway in accordance with the
Backstop Commitment. These shares include 6.5 million shares underlying
rights distributed to Berkshire Hathaway in connection with the shares it
beneficially owned on the Record Date and 0.47 million shares underlying
rights distributed to other stockholders that were not exercised in the
Rights Offering. The Corporation's net proceeds from the Rights Offering
and the Backstop Commitment were approximately $1.725 billion. The
Corporation expects to use the net proceeds from the Rights Offering,
together with other available funds, including cash on hand, to make
payments contemplated by the Plan and for general corporate purposes.
The Debtors' financial obligations under the Plan will depend upon, among
other things, whether the $3.05 billion contingent payment note becomes
due. The Debtors propose to fund their obligations under the Plan through
(i) cash and marketable securities accumulated since the Petition Date
which were used to fund the $890 million payment to the Trust as well as
other creditor payments made prior to June 30, 2006, (ii) the Rights
Offering, (iii) anticipated tax refunds and (iv) new debt financing, as
described in Note 3.
Additional information about the new debt financing, the Rights Offering
and the Plan's treatment of asbestos claims is set forth below in Notes 3,
4 and 14, respectively.
POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS
On April 19, 2005, Senator Arlen Specter, R-Pa., introduced in the United
States Senate legislation addressing compensation and administration of
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asbestos personal injury claims. The legislation was titled the Fairness in
Asbestos Injury Resolution Act of 2005 (Senate Bill 852, the "FAIR Act of
2005" or the "Act"). The Act was referred to the Senate Committee on the
Judiciary and was approved by a majority vote of the committee on May 27,
2005. The FAIR Act of 2005 was not approved by the full Senate and is not
law.
The FAIR Act of 2005 was intended to establish a nationally administered
trust fund to compensate asbestos personal injury claimants. The Act
provided that companies that had made past payments for asbestos personal
injury claims would be required to contribute amounts on a periodic basis
to a national trust fund that would pay the claims of qualifying asbestos
personal injury claimants. The nationally administered trust fund would be
the exclusive remedy for asbestos personal injury claims, and such claims
could not be brought in state or federal court as long as such claims were
being compensated under the national trust fund.
In February 2006, the Senate began debate on the FAIR Act of 2005. However,
an objection to further proceedings was raised based on the failure of the
Act to comply with federal budget rules. This objection could have been
waived by the affirmative vote of 60 senators, but a motion to waive the
budget objection failed by a vote of 58 to 41. As a result, the Senate
ceased debate on the FAIR Act of 2005.
In late May 2006, an amended version of the Act, called the "Fairness in
Asbestos Injury Resolution Act of 2006" (the "FAIR Act of 2006" or "S.
3274") was introduced by Senator Specter and Senator Patrick Leahy, D-Vt.
The FAIR Act of 2006 also contemplates creation of a national trust to pay
asbestos personal injury claims but contains some modifications from the
FAIR Act of 2005. A copy of the FAIR Act of 2006 as introduced is available
at http://thomas.loc.gov (type in "S. 3274" in the search field). The
current form of the FAIR Act of 2006 does not require contributions from
companies, such as the Reorganized Debtors, that have a confirmed plan of
reorganization under Chapter 11 of the Bankruptcy Code that is
substantially consummated and no longer subject to appeal.
Although the current form of the FAIR Act of 2006 does not require
contributions from the Reorganized Debtors to the proposed national trust,
the amounts that the Reorganized Debtors will be required to pay into the
Trust established under the Debtors' Plan of Reorganization depend on
whether the FAIR Act is enacted by the Trigger Date and either does not
become subject to or survives a subsequent constitutional challenge. Final
adjournment of the current term of Congress, which is the basis for the
Trigger Date, is currently expected to be no later than December 2006. The
outcome of the legislative process is inherently speculative, and it cannot
be known whether the FAIR Act will be enacted by the Trigger Date or, even
if enacted, would survive any subsequent constitutional challenge.
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ASBESTOS PROPERTY DAMAGE CLAIMS
The Plan of Reorganization does not create a trust for asbestos property
damage claims against the Debtors. The Plan provides that disputed asbestos
property damage claims timely filed in the bankruptcy proceeding will be
resolved either in the Bankruptcy Court or other court, where appropriate.
If it is determined that any amounts are owed for asbestos property damage
claims, the Plan provides that the Debtors will pay such amounts in full,
with interest where required. Any settled asbestos property damage claims
will also be paid in full.
As a result of the bar date for filing asbestos property damage claims in
Debtors' Chapter 11 proceedings, approximately 1,400 asbestos property
damage claims were filed by the bar date, and more than 70 such claims were
filed after the bar date. More than 950 claims were disallowed or
withdrawn, leaving approximately 520 claims pending. The Debtors have
reached agreements in principle to settle all but approximately three of
these pending claims, although there can be no assurance that all
agreements in principle will become final agreements. The estimated cost of
resolving the pending asbestos property damage claims, including both the
unresolved and the settled but unpaid claims, is included in accrued
expenses. The asbestos property damage claims are also discussed in Note
14.
CORPORATE PERFORMANCE PLAN
On January 10, 2006, the Bankruptcy Court approved the USG Corporation 2006
Corporate Performance Plan (the "CPP"). The terms of the CPP provide that
it is to be effective for eligible participants from January 1, 2006
through December 31, 2006, or through and including the effective date of a
plan of reorganization in the Debtors' Chapter 11 proceedings, whichever
comes first. The CPP provides participants, who hold key positions
identified as eligible, with two cash payments equal to a specified
percentage of their annual base salary. The first payment will be made in
January 2007. The second payment will be made in July 2007 and is subject
to a performance adjustment based on the Corporation's 2006 calendar-year
results, which could increase the second payment up to 50% or eliminate it
altogether.
Because the Plan became effective on June 20, 2006, awards earned under the
CPP were prorated through that date, subject to final adjustments. Expenses
associated with the CPP, prorated through the Effective Date, amounted to
$6.9 million and $13.0 million in the second quarter and first six months
of 2006, respectively. Expenses associated with a comparable predecessor
plan amounted to $5.0 million and $10.4 million in the second quarter and
first six months of 2005, respectively.
FINANCIAL STATEMENT PRESENTATION
While operating as debtors-in-possession under the protection of Chapter 11
of the Bankruptcy Code, the Corporation's consolidated financial statements
were prepared in accordance with AICPA SOP 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP
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90-7"), and on a going-concern basis, which contemplated continuity of
operations, realization of assets and liquidation of liabilities in the
ordinary course of business. During this period, subject to Bankruptcy
Court approval or otherwise as permitted in the ordinary course of
business, the Debtors, or any of them, had the ability to sell or otherwise
dispose of assets and liquidate or settle liabilities for amounts other
than those reflected in the consolidated financial statements.
LIABILITIES SUBJECT TO COMPROMISE
While operating as debtors-in-possession under the protection of Chapter 11
of the Bankruptcy Code, the Debtors' estimates of known or potential
pre-petition claims and related post-petition amounts to be resolved in
connection with the Chapter 11 proceedings were reflected in the
consolidated financial statements as liabilities subject to compromise. As
of June 30, 2006, such liabilities have been reclassified on the
consolidated balance sheet. This included the reclassification of the
Corporation's remaining asbestos reserve to current liabilities, either as
notes payable to Section 524(g) asbestos trust or accrued expenses, as
appropriate.
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses in the consolidated statements of
earnings consisted of the following (dollars in millions):
Three Months Six Months
ended June 30, ended June 30,
-------------- --------------
2006 2005 2006 2005
---- ---- ---- ----
Legal and financial advisory fees $ 18 $ 6 $ 32 $ 12
Bankruptcy-related interest income (12) (7) (24) (12)
---- --- ---- ----
Total Chapter 11 reorganization expenses (income) 6 (1) 8 --
==== === ==== ====
INTEREST EXPENSE
Interest expense for the second quarter and first six months of 2006 was
$37 million and $523 million, respectively. These amounts included charges
for post-petition interest and fees related to pre-petition obligations
(primarily debt and trade payables). For the second quarter of 2006, these
post-petition interest and fees were $36 million ($21 million after-tax).
For the first six months of 2006, these post-petition interest and fees
totaled $520 million ($321 million after-tax). In accordance with SOP 90-7,
virtually all of the Corporation's outstanding debt had been classified as
liabilities subject to compromise in prior periods, and from the Petition
Date through December 31, 2005, interest expense on this debt and other
pre-petition obligations had not been accrued or recorded.
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(3) DEBT
NEW FINANCING ARRANGEMENTS
On August 2, 2006, the Corporation entered into a $2.8 billion credit
agreement with a syndicate of banks. JPMorgan Chase Bank, N.A. serves as
Administrative Agent under the agreement. The credit agreement consists of
(i) a $650 million revolving credit facility with a $250 million sublimit
for letters of credit, (ii) a $1.0 billion term loan facility and (iii) a
$1.15 billion tax bridge term loan facility (collectively, the "Credit
Facilities").
The Credit Facilities have been assigned credit ratings of Baa3 by Moody's
Investor Service Inc. and BB+ by Standard & Poor's Ratings Services.
The revolving credit facility is available to fund working capital needs
and for other general corporate purposes. Borrowings under the revolving
credit facility bear interest, at the Corporation's option, at either an
alternative base rate or at LIBOR plus a margin, to be determined based on
the Credit Facilities' credit rating. Based on the current ratings of the
Credit Facilities, the margin for LIBOR borrowings would be 0.60%. The
Corporation is also required to pay facility fees on the entire revolving
credit facility, whether drawn or undrawn, and fees on outstanding letters
of credit. These fees are also dependent on the credit rating of the Credit
Facilities. The revolving credit facility matures on August 2, 2011, unless
terminated earlier in accordance with its terms. The revolving credit
facility has not been drawn upon as of the date of this report, except for
approximately $90 million of outstanding letters of credit.
The Corporation intends to use borrowings under the term loan and tax
bridge facilities to finance the payment of the contingent payment note in
accordance with the Plan. The term loan and tax bridge facilities bear
interest, at the Corporation's option, at either an alternative base rate
or LIBOR plus, in either case, a margin, to be determined based on the
Credit Facilities' credit rating. Based on the current ratings of the
Credit Facilities, the margin is 0.75% for LIBOR borrowings and 0.00% for
alternate base-rate borrowings. The Corporation is also required to pay
fees on the undrawn amount of the term loan and tax bridge facilities until
drawn. These fees are also dependent on the credit rating of the Credit
Facilities. The Corporation is required to prepay the tax bridge facility
upon receipt of tax refunds that the Corporation anticipates it will
receive as a result of tax deductions generated by the payments being made
to the Trust. The term loan facility matures on August 2, 2011, and the tax
bridge facility matures on February 2, 2009.
The term loan is to be made available to the Corporation from the lenders
in a single drawing of up to $1.0 billion, and the tax bridge facility is
to be made available to the Corporation in a single drawing of up to $1.15
billion, in each case to be made on or before January 31, 2007. If the Fair
Act of 2005, or substantially similar legislation, is enacted but
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remains subject to constitutional challenge, the Corporation would be able
to request that the availability of the term loan and tax bridge facilities
be extended. However, the availability of the term loan facility is not
permitted to be extended beyond August 1, 2008, and the availability of the
tax bridge facility is not permitted to be extended beyond February 1,
2008.
The Corporation has the ability under the terms of the Credit Facilities to
repay amounts outstanding under the revolving credit, term loan and tax
bridge facilities at any time prior to their maturities without paying any
prepayment premium or penalty. Paydowns under the term loan and tax bridge
facilities would be permanent reductions in these facilities. The
Corporation's obligations under the Credit Facilities are guaranteed by all
of its material domestic subsidiaries.
The Credit Facilities require that the Corporation meet and maintain
certain financial ratios and tests, including a maximum leverage ratio (as
defined in the credit agreement) of no more than 4.50 to 1.00 and a minimum
interest coverage ratio (as defined in the credit agreement) of not less
than 2.00 to 1.00. The credit agreement contains events of default and
covenants that are customary for similar transactions and may limit the
ability of the Corporation and its subsidiaries to take various actions.
PRE-PETITION DEBT
Pre-petition debt previously included in liabilities subject to compromise
amounted to $1.005 billion as of the Petition Date. As of June 30, 2006,
the Corporation (i) repaid $17 million of this debt, (ii) reclassified $749
million to short-term debt, which is expected to be repaid in the third
quarter of 2006, and (iii) reinstated $239 million in accordance with the
Plan and reclassified this amount to long-term debt.
The Corporation had a credit agreement with LaSalle Bank National
Association to provide letters of credit needed to support business
operations. As of June 30, 2006, there were $86 million of letters of
credit outstanding under this facility. On August 2, 2006, the letters of
credit outstanding under this facility were incorporated into the new
revolving credit facility under the Credit Facilities, and the agreement
with LaSalle Bank National Association was terminated.
