USG Corporation

101 South Wacker Drive
Chicago, Illinois 60606
U.S.A.
(312) 606-4000
Fax: (312) 606-4093

Public Company
Incorporated: 1901 as U.S.G. Company
Employees: 14,200
Sales: $2.19 billion
Stock Exchanges: New York Midwest Zürich Geneva Basel

Gypsum products are the principal goods manufactured by the USG Corporation. The manufacture of gypsum is a highly competitive and price-sensitive undertaking, with easy entry and exit from the field. As a result of these conditions USG Corporation—or the U.S.G. Company, as it was originally incorporated—has exerted substantial influence in the building-supplies field because of its market size.

Understanding gypsum production methods is essential to an understanding of USG’s corporate character. Gypsum, or hydrous calcium sulphate, is, in pure form, a white mineral commonly called alabaster. Large quantities of gypsum exist throughout North America. One of the first uses for gypsum was as a fertilizer. Gypsum is made suitable for commercial use by a process called calcination, which involves heating the mineral to remove approximately three-quarters of its water. Calcined gypsum, or plaster of Paris, can recrystallize into any shape with the simple addition of water. In the 1890s gypsum manufacturers perfected a method of strengthening plaster by adding a retarder, which controlled the setting time, thus creating a viable competitor to traditional lime plaster. Because gypsum was plentiful, and available at a relatively low price, and because the manufacturing process was so simple, new firms flooded the market and placed constant downward pressure on prices.

In the early years of the 20th century, several key businesses emerged as gypsum-product leaders. The English family of Nebraska; C.G. Root, Emil Durr, S.Q. Fulton, and Charles Pullen of Wisconsin; Waldo Avery and B.W. McCausland of Michigan; and, lastly, the largest manufacturer in the United States, J. B. King of New York, were all important gypsum processors. By 1901 several attempts to organize some of the industry’s producers into a corporate combination had failed. That year 35 gypsum companies consolidated into the U.S.G. Company. The participating firms traded their assets for securities and acquired a $200,000 loan. Directors of the new company, which controlled about 50% of U.S. gypsum output, chose B.W. McCausland as its first president. The company was based in Chicago.

Between 1901 and 1905 each director remained largely concerned with the success of his own plants. This polarization ended in 1905, when McCausland was replaced as president by Sewell Avery, his partner’s son. Avery’s tenure as president would extend 35 years, until November 12, 1936. Avery then served as chairman, between 1937 and 1951. He and his brother, Waldo Avery, were the company’s largest stockholders, controlling about 3.6% of the company’s stock. During Sewell Avery’s presidency, his character permeated the company’s culture. Avery was a conservative businessman who had the last word in virtually all matters. In 1931, when Montgomery Ward and Company was on the verge of financial collapse, Avery became chairman of the board of that company, a position which he held until 1955.

Avery had managed his father’s firm, the Alabaster Company, since 1894. When U.S.G. absorbed Alabaster, he became a U.S.G. director and its Buffalo, New York, sales manager. Avery built a strong research division after his promotion to president from his post as Cleveland sales manager. Staffed by engineers and chemists, the new division sought to find new uses for gypsum. The U.S.G. Company, reincorporated in 1920 as the United States Gypsum Company (US Gypsum), has maintained a market share ranging between 50% in 1901 and 34% in 1989. In 1909 Avery set out to diversify the company with one of his first acquisitions, the Sackett Plasterboard Company of New York. Augustine Sackett had invented gypsum wallboard and the specialized machinery to make it. This basic wallboard quickly became one of US Gypsum’s major products. Wallboard, a layer of gypsum plaster sandwiched between two pieces of paper, is a convenient building material with strong fire-proofing and insulating qualities.

US Gypsum improved on Sackett’s concept and patented a wallboard that had paper folded over its edges to seal in plaster residue, which often escaped during the wallboard’s installation. In 1927 CertainTeed Products Corporation introduced its own wallboard, which did not have enclosed edges, and challenged US Gypsum for market share. CertainTeed’s managers believed that their less expensive version had a good chance of success. The result was a price contest between the two companies, beginning in 1927 and ending in 1929. US Gypsum had a much larger market than CertainTeed. It, therefore, was able to sell wallboard at a loss only in those markets that CertainTeed also served. In all other markets US Gypsum kept prices up. CertainTeed, however, was forced to sell its product at a loss in all its markets. By 1929 CertainTeed was beaten. The smaller company was licensed to produce US Gypsum’s patented wallboard and was forced to sell the product at the price set by US Gypsum. This incident marked the start of US Gypsum’s unrivaled leadership in gypsum materials.

In 1928 Avery successfully predicted a recession which eventually became the Great Depression. Avery’s instinct for predicting business cycles helped US Gypsum get through the Depression without a single year of losses; this situation was quite unusual for a business involved in the cyclical building industry. Avery moved to protect the company, partly by ordering the construction of new plants closer to East Coast metropolitan centers. Since gypsum is a high-bulk, relatively low-value commodity, transportation costs have a large effect on pricing.

US Gypsum’s greatest advantage was size. The company was able to use its size to keep manufacturing and transportation costs down and to compete more effectively. Three specific policies, set by Avery, helped US Gypsum to counter the Depression and maintain its number-one position in the industry. According to Fortune, February 1936, diffusion of production facilities allowed US Gypsum to keep transportation costs, and thus total costs down. US Gypsum was also vertically integrated, from mine floor to retailer, and employed highly mechanized techniques when possible. The third element in US Gypsum’s success, according to Fortune, was a devotion to product diversification. US Gypsum marketed a broad cross section of building materials. Broken down into individual units these products would have been prohibitively expensive to transport. Combined, however, transportation costs were much more reasonable.

Avery took advantage of the company’s strong cash position at the beginning of the Depression to purchase nearly a dozen building-material firms weakened by the economic downturn. In 1930 US Gypsum bought into the insulation-board business with the purchase of the Greenville Insulating Board Corporation of Greenville, Mississippi. Also in 1930, it bought into the metal-lath business with the purchase of the Youngstown Pressed Steel Company of Warren, Ohio and the metal-lath division of Northwestern Expanded Metal Company. Avery also made US Gypsum, which had already been in the lime business for 15 years, a leading lime producer in 1930 with the acquisition of lime-producing firms such as the Farnam Cheshire Lime Company. Producers of mineral wool and asphalt roofing acquired in 1933, and asbestos-cement siding acquired in 1937, rounded out the Depression-era acquisitions. The company countered the downturn in new construction by exploiting the remodeling and industrial markets. During the Depression, 15% of sales were to industrial users. Glass-makers used gypsum as a packing material. Cement producers used it to retard setting, and moviemakers used flaked gypsum as snow.

In 1940, a new problem confronted the company’s management when the U.S. Justice Department filed suit against US Gypsum and six other wallboard manufacturers, charging them with price-fixing. The claim stemmed from US Gypsum’s 1929 cross-licensing of its patented wallboard. The agreement set prices at which the wallboard must be sold. In 1950 the Supreme Court forced US Gypsum and its six licensees—who produced all of the wallboard sold east of the Rocky Mountains—to cease setting prices, and US Gypsum was enjoined from exercising its patent-licensing privilege.

