usg AR_2005

USG Corporation 2005 Annual Report

Dear Fellow Shareholders

We have kept our promises, and a promising future lies ahead.

In 200, when we filed for Chapter , we committed to:

– Sustain our market leadership and operational excellence

– Maintain a strong organization

– Pay our creditors in full

– Gain the best outcome for current shareholders

– Put asbestos behind us, once and for all

– Emerge as quickly as possible, without sacrificing our other goals

Those commitments have been kept. On January 30th, 2006, we announced a watershed agree-
ment that resolves all asbestos-related personal injury claims against USG.

Protecting Your Interests

Our years of effort, on many fronts, have succeeded. Our operations team continued to serve
our customers with distinction—and lead our industry. Our finance staff assured that we had
the capital required to negotiate from a position of strength. We communicated honestly and
forthrightly with all key stakeholders, including shareholders, customers, suppliers, bankers
and investors, and all bankruptcy committees. We worked hard to develop a broad, legislative
solution to the asbestos crisis. And we succeeded in crafting an agreement that is fair, fast,
final and affordable.

The agreement is fair for everyone who has a stake in USG. People who suffer from an asbestos-
related illness will begin receiving compensation soon after the plan is approved by the courts.
All of our creditors will be paid in full, with interest—an amount totaling approximately $.4
billion. Employees can look ahead with confidence, secure in the knowledge that our enterprise


2

is stable, proud and vibrant. And for the first time ever in a major asbestos bankruptcy agree-
ment, shareholders will retain their ownership of the company.

After nearly five years in bankruptcy, the agreement offers a fast resolution. With the approval
of the courts and the continued support of key stakeholder committees, we could leave Chapter
“Now the House and the as early as July of this year.
Senate need meaningful
When the agreement is approved, we will gain a final settlement of our asbestos personal injury
asbestos reform and they
need to get it to my desk liability. We will be able to put the issue behind us once and for all and avoid the uncertainty of
as soon as possible.”
lengthy, contentious bankruptcy litigation.
President George W. Bush,
October 26, 2005 The agreement is affordable. We will finance it using funds from a number of sources, including
our existing cash balances and a rights offering.

Our record-setting operating performance over the past five years has enabled us to set aside
almost $.6 billion in cash, which provides a substantial portion of the capital required.

We plan to raise $.8 billion in new equity through a rights offering to our stockholders, who
will have the opportunity to purchase one new share of stock for each share already owned. A
backstop agreement will assure that we receive the full amount.

Under the terms of the agreement, the final amount we will pay depends on the fate of the
Fairness in Asbestos Injury Resolution Act, commonly known as the FAIR Act. The Senate
debated the legislation in February of 2006, but an effort to overcome a technical issue related
“It is a remarkable comeback for to the Act failed by one vote, stalling the legislation.
the 104-year-old company – and
When our plan of reorganization takes effect, we will pay $ 900 million into a special trust that
an unprecedented recovery for
the stock of a company that is would pay all asbestos personal injury claims against U.S. Gypsum, now and in the future. We
still doing business under
believe that $ 900 million is an equitable settlement.
protection from creditors.”
If the FAIR Act, which calls for the establishment of a $40 billion national trust fund to pay
The Wall Street Journal,
February 15, 2006
asbestos victims, is passed and signed into law by the President, $ 900 million is all that we
would pay. Our trust would be consolidated into the national trust fund, and we would owe
nothing more.

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If the FAIR Act fails, we are obligated to make two additional payments totaling $ 3.05 billion to
our personal injury trust. Although it is a large sum and does not accurately reflect what we
believe to be our true liability for asbestos, we are able to fund it, and doing so provides a clear
path toward leaving Chapter with our shareholders’ equity largely intact. Should the two
payments become necessary, we will raise about $ billion in new debt financing and add it to
the funds raised by the rights offering. Making the full $ 3.95 billion contribution to the trust will
result in a tax refund of about $. billion, which will also be used to fund the agreement.

We are speaking with representatives of property damage claimants, but as of now, property
damage claims are not a part of the agreement. Property damage claimants will retain the rights
to any valid claims that remain unresolved when the bankruptcy is concluded.

In the days and weeks ahead, we will continue to work to win passage of the FAIR Act, which we
have actively supported from the beginning. It is good for USG, good for the country and good
for people who suffer from asbestos-related illnesses. Yet even if the Act does not become law,
the agreement to resolve our bankruptcy is one of the most significant events in our 04-year
history. And it tops a year of stellar performance—one of the best we’ve ever had.

A Record-Setting Performance

Just as our restructuring team has worked to do what’s right for our shareholders, creditors
and asbestos claimants, our operations team has made tremendous progress in serving our
customers and preparing for the future.

The U.S. housing market remained strong through the end of the year, and housing starts reached
the highest level since 972. Our long-term strategies of investing in low-cost manufacturing
and expanding our distribution business enabled us to meet the demand. After topping $4 billion
USG achieved record sales of
for the first time in 2004, our sales rose 4 percent to a record $ 5. billion in 2005. We shipped a
more than $ 5 billion in 2005.
record .3 billion square feet of wallboard, up three percent from 2004. We also shipped record
volumes of joint compound and FIBEROCK products. L W Supply, our distribution company,
achieved double-digit gains in both sales and profit. Sales in our worldwide ceilings business
increased three percent, with much of the gain coming late in the year.


4

Net earnings for the year reached $ 50 million before the impact of a $.9 billion after-tax charge
associated with the bankruptcy settlement and an $ million after-tax charge related to the
adoption of a new accounting standard. After the charges, we reported a net loss of $.4 billion
for the year.

Building the Enterprise

Even in the midst of Chapter , we never stopped working to improve our products and build
our enterprise. In fact, since 200, we have invested more than $ 500 million to build the most
productive and profitable operations in the industry. Improvements include new DUROCK cement
board lines in Baltimore and Monterrey, Mexico, and new joint compound lines in Phoenix,
Jacksonville and Baltimore. Expansions to our Aliquippa, Pennsylvania, and Jacksonville,
Florida, facilities add more than 00 million square feet of new, low-cost wallboard production
When it is completed in 2008,
the new wallboard plant in capacity. Upgrades to our Bridgeport, Alabama, facility created the fastest wallboard line in the
Washingtonville, Pa., will serve
world, capable of producing more than a mile of wallboard in less than 0 minutes.
New York, Philadelphia and other
The investments we have made have dramatically improved our operating performance—our
important East Coast markets.
wallboard lines are now running an average of more than 40 percent faster than they did five
years ago. High-volume, low-cost production provides a critical strategic advantage. It gives
us the flexibility needed to be successful across market cycles—we can meet market demand
during peak periods and we can weather the storm during the low points of the cycle.

