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| USG > SEC Filings for USG > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-2009
Quarterly Report
In the following Management's Discussion and Analysis of Financial Condition and
Results of Operations, "USG," "we," "our" and "us" refer to USG Corporation, a
Delaware corporation, and its subsidiaries included in the condensed
consolidated financial statements, except as otherwise indicated or as the
context otherwise requires.
Overview
SEGMENTS
Through our subsidiaries, we are a leading manufacturer and distributor of
building materials, producing a wide range of products for use in new
residential, new nonresidential, and repair and remodel construction as well as
products used in certain industrial processes. Our operations are organized into
three reportable segments: North American Gypsum, Building Products Distribution
and Worldwide Ceilings.
North American Gypsum: North American Gypsum manufactures and markets gypsum and
related products in the United States, Canada and Mexico. It includes United
States Gypsum Company, or U.S. Gypsum, in the United States, the gypsum business
of CGC Inc., or CGC, in Canada, and USG Mexico, S.A. de C.V., or USG Mexico, in
Mexico. North American Gypsum's products are used in a variety of building
applications to finish the walls, ceilings and floors in residential, commercial
and institutional construction and in certain industrial applications. Its major
product lines include SHEETROCK® brand gypsum wallboard, a line of joint
compounds used for finishing wallboard joints also sold under the SHEETROCK®
brand name, DUROCK® brand cement board and FIBEROCK® brand gypsum fiber panels.
Building Products Distribution: Building Products Distribution consists of L&W
Supply Corporation and its subsidiaries, or L&W Supply, the leading specialty
building products distribution business in the United States. It is a service
oriented business that stocks a wide range of construction materials. It
delivers less-than-truckload quantities of construction materials to job sites
and places them in areas where work is being done, thereby reducing the need for
handling by contractors.
Worldwide Ceilings: Worldwide Ceilings manufactures and markets interior systems
products worldwide. It includes USG Interiors, Inc., or USG Interiors, the
international interior systems business managed as USG International, and the
ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior
ceilings products used primarily in commercial applications. Worldwide Ceilings
manufactures ceiling tile in the United States and ceiling grid in the United
States, Canada, Europe and the Asia-Pacific region. It markets ceiling tile and
ceiling grid in the United States, Canada, Mexico, Europe, Latin America and the
Asia-Pacific region. It also manufactures and markets joint compound in Europe,
Latin America and the Asia-Pacific region and gypsum wallboard in Latin America.
Geographic Information: For the first nine months of 2009, approximately 81% of
our net sales were attributable to the United States. Canada accounted for
approximately 9% of our net sales and other foreign countries accounted for the
remaining 10%.
FINANCIAL INFORMATION
Consolidated net sales in the third quarter of 2009 were $822 million, down 32%
from the third quarter of 2008. An operating loss of $92 million and a net loss
of $94 million, or $0.96 per diluted share, were incurred in the third quarter
of 2009. These results included charges $41 million pretax ($28 million
after-tax) for goodwill and other intangible asset impairment and charges of
$22 million pretax ($15 million after-tax) for restructuring and long-lived
asset impairment. An operating loss of $32 million and net loss of $36 million,
or $0.36 per diluted share, were recorded in the third quarter of 2008. These
results included charges of $5 million pretax ($3 million after-tax) for
restructuring and long-lived asset impairment. Financial information for the
third quarter of 2008 was retrospectively adjusted for our change in the fourth
quarter of 2008 from the last-in, first-out method to the average cost method of
inventory accounting.
As of September 30, 2009, we had cash and cash equivalents of $621 million
compared with $471 million as of December 31, 2008. During the first nine months
of 2009, we completed an offering of $300 million of 9.75% senior notes due
2014, borrowed an additional $25 million under our ship mortgage facility and
repaid the $190 million of outstanding borrowings under our revolving credit
facility in connection with its amendment and restatement in January.
