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Article by DailyStocks_admin    (04-25-08 03:17 AM)

Warren Buffett Stock Topic for USG. Berkshire Hathaway owns 17,072,192 shares. As of Dec 31,2007, this represents 0.89 percent of portfolio.

BUSINESS OVERVIEW

General
USG, through its subsidiaries, is a leading manufacturer and distributor of building materials, producing a wide range of products for use in new residential, new nonresidential, and repair and remodel construction as well as products used in certain industrial processes.
SEGMENTS
Our operations are organized into three reportable segments: North American Gypsum, Building Products Distribution and Worldwide Ceilings, the net sales of which accounted for approximately 48%, 38% and 14%, respectively, of our 2007 consolidated net sales.
North American Gypsum
BUSINESS
North American Gypsum, which manufactures and markets gypsum and related products in the United States, Canada and Mexico, includes United States Gypsum Company, or U.S. Gypsum, in the United States, the gypsum business of CGC Inc., or CGC, in Canada, and USG Mexico, S.A. de C.V., or USG Mexico, in Mexico. U.S. Gypsum is the largest manufacturer of gypsum wallboard in the United States and accounted for approximately 30% of total domestic gypsum wallboard sales in 2007. CGC is the largest manufacturer of gypsum wallboard in eastern Canada. USG Mexico is the largest manufacturer of gypsum wallboard in Mexico.
PRODUCTS
North American Gypsum’s products are used in a variety of building applications to finish the interior walls, ceilings and floors in residential, commercial and institutional construction and in certain industrial applications. These products provide aesthetic as well as sound-dampening, fire-retarding, abuse-resistance and moisture-control value. The majority of these products are sold under the SHEETROCK ® brand name. A line of joint compounds used for finishing wallboard joints is also sold under the SHEETROCK ® brand name. The DUROCK ® line of cement board and accessories provides water-damage-resistant and fire-resistant assemblies for both interior and exterior construction. The FIBEROCK ® line of gypsum fiber panels includes abuse-resistant wall panels and floor underlayment as well as sheathing panels usable as a substrate for most exterior systems and as roof cover board sold under the SECUROCK ® brand name. The LEVELROCK ® line of poured gypsum underlayments provides surface leveling and enhanced sound performance for residential and commercial installations. We also produce a variety of construction plaster products used to provide a custom finish for residential and commercial interiors. Like SHEETROCK ® brand gypsum wallboard, these products provide aesthetic, sound-dampening, fire-retarding and abuse-resistance value. Construction plaster products are sold under the trade names RED TOP ® , IMPERIAL ® and DIAMOND ® . We also produce gypsum-based products for agricultural and industrial customers to use in a number of applications, including soil conditioning, road repair, fireproofing and ceramics.
MANUFACTURING
North American Gypsum manufactures products at 46 plants located throughout the United States, Canada and Mexico.
Gypsum rock is mined or quarried at 15 company-owned locations in North America. In 2007, these locations provided approximately 68% of the gypsum used by our plants in North America. As of December 31, 2007, our geologists estimated that our recoverable rock reserves are sufficient for more than 24 years of operation based on our average annual production of crude gypsum during the past five years of 9.5 million tons. Proven reserves contain approximately 235 million tons. Additional reserves of approximately 157 million tons are found on four properties not in operation.
Some of our manufacturing plants purchase or acquire synthetic gypsum and natural gypsum rock from outside sources. In 2007, outside purchases or acquisitions of synthetic gypsum and natural gypsum rock accounted for approximately 28% and 4%, 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. The supply of synthetic gypsum continues to increase as more power generation plants are fitted with desulphurization equipment. Ten of our 22 gypsum wallboard plants use synthetic gypsum for some or all of their needs.
We own eight paper mills located across 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 wallboard production processes. We augment our paper needs through purchases from outside suppliers when necessary. Less than 1% of our paper supply was purchased from outside suppliers during 2007.
MARKETING AND DISTRIBUTION
Our gypsum products are distributed through our wholly owned subsidiary, L&W Supply Corporation, and its subsidiaries, or 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 gypsum wallboard shipment data from the Gypsum Association, we estimate that during 2007:
• Residential and nonresidential repair and remodel activity generated about 43% of volume demand for gypsum wallboard;
• New residential construction generated about 41% of total industry volume demand;
• New nonresidential construction generated about 11% of volume demand; and
• Other activities such as exports and temporary construction generated the remaining 5% of volume demand.
COMPETITION
U.S. Gypsum accounts for approximately 30% of the total gypsum wallboard sales in the United States. In 2007, U.S. Gypsum shipped 9.0 billion square feet of wallboard. The Gypsum Association estimated that U.S. industry shipments (including imports) in 2007 were 30.7 billion square feet.
Our competitors in the United States are: National Gypsum Company, CertainTeed Corporation (a subsidiary of Compagnie de Saint-Gobain SA), Georgia-Pacific (a subsidiary of Koch Industries, Inc.), American Gypsum (a unit of Eagle Materials Inc.), Temple-Inland Forest Products Corporation, Lafarge North America, Inc., Federal Gypsum Company and PABCO Gypsum. Our competitors in Canada include CertainTeed Corporation, Georgia-Pacific, Lafarge North America, Inc. and Federal Gypsum Company. Our major competitors in Mexico are Panel Rey, S.A. and Comex-Lafarge. The principal methods of competition are quality of products, service, pricing, compatibility of systems and product design features.
Building Products Distribution
BUSINESS
Building Products Distribution consists of L&W Supply, the leading specialty building products distribution business in the United States. In 2007, L&W Supply distributed approximately 13% of all gypsum wallboard in the United States, including approximately 36% of U.S. Gypsum’s wallboard production.
On March 30, 2007, L&W Supply purchased the outstanding stock of California Wholesale Material Supply, Inc. and related entities, referred to collectively as CALPLY. CALPLY sells building products and provides services from 29 locations in seven Western states and Mexico. This acquisition was part of L&W Supply’s strategy to profitably grow its specialty dealer business.