We continued to build our operations in 2005. In February, we announced plans to invest about
$30 million to modernize and upgrade our Norfolk, Virginia, wallboard plant. When the work
The new Washingtonville wall-
is completed by mid-2007, it will more than double the plant’s capacity. In September, we an-
board plant will use 800,000
nounced construction of a new, state-of-the-art wallboard plant in Washingtonville, Pennsylvania.
tons of recaptured gypsum per
Scheduled to begin operations in 2008, it will produce approximately one billion square feet of
year produced by the scrubbers
wallboard annually, while also setting new standards for environmental responsibility. The plant
on a nearby power plant.
will produce wallboard using recaptured gypsum, utilize 00 percent recycled paper, recycle 00
percent of its production waste and operate with zero discharges into nearby waterways.

5

We also have continued to build our distribution business. Today, working under a number of
locally recognized names, L W operates more than 200 locations, and is the only specialty
distributor with a national presence. Thirty-six manufacturing
plants earned a perfect
The expansion of our production and distribution facilities is part of our long-term mission safety rating in 2005.
to “Find a Better Way”—and continuously improve every aspect of our performance. We are
especially proud of our safety performance, which remains one of the best in our own—or any—
industry. In fact, 36 of our manufacturing plants achieved a perfect safety rating in 2005.

A New Chapter

Now, with the end of Chapter in sight, we are ready to open a bright new chapter in our
history. USG has a long tradition of leadership, and leadership remains our objective today. We
will achieve it by focusing on customer service and operational excellence.

The loyalty and support of our customers, some of whom have done business with us for genera-
tions, have sustained us during Chapter . We’re continuing to strengthen those relationships
and build new ones with new products for new markets.

SHEETROCK is already one of the best-known brands in the country. New marketing efforts are
strengthening our brands even more. A new multi-year title sponsorship agreement with NASCAR
USG signed a multi-year agree-
puts our major brands – SHEETROCK, DUROCK, FIBEROCK and DONN - in front of thousands of our
ment to sponsor the SHEETROCK
customers and millions of viewers around the world.
400 and the DUROCK 300 races.
NASCAR has more than 75 million
We want to be known as a company that’s easy to do business with. We are continuing to imple-
fans and is the No. 2 rated sport
ment an enterprise-wide software system, called LinX, that will connect all of our operations,
on television.
reduce costs for USG and our customers, and provide better, more timely information. The new
training and quality programs at our customer service center are allowing us to provide the
“one-and-done” service that customers are looking for. Our industry-leading Web site provides
a variety of tools to help customers easily design with and specify USG products.


6

Innovative products give customers even more reasons to do business with us. In 2005, we
launched a number of new products that round out our product lines and expand our share of
houses and commercial buildings. Created for commercial applications, new SECUROCK brand
roof board offers superior fire, wind and moisture resistance, greater versatility and less envi-
In 2005, United States Gypsum
ronmental impact than conventional products. We expanded our line of DUROCK products with
Company shipped enough wall-
board to build 1.3 million homes. new mortars, mastics and grouts that help contractors deliver high-quality tile installations.
A new family of LEVELROCK poured self-leveling cement underlayments, designed for flooring
applications, was named one of the Top 00 Products of 2005 by Buildings magazine.

Looking Ahead

With leading brand names, leading market shares, and industry-leading production and distribu-
tion 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.

We will continue to invest for the future. Along with adding to our low-cost production capacity,
we will continue to grow LW’s distribution network. We have commissioned a new ship to carry
gypsum from our mines to our plants. Later this year we will begin to move into a new headquar-
ters in Chicago, which will aid efforts to control costs and improve productivity.

We will continue to strengthen our service and our customer relationships. We will complete the
implementation of our LinX system and intensify our quest for innovation. In addition to extend-
ing our current product lines, our Research and Development staff is exploring a number of new
product innovations, as well as breakthrough technologies that could revolutionize wallboard
and ceilings production.

7

We also will continue to build the best team in the industry. Increased emphasis on skills training
and leadership development programs is helping to prepare the next generation of USG’s leader-
ship. A number of organizational changes further strengthened our team. As the new president
of USG Corporation, Jim Metcalf will lead our continuing pursuit of operational excellence by
overseeing all of our North American operating subsidiaries. Ed Bosowski is now directing our
overall growth plan and strategy, as well as our international operations. We also have added
further experience to our board of directors with the election of Steven F. Leer, chairman and
chief executive officer of Arch Coal, Inc. With the exception of myself, all of our directors are
independent as defined by both USG and NYSE standards.

In protecting the interests of shareholders throughout an asbestos-related restructuring, while
leading our industry, we have achieved something few, if any, companies have ever accom-
“It’s the most successful
plished. This singular achievement is the direct result of staying focused on our goals and true
managerial performance in
to our convictions. It is a credit to the hard work and resolve of all of USG’s 4,000 employees, not bankruptcy that I’ve ever seen.”
just over the past 2 months, but over the past five years. They all have played a role and applied Warren E. Buffett, Chairman of the
Board, Berkshire Hathaway Inc.
their strength to carry us through uncertain times. No one could be more proud of or grateful for
The Wall Street Journal,
what they have accomplished. For the record, however, I would like to single out Stan Ferguson February 15, 2006
and Rick Fleming for their valued counsel and untiring efforts to find a principled solution to an
extraordinary challenge. USG—and I—owe them our deepest thanks. Your company is stronger
than ever before. The path ahead is clear. We are moving forward.

William C. Foote

Chairman and Chief Executive Officer

February 24, 2006


Business Over view 8

Businesses Products and Services

Gypsum United States Gypsum Company Manufactures and markets gypsum
CGC Inc. wallboard, joint treatments and tex-
USG Mexico S.A. de C.V. tures, cement board, gypsum fiber
panels, plaster, shaft wall systems
and industrial gypsum products

Ceilings USG Interiors, Inc. Manufactures and markets
USG International acoustical ceiling panels, ceiling
CGC Inc. suspension grid, specialty ceilings
and other building products

Distribution LW Supply Corporation Specializes in delivering construc-
tion materials to job sites

9

Best-Known Brand Names Geographical Areas Served Customers

SHEE TROCK gypsum panels; United States, Canada, Mexico purchasers : specialty drywall
SHEE TROCK H UMITEK gypsum pan- centers, distributors, hardware
els; SHEE TROCK joint compounds; cooperatives, buying groups,
DUROCK cement board; FIbEROCK home centers, mass merchandis-
gypsum fiber panels; SECUROCK ers; influencers : architects,
roof board; LE V ELROCK floor specifiers, building owners;
underlayment; H Y DROCA L gypsum end users : contractors, builders,
cement; IMPERIAL building plasters; do-it-yourselfers
and DIAMOND building plasters

