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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-8864

USG CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		36-3329400
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

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, 2011 was 105,308,396.

 

 

Table of Contents

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations: Three Months and Nine Months Ended September 30, 2011 and 2010			3
Condensed Consolidated Balance Sheets: As of September 30, 2011 and December 31, 2010			4
Condensed Consolidated Statements of Cash Flows: Nine Months Ended September 30, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures about Market Risks			42
Item 4. Controls and Procedures			43
PART II OTHER INFORMATION
Item 1. Legal Proceedings			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 5. Other Information			44
Item 6. Exhibits			45
Signatures			46
EX-4.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

USG CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months								Nine Months
(millions, except per-share and share data)		ended September 30,								ended September 30,
		2011				2010				2011				2010
Net sales		$	792			$	758			$	2,274			$	2,243
Cost of products sold			739				707				2,132				2,123
Gross profit			53				51				142				120
Selling and administrative expenses			70				74				227				231
Restructuring and long-lived asset impairment charges			59				35				70				54
Operating loss			(76	)			(58	)			(155	)			(165	)
Interest expense			54				45				158				134
Interest income			(1	)			(1	)			(5	)			(3	)
Other income, net			—				—				(2	)			—
Loss before income taxes			(129	)			(102	)			(306	)			(296	)
Income tax expense (benefit)			(14	)			(2	)			(16	)			(12	)
Net loss		$	(115	)		$	(100	)		$	(290	)		$	(284	)
Basic loss per common share		$	(1.09	)		$	(1.00	)		$	(2.80	)		$	(2.85	)
Diluted loss per common share		$	(1.09	)		$	(1.00	)		$	(2.80	)		$	(2.85	)
Average common shares			105,304,781				100,108,673				103,592,899				99,671,209
Average diluted common shares			105,304,781				100,108,673				103,592,899				99,671,209

See accompanying Notes to Condensed Consolidated Financial Statements.

USG CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		As of				As of
		September 30,				December 31,
(millions)		2011				2010
Assets
Current Assets:
Cash and cash equivalents		$	356			$	629
Short-term marketable securities			161				128
Restricted cash			1				4
Receivables (net of reserves — $17 and $17)			376				327
Inventories			320				290
Income taxes receivable			7				3
Deferred income taxes			3				6
Other current assets			54				50
Total current assets			1,278				1,437
Long-term marketable securities			160				150
Property, plant and equipment (net of accumulated depreciation and depletion — $1,590 and $1,546)			2,129				2,266
Deferred income taxes			12				—
Other assets			240				234
Total assets		$	3,819			$	4,087
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	249			$	218
Accrued expenses			272				294
Current portion of long-term debt			7				7
Income taxes payable			8				10
Total current liabilities			536				529
Long-term debt			2,298				2,301
Deferred income taxes			8				7
Other liabilities			602				631
Commitments and contingencies
Stockholders’ Equity:
Preferred stock			—				—
Common stock			10				10
Treasury stock			—				(55	)
Capital received in excess of par value			2,559				2,565
Accumulated other comprehensive loss			(53	)			(50	)
Retained earnings (deficit)			(2,141	)			(1,851	)
Total stockholders’ equity			375				619
Total liabilities and stockholders’ equity		$	3,819			$	4,087

See accompanying Notes to Condensed Consolidated Financial Statements.

USG CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine Months
(millions)		ended September 30,
		2011				2010
Operating Activities
Net loss		$	(290	)		$	(284	)
Adjustments to reconcile net loss to net cash:
Long-lived asset impairments			52				28
Depreciation, depletion and amortization			125				134
Share-based compensation expense			19				20
Deferred income taxes			(11	)			2
Noncash income tax benefit			(3	)			(19	)
Gain on asset dispositions			(1	)			(1	)
(Increase) decrease in working capital:
Receivables			(52	)			(54	)
Income taxes receivable			(4	)			15
Inventories			(30	)			(8	)
Prepaid expenses			(2	)			—
Payables			37				18
Accrued expenses			(7	)			(5	)
(Increase)/decrease in other assets			(8	)			11
Increase in other liabilities			1				19
Other, net			1				(2	)
Net cash used for operating activities			(173	)			(126	)
Investing Activities
Purchases of marketable securities			(295	)			(188	)
Sales or maturities of marketable securities			251				44
Capital expenditures			(38	)			(18	)
Loan to joint venture			(4	)			—
Net proceeds from asset dispositions			3				3
Return (deposit) of restricted cash			2				(1	)
Net cash used for investing activities			(81	)			(160	)
Financing Activities
Repayment of debt			(5	)			(5	)
Issuance of common stock			—				1
Repurchases of common stock to satisfy employee tax withholding obligations			(3	)			(2	)
Net cash used for financing activities			(8	)			(6	)
Effect of exchange rate changes on cash			(11	)			2
Net decrease in cash and cash equivalents			(273	)			(290	)
Cash and cash equivalents at beginning of period			629				690
Cash and cash equivalents at end of period		$	356			$	400
Supplemental Cash Flow Disclosures:
Interest paid		$	141			$	129
Income taxes paid (refunded), net		$	7			$	(11	)
Amount in accounts payable for capital expenditures		$	1			$	2

See accompanying Notes to Condensed Consolidated Financial Statements.

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. 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 from those estimates. In the opinion of our management, the financial statements reflect all adjustments, which are of a normal recurring nature except as noted, necessary for a fair presentation of our financial results for the interim periods. The results of operations for the three months and nine months ended September 30, 2011 are not necessarily indicative of the results of operations to be expected for the entire year. These 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, 2010 which we filed with the SEC on February 11, 2011.

2. Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This guidance is effective for interim and annual periods beginning on or after December 15, 2011, applied prospectively. Our effective date is January 1, 2012. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

     In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires comprehensive income to be reported in either a single statement of comprehensive income or in separate, consecutive statements reporting net income and other comprehensive income. The ASU requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance will require us to change the presentation of comprehensive income and its components which we currently report within the statement of changes in stockholders’ equity in our Annual Report on Form 10-K and in a note to the financial statements in our quarterly reports on Form 10-Q.

3. Restructuring and Long-Lived Asset Impairment Charges

As part of our continuing objective to adapt our operations to market conditions, we recorded restructuring and long-lived asset impairment charges totaling $59 million during the third quarter of 2011. These charges related to the permanent closure of our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada, and L&W Supply Corporation’s closure of nine distribution branches and its Nevada custom door and frames business.

     We idled the gypsum quarry and ship loading facility during the first quarter of this year, and have now decided that we will permanently close it. As a result of that decision, we recorded additional long-lived asset impairment charges totaling $51 million during the third quarter of 2011. This amount included $41 million related to the write-down of the carrying values of property, machinery, equipment and buildings and $10 million related to the acceleration of the Windsor facility’s asset retirement obligation. Other third quarter restructuring charges included $4 million for lease obligations, $2 million for severance and $2 million for asset impairment related to the write-down of inventory. On a segment basis, $52 million of the charges related to North American Gypsum and $7 million to Building Products Distribution.

     Restructuring and long-lived asset impairment charges for the first nine months of 2011 totaled $70 million. These charges included $52 million for long-lived asset impairments, $6 million for severance, $6 million for lease obligations, $4 million for exit costs related to production facilities closed in 2010 and 2009 and $2 million for asset impairment related to the write-down of inventory. On a segment basis, $61 million of the charges related to North American Gypsum, $8 million to Building Products Distribution and $1 million to Corporate.

RESTRUCTURING RESERVES

Restructuring reserves totaling $36 million were included in accrued expenses and other liabilities on the condensed consolidated balance sheet as of September 30, 2011. Total cash payments charged against the restructuring reserve in the first nine months of 2011 amounted to $29 million. We expect future payments to be approximately $6 million during the remainder of 2011, $12 million in 2012 and $18 million after 2012. All restructuring-related payments in the first nine months of 2011 were funded with cash on hand. We expect that the future payments will be funded with cash from operations or cash on hand. The restructuring reserve is summarized as follows:

		Balance				2011 Activity												Balance
		as of								Cash				Asset				as of
(millions)		12/31/10				Charges				Payments				Impairment				9/30/11
Severance		$	11			$	6			$	(13	)		$	—			$	4
Lease obligations			29				6				(9	)			—				26
Asset impairments			—				54				—				(54	)			—
Other exit costs			9				4				(7	)			—				6
Total		$	49			$	70			$	(29	)		$	(54	)		$	36

2010

Third quarter 2010 restructuring and long-lived asset impairment charges totaled $35 million. These charges included $6 million for lease obligations and $1 million for severance related to prior-period restructuring activities. The charges for the quarter also included $28 million for long-lived asset impairments related to the write-down of the carrying values of machinery, equipment and buildings at the temporarily idled gypsum wallboard production facilities in Baltimore, Md., and Stony Point, N.Y., one of the temporarily idled gypsum wallboard production facilities in Jacksonville, Fla. and the temporarily idled paper production facility in Jacksonville, Fla. The carrying value of the machinery, equipment and buildings exceeded the estimated future undiscounted cash flows for their remaining useful lives due to the extended downturn in our markets and our forecasts regarding the timing and rate of recovery in those markets.

     For the first nine months of 2010, restructuring and long-lived asset impairment charges were $54 million. This amount primarily included charges related to the write-down of the carrying values of machinery, equipment and buildings at the temporarily idled gypsum wallboard production facilities in Baltimore, Md., and Stony Point, N.Y., one of the temporarily idled gypsum wallboard production facilities in Jacksonville, Fla. and the temporarily idled paper production facility in Jacksonville, Fla., the closure of a gypsum wallboard production facility in Southard, Okla., the temporary idling of a gypsum wallboard production facility in Stony Point, N.Y., the curtailment of operations at the mining facility in Canada and the closure of five distribution centers. The charges included $28 million for long-lived asset impairments, $12 million for other asset impairments and lease obligations, $10 million for severance and $4 million for other exit costs.

4. Segments

Our operations are organized into three reportable segments: North American Gypsum, Building Products Distribution and Worldwide Ceilings. Segment results were as follows:

		Three Months								Nine Months
		ended September 30,								ended September 30,
(millions)		2011				2010				2011				2010
Net Sales:
North American Gypsum		$	437			$	413			$	1,273			$	1,265
Building Products Distribution			283				281				796				811
Worldwide Ceilings			183				174				533				511
Eliminations			(111	)			(110	)			(328	)			(344	)
Total		$	792			$	758			$	2,274			$	2,243
Operating Profit (Loss):
North American Gypsum		$	(70	)		$	(43	)		$	(115	)		$	(89	)
Building Products Distribution			(17	)			(24	)			(53	)			(85	)
Worldwide Ceilings			25				21				73				62
Corporate			(16	)			(13	)			(60	)			(50	)
Eliminations			2				1				—				(3	)
Total		$	(76	)		$	(58	)		$	(155	)		$	(165	)

     Restructuring and long-lived asset impairment charges by segment were as follows:

		Three Months								Nine Months
		ended September 30,								ended September 30,
(millions)		2011				2010				2011				2010
North American Gypsum		$	52			$	30			$	61			$	40
Building Products Distribution			7				5				8				14
Worldwide Ceilings			—				—				—				—
Corporate			—				—				1				—
Total		$	59			$	35			$	70			$	54

     See Note 3 for information related to restructuring and long-lived asset impairment charges and the restructuring reserve as of September 30, 2011.

