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 September 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=12528231&doc=13
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 every Interactive Data File required to be submitted 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 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 ¨

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 16,820,361 shares of common stock, par value $.001 per share, of the registrant outstanding as of October 29, 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)


September 30, 2018

December 31, 2017

(Unaudited)


ASSETS
 

 
Current assets:
 

 
Cash and cash equivalents
$
25,182


$
22,581

Trade accounts receivable, net of allowances of $5,573 as of September 30, 2018 and $5,785 as of December 31, 2017
255,101


214,221

Inventories
49,597


48,085

Prepaid expenses
9,521


5,297

Other receivables
17,708


19,191

Other current assets
3,362


2,310

Total current assets
360,471


311,685

Property, plant and equipment, net of accumulated depreciation, depletion and amortization of $221,630 as of September 30, 2018 and $178,168 as of December 31, 2017
681,061


636,268

Goodwill
238,399


204,731

Intangible assets, net
123,769


118,123

Other assets
7,322


5,327

Total assets
$
1,411,022


$
1,276,134

LIABILITIES AND EQUITY
 


 

Current liabilities:
 


 

Accounts payable
$
137,313


$
117,070

Accrued liabilities
114,394


65,420

Current maturities of long-term debt
29,795


25,951

Total current liabilities
281,502


208,441

Long-term debt, net of current maturities
700,718


667,385

Other long-term obligations and deferred credits
58,284


93,341

Deferred income taxes
33,990


4,825

Total liabilities
1,074,494


973,992

Commitments and contingencies (Note 12)





Equity:
 


 

Preferred stock



Common stock
18


18

Additional paid-in capital
327,202


319,016

Retained earnings (accumulated deficit)
14,225


(13,784
)
Treasury stock, at cost
(26,675
)

(24,799
)
Total shareholders' equity
314,770


280,451

Non-controlling interest
21,758

 
21,691

Total equity
336,528

 
302,142

Total liabilities and equity
$
1,411,022


$
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
September 30,

Nine Months Ended
September 30,
 
2018

2017

2018

2017
Revenue
$
404,267


$
354,628


$
1,136,254


$
994,687

Cost of goods sold before depreciation, depletion and amortization
325,268


278,995


912,738


778,328

Selling, general and administrative expenses
32,220


30,056


96,371


86,073

Depreciation, depletion and amortization
25,473


16,593


68,190


48,802

Change in value of contingent consideration
395

 
719

 
(863
)
 
2,047

Impairment of assets

 
648

 
1,299

 
648

Gain on sale of business and assets, net
(14,081
)

(106
)

(14,642
)

(496
)
Operating income
34,992


27,723

 
73,161

 
79,285

Interest expense, net
11,741


10,552


34,564


31,062

Derivative loss (income)

 
(13,119
)



791

Loss on extinguishment of debt


60




60

Other income, net
(1,103
)

(1,287
)

(4,163
)

(2,591
)
Income from continuing operations before income taxes
24,354


31,517

 
42,760

 
49,963

Income tax expense
8,575


7,241


14,519


20,854

Income from continuing operations
15,779


24,276

 
28,241

 
29,109

Loss from discontinued operations, net of taxes


(222
)



(524
)
Net income
15,779


24,054

 
28,241

 
28,585

Less: Net income attributable to non-controlling interest
(177
)
 

 
(232
)
 

Net income attributable to U.S. Concrete
$
15,602

 
$
24,054

 
$
28,009

 
$
28,585













Basic income per share attributable to U.S. Concrete:
 


 


 


 

Income from continuing operations
$
0.95


$
1.51


$
1.70


$
1.85

Loss from discontinued operations, net of taxes


(0.01
)



(0.03
)
Net income per share attributable to U.S. Concrete - basic
$
0.95


$
1.50

 
$
1.70

 
$
1.82

 
 
 
 
 
 
 
 
Diluted income per share attributable to U.S. Concrete:
 

 
 

 
 

 
 

