CURRENCY IMPACT
Currency impacts on consolidated and segment results have been derived by translating current period results at the
quarter-to-date
average foreign currency rates for the
quarter ended March 31, 2016
.
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per-share data)
|
2017
|
|
2016
|
|
$ Favorable (Unfavorable)
|
|
% Favorable (Unfavorable)
|
Three months ended March 31:
|
|
|
|
|
|
|
|
Net sales
|
$
|
767
|
|
|
$
|
747
|
|
|
$
|
20
|
|
|
3
|
%
|
Cost of products sold
|
603
|
|
|
566
|
|
|
(37
|
)
|
|
(7
|
%)
|
Gross profit
|
164
|
|
|
181
|
|
|
(17
|
)
|
|
(9
|
)%
|
Selling and administrative expenses
|
73
|
|
|
68
|
|
|
(5
|
)
|
|
(7
|
)%
|
Recovery of receivable
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
(100
|
)%
|
Operating profit
|
91
|
|
|
116
|
|
|
(25
|
)
|
|
(22
|
)%
|
Income from equity method investments
|
13
|
|
|
7
|
|
|
6
|
|
|
86
|
%
|
Interest expense
|
(20
|
)
|
|
(40
|
)
|
|
20
|
|
|
50
|
%
|
Interest income
|
1
|
|
|
2
|
|
|
(1
|
)
|
|
50
|
%
|
Loss on extinguishment of debt
|
—
|
|
|
(2
|
)
|
|
2
|
|
|
100
|
%
|
Other (expense) income, net
|
(1
|
)
|
|
3
|
|
|
(4
|
)
|
|
*
|
|
Income before continuing operations before income taxes
|
84
|
|
|
86
|
|
|
(2
|
)
|
|
(2
|
%)
|
Income tax expense
|
(29
|
)
|
|
(26
|
)
|
|
(3
|
)
|
|
(12
|
)%
|
Income from continuing operations
|
$
|
55
|
|
|
$
|
60
|
|
|
(5
|
)
|
|
(8
|
%)
|
Income from discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
7
|
|
|
(7
|
)
|
|
(100
|
%)
|
Net income
|
$
|
55
|
|
|
$
|
67
|
|
|
$
|
(12
|
)
|
|
(18
|
%)
|
Diluted earnings per share - net income
|
$
|
0.37
|
|
|
$
|
0.46
|
|
|
$
|
(0.09
|
)
|
|
(20
|
%)
|
|
|
|
|
|
|
|
|
*not meaningful
|
|
|
|
|
|
|
|
NET SALES
Consolidated net sales for the
first quarter of 2017
increased
$20 million
, or 3%, from the
first quarter of 2016
. This reflected higher net sales for our Gypsum segment due primarily to higher average selling price offset by a small decrease in net sales from our Ceilings segment due to lower volumes. Sales for our Gypsum segment increased
3%
which reflected higher average selling price of gypsum wallboard and increased shipments of joint compound offset by lower volumes of gypsum wallboard. The decrease in net sales of
1%
for our Ceilings segment was driven by decreased shipments of both ceiling grid and ceiling tile. On a consolidated basis for the comparative periods, the impact of foreign currency translation was not material.
GROSS PROFIT
Gross profit for the
first quarter of 2017
decreased
$17 million
, or
9%
, compared with the
first quarter of 2016
. Gross profit as a percentage of net sales was
21.4%
for the
first quarter of 2017
, compared with
24.2%
for the
first quarter of 2016
. The decrease reflected lower margins in both our Gypsum and Ceilings segments due to an increase in manufacturing costs. The decrease in gross margin for our Gypsum segment was driven primarily by increased per unit costs for Gypsum products due to higher average price of waste paper and synthetic gypsum and higher per unit costs due to lower volumes. The decrease in gross margin for our Ceilings segment also reflected higher per unit costs for both ceiling grid and ceiling tile due to lower volumes.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled
$73 million
in the
first quarter of 2017
compared to
$68 million
in the
first quarter of 2016
. As a percentage of net sales, selling and administrative expenses increased to
9.5%
for the
first quarter of 2017
from
9.1%
for the
first quarter of 2016
. The increase as a percentage of net sales reflected higher costs for compensation, marketing and services, including those in support of growth platforms.
