Attached files

file filename
EX-31.2 - EX-31.2 - New Enterprise Stone & Lime Co., Inc.a13-9134_1ex31d2.htm
EX-95 - EX-95 - New Enterprise Stone & Lime Co., Inc.a13-9134_1ex95.htm
EX-32.2 - EX-32.2 - New Enterprise Stone & Lime Co., Inc.a13-9134_1ex32d2.htm
EX-31.1 - EX-31.1 - New Enterprise Stone & Lime Co., Inc.a13-9134_1ex31d1.htm
EX-32.1 - EX-32.1 - New Enterprise Stone & Lime Co., Inc.a13-9134_1ex32d1.htm

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended November 30, 2012

  

OR

  

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: 333-176538

 


 

NEW ENTERPRISE STONE & LIME CO., INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

23-1374051

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

3912 Brumbaugh Road

 

 

P.O. Box 77

 

 

New Enterprise, PA

 

16664

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (814) 766-2211

 


 

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 o  No x

 

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 o  No x

 

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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

As of April 1, 2013, the number of shares outstanding of the registrant’s Class A Voting Common Stock, $1.00 par value, was 500 shares and the number of shares outstanding of the registrant’s Class B Non-Voting Common Stock, $1.00 par value, was 273,285 shares.

 

 

 



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Table of Contents

Quarter Ended November 30, 2012

 

 

 

Page(s)

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

 Condensed Consolidated Balance Sheets at November 30, 2012 and February 29, 2012

 

3

 

 

 

 Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended November  30, 2012 and 2011

 

4

 

 

 

 Condensed Consolidated Statements of Cash Flows for the nine months ended November 30, 2012 and 2011

 

5

 

 

 

 Notes to Unaudited Condensed Consolidated Financial Statements

 

6-25

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26-37

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

Item 4. Controls and Procedures

 

38

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

41

 

 

 

Item 1A. Risk Factors

 

41

 

 

 

Item 2. Unregistered Sales of Equity in Securities and Use of Proceeds

 

42

 

 

 

Item 3. Defaults Upon Senior Securities

 

42

 

 

 

Item 4. Mine Safety Disclosure

 

42

 

 

 

Item 5. Other Information

 

42

 

 

 

Item 6. Exhibits

 

43

 

 

 

 Signature

 

44

 

 

 

 Exhibit Index

 

45

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)

 

 

 

November 30,

 

February 29,

 

(In thousands, except share and per share data)

 

2012

 

2012

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

8,481

 

$

15,032

 

Restricted cash

 

10,456

 

10,322

 

Accounts receivable (less allowance for doubtful accounts of $3,956 in November 2012 and $3,259 in February 2012)

 

110,279

 

76,841

 

Inventories

 

129,890

 

132,195

 

Deferred income taxes

 

15,393

 

16,019

 

Other current assets

 

9,063

 

7,788

 

Total current assets

 

283,562

 

258,197

 

Property, plant and equipment, net

 

373,808

 

371,574

 

Goodwill

 

90,847

 

90,847

 

Other intangible assets

 

25,564

 

26,344

 

Other assets

 

35,769

 

29,360

 

Total assets

 

$

809,550

 

$

776,322

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

16,219

 

$

7,538

 

Accounts payable — trade

 

27,052

 

27,558

 

Accrued liabilities

 

43,839

 

51,631

 

Total current liabilities

 

87,110

 

86,727

 

Long-term debt, less current maturities

 

578,586

 

521,475

 

Deferred income taxes

 

83,230

 

96,674

 

Other liabilities

 

30,143

 

21,578

 

Total liabilities

 

779,069

 

726,454

 

Commitments and contingencies (Note 7)

 

 

 

 

 

Equity

 

 

 

 

 

Common stock, Class A, voting, $1 par value

 

21

 

21

 

Common stock, Class B, nonvoting, $1 par value

 

251

 

251

 

Accumulated deficit

 

(96,223

)

(76,779

)

Additional paid in capital

 

126,964

 

126,964

 

Accumulated other comprehensive loss

 

(2,044

)

(2,181

)

Total New Enterprise Stone & Lime Co., Inc. equity

 

28,969

 

48,276

 

Noncontrolling interest in consolidated subsidiaries

 

1,512

 

1,592

 

Total equity

 

30,481

 

49,868

 

Total liabilities and equity

 

$

809,550

 

$

776,322

 

 

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

 

3



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 30,

 

November 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Revenue

 

 

 

 

 

 

 

 

 

Construction materials

 

$

97,856

 

$

108,469

 

$

314,633

 

$

313,902

 

Heavy/highway construction

 

71,012

 

85,128

 

228,138

 

247,296

 

Traffic safety services and equipment

 

19,440

 

18,624

 

59,928

 

59,262

 

Other revenues

 

1,928

 

1,666

 

6,060

 

6,910

 

Total revenue

 

190,236

 

213,887

 

608,759

 

627,370

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (exclusive of items shown separately below)

 

 

 

 

 

 

 

 

 

Construction materials

 

68,514

 

71,718

 

210,432

 

200,924

 

Heavy/highway construction

 

68,464

 

75,702

 

217,749

 

231,754

 

Traffic safety services and equipment

 

14,941

 

13,123

 

48,221

 

43,434

 

Other expenses

 

840

 

980

 

4,301

 

5,313

 

Total cost of revenue

 

152,759

 

161,523

 

480,703

 

481,425

 

 

 

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

13,381

 

12,156

 

38,504

 

35,789

 

Intangible asset impairment

 

 

 

300

 

 

Pension and profit sharing

 

2,384

 

2,385

 

6,484

 

6,387

 

Selling, administrative, and general expenses

 

19,713

 

15,231

 

55,733

 

46,485

 

Loss (gain) on sales of property and equipment

 

22

 

273

 

(6

)

(1,232

)

Operating income

 

1,977

 

22,319

 

27,041

 

58,516

 

Interest expense, net

 

(17,734

)

(11,337

)

(58,306

)

(34,915

)

(Loss) income before income taxes

 

(15,757

)

10,982

 

(31,265

)

23,601

 

Income tax (benefit) expense

 

(6,909

)

5,302

 

(12,825

)

10,749

 

Net (loss) income

 

(8,848

)

5,680

 

(18,440

)

12,852

 

Unrealized acturial gains and amortization of prior service costs, net of income taxes

 

46

 

17

 

137

 

80

 

Comprehensive (loss) income

 

(8,802

)

5,697

 

(18,303

)

12,932

 

Less: Comprehensive (income) loss attributable to noncontrolling interest

 

(365

)

81

 

(1,004

)

(518

)

Comprehensive (loss) income attributable to New Enterprise Stone & Lime Co., Inc.

 

$

(9,167

)

$

5,778

 

$

(19,307

)

$

12,414

 

 

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

 

4



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

Nine Months Ended

 

 

 

November 30,

 

(In thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Reconciliation of net (loss) income to net cash used in operating activities

 

 

 

 

 

Net (loss) income

 

$

(18,440

)

$

12,852

 

Adjustments to reconcile net (loss) income to net cash used in operating activities

 

 

 

 

 

Depreciation, depletion and amortization

 

38,504

 

35,789

 

Intangible asset impairment

 

300

 

 

Gain on disposal of property and equipment

 

(6

)

(1,232

)

Non-cash payment-in-kind interest accretion

 

17,117

 

 

Amortization and write-off of debt issuance costs

 

9,145

 

3,255

 

Deferred income taxes

 

(12,818

)

9,734

 

Bad debt expense

 

1,249

 

1,837

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(34,687

)

(90,054

)

Inventories

 

2,908

 

(11,014

)

Other assets

 

(3,121

)

3,966

 

Accounts payable

 

827

 

15,864

 

Other liabilities

 

(9,211

)

(6,655

)

Net cash used in operating activities

 

(8,233

)

(25,658

)

Cash flows from investing activities

 

 

 

 

 

Capital expenditures

 

(31,887

)

(26,677

)

Capitalized software

 

(23

)

(5,978

)

Proceeds from sale of property and equipment

 

194

 

2,603

 

Change in cash value of life insurance

 

(3,013

)

2,968

 

Change in restricted cash

 

(133

)

(8,492

)

Net cash used in investing activities

 

(34,862

)

(35,576

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from revolving credit

 

224,413

 

108,717

 

Repayment of revolving credit

 

(283,361

)

(42,500

)

Repayment of long-term debt

 

(154,029

)

(24,484

)

Payments on capital leases

 

(3,846

)

(3,975

)

Proceeds from issuance of long-term debt

 

268,513

 

12,398

 

Debt issuance costs

 

(14,062

)

(1,663

)

Distribution to noncontrolling interest

 

(1,084

)

(1,095

)

Net cash provided by financing activities

 

36,544

 

47,398

 

Net decrease in cash and cash equivalents

 

(6,551

)

(13,836

)

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

15,032

 

20,029

 

End of period

 

$

8,481

 

$

6,193

 

 

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

 

5



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

1.              Nature of Operations and Summary of Significant Accounting Policies

 

Company Activities

 

New Enterprise Stone & Lime Co., Inc., a Delaware corporation, is a leading privately held, vertically integrated construction materials supplier and heavy/highway construction contractor in Pennsylvania and western New York and a national traffic safety services and equipment provider.  Founded in 1924, the Company operates in three segments based upon the nature of its products and services: construction materials, heavy/highway construction and traffic safety services and equipment.  As used herein, the terms (“we,” “us,” “our,” “NESL,” or the “Company”) refer to New Enterprise Stone & Lime Co., Inc., and/or one or more of its subsidiaries.  Almost all of our products are produced and consumed outdoors.  Normally, our highest sales and earnings are in the second and third fiscal quarters and our lowest are in the first and fourth fiscal quarters.  As a result of this seasonality, our significant net working capital items, which are accounts receivable, inventories, accounts payable - trade and accrued liabilities, are typically higher as of interim period ends compared to fiscal year end.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and notes included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  All adjustments (all of which are of a normal recurring nature) that are necessary for a fair presentation are reflected in the condensed consolidated financial statements.  The condensed consolidated financial statements do not include all of the information or disclosures required for a complete presentation in accordance with GAAP.  Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2012 filed with the Securities and Exchange Commission (“SEC”). The results for interim periods are not necessarily indicative of the results for a full fiscal year.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and entities where the Company has a controlling equity interest. Intercompany balances and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain items previously reported in prior period financial statement captions have been conformed to agree with current presentation.

 

Use of Estimates

 

The preparation of the condensed consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.  Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment; valuation of receivables, inventories and goodwill; recognition of revenue and loss contract reserves under the percentage-of-completion method; assets and obligations related to employee benefit plans; asset retirement obligations; income tax valuation; and self-insurance reserves.  Actual results could differ from those estimates.

 

Cash and Cash Equivalents and Restricted Cash

 

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash balances were restricted in certain consolidated subsidiaries for bond sinking fund and insurance requirements as well as collateral on outstanding letters of credit or rentals.

 

In May 2012, the Company started using a cash pooling arrangement with a single financial institution with specific provisions for the right to offset positive and negative cash balances.  Accordingly, we classify net aggregate bank overdraft positions as

 

6



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

other obligations within the current maturities of long-term debt as of November 30, 2012, based on the short-term nature of these positions.

 

Trade Accounts Receivable

 

Trade accounts receivable, less allowance for doubtful accounts, are recorded at the invoiced amount plus service charges related to past due accounts.  The Company’s total accounts receivable consisted of the following:

 

(In thousands)

 

November 30,
2012

 

February 29,
2012

 

 

 

 

 

 

 

Costs and estimated earnings in excess of billings

 

$

11,844

 

$

14,570

 

Trade

 

97,447

 

60,172

 

Retainages

 

4,944

 

5,358

 

 

 

114,235

 

80,100

 

Allowance for doubtful accounts

 

(3,956

)

(3,259

)

Accounts receivable, net

 

$

110,279

 

$

76,841

 

 

Costs and estimated earnings in excess of billings relate to uncompleted contracts and amounts not processed by governmental agencies.  State and local agencies often require several approvals to process billings or payments and this may cause a lag in payment times.

 

Concentrations of Credit Risk

 

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash and temporary investments with high-quality financial institutions. At times, such balances and investments may be in excess of Federal Deposit Insurance Corporation insured limits; however the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk to its cash and cash equivalents. The Company conducts business with various governmental entities within the Commonwealth of Pennsylvania. These entities include the Pennsylvania Department of Transportation, the Pennsylvania Turnpike Commission and various townships, municipalities, school districts and universities within Pennsylvania. The Company has not experienced any material losses with these governmental agencies and does not believe it is exposed to any significant credit risk related to its outstanding accounts receivable.

 

Inventories

 

Inventories are stated at the lower of cost or market.  Cost is determined using either first-in, first-out (“FIFO”) or weighted average method based on the applicable category of inventories.

 

The Company’s total inventory consists of the following:

 

(In thousands)

 

November 30,
2012

 

February 29,
2012

 

 

 

 

 

 

 

Crushed stone, agricultural lime, and sand

 

$

82,045

 

$

84,016

 

Raw materials

 

8,901

 

9,400

 

Parts, tires, and supplies

 

11,724

 

11,313

 

Concrete blocks

 

3,945

 

4,547

 

Building materials

 

4,018

 

3,982

 

Safety equipment

 

16,076

 

16,901

 

Other

 

3,181

 

2,036

 

 

 

$

129,890

 

$

132,195

 

 

7



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

Property, Plant and Equipment

 

Property, plant and equipment are carried at cost.  Assets under capital leases are stated at the lesser of the present value of minimum lease payments or the fair value of the leased item.  Provision for depreciation is generally computed over estimated service lives by the straight-line method.

 

The Company’s property, plant and equipment consist of the following:

 

(In thousands)

 

November 30,
2012

 

February 29,
2012

 

 

 

 

 

 

 

Limestone and sand acreage

 

$

144,931

 

$

142,034

 

Land, buildings and building improvements

 

99,553

 

96,504

 

Crushing, prestressing, and manufacturing plants

 

322,873

 

310,130

 

Contracting equipment, vehicles and other

 

298,256

 

281,543

 

Construction in progress

 

7,007

 

8,829

 

Property, plant and equipment

 

872,620

 

839,040

 

Less: Accumulated depreciation and depletion

 

(498,812

)

(467,466

)

Property, plant and equipment, net

 

$

373,808

 

$

371,574

 

 

Repairs and maintenance are charged to operations as incurred. Renewals or betterments, which materially add to the useful lives of property and equipment, are capitalized.

 

Depreciation expense was $12.5 million and $10.7 million for three months ended November 30, 2012 and 2011, respectively.  Depreciation expense was $35.4 million and $33.3 million for the nine months ended November 30, 2012 and 2011, respectively.  Included in the contracting equipment, vehicles and other asset category above are capital leases with a cost basis of $28.0 million and $25.8 million as of November 30, 2012 and February 29, 2012, respectively.