Income from continuing operations
$
0.94

 
$
1.46

 
$
1.70

 
$
1.75

Loss from discontinued operations, net of taxes

 
(0.01
)
 

 
(0.03
)
Net income per share attributable to U.S. Concrete - diluted
$
0.94


$
1.45

 
$
1.70

 
$
1.72

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 


 


 


 

Basic
16,482


16,028


16,461


15,745

Diluted
16,524

 
16,651

 
16,522

 
16,633

 
 
 
 
 
 
 
 
Net income attributable to U.S. Concrete:
 
 
 
 
 
 
 
Income from continuing operations attributable to U.S. Concrete
$
15,602

 
$
24,276

 
$
28,009

 
$
29,109

Loss from discontinued operations, net of taxes

 
(222
)
 

 
(524
)
Total net income attributable to U.S. Concrete
$
15,602

 
$
24,054

 
$
28,009

 
$
28,585

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
 
Retained Earnings (Accumulated
Deficit)
 
Treasury
Stock
 
Total
Shareholders'
Equity
 
Non-controlling Interest
 
Total Equity
BALANCE, December 31, 2017
16,652

 
$
18

 
$
319,016

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

 
$
21,691

 
$
302,142

Stock-based compensation expense

 

 
8,108

 

 

 
8,108

 

 
8,108

Restricted stock vesting
8

 

 

 

 

 

 

 

Restricted stock grants, net of cancellations
182

 

 

 

 

 

 

 

Stock options exercised
6

 

 
78

 

 

 
78

 

 
78

Other treasury share purchases
(29
)
 

 

 

 
(1,876
)
 
(1,876
)
 

 
(1,876
)
Measurement period adjustments for prior year business combinations

 

 

 

 

 

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


 


 


 


 


 

 
(40
)
 
(40
)
Net income

 

 

 
28,009

 

 
28,009

 
232

 
28,241

BALANCE, September 30, 2018
16,819

 
$
18

 
$
327,202

 
$
14,225

 
$
(26,675
)
 
$
314,770

 
$
21,758

 
$
336,528


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)
 
Nine Months Ended
September 30,
 
2018

2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
Net income
$
28,241


$
28,585

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


 

Depreciation, depletion and amortization
68,190


48,802

Amortization of debt issuance costs
1,355


1,515

Amortization of discount on long-term incentive plan and other accrued interest
406


530

Amortization of premium on long-term debt
(1,163
)
 
(1,163
)
Derivative loss


791

Change in value of contingent consideration
(863
)

2,047

Net gain on disposal of business and assets
(14,642
)

(496
)
Loss on extinguishment of debt

 
60

Impairment of assets
1,299

 
648

Deferred income taxes
10,113


6,863

Provision for doubtful accounts and customer disputes
3,422


3,518

Stock-based compensation
8,108


6,523

Unrealized foreign exchange gain
(61
)
 

Changes in assets and liabilities, excluding effects of acquisitions:
 


 

Accounts receivable
(44,419
)

(30,076
)
Inventories
(153
)

(2,946
)
Prepaid expenses and other current assets
(4,801
)

1,565

Other assets and liabilities
(1,582
)

201

Accounts payable and accrued liabilities
36,766


17,279

Net cash provided by operating activities
90,216


84,246

CASH FLOWS FROM INVESTING ACTIVITIES:
 


 

Purchases of property, plant and equipment
(32,206
)

(33,984
)
Payments for acquisitions, net of cash acquired
(72,326
)

(56,796
)
Advance for note receivable

 
(8,063
)
Proceeds from disposals of businesses and property, plant and equipment
18,603


2,308

Purchases of environmental credits
(2,836
)
 

Insurance proceeds from property loss claims
2,154

 

Net cash used in investing activities
(86,611
)

(96,535
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 


 

Proceeds from revolver borrowings
338,213



Repayments of revolver borrowings
(310,713
)


Proceeds from issuance of debt

 
211,500

Proceeds from exercise of stock options and warrants
78


2,695

Payments of other long-term obligations
(5,648
)