ASTRO, ECLIPSE and R A DA R United States, Canada, Mexico purchasers : specialty acoustical
ceiling panels; DONN DX, FINELINE and more than 125 other countries centers, distributors, hardware
and CENTRICITEE ceiling grid; in all parts of the world: North, cooperatives, home centers, con-
COMPäS SO suspension trim; Central and South America, the tractors; influencers : architects,
CURVAT UR A 3-D ceiling system; Caribbean, Europe, the Middle specifiers, interior designers,
GEOME TRI X ceiling panels; East, Asia, the Pacific Rim, Africa building owners, tenants, facility
TOPO 3-dimensional system; managers; end users : contrac-
and bILLO 3-dimensional panels tors, builders, do-it-yourselfers

United States purchasers and end users :
contractors, builders


0

Board of Directors Corporate Of ficers

Rober t L . Barnet t Valerie B. Jarret t William C. Foote Dominic Dannessa
( 2*, 4, 5, 6 ) (*, 4, 5, 6)

Former Executive Managing Director and Chairman and Vice President;
Vice President, Executive Vice President, Chief Executive Officer Executive Vice President,
Motorola Corporation The Habitat Company Manufacturing, building Systems
James S. Metcalf
President and
Keith A . Brown Steven F. Leer Brendan J. Deely
( 2, 3, 4, 5 ) ( 3, 4, 6 )

President, Chairman and Chief Operating Officer Vice President; President
Chimera Corporation Chief Executive Officer, and Chief Operating Officer,
Edward M. Bosowski
Arch Coal, Inc. LW Supply Corporation
Executive Vice President
James C. Cot ting ( 3, 4, 5 )

Former Chairman and and Chief Strategy Officer;
Mar vin E. Lesser Fareed A . K han
(, 2, 4, 6)

Chief Executive Officer, Managing Partner, President, USG International Vice President;
Navistar International Sigma Partners, L.P. Executive Vice President,
Stanley L . Ferguson
Corporation Sales and Marketing,
John B. Schwemm (, 2, 4)
building Systems
Former Chairman and and General Counsel
Lawrence M. Crutcher ( 2, 3, 4*, 5, 6* )

Managing Director, Chief Executive Officer, Karen L . Leets
Richard H. Fleming
Veronis Suhler Stevenson R.R. Donnelley Sons Company Vice President and Treasurer
and Chief Financial Officer
William C. Foote Judith A. Sprieser D. Rick Lowes
(, 2, 3*, 4, 6)

Chairman and Former Chief Executive Officer, Vice President and Controller
Brian J. Cook
Chief Executive Officer Transora, Inc.
Senior Vice President, Peter K . Maitland
Human Resources
W. Douglas Ford (, 4, 5*) Vice President,
Committees of the board of Directors
Former Chief Executive, Compensation, benefits
Compensation and Organization Marcia S. Kaminsk y
Refining and Marketing, and Administration
Committee
Senior Vice President,
bP Amoco p.l.c. 2 Audit Committee
Communications Donald S. Mueller
3 Finance Committee
4 Governance Committee
David W. Fox Vice President,
(, 3, 4, 6)
5 Corporate Affairs Committee
Former Chairman and Research and Development
6 Governance-Nominating Subcommittee
Chief Executive Officer, * Denotes Chair
Clarence B. Owen
Northern Trust Corporation and
Vice President and
The Northern Trust Company
Chief Technology Officer

J. Eric Schaal
Corporate Secretary and
Associate General Counsel

Form 0-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________

FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.

Commission File Number 1-8864

USG CORPORATION
(Exact name of Registrant as Specified in its Charter)

Delaware 36-3329400
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

125 S. Franklin Street, Chicago, Illinois 60606-4678
(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (312) 606-4000
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
New York Stock Exchange
Common Stock, $0.10 par value Chicago Stock Exchange
Preferred Share Purchase Rights (subject to New York Stock Exchange
Rights Agreement dated March 27, 1998, as amended) Chicago Stock Exchange
Preferred Stock Purchase Rights (subject to New York Stock Exchange
Reorganization Rights Plan, dated January 30, 2006) Chicago Stock Exchange
8.5% Senior Notes, Due 2005 New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large
accelerated filer Accelerated filer Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)
Yes No
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section
12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
The aggregate market value of the registrant’s common stock held by non-affiliates based on the New York Stock
Exchange closing price as of June 30, 2005 (the last business day of the registrant’s most recently completed second
fiscal quarter), was approximately $1,834,759,765.
The number of shares outstanding of the registrant’s common stock as of January 31, 2006, was 44,683,671.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of USG Corporation’s definitive Proxy Statement for use in connection with the annual meeting of
stockholders to be held on May 10, 2006, are incorporated by reference into Part III of this Form 10-K Report where
indicated.

TABLE OF CONTENTS

PART I Page
Item 1. Business .............................................................................................................................................. 3
Item 1a. Risk Factors......................................................................................................................................... 8
Item 1b. Unresolved Staff Comments................................................................................................................ 13
Item 2. Properties ............................................................................................................................................ 14
Item 3. Legal Proceedings ............................................................................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders ......................................................................... 15

PART II
Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases
of Equity Securities ......................................................................................................................... 16
Item 6. Selected Financial Data ....................................................................................................................... 17
Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition .............. 18
Item 7a. Quantitative and Qualitative Disclosures About Market Risks ........................................................... 40
Item 8. Financial Statements and Supplementary Data ................................................................................... 41
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............. 81
Item 9a. Controls and Procedures...................................................................................................................... 81

PART III
Item 10. Directors and Executive Officers of the Registrant ............................................................................. 83
Item 11. Executive Compensation..................................................................................................................... 85
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ........................................................................................................................ 85
Item 13. Certain Relationships and Related Transactions ................................................................................. 85
Item 14. Principal Accounting Fees and Services ............................................................................................. 85

PART IV
Item 15. Exhibits and Financial Statement Schedules ....................................................................................... 86

Signatures ................................................................................................................................................................. 90