RECOVERY ON RECEIVABLE
In the first quarter of 2016, we received the remaining payments under a settlement agreement with our former trading partner of which $3 million represented a recovery of a previously deemed uncollectible receivable. The remaining payments received under the settlement agreement were recorded in "Interest income" and "Other (expense) income, net."
INCOME FROM EQUITY METHOD INVESTMENTS
Income from equity method investments, primarily UBBP, in the
first quarter of 2017
was
$13 million
, an increase of
$6 million
, or 86% from the
first quarter of 2016
. This reflected improved operating results for UBBP due to higher margins in South Korea and Australia offset by an increase in selling and administrative expenses. The increase also reflected favorable currency impact of $1 million.
INTEREST EXPENSE
Interest expense was
$20 million
in the
first quarter of 2017
, down
$20 million
, or
50%
, from the
first quarter of 2016
. The decrease in interest expense reflected lower debt levels.
LOSS ON EXTINGUISHMENT OF DEBT
In the
first
quarter of 2016, we recorded a loss of $2 million on the extinguishment of debt, including premiums, in connection with the open market purchases of the 6.3% Notes and write-off of deferred financing fees. See Note
6
to the condensed consolidated financial statements for additional information.
OTHER (EXPENSE) INCOME, NET
In the
first quarter of 2017
, we recorded
$1 million
of net other expense which primarily reflected net losses on foreign currency transactions. The $3 million of net other income recorded in the
first quarter of 2016
was due primarily to the receipt of payments in conjunction with a settlement agreement with our former trading partner of which $4 million was recorded as other income. See Note
15
to the condensed consolidated financial statements for additional information.
INCOME TAX EXPENSE
We recorded income tax expense of
$29 million
in the
first quarter of 2017
from federal, foreign, state and local jurisdictions. Our effective tax rate was
34.5%
for the
first quarter of 2017
. In the
first quarter of 2016
, we recorded income tax expense of
$26 million
resulting in an effective tax rate of
30.2%
.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations of $7 million reflected the results of L&W for the first quarter of 2016.
Segment Results of Operations
GYPSUM
Net sales and operating profit (loss) for the businesses comprising our Gypsum segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31:
|
|
|
|
|
|
Favorable (Unfavorable)
|
(millions)
|
2017
|
|
2016
|
|
$
|
|
%
|
Net sales
|
|
|
|
|
|
|
|
United States
|
$
|
555
|
|
|
$
|
536
|
|
|
$
|
19
|
|
|
4
|
%
|
Canada
|
83
|
|
|
82
|
|
|
1
|
|
|
1
|
%
|
Mexico / Latin America
|
49
|
|
|
44
|
|
|
5
|
|
|
11
|
%
|
Canadian Mining
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
Eliminations
|
(38
|
)
|
|
(34
|
)
|
|
(4
|
)
|
|
(12
|
)%
|
Total
|
$
|
649
|
|
|
$
|
628
|
|
|
$
|
21
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
|
|
|
|
|
United States
|
$
|
90
|
|
|
$
|
101
|
|
|
$
|
(11
|
)
|
|
(11
|
)%
|
Canada
|
1
|
|
|
6
|
|
|
(5
|
)
|
|
(83
|
)%
|
Mexico / Latin America
|
1
|
|
|
2
|
|
|
(1
|
)
|
|
(50
|
)%
|
Canadian Mining
|
(1
|
)
|
|
(3
|
)
|
|
2
|
|
|
67
|
%
|
Gypsum Transportation Limited
|
—
|
|
|
3
|
|
|
(3
|
)
|
|
(100
|
)%
|
Total
|
$
|
91
|
|
|
$
|
109
|
|
|
$
|
(18
|
)
|
|
(17
|
)%
|
United States
: Net sales in the
first
quarter of
2017
were
$555 million
, up
$19 million
, or
4%
, compared with the
first
quarter of
2016
. The increase in net sales was due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Price
|
(millions)
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
Change to Q1 2017 from Q1 2016
|
|
|
|
|
|
|
|
|
Sheetrock® brand gypsum wallboard
|
$
|
2
|
|
1
|
%
|
|
$
|
(10
|
)
|
(4
|
)%
|
|
$
|
12
|
|
5
|
%
|
Sheetrock
®
brand joint compound
|
5
|
|
5
|
%
|
|
6
|
|
6
|
%
|
|
(1
|
)
|
(1
|
)%
|
Other
|
12
|
|
|
|
|
|
|
|
|
Total increase in net sales
|
$
|
19
|
|
4
|
%
|
|
|
|
|
|
|
Sales for Sheetrock
®
brand gypsum wallboard increased $2 million from the
first
quarter of
2016
to the
first
quarter of
2017
due to higher average selling price offset by decreased shipments. The increase in average selling price reflected a price increase that was effective in late January 2017. The decrease in volumes reflected the timing of the price increase in 2016 with additional purchases in the first quarter of 2016 in anticipation of the March 2016 price increase. Our premium Sheetrock
®
brand UltraLight panels accounted for 66% of all of our wallboard shipments during the
first
quarter of
2017
which was consistent with the
first
quarter of
2016
.
