Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - New Enterprise Stone & Lime Co., Inc. | Financial_Report.xls |
| EX-95 - EXHIBIT - New Enterprise Stone & Lime Co., Inc. | exhibit9511-30x2014.htm |
| EX-31.2 - EXHIBIT - New Enterprise Stone & Lime Co., Inc. | exhibit31211-30x2014.htm |
| EX-32.1 - EXHIBIT - New Enterprise Stone & Lime Co., Inc. | exhibit32111-30x2014.htm |
| EX-31.1 - EXHIBIT - New Enterprise Stone & Lime Co., Inc. | exhibit31111-30x2014.htm |
| EX-32.2 - EXHIBIT - New Enterprise Stone & Lime Co., Inc. | exhibit32211-30x2014.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 333-176538
NEW ENTERPRISE STONE & LIME CO., INC.
(Exact name of registrant as specified in its charter)
Delaware | 23-1374051 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
3912 Brumbaugh Road P.O. Box 77 New Enterprise, PA | 16664 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (814) 766-2211
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o
No ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filero | Accelerated filero | |
Non-accelerated filerx | Smaller reporting companyo | |
(Do not check if a smaller reporting company) | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of January 12, 2015, the number of shares outstanding of the registrant’s Class A Voting Common Stock, $1.00 par value, was 500 shares and the number of shares outstanding of the registrant’s Class B Non-Voting Common Stock, $1.00 par value, was 273,285 shares.
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Table of Contents
Quarter Ended November 30, 2014
Page(s) | |
2
ITEM 1. FINANCIAL STATEMENTS
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share data) | November 30, 2014 | February 28, 2014 * | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 2,336 | $ | 23,892 | ||||
Restricted cash | 18,459 | 27,684 | ||||||
Accounts receivable, less reserves of $4,250 and $5,228 respectively | 120,687 | 61,319 | ||||||
Inventories | 109,360 | 107,313 | ||||||
Deferred income taxes | 3,713 | 3,713 | ||||||
Other current assets | 9,290 | 9,005 | ||||||
Assets held for sale | 10,490 | 14,467 | ||||||
Total current assets | 274,335 | 247,393 | ||||||
Property, plant and equipment, net | 312,089 | 333,819 | ||||||
Goodwill | 87,132 | 87,976 | ||||||
Other intangible assets, net | 19,161 | 19,951 | ||||||
Other assets | 29,586 | 32,799 | ||||||
Total assets | $ | 722,303 | $ | 721,938 | ||||
Liabilities and Deficit | ||||||||
Current liabilities | ||||||||
Current maturities of long-term debt | $ | 16,599 | $ | 30,514 | ||||
Accounts payable — trade | 45,746 | 21,946 | ||||||
Accrued liabilities | 56,521 | 60,507 | ||||||
Total current liabilities | 118,866 | 112,967 | ||||||
Long-term debt, less current maturities | 650,107 | 629,452 | ||||||
Deferred income taxes | 33,979 | 34,890 | ||||||
Other liabilities | 38,754 | 45,965 | ||||||
Total liabilities | 841,706 | 823,274 | ||||||
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 | (246,411 | ) | (227,696 | ) | ||||
Additional paid-in capital | 126,962 | 126,962 | ||||||
Accumulated other comprehensive loss | (1,859 | ) | (1,975 | ) | ||||
Total New Enterprise Stone & Lime Co., Inc. deficit | (121,034 | ) | (102,435 | ) | ||||
Noncontrolling interest in consolidated subsidiaries | 1,631 | 1,099 | ||||||
Total deficit | (119,403 | ) | (101,336 | ) | ||||
Total liabilities and deficit | $ | 722,303 | $ | 721,938 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
* Data derived from audited consolidated balance sheet as of February 28, 2014.
3
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | ||||||||||||||||
Construction materials | $ | 99,031 | $ | 109,291 | $ | 299,176 | $ | 311,411 | ||||||||
Heavy/highway construction | 91,457 | 92,432 | 237,179 | 236,792 | ||||||||||||
Traffic safety services and equipment | 19,173 | 19,623 | 61,303 | 63,252 | ||||||||||||
Total revenue | 209,661 | 221,346 | 597,658 | 611,455 | ||||||||||||
Cost of revenue (exclusive of items shown separately below) | ||||||||||||||||
Construction materials | 58,647 | 75,267 | 197,664 | 215,322 | ||||||||||||
Heavy/highway construction | 88,186 | 85,725 | 223,223 | 220,621 | ||||||||||||
Traffic safety services and equipment | 14,800 | 14,434 | 46,196 | 48,239 | ||||||||||||
Total cost of revenue | 161,633 | 175,426 | 467,083 | 484,182 | ||||||||||||
Depreciation, depletion and amortization | 12,182 | 11,741 | 34,429 | 36,990 | ||||||||||||
Asset impairment | 226 | — | 5,249 | 452 | ||||||||||||
Pension and profit sharing | 1,991 | 2,055 | 5,320 | 6,507 | ||||||||||||
Selling, administrative and general expenses | 14,512 | 18,945 | 44,091 | 56,332 | ||||||||||||
Gain on disposals of property, equipment and software | (141 | ) | (497 | ) | (451 | ) | (646 | ) | ||||||||
Operating income | 19,258 | 13,676 | 41,937 | 27,638 | ||||||||||||
Interest expense, net | (20,812 | ) | (19,162 | ) | (61,518 | ) | (57,258 | ) | ||||||||
Loss before income taxes | (1,554 | ) | (5,486 | ) | (19,581 | ) | (29,620 | ) | ||||||||
Income tax benefit | (56 | ) | (401 | ) | (1,398 | ) | (3,825 | ) | ||||||||
Net loss | (1,498 | ) | (5,085 | ) | (18,183 | ) | (25,795 | ) | ||||||||
Less: Net income attributable to noncontrolling interest | (180 | ) | (172 | ) | (532 | ) | (1,081 | ) | ||||||||
Net loss attributable to New Enterprise Stone & Lime Co., Inc. | (1,678 | ) | (5,257 | ) | (18,715 | ) | (26,876 | ) | ||||||||
Other comprehensive income (loss) | ||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income taxes | 39 | 49 | 116 | 148 | ||||||||||||
Comprehensive loss | (1,459 | ) | (5,036 | ) | (18,067 | ) | (25,647 | ) | ||||||||
Less: Comprehensive income attributable to noncontrolling interest | (180 | ) | (172 | ) | (532 | ) | (1,081 | ) | ||||||||
Comprehensive loss attributable to New Enterprise Stone & Lime Co., Inc. | $ | (1,639 | ) | $ | (5,208 | ) | $ | (18,599 | ) | $ | (26,728 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended November 30, | ||||||||
(In thousands) | 2014 | 2013 | ||||||
Reconciliation of net loss to net cash from operating activities | ||||||||
Net loss | $ | (18,183 | ) | (25,795 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation, depletion and amortization | 34,429 | 36,990 | ||||||
Asset impairment | 5,249 | 452 | ||||||
Gain on disposals of property, equipment and software | (451 | ) | (646 | ) | ||||
Non-cash payment-in-kind interest accretion | 16,683 | 17,630 | ||||||
Amortization and write-off of debt issuance costs | 3,246 | 3,703 | ||||||
Deferred income taxes | (834 | ) | (3,749 | ) | ||||
Bad debt expense | 830 | 1,678 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (60,102 | ) | (82,266 | ) | ||||
Inventories | (1,936 | ) | 3,123 | |||||
Other assets | (367 | ) | 169 | |||||
Accounts payable | 23,832 | 27,251 | ||||||
Other liabilities | (3,467 | ) | 4,455 | |||||
Net cash used in operating activities | (1,071 | ) | (17,005 | ) | ||||
Cash flows from investing activities | ||||||||
Capital expenditures | (18,761 | ) | (16,912 | ) | ||||
Proceeds from sale of property, equipment and assets held for sale | 2,450 | 801 | ||||||
Change in cash value of life insurance | (35 | ) | 3,266 | |||||
Change in restricted cash | 13,324 | (4,935 | ) | |||||
Net cash used in investing activities | (3,022 | ) | (17,780 | ) | ||||
Cash flows from financing activities | ||||||||
Repayment of revolving credit | — | (215,418 | ) | |||||
Proceeds from revolving credit | — | 252,739 | ||||||
Net repayments of RCA Facility | (9,550 | ) | — | |||||
Proceeds from issuance of long-term debt | — | 563 | ||||||
Repayment of long-term debt | (5,025 | ) | (5,236 | ) | ||||
Payments on capital leases | (2,132 | ) | (3,023 | ) | ||||
Debt issuance costs | (756 | ) | (250 | ) | ||||
Distribution to noncontrolling interest | — | (2,050 | ) | |||||
Net cash (used in) provided by financing activities | (17,463 | ) | 27,325 | |||||
Net decrease in cash and cash equivalents | (21,556 | ) | (7,460 | ) | ||||
Cash and cash equivalents | ||||||||
Beginning of period | 23,892 | 9,534 | ||||||
End of period | $ | 2,336 | $ | 2,074 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
New Enterprise Stone and Lime Co. Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter Ended November 30, 2014
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. Almost all of our products are produced and consumed outdoors. Normally, our highest sales and earnings are in the second and third fiscal quarters and our lowest are in the first and fourth fiscal quarters. As a result of this seasonality, our significant net working capital items, which are accounts receivable, inventories, accounts payable - trade and accrued liabilities, are typically higher as of interim period ends compared to fiscal year end.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and notes included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All adjustments (all of which are of a normal recurring nature) that are necessary for a fair 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 condensed balance sheet data at February 28, 2014 were derived from audited financial statements, but do not include all disclosures required by GAAP. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2014 filed with the Securities and Exchange Commission (“SEC”) on May 21, 2014. The results for interim periods are not necessarily indicative of the results for a full fiscal year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and entities where the Company has a controlling equity interest. Intercompany balances and transactions have been eliminated in consolidation.
Restructuring
During the second quarter of fiscal year 2014, we initiated a cost savings and operational efficiency plan (the “Plan”). The Plan has focused on head count reductions, operational efficiencies, and administrative savings. Under the Plan, the Company realigned its current divisional structure by combining Eastern Industries, Inc. and Martin Limestone, Inc., into a new East division and the NESL operating business, Buffalo Crushed Stone, Inc. and Valley Quarries, Inc. into a new West division. The Company has further reorganized its structure by combining the East and West divisions and creating a construction materials division and heavy/highway construction division. This has resulted in modification of the senior level organizational structure which the Company anticipates will reduce costs, streamline responsibilities and decision making, and drive best practices and efficiencies across the organization.
6
The restructuring activities during the nine months ended November 30, 2014 resulted in one-time pre-tax charges of approximately $5.2 million, comprised of approximately $0.9 million for severance and related benefit costs and approximately $4.3 million in outside advisory services related to the implementation of the Plan. The restructuring activities during the three months ended November 30, 2014 resulted in one-time pre-tax charges of approximately $2.1 million, comprised of approximately $0.7 million for severance and related benefit costs and approximately $1.4 million in outside advisory services related to the implementation of the Plan. These expenses were recorded in selling, administrative and general expenses. The Company has accrued approximately $1.4 million of severance costs as a component of accrued liabilities in the consolidated balance sheet at November 30, 2014. The Company incurred approximately $12.3 million in restructuring costs through November 30, 2014 since the inception of the Plan, and anticipates it may incur an additional $1.5 million to $2.5 million of costs associated with the Plan, comprised of approximately $1.3 million to $2.0 million of outside advisory services and $0.2 million to $0.5 million of employee-related costs.
The following table presents changes to Accrued Restructuring:
(In thousands) | Accrued restructuring | |||
Balance at February 28, 2014 | $ | 1,300 | ||
Additional accruals recorded | 5,197 | |||
Payments on or reductions of accrued restructuring charges | 5,121 | |||
Balance at November 30, 2014 | $ | 1,376 | ||
Assets Held for Sale
During the first quarter of fiscal year 2015, the Company concluded the sale of its Block manufacturing and Construction Supply Center ("CSC") operations at its New Holland, PA location for approximately $8.9 million. In addition to the sale of the Block manufacturing and CSC facilities at its New Holland, PA location, the sale agreement contained certain non-compete provisions which required the Company to close similar facilities at its Wescosville location as of the settlement date. The Company provided $4.1 million of the proceeds on the sale of the New Holland assets to the trustee of the $265.0 million 13% senior secured notes due 2018 ("the Secured Notes") which may be utilized to purchase additional equipment. As of November 30, 2014, $1.4 million of cash was held by the trustee and is recorded in restricted cash on the Condensed Consolidated Balance Sheet. The gain on the sale of the New Holland assets was approximately $0.2 million. Assets held for sale at Wescosville were $4.3 million and $5.1 million as of November 30, 2014 and February 28, 2014, respectively.
During the second quarter of fiscal year 2015, the Company sold its Block manufacturing facility and CSC facility at its Towanda, PA location for approximately $0.5 million in cash. For the nine months ended November 30, 2014, the Company recorded an asset impairment of approximately $1.5 million related to equipment and approximately $0.5 million of inventory. There were no assets held for sale at the Towanda Block and CSC facility as of November 30, 2014. he assets held for sale were from the construction materials segment.
During the second quarter of fiscal year 2015, the Company received an offer to sell the aggregate, hot mix asphalt and ready mix operations at its Sheshequin, PA and Towanda, PA locations and as a result, considered the assets as held for sale. The Company recorded impairments of $2.2 million and $0.9 million related to fixed assets, and goodwill and intangible assets, respectively, in the second quarter of fiscal year 2015. Assets held for sale at Sheshequin and Towanda were $4.3 million as of November 30, 2014. The assets held for sale are from the construction materials segment.
During the third quarter of fiscal year 2015, the Company considered a leasing arrangement related to its precast/prestressed structural concrete operations at its Roaring Spring, PA location (refer to Footnote 11. "Subsequent Events"Footnote 11. "Subsequent Events" for further information). At November 30, 2014, the Company classified $0.6 million of assets as held for sale related to its precast/prestressed structural concrete operations, consisting primarily of inventory, which is net of $0.2 million of impairments on those assets. The assets held for sale are from the construction materials segment.
The Company classified approximately $1.3 million of non-core properties and office buildings as assets held for sale during the third quarter of fiscal year 2015. There were no impairments recorded on those assets as of November 30, 2014.