 

Goodwill and Other Intangible Assets

 

Goodwill

 

The Company tests goodwill for impairment on an annual basis or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  There were no changes to the carrying value of goodwill during the nine months ended November 30, 2012.  Management continues to monitor the impact of market and economic events to determine if it is more likely than not that the carrying value of these reporting units has been impaired.  The timing of a sustained recovery in the construction industry may have a significant effect on the fair value of our reporting units. A decrease in the estimated fair value of one or more of the Company’s reporting units as a result of changes in future earnings, interest rates, market trends and/or cash flows could result in the recognition of goodwill impairment.

 

In January 2013, we began the process of completing our annual goodwill impairment assessment.  During our initial review, we identified indications that there may be significant decreases in the fair values of our Traffic Safety Services and Equipment reporting unit with goodwill of $5.8 million and a reporting unit in our Construction Materials segment with goodwill of $68.4 million as of November 30, 2012.  As of the date of issuance of this Quarterly Report on Form 10-Q, we have not completed our annual impairment assessment and we currently do not expect an impairment charge.

 

Other Intangible Assets

 

The Company’s other intangible assets consist of the following:

 

8



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

(In thousands)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount
February 29,
2012

 

Current
Impairment

 

Current
Amortization

 

Net
Carrying
Amount
November 30,
2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

12,000

 

$

(2,400

)

$

9,600

 

$

 

$

(450

)

$

9,150

 

Technology

 

600

 

(160

)

440

 

 

(30

)

410

 

 

 

12,600

 

(2,560

)

10,040

 

 

(480

)

9,560

 

Nonamortizable intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

16,304

 

 

16,304

 

(300

)

 

16,004

 

Total other intangible assets

 

$

28,904

 

$

(2,560

)

$

26,344

 

$

(300

)

$

(480

)

$

25,564

 

 

Other intangible assets consist of technology, customer relationships and trademarks acquired in previous acquisitions. The technology is being amortized over a straight-line basis of 15 years. The customer relationships are being amortized on a straight-line basis over 20 years. The trademarks are considered to have indefinite-life and are not amortized, but tested for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company performs its annual impairment analysis of intangible assets as of fiscal year end. The Company uses a variety of methodologies in conducting the impairment assessment of its intangible assets, including, but not limited to, discounted cash flow models, which are based on the assumptions we believe hypothetical marketplace participants would use. For intangible assets, other than goodwill, if the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess.

 

We recorded a $1.1 million impairment of our Traffic Safety Services and Equipment reporting unit’s trademark in the fourth quarter of the fiscal year ended February 29, 2012 due to a decline in revenues and a $0.3 million impairment of our Traffic Safety Services and Equipment reporting unit’s trademark in the  quarter ended August 31, 2012 due to changes in underlying assumptions.  The remaining balance of our Traffic Safety Services and Equipment reporting unit’s trademark is $5.1 million as of November 30, 2012.  The timing of a sustained recovery in the construction industry, our ability to meet our expected operating results and changes in interest rates requires us to continuously evaluate the fair value of our trademarks.  A decrease in the estimated fair value of our trademarks could result in the recognition of additional impairments.

 

Amortization of intangible assets for each of the nine months ended November 30, 2012 and November 30, 2011 was $0.5 million.

 

Other Assets

 

The Company’s long term other assets consist of the following:

 

(In thousands)

 

November 30,
2012

 

February 29,
2012

 

 

 

 

 

 

 

Deferred financing fees (less current portion of $3,658 at November 2012 and $4,882 at February 2012)

 

$

15,438

 

$

10,409

 

Cash value of life insurance (net of loans of $0 at November 2012 and $3,000 at February 2012)

 

4,019

 

1,006

 

Capitalized software (net of accumulated amortization $974 at November 2012 and $160 at February 2012)

 

9,594

 

11,719

 

Deferred stripping costs

 

3,848

 

2,994

 

Other

 

2,870

 

3,232

 

Total other assets

 

$

35,769

 

$

29,360

 

 

As part of our debt refinancing transactions on March 15, 2012, we incurred and capitalized $15.0 million of deferred financing fees.  The Company recognized a loss on debt retirement of approximately $6.4 million related to the write-off of unamortized debt issuance costs.  The write-off of the debt issuance costs were recorded as a component of net interest expense.

 

During the second fiscal quarter ended August 31, 2012, the Company recorded a $1.3 million reduction to capitalized software related to our new ERP system.

 

9



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

Asset Retirement Obligations

 

The change in the asset retirement obligations for the nine months ended November 30, 2012 consists of the following:

 

(In thousands)

 

 

 

 

 

 

 

Balance at February 29, 2012

 

$

11,360

 

Accretion expense

 

482

 

Change in estimated obligations

 

6,420

 

Liabilities settled

 

(4,123

)

Balance at November 30, 2012

 

$

14,139

 

 

New Accounting Standards

 

Recently Issued Accounting Standards

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU requires companies to disclose both gross and net information about financial instruments that have been offset on the consolidated balance sheet. This ASU will be effective commencing with the three months ending May 31, 2013. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

 

In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU gives companies the option to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If it is determined that it is more likely than not the indefinite-lived intangible asset is impaired, a quantitative impairment test is required. However, if it is concluded otherwise, the quantitative test is not necessary. This ASU will be effective commencing with the three months ending May 31, 2013. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

 

Recently Adopted Accounting Standards

 

In May, 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”.  The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRSs”) and change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, it is not intended for the amendments to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. We adopted this standard on March 1, 2012, which did not have a material impact on the consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update also eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  We adopted this standard on March 1, 2012, which did not have a material impact on the consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08 “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment” which amends the goodwill impairment testing guidance in ASC 350-20, “Goodwill.” Under the amended standard, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step

 

10



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  We adopted this standard on March 1, 2012, which did not have a material impact on the consolidated financial statements.

 

2.              Risks and Uncertainties

 

Our business is heavily impacted by several factors which are outside the control of management, including the overall health of the economy, the level of commercial and residential construction, the level of federal, state and local publicly funded construction projects and seasonal variations generally attributable to weather conditions.  These factors impact the amount and timing of our revenues and our overall performance.

 

On March 15, 2012, the Company sold $265.0 million aggregate principal amount of its 13.0% senior secured notes due 2018 (the “Secured Notes”) at par and entered into a new $170.0 million asset-based secured revolving credit facility (the “ABL Facility”) with Manufacturers and Traders Trust Company (“M&T”).  The Company used the net proceeds of this issuance of Secured Notes and borrowings under the ABL Facility to repay and terminate all of its outstanding indebtedness under its second amended and restated credit agreement dated January 11, 2008 (the “Credit Agreement”) and certain other debt.  See further discussion of the ABL Facility in Note 4, “Long-Term Debt - Asset-Based Loan Facility”.

 

The Company was unable to timely file its Form 10-K, its first quarter Form 10-Q, its second quarter Form 10-Q and its third quarter Form 10-Q as a result of complications in the ERP implementation and the material weaknesses in the Company’s internal control over financial reporting previously reported in the Company’s filings with the SEC.  The ABL Facility required the Company’s audited financial statements to be issued by May 29, 2012 and the Company’s first quarter Form 10-Q to be issued by July 16, 2012, and the Company’s second quarter Form 10-Q to be issued by October 15, 2012.  The indenture for the Secured Notes and the indenture for the Company’s $250.0 million 11% senior notes due 2018 (the “Notes”) required financial statements to be issued within 15 days of these aforementioned dates.  As a result, the Company obtained an amendment of the ABL Facility on September 7, 2012 and extensions to file its Form 10-K and first and second quarter Form 10-Q on September 28, 2012, November 9, 2012 and December 7, 2012. The Company filed its Form 10-K on December 17, 2012 and its Form 10-Q for the first quarter on December 26, 2012.  Also, the first amendment to the ABL Facility required the Company to develop a Profit and Liquidity Enhancement Plan and a Reporting Enhancement Plan (together, the “Plans”) as defined in the amendment, by October 1, 2012 and October 15, 2012, respectively. The Company submitted the Plans to the bank in accordance with the first amendment. The first amendment also allows M&T, in the event they cannot syndicate the ABL Facility by December 15, 2012, to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, certain covenants and the interest and fees payable. M&T has not syndicated the ABL Facility. However, there have been no further modifications to the terms of the ABL Facility.

 

As part of the first amendment entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio.  If the calculation of the Fixed Charge Coverage Ratio was less than 1.0 to 1.0, the borrowing base would be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property, plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus, (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.

 

On September 5 and 6, 2012 the Company received notices of default from the trustee under the Secured Notes and the Notes (as defined in Note 4, “Long-Term Debt”), respectively. The notices of default were related to the Company’s inability to provide the trustee with copies of the Company’s Annual Report on Form 10-K for the year ended February 29, 2012 and Quarterly Report on Form10-Q for the period ended May 31, 2012 in a timely manner as required by the underlying indentures. In accordance with the terms and conditions of the underlying indentures, the Company had 120 days from the date of those notices to cure such default by complying with its reporting requirements and related filings.  The Company filed its Annual Report on Form 10-K for the year ended February 29, 2012 and its Quarterly Report on Form 10-Q for the period ended May 31, 2012 within the 120 day period and therefore has cured such defaults under the indentures.

 

11



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

On January 14, 2013, the Company received a notice of default from the trustee under the indentures for the Secured Notes and Notes due to the Company’s  inability to provide its Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 in compliance with the indentures.  We filed our Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 within the 120 day period and therefore cured such default under the indentures.

 

On February 14, 2013, the Company received an additional extension of time to issue its Quarterly Report on Form 10-Q for the third quarter of fiscal 2013 to April 1, 2013.  There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes and Secured Notes.

 

This Quarterly Report on Form 10-Q for the third fiscal quarter ended November 30, 2012 was due on January 14, 2013. We have not received a notice of default from the trustee under the indentures for the Notes or Secured Notes.

 

3.              Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

November 30,

 

February 29,

 

(In thousands)

 

2012

 

2012

 

 

 

 

 

 

 

Payroll and vacation

 

$

7,851

 

$

8,496

 

Contract expenses

 

796

 

518

 

Withholding taxes

 

1,786

 

2,862

 

Interest

 

9,384

 

14,055

 

Insurance

 

17,398

 

18,353

 

Deferred acquisition liability

 

3,000

 

3,610

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

2,137

 

255

 

Other

 

1,487

 

3,482

 

Total accrued liabilities

 

$

43,839

 

$

51,631

 

 

4.              Long-Term Debt

 

 

 

November 30,

 

February 29,

 

(In thousands)

 

2012

 

2012

 

 

 

 

 

 

 

Land, equipment and other obligations

 

$

23,374

 

$

23,016

 

First lien term loan A & B

 

 

145,383

 

First lien revolving credit facility

 

 

100,113

 

ABL Facility

 

35,673

 

 

Notes due 2018

 

250,000

 

250,000

 

Secured notes due 2018

 

276,925

 

 

Obligations under capital leases

 

8,833

 

10,501

 

Total debt

 

594,805

 

529,013

 

Less: Current portion

 

(16,219

)

(7,538

)

Total long-term debt

 

$

578,586

 

$

521,475

 

 

Refinancing

 

On March 15, 2012, the Company completed the sale of $265.0 million of its 13.0% Secured Notes due 2018 at par.  In connection with the sale of the Secured Notes, the Company also entered into the ABL Facility.  The Company utilized the proceeds from the sale of the Secured Notes and borrowings under the ABL Facility to repay all amounts outstanding under, and terminate, the Credit Agreement and certain other debt.  See Note 2, “Risks and Uncertainties” and Note 10, “Subsequent Events” for additional discussion of the Secured Notes, the ABL Facility and details on ABL Facility amendments received and notice of default received from the trustee.  The Company classified the components of the debt refinanced on March 15, 2012 as long-term in the condensed consolidated balance sheet as of February 29, 2012.

 

12



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

Land, equipment and other obligations

 

The Company has various notes, mortgages and other financing arrangements resulting from the purchase of principally land and equipment.  All loans provide for at least annual payments, which include interest ranging up to 10.0% per annum.  Principally all loans are secured by the land and equipment acquired.

 

Obligations include three revenue bonds to different industrial development authorities with counties in Pennsylvania with a total amount outstanding of $5.8 million as of November 30, 2012 and four revenue bonds with a total amount outstanding of $10.6 million as of February 29, 2012. The effective interest rate on the industrial development bonds ranged from 0.30% to 0.41% for the three months ended November 30, 2012 and 0.28% to 0.46% for the year ended February 29, 2012.  The Company prepaid $3.8 million of industrial development bonds during the first quarter of fiscal year 2012 with the proceeds from an unsecured borrowing which was subsequently refinanced on March 15, 2012.

 

Obligations include the cash overdrafts liability of $5.5 million; as disclosed in Note 1, “Nature of Operations and Summary of Significant Accounting Policies - Cash and Cash Equivalents and Restricted Cash”; which is included within the current portion of long-term debt as of November 30, 2012.

 

First lien term loan A & B

 

The Company repaid all borrowings under the first lien term loan A & B and terminated the associated Credit Agreement on March 15, 2012.

 

First lien revolving credit facility

 

The Company repaid all borrowings under the first lien revolving credit facility and terminated the associated Credit Agreement on March 15, 2012.

 

Asset-Based Loan Facility

 

Original Terms

 

On March 15, 2012, the Company entered into a credit agreement for the ABL Facility (the “ABL Facility Agreement”) with M&T, as the issuing bank, a lender, the swing lender, the agent and the arranger. The ABL Facility provides for maximum borrowings on a revolving basis of up to $170.0 million from time to time for general corporate purposes, including working capital.  The ABL Facility includes a $15.0 million letter of credit sub-facility and a $20.0 million swing line sub-facility for short-term borrowings. The ABL Facility will mature on March 15, 2017.  At November 30, 2012, the Company classified borrowings under the ABL Facility as long-term due to its ability to maintain such borrowings on a long term basis.  As of November 30, 2012, the weighted average interest rate on the ABL facility was 4.0% and the borrowing base was $130.6 million.

 

Borrowings under the ABL Facility (except swing line loans) bear interest at a rate per annum equal to, at the Company’s option, either (a) a base rate or (b) a LIBOR rate, in each case plus an applicable margin.  Swing line loans bear interest at the base rate plus the applicable margin. Pricing on the ABL Facility is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. LIBOR margins for the ABL Facility range from 2.50% to 3.50% and base rate margins range from 0.50% to 1.50%.  The ABL Facility also contains a commitment fee that is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. The commitment fee ranges from 0.25% to 0.63%.  From the commencement of the ABL Facility Agreement until September 7, 2012 (date of amendment, discussed below), the LIBOR margin was 2.75%, the base rate margin was 0.75% and the commitment fee was 0.50%.

 

Borrowings under the ABL Facility are guaranteed by all of the Company’s subsidiaries that guarantee the Secured Notes and the Notes and are secured, subject to certain permitted liens, by first-priority liens on the ABL Priority Collateral and by second-priority liens on the collateral securing the Secured Notes on a first-priority basis, except for certain real property.