MARKETING AND DISTRIBUTION
L&W Supply was organized in 1971. 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. L&W Supply specializes in the distribution of gypsum wallboard (which accounted for 43% of its 2007 net sales), joint compound and other gypsum products manufactured by U.S. Gypsum and others. It also distributes products manufactured by USG Interiors, Inc., such as acoustical ceiling tile and grid, as well as products of other manufacturers, including drywall metal, insulation, roofing products and accessories. L&W Supply leases approximately 90% of its facilities from third parties. Typical leases have terms of five years and include renewal options.
L&W Supply remains focused on opportunities to profitably grow its specialty business as well as optimize asset utilization. L&W Supply increased the number of its locations, largely through acquisitions, to 247 in 37 states and Mexico as of December 31, 2007, compared with 220 locations as of December 31, 2006 and 192 locations as of December 31, 2005.
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 competitors include Gypsum Management Supply with locations in the southern, central and western United States, KCG, Inc. in the southwestern and central United States, The Strober Organization, Inc. in the northeastern and mid-Atlantic 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.
Worldwide Ceilings
BUSINESS
Worldwide Ceilings, which manufactures and markets interior systems products worldwide, includes USG Interiors, Inc., or USG Interiors, the international interior systems business managed as USG International, and the ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior ceilings products used primarily in commercial applications. We estimate that we are the largest manufacturer of ceiling grid and the second-largest manufacturer/marketer of acoustical ceiling tile in the world.
In the third quarter of 2007, we entered into a new joint venture agreement with a leading Chinese building materials company to manufacture a complete line of acoustical ceiling tile and grid systems in China.
PRODUCTS
Worldwide Ceilings manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region. It markets both ceiling tile and ceiling grid in the United States, Canada, Mexico, Europe, 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 trade names include the AURATONE ® and ACOUSTONE ® brands of ceiling tile and the DONN ® , DX ® , FINELINE ® , CENTRICITEE ® , CURVATURA ® and COMPASSO ® brands of ceiling grid.
MANUFACTURING
Worldwide Ceilings manufactures products at 17 plants located in North America, Europe and the Asia-Pacific region. Principal raw materials used to produce Worldwide Ceilings’ products include mineral fiber, steel, perlite, starch and high-pressure laminates. We produce some of these raw materials internally and obtain others from outside suppliers.
MARKETING AND DISTRIBUTION
Worldwide Ceilings sells products primarily in markets related to the construction and renovation of nonresidential buildings. Ceilings products are marketed and distributed through a network of distributors, installation contractors, L&W Supply locations and home improvement centers.
COMPETITION
Our principal competitors in ceiling grid include WAVE (a joint venture between Armstrong World Industries, Inc. and Worthington Industries) and Chicago Metallic Corporation. Our principal competitors in acoustical ceiling tile include Armstrong World Industries, Inc., OWA Faserplattenwerk GmbH (Odenwald), CertainTeed Corporation and AMF Mineralplatten GmbH Betriebs KG (owned by Gebr. Knauf Verwaltungsgellschaft KG). Principal methods of competition are quality of products, service, pricing, compatibility of systems and product design features.
Executive Officers of the Registrant
See Part III, Item 10, Directors, Executive Officers and Corporate Governance — Executive Officers of the Registrant (as of February 15, 2008).
Other Information
RESEARCH AND DEVELOPMENT
To maintain our high standards and remain a leader in the building materials industry, we perform extensive research and development at the USG Research and Technology Innovation Center in Libertyville, Ill. Research team members provide product support and new product development for our operating units. With unique fire, acoustical, structural and environmental testing capabilities, the research center can evaluate products and systems. Chemical analysis and materials characterization support product development and safety/quality assessment programs. Development activities can be taken to an on-site pilot plant before being transferred to a full-size plant. We also conduct research at a satellite location where industrial designers and fabricators work on new ceiling grid concepts and prototypes.
We charge research and development expenditures to earnings as incurred. These expenditures amounted to $23 million in 2007, $20 million in 2006 and $17 million in 2005.
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 use energy price swap agreements to hedge the cost of a majority of purchased natural gas. Generally, we have a majority of our anticipated purchases of natural gas over the next 12 months hedged; however, 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 11% of our consolidated net sales in each of 2007, 2006 and 2005.
OTHER
Because we fill orders upon receipt, no segment has any significant order backlog.
None of our segments has any special working capital requirements.
Loss of one or more of our patents or licenses would not have a material impact on our business or our ability to continue operations.
No material part of any of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government.
As of December 31, 2007, we had approximately 14,800 employees worldwide.
See Note 16 to the Consolidated Financial Statements for financial information pertaining to our segments and Item 1A, Risk Factors, for information regarding the possible effects that compliance with environmental laws and regulations may have on our businesses and operating results.

CEO BACKGROUND

ROBERT L. BARNETT, 67, retired as Executive Vice President of Motorola, Inc. in 2005. He previously served as President and Chief Executive Officer, Commercial, Governmental and Industrial Solutions Sector, and President, Land Mobile Products Sector, of Motorola, Inc. Mr. Barnett is a director of Johnson Controls, Inc., Central Vermont Public Service Corporation and EFJ, Inc., and a director and Treasurer of the Lincoln Foundation for Performance Excellence. He is a Senior Baldridge Examiner and a licensed professional engineer. Mr. Barnett has been a director since May 1990. He is Chair of the Board’s Audit Committee and is a member of its Corporate Affairs and Governance Committees.

VALERIE B. JARRETT, 51, is Chief Executive Officer, and previously was Managing Director and Executive Vice President, of The Habitat Company, a private residential developer and property manager. Ms. Jarrett is Chairman of the Board of Trustees of the University of Chicago Medical Center, Vice Chairman of the Board of Trustees of the University of Chicago and a Trustee of Chicago’s Museum of Science and Industry. She is a director of Navigant Consulting, Inc., RREEF America, II and The Joyce Foundation. Ms. Jarrett has been a director since August 1998. She is Chair of the Board’s Compensation and Organization Committee and is a member of its Corporate Affairs and Governance Committees.

MARVIN E. LESSER, 66, has been Managing Partner of Sigma Partners, L.P., a private investment partnership, and President of Alpina Management, LLC, an investment advisor, for more than the past five years. He is a director of Golfsmith International Holdings, Inc. and St. Moritz 2000 Fund, Ltd. Mr. Lesser has been a director since May 1993. He is a member of the Board’s Audit and Compensation and Organization Committees.

JAMES S. METCALF, 50, is our President and Chief Operating Officer. Prior to assuming that position in January 2006, he was Executive Vice President and President, USG Building Systems, from February 2004 to January 2006 and Senior Vice President and President, USG Building Systems prior thereto. Mr. Metcalf is a director of Molex Incorporated.

JOSE ARMARIO, 48, has been Group President, McDonald’s Canada and Latin America of McDonald’s Corporation since February 2008. He became President, Latin America of McDonald’s Corporation in 2003. He previously served as Senior Vice President and International Relationship Partner for McDonald’s Corporation and as director of Ronald McDonald House Charities in Latin America. Mr. Armario is a director of the International Advisory Board and President’s Council of the University of Miami. He also is a director of the Council of the Americas — New York and The Chicago Council of Global Affairs and is a board member of the Mexican Chamber of Commerce. Mr. Armario has been a director since January 2007 and is a member of the Board’s Audit and Corporate Affairs Committees.

KEITH A. BROWN, 56, has been President of Chimera Corporation, a private management holding company, since 1987. He also is a director of Myers Industries, Inc. and a Trustee of Nova Southeastern University and the Burton D. Morgan Foundation. Mr. Brown has been a director since May 1993. He is a member of the Board’s Audit and Corporate Affairs Committees.

JAMES C. COTTING, 74 retired as Chairman and Chief Executive Officer of Navistar International Corporation, a truck and diesel engine manufacturing and financial services firm, more than five years ago. Mr. Cotting has been a director since October 1987. He is a member of the Board’s Corporate Affairs and Finance Committees.

W. DOUGLAS FORD, 64, retired as Chief Executive, Refining & Marketing, of BP Amoco p.l.c. and Managing Director of BP p.l.c in 2002. He is a director of Air Products and Chemicals, Inc. and Suncor Energy Inc. He also is a Trustee of the University of Notre Dame. Mr. Ford has been a director since November 1996. He is Chair of the Board’s Corporate Affairs Committee and is a member of its Compensation and Organization and Governance Committees.

LAWRENCE M. CRUTCHER, 65, is a member of the Board of Advisors, and previously was Managing Director, of Veronis Suhler Stevenson, a private equity fund manager. Mr. Crutcher has been a director since May 1993. He is Chair of the Board’s Governance Committee and is a member of its Audit and Finance Committees.

WILLIAM C. FOOTE, 57, has been our Chairman and Chief Executive Officer for more than the past five years. He was also our President until January 2006. Mr. Foote is Deputy Chairman of the Board of The Federal Reserve Bank of Chicago and a director of Walgreens Co., Kohler Co. and the National Association of Manufacturers. He is a Trustee of the Museum of Science and Industry in Chicago, a life Trustee of Northwestern Memorial Health Care and a member of the Civic Committee of The Commercial Club and the Business Roundtable. Mr. Foote has been a director since March 1994.

STEVEN F. LEER, 55, has been Chairman and Chief Executive Officer of Arch Coal, Inc., a coal producing company, since April 2006. Prior thereto, he was President and Chief Executive Officer of that company. Mr. Leer is a director of Norfolk Southern Corporation, the Western Business Roundtable and the Mineral Information Institute. He also is a director and past Chairman of the Center for Energy and Economic Development, the National Coal Council and the National Mining Association. He is a delegate to the Coal Industry Advisory Board of the International Energy Agency in Paris, a director of the Greater St. Louis Area Boy Scouts of America and a member of the boards of the National Association of Manufacturers and the Business Roundtable. Mr. Leer has been a director since June 2005 and is a member of the Board’s Compensation and Organization and Finance Committees.

JUDITH A. SPRIESER, 54, was the Chief Executive Officer of Transora, Inc., an information technology software and services company, until March 2005. Prior to founding Transora in 2000, she was Executive Vice President (formerly Chief Financial Officer) of Sara Lee Corporation. Ms. Sprieser is a director of Allstate Corporation, Intercontinentalexchange Inc., Reckitt-Benckiser PLC and Royal Ahold, N.V., and is a member of the Board of Trustees of Northwestern University. Ms. Sprieser has been a director since February 1994. She is Chair of the Board’s Finance Committee and is a member of its Compensation and Organization and Governance Committees.

