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USG Corporation Reports Third Quarter 2016 Results

Third Quarter 2016 vs. Third Quarter 2015

Business Highlights

  • Net sales increase to $767 million from $747 million
  • Operating profit increases to $97 million from $94 million; adjusted operating profit increases to $127 million from $107 million
  • Net income decreases to $62 million from $76 million; adjusted net income increases to $69 million from $68 million
  • US Gypsum operating profit margin improvement to 17.8% from 16.8%
  • US Ceilings operating profit margin improvement to 24.6% from 17.6%
  • USG Boral operating profit margin improvement to 14.9% from 12.0%

CHICAGO--(BUSINESS WIRE)--Oct. 25, 2016-- USG Corporation (NYSE:USG), a leading building products company, today reported results for the third quarter of 2016. “I'm pleased to report that we expanded margins in both of our US businesses as well as in our USG Boral joint venture,” said James S. Metcalf, President and CEO. “We expect to close the sale of our L&W Supply business for $670 million on October 31st, and intend to use the proceeds from the sale to retire debt.”

On a consolidated basis in the third quarter of 2016, net sales were $767 million, compared to $747 million in the third quarter of 2015. Operating profit increased to $97 million from $94 million, while adjusted operating profit increased to $127 million from $107 million in the third quarter of 2016 compared to the third quarter of 2015. As a result of the August 29, 2016 announcement of the definitive agreement to sell the corporation's building product distribution business to ABC Supply, results for L&W Supply have been recorded as a discontinued operation in the third quarter of 2016 for all periods presented.

USG generated $62 million in net income and $0.42 per diluted share in the third quarter of 2016, compared to $76 million and $0.52 per diluted share in the third quarter of 2015. On an adjusted basis, net income of $69 million increased by $1 million in the third quarter of 2016 and diluted earnings per share of $0.46 was unchanged from the third quarter of 2015. Net income and adjusted net income in the third quarter of 2016 include $18 million of tax expense compared to $1 million of tax benefit in the third quarter of 2015. A full reconciliation of GAAP to adjusted metrics is set forth on an attached schedule.

The corporation’s Gypsum segment generated $89 million of operating profit in the third quarter of 2016. On an adjusted basis, operating profit of $101 million in the Gypsum segment improved by $8 million over the third quarter of 2015. Surfaces and substrates products drove $5 million of this improved profit. US wallboard volumes increased by 1% while domestic wallboard price was down roughly 1% from the third quarter of 2015. Inflation in wallboard input costs was offset by reduced SG&A spending in the US Gypsum business.

The Ceilings segment earned $33 million of operating profit in the third quarter of 2016 compared to $25 million in the third quarter of 2015. Price improvement across all products and reduced tile input costs drove third quarter operating margins to a new quarterly record of 24.6% in the US Ceilings business.

The USG Boral business generated $14 million of equity income in the third quarter of 2016. On an adjusted basis, equity income of $18 million increased by $6 million from the third quarter of 2015 on improved plasterboard price and volume, manufacturing efficiencies, and increased sales of adjacent products. Adjusted operating margins of 18.1% in the third quarter of 2016 represent the highest quarterly margins achieved in the USG Boral business since the inception of the joint venture.

“Our strategy continues to drive improved results and I’m confident in the outlook for all of our businesses,” said Jennifer F. Scanlon, CEO-Elect. “I believe that our expected strong free cash flow, high return opportunities to reinvest back into our business and a clear focus as a leading manufacturer of building products and innovative solutions for our industry around the world will continue to generate great value for all USG stakeholders.”

A conference call is being held today at 9:00 a.m. Eastern time (8:00 a.m. Central time) during which USG senior management will discuss the corporation’s operating results. The conference call will be webcast on the USG website, www.usg.com, in the Investor Relations section, where the accompanying presentation materials can be found. The dial-in number for the conference call is 1-800-315-2944 in the United States and Canada (1-847-413-2929 for other international callers), and the pass code is 43579075. After the live webcast, a replay of the webcast will be available on the USG website. In addition, a telephonic replay of the call will be available until Thursday, November 24, 2016. The replay dial-in number is 1-888-843-7419 (1-630-652-3042 for international callers), and the pass code is 43579075.