-14-
(4) RIGHTS OFFERING
In the Rights Offering, the Corporation issued to its stockholders on the
Record Date one transferable right for each share owned on the Record Date,
entitling the owner to purchase one share of common stock for $40.00 in
cash for each right. These rights expired at 5:00 p.m., New York City time,
on July 27, 2006. In connection with the Rights Offering, Berkshire
Hathaway agreed through its Backstop Commitment to purchase from the
Corporation, at $40.00 per share, all of the shares of common stock offered
pursuant to the Rights Offering that were not issued pursuant to the
exercise of rights. In the first quarter of 2006, the Debtors paid
Berkshire Hathaway a fee of $67 million for its Backstop Commitment. On
August 2, 2006, the Corporation issued 6.97 million shares of common stock
to Berkshire Hathaway in accordance with the Backstop Commitment. These
shares include 6.5 million shares underlying rights distributed to
Berkshire Hathaway in connection with the shares it beneficially owned on
the Record Date and 0.47 million shares underlying rights distributed to
other stockholders that were not exercised in the Rights Offering. The
Corporation's net proceeds from the Rights Offering and the Backstop
Commitment were approximately $1.725 billion. The Corporation expects to
use the net proceeds from the Rights Offering, together with other
available funds, including cash on hand, to make payments contemplated by
the Plan and for general corporate purposes.
In connection with the Backstop Commitment, the Corporation and Berkshire
Hathaway entered into a shareholder's agreement whereby Berkshire Hathaway
agreed, among other things, that for a period of seven years following
completion of the Rights Offering, except in limited circumstances,
Berkshire Hathaway will not acquire beneficial ownership of the
Corporation's voting securities if, after giving effect to the acquisition,
Berkshire Hathaway would own more than 40% of the Corporation's voting
securities on a fully diluted basis. Berkshire Hathaway further agreed
that, during such seven-year period, it will not solicit proxies with
respect to securities of the Corporation or submit a proposal or offer
involving a merger, acquisition or other extraordinary transaction unless
such proposal or offer (i) is requested by the Corporation's Board of
Directors or (ii) is made to the Board of Directors confidentially, is
conditioned on approval by a majority of the voting securities of the
Corporation not owned by Berkshire Hathaway and a determination by the
Board of Directors as to its fairness to stockholders and, if the proposed
transaction is not a tender offer for all shares of common stock or an
offer for the entire company, is accompanied by an undertaking to offer to
acquire all shares of common stock of the Corporation outstanding after
completion of the transaction at the same price per share as was paid in
the transaction. The shareholder's agreement also provides that, with
certain exceptions, any new shares of common stock acquired by Berkshire
Hathaway in excess of those owned on the date of the agreement (and shares
distributed on those shares, including in the Rights Offering) will be
voted proportionally with all voting shares. Berkshire Hathaway also agreed
that if purchases or sales
-15-
of common stock of the Corporation by it or specified affiliates would
prevent the Corporation from carrying back a net operating loss
attributable to a specified payment to the Trust, Berkshire Hathaway will
not, upon notice from the Corporation, make such purchases or sales until
the Corporation has made its first payment under the contingent payment
note issued to the Trust or the Corporation notifies Berkshire Hathaway
that this limitation is no longer needed.
Under the shareholder's agreement, for the same seven-year period, the
Corporation agreed to exempt Berkshire Hathaway from its existing or future
stockholder rights plans to the extent that Berkshire Hathaway complies
with the terms and conditions of the shareholder's agreement. If there is a
stockholder vote on a stockholder rights plan that does not contain this
agreed exemption, Berkshire Hathaway may vote without restriction all the
shares it holds in a stockholder vote to approve or disapprove the proposed
stockholder rights plan. The Corporation also agreed that, after the
seven-year standstill period ends, during the time that Berkshire Hathaway
owns the Corporation's equity securities, Berkshire Hathaway will be
exempted from any stockholder rights plan, except that the Board may adopt
a stockholder rights plan that restricts Berkshire Hathaway from acquiring
(although it may continue to hold) beneficial ownership of more than 50% of
the voting securities of the Corporation, on a fully diluted basis, other
than pursuant to an offer to acquire all shares of common stock of the
Corporation that is open for at least 60 calendar days.
The parties also entered into a registration rights agreement whereby the
Corporation granted Berkshire Hathaway registration rights with respect to
its shares of the Corporation's common stock.
-16-
(5) EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common
shares outstanding. Diluted earnings per share are based on the weighted
average number of common shares outstanding and the dilutive effect of the
potential exercise of outstanding stock options. Diluted earnings per share
exclude the potential exercise of outstanding stock options for any period
in which such exercise would have an anti-dilutive effect.
Earnings-per-share data for all periods have been adjusted to reflect the
effect of the Rights Offering described in Notes 2 and 4 above. The
reconciliation of basic earnings per share to diluted earnings per share is
shown in the following table (dollars in millions, except share data):
Weighted
Average
Net Shares Per-Share
Three Months Ended June 30, Earnings (000) Amount
--------------------------- -------- ------ ---------
2006:
Basic earnings $176 57,940 $3.03
Dilutive effect of stock options 96
---- ------ -----
Diluted earnings 176 58,036 3.03
==== ====== =====
2005:
Basic earnings 110 56,164 1.97
Dilutive effect of stock options 291
---- ------ -----
Diluted earnings 110 56,455 1.96
==== ====== =====
Weighted
Average
Net Shares Per-Share
Six Months Ended June 30, Earnings (000) Amount
------------------------- -------- ------ ---------
2006:
Basic earnings $ 35 57,830 $0.60
Dilutive effect of stock options 103
---- ------ -----
Diluted earnings 35 57,933 0.60
==== ====== =====
2005:
Basic earnings 187 56,022 3.35
Dilutive effect of stock options 242
---- ------ -----
Diluted earnings 187 56,264 3.33
==== ====== =====
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(6) MARKETABLE SECURITIES
The Corporation's investments in marketable securities consisted of the
following (dollars in millions):
As of As of
June 30, December 31,
2006 2005
------------------ ------------------
Fair Fair
Amortized Market Amortized Market
Cost Value Cost Value
--------- ------ --------- ------
Asset-backed securities $ 7 $ 7 $244 $243
U.S. government and agency
securities 43 43 168 166
Municipal securities -- -- 21 21
Corporate securities 19 19 123 123
Time deposits -- -- 10 10
--- --- ---- ----
Total marketable securities 69 69 566 563
=== === ==== ====
Contractual maturities of marketable securities as of June 30, 2006 were as
follows (dollars in millions):
Fair
Amortized Market
Cost Value
--------- ------
Due in 1 year or less $61 $61
Due in 1-5 years -- --
Due in 5-10 years -- --
Due after 10 years 1 1
--- ---
62 62
Asset-backed securities 7 7
--- ---
Total marketable securities 69 69
=== ===
Longer-term securities either mature within one year or have paydown or put
features and liquidity facilities. While some securities have contractual
maturities beyond one year, all are classified as short-term marketable
securities on the consolidated balance sheet as of June 30, 2006 due to the
Corporation's intent to sell the securities within one year and to use the
proceeds to fund a portion of the Plan.
Management has evaluated the nature of all unrealized losses in marketable
securities and has determined that the losses are immaterial.
-18-
(7) ASSET RETIREMENT OBLIGATIONS
Changes in the liability for asset retirement obligations consisted of the
following (dollars in millions):
Six Months ended June 30,
-------------------------
2006 2005
---- ----
Balance as of January 1 $71 $43
Accretion expense 2 1
Foreign currency translation 1 --
--- ---
Balance as of June 30 74 44
=== ===
(8) DERIVATIVE INSTRUMENTS
The Corporation uses derivative instruments to manage selected commodity
price and foreign currency exposures. The Corporation does not use
derivative instruments for trading purposes. All derivative instruments are
recorded on the balance sheet at fair value. For derivatives designated as
fair value hedges, the changes in the fair values of both the derivative
instrument and the hedged item are recognized in earnings in the current
period. For derivatives designated as cash flow hedges, the effective
portion of changes in the fair value of the derivative is recorded to
accumulated other comprehensive income ("OCI") and is reclassified to
earnings when the underlying transaction has an impact on earnings. The
ineffective portion of changes in the fair value of the derivative is
reported in cost of products sold. For derivatives designated as net
investment hedges, changes in value are recorded in OCI. As of June 30,
2006, the Corporation had no foreign currency contracts.
COMMODITY DERIVATIVE INSTRUMENTS
The Corporation uses swap contracts to hedge anticipated purchases of
natural gas to be used in its manufacturing operations. Generally, the
Corporation has a substantial majority of its anticipated purchases of
natural gas over the next 12 months hedged; however, the Corporation
reviews its positions regularly and makes adjustments as market conditions
warrant. The current contracts, all of which mature by December 31, 2009,
are designated as cash flow hedges. As of June 30, 2006, the Corporation
had swap contracts to exchange monthly payments on notional amounts of
natural gas amounting to $243 million. The fair value of these swap
contracts as of June 30, 2006 was $17 million.
COUNTERPARTY RISK
The Corporation is exposed to credit losses in the event of nonperformance
by the counterparties on its financial instruments. All counterparties have
investment grade credit standing; accordingly, the Corporation anticipates
that these counterparties will be able to fully satisfy their obligations
under the contracts. The Corporation receives collateral from
-19-
its counterparties based on the provisions in certain credit support
agreements. Similarly, the Corporation may be required to post collateral
if aggregate payables exceed certain limits. Currently, the Corporation has
no collateral requirement. The Corporation enters into master agreements
which contain netting arrangements that minimize counterparty credit
exposure.
(9) COMPREHENSIVE INCOME
The components of comprehensive income are summarized in the following
table (dollars in millions):
Three Months Six Months
ended June 30, ended June 30,
-------------- --------------
2006 2005 2006 2005
---- ---- ----- ----
Net earnings $176 $110 $ 35 $187
Pretax gain (loss) on derivatives (18) (12) (118) 47
Income tax benefit (expense) 7 5 46 (18)
---- ---- ----- ----
After-tax gain (loss) on derivatives (11) (7) (72) 29
---- ---- ----- ----
Pretax minimum pension liability -- (10) -- (10)
Income tax benefit -- 4 -- 4
---- ---- ----- ----
After-tax minimum pension liability -- (6) -- (6)
---- ---- ----- ----
Foreign currency translation 9 (4) 6 (8)
Unrealized gain on marketable securities -- -- 1 --
---- ---- ----- ----
Total comprehensive income (loss) 174 93 (30) 202
==== ==== ===== ====
There was no tax impact on the foreign currency translation adjustments.
OCI consisted of the following (dollars in millions):
As of As of
June 30, December 31,
2006 2005
-------- ------------
Gain (loss)on derivatives, net of tax $(12) $60
Foreign currency translation 27 21
Minimum pension liability, net of tax (8) (8)
Unrealized loss on marketable securities,
net of tax -- (1)
---- ---
Total 7 72
==== ===
During the second quarter of 2006, accumulated net after-tax losses of $6
million ($9 million pretax) on derivatives were reclassified from OCI to
earnings. As of June 30, 2006, the estimated net after-tax losses expected
to be reclassified within the next 12 months from OCI to earnings were $10
million.
-20-
(10) EMPLOYEE RETIREMENT PLANS
The components of net pension and postretirement benefits costs for the
three months ended June 30, 2006 and 2005 are summarized in the following
table (dollars in millions):
Three Months Six Months
ended June 30, ended June 30,
-------------- --------------
2006 2005 2006 2005
---- ---- ---- ----
PENSION:
Service cost of benefits earned $ 10 $ 8 $ 19 $ 17
Interest cost on projected
benefit obligation 16 14 31 28
Expected return on plan assets (16) (14) (32) (28)
Net amortization 6 5 10 10
---- ---- ---- ----
Net cost 16 13 28 27
==== ==== ==== ====
POSTRETIREMENT:
Service cost of benefits earned 5 4 8 7
Interest cost on projected
benefit obligation 6 4 11 9
Recognized loss (1) (1) (2) (2)
---- ---- ---- ----
Net cost 10 7 17 14
==== ==== ==== ====
In accordance with the Corporation's funding policy, the Corporation and
its subsidiaries contributed cash of $5 million and $27 million during the
second quarter and first six months of 2006, respectively, and expect to
contribute a total of approximately $72 million during fiscal year 2006 to
their pension plans.
-21-
(11) SHARE-BASED COMPENSATION
SFAS NO. 123(R)
Effective January 1, 2006, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment," as its
method to account for stock-based compensation. Stock options issued prior
to the Filing are fully vested and were adjusted during the second quarter
of 2006 as a result of the Rights Offering. The adjustment resulted in an
immaterial expense. Prior to the adoption of SFAS No. 123(R), the
Corporation presented tax benefits associated with the exercise of stock
options as operating cash flows on the consolidated statements of cash
flows. SFAS No. 123(R) requires the cash flows resulting from such tax
benefits to be classified as financing cash flows.
STOCK OPTION PLAN
Prior to the Filing, the Corporation issued stock options to key employees
under plans approved by stockholders. Under the plans, options were granted
at an exercise price equal to the market value on the date of grant. All
options granted under the plans have 10-year terms and vesting schedules of
two years. The options expire on the 10th anniversary of the date of grant,
except in the case of retirement, death or disability, in which case they
expire on the earlier of the fifth anniversary of such event or the
expiration of the original option term.
