CURRENCY IMPACT
Currency impact on consolidated and segment results has been derived by translating current period results at the
quarter-to-date and year-to-date
average foreign currency rates for the
quarter and six months ended June 30, 2016
.
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per-share data)
|
2017
|
|
2016
|
|
$ Favorable (Unfavorable)
|
|
% Favorable (Unfavorable)
|
Three months ended June 30:
|
|
|
|
|
|
|
|
Net sales
|
$
|
811
|
|
|
$
|
769
|
|
|
$
|
42
|
|
|
5
|
%
|
Cost of products sold
|
643
|
|
|
576
|
|
|
(67
|
)
|
|
(12
|
)%
|
Gross profit
|
168
|
|
|
193
|
|
|
(25
|
)
|
|
(13
|
)%
|
Selling and administrative expenses
|
72
|
|
|
71
|
|
|
(1
|
)
|
|
(1
|
)%
|
Operating profit
|
96
|
|
|
122
|
|
|
(26
|
)
|
|
(21
|
)%
|
Income from equity method investments
|
14
|
|
|
16
|
|
|
(2
|
)
|
|
(13
|
)%
|
Interest expense
|
(19
|
)
|
|
(38
|
)
|
|
19
|
|
|
50
|
%
|
Interest income
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
(100
|
)%
|
Loss on extinguishment of debt
|
(22
|
)
|
|
(2
|
)
|
|
(20
|
)
|
|
*
|
|
Other (expense) income, net
|
(3
|
)
|
|
2
|
|
|
(5
|
)
|
|
*
|
|
Income from continuing operations before income taxes
|
66
|
|
|
101
|
|
|
(35
|
)
|
|
(35
|
)%
|
Income tax expense
|
(20
|
)
|
|
(34
|
)
|
|
14
|
|
|
41
|
%
|
Income from continuing operations
|
46
|
|
|
67
|
|
|
(21
|
)
|
|
(31
|
)%
|
(Loss) income from discontinued operations, net of tax
|
(10
|
)
|
|
7
|
|
|
(17
|
)
|
|
*
|
|
Net income
|
$
|
36
|
|
|
$
|
74
|
|
|
$
|
(38
|
)
|
|
(51
|
)%
|
Diluted earnings per share - net income
|
$
|
0.24
|
|
|
$
|
0.50
|
|
|
$
|
(0.26
|
)
|
|
(52
|
)%
|
|
|
|
|
|
|
|
|
Six months ended June 30:
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,578
|
|
|
$
|
1,516
|
|
|
$
|
62
|
|
|
4
|
%
|
Cost of products sold
|
1,246
|
|
|
1,142
|
|
|
(104
|
)
|
|
(9
|
%)
|
Gross profit
|
332
|
|
|
374
|
|
|
(42
|
)
|
|
(11
|
)%
|
Selling and administrative expenses
|
145
|
|
|
139
|
|
|
(6
|
)
|
|
(4
|
)%
|
Recovery of receivable
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
(100
|
)%
|
Operating profit
|
187
|
|
|
238
|
|
|
(51
|
)
|
|
(21
|
)%
|
Income from equity method investments
|
27
|
|
|
23
|
|
|
4
|
|
|
17
|
%
|
Interest expense
|
(39
|
)
|
|
(78
|
)
|
|
39
|
|
|
50
|
%
|
Interest income
|
1
|
|
|
3
|
|
|
(2
|
)
|
|
(67
|
)%
|
Loss on extinguishment of debt
|
(22
|
)
|
|
(4
|
)
|
|
(18
|
)
|
|
*
|
|
Other (expense) income, net
|
(4
|
)
|
|
5
|
|
|
(9
|
)
|
|
*
|
|
Income before continuing operations before income taxes
|
150
|
|
|
187
|
|
|
(37
|
)
|
|
(20
|
%)
|
Income tax expense
|
(49
|
)
|
|
(60
|
)
|
|
11
|
|
|
18
|
%
|
Income from continuing operations
|
101
|
|
|
127
|
|
|
(26
|
)
|
|
(20
|
%)
|
(Loss) income from discontinued operations, net of tax
|
(10
|
)
|
|
14
|
|
|
(24
|
)
|
|
*
|
|
Net income
|
$
|
91
|
|
|
$
|
141
|
|
|
$
|
(50
|
)
|
|
(35
|
%)
|
Diluted earnings per share - net income
|
$
|
0.61
|
|
|
$
|
0.95
|
|
|
$
|
(0.34
|
)
|
|
(36
|
%)
|
|
|
|
|
|
|
|
|
*not meaningful
|
|
|
|
|
|
|
|
NET SALES
Consolidated net sales for the
second quarter of 2017
increased
$42 million
, or
5%
, compared with the
second quarter of 2016
. This reflected higher net sales for our Gypsum segment offset by lower net sales for our Ceilings segment. Sales for our Gypsum segment increased
8%
which reflected an increase in shipments of both gypsum wallboard and joint compound offset by lower average selling price for both products. The decrease in net sales of
7%
for our Ceilings segment was driven by decreased shipments of ceiling grid and lower average selling price for ceiling tile. On a consolidated basis for the comparative periods, we estimate that our net sales were negatively impacted by foreign currency translation of $5 million.
