10-K 1 usg-12312012x10k.htm 10-K USG-12.31.2012-10K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended December 31, 2012
OR
o
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
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
550 W. Adams Street, Chicago, Illinois
 
60661-3676
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (312) 436-4000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
 
 
New York Stock Exchange
Common Stock, $0.10 par value
 
Chicago Stock Exchange
 
 
Preferred Stock Purchase Rights (subject to Rights
 
New York Stock Exchange
Agreement dated December 21, 2006, as amended)
 
Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    Yes   o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x   No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  o    No  x
The aggregate market value of the registrant’s common stock held by non-affiliates computed by reference to the New York Stock Exchange closing price on June 30, 2012 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $2,045,374,040.
The number of shares of the registrant’s common stock outstanding as of January 31, 2013 was 107,874,678.
 
Documents Incorporated By Reference: Certain sections of USG Corporation’s definitive Proxy Statement for use in connection with its 2013 annual meeting of stockholders, to be filed subsequently, are incorporated by reference into Part III of this Form 10-K Report where indicated.
 




TABLE OF CONTENTS
 
 
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Item 15.
 
 



PART I
 
Item 1.
BUSINESS
In this annual report on Form 10-K, “USG,” “we,” “our” and “us” refer to USG Corporation, a Delaware corporation, and its subsidiaries included in the consolidated financial statements, except as otherwise indicated or as the context otherwise requires.
General
USG, through its subsidiaries, is a leading manufacturer and distributor of building materials. We produce a wide range of products for use in new residential, new nonresidential, and residential and nonresidential repair and remodel construction as well as products used in certain industrial processes. Our businesses are cyclical in nature and sensitive to changes in general economic conditions, including, in particular, conditions in the North American housing and construction-based markets, which are our most significant markets.
For the new residential construction market, housing starts are a very good indicator of demand for our gypsum products. Installation of our gypsum products typically follows the start of construction by one to two months. Based on preliminary data reported by the U.S. Census Bureau, housing starts in the United States increased 28.1% in 2012 to 780,000 compared with 608,800 in 2011. This followed a 3.7% increase in 2011 compared with 2010. In December 2012, the annualized rate of housing starts was reported by the U.S. Census Bureau to be 954,000 units, the highest level since June 2008. While housing starts increased for the third consecutive year in 2012, they are still low by historical standards. Industry analysts believe that the recovery in the housing market has begun and that over the longer term housing starts will begin to approach historical averages as the recovery continues. However, the rate of recovery still remains uncertain and will depend on broader economic issues such as employment, foreclosures, house price trends, availability of mortgage financing, income tax policy and consumer confidence. Industry analysts’ forecasts for housing starts in the United States in 2013 are for a range of from 760,000 to 1,170,000 units. We currently estimate that 2013 housing starts in the U.S. will be near the midpoint of that range.
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 12 to 18 months. According to McGraw-Hill Construction, total floor space for which new nonresidential construction contracts were signed in the United States increased 1% in 2012 compared with 2011. This followed a 3% increase in 2011 compared with 2010 and a 13% decrease in 2010 compared with 2009. McGraw-Hill Construction forecasts that total floor space for which new nonresidential construction contracts in the United States are signed will increase approximately 6% in 2013 from the 2012 level.
The repair and remodel market includes renovation of both residential and nonresidential buildings. As a result of the low levels of new home construction in recent years, this market currently accounts for the largest portion of our sales. Many buyers begin to remodel an existing home within two years of purchase. According to the National Association of Realtors, sales of existing homes in the United States increased to approximately 4.65 million units in 2012, the highest level in five years, reflecting a 9.2% increase from the 2011 level of 4.26 million units. The rising levels of existing home sales and home resale values have contributed to an increase in demand for our products from the residential repair and remodel market in 2012. Nonresidential repair and remodel activity is driven by factors including lease turnover rates, discretionary business investment, job growth and governmental building-related expenditures. We currently estimate that overall repair and remodel spending in 2012 increased approximately 4% over the 2011 level and that overall repair and remodel spending in 2013 will continue to grow at approximately the same pace.
The outlook for our international businesses is improving as we continue to see most of the markets in which we do business begin to recover after the effects of the global financial crisis, and emerging markets continue to grow.
Since January 2007, we have temporarily idled or permanently closed approximately 3.8 billion square feet of our highest-cost wallboard manufacturing capacity and our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada. We have eliminated approximately 4,830 salaried and hourly positions since 2007, including approximately 130 positions eliminated during 2012. The positions eliminated in 2012 primarily reflected the closure of 13 distribution branches by our wholly owned subsidiary, L&W Supply Corporation and its subsidiaries, or L&W Supply, L&W Supply’s other consolidation initiatives and a company-wide management workforce reduction implemented in the fourth quarter of the year. As part of L&W Supply’s efforts to reduce its cost structure, it has closed a total of 125 distribution branches since January 2007. It continued to serve its customers from 142 branches in the United States as of December 31, 2012. We continue to monitor economic conditions in our markets and will adjust our operations as needed.

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The effects of recent market conditions on our operations are discussed in this Item 1 and in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Segments
Our operations are organized into three reportable segments: North American Gypsum, Worldwide Ceilings and Building Products Distribution, the net sales of which accounted for approximately 53%, 16% and 31%, respectively, of our 2012 consolidated net sales.
North American Gypsum
BUSINESS
North American Gypsum manufactures and markets gypsum and related products in the United States, Canada and Mexico. It includes United States Gypsum Company, or U.S. Gypsum, in the United States, the gypsum business of CGC Inc., or CGC, in Canada, and USG Mexico, S.A. de C.V., or USG Mexico. U.S. Gypsum is the largest manufacturer of gypsum wallboard in the United States and accounted for approximately 26% of total industry shipments of gypsum board (which includes gypsum wallboard, other gypsum-related paneling products and imports) in the United States in 2012. CGC is the largest manufacturer of gypsum wallboard in eastern Canada. USG Mexico is the largest manufacturer of gypsum wallboard in Mexico with a more than 55% market share in 2012.
PRODUCTS
North American Gypsum’s products are used in a variety of building applications to finish the interior walls, ceilings and floors in residential, commercial and institutional construction and in certain industrial applications. These products provide aesthetic as well as sound-dampening, fire-retarding, abuse-resistance and moisture-control value. The majority of these products are sold under the SHEETROCK® brand name. A line of joint compounds used for finishing wallboard joints is also sold under the SHEETROCK® brand name. The DUROCK® line of cement board and accessories provides water-damage-resistant and fire-resistant assemblies for both interior and exterior construction. The FIBEROCK® line of gypsum fiber panels includes abuse-resistant wall panels and floor underlayment as well as sheathing panels usable as a substrate for most exterior systems. The SECUROCK® line of products includes glass mat sheathing used for building exteriors and gypsum fiber and glass mat panels used as roof cover board. The LEVELROCK® line of poured gypsum underlayments provides surface leveling and enhanced sound performance for residential and commercial installations. We also produce a variety of construction plaster products used to provide a custom finish for residential and commercial interiors. These products provide aesthetic, sound-dampening, fire-retarding and abuse-resistance value. Construction plaster products are sold under the brand names RED TOP®, IMPERIAL®, DIAMOND® and SUPREMO®. We also produce gypsum-based products for agricultural and industrial customers to use in a number of applications, including soil conditioning, road repair, fireproofing and ceramics.
We are the industry leader in lightweight gypsum panel innovation and are the only manufacturer to offer a broad portfolio of lightweight gypsum panels. In 2010, U.S. Gypsum introduced SHEETROCK® Brand UltraLight Panels, the industry's first lightweight wallboard panel for use in walls and ceilings. This lightweight 1/2-inch gypsum wallboard product is the industry's lightest panel with weights up to 30% lighter than competing products. In 2011, U.S. Gypsum broadened its portfolio of lightweight wallboard products with the introduction of SHEETROCK® Brand UltraLight Panels FIRECODE® 30 and SHEETROCK® Brand UltraLight Panels FIRECODE® X. SHEETROCK® Brand UltraLight Panels FIRECODE® 30 is a lightweight 5/8-inch gypsum wallboard product that is 30% lighter than competing brands and it meets standards for use in non-rated and 30-minute fire-rated partitions. SHEETROCK® Brand UltraLight Panels FIRECODE® X is a lightweight 5/8-inch gypsum wallboard product that is 15% lighter than competing brands and is designed for use in commercial and residential construction where type X wallboard (a gypsum panel that has a special core that gives it additional fire resistance compared to regular wallboard) is required.
In December 2012, U.S. Gypsum again broadened its portfolio of lightweight wallboard products with the introduction of the industry's first moisture- and mold-resistant wallboard, SHEETROCK® Brand UltraLight MOLD TOUGH® Panels. These lightweight, high-quality wall and ceiling panels weigh up to 20% less than competitive moisture- and mold-resistant panels. They are suitable for new residential, repair and remodel construction, wood and steel framing, and can be used as a tile substrate. SHEETROCK® Brand UltraLight Panels accounted for 45% of all of our wallboard shipments in the United States in 2012 and 49% during the fourth quarter of 2012.

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MANUFACTURING
North American Gypsum manufactures products at 39 plants located throughout the United States, Canada and Mexico.
Gypsum rock is mined or quarried at 13 company-owned locations in North America. Our mines and quarries provided approximately 57% of the gypsum used by our plants in North America in 2012.
Some of our manufacturing plants purchase or acquire synthetic gypsum and natural gypsum rock from outside sources. In 2012, outside purchases or acquisitions of synthetic gypsum and natural gypsum rock accounted for approximately 38% and 5%, respectively, of the gypsum used in our plants.
Synthetic gypsum is a byproduct of flue gas desulphurization carried out by electric generation or industrial plants that burn coal as a fuel. The suppliers of this kind of gypsum are primarily power companies, which are required to operate scrubbing equipment for their coal-fired generating plants under federal environmental regulations. We have entered into a number of long-term supply agreements to acquire synthetic gypsum. We generally take possession of the gypsum at the producer’s facility and transport it to our wallboard plants by ship, river barge, railcar or truck. Seven of our 19 gypsum wallboard plants in operation use synthetic gypsum for all of their needs, while another five use it for some of their needs. The U.S. Environmental Protection Agency, or U.S. EPA, classifies synthetic gypsum as a non-hazardous waste. However, the U.S. EPA is considering a regulation that could affect the use, storage and disposal of synthetic gypsum. See Item 1A, Risk Factors.
We produce wallboard paper at four company-owned production facilities located in the United States. Vertical integration in paper helps to ensure a continuous supply of high-quality paper that is tailored to the specific needs of our production processes. We augment our paper needs through purchases from outside suppliers when necessary. We did not purchase any wallboard paper from outside suppliers during 2012.
MARKETING AND DISTRIBUTION
Our gypsum products are distributed through L&W Supply, other specialty wallboard distributors, building materials dealers, home improvement centers and other retailers, and contractors. Sales of gypsum products are seasonal in the sense that sales are generally greater from spring through the middle of autumn than during the remaining part of the year.
Based on our estimates using publicly available data, internal surveys and industry shipment data for gypsum board, as reported by the Gypsum Association, we estimate that during 2012
residential and nonresidential repair and remodel activity generated about 55% of volume demand for gypsum board,
new residential construction generated about 31% of volume demand,
new nonresidential construction generated about 7% of volume demand, and
other activities, such as exports and temporary construction, generated the remaining 7% of volume demand.
COMPETITION
Industry shipments of gypsum board in the United States (including gypsum wallboard, other gypsum-related paneling products and imports), as reported by the Gypsum Association, were an estimated 19.3 billion square feet in 2012, up approximately 10% from 17.5 billion square feet in 2011. U.S. Gypsum’s share of the gypsum board market in the United States, which includes for comparability its shipments of SHEETROCK® brand gypsum wallboard, FIBEROCK® brand gypsum fiber panels and SECUROCK® brand glass mat sheathing, was approximately 26% in 2012, up from 25% in 2011.
Our competitors in the United States are: National Gypsum Company, CertainTeed Corporation (a subsidiary of Compagnie de Saint-Gobain SA), Georgia-Pacific (a subsidiary of Koch Industries, Inc.), American Gypsum (a unit of Eagle Materials Inc.), Temple Inland Forest Products Corporation (a unit of International Paper), Lafarge North America Inc. and PABCO Gypsum. Our competitors in Canada include CertainTeed Corporation and Georgia-Pacific. Our major competitors in Mexico are Panel Rey, S.A. and Comex-Lafarge. The principal methods of competition are quality of products, service, pricing, compatibility of systems and product design features.

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Worldwide Ceilings
BUSINESS
Worldwide Ceilings manufactures and markets interior systems products in the United States, Canada, Mexico, Latin America and the Asia-Pacific region. It includes USG Interiors, LLC, or USG Interiors, the international interior systems business managed as USG International, and the ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior ceilings products used primarily in commercial applications. We estimate that we are the second-largest manufacturer of ceiling grid and acoustical ceiling tile in the industry.
On August 7, 2012, USG and its indirect wholly owned subsidiaries, USG Foreign Investments, Ltd. and USG (U.K.) Ltd., together the Sellers, entered into a Share and Asset Purchase Agreement with Knauf International GmbH and Knauf AMF Ceilings Ltd., together Knauf, pursuant to which we agreed to sell to Knauf all of our wholly owned European business operations. These businesses include the manufacture and distribution of DONN® brand ceiling grid and SHEETROCK® brand finishing compounds principally throughout Europe, Russia and Turkey. The results of our European business operations have been reclassified as discontinued operations in the consolidated financial statements and accompanying footnotes presented in Item 8 of this report and were previously included in our Worldwide Ceilings reportable segment. On December 27, 2012, the sale transaction was consummated and we received net proceeds of $73 million and recognized a gain of $55 million. See Note 3 to the consolidated financial statements for additional information related to discontinued operations.
PRODUCTS
Worldwide Ceilings manufactures ceiling tile in the United States and ceiling grid in the United States, Canada and the Asia-Pacific region. It markets ceiling tile and ceiling grid in the United States, Canada, Mexico, Latin America and the Asia-Pacific region. Our integrated line of ceilings products provides qualities such as sound absorption, fire retardation and convenient access to the space above the ceiling for electrical and mechanical systems, air distribution and maintenance. USG Interiors’ significant brand names include the RADARTM, ECLIPSETM, MARSTM, and HALCYONTM brands of ceiling tile and the DONN®, DX®, FINELINE®, CENTRICITEETM, DXI IDENTITEETM, CURVATURATM and COMPASSOTM brands of ceiling grid.
MANUFACTURING
Worldwide Ceilings manufactures products at 12 plants located in North America, South America and the Asia-Pacific region. Principal raw materials used to produce Worldwide Ceilings’ products include mineral fiber, steel, perlite and starch. We produce some of these raw materials and obtain others from outside suppliers.
MARKETING AND DISTRIBUTION
Worldwide Ceilings sells products primarily in markets related to the construction and renovation of nonresidential buildings. During 2012, approximately 62% of Worldwide Ceilings’ net sales were from repair and remodel activity, primarily nonresidential, 35% of its net sales were from new nonresidential construction and 3% of its net sales were from new residential construction. Products are marketed and distributed through a network of distributors, installation contractors, L&W Supply locations and home improvement centers.
COMPETITION
Our principal competitors in ceiling grid include WAVE (a joint venture between Armstrong World Industries, Inc. and Worthington Industries), Chicago Metallic Corporation and CertainTeed Corporation. Our principal competitors in acoustical ceiling tile include Armstrong World Industries, Inc., OWA Faserplattenwerk GmbH (Odenwald), CertainTeed Corporation and AMF Mineralplatten GmbH Betriebs KG (owned by Gebr. Knauf Verwaltungsgellschaft KG). Principal methods of competition are quality of products, service, pricing, compatibility of systems and product design features.
Building Products Distribution
BUSINESS
Building Products Distribution consists of L&W Supply, the leading distributor of gypsum wallboard and other building materials in the United States. In 2012, L&W Supply distributed approximately 7% of all gypsum board in the United States, including approximately 27% of U.S. Gypsum’s gypsum board production. During 2012, approximately 40% of L&W Supply’s net sales were from residential and nonresidential repair and remodel activity, 35% of its net sales were from new nonresidential construction and 25% of its net sales were from new residential construction.
MARKETING AND DISTRIBUTION
L&W Supply is a service-oriented business that stocks a wide range of construction materials. It delivers less-than-truckload quantities of construction materials to job sites and places them in areas where work is being done, thereby reducing the need for handling by contractors. L&W Supply specializes in the distribution of gypsum wallboard (which accounted for 31% of its