Between 1946 and 1949 US Gypsum invested over $51 million in expansion under the direction of William L. Keady, who had become president in 1942. In 1949, however, Chairman Avery predicted another depression—incorrectly—and began to rein in expansion. Keady resigned as a result of Avery’s intervention. Although there was a slight recession in 1949, the company did not step up capital spending again until 1954. In May 1951, when Sewell Avery resigned as US Gypsum’s chairman and CEO, his replacement, Clarence H. Shaver, inherited a company which had a capitalized value of $61 million and produced more than 75 commodities in 47 mines or factories. Avery’s imprint was an extreme conservatism marked by strong centralized control, rigid cost-cutting practices, and few benefits for employees.

Toward the end of the 1950s US Gypsum extended its expansion internationally. One of its principal discoveries during the decade was the gypsum deposit in Mexico’s San Luis Potosi State. This find, one of the world’s largest was conservatively estimated to contain at least 300 million tons of commercial deposits.

In the 1960s US Gypsum became the first major U.S. corporation to undertake privately funded housing renovation on a large scale. The highly publicized project began in 1964, when US Gypsum purchased six adjoining tenements in the East Harlem Section of New York City. US Gypsum paid $9,125 to renovate each unit; the cost of constructing new units averaged $22,500. US Gypsum’s president, Graham J. Morgan, saw these projects as an opportunity to get in on the ground floor of a potential $20 billion market. Morgan felt the renovation would open up because of the Federal Housing Administration’s willingness to provide financing for such projects. By 1969 the company had remodeled completely 32 buildings in New York, Cleveland, Chicago, and Detroit.

In 1973 US Gypsum settled a class-action civil antitrust suit brought against it by wallboard users and buyers. Settlement of those cases, which alleged price fixing, cost US Gypsum $28 million. This case led to a criminal indictment of US Gypsum and three competitors in 1973. The criminal trial eventually found its way to the Supreme Court, which ordered a new trial, and in 1980 US Gypsum settled the case, agreeing to pay $2.6 million in taxes on deductions from earlier civil antitrust judgements.

On January 1, 1985, the holding company, USG Corporation (USG), was created, and US Gypsum became the largest of the holding company’s nine operating subsidiaries. Chairman and CEO Edward W. Duffy formed the holding company to protect the bulk of company operations from asbestos litigation against US Gypsum. Asbestos had been a standard additive in wallboard manufacture for decades. US Gypsum had already begun to face property damage suits in 1984 with a $675,000 award to a South Carolina school district. The reorganization of the company was effective January 1, 1985.

In November 1986, the Belzberg brothers of Canada attempted a hostile takeover of USG. USG immediately instituted a plan to buy back 20% of its common stock in an effort to fend off the takeover. By December 1986, however, USG had purchased Samuel, William, and Hyman Belzberg’s 4.9% stake, for $139.6 million dollars. The Belzberg family’s profits on the transaction were in excess of $25 million dollars.

In October 1987 a partnership led by Texans Cyril Wagner Jr. and Jack E. Brown’s Desert Partners attempted to gain control of the company. Wagner and Brown’s main business venture was a Midland, Texas, oil and gas partnership with secondary real estate operations. They purchased their 9.83% stake in USG as USG tried to recover financially from the Belzberg takeover attempt. In April 1988 a federal court refused to block USG’s poison-pill antitakeover plan. In May 1988 USG announced a restructuring and recapitalization plan designed to block further the takeover attempt, and by June the plan had succeeded. The plan was expensive, however, and in October 1988 USG sold its Masonite Corporation subsidiary, purchased in 1984. International Paper Corporation paid $400 million for Masonite.

USG’s United States Gypsum Company subsidiary remains the largest gypsum producer in the world. The company is divided into four divisions. The gypsum-products division produces goods ranging from wallboard to agricultural and industrial gypsum, cements, and fillers. The interior-systems section produces tile and partition goods. The building-products-distribution section transports a variety of gypsum products and construction accessories throughout the United States, primarily through its L&W Supply Corporation subsidiary. The other-products division markets goods ranging from mineral-wood products to engineering-consulting services. The future of USG Corporation will be affected by the debt it has incurred during restructuring. The firm has an outstanding debt of $2.4 billion and has been forced to abandon Avery’s habit of maintaining large cash reserves.

Principal Subsidiaries

United States Gypsum Company; USG Interiors, Inc.; L&W Supply Corporation.; DAP Inc.; CGC Inc. (76%).

Further Reading

“Gyp,” Fortune, February 1936; “U.S. Gypsum: No Nonsense,” Fortune, September 1955.

—John C. Bishop

USG Corporation

125 South Franklin Street
Chicago, Illinois 60606-4678
U.S.A.
Telephone: (312) 606-4000
Fax: (312) 606-4093
Web site: http://www.usg.com

Public Company
Founded: 1901 as U.S.G. Company
Incorporated: 1984
Employees: 13,787
Sales: $5.14 billion (2005)
Stock Exchanges: New York Chicago
Ticker Symbol: USG
NAIC: 212399 All Other Nonmetallic Mineral Mining; 327420 Gypsum Product Manufacturing; 332323 Ornamental and Architectural Metal Work Manufacturing; 423330 Roofing, Siding, and Insulation Material Merchant Wholesalers; 423390 Other Construction Material Merchant Wholesalers; 551112 Offices of Other Holding Companies

Gypsum products are the principal goods manufactured by USG Corporation, the largest maker of such products in North America. The manufacture of gypsum is a highly competitive and price-sensitive undertaking, with easy entry and exit from the field. As a result of these conditions USG Corporation, or U.S.G. Company, as it was originally incorporated, has exerted substantial influence in the building supplies field because of its market size. With such brand names as Sheetrock, USG ranks as the leading maker of gypsum wallboard in the United States, where it holds approximately one-third of the market, and in eastern Canada and Mexico. Through its L&W Supply Corporation subsidiary, USG is also the leading distributor of gypsum wallboard in the United States; L&W Supply distributes other building products as well. Via other USG subsidiaries, USG holds sway as the world's largest manufacturer of ceiling suspension grid and the second largest producer of ceiling tile (trailing only Armstrong World Industries, Inc.). In June 2006 the company emerged from a five-year period operating under Chapter 11 bankruptcy protection. USG was forced into bankruptcy because of the mounting lawsuits it faced stemming from its manufacture of asbestos-containing joint compounds and plaster from the 1930s to 1977.

GYPSUM PRODUCTION IN THE UNITED STATES

Understanding gypsum production methods is essential to an understanding of USG's corporate character. Gypsum, or hydrous calcium sulphate, is, in pure form, a white mineral commonly called alabaster. Large quantities of gypsum exist throughout North America. One of the first uses for gypsum was as a fertilizer. Gypsum is made suitable for commercial use by a process called calcination, which involves heating the mineral to remove approximately three-quarters of its water. Calcined gypsum, or plaster of Paris, can recrystallize into any shape with the simple addition of water. In the 1890s gypsum manufacturers perfected a method of strengthening plaster by adding a retarder, which controlled the setting time, thus creating a viable competitor to traditional lime plaster. Because gypsum was plentiful, and available at a relatively low price, and because the manufacturing process was so simple, new firms flooded the market and placed constant downward pressure on prices.

