Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2018
 
o 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: 001-34530
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12235128&doc=14
U.S. CONCRETE, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
76-0586680
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

331 N. Main Street, Euless, Texas 76039
(Address of principal executive offices, including zip code)
(817) 835-4105
(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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
 
 
(Do not check if a smaller reporting company)
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
There were 16,810,089 shares of common stock, par value $.001 per share, of the registrant outstanding as of May 1, 2018.




U.S. CONCRETE, INC.

INDEX

 
 
Page No.
Part I – Financial Information
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Part II – Other Information
 
Item 1.
Item 1A.
Item 2.
Item 4.
Item 6.
 
 
 






2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. CONCRETE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

March 31, 2018

December 31, 2017

(Unaudited)


ASSETS
 

 
Current assets:
 

 
Cash and cash equivalents
$
36,616


$
22,581

Trade accounts receivable, net of allowances of $6,175 and $5,785 as of March 31, 2018, and December 31, 2017, respectively
213,354


214,221

Inventories
47,341


48,085

Prepaid expenses
9,460


5,297

Other receivables
16,073


19,191

Other current assets
1,479


2,310

Total current assets
324,323


311,685

Property, plant and equipment, net of accumulated depreciation, depletion and amortization of $191,087 and $178,168 as of March 31, 2018, and December 31, 2017, respectively
664,594


636,268

Goodwill
220,107


204,731

Intangible assets, net
126,134


118,123

Other assets
7,161


5,327

Total assets
$
1,342,319


$
1,276,134

LIABILITIES AND EQUITY
 


 

Current liabilities:
 


 

Accounts payable
$
115,729


$
117,070

Accrued liabilities
84,038


65,420

Current maturities of long-term debt
25,902


25,951

Total current liabilities
225,669


208,441

Long-term debt, net of current maturities
729,826


667,385

Other long-term obligations and deferred credits
84,533


93,341

Deferred income taxes
3,123


4,825

Total liabilities
1,043,151


973,992

Commitments and contingencies (Note 11)





Equity:
 


 

Preferred stock



Common stock
18


18

Additional paid-in capital
321,216


319,016

Accumulated deficit
(17,642
)

(13,784
)
Treasury stock, at cost
(26,032
)

(24,799
)
Total shareholders' equity
277,560


280,451

Non-controlling interest
21,608

 
21,691

Total equity
299,168

 
302,142

Total liabilities and equity
$
1,342,319


$
1,276,134


The accompanying notes are an integral part of these condensed consolidated financial statements.

3


U.S. CONCRETE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
 
 
Three Months Ended
March 31,
 
2018

2017
Revenue
$
327,787


$
299,133

Cost of goods sold before depreciation, depletion and amortization
267,232


235,759

Selling, general and administrative expenses
32,276


25,817

Depreciation, depletion and amortization
20,575


15,859

Change in value of contingent consideration
368

 
608

Gain on sale of assets, net
(190
)

(192
)
Operating income
7,526


21,282

Interest expense, net
11,309


10,142

Derivative income

 
(1,856
)
Other income, net
(1,619
)

(708
)
Income (loss) from continuing operations before income taxes
(2,164
)

13,704

Income tax expense
1,652


6,702

Income (loss) from continuing operations
(3,816
)

7,002

Loss from discontinued operations, net of taxes


(122
)
Net income (loss)
(3,816
)

6,880

Less: Net income attributable to non-controlling interest
(42
)
 

Net income (loss) attributable to U.S. Concrete
$
(3,858
)
 
$
6,880







Basic income (loss) per share attributable to U.S. Concrete:
 


 

Income (loss) from continuing operations
$
(0.23
)

$
0.45

Loss from discontinued operations, net of taxes


(0.01
)
Net income (loss) per share attributable to U.S. Concrete - basic
$
(0.23
)

$
0.44

 
 
 
 
Diluted income (loss) per share attributable to U.S. Concrete:
 

 
 

Income (loss) from continuing operations
$
(0.23
)
 
$
0.43

Loss from discontinued operations, net of taxes

 
(0.01
)
Net income (loss) per share attributable to U.S. Concrete - diluted
$
(0.23
)

$
0.42

 
 
 
 
Weighted average shares outstanding:
 


 

Basic
16,423


15,498

Diluted
16,423

 
16,483

 
 
 
 
Net income (loss) attributable to U.S. Concrete:
 
 
 
Income (loss) from continuing operations attributable to U.S. Concrete
$
(3,858
)
 
$
7,002

Loss from discontinued operations, net of taxes

 
(122
)
Total net income (loss) attributable to U.S. Concrete
$
(3,858
)
 
$
6,880


The accompanying notes are an integral part of these condensed consolidated financial statements.

4


U.S. CONCRETE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF TOTAL EQUITY
(Unaudited)
(in thousands)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
# of Shares
 
Par Value
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Total
Shareholders'
Equity
(Deficit)
 
Non-controlling Interest
 
Total Equity (Deficit)
BALANCE, December 31, 2017
16,652

 
$
18

 
$
319,016

 
$
(13,784
)
 
$
(24,799
)
 
$
280,451

 
$
21,691

 
$
302,142

Stock-based compensation expense

 

 
2,172

 

 

 
2,172

 

 
2,172

Restricted stock vesting
2

 

 

 

 

 

 

 

Restricted stock grants, net of cancellations
183

 

 

 

 

 

 

 

Stock options exercised
2

 

 
28

 

 

 
28

 

 
28

Other treasury share purchases
(18
)
 

 

 

 
(1,233
)
 
(1,233
)
 

 
(1,233
)
Measurement period adjustments for prior year business combinations

 

 

 

 

 

 
(125
)
 
(125
)
Net income (loss)

 

 

 
(3,858
)
 

 
(3,858
)
 
42

 
(3,816
)
BALANCE, March 31, 2018
16,821

 
$
18

 
$
321,216

 
$
(17,642
)
 
$
(26,032
)
 
$
277,560

 
$
21,608

 
$
299,168


The accompanying notes are an integral part of these condensed consolidated financial statements.