COMPENSATION

Elements of Total Compensation

Our total compensation program consists of the following elements:


• base salary;

• annual incentive;

• long-term incentive; and

• benefits and perquisites.

Base Salary

The starting point for determining base salaries for our executive officers is the annual Hewitt Executive Compensation Competitive Review. Individual salaries for our executive officers generally range between the 50th and 75th percentiles of the comparator group. Factors that warrant paying above the 50th percentile include individual performance, as assessed by the Chief Executive Officer (or in the case of the Chief Executive Officer, the Committee), unique skills or experience, retention considerations and length of service in the position or with USG. Where the scope of an executive officer’s accountabilities is unique and cannot be reasonably compared to similar positions in the comparator group, we establish the percentile range based on a combination of available market data and internal equity. We do this so that the salary appropriately reflects the executive officer’s contribution and value to USG.

Annual Incentive

Our annual Management Incentive Program, or Program, provides a variable reward opportunity based on corporate net earnings and the achievement of objectives derived from the annual operating plan. Management believes that the Program satisfies the currently applicable requirements of Internal Revenue Code Section 162(m) and the regulations promulgated thereunder regarding the deductibility of “performance-based” compensation in excess of $1 million paid to any of our named executive officers and that awards earned under the Program in 2007 will be fully deductible as “performance-based” compensation. We pay annual incentive awards in February following the year in which they are earned.

The target annual incentive opportunity for participants in the Management Incentive Program is expressed as a percentage of base salary. In 2007, the annual incentive opportunity for executive officers ranged from 40% of base salary to 125% of base salary for the Chief Executive Officer. Our Chief Executive Officer is eligible to receive a higher percentage annual incentive opportunity than our other executive officers in recognition of the broader scope of his responsibilities and impact on corporate performance, and based on market data regarding compensation of chief executive officers of the companies in our comparator group.

For 2007, the annual incentive award opportunity was comprised of the following two equally weighted segments that are designed to provide an incentive to maximize earnings and pursue operational excellence.


• Share of the Earnings: 50% of the annual Management Incentive Program award opportunity was based on a “share of the earnings” formula. We use a portion of our consolidated net earnings to fund a pool from which we pay awards to participants. Adjustments to net earnings may be made (with the Committee’s approval) for bankruptcy related expenses, the impact of acquisitions and new accounting pronouncements and other specified matters.

We designed the share of the earnings concept to align our annual incentive awards with overall corporate results. As corporate performance (measured by consolidated net earnings) improves, more funds are allocated to the share of the earnings pool and participants receive larger awards. Similarly, if earnings decline, fewer funds are allocated to the pool resulting in lower awards for participants.

Due to the cyclical nature of our business, the allocation of consolidated net earnings to the pool is based on a schedule that is designed so that participants can earn 100% of the targeted award, or “par”, for this segment of the Program if consolidated net earnings in the current year are equal to the average of our consolidated net earnings for the prior seven years. This avoids the difficulty of setting appropriate earnings targets, particularly
when, as now, the housing market experiences significant volatility. We believe the design of the Management Incentive Program motivates managers to maximize financial results at all points of the business cycle.

No award under the share of the earnings portion of the Program would be earned if we do not generate positive consolidated net earnings for the year and an award of approximately two times par could be earned if our consolidated net earnings exceed our historical record high. For 2007, consolidated net earnings were significantly below the seven-year average, and participants received an award of 26% of par for this segment of the Management Incentive Program.


• Operating Focus Targets: 50% of the annual Management Incentive Program award opportunity was based on the achievement of annual operating objectives, called operating focus targets. These targets are derived from our annual planning process and are measurable and verifiable. We use broad, high impact measures such as customer satisfaction, revenue/earnings growth, manufacturing cost and working capital efficiency that are designed to promote a balanced performance between operational and long-term growth objectives.

The Committee approves the operating focus target measures and target, minimum and maximum performance levels for each measure early in the year. In February of the following year, the Committee reviews the prior year’s performance, including the degree of achievement of each of the operating focus targets and the computation of the share of the earnings formula, before it and the Board approve the payment of annual incentive awards. Depending on achievement, the payout can range from zero to 200% for each measure. The following table sets forth information regarding the 2007 focus targets for our named executive officers.

In 2007, achievement for the operating focus target segment of the Program on an aggregate basis resulted in a payout equal to approximately 60% of par for our executive officers. Combined with the 26% of par payout under the share of the earnings segment of the Program, the total payout for executive officers for the 2007 Program was approximately 43% of par (60% x 50% + 26% x 50%). Over the past ten years, the total payout under our annual management incentive programs has varied from zero to 169% percent of par, and has averaged approximately 97% of par, for executive officers.

Long-Term Incentive

As we concluded our Chapter 11 proceedings, the Committee, the Board and our stockholders approved a new equity-based Long-Term Incentive Plan. This Plan was implemented in 2006. The purpose of the Plan is to align the interests of management with those of our stockholders, drive earnings growth and provide a competitive compensation opportunity that enables us to attract and retain talented managers. The Plan provides for the use of several types of awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, or RSUs, performance shares, performance units and cash awards.

At their regularly scheduled meetings in March 2007, the Committee and Board approved awards under the Long-Term Incentive Plan for 2007. Each executive officer received an award with a grant date value between the 50th and 75th percentiles of the value of annual long-term incentive awards for similar positions in our comparator group companies, as measured by the Hewitt Executive Compensation Competitive Review, except as noted above with respect to Mr. Ferguson.

For executive officers, one-half of the grant date value of the total award was provided in the form of non-qualified stock options. We used stock options to align management and stockholder interests by providing an opportunity for management to achieve meaningful levels of stock ownership, to create a strong incentive for management to grow our business and to provide the opportunity for competitive compensation based on long-term stock price appreciation. The options generally vest at a rate of 25% per year, and the exercise price of the options is the closing price of our common stock on the New York Stock Exchange on the date the option grants were approved by the Board.

One-quarter of the grant date value of the total award was provided in the form of RSUs that generally vest at a rate of 25% per year. We used RSUs for the same reasons we used stock options and to promote retention of our management team. The compensation value of RSUs does not depend solely on stock price appreciation. At grant, their value is equal to our stock price. Although their value may increase or decrease as our stock price changes during the vesting period, RSUs have value in the long term, encouraging retention.

