3. Acquisitions

On June 14, 2018, we completed the $349.8 million acquisition of Layne, a U.S.-based global water management, infrastructure services and drilling company in a stock-for-stock merger. We paid $321.0 million of the purchase price in Company common stock and $28.8 million in cash to settle all outstanding stock options, restricted stock awards and unvested performance shares of Layne. In addition to the issuance of company common stock and the settlement of various equity awards in cash, we assumed $191.5 million in convertible notes at fair value. See Note 14 for further discussion of the assumed convertible notes.

Layne will operate as a wholly owned subsidiary of Granite Construction Incorporated and its results will be reported in the newly formed Water and Mineral Services operating group in the Water, Specialty and Materials segments. Layne’s customers are in both the public and private sector. Layne is a leader in water management and drilling and therefore this acquisition significantly enhances Granite’s presence in the water infrastructure market. Layne has a network of 52 offices located throughout North and Latin America. We have accounted for this transaction in accordance with ASC Topic 805, Business Combinations (“ASC 805”).

We completed our acquisition of Layne on June 14, 2018 and have included its operating results in our condensed consolidated statements of operations since the acquisition date. Revenue attributable to Layne for the three and nine months ended September 30, 2018 was $129.1 million and $150.6 million, respectively, and net income before taxes attributable to Layne for the three months ended September 30, 2018 was $8.6 million and net losses before taxes for the nine months ended September 30, 2018 were $6.7 million. Net income (loss) before taxes for the three and nine months ended September 30, 2018 included Layne's portion of total pre-tax acquisition and integration expenses of $3.4 million and $18.1 million, respectively.

Preliminary Purchase Price Allocation

In accordance with ASC 805, the total purchase price and assumed liabilities were allocated to the net tangible and identifiable intangible assets based on their estimated fair values as of June 14, 2018 as presented in the table below (in thousands). During the three months ended September 30, 2018, we made measurement period adjustments to reflect facts and circumstances in existence as of the acquisition date. These adjustments included a $2.5 million decrease in property and equipment, a $2.3 million decrease in identifiable intangible assets, a $1.1 million increase in deferred income taxes with a resulting increase in goodwill of $3.7 million. In addition, we reflected a correction to decrease the investments in affiliates balance and to increase the goodwill balance as of June 30, 2018 by $7.6 million. This correction was immaterial to our current or any prior period financial statements. As we continue to integrate the acquired business, we may obtain additional information on the acquired identifiable intangible assets which, if significant, may require revisions to preliminary valuation assumptions, estimates and resulting fair values. We expect to finalize these amounts within 12 months from the acquisition date.

Assets
Cash	$	2,995
Receivables		70,160
Contract assets		44,947
Inventories		23,424
Other current assets		5,533
Property and equipment		185,353
Investments in affiliates		55,400
Deferred income taxes		24,335
Other noncurrent assets		17,868
Total tangible assets		430,015
Identifiable intangible assets		58,448
Liabilities
Identifiable intangible liabilities		6,700
Accounts payable		38,321
Contract liabilities		7,854
Accrued expenses and other current liabilities		47,583
Long-term debt		191,500
Other long-term liabilities		31,893
Total liabilities assumed		323,851
Total identifiable net assets acquired		164,612
Goodwill		185,228
Estimated purchase price	$	349,840

In addition, on April 3, 2018, we acquired LiquiForce, a privately owned company which provides sewer lining rehabilitation services to public and private sector water and wastewater customers in both Canada and the U.S. The Company acquired LiquiForce for $35.9 million in cash borrowed under the Company’s Third Amendment and Restated Credit Agreement described more fully in Note 14. The tangible and intangible assets acquired and liabilities assumed were $14.3 million, $10.9 million and $8.5 million, respectively, resulting in acquired goodwill of $19.2 million. LiquiForce results are reported in the Water and Mineral Services operating group in the Water segment.