5. Earnings (Loss) Per Share

Basic earnings (loss) per share are based on the weighted average number of common shares outstanding. Diluted earnings per share are based on the weighted average number of common shares outstanding plus the dilutive effect, if any, of restricted stock units, or RSUs, and performance shares, the potential exercise of outstanding stock options and the potential conversion of our $400 million of 10% convertible senior notes. The reconciliation of basic loss per share to diluted loss per share is shown in the following table:

										Weighted
										Average
		Net				Shares				Per-Share
(millions, except per-share and share data)		Loss				(000)				Amount
Three Months Ended September 30, 2011:
Basic loss		$	(115	)			105,305			$	(1.09	)
Diluted loss		$	(115	)			105,305			$	(1.09	)
Three Months Ended September 30, 2010:
Basic loss		$	(100	)			100,109			$	(1.00	)
Diluted loss		$	(100	)			100,109			$	(1.00	)
Nine Months Ended September 30, 2011:
Basic loss		$	(290	)			103,593			$	(2.80	)
Diluted loss		$	(290	)			103,593			$	(2.80	)
Nine Months Ended September 30, 2010:
Basic loss		$	(284	)			99,671			$	(2.85	)
Diluted loss		$	(284	)			99,671			$	(2.85	)

     The diluted losses per share for the third quarter and the first nine months of 2011 and 2010 were computed using the weighted average number of common shares outstanding during those periods. The approximately 35.1 million shares issuable upon conversion of the $400 million of 10% convertible senior notes we issued in 2008 at the initial conversion price of $11.40 per share were not included in the computation of diluted loss per share for those periods because their inclusion was anti-dilutive. Stock options, RSUs and performance shares with respect to 4.9 million common shares for the third quarter of 2011, 3.4 million common shares for the first nine months of 2011, 6.5 million common shares for the third quarter of 2010 and 6.7 million common shares for the first nine months of 2010 were not included in the computation of diluted loss per share for those periods because their inclusion was anti-dilutive.

6. 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 accumulated other comprehensive income (loss), or AOCI, on our condensed consolidated balance sheets. The realized and unrealized gains and losses as of and for the quarter ended September 30, 2011 were immaterial. Proceeds received from sales and maturities of marketable securities were $251 million for the nine months ended September 30, 2011. Our investments in marketable securities as of September 30, 2011 consisted of the following:

		Amortized				Fair
(millions)		Cost				Value
Corporate debt securities		$	180			$	180
U.S. government and agency debt securities			53				53
Asset-backed debt securities			22				22
Certificates of deposit			44				44
Municipal debt securities			22				22
Total marketable securities		$	321			$	321

Contractual maturities of marketable securities as of September 30, 2011 were as follows:

		Amortized				Fair
(millions)		Cost				Value
Due in 1 year or less		$	161			$	161
Due in 1-5 years			160				160
Due in more than 5 years			—				—
Total marketable securities		$	321			$	321

     Actual maturities may differ from the contractual maturities because issuers of the securities may have the right to prepay them.

7. Intangible Assets

Intangible assets are included in other assets on the condensed consolidated balance sheets. Intangible assets with definite lives are amortized. These assets are summarized as follows:

		As of September 30, 2011												As of December 31, 2010
		Gross												Gross
		Carrying				Accumulated								Carrying				Accumulated
(millions)		Amount				Amortization				Net				Amount				Amortization				Net
Intangible Assets with Definite Lives:
Customer relationships		$	70			$	(32	)		$	38			$	70			$	(26	)		$	44
Other			9				(5	)			4				9				(5	)			4
Total		$	79			$	(37	)		$	42			$	79			$	(31	)		$	48

     Total amortization expense was $2 million and $6 million for the third quarter and first nine months of 2011, respectively, and $1 million and $5 million for the third quarter and first nine months of 2010, respectively. Estimated annual amortization expense is as follows:

(millions)		2011				2012				2013				2014				2015				2016
Estimated annual amortization expense		$	8			$	8			$	7			$	7			$	7			$	7

     Intangible assets with indefinite lives are not amortized. These assets are summarized as follows:

		As of September 30, 2011												As of December 31, 2010
		Gross												Gross
		Carrying				Impairment								Carrying				Impairment
(millions)		Amount				Charges				Net				Amount				Charges				Net
Intangible Assets with Indefinite Lives:
Trade names		$	22			$	—			$	22			$	22			$	—			$	22
Other			8				—				8				9				(1	)			8
Total		$	30			$	—			$	30			$	31			$	(1	)		$	30

8. Debt

Total debt, including the current portion of long-term debt, consisted of the following:

		As of				As of
		September 30,				December 31,
(millions)		2011				2010
6.3% senior notes due 2016		$	500			$	500
7.75% senior notes due 2018, net of discount			499				499
8.375% senior notes due 2018			350				350
9.75% senior notes due 2014, net of discount			296				296
10% convertible senior notes due 2018, net of discount			383				382
Ship mortgage facility (includes $7 million of current portion of long-term debt)			38				42
Industrial revenue bonds (due 2028 through 2034)			239				239
Total		$	2,305			$	2,308

CREDIT FACILITY

Our credit facility allows for revolving loans and letters of credit (up to $250 million) in an aggregate principal amount not to exceed the lesser of (a) $400 million or (b) a borrowing base determined by reference to the trade receivables and inventory of USG and its significant domestic subsidiaries. The maximum allowable borrowings may be increased at our request with the agreement of the lenders providing increased or new lending commitments, provided that the maximum allowable borrowings after giving effect to the increase may not exceed $600 million. The credit facility is guaranteed by our significant domestic subsidiaries and secured by their and USG’s trade receivables and inventory. It is available to fund working capital needs and for other general corporate purposes.

     Borrowings under the credit facility bear interest at a floating rate based on an alternate base rate or, at our option, at adjusted LIBOR plus 3.00%. We are also required to pay annual facility fees of 0.75% on the entire facility, whether drawn or undrawn, and fees on outstanding letters of credit. We have the ability to repay amounts outstanding under the credit agreement at any time without prepayment premium or penalty. The credit facility matures on December 21, 2015 unless terminated earlier in accordance with its terms, including if by May 2, 2014 our 9.75% senior notes due in 2014 are not repaid, their payment is not provided for or their maturity has not been extended until at least 2016 unless we then have liquidity of at least $500 million.

     The credit agreement contains a single financial covenant that would require us to maintain a minimum fixed charge coverage ratio of 1.1-to-1.0 if and for so long as the excess of the borrowing base over the outstanding borrowings under the credit agreement is less than the greater of (a) $40 million and (b) 15% of the lesser of (i) the aggregate revolving commitments at such time and (ii) the borrowing base at such time. As of September 30, 2011, our fixed charge coverage ratio was (0.17)-to-1. Because we do not currently satisfy the required fixed charge coverage ratio, we must maintain borrowing availability of at least $46 million under the credit facility. 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.

     Taking into account the most recent borrowing base calculation delivered under the credit facility, which reflects trade receivables and inventory as of September 30, 2011, outstanding letters of credit and the current borrowing availability requirement of $46 million, borrowings available under the credit facility were approximately $178 million. As of September 30, 2011 and during the quarter then-ended, there were no borrowings under the facility. Had there been any borrowings as of that date, the applicable interest rate would have been 3.4%. Outstanding letters of credit totaled $80 million as of September 30, 2011.

SENIOR NOTES

We have $300 million in aggregate principal amount of 9.75% senior notes due 2014 that are recorded on the condensed consolidated balance sheets at $296 million as of September 30, 2011 and December 31, 2010, net of debt discount of $4 million. Our obligations under the notes are guaranteed on a senior unsecured basis by certain of our domestic subsidiaries.

     We have $350 million in aggregate principal amount of 8.375% senior notes due 2018. Our obligations under these notes are guaranteed on a senior unsecured basis by the same domestic subsidiaries that have guaranteed the 9.75% senior notes.

     We have $500 million of 7.75% senior notes due 2018 that are recorded on the condensed consolidated balance sheets at $499 million, net of debt discount of $1 million. The interest rate payable on these notes is subject to adjustment from time to time by up to 2% in the aggregate if the debt ratings assigned to the notes are upgraded or thereafter downgraded. At our current credit ratings, the interest rate on these notes is at the maximum level of 9.75%.

     We also have $500 million of 6.3% senior notes due 2016. The 9.75% senior notes, 8.375% senior notes, 7.75% senior notes and 6.3% senior notes are senior unsecured obligations and rank equally with all of our other existing and future unsecured senior indebtedness. The indentures governing the notes contain events of default, covenants and restrictions that are customary for similar transactions, including a limitation on our ability and the ability of certain of our subsidiaries to create or incur secured indebtedness.

     The 9.75% and 8.375% senior notes contain a provision requiring us to offer to purchase those notes at a premium of 101% of their principal amount (plus accrued and unpaid interest) in the event of a change in control. The 7.75% and 6.3% senior notes contain a provision requiring us to offer to purchase those notes at a premium of 101% of their principal amount (plus accrued and unpaid interest) in the event of a change in control and a related downgrade of the rating on the notes to below investment grade by both Moody’s Investors Service and Standard & Poor’s Financial Services LLC.

     The 9.75%, 7.75% and 6.3% senior notes contain a provision that allows us to redeem the notes in whole at any time, or in part from time to time, at our option, at a redemption price equal to the greater of (1) 100% of the principal amount of the notes being redeemed and (2) the sum of the present value of the remaining scheduled payments of principal and interest on the notes being redeemed discounted to the redemption date on a semi-annual basis at the applicable U.S. Treasury rate plus a spread (as outlined in the respective indentures), plus, in each case, any accrued and unpaid interest on the principal amount being redeemed to the redemption date. The 8.375% senior notes contain a similar provision that allows us to redeem those notes, in whole or in part from time to time, at our option, beginning on October 15, 2014 at stated redemption prices, plus any accrued and unpaid interest. In addition, we may redeem the 8.375% senior notes in whole or in part from time to time, at our option, prior to October 15, 2014 at a redemption price equal to 100% of the principal amount of the notes redeemed plus a premium (as specified in the supplemental indenture with respect to those notes), plus any accrued and unpaid interest.

