Attached files
| file | filename |
|---|---|
| EX-10.3 - EXHIBIT 10.3 AMENDMENT NO 1 TERM LOAN CREDIT AND GUARANTY AGREEMENT - New Enterprise Stone & Lime Co., Inc. | exhibit10311-30x2015.htm |
| EX-31.1 - EXHIBIT 31.1 - New Enterprise Stone & Lime Co., Inc. | exhibit31111-30x2015.htm |
| EX-31.2 - EXHIBIT 31.2 - New Enterprise Stone & Lime Co., Inc. | exhibit31211-30x2015.htm |
| EX-10.2 - EXHIBIT 10.2 AMENDMENT NO 1 REVOLVING CREDIT AGREEMENT - New Enterprise Stone & Lime Co., Inc. | exhibit10211-30x2015.htm |
| EX-32.2 - EXHIBIT 32.2 - New Enterprise Stone & Lime Co., Inc. | exhibit32211-30x2015.htm |
| EX-32.1 - EXHIBIT 32.1 - New Enterprise Stone & Lime Co., Inc. | exhibit32111-30x2015.htm |
| EX-95 - EXHIBIT 95 - New Enterprise Stone & Lime Co., Inc. | exhibit9511-30x2015.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 November 30, 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 filer o | Accelerated filer o | |
Non-accelerated filer x | Smaller reporting company o | |
(Do not check if a smaller reporting company) | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of January 13, 2016, 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 November 30, 2015
Page(s) | |
Condensed Consolidated Balance Sheets at November 30, 2015 and February 28, 2015 | |
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended November 30, 2015 and 2014 | |
Condensed Consolidated Statements of Cash Flows for the nine months ended November 30, 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) | November 30, 2015 | February 28, 2015 * | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 13,867 | $ | 13,293 | ||||
Restricted cash | 25,468 | 17,177 | ||||||
Accounts receivable, less reserves of $3,357 and $4,564 respectively | 117,984 | 49,901 | ||||||
Inventories | 108,484 | 102,206 | ||||||
Deferred income taxes | 2,630 | 2,630 | ||||||
Other current assets | 7,575 | 8,885 | ||||||
Assets held for sale | 6,441 | 8,517 | ||||||
Total current assets | 282,449 | 202,609 | ||||||
Property, plant and equipment, net | 300,930 | 310,274 | ||||||
Goodwill | 81,492 | 87,132 | ||||||
Other intangible assets, net | 17,590 | 18,933 | ||||||
Other noncurrent assets | 29,721 | 31,422 | ||||||
Total assets | $ | 712,182 | $ | 650,370 | ||||
Liabilities and Deficit | ||||||||
Current liabilities | ||||||||
Current maturities of long-term debt | $ | 3,308 | $ | 8,528 | ||||
Accounts payable - trade | 43,762 | 15,652 | ||||||
Accrued liabilities | 63,468 | 64,880 | ||||||
Total current liabilities | 110,538 | 89,060 | ||||||
Long-term debt, less current maturities | 673,596 | 650,267 | ||||||
Deferred income taxes | 30,074 | 28,727 | ||||||
Other noncurrent liabilities | 40,926 | 46,274 | ||||||
Total liabilities | 855,134 | 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 | (270,118 | ) | (290,887 | ) | ||||
Additional paid-in capital | 126,962 | 126,962 | ||||||
Accumulated other comprehensive loss | (2,001 | ) | (2,119 | ) | ||||
Total New Enterprise Stone & Lime Co., Inc. deficit | (144,883 | ) | (165,770 | ) | ||||
Noncontrolling interest in consolidated subsidiaries | 1,931 | 1,812 | ||||||
Total deficit | (142,952 | ) | (163,958 | ) | ||||
Total liabilities and deficit | $ | 712,182 | $ | 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 Income (Loss) (unaudited)
Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenue | |||||||||||||||||
Construction materials | $ | 97,988 | $ | 99,031 | $ | 283,719 | $ | 299,176 | |||||||||
Heavy/highway construction | 83,169 | 91,457 | 241,649 | 237,179 | |||||||||||||
Traffic safety services and equipment | 20,872 | 19,173 | 63,932 | 61,303 | |||||||||||||
Total revenue | 202,029 | 209,661 | 589,300 | 597,658 | |||||||||||||
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below) | |||||||||||||||||
Construction materials | 51,248 | 59,303 | 162,851 | 199,228 | |||||||||||||
Heavy/highway construction | 77,914 | 89,305 | 226,137 | 226,293 | |||||||||||||
Traffic safety services and equipment | 15,654 | 14,831 | 48,478 | 46,340 | |||||||||||||
Total cost of revenue | 144,816 | 163,439 | 437,466 | 471,861 | |||||||||||||
Depreciation, depletion and amortization | 10,402 | 12,182 | 30,701 | 34,429 | |||||||||||||
Asset impairment | 10 | 226 | 193 | 5,249 | |||||||||||||
Selling, administrative and general expenses | 12,445 | 14,697 | 38,846 | 44,633 | |||||||||||||
Gain on disposals of property, equipment and software | 37 | (141 | ) | (3,796 | ) | (451 | ) | ||||||||||
Operating income | 34,319 | 19,258 | 85,890 | 41,937 | |||||||||||||
Interest expense, net | (21,231 | ) | (20,812 | ) | (63,447 | ) | (61,518 | ) | |||||||||
Income (loss) before income taxes | 13,088 | (1,554 | ) | 22,443 | (19,581 | ) | |||||||||||
Income tax expense (benefit) | 840 | (56 | ) | 1,263 | (1,398 | ) | |||||||||||
Net income (loss) | 12,248 | (1,498 | ) | 21,180 | (18,183 | ) | |||||||||||
Less: Net income attributable to noncontrolling interest | (139 | ) | (180 | ) | (411 | ) | (532 | ) | |||||||||
Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | 12,109 | (1,678 | ) | 20,769 | (18,715 | ) | |||||||||||
Other comprehensive income (loss) | |||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income taxes | 40 | 39 | 118 | 116 | |||||||||||||
Comprehensive income (loss) | 12,288 | (1,459 | ) | 21,298 | (18,067 | ) | |||||||||||
Less: Comprehensive income attributable to noncontrolling interest | (139 | ) | (180 | ) | (411 | ) | (532 | ) | |||||||||
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | $ | 12,149 | $ | (1,639 | ) | $ | 20,887 | $ | (18,599 | ) | |||||||
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)
Nine Months Ended November 30, | ||||||||
(In thousands) | 2015 | 2014 | ||||||
Reconciliation of net income (loss) to net cash from operating activities | ||||||||
Net income (loss) | $ | 21,180 | $ | (18,183 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities | ||||||||
Depreciation, depletion and amortization | 30,701 | 34,429 | ||||||
Asset impairment | 193 | 5,249 | ||||||
Gain on disposals of property, equipment and software | (3,796 | ) | (451 | ) | ||||
Non-cash payment-in-kind interest accretion | 15,321 | 16,683 | ||||||
Amortization and write-off of debt issuance costs | 3,122 | 3,246 | ||||||
Deferred income taxes | 1,346 | (834 | ) | |||||
Bad debt | 38 | 830 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (68,121 | ) | (60,102 | ) | ||||
Inventories | (5,183 | ) | (1,936 | ) | ||||
Other assets | 716 | (367 | ) | |||||
Accounts payable | 25,723 | 23,832 | ||||||
Other liabilities | 103 | (3,467 | ) | |||||
Net cash provided by (used in) operating activities | 21,343 | (1,071 | ) | |||||
Cash flows from investing activities | ||||||||
Capital expenditures | (19,329 | ) | (18,761 | ) | ||||
Proceeds from sale of property, equipment and assets held for sale | 15,654 | 2,450 | ||||||
Change in cash value of life insurance | 6 | (35 | ) | |||||
Change in restricted cash | (8,291 | ) | 13,324 | |||||
Net cash used in investing activities | (11,960 | ) | (3,022 | ) | ||||
Cash flows from financing activities | ||||||||
Repayments of short-term borrowings | (5,873 | ) | (9,550 | ) | ||||
Repayments of other debt | (1,365 | ) | (5,025 | ) | ||||
Payments on capital leases | (1,280 | ) | (2,132 | ) | ||||
Debt issuance costs | — | (756 | ) | |||||
Distribution to noncontrolling interest | (291 | ) | — | |||||
Net cash used in financing activities | (8,809 | ) | (17,463 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 574 | (21,556 | ) | |||||
Cash and cash equivalents | ||||||||
Beginning of period | 13,293 | 23,892 | ||||||
End of period | $ | 13,867 | $ | 2,336 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter Ended November 30, 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 year 2016").