In the early years of the 20th century, several key businesses emerged as gypsum-product leaders. The English family of Nebraska; C.G. Root, Emil Durr, S.Q. Fulton, and Charles Pullen of Wisconsin; Waldo Avery and B.W. McCausland of Michigan; and, lastly, the largest manufacturer in the United States, J.B. King of New York, were all important gypsum processors. By 1901 several attempts to organize some of the industry's producers into a corporate combination had failed.

CONSOLIDATION IN 1901

In 1901 35 gypsum companies consolidated into the U.S.G. Company. The participating firms traded their assets for securities and acquired a $200,000 loan. Directors of the new company, which controlled about 50 percent of U.S. gypsum output, chose B. W. McCausland as its first president. The company was based in Chicago.

Between 1901 and 1905 each director remained largely concerned with the success of his own plants. This polarization ended in 1905, when McCausland was replaced as president by Sewell Avery, his partner's son. Avery's tenure as president would extend 35 years, until November 12, 1936. Avery then served as chairman between 1937 and 1951. He and his brother, Waldo Avery, were the company's largest stockholders, controlling about 3.6 percent of the company's stock. During Sewell Avery's presidency, his character permeated the company's culture. Avery was a conservative businessman who had the last word in virtually all matters. In 1931, when Montgomery Ward & Co. was on the verge of financial collapse, Avery became chairman of the board of that company, a position he held until 1955.

Avery had managed his father's firm, the Alabaster Company, since 1894. When U.S.G. absorbed Alabaster, he became a U.S.G. director and its Buffalo, New York, sales manager. Avery built a strong research division after his promotion to president from his post as Cleveland sales manager. Staffed by engineers and chemists, the new division sought to find new uses for gypsum. In 1909 Avery set out to diversify the company with one of his first acquisitions, the Sackett Plaster Board Company of New York. Augustine Sackett had invented gypsum wallboard and the specialized machinery to make it. This basic wallboard quickly became one of U.S.G.'s major products. Wallboard, a layer of gypsum plaster sandwiched between two pieces of paper, is a convenient building material with strong fireproofing and insulating qualities.

U.S.G., which was reincorporated in 1920 as the United States Gypsum Company (U.S. Gypsum), improved on Sackett's concept and patented a wallboard (later branded Sheetrock) that had paper folded over its edges to seal in plaster residue, which often escaped during the wallboard's installation. In 1927 CertainTeed Products Corporation introduced its own wallboard, which did not have enclosed edges, and challenged U.S. Gypsum for market share. CertainTeed's managers believed that their less expensive version had a good chance of success. The result was a price contest between the two companies, beginning in 1927 and ending in 1929. U.S. Gypsum had a much larger market than CertainTeed. It therefore was able to sell wallboard at a loss only in those markets that CertainTeed also served. In all other markets U.S. Gypsum kept prices up. CertainTeed, however, was forced to sell its product at a loss in all its markets. By 1929 CertainTeed was beaten. The smaller company was licensed to produce U.S. Gypsum's patented wallboard and was forced to sell the product at the price set by U.S. Gypsum. This incident marked the start of U.S. Gypsum's unrivaled leadership in gypsum materials.

COMPANY PERSPECTIVES

With leading brand names, leading market shares, and industry-leading production and distribution operations, we can look ahead with confidence. Toward the end of 2005, the housing market began to show signs of cooling, but we expect it to remain strong by historical standards. We are ready, with a plan for all seasons. If demand slows, we have the option of idling or retiring older, higher-cost operations. We are committed to outperforming our competitors at every point in the cycle.

WEATHERING THE GREAT DEPRESSION

In 1928 Avery successfully predicted a recession that eventually became the Great Depression. Avery's instinct for predicting business cycles helped U.S. Gypsum get through the Depression without a single year of losses; this situation was quite unusual for a business involved in the cyclical building industry. Avery moved to protect the company, in part by ordering the construction of new plants closer to East Coast metropolitan centers. Because gypsum is a high-bulk, relatively low-value commodity, transportation costs typically have a large effect on pricing.

U.S. Gypsum's greatest advantage was size. The company was able to use its size to keep manufacturing and transportation costs down and to compete more effectively. Three specific policies, set by Avery, helped U.S. Gypsum to counter the Depression and maintain its number one position in the industry. According to the February 1936 issue of Fortune, diffusion of production facilities allowed U.S. Gypsum to keep transportation costs, and thus total costs down. U.S. Gypsum was also vertically integrated, from mine floor to retailer, and employed highly mechanized techniques when possible. The third element in U.S. Gypsum's success, according to Fortune, was a devotion to product diversification. U.S. Gypsum marketed a broad cross section of building materials. Broken down into individual units these products would have been prohibitively expensive to transport. Combined, however, transportation costs were much more reasonable.

Avery took advantage of the company's strong cash position at the beginning of the Depression to purchase nearly a dozen building material firms weakened by the economic downturn. In 1930 U.S. Gypsum bought into the insulation board business with the purchase of the Greenville Insulating Board Corporation of Greenville, Mississippi. Also in 1930, it bought into the metal-lath business with the purchase of the Youngstown Pressed Steel Company of Warren, Ohio, and the metal-lath division of Northwestern Expanded Metal Company. Avery also made U.S. Gypsum, which had already been in the lime business for 15 years, a leading lime producer in 1930 with the acquisition of lime-producing firms such as the Farnam Cheshire Lime Company. Producers of mineral wool and asphalt roofing acquired in 1933, and asbestos-cement siding acquired in 1937, rounded out the Depression-era acquisitions. It was also during this period that U.S. Gypsum introduced its first acoustical ceiling panel under the Acoustone brand. The company countered the downturn in new construction by exploiting the remodeling and industrial markets. During the Depression, 15 percent of sales were to industrial users. Glassmakers used gypsum as a packing material. Cement producers used it to retard setting, and moviemakers used flaked gypsum as snow.

THE 1940 PRICE-FIXING SUIT

In 1940 a new problem confronted the company's management when the U.S. Justice Department filed suit against U.S. Gypsum and six other wallboard manufacturers, charging them with price fixing. The claim stemmed from U.S. Gypsum's 1929 cross-licensing of its patented wallboard. The agreement set prices at which the wallboard must be sold. In 1950 the U.S. Supreme Court forced U.S. Gypsum and its six licensees, who produced all of the wallboard sold east of the Rocky Mountains, to cease setting prices, and U.S. Gypsum was enjoined from exercising its patent-licensing privilege.

KEY DATES

1901:

Thirty-five gypsum companies are consolidated into U.S.G. Company based in Chicago.

1905:

Sewell Avery begins long stint first as president and then as chairman.

1909:

Company enters gypsum wallboard market through acquisition of Sackett Plaster Board Company.

1920:

Company is reincorporated as the United States Gypsum Company.

1971:

L&W Supply Corporation is created as a building materials distribution subsidiary.

