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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 June 30, 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=12395451&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 16,817,964 shares of common stock, par value $.001 per share, of the registrant outstanding as of August 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.
 
 
 






i

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

June 30, 2018

December 31, 2017

(Unaudited)


ASSETS
 

 
Current assets:
 

 
Cash and cash equivalents
$
21,511


$
22,581

Trade accounts receivable, net of allowances of $5,399 as of June 30, 2018 and $5,785 as of December 31, 2017
247,634


214,221

Inventories
48,784


48,085

Prepaid expenses
8,281


5,297

Other receivables
12,197


19,191

Other current assets
7,282


2,310

Total current assets
345,689


311,685

Property, plant and equipment, net of accumulated depreciation, depletion and amortization of $205,249 as of June 30, 2018 and $178,168 as of December 31, 2017
674,192


636,268

Goodwill
217,316


204,731

Intangible assets, net
122,187


118,123

Other assets
7,191


5,327

Total assets
$
1,366,575


$
1,276,134

LIABILITIES AND EQUITY
 


 

Current liabilities:
 


 

Accounts payable
$
130,279


$
117,070

Accrued liabilities
85,928


65,420

Current maturities of long-term debt
28,753


25,951

Total current liabilities
244,960


208,441

Long-term debt, net of current maturities
721,801


667,385

Other long-term obligations and deferred credits
78,523


93,341

Deferred income taxes
3,493


4,825

Total liabilities
1,048,777


973,992

Commitments and contingencies (Note 13)





Equity:
 


 

Preferred stock
—


—

Common stock
18


18

Additional paid-in capital
324,243


319,016

Accumulated deficit
(1,377
)

(13,784
)
Treasury stock, at cost
(26,668
)

(24,799
)
Total shareholders' equity
296,216


280,451

Non-controlling interest
21,582

 
21,691

Total equity
317,798

 
302,142

Total liabilities and equity
$
1,366,575


$
1,276,134


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

1

U.S. CONCRETE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
 
 
Three Months Ended
June 30,

Six Months Ended
June 30,
 
2018

2017

2018

2017
Revenue
$
404,200


$
340,926


$
731,987


$
640,059

Cost of goods sold before depreciation, depletion and amortization
320,238


263,574


587,470


499,333

Selling, general and administrative expenses
31,875


30,200


64,151


56,017

Depreciation, depletion and amortization
22,142


16,350


42,717


32,209

Change in value of contingent consideration
(1,626
)
 
720

 
(1,258
)
 
1,328

Impairment of assets
1,299

 
—

 
1,299

 
—

Gain on sale of assets, net
(371
)

(198
)

(561
)

(390
)
Operating income
30,643


30,280

 
38,169

 
51,562

Interest expense, net
11,514


10,368


22,823


20,510

Derivative loss
—

 
15,766


—


13,910

Other income, net
(1,441
)

(596
)

(3,060
)

(1,304
)
Income from continuing operations before income taxes
20,570


4,742

 
18,406

 
18,446

Income tax expense
4,292


6,911


5,944


13,613

Income (loss) from continuing operations
16,278


(2,169
)
 
12,462

 
4,833

Loss from discontinued operations, net of taxes
—


(180
)

—


(302
)
Net income (loss)
16,278


(2,349
)
 
12,462

 
4,531

Less: Net income attributable to non-controlling interest
(13
)
 
—

 
(55
)
 
—

Net income (loss) attributable to U.S. Concrete
$
16,265

 
$
(2,349
)
 
$
12,407

 
$
4,531













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


 


 


 

Income (loss) from continuing operations
$
0.99


$
(0.14
)

$
0.75


$
0.31

Loss from discontinued operations, net of taxes
—


(0.01
)

—


(0.02
)
Net income (loss) per share attributable to U.S. Concrete - basic
$
0.99


$
(0.15
)
 
$
0.75

 
$
0.29

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

 
 

 
 

 
 

Income (loss) from continuing operations
$
0.99

 
$
(0.14
)
 