USG Corporation

USG Corporation is a manufacturer and distributor of innovative, high-performance building systems through its United States Gypsum Company, USG Interiors, LLC, and L&W Supply Corporation subsidiaries and its USG Boral Building Products joint ventures. Headquartered in Chicago, USG's worldwide operations serve the commercial, residential, and repair and remodel construction markets, enabling our customers to build the outstanding spaces where people live, work and play. USG wall, ceiling, exterior sheathing, flooring underlayment and roofing systems provide leading-edge building solutions, while L&W Supply branch locations efficiently stock and deliver building materials throughout the United States. USG Boral Building Products is a leading plasterboard & ceilings joint venture across Asia, Australasia, and the Middle East. USG and its subsidiaries are proud sponsors of the U.S. Olympic and Paralympic teams and the Canadian Olympic team. For additional information, visit www.usg.com.

Non-GAAP Financial Measures

In this press release, the corporation’s financial results are provided both in accordance with accounting principles generally accepted in the United States of America (GAAP) and using certain non-GAAP financial measures. In particular, the corporation presents the non-GAAP financial measures adjusted operating profit, impacts of foreign currency on current period results using prior period translation rates, adjusted net income, adjusted earnings per diluted share, adjusted equity income from USG Boral Building Products, and adjusted net sales, which exclude certain items. The non-GAAP financial measures are included as a complement to results provided in accordance with GAAP because management believes these non-GAAP financial measures help investors’ ability to analyze underlying trends in the corporation’s business, evaluate its performance relative to other companies in its industry and provide useful information to both management and investors by excluding certain items that may not be indicative of the corporation’s core operating results. In addition, adjusted operating profit includes the income from the corporation's equity method investments, including USG Boral Building Products, because management views the joint ventures as a business unit, even though the corporation’s share of the joint venture is 50%. In addition, the corporation uses adjusted operating profit and adjusted net income as components in the measurement of incentive compensation. Adjusted results also exclude results from Gypsum Transportation Limited (GTL), a shipping operation that the corporation has exited. Adjustments to net earnings are shown net of the tax effect computed at applicable statutory rates. The non-GAAP measures should not be considered a substitute for or superior to GAAP results and may vary from others in the industry. For further information related to the corporation’s use of non-GAAP financial measures, and reconciliations to the nearest GAAP measures, see the schedules attached hereto.

 
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 related to management’s expectations about future conditions, including but not limited to, management's expectation about the completion of the sale of L&W Supply to ABC Supply and expected use of proceeds, the outlook for our businesses and the expected generation of value for all USG stakeholders. 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. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Actual results may differ materially due to various other factors, including: the expected timeline for completion of the sale of L&W Supply; the impact on our performance and financial results due to the disposition of L&W Supply, one of our largest customers; 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; our ability to maintain or achieve price increases; our substantial indebtedness and our ability to incur substantial additional indebtedness; capital markets conditions and the availability of borrowings under our credit agreement or other financings; competitive conditions, such as price, service and product competition; certain of our customers having significant buying power; the loss of one or more major customers and our customers’ ability to meet their financial obligations to us; shortages in raw materials or changes in raw material and energy costs; our ability to successfully operate the joint venture with Boral Limited, including risks that our joint venture partner, Boral Limited, may not fulfill its obligations as an investor or may take actions that are inconsistent with our objectives; volatility in the assumptions used to determine the funded status of our pension plans; our ability to protect our intellectual property and other proprietary rights; a security breach of company information; changes in laws or regulations, including environmental and safety regulations; the outcome in legal and governmental proceedings; the occurrence of an “ownership change” within the meaning of the Internal Revenue Code; 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 press release. Additional information concerning these and other factors may be found in our filings with the Securities and Exchange Commission, including the “Risk Factors” in our most recent Annual Report on Form 10-K.
 

