On March 24, US Concrete (USCR) made two announcements, curiously released together, leading to a 9% decline in its share price. However, neither announcement will lead to a change in our $68 per share fair value estimate or no-moat rating. The ongoing handling of its accounting control issues may lead us to revisit our Standard stewardship rating, though.
First, the company announced that Ernst & Young would replace Grant Thornton as its independent auditor. For fiscal 2015 and 2016, Grant Thornton had identified material weaknesses regarding internal controls related to the accuracy and completeness of income tax accounts and disclosures. As identified in the 2016 10-K, U.S. Concrete has taken and continues to take steps to remediate the material weakness. The appointment of Ernst & Young is likely another step in this direction.
Second, U.S. Concrete announced the resignation of CFO Jody Tusa, Jr. Tusa will cease his roles as chief accounting officer on April 1 and CFO on July 1. We view the departure of Tusa as another step toward remediating the ongoing internal controls issue rather than a harbinger of future accounting issues emerging. The company’s disclosure that the “anticipated departure is not as a result of any disagreement with the Company” is in line with our view.
At first glance, the release of these two items in the same 8-K appears troubling. Yet, we think the share price drop is an overreaction for two main reasons. First, Grant Thornton’s adverse opinion on the income tax internal controls is not new, having been first identified in a restated 2015 10-K on April 27, 2016. Second, despite Grant Thornton’s concerns on the internal controls for income taxes, its opinion on the 2015 and 2016 financial statements had no adverse opinion, disclaimer of opinion, or qualification. We view this as reassurance of low likeliness for any material accounting restatement.
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