UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2016December 30, 2017
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission file numbers:
001-36873 (Summit Materials, Inc.)
333-187556 (Summit Materials, LLC)
SUMMIT MATERIALS, INC.
SUMMIT MATERIALS, LLC
(Exact name of registrants as specified in their charters)
Delaware (Summit Materials, Inc.)
| 47-1984212
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(State or other jurisdiction of
| (I.R.S. Employer
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1550 Wynkoop Street, 3rd Floor
| 80202 | |
(Address of principal executive offices) | (Zip Code) |
Registrants’ telephone number, including area code: (303) 893-0012
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Class A Common Stock (par value $.01 per share) | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Summit Materials, Inc. | Yes ☒ | No | ||
Summit Materials, LLC | Yes ☐ | No |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Summit Materials, Inc. | Yes ☐ | No | ||
Summit Materials, LLC | Yes ☐ | No |
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.
Summit Materials, Inc. | Yes ☒ | No | ||
Summit Materials, LLC | Yes ☒ | No |
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).
Summit Materials, Inc. | Yes ☒ | No | ||
Summit Materials, LLC | Yes ☒ | No |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Summit Materials, Inc.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||
Non-accelerated filer | ☐ | (Do not check if smaller reporting company) | Smaller reporting company | ☐ | ||||
| Emerging growth company | ☐ |
Summit Materials, LLC
Large accelerated filer | ☐ | Accelerated filer |
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Non-accelerated filer | ☒ | (Do not check if smaller reporting company) | Smaller reporting company | ☐ | ||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Summit Materials, Inc. | Yes ☐ | No | ||
Summit Materials, LLC | Yes ☐ | No |
The aggregate market value of the Summit Materials, Inc. voting stock held by non-affiliates of the Registrants as of June 26, 2015July 1, 2017 was approximately $697.5 million.$3.1 billion.
As of February 17, 2016,7, 2018, the number of shares of Summit Materials, Inc.’s outstanding Class A and Class B common stock, par value $0.01 per share for each class, was 49,746,982110,365,594 and 69,007,297,100, respectively.
As of February 17, 2016,7, 2018, 100% of Summit Materials, LLC’s outstanding limited liability company interests were held by Summit Materials Intermediate Holdings, LLC, its sole member and an indirect subsidiary of Summit Materials, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, 13 and 14 of Part III incorporate information by reference from Summit Materials, Inc.’s definitive proxy statement relating to its 2018 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of Summit Materials, Inc.’s fiscal year.
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7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 52 |
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9 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 129 |
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12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 158 |
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2
EXPLANATORY NOTE
This annual report on Form 10-K (this “report”) is a combined annual report being filed separately by two registrants: Summit Materials, Inc. and Summit Materials, LLC. Each registrant hereto is filing on its own behalf all of the information contained in this report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information. We believe that combining the annual reports on Form 10-K of Summit Materials, Inc. and Summit Materials, LLC into this single report eliminates duplicative and potentially confusing disclosure and provides a more streamlined presentation since a substantial amount of the disclosure applies to both registrants.
Unless stated otherwise or the context requires otherwise, references to “Summit Inc.” mean Summit Materials, Inc., a Delaware corporation, and references to “Summit LLC” mean Summit Materials, LLC, a Delaware limited liability company. The references to Summit Inc. and Summit LLC are used in cases where it is important to distinguish between them. We use the terms “we,” “our,” “us”“Summit Materials” or “the Company” to refer to Summit Inc. and Summit LLC together with their respective subsidiaries, unless otherwise noted or the context otherwise requires.
Summit Inc. was formed on September 23, 2014 to be a holding company. As of January 2, 2016,December 30, 2017, its sole material asset was a 49.7%96.8% economic interest in Summit Materials Holdings L.P. (“Summit Holdings”). Summit Inc. has 100% of the voting rights of Summit Holdings, which is the indirect parent of Summit LLC. Summit LLC is a co-issuer of our outstanding 8 1/2% senior notes due 2022 (“2022 Notes”), our 61/8% senior notes due 2023 (the “2023(“2023 Notes”) and our 5 1/8% senior notes due 2025 (“2025 Notes” and collectively with the 2022 Notes and 2023 Notes, the “Senior Notes”). Summit Inc.’s only revenue for the year ended January 2, 2016December 30, 2017 is that generated by Summit LLC. Summit Inc. controls all of the business and affairs of Summit Holdings and, in turn, Summit LLC, as a result of its reorganization into a holding corporation structure (the “Reorganization”) consummated in connection with its initial public offering (“IPO”).offering.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties. Forward-looking statements include all statements that do not relate solely to historical or current facts, and you can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “trends,” “plans,” “estimates,” “projects” or “anticipates” or similar expressions that concern our strategy, plans, expectations or intentions. All non-historical statements such as those relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, it is very difficult to predict the effect of known factors, and it is impossible to anticipate all factors that could affect our actual results.
Some of the important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this report. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.
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.
CERTAIN DEFINITIONS
As used in this report, unless otherwise noted or the context otherwise requires:
· | “board” and the “directors” refer to the board and the directors of Summit Inc. following its March 2015 initial public offering (“IPO”) and to the board and the directors of the general partner of Summit Holdings prior to Summit Inc.’s IPO; |
· | “Continental Cement” refers to Continental Cement Company, L.L.C.; |
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· | “Davenport Assets” refer to a cement plant and quarry in Davenport, Iowa and seven cement distribution terminals along the Mississippi River; |
· | “EBITDA” refers to net income (loss) before interest expense, income tax expense (benefit), depreciation, depletion and amortization expense; |
· | “Finance Corp.” refers to Summit Materials Finance Corp., an indirect wholly-owned subsidiary of Summit LLC and the co-issuer of the Senior Notes; |
· | “Issuers” refers to Summit LLC and Finance Corp. as co‑issuers of the Senior Notes; |
· | “LP Units” refers to the Class A limited partnership units of Summit Holdings; |
· | “Mainland” refers to Mainland Sand & Gravel ULC, which is the surviving entity from the acquisition of Rock Head Holdings Ltd., B.I.M. Holdings Ltd., Carlson Ventures Ltd., Mainland Sand and Gravel Ltd. and Jamieson Quarries Ltd.; |
· | “Oldcastle Assets” refers to the seven aggregates quarries located in central and northwest Missouri acquired from APAC‑Kansas, Inc. and APAC‑Missouri, Inc., subsidiaries of Oldcastle, Inc.; and |
· | “TRA” refers to tax receivable agreement between Summit Inc. and holders of LP Units. |
Defined terms above that relate to our completed acquisitions are in chronological order. See “Business—Acquisition History” for a table of acquisitions we have completed since August 2009.
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Corporate Structure
PART IThe following chart summarizes our organizational structure, equity ownership and our principal indebtedness as of December 30, 2017. This chart is provided for illustrative purposes only and does not show all of our legal entities or all obligations of such entities.
(2) | The shares of Class B Common Stock are currently held by pre-IPO investors, including certain members of management or their family trusts that directly hold LP Units. A holder of Class B Common Stock is entitled, without regard to the number of shares of Class B Common Stock held by such holder, to a number of votes that is equal to the aggregate number of LP Units held by such holder. |
(3) | Guarantor under the senior secured credit facilities, but not the Senior Notes. |
(4) | Summit LLC and Finance Corp are the issuers of the Senior Notes and Summit LLC is the borrower under our senior secured credit facilities. Finance Corp. was formed solely for the purpose of serving as co-issuer or guarantor of certain indebtedness, including the Senior Notes. Finance Corp. does not and will not have operations |
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of any kind and does not and will not have revenue or assets other than as may be incidental to its activities as a co-issuer or guarantor of certain indebtedness. |
Overview
We are one of the fastest growing construction materials companies in the United States, with an 82%a 111% increase in revenue between the year ended December 31, 201128, 2013 and the year ended January 2, 2016, as compared to an average increase of approximately 38% in revenue reported by our competitors over the same period. Our materials include aggregates, which we supply across the country, with a focus on Texas, Kansas, Utah, Missouri and Kentucky, and cement, which we supply primarily in Missouri, Iowa and along the Mississippi River.December 30, 2017. Within our markets, we offer customers a single-sourcesingle‑source provider for construction materials and related downstream products through our vertical integration. Our materials include aggregates, which we supply across the United States, and in British Columbia, Canada, and cement, which we supply to surrounding states along the Mississippi River from Minneapolis to New Orleans. In addition to supplying aggregates to customers, we use our materials internally to produce ready-mixedready‑mix concrete and asphalt paving mix, which may be sold externally or used in our paving and related services businesses. Our vertical integration creates opportunities to increase aggregates volumes, optimize margin at each stage of production and provide customers with efficiency gains, convenience and reliability, which we believe gives us a competitive advantage.
Since our first acquisition more than six years ago,inception in 2009, we have rapidly become a major participant in the U.S. construction materials industry. We believe that, by volume, we are a top 10 aggregates supplier, a top 15 cement producer and a major producer of ready-mixedready‑mix concrete and asphalt paving mix. Our revenue in 2015 was $1.4 billion with net income of $1.5 million. Our proven and probable aggregates reserves were 2.13.3 billion tons as of January 2, 2016.December 30, 2017. In the year ended January 2, 2016December 30, 2017 we sold 32.341.7 million tons of aggregates, 1.72.5 million tons of cement, 3.44.7 million cubic yards of ready-mixedready-mix concrete and 4.45.3 million tons of asphalt paving mix across our more than 200400 sites and plants.
Our
The rapid growth we have achieved over the last sixeight years has been due in large part to our acquisitions, which we funded withthrough equity issuances, debt financings and debt financing. During this period, wecash from operations. Over the past decade, the U.S. economy witnessed a cyclical decline followed by a slowgradual recovery in the private construction market and nominalmodest growth in public infrastructure spending. However, theThe U.S. private construction market is beginning to rebound, which we believe signals the outset of a strong growth periodhas grown in our industryrecent years both nationally and endin our markets. We believe we are well positioned to capitalize on this anticipated recoverygrowth to growexpand our business and reduce our leverage over time.business.
Our revenue in 2017 was $1.9 billion with net income of $125.8 million. As of January 2, 2016,December 30, 2017, our total indebtedness outstanding was approximately $1,296.8 million.$1.8 billion.
The
We anticipate continued growth in our primary end markets, public infrastructure and the private construction market includes residential and nonresidential new construction and the repair and remodel market. According to the Portland Cement Association (“PCA”), the number of total housing starts in the United States, a leading indicator for our residential business, is expected to grow 38% from 2015 to 2019. In addition, the PCA projects that spending in private nonresidential construction will grow 12% over the same period. The private construction market represented 59% of our revenue in 2015.
Public infrastructure, which includes spending by federal, state and local governments for roads, highways, bridges, airports and other public infrastructure projects, has been a relatively stable portion of government budgets providing consistent demand to our industry and is projected by the PCAPortland Cement Association (“PCA”) to grow approximately 12%17% from 20142018 to 2017.2022. With the nation’s infrastructure aging, we expect U.S.there is increasing momentum to grow federal infrastructure spending among certain legislators and the U.S. President. We also believe states will continue to institute state and local level funding initiatives dedicated towards increased infrastructure spending. We believe that growth in infrastructure spending will not be consistent across the United States, but will vary across different geographies. The public infrastructure market represented 33% of our revenue in 2017.
The private construction market includes residential and nonresidential new construction and the repair and remodel market. According to the PCA, the number of total housing starts in the United States, a leading indicator for our residential business, is expected to grow 6% from 2018 to 2022. In addition, the PCA projects that spending in private nonresidential construction will grow 7% over the long term, and we believe we are well positioned to capitalize on any such increase. Despite this projected growth, wesame period. We do not believe itthat growth in private construction spending will be consistent across the United States, but will instead be concentrated in certain regions. The public infrastructureprivate construction market represented 41%67% of our revenue in 2015.2017.
In addition to the anticipated domestic demand growth in our end markets, we expect higher volume andcontinued improvement in pricing, especially in our core product categories.materials businesses. The PCA estimates that cement consumption will increase approximately 15%16% from 20142018 to 2017,2022, reflecting rising demand in the major end markets. At the same time, weWe believe that the increased demand will drive higher cement pricing will be driven higher by tighteningas production capacity in the United States where thetightens. The PCA projects consumption will exceed domestic U.S. cement capacity by 2017 driven by both increasing demandbetween 2019 and by capacity constraints
arising from the U.S. Environmental Protection Agency’s (“EPA”) National Emission Standards for Hazardous Air Pollutants (“NESHAP”) regulation for Portland Cement Plants (“PC-MACT”), with which compliance was required in September 2015, notwithstanding certain extensions granted to individual cement plants to September 2016.
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Historically, we have sought to supplementsupplemented organic growth potential with acquisitions by strategically targeting attractive, new markets or expanding in existing markets. We consider population trends, employment rates, competitive landscape, private construction outlook, public funding and various other factors prior to entering a new market. In addition to analyzing macroeconomic data, we seek to establish, and believe that we have, a top three position in our local markets, which we believe supports improving profit margins and sustainable organic growth and attractive returns.growth. This positioning provides local economies of scale and synergies, which benefitbenefits our pricing, costs and profitability.
Our acquisition strategy, to date, has helped us to achieve scale and rapid growth, and we believe that significant opportunities remain for growth through acquisitions. We estimate that approximately 65% of the U.S. construction materials market is privately owned. From this group, our seniorOur management team maintains contact with over 300 private companies. These long-standinglong‑standing relationships, cultivated over decades, have been the primary source for our past acquisitions and, we believe, will continue to be a key driver of ouran important source for future growth.acquisitions. We believe thewe offer a compelling value proposition we offer to potentialfor private company sellers, has made us a buyerincluding secure ongoing stewardship of choice and has enabled us to largely avoid competitive auctions and instead negotiate directly with sellers at attractive valuations.their legacy businesses.
Our Business Segments
In the fourth quarter of 2015, we reorganized the operations and management reporting structure of our cement business and East segment operations, resulting in a change to our reportable business segments. We now conduct our cement business separate from our regional segments. As a result, the cement business is a reportable business segment. In addition, we have combined the material-based businesses centered in Kansas and Missouri with the Kentucky-based operations, creating an expanded East segment and eliminating what was the Central region. These changes did not affect the West region.
Information concerning our total revenue, profit, assets employed and certain additional information attributable to each reportable business segment for each year in the three-year period ended January 2, 2016, as included in “Note 21: Segment Information” of the “Notes to Financial Statements” of our 2015 consolidated financial statements, which are included under Item 8 of this Form 10-K and throughout this report have been recast to reflect the current segment structure.
