10-K 1 usg10-k12312013.htm 10-K USG10-K 12.31.2013

 
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, 2013
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, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $1,754,959,829. Solely for this purpose, directors, executive officers and greater than 10% record shareholders are considered the affiliates of the registrant.
The number of shares of the registrant’s common stock outstanding as of January 31, 2014 was 137,441,359.
 
Documents Incorporated By Reference: Certain sections of USG Corporation’s definitive Proxy Statement for use in connection with its 2014 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 18.7% in 2013 to 926,800 compared with 780,600 in 2012. This followed a 28.2% increase in 2012 compared with 2011. For December 2013, the seasonally-adjusted annualized rate of housing starts was reported by the U.S. Census Bureau to be 1,048,000 units. While housing starts increased for the fourth consecutive year in 2013, they are still low by historical standards. Industry analysts believe that the recovery in new residential construction will continue, although the recovery over the next few years may be uneven and modest, and that over the longer term housing starts will begin to reach historical averages. Industry analysts’ forecasts for 2014 housing starts in the United States included in the most recent Blue Chip Economic Indicators are 1,000,000 to 1,230,000 units, based upon the average of the bottom ten and top ten forecasts included in the report, respectively. We currently estimate that 2014 housing starts in the United States will be in the range of 1,000,000 to 1,100,000.
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's most recent construction market forecast, total floor space for which new nonresidential construction contracts were signed in the United States increased 5% in 2013 compared with 2012. This followed a 10% increase in 2012 compared with 2011 and a 3% increase in 2011 compared with 2010. McGraw-Hill Construction forecasts that total floor space for which new nonresidential construction contracts in the United States are signed will increase approximately 11% in 2014 from the 2013 level. McGraw-Hill's forecast includes several building types which do not generate significant demand for our products; therefore, we anticipate new nonresidential construction growth in our business sectors in 2014 compared to 2013 will be in the mid-single digits.
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 5.09 million units in 2013, the highest level since 2006, reflecting a 9.2% increase from the 2012 level of 4.66 million units. The generally rising levels of existing home sales and home resale values in 2012, and continuing into 2013, have contributed to an increase in demand for our products from the residential repair and remodel market in 2013. We currently estimate that overall repair and remodel spending in 2013 increased approximately 7% over the 2012 level and that overall repair and remodel spending growth in 2014, compared to 2013, will be in the mid-single digits.
However, the rate of recovery in the new residential construction market, new nonresidential construction market and the repair and remodel market still remains uncertain and will depend on broader economic issues such as employment, foreclosures, house price trends, availability of mortgage financing, interest rates, income tax policy, consumer confidence, lease turnover rates, discretionary business investment, job growth and governmental building-related expenditures.
We expect improvement over the next twelve months in the construction industries in our largest international markets, Canada and Mexico. Emerging markets, including those that are within the territory of the USG Boral Joint Venture, as discussed below under Recent Developments, provide opportunities for our operations to serve the increased demand for products in these regions, although the rate of growth in certain emerging markets has slowed.

1


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 eliminated approximately 4,830 salaried and hourly positions between 2007 and 2012. As part of our efforts to reduce the cost structure of our building products distribution business, which is comprised of L&W Supply Corporation and its subsidiaries, or L&W Supply, we closed a total of 125 distribution branches during that same time frame. L&W Supply did not close any branches during 2013, and, as of December 31, 2013, served its customers from 143 distribution branches in the United States, including one new distribution branch opened in the fourth quarter of 2013. We continue to monitor economic conditions in our markets and will adjust our operations as needed.
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.
Recent Developments
On February 27, 2014, we and certain of our subsidiaries formed a 50/50 joint venture (the "USG Boral Joint Venture") with Boral Limited ("Boral") and certain of its subsidiaries. The USG Boral Joint Venture distributes and sells certain building products, mines raw gypsum and sells natural and synthetic gypsum throughout Asia, Australasia and the Middle East (the "Territory"). The products that USG and Boral manufacture and distribute through the USG Boral Joint Venture include products for wall, ceiling, floor lining and exterior systems that utilize gypsum, wallboard, mineral fiber ceiling tiles, steel grid and studs, joint compound and other products.
As consideration for our 50% ownership in the USG Boral Joint Venture, we made a $513 million cash payment to Boral, which includes a $500 million base price and $13 million of customary estimated working capital and net debt adjustments, contributed to the USG Boral Joint Venture our subsidiaries and joint venture investments in China, Singapore, India, Malaysia, New Zealand, Australia and the Middle East, including our joint ventures in Oman, and granted to the USG Boral Joint Venture a license to use certain of our intellectual property rights in the Territory. We funded our cash payment with the net proceeds from our October 2013 issuance of $350 million of 5.875% senior notes and cash on hand. In the event certain performance targets are satisfied by the USG Boral Joint Venture, we will be obligated to pay Boral scheduled earnout payments in an aggregate amount up to $75 million, comprised of $25 million based on performance during the first three years after closing and up to $50 million based on performance during the first five years after closing. The cash portion of the consideration paid to Boral remains subject to customary post-closing adjustments.
Our investment in the USG Boral Joint Venture will be accounted for as an equity method investment and initially measured at cost. Our existing wholly owned subsidiaries and consolidated variable interest entities that were contributed into the joint venture will be deconsolidated.
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 55%, 15% and 30%, respectively, of our 2013 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 2013. 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 2013.
PRODUCTS
North American Gypsum’s products are used to construct the walls, ceilings, roofs and floors of residential, commercial and institutional buildings, as well as 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, including a broad portfolio of gypsum panels and a line of joint compounds, corner beads, and tape used for finishing wallboard joints. The DUROCK® line of cement board and accessories provides water-resistant and fire-resistant assemblies for both interior and exterior applications. The FIBEROCK® line of gypsum-fiber panels includes abuse-

2


resistant interior wall panels, tile backer boards, and flooring underlayments. The SECUROCK® line of products includes glass faced gypsum panels used for exterior sheathing and roof cover boards, as well as gypsum fiber panels used as roof cover boards. The LEVELROCK® line of poured gypsum underlayments provides surface leveling and enhanced sound-dampening performance for residential and commercial flooring applications. Our construction plaster products, sold under the brand names RED TOP®, IMPERIAL®, DIAMOND® and SUPREMO®, are used to provide a custom finish for residential and commercial interiors. These products provide aesthetic, sound-dampening, fire-retarding and abuse-resistance value. We also produce gypsum-based products for agricultural and industrial customers to use in a wide variety of applications, including soil conditioning, road repair, fireproofing and ceramics.
As the industry leader in lightweight innovation, we are the only manufacturer to offer a broad portfolio of lightweight gypsum panels. In 2010, we introduced SHEETROCK® Brand UltraLight Panels, the industry's first lightweight gypsum wallboard panel for use in interior wall and ceiling applications. In 2011, we broadened our lightweight portfolio with the introductions of SHEETROCK® Brand UltraLight Panels FIRECODE® 30 and SHEETROCK® Brand UltraLight Panels FIRECODE® X. FIRECODE® 30 is a lightweight 5/8-inch gypsum wallboard panel that meets standards for use in non-rated and 30-minute fire-rated partitions. FIRECODE® X is a lightweight 5/8-inch gypsum wallboard panel that has a special core that gives it additional fire resistance compared to regular wallboard and is designed for use in commercial and residential construction where type X wallboard is required.
In 2012, we introduced the industry's first lightweight moisture- and mold-resistant wallboard, SHEETROCK® Brand UltraLight MOLD TOUGH® Panels. These lightweight wall and ceiling panels are suitable for new residential, repair and remodel construction, wood and steel framing, and can be used as a tile substrate. In 2013, we extended our UltraLight technology to our manufactured housing baseboard line and to our line of veneer plaster substrates.
SHEETROCK® Brand UltraLight Panels accounted for 55% of all of our wallboard shipments in the United States in 2013 and 45% in 2012.
MANUFACTURING
North American Gypsum manufactures products at 40 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 59% of the gypsum used by our plants in North America in 2013.
Some of our manufacturing plants purchase or acquire synthetic gypsum and natural gypsum rock from outside sources. In 2013, outside purchases or acquisitions of synthetic gypsum and natural gypsum rock accounted for approximately 35% and 6%, 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. Six of our 19 gypsum wallboard plants in operation use synthetic gypsum for all of their needs, while another six 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. In addition, certain power companies have recently 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. 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 2013.
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 2013

3


residential and nonresidential repair and remodel activity generated about 55% of volume demand for gypsum board,
new residential construction generated about 33% of volume demand,
new nonresidential construction generated about 7% of volume demand, and
other activities, such as exports and temporary construction, generated the remaining 5% 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 20.9 billion square feet in 2013, up approximately 8% from 19.3 billion square feet in 2012. 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 2013, unchanged from 2012.
Our competitors in the United States include: National Gypsum Company, CertainTeed Corporation (a subsidiary of Compagnie de Saint-Gobain SA), Georgia-Pacific (a subsidiary of Koch Industries, Inc.), American Gypsum Company LLC (a unit of Eagle Materials Inc.), Continental Building Products LLC (Lone Star Funds) and PABCO Gypsum (a division of PABCO Building Products). Our competitors in Canada include CertainTeed Corporation, Georgia-Pacific and Cabot Gypsum Company. Our major competitors in Mexico include Panel Rey, S.A. (a Grupo Promax Company) and Comex-Lafarge (a joint venture between Comex and Lafarge SA). The principal methods of competition are quality of products, service, pricing, compatibility of systems and product design features.
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 worldwide.
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 in Part II, Item 8 of this report for additional information related to discontinued operations.
As discussed above under Recent Developments, on February 27, 2014, we contributed certain assets to the USG Boral Joint Venture, including our operations in the Asia-Pacific region. As a result, our Worldwide Ceilings segment will no longer include those contributed assets.
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 13 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.

