Edgar Filing: Owens Corning

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

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

For the transition period from to

Commission File Number: 1-33100

Owens Corning

(Exact name of registrant as specified in its charter)


Delaware		43-2109021
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Owens Corning Parkway, Toledo, OH		43659
(Address of principal executive offices)		(Zip Code)

(419) 248-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ		Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

As of October 15, 2012, 118,169,824 shares of registrant’s common stock, par value $0.01 per share, were outstanding.

Contents


Cover Page			1

PART I – FINANCIAL INFORMATION (unaudited)

	Item 1.	Financial Statements
		Consolidated Statements of Earnings	3
		Consolidated Statements of Comprehensive Earnings	4
		Consolidated Balance Sheets	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements
		1. General	7
		2. Segment Information	7
		3. Inventories	9
		4. Derivative Financial Instruments	10
		5. Goodwill and Other Intangible Assets	13
		6. Property, Plant and Equipment	14
		7. Changes in Noncontrolling Interest	14
		8. Divestitures	14
		9. Warranties	14
		10. Cost Reduction Actions	15
		11. Debt	16
		12. Pension Plans and Other Postretirement Benefits	17
		13. Contingent Liabilities and Other Matters	19
		14. Stock Compensation	19
		15. Earnings per Share	23
		16. Fair Value Measurement	24
		17. Income Taxes	25
		18. Subsequent Events	25
		19. Accounting Pronouncements	25
		20. Condensed Consolidating Financial Statements	26

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50

	Item 4.	Controls and Procedures	50

PART II – OTHER INFORMATION

	Item 1.	Legal Proceedings	51

	Item 1A.	Risk Factors	51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

	Item 3.	Defaults Upon Senior Securities	52

	Item 4.	Mine Safety Disclosures	52

	Item 5.	Other Information	52

	Item 6.	Exhibits	52

		Signatures	53
		Exhibit Index	54

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PART I

ITEM 1. FINANCIAL STATEMENTS

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited)

(in millions, except per share amounts)


	Three Months Ended Sep. 30,					Nine Months Ended Sep. 30,
	2012			2011		2012		2011
NET SALES	$	1,276		$	1,450	$	4,013	$	4,139
COST OF SALES		1,074			1,133		3,386		3,341

Gross margin		202			317		627		798
OPERATING EXPENSES
Marketing and administrative expenses		115			119		380		395
Science and technology expenses		20			20		60		58
Charges related to cost reduction actions		-			-		36		-
Other (income) expenses, net		8			1		19		(28	)

Total operating expenses		143			140		495		425

EARNINGS BEFORE INTEREST AND TAXES		59			177		132		373
Interest expense, net		29			28		85		81

EARNINGS BEFORE TAXES		30			149		47		292
Less: Income tax expense (benefit)		(14	)		23		8		63
Equity in net earnings of affiliates		-			-		-		1

NET EARNINGS		44			126		39		230
Less: Net earnings attributable to noncontrolling interests		-			2		2		4

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING	$	44		$	124	$	37	$	226

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO OWENS CORNING COMMON STOCKHOLDERS
Basic	$	0.37		$	1.02	$	0.31	$	1.83
Diluted	$	0.37		$	1.01	$	0.31	$	1.82
WEIGHTED-AVERAGE COMMON SHARES
Basic		117.9			121.7		119.8		123.2
Diluted		118.8			122.6		120.6		124.2

The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.

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OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(unaudited)

(in millions)


	Three Months Ended Sep. 30,						Nine Months Ended Sep. 30,
	2012			2011			2012			2011
NET EARNINGS	$	44		$	126		$	39		$	230
Currency translation adjustment		28			(84	)		9			(23	)
Pension and other postretirement adjustment (net of tax of $0 and $(1) for the periods ended September 30, 2012 and 2011, respectively)		(1	)		2			(2	)		1
Deferred income (loss) on hedging (net of tax of $(1), and $0 for the periods ended September 30, 2012 and 2011, respectively)		2			(3	)		3			(1	)

COMPREHENSIVE EARNINGS		73			41			49			207
Less: Comprehensive earnings attributable to noncontrolling interests		-			2			2			4

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING	$	73		$	39		$	47		$	203

The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.

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OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in millions)


ASSETS	Sep. 30, 2012			Dec. 31, 2011
CURRENT ASSETS
Cash and cash equivalents	$	51		$	52
Receivables, less allowances of $19 at Sep. 30, 2012, and $15 at Dec. 31, 2011		770			610
Inventories		793			795
Other current assets		155			179

Total current assets		1,769			1,636
Property, plant and equipment, net		2,912			2,904
Goodwill		1,144			1,144
Intangible assets		1,050			1,073
Deferred income taxes		564			538
Other non-current assets		253			232

TOTAL ASSETS	$	7,692		$	7,527


LIABILITIES AND EQUITY

CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	867		$	876
Short-term debt		19			28
Long-term debt – current portion		6			4

Total current liabilities		892			908
Long-term debt, net of current portion		2,191			1,930
Pension plan liability		420			435
Other employee benefits liability		259			267
Deferred income taxes		43			51
Other liabilities		207			195
Commitments and contingencies
OWENS CORNING STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.01 per share (a)		-			-
Common stock, par value $0.01 per share (b)		1			1
Additional paid in capital		3,917			3,907
Accumulated earnings		507			470
Accumulated other comprehensive deficit		(305	)		(315	)
Cost of common stock in treasury (c)		(475	)		(362	)

Total Owens Corning stockholders’ equity		3,645			3,701
Noncontrolling interests		35			40

Total equity		3,680			3,741

TOTAL LIABILITIES AND EQUITY	$	7,692		$	7,527

(a)

10 shares authorized; none issued or outstanding at Sep. 30, 2012, and Dec. 31, 2011

(b)

400 shares authorized; 135.5 issued and 118.2 outstanding at Sep. 30, 2012; 134.4 issued and 120.9 outstanding at Dec. 31, 2011

(c)

17.3 shares at Sep. 30, 2012, and 13.5 shares at Dec. 31, 2011

The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.

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OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)


	Nine Months Ended Sep. 30,
	2012			2011
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES
Net earnings	$	39		$	230
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		269			243
Gain on sale of businesses and fixed assets		(3	)		(30	)
Deferred income taxes		(25	)		29
Provision for pension and other employee benefits liabilities		33			26
Stock-based compensation expense		18			16
Other non-cash		(9	)		(18	)
Change in working capital		(171	)		(330	)
Pension fund contribution		(42	)		(104	)
Payments for other employee benefits liabilities		(17	)		(17	)
Other		1			14

Net cash flow provided by operating activities		93			59

NET CASH FLOW USED FOR INVESTING ACTIVITIES
Additions to plant and equipment		(235	)		(303	)
Investment in subsidiaries and affiliates, net of cash acquired		-			(84	)
Proceeds from the sale of assets or affiliates		12			81

Net cash flow used for investing activities		(223	)		(306	)

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES
Proceeds from senior revolving credit and receivables securitization facilities		1,205			1,007
Payments on senior revolving credit and receivables securitization facilities		(929	)		(629	)
Proceeds from long-term debt		-			6
Payments on long-term debt		(13	)		(10	)
Net increase (decrease) in short-term debt		(9	)		17
Purchases of noncontrolling interest		(22	)		-
Purchases of treasury stock		(113	)		(138	)
Other		9			12

Net cash flow provided by financing activities		128			265

Effect of exchange rate changes on cash		1			(20	)

Net decrease in cash and cash equivalents		(1	)		(2	)
Cash and cash equivalents at beginning of period		52			52

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	51		$	50

The accompanying Notes to the Consolidated Financial Statements are an integral part of this Statement.

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.	GENERAL

Unless the context requires otherwise, the terms “Owens Corning,” “Company,” “we” and “our” in this report refer to Owens Corning, a Delaware corporation, and its subsidiaries.

The Consolidated Financial Statements included in this report are unaudited, pursuant to certain rules and regulations of the Securities and Exchange Commission, and include, in the opinion of the Company, adjustments necessary for a fair statement of the results for the periods indicated, which, however, are not necessarily indicative of results which may be expected for the full year. The December 31, 2011, balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (U.S.). In connection with the Consolidated Financial Statements and Notes included in this report, reference is made to the Consolidated Financial Statements and Notes contained in the Company’s 2011 annual report on Form 10-K. During the three and nine months ended September 30, 2012, the Company recorded additional net pre-tax expense of $7 million ($3 million after tax expense) and net pre-tax expense of $2 million ($1 million after tax income), respectively, related to prior periods. The effect was not material to the current or any previously issued financial statements. Certain reclassifications have been made to the periods presented for 2011 to conform to the classifications used in the periods presented for 2012.

2.	SEGMENT INFORMATION

The Company has two reportable segments: Composites and Building Materials. Accounting policies for the segments are the same as those for the Company. The Company’s reportable segments are defined as follows:

Composites – comprised of our Reinforcements and Downstream businesses. Within the Reinforcements business, the Company manufactures, fabricates and sells glass reinforcements in the form of fiber. Within the Downstream business, the Company manufactures and sells glass fiber products in the form of fabrics, mat, veil and other specialized products.