Consolidated net sales for the
first six months of 2017
increased
$62 million
, or
4%
, compared with the
first six months of 2016
. The increase reflects higher sales for our Gypsum segment of
6%
offset by a decrease in sales for our Ceilings segment of
4%
. The higher levels of net sales for our Gypsum segment reflected higher volume and higher average selling price for
gypsum wallboard. The decrease in sales for our Ceilings segment reflected lower volumes of both ceiling grid and ceiling tile and lower average selling price for ceiling tile. On a consolidated basis for the comparative periods, we estimate that our net sales were negatively impacted by foreign currency translation of $5 million.
GROSS PROFIT
Gross profit for the
second quarter of 2017
decreased
$25 million
, or
13%
, compared with the
second quarter of 2016
. Gross profit as a percentage of net sales was
20.7%
for the
second quarter of 2017
, compared with
25.1%
for the
second quarter of 2016
. The lower gross margin was driven by increased manufacturing costs in both our Gypsum and Ceilings segments and a pension settlement charge of $5 million in the second quarter of 2017. The decrease in gross margin for our Gypsum segment reflected higher average per unit cost for gypsum wallboard due to higher raw material costs, primarily waste paper partially offset by lower per unit fixed costs due to higher volumes. The decrease in gross margin for our Ceilings segment also reflected higher per unit costs for ceiling grid due to higher average per unit cost for raw materials reflective of higher steel prices. Gross profit in the second quarter of 2016 also included a gain of $11 million for the sale of surplus property.
Gross profit for the
first six months of 2017
decreased
$42 million
, or
11%
, compared with the
first six months of 2016
. Gross profit as a percentage of net sales was
21.0%
for the
first six months of 2017
, compared with
24.7%
for the
first six months of 2016
. The decrease reflected lower margins due to increased manufacturing costs in both our Gypsum and Ceilings segments and a pension settlement charge of $5 million in the second quarter of 2017. The lower gross margin for our Gypsum segment was driven primarily by increased per unit costs for gypsum products due to higher average per unit cost for raw materials, primarily waste paper and to a lesser extent synthetic gypsum. The lower gross margin for our Ceilings segment reflected higher per unit costs for ceiling grid due to higher average per unit fixed cost due to lower volumes. Gross profit for the first six months of 2016 also included a gain of $11 million for the sale of surplus property.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled
$72 million
in the
second quarter of 2017
compared to
$71 million
in the
second quarter of 2016
. As a percentage of net sales, selling and administrative expenses decreased to
8.9%
for the
second quarter of 2017
from
9.2%
for the
second quarter of 2016
. The increase in selling and administrative expenses included a $2 million pension settlement charge.
Selling and administrative expenses totaled
$145 million
in the
first six months of 2017
compared to
$139 million
in the
first six months of 2016
. As a percentage of net sales, selling and administrative expenses remained unchanged at
9.2%
for each of the comparative periods. The increase in selling and administrative expenses reflected higher costs for marketing and services, including those in support of growth platforms.
RECOVERY ON RECEIVABLE
In the first quarter of 2016, we received the remaining payments under a settlement agreement with our former shipping trading partner of which $3 million represented a recovery of a previously deemed uncollectible receivable. The remaining payments received under the settlement agreement were recorded in "Interest income" and "Other (expense) income, net."
INCOME FROM EQUITY METHOD INVESTMENTS
Income from equity method investments, primarily UBBP, in the
second quarter of 2017
was
$14 million
, a decrease of
$2 million
, or
13%
, from the
second quarter of 2016
. This reflected lower income recorded by UBBP due to higher selling and administrative expenses and higher tax expense for withholding taxes partially offset by higher margins in South Korea and Vietnam.
Income from equity method investments in the
first six months of 2017
was
$27 million
, an increase of
$4 million
from the
first six months of 2016
. The improved results for UBBP were driven by higher margins in South Korea and Australia partially offset by an increase in selling and administrative expenses and higher withholding taxes. The increase also reflected favorable currency impact of $1 million.
INTEREST EXPENSE
Interest expense was
$19 million
in the
second quarter of 2017
, down
$19 million
, or
50%
, from the
second quarter of 2016
and was
$39 million
in the
first six months of 2017
, down
$39 million
, or
50%
, from the
first six months of 2016
. The decrease in interest expense in both comparative periods reflected lower debt levels and lower interest rates.
LOSS ON EXTINGUISHMENT OF DEBT
In the second quarter of 2017, we recorded a loss of
$22 million
on the extinguishment of debt. This included $21 million primarily for premiums paid as a result of a tender offer and repurchase of our 7.75% Notes and $1 million for deferred fees
upon the amendment of our credit facility. In the
second
quarter and first
six
months of 2016, we recorded a loss of $2 million and $4 million, respectively, on the extinguishment of debt, including premiums, in connection with the open market purchases of our 6.3% Notes. See Note
6
to the condensed consolidated financial statements for additional information.