4


MARKETING AND DISTRIBUTION
Worldwide Ceilings sells products primarily in markets related to the construction and renovation of nonresidential buildings. During 2013, approximately 60% of Worldwide Ceilings’ net sales were from repair and remodel activity, primarily nonresidential, 38% of its net sales were from new nonresidential construction and 2% 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. Sales of Worldwide Ceilings’ products are seasonal in nature. Sales are generally weaker in the fourth quarter of the calendar year as compared to the preceding three quarters.
COMPETITION
Our principal competitors in acoustical ceiling tile include Armstrong World Industries, Inc., Compagnie de Saint-Gobain SA, Knauf AMF GmbH & Co. KG, Odenwald Faserplattenwerk GmbH (OWA), and Rockwool International. Our principal competitors in ceiling grid include WAVE (a joint venture between Armstrong World Industries, Inc. and Worthington Industries), Compagnie de Saint-Gobain SA and Rockwool International. 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 2013, L&W Supply distributed approximately 7% of all gypsum board in the United States, including approximately 25% of U.S. Gypsum’s gypsum board production. During 2013, approximately 35% of L&W Supply’s net sales were from residential and nonresidential repair and remodel activity, 40% 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 34% of its 2013 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. Sales of L&W’s products are seasonal in nature.  Sales are generally greater from spring through autumn when access to job sites is easier and construction activity is at its peak. L&W Supply leases approximately 90% of its facilities from third parties. Typical leases have terms of five years and include renewal options.
During the economic downturn, L&W Supply focused on reducing its cost structure and optimizing utilization of its personnel and assets. As a result, L&W Supply closed 125 distribution branches between January 2007 and September 2012. The closures were widely dispersed throughout the markets that L&W Supply serves. L&W Supply did not close any branches during 2013, and, as of December 31, 2013, served its customers from 143 distribution branches in the United States, including one new distribution branch opened in the fourth quarter of 2013.
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 March 3, 2014).
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.

5


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. 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 $21 million in 2013, $18 million in 2012 and $13 million in 2011.
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.
SIGNIFICANT CUSTOMER
On a worldwide basis, The Home Depot, Inc. accounted for approximately 15% of our consolidated net sales in each of 2013, 2012 and 2011, primarily from North American Gypsum.
OTHER
Because we fill orders upon receipt, no segment has any significant order backlog.
None of our segments has any special working capital requirements.
We consider patents, copyrights, trademarks, trade secrets, proprietary technology and similar intellectual property as critical to our success. We hold numerous patents and have registered numerous trademarks of varying duration in multiple legal jurisdictions. Further, we have filed patent applications and applications for the registration of trademarks in the United States and internationally. Although we consider our patents, licenses and trade secrets to constitute valuable assets, we do not regard any of our businesses as being materially dependent upon individual patents, trade secrets, or licenses.
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, 2013, we had approximately 8,900 employees worldwide.
See Note 13 to the consolidated financial statements in Part II, Item 8 of this report for financial information pertaining to revenue and assets by geographic region and our segments and Item 1A, Risk Factors, for information regarding the risks associated with conducting business in international locations, as well as 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.


6


Item 1A.
RISK FACTORS
Our business, financial condition and operating results are subject to various risks and uncertainties. We have described below significant factors that may adversely affect our industry and our business, financial condition, operating results and cash flows. 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, operating results and cash flows.
Our business is cyclical in nature, and is particularly dependent on the housing and construction-based markets. Continued weakness, or future downturns or delays in the recovery of these markets, may have a material adverse effect on our business, financial condition, operating results and cash flows.
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. Housing starts and new nonresidential construction in the United States remain low by historical standards. Further, the residential and non-residential repair and remodel market, which accounts for the largest portion of our sales, has seen only a modest increase in 2013 compared to 2012, after years of substantial decline. Primarily in response to adverse market conditions, since January 2007, we permanently closed or temporarily idled certain of our highest cost gypsum wallboard production facilities, paper production facilities and other facilities. As a result of these closures, we have recorded long-lived asset impairment charges aggregating approximately $120 million since January 2007. If our markets do not return to historic levels, or if they experience future downturns, additional material write-downs or impairment charges may be required in the future.
We cannot predict the duration of the current market conditions, or the timing or strength of any recovery of the housing and construction-based markets, which may depend on broader economic issues such as employment, the availability of credit, lending practices, interest rates, foreclosures, house price trends, availability of mortgage financing, income tax policy, and consumer confidence. We also cannot provide any assurances that the housing and construction-based markets will continue to recover, or that further operational adjustments will not be required to address market conditions. Continued weakness, delays in recovery, or future downturns in the housing and construction-based markets may have a material adverse effect on our business, financial condition, operating results and cash flows.
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. Further, a majority of our businesses are seasonal, which has caused in the past, and will likely cause in the future, our quarterly results to vary significantly from quarter to quarter. 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, operating results and cash flows.
Our customers and suppliers are exposed to risks associated with economic 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 weak 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 or 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, operating results and cash flows.
Our substantial indebtedness may adversely affect our business, financial condition and operating results.
We have a substantial amount of indebtedness. As of December 31, 2013, we had $2.36 billion of total debt, consisting of senior notes, convertible senior notes, industrial revenue bonds and outstanding borrowings under our ship mortgage facility and our Oman joint ventures' credit facilities. 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;

7


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, taking advantage of favorable business opportunities or executing our strategic priorities;
place us at a relative competitive disadvantage compared to our competitors that have proportionately less debt;
limit our flexibility to plan for, or react to, changes in our businesses and the industries in which we operate, which may adversely affect our operating results and ability to meet our debt service obligations;
increase our vulnerability to the current and potentially more severe adverse general economic and industry conditions; and
limit our ability, or increase the cost, to refinance our indebtedness.
Under the terms of our debt instruments, we are permitted to incur substantial additional indebtedness. If we incur additional indebtedness, the risks related to our substantial indebtedness may intensify.
We require a significant amount of liquidity to service our indebtedness and fund operations, capital expenditures, research and development efforts, acquisitions and other corporate expenditures.
Our ability to fund operations, capital expenditures, research and development efforts, acquisitions and other corporate expenditures, including repayment of our indebtedness, depends on our ability to generate cash through future operating performance, which is subject to economic, financial, competitive, legislative, regulatory and other factors. Many of these factors are beyond our control. We cannot ensure that our businesses will generate sufficient cash flow from operations or that future borrowings or other financing will be available to us in an amount sufficient to pay our indebtedness or to fund our other needs.
We are required to post letters of credit or cash as collateral primarily in connection with our hedging transactions, insurance programs and bonding activities. The amounts of collateral we are required to post may vary based on our financial position and credit ratings. Use of letters of credit as collateral reduces our borrowing availability under our domestic revolving credit agreement and, therefore, like the use of cash as collateral, reduces our overall liquidity and our ability to fund other business activities.
If we are unable to generate sufficient cash flow to fund our needs, we may need to pursue one or more alternatives, such as to:
curtail our operations;
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; or
sell additional equity.
Any curtailment of operations, reduction or delay in planned capital expenditures, research and development or acquisitions, or any sales of assets or businesses, may materially and adversely affect our future revenue prospects. In addition, we cannot ensure that we will be able to raise additional equity capital, restructure or refinance any of our indebtedness or obtain additional financing on commercially reasonable terms or at all.
We face competition in each of our businesses. If we cannot effectively compete in the marketplace, our business, financial condition, operating results and cash flows 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.

8


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 significant buying power, which may materially and adversely affect our revenues, financial condition and operating results.
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, financial condition and operating results may be materially and adversely affected.
The loss of sales to one or more of our major customers may have a material adverse effect on our business, financial condition, operating results and cash flows.
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, operating results and cash flows may be materially and adversely affected, particularly for the period in which the reduction, delay or cancellation occurs and also possibly for subsequent periods.
If costs of key raw materials or energy increase, or the availability of key raw materials or 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.
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. Six of our 19 gypsum wallboard plants in operation use synthetic gypsum for all of their needs, while another six use it for some of their needs. The suppliers of synthetic gypsum are primarily power companies, and certain power companies have recently 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 business, financial condition, operating results and 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.

9


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.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has promulgated rules regarding disclosure of the presence in a company’s products of certain metals, known as “conflict minerals,” which are metals mined from the Democratic Republic of the Congo and adjoining countries, as well as procedures regarding a manufacturer’s efforts to identify the sourcing of those minerals from this region. Complying with these rules requires investigative efforts, which has and will continue to cause us to incur associated costs, and could adversely affect the sourcing, supply, and pricing of materials used in our products, or result in process or manufacturing modifications, all of which could adversely affect our business, financial condition, operating results and cash flows.
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 and cash flows 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. We are disadvantaged by the hedge agreements when spot prices are less than contractually specified prices.
In addition, the results of our hedging agreements could be negative in any period depending on price changes in the hedged exposures. Further, changes to the price of natural gas, including as a result of environmental or other legislation, 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.
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. A significant production cost differential could have a material adverse effect on our business, financial condition, operating results and cash flows.
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 operating results 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 $114 million as of December 31, 2013 and $403 million as of December 31, 2012. 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.

10


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, operating results and cash flows.
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, including the USG Boral Joint Venture, 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 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;
the incurrence of significant charges, such as asset devaluation or restructuring charges;
the incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate; and
the 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.
Our interest in the USG Boral Joint Venture significantly increases our exposure to the risks of operating internationally, which could adversely affect our business, financial condition, operating results and cash flows.
Our interest in the USG Boral Joint Venture expands our geographic footprint and increases the importance of international business to our future operations, growth and prospects. Further, it is a strategic priority of ours to continue to grow and diversify our earnings by expanding in select emerging markets. Our foreign operations, including the USG Boral Joint Venture, and our international expansion strategy are subject to a number of risks, including:
compliance with United States laws affecting operations outside of the United States, such as the Foreign Corrupt Practices Act or similar anti-bribery laws and regulations;
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;
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, operating results and cash flows.

