Owens Corning

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7. ACQUISITIONS

On February 8, 2024, the Company entered into an Arrangement Agreement (the "Arrangement Agreement") with Masonite International Corporation, a British Columbia corporation ("Masonite"), pursuant to which the Company agreed to acquire all of the issued and outstanding common shares of Masonite at a purchase price of $133.00 per share (the "Arrangement"). On May 15, 2024, as determined by the Arrangement Agreement, the Company completed the acquisition of 100% of the issued and outstanding shares of Masonite for $133.00 per share in cash, without interest for a total purchase price of $3.2 billion. The acquisition was funded primarily with debt proceeds of $2.8 billion and cash on hand. Please refer to the discussion under "364-Day Credit Facility" in Note 11 of the Consolidated Financial Statements for further information.

Masonite is a leading global designer, manufacturer, marketer and distributor of interior and exterior doors and door systems for the residential new construction and residential repair and remodeling markets. The addition of Masonite's market-leading doors business creates a new growth platform for the Company, strengthening the Company's position in building and construction and expanding its offering of branded residential building products.

Masonite's operating results and preliminary purchase price allocation have been included in the Company's newly established Doors reportable segment from May 15, 2024, the effective date of the Arrangement, within the Consolidated Financial Statements. Masonite contributed revenues of $884 million and earnings of $54 million to the Company for the period from May 15, 2024 to September 30, 2024. Please refer to Note 2 of the Consolidated Financial Statements for further information.

For the three and nine months ended September 30, 2024, the Company incurred $2 million and $49 million of transaction costs, respectively, related to the Arrangement. These expenses are included in Other expense, net on the Company's consolidated statement of earnings.

The fair value of the total purchase consideration transferred was determined as follows (in millions):

The closing cash as part of preliminary estimated consideration was calculated at the price of $133.00 per outstanding Masonite common share. At the close of the acquisition of Masonite, there were 22.07 million Masonite common shares outstanding.

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The preliminary estimated fair value of Owens Corning common stock underlying Masonite outstanding equity awards that have been converted into awards with respect to Owens Corning common stock is calculated as follows (in millions, except share and per share amounts:

(a) Represents the Masonite stock awards that have been converted into Owens Corning equity awards upon completion of the acquisition of Masonite, based on awards outstanding at May 15, 2024. Masonite equity awards include awards issued under various stock incentive plans of Masonite.

(b) The exchange rate was determined by the consideration amount divided by the volume weighted average closing sale price of one share of Owens Corning common stock for the ten consecutive trading days ended May 15, 2024, in accordance with the terms of the Arrangement Agreement.

(c) The ten-day weighted average closing share price was calculated for the ten consecutive trading days ended May 15, 2024, in accordance with the terms of the Arrangement Agreement.

On May 15, 2024, the effective date of the Arrangement, the Company transferred consideration to Masonite to repay the Masonite 2027 term loan facility (the "Masonite term loan facility"). This repayment was required by the change in control provision within the terms of the Masonite term loan facility.

The Company has applied the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations, and recognized assets acquired and liabilities assumed at their fair values as of the effective date of the Arrangement, with the excess purchase consideration recorded to goodwill. The Company has not yet finalized the valuation of the assets acquired and liabilities assumed as of September 30, 2024. The Company is continuing to obtain information to complete its valuation of certain assets and liabilities, and during the three months ended September 30, 2024, the Company recorded measurement period adjustments to the purchase price allocation. Additional adjustments may be recorded to the fair value of intangible assets, property, plant and equipment, goodwill and deferred income taxes among other items during the measurement period, a period not to exceed 12 months from the acquisition date.

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The following table summarizes the preliminary acquisition date fair value net of measurement period adjustments of net tangible and intangible assets acquired, net of liabilities assumed as part of the Arrangement (in millions):

The details on the methodology and significant inputs used for fair value of valuation are outlined below.

Goodwill

Preliminary purchase consideration allocation resulted in $1.5 billion in goodwill. During the three months ended September 30, 2024 the Company increased the value of goodwill by $165 million as a result of measurement period adjustments. The goodwill is not deductible for tax purposes. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the acquisition.

Receivables

The fair value of receivables acquired is $330 million, with the gross contractual amount being $331 million. The Company expects $1 million to be uncollectible.

Inventory

The fair value of inventory was determined by the market selling price of the inventory, less the remaining manufacturing and selling costs and a normal profit margin on those manufacturing and selling efforts. The fair value of inventory has been stepped up by $18 million, this amount has been fully amortized to Cost of Sales as the inventory was sold.