OTHER (EXPENSE) INCOME, NET
In the
second
quarter and the first
six
months of 2017, we recorded
$3 million
and
$4 million
, respectively, of net other expense, which primarily reflected net losses on foreign currency transactions. In the
second
quarter and the first
six
months of 2016, we recorded
$2 million
and
$5 million
, respectively, of net other income, which included net gains on foreign currency transactions. Also included in net other income for the first six months of 2016 was the receipt of payments in conjunction with a settlement agreement with our former shipping trading partner of which $4 million was recorded as other income. See Note
15
to the condensed consolidated financial statements for additional information.
INCOME TAX EXPENSE
We recorded income tax expense of
$20 million
in the
second quarter of 2017
from federal, foreign, state and local jurisdictions. Our effective tax rate was
30.3%
for the
second quarter of 2017
. In the
second quarter of 2016
, we recorded income tax expense of
$34 million
resulting in an effective tax rate of
33.7%
.
We recorded income tax expense for the first
six
months of 2017 of
$49 million
from federal, foreign, state and local jurisdictions. Our effective tax rate was
32.7%
for the first six months of 2017. In the first
six
months of 2016, we recorded income tax expense of
$60 million
for an effective tax rate of
32.1%
.
(LOSS) INCOME FROM DISCONTINUED OPERATIONS
In the second quarter and first six months of 2017, we recorded a loss of
$10 million
to discontinued operations which primarily reflected a pension settlement charge related to lump sum benefits paid to former employees of L&W and also included a loss of $1 million for our European operations which were sold in December 2012. For the second quarter and first six months of 2016, income from discontinued operations was
$7 million
and
$14 million
, respectively, and reflected the results of L&W.
Segment Results of Operations
GYPSUM
Net sales and operating profit (loss) for the businesses comprising our Gypsum segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30:
|
|
Six months ended June 30:
|
|
|
|
|
|
Favorable (Unfavorable)
|
|
|
|
|
|
Favorable (Unfavorable)
|
(millions)
|
2017
|
|
2016
|
|
$
|
|
%
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
582
|
|
|
$
|
539
|
|
|
$
|
43
|
|
|
8
|
%
|
|
$
|
1,137
|
|
|
$
|
1,075
|
|
|
$
|
62
|
|
|
6
|
%
|
Canada
|
92
|
|
|
86
|
|
|
6
|
|
|
7
|
%
|
|
175
|
|
|
168
|
|
|
7
|
|
|
4
|
%
|
Mexico / Latin America
|
52
|
|
|
49
|
|
|
3
|
|
|
6
|
%
|
|
101
|
|
|
93
|
|
|
8
|
|
|
9
|
%
|
Canadian Mining
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
Eliminations
|
(38
|
)
|
|
(38
|
)
|
|
—
|
|
|
—
|
%
|
|
(76
|
)
|
|
(72
|
)
|
|
(4
|
)
|
|
(6
|
)%
|
Total
|
$
|
688
|
|
|
$
|
636
|
|
|
$
|
52
|
|
|
8
|
%
|
|
$
|
1,337
|
|
|
$
|
1,264
|
|
|
$
|
73
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
87
|
|
|
$
|
106
|
|
|
$
|
(19
|
)
|
|
(18
|
)%
|
|
$
|
177
|
|
|
$
|
207
|
|
|
$
|
(30
|
)
|
|
(14
|
)%
|
Canada
|
2
|
|
|
5
|
|
|
(3
|
)
|
|
(60
|
)%
|
|
3
|
|
|
11
|
|
|
(8
|
)
|
|
(73
|
)%
|
Mexico / Latin America
|
2
|
|
|
4
|
|
|
(2
|
)
|
|
(50
|
)%
|
|
3
|
|
|
6
|
|
|
(3
|
)
|
|
(50
|
)%
|
Canadian Mining
|
(1
|
)
|
|
(3
|
)
|
|
2
|
|
|
67
|
%
|
|
(2
|
)
|
|
(6
|
)
|
|
4
|
|
|
67
|
%
|
Gypsum Transportation Limited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
3
|
|
|
(3
|
)
|
|
(100
|
)%
|
Total
|
$
|
90
|
|
|
$
|
112
|
|
|
$
|
(22
|
)
|
|
(20
|
)%
|
|
$
|
181
|
|
|
$
|
221
|
|
|
$
|
(40
|
)
|
|
(18
|
)%
|
United States
: Net sales in the
second
quarter of
2017
were
$582 million
, up
$43 million
, or
8%
, compared with the
second
quarter of
2016
. The increase in net sales was due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Price
|
(millions)
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
Change to Q2 2017 from Q2 2016
|
|
|
|
|
|
|
|
|
Sheetrock® brand gypsum wallboard
|
$
|
22
|
|
9
|
%
|
|
$
|
25
|
|
10
|
%
|
|
$
|
(3
|
)
|
(1
|
)%
|
Sheetrock
®
brand joint compound
|
3
|
|
4
|
%
|
|
5
|
|
5
|
%
|
|
(2
|
)
|
(1
|
)%
|
Durock® brand cement board
|
1
|
|
2
|
%
|
|
1
|
|
2
|
%
|
|
—
|
|
—
|
%
|
Other
|
17
|
|
|
|
|
|
|
|
|
Total increase in net sales
|
$
|
43
|
|
8
|
%
|
|
|
|
|
|
|
Sales for Sheetrock
®
brand gypsum wallboard increased $22 million from the
second
quarter of
2016
compared to the
second
quarter of
2017
due to increased shipments offset by lower average selling price. The increased volumes were driven by higher shipments to big box retailers, pro dealers and specialty dealers. The increased volumes were also driven by the timing of a price increase, which in 2017 occurred in late January and in 2016 occurred in March. During 2016, additional purchases by customers were made in the first quarter in anticipation of the price increase. The decrease in the average selling price reflected some competitive pricing pressures as we balance price and volume across the country with new customers and the continued transition under the L&W supply agreement.