11


The USG Boral Joint Venture reduces our control over certain of our assets and could give rise to disputes with Boral that could adversely affect our business, financial condition, operating results and cash flows.
The USG Boral Joint Venture involves risks not otherwise present when we operate our business through wholly-owned entities. For example:
Certain major decisions with respect to the USG Boral Joint Venture require the majority or unanimous approval of the joint venture’s board or shareholders. Accordingly, we may not be able to obtain approval of certain matters that would be in our best interests.
A deadlock with respect to certain fundamental decisions may result in the triggering of a sale process of the USG Boral Joint Venture. In such a case, the terms of the sale may be less attractive than if we had held onto our investment.
The USG Boral Joint Venture is operated in accordance with the terms of a shareholders agreement (the "Shareholders Agreement") that limits our ability to transfer our interest in the USG Boral Joint Venture. As a result, we may be unable to sell our interest in the USG Boral Joint Venture when we would otherwise like.
The USG Boral Joint Venture may not pay dividends if such payments are, among other things, restricted pursuant to the terms of the credit facilities maintained by the USG Boral Joint Venture, inconsistent with the then-applicable strategic plan, or illegal. Accordingly, we may not receive dividend payments from the USG Boral Joint Venture in the amounts that we currently anticipate or at all, which may adversely impact our ability to receive any economic benefit from the USG Boral Joint Venture.
If we or certain of our affiliates are subject to a change of control, or if certain other events of default under the Shareholders Agreement occur with respect to us, we may be required to sell our entire interest in the USG Boral Joint Venture at fair market value, as determined in accordance with the Shareholders Agreement, which may be substantially less than we would otherwise be willing to sell our interest in the USG Boral Joint Venture.
We have provided unconditional and irrevocable guarantees of the obligations of our subsidiaries under two share sale and subscription agreements and the Shareholders Agreement (together, the “Joint Venture Agreements”) and have agreed to indemnify Boral and its subsidiaries for all losses, actions, proceedings and judgments resulting from any default or delay in performance by our subsidiaries thereunder. Any such payments may have a material adverse effect on our business, financial condition and operating results.
In certain circumstances, a capital call may be issued to the shareholders of the USG Boral Joint Venture in order to obtain additional funding for the joint venture’s operations. If we do not provide capital and Boral does, Boral may receive additional shares in the USG Boral Joint Venture, thereby diluting our interest and impairing our rights under the Shareholders Agreement.
Boral may become insolvent, refuse to make additional capital contributions or fail to meet its obligations under the Joint Venture Agreements, which may result in certain liabilities to us for guarantees and other commitments.
Boral may have economic or other business interests or goals that are or become inconsistent with our interests or goals, or we may become engaged in a dispute with Boral that could require us to spend additional resources to resolve such dispute and have an adverse impact on the operations and profitability of the USG Boral Joint Venture.
In the event we exit the USG Boral Joint Venture, we may be restricted from competing in certain markets, many of which we anticipate to be high-growth markets, until the later of the third anniversary of our exit and ten years from the commencement of the USG Boral Joint Venture.
If any of these risks were to materialize, our business, financial condition, operating results and cash flows could be negatively impacted.
If we are unable to adequately protect our intellectual property and other proprietary rights, our business, financial condition and operating results could be materially and adversely affected.
Our success depends, in part, upon our intellectual property rights. We rely on a combination of contractual rights, copyright, trademark and trade secret laws to establish and protect our intellectual property. We also maintain patents for certain of our technologies. We customarily require our employees and independent contractors to execute confidentiality agreements or otherwise to agree to keep our proprietary information confidential when their relationship with us begins. In addition, we have entered into certain contractual intellectual property protections in connection with the licensure and use of our intellectual property by the USG Boral Joint Venture.

12


Despite our efforts, the steps we have taken to protect our intellectual property may be inadequate. Existing trade secret, patent, trademark and copyright laws offer only limited protection. Our patents could be invalidated or circumvented. In addition, others may develop substantially equivalent or superseding proprietary technology, or competitors may offer similar competing products, thereby substantially reducing the value of our proprietary rights.
Moreover, the laws of some foreign countries in which our products are or may be manufactured or sold may not protect our products or intellectual property rights to the same extent as do the laws of the United States. This risk may be heightened in connection with our investment in the USG Boral Joint Venture, which will result in the use of our intellectual property in additional foreign jurisdictions, some of which lack robust or accessible intellectual property protection enforcement mechanisms.
From time to time, litigation may be necessary to defend and enforce our proprietary rights. As a result, we could incur substantial costs and divert management resources, which could harm our business, regardless of the final outcome. Despite our efforts to safeguard and maintain our intellectual property rights, both in the United States and abroad, we may be unsuccessful in doing so, which could materially and adversely affect our business, financial condition, operating results and cash flows.
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.
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. Further, new environmental and safety legislation may have a material and adverse impact on our operations and results. 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 Occupational Safety and Health Administration has proposed a comprehensive occupational health standard for

13


crystalline silica which would, among other things, lower the permissible occupational exposure limits. We would incur substantial costs in connection with complying with these rules as proposed.
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, several states and the international community are considering measures to reduce emission of greenhouse gases (GHGs), including carbon dioxide and methane. Some states have already adopted greenhouse gas regulation or legislation. Following a finding by the U.S. EPA that certain GHGs represent an endangerment to human health, the U.S. EPA adopted two sets of rules regulating GHG emissions under the Clean Air Act, one that requires a reduction in emissions of GHGs from motor vehicles and another that regulates emissions of GHGs from certain large stationary sources. These rules, if they withstand legal challenge, could affect all of our U.S. wallboard and ceiling tile plants and paper mills and would require that we incur significant costs to satisfy permitting requirements. In addition, enactment of new climate control legislation, regulatory initiatives or treaties impacting the locations where we conduct business could have a materially adverse effect on our operations and demand for our services or products. For example, any new legislation, such as a “carbon tax” on energy use or establishing a “cap and trade”, could materially and adversely 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. Further, stricter regulation of emissions might require us to install emissions controls or other equipment at some or all of our manufacturing facilities, requiring significant additional capital investments.
We have outsourced certain corporate and operational functions, which makes us more dependent on third parties.
We have outsourced certain elements of our corporate and operational functions, including certain elements of our finance, accounting and information technology functions, to third party service providers, some of whom operate outside of the United States. We may outsource additional functions in the future. As a result, we rely on third parties to ensure that these functions are sufficiently performed. 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 provision of these services by our suppliers. A failure of our service providers to satisfactorily perform these functions may have an adverse effect on our business and operating results.
A small number of our stockholders could significantly influence our business, affairs and stock price.
Based on filings made with the SEC and other information available to us, we believe that, as of January 31, 2014, five stockholders collectively controlled over 50% of our common stock. 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. In addition, if one or more of these stockholders sell a large number of our shares, our share price may decline, and could then continue to trade at lower prices.
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.
Our continuing efforts to return to historic levels of 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 historic levels of 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, operating results and cash flows could be adversely

14


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 3.50% for December 2013). 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, 2013, our annual U.S. federal NOL utilization would have been limited to approximately $136 million per year.
We may use our NOL carryforwards to offset future earnings and reduce our federal income tax liability. As a result, we believe these NOL carryforwards are a substantial asset for us. We have a stockholder rights plan, or the Rights Agreement, in place to protect our stockholders from coercive takeover practices or takeover bids that are inconsistent with their best interests. On March 22, 2013, our board of directors approved an amendment to the Rights Agreement in an effort to protect our NOLs during the effective period of the amendment. Further, on May 9, 2013, we filed an amendment to our Restated Certificate of Incorporation, or the Protective Amendment, that restricts certain transfers of our common stock. The Protective Amendment is intended to protect the tax benefits of our NOLs. See Note 17 to the consolidated financial statements in Part II, Item 8 of this report for a description of the amendment to the Rights Agreement and the Protective Amendment. Although the amendment to the Rights Agreement and Protective Amendment are intended to reduce the likelihood of an “ownership change” that could adversely affect us, we cannot provide assurance that the restrictions on transferability in the amendment to the Rights Agreement and Protective Amendment will prevent all transfers that could result in such an “ownership change.” There also can be no assurance that the transfer restrictions in the Protective Amendment will be enforceable against all of our shareholders absent a court determination confirming such enforceability. The transfer restrictions may be subject to challenge on legal or equitable grounds.
A security breach of customer, employee, supplier or company information may have a material adverse effect on our business, financial condition and operating results.
In the conduct of our business we collect, use, transmit and store data on information systems, which are vulnerable to an increasing threat of continually evolving cybersecurity risks. Any security breach or compromise of our information systems could significantly damage our reputation, cause the disclosure of confidential customer, employee, supplier or company information, including our intellectual property, and result in significant losses, litigation, fines and costs. While we have implemented processes to protect against unauthorized access to our information systems and data, there is no guarantee that these procedures are adequate or will be able to prevent breaches. The regulatory environment related to information security, data collection and privacy is evolving, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.
We do not expect to pay cash dividends on our common stock for the foreseeable future.
We have not paid a dividend on our common stock since the first quarter of 2001 and have no plans to do so in the foreseeable future. Further, our credit agreement limits our ability to pay a dividend or repurchase our stock unless specified borrowing availability and fixed charge coverage ratio tests are met, and it prohibits payment of a dividend if a default exists under the agreement. Because we do not expect to pay dividends on our common stock in the foreseeable future, investors in our common stock will have to rely on the possibility of stock appreciation for a return on their investment.
 
