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Anna Cororaton

USG AT A GLANCE

P/E ► -2.65   EV/EBITDA ► -13.1   ROA ► -8.1% AVG ROE ► -29.9% AVG Debt to Equity ► 2.15 HIGH Current Ratio ► 2.82 AVG Interest Coverage Ratio ► -3.47 LOW

 

 

 

 

 

 

USG Corporation (NYSE:USG) is the largest manufacturer of gypsum wallboard (drywall) in the US and a distributor of specialty construction materials. In 2007, USG accounted for about 30% of gypsum wallboard sales in the US. ^[1] The company's products are used in new residential and commercial construction, as well as the remodeling and repairing industry. The latter, which generates 43% of demand for gypsum wallboard, has helped mitigate the negative effect of the ongoing housing slump on USG's sales. However, net revenue still dropped 10% to $5.202 billion in 2007. ^[2] 84% of the company's 2007 net sales come from the US. ^[3] USG owns more gypsum plants, paper mills and other manufacturing facilities relative to its competitors such as National Gypsum Corporation and Eagle Materials. Home Depot is USG's largest customer, accounting for about 11% of the company's sales.

The company emerged from bankruptcy in 2006 following a surge of asbestos-related lawsuits. With financial help from Berkshire Hathaway, which owns 19% of USG's shares as of 2008,^[4] the company has hedged future risks by investing in a $4 billion fund to resolve further asbestos claims. The company is replacing old gypsum factories with high-quality, low-cost plants to increase efficiency and counter increasing prices of key raw materials. ^[5] Anticipated natural gas purchases for the next 12 months are completely hedged. ^[6] In addition, L&W Supply - USG's distribution subsidiary - has improved efficiency by increasing its on-time delivery rate to customers from 50% in 2002 to 90% in 2007. ^[7]

Company Overview

USG Corporation is the largest manufacturer of gypsum wallboard in the US and a specialty distributor of construction materials. It's gypsum-based products account for about 48% of business net revenue while product distribution and other construction materials comprise the rest. ^[8] USG's sales are contingent on the housing market and have experienced losses since the market collapse in 2005.

Business and Financial Metrics

Net sales for USG Corporation and its subsidiaries were $ 5.2 billion in 2007, declining by about 10% from 2006. ^[9]. As a result, operating income declined sharply from $985 million in 2006 to $165 in 2007. This is primarily due to the tightening of US housing markets; USG is highly cyclical and closely tied with the construction industry. However, USG does not only service new residential construction but also remodeling and non-residential construction, which did not dwindle down as much. In 2007, USG estimated that 43% of demand for gypsum wallboard was from repair and remodel activity, 41% was from new residential construction, and 11% of demand was from nonresidential construction. ^[10]

Statement of Operations Data (in Millions of $)

^[12]

Business Segments

• North American Gypsum (48% of 2007 sales, 29% of income)

USG's North American Gypsum products include a line of interior finishing applications used for floors, walls, and ceilings in residential, commercial and industrial construction. A majority of its gypsum wallboard products are sold under the SHEETROCK brand name while it's major cement board product line is under the DUROCK brand name. Management estimates that US Gypsum, USG's domestic manufacturer, provided 30% of US wallboard gypsum in 2007. ^[13] Because of tight housing markets, net sales for North American Gypsum declined by 22% from $3.621 billion in 2006 to $2.837 billion in 2007. ^[14]

• Building Products Distribution (38% of 2007 sales, 43% of income)

This business segment comprises L&W Supply, USG's specialty distributor of building and construction materials. In 2007, L&W supplied 13% of gypsum wallboard in the US and 36% of USG's products. Overall, wallboard accounted for 47% of L&W sales. ^[15] Operating mainly in the US, L&W Supply has over 220 distribution centers nationwide. ^[16] L&W Supply is service-oriented, and offers on-site delivery to contractors. The impact of the housing slump on the Building Products Distribution segment was less adverse than on the North American Gypsum segment, with sales only dropping down 8% to $2.291 billion in 2007. However, L&W Supply closed down 12 locations that year. ^[17]

While owning a distributional segment, USG is not completely vertically integrated. L&W Supply is not limited to selling USG-manufactured products. Likewise, it's manufacturing segment supplies construction materials to other distribution facilities as well.