Sales of Sheetrock
®
brand joint compound increased
$5 million
on increased volume driven primarily by higher shipments to the big box retailers. Sales of Durock
®
brand cement board and Levelrock
®
brand gypsum underlayment were primarily flat over the comparative period. Included in the increase in Other was higher sales of other surfaces and substrates products of $4 million, including Fiberock
®
brand backerboard and Durock
®
brand glass-mat tile backerboard. Also included in Other was a $6 million increase in sales for inventory sold by Gypsum that was included in L&W's inventory as of March 31, 2016 and a $2 million increase for freight.
Operating profit of
$90 million
was recorded in the
first
quarter of
2017
compared to
$101 million
recorded in the
first
quarter of
2016
. The decrease of
$11 million
in operating profit reflected the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Price
|
|
Cost
|
(millions)
|
$
|
|
$
|
|
$
|
|
$
|
Change to Q1 2017 from Q1 2016
|
|
|
|
|
|
|
|
Sheetrock
®
brand gypsum wallboard
|
$
|
(9
|
)
|
|
$
|
(5
|
)
|
|
$
|
12
|
|
|
$
|
(16
|
)
|
Sheetrock
®
brand joint compound
|
(1
|
)
|
|
2
|
|
|
(1
|
)
|
|
(2
|
)
|
Other
|
(1
|
)
|
|
|
|
|
|
|
Total decrease in operating profit
|
$
|
(11
|
)
|
|
|
|
|
|
|
The decrease in operating profit reflected lower gross profit for Sheetrock
®
brand gypsum wallboard and Sheetrock
®
brand joint compound. The decrease in gross profit for Sheetrock
®
brand gypsum wallboard reflected higher cost per unit and lower volumes offset by higher average selling price. The higher per unit cost for Sheetrock
®
brand gypsum wallboard reflected an increase in per unit cost of 15% for raw materials driven primarily by waste paper, for which costs are typically highest in the first quarter, and synthetic gypsum, 6% for conversion costs driven by higher labor costs and 10% for fixed costs due to lower volumes.
The decrease in gross profit for Sheetrock
®
brand joint compound reflected higher per unit costs. Gross profit of Durock
®
brand cement board and Levelrock
®
brand gypsum underlayment were primarily flat over the comparative period.
Included in Other is the following:
|
|
•
|
increase in gross profit of $2 million recorded on sales by Gypsum to L&W that were included in L&W's inventory at the end of the first quarter of 2016, offset by
|
|
|
•
|
higher selling and administrative costs of $3 million in the first quarter of 2017 due primarily to higher compensation and benefit expenses and marketing costs.
|
Canada
: Net sales in the
first
quarter of
2017
were
$83 million
, an increase of $1 million from
$82 million
in the
first
quarter of
2016
. The change in sales reflected higher sales of gypsum wallboard of $4 million and favorable impact of currency translation of $3 million offset by a decrease in sales of joint compound of $1 million and lower freight of $5 million. The increase in sales of gypsum wallboard was driven by an increase of 18% in average selling price offset by a decrease of 9% in volume. The increase in average selling price reflected the final decisions of the Canadian authorities on the minimum pricing of gypsum board imported into Western Canada. The decisions were as a result of an anti-dumping proceeding initiated by a competing Canadian wallboard manufacturer. Operating profit in the
first
quarter of
2017
was
$1 million
, a decrease of $5 million from the
first
quarter of
2016
. The decrease reflected a change of $3 million for an adjustment of an accrual for volume rebate incentives that was recorded in the first quarter of 2016, a $2 million increase for royalties and unfavorable impact of foreign currency of $1 million offset by higher gross profit of gypsum wallboard of $2 million.