As a result of the Rights Offering, the Corporation has, pursuant to the
terms of outstanding stock options, adjusted the number of shares
underlying the outstanding stock options and the related exercise prices to
account for the Rights Offering. In accordance with the provisions of SFAS
No.123(R), the adjustments were accounted for as a modification. The
adjustments were made in a manner that was designed to preserve the value
of the outstanding stock options without triggering adverse tax
consequences. The adjustments did not have a material impact on the
Corporation's financial position, cash flows or results of operations.
Stock option activity during the first six months of 2006, as adjusted to
account for the Rights Offering, was as follows:
Options Weighted Average
(000) Exercise Price
------- ----------------
Outstanding, January 1 808 $33.37
Granted -- --
Exercised (387) 33.72
Cancelled (58) 32.41
Outstanding and exercisable, June 30 363 33.15
The aggregate intrinsic value and weighted average remaining contractual
term of all options outstanding as of June 30, 2006 were $8 million and
2.51 years, respectively. The total intrinsic value of options exercised
during the first six months of 2006 was $14 million.
As of June 30, 2006, a total of 362,582 common shares were reserved for
-22-
future issuance in connection with existing stock option grants. Shares
issued in option exercises may be originally issued or from treasury
shares. There were no common shares reserved for future grants under plans
approved prior to the Filing.
NON-EMPLOYEE DIRECTOR FEES
Non-employee directors of the Corporation may elect to defer a portion of
their compensation in the form of deferred stock units which increase or
decrease in value in direct relation to the market price of shares of
common stock and are paid in cash upon termination of board service. As of
June 30, 2006, there were approximately 18,035 deferred stock units held by
non-employee directors. Amounts expensed in the first six months of 2006
and 2005 were immaterial.
As a result of the Rights Offering, the Corporation adjusted the deferred
stock units held by members of the Board of Directors. These adjustments,
which were made in a manner that was designed to preserve the value of the
deferred stock units without triggering adverse tax consequences, had no
impact on the Corporation's financial position, cash flows or results of
operations.
Pursuant to the Corporation's Stock Compensation Program for Non-Employee
Directors, on July 1, 2006, the Corporation's non-employee directors were
entitled to receive a $30,000 annual grant, payable at their election in
cash or common stock with an equivalent value. Pursuant to this provision,
effective July 1, 2006, a total of 2,645 shares of common stock were issued
to five non-employee directors based on the fair market value of a share of
common stock on July 3, 2006.
NEW LONG-TERM INCENTIVE PLAN
The USG Corporation Long-Term Incentive Plan (the "LTIP") was approved by
the Board of Directors in March 2006 and by the stockholders of the
Corporation at the annual meeting in May 2006. The LTIP authorizes the
Board of Directors, or the Board's Compensation and Organization Committee,
to provide equity-based compensation in the form of stock options, stock
appreciation rights ("SARs"), restricted stock, restricted stock units,
performance shares and units, and other cash and stock-based awards for the
purpose of providing the Corporation's officers and employees incentives
and rewards for superior performance. As adjusted to account for the Rights
Offering, there are 8.2 million shares of common stock reserved for future
grants under the LTIP.
-23-
(12) INCOME TAXES
Income tax expense recorded by the Corporation in the first six months of
2006 includes interest expense of $7 million ($4 million after-tax),
representing an accrual for post-petition interest (from the Petition Date
through June 30, 2006) related to pre-petition income tax obligations which
are expected to be paid as outlined in the Plan.
In the second quarter of 2006, the Corporation (i) reduced the amount of
its long-term deferred income taxes by $361 million as a result of the $909
million of payments made by the Corporation during the quarter for
asbestos-related claims and the $27 million reversal of its reserve for
asbestos-related claims and (ii) reclassified the net deferred taxes on the
estimated liability for asbestos-related claims as of June 30, 2006 ($1,217
million) from long-term deferred income taxes to current deferred income
taxes, consistent with the classification of that liability. In addition,
the Corporation has recorded an income tax receivable of $329 million as of
June 30, 2006. This amount primarily represents current income tax benefits
relating to the $909 million of payments referred to above and the tax
deduction for post-petition interest and fees relating to pre-petition
obligations that are expected to be realized during the last six months of
2006 or from a federal income tax refund resulting from the carryback of a
2006 net operating loss.
The Corporation has a valuation allowance for deferred tax assets relating
to certain foreign and U.S. state net operating loss and tax credit
carryforwards and a portion of the Corporation's liability for asbestos
claims due to uncertainty regarding their ultimate realization. During the
second quarter of 2006, the Corporation reduced its valuation allowance for
deferred tax assets by a total of $15 million due to (i) a change in
management's judgment about the realizability of the deferred tax asset in
future years and (ii) the enactment of legislation by the state of Texas in
May 2006 replacing its corporation franchise tax with a tax based on
taxable margin. Of the total valuation allowance as of June 30, 2006, $40
million relates to the liability for asbestos claims, $12 million relates
to foreign net operating loss and tax credit carryforwards, and $12 million
relates to U.S. state net operating loss and tax credit carryforwards. The
Corporation has net operating loss and tax credit carryforwards in varying
amounts in numerous U.S. state and foreign jurisdictions. Under applicable
law, if not used prior thereto, most of these carryforwards will expire
over periods ranging from five to 20 years from the date of origin.
The Corporation's financial statements include amounts recorded for
contingent tax liabilities with respect to loss contingencies that are
deemed probable of occurrence. These amounts are included in income taxes
payable on the Corporation's consolidated balance sheets. These loss
contingencies relate primarily to tax disputes with various state tax
authorities and costs incurred with respect to the Chapter 11 proceedings.
The Corporation's U.S. income tax returns for 2002 and prior years have
-24-
been audited by the IRS and are closed.
(13) OPERATING SEGMENTS AND ACQUISITIONS
The Corporation's operations are organized into three operating segments:
(i) North American Gypsum, which manufactures SHEETROCK(R) brand gypsum
wallboard and joint compound, DUROCK(R) brand cement board, FIBEROCK(R)
brand gypsum fiber panels and other related building products in the United
States, Canada and Mexico; (ii) Worldwide Ceilings, which manufactures
ceiling tile in the United States and ceiling grid in the United States,
Canada, Europe and the Asia-Pacific region; and (iii) Building Products
Distribution, which distributes gypsum wallboard, drywall metal, ceiling
products, joint compound and other building products throughout the United
States. Operating segment results were as follows (dollars in millions):
Three Months Six Months
ended June 30, ended June 30,
--------------- ---------------
2006 2005 2006 2005
------ ------ ------ ------
NET SALES:
North American Gypsum $ 977 $ 804 $1,908 $1,529
Worldwide Ceilings 199 178 385 348
Building Products Distribution 680 506 1,284 962
Eliminations (283) (201) (539) (379)
------ ------ ------ ------
Total USG Corporation 1,573 1,287 3,038 2,460
====== ====== ====== ======
OPERATING PROFIT:
North American Gypsum 267 148 478 255
Worldwide Ceilings 26 17 46 29
Building Products Distribution 58 39 111 65
Corporate (24) (22) (52) (45)
Chapter 11 reorganization expenses (6) 1 (8) --
Eliminations (3) (2) (1) 1
------ ------ ------ ------
Total USG Corporation 318 181 574 305
====== ====== ====== ======
During the first quarter of 2006, L&W Supply purchased the outstanding
stock of several companies located in the midwestern United States for
approximately $74 million, net of cash acquired and subject to final
purchase price adjustments. All of these acquisitions were part of L&W
Supply's strategy to profitably grow its specialty dealer business. These
acquisitions were accounted for under the purchase method of accounting
and, accordingly, included the results of operations in the accompanying
consolidated results of operations from their date of acquisition. Pro
forma combined results of operations for 2005 and 2006 would not be
materially different as a result of these acquisitions and therefore are
not presented. The purchase price of the acquisitions is allocated to the
tangible assets, liabilities and intangible assets acquired, based on their
estimated fair values. L&W Supply has preliminarily recorded approximately
$41 million of goodwill and approximately $4 million of intangible assets
not subject to amortization in connection with these
-25-
acquisitions. The remaining $29 million was primarily recorded to accounts
receivable, inventory, and property, plant and equipment, net of current
liabilities.
(14) LITIGATION
ASBESTOS LITIGATION
ASBESTOS PERSONAL INJURY LITIGATION: The Plan of Reorganization resolves
the Debtors' liability for all present and future asbestos personal injury
and related claims. At the time of the Filing, Debtor U.S. Gypsum was a
defendant in more than 100,000 pending asbestos personal injury claims. In
addition, Debtors L&W Supply and Beadex had been named as defendants in a
small number of asbestos personal injury claims.
Pursuant to the Plan, the Trust has been created under Section 524(g) of
the Bankruptcy Code and has assumed all of the asbestos personal injury
liabilities of the Debtors. The Trust has been funded by the Reorganized
Debtors and will be administered by independent trustees appointed under
the Plan. The Trust will pay qualifying asbestos personal injury and
related claims against the Debtors pursuant to trust distribution
procedures that are part of the confirmed Plan.
The Confirmation Order contains a channeling injunction which provides that
all present and future asbestos personal injury claims against the Debtors
must be brought against the Trust and no individual or entity may bring an
asbestos personal injury claim against the Reorganized Debtors. This
channeling injunction applies to all present and future asbestos personal
injury claims for which any Debtor is alleged to be liable, including any
asbestos personal injury claims against U.S. Gypsum, L&W Supply or Beadex,
as well as any asbestos personal injury claims against the Debtors relating
to A.P. Green Refractories Co., a former subsidiary of U.S. Gypsum and the
Corporation.
ASBESTOS PROPERTY DAMAGE LITIGATION: The Plan of Reorganization provides
that all resolved asbestos property damage claims filed in the Debtors'
Chapter 11 proceedings will be paid in full. Any remaining disputed
asbestos property damage claims that were timely filed will be resolved in
the Bankruptcy Court or other court, where appropriate. Upon resolution of
these claims, the allowed amount, if any, of such claims will be paid in
full, with interest where required. Approximately 1,400 asbestos property
damage claims were timely filed in the Debtors' Chapter 11 proceedings. In
addition, more than 70 claims were filed after the bar date for filing such
claims. More than 950 of the claims were disallowed or withdrawn, leaving
approximately 520 claims pending. The Debtors have reached agreements in
principle to settle all but approximately three of these pending claims,
although there can be no assurance that all agreements in principle will
become final agreements. The estimated cost of resolving the pending
asbestos property damage claims, including both the unresolved
-26-
and the settled but unpaid claims, is included in accrued expenses.
INSURANCE COVERAGE: As of June 30, 2006, U.S. Gypsum's insurance coverage
for asbestos claims was exhausted. One of the Debtors, Beadex, which was
named as a defendant in asbestos personal injury lawsuits, had confirmed
coverage of approximately $11 million in primary or umbrella insurance
coverage available to pay asbestos-related costs. In addition, Beadex had
$15 million in available excess coverage. Pursuant to the Plan, this
coverage is transferred to the Trust. At the time of confirmation of the
Plan, the Debtors reached agreements with the issuers of the primary and
umbrella policies, Federal Insurance Company and TIG Insurance Company, to
resolve all of the insurers' liabilities under these policies in exchange
for the insurers' payments of $1,723,000 and $2,500,000, respectively, to
the Trust. These agreements were approved by the Bankruptcy Court in June
2006.
ESTIMATED COST: In the fourth quarter of 2005, the Corporation recorded a
pretax charge of $3.1 billion for all asbestos-related claims, increasing
U.S. Gypsum's reserve for all asbestos-related claims to $4.161 billion.
This reserve included the Debtors' obligations to fund the Trust
established under the Plan (recorded at $3.95 billion based upon the
assumption that the Plan would be confirmed, but that the FAIR Act would
not be enacted by the Trigger Date). This reserve also included the
Debtors' estimate of the cost of resolving asbestos property damage claims
filed in its Chapter 11 proceedings, including estimated legal fees
associated with those claims, and the Debtors' estimate of resolving other
asbestos-related claims and estimated legal expenses associated with those
claims. As of June 30, 2006, such liabilities have been reclassified on the
consolidated balance sheet to current liabilities, either as notes payable
to the Trust or accrued expenses, as appropriate.
In the second quarter of 2006, the Corporation made total payments of $909
million for asbestos-related claims. These payments included the $890
million payment to the Trust and $19 million of payments related to the
settlement of other asbestos-related claims included within the asbestos
reserve. The Corporation also has reached agreements in principle to settle
all but approximately three of the asbestos property damage claims filed in
the Chapter 11 proceedings that had not been disallowed or withdrawn.
Although there can be no assurance that all of these settlements will be
completed, based on the Corporation's evaluation of the asbestos property
damage settlements it has reached in principle and the remaining unresolved
asbestos property damage claims, in the second quarter of 2006, the
Corporation reversed $27 million of its reserve for asbestos-related
claims. This $27 million reversal is reflected as income in the
consolidated statements of earnings.