Item 1B.
UNRESOLVED STAFF COMMENTS
None


15


Item 2.PROPERTIES
We operate plants, mines, quarries, transport ships and other facilities in North America, South America and other regions. U.S. Gypsum’s SHEETROCK® brand gypsum wallboard plants operated at approximately 55% of capacity during 2013. USG Interiors’ ceiling tile plants operated at approximately 83% of capacity during 2013. The locations of our production properties in operation as of December 31, 2013, 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*
 
 
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
 
 
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
 
 
*
Plants supplied fully by synthetic gypsum
**
Plants supplied partially by synthetic gypsum
***
Leased

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 paper-faced metal corner bead at Auburn, Washington and Weirton, West Virginia (leased). We also manufacture cement panels at a manufacturing facility in Delavan, Wisconsin.
OCEAN VESSELS
Gypsum Transportation Limited, or GTL, our wholly owned subsidiary, owns 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 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. In 2013, GTL completed the second 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***†
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, California (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***†
Sholavaram, India***†
 
 
 
 
***
Leased
On February 27, 2014, the lease agreement for this property was assigned to the USG Boral Joint Venture in connection with our investment in the USG Boral Joint Venture.
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, 2014, there were 2,574 record holders of our common stock. We currently do not pay dividends on our common stock. Our credit agreement restricts our ability to pay cash dividends on, or repurchase, our common stock. See Item 8, Financial Statements and Supplementary Data, Note 6, Debt, for more information regarding these restrictions.
We did not purchase any of our equity securities during the fourth quarter of 2013.
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 two of our non-employee directors deferred the quarterly retainers, they were entitled to receive on December 31, 2013 under our Non-Employee Director Compensation Program, into a total of 15,833 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.
During the fourth quarter of 2013, holders of $325 million aggregate principal amount of our 10% convertible senior notes due 2018 converted all such outstanding notes into 28,508,768 shares of our common stock. The issuance of the shares of our common stock was exempt from any registration requirements under the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) of the Securities Act. See Item 8, Financial Statements and Supplementary Data, Note 6, Debt, for more information regarding our 10% convertible senior notes due 2018, and the conversion thereof that occurred during the fourth quarter of 2013.
COMMON STOCK PRICES
The high and low sales prices of our common stock in 2013 and 2012 were as follows:
 
 
2013
 
2012
 
High
 
Low
 
High
 
Low
First quarter
$
30.44

 
$
26.44

 
$
19.44

 
$
10.23

Second quarter
29.25

 
22.19

 
19.35

 
13.12

Third quarter
28.58

 
23.06

 
24.23

 
15.25

Fourth quarter
28.77

 
25.13

 
28.52

 
20.84










18


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, 2013.

 
 
Value of Investment as of December 31
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
USG
$
100

 
$
175

 
$
209

 
$
126

 
$
349

 
$
353

S&P 500
100

 
126

 
146

 
149

 
172

 
228

DJUSCN
100

 
113

 
136

 
127

 
178

 
231

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,
 
2013
 
2012
 
2011 (a)
 
2010 (a)
 
2009 (a)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
3,570

 
$
3,224

 
$
2,910

 
$
2,834

 
$
3,130

Cost of products sold
2,989

 
2,829

 
2,752

 
2,697

 
3,011

Gross profit
581

 
395

 
158

 
137

 
119

Selling and administrative expenses
320

 
304

 
289

 
295

 
286

Litigation settlement income (b)

 

 

 

 
(97
)
Restructuring and long-lived asset impairment charges
3

 
18

 
75

 
110

 
76

Goodwill and other intangible asset impairment charges

 

 

 

 
43

Operating profit (loss)
258

 
73

 
(206
)
 
(268
)
 
(189
)
Interest expense
203

 
206

 
211

 
183

 
165

Interest income
(3
)
 
(4
)
 
(6
)
 
(5
)
 
(4
)
Loss on extinguishment of debt

 
41

 

 

 

Other (income) expense, net
(1
)
 

 
(1
)
 
1

 
(10
)
Income (loss) from continuing operations before income taxes
59

 
(170
)
 
(410
)
 
(447
)
 
(340
)
Income tax expense (benefit) (c)
11

 
12

 
(14
)
 
(37
)
 
445

Income (loss) from continuing operations
48

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

 
6

 
5

 
(2
)
Gain on sale of discontinued operations, net of tax

 
55

 

 

 

Net income (loss)
46

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

 

 

 

Net income (loss) attributable to USG
$
47

 
$
(126
)
 
$
(390
)
 
$
(405
)
 
$
(787
)
Income (loss) from continuing operations per common share:
 
 
 
 
 
 
 
 
 
Basic
0.45

 
(1.72
)
 
(3.81
)
 
(4.08
)
 
(7.91
)
Diluted
0.44

 
(1.72
)
 
(3.81
)
 
(4.08
)
 
(7.91
)
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (as of the end of the year):
 
 
 
 
 
 
 
 
 
Working capital
$
1,132

 
$
776

 
$
715

 
$
924

 
$
958

Current ratio
2.99

 
2.41

 
2.36

 
2.75

 
2.96

Cash and cash equivalents
810

 
546

 
365

 
629

 
690

Property, plant and equipment, net
2,103

 
2,100

 
2,104

 
2,252

 
2,411

Total assets
4,121

 
3,723

 
3,719

 
4,087

 
4,097

Long-term debt (d)
2,292

 
2,305

 
2,297

 
2,301

 
1,955

Total stockholders’ equity
662

 
19

 
156

 
619

 
930

Other Information:
 
 
 
 
 
 
 
 
 
Capital expenditures
$
124

 
$
70

 
$
54

 
$
38

 
$
43

Closing stock price per common share as of December 31
$
28.38

 
$
28.07

 
$
10.16

 
$
16.83

 
$
14.05

Average number of employees (e)
8,732

 
8,758

 
8,880

 
9,450

 
10,800

 
(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 $(8) million in 2013, $76 million in 2012, $149 million in 2011, $179 million in 2010 and $575 million in 2009.
(d)
Amounts reflected above exclude currently maturing portion of long-term debt.
(e)
As of December 31, 2013, we had approximately 8,900 employees worldwide. For 2011, 2010 and 2009, 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 2013
residential and nonresidential repair and remodel activity accounted for approximately 49% of our net sales,
new residential construction accounted for approximately 25% of our net sales,
new nonresidential construction accounted for approximately 24% 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.
As discussed below under Key Strategies and Recent Developments, on February 27, 2014, we contributed certain assets to the USG Boral Joint Venture, including our operations in the Asia-Pacific region.
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 2013, approximately 81% of our net sales were attributable to the United States. Canada accounted for approximately 11% of our net sales, and other foreign countries accounted for the remaining 8%.

21


FINANCIAL INFORMATION
Consolidated net sales increased for the third consecutive year in 2013, up $346 million, or 11%, compared to 2012. We had an operating profit of $258 million in 2013 compared to $73 million in 2012. Our income from continuing operations was $48 million, or $0.44 per diluted share, in 2013 compared to an operating loss from continuing operations of $182 million, or $(1.72) per diluted share, in 2012. As of December 31, 2013, we had $952 million of cash and cash equivalents and marketable securities compared with $677 million as of December 31, 2012. Our total liquidity was $1.266 billion as of December 31, 2013 (including $314 million of borrowing availability under our revolving credit facilities) compared to $874 million as of December 31, 2012 (including $197 million of borrowing availability under our revolving credit facilities). Liquidity as of December 31, 2013 included the net proceeds of our $350 million notes offering completed in October 2013, which we used, together with cash on hand, to fund our investment in the USG Boral Joint Venture on February 27, 2014, as further discussed below under Key Strategies and Recent Developments.
KEY STRATEGIES AND RECENT DEVELOPMENTS
We continue 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.
In line with our strategy to diversify our earnings, on February 27, 2014, we and certain of our subsidiaries formed a 50/50 joint venture (the "USG Boral Joint Venture") with Boral Limited ("Boral") and certain of its subsidiaries. The USG Boral Joint Venture manufactures, distributes and sells certain building products, mines raw gypsum and sells natural and synthetic gypsum throughout Asia, Australasia and the Middle East (the "Territory"). The products that USG and Boral manufacture and distribute through the USG Boral Joint Venture include products for wall, ceiling, floor lining and exterior systems that utilize gypsum, wallboard, mineral fiber ceiling tiles, steel grid and studs, joint compound and other products.
As consideration for our 50% ownership in the USG Boral Joint Venture, we made a $513 million cash payment to Boral, which includes a $500 million base price and $13 million of customary estimated working capital and net debt adjustments, contributed to the USG Boral Joint Venture our subsidiaries and joint venture investments in China, Singapore, India, Malaysia, New Zealand, Australia and the Middle East, including our joint ventures in Oman, and granted to the USG Boral Joint Venture a license to use certain of our intellectual property rights in the Territory. We funded our cash payment with the net proceeds from our October 2013 issuance of $350 million of 5.875% senior notes and cash on hand. In the event certain performance targets are satisfied by the USG Boral Joint Venture, we will be obligated to pay Boral scheduled earnout payments in an aggregate amount up to $75 million, comprised of $25 million based on performance during the first three years after closing and up to $50 million based on performance during the first five years after closing. The cash portion of the consideration paid to Boral remains subject to customary post-closing adjustments.
The USG Boral Joint Venture is targeting the distribution of 50% of combined after tax profits to USG and Boral in proportion to their respective ownership interests; provided, however, that the USG Boral Joint Venture will not pay dividends if such payments are, among other things, restricted pursuant to the terms of the credit facilities maintained by the USG Boral Joint Venture, inconsistent with the then-applicable strategic plan, or illegal.
The USG Boral Joint Venture will be operated in accordance with the terms of a shareholders’ agreement. As an ongoing operation, it is our intent that USG Boral Joint Venture will be funded from its net cash flow from operations and third-party financing. Our subsidiaries in Singapore, India, Malaysia, New Zealand and Australia and our consolidated joint ventures in Oman that were contributed to the USG Boral Joint Venture had approximately $51 million in net sales and an operating loss of $3 million, and as a result of our contribution of these entities to the USG Boral Joint Venture, the net sales and operating profit (loss) attributable to these entities will no longer be included in those line items on our consolidated statement of operations. Instead, our share of the equity income from the USG Boral Joint Venture will be included separately within operating profit.
Our investment in the USG Boral Joint Venture will be accounted for as an equity method investment and initially measured at cost. Our existing wholly owned subsidiaries and consolidated variable interest entities that were contributed into the joint venture will be deconsolidated.