CONVERTIBLE SENIOR NOTES

We have $400 million aggregate principal amount of 10% convertible senior notes due 2018 that are recorded on the condensed consolidated balance sheets at $383 million as of September 30, 2011 and December 31, 2010, net of debt discount of $17 million as a result of an embedded derivative. The notes bear cash interest at the rate of 10% per year until maturity, redemption or conversion. The notes are initially convertible into 87.7193 shares of our common stock per $1,000 principal amount of notes which is equivalent to an initial conversion price of $11.40 per share, or a total of 35.1 million shares. The notes contain anti-dilution provisions that are customary for convertible notes issued in transactions similar to that in which the notes were issued. The notes mature on December 1, 2018 and are not callable until December 1, 2013, after which we may elect to redeem all or part of the notes at stated redemption prices, plus accrued and unpaid interest.

     The notes are senior unsecured obligations and rank equally with all of our other existing and future unsecured senior indebtedness. The indenture governing the notes contains events of default, covenants and restrictions that are customary for similar transactions, including a limitation on our ability and the ability of certain of our subsidiaries to create or incur secured indebtedness. The notes also contain a provision requiring us to offer to purchase the notes at a premium of 105% of their principal amount (plus accrued and unpaid interest) in the event of a change in control or the termination of trading of our common stock on a national securities exchange.

SHIP MORTGAGE FACILITY

Our subsidiary, Gypsum Transportation Limited, or GTL, has a secured loan facility agreement with DVB Bank SE, as lender, agent and security trustee. Both advances provided for under the secured loan facility have been drawn, and the total outstanding loan balances under the facility were $38 million as of September 30, 2011 and $42 million as of December 31, 2010. Of the total amounts outstanding as of September 30, 2011 and December 31, 2010, $7 million was classified as current portion of long-term debt on our condensed consolidated balance sheets.

     The loan balance under the secured loan facility bears interest at a floating rate based on LIBOR plus a margin of 1.65%. The interest rate was 2.52% as of September 30, 2011. Each advance is repayable in quarterly installments in amounts determined in accordance with the secured loan facility agreement, with the balance of each advance repayable eight years after the date it was advanced, or October 31, 2016 and May 22, 2017. The secured loan facility agreement contains affirmative and negative covenants affecting GTL and certain customary events of default. GTL has granted DVB Bank SE a security interest in the Gypsum Centennial and Gypsum Integrity ships and related insurance, contract, account and other rights as security for borrowings under the secured loan facility. USG Corporation has guaranteed the obligations of GTL under the secured loan facility and has agreed to maintain liquidity of at least $175 million.

CGC CREDIT FACILITY

Our Canadian subsidiary, CGC Inc., or CGC, has a Can. $30 million credit agreement with The Toronto-Dominion Bank. The credit agreement allows for revolving loans and letters of credit (up to Can. $3 million in aggregate) in an aggregate principal amount not to exceed Can. $30 million. The credit agreement is available for the general corporate purposes of CGC, excluding hostile acquisitions. The credit agreement is secured by a general security interest in substantially all of CGC’s assets other than intellectual property.

     Revolving loans under the agreement may be made in Canadian dollars or U.S. dollars. Revolving loans made in Canadian dollars bear interest at a floating rate based on the prime rate plus 1.50% or the Bankers’ Acceptance Discount Rate plus 3.00%, at the option of CGC. Revolving loans made in U.S. dollars bear interest at a floating rate based upon a base rate plus 1.50% or the LIBOR rate plus 3.00%, at the option of CGC. CGC may prepay the revolving loans at its discretion without premium or penalty and may be required to repay revolving loans under certain circumstances. The credit agreement matures on June 1, 2012, unless terminated earlier in accordance with its terms. The credit agreement contains customary representations and warranties, affirmative and negative covenants that may limit CGC’s ability to take certain actions and events of default. Borrowings under the credit agreement are subject to acceleration upon the occurrence of an event of default.

     As of September 30, 2011 and during the quarter then ended, there were no borrowings outstanding under this credit agreement. Had there been any borrowings as of that date, the applicable interest rate would have been 4.3%. As of September 30, 2011, outstanding letters of credit totaled Can. $0.5 million. The U.S. dollar equivalent of borrowings available under this agreement as of September 30, 2011 was $28 million.

INDUSTRIAL REVENUE BONDS

Our $239 million of industrial revenue bonds have fixed interest rates ranging from 5.5% to 6.4%. The weighted average rate of interest on our industrial revenue bonds is 5.875%. These bonds mature during the years 2028 through 2034.

OTHER INFORMATION

The fair value of our debt was $1.981 billion as of September 30, 2011 and $2.564 billion as of December 31, 2010. The fair value was based on quoted market prices of our debt or, where quoted market prices were not available, on quoted market prices of instruments with similar terms and maturities or internal valuation models. Interest accrued on our debt as of September 30, 2011 and December 31, 2010 was $58 million and $49 million, respectively.

     As of September 30, 2011, we were in compliance with the covenants contained in our credit facilities.

9. 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 net cash used for operating activities in the condensed consolidated statements of cash flows.

COMMODITY DERIVATIVE INSTRUMENTS

As of September 30, 2011, we had swap and option contracts to hedge $53 million notional amounts of natural gas. All of these contracts mature by December 31, 2012. For contracts designated as cash flow hedges, the unrealized loss that remained in AOCI as of September 30, 2011 was $10 million. AOCI also included $1 million of losses related to closed derivative contracts hedging underlying transactions that have not yet affected earnings. No ineffectiveness was recorded on contracts designated as cash flow hedges in the first nine months of 2011. 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 regular basis. Changes in fair value on contracts not designated as cash flow hedges are recorded to earnings. The fair value of those contracts not designated as cash flow hedges was $1 million as of September 30, 2011.

FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS

We have foreign exchange forward contracts to hedge purchases of products and services denominated in foreign currencies. The notional amount of these contracts was $98 million as of September 30, 2011, and they mature by December 21, 2012. These forward contracts are designated as cash flow hedges and no ineffectiveness was recorded in the first nine months of 2011. Gains and losses on the contracts are reclassified into earnings when the underlying transactions affect earnings. The fair value of these contracts that remained in AOCI was a $5 million unrealized gain as of September 30, 2011.

COUNTERPARTY RISK

We are exposed to credit losses in the event of nonperformance by the counterparties to our derivative instruments. 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. Additionally, the derivatives 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 of September 30, 2011, our derivatives were in a net liability

position of $4 million, and we provided $10 million of collateral to our counterparties related to our derivatives. If full collateralization of these agreements were to be required, an additional $1 million of collateral would be provided. We have not adopted an accounting policy to offset fair value amounts related to derivative contracts under our master netting arrangements. Amounts paid as cash collateral are included in receivables on our condensed consolidated balance sheets.

FINANCIAL STATEMENT INFORMATION

The following are the pretax effects of derivative instruments on the condensed consolidated statements of operations for the three months ended September 30, 2011 and 2010 (dollars in millions):

		Amount of Gain or (Loss)
		Recognized in								Location of Gain or (Loss)				Amount of Gain or (Loss)
Derivatives in		Other Comprehensive								Reclassified from				Reclassified from
Cash Flow Hedging		Income on Derivatives								AOCI into Income				AOCI into Income
Relationships		(Effective Portion)								(Effective Portion)				(Effective Portion)
		2011				2010								2011				2010
Commodity contracts		$	(1	)		$	(6	)		Cost of products sold				$	(4	)		$	(5	)
Foreign exchange contracts			8				(1	)		Cost of products sold					(2	)			—
Total		$	7			$	(7	)						$	(6	)		$	(5	)

Derivatives Not		Location of Gain or (Loss)				Amount of Gain or (Loss)
Designated as Hedging		Recognized in Income				Recognized in Income
Instruments		on Derivatives				on Derivatives
						2011				2010
Commodity contracts		Cost of products sold				$	(2	)		$	(2	)
Foreign exchange contracts		Other expense (income), net					—				—
Total						$	(2	)		$	(2	)

     The following are the pretax effects of derivative instruments on the condensed consolidated statement of operations for the nine months ended September 30, 2011 and 2010 (dollars in millions):

		Amount of Gain or (Loss)
		Recognized in								Location of Gain or (Loss)				Amount of Gain or (Loss)
Derivatives in		Other Comprehensive								Reclassified from				Reclassified from
Cash Flow Hedging		Income on Derivatives								AOCI into Income				AOCI into Income
Relationships		(Effective Portion)								(Effective Portion)				(Effective Portion)
		2011				2010								2011				2010
Commodity contracts		$	(2	)		$	(18	)		Cost of products sold				$	(13	)		$	(15	)
Foreign exchange contracts			5				—			Cost of products sold					(4	)			—
Total		$	3			$	(18	)						$	(17	)		$	(15	)

Derivatives Not		Location of Gain or (Loss)				Amount of Gain or (Loss)
Designated as Hedging		Recognized in Income				Recognized in Income
Instruments		on Derivatives				on Derivatives
						2011				2010
Commodity contracts		Cost of products sold				$	(3	)		$	(3	)
Foreign exchange contracts		Other expense (income), net					(1	)			(2	)
Total						$	(4	)		$	(5	)

     As of September 30, 2011, we had no derivatives designated as net investment or fair value hedges.

     The following are the fair values of derivative instruments on the condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010 (dollars in millions):

Derivatives		Assets										Liabilities
Designated as Hedging		Balance Sheet										Balance Sheet
Instruments		Location		Fair Value								Location		Fair Value
				9/30/11				12/31/10						9/30/11				12/31/10
Commodity contracts		Other current assets		$	1			$	—			Accrued expenses		$	10			$	16
Commodity contracts		Other assets			—				—			Other liabilities			1				5
Foreign exchange contracts		Other current assets			4				—			Accrued expenses			—				3
Foreign exchange contracts		Other assets			1				—			Other liabilities			—				1
Total				$	6			$	—					$	11			$	25

Derivatives Not		Assets										Liabilities
Designated as Hedging		Balance Sheet										Balance Sheet
Instruments		Location		Fair Value								Location		Fair Value
				9/30/11				12/31/10						9/30/11				12/31/10
Commodity contracts		Other current assets		$	1			$	1			Accrued expenses		$	—			$	—
Total				$	1			$	1					$	—			$	—
Total derivatives				$	7			$	1					$	11			$	25

10. 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. Level 1 is defined as quoted prices for identical assets and liabilities in active markets. Level 2 is defined as 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. Level 3 is defined as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Certain assets and liabilities are measured at fair value on a nonrecurring basis rather than on an ongoing basis, such as when there is evidence of impairment or when a new liability is being established that requires fair value measurement.