5


U.S. CONCRETE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Three Months Ended
March 31,
 
2018

2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
Net income (loss)
$
(3,816
)

$
6,880

Adjustments to reconcile net income to net cash provided by operating activities:
 


 

Depreciation, depletion and amortization
20,575


15,859

Amortization of debt issuance costs
463


519

Amortization of discount on long-term incentive plan and other accrued interest
194


185

Amortization of premium on long-term debt
(388
)
 
(388
)
Derivative income


(1,856
)
Change in value of contingent consideration
368


608

Net gain on disposal of assets
(190
)

(192
)
Deferred income taxes
(547
)

2,761

Provision for doubtful accounts and customer disputes
982


718

Stock-based compensation
2,172


1,619

Unrealized foreign exchange gain
(13
)
 

Changes in assets and liabilities, excluding effects of acquisitions:
 


 

Accounts receivable
(128
)

6,749

Inventories
1,418


182

Prepaid expenses and other current assets
(1,785
)

(2,246
)
Other assets and liabilities
(1,346
)

(77
)
Accounts payable and accrued liabilities
7,977


(1,777
)
Net cash provided by operating activities
25,936


29,544

CASH FLOWS FROM INVESTING ACTIVITIES:
 


 

Purchases of property, plant and equipment
(8,375
)

(10,718
)
Payments for acquisitions, net of cash acquired
(60,250
)

(2,731
)
Proceeds from disposals of property, plant and equipment
262


485

Proceeds from disposal of businesses
72


294

Insurance proceeds from property loss claims
1,634

 

Net cash used in investing activities
(66,657
)

(12,670
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 


 

Proceeds from revolver borrowings
135,650



Repayments of revolver borrowings
(69,650
)


Proceeds from issuance of debt

 
211,500

Proceeds from exercise of warrants and stock options
28


327

Payments of other long-term obligations
(3,540
)

(4,500
)
Payments for other financing
(6,419
)

(4,246
)
Debt issuance costs


(3,170
)
Other treasury share purchases
(1,233
)

(735
)
Net cash provided by financing activities
54,836


199,176

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(80
)
 

NET INCREASE IN CASH AND CASH EQUIVALENTS
14,035


216,050

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
22,581


75,774

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
36,616


$
291,824


6


U.S. CONCRETE, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(in thousands)

 
Three Months Ended
March 31,
 
2018
 
2017
Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash paid for interest
$
1,420

 
$
542

Cash paid for income taxes
$
557

 
$
5,732

 
 
 
 
Supplemental Disclosure of Non-cash Investing and Financing Activities:
 
 
 
Capital expenditures funded by capital leases and promissory notes
$
2,735

 
$
4,708

Acquisitions funded by contingent consideration
$
893

 
$


The accompanying notes are an integral part of these condensed consolidated financial statements.

7


U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.
BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include the accounts of U.S. Concrete, Inc. and its subsidiaries (collectively, "we," "us," "our," the "Company," or "U.S. Concrete") and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for reporting interim financial information. Some information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") have been condensed or omitted pursuant to the SEC’s rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 Form 10-K").  In the opinion of our management, all material adjustments necessary to state fairly the information in our unaudited condensed consolidated financial statements have been included. All adjustments are of a normal or recurring nature. All amounts are presented in United States dollars, unless otherwise noted. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements and accompanying notes in conformity with U.S. GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates. Estimates and assumptions that we consider significant in the preparation of our financial statements include those related to our allowance for doubtful accounts, business combinations, goodwill, intangibles, valuation of contingent consideration, accruals for self-insurance programs, income taxes, the valuation of inventory and the valuation and useful lives of property, plant and equipment.

2.
RECENT ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICIES

Standards/Updates Adopted This Quarter

Revenue Recognition. In May 2014, the FASB issued guidance that outlines a single comprehensive model for accounting for revenue arising from contracts with customers, which supersedes most of the existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. We adopted this guidance and related amendments as of January 1, 2018, applying the modified retrospective transition approach to all contracts. Adoption of the new guidance did not result in changes in the amount of revenue recognized or the timing of when such revenue is recognized.

Clarification of the Definition of a Business in Business Combinations. In January 2017, the FASB issued an update under business combinations in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or as business combinations. The amendments in this update provide a screen to determine when a set of assets is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. The adoption of this standard did not have a material impact on our financial condition and results of operations.

Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued guidance to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Adoption of this standard did not result in any material changes to our statements of cash flows.


8



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Standards/Updates Not Yet Adopted

Lease Accounting. In February 2016, the FASB issued an amendment related to leases intended to increase transparency and comparability among organizations by reorganizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Additionally, this guidance will require disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. We expect to adopt the guidance using a modified retrospective transition approach. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods. We are currently evaluating the potential impact on our financial position and results of operations upon adoption of this guidance. This guidance will result in our existing operating leases, for certain real estate and equipment, to be recognized on our balance sheet. We will further analyze our lease arrangements as we complete our assessment and implementation of this new guidance. The evaluation process will include reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the practical expedients and assessing the need to make any changes to our lease accounting technology system in order to determine the best implementation strategy.

For a description of our significant accounting policies, see Note 1 of the consolidated financial statements in our 2017 Form 10-K.

3.    REVENUE

We derive substantially all of our revenue from the production and delivery of ready-mixed concrete, aggregates and related building materials.  Revenue from the sale of these products is recognized when there is persuasive evidence of an arrangement and control passes to the customer, which generally occurs at the point in time when products are delivered. We do not deliver product unless we have an order or other documentation authorizing delivery to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales and other taxes we collect concurrently with revenue-producing activities are excluded from revenue. Incidental items, such as mix formulation and testing services that are immaterial in the context of the revenue contract and completed in close proximity to the revenue-producing activities, are recorded within cost of goods sold as incurred. We generally do not provide post-delivery services, such as paving or finishing. Customer dispute costs are recorded as a reduction of revenue at the end of each period and are estimated by using a combination of historical customer experience and a customer-by-customer analysis.  

Amounts billed to customers for delivery costs are classified as a component of total revenue. Our payment terms vary by the type and location of our customer and the products offered. The term between invoicing and when payment is due is not significant. As permitted under U.S. GAAP, we have elected not to assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods to the customer will be one year or less.

See Note 12 for disaggregation of revenue by segment and product as we believe that best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

We do not have any customer contracts that meet the definition of unsatisfied performance obligations in accordance with U.S. GAAP.


9



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


4.
BUSINESS COMBINATIONS

The accounting for business combinations requires the significant use of estimates and is based on information that was available to management at the time these condensed consolidated financial statements were prepared. The estimates used for determining the fair value of certain liabilities related to acquisitions are considered Level 3 inputs (as defined in Note 8). We utilized recognized valuation techniques, including the income approach, sales approach, and cost approach to value the net assets acquired. See Note 8 for additional information related to contingent consideration obligations, including maximum payout amounts and how the fair value was estimated. Any changes to the provisional business combination accounting will be made as soon as practical, but no later than one year from the respective acquisition dates.

2018 Acquisitions

We completed three acquisitions during the three months ended March 31, 2018 that expanded our ready-mixed concrete operations in the Atlantic Region (which we define to include New York, New Jersey, Washington D.C. and Pennsylvania), and expanded our ready-mixed concrete and aggregate products operations in West Texas. The aggregate fair value consideration for these acquisitions, which were all accounted for as business combinations, was $60.8 million. The acquisitions included the assets and certain liabilities of the following:

On Time Ready Mix, Inc. ("On Time") located in Flushing, New York on January 10, 2018;
Cutrell Trucking, LLC., Dumas Concrete, LLC., Pampa Concrete Co., Inc., Panhandle Concrete, LLC., Texas Sand & Gravel Co., Inc. (collectively "Golden Spread") located in Amarillo, Texas on March 2, 2018; and
One individually immaterial ready-mixed concrete operation in our Atlantic Region on March 5, 2018.

