Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - New Enterprise Stone & Lime Co., Inc. | exhibit32205-31x2016.htm |
| EX-95 - EXHIBIT 95 - New Enterprise Stone & Lime Co., Inc. | exhibit9505-31x2016.htm |
| EX-32.1 - EXHIBIT 32.1 - New Enterprise Stone & Lime Co., Inc. | exhibit32105-31x2016.htm |
| EX-31.2 - EXHIBIT 31.2 - New Enterprise Stone & Lime Co., Inc. | exhibit31205-31x2016.htm |
| EX-31.1 - EXHIBIT 31.1 - New Enterprise Stone & Lime Co., Inc. | exhibit31105-31x2016.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2016
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 July 11, 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 May 31, 2016
Page(s) | |
Condensed Consolidated Balance Sheets at May 31, 2016 and February 29, 2016 | |
Condensed Consolidated Statements of Comprehensive Loss for the three months ended May 31, 2016 and 2015 | |
Condensed Consolidated Statements of Cash Flows for the three months ended May 31, 2016 and 2015 | |
2
ITEM 1. FINANCIAL STATEMENTS
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share data) | May 31, 2016 | February 29, 2016 * | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 511 | $ | 40,561 | ||||
Restricted cash | 16,867 | 22,711 | ||||||
Accounts receivable, less reserves of $2,792 and $3,742 respectively | 90,461 | 48,296 | ||||||
Inventories | 108,233 | 103,363 | ||||||
Other current assets | 5,430 | 5,134 | ||||||
Assets held for sale | 5,563 | 5,558 | ||||||
Total current assets | 227,065 | 225,623 | ||||||
Property, plant and equipment, net | 308,710 | 307,421 | ||||||
Goodwill | 81,492 | 81,492 | ||||||
Other intangible assets, net | 17,140 | 17,365 | ||||||
Other noncurrent assets | 21,245 | 21,182 | ||||||
Total assets | $ | 655,652 | $ | 653,083 | ||||
Liabilities and Deficit | ||||||||
Current liabilities | ||||||||
Current maturities of long-term debt | $ | 4,344 | $ | 3,155 | ||||
Accounts payable - trade | 42,121 | 33,481 | ||||||
Accrued liabilities | 67,713 | 69,671 | ||||||
Total current liabilities | 114,178 | 106,307 | ||||||
Long-term debt, less current maturities | 679,104 | 664,517 | ||||||
Deferred income taxes | 20,518 | 20,913 | ||||||
Other noncurrent liabilities | 37,579 | 46,744 | ||||||
Total liabilities | 851,379 | 838,481 | ||||||
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 | (322,638 | ) | (312,510 | ) | ||||
Additional paid-in capital | 126,962 | 126,962 | ||||||
Accumulated other comprehensive loss | (2,155 | ) | (2,196 | ) | ||||
Total New Enterprise Stone & Lime Co., Inc. deficit | (197,557 | ) | (187,470 | ) | ||||
Noncontrolling interest in consolidated subsidiaries | 1,830 | 2,072 | ||||||
Total deficit | (195,727 | ) | (185,398 | ) | ||||
Total liabilities and deficit | $ | 655,652 | $ | 653,083 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
* Data derived from audited consolidated balance sheet as of February 29, 2016.
3
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
Three Months Ended May 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Revenue | ||||||||
Construction materials | $ | 69,548 | $ | 69,878 | ||||
Heavy/highway construction | 40,989 | 50,681 | ||||||
Traffic safety services and equipment | 24,858 | 20,157 | ||||||
Total revenue | 135,395 | 140,716 | ||||||
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below) | ||||||||
Construction materials | 43,416 | 48,841 | ||||||
Heavy/highway construction | 41,997 | 50,241 | ||||||
Traffic safety services and equipment | 19,303 | 15,868 | ||||||
Total cost of revenue | 104,716 | 114,950 | ||||||
Depreciation, depletion and amortization | 10,491 | 9,955 | ||||||
Asset impairment | — | 183 | ||||||
Selling, administrative and general expenses | 9,994 | 14,704 | ||||||
Gain on disposals of property, equipment and software | (391 | ) | (100 | ) | ||||
Operating income | 10,585 | 1,024 | ||||||
Interest expense, net | (20,979 | ) | (21,070 | ) | ||||
Loss before income taxes | (10,394 | ) | (20,046 | ) | ||||
Income tax benefit | (424 | ) | (908 | ) | ||||
Net loss | (9,970 | ) | (19,138 | ) | ||||
Less: Net income attributable to noncontrolling interest | (158 | ) | (135 | ) | ||||
Net loss attributable to New Enterprise Stone & Lime Co., Inc. | (10,128 | ) | (19,273 | ) | ||||
Other comprehensive income (loss) | ||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income taxes | 41 | 39 | ||||||
Comprehensive loss | (9,929 | ) | (19,099 | ) | ||||
Less: Comprehensive income attributable to noncontrolling interest | (158 | ) | (135 | ) | ||||
Comprehensive loss attributable to New Enterprise Stone & Lime Co., Inc. | $ | (10,087 | ) | $ | (19,234 | ) | ||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Three Months Ended May 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Reconciliation of net loss to net cash from operating activities | ||||||||
Net loss | $ | (9,970 | ) | $ | (19,138 | ) | ||
Adjustments to reconcile net income (loss) to net cash used in operating activities | ||||||||
Depreciation, depletion and amortization | 10,491 | 9,955 | ||||||
Asset impairment | — | 183 | ||||||
Gain on disposals of property, equipment and software | (391 | ) | (100 | ) | ||||
Non-cash payment-in-kind interest accretion | 863 | 5,136 | ||||||
Amortization and write-off of debt issuance costs | 1,200 | 826 | ||||||
Deferred income taxes | (395 | ) | (880 | ) | ||||
Provision for bad debt | (499 | ) | (133 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (41,666 | ) | (49,540 | ) | ||||
Inventories | (4,870 | ) | (94 | ) | ||||
Other assets | (800 | ) | 334 | |||||
Accounts payable | 18,032 | 28,265 | ||||||
Other liabilities | (1,692 | ) | (5,728 | ) | ||||
Net cash used in operating activities | (29,697 | ) | (30,914 | ) | ||||
Cash flows from investing activities | ||||||||
Capital expenditures | (20,478 | ) | (4,371 | ) | ||||
Proceeds from sale of property, equipment and assets held for sale | 514 | 2,831 | ||||||
Change in cash value of life insurance | — | (41 | ) | |||||
Change in restricted cash | 5,844 | 68 | ||||||
Net cash used in investing activities | (14,120 | ) | (1,513 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of short-term borrowings | — | 23,705 | ||||||
Proceeds from issuance of long-term debt and other obligations | 5,200 | — | ||||||
Repayments of long-term debt and other obligations | (1,033 | ) | (772 | ) | ||||
Distribution to noncontrolling interest | (400 | ) | (291 | ) | ||||
Net cash provided by financing activities | 3,767 | 22,642 | ||||||
Net decrease in cash and cash equivalents | (40,050 | ) | (9,785 | ) | ||||
Cash and cash equivalents | ||||||||
Beginning of period | 40,561 | 13,293 | ||||||
End of period | $ | 511 | $ | 3,508 | ||||
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 May 31, 2016
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 29, 2016 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 29, 2016 filed with the Securities and Exchange Commission (“SEC”) on May 23, 2016. The results for interim periods are not necessarily indicative of the results for the full fiscal year ending February 28, 2017 ("fiscal year 2017").
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) and 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.
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 have been reclassified to conform with the fiscal 2017 presentation. During the first quarter of fiscal year 2017, the Company adopted Accounting Standards Update (ASU) No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," resulting in retrospective adjustments to our prior financial statements. Debt issuance costs of $9.0 million previously reported as other current assets and other noncurrent assets on the Condensed Consolidated Balance Sheet as of February 29, 2016 were reclassified as a deduction from long-term debt.