 

Covenants

 

The ABL Facility provides that if excess availability is less than the greater of (i) $25.0 million or (ii) 15% of the lesser of the commitments and the borrowing base, the Company must comply with a minimum fixed charge coverage ratio test of at least

 

13



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

1.0 to 1.0 for the immediately preceding four fiscal quarters or twelve consecutive months, as applicable. In addition, the ABL Facility includes affirmative and negative covenants that, subject to significant exceptions, limit the ability of the Company and the Guarantors to undertake certain actions, including, among other things, limitations on (i) the incurrence of indebtedness and liens, (ii) asset sales, (iii) dividends and other payments with respect to capital stock, (iv) acquisitions, investments and loans, (v) affiliate transactions, (vi) altering the business, (vii) issuances of equity that have mandatory redemption or put rights prior to the maturity of the ABL Facility and (viii) providing negative pledges to third parties.  As of November 30, 2012 the Company was in compliance with these affirmative and negative covenants.

 

Amendment of ABL Facility

 

The ABL Facility contained a covenant that required the Company to deliver its fiscal year 2012 annual financial statements to the lender by May 29, 2012.  On September 7, 2012, the Company entered into the first amendment to the ABL Facility, and subsequent letters on September 28, 2012, November 9, 2012, December 7, 2012 and February 14, 2013 to change the required delivery date of the audited February 29, 2012 financial statements and the required delivery date of its first and second quarter results and financial statements to December 15, 2012, January 1, 2013, and February 28, 2013, respectively.

 

Availability under the ABL Facility is restricted to a borrowing base formula. As part of the first amendment entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio.  If the calculation of the Fixed Charge Coverage Ratio was less than 1.0 to 1.0, the borrowing base would be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.

 

The first amendment also allows M&T, in the event M&T is unable to reduce its final participation in the ABL Facility to no more than $75.0 million during the primary syndication of the ABL Facility by December 15, 2012, to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, and certain covenants and the interest and fees payable.  M&T has not syndicated the ABL Facility. However, there have been no further modifications of the terms of the ABL Facility.

 

On February 14, 2013, the Company received an additional extension of time to issue this Quarterly Report on Form 10-Q for the third quarter of fiscal 2013 to April 1, 2013.  There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes and Secured Notes.

 

Notes due 2018

 

In August 2010, the Company sold $250.0 million aggregate principal amount of Notes at par value.  Interest on the Notes is payable semi-annually in cash in arrears on March 1 and September 1 of each year.  The proceeds from the issuance of the Notes were used to pay down debt.

 

Secured Notes due 2018

 

Interest on the Secured Notes is initially payable at 13.0% per annum, semi-annually in arrears on March 15 and September 15.  The Company will make each interest payment to the holders of record of the Secured Notes as of the immediately preceding March 1 and September 1. The Company used the proceeds from this offering to repay certain existing indebtedness and to pay related fees and expenses.  The Secured Notes will mature on March 15, 2018.

 

With respect to any interest payment date on or prior to March 15, 2017, the Company may, at its option, elect (an ‘‘Interest Form Election’’) to pay interest on the Secured Notes (i) entirely in cash (‘‘Cash Interest’’) or (ii) subject to any Interest Rate Increase (as defined below), initially at the rate of 4% per annum in cash (‘‘Cash Interest Portion’’) and 9% per annum by increasing the outstanding principal amount of the Secured Notes or by issuing additional paid in kind notes under the indenture on the same terms as the Secured Notes (‘‘PIK Interest Portion’’ or “PIK Interest”); provided that in the absence of an Interest Form Election, interest on the Secured Notes will be payable as PIK Interest.  At November 30, 2012, PIK interest was $17.1

 

14



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

million ($11.9 million was recorded as an increase to the Secured Notes and $5.2 million was recorded as a long-term obligation in Other liabilities).

 

With respect to any interest payment payable after March 15, 2017, interest will be payable solely in cash. In addition, at the beginning of and with respect to each 12-month period that begins on March 15, 2013, March 15, 2014 and March 15, 2015, the interest rate on the Secured Notes as of such date shall permanently increase by an additional 1.0% per annum (an ‘‘Interest Rate Increase’’) unless the Company delivers a written notice to the Trustee of the Company’s election for such 12-month period to either (x) alter the manner of interest payment on the Secured Notes going forward by increasing the Cash Interest Portion and decreasing the PIK Interest Portion in each case in effect with respect to the immediately preceding interest period for which any PIK Interest was paid prior to each such election by, in each case, 1.0% per annum or (y) pay interest on the Secured Notes for such 12-month period entirely in cash (a ‘‘12-Month Cash Election’’). In the event of a 12-Month Cash Election for any 12-month period prior to March 15, 2017, the interest rate on the Secured Notes applicable for such 12-month period shall be 1.0% less than the total interest rate applicable to the Secured Notes in effect with respect to the immediately preceding interest period for which any PIK Interest was paid. Any Interest Rate Increase shall be affected by increasing the PIK Interest Portion in effect with respect to the immediately preceding interest period for which any PIK Interest was paid prior to each such Interest Rate Increase. If the Company makes a 12-Month Cash Election for and in respect of the 12-month period beginning on March 15, 2016, the same interest rate will apply for and in respect of the 12-month period beginning on March 15, 2017.  The additional 1.0% per annum Interest Rate Increase will only apply to the three consecutive annual periods beginning March 15, 2013.

 

At any time prior to March 15, 2015, the Company may redeem at its option up to 35% of the Secured Notes with the net cash proceeds from certain public equity offerings at a redemption price equal to 113.0% of the principal amount outstanding, plus accrued and unpaid interest. The Company may also redeem some or all of the Secured Notes at any time prior to March 15, 2015 at a redemption price equal to 100.0% of the principal amount of the outstanding Secured Notes, plus accrued and unpaid interest, plus a ‘‘make-whole’’ premium. On and after March 15, 2015, the Secured Notes will be redeemable, in whole or in part, at the redemption prices specified as follows:

 

Year

 

Percentage

 

 

 

 

 

2015

 

106.50

%

2016

 

103.25

%

2017

 

100.00

%

 

In addition, the Company may be required to make an offer to purchase the Secured Notes upon the sale of certain assets or upon a change of control. The Company will be required to redeem certain portions of the Secured Notes for tax purposes at the end of the first accrual period ending after the fifth anniversary of the Secured Notes issuance and each accrual period thereafter.

 

The Secured Notes are guaranteed on a joint and several basis by the Company’s existing and future domestic subsidiaries (the “Guarantors” as described in Note 9, “Condensed Issuer, Guarantor and Non Guarantor Financial Information”) that currently guarantee the Company’s Notes and the ABL Facility. The Secured Notes and related guarantees are senior secured obligations of the Company and the Guarantors that rank equally in right of payment with all existing and future senior debt of the Company and the Guarantors, including the Notes and ABL Facility, and senior to all existing and future subordinated debt of the Company and Guarantors.  The Secured Notes and related guarantees are secured, subject to certain permitted liens and except for certain excluded assets, by first-priority liens on substantially all of the Company’s and Guarantors’ personal property and certain owned and leased real property and second-priority liens on certain real property and substantially all of the Company’s and Guarantors’ accounts receivable, inventory and deposit accounts and related assets and proceeds of the foregoing that secure the ABL Facility on a first-priority basis (the “ABL Priority Collateral”).

 

The indenture for the Secured Notes contains restrictive covenants that limit the Company’s ability and the ability of its subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with affiliates.

 

15



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

In accordance with the indenture for the Secured Notes, the Company was required to file a registration statement with the Securities and Exchange Commission and consummate a registered offer to exchange the Secured Notes for new Secured Notes having terms substantially identical in all material respects to the Secured Notes by March 11, 2013.  We have not filed the registration statement or completed the exchange offer.  Due to the failure to consummate the exchange offer within the required time period, the interest rate on the Secured Notes will increase by 0.25% per annum for the first 90-day period following the default and by an additional 0.25% per annum with respect to each subsequent 90-day period, up to a maximum additional rate of 1.0% per annum until such exchange offer is completed or the Secured Notes are redeemed.

 

Obligations under capital leases

 

The Company has various arrangements for the lease of machinery and equipment which qualify as capital leases. These arrangements typically provide for monthly payments, some of which include residual value guarantees if the Company were to terminate the arrangement during certain specified periods of time for each underlying asset under lease.

 

5.              Income Taxes

 

The Company’s tax provision and the corresponding effective tax rate are based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. For interim financial reporting the Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly tax provision in accordance with the anticipated annual rate. As the year progresses, the Company refines the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to the Company’s expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining the Company’s effective interim tax rate and in evaluating its tax positions.

 

The Company’s effective income tax rate was 43.8% and 48.3% for the three months ended November 30, 2012 and 2011, respectively.  The Company’s effective tax rate was 41.0% and 45.5% for the nine months ended November 30, 2012 and 2011, respectively.  The principal factor affecting the comparability of the effective income tax rate for the respective periods is a result of increased projected pre-tax book loss of the Company for the year ended February 28, 2013, when compared to projected pre-tax book loss of the Company for the year ended February 29, 2012. When pre-tax book income is projected for the year, favorable permanent items can decrease the Company’s effective tax rate well below the statutory rate of 35%.  In the case where a pre-tax book loss is projected for the year, favorable permanent differences will increase this loss for tax purposes, and subsequently increase the effective tax rate projected for the year.  The substantial increase in the estimated full year pre-tax book loss when compared to the prior period was the primary driver of the decrease in tax expense.  The significant pre-tax loss reduces the impact of permanent adjustments which did not materially change period over period.  The state tax impact on the effective tax rate was minimal because of anticipated valuation allowance needs for deferred tax assets relating to state losses originating in the current period.  Our income tax benefits for the three and nine months ended November 30, 2012 are based on an estimated annual effective income tax rate of 36.7%.  Included in the income tax benefits for these periods is a discrete out-of-period tax benefit of $1.2 million due to differences in our state apportionment calculation when we finalized our tax returns for the year ended February 29, 2012 in November 2012.  This out-of-period adjustment is not material to the prior or current condensed consolidated financial statements.

 

The cash taxes paid were not material for the three and nine months ended November 30, 2012 and November 30, 2011, respectively, primarily as a result of the net operating losses.

 

6.              Retirement and Benefit Programs

 

Substantially all employees are covered by a defined contribution plan, a defined benefit plan, a collectively bargained multiemployer plan, or a noncontributory profit sharing plan.  The expense associated with these programs, excluding defined benefit plans, was $2.3 million for the three months ended November 30, 2012 and 2011, and $6.2 million for the nine months ended November 30, 2012 and 2011.

 

The Company has two defined benefit pension plans covering certain union employees covered by labor union contracts. The benefits are based on years of service. Actuarial gains and losses are generally amortized over the average remaining service life of the Company’s active employees.  Net periodic pension expense recognized for the three and nine months ended November 30, 2012 and 2011, was as follows:

 

16



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

 

 

Three Months
 Ended November 30,

 

Nine Months 
Ended November 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Components of net periodic benefit cost

 

 

 

 

 

 

 

 

 

Service cost

 

$

68

 

$

53

 

$

203

 

$

162

 

Interest cost

 

99

 

109

 

297

 

329

 

Expected return on plan assets

 

(146

)

(153

)

(439

)

(463

)

Amortization of prior service cost

 

15

 

15

 

45

 

46

 

Recognized net actuarial loss

 

62

 

29

 

186

 

87

 

Total pension expense

 

$

98

 

$

53

 

$

292

 

$

161

 

 

The Company made contributions to the defined benefit pension plans of $0.2 million during the nine months ended November 30, 2012 and expects to make additional contributions of $0.1 million in the remainder of fiscal year 2013.

 

7.              Commitments and Contingencies

 

In the normal course of business, the Company has commitments, lawsuits, claims and contingent liabilities. The ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, statement of comprehensive income (loss) or liquidity.

 

The Company maintains a captive insurance company, Rock Solid Insurance Company (“Rock Solid”), for workers’ compensation (non-Pennsylvania employees), general liability, auto, health, and property coverage. On April 8, 2011, Rock Solid entered into a Collateral Trust Agreement with an insurer to eliminate a letter of credit that was required to maintain coverage of the deductible portion of its liability coverage.  The total amount of collateral provided in the arrangement was $8.8 million and is recorded as part of restricted cash as of November 30, 2012 and February 29, 2012 in our condensed consolidated balance sheets.   Reserves for retained losses within this captive, which are recorded in accrued liabilities in our condensed consolidated balance sheets, were approximately $8.5 million and $9.7 million as of November 30, 2012 and February 29, 2012, respectively.  Exposures for periods prior to the inception of the captive are covered by pre-existing insurance policies.  Other accrued amounts included as insurance, which mostly relates to worker’s compensation, included in Note 3, “Accrued Liabilities” totaled $8.7 million as of November 30, 2012 and February 29, 2012.

 

8.              Segment Reporting

 

The Company reports information about its operating segments using the “management approach,” which is based on the way management organizes and reports the segments within the organization for making operating decisions and assessing performance to the chief operating decision maker. The Company’s three reportable segments are: (i) construction materials; (ii) heavy/highway construction; and (iii) traffic safety services and equipment.  Almost all activity of the Company is domestic.  Segment information includes both intersegment and certain intrasegment activities.

 

The Company reviews earnings of the segments principally at the operating profit level and accounts for intersegment and certain intrasegment sales at prices that range from negotiated rates to those that approximate fair market value. Segment operating profit consists of revenue less operating costs and expenses. Corporate and unallocated costs include those administrative and financial costs which are not allocated to segment operations and are excluded from segment operating profit.  These costs include corporate administrative functions, unallocated corporate functions and divisional administrative functions.

 

The Company’s segment revenue presentation for the three and nine months ended November 30, 2011 has been revised to conform to the current presentation. The revisions resulted in decreases to heavy/highway construction revenue and eliminations of $11.3 million and $23.0 million for the three and nine months ended November 30, 2011, respectively.  These revisions were made to align with the current management approach related to this segment.