     The cash equivalents shown in the table below primarily consist of money market funds that are valued based on quoted prices in active markets and as a result are classified as Level 1. We use quoted prices, other readily observable market data and internally developed valuation models when valuing our derivatives and marketable securities and have classified them as Level 2. Derivatives are valued using the income approach including discounted-cash-flow models or a Black-Scholes option pricing model 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 and foreign currency exchange rates, natural gas price volatility and LIBOR and swap rates for discounting the cash flows implied from the derivative contracts. Marketable securities are valued using income and market value approaches and values are based on quoted prices or other observable market inputs received from data providers. The valuation process may include pricing matrices, or prices based upon yields, credit spreads or prices of securities of comparable quality, coupon, maturity and type. Our assets and liabilities measured at fair value on a recurring basis were as follows:

		Quoted Prices
		in Active				Significant
		Markets for				Other				Significant
		Identical				Observable				Unobservable
		Assets				Inputs				Inputs
(millions)		(Level 1)				(Level 2)				(Level 3)				Total
As of September 30, 2011:
Cash equivalents		$	116			$	39			$	—			$	155
Marketable securities:
Corporate debt securities			—				180				—				180
U.S. government and agency debt securities			—				53				—				53
Asset-backed debt securities			—				22				—				22
Certificates of deposit			—				44				—				44
Municipal debt securities			—				22				—				22
Derivative assets			—				7				—				7
Derivative liabilities			—				(11	)			—				(11	)
As of December 31, 2010:
Cash equivalents		$	357			$	59			$	—			$	416
Marketable securities:
Corporate debt securities			—				123				—				123
U.S. government and agency debt securities			—				58				—				58
Asset-backed debt securities			—				19				—				19
Non-U.S. government debt securities			—				10				—				10
Certificates of deposit			—				41				—				41
Municipal debt securities			—				27				—				27
Derivative assets			—				1				—				1
Derivative liabilities			—				(25	)			—				(25	)

Certain assets and liabilities are measured at fair value on a nonrecurring basis rather than on an ongoing basis, but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment or when a new liability is being established that requires fair value measurement. During the third quarter of 2011, we decided that we will permanently close our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada. We measured the fair value of the Windsor real property, buildings, machinery and equipment as of September 30, 2011 by evaluating the current economic conditions for similar use assets using measurements classified as Level 3 and maximizing the use of available and reliable inputs observable in the marketplace. The fair value of the real property and buildings was estimated after considering a range of possible outcomes based on recent comparable sales and similar properties currently being marketed. Due to the lack of an established secondary market for the machinery and equipment and the lack of an income stream attributable to the machinery and equipment, the fair values were developed based upon a market approach considering comparable equipment adjusted for condition, age, functionality, obsolescence, marketability and location. As a result of our evaluation, long-lived Windsor assets with a carrying amount of $57 million were written down to their fair value of $6 million, resulting in a long-lived asset impairment charge of $51 million that was included in the condensed consolidated statement of operations for the three and nine months ended September 30, 2011.

11. Employee Retirement Plans

The components of net pension and postretirement benefits costs are summarized in the following table:

		Three Months								Nine Months
		ended September 30,								ended September 30,
(millions)		2011				2010				2011				2010
Pension:
Service cost of benefits earned		$	7			$	7			$	21			$	20
Interest cost on projected benefit obligation			15				16				47				48
Expected return on plan assets			(16	)			(16	)			(49	)			(49	)
Net amortization			7				3				20				11
Net pension cost		$	13			$	10			$	39			$	30
Postretirement:
Service cost of benefits earned		$	1			$	1			$	4			$	5
Interest cost on projected benefit obligation			3				4				10				13
Net amortization			(5	)			(4	)			(16	)			(13	)
Net postretirement cost		$	(1	)		$	1			$	(2	)		$	5

     During the third quarter of 2011, we made a $10 million cash contribution to the USG Corporation Retirement Plan Trust, or Trust. In the second quarter of 2011, we made a contribution to the Trust that was recorded on the condensed consolidated balance sheet at $30.9 million. This contribution consisted of 2,084,781 shares of our common stock, or the Contributed Shares, and was recorded on the condensed consolidated balance sheet at the June 20, 2011 closing price of $14.84 per share. The Contributed Shares are not reflected on the condensed consolidated statement of cash flows because they were treated as a noncash financing activity. The Contributed Shares were valued for purposes of crediting the contribution to the Trust at a discounted value of $14.39 per share ($14.84 less a 3% discount), or approximately $30.0 million in the aggregate, by an independent appraiser retained by Evercore Trust Company, N.A., or Evercore, an independent fiduciary that has been appointed as investment manager with respect to the Contributed Shares. The Contributed Shares are registered for resale, and Evercore has authority to sell some or all of them, as well as other of our shares in the Trust, in its discretion as fiduciary. No additional contributions to the Trust are expected for 2011.

     During the first quarter of 2011, we contributed $10 million in cash to our pension plan in Canada.

12. Share-Based Compensation

During 2011, we granted share-based compensation to eligible participants under our 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 or the service period of the award for awards expected to vest. Expense is generally reduced for estimated forfeitures.

STOCK OPTIONS

We granted stock options to purchase 662,032 shares of common stock during the first nine months of 2011 with an exercise price equal to the closing price of our common stock on the date of grant. The stock options generally become exercisable in four equal annual installments beginning one year from the date of grant, although they may become exercisable earlier in the event of death, disability, retirement or a change in control. The stock options generally expire 10 years from the date of grant, or earlier in the event of death, disability or retirement.

     We estimated the fair value of each stock option granted to be $10.60 on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted below. We based expected volatility on a 50% weighting of our historical volatilities and 50% weighting of our implied volatilities. The risk-free rate was based on zero coupon U.S. government issues at the time of grant. The expected term was developed using the simplified method, as permitted by the SEC because there is not sufficient historical stock option exercise experience available.

     The assumptions used in the valuation were as follows: expected volatility 55.88%, risk-free rate 2.85%, expected term (in years) 6.25 and expected dividends 0.

RESTRICTED STOCK UNITS

We granted RSUs with respect to 456,401 shares of common stock during the first nine months of 2011 that generally vest in four equal annual installments beginning one year from the date of grant. During the first nine months of 2011, we also granted RSUs with respect to 35,000 shares of common stock that will vest in four equal annual installments beginning one year from the date of grant as a special retention award and with respect to an additional 35,000 shares of common stock that will vest upon the satisfaction of a specified performance goal. Generally, RSUs may vest earlier in the case of death, disability, retirement or a change in control. Each RSU is settled in a share of our common stock after the vesting period. The fair value of each RSU granted is equal to the closing price of our common stock on the date of grant. Substantially all RSU’s granted during the first nine months of 2011 had a fair value of $18.99.

PERFORMANCE SHARES

We granted 227,539 performance shares during the first nine months of 2011. The performance shares generally vest after a three-year period based on our total stockholder return relative to the performance of the Dow Jones U.S. Construction and Materials Index, with adjustments to that index in certain circumstances, for the three-year period. The number of performance shares earned will vary from 0 to 200% of the number of performance shares awarded depending on that relative performance. Vesting will be pro-rated based on the number of full months employed during the performance period in the case of death, disability, retirement or a change-in-control, and pro-rated awards earned will be paid at the end of the three-year period. Each performance share earned will be settled in a share of our common stock.

     We estimated the fair value of each performance share granted to be $28.40 on the date of grant using a Monte Carlo simulation that uses the assumptions noted below. Expected volatility is based on implied volatility of our traded options and the daily historical volatilities of our peer group. The risk-free rate was based on zero coupon U.S. government issues at the time of grant. The expected term represents the period from the valuation date to the end of the performance period.

     The assumptions used in the valuation were as follows: expected volatility 77.84%, risk-free rate 1.20%, expected term (in years) 2.89 and expected dividends 0.

13. Supplemental Balance Sheet Information

INVENTORIES

Total inventories consisted of the following:

		As of				As of
		September 30,				December 31,
(millions)		2011				2010
Finished goods and work in progress		$	252			$	227
Raw materials			68				63
Total		$	320			$	290

ASSET RETIREMENT OBLIGATIONS

Changes in the liability for asset retirement obligations consisted of the following:

		Nine Months
		ended September 30,
(millions)		2011				2010
Balance as of January 1		$	103			$	101
Accretion expense			5				5
Liabilities incurred/adjusted (a)			12				(1	)
Liabilities settled			(1	)			(1	)
Asset retirements			(1	)			(1	)
Foreign currency translation			(1	)			—
Balance as of September 30		$	117			$	103

PROPERTY, PLANT AND EQUIPMENT

As of September 30, 2011, we had $7 million of net property, plant and equipment included in other current assets on the condensed consolidated balance sheet classified as “assets held for sale.” These assets are primarily owned by United States Gypsum Company. Assets held for sale as of December 31, 2010 amounted to $7 million.

14. Income Taxes

We had an income tax benefit of $14 million and an effective tax rate of 11.2% in the third quarter of 2011.

     Accounting rules require a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed periodically. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more-likely-than-not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. Under the accounting rules, this assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused and tax planning alternatives. A history of cumulative losses for a certain threshold period is a significant form of negative evidence used in the assessment, and the accounting rules require that we have a policy regarding the duration of the threshold period. If a cumulative loss threshold is met, forecasts of future profitability may not be used as positive evidence related to the realization of the deferred tax assets in the assessment. Consistent with practices in the home building and related industries, we have a policy of four years as our threshold period for cumulative losses.

     As of September 30, 2011, we had federal net operating loss, or NOL, carryforwards of approximately $1.8 billion that are available to offset future federal taxable income and will expire in the years 2026 through 2031. In addition, as of that date, we had federal alternative minimum tax credit carryforwards of approximately $52 million that are available to reduce future regular federal income taxes over an indefinite period. In order to fully realize these U.S. federal net deferred tax assets, taxable income of approximately $1.9 billion would need to be generated during the period before their expiration. In addition, we have federal foreign tax credit carryforwards of $6 million that will expire in 2015.

     As of September 30, 2011, we had a gross deferred tax asset related to our state NOLs and tax credit carryforwards of $285 million, of which $11 million will expire in 2011. The remainder will expire if unused in years 2012 through 2031. To the extent that we do not generate sufficient state taxable income within the statutory carryforward periods to utilize the NOL and tax credit carryforwards in these states, they will expire unused.

     We also had NOL and tax credit carryforwards in various foreign jurisdictions in the amount of $4 million as of September 30, 2011 against a portion of which we have historically maintained a valuation allowance.

     During periods prior to 2011, we established a valuation allowance against our deferred tax assets totaling $884 million. Based upon an evaluation of all available evidence and our losses for the first nine months of 2011, we recorded increases in the valuation allowance against our deferred tax assets of $54 million in the first quarter, $26 million in the second quarter and $28 million in the third quarter. Our cumulative loss position over the last four years was significant evidence supporting the recording of the additional valuation allowance. In addition to being impacted by the $108 million increase due to the first, second and third quarter losses, the valuation allowance was also impacted by other discrete adjustments that decreased the valuation allowance by $3 million. As a result, the net increase in the valuation allowance was $105 million, increasing our deferred tax assets valuation allowance to $989 million as of September 30, 2011. In future periods, the valuation allowance can be reversed based on sufficient evidence indicating that it is more likely than not that a portion of our deferred tax assets will be realized.