 
USG CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except share and per share data)
(Unaudited)
 

Three months ended
September 30,

Nine months ended
September 30,

2016   2015 2016   2015
Net sales $ 767 $ 747 $ 2,283 $ 2,195
Cost of products sold 586   578   1,728   1,710  
Gross profit 181 169 555 485
 
Selling and administrative expenses 74 75 213 225
Long-lived asset impairment charges 10 10
Recovery of receivable (3 )
Gain on disposal of shipping operations, net       (1 )
Operating profit 97 94 335 261
 
Income from equity method investments 14 13 37 35
Interest expense (37 ) (40 ) (115 ) (123 )
Interest income 3 1
Loss on extinguishment of debt (1 ) (5 ) (19 )
Other income, net 1     6    
Income from continuing operations before income taxes 74 67 261 155
 
Income tax (expense) benefit (18 ) 1   (78 ) 2  
Income from continuing operations 56 68 183 157
Income from discontinued operations, net of tax 6   8   20   22  
Net income $ 62   $ 76   $ 203   $ 179  
 
 
Earnings per average common share - basic:
Income from continuing operations $ 0.39 $ 0.46 $ 1.26 $ 1.08
Income from discontinued operations 0.04   0.06   0.13   0.15  
Net income $ 0.43 $ 0.52 $ 1.39 $ 1.23
 
Earnings per average common share - diluted:
Income from continuing operations $ 0.38 $ 0.46 $ 1.25 $ 1.07
Income from discontinued operations 0.04   0.06   0.13   0.14  
Net income $ 0.42 $ 0.52 $ 1.38 $ 1.21
 
Average common shares 146,043,791 145,569,692 145,892,390 145,421,798
Average diluted common shares 148,387,637 147,534,779 147,520,891 147,223,897

 
USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
(Unaudited)
  As of   As of
September 30, 2016 December 31, 2015
 
Assets
Cash and cash equivalents $ 634 $ 442
Short-term marketable securities 102 194
Restricted cash 9
Receivables (net of reserves - $17 and $10) 197 184
Inventories 228 219
Income taxes receivable 4 5
Other current assets 37 41
Assets related to discontinued operations 385   306  
Total current assets 1,587 1,400
Long-term marketable securities 36

Property, plant and equipment (net of accumulated depreciation and depletion - $1,938 and $1,881)

1,700 1,771
Deferred income taxes 636 728
Equity method investments 674 682
Other assets 64 68
Assets related to discontinued operations   51  
Total assets $ 4,661   $ 4,736  
 
Liabilities and Stockholders' Equity
Accounts payable $ 222 $ 208
Accrued expenses 165 186
Current portion of long-term debt 300 500
Income taxes payable 7 9
Litigation settlement accrual 9
Liabilities related to discontinued operations 118   80  
Total current liabilities 812 992
 
Long-term debt 1,677 1,675
Deferred income taxes 3 5
Pension and other postretirement benefits 357 392
Other liabilities 183 216
Liabilities related to discontinued operations   20  
Total liabilities 3,032 3,300
Stockholders' Equity:
Preferred stock – $1 par value, authorized 36,000,000 shares; outstanding - none
Common stock – $0.10 par value; authorized 200,000,000 shares; issued: 2016 - 146,079,000 shares; 2015 - 145,667,000 shares 15 15
Additional paid-in capital 3,034 3,027
Accumulated other comprehensive loss (331 ) (314 )
Retained earnings (accumulated deficit) (1,089 ) (1,292 )
Total stockholders' equity 1,629   1,436  
Total liabilities and stockholders' equity $ 4,661   $ 4,736  
         
Other Information:
Total cash and cash equivalents and marketable securities $ 736 $ 672
Borrowing availability under existing credit facilities 337   295  
Total Liquidity   $ 1,073     $ 967  

 
USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
(Unaudited)
  Nine months ended September 30,
2016   2015
Operating Activities
Net income $ 203 $ 179
Less: income from discontinued operations 20   22  
Income from continuing operations 183 157
 
Adjustments to reconcile income from continuing operations to net cash:
Depreciation, depletion and amortization 100 99
Loss on extinguishment of debt 5 19
Long-lived asset impairment charge 10
Recovery of receivable (3 )
Share-based compensation expense 14 9
Deferred income taxes 85 1
Gain on asset dispositions (10 ) (6 )
Income from equity method investments (37 ) (35 )
Dividends received from equity method investments 18 18
Pension settlement 3 (1 )
(Increase) decrease in working capital:
Receivables (10 ) (7 )
Income taxes receivable 2 (4 )
Inventories (9 ) (9 )
Other current assets 1
Payables 10 (29 )
Accrued expenses (34 ) (65 )
Decrease in other assets 2 4
Decrease in pension and other postretirement benefits (47 ) (33 )
Decrease in other liabilities (9 ) (7 )
Other, net 12   15  
Net cash provided by operating activities of continuing operations 285 127
Net cash provided by operating activities of discontinued operations 12   26  
Net cash provided by operating activities $ 297   $ 153  
 