MARKET CONDITIONS AND OUTLOOK
Our businesses are cyclical in nature and sensitive to changes in general
economic conditions, in particular conditions in the North American housing and
construction-based markets. Housing starts in the United States, which are a
major source of demand for our products and services, declined in each of the
last two years and this year. Based on data issued by the U.S. Census Bureau,
U.S. housing starts were 905,500 units in 2008 compared with housing starts of
1.355 million units in 2007 and 1.801 million units in 2006. The year-over-year
decline continued during the first nine months of 2009. In September 2009, the
annualized rate of housing starts was reported by the U.S. Census Bureau to be
590,000 units. Housing starts remain near the lowest levels recorded in the last
50 years. Industry analysts' forecasts for housing starts in the United States
in 2010 are for a range of from 650,000 to 900,000 units.
The repair and remodel market, which includes renovation of both residential and
nonresidential buildings, currently accounts for the largest portion of our
sales, ahead of new housing construction. Many buyers begin to remodel an
existing home within two years of purchase. According to the National
Association of Realtors, sales of existing homes in the United States in the
first nine months of 2009 were 3.8 million units and sales of existing homes for
all of 2009 are estimated to be 5.0 million units. Sales of existing homes in
the United States in 2008 were estimated to have been 4.9 million units compared
with 5.7 million units in 2007 and 6.5 million units in 2006. The declines in
existing home sales in prior years have contributed to a decrease in demand for
our products in 2009 from the residential repair and remodel market.
Nonresidential repair and remodel activity is driven by factors including lease
turnover rates, discretionary business investment, job growth and governmental
building-related expenditures. Industry analysts' forecasts for residential and
nonresidential repair and remodel activity in the United States are for a
decline for all of 2009 of approximately 7% to 13% from the 2008 level. However,
a number of industry analysts report that the declines in residential repair and
remodel spending are beginning to moderate, and they forecast that spending may
begin to increase by the second quarter of 2010.
Demand for our products from new nonresidential construction is determined by
floor space for which contracts are signed. Installation of gypsum and ceilings
products typically follows signing of construction contracts by about a year.
According to McGraw-Hill Construction, total floor space for which contracts
were signed in the United States declined 17% in 2008 compared with 2007. New
nonresidential construction declined significantly in the first nine months of
2009 compared with the first nine months of 2008. McGraw-Hill Construction
forecasts that new nonresidential construction starts in the United States will
decline approximately 40% to 45% for all of 2009 from the 2008 level and will
further decline by approximately 4% in 2010 from the 2009 level.
The markets that we serve, including in particular the housing and
construction-based markets, are affected by economic conditions, the
availability of credit, lending practices, interest rates, the unemployment rate
and consumer confidence. Higher interest rates, continued high levels of
unemployment and continued restrictive lending practices could have a material
adverse effect on our businesses, financial condition and results of operations.
Our businesses are also affected by a variety of other factors beyond our
control, including the inventory of unsold homes, which currently remains near a
record level, the level of foreclosures, home resale rates, housing
affordability, office vacancy rates and foreign currency exchange rates. Since
we operate in a variety of geographic markets, our businesses are subject to the
economic conditions in each of these geographic markets. General economic
downturns or localized downturns in the regions where we have operations may
have a material adverse effect on our businesses, financial condition and
results of operations.
Our results of operations have been adversely affected by the economic downturn
and uncertainty in the financial markets. In the first nine months of 2009, our
North American Gypsum segment continued to be adversely affected by the sharp
drop in the residential housing market and other construction activity. Our
Building Products Distribution segment, which serves both the residential and
commercial markets, and our Worldwide Ceilings segment, which primarily serves
the commercial markets, have been adversely affected by lower product shipments
and tighter margins.
Industry shipments of gypsum wallboard in the United States (including imports)
were an estimated 14.2 billion square feet in the first nine months of 2009,
down approximately 29% compared with 19.9 billion square feet in the first nine
months of 2008. U.S. Gypsum shipped 3.7 billion square feet of SHEETROCK® brand
gypsum wallboard in the first nine months of 2009, a 35% decrease from
5.7 billion square feet in the first nine months of 2008. The percentage decline
of U.S. Gypsum's wallboard shipments in the first nine months of 2009 compared
with the first nine months of 2008 exceeded the decline for the industry
primarily due to our continuing efforts to improve profitability. U.S. Gypsum's
share of the gypsum wallboard market in the United States declined to
approximately 27% for the first nine months of 2009 from approximately 30% for
the first nine months of 2008 and to approximately 26% for the third quarter of
2009 from approximately 27% for the second quarter of 2009.