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PART I

Item 1. BUSINESS

General the Bankruptcy Court. Since the Filing, the Debtors
have ceased making payments with respect to asbestos
United States Gypsum Company (“U.S. Gypsum”) was lawsuits.
incorporated in 1901. USG Corporation (the In late January 2006, the Debtors, the committee
“Corporation”) was incorporated in Delaware on representing asbestos personal injury claimants (the
October 22, 1984. By a vote of stockholders on “Official Committee of Asbestos Personal Injury
December 19, 1984, U.S. Gypsum became a wholly Claimants” or “ACC”), and the legal representative for
owned subsidiary of the Corporation, and the future asbestos personal injury claimants (the “Futures
stockholders of U.S. Gypsum became the stockholders Representative”) reached an agreement to resolve
of the Corporation, all effective January 1, 1985. Debtors’ present and future asbestos personal injury
Through its subsidiaries, the Corporation is a liabilities and to cooperate in the confirmation of a plan
leading manufacturer and distributor of building of reorganization consistent with that resolution (the
materials, producing a wide range of products for use in “Asbestos Agreement”). The Asbestos Agreement was
new residential, new nonresidential, and repair and approved by USG’s Board of Directors on January 29,
remodel construction as well as products used in certain 2006, and was executed by the Futures Representative
industrial processes. and each law firm representing a member of the ACC.
The Asbestos Agreement also is supported by the
VOLUNTARY REORGANIZATION UNDER CHAPTER 11 committee representing unsecured creditors (the
On June 25, 2001, the Corporation and 10 of its United “Official Committee of Unsecured Creditors”) and the
States subsidiaries (collectively, the “Debtors”) filed committee representing the Corporation’s shareholders
voluntary petitions for reorganization (the “Filing”) (the “Official Committee of Equity Security Holders”).
under Chapter 11 of the United States Bankruptcy Code The Asbestos Agreement does not include asbestos
(the “Bankruptcy Code”) in the United States property damage claims, and the committee
Bankruptcy Court for the District of Delaware (the representing asbestos property damage claimants (the
“Bankruptcy Court”). The Chapter 11 cases of the “Official Committee of Asbestos Property Damage
Debtors (the “Chapter 11 Cases”) have been Claimants”) has not taken a position on the Asbestos
consolidated for purposes of joint administration as In Agreement.
re: USG Corporation et al. (Case No. 01-2094). These As contemplated by the Asbestos Agreement, the
cases do not include any of the Corporation’s non-U.S. Debtors expect to file a proposed plan of reorganization
subsidiaries or companies that were acquired post- (the “Proposed Plan”) and a Disclosure Statement with
petition by Debtor LW Supply Corporation. The the Bankruptcy Court in February 2006 incorporating
Debtors initiated Chapter 11 proceedings to resolve the terms of the Asbestos Agreement and addressing the
asbestos claims in a fair and equitable manner, to treatment of other claims and interests. Pursuant to the
protect the long-term value of the Debtors’ businesses, Proposed Plan, a trust would be created and funded by
and to maintain the Debtors’ leadership positions in Debtors pursuant to Section 524(g) of the Bankruptcy
their markets. The Debtors are operating their Code, and this trust would compensate all qualifying
businesses as debtors-in-possession subject to the present and future asbestos personal injury claims
provisions of the Bankruptcy Code. against the Debtors. If confirmed by the courts, the
U.S. Gypsum is a defendant in asbestos lawsuits Proposed Plan would contain an injunction channeling
alleging both property damage and personal injury. all asbestos personal injury claims against the Debtors
Other Debtors also have been named as defendants in a to the Section 524(g) trust for payment and precluding
small number of asbestos personal injury lawsuits. As a any individual or entity from bringing an asbestos
result of the Filing, all pending asbestos lawsuits personal injury claim against Debtors. This channeling
against U.S. Gypsum and other Debtors are stayed, and injunction would include any asbestos personal injury
no party may take any action to pursue or collect on claims against Debtors relating to A.P. Green
such asbestos claims absent specific authorization of Refractories Co., a former subsidiary of U.S. Gypsum

3

and the Corporation. The amount that the Debtors and Note 18, Litigation.
would be required to pay to the Section 524(g) asbestos
OPERATING SEGMENTS
personal injury trust would depend upon whether
The Corporation’s operations are organized into three
national legislation creating a trust for payment of
operating segments: North American Gypsum,
asbestos personal injury claims is enacted by the 10th
Worldwide Ceilings and Building Products
day after final adjournment of the 109th Congress. If the
Distribution. Net sales for the respective segments
Proposed Plan is confirmed and the legislation is
accounted for approximately 54%, 12% and 34% of
enacted by that date, the Debtors’ funding obligation to
2005 consolidated net sales.
the Section 524(g) trust would be $900 million. If the
Proposed Plan is confirmed and such legislation is not North American Gypsum
enacted before that date, or such legislation is enacted
but held unconstitutional, the Debtors’ funding BUSINESS
North American Gypsum, which manufactures and
obligation to the Section 524(g) trust would total $3.95
markets gypsum and related products in the United
billion.
States, Canada and Mexico, includes U.S. Gypsum in
Under the Proposed Plan, allowed claims of all
the United States, the gypsum business of CGC Inc.
other creditors, including allowed claims of general
(“CGC”) in Canada, and USG Mexico, S.A. de C.V.
unsecured creditors, would be paid in full, with interest
(“USG Mexico”) in Mexico. U.S. Gypsum is the largest
where required. Disputed claims, including disputed
manufacturer of gypsum wallboard in the United States
asbestos property damage claims, would be resolved in
and accounted for approximately one-third of total
the bankruptcy proceedings or other forum, where
domestic gypsum wallboard sales in 2005. CGC is the
appropriate. Upon resolution of those disputed claims,
largest manufacturer of gypsum wallboard in eastern
the allowed amount of any such claims would also be
Canada. USG Mexico is the largest manufacturer of
paid in full, with interest where required. Shareholders
gypsum wallboard in Mexico.
of the Corporation as of the effective date of the
Proposed Plan would retain their shares, and pursuant
to a proposed shareholder rights offering, would have PRODUCTS
North American Gypsum’s products are used in a
the right to purchase, at $40.00 per share, one new
variety of building applications to finish the interior
common share of the Corporation for each share owned
walls, ceilings and floors in residential, commercial and
as of the effective date of the rights offering.
institutional construction and in certain industrial
There are important conditions to the Asbestos
applications. These products provide aesthetic as well
Agreement and conditions to confirmation and
as sound-dampening, fire-retarding, abuse-resistance
effectiveness of the Proposed Plan. One of the
and moisture-control value. The majority of these
conditions of the Asbestos Agreement is that the
products are sold under the SHEETROCK® brand
Proposed Plan must be confirmed and have an effective
name. Also sold under the SHEETROCK® brand name
date on or before August 1, 2006, absent written
is a line of joint compounds used for finishing
agreement among all parties to the Asbestos Agreement
wallboard joints. The DUROCK® line of cement board
to extend that time. There can be no assurance that the
and accessories provides water-damage-resistant and
Proposed Plan will be confirmed or, if confirmed,
fire-resistant assemblies for both interior and exterior
become effective by August 1, 2006.
construction. The FIBEROCK® line of gypsum fiber
Additional information about the Proposed Plan,
panels includes abuse-resistant wall panels and floor
the Section 524(g) asbestos personal injury trust
underlayment as well as sheathing panels usable as a
contemplated by the Proposed Plan, funding relating to
substrate for most exterior systems and as roof cover
the Proposed Plan, conditions and other factors relating
board sold under the SECUROCK® brand name. The
to the effectiveness of the Proposed Plan, and asbestos
LEVELROCK® line of poured gypsum underlayments
litigation involving the Debtors is set forth in Part II,
provides surface leveling and enhanced sound
Item 7, Management’s Discussion and Analysis of
performance for residential, commercial and multi-
Results of Operations and Financial Condition, and Part
family installations. The Corporation produces a variety
II, Item 8, Financial Statements and Supplementary
of construction plaster products used to provide a
Data - Notes to Consolidated Financial Statements,
custom finish for residential and commercial interiors.
Note 2, Voluntary Reorganization Under Chapter 11,