7
The Company's assets held for sale consisted of the following:
November 30, 2014 | February 28, 2014 | ||||||
Inventory | $ | 1,541 | $ | 6,690 | |||
PP&E, net of impairment | 8,949 | 7,777 | |||||
$ | 10,490 | $ | 14,467 | ||||
Liabilities related to assets held for sale at Sheshequin and Towanda were $1.1 million as of November 30, 2014 and classified as part of "Accrued Liabilities" in the Condensed Consolidated Balance Sheet.
Out of Period Adjustments
For the nine months ended November 30, 2013, the Company recorded an out of period pre-tax loss of approximately $0.1 million primarily related to an increase in cost of revenue of $1.1 million and offset by depreciation of $1.0 million.
Management does not believe these out of period errors and adjustments are material to the unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended November 30, 2013 or to any prior periods.
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.
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash balances were restricted in certain consolidated subsidiaries for bond sinking fund and insurance requirements as well as collateral on outstanding letters of credit or rentals.
Accounts Receivable
Trade accounts receivable, less allowance for doubtful accounts, are recorded at the invoiced amount plus service charges related to past due accounts. Costs and estimated earnings in excess of billings relate to revenue recognized and not yet billed due to contract terms. State and local agencies often require several approvals to process billings or payments and this may cause a lag in payment times. The Company’s total accounts receivable consists of the following:
November 30, | February 28, | |||||||
(In thousands) | 2014 | 2014 | ||||||
Costs and estimated earnings in excess of billings | $ | 19,182 | $ | 9,838 | ||||
Trade | 97,735 | 51,310 | ||||||
Retainages | 8,020 | 5,399 | ||||||
124,937 | 66,547 | |||||||
Allowance for doubtful accounts | (4,250 | ) | (5,228 | ) | ||||
Accounts receivable, net | $ | 120,687 | $ | 61,319 | ||||
8
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using either first-in, first-out (“FIFO”) or weighted average method based on the applicable category of inventories.
The Company’s total inventories consist of the following:
November 30, | February 28, | |||||||
(In thousands) | 2014 | 2014 | ||||||
Crushed stone, agricultural lime and sand | $ | 76,800 | $ | 70,820 | ||||
Safety equipment | 13,859 | 12,091 | ||||||
Parts, tires and supplies | 8,009 | 10,187 | ||||||
Raw materials | 7,945 | 10,542 | ||||||
Building materials | 1,049 | 1,012 | ||||||
Other | 1,698 | 2,661 | ||||||
$ | 109,360 | $ | 107,313 | |||||
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Assets under capital leases are stated at the lesser of the present value of minimum lease payments or the fair value of the leased item. Provision for depreciation is generally computed over estimated service lives by the straight-line method.
The Company’s property, plant and equipment consist of the following:
November 30, | February 28, | |||||||
(In thousands) | 2014 | 2014 | ||||||
Limestone and sand acreage | $ | 146,293 | $ | 148,957 | ||||
Land, buildings and building improvements | 87,100 | 89,762 | ||||||
Crushing, prestressing and manufacturing plants | 310,990 | 316,772 | ||||||
Contracting equipment vehicles and other | 303,753 | 293,336 | ||||||
Construction in progress | 1,534 | 730 | ||||||
Property, plant and equipment | 849,670 | 849,557 | ||||||
Less: Accumulated depreciation and depletion | (537,581 | ) | (515,738 | ) | ||||
Property, plant and equipment, net | $ | 312,089 | $ | 333,819 | ||||
For the three months ended November 30, 2014 and 2013, depreciation expense was $9.9 million and $10.7 million, respectively. For the nine months ended November 30, 2014 and 2013, depreciation expense was $30.1 million and $33.7 million, respectively.
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, step two does not need to be performed.
9
Our reporting units were determined based on our organization 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 at fiscal year end. The estimated fair value of each of the reporting units was in excess of its carrying value, even after conducting various sensitivity analysis on key assumptions, such that no adjustment to the carrying values of goodwill was required as of February 28, 2014. During the nine months ended November 30, 2014, goodwill of $0.8 million was allocated to the sale of certain business operations and included in assets held for sale and then impaired.
The inputs used within the fair value measurements were categorized within Level 3 of the fair value hierarchy.
Other Intangible Assets
Other intangible assets consist of technology, customer relationships and trademarks acquired in previous acquisitions. The technology, customer relationships and trademarks are amortized over a straight-line basis.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
For the three months ended November 30, 2014 and 2013, amortization of intangible assets was $0.5 million and $0.2 million, respectively. For the nine months ended November 30, 2014 and 2013, amortization of intangible assets was $1.4 million and $0.7 million, respectively. During the nine months ended November 30, 2014, the Company allocated approximately $0.1 million of intangible assets to certain operations included in assets held for sale and then impaired.
Other Noncurrent Assets
The Company’s other noncurrent assets consist of the following:
November 30, | February 28, | |||||||
(In thousands) | 2014 | 2014 | ||||||
Deferred financing fees (less current portion of $4,328 and $4,324, respectively) | $ | 9,973 | $ | 13,207 | ||||
Capitalized software, net of accumulated amortization | 7,331 | 8,084 | ||||||
Cash surrender value of life insurance (net of loans of $5,733 and $3,200, respectively) | 1,171 | 1,135 | ||||||
Deferred stripping costs | 4,411 | 3,900 | ||||||
Other | 6,700 | 6,473 | ||||||
Total other assets | $ | 29,586 | $ | 32,799 | ||||
10
Revenue Recognition
The Company recognizes revenue on construction contracts under the percentage-of-completion method of accounting, as measured by the cost incurred to date over estimated total cost. 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 in the period in which such losses are identified. Contract costs include all direct material, labor, subcontract and other costs and those indirect costs related to contract performance, such as indirect salaries and wages, equipment repairs and depreciation, insurance and payroll taxes. Administrative and general expenses are charged to expense as incurred. Costs and estimated earnings in excess of billings on uncompleted contracts represent the excess of contract revenue recognized to date over billings to date. Billings in excess of costs and estimated earnings on uncompleted contracts represent the excess of billings to date over the amount of revenue recognized to date. As of November 30, 2014 and February 28, 2014, 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 consolidated balance sheets. The Company recorded a charge included in operating income of approximately $2.9 million and $3.0 million related to the revision of costs to complete on two significant contracts during the three and nine months ended November 30, 2014, respectively.
The Company accounts for custom-built concrete products under the units-of-production method. Under this method, the revenue is recognized as the units are produced under firm contracts.
The Company generally recognizes revenue on the sale of construction materials and concrete products, other than custom-built concrete products, when the customer takes title and assumes risk of loss. Typically, this occurs when products are shipped.
The Company 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.
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. Our regions are, i) Central Pennsylvania, ii) Chambersburg, Shippensburg, Gettysburg, Pennsylvania, iii) Lancaster, Pennsylvania, iv) Northeastern Pennsylvania and v) Western New York. The construction materials regions’ long-lived assets predominantly include limestone and sand acreage and crushing, prestressing equipment and manufacturing plants and the heavy/highway construction region’s long lived assets predominantly include contracting equipment and vehicles. The traffic safety services and equipment business includes two asset groups, distinguished between its retail sales and distribution as one asset group and its manufacturing and assembly as the second asset group. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset group.
11
Recently Issued and Adopted Accounting Standards
In November 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The standards allows an acquired entity to elect to apply the guidance to future change-in-control events if the financial statements in which the most recent event occurred has not yet been issued or made available to be issued. This pronouncement is effective November 18, 2014. The Company does not anticipate that this standard will have a material effect on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The standards requires an entity's management to evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. Public entities are required to apply standards for annual reporting periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. The Company is evaluating the impact of this standard on its consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, Compensation—Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The standard requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Entities are required to apply the standard for annual periods and interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted. The Company does not anticipate that this standard will have a material effect on its consolidated financial statements.
In June 2014, the FASB issued ASU 2014-10, Development Stage Entities: Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidelines in Topic 810, Consolidation. The standard will eliminate the reporting requirements for certain disclosures for development stage entities. Public entities are required to apply the presentation and disclosure requirements for annual reporting periods beginning on or after December 15, 2014. The revised consolidation standards are effective for annual reporting periods beginning on or after December 15, 2015. Early application is permitted. The Company is evaluating the impact of this standard on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Public entities are required to apply the revenue recognition standard for annual reporting period beginning on or after December 15, 2016, including interim periods within that annual reporting period. Early application is not permitted. The Company has not yet selected a transition method and is evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the requirements for reporting discontinued operations. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, this ASU requires additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The Company has early adopted the provisions of ASU 2014-08 during the fourth quarter of fiscal year 2014. The Company determined that its assets held for sale in the fourth quarter of fiscal year 2014 and the first three quarters of fiscal year 2015 did not meet the requirements for discontinued operations.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit Where Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU requires companies with unrecognized tax benefits, or a portion of unrecognized tax benefits, to present these benefits in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted, and is applicable to the Company’s fiscal year beginning March 1, 2014. The Company's adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
12
2. Risks and Uncertainties
Our business is heavily impacted by several factors which are outside the control of management, including the overall health of the economy, the level of commercial and residential construction, the level of federal, state and local publicly funded construction projects and seasonal variations generally attributable to weather conditions. These factors impact the amount and timing of our revenues and our overall performance.
On February 12, 2014, the Company entered into (i) an asset-based revolving credit agreement, dated as of February 12, 2014, among the Company and certain of its subsidiaries party thereto as borrowers, the lenders party thereto, PNC Bank, National Association, as issuer, swing loan lender, administrative agent and collateral agent (the “Revolving Credit Agreement” or “RCA”) and a (ii) term loan credit and guaranty agreement, dated as of February 12, 2014, among the Company as borrower, certain subsidiaries of the Company party thereto as guarantors, the lenders party thereto and Cortland Capital Market Services LLC as administrative agent (the “Term Loans”, and together with RCA, the “Credit Facilities”). The Credit Facilities contain certain financial maintenance and other covenants. 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 Secured Notes. If the lenders were to accelerate the due dates of our indebtedness or if current sources of liquidity prove to be insufficient, there can be no assurance that the Company would be able to repay or refinance such indebtedness or to obtain sufficient funding. This could require the Company to restructure or alter its operations and capital structure. We believe we have sufficient financial resources, including cash and cash equivalents, cash from operations and amounts available for borrowing under our RCA, to fund our business and operations, including capital expenditures and debt service obligations, for at least the next twelve months. At November 30, 2014, the Company was in compliance with all of its financial covenants.
During the second quarter of fiscal year 2014, we initiated a cost savings and operational efficiency plan (the "Plan"). Under the Plan, we have taken steps to consolidate the operations, sales, finance, accounting, human resources and engineering functions. This consolidation is expected to reduce the cost of overhead support functions going forward. The administrative efficiencies which we believe will result from the consolidation may not be realized to the extent anticipated thereby reducing the operating income benefit. Additionally, key personnel may decide not to relocate and employees affected by the consolidation may leave us due to uncertainty prior to completing the transition efforts, which may slow the restructuring process and increase its cost.
3. Accrued Liabilities
Accrued liabilities consist of the following:
November 30, | February 28, | |||||||
(In thousands) | 2014 | 2014 | ||||||
Insurance | $ | 26,120 | $ | 23,661 | ||||
Interest | 11,789 | 21,279 | ||||||
Payroll and vacation | 7,477 | 6,484 | ||||||
Withholding taxes | 691 | 2,350 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 2,731 | 1,431 | ||||||
Contract expenses | 2,399 | 727 | ||||||
Other | 5,314 | 4,575 | ||||||
Total accrued liabilities | $ | 56,521 | $ | 60,507 | ||||
13
4. Long-Term Debt
The Company's long-term debt consists of the following:
November 30, | February 28, | |||||||
(In thousands) | 2014 | 2014 | ||||||
RCA ($64.1 million and $36.5 million available as of November 30, 2014 and February 28, 2014, respectively), interest rate of 6.25% | $ | 12,863 | $ | 22,413 | ||||
11% Notes, due 2018 | 250,000 | 250,000 | ||||||
13% Secured Notes, due 2018 | 323,956 | 300,962 | ||||||
Term Loans, interest rate of 8% | 70,000 | 70,000 | ||||||
Land, equipment and other obligations | 6,463 | 11,488 | ||||||
Obligations under capital leases | 3,424 | 5,103 | ||||||
Total debt | 666,706 | 659,966 | ||||||
Less: Current portion | (16,599 | ) | (30,514 | ) | ||||
Total long-term debt | $ | 650,107 | $ | 629,452 | ||||
Refinancing
On February 12, 2014, the Company entered into the RCA providing for revolving credit loans and letters of credit in an aggregate principal amount up to $105.0 million and the Term Loan providing for term loans in the aggregate principal amount of $70.0 million. The Company utilized the proceeds from borrowings under the Credit Facilities to repay amounts outstanding under, and terminate, the Company’s prior asset based loan facility.
The RCA bears interest, at the Company’s option, at rates based upon LIBOR, plus a margin of 4.0% (with a LIBOR floor of 1.0%) or the base rate, plus a margin of 3.0%. The unused portion of the revolving credit commitment is subject to a commitment fee at a rate of 0.5%. At November 30, 2014, the weighted average interest rate on the RCA was 6.86%. 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%.
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 1, 2018 unless the Company refinances its Notes by such date.
Availability under the RCA is determined pursuant to a borrowing base formula based on eligible receivables and eligible inventory, subject to an availability block and to such other reserves as the Revolver Agent and the Syndication Agent may impose in accordance with the RCA. The availability block is initially $20.0 million but reduces to $10.0 million if the Company achieves a fixed charge coverage ratio of 1.00 to 1.00 as of the end of any fiscal quarter on a rolling four (4) quarter basis and further reduces to $0 if the Company achieves such fixed charge coverage ratio as of the end of the two immediately subsequent fiscal quarters. However, if at any time following the effectiveness of any of the reductions to the availability block the fixed charge coverage ratio as of the end of any quarter measured on a rolling four (4) quarter basis shall be less than 1.00 to 1.00, the availability block shall be increased back to $20.0 million, subject to further reduction as provided above; provided, that such reductions may occur no more than two (2) times, and if the availability block is increased back to $20.0 million following the second reduction, such increase shall be permanent and shall not be subject to further reduction.
The RCA includes a $20.0 million letter of credit sub-facility and a $10.5 million swing loan sub-facility for short-term borrowings. As of November 30, 2014, the Company had $16.7 million of letters of credit outstanding under the sub-facility. We classify borrowings under the RCA as current due to the nature of the agreement.