(7,722
)
Payments for other financing
(21,212
)

(14,317
)
Debt issuance costs


(4,332
)
Other treasury share purchases
(1,876
)

(3,046
)
Payments to non-controlling interest
(249
)
 

Other proceeds
464

 

Net cash provided by (used in) financing activities
(943
)

184,778

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(61
)
 

NET INCREASE IN CASH AND CASH EQUIVALENTS
2,601


172,489

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
22,581


75,774

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
25,182


$
248,263


4


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

 
Nine Months Ended
September 30,
 
2018
 
2017
Supplemental Disclosure of Cash Flow Information:
 

 
 

Net cash paid for interest
$
24,515

 
$
20,870

Net cash paid for income taxes
$
2,896

 
$
17,377

 
 
 
 
Supplemental Disclosure of Non-cash Investing and Financing Activities:
 
 
 
Capital expenditures funded by capital leases and promissory notes
$
30,716

 
$
45,517

Acquisitions funded by contingent consideration
$
1,143

 
$
20,620


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 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 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 are currently finalizing our lease portfolio analysis to determine the impact to our consolidated financial statements. To facilitate our adoption beginning in the first quarter of 2019, we are implementing processes and information technology tools to assist in our ongoing lease data collection and analysis and updating our accounting policies and internal controls that will be impacted by the new guidance.

Fair Value Measurement Disclosures. In August 2018, the FASB issued a new Accounting Standards Update ("ASU") to eliminate or modify certain of the disclosures related to fair value measurement while adding new disclosures. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted, including in any interim period for which financial statements have not yet been issued. Early adoption is permitted for the eliminated or modified disclosure requirements and the adoption of all the new disclosure requirements may be delayed until their effective date. The ASU requires prospective application to the new requirements and any modification to disclosures made because of the change to the requirements for the narrative description of measurement of uncertainty. The effects of all other amendments must be applied retrospectively to all periods presented. We are still evaluating this ASU, but since it is focused on disclosures, we do not expect that its adoption will have a significant impact on our consolidated financial statements.

Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. In August 2018, the FASB issued a new ASU to address the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by this ASU. Under this ASU, costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The ASU also requires that the capitalized implementation costs be expensed over the term of the hosting arrangement, while subjecting the capitalized costs to the guidance for impairment of long-lived assets. The ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those years. Early adoption is permitted, including adoption in any interim period. The ASU may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating this ASU, but we do not expect that its adoption will have a significant impact on our consolidated financial statements.

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.  


7


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

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 13 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.

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 five acquisitions during the nine months ended September 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 $71.0 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., and Texas Sand & Gravel Co., Inc. (collectively "Golden Spread") located in Amarillo, Texas on March 2, 2018;
Leon River Aggregate Materials, LLC. ("Leon River") located in Proctor, Texas on August 29, 2018; and
Two individually immaterial ready-mixed concrete operations in our Atlantic Region and West Texas Region on March 5, 2018 and September 14, 2018, respectively.

The aggregate fair value consideration for these five acquisitions included $69.9 million in cash and fair value contingent consideration of $1.1 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 149 mixer trucks, 20 concrete plant facilities and 2 aggregate facilities. During the three and nine months ended September 30, 2018, we incurred approximately $0.1 million and $0.6 million, respectively, 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. See Note 6 for a description of our measurement period adjustments.


8


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

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
$
1,406

Other current assets
77

Property, plant and equipment
36,576

Definite-lived intangible assets
20,615

Total assets acquired
58,674

Current liabilities
50

Other long-term liabilities
153

Total liabilities assumed
203

Goodwill
12,581

Total consideration (fair value) (1)
$
71,052


(1) Included $1.1 million of contingent consideration.