     The Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. If we were to experience an ownership change, utilization of our NOLs would be subject to an annual limitation determined by multiplying the market value of our outstanding shares of stock at the time of the ownership change by the applicable long-term tax-exempt rate, which was 3.77% for September 2011. Any unused annual limitation may be carried over to later years within the allowed NOL carryforward period. The amount of the limitation may, under certain circumstances, be increased or decreased by built-in gains or losses held by us at the time of the change that are recognized in the five-year period after the change. Many states have similar limitations. If an ownership change had occurred as of September 30, 2011, our annual U.S. federal NOL utilization would have been limited to approximately $26 million per year.

     We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income taxes (benefit). As of September 30, 2011, the total amount of interest expense and penalties recognized on our condensed consolidated balance sheet was $4 million. We recognized a $6 million tax benefit in the first quarter of 2011 due to the reversal of reserves for uncertain tax positions that were resolved during the period.

     Our federal income tax returns for 2008 and prior years have been examined by the Internal Revenue Service, or IRS. The U.S. federal statute of limitations remains open for the year 2004 and later years. We are under examination in various U.S. state and foreign jurisdictions. It is possible that these examinations may be resolved within the next 12 months. Due to the potential for resolution of the examinations and the expiration of various statutes of limitation, it is reasonably possible that our gross unrecognized tax benefit may change within the next 12 months by a range of $5 million to $7.5 million. Foreign and U.S. state jurisdictions have statutes of limitations

generally ranging from three to five years.

     Under current accounting rules, we are required to consider all items (including items recorded in other comprehensive income) in determining the amount of tax benefit that results from a loss from continuing operations and that should be allocated to continuing operations. As a result, during the second quarter of 2011, we recorded a $3 million noncash income tax benefit on the loss from continuing operations. This benefit was offset by income tax expense on comprehensive income. However, while the income tax benefit from continuing operations is reported on the condensed consolidated statement of operations, the income tax expense on comprehensive income is recorded directly to AOCI, which is a component of stockholders’ equity. Because the income tax expense on comprehensive income is equal to the income tax benefit from continuing operations, our deferred tax position was not impacted by this tax allocation. A similar noncash income tax benefit of $19 million was recorded during the first quarter of 2010 relating to the fourth quarter of 2009.

15. Comprehensive Income (Loss)

The components of comprehensive income (loss) are summarized in the following table:

		Three Months								Nine Months
		ended September 30,								ended September 30,
(millions)		2011				2010				2011				2010
Net loss		$	(115	)		$	(100	)		$	(290	)		$	(284	)
Derivatives, net of tax			10				(2	)			18				(3	)
Pension and postretirement benefit plans, net of tax			4				(2	)			10				(10	)
Foreign currency translation, net of tax			(54	)			21				(31	)			8
Total comprehensive loss		$	(155	)		$	(83	)		$	(293	)		$	(289	)

     AOCI consisted of the following:

		As of				As of
		September 30,				December 31,
(millions)		2011				2010
Unrecognized loss on pension and postretirement benefit plans, net of tax		$	(96	)		$	(106	)
Derivatives, net of tax			26				8
Foreign currency translation, net of tax			17				48
Total		$	(53	)		$	(50	)

     After-tax loss on derivatives reclassified from AOCI to earnings was $5 million during the third quarter of 2011. We estimate that we will reclassify a net $7 million after-tax loss on derivatives from AOCI to earnings within the next 12 months.

16. Litigation

CHINESE-MANUFACTURED DRYWALL LAWSUITS

L&W Supply Corporation is one of many defendants in lawsuits relating to Chinese-made wallboard installed in homes primarily in the southeastern United States during 2006 and 2007. The wallboard was made in China by a number of manufacturers, including Knauf Plasterboard (Tianjin) Co., or Knauf Tianjin, and was sold or used by hundreds of distributors, contractors, and homebuilders. Knauf Tianjin is an affiliate or indirect subsidiary of Knauf Gips KG, a multinational manufacturer of building materials headquartered in Germany. The plaintiffs in these lawsuits, most of whom are homeowners, claim that the Chinese-made wallboard is defective and emits elevated levels of sulfur gases causing a bad smell and corrosion of copper or other metal surfaces. Plaintiffs also allege that the Chinese-made wallboard causes health problems such as respiratory problems and allergic reactions. The plaintiffs seek damages for the costs of removing and replacing the Chinese-made wallboard and other allegedly damaged property as well as damages for bodily injury, including medical monitoring in some cases. Most of the lawsuits against L&W Supply are part of the consolidated multi-district litigation titled In re Chinese-Manufactured Drywall Products Liability Litigation, MDL No. 2047, pending in New Orleans, Louisiana. The focus of the litigation to date has been on plaintiffs’ property damage claims and not their alleged bodily injury claims.

     L&W Supply’s sales of Knauf Tianjin wallboard, which were confined to the Florida region in 2006, were relatively limited. The amount of Knauf Tianjin wallboard potentially sold by L&W Supply Corporation could completely furnish approximately 250-300 average-size houses; however, the actual number of homes involved is greater because many homes contain a mixture of different brands of wallboard. Our records contain the addresses of the homes and other construction sites to which L&W Supply delivered wallboard, but do not specifically identify the manufacturer of the wallboard delivered. Therefore, when Chinese-made wallboard is identified in a home, we can determine from our records whether L&W Supply delivered wallboard to that home.

     We have entered into an agreement with Knauf that caps our responsibility for property damage claims relating to Knauf Tianjin wallboard. Pursuant to the agreement, our liability for property damage claims relating to Knauf Tianjin wallboard is limited to a fixed amount per square foot for the property at issue. The agreement with Knauf does not address claims for bodily injury or claims relating to wallboard made at other Knauf plants in China, neither of which has been a significant factor in the Chinese wallboard litigation.

     Of the property damage claims asserted to date where our records indicate we delivered wallboard to the home, we have identified approximately 270 homes where we have confirmed the presence of Knauf Tianjin wallboard or, based on the date and location, the wallboard in the home could be Knauf Tianjin wallboard. We have resolved the claims relating to approximately 144 of those homes.

     Although the vast majority of Chinese drywall claims against us relate to Knauf Tianjin board, we have received some claims relating to other Chinese-made wallboard sold by L&W Supply Corporation. Most, but not all, of the other Chinese-made wallboard we sold was manufactured by Knauf at other plants in China. We are not aware of any instances in which the wallboard from the other Knauf Chinese plants has been determined to cause odor or corrosion problems. A small percentage of claims made against L&W Supply Corporation relate to Chinese-made wallboard that was not manufactured by Knauf, but which is alleged to have odor and corrosion problems.

     As of September 30, 2011, we have an accrual of $15 million for our estimated cost of resolving all the Chinese wallboard property damage claims pending against L&W Supply and estimated to be asserted in the future, and, based on the terms of our settlement with Knauf, we have recorded a related receivable of $12 million. Our accrual does not take into account litigation costs, the costs of resolving claims for bodily injury, or any set-off for potential insurance recoveries. Our estimated liability is based on the information available to us regarding the number and type of pending claims, estimates of likely future claims, and the costs of resolving those claims. Our estimated liability could be higher if the other Knauf Chinese wallboard that we sold is determined to be problematic, the number of Chinese wallboard claims exceeds our estimates, or the cost of resolving bodily injury claims is more

than nominal. Considering all factors known to date, we do not believe that these claims and other similar claims that might be asserted will have a material adverse effect on our results of operations, financial position or cash flows. However, there can be no assurance that the lawsuits will not have such an effect.

ENVIRONMENTAL LITIGATION

We have been notified by state and federal environmental protection agencies of possible involvement as one of numerous “potentially responsible parties” in a number of Superfund sites in the United States. As a potentially responsible party, we may be responsible to pay for some part of the cleanup of hazardous waste at those sites. In most of these sites, our involvement is expected to be minimal. In addition, we are involved in environmental cleanups of other property that we own or owned. As of September 30, 2011, we have an accrual of $13 million for our potential liability in connection with these matters. Our accruals take into account all known or estimated undiscounted costs associated with these sites, including site investigations and feasibility costs, site cleanup and remediation, certain legal costs, and fines and penalties, if any. However, we continue to review these accruals as additional information becomes available and revise them as appropriate.

OTHER LITIGATION

We are named as defendants in other claims and lawsuits arising from our operations, including claims and lawsuits arising from the operation of our vehicles, product warranties, personal injury and commercial disputes. We believe that we have properly accrued for our potential liability in connection with these claims and suits, taking into account the probability of liability, whether our exposure can be reasonably estimated and, if so, our estimate of our liability or the range of our liability. We do not expect these or any other litigation matters involving USG to have a material adverse effect upon our results of operations, financial position or cash flows.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, “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.

Overview

SEGMENTS
Through our subsidiaries, we are a leading manufacturer and distributor of building materials. We produce a wide range of products for use in new residential, new nonresidential, and residential and nonresidential repair and remodel construction as well as products used in certain industrial processes. We estimate that during the first nine months of 2011

•

residential and nonresidential repair and remodel activity accounted for approximately 55% of our net sales,

•

new residential construction accounted for approximately 21% of our net sales,

•

new nonresidential construction accounted for approximately 21% of our net sales, and

•

other activities accounted for approximately 3% of our net sales.

Our operations are organized into three reportable segments: North American Gypsum, Building Products Distribution and Worldwide Ceilings.

North American Gypsum: North American Gypsum manufactures and markets gypsum and related products in the United States, Canada and Mexico. It includes United States Gypsum Company, or U.S. Gypsum, in the United States, the gypsum business of CGC Inc., or CGC, in Canada, and USG Mexico, S.A. de C.V., or USG Mexico, in Mexico. North American Gypsum’s products are used in a variety of building applications to finish the walls, ceilings and floors in residential, commercial and institutional construction and in certain industrial applications. Its major product lines include SHEETROCK^® brand gypsum wallboard, a line of joint compounds used for finishing wallboard joints also sold under the SHEETROCK^® brand name, DUROCK^® brand cement board, FIBEROCK^® brand gypsum fiber panels and SECUROCK^® brand glass mat sheathing used for building exteriors and gypsum fiber panels used as roof cover board.

Building Products Distribution: Building Products Distribution consists of L&W Supply Corporation and its subsidiaries, or L&W Supply, the leading distributor of gypsum wallboard and other building materials in the United States. It is a service oriented business that stocks a wide range of construction materials. It delivers less-than-truckload quantities of construction materials to job sites and places them in areas where work is being done, thereby reducing the need for handling by contractors.