Building Materials – comprised of our Insulation and Roofing businesses. Within the Insulation business, the Company manufactures and sells fiberglass insulation into residential, commercial, industrial and other markets for both thermal and acoustical applications. It also manufactures and sells glass fiber pipe insulation, energy efficient flexible duct media and foam insulation used in above- and below-grade construction applications. Within the Roofing business, the Company manufactures and sells residential roofing shingles and oxidized asphalt materials used in residential and commercial construction and specialty applications.

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2.	SEGMENT INFORMATION (continued)

NET SALES

The following table summarizes our net sales by segment, geographic region and product group (in millions). External customer sales are attributed to geographic region based upon the location from which the product is shipped to the external customer.


	Three Months Ended Sep. 30,						Nine Months Ended Sep. 30,
	2012			2011			2012			2011
Reportable Segments
Composites	$	459		$	496		$	1,433		$	1,517
Building Materials		855			1,009			2,719			2,766

Total reportable segments		1,314			1,505			4,152			4,283
Corporate eliminations		(38	)		(55	)		(139	)		(144	)

NET SALES	$	1,276		$	1,450		$	4,013		$	4,139


External Customer Sales by Geographic Region
United States	$	856		$	1,008		$	2,755		$	2,781
Europe		133			147			431			487
Asia Pacific		165			171			477			504
Other		122			124			350			367

NET SALES	$	1,276		$	1,450		$	4,013		$	4,139


Sales by Product Group
Composites	$	459		$	496		$	1,433		$	1,517
Insulation		384			365			1,055			981
Roofing		471			644			1,664			1,785
Corporate Eliminations		(38	)		(55	)		(139	)		(144	)

NET SALES	$	1,276		$	1,450		$	4,013		$	4,139

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2.	SEGMENT INFORMATION (continued)

EARNINGS BEFORE INTEREST AND TAXES

Earnings before interest and taxes (“EBIT”) by segment consists of net sales less related costs and expenses and are presented on a basis that is used internally for evaluating segment performance. Certain items, such as general corporate expenses or income and certain other expense or income items, are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in EBIT for our reportable segments and are included in the Corporate, Other and Eliminations category.

The following table summarizes EBIT by segment (in millions):


	Three Months Ended Sep. 30,						Nine Months Ended Sep. 30,
	2012			2011			2012			2011
Reportable Segments
Composites	$	11		$	49		$	68		$	152
Building Materials		86			144			242			277

Total reportable segments	$	97		$	193		$	310		$	429


Corporate, Other and Eliminations
Charges related to cost reduction actions and related items	$	(22	)	$	-		$	(109	)	$	(17	)
Gain on sale of Capivari, Brazil, facility		-			-			-			16
General corporate expense and other		(16	)		(16	)		(69	)		(55	)

EBIT	$	59		$	177		$	132		$	373

3.	INVENTORIES

Inventories consist of the following (in millions):


	Sep. 30, 2012		Dec. 31, 2011
Finished goods	$	578	$	597
Materials and supplies		215		198

Total inventories	$	793	$	795

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

4.	DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to, among other risks, the impact of changes in commodity prices, foreign currency exchange rates, and interest rates in the normal course of business. The Company’s risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments to offset a portion of these risks. The Company uses derivative financial instruments only to the extent necessary to hedge identified business risks, and does not enter into such transactions for trading purposes.

The Company generally does not require collateral or other security with counterparties to these financial instruments and is therefore subject to credit risk in the event of nonperformance; however, the Company monitors credit risk and currently does not anticipate nonperformance by other parties. Contracts with counterparties generally contain right of offset provisions. These provisions effectively reduce the Company’s exposure to credit risk in situations where the Company has gain and loss positions outstanding with a single counterparty. It is the Company’s policy to offset on the Consolidated Balance Sheets the amounts recognized for derivative instruments with any cash collateral arising from derivative instruments executed with the same counterparty under a master netting agreement. As of September 30, 2012, and December 31, 2011, the Company did not have any amounts on deposit with any of its counterparties, nor did any of its counterparties have any amounts on deposit with the Company.

The following table presents the fair value of derivatives and hedging instruments and the respective location on the Consolidated Balance Sheets (in millions):


			Fair Value at
	Location		Sep. 30, 2012		Dec. 31, 2011
Derivative assets designated as hedging instruments:
Cash flow hedges:
Natural gas		Other current assets	$	1	$	1
Amount of gain recognized in OCI (effective portion)		OCI	$	1	$	1

Derivative liabilities designated as hedging instruments:
Cash flow hedges:
Natural gas		Accounts payable and accrued liabilities	$	1	$	4
Amount of loss recognized in OCI (effective portion)		OCI	$	1	$	4

Derivative assets not designated as hedging instruments:
Foreign exchange contracts		Other current assets	$	-	$	2

Derivative liabilities not designated as hedging instruments:
Natural gas		Accounts payable and accrued liabilities	$	-	$	1
Foreign exchange contracts		Accounts payable and accrued liabilities	$	2	$	1

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

4.	DERIVATIVE FINANCIAL INSTRUMENTS (continued)

The following table presents the impact and respective location of derivative activities on the Consolidated Statements of Earnings (in millions):


			Three Months Ended Sep. 30,					Nine Months Ended Sep. 30,
	Location		2012		2011			2012			2011
Derivative activity designated as hedging instruments:
Natural gas:
Amount of loss reclassified from OCI into earnings (effective portion)		Cost of sales	$	1	$	-		$	6		$	2

Interest rate swaps:
Amount of loss recognized in earnings (ineffective portion)		Interest expense, net	$	-	$	1		$	-		$	-

Derivative activity not designated as hedging instruments:
Natural gas:
Amount of gain recognized in earnings		Other (income) expenses, net	$	-	$	-		$	(1	)	$	(1	)

Foreign currency exchange contract:
Amount of (gain) loss recognized in earnings (a)		Other (income) expenses, net	$	1	$	(9	)	$	5		$	(14	)

(a)	(Gains)/losses related to foreign currency derivatives were substantially offset by net revaluation impacts on foreign denominated balance sheet exposures, which were also recorded in Other (income) expenses, net.

Cash Flow Hedges

The Company uses forward and swap contracts, which qualify as cash flow hedges, to manage forecasted exposure to natural gas prices. The effective portion of the change in the fair value of cash flow hedges is deferred in accumulated OCI and is subsequently recognized in cost of sales on the Consolidated Statements of Earnings for commodity hedges, when the hedged item impacts earnings. Changes in the fair value of derivative assets and liabilities designated as hedging instruments are shown in other within operating activities on the Consolidated Statement of Cash Flows. Any portion of the change in fair value of derivatives designated as hedging instruments that is determined to be ineffective is recorded in other (income) expenses on the Consolidated Statements of Earnings.

The Company currently has natural gas derivatives designated as hedging instruments that mature within 15 months. The Company’s policy is to hedge up to 75% of its total forecasted natural gas exposures for the next two months, up to 50% of its total forecasted natural gas exposures for the following four months, and lesser amounts for the remaining periods. Based on market conditions, approved variation from the standard policy may occur. The Company performs an analysis for effectiveness of its derivatives designated as hedging instruments at the end of each quarter based on the terms of the contract and the underlying item being hedged.

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

4.	DERIVATIVE FINANCIAL INSTRUMENTS (continued)

As of September 30, 2012, $1 million of gains included in accumulated OCI on the Consolidated Balance Sheets relate to contracts that will impact earnings during the next 12 months. Transactions and events that are expected to occur over the next 12 months that will necessitate recognizing these deferred amounts include the recognition of the hedged item through earnings.

Fair Value Hedges

The Company manages its interest rate exposure by balancing the mixture of its fixed and variable rate instruments through interest rate swaps. The swaps are carried at fair value and recorded as other assets or liabilities, with the offset to long-term debt on the Consolidated Balance Sheets. Changes in the fair value of these swaps and that of the related debt are recorded in interest expense, net on the Consolidated Statements of Earnings. In the fourth quarter of 2011, the Company terminated all existing interest rate swaps.

Other Derivatives

The Company uses forward currency exchange contracts to manage existing exposures to foreign exchange risk related to assets and liabilities recorded on the Consolidated Balance Sheets. Gains and losses resulting from the changes in fair value of these instruments are recorded in other (income) expenses on the Consolidated Statements of Earnings.

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

5.	GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets and goodwill consist of the following (in millions):


Sep. 30, 2012	Weighted Average Useful Life		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizable intangible assets:
Customer relationships		19	$	169	$	(55	)	$	114
Technology		20		197		(62	)		135
Franchise and other agreements		15		37		(13	)		24
Indefinite-lived intangible assets:
Trademarks				777		-			777

Total intangible assets			$	1,180	$	(130	)	$	1,050

Goodwill			$	1,144


Dec. 31, 2011	Weighted Average Useful Life		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizable intangible assets:
Customer relationships		19	$	170	$	(48	)	$	122
Technology		20		204		(54	)		150
Franchise and other agreements		15		36		(12	)		24
Indefinite-lived intangible assets:
Trademarks				777		-			777

Total intangible assets			$	1,187	$	(114	)	$	1,073

Goodwill			$	1,144

Other Intangible Assets

The Company expects the ongoing amortization expense for amortizable intangible assets to be approximately $21 million in each of the next five fiscal years. The Company’s future cash flows are not materially impacted by its ability to extend or renew agreements related to our amortizable intangible assets.