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 accounts receivable consists of the following:
May 31, | February 29, | |||||||
(In thousands) | 2016 | 2016 | ||||||
Costs and estimated earnings in excess of billings | $ | 21,012 | $ | 7,728 | ||||
Trade | 65,059 | 38,651 | ||||||
Retainages | 7,182 | 5,659 | ||||||
93,253 | 52,038 | |||||||
Allowance for doubtful accounts | (2,792 | ) | (3,742 | ) | ||||
Accounts receivable, net | $ | 90,461 | $ | 48,296 | ||||
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.
7
The Company’s inventories consist of the following:
May 31, | February 29, | |||||||
(In thousands) | 2016 | 2016 | ||||||
Crushed stone, agricultural lime and sand | $ | 73,976 | $ | 70,230 | ||||
Safety equipment | 15,394 | 14,762 | ||||||
Parts, tires and supplies | 6,836 | 6,855 | ||||||
Raw materials | 9,981 | 9,620 | ||||||
Building materials | 1,352 | 1,167 | ||||||
Other | 694 | 729 | ||||||
Total inventories | $ | 108,233 | $ | 103,363 | ||||
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 the shorter of the estimated service lives or the lease term by the straight-line method.
The Company’s property, plant and equipment consist of the following:
May 31, | February 29, | |||||||
(In thousands) | 2016 | 2016 | ||||||
Limestone and sand acreage | $ | 145,569 | $ | 145,569 | ||||
Land, buildings and building improvements | 84,732 | 84,521 | ||||||
Crushing, prestressing and manufacturing plants | 308,399 | 307,807 | ||||||
Contracting equipment vehicles and other | 322,428 | 320,450 | ||||||
Construction in progress | 21,648 | 14,884 | ||||||
Property, plant and equipment | 882,776 | 873,231 | ||||||
Less: Accumulated depreciation and depletion | (574,066 | ) | (565,810 | ) | ||||
Property, plant and equipment, net | $ | 308,710 | $ | 307,421 | ||||
For the three months ended May 31, 2016 and 2015, depreciation expense was $9.3 million and $9.0 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.
As of May 31, 2016 and February 29, 2016, assets held for sale consists of land and certain operations at the Company's Wescosville, PA location and miscellaneous property in the amount of $4.9 million and $0.7 million, respectively. The Company expects to complete the sale of the remaining Wescosville, PA assets during the fiscal year ending February 28, 2017, however the sale of these assets requires certain regulatory approvals that could delay the sale beyond February 28, 2017.
8
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment; valuation of receivables, inventories, goodwill and other intangible assets; recognition of revenue and loss contract reserves under the percentage-of-completion method; assets and obligations related to employee benefit plans; asset retirement obligations; income tax valuation; and self-insurance reserves. Actual results could differ from those estimates and those differences could be material.
Goodwill and Other Intangible Assets
Goodwill
Goodwill is tested for impairment on an annual basis or more frequently whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment test for goodwill is a two-step process. Under the first step, the fair value of the reporting unit is compared with its carrying value. If the fair value of the reporting unit is less than its carrying value, an indication of impairment exists and the reporting unit must perform step two of the impairment test. Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. If the fair value of the reporting unit exceeds its carrying value under the first step, step two does not need to be performed.
Our reporting units were determined based on our organizational structure, considering the level at which discrete financial information for businesses is available and regularly reviewed. The Company has three operating segments, which is the basis for determining its reporting units, organized around its three lines of business: (i) construction materials; (ii) heavy/highway construction; and (iii) traffic safety services and equipment. Construction materials include three reporting units within the operating segment based on geographic location. The operating segment of traffic safety services and equipment consists of one reporting unit within the segment based upon the similar economic characteristics of its operations.
Our annual goodwill impairment analysis takes place as of fiscal year end. The estimated fair value of each of the reporting units was in excess of its carrying value, even after conducting various sensitivity analysis on key assumptions, such that no adjustment to the carrying values of goodwill was required as of February 29, 2016, 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. There were no impairment indicators noted during the three months ended May 31, 2016.
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. The Company recorded amortization expense related to intangible assets other than goodwill of $0.2 million during the three months ended May 31, 2016 and 2015.
9
Other Noncurrent Assets
The Company’s Other noncurrent assets consist of the following:
May 31, | February 29, | |||||||
(In thousands) | 2016 | 2016 | ||||||
Capitalized software (net of accumulated amortization of $5,000 and $4,625, respectively) | $ | 6,775 | $ | 7,150 | ||||
Deferred stripping costs | 4,952 | 5,017 | ||||||
Other | 9,518 | 9,015 | ||||||
Total other noncurrent assets | $ | 21,245 | $ | 21,182 | ||||
The amortization expense related to capitalized software was $0.4 million and $0.3 million for the three months ended May 31, 2016 and 2015, respectively.
Revenue Recognition
The Company recognizes revenue on construction contracts under the percentage-of-completion method of accounting, as measured by the cost incurred to date over estimated total cost. Our construction contracts are primarily fixed-price contracts. The typical contract life cycle for these projects can be up to two to four years in duration. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to revenues and costs. Revenue from contract change orders is recognized when the contract owner has agreed to the change order with the customer and the related costs are incurred. We do not recognize revenue on a basis of contract claims. Provisions for estimated losses on uncompleted contracts are made for the full amount of estimated loss in the period in which evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue and are recorded as an additional cost (rather than as a reduction of revenue). Contract costs include all direct material, labor, subcontract and other costs and those indirect costs related to contract performance, such as indirect salaries and wages, equipment repairs and depreciation, insurance and payroll taxes. Administrative and general expenses are charged to expense as incurred. Costs and estimated earnings in excess of billings on uncompleted contracts represent the excess of contract revenue recognized to date over billings to date. Billings in excess of costs and estimated earnings on uncompleted contracts represent the excess of billings to date over the amount of revenue recognized to date. As of May 31, 2016 and February 29, 2016, 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 when the customer takes title and assumes risk of loss. Typically, this occurs when products are shipped.
The Company recognizes equipment rental revenue on a straight-line basis over the specific daily, weekly or monthly terms of the agreements. Revenues from the sale of equipment and contractor supplies are recognized at the time of delivery to, or pick-up by, the customer.
Other revenue consists of sales of miscellaneous materials, scrap and other products that do not fall into our other primary lines of business. The Company generally recognizes revenue when the customer takes title and assumes risk of loss, the price is fixed or determinable and collection is reasonably assured.
10
Impairment of Definite-Lived Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The Company considers an asset group as the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. For our construction materials and heavy/highway construction operations, the lowest level of largely independent identifiable cash flows is at the regional level, which collectively serves a local market. Each region shares and allocates its material production, resources, equipment and business activity among the locations within the region in generating cash flows. The Company is aligned into three regions, the Eastern Region, which includes Lancaster, Pennsylvania, and Northeastern Pennsylvania, the Western Region, which includes Central Pennsylvania, Chambersburg, Shippensburg, and Gettysburg Pennsylvania and the Northern Region, which includes Buffalo, New York and the Port of Buffalo. The construction materials regions’ long-lived assets predominantly include limestone and sand acreage and crushing 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 February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases, which amends existing accounting standards for lease accounting and adds additional disclosures about leasing arrangements. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement and presentation of cash flow in the statement of cash flows. This ASU is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods. Early adoption is permitted and modified retrospective application is required. While we are still evaluating the impact of ASU 2016-02, we do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements.
In January 2016 the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of current guidance on the recognition, measurement and disclosure of financial instruments. Among other changes, this ASU requires most equity investments be measured at fair value. Additionally, the ASU eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value for instruments not recognized at fair value in our financial statements. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. While we are still evaluating the impact of ASU 2016-01, we do not expect the adoption of this standard to have a material impact on our 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. This standard was adopted by the Company as of May 31, 2016 and required no adjustment to the financial statements.
11
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. This standard was adopted by the Company as of May 31, 2016.
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. This standard was adopted by the Company as of May 31, 2016 and required no adjustment to the 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. This standard was adopted by the Company as of May 31, 2016 and required no adjustment to the 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 May 31, 2016 adoption of the ASU resulted in a reclassification of our other current and noncurrent assets to long-term debt in our Consolidated Balance Sheet as of February 29, 2016 and May, 31, 2016.