Enactment of the FAIR Act would not require increasing the Corporation's
recorded estimated liability for asbestos claims, because the amount
accrued assumes that the Corporation will make all contingent payments to
the Trust. However, if the FAIR Act is enacted by the Trigger Date and
-27-
either does not become subject to or survives subsequent constitutional
challenge, the Corporation will not be required to make the contingent
payments of $3.05 billion to the Trust. In that event, $3.05 billion of the
asbestos liability attributable to the contingent payment note, as
reflected on the June 30, 2006 consolidated balance sheet, would be
reversed and taken into income. If the FAIR Act is enacted after the
Trigger Date, the Corporation will still be required to make the contingent
payments to the Trust and therefore its asbestos liability would not be
affected.
BOND TO SECURE CERTAIN CENTER OBLIGATIONS: In January 2001, U.S. Gypsum
obtained a performance bond from Safeco Insurance Company of America
("Safeco") in the amount of $60.3 million to secure certain obligations of
U.S. Gypsum for extended payout settlements of asbestos personal injury
cases and other obligations owed by U.S. Gypsum to the Center for Claims
Resolution (the "Center"). The Center was an organization created by U.S.
Gypsum and other corporations in 1988 to defend, settle and pay asbestos
personal injury claims brought against the member companies. The Safeco
bond was secured by an irrevocable letter of credit obtained by the
Corporation in the amount of $60.3 million and issued by JPMorgan Chase
Bank (formerly Chase Manhattan Bank) to Safeco. After the Filing, the
Center made demands to Safeco for payment of the bond in the approximate
aggregate amount of $143 million, which exceeds the original penal sum of
the bond.
On November 30, 2001, the Corporation and U.S. Gypsum filed an Adversary
Complaint in the Chapter 11 proceedings to, among other things, enjoin the
Center from drawing on the bond and enjoin Safeco from paying on the bond
during the pendency of the bankruptcy proceedings.
In the second quarter of 2006, the Center and the Debtors settled the
litigation regarding the Safeco bond. The total amount of U.S. Gypsum's
payment obligation under the settlement was $16.5 million, which was paid
by U.S. Gypsum in June 2006. As a result of the settlement, the Safeco bond
and the letter of credit issued by JPMorgan Chase Bank have been cancelled
and are no longer outstanding.
SILICA LITIGATION
During the 10 years prior to the Filing, one or more of the Debtors had
been named as defendants in approximately 10 lawsuits claiming personal
injury from exposure to silica allegedly from the Debtors' products. In
most of these cases, U.S. Gypsum was named as a defendant. As of the
Petition Date, one of those cases had been resolved with payment, and U.S.
Gypsum had obtained summary judgment in its favor in three of the cases.
The silica-related personal injury lawsuits pending at the time of the
Filing were stayed as a result of the Filing. Only one claimant filed a
proof of claim alleging silica personal injury liability as of the bar date
in the Chapter 11 proceedings. That claim was recently settled.
In the fourth quarter of 2004, U.S. Gypsum was served with 17 complaints
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involving more than 400 plaintiffs alleging personal injury resulting from
exposure to silica. These complaints were filed in various Mississippi
state courts, and each named from 178 to 195 defendants. In the third
quarter of 2005, 14 of these complaints, involving 392 plaintiffs, were
voluntarily dismissed without prejudice to refile. In the second quarter of
2006, the Corporation learned that the remaining three complaints were also
dismissed without prejudice. Therefore, none of the 17 silica complaints
filed in late 2004 is still pending, and the one silica-related proof of
claim filed in the Chapter 11 proceedings has been settled.
ENVIRONMENTAL LITIGATION
The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as
one of numerous "potentially responsible parties" in a number of so-called
"Superfund" sites in the United States. In most of these sites, the
involvement of the Corporation or its subsidiaries is expected to be
minimal. The Corporation believes that appropriate reserves have been
established for its potential liability in connection with all Superfund
sites but is continuing to review its accruals as additional information
becomes available. Such reserves take into account all known or estimated
undiscounted costs associated with these sites, including site
investigations and feasibility costs, site cleanup and remediation, legal
costs, and fines and penalties, if any. In addition, environmental costs
connected with site cleanups on Corporation-owned property also are covered
by reserves established in accordance with the foregoing. The Corporation
believes that neither these matters nor any other known governmental
proceedings regarding environmental matters will have a material adverse
effect upon its financial position, cash flows or results of operations.
-29-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
PLAN OF REORGANIZATION
In the second quarter of 2006, USG Corporation (the "Corporation") and 10 of its
United States subsidiaries (collectively, the "Debtors" or "Reorganized
Debtors") emerged from reorganization proceedings under Chapter 11 of the United
States Bankruptcy Code following confirmation of a plan of reorganization by the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court") and the United States District Court for the District of Delaware (the
"District Court"), as discussed below. Confirmation of the plan achieves the
Debtors' goals of resolving asbestos claims in a fair and equitable manner,
protecting the long-term value of the Debtors' businesses and maintaining the
Debtors' leadership positions in their markets.
The Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 2005, which was filed on February 14, 2006, discussed the Debtors' Chapter
11 reorganization proceedings and the agreement among the Debtors, the committee
representing asbestos personal injury claimants (the "Official Committee of
Asbestos Personal Injury Claimants" or "ACC") and the legal representative for
future asbestos personal injury claimants (the "Futures Representative") to
resolve the Debtors' present and future asbestos personal injury liabilities
(the "Asbestos Agreement"). The Asbestos Agreement led to the Debtors' First
Amended Joint Plan of Reorganization of USG Corporation and its Debtor
Subsidiaries dated March 27, 2006 (as confirmed, the "Plan" or "Plan of
Reorganization"), which was filed with the Bankruptcy Court in the Debtors'
jointly administered cases captioned In re USG Corporation, et al., Case No.
01-2094. Significant aspects of the Chapter 11 proceedings and the Plan of
Reorganization include:
- On June 16, 2006, the Debtors' Plan of Reorganization was confirmed by
order (the "Confirmation Order") of the Bankruptcy Court and the District
Court;
- The Plan became effective on June 20, 2006 (the "Effective Date");
- A trust has been created and funded under Section 524(g) of the Bankruptcy
Code (the "United States Gypsum Asbestos Trust" or "Trust") for the payment
of asbestos personal injury claims against the Debtors;
- The Reorganized Debtors paid $890 million to the Trust and issued to the
Trust an interest-bearing note in the amount of $10 million, payable no
later than December 31, 2006;
- The Reorganized Debtors also issued to the Trust a contingent payment note
in the aggregate principal amount of $3.05 billion, which, as discussed
below, will be payable to the Trust depending upon whether the Fairness in
Asbestos Injury Resolution Act of 2005 or substantially similar legislation
creating a national trust or similar fund (collectively, the "FAIR Act") is
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enacted by the 10th day (excluding Sundays) after final adjournment of the
current term of Congress (the "Trigger Date"), which is currently expected
to be no later than December 2006;
- The Confirmation Order contains a channeling injunction which provides that
all present and future asbestos personal injury claims against the Debtors
must be brought against the Trust and no individual or entity may bring an
asbestos personal injury claim against the Reorganized Debtors;
- Pursuant to the Plan, allowed claims of all other creditors, including
allowed claims of general unsecured creditors and resolved asbestos
property damage claims, have been, or will be, paid in full, with interest
as provided in the Plan; and
- A rights offering (the "Rights Offering") that provided stockholders as of
June 30, 2006 the right to purchase, at $40.00 per share, one new share of
the Corporation's common stock for each share owned was completed on July
27, 2006, raising net proceeds of approximately $1.725 billion. The
completion of the transactions contemplated by the Plan of Reorganization
and borrowings under the Corporation's new $2.8 billion credit agreement
entered into on August 2, 2006 with a syndicate of banks (the "Credit
Facilities") have caused and will cause changes to the Corporation's
capital structure.
Additional information about the Plan, the Trust, funding relating to the Plan,
the Credit Facilities and the Rights Offering is set forth in Notes 2, 3 and 4
to the Consolidated Financial Statements and below under "Voluntary
Reorganization Proceedings and Confirmation of the Plan of Reorganization" and
"Liquidity and Capital Resources."
FINANCIAL RESULTS
The Corporation's second quarter of 2006 net sales and operating profit were the
highest levels for any quarter in its history, increasing 22% and 76%,
respectively, compared with the second quarter of 2005. The Corporation's gross
margin percentage (gross profit as a percent of net sales) was 25.4% in the
second quarter of 2006, up from 20.7% in the second quarter of 2005. Gross
profit improved primarily as a result of higher selling prices for most major
product lines and increased shipments of SHEETROCK(R) brand gypsum wallboard.
Demand for products sold by the Corporation's North American Gypsum and Building
Products Distribution operating segments continued to be strong in the second
quarter of 2006 due to strength in the new housing and repair and remodel
markets. Shipments of gypsum wallboard remained at historically high levels for
the Corporation and the industry in the second quarter of 2006.
Other second quarter 2006 financial highlights included:
- United States Gypsum Company ("U.S. Gypsum") shipped more wallboard in the
second quarter of 2006 than in any other quarter in its history. The
favorable level of activity in the aforementioned markets and extremely
high
-31-
industry capacity utilization rates have resulted in higher market selling
prices for gypsum wallboard. The nationwide average realized selling price
for U.S. Gypsum's SHEETROCK(R) brand gypsum wallboard was up 32% from the
second quarter of 2005 and up 7% versus the first quarter of 2006.
- L&W Supply Corporation ("L&W Supply"), the leading specialty building
products distribution business in the United States, shipped more gypsum
wallboard and complementary products in the second quarter of 2006 than in
any other quarter in its history. L&W Supply's net sales and operating
profit also were all-time highs for any quarter.
- USG Interiors, Inc. ("USG Interiors"), the Corporation's domestic ceilings
business, and the Corporation's international interior systems business
managed as USG International recorded gains in second quarter net sales and
operating profit compared with the prior-year period.
- The Corporation's new Credit Facilities have been assigned credit ratings
of Baa3 by Moody's Investor Service Inc. and BB+ by Standard & Poor's
Ratings Services. Ratings from credit rating agencies are not
recommendations to buy, sell or hold securities and may be subject to
revision or withdrawal by the applicable rating agency at any time and
should be evaluated independently of any other ratings.
As of June 30, 2006, the Corporation had $663 million of cash, cash equivalents,
restricted cash and marketable securities on a consolidated basis, down $914
million from December 31, 2005, primarily due to payments in the second quarter
related to the Plan, including the $890 million payment to the Trust. The
Corporation believes that cash and marketable securities on hand, future cash
available from operations and the other sources of liquidity described under
"Liquidity and Capital Resources" below will provide sufficient liquidity to
allow the Corporation's businesses to carry on normal operations and to allow
the Corporation to complete the transactions contemplated by the Plan.
Normal-course cash requirements include, among other things, capital
expenditures, working capital needs and contractual obligations.
VOLUNTARY REORGANIZATION UNDER CHAPTER 11 AND CONFIRMATION OF THE PLAN OF
REORGANIZATION
On June 25, 2001 (the "Petition Date"), the Debtors filed voluntary petitions
for reorganization (the "Filing") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the Bankruptcy Court. This action was
taken to resolve asbestos claims in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses and to maintain the Debtors'
leadership positions in their markets. As described more fully below, the
Debtors' Chapter 11 proceedings have been concluded by the Plan of
Reorganization involving all Debtors that has been confirmed by the Bankruptcy
Court and the District Court. This confirmed Plan provides for the resolution of
all present and future asbestos personal injury claims against the Debtors.
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The following subsidiaries of the Corporation were included in the Chapter 11
proceedings and are included in the Plan of Reorganization: U.S. Gypsum; USG
Interiors; USG Interiors International, Inc.; L&W Supply; Beadex Manufacturing,
LLC; B-R Pipeline Company; La Mirada Products Co., Inc.; Stocking Specialists,
Inc.; USG Industries, Inc.; and USG Pipeline Company. The Chapter 11 proceedings
and the Plan resolving the Debtors' asbestos personal injury liabilities do not
include any of the Corporation's non-U.S. subsidiaries or companies that were
acquired post-petition by any of the Debtors.
Pursuant to the Plan, the Trust was created under Section 524(g) of the
Bankruptcy Code to pay all qualifying present and future asbestos personal
injury claims against the Debtors. On the Effective Date, the Reorganized
Debtors funded the Trust as follows:
- The Reorganized Debtors paid $890 million to the Trust and issued to
the Trust an interest-bearing note in the amount of $10 million,
payable no later than December 31, 2006; and
- The Reorganized Debtors also issued to the Trust a contingent payment
note in the aggregate principal amount of $3.05 billion, which will be
payable to the Trust depending upon whether the FAIR Act is enacted by
the Trigger Date, as described more fully below.
The Reorganized Debtors are co-obligors and are jointly and severally liable
under the $10 million promissory note and the $3.05 billion contingent payment
note. Each of the notes is secured by an obligation to pledge to the Trust
shares of the voting stock of the Corporation equal to 51% of the amount
outstanding. The obligation to pledge those shares would be triggered by a
payment default under the applicable note.