Goodwill

The Company tests goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount. No testing was deemed necessary in the third quarter of 2012.

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

6.	PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following (in millions):


	Sep. 30, 2012			Dec. 31, 2011
Land	$	221		$	221
Buildings and leasehold improvements		766			727
Machinery and equipment		3,187			2,932
Construction in progress		161			268

		4,335			4,148
Accumulated depreciation		(1,423	)		(1,244	)

Property, plant and equipment, net	$	2,912		$	2,904

Machinery and equipment includes certain precious metals used in our production tooling, which comprise approximately 18% and 20% of total machinery and equipment as of September 30, 2012, and December 31, 2011, respectively. Precious metals used in our production tooling are depleted as they are consumed during the production process, which typically represents an annual expense of less than 3% of the outstanding carrying value.

7.	CHANGES IN NONCONTROLLING INTERESTS

In the third quarter of 2012, the Company executed a purchase agreement for the remaining noncontrolling interest of Northern Elastomeric Incorporated (“NEI”), one of the Company’s consolidated subsidiaries. As a result of the purchase agreement, NEI became a wholly-owned subsidiary of the Company, with the Company providing $22 million in cash consideration. The transaction resulted in a $6 million decrease in Noncontrolling interests on the Consolidated Balance Sheets.

8.	DIVESTITURES

On May 18, 2011, the Company sold its Composites glass reinforcements facility in Capivari, Brazil, to Chongqing Polycomp International Company (“CPIC”), an unrelated third party. At closing, the Company received $55 million in cash and an additional $6 million was placed into escrow to satisfy any potential adjustments or claims. The sale resulted in a $16 million gain that is recorded in other (income) expenses on the Consolidated Statements of Earnings in the second quarter of 2011.

9.	WARRANTIES

The Company records a liability for warranty obligations at the date the related products are sold. Adjustments are made as new information becomes available. A reconciliation of the warranty liability is as follows (in millions):


	Nine Months Ended Sep. 30, 2012
Beginning balance	$	38
Amounts accrued for current year		16
Settlements of warranty claims		(17	)

Ending balance	$	37

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

10.

COST REDUCTION ACTIONS

2012 Cost Reduction Actions

As a result of evaluating market conditions, we took actions to improve the competitive position of our global manufacturing network by closing certain facilities in Europe along with other actions that align with our objectives in the region. In conjunction with these actions, the Company recorded $22 million and $109 million in charges related to cost reduction actions and related items for the three and nine months ended September 30, 2012, respectively; of which, $0 and $36 million is related to severance and is included in charges related to cost reduction actions on the Consolidated Statements of Earnings. The $22 million and $73 million in other related charges, respectively, relates primarily to accelerated depreciation and is included in cost of sales on the Consolidated Statements of Earnings. Cash payments related to these activities will continue through 2015. The Company will continue to evaluate its global network to ensure it has the appropriate capacity to respond to future anticipated demand around the world.

Composites

The Company recorded $22 million and $104 million in charges related to cost reduction actions and related items for the three and nine months ended September 30, 2012, respectively; of which $0 and $34 million is related to severance costs and $22 million and $70 million is related to other charges, respectively. The $22 million and $70 million of other charges consist of $14 million and $48 million in accelerated depreciation and $8 million and $22 million in other related charges, respectively.

The Company anticipates incurring approximately $25 million in additional charges throughout 2012 and into 2013 related to these actions, of which $6 million will be presented as charges related to cost reduction actions on the Consolidated Statements of Earnings.

Building Materials

In the first quarter of 2012, the Company’s actions resulted in $5 million in charges, comprised of $2 million in severance costs and $3 million of other charges.

The following table summarizes the status of the unpaid liabilities from the Company’s 2012 cost reduction actions (in millions):


	Beginning Balance Dec. 31, 2011		Costs Incurred		Payments		Ending Balance Sep. 30, 2012		Cumulative Charges Incurred
Severance	$	-	$	36	$	2	$	34	$	36

Total	$	-	$	36	$	2	$	34	$	36

- 16 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

11.

DEBT

Details of the Company’s outstanding long-term debt are as follows (in millions):


	Sep. 30, 2012		Dec. 31, 2011
6.50% senior notes, net of discount, due 2016	$	649	$	649
7.00% senior notes, net of discount, due 2036		540		540
9.00% senior notes, net of discount, due 2019		346		346
Accounts receivable securitization facility, maturing in 2014		180		158
Senior revolving credit facility, maturing in 2016		390		136
Various capital leases, due through and beyond 2050		53		55
Other floating rate debt, maturing through 2017		2		3
Other fixed rate debt, with maturities up to 2016, at rates up to 11.0%		3		8
Fair value adjustment to debt		34		39

Total long-term debt		2,197		1,934
Less – current portion		6		4

Long-term debt, net of current portion	$	2,191	$	1,930

Senior Notes

The Company issued $350 million of senior notes on June 3, 2009, and $1.2 billion of senior notes on October 31, 2006, which are collectively referred to as the “Senior Notes.” The Senior Notes are general unsecured obligations of the Company and rank pari passu with all existing and future senior unsecured indebtedness of the Company.

The Senior Notes are fully and unconditionally guaranteed by each of the Company’s current and future domestic subsidiaries that are a borrower or guarantor under the Company’s Credit Agreement (as defined below). The guarantees are unsecured and rank equally in right of payment with all other existing and future senior unsecured indebtedness of the guarantors. The guarantees are effectively subordinated to existing and future secured debt of the guarantors to the extent of the assets securing that indebtedness.

The Company has the option to redeem all or part of the Senior Notes at any time at a “make whole” redemption price. The Company is subject to certain covenants in connection with the issuance of the Senior Notes that it believes are usual and customary. The Company was in compliance with these covenants as of September 30, 2012.

In the fourth quarter of 2011, the Company terminated all existing interest rate swaps. The swaps were carried at fair value and recorded as other assets or liabilities, with a fair value adjustment to long-term debt on the Consolidated Balance Sheets. The fair value adjustment to debt will be amortized through 2016 as a reduction to interest expense in conjunction with the maturity date of the notes.

Senior Credit Facilities

In July 2011, the Company amended the Senior Revolving Credit Facility to extend the maturity to July 2016 and reduce the pricing. The available principal amount of $800 million on the Senior Revolving Credit Facility includes both borrowings and letters of credit. Borrowings under the Senior Revolving Credit Facility may be used for general corporate purposes and working capital. The Company has the discretion to borrow under multiple options, which provide for varying terms and interest rates including the United States prime rate or LIBOR plus a spread.

- 17 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

11.

DEBT (continued)

The Senior Revolving Credit Facility contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio that the Company believes are usual and customary for a senior unsecured credit agreement. The Company was well within compliance with these covenants as of September 30, 2012.

The Company had $15 million and $42 million of letters of credit outstanding under the Senior Revolving Credit Facility at September 30, 2012 and December 31, 2011, respectively.

Receivables Securitization Facility

Included in long-term debt on the Consolidated Balance Sheets are amounts outstanding under a Receivable Purchase Agreement (the “RPA”). Owens Corning Sales, LLC and Owens Corning Receivables LLC, each a subsidiary of the Company, have a $250 million RPA with certain financial institutions. The securitization facility was amended in the fourth quarter of 2011 to extend maturity to December 2014. At September 30, 2012, the Company utilized the full amount permitted under the terms of the receivables securitization facility. The Company had $37 million of letters of credit outstanding under the receivables securitization facility at September 30, 2012. There were no letters of credit outstanding under the receivables securitization facility at December 31, 2011.

The receivables securitization facility contains various covenants, including a maximum allowed leverage ratio and a minimum required interest expense coverage ratio that the Company believes are usual and customary for a securitization facility. The Company was well within compliance with these covenants as of September 30, 2012.

Owens Corning Receivables LLC’s sole business consists of the purchase or acceptance through capital contributions of trade receivables and related rights from Owens Corning Sales, LLC and the subsequent retransfer of or granting of a security interest in such trade receivables and related rights to certain purchasers party to the RPA. Owens Corning Receivables LLC is a separate legal entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of Owens Corning Receivables LLC’s assets prior to any assets or value in Owens Corning Receivables LLC becoming available to Owens Corning Receivables LLC’s equity holders. The assets of Owens Corning Receivables LLC are not available to pay creditors of the Company or any other affiliates of the Company or Owens Corning Sales, LLC.