Worldwide Ceilings: Worldwide Ceilings manufactures and markets interior systems products worldwide. It includes USG Interiors, Inc., or USG Interiors, the international interior systems business managed as USG International, and the ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior ceilings products used primarily in commercial applications. Worldwide Ceilings manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region. It markets ceiling tile and ceiling grid in the United States, Canada, Mexico, Europe, Latin America and the Asia-Pacific region. It also manufactures and markets joint compound in Europe, Latin America and the Asia-Pacific region.

Geographic Information: For the first nine months of 2011, approximately 77% of our net sales were attributable to the United States, Canada accounted for approximately 12% of our net sales and other foreign countries accounted for the remaining 11%.

NEW PRODUCT INTRODUCTION

We are the industry leader in lightweight gypsum panel technology and are the only manufacturer to offer both 1/2-inch and 5/8-inch lightweight gypsum panels. In the third quarter of 2011, U.S. Gypsum expanded its portfolio of lightweight wallboard products with the introduction of SHEETROCK^® Brand UltraLight Panels FIRECODE^® X. This new 5/8-inch panel is the industry’s first lightweight type X gypsum panel and is designed to be used for all fire-rated assemblies in commercial and residential construction where type X wallboard (i.e., a gypsum panel that has a special core that gives it additional fire resistance compared to regular wallboard) is required. It weighs up to 15% less than standard type X wallboard.

     In April 2011, U.S. Gypsum introduced SHEETROCK^® Brand UltraLight Panels FIRECODE^® 30. This lightweight 5/8-inch gypsum wallboard product meets standards for use in non-rated and 30-minute fire-rated partitions and is up to 30% lighter than competing brands. SHEETROCK^® UltraLight Panels FIRECODE^®30 are now available through more than 200 specialty dealers in the eastern half of the United States. In 2010, U.S. Gypsum introduced SHEETROCK^® Brand UltraLight Panels, a lightweight 1/2-inch gypsum wallboard product that is up to 30% lighter than competing brands. This product is now available at more than 2,300 retail and specialty dealer locations in the United States and Canada.

FINANCIAL INFORMATION

Consolidated net sales in the third quarter of 2011 were $792 million, up 4% from the third quarter of 2010. An operating loss of $76 million and a net loss of $115 million, or $1.09 per share, were incurred in the third quarter of 2011. These results compared with an operating loss of $58 million and a net loss of $100 million, or $1.00 per share, in third quarter of 2010.

     As of September 30, 2011, we had $677 million of cash and cash equivalents and marketable securities compared with $725 million as of June 30, 2011 and $907 million as of December 31, 2010. Uses of cash during the first nine months of 2011 primarily included $141 million for interest payments, $29 million for severance and other obligations associated with restructuring activities, $38 million for capital expenditures and $10 million for state and foreign tax payments.

MARKET CONDITIONS AND OUTLOOK

Our businesses are cyclical in nature and sensitive to changes in general economic conditions, including, in particular, conditions in the North American construction-based markets, which are our most significant markets. The market segments we serve can be broadly categorized as new residential construction, new nonresidential construction and repair and remodel activity, which includes both residential and nonresidential construction.

     Housing starts are a very good indicator of demand for our gypsum products. Installation of our gypsum products typically follows the start of construction by one to two months. As reported by the U.S. Census Bureau, housing starts were approximately 125,500 units in the first quarter of 2011, 163,500 units in the second quarter of 2011 and 170,800 units in the third quarter of 2011, which are very low levels by historical standards. In September 2011, the seasonally-adjusted annualized rate of housing starts was reported by the U.S. Census Bureau to have increased to 658,000 units, the highest level in 17 months, but still only one-third of the level at the peak of the housing boom. However, newly issued building permits, a gauge of future construction, fell 5% in September compared to the prior month to an annual rate of 594,000, the lowest level in five months. We believe 2011 housing starts will be approximately 590,000 units. Many industry analysts believe that the decline in new home construction has stabilized, that there will be a muted recovery over the next few years, and that over the longer term housing starts will begin to approach historical averages. However, the rate of recovery remains uncertain and will depend on broader economic issues such as employment, foreclosures, house price trends, availability of mortgage financing and consumer confidence. Industry analysts’ forecasts for new single and multi-family construction in the United States in 2012 are for a range of from 610,000 to 830,000 units. We currently estimate that 2012 housing starts in the U.S. will be near the low end of that range.

     New nonresidential construction has also experienced significant declines over the past several years. Demand for our products from new nonresidential construction is determined by floor space for which contracts are signed. Installation of gypsum and ceilings products typically follows signing of construction contracts by about one year. According to McGraw-Hill Construction, total floor space for which new nonresidential construction contracts in the United States were signed declined 13% in 2010 compared to 2009 following a 44% decrease in 2009 compared to 2008. Floor space for which new nonresidential construction contracts were signed declined 6% in the first nine months of 2011. A recovery in this segment has not materialized as was expected earlier this year due to continued concerns about the level of job growth and the uncertain state of the U.S. economy. McGraw-Hill Construction forecasts that total floor space for which new nonresidential construction contracts in the United States are signed will decline approximately 4% in 2011 from the 2010 level and will increase 2% in 2012 from the 2011 level.

     The repair and remodel segment includes renovation of both residential and nonresidential buildings. As a result of the low levels of new home construction in recent years, this segment currently accounts for the largest portion of our sales. Many buyers begin to remodel an existing home within two years of purchase. According to the National Association of Realtors, sales of existing homes in the United States in 2010 were at the lowest level since 1997, decreasing to 4.9 million units. For September 2011, the National Association of Realtors reported that sales of existing homes were at a seasonally adjusted annual rate of 4.91 million. The low levels of existing home sales in recent years, continued concerns regarding the job market and home resale values and tight lending standards have all contributed to a decrease in demand for our products from the residential repair and remodel segment. Recent home price trends, as indicated by indices such as the S&P Case-Shiller Home Price Index, suggest that home resale values are stabilizing at low levels. Nonresidential repair and remodel activity is driven by factors including lease turnover rates, discretionary business investment, job growth and governmental building-related expenditures. We currently estimate that overall repair and remodel spending in 2011 will be approximately 1% above the 2010 level and that overall repair and remodel spending in 2012 will be approximately 1% above the 2011 level.

     The outlook for our international businesses is more positive. We continue to see most of the markets in which we do business stabilize after the effects of the global financial crisis, and emerging markets are showing positive growth. However, there is uncertainty regarding the strength of our Western European markets due to continuing concerns about the European economic environment.

     The housing and construction-based market segments we serve are affected by economic conditions, the availability of credit, lending practices, interest rates, the unemployment rate and consumer confidence. An increase in interest rates, continued high levels of unemployment, continued restrictive lending practices, a decrease in consumer confidence or other adverse economic conditions could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our businesses are also affected by a variety of other factors beyond our control, including the inventory of unsold homes, which remains at a historically high level, the level of foreclosures, home resale rates, housing affordability, office and retail vacancy rates and foreign currency exchange rates. Since we operate in a variety of geographic markets, our businesses are subject to the economic conditions in each of these geographic markets. General economic downturns or localized downturns or financial concerns in the regions where we have operations may have a material adverse effect on our business, results of operations, financial condition and cash flows.

     Our results of operations have been adversely affected by the economic downturn and continued uncertainty in the financial markets. During the first nine months of 2011, our North American Gypsum segment continued to be adversely affected by the low level of residential and other construction activity. Our Building Products Distribution segment, which serves the residential and commercial market segments, and our Worldwide Ceilings segment, which primarily serves the commercial markets, continued to be adversely affected by the significant reduction in new commercial construction activity.

     Industry shipments of gypsum board in the United States (including gypsum wallboard, other gypsum-related paneling products and imports), as reported by the Gypsum Association, were an estimated 12.9 billion square feet in first nine months of 2011, down approximately 3% compared with 13.3 billion square feet in the first nine months of 2010. We estimate that industry shipments in the United States for all of 2011 will be approximately 17.3 billion square feet, unchanged from 17.3 billion square feet in 2010.

     U.S. Gypsum shipped 3.02 billion square feet of SHEETROCK^® brand gypsum wallboard in the first nine months of 2011, a 7% decrease from 3.25 billion square feet in the first nine months of 2010. The percentage decline of U.S. Gypsum’s SHEETROCK^® wallboard shipments in the first nine months of 2011 compared with the first nine months of 2010 exceeded the decline for industry gypsum board shipments primarily due to our continuing efforts to improve profitability. U.S. Gypsum’s share of the gypsum board market in the United States, which includes for comparability its shipments of SHEETROCK^® brand gypsum wallboard, FIBEROCK^® brand gypsum fiber panels and SECUROCK^® brand glass mat sheathing, was approximately 25% in the third quarter and first nine months of 2011, unchanged from the third quarter and first nine months of 2010. Its share of the gypsum board market in the United States was approximately 24% in the first and second quarters of 2011.

     Currently, there is significant excess wallboard production capacity industry-wide in the United States. Industry capacity in the United States was approximately 32.9 billion square feet. We estimate that the industry capacity utilization rate was approximately 52% during the first nine months of 2011 compared to 51% during the first nine months of 2010. We project that the industry capacity utilization rate will remain at approximately that level for the balance of 2011. Despite our realization of some price improvement since the first quarter, we expect there to be continued pressure on gypsum wallboard selling prices and gross margins at such a low level of capacity utilization.

RESTRUCTURING, IMPAIRMENTS AND OTHER INITIATIVES

We have been adjusting our operations in response to market conditions since the downturn began in 2006. Since mid-2006, we have temporarily idled or permanently closed approximately 3.8 billion square feet of our highest-cost wallboard manufacturing capacity and we recently decided to permanently close our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada. Since January 1, 2007, we have eliminated approximately 4,625 salaried and hourly positions, including approximately 125 positions eliminated during the first nine months of 2011. The positions eliminated in 2011 primarily reflected L&W Supply’s closure of nine distribution branches and its Nevada custom door and frames business and its other 2011 cost reduction initiatives. As part of L&W Supply’s efforts to reduce its cost structure, it has closed a total of 112 distribution branches since January 1, 2007. It continued to serve its customers from 155 branches in the United States as of September 30, 2011.

     We will continue to adjust our operations to the economic conditions in our markets.

     Historically, the housing and other construction markets that we serve have been deeply cyclical. Downturns in demand are typically steep and last several years, but they have typically been followed by periods of strong recovery. If the recovery from this cycle results in increases in demand similar to those realized in recoveries from past cycles, we believe we will generate significant cash flows when our markets recover. We regularly monitor forecasts prepared by external economic forecasters and review our facilities and other assets to determine which of them, if any, are impaired under applicable accounting rules. During the first nine months of 2011, we recorded a total of $52 million of long-lived asset impairment charges associated with our decision to permanently close our Windsor gypsum quarry and ship loading facility. Because we believe that a significant recovery in the housing and other construction markets we serve is likely to begin in the next two to three years, we determined that there were no other impairments of our long-lived assets during the first nine months of 2011.