Investing Activities
Purchases of marketable securities (183 ) (96 )
Sales or maturities of marketable securities 310 132
Capital expenditures (44 ) (67 )
Net proceeds from asset dispositions 12 42
Return of capital 1
Release (deposit) of restricted cash 9   (8 )
Net cash provided by investing activities of continuing operations 105 3
Net cash used for investing activities of discontinued operations (1 )  
Net cash provided by investing activities $ 104   $ 3  
 
Financing Activities
Issuance of debt 350
Repayment of debt (205 ) (386 )
Payment of debt issuance fees (6 )
Issuance of common stock 3 6
Repurchases of common stock to satisfy employee tax withholding obligations (2 ) (8 )
Net cash used for financing activities of continuing operations $ (204 ) $ (44 )
(continued)
 
USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in millions)
(Unaudited)
Nine months ended September 30,
2016 2015
Effect of exchange rate changes on cash from continuing operations (3 ) (7 )
 
Net increase in cash and cash equivalents from continuing operations $ 183 $ 79
Net increase in cash and cash equivalents from discontinued operations 11 26
Change in cash balance included in discontinued operations (2 ) (1 )
Net increase in cash and cash equivalents 192 104
Cash and cash equivalents at beginning of period 442   231  
Cash and cash equivalents at end of period $ 634   $ 335  
 
Supplemental Cash Flow Disclosures:
Interest paid, net of interest capitalized $ 124 $ 128
Income taxes paid, net of refunds received 6 2
 
Noncash Investing and Financing Activities:
Amount in accounts payable for capital expenditures 8 6
Reversal of USG Boral Building Products earnout (24 )

 
USG CORPORATION
CORE BUSINESS RESULTS
(dollars in millions)
(Unaudited)
 

Three months ended
September 30,

 

Nine months ended
September 30,

2016   2015 2016   2015

Net Sales:

Gypsum:
United States $ 534 $ 524 $ 1,609 $ 1,524
Canada 86 79 254 242
Mexico / Latin America 48 46 141 142
Canadian Mining 2 4
Gypsum Transportation Limited 10
Eliminations (33 ) (34 ) (105 ) (104 )
Total 635 617 1,899 1,818
Ceilings:
United States 126 125 365 359
Canada 13 13 40 41
Mexico / Latin America 8 9 24 26
Eliminations (12 ) (15 ) (38 ) (42 )
Total 135 132 391 384
Eliminations (3 ) (2 ) (7 ) (7 )
Total USG Corporation Net Sales $ 767   $ 747   $ 2,283   $ 2,195  
 

Operating Profit (Loss):

Gypsum:
United States $ 95 $ 88 $ 302 $ 248
Canada 6 3 17 7
Mexico / Latin America 2 3 8 12
Canadian Mining (14 ) (1 ) (20 ) (6 )
Gypsum Transportation Limited     3   1  
Total 89 93 310 262
Ceilings:
United States 31 22 86 63
Canada 1 1 4 3
Mexico / Latin America 1   2   3   4  
Total 33 25 93 70
Corporate (25 ) (24 ) (68 ) (71 )
Total USG Corporation Operating Profit $ 97   $ 94   $ 335   $ 261  
 
USG Boral Building Products (UBBP):
Net sales $ 276 $ 250 $ 778 $ 742
Operating profit 41 30 105 87
Net income attributable to UBBP 28 24 74 66
USG share of income from UBBP 14 12 37 33

 
USG CORPORATION
RECONCILIATION OF NON-GAAP MEASURES TO GAAP MEASURES
(dollars in millions, except share and per share data)
(Unaudited)
   