 

The following is a summary of certain financial data for the Company’s operating segments:

 

17



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

 

 

Three Months Ended
November 30,

 

Nine Months Ended
November 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Revenue

 

 

 

 

 

 

 

 

 

Construction materials

 

$

141,831

 

$

161,788

 

$

458,257

 

$

469,826

 

Heavy/highway construction

 

71,969

 

86,402

 

234,915

 

251,832

 

Traffic safety services and equipment

 

21,104

 

21,155

 

69,219

 

69,015

 

Other revenues

 

6,735

 

4,674

 

13,885

 

13,584

 

Segment totals

 

241,639

 

274,019

 

776,276

 

804,257

 

Eliminations

 

(51,403

)

(60,132

)

(167,517

)

(176,887

)

Total revenue

 

$

190,236

 

$

213,887

 

$

608,759

 

$

627,370

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

 

 

 

 

Construction materials

 

$

11,621

 

$

22,340

 

$

47,710

 

$

60,439

 

Heavy/highway construction

 

(3,632

)

4,634

 

(1,693

)

5,363

 

Traffic safety services and equipment

 

875

 

1,366

 

(400

)

4,544

 

Corporate and unallocated

 

(6,887

)

(6,021

)

(18,576

)

(11,830

)

Total operating income

 

$

1,977

 

$

22,319

 

$

27,041

 

$

58,516

 

 

 

 

Three Months Ended
November 30,

 

Nine Months Ended
November 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Product and services revenue

 

 

 

 

 

 

 

 

 

Construction materials

 

 

 

 

 

 

 

 

 

Aggregates

 

$

50,864

 

$

58,677

 

$

163,785

 

$

170,341

 

Hot mix asphalt

 

57,636

 

67,417

 

193,526

 

197,795

 

Ready mixed concrete

 

18,901

 

18,921

 

54,785

 

52,627

 

Precast/prestressed structural concrete

 

6,698

 

8,602

 

21,318

 

22,695

 

Masonry products

 

4,056

 

4,312

 

12,684

 

13,901

 

Construction supply centers

 

3,676

 

3,859

 

12,159

 

12,467

 

Heavy/highway construction

 

71,969

 

86,402

 

234,915

 

251,832

 

Traffic safety services and equipment

 

21,104

 

21,155

 

69,219

 

69,015

 

Other revenues

 

6,735

 

4,674

 

13,885

 

13,584

 

Eliminations

 

(51,403

)

(60,132

)

(167,517

)

(176,887

)

Total revenue

 

$

190,236

 

$

213,887

 

$

608,759

 

$

627,370

 

 

 

 

 

 

 

 

 

 

 

Product and services operating income (loss)

 

 

 

 

 

 

 

 

 

Construction materials

 

 

 

 

 

 

 

 

 

Aggregates

 

$

5,533

 

$

13,174

 

$

22,541

 

$

35,549

 

Hot mix asphalt

 

5,440

 

7,221

 

21,938

 

20,394

 

Ready mixed concrete

 

864

 

1,509

 

3,622

 

4,012

 

Precast/prestressed structural concrete

 

(445

)

(11

)

(939

)

(461

)

Masonry products

 

(129

)

212

 

(592

)

27

 

Construction supply centers

 

358

 

235

 

1,140

 

918

 

Heavy/highway construction

 

(3,632

)

4,634

 

(1,693

)

5,363

 

Traffic safety services and equipment

 

875

 

1,366

 

(400

)

4,544

 

Corporate and unallocated

 

(6,887

)

(6,021

)

(18,576

)

(11,830

)

Total operating income

 

$

1,977

 

$

22,319

 

$

27,041

 

$

58,516

 

 

18



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 30,

 

November 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Depreciation, depletion and amortization

 

 

 

 

 

 

 

 

 

Construction materials

 

$

5,831

 

$

5,902

 

$

21,132

 

$

21,916

 

Heavy/highway construction

 

4,037

 

3,853

 

8,854

 

7,234

 

Traffic safety services and equipment

 

2,128

 

1,907

 

5,542

 

5,377

 

Corporate and unallocated

 

1,385

 

494

 

2,976

 

1,262

 

Total depreciation, depletion and amortization

 

$

13,381

 

$

12,156

 

$

38,504

 

$

35,789

 

 

9.              Condensed Issuer, Guarantor and Non Guarantor Financial Information

 

The Company’s Secured Notes and Notes are guaranteed by certain subsidiaries.  Except for Rock Solid, NESL, II LLC, and Kettle Creek Partners GP, LLC, all existing consolidated subsidiaries of the Company are 100% owned and provide a joint and several, full and unconditional guarantee of the securities. These entities include Gateway Trade Center Inc., EII Transport Inc., Protections Services Inc., Work Area Protection Corp., SCI Products Inc., ASTI Transportation Systems, Inc., and Precision Solar Controls Inc. (“Guarantor Subsidiaries”).  There are no significant restrictions on the parent Company’s ability to obtain funds from any of the Guarantor Subsidiaries in the form of a dividend or loan.  Additionally, there are no significant restrictions on a Guarantor Subsidiary’s ability to obtain funds from the parent Company or its direct or indirect subsidiaries. Certain other wholly owned subsidiaries and consolidated partially owned partnerships do not guarantee the Secured Notes or the Notes.  These entities include Rock Solid, South Woodbury, L.P., NESL, II LLC, Kettle Creek Partners L.P., and Kettle Creek Partners GP, LLC (“Non Guarantors”).

 

The following condensed consolidating balance sheets, statements of comprehensive income (loss) and statements of cash flows are provided for the Company, all Guarantor Subsidiaries and Non Guarantors. The information has been presented as if the parent Company accounted for its ownership of the Guarantor Subsidiaries and Non Guarantors using the equity method of accounting.

 

The Company revised its condensed consolidating statements of comprehensive income for the three and nine months ended November 30, 2011, to correct certain errors in noncontrolling interest and certain other eliminating adjustments.  The revisions were made to accurately present parent company and eliminating activity in the appropriate columns of the consolidating schedules. For the three and nine months ended November 30, 2011, the revisions resulted in an increase of $0.1 million and a decrease of $0.5 million, respectively, to “Income before income taxes” in the Eliminations columns and an offsetting amounts in the New Enterprise Stone & Lime Co., Inc. columns.  In addition, a decrease of $0.1 million and an increase of $0.5 million for the three and nine months ended November 30, 2011, respectively, were made to “Less: comprehensive income attributable to noncontrolling interest” in the Eliminations columns with offsetting amounts in the Non Guarantors columns.

 

19



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

Condensed Consolidating Balance Sheet at November 30, 2012

(In thousands)

 

 

 

New Enterprise
Stone & Lime
Co., Inc.

 

Guarantor
Subsidiaries

 

Non
Guarantors

 

Eliminations

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25

 

$

20

 

$

8,436

 

$

 

$

8,481

 

Restricted cash

 

1,507

 

106

 

8,843

 

 

10,456

 

Accounts receivable

 

93,254

 

17,011

 

14

 

 

110,279

 

Inventories

 

113,758

 

16,132

 

 

 

129,890

 

Net investment in lease

 

 

 

634

 

(634

)

 

Deferred income taxes

 

14,353

 

1,040

 

 

 

15,393

 

Other current assets

 

7,593

 

1,445

 

25

 

 

9,063

 

Total current assets

 

230,490

 

35,754

 

17,952

 

(634

)

283,562

 

Property, plant and equipment, net

 

351,220

 

22,588

 

7,741

 

(7,741

)

373,808

 

Goodwill

 

85,002

 

5,845

 

 

 

90,847

 

Other intangible assets

 

10,797

 

14,767

 

 

 

25,564

 

Investment in subsidiaries

 

86,276

 

 

 

(86,276

)

 

Intercompany receivables

 

279

 

17,176

 

 

(17,455

)

 

Other assets

 

34,549

 

1,220

 

 

 

35,769

 

Total assets

 

$

798,613

 

$

97,350

 

$

25,693

 

$

(112,106

)

$

809,550

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

16,052

 

$

 

$

801

 

$

(634

)

$

16,219

 

Accounts payable - trade

 

24,673

 

2,221

 

158

 

 

27,052

 

Accrued liabilities

 

30,692

 

4,228

 

8,919

 

 

43,839

 

Total current liabilities

 

71,417

 

6,449

 

9,878

 

(634

)

87,110

 

Intercompany payables

 

17,176

 

 

279

 

(17,455

)

 

Long-term debt, less current maturities

 

571,592

 

 

6,994

 

 

578,586

 

Obligations under capital leases, less current installments

 

7,741

 

 

 

(7,741

)

 

Deferred income taxes

 

72,599

 

10,631

 

 

 

83,230

 

Other liabilities

 

29,119

 

1,024

 

 

 

30,143

 

Total liabilities

 

769,644

 

18,104

 

17,151

 

(25,830

)

779,069

 

Equity

 

 

 

 

 

 

 

 

 

 

 

New Enterprise Stone & Lime Co., Inc. equity

 

28,969

 

79,246

 

7,030

 

(86,276

)

28,969

 

Noncontrolling interest

 

 

 

1,512

 

 

1,512

 

Total equity

 

28,969

 

79,246

 

8,542

 

(86,276

)

30,481

 

Total liabilities and equity

 

$

798,613

 

$

97,350

 

$

25,693

 

$

(112,106

)

$

809,550

 

 

20



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

Condensed Consolidating Balance Sheet at February 29, 2012

(In thousands)

 

 

 

New Enterprise
Stone & Lime
Co., Inc.

 

Guarantor
Subsidiaries

 

Non
Guarantors

 

Eliminations

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,106

 

$

476

 

$

7,450

 

$

 

$

15,032

 

Restricted cash

 

1,379

 

102

 

8,841

 

 

10,322

 

Accounts receivable

 

61,891

 

14,933

 

17

 

 

76,841

 

Inventories

 

114,888

 

17,307

 

 

 

132,195

 

Net investment in lease

 

 

 

610

 

(610

)

 

Deferred income taxes

 

14,912

 

1,107

 

 

 

16,019

 

Other current assets

 

7,434

 

326

 

28

 

 

7,788

 

Total current assets

 

207,610

 

34,251

 

16,946

 

(610

)

258,197

 

Property, plant and equipment, net

 

345,461

 

25,947

 

7,451

 

(7,285

)

371,574

 

Goodwill

 

85,002

 

5,845

 

 

 

90,847

 

Other intangible assets

 

10,904

 

15,440

 

 

 

26,344

 

Investment in subsidiaries

 

82,166

 

 

 

(82,166

)

 

Intercompany receivables

 

280

 

16,310

 

 

(16,590

)

 

Other assets

 

29,360

 

 

 

 

29,360

 

Total assets

 

$

760,783

 

$

97,793

 

$

24,397

 

$

(106,651

)

$

776,322

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

7,671

 

$

 

$

477

 

$

(610

)

$

7,538

 

Accounts payable - trade

 

24,239

 

3,166

 

153

 

 

27,558

 

Accrued liabilities

 

38,594

 

3,309

 

9,728

 

 

51,631

 

Total current liabilities

 

70,504

 

6,475

 

10,358

 

(610

)

86,727

 

Intercompany payables

 

16,310

 

 

280

 

(16,590

)

 

Long-term debt, less current maturities

 

514,191

 

 

7,284

 

 

521,475

 

Obligations under capital leases, less current installments

 

7,285

 

 

 

(7,285

)

 

Deferred income taxes

 

82,772

 

13,902

 

 

 

96,674

 

Other liabilities

 

21,445

 

133

 

 

 

21,578

 

Total liabilities

 

712,507

 

20,510

 

17,922

 

(24,485

)

726,454

 

Equity

 

 

 

 

 

 

 

 

 

 

 

New Enterprise Stone & Lime Co., Inc. equity

 

48,276

 

77,283

 

4,883

 

(82,166

)

48,276

 

Noncontrolling interest

 

 

 

1,592

 

 

1,592

 

Total equity

 

48,276

 

77,283

 

6,475

 

(82,166

)

49,868

 

Total liabilities and equity

 

$

760,783

 

$

97,793

 

$

24,397

 

$

(106,651

)

$

776,322

 

 

21



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ending November 30, 2012

(In thousands)

 

 

 

New Enterprise
Stone & Lime
Co., Inc.

 

Guarantor
Subsidiaries

 

Non
Guarantors

 

Eliminations

 

Total

 

Revenue

 

$

168,021

 

$

22,644

 

$

1,974

 

$

(2,403

)

$

190,236

 

Cost of revenue (exclusive of items shown separately below)

 

136,264

 

18,091

 

807

 

(2,403

)

152,759

 

Depreciation, depletion and amortization

 

10,454

 

2,927

 

 

 

13,381

 

Pension and profit sharing

 

2,297

 

87

 

 

 

2,384

 

Selling, administrative, and general expenses

 

17,189

 

2,429

 

95

 

 

19,713

 

Loss on sales of property and equipment

 

15

 

7

 

 

 

22

 

Operating income (loss)

 

1,802

 

(897

)

1,072

 

 

1,977

 

Interest expense, net

 

(17,597

)

(69

)

(68

)

 

(17,734

)

(Loss) income before income taxes

 

(15,795

)

(966

)

1,004

 

 

(15,757

)

Income tax benefit

 

(5,551

)

(1,358

)

 

 

(6,909

)

Equity in earnings of subsidiaries

 

1,031

 

 

 

(1,031

)

 

Net (loss) income

 

(9,213

)

392

 

1,004

 

(1,031

)

(8,848

)

Unrealized actuarial gains and amortization of prior service costs, net of income tax

 

46

 

 

 

 

46

 

Comprehensive (loss) income

 

(9,167

)

392

 

1,004

 

(1,031

)

(8,802

)

Less: comprehensive income attributable to noncontrolling interest

 

 

 

(365

)

 

(365

)

Comprehensive (loss) income attributable to New Enterprise Stone & Lime Co., Inc.

 

$

(9,167

)

$

392

 

$

639

 

$

(1,031

)

$

(9,167

)

 

Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ending November 30, 2011

(In thousands)

 

 

 

New Enterprise
Stone & Lime
Co., Inc.

 

Guarantor
Subsidiaries

 

Non
Guarantors

 

Eliminations

 

Total

 

Revenue

 

$

198,870

 

$

21,344

 

$

1,028

 

$

(7,355

)

$

213,887

 

Cost of revenue (exclusive of items shown separately below)

 

152,833

 

15,597

 

448

 

(7,355

)

161,523

 

Depreciation, depletion and amortization

 

10,282

 

1,874

 

 

 

12,156

 

Pension and profit sharing

 

2,338

 

47

 

 

 

2,385

 

Selling, administrative, and general expenses

 

12,874

 

2,289

 

68

 

 

15,231

 

Loss on sales of property and equipment

 

273

 

 

 

 

273

 

Operating income

 

20,270

 

1,537

 

512

 

 

22,319

 

Interest expense, net

 

(11,135

)

(45

)

(157

)

 

(11,337

)

Income before income taxes

 

9,135

 

1,492

 

355

 

 

10,982

 

Income tax expense (benefit)

 

5,421

 

(119

)

 

 

5,302

 

Equity in earnings of subsidiaries

 

2,047

 

 

 

(2,047

)

 

Net income

 

5,761

 

1,611

 

355

 

(2,047

)

5,680

 

Unrealized actuarial gains and amortization of prior service costs, net of income tax

 

17

 

 

 

 

17

 

Comprehensive income

 

5,778

 

1,611

 

355

 

(2,047

)

5,697

 

Less: comprehensive loss attributable to noncontrolling interest

 

 

 

81

 

 

81

 

Comprehensive income attributable to New Enterprise Stone & Lime Co., Inc.

 

$

5,778

 

$

1,611

 

$

436

 

$

(2,047

)

$

5,778

 

 

22



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

Condensed Consolidating Statement of Comprehensive Income (Loss) for the nine months ending November 30, 2012

(In thousands)

 

 

 

New Enterprise
Stone & Lime
Co., Inc.