We operate in 2123 U.S. states and in British Columbia, Canada and currently have assets in 1922 U.S. states and in British Columbia, Canada through our threeplatforms that make up our operating segments: West; East; and Cement. In addition to the cement business, we haveThe platform businesses in the westWest and eastEast segments that have their own management teamteams that in turn, reportsreport to a segment president who ispresident. The segment presidents are responsible for overseeing the operating businesses,platforms, implementing best practices, developing growth opportunities implementing best practices and integrating acquired businesses. Acquisitions are an important element of our strategy, as we seek to enhance value through increased scale, efficiencies and cost savings within local markets.
· | West Segment: Our West segment includes operations in Texas, Utah, Colorado, Idaho, Wyoming, Oklahoma, Nevada and British Columbia, Canada. We supply aggregates, ready‑mix concrete, asphalt paving mix and paving and related services in the West segment. As of December 30, 2017, the West segment controlled approximately 1.1 billion tons of proven and probable aggregates reserves and $555.1 million of net property, plant and equipment and inventories (“hard assets”). During the year ended December 30, 2017, approximately 52% of our revenue was generated in the West segment. |
· | East Segment: Our East segment serves markets extending across the Midwestern and Eastern United States, most notably in Kansas, Missouri, Virginia, Kentucky, North Carolina, South Carolina, Arkansas and Nebraska where we supply aggregates, ready‑mix concrete, asphalt paving mix and paving and related services. As of December 30, 2017, the East segment controlled approximately 1.7 billion tons of proven and probable aggregates reserves and $623.8 million of hard assets. During the year ended December 30, 2017, approximately 32% of our revenue was generated in the East segment. |
· | Cement Segment: Our Cement segment consists of our Hannibal, Missouri and Davenport, Iowa cement plants and 10 distribution terminals along the Mississippi River from Minnesota to Louisiana. Our highly efficient plants are complemented by our integrated distribution system that spans the Mississippi River. We process solid and liquid waste into fuel from the plants, which can reduce the plants’ fuel costs by up to 50%. The Hannibal, Missouri plant is one of very fewfacilities in the United States that can process both hazardous and non-hazardous solid and liquid waste into fuel. As of December 30, 2017, the Cement segment controlled approximately 0.5 billion tons of proven and probable aggregates reserves, which serve its cement business, and $611.7 million of hard assets. During the year ended December 30, 2017, approximately 16% of our revenue was generated in the Cement segment. |
Additional information concerning our total revenue, profit, assets employed and certain additional information attributable to each segment includes operationsis included in Texas,“Note 20: Segment Information” of the Mountain states of Utah, Colorado, Idaho and Wyoming and in British Columbia, Canada. We supply aggregates, ready-mixed concrete, asphalt paving mix and paving and related services in“Notes to the West segment. As of January 2, 2016, the West segment controlled approximately 0.7 billion tons of proven and probable aggregates reserves and $415.6 million of net property, plant and equipment and inventories (“hard assets”). During the year ended January 2, 2016, approximately 56%Financial Statements” of our revenue and approximately 47%2017 consolidated financial statements, which are included under Item 8 of our Adjusted EBITDA, excluding corporate charges, were generated in the West segment.
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Acquisition History
The following table lists acquisitions we have completed since August 2009:
Company | Date of Acquisition | Segment | ||
Hamm, Inc. | August 25, 2009 | East | ||
Hinkle Contracting Company, LLC | February 1, 2010 | East | ||
Cornejo & Sons LLC and affiliates | April 16, 2010 | East | ||
Elmo Greer & Sons, LLC | April 20, 2010 | East | ||
Continental Cement LLC | May 27, 2010 | Cement | ||
Harshman Construction L.L.C. and Harshman Farms, Inc. | June 15, 2010 | East | ||
South Central Kentucky Limestone, LLC | July 23, 2010 | East | ||
Harper Contracting, Inc. and affiliates | August 2, 2010 | West | ||
Kilgore Pavement Maintenance, LLC and Kilgore Properties, LLC | August 2, 2010 | West | ||
Con-Agg of MO, L.L.C. | September 15, 2010 | East | ||
Altaview Concrete, LLC and affiliates | September 15, 2010 | West | ||
EnerCrest Products, Inc. | September 28, 2010 | West | ||
RK Hall Construction, Ltd and affiliates | November 30, 2010 | West | ||
Triple C Concrete, Inc. | January 14, 2011 | West | ||
Elam Construction, Inc. | March 31, 2011 | West | ||
Bourbon Limestone Company | May 27, 2011 | East | ||
Fischer Quarries, L.L.C. | May 27, 2011 | East | ||
B&B Resources, Inc. and affiliates | June 8, 2011 | West | ||
Grand Junction Concrete Pipe, Inc. | June 10, 2011 | West | ||
Industrial Asphalt, LLC and affiliates | August 2, 2011 | West | ||
J. D. Ramming Paving Co. LLC and affiliates | October 28, 2011 | West | ||
Norris Quarries, LLC | February 29, 2012 | East | ||
Kay & Kay Contracting, LLC | October 5, 2012 | East | ||
Sandco Inc. | November 30, 2012 | West |
Lafarge-Wichita | April 1, 2013 | East | ||
Westroc, LLC | April 1, 2013 | West | ||
Alleyton Resource Company LLC and affiliates | January 17, 2014 | West | ||
Troy Vines, Inc. | March 31, 2014 | West | ||
Buckhorn Materials, LLC and affiliate | June 9, 2014 | East | ||
Canyon Redi-Mix, Inc. and affiliate | July 29, 2014 | West | ||
Mainland Sand & Gravel ULC and affiliates | September 4, 2014 | West | ||
Southwest Ready Mix, LLC | September 19, 2014 | West | ||
Colorado County | September 30, 2014 | West | ||
Concrete Supply of Topeka, Inc. and affiliates | October 3, 2014 | East | ||
Lewis & Lewis, Inc. | June 1, 2015 | West | ||
Davenport Assets | July 17, 2015 | Cement | ||
LeGrand Johnson Construction Co. | August 21, 2015 | West | ||
Pelican Asphalt Company, LLC. | December 11, 2015 | West | ||
American Materials Company | February 5, 2016 | East | ||
Boxley Materials Company | March 18, 2016 | East | ||
Sierra Ready Mix, LLC | April 29, 2016 | West | ||
Oldcastle Assets | May 20, 2016 | East | ||
Weldon Real Estate LLC | August 8, 2016 | East | ||
H. C. Rustin Corporation | August 19, 2016 | West | ||
RD Johnson Excavating Company LLC and affiliate | August 26, 2016 | East | ||
Angelle Assets | August 30, 2016 | Cement | ||
Midland Concrete Ltd. | October 3, 2016 | West | ||
Everist Materials, LLC. | January 30, 2017 | West | ||
Razorback Concrete Company | February 24, 2017 | East | ||
Sandidge Manufacturing, Inc. | March 17, 2017 | East | ||
Hanna’s Bend Aggregate Ltd | April 3, 2017 | West | ||
Carolina Sand, LLC | April 3, 2017 | East | ||
Winvan Paving Ltd. | May 1, 2017 | West | ||
Glasscock Company, Inc. and affiliate | May 12, 2017 | East | ||
Ready Mix Concrete of Somerset and affiliate | July 28, 2017 | East |
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Company | Date of Acquisition | Segment | ||
Great Southern Ready Mix LLC and affiliates | July 31, 2017 | West | ||
Northwest Ready Mix, Inc. and affiliate | August 1, 2017 | West | ||
Georgia Stone Products, LLC. | August 3, 2017 | East | ||
Alan Ritchey Materials Company LC | August 20, 2017 | West | ||
Columbia Silica Sand, Inc. and affiliates | September 8, 2017 | East | ||
Stockman Quarry LLC and affiliate | October 6, 2017 | East | ||
Metro Ready Mix, LLC | January 5, 2018 | West | ||
Price Construction, Ltd and affiliates | January 12, 2018 | West | ||
Mertens Construction Company, Inc. and affiliates | January 26, 2018 | East |
Our End Markets
Residential Construction. Residential construction includes single family houses and multi-family units such as apartments and condominiums. Demand for residential construction is influenced by employment prospects, new household formation and mortgage interest rates. In recent years, foreclosures have resulted in an oversupply of available houses, which had dampened the demand for new residential construction in many markets in the United States. However, employment prospects have improved, foreclosure rates have stabilized and demand has begun to grow, although the rate of growth is inconsistent across the United States.
Nonresidential Construction. Nonresidential construction encompasses all privately financed construction other than residential structures. Demand for nonresidential construction is driven by population and economic growth. Population growth spurs demand for stores, shopping centers and restaurants. Economic growth creates demand for projects such as hotels, office buildings, warehouses and factories. The supply of nonresidential construction projects is affected by interest rates and the availability of credit to finance these projects.
Public Infrastructure Construction.Infrastructure.Public infrastructure construction includes spending by federal, state and local governments for highways, bridges, airports, schools, public buildings and other public infrastructure projects. Public infrastructure spending has historically been more stable than private sector construction. We believe that public infrastructure spending is less sensitive to interest rate changes and economic cycles and often is supported by multi-year federal and state legislation and programs. A significant portion of our revenue is derived from public infrastructure projects. As a result, the supply of federal and state funding for public infrastructure highway construction significantly affects our public infrastructure end-use business.
In the past, public infrastructure sector funding was underpinned by a series of six-yearsix‑year federal highway authorization bills. Federal funds are allocated to the states, which are required to match a portion of the federal funds they receive. Federal highway spending uses funds predominantly from the Federal Highway Trust Fund, which derives its revenue from taxes on diesel fuel, gasoline and other user fees. The dependability of federal funding allows the state departments of transportation to plan for their long term highway construction and maintenance needs. The Fixing America’s Surface Transportation (“FAST”) Act (“FAST Act”) was signed into law on December 4, 2015 and authorizes $305 billion of funding between 2016 and 2020. It extends five years and provides funding for surface transportation infrastructure, including roads, bridges, transit systems, and the rail transportation network.
Residential Construction. Residential construction includes single family homes and multi‑family units such as apartments and condominiums. Demand for residential construction is influenced by employment prospects, new household formation and mortgage interest rates. In recent years, residential construction demand has been growing, although the rate of growth has varied across the U.S.
Nonresidential Construction. Nonresidential construction encompasses all privately financed construction other than residential structures. Demand for nonresidential construction is driven by population and economic growth. Population growth spurs demand for stores, shopping centers and restaurants. Economic growth creates demand for projects such as hotels, office buildings, warehouses and factories, although growth rates vary across the U.S. The supply of nonresidential construction projects is affected by interest rates and the availability of credit to finance these projects.
Our Competitive Strengths
Leading market positions.positions. We believe each of our operating companies has a top three market share position in its local market area achieved through their respective, extensive operating histories, averaging over 3530 years. We believe we are a top 10 supplier of aggregates, a top 15 producer of cement and a major producer of
ready-mixed ready‑mix concrete and asphalt paving mix in the United States by volume. We focus on acquiring aggregate-based companies that have leading local market positions, in aggregates, which we seek to enhance by building scale with other local aggregates and downstream products and services.through additional bolt-on acquisitions. The construction materials industry is highly local in nature due to transportation costs from the high weight-to-valueweight‑to‑value ratio of the products. Given this dynamic, we believe achieving local market scale provides a competitive advantage that drives growth and profitability for our business. We believe that our ability to prudently acquire, improverapidly integrate and rapidly integrateimprove multiple businesses has enabled, and will continue to enable, us to become market leaders.
Operations positioned to benefit from attractive industry fundamentals.fundamentals. We believe the construction materials industry has attractive fundamentals, characterized by high barriers to entry and a stable competitive environment in the majority of markets. Barriers to entry are created by scarcity of raw material resources, limited efficient distribution range, asset intensity of equipment, land required for quarry operations and a time-consumingtime‑consuming and complex regulatory
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and permitting process. According to the April 2014January 2018 U.S. Geological Survey, aggregates pricing in the United States had increased in 6564 of the previous 7075 years, with growth accelerating since 2002 as continuing resource scarcity in the industry has led companies to focus increasingly on improved pricing strategies.
One significantcontributing factor that allows forsupports pricing growth in periods of volume declinesthrough the economic cycles is that aggregates and asphalt paving mix have significant exposure to public road construction, which has demonstrated growth over the past 30 years, even during times of broader economic weakness. The majority of public road construction spending is funded at the state level through the states’ respective departments of transportation. The five keyTexas, Utah and Missouri, three of the states in which we operate (Texas, Kansas, Utah, Missouri and Kentucky)have had our highest revenues, have funds with certain constitutional protections for revenue sources dedicated for transportation projects. These dedicated, earmarked funding sources limit the negative effect current state deficits may have on public spending. As a result, we believe our business’ profitability is significantly more stable than most other building product subsectors.
Vertically-integrated
Vertically‑integrated business model.model.We generate revenue across a spectrum of related products and services. We internally supply approximately 26%Approximately 25% of the aggregates used in the ready-mixed concreteour products and asphalt paving mixes that we produce and the asphalt paving mix that our paving crews lay.services are internally supplied. Our vertically-integratedvertically‑integrated business model enables us to operate as a single source provider of materials and paving and related services, creating cost, convenience and reliability advantages for our customers, while at the same time creating significant cross-marketingcross‑marketing opportunities among our interrelated businesses. We believe this creates opportunities to increase aggregates volumes, optimize margin at each stage of production, foster more stable demand for aggregates through a captive demand outlet, create a competitive advantage through the efficiency gains, convenience and reliability provided to customers and enhance our acquisition strategy by allowingproviding a greater rangepopulation of target companies.
Attractive diversity, scale and product portfolio.portfolio.We operate in 43 metropolitan statistical areas across 2123 U.S. states and in British Columbia, Canada in 33 metropolitan statistical areas.Canada. Between the year ended December 31, 201128, 2013 and the year ended January 2, 2016,December 30, 2017, we grew our revenue by 82%111% and brought substantial additional scale and geographic diversity to our operations. A combination of increased scale and vertical integration enabled us to improve profitability with Adjusted EBITDA margins increasing 651 basis points fromIn the year ended December 28, 2013, to30, 2017, 45.3% of our operating income increase came from the year ended January 2, 2016. In the year ended January 2, 2016, 29% of gross margin was derived from aggregates, 19%West segment, 31.1% from the Cement segment 37%and 23.6% from products and the remaining 15% from services.East segment, excluding corporate charges. We have approximately 2.13.3 billion tons of proven and probable aggregates reserves serving our aggregates and cement business. We estimate that the useful life of our proven and probable reserves serving our aggregates and cement businesses are approximately 7080 years and 170270 years, respectively, based on the average production rates in 20152017 and 2014.2016.