4

Like SHEETROCK® brand gypsum wallboard, these The Corporation owns and operates seven paper
products provide aesthetic, sound-dampening, fire- mills located across the United States. Vertical
retarding and abuse-resistance value. Construction integration in paper ensures a continuous supply of
plaster products are sold under the trade names RED high-quality paper that is tailored to the specific needs
TOP®, IMPERIAL® and DIAMOND®. The Corporation of the Corporation’s wallboard production processes.
also produces gypsum-based products for agricultural The Corporation augments its paper needs through
and industrial customers to use in a number of purchases from outside suppliers. About 7% of the
applications, including soil conditioning, road repair, Corporation’s paper supply was purchased from such
fireproofing and ceramics. sources during 2005.

MANUFACTURING MARKETING AND DISTRIBUTION
North American Gypsum’s products are manufactured Distribution is carried out through LW Supply
at 42 plants located throughout the United States, Corporation (“LW Supply”), a wholly owned
Canada and Mexico. subsidiary of the Corporation, other specialty wallboard
Gypsum rock is mined or quarried at 14 company- distributors, building materials dealers, home
owned locations in North America. In 2005, these improvement centers and other retailers, and
locations provided approximately 70% of the gypsum contractors. Sales of gypsum products are seasonal in
used by the Corporation’s plants in North America. the sense that sales are generally greater from spring
Certain plants purchase or acquire synthetic gypsum through the middle of autumn than during the remaining
and natural gypsum rock from various outside sources. part of the year. Based on the Corporation’s estimates
Outside purchases or acquisitions accounted for 30% of using publicly available data, internal surveys and
the gypsum used in the Corporation’s plants. The gypsum wallboard shipment data from the Gypsum
Corporation’s geologists estimate that its recoverable Association, management estimates that during 2005
rock reserves are sufficient for more than 24 years of about 47% of total industry volume demand for gypsum
operation based on the Corporation’s average annual wallboard was generated by new residential
production of crude gypsum during the past five years construction, 39% of volume demand was generated by
of 9.7 million tons. Proven reserves contain residential and nonresidential repair and remodel
approximately 240 million tons. Additional reserves of activity, 8% of volume demand was generated by new
approximately 148 million tons are found on four nonresidential construction, and the remaining 6% of
properties not in operation. volume demand was generated by other activities such
About 26% of the gypsum used in the as exports and temporary construction.
Corporation’s plants in North America is synthetic
gypsum, which is a by-product resulting from flue gas COMPETITION
desulphurization carried out by electric generation or The Corporation accounts for more than 30% of the
industrial plants burning coal as a fuel. The suppliers of total gypsum wallboard sales in the United States. In
this kind of gypsum are primarily power companies, 2005, U.S. Gypsum shipped 11.3 billion square feet of
which are required to operate scrubbing equipment for wallboard, the highest level in its history. U.S. industry
their coal-fired generating plants under federal shipments (including imports) estimated by the Gypsum
environmental regulations. The Corporation has entered Association were a record 37.2 billion square feet.
into a number of long-term supply agreements that Competitors in the United States are: National Gypsum
provide for the acquisition of such gypsum. The Company, BPB (through its subsidiaries BPB Gypsum,
Corporation generally takes possession of the gypsum Inc. and BPB America Inc.), Georgia-Pacific
at the producer’s facility and transports it to its user Corporation, American Gypsum (a unit of Eagle
wallboard plants, by water where convenient using Materials Inc.), Temple-Inland Forest Products
ships or river barges, or by railcar or truck. The supply Corporation, Lafarge North America, Inc. and PABCO
of synthetic gypsum is continuing to increase as more Gypsum. Competitors in Canada include BPB Canada
power generation plants are fitted with desulphurization Inc., Georgia-Pacific Corporation and Lafarge North
equipment. Of the Corporation’s gypsum wallboard America, Inc. The major competitor in Mexico is Panel
plants, 48% use some or all synthetic gypsum in their Rey, S.A. Principal methods of competition are quality
operations. of products, service, pricing, compatibility of systems