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. This standard was adopted by the Company as of May 31, 2016 and required no adjustment to the financial statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This standard was adopted by the Company as of May 31, 2016 and required no adjustment to the financial statements.
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In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The standards requires an entity's management to evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. Public entities are required to apply standards for annual reporting periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.
In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASU provides a more robust framework for addressing revenue issues and expands required revenue recognition disclosures. This ASU (as later amended) is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the impact of this standard on our 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.
The Company maintains credit facilities that 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 Revolving Credit Facility, to fund our business and operations, including capital expenditures and debt service obligations, for at least the next twelve months. At May 31, 2016, the Company was in compliance with all of its financial covenants.
3. Accrued Liabilities
Accrued liabilities consist of the following:
May 31, | February 29, | |||||||
(In thousands) | 2016 | 2016 | ||||||
Insurance | $ | 24,835 | $ | 24,732 | ||||
Interest | 16,533 | 25,578 | ||||||
Payroll and vacation | 8,822 | 6,385 | ||||||
Withholding taxes | 1,269 | 173 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 5,413 | 3,504 | ||||||
Contract expenses * | 2,821 | 1,684 | ||||||
Other | 8,020 | 7,615 | ||||||
Total accrued liabilities | $ | 67,713 | $ | 69,671 | ||||
* Included within contract expenses is $0.3 million and $0.6 million of provision for loss contracts as of May 31, 2016 and February 29, 2016, respectively.
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4. Long-Term Debt
The Company's long-term debt consists of the following:
May 31, | February 29, | |||||||
(In thousands) | 2016 | 2016 | ||||||
RCA ($88.4 million and $80.6 million available as of May 31, 2016 and February 29, 2016, respectively) | $ | — | $ | — | ||||
11% Notes, due 2018 | 250,000 | 250,000 | ||||||
13% Secured Notes, due 2018 | 355,713 | 345,353 | ||||||
Term Loans, interest rate of 8% | 70,000 | 70,000 | ||||||
Other obligations | 15,638 | 11,319 | ||||||
Unamortized discounts and debt issuance costs | (7,903 | ) | (9,000 | ) | ||||
Total debt | 683,448 | 667,672 | ||||||
Less: Current portion | (4,344 | ) | (3,155 | ) | ||||
Total long-term debt | $ | 679,104 | $ | 664,517 | ||||
Our total debt is presented in the table above net of unamortized discounts from par and unamortized deferred debt issuance costs. Discounts and debt issuance costs are amortized using the effective interest method over the terms of the respective notes resulting in $1.1 million of interest expense for the three months ended May 31, 2016 and 2015.
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%. The weighted average interest rate on the RCA was 7.05% and 6.65% as of May 31, 2016 and 2015, respectively. The Term Loans bear interest, at the Company’s option, at rates based upon the LIBOR plus, a margin of 7.0% (with a LIBOR floor of 1.0%) or the base rate plus a margin of 6.0%. At May 31, 2016 and 2015 the weighted average interest rate on the Term Loans was 8.0%.
The Credit Facilities contain a springing maturity date based upon certain events with a final maturity date of February 12, 2019. The Term Loans and the RCA will mature on December 14, 2017 unless the Company refinances its Secured Notes by such date and will mature on June 2, 2018 unless the Company refinances its Notes by June 1, 2018.
Availability under the RCA is determined pursuant to a borrowing base formula based on eligible receivables and eligible inventory, subject to an availability block and to such other reserves as the Revolver Agent and the Syndication Agent may impose in accordance with the RCA. The availability block is initially $20.0 million but reduces to $10.0 million if the Company achieves a fixed charge coverage ratio of 1.00 to 1.00 as of the end of any fiscal quarter on a rolling four (4) quarter basis and further reduces to $0.0 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 for the previous three consecutive quarter and therefore the availability block related to the RCA remained at $0.0 million.
The Company is required to have trailing twelve-month EBITDA in an amount not less than certain amounts specified in the Credit Facilities. As of May 31, 2016 the Company was required to have a minimum trailing twelve-month EBITDA, as defined in the credit agreement, of at least $66.8 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.
As of May 31, 2016, the Company was in compliance with all of its covenant requirements.
Refer to Note 12, "Subsequent Events" for further information related to the Secured Notes.
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13% Secured Notes due 2018
In March 2012, the Company sold $265.0 million aggregate principal amount of the Secured Notes. 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.
On March 3, 2016, 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, 2016 in the form of 12% cash payment and 0% payment in kind, which represents $42.7 million and $0.0 million of interest, respectively, for the same 12-month period. At May 31, 2016, the inception-to-date PIK interest was $90.7 million and was recorded as an increase to the Secured Notes.
With respect to any interest payment payable after March 15, 2017, interest will be payable solely in cash.
On and after March 15, 2016, the Secured Notes are redeemable, in whole or in part, at the redemption prices specified as follows:
Time Period | Percentage | |
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 by 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.
Refer to Note 12, "Subsequent Events" for further information related to the Secured Notes.
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.
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On or after September 1, 2015, 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, 2015 to August 31, 2016 | 102.75 | % |
September 1, 2016 and thereafter | 100.00 | % |
If the Company experiences a change of control, as outlined in the indenture governing the Notes, the Company may be required to offer to purchase the Notes at a purchase price equal to 101.0% of the principal amount, plus accrued interest.
The Notes are guaranteed on a full and unconditional, and joint and several, basis by certain of the Company’s existing and future domestic subsidiaries (the “Guarantors” as described in Note 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.
Land, Equipment and 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 at 6.0% for 45 months secured by certain equipment, in the three months ended May 31, 2016.
5. Income Taxes
The income tax provisions for all periods consist of federal and state taxes that are based on the estimated effective tax rates applicable for the full years ending February 28, 2017 and February 29, 2016, after giving effect to items specifically related to the interim periods.
The effective income tax rates for the three months ended May 31, 2016 and 2015 were 4.1% and 4.5%, respectively, resulting in tax benefit of $0.4 million and $0.9 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 months ended May 31, 2016 and 2015, primarily as a result of net operating losses.
6. Retirement and Benefit Programs
Substantially all employees are covered by a defined contribution plan, a defined benefit plan, a collectively bargained multiemployer plan, or a noncontributory profit sharing plan. The expense associated with these programs is included within Cost of revenue and Selling, administrative and general expenses in the amounts of $1.5 million and $0.2 million, respectively, for the three months ended May 31, 2016, and $1.5 million and $0.1 million, respectively for the three months ended May 31, 2015.
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 May 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Net periodic benefit cost | ||||||||
Service cost | $ | 62 | $ | 78 | ||||
Interest cost | 100 | 93 | ||||||
Expected return on plan assets | (135 | ) | (155 | ) | ||||
Amortization of prior service cost | 10 | 13 | ||||||
Recognized net actuarial loss | 60 | 54 | ||||||
Total pension expense | $ | 97 | $ | 83 | ||||
The Company does not expect to make contributions to the plans during the fiscal year ending February 28, 2017.
7. Other Noncurrent Liabilities
The Company's other noncurrent liabilities consist of:
May 31, | February 29, | |||||||
(In thousands) | 2016 | 2016 | ||||||
Reclamation costs | $ | 19,389 | $ | 19,116 | ||||
Executive deferred compensation liability | 4,912 | 4,989 | ||||||
PIK accrued interest | — | 9,497 | ||||||
Other | 13,278 | 13,142 | ||||||
$ | 37,579 | $ | 46,744 | |||||
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. 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.
Prior to January 1, 2016, the Company maintained 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 May 31, 2016 and February 29, 2016 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 $16.4 million and $16.0 million as of May 31, 2016 and February 29, 2016, respectively. Included in Other noncurrent assets is approximately $7.0 million as of May 31, 2016 and February 29, 2016 for recoverable amounts from insurance companies for claims in excess of deductibility. Liabilities associated with amounts that are payable by insurance companies of approximately $7.0 million were recorded in other noncurrent liabilities in our Condensed Consolidated Balance Sheets as of May 31, 2016 and February 29, 2016.