Our dry process cement plantplants in Hannibal, Missouri wasand Davenport, Iowa were commissioned in 2008 and our Davenport, Iowa plant was commissioned in 1981.1981, respectively. These large capacitylow-cost cement plants have technologically advancedefficient manufacturing capabilities.capabilities and are strategically located on the Mississippi River and complemented by an extensive network of river and rail fed distribution terminals. Our terminal network can accept imported cement to supplement our internal production capacity as demand and market conditions dictate. According to PCA forecasts, consumption of cement in the United States is expected
to exceed production capacity bybetween 2019 and 2020. Due to the year 2017, creating opportunities for existing cement plants. Ourlocation of our Hannibal and Davenport plants are strategically located on the Mississippi River, and, consequently, in 2015,2017, approximately 58% and 26%70% of cement sold from the Hannibaldistributed to our terminals and Davenport plants, respectively,customers was shipped by barge, which is generally more cost-effectivecost-effective than truck transport.
Proven ability to incorporate new acquisitions and grow businesses. Since July 2009, webusinesses. We have acquired 38 companies,dozens of businesses, successfully integrating the businessesthem into three segments through the implementation of operational improvements, industry-provenindustry‑proven information technology systems, a comprehensive safety program and best in class management programs. A typical acquisition generally involves retaining the local management team of the acquired business, maintaining operational decisions at the local level, implementing common back-office systems, driving best practices, and providing management support, strategic insightsdirection and financial capital for investment under a leadership directed by Tom Hill, our President and Chief Executive Officer, a 30-year35‑year industry veteran. These acquisitions have helped us achieve significant revenue growth, from $0.4 billion in 2010 to $1.4$1.9 billion in 2015.2017.
Experienced and proven leadership driving organic growth and acquisition strategy. Our management team led by Mr. Hill, has a proven track record of creating value. In addition to Mr. Hill, our management team, including corporate and segment operations managers, corporate development, finance executives and other heavy side industry operators, has extensive experience in the industry. Our management team has a proven track record of executing and successfully integrating acquisitions in the sector. Mr. Hill and his team successfully executed a similar consolidation strategy at another company in the industry, where Mr. Hill led the integration
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Our Business Strategy
Capitalize on expected recovery in U.S. economy and construction markets. The residential and nonresidential markets are starting to show positive growth signs in varying degrees across our markets. The PCA forecasts total housing starts to accelerate to 1.53 million in the United States by 2019. The American Institute of Architects’ Consensus Construction Forecast projects nonresidential construction to grow 8.2% in 2016. We believe that we have sufficient exposure to the residential and nonresidential end markets to benefit from a potential recovery in all of our markets. In 2015, approximately 78% of our revenue was derived from Texas, Kansas, Utah, Missouri and Kentucky. Across these states, Department of Transportation (“DOT”) budgets grew a combined 9.8% from 2014 to 2015. Given the nation’s aging infrastructure and considering longstanding historical spending trends, we expect U.S. infrastructure investment to grow over time. We believe we are well positioned to capitalize on any such increase in investment.
Expand local positions in the most attractive markets through targeted capital investments and bolt-on acquisitions. We plan to expand our business through organic growth and bolt-on acquisitions in each of our local markets. Our acquisition strategy involves acquiring platforms that serve as the foundation for continued incremental and complementary growth via locally situated bolt-on acquisitions to these platforms. We believe that increased local market scale will drive profitable growth. Our existing platform of operations is expected to enable us to grow significantly as we expand in our existing markets. In pursuing our growth strategy, we believe that our balance sheet and liquidity position will enable us to acquire most of the bolt-on acquisitions and platforms that we seek to purchase, but we may also pursue larger acquisition transactions that may require us to raise additional equity capital and indebtedness. Consistent with this strategy, we regularly evaluate potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions.
Drive profitable growth through strategic acquisitions. Our goal is to become a top-five U.S. construction materials company through the successful execution of our acquisition strategy and implementation of best practices to drive organic growth. Based on aggregates sales, in volumes, we believe that we are currently a top-ten player, which we achieved within five years of our first acquisition. We believe that the relative fragmentation of our
industry creates an environment in which we can continue to acquire companies at attractive valuations and increase scale and diversity over time through strategic acquisitions in markets adjacent to our existing markets within the states where we currently operate, as well as into additional states as market and competitive conditions support further growth.
Enhance margins and free cash flow generation through implementation of operational improvements. Our management team includes individuals with decades of experience in our industry and proven success in integrating acquired businesses and organically growing operations. This experience represents a significant source of value to us that has driven Adjusted EBITDA margins up 651 basis points from the year ended December 28, 2013 to the year ended January 2, 2016. These margin improvements are accomplished through proven profit optimization plans, leveraging information technology and financial systems to control costs, managing working capital, achieving scale-driven purchasing synergies and fixed overhead control and reduction. Our segment presidents, supported by our central operations, risk management and finance and information technology teams, drive the implementation of detailed and thorough profit optimization plans for each acquisition post close, which typically includes, among other things, implementation of a systematic pricing strategy and an equipment utilization analysis that assesses repair and maintenance spending, the health of each piece of equipment and a utilization review to ensure we are maximizing productivity and selling any pieces of equipment that are not needed in the business.
Leverage vertically-integratedvertically‑integrated and strategically located operations for growth.growth. We believe that our vertical integration of construction materials, products and services is a significant competitive advantage that we will leverage to grow share in our existing markets and enter into new markets. A significant portion of materials used to produce our products and provide services to our customers is internally supplied, which enables us to operate as a single source provider of materials, products and paving and related services, creatingservices. This creates cost, convenience and reliability advantages for our customers and enablingenables us to capture additional value throughout the supply chain, while at the same time creating significant cross-marketingcross‑marketing opportunities among our interrelated businesses.
Enhance margins and free cash flow generation through implementation of operational improvements. Our management team includes individuals with decades of experience in our industry and proven success in integrating acquired businesses and organically growing operations. We have enhanced margins through proven profit optimization plans, leveraging information technology and financial systems to control costs, managing working capital and achieving scale‑driven purchasing synergies and fixed overhead control and reduction. Our segment presidents, supported by our operations, development, risk management, information technology and finance teams, drive the implementation of detailed and thorough profit optimization plans for each acquisition post close, which typically includes, among other things, implementation of a systematic pricing strategy, safety, commercial strategies, operational benefits, efficiency improvement plans and business-wide cost reduction techniques.
Expand local positions in the most attractive markets through targeted capital investments and bolt‑on acquisitions. We seek to expand our business through organic growth and bolt‑on acquisitions in each of our local markets. Our acquisition strategy involves acquiring platforms that serve as the foundation for continued incremental and complementary growth via locally situated bolt‑on acquisitions to these platforms. We believe that increased local market scale drives profitable growth through efficiencies. Our existing platform of operations is expected to enable us to grow significantly as we expand in our existing markets. In pursuing our growth strategy, we believe that our balance sheet and liquidity position will enable us to acquire many of the bolt‑on acquisitions and platforms that we seek to purchase, but we may also pursue larger acquisition transactions that may require us to raise additional equity capital and or debt from time to time. Consistent with this strategy, we regularly evaluate potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions.
Drive profitable growth through strategic acquisitions. Our growth to a top‑10 U.S. construction materials company has been a result of the successful execution of our acquisition strategy and implementation of best practices to drive organic growth. Based on aggregates sales, in volumes, we believe that we are currently a top‑10 player, which we achieved within five years of our first acquisition. We believe that the relative fragmentation of our industry creates an environment in which we can continue to acquire companies at attractive valuations and increase scale and diversity over time through strategic acquisitions in markets adjacent to our existing markets within the states where we currently operate, as well as into additional states as market and competitive conditions support further growth.
Capitalize on recovery in the U.S. economy and construction markets. Given the nation’s aging infrastructure and considering longstanding historical spending trends, we expect U.S. infrastructure investment to grow over time. We believe we are well positioned to capitalize on any such increase in investment. The residential and nonresidential markets are showing positive growth signs in varying degrees across our markets. The PCA forecasts total housing starts to accelerate to 1.34 million in the United States by 2022. The American Institute of Architects’ Consensus Construction Forecast projects nonresidential construction to grow 3.6% in 2018. We believe that we have sufficient exposure to the public infrastructure, residential and nonresidential end markets to benefit from a potential recovery in all of our markets.
Our Industry
The U.S. construction materials industry is composed of four primary sectors: aggregates; cement; ready-mixedready‑mix concrete; and asphalt paving mix. Each of these materials is widely used in most forms of construction activity. Participants in these sectors typically range from small, privately-heldprivately‑held companies focused on a single material, product or market to multinational corporations that offer a wide array of construction materials and services. Competition is constrained in part by the distance materials can be transported efficiently, resulting in predominantly local or regional operations. Due to the lack of product differentiation, competition for all of our products is predominantly based on price and, to a lesser extent, quality of products and service. As a result, the prices we charge our customers are not likely to
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be materially different from the prices charged by other producers in the same markets. Accordingly, our profitability is generally dependent on the level of demand for our products and our ability to control operating costs.
Transportation infrastructure projects, driven by both federal and state funding programs, represent a significant share of the U.S. construction materials market. Federal funds are allocated to the states, which are required to match a portion of the federal funds they receive. Federal highway spending uses funds predominantly from the Federal Highway Trust Fund, which derives its revenue from taxes on diesel fuel, gasoline and other user fees. The dependability of federal funding allows the state departments of transportation to plan for their long term highway construction and maintenance needs. Funding for the existing federal transportation funding program extends through 2020. With the nation’s infrastructure aging, we expectthere is increased demand by states and municipalities for long-term federal funding to support the construction of new roads, highways and bridges in addition to the maintaining the existing infrastructure. The U.S. President and his administration have called for, among other things, an infrastructure spending to grow overstimulus plan. However, there is currently a lack of clarity around both the long term,timing and we believe we are well positioned to capitalize ondetails of any such increase.infrastructure plan and the impact, if any, it or other proposed changes in law and regulations may have on our business.
In addition to federal funding, state, county and local agencies provide highway construction and maintenance funding is also available through state, county and local agencies.. Our fivefour largest states by revenue, (Texas,Texas, Utah, Kansas Utah,and Missouri, and Kentucky,
which represented approximately 33%21%, 16%13%, 11%12% and 9%, 10% and 8%, respectively, of our total revenue in 2015) each have funds whose revenue sources are constitutionally protected and may only be spent on transportation projects:2017.
Within many of our markets, state and local governments have taken actions to maintain or grow highway funding during a time of uncertainty with respect to federal funding. For example:Operations
Demand for our products is observed to have low elasticity in relation to prices. We believe this is partially explained by the absence of competitive replacement products and relatively low contribution of our products to total construction costs.products. We do not believe that increases in our products’ prices are likely to affect the decision to undertake a construction project since these costs usually represent a small portion of total construction costs.
We operate our construction materials and products and paving and related services businesses through local management teams, which work closely with our end customers to deliver the materials, products and services that meet each customer’s specific needs for a project. We believe that this strong local presence gives us a competitive advantage by allowing us to obtain a unique understanding for the evolving needs of our customers.
We have operations in 23 U.S. states and in British Columbia, Canada. Our business in each region is vertically‑integrated. We supply aggregates internally for the production of cement, ready‑mix concrete and asphalt paving mix and a significant portion of our asphalt paving mix is used internally by our paving and related services businesses. In the year ended December 30, 2017, approximately 75% of our aggregates production was sold directly to outside customers with the remaining amount being further processed by us and sold as a downstream product. In addition, we operate a municipal waste landfill in our East segment, and have construction and demolition debris landfills and liquid asphalt terminal operations in our West and East segments.
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Approximately 73% of our asphalt paving mix was installed by our paving and related services businesses in the year ended December 30, 2017. We charge a market price and competitive margin at each stage of the production process in order to optimize profitability across our operations. Our production value chain is illustrated as follows:
Aggregates
Aggregates are key material components used in the production of cement, ready-mixedready‑mix concrete and asphalt paving mixes for the residential, nonresidential and public infrastructure, residential and nonresidential end markets and are also widely used for various applications and products, such as road and building foundations, railroad ballast, erosion control, filtration, roofing granules and in solutions for snow and ice control. Generally extracted from the earth using surface or underground mining methods, aggregates are produced from natural deposits of various materials such as limestone, sand and gravel, granite and trap rock. Aggregates are produced mainly from blasting hard rock from quarries and then crushing and screening it to various sizes to meet our customers’ needs. The production of aggregates also involves the extraction of sand and gravel, which requires less crushing, but still requires screening for different sizes. Aggregate production utilizes capital intensive heavy equipment which includes the use of loaders, large haul trucks, crushers, screens and other heavy equipment at quarries. Once extracted, processed and/or crushed and graded aggregateson-site into crushed stone, concrete and masonry sand, specialized sand, pulverized lime or agricultural lime, they are supplied directly to their end use or incorporated for further processing into construction materials and products, such as cement, ready-mixedready‑mix concrete and asphalt paving mix. The minerals are processed to meet customer specifications or to meet industry standard sizes. Crushed stone is used primarily in ready‑mix concrete, asphalt paving mix, and the construction of road base for highways.
We believe that the long‑term growth of the market for aggregates is predominantly driven by growth in population, employment and households, which in turn affects demand for transportation infrastructure and nonresidential construction, including stores, shopping centers and restaurants. While short‑term demand for aggregates fluctuates with economic cycles, the declines have historically been followed by strong recovery, with each peak establishing a new historical high. We believe we are in the midst of an extended economic recovery.
We mine limestone, gravel, and other natural resources from 103 crushed stone quarries and 102 sand and gravel deposits throughout the United States and in British Columbia, Canada. Our extensive network of quarries, plants and facilities, located throughout the regions in which we operate, enables us to have a nearby operation to meet the needs of customers in each of our markets. As of December 30, 2017, we had approximately 3.3 billion tons of proven and probable reserves of recoverable stone, and sand and gravel of suitable quality for economic extraction. Our estimate is based on drilling and studies by geologists and engineers, recognizing reasonable economic and operating restraints as to maximum depth of extraction and permit or other restrictions. Reported proven and probable reserves include only quantities that are owned or under lease, and for which all required zoning and permitting have been obtained. Of the 3.3 billion tons of proven and probable aggregates reserves, 1.9 billion, or 57%, are located on owned land and 1.4 billion are located on leased land.