22


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 18.7% in 2013 to 926,800 compared with 780,600 in 2012. This followed a 28.2% increase in 2012 compared with 2011. For December 2013, the seasonally-adjusted annualized rate of housing starts was reported by the U.S. Census Bureau to be 1,048,000 units. While housing starts increased for the fourth consecutive year in 2013, they are still low by historical standards. Industry analysts believe that the recovery in new residential construction will continue, although the recovery over the next few years may be uneven and modest, and that over the longer term housing starts will begin to reach historical averages. Industry analysts’ forecasts for 2014 housing starts in the United States included in the most recent Blue Chip Economic Indicators are 1,000,000 to 1,230,000 units, based on the average of the bottom ten and top ten forecasts including in the report, respectively. We currently estimate that 2014 housing starts in the United States will be in the range of 1,000,000 to 1,100,000.
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's most recent construction market forecast, total floor space for which new nonresidential construction contracts were signed in the United States increased 5% in 2013 compared with 2012. This followed a 10% increase in 2012 compared with 2011 and a 3% increase in 2011 compared with 2010. McGraw-Hill Construction forecasts that total floor space for which new nonresidential construction contracts in the United States are signed will increase approximately 11% in 2014 from the 2013 level. McGraw-Hill's forecast includes several building types which do not generate significant demand for our products; therefore, we anticipate new nonresidential construction growth in our business sectors in 2014 compared to 2013 will be in the mid-single digits.
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 5.09 million units in 2013, the highest level since 2006, reflecting a 9.2% increase from the 2012 level of 4.66 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 2013. We currently estimate that overall repair and remodel spending in 2013 increased approximately 7% over the 2012 level and that overall repair and remodel spending growth in 2014, compared to 2013, will be in the mid-single digits.
However, the rate of recovery in the new residential construction market, new nonresidential construction market and the repair and remodel market still remains uncertain and will depend on broader economic issues such as employment, foreclosures, house price trends, availability of mortgage financing, interest rates, income tax policy, consumer confidence, lease turnover rates, discretionary business investment, job growth and governmental building-related expenditures.
We expect improvement over the next twelve months in the construction industries in our largest international markets, Canada and Mexico. Emerging markets, including those that will be included in the USG Boral Joint Venture, as discussed above under Key Strategies and Recent Developments, provide opportunities for our operations to serve the increased demand for products in these regions, although the rate of growth in certain emerging markets has slowed.
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, high levels of unemployment, 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. 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, financial condition, results of operations and cash flows.

23


During the last several years, our results of operations have been adversely affected by the economic downturn and uncertainty in the financial markets. Although our North American Gypsum segment has improved in connection with increased activity in residential housing in 2012 and 2013, 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, have both showed some improvements, however, they 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 20.9 billion square feet in 2013, up approximately 8% from 19.3 billion square feet in 2012.
U.S. Gypsum shipped 5.14 billion square feet of SHEETROCK® brand gypsum wallboard in 2013, a 9% increase from 4.72 billion square feet in 2012. SHEETROCK® Brand UltraLight Panels accounted for approximately 55% of that volume. 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 2013, unchanged from 2012.
There is 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, 2014. We estimate that the industry capacity utilization rate was approximately 73% during the fourth quarter of 2013 and approximately 64% during the full year 2013 compared to approximately 63% during the fourth quarter of 2012 and approximately 58% during the full year 2012, respectively. Based on current industry trends and forecasts, demand for gypsum wallboard is expected to increase in 2014, 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 experience a modest increase in 2014 compared to 2013. Despite our realization of improvement in our average wallboard selling price, we could experience pressure on gypsum wallboard selling prices and our gross margins at such low levels of capacity utilization. In early 2014, as it did in 2013 and 2012, U.S. Gypsum implemented a price increase for wallboard with the new price being set for the year. However, it is uncertain that we will be able to maintain the increase in our gypsum wallboard selling prices. If we are unable to maintain our prices increases, our net sales and operating profit may be materially and adversely impacted.
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 from 2007 to 2012. As part of our efforts to reduce the cost structure, we closed a total of 125 distribution branches during that same timeframe. 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 current recovery 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 fully recover. However, this recovery could be slower than recoveries in the past, as the most recent downturn was especially steep. 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. If the recovery in our markets is delayed, or we experience a future downturn in the housing and construction-based markets, material write-downs or impairment charges may be required in the future. The magnitude, likelihood and timing of those possible charges would be dependent on the severity and duration of the downturn, should the downturn 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.
Our focus on costs and efficiencies, including capacity closures and overhead reductions, helped to mitigate the effects of the most recent 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.

24


Consolidated Results of Operations
 
 
 
 
 
 
 
Favorable (Unfavorable)
 
 
 
 
 
 
 
2013 vs. 2012
 
2012 vs. 2011
(dollars in millions, except per-share data)
2013
 
2012
 
2011
 
$
 
%
 
$
 
%
Net sales
$
3,570

 
$
3,224

 
$
2,910

 
$
346

 
11
 %
 
$
314

 
11
 %
Cost of products sold
2,989

 
2,829

 
2,752

 
(160
)
 
(6
)%
 
(77
)
 
(3
)%
Gross profit
581

 
395

 
158

 
186

 
47
 %
 
237

 
150
 %
Selling and administrative expenses
320

 
304

 
289

 
(16
)
 
(5
)%
 
(15
)
 
(5
)%
Restructuring and long-lived asset impairment charges
3

 
18

 
75

 
15

 
83
 %
 
57

 
76
 %
Operating profit (loss)
258

 
73

 
(206
)
 
185

 
*

 
279

 
*

Interest expense
203

 
206

 
211

 
3

 
1
 %
 
5

 
2
 %
Interest income
(3
)
 
(4
)
 
(6
)
 
(1
)
 
(25
)%
 
(2
)
 
(33
)%
Loss on extinguishment of debt

 
41

 

 
41

 
*

 
(41
)
 
*

Other (income) expense, net
(1
)
 

 
(1
)
 
1

 
*

 
(1
)
 
(100
)%
Income (loss) from continuing operations before income taxes
59

 
(170
)
 
(410
)
 
229

 
*

 
240

 
59
 %
Income tax expense (benefit)
11

 
12

 
(14
)
 
1

 
8
 %
 
(26
)
 
(186
)%
Income (loss) from continuing operations
48

 
(182
)
 
(396
)
 
230

 
*

 
214

 
54
 %
Income (loss) from discontinued operations, net of tax
(2
)
 
2

 
6

 
(4
)
 
*

 
(4
)
 
(67
)%
Gain on sale of discontinued operations, net of tax

 
55

 

 
(55
)
 
*

 
55

 
*

Net income (loss)
46

 
(125
)
 
(390
)
 
171

 
*

 
265

 
68
 %
Less: Net income (loss) attributable to noncontrolling interest
(1
)
 
1

 

 
2

 
*

 
(1
)
 
*

Net income (loss) attributable to USG
$
47

 
$
(126
)
 
$
(390
)
 
$
173

 
*

 
$
264

 
68
 %
Diluted earnings (loss) per share - continuing operations
$
0.44

 
$
(1.72
)
 
$
(3.81
)
 
$
2.16

 
 
 
$
2.09

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
NET SALES
Consolidated net sales in 2013 increased $346 million, or 11%, compared with 2012. This was our third consecutive year-on-year increase. Net sales increased 15% for our North American Gypsum segment, 4% for our Worldwide Ceilings segment and 9% for our Building Products Distribution segment. The higher levels of net sales for North American Gypsum and Building Products Distribution primarily reflected increased selling prices and higher volume for U.S. Gypsum’s SHEETROCK® brand gypsum wallboard. The higher level of net sales for Worldwide Ceilings primarily reflected an increase in net sales for USG International and USG Interiors, primarily driven by higher selling prices for ceiling tile and grid and higher volume for ceiling grid.
Consolidated net sales in 2012 increased $314 million, or 11%, compared with 2011. This was our second year-on-year increase in net sales 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 level 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.
GROSS PROFIT
Gross profit was $581 million in 2013, $395 million in 2012 and $158 million in 2011. Gross profit as a percentage of net sales was 16.3% in 2013, 12.3% in 2012 and 5.4% in 2011. The higher percentage for 2013 compared with 2012 was primarily due to higher selling prices for U.S. Gypsum's SHEETROCK® brand gypsum wallboard. 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.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled $320 million in 2013, $304 million in 2012 and $289 million in 2011. The increase for 2013 compared with 2012 primarily reflected increased employee compensation and benefits, marketing expenses related to our new brand roll-out and higher information technology costs, partially offset by lower expense related to our incentive plans. The increase for 2012 compared with 2011 primarily reflected increased expenses related to our incentive plans driven by improved operating results in 2012. As a percentage of net sales, selling and administrative expenses were 9.0% in 2013, 9.4% in 2012 and 9.9% in 2011. The year-over-year decrease in the percentage for 2013 compared with 2012 was primarily attributable to the higher level of net sales partially offset by the increased costs described above. The year-over-year decrease in the percentage for 2012 compared with 2011 was attributable the higher level of net sales partially offset by higher incentive compensation in 2012.

25


RESTRUCTURING AND LONG-LIVED ASSET IMPAIRMENT CHARGES
In recent years, we implemented restructuring activities and, as a result, recorded restructuring and long-lived asset impairment charges of $3 million in 2013, $18 million in 2012 and $75 million in 2011. 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 2013 amounted to $12 million. We expect future payments to be approximately $3 million in 2014, $3 million in 2015 and $5 million after 2015. On a segment basis, $8 million of all expected future payments relate to Building Products Distribution, $1 million to North American Gypsum and $2 million to Corporate. All restructuring-related payments in 2013 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 $203 million in 2013, $206 million in 2012 and $211 million in 2011. Lower interest expense in 2013 primarily reflects the favorable impact of (a) the conversion of $325 million of our 10% convertible senior notes into common stock in December 2013 resulting in a decrease of $3 million of interest expense, (b) an increase in the amount of interest capitalized in 2013 compared to 2012, driven by higher capital expenditures, which resulted in a decrease of $3 million of interest expense and (c) the favorable impact of our second quarter 2012 refinancing, which included the issuance of 7.875% senior notes, the proceeds of which were used to fund a portion of the repurchase of our 9.75% senior notes, which lowered interest expense by $2 million. These favorable impacts were offset by $3 million of interest expense from our October 2013 issuance of $350 million of 5.875% senior notes and a $2 million bridge loan commitment fee. The decrease in interest expense in 2012 compared to 2011 primarily reflected the favorable impact of our second quarter 2012 refinancing.
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)
Income tax expense was $11 million in 2013 compared with $12 million in 2012. Our effective tax rate was 18.6% as we recorded expense of $11 million on pre-tax income of $59 million. Income tax expense in 2013 primarily reflects income taxes for certain foreign, state and local jurisdictions of $14 million, including $6 million of withholding taxes on dividends between foreign jurisdictions, partially offset by an income tax benefit of $3 million recorded in the first quarter of 2013, which primarily related to the release of the valuation allowance against a portion of our alternative minimum tax, or AMT, credits. This change in the realizability of those credits was due to the enactment of the American Taxpayer Relief Act of 2012.  Our income tax expense for 2012 was $12 million compared to an income tax benefit of $14 million in 2011 due to higher earnings in foreign jurisdictions.
The effective tax rates based on our income (loss) from continuing operations were (7.1)% for 2012 and 3.4% for 2011. 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:
 