     However, if the downturn in our markets does not significantly reverse or the downturn is significantly further extended, material write-downs or impairment charges may be required in the future. If these conditions were to materialize or worsen, or if there is a fundamental change in the housing and other construction markets we serve, which individually or collectively lead to a significantly extended downturn or decrease in demand, we may permanently close additional production and distribution facilities and material restructuring and impairment charges may be necessary. The magnitude, likelihood and timing of those possible charges would be dependent on the severity and duration of the extended downturn, should it materialize, and cannot be determined at this time. Any material restructuring or impairment charges, including write-downs of property, plant and equipment, would have a material adverse effect on our results of operations and financial condition. We will continue to monitor economic forecasts and their effect on our facilities to determine whether any of our assets are impaired.

     Our focus on costs and efficiencies, including capacity closures and overhead reductions, has helped to mitigate the effects of the downturn in all of our markets. As economic and market conditions warrant, we will evaluate alternatives to further reduce costs, improve operational efficiency and maintain adequate liquidity. Actions to reduce costs and improve efficiencies could require us to record additional restructuring charges. See Liquidity and Capital Resources below for information regarding our cash position and credit facilities. See Part I, Item 1A, Risk Factors, in our 2010 Annual Report on Form 10-K for additional information regarding conditions affecting our businesses, the possibility that additional capital investment would be required to address future environmental laws and regulations and the effects of climate change and other risks and uncertainties that affect us.

KEY OBJECTIVES AND STRATEGIES

While adjusting our operations during this challenging business cycle, we are continuing to focus on the following key objectives and strategic priorities:

Objectives:

•		extend our customer satisfaction leadership;
•		improve operating efficiencies and reduce costs;
•		maintain financial flexibility;

Strategic Priorities:

•		strengthen our core businesses;
•		diversify our earnings by expanding internationally and expanding our current product lines; and
•		differentiate USG from our competitors through innovation.

Consolidated Results of Operations

										% Increase
(dollars in millions, except per-share data)		2011				2010				(Decrease)
Three Months ended September 30:
Net sales		$	792			$	758				4	%
Cost of products sold			739				707				5	%
Gross profit			53				51				4	%
Selling and administrative expenses			70				74				(5	)%
Restructuring and long-lived asset impairment charges			59				35				69	%
Operating loss			(76	)			(58	)			31	%
Interest expense			54				45				20	%
Interest income			(1	)			(1	)			—
Other income, net			—				—				—
Income tax expense			(14	)			(2	)			—
Net loss			(115	)			(100	)			15	%
Diluted loss per share			(1.09	)			(1.00	)			9	%
Nine Months ended September 30:
Net sales		$	2,274			$	2,243				1	%
Cost of products sold			2,132				2,123				—
Gross profit			142				120				18	%
Selling and administrative expenses			227				231				(2	)%
Restructuring and long-lived asset impairment charges			70				54				30	%
Operating loss			(155	)			(165	)			(6	)%
Interest expense			158				134				18	%
Interest income			(5	)			(3	)			67	%
Other income, net			(2	)			—				—
Income tax benefit			(16	)			(12	)			33	%
Net loss			(290	)			(284	)			2	%
Diluted loss per share			(2.80	)			(2.85	)			(2	)%

NET SALES

Consolidated net sales in the third quarter of 2011 increased $34 million, or 4%, compared with the third quarter of 2010. Net sales increased 6% for our North American Gypsum segment, 5% for our Worldwide Ceilings segment and 1% for our Building Products Distribution segment. The higher level of net sales for North American Gypsum reflected increased sales of gypsum products for our CGC and USG Mexico subsidiaries as well as increased sales of U.S. Gypsum’s DUROCK^® brand cement board and other complementary products. Those increases more than offset sales declines for U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard and FIBEROCK^® brand gypsum fiber panels. The higher level of net sales for Worldwide Ceilings was primarily due to USG Interiors’ higher selling prices for ceiling grid and ceiling tile. Net sales for Building Products Distribution were up primarily due to increased sales of metal, ceilings and other products, which more than offset lower sales of gypsum wallboard.

     Consolidated net sales in the first nine months of 2011 increased $31 million, or 1%, compared with the first nine months of 2010. Net sales increased 4% for our Worldwide Ceilings segment and 1% for our North American Gypsum segment, but decreased 2% for our Building Products Distribution segment. The higher level of net sales in the first nine months of 2011 for Worldwide Ceilings was primarily due to USG Interiors’ higher ceiling grid volume (up 11%) compared with the first nine months of 2010. The higher level of net sales for North American Gypsum was attributable to increased sales of U.S. Gypsum’s DUROCK^® brand cement board and other complementary products. Net sales for Building Products Distribution were down primarily due to a 19% decrease in gypsum wallboard volume, partially offset by a 6% increase in average gypsum wallboard selling price.

COST OF PRODUCTS SOLD

Cost of products sold for the third quarter of 2011 increased $32 million, or 5%, compared with the third quarter of 2010 primarily reflecting higher manufacturing costs for most non-wallboard product lines. Manufacturing costs per unit for U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard were virtually unchanged in the third quarter of 2011 compared with the third quarter of 2010, as per unit cost decreases of 12% for fixed costs and 6% for energy were offset by a 7% increase in per unit costs for raw materials, primarily waste paper and starch. For USG Interiors, manufacturing costs per unit increased in the third quarter of 2011 compared with the third quarter of 2010 for ceiling grid due to higher steel costs and for ceiling tile due to higher per unit costs for raw materials, offset in part by lower per unit energy costs.

     Cost of products sold for the first nine months of 2011 increased $9 million, or less than 1%, compared with the first nine months of 2010 primarily reflecting higher manufacturing costs for most non-wallboard product lines. Manufacturing costs per unit decreased 1% for U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard in the first nine months of 2011 compared with the first nine months of 2010, due primarily to cost decreases of 7% for fixed costs and 6% for energy, partially offset by a 3% increase in per unit costs for raw materials, primarily waste paper and starch. For USG Interiors, manufacturing costs per unit in the first nine months of 2011 compared with the first nine months of 2010 increased for ceiling grid due to higher steel costs and for ceiling tile due to higher per unit costs for raw materials, offset in part by lower per unit energy costs.

GROSS PROFIT

Gross profit for the third quarter of 2011 increased $2 million, or 4%, compared with the third quarter of 2010. Gross profit as a percentage of net sales was 6.7% for the third quarter of both 2011and 2010.

     Gross profit for the first nine months of 2011 increased $22 million, or 18%, compared with the first nine months of 2010. Gross profit as a percentage of net sales was 6.2% for the first nine months of 2011 compared with 5.3% for the first nine months of 2010. The higher percentage for the first nine months of 2011 was primarily due to improved gross margins for L&W Supply and USG Interiors.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses totaled $70 million and $227 million in the third quarter and first nine months of 2011, respectively, down from $74 million and $231 million in the third quarter and first nine months of 2010, respectively. The decline for the third quarter primarily reflected lower expenses for marketing and compensation and benefits. The decline for the nine months period primarily reflected lower expenses for compensation and benefits. As a percentage of net sales, selling and administrative expenses were 8.8% for the third quarter of 2011 compared to 9.8% for the third quarter of 2010 and 10.0% and 10.3% for the first nine months of 2011 and 2010, respectively.

RESTRUCTURING AND LONG-LIVED ASSET IMPAIRMENT CHARGES

We recorded restructuring and long-lived asset impairment charges totaling $59 million during the third quarter of 2011. These charges related to the permanent closure of our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada, and L&W Supply Corporation’s closure of nine distribution branches and its Nevada custom door and frames business.

     We idled the gypsum quarry and ship loading facility during the first quarter of this year, and have now decided that we will permanently close that facility. As a result of that decision, we recorded additional long-lived asset impairment charges totaling $51 million during the third quarter of 2011. This amount included $41 million related to the write-down of the carrying values of property, machinery, equipment and buildings and $10 million related to the acceleration of the Windsor facility’s asset retirement obligation. Other third quarter restructuring charges included $4 million for lease obligations, $2 million for severance and $2 million for asset impairment related to the write-down of inventory. On a segment basis, $52 million of the charges related to North American Gypsum and $7 million to Building Products Distribution.

     Restructuring and long-lived asset impairment charges for the first nine months of 2011 totaled $70 million. These charges included $52 million for long-lived asset impairments, $6 million for severance, $6 million for lease obligations, $4 million for exit costs related to production facilities closed in 2010 and 2009 and $2 million for asset impairment related to the write-down of inventory. On a segment basis, $61 million of the charges related to North American Gypsum, $8 million to Building Products Distribution and $1 million to Corporate.

     Third quarter 2010 restructuring and long-lived asset impairment charges totaled $35 million. These charges included $6 million for lease obligations and $1 million for severance related to prior-period restructuring activities. The charges for the quarter also included $28 million for long-lived asset impairments related to the write-down of the carrying values of machinery, equipment and buildings at the temporarily idled gypsum wallboard production facilities in Baltimore, Md., and Stony Point, N.Y., one of the temporarily idled gypsum wallboard production facilities in Jacksonville, Fla. and the temporarily idled paper production facility in Jacksonville, Fla. The carrying value of the machinery, equipment and buildings exceeded the estimated future undiscounted cash flows for their remaining useful lives due to the extended downturn in our markets and our forecasts regarding the timing and rate of recovery in those markets.

     For the first nine months of 2010, restructuring and long-lived asset impairment charges were $54 million. This amount primarily included charges related to the write-down of the carrying values of machinery, equipment and buildings at the temporarily idled gypsum wallboard production facilities in Baltimore, Md., and Stony Point, N.Y., one of the temporarily idled gypsum wallboard production facilities in Jacksonville, Fla. and the temporarily idled paper production facility in Jacksonville, Fla., the closure of a gypsum wallboard production facility in Southard, Okla., the temporary idling of a gypsum wallboard production facility in Stony Point, N.Y., the curtailment of operations at the mining facility in Canada and the closure of five distribution centers. The charges included $28 million for long-lived asset impairments, $12 million for other asset impairments and lease obligations, $10 million for severance and $4 million for other exit costs.

     Total cash payments charged against the restructuring reserve in the first nine months of 2011 amounted to $29 million. We expect future payments to be approximately $6 million during the remainder of 2011, $12 million in 2012 and $18 million after 2012. All restructuring-related payments in the first nine months of 2011 were funded with cash on hand. We expect that the future payments will be funded with cash from operations or cash on hand. See Note 3 to the condensed consolidated financial statements for additional information related to our restructuring reserve.

INTEREST EXPENSE

Interest expense was $54 million in the third quarter of 2011 compared with $45 million in the third quarter of 2010. For the first nine months of 2011, interest expense was $158 million compared with $134 million for the first nine months of 2010. Interest expense was higher in the 2011 periods primarily due to higher average levels of debt outstanding.