$
0.75

 
$
0.29

Loss from discontinued operations, net of taxes
—

 
(0.01
)
 
—

 
(0.02
)
Net income (loss) per share attributable to U.S. Concrete - diluted
$
0.99


$
(0.15
)
 
$
0.75

 
$
0.27

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 


 


 


 

Basic
16,477


15,703


16,450


15,601

Diluted
16,506

 
15,703

 
16,518

 
16,531

 
 
 
 
 
 
 
 
Net income (loss) attributable to U.S. Concrete:
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to U.S. Concrete
$
16,265

 
$
(2,169
)
 
$
12,407

 
$
4,833

Loss from discontinued operations, net of taxes
—

 
(180
)
 
—

 
(302
)
Total net income (loss) attributable to U.S. Concrete
$
16,265

 
$
(2,349
)
 
$
12,407

 
$
4,531


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

2

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
—

 
—

 
5,149

 
—

 
—

 
5,149

 
—

 
5,149

Restricted stock vesting
6

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Restricted stock grants, net of cancellations
180

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock options exercised
6

 
—

 
78

 
—

 
—

 
78

 
—

 
78

Other treasury share purchases
(28
)
 
—

 
—

 
—

 
(1,869
)
 
(1,869
)
 
—

 
(1,869
)
Measurement period adjustments for prior year business combinations
—

 
—

 
—

 
—

 
—

 
—

 
(125
)
 
(125
)
Payments to non-controlling interest


 


 


 


 


 
—

 
(39
)
 
(39
)
Net income
—

 
—

 
—

 
12,407

 
—

 
12,407

 
55

 
12,462

BALANCE, June 30, 2018
16,816

 
$
18

 
$
324,243

 
$
(1,377
)
 
$
(26,668
)
 
$
296,216

 
$
21,582

 
$
317,798


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



3

U.S. CONCRETE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Six Months Ended
June 30,
 
2018

2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
Net income
$
12,462


$
4,531

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


 

Depreciation, depletion and amortization
42,717


32,209

Amortization of debt issuance costs
909


1,041

Amortization of discount on long-term incentive plan and other accrued interest
285


374

Amortization of premium on long-term debt
(775
)
 
(775
)
Derivative loss
—


13,910

Change in value of contingent consideration
(1,258
)

1,328

Net gain on disposal of assets
(561
)

(390
)
Impairment of assets
1,299

 
—

Deferred income taxes
(177
)

4,816

Provision for doubtful accounts and customer disputes
2,007


1,896

Stock-based compensation
5,149


4,253

Unrealized foreign exchange gain
(67
)
 
—

Changes in assets and liabilities, excluding effects of acquisitions:
 


 

Accounts receivable
(35,523
)

(12,856
)
Inventories
(25
)

(1,942
)
Prepaid expenses and other current assets
2,434


98

Other assets and liabilities
(1,276
)

(22
)
Accounts payable and accrued liabilities
20,260


4,684

Net cash provided by operating activities
47,860


53,155

CASH FLOWS FROM INVESTING ACTIVITIES:
 


 

Purchases of property, plant and equipment
(20,837
)

(18,692
)
Payments for acquisitions, net of cash acquired
(61,111
)

(32,836
)
Proceeds from disposals of property, plant and equipment
1,085


841

Proceeds from disposal of businesses
158


873

Insurance proceeds from property loss claims
2,134

 
—

Net cash used in investing activities
(78,571
)

(49,814
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 


 

Proceeds from revolver borrowings
228,613


—

Repayments of revolver borrowings
(177,213
)

—

Proceeds from issuance of debt
—

 
211,500

Proceeds from exercise of stock options and warrants
78


494

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

(4,536
)
Payments for other financing
(13,709
)

(8,778
)
Debt issuance costs
—


(3,231
)
Other treasury share purchases
(1,869
)

(2,825
)
Payments to non-controlling interest
(249
)
 