Intangible assets

The following table lists amortized intangible assets and liabilities from the Layne and LiquiForce acquisitions that are included in other noncurrent assets and other long-term liabilities in the condensed consolidated balance sheets as of September 30, 2018 (in thousands):

	Weighted Average Useful Lives (Years)		Gross Value		Accumulated Amortization			Net Value
Assets
Customer relationships		7	$	33,391	$	(2,813	)	$	30,578
Backlog		3		9,488		(4,013	)		5,475
Developed technologies		4		9,276		(817	)		8,459
Trademarks/trade names		4		8,996		(770	)		8,226
Favorable contracts		3		4,900		(1,511	)		3,389
Covenants not to compete and other		5		873		(103	)		770
Intangible assets			$	66,924	$	(10,027	)	$	56,897
Liabilities
Unfavorable contracts		2	$	6,897	$	(3,209	)	$	3,688
Unfavorable leases		1		300		(88	)		212
Intangible liabilities			$	7,197	$	(3,297	)	$	3,900

The net amortization expense related to the acquired amortized intangible assets and liabilities for the three and nine months ended September 30, 2018 was $4.2 million and $6.7 million, respectively, and was included in cost of revenue and selling, general and administrative expenses in the condensed consolidated statements of operations. All of the acquired intangible assets and liabilities will be amortized on a straight line basis except for backlog, favorable contracts and unfavorable contracts which will be amortized as the associated projects progress, and customer relationships which will be amortized on a double declining basis. Amortization expense related to the acquired amortized intangible asset balances at September 30, 2018 is expected to be recorded in the future as follows: $4.6 million for the remainder of 2018; $16.2 million in 2019; $11.3 million in 2020; $8.7 million in 2021; and $12.1 million thereafter.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. The factors that contributed to the recognition of goodwill from the acquisitions of Layne and LiquiForce include acquiring a workforce with capabilities in the global water management, construction and drilling markets, cost savings opportunities and synergies. For the Layne acquisition, we recorded $128.9 million, $47.9 million, and $8.4 million of goodwill allocated to our Water, Materials and Specialty reportable segments, respectively. For the LiquiForce acquisition, we recorded $19.2 million in goodwill that was allocated to our Water reportable segment. The goodwill from both acquisitions is not expected to be deductible for income tax purposes. The following table presents the changes in goodwill since December 31, 2017 (in thousands):

Balance at December 31, 2017	$	53,799
Layne acquisition goodwill		185,228
LiquiForce acquisition goodwill		19,264
Reclassification of goodwill to assets held for sale		(13,450	)
Goodwill translation adjustment		(145	)
Balance at September 30, 2018	$	244,696

Pro Forma Financial Information

The financial information in the table below summarizes the combined results of operations of Granite and Layne, on a pro forma basis, as though the companies had been combined as of January 1, 2017 (in thousands, except per share amounts). The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2017.

	Three Months Ended September 30,		Nine Months Ended September 30,
	2017		2018		2017
Revenue	$	1,087,111	$	2,638,664	$	2,539,178
Net income (loss)		39,550		81,151		(25,271	)

Net income (loss) attributable to Granite		37,477		73,661		(29,422	)
Basic net income (loss) per share attributable to common shareholders		0.82		1.61		(0.65	)
Diluted net income (loss) per share attributable to common shareholders		0.80		1.60		(0.65	)

These amounts have been calculated after applying Granite’s accounting policies and adjusting the results of Layne to reflect the additional depreciation and amortization that would have been recorded assuming the fair value adjustments to property and equipment and intangible assets had been applied starting on January 1, 2017. Acquisition and integration expenses related to Layne that were incurred during the three and nine months ended September 30, 2018 are reflected in the three and nine months ended September 30, 2017 due to the assumed timing of the transaction. The statutory tax rate of 26% and 39% was used for 2018 and 2017, respectively, for the pro forma adjustments.

Acquisition and integration expenses associated with both the Layne and LiquiForce acquisitions for the three and nine months ended September 30, 2018 were comprised of the following (in thousands):

	Three Months Ended		Nine Months Ended
	September 30, 2018		September 30, 2018
Professional services and other expenses	$	7,083	$	33,556
Severance and personnel costs		2,251		10,474
Total	$	9,334	$	44,030