Sales of Sheetrock
®
brand joint compound increased
$3 million
on increased volume offset by decreased average selling price. The higher volume was driven by higher shipments to big box retailers, pro dealers and specialty dealers. The lower average selling price reflected the continued transition under the supply agreement with L&W. Sales of Durock
®
brand cement board increased $1 million. Included in the increase in Other was higher sales of other gypsum sales of $5 million. Also included in Other was a $1 million increase in sales for inventory sold by Gypsum that was included in L&W's inventory as of June 30, 2016, a $9 million increase for freight and an adjustment in the second quarter of 2016 of $2 million to customer reserves.
Operating profit of
$87 million
was recorded in the
second
quarter of
2017
compared to
$106 million
recorded in the
second
quarter of
2016
. The decrease of
$19 million
in operating profit reflected the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Price
|
|
Cost
|
(millions)
|
$
|
|
$
|
|
$
|
|
$
|
Change to Q2 2017 from Q2 2016
|
|
|
|
|
|
|
|
Sheetrock
®
brand gypsum wallboard
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
(3
|
)
|
|
$
|
(8
|
)
|
Sheetrock
®
brand joint compound
|
(2
|
)
|
|
1
|
|
|
(2
|
)
|
|
(1
|
)
|
Other
|
(17
|
)
|
|
|
|
|
|
|
Total decrease in operating profit
|
$
|
(19
|
)
|
|
|
|
|
|
|
The decrease in operating profit reflected flat gross profit for Sheetrock
®
brand gypsum wallboard and lower gross profit for Sheetrock
®
brand joint compound. The unchanged gross profit for Sheetrock
®
brand gypsum wallboard reflected higher cost per unit and lower average selling price offset by higher volumes. The higher per unit cost for Sheetrock
®
brand gypsum wallboard reflected an increase in per unit cost of 11% for raw materials driven primarily by waste paper offset by a decrease in per unit cost of 4% for conversion costs and 9% for fixed costs due to higher volumes. The drivers of the lower average selling price and higher volumes are discussed above in our analysis over the increase in sales.
The decrease in gross profit for Sheetrock
®
brand joint compound reflected lower average selling price and higher per unit costs. The higher cost per unit for joint treatment reflected higher per unit costs for raw materials. Gross profit of Durock
®
brand cement board was primarily flat over the comparative period.
Included in Other is the following:
|
|
•
|
the absence of $9 million for items recorded in the second quarter of 2016 which included a gain of $11 million for the sale of surplus property offset by a $2 million adjustment to customer reserves,
|
|
|
•
|
a pension settlement charge of $5 million,
|
|
|
•
|
lower gross profit of $3 million on other surfaces and substrates products,
|
|
|
•
|
higher selling and administrative expenses of $1 million, offset by
|
|
|
•
|
the increase in gross profit of $1 million recorded on sales by Gypsum to L&W that were included in L&W's inventory at the end of the second quarter of 2016.
|
Canada
: Net sales for our gypsum business in Canada in the
second
quarter of
2017
were
$92 million
, an increase of $6 million from
$86 million
in the
second
quarter of
2016
. The change in sales reflected higher sales of gypsum wallboard of $9 million and higher freight of $1 million offset by an unfavorable impact of currency translation of $4 million. The increase in sales of gypsum wallboard was driven by an increase of 13% in average selling price and an increase of 6% in volume. The increase in average selling price reflected the final decisions of the Canadian authorities on the minimum pricing of gypsum board imported into Western Canada. The decisions were as a result of an anti-dumping proceeding initiated by a competing Canadian wallboard manufacturer.
Operating profit in the
second
quarter of
2017
was
$2 million
, a decrease of
$3 million
from the
second
quarter of
2016
. The decrease reflected an increase for royalties of $2 million, the unfavorable impact due to currency fluctuations of $2 million and lower gross profit on joint compound of $1 million offset by higher gross profit of gypsum wallboard of $2 million.
Mexico / Latin America
: Net sales for our gypsum businesses in Mexico and Latin America were
$52 million
for the
second
quarter of
2017
, an increase of
$3 million
from the
second
quarter of
2016
. The increase reflected higher sales of gypsum wallboard, joint treatment, Durock
®
brand cement tile backerboard and drywall steel offset by unfavorable currency translation of $1 million. Operating profit decreased to
$2 million
in the
second
quarter of
2017
from
$4 million
in the
second
quarter of
2016
due primarily to an increase in selling and administrative expenses and lower gross profit on other products offset by lower miscellaneous costs. The impact due to foreign currency translation was immaterial.