1984:

USG Corporation is incorporated.

1985:

USG Corporation becomes holding company for U.S. Gypsum and several other subsidiaries.

1986:

Company fends off takeover attempt by the Belzberg brothers of Canada.

1988:

Another takeover attempt is foiled.

1993:

Company reorganizes through a "prepackaged" Chapter 11 bankruptcy plan.

2001:

Facing mounting asbestos litigation, USG files for Chapter 11 bankruptcy protection.

2005:

An after-tax, asbestos-related charge of $1.9 billion leads to a net loss of $1.44 billion.

2006:

With its equity intact, USG emerges from bankruptcy having set up a trust fund to pay all current and future asbestos claimants.

Between 1946 and 1949 U.S. Gypsum invested over $51 million in expansion under the direction of William L. Keady, who had become president in 1942. In 1949, however, Chairman Avery predicted another depression, incorrectly, and began to rein in expansion. Keady resigned as a result of Avery's intervention. Although there was a slight recession in 1949, the company did not step up capital spending again until 1954. In May 1951, when Avery resigned as U.S. Gypsum's chairman and CEO, his replacement, Clarence H. Shaver, inherited a company that had a capitalized value of $61 million and produced more than 75 commodities in 47 mines or factories. Avery's imprint was an extreme conservatism marked by strong centralized control, rigid cost-cutting practices, and few benefits for employees.

EXPANSION IN MID-CENTURY

Toward the end of the 1950s U.S. Gypsum extended its expansion internationally. One of its principal discoveries during the decade was the gypsum deposit in Mexico's San Luis Potosi State. This find, one of the world's largest, was conservatively estimated to contain at least 300 million tons of commercial deposits.

In the 1960s U.S. Gypsum became the first major U.S. corporation to undertake privately funded housing renovation on a large scale. The highly publicized project began in 1964, when U.S. Gypsum purchased six adjoining tenements in the East Harlem section of New York City. U.S. Gypsum paid $9,125 to renovate each unit; the cost of constructing new units averaged $22,500. U.S. Gypsum's president, Graham J. Morgan, saw these projects as an opportunity to get in on the ground floor of a potential $20 billion market. Morgan felt the renovation would open up because of the Federal Housing Administration's willingness to provide financing for such projects. By 1969 the company had completely remodeled 32 buildings in New York, Cleveland, Chicago, and Detroit.

In 1973 U.S. Gypsum settled a class-action civil antitrust suit brought against it by wallboard users and buyers. Settlement of those cases, which alleged price fixing, cost U.S. Gypsum $28 million. This case led to a criminal indictment of U.S. Gypsum and three competitors in 1973. The criminal trial eventually found its way to the U.S. Supreme Court, which ordered a new trial, and in 1980 U.S. Gypsum settled the case, agreeing to pay $2.6 million in taxes on deductions from earlier civil antitrust judgments. Meanwhile, in 1971, U.S. Gypsum expanded into the distribution of wallboard and other building materials through the creation of the L&W Supply Corporation subsidiary.

In October 1984 USG Corporation (USG) was incorporated as a holding company. On January 1, 1985, U.S. Gypsum and eight smaller operating companies became subsidiaries of the new holding company. Chairman and CEO Edward W. Duffy reportedly formed the holding company to protect the bulk of company operations from asbestos litigation against U.S. Gypsum. Asbestos had been a standard additive in wallboard manufacture for decades. U.S. Gypsum had already begun to face property damage suits in 1984 with a $675,000 award to a South Carolina school district.

TAKEOVER BATTLES

In November 1986 the Belzberg brothers of Canada attempted a hostile takeover of USG. USG immediately instituted a plan to buy back 20 percent of its common stock in an effort to fend off the takeover. By December 1986, however, USG had purchased Samuel, William, and Hyman Belzberg's 4.9 percent stake, for $139.6 million. The Belzberg family's profits on the transaction were in excess of $25 million.

In 1987 USG acquired DAP Inc., maker of caulking and sealants, for $127 million. In October of that year a partnership led by Texans Cyril Wagner, Jr., and Jack E. Brown's Desert Partners attempted to gain control of the company. Wagner and Brown's main business venture was a Midland, Texas, oil and gas partnership with secondary real estate operations. They purchased their 9.83 percent stake in USG as USG tried to recover financially from the Belzberg takeover attempt. In April 1988 a federal court refused to block USG's poison-pill antitakeover plan. In May 1988 USG announced a restructuring and recapitalization plan designed to further block the takeover attempt, and by June the plan had succeeded.

The plan was expensive, however, and $2.5 billion in new debt (on top of previous debt of $851 million) left USG in a precarious financial state. Several noncore assets were sold over the next few years to help pay down debt. In October 1988 USG sold its Masonite Corporation subsidiary, purchased in 1984. International Paper Corporation paid $400 million for Masonite. Sold the following year were the Kinkead division (to Kohler Company) and Marlite (to Commercial and Architectural Products Inc.). In September 1991 USG sold DAP to U.K.-based Wassall plc for $90 million.

1993–2000: "PREPACKAGED" BANKRUPTCY, STRONG RECOVERY

These moves proved inadequate, however, as USG's management had not anticipated the depressed state of the housing market in the late 1980s and early 1990s. With revenues declining and the company posting a net loss for 1990, USG defaulted on $40 million in loans in 1991. USG, led by CEO Eugene B. Connolly starting in January 1990, attempted to reorganize outside of bankruptcy court through negotiations with its lenders. Finally, in March 1993 USG was forced to declare Chapter 11 bankruptcy, although it quickly emerged only two months later, following the implementation of a "prepackaged" plan of reorganization. Banks and bondholders ended up owning 97 percent of the com-mon stock of USG in exchange for the elimination of $1.4 billion in debt. The company was also able to reduce its annual interest payments by $200 million.

USG emerged from bankruptcy with a still high debt load of $1.56 billion, and set a goal of reducing that to $650 million within five years. In 1994 the housing market, and USG's future outlook, had improved enough to enable the company to raise $224 million through a stock offering, the proceeds of which were used to pay down debt. Connolly retired in early 1996, replaced as chairman and CEO by William C. Foote. Later that year USG sold its insulation manufacturing operation. The company returned to profitability in 1996, posting net income of $15 million on net sales of $2.59 billion.

The following year was even better, as sales hit $2.87 billion, while net income increased almost tenfold, to $148 million. Improving economic conditions played a big role in USG's turnaround as did heavy capital expenditures that aimed at achieving organic, profitable growth. From the company's emergence out of bankruptcy through year-end 1997, USG had spent $532 million in capital expenditures, including the beginning of construction in mid-1997 of a new $110 million wallboard plant in Bridgeport, Alabama, USG's largest nonacquisition capital investment ever. In April 1997 USG announced that it would build a plant in Gypsum, Ohio, to manufacture gypsum wood fiber panels, which combined gypsum with cellulosic fibers to create strong, impact-resistant panels, under the Fiberock brand. In November of that year USG purchased a 60 percent stake in Zhongbei Building Material Products Company, China's largest ceiling grid company. By the end of 1997 total debt had been reduced to $620 million, marking the achievement of the firm's debt reduction target.