The aggregate fair value consideration for these three acquisitions, included $59.9 million in cash and fair value contingent consideration of $0.9 million. We funded the cash portion of the 2018 acquisitions through a combination of cash on hand and borrowings under our Revolving Facility (as defined in Note 7). The combined assets acquired through these 2018 acquisitions included 140 mixer trucks, 19 ready-mix concrete plants and one aggregates facility. During the three months ended March 31, 2018, we incurred $0.5 million of transaction costs to effect the 2018 acquisitions, which are included in selling and general administrative expenses in our condensed consolidated statements of operations.

Our accounting for the 2018 business combinations is preliminary. We expect to record adjustments as we accumulate information needed to estimate the fair value of assets acquired and liabilities assumed, including working capital balances, estimated fair value of identifiable intangible assets, property, plant and equipment, total consideration and goodwill.

The following table presents the total consideration for the 2018 acquisitions and the preliminary amounts related to the assets acquired and liabilities assumed based on the estimated fair values as of the respective acquisition dates (in thousands):

 
2018 Acquisitions
Inventory
$
674

Other current assets
77

Property, plant and equipment
30,287

Definite-lived intangible assets
13,125

Total assets acquired
44,163

Total liabilities assumed
153

Goodwill
16,830

Total consideration (fair value) (1)
$
60,840


(1) Included $0.9 million of contingent consideration.


10



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


2017 Acquisitions

We completed eight acquisitions during 2017 that expanded our ready-mixed concrete and aggregate products operations in our Atlantic Region, expanded our ready-mixed concrete operations in Northern California and facilitated vertical integration on the West Coast. The aggregate fair value consideration for these acquisitions, which were all accounted for as business combinations, was $327.9 million. The acquisitions included the assets and certain liabilities of the following:

Corbett Aggregate Companies, LLC. ("Corbett") located in Quinton, New Jersey on April 7, 2017;
Harbor Ready-Mix ("Harbor") located in Redwood City, California on September 29, 2017;
A-1 Materials, Inc. ("A-1”) and L.C. Frey Company, Inc. ("Frey") (collectively “A-1/Frey”) located in San Carlos, California on September 29, 2017;
Action Supply Co., Inc. ("Action Supply") located in Philadelphia, Pennsylvania on September 29, 2017;
Polaris Materials Corporation ("Polaris") located in British Columbia, Canada on November 17, 2017; and
Three individually immaterial acquisitions in December 2017 consisting of two ready-mixed concrete operations and a software company.

The aggregate fair value consideration for these eight acquisitions, included $298.4 million in cash, $5.5 million in payments deferred over a four-year period, and fair value contingent consideration of $24.0 million. The combined assets acquired through these 2017 acquisitions included 409 acres of land, two aggregate facilities with approximately 130 million tons of proven aggregates reserves, 51 mixer trucks, seven ready-mix concrete plants and four aggregates distribution terminals. We funded the cash portion of the acquisitions through a combination of cash on hand and borrowings under our Revolving Facility (as defined in Note 7). Prior to the completion of the Polaris acquisition, we received two promissory notes from Polaris aggregating $18.1 million Canadian dollars, which were subsequently reclassified as intercompany loans upon completion of the acquisition and have been eliminated from our consolidated balance sheet. During the three months ended March 31, 2017, we incurred $0.2 million of transaction costs to effect the 2017 acquisitions, which are included in selling and general administrative expenses in our condensed consolidated statements of operations.
 
Our accounting for the 2017 business combinations is preliminary except for the Corbett acquisition. We expect to record adjustments as we accumulate information needed to estimate the fair value of assets acquired and liabilities assumed, including working capital balances, estimated fair value of identifiable intangible assets, property, plant and equipment, adjustments related to determination of the conclusion of tax attributes as of the acquisition date, total consideration and goodwill.

11



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following table presents the total consideration for the 2017 acquisitions and the preliminary amounts related to the assets acquired and liabilities assumed based on the estimated fair values as of the respective acquisition dates (in thousands):

 
Polaris
 
2017 Acquisitions (Excluding Polaris)
Cash
$
20,678

 
$

Accounts receivable(1)
4,661

 
1,110

Inventory
6,022

 
695

Other current assets
1,522

 
48

Property, plant and equipment
198,703

 
63,145

Other long-term assets
896

 

Definite-lived intangible assets

 
8,378

Total assets acquired
232,482

 
73,376

Current liabilities(2)
26,465

 
1,057

Other long-term liabilities
2,999

 
62

Total liabilities assumed
29,464

 
1,119

Non-controlling interest
21,442

 

Goodwill
61,192

 
12,842

Total consideration (fair value)(3)
$
242,768

 
$
85,099


(1)
Except for Polaris, the aggregate fair value of the 2017 acquisitions' acquired accounts receivable approximated the aggregate gross contractual amount. The fair value of Polaris's acquired accounts receivable was $4.7 million, which represented an aggregate gross contractual amount of $5.0 million, less estimated amounts not expected to be collected.
(2)
Current liabilities for Polaris included $14.2 million payable to the Company, which was eliminated in consolidation.
(3)
Included $29.5 million of deferred and contingent consideration for acquisitions other than Polaris.

Acquired Intangibles and Goodwill

A summary of the intangible assets acquired in 2018 and 2017 and their estimated useful lives is as follows (in thousands):
 
Weighted Average Amortization Period (In Years)
 
Fair Value At Acquisition Date
Customer relationships
7.20
 
$
19,325

Non-compete agreements
5.00
 
1,794

Favorable Contract
3.67
 
384

Total
 
 
$
21,503



12



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


As of March 31, 2018, the estimated future aggregate amortization expense of definite-lived intangible assets from the 2018 and 2017 acquisitions was as follows (in thousands):
 
Year Ending December 31,
2018 (remainder of the year)
$
2,499

2019
3,332

2020
3,315

2021
3,194

2022
3,165

Thereafter
5,387

Total
$
20,892


During the three months ended March 31, 2018, we recorded $0.3 million of amortization expense related to these intangible assets. During the three months ended March 31, 2017, there was no amortization expense related to these intangible assets, as they were all subsequently acquired.

The goodwill ascribed to our acquisitions is related to the synergies we expect to achieve with expansion in the markets in which we already operate as well as entry into new metropolitan areas of our existing geographic markets. The goodwill relates to our ready-mixed concrete and aggregate products segments. See Note 6 for the allocation of goodwill to our segments. We expect the goodwill to be deductible for tax purposes. See Note 9 for additional information regarding income taxes.

Actual Impact of Acquisitions

During the three months ended March 31, 2018, we recorded approximately $30.3 million of revenue and $0.1 million of operating loss in our condensed consolidated statements of operations related to the 2017 and 2018 acquisitions following their respective dates of acquisition. During the three months ended March 31, 2017, there were no acquisitions.