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 concrete plant facilities 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 nine months ended September 30, 2017, we incurred $1.1 million and $1.8 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 final except for the Polaris acquisition and one of the individually immaterial acquisitions. We expect to record adjustments as we accumulate information needed to finalize the fair value of assets acquired and liabilities assumed, including other long-term liabilities, fair value of property, plant and equipment, tax-related balances and goodwill. See Note 6 for a description of our measurement period adjustments.

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)
29,317

 
1,081

Long-term deferred income tax liability
20,207

 

Other long-term liabilities
2,999

 
62

Total liabilities assumed
52,523

 
1,143

Non-controlling interest
21,442

 

Goodwill
83,738

 
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
6.7
 
$
27,050

Non-compete agreements
5.0
 
1,512

Favorable contract
3.7
 
384

Total
 
 
$
28,946



10


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

As of September 30, 2018, the estimated future aggregate amortization expense of definite-lived intangible assets from the 2018 and 2017 acquisitions was as follows (in thousands):
 
 
2018 (remainder of the year)
$
1,248

2019
4,991

2020
4,974

2021
4,038

2022
3,834

Thereafter
6,819

Total
$
25,904


During the three and nine months ended September 30, 2018, we recorded $1.4 million and $2.8 million of amortization expense, respectively, related to these intangible assets. We recorded less than $0.1 million of amortization expense related to these intangible assets during both the three and nine months ended September 30, 2017. We recorded additional amortization expense of $0.2 million and $0.3 million during the three and nine months ended September 30, 2018, respectively, for measurement period adjustments related to these intangible assets.

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 generally expect $25.4 million of goodwill from the 2017 and 2018 acquisitions to be deductible for tax purposes. See Note 9 for additional information regarding income taxes.

Actual Impact of Acquisitions

During the three months ended September 30, 2018, we recorded approximately $46.2 million of revenue and $2.4 million of operating loss in our condensed consolidated statements of operations, including the impact of depreciation, depletion and amortization as well as certain measurement period adjustments (see Note 6) related to the 2017 and 2018 acquisitions following their respective dates of acquisition. During the nine months ended September 30, 2018, we recorded approximately $123.4 million of revenue and $3.7 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 three months ended September 30, 2017, we recorded approximately $0.5 million of revenue and $0.5 million of operating loss in our condensed consolidated statements of operations related to the 2017 acquisitions following their respective dates of acquisition. During the nine months ended September 30, 2017, we recorded approximately $1.0 million of revenue and $0.1 million of operating income in our condensed consolidated statements of operations related to the 2017 acquisitions following their respective dates of acquisition.


11


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

Unaudited Pro Forma Impact of Acquisitions

The information presented below reflects the unaudited pro forma combined financial results for the 2017 and 2018 acquisitions, excluding the individually immaterial acquisitions 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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue from continuing operations
$
404,877

 
$
398,597

 
$
1,153,093

 
$
1,120,082

Net income attributable to U.S. Concrete
$
15,441

 
$
24,494

 
$
28,309

 
$
29,368

 
 
 
 
 
 
 
 
Net income per share attributable to U.S. Concrete - basic
$
0.94

 
$
1.53

 
$
1.72

 
$
1.87

Net income per share attributable to U.S. Concrete - diluted
$
0.93

 
$
1.47

 
$
1.71

 
$
1.77


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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Increase in intangible amortization expense
$
131

 
$
(1,149
)
 
$
(912
)
 
$
(3,472
)
Decrease (increase) in depreciation expense

 
1,018

 

 
(3,482
)
Exclusion of buyer transaction costs
47

 
1,230

 
899

 
1,874

Exclusion of seller transaction costs

 
6,447

 

 
9,671

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

 
(93
)
 

 
(206
)
Decrease (increase) in income tax expense
31

 
490

 
(117
)
 
(400
)
Increase in non-controlling loss

 
(32
)
 

 
(312
)

(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.


