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EX-95 - EXHIBIT 95 - New Enterprise Stone & Lime Co., Inc.exhibit9505-31x2015.htm
EX-32.1 - EXHIBIT 32.1 - New Enterprise Stone & Lime Co., Inc.exhibit32105-31x2015.htm
EX-31.2 - EXHIBIT 31.2 - New Enterprise Stone & Lime Co., Inc.exhibit31205-31x2015.htm
EX-32.2 - EXHIBIT 32.2 - New Enterprise Stone & Lime Co., Inc.exhibit32205-31x2015.htm
EX-31.1 - EXHIBIT 31.1 - New Enterprise Stone & Lime Co., Inc.exhibit31105-31x2015.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended May 31, 2015
 
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
 incorporation or organization)
 
(I.R.S. Employer
 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   ý
 
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   ý  No   o
 

The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.

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 filero
 
Accelerated filero
 
 
 
Non-accelerated filerx
 
Smaller reporting companyo
(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   ý
 
As of July 10, 2015, 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.
 



New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Table of Contents
Quarter Ended May 31, 2015
 
 
Page(s)
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets at May 31, 2015 and February 28, 2015
 
 
Condensed Consolidated Statements of Comprehensive Loss for the three months ended May 31, 2015 and 2014
 
 
Condensed Consolidated Statements of Cash Flows for the three months ended May 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



ITEM 1. FINANCIAL STATEMENTS

New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
 
(In thousands, except share and per share data)
 
May 31, 2015
 
February 28, 2015 *
Assets
 
 
 
 
Current assets
 
 

 
 

Cash and cash equivalents
 
$
3,508

 
$
13,293

Restricted cash
 
17,109

 
17,177

Accounts receivable, less reserves of $4,144 and $4,564 respectively
 
99,574

 
49,901

Inventories
 
103,279

 
102,206

Deferred income taxes
 
2,630

 
2,630

Other current assets
 
8,402

 
8,885

Assets held for sale
 
3,532

 
8,517

Total current assets
 
238,034

 
202,609

Property, plant and equipment, net
 
311,347

 
310,274

Goodwill
 
87,132

 
87,132

Other intangible assets, net
 
18,705

 
18,933

Other noncurrent assets
 
30,830

 
31,422

Total assets
 
$
686,048

 
$
650,370

Liabilities and Deficit
 
 

 
 

Current liabilities
 
 

 
 

Current maturities of long-term debt
 
$
33,070

 
$
8,528

Accounts payable — trade
 
46,168

 
15,652

Accrued liabilities
 
57,705

 
64,880

Total current liabilities
 
136,943

 
89,060

Long-term debt, less current maturities
 
664,279

 
650,267

Deferred income taxes
 
27,847

 
28,727

Other noncurrent liabilities
 
40,327

 
46,274

Total liabilities
 
869,396

 
814,328

Commitments and contingencies (Note 2 and Note 8)
 
0

 
0

 
 
 

 
 

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

 
1

Common stock, Class B, nonvoting, $1 par value
 
273

 
273

Accumulated deficit
 
(310,160
)
 
(290,887
)
Additional paid-in capital
 
126,962

 
126,962

Accumulated other comprehensive loss
 
(2,080
)
 
(2,119
)
Total New Enterprise Stone & Lime Co., Inc. deficit
 
(185,004
)
 
(165,770
)
Noncontrolling interest in consolidated subsidiaries
 
1,656

 
1,812

Total deficit
 
(183,348
)
 
(163,958
)
Total liabilities and deficit
 
$
686,048

 
$
650,370

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
* Data derived from audited consolidated balance sheet as of February 28, 2015.

3


New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
 
 
 
Three Months Ended May 31,
 
(In thousands)
 
2015
 
2014
 
Revenue
 
 

 
 

 
Construction materials
 
$
69,878

 
$
76,645

 
Heavy/highway construction
 
50,681

 
44,098

 
Traffic safety services and equipment
 
20,157

 
19,685

 
Total revenue
 
140,716

 
140,428


 
 
 
 
 
 
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below)
 
 

 
 

 
Construction materials
 
48,841

 
61,425

 
Heavy/highway construction
 
50,241

 
45,225

 
Traffic safety services and equipment
 
15,868

 
15,221

 
Total cost of revenue
 
114,950


121,871


 
 
 
 
 
 
Depreciation, depletion and amortization
 
9,955


11,090


Asset impairment
 
183


1,680


Selling, administrative and general expenses 
 
14,704


15,287


Gain on disposals of property, equipment and software
 
(100
)

(149
)

Operating income (loss)
 
1,024

 
(9,351
)
 
Interest expense, net
 
(21,070
)

(20,326
)

Loss before income taxes
 
(20,046
)
 
(29,677
)
 
Income tax benefit
 
(908
)

(2,242
)

Net loss
 
(19,138
)
 
(27,435
)
 
Less: Net income attributable to noncontrolling interest
 
(135
)
 
(175
)
 
Net loss attributable to New Enterprise Stone & Lime Co., Inc.
 
(19,273
)
 
(27,610
)
 
Other comprehensive income (loss)
 
 
 
 
 
Unrealized actuarial gains and amortization of prior service costs, net of income taxes
 
39

 
39

 
Comprehensive loss
 
(19,099
)
 
(27,396
)
 
Less: Comprehensive income attributable to noncontrolling interest
 
(135
)
 
(175
)
 
Comprehensive loss attributable to New Enterprise Stone & Lime Co., Inc.
 
$
(19,234
)
 
$
(27,571
)
 



 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


4


New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
 
 
 
Three Months Ended May 31,
(In thousands)
 
2015
 
2014
Reconciliation of net loss to net cash from operating activities
 
 

 
 

Net loss
 
$
(19,138
)
 
(27,435
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 

 
 

Depreciation, depletion and amortization
 
9,955

 
11,090

Asset impairment
 
183

 
1,680

Gain on disposals of property, equipment and software
 
(100
)
 
(149
)
Non-cash payment-in-kind interest accretion
 
5,136

 
5,568

Amortization and write-off of debt issuance costs
 
826

 
1,082

Deferred income taxes
 
(880
)
 
(1,809
)
Bad debt
 
(133
)
 
343

Changes in assets and liabilities:
 
 

 
 

Accounts receivable
 
(49,540
)
 
(45,050
)
Inventories
 
(94
)
 
4,464

Other assets
 
334

 
1,574

Accounts payable
 
28,265

 
24,003

Other liabilities
 
(5,728
)
 
(9,565
)
Net cash used in operating activities
 
(30,914
)
 
(34,204
)
Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(4,371
)
 
(4,110
)
Proceeds from sale of property, equipment and assets held for sale
 
2,831

 
939

Change in cash value of life insurance
 
(41
)
 
(31
)
Change in restricted cash
 
68

 
10,236

Net cash (used in) provided by investing activities
 
(1,513
)
 
7,034

Cash flows from financing activities
 
 

 
 

Proceeds from issuance of short-term borrowings
 
23,705

 
11,528

Proceeds from issuance of long-term debt
 

 
39

Repayments of other debt
 
(772
)
 
(5,157
)
Debt issuance costs
 

 
(756
)
Distribution to noncontrolling interest
 
(291
)
 

Net cash provided by financing activities
 
22,642

 
5,654

Net decrease in cash and cash equivalents
 
(9,785
)
 
(21,516
)
Cash and cash equivalents
 
 

 
 

Beginning of period
 
13,293

 
23,892

End of period
 
$
3,508

 
$
2,376

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


5


New Enterprise Stone and Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter Ended May 31, 2015
 
1.              Nature of Operations and Summary of Significant Accounting Policies
 
Company Activities
 
New Enterprise Stone & Lime Co., Inc., a Delaware corporation, is a 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.

Construction materials is comprised of aggregate production, including crushed stone and construction sand and gravel, hot mix asphalt production, and ready mixed concrete production.  Heavy/highway construction includes heavy construction, blacktop paving and other site preparation services. The Company's heavy/highway construction operations are primarily supplied with construction materials from our construction materials segment.  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.

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”) and include the accounts of the Company and its wholly owned subsidiary companies, and their wholly owned subsidiary companies, and entities where the Company has a controlling equity interest. All adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited Condensed Consolidated Financial Statements.  The unaudited Condensed Consolidated Financial Statements do not include all of the information or disclosures required for a complete presentation in accordance with GAAP. The year-end condensed balance sheet data at February 28, 2015 was derived from audited financial statements, but does not include all disclosures required by 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 28, 2015 filed with the Securities and Exchange Commission (“SEC”) on May 18, 2015. The results for interim periods are not necessarily indicative of the results for the full fiscal year ending February 29, 2016 ("fiscal 2016").
 
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 the current presentation. The expenses associated with certain benefit programs previously disclosed within the Pension and profit sharing caption have been reclassified to the Cost of revenue and to the Selling, administrative and general captions in the Condensed Consolidated Statements of Comprehensive Loss in the amounts of $1.2 million and $0.2 million, respectively for the three months ended May 31, 2014. The reclassification had no effect on Operating income, Comprehensive loss within the Condensed consolidated statements of comprehensive loss, the Condensed consolidated statement of cash flows, or the Condensed consolidated balance sheets.

6



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.

The Company uses a cash pooling arrangement with a single financial institution with specific provisions for the right to offset positive and negative cash balances.  In addition, the Company has agreed to provide cash dominion for all accounts associated with this arrangement. Accordingly, the Company classifies net aggregate cash overdraft positions as other obligations within the current maturities of long-term debt, as applicable.