Currently, there is significant excess wallboard production capacity
industry-wide in the United States. Industry capacity in the United States was
approximately 35 billion square feet as of January 1, 2009. We estimate that the
industry capacity utilization rate dropped to approximately 53% during the third
quarter of 2009. Based on current industry trends, demand for gypsum wallboard
may increase in 2010, but the magnitude of any increase will be dependent on the
levels of housing starts and repair and remodel activity. We project that the
industry capacity utilization rate will remain at approximately the third
quarter level for the next several quarters.
RESTRUCTURING AND OTHER INITIATIVES
We have been scaling back our operations in response to market conditions since
the downturn began in 2006. During the third quarter of 2009, we temporarily
idled a paper mill in Clark, N.J. During the second quarter of 2009, we
permanently closed a gypsum wallboard production facility in Santa Fe Springs,
Calif., a cement board production facility in Santa Fe Springs, Calif. and a
sealants and finishes production facility in La Mirada, Calif. In 2008, we
permanently closed two gypsum wallboard production facilities and a plaster
production facility, and we temporarily idled four other gypsum wallboard
production facilities, two paper mills, a cement board production facility and a
structural cement panel production facility Since mid-2006, we have temporarily
idled or permanently closed approximately 3.1 billion square feet of our
highest-cost wallboard manufacturing capacity.
As part of L&W Supply's ongoing efforts to reduce its cost structure in light of
market conditions, it closed 54 distribution centers in 2008, 15 centers during
the first nine months of 2009 and an additional 22 centers in October 2009.
These closures have been widely dispersed throughout the markets L&W Supply
serves. As of the date of this report, L&W Supply is serving its customers from
162 centers.
We eliminated approximately 180 salaried positions during the first nine months
of 2009 and approximately 1,400 salaried positions during 2008. We are
continuing to adjust our operations in response to the extended downturn in our
markets.
Historically, the housing and other construction markets that we serve have been
deeply cyclical. Downturns in demand are typically steep and last several years,
but they have typically been followed by periods of strong recovery. If the
recovery from this cycle is similar to the recovery from past cycles, we believe
we will generate significant cash flows when our markets recover. As a result,
we currently expect to realize the carrying value of all facilities that are not
permanently closed through future cash flows. We regularly monitor forecasts
prepared by external economic forecasters and review our facilities and other
assets to determine which of them, if any, are impaired under applicable
accounting rules. In the first nine months of 2009, we recorded asset impairment
charges related to the write-downs of the values of machinery and equipment at
the closed Santa Fe Springs, Calif., and La Mirada, Calif., production
facilities and the temporarily idled Delevan, Wis., and Detroit, Mich.,
production facilities. Because we continue to believe that a recovery in the
housing and other construction markets we serve will begin in the next two to
three years, we determined that there were no other material impairments of our
long-lived assets during the first nine months of 2009.
However, if the downturn in these markets does not reverse or the downturn is
significantly further extended, material write-downs or impairment charges may
be required in the future. If these conditions were to materialize or worsen, or
if there is a fundamental change in the housing market, which individually or
collectively lead to a significantly extended downturn or permanent decrease in
demand, material impairment charges may be necessary if we permanently close
gypsum wallboard production facilities. The magnitude and timing of those
charges would be dependent on the severity and duration of the downturn and
cannot be determined at this time. Any material cash or noncash impairment
charges related to property, plant and equipment would have a material adverse
effect on our financial condition and results of operations.
Our focus on costs and efficiencies, including capacity closures and overhead
reductions, has helped to mitigate the effects of the downturn in all of our
markets. In light of current economic and market conditions, we continue to
evaluate alternatives to further reduce costs, improve operational efficiency
and maintain adequate liquidity. See the discussion under "Liquidity and Capital
Resources" below for information regarding our cash position and credit
facilities.
KEY OBJECTIVES
While adjusting our operations during this challenging business cycle, we are
continuing to focus on the following key objectives:
• extend our customer satisfaction leadership;
• achieve significant cost reductions; and
• maintain financial flexibility.
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