 
 
 
 
 
 
2013 vs. 2012
 
2012 vs. 2011
 
 
 
 
 
 
 
Favorable (Unfavorable)
 
Favorable (Unfavorable)
(dollars in millions)
2013(a)
 
2012(b)
 
2011(c)
 
$
 
%
 
$
 
%
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Gypsum
$
1,758

 
$
1,512

 
$
1,297

 
$
246

 
16
 %
 
$
215

 
17
 %
CGC (gypsum)
348

 
336

 
307

 
12

 
4
 %
 
29

 
9
 %
USG Mexico
177

 
166

 
161

 
11

 
7
 %
 
5

 
3
 %
Other **
89

 
63

 
32

 
26

 
41
 %
 
31

 
97
 %
Eliminations
(123
)
 
(114
)
 
(102
)
 
(9
)
 
(8
)%
 
(12
)
 
(12
)%
Total
$
2,249

 
$
1,963

 
$
1,695

 
$
286

 
15
 %
 
$
268

 
16
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Profit (Loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Gypsum
$
216

 
$
89

 
$
(78
)
 
$
127

 
143
 %
 
$
167

 
*

CGC (gypsum)
17

 
12

 
(1
)
 
5

 
42
 %
 
13

 
*

USG Mexico
22

 
20

 
21

 
2

 
10
 %
 
(1
)
 
(5
)%
Other **
10

 
(5
)
 
(78
)
 
15

 
*

 
73

 
94
 %
Eliminations
(1
)
 
(1
)
 

 

 
*

 
(1
)
 
*

Total
$
264

 
$
115

 
$
(136
)
 
$
149

 
*

 
$
251

 
*

 
 
 
 
 
 
 
 
 
 
 
 
 
 
*
Not meaningful
**
Includes our shipping company, our mining operation in Little Narrows, Nova Scotia, Canada, and, for 2011, our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada that we closed in the fourth quarter of 2011.
(a)
Operating profit in 2013 included restructuring charges of $3 million, which all related to U.S. Gypsum, and pension settlement charges of $9 million, which primarily related to U.S. Gypsum.
(b)
Operating profit 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).
(c)
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.
U.S. Gypsum - 2013 Compared With 2012: Net sales in 2013 increased $246 million, or 16%, compared with 2012. Net sales of SHEETROCK® brand gypsum wallboard increased $170 million, or 27%, reflecting an 17% increase in average gypsum wallboard selling prices, which increased sales by $115 million, and a 9% increase in gypsum wallboard shipments, which raised sales by $55 million. Net sales of products other than SHEETROCK® brand gypsum wallboard were $966 million in 2013, a 9% increase compared with 2012. Net sales of SHEETROCK® brand joint compound were up $22 million due to a 6% increase in volume and a 1% increase in selling prices. Net sales of DUROCK® brand cement board increased $10 million due to a 10% increase in volume. The improvement in sales also included an increase in net sales for FIBERROCK® brand gypsum fiber panels of $4 million primarily due to a 17% increase in volume. Net sales of other products, including freight, increased an aggregate of $40 million compared with 2012.
Operating profit in 2013 increased $127 million, or 143% , compared with 2012, reflecting (a) a gross profit increase of $128 million for SHEETROCK® brand gypsum wallboard primarily due to higher selling prices, (b) a gross profit increase of $4 million for SHEETROCK® brand joint compound primarily due to higher volume and selling prices, partially offset by higher per unit costs, (c) a gross profit increase of $3 million for DUROCK® brand cement board primarily due to the increased volume, (d) a gross profit increase of $2 million for FIBEROCK® brand gypsum fiber panels due to the increased volume and, to a lesser extent, a 2% decrease in per unit costs, and (e) a $1 million aggregate increase in gross profit for other product lines. Operating profit was also favorably impacted by a $3 million decrease in restructuring charges and a $5 million decrease in miscellaneous costs. These favorable variations were partially offset by $9 million of pension settlement charges, a $2 million increase in selling and administrative expenses and an $8 million gain in the prior year from the sale of surplus assets.

27


New housing construction increased in 2013, resulting in increased demand for gypsum wallboard, as discussed above. U.S. Gypsum shipped 5.14 billion square feet of SHEETROCK® brand gypsum wallboard in 2013, a 9% increase from 4.72 billion square feet in 2012. During 2013, SHEETROCK® Brand UltraLight Panels accounted for 55% of all of our wallboard shipments in the United States. We estimate that industry capacity utilization rates averaged approximately 64% during 2013, while U.S. Gypsum’s capacity utilization rate averaged 55%.
In 2013, our nationwide average realized selling price for SHEETROCK® brand gypsum wallboard was $154.04 per thousand square feet, an increase of 17% from $131.70 in 2012 due to the implementation of a price increase for wallboard on January 1, 2013. During the fourth quarter of 2013, our average realized selling price for SHEETROCK® brand gypsum wallboard was $155.09 per thousand square feet, an increase of 1% from the third quarter of 2013 and an increase of 17% compared to the fourth quarter of 2012. In early 2014, as we did in 2013 and 2012, we implemented a price increase for wallboard with the new price being set for the year. However, it is uncertain that we will be able to maintain the increase in our gypsum wallboard selling prices. If we are unable to maintain our prices increases, our net sales and operating profit may be materially and adversely impacted.
Manufacturing costs per unit increased 1% for U.S. Gypsum’s SHEETROCK® brand gypsum wallboard in 2013 compared with 2012, due primarily to per unit cost increases of 4% for conversion costs and 2% for raw materials, primarily due to gypsum and starch. These per unit cost increases were mostly offset by a per unit cost decrease of 3% for fixed costs, reflecting the favorable impact from higher volumes, and a per unit cost decrease of 1% for energy.
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.
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.

28


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.
CGC (gypsum):  Net sales in 2013 were $348 million, up $12 million compared to 2012, primarily driven by $19 million of higher net sales for SHEETROCK® brand gypsum wallboard due to a 12% increase in average realized selling prices partially offset by a 2% decrease in volume. Net sales of joint treatment increased by $2 million and net sales of other non-wallboard products increased by $2 million. These increases in net sales were partially offset by the unfavorable impact of currency translation of $10 million and a decrease of $1 million in outbound freight. Operating profit was $17 million in 2013 compared with $12 million in 2012. This $5 million increase in operating profit was primarily driven by $11 million of higher gross profit for gypsum wallboard, primarily due to the increase in average realized selling prices, partially offset by an increase in per unit manufacturing costs, and a $3 million increase in gross profit for joint treatment products. These improvements were partially offset by a decrease of $2 million in gross profit for non-wallboard products, an increase of $6 million in miscellaneous costs and an increase of $1 million in cash discounts.
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 selling and administrative expenses.
USG Mexico: Net sales for our Mexico-based subsidiary were $177 million in 2013 compared with $166 million in 2012. The improvement included sales increases of $1 million for gypsum wallboard, reflecting 2% higher volume, partially offset by a 7% decrease in selling prices, $1 million for joint treatment products, $4 million for other products and the $5 million favorable impact of currency translation. Operating profit was $22 million in 2013 compared with $20 million in 2012 reflecting a $2 million increase in operating profit for drywall steel, a $2 million increase in operating profit for other nonwallboard products and the favorable impact from currency translation of $1 million. These increases were partially offset by a decrease in operating profit of $1 million for cement board, an increase of $1 million in miscellaneous costs and an increase of $1 million in selling and administrative expenses.
Comparing 2012 with 2011, net sales increased $5 million which included increased sales 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 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.
Other: Other includes our shipping company, our mining operation in Little Narrows, Nova Scotia, Canada, and, for 2011, 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 $89 million in 2013, $63 million in 2012 and $32 million in 2011. Both year over year increases were primarily due to an increase in volumes shipped by our shipping company.
Operating profit of $10 million was recognized in 2013 compared with operating losses of $5 million for 2012 and $78 million for 2011. The increase in operating profit in 2013 compared to 2012 was driven by the favorable impact of $7 million of higher operating profit from our shipping company, due to increased shipments, and $8 million of higher operating profit primarily due to long-lived asset impairment charges in 2012 related to our closed gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada. 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:
 
 
 
 
 
 
 
2013 vs. 2012
 
2012 vs. 2011
 
 
 
Favorable (Unfavorable)
 
Favorable (Unfavorable)
(dollars in millions)
2013 (b)
 
2012 (c)
 
2011
 
$
 
%
 
$
 
%
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
USG Interiors
$
467

 
$
455

 
$
448

 
$
12

 
3
 %
 
$
7

 
2
 %
USG International (a)
144

 
128

 
117

 
16

 
13
 %
 
11

 
9
 %
CGC (ceilings)
61

 
64

 
67

 
(3
)
 
(5
)%
 
(3
)
 
(4
)%
Eliminations
(47
)
 
(47
)
 
(49
)
 

 
 %
 
2

 
4
 %
Total
$
625

 
$
600

 
$
583

 
$
25

 
4
 %
 
$
17

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
USG Interiors
$
81

 
$
71

 
$
66

 
$
10

 
14
 %
 
$
5

 
8
 %
USG International (a)
2

 
1

 
3

 
1

 
100
 %
 
(2
)
 
(67
)%
CGC (ceilings)
11

 
11

 
13

 

 
 %
 
(2
)
 
(15
)%
Total
$
94

 
$
83

 
$
82

 
$
11

 
13
 %
 
$
1

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* 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 2013 included a pension settlement charge of $2 million.
(c)
Operating profit for 2012 included restructuring and long-lived asset impairment charges of $1 million related to USG Interiors.
USG Interiors - 2013 Compared With 2012: Net sales for our domestic ceilings business increased to $467 million in 2013, a $12 million, or 3%, increase from $455 million in 2012. This increase was primarily due to higher average realized selling prices for ceiling tile and grid in addition to higher volume for ceiling grid, partially offset by lower volume for ceiling tile. Operating profit of $81 million was up $10 million, or 14%, compared with 2012, primarily due to a higher gross margin for ceiling grid and tile partially offset by the net impact of environmental charges accrued in 2013.
Net sales in 2013 increased $5 million for ceiling grid, $6 million for ceiling tile and an aggregate of $1 million for other product lines compared with 2012. The increase in ceiling grid sales was primarily attributable to an increase in average realized selling prices of 2%, which favorably affected sales by $3 million and a 1% increase in ceiling grid volume, which favorably affected sales by $2 million. An increase in average realized selling prices of 5% for ceiling tile, which favorably affected sales by $12 million, was partially offset by a 2% decrease in ceiling tile volume, which adversely affected sales by $6 million.
The increase in operating profit was attributable to an $8 million increase in gross profit for ceiling grid and an $11 million increase in gross profit for ceiling tile, and, to a lesser extent, a decrease of $1 million in restructuring costs. These favorable variances were partially offset by $6 million of environmental charges accrued in 2013, a pension settlement charge of $2 million, a $1 million increase in miscellaneous costs and a $1 million increase in overhead. Gross profit for ceiling grid was favorably affected by $7 million due to an increase in gross margin reflecting higher selling prices and a decrease in per unit manufacturing costs. An increase in volume further impacted ceiling grid gross profit by $1 million. Gross profit for ceiling tile increased by $13 million as a result of an increase in gross margin primarily reflecting higher selling prices. The improvement in ceiling tile gross profit was partially offset by a $2 million decline due to the decrease in ceiling tile volume.
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.