The remaining one-quarter of the grant date value of the total award was provided in the form of performance shares. The actual number of performance shares to be issued can range from zero to 200% of the number of performance shares awarded, based on a comparison of our total stockholder return over the three-year vesting period ending December 31, 2009 compared to the total stockholder return for the companies in the Dow Jones U.S. Construction and Materials Index, with adjustments to the Index to reflect changes in the companies included in the Index during the vesting period. We use this Index because it is comprised of companies that participate in the same or similar markets as our operating businesses and, therefore, provides an appropriate benchmark to measure the relative performance of our stock.
MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
SEGMENTS
Through our subsidiaries, we are a leading manufacturer and distributor of building materials, producing a wide range of products for use in new residential, new nonresidential, and repair and remodel construction as well as products used in certain industrial processes. Our operations are organized into three reportable segments: North American Gypsum, Building Products Distribution and Worldwide Ceilings.
North American Gypsum : North American Gypsum, which manufactures and markets gypsum and related products in the United States, Canada and Mexico, includes United States Gypsum Company, or U.S. Gypsum, in the United States, the gypsum business of CGC Inc., or CGC, in Canada, and USG Mexico, S.A. de C.V., or USG Mexico, in Mexico. North American Gypsum’s products are used in a variety of building applications to finish the interior walls, ceilings and floors in residential, commercial and institutional construction and in certain industrial applications. Its major product lines include SHEETROCK ® brand gypsum wallboard, a line of joint compounds used for finishing wallboard joints also sold under the SHEETROCK ® brand name, DUROCK ® brand cement board and FIBEROCK ® brand gypsum fiber panels.
Building Products Distribution : Building Products Distribution consists of L&W Supply Corporation and its subsidiaries, or L&W Supply, the leading specialty building products distribution business in the United States. It is a service-oriented business that stocks a wide range of construction materials. It delivers less-than-truckload quantities of construction materials to job sites and places them in areas where work is being done, thereby reducing the need for handling by contractors.
Worldwide Ceilings : Worldwide Ceilings, which manufactures and markets interior systems products worldwide, includes USG Interiors, Inc., or USG Interiors, the international interior systems business managed as USG International, and the ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior ceilings products used primarily in commercial applications. It manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region. It markets both ceiling tile and ceiling grid in the United States, Canada, Mexico, Europe, Latin America and the Asia-Pacific region.
Geographic Information: Approximately 84% of our net sales are attributable to the United States. Canada accounts for approximately 8% of our net sales and other foreign countries account for the remaining 8%.
FINANCIAL INFORMATION
Consolidated net sales in 2007 were $5.202 billion, down 10% from 2006. Operating profit was $165 million, down from $985 million for the prior year. Net earnings were $76 million, or $0.78 per diluted share, for 2007 compared with net earnings of $288 million, or $4.33 per diluted share, for 2006.
In 2007, new housing construction in the United States dropped 25% compared with 2006 as the inventory of unsold homes continued to build and the availability of mortgage financing tightened. The residential repair and remodeling market declined as well. As expected, this has led to lower wallboard shipments and selling prices and has significantly reduced our sales and profits compared with 2006.
Shipments of U.S. Gypsum’s SHEETROCK ® brand gypsum wallboard in 2007 were down 17% compared with 2006. Capacity utilization rates for our gypsum wallboard plants were approximately 78% for 2007. These plants operated at 92% of capacity during 2006. The decrease in demand caused U.S. Gypsum’s nationwide average realized selling price for SHEETROCK ® brand gypsum wallboard to fall to $134.93 per thousand square feet for 2007 compared with $180.59 for 2006. Gypsum wallboard selling prices continued to decline during the fourth quarter, but at a slower rate of decline compared to earlier in the year. During 2007, manufacturing costs for SHEETROCK ® brand gypsum wallboard were adversely affected by higher costs for wastepaper, other raw materials and natural gas compared with 2006.
As of December 31, 2007, we had $297 million of cash and cash equivalents compared with $565 million as of December 31, 2006. The decrease in cash was primarily attributable to lower earnings, increased capital expenditures and the repayment of a portion of our bank debt.
MARKET CONDITIONS AND OUTLOOK
Our businesses are cyclical in nature and sensitive to changes in general economic conditions, including, in particular, conditions in the housing and construction-based markets. Housing starts in the United States, which are a major source of demand for our products and services, continued to decline during 2007. Based on preliminary data issued by the U.S. Bureau of the Census, U.S. housing starts in 2007 were an estimated 1.354 million units, compared with actual housing starts of 1.801 million units in 2006 and 2.068 million units in 2005.
The downturn has caused both homebuilders and drywall dealers to reduce activity to keep inventories from expanding. As a result, industry shipments of gypsum wallboard in the United States were an estimated 30.7 billion square feet in 2007, a 15% decrease from 36.2 billion square feet in 2006.
The repair and remodel market, which includes renovation of both residential and nonresidential buildings, currently accounts for the largest portion of our sales, ahead of new housing construction. Many buyers begin to remodel an existing home within two years of purchase. Because sales of existing homes in 2007 dropped to an estimated 5.7 million units compared with 6.5 million units in 2006 and 7.1 million units in 2005, opportunity from the residential repair and remodel market has also decreased.
Demand for our products from new nonresidential construction is determined by floor space for which contracts are signed. Installation of gypsum and ceilings products follows signing of construction contracts by about a year. After a moderate increase in 2006, total floor space for which contracts were signed was flat in 2007, with increased investments in office construction offset by declines in store and educational construction.
The rate of new home construction in the United States dropped by 25% during 2007 compared to 2006, and current forecasts indicate a similar percentage decline in 2008 compared to 2007. Residential repair and remodeling expenditures also are expected to decline due to lower sales of existing homes and weakness in housing prices. We expect the nonresidential markets to be down modestly in 2008.
Demand for gypsum wallboard in the fourth quarter of 2007 was lower than in the fourth quarter of 2006. We anticipate that this trend will continue and that U.S. industry-wide demand for gypsum wallboard in 2008 will be down approximately 10% to 15% from 2007. Industry capacity utilization rates are expected to be below 70% for 2008. At this level of capacity utilization, we expect to see continued pressure on wallboard selling prices. This combination is expected to have a significant negative impact on North American Gypsum’s profits.
We have responded to the lower level of demand for our products by making significant adjustments to our manufacturing capacity. We have idled or closed approximately 3.3 billion square feet of higher-cost wallboard capacity in the last 18 months. This figure includes wallboard capacity that was idled at the New Orleans plant during the fourth quarter of 2007. We have also eliminated about 1,250 hourly and salaried positions and closed or consolidated 12 L&W Supply locations. We will close our 80-year-old Boston gypsum wallboard line in March of 2008. We will continue adjusting our operations as conditions warrant.
See Part I, Item 1A, Risk Factors, for additional information on the cyclicality of our businesses and other risks and uncertainties that affect our businesses.
KEY OBJECTIVES
In order to perform as efficiently as possible during this challenging business cycle and to support our long-term growth objectives, we will focus on the following key objectives:
• extend our customer satisfaction leadership;

• achieve significant cost reductions;

• continue to invest in new, low-cost gypsum wallboard manufacturing capacity in order to maximize profits to support our long-term growth plan;

• keep the enterprise financially strong to act on selective acquisition opportunities that support our long-term vision; and

• continue to enhance financial flexibility.
In line with our objectives to invest in new, low-cost manufacturing capacity and improve customer service, during the third quarter of 2007,

U.S. Gypsum opened a new, low-cost wallboard line in Norfolk, Va., to replace a high-cost, 50-year-old line at the same location. U.S. Gypsum also opened a new joint compound facility in Baltimore, Md., in the third quarter of 2007. USG Mexico opened a new gypsum wallboard manufacturing plant in Tecoman, Colima, Mexico, in the third quarter of 2007 that is serving western Mexico and Latin America. We expect to begin production at our new paper mill in Otsego, Mich., in the first half of 2008. Construction of a new gypsum wallboard plant in Washingtonville, Pa., that will serve the northeastern United States is expected to be completed in the second half of 2008. The new, low-cost wallboard line in Washingtonville will serve the customers of the Boston facility that we are closing in March of 2008.

