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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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.)
 
 
 
550 West Adams Street, Chicago, Illinois
 
60661-3676
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code (312) 436-4000
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of the registrant’s common stock outstanding as of September 30, 2018 was 139,755,820.



Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(millions, except per-share and share data)
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
851

 
$
795

 
$
2,517

 
$
2,373

Cost of products sold
699

 
633

 
2,042

 
1,884

Gross profit
152

 
162

 
475

 
489

Selling and administrative expenses
83

 
71

 
285

 
219

Operating profit
69

 
91

 
190

 
270

Income from equity method investments
12

 
15

 
33

 
42

Interest expense
(14
)
 
(15
)
 
(43
)
 
(54
)
Interest income
2

 
1

 
5

 
2

Loss on extinguishment of debt

 

 

 
(22
)
Other income, net
4

 
1

 
4

 
5

Income from continuing operations before income taxes
73

 
93

 
189

 
243

Income tax expense
(15
)
 
(27
)
 
(37
)
 
(76
)
Income from continuing operations
58

 
66

 
152

 
167

Income (loss) from discontinued operations, net of tax
1

 

 
2

 
(10
)
Net income
$
59

 
$
66

 
$
154

 
$
157

 
 
 
 
 
 
 
 
Earnings per average common share - basic:
 
 
 
 
 
 
 
Income from continuing operations
$
0.42

 
$
0.47

 
$
1.08

 
$
1.16

Income (loss) from discontinued operations

 

 
0.01

 
(0.07
)
Net income
$
0.42

 
$
0.47

 
$
1.09

 
$
1.09

 
 
 
 
 
 
 
 
Earnings per average common share - diluted:
 
 
 
 
 
 
 
Income from continuing operations
$
0.41

 
$
0.46

 
$
1.06

 
$
1.14

Income (loss) from discontinued operations

 

 
0.01

 
(0.07
)
Net income
$
0.41

 
$
0.46

 
$
1.07

 
$
1.07

 
 
 
 
 
 
 
 
Average common shares
139,943,168

 
142,103,717

 
140,328,443

 
145,054,965

Dilutive awards under long-term incentive plan
2,902,210

 
2,389,428

 
2,255,947

 
2,312,816

Deferred shares for non-employee directors
23,948

 
188,546

 

 
216,242

Average diluted common shares
142,869,326

 
144,681,691

 
142,584,390

 
147,584,023

 
 
 
 
 
 
 
 
Cash dividend declared per share
$
0.50

 
$

 
$
0.50

 
$

See accompanying Notes to Condensed Consolidated Financial Statements.


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USG CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three months ended September 30,
 
Nine months ended September 30,
(millions)
 
 
2018
 
2017
 
2018
 
2017
Net income
$
59

 
$
66

 
$
154

 
$
157

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges:
 
 
 
 
 
 
 
Gain (loss) on derivatives qualifying as cash flow hedges, net of tax (benefit) of $0, ($2), $0 and ($7), respectively
(1
)
 
(3
)
 
1

 
(11
)
Less: Reclassification adjustment for loss on derivatives included in net income, net of tax (benefit) of $0, ($1), $0, ($1), respectively
(1
)
 

 
(3
)
 
(1
)
Net derivatives qualifying as cash flow hedges

 
(3
)
 
4

 
(10
)
 
 
 
 
 
 
 
 
Pension and postretirement benefits:
 
 
 
 
 
 
 
Changes in pension and postretirement benefits, net of tax (benefit) of $0, ($10), $0 and ($8), respectively
(1
)
 
(15
)
 
2

 
(12
)
Less: Amortization of prior service cost included in net periodic pension cost, net of tax (benefit) of ($1), ($2), ($2) and ($9), respectively
(1
)
 
(1
)
 
(4
)
 
(13
)
Net pension and postretirement benefits

 
(14
)
 
6

 
1

 
 
 
 
 
 
 
 
Foreign currency translation:
 
 
 
 
 
 
 
Changes in foreign currency translation, net of tax of $0 in all periods
4

 
10

 
(22
)
 
58

Less: Translation loss realized upon sale of foreign equity method investment, net of tax (benefit) of $0, $0, ($2) and $0, respectively

 

 
(4
)
 

Net foreign currency translation
4

 
10

 
(18
)
 
58

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
$
4

 
$
(7
)
 
$
(8
)
 
$
49

 
 
 
 
 
 
 
 
Comprehensive income
$
63

 
$
59

 
$
146

 
$
206


See accompanying Notes to Condensed Consolidated Financial Statements.


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USG CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(millions, except share data)
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Cash and cash equivalents
$
329

 
$
394

Short-term marketable securities
61

 
62

Receivables (net of reserves 2018 - $10 and 2017 - $9)
303

 
233

Inventories
288

 
252

Income taxes receivable
16

 
15

Other current assets
34

 
35

Total current assets
1,031

 
991

Long-term marketable securities
38

 
37

Property, plant and equipment (net of accumulated depreciation and depletion - 2018 - $2,146 and 2017 - $2,053)
1,814

 
1,762

Deferred income taxes
252

 
287

Equity method investments
671

 
686

Goodwill and intangible assets
41

 
43

Other assets
43

 
45

Total assets
$
3,890

 
$
3,851

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
284

 
$
280

Accrued expenses
132

 
135

Dividend payable
72

 

Income taxes payable
2

 

Total current liabilities
490

 
415

Long-term debt
1,079

 
1,078

Deferred income taxes
5

 
4

Pension and other postretirement benefits
281

 
326

Other liabilities
172

 
183

Total liabilities
2,027

 
2,006

Stockholders' Equity:
 
 
 
Preferred stock

 

Common stock
15

 
15

Treasury stock at cost
(209
)
 
(169
)
Additional paid-in capital
3,039

 
3,057

Accumulated other comprehensive loss
(397
)
 
(389
)
Retained earnings (accumulated deficit)
(585
)
 
(669
)
Total stockholders’ equity
1,863

 
1,845

Total liabilities and stockholders’ equity
$
3,890

 
$
3,851

See accompanying Notes to Condensed Consolidated Financial Statements.