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2012 net sales) and joint compound manufactured by U.S. Gypsum as well as other manufacturers. It also distributes products manufactured by USG Interiors, LLC, such as acoustical ceiling tile and grid, as well as products of other manufacturers, including drywall metal, insulation, roofing, fasteners and exterior insulation finishing systems. L&W Supply leases approximately 90% of its facilities from third parties. Typical leases have terms of five years and include renewal options.
As of December 31, 2012, L&W Supply continued to serve its customers from 142 distribution branches in the United States. During the economic downturn, L&W Supply has focused on reducing its cost structure and optimizing utilization of its personnel and assets. As a result, L&W Supply closed thirteen distribution branches and opened no new branches in 2012. Including the closures in 2012, it has closed a total of 125 distribution branches since January 2007. The closures have been widely dispersed throughout the markets that L&W Supply serves. L&W Supply from time to time evaluates opportunities to grow its specialty distribution business taking into account the current market environment.
COMPETITION
L&W Supply competes with a number of specialty wallboard distributors, lumber dealers, hardware stores, home improvement centers and acoustical ceiling tile distributors. Its principal competitors include ProBuild Holdings Inc., a national supplier of building materials, Gypsum Management Supply with locations in the southern, central and western United States, KCG, Inc. in the southwestern and central United States, and Allied Building Products Corporation in the northeastern, central and western United States. Principal methods of competition are location, service, range of products and pricing.
Executive Officers of the Registrant
See Part III, Item 10, Directors, Executive Officers and Corporate Governance - Executive Officers of the Registrant (as of February 15, 2013).
Other Information
RESEARCH AND DEVELOPMENT
To contribute to our high standards and our leadership in the building materials industry, we perform extensive research and development at the USG Corporate Innovation Center in Libertyville, Illinois, using open innovation models and outside partnerships. Research team members collaborate with suppliers, universities and national research laboratories to provide product support and to develop new products and technologies for our operating units. With fire, acoustical, structural and environmental testing capabilities, the research center allows us to conduct our own on-site evaluation of products and systems. Chemical analysis and materials characterization support product development and safety/quality assessment programs. Development activities can be taken to an on-site pilot plant before being transferred to a full-size plant. We also conduct research at a satellite location where industrial designers and fabricators work on new ceiling grid concepts and prototypes. Research and development activities have been focused on customer preferred system solutions. We charge research and development expenditures to earnings as incurred. These expenditures amounted to $18 million in 2012 and $13 million in each of 2011 and 2010.
SUSTAINABILITY
The adoption of green building codes and standards such as the Leadership in Energy and Environmental Design, or LEED, rating system established by the U.S. Green Building Council to encourage the design and construction of buildings that are environmentally friendly, combined with an increase in customer preference for products that can assist in obtaining LEED credit or are otherwise environmentally preferable, has increased demand for products, systems and services that contribute to building sustainable spaces. Many of our products meet the requirements for the awarding of LEED credits, and we are continuing to develop new products, systems and services to address market demand for products that enable construction of buildings that require fewer natural resources to build, operate and maintain. Our competitors also have developed and introduced to the market more environmentally responsible products.
We expect that there will be increased demand over time for products, systems and services that meet regulatory and customer sustainability standards and preferences and decreased demand for products that produce significant greenhouse gas emissions. We also believe that our ability to continue to provide these products, systems and services to our customers will be necessary to maintain our competitive position in the marketplace.
ENERGY
Our primary supplies of energy have been adequate, and we have not been required to curtail operations as a result of insufficient supplies. Supplies are likely to remain sufficient for our projected requirements. Currently, we are using swap and option contracts to hedge a significant portion of our anticipated purchases of natural gas to be used in our manufacturing operations over the next 12 months. We review our positions regularly and make adjustments as market conditions warrant.

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SIGNIFICANT CUSTOMER
On a worldwide basis, The Home Depot, Inc. accounted for approximately 15% of our consolidated net sales in each of 2012, 2011 and 2010.
OTHER
Because we fill orders upon receipt, no segment has any significant order backlog.
None of our segments has any special working capital requirements.
Loss of one or more of our patents or licenses would not have a material impact on our business or our ability to continue operations.
No material part of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any government.
As of December 31, 2012, we had approximately 8,500 employees worldwide.
See Note 13 to the consolidated financial statements in Item 8 for financial information pertaining to our segments and Item 1A, Risk Factors, for information regarding the possible effects that compliance with environmental laws and regulations may have on our businesses and operating results.
Available Information
We maintain a website at www.usg.com and make available at this website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, or SEC. If you wish to receive a paper copy of any exhibit to our reports filed with or furnished to the SEC, the exhibit may be obtained, upon payment of reasonable expenses, by writing to: Corporate Secretary, USG Corporation, 550 West Adams Street, Chicago, Illinois 60661-3676.


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Item 1A.
RISK FACTORS
Our business, operations and financial condition are subject to various risks and uncertainties. We have described below significant factors that may adversely affect our business, operations, financial performance and condition or industry. You should carefully consider these factors, together with all of the other information in this annual report on Form 10-K and in other documents that we file with the SEC, before making any investment decision about our securities. Adverse developments or changes related to any of the factors listed below could affect our business, financial condition, results of operations and growth.
Our businesses can be adversely affected by economic and financial conditions, including restrictive lending practices, and are cyclical in nature. Prolonged periods of weak product demand or excess product supply may have a material adverse effect on our business, financial condition and operating results.
The markets that we serve, including, in particular, the housing and construction-based markets, are affected by economic conditions, the availability of credit, lending practices, interest rates, the unemployment rate and consumer confidence. An increase in interest rates, continued high levels of unemployment, continued restrictive lending practices, a decrease in consumer confidence or other adverse economic conditions could have a material adverse effect on our business, financial condition and operating results. Our businesses are also affected by a variety of other factors beyond our control, including the inventory of unsold homes, the level of foreclosures, home resale rates, housing affordability, office and retail vacancy rates and foreign currency exchange rates.
Our businesses are cyclical in nature and sensitive to changes in general economic conditions, including, in particular, conditions in the North American housing and construction-based markets, which are our most significant markets. Housing starts in the United States are a major source of demand for our products and services. According to data issued by the U.S. Census Bureau, those starts remain low by historical standards. The rate of any recovery remains uncertain and will depend on broader economic issues such as employment, foreclosures, house price trends, availability of mortgage financing, income tax policy and consumer confidence.
New nonresidential construction has also experienced significant declines over the past several years. 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 one year. According to McGraw-Hill Construction, total floor space for which new nonresidential construction contracts in the United States were signed has experienced only slight increases in the past two years following notable declines in the previous three years.
The repair and remodel market includes renovation of both residential and nonresidential buildings. As a result of the low levels of new home construction in recent years, this market currently accounts for the largest portion of our sales. Many buyers begin to remodel an existing home within two years of purchase. The low levels of existing home sales in recent years, continued concerns regarding the job market and home resale values and tight lending standards have all contributed to lower demand for our products from the residential repair and remodel market in recent years, with only a modest increase in 2012 compared to 2011. Nonresidential repair and remodel activity is driven by factors including lease turnover rates, discretionary business investment, job growth and governmental building-related expenditures.
Prices for our products are affected by overall supply and demand in the markets for our products and our competitors’ products. Market prices of building products historically have been volatile and cyclical. Currently, there is significant excess wallboard production capacity industry wide in the United States. A prolonged continuation of weak demand or excess supply in any of our businesses may have a material adverse effect on our business, financial condition and operating results.
We cannot predict the duration of the current market conditions, or the timing or strength of any future recovery of the North American housing and construction-based markets. We also cannot provide any assurances that those markets will not weaken further, or that further operational adjustments will not be required to address market conditions. Continued weakness in these markets and the homebuilding industry may have a material adverse effect on our business, financial condition and operating results.
The breadth and fragility of global credit dependencies, most notably for U.S. consumers, European banks and European sovereign governments, have heightened concerns of an evolving economic and policy environment that could adversely impact our operations. Our businesses are subject to the economic conditions in each of the geographic markets in which we operate. Those conditions vary regionally, but are increasingly interdependent. General economic downturns or localized downturns in the regions where we have operations may have a material adverse effect on our business, financial condition and operating results.

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Our customers and suppliers are exposed to risks associated with the economic downturn and financial conditions that could adversely affect their payment of our invoices or the continuation of their businesses at the same level.
The businesses of many of our customers and suppliers are exposed to risks related to the current economic environment. A number of our customers and suppliers have been and may continue to be adversely affected by unsettled financial conditions in their markets, disruptions to the capital and credit markets and decreased demand for their products and services. In the event that any of our large customers or suppliers, or a significant number of smaller customers and suppliers, are adversely affected by these risks, we may face disruptions in supply, further reductions in demand for our products and services, failure of customers to pay invoices when due and other adverse effects that may have a material adverse effect on our business, financial condition and operating results.
Our substantial indebtedness may adversely affect our business, financial condition and operating results.
As of December 31, 2012, we had $2.3 billion of total debt. Our substantial indebtedness may have material adverse effects on our business, financial condition and operating results, including to
make it more difficult for us to satisfy our debt service obligations or refinance our indebtedness,
require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures and other general operating requirements,
limit our ability to obtain additional financing to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service obligations and other general corporate requirements,
restrict us from making strategic acquisitions or taking advantage of favorable business opportunities,
place us at a relative competitive disadvantage compared to our competitors that have proportionately less debt,
limit our flexibility to plan for, or react to, changes in our businesses and the industries in which we operate, which may adversely affect our operating results and ability to meet our debt service obligations, and
increase our vulnerability to the current and potentially more severe adverse general economic and industry conditions.
If we incur additional indebtedness, the risks related to our substantial indebtedness may intensify.
We require a significant amount of liquidity to service our indebtedness and fund operations, capital expenditures, research and development efforts, acquisitions and other corporate expenditures.
Our ability to fund operations, capital expenditures, research and development efforts, acquisitions and other corporate expenditures, including repayment of our indebtedness, depends on our ability to generate cash through future operating performance, which is subject to economic, financial, competitive, legislative, regulatory and other factors. Many of these factors are beyond our control. We cannot ensure that our businesses will generate sufficient cash flow from operations or that future borrowings or other financing will be available to us in an amount sufficient to pay our indebtedness or to fund our other needs.
We are required to post letters of credit or cash as collateral primarily in connection with our hedging transactions, insurance programs and bonding activities. The amounts of collateral we are required to post may vary based on our financial position and credit ratings. Use of letters of credit as collateral reduces our borrowing availability under our domestic revolving credit agreement and, therefore, like the use of cash as collateral, reduces our overall liquidity and our ability to fund other business activities.
If we are unable to generate sufficient cash flow to fund our needs, we may need to pursue one or more alternatives, such as to
curtail operations further,
reduce or delay planned capital expenditures, research and development or acquisitions,
seek additional financing or restructure or refinance all or a portion of our indebtedness at or before maturity,
sell assets or businesses, and
sell additional equity.

8


Any curtailment of operations, reduction or delay in planned capital expenditures, research and development or acquisitions, or any sales of assets or businesses, may materially and adversely affect our future revenue prospects. In addition, we cannot ensure that we will be able to raise additional equity capital, restructure or refinance any of our indebtedness or obtain additional financing on commercially reasonable terms or at all.
The loss of sales to one or more of our major customers may have a material adverse effect on our business, financial condition and operating results.
We face strong competition for our major customers. If one or more of our major customers reduces, delays or cancels substantial orders, our business, financial condition and operating results may be materially and adversely affected, particularly for the period in which the reduction, delay or cancellation occurs and also possibly for subsequent periods.
We face competition in each of our businesses. If we cannot effectively compete in the marketplace, our business, financial condition and operating results may be materially and adversely affected.
We face competition in each of our businesses. Principal methods of competition include quality and range of products, service, location, pricing, compatibility of systems and product design features. Actions of our competitors, or the entry of new competitors in our markets, could lead to lower pricing by us in an effort to maintain market share and could also lead to lower sales volumes. To achieve and/or maintain leadership positions in key product categories, we must continue to develop brand recognition and loyalty, enhance product quality and performance, introduce new products and develop our manufacturing and distribution capabilities.
We also compete through our use and improvement of information technology. In order to remain competitive, we need to provide customers with timely, accurate, easy-to-access information about product availability, orders and delivery status using state-of-the-art systems. While we have provided manual processes for short-term failures and disaster recovery capability, a prolonged disruption of systems or other failure to meet customers’ expectations regarding the capabilities and reliability of our systems may materially and adversely affect our operating results, particularly during any prolonged period of disruption.
We intend to continue making investments in research and development to develop new and improved products and more efficient production methods in order to maintain our market leadership position. If we do not make these investments, or our investments are not successful, our revenues, operating results and market share could be materially and adversely affected. In addition, there can be no assurance that revenue from new products or enhancements will be sufficient to recover the research and development expenses associated with their development.
Certain of our customers have been expanding and may continue to expand through consolidation and internal growth, thereby possibly developing increased buying power, which may materially and adversely affect our revenues, results of operations and financial position.
Certain of our important customers are large companies with significant buying power. In addition, potential further consolidation in our distribution channels could enhance the ability of certain of our customers to seek more favorable terms, including pricing, for the products that they purchase from us. Accordingly, our ability to maintain or raise prices in the future may be limited, including during periods of raw material and other cost increases. If we are forced to reduce prices or to maintain prices during periods of increased costs, or if we lose customers because of pricing or other methods of competition, our revenues, operating results and financial position may be materially and adversely affected.
If costs of key raw materials or energy increase, or the availability of key raw materials and energy decreases, our cost of products sold will increase and our operating results or cash flows may be materially and adversely affected.
The cost and availability of raw materials and energy are critical to our operations. For example, we use substantial quantities of gypsum, wastepaper, mineral fiber, steel, perlite and starch. The cost of certain of these items has been volatile, and availability has sometimes been limited. We obtain some of these materials from a limited number of suppliers, which increases the risk of unavailability. We may not be able to pass increased raw material prices on to our customers in the future if the market or existing agreements with our customers do not allow us to raise the prices of our finished products. If price adjustments for our finished products significantly trail the increase in raw material prices, or if we cannot effectively hedge against price increases, our operating results or cash flows may be materially and adversely affected.
Wastepaper prices are affected by market conditions, principally supply. We buy various grades of wastepaper, and shortages occur periodically in one or more grades and may vary among geographic regions. As a result, we have experienced, and expect in the future to experience, volatility in wastepaper availability and its cost, affecting the mix of products manufactured at particular locations or the cost of producing them.

9


Steel is used as the primary raw material in ceiling grid. Steel prices have been volatile, and there is no guarantee that we can pass on higher steel costs to our customers in the form of higher ceiling grid prices.
Approximately one-third of the gypsum used in our plants is synthetic gypsum, which is a coal-combustion byproduct, or CCB, resulting primarily from flue gas desulphurization carried out by electric generation or industrial plants burning coal as a fuel. Seven of our 19 gypsum wallboard plants in operation use synthetic gypsum for all of their needs, while another five use it for some of their needs. The suppliers of synthetic gypsum are primarily power companies, and certain power companies over the last twelve months have switched to using natural gas instead of coal for their electric generation needs. In the event more power companies switch to using natural gas instead of coal, the availability of synthetic gypsum may decrease.
Environmental regulatory changes or changes in methods used to comply with environmental regulations could also adversely affect the price and availability of synthetic gypsum. The U.S. EPA currently classifies synthetic gypsum as a non-hazardous waste. In June 2010, in the wake of a December 2008 coal ash spill from a surface impoundment in Kingston, Tenn. (operated by an unrelated third party), the U.S. EPA proposed two alternative regulations that would address the storage and disposal of all CCBs, including synthetic gypsum. One of the proposed regulations would regulate the transportation, storage and disposal of CCBs as “special” waste, except when they are “beneficially used.” The U.S. EPA has stated that synthetic gypsum used in wallboard is considered a “beneficial use,” although the proposed regulation does not specifically address the regulatory status of synthetic gypsum prior to its incorporation into wallboard or at the time such wallboard ultimately is disposed. The comment period on the U.S. EPA’s proposed rules ended on November 19, 2010. If the U.S. EPA adopts a final regulation that affects the use, storage or disposal of synthetic gypsum, it could have a material adverse effect on our results of operations, financial position or cash flows. This effect would depend on, among other things, the regulation’s impact, if any, on the cost or supply of synthetic gypsum used in manufacturing wallboard and the demand for wallboard made with synthetic gypsum.
Energy costs also are affected by various market factors, including the availability of supplies of particular forms of energy, energy prices and local and national regulatory decisions. Prices for natural gas and electrical power, which are significant components of the costs associated with production of our gypsum and interior systems products, have been volatile in recent years. There may be substantial increases in the price, or a decline in the availability, of energy in the future, especially in light of instability or possible dislocations in some energy markets.
Significant changes in discount rates used to measure our defined benefit plan obligations, actual investment returns on pension assets and other factors could negatively impact our results of operations and cash flows.
We maintain defined benefit pension plans as well as other postretirement benefit plans for eligible employees. Our profit margins are affected by costs related to maintaining these plans for active employees and retirees. The recognition of costs and liabilities associated with these plans for financial reporting purposes is affected by the level of interest rates and assumptions made by management and used by actuaries engaged by us to calculate the projected and accumulated benefit obligations and the annual expense recognized for these plans. The assumptions used in developing the required estimates primarily include discount rates, expected return on plan assets for the funded plans, compensation increase rates, retirement rates, mortality rates and, for postretirement benefits, health care cost trend rates. Economic and market factors and conditions could affect any of these assumptions and may affect our estimated and actual employee benefit plan costs and our business, financial condition and operating results.
Our pension plans were underfunded by approximately $403 million and $369 million as of December 31, 2012 and December 31, 2011. In recent years, the declining interest rates have negatively impacted the funded status of our pension plans. The asset performance has been volatile since 2008, with plan assets outperforming in some years and underperforming in other years versus the assumed rate of return used to determine pension expense. If the discount rates and actual asset returns increase or decrease, the funded status of our plan as well as the future pension expense and funding obligations will decrease and increase, respectively.
Fluctuations in the market price of natural gas may have a material adverse effect on our business, financial condition and operating results.
We use natural gas extensively in the production of gypsum and interior systems products in the United States, Canada and Mexico. As a result, our profitability, operating cash flows and future rate of growth can be highly dependent on the price of natural gas, which historically has been very volatile and is affected by numerous factors beyond our control. We are not always able to pass on increases in energy costs to our customers through increases in product prices.
In an attempt to reduce our price risk related to fluctuations in natural gas prices, we periodically enter into hedging agreements using swaps or options. We benefit from the hedge agreements when spot prices exceed contractually specified prices.