Pursuant to the Term Loans, in the event of a voluntary or mandatory prepayment or acceleration of the Term Loans, the Company shall be required to pay principal and a prepayment premium equal to:
14
Time Period | Percentage | ||
On or prior to 5/12/2015 | 103.00 | % | |
Between 5/13/2015 and 2/12/2016 | 102.00 | % | |
2/13/2016 and thereafter | 100.00 | % | |
Under the Credit Facilities, during the period from February 1, 2014 through February 28, 2015, the aggregate cash burn of the Company and its subsidiaries, tested on a monthly, cumulative basis, may not exceed by more than $17.5 million the projected aggregate cash burn of the Company and its subsidiaries as shown in the projections provided to the lenders prior to closing. Commencing May 31, 2015, as of the end of each fiscal quarter, the Company will be required to have trailing twelve-month EBITDA in an amount not less than certain amounts specified in the Credit Facilities. Commencing with the fiscal quarter ending May 31, 2017, the Company will be required under the Credit Facilities to maintain as of the end of each fiscal quarter a fixed charge coverage ratio of not less than 1.00 to 1.00 measured on a rolling four quarter basis. The Company also has a capital expenditure limitation of $27.5 million in fiscal year 2015, $40.0 million in fiscal year 2016 and $35.0 million for each fiscal year thereafter through the Credit Facilities' maturity.
The Credit Facilities include affirmative and negative covenants that limit the ability of the Company and its subsidiaries to undertake certain actions, including, among other things, limitations on (i) the incurrence of indebtedness and liens, (ii) asset sales, (iii) dividends and other payments with respect to capital stock, (iv) acquisitions, investments and loans, (v) affiliate transactions, (vi) altering the business, (vii) prepaying indebtedness, (viii) making capital expenditures, and (ix) providing negative pledges to third parties. In addition, the Credit Facilities contain conditions to lending, representations and warranties and events of default, including, among other things: (i) payment defaults, (ii) cross-defaults to other material indebtedness, (iii) covenant defaults, (iv) certain events of bankruptcy, (v) the occurrence of a material adverse effect, (vi) material judgments, (vii) change in control, (viii) seizures of material property, (ix) involuntary interruptions of material operations, and (x) certain material events with respect to pension plans.
As of November 30, 2014, the Company was in compliance with all of its covenant requirements through that date.
13% Secured Notes due 2018
Interest on the Secured Notes is initially payable at 13.0% per annum, semi-annually in arrears on March 15 and September 15. The Company will make each interest payment to the holders of record of the Secured Notes as of the immediately preceding March 1 and September 1. The Company used the proceeds from this offering to repay certain existing indebtedness and to pay related fees and expenses. The Secured Notes will mature on March 15, 2018.
On February 28, 2014, the Company notified the trustee of its Secured Notes that it had selected to pay interest on the Secured Notes for the 12-month period commencing March 15, 2014 in the form of 6% cash payment and 7% payment in kind, which represents $18.9 million and $22.4 million of interest, respectively, for the same 12-month period. At November 30, 2014, the inception-to-date PIK interest was $63.7 million ($59.0 million was recorded as an increase to the Secured Notes and $4.7 million was recorded as a long-term obligation in other liabilities).
With respect to any interest payment date on or prior to March 15, 2017, the Company may, at its option, elect (an “Interest Form Election”) to pay interest on the Secured Notes (i) entirely in cash (“Cash Interest”) or (ii) subject to any Interest Rate Increase (as defined below), initially at the rate of 4% per annum in cash (“Cash Interest Portion”) and 9% per annum by increasing the outstanding principal amount of the Secured Notes or by issuing additional paid in kind notes under the indenture on the same terms as the Secured Notes (“PIK Interest Portion” or “PIK Interest”); provided that in the absence of an Interest Form Election, interest on the Secured Notes will be payable as PIK Interest.
With respect to any interest payment payable after March 15, 2017, interest will be payable solely in cash. In addition, at the beginning of and with respect to each 12-month period that begins on March 15, 2013, March 15, 2014 and March 15, 2015, the interest rate on the Secured Notes as of such date shall permanently increase by an additional 1.0% per annum (an “Interest Rate Increase”) unless the Company delivers a written notice to the Trustee of the Company’s election for such 12-month period to either (x) alter the manner of interest payment on the Secured Notes going forward by increasing the Cash Interest Portion and decreasing the PIK Interest Portion in each case in effect with respect to the immediately preceding interest period for which any PIK Interest was paid prior to each such election by, in each case, 1.0% per annum or (y) pay interest on the Secured Notes for such 12-month period entirely in cash (a “12-Month Cash Election”). In the event of a 12-Month Cash Election for any 12-month period prior to March 15, 2017, the interest rate on the Secured Notes applicable for such 12-month period shall be 1.0% less than the total interest rate applicable to the Secured Notes in effect
15
with respect to the immediately preceding interest period for which any PIK Interest was paid. Any Interest Rate Increase shall be affected by increasing the PIK Interest Portion in effect with respect to the immediately preceding interest period for which any PIK Interest was paid prior to each such Interest Rate Increase. If the Company makes a 12-Month Cash Election for and in respect of the 12-month period beginning on March 15, 2016, the same interest rate will apply for and in respect of the 12-month period beginning on March 15, 2017. The additional 1.0% per annum Interest Rate Increase will only apply to the one consecutive annual period beginning March 15, 2015.
At any time prior to March 15, 2015, the Company may redeem, at its option, up to 35% of the Secured Notes with the net cash proceeds from certain public equity offerings at a redemption price equal to 113.0% of the principal amount outstanding, plus accrued and unpaid interest. The Company may also redeem some or all of the Secured Notes at any time prior to March 15, 2015 at a redemption price equal to 100.0% of the principal amount of the outstanding Secured Notes, plus accrued and unpaid interest, plus a “make-whole” premium. On and after March 15, 2015, the Secured Notes will be redeemable, in whole or in part, at the redemption prices specified as follows:
Year | Percentage | |
2015 | 106.50 | % |
2016 | 103.25 | % |
2017 and thereafter | 100.00 | % |
In addition, the Company may be required to make an offer to purchase the Secured Notes upon the sale of certain assets or upon a change of control. The Company will be required to redeem certain portions of the Secured Notes for tax purposes on September 15, 2017 and each accrual period thereafter.
The Secured Notes are guaranteed on a full and unconditional, and joint and several basis, by certain of the Company’s existing and future domestic subsidiaries (the “Guarantors” as described in Note 10, “Condensed Issuer, Guarantor and Non-Guarantor Financial Information”). The Secured Notes and related guarantees are senior secured obligations of the Company and the Guarantors that rank equally in right of payment with all existing and future senior debt of the Company and the Guarantors, including the Notes and Credit Facilities, and senior to all existing and future subordinated debt of the Company and Guarantors. The Secured Notes and related guarantees are secured, subject to certain permitted liens and except for certain excluded assets, by first-priority liens on substantially all of the Company’s and Guarantors’ personal property and certain owned and leased real property and second-priority liens on certain real property and substantially all of the Company’s and Guarantors’ accounts receivable, inventory and deposit accounts and related assets and proceeds of the foregoing that secure the RCA on a first-priority basis.
The indenture for the Secured Notes contains restrictive covenants that limit the Company’s ability and the ability of its subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with affiliates.
The indenture governing the Secured Notes required that the Company file a registration statement with the SEC and exchange the Secured Notes for new Secured Notes having terms substantially identical in all material respects to the Secured Notes by March 10, 2013. On June 13, 2013, the Company filed the Secured Notes Registration Statement and concluded the exchange offer on October 30, 2013. The Company incurred $0.8 million of penalty interest through October 30, 2013.
11% Notes Due 2018
In August 2010, the Company sold $250.0 million aggregate principal amount of the Notes. Interest on the Notes is payable semi-annually in arrears on March 1 and September 1 of each year. The proceeds from the issuance of Notes were used to pay down debt. In fiscal year 2012, the Company recognized a loss on debt retirement of approximately $2.9 million relating to the write off of unamortized debt issuance costs associated with the components of outstanding debt that were paid down. The write off of the debt issuance costs were recorded as a component of interest expense. 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.
16
At any time prior to September 1, 2014, the Company was permitted to redeem all or part of the Notes at a redemption price equal to 100.0% of the principal amount plus accrued and unpaid interest and an applicable “make-whole” premium which is set forth in the indenture governing the Notes. On or after September 1, 2014, the Company may redeem all or a part of the Notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest if redeemed during the twelve-month period beginning on September 1 of the years indicated below:
Year | Percentage | |
2014 | 105.50 | % |
2015 | 102.75 | % |
2016 and thereafter | 100.00 | % |
If the Company experiences a change of control, as outlined in the indenture governing the Notes, the Company may be required to offer to purchase the Notes at a purchase price equal to 101.0% of the principal amount, plus accrued interest.
The Notes are guaranteed on a full and unconditional, and joint and several, basis by certain of the Company’s existing and future domestic subsidiaries (the “Guarantors” as described in Note 9, “Condensed Issuer, Guarantor and Non-Guarantor Financial Information”). The indenture governing the Notes contains affirmative and negative covenants that, among other things, limit the Company’s and its subsidiaries’ ability to incur additional debt, make restricted payments, dividends or other payments from subsidiaries to the Company, create liens, engage in the sale or transfer of assets and engage in transactions with affiliates. The Company is not required to maintain any affirmative financial ratios or covenants under the indenture governing the Notes.
The indenture governing the Notes required that the Company file a registration statement with the SEC and exchange the Notes for new Notes having terms substantially identical in all material respects to the Notes. The Company filed its registration statement with the SEC for the Notes on August 29, 2011. The registration statement became effective on September 13, 2011, and the Company concluded the exchange offer on October 12, 2011.
Land, equipment and other obligations
The Company has various notes, mortgages and other financing arrangements resulting from the purchase of principally land and equipment. All loans provide for at least annual payments and are principally secured by the land and equipment acquired.
From 1998 through 2005, the Company issued four revenue bonds to different industrial development authorities for counties in Pennsylvania in order to fund the acquisition and installation of plant and equipment. The original issuance of these bonds totaled $25.3 million with dates of maturity through May 2022. The Company prepaid $4.2 million of the remaining bonds in April 2014.
Obligations under capital lease
The Company has various arrangements for the lease of machinery and equipment which qualify as capital leases. These arrangements typically provide for monthly payments, some of which include residual value guarantees if the Company were to terminate the arrangement during certain specified periods of time for each underlying asset under lease.
5. Income Taxes
The 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, 2015 and February 28, 2014, after giving effect to items specifically related to the interim periods.
The effective income tax rates for the three months ended November 30, 2014 and 2013 were 3.6% and 7.3%, respectively, resulting in tax benefit of $0.1 million and $0.4 million, respectively. For the nine months ended November 30, 2014 and 2013, the effective income tax rates were 7.1% and 12.9%, respectively, resulting in a tax benefit of $1.4 million and $3.8 million, respectively. The principal factor affecting the comparability of the effective income tax rates for the respective periods is the Company’s assessment of the realizability of the current year projected income tax loss. The Company recorded a valuation allowance on the portion of the current year federal and state income tax losses that it believes are not more likely than not to be realized.
Cash paid for income taxes was immaterial for the three and nine months ended November 30, 2014 and 2013, primarily as a result of net operating losses.
17
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 shown as pension and profit sharing in our condensed consolidated statements of comprehensive loss. Effective October 1, 2013, the Company froze contributions to its nonqualified benefit plan, reduced the matching contribution rate for its qualified plan and froze certain other hourly and profit share contributions. In May 2014, the Company subsequently restored the matching contribution rates for its qualified plan and certain hourly and profit share contributions.
The Company has two defined benefit pension plans covering certain union employees covered by labor union contracts. The benefits are based on years of service. Actuarial gains and losses are generally amortized over the average remaining service life of the Company’s active employees. Net periodic pension expense recognized for the three and nine months ended November 30, 2014 and 2013, was as follows:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Net periodic benefit cost | ||||||||||||||||
Service cost | $ | 86 | $ | 86 | $ | 258 | $ | 257 | ||||||||
Interest cost | 105 | 100 | 315 | 300 | ||||||||||||
Expected return on plan assets | (150 | ) | (143 | ) | (451 | ) | (431 | ) | ||||||||
Amortization of prior service cost | 14 | 17 | 43 | 50 | ||||||||||||
Recognized net actuarial loss | 51 | 66 | 152 | 198 | ||||||||||||
Total pension expense | $ | 106 | $ | 126 | $ | 317 | $ | 374 | ||||||||
The Company made contributions to the defined benefit pension plans of approximately $0.2 million during the nine months ended November 30, 2014, and expects to make additional contributions of approximately $0.1 million in the remainder of fiscal year 2015.
7. Other Noncurrent Liabilities
The Company's other noncurrent liabilities consist of:
November 30, | February 28, | |||||||
(In thousands) | 2014 | 2014 | ||||||
Reclamation costs | $ | 18,520 | $ | 18,745 | ||||
Executive deferred compensation liability | 5,733 | 5,790 | ||||||
PIK accrued interest | 4,724 | 11,035 | ||||||
Other | 9,777 | 10,395 | ||||||
$ | 38,754 | $ | 45,965 | |||||
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 $7.2 million surety bond with the Commonwealth of Pennsylvania. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported. The Company also maintains three self-insurance programs for health coverage with losses limited to $0.3 million per member
18
per year. Additionally, the Company is required to and does provide a letter of credit in the amount of $0.3 million to guarantee payment of the deductible portion of its liability coverage which existed prior to January 1, 2008, and also maintains a cash collateral amount of approximately $1.0 million, which is recorded as part of restricted cash on the condensed consolidated balance sheet.
The Company maintains a captive insurance company, Rock Solid Insurance Company (“Rock Solid”), for workers’ compensation (non-Pennsylvania employees), general liability, auto, health, and property coverage. On April 8, 2011, Rock Solid entered into a Collateral Trust Agreement with an insurer to eliminate a letter of credit that was required to maintain coverage of the deductible portion of its liability coverage. The total amount of collateral provided under this arrangement is recorded as part of restricted cash in the amount of $15.8 million and $15.6 million as of November 30, 2014 and February 28, 2014, respectively. Exposures for periods prior to the inception of the captive are covered by pre-existing insurance policies. Other accrued amounts included as insurance, which primarily relates to worker’s compensation, included in Note 3, “Accrued Liabilities” totaled $10.9 million and $9.7 million as of November 30, 2014 and February 28, 2014, respectively. Liabilities associated with amounts that are payable by insurance companies of approximately $6.0 million were recorded in other noncurrent liabilities in our consolidated balance sheets as of November 30, 2014 and February 28, 2014.