As provided in the Plan, if the FAIR Act is enacted and made law on or before
the Trigger Date and is not subject to, or survives, a constitutional challenge
initiated within 60 days of the Trigger Date, the contingent payment note will
be cancelled and the Reorganized Debtors will have no further payment
obligations to the Trust. In that situation, the total amount to be paid by the
Reorganized Debtors to the Trust will be the $890 million already paid and the
obligations under the $10 million promissory note.
If the FAIR Act is not enacted and made law by the Trigger Date, the Reorganized
Debtors will be obligated to make payments under the contingent payment note as
follows: $1.9 billion will be payable to the Trust within 30 days after the
Trigger Date, with the remaining $1.15 billion payable within 180 days after the
Trigger Date. Interest will accrue on the unpaid balance of the $3.05 billion
contingent payment note beginning on the Trigger Date. The rate of interest is
the rate of the 90-day LIBOR in effect as of the Trigger Date plus 40 basis
points.
If the FAIR Act is enacted by the Trigger Date but is held unconstitutional, the
Reorganized Debtors will be obligated to pay the $3.05 billion contingent note,
as described more fully below. Specifically, if the FAIR Act is enacted by the
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Trigger Date and there is a constitutional challenge to the FAIR Act initiated
within 60 days of the Trigger Date, the Debtors will be obligated to pay the
$3.05 billion contingent payment note if the constitutional challenge results in
a final, non-appealable court order that the FAIR Act is (i) unconstitutional in
its entirety or (ii) unconstitutional insofar as it applies to debtors in
Chapter 11 cases whose plans of reorganization had not yet been confirmed and
become substantially consummated as of February 1, 2006. In those circumstances,
the Debtors would be obligated to pay $1.9 billion within 30 days after the date
when the court order becomes final and non-appealable and pay the remaining
$1.15 billion within 180 days after the date the order becomes final and
non-appealable. If the constitutional challenge is resolved by a final,
non-appealable court order in any manner other than as described above, then the
$3.05 billion contingent payment, including the right of the Trust to own stock
of the Corporation under the note, will be cancelled.
The amounts that the Reorganized Debtors will be obligated to pay to the Trust
under the Plan, either $900 million or $3.95 billion, are fixed amounts,
depending only upon passage of the FAIR Act, that were determined through
settlement negotiations with the Official Committee of Asbestos Personal Injury
Claimants and the Futures Representative appointed in the Debtors' Chapter 11
proceedings. The Reorganized Debtors will not be obligated to make additional
payments to the Trust beyond the payments described above.
The Confirmation Order contains a channeling injunction which provides that all
present and future asbestos personal injury claims against the Debtors must be
brought against the Trust and no individual or entity may bring such a claim
against the Reorganized Debtors. This channeling injunction applies to all
present and future asbestos personal injury claims for which any Debtor is
alleged to be liable, including any asbestos personal injury claims against the
Debtors relating to A.P. Green Refractories Co., a former subsidiary of U.S.
Gypsum and the Corporation.
The Plan also provides for the resolution of other pre-petition claims against
the Debtors. Allowed claims of all other creditors will be, or already have
been, paid in full, with interest as provided in the Plan. Disputed claims,
including disputed asbestos property damage claims, that have not been resolved
will be resolved in the Bankruptcy Court or other court, where appropriate. If
it is ultimately determined that any amounts are owed on these disputed claims,
they will also be paid in full, with interest as required.
As a result of confirmation of the Plan of Reorganization, the four official
committees appointed in the Chapter 11 proceedings have been disbanded. The
Futures Representative will continue to act as the Futures Representative for
the Trust.
Under the Plan, stockholders of the Corporation as of the Effective Date
retained their shares. In addition, on June 30, 2006 (the "Record Date"), the
Corporation issued to its stockholders one transferable right for each share
owned on the Record Date, entitling the owner to purchase one share of common
stock for $40.00 in cash for each right (the "Rights Offering"). These rights
expired at 5:00
-34-
p.m., New York City time, on July 27, 2006. In connection with the Rights
Offering, Berkshire Hathaway Inc. ("Berkshire Hathaway"), the Corporation's
largest stockholder, agreed to purchase from the Corporation, at $40.00 per
share, all of the shares of common stock offered pursuant to the Rights Offering
that were not issued pursuant to the exercise of rights (the "Backstop
Commitment"). In the first quarter of 2006, the Debtors paid Berkshire Hathaway
a fee of $67 million for its Backstop Commitment. On August 2, 2006, the
Corporation issued 6.97 million shares of common stock to Berkshire Hathaway in
accordance with the Backstop Commitment. These shares include 6.5 million shares
underlying rights distributed to Berkshire Hathaway in connection with the
shares it beneficially owned on the Record Date and 0.47 million shares
underlying rights distributed to other stockholders that were not exercised in
the Rights Offering. The Corporation's net proceeds from the Rights Offering and
the Backstop Commitment were approximately $1.725 billion. The Corporation
expects to use the net proceeds from the Rights Offering, together with other
available funds, including cash on hand, to make payments contemplated by the
Plan and for general corporate purposes.
The Debtors' financial obligations under the Plan will depend upon, among other
things, whether the $3.05 billion contingent payment note becomes due. The
Debtors propose to fund their obligations under the Plan through (i) cash and
marketable securities accumulated since the Petition Date which were used to
fund the $890 million payment to the Trust as well as other creditor payments
made prior to June 30, 2006, (ii) the Rights Offering, (iii) anticipated tax
refunds and (iv) new debt financing, as described in Note 3 to the Consolidated
Financial Statements.
Additional information about the new debt financing, the Rights Offering and the
Plan's treatment of asbestos claims is set forth in Notes 3, 4 and 14,
respectively, to the Consolidated Financial Statements.
POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS
On April 19, 2005, Senator Arlen Specter, R-Pa., introduced in the United States
Senate legislation addressing compensation and administration of asbestos
personal injury claims. The legislation was titled the Fairness in Asbestos
Injury Resolution Act of 2005 (Senate Bill 852, the "FAIR Act of 2005" or the
"Act"). The Act was referred to the Senate Committee on the Judiciary and was
approved by a majority vote of the committee on May 27, 2005. The FAIR Act of
2005 was not approved by the full Senate and is not law.
The FAIR Act of 2005 was intended to establish a nationally administered trust
fund to compensate asbestos personal injury claimants. The Act provided that
companies that had made past payments for asbestos personal injury claims would
be required to contribute amounts on a periodic basis to a national trust fund
that would pay the claims of qualifying asbestos personal injury claimants. The
nationally administered trust fund would be the exclusive remedy for asbestos
personal injury claims, and such claims could not be brought in state or federal
court as long as such claims were being compensated under the national trust
fund.
-35-
In February 2006, the Senate began debate on the FAIR Act of 2005. However, an
objection to further proceedings was raised based on the failure of the Act to
comply with federal budget rules. This objection could have been waived by the
affirmative vote of 60 senators, but a motion to waive the budget objection
failed by a vote of 58 to 41. As a result, the Senate ceased debate on the FAIR
Act of 2005.
In late May 2006, an amended version of the Act, called the "Fairness in
Asbestos Injury Resolution Act of 2006" (the "FAIR Act of 2006" or "S. 3274")
was introduced by Senator Specter and Senator Patrick Leahy, D-Vt. The FAIR Act
of 2006 also contemplates creation of a national trust to pay asbestos personal
injury claims but contains some modifications from the FAIR Act of 2005. A copy
of the FAIR Act of 2006 as introduced is available at http://thomas.loc.gov
(type in "S. 3274" in the search field). The current form of the FAIR Act of
2006 does not require contributions from companies, such as the Reorganized
Debtors, that have a confirmed plan of reorganization under Chapter 11 of the
Bankruptcy Code that is substantially consummated and no longer subject to
appeal.
Although the current form of the FAIR Act of 2006 does not require contributions
from the Reorganized Debtors into the proposed national trust, the amounts that
the Reorganized Debtors will be required to pay into the Trust established under
the Debtors' Plan of Reorganization depend on whether the FAIR Act is enacted by
the Trigger Date and either does not become subject to or survives a subsequent
constitutional challenge. Final adjournment of the current term of Congress,
which is the basis for the Trigger Date, is currently expected to be no later
than December 2006. The outcome of the legislative process is inherently
speculative, and it cannot be known whether the FAIR Act will be enacted by the
Trigger Date or, even if enacted, would survive any subsequent constitutional
challenge.
ASBESTOS PROPERTY DAMAGE CLAIMS
The Plan of Reorganization does not create a trust for asbestos property damage
claims against the Debtors. The Plan provides that disputed asbestos property
damage claims timely filed in the bankruptcy proceeding will be resolved either
in the Bankruptcy Court or other court, where appropriate. If it is determined
that any amounts are owed for asbestos property damage claims, the Plan provides
that the Debtors will pay such amounts in full, with interest where required.
Any settled asbestos property damage claims will also be paid in full.
As a result of the bar date for filing asbestos property damage claims in
Debtors' Chapter 11 proceedings, approximately 1,400 asbestos property damage
claims were filed by the bar date, and more than 70 such claims were filed after
the bar date. More than 950 claims were disallowed or withdrawn, leaving
approximately 520 claims pending. The Debtors have reached agreements in
principle to settle all but approximately three of these pending claims,
although there can be no assurance that all agreements in principle will become
final agreements. The estimated cost of resolving the pending asbestos property
damage claims, including both the unresolved and the settled but unpaid claims,
is included in accrued expenses. The asbestos property damage claims are also
discussed in Note 14 to the Consolidated Financial Statements.
-36-
CONSOLIDATED RESULTS OF OPERATIONS
NET SALES
Net sales in the second quarter of 2006 totaled $1.573 billion, a record for any
quarter in the Corporation's history and a 22% increase from $1.287 billion in
the second quarter of 2005. For the first six months of 2006, net sales totaled
$3.038 billion, up 24% from $2.460 billion in the comparable 2005 period. The
increases in net sales were primarily due to strength in the new housing and
repair and remodel markets and improvement in the commercial market. As
explained below under Core Business Results of Operations, net sales increased
for all three of the Corporation's operating segments.
COST OF PRODUCTS SOLD
Cost of products sold in the second quarter of 2006 was $1.173 billion, up 15%
from $1.020 billion a year ago. For the first six months of 2006, cost of
products sold totaled $2.281 billion, up 15% from $1.979 billion in the
comparable 2005 period. These increases were primarily attributable to increased
volume for SHEETROCK(R) brand gypsum wallboard and other products as well as
higher manufacturing costs related to energy and raw materials.
GROSS PROFIT
Gross profit in the second quarter of 2006 was $400 million, a 50% increase from
$267 million in the second quarter of 2005. For the first six months of 2006,
gross profit totaled $757 million, up 57% from $481 million in the comparable
2005 period. These increases primarily reflected record shipments and selling
prices for SHEETROCK(R) brand gypsum wallboard. The gross margin percentage was
25.4% in the second quarter of 2006, up from 20.7% in the second quarter of
2005. For the first six months of 2006, the gross margin percentage was 24.9%,
up from 19.6% in the comparable 2005 period.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses in the second quarter of 2006 were $103
million, up 18% from $87 million in the second quarter of 2005. For the first
six months, these expenses were $202 million versus $176 million a year ago.
Expenses were up in the 2006 periods primarily due to increased levels of
compensation and benefits and expenses in connection with growth initiatives.
Selling and administrative expenses as a percent of net sales were 6.5% for the
second quarter of 2006 and 6.6% for the first six months of 2006, compared with
6.8% and 7.2% for the respective 2005 periods.
REVERSAL OF ASBESTOS CLAIMS RESERVE
In the second quarter of 2006, the Corporation reversed $27 million of a reserve
for asbestos-related claims. This reversal, which is reflected as income in the
consolidated statements of earnings, was based on the Corporation's evaluation
of the asbestos property damage settlements it has reached in principle and the
remaining unresolved asbestos property damage claims.
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CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses in the consolidated statements of earnings
consisted of the following (dollars in millions):
Three Months Six Months
ended June 30, ended June 30,
-------------- --------------
2006 2005 2006 2005
---- ---- ---- ----
Legal and financial advisory fees $ 18 $ 6 $ 32 $ 12
Bankruptcy-related interest income (12) (7) (24) (12)
---- --- ---- ----
Total Chapter 11 reorganization expenses (income) 6 (1) 8 --
==== === ==== ====
INTEREST EXPENSE
Interest expense for the second quarter and first six months of 2006 was $37
million and $523 million, respectively. These amounts included charges for
post-petition interest and fees related to pre-petition obligations (primarily
debt and trade payables). For the second quarter of 2006, these post-petition
interest and fees were $36 million ($21 million after-tax). For the first six
months of 2006, these post-petition interest and fees totaled $520 million ($321
million after-tax). In accordance with AICPA SOP 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," virtually all of the
Corporation's outstanding debt had been classified as liabilities subject to
compromise, and from the Petition Date through December 31, 2005, interest
expense on this debt and other pre-petition obligations had not been accrued or
recorded. Interest expense, other than that related to post-petition interest
and fees, was $2 million and $3 million in the second quarter and first six
months of 2005, respectively.