12


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

5.
INVENTORIES
 
Inventories were as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Raw materials
$
43,958

 
$
44,238

Building materials for resale
2,647

 
2,192

Other
2,992

 
1,655

Total inventories
$
49,597

 
$
48,085


6.     GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in goodwill by reportable segment from December 31, 2017 to September 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)
 
11,722

 

 
859

 
12,581

Measurement period adjustments for prior year business combinations (2)
 
(341
)
 
29,970

 
(8,542
)
 
21,087

Goodwill, gross at September 30, 2018
 
151,215

 
87,408

 
5,529

 
244,152

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

 
(5,753
)
Goodwill, net at September 30, 2018
 
$
146,801

 
$
86,069

 
$
5,529

 
$
238,399


(1)
During the nine months ended September 30, 2018, we recorded significant measurement period adjustments for the 2018 acquisitions of $5.3 million related to additional definite-lived intangible assets.
(2)
Adjustments for the 2017 acquisitions recorded during 2018 included $20.7 million of additional long-term obligations, of which $20.2 million related to deferred taxes attributable to fair value adjustments on Polaris's fixed assets as of the acquisition date; $2.9 million of assumed liabilities; $0.7 million of lower working capital; $2.7 million of additional property, plant, and equipment; $0.3 million of additional definite-lived intangible assets; 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. 


13


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 September 30, 2018
 
 
Gross
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life (In Years)
Definite-lived intangible assets
 
 
 
 
 
 
 
 
Customer relationships
 
$
109,343

 
$
(39,215
)
 
$
70,128

 
5.2
Trade names
 
44,456

 
(10,422
)
 
34,034

 
19.7
Non-competes
 
18,387

 
(11,159
)
 
7,228

 
2.8
Leasehold interests
 
12,480

 
(4,642
)
 
7,838

 
6.1
Favorable contracts
 
4,034

 
(3,807
)
 
227

 
2.2
Environmental credits
 
2,836

 

 
2,836

 
17.3
Total definite-lived intangible assets
 
191,536


(69,245
)

122,291

 
9.4
Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
Land rights(1)
 
1,478

 

 
1,478

 
 
Total purchased intangible assets
 
$
193,014

 
$
(69,245
)
 
$
123,769

 
 

(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

 
5.5
Trade names
 
44,456

 
(8,120
)
 
36,336

 
19.9
Non-competes
 
16,875

 
(8,510
)
 
8,365

 
2.9
Leasehold interests
 
12,480

 
(3,378
)
 
9,102

 
6.7
Favorable contracts
 
4,034

 
(3,033
)
 
1,001

 
1.3
Total definite-lived intangible assets
 
167,778

 
(51,133
)
 
116,645

 
9.8
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.


14


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

As of September 30, 2018, the estimated remaining amortization of our definite-lived intangible assets was as follows (in thousands):
 
 
2018 (remainder of the year)
$
6,088

2019
23,457

2020
21,248

2021
18,890

2022
12,990

Thereafter
39,618

Total
$
122,291


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 September 30, 2018 and December 31, 2017, and a net carrying amount of $0.8 million and $1.0 million as of September 30, 2018 and December 31, 2017, respectively. These unfavorable lease intangibles had a weighted average remaining life of 4.4 years as of September 30, 2018.

We recorded $6.4 million and $5.1 million of amortization expense on our definite-lived intangible assets and unfavorable lease intangibles for the three months ended September 30, 2018 and 2017, respectively. We recorded $17.9 million and $15.4 million of amortization expense on our definite-lived intangible assets and unfavorable lease intangibles for the nine months ended September 30, 2018 and 2017, respectively.

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

 
September 30, 2018
 
December 31, 2017
6.375% senior unsecured notes due 2024 and unamortized premium(1)
$
608,786

 
$
609,949

Senior secured credit facility
36,500

 
9,000

Capital leases
63,789

 
53,324

Other financing
30,906

 
31,886

Debt issuance costs
(9,468
)
 
(10,823
)
Total debt
730,513

 
693,336

Less: current maturities
(29,795
)
 
(25,951
)
Long-term debt, net of current maturities
$
700,718

 
$
667,385


(1)
The effective interest rate for these notes was 6.56% as of both September 30, 2018 and December 31, 2017.