Related Party Transactions
The Company has certain related party transactions, including: (i) an arrangement to lease its precast/prestressed structural concrete operations in Roaring Spring, PA to an entity controlled by a member of the Company's Board of Directors and stockholder; (ii) investments in Means to Go, LLC, in which the Company has an ownership interest of 50% or less, and an aircraft lease agreement with Means to Go, LLC; (iii) South Woodbury, L.P. owns an office building in Roaring Spring, PA and an office building that is being used as the Company's corporate headquarters in New Enterprise, PA; and (iv) payments of consulting fees to Larry R. Webber, a director of the Company, per a management consulting agreement.
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. All material intercompany balances and transactions have been eliminated in consolidation.
6
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 Income (Loss) in the amounts of $1.8 million and $0.2 million, respectively for the three months ended November 30, 2014 and $4.8 million and $0.5 million, respectively, for the nine months ended November 30, 2014. The reclassification had no effect on Operating income, Comprehensive income (loss) within the Condensed Consolidated Statements of Comprehensive Income (Loss), the Condensed Consolidated Statement of Cash Flows, or the Condensed Consolidated Balance Sheets.
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 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:
November 30, | February 28, | |||||||
(In thousands) | 2015 | 2015 | ||||||
Costs and estimated earnings in excess of billings | $ | 25,481 | $ | 7,392 | ||||
Trade | 88,614 | 39,792 | ||||||
Retainages | 7,246 | 7,281 | ||||||
121,341 | 54,465 | |||||||
Allowance for doubtful accounts | (3,357 | ) | (4,564 | ) | ||||
Accounts receivable, net | $ | 117,984 | $ | 49,901 | ||||
7
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:
November 30, | February 28, | |||||||
(In thousands) | 2015 | 2015 | ||||||
Crushed stone, agricultural lime and sand | $ | 74,086 | $ | 70,112 | ||||
Safety equipment | 16,111 | 14,187 | ||||||
Parts, tires and supplies | 6,980 | 7,753 | ||||||
Raw materials | 9,190 | 7,980 | ||||||
Building materials | 1,203 | 1,066 | ||||||
Other | 914 | 1,108 | ||||||
Total inventories | $ | 108,484 | $ | 102,206 | ||||
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:
November 30, | February 28, | |||||||
(In thousands) | 2015 | 2015 | ||||||
Limestone and sand acreage | $ | 144,963 | $ | 146,293 | ||||
Land, buildings and building improvements | 84,305 | 87,097 | ||||||
Crushing, prestressing and manufacturing plants | 306,414 | 305,923 | ||||||
Contracting equipment vehicles and other | 320,819 | 307,644 | ||||||
Construction in progress | 4,817 | 3,923 | ||||||
Property, plant and equipment | 861,318 | 850,880 | ||||||
Less: Accumulated depreciation and depletion | (560,388 | ) | (540,606 | ) | ||||
Property, plant and equipment, net | $ | 300,930 | $ | 310,274 | ||||
For the three months ended November 30, 2015 and 2014, depreciation expense was $9.1 million and $9.9 million, respectively. For the nine months ended November 30, 2015 and 2014, depreciation expense was $27.2 million and $30.1 million, respectively.
Assets Held for Sale
The Company classifies assets as held for sale when all the 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 qualify 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.
During the nine months ended November 30, 2015, the Company finalized its sale of certain properties previously recorded in Assets Held for Sale at February 28, 2015 for $7.1 million and the assumption of $1.1 million in liabilities. The Company recorded a gain of approximately $3.2 million and recorded additional impairment of approximately $0.2 million on these sales in the nine months ended November 30, 2015.
8
Additionally during the nine months ended November 30, 2015, the Company completed the sale of other assets for $9.9 million in cash, $1.0 million of deferred purchase price, and the assumption of $0.3 million of liabilities. Goodwill and Other intangible assets of $6.3 million were allocated on the sale of these business operations.
During the nine months ended November 30, 2015, the Company classified an additional $3.0 million in assets as held for sale. No additional impairments were recorded.
During the three months ended November 30, 2015, the Company reclassified $6.4 million of assets held for sale to assets held for use. There was no gain or loss recorded on the transfer.
The Company's assets held for sale consisted of the following:
November 30, 2015 | February 28, 2015 | ||||||
Inventory | $ | — | $ | 961 | |||
PP&E, net of impairment | 6,441 | 7,556 | |||||
Total assets held for sale | $ | 6,441 | $ | 8,517 | |||
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, included in Accrued liabilities on the Condensed Consolidated Financial Statements:
(In thousands) | Accrued restructuring | |||
Balance at February 28, 2015 | $ | 1,461 | ||
Additional accruals recorded | — | |||
Payments on or reductions of accrued restructuring charges | 1,322 | |||
Balance at November 30, 2015 | $ | 139 | ||
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.
9
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. Management did not note any impairment indicators during the nine months ended November 30, 2015. 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, unless events or circumstances indicate that it is more likely than not that the fair value of a reporting unit has been reduced below its carrying value.
The inputs used within the fair value measurements were categorized within Level 3 of the fair value hierarchy.
During the nine months ended November 30, 2015, the Company allocated $5.6 million of goodwill to the sale of certain assets.
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.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
During the nine months ended November 30, 2015, the Company allocated $0.7 million of other intangibles to the sale of certain assets.
Other Noncurrent Assets
The Company’s Other noncurrent assets consist of the following:
November 30, | February 28, | |||||||
(In thousands) | 2015 | 2015 | ||||||
Deferred financing fees (less current portion of $2,181 and $2,905, respectively) | $ | 7,916 | $ | 10,314 | ||||
Capitalized software (net of accumulated amortization of $4,265 and $3,364, respectively) | 6,891 | 7,553 | ||||||
Cash surrender value of life insurance (net of loans of $3,035) | 1,243 | 1,249 | ||||||
Deferred stripping costs | 5,017 | 4,514 | ||||||
Other | 8,654 | 7,792 | ||||||
Total other noncurrent assets | $ | 29,721 | $ | 31,422 | ||||
10
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 November 30, 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.
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 regional structure by combining Lancaster, Pennsylvania and Northeastern Pennsylvania into our Eastern 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 November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes-ASU 2015-17 is being issued to align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS). IAS 1, Presentation of Financial Statements, requires deferred tax assets and
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liabilities to be classified as noncurrent in a classified statement of financial position. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.
In September 2015, the FASB Issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments-ASU 2015-16 was issued to require an acquirer to recognize measurement-period adjustments to provisional amounts in the reporting period in which the adjustments are determined. Previously, measurement-period adjustments were retrospectively applied. As an alternative to restating the prior periods for the measurement-period adjustments, the ASU requires acquirers to present separately on the face of the earnings statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date. This ASU is to be applied prospectively to adjustments to provisional amounts that occur after December 15, 2015. Early adoption is permitted. While we are still evaluating the impact of ASU 2015-16, we do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements.
In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update). ASU 2015-15 was issued to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods with those fiscal years. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.
In August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in this update defers the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact of this standard on its Consolidated Financial Statements and is unlikely to early adopt this standard.
In July 2015, the FASB issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient. The amendments in all three parts of this Update are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. An entity should apply the amendments in Parts I and II retrospectively for all financial statements presented. An entity should apply the amendments on Part III prospectively. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. 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 amendments in this Update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-04, Compensation - Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets. 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. Early adoption of the amendments in this update are permitted. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.
In April 2015, the FASB issued 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.
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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.
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 November 30, 2015, the Company was in compliance with all of its financial covenants.