INTEREST INCOME
Interest income amounted to $4 million in the second quarter and $7 million in
the first six months of 2006. Interest income for the respective 2005 periods
was $2 million and $4 million. Interest income increased in the 2006 periods
primarily due to the inclusion of interest earned on cash held by the
Reorganized Debtors from the Effective Date through June 30, 2006. Prior to the
Effective Date, this interest income was included as an offset to Chapter 11
reorganization expenses in the consolidated statements of earnings.
INCOME TAXES
Income tax expense of $109 million and $23 million was recorded in the second
quarter and first six months of 2006, respectively, compared with $70 million
and $118 million in the corresponding 2005 periods. The effective tax rates were
40.1% and 38.6% for the first six months of 2006 and 2005, respectively.
NET EARNINGS
Net earnings of $176 million, or $3.03 per diluted share, were reported for the
second quarter of 2006 compared with $110 million, or $1.96 per diluted share,
for the second quarter of 2005. For the first six months of 2006, net earnings
totaled $35 million, or $0.60 per diluted share, compared with $187 million, or
$3.33 per diluted share, for the first six months of 2005.
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Net earnings and earnings per share for the 2006 periods include charges for
post-petition interest and fees related to pre-petition obligations as described
above. These charges, on an after-tax basis, were $21 million, or $0.36 per
diluted share, for the second quarter of 2006 and $321 million, or $5.54 per
diluted share, for the first six months of 2006. Net earnings and earnings per
share for the 2006 periods also include the reversal of a reserve for
asbestos-related claims described above. The after-tax income from this reversal
amounted to $17 million, or $0.29 per diluted share.
Earnings-per-share data for all periods have been adjusted to reflect the effect
of the Rights Offering.
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CORE BUSINESS RESULTS OF OPERATIONS
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
(dollars in millions) 2006 2005 2006 2005
------ ------ ------ ------
NET SALES:
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 878 $ 720 $1,712 $1,374
CGC Inc. (gypsum) 91 82 177 157
Other subsidiaries* 64 55 128 95
Eliminations (56) (53) (109) (97)
------ ------ ------ ------
Total 977 804 1,908 1,529
------ ------ ------ ------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 137 124 264 241
USG International 59 52 113 103
CGC Inc. (ceilings) 14 14 30 27
Eliminations (11) (12) (22) (23)
------ ------ ------ ------
Total 199 178 385 348
------ ------ ------ ------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 680 506 1,284 962
------ ------ ------ ------
Eliminations (283) (201) (539) (379)
------ ------ ------ ------
Total USG Corporation 1,573 1,287 3,038 2,460
====== ====== ====== ======
OPERATING PROFIT:
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company 242 125 431 218
CGC Inc. (gypsum) 14 14 26 26
Other subsidiaries* 11 9 21 11
------ ------ ------ ------
Total 267 148 478 255
------ ------ ------ ------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 17 13 31 19
USG International 5 2 8 5
CGC Inc. (ceilings) 4 2 7 5
------ ------ ------ ------
Total 26 17 46 29
------ ------ ------ ------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 58 39 111 65
------ ------ ------ ------
Corporate (24) (22) (52) (45)
Chapter 11 reorganization expenses (6) 1 (8) --
Eliminations (3) (2) (1) 1
------ ------ ------ ------
Total USG Corporation 318 181 574 305
====== ====== ====== ======
* Includes USG Mexico, S.A. de C.V., a building products business in Mexico,
Gypsum Transportation Limited, a shipping company in Bermuda, and USG
Canadian Mining Ltd., a mining operation in Nova Scotia.
-40-
NORTH AMERICAN GYPSUM
Net sales of $977 million in the second quarter of 2006 increased 22% from the
comparable period in 2005, while operating profit increased 80% to $267 million.
First six months 2006 net sales of $1.908 billion were 25% greater than a year
ago, while operating profit of $478 million increased 87%. Second quarter and
first six months 2006 operating profit for North American Gypsum included the
$27 million reversal of a reserve for asbestos-related claims discussed above.
United States Gypsum Company: Second quarter 2006 net sales for U.S. Gypsum were
a record and increased $158 million, or 22%, compared with the second quarter of
2005, while operating profit rose $117 million, or 94%. These increases
primarily reflected higher selling prices and record shipments for SHEETROCK(R)
brand gypsum wallboard. Strong customer demand for the company's products also
resulted in higher selling prices and record shipments for SHEETROCK(R) brand
joint compound and FIBEROCK(R) brand gypsum fiber panels. In addition, operating
profit for U.S. Gypsum included the $27 million reversal of a reserve for
asbestos-related claims.
U.S. Gypsum's nationwide average realized selling price for SHEETROCK(R) brand
gypsum wallboard was $182.65 per thousand square feet in the second quarter of
2006. This price represented a 32% increase from $138.28 in the second quarter
of 2005. However, the benefit of improved pricing was partially offset by higher
costs, including higher energy and raw material prices. The robust level of
activity in the new housing and residential repair and remodel markets, which
together account for nearly two-thirds of all demand for gypsum wallboard, and
near-capacity utilization rates for the industry have resulted in strong demand
and higher selling prices for gypsum wallboard.
Shipments of SHEETROCK(R) brand gypsum wallboard totaled 3.0 billion square feet
during the second quarter of 2006, a record for any quarter and a 3% increase
from 2.9 billion in the second quarter of 2005. Wallboard plants operated at
full capacity in the second quarter of 2006 compared with 96% of capacity in the
second quarter of 2005. Industry shipments of gypsum wallboard were up
approximately 4% from the second quarter of 2005.
CGC Inc.: Second quarter 2006 net sales for the gypsum business of Canada-based
CGC Inc. totaled $91 million, up 11% from the second quarter of 2005. Operating
profit of $14 million was the same level attained in last year's second quarter.
The higher level of net sales was largely attributable to increased selling
prices for SHEETROCK(R) brand gypsum wallboard and the favorable effects of
currency translation. However, this improvement was offset by higher gypsum
wallboard manufacturing costs.
WORLDWIDE CEILINGS
Second quarter 2006 net sales of $199 million increased 12% and operating profit
of $26 million rose 53% from the second quarter of 2005. First six months net
sales of $385 million were 11% higher than a year ago, while operating profit of
$46 million rose 59%.
-41-
USG Interiors, Inc.: USG Interiors reported second quarter 2006 net sales and
operating profit of $137 million and $17 million, respectively. These results
compared with net sales of $124 million and operating profit of $13 million in
the second quarter of 2005. The improvement in results was largely attributable
to increased selling prices for ceiling tile and higher shipments of ceiling
grid, partially offset by higher manufacturing costs for ceiling tile. The gains
reflect a rebound in the commercial construction market, which has benefited
from declining office vacancy rates, job growth and improved corporate
investment, as well as improved plant efficiencies.
USG International: USG International reported net sales and operating profit of
$59 million and $5 million, respectively, in the second quarter of 2006. These
results compared with net sales of $52 million and operating profit of $2
million for the same period a year ago. This improvement primarily reflected
higher demand for USG ceiling grid in Europe.
CGC Inc.: The ceilings business of CGC Inc. reported net sales of $14 million in
both the second quarter of 2006 and the second quarter of 2005. However,
operating profit doubled to $4 million in the second quarter of 2006 largely as
a result of lower manufacturing costs for ceiling grid.
BUILDING PRODUCTS DISTRIBUTION
L&W Supply reported second quarter 2006 net sales of $680 million and operating
profit of $58 million, both records for any quarter in the company's history.
Net sales rose $174 million, or 34%, while operating profit increased by $19
million, or 49%, over the second quarter of 2005. The improved results reflected
record shipments of gypsum wallboard and complementary building products, such
as drywall metal, ceiling products and joint compound. Results also benefited
from higher selling prices for gypsum wallboard, which increased 33% from the
second quarter of 2005. Sales of complementary building products rose 17%
compared with last year's second quarter.
For the first six months of 2006, net sales of $1.284 billion and operating
profit of $111 million represented increases of 33% and 71%, respectively,
versus the first six months of 2005.
L&W Supply operated 211 locations in the United States as of June 30, 2006,
compared with 194 locations as of June 30, 2005.
MARKET CONDITIONS AND OUTLOOK
Industry shipments of gypsum wallboard in the United States were an estimated
9.9 billion square feet in the second quarter of 2006, a 4% increase from 9.5
billion square feet in the second quarter of 2005 and a 1% increase from the
first quarter of 2006. The first-half 2006 robust level of activity in the new
housing and residential repair and remodel markets, which together account for
nearly two-thirds of all demand for gypsum wallboard, and near-capacity
utilization rates for the industry have resulted in strong demand and higher
selling prices for gypsum wallboard.
-42-
The outlook for the Corporation's markets for the balance of 2006 remains
positive. However, recent changes in some demand indicators, such as lower
levels of housing affordability, rising mortgage interest rates, declines in new
orders at major homebuilders and rising inventory of unsold homes, suggest that
demand from the new housing market, which has been at record levels, will likely
continue to moderate during the balance of 2006. The fundamentals for
nonresidential building and repair and remodeling remain solid, and modest
growth is expected in these markets in 2006. In addition, the Corporation's
operating subsidiaries, like many other companies, face many ongoing cost
pressures, particularly in the areas of energy and raw materials.
The Corporation continues to focus its attention and capital investments on
improving customer service, manufacturing costs and operating efficiencies, as
well as strategic investments to grow its businesses. In addition, the
Corporation is keenly focused on completing the transactions related to the
confirmed Plan.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of June 30, 2006, the Corporation had $663 million of cash, cash equivalents,
restricted cash and marketable securities on a consolidated basis, down $914
million from December 31, 2005, primarily due to payments in the second quarter
related to the Plan, including the $890 million payment to the Trust. The
Corporation believes that cash and marketable securities on hand, future cash
available from operations and the other sources of liquidity described below,
including approximately $1.725 billion of net proceeds that the Corporation
received following the completion of the Rights Offering and performance by
Berkshire Hathaway of its obligations under the Backstop Commitment, will
provide sufficient liquidity to allow the Corporation's businesses to carry on
normal operations and to allow the Corporation to complete the transactions
contemplated by the Plan. Normal-course cash requirements include, among other
things, capital expenditures, working capital needs and contractual obligations.
Additionally, the Corporation from time to time considers selective strategic
transactions to create value and improve performance. Such transactions may
include acquisitions, joint ventures, partnerships, restructurings and
dispositions. Transactions of these types may result in material cash outlays or
proceeds.
The timing of certain cash inflows and outflows related to the Plan will depend
on whether the FAIR Act is enacted prior to the Trigger Date and withstands any
constitutional challenge initiated within 60 days of the Trigger Date. On the
Effective Date, the Reorganized Debtors paid $890 million to the Trust and
issued to the Trust an interest-bearing note in the amount of $10 million,
payable no later than December 31, 2006. The Reorganized Debtors also issued to
the Trust a contingent payment note in the aggregate principal amount of $3.05
billion, which will be payable to the Trust in the event that the FAIR Act has
not been enacted by the Trigger Date or, if enacted, is later held to be
unconstitutional after a challenge initiated within 60 days of the Trigger Date.
-43-
With certain exceptions, outlined above, the Debtors' obligations under the
$3.05 billion contingent payment note will be cancelled if the FAIR Act is
enacted and made law by the Trigger Date. If the FAIR Act is not enacted and
made law by the Trigger Date, or is enacted but declared unconstitutional after
a challenge brought within 60 days after the Trigger Date, the Debtors will be
obligated to make payments under the $3.05 billion contingent payment note to
the Trust as follows: $1.9 billion of the contingent payment note will be
payable within 30 days after the Trigger Date, and the remaining $1.15 billion
of the contingent payment note will be payable within 180 days after the Trigger
Date or the date of order declaring the FAIR Act unconstitutional, as the case
may be. Interest will accrue on the unpaid balance of the $3.05 billion
contingent payment note beginning on the Trigger Date at a per annum rate equal
to the 90-day LIBOR in effect as of the Trigger Date plus 40 basis points.
During the period from the Effective Date through June 30, 2006, the Reorganized
Debtors paid $174 million to unsecured creditors. Approximately $1.2 billion of
additional payments are being made to unsecured creditors in the third quarter
of 2006.
The Corporation expects to fund these obligations from accumulated cash and
marketable securities, as well as future cash available from operations, the net
proceeds of approximately $1.725 billion from the Rights Offering, anticipated
tax refunds and new debt financing under the Credit Facilities. The Credit
Facilities include a revolving credit facility, term loan facility and a tax
bridge facility that would be utilized to make payments to the Trust if the
proceeds from tax refunds following the Debtors' contributions to the Trust are
not received prior to the time those payments are due. Assuming that the $3.05
billion contingent payment note becomes due and payable to the Trust, the
Corporation expects to receive cash tax refunds of about $1.1 billion in the
year following the payment of such note.
See Voluntary Reorganization Under Chapter 11 and Confirmation of the Plan of
Reorganization, above, and Note 3 to the Consolidated Financial Statements for
additional information regarding the Debtors' obligations and the funding of
those obligations under the Plan.