Throughout the 1990s the company continued to be involved in litigation relating to personal injury suits and other claims based on asbestos-containing products, which were sold by USG from the 1930s through 1977. The claims were being paid by insurance income under the 1985 Wellington Agreement on asbestos-related claims. In 1988 USG and 19 other former producers of asbestos-containing products replaced the Wellington Asbestos Claims Facility with the Center for Claims Resolution (CCR), which continued in operation through the late 1990s. A class-action lawsuit resulted in a $1.3 billion agreement with the CCR in 1993, but in June 1997 the U.S. Supreme Court invalidated the settlement, finding that the class was defined improperly. USG estimated in 1997 that it was the defendant in about 73,000 personal injury cases and that the average settlement would be about $1,600.

USG had itself sued nearly two dozen insurance companies who had refused to cover these claims. By 1997 the company had reached settlements with a number of these insurers, resulting in about $325 million in coverage for the company. USG expected to receive substantial additional payments, between $200 million and $265 million, as the remaining suits reached settlements.

During 1998 USG continued to spend heavily on capital improvement projects and the construction of new plants. In April the company announced it would build a new $112 million wallboard factory in Aliquippa, Pennsylvania. In September USG announced plans to construct two new, state-of-the-art wallboard plants in Plaster City, California, and Rainier, Oregon, for a total cost of $225 million. Replacing older facilities with modern, low-cost plants aided USG's overall productivity. With the economic boom of the mid- to late 1990s making for an exceptionally strong building industry, and with the company's debt load finally eased, USG was in its best financial shape in years. Perhaps most indicative of its recovery was USG's September 1998 announcement that it would pay a quarterly dividend for the first time in a decade, as well as repurchase as many as five million of its common shares.

The robust construction market powered USG to record heights in both 1998 and 1999. In the latter year, a shortage of wallboard drove up prices and helped revenues reach $3.6 billion, an 88 percent increase since the 1993 restructuring. Net earnings quadrupled over the same period, surging to $421 million. The first of USG's new wallboard plants, the Bridgeport facility, opened in May 1999, after which an older plant in Plasterco, Virginia, was shut down. In November a new plant in East Chicago, Indiana, replaced an old one in that same location. Also in 1999, USG became a NASCAR sponsor as part of an aggressive new marketing push.

In 2000, as USG brought more new plants online and shuttered additional outdated facilities, the wallboard industry went into another cyclical downturn as overcapacity in the market sent wallboard prices into a sharp decline. This trend, coupled with ongoing concerns about the asbestos litigation, sent USG shares down 60 percent by late 2000. At this stage, some investors began viewing the stock as a bargain, including legendary value investor Warren Buffett, who in December 2000 bought a 15 percent stake in USG through his investment vehicle, Berkshire Hathaway Inc.

2001–2006: RESTRUCTURING UNDER BANKRUPTCY PROTECTION

Despite Buffett's vote of confidence, USG's position deteriorated in 2001. Early in the year, the company announced that it would take year-end 2000 after-tax charges of $557 million to cover the estimated cost of settling asbestos lawsuits through 2003. This led to a net loss for 2000 of $259 million. In May 2001 the company announced that it would once again stop paying a dividend. As asbestos litigation mounted, USG lobbied the U.S. Congress for a legislative solution that would limit the lawsuits, but when no such outcome seemed likely, the company opted to once again file for Chapter 11 bankruptcy protection. By the time of the filing in June 2001, USG had been named in 250,000 asbestos-related personal-injury cases and had paid out more than $450 million before insurance recoveries. Its annual asbestos-related costs had increased from $30 million in 1997 to more than $160 million in 2000, and the company had expected the 2001 costs to top $275 million.

Unlike the previous brief stint in bankruptcy, this foray proved to be a prolonged one as USG struggled to come up with a plan to resolve its asbestos liabilities while continuing to lobby for legislative action. The company's operations, meantime, prospered. Riding a booming market for housing and commercial construction, USG expanded its production and distribution capabilities. Product shipments reached new highs, and record revenues were recorded in both 2004 and 2005. Sales surged to $5.14 billion in 2005, when gross profits hit an all-time high of $1.1 billion. USG ramped up its marketing efforts that year when it began sponsoring the USG Sheetrock 400, a NASCAR race held at the Chicagoland Speedway.

Because of the stellar financial performance, USG's stock actually rose sharply over the course of the bankruptcy, from less than $4 a share at the time of the filing to around $80 in early 2006. This remarkable, if not unprecedented, recovery of the stock of a company operating under bankruptcy protection impressed Buffett, who told the Wall Street Journal in February 2006, "It's the most successful managerial performance in bankruptcy that I've ever seen." In June 2006 USG emerged from bankruptcy via a complex plan through which the shareholders retained their ownership of the company, a highly unusual outcome.

USG set up a trust fund to settle all of its current and future asbestos claims. It made an initial $900 million payment into the fund, and also planned to make two subsequent payments totaling $3.05 billion by mid-2007, unless the U.S. Congress stepped in to create a national trust to handle all asbestos-exposure cases, an occurrence most observers considered unlikely. To raise money for the fund and to help pay its creditors, USG set up a rights issue whereby current stockholders could buy one new share of company stock for each share already owned, at $40 per share, a price well under the then-current trading level. This $1.8 billion rights offering was backed up by Buffett's Berkshire Hathaway, which promised to buy any shares not snapped up by other shareholders. In the fourth quarter of 2005, USG recorded an after-tax charge of $1.9 billion as a provision for asbestos claims, leading to a net loss for the year of $1.44 billion. With its asbestos headache seemingly under control, USG was well positioned to continue its sharp recovery, although a long-expected slowdown in the U.S. housing industry appeared certain to provide new challenges.

                                      John C. Bishop

                           Updated, David E. Salamie

PRINCIPAL SUBSIDIARIES

United States Gypsum Company; USG Interiors, Inc.; L&W Supply Corporation; CGC Inc. (Canada); USG Mexico S.A. de C.V.

PRINCIPAL OPERATING UNITS

USG International.

PRINCIPAL COMPETITORS

National Gypsum Company; BPB plc; Georgia-Pacific Corporation; Eagle Materials Inc.; Temple-Inland Forest Products Corporation; Lafarge North America Inc.; Pacific Coast Building Products, Inc.; Panel Rey, S.A.; Armstrong World Industries, Inc.; Worthington Industries, Inc.; Chicago Metallic Corporation; Odenwald Faserplattenwerk GmbH; AMF Mineralplatten GmbH Betriebs KG; Gypsum Management and Supply, Inc.; Rinker Materials Corporation; KCG, Inc.; The Strober Organization, Inc.; Allied Building Products Corp.

FURTHER READING

Arndorfer, James B., "For USG's CEO, Bankruptcy Paying Off," Crain's Chicago Business, May 12, 2003, p. 1.

――――――, "USG's Buffett Boom: Investment Guru's Buy Boosts Management," Crain's Chicago Business, December 4, 2000, p. 4.