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 allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable, including service charges.  The Company determines the allowance based on historical write-off experience, specific identification based on a review of individual past due balances and their composition, and the nature of the customer.  Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The Company’s total accounts receivable consists of the following:
 
 
May 31,
 
February 28,
(In thousands)
 
2015
 
2015
Costs and estimated earnings in excess of billings

$
20,802


$
7,392

Trade

76,578


39,792

Retainages

6,338


7,281



103,718


54,465

Allowance for doubtful accounts

(4,144
)

(4,564
)
    Accounts receivable, net

$
99,574


$
49,901



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 inventories consist of the following:
 
 
 
May 31,
 
February 28,
(In thousands)
 
2015
 
2015
Crushed stone, agricultural lime and sand
 
$
68,839

 
$
70,112

Safety equipment
 
14,176

 
14,187

Parts, tires and supplies
 
7,564

 
7,753

Raw materials
 
10,461

 
7,980

Building materials
 
1,183

 
1,066

Other
 
1,056

 
1,108

 
 
$
103,279

 
$
102,206


7



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:
 
 
 
May 31,
 
February 28,
(In thousands)
 
2015
 
2015
Limestone and sand acreage
 
$
146,293

 
$
146,293

Land, buildings and building improvements
 
87,089

 
87,097

Crushing, prestressing and manufacturing plants
 
306,505

 
305,923

Contracting equipment vehicles and other
 
315,464

 
307,644

Construction in progress
 
5,294

 
3,923

Property, plant and equipment
 
860,645

 
850,880

Less: Accumulated depreciation and depletion
 
(549,298
)
 
(540,606
)
Property, plant and equipment, net
 
$
311,347

 
$
310,274

 
For the three months ended May 31, 2015 and 2014, depreciation expense was $9.0 million and $10.2 million, respectively. 

Assets Held for Sale

The Company classifies assets as held for sale when the all following criteria are met: (i) management, having the authority to approve the action, commits to a plan to sell the asset; (ii) the asset is available for immediate sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; (iv) the sale of the asset is probable, and transfer of the asset is expected to quality for recognition as a completed sale, within one year, with a few exceptions: and (v) the asset is being actively marketed for sale at a price that is reasonable, in relation to its current fair value.

On March 5, 2015, the Company entered into an agreement to sell certain properties for $3.4 million in cash. The Company received $0.3 million as of May 31, 2015 and recorded a gain on sale of approximately $0.1 million. See "Note 11 - Subsequent Events" for further information.

During the first quarter of the fiscal year ending February 28, 2016, the Company finalized its sale of certain properties for $3.7 million in cash and the assumption of $1.1 million in liability. An additional net impairment of $0.1 million was recorded in the first quarter of fiscal year 2016. The assets and associated liability were classified as held for sale as of February 28, 2015.

Assets held for sale at May 31, 2015 are comprised primarily of non-core operations, including those related to the Company's block manufacturing facility and CSC facility at its Wescosville, PA location and excess office buildings. Additional impairment of $0.1 million related to these assets was recorded in the first quarter of fiscal year 2016.

The Company's assets held for sale consisted of the following:
 
May 31, 2015
 
February 28, 2015
Inventory
$


$
961

PP&E, net of impairment
3,532


7,556

 
$
3,532


$
8,517



8


Restructuring

The Company initiated, during fiscal year 2014, and substantially concluded in fiscal year 2015, a cost savings and operational efficiency plan (the “Plan”).  The Plan focused on headcount reductions, operational efficiencies, administrative savings, and a management realignment. 



The following table presents changes to Accrued restructuring:
(In thousands)
 
Accrued restructuring
Balance at February 28, 2015
 
$
1,461

Additional accruals recorded
 

Payments on or reductions of accrued restructuring charges
 
971

Balance at May 31, 2015
 
$
490


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, goodwill and other intangible assets; 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 and those differences could be material.

Goodwill and Other Intangible Assets
 
Goodwill
 
Goodwill is tested for impairment on an annual basis or more frequently whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  The impairment test for goodwill is a two-step process.  Under the first step, the fair value of the reporting unit is compared with its carrying value.  If the fair value of the reporting unit is less than its carrying value, an indication of impairment exists and the reporting unit must perform step two of the impairment test.  Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.  If the fair value of the reporting unit exceeds its carrying value under the first step, step two does not need to be performed.
 
Our reporting units were determined based on our organizational structure, considering the level at which discrete financial information for businesses is available and regularly reviewed. The Company has three operating segments, which is the basis for determining its reporting units, organized around its three lines of business: (i) construction materials; (ii) heavy/highway construction; and (iii) traffic safety services and equipment. Construction materials include three reporting units within the operating segment based on geographic location. The operating segment of traffic safety services and equipment consists of one reporting unit within the segment based upon the similar economic characteristics of its operations.
 
Our annual goodwill impairment analysis takes place as of fiscal year end.  The estimated fair value of each of the reporting units was in excess of its carrying value, even after conducting various sensitivity analysis on key assumptions, such that no adjustment to the carrying values of goodwill was required as of February 28, 2015.

The inputs used within the fair value measurements were categorized within Level 3 of the fair value hierarchy.
 
Other Intangible Assets
 
Other intangible assets consist of technology, customer relationships and trademarks acquired in previous acquisitions. The technology, customer relationships and trademarks are amortized over a straight-line basis.

9



Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
 
Other Noncurrent Assets
 
The Company’s Other noncurrent assets consist of the following:
 
 
 
May 31,
 
February 28,
(In thousands)
 
2015
 
2015
Deferred financing fees (less current portion of $2,648 and $2,905, respectively)
 
$
9,488

 
$
10,314

Capitalized software (net of accumulated amortization of $3,634 and $3,364, respectively)
 
7,523

 
7,553

Cash surrender value of life insurance (net of loans of $3,035 and $3,035, respectively)
 
1,290

 
1,249

Deferred stripping costs
 
4,615

 
4,514

Other
 
7,914

 
7,792

Total other noncurrent assets
 
$
30,830

 
$
31,422


Revenue Recognition
 
The Company recognizes revenue on construction contracts under the percentage-of-completion method of accounting, as measured by the cost incurred to date over estimated total cost.  Our construction contracts are primarily fixed-price contracts. The typical contract life cycle for these projects can be up to two to four years in duration.  Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to revenues and costs. Revenue from contract change orders is recognized when the contract owner has agreed to the change order with the customer and the related costs are incurred. We do not recognize revenue on a basis of contract claims. Provisions for estimated losses on uncompleted contracts are made for the full amount of estimated loss in the period in which evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue and are recorded as an additional cost (rather than as a reduction of revenue). Contract costs include all direct material, labor, subcontract and other costs and those indirect costs related to contract performance, such as indirect salaries and wages, equipment repairs and depreciation, insurance and payroll taxes. Administrative and general expenses are charged to expense as incurred. Costs and estimated earnings in excess of billings on uncompleted contracts represent the excess of contract revenue recognized to date over billings to date. Billings in excess of costs and estimated earnings on uncompleted contracts represent the excess of billings to date over the amount of revenue recognized to date.  As of May 31, 2015 and February 28, 2015, such amounts are included in accounts receivable (Note 1, “Nature of Operations and Summary of Significant Accounting Policies”) and accrued liabilities (Note 3, “Accrued Liabilities”), respectively, in the Condensed Consolidated Balance Sheets.
 
The Company generally recognizes revenue on the sale of construction materials and concrete products, other than custom-built concrete products, when the customer takes title and assumes risk of loss. Typically, this occurs when products are shipped.  The Company accounts for custom-built concrete products under the units-of-production method.  Under this method, the revenue is recognized as the units are produced under firm contracts.
 
The Company recognizes equipment rental revenue on a straight-line basis over the specific daily, weekly or monthly terms of the agreements. Revenues from the sale of equipment and contractor supplies are recognized at the time of delivery to, or pick-up by, the customer.

Other revenue consists of sales of miscellaneous materials, scrap and other products that do not fall into our other primary lines of business. The Company generally recognizes revenue when the customer takes title and assumes risk of loss, the price is fixed or determinable and collection is reasonably assured.


10


Impairment of Definite-Lived Long-Lived Assets

Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The Company considers an asset group as the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. For our construction materials and heavy/highway construction operations, the lowest level of largely independent identifiable cash flows is at the regional level, which collectively serves a local market. Each region shares and allocates its material production, resources, equipment and business activity among the locations within the region in generating cash flows. We have realigned our current divisional structure by combining Lancaster, Pennsylvania and Northeastern Pennsylvania into our East Region, Central Pennsylvania, Chambersburg, Shippensburg and Gettysburg Pennsylvania into our Western Region, and Western New York into our North Region. The construction materials regions’ long-lived assets predominantly include limestone and sand acreage and crushing, prestressing equipment and manufacturing plants and the heavy/highway construction region’s long lived assets predominantly include contracting equipment and vehicles. The traffic safety services and equipment business includes two asset groups, distinguished between its retail sales and distribution as one asset group and its manufacturing and assembly as the second asset group. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset group.

Recently Issued and Adopted Accounting Standards

In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2015 and for interim periods within fiscal years beginning after December 15, 2016. Early adoption of the amendments in this update are permitted for financial statements that have not been previously issued. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. Effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016 and for interim periods within fiscal years beginning after December 15, 2017. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The standards requires an entity's management to evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. Public entities are required to apply standards for annual reporting periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Public entities are required to apply the revenue recognition standard for annual reporting period beginning on or after December 15, 2016, including interim periods within that annual reporting period. Early application is not permitted. The Company has not yet selected a transition method and is evaluating the effect that the updated standard will have on its Consolidated Financial Statements and related disclosures.