Unaudited Pro Forma Impact of Acquisitions

The information presented below reflects the unaudited pro forma combined financial results for the acquisitions completed during 2018 and 2017, excluding the individually immaterial acquisitions in 2018 and 2017 as described above, as historical financial results for these operations were not material and were impractical to obtain from the former owners. All other acquisitions have been included and represent our estimate of the results of operations for the three months ended March 31, 2018 and 2017, as if the 2018 acquisitions had been completed on January 1, 2017 and the 2017 acquisitions had been completed on January 1, 2016 (in thousands, except per share information):

 
Three Months Ended
March 31,
 
2018
 
2017
Revenue from continuing operations
$
342,525

 
$
342,017

Net income attributable to U.S. Concrete
$
(2,731
)
 
$
7,620

 
 
 
 
Net income per share attributable to U.S. Concrete - basic
$
(0.17
)
 
$
0.49

Net income per share attributable to U.S. Concrete - diluted
$
(0.17
)
 
$
0.46


The above pro forma results are unaudited and were prepared based on the historical U.S. GAAP results of the Company and the historical results of the acquired companies for which financial information was available, based on data provided by the former owners. These results are not necessarily indicative of what the Company's actual results would have been had the 2018 acquisitions occurred on January 1, 2017, and the 2017 acquisitions occurred on January 1, 2016.


13



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The unaudited pro forma net income attributable to U.S. Concrete and per share amounts above reflect the following adjustments (in thousands):
 
Three Months Ended
March 31,
 
2018
 
2017
Increase in intangible amortization expense
$
(479
)
 
$
(766
)
Increase in depreciation expense

 
(1,175
)
Exclusion of buyer transaction costs
499

 
231

Exclusion of seller transaction costs

 
3,224

Increase in expenses related to conversions from IFRS(1) to U.S. GAAP

 
(69
)
Decrease in income tax expense
426

 
359

Increase in non-controlling loss

 
137


(1)
IFRS is defined as International Financial Reporting Standards as issued by the International Accounting Standards Board.

The unaudited pro forma results do not reflect any operational efficiencies or potential cost savings that may occur as a result of consolidation of the operations.

5.
INVENTORIES
 
Inventories were as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
Raw materials
$
42,849

 
$
44,238

Building materials for resale
2,871

 
2,192

Other
1,621

 
1,655

Total inventories
$
47,341

 
$
48,085


6.     GOODWILL AND OTHER INTANGIBLES

Goodwill

The changes in goodwill by reportable segment from December 31, 2017 to March 31, 2018 were as follows (in thousands):
 
 
Ready-Mixed Concrete Segment
 
Aggregate Products Segment
 
Other Non-Reportable Segments
 
Total
Goodwill, gross at December 31, 2017
 
$
139,834

 
$
57,438

 
$
13,212

 
$
210,484

2018 acquisitions
 
15,971

 

 
859

 
16,830

Measurement period adjustments for prior year business combinations (1)
 
(337
)
 
(2,133
)
 
1,016

 
(1,454
)
Goodwill, gross at March 31, 2018
 
155,468

 
55,305

 
15,087

 
225,860

Accumulated impairment at December 31, 2017 and March 31, 2018
 
(4,414
)
 
(1,339
)
 

 
(5,753
)
Goodwill, net at March 31, 2018
 
$
151,054

 
$
53,966

 
$
15,087

 
$
220,107


(1)
The measurement period adjustments for the 2017 acquisitions recorded during 2018 primarily included $2.0 million of property, plant, and equipment and $0.4 million of definite-lived intangible assets.


14



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Other Intangible Assets

Our purchased intangible assets were as follows (in thousands):
 
 
As of March 31, 2018
 
 
Gross
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life (In Years)
Definite-lived intangible assets
 
 
 
 
 
 
 
 
Customer relationships
 
$
101,618

 
$
(31,246
)
 
$
70,372

 
5.36
Trade names
 
44,456

 
(8,888
)
 
35,568

 
19.80
Non-competes
 
18,668

 
(9,347
)
 
9,321

 
3.17
Leasehold interests
 
12,480

 
(3,799
)
 
8,681

 
6.47
Favorable contracts
 
4,034

 
(3,320
)
 
714

 
1.30
Total definite-lived intangible assets
 
181,256

 
(56,600
)
 
124,656

 
9.37
Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
Land rights(1)
 
1,478

 

 
1,478

 
 
Total purchased intangible assets
 
$
182,734

 
$
(56,600
)
 
$
126,134

 
 

(1)
Land rights acquired in a prior year acquisition will be reclassified to property, plant, and equipment upon the division of certain shared properties and settlement of the associated deferred payment.

 
 
As of December 31, 2017
 
 
Gross
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life (In Years)
Definite-lived intangible assets
 
 
 
 
 
 
 
 
Customer relationships
 
$
89,933

 
$
(28,092
)
 
$
61,841

 
5.47
Trade names
 
44,456

 
(8,120
)
 
36,336

 
19.87
Non-competes
 
16,875

 
(8,510
)
 
8,365

 
2.93
Leasehold interests
 
12,480

 
(3,378
)
 
9,102

 
6.66
Favorable contracts
 
4,034

 
(3,033
)
 
1,001

 
1.35
Total definite-lived intangible assets
 
167,778

 
(51,133
)
 
116,645

 
9.83
Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
Land rights(1)
 
1,478

 

 
1,478

 
 
Total purchased intangible assets
 
$
169,256

 
$
(51,133
)
 
$
118,123

 
 

(1)
Land rights acquired in a prior year acquisition will be reclassified to property, plant, and equipment upon the division of certain shared properties and settlement of the associated deferred payment.


15



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


As of March 31, 2018, the estimated remaining amortization of our definite-lived intangible assets was as follows (in thousands):
 
Year Ending December 31,
2018 (remainder of the year)
$
17,514

2019
21,633

2020
19,425

2021
17,881

2022
12,155

Thereafter
36,048

Total
$
124,656


Also included in other non-current liabilities in the accompanying condensed consolidated balance sheets are unfavorable lease intangibles with a gross carrying amount of $1.5 million and a net carrying amount of $1.0 million as of both March 31, 2018 and December 31, 2017. These unfavorable lease intangibles have a weighted average remaining life of 4.77 years as of March 31, 2018.

We recorded $5.4 million and $5.2 million of amortization expense on our definite-lived intangible assets and unfavorable lease intangibles for the three months ended March 31, 2018 and 2017, respectively. This amortization expense is included in the accompanying condensed consolidated statements of operations.

7.
DEBT
 
Our debt and capital leases were as follows (in thousands):

 
March 31, 2018
 
December 31, 2017
6.375% senior unsecured notes due 2024 and unamortized premium(1)
$
609,562

 
$
609,949

Senior secured credit facility
75,000

 
9,000

Capital leases
51,546

 
53,324

Other financing
29,980

 
31,886

Debt issuance costs
(10,360
)
 
(10,823
)
Total debt
755,728

 
693,336

Less: current maturities
(25,902
)
 
(25,951
)
Long-term debt, net of current maturities
$
729,826

 
$
667,385


(1)
The effective interest rates for these notes were 6.57% as of March 31, 2018 and 6.56% as of December 31, 2017.