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Any substantial or extended decline in prices of, or demand for, natural gas that has been hedged could cause our production costs to be greater than those of our competitors. We include options as part of our hedging strategy to provide protection if gas prices increase significantly while allowing us to take advantage of lower gas prices. In addition, our use of swaps could cause our production costs to be greater than those of our competitors if the swap price is higher than market. A significant production cost differential could have a material adverse effect on our business, financial condition and operating results.
In addition, the results of our hedging agreements could be positive, neutral or negative in any period depending on price changes in the hedged exposures. Further, changes to the price of natural gas could result in changes to the value of our hedging contracts, which could impact our results of operations for a particular period. Our hedging activities are not designed to mitigate long-term natural gas price fluctuations and, therefore, will not protect us from long-term natural gas price increases.
Covenant restrictions under the agreements governing our indebtedness may limit our ability to pursue business activities or otherwise operate our business.
The agreements governing our indebtedness contain covenants that may limit our ability to finance future operations or capital needs or to engage in other business activities, including, among other things, our ability to
incur additional indebtedness,
make guarantees,
sell assets or make other fundamental changes,
engage in mergers and acquisitions,
make investments,
enter into transactions with affiliates,
change our business purposes, and
enter into sale and lease-back transactions.
In addition, we are subject to agreements that may require us to meet and maintain certain financial ratios and tests, which may require that we take action to reduce our debt or to act in a manner contrary to our current or future business plans. General business and economic conditions may affect our ability to comply with these covenants or meet those financial ratios and tests.
A breach of any of our credit agreement or indenture covenants or failure to maintain a required ratio or meet a required test may result in an event of default under those agreements. This may allow the counterparties to those agreements to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If this occurs, we may not be able to refinance the accelerated indebtedness on favorable terms, or at all, or repay the accelerated indebtedness.
Risks relating to our international operations and expansion into new geographical markets could adversely affect our business, financial condition and operating results.
We generated approximately 20% of our net revenues in 2012 and 2011 outside the United States, and it is a strategic priority of ours to grow and diversify our earnings by expanding in select emerging markets. Our foreign operations and our international expansion strategy are subject to general risks related to international operations, including:
compliance with United States laws affecting operations outside of the United States, such as the Foreign Corrupt Practices Act,
compliance with a variety of local regulations and laws,
changes in tax laws and the interpretation of those laws,
fluctuations in currency values,
sudden changes in foreign currency exchange controls,
discriminatory or conflicting fiscal policies,
difficulties enforcing intellectual property and contractual rights in certain jurisdictions,
greater risk of uncollectible accounts and longer collection cycles,

11


effective and immediate implementation of control environment processes across our diverse operations and employee base,
nationalization of properties by foreign governments, and
imposition of more or new tariffs, quotas, trade barriers, and similar restrictions on our sales outside the United States.
Moreover, political and economic changes or volatility, geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war, public corruption and other economic or political uncertainties could interrupt and negatively affect our business operations. All of these factors could result in increased costs or decreased revenues, and could materially and adversely affect our business, financial condition and operating results.
If the downturn in the markets for our businesses does not significantly reverse or is significantly extended, we may incur material restructuring and impairment charges.
Since January 2007, we permanently closed six and temporarily idled four of our highest cost gypsum wallboard production facilities with approximately 3.8 billion square feet of capacity, permanently closed two and temporarily idled two paper production facilities and permanently closed our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada. As a result of these closures, we have recorded long-lived asset impairment charges aggregating approximately $120 million since January 2007.
Historically, the housing and other construction markets that we serve have been deeply cyclical. Downturns in demand are typically steep and last several years, but they have typically been followed by periods of strong recovery. If the recovery from this cycle results in increases in demand similar to those realized in recoveries from past cycles, we believe we will generate significant cash flows when our markets recover. We regularly monitor forecasts prepared by external economic forecasters and review our facilities and other assets to determine which of them, if any, are impaired under applicable accounting rules.
However, if the downturn in our markets does not significantly reverse or the downturn is significantly further extended, material write-downs or impairment charges may be required in the future. If these conditions were to materialize or worsen, or if there is a fundamental change in the housing and other construction markets we serve, which individually or collectively lead to a significantly extended downturn or decrease in demand, we may permanently close additional production and distribution facilities and material restructuring and impairment charges may be necessary. The magnitude, likelihood and timing of those possible charges would be dependent on the severity and duration of the extended downturn, should it materialize, and cannot be determined at this time. Any material restructuring or impairment charges, including write-downs of property, plant and equipment, would have a material adverse effect on our results of operations and financial condition. We will continue to monitor economic forecasts and their effect on our facilities to determine whether any of our assets are impaired.
We may pursue acquisitions, joint ventures and other transactions that complement or expand our businesses. We may not be able to complete proposed transactions, and even if completed, the transactions may involve a number of risks that may result in a material adverse effect on our business, financial condition and operating results.
As business conditions warrant and our financial resources permit, we may pursue opportunities to acquire businesses or technologies and to form joint ventures that we believe could complement, enhance or expand our current businesses or product lines or that might otherwise offer us growth opportunities. We may have difficulty identifying appropriate opportunities, or if we do identify opportunities, we may not be successful in completing transactions for a number of reasons. Any transactions that we are able to identify and complete may involve one or more of a number of risks, including
the diversion of management’s attention from our existing businesses to integrate the operations and personnel of the acquired or combined business or joint venture,
possible adverse effects on our operating results during the integration process,
failure of the acquired business or joint venture to achieve expected operational, profitability and investment return objectives, and
inability to achieve other intended objectives of the transaction.
In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or their employees. We may not be able to maintain uniform standards, controls, procedures and policies, which may lead to operational inefficiencies. In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of additional indebtedness.

12


We are subject to environmental and safety laws and regulations that may change. These laws and regulations could cause us to make modifications to how we manufacture and price our products. They could also require that we make significant capital investments or otherwise increase our costs.
We are subject to federal, state, local and foreign laws and regulations governing the protection of the environment and occupational health and safety, including laws regulating air emissions, wastewater discharges, the management and disposal of hazardous materials and wastes, and the health and safety of our employees. We are also required to obtain permits from governmental authorities for certain operations. If we were to fail to comply with these laws, regulations or permits, we could incur fines, penalties or other sanctions. In addition, we could be held responsible for costs and damages arising from any contamination at our past or present facilities or at third-party waste disposal sites. We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials. Environmental laws and regulations tend to become more stringent over time, and we could incur material expenses relating to compliance with future environmental laws. As noted above, the U.S. EPA is considering a regulation that could affect the classification, use, storage and disposal of synthetic gypsum.
In addition, the price and availability of certain of the raw materials that we use may vary in the future as a result of environmental laws and regulations affecting our suppliers. An increase in the price of our raw materials, a decline in their availability or future costs relating to our compliance with environmental laws and regulations may materially and adversely affect our operating margins or result in reduced demand for our products.
The U.S. Congress and several states are considering proposed legislation to reduce emission of “greenhouse gases,” including carbon dioxide and methane. Some states have already adopted greenhouse gas regulation or legislation. In 2009, the U.S. EPA issued its findings that certain greenhouse gases, including carbon dioxide, endanger the public health and welfare. Subsequently, the U.S. EPA issued two rules that will make greenhouse gas emissions from both stationary and mobile sources subject to regulation under the existing federal Clean Air Act. In 2010, the U.S. EPA, jointly with the U.S. Department of Transportation’s National Highway Traffic Safety Administration, issued a rule that will regulate tailpipe greenhouse gas emissions by light-duty vehicles in the model years 2012 to 2016. In 2010, the U.S. EPA also adopted rules to phase in requirements for all new or modified “stationary sources” that emit 100,000 tons of greenhouse gases per year, or modified sources that increase emissions by 75,000 tons per year, to annually obtain permits demonstrating that they are incorporating the “best available control technology” to minimize greenhouse gas emissions. These rules would affect all of our U.S. wallboard and ceiling tile plants and paper mills and are the subject of pending legal challenges that have been filed by certain interested parties, including states, industry groups and environmental organizations, in the U.S. federal courts. If these rules withstand challenge, they could require that we incur significant costs to satisfy permitting requirements. In addition, enactment of new climate control legislation or other regulatory initiatives by Congress or various states, or the adoption of additional regulations by the U.S. EPA and analogous state or foreign governmental agencies that restrict emissions of greenhouse gases in areas in which we conduct business, could have a materially adverse effect on our operations and demand for our services or products. For example, our manufacturing processes, particularly the manufacturing process for wallboard, use a significant amount of energy, especially natural gas. Increased regulation of energy use to address the possible emission of greenhouse gases and climate change could materially increase our manufacturing costs. From time to time, legislation has been introduced proposing a “carbon tax” on energy use or establishing a so-called “cap and trade” system. Such legislation would almost certainly increase the cost of energy used in our manufacturing processes. If energy becomes more expensive, we may not be able to pass these increased costs on to purchasers of our products.
It is difficult to accurately predict if or when currently proposed or additional laws and regulations regarding emissions and other environmental concerns will be enacted or what capital expenditures might be required as a result of them. Stricter regulation of emissions might require us to install emissions control or other equipment at some or all of our manufacturing facilities, requiring significant additional capital investments.
We are outsourcing certain corporate functions, which will make us more dependent on third parties.
In an effort to make certain of our finance, accounting, information technology and other functions more efficient, we have outsourced certain elements of these functions to third party service providers, and we may outsource additional functions in the future. As a result, we rely on third parties to ensure that our related needs are sufficiently met. This reliance subjects us to risks arising from the loss of control over certain processes, changes in pricing that may affect our operating results, and the termination of the provision of these services by our suppliers. A failure of our service providers to satisfactorily perform these functions may have an adverse affect on our business and operating results.

13


Our continuing efforts to return to profitability by reducing costs may not result in the anticipated savings in operating costs.
In response to the prolonged economic downturn in our markets, we have implemented various cost reduction programs to lower our breakeven and return to profitability, including plant and distribution branch closures and workforce reductions, and we may implement additional programs in the future. These cost reduction programs may not produce anticipated results. Our ability to achieve cost savings and other benefits within expected time frames is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business, financial condition and operating results could be adversely impacted. If the eventual recovery in our markets is fast-paced and robust, we may not be able to replace our reduced manufacturing and distribution capacity in a timely fashion, and our ability to respond to increased demand could be limited, which could result in lost market share and could negatively impact our operating results.
If we experience an “ownership change” within the meaning of the Internal Revenue Code, utilization of our net operating loss, or NOL, carryforwards would be subject to an annual limitation.
The Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs to reduce its federal income taxes if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. If we were to experience an ownership change, utilization of our NOLs would be subject to an annual limitation determined by multiplying the market value of our outstanding shares of stock at the time of the ownership change by the applicable long-term tax-exempt rate (which was 2.87% for December 2012). Any unused annual limitation may be carried over to later years within the allowed NOL carryforward period. The amount of the limitation may, under certain circumstances, be increased or decreased by built-in gains or losses held by us at the time of the change that are recognized in the five-year period after the change. Many states have similar limitations. If an ownership change had occurred as of December 31, 2012, our annual U.S. federal NOL utilization would have been limited to approximately $86.9 million per year.
Our financial results may be affected by various legal and regulatory proceedings, including those involving antitrust, tax, environmental, or other matters.
We are subject to litigation and regulatory proceedings in the normal course of business and could become subject to additional claims in the future, some of which could be material. The outcome of existing legal proceedings may differ from our expectations because the outcomes of litigation and similar disputes are often difficult to predict reliably. Various factors and developments can lead to changes in current estimates of liabilities and related insurance receivables, where applicable, or make additional estimates, including new or modified estimates that may be appropriate due to a judicial ruling or judgment, a settlement, regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our results of operations in any particular period. For a more detailed discussion of certain of the legal proceedings in which we are involved, see Item 3, below.
A small number of our stockholders could significantly influence our business and affairs.
Based on filings made with the SEC and other information available to us, we believe that, as of January 31, 2013, seven stockholders collectively controlled over 50% of our common stock. Also, all of our 10% convertible senior notes are currently held by two of our stockholders. At the current conversion price of $11.40 per share, the notes are convertible into approximately 35.1 million shares of our common stock, or approximately 25% of the shares that would be outstanding if all of the notes were converted at that price. Accordingly, a small number of our stockholders could affect matters requiring approval by stockholders, including the election of directors and the approval of potential business combination transactions.
The seasonal nature of our businesses may materially and adversely affect the trading prices of our securities.
A majority of our businesses are seasonal, with peak sales typically occurring from spring through the middle of autumn. Quarterly results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future. Those variations may materially and adversely affect our financial performance and the trading prices of our securities.
We do not expect to pay cash dividends on our common stock for the foreseeable future.
We have not paid a dividend on our common stock since the first quarter of 2001 and have no plans to do so in the foreseeable future. Further, our credit agreement limits our ability to pay a dividend or repurchase our stock unless specified borrowing availability and fixed charge coverage ratio tests are met, and it prohibits payment of a dividend if a default exists under the

14


agreement. Because we do not expect to pay dividends on our common stock in the foreseeable future, investors in our common stock will have to rely on the possibility of stock appreciation for a return on their investment.
 