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 February 12, 2014, the Company entered into (i) an asset-based revolving credit agreement, among the Company and certain of its subsidiaries party thereto as borrowers, the lenders party thereto, PNC Bank, National Association, as issuer, swing loan lender, administrative agent and collateral agent (the “Revolving Credit Agreement” or “RCA”) and a (ii) term loan credit and guaranty agreement, among the Company as borrower, certain subsidiaries of the Company party thereto as guarantors, the lenders party thereto and Cortland Capital Market Services LLC as administrative agent (the “Term Loans”, and together with RCA, the “Credit Facilities”). The Credit Facilities contain certain financial maintenance and other covenants (Note 4, "Long-Term Debt"). In the past, the Company has failed to meet certain operating performance measures as well as the financial covenant requirements set forth under its previous credit facilities, which resulted in the need to obtain several amendments, and should the Company fail in the future, the Company cannot guarantee that it will be able to obtain such amendments. A failure to obtain such amendments could result in an acceleration of its indebtedness under the Credit Facilities and a cross-default under our other indebtedness, including the $250.0 million 11% senior notes due 2018 (the “Notes”) and the $265 million 13% senior secured notes due 2018 (the "Secured Notes"). If the lenders were to accelerate the due dates of our indebtedness or if current sources of liquidity prove to be insufficient, there can be no assurance that the Company would be able to repay or refinance such indebtedness or to obtain sufficient funding. This could require the Company to restructure or alter its operations and capital structure. We believe we have sufficient financial resources, including cash and cash equivalents, cash from operations and amounts available for borrowing under our RCA, to fund our business and operations, including capital expenditures and debt service obligations, for at least the next twelve months. At May 31, 2015, the Company was in compliance with all of its financial covenants.

3.              Accrued Liabilities
 
Accrued liabilities consist of the following: 
 
 
May 31,
 
February 28,
(In thousands)
 
2015
 
2015
Insurance
 
$
25,190

 
$
24,565

Interest
 
12,705

 
23,408

Payroll and vacation
 
7,844

 
5,805

Withholding taxes
 
2,032

 
858

Billings in excess of costs and estimated earnings on uncompleted contracts
 
2,033

 
3,082

Contract expenses *
 
2,379

 
2,676

Other
 
5,522

 
4,486

Total accrued liabilities
 
$
57,705

 
$
64,880


* Included within contract expenses is $1.5 million of provision for loss contracts as of May 31, 2015 and February 28, 2015, respectively.


11


4.              Long-Term Debt

The Company's long-term debt consists of the following:  
 
 
May 31,
 
February 28,
(In thousands)
 
2015
 
2015
RCA ($25.8 million and $27.3 million available as of May 31, 2015 and February 28, 2015, respectively), interest rate of 6.25%
 
$
29,578

 
$
5,873

11% Notes, due 2018
 
250,000

 
250,000

13% Secured Notes, due 2018
 
335,294

 
323,956

Term Loans, interest rate of 8%
 
70,000

 
70,000

Other obligations
 
12,477

 
8,966

Total debt
 
697,349

 
658,795

Less: Current portion
 
(33,070
)
 
(8,528
)
Total long-term debt
 
$
664,279

 
$
650,267

 
The RCA bears interest, at the Company’s option, at rates based upon LIBOR, plus a margin of 4.0% (with a LIBOR floor of 1.0%) or the base rate, plus a margin of 3.0%. The unused portion of the revolving credit commitment is subject to a commitment fee at a rate of 0.5%. At May 31, 2015, the weighted average interest rate on the RCA was 6.65%. The Term Loans bear interest, at the Company’s option, at rates based upon the LIBOR plus, a margin of 7.0% (with a LIBOR floor of 1.0%) or the base rate plus a margin of 6.0%. At May 31, 2015 the weighted average interest rate on the Term Loans was 8.0%.

The Credit Facilities contain a springing maturity date based upon certain events with a final maturity date of February 12, 2019. The Term Loans and the RCA will mature on December 14, 2017 unless the Company refinances its Secured Notes by such date and will mature on June 2, 2018 unless the Company refinances its Notes by June 1, 2018.

Availability under the RCA is determined pursuant to a borrowing base formula based on eligible receivables and eligible inventory, subject to an availability block and to such other reserves as the Revolver Agent and the Syndication Agent may impose in accordance with the RCA. The availability block is initially $20.0 million but reduces to $10.0 million if the Company achieves a fixed charge coverage ratio of 1.00 to 1.00 as of the end of any fiscal quarter on a rolling four (4) quarter basis and further reduces to $0 if the Company achieves such fixed charge coverage ratio as of the end of the two immediately subsequent fiscal quarters. However, if at any time following the effectiveness of any of the reductions to the availability block the fixed charge coverage ratio as of the end of any quarter measured on a rolling four (4) quarter basis shall be less than 1.00 to 1.00, the availability block shall be increased back to $20.0 million, subject to further reduction as provided above; provided, that such reductions may occur no more than two (2) times, and if the availability block is increased back to $20.0 million following the second reduction, such increase shall be permanent and shall not be subject to further reduction.

The RCA includes a $20.0 million letter of credit sub-facility and a $10.5 million swing loan sub-facility for short-term borrowings. As of May 31, 2015, the Company had $16.7 million of letters of credit outstanding under the sub-facility. We classify borrowings under the RCA as current due to the nature of the agreement.
 
Pursuant to the Term Loans, in the event of a voluntary or mandatory prepayment or acceleration of the Term Loans, the Company shall be required to pay principal and a prepayment premium equal to:
Time Period
 
Percentage
 
 
 

On or prior to 5/12/2015
 
103.00
%
Between 5/13/2015 and 2/12/2016
 
102.00
%
2/13/2016 and thereafter
 
100.00
%

Commencing May 31, 2015, as of the end of each fiscal quarter, the Company will be required to have trailing twelve-month EBITDA in an amount not less than certain amounts specified in the Credit Facilities. Commencing with the fiscal quarter ending May 31, 2017, the Company will be required under the Credit Facilities to maintain as of the end of each fiscal quarter a fixed charge coverage ratio of not less than 1.00 to 1.00 measured on a rolling four quarter basis.


12


The Credit Facilities include affirmative and negative covenants that limit the ability of the Company and its subsidiaries 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) prepaying indebtedness, (viii) making capital expenditures, and (ix) providing negative pledges to third parties. In addition, the Credit Facilities contain conditions to lending, representations and warranties and events of default, including, among other things: (i) payment defaults, (ii) cross-defaults to other material indebtedness, (iii) covenant defaults, (iv) certain events of bankruptcy, (v) the occurrence of a material adverse effect, (vi) material judgments, (vii) change in control, (viii) seizures of material property, (ix) involuntary interruptions of material operations, and (x) certain material events with respect to pension plans.

As of May 31, 2015, the Company was in compliance with all of its covenant requirements.

 
13% 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 or (ii) subject to any Interest Rate Increase (as defined below), initially at the rate of 4% per annum in cash 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. 

On March 4, 2015, the Company notified the trustee of its Secured Notes that it had elected to pay interest on the Secured Notes for the 12-month period commencing March 15, 2015 in the form of 7% cash payment and 6% payment in kind, which represents $23.8 million and $20.4 million of interest, respectively, for the same 12-month period. At May 31, 2015, the inception-to-date PIK interest was $74.5 million ($70.3 million was recorded as an increase to the Secured Notes and $4.2 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 permanently increased by an additional 1.0% per annum (an "Interest Rate Increase") unless the Company delivered 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 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 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. 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. 

At any time prior to March 15, 2015, the Company was permitted to 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 was also permitted to 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 are redeemable, in whole or in part, at the redemption prices specified as follows:
 
Year
Percentage
2015
106.50
%
2016
103.25
%
2017 and thereafter
100.00
%
 

13


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 on September 15, 2017 and each accrual period thereafter.

The Secured Notes are guaranteed on a full and unconditional, and joint and several basis, by certain of the Company’s existing and future domestic subsidiaries (the “Guarantors” as described in Note 10, “Condensed Issuer, Guarantor and Non-Guarantor Financial Information”).  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 Credit Facilities, 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 RCA on a first-priority basis.
 
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.
 
The indenture governing the Secured Notes required that the Company file a registration statement with the SEC and exchange the Secured Notes for new Secured Notes having terms substantially identical in all material respects to the Secured Notes by March 10, 2013. On June 13, 2013, the Company filed a Registration Statement on Form S-4 and concluded the exchange offer on October 30, 2013.  The Company incurred $0.8 million of penalty interest through October 30, 2013. 
 
11% Notes Due 2018
 
In August 2010, the Company sold $250.0 million aggregate principal amount of the Notes.  Interest on the Notes is payable semi-annually in arrears on March 1 and September 1 of each year.  The proceeds from the issuance of Notes were used to pay down debt. In connection with the issuance of the Notes, the Company incurred costs of approximately $8.3 million which were deferred and are being amortized on the effective interest method through the 2018 maturity date.
 
On or after September 1, 2014, the Company was permitted to redeem all or a part of the Notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest if redeemed during the twelve-month period beginning on September 1 of the years indicated below:
Year
Percentage
2014
105.50
%
2015
102.75
%
2016 and thereafter
100.00
%
 
If the Company experiences a change of control, as outlined in the indenture governing the Notes, the Company may be required to offer to purchase the Notes at a purchase price equal to 101.0% of the principal amount, plus accrued interest.
 
The Notes are guaranteed on a full and unconditional, and joint and several, basis by certain of the Company’s existing and future domestic subsidiaries (the “Guarantors” as described in Note 10, “Condensed Issuer, Guarantor and Non-Guarantor Financial Information”). The indenture governing the Notes contains affirmative and negative covenants that, among other things, limit the Company’s and its subsidiaries’ ability to incur additional debt, make restricted payments, dividends or other payments from subsidiaries to the Company, create liens, engage in the sale or transfer of assets and engage in transactions with affiliates. The Company is not required to maintain any affirmative financial ratios or covenants under the indenture governing the Notes.
 
The indenture governing the Notes required that the Company file a registration statement with the SEC and exchange the Notes for new Notes having terms substantially identical in all material respects to the Notes. The Company filed a Registration Statement on Form S-4 with the SEC for the Notes on August 29, 2011. The registration statement became effective on September 13, 2011, and the Company concluded the exchange offer on October 12, 2011.

