ACQUISITION

12 Months Ended

Aug. 31, 2019

NOTE 3. ACQUISITION

On November 5, 2018 (the "Acquisition Date"), the Company completed the acquisition of 33 rebar fabrication facilities in the U.S., as well as four EAF mini mills located in Knoxville, Tennessee; Jacksonville, Florida; Sayreville, New Jersey and Rancho Cucamonga, California from Gerdau S.A., hereinafter collectively referred to as the "Acquired Businesses." The total cash purchase price, including working capital adjustments, was $701.2 million, subject to customary purchase price adjustments, and was funded through a combination of domestic cash on-hand and borrowings under the 2018 Term Loan, as defined in Note 10, Credit Arrangements.

The Company accounts for business combinations by recognizing the assets acquired and liabilities assumed at the Acquisition Date fair value. The purchase price paid was allocated between the acquired mills and fabrication facilities. The fair value for each business was estimated by the Company using valuation techniques and Level 3 inputs, including expected future cash flows and discount rates. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the Acquisition Date, the Company’s estimates are subject to refinement. Adjustments to provisional amounts identified during the allowable one-year measurement period (the "Measurement Period") are recorded in the reporting period in which the adjustment was determined. The results of operations of the Acquired Businesses are reflected in the Company’s consolidated financial statements from the Acquisition Date.

The table below presents the preliminary fair value that was allocated to the Acquired Businesses' assets and liabilities based upon fair values as determined by the Company, as well as any Measurement Period adjustments made since the Acquisition Date. Final determination of the fair values may result in further adjustments to the values presented in the following table:



(in thousands)	Estimated Fair Value as of Acquisition Date			Measurement Period Adjustments			Estimated Fair Value
Cash and cash equivalents	$	6,399		$	—		$	6,399
Accounts receivable	308,074			(11,615		)	296,459
Inventories	207,648			(5,566		)	202,082
Other current assets	11,788			14,502			26,290
Property, plant and equipment	424,541			(2,572		)	421,969
Intangible assets	10,252			(10,252		)	—
Deferred income taxes	10,567			(1,412		)	9,155
Accounts payable-trade, accrued expenses and other payables	(128,183		)	(6,519		)	(134,702		)
Acquired unfavorable contract backlog	(133,600		)	23,434			(110,166		)
Other long-term liabilities	(9,920		)	—			(9,920		)
Pension and other post retirement employment benefits	(6,365		)	—			(6,365		)
Total assets acquired and liabilities assumed	$	701,201		$	—		$	701,201

Inventories

The acquired inventory is comprised of finished goods, work in process and raw materials. The fair value of finished goods was calculated as the estimated selling price, adjusted for the selling costs and a reasonable profit margin. The fair value of semi-finished goods was calculated as the estimated selling price, adjusted for estimated costs to complete manufacturing, estimated selling costs and a reasonable profit margin. The fair value of raw materials was determined to approximate the historical carrying value as it represented market cost. The inventory step-up recognized for the year ended August 31, 2019 was $10.3 million, which has been reflected in the Company's Americas Mills segment as cost of goods sold as the related inventory has been sold.

Property, Plant and Equipment

The cost approach was used to determine the fair value for buildings, improvements and equipment, and the market approach was used to determine the fair value for land. The cost approach measures the value by estimating the cost to acquire or construct comparable assets and adjusts for age and condition. The Company assigned building and improvements a useful life ranging from 1 to 35 years and equipment a useful life ranging from 1 to 25 years.

Deferred Income Taxes

Deferred income tax assets include the expected future federal and state tax consequences associated with temporary differences between the fair values of the assets acquired and liabilities assumed and the respective tax bases. Tax rates utilized in calculating the deferred tax assets represent a consolidated tax rate as the Company applies the appropriate tax rate for each legal entity.

Pension and Other Postretirement Liabilities

The Company recognized a net liability of $6.4 million, representing the unfunded portion of the acquired defined-benefit pension plan and other postretirement-benefit plan.

Acquired Unfavorable Contract Backlog

The Company determined that the backlog associated with existing contracts at the acquired fabrication facilities in which the selling price was less than estimated costs to fulfill the contracts using market participant assumptions represented a separable intangible liability. The unfavorable contract backlog was valued using the income approach. Amortization of the backlog will correspond with completion of the acquired contracts, which is estimated to be between 1 to 2 years.

Other Assets Acquired and Liabilities Assumed

The Company used historical carrying values for trade accounts receivable and payables, as well as certain other current and non-current assets and liabilities, as their carrying values represented the fair value of those items as of the Acquisition Date.

Financial Results

The following table summarizes the financial results of the Acquired Businesses from the Acquisition Date for 2019 included in the Company’s consolidated statement of earnings and consolidated statement of comprehensive income.



(in thousands)	Year Ended August 31, 2019
Net sales	$	1,379,455
Earnings before income taxes	132,733

Pro Forma Supplemental Information

Supplemental information on an unaudited pro forma basis is presented below as if the acquisition of the Acquired Businesses (the "Acquisition") occurred on September 1, 2017. The pro forma financial information is presented for comparative purposes only, based on certain estimates and assumptions, which the Company believes to be reasonable, but not necessarily indicative of future results of operations or the results that would have been reported if the Acquisition had been completed on September 1, 2017. These results were not used as part of management analysis of the financial results and performance of the Company. These results are adjusted, where possible, for transaction and integration related costs. These results involve significant estimates.



(in thousands)	Year Ended August 31,
	2019		2018
Pro forma net sales ⁽¹⁾	$	6,033,908	$	6,303,812
Pro forma net earnings ⁽²⁾	162,255		105,377

_________________

(1) Pro forma net sales for the year ended August 31, 2018 includes estimated fair value adjustments related to amortization of unfavorable contract backlog. The impact of the amortization of unfavorable contract backlog has been removed from the pro forma net sales for the year ended August 31, 2019.

(2) Pro forma net earnings for the year ended August 31, 2018 reflects the impact of fair value adjustments related to the amortization of unfavorable contract backlog described above and includes estimated fair value adjustments related to inventory step-up, as well as non-recurring acquisition and integration costs of approximately $51.7 million.