 

Guarantor
Subsidiaries

 

Non
Guarantors

 

Eliminations

 

Total

 

Revenue

 

$

540,013

 

$

71,343

 

$

5,927

 

$

(8,524

)

$

608,759

 

Cost of revenue (exclusive of items shown separately below)

 

429,734

 

57,358

 

2,135

 

(8,524

)

480,703

 

Depreciation, depletion and amortization

 

31,875

 

6,629

 

 

 

38,504

 

Intangible asset impairment

 

 

300

 

 

 

300

 

Pension and profit sharing

 

6,213

 

271

 

 

 

6,484

 

Selling, administrative, and general expenses

 

48,107

 

7,328

 

298

 

 

55,733

 

(Gain) loss on sales of property and equipment

 

(107

)

101

 

 

 

(6

)

Operating income (loss)

 

24,191

 

(644

)

3,494

 

 

27,041

 

Interest expense, net

 

(57,751

)

(212

)

(343

)

 

(58,306

)

(Loss) income before income taxes

 

(33,560

)

(856

)

3,151

 

 

(31,265

)

Income tax benefit

 

(10,006

)

(2,819

)

 

 

(12,825

)

Equity in earnings of subsidiaries

 

4,110

 

 

 

(4,110

)

 

Net (loss) income

 

(19,444

)

1,963

 

3,151

 

(4,110

)

(18,440

)

Unrealized actuarial gains and amortization of prior service costs, net of income tax

 

137

 

 

 

 

137

 

Comprehensive (loss) income

 

(19,307

)

1,963

 

3,151

 

(4,110

)

(18,303

)

Less: comprehensive income attributable to noncontrolling interest

 

 

 

(1,004

)

 

(1,004

)

Comprehensive (loss) income attributable to New Enterprise Stone & Lime Co., Inc.

 

$

(19,307

)

$

1,963

 

$

2,147

 

$

(4,110

)

$

(19,307

)

 

Condensed Consolidating Statement of Comprehensive Income (Loss) for the nine months ending November 30, 2011

(In thousands)

 

 

 

New Enterprise
Stone & Lime
Co., Inc.

 

Guarantor
Subsidiaries

 

Non
Guarantors

 

Eliminations

 

Total

 

Revenue

 

$

572,771

 

$

67,049

 

$

4,856

 

$

(17,306

)

$

627,370

 

Cost of revenue (exclusive of items shown separately below)

 

447,536

 

49,446

 

1,749

 

(17,306

)

481,425

 

Depreciation, depletion and amortization

 

30,111

 

5,678

 

 

 

35,789

 

Pension and profit sharing

 

6,231

 

156

 

 

 

6,387

 

Selling, administrative, and general expenses

 

39,298

 

6,836

 

351

 

 

46,485

 

Gain on sales of property and equipment

 

(1,232

)

 

 

 

(1,232

)

Operating income

 

50,827

 

4,933

 

2,756

 

 

58,516

 

Interest expense, net

 

(34,262

)

(171

)

(482

)

 

(34,915

)

Income before income taxes

 

16,565

 

4,762

 

2,274

 

 

23,601

 

Income tax expense (benefit)

 

11,011

 

(262

)

 

 

10,749

 

Equity in earnings of subsidiaries

 

6,780

 

 

 

(6,780

)

 

Net income

 

12,334

 

5,024

 

2,274

 

(6,780

)

12,852

 

Unrealized actuarial gains and amortization of prior service costs, net of income tax

 

80

 

 

 

 

80

 

Comprehensive income

 

12,414

 

5,024

 

2,274

 

(6,780

)

12,932

 

Less: comprehensive income attributable to noncontrolling interest

 

 

 

(518

)

 

(518

)

Comprehensive income attributable to New Enterprise Stone & Lime Co., Inc.

 

$

12,414

 

$

5,024

 

$

1,756

 

$

(6,780

)

$

12,414

 

 

23



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

Condensed Consolidating Statement of Cash Flows for the nine months ending November 30, 2012

(In thousands)

 

 

 

New Enterprise
Stone & Lime
Co., Inc.

 

Guarantor
Subsidiaries

 

Non
Guarantors

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

$

(13,020

)

$

2,325

 

$

2,462

 

$

 

$

(8,233

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(29,110

)

(2,777

)

 

 

(31,887

)

Capitalized software

 

(23

)

 

 

 

(23

)

Proceeds from sale of property and equipment

 

194

 

 

 

 

194

 

Change in cash value of life insurance

 

(3,013

)

 

 

 

(3,013

)

Change in restricted cash

 

(127

)

(4

)

(2

)

 

(133

)

Net cash used in investing activities

 

(32,079

)

(2,781

)

(2

)

 

(34,862

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

Proceeds from revolving credit

 

224,413

 

 

 

 

224,413

 

Repayment of revolving credit

 

(283,361

)

 

 

 

(283,361

)

Repayment of long-term debt

 

(153,639

)

 

(390

)

 

(154,029

)

Payments on capital leases

 

(3,846

)

 

 

 

(3,846

)

Proceeds from issuance of long-term debt

 

268,513

 

 

 

 

268,513

 

Debt issuance costs

 

(14,062

)

 

 

 

(14,062

)

Distribution to noncontrolling interest

 

 

 

(1,084

)

 

(1,084

)

Net cash provided by (used in) financing activities

 

38,018

 

 

(1,474

)

 

36,544

 

Net (decrease) increase in cash and cash equivalents

 

(7,081

)

(456

)

986

 

 

(6,551

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

7,106

 

476

 

7,450

 

 

15,032

 

End of period

 

$

25

 

$

20

 

$

8,436

 

$

 

$

8,481

 

 

Condensed Consolidating Statement of Cash Flows for the nine months ending November 30, 2011

(In thousands)

 

 

 

New Enterprise
Stone & Lime
Co., Inc.

 

Guarantor
Subsidiaries

 

Non
Guarantors

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

$

(26,219

)

$

1,329

 

$

432

 

$

(1,200

)

$

(25,658

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(23,471

)

(3,206

)

 

 

(26,677

)

Capitalized software

 

(5,978

)

 

 

 

(5,978

)

Proceeds from sale of property and equipment

 

1,208

 

405

 

990

 

 

2,603

 

Change in cash value of life insurance

 

2,968

 

 

 

 

2,968

 

Change in restricted cash

 

348

 

 

(8,840

)

 

(8,492

)

Net cash used in investing activities

 

(24,925

)

(2,801

)

(7,850

)

 

(35,576

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

Proceeds from revolving credit

 

108,717

 

 

 

 

108,717

 

Repayment of revolving credit

 

(42,500

)

 

 

 

(42,500

)

Repayment of long-term debt

 

(22,526

)

 

(1,958

)

 

(24,484

)

Payments on capital leases

 

(3,975

)

 

 

 

(3,975

)

Proceeds from issuance of long-term debt

 

12,398

 

 

 

 

12,398

 

Debt issuance costs

 

(1,663

)

 

 

 

(1,663

)

Dividends paid

 

 

 

(1,200

)

1,200

 

 

Distribution to noncontrolling interest

 

 

 

(1,095

)

 

(1,095

)

Net cash provided by (used in) financing activities

 

50,451

 

 

(4,253

)

1,200

 

47,398

 

Net decrease in cash and cash equivalents

 

(693

)

(1,472

)

(11,671

)

 

(13,836

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

5,058

 

1,472

 

13,499

 

 

20,029

 

End of period

 

$

4,365

 

$

 

$

1,828

 

$

 

$

6,193

 

 

24



Table of Contents

 

New Enterprise Stone & Lime Co., Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Quarter ended November 30, 2012

 

10.       Subsequent Events

 

Amendment of ABL Facility

 

On December 7, 2012, the Company entered into the second amendment to the ABL Facility to change the required January 14, 2013 delivery date of its third quarter Form 10-Q to March 15, 2013.

 

On February 14, 2013, the Company received additional extensions of time to issue its Quarterly Report on Form 10-Q for the second quarter of fiscal 2013 to February 28, 2013 and to issue this Quarterly Report on Form 10-Q for the third quarter of fiscal 2013 to April 1, 2013.  There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes and Secured Notes.

 

Notice of Default

 

On January 14, 2013, the Company received a notice of default from the trustee under the indentures for the Secured Notes and Notes due to the Company’s inability to provide its Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 in compliance with the indentures.  We filed our Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 within the 120 day period and therefore cured such default under the indentures.

 

This Quarterly Report on Form 10-Q for the third fiscal quarter ended November 30, 2012 was due on January 14, 2013. We have not received a notice of default from the trustee under the indentures for the Notes or Secured Notes.

 

Exchange of Common Stock

 

On December 28, 2012, each of Paul I. Detwiler, Jr. and Donald L. Detwiler exchanged 10,000 shares of Class A voting common stock of the Company for 11,180 shares of Class B non-voting common stock of the Company.  The shares of the exchanged Class B non-voting common stock were then gifted by such individuals to their family members, each of whom is an existing shareholder.  As a result of the exchange for Class B non-voting common stock, the gifting of such equity securities did not affect the voting control of the Company.

 

25



Table of Contents

 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are a leading privately held, vertically integrated construction materials supplier and heavy/highway construction contractor in Pennsylvania and western New York and a national traffic safety services and equipment provider. Founded in 1924, we are one of the top 10 construction aggregates producers based on tonnage of crushed stone produced and one of the top 15 highway contractors based on revenues in the United States, according to industry surveys.

 

We operate in three segments based upon the nature of our products and services: construction materials, heavy/highway construction and traffic safety services and equipment.  Construction materials is comprised of aggregate production (crushed stone and construction sand and gravel), hot mix asphalt production, ready mixed concrete production, and the production of concrete products, including precast/prestressed structural concrete components and masonry blocks.  Heavy/highway construction includes heavy construction, blacktop paving and other site preparation services.  Our heavy/highway construction operations are primarily supplied with construction materials from our construction materials operation.  Traffic safety services and equipment consists primarily of sales, leasing, and servicing of general and specialty traffic control and work zone safety equipment and devices to industrial construction end-users.

 

Market conditions remained challenging through the first three quarters of fiscal year 2013.  Our business continues to be impacted by the slow pace of economic recovery and the continued pressure on state budgets which has limited state spending on public highway construction projects. The overall housing market remains weak and private non-residential construction is still experiencing a slow recovery.  Competition remains strong as a result of the weak public and private sector demand, with residential and commercial contractors bidding aggressively on projects, which continues to affect our profitability.  Our margins also remain under pressure as a result of higher fuel and liquid asphalt costs.  We expect that the challenges to our business environment will persist throughout the remainder of fiscal year 2013, which will continue to affect our heavy/highway construction and traffic safety services and equipment businesses, which constitute a significant portion of our overall business.  We expect that these conditions will continue to negatively impact our financial position, results of operations, cash flows and liquidity throughout the remainder of fiscal year 2013.  To address these challenges, we are continuing our efforts to monitor and adjust our cost structure in our operating plants and control administrative and general spending.  We also actively review our assets and properties on an ongoing basis for strategic disposals of lesser performing or non-core assets.

 

RESULTS OF OPERATIONS

 

The following table summarizes our operating results on a consolidated basis:

 

 

 

Three Months
 Ended November 30,

 

Nine Months
Ended November 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

190,236

 

$

213,887

 

$

608,759

 

$

627,370

 

Cost of revenue (exclusive of items shown separately below)

 

152,759

 

161,523

 

480,703

 

481,425

 

Depreciation, depletion and amortization

 

13,381

 

12,156

 

38,504

 

35,789

 

Intangible asset impairment

 

 

 

300

 

 

Pension and profit sharing

 

2,384

 

2,385

 

6,484

 

6,387

 

Selling, administrative, and general expenses

 

19,713

 

15,231

 

55,733

 

46,485

 

Loss (gain) on sales of property and equipment

 

22

 

273

 

(6

)

(1,232

)

Operating income

 

1,977

 

22,319

 

27,041

 

58,516

 

Interest expense, net

 

(17,734

)

(11,337

)

(58,306

)

(34,915

)

(Loss) income before income taxes

 

(15,757

)

10,982

 

(31,265

)

23,601

 

Income tax (benefit) expense

 

(6,909

)

5,302

 

(12,825

)

10,749

 

Net (loss) income

 

$

(8,848

)

$

5,680

 

$

(18,440

)

$

12,852

 

 

The tables below disclose revenue and operating income data for our reportable segments on a gross basis.  We include intersegment and certain intrasegment sales in our comparative analysis of revenue at the product line level and this presentation is consistent with the basis on which we review results of operations.  Total net revenue and total operating income exclude inter-segment sales and delivery revenues and costs.  We also operate ancillary port operations and certain rental operations, which are included in our other

 

26



Table of Contents

 

non-core business operations line items presented below.  We include all non-allocated operating costs in the eliminations line item presented below.

 

The Company’s segment revenue presentation for the three and nine months ended November 30, 2011 has been revised to conform to the current presentation. The revisions resulted in decreases to heavy/highway construction revenue and eliminations of $11.3 million and $23.0 million for the three and nine months ended November 30, 2011, respectively.  These revisions were made to align with the current management approach related to this segment.

 

 

 

Three Months
 Ended November 30,

 

Nine Months
Ended November 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Revenue:

 

 

 

 

 

 

 

 

 

Construction materials

 

$

141,831

 

$

161,788

 

$

458,257

 

$

469,826

 

Heavy/highway construction

 

71,969

 

86,402

 

234,915

 

251,832

 

Traffic safety services and equipment

 

21,104

 

21,155

 

69,219

 

69,015

 

Other revenues

 

6,735

 

4,674

 

13,885

 

13,584

 

Segment totals

 

241,639

 

274,019

 

776,276

 

804,257

 

Eliminations

 

(51,403

)

(60,132

)

(167,517

)

(176,887

)

Total revenue

 

$

190,236

 

$

213,887

 

$

608,759

 

$

627,370

 

 

The following tables summarize the percentage of revenue and operating income (loss) from our primary lines of business:

 

 

 

Three Months
 Ended November 30,

 

Nine Months
Ended November 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Construction materials

 

58.7

%

59.0

%

59.0

%

58.4

%

Heavy/highway construction

 

29.8

%

31.5

%

30.3

%

31.3

%

Traffic safety services and equipment

 

8.7

%

7.7

%

8.9

%

8.6

%

Other revenues

 

2.8

%

1.8

%

1.8

%

1.7

%

Segment totals

 

100.0

%

100.0

%

100.0

%

100.0

%

 

 

 

Three Months
 Ended November 30,

 

Nine Months
Ended November 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Construction materials

 

$

11,621

 

$

22,340

 

$

47,710

 

$

60,439

 

Heavy/highway construction

 

(3,632

)

4,634

 

(1,693

)

5,363

 

Traffic safety services and equipment

 

875

 

1,366

 

(400

)

4,544

 

Other non-core business operations

 

827

 

324

 

538

 

551

 

Segment totals

 

9,691

 

28,664

 

46,155

 

70,897

 

Corporate and unallocated

 

(7,714

)

(6,345

)

(19,114

)

(12,381

)

Total operating income

 

$

1,977

 

$

22,319

 

$

27,041

 

$

58,516

 

 

Three Months Ended November 30, 2012 Compared to Three Months Ended November 30, 2011

 

Revenue

 

Revenue for our construction materials business decreased $20.0 million, or 12.4%, to $141.8 million for the three months ended November 30, 2012 compared to $161.8  million for the three months ended November 30, 2011.  This decrease was primarily attributable to the decrease in sales of aggregates, hot mix asphalt and precast/prestressed structural concrete in the amount of $7.8 million, $9.8  million and $1.9 million, respectively.  Sales volumes of aggregates decreased 18.1% to 4.3 million tons shipped and consumed and the average price per ton shipped and consumed increased 5.9% to $11.76 for the three months ended November 30, 2012.  Sales volumes of hot mix asphalt decreased 14.8% to 1.1 million tons shipped and consumed while the average price per ton

 

27



Table of Contents

 

shipped and consumed increased 0.3% to $54.04.  Sales volumes of precast/prestressed structural concrete decreased 38.9%.  The price and demand for our materials is largely based upon local markets and varies across the Company.