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.
The Company reviews earnings of the segments principally at the operating income level less indirect costs 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 income consists of revenue less direct 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 income. These costs include corporate administrative functions such as trade receivable billings and collections, payment processing, accounting, legal and other administrative costs, unallocated corporate functions and divisional administrative functions.
The following is a summary of certain financial data for the Company’s operating segments:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | ||||||||||||||||
Construction materials | $ | 147,087 | $ | 166,235 | $ | 424,608 | $ | 459,257 | ||||||||
Heavy/highway construction | 91,457 | 92,433 | 237,179 | 236,793 | ||||||||||||
Traffic safety services and equipment | 22,911 | 23,108 | 73,732 | 74,932 | ||||||||||||
Segment totals | 261,455 | 281,776 | 735,519 | 770,982 | ||||||||||||
Eliminations | (51,794 | ) | (60,430 | ) | (137,861 | ) | (159,527 | ) | ||||||||
Total revenue | $ | 209,661 | $ | 221,346 | $ | 597,658 | $ | 611,455 | ||||||||
Operating income | ||||||||||||||||
Construction materials | $ | 27,596 | $ | 23,883 | $ | 72,986 | $ | 66,227 | ||||||||
Heavy/highway construction | 8 | 4,317 | 4,897 | 7,859 | ||||||||||||
Traffic safety services and equipment | 1,814 | 1,986 | 5,518 | 3,339 | ||||||||||||
Corporate and unallocated | (10,160 | ) | (16,510 | ) | (41,464 | ) | (49,787 | ) | ||||||||
Total operating income | $ | 19,258 | $ | 13,676 | $ | 41,937 | $ | 27,638 | ||||||||
19
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Depreciation, depletion and amortization | ||||||||||||||||
Construction materials | $ | 8,524 | $ | 8,107 | $ | 23,253 | $ | 25,162 | ||||||||
Heavy/highway construction | 2,040 | 2,088 | 6,378 | 5,861 | ||||||||||||
Traffic safety services and equipment | 1,240 | 1,304 | 3,683 | 4,664 | ||||||||||||
Corporate and unallocated | 378 | 242 | 1,115 | 1,303 | ||||||||||||
Total depreciation, depletion and amortization | $ | 12,182 | $ | 11,741 | $ | 34,429 | $ | 36,990 | ||||||||
10. Condensed Issuer, Guarantor and Non Guarantor Financial Information
The Company’s Secured Notes and Notes are guaranteed by certain subsidiaries. Except for Rock Solid, NESL, II LLC, and Kettle Creek Partners GP, LLC, all existing consolidated subsidiaries of the Company are 100% owned and provide a joint and several, full and unconditional guarantee of the securities. These entities include Gateway Trade Center Inc., EII Transport Inc., Protections Services Inc., Work Area Protection Corp., SCI Products Inc., ASTI Transportation Systems, Inc., and Precision Solar Controls Inc. (“Guarantor Subsidiaries”). There are no significant restrictions on the parent Company’s ability to obtain funds from any of the Guarantor Subsidiaries in the form of a dividend or loan. Additionally, there are no significant restrictions on a Guarantor Subsidiary’s ability to obtain funds from the parent Company or its direct or indirect subsidiaries. Certain other wholly owned subsidiaries and consolidated partially owned partnerships do not guarantee the Secured Notes or the Notes. These entities include Rock Solid, South Woodbury, L.P., NESL, II LLC, Kettle Creek Partners L.P., and Kettle Creek Partners GP, LLC (“Non Guarantors”).
The following condensed consolidating balance sheets, statements of comprehensive income (loss) and statements of cash flows are provided for the Company, all Guarantor Subsidiaries and Non Guarantors. The information has been presented as if the parent Company accounted for its ownership of the Guarantor Subsidiaries and Non Guarantors using the equity method of accounting.
20
Condensed Consolidating Balance Sheet at November 30, 2014
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | (817 | ) | $ | (489 | ) | $ | 3,642 | $ | — | $ | 2,336 | ||||||||
Restricted cash | 2,584 | 88 | 15,787 | — | 18,459 | |||||||||||||||
Accounts receivable, net | 104,623 | 16,050 | 14 | — | 120,687 | |||||||||||||||
Inventories | 95,217 | 14,143 | — | — | 109,360 | |||||||||||||||
Net investment in lease | — | — | 1,137 | (1,137 | ) | — | ||||||||||||||
Deferred income taxes | 2,749 | 964 | — | — | 3,713 | |||||||||||||||
Other current assets | 8,344 | 939 | 7 | — | 9,290 | |||||||||||||||
Assets held for sale | 10,490 | — | — | — | 10,490 | |||||||||||||||
Total current assets | 223,190 | 31,695 | 20,587 | (1,137 | ) | 274,335 | ||||||||||||||
Property, plant and equipment, net | 291,964 | 20,125 | 6,023 | (6,023 | ) | 312,089 | ||||||||||||||
Goodwill | 81,287 | 5,845 | — | — | 87,132 | |||||||||||||||
Other intangible assets, net | 7,679 | 11,482 | — | — | 19,161 | |||||||||||||||
Investment in subsidiaries | 85,465 | — | — | (85,465 | ) | — | ||||||||||||||
Intercompany receivables | 3,308 | 29,342 | (34 | ) | (32,616 | ) | — | |||||||||||||
Other assets | 26,226 | 1,011 | 2,349 | — | 29,586 | |||||||||||||||
$ | 719,119 | $ | 99,500 | $ | 28,925 | $ | (125,241 | ) | $ | 722,303 | ||||||||||
Liabilities and (Deficit) Equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Current maturities of long-term debt | $ | 16,892 | $ | — | $ | 844 | $ | (1,137 | ) | $ | 16,599 | |||||||||
Accounts payable - trade | 40,371 | 5,064 | 311 | — | 45,746 | |||||||||||||||
Accrued liabilities | 38,914 | 1,464 | 16,143 | — | 56,521 | |||||||||||||||
Total current liabilities | 96,177 | 6,528 | 17,298 | (1,137 | ) | 118,866 | ||||||||||||||
Intercompany payables | 31,614 | 2,018 | (1,016 | ) | (32,616 | ) | — | |||||||||||||
Long-term debt, less current maturities | 644,928 | — | 5,179 | — | 650,107 | |||||||||||||||
Intercompany capital leases, less current installments | 6,023 | — | — | (6,023 | ) | — | ||||||||||||||
Deferred income taxes | 25,566 | 8,413 | — | — | 33,979 | |||||||||||||||
Other liabilities | 35,845 | 561 | 2,348 | — | 38,754 | |||||||||||||||
Total liabilities | 840,153 | 17,520 | 23,809 | (39,776 | ) | 841,706 | ||||||||||||||
(Deficit) equity | ||||||||||||||||||||
New Enterprise Stone & Lime Co., Inc. (deficit) equity | (121,034 | ) | 81,980 | 3,485 | (85,465 | ) | (121,034 | ) | ||||||||||||
Noncontrolling interest | — | — | 1,631 | — | 1,631 | |||||||||||||||
Total (deficit) equity | (121,034 | ) | 81,980 | 5,116 | (85,465 | ) | (119,403 | ) | ||||||||||||
Total liabilities and (deficit) equity | $ | 719,119 | $ | 99,500 | $ | 28,925 | $ | (125,241 | ) | $ | 722,303 | |||||||||
21
Condensed Consolidating Balance Sheet at February 28, 2014
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 21,344 | $ | — | $ | 2,548 | $ | — | $ | 23,892 | ||||||||||
Restricted cash | 11,996 | 92 | 15,596 | — | 27,684 | |||||||||||||||
Accounts receivable, net | 49,093 | 12,212 | 271 | (257 | ) | 61,319 | ||||||||||||||
Inventories | 95,135 | 12,178 | — | — | 107,313 | |||||||||||||||
Net investment in lease | — | — | 647 | (647 | ) | — | ||||||||||||||
Deferred income taxes | 2,749 | 964 | — | — | 3,713 | |||||||||||||||
Other current assets | 8,131 | 839 | 35 | — | 9,005 | |||||||||||||||
Assets held for sate | 14,467 | — | — | — | 14,467 | |||||||||||||||
Total current assets | 202,915 | 26,285 | 19,097 | (904 | ) | 247,393 | ||||||||||||||
Property, plant and equipment, net | 314,140 | 19,679 | 6,969 | (6,969 | ) | 333,819 | ||||||||||||||
Goodwill | 82,131 | 5,845 | — | — | 87,976 | |||||||||||||||
Other intangible assets, net | 7,904 | 12,047 | — | — | 19,951 | |||||||||||||||
Investment in subsidiaries | 81,037 | — | — | (81,037 | ) | — | ||||||||||||||
Intercompany receivables | 720 | 27,794 | (34 | ) | (28,480 | ) | — | |||||||||||||
Other assets | 29,336 | 1,115 | 2,348 | — | 32,799 | |||||||||||||||
$ | 718,183 | $ | 92,765 | $ | 28,380 | $ | (117,390 | ) | $ | 721,938 | ||||||||||
Liabilities and (Deficit) Equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Current maturities of long-term debt | $ | 30,317 | $ | — | $ | 844 | $ | (647 | ) | $ | 30,514 | |||||||||
Accounts payable - trade | 17,892 | 3,858 | 453 | (257 | ) | 21,946 | ||||||||||||||
Accrued liabilities | 44,603 | 1,531 | 14,373 | — | 60,507 | |||||||||||||||
Total current liabilities | 92,812 | 5,389 | 15,670 | (904 | ) | 112,967 | ||||||||||||||
Intercompany payables | 27,632 | 848 | — | (28,480 | ) | — | ||||||||||||||
Long-term debt, less current maturities | 623,714 | — | 5,738 | — | 629,452 | |||||||||||||||
Intercompany capital leases, less current installments | 6,969 | — | — | (6,969 | ) | — | ||||||||||||||
Deferred income taxes | 26,477 | 8,413 | — | — | 34,890 | |||||||||||||||
Other liabilities | 43,014 | 603 | 2,348 | — | 45,965 | |||||||||||||||
Total liabilities | 820,618 | 15,253 | 23,756 | (36,353 | ) | 823,274 | ||||||||||||||
(Deficit) equity | ||||||||||||||||||||
New Enterprise Stone & Lime Co., Inc. (deficit) equity | (102,435 | ) | 77,512 | 3,525 | (81,037 | ) | (102,435 | ) | ||||||||||||
Noncontrolling interest | — | — | 1,099 | — | 1,099 | |||||||||||||||
Total (deficit) equity | (102,435 | ) | 77,512 | 4,624 | (81,037 | ) | (101,336 | ) | ||||||||||||
Total liabilities and (deficit) equity | $ | 718,183 | $ | 92,765 | $ | 28,380 | $ | (117,390 | ) | $ | 721,938 | |||||||||
22
Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ended November 30, 2014
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Revenue | $ | 192,996 | $ | 18,992 | $ | 1,731 | $ | (4,058 | ) | $ | 209,661 | |||||||||
Cost of revenue (exclusive of items shown separately below) | 146,501 | 15,550 | 1,430 | (1,848 | ) | 161,633 | ||||||||||||||
Depreciation, depletion and amortization | 10,899 | 1,283 | — | — | 12,182 | |||||||||||||||
Equipment and intangible asset impairment | 75 | 151 | — | — | 226 | |||||||||||||||
Pension and profit sharing | 1,918 | 73 | — | — | 1,991 | |||||||||||||||
Selling, administrative and general expenses | 12,804 | 1,658 | 50 | — | 14,512 | |||||||||||||||
(Gain) loss on disposals of property, equipment and software | (148 | ) | 7 | — | — | (141 | ) | |||||||||||||
Operating income (loss) | 20,947 | 270 | 251 | (2,210 | ) | 19,258 | ||||||||||||||
Interest expense, net | (20,894 | ) | 28 | (54 | ) | 108 | (20,812 | ) | ||||||||||||
Income (loss) before income taxes | 53 | 298 | 197 | (2,102 | ) | (1,554 | ) | |||||||||||||
Income tax benefit | (56 | ) | — | — | — | (56 | ) | |||||||||||||
Equity in earnings of subsidiaries | (1,787 | ) | — | — | 1,787 | — | ||||||||||||||
Net income (loss) | (1,678 | ) | 298 | 197 | (315 | ) | (1,498 | ) | ||||||||||||
Less: Net income attributable to noncontrolling interest | — | — | (180 | ) | — | (180 | ) | |||||||||||||
Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | (1,678 | ) | 298 | 17 | (315 | ) | (1,678 | ) | ||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income tax | 39 | — | — | — | 39 | |||||||||||||||
Comprehensive income (loss) | (1,639 | ) | 298 | 197 | (315 | ) | (1,459 | ) | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | — | (180 | ) | — | (180 | ) | |||||||||||||
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | $ | (1,639 | ) | $ | 298 | $ | 17 | $ | (315 | ) | $ | (1,639 | ) | |||||||
23
Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ended November 30, 2013
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Revenue | $ | 198,687 | $ | 25,950 | $ | 1,819 | $ | (5,110 | ) | $ | 221,346 | |||||||||
Cost of revenue (exclusive of items shown separately below) | 158,526 | 20,353 | 1,465 | (4,918 | ) | 175,426 | ||||||||||||||
Depreciation, depletion and amortization | 10,392 | 1,349 | — | — | 11,741 | |||||||||||||||
Equipment and intangible asset impairment | — | — | — | — | — | |||||||||||||||
Pension and profit sharing | 1,988 | 67 | — | — | 2,055 | |||||||||||||||
Selling, administrative and general expenses | 16,925 | 1,940 | 80 | — | 18,945 | |||||||||||||||
Loss on disposals of property, equipment and software | (516 | ) | 19 | — | — | (497 | ) | |||||||||||||
Operating income (loss) | 11,372 | 2,222 | 274 | (192 | ) | 13,676 | ||||||||||||||
Interest expense, net | (19,230 | ) | 21 | (145 | ) | 192 | (19,162 | ) | ||||||||||||
Income (loss) before income taxes | (7,858 | ) | 2,243 | 129 | — | (5,486 | ) | |||||||||||||
Income tax benefit | (401 | ) | — | — | — | (401 | ) | |||||||||||||
Equity in earnings of subsidiaries | 2,200 | — | — | (2,200 | ) | — | ||||||||||||||
Net income (loss) | (5,257 | ) | 2,243 | 129 | (2,200 | ) | (5,085 | ) | ||||||||||||
Less: Net income attributable to noncontrolling interest | — | — | (172 | ) | — | (172 | ) | |||||||||||||
Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | (5,257 | ) | 2,243 | (43 | ) | (2,200 | ) | (5,257 | ) | |||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income tax | 49 | — | — | — | 49 | |||||||||||||||
Comprehensive income (loss) | (5,208 | ) | 2,243 | 129 | (2,200 | ) | (5,036 | ) | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | — | (172 | ) | — | (172 | ) | |||||||||||||
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | $ | (5,208 | ) | $ | 2,243 | $ | (43 | ) | $ | (2,200 | ) | $ | (5,208 | ) | ||||||
24
Condensed Consolidating Statement of Comprehensive Income (Loss) for the nine months ended November 30, 2014