Item 1B.
UNRESOLVED STAFF COMMENTS
None


15


Item 2.PROPERTIES
We operate plants, mines, quarries, transport ships and other facilities in North America, South America and the Asia-Pacific region. U.S. Gypsum’s SHEETROCK® brand gypsum wallboard plants operated at approximately 51% of capacity during 2012. USG Interiors’ ceiling tile plants operated at approximately 83% of capacity during 2012. The locations of our production properties in operation as of December 31, 2012, grouped by reportable segment, are as follows (plants are owned unless otherwise indicated):
North American Gypsum
GYPSUM WALLBOARD AND OTHER GYPSUM PRODUCTS
Aliquippa, Pennsylvania*
 
Plaster City, California
 
Hagersville, Ontario, Canada**
Baltimore, Maryland**
 
Rainier, Oregon
 
Montreal, Quebec, Canada *
Bridgeport, Alabama*
 
Shoals, Indiana**
 
Monterrey, Nuevo Leon, Mexico
East Chicago, Indiana*
 
Sigurd, Utah
 
Puebla, Puebla, Mexico
Galena Park, Texas*
 
Sperry, Iowa**
 
Tecoman, Colima, Mexico
Jacksonville, Florida**
 
Sweetwater, Texas
 
 
Norfolk, Virginia*
 
Washingtonville, Pennsylvania*
 
 
*
Plants supplied fully by synthetic gypsum
**
Plants supplied partially by synthetic gypsum
JOINT COMPOUND (SURFACE PREPARATION AND JOINT TREATMENT PRODUCTS)
Auburn, Washington
 
Galena Park, Texas
 
Calgary, Alberta, Canada*
Baltimore, Maryland
 
Gypsum, Ohio
 
Hagersville, Ontario, Canada
Bridgeport, Alabama
 
Jacksonville, Florida
 
Montreal, Quebec, Canada
Chamblee, Georgia
 
Phoenix (Glendale), Arizona*
 
Surrey, British Columbia, Canada
Dallas, Texas
 
Port Reading, New Jersey
 
Monterrey, Nuevo Leon, Mexico
East Chicago, Indiana
 
Sigurd, Utah
 
Puebla, Puebla, Mexico
Fort Dodge, Iowa
 
Torrance, California
 
 
*
Leased
CEMENT BOARD
 
 
 
 
Baltimore, Maryland
 
New Orleans, Louisiana
 
Monterrey, Nuevo Leon, Mexico
Detroit (River Rouge), Michigan
 
 
 
 
GYPSUM ROCK (MINES AND QUARRIES)
Alabaster (Tawas City), Michigan
 
Sigurd, Utah
 
Hagersville, Ontario, Canada
Fort Dodge, Iowa
 
Southard, Oklahoma
 
Little Narrows, Nova Scotia, Canada
Plaster City, California
 
Sperry, Iowa
 
Monterrey, Nuevo Leon, Mexico
Shoals, Indiana
 
Sweetwater, Texas
 
San Luis Potosi, San Luis Potosi, Mexico
 
 
 
 
Tecoman, Colima, Mexico
PAPER FOR GYPSUM WALLBOARD
 
 
 
 
Galena Park, Texas
 
Oakfield, New York
 
 
North Kansas City, Missouri
 
Otsego, Michigan
 
 

16


OTHER PRODUCTS
We operate a mica-processing plant at Spruce Pine, North Carolina. We manufacture metal lath, plaster and drywall accessories and light gauge steel framing products at Monterrey, Nuevo Leon, Mexico, and Puebla, Puebla, Mexico. We produce plaster products at Southard, Oklahoma; Puebla, Puebla, Mexico; Saltillo, Coahuila, Mexico; and San Luis Potosi, San Luis Potosi, Mexico. We manufacture gypsum fiber panel products at Gypsum, Ohio, and paper-faced metal corner bead at Auburn, Washington and Weirton, West Virginia.
OCEAN VESSELS
Gypsum Transportation Limited, or GTL, our wholly owned subsidiary, owns and operates two self-unloading ocean vessels. In past years, these vessels were used primarily to transport gypsum rock from our Nova Scotia quarries to our East Coast plants.  However, due to the decrease in demand for natural gypsum and the increased use of synthetic gypsum in the manufacture of wallboard at our East Coast plants, the utilization of these vessels dropped significantly and, therefore, we found an alternate use for the vessels. During 2012, GTL completed the first year of a five-year contract of affreightment to transship iron ore for a third party.

Worldwide Ceilings
 
CEILING GRID
Cartersville, Georgia
 
Stockton, California
 
Oakville, Ontario, Canada
Westlake, Ohio
 
 
 
Auckland, New Zealand*
*
Leased
A coil coater and slitter plant used in the production of ceiling grid is located in Westlake, Ohio. A slitter plant is located in Stockton, Calif. (leased).
CEILING TILE
Cloquet, Minnesota
 
Greenville, Mississippi
 
Walworth, Wisconsin
 
JOINT COMPOUND (SURFACE PREPARATION AND JOINT TREATMENT PRODUCTS)
Buenos Aires, Argentina*
 
Lima, Peru
 
Port Klang, Malaysia*
*
Leased
OTHER PRODUCTS
We manufacture mineral fiber products at Red Wing, Minnesota, and Walworth, Wisconsin, and metal specialty systems at Oakville, Ontario, Canada.
 
Item 3.
LEGAL PROCEEDINGS
See Part II, Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements, Note 19, Litigation, for information on legal proceedings, which information is incorporated herein by reference.

Item 4.
MINE SAFETY DISCLOSURES
The information concerning mine safety violations or regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K promulgated by the SEC is included in Exhibit 95 to this report.


17


PART II
 
Item 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the New York Stock Exchange, or NYSE, and the Chicago Stock Exchange under the symbol USG. The NYSE is the principal market for our common stock. As of January 31, 2013, there were 2,744 record holders of our common stock. We currently do not pay dividends on our common stock.
We did not purchase any of our equity securities during the fourth quarter of 2012.
See Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for information regarding common stock authorized for issuance under equity compensation plans.
Pursuant to our Deferred Compensation Program for Non-Employee Directors, five of our non-employee directors deferred the $80,000 annual grant, and one of our non-employee directors deferred the quarterly retainer, they were entitled to receive on December 31, 2012 under our Non-Employee Director Compensation Program, into a total of approximately 13,299 deferred stock units. These units will increase or decrease in value in direct proportion to the market value of our common stock and will be paid in cash or shares of common stock, at each director’s option, following termination of service as a director. The issuance of these deferred stock units was effected through a private placement under Section 4(2) of the Securities Act and was exempt from registration under Section 5 of the Securities Act.
COMMON STOCK PRICES
The high and low sales prices of our common stock in 2012 and 2011 were as follows:
 
 
2012
 
2011
 
High
 
Low
 
High
 
Low
First quarter
$
19.44

 
$
10.23

 
$
19.91

 
$
15.38

Second quarter
19.35

 
13.12

 
16.81

 
12.92

Third quarter
24.23

 
15.25

 
14.71

 
6.55

Fourth quarter
28.52

 
20.84

 
10.99

 
5.75

PERFORMANCE GRAPH
The following graph and table compare the cumulative total stockholder return on our common stock with the Standard and Poor’s 500 Index, or S&P 500, and the Dow Jones U.S. Construction and Materials Index, or DJUSCN, in each case assuming an initial investment of $100 and full dividend reinvestment, for the five-year period ended December 31, 2012.
 

 

18


 
Value of Investment as of December 31
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
USG
$
100

 
$
22

 
$
39

 
$
47

 
$
28

 
$
78

S&P 500
100

 
63

 
80

 
92

 
94

 
109

DJUSCN
100

 
57

 
65

 
78

 
73

 
103

All amounts are rounded to the nearest dollar.

19


Item 6.
SELECTED FINANCIAL DATA
(dollars in millions, except per-share data)
Years Ended December 31,
 
2012
 
2011 (a)
 
2010 (a)
 
2009 (a)
 
2008 (a)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
3,224

 
$
2,910

 
$
2,834

 
$
3,130

 
$
4,461

Cost of products sold
2,829

 
2,752

 
2,697

 
3,011

 
4,302

Gross profit
395

 
158

 
137

 
119

 
159

Selling and administrative expenses
304

 
289

 
295

 
286

 
358

Litigation settlement income (b)

 

 

 
(97
)
 

Restructuring and long-lived asset impairment charges
18

 
75

 
110

 
76

 
96

Goodwill and other intangible asset impairment charges

 

 

 
43

 
226

Operating profit (loss)
73

 
(206
)
 
(268
)
 
(189
)
 
(521
)
Interest expense
206

 
211

 
183

 
165

 
86

Interest income
(4
)
 
(6
)
 
(5
)
 
(4
)
 
(7
)
Loss on extinguishment of debt
41

 

 

 

 

Other (income) expense, net

 
(1
)
 
1

 
(10
)
 
(10
)
Loss from continuing operations before income taxes
(170
)
 
(410
)
 
(447
)
 
(340
)
 
(590
)
Income tax expense (benefit) (c)
12

 
(14
)
 
(37
)
 
445

 
(123
)
Loss from continuing operations
(182
)
 
(396
)
 
(410
)
 
(785
)
 
(467
)
Income (loss) from discontinued operations, net of tax
2

 
6

 
5

 
(2
)
 
4

Gain on sale of discontinued operations, net of tax
55

 

 

 

 

Net loss
(125
)
 
(390
)
 
(405
)
 
(787
)
 
(463
)
Less: Net income attributable to noncontrolling interest
1

 

 

 

 

Net loss attributable to USG
$
(126
)
 
$
(390
)
 
$
(405
)
 
$
(787
)
 
$
(463
)
Loss from continuing operations per common share:
 
 
 
 
 
 
 
 
 
Basic
(1.72
)
 
(3.81
)
 
(4.08
)
 
(7.95
)
 
(4.71
)
Diluted
(1.72
)
 
(3.81
)
 
(4.08
)
 
(7.95
)
 
(4.71
)
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (as of the end of the year):
 
 
 
 
 
 
 
 
 
Working capital
$
776

 
$
715

 
$
924

 
$
958

 
$
759

Current ratio
2.41

 
2.36

 
2.75

 
2.96

 
2.01

Cash and cash equivalents
546

 
365

 
629

 
690

 
471

Property, plant and equipment, net
2,100

 
2,104

 
2,252

 
2,411

 
2,546

Total assets
3,723

 
3,719

 
4,087

 
4,097

 
4,719

Long-term debt
2,305

 
2,297

 
2,301

 
1,955

 
1,642

Total stockholders’ equity
19

 
156

 
619

 
930

 
1,550

Other Information:
 
 
 
 
 
 
 
 
 
Capital expenditures
$
70

 
$
54

 
$
38

 
$
43

 
$
235

Closing stock price per common share as of December 31
$
28.07

 
$
10.16

 
$
16.83

 
$
14.05

 
$
8.04

Average number of employees (d)
8,758

 
8,880

 
9,450

 
10,800

 
13,600

 
(a)
Amounts reflected above have been adjusted to reflect our European businesses, which were sold on December 27, 2012, as discontinued operations. See Note 3 to our consolidated financial statements in Item 8 of this report.
(b)
Reflects settlement income, net of fees, from our lawsuit against Lafarge North America Inc. and its parent, Lafarge S.A.
(c)
Income tax expense (benefit) includes a noncash increase (decrease) in the deferred tax asset valuation allowances of $76 million in 2012, $149 million in 2011, $179 million in 2010, $575 million in 2009 and $71 million in 2008.
(d)
As of December 31, 2012, we had approximately 8,500 employees worldwide. For 2011, 2010, 2009 and 2008, the average number of employees includes our discontinued operations.


20


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
SEGMENTS
Through our subsidiaries, we are a leading manufacturer and distributor of building materials. We produce a wide range of products for use in new residential, new nonresidential, and residential and nonresidential repair and remodel construction as well as products used in certain industrial processes. We estimate that during 2012
residential and nonresidential repair and remodel activity accounted for approximately 52% of our net sales,
new residential construction accounted for approximately 24% of our net sales,
new nonresidential construction accounted for approximately 22% of our net sales, and
other activities accounted for approximately 2% of our net sales.
Our operations are organized into three reportable segments: North American Gypsum, Worldwide Ceilings and Building Products Distribution.
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. North American Gypsum’s products are used in a variety of building applications to finish the walls, ceilings and floors in residential, commercial and institutional construction and in certain industrial applications. Its major product lines include SHEETROCK® brand gypsum wallboard, a line of joint compounds used for finishing wallboard joints also sold under the SHEETROCK® brand name, DUROCK® brand cement board, FIBEROCK® brand gypsum fiber panels and SECUROCK® brand glass mat sheathing used for building exteriors and gypsum fiber and glass mat panels used as roof cover board.
Worldwide Ceilings: Worldwide Ceilings manufactures and markets interior systems products in the United States, Canada, Mexico, Latin America and the Asia-Pacific region. It includes USG Interiors, LLC, 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 and the Asia-Pacific region. It markets ceiling tile and ceiling grid in the United States, Canada, Mexico, Latin America and the Asia-Pacific region. It also manufactures and markets joint compound in Latin America and the Asia-Pacific region. As discussed below under Discontinued Operations and in Note 3 to our consolidated financial statements in Item 8, our European business operations were classified as discontinued operations during the third quarter of 2012; therefore, the segment results for Worldwide Ceilings exclude the results of these operations. On December 27, 2012, the sale transaction was consummated and we received net proceeds of $73 million resulting in a gain of $55 million.
Building Products Distribution: Building Products Distribution consists of L&W Supply Corporation and its subsidiaries, or L&W Supply, the leading distributor of gypsum wallboard and other building materials in the United States. It is a service-oriented business that stocks a wide range of construction materials. It delivers less-than-truckload quantities of construction materials to job sites and places them in areas where work is being done, thereby reducing the need for handling by contractors.
Geographic Information: In 2012, approximately 80% of our net sales were attributable to the United States. Canada accounted for approximately 12% of our net sales, and other foreign countries accounted for the remaining 8%.
FINANCIAL INFORMATION
Consolidated net sales increased for the second consecutive year in 2012, up $314 million, or 11%, compared to 2011. We had an operating profit of $73 million in 2012 compared to an operating loss of $206 million in 2011. Our loss from continuing operations was $182 million, or $(1.72) per diluted share, in 2012 compared to $396 million, or $(3.81) per diluted share, in 2011. As of December 31, 2012, we had $677 million of cash and cash equivalents and marketable securities compared with $651 million as of December 31, 2011. Our total liquidity was $874 million as of December 31, 2012 (including $197 million of borrowing availability under our revolving credit facilities) compared to $834 million as of December 31, 2011 (including $183 million of borrowing availability under our revolving credit facilities).

21



DISCONTINUED OPERATIONS
On August 7, 2012, USG and its indirect wholly owned subsidiaries, USG Foreign Investments, Ltd. and USG (U.K.) Ltd., together the Sellers, entered into a Share and Asset Purchase Agreement with Knauf International GmbH and Knauf AMF Ceilings Ltd., together Knauf, pursuant to which we agreed to sell to Knauf all of our wholly owned European business operations. These businesses include the manufacture and distribution of DONN® brand ceiling grid and SHEETROCK® brand finishing compounds principally throughout Europe, Russia and Turkey. The results of our European business operations have been reclassified as discontinued operations in the consolidated financial statements and accompanying footnotes presented in Item 8 of this report and were previously included in our Worldwide Ceilings reportable segment. On December 27, 2012, the sale transaction was consummated and we received net proceeds of $73 million and recognized a gain of $55 million. See Note 3 to the consolidated financial statements for additional information related to discontinued operations.
MARKET CONDITIONS AND OUTLOOK
Our businesses are cyclical in nature and sensitive to changes in general economic conditions, including, in particular, conditions in the North American housing and construction-based markets, which are our most significant markets. The markets we serve can be broadly categorized as new residential construction, new nonresidential construction and repair and remodel activity, which includes both residential and nonresidential construction.
For the new residential construction market, housing starts are a very good indicator of demand for our gypsum products. Installation of our gypsum products typically follows the start of construction by one to two months. Based on preliminary data reported by the U.S. Census Bureau, housing starts in the United States increased 28.1% in 2012 to 780,000 compared with 608,800 in 2011. This followed a 3.7% increase in 2011 compared with 2010. In December 2012, the annualized rate of housing starts was reported by the U.S. Census Bureau to be 954,000 units, the highest level since June 2008. While housing starts increased for the third consecutive year in 2012, they are still low by historical standards. Industry analysts believe that the recovery in the housing market has begun and that over the longer term housing starts will begin to approach historical averages as the recovery continues. However, the rate of recovery still remains uncertain and will depend on broader economic issues such as employment, foreclosures, house price trends, availability of mortgage financing, income tax policy and consumer confidence. Industry analysts’ forecasts for housing starts in the United States in 2013 are for a range of from 760,000 to 1,170,000 units. We currently estimate that 2013 housing starts in the U.S. will be near the midpoint of that range.
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 12 to 18 months. According to McGraw-Hill Construction, total floor space for which new nonresidential construction contracts were signed in the United States increased 1% in 2012 compared with 2011. This followed a 3% increase in 2011 compared with 2010 and a 13% decrease in 2010 compared with 2009. McGraw-Hill Construction forecasts that total floor space for which new nonresidential construction contracts in the United States are signed will increase approximately 6% in 2013 from the 2012 level.
The repair and remodel market includes renovation of both residential and nonresidential buildings. As a result of the low levels of new home construction in recent years, this market currently accounts for the largest portion of our sales. Many buyers begin to remodel an existing home within two years of purchase. According to the National Association of Realtors, sales of existing homes in the United States increased to approximately 4.65 million units in 2012, the highest level in five years, reflecting a 9.2% increase from the 2011 level of 4.26 million units. The rising levels of existing home sales and home resale values have contributed to an increase in demand for our products from the residential repair and remodel market in 2012. Nonresidential repair and remodel activity is driven by factors including lease turnover rates, discretionary business investment, job growth and governmental building-related expenditures. We currently estimate that overall repair and remodel spending in 2012 increased approximately 4% over the 2011 level and that overall repair and remodel spending in 2013 will continue to grow at approximately the same pace.
The outlook for our international businesses is improving as we continue to see most of the markets in which we do business begin to recover after the effects of the global financial crisis, and emerging markets continue to grow.
The housing and construction-based markets we serve are affected by economic conditions, the availability of credit, lending practices, interest rates, the unemployment rate and consumer confidence. An increase in interest rates, continued high levels of unemployment, continued restrictive lending practices, a decrease in consumer confidence or other adverse economic conditions could have a material adverse effect on our business, financial condition, operating results and cash flows. Our businesses are also affected by a variety of other factors beyond our control, including the inventory of unsold homes, the level of foreclosures, home resale rates, housing affordability, office and retail vacancy rates and foreign currency exchange rates.