Senior Secured Credit Facility

As of March 31, 2018, we had $17.5 million of undrawn standby letters of credit under our senior secured credit facility ("Revolving Facility"). The weighted average interest rate for the facility was 2.95% as of March 31, 2018.

Our actual maximum credit availability under the Revolving Facility varies from time to time and is determined by calculating the value of our eligible accounts receivable, inventory, mixer trucks and machinery, minus reserves imposed by the lenders and certain other adjustments. Our availability under the Revolving Facility at March 31, 2018 was $137.7 million. We are required, upon the occurrence of certain events, to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 for each period of 12 calendar months. As of March 31, 2018, we were in compliance with all covenants under the loan agreement that governs the Revolving Facility.


16



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


8.
FAIR VALUE DISCLOSURES

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Accounting guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

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

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain assets and liabilities within the fair value hierarchy.

The following tables present our fair value hierarchy for liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Contingent consideration, including current portion (1)
$
60,997

 
$

 
$

 
$
60,997

 
$
60,997

 
$

 
$

 
$
60,997


 
December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Contingent consideration, including current portion (1)
$
61,817

 
$

 
$

 
$
61,817

 
$
61,817

 
$

 
$

 
$
61,817

 
(1)
The current portion of contingent consideration is included in accrued liabilities in our condensed consolidated balance sheets. The long-term portion of contingent consideration is included in other long-term obligations and deferred credits in our condensed consolidated balance sheets.



17



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following tables present the valuation inputs for the fair value estimates of our contingent consideration associated with the 2015 acquisition of Ferrara Bros. Building Materials Corp. ("Ferrara Bros"), 2017 acquisition of Corbett, 2015 acquisition of Right Away Redy Mix, Inc. ("Right Away"), 2018 acquisition of On Time, 2015 acquisition of DuBrook Concrete, Inc. ("DuBrook") and two of the individually immaterial 2017 acquisitions ("Other").

 
 
As of March 31, 2018
Valuation Inputs
 
Ferrara Bros
 
Corbett
 
Right Away
 
On Time
 
DuBrook
 
Other
Fair value (in millions)
 
$
33.1

 
$
21.0

 
$
2.1

 
$
0.9

 
$
0.5

 
$
3.4

Discount rate
 
11.75
%
 
5.00
%
 
9.75
%
 
3.70
%
 
15.75
%
 
3.70
%
Payment cap (in millions)
 
$
35.0

 
$
23.0

 
$
2.2

 
$
1.0

 
$
0.5

 
$
3.9

Expected payment period remaining (in years)
 
4
 
5
 
2
 
1
 
1
 
5
Management projections of the payout criteria
 
EBITDA
 
Permitted reserves
 
Volumes
 
Volumes
 
Volumes
 
Certain other criteria

 
 
As of December 31, 2017
Valuation Inputs
 
Ferrara Bros
 
Corbett
 
Right Away
 
DuBrook
 
Other
Fair value (in millions)
 
$
33.0

 
$
20.9

 
$
4.1

 
$
0.5

 
$
3.3

Discount rate
 
11.75
%
 
5.00
%
 
9.75
%
 
15.75
%
 
3.70
%
Payment cap (in millions)
 
$
35.0

 
$
23.0

 
$
4.3

 
$
0.5

 
$
3.9

Minimum payment period from the acquisition date (in years)
 
4
 
2
 
4
 
2
 
5
Management projections of the payout criteria
 
EBITDA
 
Permitted reserves
 
Volumes
 
Volumes
 
Certain other criteria

The following table provides a reconciliation of the changes in Level 3 fair value measurements from December 31, 2017 to March 31, 2018 (in thousands):
 
Contingent Consideration
Balance at December 31, 2017
$
61,817

Acquisitions (1)
893

Increases in contingent consideration valuation
368

Payments of contingent consideration
(2,081
)
Balance at March 31, 2018
$
60,997


(1)
Represents the fair value of the contingent consideration associated with the On Time acquisition as of the acquisition date.

The liabilities for the Right Away earn-out and the Ferrara Bros contingent consideration were valued using Monte Carlo simulations, which incorporated probability-weighted assumptions related to the achievement of specific milestones mentioned above. The liabilities for the Corbett and the On Time contingent consideration were valued using the income approach, which incorporated probability-weighted assumptions related to the achievement of specific milestones mentioned above. The liability for the DuBrook earn-out was valued using a discounted cash flow technique. Inputs into the models were based upon observable market data where possible. Where observable market data did not exist, we modeled inputs based upon similar observable inputs.


18



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Our other financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt.  We consider the carrying values of cash and cash equivalents, accounts receivable, and accounts payable to be representative of their respective fair values because of their short-term maturities or expected settlement dates.  The fair value of our 6.375% senior unsecured notes due 2024 ("2024 Notes"), which was estimated based on quoted market prices (i.e., Level 2 inputs), was $623.2 million as of March 31, 2018. The carrying value of the outstanding amounts under our Revolving Facility approximates fair value due to the floating interest rate.

9.
INCOME TAXES

We recorded income tax expense allocated to continuing operations of $1.7 million and $6.7 million for the three months ended March 31, 2018 and 2017, respectively. For the three months ended March 31, 2018, our effective tax rate differed from the federal statutory rate primarily due to the fact that our Canadian operations had a net pre-tax loss for which no income tax benefit is recorded because of a related full valuation allowance. Our other entities had net pre-tax income and recorded corresponding net income tax expense, which included cumulative adjustments related to deferred income taxes in the amount of $1.3 million. For the three months ended March 31, 2017, our effective tax rate was higher than the federal statutory tax rate primarily due to adjustments related to certain state net operating loss carryforwards that will not be utilized prior to expiration and other cumulative adjustments to deferred income taxes, which resulted in additional income tax expense. In addition, both periods were impacted by certain state income taxes that were calculated on a basis other than pre-tax income (loss).

In accordance with U.S. GAAP, we reduce the value of deferred tax assets to the amount that is more likely than not to be realized in future periods. The ultimate realization of the benefit of deferred tax assets from deductible temporary differences or tax carryovers depends on generating sufficient taxable income during the periods in which those temporary differences become deductible. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on these considerations, we relied upon the reversal of certain deferred tax liabilities to realize a portion of our deferred tax assets and established valuation allowances as of March 31, 2018 and December 31, 2017 for other deferred tax assets because of uncertainty regarding their ultimate realization. Our total net deferred tax liability was approximately $3.1 million as of March 31, 2018 and $4.8 million as of December 31, 2017.

We record changes in our unrecognized tax benefits based on anticipated federal and state tax filing positions on a quarterly basis. For the three months ended March 31, 2018 and 2017, we recorded unrecognized tax benefits of $0.1 million and $0.6 million, respectively.

On December 22, 2017, the President signed into law “H.R.1” for U.S. tax reform legislation (the “Tax Act”). Among other items, the Tax Act lowered the corporate federal statutory tax rate from 35% to 21%. We estimate a decrease to our 2018 tax expense primarily due to the lower blended effective U.S. federal tax rate.