5

and product design features. COMPETITION
The Corporation estimates that it is the world’s largest
Worldwide Ceilings manufacturer of ceiling grid. Principal competitors in
ceiling grid include WAVE (a joint venture between
Armstrong World Industries, Inc. and Worthington
BUSINESS
Worldwide Ceilings, which manufactures and markets Industries) and Chicago Metallic Corporation. The
interior systems products worldwide, includes USG Corporation estimates that it is the second-largest
Interiors, Inc. (“USG Interiors”), the international manufacturer/marketer of acoustical ceiling tile in the
interior systems business managed as USG world. Principal global competitors include Armstrong
International, and the ceilings business of CGC. World Industries, Inc., OWA Faserplattenwerk GmbH
Worldwide Ceilings is a leading supplier of interior (Odenwald), BPB America Inc. and AMF
ceilings products used primarily in commercial Mineralplatten GmbH Betriebs KG (owned by Gebr.
applications. The Corporation estimates that it is the Knauf Verwaltungsgellschaft KG). Principal methods
largest manufacturer of ceiling grid and the second- of competition are quality of products, service, pricing,
largest manufacturer/marketer of acoustical ceiling tile compatibility of systems and product design features.
in the world.
Building Products Distribution
PRODUCTS
Worldwide Ceilings manufactures ceiling tile in the BUSINESS
United States and ceiling grid in the United States, Building Products Distribution consists of LW
Canada, Europe and the Asia-Pacific region. It markets Supply, the leading specialty building products
both ceiling tile and ceiling grid in the United States, distribution business in the United States. In 2005,
Canada, Mexico, Europe, Latin America and the Asia- LW Supply distributed approximately 11% of all
Pacific region. Its integrated line of ceilings products gypsum wallboard in the United States, including
provides qualities such as sound absorption, fire approximately 32% of U.S. Gypsum’s wallboard
retardation and convenient access to the space above production.
the ceiling for electrical and mechanical systems, air
distribution and maintenance. USG Interiors’ MARKETING AND DISTRIBUTION
significant trade names include the AURATONE® and LW Supply was organized in 1971. It is a
ACOUSTONE® brands of ceiling tile and the DONN®, service-oriented organization that stocks a wide range
DX®, FINELINE®, CENTRICITEE®, CURVATURA® of construction materials and delivers less-than-
and COMPASSO® brands of ceiling grid. truckload quantities of construction materials to job
sites and places them in areas where work is being
done, thereby reducing the need for handling by
MANUFACTURING
Worldwide Ceilings’ products are manufactured at 15 contractors. LW Supply specializes in the distribution
plants located in North America, Europe and the Asia- of gypsum wallboard (which accounted for 50% of its
Pacific region. Principal raw materials used in the 2005 net sales), joint compound and other gypsum
production of Worldwide Ceilings’ products include products manufactured by U.S. Gypsum and others. It
mineral fiber, steel, perlite, starch and high-pressure also distributes products manufactured by USG
laminates. Certain of these raw materials are produced Interiors such as acoustical ceiling tile and grid as well
internally, while others are obtained from various as products of other manufacturers, including drywall
outside suppliers. metal, insulation, roofing products and accessories.
LW Supply leases approximately 90% of its facilities
from third parties. Typical leases are five years and
MARKETING AND DISTRIBUTION
Worldwide Ceilings’ products are sold primarily in include renewal options.
markets related to the construction and renovation of LW Supply remains focused on opportunities to
commercial buildings. Marketing and distribution are profitably grow its specialty business as well as
conducted through a network of distributors, optimize asset utilization. As part of its plan, LW
installation contractors, LW Supply locations and Supply acquired eight locations in 2005. As of
home improvement centers. December 31, 2005, LW Supply operated 192

6

locations in 36 states, compared with 186 locations and million, $17 million and $18 million in the years ended
183 locations as of December 31, 2004 and 2003, December 31, 2005, 2004 and 2003, respectively.
respectively.
ENERGY
Primary supplies of energy have been adequate, and no
COMPETITION
LW Supply competes with a number of specialty curtailment of plant operations has resulted from
wallboard distributors, lumber dealers, hardware stores, insufficient supplies. Supplies are likely to remain
home improvement centers and acoustical ceiling tile sufficient for projected requirements. Currently, energy
distributors. Competitors include Gypsum Management price swap agreements are used by the Corporation to
Supply with locations in the southern, central and hedge the cost of a substantial majority of purchased
western United States, Rinker Materials Corporation in natural gas.
the southeastern United States (primarily in Florida),
KCG, Inc. in the southwestern and central United SIGNIFICANT CUSTOMER
States, The Strober Organization, Inc. in the On a worldwide basis, The Home Depot, Inc. accounted
northeastern and mid-Atlantic states, and Allied for approximately 11% of the Corporation’s
Building Products Corporation in the northeastern, consolidated net sales in 2005, 2004 and 2003.
central and western United States. Principal methods of
competition are location, service, range of products and OTHER
pricing. Because orders are filled upon receipt, no operating
segment has any significant order backlog.
Executive Officers of the Registrant None of the operating segments has any special
working capital requirements.
See Part III, Item 10, Directors and Executive Officers Loss of one or more of the patents or licenses held
of the Registrant - Executive Officers of the Registrant by the Corporation would not have a major impact on
(as of February 14, 2006). the Corporation’s business or its ability to continue
operations.
Other Information No material part of any of the Corporation’s
business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election
RESEARCH AND DEVELOPMENT
The Corporation performs research and development at of the government.
the USG Research and Technology Innovation Center All of the Corporation’s products regularly require
(the “Research Center”) in Libertyville, Ill. Research improvement to remain competitive. The Corporation
team members provide product support and new also develops and produces comprehensive systems
product development for the operating units of the employing several of its products. To maintain its high
Corporation. With unique fire, acoustical, structural and standards and remain a leader in the building materials
environmental testing capabilities, the Research Center industry, the Corporation performs ongoing extensive
can evaluate products and systems. Chemical analysis research and development activities and makes the
and materials characterization support product necessary capital expenditures to maintain production
development and safety/quality assessment programs. facilities in good operating condition.
Development activities can be taken to an on-site pilot- In 2005, the average number of employees of the
plant level before being transferred to a full-size plant. Corporation was 14,100.
Research is also conducted at two satellite locations See Part II, Item 8, Financial Statements and
where industrial designers and fabricators work on new Supplementary Data - Notes to Consolidated Financial
ceiling grid concepts and prototypes. Statements, Note 16, Segments, for financial
In 2006, a new lab will be formed to give special information pertaining to operating and geographic
focus to innovation, further enhancing the research segments.
team’s commitment to the Corporation’s growth
initiative.
Research and development expenditures are
charged to earnings as incurred and amounted to $17