CASH FLOWS
As shown on the consolidated statements of cash flows, cash and cash equivalents
decreased $349 million during the first six months of 2006. The primary uses of
cash were (i) the $890 million payment to the Trust and $19 million of payments
related to the settlement of other asbestos-related claims; (ii) the $174
million of payments to unsecured creditors; (iii) capital spending of $150
million; (iv) payments of fees related to the Rights Offering, including a $67
million payment to Berkshire Hathaway in connection with the Backstop
Commitment; (v) acquisitions of businesses, net of cash acquired, of $74
million; and (vi) pension funding of $27 million. The primary sources of cash in
the first six months of 2006 were net sales of marketable securities, earnings
from operations adjusted for both the post-petition interest charges and
reversal of the asbestos claims reserve described above, and the return of
restricted cash.
-44-
Comparing the first six months of 2006 with the first six months of 2005, net
cash used for operating activities was $631 million in the 2006 period compared
with net cash provided by operating activities of $141 million a year ago. This
variation was primarily attributable to the payments of $890 million to the
Trust, $19 million related to the settlement of other asbestos-related claims
and $174 million to unsecured creditors, as discussed above.
Investing activities in the first six months of 2006 provided net cash of $344
million, while net cash of $218 million was used in the comparable 2005 period.
This variation primarily reflected net sales of marketable securities of $496
million in 2006 compared with net purchases of marketable securities of $85
million in 2005. Capital spending and cash spent to acquire businesses increased
by $74 million and $45 million, respectively, in 2006. The return of $71 million
of restricted cash in the first six months of 2006 compared with a deposit of
$28 million in the comparable 2005 period.
Net cash of $65 million used for financing activities during the first six
months of 2006 primarily reflected payments of fees related to the Rights
Offering, including the $67 million payment to Berkshire Hathaway in connection
with the Backstop Commitment, and the payment of $16 million related to
pre-petition debt principal. These payments were partially offset by increased
issuances of common stock upon the exercise of stock options and a tax benefit
related to share-based payments in 2006.
CAPITAL EXPENDITURES
Capital spending amounted to $150 million in the first six months of 2006
compared with $76 million in the corresponding 2005 period. As of June 30, 2006,
remaining capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $543 million, compared with $587 million as
of December 31, 2005. The Corporation's capital expenditures program is expected
to be funded by cash from operations and, if necessary, borrowings under the
revolving credit facility portion of the Credit Facilities. Capital expenditure
commitments as of June 30, 2006 included:
- approximately $180 million for a new low-cost gypsum wallboard plant in
Washingtonville, Pa., that will serve the Northeast markets. Construction
of this plant will begin in late 2006 and is expected to be completed in
2008.
- approximately $130 million to replace existing capacity at U.S. Gypsum's
Norfolk, Va., gypsum wallboard plant with a new low-cost wallboard line
that will position the company for profitable growth in the mid-Atlantic
market. Construction on this project began in 2005 and is expected to be
completed in 2007.
- approximately $75 million for a new 40,000-ton self-unloading ship that
will lower the delivered cost of gypsum rock to East Coast wallboard
plants. The new ship is expected to become operational in 2007.
-45-
- approximately $70 million for a new gypsum wallboard plant in Tecoman,
Mexico. This facility will serve markets in western Mexico and export
gypsum wallboard to Latin America. Construction of this plant began in the
third quarter of 2006 and is expected to be completed in 2007.
- approximately $30 million for a mill modernization at U.S. Gypsum's Plaster
City, Calif., gypsum wallboard plant. Construction on this project began in
early 2006 and is expected to be completed in 2007.
- approximately $16 million to build a ready-mixed joint compound line at
U.S. Gypsum's Baltimore plant. Construction on this project began in the
third quarter of 2006 and is expected to be completed in 2007.
- approximately $13 million to rebuild the ready-mixed joint compound line at
U.S. Gypsum's Jacksonville, Fla., plant. Construction on this project began
in early 2006 and is expected to be completed in 2007.
WORKING CAPITAL
As of June 30, 2006, current liabilities for the Corporation included the $3.05
billion contingent note payable to the Trust and certain other liabilities
previously included in liabilities subject to compromise. In addition, the
Corporation made payments in the second quarter related to the Plan, including
the $890 million payment to the Trust. Consequently, as of June 30, 2006,
current liabilities exceeded current assets by $1.763 billion, and the ratio of
current assets to current liabilities was 0.65-to-1. As of December 31, 2005,
working capital (current assets less current liabilities) amounted to $1.579
billion, and the ratio of current assets to current liabilities was 3.63-to-1.
Receivables increased to $579 million as of June 30, 2006 from $453 million as
of December 31, 2005, primarily reflecting a 28% increase in net sales for the
month of June 2006 as compared with December 2005. Inventories increased to $361
million from $315 million primarily due to the increased level of business in
the second quarter of 2006 as compared with the fourth quarter of 2005. Accounts
payable as of June 30, 2006 increased to $368 million from $281 million as of
December 31, 2005, while accrued expenses increased to $868 million from $275
million. The higher levels of accounts payable and accrued expenses primarily
reflected the reclassification of liabilities subject to compromise and the
increased level of business.
MARKETABLE SECURITIES
As of June 30, 2006, $69 million was invested in marketable securities, down
$494 million from $563 million as of December 31, 2005. While some securities
have contractual maturities beyond one year, all are classified as short-term
marketable securities on the consolidated balance sheet as of June 30, 2006, due
to the Corporation's intent to sell the securities within one year and to use
the proceeds to fund a portion of the Corporation's obligations under the Plan.
The Corporation's marketable securities are classified as available-for-sale
securities and reported at fair market value with unrealized gains and losses
excluded from earnings and reported in accumulated other comprehensive income
(loss) on the consolidated balance sheets.
-46-
LETTERS OF CREDIT
The Corporation had a credit agreement with LaSalle Bank National Association to
provide letters of credit needed to support business operations. As of June 30,
2006, there were $86 million of letters of credit outstanding under this
facility. On August 2, 2006, the letters of credit outstanding under this
facility were incorporated into the new revolving credit facility under the
Credit Facilities, and the agreement with LaSalle Bank National Association was
terminated.
DEBT
Pre-petition debt previously included in liabilities subject to compromise
amounted to $1.005 billion as of the Petition Date. As of June 30, 2006, the
Corporation (i) repaid $17 million of this debt (ii) reclassified $749 million
to short-term debt, which is expected to be repaid in the third quarter of 2006,
and (iii) reinstated $239 million in accordance with the Plan and reclassified
this amount to long-term debt.
On August 2, 2006, the Corporation entered into the Credit Facilities as
described in Note 3 to the Consolidated Financial Statements. As of December 31,
2005, total debt amounted to $1.005 billion, all of which was included in
liabilities subject to compromise.
REALIZATION OF DEFERRED TAX ASSET
The Corporation's consolidated balance sheet as of June 30, 2006 includes a net
current deferred tax asset of $1.247 billion and a net long-term deferred tax
liability of $137 million. Included in these amounts is a deferred tax asset of
$1.307 billion and $27 million, respectively, relating to the U.S. federal and
state income tax benefits expected to be realized in future periods with respect
to the Corporation's asbestos liability and asbestos-related payments made
through June 30, 2006. Management has concluded, based on the weight of
available evidence, that all but $40 million of these tax benefits are more
likely than not to be realized in the future. This amount represents a decrease
of $15 million from the valuation allowance of $55 million previously recorded
as of March 31, 2006.
In arriving at its conclusion, management has considered both the federal
taxable income reported by the Corporation for the 1996 through 2005 taxable
years, as well as future reversals of existing taxable temporary differences and
projections of future taxable income. In the taxable year(s) in which the
Corporation's cash contributions to the Trust are made, the related federal
income tax deduction will create a net operating loss. Under the Internal
Revenue Code, a net operating loss resulting from the payment of asbestos
claims, including cash contributions to the Trust, can be carried back and
offset against the Corporation's federal taxable income in the 10 preceding
years, generating a refund of taxes paid in those years. Since the Corporation
has reported (or expects to report) federal taxable income of $3.2 billion, in
the aggregate, for the years 1996 through 2005, the carryback of this loss is
expected to produce a refund of federal income taxes paid in those years of
approximately $1.1 billion, which the Corporation expects to receive in 2007 and
2008. Further, as a result of federal taxable income (excluding tax deductions
for asbestos-related
-47-
payments) projected to be realized in 2006 and 2007, the Corporation expects to
utilize the remaining $360 million of federal tax benefits relating to its
asbestos liability by the end of 2007. As a result, it is more likely than not
that the Corporation will realize the federal deferred tax asset relating to its
asbestos reserve.
In contrast to the results under the Internal Revenue Code, most U.S. states do
not allow the carryback of a net operating loss in any significant amount. As a
result, most of the state tax benefits relating to the Corporation's payment of
asbestos claims will be realized through a reduction of future state income tax
liabilities by offsetting the net operating losses resulting from the
Corporation's cash contributions to the Trust in 2006 and 2007 against future
state taxable income. Based on projections of future taxable income (consistent
with historical results and anticipated future trends) in the U.S. states in
which the Corporation conducts business operations and the loss carryforward
periods allowed by current state laws (generally five to 20 years), management
has concluded that all but $40 million of the $240 million of state tax benefits
relating to the Corporation's asbestos liability is more likely than not to be
realized.
LEGAL CONTINGENCIES
The confirmed Plan of Reorganization resolves the Debtors' liability for all
present and future asbestos personal injury and related claims. The Plan of
Reorganization also provides that all resolved asbestos property damage claims
will be paid in full. Any remaining disputed asbestos property damage claims
timely filed in the Debtors' bankruptcy proceedings will be resolved in the
Bankruptcy Court or other court, where appropriate.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its financial position, cash flows or
results of operations.
See Note 14 to the Consolidated Financial Statements for additional information
on asbestos, silica and environmental litigation.
CRITICAL ACCOUNTING POLICIES
The preparation of the Corporation's financial statements requires management to
make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses during the periods presented. The
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
2005 includes a summary of the critical accounting policies the Corporation
believes are the most important to aid in understanding its financial results.
As
-48-
a result of the Plan of Reorganization becoming effective on June 20, 2006 and
agreements in principle to settle the majority of the asbestos property damage
claims, the accounting policies related to (i) voluntary reorganization under
Chapter 11 and the application of SOP 90-7 and (ii) the determination of the
Corporation's asbestos liability are no longer deemed critical. There were no
material changes to the other critical accounting policies that affected the
Corporation's reported amounts of assets, liabilities, revenues or expenses
during the first six months of 2006.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2006, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment," which requires
companies to recognize as compensation expense the grant-date fair value of
stock options and other equity-based compensation issued to employees. Stock
options issued prior to the Filing are fully vested and were adjusted during the
second quarter of 2006 as a result of the Rights Offering. The adjustment
resulted in an immaterial expense. Prior to the adoption of SFAS No. 123(R), the
Corporation presented tax benefits associated with the exercise of stock options
as operating cash flows on the consolidated statements of cash flows. SFAS No.
123(R) requires the cash flows resulting from such tax benefits to be classified
as financing cash flows.
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of Financial Accounting Standards Board Statement No. 109,"
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected to be
taken, in a tax return. The Corporation has not yet determined the impact of
this Interpretation, which is effective for fiscal years beginning after
December 15, 2006, on its financial statements.
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
the Corporation's 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 construction activity, employment levels, mortgage
interest rates, housing affordability, currency exchange rates and consumer
confidence; competitive conditions such as price and product competition;
shortages in raw materials; increases in raw material, energy and employee
costs; loss of one or more major customers; capacity constraints; the
unpredictable effects of acts of terrorism or war upon domestic and
international economies and financial markets; and acts of God. The Corporation
assumes no obligation to update any forward-looking information contained in
this report.
-49-
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Corporation's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Corporation's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934), have concluded that, as of the end of the quarter covered by this report
on Form 10-Q, the Corporation's disclosure controls and procedures were
effective to provide reasonable assurance that information required to be
disclosed by the Corporation in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the 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.
(b) Changes in internal control over financial reporting.
On October 1, 2005, the Corporation began to roll out a new enterprise resource
planning system in the United States and Canada. The rollout is being undertaken
in phases and is currently planned to be substantially completed in 2007.
Management expects that the new system will enhance operational efficiencies and
help the Corporation better serve its customers. Other than changes related to
the new system, there was no change in the Corporation's "internal control over
financial reporting" (as defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) identified in
connection with the evaluation required by Rule 13a-15(d) promulgated under the
Exchange Act that occurred during the quarter of the fiscal year covered by this
report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
-50-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of USG Corporation:
We have reviewed the accompanying consolidated balance sheet of USG Corporation
and subsidiaries as of June 30, 2006 and the related consolidated statements of
earnings and cash flows for each of the three month and six month periods ended
June 30, 2006 and 2005. These interim financial statements are the
responsibility of the Corporation's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of USG Corporation and subsidiaries as of December 31, 2005 and 2004, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2005
(not presented herein); and in our report dated February 13, 2006 we expressed
an unqualified opinion on those consolidated financial statements and included
explanatory paragraphs concerning (i) matters which raise substantial doubt
about the Corporation's ability to continue as a going concern; and (ii) a
change in the method of accounting for asset retirement obligations due to the
Corporation's adoption of Statement of Financial Accounting Standards (SFAS) No.