Canadian Mining
: Our mining operation in Canada recorded
no
sales for both the
second
quarter of
2017
and the
second
quarter of
2016
. Operating loss was
$1 million
for the
second
quarter of
2017
and
$3 million
for the
second
quarter of
2016
. In the third quarter of 2016, we indefinitely idled our mining operations in Little Narrows, Nova Scotia, Canada which resulted in a decrease of operating costs.
Gypsum Transportation Limited
: Our shipping company, Gypsum Transportation Limited, or GTL, recorded no sales or operating profit for the
second
quarter of
2017
or 2016 as we have exited this business.
CEILINGS
Net sales and operating profit for the businesses comprising our Ceilings segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30:
|
|
Six months ended June 30:
|
|
|
|
|
|
Favorable (Unfavorable)
|
|
|
|
|
|
Favorable (Unfavorable)
|
(millions)
|
2017
|
|
2016
|
|
$
|
|
%
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
118
|
|
|
$
|
124
|
|
|
$
|
(6
|
)
|
|
(5
|
)%
|
|
$
|
230
|
|
|
$
|
239
|
|
|
$
|
(9
|
)
|
|
(4
|
)%
|
Canada
|
12
|
|
|
14
|
|
|
(2
|
)
|
|
(14
|
)%
|
|
25
|
|
|
27
|
|
|
(2
|
)
|
|
(7
|
)%
|
Mexico / Latin America
|
7
|
|
|
8
|
|
|
(1
|
)
|
|
(13
|
)%
|
|
14
|
|
|
16
|
|
|
(2
|
)
|
|
(13
|
)%
|
Eliminations
|
(11
|
)
|
|
(11
|
)
|
|
—
|
|
|
—
|
%
|
|
(23
|
)
|
|
(26
|
)
|
|
3
|
|
|
12
|
%
|
Total
|
$
|
126
|
|
|
$
|
135
|
|
|
$
|
(9
|
)
|
|
(7
|
)%
|
|
$
|
246
|
|
|
$
|
256
|
|
|
$
|
(10
|
)
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
23
|
|
|
$
|
29
|
|
|
$
|
(6
|
)
|
|
(21
|
)%
|
|
$
|
44
|
|
|
$
|
55
|
|
|
$
|
(11
|
)
|
|
(20
|
)%
|
Canada
|
—
|
|
|
2
|
|
|
(2
|
)
|
|
(100
|
)%
|
|
1
|
|
|
3
|
|
|
(2
|
)
|
|
(67
|
)%
|
Mexico / Latin America
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
(100
|
)%
|
|
1
|
|
|
2
|
|
|
(1
|
)
|
|
(50
|
)%
|
Total
|
$
|
23
|
|
|
$
|
32
|
|
|
$
|
(9
|
)
|
|
(28
|
)%
|
|
$
|
46
|
|
|
$
|
60
|
|
|
$
|
(14
|
)
|
|
(23
|
)%
|
United States
: Net sales for our domestic ceilings business in the
second
quarter of
2017
were
$118 million
, a decrease of
$6 million
, or
5%
, from the
second
quarter of
2016
. The decrease reflected the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Price
|
(millions)
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
Change to Q2 2017 from Q2 2016
|
|
|
|
|
|
|
|
|
Ceiling grid
|
$
|
(3
|
)
|
(4
|
)%
|
|
$
|
(3
|
)
|
(4
|
)%
|
|
$
|
—
|
|
—
|
%
|
Ceiling tile
|
(3
|
)
|
(3
|
)%
|
|
(1
|
)
|
(1
|
)%
|
|
(2
|
)
|
(2
|
)%
|
Total decrease in net sales
|
$
|
(6
|
)
|
(5
|
)%
|
|
|
|
|
|
|
Sales of both ceiling grid and ceiling tile decreased in the second quarter of 2017 compared with the second quarter of 2016 due to changes in product mix. The decrease in ceiling grid reflected lower volumes due to the timing of shipments and projects. The decrease in ceiling tile reflected lower average selling price which reflected the competitive market and lower volumes due to timing of shipments. Net sales also included a decrease of $1 million in freight offset by a $1 million increase in sales for inventory sold by Ceilings that was included in L&W's inventory as of June 30, 2016.
Operating profit was
$23 million
for the
second
quarter of
2017
, a decrease of
$6 million
, or
21%
, from the
second
quarter of
2016
. The decrease reflected the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Price
|
|
Cost
|
(millions)
|
$
|
|
$
|
|
$
|
|
$
|
Change to Q2 2017 from Q2 2016
|
|
|
|
|
|
|
|
Ceiling grid
|
$
|
(4
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
Ceiling tile
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Total decrease in operating profit
|
$
|
(6
|
)
|
|
|
|
|
|
|
The decrease in operating profit reflected a decrease in gross profit for both ceiling grid and ceiling tile due to changes in product mix. The lower gross profit for ceiling grid reflected higher per unit cost and lower volumes. The higher per unit cost w
as driven primarily by higher raw material cost led by higher steel prices. The decrease in gross profit for ceiling tile reflected lower average selling price due to the competitive market.
Operating profit included a $1 million pension settlement charge offset by $1 million in gross profit recorded on sales by Ceilings to L&W that were included in L&W's inventory as of June 30, 2016.