Short-Term Debt

At September 30, 2012 and December 31, 2011, short-term borrowings were $19 million and $28 million, respectively. The short-term borrowings for both periods consisted of various operating lines of credit and working capital facilities. Certain of these borrowings are collateralized by receivables, inventories or property. The borrowing facilities are typically for one-year renewable terms. The weighted average interest rate on short-term borrowings was approximately 5.8% for September 30, 2012, and 7.4% for December 31, 2011.

12.

PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Pension Plans

The Company sponsors defined benefit pension plans. Under the plans, pension benefits are based on an employee’s years of service and, for certain categories of employees, qualifying compensation. Company contributions to these pension plans are determined by an independent actuary to meet or exceed minimum funding requirements. The unrecognized cost of any retroactive amendments and actuarial gains and losses are amortized over the average future service period of plan participants expected to receive benefits.

- 18 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

12.

PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)

The following tables provide information regarding pension expense recognized (in millions):


	Three Months Ended Sep. 30, 2012									Three Months Ended Sep. 30, 2011
	U.S.			Non-U.S.			Total			U.S.			Non-U.S.			Total
Components of Net Periodic Pension Cost
Service cost	$	3		$	1		$	4		$	2		$	1		$	3
Interest cost		12			5			17			13			5			18
Expected return on plan assets		(15	)		(7	)		(22	)		(16	)		(5	)		(21	)
Amortization of actuarial loss		6			2			8			3			-			3

Net periodic pension cost	$	6		$	1		$	7		$	2		$	1		$	3


	Nine Months Ended Sep. 30, 2012									Nine Months Ended Sep. 30, 2011
	U.S.			Non-U.S.			Total			U.S.			Non-U.S.			Total
Components of Net Periodic Pension Cost
Service cost	$	7		$	5		$	12		$	6		$	4		$	10
Interest cost		37			17			54			40			18			58
Expected return on plan assets		(45	)		(20	)		(65	)		(48	)		(19	)		(67	)
Amortization of actuarial loss		18			4			22			9			1			10

Net periodic pension cost	$	17		$	6		$	23		$	7		$	4		$	11

During July of 2012, Congress passed the “Moving Ahead for Progress in the 21^st Century Act,” which included pension funding stabilization provisions. The measure, which is designed to stabilize the discount rate used to determine funding requirements from the effects of interest rate volatility, reduces the Company’s United States Pension Plan contributions by approximately $21 million during 2012.

The Company now expects to contribute approximately $32 million in cash to the United States Pension Plans and another $21 million to non-United States plans during 2012. The Company made cash contributions of approximately $42 million to the plans during the nine months ended September 30, 2012.

Postemployment and Postretirement Benefits Other than Pension Plans

The Company maintains healthcare and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the United States are non-funded and pay either (1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met, or (2) fixed amounts of medical expense reimbursement.

- 19 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

12.

PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)

The following table provides the components of net periodic benefit cost for aggregated United States and non-United States Plans for the periods indicated (in millions):


	Three Months Ended Sep. 30,					Nine Months Ended Sep. 30,
	2012			2011		2012			2011
Components of Net Periodic Benefit Cost
Service cost	$	1		$	-	$	2		$	2
Interest cost		2			4		8			11
Amortization of prior service cost		(1	)		-		(3	)		-
Amortization of actuarial gain		(1	)		-		(2	)		(1	)

Net periodic benefit cost	$	1		$	4	$	5		$	12

13.

CONTINGENT LIABILITIES AND OTHER MATTERS

Litigation

The Company is involved in various legal proceedings relating to employment, product liability and other matters. The Company regularly reviews the status of these proceedings along with legal counsel. Liabilities for such items are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s operations or financial condition taken as a whole.

Environmental Matters

We have been deemed by the Environmental Protection Agency (“EPA”) to be a Potentially Responsible Party (“PRP”) with respect to certain sites under the Comprehensive Environmental Response Compensation and Liability Act. We have also been deemed a PRP under similar state or local laws and in other instances other PRPs have brought suits against us as a PRP for contribution under such federal, state, or local laws. At September 30, 2012, we had environmental remediation liabilities as a PRP at 20 sites where we have a continuing legal obligation to either complete remedial actions or contribute to the completion of remedial actions as part of a group of PRPs. For these sites we estimate a reserve to reflect environmental liabilities that have been asserted or are probable of assertion, in which liabilities are probable and reasonably estimable. At September 30, 2012, our reserve for such liabilities was $6 million.

14.

STOCK COMPENSATION

2010 Stock Plan

On April 22, 2010, the Company’s stockholders approved the Owens Corning 2010 Stock Plan (the “2010 Stock Plan”), which replaced the Owens Corning 2006 Stock Plan (the “2006 Stock Plan”), as amended and restated. The 2010 Stock Plan authorizes grants of stock options, stock appreciation rights, stock awards, restricted stock awards, restricted stock units, bonus stock awards and performance stock awards. Such shares of common stock include shares that were available but not granted, or which were granted but were not issued or delivered due to expiration, termination, cancellation or forfeiture of such awards. At September 30, 2012, the number of shares remaining available under the 2010 Stock Plan for all stock awards was 2.8 million.

- 20 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

14.

STOCK COMPENSATION (continued)

Stock Options

The Company has granted stock options under its stockholder approved stock plans. The Company calculates a weighted-average grant-date fair value using a Black-Scholes valuation model for options granted. Compensation expense for options is measured based on the fair market value of the option on the date of grant, and is recognized on a straight-line basis over a four-year vesting period. In general, the exercise price of each option awarded was equal to the market price of the Company’s common stock on the date of grant and an option’s maximum term is 10 years. The volatility assumption was based on a benchmark study of our peers.

During the nine months ended September 30, 2012, 409,700 stock options were granted with a weighted-average grant date fair value of $15.27. Assumptions used in the Company’s Black-Scholes valuation model to estimate the grant date fair value were expected volatility of 45.8%, expected dividends of 0%, expected term of 6.26 years and a risk-free interest rate of 1.1%.

During the three and nine months ended September 30, 2012, the Company recognized expense of $1 million and $3 million respectively, related to the Company’s stock options. During the three and nine months ended September 30, 2011, the Company recognized expense of $1 million and $3 million respectively, related to the Company’s stock options. As of September 30, 2012, there was $9 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 2.68 years. The total aggregate intrinsic value of options outstanding as of September 30, 2012 and 2011 was $19 million and $6 million.

The following table summarizes the Company’s stock option activity for the nine months ended Sep. 30, 2012:


	Nine Months Ended Sep. 30, 2012
	Number of Options			Weighted-Average Exercise Price
Beginning Balance		3,293,545		$	26.26
Granted		409,700			33.73
Exercised		(397,045	)		22.53
Forfeited		(130,375	)		28.42

Ending Balance		3,175,825		$	27.60

The following table summarizes information about the Company’s options outstanding and exercisable:


	Options Outstanding						Options Exercisable
	Options Outstanding		Weighted-Average				Number Exercisable at Sep. 30, 2012		Weighted-Average
Range of Exercise Prices	Options Outstanding		Remaining Contractual Life		Exercise Price		Number Exercisable at Sep. 30, 2012		Remaining Contractual Life		Exercise Price

$7.57- $34.94		3,175,825		5.85	$	27.60		2,193,858		4.86	$	27.00

Restricted Stock Awards and Restricted Stock Units

The Company has granted restricted stock awards and restricted stock units (collectively referred to as “restricted stock”) under its stockholder approved stock plans. Compensation expense for restricted stock is measured based on the market price

- 21 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

14.

STOCK COMPENSATION (continued)

of the stock at date of grant and is recognized on a straight-line basis over the four-year vesting period. Stock restrictions are subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2015.

During the three and nine months ended September 30, 2012, the Company recognized expense of $3 million and $11 million respectively, related to the Company’s restricted stock. During the three and nine months ended September 30, 2011, the Company recognized expense of $4 million and $10 million respectively. As of September 30, 2012, there was $26 million of total unrecognized compensation cost related to restricted stock. That cost is expected to be recognized over a weighted-average period of 2.80 years. The total fair value of shares vested during the nine months ended September 30, 2012 and 2011 was $11 million and $8 million, respectively.

A summary of the status of the Company’s plans that had restricted stock issued as of September 30, 2012, and changes during the nine months ended September 30, 2012, are presented below.


	Nine Months Ended Sep. 30, 2012
	Number of Shares			Weighted-Average Grant-Date Fair Value
Beginning Balance		1,941,742		$	19.74
Granted		617,082			33.39
Vested		(512,409	)		22.13
Forfeited		(136,230	)		28.25

Ending Balance		1,910,185		$	22.90

Performance Stock Awards and Performance Stock Units

The Company has granted performance stock awards and performance stock units (collectively referred to as “PSUs”) as a part of its long-term incentive plan, of which 50% will be settled in stock and 50% will be settled in cash. The number of the PSUs ultimately distributed is contingent on meeting various company or stockholder return goals.

Compensation expense for PSUs settled in stock is measured based on the grant date fair value and is recognized on a straight-line basis over the vesting period. Compensation expense for PSUs settled in cash is measured based on the fair value at the end of each quarter and is recognized on a straight-line basis over the vesting period. Vesting will be pro-rated based on the number of full months employed during the performance period in the case of death, disability, change in control or involuntary termination, and pro-rated awards earned will be paid at the end of the three-year period.