Brat, Ilan, "USG Settles Asbestos Lawsuits, Swings to a $1.78 Billion Loss," Wall Street Journal, January 31, 2006, p. B4.

Callahan, Patricia, "USG Takes Charge of $557 Million for Asbestos Costs," Wall Street Journal, January 12, 2001, p. B8.

Duff, Christina, "Costly Recapitalization Drives USG Corp. to the Wall," Wall Street Journal, June 3, 1992, p. B4.

Fitch, Stephane, "The Gypsum King," Forbes, February 5, 2001, pp. 68-70.

Gilbert, Nick, "USG: Now a Value Play," Financial World, May 9, 1995, p. 26.

Greising, David, "USG's Remodeling May Mean Gutting the House," Business Week, January 21, 1991, pp. 54-55.

Guy, Sandra, "'Affordable' USG Asbestos Plan: Complex Plan Wins Support of Victim Groups," Chicago Sun-Times, January 31, 2006, p. 51.

――――――, "Builders Sold on USG—but Investors Aren't," Chicago Sun-Times, October 4, 1999, p. 49.

――――――, "New Look for USG: Wallboard-Manufacturing Giant Says It's Made the Most of Its Retooling Time," Chicago Sun-Times, May 11, 2006, p. 52.

――――――, "USG Eliminates Dividend," Chicago Sun-Times, May 10, 2001, p. 59.

――――――, "USG Files Bankruptcy," Chicago Sun-Times, June 26, 2001, p. 45.

――――――, "USG Hangs in There: Wallboard Maker Out of Bankruptcy with Clean Slate," Chicago Sun-Times, June 21, 2006, p. 67.

"Gyp," Fortune, February 1936.

"Home Run? U.S. Gypsum Is Hoping for One, to Cash in on Its Lower Costs," Barron's, September 29, 1980, pp. 52+.

Mehlman, William, "USG Positioned for Success in Restructured Housing Arena," Insiders' Chronicle, July 21, 1986, pp. 1 +.

Miller, James P., "USG Modifies 'Prepackaged' Chapter 11 Plan," Wall Street Journal, January 25, 1993, p. A11.

Richardson, Karen, "Years into Filing, USG Is Smiling," Wall Street Journal, February 15, 2006, pp. C1, C4.

Saporito, Bill, "The Benefits of Bankruptcy," Fortune, July 13, 1993, p. 98.

Taub, Stephen, "The 1980s Legacy Still Stalks USG," Financial World, August 21, 1990, p. 11.

"U.S. Gypsum: No Nonsense," Fortune, September 1955.

USG Corporation

125 South Franklin Street
Chicago, Illinois 60606-4678
U.S.A.
(312) 606-4000
Fax: (312) 606-4093
Web site: http://www.usg.com

Public Company
Incorporated: 1901 as U.S.G. Company
Employees: 13,000
Sales: $2.87 billion (1997)
Stock Exchanges: New York Midwest
Ticker Symbol: USG
SICs: 3275 Gypsum Products; 3296 Mineral Wool; 3299 Nonmetallic Mineral Products, Not Elsewhere Classified; 6719 Offices of Holding Companies, Not Elsewhere Classified

Gypsum products are the principal goods manufactured by USG Corporation, the largest maker of such products in the world. The manufacture of gypsum is a highly competitive and price-sensitive undertaking, with easy entry and exit from the field. As a result of these conditions USG Corporation—or the U.S.G. Company, as it was originally incorporated—has exerted substantial influence in the building-supplies field because of its market size. Among USG’s operating companies are the world’s largest maker of gypsum wallboard, the leading distributor of gypsum wallboard in the United States, the world’s largest manufacturer of ceiling suspension grid, and the second largest producer of ceiling tile in the world (trailing only Armstrong World Industries, Inc.).

Gypsum Production in the United States

Understanding gypsum production methods is essential to an understanding of USG’s corporate character. Gypsum, or hydrous calcium sulphate, is, in pure form, a white mineral commonly called alabaster. Large quantities of gypsum exist throughout North America. One of the first uses for gypsum was as a fertilizer. Gypsum is made suitable for commercial use by a process called calcination, which involves heating the mineral to remove approximately three-quarters of its water. Calcined gypsum, or plaster of Paris, can recrystallize into any shape with the simple addition of water. In the 1890s gypsum manufacturers perfected a method of strengthening plaster by adding a retarder, which controlled the setting time, thus creating a viable competitor to traditional lime plaster. Because gypsum was plentiful, and available at a relatively low price, and because the manufacturing process was so simple, new firms flooded the market and placed constant downward pressure on prices.

In the early years of the 20th century, several key businesses emerged as gypsum-product leaders. The English family of Nebraska; C.G. Root, Emil Durr, S.Q. Fulton, and Charles Pullen of Wisconsin; Waldo Avery and B.W. McCausland of Michigan; and, lastly, the largest manufacturer in the United States, J.B. King of New York, were all important gypsum processors. By 1901 several attempts to organize some of the industry’s producers into a corporate combination had failed.

Consolidation in 1901

That year 35 gypsum companies consolidated into the U.S.G. Company. The participating firms traded their assets for securities and acquired a $200,000 loan. Directors of the new company, which controlled about 50 percent of U.S. gypsum output, chose B.W. McCausland as its first president. The company was based in Chicago.

Between 1901 and 1905 each director remained largely concerned with the success of his own plants. This polarization ended in 1905, when McCausland was replaced as president by Sewell Avery, his partner’s son. Avery’s tenure as president would extend 35 years, until November 12, 1936. Avery then served as chairman, between 1937 and 1951. He and his brother, Waldo Avery, were the company’s largest stockholders, controlling about 3.6 percent of the company’s stock. During Sewell Avery’s presidency, his character permeated the company’s culture. Avery was a conservative businessman who had the last word in virtually all matters. In 1931, when Montgomery Ward and Company was on the verge of financial collapse, Avery became chairman of the board of that company, a position he held until 1955.

Avery had managed his father’s firm, the Alabaster Company, since 1894. When U.S.G. absorbed Alabaster, he became a U.S.G. director and its Buffalo, New York, sales manager. Avery built a strong research division after his promotion to president from his post as Cleveland sales manager. Staffed by engineers and chemists, the new division sought to find new uses for gypsum. The U.S.G. Company, reincorporated in 1920 as the United States Gypsum Company (US Gypsum), has maintained a market share ranging between 50 percent in 1901 and 33 percent in the late 1990s. In 1909 Avery set out to diversify the company with one of his first acquisitions, the Sackett Plasterboard Company of New York. Augustine Sackett had invented gypsum wallboard and the specialized machinery to make it. This basic wallboard quickly became one of US Gypsum’s major products. Wallboard, a layer of gypsum plaster sandwiched between two pieces of paper, is a convenient building material with strong fireproofing and insulating qualities.

