125 South Franklin Street
Chicago, Illinois 60606-4678
Telephone: (312) 606-4000
Fax: (312) 606-4093
Incorporated: 1901 as U.S.G. Company
Sales: $2.87 billion (1997)
Stock Exchanges: New York Midwest
Ticker Symbol: USG
SICs: 3275 Gypsum Products; 3296 Mineral Wool; 3299 Nonmetallic Mineral Products, Not Elsewhere Classified; 6719 Offices of Holding Companies, Not Elsewhere Classified
USG, its businesses and employees are: improving and expanding manufacturing to lower costs, meet demand and improve service; expanding distribution; providing new and better services; introducing new and improved products that anticipate customer and industry needs; focusing marketing efforts on key customer groups and growth segments of the construction market; expanding USG's presence in international markets; increasing efficiency; keeping USG work places safe; and working to sustain the environment and the communities in which the corporation operates, all with the goals of increasing USG's earnings and adding to the value of this enterprise.
Gypsum products are the principal goods manufactured by USG Corporation, the largest maker of such products in the world. The manufacture of gypsum is a highly competitive and price-sensitive undertaking, with easy entry and exit from the field. As a result of these conditions USG Corporation--or the U.S.G. Company, as it was originally incorporated--has exerted substantial influence in the building-supplies field because of its market size. Among USG's operating companies are the world's largest maker of gypsum wallboard, the leading distributor of gypsum wallboard in the United States, the world's largest manufacturer of ceiling suspension grid, and the second largest producer of ceiling tile in the world (trailing only Armstrong World Industries, Inc.).
Gypsum Production in the United States
Understanding gypsum production methods is essential to an understanding of USG's corporate character. Gypsum, or hydrous calcium sulphate, is, in pure form, a white mineral commonly called alabaster. Large quantities of gypsum exist throughout North America. One of the first uses for gypsum was as a fertilizer. Gypsum is made suitable for commercial use by a process called calcination, which involves heating the mineral to remove approximately three-quarters of its water. Calcined gypsum, or plaster of Paris, can recrystallize into any shape with the simple addition of water. In the 1890s gypsum manufacturers perfected a method of strengthening plaster by adding a retarder, which controlled the setting time, thus creating a viable competitor to traditional lime plaster. Because gypsum was plentiful, and available at a relatively low price, and because the manufacturing process was so simple, new firms flooded the market and placed constant downward pressure on prices.
In the early years of the 20th century, several key businesses emerged as gypsum-product leaders. The English family of Nebraska; C.G. Root, Emil Durr, S.Q. Fulton, and Charles Pullen of Wisconsin; Waldo Avery and B.W. McCausland of Michigan; and, lastly, the largest manufacturer in the United States, J.B. King of New York, were all important gypsum processors. By 1901 several attempts to organize some of the industry's producers into a corporate combination had failed.
Consolidation in 1901
That year 35 gypsum companies consolidated into the U.S.G. Company. The participating firms traded their assets for securities and acquired a $200,000 loan. Directors of the new company, which controlled about 50 percent of U.S. gypsum output, chose B.W. McCausland as its first president. The company was based in Chicago.
Between 1901 and 1905 each director remained largely concerned with the success of his own plants. This polarization ended in 1905, when McCausland was replaced as president by Sewell Avery, his partner's son. Avery's tenure as president would extend 35 years, until November 12, 1936. Avery then served as chairman, between 1937 and 1951. He and his brother, Waldo Avery, were the company's largest stockholders, controlling about 3.6 percent of the company's stock. During Sewell Avery's presidency, his character permeated the company's culture. Avery was a conservative businessman who had the last word in virtually all matters. In 1931, when Montgomery Ward and Company was on the verge of financial collapse, Avery became chairman of the board of that company, a position he held until 1955.
Avery had managed his father's firm, the Alabaster Company, since 1894. When U.S.G. absorbed Alabaster, he became a U.S.G. director and its Buffalo, New York, sales manager. Avery built a strong research division after his promotion to president from his post as Cleveland sales manager. Staffed by engineers and chemists, the new division sought to find new uses for gypsum. The U.S.G. Company, reincorporated in 1920 as the United States Gypsum Company (US Gypsum), has maintained a market share ranging between 50 percent in 1901 and 33 percent in the late 1990s. In 1909 Avery set out to diversify the company with one of his first acquisitions, the Sackett Plasterboard Company of New York. Augustine Sackett had invented gypsum wallboard and the specialized machinery to make it. This basic wallboard quickly became one of US Gypsum's major products. Wallboard, a layer of gypsum plaster sandwiched between two pieces of paper, is a convenient building material with strong fireproofing and insulating qualities.