Consolidated Results of Operations

NET SALES
Net sales were $5.202 billion in 2007, $5.810 billion in 2006 and $5.139 billion in 2005.
Net sales for 2007 declined 10% from the record level of 2006. The steep downturn in United States residential construction since mid-2006 resulted in decreased demand for building products and lower selling prices for gypsum wallboard. Consequently, net sales in 2007 for North American Gypsum and Building Products Distribution decreased compared with 2006. However, net sales in 2007 for Worldwide Ceilings, which mainly serves the nonresidential construction market, improved compared with 2006 primarily due to higher volume and selling prices for ceiling grid and higher selling prices, partially offset by lower volume, for ceiling tile.
Net sales for 2006 were an all-time high and represented a 13% increase over 2005 primarily due to higher realized selling prices for all major product lines. Net sales increased for all three of our segments. Net sales were up for North American Gypsum and Building Products Distribution primarily due to higher selling prices, partially offset by lower volume, for gypsum wallboard. Net sales for Worldwide Ceilings increased primarily due to higher selling prices and volume for ceiling grid and higher selling prices, partially offset by lower volume, for ceiling tile.
COST OF PRODUCTS SOLD
Cost of products sold totaled $4.603 billion in 2007, $4.440 billion in 2006 and $4.037 billion in 2005.
Cost of products sold increased in 2007 compared with 2006 primarily reflecting higher costs for wastepaper, other raw materials and natural gas, partially offset by lower product volumes.
Cost of products sold increased in 2006 compared with 2005 primarily due to the effect of higher costs for natural gas and raw materials for all major product lines.
GROSS PROFIT
Gross profit was $599 million in 2007, $1.370 billion in 2006 and $1.102 billion in 2005. Gross margin (gross profit as a percentage of net sales) was 11.5% in 2007, 23.6% in 2006 and 21.4% in 2005.
Gross profit was down in 2007 compared with 2006 primarily due to lower demand for gypsum wallboard, lower gypsum wallboard selling prices and higher costs for wastepaper, other raw materials and natural gas.
Gross profit increased in 2006 compared with 2005 primarily due to higher selling prices for gypsum wallboard and for all other major product lines, partially offset by higher costs for natural gas and raw materials.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled $408 million in 2007, $419 million in 2006 and $352 million in 2005. As a percentage of net sales, these expenses were 7.8% in 2007, 7.2% in 2006 and 6.8% in 2005.
The decrease in selling and administrative expenses in 2007 compared with 2006 primarily reflected lower accruals for incentive compensation and a company-wide emphasis on reducing expenses, which more than offset a higher level of salaries and related benefits. Selling and administrative expenses as a percentage of net sales increased due to the lower level of net sales in 2007.
The increase in 2006 selling and administrative expenses versus 2005 primarily reflected increased expenses for salaries and related benefits, incentive compensation and funding for marketing and growth initiatives, as well as costs incurred in 2006 associated with our move to our new corporate offices in the first quarter of 2007.
RESTRUCTURING AND IMPAIRMENT CHARGES
In 2007, we recorded restructuring and impairment charges totaling $26 million pretax ($16 million after-tax, or $0.16 per diluted share) associated with salaried workforce reductions, shutdown costs for several manufacturing facilities and asset impairment charges. We implemented these actions in response to current market conditions. See Note 4 to the Consolidated Financial Statements for additional information related to these charges.
ASBESTOS CLAIMS PROVISION (REVERSAL)
In the fourth quarter of 2005, in connection with our evaluation of the cost of resolving our asbestos-related liabilities, we recorded a pretax charge of $3.1 billion ($1.935 billion after-tax, or $34.34 per share), increasing our reserve for all asbestos claims to $4.161 billion. In increasing our reserve, we included the anticipated cost of funding the bankruptcy-related asbestos trust created in connection with our plan of reorganization (see Notes 19 and 21 to the Consolidated Financial Statements). We also included the estimated cost of resolving asbestos property damage claims, other asbestos-related claims and associated legal expenses.
In 2006, we reversed $44 million pretax ($27 million after-tax, or $0.41 per diluted share) of our reserve for asbestos-related liabilities. This included pretax reversals of $27 million in the second quarter and an additional $17 million in the third quarter. These reversals, which are reflected as income in the consolidated statement of operations, were based on our evaluation in each quarter of the settlements of asbestos property damage claims.
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses amounted to $10 million in 2006 and $4 million in 2005. These expenses consisted of legal and financial advisory fees partially offset by bankruptcy-related interest income.
INTEREST EXPENSE
Interest expense was $105 million in 2007, $555 million in 2006 and $5 million in 2005.
Interest expense in 2007 included charges totaling $14 million pretax ($9 million after-tax, or $0.09 per diluted share) to write off deferred financing fees primarily due to the first-quarter repayment of our tax bridge loan and the third-quarter repayment of our bank term loan.
Interest expense in 2006 included charges totaling $528 million pretax ($325 million after-tax, or $4.88 per diluted share) for post-petition interest and fees related to pre-petition obligations.

INTEREST INCOME
Interest income was $22 million in 2007, $43 million in 2006 and $10 million in 2005. Interest income in 2007 was generated primarily from money market investments. Interest income in 2006 was generated primarily from investments in marketable securities.
OTHER INCOME, NET
Other income, net was $4 million in 2007, $3 million in 2006 and zero in 2005.
INCOME TAXES (BENEFIT)
Income tax expense was $10 million in 2007 and $188 million in 2006. An income tax benefit of $924 million was recorded in 2005 as a result of the provision for asbestos claims. Our effective tax rates were 12.2% for 2007, 39.5% for 2006 and 39.3% for 2005.
The difference in the 2007 and 2006 effective tax rates was primarily attributable to a larger portion of our consolidated operating earnings arising in lower taxed foreign jurisdictions, the favorable effects of state and foreign tax law changes enacted in 2007, the reversal of valuation allowances on net operating loss and investment credit carryovers in our Worldwide Ceilings and Canadian businesses and a tax expense of $4 million related to post-petition interest on pre-petition tax obligations that was recorded in 2006.
The effective tax rate for 2005 reflected a $25 million reduction in our third quarter 2005 income tax provision in connection with the Internal Revenue Service’s completion of its audit of our federal income tax returns for the years 2000 through 2002. Due to the results of the audit, a portion of our recorded income tax contingency reserves became unnecessary and were eliminated. In the fourth quarter of 2005, this reduction was offset by an increase of $41 million ($28 million net of federal benefit) in the valuation allowance relating to our reserve for asbestos claims.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In December 2005, we adopted Financial Accounting Standards Board Interpretation No. 47, or FIN 47. A noncash, after-tax charge of $11 million, or $0.20 per share ($18 million pretax), was reflected in the consolidated statement of operations as a cumulative effect of a change in accounting principle as of December 31, 2005.
See Note 8 to the Consolidated Financial Statements for additional information related to the adoption of FIN 47.
NET EARNINGS (LOSS)
2007 : Net earnings in 2007 were $76 million, or $0.78 per diluted share. These amounts included the after-tax charge of $16 million, or $0.16 per diluted share, for restructuring and impairment charges. Net earnings and earnings per share for 2007 also included the after-tax charge of $9 million, or $0.09 per diluted share, for the write-off of deferred financing fees.
2006 : Net earnings in 2006 were $288 million, or $4.33 per diluted share. These amounts included the after-tax charge of $325 million, or $4.88 per diluted share, for post-petition interest and fees related to pre-petition obligations. Net earnings and earnings per share for 2006 also included after-tax income of $27 million, or $0.41 per diluted share, as a result of the reversal of the reserve for asbestos-related claims.
2005 : We incurred a net loss of $1.436 billion, or $25.49 per share, in 2005. This loss included the after-tax provision of $1.935 billion, or $34.34 per share, for asbestos claims and the after-tax charge of $11 million, or $0.20 per share, for the cumulative effect of an accounting change related to the adoption of FIN 47.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

CONSOLIDATED RESULTS OF OPERATIONS

NET SALES

Consolidated net sales in the third quarter and first nine months of 2007 declined 10% and 11% from the respective 2006 periods primarily due to decreased demand for building products and lower selling prices for gypsum wallboard. As explained below under Core Business Results of Operations, net sales in the third quarter and first nine months of 2007 for North American Gypsum and Building Products Distribution decreased compared with the same periods in 2006. Net sales in the third quarter and first nine months of 2007 for Worldwide Ceilings improved compared with the respective prior-year periods.

COST OF PRODUCTS SOLD

Cost of products sold increased 8% in the third quarter of 2007 compared with the third quarter of 2006 and 2% in the first nine months of 2007 compared with the same period in 2006. These increases primarily reflect higher prices for energy, wastepaper and other raw materials, partially offset by lower product volumes.

GROSS PROFIT

Gross profit for the third quarter and first nine months of 2007 decreased 66% and 52% from the respective 2006 periods primarily due to lower demand for gypsum wallboard, lower gypsum wallboard selling prices and higher manufacturing costs. The gross margin percentage was 8.8% in the third quarter of 2007, down from 23.4% in the third quarter of 2006. For the first nine months of 2007, the gross margin percentage was 13.3%, down from 24.4% for the first nine months of 2006.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses for the third quarter of 2007 decreased 13% from the third quarter of 2006 primarily due to lower levels of incentive compensation, the impact of our salaried workforce reduction program and the company-wide emphasis on reducing expenses. As a percent of net sales, selling and administrative expenses were 6.7% for the third quarter of 2007, down from 7.0% for the third quarter of 2006.

Selling and administrative expenses for the first nine months of 2007 increased $1 million from the first nine months of 2006 primarily due to higher levels of compensation and benefits and costs associated with our first quarter 2007 move to a new corporate office, largely offset by lower accruals for incentive compensation and a company-wide emphasis on reducing expenses. As a percent of net sales, selling and administrative expenses were 7.6% for the first nine months of 2007, up from 6.8% for the first nine months of 2006.