3. Accrued Liabilities
Accrued liabilities consist of the following:
November 30, | February 28, | |||||||
(In thousands) | 2015 | 2015 | ||||||
Insurance | $ | 28,933 | $ | 24,565 | ||||
Interest | 12,701 | 23,408 | ||||||
Payroll and vacation | 8,319 | 5,805 | ||||||
Withholding taxes | 489 | 858 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 3,214 | 3,082 | ||||||
Contract expenses * | 3,536 | 2,676 | ||||||
Other | 6,276 | 4,486 | ||||||
Total accrued liabilities | $ | 63,468 | $ | 64,880 | ||||
* Included within contract expenses is $0.7 million and $1.5 million of provision for loss contracts as of November 30, 2015 and February 28, 2015, respectively.
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4. Long-Term Debt
The Company's long-term debt consists of the following:
November 30, | February 28, | |||||||
(In thousands) | 2015 | 2015 | ||||||
RCA ($83.1 million and $27.3 million available as of November 30, 2015 and February 28, 2015, respectively) | $ | — | $ | 5,873 | ||||
11% Notes, due 2018 | 250,000 | 250,000 | ||||||
13% Secured Notes, due 2018 | 345,353 | 323,956 | ||||||
Term Loans, interest rate of 8% | 70,000 | 70,000 | ||||||
Other obligations | 11,551 | 8,966 | ||||||
Total debt | 676,904 | 658,795 | ||||||
Less: Current portion | (3,308 | ) | (8,528 | ) | ||||
Total long-term debt | $ | 673,596 | $ | 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 November 30, 2015, the weighted average interest rate on the RCA was 6.49%. 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 November 30, 2015 the weighted average interest rate on the Term Loans was 8.0%.
Effective August 31, 2015, the Company obtained an amendment to the Credit Facility which allowed (i) certain assets to be added to a schedule of permitted asset sales and dispositions, and (ii) permitted the Company to incur additional capital expenditures equal to the unrestricted net cash proceeds received from the asset sales permitted under the terms of the Credit Agreements, as amended.
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 $0.0 million 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 Company achieved a fixed charge coverage ratio (as defined in the Credit Facilities) of greater than 1.00 to 1.00 as of August 31, 2015. During the third quarter ended November 30, 2015, the company achieved a greater than 1.00 to 1.00 fixed charge coverage ratio for a second consecutive quarter; therefore the availability block will be reduced to $0.0 million.
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 November 30, 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:
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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. As of November 30, 2015 the Company was required to have a minimum trailing twelve-month EBITDA, as defined in the credit agreement, of at least $60.5 million. 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.
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 November 30, 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 November 30, 2015, the inception-to-date PIK interest was $84.7 million ($80.4 million was recorded as an increase to the Secured Notes and $4.3 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.
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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:
Time Period | Percentage | |
March 15, 2015 to March 14, 2016 | 106.50 | % |
March 15, 2016 to March 14, 2017 | 103.25 | % |
March 15, 2017 and thereafter | 100.00 | % |
In addition, the Company may be required to make an offer to purchase the Secured Notes upon the sale of certain assets or upon a change of control. The Company will be required to redeem certain portions of the Secured Notes for tax purposes 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 11, “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 12-month period beginning on September 1 of the years indicated below:
Time Period | Percentage | |
September 1, 2014 to August 31, 2015 | 105.50 | % |
September 1, 2015 to August 31, 2016 | 102.75 | % |
September 1, 2016 and thereafter | 100.00 | % |
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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 11, “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.
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 $5.2 million of new obligations under various financing arrangements related to equipment, in the nine months ended November 30, 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 29, 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 November 30, 2015 and 2014 were 6.4% and 3.6%, respectively, resulting in tax expense of $0.8 million and tax benefit of $0.1 million, respectively. The effective income tax rates for the nine months ended November 30, 2015 and 2014 were 5.6% and 7.1%, respectively, resulting in tax expense of $1.3 million and tax benefit of $1.4 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. The Company’s determination of its valuation allowance considers the impact of utilization of alternative minimum tax net operating loss and alternative minimum tax credit carryforwards.
Cash paid for income taxes was immaterial for the three and nine months ended November 30, 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 $1.9 million and $0.1 million, respectively, for the three months ended November 30, 2015, and $1.8 million and $0.2 million, respectively for the three months ended November 30, 2014. The expense associated with these programs is included within Cost of revenue and Selling, administrative and general expenses in the amounts of $4.8 million and $0.3 million, respectively, for the nine months ended November 30, 2015, and $4.8 million and $0.5 million, respectively for the nine months ended November 30, 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.
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Net periodic pension expense recognized was as follows:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Net periodic benefit cost | ||||||||||||||||
Service cost | $ | 78 | $ | 86 | $ | 234 | $ | 258 | ||||||||
Interest cost | 93 | 105 | 279 | 315 | ||||||||||||
Expected return on plan assets | (155 | ) | (150 | ) | (465 | ) | (451 | ) | ||||||||
Amortization of prior service cost | 13 | 14 | 39 | 43 | ||||||||||||
Recognized net actuarial loss | 54 | 51 | 162 | 152 | ||||||||||||
Total pension expense | $ | 83 | $ | 106 | $ | 249 | $ | 317 | ||||||||
The Company made contributions to the defined benefit pension plans of approximately $0.2 million during the nine months ended November 30, 2015 and November 30, 2014, and expects to make additional contributions of approximately $0.1 million in the remainder of fiscal year 2016.
7. Other Noncurrent Liabilities
The Company's other noncurrent liabilities consist of:
November 30, | February 28, | |||||||
(In thousands) | 2015 | 2015 | ||||||
Reclamation costs | $ | 19,642 | $ | 18,835 | ||||
Executive deferred compensation liability | 5,366 | 5,512 | ||||||
PIK accrued interest | 4,317 | 10,394 | ||||||
Other | 11,601 | 11,533 | ||||||
$ | 40,926 | $ | 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.
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. Rock Solid is required to maintain a Collateral Trust Agreement with an insurer for 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 November 30, 2015 and February 28, 2015 in our Condensed Consolidated Balance Sheets. Reserves for retained losses within Rock Solid, which are recorded in accrued liabilities in our Condensed Consolidated Balance Sheets, were approximately $18.9 million and $15.5 million as of November 30, 2015 and February 28, 2015, respectively. Other accrued insurance amounts of $10.0 million and $9.1 million as of November 30, 2015 and February 28, 2015, respectively, relate to exposures for periods prior to the inception of the captive and are covered by pre-existing insurance
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policies. Included in Other noncurrent assets is approximately $6.7 million as of November 30, 2015 for recoverable amounts from insurance companies for claims in excess of deductibility. Liabilities associated with amounts that are payable by insurance companies of approximately $6.7 million were recorded in other noncurrent liabilities in our Condensed Consolidated Balance Sheets as of November 30, 2015 and February 28, 2015.
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 stockholder, James W. Van Buren, who is the principal of MacInnis Group, LLC.
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.
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 November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenue | ||||||||||||||||
Construction materials | $ | 145,402 | $ | 147,087 | $ | 415,548 | $ | 424,608 | ||||||||
Heavy/highway construction | 83,169 | 91,457 | 241,649 | 237,179 | ||||||||||||
Traffic safety services and equipment | 25,841 | 22,911 | 77,339 | 73,732 | ||||||||||||
Segment totals | 254,412 | 261,455 | 734,536 | 735,519 | ||||||||||||
Eliminations | (52,383 | ) | (51,794 | ) | (145,236 | ) | (137,861 | ) | ||||||||
Total revenue | $ | 202,029 | $ | 209,661 | $ | 589,300 | $ | 597,658 | ||||||||
Operating income | ||||||||||||||||
Construction materials | $ | 38,792 | $ | 27,596 | $ | 102,888 | $ | 72,986 | ||||||||
Heavy/highway construction | 3,317 | 8 | 10,308 | 4,897 | ||||||||||||
Traffic safety services and equipment | 2,525 | 1,814 | 7,341 | 5,518 | ||||||||||||
Corporate and unallocated | (10,315 | ) | (10,160 | ) | (34,647 | ) | (41,464 | ) | ||||||||
Total operating income | $ | 34,319 | $ | 19,258 | $ | 85,890 | $ | 41,937 | ||||||||
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Depreciation, depletion and amortization | ||||||||||||||||
Construction materials | $ | 7,047 | $ | 8,524 | $ | 20,570 | $ | 23,253 | ||||||||
Heavy/highway construction | 1,771 | 2,040 | 5,348 | 6,378 | ||||||||||||
Traffic safety services and equipment | 1,229 | 1,240 | 3,725 | 3,683 | ||||||||||||
Corporate and unallocated | 355 | 378 | 1,058 | 1,115 | ||||||||||||
Total depreciation, depletion and amortization | $ | 10,402 | $ | 12,182 | $ | 30,701 | $ | 34,429 | ||||||||
19
10. Supplemental Disclosures of Cash Flow Information
The following table shows the supplemental information related to our cash flows for the nine months ended:
(In thousands) | November 30, 2015 | November 30, 2014 | ||||||
Capital lease and other non-cash obligations incurred | $ | 7,615 | $ | 2,169 | ||||
Cash paid for interest, net of amounts capitalized | 55,698 | 51,113 | ||||||
11. 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.