Canada
: Net sales for the
second
quarter of
2017
were
$12 million
, a decrease of $2 million from the
second
quarter of
2016
. The decrease in sales reflected lower sales of $1 million for both ceiling tile and ceiling grid due to lower volumes and lower freight of $1 million. Operating profit decreased $2 million for the
second
quarter of
2017
to
$0 million
from the
second
quarter of
2016
and reflected lower gross profit of both ceiling tile and ceiling grid due to lower volumes and higher input costs.
Mexico / Latin America
: Net sales of
$7 million
for the
second
quarter of
2017
decreased $1 million from the
second
quarter of
2016
. Operating profit decreased $1 million to
$0 million
for the
second
quarter of
2017
from the
second
quarter of
2016
. The decrease in sales and operating profit primarily reflected lower sales and operating profit in our Latin America region.
USG BORAL BUILDING PRODUCTS
The following reflects the net sales and operating profit as recorded by UBBP and the equity income recorded by USG.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30:
|
|
Six months ended June 30:
|
|
|
|
|
|
Favorable (Unfavorable)
|
|
|
|
|
|
Favorable (Unfavorable)
|
(millions)
|
2017
|
|
2016
|
|
$
|
|
%
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Net sales
|
$
|
287
|
|
|
$
|
273
|
|
|
$
|
14
|
|
|
5
|
%
|
|
$
|
563
|
|
|
$
|
502
|
|
|
$
|
61
|
|
|
12
|
%
|
Operating profit
|
40
|
|
|
41
|
|
|
(1
|
)
|
|
(2
|
)%
|
|
75
|
|
|
64
|
|
|
11
|
|
|
17
|
%
|
Income from equity method investments - UBBP
|
14
|
|
|
16
|
|
|
(2
|
)
|
|
(13
|
)%
|
|
27
|
|
|
23
|
|
|
4
|
|
|
17
|
%
|
Net sales for UBBP were
$287 million
in the
second
quarter of
2017
compared to
$273 million
for the
second
quarter of
2016
. The increase of
$14 million
reflected increased plasterboard shipments in South Korea, Vietnam, India and Oman and favorable impact of currency translation of $2 million. The increase is offset by decreased sales in Indonesia. Plasterboard shipments increased to 1.20 billion square feet for the
second
quarter of
2017
from 1.19 billion square feet for the
second
quarter of
2016
. Shipments of certain adjacent products, including mineral fiber ceiling tiles, also increased in the second quarter of 2017 from the second quarter of 2016.
Operating profit decreased to
$40 million
in the
second
quarter of
2017
compared to
$41 million
in the
second
quarter of
2016
. Operating profit in 2017 reflected lower margins in Indonesia and China and higher selling and administrative expenses offset by higher margins in South Korea and Vietnam, continued improved market acceptance of lightweight products and a favorable currency impact of $1 million.
Our share of net income of UBBP decreased
$2 million
in the
second
quarter of
2017
as compared to the
second
quarter of
2016
. This decrease reflected lower income recorded by UBBP due to lower operating profit and higher tax expense due to $2 million recorded for withholding taxes on intercompany dividends.
CORPORATE
The operating loss for Corporate decreased to
$17 million
in the
second
quarter of
2017
compared with
$22 million
in the
second
quarter of
2016
primarily due to lower expense for incentive compensation.
Liquidity and Capital Resources
As of
June 30, 2017
, we had
$463 million
of cash and cash equivalents and marketable securities compared with
$518 million
as of
December 31, 2016
. See discussion below under Cash Flows for explanation of the change in cash and cash equivalents. Our total liquidity as of
June 30, 2017
was
$652 million
compared to
$603 million
as of December 31, 2016 (including
$189 million
and
$85 million
, respectively, of borrowing availability under our credit facility). The increase in liquidity reflected higher borrowing availability offset by payments for our share repurchase program, premiums paid for the refinancing of our 7.75% Notes and for incentives.
We invest in cash equivalents and marketable securities pursuant to an investment policy that has preservation of principal as its primary objective. The policy includes provisions regarding diversification, credit quality and maturity profile
that are designed to minimize the overall risk profile of our investment portfolio. The securities in the portfolio are subject to normal market fluctuations. See Note
5
to the condensed consolidated financial statements for additional information regarding our investments in marketable securities.
Total debt, consisting of senior notes and industrial revenue bonds, amounted to
$1.077 billion
(
$1.089 billion
in aggregate principal amount less
$12 million
of debt issuance costs) as of
June 30, 2017
and
$1.083 billion
(
$1.089 billion
in aggregate principal amount less
$6 million
of debt issuance costs) as of
December 31, 2016
. During the
six
months ended
June 30, 2017
, there were no borrowings under our revolving credit facility and
no
borrowings outstanding at period-end.
During the second quarter of 2017, we amended and restated our credit facility agreement. Our amended and restated agreement increased the maximum borrowing limit from $180 million to $220 million (including a $50 million borrowing sublimit for CGC) that is available to fund working capital needs and other general corporate purposes and matures on May 1, 2022. The facility is guaranteed by certain of our significant subsidiaries and secured by such parties’ eligible trade receivables and inventory. The maximum borrowing limit under the credit agreement may be increased up to $450 million at our request and with our lenders’ approval. The credit agreement contains other covenants and events of default that are customary for similar agreements and may limit our ability to take various actions including our ability to pay a dividend or repurchase our stock.