PROVISION FOR RESTRUCTURING

In the third quarter of 2007, we recorded a provision of $3 million pretax ($2 million after-tax) related to our salaried workforce reduction program. Through the first nine months of 2007, the total provision for restructuring was $17.5 million pretax ($11 million after-tax). Our restructuring activities include the salaried workforce reduction program and the shutdown of a framing products manufacturing plant. We implemented these actions beginning in the second quarter of 2007 in response to current market conditions. See Note 4 to the Condensed Consolidated Financial Statements for additional information related to this restructuring program.

REVERSAL OF ASBESTOS CLAIMS RESERVE

In the third quarter of 2006, we reversed $17 million pretax ($10 million after-tax) of a reserve for asbestos-related claims. This reversal, which is reflected as income in the condensed consolidated statements of earnings, was based on our evaluation of our asbestos property damage settlements and the remaining unresolved asbestos property damage claims at that time. Through the first nine months of 2006, a total of $44 million pretax ($27 million after- tax) of the reserve for asbestos-related claims was reversed.

CHAPTER 11 REORGANIZATION EXPENSES

In connection with our bankruptcy proceedings that concluded in 2006, we recorded Chapter 11 reorganization expenses of $2 million in the third quarter of 2006 and $10 million for the first nine months of 2006.

INTEREST EXPENSE

Interest expense of $22 million for the third quarter of 2007 included a charge of $4 million pretax ($3 million after-tax) to write off deferred financing fees due to the repayment of our bank term loan. Interest expense of $85 million for the first nine months of 2007 included charges totaling $14 million pretax ($9 million after-tax) to write off deferred financing fees primarily due to the first quarter repayment of our tax bridge loan and the third quarter repayment of the bank term loan.

Interest expense of $16 million for the third quarter of 2006 included charges for post-petition interest and fees totaling $8 million pretax ($5 million after-tax) related to pre-petition obligations. Interest expense of $539 million for the first nine months of 2006 included charges for post-petition interest and fees totaling $528 million pretax ($326 million after-tax) related to pre-petition obligations.

INCOME TAXES

Income tax expense was $3 million for the third quarter of 2007 compared with $107 million for the third quarter of 2006. The effective tax rate was 27.8% for the third quarter of 2007 compared with 40.9% for last year's third quarter. The difference in the third quarter effective tax rates is primarily attributable to a larger portion of our consolidated operating earnings arising in lower taxed non-U.S. jurisdictions and lower state income tax expense in 2007, offset in part by a $6.7 million unfavorable tax adjustment described below.

Income tax expense was $41 million for first nine months of 2007 compared with $130 million for the corresponding 2006 period. The effective tax rates were 28.2% for the first nine months of 2007 and 40.7% for the first nine months of 2006. The difference in the nine months effective tax rates is primarily attributable to a larger portion of our consolidated operating earnings arising in lower taxed non-U.S. jurisdictions and lower state income tax expense in 2007, the favorable effects of state tax law changes enacted in the first nine months of 2007 and a tax expense of $4 million related to post-petition interest on pre-petition tax obligations that was recorded in the first quarter of 2006. In addition, a $6.6 million favorable tax adjustment was recorded in the first quarter of 2007 and a $6.7 million unfavorable tax adjustment was recorded in the third quarter of 2007 resulting from corrections to deferred tax balances from prior years.

NET EARNINGS

2007: Net earnings for the third quarter of 2007 were $7 million, or $0.07 per diluted share. Net earnings for the first nine months of 2007 were $104 million, or $1.07 per diluted share.

Net earnings and earnings per share for the 2007 periods include charges for the restructuring program described above. These charges, on an after-tax basis, were $2 million, or $0.02 per diluted share, for the third quarter of 2007 and $11 million, or $0.11 per diluted share, for the first nine months of 2007.

Net earnings and earnings per share for the 2007 periods also include charges for the write-off of deferred financing fees described above. These charges, on an after-tax basis, were $3 million, or $0.03 per diluted share, for the third quarter of 2007 and $9 million, or $0.09 per diluted share, for the first nine months of 2007.

In addition, a $6.7 million, or $0.07 per diluted share, unfavorable tax adjustment was recorded in the third quarter of 2007. In the first quarter of 2007, we recorded a $6.6 million, or $0.07 per diluted share, favorable tax adjustment. These adjustments resulted from corrections of the deferred tax balances from prior years.

2006: For the third quarter of 2006, net earnings were $153 million, or $1.71 per diluted share. For the first nine months of 2006, net earnings totaled $188 million, or $3.03 per diluted share.

Net earnings and earnings per share for the 2006 periods include the charges for post-petition interest and fees related to pre-petition obligations described above. These charges, on an after-tax basis, were $5 million, or $0.06 per diluted share, for the third quarter of 2006 and $326 million, or $5.24 per diluted share, for the first nine months of 2006.

Net earnings and earnings per share for the 2006 periods also include the reversals of a reserve for asbestos-related claims described above. The after-tax income from the reversals amounted to $10 million, or $0.11 per diluted share, for the third quarter of 2006 and $27 million, or $0.43 per diluted share, for the first nine months of 2006.


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dailystock_admin 
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Posts: 249

Reg: 09-24-07

05-30-08 06:01 PM - Post#878    
    In response to Stock_Man

Notes from Conference call on April 22, 2008

William C. Foote – Chairman and Chief Executive Officer

Thank you, Jim, and good morning to all of you, thanks for dialing in. We truly appreciate your support of and interest in the company. I wish I had great news to report today; unfortunately I do not. We reported a loss of $45 million in the quarter. Market conditions continue to be extremely challenging. Both segments of the housing market, new construction and repair and remodel, are weak.

New residential construction eroded further in the first quarter of 2008. Consensus forecasts for housing starts have been revised downward again with projections slightly below 1 million units for the year. It can feel like an eternity, but it wasn't really that long ago that housing starts were at more than 2 million units per year. So as far as new residential construction is concerned, we're dealing with a market segment that has fallen more than 50% from a relatively recent peak in early 2006.

The repair and remodel market has weakened as well. The large national home improvement retailers who are important customers of ours have reported that they expect same-store sales to fall in 2008. The commercial market, which had remained relatively stable during the collapse of the housing market may have reached its peak. So our major market segments are weak, but any further declines are likely to be less severe than that which we've already experienced.

Said another way, we believe the drama is over and it's now about working through the bottom and getting back to a more growing environment. Indeed not all the news, though, I have to share is bad. There are some encouraging signs in the market and some very positive results that we've achieved by focusing on the controllable elements of our business. Some of those achievements are obscured by the recession and the corresponding decline in our results. But these improvements are real and I'd like to highlight some of them before I turn the call over to Jim and Rick.

First, the decline in wallboard prices stopped in the first quarter. As you might recall from our fourth-quarter call, we said that the rate of decline in wallboard prices had slowed. That trend continued early in the first quarter this year and toward the end of the quarter we announced and achieved a price increase. The increase during the quarter was modest, but it is important because it represents the first increase in wallboard prices in more than 15 months.

The second positive. The growth strategy for our distribution business is working well. Last year L&W Supply made two sizable acquisitions that not only increased our market presence, but also favorably altered or product mix toward non-wallboard building materials. CALPLY and AS [ph] both contributed to strong first-quarter sales of complementary products such as metal studs, ceilings and insulation. Those products are directed to the commercial market, which up to this point has performed much, much better than the housing market.

A third positive, our Worldwide Ceilings business followed up a record fourth quarter with another terrific quarter recording net sales of $211 million and operating profit of $22 million, an $8 million increase over the same quarter last year. Lastly, our cost reduction efforts are succeeding. Since the market began to decline in 2006 we moved quickly and aggressively to scale our operations according to market conditions and reduce discretionary spending and staffing. We can see costs coming out of the business and the trends are positive for favorable year-over-year comparisons.