20
Condensed Consolidating Balance Sheet at November 30, 2015
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 5,523 | $ | 388 | $ | 7,956 | $ | — | $ | 13,867 | ||||||||||
Restricted cash | 9,617 | 61 | 15,790 | — | 25,468 | |||||||||||||||
Accounts receivable, net | 102,388 | 15,590 | 6 | — | 117,984 | |||||||||||||||
Inventories | 92,417 | 16,067 | — | — | 108,484 | |||||||||||||||
Net investment in lease | — | — | 1,678 | (1,678 | ) | — | ||||||||||||||
Deferred income taxes | 1,918 | 712 | — | — | 2,630 | |||||||||||||||
Other current assets | 6,651 | 909 | 15 | — | 7,575 | |||||||||||||||
Assets held for sale | 6,441 | — | — | — | 6,441 | |||||||||||||||
Total current assets | 224,955 | 33,727 | 25,445 | (1,678 | ) | 282,449 | ||||||||||||||
Property, plant and equipment, net | 279,964 | 20,966 | 4,730 | (4,730 | ) | 300,930 | ||||||||||||||
Goodwill | 75,647 | 5,845 | — | — | 81,492 | |||||||||||||||
Other intangible assets, net | 6,860 | 10,730 | — | — | 17,590 | |||||||||||||||
Investment in subsidiaries | 94,445 | — | — | (94,445 | ) | — | ||||||||||||||
Intercompany receivables | (31,033 | ) | 31,067 | — | (34 | ) | — | |||||||||||||
Other noncurrent assets | 26,500 | 873 | 2,348 | — | 29,721 | |||||||||||||||
Total Assets | $ | 677,338 | $ | 103,208 | $ | 32,523 | $ | (100,887 | ) | $ | 712,182 | |||||||||
Liabilities and (Deficit) Equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Current maturities of long-term debt | $ | 4,090 | $ | — | $ | 896 | $ | (1,678 | ) | $ | 3,308 | |||||||||
Accounts payable - trade | 38,109 | 5,185 | 468 | — | 43,762 | |||||||||||||||
Accrued liabilities | 43,063 | 1,466 | 18,939 | — | 63,468 | |||||||||||||||
Total current liabilities | 85,262 | 6,651 | 20,303 | (1,678 | ) | 110,538 | ||||||||||||||
Intercompany payables | — | 34 | (34 | ) | — | |||||||||||||||
Long-term debt, less current maturities | 669,406 | — | 4,190 | — | 673,596 | |||||||||||||||
Obligations under capital leases, less current maturities | 4,730 | — | — | (4,730 | ) | — | ||||||||||||||
Deferred income taxes | 24,813 | 5,261 | — | — | 30,074 | |||||||||||||||
Other noncurrent liabilities | 38,010 | 568 | 2,348 | — | 40,926 | |||||||||||||||
Total liabilities | 822,221 | 12,480 | 26,875 | (6,442 | ) | 855,134 | ||||||||||||||
(Deficit) equity | ||||||||||||||||||||
New Enterprise Stone & Lime Co., Inc. (deficit) equity | (144,883 | ) | 90,728 | 3,717 | (94,445 | ) | (144,883 | ) | ||||||||||||
Noncontrolling interest | — | — | 1,931 | — | 1,931 | |||||||||||||||
Total (deficit) equity | (144,883 | ) | 90,728 | 5,648 | (94,445 | ) | (142,952 | ) | ||||||||||||
Total liabilities and (deficit) equity | $ | 677,338 | $ | 103,208 | $ | 32,523 | $ | (100,887 | ) | $ | 712,182 | |||||||||
21
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 sale | 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 | |||||||||||||||
Total Assets | $ | 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 maturities | 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 | |||||||||
22
Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ended November 30, 2015
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Revenue | $ | 179,387 | $ | 24,393 | $ | 1,818 | $ | (3,569 | ) | $ | 202,029 | |||||||||
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below) | 128,353 | 18,389 | 1,567 | (3,493 | ) | 144,816 | ||||||||||||||
Depreciation, depletion and amortization | 9,097 | 1,305 | — | — | 10,402 | |||||||||||||||
Asset impairment | 1 | 9 | — | — | 10 | |||||||||||||||
Selling, administrative and general expenses | 10,920 | 1,482 | 43 | — | 12,445 | |||||||||||||||
Gain on disposals of property, equipment and software | 79 | (42 | ) | — | — | 37 | ||||||||||||||
Operating income (loss) | 30,937 | 3,250 | 208 | (76 | ) | 34,319 | ||||||||||||||
Interest (expense) income, net | (21,182 | ) | (80 | ) | (45 | ) | 76 | (21,231 | ) | |||||||||||
Income (loss) before income taxes | 9,755 | 3,170 | 163 | — | 13,088 | |||||||||||||||
Income tax expense | 840 | — | — | — | 840 | |||||||||||||||
Equity in earnings of subsidiaries | 3,194 | — | — | (3,194 | ) | — | ||||||||||||||
Net income (loss) | 12,109 | 3,170 | 163 | (3,194 | ) | 12,248 | ||||||||||||||
Less: Net income attributable to noncontrolling interest | — | — | (139 | ) | — | (139 | ) | |||||||||||||
Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | 12,109 | 3,170 | 24 | (3,194 | ) | 12,109 | ||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income tax | 40 | — | — | — | 40 | |||||||||||||||
Comprehensive income (loss) | 12,149 | 3,170 | 163 | (3,194 | ) | 12,288 | ||||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | — | (139 | ) | — | (139 | ) | |||||||||||||
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | $ | 12,149 | $ | 3,170 | $ | 24 | $ | (3,194 | ) | $ | 12,149 | |||||||||
23
Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ended November 30, 2014
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Revenue | $ | 192,996 | $ | 18,992 | $ | 1,731 | $ | (4,058 | ) | $ | 209,661 | |||||||||
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below) | 148,242 | 15,615 | 1,430 | (1,848 | ) | 163,439 | ||||||||||||||
Depreciation, depletion and amortization | 10,899 | 1,283 | 12,182 | |||||||||||||||||
Asset impairment | 75 | 151 | 226 | |||||||||||||||||
Selling, administrative and general expenses | 12,981 | 1,666 | 50 | 14,697 | ||||||||||||||||
Gain loss on disposals of property, equipment and software | (148 | ) | 7 | (141 | ) | |||||||||||||||
Operating income (loss) | 20,947 | 270 | 251 | (2,210 | ) | 19,258 | ||||||||||||||
Interest (expense) income, net | (20,894 | ) | 28 | (54 | ) | 108 | (20,812 | ) | ||||||||||||
Income (loss) before income taxes | 53 | 298 | 197 | (2,102 | ) | (1,554 | ) | |||||||||||||
Income tax expense | (56 | ) | (56 | ) | ||||||||||||||||
Equity in earnings of subsidiaries | (1,787 | ) | 1,787 | — | ||||||||||||||||
Net income (loss) | (1,678 | ) | 298 | 197 | (315 | ) | (1,498 | ) | ||||||||||||
Less: Net income attributable to noncontrolling interest | — | (180 | ) | — | (180 | ) | ||||||||||||||
Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | (1,678 | ) | 298 | 17 | (315 | ) | (1,678 | ) | ||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income tax | 39 | — | — | 39 | ||||||||||||||||
Comprehensive income (loss) | (1,639 | ) | 298 | 197 | (315 | ) | (1,459 | ) | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | (180 | ) | — | (180 | ) | ||||||||||||||
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | $ | (1,639 | ) | $ | 298 | $ | 17 | $ | (315 | ) | $ | (1,639 | ) | |||||||
24
Condensed Consolidating Statement of Comprehensive Income (Loss) for the nine months ended November 30, 2015
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Revenue | $ | 521,078 | $ | 70,168 | $ | 5,238 | $ | (7,184 | ) | $ | 589,300 | |||||||||
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below) | 387,026 | 52,658 | 4,739 | (6,957 | ) | 437,466 | ||||||||||||||
Depreciation, depletion and amortization | 26,814 | 3,887 | — | — | 30,701 | |||||||||||||||
Asset impairment | 161 | 32 | — | — | 193 | |||||||||||||||