Senior Secured Credit Facility

As of September 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 3.62% as of September 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 September 30, 2018 was $226.2 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 September 30, 2018, we were in compliance with all covenants under the loan agreement that governs the Revolving Facility.


15


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 September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Contingent consideration, including current portion (1)
$
59,869

 
$

 
$

 
$
59,869

 
$
59,869

 
$

 
$

 
$
59,869


 
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.


16


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

 
 
As of September 30, 2018
Valuation Inputs
 
Monte Carlo Simulation
 
Income Approach
 
Discounted Cash Flow Technique
Fair value (in millions)
 
$
33.7

 
$
25.1

 
$
1.1

Discount rate
 
10.50% - 11.50%

 
3.70% - 5.00%

 
6.03% - 15.75%

Payment cap (in millions)
 
$
37.3

 
$
27.3

 
$
1.3

Expected payment period remaining (in years)
 
1-3
 
1-5
 
1-4
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


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

Acquisitions (1)
1,143

Change in contingent consideration valuation
(863
)
Payments of contingent consideration
(2,228
)
Balance at September 30, 2018
$
59,869


(1)
Represents the fair value of the contingent consideration associated with two of the 2018 acquisitions 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 $607.4 million as of September 30, 2018. The carrying value of the outstanding amounts under our Revolving Facility approximates fair value due to the floating interest rate.


17


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

9.
INCOME TAXES

We recorded income tax expense of $8.6 million and $14.5 million for the three and nine months ended September 30, 2018, respectively. We recorded income tax expense allocated to continuing operations of $7.2 million and $20.9 million for the three and nine months ended September 30, 2017, respectively. For the nine months ended September 30, 2018, our effective tax rate of 34.0% exceeded the federal statutory rate primarily due to (i) certain subsidiaries having no income tax benefit on their operating losses due to full valuation allowances recorded, (ii) adjustments related to the tax rate change enacted as part of the Tax Cuts and Jobs Act (the "Tax Act"), and (iii) state taxes. For the nine months ended September 30, 2017, our effective tax rate of 41.7% differed from the federal statutory rate primarily due to state taxes and the impact of a $0.8 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 nine months ended September 30, 2018 and 2017, we recorded unrecognized tax benefits of $0.3 million and $0.1 million, respectively.

The $29.2 million increase in deferred income tax liability as of September 30, 2018 compared to December 31, 2017 was primarily related to fair value adjustments on fixed assets that were made as part of the purchase accounting for Polaris, offset by the release of valuation allowances on certain of Polaris's subsidiaries' carryforward net operating losses that are more likely than not expected to be utilized, in whole or in part.

On December 22, 2017, the President signed the Tax Act into law. 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 September 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 allowed under SAB 118.


18


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 nine months ended September 30, 2018 and 2017 (in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Income from continuing operations attributable to U.S. Concrete
$
15,602

 
$
24,276

 
$
28,009

 
$
29,109

Loss from discontinued operations, net of taxes

 
(222
)
 

 
(524
)
Net income attributable to U.S. Concrete
$
15,602

 
$
24,054

 
$
28,009

 
$
28,585

 
 
 
 
 
 
 
 
Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
16,482

 
16,028

 
16,461

 
15,745

Restricted stock and restricted stock units
33

 
84

 
50

 
112

Warrants

 
524

 

 
760

Stock options
9

 
15

 
11

 
16

Diluted weighted average common shares outstanding
16,524

 
16,651

 
16,522

 
16,633


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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Potentially dilutive shares:
 
 
 
 
 
 
 
Unvested restricted stock awards and restricted stock units
169

 
60

 
171

 
62

Total potentially dilutive shares
169

 
60

 
171

 
62



19


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


11.
DIVESTITURES
 
During the three months ended September 30, 2018, we sold our Dallas/Fort Worth area lime operations, including property, plant and equipment and inventory. Also during this period, we sold the assets and liabilities associated with our Michigan property, which was part of our aggregate products segment. In connection with these divestitures, we received total net proceeds of $16.7 million and recorded a pre-tax gain of $14.6 million, which is included in gain on sale of business and assets, net, in the accompanying condensed consolidated statements of operations.