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USG CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(millions)
Nine months ended September 30,
 
2018
 
2017
Operating Activities
 
 
 
Net income
$
154

 
$
157

Less: Income (loss) from discontinued operations, net of tax
2

 
(10
)
Income from continuing operations
152

 
167

Adjustments to reconcile net income from continuing operations to net cash:
 
 
 
Depreciation, depletion and amortization
113

 
98

Loss on extinguishment of debt

 
22

Share-based compensation expense
15

 
13

Deferred income taxes
33

 
75

Gain on asset dispositions
(13
)
 

Loss on sale of equity method investment
8

 

Income from equity method investments
(33
)
 
(42
)
Dividends received from equity method investments
16

 
23

Pension settlement

 
10

Change in operating assets and liabilities
(152
)
 
(164
)
Other, net
8

 
1

Net cash provided by operating activities of continuing operations
147

 
203

Net cash provided by (used for) operating activities of discontinued operations
2

 
(1
)
Net cash provided by operating activities
149

 
202

Investing Activities
 
 
 
Purchases of marketable securities
(75
)
 
(75
)
Sales or maturities of marketable securities
73

 
69

Capital expenditures
(159
)
 
(109
)
Net proceeds from asset dispositions
14

 
2

Net proceeds from sale of equity method investment
3

 

Working capital adjustment from acquisition of business
2

 

Receipt of collection on loan from former joint venture
2

 

Insurance proceeds

 
1

Net cash used for investing activities of continuing operations
(140
)
 
(112
)
Net cash provided by investing activities of discontinued operations

 
6

Net cash used for investing activities
(140
)
 
(106
)
Financing Activities
 
 
 
Issuance of debt

 
500

Repayment of debt

 
(520
)
Payment of debt issuance fees

 
(8
)
Issuance of common stock
10

 
3

Repurchase of common stock
(76
)
 
(153
)
Repurchases of common stock to satisfy employee tax withholding obligations
(7
)
 
(4
)
Net cash used for financing activities of continuing operations
(73
)
 
(182
)
Effect of exchange rate changes on cash from continuing operations
(1
)
 
6

Net decrease in cash and cash equivalents from continuing operations
(67
)
 
(85
)
Net increase in cash and cash equivalents from discontinued operations
2

 
5

Net decrease in cash and cash equivalents
(65
)
 
(80
)
Cash and cash equivalents at beginning of period
394

 
427

Cash and cash equivalents at end of period
$
329

 
$
347

 
 
 
 
Supplemental Cash Flow Disclosures:
 
 
 
Interest paid, net of capitalized interest
$
39

 
$
66

Income taxes paid, net of refunds received
5

 
13

Noncash Investing and Financing Activities:
 
 
 
Amount in accounts payable for capital expenditures
14

 
12

Dividend payable
72

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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USG CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the following Notes to Condensed Consolidated Financial Statements, “USG,” “we,” “our” and “us” refer to USG Corporation, a Delaware corporation, and its subsidiaries included in the condensed consolidated financial statements, except as otherwise indicated or as the context otherwise requires.
1.
Organization, Consolidation and Presentation of Financial Statements

PREPARATION OF FINANCIAL STATEMENTS
We prepared the accompanying unaudited condensed consolidated financial statements of USG Corporation in accordance with applicable United States Securities and Exchange Commission, or SEC, guidelines pertaining to interim financial information. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ materially from those estimates. In the opinion of our management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of our financial results for the interim periods. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results of operations to be expected for the entire year.
SEGMENTS
Our reportable segments are determined considering both qualitative and quantitative metrics for aggregation of the product type within geographies for which discrete financial information is available. We have five reportable segments: U.S. Wallboard and Surfaces, U.S. Performance Materials, U.S. Ceilings, Canada, and USG Boral Building Products, or UBBP. Our U.S. Wallboard and Surfaces, U.S. Performance Materials and U.S. Ceilings reportable segments are identified based on products manufactured and marketed. Our Canada segment is a separately reportable segment, as while it has similar qualitative factors to U.S. operations, it has different quantitative metrics and, therefore, cannot be aggregated. Our operating segments in Mexico and Latin America are included in Other as reconciling items to our consolidated segments. This segment structure was effective for the quarter ended December 31, 2017. Our prior period results have been recast to reflect these changes and present comparative year over year information by segment. See Note 4, Segments.
These condensed consolidated financial statements and notes are to be read in conjunction with the financial statements and notes included in USG’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which we filed with the SEC on February 14, 2018.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
We adopted Accounting Standard Update, or ASU, 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," in the first quarter of 2018. The ASU allows for the reclassification of stranded tax effects on items resulting from the Tax Cuts and Jobs Act, or the 2017 Tax Act, from accumulated other comprehensive income, or AOCI, to retained earnings. Tax effects unrelated to the 2017 Tax Act are released from AOCI using either the specific identification approach or the portfolio approach based on the nature of the underlying item. We elected not to reclassify the income tax effects of the 2017 Tax Act.
We adopted ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” on January 1, 2018 using the practical expedient. This ASU required us to disaggregate and present current service cost along with other current compensation costs for employees while presenting other net benefit cost components below operating profit. In addition, only the service cost component of net benefit cost is eligible for capitalization in our inventory and fixed assets. We retrospectively adopted the presentation of service cost and prospectively adopted the capitalization of only service cost into inventory and fixed assets.