30


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 International: Net sales in 2013 for USG International were $144 million, an increase of $16 million, or 13%, compared to 2012. This increase was primarily attributable to sales of SHEETROCK® brand gypsum wallboard in India as we entered this market in 2013, higher sales of gypsum and ceiling products in Latin America and increased sales of ceiling tile in the Asia-Pacific region. Operating profit for USG International increased to $2 million in 2013 from $1 million in 2012 primarily reflecting higher gross profit in Latin America, partially offset by increases in selling and administrative expenses and miscellaneous costs associated with our joint ventures in Oman.
Net sales in 2012 for USG International 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.
As described above under Key Strategies and Recent Developments, on February 27, 2014, we contributed certain assets to the USG Boral Joint Venture, including our joint ventures and operations in India, Oman and the Asia-Pacific region.

CGC (ceilings): Net sales in 2013 were $61 million, a decrease of $3 million, or 5%, compared with 2012. Lower sales were primarily driven by lower volumes, partially offset by higher average realized selling prices, and a $2 million unfavorable impact of currency translation. Operating profit was $11 million in 2013 unchanged from 2012, which primarily reflected higher average realized selling prices for ceiling tile and grid, an increase in gross profit for specialty ceilings and a decrease in miscellaneous costs, offset by lower volumes for ceiling tile and grid.
Comparing 2012 with 2011, net sales decreased $3 million, or 4%, to $64 million and operating profit decreased to $11 million from $13 million. 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.
BUILDING PRODUCTS DISTRIBUTION
Net sales and operating profit (loss) for our Building Products Distribution segment, which consists of L&W Supply, were as follows:
 
 
 
 
 
 
 
2013 vs. 2012
 
2012 vs. 2011
 
 
 
 
 
 
 
Favorable (Unfavorable)
 
Favorable (Unfavorable)
(dollars in millions)
2013(a)
 
2012
 
2011(b)
 
$
 
%
 
$
 
%
Net sales
$
1,245

 
$
1,145

 
$
1,060

 
$
100

 
9
%
 
$
85

 
8
%
Operating profit (loss)
6

 
(33
)
 
(68
)
 
39

 
*

 
35

 
51
%
* not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
(a)
The operating profit for 2013 includes a $1 million reduction to previously accrued restructuring charges and $3 million of pension settlement charges.
(b)
The operating loss for 2011 included restructuring and long-lived asset impairment charges of $7 million.

L&W Supply - 2013 Compared With 2012: Net sales in 2013 increased $100 million compared with 2012. Net sales of gypsum wallboard increased $75 million, or 21%, reflecting a 17% increase in average gypsum wallboard selling prices, which favorably affected sales by $62 million, and a 4% increase in gypsum wallboard shipments, which favorably affected sales by $13 million. The improvement also included an increase of $6 million, or 12%, for joint treatment products. Net sales decreased $3 million, or 1%, for construction metal products and $7 million, or 3%, for ceilings products. Net sales of all other products increased $30 million, or 12%. Same-location net sales for 2013 were up 12% compared with 2012.
Operating profit was $6 million in 2013 compared with an operating loss of $33 million in 2012. The improvement of $39 million was driven by increased gross profit of $24 million for gypsum wallboard, an aggregate gross profit increase of $10 million for other non-wallboard products, a decrease in the provision for bad debt of $7 million and the reduction to previously accrued restructuring expenses of $1 million in 2013 due to a change in estimate, partially offset by $3 million of pension

31


settlement charges. The gross profit improvement for gypsum wallboard reflected a 20% increase in gross margin, and, to a lesser extent, the favorable impact of rebates.
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 - Distribution Branches: As of December 31, 2013, L&W Supply served its customers from 143 distribution branches in the United States. It operated 142 branches as of December 31, 2012 and 155 branches as of December 31, 2011. During the economic downturn, L&W Supply 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. The closures were widely dispersed throughout the markets that L&W Supply serves. In 2013, no distribution branches were closed, and one new branch was opened.
CORPORATE
Operating expenses for Corporate were $92 million in 2013, $83 million in 2012 and $80 million in 2011. The increased expenses in 2013 compared to 2012 primarily reflected an increase in marketing expenses resulting from our new brand roll-out and a higher level of expenses related to upgrades to our information technology. The increased expenses 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.

32


Liquidity and Capital Resources
LIQUIDITY
As of December 31, 2013, we had $952 million of cash and cash equivalents and marketable securities compared with $677 million as of December 31, 2012. Our total liquidity was $1.266 billion as of December 31, 2013 (including $314 million of borrowing availability under our credit facilities in the United States, Canada and Oman) compared to $874 million as of December 31, 2012 (including $197 million of borrowing availability under our credit facilities in the United States and Canada).
We invest 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, outstanding borrowings under our ship mortgage facility and our Oman joint ventures' credit facilities, amounted to $2.355 billion ($2.359 billion in aggregate principal amount less $4 million of unamortized original issue discount) as of December 31, 2013 and $2.309 billion ($2.327 billion in aggregate principal amount less $18 million of unamortized original issue discount) as of December 31, 2012. As of December 31, 2013 and during the year then ended, there were no borrowings under our U.S. or Canadian revolving credit facilities and $11 million of borrowings outstanding under the credit facilities of our joint ventures in Oman. See Note 6 to the consolidated financial statements for additional information about our debt.
Our U.S. 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, 2013, our fixed charge coverage ratio was 1.15-to-1.0. Because we currently satisfy the required fixed charge coverage ratio, we are not required to maintain a minimum borrowing availability under the credit facility. Taking into account the most recent borrowing base calculation, borrowings available under the credit facility were approximately $252 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, 2013 was $37 million. The maximum amount available for borrowing under the credit facilities of our consolidated joint ventures in Oman is $36 million, of which $25 million was available for term loan borrowings as of December 31, 2013.
Our $75 million aggregate principal amount of 10% convertible senior notes due 2018 are currently callable, subject to notice of redemption to the holders thereof of no less than 30 days and no more than 60 days. Accordingly, we currently may elect to redeem all or part of the convertible notes at stated redemption prices, plus accrued and unpaid interest. In lieu of redemption, holders may convert each $1,000 principal amount of the notes into shares of our common stock. The notes are initially convertible into 87.7193 shares of our common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of $11.40 per share, or a total of approximately 6.6 million shares. If we issue a notice of redemption of some or all of our 10% convertible senior notes due 2018, we believe based on recent trading prices of our common stock that the holders of such convertible notes currently would elect to convert their convertible notes called for redemption rather than receive the applicable redemption price.
See Liquidity Outlook below for a discussion of our recent payment of $513 million of cash on hand to fund our investment in the USG Boral Joint Venture, and our contribution to the USG Boral Joint Venture of our Oman joint ventures, as well as the corresponding Oman credit facilities.

33


CASH FLOWS
The following table presents a summary of our cash flows:
(millions)
2013
 
2012
 
2011
Net cash provided by (used for):
 
 
 
 
 
Operating activities - Continuing operations
$
80

 
$
68

 
$
(205
)
Investing activities - Continuing operations
(157
)
 
138

 
(55
)
Financing activities - Continuing operations
350

 
(38
)
 
(9
)
Discontinued operations
(2
)
 
9

 
10

Effect of exchange rate changes on cash
(7
)
 
4

 
(5
)
Net increase (decrease) in cash and cash equivalents
$
264

 
$
181

 
$
(264
)