The maximum borrowing limit under the credit agreement is $220 million. The credit agreement also specifies that the maximum principal that may be borrowed is impacted by any outstanding borrowings and letters of credit under the credit agreement, by a borrowing base (comprised of eligible trade receivables and inventory), and the minimum excess availability that may be required due to the Covenant Trigger Threshold, described below, being applicable. As of
June 30, 2017
, the maximum principal we could borrow after taking into account the foregoing factors was approximately
$189 million
.
The credit agreement contains a covenant that would require us to maintain a minimum fixed charge coverage ratio of not less than 1.0-to-1.0 in the event that excess availability falls below the Covenant Trigger Threshold equal to 10% of the lesser of (a) the aggregate revolving commitment and (b) the aggregate of the USG and CGC borrowing base. As of
June 30, 2017
, our fixed charge coverage ratio was 1.46-to-1.0; and therefore, we are not required to maintain minimum excess availability of no less than the Covenant Trigger Threshold so that the financial covenant will remain inapplicable.
Our undistributed foreign earnings as of
June 30, 2017
are considered permanently reinvested with the exception of earnings associated with the former holding company of the Knauf-USG joint venture that was sold in December 2015. The amount of cash and cash equivalents held by our foreign subsidiaries was $166 million as of
June 30, 2017
and would be subject to material repatriation tax effects.
CASH FLOWS
The following table presents a summary of our cash flows:
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
(millions)
|
2017
|
|
2016
|
Net cash provided by (used for):
|
|
|
|
Operating activities from continuing operations
|
$
|
129
|
|
|
$
|
151
|
|
Investing activities from continuing operations
|
(70
|
)
|
|
16
|
|
Financing activities from continuing operations
|
(126
|
)
|
|
(141
|
)
|
Discontinued operations
|
5
|
|
|
11
|
|
Effect of exchange rate changes on cash
|
6
|
|
|
—
|
|
Net (decrease) increase in cash and cash equivalents
|
$
|
(56
|
)
|
|
$
|
37
|
|
Operating Activities
: Net cash provided by operating activities was lower for the
first six months of 2017
compared to the
first six months of 2016
due to lower operating profit. Also driving the decrease was a higher net cash outflow in the first six months of 2017 for working capital of $102 million as compared to the cash outflow of $35 million for the first six months of 2016. The increase in cash outflows reflected an increase in accounts receivable of $37 million due to higher sales in the current quarter, an increase in inventories of $5 million due to increased costs for raw materials and a decrease in accrued expenses of $23 million due to higher payments on incentive accruals and timing of interest payments. These were offset by lower cash outflows for accounts payable of $5 million in the first six months of 2017 as compared to 2016, which included an increase in capital expenditures which remained in accounts payable at June 30, 2017.
As of
June 30, 2017
, working capital (current assets less current liabilities) amounted to $
570 million
, and the ratio of current assets to current liabilities was
2.50
-to-1. As of
December 31, 2016
, working capital amounted to $
527 million
, and the ratio of current assets to current liabilities was
2.25
-to-1.
Investing Activities
: Net cash used for investing activities was
$70 million
for the
first six months of 2017
compared to
$16 million
of net cash provided by investing activities for the
six months ended June 30, 2016
. The increase in the use of cash reflected lower cash inflows for marketable securities and higher cash outflows for capital expenditures. The net activity of purchases and sales or maturities of marketable securities was a cash outflow of
$1 million
for the
six months ended June 30, 2017
as compared to a cash inflow of
$20 million
for the
six months ended June 30, 2016
.
The increase in capital expenditures to $
72 million
in the
first six months of 2017
from $
26 million
in the
first six months of 2016
reflected expenditures for the replacement, modernization and expansion of operations, including Advanced Manufacturing initiatives. Approved capital expenditures totaled $148 million as of
June 30, 2017
compared with $
121 million
as of
December 31, 2016
.
Financing Activities:
Net cash used for financing activities for the
first six months of 2017
was
$126 million
compared to
$141 million
for the
first six months of 2016
. The cash used in 2017 reflected the
$520 million
paid to redeem $500 million of our 7.75% Notes including tender premiums and the repurchase of common stock under the approved share repurchase program of
$97 million
. This was offset by the issuance of $500 million of our 4.875% Notes, net of debt issuance fees. The cash used in 2016 reflected $141 million paid to repurchase $137 million of our 6.3% Notes.
Discontinued Operations:
Net cash provided by discontinued operations for
first six months of 2017
was
$5 million
compared to
$11 million
for the
first six months of 2016
. The net cash inflow in 2017 primarily reflected a working capital adjustment associated with the sale of L&W.
DEFINED BENEFIT PLANS
During the first
six
months of
2017
, we made cash contributions of $16 million to our domestic supplemental pension plan and
$3 million
to our pension plan in Canada. In July 2017, we made cash contributions of $50 million to the USG Corporation Retirement Plan Trust. We expect to make total contributions to our pension and postretirement plans in
2017
of approximately
$71 million
.