The Tax Act also contains certain provisions that could impact our taxable income beginning in tax year 2018, including, but not limited to (1) a Base Erosion Anti-abuse Tax ("BEAT"), which is a new minimum tax; (2) general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (3) a mechanism to tax currently global intangible low taxed income ("GILTI"), which allows for the possibility of utilizing foreign tax credits and a deduction equal to 50% to offset the income tax liability (subject to some limitations); (4) allowing us to elect treatment of the GILTI as a period cost or in deferred taxes; (5) a limit on the amount of deductible interest expense; (6) the repeal of the domestic production activity deduction; (7) limitations on the deductibility of certain executive compensation; and (8) limitations on the utilization of foreign tax credits to reduce the U.S. income tax liability.


19



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Shortly after the Tax Act was enacted, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the Tax Act’s impact. This guidance provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date. For the period ended December 31, 2017, we recorded provisional amounts related to the remeasurement of our deferred income tax assets and liabilities based on the income tax rates that are expected to be in effect at the time the tax deduction or taxable item will be reported in our income tax returns, as well as assessed our ability to realize deferred income tax assets in the future under the new rules of the Tax Act. Additionally, we assessed the impacts of the new provisions associated with the deductibility of executive compensation under Internal Revenue Code Section 162(m), and the associated “grandfathering” rules within the Tax Act to provide taxpayers transition relief when applying the change in law. At March 31, 2018, we have not completed our accounting for the income tax effects of the Tax Act; however, in certain cases, we have made a reasonable estimate of the effects on our existing deferred income tax balances. We will monitor future guidance set forth by the U.S. Department of Treasury with regard to the new provisions under the Tax Act, and true up provisional amounts as appropriate within the one-year measurement period required under SAB 118.

10.
NET EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net earnings (loss) attributable to U.S. Concrete by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net earnings (loss) attributable to U.S. Concrete by the weighted average number of common shares outstanding during the period after giving effect to all potentially dilutive securities outstanding during the period.

The following is a reconciliation of the components of the basic and diluted earnings (loss) per share calculations for the three months ended March 31, 2018 and 2017 (in thousands):

 
Three Months Ended
March 31,
 
2018 (1)
 
2017
Numerator for basic and diluted earnings per share:
 
 
 
Income (loss) from continuing operations attributable to U.S. Concrete
$
(3,858
)
 
$
7,002

Loss from discontinued operations, net of taxes

 
(122
)
Net income (loss) attributable to U.S. Concrete
$
(3,858
)
 
$
6,880

 
 
 
 
Denominator for diluted earnings per share:
 
 
 
Basic weighted average common shares outstanding
16,423

 
15,498

Restricted stock and restricted stock units

 
117

Warrants

 
851

Stock options

 
17

Diluted weighted average common shares outstanding
16,423

 
16,483


(1)
We reported a loss from continuing operations attributable to U.S. Concrete for the three months ended March 31, 2018; therefore, the share count used in the basic and diluted earnings per share calculation is the same.

20



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



The following table shows the type and number (in thousands) of potentially dilutive shares excluded from the diluted earnings (loss) per share calculations for the periods presented as their effect would have been anti-dilutive or they have not met their performance target:
 
Three Months Ended
March 31,
 
2018
 
2017
Potentially dilutive shares:
 
 
 
Unvested restricted stock awards and restricted stock units
386

 
165

Stock options
17

 

Total potentially dilutive shares
403

 
165



21



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


11.
COMMITMENTS AND CONTINGENCIES
 
Legal Proceedings
 
From time to time, and currently, we are subject to various claims and litigation brought by employees, customers and other third-parties for, among other matters, personal injuries, property damages, product defects and delay damages that have, or allegedly have, resulted from the conduct of our operations.  As a result of these types of claims and litigation, we must periodically evaluate the probability of damages being assessed against us and the range of possible outcomes.  In each reporting period, if we determine that the likelihood of damages being assessed against us is probable, and if we believe we can estimate a range of possible outcomes, then we will record a liability. The amount of the liability will be based upon a specific estimate, if we believe a specific estimate to be likely, or it will reflect the low end of our range. Currently, there are no material legal proceedings pending against us.
 
In the future, we may receive funding deficiency demands related to multi-employer pension plans to which we contribute.  We are unable to estimate the amount of any potential future funding deficiency demands because the actions of each of the contributing employers in the plans has an effect on each of the contributing employers and the development of a rehabilitation plan by the trustees and subsequent submittal to and approval by the Internal Revenue Service is not predictable. Further, the allocation of fund assets and return assumptions by trustees are variable, as are actual investment returns relative to the plan assumptions.

As of March 31, 2018, there are no material product defect claims pending against us.  Accordingly, our existing accruals for claims against us do not reflect any material amounts relating to product defect claims.  While our management is not aware of any facts that would reasonably be expected to lead to material product defect claims against us that would have a material adverse effect on our business, financial condition or results of operations, it is possible that claims could be asserted against us in the future.  We do not maintain insurance that would cover all damages resulting from product defect claims.  In particular, we generally do not maintain insurance coverage for the cost of removing and rebuilding structures.  In addition, our indemnification arrangements with contractors or others, when obtained, generally provide only limited protection against product defect claims.  Due to inherent uncertainties associated with estimating unasserted claims in our business, we cannot estimate the amount of any future loss that may be attributable to product defect claims related to ready-mixed concrete we have delivered prior to March 31, 2018.

We believe that the resolution of all litigation currently pending or threatened against us or any of our subsidiaries will not materially exceed our existing accruals for those matters.  However, because of the inherent uncertainty of litigation, there is a risk that we may have to increase our accruals for one or more claims or proceedings to which we or any of our subsidiaries is a party as more information becomes available or proceedings progress, and any such increase in accruals could have a material adverse effect on our consolidated financial condition or results of operations.  We expect in the future that we and our operating subsidiaries will, from time to time, be a party to litigation or administrative proceedings that arise in the normal course of our business.

We are subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions and wastewater discharge. Our management believes we are in substantial compliance with applicable environmental laws and regulations. From time to time, we receive claims from federal and state environmental regulatory agencies and entities asserting that we may be in violation of environmental laws and regulations. Based on experience and the information currently available, our management does not believe that these claims will materially exceed our related accruals.  Despite compliance and experience, it is possible that we could be held liable for future charges, which might be material, but are not currently known to us or cannot be estimated by us.  In addition, changes in federal or state laws, regulations or requirements, or discovery of currently unknown conditions, could require additional expenditures.

As permitted under Delaware law, we have agreements that provide indemnification of officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The maximum potential amount of future payments that we could be required to make under these indemnification agreements is not limited; however, we have a director and officer insurance policy that potentially limits our exposure and enables us to recover a portion of future amounts that may be paid.  As a result of the insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of March 31, 2018.

We and our subsidiaries are parties to agreements that require us to provide indemnification in certain instances when we acquire businesses and real estate and in the ordinary course of business with our customers, suppliers, lessors and service providers.