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The effect of the adoption of ASU 2017-07 on our condensed consolidated statements of income for the three and nine months ended September 30, 2017 was as follows.
(millions)
Three months ended September 30, 2017
 
Nine months ended September 30, 2017
 
As Restated
 
Adjustment for Adoption of
ASU 2017-07
 
As Previously Reported
 
As Restated
 
Adjustment for Adoption of
ASU 2017-07
 
As Previously Reported
Gross profit
$
162

 
$
(1
)
 
$
163

 
$
489

 
$
(6
)
 
$
495

Operating profit
91

 
(2
)
 
93

 
270

 
(10
)
 
280

Other income, net
1

 
2

 
(1
)
 
5

 
10

 
(5
)
Net income
66

 

 
66

 
157

 

 
157

We adopted ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" on January 1, 2018 using the retrospective transition method. Topic 230 addresses specific cash flow issues with the stated objective of reducing the existing diversity in practice. There was no impact on adoption to our condensed consolidated cash flow statements and disclosures as we were already compliant with the provisions of the standard.
We adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” and all related amendments on January 1, 2018 using the modified retrospective method and practical expedients. Topic 606 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)" and requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
On January 1, 2018, we recorded an increase of $2 million to our opening balance of retained earnings for the cumulative effect of adopting Topic 606. The adjustment related to a change to the point in time at which we record revenue for most customers. Prior period amounts have not been restated and continue to be reported under the legacy accounting guidance of Topic 605. As of and for the three and nine months ended September 30, 2018, the impact of applying Topic 606 as compared to applying Topic 605 is immaterial to our financial statements.
In addition to our cumulative effect adjustment, our adoption of Topic 606 resulted in additional quantitative disclosure of revenue by product and in the modification of certain significant accounting policies. See Note 4, Segments, for our revenue disaggregated by product and the revised polices below.
Revenue Recognition
We recognize revenue upon transfer of control of our products to the customer which generally occurs upon shipment. We enter into agreements with customers to offer rebates, generally based on achievement of specified sales levels and various marketing allowances that are common industry practice. Reductions to revenue for customer programs and incentive offerings, including promotions and other volume-based incentives, are estimated using the most likely amount method and recorded in the period in which the sale occurs. Provisions for early payment discounts are accrued in the same period in which the sale occurs. We do not have any material payment terms as payment is received shortly after the point of sale. We pay commissions to third parties to obtain contracts. As these contracts are less than one year, these costs are expensed as incurred.
Shipping and Handling Costs
We include shipping and handling costs billed to customers in net sales and account for related costs as fulfillment activities. We present the costs in cost of products sold when control of our products transfers to the customer.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2018, the Financial Accounting Standards Board, or FASB, issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for us on January 1, 2020, and earlier adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". Topic 326 eliminates the probable initial recognition threshold and, instead, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This standard is effective for us on January 1, 2020 and earlier adoption is permitted. We are currently evaluating the impact of Topic 326 on our consolidated financial position, results of operations and disclosures. We do not expect the adoption of Topic 326 to have a significant impact to our consolidated financial statements.

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In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which supersedes existing lease guidance. The new standard requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. Subsequently, the FASB has issued various ASUs to provide further clarification around certain aspects of Topic 842. We will adopt the new standard on January 1, 2019 using the modified retrospective transition method and will record a cumulative-effect adjustment to the opening balance of retained earnings at the adoption date. We are currently finalizing our accounting policies, implementing a new leasing system, determining changes needed in current processes for lease accounting and verifying the completeness of our lease population and, thus, we are unable to quantify the financial statement impact at this time. The adoption of Topic 842 is expected to have a significant impact on our consolidated balance sheets and increase our disclosures on leases.
2.    Acquisitions and Dispositions

Acquisition of Ceilings Plus
On November 30, 2017, we completed our acquisition of Ceilings Plus for $50 million, net of working capital adjustments. The addition of Ceilings Plus to our U.S. Ceilings segment expands our operations in the specialty ceilings markets. We finalized our valuation in the second quarter of 2018. The fair value of tangible assets acquired, less liabilities assumed, in connection with the Ceilings Plus acquisition was $15 million. The fair value of intangible assets acquired, which included customer relationships and trade names, totaled $20 million. The resulting goodwill recorded was $15 million and all is expected to be deductible for tax purposes. The goodwill consists largely of Ceilings Plus' expected future product sales and synergies with the existing U.S. Ceilings product offerings.
Discontinued Operations
On October 31, 2016, we completed the sale of our L&W Supply, or L&W, distribution business to ABC Supply. For the nine months ended September 30, 2017, we recorded a loss of $10 million, net of tax, to "Income (loss) from discontinued operations", of which $9 million related to L&W and primarily reflected a pension settlement charge related to lump sum benefits paid to former employees of L&W.
For the three and nine months ended September 30, 2018, we recorded sales of $120 million and $337 million, respectively, and cash inflows related to payments on trade receivables during those same periods of $131 million and $342 million, respectively, which included sales to L&W pursuant to the supply agreement entered into upon the close of the sale. For the comparative periods in 2017, we recorded sales of $122 million and $387 million, respectively, and cash inflows related to payments on trade receivables of $112 million and $364 million, respectively.
3.    Equity Method Investments
Equity method investments as of September 30, 2018 and December 31, 2017, were as follows:
 
 
September 30, 2018
 
December 31, 2017
(dollars in millions)
 
Carrying Value
 
Ownership Percentage
 
Carrying Value
 
Ownership Percentage
USG Boral Building Products
 
$
669

 
50%
 
$
679

 
50%
Other equity method investments
 
2

 
50%
 
7

 
33% - 50%
Total equity method investments
 
$
671

 
 
 
$
686

 
 
INVESTMENT IN USG BORAL BUILDING PRODUCTS
UBBP is our 50/50 joint ventures with Boral Limited, or Boral. We account for our investment in UBBP using the equity method of accounting. Through the first nine months of 2018, UBBP paid cash dividends on its earnings through March 2018 of which our 50% share totaled $16 million. As of September 30, 2018, the amount of our consolidated retained earnings which represents undistributed earnings from UBBP was $78 million.
In the event certain U.S. Dollar denominated performance targets are satisfied by UBBP, we will be obligated to pay Boral an earnout payment of up to $50 million based on performance through 2019. We have not recorded a liability for this earnout payment as we have concluded that it is not probable that the five-year performance target will be achieved. If our conclusion on the probability of achievement changes, we will record a liability representing the present value of the earnout payment with a corresponding increase to our investment.