Mexico / Latin America
: Net sales for our gypsum businesses in Mexico and Latin America were
$49 million
for the
first
quarter of
2017
, an increase of $5 million from the
first
quarter of
2016
. The increase reflected higher sales of gypsum wallboard, joint treatment, Durock
®
brand cement tile backerboard and drywall steel offset by the unfavorable impact due to fluctuations in currency of $3 million. Operating profit decreased to
$1 million
in the
first
quarter of
2017
from
$2 million
in the
first
quarter of
2016
due primarily to unfavorable impact of foreign currency of $1 million and lower gross profit on other products of $3 million offset by improved gross margins on joint treatment of $3 million.
Canadian Mining
: Our mining operation in Canada recorded
no
sales for both the
first
quarter of
2017
and the
first
quarter of
2016
. Operating loss was
$1 million
for the
first
quarter of
2017
and
$3 million
for the
first
quarter of
2016
. In the third quarter of 2016, we indefinitely idled our mining operations in Little Narrows, Nova Scotia, Canada which resulted in a decrease of operating costs.
Gypsum Transportation Limited
: There were no sales for our shipping company, Gypsum Transportation Limited, or GTL, for the
first
quarter of
2017
or 2016 as we have exited this business. GTL recorded $3 million in operating profit in the first quarter of 2016 which reflected a recovery of a receivable of $3 million owed to GTL by its trading partner that was fully reserved for in 2014.
CEILINGS
Net sales and operating profit for the businesses comprising our Ceilings segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31:
|
|
|
|
|
|
|
Favorable (Unfavorable)
|
(millions)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Net sales
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
112
|
|
|
$
|
115
|
|
|
$
|
(3
|
)
|
|
(3
|
)%
|
Canada
|
|
13
|
|
|
13
|
|
|
—
|
|
|
—
|
%
|
Mexico / Latin America
|
|
7
|
|
|
8
|
|
|
(1
|
)
|
|
(13
|
)%
|
Eliminations
|
|
(12
|
)
|
|
(15
|
)
|
|
3
|
|
|
20
|
%
|
Total
|
|
$
|
120
|
|
|
$
|
121
|
|
|
$
|
(1
|
)
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
21
|
|
|
$
|
26
|
|
|
$
|
(5
|
)
|
|
(19
|
)%
|
Canada
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
%
|
Mexico / Latin America
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
%
|
Total
|
|
$
|
23
|
|
|
$
|
28
|
|
|
$
|
(5
|
)
|
|
(18
|
)%
|
United States
: Net sales for our domestic ceilings business in the
first
quarter of
2017
were
$112 million
, a decrease of
$3 million
, or
3%
, from the
first
quarter of
2016
. The decrease reflected the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Price
|
(millions)
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
Change to Q1 2017 from Q1 2016
|
|
|
|
|
|
|
|
|
Ceiling grid
|
$
|
(2
|
)
|
(7
|
)%
|
|
$
|
(2
|
)
|
(7
|
)%
|
|
$
|
—
|
|
—
|
%
|
Ceiling tile
|
(4
|
)
|
(6
|
)%
|
|
(4
|
)
|
(6
|
)%
|
|
—
|
|
—
|
%
|
Other
|
3
|
|
|
|
|
|
|
|
|
Total decrease in net sales
|
$
|
(3
|
)
|
(3
|
)%
|
|
|
|
|
|
|
The decrease in sales of both ceiling grid and ceiling tile reflected timing of projects. Also impacting sales was an increase in customer incentive programs offset by a price increase implemented in the first quarter of 2017. The favorable change in other reflected a $4 million increase in sales for inventory sold by Ceilings that was included in L&W's inventory as of March 31, 2016 offset by a decrease in freight of $1 million due to lower shipments.