In the first nine months of 2012, the Company granted PSUs. The 2012 grant vests after a three-year period based on the Company’s total stockholder return relative to the performance of the components of the S&P 500 Index for the respective three-year period. The amount of PSUs earned will vary from 0% to 200% of PSUs awarded depending on the relative stockholder return performance.

For all PSUs, respectively during the three and nine months ended September 30, 2012, the Company recognized expense of $5 million and $11 million, respectively. During the three and nine months ended September 30, 2011, the Company recognized income of $9 million and expense of $2 million, respectively, related to PSUs. As of September 30, 2012, there was $12 million of total unrecognized compensation cost related to PSUs. That cost is expected to be recognized over a weighted-average period of 1.83 years.

- 22 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

14.

STOCK COMPENSATION (continued)

2012 Grant

For the 2012 grant, the portion of the PSUs settled in cash will be revalued every reporting period until the award is fully vested. As a result, compensation expense recognized will be adjusted and previous surplus compensation expense recognized will be reversed or additional expense will be recognized. For the nine-month period ended September 30, 2012, the Company estimated the fair value of the PSUs granted using a Monte Carlo simulation that used various assumptions that include expected volatility of 36.9%, a risk free rate of 0.3% and an expected term of 2.27 years. Expected volatility was based on a benchmark study of our peers. The risk-free interest rate was based on zero coupon United States Treasury bills at the time of revaluation. The expected term represents the period beginning September 30, 2012, to the end of the three-year performance period.

For the 2012 grant, the fair value of the portion of PSUs settled in stock was estimated at the grant date using a Monte Carlo simulation that used various assumptions that include expected volatility of 48.2%, a risk free interest rate of 0.3% and an expected term of 2.91 years. Expected volatility was based on a benchmark study of ourselves and our peers. The risk-free interest rate was based on zero coupon United States Treasury bills at the grant date. The expected term represents the period from the grant date to the end of the three-year performance period.

A summary of the status of the Company’s plans that had issued PSUs as of September 30, 2012, and changes during the nine months ended September 30, 2012, are presented below:


	Nine Months Ended Sep. 30, 2012
	Number of PSUs			Weighted-Average Grant-Date Fair Value
Beginning Balance		508,616		$	42.24
Granted		256,400			47.97
Forfeited		(79,776	)		43.27

Ending Balance		685,240		$	44.26

- 23 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

15.

EARNINGS PER SHARE

The following table summarizes the number of shares outstanding as well as our basic and diluted earnings per-share (in millions, except per share amounts):


	Three Months Ended Sep. 30,				Nine Months Ended Sep. 30,
	2012		2011		2012		2011
Net earnings attributable to Owens Corning	$	44	$	124	$	37	$	226

Weighted-average number of shares outstanding used for basic earnings per share		117.9		121.7		119.8		123.2
Non-vested restricted and performance shares		0.6		0.6		0.5		0.6
Options to purchase common stock		0.3		0.3		0.3		0.4

Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings per share		118.8		122.6		120.6		124.2

Earnings per common share attributable to Owens Corning common stockholders:

Basic	$	0.37	$	1.02	$	0.31	$	1.83
Diluted	$	0.37	$	1.01	$	0.31	$	1.82

Basic earnings per share is calculated by dividing earnings attributable to Owens Corning by the weighted-average number of shares of the Company’s common stock outstanding during the period. Outstanding shares consist of issued shares less treasury stock.

On April 19, 2012, the Company approved a new share buy-back program under which the Company is authorized to repurchase up to 10 million shares of the Company’s outstanding common stock (the “2012 Repurchase Program”). The 2012 Repurchase Program is in addition to the share buy-back program announced August 4, 2010, (the “2010 Repurchase Program” and collectively with the 2012 Repurchase Program, the “Repurchase Programs”). The Repurchase Programs authorize the Company to repurchase shares through the open market, privately negotiated, or other transactions. The actual number of shares repurchased will depend on timing, market conditions and other factors and will be at the Company’s discretion. During the nine months ended September 30, 2012, 3.7 million shares were repurchased under the Repurchase Programs. As of September 30, 2012, 10 million shares remain available for repurchase under the Repurchase Programs.

For the three and nine months ended September 30, 2012, the number of shares used in the calculation of diluted earnings per share did not include 0.3 million options to purchase common stock, 17.5 million common equivalent shares from Series A Warrants or 7.8 million common equivalent shares from Series B Warrants due to their anti-dilutive effect.

For the three and nine months ended September 30, 2011, the number of shares used in the calculation of diluted earnings per share did not include 0.3 and 0.2 million options to purchase common stock, 17.5 million common equivalent shares from Series A Warrants or 7.8 million common equivalent shares from Series B Warrants due to their anti-dilutive effect.

- 24 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

16.

FAIR VALUE MEASUREMENT

Items Measured at Fair Value

The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The following table summarizes the fair values, and levels within the fair value hierarchy in which the fair value measurements fall, for assets and liabilities measured on a recurring basis as of September 30, 2012 (in millions):


	Total Measured at Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	10		$	10	$	-		$	-
Term deposits	$	8		$	8	$	-		$	-
Derivative assets	$	1		$	-	$	1		$	-

Total assets	$	19		$	18	$	1		$	-

Liabilities:
Derivative liabilities	$	(3	)	$	-	$	(3	)	$	-

Total liabilities	$	(3	)	$	-	$	(3	)	$	-

Cash equivalents and term deposits, by their nature, utilize Level 1 inputs in determining fair value. The term deposits are included in other current assets on the Consolidated Balance Sheets. The Company measures the value of its natural gas hedge contracts and foreign currency forward contracts using Level 2 inputs. The fair value of the Company’s natural gas hedges is determined by a mark to market valuation based on forward curves using observable market prices and the fair value of its foreign currency forward contracts is determined using observable market transactions in over-the-counter markets.

Items Disclosed at Fair Value

Long-term notes receivable

The fair value has been calculated using the expected future cash flows discounted at market interest rates. The Company believes that the carrying amounts reasonably approximate the fair values of long-term notes receivable. Long-term notes receivable were $51 million as of September 30, 2012.

- 25 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

16.

FAIR VALUE MEASUREMENT (continued)

Long-term debt

The fair value of the Company’s long-term debt has been calculated based on quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities.

As of September 30, 2012, the Company’s 6.50% senior notes due 2016 were trading at approximately 114% of par value, the 7.00% senior notes due 2036 were trading at approximately 110% of par value and the 9.00% senior notes due 2019 were trading at approximately 128% of par value.

At September 30, 2012, the Company determined that the book value of the remaining long-term debt instruments approximates market value. This approach, using level 1 inputs and utilizing indicative market rates for a new debt issuance, approximated the fair value of the remaining long-term debt at $628 million.

17.

INCOME TAXES

Income tax expense for the three and nine months ended September 30, 2012, was a benefit of $14 million and an expense of $8 million, respectively. For the third quarter and year-to-date 2012, the Company’s effective tax rate was (47)% and 17%, respectively. The third quarter 2012 effective tax rate is reflective of a cumulative adjustment attributable to lower estimated tax expense for 2012. For both periods, the difference between the effective tax rate and the statutory rate of 35% is primarily attributable to the tax accounting treatment related to various locations which are currently in a loss position and various tax planning initiatives.

Income tax expense for the three and nine months ended September 30, 2011, was $23 million and $63 million, respectively. The Company’s effective tax rate for the third quarter 2011 was 15%. Excluding the effect of discrete items related to the reversal of the valuation allowance and uncertain tax positions, in the nine months ended September 30, 2011, the Company’s adjusted effective tax would have been 28%. The difference between the adjusted effective tax rate for both the quarter and the year-to-date and the statutory rate of 35% is primarily attributable to the benefit of lower foreign tax rates and various tax planning initiatives.

18.

SUBSEQUENT EVENTS

On October 17, 2012, the Company issued $600 million of Senior Notes to refinance portions of our 2016 Senior Notes, our 2019 Senior Notes and pay down our Senior Revolving Credit Facility. Interest on the notes is payable semiannually in arrears on June 15 and December 15 each year, beginning on June 15, 2013. The notes have a 10 year maturity.

As a result of refinancing portions of our Senior Notes, we anticipate incurring a loss from debt extinguishment of approximately $75 million in the fourth quarter of 2012.

19.

ACCOUNTING PRONOUNCEMENTS

In July 2012, the Financial Accounting Standards Board issued updated guidance on the periodic testing of indefinite-lived intangible assets for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and, thus, whether further impairment testing is necessary. The updated accounting guidance is effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company believes there will be no impact on its Consolidated Financial Statements.

- 26 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The following Condensed Consolidating Financial Statements present the financial information required with respect to those entities which guarantee certain of the Company’s debt. The Condensed Consolidating Financial Statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share of the subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investment in subsidiaries and intercompany balances and transactions.

