History of USG Corporation

USG, along with BNI (now owned by Buffett’s BRK Hathaway) and WDC are among the companies that have made me earn more money until now. USG is in the housing materials business, specifically gypsum wallboard. I bought it before and during the 2008 crisis, a tiny part at 35 and a huge part at a bit over 5/share, I bought quite a big amount, mainly via call options, extremely cheap, which I sold a couple of years later during USG’s run up to 25/share in what seemed to be a short squeeze. This first time I sold was the best profit I made with it because the options I bought multiplied by more than 10. Then USG tanked again to the low teens and I bought it back to sell it some months later on the high teens. Finally it tanked recently again when I bought it yet again, for a third time, but I still have not sold it, and this time I bought a much smaller position. As you can see it has been an extremely volatile stock, and this is not new, the company has more than 100 years and has been 3 times in bankruptcy. After its last bankruptcy, near the beginning of this century, it went from around 3 dollars to more than one hundred dollars per share, I’d like to have been one that made money on that trade !

For other people interested in USG here is something about it’s history:

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

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 & 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.

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.

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 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 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.

History source and more: http://www.referenceforbusiness.com/history2/16/USG-Corporation.html


About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
This entry was posted in General and tagged , . Bookmark the permalink.

The Intelligent Investor Blog Posts Feeds

Receive posts by email?