14



Other obligations

The Company has various notes, mortgages, leases and other financing arrangements resulting from the purchase of principally land, machinery and equipment. All loans provide for at least annual payments and are principally secured by the land and equipment acquired. Capital lease 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. The Company incurred $4.3 million of new obligations under various financing arrangements related to equipment, assets and other in the quarter ended May 31, 2015.
 
5.              Income Taxes
 
The income tax provisions for all periods consist of federal and state taxes that are based on the estimated effective tax rates applicable for the full years ending February 28, 2016 and February 28, 2015, after giving effect to items specifically related to the interim periods.
 
The effective income tax rates for the three months ended May 31, 2015 and 2014 were 4.5% and 7.6%, respectively, resulting in tax benefit of $0.9 million and $2.2 million, respectively. The principal factor affecting the comparability of the effective income tax rates for the respective periods is the Company’s assessment of the realizability of the current year projected income tax loss. The Company recorded a valuation allowance on the portion of the current year federal and state income tax losses that it believes are not more likely than not to be realized.

Cash paid for income taxes was immaterial for the three months ended May 31, 2015 and 2014, primarily as a result of 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 is included within Cost of revenue and Selling, administrative and general expenses in the amounts of $1.5 million and $0.1 million, respectively, for the three months ended May 31, 2015, and $1.2 million and $0.2 million, respectively for the three months ended May 31, 2014.
 
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 months ended May 31, 2015 and 2014, was as follows:
 
 
 
Three Months Ended 
 May 31,
(In thousands)
 
2015
 
2014
Net periodic benefit cost
 
 

 
 

Service cost
 
$
78

 
$
86

Interest cost
 
93

 
105

Expected return on plan assets
 
(155
)
 
(150
)
Amortization of prior service cost
 
13

 
14

Recognized net actuarial loss
 
54

 
51

Total pension expense
 
$
83

 
$
106

 
The Company made contributions to the defined benefit pension plans of approximately $0.1 million during the three months ended May 31, 2015 and May 31, 2014, and expects to make additional contributions of approximately $0.2 million in the remainder of fiscal year 2015.


15


7. Other Noncurrent Liabilities

The Company's other noncurrent liabilities consist of:

 
 
May 31,
 
February 28,
(In thousands)
 
2015
 
2015
Reclamation costs
$
19,125


$
18,835

Executive deferred compensation liability
5,454


5,512

PIK accrued interest
4,191


10,394

Other
11,557


11,533

 
 
$
40,327


$
46,274



8.              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 loss or liquidity.

The Company maintains a self-insurance program for workers’ compensation (Pennsylvania employees) coverage, which is administered by a third party management company. The Company’s self-insurance retention is limited to $1.0 million per claim with the excess covered by workers’ compensation excess liability insurance. The Company is required to maintain a $2.4 million surety bond with the Commonwealth of Pennsylvania. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported.  The Company also maintains four self-insurance programs for health coverage with losses limited to $0.3 million per member per year.  Additionally, the Company is required to and does provide a letter of credit in the amount of $0.1 million to guarantee payment of the deductible portion of its liability coverage which existed prior to January 1, 2008. We are also required to maintain a $20,000 surety bond to cover the deductible portion of our workers' compensation policies for 1992 and 1993.
 
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 under this arrangement is recorded as part of restricted cash in the amount of $15.5 million as of May 31, 2015 and February 28, 2015 in our unaudited Condensed Consolidated Balance Sheets. Reserves for retained losses within this captive, which are recorded in accrued liabilities in our unaudited Condensed Consolidated Balance Sheets, were approximately $16.8 million and $15.5 million as of May 31, 2015 and February 28, 2015, 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 primarily relates to worker’s compensation, included in Note 3, “Accrued Liabilities” totaled $8.4 million and $9.1 million as of May 31, 2015 and February 28, 2015, respectively. Liabilities associated with amounts that are payable by insurance companies of approximately $6.7 million were recorded in other noncurrent liabilities in our unaudited Condensed Consolidated Balance Sheets as of May 31, 2015 and February 28, 2015.

9.         Business Segments
 
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 inter-segment and certain intra-segment activities.  A description of the services and product offerings within each of the Company’s segments is provided below.
 

16


The Company reviews earnings of the segments principally at the operating profit level and accounts for inter-segment and certain intra-segment 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 other business line administrative functions. 

The following is a summary of certain financial data for the Company’s operating segments:
 
 
Three Months Ended 
 May 31,
(In thousands)
 
2015
 
2014
Revenue
 
 

 
 

Construction materials
 
$
95,563

 
$
99,113

Heavy/highway construction
 
50,681

 
44,098

Traffic safety services and equipment
 
20,157

 
23,666

Segment totals
 
166,401

 
166,877

Eliminations
 
(25,685
)
 
(26,449
)
Total revenue
 
$
140,716

 
$
140,428

Operating income
 
 

 
 

Construction materials
 
$
13,581

 
$
6,087

Heavy/highway construction
 
(1,185
)
 
(3,097
)
Traffic safety services and equipment
 
1,563

 
1,090

Corporate and unallocated
 
(12,935
)
 
(13,431
)
Total operating income (loss)
 
$
1,024

 
$
(9,351
)
 
 
 
Three Months Ended 
 May 31,
(In thousands)
 
2015
 
2014
Depreciation, depletion and amortization
 
 

 
 

Construction materials
 
$
6,669

 
$
7,198

Heavy/highway construction
 
1,697

 
2,293

Traffic safety services and equipment
 
1,235

 
1,242

Corporate and unallocated
 
354

 
357

Total depreciation, depletion and amortization
 
$
9,955

 
$
11,090

 

 

10.              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.

17


Condensed Consolidating Balance Sheet at May 31, 2015
 
(In thousands)
 
New Enterprise
Stone & Lime
Co., Inc.
 
Guarantor
Subsidiaries
 
Non
Guarantors
 
Eliminations
 
Total
Assets
 
 

 
 

 
 

 
 

 
 

Current assets
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$

 
$

 
$
3,508

 
$

 
$
3,508

Restricted cash
 
1,267

 
54

 
15,788

 

 
17,109

Accounts receivable, net
 
84,702

 
14,872

 

 

 
99,574

Inventories
 
89,105

 
14,174

 

 

 
103,279

Net investment in lease
 

 

 
647

 
(647
)
 

Deferred income taxes
 
1,918

 
712

 

 

 
2,630

Other current assets
 
6,852

 
(516
)
 
2,066

 

 
8,402

Assets held for sale
 
3,532

 

 

 

 
3,532

Total current assets
 
187,376

 
29,296

 
22,009

 
(647
)
 
238,034

Property, plant and equipment, net
 
290,736

 
20,611

 
6,161

 
(6,161
)
 
311,347

Goodwill
 
81,287

 
5,845

 

 

 
87,132

Other intangible assets, net
 
7,600

 
11,105

 

 

 
18,705

Investment in subsidiaries
 
87,467

 

 

 
(87,467
)
 

Intercompany receivables
 
3,308

 
31,284

 
141

 
(34,733
)
 

Other noncurrent assets
 
27,539

 
942

 
2,349

 

 
30,830

 
 
$
685,313

 
$
99,083

 
$
30,660

 
$
(129,008
)
 
$
686,048

Liabilities and (Deficit) Equity
 
 

 
 

 
 

 
 

 
 

Current liabilities
 
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt
 
$
32,946

 
$

 
$
771

 
$
(647
)
 
$
33,070

Accounts payable - trade
 
38,232

 
7,622

 
314

 

 
46,168

Accrued liabilities
 
39,284

 
1,595

 
16,826

 

 
57,705

Total current liabilities
 
110,462

 
9,217

 
17,911

 
(647
)
 
136,943

Intercompany payables
 
34,234

 
499

 

 
(34,733
)
 

Long-term debt, less current maturities
 
659,456

 

 
4,823

 

 
664,279

Obligations under capital leases, less current installments
 
6,161

 

 

 
(6,161
)
 

Deferred income taxes
 
22,586

 
5,261

 

 

 
27,847

Other noncurrent liabilities
 
37,418

 
561

 
2,348

 

 
40,327

Total liabilities
 
870,317

 
15,538

 
25,082

 
(41,541
)
 
869,396

(Deficit) equity
 
 

 
 

 
 

 
 

 
 

New Enterprise Stone & Lime Co., Inc. (deficit) equity
 
(185,004
)
 
83,545

 
3,922

 
(87,467
)
 
(185,004
)
Noncontrolling interest
 

 

 
1,656

 

 
1,656

Total (deficit) equity
 
(185,004
)
 
83,545

 
5,578

 
(87,467
)
 
(183,348
)
      Total liabilities and (deficit) equity
 
$
685,313

 
$
99,083

 
$
30,660

 
$
(129,008
)
 
$
686,048

 

18


Condensed Consolidating Balance Sheet at February 28, 2015
 
(In thousands)
 
New Enterprise
Stone & Lime
Co., Inc.
 