US Gypsum improved on Sackett's concept and patented a wallboard that had paper folded over its edges to seal in plaster residue, which often escaped during the wallboard's installation. In 1927 CertainTeed Products Corporation introduced its own wallboard, which did not have enclosed edges, and challenged US Gypsum for market share. CertainTeed's managers believed that their less expensive version had a good chance of success. The result was a price contest between the two companies, beginning in 1927 and ending in 1929. US Gypsum had a much larger market than CertainTeed. It, therefore, was able to sell wallboard at a loss only in those markets that CertainTeed also served. In all other markets US Gypsum kept prices up. CertainTeed, however, was forced to sell its product at a loss in all its markets. By 1929 CertainTeed was beaten. The smaller company was licensed to produce US Gypsum's patented wallboard and was forced to sell the product at the price set by US Gypsum. This incident marked the start of US Gypsum's unrivaled leadership in gypsum materials.
Weathering the Great Depression
In 1928 Avery successfully predicted a recession that eventually became the Great Depression. Avery's instinct for predicting business cycles helped US Gypsum get through the Depression without a single year of losses; this situation was quite unusual for a business involved in the cyclical building industry. Avery moved to protect the company, in part by ordering the construction of new plants closer to East Coast metropolitan centers. Since gypsum is a high-bulk, relatively low-value commodity, transportation costs continue to have a large effect on pricing.
US Gypsum's greatest advantage was size. The company was able to use its size to keep manufacturing and transportation costs down and to compete more effectively. Three specific policies, set by Avery, helped US Gypsum to counter the Depression and maintain its number one position in the industry. According to the February 1936 issue of Fortune, diffusion of production facilities allowed US Gypsum to keep transportation costs, and thus total costs down. US Gypsum was also vertically integrated, from mine floor to retailer, and employed highly mechanized techniques when possible. The third element in US Gypsum's success, according to Fortune, was a devotion to product diversification. US Gypsum marketed a broad cross section of building materials. Broken down into individual units these products would have been prohibitively expensive to transport. Combined, however, transportation costs were much more reasonable.
Avery took advantage of the company's strong cash position at the beginning of the Depression to purchase nearly a dozen building material firms weakened by the economic downturn. In 1930 US Gypsum bought into the insulation board business with the purchase of the Greenville Insulating Board Corporation of Greenville, Mississippi. Also in 1930, it bought into the metal-lath business with the purchase of the Youngstown Pressed Steel Company of Warren, Ohio, and the metal-lath division of Northwestern Expanded Metal Company. Avery also made US Gypsum, which had already been in the lime business for 15 years, a leading lime producer in 1930 with the acquisition of lime-producing firms such as the Farnam Cheshire Lime Company. Producers of mineral wool and asphalt roofing acquired in 1933, and asbestos-cement siding acquired in 1937, rounded out the Depression-era acquisitions. The company countered the downturn in new construction by exploiting the remodeling and industrial markets. During the Depression, 15 percent of sales were to industrial users. Glassmakers used gypsum as a packing material. Cement producers used it to retard setting, and moviemakers used flaked gypsum as snow.
The 1940 Price-Fixing Suit
In 1940, a new problem confronted the company's management when the U.S. Justice Department filed suit against US Gypsum and six other wallboard manufacturers, charging them with price fixing. The claim stemmed from US Gypsum's 1929 cross-licensing of its patented wallboard. The agreement set prices at which the wallboard must be sold. In 1950 the Supreme Court forced US Gypsum and its six licensees--who produced all of the wallboard sold east of the Rocky Mountains&mdashø cease setting prices, and US Gypsum was enjoined from exercising its patent-licensing privilege.
Between 1946 and 1949 US Gypsum invested over $51 million in expansion under the direction of William L. Keady, who had become president in 1942. In 1949, however, Chairman Avery predicted another depression--incorrectly--and began to rein in expansion. Keady resigned as a result of Avery's intervention. Although there was a slight recession in 1949, the company did not step up capital spending again until 1954. In May 1951, when Sewell Avery resigned as US Gypsum's chairman and CEO, his replacement, Clarence H. Shaver, inherited a company that had a capitalized value of $61 million and produced more than 75 commodities in 47 mines or factories. Avery's imprint was an extreme conservatism marked by strong centralized control, rigid cost-cutting practices, and few benefits for employees.