Guarantor and Nonguarantor Financial Statements

The Senior Notes and the Senior Revolving Credit Facility are guaranteed, fully, unconditionally and jointly and severally, by each of Owens Corning’s current and future 100% owned material domestic subsidiaries that is a borrower or a guarantor under Owens Corning’s Credit Agreement, which permits changes to the named guarantors in certain situations (collectively, the “Guarantor Subsidiaries”). The remaining subsidiaries have not guaranteed the Senior Notes and the Senior Revolving Credit Facility (collectively, the “Nonguarantor Subsidiaries”).

During the fourth quarter of 2011, the Company discovered certain items were not appropriately classified between the Parent and Guarantor Subsidiaries within the Condensed Consolidating Financial Statements. The effect of correcting these classifications was not material to the consolidating financial information. The Company has revised its 2011 quarterly consolidating information for comparison with 2012.

- 27 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
NET SALES	$	-		$	895		$	485		$	(104	)	$	1,276
COST OF SALES		(3	)		741			440			(104	)		1,074

Gross margin		3			154			45			-			202
OPERATING EXPENSES
Marketing and administrative expenses		24			58			33			-			115
Science and technology expenses		-			15			5			-			20
Other expenses, net		(6	)		24			(10	)		-			8

Total operating expenses		18			97			28			-			143

EARNINGS BEFORE INTEREST AND TAXES		(15	)		57			17			-			59
Interest expense, net		27			-			2			-			29

EARNINGS BEFORE TAXES		(42	)		57			15			-			30
Less: Income tax benefit		(16	)		11			(9	)		-			(14	)
Equity in net earnings of subsidiaries		70			25			-			(95	)		-
Equity in net earnings (loss) of affiliates		-			(1	)		1			-			-

NET EARNINGS		44			70			25			(95	)		44
Less: Net earnings attributable to noncontrolling interest		-			-			-			-			-

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING	$	44		$	70		$	25		$	(95	)	$	44

- 28 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011

(in millions)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
NET SALES	$	-		$	1,028		$	507		$	(85	)	$	1,450
COST OF SALES		(6	)		809			415			(85	)		1,133

Gross margin		6			219			92			-			317
OPERATING EXPENSES
Marketing and administrative expenses		14			68			37			-			119
Science and technology expenses		-			16			4			-			20
Other expenses, net		(24	)		6			19			-			1

Total operating expenses		(10	)		90			60			-			140

EARNINGS BEFORE INTEREST AND TAXES		16			129			32			-			177
Interest expense, net		25			1			2			-			28

EARNINGS BEFORE TAXES		(9	)		128			30			-			149
Less: Income tax expense		(2	)		26			(1	)		-			23
Equity in net earnings of subsidiaries		131			30			-			(161	)		-
Equity in net earnings (loss) of affiliates		-			(1	)		1			-			-

NET EARNINGS		124			131			32			(161	)		126
Less: Net earnings attributable to noncontrolling interest		-			-			2			-			2

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING	$	124		$	131		$	30		$	(161	)	$	124

- 29 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
NET SALES	$	-		$	2,846		$	1,461		$	(294	)	$	4,013
COST OF SALES		-			2,353			1,327			(294	)		3,386

Gross margin		-			493			134			-			627
OPERATING EXPENSES
Marketing and administrative expenses		86			190			104			-			380
Science and technology expenses		-			47			13			-			60
Charges related to cost reduction actions		-			-			36			-			36
Other expenses, net		(25	)		34			10			-			19

Total operating expenses		61			271			163			-			495

EARNINGS BEFORE INTEREST AND TAXES		(61	)		222			(29	)		-			132
Interest expense, net		76			2			7			-			85

EARNINGS BEFORE TAXES		(137	)		220			(36	)		-			47
Less: Income tax expense		(52	)		56			4			-			8
Equity in net earnings (loss) of subsidiaries		122			(41	)		-			(81	)		-
Equity in net earnings (loss) of affiliates		-			(1	)		1			-			-

NET EARNINGS		37			122			(39	)		(81	)		39
Less: Net earnings attributable to noncontrolling interest		-			-			2			-			2

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING	$	37		$	122		$	(41	)	$	(81	)	$	37

- 30 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(in millions)


	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminations			Consolidated
NET SALES	$	-		$	2,865		$	1,527	$	(253	)	$	4,139
COST OF SALES		(19	)		2,371			1,242		(253	)		3,341

Gross margin		19			494			285		-			798
OPERATING EXPENSES
Marketing and administrative expenses		40			248			107		-			395
Science and technology expenses		-			47			11		-			58
Other income, net		(81	)		41			12		-			(28	)

Total operating expenses		(41	)		336			130		-			425

EARNINGS BEFORE INTEREST AND TAXES		60			158			155		-			373
Interest expense, net		79			(2	)		4		-			81

EARNINGS BEFORE TAXES		(19	)		160			151		-			292
Less: Income tax expense		(4	)		35			32		-			63
Equity in net earnings (loss) of subsidiaries		241			118			-		(359	)		-
Equity in net earnings of affiliates		-			(2	)		3		-			1

NET EARNINGS		226			241			122		(359	)		230
Less: Net earnings attributable to noncontrolling interest		-			-			4		-			4

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING	$	226		$	241		$	118	$	(359	)	$	226

- 31 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)


	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
NET EARNINGS	$	44		$	70	$	25	$	(95	)	$	44
Currency translation adjustment		28			-		-		-			28
Pension and other postretirement adjustment (net of tax)		(1	)		-		-		-			(1	)
Deferred income on hedging (net of tax)		2			-		-		-			2

COMPREHENSIVE EARNINGS		73			70		25		(95	)		73
Less: Comprehensive earnings attributable to noncontrolling interest		-			-		-		-			-

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING	$	73		$	70	$	25	$	(95	)	$	73

- 32 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011

(in millions)


	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
NET EARNINGS	$	124		$	131	$	32	$	(161	)	$	126
Currency translation adjustment		(84	)		-		-		-			(84	)
Pension and postretirement adjustment (net of tax)		2			-		-		-			2
Deferred loss on hedging (net of tax)		(3	)		-		-		-			(3	)

COMPREHENSIVE EARNINGS		39			131		32		(161	)		41
Less: Comprehensive earnings attributable to noncontrolling interest		-			-		2		-			2

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING	$	39		$	131	$	30	$	(161	)	$	39

- 33 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)


	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Consolidated
NET EARNINGS	$	37		$	122	$	(39	)	$	(81	)	$	39
Currency translation adjustment		9			-		-			-			9
Pension and other postretirement adjustment (net of tax)		(2	)		-		-			-			(2	)
Deferred income on hedging (net of tax)		3			-		-			-			3

COMPREHENSIVE EARNINGS		47			122		(39	)		(81	)		49
Less: Comprehensive earnings attributable to noncontrolling interest		-			-		2			-			2

NET EARNINGS ATTRIBUTABLE TO OWENS CORNING	$	47		$	122	$	(41	)	$	(81	)	$	47

- 34 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF COMPREHENSIVE EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(in millions)


	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
NET EARNINGS	$	226		$	241	$	122	$	(359	)	$	230
Currency translation adjustment		(23	)		-		-		-			(23	)
Pension and postretirement adjustment (net of tax)		1			-		-		-			1
Deferred loss on hedging (net of tax)		(1	)		-		-		-			(1	)

COMPREHENSIVE EARNINGS		203			241		122		(359	)		207
Less: Comprehensive earnings attributable to noncontrolling interest		-			-		4		-			4

COMPREHENSIVE EARNINGS ATTRIBUTABLE TO OWENS CORNING	$	203		$	241	$	118	$	(359	)	$	203

- 35 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2012

(in millions)


ASSETS	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
CURRENT ASSETS
Cash and cash equivalents	$	-		$	-	$	51	$	-		$	51
Receivables, net		-			-		871		(101	)		770
Due from affiliates		33			2,503		46		(2,582	)		-
Inventories		-			466		327		-			793
Other current assets		(1	)		60		96		-			155

Total current assets		32			3,029		1,391		(2,683	)		1,769
Investment in subsidiaries		6,890			2,484		533		(9,907	)		-
Due from affiliates		-			63		1,009		(1,072	)		-
Property, plant and equipment, net		395			1,290		1,227		-			2,912
Goodwill		-			1,068		76		-			1,144
Intangible assets		-			944		313		(207	)		1,050
Deferred income taxes		101			440		23		-			564
Other non-current assets		64			75		114		-			253

TOTAL ASSETS	$	7,482		$	9,393	$	4,686	$	(13,869	)	$	7,692

LIABILITIES AND EQUITY

CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	28		$	514	$	426	$	(101	)	$	867
Due to affiliates		1,371			-		1,211		(2,582	)		-
Short-term debt		-			-		19		-			19
Long-term debt – current portion		-			2		4		-			6