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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 May 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Revenue | ||||||||
Construction materials | $ | 91,869 | $ | 95,563 | ||||
Heavy/highway construction | 40,989 | 50,681 | ||||||
Traffic safety services and equipment | 28,335 | 20,157 | ||||||
Segment totals | 161,193 | 166,401 | ||||||
Eliminations | (25,798 | ) | (25,685 | ) | ||||
Total revenue | $ | 135,395 | $ | 140,716 | ||||
Operating income | ||||||||
Construction materials | $ | 18,260 | $ | 13,581 | ||||
Heavy/highway construction | (2,211 | ) | (1,185 | ) | ||||
Traffic safety services and equipment | 3,149 | 1,563 | ||||||
Corporate and unallocated | (8,613 | ) | (12,935 | ) | ||||
Total operating income | $ | 10,585 | $ | 1,024 | ||||
Three Months Ended May 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Depreciation, depletion and amortization | ||||||||
Construction materials | $ | 7,346 | $ | 6,669 | ||||
Heavy/highway construction | 1,541 | 1,697 | ||||||
Traffic safety services and equipment | 1,272 | 1,235 | ||||||
Corporate and unallocated | 332 | 354 | ||||||
Total depreciation, depletion and amortization | $ | 10,491 | $ | 9,955 | ||||
Expenditures for assets (1) | ||||||||
Construction materials | $ | 9,333 | $ | 6,711 | ||||
Heavy/highway construction | 667 | 2,603 | ||||||
Traffic safety services and equipment | 1,210 | 1,483 | ||||||
Corporate and unallocated | 30 | 107 | ||||||
Total expenditures for assets | $ | 11,240 | $ | 10,904 | ||||
(1) Includes $0.0 million and $0.1 million of deferred stripping and $0.0 million and $0.2 million of capitalized software for the three months ended May 31, 2016 and 2015, respectively.
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10. Supplemental Disclosures of Cash Flow Information
The following table shows the supplemental information related to our cash flows for the three months ended:
(In thousands) | May 31, 2016 | May 31, 2015 | ||||||
Capital lease and other non-cash obligations incurred | $ | 3,113 | $ | 6,533 | ||||
Cash paid for interest, net of amounts capitalized | 27,878 | 25,478 | ||||||
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 (RSIC), South Woodbury, L.P., NESL, II LLC, Kettle Creek Partners L.P., and Kettle Creek Partners GP, LLC (“Non Guarantors”). Beginning January 1, 2016 RSIC was inactive.
The following condensed consolidating balance sheets, Statements of comprehensive 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.
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Condensed Consolidating Balance Sheet at May 31, 2016
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 239 | $ | (755 | ) | $ | 1,027 | $ | — | $ | 511 | |||||||||
Restricted cash | 16,814 | 53 | — | — | 16,867 | |||||||||||||||
Accounts receivable, net | 72,016 | 18,431 | 14 | — | 90,461 | |||||||||||||||
Inventories | 92,889 | 15,344 | — | — | 108,233 | |||||||||||||||
Net investment in lease | — | — | 1,505 | (1,505 | ) | — | ||||||||||||||
Other current assets | 4,588 | 842 | — | — | 5,430 | |||||||||||||||
Assets held for sale | 5,563 | — | — | — | 5,563 | |||||||||||||||
Total current assets | 192,109 | 33,915 | 2,546 | (1,505 | ) | 227,065 | ||||||||||||||
Property, plant and equipment, net | 288,046 | 20,664 | 4,519 | (4,519 | ) | 308,710 | ||||||||||||||
Goodwill | 75,647 | 5,845 | — | — | 81,492 | |||||||||||||||
Other intangible assets, net | 6,788 | 10,352 | — | — | 17,140 | |||||||||||||||
Investment in subsidiaries | 89,371 | — | — | (89,371 | ) | — | ||||||||||||||
Other noncurrent assets | 20,442 | 803 | — | — | 21,245 | |||||||||||||||
Total Assets | $ | 672,403 | $ | 71,579 | $ | 7,065 | $ | (95,395 | ) | $ | 655,652 | |||||||||
Liabilities and (Deficit) Equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Current maturities of long-term debt | $ | 4,927 | $ | — | $ | 922 | $ | (1,505 | ) | $ | 4,344 | |||||||||
Accounts payable - trade | 34,685 | 7,149 | 287 | — | 42,121 | |||||||||||||||
Accrued liabilities | 66,774 | 939 | — | — | 67,713 | |||||||||||||||
Total current liabilities | 106,386 | 8,088 | 1,209 | (1,505 | ) | 114,178 | ||||||||||||||
Intercompany payables | 15,477 | (15,511 | ) | 34 | — | — | ||||||||||||||
Long-term debt, less current maturities | 675,384 | — | 3,720 | — | 679,104 | |||||||||||||||
Obligations under capital leases, less current maturities | 4,519 | — | — | (4,519 | ) | — | ||||||||||||||
Deferred income taxes | 31,157 | (10,639 | ) | — | — | 20,518 | ||||||||||||||
Other noncurrent liabilities | 37,037 | 542 | — | — | 37,579 | |||||||||||||||
Total liabilities | 869,960 | (17,520 | ) | 4,963 | (6,024 | ) | 851,379 | |||||||||||||
(Deficit) equity | ||||||||||||||||||||
New Enterprise Stone & Lime Co., Inc. (deficit) equity | (197,557 | ) | 89,099 | 272 | (89,371 | ) | (197,557 | ) | ||||||||||||
Noncontrolling interest | — | — | 1,830 | — | 1,830 | |||||||||||||||
Total (deficit) equity | (197,557 | ) | 89,099 | 2,102 | (89,371 | ) | (195,727 | ) | ||||||||||||
Total liabilities and (deficit) equity | $ | 672,403 | $ | 71,579 | $ | 7,065 | $ | (95,395 | ) | $ | 655,652 | |||||||||
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Condensed Consolidating Balance Sheet at February 29, 2016
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 39,380 | $ | (125 | ) | $ | 1,306 | $ | — | $ | 40,561 | |||||||||
Restricted cash | 22,658 | 53 | — | — | 22,711 | |||||||||||||||
Accounts receivable, net | 35,663 | 12,619 | 14 | — | 48,296 | |||||||||||||||
Inventories | 88,602 | 14,761 | — | — | 103,363 | |||||||||||||||
Net investment in lease | — | — | 1,344 | (1,344 | ) | — | ||||||||||||||
Other current assets | 4,270 | 864 | — | — | 5,134 | |||||||||||||||
Assets held for sale | 5,558 | — | — | — | 5,558 | |||||||||||||||
Total current assets | 196,131 | 28,172 | 2,664 | (1,344 | ) | 225,623 | ||||||||||||||
Property, plant and equipment, net | 286,854 | 20,567 | 4,864 | (4,864 | ) | 307,421 | ||||||||||||||
Goodwill | 75,647 | 5,845 | — | — | 81,492 | |||||||||||||||
Other intangible assets, net | 6,825 | 10,540 | — | — | 17,365 | |||||||||||||||
Investment in subsidiaries | 83,794 | — | — | (83,794 | ) | — | ||||||||||||||
Other noncurrent assets | 16,691 | 838 | 3,653 | — | 21,182 | |||||||||||||||
Total Assets | $ | 665,942 | $ | 65,962 | $ | 11,181 | $ | (90,002 | ) | $ | 653,083 | |||||||||
Liabilities and (Deficit) Equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Current maturities of long-term debt | $ | 3,581 | $ | — | $ | 918 | $ | (1,344 | ) | $ | 3,155 | |||||||||
Accounts payable - trade | 29,239 | 3,955 | 287 | — | 33,481 | |||||||||||||||
Accrued liabilities | 68,337 | 1,334 | — | — | 69,671 | |||||||||||||||
Total current liabilities | 101,157 | 5,289 | 1,205 | (1,344 | ) | 106,307 | ||||||||||||||
Intercompany payables | 12,710 | (12,744 | ) | 34 | — | — | ||||||||||||||
Long-term debt, less current maturities | 660,571 | — | 3,946 | — | 664,517 | |||||||||||||||
Obligations under capital leases, less current maturities | 4,864 | — | — | (4,864 | ) | — | ||||||||||||||
Deferred income taxes | 31,552 | (10,639 | ) | — | — | 20,913 | ||||||||||||||
Other noncurrent liabilities | 42,558 | 533 | 3,653 | — | 46,744 | |||||||||||||||
Total liabilities | 853,412 | (17,561 | ) | 8,838 | (6,208 | ) | 838,481 | |||||||||||||
(Deficit) equity | ||||||||||||||||||||
New Enterprise Stone & Lime Co., Inc. (deficit) equity | (187,470 | ) | 83,523 | 271 | (83,794 | ) | (187,470 | ) | ||||||||||||
Noncontrolling interest | — | — | 2,072 | — | 2,072 | |||||||||||||||