Expansion in Mid-Century
Toward the end of the 1950s US Gypsum extended its expansion internationally. One of its principal discoveries during the decade was the gypsum deposit in Mexico's San Luis Potosi State. This find, one of the world's largest, was conservatively estimated to contain at least 300 million tons of commercial deposits.
In the 1960s US Gypsum became the first major U.S. corporation to undertake privately funded housing renovation on a large scale. The highly publicized project began in 1964, when US Gypsum purchased six adjoining tenements in the East Harlem Section of New York City. US Gypsum paid $9,125 to renovate each unit; the cost of constructing new units averaged $22,500. US Gypsum's president, Graham J. Morgan, saw these projects as an opportunity to get in on the ground floor of a potential $20 billion market. Morgan felt the renovation would open up because of the Federal Housing Administration's willingness to provide financing for such projects. By 1969 the company had completely remodeled 32 buildings in New York, Cleveland, Chicago, and Detroit.
In 1973 US Gypsum settled a class-action civil antitrust suit brought against it by wallboard users and buyers. Settlement of those cases, which alleged price fixing, cost US Gypsum $28 million. This case led to a criminal indictment of US Gypsum and three competitors in 1973. The criminal trial eventually found its way to the Supreme Court, which ordered a new trial, and in 1980 US Gypsum settled the case, agreeing to pay $2.6 million in taxes on deductions from earlier civil antitrust judgments.
On January 1, 1985, a holding company, USG Corporation (USG), was created, and US Gypsum became the largest of the holding company's nine operating subsidiaries. Chairman and CEO Edward W. Duffy reportedly formed the holding company to protect the bulk of company operations from asbestos litigation against US Gypsum. Asbestos had been a standard additive in wallboard manufacture for decades. US Gypsum had already begun to face property damage suits in 1984 with a $675,000 award to a South Carolina school district.
1980s Takeover Battles
In November 1986 the Belzberg brothers of Canada attempted a hostile takeover of USG. USG immediately instituted a plan to buy back 20 percent of its common stock in an effort to fend off the takeover. By December 1986, however, USG had purchased Samuel, William, and Hyman Belzberg's 4.9 percent stake, for $139.6 million. The Belzberg family's profits on the transaction were in excess of $25 million.
In 1987 USG acquired DAP Inc., maker of caulking and sealants, for $127 million. In October of that year a partnership led by Texans Cyril Wagner, Jr., and Jack E. Brown's Desert Partners attempted to gain control of the company. Wagner and Brown's main business venture was a Midland, Texas, oil and gas partnership with secondary real estate operations. They purchased their 9.83 percent stake in USG as USG tried to recover financially from the Belzberg takeover attempt. In April 1988 a federal court refused to block USG's poison-pill 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 Co.) and Marlite (to Commercial and Architectural Products Inc.). In September 1991 USG sold DAP to U.K.-based Wassall plc for $90 million.
"Prepackaged" Bankruptcy in 1993
These moves proved inadequate, however, as USG's management had not anticipated the depressed state of the housing market in the late 1980s and early 1990s. With revenues declining and the company posting a net loss for 1990, USG defaulted on $40 million in loans in 1991. USG--led by CEO Eugene B. Connolly starting in January 1990--attempted to reorganize outside of bankruptcy court through negotiations with its lenders. Finally, in March 1993 USG was forced to declare Chapter 11 bankruptcy, although it quickly emerged only two months later, following the implementation of a "prepackaged" plan of reorganization. Banks and bondholders ended up owning 97 percent of the common stock of USG, in exchange for the elimination of $1.4 billion in debt. The company was also able to reduce its annual interest payments by $200 million.
USG emerged from bankruptcy with a still high debt load of $1.56 billion, and set a goal of reducing that to $650 million within five years. In 1994 the housing market--and USG's future outlook--had improved enough to enable the company to raise $224 million through a stock offering, the proceeds of which were used to pay down debt. Connolly retired in early 1996, replaced as chairman and CEO by William C. Foote. Later that year USG sold its insulation manufacturing operation. The company returned to profitability in 1996, posting net income of $15 million on net sales of $2.59 billion.
The following year was even better, as sales hit $2.87 billion, while net income increased almost tenfold, to $148 million. Improving economic conditions played a big role in USG's turnaround as did heavy capital expenditures that aimed at achieving organic, profitable growth. From the company's emergence out of bankruptcy through year-end 1997, USG had spent $532 million in capital expenditures, including the beginning of construction in mid-1997 of a new $110 million 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 Fibrerock brand. In November of that year USG purchased a 60 percent stake in Zhongbei Building Material Products Company, China's largest ceiling grid company. By the end of 1997 total debt had been reduced to $620 million, marking the achievement of the firm's debt reduction target.