^[18]

• Worldwide Ceilings (14% of 2007 sales, 29% of income)

Worldwide Ceilings include USG Interiors, USG International and CGC. This segment handles USG business outside North America and the manufacturing and marketing of specialty ceiling products (including the ceiling grid and ceiling tile) in North America, Europe, Latin America and the Asia-Pacific. CDG is the largest manufacturer in Canada, while USG Mexico is the largest in the country. ^[19] Among USG's business segments, only Worldwide ceilings increased in terms of net sales, advancing 8% to $813 million in 2007. USG has not fully developed in the international market because of the high cost of shipping and handling overseas, although this is an opportunity for hedging domestic risks.

^[20]

Trends and Forces

The housing industry determines the construction industry, hence revenues are highly cyclical in nature.

The housing crisis has adversely affected the construction industry in the last few years. New residential construction dwindled by about 25% in 2007, and has been declining since 2004 ^[21]. USG estimates that the US overall demand for gypsum wallboard declined 15% in 2007. ^[22]. In response, USG reported lowering its selling price from $181 in 2006 to 134 in 2007, lowering its revenue. In addition, there was excess supply and a corresponding contraction in production capacity from 92% in 2006 to 72% in2007 (3.3 billion square feet decline)^[23] which increased the cost of production and lowered margin of profit. In addition, the opportunity for future repair and remodeling activity is reduced because of the ongoing housing crisis.

The cost and availability of key raw materials are volatile

In 2007, manufacturing costs for USG increased by 9%, mainly due to the increasing cost of raw materials (including natural gas, wastepaper, and other materials). ^[24]. In addition, the company acquires materials from a limited number of suppliers, increasing the risk of unavailability. In terms of natural gas, the company enters into fixed-price supply agreements and hedging transactions (generally for the next 12 months). However, if the price of natural gas declines, USG will be unable to take advantage of lower costs.^[25]

Competition

• National Gypsum Company (or NSG) is a privately-owned, fully-integrated construction company and is the second-manufacturer of gypsum wallboard in the US, next to USG. ^[26] USG operates on a wider scale than National Gypsum, owning 22 gypsum wallboard plants and 8 paper mills, compared to National Gypsum’s 19 plants and 4 mills.

• Eagle Materials (EXP) manufactures construction materials including gypsum wallboard, cement and recycled paperboard. Its products are distributed throughout the US, but are more concentrated in regions close to its 5 wallboard plants. In contrast, USG supplies materials more evenly through its own L&W Supply and other distribution facilities. In 2007 (FY ending in March 2008), 77.6% or $687.8 million of Eagle Material’s net revenue was generated by gypsum wallboard and cement, ^[27] while USG’s sales for similar products totaled $2.8 billion.

• CertainTeed is a subsidiary of the French industrial company Compagnie de Saint-Gobain, sells construction materials to residential and commercial contractors in the US. CertainTeed has 13 gypsum plants in the country. ^[28]

• Lafarge North America is a supplier of construction materials in the US and Canada. Unlike USG, Lafarge isn’t focused on the production of gypsum materials. Its gypsum segment accounts for 10% ($411 million) ^[29] while 48% USG’s sales come from gypsum-based products.

References

1. ↑ USG 2007 10-K: Item 1, page 1
2. ↑ USG 2007 10-K: Item 1, page 2
3. ↑ USG 2007 10-K: Item 7, page 15
4. ↑ seekingalpha.com
5. ↑ USG 2007 10-K: Item 2, page 12
6. ↑ USG 2007 10-K: Item 1, page 4
7. ↑ BearingPoint: USG Corporation
8. ↑ USG 2007 10-K: Item 1, page 1
9. ↑ www.nahb.org
10. ↑ USG 2007 10-K: Item 1, page 2
11. ↑ USG 2007 10-K: Item 7, page 14
12. ↑ USG 2007 10-K: Item 7, page 20
13. ↑ USG 2007 10-K: Item 1, page 1
14. ↑ USG 2007 10-K: Item 7, page 20
15. ↑ USG 2007 10-K
16. ↑ www.lwsupply.com
17. ↑ USG 2007 10-K: Item 7, page 22
18. ↑ USG 2007 10-K: Item 7, page 17
19. ↑ USG 2007 10-K: Item 1, page 1
20. ↑ USG 2007 10-K: Item 7, page 15
21. ↑ www.census.gov
22. ↑ USG 2007 10-K: Item 7, page 16
23. ↑ USG 2007 10-K: Item 7, page 15
24. ↑ USG 2007 10-K: Item 7, page 20
25. ↑ USG 2007 10-K: Item 1A, page 7
26. ↑ biz.yahoo.com
27. ↑ EXP 2008 10-K: Item 1, Page 3
28. ↑ biz.yahoo.com
29. ↑ Lafarge 2005 10-K