7

Available Information substantially diluted or cancelled in whole or in part.
Even if the Proposed Plan is confirmed, the
The Corporation maintains a website at www.usg.com Corporation’s payments to the asbestos personal
and makes available at this website its annual report on injury trust will vary substantially depending upon
Form 10-K, quarterly reports on Form 10-Q, current whether federal asbestos trust fund legislation is
reports on Form 8-K and all amendments to those enacted, or is enacted but found unconstitutional.
reports as soon as reasonably practicable after such Passage of such legislation is extremely speculative
material is electronically filed with or furnished to the and not within the control of the Corporation.
Securities and Exchange Commission (the “SEC”). If
you wish to receive a paper copy of any exhibit to the Pursuant to the Asbestos Agreement with the ACC and
Corporation’s reports filed with or furnished to the the Futures Representative, the Debtors expect to file a
SEC, such exhibit may be obtained, upon payment of Proposed Plan in February 2006 pursuant to which the
reasonable expenses, by writing to: J. Eric Schaal, Debtors propose to resolve their present and future
Corporate Secretary, USG Corporation, P.O. Box 6721, asbestos personal injury liabilities through the creation
Chicago, IL 60680-6721. You may read and copy any and funding of an asbestos personal injury trust under
materials the Corporation files with the SEC at the Section 524(g) of the Bankruptcy Code. If the Proposed
SEC’s Public Reference Room at 100 F Street, N.E., Plan is confirmed, all present and future asbestos
Washington, D.C. 20549. You may obtain information personal injury claims against the Debtors would be
on the operation of the Public Reference Room by channeled to the trust, and no individual or entity may
calling the SEC at 1-800-SEC-0330. thereafter bring an asbestos personal injury claim
against Debtors. The amount that the Debtors must pay
to the Section 524(g) asbestos personal injury trust
Item 1a. RISK FACTORS would depend upon whether national legislation
creating a trust for payment of asbestos personal injury
claims is enacted into law by the 10th day after final
Our business, operations and financial condition are
adjournment of the 109th Congress. If the legislation is
subject to various risks and uncertainties. You should
carefully consider the risks and uncertainties described enacted by that date, the Debtors’ funding obligation to
below, together with all of the other information in this the Section 524(g) trust would be $900 million. If such
annual report on Form 10-K and in other documents legislation is not enacted before that date, or is enacted
that we file with the SEC, before making any investment but held unconstitutional, the Debtors’ funding
decision with respect to our securities. If any of the obligation to the Section 524(g) trust would total $3.95
following risks or uncertainties actually occur or billion.
develop, our business, financial condition, results of The Asbestos Agreement is subject to numerous
operations and future growth prospects could change. conditions. One of the conditions of the Asbestos
Under these circumstances, the trading prices of our Agreement is that the Proposed Plan be confirmed and
securities could decline, and you could lose all or part effective no later than August 1, 2006. There is no
of your investment in our securities. guarantee that the Proposed Plan will be confirmed or
become effective. If the Proposed Plan is not
The Debtors expect to file a Proposed Plan to resolve confirmed, the Debtors will remain in chapter 11, the
their present and future asbestos personal injury amount of Debtors’ present and future asbestos
liabilities pursuant to an agreement with the Official personal injury liabilities will be unresolved, and the
Committee of Asbestos Personal Injury Claimants (or terms and timing of any plan of reorganization
ACC) and the Futures Representative. However, there ultimately confirmed in the Debtors’ Chapter 11 Cases
is no guarantee that the Proposed Plan will be are unknown. In such a situation, it cannot be known
confirmed. If the Proposed Plan, or a substantially what amount will be necessary to resolve Debtors’
similar plan, is not confirmed, the interests of the present and future asbestos personal injury liabilities,
Debtors’ creditors and stockholders may be how the plan of reorganization ultimately approved will
significantly and adversely affected by any plan of treat other pre-petition claims, whether there will be
reorganization ultimately confirmed, and the interests sufficient assets to satisfy Debtors’ pre-petition
of the Corporation’s stockholders may be liabilities, and what impact any plan of reorganization

8

Corporation’s ability to continue as a going concern.
ultimately confirmed may have on the value of the
Our plans concerning this matter also are described in
shares of the Corporation’s common stock or other
Note 2. The financial statements do not include any
securities. The interests of the Corporation’s
adjustments that might result from the outcome of this
stockholders may be substantially diluted or cancelled
uncertainty.
in whole or in part.
Our historical financial information will not be
The Asbestos Agreement does not resolve asbestos
indicative of our financial performance following
property damage claims. Currently, approximately 900
approval of any plan of reorganization by the
proofs of claim alleging asbestos property damage are
Bankruptcy Court. Under American Institute of
pending. Under the Proposed Plan, asbestos property
Certified Public Accountants Statement of Position
damage claims would be separately resolved in the
90-7, “Financial Reporting by Entities in
bankruptcy proceedings or other forum, where
Reorganization under the Bankruptcy Code,” all of our
appropriate.
outstanding debt is classified as liabilities subject to
See Part II, Item 7, Management’s Discussion and
compromise, and interest expense on this debt has not
Analysis of Results of Operations and Financial
been accrued or recorded since June 25, 2001 (the
Condition, and Part II, Item 8, Financial Statements and
“Petition Date”). From the Petition Date through
Supplementary Data - Notes to Consolidated Financial
December 31, 2005, contractual interest expense not
Statements, Note 2, Voluntary Reorganization Under
accrued or recorded on pre-petition debt totaled $337
Chapter 11, and Note 18, Litigation, for additional
million. This calculation excludes the impact of any
information on the bankruptcy proceeding, including
compounding of interest on unpaid interest that may be
the potential impacts of asbestos litigation on those
payable under the relevant contractual obligations, as
proceedings.
well as any interest that may be payable under a plan of
reorganization to trade or other creditors that are not
As a result of the Chapter 11 Cases, our historical
otherwise entitled to interest under the express terms of
financial information will not be indicative of our
their claims.
future financial performance.
In connection with the Chapter 11 Cases and the
As a result of the Chapter 11 Cases, our capital development of any plan of reorganization, it is also
structure may be significantly changed by any plan of possible that additional restructuring and similar
reorganization. Under fresh start accounting rules that charges may be identified and recorded in future
may, or may not, apply to us upon the effective date of periods. Such charges could be material to the
any plan of reorganization, our assets and liabilities consolidated financial position and results of operations
would be adjusted to fair values and retained earnings of the Corporation in any given period.
would be restated to zero. Accordingly, if fresh start
accounting rules apply, our financial condition and Debtor U.S. Gypsum has significant asbestos personal
results of operations following our emergence from injury liabilities, and the ACC and Futures
Chapter 11 would not be comparable to the financial Representative claim that other Debtors have
condition or results of operations reflected in our significant asbestos personal injury liabilities as well.
historical financial statements. The Proposed Plan will establish the possible amount
The accompanying consolidated financial that Debtors would be required to pay into a Section
statements have been prepared assuming that the 524(g) asbestos personal injury trust to satisfy all
Corporation will continue as a going concern. As liabilities for present and future asbestos personal
discussed in Part II, Item 8, Financial Statements and injury claims against Debtors, including claims
Supplementary Data - Notes to Consolidated Financial against Debtors relating to A.P. Green Refractories,
Statements, Note 2, Voluntary Reorganization Under Inc., a former subsidiary of U.S. Gypsum and the
Chapter 11, there is significant uncertainty as to the Corporation. However, if the Proposed Plan is not
resolution of our asbestos litigation, which, among confirmed, the amount of the Debtors’ asbestos
other things, may lead to possible changes in the personal injury liabilities will not be resolved and will
composition of our business portfolio, as well as be subject to substantial dispute and uncertainty.
changes in the ownership of the Corporation. This
uncertainty raises substantial doubt about the