Operating Activities: Higher cash flows from operating activities in 2013 compared to 2012 primarily reflected stronger operating results in 2013, partially offset by higher cash outflows for working capital which includes (a) the impact on accounts receivable from higher sales in December of 2013 compared to December of 2012 and (b) $68 million of higher cash outflows for accounts payable and accrued expenses, which includes the payments for annual customer sales incentives and our management incentive programs during 2013. As of December 31, 2013, working capital (current assets less current liabilities) amounted to $1.132 billion, and the ratio of current assets to current liabilities was 2.99-to-1. As of December 31, 2012, working capital amounted to $776 million, and the ratio of current assets to current liabilities was 2.41-to-1. Higher working capital at December 31, 2013 includes the net proceeds of $344 million received for the October 2013 issuance of 5.875% senior notes as described in Financing Activities below.
Investing Activities: Net cash used for investing activities in 2013 was $157 million compared to net cash provided by investing activities of $138 million during 2012. The primary drivers of the $295 million variation were:
a $165 million difference between a net cash outflow in 2013 of $11 million for purchases of marketable securities, net of sale or maturities, compared with a net cash inflow in 2012 of $154 million from the sales or maturities of marketable securities, net of purchases;
net proceeds of $73 million from the sale of our European businesses in the fourth quarter of 2012; and
an increase in capital expenditures of $54 million, to $124 million in 2013 compared with $70 million in 2012.
Financing Activities: The net cash provided by financing activities in 2013 primarily reflected the net proceeds of $344 million from the October 2013 issuance of $350 million of 5.875% senior notes and $11 million of borrowings under the credit facilities of our Oman consolidated joint ventures. The net cash used for financing activities in 2012 reflected the $277 million paid in April 2012 to repurchase our $241 million principal amount of the 2014 Senior Notes, partially offset by the net proceeds of $243 million we received from the April 2012 issuance of the $250 million senior notes due 2020.
LIQUIDITY OUTLOOK
In 2013, our investing cash outflows included $17 million for the acquisition of mining rights and $124 million of capital expenditures, of which $20 million was spent by our Oman consolidated joint ventures. In 2014, in addition to the cash payment to Boral of $513 million in connection with our investment in the USG Boral Joint Venture, we plan to spend approximately $145 million on capital spending, which includes $135 million of capital expenditures in the normal course of our business and an additional $10 million consisting of the capital spending of our Oman consolidated subsidiaries prior to the closing of the USG Boral Joint Venture on February 27, 2014. We expect to fund these capital expenditures with cash from operations or cash on hand, and, if determined to be appropriate and available, borrowings under our revolving credit facilities.
Estimated future spending on approved capital expenditures for the replacement, modernization and expansion of operations totaled $307 million as of December 31, 2013 compared with $320 million as of December 31, 2012. Approved expenditures as of December 31, 2013 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 $183 million in 2014 compared with $195 million in 2013 primarily due to the conversion of $325 million of our 10% convertible senior notes in December 2013 partially offset by interest on the $350 million of 5.875% senior notes issued in October 2013. In 2014, we have term debt maturities of $59 million for our 9.75% senior notes and approximately $4 million of annual debt amortization under our ship mortgage facility. We have no other term debt maturities until 2016.

34


Our undistributed foreign earnings as of December 31, 2013 are considered permanently reinvested. The amount of cash and cash equivalents held by our foreign subsidiaries was $235 million as of December 31, 2013. 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.
We believe that cash, cash equivalents, and marketable securities on hand, 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.
Realization of Deferred Tax Asset
As of December 31, 2013, we had federal NOL carryforwards of approximately $2.067 billion that are available to offset future federal taxable income and will expire in the years 2026 through 2033. In addition, as of that date, we had federal alternative minimum tax credit carryforwards of approximately $45 million that are available to reduce future regular federal income taxes over an indefinite period.
As of December 31, 2013, we had a gross deferred tax asset related to our state NOLs and tax credit carryforwards of $270 million, of which $11.0 million will expire in 2014. The remainder will expire if unused in years 2015 through 2033. We also had NOL and tax credit carryforwards in various foreign jurisdictions in the amount of $2 million as of December 31, 2013 against a portion of which we have historically maintained a valuation allowance.
During the year ended December 31, 2013, we decreased our valuation allowance by $130 million which resulted in a deferred tax asset valuation allowance of $995 million as of December 31, 2013. The decrease in the valuation allowance primarily related to the decrease in deferred tax assets for pension and state net operating losses. The valuation allowance has 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
As of December 31, 2013, our contractual obligations and commitments were as follows:
 
Payments Due by Period
(millions)
Total
 
2014
 
2015-
2016
 
2017-
2018
 
There-
after
Debt obligations (a)
$
2,359

 
$
63

 
$
512

 
$
934

 
$
850

Other long-term liabilities (b)
644

 
5

 
18

 
9

 
612

Interest payments (c)
1,058

 
183

 
347

 
255

 
273

Purchase obligations (d)
509

 
120

 
168

 
101

 
120

Capital expenditures (e)
98

 
86

 
12

 

 

Operating leases
283

 
60

 
94

 
64

 
65

Investment in USG Boral Joint Venture (f)
588

 
513

 

 
25

 
50

Unrecognized tax benefits (g)
22

 
1

 
7

 

 
14

Total
$
5,561

 
$
1,031

 
$
1,158

 
$
1,388

 
$
1,984

 
(a)
Excludes debt discount of $4 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, 2013.
(d)
Purchase obligations primarily consist of contracts to purchase energy, certain raw materials and finished goods.
(e)
Reflects estimates of future spending on active capital projects that were approved prior to December 31, 2013 but were not completed by that date.
(f)
Reflects payment made on February 27, 2014 for our investment in the USG Boral Joint Venture, which is subject to post-closing adjustments, and scheduled earnout payments of $25 million based on performance during the first three years after closing and up to $50 million based on performance during the first five years after closing.
(g)
Reflects estimated payments (if required) of gross unrecognized tax benefits.

35


For 2014, 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 $59 million to our pension plans in 2014.
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 2013 was $13 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.
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 relating to Chinese-manufactured drywall distributed by L&W Supply in the southeastern United States in 2006 and 2007. In addition, USG Corporation, United States Gypsum Company, and CGC Inc. have been named as defendants in class action lawsuits alleging that North American wallboard manufacturers conspired to fix the price of wallboard sold in the United States and Canada.
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 to have a material 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 are reasonably likely to occur from period to period, that 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

36


the asset and its carrying value. The determination of fair value is based on a discounted cash flow technique, in which multiple cash flow scenarios that reflect a range of possible outcomes and a risk-free rate of interest are used to estimate fair value, or on a market appraisal.
Determination as to whether and how much an asset is impaired involves significant management judgment involving highly uncertain matters, including estimating the future success of product lines, future sales volumes, future selling prices and costs, alternative uses for the assets, and estimated proceeds from disposal of the assets. However, the impairment reviews and calculations are based on estimates and assumptions that take into account our business plans and long-term investment decisions.
We regularly evaluate the recoverability of assets idled or at risk of being idled. In most cases, the idled assets are relatively older and higher-cost production plants or lines, which we refer to as facilities, and have relatively low carrying values. 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 2013, 2012 and 2011. 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 2013, 2012 and 2011 related to our North American Gypsum segment. As of December 31, 2013, the total carrying value of net property, plant and equipment for the North American Gypsum segment was $1.796 billion, including the aggregate carrying value of $23 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 at low levels despite increases of approximately 18.7% in 2013 compared with 2012, 28.2% in 2012 compared with 2011 and 3.7% in 2011 compared with 2010.
INTANGIBLE ASSETS
We have indefinite and definite lived intangible assets with net values of $29 million and $25 million, respectively, as of December 31, 2013. 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 2013, 2012 and 2011, 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, 2013, we determined that no impairment of customer relationships existed nor was a revision to the remaining useful life necessary.

37


EMPLOYEE RETIREMENT PLANS
We maintain defined benefit pension plans for most of our employees. Most of these plans require employee contributions in order to accrue benefits. We also maintain plans that provide postretirement benefits (retiree health care and life insurance) for eligible existing retirees and for eligible active employees who may qualify for coverage in the future. For accounting purposes, these plans depend on assumptions made by management, which are used by actuaries we engage to calculate the projected and accumulated benefit obligations and the annual expense recognized for these plans. The assumptions used in developing the required estimates primarily include discount rates, expected return on plan assets for the funded plans, compensation increase rates, retirement rates, mortality rates and, for postretirement benefits, health care cost trend rates.
We 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
 
2014
Net Annual
Benefit Cost
 
2013
Projected
Benefit
Obligation
Pension Benefits:
 
 
 
 
 
Discount rate
0.5% increase
 
$
(7
)
 
$
(74
)
Discount rate
0.5% decrease
 
8

 
82

Expected return on plan assets
0.5% increase
 
(6
)
 

Expected return on plan assets
0.5% decrease
 
6

 

Postretirement Benefits:
 
 
 
 
 
Discount rate
0.5% increase
 
$

 
$
(9
)
Discount rate
0.5% decrease
 
1

 
10

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 2013. 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.

38


Accounting rules require a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed periodically. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more-likely-than-not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. Under the accounting rules, this assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused and tax planning alternatives. A history of cumulative losses for a certain threshold period is a significant form of negative evidence used in the assessment, and the accounting rules require that we have a policy regarding the duration of the threshold period. If a cumulative loss threshold is met, forecasts of future profitability may not be used as positive evidence related to the realization of the deferred tax assets in the assessment. Consistent with practices in the home building and related industries, we have a policy of four years as our threshold period for cumulative losses.
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.


39


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;
our substantial indebtedness and our ability to incur substantial additional indebtedness;
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;
our ability to successfully operate the USG Boral Joint Venture, including risks that our joint venture partner, Boral, may not fulfill its obligations as an investor or may take actions that are inconsistent with our objectives;
our ability to protect our intellectual property and other proprietary rights;
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.

40


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 natural gas 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 2014. The aggregate notional amount of these hedge contracts in place as of December 31, 2013 was 14 million mmBTUs. We review our positions regularly and make adjustments as market and business conditions warrant. The fair value of these contracts was a $3 million unrealized gain as of December 31, 2013.

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, 2013 was $3 million. This analysis does not consider the underlying exposure.
FOREIGN CURRENCY EXCHANGE RISK
We have foreign exchange forward contracts to hedge forecasted purchases of products and services denominated in foreign currencies. The notional amount of these contracts was $58 million as of December 31, 2013, and they mature by December 31, 2014. The fair value of these contracts was an $1 million unrealized gain as of December 31, 2013.

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, 2013 was $6 million. This analysis does not consider the underlying exposure.
INTEREST RATE RISK
As of December 31, 2013, 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.

A sensitivity analysis was also prepared to estimate the potential change in fair value of our marketable securities portfolio 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 fair value of our marketable securities as of December 31, 2013 would be approximately $1 million.
See Notes 1 and 7 to the consolidated financial statements in Item 8 for additional information regarding our financial exposures.

41


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.
21.
 
 
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.

42


USG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(millions, except share and per-share data)
Years Ended December 31,
 
2013
 
2012
 
2011
Net sales
$
3,570

 
$
3,224

 
$
2,910

Cost of products sold
2,989

 
2,829

 
2,752

Gross profit
581

 
395

 
158

 
 
 
 
 
 
Selling and administrative expenses
320

 
304

 
289

Restructuring and long-lived asset impairment charges
3

 
18

 
75

Operating profit (loss)
258