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According to the August 20152017 U.S. Geological Survey, approximately 1.41.5 billion tons of crushed stone with a value of approximately $12.9$15.1 billion was produced in the United States in 2014, in line2016, which is consistent with the 1.31.5 billion tons produced in 2013.2015. Sand and gravel production was approximately 988.8 million1.0 billion tons in 20142016 and 2015, valued at approximately $7.3$7.6 billion up from 934 million tons produced in 2013.2016. The U.S. aggregate industry is highly
fragmented relative to other building product markets, with numerous participants operating in localized markets and the top ten players controlling approximately 30%35% of the national market in 2013.2017. In January 2015,2017, the U.S. Geological Survey reported that a total of 1,5501,430 companies operating 4,0003,700 quarries and 9182 underground mines produced or sold crushed stone in 20142016 in the United States. This fragmentation is a result of the cost of transporting aggregates, which typically limits producers to a market area within approximately 40 miles of their production facilities.
Transportation costs are a major variable in determining aggregate pricing and marketing radius. The cost of transporting aggregate products from the plant to the market often equates to or exceeds the sale price of the product at the plant. As a result of the high transportation costs and the large quantities of bulk material that have to be shipped, finished products are typically marketed locally. High transportation costs are responsible for the wide dispersion of production sites. Where possible, construction material producers maintain operations adjacent to highly populated areas to reduce transportation costs and enhance margins. However, more recently, rising land values combined with local environmental concerns have been forcing production sites to move further away from the end-useend‑use locations.
We believe that the long-term growth of the market for aggregates
Each quarry location is predominantly driven by growth in population, employment and households, which in turn affectsunique with regards to demand for nonresidential construction, including stores, shopping centerseach product, proximity to competition and restaurantsdistribution network. Each of our aggregates operations is responsible for the sale and increases transportation infrastructure spending. In recent years,marketing of its aggregates products. Approximately 75% of our aggregates production is sold directly to outside customers and the recessionremaining amount is further processed by us and subsequent slow recovery insold as a downstream product. Even though aggregates are a commodity product, we work to optimize pricing depending on the United States has ledsite location, availability of a particular product, customer type, project type and haul cost. We sell aggregates to a decrease in overall private and public infrastructure construction activity. While short-term demand for aggregates fluctuates with economic cycles, the declines have historically been followed by strong recovery, with each peak establishing a new historical high.internal downstream operations at market prices.
A significant portion of annual demand for aggregates is derived from large public infrastructure and highway construction projects. According to the Montana Contractors’ Association, approximately 38,000 tons of aggregate are required to construct a one mile stretch of a typical four-lanefour‑lane interstate highway. Highways located in markets with significant seasonal temperature variances are particularly vulnerable to freeze-thawfreeze‑thaw conditions that exert excessive stress on pavement and lead to more rapid surface degradation. Surface maintenance repairs, as well as general highway construction, occur in the warmer months, resulting in a majority of aggregates production and sales in the period from April through November in most states.
The primary national players are large vertically‑integrated companies, including Vulcan Materials Company, Martin Marietta Materials, Inc. (“Martin Marietta”), CRH plc, Heidelberg Cement plc (“Heidelberg”), LafargeHolcim and Cemex, S.A.B. de C.V. (“Cemex”), that have a combined estimated market share of approximately 30%. Our major aggregates competitors by segment include the following:
· | West—CRH plc, Heidelberg, Martin Marietta, CEMEX, LafargeHolcim and various local suppliers. |
· | East—Martin Marietta, CRH plc, LafargeHolcim, Heidelberg, Vulcan Materials Company and various local suppliers. |
We believe we have a strong competitive advantage in aggregates through our well located reserves and assets in key markets, high quality reserves and our logistic networks. We further share and implement best practices relating to safety, strategy, sales and marketing, production, and environmental and land management. Our vertical integration and local market knowledge enable us to maintain a strong understanding of the needs of our aggregates customers. In addition, our companies have a reputation for responsible environmental stewardship and land restoration, which assists us in obtaining new permits and new reserves.
Cement
Portland cement, an industry term for the common cement in general use around the world, is made from a combination of limestone, shale, clay, silica and iron ore. It is a fundamental building material consumed in several stages throughout the construction cycle of residential, nonresidential and public infrastructure, residential and nonresidential projects. It is a binding agent that, when mixed with sand or aggregates and water, produces either ready-mixedready‑mix concrete or mortar and is an
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important component of other essential construction materials. Cement is sold either in bulk or in bags as branded products in bags, depending on its final user. Few construction projects can take place without utilizing cement somewhere in the design, making it a key ingredient used in the construction industry. The majority of all cement shipments are sent to ready-mixedready‑mix concrete operators. The remaining shipments are directed to concrete paving projects or manufacturers of concrete relatedconcrete-related products such as block and precast. Sales are made on the basis of competitive prices in each market and, as is customary in the industry, we do not typically enter into long‑term sales contracts. Nearly two-thirdstwo‑thirds of U.S. consumption occurs between May and November, coinciding with end-marketend‑market construction activity.
The principal raw materials in cement are a blend of approximately 80% limestone and approximately 5% shale, with the remaining raw materials being clay and iron ore. Generally, the limestone and shale are mined from quarries located on site with the production plant. These core ingredients are blended and crushed into a fine grind and then preheated and ultimately introduced into a kiln heated to aboutover 3,000°F. Under this extreme heat, a chemical transformation occurs uniting the elements to form a new substance with new physical and chemical characteristics. This new substance is called clinker and it is formed into pieces about the size of marbles. The clinker is then cooled and later ground into a fine powder that then is classified as Portland cement.
Cement production in the United States is distributed among 10792 production facilities located across 36a majority of the states and is a capital-intensivecapital‑intensive business with variable costs dominated by raw materials and energy required
to fuel the kiln. Building new plantsMost U.S. cement producers are owned by large foreign companies operating in multiple international markets. Our largest competitors include LafargeHolcim and Buzzi Unicem. Construction of cement production facilities is challenging given the extensive permitting requirementshighly capital intensive and capital investment requirements. We estimate new plant construction costs in the United Statesrequires long lead times to be approximately $250-300 per ton, not including costs for property or securing raw materialscomplete engineering design, obtain regulatory permits, acquire equipment and the required distribution network. Assuming construction costs of $275 per ton,construct a 1.25 million ton facility, comparable to our Hannibal, Missouri cement plant’s potential annual capacity, would cost approximately $343.8 million to construct. Establishing a distribution network, such as the seven terminals included in the Davenport Assets, adds significant cost to a cement plant investment.plant.
As reported by the PCA in the 20152017 United States Cement Industry Annual Yearbook, consumption is down significantly from the industry peak of approximately 140.9 million tons in 2005 to approximately 97.8104.0 million tons in 2014 because of2016 consistent with a decline in U.S. construction activity. U.S. cement consumption has at times outpaced domestic production capacity with the shortfall being supplied with imports, primarily from China, Canada, Greece, MexicoTurkey, China and South Korea. The PCA reports that cement imports have declined sinceremain below their peak of approximately 39.6 million tons in 2006 toversus approximately 9.315.0 million tons in 2014, in a manner indicative of the industry’s general response to the demand downturn. In addition to the reduction in imports, according to the PCA, U.S. excess capacity increased from 5% in 2006 to approximately 25% in 2014.2016. However, the PCA estimates that demand will exceed domestic supply between 2019 and 2020.
We operate a highly‑efficient, low-cost integrated cement manufacturing and distribution network through our cement plants in Hannibal, Missouri, 100 miles north of St. Louis, and Davenport, Iowa and our 10 terminals along the Mississippi River from Minnesota to Louisiana. The combined potential capacity at our Hannibal and Davenport cement plants is approximately 2.4 million short tons per annum. We also operate on‑site waste fuel processing facilities at the plants, which can reduce plant fuel costs by 2017.up to 50%. Our Hannibal plant is one of very few with hazardous waste fuel facilities permitted and operating out of 92 total cement plants in the United States. Competitive factors include price, reliability of deliveries, location, quality of cement and support services. With two cement plants, on‑site raw material supply, a network of cement terminals, and longstanding customer relationships, we believe we are well positioned to serve our customers.
Cement is a product that is costly to transport. Consequently, the radius within which a typical cement plant is competitive is typically limited to 150 miles from any shipping/distribution point. However, access to rail and barge can extend the distribution radius significantly. With both of our plants located strategically on the Mississippi River, we are able to distribute cement from both of our plants by truck, rail and barge directly to customers or to our 10 storage and distribution terminals along the Mississippi River. Our Hannibal and Davenport plants are strategically located on the Mississippi River and, consequently, in 2017, approximately 70% of cement distributed to our terminals and customers was shipped by barge, which is significantly more cost‑effective than truck transport.
On December 20, 2012, the EPA signed the PC-MACT,Portland Cement – Maximum Achievable Control Technology (“PC‑MACT”), with which compliance was required in September 2015, notwithstanding certain extensions granted to individual cement plants to September 2016. TheOur Hannibal and Davenport cement plants utilize alternative fuels, hazardous and non-hazardousnon‑hazardous at Hannibal and non-hazardousnon‑hazardous at Davenport, as well as coal, natural gas and petroleum coke and, as a result, are subject to the Hazardous Waste Combustor NESHAPof the National Emission Standards for Hazardous Air Pollutants (“HWC-MACT”HWC‑MACT”) and Commercial/Industrial Solid Waste Incinerators (“CISWI”) standards, respectively, rather than PC-MACTPC‑MACT standards. The costs to complymaintain compliance with the existing HWC-MACTHWC‑MACT and CISWI standards are not expected to be material.
Ready-Mixed
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Ready‑mix Concrete
Ready-mixed
Ready‑mix concrete is one of the most versatile and widely used materials in construction today. Its flexible recipe characteristics allow for an end product that can assume almost any color, shape, texture and strength to meet the many requirements of end users that range from bridges, foundations, skyscrapers, pavements, dams, houses, parking garages, water treatment facilities, airports, tunnels, power plants, hospitals and schools. The versatility of ready-mixedready‑mix concrete gives engineers significant flexibility when designing these projects.
Cement, coarse aggregate, fine aggregate, water and admixtures are the primary ingredients in ready-mixedready‑mix concrete. The cement and water are combined and a chemical reaction process called hydration occurs whereby a paste is produced. This paste or binder represents between 15 to 20% of the volume of the mix that coats each particle of aggregate and serves as the agent that binds the aggregates together, according to the National Ready Mixed Concrete Association (“NRMCA”). The aggregates represent approximately 60 to 75% of the mix by volume, with a small portion of volume (5 to 8%) consisting of entrapped air that is generated by using air entraining admixtures. Once fully hydrated, the workable concrete will then harden and take on the shape of the form in which it was placed.
The quality of a concrete mix is generally determined by the weight ratio of water to cement. Higher quality concrete is produced by lowering the water-cementwater‑cement ratio as much as possible without sacrificing the workability of the fresh concrete. Specialty admixtures such as high range water reducers can aid in achieving this condition without sacrificing quality. Competition among ready‑mix concrete suppliers is generally based on product characteristics, delivery times, customer service and price. Product characteristics such as tensile strength, resistance to pressure, durability, set times, ease of placing, aesthetics, workability under various weather and construction conditions as well as environmental effect are the main criteria that our customers consider for selecting their product. Our quality assurance program produces results in excess of design strengths while optimizing material costs. Additionally, we believe our strategic network of locations and superior customer service gives us a competitive advantage relative to other producers. Our ready‑mix concrete operations compete with CEMEX in Texas and Nevada and CRH plc in Utah and Colorado and various other privately owned competitors in other parts of the West and East segments.
Other materials commonly used in the production of ready-mixedready‑mix concrete include fly-ash,fly‑ash, a waste by-productby‑product from coal burning power plants, silica fume, a waste by-productby‑product generated from the manufacture of silicon and ferro-siliconferro‑silicon metals, and ground granulated blast furnace slag, a by-productby‑product of the iron and steel
manufacturing process. All of these products have cementitious properties that enhance the strength, durability and permeability of the concrete. These materials are available directly from the producer or via specialist distributors who intermediate between the ready-mixedready‑mix concrete producers and the users.
Given the high weight-to-valueweight‑to‑value ratio, delivery of ready-mixedready‑mix concrete is typically limited to a one-hourone‑hour haul from a production plant and is further limited by a 90 minute window in which newly-mixednewly‑mixed concrete must be poured to maintain quality and performance. As a result of the transportation constraints, the ready-mixedready‑mix concrete market is highly localized, with an estimated 5,500 ready-mixedready‑mix concrete plants in the United States according to the NRMCA. According to the NRMCA, 324.7343.0 million cubic yards of ready-mixedready‑mix concrete were produced in 2014,2016, which is an 8%a 2% increase from the 300.4336.0 million cubic yards produced in 20132015 but a 29%25% decrease from the industry peak of 458.3 million cubic yards in 2005.
We believe our West and East segments are leaders in the supply of ready‑mix concrete in their respective markets. The West segment has ready‑mix concrete operations in the Texas, Utah, Nevada, Idaho and Colorado markets. Our East segment supplies ready‑mix concrete in the Kansas, Missouri, Arkansas, South Carolina, Kentucky and Virginia markets and surrounding areas. We operated 66 ready-mix concrete plants and over 600 concrete delivery trucks in the West segment and 56 ready-mix concrete plants and over 400 concrete delivery trucks in the East segment as of December 30, 2017. Our aggregates business serves as the primary source of the raw materials for our concrete production, functioning essentially as a supplier to our ready‑mix concrete operations. Different types of concrete include lightweight concrete, high performance concrete, self‑compacting/consolidating concrete and architectural concrete and are used in a variety of activities ranging from building construction to highway paving.
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Asphalt Paving Mix
Asphalt paving mix is the most common roadway material used today. It is a versatile and essential building material that has been used to surface 93%94% of the more than 2.62.7 million miles of paved roadways in the United States, according to the National Asphalt Pavement Association (“NAPA”).
Typically, asphalt paving mix is placed in three distinct layers to create a flexible pavement structure. These layers consist of a base course, an intermediate or binder course, and a surface or wearing course. These layers vary in thicknesses of three to six inches for base mix, two to four inches for intermediate mix and one to two inches for surface mix.
According
Asphalt paving mix is produced by first heating carefully measured amounts of aggregates at high temperatures to NAPA,remove the components ofmoisture from the materials in an asphalt paving mix by weightplant. As the aggregates are approximately 95%heated, liquid asphalt is then introduced to coat the aggregates. Depending on the specifications of a particular mix, recycled asphalt may be added to the mix, which lowers the production costs. The aggregates used for production of these products are generally supplied from our quarries or sand and 5% asphalt cement, a petroleum based product that serves as the binder.gravel plants. The ingredients are then metered, mixed and heatedbrought up to a temperature in excess of 300°F before being placed in a truck and delivered to the jobsite for final placement. According to NAPA, the components of asphalt paving mix by weight are approximately 95% aggregates and 5% asphalt cement, a petroleum-based product that serves as the binder.