Guarantor
Subsidiaries
 
Non
Guarantors
 
Eliminations
 
Total
Assets
 
 

 
 

 
 

 
 

 
 

Current assets
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
8,633

 
$
60

 
$
4,600

 
$

 
$
13,293

Restricted cash
 
1,301

 
88

 
15,788

 

 
17,177

Accounts receivable, net
 
39,125

 
10,762

 
14

 

 
49,901

Inventories
 
87,995

 
14,211

 

 

 
102,206

Net investment in lease
 

 

 
1,198

 
(1,198
)
 

Deferred income taxes
 
1,918

 
712

 

 

 
2,630

Other current assets
 
8,038

 
836

 
11

 

 
8,885

Assets held for sate
 
8,517

 

 

 

 
8,517

Total current assets
 
155,527

 
26,669

 
21,611

 
(1,198
)
 
202,609

Property, plant and equipment, net
 
290,137

 
20,137

 
5,810

 
(5,810
)
 
310,274

Goodwill
 
81,287

 
5,845

 

 

 
87,132

Other intangible assets, net
 
7,640

 
11,293

 

 

 
18,933

Investment in subsidiaries
 
85,531

 

 

 
(85,531
)
 

Intercompany receivables
 
3,308

 
29,169

 
(34
)
 
(32,443
)
 

Other noncurrent assets
 
28,097

 
977

 
2,348

 

 
31,422

 
 
$
651,527

 
$
94,090

 
$
29,735

 
$
(124,982
)
 
$
650,370

Liabilities and (Deficit) Equity
 
 

 
 

 
 

 
 

 
 

Current liabilities
 
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt
 
$
8,955

 
$

 
$
771

 
$
(1,198
)
 
$
8,528

Accounts payable - trade
 
8,510

 
6,265

 
331

 
546

 
15,652

Accrued liabilities
 
47,876

 
1,508

 
15,496

 

 
64,880

Total current liabilities
 
65,341

 
7,773

 
16,598

 
(652
)
 
89,060

Intercompany payables
 
34,087

 
(1,098
)
 

 
(32,989
)
 

Long-term debt, less current maturities
 
645,228

 

 
5,039

 

 
650,267

Obligations under capital leases, less current installments
 
5,810

 

 

 
(5,810
)
 

Deferred income taxes
 
23,466

 
5,261

 

 

 
28,727

Other noncurrent liabilities
 
43,365

 
561

 
2,348

 

 
46,274

Total liabilities
 
817,297

 
12,497

 
23,985

 
(39,451
)
 
814,328

(Deficit) equity
 
 

 
 

 
 

 
 

 
 

New Enterprise Stone & Lime Co., Inc. (deficit) equity
 
(165,770
)
 
81,593

 
3,938

 
(85,531
)
 
(165,770
)
Noncontrolling interest
 

 

 
1,812

 

 
1,812

Total (deficit) equity
 
(165,770
)
 
81,593

 
5,750

 
(85,531
)
 
(163,958
)
      Total liabilities and (deficit) equity
 
$
651,527

 
$
94,090

 
$
29,735

 
$
(124,982
)
 
$
650,370

 

19


Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ended May 31, 2015
(In thousands)
 
New Enterprise
Stone & Lime
Co., Inc.
 
Guarantor
Subsidiaries
 
Non
Guarantors
 
Eliminations
 
Total
Revenue
 
$
119,524

 
$
21,387

 
$
3,191

 
$
(3,386
)
 
$
140,716

Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below)
 
98,651

 
16,669

 
2,955

 
(3,325
)
 
114,950

Depreciation, depletion and amortization
 
8,681

 
1,274

 

 

 
9,955

Asset impairment
 
160

 
23

 

 

 
183

Selling, administrative and general expenses
 
13,087

 
1,534

 
83

 

 
14,704

(Gain) on disposals of property, equipment and software
 
(53
)
 
(47
)
 

 

 
(100
)
Operating income (loss)
 
(1,002
)
 
1,934

 
153

 
(61
)
 
1,024

Interest expense (income), net
 
(21,115
)
 
18

 
(34
)
 
61

 
(21,070
)
Loss (income) before income taxes
 
(22,117
)
 
1,952

 
119

 

 
(20,046
)
Income tax benefit
 
(908
)
 

 

 

 
(908
)
Equity in earnings of subsidiaries
 
1,936

 

 

 
(1,936
)
 

Net (loss) income
 
(19,273
)
 
1,952

 
119

 
(1,936
)
 
(19,138
)
Less: Net income attributable to noncontrolling interest
 

 

 
(135
)
 

 
(135
)
  Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc.
 
(19,273
)
 
1,952


(16
)

(1,936
)

(19,273
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
Unrealized actuarial gains and amortization of prior service costs, net of income tax
 
39

 

 

 

 
39

Comprehensive income (loss)
 
(19,234
)
 
1,952


119


(1,936
)

(19,099
)
Less: Comprehensive income attributable to noncontrolling interest
 

 

 
(135
)
 

 
(135
)
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc.
 
$
(19,234
)
 
$
1,952

 
$
(16
)
 
$
(1,936
)
 
$
(19,234
)
 































20


Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ended May 31, 2014
(In thousands)
 
New Enterprise
Stone & Lime
Co., Inc.
 
Guarantor
Subsidiaries
 
Non
Guarantors
 
Eliminations
 
Total
Revenue
 
$
119,447

 
$
22,483

 
$
1,737

 
$
(3,239
)
 
$
140,428

Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below)
 
105,812

 
17,753

 
1,438

 
(3,132
)
 
121,871

Depreciation, depletion and amortization
 
9,806

 
1,284

 

 

 
11,090

Asset impairment
 
1,680

 

 

 

 
1,680

Selling, administrative and general expenses
 
12,910

 
2,332

 
45

 

 
15,287

(Gain) loss on disposals of property, equipment and software
 
(159
)
 
10

 

 

 
(149
)
Operating income (loss)
 
(10,602
)
 
1,104

 
254

 
(107
)
 
(9,351
)
Interest expense (income), net
 
(20,386
)
 
9

 
(56
)
 
107

 
(20,326
)
Loss (income) before income taxes
 
(30,988
)
 
1,113

 
198

 

 
(29,677
)
Income tax benefit
 
(2,242
)
 

 

 

 
(2,242
)
Equity in earnings of subsidiaries
 
1,136

 

 

 
(1,136
)
 

Net (loss) income
 
(27,610
)
 
1,113

 
198

 
(1,136
)
 
(27,435
)
Less: Net income attributable to noncontrolling interest
 

 

 
(175
)
 

 
(175
)
  Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc.
 
(27,610
)
 
1,113


23


(1,136
)
 
(27,610
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
Unrealized actuarial gains and amortization of prior service costs, net of income tax
 
39

 

 

 

 
39

Comprehensive income (loss)
 
(27,571
)
 
1,113

 
198

 
(1,136
)
 
(27,396
)
Less: Comprehensive income attributable to noncontrolling interest
 

 

 
(175
)
 

 
(175
)
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc.
 
$
(27,571
)
 
$
1,113

 
$
23

 
$
(1,136
)
 
$
(27,571
)








21


 
Condensed Consolidating Statement of Cash Flows for the three months ended May 31, 2015
 
(In thousands)
 
New Enterprise
Stone & Lime
Co., Inc.
 
Guarantor
Subsidiaries
 
Non
Guarantors
 
Eliminations
 
Total
Cash flows from operating activities
 
$
(29,728
)
 
$
(94
)
 
$
(1,092
)
 
$

 
$
(30,914
)
Cash flows from investing activities
 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
(4,371
)
 

 

 

 
(4,371
)
Proceeds from sale of property, equipment and assets held for sale
 
2,831

 

 

 

 
2,831

Change in cash value of life insurance
 
(41
)
 

 

 

 
(41
)
Change in restricted cash
 
34

 
34

 

 

 
68

Net cash (used in) provided by investing activities
 
(1,547
)
 
34

 

 

 
(1,513
)
Cash flows from financing activities
 
 

 
 

 
 

 
 

 
 

Proceeds from issuance of short-term borrowings
 
23,705

 

 

 

 
23,705

Repayment of other debt
 
(772
)
 

 

 

 
(772
)
Distribution to noncontrolling interest
 
(291
)
 

 

 

 
(291
)
Net cash provided by (used in) financing activities
 
22,642

 

 

 

 
22,642

Net decrease in cash and cash equivalents
 
(8,633
)
 
(60
)
 
(1,092
)
 

 
(9,785
)
Cash and cash equivalents
 
 

 
 

 
 

 
 

 
 

Beginning of period
 
8,633

 
60

 
4,600

 

 
13,293

End of period
 
$

 
$

 
$
3,508

 
$

 
$
3,508

 

22


Condensed Consolidating Statement of Cash Flows for the three months ended May 31, 2014
 
(In thousands)
 
New Enterprise
Stone & Lime
Co., Inc.
 
Guarantor
Subsidiaries
 
Non
Guarantors
 
Eliminations
 
Total
Cash flows from operating activities
 
$
(36,227
)
 
$
680

 
$
1,343

 
$

 
$
(34,204
)
Cash flows from investing activities
 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
(3,426
)
 
(684
)
 

 

 
(4,110
)
Proceeds from sale of property and equipment, and assets held for sale

 
939

 

 

 

 
939

Change in cash value of life insurance
 
(31
)
 

 

 

 
(31
)
Change in restricted cash
 
10,233

 
4

 
(1
)
 

 
10,236

Net cash provided by (used in) investing activities
 
7,715

 
(680
)
 
(1
)
 

 
7,034

Cash flows from financing activities
 
 

 
 

 
 

 
 

 
 

Proceeds from issuance of short-term borrowings
 
11,528

 

 

 

 
11,528

Proceeds from issuance of long-term debt
 
39

 

 

 

 
39

Repayment of other debt
 
(5,020
)
 

 
(137
)
 

 
(5,157
)
Debt issuance costs
 
(756
)
 

 

 

 
(756
)
Net cash provided by (used in) financing activities
 
5,791

 

 
(137
)
 

 
5,654

Net increase (decrease) in cash and cash equivalents
 
(22,721
)
 

 
1,205

 

 
(21,516
)
Cash and cash equivalents
 
 

 
 

 
 

 
 

 
 

Beginning of period
 
21,344

 

 
2,548

 

 
23,892

End of period
 
$
(1,377
)
 
$

 
$
3,753

 
$

 
$
2,376


23




11. Subsequent Events

In June 2015, the Company finalized the sale it had entered into on March 5, 2015, to sell certain properties for $3.4 million in cash. The Company recognized a gain of approximately $3.2 million. The Company plans to utilize the funds to pay down debt.