As of September 30, 2018, other current assets included $2.0 million of property, plant and equipment held for sale and accrued liabilities included $1.0 million of liabilities that are expected to be assumed by the purchasers upon the closing of a pending sale of a New Jersey property in our aggregate products segment. We expect to close the sale of this property, which is near the end of its economic life and no longer fits into our operating plans, during the fourth quarter of 2018.

12.
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 September 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 September 30, 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.


20


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

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 September 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 sought injunctive relief, civil penalties, restitution, and costs of investigation and litigation, including damages of between $2,500 and $25,000 per alleged violation. In September 2018, the Company settled this matter for $0.2 million, and the lawsuit was dismissed.

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. The total royalties and interest claimed to date are approximately CAD $3.8 million ($2.9 million). Although the Company has recorded a provision for a portion of the assessment, it continues to dispute and negotiate certain aspects of the claim, including interest charges and the timing of payment.

Eminent Domain Matter

In the third quarter of 2018, we incurred $0.6 million of expenses to dismantle and move a ready-mixed concrete plant and office to another location, because the District of Columbia exercised its power of eminent domain over the former site. The Company incurred certain additional expenditures that were capitalized for the new facilities. We have filed reimbursement claims for all of our costs, but have not recognized a receivable for such reimbursement pending approval by a third party right-of-way agent and the District of Columbia Department of Transportation.

21


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 $21.9 million as of September 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 $38.5 million in performance bonds that various contractors, states and municipalities have required as of September 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 September 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. 



22


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

13.
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 (until we divested it on September 5, 2018), ARIDUS® Rapid Drying Concrete technology, brokered product sales and a recycled aggregates operation. 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 our income from continuing operations, excluding the impact of income tax expense (benefit), depreciation, depletion and amortization, net interest expense and certain other non-cash, non-recurring and/or unusual, non-operating items including, but not limited to: non-cash stock compensation expense, non-cash change in value of contingent consideration, impairment of assets, acquisition-related costs, officer transition expenses, quarry dredge costs for specific event, hurricane-related losses, net of recoveries and derivative loss (income). Acquisition-related costs consist of fees and expenses for accountants, lawyers and other professionals incurred during the negotiation and closing of strategic acquisitions and certain acquired entities' management severance costs. Acquisition-related costs do not include fees or expenses associated with post-closing integration of strategic acquisitions. 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 2018 amounts have been reclassified from those previously reported.

23


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
September 30,

Nine Months Ended
September 30,
 

2018

2017

2018

2017
Revenue:

 

 




Ready-mixed concrete








Sales to external customers

$
346,242


$
323,567


$
985,509


$
909,145

Aggregate products








Sales to external customers

41,146


10,972


100,937


32,305

Intersegment sales

12,383


9,987


35,267


29,244

Total aggregate products
 
53,529

 
20,959

 
136,204

 
61,549

Total reportable segment revenue

399,771

 
344,526

 
1,121,713

 
970,694

Other products and eliminations

4,496


10,102


14,541


23,993

Total revenue

$
404,267


$
354,628

 
$
1,136,254

 
$
994,687










Reportable Segment Adjusted EBITDA:

 

 

 

 
Ready-mixed concrete

$
47,545


$
53,627


$
140,307


$
144,777

Aggregate products

12,138


6,218


29,051


18,889

Total reportable segment Adjusted EBITDA

$
59,683

 
$
59,845

 
$
169,358

 
$
163,666










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










Total reportable segment Adjusted EBITDA
 
$
59,683

 
$
59,845

 
$
169,358

 
$
163,666

Other products and eliminations from operations
 
16,549

 
3,315

 
21,027

 
9,338

Corporate overhead
 
(15,701
)
 