 

Revenue for our heavy/highway construction business decreased $14.4  million, or 16.7%, to $72.0 million for the three months ended November 30, 2012 compared to $86.4  million for the three months ended November 30, 2011.  We continue to experience strong competition, as well as a reduced number of projects, in the public and commercial markets.  Further, we believe that the lack of a federal multi-year surface transportation bill over the past several construction seasons has caused the number of larger, heavy, multidiscipline, multiyear highway and bridge construction projects to decrease in favor of smaller, shorter jobs such as road resurfacing and bridge replacement and rehabilitation.

 

Revenue for our traffic safety services and equipment businesses decreased $0.1 million, or 0.5%, to $21.1  million for the three months ended November 30, 2012 compared to $21.2 million for the three months ended November 30, 2011.  The decrease was the result of decreased rental service activity, which was offset by increased equipment sales.  The increase in equipment sales can be attributed primarily to the continued benefits associated with the enhancement of our product offerings.  Overall rental service activity decreased compared to the prior period as a result of increased competition.

 

Cost of Revenue

 

Cost of revenue decreased $8.7 million, or 5.4% to $152.8 million for the three months ended November 30, 2012 compared to $161.5 million for the three months ended November 30, 2011. Cost of revenue as a percentage of revenue increased for the three months ended November 30, 2012 to 80.3% from 75.5% for the three months ended November 30, 2011, due to reduced profitability in all three of our businesses.

 

Depreciation, Depletion and Amortization

 

Depreciation, depletion and amortization increased $1.2 million, or 9.8%, to $13.4 million for the three months ended November 30, 2012 compared to $12.2 million for the three months ended November 30, 2011. The increase is primarily due to $0.3 million of capitalized software amortization in the current period related to our new ERP system and other new assets placed in service.  Amortization of capitalized software began during the fourth quarter of fiscal year 2012.

 

Selling, Administrative and General Expenses

 

Selling, administrative and general expenses increased  $4.5 million, or 29.6%, to $19.7 million for the three months ended November 30, 2012 compared to $15.2 million for the three months ended November 30, 2011, which was primarily attributable to higher legal and accounting fees of $2.8 million and $1.0 million in costs associated with the remediation of our ERP system.

 

Operating Income

 

Operating income for our construction materials business decreased $10.7 million, or 48.0%, to $11.6  million for the three months ended November 30, 2012 compared to $22.3 million for the three months ended November 30, 2011. Operating income as a percentage of construction materials revenue was 8.2% in the current period compared to 13.8% in the prior period.  Income from the sale of aggregates decreased $7.7 million, or 58.3%, to $5.5  million for the three months ended November 30, 2012 compared to $13.2 million for the three months ended November 30, 2011.  Additionally, operating income for hot mix asphalt also decreased $1.8 million, or 25.0%, to $5.4  million for the three months ended November 30, 2012 compared to $7.2  million for the three months ended November 30, 2011.    The overall decrease in operating income from our construction material business was primarily attributable to reduced sales volume without a commensurate reduction in costs.  The price and demand for our materials is largely based upon local markets and varies across the Company.

 

Operating income for our heavy/highway construction business decreased $8.2 million to a $3.6 million loss for the three months ended November 30, 2012 compared to income of $4.6 million for the three months ended November 30, 2011.  The change in profitability for the third quarter is primarily attributable to a decrease in activity without a commensurate reduction in costs and the general timing of the completion of various jobs.

 

Operating income for our traffic safety services and equipment businesses decreased $0.5 million to $0.9 million for the three months ended November 30, 2012 compared to $1.4 million for three months ended November 30, 2011.  The decrease in operating income is primarily due to decreased rental service activity due to increased competition, partially offset by increased sales of highway safety equipment.

 

28



Table of Contents

 

Interest Expense, net

 

Net interest expense increased $6.4 million, or 56.6%, to $17.7 million for the three months ended November 30, 2012 compared to $11.3 million for the three months ended November 30, 2011. This increase is due to the increase in the Company’s net effective interest rate associated with the issuance of the Secured Notes as well as an overall increase in the average debt outstanding in the current period.

 

Income Tax Expense

 

Our effective tax rates for the three months ended November 30, 2012 and 2011 were 43.8% and 48.3%, respectively.  We estimate our annual tax rate based on projected taxable income for the full year and record a quarterly tax provision in accordance with the anticipated annual tax rate.  As the year progresses, we refine our estimate of the year’s taxable income as new information becomes available such as year-to-date financial results.  The swing from tax expense to tax benefit for the nine months ended November 30, 2012 compared to the nine months ended November 30, 2011 is a result of a swing from pre-tax book earnings to a pre-tax book loss.  The projected loss year over year has increased significantly which reduces the impact of the permanent adjustments which have not materially changed year over year.  This continual estimation process may result in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate.  Significant judgment is required in determining the Company’s effective interim tax rate and there may be large swings on a quarterly basis due to the seasonal nature of the Company’s business.  Our income tax benefit for the current period is based on an estimated annual effective income tax rate of 36.7%.  Included in the income tax benefit for this period is a discrete out-of-period tax benefit of $1.2 million due to differences in our state apportionment calculation when we finalized our tax returns for the year ended February 29, 2012 in November 2012.  This out-of-period adjustment is not material to the prior or current condensed consolidated financial statements.

 

Nine Months Ended November 30, 2012 Compared to Nine Months Ended November 30, 2011

 

Revenue

 

Revenue for our construction materials business decreased $11.5 million, or 2.4%, to $458.3 million for the nine months ended November 30, 2012 compared to $469.8 million for the nine months ended November 30, 2011. This decrease was primarily attributable to the decrease in sales of aggregates, hot mix asphalt and precast/prestressed structural concrete in the amount of $6.5  million, $4.3 million and $1.4 million respectively, which was partially offset by a $2.2 million increase in ready mixed concrete. Sales volumes of aggregates decreased 4.7% to 14.81 million tons shipped and consumed and the average price per ton shipped and consumed increased 0.9% to $11.06 for the nine months ended November 30, 2012.  Sales volumes of hot mix asphalt decreased 3.3% to 3.54 million tons shipped and consumed and partially offset by an increase in the average price per ton shipped and consumed of 1.2% to $54.66.  Precast/prestressed structural concrete sales volume decreased 32.0%.  The price and demand for our materials is largely based upon local markets and varies across the Company.

 

Revenue for our heavy/highway construction business decreased $16.9 million, or 6.7%, to $234.9  million for the nine months ended November 30, 2012 compared to $251.8 million for the nine months ended November 30, 2011.  We continue to experience strong competition in the public and commercial markets.  Further, we believe that the lack of a federal multi-year surface transportation bill over the past several construction seasons has caused the number of larger, heavy, multidiscipline, multiyear highway and bridge construction projects to decrease in favor of smaller, shorter jobs such as road resurfacing and bridge replacement and rehabilitation.

 

Revenue for our traffic safety services and equipment business increased $0.2 million, or 0.3%, to $69.2 million for the nine months ended November 30, 2012 as compared to $69.0 million for the nine months ended November 30, 2011.  The increase is attributable to increased equipment sales, offset by decreased rental service activity and a $1.1 million state use tax refund included in the nine months ended November 30, 2011.

 

Cost of Revenue

 

Cost of revenue decreased $0.7 million to $480.7 million for the nine months ended November 30, 2012 compared to $481.4 million for the nine months ended November 30, 2011. Cost of revenue as a percentage of revenue increased to 79.0% for the nine months ended November 30, 2012 compared to 76.7% for the nine months ended November 30, 2011, due to reduced profitability in all three of our businesses.

 

Depreciation, Depletion and Amortization

 

Depreciation, depletion and amortization increased $2.7 million, or 7.5%, to $38.5 million for the nine months ended November 30, 2012 compared to $35.8 million for the nine months ended November 30, 2011.  The increase is primarily due to increased depreciation related to capitalized asset retirement obligations of approximately $1.2 million, $0.8 million of capitalized software

 

29



Table of Contents

 

amortization in the current period related to our new ERP system and other new assets placed in service.  Amortization of capitalized software began during the fourth quarter of fiscal year 2012.

 

Selling, Administrative and General Expenses

 

Selling, administrative and general expenses increased $9.2 million, or 19.8%, to $55.7 million for the nine months ended November 30, 2012 compared to $46.5 million for the nine months ended November 30, 2011. The increase was primarily attributable to costs associated with the remediation of our ERP system of approximately $5.2 million and higher legal and accounting fees of $3.8 million.

 

Operating Income

 

Operating income for our construction materials business decreased $12.7 million, or 21.0%, to $47.7 million for the nine months ended November 30, 2012 compared to $60.4 million for the nine months ended November 30, 2011. Operating income for construction materials as a percentage of construction materials revenue was 10.4% in the current period compared to 12.9% in the prior period.  The decrease in aggregates income of $13.0 million, or 36.6%, to $22.5 million was partially offset by an increase in income of hot mix asphalt of $1.5 million.  The overall decrease in income from our construction material business was primarily attributable to the reduced sales volume without a commensurate reduction in costs and $2.2 million of higher stripping costs associated with uncovering additional reserves.

 

Operating income for our heavy/highway construction business decreased $7.1 million to a $1.7 million loss for the nine months ended November 30, 2012 compared to $5.4 million of income for the nine months ended November 30, 2011.  The change in profitability for the third quarter is primarily attributable to a decrease in activity without a commensurate reduction in costs and the general timing of the completion of various jobs.

 

The operating results for our traffic safety services and equipment business decreased $4.9 million to a $0.4 million loss during the nine months ended November 30, 2012 compared to income of $4.5 million during the nine months ended November 30, 2011. The decrease was attributable primarily to a decrease in rental service activity and the fact that prior year included a $1.1 million state use tax refund.  The decrease in rental service activity was due to increased competition as well as decreased Marcellus Shale related activity.

 

Interest Expense, net

 

Net interest expense increased $23.4 million, or 67.0%, to $58.3 million for the nine months ended November 30, 2012 compared to $34.9 million for the nine months ended November 30, 2011.  For the nine months ended November 30, 2012, we recognized a $6.4 million loss on extinguishment of debt associated with the write-off of unamortized deferred financing fees.  The remaining increase was attributable to higher interest rates associated with the Secured Notes issued on March 15, 2012 as well an overall increase in the average debt outstanding in the current period.

 

Income Tax Expense

 

Our effective tax rates for the nine months ended November 30, 2012 and 2011 were 41.0% and 45.5%, respectively. We estimate our annual tax rate based on projected taxable income for the full year and record a quarterly tax provision in accordance with the anticipated annual tax rate. As the year progresses, we refine our estimate of the year’s taxable income as new information becomes available such as year-to-date financial results. The swing from tax expense to tax benefit for the nine months ended November 30, 2012 compared to the nine months ended November 30, 2011 is a result of a swing from pre-tax book earnings to a pre-tax book loss.    The effective tax rate decreased as a result of the effect of the permanent adjustments, which did not materially change year over year, are reduced with the substantial increase in projected pre-tax book loss year over year.  This continual estimation process may result in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining the Company’s effective interim tax rate and there may be large swings on a quarterly basis due to the seasonal nature of the Company’s business.  Our income tax benefit for the current period is based on an estimated annual effective income tax rate of 36.7%.  Included in the income tax benefit for this period is a discrete out-of-period tax benefit of $1.2 million due to differences in our state apportionment calculation when we finalized our tax returns for the year ended February 29, 2012 in November 2012.  This out-of-period adjustment is not material to the prior or current condensed consolidated financial statements.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our sources of liquidity include cash and cash equivalents, cash from operations and amounts available for borrowing under our credit facilities. As of November 30, 2012, we had $8.5 million in cash and cash equivalents and working capital of $196.5 million as

 

30



Table of Contents

 

compared to $15.0 million in cash and cash equivalents and working capital of $171.5 million as of February 29, 2012.  In May 2012, we began managing our cash and cash equivalents through a cash pooling arrangement with a single financial institution, which has resulted in lower overall cash and cash equivalents balances as excess cash is applied daily to our ABL Facility.

 

Given the nature and seasonality of our business, we typically experience significant fluctuations in working capital needs and balances during our peak summer season; these amounts are converted to cash over the course of our normal operating cycle.

 

Restricted cash balances of $10.5 million and $10.3 million as of November 30, 2012 and February 29, 2012, respectively, were restricted in certain consolidated subsidiaries for bond sinking fund and insurance requirements, as well as collateral on outstanding letters of credit or rentals.

 

On March 15, 2012, the Company completed the sale of its Secured Notes at par.  In connection with the sale of the Secured Notes, the Company also entered into the ABL Facility. The Company utilized the proceeds from the sale of the Secured Notes and the new ABL Facility to repay all amounts outstanding under, and terminate, the Credit Agreement and certain other debt.

 

As of November 30, 2012, the ABL Facility had $35.7 million outstanding and a borrowing base of $130.6 million. On September 7, 2012, we entered into the first amendment to the ABL Facility. Among certain other things, the amendment changed the reserve percentages used for calculating the borrowing base.   The amendment also added a minimum LIBOR borrowing rate of 1.25%.

 

We believe that we have sufficient financial resources, including cash and cash equivalents, cash from operations and available borrowings under our ABL Facility, to fund our business and operations for at least the next twelve months, including capital expenditures and debt service obligations. However, in the past we have failed to meet certain operating performance measures as well as the financial covenant requirements set forth under our previous credit facilities, which resulted in the need to obtain several amendments and we cannot guarantee that we will be able to comply with our covenants in the future. Any default under our ABL Facility, the indenture for our Notes, or the indenture for our Secured Notes would result in a cross-default and acceleration of indebtedness under the other.