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UBBP is operated in accordance with the terms of a Shareholders Agreement. The Shareholders Agreement provides that a change of control with respect to one party constitutes an event of default that allows the non-defaulting party the opportunity to purchase the defaulting shareholder's interest in UBBP for fair market value, as determined in accordance with the Shareholders Agreement. On August 28, 2018, Boral delivered a default notice under the Shareholders Agreement to commence the process to establish the fair market value of our 50% interest in UBBP. Once fair market value is established, Boral will have the right to purchase our 50% interest in UBBP, in each case in accordance with the Shareholders Agreement.  Boral’s exercise of its right to purchase our 50% interest in UBBP could occur prior to the closing of the Merger Agreement, in which case we would receive the cash proceeds for our interest, and we would no longer own an interest in UBBP.
Our underlying net assets in our investments are denominated in a foreign currency, and translation gains or losses will impact the recorded value of our investments. Translation gains or losses recorded in other comprehensive income were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
(millions)
2018
 
2017
 
2018
 
2017
Translation (loss) gain
$
(7
)
 
$
5

 
$
(28
)
 
$
28

Summarized financial information for UBBP is as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
(millions)
2018
 
2017
 
2018
 
2017
USG Boral Building Products
 
 
 
 
 
 
 
Net sales
$
305

 
$
324

 
$
889

 
$
887

Gross profit
81

 
98

 
243

 
275

Operating profit
32

 
43

 
91

 
118

Income from continuing operations before income taxes
36

 
47

 
103

 
129

Net income
24

 
32

 
69

 
86

Net income attributable to USG Boral Building Products
24

 
30

 
67

 
83

USG share of income from investment accounted for using the equity method
12

 
15

 
33

 
42

TRANSACTIONS WITH UBBP
Our U.S. Wallboard and Surfaces and U.S. Performance Materials segments sell products to UBBP. Total sales to UBBP for the three and nine months ended September 30, 2018 and 2017 were immaterial.
In 2014, in connection with the formation of UBBP, we contributed our ownership interest in a joint venture in China to UBBP, but retained our loan receivable from this joint venture. During the third quarter of 2018, we received a $2 million payment on the loan receivable. As of September 30, 2018 and December 31, 2017, the loan receivable, including interest, totaled $11 million and $13 million, respectively, and is included in "Other assets" on our accompanying condensed consolidated balance sheets.
INVESTMENT IN SOUTH AFRICA JOINT VENTURE
During the second quarter of 2018, we completed the sale of our 33% interest in a joint venture in South Africa for approximately $3 million. We recorded a loss on the sale of $8 million in "Other income, net" on our accompanying condensed consolidated income statements for the nine months ended September 30, 2018. The loss, which totaled $5 million net of tax, was driven primarily by foreign currency losses included in equity that were recognized upon the disposition of the joint venture and was recorded within Other, as it does not relate to a reportable segment.

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4.     Segments
During the fourth quarter of 2017, as part of the realignment of our operating structure, we changed the composition of our reportable segments, effective for the quarter ended December 31, 2017. See Note 1, Organization, Consolidation and Presentation of Financial Statements, for additional information regarding our five reportable segments. See Note 3, Equity Method Investments, for segment results for UBBP. Segment results for our U.S. Wallboard and Surfaces, U.S. Performance Materials, U.S. Ceilings and Canada segments were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
(millions)
2018
 
2017
 
2018
 
2017
Net Sales:
 
 
 
 
 
 
 
U.S. Wallboard and Surfaces
$
487

 
$
466

 
$
1,440

 
$
1,417

U.S. Performance Materials
101

 
92

 
298

 
278

U.S. Ceilings
143

 
125

 
420

 
355

Canada
110

 
100

 
342

 
300

Other
66

 
63

 
191

 
178

Eliminations
(56
)
 
(51
)
 
(174
)
 
(155
)
Total
$
851

 
$
795

 
$
2,517

 
$
2,373

 
 
 
 
 
 
 
 
Operating Profit (Loss):
 
 
 
 
 
 
 
U.S. Wallboard and Surfaces
$
64

 
$
71

 
$
194

 
$
228

U.S. Performance Materials
(1
)
 
6

 
(6
)
 
20

U.S. Ceilings
24

 
25

 
66

 
68

Canada
6

 
3

 
16

 
7

Other
4

 
6

 
12

 
8

Corporate
(28
)
 
(20
)
 
(92
)
 
(61
)
Total
$
69

 
$
91

 
$
190

 
$
270


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Table of Contents

Net sales disaggregated by product type were as follows:
 
Three months ended September 30, 2018
(millions)
U.S. Wallboard and Surfaces
 
U.S. Performance Materials
 
U.S. Ceilings
 
Canada
 
Other
 
Total
Wallboard
$
253

 
$

 
$

 
$
65

 
$
20

 
$
338

Surfaces and industrial products
145

 

 

 
21

 
7

 
173

Underlayment

 
69

 

 
3

 
11

 
83

Building envelope and structural

 
21

 

 

 

 
21

Ceiling tile and grid

 

 
122

 
10

 
8

 
140

Specialty ceilings

 

 
15

 
3

 

 
18

Other products
25

 

 
1

 
2

 
18

 
46

Total product sales
423

 
90

 
138

 
104

 
64

 
819

Other miscellaneous sales (a)
64

 
11

 
5

 
6

 
2

 
88

Total sales before eliminations
487

 
101

 
143

 
110

 
66

 
907

Eliminations
(31
)
 