Total (deficit) equity | (187,470 | ) | 83,523 | 2,343 | (83,794 | ) | (185,398 | ) | ||||||||||||
Total liabilities and (deficit) equity | $ | 665,942 | $ | 65,962 | $ | 11,181 | $ | (90,002 | ) | $ | 653,083 | |||||||||
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Condensed Consolidating Statement of Comprehensive Loss for the three months ended May 31, 2016
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Revenue | $ | 109,304 | $ | 26,492 | $ | 385 | $ | (786 | ) | $ | 135,395 | |||||||||
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below) | 84,735 | 20,508 | — | (527 | ) | 104,716 | ||||||||||||||
Depreciation, depletion and amortization | 9,177 | 1,314 | — | — | 10,491 | |||||||||||||||
Selling, administrative and general expenses | 8,773 | 1,221 | — | — | 9,994 | |||||||||||||||
Gain on disposals of property, equipment and software | (348 | ) | (43 | ) | — | — | (391 | ) | ||||||||||||
Operating income (loss) | 6,967 | 3,492 | 385 | (259 | ) | 10,585 | ||||||||||||||
Interest (expense) income, net | (21,024 | ) | 12 | (226 | ) | 259 | (20,979 | ) | ||||||||||||
(Loss) income before income taxes | (14,057 | ) | 3,504 | 159 | — | (10,394 | ) | |||||||||||||
Income tax benefit | (424 | ) | — | — | — | (424 | ) | |||||||||||||
Equity in earnings of subsidiaries | 9,303 | — | — | (9,303 | ) | — | ||||||||||||||
Net (loss) income | (4,330 | ) | 3,504 | 159 | (9,303 | ) | (9,970 | ) | ||||||||||||
Less: Net loss attributable to noncontrolling interest | — | — | (158 | ) | — | (158 | ) | |||||||||||||
Net (loss) income attributable to New Enterprise Stone & Lime Co., Inc. | (4,330 | ) | 3,504 | 1 | (9,303 | ) | (10,128 | ) | ||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income tax | 41 | — | — | — | 41 | |||||||||||||||
Comprehensive (loss) income | (4,289 | ) | 3,504 | 159 | (9,303 | ) | (9,929 | ) | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | — | (158 | ) | — | (158 | ) | |||||||||||||
Comprehensive (loss) income attributable to New Enterprise Stone & Lime Co., Inc. | $ | (4,289 | ) | $ | 3,504 | $ | 1 | $ | (9,303 | ) | $ | (10,087 | ) | |||||||
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Condensed Consolidating Statement of Comprehensive Loss for the three months ended May 31, 2015
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Revenue | $ | 119,524 | $ | 21,387 | $ | 3,191 | $ | (3,386 | ) | $ | 140,716 | |||||||||
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below) | 98,651 | 16,669 | 2,955 | (3,325 | ) | 114,950 | ||||||||||||||
Depreciation, depletion and amortization | 8,681 | 1,274 | — | — | 9,955 | |||||||||||||||
Asset impairment | 160 | 23 | — | — | 183 | |||||||||||||||
Selling, administrative and general expenses | 13,087 | 1,534 | 83 | — | 14,704 | |||||||||||||||
Gain loss on disposals of property, equipment and software | (53 | ) | (47 | ) | — | — | (100 | ) | ||||||||||||
Operating income (loss) | (1,002 | ) | 1,934 | 153 | (61 | ) | 1,024 | |||||||||||||
Interest (expense) income, net | (21,115 | ) | 18 | (34 | ) | 61 | (21,070 | ) | ||||||||||||
(Loss) income before income taxes | (22,117 | ) | 1,952 | 119 | — | (20,046 | ) | |||||||||||||
Income tax benefit | (908 | ) | — | — | — | (908 | ) | |||||||||||||
Equity in earnings of subsidiaries | 1,936 | — | — | (1,936 | ) | — | ||||||||||||||
Net (loss) income | (19,273 | ) | 1,952 | 119 | (1,936 | ) | (19,138 | ) | ||||||||||||
Less: Net loss attributable to noncontrolling interest | — | (135 | ) | — | (135 | ) | ||||||||||||||
Net (loss) income attributable to New Enterprise Stone & Lime Co., Inc. | (19,273 | ) | 1,952 | (16 | ) | (1,936 | ) | (19,273 | ) | |||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income tax | 39 | — | — | 39 | ||||||||||||||||
Comprehensive (loss) income | (19,234 | ) | 1,952 | 119 | (1,936 | ) | (19,099 | ) | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | (135 | ) | — | (135 | ) | ||||||||||||||
Comprehensive (loss) income attributable to New Enterprise Stone & Lime Co., Inc. | $ | (19,234 | ) | $ | 1,952 | $ | (16 | ) | $ | (1,936 | ) | $ | (19,234 | ) | ||||||
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Condensed Consolidating Statement of Cash Flows for the three months ended May 31, 2016
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Cash flows from operating activities | $ | (29,410 | ) | $ | (630 | ) | $ | 343 | $ | — | $ | (29,697 | ) | |||||||
Cash flows from investing activities | ||||||||||||||||||||
Capital expenditures | (20,478 | ) | — | — | — | (20,478 | ) | |||||||||||||
Proceeds from sale of property, equipment and assets held for sale | 514 | — | — | — | 514 | |||||||||||||||
Change in restricted cash | 5,844 | — | — | — | 5,844 | |||||||||||||||
Net cash used in investing activities | (14,120 | ) | — | — | — | (14,120 | ) | |||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Proceeds from issuance of long-term debt and other obligations | 5,200 | — | — | — | 5,200 | |||||||||||||||
Repayments of long-term debt and other obligations | (811 | ) | — | (222 | ) | — | (1,033 | ) | ||||||||||||
Distribution to noncontrolling interest | — | — | (400 | ) | — | (400 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 4,389 | — | (622 | ) | — | 3,767 | ||||||||||||||
Net decrease in cash and cash equivalents | (39,141 | ) | (630 | ) | (279 | ) | — | (40,050 | ) | |||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | 39,380 | (125 | ) | 1,306 | — | 40,561 | ||||||||||||||
End of period | $ | 239 | $ | (755 | ) | $ | 1,027 | $ | — | $ | 511 | |||||||||
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Condensed Consolidating Statement of Cash Flows for the three months ended May 31, 2015
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Cash flows from operating activities | $ | (29,728 | ) | $ | (94 | ) | $ | (1,092 | ) | $ | — | $ | (30,914 | ) | ||||||
Cash flows from investing activities | ||||||||||||||||||||
Capital expenditures | (4,371 | ) | — | — | (4,371 | ) | ||||||||||||||
Proceeds from sale of property and equipment, and assets held for sale | 2,831 | — | — | — | 2,831 | |||||||||||||||
Change in cash value of life insurance | (41 | ) | — | — | — | (41 | ) | |||||||||||||
Change in restricted cash | 34 | 34 | — | — | 68 | |||||||||||||||
Net cash (used in) provided by investing activities | (1,547 | ) | 34 | — | — | (1,513 | ) | |||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Proceeds from issuance of short term borrowings | 23,705 | — | — | — | 23,705 | |||||||||||||||
Repayments of long-term debt and other obligations | (772 | ) | — | — | — | (772 | ) | |||||||||||||
Distribution to noncontrolling interest | (291 | ) | — | — | — | (291 | ) | |||||||||||||
Net cash provided by financing activities | 22,642 | — | — | — | 22,642 | |||||||||||||||
Net decrease in cash and cash equivalents | (8,633 | ) | (60 | ) | (1,092 | ) | — | (9,785 | ) | |||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | 8,633 | 60 | 4,600 | — | 13,293 | |||||||||||||||
End of period | $ | — | $ | — | $ | 3,508 | $ | — | $ | 3,508 | ||||||||||
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12. Subsequent Events
New Term Loan Credit Agreement and 13% Notes Redemption
On July 8, 2016 (the “Closing Date”), the Company entered into a Term Loan Credit and Guaranty Agreement (the “New Term Loan Agreement”) among the Company, certain of its subsidiaries as guarantors, the lenders from time to time party thereto and Cortland Capital Market Services LLC (“Cortland”) as administrative agent and collateral agent (the “Term Loan Agent”), providing for a term loan in the amount of $450.0 million (the “New Term Loan”).