 

On September 5, 2012, we received a notice of default from the trustee under the indenture for the Secured Notes, and on September 6, 2012, we received a notice of default from the trustee under the indenture for the Notes, each to the effect that we had failed to provide to the trustee our Annual Report on Form 10-K for our fiscal year ended February 29, 2012 and Quarterly Report on Form 10-Q for our fiscal quarter ended May 31, 2012 in compliance with the indentures. In accordance with the terms and conditions of the indentures for the Secured Notes and the Notes, we had 120 days from the date of those notices to cure such default by providing the required filings. We filed our Form 10-K for the year ended February 29, 2012 and our Form 10-Q for the first fiscal quarter ended May 31, 2012 within the 120 day period and therefore has cured such defaults under the indentures.

 

On January 14, 2013, the Company received a notice of default from the trustee under the indentures for the Secured Notes and Notes due to the Company’s  inability to provide its Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 in compliance with the indentures.  We filed our Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 within the 120 day period and therefore cured such default under the indentures.

 

This Quarterly Report on Form 10-Q for the third fiscal quarter ended November 30, 2012 was due on January 14, 2013. We have not received a notice of default from the trustee under the indentures for the Notes or Secured Notes.

 

Cash Flows

 

The following table summarizes our net cash provided by or used in operating activities, investing activities and financing activities and our capital expenditures for the nine months ended November 30, 2012 and November 30, 2011.

 

 

 

Nine Months

 

 

 

Ended November 30,

 

(In thousands)

 

2012

 

2011

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

(8,233

)

$

(25,658

)

Investing activities

 

(34,862

)

(35,576

)

Financing activities

 

36,544

 

47,398

 

Cash paid for capital expenditures

 

(31,910

)

(32,655

)

 

31



Table of Contents

 

Operating Activities

 

Net cash used in operating activities decreased $17.5 million to $8.2 million for the nine months ended November 30, 2012 compared to $25.7 million for the nine months ended November 30, 2011.  Cash used in operating activities decreased primarily as a result of lower investments in working capital items of $44.6 million due to decreased activity and timing of collections of accounts receivable, partially offset by less cash generated from operations of $27.1 million.  Operating cash flow in the current period included the favorable impact of the payment-in-kind interest election of $17.1 million.

 

Investing Activities

 

Net cash used in our investing activities decreased $0.7 million to $34.9 million in the nine months ended November 30, 2012 compared to $35.6 million in the nine months ended November 30, 2011. Net cash used in the nine months ended November 30, 2012 included capital expenditures of $31.9 million and a $3.0 million payment associated with our cash surrender value life insurance policies.  Net cash used in the nine months ended November 30, 2011 included uses for capital expenditures of $32.7 million and the commitment of $8.8 million of cash collateral related to our captive insurance arrangement, offset by proceeds from the sale of property and equipment of $2.6 million and $3.0 million related to our cash surrender value  life insurance policies.

 

Financing Activities

 

Net cash provided by financing activities decreased $10.9 million to $36.5 million in the nine months ended November 30, 2012 compared to $47.4 million in the nine months ended November 30, 2011.  Net cash provided by our financing activities in the nine months ended November 30, 2012 were primarily driven by the March 15, 2012 refinancing, which included a new ABL Facility and $265.0 million in Secured Notes which was offset by the repayment of our previous first lien term loan A & B, first lien revolving credit facility and other long-term debt.  The period over period decrease in cash provided was primarily due to less cash needed to support operating cash flows in the current period.

 

Capital Expenditures

 

Cash capital expenditures decreased $0.8 million to $31.9 million for the nine months ended November 30, 2012 compared to $32.7 million for the nine months ended November 30, 2011.  This decrease is a result of $6.0 million lower capitalized software spend, offset by higher spending on existing manufacturing and other plant related equipment of $5.2 million.

 

Our Indebtedness

 

Refinancing Transactions

 

On March 15, 2012, we completed the sale of our Secured Notes at par.  In connection with the sale of the Secured Notes, we also entered into the ABL Facility.  We utilized the proceeds from the sale of the Secured Notes and the ABL Facility to repay all amounts outstanding under, and terminate, the Credit Agreement and certain other debt.  In our consolidated balance sheet as of February 29, 2012, we classified the components of debt refinanced on March 15, 2012 as long-term.

 

Asset-Based Loan Facility

 

Original Terms

 

As noted in the Refinancing section above, we entered into a new ABL Facility with M&T, as the issuing bank, a lender, the swing lender, the agent and the arranger. The ABL Facility provides for maximum borrowings on a revolving basis of up to $170.0 million from time to time for general corporate purposes, including working capital. The ABL Facility includes a $15.0 million letter of credit sub-facility and a $20.0 million swing line sub-facility for short-term borrowings. The ABL Facility will mature on March 15, 2017.

 

Borrowings under the ABL Facility are classified as long-term debt due to our ability to extend borrowings at the end of each borrowing period.

 

Borrowings under the ABL Facility (except swing line loans) bear interest at a rate per annum equal to, at the Company’s option to draw on a sub-facility, either (a) a base rate or (b) a LIBOR rate, in each case plus an applicable margin.  Swing line loans bear interest at the base rate plus the applicable margin. Pricing on the ABL Facility is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. LIBOR margins for the ABL Facility range from 2.50% to 3.50% and base rate margins range from 0.50% to 1.50%.  The ABL Facility also contains a commitment fee that is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. The commitment fee ranges from 0.25% to 0.63%.  From the commencement of the ABL Facility Agreement until September 7, 2012, which was the date of the amendment to the ABL Facility discussed below, the LIBOR margin was 2.75%, the base rate margin was 0.75% and the commitment fee was 0.50%.  The Company classified borrowings under the ABL Facility as long-term as a result of the March 15, 2017 maturity date and the revolving nature of the ABL Facility.

 

32



Table of Contents

 

Borrowings under the ABL Facility are guaranteed by the Company’s subsidiaries that guarantee the Secured Notes and Notes and are secured, subject to certain permitted liens, by first-priority liens on the ABL Priority Collateral and by second-priority liens on the collateral securing the Secured Notes on a first-priority basis, except for certain real property.

 

Covenants

 

The ABL Facility provides that if excess availability is less than the greater of (i) $25.0 million or (ii) 15% of the lesser of the commitments and the borrowing base, the Company must comply with a minimum fixed charge coverage ratio test of at least 1.0 to 1.0 for the immediately preceding four fiscal quarters or twelve consecutive months, as applicable. In addition, the ABL Facility includes customary affirmative and negative covenants that, subject to significant exceptions, limit the ability of the Company and the Guarantors to undertake certain actions, including, among other things, limitations on (i) the incurrence of indebtedness and liens, (ii) asset sales, (iii) dividends and other payments with respect to capital stock, (iv) acquisitions, investments and loans, (v) affiliate transactions, (vi) altering the business, (vii) issuances of equity that have mandatory redemption or put rights prior to the maturity of the ABL Facility and (viii) providing negative pledges to third parties.  As of November 30, 2012 the Company was in compliance with these affirmative and negative covenants.

 

Amendment of ABL Facility

 

The ABL Facility contained a covenant that required the Company to deliver its fiscal year 2012 annual financial statements to the lender by May 29, 2012.  On September 7, 2012 the Company entered into the first amendment to the ABL Facility, and subsequent letters on September 28, 2012, November 9, 2012, December 7, 2012 and February 14, 2013 to change the required delivery date of the audited February 29, 2012 financial statements and the required delivery date of its first and second quarter results and financial statements to December 15, 2012, January 1, 2013, and February 28, 2013, respectively.

 

Availability under the ABL Facility is restricted to a borrowing base formula. As part of the first amendment entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio.  If the calculation of the Fixed Charge Coverage Ratio was less than 1.0 to 1.0, the borrowing base would be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.

 

The first amendment also allows M&T, in the event M&T is unable to reduce its final participation in the ABL Facility to no more than $75.0 million during the primary syndication of the ABL Facility by December 15, 2012, to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, and certain covenants and the interest and fees payable.  M&T has not syndicated the ABL Facility. However, there have been no further modifications of the terms of the ABL Facility.

 

On December 7, 2012, the Company entered into the second amendment of the ABL Facility, and a subsequent letter dated February 14, 2013, to change the required January 14, 2013 delivery date of this third quarter Form 10-Q to April 1, 2013.  There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes and Secured Notes.

 

Secured Notes due 2018

 

Interest on the Secured Notes is initially payable at 13.0% per annum, semi-annually in arrears on March 15 and September 15, 2012. The Company will make each interest payment to the holders of record of the Secured Notes as of the immediately preceding March 1 and September 1. The Company used the proceeds from this offering to repay certain existing indebtedness and to pay related fees and expenses.  The Secured Notes will mature on March 15, 2018.

 

With respect to any interest payment date on or prior to March 15, 2017, the Company may, at its option, elect (an ‘‘Interest Form Election’’) to pay interest on the Secured Notes (i) entirely in cash (‘‘Cash Interest’’) or (ii) subject to any Interest Rate Increase (as defined below), initially at the rate of 4% per annum in cash (‘‘Cash Interest Portion’’) and 9% per annum by increasing the outstanding principal amount of the Secured Notes or by issuing additional paid in kind notes under the indenture on the same terms as the Secured Notes (‘‘PIK Interest Portion’’ or “PIK Interest”); provided that in the absence of an Interest Form Election, interest on

 

33



Table of Contents

 

the Secured Notes will be payable as PIK Interest.  At November 30, 2012, PIK interest was $17.1 million ($11.9 million was recorded as an increase to the Secured Notes and $5.2 million was recorded as a long-term obligation in Other liabilities).

 

The indenture for the Secured Notes contains restrictive covenants that limit our ability and the ability of our subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with affiliates.

 

In accordance with the indenture for the Secured Notes, the Company was required to file a registration statement with the Securities and Exchange Commission and consummate a registered offer to exchange the Secured Notes for new Secured Notes having terms substantially identical in all material respects to the Secured Notes by March 11, 2013.  We have not filed the registration statement or completed the exchange offer.  Due to the failure to consummate the exchange offer within the required time period, the interest rate on the Secured Notes will increase by 0.25% per annum for the first 90-day period following the default and by an additional 0.25% per annum with respect to each subsequent 90-day period, up to a maximum additional rate of 1.0% per annum until such exchange offer is completed or the Secured Notes are redeemed.

 

Notices of Default

 

On September 5, 2012, the Company received a notice of default from the trustee under the indenture for the Secured Notes, and on September 6, 2012, the Company received a notice of default from the trustee under the indenture for the Notes, each to the effect that the Company has failed to provide to the trustees its Annual Report on Form 10-K for the fiscal year ended February 29, 2012 and Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2012 in compliance with the indentures.  In accordance with the terms and conditions of indentures for the Secured Notes and Notes, the Company had 120 days from the date of those notices to cure such default by complying with its reporting requirements and related filings.  The Company filed its Annual Report on Form 10-K for the year ended February 29, 2012 and its Quarterly Report on Form 10-Q for the period ended May 31, 2012 within the 120 day period and therefore has cured such defaults under the indentures.

 

On January 14, 2013, the Company received a notice of default from the trustee under the indentures for the Secured Notes and Notes due to the Company’s  inability to provide its Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 in compliance with the indentures.  We filed our Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 within the 120 day period and therefore cured such default under the indentures.

 

This Quarterly Report on Form 10-Q for the third fiscal quarter ended November 30, 2012 was due on January 14, 2013. We have not received a notice of default from the trustee under the indentures for the Notes or Secured Notes.

 

Notes due 2018

 

In August 2010, the Company sold $250.0 million aggregate principal amount of Notes at par value.  Interest on the Notes is payable semi-annually in cash in arrears on March 1 and September 1 of each year.

 

The Notes are subject to redemption in whole or in part, at any time on or after September 1, 2014 at certain redemption prices specified in the indenture for the Notes. The Company may also at any time before September 1, 2013 at its option redeem up to 35% of the Notes with the net cash proceeds from certain equity offerings. The Company may also redeem some or all of the Notes at any time prior to September 1, 2014 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest on the existing notes plus a make-whole premium defined in the indenture for the Notes. In addition, the Company may be required to make an offer to purchase the Notes upon the sale of certain assets or upon a change of control. The Notes are senior unsecured notes guaranteed on a joint and several basis on a senior unsecured basis by each of the Company’s subsidiaries that guarantee payments of the Company’s indebtedness under the ABL Facility and the Secured Notes.

 

The indenture for the Notes contains restrictive covenants that limit the Company’s ability and the ability of its subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with its affiliates.

 

Land and Equipment Obligations

 

The Company has various notes, mortgages and other financing arrangements resulting from the purchase of principally land and equipment.  All loans provide for at least annual payments, which include interest ranging up to 10.0% per annum.  Principally all loans are secured by the land and equipment acquired.

 

34



Table of Contents

 

Obligations include three revenue bonds, as of November 30, 2012 to different industrial development authorities with counties in Pennsylvania with a total amount outstanding of $5.8 million. The Company prepaid $3.8 million of industrial development bonds during the first quarter of fiscal year 2012 with the proceeds from an unsecured borrowing which was subsequently refinanced on March 15, 2012.

 

Changes in Future Contractual Obligations

 

There were no material changes to the contractual obligations disclosed in our Annual Report on Form 10-K “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Debt and Contractual Obligations”.

 

Off Balance Sheet Arrangements

 

We utilize off-balance sheet arrangements in our outstanding letters of credit associated with our industrial development authority bonds totaling $7.6 million and $14.5 million at November 30, 2012 and February 29, 2012, respectively, which were not included in our Consolidated Balance Sheets.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period.

 

In January 2013, we began the process of completing our annual goodwill impairment assessment.  During our initial review, we identified indications that there may be significant decreases in the fair values of our Traffic Safety Services and Equipment reporting unit with goodwill of $5.8 million and a reporting unit in our Construction Materials segment with goodwill of $68.4 million as of November 30, 2012.  As of the date of issuance of this Quarterly Report on Form 10-Q, we have not completed our annual impairment assessment and we currently do not expect an impairment charge.

 

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, inventories, product warranties, taxes and goodwill and intangible assets. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to Note 1 “Summary of Significant Accounting Policies” as reported in our notes to our financial statements for the fiscal year ended February 29, 2012 as filed as part of the Company’s Annual Report on Form 10-K and our financial statements herein.

 

Recently Issued Accounting Standards

 

Refer to Note 1, “Nature of Operations and Summary of Significant Accounting Policies” to the condensed consolidated financial statements for a discussion of recent accounting guidance and pronouncements.