(6
)
 
(11
)
 
(8
)
 

 
(56
)
Total net sales
$
456

 
$
95

 
$
132

 
$
102

 
$
66

 
$
851

 
Nine months ended September 30, 2018
(millions)
U.S. Wallboard and Surfaces
 
U.S. Performance Materials
 
U.S. Ceilings
 
Canada
 
Other
 
Total
Wallboard
$
743

 
$

 
$

 
$
196

 
$
57

 
$
996

Surfaces and industrial products
441

 

 

 
67

 
21

 
529

Underlayment

 
204

 

 
8

 
31

 
243

Building envelope and structural

 
62

 

 
1

 
1

 
64

Ceiling tile and grid

 

 
359

 
34

 
25

 
418

Specialty ceilings

 

 
48

 
7

 

 
55

Other products
75

 

 
1

 
10

 
51

 
137

Total product sales
1,259

 
266

 
408

 
323

 
186

 
2,442

Other miscellaneous sales (a)
181

 
32

 
12

 
19

 
5

 
249

Total sales before eliminations
1,440

 
298

 
420

 
342

 
191

 
2,691

Eliminations
(92
)
 
(19
)
 
(38
)
 
(25
)
 

 
(174
)
Total net sales
$
1,348

 
$
279

 
$
382

 
$
317

 
$
191

 
$
2,517

(a)
Other miscellaneous sales primarily includes shipping and handling costs billed to customers.

5.
Marketable Securities
Marketable securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in AOCI on our accompanying condensed consolidated balance sheets.
Our investments in marketable securities consisted of the following:
 
As of September 30, 2018
 
As of December 31, 2017
(millions)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Corporate debt securities
$
74

 
$
74

 
$
68

 
$
68

U.S. government and agency debt securities
3

 
3

 
6

 
6

Asset-backed debt securities
14

 
14

 
11

 
11

Certificates of deposit
7

 
7

 
13

 
13

Municipal debt securities
1

 
1

 
1

 
1

Total marketable securities
$
99

 
$
99

 
$
99

 
$
99


12

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The realized and unrealized gains and losses for the three and nine months ended September 30, 2018 and 2017 were immaterial. Cost basis for securities sold are determined on a first-in-first-out basis.
Contractual maturities of marketable securities as of September 30, 2018 were as follows:
(millions)
Amortized
Cost
 
Fair
Value
Due in 1 year or less
$
61

 
$
61

Due in 1-5 years
38

 
38

Total marketable securities
$
99

 
$
99

Actual maturities may differ from the contractual maturities because issuers of the securities may have the right to prepay them.
6.     Debt
Total debt consisted of the following:
(millions)
September 30,
2018
 
December 31,
2017
4.875% senior notes due 2027
$
500

 
$
500

5.5% senior notes due 2025
350

 
350

Industrial revenue bonds (due 2028 through 2034)
239

 
239

Total
1,089

 
1,089

Less: Unamortized debt issuance costs
10

 
11

Total
$
1,079

 
$
1,078

SENIOR NOTES AND CREDIT FACILITY
During the second quarter of 2017, we issued $500 million of 4.875% Senior Notes due 2027, referred to as our 4.875% Notes. The net proceeds from the issuance of these notes and cash on hand were used to fund the repurchase of our 7.75% Senior Notes due 2018, referred to as our 7.75% Notes, and all related costs and expenses. We deferred $7 million of debt issuance costs that are being amortized to interest expense over the term of the 4.875% Notes.
We repurchased the 7.75% Notes through both a cash tender offer and a subsequent notice of redemption for aggregate consideration of $536 million, including premiums of $20 million and accrued interest of $16 million. In the nine months ended September 30, 2017, we recorded a pre-tax loss on the early extinguishment of debt of $21 million.
Also during the second quarter of 2017, we amended and restated our credit facility agreement. As a result, we recorded a pre-tax loss on extinguishment of debt of $1 million in the nine months ended September 30, 2017.
CREDIT FACILITY
Our credit facility agreement has a maximum borrowing limit of $220 million and requires us to maintain a minimum fixed charge coverage ratio in the event excess availability falls below a minimum threshold. Our excess borrowing availability as of September 30, 2018 of $198 million exceeds this threshold, thus the requirement to maintain the minimum fixed charge coverage ratio is not applicable. As of September 30, 2018, we were in compliance with the covenants contained in our credit facility.
As of September 30, 2018 and during the quarter then-ended, there were no borrowings under the facility. Outstanding letters of credit totaled $22 million as of September 30, 2018.

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OTHER INFORMATION
(millions)
September 30,
2018
 