—

Other proceeds
464

 
—

Net cash provided by financing activities
32,575


192,624

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(98
)
 
—

NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
1,766


195,965

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
22,581


75,774

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
24,347


$
271,739


4

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

 
Six Months Ended
June 30,
 
2018
 
2017
Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash paid for interest
$
22,667

 
$
20,155

Cash paid for income taxes
$
2,678

 
$
12,302

 
 
 
 
Supplemental Disclosure of Non-cash Investing and Financing Activities:
 
 
 
Capital expenditures funded by capital leases and promissory notes
$
20,046

 
$
24,393

Acquisitions funded by contingent consideration
$
893

 
$
—


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

5

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, intangible assets, 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.

Certain reclassifications have been made to prior period balances to conform with the current year presentation.

2.
RECENT ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICIES

Standards/Updates Adopted This Year

Revenue Recognition. In May 2014, the Financial Accounting Standards Board ("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.

Restricted Cash in the Statement of Cash Flows. In November 2016, the FASB issued guidance to reduce diversity in the presentation of restricted cash in the statement of cash flows. The standard has certain disclosure requirements related to restricted cash and requires that restricted cash be included with cash balances in the statement of cash flows. Adoption of this standard did not have a material impact on our statement of cash flows.


6

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 a new lease accounting standard 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 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 the recently approved transition approach that permits application of the new standard at the adoption date instead of the earliest comparative period presented in the financial statements, with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have established a cross-functional coordinated team to implement the standard. The implementation process includes reviewing all leases, performing a completeness assessment over the lease population, analyzing the practical expedients and identifying a new lease accounting technology system. We will also evaluate our processes and internal controls to meet the new accounting, reporting and disclosure requirements. This guidance will be effective for us beginning with the first quarter of 2019. Although we have not yet completed our evaluation of the impact on our financial statements, we expect that our adoption of the standard will have a significant impact on our consolidated balance sheet.

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 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 14 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.


7

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 six months ended June 30, 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 June 30, 2018, we incurred no transaction costs to effect the 2018 acquisitions. During the six months ended June 30, 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
30,235

Definite-lived intangible assets
15,450

Total assets acquired
46,436

Total liabilities assumed
153

Goodwill
14,556

Total consideration (fair value) (1)
$
60,839


(1) Included $0.9 million of contingent consideration.


8

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. Prior to the completion of the Polaris acquisition, we received two promissory notes from Polaris aggregating $18.1 million Canadian dollars, which were reclassified as intercompany loans upon completion of the acquisition and have been eliminated from our consolidated balance sheet. During the three and six months ended June 30, 2017, we incurred $0.5 million and $0.7 million of transaction costs, respectively, 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.

9

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)
4,561

 
1,110

Inventory
6,022

 
695

Other current assets
1,522

 
48

Property, plant and equipment
199,316

 
63,221

Other long-term assets
896

 
—

Definite-lived intangible assets
—

 
8,331

Total assets acquired
232,995

 
73,405

Current liabilities(2)
26,465

 
1,081

Other long-term liabilities
2,999

 
62

Total liabilities assumed
29,464

 
1,143

Non-controlling interest
21,442

 
—

Goodwill
60,679

 
12,837

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 $4.6 million, which represented an aggregate gross contractual amount of $4.9 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 Intangible Assets 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
6.86
 
$
21,171

Non-compete agreements
5.00
 
2,226

Favorable contract
3.67
 
384

Total
 
 
$
23,781



10

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

As of June 30, 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)
$
1,946

2019
3,892

2020
3,875

2021
3,690

2022
3,735

Thereafter
4,965

Total
$
22,103


During the three and six months ended June 30, 2018, we recorded $1.1 million and $1.4 million of amortization expense, respectively, related to these intangible assets. We recorded no amortization expense related to these intangible assets during the three and six months ended June 30, 2017.