Throughout the 1990s the company continued to be involved in litigation relating to personal injury suits and other claims based on asbestos-containing products, which were sold by USG from the 1930s through 1977. The claims were being paid by insurance income under the 1985 Wellington Agreement on asbestos-related claims. In 1988 USG and 19 other former producers of asbestos-containing products replaced the Wellington Asbestos Claims Facility with the Center for Claims Resolution (CCR), which continued in operation through the late 1990s. A class-action lawsuit resulted in a $1.3 billion agreement with the CCR in 1993, but in June 1997 the U.S. Supreme Court invalidated the settlement, finding that the class was defined improperly. USG estimated in 1997 that it was the defendant in about 73,000 personal injury cases and that the average settlement would be about $1,600.
USG had itself sued nearly two dozen insurance companies who had refused to cover these claims. By 1997 the company had reached settlements with a number of these insurers, resulting in about $325 million in coverage for the company. USG expected to receive substantial additional payments--between $200 million and $265 million&mdash the remaining suits reached settlements.
During 1998 USG continued to spend heavily on capital improvement projects and the construction of new plants. In April the company announced it would build a new $112 million wallboard factory in Aliquippa, Pennsylvania. In September USG announced plans to construct two new, state-of-the-art wallboard plants in Plaster City, California, and Rainier, Oregon, for a total cost of $225 million. Replacing older facilities with modern, low-cost plants aided USG's overall productivity. With the economic boom of the mid- to late 1990s making for an exceptionally strong building industry, and with the company's debt load finally eased, USG was in its best financial shape in years. Perhaps most indicative of its recovery was USG's September 1998 announcement that it would pay a quarterly dividend for the first time in a decade, as well as repurchase as many as five million of its common shares.
Principal Subsidiaries: United States Gypsum Company; USG Interiors, Inc.; L&W Supply Corporation; USG International, Ltd.; USG Foreign Investments, Ltd.; USG Interiors International, Inc.; USG Funding Corporation; La Mirada Products Co., Inc.; USG Foreign Sales Corporation; Gypsum Engineering Company; Alabaster Assurance Company, Ltd.; USG Interiors Australia Pty. Ltd. (Australia); USG Interiors (Donn) S.A. (Belgium); USG Interiors (Europe) S.A. (Belgium); USG Interiors Coordination Centre S.A. (Belgium); USG Belgium Holdings S.A.; Gypsum Transportation Limited (Bermuda); CGC Inc. (Canada); USG Canadian Mining Ltd. (Canada); USG Manufacturing Worldwide, Ltd. (Caymans); Shenzhen USG Zhongbei Building Materials Co. (China; 60%); USG France S.A.; Donn Products GmbH (Germany); USG Interiors Eastern Manufacturing GmbH (Germany); USG Interiors East Sales GmbH (Germany); USG Interiors (Far East) SDN BHD (Malaysia); Yeso Panamericano, S.A. de C.V. (Mexico); USG (Netherlands) B.V.; Alabaster Engineering (Nederland) B.V. (Netherlands); Red Top Technology (Nederland) B.V. (Netherlands); USG Interiors Pacific Ltd. (New Zealand); Panama Gypsum Company; USG Asia Pacific Holdings Pty. Ltd. (Singapore); USG (U.K.) Ltd.
Principal Operating Units: North American Gypsum; Worldwide Ceilings.
Duff, Christina, "Costly Recapitalization Drives USG Corp. to the Wall," Wall Street Journal, June 3, 1992, p. B4.
Gilbert, Nick, "USG: Now a Value Play," Financial World, May 9, 1995, p. 26.
Greising, David, "USG's Remodeling May Mean Gutting the House," Business Week, January 21, 1991, pp. 54-55.
"Gyp," Fortune, February 1936.
Miller, James P., "USG Modifies 'Prepackaged' Chapter 11 Plan," Wall Street Journal, January 25, 1993, p. A11.
Saporito, Bill, "The Benefits of Bankruptcy," Fortune, July 13, 1993, p. 98.
Taub, Stephen, "The 1980s Legacy Still Stalks USG," Financial World, August 21, 1990, p. 11.
"U.S. Gypsum: No Nonsense," Fortune, September 1955.
Source: International Directory of Company Histories, Vol. 26. St. James Press, 1999.