December 31,
2017
Fair value of debt
$
1,103

 
$
1,134

Accrued interest
13

 
12

The fair values of our debt were determined utilizing unadjusted prices from independent pricing services and are classified as Level 2. See Note 8, Fair Value Measurements, for further discussion on fair value measurements. The vendors’ methodologies utilize various forms of market data, including but not limited to, trade data, yield, spreads, bids and offers. We review the values provided by the independent pricing service for reasonableness by comparing the valuations received from the independent pricing service to valuations from at least one other observable source.
7.
Derivative Instruments
We use derivative instruments to manage selected commodity price and foreign currency exposures as described below. We do not use derivative instruments for speculative trading purposes, and we typically do not hedge beyond five years. Cash flows from derivative instruments are included in operating activities in our condensed consolidated statements of cash flows. Gains and losses on contracts designated as cash flow hedges are reclassified into earnings when the underlying forecasted transactions affect earnings. For contracts designated as cash flow hedges, we reassess the probability of the underlying forecasted transactions occurring on a quarterly basis.
Derivative Instruments
Type
Hedged Item
Aggregate Notional Amount
Contracts Maturing Through
Commodity
Natural gas swaps
Purchases of natural gas
45 million mmBTUs*
December 31, 2022
Foreign Exchange
Forward contracts
Purchases of products and services denominated in a foreign currency
$108 million
December 31, 2019
* - millions of British Thermal Units
COUNTERPARTY RISK, MASTER NETTING ARRANGEMENTS AND BALANCE SHEET OFFSETTING
We are exposed to credit losses in the event of nonperformance by the counterparties to our derivative instruments. As of September 30, 2018, our derivatives were in a $11 million net liability position. All of our counterparties have investment grade credit ratings; accordingly, we anticipate that they will be able to fully satisfy their obligations under the contracts.
All of our derivative contracts are governed by master netting agreements negotiated between us and the counterparties that reduce our counterparty credit exposure. The agreements outline the conditions (such as credit ratings and net derivative fair values) upon which we, or the counterparties, are required to post collateral. As required by certain of our agreements, we had $9 million of collateral posted with our counterparties related to our derivatives as of September 30, 2018. Amounts paid as cash collateral are included in "Receivables" on our accompanying condensed consolidated balance sheets.
We have not adopted an accounting policy to offset fair value amounts related to derivative contracts under our master netting arrangements; therefore, individual derivative contracts are reflected on a gross basis, as either assets or liabilities, on our accompanying condensed consolidated balance sheets, based on their fair value as of the balance sheet date.

 
 
 
 
 
 
 


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Table of Contents

FINANCIAL STATEMENT INFORMATION
The following are the pre-tax effects of derivative instruments on the condensed consolidated statements of income and condensed consolidated statements of comprehensive income for the three months ended September 30, 2018 and 2017. We recognized no gain or loss in net income on derivatives not designated as hedging instruments for the three months ended September 30, 2018 and 2017.
 
Amount of Gain or (Loss)
Recognized in
Other Comprehensive Income on Derivatives (Effective Portion)
 
Location of Gain or (Loss)
 Reclassified from
AOCI into Income
(Effective Portion)
 
Amount of Gain or (Loss) Reclassified from
AOCI into Income
(Effective Portion)
(millions)
2018
 
2017
 
 
 
2018
 
2017
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
Commodity contracts
$

 
$
(2
)
 
Cost of products sold
 
$
(1
)
 
$
(1
)
Foreign exchange contracts
(1
)
 
(3
)
 
Cost of products sold
 

 

Total
$
(1
)
 
$
(5
)
 
 
 
$
(1
)
 
$
(1
)
The following are the pre-tax effects of derivative instruments on the condensed consolidated statements of income and condensed consolidated statements of comprehensive income for the nine months ended September 30, 2018 and 2017.
 
Amount of Gain or (Loss)
Recognized in
Other Comprehensive Income on Derivatives (Effective Portion)
 
Location of Gain or (Loss)
 Reclassified from
AOCI into Income
(Effective Portion)
 
Amount of Gain or (Loss) Reclassified from
AOCI into Income
(Effective Portion)
(millions)
2018
 
2017
 
 
 
2018
 
2017
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
Commodity contracts
$
(3
)
 
$
(12
)
 
Cost of products sold
 
$
(3
)
 
$
(2
)
Foreign exchange contracts
4

 
(6
)
 
Cost of products sold
 

 

Total
$
1

 
$
(18
)
 
 
 
$
(3
)
 
$
(2
)
 
 
Location of Gain or (Loss)
 Recognized in Income
on Derivatives
 
Amount of Gain or (Loss) Recognized in Income
on Derivatives
(millions)
 
 
 
2018
 
2017
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
Commodity contracts
 
Cost of products sold
 
$

 
$
(1
)
Total
 
 
 
$

 
$
(1
)
For both commodity contracts and foreign exchange contracts, no ineffectiveness was recorded in the three and nine months ended September 30, 2018 and 2017.
The following are the fair values of derivative instruments and the location on our accompanying condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017.
 
Balance Sheet
Location
Fair Value
 
Balance Sheet
Location
Fair Value
 
 
(millions)
 
9/30/18
 
12/31/17
 
 
9/30/18
 
12/31/17
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
$
2

 
$
1

 
Accrued expenses
$
5

 
$
6

Commodity contracts
Other assets
1

 
1

 
Other liabilities
11

 
8

Foreign exchange contracts
Other current assets
2

 

 
Accrued expenses

 
3

   Foreign exchange contracts
Other assets

 

 
Other liabilities

 

Total derivatives in cash flow hedging relationships
 
$
5

 
$
2

 
 
$
16

 
$
17

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
$

 
$

 
Accrued expenses
$

 
$

Total derivatives not designated as hedging instruments
 
$

 
$

 
 
$

 
$

Total derivatives
Total assets
$
5

 
$
2

 
Total liabilities
$
16

 
$
17

As of September 30, 2018, we had no derivatives designated as fair value hedges or net investment hedges.

15

Table of Contents

8.     Fair Value Measurements
Certain assets and liabilities are required to be recorded at fair value. There are three levels of inputs that may be used to measure fair value which are described below along with how USG derives fair value.
Level
Definition
USG Valuation Method
Level 1
Quoted prices for identical assets and liabilities in active markets
Cash equivalents and equity mutual funds consist of money market funds that are valued based on quoted prices in active markets.
Level 2
Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets
Marketable securities, including certain cash equivalents, are valued using a "market value" approach. Values are based on quoted prices and other observable market inputs received from data providers.
Derivatives are valued using the "income" approach such as discounted-cash-flow models and readily observable market data. The inputs for the valuation models are obtained from data providers and include end-of-period spot and forward natural gas prices, foreign currency exchange rates, natural gas price volatility and LIBOR and swap rates for discounting the cash flows implied from the derivative contracts.
Level 3
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
No level 3 investments.
Our assets and liabilities measured at fair value on a recurring basis were as follows:
 