Operating profit was
$21 million
for the
first
quarter of
2017
, a decrease of
$5 million
, or
19%
, from the
first
quarter of
2016
. The decrease reflected the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Price
|
|
Cost
|
(millions)
|
$
|
|
$
|
|
$
|
|
$
|
Change to Q1 2017 from Q1 2016
|
|
|
|
|
|
|
|
Ceiling grid
|
$
|
(3
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
Ceiling tile
|
(4
|
)
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Other
|
2
|
|
|
|
|
|
|
|
Total decrease in operating profit
|
$
|
(5
|
)
|
|
|
|
|
|
|
The decrease in operating profit reflected a decrease in gross profit for both ceiling grid and ceiling tile driven by lower volumes and higher per unit cost. The higher per unit cost for ceiling grid reflected higher per unit raw material cost led by higher steel prices, higher per unit conversion cost due to increased labor costs and higher per unit fixed cost due to lower volumes. The higher per unit cost for ceiling tile primarily reflected higher per unit fixed cost due to lower volumes, higher expenditures for maintenance and, to a lesser extent, higher per unit conversion cost due to increased labor costs and higher per
unit raw material cost including higher costs for waste paper. Offsetting the decrease in gross profit was lower selling and administrative expenses of $1 million and gross profit of $1 million recorded on sales by Ceilings to L&W that were included in L&W's inventory as of March 31, 2016.
Canada
: Net sales of
$13 million
for the
first
quarter of
2017
were flat as compared to the
first
quarter of
2016
. Operating profit was
$1 million
for the
first
quarter of
2017
and unchanged from the
first
quarter of
2016
.
Mexico / Latin America
: Net sales of
$7 million
for the
first
quarter of
2017
decreased $1 million from the
first
quarter of
2016
. Operating profit was
$1 million
for both the
first
quarter of
2017
and the
first
quarter of
2016
.
USG BORAL BUILDING PRODUCTS
The following reflects the net sales and operating profit as recorded by UBBP and the equity income recorded by USG.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31:
|
|
|
|
|
|
|
Favorable (Unfavorable)
|
(millions)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Net sales
|
|
$
|
276
|
|
|
$
|
229
|
|
|
$
|
47
|
|
|
21
|
%
|
Operating profit
|
|
35
|
|
|
23
|
|
|
12
|
|
|
52
|
%
|
Income from equity method investments - UBBP
|
|
13
|
|
|
7
|
|
|
6
|
|
|
86
|
%
|
Net sales for UBBP were
$276 million
in the
first
quarter of
2017
compared to
$229 million
for the
first
quarter of
2016
. The increase of
$47 million
reflected increased plasterboard shipments in South Korea, India, Malaysia and Australia and favorable impact of currency translation of $7 million. The increase is offset by decreased sales in Indonesia and Vietnam. Plasterboard shipments increased 16% to 1.13 billion square feet for the
first
quarter of
2017
from 0.97 billion square feet for the
first
quarter of
2016
. Additionally, volumes of metal studs increased 20%.
Operating profit increased
$12 million
to
$35 million
in the
first
quarter of
2017
compared to
$23 million
in the
first
quarter of
2016
. Operating profit in 2016 reflected improved margins in South Korea and Australia, realized synergy savings and improved market acceptance of lightweight products offset by an increase in selling and administrative expenses. The increase also reflected favorable currency impact of $2 million.
Our share of net income of UBBP, which is recorded in income from equity method investment, increased
$6 million
in the
first
quarter of
2017
as compared to the
first
quarter of
2016
. This increase reflected higher income recorded by UBBP and a favorable impact of foreign currency of $1 million.
CORPORATE
The operating loss for Corporate increased to
$23 million
in the
first
quarter of
2017
compared with
$21 million
in the
first
quarter of
2016
primarily due to higher costs for services, including those in support of growth platforms.
Liquidity and Capital Resources
As of
March 31, 2017
, we had
$434 million
of cash and cash equivalents and marketable securities compared with
$518 million
as of
December 31, 2016
. See discussion below under Cash Flows for explanation of the change in cash and cash equivalents. Our total liquidity as of
March 31, 2017
was
$559 million
(including
$125 million
of borrowing availability under our credit facility) compared to
$603 million
as of December 31, 2016 (including
$85 million
of borrowing availability under our credit facility). The decrease in liquidity reflected payments for our share repurchase program and for incentives.