22



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Royalty Assessment

In 2014, Eagle Rock Materials Ltd. (“ERM”), a Polaris subsidiary, was notified by the British Columbia Ministry of Forests, Lands and Natural Resource Operations that royalties were due for 2012 and 2013, based on the tenure date, in respect of Polaris’s quarrying lease for the Eagle Rock Quarry project. In 2016, ERM was notified that further royalties were due for 2014, 2015 and 2016 (up to October) based on the tenure date, and in 2017, ERM was notified of interest charges of $0.4 million. The total royalties and interest claimed to date are approximately $2.2 million, which the Company, through its Polaris subsidiary, is disputing. Polaris’s position is that royalties are only payable based on actual production, in accordance with a written undertaking from the responsible government agency prior to commencement of the lease, and as the project has not been developed, no royalties are currently due. Accordingly, the Company has currently not recorded a provision for the royalty assessment.

Insurance Programs

We maintain third-party insurance coverage against certain workers' compensation, automobile and general liability risks in amounts we believe are reasonable.  Under certain components of our insurance program, we share the risk of loss with our insurance underwriters by maintaining high deductibles subject to aggregate annual loss limitations.  Generally, our deductible retentions per occurrence for auto, workers’ compensation and general liability insurance programs are $1.0 million, although certain of our operations are self-insured for workers’ compensation.  We fund these deductibles and record an expense for expected losses under the programs.  We determine the expected losses using a combination of our historical loss experience and subjective assessments of our future loss exposure. The estimated losses are subject to uncertainty, including changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation and economic conditions.  Although we believe the estimated losses we have recorded are reasonable, significant differences related to the items we have noted above could materially affect our insurance obligations and future expense. The amount recorded in accrued liabilities and other long-term obligations in our condensed consolidated balance sheet for estimated losses was $19.7 million as of March 31, 2018 and $19.2 million as of December 31, 2017.

Performance Bonds
 
In the normal course of business, we are contingently liable for performance under $34.5 million in performance bonds that various contractors, states and municipalities have required as of March 31, 2018. The bonds principally relate to construction contracts, reclamation obligations, licensing and permitting. We and our subsidiaries have indemnified the underwriting insurance company against any exposure under the performance bonds. No material claims have been made against these bonds as of March 31, 2018.

Employment Agreements

We have employment agreements with executive officers and certain key members of management under which severance payments would become payable in the event of specified terminations without cause or after a change of control. 



23



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


12.
SEGMENT INFORMATION

Our two reportable segments consist of ready-mixed concrete and aggregate products as described below.

Our ready-mixed concrete segment produces and sells ready-mixed concrete. This segment serves the following markets: Texas, Northern California, New York, New Jersey, Pennsylvania, Washington, D.C., Oklahoma and the U.S. Virgin Islands. Our aggregate products segment includes crushed stone, sand and gravel products and serves the markets in which our ready-mixed concrete segment operates as well as the West Coast and Hawaii. Other products not associated with a reportable segment include our aggregates distribution operations, building materials stores, hauling operations, lime slurry, ARIDUS® Rapid Drying Concrete technology, brokered product sales, recycled aggregates operation and an industrial waterfront marine terminal and sales yard. The financial results of the acquisitions have been included in their respective reportable segment or in other products, as applicable, as of their respective acquisition dates.

Our customers are generally involved in the construction industry, which is a cyclical business and is subject to general and more localized economic conditions.  In addition, our business is impacted by seasonal variations in weather conditions, which vary by regional market.  Accordingly, demand for our products and services during the winter months is typically lower than in other months of the year because of inclement weather.  Also, sustained periods of inclement weather and other adverse weather conditions could cause the delay of construction projects during other times of the year.

Our chief operating decision maker evaluates segment performance and allocates resources based on Adjusted EBITDA. We define Adjusted EBITDA as income (loss) from continuing operations excluding the impact of income tax expense (benefit), depreciation, depletion and amortization, net interest expense, loss on extinguishment of debt, derivative income (loss), the non-cash change in value of contingent consideration, impairment of goodwill and other assets, hurricane-related losses, quarry dredge costs for a specific event, purchase accounting adjustments for inventory and foreign currency losses resulting from the Polaris acquisition. Other impacts excluded from our Adjusted EBITDA are non-cash stock compensation expense, acquisition-related costs and officer transition expenses. Many of the impacts excluded to derive Adjusted EBITDA are similar to those excluded for use in calculating our compliance with debt covenants.

We consider Adjusted EBITDA to be an indicator of the operational strength and performance of our business. We have included Adjusted EBITDA because it is a key financial measure used by our management to (1) internally measure our operating performance and (2) assess our ability to service our debt, incur additional debt, and meet our capital expenditure requirements.

Adjusted EBITDA should not be construed as an alternative to, or a better indicator of, operating income or loss, is not based on U.S. GAAP, and is not a measure of our cash flows or ability to fund our cash needs. Our measurements of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies, and may not be comparable to similarly titled measures used in the agreements governing our debt.

We generally account for inter-segment sales at market prices. Corporate includes executive, administrative, financial, legal, human resources, business development and risk management activities that are not allocated to reportable segments and are excluded from segment Adjusted EBITDA. Eliminations include transactions to account for intercompany activity.


24



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following tables set forth certain financial information relating to our continuing operations by reportable segment (in thousands):



Three Months Ended
March 31,
 

2018

2017
Revenue:

 

 
Ready-mixed concrete




Sales to external customers

$
289,240


$
275,456

Aggregate products




Sales to external customers

19,455


9,297

Intersegment sales

13,223


8,527

Total aggregate products
 
32,678

 
17,824

Total reportable segment revenue

321,918


293,280

Other products and eliminations

5,869


5,853

Total revenue

$
327,787


$
299,133






Reportable Segment Adjusted EBITDA:

 

 
Ready-mixed concrete

$
40,967


$
41,504

Aggregate products

5,030


3,997

Total reportable segment Adjusted EBITDA

$
45,997

 
$
45,501






Reconciliation of Total Reportable Segment Adjusted EBITDA to Income (Loss) From Continuing Operations:





Total reportable segment Adjusted EBITDA
 
$
45,997

 
$
45,501

Other products and eliminations from operations
 
(1,639
)
 
2,857

Corporate overhead
 
(15,470
)
 
(10,992
)
Depreciation, depletion and amortization for reportable segments
 
(18,271
)
 
(14,853
)
Hurricane-related losses for reportable segments
 
(307
)
 

Quarry dredge costs for specific event for reportable segment
 
(191
)
 

Purchase accounting adjustments for inventory
 
(706
)
 

Interest expense, net
 
(11,309
)
 
(10,142
)
Corporate derivative income
 

 
1,856

Change in value of contingent consideration for reportable segments
 
(368
)
 
(608
)
Corporate, other products and eliminations other income, net
 
100

 
85

Income (loss) from continuing operations before income taxes
 
(2,164
)
 
13,704

Income tax expense
 
(1,652
)
 
(6,702
)
Income (loss) from continuing operations
 
$
(3,816
)
 
