Merger Agreement

9 Months Ended

Sep. 30, 2018

Business Combinations [Abstract]

Merger Agreement

Acquisitions and Dispositions

Acquisition of Ceilings Plus

On November 30, 2017, we completed our acquisition of Ceilings Plus for $50 million, net of working capital adjustments. The addition of Ceilings Plus to our U.S. Ceilings segment expands our operations in the specialty ceilings markets. We finalized our valuation in the second quarter of 2018. The fair value of tangible assets acquired, less liabilities assumed, in connection with the Ceilings Plus acquisition was $15 million. The fair value of intangible assets acquired, which included customer relationships and trade names, totaled $20 million. The resulting goodwill recorded was $15 million and all is expected to be deductible for tax purposes. The goodwill consists largely of Ceilings Plus' expected future product sales and synergies with the existing U.S. Ceilings product offerings.

Discontinued Operations

On October 31, 2016, we completed the sale of our L&W Supply, or L&W, distribution business to ABC Supply. For the nine months ended September 30, 2017, we recorded a loss of $10 million, net of tax, to "Income (loss) from discontinued operations", of which $9 million related to L&W and primarily reflected a pension settlement charge related to lump sum benefits paid to former employees of L&W.

For the three and nine months ended September 30, 2018, we recorded sales of $120 million and $337 million, respectively, and cash inflows related to payments on trade receivables during those same periods of $131 million and $342 million, respectively, which included sales to L&W pursuant to the supply agreement entered into upon the close of the sale. For the comparative periods in 2017, we recorded sales of $122 million and $387 million, respectively, and cash inflows related to payments on trade receivables of $112 million and $364 million, respectively.

Merger Agreement

On June 10, 2018, we entered into an Agreement and Plan of Merger, as it may be amended from time to time, or the Merger Agreement, with Gebr. Knauf KG, a limited partnership (Kommanditgesellschaft) organized under the laws of Germany, or Knauf, and World Cup Acquisition Corporation, a Delaware corporation and an indirect, wholly-owned subsidiary of Knauf, or Merger Sub. The Merger Agreement provides that, subject to the satisfaction of customary closing conditions, Merger Sub will be merged with and into USG, or the Merger, with USG continuing as the surviving corporation and an indirect, wholly-owned subsidiary of Knauf. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $0.10, of USG issued and outstanding immediately prior to the effective time of the Merger (other than shares of common stock owned by Knauf and its subsidiaries, USG and its subsidiaries and certain excluded holders) will be converted into the right to receive $43.50 in cash, without interest and subject to tax withholding. In addition, as contemplated by the Merger Agreement, we announced on August 9, 2018 that USG had declared a conditional special cash dividend of $0.50 per share, or the conditional special dividend, payable to holders of record of our common stock as of the close of business on August 21, 2018 (subject to due bill trading). Payment of the dividend was conditioned on adoption of the Merger Agreement by our stockholders at the special meeting held on September 26, 2018, or the special meeting. The Merger Agreement was adopted by our stockholders at the special meeting and following certification of the vote in favor of adoption, the conditional special dividend was paid on October 2, 2018. The conditional special dividend totaled $70 million and was declared from retained earnings. Pursuant to the Dividend Make-Whole Amount Plan approved by USG in connection with the Merger and the conditional special dividend, an additional $2 million is expected to be paid to holders of stock options, market share units and performance shares of USG (such awards, “Incentive Equity Awards”), that were outstanding as of June 10, 2018, and are or become vested and paid out in connection with completion of the Merger or are or become vested and become payable following the record date of the special meeting, but prior to the closing of the Merger. These Incentive Equity Awards would not otherwise be entitled to dividend equivalent payments pursuant to their existing terms. The aggregate amounts of the conditional special dividend and the payments pursuant to the Dividend Make-Whole Amount Plan are included in "Dividend payable" on our condensed consolidated balance sheets as of September 30, 2018.

The Merger, which is currently expected to close in early 2019, is subject to the satisfaction or waiver of certain customary closing conditions, including, among others, receipt of certain regulatory approvals. The Merger Agreement contains certain termination rights for both USG and Knauf. If the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Knauf a termination fee of $215 million. We have incurred $5 million and $14 million, pre-tax, of Merger-related costs for the three and nine months ended September 30, 2018, respectively, which are included in "Selling and administrative expenses" on our condensed consolidated statement of income.

See Note 3, Equity Method Investments, for additional information regarding the default noticed under the UBBP Shareholders Agreement delivered by Boral in connection with the Merger.