Total current liabilities		1,399			516		1,660		(2,683	)		892
Long-term debt, net of current portion		1,958			29		204		-			2,191
Due to affiliates		-			1,009		63		(1,072	)		-
Pension plan liability		281			-		139		-			420
Other employee benefits liability		-			238		21		-			259
Deferred income taxes		-			-		43		-			43
Other liabilities		199			178		37		(207	)		207
Commitments and contingencies
OWENS CORNING STOCKHOLDERS’ EQUITY
Common stock		1			-		-		-			1
Additional paid in capital		3,917			6,539		2,040		(8,579	)		3,917
Accumulated earnings		507			884		444		(1,328	)		507
Accumulated other comprehensive deficit		(305	)		-		-		-			(305	)
Cost of common stock in treasury		(475	)		-		-		-			(475	)

Total Owens Corning stockholders’ equity		3,645			7,423		2,484		(9,907	)		3,645
Noncontrolling interest		-			-		35		-			35

Total equity		3,645			7,423		2,519		(9,907	)		3,680

TOTAL LIABILITIES AND EQUITY	$	7,482		$	9,393	$	4,686	$	(13,869	)	$	7,692

- 36 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2011

(in millions)


ASSETS	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
CURRENT ASSETS
Cash and cash equivalents	$	-		$	-	$	52	$	-		$	52
Receivables, net		-			-		730		(120	)		610
Due from affiliates		529			2,369		-		(2,898	)		-
Inventories		-			447		348		-			795
Other current assets		1			75		103		-			179

Total current assets		530			2,891		1,233		(3,018	)		1,636
Investment in subsidiaries		6,587			2,374		533		(9,494	)		-
Due from affiliates		-			63		997		(1,060	)		-
Property, plant and equipment, net		384			1,278		1,242		-			2,904
Goodwill		-			1,069		75		-			1,144
Intangible assets		-			959		352		(238	)		1,073
Deferred income taxes		71			448		19		-			538
Other non-current assets		60			72		100		-			232

TOTAL ASSETS	$	7,632		$	9,154	$	4,551	$	(13,810	)	$	7,527

LIABILITIES AND EQUITY

CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	21		$	553	$	422	$	(120	)	$	876
Due to affiliates		1,676			25		1,197		(2,898	)		-
Short-term debt		8			-		20		-			28
Long-term debt – current portion		-			1		3		-			4

Total current liabilities		1,705			579		1,642		(3,018	)		908
Long-term debt, net of current portion		1,709			29		192		-			1,930
Due to affiliates		-			997		63		(1,060	)		-
Pension plan liability		293			-		142		-			435
Other employee benefits liability		-			247		20		-			267
Deferred income taxes		-			-		51		-			51
Other liabilities		224			182		27		(238	)		195
Commitments and contingencies
OWENS CORNING STOCKHOLDERS’ EQUITY
Preferred stock		-			-		-		-			-
Common stock		1			-		-		-			1
Additional paid in capital		3,907			6,357		1,889		(8,246	)		3,907
Accumulated earnings		470			763		485		(1,248	)		470
Accumulated other comprehensive deficit		(315	)		-		-		-			(315	)
Cost of common stock in treasury		(362	)		-		-		-			(362	)

Total Owens Corning stockholders’ equity		3,701			7,120		2,374		(9,494	)		3,701
Noncontrolling interest		-			-		40		-			40

Total equity		3,701			7,120		2,414		(9,494	)		3,741

TOTAL LIABILITIES AND EQUITY	$	7,632		$	9,154	$	4,551	$	(13,810	)	$	7,527

- 37 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES	$	(64	)	$	37		$	120		$	-	$	93
NET CASH FLOW USED FOR INVESTING ACTIVITIES
Additions to plant and equipment		(22	)		(123	)		(90	)		-		(235	)
Proceeds from the sale of assets or affiliates		-			5			7			-		12

Net cash flow used for investing activities		(22	)		(118	)		(83	)		-		(223	)

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES
Proceeds from senior revolving credit and receivables securitization facilities		1,089			-			116			-		1,205
Payments on senior revolving credit and receivables securitization facilities		(835	)		-			(94	)		-		(929	)
Payments on long-term debt		(4	)		-			(9	)		-		(13	)
Net decrease in short-term debt		(8	)		-			(1	)		-		(9	)
Purchases of noncontrolling interest		-			(22	)		-			-		(22	)
Purchases of treasury stock		(113	)		-			-			-		(113	)
Other intercompany loans		(52	)		103			(51	)		-		-
Other		9			-			-			-		9

Net cash flow provided by financing activities		86			81			(39	)		-		128

Effect of exchange rate changes on cash		-			-			1			-		1

Net decrease in cash and cash equivalents		-			-			(1	)		-		(1	)
Cash and cash equivalents at beginning of period		-			-			52			-		52

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	-		$	-		$	51		$	-	$	51

- 38 -

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

20.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(in millions)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES	$	(50	)	$	97		$	12		$	-	$	59
NET CASH FLOW USED FOR INVESTING ACTIVITIES
Additions to plant and equipment		(3	)		(155	)		(145	)		-		(303	)
Investment in subsidiaries and affiliates, net of cash acquired		-			(84	)		-			-		(84	)
Proceeds from the sale of assets or affiliates		-			3			78			-		81

Net cash flow used for investing activities		(3	)		(236	)		(67	)		-		(306	)

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES
Proceeds from senior revolving credit and receivables securitization facilities		805			-			202			-		1,007
Payments on senior revolving credit and receivables securitization facilities		(629	)		-			-			-		(629	)
Proceeds from long-term debt		-			-			6			-		6
Payments on long-term debt		-			-			(10	)		-		(10	)
Net decrease in short-term debt		-			-			17			-		17
Purchase of treasury stock		(138	)		-			-			-		(138	)
Other intercompany loans		50			139			(189	)		-		-
Other		12			-			-			-		12

Net cash flow provided by financing activities		100			139			26			-.		265

Effect of exchange rate changes on cash		-			-			(20	)		-		(20	)

Net decrease in cash and cash equivalents		47			-			(49	)		-		(2	)
Cash and cash equivalents at beginning of period		3			-			49			-		52

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	50		$	-		$	-		$	-	$	50

- 39 -

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand Owens Corning, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes thereto contained in this report. Unless the context requires otherwise, the terms “Owens Corning,” “Company,” “we” and “our” in this report refer to Owens Corning.

GENERAL

Owens Corning is a leading global producer of glass fiber reinforcements and other materials for composites and of residential and commercial building materials. The Company’s business operations fall within two reportable segments, Composites and Building Materials. Composites includes our Reinforcements and Downstream businesses. Building Materials includes our Insulation and Roofing businesses. Through these lines of business, we manufacture and sell products worldwide. We maintain leading market positions in many of our major product categories.

EXECUTIVE OVERVIEW

We reported $59 million in earnings before interest and taxes (“EBIT”) for the third quarter 2012. We generated $81 million in adjusted earnings before interest and taxes (“Adjusted EBIT”) for the third-quarter 2012. Third quarter EBIT in our Building Materials segment declined by $58 million and EBIT in our Composites segment declined by $38 million compared to the same period in 2011. The repositioning of our European assets remains on track with $22 million of charges recorded during the third quarter. See below for further information regarding adjusted EBIT, including the reconciliation to net earnings attributable to Owens Corning.

In our Composites segment, EBIT in the third quarter 2012 was $11 million compared to $49 million in the same period in 2011 driven primarily by start-up costs related to our new low-cost capacity in Russia and Mexico, inflation and slightly lower selling prices.

In our Building Materials segment, EBIT in the third quarter 2012 was $86 million, compared to $144 million in the same period in 2011. In our Roofing business, EBIT declined $73 million on lower sales volumes driven by weakness in the U.S. roofing shingle market. Our Insulation business delivered EBIT of $3 million in the third quarter 2012 compared to a loss of $12 million in the same period in 2011, on the strength of higher sales volumes, manufacturing productivity and improved capacity utilization.

We maintain a strong balance sheet with ample liquidity. We have access to an $800 million senior revolving credit facility with a July 2016 maturity date and a $250 million receivables securitization facility with a December 2014 maturity date. We have no other significant debt maturities before 2016.

We repurchased 1.1 million shares of the Company’s common stock for $31 million during the third quarter of 2012 under previously announced repurchase programs. As of September 30, 2012, 10 million shares remain available for repurchase under the authorized programs.

RECENT DEVELOPMENTS

As a result of refinancing portions of our Senior Notes, we anticipate incurring a loss from debt extinguishment of approximately $75 million in the fourth quarter of 2012.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

RESULTS OF OPERATIONS

Consolidated Results (in millions)


	Three Months Ended Sep. 30,						Nine Months Ended Sep. 30,
	2012			2011			2012			2011
Net sales	$	1,276		$	1,450		$	4,013		$	4,139
Gross margin	$	202		$	317		$	627		$	798
% of net sales		16	%		22	%		16	%		19	%
Charges related to cost reduction actions	$	-		$	-		$	36		$	-
Earnings before interest and taxes	$	59		$	177		$	132		$	373
Interest expense, net	$	29		$	28		$	85		$	81
Income tax (income) expense	$	(14	)	$	23		$	8		$	63
Net earnings attributable to Owens Corning	$	44		$	124		$	37		$	226

The Consolidated Results discussion below provides a summary of our results and the trends affecting our business, and should be read in conjunction with the more detailed Segment Results discussion that follows.