During the first quarter, we curtailed operations at an older less efficient wallboard line in Iowa. That brings our total capacity reduction to 3.5 billion feet since the market decline began. We also closed a paper mill in Ohio in anticipation of the start-up of our new large capacity mill, which is in start-up now in Michigan. And the management team remains keenly focused on overhead costs. On April 1st we announced a salaried workforce reduction program that will eliminate approximately 500 positions. This program is very similar to the salaried workforce reduction program we implemented this time last year, which also eliminated about 500 positions. Since the downturn began we've removed approximately 1,750 positions, both salaried and hourly, from the ranks of the Company. Plant closures and headcount reductions are difficult and painful decisions, but they are necessary for the long-term success of the company.

Let me wrap up by saying that this is a difficult market, but the actions we are taking now to control costs and optimize our manufacturing network are having a positive impact on our results and our efforts will surely be rewarded when the market rebounds. Pendulums do swing. In our case we don't know when the drywall pendulum will swing, but when it does we will be able to capitalize on our terrific customer relationships, our low-cost manufacturing network and our growing distribution business.

I mentioned that there were other positives in the quarter, and for that I'd like to turn the discussion over to Jim who will comment more on operations, both the challenges that we have faced and some of the positives in the quarter. Jim?

James S. Metcalf – President and Chief Operating Officer

Thank you, Bill, good morning. As Bill described, our core markets continue to be very weak and the impact can be seen in our financial results. In markets like this we know that we have to focus on controllable areas like safety, customer relationships, operational efficiency, cost control and innovation. What I'd like to do this morning is briefly touch on each of these areas. First, I'd like to talk about our top two focus areas, employee safety and customer satisfaction.

The safety of our employees is critical to us regardless of market conditions. We had a fantastic year in 2007, in fact, a record performance in safety. I'm pleased to report that our great performance has continued into 2008, but safety is an hourly and daily job and we never stop focusing on it. In the first quarter 97% of our locations have achieved a perfect safety rating and 99% of our locations have operated without a single lost time injury. That is a level we will strive to and expect to maintain throughout 2008.

I've discussed in the past few quarters the importance of controlling costs within our operations. In addition to cost control, many of our efforts are directed at constantly improving our customer satisfaction and growing our position as a preferred supplier. Our customers are dealing with the same difficult market conditions that we are in. To succeed and grow our customer relationships we need to find new ways to help them operate more efficiently. To do that we've made substantial technology investments and we have focused our sales force to better serve our customers and we believe those investments are paying dividends.

For example, our substrates and services business is outperforming the industry. This is in part to recent changes in our sales organization structure that has improved our customer focus. We have also improved key customer requirements such as invoice accuracy and on-time deliveries to the best levels in the industry because of our investment in technology. As I said before, customers have choices, particularly in this market, and we want USG to be their best choice.

We continue to strive to have the lowest delivered wallboard cost. A key component is our focus on operating metrics in our plants that have a strong bearing on our manufacturing costs. This focus is paying off; we see positive trends throughout our operations. In fact, the overall efficiency of our network is at or near historically high levels. We've adapted to the recession in the housing market by curtailing or closing our high cost operations to take advantage of our more efficient plants. Through a combination of plant closures, temporary curtailments and shift reductions we've taken out 3.5 billion feet of capacity, as Bill mentioned earlier. This includes the capacity that's being eliminated by closing our Boston plant and idling our Fort Dodge, Iowa plant, both of which were announced this quarter… or in the first quarter.

We're taking a similar approach for our distribution business, L&W Supply. In the first quarter L&W closed 10 locations. Since late 2006 we have closed a total of 16 centers and reduced staffing accordingly. We're controlling cost in L&W Supply in other ways as well. For example, we reduced the size of our delivery fleet by 150 vehicles with half of the trucks coming out in the first quarter alone. Bill mentioned the modest improvement in wallboard prices during the quarter. This is a positive trend and we will attempt to raise prices as the year unfolds. But price is only part of the equation. We are also aggressively driving costs out of our system. You can see the results of our cost reduction efforts in the wallboard business, which performed better in the first quarter than in the fourth quarter of last year.

This was done despite the fact that raw material costs were up in the first quarter and the price of wallboard was lower. That's a trend we expect to continue throughout the year as we realize the benefits of our cost reduction initiatives. We've addressed cost in many areas and we are seeing the positive results of those efforts. Specifically, overhead in the first quarter was $15 million lower than the first quarter of 2007, that's a sustainable trend that we expect to continue each quarter in 2008.

We've cut costs in other ways as well. For example, we reduced funding for special projects. We expect to save more than $50 million in 2008 by reducing funding for these projects. Since the downturn began we've reduced the number of positions by over 1,700 including the plan that we announced on April 1st. The cost savings from this phase will appear in our results later this year. We have a laser-like focus to lower costs in our manufacturing network, reduce overhead and control discretionary spending. We are not finished challenging our cost structure. We will continue to think critically about our business and how we can operate more efficiently. We will also monitor market conditions to determine if further action is necessary.

Managing through this downturn is more than just reducing costs, it requires building for the future, preparing to take full advantage of the market recovery. As a reminder, industry experts project long-term wallboard industry growth of 2% to 3%. Our company and this management team have managed through downturns before. We know we have to aggressively manage for the current market conditions and at the same time invest for growth. So while we've been closing or idling older assets from our network we have also been building for the future.

Our new wallboard plant in Norfolk, Virginia is now up and running. This plant will operate for decades with the ability to utilize both natural rock and synthetic gypsum, servicing the key mid-Atlantic and Carolina markets. Norfolk to will produce wallboard at a considerably lower cost than the older Norfolk plant it replaced. We also opened a new paper mill in Otsego, Michigan. It is the most technologically advanced paper mill in the wallboard industry. This new state-of-the-art mill will lower our overall network cost for manufacturing wallboard.

As we build for the future, we must remain the innovation leader in our industry. Customers are always interested in and demand exciting new products and systems. One new innovation, dust control joint compound, which is focused on remodelers, has been a success in the US and Canada. In the first quarter, we extended the reach and exposure of dust control with product launches in national big box retailers.

We are also launching Sheetrock tools in the professional paint channel. Sheetrock tools and dust control compound have enabled us to penetrate this important market segment. In our ceilings business, we've introduced the industry's widest selection of ceiling panels to meet the most stringent standards in formaldehyde emissions. This offering is desired by architects and building owners and is one example of our effort to support sustainable design and construction. Innovation is a key to our long-term success. We will continue to explore new products and systems that meet the ever-changing needs of our customers.

As I conclude my comments, I'd like to emphasize we remain focused on the most fundamental aspects of our business; safety, customers, operational efficiency, cost control and innovation. We firmly believe that the keys to success in this market are focus and execution. We have acted decisively to respond to the significant decline in our core market. Our efforts are paying off; we can see cost coming out of the business in numerous areas. At the same time our customer satisfaction ratings remain high and we continue to innovate with new products with the safety of our employees as job number one. By focusing on the basics and successfully executing our strategic plan we will position USG to capitalize on the long-term growth of our industry.

Now I'd like to turn the call over to Rick Fleming who will talk about the financials.

Richard H. Fleming – Executive Vice President and Chief Financial Officer

Thanks, Jim; good morning. As indicated, I'll update you on our first-quarter financial results and provide some details on performance of our core businesses, capital spending and debt and cash management. Jim commented on how we are focusing operationally on those areas we can control, like safety, customer satisfaction, efficiency and innovation. We have a similar focus on our finances and I'll describe what we're doing to manage our financial flexibility during these challenging times, but first I'll recap our first-quarter results.

First quarter 2008 net sales were $1.165 billion, down 7% from net sales level in the first quarter of 2007. We had an operating loss of $65 million compared with last year's first quarter operating profit of $95 million. The first quarter of 2008 net loss was $45 million after-tax versus net earnings of $41 million in last year's first quarter. This loss largely reflects lower levels of wallboard prices combined with higher raw material costs and lower profitability in our distribution business.

The loss also included startup costs for new plants of $12 million pretax or $0.07 per share after-tax and restructuring charges of $4 million or $0.02 per share after-tax primarily associated with severance costs related to the shutdown of several North American gypsum manufacturing facilities and workforce reductions.

I should note that additional startup cost will be incurred primarily in the second and third quarters of this year totaling approximately $15 million for Otsego, Washingtonville and several other projects. And as announced, further restructuring charges of $15 million to $20 million will result from our recently initiated 2008 workforce reduction.