We invest in cash equivalents and marketable securities pursuant to an investment policy that has preservation of principal as its primary objective. The policy includes provisions regarding diversification, credit quality and maturity profile that are designed to minimize the overall risk profile of our investment portfolio. The securities in the portfolio are subject to normal market fluctuations. See Note
5
to the condensed consolidated financial statements for additional information regarding our investments in marketable securities.
Total debt, consisting of senior notes and industrial revenue bonds, amounted to
$1.084 billion
(
$1.089 billion
in aggregate principal amount less
$5 million
of debt issuance costs) as of
March 31, 2017
and
$1.083 billion
(
$1.089 billion
in aggregate principal amount less
$6 million
of debt issuance costs) as of
December 31, 2016
. During the
three
months ended
March 31, 2017
, there were no borrowings under our revolving credit facility and
no
borrowings outstanding at period end.
Our senior notes and industrial revenue bonds are rated by the three major credit-rating agencies: Moody’s Investors Service (Moody’s), Standard & Poor’s Global Ratings (S&P), and Fitch Ratings, Inc. (Fitch). The ratings are typically monitored by stockholders, creditors, or suppliers as an indicator of the company's viability. Additionally, the ratings of Moody’s and S&P impact the interest rate on our 7.75% senior notes maturing in 2018. See Note
6
to the condensed consolidated financial statements in our Annual Report on Form 10-K for additional information regarding the impact of changes to our credit ratings on interest rates. Below is a summary of the ratings published by the three agencies as of the date indicated:
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S&P
|
|
Moody's
|
|
Fitch
|
Corporate/Family rating
|
|
BB+
|
|
Ba2
|
|
BB+
|
Outlook
|
|
Stable
|
|
Positive
|
|
Stable
|
Guaranteed senior notes
|
|
BB+
|
|
Ba2
|
|
BB+
|
All other notes and bonds
|
|
BB+
|
|
Ba3
|
|
BB+
|
Report date
|
|
November 10, 2016
|
|
November 22, 2016
|
|
April 19, 2017
|
We maintain a credit facility with a maximum borrowing limit of $180 million (including a $50 million borrowing sublimit for CGC) that is available to fund working capital needs and other general corporate purposes and matures on October 22, 2019. The facility is guaranteed by certain of our significant subsidiaries and secured by such parties’ eligible trade receivables and inventory. The maximum borrowing limit under the credit agreement may be increased up to $650 million at our request and with our lenders’ approval. The credit agreement contains other covenants and events of default that are customary for similar agreements and may limit our ability to take various actions including our ability to pay a dividend or repurchase our stock.
Although the maximum borrowing limit under the credit agreement is $180 million, the credit agreement specifies the maximum principal that may be borrowed by USG and CGC is impacted by any amounts outstanding under the credit agreement, outstanding letters of credit, a borrowing base comprised of eligible trade receivables and inventory, and the minimum excess availability that may be required due to the Covenant Trigger Threshold, described below, being applicable. As of
March 31, 2017
, the maximum principal we could borrow after taking into account the foregoing factors was approximately
$125 million
.
The credit agreement contains a covenant that would require us to maintain a minimum fixed charge coverage ratio of not less than 1.0-to-1.0 in the event that excess availability falls below the "Covenant Trigger Threshold" equal to 10% of the lesser of (a) the aggregate revolving commitment and (b) the aggregate of the USG and CGC borrowing base. As of
March 31, 2017
, our fixed charge coverage ratio was 0.38-to-1.0 and; therefore, we are required to maintain minimum excess availability of no less than the Covenant Trigger Threshold so that the financial covenant will remain inapplicable. Currently, that amount would be approximately $18 million.
Our undistributed foreign earnings as of
March 31, 2017
are considered permanently reinvested with the exception of earnings associated with the former holding company of the Knauf-USG joint venture that was sold in December 2015. The amount of cash and cash equivalents held by our foreign subsidiaries was $177 million as of
March 31, 2017
and would be subject to material repatriation tax effects.