24




ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
General
 
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 50 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. Our construction materials operations are comprised primarily of the production of aggregate (crushed stone and construction sand and gravel), hot mix asphalt, and ready mixed concrete.  Another of our core businesses, 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. Accordingly, we favor construction activity that maximizes our ability to utilize our construction materials. Our third core business, 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.

Operating Structure and Executive Leadership

     We have finalized the re-alignment of our organizational structure and continue to implement and enhance our strategic plan (the "Plan"). For the three months ended May 31, 2015, the Company has sold certain assets providing up to $4.0 million of additional cash for additional working capital and fixed asset purchases. We have approximately $3.5 million in assets held for sale as of May 31, 2015.

We believe our new cost structure has reduced our fixed cost base while targeting operational efficiencies. Although most non-core operations were wound down during the prior year, after removing $13.1 million in revenues associated with non-core operations, our revenues increased. We believe this focus on our core products in conjunction with renewed emphasis on construction activity that favors maximum vertical integration will position us to be successful in our markets. Additionally, for the first time since 2009, we have an operating income in the first quarter of the fiscal year. Although the Transportation Act has provided more bidding opportunities in the Commonwealth of Pennsylvania overall, we have experienced declines in the markets in which we participate, and we continue to be disciplined and selective in our bidding process.

Seasonality and Cyclical Nature of Our Business

Almost all of our products are produced and consumed outdoors. Our financial results for any quarter do not necessarily indicate the results expected for the year because seasonal changes and other weather-related conditions can affect the production and sales volumes of our products. Normally, the highest sales and earnings are in the second and third fiscal quarters and the lowest are in the first and fourth fiscal quarters. Our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical swings in construction spending, especially in the private sector.  Our primary balance sheet accounts, such as accounts receivable and accounts payable, vary greatly during these peak periods, but return to historical levels as our operating cycle is completed each fiscal year.



25


Reclassifications
Certain items previously reported in prior period financial statement captions have been conformed to agree with the current presentation. The expenses associated with certain benefit programs previously disclosed within the Pension and profit sharing caption have been reclassified to the Cost of revenue and to the Selling, administrative and general captions in the Condensed Consolidated Statements of Comprehensive Loss in the amounts of $1.2 million and $0.2 million, respectively for the three months ended May 31, 2014. The reclassification had no effect on Operating income, Comprehensive loss within the Condensed consolidated statements of comprehensive loss, the Condensed consolidated statement of cash flows, or the Condensed consolidated balance sheets.

Executive Summary
 
The following are key statistics for the three months ended May 31, 2015 as compared to the three months ended May 31, 2014.

Total revenue increased $0.3 million (0.2%) despite the divestment of certain non-core assets;
Cost of revenue decreased by $6.9 million (5.7%);
Operating loss became operating income, an improvement of $10.4 million (110.6%);
Net cash used in operating activities decreased by $3.3 million; and
Selling, administrative and general expenses decreased by $0.6 million or 3.9%.
 
RESULTS OF OPERATIONS
 
The following table summarizes our operating results on a consolidated basis:
 
 
Three Months Ended 
 May 31,
(In thousands)
 
2015
 
2014
Revenue
 
$
140,716

 
$
140,428

Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below)
 
114,950

 
121,871

Depreciation, depletion and amortization
 
9,955

 
11,090

Asset impairment
 
183

 
1,680

Selling, administrative and general expenses 
 
14,704

 
15,287

Loss on disposals of property, equipment and software
 
(100
)
 
(149
)
Operating income (loss)
 
1,024

 
(9,351
)
Interest expense, net
 
(21,070
)
 
(20,326
)
Loss before income taxes
 
(20,046
)
 
(29,677
)
Income tax benefit
 
(908
)
 
(2,242
)
Net loss
 
$
(19,138
)
 
$
(27,435
)

 
The tables below disclose revenue and operating data for our reportable segments before certain intra- and intercompany eliminations. We include inter-segment and certain intra-segment 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.  We also operate ancillary port operations and certain rental operations, which are included in our other non-core business operations line items presented below. All non-allocated operating costs are reflected in the corporate and unallocated line item presented below.
 

26


The following table summarizes our segment revenue:
 
 
Three Months Ended 
 May 31,
(In thousands)
 
2015
 
2014
Segment Revenue
 
 

 
 

Construction materials
 
$
95,563

 
$
99,113

Heavy/highway construction
 
50,681

 
44,098

Traffic safety services and equipment
 
20,157

 
23,666

Segment totals
 
166,401

 
166,877

Inter-segment eliminations
 
(25,685
)
 
(26,449
)
Total revenue
 
$
140,716

 
$
140,428

 
The following table summarizes the percentage of segment revenue by our primary lines of business:
 
Three Months Ended 
 May 31,
 
2015
 
2014
Segment Revenue:
 

 
 

Construction materials
57.4
%
 
59.4
%
Heavy/highway construction
30.5
%
 
26.4
%
Traffic safety services and equipment
12.1
%
 
14.2
%
Segment totals
100.0
%
 
100.0
%

The following table summarizes the segment cost of revenue:
 
 
Three Months Ended 
 May 31,
(In thousands)
 
2015
 
2014
Segment Cost of Revenue
 
 

 
 

Construction materials
 
$
74,526

 
$
83,893

Heavy/highway construction
 
50,241

 
45,225

Traffic safety services and equipment
 
15,868

 
19,202

Segment totals
 
140,635

 
148,320

Eliminations
 
(25,685
)
 
(26,449
)
Total cost of revenue
 
$
114,950

 
$
121,871



The following table summarizes the segment cost of revenue as a percent of segment revenue:
 
 
Three Months Ended 
 May 31,
 
 
2015
 
2014
Cost of Revenue as Percent of Revenue (before eliminations)
 
 

 
 

Construction materials
 
78.0
%
 
84.6
%
Heavy/highway construction
 
99.1
%
 
102.6
%
Traffic safety services and equipment
 
78.7
%
 
81.1
%



27


The following table summarizes the segment operating income:
 
 
Three Months Ended 
 May 31,
(In thousands)
 
2015
 
2014
Operating Income
 
 

 
 

Construction materials
 
$
13,581

 
$
6,087

Heavy/highway construction
 
(1,185
)
 
(3,097
)
Traffic safety services and equipment
 
1,563

 
1,090

Segment totals
 
13,959

 
4,080

Corporate and unallocated
 
(12,935
)
 
(13,431
)
Total operating income
 
$
1,024

 
$
(9,351
)
 
Three Months Ended May 31, 2015 Compared to Three Months Ended May 31, 2014
 
Revenue
 
Total revenue remained relatively flat, increasing $0.3 million or 0.2% to $140.7 million for the three months ended May 31, 2015 compared to $140.4 million for the three months ended May 31, 2014.  When considering the impact of reduced revenue of $13.1 million associated with non-core operations in the prior fiscal year, total revenue increased $13.4 million or 9.5% on a like-for-like basis.
 
Segment revenue for our construction materials business decreased $3.5 million, or 3.5% to $95.6 million for the three months ended May 31, 2015 compared to $99.1 million for the three months ended May 31, 2014. The prior fiscal year contained $13.1 million of revenues associated with non-core operations, which did not recur due primarily to the winding down of certain non-core operations. When the exclusion of these revenues associated with non-core business operations are considered, our revenues increased $9.6 million on a comparable basis. Revenues for aggregates increased $2.9 million or 6.5%, for the three months ended May 31, 2015 compared to the three months ended May 31, 2014. Revenues for hot mix asphalt and ready mixed concrete increased $4.3 million and $2.4 million, respectively, for the three months ended May 31, 2015 compared to the three months ended May 31, 2014. The increase in aggregates was primarily attributable to an increase in sales prices for aggregates of 10.4%, partially offset by a decrease in sales volumes of 3.3%. The increases in hot mix asphalt and ready mixed concrete were due to increases in volumes coupled with slight price increases for the three months ended May 31, 2015 compared to the three months ended May 31, 2014.

Segment revenue for our heavy/highway construction business increased $6.6 million, or 15.0% to $50.7 million for the three months ended May 31, 2015 compared to $44.1 million for the three months ended May 31, 2014.  The increase in revenue was primarily attributable to the timing of completion of available work. Although revenue increased quarter over quarter, we continue to experience delays on certain jobs. Although the Transportation Act has provided more bidding opportunities in the Commonwealth of Pennsylvania overall, we have experienced declines in the markets in which we participate, and we continue to be disciplined and selective in our bidding process.
 
Segment revenue for our traffic safety services and equipment businesses decreased $3.5 million, or 14.8% to $20.2 million for the three months ended May 31, 2015 compared to $23.7 million for the three months ended May 31, 2014, primarily due to a number of programs expected to ship being pushed beyond the first quarter.

Cost of Revenue

Total cost of revenue decreased $6.9 million or 5.7% to $115.0 million for the three months ended May 31, 2015 compared to approximately $121.9 million for the three months ended May 31, 2014.  The majority of this decrease is attributable to the winding down of our non-core operations in the prior fiscal year.

 Segment cost of revenue for our construction materials business as a percentage of its segment revenue decreased 6.6% to 78.0% for the three months ended May 31, 2015 compared to 84.6% for the three months ended May 31, 2014. Segment cost of revenue as a percentage of segment revenue improved primarily as a result of lower revenues associated with the winding down of non-core operations which generally carried lower margins compared to other products. This was assisted by our price increase in aggregates, and our volume increases in hot mix asphalt and ready mixed concrete.
 

28


Segment cost of revenue for our heavy/highway construction business as a percentage of its segment revenue decreased 3.5% to 99.1% for the three months ended May 31, 2015 compared to 102.6% for the three months ended May 31, 2014. The decrease in segment cost of sales as a percentage of sales was primarily attributable to increased amount of work done on a fixed cost base as well as an increase in overall margin on work completed.