22


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 or financial concerns in the regions where we have operations may have a material adverse effect on our business, operating results, financial condition and cash flows.
Our results of operations have been adversely affected by the economic downturn and continued uncertainty in the financial markets. Although our North American Gypsum segment showed some improvement in connection with the improvement in residential housing in 2012, it continued to be adversely affected by the low level of residential and other construction activity compared to historical averages. Our Building Products Distribution segment, which serves the residential and commercial markets, and our Worldwide Ceilings segment, which primarily serves the commercial markets, continued to be adversely affected by the low levels of new commercial construction activity.
Industry shipments of gypsum board in the United States (including gypsum wallboard, other gypsum-related paneling products and imports), as reported by the Gypsum Association, were an estimated 19.3 billion square feet in 2012, up approximately 10% from 17.5 billion square feet in 2011.
U.S. Gypsum shipped 4.72 billion square feet of SHEETROCK® brand gypsum wallboard in 2012, a 15% increase from 4.11 billion square feet in 2011. SHEETROCK® Brand UltraLight Panels accounted for approximately 45% of that volume. The percentage increase of U.S. Gypsum’s SHEETROCK® wallboard shipments in 2012 compared with 2011 exceeded the increase for industry gypsum board shipments primarily due to demand for our lightweight gypsum panel products. U.S. Gypsum’s share of the gypsum board market in the United States, which includes, for comparability, its shipments of SHEETROCK® brand gypsum wallboard, FIBEROCK® brand gypsum fiber panels and SECUROCK® brand glass mat sheathing, was approximately 26% in 2012, an increase from 25% in 2011.
There is significant excess wallboard production capacity industry-wide in the United States. Industry capacity in the United States was approximately 32.7 billion square feet as of January 1, 2013. We estimate that the industry capacity utilization rate was approximately 63% during the fourth quarter of 2012 and approximately 58% during the full year 2012 compared to approximately 56% during the fourth quarter of 2011 and approximately 53% during the full year 2011, respectively. Based on current industry trends and forecasts, demand for gypsum wallboard is expected to increase in 2013, but the magnitude of any increase will be dependent primarily on the levels of housing starts and repair and remodel activity. We project that the industry capacity utilization rate will increase slightly in 2013. Effective January 1, 2013, U.S. Gypsum implemented a price increase for wallboard with the new price being set for all of 2013. However, it is uncertain that we will be able to maintain the increase in our gypsum wallboard selling prices.
RESTRUCTURING, IMPAIRMENTS AND OTHER INITIATIVES
Since January 2007, we have temporarily idled or permanently closed approximately 3.8 billion square feet of our highest-cost wallboard manufacturing capacity and our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada. We have eliminated approximately 4,830 salaried and hourly positions since 2007, including approximately 130 positions eliminated during 2012. The positions eliminated in 2012 primarily reflected the closure of 13 distribution branches by L&W Supply, L&W Supply’s other consolidation initiatives and a company-wide management workforce reduction implemented in the fourth quarter of the year. As part of L&W Supply’s efforts to reduce its cost structure, it has closed a total of 125 distribution branches since January 2007. It continued to serve its customers from 142 branches in the United States as of December 31, 2012. We continue to monitor economic conditions in our markets and will adjust our operations as needed.
Historically, the housing and other construction markets that we serve have been deeply cyclical. Downturns in demand are typically steep and last several years, but they have typically been followed by periods of strong recovery. If the recovery from this cycle results in increases in demand similar to those realized in recoveries from past cycles, we believe we will generate significant cash flows when our markets recover. We regularly monitor forecasts prepared by external economic forecasters and review our facilities and other assets to determine which of them, if any, are impaired under applicable accounting rules. As a result of our decision to permanently close our Windsor operations, we recorded $53 million of long-lived asset impairment charges in 2011. In 2012, as the result of a change in estimates, we increased the asset retirement obligation related to this facility by $7 million with a corresponding increase to the long-lived assets; consequently, we recorded an asset impairment charge to write-down the assets to estimated fair value. If the downturn in our markets does not significantly reverse or the downturn is significantly further extended, material write-downs or impairment charges may be required in the future. If these conditions were to materialize or worsen, or if there is a fundamental change in the housing and other construction markets we serve, which individually or collectively lead to a significantly extended downturn or decrease in demand, we may permanently close additional production and distribution facilities and material restructuring and impairment charges may be necessary. The magnitude, likelihood and timing of those possible charges would be dependent on the severity and duration of the extended downturn, should it materialize, and cannot be determined at this time. Any material restructuring or impairment charges, including write-downs of property, plant and equipment, would have a material adverse effect on our

23


results of operations and financial condition. We will continue to monitor economic forecasts and their effect on our facilities to determine whether any of our assets are impaired.
Our focus on costs and efficiencies, including capacity closures and overhead reductions, has helped to mitigate the effects of the downturn in all of our markets. As economic and market conditions warrant, we will evaluate alternatives to further reduce costs, improve operational efficiency and maintain adequate liquidity. Actions to reduce costs and improve efficiencies could require us to record additional restructuring charges. See Liquidity and Capital Resources below for information regarding our cash position and credit facilities. See Part I, Item 1A, Risk Factors for additional information regarding conditions affecting our businesses, the possibility that additional capital investment would be required to address future environmental laws and regulations and other risks and uncertainties that affect us.
KEY STRATEGIES
While adjusting our operations during this challenging business cycle, we are continuing to focus on the following strategic priorities:
strengthen our core businesses;
diversify our earnings by expanding in select emerging markets and growing our nonwallboard product lines; and
differentiate USG from our competitors through innovation.
On June 29, 2012, we entered into a strategic partnership with the Zawawi Group in Oman to meet the growing demand for our building products in India and the Middle East. We expect our investment of approximately $60 million in this partnership to be incurred over two years, of which $20 million was funded in 2012. The amount funded in 2012 included approximately $16 million for the acquisition of mining rights. In January 2013, we acquired additional mining rights for approximately $17 million.
The partnership with the Zawawi Group will be multifaceted. The first phase is establishment of a mining venture through which we acquired 55% of Zawawi Gypsum LLC, which holds the mining rights to a gypsum quarry in Salalah, Oman. The venture will develop infrastructure and operate the quarry. Quarry mining operations are targeted for startup in the third quarter of 2013.
The second phase of the partnership is a 50/50 manufacturing venture with Zawawi Minerals LLC to build and operate a low cost wallboard plant in the Salalah Free Zone, Oman. The plant site is in close proximity to the gypsum quarry and port facilities, facilitating access into markets in India and the Middle East. The target for commencement of wallboard production operations is the first half of 2014.
See Note 16 to the consolidated financial statements in Item 8 of this report for additional information regarding the accounting for the mining and manufacturing ventures.


24


Consolidated Results of Operations
 
 
 
 
 
 
 
Favorable (Unfavorable)
 
 
 
 
 
 
 
2012 vs. 2011
 
2011 vs. 2010
(dollars in millions, except per-share data)
2012
 
2011
 
2010
 
$
 
%
 
$
 
%
Net sales
$
3,224

 
$
2,910

 
$
2,834

 
$
314

 
11
 %
 
$
76

 
3
 %
Cost of products sold
2,829

 
2,752

 
2,697

 
(77
)
 
(3
)%
 
(55
)
 
(2
)%
Gross profit
395

 
158

 
137

 
237

 
150
 %
 
21

 
15
 %
Selling and administrative expenses
304

 
289

 
295

 
(15
)
 
(5
)%
 
6

 
2
 %
Restructuring and long-lived asset impairment charges
18

 
75

 
110

 
57

 
76
 %
 
35

 
32
 %
Operating profit (loss)
73

 
(206
)
 
(268
)
 
279

 
*

 
62

 
23
 %
Interest expense
206

 
211

 
183

 
5

 
2
 %
 
(28
)
 
(15
)%
Interest income
(4
)
 
(6
)
 
(5
)
 
(2
)
 
(33
)%
 
1

 
20
 %
Loss on extinguishment of debt
41

 

 

 
(41
)
 
*

 

 
 %
Other (income) expense, net

 
(1
)
 
1

 
(1
)
 
(100
)%
 
2

 
*

Loss from continuing operations before income taxes
(170
)
 
(410
)
 
(447
)
 
240

 
59
 %
 
37

 
8
 %
Income tax expense (benefit)
12

 
(14
)
 
(37
)
 
(26
)
 
(186
)%
 
(23
)
 
(62
)%
Loss from continuing operations
(182
)
 
(396
)
 
(410
)
 
214

 
54
 %
 
14

 
3
 %
Income from discontinued operations, net of tax
2

 
6

 
5

 
(4
)
 
(67
)%
 
1

 
20
 %
Gain on sale of discontinued operations, net of tax
55

 

 

 
55

 
*

 

 
 %
Net loss
(125
)
 
(390
)
 
(405
)
 
265

 
68
 %
 
15

 
4
 %
Less: Net income attributable to noncontrolling interest
1

 

 

 
(1
)
 
*

 

 
 %
Net loss attributable to USG
$
(126
)
 
$
(390
)
 
$
(405
)
 
$
264

 
68
 %
 
$
15

 
4
 %
Basic and diluted loss per share - continuing operations
$
(1.72
)
 
$
(3.81
)
 
$
(4.08
)
 
$
2.09

 
 
 
$
0.27

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
NET SALES
Consolidated net sales in 2012 increased $314 million, or 11%, compared with 2011. This was our second consecutive year-on-year increase since 2006. Net sales increased 16% for our North American Gypsum segment, 3% for our Worldwide Ceilings segment and 8% for our Building Products Distribution segment. The higher levels of net sales for North American Gypsum and Building Products Distribution primarily reflected increased volume and selling prices for U.S. Gypsum’s SHEETROCK® brand gypsum wallboard. The slightly higher level of net sales for Worldwide Ceilings primarily reflected an increase in net sales for USG International and USG Interiors.
Consolidated net sales in 2011 increased $76 million, or 3%, compared with 2010. This was our first year-on-year increase in net sales since 2006. Net sales increased 5% for our Worldwide Ceilings segment and 2% for our North American Gypsum segment, but were down slightly for our Building Products Distribution segment. The higher level of net sales in 2011 for Worldwide Ceilings was primarily due to USG Interiors’ higher selling prices for both ceiling grid (up 9%) and ceiling tile (up 6%) compared with 2010. The higher level of net sales for North American Gypsum was primarily attributable to increased sales of U.S. Gypsum’s DUROCK® brand cement board and other complementary products. Net sales for Building Products Distribution were down slightly due to lower sales of gypsum wallboard that were offset to a large extent by increased sales of construction metal and ceiling products.
GROSS PROFIT
Gross profit was $395 million in 2012, $158 million in 2011 and $137 million in 2010. Gross profit as a percentage of net sales was 12.3% in 2012, 5.4% in 2011 and 4.8% in 2010. The higher percentage for 2012 compared with 2011 was primarily driven by higher selling prices and lower per unit manufacturing costs for U.S. Gypsum's SHEETROCK® brand gypsum wallboard. The higher percentage for 2011 compared with 2010 was primarily due to improved gross margins for L&W Supply and USG Interiors.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled $304 million in 2012, $289 million in 2011 and $295 million in 2010. The increase for 2012 compared with 2011 primarily reflected increased expenses related to our incentive compensation plans driven by improved operating results in 2012. The decline for 2011 compared with 2010 primarily reflected lower expenses for compensation and benefits. As a percentage of net sales, selling and administrative expenses were 9.4% in 2012, 9.9% in 2011 and 10.4% in 2010. The year-over-year decrease in the percentage for 2012 compared with 2011 was attributable to the higher level of net sales partially offset by higher incentive compensation expense in 2012. The year-over-year decrease in the percentage for 2011 compared with 2010 was attributable the higher level of net sales and lower selling and administrative expenses in 2011.

25


RESTRUCTURING AND LONG-LIVED ASSET IMPAIRMENT CHARGES
As part of our continuing effort to adapt our operations to market conditions, we implemented restructuring activities in each of the past four years. We recorded restructuring and long-lived asset impairment charges of $18 million in 2012, $75 million in 2011 and $110 million in 2010. These charges primarily related to the temporary idling or permanent closure of production facilities, the permanent closure of a gypsum quarry and ship loading facility, the closure of distribution branches and salaried workforce reductions. Total cash payments charged against our restructuring reserve in 2012 amounted to $24 million. We expect future payments to be approximately $8 million in 2013, $5 million in 2014 and $7 million after 2014. On a segment basis, $14 million of all expected future payments relate to Building Products Distribution, $3 million to North American Gypsum and $3 million to Corporate. All restructuring-related payments in 2012 were funded with cash on hand. We expect that the future payments will be funded with cash from operations or cash on hand.
See Note 12 to the consolidated financial statements for additional information related to restructuring and long-lived asset impairment charges and restructuring reserves.
INTEREST EXPENSE
Interest expense was $206 million in 2012, $211 million in 2011 and $183 million in 2010. The decrease in interest expense primarily reflects the favorable impact of our second quarter 2012 refinancing which included the issuance of 7.875% senior notes due 2020, the proceeds of which were used to fund a portion of the repurchase of our 9.75% senior notes due 2014. Interest expense increased in 2011 compared to 2010 primarily due to higher average levels of debt outstanding.
LOSS ON EXTINGUISHMENT OF DEBT
In the second quarter of 2012, we recorded a $41 million loss on the extinguishment of debt, including premiums, the write-off of unamortized debt discount and deferred financing fees, in connection with the tender offer and repurchase of our 9.75% senior notes.
INCOME TAX EXPENSE (BENEFIT)
We had income tax expense of $12 million in 2012 compared with an income tax benefit of $14 million in 2011. Our income tax expense for 2012 was higher compared to 2011 due to higher earnings in foreign jurisdictions. Our income tax benefit for 2011 was lower compared to 2010 as we did not have an allocation of income tax benefit to loss from continuing operations and a corresponding allocation of income tax expense to other comprehensive income in 2011. The effective tax rates based on our loss from continuing operations were (7.1)% for 2012, 3.4% for 2011 and 8.3% for 2010. Since recording a full valuation allowance against our federal and state deferred tax assets in 2009, the effective tax rate is generally lower than statutory rates as we do not record a tax benefit from our losses in any domestic jurisdiction.
GAIN ON SALE OF DISCONTINUED OPERATIONS, NET OF TAX
On December 27, 2012, we consummated the sale of our European operations and received net proceeds of $73 million, resulting in a gain on the sale of $55 million net of tax. See further discussion in Note 3 to our consolidated financial statements included in Item 8 of this report.