Asphalt pavement is generally 100% recyclable and reusable and is the most reused and recycled pavement material in the United States. Reclaimed asphalt pavement can be incorporated into new pavement at replacement rates in excess of 30% depending upon the mix and the application of the product. We actively engage in the recycling of previously used asphalt pavement and concrete. This material is crushed and repurposed in the construction cycle. Approximately 71.976.9 million tons of used asphalt is recycled annually by the industry according to a November 20142017 NAPA survey.As of December 30, 2017, we operated 27 and 24 asphalt paving mix plants in the West and East segments, respectively. Approximately 96% of our plants can utilize recycled asphalt pavement.
The use of warm mix asphalt (“WMA”) or “green” asphalt is gaining popularity. The immediate benefit to producing WMA is the reduction in energy consumption required by burning fuels to heat traditional hot mix asphalt (“HMA”) to temperatures in excess of 300°F at the production plant. These high production temperatures are needed to allow the asphalt binder to become viscous enough to completely coat the aggregate in the HMA, have good workability during laying and compaction, and durability during traffic exposure. According to the Federal Highway Administration, WMA can reduce the temperature by 50 to 70°F, resulting in lower emissions, fumes and odors generated at the plant and the paving site.
According to NAPA, there are approximately 4,000 asphalt paving mix plants in the United States and an estimated 352.0 million tons of asphalt paving mix was produced in 2014, which was broadly in line with the estimated 350.7 million tons produced in 2013.
Our Operations
We operate our construction materials and products and paving and related services businesses through local operations and marketing teams, which work closely with our end customers to deliver the products and services that meet each customer’s specific needs for a project. We believe that this strong local presence gives us a competitive advantage by keeping our costs low and allowing us to obtain a unique understanding for the evolving needs of our customers.
We have operations in 21 U.S. states and in British Columbia, Canada. Our business in each region is vertically-integrated. We supply aggregates internally for the production of cement, ready-mixed concrete and asphalt paving mix and a significant portion of our asphalt paving mix is used internally by our paving and related services businesses. In the year ended January 2, 2016, approximately 74% of our aggregates production was sold directly to outside customers with the remaining amount being further processed by us and sold as a downstream product. In addition, we operate a municipal waste and construction and demolition debris landfills in our East segment and have liquid asphalt terminal operations in our West and East segments.
Approximately 80% of our asphalt paving mix was installed by our paving and related services businesses in the year ended January 2, 2016. We charge a market price and competitive margin at each stage of the production process in order to optimize profitability across our operations. Our production value chain is illustrated as follows:
Construction Materials
We are a leading provider of construction materials in the markets we serve. Our construction materials operations are composed of aggregates production, including crushed stone and construction sand and gravel, cement and ready-mixed concrete production and asphalt paving mix production.
Our Aggregates Operations
Aggregates Products
We mine limestone, gravel, and other natural resources from 85 crushed stone quarries and 60 sand and gravel deposits throughout the United States and in British Columbia, Canada. Aggregates are produced mainly from blasting hard rock from quarries and then crushing and screening it to various sizes to meet our customers’ needs. The production of aggregates also involves the extraction of sand and gravel, which requires less crushing, but still requires screening for different sizes. Aggregate production utilizes capital intensive heavy equipment which includes the use of loaders, large haul trucks, crushers, screens and other heavy equipment at quarries.
Once extracted, the minerals are processed and/or crushed on site into crushed stone, concrete and masonry sand, specialized sand, pulverized lime or agricultural lime. The minerals are processed to meet customer specifications or to meet industry standard sizes. Crushed stone is used primarily in ready-mixed concrete, asphalt paving mix, and the construction of road base for highways.
Our extensive network of quarries, plants and facilities, located throughout the regions in which we operate, enables us to have a nearby operation to meet the needs of customers in each of our markets.
Aggregates Reserves
As of January 2, 2016, we had approximately 2.1 billion tons of proven and probable reserves of recoverable stone, and sand and gravel of suitable quality for economic extraction. Our estimate is based on drilling and studies by geologists and engineers, recognizing reasonable economic and operating restraints as to maximum depth of extraction and permit or other restrictions.
Reported proven and probable reserves include only quantities that are owned or under lease, and for which all required zoning and permitting have been obtained. Of the 2.1 billion tons of proven and probable aggregates reserves, 1.1 billion, or 52%, are located on owned land and 1.0 billion are located on leased land.
Aggregates Sales and Marketing
The cost of transportation from each quarry and the proximity of competitors are key factors that determine the effective market area for each quarry. Each quarry location is unique with regards to demand for each product, proximity to competition and distribution network. Each of our aggregates operations is responsible for the sale and marketing of its aggregates products. Approximately 74% of our aggregates production is sold directly to outside customers and the remaining amount is further processed by us and sold as a downstream product. Even though aggregates are a commodity product, we work to optimize pricing depending on the site location, availability of a particular product, customer type, project type and haul cost. We sell aggregates to internal downstream operations at market prices.
Aggregates Competition
The U.S. aggregate industry is highly fragmented with numerous participants operating in localized markets. The January 2015 U.S. Geological Survey reported that a total of 1,550 companies operating 4,000 quarries and 91 underground mines produced or sold crushed stone in 2014 in the United States. This fragmentation is a result of the cost of transporting aggregates, which typically limits producers to a market area within approximately 40 miles of their production facilities.
The primary national players are large vertically-integrated companies, including Vulcan Materials Company, Martin Marietta Materials, Inc. (“Martin Marietta”), CRH plc, Heidelberg, LafargeHolcim and Cemex, S.A.B. de C.V., that have a combined estimated market share of approximately 40%.
Competitors by segment include:
We believe we have a strong competitive advantage in aggregates through our well located reserves in key markets, high quality reserves and our logistic networks. We further share and implement best practices relating to safety, strategy, sales and marketing, production, and environmental and land management. As a result of our vertical integration and local market knowledge, we have a strong understanding of the needs of our aggregates customers. In addition, our companies have a reputation for responsible environmental stewardship and land restoration, which assists us in obtaining new permits and new reserves.
Our Cement Operations
Cement Products
We operate a highly-efficient, technologically-advanced integrated cement manufacturing and distribution network through our cement plants in Hannibal, Missouri, 100 miles north of St. Louis, and Davenport, Iowa and our eight terminals along the Mississippi River from Minnesota to Louisiana. The combined potential capacity at our Hannibal and Davenport cement plants is 2.4 million short tons per annum. We also operate on-site waste fuel processing facilities at the plants, which can reduce plant fuel costs by up to 50%. Our Hannibal Plant is one of only 12 with hazardous waste fuel facilities permitted and operating out of 107 total cement plants in the United States.
Cement Markets
Cement is a product that is costly to transport. Consequently, the radius within which a typical cement plant is competitive is typically limited to 150 miles from any shipping/distribution point. However, access to rail and barge can extend the distribution radius significantly. With both of our plants located strategically on the Mississippi River, we are able to distribute cement from both of our plants by truck, rail and barge directly to customers or to our eight storage and distribution terminals along the Mississippi River. In 2015, approximately 58% and 26% of cement sold from the Hannibal and Davenport plants, respectively, was shipped by barge. Barge shipments extend our distribution radius and are generally more cost-effective than truck transport.
Cement Sales and Marketing
Our cement customers are ready-mixed concrete and concrete products producers and contractors within our markets. Sales are made on the basis of competitive prices in each market and, as is customary in the industry, we do not typically enter into long-term sales contracts.
Cement Competition
Construction of cement production facilities is highly capital intensive and requires long lead times to complete engineering design, obtain regulatory permits, acquire equipment and construct a plant. Most U.S. cement producers are owned by large foreign companies operating in multiple international markets. Our largest competitors include LafargeHolcim, whose parent companies merged, effective in July 2015, to create the world’s largest cement maker, in addition to Buzzi Unicem. Competitive factors include price, reliability of deliveries, location, quality of cement and support services. With two cement plants, on-site raw material supply, a network of cement terminals, and longstanding customer relationships, we believe we are well positioned to serve our customers.
Our Ready-mixed Concrete Operations
Ready-mixed Concrete Products
We believe our West and East segments are leaders in the supply of ready-mixed concrete in their respective markets. The West segment has ready-mixed concrete operations in the Houston and Midland/Odessa, Texas, Salt Lake Valley, Utah, Twin Falls, Idaho and Grand Junction, Colorado markets. Our East segment supplies ready-mixed concrete to the Wichita, Kansas and Columbia, Missouri markets and surrounding areas. We produce ready-mixed concrete by blending aggregates, cement, chemical admixtures, in various ratios, and water at our concrete production plants.
Our aggregates business serves as the primary source of the raw materials for our concrete production, functioning essentially as a supplier to our ready-mixed concrete operations. Different types of concrete include lightweight concrete, high performance concrete, self-compacting/consolidating concrete and architectural concrete and are used in a variety of activities ranging from building construction to highway paving.
We operated 52 ready-mixed concrete plants and 419 concrete delivery trucks in the West segment and 22 ready-mixed concrete plants and 210 concrete delivery trucks in the East segment as of January 2, 2016.
Ready-mixed Concrete Competition
Ready-mixed concrete production requires relatively small amounts of capital to build a concrete batching plant and acquire delivery trucks. As a result, in each local market, we face competition from numerous small producers, as well as other large vertically-integrated companies with facilities in multiple markets. There are approximately 5,500 ready-mixed concrete plants in the United States, and in 2014 the U.S. ready-mixed concrete industry produced approximately 324.7 million cubic yards of ready-mixed concrete according to the NRMCA. Our ready-mixed concrete operations compete with CEMEX, S.A.B. de C.V. in Texas and CRH plc in Utah and Colorado and various other privately owned competitors in other parts of the West and East segments.
Competition among ready-mixed concrete suppliers is generally based on product characteristics, delivery times, customer service and price. Product characteristics such as tensile strength, resistance to pressure, durability, set times, ease of placing, aesthetics, workability under various weather and construction conditions as well as environmental effect are the main criteria that our customers consider for selecting their product. Our quality assurance program produces results in excess of design strengths while optimizing material costs. Additionally, we believe our strategic network of locations and superior customer service gives us a competitive advantage relative to other producers.
Our Asphalt Paving Mix Operations
Asphalt Paving Mix Products
Our asphalt paving mix products are produced by first heating carefully measured amounts of aggregates at high temperatures to remove the moisture from the materials in an asphalt paving mix plant. As the aggregates are heated, liquid asphalt is then introduced to coat the aggregates. Depending on the specifications of a particular mix, recycled asphalt may be added to the mix, which lowers the production costs. The aggregates used for production of these products are generally supplied from our quarries or sand and gravel plants. The ingredients are metered, mixed and brought up to a temperature in excess of 300°F before being placed in a truck and delivered to the jobsite for final placement.
As of January 2, 2016, we operated 28 and 19 asphalt paving mix plants in the West and East segments, respectively. Approximately 94% of our plants can utilize recycled asphalt pavement.
Asphalt Paving Mix Sales and Marketing
Approximately 80%73% of the asphalt paving mix we produce is installed by our own paving crews. The rest is sold on a per ton basis to road contractors, state departments of transportation and local agencies. Asphalt paving mix is used by our paving crews and by our customers primarily for the construction of roads, driveways and parking lots.
Asphalt Paving Mix Competition
According to NAPA, there were approximately 4,0003,500 asphalt paving mix plants in the United States in 20152016 and an estimated 352.0374.9 million tons of asphalt paving mix was produced in 2014.2016 compared to 364.9 million tons produced in 2015. Our asphalt paving mix operations compete with CRH plc and other local suppliers. Based on availability of internal aggregate supply, quality, operating efficiencies, and location advantages, we believe we are well positioned vis-vis‑à-vis‑vis our competitors.
Asphalt paving mix is generally applied at high temperatures. Prolonged exposure to air causes the mix to lose temperature and harden. Therefore, delivery is typically within close proximity to the asphalt paving mix
plant. Local market demand, proximity to competition, transportation costs and supply of aggregates and liquid asphalt vary widely from market to market. Most of our asphalt operations use a combination of company-ownedcompany‑owned and hired haulers to deliver materials to job sites.
Asphalt Paving and Related Services
As part of our vertical integration strategy, we provide asphalt paving and related services to both the private and public infrastructure sectors as either a prime or sub-contractor.sub‑contractor. These services complement our construction materials and products businesses by providing a reliable downstream outlet, in addition to our external distribution channels.
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Our asphalt paving and related services businesses bid on both private construction and public infrastructure projects in their respective local markets. We only provide paving and related services operations as a complement to our aggregates operations, which we believe is a major competitive strength. Factors affecting competitiveness in this business segment include price, estimating abilities, knowledge of local markets and conditions, project management, financial strength, reputation for quality and the availability of machinery and equipment.
Contracts with our customers are primarily fixed price or fixed unit price. Under fixed unit price contracts, we provide materials or services at fixed unit prices (for example, dollars per ton of asphalt placed). While the fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the bid amount, whether due to inflation, inefficiency, errors in our estimates or other factors, is borne by us unless otherwise provided in the contract. Most of our contracts contain adjusters for changes in liquid asphalt prices.
Customers
Our business is not dependent on any single customer or a few customers. Therefore, the loss of any single or particular small number of customers would not have a material adverse effect on any individual respective market in which we operate or on us as a whole. No individual customer accounted for more than 10% of our 20152017 revenue.
Seasonality
Use and consumption of our products fluctuate due to seasonality. Nearly all of the products used by us, and by our customers, in the private construction or public infrastructure industries are used outdoors. Our highway operations and production and distribution facilities are also located outdoors. Therefore, seasonal changes and other weather-relatedweather‑related conditions, in particular extended rainy and cold weather in the spring and fall and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect our business and operations through a decline in both the use of our products and demand for our services. In addition, construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall. Warmer and drier weather during the second and third quarters of our fiscal year typically result in higher activity and revenue levels during those quarters. The first quarter of our fiscal year typically has typically lower levels of activity due to weather conditions.
Backlog
Our products are generally delivered upon receipt of orders or requests from customers, or shortly thereafter. Accordingly, the backlog associated with product sales is converted into revenue within a relatively short period of time. Inventory for products is generally maintained in sufficient quantities to meet rapid delivery requirements of customers. Therefore, a period over period increase or decrease of backlog does not necessarily result in an improvement or a deterioration of our business. Our backlog includes only those products and
projects for which we have obtained a purchase order or a signed contract with the customer and does not include products purchased and sold or services awarded and provided within the period.