Selling, administrative and general expenses | 34,151 | 4,529 | 166 | — | 38,846 | |||||||||||||||
Gain on disposals of property, equipment and software | (3,704 | ) | (92 | ) | — | — | (3,796 | ) | ||||||||||||
Operating income (loss) | 76,630 | 9,154 | 333 | (227 | ) | 85,890 | ||||||||||||||
Interest (expense) income, net | (63,512 | ) | (19 | ) | (143 | ) | 227 | (63,447 | ) | |||||||||||
Income (loss) before income taxes | 13,118 | 9,135 | 190 | — | 22,443 | |||||||||||||||
Income tax expense | 1,263 | — | — | — | 1,263 | |||||||||||||||
Equity in earnings of subsidiaries | 8,914 | — | — | (8,914 | ) | — | ||||||||||||||
Net income (loss) | 20,769 | 9,135 | 190 | (8,914 | ) | 21,180 | ||||||||||||||
Less: Net income attributable to noncontrolling interest | — | (411 | ) | — | (411 | ) | ||||||||||||||
Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | 20,769 | 9,135 | (221 | ) | (8,914 | ) | 20,769 | |||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income tax | 118 | — | — | — | 118 | |||||||||||||||
Comprehensive income (loss) | 20,887 | 9,135 | 190 | (8,914 | ) | 21,298 | ||||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | (411 | ) | — | (411 | ) | ||||||||||||||
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | $ | 20,887 | $ | 9,135 | $ | (221 | ) | $ | (8,914 | ) | $ | 20,887 | ||||||||
25
Condensed Consolidating Statement of Comprehensive Income (Loss) for the nine months ended November 30, 2014
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Revenue | $ | 535,820 | $ | 65,667 | $ | 5,192 | $ | (9,021 | ) | $ | 597,658 | |||||||||
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below) | 422,482 | 51,589 | 4,386 | (6,596 | ) | 471,861 | ||||||||||||||
Depreciation, depletion and amortization | 30,610 | 3,819 | 34,429 | |||||||||||||||||
Asset impairment | 5,098 | 151 | 5,249 | |||||||||||||||||
Selling, administrative and general expenses | 38,810 | 5,673 | 150 | 44,633 | ||||||||||||||||
Gain loss on disposals of property, equipment and software | (449 | ) | (2 | ) | (451 | ) | ||||||||||||||
Operating income (loss) | 39,269 | 4,437 | 656 | (2,425 | ) | 41,937 | ||||||||||||||
Interest (expense) income, net | (61,707 | ) | 31 | (164 | ) | 322 | (61,518 | ) | ||||||||||||
Income (loss) before income taxes | (22,438 | ) | 4,468 | 492 | (2,103 | ) | (19,581 | ) | ||||||||||||
Income tax benefit | (1,398 | ) | — | — | — | (1,398 | ) | |||||||||||||
Equity in earnings of subsidiaries | 2,325 | — | — | (2,325 | ) | — | ||||||||||||||
Net income (loss) | (18,715 | ) | 4,468 | 492 | (4,428 | ) | (18,183 | ) | ||||||||||||
Less: Net income attributable to noncontrolling interest | — | — | (532 | ) | — | (532 | ) | |||||||||||||
Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | (18,715 | ) | 4,468 | (40 | ) | (4,428 | ) | (18,715 | ) | |||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income tax | 116 | — | — | 116 | ||||||||||||||||
Comprehensive income (loss) | (18,599 | ) | 4,468 | 492 | (4,428 | ) | (18,067 | ) | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | — | (532 | ) | — | (532 | ) | |||||||||||||
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | $ | (18,599 | ) | $ | 4,468 | $ | (40 | ) | $ | (4,428 | ) | $ | (18,599 | ) | ||||||
26
Condensed Consolidating Statement of Cash Flows for the nine months ended November 30, 2015
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Cash flows from operating activities | $ | 12,576 | $ | 4,394 | $ | 4,373 | $ | 21,343 | ||||||||||||
Cash flows from investing activities | ||||||||||||||||||||
Capital expenditures | (15,236 | ) | (4,093 | ) | — | — | (19,329 | ) | ||||||||||||
Proceeds from sale of property, equipment and assets held for sale | 15,654 | — | — | — | 15,654 | |||||||||||||||
Change in cash value of life insurance | 6 | — | — | — | 6 | |||||||||||||||
Change in restricted cash | (8,316 | ) | 27 | (2 | ) | — | (8,291 | ) | ||||||||||||
Net cash used in investing activities | (7,892 | ) | (4,066 | ) | (2 | ) | — | (11,960 | ) | |||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Repayments of short term borrowings | (5,873 | ) | — | — | — | (5,873 | ) | |||||||||||||
Repayments of other debt | (641 | ) | — | (724 | ) | — | (1,365 | ) | ||||||||||||
Payments on capital leases | (1,280 | ) | — | — | — | (1,280 | ) | |||||||||||||
Distribution to noncontrolling interest | — | — | (291 | ) | — | (291 | ) | |||||||||||||
Net cash used in financing activities | (7,794 | ) | — | (1,015 | ) | — | (8,809 | ) | ||||||||||||
Net increase in cash and cash equivalents | (3,110 | ) | 328 | 3,356 | — | 574 | ||||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | 8,633 | 60 | 4,600 | — | 13,293 | |||||||||||||||
End of period | $ | 5,523 | $ | 388 | $ | 7,956 | $ | — | $ | 13,867 | ||||||||||
27
Condensed Consolidating Statement of Cash Flows for the nine months ended November 30, 2014
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Cash flows from operating activities | $ | (8,202 | ) | $ | 5,286 | $ | 3,245 | $ | (1,400 | ) | $ | (1,071 | ) | |||||||
Cash flows from investing activities | ||||||||||||||||||||
Capital expenditures | (12,982 | ) | (5,779 | ) | — | (18,761 | ) | |||||||||||||
Proceeds from sale of property and equipment, and assets held for sale | 2,450 | — | 2,450 | |||||||||||||||||
Change in cash value of life insurance | (35 | ) | — | (35 | ) | |||||||||||||||
Change in restricted cash | 13,512 | 4 | (192 | ) | — | 13,324 | ||||||||||||||
Net cash provided by (used in) investing activities | 2,945 | (5,775 | ) | (192 | ) | — | (3,022 | ) | ||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Repayments of short term borrowings | (9,550 | ) | — | — | — | (9,550 | ) | |||||||||||||
Repayments of other debt | (4,466 | ) | — | (559 | ) | — | (5,025 | ) | ||||||||||||
Payments on capital leases | (2,132 | ) | — | — | — | (2,132 | ) | |||||||||||||
Debt issuance costs | (756 | ) | — | — | — | (756 | ) | |||||||||||||
Dividends (paid) | — | — | (1,400 | ) | 1,400 | — | ||||||||||||||
Distribution to noncontrolling interest | — | |||||||||||||||||||
Net cash (used in) provided by financing activities | (16,904 | ) | — | (1,959 | ) | 1,400 | (17,463 | ) | ||||||||||||
Net increase in cash and cash equivalents | (22,161 | ) | (489 | ) | 1,094 | — | (21,556 | ) | ||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | 21,344 | — | 2,548 | — | 23,892 | |||||||||||||||
End of period | $ | (817 | ) | $ | (489 | ) | $ | 3,642 | $ | — | $ | 2,336 | ||||||||
28
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"). Through the third quarter of fiscal year 2016, we have monetized certain assets providing $17 million of cash this fiscal year for additional working capital and fixed asset purchases. We have approximately $6.4 million in assets held for sale as of November 30, 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 approximately $18 million in revenues associated with the sale of 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. Although the Transportation Act has provided more bidding opportunities in the Commonwealth of Pennsylvania overall, we have continued to experience declines in the markets in which we participate.