CASH FLOWS
The following table presents a summary of our cash flows:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(millions)
|
2017
|
|
2016
|
Net cash provided by (used for):
|
|
|
|
Operating activities from continuing operations
|
$
|
(29
|
)
|
|
$
|
(46
|
)
|
Investing activities from continuing operations
|
(41
|
)
|
|
—
|
|
Financing activities from continuing operations
|
(25
|
)
|
|
(65
|
)
|
Discontinued operations
|
5
|
|
|
15
|
|
Effect of exchange rate changes on cash
|
4
|
|
|
1
|
|
Net decrease in cash and cash equivalents
|
$
|
(86
|
)
|
|
$
|
(95
|
)
|
Operating Activities
: Net cash used for operating activities was lower for the
first three months of 2017
compared to the
first three months of 2016
due to lower payments to our pension and postretirement plans in the first quarter of 2017. We contributed
$2 million
and $61 million in the first three months of 2017 and 2016, respectively. Our net cash outflows were higher in 2017 compared to 2016, primarily because of an increase in accounts receivable of $23 million as a result of higher sales in the current quarter, an increase in inventories of $7 million due to increased costs for raw materials and a decrease in accrued expenses of $12 million due to higher incentive payments. These were offset by lower cash outflows for accounts payable of $11 million in 2017 as compared to 2016, which included an increase in capital expenditures that remained in accounts payable as of March 31, 2017.
As of
March 31, 2017
, working capital (current assets less current liabilities) amounted to $
84 million
, and the ratio of current assets to current liabilities was
1.10
-to-1. As of
December 31, 2016
, working capital amounted to $
527 million
, and the ratio of current assets to current liabilities was
2.25
-to-1. This decrease reflected the classification of $500 million of our 7.75% senior notes due 2018 as current as of
March 31, 2017
, which we intend to refinance to long-term in the near term.
Investing Activities
: Net cash used for investing activities was
$41 million
for the
first three months of 2017
compared to
$0 million
for the
three months ended March 31, 2016
. The net activity of purchases and sales or maturities of marketable securities was a cash outflow of
$2 million
for the
three months ended March 31, 2017
as compared to a cash inflow of
$5 million
for the
three months ended March 31, 2016
.
The increase in capital expenditures to $
39 million
in the
first three months of 2017
from $
14 million
in the
first three months of 2016
reflected expenditures for the replacement, modernization and expansion of operations, including Advanced Manufacturing initiatives. Approved capital expenditures totaled $126 million as of
March 31, 2017
compared with $
121 million
as of
December 31, 2016
.
Financing Activities:
Net cash used for financing activities for the
first three months of 2017
was
$25 million
compared to
$65 million
for the
first three months of 2016
. The cash used in 2017 reflected the repurchase of common stock under the approved stock repurchase program of $25 million. The cash used in 2016 reflected $64 million paid to repurchase $62 million of our 6.3% Notes in the open market.
Discontinued Operations:
Net cash provided by discontinued operations for
first three months of 2017
was
$5 million
compared to
$15 million
for the
first three months of 2016
. The cash inflow in 2017 reflected a working capital adjustment associated with the sale of L&W.
DEFINED BENEFIT PLANS
During the first
three
months of
2017
, we made cash contributions of
$2 million
to our pension plan in Canada. We expect to make total contributions to our pension and postretirement plans in
2017
of approximately
$74 million
.
LIQUIDITY OUTLOOK
In the
first three months of 2017
, our investing cash outflows included
$39 million
of capital expenditures. In total for
2017
, we plan to spend approximately $200 million on capital expenditures in the normal course of business, which includes up to $80 million allocated for Advanced Manufacturing projects to standardize and automate production across our Gypsum and Ceilings businesses. We expect to fund these expenditures with cash from operations or cash on hand.
Interest payments, based on our current level of outstanding debt, are expected to remain at approximately
$77 million
in
2017
compared with $
153 million
in
2016
which reflects lower debt levels due to the repayment of $1.1 billion in debt in 2016. We intend to refinance our 7.75% senior notes due 2018, as well as our credit facility, in the near term.
On January 31, 2017, our Board of Directors approved a share repurchase program in which we may repurchase up to $250 million of our common stock. As of March 31, 2017, we purchased $25 million in shares under the program, and to date we have purchased $47 million in shares under the program, with $203 million remaining. The timing and the amount of any repurchases will be determined based on market conditions and other factors. Share repurchases will be funded with available cash on hand. See Part II, Item 2 for additional information.