US Gypsum improved on Sackett’s concept and patented a wallboard that had paper folded over its edges to seal in plaster residue, which often escaped during the wallboard’s installation. In 1927 CertainTeed Products Corporation introduced its own wallboard, which did not have enclosed edges, and challenged US Gypsum for market share. CertainTeed’s managers believed that their less expensive version had a good chance of success. The result was a price contest between the two companies, beginning in 1927 and ending in 1929. US Gypsum had a much larger market than CertainTeed. It, therefore, was able to sell wallboard at a loss only in those markets that CertainTeed also served. In all other markets US Gypsum kept prices up. CertainTeed, however, was forced to sell its product at a loss in all its markets. By 1929 CertainTeed was beaten. The smaller company was licensed to produce US Gypsum’s patented wall-board and was forced to sell the product at the price set by US Gypsum. This incident marked the start of US Gypsum’s unrivaled leadership in gypsum materials.

Weathering the Great Depression

In 1928 Avery successfully predicted a recession that eventually became the Great Depression. Avery’s instinct for predicting business cycles helped US Gypsum get through the Depression without a single year of losses; this situation was quite unusual for a business involved in the cyclical building industry. Avery moved to protect the company, in part by ordering the construction of new plants closer to East Coast metropolitan centers. Since gypsum is a high-bulk, relatively low-value commodity, transportation costs continue to have a large effect on pricing.

US Gypsum’s greatest advantage was size. The company was able to use its size to keep manufacturing and transportation costs down and to compete more effectively. Three specific policies, set by Avery, helped US Gypsum to counter the Depression and maintain its number one position in the industry. According to the February 1936 issue of Fortune, diffusion of production facilities allowed US Gypsum to keep transportation costs, and thus total costs down. US Gypsum was also vertically integrated, from mine floor to retailer, and employed highly mechanized techniques when possible. The third element in US Gypsum’s success, according to Fortune, was a devotion to product diversification. US Gypsum marketed a broad cross section of building materials. Broken down into individual units these products would have been prohibitively expensive to transport. Combined, however, transportation costs were much more reasonable.

Avery took advantage of the company’s strong cash position at the beginning of the Depression to purchase nearly a dozen building material firms weakened by the economic downturn. In 1930 US Gypsum bought into the insulation board business with the purchase of the Greenville Insulating Board Corporation of Greenville, Mississippi. Also in 1930, it bought into the metal-lath business with the purchase of the Youngstown Pressed Steel Company of Warren, Ohio, and the metal-lath division of Northwestern Expanded Metal Company. Avery also made US Gypsum, which had already been in the lime business for 15 years, a leading lime producer in 1930 with the acquisition of lime-producing firms such as the Farnam Cheshire Lime Company. Producers of mineral wool and asphalt roofing acquired in 1933, and asbestos-cement siding acquired in 1937, rounded out the Depression-era acquisitions. The company countered the downturn in new construction by exploiting the remodeling and industrial markets. During the Depression, 15 percent of sales were to industrial users. Glassmakers used gypsum as a packing material. Cement producers used it to retard setting, and moviemakers used flaked gypsum as snow.

The 1940 Price-Fixing Suit

In 1940, a new problem confronted the company’s management when the U.S. Justice Department filed suit against US Gypsum and six other wallboard manufacturers, charging them with price fixing. The claim stemmed from US Gypsum’s 1929 cross-licensing of its patented wallboard. The agreement set prices at which the wallboard must be sold. In 1950 the Supreme Court forced US Gypsum and its six licensees–who produced all of the wallboard sold east of the Rocky Mountains—to cease setting prices, and US Gypsum was enjoined from exercising its patent-licensing privilege.

Company Perspectives:

USG, its businesses and employees are: improving and expanding manufacturing to lower costs, meet demand and improve service; expanding distribution; providing new and better services; introducing new and improved products that anticipate customer and industry needs; focusing marketing efforts on key customer groups and growth segments of the construction market; expanding USG’s presence in international markets; increasing efficiency; keeping USG work places safe; and working to sustain the environment and the communities in which the corporation operates, all with the goals of increasing USG’s earnings and adding to the value of this enterprise.

Between 1946 and 1949 US Gypsum invested over $51 million in expansion under the direction of William L. Keady, who had become president in 1942. In 1949, however, Chairman Avery predicted another depression—incorrectly—and began to rein in expansion. Keady resigned as a result of Avery’s intervention. Although there was a slight recession in 1949, the company did not step up capital spending again until 1954. In May 1951, when Sewell Avery resigned as US Gypsum’s chairman and CEO, his replacement, Clarence H. Shaver, inherited a company that had a capitalized value of $61 million and produced more than 75 commodities in 47 mines or factories. Avery’s imprint was an extreme conservatism marked by strong centralized control, rigid cost-cutting practices, and few benefits for employees.

Expansion in Mid-Century

Toward the end of the 1950s US Gypsum extended its expansion internationally. One of its principal discoveries during the decade was the gypsum deposit in Mexico’s San Luis Potosi State. This find, one of the world’s largest, was conservatively estimated to contain at least 300 million tons of commercial deposits.

In the 1960s US Gypsum became the first major U.S. corporation to undertake privately funded housing renovation on a large scale. The highly publicized project began in 1964, when US Gypsum purchased six adjoining tenements in the East Harlem Section of New York City. US Gypsum paid $9,125 to renovate each unit; the cost of constructing new units averaged $22,500. US Gypsum’s president, Graham J. Morgan, saw these projects as an opportunity to get in on the ground floor of a potential $20 billion market. Morgan felt the renovation would open up because of the Federal Housing Administration’s willingness to provide financing for such projects. By 1969 the company had completely remodeled 32 buildings in New York, Cleveland, Chicago, and Detroit.

In 1973 US Gypsum settled a class-action civil antitrust suit brought against it by wallboard users and buyers. Settlement of those cases, which alleged price fixing, cost US Gypsum $28 million. This case led to a criminal indictment of US Gypsum and three competitors in 1973. The criminal trial eventually found its way to the Supreme Court, which ordered a new trial, and in 1980 US Gypsum settled the case, agreeing to pay $2.6 million in taxes on deductions from earlier civil antitrust judgments.

On January 1, 1985, a holding company, USG Corporation (USG), was created, and US Gypsum became the largest of the holding company’s nine operating subsidiaries. Chairman and CEO Edward W. Duffy reportedly formed the holding company to protect the bulk of company operations from asbestos litigation against US Gypsum. Asbestos had been a standard additive in wallboard manufacture for decades. US Gypsum had already begun to face property damage suits in 1984 with a $675,000 award to a South Carolina school district.

1980s Takeover Battles

In November 1986 the Belzberg brothers of Canada attempted a hostile takeover of USG. USG immediately instituted a plan to buy back 20 percent of its common stock in an effort to fend off the takeover. By December 1986, however, USG had purchased Samuel, William, and Hyman Belzberg’s 4.9 percent stake, for $139.6 million. The Belzberg family’s profits on the transaction were in excess of $25 million.

In 1987 USG acquired DAP Inc., maker of caulking and sealants, for $127 million. In October of that year a partnership led by Texans Cyril Wagner, Jr., and Jack E. Brown’s Desert Partners attempted to gain control of the company. Wagner and Brown’s main business venture was a Midland, Texas, oil and gas partnership with secondary real estate operations. They purchased their 9.83 percent stake in USG as USG tried to recover financially from the Belzberg takeover attempt. In April 1988 a federal court refused to block USG’s poison-pill anti-takeover plan. In May 1988 USG announced a restructuring and recapitalization plan designed to further block the takeover attempt, and by June the plan had succeeded.