NET SALES

Third quarter and year-to-date net sales decreased $174 million and $126 million, respectively, compared to the same periods in 2011. For both the third quarter and year-to-date comparisons, the decline in net sales was mainly due to lower sales volumes in our Roofing business, which were partially offset by higher sales volumes in our Insulation business, and the unfavorable impact of translating sales denominated in foreign currencies into United States dollars in our Composites segment.

GROSS MARGIN

Gross margin in both the third-quarter and year-to-date included a $22 million and $73 million charge resulting from our European restructuring actions, respectively, both of which are reflected in cost of sales. The primary contributors to the remaining change in gross margin for both periods was a decrease in gross margin in our Roofing business, partially offset by an increase in Insulation gross margin, and a decrease in gross margin in our Composites segment.

CHARGES RELATED TO COST REDUCTION ACTIONS

During the first quarter of 2012, we took actions to improve the competitive position of our global manufacturing network through the closure or optimization of certain facilities in Europe. As a result of these actions, in addition to the charges recorded in cost of sales, we recognized $36 million in severance charges year-to-date in 2012, none of which occurred in the third quarter. The total charges related to cost reduction actions and related items for the three and nine months ended September 30, 2012, were $22 million and $109 million, respectively. No charges were taken in 2011 as a result of cost reduction actions.

EARNINGS BEFORE INTEREST AND TAXES

EBIT decreased by $118 million and $241 million, respectively, for the third quarter and year-to-date 2012 compared to the same periods in 2011. Third quarter and year-to-date EBIT in our Composites segment decreased by $38 million and $84 million, respectively, and EBIT in our Building Materials segment decreased by $58 million and $35 million, respectively, compared to the same periods in 2011. Corporate EBIT losses for the third quarter and year-to-date 2012 increased by $22 million and $122 million, respectively, compared to the same periods in 2011.

INTEREST EXPENSE, NET

Year-to-date 2012 interest expense was higher than in 2011 due primarily to higher average borrowing levels.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

INCOME TAX EXPENSE

The effective tax rate for the third quarter 2012 was negative 47 percent. The third quarter 2012 effective tax rate is reflective of a cumulative adjustment attributable to lower estimated tax expense for 2012. We estimate that the effective tax rate on adjusted earnings for the full year 2012 will be about 25 percent. The difference between the effective tax rate of 25 percent and the statutory rate of 35 percent is primarily attributable to lower foreign tax rates and various tax planning initiatives.

Adjusted Earnings Before Interest and Taxes (“Adjusted EBIT”)

Adjusted EBIT excludes certain significant items that management does not allocate to our segment results because it believes they are not a result of the Company’s current operations. Adjusted EBIT is used internally by the Company for various purposes, including reporting results of operations to the Board of Directors of the Company, analysis of performance and related employee compensation measures. Although management believes that these adjustments result in a measure that provides a useful representation of our operational performance, the adjusted measure should not be considered in isolation or as a substitute for net earnings attributable to Owens Corning as prepared in accordance with accounting principles generally accepted in the United States.

Adjusting items are shown in the table below (in millions), which are related to our European restructuring actions:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Charges related to cost reduction actions and related items	$	(22)	$	-	$	(109)	$	-

Total adjusting items	$	(22)	$	-	$	(109)	$	-

The reconciliation from net earnings attributable to Owens Corning to Adjusted EBIT is shown in the table below (in millions):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
NET EARNINGS ATTRIBUTABLE TO
OWENS CORNING	$	44		$	124	$	37		$	226
Less: Net earnings attributable to noncontrolling interests		—			2		2			4

NET EARNINGS		44			126		39			230
Equity in net earnings of affiliates		-			-		-			1
Income tax expense (benefit)		(14	)		23		8			63

EARNINGS BEFORE TAXES		30			149		47			292
Interest expense, net		29			28		85			81

EARNINGS BEFORE INTEREST AND TAXES		59			177		132			373
Less: adjusting items from above		(22	)		-		(109	)		-

ADJUSTED EBIT	$	81		$	177	$	241		$	373

Segment Results

- 42 -

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Composites

The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Composites segment (in millions):


	Three Months Ended Sep. 30,						Nine Months Ended Sep. 30,
	2012			2011			2012			2011
Net sales	$	459		$	496		$	1,433		$	1,517
% change from prior year		-7	%		4	%		-6	%		6	%
EBIT	$	11		$	49		$	68		$	152
EBIT as a % of net sales		2	%		10	%		5	%		10	%
Depreciation and amortization expense	$	30		$	31		$	91		$	97

NET SALES

Third quarter and year-to-date net sales in our Composites business decreased $37 million and $84 million, respectively, compared to the same periods in 2011. For both the third-quarter and year-to-date comparisons, net sales were unfavorably impacted by approximately $30 million and $70 million, respectively, as a result of translating sales denominated in foreign currencies into United States dollars. For the third quarter, favorable mix was more than offset by the impact of lower sales volumes and slightly lower selling prices. For the year-to-date comparison, higher sales volumes and favorable mix were offset by slightly lower selling prices. The year-to-date comparison was unfavorably impacted by approximately $20 million from the May 2011 divestiture of our glass reinforcements facility in Capivari, Brazil.

EBIT

EBIT in our Composites business decreased $38 million and $84 million, respectively, for the third quarter and year-to-date 2012 compared to the same periods in 2011. For the quarter, about $15 million of the decline was due to start-up costs for our low-delivered-cost facilities in Mexico and Russia, as well as planned maintenance costs at one of our North American facilities. The remaining decline was driven equally by slightly lower selling prices, inflation and the impact of rebalancing supply and demand in our manufacturing network. For the year-to-date comparison, in addition to the $15 million in start-up and planned maintenance costs discussed above, about $50 million of the decline in EBIT was driven equally by inflation and slightly lower selling prices. The remaining decline was due to the impact of rebalancing supply and demand in our manufacturing network and the benefit from resolution of an acquisition liability in the first quarter of 2011.

OUTLOOK

Global glass reinforcements market demand has grown on average with global industrial production and we believe this relationship will continue. In 2011, global glass reinforcements market demand grew less than the historical average of five percent driven by weaknesses in European industrial production. As previously announced, we took actions in the first quarter of 2012 to close or optimize certain facilities in Europe and other actions that align with our objectives in the region to improve our competiveness. We anticipate incurring charges of approximately $130 million related to these actions in 2012 and 2013. For the year-to-date, we recognized $109 million in charges associated with these actions.

For 2012, the current market outlook for Composites demand will be impacted by lower global industrial production, particularly in Europe, as well as the weaker U.S. roofing market. To respond to this weaker environment, we have initiated further production curtailments to bring inventories in line with previously discussed year-end targets. Based on these market conditions, we no longer expect second half 2012 financial performance to be stronger than the first half of the year.

- 43 -

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Building Materials

The table below provides a summary of net sales, EBIT and depreciation and amortization expense for the Building Materials segment and our businesses within this segment (in millions):


	Three Months Ended Sep. 30,						Nine Months Ended Sep. 30,
	2012			2011			2012			2011
Net sales
Insulation	$	384		$	365		$	1,055		$	981
Roofing		471			644			1,664			1,785

Total Building Materials	$	855		$	1,009		$	2,719		$	2,766
% change from prior year		-15	%		36	%		-2	%		10	%

EBIT
Insulation	$	3		$	(12	)	$	(47	)	$	(97	)
Roofing		83			156			289			374

Total Building Materials	$	86		$	144		$	242		$	277
EBIT as a % of net sales		10	%		14	%		9	%		10	%

Depreciation and amortization expense
Insulation	$	28		$	30		$	80		$	89
Roofing		10			10			28			31

Total Building Materials	$	38		$	40		$	108		$	120

NET SALES

Third quarter and year-to-date net sales in our Building Materials segment decreased $154 million and $47 million, respectively, compared to the same periods in 2011. For the quarter, net sales decreased due primarily to lower sales volumes in our Roofing business. For the year-to-date comparison, higher sales volumes within our Insulation business were more than offset by lower sales volumes in our Roofing business.

In our Roofing business, net sales decreased $173 million and $121 million in the third quarter and year-to-date 2012, compared to the same periods in 2011, respectively. For the third quarter, lower sales volumes drove about a 20 percent decrease in net sales. The remaining difference was driven primarily by unfavorable mix. For the year-to-date comparison, the decline in net sales was due to lower sales volumes, which was partially offset by higher selling prices.

In our Insulation business, net sales increased $19 million and $74 million in the third quarter and year-to-date 2012, compared to the same periods in 2011. Sales volumes were higher by approximately $25 million in the third quarter and approximately $100 million year-to-date 2012. For both periods, the impact of higher sales volumes was partially offset by unfavorable mix. Our experience shows that our residential insulation demand lags United States housing starts by approximately three months.

EBIT

EBIT for our Building Materials segment decreased $58 million and $35 million in the third quarter and year-to-