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, aggregate products and other non-reportable 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 June 30, 2018, we recorded approximately $46.9 million of revenue and $6.2 million of operating income in our condensed consolidated statements of operations related to the 2017 and 2018 acquisitions following their respective dates of acquisition. During the six months ended June 30, 2018, we recorded approximately $77.2 million of revenue and $6.1 million of operating income in our condensed consolidated statements of operations related to the 2017 and 2018 acquisitions following their respective dates of acquisition. During both the three and six months ended June 30, 2017, we recorded approximately $0.5 million of revenue and $0.5 million of operating income in our condensed consolidated statements of operations related to the 2017 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 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
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Revenue from continuing operations
$
404,200

 
$
378,692

 
$
746,725

 
$
720,709

Net income (loss) attributable to U.S. Concrete
$
16,440

 
$
(2,117
)
 
$
13,794

 
$
5,232

 
 
 
 
 
 
 
 
Net income (loss) per share attributable to U.S. Concrete - basic
$
1.00

 
$
(0.13
)
 
$
0.84

 
$
0.34

Net income (loss) per share attributable to U.S. Concrete - diluted
$
1.00

 
$
(0.13
)
 
$
0.84

 
$
0.32



11

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

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.

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
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Increase in intangible amortization expense
$
—

 
$
(902
)
 
$
(523
)
 
$
(1,804
)
Increase in depreciation expense
—

 
(3,325
)
 
—

 
(4,500
)
Exclusion of buyer transaction costs
159

 
413

 
851

 
644

Exclusion of seller transaction costs
—

 
—

 
—

 
3,224

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

 
(44
)
 
—

 
(113
)
Decrease (increase) in income tax expense
16

 
(923
)
 
(474
)
 
(1,416
)
Increase in non-controlling loss
—

 
(143
)
 
—

 
(280
)

(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):
 
June 30, 2018
 
December 31, 2017
Raw materials
$
44,288

 
$
44,238

Building materials for resale
2,998

 
2,192

Other
1,498

 
1,655

Total inventories
$
48,784

 
$
48,085



12

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

6.     GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in goodwill by reportable segment from December 31, 2017 to June 30, 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 (1)
 
13,697

 
—

 
859

 
14,556

Measurement period adjustments for prior year business combinations (2)
 
(340
)
 
6,911

 
(8,542
)
 
(1,971
)
Goodwill, gross at June 30, 2018
 
153,191

 
64,349

 
5,529

 
223,069

Accumulated impairment at December 31, 2017 and June 30, 2018
 
(4,414
)
 
(1,339
)
 
—

 
(5,753
)
Goodwill, net at June 30, 2018
 
$
148,777

 
$
63,010

 
$
5,529

 
$
217,316


(1)
During the three months ended June 30, 2018, we recorded measurement period adjustments for the 2018 acquisitions of $2.3 million related to additional definite-lived intangible assets.
(2)
The measurement period adjustments for the 2017 acquisitions recorded during 2018 primarily included $2.7 million of additional property, plant, and equipment, $0.3 million of additional definite-lived intangible assets offset by $0.7 million of lower working capital items and other various changes. The measurement period adjustments for the 2017 acquisitions also included a $9.6 million reclassification of goodwill between the aggregate products segment and other non-reportable segments. We re-characterized the results of our Polaris distribution operations, which include shipping and terminal operations, to the aggregate products segment from other non-reportable segments.  This change was made to better reflect how the Polaris business is viewed and operated by management and more closely aligns our reporting with how we manage and report our other aggregate products operations. 

Other Intangible Assets

Our purchased intangible assets were as follows (in thousands):
 
 
As of June 30, 2018
 
 
Gross
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life (In Years)
Definite-lived intangible assets
 
 
 
 
 
 
 
 
Customer relationships
 
$
103,464

 
$
(35,030
)
 
$
68,434

 
5.08
Trade names
 
44,456

 
(9,655
)
 
34,801

 
19.73
Non-competes
 
19,101

 
(10,314
)
 
8,787

 
3.06
Leasehold interests
 
12,480

 
(4,220
)
 
8,260

 
6.28
Favorable contracts
 
4,034

 
(3,607
)
 
427

 
1.50
Total definite-lived intangible assets
 
183,535

 
(62,826
)
 
120,709

 
9.23
Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
Land rights(1)
 
1,478

 
—

 
1,478

 
 
Total purchased intangible assets
 
$
185,013

 
$
(62,826
)
 
$
122,187

 
 

(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.