The proceeds of the New Term Loan together with cash on hand and funds drawn from our RCA, (i) were used to repay the entire outstanding balance of the Company’s obligations under the existing term loan credit agreement dated February 14, 2014, as amended (the “Prior Term Loan Credit Agreement”) among the Company, certain funds managed by KKR Asset Management as lenders, and Cortland, terminating the Prior Term Loan Credit Agreement, and (ii) will be used to fund the redemption of all of the Company’s 13% Senior Secured Notes due 2018 (the “Secured Notes”), including accrued and unpaid interest thereon and the required make-whole premium. Funds sufficient to redeem in full all of the outstanding Secured Notes were deposited with the Secured Notes trustee on the Closing Date, and an irrevocable notice of such redemption was given to the holders of the Secured Notes, with the result that the Indenture governing the Secured Notes was discharged.
The obligations under the New Term Loan Agreement are secured by substantially all of the assets of the Company and its subsidiaries. Priorities on various categories of collateral are allocated between the Company’s Revolving Credit Facility, amended as described below, and the New Term Loan pursuant to an Intercreditor Agreement dated as of the Closing Date.
The New Term Loan will mature on July 8, 2021, unless the Company fails to refinance its 11% Senior Notes due 2018 by June 1, 2018 (in which case the New Term Loan will mature on June 1, 2018).
Outstanding balances under the New Term Loan Agreement will bear interest at a rate per annum equal to, at the Company’s option, either (a) a base rate plus 7.0% or (b) a LIBOR rate plus 8.0% with a LIBOR floor of 1.0%.
In the event of a voluntary or mandatory prepayment or acceleration of the New Term Loan prior to July 8, 2020, the Company will be required to pay a prepayment premium. The amount of the prepayment premium depends on the circumstances in which it is triggered.
In connection with a Change of Control, so long as the New Term Loan has not been accelerated, the Company may prepay the New Term Loan and the prepayment premium will be the Specified Prepayment Premium. If the Company does not prepay the New Term Loan in full in connection with such Change of Control, then it must make an offer to prepay the New Term Loan at 101% of par.
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 New Term Loan Agreement and Revolving Credit Agreement Amendment (as defined below).
The New Term Loan Agreement includes other customary affirmative and negative covenants that, subject to significant exceptions, 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 New Term Loan Agreement contains certain customary 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) loss of custody or control of property, (v) certain events of bankruptcy, (vi) the occurrence of a material adverse effect, (vii) material judgments, (viii) change in control, (ix) seizures of material property, (x) involuntary interruptions of material operations, and (xi) certain material events with respect to pension plans.
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Amendment of Revolving Credit Agreement
On July 8, 2016, the Company entered into an Amended and Restated Revolving Credit Agreement (the “Revolving Credit Agreement Amendment”) among the Company and certain of its subsidiaries as borrowers, the lenders party thereto, Wells Fargo Bank, National Association as syndication agent (the “Syndication Agent”) and PNC Bank, National Association as administrative agent (the “Revolver Agent”). The Revolving Credit Agreement Amendment makes certain changes to the Company’s existing $105 million Revolving Credit Agreement among the same parties (the “Existing RCA”, and as amended, the “Revolving Credit Agreement”), including:
1) creation of a subfacility specifically for surety and insurance letters of credit, and an increase in the aggregate letter of credit sublimit by $15 million;
2) removal of an “Availability Block” triggered under the Existing RCA if the Company’s Fixed Charge Coverage Ratio was less than 1.00:1.00;
3) improvements to certain operational and reporting requirements;
4) amendments to allow for the New Term Loan Agreement and certain anticipated refinancing activities in relation to the Company’s outstanding unsecured notes;
5) reduced the interest rate margin to 2.75% on LIBOR based borrowings (with a 1% LIBOR Floor) or 1.75% on Domestic Rate based borrowings;
6) amendments to permit certain asset sales.
On July 8, 2016, the entire outstanding balance of the Company's obligations under the Company's Prior Term Loan Credit Agreement was terminated and the liability of the Company and its subsidiaries with respect to their obligations thereunder were discharged. In addition, funds sufficient to redeem in full all of the outstanding Secured Notes on August 8, 2016 (the “Redemption Date”) were deposited with the Secured Notes trustee on July 8, 2016. On the Redemption Date, such funds will be utilized to redeem the Secured Notes and at such time the Secured Notes Indenture shall terminate.
In connection with the New Term Loan Credit Agreement, the 13% Secured Notes Redemption and the Amendment of Revolving Credit Agreement, the Company wrote off all applicable pre-exiting unamortized deferred financing fees and incurred a 3.25% or $11.6 million prepayment penalty. The Company also incurred $23.6 million in fees in connection with the above mentioned agreements.
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 20 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.
27
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.
Execution of Strategic Initiates
Fiscal year 2016 demonstrated our ability and commitment to implementing our strategic plan which led to a significant improvement in our financial performance and a further stabilization of our financial position. Our progress continued in the first quarter this year with a $9.6 million increase in operating profit to a record first quarter of $10.6 million. We believe our focus on standardization of operating procedures and utilization of performance measures, coupled with our new cost structure, will allow us to continue to make timely decisions in managing the business. We will continue to focus our resources on our core products and seek construction activity that favors maximum vertical integration. We continue to believe that operating income will increase at least 15% for the full fiscal year 2017.
Executive Summary
The following are key statistics for the three months ended May 31, 2016 as compared to the three months ended May 31, 2015.
• | Cost of revenue decreased by $10.3 million (9.0%); |
• | Operating income increased by $9.6 million (960.0%); |
• | Selling, administrative and general expenses decreased by $4.7 million or 32.0%; and |
RESULTS OF OPERATIONS
The following table summarizes our operating results on a consolidated basis:
Three Months Ended May 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Revenue | $ | 135,395 | $ | 140,716 | ||||
Cost of revenue (exclusive of Depreciation, depletion and amortization shown separately below) | 104,716 | 114,950 | ||||||
Depreciation, depletion and amortization | 10,491 | 9,955 | ||||||
Asset impairment | — | 183 | ||||||
Selling, administrative and general expenses | 9,994 | 14,704 | ||||||
Gain on disposals of property, equipment and software | (391 | ) | (100 | ) | ||||
Operating income | 10,585 | 1,024 | ||||||
Interest expense, net | (20,979 | ) | (21,070 | ) | ||||
Income (loss) before income taxes | (10,394 | ) | (20,046 | ) | ||||
Income tax expense (benefit) | (424 | ) | (908 | ) | ||||
Net income (loss) | $ | (9,970 | ) | $ | (19,138 | ) | ||
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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 presented as part of construction materials. All non-allocated operating costs are reflected in the corporate and unallocated line item presented below.