Subject to applicable contract terms, substantially all contracts in our backlog may be cancelled or modified by our customers. Historically, we have not been materially adversely affected by contract cancellations or modifications. The following table sets forthAs a vertically‑integrated business, approximately 25% of aggregates sold were used internally in our ready‑mix concrete and asphalt paving mixes and approximately 73% of the asphalt paving mix was laid by our paving crews during the year ended December 30, 2017. Our backlog as of December 30, 2017, was 15.6 million tons of aggregates, 0.9 million cubic yards of ready‑mix concrete, 2.0 million tons of asphalt and $294.9 million of construction services, which includes the indicated dates:value of the aggregate and asphalt tons and ready‑mix concrete cubic yards that are expected to be sourced internally.
(in thousands) | 2015 | 2014 | 2013 | |||||||||
Aggregate (in tons) | 6,519 | 4,853 | 5,153 | |||||||||
Ready-mixed concrete (in cubic yards) | 341 | 260 | 138 | |||||||||
Asphalt (in tons) | 1,730 | 2,112 | 2,387 | |||||||||
Construction services(1) | $ | 264,190 | $ | 301,333 | $ | 359,263 |
Intellectual Property
We do not own or have a license or other rights under any patents that are material to our business.
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Corporate Information
Summit Materials, Inc. and Summit Materials, LLC were formed under the laws of the State of Delaware on September 23, 2014 and September 24, 2008, respectively. Our principal executive office is located at 1550 Wynkoop Street, 3rd Floor, Denver, Colorado 80202. Through its predecessor, Summit Inc. commenced operations in 2009 when Summit Holdings was formed as an exempted limited partnership in the Cayman Islands. In December 2013, Summit Holdings was domesticated as a limited partnership in Delaware.formed. Our telephone number is (303) 893-0012.
Employees
As of January 2, 2016December 30, 2017 we had approximately 4,3006,000 employees, of whom approximately 76%80% were hourly workers and the remainder were salaried employees. Because of the seasonal nature of our industry, many of our hourly and certain of our salaried employees are subject to seasonal layoffs. The scope of layoffs varies greatly from season to season as they are predominantly a function of the type of projects in process and the weather during the late fall through early spring.
Approximately 6.1%7% of our hourly employees and approximately 0.4% of our salaried employees are union members. Wemembers, with whom we believe we enjoy a satisfactory working relationship with our employees and their unions.relationship.
Legal Proceedings
We are party to certain legal actions arising from the ordinary course of business activities. While the ultimate results of claims and litigation cannot be predicted with certainty, management expects that the ultimate resolution of all current pending or threatened claims and litigation will not have a material effect on our consolidated financial condition, results of operations or liquidity.
Pursuant to an Administrative Order on Consent with the Missouri Department of Natural Resources, Continental Cement paid a penalty of $75,000 relating to alleged past violations of air pollution control requirements at its Hannibal, Missouri facility. Recent alleged additional violations of environmental requirements may result in the payment of further penalties under that Order, which although anticipated to be immaterial to us, may in aggregate with the prior $75,000 penalty, exceed $100,000.
Environmental and Government Regulation
We are subject to federal, state, provincial and local laws and regulations relating to the environment and to health and safety, including noise, discharges to air and water, waste management including the management of hazardous waste used as a fuel substitute in our Hannibal, Missouri cement kiln and solid waste used as a fuel substitute in our Davenport, Iowa cement kiln,plants, remediation of contaminated sites, mine reclamation, operation
and closure of landfills and dust control and to zoning, land use and permitting. Our failure to comply with such laws and regulations can result in sanctions such as fines or the cessation of part or all of our operations. From time to time, we may also be required to conduct investigation or remediation activities. There also can be no assurance that our compliance costs or liabilities associated with such laws and regulations or activities will not be significant.
In addition, our operations require numerous governmental approvals and permits. Environmental operating permits are subject to modification, renewal and revocation and can require us to make capital, maintenance and operational expenditures to comply with the applicable requirements. Stricter laws and regulations, or more stringent interpretations of existing laws or regulations, may impose new liabilities on us, reduce operationoperating hours, require additional investment by us in pollution control equipment or impede our opening new or expanding existing plants or facilities. We regularly monitor and review our operations, procedures and policies for compliance with environmental laws and regulations, changes in interpretations of existing laws and enforcement policies, new laws that are adopted, and new requirements that we anticipate will be adopted that could affect our operations.
Multiple permits are required for our operations, including those required to operate our cement plants. Applicable permits may include conditional use permits to allow us to operate in certain areas absent zoning approval and operational permits governing, among other matters, air and water emissions, dust, particulate matter and storm water management and control. In addition, we are often required to obtain bonding for future reclamation costs, most commonly specific to restorative grading and seeding of disturbed surface areas.
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Like others in our industry, we expend substantial amounts to comply with applicable environmental laws and regulations and permit limitations, which include amounts for pollution control equipment required to monitor and regulate emissions into the environment. The Hannibal and Davenport Plant iscement plants are subject to HWC-MACT and CISWI standards, respectively, for which we do not expect any material future costs to achieve or maintain compliance. Since many environmental requirements are likely to be affected by future legislation or rule making by government agencies, and are therefore not quantifiable, it is not possible to accurately predict the aggregate future costs of compliance and their effect on our future financial condition, results of operations and liquidity.
At most of our quarries, we incur reclamation obligations as part of our mining activities. Reclamation methods and requirements can vary depending on the individual site and state regulations. Generally, we are required to grade the mined properties to a certain slope and seed the property to prevent erosion. We record a mining reclamation liability in our consolidated financial statements to reflect the estimated fair value of the cost to reclaim each property including active and closed sites.
Our operations in Kansas include one municipal waste landfill and two construction and demolition debris landfills, one of which has been closed.closed and in Colorado, we have a construction and demolition debris landfill. Among other environmental, health and safety requirements, we are subject to obligations to appropriately close those landfills at the end of their useful lives and provide for appropriate post-closurepost‑closure care. Asset retirement obligations relating to these landfills are recorded in our consolidated financial statements.
Health and Safety
Our facilities and operations are subject to a variety of worker health and safety requirements, particularly those administered by the federal Occupational Safety and Health Administration (“OSHA”) and Mine Safety and Health Administration (“MSHA”). Throughout our organization, we strive for a zero-incidentzero‑incident safety culture and full compliance with safety regulations. Failure to comply with these requirements can result in sanctions such as fines and penalties and claims for personal injury and property damage. These requirements may also result in increased operating and capital costs in the future.
Worker safety and health matters are overseen by our corporate risk management and safety department as well as operating company level safety managers. We provide our operating company level safety managers leadership and support, comprehensive training, and other tools designed to accomplish health and safety goals, reduce risk, eliminate hazards, and ultimately make our work places safer.
Insurance
Insurance
Our insurance program is structured using multiple “A” rated insurance carriers, and a variety of deductible amounts. In particular, our workers compensation, general liability and auto liability policies are subject to a $500,000 per occurrence deductible. Losses within these deductiblesdeductible amounts, are accrued for using projections based on past loss history.
We also maintain $50.0 million in combined umbrella insurance. Other policies have smaller deductibles and include property, contractors equipment, contractors pollution and professional, directors and officers, employment practices liability and fiduciary and crime. We also have a separate marine insurance policy for our cement operations on the Mississippi River, which ship cement on the river via barge.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website, free of charge, at http://www.summit-materials.com as soon as reasonably practicable after they are filed with or furnished to the SEC. You may also read and copy any filed document at the SEC’s public reference room in Washington, D.C. at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about public reference rooms.
We maintain an internet site at http://www.summit-materials.com. Our website and the information contained on or connected to that site are not incorporated into this report.
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Risks Related to Our Industry and Our Business
Industry Risks
Our business depends on activity within the construction industry and the strength of the local economies in which we operate.
We sell most of our construction materials and products and provide all of our paving and related services to the construction industry, so our results are significantly affected by the strength of the construction industry. Federal and state budget issues may negatively affect the amount of funding available for infrastructure spending, particularly highway construction, which constitutes a significant portion of our business. Demand for our products, particularly in the residential and nonresidential construction markets, could decline if companies and consumers cannot obtain creditfunding for construction projects or if theprojects. In addition, a slow pace of economic activity results in delays or cancellations of capital projects. In addition, federal and state budget issues may hurt the funding available for infrastructure spending, particularly highway construction, which constitutes a significant portion of our business.
Our earnings depend on the strength of the local economies in which we operate because of the high cost to transport our products relative to their price. InAlthough some states in recent years, although some states, such as Texas, have increased their budgets for road construction, maintenance, rehabilitation and acquiring right-of-wayright of way for public roads, certain other states have reduced their construction spending due to budget shortfalls from lower tax revenue, as well as uncertainty in recent years relating to long-termlong‑term federal highway funding prior to the FAST Act, the first law with long‑term transportation funding in ten years, which was signed into law on December 4, 2015, the first law with long-term transportation funding in ten years.2015. As a result, there has been a reduction in certain states’ investment in infrastructure spending.
If economic and construction activity diminishes in one or more areas, particularly in our top revenue-generatingrevenue‑generating markets of Texas, Utah, Kansas Utah,and Missouri, and Kentucky, our financial condition, results of operations and liquidity could be materially adversely affected.
Our business is cyclical and requires significant working capital to fund operations.
Our business is cyclical and requires that we maintain significant working capital to fund our operations. Our ability to generate sufficient cash flow depends on future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to generate sufficient cash to operate our business and service our outstanding debt and other obligations, we may be required, among other things, to further reduce or delay planned capital or operating expenditures, sell assets or take other measures, including the restructuring of all or a portion of our debt, which may only be available, if at all, on unsatisfactory terms.
Weather can materially affect our business and we are subject to seasonality.
Nearly all of the products we sell and the services we provide are used or performed outdoors. Therefore, seasonal changes and other weather-relatedweather‑related conditions can adversely affect our business and operations through a decline in both the use and production of our products and demand for our services. Adverse weather conditions such as extended rainy and cold weather in the spring and fall can reduce demand for our products and reduce sales or render our contracting operations less efficient. Major weather events such as hurricanes, tornadoes, tropical storms and heavy snows have adversely affected and could adversely affect sales in the near term. In particular, our operations in the southeastern and Gulf Coast regions of the United States are at risk for hurricane activity, most notably in August, September and October. For example, in 2017, Hurricane Harvey adversely affected our operations not only during the days immediately before and after the storm, but also in the weeks and months after the storm as our customers recovered and reallocated resources in response to damage caused by the storm.
Construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall. Warmer and drier weather during the second and third quarters of our fiscal year typically result in higher activity and revenue levels during those quarters. The first quarter of our fiscal year has typically lower levels of activity due to the weather conditions. Our second quarter varies greatly with spring rains and wide temperature variations. A cool wet spring increases drying time on projects, which can delay sales in the second quarter, while a warm dry spring may enable earlier project startup.
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Our industry is capital intensive and we have significant fixed and semi-fixedsemi‑fixed costs. Therefore, our earnings areprofitability is sensitive to changes in volume.
The property and machinery needed to produce our products can be very expensive. Therefore, we need to spend a substantial amount of capital to purchase and maintain the equipment necessary to operate our business. Although we believe that our current cash balance, along with our projected internal cash flows and our available financing resources, will provide sufficient cash to support our currently anticipated operating and capital needs, if we are unable to generate sufficient cash to purchase and maintain the property and machinery necessary to operate our business, we may be required to reduce or delay planned capital expenditures or incur additional debt. In addition, given the level of fixed and semi-fixedsemi‑fixed costs within our business, particularly at our cement production facilities, decreases in volumes could have a material adverse effect on our financial condition, results of operations and liquidity.
Within our local markets, we operate in a highly competitive industry.
The U.S. construction aggregates industry is highly fragmented with a large number of independent local producers in a number of our markets. Additionally, in most markets, we compete against large private and public infrastructure companies, some of which are also vertically-integrated.vertically‑integrated. Therefore, there is intense competition in a number of the markets in which we operate. This significant competition could lead to lower prices, lower sales volumes and higher costs in some markets, negatively affecting our financial condition, results of operations and liquidity.
Growth Risks
The success of our business depends in part, on our ability to execute on our acquisition strategy, to successfully integrate acquisitions and to retain key employees of our acquired businesses.strategy.
A significant portion of our historical growth has occurred through acquisitions, and we will likely enter into acquisitions in the future. We are presently evaluating, and we expect to continue to evaluate on an ongoing basis, possible acquisition transactions. We are presently engaged, and at any time in the future we may be engaged, in discussions or negotiations with respect to possible acquisitions, including larger transactions that would be significant to us. We regularly make, and we expect to continue to make, non-bindingnon‑binding acquisition proposals, and we may enter into letters of intent, in each case allowing us to conduct due diligence on a confidential basis. We cannot predict the timing of any contemplated transactions. To successfully acquire a significant target, we may need to raise additional capital through additional equity capitalissuances, additional indebtedness, or a combination of equity and indebtedness, which would increase our leverage level.debt issuances. There can be no assurance that we will enter into definitive agreements with respect to any
contemplated transactions or that they will be completed. Our growth has placed, and will continue to place, significant demands on our management and operational and financial resources. Acquisitions involve risks that the businesses acquired will not perform as expectedexpected.
Our results of operations from these acquisitions could, in the future, result in impairment charges for any of our intangible assets, including goodwill, or other long‑lived assets, particularly if economic conditions worsen unexpectedly. As a result of these changes, our financial condition, results of operations and liquidity could be materially adversely affected. In addition, many of the businesses that we have acquired and will acquire have unaudited financial statements that have been prepared by the management of such companies and have not been independently reviewed or audited. We cannot assure you that the financial statements of companies we have acquired or will acquire would not be materially different if such statements were independently reviewed or audited. If such statements were to be materially different, the tangible and intangible assets we acquire may be more susceptible to impairment charges, which could have a material adverse effect on us.
The success of our business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect.depends on our ability to successfully integrate acquisitions.