13

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

 
 
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.

As of June 30, 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)
$
11,802

2019
22,193

2020
19,985

2021
18,376

2022
12,727

Thereafter
35,626

Total
$
120,709


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 as of both June 30, 2018 and December 31, 2017, and a net carrying amount of $0.9 million and $1.0 million as of June 30, 2018 and December 31, 2017, respectively. These unfavorable lease intangibles have a weighted average remaining life of 4.61 years as of June 30, 2018.

We recorded $6.2 million and $5.1 million of amortization expense on our definite-lived intangible assets and unfavorable lease intangibles for the three months ended June 30, 2018 and 2017, respectively. We recorded $11.6 million and $10.3 million of amortization expense on our definite-lived intangible assets and unfavorable lease intangibles for the six months ended June 30, 2018 and 2017, respectively.


14

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

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

 
June 30, 2018
 
December 31, 2017
6.375% senior unsecured notes due 2024 and unamortized premium(1)
$
609,174

 
$
609,949

Senior secured credit facility
60,400

 
9,000

Capital leases
62,632

 
53,324

Other financing
28,914

 
31,886

Debt issuance costs
(10,566
)
 
(10,823
)
Total debt
750,554

 
693,336

Less: current maturities
(28,753
)
 
(25,951
)
Long-term debt, net of current maturities
$
721,801

 
$
667,385


(1)
The effective interest rates for these notes were 6.56% for both June 30, 2018 and December 31, 2017.

Senior Secured Credit Facility

As of June 30, 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 3.53% as of June 30, 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 June 30, 2018 was $173.6 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 June 30, 2018, we were in compliance with all covenants under the loan agreement that governs the Revolving Facility.

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.


15

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

The following tables present our fair value hierarchy for liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Contingent consideration, including current portion (1)
$
59,371

 
$
—

 
$
—

 
$
59,371

 
$
59,371

 
$
—

 
$
—

 
$
59,371


 
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.

The following tables present the valuation inputs for the fair value estimates for our three model types of acquisition-related contingent consideration arrangements. We estimate the fair value of acquisition-related contingent consideration arrangements using a Monte Carlo simulation model, an income approach or a discounted cash flow technique, as appropriate. These fair value measurements are based on significant inputs not observable in the market, and thus represent Level 3 inputs.
 
The fair value of the contingent consideration arrangements is sensitive to changes in the forecasts of earnings and/or the relevant operating metrics and changes in discount rates.  The fair value of the contingent consideration is reassessed quarterly based on assumptions used in our latest projections and input provided by practice leaders and management.  Any change in the fair value estimate is recorded in our consolidated statement of operations for that period.  The use of different estimates and assumptions could increase or decrease the estimated fair value of our contingent consideration liability, which would result in different impacts to our consolidated balance sheets and consolidated statements of operations.

 
 
As of June 30, 2018
Valuation Inputs
 
Monte Carlo Simulation
 
Income Approach
 
Discounted Cash Flow Technique
Fair value (in millions)
 
$
33.4

 
$
24.7

 
$
1.3

Discount rate
 
10.50% - 11.50%

 
3.70% - 5.00%

 
6.03% - 15.75%

Payment cap (in millions)
 
$
37.3

 
$
27.0

 
$
1.4

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

 
 
As of December 31, 2017
Valuation Inputs
 
Monte Carlo Simulation
 
Income Approach
 
Discounted Cash Flow Technique
Fair value (in millions)
 
$
37.1

 
$
23.6

 
$
1.1

Discount rate
 
9.75% - 11.75%

 
3.70% - 5.00%

 
6.03% - 15.75%

Payment cap (in millions)
 