The following table summarizes our segment revenue:
Three Months Ended May 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Segment Revenue | ||||||||
Construction materials | $ | 91,869 | $ | 95,563 | ||||
Heavy/highway construction | 40,989 | 50,681 | ||||||
Traffic safety services and equipment | 28,335 | 20,157 | ||||||
Segment totals | 161,193 | 166,401 | ||||||
Inter-segment eliminations | (25,798 | ) | (25,685 | ) | ||||
Total revenue | $ | 135,395 | $ | 140,716 | ||||
The following table summarizes the percentage of segment revenue by our primary lines of business:
Three Months Ended May 31, | ||||||
2016 | 2015 | |||||
Segment Revenue: | ||||||
Construction materials | 57.0 | % | 57.4 | % | ||
Heavy/highway construction | 25.4 | % | 30.5 | % | ||
Traffic safety services and equipment | 17.6 | % | 12.1 | % | ||
Segment totals | 100.0 | % | 100.0 | % | ||
The following table summarizes the segment cost of revenue:
Three Months Ended May 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Segment Cost of Revenue | ||||||||
Construction materials | $ | 65,737 | $ | 74,526 | ||||
Heavy/highway construction | 41,997 | 50,241 | ||||||
Traffic safety services and equipment | 22,780 | 15,868 | ||||||
Segment totals | 130,514 | 140,635 | ||||||
Eliminations | (25,798 | ) | (25,685 | ) | ||||
Total cost of revenue | $ | 104,716 | $ | 114,950 | ||||
The following table summarizes the segment cost of revenue as a percent of segment revenue:
Three Months Ended May 31, | ||||||
2016 | 2015 | |||||
Segment Cost of Revenue as Percent of Segment Revenue | ||||||
Construction materials | 71.6 | % | 78.0 | % | ||
Heavy/highway construction | 102.5 | % | 99.1 | % | ||
Traffic safety services and equipment | 80.4 | % | 78.7 | % | ||
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The following table summarizes the segment operating income:
Three Months Ended May 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Operating Income (Loss) | ||||||||
Construction materials | $ | 18,260 | $ | 13,581 | ||||
Heavy/highway construction | (2,211 | ) | (1,185 | ) | ||||
Traffic safety services and equipment | 3,149 | 1,563 | ||||||
Segment totals | 19,198 | 13,959 | ||||||
Corporate and unallocated | (8,613 | ) | (12,935 | ) | ||||
Total operating income | $ | 10,585 | $ | 1,024 | ||||
Three Months Ended May 31, 2016 Compared to Three Months Ended May 31, 2015
Revenue
Total revenue decreased $5.3 million or 3.8% to $135.4 million for the three months ended May 31, 2016 compared to $140.7 million for the three months ended May 31, 2015. The decrease in revenue was primarily the result of reduced heavy/highway construction revenue of $9.7 million in the three months ended May 31, 2016 compared to the three months ended May 31, 2015 which was due to the weather delaying the progress of certain projects.
Segment revenue for our construction materials business decreased $3.7 million, or 3.9% to $91.9 million for the three months ended May 31, 2016 compared to $95.6 million for the three months ended May 31, 2015. Increases in both aggregates revenues of $2.7 million and ready mixed concrete revenues of $0.2 million, were offset by a decline in hot mixed asphalt revenues of $3.0 million for the three months ended May 31, 2016 compared to the three months ended May 31, 2015. The increase in both aggregates and ready mixed concrete revenue was primarily attributable to the increase in price per ton shipped and consumed and price per yard, respectively as we continue to focus on strategic price increases in our markets. Tons of aggregates shipped and consumed and yards of ready mixed concrete sold were flat for the three months ended May 31, 2016 compared to the three months ended May 31, 2015. Hot mix asphalt revenues declined as a result of a reduction in asphalt selling prices attributable to the lower asphalt cement costs offset by a approximately a 6.1% increase in volume. The remainder of the decrease was a primarily a result of reduced fuel revenues attributable to the lower cost of fuel which is a pass through to hired haulers and other internal operations.
Segment revenue for our heavy/highway construction business decreased $9.7 million, or 19.1% to $41.0 million for the three months ended May 31, 2016 compared to $50.7 million for the three months ended May 31, 2015. The decrease in revenue was primarily attributable to the weather delaying the timing of completion of available work on certain heavy highway projects in our West region.
Segment revenue for our traffic safety services and equipment businesses increased, $8.1 million, or 40.1% to $28.3 million for the three months ended May 31, 2016 compared to $20.2 million for the three months ended May 31, 2015. The increase was attributable to increased intercompany activity as well as revenue associated with our new service offerings.
Cost of Revenue
Total cost of revenue decreased $10.3 million or 9.0% to $104.7 million for the three months ended May 31, 2016 compared to approximately $115.0 million for the three months ended May 31, 2015. This decrease is attributable to the reduction of heavy/highway construction activity and a reduction in commodity prices as compared to the prior year's three months ended May 31, 2015.
Segment cost of revenue for our construction materials business as a percentage of its segment revenue decreased 6.4% to 71.6% for the three months ended May 31, 2016 compared to 78.0% for the three months ended May 31, 2015. 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 a decrease in the cost of commodities as compared to the prior year's three months ended May 31, 2015.
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Segment cost of revenue for our heavy/highway construction business as a percentage of its segment revenue increased by 3.4% to 102.5% for the three months ended May 31, 2016 compared to 99.1% for the three months ended May 31, 2015. The increase in segment cost of sales as a percentage of sales was primarily attributable to reduced segment revenue on a similar cost base as we began operations for the year.
Segment cost of revenue for our traffic services and equipment business as a percentage of its segment revenue declined slightly by 1.7% to 80.4% for the three months ended May 31, 2016 compared to 78.7% for the three months ended May 31, 2015.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased $0.5 million, or 5.0% to $10.5 million for the three months ended May 31, 2016 compared to $10.0 million for the three months ended May 31, 2015. The increase was primarily attributable to higher depreciable assets due to increase of capital expenditures compared to the prior year's three months ended May 31, 2015.
Selling, Administrative and General Expenses
Selling, administrative and general expenses decreased $4.7 million, or 32.0% to $10.0 million for the three months ended May 31, 2016 compared to $14.7 million for the three months ended May 31, 2015. The decrease was primarily attributable to a reduction in consultants fees related to restructuring in the previous year which did not recur and to a lesser extent reduced costs related to the utilization of shared services.
Operating Income
Operating income increased $9.6 million, or 960.0% to $10.6 million for the three months ended May 31, 2016, as compared to $1.0 million for the three months ended May 31, 2015. 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 $4.7 million, or 34.6% to $18.3 million for the three months ended May 31, 2016 compared to $13.6 million for the three months ended May 31, 2015. Operating income for aggregates increased $4.7 million, to $15.0 million for the three months ended May 31, 2016 compared to $10.3 million for the three months ended May 31, 2015. 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. Ready mixed concrete and hot mix asphalt operating income was flat for the three months ended May 31, 2016 compared to the three months ended May 31, 2015.
Operating loss for our heavy/highway construction business grew by $1.0 million, to an operating loss of $2.2 million for the three months ended May 31, 2016 compared to an operating loss of $1.2 million for the three months ended May 31, 2015. The widening operating loss was attributable to less work completed for the period with similar startup costs in the beginning of the construction season.
Operating income for our traffic safety services and equipment businesses increased by $1.5 million, or 93.8% to $3.1 million for the three months ended May 31, 2016 compared to $1.6 million for the three months ended May 31, 2015. The increase in profitability is primarily attributable to the revenue increases on a fixed cost basis.
Interest Expense, net
Net interest expense decreased $0.1 million, or 0.5% to $21.0 million for the three months ended May 31, 2016 compared to $21.1 million for the three months ended May 31, 2015 due primarily to the 1% decrease in interest rates associated with the election of paying all cash on our secure notes offset by higher borrowings year over year.