Three months ended
September 30,

Nine months ended
September 30,

2016   2015 2016   2015
Income from equity method investments - GAAP measure $ 14 $ 13 $ 37 $ 35
Less: Income from equity method investments - Other joint ventures 1 2
USG's share of UBBP impairment charges 4     4    
Adjusted equity income from UBBP - Non-GAAP measure $ 18   $ 12   $ 41   $ 33  
 
Net sales - GAAP measure $ 767 $ 747 $ 2,283 $ 2,195
GTL - Shipping operations       (10 )
Adjusted net sales - Non-GAAP measure $ 767   $ 747   $ 2,283   $ 2,185  
 
Operating profit - GAAP measure $ 97 $ 94 $ 335 $ 261
Income from equity method investments 14 13 37 35
Long-lived asset impairment and severance charges (Canadian Mining) 12 12
USG's share of UBBP impairment charges 4 4
Gain on sale of surplus property (US Gypsum) (11 )
GTL (recovery) of receivable / shipping operations     (3 ) (1 )
Adjusted operating profit - Non-GAAP measure $ 127   $ 107   $ 374   $ 295  
 
Gypsum operating profit - GAAP measure $ 89 $ 93 $ 310 $ 262
Long-lived asset impairment and severance charges (Canadian Mining) 12 12
Gain on sale of surplus property (US Gypsum) (11 )
GTL (recovery) of receivable / shipping operations     (3 ) (1 )
Gypsum adjusted operating profit - Non-GAAP measure $ 101   $ 93   $ 308   $ 261  
 
UBBP operating profit - GAAP measure $ 41 $ 30 $ 105 $ 87
Income from equity method investments owned by UBBP 3 2 9 7
Operating profit attributable to non-controlling interest, pre-tax (2 ) (2 ) (6 ) (5 )
Severance charges 1
Long-lived asset impairment charges 8     8    
UBBP adjusted operating profit - Non-GAAP measure $ 50   $ 30   $ 117   $ 89  

       
USG CORPORATION
RECONCILIATION OF NON-GAAP MEASURES TO GAAP MEASURES
(dollars in millions, except share and per share data)
(Unaudited)
 

Three months ended
September 30,

Nine months ended
September 30,

2016 2015 2016 2015
Net income - GAAP measure $ 62 $ 76 $ 203 $ 179
Long-lived asset impairment and severance charges 12 12
Income from discontinued operations, net of tax (6 ) (8 ) (20 ) (22 )
USG's share of UBBP impairment charges 4 4
Tax effect on adjustments (38.6% tax rate) (4 ) 1
Loss on extinguishment of debt 1 5 19
Gain on sale of surplus property (US Gypsum) (11 )
GTL (recovery) of receivable / shipping operations     (8 )  
Adjusted net income - Non-GAAP measure $ 69   $ 68   $ 186   $ 176  
 
Earnings per average diluted common share - GAAP measure $ 0.42 $ 0.52 $ 1.38 $ 1.21
Adjustments per average diluted common share:
Long-lived asset impairment charges 0.08 0.08
Income from discontinued operations, net of tax (0.04 ) (0.06 ) (0.14 ) (0.14 )
Tax effect on adjustments (38.6% tax rate) (0.04 )
USG's share of UBBP impairment charges 0.03 0.03
Loss on extinguishment of debt 0.01 0.04 0.13
Gain on sale of surplus property (0.08 )
GTL (recovery) of receivable / shipping operations     (0.05 )  
Adjusted earnings per adjusted average diluted common share – Non-GAAP measure $ 0.46   $ 0.46   $ 1.26   $ 1.20  
 
Average diluted common shares – GAAP 148,387,637 147,534,779 147,520,891 147,223,897
Adjustment to add common shares that would be dilutive based on adjusted net income        
Adjusted average diluted common shares – Non-GAAP 148,387,637   147,534,779   147,520,891   147,223,897  
 
Currency impacts on consolidated and segment results have been derived by translating current period results at the quarter-to-date and year-to-date average foreign currency rates, as applicable, for the period ending September 30, 2015.

Source: USG Corporation

USG Corporation
Media:
Kathleen Prause, 312-436-6607
kprause@usg.com
or
Investors:
Ryan Flanagan, 312-436-5304
investorrelations@usg.com