26


Segment Results of Operations
NORTH AMERICAN GYPSUM
Net sales and operating profit (loss) for the businesses comprising our North American Gypsum segment were as follows:
 
 
 
 
 
 
 
2012 vs. 2011
 
2011 vs. 2010
 
 
 
 
 
 
 
Favorable (Unfavorable)
 
Favorable (Unfavorable)
(dollars in millions)
2012(a)
 
2011(b)
 
2010(c)
 
$
 
%
 
$
 
%
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Gypsum
$
1,512

 
$
1,297

 
$
1,295

 
$
215

 
17
 %
 
$
2

 
 %
CGC (gypsum)
336

 
307

 
290

 
29

 
9
 %
 
17

 
6
 %
USG Mexico
166

 
161

 
151

 
5

 
3
 %
 
10

 
7
 %
Other **
63

 
32

 
33

 
31

 
97
 %
 
(1
)
 
(3
)%
Eliminations
(114
)
 
(102
)
 
(111
)
 
(12
)
 
(12
)%
 
9

 
8
 %
Total
$
1,963

 
$
1,695

 
$
1,658

 
$
268

 
16
 %
 
$
37

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Profit (Loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Gypsum
$
89

 
$
(78
)
 
$
(160
)
 
$
167

 
*

 
$
82

 
51
 %
CGC (gypsum)
12

 
(1
)
 
17

 
13

 
*

 
(18
)
 
*

USG Mexico
20

 
21

 
17

 
(1
)
 
(5
)%
 
4

 
24
 %
Other **
(5
)
 
(78
)
 
(39
)
 
73

 
94
 %
 
(39
)
 
(100
)%
Eliminations
(1
)
 

 

 
(1
)
 
*

 

 
 %
Total
$
115

 
$
(136
)
 
$
(165
)
 
$
251

 
*

 
$
29

 
18
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**
Includes our shipping company, our mining operation in Little Narrows, Nova Scotia, Canada, and, for 2011 and 2010, our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada that we closed in the fourth quarter of 2011.
(a)
Operating income in 2012 included restructuring and long-lived asset impairment charges of $15 million. These charges included $9 million related to our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada, $5 million related to U.S. Gypsum and $1 million related to CGC (Gypsum).
(b)
The operating loss for 2011 included restructuring and long-lived asset impairment charges of $67 million. These charges included $57 million related to our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada, and $10 million related to U.S. Gypsum.
(c)
The operating loss for 2010 included restructuring and long-lived asset impairment charges of $93 million. These charges included $75 million related to U.S. Gypsum and $18 million related to our mining operation in Nova Scotia, Canada.
U.S. Gypsum - 2012 Compared With 2011: Net sales in 2012 increased $215 million, or 17%, compared with 2011. Net sales of SHEETROCK® brand gypsum wallboard increased $164 million, or 36%, reflecting an 18% increase in average gypsum wallboard selling prices, which increased sales by $96 million and a 15% increase in gypsum wallboard shipments which raised sales by $68 million. Net sales of products other than SHEETROCK® brand gypsum wallboard were $890 million in 2012, a 6% increase compared with 2011. Increases in sales were partially offset by a decrease in net sales for FIBERROCK® brand gypsum fiber panels of $2 million primarily due to a 7% decrease in volume. Net sales of SHEETROCK® brand joint compound were up $9 million due to a 2% increase in selling prices and a 1% increase in volume. Net sales of DUROCK® brand cement board increased $11 million due to a 15% increase in volume, partially offset by a 1% decrease in selling prices. Net sales of other products, including freight, increased an aggregate of $33 million compared with 2011.
Operating income of $89 million was recorded in 2012 compared with an operating loss of $78 million in 2011. The $167 million favorable change in operating profit reflected a gross profit increase of $142 million for SHEETROCK® brand gypsum wallboard primarily due to a higher selling prices and lower per unit costs, a gross profit increase of $10 million for SHEETROCK® brand joint compound primarily due to higher selling prices, lower per unit costs and higher volume, a gross profit increase of $4 million for DUROCK® brand cement board due to an increase in volume and 3% lower per unit costs partially offset by a 1% decrease in selling prices, an $8 million aggregate increase in gross profit for other product lines, a $3 million favorable variance in gains on sale of surplus properties, and an $11 million decrease in miscellaneous costs. Gross profit for FIBEROCK® brand gypsum fiber panels was unchanged compared to 2011 as the decrease in volume was offset by a higher gross margin due to 3% lower per unit costs. A $5 million decrease in restructuring and long-lived asset impairment charges in 2012 compared with 2011 also favorably impacted operating profit. These favorable variations were partially offset by the absence of a $12 million favorable adjustment related to a third quarter 2011 settlement with United States and Canadian tax authorities related to the deductibility of certain expenses in the years 2003 through 2006 that had the effect of reallocating those expenses from U.S. Gypsum to CGC and its Windsor operations, and a $4 million increase in selling and administrative expenses compared to 2011.

27


New housing construction increased in 2012, resulting in increased demand for gypsum wallboard, as discussed above. U.S. Gypsum shipped 4.72 billion square feet of SHEETROCK® brand gypsum wallboard in 2012, a 15% increase from 4.11 billion square feet in 2011. During 2012, SHEETROCK® Brand UltraLight Panels accounted for 45% of all of our wallboard shipments in the United States. We estimate that industry capacity utilization rates averaged approximately 58% during 2012, while U.S. Gypsum’s capacity utilization rate averaged 51%.
In 2012, our nationwide average realized selling price for SHEETROCK® brand gypsum wallboard was $131.70 per thousand square feet, an increase of 18% from $111.27 in 2011 due to the implementation of a price increase for wallboard on January 1, 2012. During the fourth quarter of 2012, our average realized selling price for SHEETROCK® brand gypsum wallboard was $132.26 per thousand square feet, virtually unchanged from the third quarter of 2012 and an increase of 17% compared to the fourth quarter of 2011. Effective January 1, 2013, we implemented a price increase for wallboard with the new price being set for all of 2013. However, it is uncertain that we will be able to maintain the increase in our gypsum wallboard selling prices.
Manufacturing costs per unit decreased 8% for U.S. Gypsum’s SHEETROCK® brand gypsum wallboard in 2012 compared with 2011, due primarily to per unit cost decreases of 25% for energy, 11% for fixed costs and 1% for raw materials, primarily due to wastepaper partially offset by starch.
U.S. Gypsum - 2011 Compared With 2010: Net sales in 2011 increased $2 million, or less than 1%, compared with 2010. Net sales of SHEETROCK® brand gypsum wallboard declined $10 million, or 2%, reflecting a 2% decrease in gypsum wallboard shipments which lowered sales by $9 million. Average gypsum wallboard selling prices were 1% lower than in 2010, which reduced sales by $1 million. Net sales of products other than SHEETROCK® brand gypsum wallboard were $839 million in 2011, a 1% increase compared with 2010. Net sales for FIBEROCK® brand gypsum fiber panels declined $8 million primarily due to a 22% decrease in volume as a result of the decision by that product’s principal customer to reduce the number of tile backer products it carries. Net sales of SHEETROCK® brand joint compound were down $3 million due to a 3% decrease in volume, partially offset by a 2% increase in selling prices. Net sales of DUROCK® brand cement board increased $7 million due to a 10% increase in volume, partially offset by a 1% decrease in selling prices. Net sales of other products increased an aggregate of $16 million compared with 2010.
An operating loss of $78 million was recorded in 2011 compared with an operating loss of $160 million in 2010. The $82 million favorable change in operating loss reflected a $65 million decrease in restructuring and long-lived asset impairment charges, a $12 million favorable adjustment related to a third quarter 2011 settlement with United States and Canadian tax authorities related to the deductibility of certain expenses in the years 2003 through 2006 that had the effect of reallocating those expenses from U.S. Gypsum to CGC and its Windsor operations, a $12 million reduction in depreciation in 2011 resulting from the 2010 impairment of permanently closed and idled production facilities, a gross profit increase of $4 million for SHEETROCK® brand gypsum wallboard primarily due to a higher gross margin resulting from sales of higher margin SHEETROCK® Brand UltraLight Panels, a $5 million decrease in selling and administrative expenses compared to 2010 and a $3 million aggregate increase in gross profit for other product lines. These favorable variations were partially offset by gross profit declines of $9 million for SHEETROCK® brand joint compound primarily due to the lower volume and 6% higher per unit costs and $4 million for FIBEROCK® brand gypsum fiber panels primarily due to the lower volume and a lower gross margin and a $6 million increase in miscellaneous costs. DUROCK® brand cement board gross profit was unchanged compared to 2010 as the increase in volume was offset by a lower gross margin due to the lower selling prices and 2% higher per unit costs.
New housing construction continued to be weak in 2011, resulting in reduced demand for gypsum wallboard, as discussed above. U.S. Gypsum shipped 4.11 billion square feet of SHEETROCK® brand gypsum wallboard in 2011, a 2% decrease from 4.19 billion square feet in 2010. We estimate that industry capacity utilization rates averaged approximately 53% during 2011, while U.S. Gypsum’s capacity utilization rate averaged 43%. For the fourth quarter of 2011, we estimate that the industry operated at 56% of capacity while U.S. Gypsum’s wallboard plants operated at approximately 46% of capacity.
In 2011, our nationwide average realized selling price for SHEETROCK® brand gypsum wallboard was $111.27 per thousand square feet, down slightly from $111.66 in 2010. During the fourth quarter of 2011, our average realized selling price for SHEETROCK® brand gypsum wallboard was $112.59 per thousand square feet, an increase of 1% compared to both the third quarter of 2011 and the fourth quarter of 2010 due primarily to increased sales of SHEETROCK® Brand UltraLight Panels.
Manufacturing costs per unit decreased 2% for U.S. Gypsum’s SHEETROCK® brand gypsum wallboard in 2011 compared with 2010, due primarily to per unit cost decreases of 7% for fixed costs and 8% for energy, partially offset by a 4% increase in per unit costs for raw materials, primarily wastepaper.

28


CGC (gypsum):  Net sales in 2012 were $336 million, up $29 million compared to 2011 primarily driven by an increase of $23 million in net sales for SHEETROCK® brand gypsum wallboard due to a 16% increase in volume partially offset by a decrease of 2% in selling prices. Net sales of joint treatment increased by $3 million and net sales of other non-wallboard products increased by $5 million. Currency translation had a $3 million unfavorable impact on net sales. Operating profit was $12 million in 2012 compared with an operating loss of $1 million in 2011. This $13 million increase in operating profit was primarily driven by the absence in 2012 of a $9 million unfavorable adjustment in 2011 related to the settlement with United States and Canadian tax authorities. An increase of $3 million in gross profit for gypsum wallboard, primarily due to the higher volume and 3% decrease in per unit manufacturing costs, and a $4 million increase in gross profit for non-wallboard products, was partially offset by a decrease of $1 million in gross profit for joint treatment products and an increase of $1 million in overhead costs.
Comparing 2011 with 2010, net sales increased $17 million as a result of a $12 million favorable effect of currency translation and a $5 million favorable variation for outbound freight due to a higher surcharge for fuel. Sales of SHEETROCK® brand gypsum wallboard declined $2 million despite a 2% increase in volume due to 3% lower selling prices. Sales of joint treatment increased $2 million. Operating loss was $1 million in 2011 compared with operating income of $17 million in 2010. This $18 million decline was attributable to a $12 million decrease in gypsum wallboard gross profit, primarily due to 5% higher per unit manufacturing costs due to higher raw material costs and a $9 million unfavorable adjustment related to the settlement with United States and Canadian tax authorities, partially offset by a gross profit increase of $3 million for joint treatment products.
USG Mexico: Net sales for our Mexico-based subsidiary were $166 million in 2012 compared with $161 million in 2011. Sales increases of $11 million for gypsum wallboard, reflecting 23% higher volume and 4% higher selling prices, $1 million for joint treatment products and $1 million for other products were partially offset by the $4 million unfavorable impact of currency translation, a $2 million decline in sales for DUROCK® brand cement board and a $2 million decline in sales of drywall steel. Operating profit was $20 million in 2012 compared with $21 million in 2011 reflecting a $4 million decrease in operating profit for cement board and a $1 million decrease in operating profit for joint treatment products offset by an increase in operating profit of $2 million for gypsum wallboard and $2 million for other nonwallboard products.
Comparing 2011 with 2010, net sales increased $10 million reflecting an aggregate increase of $11 million for ceiling products, glass mat sheathing and miscellaneous product lines and $2 million for drywall steel. These increases were partially offset by a $2 million decrease in net sales of gypsum wallboard and a $1 million unfavorable effect of currency translation. Operating profit was $21 million in 2011 compared with $17 million in 2010 reflecting gross profit increases of $3 million for joint treatment products, $1 million for cement board and an aggregate of $5 million for other nonwallboard products, partially offset by a $2 million decrease in gross profit for gypsum wallboard and a $3 million increase in miscellaneous costs.
Other: Other includes our shipping company, our mining operation in Little Narrows, Nova Scotia, Canada, and, for 2011 and 2010, our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada that we closed in the fourth quarter of 2011. Net sales for these operations were $63 million in 2012, $32 million in 2011 and $33 million in 2010. The increase in 2012 compared to 2011 is primarily related to higher revenue from our shipping company. An operating loss of $5 million was recognized in 2012 compared with operating losses of $78 million for 2011 and $39 million for 2010. The reduction in the operating loss in 2012 compared to 2011 was driven by the favorable impact of $21 million of higher operating profit from our shipping company, a $48 million reduction in restructuring and long-lived asset impairment charges and the absence of a $3 million unfavorable adjustment related to the settlement with United States and Canadian tax authorities in the third quarter of 2011.

29


WORLDWIDE CEILINGS
Net sales and operating profit for the businesses comprising our Worldwide Ceilings segment were as follows:
 
 
 
 
 
 
 
2012 vs. 2011
 
2011 vs. 2010
 
 
 
Favorable (Unfavorable)
 
Favorable (Unfavorable)
(dollars in millions)
2012 (b)
 
2011
 
2010 (c)
 
$
 
%
 
$
 
%
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
USG Interiors
$
455

 
$
448

 
$
422

 
$
7

 
2
 %
 
$
26

 
6
 %
USG International (a)
128

 
117

 
119

 
11

 
9
 %
 
(2
)
 
(2
)%
CGC (ceilings)
64

 
67

 
62

 
(3
)
 
(4
)%
 
5

 
8
 %
Eliminations
(47
)
 
(49
)
 
(48
)
 
2

 
4
 %
 
(1
)
 
(2
)%
Total
$
600

 
$
583

 
$
555

 
$
17

 
3
 %
 
$
28

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
USG Interiors
$
71

 
$
66

 
$
57

 
$
5

 
8
 %
 
$
9

 
16
 %
USG International (a)
1

 
3

 
(1
)
 
(2
)
 
(67
)%
 
4

 
*

CGC (ceilings)
11

 
13

 
10

 
(2
)
 
(15
)%
 
3

 
30
 %
Total
$
83

 
$
82

 
$
66

 
$
1

 
1
 %
 
$
16

 
24
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* not meaningful
 
 
 
 
 
 
 
 
 
 


 
 
(a)
As discussed in Note 3 to our consolidated financial statements in Item 8 of this report, our European business operations have been classified as discontinued operations; therefore, the table above and discussion below exclude the results of the European operations previously included in USG International.
(b)
Operating profit for 2012 included restructuring and long-lived asset impairment charges of $1 million related to USG Interiors.
(c)
Operating profit for 2010 included restructuring and long-lived asset impairment charges of $1 million related to USG International.
USG Interiors - 2012 Compared With 2011: Net sales for our domestic ceilings business increased to $455 million in 2012, a $7 million, or 2%, increase from $448 million in 2011. This increase was primarily due to higher selling prices partially offset by lower volume for ceiling grid and tile. Operating profit of $71 million was up $5 million, or 8%, compared with 2011 primarily due to a higher gross margin for ceiling grid and tile partially offset by the lower volume.
Net sales in 2012 increased $4 million for ceiling grid, $2 million for ceiling tile and an aggregate of $1 million for other product lines compared with 2011. The increase in ceiling grid sales was primarily attributable to a 4% increase in ceiling grid selling prices, which favorably affected sales by $5 million partially offset by a 1% decrease in ceiling grid volume, which unfavorably affected sales by $1 million. A 4% increase in ceiling tile selling prices, which favorably affected sales by $12 million, was partially offset by a 4% decrease in ceiling tile volume which adversely affected sales by $10 million.
The increase in operating profit was attributable to a $5 million increase in gross profit for ceiling grid and a $2 million increase in gross profit for ceiling tile, partially offset by a $1 million increase in both miscellaneous costs and restructuring and long-lived asset impairment charges as compared to 2011. Gross profit for ceiling grid was favorably affected by $5 million due to an increase in gross margin reflecting higher selling prices. Per unit manufacturing costs were unchanged in 2012 compared to 2011. Gross profit for ceiling tile increased by $5 million as a result of an increase in gross margin reflecting higher selling prices partially offset by higher per unit manufacturing costs. The improvement in ceiling tile gross profit was partially offset by a $3 million decline due to the decrease in ceiling tile volume.
USG Interiors - 2011 Compared With 2010: Net sales increased to $448 million in 2011, a $26 million, or 6%, increase from $422 million in 2010. This increase was primarily due to higher selling prices for ceiling grid and tile, partially offset by lower ceiling tile volume. Operating profit of $66 million was up $9 million, or 16%, compared with 2010 primarily due to a higher gross margin for ceiling grid.
Net sales in 2011 increased $13 million for ceiling grid, $10 million for ceiling tile and an aggregate of $3 million for other product lines compared with 2010. The increase in ceiling grid sales was primarily attributable to a 9% increase in ceiling grid selling prices, which favorably affected sales by $11 million, and a 1% increase in ceiling grid volume, which favorably affected sales by $2 million. A 6% increase in ceiling tile selling prices, which favorably affected sales by $15 million, was partially offset by a 2% decrease in ceiling tile volume which adversely affected sales by $5 million.
The increase in operating profit was attributable to an $8 million increase in gross profit for ceiling grid, a $2 million increase in gross profit for ceiling tile and a $1 million decline in selling and administrative expenses, partially offset by a $2