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.
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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 Income (Loss) in the amounts of $1.8 million and $0.2 million, respectively for the three months ended November 30, 2014 and $4.8 million and $0.5 million, respectively, for the nine months ended November 30, 2014. The reclassification had no effect on Operating income, Comprehensive income (loss) within the Condensed Consolidated Statements of Comprehensive Income (Loss), the Condensed Consolidated Statement of Cash Flows, or the Condensed Consolidated Balance Sheets.
Executive Summary
The following are key statistics for the nine months ended November 30, 2015 as compared to the nine months ended November 30, 2014.
• | Cost of revenue decreased by $34.4 million (7.3%); |
• | Operating income more than doubled; increasing by $44.0 million (105.0%); |
• | Selling, administrative and general expenses decreased by $5.8 million or 13.0%; and |
• | Net cash flows from operating activities increased $22.4 million. |
RESULTS OF OPERATIONS
The following table summarizes our operating results on a consolidated basis:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenue | $ | 202,029 | $ | 209,661 | $ | 589,300 | $ | 597,658 | ||||||||
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below) | 144,816 | 163,439 | 437,466 | 471,861 | ||||||||||||
Depreciation, depletion and amortization | 10,402 | 12,182 | 30,701 | 34,429 | ||||||||||||
Asset impairment | 10 | 226 | 193 | 5,249 | ||||||||||||
Selling, administrative and general expenses | 12,445 | 14,697 | 38,846 | 44,633 | ||||||||||||
Gain on disposals of property, equipment and software | 37 | (141 | ) | (3,796 | ) | (451 | ) | |||||||||
Operating income | 34,319 | 19,258 | 85,890 | 41,937 | ||||||||||||
Interest expense, net | (21,231 | ) | (20,812 | ) | (63,447 | ) | (61,518 | ) | ||||||||
Income (loss) before income taxes | 13,088 | (1,554 | ) | 22,443 | (19,581 | ) | ||||||||||
Income tax expense (benefit) | 840 | (56 | ) | 1,263 | (1,398 | ) | ||||||||||
Net income (loss) | $ | 12,248 | $ | (1,498 | ) | $ | 21,180 | $ | (18,183 | ) | ||||||
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.
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The following table summarizes our segment revenue:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Segment Revenue | ||||||||||||||||
Construction materials | $ | 145,402 | $ | 147,087 | $ | 415,548 | $ | 424,608 | ||||||||
Heavy/highway construction | 83,169 | 91,457 | 241,649 | 237,179 | ||||||||||||
Traffic safety services and equipment | 25,841 | 22,911 | 77,339 | 73,732 | ||||||||||||
Segment totals | 254,412 | 261,455 | 734,536 | 735,519 | ||||||||||||
Inter-segment eliminations | (52,383 | ) | (51,794 | ) | (145,236 | ) | (137,861 | ) | ||||||||
Total revenue | $ | 202,029 | $ | 209,661 | $ | 589,300 | $ | 597,658 | ||||||||
The following table summarizes the percentage of segment revenue by our primary lines of business:
Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||
Segment Revenue: | |||||||||||
Construction materials | 57.2 | % | 56.3 | % | 56.6 | % | 57.8 | % | |||
Heavy/highway construction | 32.7 | % | 35.0 | % | 32.9 | % | 32.2 | % | |||
Traffic safety services and equipment | 10.1 | % | 8.7 | % | 10.5 | % | 10.0 | % | |||
Segment totals | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
The following table summarizes the segment cost of revenue:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Segment Cost of Revenue | ||||||||||||||||
Construction materials | $ | 98,662 | $ | 107,359 | $ | 294,680 | $ | 324,660 | ||||||||
Heavy/highway construction | 77,914 | 89,305 | 226,137 | 226,293 | ||||||||||||
Traffic safety services and equipment | 20,623 | 18,569 | 61,885 | 58,769 | ||||||||||||
Segment totals | 197,199 | 215,233 | 582,702 | 609,722 | ||||||||||||
Eliminations | (52,383 | ) | (51,794 | ) | (145,236 | ) | (137,861 | ) | ||||||||
Total cost of revenue | $ | 144,816 | $ | 163,439 | $ | 437,466 | $ | 471,861 | ||||||||
The following table summarizes the segment cost of revenue as a percent of segment revenue:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||
Segment Cost of Revenue as Percent of Segment Revenue | ||||||||||||
Construction materials | 67.9 | % | 73.0 | % | 70.9 | % | 76.5 | % | ||||
Heavy/highway construction | 93.7 | % | 97.6 | % | 93.6 | % | 95.4 | % | ||||
Traffic safety services and equipment | 79.8 | % | 81.0 | % | 80.0 | % | 79.7 | % | ||||
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The following table summarizes the segment operating income:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Operating Income | ||||||||||||||||
Construction materials | $ | 38,792 | $ | 27,596 | $ | 102,888 | $ | 72,986 | ||||||||
Heavy/highway construction | 3,317 | 8 | 10,308 | 4,897 | ||||||||||||
Traffic safety services and equipment | 2,525 | 1,814 | 7,341 | 5,518 | ||||||||||||
Segment totals | 44,634 | 29,418 | 120,537 | 83,401 | ||||||||||||
Corporate and unallocated | (10,315 | ) | (10,160 | ) | (34,647 | ) | (41,464 | ) | ||||||||
Total operating income | $ | 34,319 | $ | 19,258 | $ | 85,890 | $ | 41,937 | ||||||||
Three Months Ended November 30, 2015 Compared to Three Months Ended November 30, 2014
Revenue
Total revenue decreased $7.7 million or 3.7% to $202.0 million for the three months ended November 30, 2015 compared to $209.7 million for the three months ended November 30, 2014. The decrease in revenue was primarily the result of reduced heavy/highway construction revenue of $8.3 million in the three months ended November 30, 2015 compared to the three months ended November 30, 2014. For the comparative periods, non-core revenues decreased $2.3 million due to the winding down of those operations however the decrease was offset by a slight increase in Traffic safety services and equipment revenues.
Segment revenue for our construction materials business decreased $1.7 million, or 1.2% to $145.4 million for the three months ended November 30, 2015 compared to $147.1 million for the three months ended November 30, 2014. The prior fiscal year contained $3.3 million of revenues which did not recur in fiscal 2016 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 were essentially flat on a comparable basis. Increases in both aggregates revenues of $3.1 million and ready mixed concrete revenues of $3.2 million, were offset by a decline in hot mixed asphalt revenues of $5.3 million for the three months ended November 30, 2015 compared to the three months ended November 30, 2014. The increase in aggregates revenue was primarily attributable to the increase in price per ton shipped and consumed as we continue to focus on strategic price increases in our markets. The increase in ready mixed concrete was attributable to volume increases associated with select pockets of commercial demand as well as strong pricing. Hot mix asphalt revenues declined as the result of lower internal consumption as well as a slight reduction in asphalt selling prices due to the passing on of lower asphalt cement costs.
Segment revenue for our heavy/highway construction business decreased $8.3 million, or 9.1% to $83.2 million for the three months ended November 30, 2015 compared to $91.5 million for the three months ended November 30, 2014. The decrease in revenue was primarily attributable to the timing of available work as a larger job in our East region was not replaced in the current year.
Segment revenue for our traffic safety services and equipment businesses increased, $2.9 million, or 12.7% to $25.8 million for the three months ended November 30, 2015 compared to $22.9 million for the three months ended November 30, 2014. The increase was primarily attributable to the completion of previously delayed orders.
Cost of Revenue
Total cost of revenue decreased $18.6 million or 11.4% to $144.8 million for the three months ended November 30, 2015 compared to approximately $163.4 million for the three months ended November 30, 2014. This decrease is attributable to the reduction of heavy/highway construction activity and reduced volumes in construction materials along with a reduction in commodity prices.