(14,051
)
 
(45,793
)
 
(39,757
)
Depreciation, depletion and amortization for reportable segments
 
(23,700
)
 
(15,441
)
 
(63,736
)
 
(45,586
)
Acquisition-related costs
 

 

 
(1,017
)
 

Impairment of assets
 

 
(648
)
 
(1,299
)
 
(648
)
Hurricane-related losses for reportable segments
 

 
(1,206
)
 
185

 
(1,206
)
Quarry dredge costs for specific event for reportable segment
 
(162
)
 
(2,175
)
 
(718
)
 
(2,175
)
Purchase accounting adjustments for inventory
 

 

 
(706
)
 

Eminent domain costs
 
(570
)
 

 
(570
)
 

Interest expense, net
 
(11,741
)
 
(10,552
)
 
(34,564
)
 
(31,062
)
Corporate loss on early extinguishment of debt
 

 
(60
)
 

 
(60
)
Corporate derivative income (loss)
 

 
13,119

 

 
(791
)
Change in value of contingent consideration for reportable segments
 
(395
)
 
(719
)
 
863

 
(2,047
)
Corporate, other products and eliminations other income, net
 
391

 
90

 
(270
)
 
291

Income from continuing operations before income taxes
 
24,354

 
31,517

 
42,760

 
49,963

Income tax expense
 
(8,575
)
 
(7,241
)
 
(14,519
)
 
(20,854
)
Income from continuing operations
 
$
15,779

 
$
24,276

 
$
28,241

 
$
29,109




24


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

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Capital Expenditures:
 
 
 
 
 
 
 
 
Ready-mixed concrete
 
$
4,266

 
$
5,006

 
$
17,732

 
$
17,329

Aggregate products
 
6,869

 
10,092

 
12,955

 
15,769

Other products and corporate
 
234

 
194

 
1,519

 
886

Total capital expenditures
 
$
11,369

 
$
15,292

 
$
32,206

 
$
33,984



 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue by Product:
 
 
 
 
 
 
 
 
Ready-mixed concrete
 
$
346,242

 
$
323,567

 
$
985,509

 
$
909,145

Aggregate products
 
41,146

 
10,972

 
100,937

 
32,305

Aggregates distribution
 
6,100

 
8,423

 
16,470

 
21,376

Building materials
 
7,032

 
7,263

 
20,162

 
18,007

Lime
 
1,873

 
2,240

 
7,384

 
7,380

Hauling
 
1,170

 
1,465

 
3,875

 
4,066

Other
 
704

 
698

 
1,917

 
2,408

Total revenue
 
$
404,267

 
$
354,628

 
$
1,136,254

 
$
994,687


 
 
 
As of September 30, 2018
 
As of
December 31, 2017
Identifiable Property, Plant and Equipment Assets:
 
 
 
 
 
Ready-mixed concrete
 
$
297,655

 
$
266,584

 
Aggregate products
 
354,759

 
342,090

(1) 
Other products and corporate
 
28,647

 
27,594

(1) 
Total identifiable assets
 
$
681,061

 
$
636,268

 

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


25


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

14.
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
SEPTEMBER 30, 2018
(in thousands)
 
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations and Reclassifications
 
U.S. Concrete Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
14,634

 
$
10,548

 
$

 
$
25,182

Trade accounts receivable, net
 

 
240,970

 
14,131

 

 
255,101

Inventories
 

 
44,409

 
5,188

 

 
49,597

Prepaid expenses
 

 
8,587

 
934

 

 
9,521

Other receivables
 
8,877

 
8,634

 
197

 

 
17,708

Other current assets
 

 
3,353

 
9

 

 
3,362

Intercompany receivables
 
16,124

 

 

 
(16,124
)
 

Total current assets
 
25,001

 
320,587

 
31,007

 
(16,124
)
 
360,471

Property, plant and equipment, net
 

 
466,641

 
214,420

 

 
681,061

Goodwill
 

 
154,661

 
83,738