Segment cost of revenue for our traffic services and equipment business as a percentage of its segment revenue decreased 2.4% to 78.7% for the three months ended May 31, 2015 compared to 81.1% for the three months ended May 31, 2014. The decrease in segment cost of revenue as a percentage of segment revenue was attributable to lower labor costs and other cost reductions.
 
Depreciation, Depletion and Amortization
 
Depreciation, depletion and amortization decreased $1.1 million, or 9.9% to $10.0 million for the three months ended May 31, 2015 compared to $11.1 million for the three months ended May 31, 2014. The decrease was primarily attributable to less depreciation due to sales of assets within the past year and additional assets becoming fully depreciated.

Selling, Administrative and General Expenses
 
Selling, administrative and general expenses decreased $0.6 million, or 3.9% to $14.7 million for the three months ended May 31, 2015 compared to $15.3 million for the three months ended May 31, 2014. The decrease was primarily attributable to benefits from headcount reductions and associated employee benefit reductions related to our cost reduction program. Included in the three months ended May 31, 2015 was $0.9 million related to outside advisory fees which will wind down in the second quarter of fiscal year 2016.

Operating Income

Operating income increased $10.4 million to $1.0 million for the three months ended May 31, 2015, as compared to an operating loss of $9.4 million for the three months ended May 31, 2014. This increase was primarily attributable to the increased efficiencies related to our cost reduction program, improved utilization of our enterprise resource plan ("ERP") system, and our shared services center.
 
Operating income for our construction materials business increased $7.5 million, or 123.0% to $13.6 million for the three months ended May 31, 2015 compared to $6.1 million for the three months ended May 31, 2014. Operating income for aggregates, hot mix asphalt and ready mixed concrete increased $4.5 million, $0.2 million, and $1.3 million, respectively, or 77.6%, 33.3%, and 118.2%, to $10.3 million, $0.8 million, and $2.4 million for the three months ended May 31, 2015 compared to $5.8 million, $0.6 million, and $1.1 million for the three months ended May 31, 2014, respectively. These increases were primarily due to net increased sales prices on a fixed cost base. In addition, we had decreases of operating loss from non-core operations of $1.5 million.
 
Operating loss for our heavy/highway construction business improved by $1.9 million, or 61.3% to an operating loss of $1.2 million for the three months ended May 31, 2015 compared to operating loss of $3.1 million for the three months ended May 31, 2014.  This improvement was primarily attributable to additional work done on consistent fixed costs.

Operating income for our traffic safety services and equipment businesses increased by $0.5 million, or 45.5% to $1.6 million for the three months ended May 31, 2015 compared to $1.1 million for the three months ended May 31, 2014.  The increase in profitability is primarily attributable to improvements in cost controls.
 
Interest Expense, net
 
Net interest expense increased $0.8 million, or 3.9% to $21.1 million for the three months ended May 31, 2015 compared to $20.3 million for the three months ended May 31, 2014 due primarily to increased overall indebtedness.
 
Income Tax Benefit
 
The income tax provision for the three months ended May 31, 2015 and May 31, 2014 consisted of federal and state taxes that are based on the estimated effective tax rates applicable for the full fiscal years ending February 28, 2015 and February 28, 2014, respectively, after giving effect to items specifically related to the interim periods.


29


Our effective tax rates for the three months ended May 31, 2015 and 2014 were 4.5% and 7.6%, respectively, resulting in tax benefit of $0.9 million and $2.2 million, respectively. The principal factor affecting the comparability of the effective income tax rates for the respective periods is our assessment of the realizability of the current period projected pre-tax loss. We recorded a valuation allowance on the portion of the current period federal and state income tax losses that we believe is not more likely than not to be realized.

LIQUIDITY AND CAPITAL RESOURCES

Our sources of liquidity include cash and cash equivalents, cash from operations and amounts available for borrowing under the RCA. As of May 31, 2015 we had borrowed $29.6 million under the RCA with $25.8 million available compared to $5.9 million under the RCA, with $27.3 million available as of February 28, 2015. As of May 31, 2015, we had $3.5 million in cash and cash equivalents and working capital of $101.1 million compared to $13.3 million in cash and cash equivalents and working capital of $113.5 million as of February 28, 2015. We carried a higher cash balance as of February 28, 2015 as amounts were borrowed prior to February 28, 2015 to pay semi-annual interest associated with the Notes due March 1, 2015. Cash balances of $17.1 million and $17.2 million as of May 31, 2015 and February 28, 2015, 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. 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.

We believe we have sufficient financial resources, including cash and cash equivalents, cash from operations and amounts available for borrowing under the RCA, to fund our business and operations, including capital expenditures and debt service obligations, for at least the next twelve months. Under the Credit Facilities we are subject to certain affirmative and negative covenants, of which the minimum EBITDA covenant and the capital expenditure limitation are the primary financial covenants for the next twelve months. Commencing May 31, 2015, as of the end of each fiscal quarter, we are required to have trailing twelve-month EBITDA in an amount not less than certain amounts specified in the Credit Facilities. Our capital expenditure limitation for fiscal year 2016 is $40.0 million. As of May 31, 2015, we were in compliance with all of our covenant requirements through that date, and expect to remain in compliance for the next twelve months as applicable.

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 should we fail in the future, we cannot guarantee that we will be able to obtain such amendments. A failure to obtain such amendments could result in an acceleration of our indebtedness under the Credit Facilities and a cross-default under our other indebtedness, including the Notes and Secured Notes. If the lenders were to accelerate the due dates of our indebtedness or if current sources of liquidity prove to be insufficient, there can be no assurance that we would be able to repay or refinance such indebtedness or to obtain sufficient funding. This could require us to restructure or alter our operations and capital structure.

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 three months ended May 31, 2015 and May 31, 2014.
 
 
 
Three Months Ended 
 May 31,
(In thousands)
 
2015
 
2014
Net cash (used in) provided by:
 
 

 
 

Operating activities
 
$
(30,914
)
 
$
(34,204
)
Investing activities
 
(1,513
)
 
7,034

Financing activities
 
22,642

 
5,654

Cash paid for capital expenditures
 
(4,371
)
 
(4,110
)

Operating Activities
 
Net cash used in operating activities improved $3.3 million to $30.9 million for the three months ended May 31, 2015 compared to net cash used of $34.2 million for the three months ended May 31, 2014. Cash used in operating activities decreased as a result of better working capital management as well as a reduced net loss.

30



Investing Activities
 
Net cash from investing activities changed $8.5 million to net cash used of $1.5 million in the three months ended May 31, 2015 compared to net cash provided of $7.0 million in the three months ended May 31, 2014. Net cash used in investing activities changed primarily due to the monetization of cash collateralized letters of credit in fiscal year 2015 that did not recur in fiscal year 2016.
 
Financing Activities
 
Net cash provided by financing activities increased $16.9 million to $22.6 million in the three months ended May 31, 2015 compared to $5.7 million in the three months ended May 31, 2014.  The increase in cash provided by financing activities was primarily due to the increase of $12.2 million in net borrowings under our short-term obligations in the three months ended May 31, 2015 of $23.7 million, as compared to net borrowings of $11.5 million in three months ended May 31, 2014. This increase was partially offset by lower repayments of long-term debt of $0.8 million in the three months ended May 31, 2015, as compared to $5.2 million in the three months ended May 31, 2014.
 
Capital Expenditures
 
Cash capital expenditures increased $0.3 million to $4.4 million for the three months ended May 31, 2015 compared to $4.1 million for the three months ended May 31, 2014. Total cash capital expenditures are being managed to remain below our capital expenditure covenant limit of $40.0 million for the fiscal year ending February 28, 2016.

Our Indebtedness

Refer to Note 4 “Long-Term Debt” to the Condensed Consolidated Financial Statements for further information.
 
Off Balance Sheet Arrangements
 
We provide from time to time in the ordinary course of business letters of credit. Letters of credit bear interest and fees between 3.50% and 4.25%. We have secured outstanding letters of credit of $16.7 million under our $20.0 million RCA and $1.1 million of unsecured letters of credit at May 31, 2015, which were not included in our unaudited Condensed Consolidated Balance Sheet. Additionally, we may be required to provide letters of credit for bonding purposes. If we do not have availability to issue secured letters of credit under the RCA, we may be required to enter into a cash collateral or similar type of agreement to secure certain types of future bonding.

On December 15, 2014, the Company entered into an arrangement to lease its precast/prestressed structural concrete operations in Roaring Spring, PA for a term of seven years to an entity controlled by a member of the Company’s Board of Directors and stock holder, James W. Van Buren, who is the principal of the entity ("the Lessee"). Under the arrangement, the Company leases approximately 60 acres and 240,000 square feet of operating space and 3,800 square feet of office space, including equipment valued at $3.2 million. The annual base rent, began at $65,000 and is scheduled to increase to $95,000 within the first 18 months upon satisfaction of certain conditions. The Company is providing transition services for six months at approximately $3,200 a month and is allowing the use of applicable patents, trade names and websites. The Lessee also pays applicable taxes, licenses, and certification fees.

We own a partnership interest in Means to Go, LLC, and may be liable for up to $3.3 million in debt in the event of a bankruptcy of the entity.

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.
 