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Revenue | $ | 535,820 | $ | 65,667 | $ | 5,192 | $ | (9,021 | ) | $ | 597,658 | |||||||||
Cost of revenue (exclusive of items shown separately below) | 417,884 | 51,409 | 4,386 | (6,596 | ) | 467,083 | ||||||||||||||
Depreciation, depletion and amortization | 30,610 | 3,819 | — | — | 34,429 | |||||||||||||||
Equipment and intangible asset impairment | 5,098 | 151 | — | — | 5,249 | |||||||||||||||
Pension and profit sharing | 5,119 | 201 | — | — | 5,320 | |||||||||||||||
Selling, administrative and general expenses | 38,289 | 5,652 | 150 | — | 44,091 | |||||||||||||||
(Gain) loss on disposals of property, equipment and software | (449 | ) | (2 | ) | — | — | (451 | ) | ||||||||||||
Operating income (loss) | 39,269 | 4,437 | 656 | (2,425 | ) | 41,937 | ||||||||||||||
Interest expense, net | (61,707 | ) | 31 | (164 | ) | 322 | (61,518 | ) | ||||||||||||
Income (loss) before income taxes | (22,438 | ) | 4,468 | 492 | (2,103 | ) | (19,581 | ) | ||||||||||||
Income tax benefit | (1,398 | ) | — | — | — | (1,398 | ) | |||||||||||||
Equity in earnings of subsidiaries | 2,325 | — | — | (2,325 | ) | — | ||||||||||||||
Net income (loss) | (18,715 | ) | 4,468 | 492 | (4,428 | ) | (18,183 | ) | ||||||||||||
Less: Net income attributable to noncontrolling interest | — | — | (532 | ) | — | (532 | ) | |||||||||||||
Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | (18,715 | ) | 4,468 | (40 | ) | (4,428 | ) | (18,715 | ) | |||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income tax | 116 | — | — | 116 | ||||||||||||||||
Comprehensive income (loss) | (18,599 | ) | 4,468 | 492 | (4,428 | ) | (18,067 | ) | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | — | (532 | ) | — | (532 | ) | |||||||||||||
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | $ | (18,599 | ) | $ | 4,468 | $ | (40 | ) | $ | (4,428 | ) | $ | (18,599 | ) | ||||||
25
Condensed Consolidating Statement of Comprehensive Income (Loss) for the nine months ended November 30, 2013
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Revenue | $ | 539,523 | $ | 78,212 | $ | 7,125 | $ | (13,405 | ) | $ | 611,455 | |||||||||
Cost of revenue (exclusive of items shown separately below) | 429,231 | 61,837 | 6,164 | (13,050 | ) | 484,182 | ||||||||||||||
Depreciation, depletion and amortization | 32,197 | 4,793 | — | — | 36,990 | |||||||||||||||
Equipment and intangible asset impairment | — | 452 | — | — | 452 | |||||||||||||||
Pension and profit sharing | 6,254 | 253 | — | — | 6,507 | |||||||||||||||
Selling, administrative and general expenses | 49,261 | 6,777 | 294 | — | 56,332 | |||||||||||||||
(Gain) loss on disposals of property, equipment and software | (510 | ) | (136 | ) | — | — | (646 | ) | ||||||||||||
Operating income (loss) | 23,090 | 4,236 | 667 | (355 | ) | 27,638 | ||||||||||||||
Interest expense, net | (57,271 | ) | (78 | ) | (264 | ) | 355 | (57,258 | ) | |||||||||||
Income (loss) before income taxes | (34,181 | ) | 4,158 | 403 | — | (29,620 | ) | |||||||||||||
Income tax benefit | (3,714 | ) | (111 | ) | — | — | (3,825 | ) | ||||||||||||
Equity in earnings of subsidiaries | 3,591 | — | — | (3,591 | ) | — | ||||||||||||||
Net income (loss) | (26,876 | ) | 4,269 | 403 | (3,591 | ) | (25,795 | ) | ||||||||||||
Less: Net income attributable to noncontrolling interest | — | — | (1,081 | ) | — | (1,081 | ) | |||||||||||||
Net income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | (26,876 | ) | 4,269 | (678 | ) | (3,591 | ) | (26,876 | ) | |||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Unrealized actuarial gains and amortization of prior service costs, net of income tax | 148 | — | — | — | 148 | |||||||||||||||
Comprehensive income (loss) | (26,728 | ) | 4,269 | 403 | (3,591 | ) | (25,647 | ) | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | — | (1,081 | ) | — | (1,081 | ) | |||||||||||||
Comprehensive income (loss) attributable to New Enterprise Stone & Lime Co., Inc. | $ | (26,728 | ) | $ | 4,269 | $ | (678 | ) | $ | (3,591 | ) | $ | (26,728 | ) | ||||||
26
Condensed Consolidating Statement of Cash Flows for the nine months ended November 30, 2014
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Cash flows from operating activities | $ | (8,202 | ) | $ | 5,286 | $ | 3,245 | $ | (1,400 | ) | $ | (1,071 | ) | |||||||
Cash flows from investing activities | ||||||||||||||||||||
Capital expenditures | (12,982 | ) | (5,779 | ) | — | — | (18,761 | ) | ||||||||||||
Proceeds from sale of property, equipment and assets held for sale | 2,450 | — | — | — | 2,450 | |||||||||||||||
Change in cash value of life insurance | (35 | ) | — | — | — | (35 | ) | |||||||||||||
Change in restricted cash | 13,512 | 4 | (192 | ) | — | 13,324 | ||||||||||||||
Net cash provided by (used in) investing activities | 2,945 | (5,775 | ) | (192 | ) | — | (3,022 | ) | ||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Net repayments of RCA Facility | (9,550 | ) | — | — | — | (9,550 | ) | |||||||||||||
Repayment of long-term debt | (4,466 | ) | — | (559 | ) | — | (5,025 | ) | ||||||||||||
Payments on capital leases | (2,132 | ) | — | — | — | (2,132 | ) | |||||||||||||
Debt issuance costs | (756 | ) | — | — | — | (756 | ) | |||||||||||||
Dividends received (paid) | — | — | (1,400 | ) | 1,400 | — | ||||||||||||||
Distribution to noncontrolling interest | — | — | — | — | — | |||||||||||||||
Net cash provided by (used in) financing activities | (16,904 | ) | — | (1,959 | ) | 1,400 | (17,463 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (22,161 | ) | (489 | ) | 1,094 | — | (21,556 | ) | ||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | 21,344 | — | 2,548 | — | 23,892 | |||||||||||||||
End of period | $ | (817 | ) | $ | (489 | ) | $ | 3,642 | $ | — | $ | 2,336 | ||||||||
27
Condensed Consolidating Statement of Cash Flows for the nine months ended November 30, 2013
(In thousands) | New Enterprise Stone & Lime Co., Inc. | Guarantor Subsidiaries | Non Guarantors | Eliminations | Total | |||||||||||||||
Cash flows from operating activities | $ | (19,836 | ) | $ | 2,842 | $ | 2,989 | $ | (3,000 | ) | $ | (17,005 | ) | |||||||
Cash flows from investing activities | ||||||||||||||||||||
Capital expenditures | (14,040 | ) | (2,872 | ) | — | — | (16,912 | ) | ||||||||||||
Proceeds from sale of property and equipment, and assets held for sale | 786 | 15 | — | — | 801 | |||||||||||||||
Change in cash value of life insurance | 3,266 | — | — | — | 3,266 | |||||||||||||||
Change in restricted cash | (183 | ) | (1 | ) | (4,751 | ) | — | (4,935 | ) | |||||||||||
Net cash provided by (used in) investing activities | (10,171 | ) | (2,858 | ) | (4,751 | ) | — | (17,780 | ) | |||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Proceeds from revolving credit | 252,739 | — | — | — | 252,739 | |||||||||||||||
Repayment of revolving credit | (215,418 | ) | — | — | — | (215,418 | ) | |||||||||||||
Proceeds from issuance of long-term debt | 563 | — | — | — | 563 | |||||||||||||||
Repayment of long-term debt | (4,562 | ) | — | (674 | ) | — | (5,236 | ) | ||||||||||||
Payments on capital leases | (3,023 | ) | — | — | — | (3,023 | ) | |||||||||||||
Debt issuance costs | (250 | ) | — | — | — | (250 | ) | |||||||||||||
Dividends received (paid) | — | — | (3,000 | ) | 3,000 | — | ||||||||||||||
Distribution to noncontrolling interest | — | — | (2,050 | ) | — | (2,050 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 30,049 | — | (5,724 | ) | 3,000 | 27,325 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 42 | (16 | ) | (7,486 | ) | — | (7,460 | ) | ||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | 31 | 19 | 9,484 | — | 9,534 | |||||||||||||||
End of period | $ | 73 | $ | 3 | $ | 1,998 | $ | — | $ | 2,074 | ||||||||||
28
11. Subsequent Events
On December 15, 2014, the Company entered into an arrangement to lease its precast/prestressed structural concrete operations in Roaring Spring, PA for a term of seven years to an entity controlled by a member of the Company’s Board of Directors and stock holder, James W. Van Buren, who is the principal of the entity ("the Lessee"). Under the arrangement, the Company will lease approximately 60 acres and 240,000 square feet of operating space and 3,800 square feet of office space, including equipment valued at $3.2 million. The annual base rent begins at $65,000 and is scheduled to increase to $95,000 within the first 18 months upon satisfaction of certain conditions. The Company will provide transition services for six months at approximately $3,200 a month and allow the use of applicable patents, trade names and websites. The Lessee will also pay applicable taxes, licenses, and certification fees. The Company also sold approximately $0.6 million of inventory, at cost, to the Lessee.
29
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are a leading privately held, vertically integrated construction materials supplier and heavy/highway construction contractor in Pennsylvania and western New York and a national traffic safety services and equipment provider. Founded in 1924, we are one of the top 10 construction aggregates producers based on tonnage of crushed stone produced and one of the top 50 highway contractors based on revenues in the United States, according to industry surveys.
We operate in three segments based upon the nature of our products and services: construction materials, heavy/highway construction and traffic safety services and equipment. Our construction materials operations are comprised of aggregate production (crushed stone and construction sand and gravel), hot mix asphalt production, ready mixed concrete production and the production of concrete products. 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. 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.
We believe that passage of the Pennsylvania House Bill 1060 (the "Transportation Bill"), which became effective in January 2014, will provide an increase in bidding opportunities in our markets. The increased opportunities in the public sector have positively impacted our second and third quarter of fiscal year 2015 activities. Market conditions remain stable throughout our geographic regions during the first three quarters of fiscal year 2015, although the private commercial and residential segments continue to be weak. Additionally, the first three quarters results benefited from the new cost restructuring. During the second quarter of fiscal year 2015, we obtained a $110 million Pennsylvania Turnpike job that will span up to three years.
Cost Savings and Operational Efficiency Plan
During the second quarter of fiscal year 2014, we initiated a cost savings and operational efficiency plan (the “Plan”). The Plan has focused on head count reductions, operational efficiencies, and administrative savings. Under the Plan, we realigned our current divisional structure by combining Eastern Industries, Inc. ("Eastern"), and Martin Limestone, Inc. ("Martin"), into a new East division and the NESL operating business, Valley Quarries, Inc. ("Valley") and Buffalo Crushed Stone, Inc. (“BCS”) into a new West division. We have further reorganized our structure by combining the East and West divisions and creating a construction materials division and heavy/highway construction division. This has resulted in modification of the senior level organizational structure which we anticipate will reduce costs, streamline responsibilities and decision making and allow us to drive best practices and efficiencies across the organization.
The restructuring associated with the activities during the first three quarters of fiscal year 2015 resulted in one-time pre-tax charges of approximately $5.2 million, comprised of approximately $0.9 million for severance and related benefit costs and $4.3 million in outside advisory services related to the implementation of such plan. The cost reductions are comprised of head count, operational consolidations, administrative and benefit structure savings. We are currently working to identifying additional savings associated with the Plan. Since the inception of the Plan, we have incurred approximately $12.3 million in costs through November 30, 2014. We anticipate we will incur an additional $1.5 million to $2.5 million of costs associated with the Plan, comprised of approximately $1.3 million to $2.0 million of outside advisory services and $0.2 million to $0.5 million of employee-related costs. We continue to execute and evaluate the sale of non-core assets as part of enhancing overall liquidity.
For the nine months ended November 30, 2014, the Company has sold certain assets providing up to $10.5 million of additional cash for additional working capital and fixed asset purchases. We have approximately $10.5 million in assets and $1.1 million of liabilities held for sale as of November 30, 2014.
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 quarters and the lowest are in the first and fourth quarters. Our sales and earnings are sensitive to national, regional and local economic
30
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.
Executive Summary
The following are key statistics for the three months ended November 30, 2014 as compared to the three months ended November 30, 2013 and a cash flow summary for the nine months ended November 30, 2014 as compared to the nine months ended November 30, 2013.