The plan was expensive, however, and $2.5 billion in new debt (on top of previous debt of $851 million) left USG in a precarious financial state. Several noncore assets were sold over the next few years to help pay down debt. In October 1988 USG sold its Masonite Corporation subsidiary, purchased in 1984. International Paper Corporation paid $400 million for Masonite. Sold the following year were the Kinkead division (to Kohler Co.) and Marlite (to Commercial and Architectural Products Inc.). In September 1991 USG sold DAP to U.K.-based Wassail pic for $90 million.

“Prepackaged” Bankruptcy in 1993

These moves proved inadequate, however, as USG’s management had not anticipated the depressed state of the housing market in the late 1980s and early 1990s. With revenues declining and the company posting a net loss for 1990, USG defaulted on $40 million in loans in 1991. USG—led by CEO Eugene B. Connolly starting in January 1990—attempted to reorganize outside of bankruptcy court through negotiations with its lenders. Finally, in March 1993 USG was forced to declare Chapter 11 bankruptcy, although it quickly emerged only two months later, following the implementation of a “prepackaged” plan of reorganization. Banks and bondholders ended up owning 97 percent of the common stock of USG, in exchange for the elimination of $1.4 billion in debt. The company was also able to reduce its annual interest payments by $200 million.

USG emerged from bankruptcy with a still high debt load of $1.56 billion, and set a goal of reducing that to $650 million within five years. In 1994 the housing market—and USG’s future outlook—had improved enough to enable the company to raise $224 million through a stock offering, the proceeds of which were used to pay down debt. Connolly retired in early 1996, replaced as chairman and CEO by William C. Foote. Later that year USG sold its insulation manufacturing operation. The company returned to profitability in 1996, posting net income of $15 million on net sales of $2.59 billion.

The following year was even better, as sales hit $2.87 billion, while net income increased almost tenfold, to $148 million. Improving economic conditions played a big role in USG’s turnaround as did heavy capital expenditures that aimed at achieving organic, profitable growth. From the company’s emergence out of bankruptcy through year-end 1997, USG had spent $532 million in capital expenditures, including the beginning of construction in mid-1997 of a new $110 million wall-board plant in Bridgeport, Alabama—USG’s largest nonacquisition capital investment ever. In April 1997 USG announced that it would build a plant in Gypsum, Ohio, to manufacture gypsum wood fiber panels—which combined gypsum with cellulosic fibers to create strong, impact-resistant panels—under the Fibrerock brand. In November of that year USG purchased a 60 percent stake in Zhongbei Building Material Products Company, China’s largest ceiling grid company. By the end of 1997 total debt had been reduced to $620 million, marking the achievement of the firm’s debt reduction target.

Throughout the 1990s the company continued to be involved in litigation relating to personal injury suits and other claims based on asbestos-containing products, which were sold by USG from the 1930s through 1977. The claims were being paid by insurance income under the 1985 Wellington Agreement on asbestos-related claims. In 1988 USG and 19 other former producers of asbestos-containing products replaced the Wellington Asbestos Claims Facility with the Center for Claims Resolution (CCR), which continued in operation through the late 1990s. A class-action lawsuit resulted in a $1.3 billion agreement with the CCR in 1993, but in June 1997 the U.S. Supreme Court invalidated the settlement, finding that the class was defined improperly. USG estimated in 1997 that it was the defendant in about 73,000 personal injury cases and that the average settlement would be about $1,600.

USG had itself sued nearly two dozen insurance companies who had refused to cover these claims. By 1997 the company had reached settlements with a number of these insurers, resulting in about $325 million in coverage for the company. USG expected to receive substantial additional payments—between $200 million and $265 million—as the remaining suits reached settlements.

During 1998 USG continued to spend heavily on capital improvement projects and the construction of new plants. In April the company announced it would build a new $112 million wallboard factory in Aliquippa, Pennsylvania. In September USG announced plans to construct two new, state-of-the-art wallboard plants in Plaster City, California, and Rainier, Oregon, for a total cost of $225 million. Replacing older facilities with modern, low-cost plants aided USG’s overall productivity. With the economic boom of the mid- to late 1990s making for an exceptionally strong building industry, and with the company’s debt load finally eased, USG was in its best financial shape in years. Perhaps most indicative of its recovery was USG’s September 1998 announcement that it would pay a quarterly dividend for the first time in a decade, as well as repurchase as many as five million of its common shares.

Principal Subsidiaries

United States Gypsum Company; USG Interiors, Inc.; L&W Supply Corporation; USG International, Ltd.; USG Foreign Investments, Ltd.; USG Interiors International, Inc.; USG Funding Corporation; La Mirada Products Co., Inc.; USG Foreign Sales Corporation; Gypsum Engineering Company; Alabaster Assurance Company, Ltd.; USG Interiors Australia Pty. Ltd. (Australia); USG Interiors (Donn) S.A. (Belgium); USG Interiors (Europe) S.A. (Belgium); USG Interiors Coordination Centre S.A. (Belgium); USG Belgium Holdings S.A.; Gypsum Transportation Limited (Bermuda); CGC Inc. (Canada); USG Canadian Mining Ltd. (Canada); USG Manufacturing Worldwide, Ltd. (Caymans); Shenzhen USG Zhongbei Building Materials Co. (China; 60%); USG France S.A.; Donn Products GmbH (Germany); USG Interiors Eastern Manufacturing GmbH (Germany); USG Interiors East Sales GmbH (Germany); USG Interiors (Far East) SDN BHD (Malaysia); Yeso Panamericano, S.A. de C.V. (Mexico); USG (Netherlands) B.V.; Alabaster Engineering (Nederland) B.V. (Netherlands); Red Top Technology (Nederland) B.V. (Netherlands); USG Interiors Pacific Ltd. (New Zealand); Panama Gypsum Company; USG Asia Pacific Holdings Pty. Ltd. (Singapore); USG (U.K.) Ltd.

Principal Operating Units

North American Gypsum; Worldwide Ceilings.

Further Reading

Duff, Christina, “Costly Recapitalization Drives USG Corp. to the Wall,” Wall Street Journal June 3, 1992, p. B4.

Gilbert, Nick, “USG: Now a Value Play,” Financial World, May 9, 1995, p. 26.

Greising, David, “USG’s Remodeling May Mean Gutting the House,” Business Week, January 21, 1991, pp. 54-55.

“Gyp,” Fortune, February 1936.

Miller, James P., “USG Modifies ‘Prepackaged’ Chapter 11 Plan,” Wall Street Journal, January 25, 1993, p. All.

Saporito, Bill, “The Benefits of Bankruptcy,” Fortune, July 13, 1993, p. 98.

Taub, Stephen, “The 1980s Legacy Still Stalks USG,” Financial World, August 21, 1990, p. 11.

“U.S. Gypsum: No Nonsense,” Fortune, September 1955.

—John C. Bishop

—updated by David E. Salamie