Turning to earnings per share, our loss per diluted share was $0.45 for the first quarter based on average diluted shares outstanding of 99.1 million. Last year's first quarter EPS was a profit of $0.45 per share. Now let's look at the performance of our three core businesses. North American Gypsum, our largest business segment, had an operating loss of $57 million. Canada and Mexico each posted a modest operating profit of $4 million during the quarter, while the U.S. Gypsum company had an operating loss of $64 million compared with an operating profit of $81 million in last year's first quarter.

Lower selling prices and higher production cost per Sheetrock brand gypsum wallboard were the biggest contributors to the decline in U.S. Gypsum's profitability. For example, wallboard-selling prices were down 36% from the first quarter of last year and this alone accounted for $127 million lower profit. But there are some interesting things to note about the U.S. Gypsum results, so let's dig a little deeper.

Wallboard manufacturing costs were up 7%, primarily reflecting the impact of higher prices for raw materials like paper and starch. Paper costs for example were up nearly 14%. Unfortunately raw material cost pressures more than offset the gains we achieved in improved plant operating efficiencies. But it is important to remember that higher raw material costs affect all industry participants. Also, our new low-cost paper mill in Otsego, Michigan will help reduce paper costs once it is fully operational.

Next I'd like to highlight our first-quarter capacity utilization rate. Although it was only 76%, it was up from 75% in the first quarter of last year and this level is much better than the first quarter 2008 estimated industry operating rate of 67%. Another key point to note is that our first-quarter volume was up slightly from the fourth quarter of 2007. The increase was only 1%, but we will take anything we can get. Regarding wallboard prices, there is another interesting aspect to the quarter. As Bill noted, prices showed signs of stabilizing during the quarter and we actually achieved some modest price improvement in February and March.

It's probably too early to call this a trend, but nonetheless we are encouraged to have prices actually go up for a change, albeit modestly. Returning the United States Gypsum company to profitability is a key priority for us. We've been taking cost and capacity out of the system and pushing price increases to recover cost increases. In addition, our new wallboard and papermaking capacity that is starting up this year will help reduce costs and improve service as the year progresses. The final item that I'd like to highlight for you regarding U.S. Gypsum is that its first quarter operating loss narrowed by $10 million versus the fourth quarter of 2007 despite lower wallboard prices and higher manufacturing costs. We still have a long way to go but we are making progress.

L&W Supply, our building products distribution business, reported an operating loss of $1 million versus an operating profit of $26 million in the first quarter of last year. The loss included a $3 million charge for LIFO adjustments. The decline in profitability at L&W is primarily attributable to lower shipments and profit margins on gypsum wallboard, which remains L&W's single largest product category. But efforts to diversify L&W's product offering have been successful and sales of drywall metal, ceilings and insulation were up 24% compared to the first quarter of 2007. These products have less exposure to residential construction and these results were benefited by the favorable impact of our CALPLY and AIS acquisitions.

As Jim mentioned, L&W closed ten centers during the quarter as part of its ongoing efforts to reduce its cost structure in light of the current market conditions. USG's Worldwide Ceilings business reported strong results with first-quarter 2008 operating profit of $22 million, up $8 million compared to the first quarter of last year. USG interiors, USG's domestic ceiling business, achieved operating profit of $15 million which is nearly double from last year's level of $8 million. These results reflect our success in achieving price and volume improvement for both ceiling tile and grid products as well as improved manufacturing efficiencies.

As Bill mentioned, we anticipate that commercial construction has likely peaked and could weaken as the year progresses. We also expect renewed cost pressures in areas such as steel prices. Nonetheless we are very optimistic that our ceilings business is well situated. Our distribution is stronger than ever and we have strengthened our sales and specification activities and introduced exciting new products. Now turning to some additional financial highlights of our consolidated results.

Selling, general and administrative expense, or SG&A, totaled $102 million in the first quarter, a decrease of $15 million or 13% from a year ago due to the cost control measures implemented during the past year including a workforce reduction in the spring of last year. As a percentage of net sales, SG&A was 8.8% compared with 9.3% for the first quarter of 2007. A few weeks ago we announced plans for another salaried workforce reduction, we expect to eliminate about 500 positions. This should produce about $40 million to $50 million in annual savings, similar to the program last year.

As mentioned, we currently estimate the cost of this program to be between $15 million and $20 million and these severance charges are expected to be begin in the second quarter of this year. Interest expense in the first quarter was $17 million, $44 million of expense in the first quarter of last year included the write-off of deferred financing fees and interest on a higher level of debt. The run rate for our annual interest expense is about $82 million per year based on a blended average interest rate of about 7% and capitalized interest of $15 million.

The effective tax benefit rate for the first quarter of 2008 was 43.6% versus a tax rate of 30.2% in the first quarter of 2007. The difference in the three months effective tax rates is primarily attributable to the worldwide mix of income. Specifically, a larger portion of our consolidated operating earnings rose in lower tax foreign jurisdictions, while higher domestic tax rates applied to domestic operating losses. In addition, first-quarter 2007 results included a $6.6 million favorable tax adjustment resulting from a correction of the December 31, 2006 deferred tax balances.

Depending on the mix of worldwide income, we expect that our full-year tax rate will be about the same as the first quarter rate. Regarding our cash and debt situation, our cash balance as of March 31st was $190 million compared with $297 million on December 31, 2007. Total debt was $1.283 billion as of March 31st, compared with $1.238 billion on December 31, 2007, an increase of $45 million.

As of March 31, 2008, the unused borrowing capacity on our revolving credit facility totaled $527 million, and when combined with cash on hand, total liquidity was $717 million. However it is important to note that under our revised credit agreement, which was amended to reflect financial covenants appropriate for the current housing recession, we are required to keep available cash and unused committed borrowing capacity of at least $300 million, including $100 million of unrestricted cash and marketable securities. We believe our liquidity provides us with the financial flexibility to deal with these challenging times and take advantage of strategic opportunities.

We have actively managed our capital structure to position USG for the current downturn. Since emerging from bankruptcy less than two years ago, we have issued $1 billion of ten-year notes, repaid $700 million of floating-rate bank debt, received a $1.1 billion tax refund which was used to pay off the $1.1 billion tax bridge note; issued $422 million of new equity, and as a result we have no term debt maturities until 2016. Even now we continue to explore additional potential sources of liquidity. These may include things such as an Accounts Receivable back credit facility and financing for our fleet of ships that haul gypsum rock to our plants.

Regarding capital spending, capital expenditures totaled $105 million in the first quarter compared to $111 million in the same quarter of last year. For the year we expect CapEx to be approximately $225 million excluding acquisitions versus $460 million last year. This lower-level of capital spending reflects the substantial completion of a number of strategic investments including two new wallboard plants in the U.S., a new paper mill and a new ship that will help strengthen USG's competitive cost position. Now, we will be happy to answer any questions you may have.

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dailystock_admin 
Administrator
Posts: 249

Reg: 09-24-07

02-16-09 07:49 PM - Post#2005    
    In response to dailystock_admin

Cramer says Avoid USG for now. Thinks housing has one more leg. What does the board think?

http://www.cnbc.com/id/28753139/?__source =yahoo|he...

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graham 
newbie
Posts: 31

Reg: 02-16-09

02-16-09 08:29 PM - Post#2007    
    In response to dailystock_admin

I agree. I think USG is a value trap until 2010. Housing problem is not being addressed. The chief Economist for the NAHB, as well as economists from Freddie Mac and PMI, are predicting a difficult 2009 as 1.5 unsold units (many of which are resales and not new homes) will take time to absorb.

Even Bruce Berkowitz of Fairholme Funds sold its entire stake in USG.

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ben 
newbie
Posts: 11

Reg: 02-22-09

02-16-09 08:49 PM - Post#2010    
    In response to graham

Depends on what your time frame is. Notice that Fairfax and Berkshire's recent investments in the USG convertible bonds give Buffett a potential 34% stake in USG. Sheetrock is such a brand name. I recently heard that Chinese wallboards were causing a bad odor in some of the homes built in Florida. They are being sued. More wallboard companies will go down in this downturn. USG will come out of this much stronger. I am bullish on USG for the long-term

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