9

Our future indebtedness could adversely affect our
As a result of the Asbestos Agreement and Proposed
financial condition.
Plan, in the fourth quarter of 2005, the Corporation
recorded a pretax charge of $3.1 billion ($1.935 billion,
The optimum level of future indebtedness will be
or $44.36 per share, after tax) for all asbestos-related
contingent on the capital structure of the Corporation
claims, increasing the reserve for all asbestos-related
under a plan of reorganization or in connection with
claims to $4.161 billion. This reserve includes the
developments thereafter. Our indebtedness could have
Debtors’ obligations to fund asbestos personal injury
significant adverse effects on our business. Such
claims as will be set forth in the Proposed Plan
adverse effects could include, but are not limited to, the
(recorded at $3.95 billion on the assumption that the
following:
Proposed Plan is confirmed but that the FAIR Act or
substantially similar legislation is not enacted as set
• make it more difficult for us to satisfy our debt
forth in the Proposed Plan). This reserve also includes
service obligations;
the Debtors’ estimate of the cost of resolving asbestos
property damage claims filed in its chapter 11
• increase our vulnerability to adverse economic
proceedings, including estimated legal fees associated
and industry conditions;
with those claims; and the Debtors’ estimate of
resolving other asbestos-related claims and legal
• require us to dedicate a substantial portion of
expenses associated with those claims.
our cash flows from operations to payments
If the Proposed Plan is not confirmed, the amount
on our indebtedness, thereby reducing the
of Debtors’ asbestos personal injury liabilities will not
availability of our cash flows to fund working
be resolved and will likely be subject to substantial
capital, capital expenditures and other general
dispute and uncertainty. In that event, if the amount of
operating requirements;
such liabilities is not resolved through negotiation or
through federal asbestos legislation, such liabilities
• limit our flexibility in planning for, or reacting
likely will be determined by the Court through an
to, changes in our business and industry,
estimation proceeding in the Chapter 11 Cases. The
which may place us at a disadvantage
ACC and the Futures Representative have stated in a
compared to our competitors with stronger
court filing that they estimate that the net present value
liquidity positions, thereby hurting our results
of the Debtors’ liability for present and future asbestos
of operations and ability to meet our debt
personal injury liabilities is approximately $5.5 billion
service obligations with respect to our
and that the Debtors are insolvent. The Debtors have
outstanding indebtedness; and
stated that they believe they are solvent if their asbestos
liabilities are fairly and appropriately valued. If the
• limit, along with the financial and other
Proposed Plan is not confirmed, the amount of Debtors’
restrictive covenants in our outstanding
asbestos personal injury liabilities could ultimately be
indebtedness, our ability to borrow additional
determined to be significantly different from the
funds.
currently accrued reserve. This difference could be
material to the Corporation’s financial position, cash
Our businesses are cyclical in nature, and prolonged
flows and results of operations in the period recorded.
periods of weak demand or excess supply may have a
See Part II, Item 7, Management’s Discussion and
material adverse effect on our business, financial
Analysis of Results of Operations and Financial
condition and operating results.
Condition, and Part II, Item 8, Financial Statements and
Supplementary Data - Notes to Consolidated Financial
Our businesses are cyclical in nature and sensitive to
Statements, Note 2, Voluntary Reorganization Under
changes in general economic conditions, including, in
Chapter 11, and Note 18, Litigation, for additional
particular, conditions in the housing and
information on the bankruptcy proceeding and litigation
construction-based markets. Prices for our products and
matters.
services are affected by overall supply and demand in
the market for our products and for our competitors’
products. In particular, market prices of building

10

performance, and develop our manufacturing and
products historically have been volatile and cyclical,
distribution capabilities.
and we, like other producers, may have limited ability
We also compete through our use of information
to control the timing and amount of pricing changes for
technology and expect to continue to improve our
our products. Prolonged periods of weak demand or
systems. We need to provide customers with timely,
excess supply in any of our businesses could negatively
accurate, easy-to-access information about product
affect our revenues and margins and harm our liquidity,
availability, orders and delivery status using state-of-
financial condition and operating results.
the-art systems in order to maintain our market share.
The markets that we serve, including, in particular,
While we may use manual processes for short-term
the housing and construction-based markets, are
failures and disaster recovery capability, a prolonged
significantly affected by the movement of interest rates.
disruption of systems or other failure to meet
Significantly higher interest rates could have a material
customers’ expectations for the capabilities and
adverse effect on our business and results of operations.
reliability of these systems could adversely affect our
Our business is also affected by a variety of other
results of operations, particularly during any prolonged
factors beyond our control, including, but not limited
period of disruption.
to, employment levels, foreign currency exchange rates,
We intend to continue making investments in
office vacancy rates, unforeseen inflationary pressures
research and development to develop new and
and consumer confidence. Since our operations occur in
improved products and more-efficient production
a variety of geographic markets, our businesses are
methods. We believe we need to continue to develop
subject to the economic conditions in each such
new products and improve our existing products and
geographic market. General economic downturns or
production efficiency in order to maintain our market
localized downturns in the regions where we have
leadership position. A failure to continue making such
operations could have a material adverse effect on our
investments could restrain our revenue growth and
business, financial condition and operating results.
harm our operating results and market share. In
The seasonal nature of our businesses may adversely addition, even if we are able to invest sufficient
affect our quarterly financial results. resources in research and development, these
investments may not generate net sales that exceed our
A majority of our business is seasonal with peak sales expenses, generate any net sales at all or result in any
typically occurring from spring through the middle of commercially acceptable products.
autumn. Quarterly results have varied significantly in
the past and are likely to vary significantly from quarter If costs of key raw materials or employee benefits
to quarter in the future. Such variations could have a increase, or the availability of key raw materials
negative impact on our financial performance and the decreases, our cost of products sold will increase, and
trading prices of our common stock or our other our operating results may be materially and adversely
securities. affected.

We face competition in each of our businesses. If we The cost and availability of raw materials and energy
cannot successfully compete in the marketplace, our are critical to our operations. For example, we use
business, financial condition and operating results substantial quantities of gypsum, wastepaper, mineral
may be materially and adversely affected. fiber, steel, perlite, starch and high pressure laminates.
The cost of these items has been volatile, and
We face competition in each of our operating segments. availability has sometimes been limited. We source
Principal methods of competition include quality of some of these materials from a limited number of
products, service, location, pricing, compatibility of suppliers, which increases the risk of unavailability.
systems, range of products and product design features. Furthermore, we may not be able to pass increased raw
Aggressive actions by our competitors could lead to materials prices on to our customers if the market or
lower pricing by us in order to compete. To achieve existing agreements with our clients do not allow us to
and/or maintain leadership positions in key product raise the prices of our finished products. If price
categories, we must continue to develop brand adjustments significantly trail the increase in raw
recognition and loyalty, enhance product quality and materials prices or if we cannot effectively hedge

11

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