Level 1
 
Level 2
 
Level 3
 
Total
(millions)
9/30/18
 
12/31/17
 
9/30/18
 
12/31/17
 
9/30/18
 
12/31/17
 
9/30/18
 
12/31/17
Cash equivalents
$
90

 
$
124

 
$
29

 
$
24

 
$

 
$

 
$
119

 
$
148

Equity mutual funds
6

 
6

 

 

 

 

 
6

 
6

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities

 

 
74

 
68

 

 

 
74

 
68

U.S. government and agency debt securities

 

 
3

 
6

 

 

 
3

 
6

Asset-backed debt securities

 

 
14

 
11

 

 

 
14

 
11

Certificates of deposit

 

 
7

 
13

 

 

 
7

 
13

Municipal debt securities

 

 
1

 
1

 

 

 
1

 
1

Derivative assets

 

 
5

 
2

 

 

 
5

 
2

Derivative liabilities

 

 
(16
)
 
(17
)
 

 

 
(16
)
 
(17
)

16

Table of Contents

9.    Employee Retirement Plans
The components of net pension and postretirement benefit costs are summarized in the following table:
 
Three months ended September 30,
 
Nine months ended September 30,
(millions)
2018
 
2017
 
2018
 
2017
Pension:
 
 
 
 
 
 
 
Service cost of benefits earned
$
13

 
$
11

 
$
37

 
$
32

Interest cost on projected benefit obligation
15

 
15

 
47

 
46

Expected return on plan assets
(24
)
 
(23
)
 
(72
)
 
(69
)
Settlement

 
3

 

 
23

Net amortization
8

 
6

 
24

 
16

     Net pension cost (a)
$
12

 
$
12

 
$
36

 
$
48

Postretirement:
 
 
 
 
 
 
 
Service cost of benefits earned
$
1

 
$

 
$
3

 
$
2

Interest cost on projected benefit obligation
1

 
2

 
3

 
4

Net amortization
(6
)
 
(6
)
 
(18
)
 
(18
)
     Net postretirement benefit
$
(4
)
 
$
(4
)
 
$
(12
)
 
$
(12
)
(a)
Net pension cost, excluding settlement costs, includes amounts allocated to (loss) income from discontinued operations for L&W totaling a benefit of $1 million for the three and nine months ended September 30, 2017.
Service cost of benefits earned is included in "Costs of products sold" and "Selling and administrative expenses" on our condensed consolidated statements of income. The other components of net pension and postretirement costs are included in "Other income, net".
For the three and nine months ended September 30, 2017, we recorded settlement expense of $3 million and $23 million, respectively, as the total lump sum distributions paid by the USG Corporation pension plan to both L&W employees and former USG employees during the first nine months of 2017 exceeded the settlement threshold. Upon termination of their employment from USG, all L&W employees had the option to receive a lump sum benefit payment from the USG Corporation pension plan. For the benefits paid to terminated employees of L&W, we recorded a pre-tax loss of $13 million to "Income (loss) from discontinued operations" for the nine months ended September 30, 2017. For the benefits paid to USG retirees, we recorded a pre-tax loss of $3 million and $10 million to "Other income, net" for the three and nine months ended September 30, 2017.
During the first nine months of 2018, we made cash contributions of $50 million to the USG Corporation Retirement Plan Trust, $1 million to our domestic supplemental pension plan and $4 million to our pension plans in Canada. We expect to make total contributions to our pension plans in 2018 of approximately $60 million.

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Table of Contents

10.    Share-Based Compensation
During the first nine months of 2018, we granted share-based compensation in the form of market share units, or MSUs, performance shares, and restricted stock units, or RSUs, to eligible participants under our 2016 Long-Term Incentive Plan. We recognize expense on all share-based grants over the service period, which is the shorter of the period until the employees’ retirement eligibility dates and the service period of the award for awards expected to vest. We record forfeitures as they occur. Awards granted during the first nine months of 2018, weighted average fair value, and assumptions used to determine fair value were as follows:
 
MSUs
 
Performance Shares
 
RSUs (e)
Awards granted
428,574

 
103,819

 
44,000

Weighted average fair value (a)
$
34.22

 
$
34.21

 
$
36.92

Expected volatility (b)
32.62
%
 
32.61
%
 
N/A

Risk-free rate (c)
2.37
%
 
2.37
%
 
N/A

Expected term (in years) (d)
2.95

 
2.95

 
N/A

Expected dividends

 

 
N/A

(a)
Fair value of MSUs and performance shares is estimated on the date of grant using the Monte Carlo simulation utilizing the assumptions outlined above. Fair value of RSUs is equal to the closing price of our common stock on the date of grant.
(b)
The expected volatility rate is based on stock price history immediately prior to grant for a period commensurate with the expected term.
(c)
The risk-free rate is based on zero coupon U.S. government issues at the time of grant.
(d)
The expected term represents the period from the valuation date to the end of the performance period.
(e)
We granted 3,812 dividend equivalents on unvested RSU awards on October 2, 2018 following the adoption of the Merger Agreement by our stockholders on September 26, 2018 and the payment of the conditional special dividend. See Note 15, Merger Agreement. The dividend equivalents are subject to the same terms and conditions as the RSUs to which they are credited.
Terms of the awards granted during the first nine months of 2018 were as follows:
 
MSUs
Performance Shares
RSUs
Maximum shares/units earned
Varies from 0% to 150% of the number of MSUs awarded depending on the actual performance of our stock price
Varies from 0% to 200% of the number of performance shares awarded depending on the performance of our total stockholder return relative to the performance of the Dow Jones U.S. Construction and Materials Index (a)
100%
Vesting Provisions
Three-year performance period
Three-year performance period
Specified number of years from the grant date
Vesting in the case of termination of employment due to death, disability, retirement or change in control during performance period (b)
Pro-rated based on the number of full months employed in 2018 with awards issued at the end of the three-year period
Pro-rated based on the number of full months employed during the performance period with awards issued at the end of the three-year period
Varies
Settlement
Settled in common stock at the end of the performance or vesting period
(a)
Adjustments to the performance of the Dow Jones U.S. Construction and Materials Index may be made to reflect changes in the companies included in the index during the performance period.
(b)
Early vesting for MSUs, performance shares and RSUs in situations where there is a change in control also requires a related loss of employment or diminution of duties in certain circumstances.
OTHER
MSUs, performance shares, RSUs, and stock options that were not included in the computation of diluted earnings per share for those periods because their inclusion would be anti-dilutive were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
(millions)
2018
 