• | Total revenue decreased $11.6 million (5.2%) primarily due to divestment of non-core assets; |
• | Operating income improved by $5.6 million (40.9%); |
• | Net interest expense increased $1.6 million (8.3%); |
• | Net cash used in operating activities was reduced by $15.9 million; |
• | Cash used in investing activities was reduced by $14.8 million; and |
• | Cash provided by financing activities benefited from reduced borrowings by $44.8 million. |
RESULTS OF OPERATIONS
The following table summarizes our operating results on a consolidated basis:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | $ | 209,661 | $ | 221,346 | $ | 597,658 | $ | 611,455 | ||||||||
Cost of revenue (exclusive of items shown separately below) | 161,633 | 175,426 | 467,083 | 484,182 | ||||||||||||
Depreciation, depletion and amortization | 12,182 | 11,741 | 34,429 | 36,990 | ||||||||||||
Asset impairment | 226 | — | 5,249 | 452 | ||||||||||||
Pension and profit sharing | 1,991 | 2,055 | 5,320 | 6,507 | ||||||||||||
Selling, administrative and general expenses | 14,512 | 18,945 | 44,091 | 56,332 | ||||||||||||
(Gain) loss on disposals of property, equipment and software | (141 | ) | (497 | ) | (451 | ) | (646 | ) | ||||||||
Operating income | 19,258 | 13,676 | 41,937 | 27,638 | ||||||||||||
Interest expense, net | (20,812 | ) | (19,162 | ) | (61,518 | ) | (57,258 | ) | ||||||||
Income (loss) before income taxes | (1,554 | ) | (5,486 | ) | (19,581 | ) | (29,620 | ) | ||||||||
Income tax expense (benefit) | (56 | ) | (401 | ) | (1,398 | ) | (3,825 | ) | ||||||||
Net loss | $ | (1,498 | ) | $ | (5,085 | ) | $ | (18,183 | ) | $ | (25,795 | ) | ||||
The tables below disclose revenue and operating data for our reportable segments before certain inter- and intra-segment 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. Net revenue and operating income exclude inter-segment sales and delivery revenues and costs. We also operate ancillary port operations and certain rental operations, which are included in construction materials line items presented below. 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 November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Segment Revenue | ||||||||||||||||
Construction materials | $ | 147,087 | $ | 166,235 | $ | 424,608 | $ | 459,257 | ||||||||
Heavy/highway construction | 91,457 | 92,433 | 237,179 | 236,793 | ||||||||||||
Traffic safety services and equipment | 22,911 | 23,108 | 73,732 | 74,932 | ||||||||||||
Segment totals | 261,455 | 281,776 | 735,519 | 770,982 | ||||||||||||
Inter-segment eliminations | (51,794 | ) | (60,430 | ) | (137,861 | ) | (159,527 | ) | ||||||||
Total revenue | $ | 209,661 | $ | 221,346 | $ | 597,658 | $ | 611,455 | ||||||||
31
The following table summarizes the percentage of segment revenue by our primary lines of business:
Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Segment Revenue: | |||||||||||
Construction materials | 56.3 | % | 59.0 | % | 57.8 | % | 59.6 | % | |||
Heavy/highway construction | 35.0 | % | 32.8 | % | 32.2 | % | 30.7 | % | |||
Traffic safety services and equipment | 8.7 | % | 8.2 | % | 10.0 | % | 9.7 | % | |||
Segment totals | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
The following table summarizes the segment cost of revenue:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Segment Cost of Revenue | ||||||||||||||||
Construction materials | $ | 106,703 | $ | 132,210 | $ | 323,096 | $ | 363,168 | ||||||||
Heavy/highway construction | 88,186 | 85,726 | 223,223 | 220,622 | ||||||||||||
Traffic safety services and equipment | 18,538 | 17,920 | 58,625 | 59,919 | ||||||||||||
Segment totals | 213,427 | 235,856 | 604,944 | 643,709 | ||||||||||||
Eliminations | (51,794 | ) | (60,430 | ) | (137,861 | ) | (159,527 | ) | ||||||||
Total cost of revenue | $ | 161,633 | $ | 175,426 | $ | 467,083 | $ | 484,182 | ||||||||
The following table summarizes the segment cost of revenue as a percent of segment revenue:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
Cost of Revenue as Percent of Revenue (before eliminations) | ||||||||||||
Construction materials | 72.5 | % | 79.5 | % | 76.1 | % | 79.1 | % | ||||
Heavy/highway construction | 96.4 | % | 92.7 | % | 94.1 | % | 93.2 | % | ||||
Traffic safety services and equipment | 80.9 | % | 77.5 | % | 79.5 | % | 80.0 | % | ||||
The following table summarizes the segment operating income:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Operating Income | ||||||||||||||||
Construction materials | $ | 27,596 | $ | 23,883 | $ | 72,986 | $ | 66,227 | ||||||||
Heavy/highway construction | 8 | 4,317 | 4,897 | 7,859 | ||||||||||||
Traffic safety services and equipment | 1,814 | 1,986 | 5,518 | 3,339 | ||||||||||||
Segment totals | 29,418 | 30,186 | 83,401 | 77,425 | ||||||||||||
Corporate and unallocated | (10,160 | ) | (16,510 | ) | (41,464 | ) | (49,787 | ) | ||||||||
Total operating income | $ | 19,258 | $ | 13,676 | $ | 41,937 | $ | 27,638 | ||||||||
32
Three Months Ended November 30, 2014 Compared to Three Months Ended November 30, 2013
Revenue
Total revenue decreased $11.6 million or 5.2% to $209.7 million for the three months ended November 30, 2014 compared to $221.3 million for the three months ended November 30, 2013. The decrease in total revenue was primarily attributable to reduced revenues related to certain non-core operations during the three months ended November 30, 2014.
Segment revenue for our construction materials business decreased $19.1 million, or 11.5% to $147.1 million for the three months ended November 30, 2014 compared to $166.2 million for the three months ended November 30, 2013. The sale of Block and CSC operations during the first quarter of fiscal year 2015 contributed to approximately $7.7 million of the decrease. Revenues associated with precast/prestressed structural concrete decreased by $4.5 million for the three months ended November 30, 2014 compared to the three months ended November 30, 2013. By removing the impact of the reduced revenues associated with non-core business operations, our revenues decreased $6.9 million on a comparable basis. Revenues for aggregates and ready mixed increased $0.4 million and $0.8 million, or 0.6% and 4.3%, respectively, for the three months ended November 30, 2014 compared to the three months ended November 30, 2013. This increase was offset by a decrease in other revenues of $6.3 million for the three months ended November 30, 2014 compared to the three months ended November 30, 2013. The increases in aggregates and ready mixed were primarily attributable to an increase in sales prices for aggregates of 13.7% and an increase in sales volumes for ready mix of 8.4%. These increases were partially offset by a decrease in sales volumes for aggregates.
Segment revenue for our heavy/highway construction business decreased $0.9 million, or 1.0% to $91.5 million for the three months ended November 30, 2014 compared to $92.4 million for the three months ended November 30, 2013. The decrease in revenue was primarily attributable to a decrease to pre-tax income of approximately $2.9 million related to the revision of costs to complete on two significant contracts during the three months ended November 30, 2014.
Segment revenue for our traffic safety services and equipment businesses decreased slightly by $0.2 million, or 0.9% to $22.9 million for the three months ended November 30, 2014 compared to $23.1 million for the three months ended November 30, 2013, primarily due to the sale of certain branches in September 2013.
Cost of Revenue
Total cost of revenue decreased $13.8 million or 7.9% to $161.6 million for the three months ended November 30, 2014 compared to approximately $175.4 million for the three months ended November 30, 2013. The majority of this decrease is attributable to the winding down of certain non-core Block and CSC operations during the first quarter of fiscal year 2015, and decreases in costs of revenue associated with reduced aggregates volumes.
Segment cost of revenue for our construction materials business as a percentage of its segment revenue decreased 7.0% to 72.5% for the three months ended November 30, 2014 compared to 79.5% for the three months ended November 30, 2013. Segment cost of revenue as a percentage of segment revenue improved as a result of lower revenues associated with non-core operations which generally carried lower margins compared to other products. The sale of Block and CSC operations during the first quarter of fiscal year 2015 contributed to approximately $6.7 million of the decrease in cost of revenue. Cost of revenue associated with precast/prestressed structural concrete decreased by $3.5 million for the three months ended November 30, 2014 compared to the three months ended November 30, 2013.
Segment cost of revenue for our heavy/highway construction business as a percentage of its segment revenue increased 3.7% to 96.4% for the three months ended November 30, 2014 compared to 92.7% for the three months ended November 30, 2013. The increase in segment cost of sales as a percentage of sales was primarily due to $2.9 million of unfavorable cost revisions on two significant contracts during the three months ended November 30, 2014.
Segment cost of revenue for our traffic services and equipment business as a percentage of its segment revenue increased 3.4% to 80.9% for the three months ended November 30, 2014 compared to 77.5% for the three months ended November 30, 2013. The increase in segment cost of revenue as a percentage of segment revenue was attributable to higher labor costs, despite relatively stable sales and other cost reductions.
33
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased $0.5 million, or 4.3% to $12.2 million for the three months ended November 30, 2014 compared to $11.7 million for the three months ended November 30, 2013. The increase was primarily attributable to the amortization of certain deferred stripping costs of $0.9 million, partially offset by less depreciation on a smaller depreciable asset base as a result of assets sold within the past year and additional assets becoming fully depreciated.
Pension and Profit Sharing
Pension and profit sharing expense decreased $0.1 million, or 4.8%, to $2.0 million for the three months ended November 30, 2014 compared to $2.1 million for the three months ended November 30, 2013. This decrease was attributable to the reductions in force from the Company's restructuring Plan, as well as the cost savings associated with the discontinuation of contributions to certain benefit plans.
Selling, Administrative and General Expenses
Selling, administrative and general expenses decreased $4.4 million, or 23.3% to $14.5 million for the three months ended November 30, 2014 compared to $18.9 million for the three months ended November 30, 2013. The decrease was primarily attributable to benefits from head count reductions and associated employee benefit reductions related to our cost reduction program and asset sales, increased efficiencies related to improved utilization of our ERP system, and a reduction in legal and consulting services.
Operating Income
Operating income for our construction materials business increased $3.7 million, or 15.5% to $27.6 million for the three months ended November 30, 2014 compared to $23.9 million for the three months ended November 30, 2013. Operating income for aggregates increased $5.9 million, or 52.7% to $17.1 million for the three months ended November 30, 2014 compared to $11.2 million for the three months ended November 30, 2013. This increase was primarily due to better pricing, as well as the impact of the cost reduction initiatives. Hot mix asphalt decreased by $1.5 million to $7.7 million for the three months ended November 30, 2014 compared to $9.2 million for the three months ended November 30, 2013. This decrease was primarily due to the sale of lower profit material in the current quarter compared to the prior quarter. Ready mix concrete increased $1.3 million to $3.3 million for the three months ended November 30, 2014 compared to $2.0 million for the three months ended November 30, 2013, primarily due to increased volumes on a fixed cost base.
Operating income for our heavy/highway construction business decreased by $4.3 million, or 100.0% to almost break-even for the three months ended November 30, 2014 compared to operating profit of $4.3 million for the three months ended November 30, 2013. This decrease was primarily attributable to approximately $2.9 million of cost revisions on two significant contracts during the three months ended November 30, 2014.
Operating income for our traffic safety services and equipment businesses decreased by $0.2 million, or 10.0% to $1.8 million for the three months ended November 30, 2014 compared to $2.0 million for the three months ended November 30, 2013. The decrease in profitability is primarily attributable to slightly increased labor costs.
Interest Expense, net
Net interest expense increased $1.6 million, or 8.3% to $20.8 million for the three months ended November 30, 2014 compared to $19.2 million for the three months ended November 30, 2013 due primarily to increased overall indebtedness and an increase in interest rates for the current period.
Income Tax Benefit
The income tax provision for the three months ended November 30, 2014 and November 30, 2013 consisted of federal and state taxes that are based on the estimated effective tax rates applicable for the full fiscal years ending February 28, 2014 and February 28, 2013, respectively, after giving effect to items specifically related to the interim periods.
Our effective tax rates for the three months ended November 30, 2014 and 2013 were 3.6% and 7.3%, respectively, resulting in tax benefit of $0.1 million and $0.4 million, respectively. The principal factor affecting the comparability of the effective income tax rates for the respective periods is our assessment of the realizability of the current period projected pre-tax
34
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.
Nine Months Ended November 30, 2014 Compared to Nine Months Ended November 30, 2013
Revenue
Total revenue decreased $13.8 million or 2.3% to $597.7 million for the nine months ended November 30, 2014 compared to $611.5 million for the nine months ended November 30, 2013. The decrease in total revenue was driven primarily by approximately $20.5 million of reduced revenues related to certain non-core operations during the nine months ended November 30, 2014. When considering the exclusion of these revenues associated with these non-core business operations, revenues increased by $6.7 million.
Segment revenue for our construction materials business decreased $34.7 million, or 7.6% to $424.6 million for the nine months ended November 30, 2014 compared to $459.3 million for the nine months ended November 30, 2013. A decrease of revenue of $21.2 million was due to the sale of Block and CSC operations, which were wound down during the first quarter of fiscal year 2015. When considering the exclusion of these revenues associated with non-core business operations, our revenues decreased by a net amount of $13.5 million. Increases in aggregates and ready mixed concrete of $0.3 million and $1.6 million, respectively, were offset by a decrease in hot mix asphalt revenues of $5.5 million. The increase in revenues associated with aggregate was primarily driven by an increase in sales price of 7.3%, partially offset by a decrease in sales volume of 2.5%, for the nine months ended November 30, 2014, as compared to the nine months ended November 30, 2013. The increase in revenues associated with ready mixed concrete was primarily driven by an increase in sales price of 1.4% and an increase in sales volumes of 4.7%, for the nine months ended November 30, 2014, as compared to the nine months ended November 30, 2013. The adverse weather conditions during the first quarter particularly impacted our hot mix asphalt activity, where volume was down year to date by approximately 2.3%.
Segment revenue for our heavy/highway construction business remained flat at $237.2 million for the nine months ended November 30, 2014 compared to $236.8 million for the nine months ended November 30, 2013.
Segment revenue for our traffic safety services and equipment businesses decreased $1.2 million, or 1.6% to $73.7 million for the nine months ended November 30, 2014 compared to $74.9 million for the nine months ended November 30, 2013. The decrease in revenues of approximately $1.5 million was primarily due to the sale of certain branches in September 2013.
Cost of Revenue
Total cost of revenue decreased $17.1 million or 3.5% to $467.1 million for the nine months ended November 30, 2014 compared to approximately $484.2 million for the nine months ended November 30, 2013. By removing costs of revenue associated with non-core business operations, our cost of revenue as a percentage of sales improved 1.0% to 78.2% for the nine months ended November 30, 2014 compared to 79.2% for the nine months ended November 30, 2013, as a result of enhanced operational efficiencies as well as the reduction of lower margin business.