Acquisitions may require integration of the acquired companies’ sales and marketing, distribution, engineering, purchasing, finance and administrative organizations. We may not be able to integrate successfully any business we may acquire or have acquired into our existing business and any acquired businesses may not be profitable or as profitable as we had expected. Our inability to complete the integration of new businesses in a timely and orderly manner could
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increase costs and lower profits. Factors affecting the successful integration of acquired businesses include, but are not limited to, the following:
· | We may become liable for certain liabilities of any acquired business, whether or not known to us. These risks could include, among others, tax liabilities, product liabilities, environmental liabilities and liabilities for employment practices. These liabilities may |
· | Substantial attention from our senior management and the management of the acquired business may be required, which could decrease the time that they have to service and attract customers. |
· | We may not effectively utilize new equipment that we acquire through acquisitions or otherwise at utilization and rental rates consistent with that of our existing equipment. Further, capital equipment at acquired businesses may require additional maintenance or need to be replaced sooner than we expected. |
· | The complete integration of acquired companies depends, to a certain extent, on the full implementation of our financial systems and policies. |
· | We may actively pursue a number of opportunities simultaneously and we may encounter unforeseen expenses, complications and delays, including difficulties in employing sufficient staff and maintaining operational and management oversight. |
The success of our existing equipment.
We cannot assure you that we will achieve synergiesbe able to retain local managers and cost savings in connection with acquisitions. In addition, many ofemployees who are important to the businesses that we have acquired and will acquire have unaudited financial statements that have been prepared by the management of such companies and have not been independently reviewed or audited. We cannot assure you that the financial statements of companies we have acquired or will acquire would not be materially different if such statements were independently reviewed or audited. Finally, we cannot assure you that we will continue to acquire businesses at valuations consistent with our prior acquisitions or that we will complete future acquisitions at all. We cannot assure you that there will be attractive acquisition opportunities at reasonable prices, that financing will be available or that we can successfully integrate such acquired businesses into our existing operations. In addition, our results of operations from these acquisitions could, in the future, result in impairment charges for any of our intangible assets, including goodwill, or other long-lived assets, particularly if economic conditions worsen unexpectedly. Asacquired businesses. The loss of key employees may have an adverse effect on the acquired business and on our business as a result of these changes, our financial condition, results of operations and liquidity could be materially adversely affected.whole.
Our long-termlong‑term success is dependent upon securing and permitting aggregate reserves in strategically located areas. The inability to secure and permit such reserves could negatively affect our earnings in the future.
Aggregates are bulky and heavy and therefore difficult to transport efficiently. Because of the nature of the products, the freight costs can quickly surpass production costs. Therefore, except for geographic regions that do not possess commercially viable deposits of aggregates and are served by rail, barge or ship, the markets for our products tend to be localized around our quarry sites and are served by truck. New quarry sites often take a number of years to develop. Our strategic planning and new site development must stay ahead of actual growth. Additionally, in a number of urban and suburban areas in which we operate, it is increasingly difficult to permit new sites or expand existing sites due to community resistance. Therefore, our future success is dependent, in part, on our ability to accurately forecast future areas of high growth in order to locate optimal facility sites and on our ability to either acquire existing quarries or secure operating and environmental permits to open new
quarries. If we are unable to accurately forecast areas of future growth, acquire existing quarries or secure the necessary permits to open new quarries, our financial position, results of operations and liquidity could be materially adversely affected.
Economic Risks
Our business relies on private investment in infrastructure, and a slower than expected economic recovery may adversely affect our earnings in the future.
A significant portion of our sales are for projects with non-public owners. Construction spending is affected by developers’ ability to finance projects. Residential and nonresidential construction could decline if companies and consumers are unable to finance construction projects or if an economic recovery is stalled, which could result in delays or cancellations of capital projects. If housing starts and nonresidential projects do not rise steadily with the economic recovery as they historically have when recessions end, sale of our construction materials, downstream products and paving and related services may decline and our financial condition, results of operations and liquidity could be materially adversely affected.
Economic Risks
A decline in public infrastructure construction and reductions in governmental funding could adversely affect our earnings in the future.
A significant portion of our revenue is generated from publicly-fundedpublicly‑funded construction projects. As a result, if publicly-fundedpublicly‑funded construction decreases due to reduced federal or state funding or otherwise, our financial condition, results of operations and liquidity could be materially adversely affected.
In January 2011, the U.S. House of Representatives passed a new rules package that repealed a transportation law dating back to 1998, which protected annual funding levels from amendments that could reduce such funding. This rule change subjects funding for highways to yearly appropriation reviews. The change in the funding mechanism increases the uncertainty of many state departments of transportation regarding funds for highway projects. This uncertainty could result in states being reluctant to undertake large multi-yearmulti‑year highway projects which could, in turn, negatively affect our
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sales. The FAST Act was signed into law on December 4, 2015 and authorizes $305 billion of funding between 2016 and 2020. It extends five years and provides funding for surface transportation infrastructure, including roads, bridges, transit systems, and the rail transportation network.
We cannot be assured of the existence, amount and timing of appropriations for spending on federal, state or local projects. Federal support for the cost of highway maintenance and construction is dependent on congressional action. In addition, each state funds its infrastructure spending from specially allocated amounts collected from various taxes, typically gasoline taxes and vehicle fees, along with voter-approvedvoter‑approved bond programs. Shortages in state tax revenues can reduce the amounts spent on state infrastructure projects, even below amounts awarded under legislative bills. In recent years, certain states have experienced state-levelstate‑level funding pressures caused by lower tax revenues and an inability to finance approved projects. Delays or cancellations of state infrastructure spending could have a material adverse effect on our financial condition, results of operations and liquidity because aliquidity.
Our business relies on private investment in infrastructure, and periods of economic stagnation or recession may adversely affect our earnings in the future.
A significant portion of our businesssales are for projects with non‑public owners whose construction spending is dependent on public infrastructure spending.affected by developers’ ability to finance projects. Residential and nonresidential construction could decline if companies and consumers are unable to finance construction projects or in periods of economic stagnation or recession, which could result in delays or cancellations of capital projects. If housing starts and nonresidential projects stagnate or decline, sale of our construction materials, downstream products and paving and related services may decline and our financial condition, results of operations and liquidity could be materially adversely affected.
Environmental, health and safety laws and regulations and any changes to, or liabilities arising under, such laws and regulations could have a material adverse effect on our financial position,condition, results of operations and liquidity.
We are subject to a variety of federal, state, provincial and local laws and regulations relating to, among other things: (i) the release or discharge of materials into the environment; (ii) the management, use, generation, treatment, processing, handling, storage, transport or disposal of hazardous materials, including the management
of hazardous and non-hazardous waste used as a fuel substitute in our cement kiln in Hannibal, Missouri; (iii) the management, use, generation, treatment, processing, handling, storage, transport or disposal of non-hazardous,non‑hazardous solid waste used as a fuel substitute in our cement kiln in Davenport, Iowa; and (iv) the protection of public and employee health and safety and the environment. These laws and regulations impose strict liability in some cases without regard to negligence or fault and expose us to liability for the environmental condition of our currently or formerly owned, leased or operated facilities or third-partythird‑party waste disposal sites, and may expose us to liability for the conduct of others or for our actions, even if such actions complied with all applicable laws at the time these actions were taken. In particular, we may incur remediation costs and other related expenses because our facilities were constructed and operated before the adoption of current environmental laws and the institution of compliance practices or because certain of our processes are regulated. These laws and regulations may also expose us to liability for claims of personal injury or property or natural resource damage related to alleged exposure to, or releases of, regulated or hazardous materials. The existence of contamination at properties we own, lease or operate could also result in increased operational costs or restrictions on our ability to use those properties as intended, including for purposes of mining.
Despite our compliance efforts, there
There is an inherent risk of liability in the operation of our business, especially from an environmental standpoint, or from time to time,and despite our compliance efforts, we may be in noncompliance with environmental, health and safety laws and regulations.regulations from time to time. These potential liabilities or events of noncompliance could have a material adverse effect on our operations and profitability. In many instances, we must have government approvals, certificates, permits or licenses in order to conduct our business, which oftencould require us to make significant capital, operating and maintenance expenditures to comply with environmental, health and safety laws and regulations. Our failure to obtain and maintain required approvals, certificates, permits or licenses or to comply with applicable governmental requirements could result in sanctions, including substantial fines or possible revocation of our authority to conduct some or all of our operations. Governmental requirements that affect our operations also include those relating to air and water quality, waste management, asset reclamation, the operation and closure of municipal waste and construction and demolition debris landfills, remediation of contaminated sites and worker health and safety. These requirements are complex and subject to frequent change. Stricter laws and regulations, more stringent interpretations of existing laws or regulations or the future discovery of environmental conditions may impose new liabilities on us, reduce operating hours, require additional investment by us in pollution control equipment or impede our opening new or expanding existing plants or facilities.
We have incurred, and may in the future incur, significant capital and operating expenditures to comply with such laws and regulations. The cost of complying with such laws could have a material adverse effect on our financial condition, results of operations and liquidity. In addition, we have recorded liabilities in connection with our reclamation and landfill closure obligations, but there can be no assurances that the costs of our obligations will not exceed our accruals.estimates. The cost of
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complying with such laws could have a material adverse effect on our financial condition, results of operations and liquidity.
Financial Risks
Difficult and volatile conditions in the credit markets could affect our financial condition, results of operations and liquidity.
Demand for our products is primarily dependent on the overall health of the economy, and federal, state and local public infrastructure funding levels. A stagnant or declining economy tends to produce less tax revenue for public infrastructure agencies, thereby decreasing a source of funds available for spending on public infrastructure improvements, which constitute a significant part of our business.
With the slow pace of economic recovery, there
There is also a likelihood that we will not be able to collect on certain of our accounts receivable from our customers. Although we are protected in part by payment bonds posted by some ofIf our customers delays and defaultsare unable to obtain credit or unable to obtain credit in a timely manner, they may be unable to pay us, which could have a material adverse effect on our financial condition, results of operations and liquidity.
If we are unable to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us, we may achieve lower than anticipated profits or incur contract losses.
Even though the majority of our government contracts contain raw material escalators to protect us from certain price increases, a portion or all of the contracts are often on a fixed cost basis. Pricing on a contract with a fixed unit price is based on approved quantities irrespective of our actual costs and contracts with a fixed total price require that the total amount of work be performed for a single price irrespective of our actual costs. We realize profit on our contracts only if our revenue exceeds actual costs, which requires that we successfully estimate our costs and then successfully control actual costs and avoid cost overruns. If our cost estimates for a contract are inadequate, or if we do not execute the contract within our cost estimates, then cost overruns may cause us to incur a loss or cause the contract not to be as profitable as we expected. The costs incurred and profit realized, if any, on our contracts can vary, sometimes substantially, from our original projections due to a variety of factors, including, but not limited to:
· | failure to include materials or work in a bid, or the failure to estimate properly the quantities or costs needed to complete a lump sum contract; |
· | delays caused by weather conditions or otherwise failing to meet scheduled acceptance dates; |
· | contract or project modifications or conditions creating unanticipated costs that are not covered by change orders; |
· | changes in availability, proximity and costs of materials, including liquid asphalt, cement, aggregates and other construction materials (such as stone, gravel, sand and oil for asphalt paving), as well as fuel and lubricants for our equipment; |
· | to the extent not covered by contractual cost escalators, variability and inability to predict the costs of purchasing diesel, liquid asphalt and cement; |
· | availability and skill level of workers; |
· | failure by our suppliers, subcontractors, designers, engineers or customers to perform their obligations; |
· | fraud, theft or other improper activities by our suppliers, subcontractors, designers, engineers, customers or our own personnel; |
· | mechanical problems with our machinery or equipment; |
· | citations issued by any governmental authority, including |
· | difficulties in obtaining required governmental permits or approvals; |
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· | changes in applicable laws and regulations; |
· | uninsured claims or demands from third parties for alleged damages arising from the design, construction or use and operation of a project of which our work is part; and |
· | public infrastructure customers may seek to impose contractual risk‑shifting provisions more aggressively which may result in us facing increased risks. |
These factors, as well as others, may cause us to incur losses, which could have a material adverse effect on our financial condition, results of operations and liquidity.
We could incur material costs and losses as a result of claims that our products do not meet regulatory requirements or contractual specifications.
We provide our customers with products designed to meet building code or other regulatory requirements and contractual specifications for measurements such as durability, compressive strength, weight-bearing
weight‑bearing capacity and other characteristics. If we fail or are unable to provide products meeting these requirements and specifications, material claims may arise against us and our reputation could be damaged. Additionally, if a significant uninsured, non-indemnifiednon‑indemnified or product-relatedproduct‑related claim is resolved against us in the future, that resolution could have a material adverse effect on our financial position,condition, results of operations and liquidity.
The cancellation of a significant number of contracts or our disqualification from bidding for new contracts could have a material adverse effect on our financial condition, results of operations and liquidity.
We could be prohibited from bidding on certain governmentalgovernment contracts if we fail to maintain qualifications required by thosethe relevant government entities. In addition, contracts with governmental entities can usually be canceled at any time by them with payment only for the work completed. A cancellation of an unfinished contract or our disqualification from the bidding process could result in lost revenue and cause our equipment to be idled for a significant period of time until other comparable work becomes available, which could have a material adverse effect on our financial condition, results of operations and liquidity.
Our operations are subject to special hazards that may cause personal injury or property damage, subjecting us to liabilities and possible losses which may not be covered by insurance.
Operating hazards inherent in our business, some of which may be outside our control, can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. We maintain insurance coverage in amounts and against the risks we believe are consistent with industry practice, but this insurance may not be adequate or available to cover all losses or liabilities we may incur in our operations. Our insurance policies are subject to varying levels of deductibles. Losses up to our deductible amounts are accrued based upon our estimates of the ultimate liability for claims incurred and an estimate of claims incurred but not reported. However, liabilities subject to insurance are difficult to estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety programs. If we were to experience insurance claims or costs above our estimates, we might alsoour financial condition, results of operations and liquidity could be required to use working capital to satisfy these claims rather than using working capital to maintain or expand our operations.materially adversely effected.
Unexpected factors affecting self-insuranceself‑insurance claims and reserve estimates could adversely affect our business.
We use a combination of third-partythird‑party insurance and self-insuranceself‑insurance to provide for potential liabilities for workers’ compensation, general liability, vehicle accident, property and medical benefit claims. Although we believe we have minimizedseek to minimize our exposure on individual claims, for the benefit of costs savings we have accepted the risk of multiple independent material claims arising. We estimate the projected losses and liabilities associated with the risks retained by us, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. Any such matters could have a material adverse effect on our financial condition, results of operations and liquidity.
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Our substantial leverage could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry and our ability to pay our debts, including our obligations under the 2023 Notes andwhich could divert our cash flow from operations to debt payments.
We are highly leveraged. As of January 2, 2016,December 30, 2017, our total debt was approximately $1,296.8 million,$1.8 billion, which includes $650.0 million$1.2 billion of 2023Senior Notes and $646.8$635.4 million of senior secured indebtedness under our senior secured credit facilities and we had an additional $210.6$218.9 million of unutilized capacity under our senior secured revolving credit facility (after giving effect to approximately $24.4$16.1 million of letters of credit outstanding).