Since formation, UBBP was funded from its net cash flow from operations and third-party financing, and it is our intent that as an ongoing operation, UBBP will continue to self-fund. UBBP is targeting the distribution of 50% of combined after tax profits to USG and Boral; however, this dividend may be adjusted by the UBBP Board with unanimous resolution.
In the event certain performance targets are satisfied by UBBP, we will be obligated to pay Boral an earnout payment in an amount up to $50 million in 2019, based on UBBP performance during the first five years. We have not recorded a liability for this earnout payment as we have concluded that it is currently not probable that the five-year performance target will be achieved.
We believe that cash on hand, cash equivalents, marketable securities, cash available from future operations and our credit facility will provide sufficient liquidity to fund our operations for at least the next 12 months. Cash requirements include, among other things, capital expenditures, working capital needs, employee retirement plans funding, interest payments and other contractual obligations.
Recently Issued Accounting Pronouncements
See Part 1, Item 1, Note 1 to the condensed consolidated financial statements for information related to new accounting standards.
Legal Contingencies
We are named as defendants in litigation arising from our operations, including lawsuits or claims arising from commercial disputes, product performance or warranties, products liability, and worksite or vehicular accidents.
In 2015, USG, United States Gypsum Company, L&W Supply Corporation, and seven other wallboard manufacturers were named as defendants in a lawsuit filed by twelve homebuilders alleging that the defendants conspired to fix the price of wallboard sold in the United States. Earlier, in 2013, class action lawsuits making similar allegations were filed in Canada on behalf of a class of purchasers of wallboard in Canada. We believe that the cost, if any, of resolving the homebuilders’ lawsuit and Canadian class action litigation will not have a material effect on our results of operations, financial position or cash flows.
In the third quarter of 2015 United States Gypsum Company was served with a federal grand jury subpoena requesting the production of company records in connection with a federal investigation of the gypsum drywall industry. Two former employees of USG have also been served with subpoenas. We believe the investigation, although a separate proceeding, is related to the same events at issue in the litigation discussed above. We are fully cooperating with the grand jury investigation. We believe we acted in full compliance with the law, and we do not expect the resolution of this matter to result in any material effect on our business, financial position, liquidity or results of operations; however, we can provide no assurances as to the scope, timing, or outcome of any such investigation.
See Note
14
to the condensed consolidated financial statements for further information regarding the foregoing lawsuits and other legal matters.
Critical Accounting Policies
The preparation of our financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
, which we filed with the Securities and Exchange Commission on
February 8, 2017
, includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues or expenses during the first
three
months of
2017
.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 related to management’s expectations about future conditions. Any forward-looking statements represent our views only as of the date of this report and should not be relied upon as representing our views as of any subsequent date, and we undertake no obligation to update any forward-looking statement. Forward-looking statements include, but are not limited to, statements under the following headings: (1) “Management’s Discussion and Analysis” about (a) market conditions and outlook, including anticipated growth in new residential and nonresidential construction, repair and remodel spending, and the construction industries in Canada and Mexico, and the anticipated growth or decline in countries in the UBBP territory and its effect on the cyclicality of our North American business, industry shipments of gypsum, demand for gypsum wallboard and industry capacity utilization rate, and our selling prices and margins; (b) expected contributions to our pension and postretirement plans; (c) our liquidity outlook, including our capital expenditure plans, expected interest payments, intended debt refinancings, share repurchase program, UBBP’s dividend policy and ability to self-fund, and cash requirements and adequacy of resources to fund them; and (d) the outcome and effect of ongoing and future legal and governmental proceedings; and (2) “Legal Proceedings” about the outcome and effect of ongoing and future legal and governmental proceedings.
Some of the risk factors that affect our business and financial results are discussed under “Risk Factors” in our most recent Annual Report on Form 10-K. We wish to caution the reader that actual business, market or other conditions, including the “Risk Factors” discussed in our most recent Annual Report on Form 10-K or in our other Securities and Exchange Commission filings, could cause our actual results to differ materially from those stated in the forward-looking statements.