Segment cost of revenue for our construction materials business as a percentage of its segment revenue improved 3.0% to 76.1% for the nine months ended November 30, 2014 compared to 79.1% for the nine months ended November 30, 2013. Segment cost of revenue as a percentage of segment revenue improved as a result of lower revenues associated with non-core operations which generally carried lower margins compared to other products. The sale of Block and CSC operations during the first quarter of fiscal year 2015 contributed to approximately $18.0 million of the decrease in cost of revenue for the nine months ended November 30, 2014. This was offset by the cost of revenue associated with precast/prestressed structural concrete, which increased by $4.9 million for the nine months ended November 30, 2014 compared to the nine months ended November 30, 2013.
Segment cost of revenue for our heavy/highway construction business as a percentage of its segment revenue increased 0.9% to 94.1% for the nine months ended November 30, 2014 compared to 93.2% for the nine months ended November 30, 2013. The increase in cost of sales as a percentage of sales was primarily due to $3.0 million of unfavorable cost revisions on two significant contracts during the nine months ended November 30, 2014.
Segment cost of revenue for our traffic services and equipment business as a percentage of its segment revenue improved 0.5% to 79.5% for the nine months ended November 30, 2014 compared to 80.0% for the nine months ended November 30, 2013. The decrease in segment cost of revenue as a percentage of segment revenue was attributable to the impact of cost reductions over a relatively stable sales base.
35
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased $2.6 million, or 7.0% to $34.4 million for the nine months ended November 30, 2014 compared to $37.0 million for the nine months ended November 30, 2013. The decrease was primarily attributable to less depreciation on a smaller depreciable asset base as a result of assets sold within the past year and additional assets becoming fully depreciated, partially offset by the amortization of certain deferred stripping costs of $0.9 million.
Pension and Profit Sharing
Pension and profit sharing expense decreased $1.2 million, or 18.5%, to $5.3 million for the nine months ended November 30, 2014 compared to $6.5 million for the nine months ended November 30, 2013. This decrease was attributable to the reductions in force from the Company's restructuring Plan, as well as the cost savings associated with the discontinuation of contributions to certain benefit plans.
Selling, Administrative and General Expenses
Selling, administrative and general expenses decreased $12.2 million, or 21.7% to $44.1 million for the nine months ended November 30, 2014 compared to $56.3 million for the nine months ended November 30, 2013. The decrease was primarily attributable to benefits from head count reductions and benefit plans, and reduced fees associated with various consultants.
Operating Income
Operating income for our construction materials business increased $6.8 million, or 10.3% to $73.0 million for the nine months ended November 30, 2014 compared to $66.2 million for the nine months ended November 30, 2013. Operating income for aggregates increased $9.3 million, or 26.3% to $44.6 million for the nine months ended November 30, 2014 compared to $35.3 million for the nine months ended November 30, 2013. This increase was due to better pricing, as well as the impact of the cost reduction initiatives. Hot mix asphalt decreased by $3.4 million, or 14.6%, to $19.9 million for the nine months ended November 30, 2014 compared to $23.3 million for the nine months ended November 30, 2013. This decrease was primarily due to the sale of less favorable sales mix as well as reduced volumes in the current period compared to the prior year. Ready mix concrete increased $3.2 million, or 62.7%, to $8.3 million for the nine months ended November 30, 2014 compared to $5.1 million for the nine months ended November 30, 2013, primarily due to increased volumes on a fixed cost base. Operating income associated with precast/prestressed structural concrete, Block and CSC operations decreased by $3.0 million for the nine months ended November 30, 2014 compared to the nine months ended November 30, 2013.
Operating income for our heavy/highway construction business decreased $3.0 million to $4.9 million, or 38.0% for the nine months ended November 30, 2014 compared to $7.9 million for the nine months ended November 30, 2013. This decrease was primarily attributable to approximately $3.0 million of unfavorable cost revisions on two significant contracts during the three months ended November 30, 2014.
Operating income for our traffic safety services and equipment businesses increased $2.2 million, or 66.7% to $5.5 million for the nine months ended November 30, 2014 compared to $3.3 million for the nine months ended November 30, 2013. The increase in profitability is attributable primarily to improvements in cost controls as well as the sale of certain non-performing branches in September 2013.
Interest Expense, net
Net interest expense increased $4.2 million, or 7.3% to $61.5 million for the nine months ended November 30, 2014 compared to $57.3 million for the nine months ended November 30, 2013 due primarily to increased overall indebtedness in the current period and an increase in interest rates.
Income Tax Benefit
The income tax provision for the nine months ended November 30, 2014 and November 30, 2013 consisted of federal and state taxes that are based on the estimated effective tax rates applicable for the full fiscal years ending February 28, 2014 and February 28, 2013, respectively, after giving effect to items specifically related to the interim periods.
36
Our effective tax rates for the nine months ended November 30, 2014 and 2013 were 7.1% and 12.9%, respectively, resulting in tax benefit of $1.4 million and $3.8 million, respectively. The principal factor affecting the comparability of the effective income tax rates for the respective periods is our assessment of the realizability of the current period projected pre-tax loss. We recorded a valuation allowance on the portion of the current period federal and state income tax losses that we believe is not more likely than not to be realized.
LIQUIDITY AND CAPITAL RESOURCES
On February 12, 2014, the Company entered into the RCA providing for revolving credit loans and letters of credit in an aggregate principal amount up to $105.0 million and the Term Loans providing for term loans in the aggregate principal amount of $70.0 million. The Company utilized the proceeds from the Credit Facilities to repay amounts outstanding under, and terminate, the Company's prior asset based loan facility. Refer to Note 4 “Long-Term Debt” to the condensed consolidated financial statements for further information.
Our sources of liquidity include cash and cash equivalents, cash from operations and amounts available for borrowing under the RCA. As of November 30, 2014 we had borrowed $12.9 million under the RCA with $64.1 million available compared to $22.4 million under the RCA with $36.5 million available as of February 28, 2014. As of November 30, 2014, we had $2.3 million in cash and cash equivalents and working capital of $155.5 million compared to $23.9 million in cash and cash equivalents and working capital of $134.4 million as of February 28, 2014. Cash balances of $18.5 million and $27.7 million as of November 30, 2014 and February 28, 2014, respectively, were restricted in certain consolidated subsidiaries for bond sinking fund and insurance requirements, as well as collateral on outstanding letters of credit or rentals. In December, 2013, the Company provided cash collateral of $10.5 million associated with outstanding letters of credit, which was returned during the nine months ended November 30, 2014 as we secured replacement letters of credit under the RCA.
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 limits, are the primary financial covenants for the next twelve months. Through February 28, 2015, the Company and its subsidiaries must comply with an aggregate Cash Burn covenant, tested on a monthly, cumulative basis, which may not exceed by more than $17.5 million the projected aggregate Cash Burn of the Company and its subsidiaries as shown in the projections provided to the lenders prior to entering into the Credit Facilities. The Cash Burn covenant calculation is based upon EBITDA with certain adjustments related to consultants and financial advisors, severance costs, and certain losses on asset sales as defined in the Credit Facilities. Capital expenditures may not exceed $27.5 million and $40.0 million in our fiscal years 2015 and 2016, respectively. We have included additional information in Note 2. "Risks and Uncertainties" and Note 4. "Long-Term Debt" of the unaudited condensed consolidated financial statements regarding our ability to meet certain operating performance measures and financial covenant requirements. As of November 30, 2014, the Company was in compliance with all of its covenant requirements through that date, and expects to remain in compliance for the next twelve months as applicable.
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.
On December 15, 2014, the Company entered into an arrangement to lease its precast/prestressed structural concrete operations in Roaring Spring, PA for a term of seven years to an entity controlled by a member of the Company’s Board of Directors and stock holder, James W. Van Buren, who is the principal of the entity ("the Lessee"). Under the arrangement, the Company will lease approximately 60 acres and 240,000 square feet of operating space and 3,800 square feet of office space, including equipment valued at $3.2 million. The annual base rent, which we believe is below market, begins at $65,000 and is scheduled to increase to $95,000 within the first 18 months upon satisfaction of certain conditions. The Company will provide transition services for six months at approximately $3,200 a month and allow the use of applicable patents, trade names and websites. The Lessee will also pay applicable taxes, licenses, and certification fees. The Company also sold approximately $0.6 million of inventory, at cost, to the Lessee.
37
Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing activities and financing activities and our capital expenditures for the nine months ended November 30, 2014 and November 30, 2013.
Nine Months Ended November 30, | ||||||||
(In thousands) | 2014 | 2013 | ||||||
Net cash (used in) provided by: | ||||||||
Operating activities | $ | (1,071 | ) | $ | (17,005 | ) | ||
Investing activities | (3,022 | ) | (17,780 | ) | ||||
Financing activities | (17,463 | ) | 27,325 | |||||
Cash paid for capital expenditures | (18,761 | ) | (16,912 | ) | ||||
As of November 30, 2014, we had approximately $16.7 million of letters of credit outstanding under our $20.0 million facility, and $1.2 million of unsecured letters of credit.
Operating Activities
Net cash used in operating activities improved $15.9 million to $1.1 million for the nine months ended November 30, 2014 compared to net cash used of $17.0 million for the nine months ended November 30, 2013. Cash used in operating activities decreased as a result of better working capital management as well as reduced net loss.
Investing Activities
Net cash used in our investing activities improved $14.8 million to $3.0 million in the nine months ended November 30, 2014 compared to a use of $17.8 million in the nine months ended November 30, 2013. Net cash used in investing activities improved primarily due to the return of cash collateral letters of credit which were replaced with letters of credit under the RCA.
Financing Activities
Net cash from financing activities decreased $44.8 million to a use of $17.5 million in the nine months ended November 30, 2014 compared to $27.3 million provided in the nine months ended November 30, 2013. The decrease in cash provided by financing activities was primarily due to the repayment of debt and capital lease obligations in fiscal year 2015 of $16.7 million, as compared to net borrowings of $27.3 million in fiscal year 2014.
Capital Expenditures
Cash capital expenditures increased $1.9 million to $18.8 million for the nine months ended November 30, 2014 compared to $16.9 million for the nine months ended November 30, 2013. This increase was a result of higher spending on construction in progress. Total cash capital expenditures are being managed to remain below our capital expenditure covenant limit of $27.5 million.
Our Indebtedness
Refer to Note 4 “Long-Term Debt” to the condensed consolidated financial statements for further information.
Off Balance Sheet Arrangements
We provide from time to time in the ordinary course of business letters of credit. Letters of credit bear interest and fees between 2.25% and 4.25%. We have outstanding letters of credit of $16.7 million of secured letters of credit under our $20.0 million RCA and $1.2 million of unsecured letters of credit at November 30, 2014, which were not included in our Consolidated Balance Sheet. Additionally, we may be required to provide letters of credit for bonding purposes. If we do not have availability to issue secured letters of credit under the RCA, we may be required to enter into a cash collateral or similar type of agreement to secure certain types of future bonding.
38
On December 15, 2014, the Company entered into an arrangement to lease its precast/prestressed structural concrete operations in Roaring Spring, PA for a term of seven years to an entity controlled by a member of the Company’s Board of Directors and stock holder, James W. Van Buren, who is the principal of the entity ("the Lessee"). Under the arrangement, the Company will lease approximately 60 acres and 240,000 square feet of operating space and 3,800 square feet of office space, including equipment valued at $3.2 million. The annual base rent, which we believe is below market, begins at $65,000 and is scheduled to increase to $95,000 within the first 18 months upon satisfaction of certain conditions. The Company will provide transition services for six months at approximately $3,200 a month and allow the use of applicable patents, trade names and websites. The Lessee will also pay applicable taxes, licenses, and certification fees. The Company also sold approximately $0.6 million of inventory, at cost, to the Lessee.
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 “Summary of Significant Accounting Policies” as reported in our notes to our financial statements for the fiscal year ended February 28, 2014 as filed as part of the Company’s Annual Report on Form 10-K and our financial statements herein.
Recently Issued Accounting Standards
Refer to Note 1, “Nature of Operations and Summary of Significant Accounting Policies” to the condensed consolidated financial statements for a discussion of recent accounting guidance and pronouncements.
Forward-looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, in particular, statements about our plans, strategies and prospects under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” You can identify certain forward-looking statements by our use of forward-looking terminology such as, but not limited to, “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “likely,” “will,” “would,” “could” and similar expressions that identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Many risks and uncertainties are inherent in our industry and markets. Others are more specific to our operations. The occurrence of the events described and the achievement of the expected results depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:
• | material weaknesses and significant deficiencies in our internal control over financial reporting; |
• | risks associated with the cyclical nature of our business and dependence on activity within the construction industry; |
• | declines in public sector construction and reductions in governmental funding which could continue to adversely affect our operations and results; |
• | our reliance on private investment in infrastructure and a slower than normal recovery which continue to adversely affect our results; |
• | a decline in the funding of Pennsylvania Department of Transportation, which we refer to as PennDot, the Pennsylvania Turnpike Commission, the New York State Thruway Authority or other state agencies; |
39
• | difficult and volatile conditions in the credit markets may adversely affect our financial position, results of operations and cash flows; |
• | 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; |
• | 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; |
• | cancellation of significant contracts or our disqualification from bidding for new contracts; |
• | general business and economic conditions, particularly an economic downturn; |
• | the other factors discussed under Item 1A-Risk Factors in our Annual Report on Form 10-K for our fiscal year ended February 28, 2014; and |
• | 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. |
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.
40
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to financial market risks, including changes in commodity prices, interest rates and other relevant market prices.
Commodity Price Risk
We are subject to commodity price risk with respect to price changes in energy, including fossil fuels, electricity and natural gas for production of hot mix asphalt and cement and diesel fuel for distribution and production related vehicles. We attempt to limit our exposure to changes in commodity prices by putting sales price escalators in place for most public contracts, and we aggressively seek to obtain escalators on private and commercial contracts.
Interest Rate Risk
We are subject to interest rate risk in connection with borrowings under our indebtedness. As of November 30, 2014, we have $12.9 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 $0.8 million change in our annual interest expense in total on 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.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2014. Based upon that evaluation, our CEO and CFO concluded that, as of November 30, 2014, 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.
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.
41
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our financial statements for the years ended February 28, 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.