$
39.3

 
$
26.0

 
$
1.4

Expected payment period remaining (in years)

 
2-4
 
1-5
 
1-5
Management projections of the payout criteria
 
EBITDA/Volumes
 
Permitted reserves/Volumes
 
Volumes

16

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



The following table provides a reconciliation of the changes in Level 3 fair value measurements from December 31, 2017 to June 30, 2018 (in thousands):
 
Contingent Consideration
Balance at December 31, 2017
$
61,817

Acquisitions (1)
893

Change in contingent consideration valuation
(1,258
)
Payments of contingent consideration
(2,081
)
Balance at June 30, 2018
$
59,371


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

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 $601.5 million as of June 30, 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 of $4.3 million and $5.9 million for the three and six months ended June 30, 2018, respectively. We recorded income tax expense allocated to continuing operations of $6.9 million and $13.6 million for the three and six months ended June 30, 2017, respectively. For the six months ended June 30, 2018, our effective tax rate of 32.3% differed from the federal statutory rate primarily due to state taxes and adjustments related to the $1.3 million impact of the tax rate change enacted as part of the Tax Cuts and Jobs Act (the "Tax Act"). For the six months ended June 30, 2017, our effective tax rate of 73.8% differed from the federal statutory rate primarily due to state taxes and the impact of a $13.9 million non-cash loss on our now expired warrants, which was recorded with no associated tax benefit.

We record changes in our unrecognized tax benefits based on anticipated federal and state tax filing positions on a quarterly basis. For the six months ended June 30, 2018 and 2017, we recorded unrecognized tax benefits of $0.2 million and $5.7 million, respectively.

On December 22, 2017, the President signed into law the Tax Act. Shortly after the Tax Act was enacted, the 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. As of June 30, 2018, we recorded provisional amounts for the effects of the Tax Act for the Base Erosion Anti-abuse Tax, which is a new minimum tax, and a mechanism to tax global intangible low taxed income. These provisional amounts were immaterial to our consolidated financial statements. 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.


17

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

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 and six months ended June 30, 2018 and 2017 (in thousands):

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017 (1)
 
2018
 
2017
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to U.S. Concrete
$
16,265

 
$
(2,169
)
 
$
12,407

 
$
4,833

Loss from discontinued operations, net of taxes
—

 
(180
)
 
—

 
(302
)
Net income (loss) attributable to U.S. Concrete
$
16,265

 
$
(2,349
)
 
$
12,407

 
$
4,531

 
 
 
 
 
 
 
 
Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
16,477

 
15,703

 
16,450

 
15,601

Restricted stock and restricted stock units
18

 
—

 
56

 
123

Warrants
—

 
—

 
—

 
791

Stock options
11

 
—

 
12

 
16

Diluted weighted average common shares outstanding
16,506

 
15,703

 
16,518

 
16,531


(1)
We reported a loss from continuing operations attributable to U.S. Concrete for the three months ended June 30, 2017; therefore, the share count used in the basic and diluted earnings per share calculation was the same.

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 had not met their performance target:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Potentially dilutive shares:
 
 
 
 
 
 
 
Unvested restricted stock awards and restricted stock units
171

 
275

 
141

 
131

Stock options
—

 
19

 
—

 
—

Warrants
—

 
1,127

 
—

 
—

Total potentially dilutive shares
171

 
1,421

 
141

 
131



18

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

11.
RESTRICTED CASH
 
The following table provides a reconciliation of cash and cash equivalents and restricted cash (in thousands) as reported within our condensed consolidated balance sheets to the same items as reported in our condensed consolidated statement of cash flows:

 
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
21,511

 
$
22,581

Restricted cash included in other current assets
2,836

 
—

Total cash and cash equivalents and restricted cash
$
24,347

 
$
22,581


Restricted cash as of June 30, 2018 related to amounts held in escrow pending the purchase of certain emission credits to expand our sales capacity in California of aggregate products delivered by ship from our Canadian operations. The purchase of these emission credits was finalized on July 20, 2018.