2017
 
2018
 
2017
MSUs, performance shares, RSUs and stock options

 
0.6

 

 
0.8


18

Table of Contents

11.    Supplemental Balance Sheet Information
INVENTORIES
Total inventories consisted of the following:
(millions)
September 30, 2018
 
December 31, 2017
Finished goods
$
167

 
$
140

Work in progress
43

 
39

Raw materials
78

 
73

Total
$
288

 
$
252

ACCRUED EXPENSES
Accrued expenses consisted of the following:
(millions)
September 30, 2018
 
December 31, 2017
Self-insurance reserves
$
14

 
$
12

Employee compensation
13

 
17

Interest
13

 
12

Derivatives
5

 
9

Pension and other postretirement benefits
17

 
17

Environmental
12

 
17

Other
58

 
51

Total
$
132

 
$
135

ASSET RETIREMENT OBLIGATIONS
Changes in the liability for asset retirement obligations, which are included in "Other liabilities" on our condensed consolidated balance sheets, consisted of the following:
 
Nine months ended September 30,
(millions)
2018
 
2017
Balance as of January 1
$
118

 
$
113

Accretion expense
5

 
5

Liabilities incurred

 
3

Changes in estimated cash flows
(5
)
 
(4
)
Liabilities settled
(1
)
 
(1
)
Foreign currency translation

 
2

Balance as of September 30
$
117

 
$
118

ASSET DISPOSITIONS
In the second quarter of 2018, we recorded a gain of $13 million, or $9 million net of tax, on the sale of a surplus property. The pre-tax gain was recorded in cost of products sold within the U.S. Wallboard and Surfaces segment.

19

Table of Contents

12.    Stockholders' Equity
TREASURY STOCK
Changes in treasury stock for the nine months ended September 30, 2018 and 2017 were as follows:
 
2018
 
2017
(millions, except share data)
Treasury Shares (000)
 
Treasury Stock
 
Treasury Shares (000)
 
Treasury Stock
Balance as of January 1
(5,571
)
 
$
(169
)
 

 
$

Repurchase of common stock for tax withholdings related to stock-based compensation
(204
)
 
(7
)
 
(115
)
 
(4
)
Repurchase of common stock under share repurchase program (a)
(2,156
)
 
(76
)
 
(5,150
)
 
(153
)
Stock reissuances
1,175

 
43

 
227

 
7

Balance as of September 30
(6,756
)
 
$
(209
)
 
(5,038
)
 
$
(150
)
(a)
The Merger Agreement limits our ability to repurchase shares of our common stock, subject to certain exceptions, and share repurchases under the program will not continue so long as the Merger Agreement is in effect.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in the balances of each component of AOCI for the nine months ended September 30, 2018 and 2017 were as follows:
 
Derivatives
 
Defined Benefit Plans
 
Foreign
Currency Translation
 
AOCI
(millions)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Balance as of January 1
$
16

 
$
27

 
$
(297
)
 
$
(246
)
 
$
(108
)
 
$
(166
)
 
$
(389
)
 
$
(385
)
Other comprehensive income (loss) before reclassifications, net of tax
1

 
(11
)
 
2

 
(12
)
 
(22
)
 
58

 
(19
)
 
35

Less: Amounts reclassified from AOCI, net of tax
(3
)
 
(1
)
 
(4
)
 
(13
)
 
(4
)
 

 
(11
)
 
(14
)
Net other comprehensive income (loss)
4

 
(10
)
 
6

 
1

 
(18
)
 
58

 
(8
)
 
49

Balance as of September 30
$
20

 
$
17

 
$
(291
)
 
$
(245
)
 
$
(126
)
 
$
(108
)
 
$
(397
)
 
$
(336
)
Amounts reclassified from AOCI, net of tax, for the three and nine months ended September 30, 2018 and 2017, were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
(millions)
2018
 
2017
 
2018
 
2017
Derivatives
 
 
 
 
 
 
 
Net reclassification from AOCI for cash flow hedges included in cost of products sold
$
(1
)
 
$
(1
)
 
$
(3
)
 
$
(2
)
Less: Income tax benefit on reclassification from AOCI included in income tax expense

 
(1
)
 

 
(1
)
Net amount reclassified from AOCI
$
(1
)
 
$

 
$
(3
)
 
$
(1
)
 
 
 
 
 
 
 
 
Defined Benefit Plans
 
 
 
 
 
 
 
Net reclassification in AOCI for amortization of prior service cost included in other income, net
$
(2
)
 
$
(3
)
 
$
(6
)
 
$
(10
)
Net reclassification from AOCI for amortization of prior service cost included in (loss) income from discontinued operations, net of tax

 

 

 
(8
)
Less: Income tax benefit on reclassification from AOCI included in income tax expense
(1
)
 
(2
)
 
(2
)
 
(5
)
Net amount reclassified from AOCI
$
(1
)
 
$
(1
)
 
$
(4
)
 
$
(13
)
 
 
 
 
 
 
 
 
Foreign Currency Translation
 
 
 
 
 
 
 
Net reclassification from AOCI for translation gains realized upon the sale of foreign equity method investment included in other (expense) income, net
$

 
$

 
$
(6
)
 
$

Less: Income tax expense on reclassification from AOCI included in income tax expense (benefit)

 

 
(2
)
 

Net amount reclassified from AOCI
$

 
$

 
$
(4
)
 
$