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Property, Plant and Equipment

The preliminary fair value of property, plant and equipment is $861 million and was determined using cost and market approaches. The cost approach reflects the amount that would be required to replace the asset to service capacity, this approach was used where there was historical data available. Where there was not historical data available the market approach was used, this approach reflects recent sales of identical or comparable assets.

Intangible Assets

The preliminary fair value of acquired intangible assets is $1.4 billion. During the three months ended September 30, 2024, the Company reduced the value of acquired intangibles by $221 million, as we continue to obtain information used to determine the fair value during the measurement period. There were no material impacts to the Consolidated Statements of Earnings as a result of this adjustment. The fair value of customer relationships was determined using the multi-period excess earnings method. Key assumptions under this method are future cash flow estimates, customer attrition, discount rate, contributory asset charges and tax amortization benefits. The fair value of trade names were determined using the relief from royalty method. Key assumptions under this method are future cash flow estimates, royalty rate, discount rate and tax amortization benefits.

Debt

The fair value of Masonite's unsecured senior notes was determined using the market approach, based on the trading value of the notes in the market.

Joint Ventures and Non-Controlling Interests

The Company's acquisition of Masonite included joint ventures with Dominance Industries, Inc.,45% owned, and Vanair Design Inc.,30% owned as well as a 25% non-controlling interest in Sacopan Inc. owned by a third party and a 50% non-controlling interest in Magna Foremost SDN BHD owned by a third party. The value of these investments and non-controlling interests were determined using an equally weighted value from the income approach and the market approach.

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Pro Forma Financial Information

The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company for the three months ended and the nine months ended September 30, 2024 and 2023, assuming the acquisition had occurred on January 1, 2023 (in millions).

The pro forma financial information includes certain adjustments to adhere to the Company's accounting policies and adjustments to the historical results with pro forma adjustments, net of tax, that assume the acquisition occurred on January 1, 2023. This includes removing the results of the Architectural segment that was sold by Masonite prior to the close of the Arrangement, an adjustment to cost of goods sold to expense the step-up of inventory to fair value, increased depreciation expense to reflect the fair value of property, plant and equipment, and increased amortization expense related to the fair value of identifiable amortizable intangible assets. Adjustments were also made to recognize transaction costs incurred by the Company in the beginning of the comparative pro forma period and remove Masonite transaction costs. In addition, adjustments were made to reflect the interest and financing costs of the 364-Day Credit Facility (as defined below) used to fund the purchase price, and the interest, discount amortization, and capitalized financing cost amortization for the 2027, 2034 and 2054 senior notes that were issued to pay off the 364-Day Credit Facility in the comparative pro forma period, see Note 11 for further detail.

Finally, adjustments were made to remove interest expense for the pro forma period related to the Masonite term loan facility that was paid off at closing as part of the consideration for the Arrangement.

Significant adjustments to the pro forma financial information are as follows:

1. Net sales were decreased for the three months ended September 30, 2023 by $83 million and for the nine months ended September 30, 2023 and 2024 by $268 million and $119 million, respectively, to remove the sales of the Architectural segment that was sold by Masonite prior to the close of the Arrangement.

2. Net earnings were decreased by $19 million for the three months ended September 30, 2023 and by $68 million and $14 million for the nine months ended September 30, 2023 and 2024, respectively, to reflect increased amortization expense related to the fair value of identified amortizable intangible assets.

3. Net earnings were adjusted by $56 million, for the nine months ended September 30, 2024, to remove transaction costs incurred by Masonite.

4. Net earnings were increased for the three months ended September 30, 2024 by $2 million and were adjusted by $49 million each, for the nine months ended September 30, 2023 and 2024, to move transaction costs incurred by the Company to the beginning of the comparative period.

5. Net earnings were decreased by $29 million for the three months ended September 30, 2023 and by $78 million and $49 million for the nine months ended September 30, 2023 and 2024, respectively, to reflect the interest expense, discount amortization, and capitalized financing cost amortization for the 2027, 2034 and 2054 senior notes that were issued to pay off the 364-Day Credit Facility.

6. Net earnings were increased by $14 million and decreased by $2 million for the three months ended September 30, 2023 and 2024, respectively, to give effect to the tax impact of pro forma adjustments. Net earnings were increased by $60 million and decreased by $88 million for the nine months ended September 30, 2023 and 2024, respectively, to give effect to the tax impact of pro forma adjustments.

The pro forma financial information does not reflect any anticipated synergies or dis-synergies, operating efficiencies or cost savings that may result from the Arrangement and integration costs that may be incurred.