Segment cost of revenue for our construction materials business as a percentage of its segment revenue decreased 5.1% to 67.9% for the three months ended November 30, 2015 compared to 73.0% for the three months ended November 30, 2014. Segment cost of revenue as a percentage of segment revenue improved primarily as a result of improved pricing on a fixed cost base, as well as lower revenues associated with the winding down of non-core operations which generally carried lower margins compared to other products.
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Segment cost of revenue for our heavy/highway construction business as a percentage of its segment revenue decreased by 3.9% to 93.7% for the three months ended November 30, 2015 compared to 97.6% for the three months ended November 30, 2014. The decrease in segment cost of sales as a percentage of sales was primarily attributable to increased margins on the work bid and completed as compared to the prior period.
Segment cost of revenue for our traffic services and equipment business as a percentage of its segment revenue declined slightly by 1.2% to 79.8% for the three months ended November 30, 2015 compared to 81.0% for the three months ended November 30, 2014.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased $1.8 million, or 14.8% to $10.4 million for the three months ended November 30, 2015 compared to $12.2 million for the three months ended November 30, 2014. The decrease was primarily attributable to less depreciation due to sales of assets within the past year and as a result of lower depreciable assets due to decreased capital expenditures over the last several years.
Selling, Administrative and General Expenses
Selling, administrative and general expenses decreased $2.3 million, or 15.6% to $12.4 million for the three months ended November 30, 2015 compared to $14.7 million for the three months ended November 30, 2014. The decrease was primarily attributable to a reduction in professional service fees and to a lesser extent reduced costs related to utilization of shared services.
Operating Income
Operating income increased $15.0 million, or 77.7% to $34.3 million for the three months ended November 30, 2015, as compared to $19.3 million for the three months ended November 30, 2014. This increase was primarily attributable to strategic price increases within certain markets, continued cost controls and to a lesser extent lower commodity prices.
Operating income for our construction materials business increased $11.2 million, or 40.6% to $38.8 million for the three months ended November 30, 2015 compared to $27.6 million for the three months ended November 30, 2014. Operating income for aggregates, hot mix asphalt and ready mixed concrete increased $3.4 million, $5.7 million, and $1.6 million, respectively, to $20.5 million, $13.4 million, and $4.9 million for the three months ended November 30, 2015 compared to $17.1 million, $7.7 million, and $3.3 million for the three months ended November 30, 2014, respectively. These increases were primarily due to strategic price increases on tons shipped and consumed for our products in most markets, as well as continued cost controls.
Operating income for our heavy/highway construction business increased by $3.3 million, to $3.3 million for the three months ended November 30, 2015 compared to a break even for the three months ended November 30, 2014. The increase in operating income was attributable to the increased margins on work bid and completed as compared to the prior period.
Operating income for our traffic safety services and equipment businesses increased by $0.7 million, or 38.9% to $2.5 million for the three months ended November 30, 2015 compared to $1.8 million for the three months ended November 30, 2014. The increase in profitability is primarily attributable to the revenue increases on a fixed cost basis.
Interest Expense, net
Net interest expense increased $0.4 million, or 1.9% to $21.2 million for the three months ended November 30, 2015 compared to $20.8 million for the three months ended November 30, 2014 due primarily to increased overall indebtedness.
Income Tax Expense (Benefit)
The income tax provision for the three months ended November 30, 2015 and November 30, 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.
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Our effective tax rates for the three months ended November 30, 2015 and 2014 were 6.4% and 3.6%, respectively, resulting in tax expense of $0.8 million and tax benefit of $0.1 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. The Company’s determination of its valuation allowance considers the impact of utilization of alternative minimum tax net operating loss and alternative minimum tax credit carryforwards.
Nine Months Ended November 30, 2015 Compared to Nine Months Ended November 30, 2014
Revenue
Total revenue decreased $8.4 million or 1.4% to $589.3 million for the nine months ended November 30, 2015 compared to $597.7 million for the nine months ended November 30, 2014. When considering the impact of reduced revenue of $18.0 million associated with the winding down of certain non-core operations in the prior fiscal year, total revenue increased $9.6 million or 1.6% on a comparable basis.
Segment revenue for our construction materials business decreased $9.1 million, or 2.1% to $415.5 million for the nine months ended November 30, 2015 compared to $424.6 million for the nine months ended November 30, 2014. The prior fiscal year contained $19.7 million of revenues 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 $10.6 million or 2.5% on a comparable basis. Aggregates, hot mix asphalt and ready mixed concrete experienced increases overall in the amounts of $1.8 million, $1.9 million and $6.8 million respectively for the nine months ended November 30, 2015. The increases for aggregates and hot mix asphalt were primarily attributable to increases in price per ton on materials shipped and consumed. While the increase in ready mixed concrete was the result in an overall increase in both price and yards shipped and consumed.
Segment revenue for our heavy/highway construction business increased $4.4 million, or 1.9% to $241.6 million for the nine months ended November 30, 2015 compared to $237.2 million for the nine months ended November 30, 2014. The increase in revenue was primarily attributable to the timing of available work.
Segment revenue for our traffic safety services and equipment businesses increased $3.6 million, or 4.9% to $77.3 million for the nine months ended November 30, 2015 compared to $73.7 million for the nine months ended November 30, 2014. The increase was primarily attributable to the completion of previously delayed orders.
Cost of Revenue
Total cost of revenue decreased $34.4 million or 7.3% to $437.5 million for the nine months ended November 30, 2015 compared to approximately $471.9 million for the nine months ended November 30, 2014. The decrease in cost of revenue is attributable to the winding down of our non-core operations in the prior fiscal year in the amount of $19.1 million with the remainder of the decrease due to a reduction in sales volumes of construction materials.
Segment cost of revenue for our construction materials business as a percentage of its segment revenue decreased 5.6% to 70.9% for the nine months ended November 30, 2015 compared to 76.5% for the nine months ended November 30, 2014. Segment cost of revenue as a percentage of segment revenue improved primarily as a result of improved pricing on a fixed cost base, as well as lower revenues associated with the winding down of non-core operations which generally carried lower margins compared to other products.
Segment cost of revenue for our heavy/highway construction business as a percentage of its segment revenue decreased 1.8% to 93.6% for the nine months ended November 30, 2015 compared to 95.4% for the nine months ended November 30, 2014. The decrease in segment cost of revenue as a percentage of segment revenue was primarily attributable to increased margins on the work bid and completed as compared to the prior period.
Segment cost of revenue for our traffic services and equipment business as a percentage of its segment revenue remained relatively flat, increasing 0.3% to 80.0% for the nine months ended November 30, 2015 compared to 79.7% for the nine months ended November 30, 2014.
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Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased $3.7 million, or 10.8% to $30.7 million for the nine months ended November 30, 2015 compared to $34.4 million for the nine months ended November 30, 2014. The decrease was primarily attributable to less depreciation due to sales of assets within the past year and as a result of lower depreciable assets due to decreased capital expenditures over the last several years.
Selling, Administrative and General Expenses
Selling, administrative and general expenses decreased $5.8 million, or 13.0% to $38.8 million for the nine months ended November 30, 2015 compared to $44.6 million for the nine months ended November 30, 2014. The decrease was primarily attributable to a reduction in professional service fees and to a lesser extent reduced costs related to utilization of shared services.
Operating Income
Operating income increased $44.0 million to $85.9 million for the nine months ended November 30, 2015, as compared to $41.9 million for the nine months ended November 30, 2014. This increase was primarily attributable to strategic price increases within certain markets, continued cost controls and to a lesser extent lower commodity prices.
Operating income for our construction materials business increased $29.9 million, or 41.0% to $102.9 million for the nine months ended November 30, 2015 compared to $73.0 million for the nine months ended November 30, 2014. Operating income for aggregates, hot mix asphalt and ready mixed concrete increased $15.0 million, $10.0 million, and $3.1 million, respectively, to $61.6 million, $29.9 million, and $11.4 million for the nine months ended November 30, 2015 as compared to $46.6 million, $19.9 million, and $8.3 million for the nine months ended November 30, 2014, respectively. These increases were primarily due to strategic price increases on tons shipped and consumed for our products in most markets, as well as continued cost controls.