$
7,002






Capital Expenditures:
 
 
 
 
Ready-mixed concrete
 
$
6,518

 
$
6,107

Aggregate products
 
828

 
4,268

Other products and corporate
 
1,029

 
343

Total capital expenditures
 
$
8,375

 
$
10,718


25



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Revenue by Product:
 
 
 
 
Ready-mixed concrete
 
$
289,240

 
$
275,456

Aggregate products
 
19,455

 
9,297

Aggregates distribution
 
9,392

 
5,453

Building materials
 
5,861

 
4,070

Lime
 
2,292

 
2,695

Hauling
 
1,112

 
1,341

Other
 
435

 
821

Total revenue
 
$
327,787

 
$
299,133


 
 
 
As of
March 31, 2018
 
As of
December 31, 2017
Identifiable Property, Plant and Equipment Assets:
 
 
 
 
Ready-mixed concrete
 
$
281,171

 
$
266,584

Aggregate products
 
328,020

 
314,573

Other products and corporate
 
55,403

 
55,111

Total identifiable assets
 
$
664,594

 
$
636,268


13.
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Our 2024 Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by each direct and indirect domestic subsidiary of the Company, each a guarantor subsidiary. Each guarantor subsidiary is directly or indirectly 100% owned by the Company. Neither the net book value nor the purchase price of any of our recently acquired guarantor subsidiaries were 20% or more of the aggregate principal amount of our 2024 Notes. The 2024 Notes are not guaranteed by any direct or indirect foreign subsidiaries of the Company, each a non-guarantor subsidiary. Consequently, we are required to provide condensed consolidating financial information in accordance with Rule 3-10 of Regulation S-X.

The following condensed consolidating financial statements present, in separate columns, financial information for (1) the Parent on a parent only basis, (2) the guarantor subsidiaries on a combined basis, (3) the non-guarantor subsidiaries on a combined basis, (4) the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis, and (5) the Company on a consolidated basis.

The following condensed consolidating financial statements of U.S. Concrete, Inc. and its subsidiaries present investments in consolidated subsidiaries using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.


26



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2018
(in thousands)
 
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations and Reclassifications
 
U.S. Concrete Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
19,533

 
$
17,083

 
$

 
$
36,616

Trade accounts receivable, net
 

 
207,691

 
5,663

 

 
213,354

Inventories
 

 
41,404

 
5,937

 

 
47,341

Prepaid expenses
 

 
9,093

 
367

 

 
9,460

Other receivables
 
2,683

 
13,325

 
65

 

 
16,073

Other current assets
 

 
1,476

 
3

 

 
1,479

Intercompany receivables
 
14,463

 

 

 
(14,463
)
 

Total current assets
 
17,146

 
292,522

 
29,118

 
(14,463
)
 
324,323

Property, plant and equipment, net
 

 
445,784

 
218,810

 

 
664,594

Goodwill
 

 
158,915

 
61,192

 

 
220,107

Intangible assets, net
 

 
123,736

 
2,398

 

 
126,134

Deferred income taxes
 

 

 
674

 
(674
)
 

Investment in subsidiaries
 
547,526

 

 

 
(547,526
)
 

Long-term intercompany receivables
 
403,493

 

 

 
(403,493
)
 

Other assets
 

 
6,214

 
947

 

 
7,161

Total assets
 
$
968,165

 
$
1,027,171

 
$
313,139

 
$
(966,156
)
 
$
1,342,319

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
17

 
$
113,901

 
$
1,811

 
$

 
$
115,729

Accrued liabilities
 
15,556

 
63,157

 
5,325

 

 
84,038

Current maturities of long-term debt
 

 
25,274

 
628

 

 
25,902

Intercompany payables
 

 

 
14,463

 
(14,463
)
 

Total current liabilities
 
15,573

 
202,332

 
22,227

 
(14,463
)
 
225,669

Long-term debt, net of current maturities
 
674,202

 
55,022

 
602

 

 
729,826

Other long-term obligations and deferred credits
 
830

 
80,781

 
2,922

 

 
84,533

Deferred income taxes
 

 
3,797

 

 
(674
)
 
3,123

Long-term intercompany payables
 

 
274,832

 
128,661

 
(403,493
)
 

Total liabilities
 
690,605

 
616,764

 
154,412

 
(418,630
)
 
1,043,151

Total shareholders' equity
 
277,560

 
410,407

 
137,119

 
(547,526
)
 
277,560

Non-controlling interest
 

 

 
21,608

 

 
21,608

Total equity
 
277,560

 
410,407

 
158,727

 
(547,526
)
 
299,168

Total liabilities and equity
 
$
968,165

 
$
1,027,171

 
$
313,139

 
$
(966,156
)
 
$
1,342,319



27



U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2017
(in thousands)
 
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations and Reclassifications
 
U.S. Concrete Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
6,970

 
$
15,611

 
$

 
$
22,581

Trade accounts receivable, net
 

 
208,669

 
5,552

 

 
214,221

Inventories
 

 
41,006

 
7,079

 

 
48,085

Prepaid expenses
 

 
4,723

 
574

 

 
5,297

Other receivables
 
16,256

 
2,644

 
291

 

 
19,191

Other current assets
 

 
2,307

 
3

 

 
2,310

Intercompany receivables
 
14,628

 

 

 
(14,628
)
 

Total current assets
 
30,884

 
266,319

 
29,110

 
(14,628
)
 
311,685

Property, plant and equipment, net
 

 
416,888

 
219,380

 

 
636,268

Goodwill
 

 
142,221

 
62,510

 

 
204,731

Intangible assets, net
 

 
115,570

 
2,553

 

 
118,123

Deferred income taxes
 

 

 
674

 
(674
)
 

Investment in subsidiaries
 
544,256

 

 

 
(544,256
)
 

Long-term intercompany receivables
 
322,193

 

 

 
(322,193
)
 

Other assets
 

 
4,384

 
943

 

 
5,327

Total assets
 
$
897,333

 
$
945,382

 
$
315,170

 
$
(881,751
)
 
$
1,276,134

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
17

 
$
115,465

 
$
1,588

 
$

 
$
117,070

Accrued liabilities
 
6,703

 
53,097

 
5,620

 

 
65,420

Current maturities of long-term debt
 

 
25,284

 
667

 

 
25,951

Intercompany payables
 

 

 
14,628

 
(14,628
)
 

Total current liabilities
 
6,720

 
193,846

 
22,503

 
(14,628
)
 
208,441

Long-term debt, net of current maturities
 
608,127

 
58,545

 
713

 

 
667,385

Other long-term obligations and deferred credits
 
2,035

 
88,743

 
2,563

 

 
93,341

Deferred income taxes
 

 
5,499

 

 
(674
)
 
4,825

Long-term intercompany payables
 

 
195,282

 
126,911

 
(322,193
)
 

Total liabilities
 
616,882

 
541,915

 
152,690

 
(337,495
)
 
973,992

Total shareholders' equity
 
280,451

 
403,467

 
140,789

 
(544,256
)
 
280,451