31


On an ongoing basis, management evaluates its estimates, including those related to the carrying amount of property, plant and equipment; valuation of receivables, inventories, goodwill and intangible assets; recognition of revenue and loss contracts 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. 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 28, 2015 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:
 
material weaknesses and significant deficiencies in our internal control over financial reporting;
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 Pennsylvania Department of Transportation, which we refer to as PennDot, the Pennsylvania Turnpike Commission, the New York State Thruway Authority 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 substantial debt and the risk of default of our existing and future indebtedness, which may result in an acceleration of our indebtedness thereunder;
impact of our credit rating on our cost of capital and ability to refinance;
the potential for our lender to modify the terms of our asset-based loan facility;
the risk of default of our existing and future indebtedness, which may result in an acceleration of our indebtedness hereunder;
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;
the weather and seasonality;
our operation in a highly competitive industry within our local markets; 
rising costs of health care;
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;

32


our dependence on our senior management;
our ability to recruit additional management and other personnel and our ability 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;
our ability to permit additional reserves in select locations;
cancellation of significant contracts or our disqualification from bidding for new contracts;
general business and economic conditions, particularly an economic downturn;
our new regional alignment and restructuring of our accounting and certain administrative functions may not yield the anticipated efficiencies and may result in a loss of key personnel; and
the other factors discussed under Item 1A-Risk Factors in our Annual Report on Form 10-K for our fiscal year ended February 28, 2015.
 
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.


33


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 May 31, 2015, we had $29.6 million in indebtedness outstanding under the RCA and $70.0 million under the Term Loans subject to variable interest rates.  Each change of 1.00% in interest rates would result in an approximate $1.0 million change in our annual interest expense relating to the RCA and Term Loans.  Any debt we incur in the future could also bear interest at floating rates.


ITEM 4 - CONTROLS AND PROCEDURES
 
The information provided in this Item 4 (Controls and Procedures) is as of the date of the filing of this Form 10-Q.

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 Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.
 
Our system of internal control is based on the control criteria framework of the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 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 May 31, 2015. Based upon that evaluation, our CEO and CFO concluded that, as of May 31, 2015, our disclosure controls and procedures were not effective as a 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 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.
 

34


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 years ended February 28, 2015, February 28, 2014, February 28, 2013, February 29, 2012, and February 28, 2011, management identified certain material weaknesses in our internal control over financial reporting as further described below.

In the areas of finance, tax, accounting and information technology departments, we did not ensure a sufficient complement of personnel with an appropriate level of knowledge, experience and training commensurate with our structure and accounting and financial reporting requirements, which was identified as a material weakness by management during the fiscal 2012 year-end financial reporting process.

As part of our remediation efforts, we have hired professional finance resources to enhance accounting and aid in financial reporting and internal control capabilities. Specifically, we hired a Director of Financial Reporting, Business Unit Controllers, Internal Audit Director and Internal Audit resources. In March 2013, we appointed a new Chief Financial Officer. Management continues to evaluate personnel and augment resources where needed to further strengthen competencies. These areas continue to improve through the hiring of professionals with the appropriate educational backgrounds and business experiences, and through our support of their continuing professional education. Additionally, we have augmented these resources with support from third party professional finance resources. Although we recently hired a Chief Information Officer, we continue to experience turnover of Information Technology resources. We will continue our remediation efforts during fiscal year 2016.

We did not design, maintain or implement policies and procedures to adequately review and account for significant accounting transactions, which were identified as a material weakness during the 2012 fiscal year end financial reporting process. 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.

As part of our remediation efforts, we have provided internal control training to reinforce the importance of our control environment for Finance, Accounting, Information Technology Department personnel and all operations managers across the Company. We have hired professional finance resources in these areas to enhance accounting and financial reporting competencies and aid internal control capabilities. We have developed and implemented policies and procedures which emphasize adherence to GAAP and made these available to employees on the company’s intranet site. To augment the policies and procedures and provide additional structure, the Board of Directors approved a Delegation of Authority policy during the fiscal year 2015. We will continue our remediation efforts during fiscal year 2016.
 
We did not maintain effective controls over information and communication:
 
We did not maintain effective controls over information and communication, specifically around reports and financial data, as we had several issues with our ERP implementation in 2012. 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 associated with the actual information/reports provided, which proved to be a pervasive issue. This deficiency which was identified by management and its independent auditors in fiscal year 2012 resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.
    
As part of our remediation efforts, we have provided further training and made configuration changes such that our ERP is operating in a more effective manner. Although we recently hired a Chief Information Officer, we continue to experience turnover of Information Technology resources. Additionally, we have provided internal control training to reinforce the importance of our control environment for Finance, Accounting, Information Technology Department personnel and all operations managers across the Company. We have designed information technology general controls and we have begun implementation. We will continue our remediation efforts during fiscal year 2016.
 

35


The material weaknesses in our control environment, monitoring of controls, information and communication, and risk assessments contributed to additional material weaknesses in various control activities as set forth below:

We did not maintain effective controls over the implementation of a new ERP in 2012. 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 during the implementation of the ERP. During the implementation of the ERP, management did not provide appropriate logical security design and testing, perform sufficient data conversion testing, and maintain appropriate system documentation. This material weakness was identified by management and the Company’s independent auditors during the fiscal year 2012 financial reporting process. This material weakness contributed to other control issues described below.
 
As described above, we have provided training, made configuration changes to our ERP, and provided training to staff. We have designed information technology general controls and we have begun implementation. All locations are now operating on the new ERP. As mentioned previously, we recently hired a Chief Information Officer but continue to experience turnover of Information Technology resources. We will continue our remediation efforts during fiscal year 2016.
 
We did not implement appropriate information technology controls related to change management, data integrity, access and segregation of duties. This material weakness, which was previously identified as a significant deficiency in prior years by our independent auditors and elevated to a material weakness in fiscal 2012 due to issues with our ERP implementation, 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. For example, we did not maintain adequate segregation of duties around most accounting processes and did not have adequate integrity verification of our sub-ledgers.

As part of our remediation efforts, we have continued to assess the existing roles and responsibilities and remediate system access and functionality issues. Additionally, we have provided internal control training to reinforce the importance of our control environment for Finance, Accounting, Operations, Information Technology Department personnel and all operations managers across the Company. We are evaluating segregation of duties and have designed information technology general controls which we have begun to implement. Although we recently hired a Chief Information Officer, we continue to experience turnover of Information Technology resources. We will continue our remediation efforts during fiscal year 2016.

We did not maintain effective controls over accounting for contracts including those in our Traffic Safety and Services operations. 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. For example, as a result of the ERP conversion in 2012, intercompany contracts were incorrectly classified as third party contracts and contract expenses for certain multi-year contracts were under accrued. This material weakness, which was identified by management during the 2012 financial reporting process, resulted in additional procedures performed by management and adjustments during the fiscal years 2015, 2014, 2013 and 2012 year-end financial closing and reporting processes.

We have established a manual process to track and eliminate intercompany activity as described above. Additionally, we implemented a training program and analytical tools and we are in the process of implementing project management software. We have implemented a formal review and approval process by appropriate personnel that include contracts, billing costing, job performance and account reconciliation. Despite these efforts, we have made significant accounting adjustments associated with contracts during fiscal year 2015. We will continue our remediation efforts during fiscal year 2016.

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. For example, during conversion to the new ERP several customers were invoiced incorrect prices which resulted in significant billing adjustments credit memos. This material weakness which was identified during the fiscal 2012 year end audit by management, in conjunction with our independent auditors resulted in additional procedures performed by management and adjustments in both fiscal 2013 and 2012. 

We have implemented a new billing system and updated and documented our revenue procedures. We implemented activities that have formalized the review and approval process by appropriate personnel that include price, invoice, shipment, adjustments and account reconciliation reviews related to sales of tangible goods.  We will continue our remediation efforts during fiscal year 2016.


36


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 which was identified by management and our independent auditors in fiscal 2011 resulted in additional procedures performed by management and adjustments identified by management and our independent auditors during the fiscal year 2013, 2012, 2011 year end and first quarter fiscal 2014 financial closing and reporting processes.
    
We have contracted third party advisors to provide training and support related to our tax provision preparation. We have implemented formal internal control reviews that include tax filing, provision and disclosure review. We will continue our remediation efforts during fiscal year 2016.

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. This material weakness which was identified by our independent auditors in prior years but elevated to a material weakness in fiscal year 2012, resulted in additional procedures performed by management and adjustments identified by management and our independent auditors during the fiscal year 2013, 2012 and 2011 year-end financial closing and reporting processes.

Working with a third party advisor, we have completed an assessment of our internal control processes and during fiscal year 2014 we began restructuring personnel and duties to address the deficiencies. We will continue our remediation efforts during fiscal year 2016.
 
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 determine 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 fiscal year ended May 31, 2015, are fairly stated in all material respects.

Changes in Internal Control Over Financial Reporting
None.

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 28, 2015 filed with the SEC on May 18, 2015, 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.  The risks described in our Form 10-K have not materially changed.



ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

37


 
None.

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.


38


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
 
 
 
 
101.INS XBRL***
 
Instance document
 
 
 
 
101.SCH XBRL***
 
Taxonomy Extension Schema
 
 
 
 
101.CAL XBRL***
 
Taxonomy Extension Calculation Linkbase
 
 
 
 
101.DEF XBRL***
 
Taxonomy Extension Definition Linkbase
 
 
 
 
101.LAB XBRL***
 
Taxonomy Extension Label Linkbase
 
 
 
 
101.PRE XBRL***
 
Taxonomy Extension Presentation Linkbase
 
 
 
 
 

*       Filed herewith.
**     Furnished herewith.
***   Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files.


39


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: July 10, 2015
By:
/s/ Albert L. Stone
 
 
Albert L. Stone
 
 
Executive Vice President and Chief Financial Officer


40


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 Disclosures
 
 
 
 
101.INS XBRL***
 
Instance document
 
 
 
 
101.SCH XBRL***
 
Taxonomy Extension Schema
 
 
 
 
101.CAL XBRL***
 
Taxonomy Extension Calculation Linkbase
 
 
 
 
101.DEF XBRL***
 
Taxonomy Extension Definition Linkbase
 
 
 
 
101.LAB XBRL***
 
Taxonomy Extension Label Linkbase
 
 
 
 
101.PRE XBRL***
 
Taxonomy Extension Presentation Linkbase
 
 
 
 
 

*        Filed herewith.
**      Furnished herewith.
***   Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files.


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