We did not maintain an effective control environment primarily attributable to the following:
• | We did not maintain an effective control environment that consistently emphasized adherence to GAAP. This control deficiency, which was identified in 2011 by the Company’s independent auditors and elevated to a material weakness in fiscal 2012 in part because of difficulties encountered with the ERP implementation, led to adjustments identified by both management and the Company’s independent auditors during the fiscal year 2013, 2012 and 2011 financial closing and reporting process. None of these adjustments resulted in the requirement to restate previously issued financial statements. |
As part of our remediation efforts, we have hired professional finance resources to enhance accounting and aid in financial reporting and internal control capabilities. Additionally, we reorganized existing resources to better match the accounting needs of the organization. Management continues to evaluate personnel and augment resources where needed to further strengthen competencies. We have developed and implemented policies and procedures which emphasize adherence to GAAP and made these available to employees on the company’s intranet site. As of this filing, the Board of Directors approved a Delegation of Authority policy that was placed into effect for the fiscal year 2015. We have completed the related internal control design and implementation activities that include financial statement analytical review and disclosure review. We will continue our remediation efforts during the remainder of fiscal year 2015.
• | In the areas of finance, tax, accounting and information technology departments, we did not ensure a sufficient complement of personnel with an appropriate level of knowledge, experience and training commensurate with our structure and accounting and financial reporting requirements, which was identified as a material weakness by management during the fiscal 2012 year-end financial reporting process. |
As part of our remediation efforts, we have hired professional finance resources to enhance accounting and aid in financial reporting and internal control capabilities. Specifically, we hired a Director of Financial Reporting, Business Unit Controllers, Internal Audit Director and Internal Audit resources and we have 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. Despite these improvements, the Chief Information Officer position continues to be vacant and we have lost additional Information Technology resources. We will continue our remediation efforts during the remainder of fiscal year 2015.
• | We did not ensure complete and accurate business documentation to support certain transactions and accounting records. The controls in these areas with respect to the creation, maintenance and retention of complete and accurate business records were not effective. This was primarily attributable to the ERP implementation in fiscal year 2012 and identified by management and the Company’s independent auditors during the 2012 year-end financial reporting process. |
As part of our remediation efforts, we developed and implemented policies and procedures to ensure that we maintain appropriate business and accounting records and formally document the application of GAAP for business transactions for fiscal year 2014. We continue to assess the need for additional policies and procedures based on business needs and changes. In addition, the Board of Directors approved a Delegation of Authority policy that was placed into effect for the fiscal year 2015. We will continue our remediation efforts during the remainder of fiscal year 2015.
• | We did not design, maintain or implement policies and procedures to adequately review and account for significant accounting transactions, which were identified as a material weakness during the 2012 fiscal year end financial reporting process. Specifically, we did not maintain and communicate sufficient and consistent accounting policies, which limited our ability to make accounting decisions and to detect and correct accounting errors. |
As part of our remediation efforts, we have provided internal control training to reinforce the importance of our control environment for Finance, Accounting, Information Technology Department personnel and all operations managers across the Company. We have hired professional finance resources in these areas to enhance accounting and financial reporting
42
competencies and aid internal control capabilities. We have developed and implemented policies and procedures which emphasize adherence to GAAP and made these available to employees on the company’s intranet site. To augment the policies and procedures and provide additional structure, the Board of Directors approved a Delegation of Authority policy that was placed into effect for the fiscal year 2015. We will continue our remediation efforts during the remainder of fiscal year 2015.
We did not maintain effective monitoring of controls:
• | We did not maintain effective monitoring of controls in areas related to revenue recognition and contracts. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls which was identified as a material weakness during the 2012 fiscal year end financial reporting process by management and its independent auditors. |
As part of our remediation efforts, we have provided internal control training to reinforce the importance of our control environment for Finance, Accounting, Information Technology Department personnel and all operations managers across the Company. We have implemented a system of ongoing monitoring that includes the reporting of control deficiencies. We have also implemented a series of management reports to augment our analytical review processes. We have completed the related internal control design and implementation activities that include financial statement analytical review, numerous review and approval controls in these areas, and an internal control certification by business process owners. Further, we have continued to monitor certain controls as we have completed our testing of internal control effectiveness. Remediation of this material weakness is expected to be complete before fiscal year-end 2015.
We did not maintain effective controls over information and communication:
• | We did not maintain effective controls over information and communication, specifically around reports and financial data, as we had several issues with our ERP implementation in 2012. Thus, we had issues in providing the identification, capture, and exchange of information in a form and time frame that enabled our employees to carry out their responsibilities. Specifically, due to the system implementation, there were issues associated with the actual information/reports provided, which proved to be a pervasive issue. This deficiency which was identified by |
management and its independent auditors in fiscal year 2012 resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.
As part of our remediation efforts, we have provided further training and made configuration changes such that our ERP is operating in a more effective manner. Although we have attempted to hire new information technology personnel including a Chief Information Officer, who are responsible for assisting with information technology general controls remediation, we have not been successful in recruiting such personnel. We have also experienced turnover in existing IT personnel. Additionally, we have provided internal control training to reinforce the importance of our control environment for Finance, Accounting, Information Technology Department personnel and all operations managers across the Company. We have designed information technology general controls and we have begun implementation. We will continue our remediation efforts during the remainder
of fiscal year 2015.
The material weaknesses in our control environment, monitoring of controls, information and communication, and risk assessments contributed to additional material weaknesses in various control activities as set forth below:
• | We did not maintain effective controls over the implementation of a new ERP in 2012. Specifically, we did not implement appropriate logical security design and testing, perform sufficient data conversion testing, maintain appropriate system documentation, or provide sufficient end user training during the implementation of the ERP. During the implementation of the ERP, management did not provide appropriate logical security design and testing, |
perform sufficient data conversion testing, and maintain appropriate system documentation. This material weakness was identified by management and the Company’s independent auditors during the fiscal year 2012 financial reporting process. This material weakness contributed to other control issues described below.
As described above, we have provided training, made configuration changes to our ERP, and provided training to staff. We have designed information technology general controls and we have begun implementation. As of this filing, all locations are operating on the new ERP As mentioned previously, we have not been successful in hiring new information technology personnel including a Chief Information Officer and have experienced turnover in IT personnel. We will continue our remediation efforts during the remainder of fiscal year 2015.
• | 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 |
43
years by our independent auditors and elevated to a material weakness in fiscal 2012 due to issues with our ERP implementation, resulted in both not having adequate automated and manual controls designed and in place and not achieving the intended operating effectiveness of controls to ensure accuracy of our financial reporting. For example, we did not maintain adequate segregation of duties around most accounting processes and did not have adequate integrity verification of our sub-ledgers.
As part of our remediation efforts, we have continued to assess the existing roles and responsibilities and remediate system access and functionality issues. Additionally, we have provided internal control training to reinforce the importance of our control environment for Finance, Accounting, Operations, Information Technology Department personnel and all operations managers across the Company. We are evaluating segregation of duties and have designed information technology general controls which we have begun to implement. The loss of IT personnel and our in ability to hire a Chief Information Officer has delayed our remediation efforts in fiscal year 2015.
• | We did not maintain effective controls over accounting for contracts. Specifically, we did not design and maintain effective controls over the reconciliation of contract billings and accruals to the general ledger, or formally analyze the recognition of contract revenue, profit and loss. For example, as a result of the ERP conversion in 2012, intercompany contracts were incorrectly classified as third party contracts and contract expenses for certain multi-year contracts were under accrued. This material weakness, which was identified by management during the 2012 financial reporting process, resulted in additional procedures performed by management and adjustments during the fiscal years 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 as of the first quarter of fiscal year 2014. 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 the third quarter. We will continue our remediation efforts during the remainder of fiscal year 2015.
• | We did not maintain effective controls to ensure the completeness and accuracy of recorded revenue. Specifically, we did not design and maintain effective controls over pricing, billing practices and credit memos. For example, during conversion to the new ERP several customers were invoiced incorrect prices which resulted in significant billing adjustments credit memos. This material weakness which was identified during the fiscal 2012 year end audit by management, in conjunction with our independent auditors resulted in additional procedures performed by management and adjustments in both fiscal 2013 and 2012. |
This material weakness related to recorded revenue existed at our Traffic Safety locations. During the first quarter of fiscal year 2014, we began implementation of a new billing system and updated and documented our revenue procedures. We implemented activities that have formalized the review and approval process by appropriate personnel that include price, invoice, shipment, adjustments and account reconciliation reviews. Remediation is expected to be complete during fiscal year 2015.
• | We did not maintain effective controls over the completeness and accuracy of our accounting estimates related to inventory reserves. Specifically, we did not design and maintain effective controls with respect to the review and analysis of excess and obsolete inventory and lower of cost or market considerations due to lack of empirical data available upon converting to our new ERP in 2012. This material weakness, which was identified by management in conjunction with our independent auditors during the fiscal year 2012 audit, resulted in adjustments identified through additional procedures performed by management in fiscal years 2013 and 2012. |
We have implemented a monthly physical inventory observation procedure at certain locations in lieu of a failed perpetual system. We have created system reports to provide inventory information at our Traffic Safety locations to identify and assess lower of cost or market and obsolete inventory issues. Additionally, we have contracted for third party physical inventory observations to be performed at our quarry locations twice a year. We have completed our testing of internal control effectiveness and, based on the results, we believe we no longer have a material weakness as of the third quarter ended fiscal year 2015.
• | We did not maintain effective controls over the estimation process related to changes in asset retirement obligations and related activity. Specifically, we did not design and maintain effective controls to ensure that changes in asset retirement obligations were properly estimated and recorded timely on our books. This material weakness, which was identified by the Company’s independent auditors during the year end fiscal 2012 reporting process, resulted in additional procedures |
44
performed by management and adjustments during the fiscal year 2013 and 2012 year-end financial closing and reporting processes.
We implemented specialized software that is used to track and analyze these expenses and created a formal review of asset retirement obligations related activity. We have completed our testing of internal control effectiveness and, based on the results, we believe we no longer have a material weakness as of the end of the third quarter 2015.
• | We did not maintain effective controls over the completeness, accuracy and valuation of our deferred tax assets and liabilities. Specifically, we did not design and maintain effective controls with respect to accounting for the difference between the book and tax bases of the company’s property, plant and equipment and capital leases. This material weakness which was identified by management and our independent auditors in fiscal 2011 resulted in additional procedures performed by management and adjustments identified by management and our independent auditors during the fiscal year 2013, 2012, 2011 year end and first quarter fiscal 2014 financial closing and reporting processes. |
We have contracted third party advisors to provide training and support related to our tax provision preparation. We have implemented formal internal control reviews that include tax filing, provision and disclosure review. We will continue our remediation efforts during fiscal year 2015.
• | We did not adequately segregate the duties of personnel within our Accounting Department, including those related to cash management, payroll processing, accounts payable processing, and accounts receivable and general ledger maintenance, due to an insufficient complement of staff. This material weakness which was identified by our independent auditors in prior years but elevated to a material weakness in fiscal year 2012, resulted in additional procedures performed by management and adjustments identified by management and our independent auditors during the fiscal year 2013, 2012 and 2011 year-end financial closing and reporting processes. |
Working with a third party advisor, we have completed an assessment of our internal control processes and during fiscal year 2014 we began restructuring personnel and duties to address the deficiencies. We will continue our remediation efforts during fiscal year 2015.
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 period ended November 30, 2014, are fairly stated in all material respects.
Changes in Internal Control Over Financial Reporting
We believe the following material weaknesses have been addressed as of the third quarter ended November 30, 2014:
• | We implemented controls over the completeness and accuracy of our accounting estimates related to inventory reserves. Specifically, we designed and maintained effective controls with respect to the review and analysis of excess and obsolete inventory and lower of cost or market considerations. We have created system reports to provide inventory information at our Traffic Safety locations to identify and assess lower of cost or market and obsolete inventory issues. |
• | We implemented controls over the estimation process related to changes in asset retirement obligations and related activity. Specifically, we designed and maintained effective controls to ensure that changes in asset retirement obligations were properly estimated and recorded timely on our books. This was accomplished through the implementation of specialized software that is used to track and analyze these expenses and creation of a formal review of asset retirement obligations related activity. |
As it relates to changes in internal control, we have re-aligned the company on a regional/product line basis and restructured our accounting and certain administrative functions. These changes may not yield the anticipated efficiencies and may result in a loss of key personnel, which could materially impact our control environment. We continue to perform monitoring procedures to ensure material weaknesses are identified, reported and remediated, as applicable, on a timely basis.
Finally, we have implemented an Internal Control Committee comprised of the Chief Financial Officer, Chief Accounting Officer, Director of Internal Audit and Sarbanes-Oxley Compliance Coordinator. The purpose of this Committee is to provide oversight regarding the control structure across the organization and material weakness remediation plans.
45
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
We are a party from time to time to legal proceedings relating to our operations. Our ultimate legal and financial liability in respect to all legal proceedings in which we are involved at any given time cannot be estimated with any certainty. However, based upon examination of such matters and consultation with counsel, management currently believes that the ultimate outcome of these contingencies will not have a material adverse effect on our consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and/or cash flows for that period.
ITEM 1A - RISK FACTORS
You should carefully consider the risks described in the Form 10-K, as amended, 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, other than as indicated below.
46
Our new regional/product line 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.
In August of 2013, we announced a major change in the structure of our business, consolidating our divisions to four regions and subsequently three regions or product lines. We have taken steps to consolidate the operations, sales, accounting, human resources, and geologic services functions. This consolidation is expected to reduce the cost of overhead support functions going forward. The administrative efficiencies which we believe will result from the consolidation may not be realized to the extent anticipated thereby reducing the operating income benefit. Additionally, key personnel may decide not to relocate and employees affected by the consolidation may leave us due to uncertainty prior to completing the transition efforts, which may slow the restructuring process and increase its cost.
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.
47
ITEM 5 - OTHER INFORMATION
None.
48
ITEM 6 - EXHIBITS
Exhibit Number | Description | ||
10.1 | New Enterprise Stone & Lime Co., Inc., Incentive Compensation Guidelines (incorporated by reference from the Company's current report on Form 8-K filed on September 3, 2014). | ||
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.
49
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NEW ENTERPRISE STONE & LIME CO., INC. | ||
Date: January 12, 2015 | By: | /s/ Albert L. Stone |
Albert L. Stone | ||
Executive Vice President and Chief Financial Officer | ||
50
EXHIBIT INDEX
Exhibit Number | Description | ||
10.1 | New Enterprise Stone & Lime Co., Inc., Incentive Compensation Guidelines (incorporated by reference from the Company's current report on Form 8-K filed on September 3, 2014). | ||
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.
51