Income Tax Benefit
The income tax provision for the three months ended May 31, 2016 and May 31, 2015 consisted of federal and state taxes that are based on the estimated effective tax rates applicable for the full fiscal years ending February 29, 2016 and February 28, 2015, 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 May 31, 2016 and 2015 were 4.1% and 4.5%, respectively, resulting in tax benefit of $0.4 million and $0.9 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.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of liquidity include cash and cash equivalents, cash from operations and amounts available for borrowing under the RCA. As of May 31, 2016 we had no borrowings under the RCA with $88.4 million available compared to no borrowings under the RCA, with $80.6 million available as of February 29, 2016. As of May 31, 2016, we had $0.5 million in cash and cash equivalents and working capital of $112.9 million compared to $40.6 million in cash and cash equivalents and working capital of $121.2 million as of February 29, 2016. Cash balances of $16.9 million and $22.7 million as of May 31, 2016 and February 29, 2016, respectively, were restricted in certain consolidated subsidiaries for insurance requirements or for the purchase of fixed assets. 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. 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 2017 is $45.0 million, adjusted for certain asset proceeds in accordance with amendments. As of May 31, 2016, we were in compliance with all of our covenant requirements through that date, and expect to remain in compliance for the next twelve months as applicable.
In the past, we have failed to meet certain operating performance measures as well as the financial covenant requirements set forth under our previous credit facilities, which resulted in the need to obtain several amendments, and should we fail in the future, we cannot guarantee that we will be able to obtain such amendments. A failure to obtain such amendments could result in an acceleration of our indebtedness under the Credit Facilities and a cross-default under our other indebtedness, including the Notes and Secured Notes. If the lenders were to accelerate the due dates of our indebtedness or if current sources of liquidity prove to be insufficient, there can be no assurance that we would be able to repay or refinance such indebtedness or to obtain sufficient funding. This could require us to restructure or alter our operations and capital structure.
We have begun a process to evaluate our options to refinance the indentures. Refer to Subsequent Events footnote for further information.
Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing activities and financing activities and our capital expenditures for the three months ended May 31, 2016 and May 31, 2015.
Three Months Ended May 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Net cash (used in) provided by: | ||||||||
Operating activities | $ | (29,697 | ) | $ | (30,914 | ) | ||
Investing activities | (14,120 | ) | (1,513 | ) | ||||
Financing activities | 3,767 | 22,642 | ||||||
Cash paid for capital expenditures | (20,478 | ) | (4,371 | ) | ||||
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Operating Activities
Net cash used in operating activities improved $1.2 million to $29.7 million for the three months ended May 31, 2016 compared to net cash used of $30.9 million for the three months ended May 31, 2015. Cash used in operating activities decreased as a result of improved operating income offset by the timing of accounts payable payments associated with certain fixed asset expenditures committed in the previous year.
Investing Activities
Net cash used in investing activities changed $12.6 million to $14.1 million in the three months ended May 31, 2016 compared to net cash used of $1.5 million in the three months ended May 31, 2015. Net cash used in investing activities changed primarily due to the increase in capital expenditures.
Financing Activities
Net cash from financing activities improved $18.8 million to $3.8 million in the three months ended May 31, 2016 compared to $22.6 million of cash provided by for the three months ended May 31, 2015. The improvement in cash used in financing activities was primarily due to the increased cash at fiscal year end February 29, 2016 which resulted in no borrowings for the three months ended May 31, 2016 , as compared to borrowings of $23.7 million in three months ended May 31, 2015, respectively, under our short-term opligations.
Capital Expenditures
Cash capital expenditures increased to $20.5 million for the three months ended May 31, 2016 compared to $4.4 million for the three months ended May 31, 2015. Cash paid for capital expenditures included $12.4 million of assets purchased in the prior period and paid during the three months ended May 31, 2016. Total capital expenditures during the three months ended May 31, 2016 increased slightly compared to the three months ended May 31, 2015. The capital expenditures for the three months ended May 31, 2016 were related primarily to mobile plant equipment. The Company also incurred $3.1 million of non-cash capital expenditures for the three months ended May 31, 2016 as compared to $6.5 million for the three months ended May 31, 2015.
Our Indebtedness
Refer to Note 4 “Long-Term Debt” and Note 12 "Subsequent Events" 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 29, 2016 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 29, 2016. |
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 May 31, 2016, 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 $0.7 million change in our annual interest expense relating to the RCA and Term Loans. Any debt we incur in the future could also bear interest at floating rates.
ITEM 4 - CONTROLS AND PROCEDURES
The information provided in this Item 4 (Controls and Procedures) is as of the date of the filing of this Form 10-Q.
This report includes the certifications attached as Exhibits 31.1 and 31.2 of our CEO and CFO required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.
Our system of internal control is based on the control criteria framework of the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of May 31, 2016. Based upon that evaluation, our CEO and CFO concluded that, as of May 31, 2016, 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 29, 2016, 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 Business Unit Controllers, an Internal Audit Director, Internal Audit resources and a Chief Information Officer. 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. We will continue our remediation efforts during fiscal year 2017.
We did not maintain effective controls over information and communication:
• | We did not maintain effective controls over information and communication, specifically around reports and financial data, as we had several issues with our ERP 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. We have hired a Chief Information Officer, and information technology resources to ensure policies, procedures and processes are executed. 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 continue to implement information technology general controls and will continue to enhance and test those controls during fiscal year 2017 as part of our remediation efforts.
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 continue to ensure a sufficient complement of qualified information technology resources are in place to execute the policies, procedures and processes that continue to be implemented. We will continue to enhance and test those controls during fiscal year 2017.
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• | We did not implement appropriate information technology controls related to change management, data integrity, access and segregation of duties. This material weakness, which was previously identified as a significant deficiency in prior years by our independent auditors and elevated to a material weakness in fiscal 2012 due to issues with our ERP implementation, resulted in both not having adequate automated and manual controls designed and in place and not achieving the intended operating effectiveness of controls to ensure accuracy of our financial reporting. For example, we did not maintain adequate segregation of duties around most accounting processes and did not have adequate integrity verification of our sub-ledgers. |
As part of our remediation efforts, we have continued to assess the existing roles and responsibilities and remediate system access and functionality issues. Additionally, we have provided internal control training to reinforce the importance of our control environment for Finance, Accounting, Operations, Information Technology Department personnel and all operations managers across the Company. We continue to implement information technology general controls and we will continue to enhance and test those controls during fiscal year 2017 as part of our remediation efforts.
• | 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 2016, 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 2016. We will continue our remediation efforts during fiscal year 2017.
• | 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 2012 resulted in additional procedures performed by management and adjustments identified by management and our independent auditors during the fiscal years 2016, 2015, 2014, 2013, and 2012. |
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 2017.
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 May 31, 2016, are fairly stated in all material respects.
Changes in Internal Control Over Financial Reporting
No changes as of the first quarter ended May 31, 2016.
PART II. OTHER INFORMATION
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ITEM 1 - LEGAL PROCEEDINGS
We are a party from time to time to legal proceedings relating to our operations. Our ultimate legal and financial liability in respect to all legal proceedings in which we are involved at any given time cannot be estimated with any certainty. However, based upon examination of such matters and consultation with counsel, management currently believes that the ultimate outcome of these contingencies will not have a material adverse effect on our consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and/or cash flows for that period.
ITEM 1A - RISK FACTORS
You should carefully consider the risks described in our Annual Report on Form 10-K for the fiscal year ended February 29, 2016 filed with the SEC on May 23, 2016, 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.
ITEM 5 - OTHER INFORMATION
None.
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ITEM 6 - EXHIBITS
Exhibit Number | Description | ||
31.1* | Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act, as amended. | ||
31.2* | Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act, as amended. | ||
32.1** | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. | ||
32.2** | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. | ||
95** | Mine Safety Disclosures | ||
101.INS XBRL*** | Instance document | ||
101.SCH XBRL*** | Taxonomy Extension Schema | ||
101.CAL XBRL*** | Taxonomy Extension Calculation Linkbase | ||
101.DEF XBRL*** | Taxonomy Extension Definition Linkbase | ||
101.LAB XBRL*** | Taxonomy Extension Label Linkbase | ||
101.PRE XBRL*** | Taxonomy Extension Presentation Linkbase | ||
* Filed herewith.
** Furnished herewith.
*** Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files.
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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: July 11, 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 | ||
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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