30


million decrease in gross profit for all other product lines. Gross profit for ceiling grid was favorably affected by $7 million due to an increase in gross margin reflecting higher selling prices, partially offset by higher per unit manufacturing costs, and by $1 million due to the increase in grid volume. Gross profit for ceiling tile increased by $3 million as a result of an increase in gross margin reflecting higher selling prices partially offset by higher per unit manufacturing costs. The improvement in ceiling tile gross profit was partially offset by a $1 million decline due to the decrease in ceiling tile volume.
USG International: Net sales in 2012 for USG International's continuing businesses were $128 million, an increase of $11 million, or 9%, compared to 2011. This increase was primarily attributable to increased sales of gypsum wallboard, joint treatment and ceiling tile in Latin America partially offset by lower exports to the Middle East. Operating profit for USG International decreased to $1 million in 2012 from $3 million in 2011 primarily reflecting higher selling and administrative expenses partially offset by improved gross margins for gypsum products in Latin America.
Net sales in 2011 were $117 million, a decrease of $2 million, or 2%, compared to 2010. This decrease was primarily attributable to the favorable impact of currency translation. Increased sales of gypsum products in Latin America were offset by lower total net sales in the Asia-Pacific region. Operating profit for USG International increased to $3 million in 2011 from an operating loss of $1 million in 2010 primarily reflecting lower selling and administrative expenses, higher gross margins for gypsum products in Latin America and the favorable impact of currency translation, while total gross profit was flat in the Asia-Pacific region.
CGC (ceilings): Net sales in 2012 were $64 million, a decrease of $3 million, or 4%, compared with 2011. Operating profit was $11 million in 2012 compared with $13 million for 2011. These results primarily reflected lower average realized selling prices for ceiling tile and lower volumes for ceiling grid partially offset by higher average realized selling prices for ceiling grid.
Comparing 2011 with 2010, net sales increased $5 million, or 8%, to $67 million and operating profit increased to $13 million from $10 million. These results primarily reflected higher selling prices for ceiling tile and grid.
BUILDING PRODUCTS DISTRIBUTION
Net sales and operating loss for our Building Products Distribution segment, which consists of L&W Supply, were as follows:

 
 
 
 
 
 
2012 vs. 2011
 
2011 vs. 2010
 
 
 
 
 
 
 
Favorable (Unfavorable)
 
Favorable (Unfavorable)
(dollars in millions)
2012
 
2011(a)
 
2010(b)
 
$
 
%
 
$
 
%
Net sales
$
1,145

 
$
1,060

 
$
1,061

 
$
85

 
8
%
 
$
(1
)
 
*

Operating loss
(33
)
 
(68
)
 
(97
)
 
35

 
51
%
 
29

 
30
%
* not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
(a)
The operating loss for 2011 included restructuring and long-lived asset impairment charges of $7 million.
(b)
The operating loss for 2010 included restructuring and long-lived asset impairment charges of $15 million.
L&W Supply - 2012 Compared With 2011: Net sales in 2012 increased $85 million compared with 2011. Net sales of gypsum wallboard increased $55 million, or 18%, reflecting a 13% increase in average gypsum wallboard selling prices, which favorably affected sales by $41 million, and a 5% increase in gypsum wallboard shipments, which favorably affected sales by $14 million. Net sales increased $8 million, or 3%, for construction metal products and $2 million, or 1%, for ceilings products. Net sales of all other products increased $20 million, or 7%. Same-location net sales for 2012 were up 12% compared with 2011.
An operating loss of $33 million was incurred in 2012 compared with an operating loss of $68 million in 2011. The improvement of $35 million was driven by increased gross profit of $13 million for gypsum wallboard, an aggregate gross profit increase of $13 million for other product lines, a decrease in operating expenses of $2 million and a decrease in restructuring expenses of $7 million. The gross profit improvement for gypsum wallboard reflected a $3 million increase due to the higher level of shipments and a 10% increase in gross margin. That gross margin increase and the impact of rebates favorably affected operating profit by $10 million.
L&W Supply - 2011 Compared With 2010: Net sales in 2011 declined $1 million compared with 2010. Net sales of gypsum wallboard declined $39 million, or 12%, reflecting a 16% decrease in gypsum wallboard shipments, which adversely affected sales by $54 million, partially offset by a 5% increase in average gypsum wallboard selling prices, which favorably affected sales by $15 million. Net sales increased $26 million, or 11%, for construction metal products and $17 million, or 8%, for

31


ceilings products primarily due to higher selling prices. Net sales of all other products decreased $5 million, or 2%. Same-location net sales for 2011 were up 1% compared with 2010.
An operating loss of $68 million was incurred in 2011 compared with an operating loss of $97 million in 2010. Operating expenses decreased $38 million primarily due to L&W Supply’s cost reduction programs and restructuring charges decreased $8 million. These favorable factors were partially offset by lower gross profits for gypsum wallboard (down $4 million) and other product lines (down $13 million). The decline in gross profit for gypsum wallboard reflected an $11 million decrease due to the lower shipments, offset by an 18% increase in gypsum wallboard gross margin and the impact of rebates.
L&W Supply - Distribution Branches: As of December 31, 2012, L&W Supply served its customers from 142 distribution branches in the United States. It operated 155 branches as of December 31, 2011 and 163 branches as of December 31, 2010. During the economic downturn, L&W Supply has focused on reducing its cost structure and optimizing utilization of its personnel and assets. As part of L&W Supply's efforts to reduce its cost structure, it closed a total of 125 distribution branches from January 1, 2007 through December 31, 2012, including 13 branches closed in 2012. The closures have been widely dispersed throughout the markets that L&W Supply serves.
CORPORATE
Operating losses for Corporate were $83 million in 2012, $80 million in 2011 and $69 million in 2010. The increased loss in 2012 compared to 2011 primarily reflected a higher level of expenses related to incentive compensation and an enterprise-wide initiative to improve back office efficiency partially offset by lower expenses related to upgrades to our technology. The increased loss in 2011 compared to 2010 primarily reflected a higher level of expenses associated with upgrades to our technology infrastructure and an enterprise-wide initiative to improve back office efficiency.

32


Liquidity and Capital Resources
LIQUIDITY
As of December 31, 2012, we had $677 million of cash and cash equivalents and marketable securities compared with $651 million as of December 31, 2011. Our total liquidity was $874 million as of December 31, 2012 (including $197 million of borrowing availability under our revolving credit facilities) compared to $834 million as of December 31, 2011 (including $183 million of borrowing availability under our revolving credit facilities).
Our cash is invested in cash equivalents and marketable securities pursuant to an investment policy that has preservation of principal as its primary objective. The policy includes provisions regarding diversification, credit quality and maturity profile that are designed to minimize the overall risk profile of our investment portfolio. The securities in the portfolio are subject to normal market fluctuations. See Note 4 to the consolidated financial statements for additional information regarding our investments in marketable securities.
Total debt, consisting of senior notes, convertible senior notes, industrial revenue bonds and outstanding borrowings under our ship mortgage facility, amounted to $2.309 billion ($2.327 billion in aggregate principal amount less $18 million of unamortized original issue discount) as of December 31, 2012 and $2.304 billion ($2.325 billion in aggregate principal amount less $21 million of unamortized original issue discount) as of December 31, 2011. As of December 31, 2012 and during the quarter then ended, there were no borrowings under our revolving credit facilities. See Note 6 to the consolidated financial statements for additional information about our debt.
Our credit facility is guaranteed by our significant domestic subsidiaries and secured by their and USG’s trade receivables and inventory. It matures in December 2015 and allows for revolving loans and letters of credit (up to $250 million) in an aggregate principal amount not to exceed the lesser of (a) $400 million or (b) a borrowing base determined by reference to the trade receivables and inventory of USG and its significant domestic subsidiaries. The maximum allowable borrowings may be increased at our request with the agreement of the lenders providing increased or new lending commitments, provided that the maximum allowable borrowings after giving effect to the increase may not exceed $600 million. Availability under the credit facility will increase or decrease depending on changes to the borrowing base over time. The facility contains a single financial covenant that would require us to maintain a minimum fixed charge coverage ratio of 1.1-to-1.0 if and for so long as the excess of the borrowing base over the outstanding borrowings under the credit agreement is less than the greater of (a) $40 million and (b) 15% of the lesser of (i) the aggregate revolving commitments at such time and (ii) the borrowing base at such time. As of December 31, 2012, our fixed charge coverage ratio was 0.56-to-1.0. Because we do not currently satisfy the required fixed charge coverage ratio, we must maintain borrowing availability of at least $44 million under the credit facility. Taking into account the most recent borrowing base calculation, borrowings available under the credit facility were approximately $157 million. The maximum amount available for borrowing under CGC’s credit facility is Can. $40 million, all of which is available for borrowing. The U.S. dollar equivalent of borrowings available under CGC’s credit facility as of December 31, 2012 was $40 million.
On April 12, 2012, we completed a cash tender offer pursuant to which we repurchased approximately $118 million of our 9.75% senior notes due in 2014, or the 2014 Senior Notes, for aggregate consideration, including tender offer premium and accrued and unpaid interest, of approximately $136 million. Subsequent to the completion of the cash tender offer, we repurchased $123 million of the 2014 Senior Notes in privately negotiated transactions, for aggregate consideration, including premiums and accrued and unpaid interest, of $145 million. As of December 31, 2012, $59 million of the 2014 Senior Notes remained outstanding. Also on April 12, 2012, we issued $250 million of 7.875% senior notes due March 30, 2020, or the 2020 Senior Notes. The net proceeds from the issuance of the 2020 Senior Notes and cash on hand were used to fund the repurchases of the 2014 Senior Notes and all related costs and expenses.
CASH FLOWS
The following table presents a summary of our cash flows:
(millions)
2012
 
2011
 
2010
Net cash provided by (used for):
 
 
 
 
 
Operating activities - Continuing operations
$
68

 
$
(205
)
 
$
(95
)
Investing activities - Continuing operations
138

 
(55
)
 
(298
)
Financing activities - Continuing operations
(38
)
 
(9
)
 
326

Discontinued operations
9

 
10

 

Effect of exchange rate changes on cash
4

 
(5
)
 
6

Net increase (decrease) in cash and cash equivalents
$
181

 
$
(264
)
 
$
(61
)

33


Operating Activities: Higher cash flows from operating activities in 2012 compared to 2011 primarily reflected stronger operating results in 2012 and, to a lesser extent, lower cash outflows for working capital. As of December 31, 2012, working capital (current assets less current liabilities) amounted to $776 million, and the ratio of current assets to current liabilities was 2.41-to-1. As of December 31, 2011, working capital amounted to $715 million, and the ratio of current assets to current liabilities was 2.36-to-1. Higher working capital at December 31, 2012 includes the net proceeds received for the December 2012 sale of our European businesses of $73 million partially offset by the net assets sold.
Investing Activities: Net cash provided by investing activities in 2012 was $138 million compared to net cash used in investing activities of $55 million during 2011. The variation was primarily driven by a cash inflow in 2012 of $154 million from the sales or maturities of marketable securities, net of purchases, compared with a cash outflow in 2011 of $10 million for purchases of marketable securities, net of sales or maturities. Higher cash inflows also include $73 million of net proceeds from the sale of our European businesses in the fourth quarter of 2012. These increased cash inflows were partially offset by higher cash outflows including $16 million of higher capital expenditures, $16 million for the acquisition of mining rights and $14 million of investments in our joint ventures in 2012. Capital expenditures amounted to $70 million in 2012 compared with $54 million in 2011.
Financing Activities: The variation between 2012 and 2011 primarily reflected the $277 million paid to repurchase our $241 million principal amount of the 2014 Senior Notes, partially offset by the $243 million of net proceeds received from the issuance of the $250 million senior notes due 2020.
LIQUIDITY OUTLOOK
In 2012, our total capital spending included $70 million of capital expenditures in the normal course of our business, $16 million for the acquisition of mining rights and $18 million of investments in and loans to joint ventures. In total for 2013, we plan to spend approximately $175 million on capital spending and investments in and loans to joint ventures. This amount includes $110 million of capital expenditures in the normal course of our business and an additional $65 million consisting of the capital spending made by our Oman consolidated subsidiaries, our acquisition of mining rights and our investments in and loans to joint ventures. We expect to fund these expenditures with cash from operations or cash on hand, and, if determined to be appropriate and they are available, borrowings under our revolving credit facility or other alternative financings.
Approved capital expenditures for the replacement, modernization and expansion of operations totaled $320 million as of December 31, 2012 compared with $256 million as of December 31, 2011. Approved expenditures as of December 31, 2012 included $209 million for construction of a new, low-cost gypsum wallboard plant in Stockton, California. Commencement of construction of this facility has been delayed with the actual timing dependent on market conditions. Its cost will be reassessed when construction is considered ready to commence.
Interest payments are expected to decrease to approximately $194 million in 2013 compared with $200 million in 2012 primarily due to a lower average level of debt outstanding and a reduced average interest rate on our debt. We have no term debt maturities until 2014, other than approximately $4 million of annual debt amortization under our ship mortgage facility.
We believe that cash on hand, including cash equivalents and marketable securities, cash available from future operations and our credit facilities will provide sufficient liquidity to fund our operations for at least the next 12 months. Cash requirements include, among other things, capital expenditures, working capital needs, employee retirement plans funding, debt amortization and other contractual obligations. Additionally, we may consider selective strategic transactions and alliances that we believe create value, including mergers and acquisitions, joint ventures, partnerships or other business combinations, restructurings and dispositions. Transactions of these types, if any, may result in material cash expenditures or proceeds.
Our undistributed foreign earnings as of December 31, 2012 are considered permanently reinvested. The amount of cash and cash equivalents held by our foreign subsidiaries was $231 million as of December 31, 2012. Any repatriation of these funds to the U.S. would have an immaterial impact on our current tax rate due to our substantial net operating loss, or NOL, carryforwards and related valuation allowance.
Despite our present liquidity position, some uncertainty exists as to whether we will have sufficient cash flows to weather a significantly extended downturn or significant decrease in demand for our products. As discussed above, during the last several years, we took actions to reduce costs and increase our liquidity. We will continue our efforts to maintain our financial flexibility, but there can be no assurance that our efforts will be sufficient to withstand the impact of extended negative economic conditions. Under those conditions, our funds from operations and the other sources referenced above may not be sufficient to fund our operations or pursue strategic transactions, and we may be required to seek alternative sources of financing. There is no assurance, however, that we will be able to obtain financing on acceptable terms, or at all.

34


Realization of Deferred Tax Asset
As of December 31, 2012, we had federal NOL carryforwards of approximately $2.051 billion that are available to offset future federal taxable income and will expire in the years 2026 through 2032. In addition, as of that date, we had federal alternative minimum tax credit carryforwards of approximately $49 million that are available to reduce future regular federal income taxes over an indefinite period.
As of December 31, 2012, we had a gross deferred tax asset related to our state NOLs and tax credit carryforwards of $290 million, of which $1.0 million will expire in 2013. The remainder will expire if unused in years 2014 through 2032. We also had NOL and tax credit carryforwards in various foreign jurisdictions in the amount of $1 million as of December 31, 2012 against a portion of which we have historically maintained a valuation allowance.
For 2012, we established an additional valuation allowance of $83 million against our deferred tax assets primarily due to our losses during that period. As a result, we increased our deferred tax assets valuation allowance to $1.125 billion as of December 31, 2012. Recording this allowance will have no impact on our ability to utilize our U.S. federal and state NOL and tax credit carryforwards to offset future U.S. profits. We continue to believe that we ultimately will have sufficient U.S. profitability during the remaining NOL and tax credit carryforward periods to realize substantially all of the economic value of the federal NOLs and some of the state NOLs before they expire. In future periods, the valuation allowance can be reversed based on sufficient evidence indicating that it is more likely than not that a portion of our deferred tax assets will be realized.
See Note 14 to the consolidated financial statements in Item 8 for additional information regarding income tax matters.

Contractual Obligations and Other Commitments
CONTRACTUAL OBLIGATIONS
As of December 31, 2012, our contractual obligations and commitments were as follows:
 
Payments Due by Period
(millions)
Total
 
2013
 
2014-
2015
 
2016-
2017
 
There-
after
Debt obligations (a)
$
2,327

 
$
4

 
$
67

 
$
517

 
$
1,739

Other long-term liabilities (b)
707

 
6

 
20

 
8

 
673

Interest payments (c)
1,262

 
194

 
381

 
336

 
351

Purchase obligations (d)
450

 
91

 
136

 
101

 
122

Capital expenditures (e)
320

 
83

 
28

 
70

 
139

Operating leases
250

 
59

 
87

 
47

 
57

Unrecognized tax benefits (f)
16

 
2

 
7

 
1

 
6

Total
$
5,332

 
$
439

 
$
726

 
$
1,080

 
$
3,087

 
(a)
Excludes debt discount of $18 million.
(b)
Other long-term liabilities primarily consist of asset retirement obligations that principally extend over a 50-year period. The majority of associated payments are due toward the latter part of that period.
(c)
Reflects estimated interest payments on debt obligations as of December 31, 2012.
(d)
Purchase obligations primarily consist of contracts to purchase energy and certain raw materials.
(e)
Reflects estimates of future spending on capital projects that were approved prior to December 31, 2012 but were not completed by that date.
(f)
Reflects estimated payments (if required) of gross unrecognized tax benefits.
For 2013, our defined benefit pension plans have no minimum funding requirements under the Employee Retirement Income Security Act of 1974. We are evaluating our level of funding for pension plans and currently estimate that we will contribute approximately $71 million to our pension plans in 2013.
The above table excludes liabilities related to postretirement benefits (retiree health care and life insurance). We voluntarily provide postretirement benefits for eligible employees and retirees. The portion of benefit claim payments we made in 2012 was $14 million. See Note 9 to the consolidated financial statements in Item 8 for additional information on future expected cash payments for pension and other postretirement benefits.
OFF-BALANCE-SHEET ARRANGEMENTS
With the exception of letters of credit, it is not our business practice to use off-balance-sheet arrangements, such as third-party special-purpose entities.