 

Forward-looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, in particular, statements about our plans, strategies and prospects under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” You can identify certain forward-looking statements by our use of forward-looking terminology such as, but not limited to, “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “likely,” “will,” “would,” “could” and similar expressions that identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Many risks and uncertainties are inherent in our industry and markets. Others are more specific to our operations. The occurrence of the events described and the achievement of the expected results depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q.  Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

 

35



Table of Contents

 

·                  risks associated with the cyclical nature of our business and dependence on activity within the construction industry;

 

·                  declines in public sector construction and reductions in governmental funding which could continue to adversely affect our operations and results;

 

·                  our reliance on private investment in infrastructure and a slower than normal recovery which continue to adversely affect our results;

 

·                  a decline in the funding of PennDOT, the Pennsylvania Turnpike Commission, the New York State Thruway or other state agencies;

 

·                  difficult and volatile conditions in the credit markets may adversely affect our financial position, results of operations and cash flows;

 

·                  our ability to amend, extend or enter into new financing arrangements to refinance our existing financing arrangements and to generate a sufficient amount of cash to service our existing indebtedness, the notes and fund our operations;

 

·                  the risk of default on our existing and future indebtedness which may or may not result in an acceleration of our indebtedness thereunder;

 

·                  the potential to inaccurately estimate the overall risks, requirements or costs when we bid on or negotiate a contract that is ultimately awarded to us, which may result in a lower than anticipated income or incurrence of a loss on the contract;

 

·                  the weather and seasonality;

 

·                  our operation in a highly competitive industry within our local markets;

 

·                  our dependence upon securing and permitting aggregate reserves in strategically located areas;

 

·                  risks related to our ability to acquire other businesses in our industry and successfully integrate them with our existing operations;

 

·                  risks associated with our capital-intensive business;

 

·                  risks related to our ability to meet schedule or performance requirements of our contracts;

 

·                  changes to environmental, health and safety laws;

 

·                  our dependence on our senior management;

 

·                  the potential risks if we are unable to recruit additional management and other personnel and are not able to grow our business effectively or successfully implement our growth plans;

 

·                  the potential for labor disputes to disrupt operations of our businesses;

 

·                  special hazards related to our operations that may cause personal injury or property damage;

 

·                  unexpected self-insurance claims and reserve estimates;

 

·                  material costs and losses as a result of claims that our products do not meet regulatory requirements or contractual specifications;

 

·                  material weaknesses and significant deficiencies in our internal controls over financial reporting;

 

·                  cancellation of significant contracts or our disqualification from bidding for new contracts;

 

36



Table of Contents

 

·                  general business and economic conditions, particularly an economic downturn; and

 

·                  the other factors discussed under Item 1A-Risk Factors in our Annual Report on Form 10-K for our fiscal year ended February 29, 2012.

 

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have exposure to financial market risks, including changes in commodity prices, interest rates and other relevant market prices.

 

Commodity Price Risk

 

We are subject to commodity price risk with respect to price changes in energy, including fossil fuels, electricity and natural gas for production of hot mix asphalt and cement and diesel fuel for distribution and production related vehicles. We attempt to limit our exposure to changes in commodity prices by putting sales price escalators in place for most public contracts, and we aggressively seek to obtain escalators on private and commercial contracts.

 

Interest Rate Risk

 

We are subject to interest rate risk in connection with borrowings under our indebtedness.  As of November 30, 2012, we have $35.7 million in indebtedness outstanding under our ABL Facility subject to variable interest rates.  Each change of 1.00% in interest rates would result in an approximate $0.4 million change in our annual interest expense in total on our ABL Facility.  Any debt we incur in the future could also bear interest at floating rates.

 

37



Table of Contents

 

ITEM 4 - CONTROLS AND PROCEDURES

 

This report includes the certifications attached as Exhibits 31.1 and 31.2 of our CEO and CFO required by Rule 13a-14 of the Exchange Act.  This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2012.  Based upon that evaluation, our CEO and CFO concluded that, as of November 30, 2012, our disclosure controls and procedures were not effective as the result of the material weaknesses in internal control over financial reporting described below.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision of the Company’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). Internal control over financial reporting includes those policies and procedures that:

 

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

(ii) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and

 

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our financial statements for the year ended February 29, 2012, management identified certain material weaknesses in our internal control over financial reporting as of February 29, 2012. The material weaknesses are as follows:

 

·                  We did not maintain effective controls over the implementation of a new enterprise resource planning system (“ERP”).  Specifically, we did not implement appropriate logical security design and testing, perform sufficient data conversion testing, maintain appropriate system documentation, or provide sufficient end user training. This material weakness contributed to other deficiencies, some of which have resulted in additional material weaknesses, as further described below.

 

·                  We did not implement appropriate information technology controls related to change management, data integrity, access and segregation of duties. This material weakness resulted in both not having adequate automated and manual controls designed and in place and not achieving the intended operating effectiveness of controls to ensure accuracy of our financial reporting.

 

·                  We did not maintain effective controls over the recording of journal entries, both recurring and nonrecurring. Specifically, effective controls were not in place to ensure that journal entries were properly prepared, included sufficient supporting documentation, or were reviewed and approved to ensure the validity, accuracy and completeness of the journal entries. This material weakness resulted in additional procedures performed by management and contributed to other deficiencies, some of which have resulted in additional material weaknesses and adjustments during the fiscal 2012 year-end financial closing process, as further described below.

 

38



Table of Contents

 

·                  We did not maintain effective controls over the recording of intercompany transactions. Specifically, effective controls were not in place to ensure that intercompany balances were properly reconciled and eliminated on a timely basis. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls over accounting for contracts. Specifically, we did not design and maintain effective controls over the reconciliation of contract billings and accruals to the general ledger, or formally analyze the recognition of contract revenue, profit and loss. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls to ensure the completeness and accuracy of recorded revenue. Specifically, we did not design and maintain effective controls over pricing, billing practices and credit memos. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls to ensure the completeness, accuracy, cutoff and valuation of accounts receivable. Specifically, we did not timely reconcile accounts receivable balances and did not implement and maintain a formal review process. Further, we did not have a formal process in place to determine and appropriately assess the adequacy of accounts receivable valuation reserves. There also is no required formal approval process to determine and write off uncollectible account balances. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls over the completeness and accuracy of property, plant and equipment and related depreciation expense. Specifically, we did not design and maintain effective controls to ensure that assets are properly capitalized on the Company’s books. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls over the completeness and accuracy of our accounting estimates related to inventory reserves. Specifically, we did not design and maintain effective controls with respect to the review and analysis of excess and obsolete inventory and lower of cost or market considerations. This material weakness resulted in adjustments identified through additional procedures performed by management and audit adjustments recorded in 2012.

 

·                  We did not maintain effective controls over the completeness, accuracy and cutoff of our inventory counts.  Specifically, we did not design and maintain effective controls and policies with respect to physical inventory counting procedures, including the appropriate level of review. We also did not capitalize inventory variances for materials, labor, and overhead. This material weakness resulted in adjustments identified through additional procedures performed by management and audit adjustments recorded in 2012.

 

·                  We did not maintain effective controls to ensure the completeness and timely recording of accounts payable and accrued liabilities. Specifically, we did not timely reconcile accounts payable and accrued liabilities or properly accrue for invoices payable in the period. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls over the completeness, accuracy and valuation of our deferred tax assets and liabilities. Specifically, we did not design and maintain effective controls with respect to accounting for the difference between the book and tax bases of the company’s property, plant and equipment and capital leases. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not adequately segregate the duties of personnel within our Accounting Department, including those related to cash management, payroll processing, accounts payable processing, and accounts receivable and general ledger maintenance, due to an insufficient complement of staff.

 

Despite the fact that we are not required to and have not completed an assessment of the effectiveness of the Company’s internal control over financial reporting, as a result of the foregoing material weaknesses, we believe we identified control deficiencies that individually and in aggregate also constituted material weaknesses in our internal control over financial reporting as of November 30, 2012, as described below:

 

39



Table of Contents

 

·                  We did not maintain an effective control environment primarily attributable to the following:

 

·                  We did not maintain an effective control environment that consistently emphasized adherence to GAAP. This control deficiency, in certain instances, led to adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  In certain areas (finance, tax, accounting and information technology departments), we did not maintain effective controls to ensure a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements.

 

·                  We did not maintain effective controls to ensure complete and accurate business documentation to support certain transactions and accounting records. The controls in these areas with respect to the creation, maintenance and retention of complete and accurate business records were not effective.

 

·                  We did not design or maintain effective controls relating to policies and procedures to adequately review and account for significant accounting transactions. Specifically, we did not maintain and communicate sufficient and consistent accounting policies, which limited our ability to make accounting decisions and to detect and correct accounting errors. This deficiency contributed to other control deficiencies, some of which have resulted in material weaknesses.

 

·                  We do not maintain an internal audit or similar function. This deficiency resulted in not having an adequate independent, objective body to assess, monitor, and evaluate the intended operating effectiveness of controls or to conduct operational audits for the identification of recommendations to improve operating effectiveness of the organization.

 

·                  We did not maintain effective monitoring of controls in certain areas, for example in areas related to period-end financial reporting process, revenue recognition, cash, contracts, inventory, property, plant and equipment and estimates in accruals. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

·                  We did not maintain effective controls over risk assessments. Specifically, we did not maintain processes to evaluate certain business and fraud risks. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

·                  We did not maintain effective control activities in certain areas, including period-end financial reporting process, revenue recognition, cash, contracts, inventory, property, plant and equipment and estimates in accruals. Specifically, we did not maintain formal policies and procedures in several of the major areas that would help to ensure that management directives are carried out appropriately. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

·                  We did not maintain effective controls over information and communication, specifically around reports and financial data, as we had several issues with our system implementation. Thus, we had issues in providing the identification, capture, and exchange of information in a form and time frame that enabled our employees to carry out their responsibilities.  Specifically, due to the system implementation, there were issues revolving around the actual information/reports provided, which proved to be a pervasive issue. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

Misstatements could result in substantially all of the accounts and disclosures associated with the material weaknesses described above and as a result a material misstatement in our annual or interim consolidated financial statements would not be prevented or detected in a timely manner. Management has performed procedures designed to ensure the reliability of our financial reporting and related financial statements and we believe the consolidated financial statements included in this report as of and for the period ended November 30, 2012, are fairly stated in all material respects.

 

Plans for Remediation of Material Weaknesses

 

With the oversight of our CEO and CFO we have begun efforts to improve our internal control over financial reporting and our disclosure controls and procedures. Specific initiatives to date have been focused on the following:

 

·                  We are instituting a formal code of ethics review annually to communicate, both internally and externally, our commitment to a strong effective control environment, high ethical standards and financial reporting integrity,

 

40



Table of Contents

 

·                  We are providing training to reinforce the importance of our control environment for Finance, Accounting, Information Technology Department personnel and all operations Managers across the Company,

 

·                  We are implementing policies and procedures to ensure that we maintain appropriate business and accounting records and formally document the application of generally accepted accounting principles for business transactions,

 

·                  We are performing a review of existing Accounting, Tax and Information Technology Department personnel with the goals of enhancing our complement of resources with a higher degree of accounting and internal control knowledge, experience, and training,

 

·                  We are documenting and formalizing our period end financial reporting processes, including the implementation of a monthly close checklist and formal policies and procedures concerning journal entries, account reconciliations, accrued expenses and estimates,

 

·                  We are implementing policies and procedures to ensure revenue is properly valued and recognized,

 

·                  We have hired a new information technology director that is responsible for overseeing the completion of the ERP implementation, and

 

·                  We are in the process of implementing a more formalized internal risk assessment process and evaluating the potential to add an in-house internal audit function as well.

 

We believe the steps taken to date have improved the effectiveness of our internal control over financial reporting; however, we have not completed all of the corrective processes, procedures and related evaluation or remediation efforts identified herein that we believe are necessary.  As we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we will perform additional procedures prescribed by management, including the use of manual mitigating control procedures, to ensure that our financial statements continue to be fairly stated in all material respects.  We were not able to remediate all of the foregoing material weaknesses during our fiscal year ended February 28, 2013.

 

Changes in Internal Control over Financial Reporting

 

During the three months ended February 2012, we began the implementation of a new ERP at certain divisions.  The implementation materially affected our internal control over financial reporting and has contributed to the material weaknesses previously disclosed. After we fully address the implementation issues discussed above, we will further address our internal control over financial reporting. As a result, there was no change in our internal control over financial reporting during the fiscal quarter ended November 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1 - LEGAL PROCEEDINGS

 

We are a party from time to time to legal proceedings relating to our operations. Our ultimate legal and financial liability in respect to all legal proceedings in which we are involved at any given time cannot be estimated with any certainty. However, based upon examination of such matters and consultation with counsel, management currently believes that the ultimate outcome of these contingencies will not have a material adverse effect on our consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and/or cash flows for that period.

 

ITEM 1A - RISK FACTORS

 

You should carefully consider the risks described in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012 (the “Form 10-K”), including those disclosed under the caption “Risk Factors,” which could materially affect our business, financial condition or future results.  Additional regulatory and other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.  If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.  Except as set forth below, the risks described in our Form 10-K have not materially changed.

 

41



Table of Contents

 

The cancellation of significant contracts or our disqualification from bidding for, or being awarded, new contracts could reduce revenues and have a material adverse effect on our results of operations.

 

Contracts that we enter into with governmental entities can usually be canceled at any time by them with payment only for the work already completed.  In addition, we could be prohibited from bidding on or being awarded certain governmental and other contracts if we fail to maintain qualifications required by those entities, including failing to post required surety bonds or meet disadvantaged business or minority business requirements, bidding an amount outside of the governmental entity’s estimate or including a bid item which the governmental entity determines is unacceptable. A cancellation of an unfinished contract or our disqualification from the bidding process could cause our equipment to be idled for a significant period of time until other comparable work is secured, which could have a material adverse effect on our business and results of operations.

 

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On December 28, 2012, each of Paul I. Detwiler, Jr. and Donald L. Detwiler exchanged 10,000 shares of Class A voting common stock of the Company for 11,180 shares of Class B non-voting common stock of the Company. The shares of the exchanged Class B non-voting common stock were then gifted by such individuals to their family members, each of whom is an existing shareholder. As a result of the exchange for Class B non-voting common stock, the gifting of such equity securities did not affect the voting control of the Company.

 

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

 

There are no other defaults upon senior securities except as described in the financial statements and accompanying notes herein and disclosed in the applicable Current Reports on Form 8-K filed with the Securities and Exchange Commission.

 

ITEM 4 - MINE SAFETY DISCLOSURES

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 of this Quarterly Report on Form 10-Q.

 

ITEM 5 - OTHER INFORMATION

 

None.

 

42



Table of Contents

 

ITEM 6 - EXHIBITS

 

Exhibit
Number

 

Description

 

 

 

31.1*

 

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act, as amended.

 

 

 

31.2*

 

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act, as amended.

 

 

 

32.1**

 

Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

 

 

 

32.2**

 

Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

 

 

95

 

Mine Safety Disclosures

 


*                      Filed herewith.

**               Furnished herewith.

 

43



Table of Contents

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

NEW ENTERPRISE STONE & LIME CO., INC.

 

 

Date: April 1, 2013

By:

/s/ Albert L. Stone

 

 

Albert L. Stone

 

 

Senior Vice President and Chief Financial Officer

 

44



Table of Contents

 

EXHIBIT INDEX

 

Exhibit
Number

 

Description

 

 

 

31.1*

 

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act, as amended.

 

 

 

31.2* 

 

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act, as amended.

 

 

 

32.1**

 

Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

 

 

 

32.2**

 

Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

 

 

95

 

Mine Safety Disclosure.

 


*                      Filed herewith.

**               Furnished herewith.

 

45