LIQUIDITY OUTLOOK
In the
first six months of 2017
, our investing cash outflows included
$72 million
of capital expenditures. In total for
2017
, we plan to spend approximately $200 million on capital expenditures, which includes up to $80 million allocated for Advanced Manufacturing projects to standardize and automate production across our Gypsum and Ceilings businesses. We expect to fund these expenditures with cash from operations or cash on hand.
Interest payments, based on our current level of outstanding debt, are expected to decrease to
$87 million
in
2017
compared with $
153 million
in
2016
which reflects lower debt levels due to the repayment of $1.1 billion in debt in 2016 and the refinancing of our 7.75% Notes to our 4.875% Notes.
On January 31, 2017, our Board of Directors approved a share repurchase program in which we may repurchase up to $250 million of our common stock. As of
June 30, 2017
, we have purchased
$97 million
in shares of common stock under the program. The timing and the amount of any repurchases will be determined based on market conditions and other factors. Share repurchases will be funded with available cash on hand. See Part II, Item 2 for additional information.
Since formation, UBBP was funded from its net cash flow from operations and third-party financing, and it is our intent that as an ongoing operation, UBBP will continue to self-fund. UBBP targets the distribution of 50% of combined after tax profits to USG and Boral; however, this dividend may be adjusted by the UBBP Board with unanimous resolution. During the second quarter of 2017, UBBP paid cash dividends on earnings through March 2017, of which our 50% share totaled
$23 million
.
In the event certain performance targets are satisfied by UBBP, we will be obligated to pay Boral an earnout payment in an amount up to $50 million in 2019, based on UBBP performance during the first five years. We have not recorded a liability for this earnout payment as we have concluded that it is currently not probable that the five-year performance target will be achieved.
We believe that cash on hand, cash equivalents, marketable securities, cash available from future operations and our credit facility will provide sufficient liquidity to fund our operations for at least the next 12 months. Cash requirements include, among other things, capital expenditures, working capital needs, employee retirement plans funding, interest payments and other contractual obligations.
Recently Issued Accounting Pronouncements
See Part 1, Item 1, Note 1 to the condensed consolidated financial statements for information related to new accounting standards.
Legal Contingencies
We are named as defendants in litigation arising from our operations, including lawsuits or claims arising from commercial disputes, product performance or warranties, products liability, and worksite or vehicular accidents.
In 2015, USG, United States Gypsum Company, L&W Supply Corporation, and seven other wallboard manufacturers were named as defendants in a lawsuit filed by twelve homebuilders alleging that the defendants conspired to fix the price of wallboard sold in the United States. Earlier, in 2013, class action lawsuits making similar allegations were filed in Canada on behalf of a class of purchasers of wallboard in Canada. We believe that the cost, if any, of resolving the homebuilders’ lawsuit and Canadian class action litigation will not have a material effect on our results of operations, financial position or cash flows.
In the third quarter of 2015 United States Gypsum Company was served with a federal grand jury subpoena requesting the production of company records in connection with a federal investigation of the gypsum drywall industry. Two former employees of USG have also been served with subpoenas. We believe the investigation, although a separate proceeding, is related to the same events at issue in the litigation discussed above. We are fully cooperating with the grand jury investigation. We believe we acted in full compliance with the law, and we do not expect the resolution of this matter to result in any material effect on our business, financial position, liquidity or results of operations; however, we can provide no assurances as to the scope, timing, or outcome of any such investigation.
See Note
14
to the condensed consolidated financial statements for further information regarding the foregoing lawsuits and other legal matters.
Critical Accounting Policies
The preparation of our financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
, which we filed with the Securities and Exchange Commission on
February 8, 2017
, includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues or expenses during the first
six
months of
2017
.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 related to management’s expectations about future conditions. Any forward-looking statements represent our views only as of the date of this report and should not be relied upon as representing our views as of any subsequent date, and we undertake no obligation to update any forward-looking statement. Forward-looking statements include, but are not limited to, statements under the following headings: (1) “Management’s Discussion and Analysis” about (a) market conditions and outlook, including anticipated growth in new residential and nonresidential construction, repair and remodel spending, and the construction industries in Canada and Mexico, and the anticipated growth or decline in countries in the UBBP territory and its effect on the cyclicality of our North American business, industry shipments of gypsum, demand for gypsum wallboard and industry capacity utilization rate, and our selling prices and margins; (b) expected contributions to our pension and postretirement plans; (c) our liquidity outlook, including our capital expenditure plans, expected interest payments, share repurchase program, UBBP’s dividend policy and ability to self-fund, and cash requirements and adequacy of resources to fund them; and (d) the outcome and effect of ongoing and future legal and governmental proceedings; and (2) “Legal Proceedings” about the outcome and effect of ongoing and future legal and governmental proceedings.
Some of the risk factors that affect our business and financial results are discussed under “Risk Factors” in our most recent Annual Report on Form 10-K. We wish to caution the reader that actual business, market or other conditions, including the “Risk Factors” discussed in our most recent Annual Report on Form 10-K or in our other Securities and Exchange Commission filings, could cause our actual results to differ materially from those stated in the forward-looking statements.