12.
ASSETS AND LIABILITIES HELD FOR SALE
 
As of June 30, 2018, the Company had completed negotiations with buyers for properties in New Jersey and Michigan, both within our aggregate products segment, that were near the end of their economic lives and no longer fit into the operating plans of the Company. Upon finalizing negotiations, we recorded a $1.3 million impairment to write the assets down to their fair value. As of June 30, 2018, other current assets included $3.1 million of property, plant and equipment held for sale and accrued liabilities included $1.2 million of liabilities that will be assumed by the buyers. We closed the sale of the Michigan property on July 2, 2018 and expect to close the sale of the New Jersey property in the third quarter of 2018.

13.
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 June 30, 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 June 30, 2018.


19

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

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 believes we have adequately accrued for these claims.  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 June 30, 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.

San Francisco County Matter

On April 5, 2018, the State of California filed a lawsuit against the Company in San Francisco County Superior Court alleging
violations of California environmental statutes, unfair business practices, and false advertising arising out of alleged incidents of employees spraying down mixer trucks on public streets allegedly resulting in concrete residue and waste water entering sewer and storm drain systems. The State of California seeks injunctive relief, civil penalties, restitution, and costs of investigation and litigation, including damages of between $2,500 and $25,000 per alleged violation. The Company is vigorously defending against these allegations and while the ultimate liability with respect to these claims cannot be determined at this time, the Company does not expect these matters to result in fines of more than $300,000. The Company does not expect this matter to have a material impact on its financial position, results of operations or liquidity.

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.

20

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

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. 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 sheets for estimated losses was $20.2 million as of June 30, 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 $35.0 million in performance bonds that various contractors, states and municipalities have required as of June 30, 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 June 30, 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. 



21

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

14.
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 our 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 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 in calculating our compliance with our 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.

During the quarter ended June 30, 2018, we re-characterized the results of our Polaris distribution operations, which include shipping and terminal operations, to the aggregate products segment from other products and eliminations.  This change was made to better reflect how the Polaris business is viewed and operated by management and more closely aligns our reporting with how we manage and report our other aggregate products operations.  As a result of this change, certain first quarter of 2018 amounts have been reclassified from those previously reported.

22

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
June 30,

Six Months Ended
June 30,
 

2018

2017

2018

2017
Revenue:

 

 




Ready-mixed concrete








Sales to external customers

$
350,027


$
310,122


$
639,267


$
585,578

Aggregate products








Sales to external customers

35,065


12,036


59,791


21,333

Intersegment sales

13,449


10,730


22,884


19,257

Total aggregate products
 
48,514

 
22,766

 
82,675

 
40,590

Total reportable segment revenue

398,541

 
332,888

 
721,942

 
626,168

Other products and eliminations

5,659


8,038


10,045


13,891

Total revenue

$
404,200


$
340,926

 
$
731,987

 
$
640,059










Reportable Segment Adjusted EBITDA:

 

 

 

 
Ready-mixed concrete

$
51,795


$
49,646


$
92,762


$
91,150

Aggregate products

12,237


8,674


16,913


12,671

Total reportable segment Adjusted EBITDA

$
64,032

 
$
58,320

 
$
109,675

 
$
103,821










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










Total reportable segment Adjusted EBITDA
 
$
64,032

 
$
58,320

 
$
109,675

 
$
103,821

Other products and eliminations from operations
 
3,333

 
3,166

 
4,478

 
6,023

Corporate overhead
 
(14,622
)
 
(14,714
)
 
(30,092
)
 
(25,706
)
Depreciation, depletion and amortization for reportable segments
 
(20,877
)
 
(15,292
)
 
(40,036
)
 
(30,145
)
Acquisition-related costs
 
—

 
—

 
(1,017
)
 
—

Impairment of assets
 
(1,299
)
 
—

 
(1,299
)
 