35


GUARANTEES
We are party to a variety of agreements under which we may be obligated to indemnify a third party with respect to certain matters. We do not consider the maximum potential amount of future payments that we could be required to make under these agreements to be material.
Legal Contingencies
We are named as defendants in litigation arising from our operations, including claims and lawsuits arising from the operation of our vehicles and claims arising from product warranties, workplace or job site injuries, and general commercial disputes. This litigation includes multiple lawsuits, including class actions, relating to Chinese-manufactured drywall distributed by L&W Supply Corporation in the southeastern United States in 2006 and 2007. In addition, USG Corporation, United States Gypsum Company, and L&W Supply Corporation have been named as defendants in class action lawsuits alleging that U.S. wallboard manufacturers conspired to fix the price of wallboard sold in the United States.
We have also been notified by state and federal environmental protection agencies of possible involvement as one of numerous “potentially responsible parties” in a number of Superfund sites in the United States.
We believe that we have appropriately accrued for our potential liability in connection with these matters, taking into account the probability of liability, whether our exposure can be reasonably estimated and, if so, our estimate of our liability or the range of our liability. However, we continue to review these accruals as additional information becomes available and revise them as appropriate. We do not expect these matters involving USG to have a material adverse effect upon our results of operations, financial position or cash flows. See Note 19 to the consolidated financial statements in Item 8 for additional information regarding litigation matters. See, also, Part I, Item 1A, Risk Factors, for information regarding the possible effects of environmental laws and regulations on our businesses.
Critical Accounting Policies
In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we make decisions that impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of the relevant circumstances, current developments and historical experience. Actual amounts could differ materially from those estimated at the time the consolidated financial statements are prepared.
Our significant accounting policies are described in Note 1 to the consolidated financial statements in Item 8 of this annual report. Some of these significant accounting policies require us to make difficult, subjective or complex judgments or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (1) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made and (2) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period, would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. Our critical accounting estimates include the following:
PROPERTY, PLANT AND EQUIPMENT
We assess our property, plant and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying values of the assets may not be recoverable or a revision of remaining useful lives is necessary. Such indicators may include economic and competitive conditions, changes in our business plans or management’s intentions regarding future utilization of the assets or changes in our commodity prices. An asset impairment would be indicated if the sum of the expected future net pretax cash flows from the use of an asset (undiscounted and without interest charges) is less than the carrying amount of the asset. An impairment loss would be measured based on the difference between the fair value of the asset and its carrying value. The determination of fair value is based on an expected present value technique, in which multiple cash flow scenarios that reflect a range of possible outcomes and a risk-free rate of interest are used to estimate fair value, or on a market appraisal.
Determination as to whether and how much an asset is impaired involves significant management judgment involving highly uncertain matters, including estimating the future success of product lines, future sales volumes, future selling prices and costs, alternative uses for the assets, and estimated proceeds from disposal of the assets. However, the impairment reviews and calculations are based on estimates and assumptions that take into account our business plans and long-term investment decisions.

36


We regularly evaluate the recoverability of assets idled or at risk of being idled. In most cases, the idled assets are relatively older and higher-cost production plants or lines, which we refer to as facilities, have relatively low carrying values. The last downturn during which we idled production facilities occurred in 1981 and 1982. At that time, we idled three facilities, all of which were restarted during the subsequent recovery. We consider idled facilities to be unimpaired if we plan to reopen them to meet future demand and the estimated future undiscounted cash flows exceed the carrying values of those facilities. We record impairment charges for facilities that we permanently close if their fair value is less than their carrying value and for temporarily idled facilities with estimated future undiscounted cash flows that do not exceed the carrying values of those facilities. Because we believe that we may be in the early stages of a recovery in the housing and other construction markets we serve, and a significant recovery is likely over the longer term which would result in higher demand than today’s conditions, it is our current intention to restart all facilities that are currently idled. As a result, estimated future undiscounted cash flows from their operations exceed their carrying values.
See Note 12 to our consolidated financial statements in Item 8 of this report for discussion of asset impairments during the years ended 2012, 2011 and 2010. On a segment basis, all of the permanently closed and temporarily idled wallboard, quarry, ship loading and paper facilities and related long-lived asset impairment charges during the years ended 2012, 2011 and 2010 related to our North American Gypsum segment. As of December 31, 2012, the total carrying value of net property, plant and equipment for the North American Gypsum segment was $1.856 billion, including the aggregate carrying value of $29 million, after impairment charges, of its facilities permanently closed and temporarily idled.
Our gypsum wallboard business is cyclical in nature, and prolonged periods of weak product demand or excess product supply may have a material adverse effect on our business, financial condition and operating results. This business is also sensitive to changes in general economic conditions, including, in particular, conditions in the North American housing and construction-based markets. The rate of new home construction in the United States remains near historically low levels despite increases of approximately 28.1% in 2012 compared with 2011, 3.7% in 2011 compared with 2010 and 6% in 2010 compared with 2009.
INTANGIBLE ASSETS
We have indefinite and definite lived intangible assets with net values of $30 million and $32 million, respectively, as of December 31, 2012. See Note 5 to our consolidated financial statements in Item 8 of this report. Intangible assets determined to have indefinite useful lives, primarily comprised of trade names, are not amortized. We perform impairment tests for intangible assets with indefinite useful lives annually, or more frequently if events or circumstances indicate they might be impaired. The impairment tests consist of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. An income approach is used for valuing trade names. Assumptions used in the income approach include projected revenues and assumed royalty, long-term growth and discount rates.
In 2012, 2011 and 2010, our impairment tests for trade names indicated that there was no impairment.
Intangible assets with definite lives, primarily customer relationships, are amortized over their useful lives. Judgment is used in assessing whether the carrying amount is not expected to be recoverable over the assets’ estimated remaining useful lives and whether conditions exist to warrant a revision to the remaining periods of amortization. An asset impairment would be indicated if the sum of the expected future net pretax cash flows from the use of an asset group (undiscounted and without interest charges) is less than the carrying amount of the asset group. An impairment loss would be measured based on the difference between the fair value of the asset group and its carrying value. Customer relationships are currently being amortized over 10 years using annualized attrition rates. We periodically compare the current attrition rate with the attrition rates assumed in the initial determination of the useful life to ensure that the useful life is still appropriate. As of December 31, 2012, we determined that no impairment of customer relationships existed nor was a revision to the remaining useful life necessary.
EMPLOYEE RETIREMENT PLANS
We maintain defined benefit pension plans for most of our employees. Most of these plans require employee contributions in order to accrue benefits. We also maintain plans that provide postretirement benefits (retiree health care and life insurance) for eligible existing retirees and for eligible active employees who may qualify for coverage in the future. For accounting purposes, these plans depend on assumptions made by management, which are used by actuaries we engage to calculate the projected and accumulated benefit obligations and the annual expense recognized for these plans. The assumptions used in developing the required estimates primarily include discount rates, expected return on plan assets for the funded plans, compensation increase rates, retirement rates, mortality rates and, for postretirement benefits, health care cost trend rates.

37


We determined the assumed discount rate based on a hypothetical AA yield curve represented by a series of annualized individual discount rates. Each underlying bond issue is required to have a credit rating of Aa or better by Moody’s Investors Service or a credit rating of AA or better by Standard & Poor’s Financial Services LLC. We consider the underlying types of bonds and our projected cash flows of the plans in evaluating the yield curve selected. The use of a different discount rate would impact net pension and postretirement benefit costs and benefit obligations. In determining the expected return on plan assets, we use a “building block” approach, which incorporates historical experience, our pension plan investment guidelines and expectations for long-term rates of return. The use of a different rate of return would impact net pension costs. A one-half percentage point change in the assumed discount rate and return on plan asset rate would have the following effects (dollars in millions): 
 
 
 
Increase (Decrease) in
Assumptions
Percentage
Change
 
2013
Net Annual
Benefit Cost
 
2012
Projected
Benefit
Obligation
Pension Benefits:
 
 
 
 
 
Discount rate
0.5% increase
 
$
(8
)
 
$
(91
)
Discount rate
0.5% decrease
 
9

 
101

Expected return on plan assets
0.5% increase
 
(5
)
 

Expected return on plan assets
0.5% decrease
 
5

 

Postretirement Benefits:
 
 
 
 
 
Discount rate
0.5% increase
 
$
(1
)
 
$
(11
)
Discount rate
0.5% decrease
 
1

 
12

Compensation increase rates are based on historical experience and anticipated future management actions. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality rates.
We developed health care cost trend rate assumptions based on historical cost data and an assessment of likely long-term trends. Effective January 1, 2011, we made modifications to our U.S. postretirement health care plan to limit the increase in the annual amount we pay for retiree health care coverage for certain current and future retirees to 3%. Any additional increase will be the responsibility of plan participants. In 2011, we also amended our U.S. postretirement benefit plan to require retiree medical plan participants to begin purchasing individual coverage in the Affordable Insurance Exchanges or individual Medicare marketplace beginning January 1, 2015 using a company-funded subsidy based upon years of service at retirement. After January 1, 2015, due to this 2011 amendment to the U.S. postretirement health care plan, we do not expect to have a material exposure to health care cost inflation for the U.S. plan.
Results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect the net benefit cost of future periods. The sensitivity of assumptions reflects the impact of changing one assumption at a time and is specific to conditions at the end of 2012. Economic factors and conditions could affect multiple assumptions simultaneously, and the effects of changes in assumptions are not necessarily linear.
See Note 9 to our consolidated financial statements in Item 8 of this report for additional information regarding costs, plan obligations, plan assets and discount rate and other assumptions, including the health care cost trend rate.
INCOME TAXES
We record income taxes (benefit) under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the change is enacted.
Accounting rules require a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed periodically. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more-likely-than-not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. Under the accounting rules, this assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused and tax planning alternatives. A history of cumulative losses for a certain threshold period is a significant form of negative evidence

38


used in the assessment, and the accounting rules require that we have a policy regarding the duration of the threshold period. If a cumulative loss threshold is met, forecasts of future profitability may not be used as positive evidence related to the realization of the deferred tax assets in the assessment. Consistent with practices in the home building and related industries, we have a policy of four years as our threshold period for cumulative losses. The 2011 and 2010 tax expense reflected the recording of a valuation allowance against virtually all of our U.S. federal and state deferred tax assets.
We recognize the tax benefits of an uncertain tax position only if those benefits are more likely than not to be sustained upon examination by the relevant taxing authorities. Unrecognized tax benefits are subsequently recognized at the time the more-likely-than-not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.
See Note 14 to our consolidated financial statements in Item 8 of this report for additional information on deferred income taxes and valuation allowances.

Recent Accounting Pronouncements and New Tax Legislation
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires enhanced disclosures for financial instruments subject to enforceable master netting arrangements. This requirement will be effective retrospectively for annual and interim periods beginning on or after January 1, 2013. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
The American Taxpayer Relief Act of 2012 as signed into law on January 2, 2013 extends through 2013 an array of temporary business tax provisions such as the research and experimentation credit, the look- through rule for payments between related controlled foreign corporations, fuel credits and credits for AMT tax paid in lieu of bonus depreciation, among other things.  The effects of The American Taxpayer Relief Act of 2012 will be recognized in our first quarter of fiscal 2013, which is the quarter that the law was enacted, and is not expected to have a material impact on our results of operations, financial condition or cash flows.   

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 materially from management’s expectations and, accordingly, may affect our sales and profitability or other results and liquidity. Actual results may differ materially due to various other factors, including:
economic conditions, such as the levels of new home and other construction activity, employment levels, the availability of mortgage, construction and other financing, mortgage and other interest rates, housing affordability and supply, the levels of foreclosures and home resales, currency exchange rates and consumer confidence;
capital markets conditions and the availability of borrowings under our credit agreement or other financings;
competitive conditions, such as price, service and product competition;
shortages in raw materials;
changes in raw material and energy costs;
volatility in the assumptions used to determine the funded status of our pension plans;
the loss of one or more major customers and our customers’ ability to meet their financial obligations to us;
capacity utilization rates for us and the industry;
our ability to expand into new geographic markets and the stability of such markets;
changes in laws or regulations, including environmental and safety regulations;
the satisfactory performance of certain business functions by third party service providers;
our ability to achieve anticipated savings from cost reduction programs;
the outcome in contested litigation matters;
the effects of acts of terrorism or war upon domestic and international economies and financial markets; and
acts of God.
We assume no obligation to update any forward-looking information contained in this report.

39


Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use derivative instruments to manage selected commodity price and foreign currency exposures. We do not use derivative instruments for speculative trading purposes, and we typically do not hedge beyond two years.
COMMODITY PRICE RISK
We use swap and option contracts to manage our exposure to fluctuations in commodity prices associated with anticipated purchases of natural gas. Currently, a significant portion of our anticipated purchases of natural gas is hedged for 2013. The notional amount of these hedge contracts in place as of December 31, 2012 was $49 million. We review our positions regularly and make adjustments as market and business conditions warrant. The fair value of these contracts was a $2 million unrealized loss as of December 31, 2012. A sensitivity analysis was prepared to estimate the potential change in the fair value of our natural gas hedge contracts assuming a hypothetical 10% change in market prices. Based on the results of this analysis, which may differ from actual results, the potential change in the fair value of our natural gas hedge contracts as of December 31, 2012 was $4 million. This analysis does not consider the underlying exposure.
FOREIGN CURRENCY EXCHANGE RISK
We have foreign exchange forward contracts to hedge purchases of products and services denominated in foreign currencies. The notional amount of these contracts was $84 million as of December 31, 2012, and they mature by December 31, 2013. The fair value of these contracts was a $1 million unrealized gain as of December 31, 2012. A sensitivity analysis was prepared to estimate the potential change in the fair value of our foreign exchange forward contracts assuming a hypothetical 10% change in foreign exchange rates. Based on the results of this analysis, which may differ from actual results, the potential change in the fair value of our foreign exchange forward contracts as of December 31, 2012 was $9 million. This analysis does not consider the underlying exposure.
INTEREST RATE RISK
As of December 31, 2012, most of our outstanding debt was fixed-rate debt. A sensitivity analysis was prepared to estimate the potential change in interest expense assuming a hypothetical 100-basis-point increase in interest rates. Based on the results of this analysis, which may differ from actual results, the potential change in interest expense would be immaterial.
See Notes 1 and 7 to the consolidated financial statements in Item 8 for additional information regarding our financial exposures.

40


Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
Page
CONSOLIDATED FINANCIAL STATEMENTS:
 
 
 
 
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
 
 
All other schedules have been omitted because they are not required or applicable or the information is included in the consolidated financial statements or notes thereto.

41


USG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(millions, except share and per-share data)
Years Ended December 31,
 
2012
 
2011
 
2010
Net sales
$
3,224

 
$
2,910

 
$
2,834

Cost of products sold

2,829

 
2,752

 
2,697

Gross profit
395

 
158

 
137

 
 
 
 
 
 
Selling and administrative expenses
304

 
289

 
295

Restructuring and long-lived asset impairment charges
18

 
75

 
110

Operating profit (loss)
73

 
(206
)
 
(268
)
 
 
 
 
 
 
Interest expense
206

 
211

 
183

Interest income
(4
)
 
(6
)
 
(5
)
Loss on extinguishment of debt
41

 

 

Other (income) expense, net

 
(1
)
 
1

Loss from continuing operations before income taxes
(170
)
 
(410
)
 
(447
)
 
 
 
 
 
 
Income tax expense (benefit)
12

 
(14
)
 
(37
)
Loss from continuing operations
(182
)
 
(396
)
 
(410
)
 
 
 
 
 
 
Income from discontinued operations, net of tax
2

 
6

 
5

Gain on sale of discontinued operations, net of tax
55