Operating income for our heavy/highway construction business increased $5.4 million, or 110.2% to $10.3 million for the nine months ended November 30, 2015 compared to $4.9 million for the nine months ended November 30, 2014. This improvement was primarily attributable to reduced losses compared to the prior year on heavy/highway construction work.
Operating income for our traffic safety services and equipment businesses increased by $1.8 million, or 32.7% to $7.3 million for the nine months ended November 30, 2015 compared to $5.5 million for the nine months ended November 30, 2014. The increase in profitability is attributable to a favorable product mix and continued cost controls.
Interest Expense, net
Net interest expense increased $1.9 million, or 3.1% to $63.4 million for the nine months ended November 30, 2015 compared to $61.5 million for the nine months ended November 30, 2014 due primarily to increased overall indebtedness.
Income Tax Expense (Benefit)
The income tax provision for the nine months ended November 30, 2015 and nine months ended November 30, 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.
Our effective tax rates for the nine months ended November 30, 2015 and nine months ended November 30, 2014 were 5.6% and 7.1%, respectively, resulting in a tax expense of $1.3 million and tax benefit of $1.4 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. The Company’s determination of its valuation allowance considers the impact of utilization of alternative minimum tax net operating loss and alternative minimum tax credit carryforwards.
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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 November 30, 2015 we had no borrowings under the RCA with $83.1 million available compared to $5.9 million borrowed under the RCA, with $27.3 million available as of February 28, 2015. As of November 30, 2015, we had $13.9 million in cash and cash equivalents and working capital of $171.9 million compared to $13.3 million in cash and cash equivalents and working capital of $113.5 million as of February 28, 2015. Cash balances of $25.5 million and $17.2 million as of November 30, 2015 and February 28, 2015, respectively, were restricted in certain consolidated subsidiaries for 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, except as noted below. As of November 30, 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.
Effective August 31, 2015, we obtained an amendment to the Credit Facilities which (1) allowed certain assets to be added to a schedule of permitted asset sales and dispositions, and (ii) permitted us to incur additional capital expenditures equal to the unrestricted net cash proceeds received from the asset sales permitted under the terms of the Credit Agreements, as amended.
We achieved a fixed charge coverage ratio (as defined in the Credit Facilities) of greater than 1.00 to 1.00 as of August 31, 2015. During the third quarter we achieved a greater than 1.00 to 1.00 fixed charge coverage ratio for a second consecutive quarter; therefore the availability block will be reduced to $0.0 million.
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.
We have begun a process to evaluate our options to refinance the indentures. At present, there is no determination related to the timing or structure of such a refinancing.
Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing activities and financing activities and our capital expenditures for the nine months ended November 30, 2015 and November 30, 2014.
Nine Months Ended November 30, | ||||||||
(In thousands) | 2015 | 2014 | ||||||
Net cash (used in) provided by: | ||||||||
Operating activities | $ | 21,343 | $ | (1,071 | ) | |||
Investing activities | (11,960 | ) | (3,022 | ) | ||||
Financing activities | (8,809 | ) | (17,463 | ) | ||||
Cash paid for capital expenditures | (19,329 | ) | (18,761 | ) | ||||
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Operating Activities
Net cash from operating activities increased $22.4 million to $21.3 million of net cash provided by operating activities for the nine months ended November 30, 2015 compared to net cash used of $1.1 million for the nine months ended November 30, 2014. Cash used in operating activities increased as a result of changes in working capital and improved operating income.
Investing Activities
Net cash from investing activities changed $9.0 million to net cash used of $12.0 million in the nine months ended November 30, 2015 compared to net cash used of $3.0 million in the nine months ended November 30, 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, partially offset by proceeds from the sale of property and equipment.
Financing Activities
Net cash used in financing activities improved $8.7 million to $8.8 million in the nine months ended November 30, 2015 compared to $17.5 million used in the nine months ended November 30, 2014. The improvement in cash used in financing activities was primarily due to the decrease of $3.7 million in repayments under our short-term obligations in the nine months ended November 30, 2015 of $5.9 million, as compared to repayments of $9.6 million in nine months ended November 30, 2014. This decrease was accompanied by lower repayments of long-term debt of $1.4 million in the nine months ended November 30, 2015, as compared to $5.0 million in the nine months ended November 30, 2014.
Capital Expenditures
Cash capital expenditures increased slightly to $19.3 million for the nine months ended November 30, 2015 compared to $18.8 million for the nine months ended November 30, 2014. The Company also incurred $7.6 million of non-cash capital expenditures for the nine months ended November 30, 2015 as compared to $2.2 million for the nine months ended November 30, 2014. Overall cash and noncash capital expenditures increased $6.0 million year over year.
Our Indebtedness
Refer to Note 4 “Long-Term Debt” to the Condensed Consolidated Financial Statements for further information.
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.
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, Nature of Operations and 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.
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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; |
• | 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; |
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• | 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.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to financial market risks, including changes in commodity prices, interest rates and other relevant market prices.
Commodity Price Risk
We are subject to commodity price risk with respect to price changes in energy, including fossil fuels, electricity and natural gas for production of hot mix asphalt and cement and diesel fuel for distribution and production related vehicles. We attempt to limit our exposure to changes in commodity prices by putting sales price escalators in place for most public contracts, and we aggressively seek to obtain escalators on private and commercial contracts.
Interest Rate Risk
We are subject to interest rate risk in connection with borrowings under our indebtedness. As of November 30, 2015, we had $0.0 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 November 30, 2015. Based upon that evaluation, our CEO and CFO concluded that, as of November 30, 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.
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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 year 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 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 enterprise resource planning ("ERP") system 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.
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 |
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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. In addition, during fiscal year 2016, there were select instances where the Delegation of Authority was not properly followed. 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 years 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.
• | 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 year 2011 resulted in additional procedures performed by management and adjustments identified by management and our independent auditors during the fiscal years 2013, 2012 and 2011 year end and first quarter fiscal year 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 years 2013, 2012 and 2011 year-end financial closing and reporting processes. |
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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 have developed and implemented a Segregation of Duties Policy and provided segregation of duties training. While the appropriateness of segregation of duties will continue to be evaluated and, where necessary, refined, we have concluded that this is no longer a material weakness.
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 quarter ended November 30, 2015, are fairly stated in all material respects.
Changes in Internal Control Over Financial Reporting
We believe the following material weakness has been addressed as of the third quarter ended November 30, 2015:
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 have developed and implemented a Segregation of Duties Policy and provided segregation of duties training. While the appropriateness of segregation of duties will continue to be evaluated and, where necessary, refined, we have concluded that this is no longer a material weakness.
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
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.
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ITEM 5 - OTHER INFORMATION
None.
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ITEM 6 - EXHIBITS
Exhibit Number | Description | ||
10.1 | Amended and Restated Executive Benefit Plan (incorporated by reference from the Company's quarterly report on Form 10-Q/A (file no. 333-176538) filed on October 13, 2015 | ||
10.2* | Amendment No. 1 to Revolving Credit Agreement among the Company and certain of its subsidiaries as borrowers, the lenders party thereto, Wells Fargo Bank, National Association as syndication agent and PNC Bank, National Association as administrative agent. | ||
10.3* | Amendment No. 1 to Term Loan Credit and Guaranty Agreement among the Company, certain of its subsidiaries as guarantors, Cortland Capital Market Services LLC, as administrative agent and certain funds managed by KKR Asset Management LLC, as lenders. | ||
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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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: January 13, 2016 | By: | /s/ Albert L. Stone |
Albert L. Stone | ||
Executive Vice President and Chief Financial Officer | ||
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EXHIBIT INDEX
Exhibit Number | Description | ||
10.1 | Amended and Restated Executive Benefit Plan | ||
10.2* | Amendment No. 1 to Revolving Credit Agreement among the Company and certain of its subsidiaries as borrowers, the lenders party thereto, Wells Fargo Bank, National Association as syndication agent and PNC Bank, National Association as administrative agent. | ||
10.3* | Amendment No. 1 to Term Loan Credit and Guaranty Agreement among the Company, certain of its subsidiaries as guarantors, Cortland Capital Market Services LLC, as administrative agent and certain funds managed by KKR Asset Management LLC, as lenders. | ||
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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