—

Hurricane-related losses for reportable segments
 
492

 
—

 
185

 
—

Quarry dredge costs for specific event for reportable segment
 
(365
)
 
—

 
(556
)
 
—

Purchase accounting adjustments for inventory
 
—

 
—

 
(706
)
 
—

Interest expense, net
 
(11,514
)
 
(10,368
)
 
(22,823
)
 
(20,510
)
Corporate derivative loss
 
—

 
(15,766
)
 
—

 
(13,910
)
Change in value of contingent consideration for reportable segments
 
1,626

 
(720
)
 
1,258

 
(1,328
)
Corporate, other products and eliminations other income, net
 
(236
)
 
116

 
(661
)
 
201

Income from continuing operations before income taxes
 
20,570

 
4,742

 
18,406

 
18,446

Income tax expense
 
(4,292
)
 
(6,911
)
 
(5,944
)
 
(13,613
)
Income (loss) from continuing operations
 
$
16,278

 
$
(2,169
)
 
$
12,462

 
$
4,833




23

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

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Capital Expenditures:
 
 
 
 
 
 
 
 
Ready-mixed concrete
 
$
6,948

 
$
6,216

 
$
13,466

 
$
12,323

Aggregate products
 
5,258

 
1,409

 
6,086

 
5,677

Other products and corporate
 
256

 
349

 
1,285

 
692

Total capital expenditures
 
$
12,462

 
$
7,974

 
$
20,837

 
$
18,692



 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue by Product:
 
 
 
 
 
 
 
 
Ready-mixed concrete
 
$
350,027

 
$
310,122

 
$
639,267

 
$
585,578

Aggregate products
 
35,065

 
12,036

 
59,791

 
21,333

Aggregates distribution
 
6,249

 
7,500

 
10,370

 
12,953

Building materials
 
7,269

 
6,674

 
13,130

 
10,744

Lime
 
3,219

 
2,445

 
5,511

 
5,140

Hauling
 
1,593

 
1,260

 
2,705

 
2,601

Other
 
778

 
889

 
1,213

 
1,710

Total revenue
 
$
404,200

 
$
340,926

 
$
731,987

 
$
640,059


 
 
 
As of June 30, 2018
 
As of
December 31, 2017
Identifiable Property, Plant and Equipment Assets:
 
 
 
 
 
Ready-mixed concrete
 
$
292,897

 
$
266,584

 
Aggregate products
 
352,145

 
342,090

(1) 
Other products and corporate
 
29,150

 
27,594

(1) 
Total identifiable assets
 
$
674,192

 
$
636,268

 

(1) $27.5 million has been reclassified to aggregate products from other products and corporate due to the segment reporting change made during the three months ended June 30, 2018.


24

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

15.
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.



25

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

CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2018
(in thousands)
 
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations and Reclassifications
 
U.S. Concrete Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
12,713

 
$
8,798

 
$
—

 
$
21,511

Trade accounts receivable, net
 
—

 
239,109

 
8,525

 
—

 
247,634

Inventories
 
—

 
41,496

 
7,288

 
—

 
48,784

Prepaid expenses
 
—

 
7,974

 
307

 
—

 
8,281

Other receivables
 
5,776

 
6,366

 
55

 
—

 
12,197

Other current assets
 
—

 
4,437

 
2,845

 
—

 
7,282

Intercompany receivables
 
14,394

 
—

 
—

 
(14,394
)
 
—

Total current assets
 
20,170

 
312,095

 
27,818

 
(14,394
)
 
345,689

Property, plant and equipment, net
 
—

 
457,426

 
216,766

 
—

 
674,192

Goodwill
 
—

 
156,637

 
60,679

 
—

 
217,316

Intangible assets, net
 
—

 
119,945

 
2,242

 
—

 
122,187

Deferred income taxes
 
—

 
—

 
677

 
(677
)
 
—

Investment in subsidiaries
 
571,615

 
—

 
—

 
(571,615
)
 
—

Long-term intercompany receivables