143, "Accounting for Asset Retirement Obligations" in 2003, and Financial
Accounting Standards Board Interpretation No. 47, "Accounting for Conditional
Asset Retirements" in 2005. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2005 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
As discussed in Note 2 to the consolidated financial statements, USG
Corporation's plan of reorganization in its reorganization proceedings under
Chapter 11 was confirmed on June 16, 2006.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Chicago, Illinois
August 3, 2006
-51-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1, Note 14 to the Consolidated Financial Statements for
information concerning asbestos litigation, silica litigation and environmental
litigation, which information is incorporated herein by reference.
ITEM 1A. RISK FACTORS
The Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 2005, which was filed with the Securities and Exchange Commission on
February 14, 2006, includes disclosure in Item 1a of certain risk factors to
which the Corporation's business, operations and financial condition are
subject. As a result of the Corporation's Plan of Reorganization becoming
effective on June 20, 2006, the first three and penultimate risk factors
presented in Item 1a of that Form 10-K report are removed and replaced with the
following. The risks and uncertainties described below should be carefully
considered before making any decision with respect to the Corporation's
securities.
THE CORPORATION'S PAYMENTS TO THE ASBESTOS PERSONAL INJURY TRUST WILL VARY
SUBSTANTIALLY DEPENDING UPON WHETHER FEDERAL ASBESTOS TRUST FUND LEGISLATION IS
ENACTED OR IS ENACTED BUT FOUND UNCONSTITUTIONAL. PASSAGE OF SUCH LEGISLATION IS
EXTREMELY SPECULATIVE AND NOT WITHIN THE CONTROL OF THE CORPORATION.
The amount that the Debtors must pay to the Trust would depend upon whether
national legislation creating a trust for payment of asbestos personal injury
claims is enacted into law by the 10th day after final adjournment of the
current session of Congress. If the legislation is enacted by that date and
either does not become subject to or survives subsequent constitutional
challenge, the Debtors' funding obligation to the Trust would be $900 million.
If such legislation is not enacted before that date, or is enacted but held
unconstitutional after a challenge brought within 60 days of that date, the
Debtors' funding obligation to the Trust would total $3.95 billion. As described
under "Liquidity" in Management's Discussion and Analysis of Results of
Operations and Financial Condition, the Corporation expects to fund these
obligations from accumulated cash and marketable securities, as well as future
cash available from operations, the net proceeds of approximately $1.725 billion
from the Rights Offering, anticipated tax refunds and borrowings available under
the Credit Facilities.
AS A RESULT OF THE TRANSACTIONS RELATED TO THE PLAN OF REORGANIZATION, OUR
HISTORICAL FINANCIAL INFORMATION WILL NOT BE INDICATIVE OF OUR FUTURE FINANCIAL
PERFORMANCE.
As a result of the transactions related to the Plan of Reorganization, our
capital structure has changed significantly from prior periods. Under American
Institute of Certified Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code," all of our
outstanding debt was classified as liabilities subject to compromise from June
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25, 2001 (the "Petition Date") through March 31, 2006. Interest expense on this
debt was not accrued or recorded on our books from the Petition Date through
December 31, 2005.
As of June 30, 2006, such debt and other pre-petition liabilities have been
reclassified on the consolidated balance sheet, where appropriate. For the first
six months of 2006, the Corporation recorded post-petition interest and fees
related to pre-petition liabilities (primarily debt and trade payables) of $520
million ($321 million after-tax).
The financial obligations under the Plan will depend upon, among other things,
whether the $3.05 billion contingent payment note becomes due. The Debtors
propose to fund their obligations under the Plan through (i) accumulated cash
and marketable securities, as well as future cash available from operations,
(ii) the proceeds from the Rights Offering and Backstop Commitment, (iii)
anticipated tax refunds and (iv) new debt financing under the Credit Facilities.
If the Reorganized Debtors are required to pay the $3.05 billion contingent
payment note to the Trust, the Corporation expects to fund part of this payment
obligation through its new $2.8 billion Credit Facilities with a syndicate of
banks. The Credit Facilities consist of a $1.0 billion term loan facility, a
$650 million revolving credit facility (with a $250 million sublimit for letters
of credit) and a $1.15 billion tax bridge facility. Use of the proceeds of the
term loan facility and the tax bridge facility is restricted to payments under
the contingent payment note. Assuming that the $3.05 billion contingent payment
note becomes due and is payable to the Trust, the Corporation expects to receive
cash tax refunds of approximately $1.1 billion. If these tax refunds have not
been received by the Corporation when the final payment of the contingent
payment note is due to the Trust, the Corporation may use the tax bridge
facility to fund such payment.
A SMALL NUMBER OF THE CORPORATION'S STOCKHOLDERS COULD BE ABLE TO SIGNIFICANTLY
INFLUENCE THE CORPORATION'S BUSINESS AND AFFAIRS.
Based on filings made with the SEC and other information available to the
Corporation, as of August 2, 2006, the Corporation believes that approximately
10 organizations or individuals collectively controlled over 50% of the
Corporation's common stock. Accordingly, a small number of the Corporation's
stockholders could affect matters requiring approval by stockholders, including
the election of directors and the approval of mergers or other business
combination transactions.
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 commence doing so in the foreseeable future. Further, the
contingent payment note payable to the Trust prohibits us from paying cash
dividends on, or repurchasing, any of our stock in an aggregate amount in excess
of $150 million, and the Credit Facilities prohibit us from paying a dividend
on, or repurchasing, our stock if a default exists under the Credit Facilities.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Total Number of (c) Maximum Number (or
Shares (or Units) Approximate Dollar Value)
(a) Total Number of (b) Average Price Purchased as Part of of Shares (or Units)
2006 of Shares (or Units) Paid per Share (or Publicly Announced that May Yet Be Purchased
Period Purchased Unit) Plans or Programs Under the Plans or Programs
------ -------------------- ------------------ -------------------- ---------------------------
January -- -- -- --
February -- -- -- --
March -- -- -- --
----- ----- --- ---
Total 1st Quarter -- -- -- --
----- ----- --- ---
April -- -- -- --
May (d) 2,015 69.20 -- --
June -- -- -- --
----- ----- --- ---
Total 2nd Quarter (d) 2,015 69.20 -- --
===== ===== === ===
(a) Reflects shares reacquired to provide for tax withholdings on shares issued
to employees under the terms of the USG Corporation 1995 Long-Term Equity
Plan, 1997 Management Incentive Plan or 2000 Omnibus Management Incentive
Plan.
(b) The price per share is based upon the mean of the high and the low prices
for a USG Corporation common share on the NYSE on the date of the tax
withholding transaction.
(c) The Corporation currently does not have in place a share repurchase plan or
program.
(d) Total number of shares and average price paid per share have been adjusted
to reflect the impact of the Rights Offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) In accordance with the Corporation's notice and proxy statement dated
April 1, 2006, the matters set forth in paragraphs (b) and (c) below
were submitted to a vote of stockholders at the Corporation's May 10,
2006 annual meeting of stockholders.
(b) The four director-nominees (Keith A. Brown, James C. Cotting, W.
Douglas Ford and John B. Schwemm) were each re-elected to a three-year
term of office which will expire in 2009. The other directors whose
terms of office continued after the annual meeting of stockholders
were: Lawrence M. Crutcher, William C. Foote, Steven F. Leer, Judith
A. Sprieser, Robert L. Barnett, David W. Fox, Valerie B. Jarrett and
Marvin E. Lesser.
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Votes Votes
For Withheld
---------- ---------
Election of Directors:
Keith A. Brown 40,287,504 1,428,164
James C. Cotting 40,277,422 1,438,247
W. Douglas Ford 40,342,653 1,373,015
John B. Schwemm 40,275,501 1,440,168
(c) The following proposals were recommended by the Corporation's Board of
Directors and approved by a majority of the shares voted.
Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
---------- ---------- -----------
Approval of the USG Corporation
Management Incentive Plan 41,125,870 466,169 123,630
Approval of the USG Corporation
Long-Term Incentive Plan 31,281,908 581,451 105,361
Ratification of Appointment of
Deloitte & Touche LLP as Independent
Registered Public Accountants for
Year Ended 2006 41,532,749 99,268 83,651
ITEM 5. OTHER INFORMATION.
On August 2, 2006, the Corporation entered into a $2.8 billion credit agreement
with a syndicate of banks. JPMorgan Chase Bank, N.A. serves as Administrative
Agent under the agreement. The credit agreement consists of (i) a $650 million
revolving credit facility with a $250 million sublimit for letters of credit,
(ii) a $1.0 billion term loan facility and (iii) a $1.15 billion tax bridge term
loan facility. See the discussion of the Credit Facilities in Note 3 to the
Consolidated Financial Statements and "Item 2. Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources."
The Corporation had a credit agreement with LaSalle Bank National Association to
provide letters of credit needed to support business operations. As of June 30,
2006, there were $86 million of letters of credit outstanding under this
facility. On August 2, 2006, the letters of credit outstanding under this
facility were incorporated into the new revolving credit facility under the
Credit Facilities, and the agreement with LaSalle Bank National Association was
terminated.
In connection with the Rights Offering, Berkshire Hathaway, the Corporation's
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largest stockholder, agreed to purchase from the Corporation, at $40.00 per
share, all of the shares of common stock offered pursuant to the Rights Offering
that were not issued pursuant to the exercise of rights. In the first quarter of
2006, the Corporation paid Berkshire Hathaway a fee of $67 million for its
Backstop Commitment. On August 2, 2006, the Corporation issued 6,969,274 shares
of common stock to Berkshire Hathaway in accordance with the Backstop
Commitment. These shares include 6.5 million shares underlying rights
distributed to Berkshire Hathaway in connection with the shares it beneficially
owned on the Record Date and 469,274 shares underlying rights distributed to
other stockholders that were not exercised in the Rights Offering. The aggregate
purchase price for the shares sold to Berkshire Hathaway in accordance with the
Backstop Commitment was approximately $279 million.
The sale of the securities to Berkshire Hathaway pursuant to the performance of
its obligations under the Backstop Commitment was effected through a private
placement under Section 4(2) of the Securities Act of 1933, as amended, and Rule
506 of Regulation D promulgated thereunder and is exempt from registration under
Section 5 of the Securities Act.
ITEM 6. EXHIBITS
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 (the "Form
8-K"))
2.2 Order Confirming First Amended Joint Plan of Reorganization (incorporated
by reference to Exhibit 2.02 to the Form 8-K)
3 Restated Certificate of Incorporation of USG Corporation (incorporated by
reference to Exhibit 3.01 to the Form 8-K)
10.1 Amendment No. 1 to the USG Corporation Stock Compensation Program for
Non-Employee Directors (as Amended and Restated as of January 1, 2005)
10.2 Contingent Non-Negotiable Promissory Note of USG Corporation and its Debtor
Subsidiaries payable to the Asbestos Personal Injury Trust dated June 20,
2006 in the principal amount of $3,050,000,000
10.3 Non-Negotiable Promissory Note of USG Corporation and its Debtor
Subsidiaries payable to the Asbestos Personal Injury Trust dated June 20,
2006 in the principal amount of $10,000,000
10.4 Pledge Agreement Regarding Contingent Payment Note dated as of June 20,
2006 by and among USG Corporation and certain individuals in their
capacities as the Asbestos Personal Injury Trustees (the "Trustees")
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10.5 Pledge Agreement Regarding Non-Contingent Note dated as of June 20, 2006 by
and between USG Corporation and the Trustees
10.6 Credit Agreement, dated as of August 2, 2006 among USG Corporation, the
Lenders Party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent,
and Goldman Sachs Credit Partners L.P., as Syndication Agent*
10.7 Guarantee Agreement dated as of August 2, 2006 among the Subsidiaries of
USG Corporation identified therein and JPMorgan Chase Bank, N.A., as
Administrative Agent
10.8 Amendment No. 1 to the USG Corporation Long-Term Incentive Plan
10.9 Form of USG Corporation Nonqualified Stock Option Agreement
10.10 Form of USG Corporation Restricted Stock Units Agreement
15 Letter from Deloitte & Touche LLP regarding unaudited financial information
31.1 Rule 13a-14(a) Certifications of USG Corporation's Chief Executive Officer
31.2 Rule 13a-14(a) Certifications of USG Corporation's Chief Financial Officer
32.1 Section 1350 Certifications of USG Corporation's Chief Executive Officer
32.2 Section 1350 Certifications of USG Corporation's Chief Financial Officer
----------
* The schedules and exhibits to the Credit Agreement have been omitted. A
copy of any omitted schedule or exhibit will be furnished to the Commission
supplementally upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By /s/ William C. Foote
-------------------------------------
William C. Foote,
Chairman and Chief Executive Officer
By /s/ Richard H. Fleming
-------------------------------------
Richard H. Fleming,
Executive Vice President and
Chief Financial Officer
By /s/ D. Rick Lowes
-------------------------------------
D. Rick Lowes,
Vice President and Controller
August 3, 2006
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