INCOME TAX EXPENSE (BENEFIT)

Income tax benefit was $14 million in the third quarter of 2011 compared to $2 million in the third quarter of 2010. We had effective tax rates of 11.2% and 1.5% for the third quarter of 2011 and 2010, respectively. Income tax benefit was $16 million for the first nine months of 2011 and $12 million for the first nine months of 2010. Our effective tax rates were 5.4% and 4.0% for the first nine months of 2011 and 2010, respectively. Since recording a full valuation allowance against our federal and most state deferred tax assets in 2009, the effective tax rate in 2011 is slightly lower as we do not benefit losses in those jurisdictions and have a provision in foreign jurisdictions. In addition, during the second quarter of 2011, we recorded a noncash income tax benefit of $3 million resulting from the requirement to consider all items (including items recorded in other comprehensive income) in determining the amount of income tax benefit that results from a loss from continuing operations. This income tax benefit was offset by income tax expense on other comprehensive income. A similar noncash income tax benefit of $19 million was recorded during the first quarter of 2010 relating to the fourth quarter of 2009.

NET LOSS

A net loss of $115 million, or $1.09 per diluted share, was recorded in the third quarter of 2011 compared with a net loss of $100 million, or $1.00 per diluted share, in the third quarter of 2010. A net loss of $290 million, or $2.80 per diluted share, was recorded for the first nine months of 2011 compared with a net loss of $284 million, or $2.85 per diluted share, for the first nine months of 2010.

Segment Results of Operations

NORTH AMERICAN GYPSUM
Net sales and operating profit (loss) for the businesses comprising our North American Gypsum
segment were as follows:

		Three Months ended September 30,												Nine Months ended September 30,
										% Increase												% Increase
(millions)		2011(a)				2010(b)				(Decrease)				2011(a)				2010(b)				(Decrease)
Net Sales:
U. S. Gypsum		$	332			$	325				2	%		$	972			$	993				(2	)%
CGC (gypsum)			78				70				11	%			230				221				4	%
USG Mexico			42				37				14	%			123				110				12	%
Other (c)			10				7				43	%			24				22				9	%
Eliminations			(25	)			(26	)			(4	)%			(76	)			(81	)			(6	)%
Total		$	437			$	413				6	%		$	1,273			$	1,265				1	%
Operating Profit (Loss):
U. S. Gypsum		$	(10	)		$	(46	)			(78	)%		$	(60	)		$	(99	)			(39	)%
CGC (gypsum)			(7	)			3				—				(2	)			16				—
USG Mexico			6				5				20	%			16				12				33	%
Other (c)			(59	)			(5	)			—				(69	)			(18	)			—
Total		$	(70	)		$	(43	)			63	%		$	(115	)		$	(89	)			29	%

U.S. Gypsum: Net sales in the third quarter of 2011 were $332 million, up $7 million, or 2%, compared with the third quarter of 2010. Net sales of SHEETROCK^® brand gypsum wallboard declined $1 million, or 1%, reflecting a 2% decrease in average gypsum wallboard selling prices which lowered sales by $3 million, partially offset by a 2% increase in gypsum wallboard shipments which favorably affected sales by $2 million. Net sales for FIBEROCK^® brand gypsum fiber panels declined $2 million primarily due to a 20% decrease in volume as a result of the decision by that product’s principal customer to reduce the number of tile backer products it carries. Net sales of DUROCK^® brand cement board increased $3 million due to a 16% increase in volume, partially offset by a 2% decrease in selling prices. Net sales of SHEETROCK^® brand joint compound were virtually unchanged as a 1% decrease in volume was offset by a 1% increase in selling prices. Net sales of other products increased an aggregate of $7 million compared with the third quarter of 2010.

     An operating loss of $10 million was recorded in the third quarter of 2011 compared with an operating loss of $46 million in the third quarter of 2010. The $36 million favorable change in operating loss reflected a $29 million decrease in restructuring and long-lived asset impairment charges, a $12 million favorable adjustment related to a third quarter 2011 settlement with United States and Canadian tax authorities related to the deductibility of certain expenses in the years 2003 through 2006 that had the effect of reallocating those expenses from U.S. Gypsum to

CGC and its Windsor operations, and a $3 million decrease in selling and administrative expenses compared to the third quarter of 2010. These favorable changes were partially offset by gross profit declines of $3 million for SHEETROCK^® brand gypsum wallboard due to a lower gross margin, $3 million for SHEETROCK^® brand joint compound primarily due to the lower volume and 7% higher per unit costs, $1 million for FIBEROCK^® brand gypsum fiber panels primarily due to the lower volume and a lower gross margin, and a $1 million aggregate decrease in gross profit for other product lines. DUROCK^® brand cement board gross profit was unchanged compared to the third quarter of 2010 as the increase in volume was offset by a lower gross margin due to the lower selling prices and 2% higher per unit costs.

     Demand for gypsum wallboard increased in the third quarter of 2011 compared to the third quarter of 2010. U.S. Gypsum shipped 1.05 billion square feet of SHEETROCK^® brand gypsum wallboard in the third quarter of 2011, up 2% from 1.03 billion square feet in the third quarter of 2010. We estimate that capacity utilization rates were approximately 53% for the industry and 43% for U.S. Gypsum during the third quarter of 2011.

     In the third quarter of 2011, our nationwide average realized selling price for SHEETROCK^® brand gypsum wallboard was $111.66 per thousand square feet, down 2% from $114.45 in the third quarter of 2010, and virtually unchanged from $111.55 in the second quarter of 2011.

     Manufacturing costs per unit for U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard were virtually unchanged in the third quarter of 2011 compared with the third quarter of 2010, as per unit cost decreases of 12% for fixed costs and 6% for energy were offset by a 7% increase in per unit costs for raw materials, primarily waste paper and starch. Compared to the second quarter of 2011, SHEETROCK^® brand gypsum wallboard manufacturing costs per unit increased 1% primarily due to per unit cost increases of 6% for energy and 1% for raw materials, partially offset by 4% lower per unit fixed costs.

     CGC (gypsum): Net sales in the third quarter of 2011 were $78 million, an increase of $8 million compared to the third quarter of 2010 as a result of net sales increases of $3 million for joint treatment products, $2 million for SHEETROCK^® brand gypsum wallboard due to 4% increases in volume and selling prices, $1 million for other products and favorable variations of $1 million each for cash discounts and currency. An operating loss of $7 million was recorded for the third quarter of 2011 compared with an operating profit of $3 million in the third quarter of 2010. This $10 million decline was attributable to a $9 million unfavorable adjustment related to the settlement with United States and Canadian tax authorities and a $2 million decrease in gypsum wallboard gross profit primarily due to 9% higher per unit manufacturing costs due to higher raw materials costs, partially offset by an aggregate gross profit improvement of $1 million for joint treatment and other products.

USG Mexico: Net sales for our Mexico-based subsidiary were $42 million in the third quarter of 2011 compared with $37 million in the third quarter of 2010. Net sales increased by an aggregate of $4 million for ceiling products, glass mat sheathing and miscellaneous product lines and $2 million as a result of the favorable effects of currency translation. These increases were partially offset by a $1 million aggregate decrease in net sales of gypsum wallboard and cement board. Operating profit was $6 million in the third quarter of 2011 compared with $5 million in the third quarter of 2010 reflecting gross profit increases of $1 million each for drywall steel, cement board and joint treatment, offset by a $2 million decrease in gross profit related to other nonwallboard products and miscellaneous costs. Gross profit was unchanged for gypsum wallboard.

Other: Other includes our Bermuda-based shipping company and our gypsum quarry and ship loading facility in Windsor, Nova Scotia, Canada. Third quarter 2011 net sales for these operations were $10 million, up from $7 million for the third quarter of 2010. Operating loss for the third quarter of 2011 was $59 million compared with $5 million for the prior-year period. That loss included the charges of $51 million recorded as a result of our decision to permanently close the Windsor operations. The Windsor operations also incurred a $3 million unfavorable adjustment related to the settlement with United States and Canadian tax authorities.

BUILDING PRODUCTS DISTRIBUTION

Net sales and operating loss for our Building Products Distribution segment, which consists of L&W Supply, were as follows:

		Three Months ended September 30,												Nine Months ended September 30,
										% Increase												%
(millions)		2011(a)				2010(b)				(Decrease)				2011(a)				2010(b)				(Decrease)
Net sales		$	283			$	281				1	%		$	796			$	811				(2	)%
Operating loss			(17	)			(24	)			(29	)%			(53	)			(85	)			(38	)%

L&W Supply’s net sales in the third quarter of 2011 were $283 million, up $2 million, or 1%, compared with the third quarter of 2010. Net sales of gypsum wallboard declined $11 million, or 12%, reflecting a 13% decrease in gypsum wallboard shipments, which adversely affected sales by $12 million, partially offset by a 1% increase in average gypsum wallboard selling prices, which favorably affected sales by $1 million. Net sales increased $6 million, or 10%, for construction metal products and $5 million, or 8%, for ceilings products primarily due to higher selling prices. Net sales of all other products increased $2 million, or 3%. Same-location net sales for the third quarter of 2011 were up 1% compared with the third quarter of 2010.

     An operating loss of $17 million was incurred in the third quarter of 2011 compared with an operating loss of $24 million in the third quarter of 2010. The $7 million reduction in operating loss was attributable to a $14 million decrease in operating expenses primarily attributable to L&W Supply’s cost reduction programs, partially offset by lower gross profit for gypsum wallboard (down $2 million) and other product lines (down $3 million). The decline in gross profit for gypsum wallboard reflected a $3 million decrease due to the lower shipments, partially offset by a 10% increase in gypsum wallboard gross margin. That gross margin increase and the impact of rebates favorably affected operating profit by $1 million. Restructuring charges were $7 million in the third quarter of 2011 compared with $5 million in the third quarter of 2010.

     L&W Supply continued to serve its customers from 155 branches in the United States as of September 30, 2011. L&W Supply operated 163 branches as of December 31, 2010 and September 30, 2010.

WORLDWIDE CEILINGS

Net sales and operating profit for the businesses comprising our Worldwide Ceilings segment were as follows:

		Three Months ended September 30,												Nine Months ended September 30,
										% Increase												% Increase
(millions)		2011				2010				(Decrease)				2011				2010				(Decrease)
Net Sales:
USG Interiors		$	121			$	114				6	%		$	343			$	328				5	%
USG International			59				59				—				175				173				1	%
CGC (ceilings)			15				15				—				52				48				8	%
Eliminations			(12	)			(14	)			(14	)%			(37	)			(38	)			(3	)%
Total		$	183			$	174				5	%		$	533			$	511				4	%
Operating Profit:
USG Interiors		$	18			$	17				6	%		$	51			$	47				9	%
USG International			4				3				33	%			11				8				38	%
CGC (ceilings)			3				1				—				11				7				57	%
Total		$	25			$	21				19	%		$	73			$	62				18	%