Our high degree of leverage could have important consequences, including:
· | increasing our vulnerability to general economic and industry conditions; |
· | requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; |
· | subject us to the risk of increased interest rates as a portion of our borrowings under our senior secured credit facilities are exposed to variable rates of interest; |
· | restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; |
· | limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; |
· | limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged; and |
· | making it more difficult for us to make payments on our debt. |
Borrowings under our senior secured credit facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. We have and may in the future enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any interest rate swaps we enter into may not fully mitigate our interest rate risk. In addition, the indentureindentures that governsgovern the 2023Senior Notes and the amended and restated credit agreement governing our senior secured credit facilities (“Credit Agreement”) contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.
Summit Inc. is a holding company, and our consolidated assets are owned by, and our business is conducted through, our subsidiaries. Revenues from these subsidiaries are our primary source of funds for debt payments and operating expenses. If our subsidiaries are restricted from making distributions to us, that may impair our ability to meet our debt service obligations or otherwise fund our operations. Moreover, there may be restrictions on payments by subsidiaries to their parent companies under applicable laws, including laws that require companies to maintain minimum amounts of capital and to make payments to stockholders only from profits. As a result, although a subsidiary of ours may have cash, we may not be able to obtain that cash to satisfy our obligation to service our outstanding debt or fund our operations.
Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could reduce our ability to satisfy our current obligations and further exacerbate the risks to our financial condition described above.
We and our subsidiaries may be able to incur significant additional indebtedness in the future and we may do so, among other reasons, to fund acquisitions as part of our growth strategy. Although the indentureindentures governing the 2023Senior Notes and the amended and restated credit agreement governing our senior secured credit facilitiesCredit Agreement contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and we could incur substantial additional indebtedness in compliance with these restrictions.
Our senior secured credit facilities include an uncommitted incremental facility that allows us the option to increase the amount available under the term loan facility and/or the senior secured revolving credit facility by (i)
$225.0 $225.0 million plus (ii) an additional amount so long as we are in pro forma compliance with a consolidated first lien net leverage ratio. Availability of such incremental facilities will be subject to, among other conditions, the absence of an event of default and the receipt of commitments by existing or additional financial institutions.
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We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or toour debt obligations, refinance our debt obligations and to fund planned capital expenditures and other corporate expenses depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions andconditions. We are also subject to certain financial, business, legislative, regulatory and other factors and any legal and regulatory restrictions on the payment of distributions and dividends to which we may be subject.dividends. Many of these factors are beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.indebtedness, which would constitute an event of default if not cured. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” If our cash flows and capital resources are insufficient to fund our debt service obligations or our other needs, we may be forced to reduce or delay investments and capital expenditures, seek additional capital, restructure or refinance our indebtedness or sell assets. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations or fund planned capital expenditures. Significant delays in our planned capital expenditures may materially and adversely affect our future revenue prospects. In addition, our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The senior secured credit facilitiesCredit Agreement and the indentureindentures governing the 2023Senior Notes restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair and proceeds that we do receive may not be adequate to meet any debt service obligations then due. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness.
The indentureindentures governing the 2023Senior Notes and the amendedCredit Agreement contain covenants and restated credit agreement governing our senior secured credit facilities restrict our ability and the ability of most of our subsidiaries to engage in some business and financial transactions.provisions that are restrictive.
The indentureindentures governing the 2023Senior Notes containsand Credit Agreement contain restrictive covenants that, among other things, limit our ability, and the ability of our restricted subsidiaries, to:
· | incur additional indebtedness, issue certain preferred shares or issue guarantees; |
· | pay dividends, redeem our membership interests or make other restricted payments; |
· | make investments, loans or advances; |
· | incur additional liens; |
· | transfer or sell assets; |
· | merge or engage in consolidations; |
· | enter into certain transactions with our affiliates; |
· | designate subsidiaries as unrestricted subsidiaries; |
Senior secured credit facilities. The amended and restated credit agreement governing our senior secured credit facilities contains a number of covenants that limit our ability and the ability of our restricted subsidiaries to:
· | repay subordinated indebtedness; and |
· | change our lines of business. |
The senior secured credit facilities also require us to maintain a maximum first lien net leverage ratio. The amended and restated credit agreement governing our senior secured credit facilitiesCredit Agreement also contains certain customary representations and warranties, affirmative covenants and events of default (including, among others, an event of default upon a change of control). If an event of default occurs, the lenders under our senior secured credit facilities will be entitled to take various actions, including the acceleration of amounts due under our senior secured credit facilities and all actions permitted to be taken by a secured creditor. Our failure to comply with obligations under the indentureindentures governing the 2023Senior Notes and the amended and restated credit agreement governing our senior secured credit facilitiesCredit Agreement may result in an event of default under the indenture or the amended and restated credit agreement.Credit Agreement. A default, if not cured or waived,
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may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be certain that we willmay not have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all.
Many of the covenants in the indenture that governs the 2023 Notes will not apply during any period in which the 2023 Notes are rated investment grade by both Moody’s and Standard & Poor’s.
Many of the covenants in the indenture that governs the 2023 Notes will not apply to us during any period in which the 2023 Notes are rated investment grade by both Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. (“Standard & Poor’s”) provided at such time no default or event of default has occurred and is continuing. These covenants restrict among other things, our ability to pay distributions, incur debt and to enter into certain other transactions. There can be no assurance that the 2023 Notes will ever be rated investment grade, or that if they are rated investment grade, that the 2023 Notes will maintain these ratings. However, suspension of these covenants would allow us to incur debt, pay dividends and make other distributions and engage in certain other transactions that would not be permitted while these covenants were in force. To the extent the covenants are subsequently reinstated, any such actions taken while the covenants were suspended would not result in an event of default under the indenture that will govern the exchange notes.
Other Risks
Our success is dependent on our Chief Executive Officer and other key personnel.
Our success depends on the continuing services of our Chief Executive Officer, Tom Hill, and other key personnel.personnel assembled by Mr. Hill. We believe that Mr. Hill possesses valuable knowledge and skills that are crucial to our success and would be very difficult to replicate. Our senior management team was assembled under the leadership of Mr. Hill. Not all of our senior management team resides near or works at our headquarters. The geographic distance ofbetween the members of our senior management team may impede the team’s ability to work together effectively. Our success will depend, in part, on the effortseffectively, and abilities of our senior management and their ability to work together. Wewe cannot assure you that they will be able to do so.
Over time, our success will depend on attracting and retaining qualified personnel.
Competition for senior management is intense, and we may not be able to retain our management team or attract additional qualified personnel. The loss of a member of senior management wouldcould require certain of our remaining senior officers to divert immediate attention, which could be substantial or require costly external resources in the short term. The inability to adequately fill vacancies in our senior executive positions on a timely basis could negatively affect our ability to implement our business strategy, which could have a material adverse effect on our results of operations, financial condition and liquidity.
We use large amounts of electricity, diesel fuel, liquid asphalt and other petroleum-basedpetroleum‑based resources that are subject to potential reliability issues, supply constraints and significant price fluctuation, which could have a material adverse effect on our financial condition, results of operations and liquidity.
In our production and distribution processes, we consume significant amounts of electricity, diesel fuel, liquid asphalt and other petroleum-basedpetroleum‑based resources. The availability and pricing of these resources are subject to market forces that are beyond our control. Furthermore, we are vulnerable to any reliability issues experienced by our suppliers, which also are beyond our control. Our suppliers contract separately for the purchase of such resources and our sources of supply could be interrupted should our suppliers not be able to obtain these materials due to higher demand or other factors that interrupt their availability. Variability in the supply and prices of these resources could have a material adverse effect on our financial condition, results of operations and liquidity.
Climate change and climate change legislation or regulations may adversely affect our business.
A number of governmental bodies have finalized, or proposed or are contemplating legislative and regulatory changes in response to the potential effects of climate change, and international negotiations are continuing with respectthe United States and Canada have agreed to athe Paris Agreement, the successor treaty to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which negotiations could lead to additional legislative and regulatory changes in the United States and Canada if either country becomes signatory to such successor treaty.Canada. Such legislation or regulation has and potentially could include provisions for a “cap and trade” system of allowances and credits, among other provisions. The EPA promulgated a mandatory reporting rule covering greenhouse gas (“GHG”) emissions from sources considered to be large emitters. The EPA has also promulgated a GHG emissions permitting rule, referred to as the “Tailoring Rule” which sets forth criteria for determining which facilities are required to obtain permits for GHG emissions pursuant to the U.S. Clean Air Act’s Prevention of Significant Deterioration (“PSD”) and Title V operating permit programs. The U.S. Supreme Court ruled in June 2014 that the EPA exceeded its statutory authority in issuing the Tailoring Rule but upheld the Best Available Control Technology (“BACT”) requirements for GHGs emitted by sources already subject to PSD requirements for other pollutants. Our cement plants and one of our landfills hold Title V Permits. If future modifications to our facilities require PSD review for other pollutants, GHG BACT requirements may also be triggered, which could require significant additional costs.
Other potential effects of climate change include physical effects such as disruption in production and product distribution as a result of major storm events and shifts in regional weather patterns and intensities. There is also a potential for climate change legislation and regulation to adversely affect the cost of purchased energy and electricity.
The effects of climate change on our operations are highly uncertain and difficult to estimate. However, because a chemical reaction inherent to the manufacture of Portland cement releases carbon dioxide, a GHG, cement kiln operations may be disproportionately affected by future regulation of GHGs. Climate change and legislation and
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regulation concerning GHGs could have a material adverse effect on our financial condition, results of operations and liquidity.
Unexpected operational difficulties at our facilities could disrupt operations, raise costs, and reduce revenue and earnings in the affected locations.
The reliability and efficiency of certain of our facilities is dependent upon vital pieces of equipment, such as our cement manufacturing kilns in Hannibal, Missouri and Davenport, Iowa. Although we have scheduled outages to perform maintenance on certain of our facilities, vital equipment may periodically experience unanticipated disruptions due to accidents, mechanical failures or other unanticipated events such as fires, explosions, violent weather conditions or other unexpected operational difficulties. A substantial interruption of one of our facilities could require us to make significant capital expenditures to restore operations and could disrupt our operations, raise costs, and reduce revenue and earnings in the affected locations.
We are dependent on information technology. Our systems and infrastructure face certain risks, including cyber security risks and data leakage risks.
We are dependent on information technology systems and infrastructure. Any significant breakdown, invasion, destruction or interruption of these systems by employees, others with authorized access to our systems, or unauthorized persons could negatively affect operations. There is also a risk that we could experience a business interruption, theft of information or reputational damage as a result of a cyber-attack, such as an infiltration of a data center, or data leakage of confidential information either internally or at our third-partythird‑party providers. While we have invested in the protection of our data and information technology to reduce these risks and periodically test the security of our information systems network, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could have a material adverse effect on our financial condition, results of operations and liquidity.
Labor disputes could disrupt operations of our businesses.
As of January 2, 2016,December 30, 2017, labor unions represented approximately 6.5%7% of our total employees, substantially all in our cement division and at Continental Cement and Mainland.our Canadian operations. Our collective bargaining agreements for employees generally expire between 20162018 and 2020. Although we believe we have good relations with our employees and unions, disputes with our trade unions, union organizing activity, or the inability to renew our labor agreements, could lead to strikes or other actions that could disrupt our operations and, consequently, have a material adverse effect on our financial condition, results of operations and liquidity.
Blackstone and its affiliates control us and their interests may conflict with ours or yours in the future.
Blackstone and its affiliates hold approximately 51% of the combined voting power of our Class A and Class B common stock, including shares of Class A common stock held by Summit Owner Holdco LLC (“Summit Owner Holdco”). Moreover, under our bylaws and the stockholders’ agreement with Blackstone and its affiliates, for so long as our existing owners and their affiliates retain significant ownership of us, we will agree to nominate to our board individuals designated by Blackstone, whom we refer to as the “Sponsor Directors.” For so long as Blackstone continues to own a significant percentage of our stock, even if such amount is less than 50%, Blackstone will still be able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval through its voting power. Accordingly, for such period of time, Blackstone will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, for so long as Blackstone continues to own a significant percentage of our stock, Blackstone will be able to cause or prevent a change of control of
our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of Class A common stock as part of a sale of our company and ultimately might affect the market price of our Class A common stock.
Our Sponsors and their respective affiliates engage in a broad spectrum of activities. In the ordinary course of their business activities, our Sponsors and their respective affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation provides that none of Blackstone, Silverhawk, any of their respective affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate.
Our Sponsors also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsors may have an interest in us pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.
We are a “controlled company” within the meaning of New York Stock Exchange (“NYSE”) rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Affiliates of Blackstone control a majority of the combined voting power of all classes of our stock entitled to vote generally in the election of directors. As a result, we qualify as a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our Class A common stock:
As a result, we do not have a majority of independent directors on our board. In addition, our compensation committee and corporate governance and nominating committee do not consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
Organizational Structure Risks
Summit Inc.’s only material asset is its interest in Summit Holdings, and it is accordingly dependent upon distributions from Summit Holdings to pay taxes, make payments under the tax receivable agreementTRA and pay dividends.
Summit Inc. is a holding company and has no material assets other than its ownership of LP Units and has no independent means of generating revenue. Summit Inc. intends to cause Summit Holdings to make distributions to holders and former holders of LP Units in an amount sufficient to cover all applicable taxes at assumed tax rates, payments under the tax receivable agreementTRA and cash dividends,distributions, if any, declared by it. Deterioration in the financial condition, earnings or cash flow of Summit Holdings and its subsidiaries for any reason, or restrictions on payments by subsidiaries to their parent companies under applicable laws, including laws that require
companies to maintain minimum amounts of capital and to make payments to stockholders only from profits, could limit or impair their ability to pay such distributions. Additionally, to the extent that Summit Inc. needs funds, and Summit Holdings is restricted from making such distributions under applicable law or regulation or under the terms of our financing arrangements, or is otherwise unable to provide such funds, it could have a material adverse effect on our financial condition, results of operations and liquidity.
Payments of dividends, if any, are at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. Any financing arrangement that we enter into in the future may include restrictive covenants that limit our ability to pay dividends. In addition, Summit Holdings is generally prohibited under Delaware law from making a distribution to a limited partner to the extent that, at
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the time of the distribution, after giving effect to the distribution, liabilities of Summit Holdings (with certain exceptions) exceed the fair value of its assets. Subsidiaries of Summit Holdings are generally subject to similar legal limitations on their ability to make distributions to Summit Holdings.
Summit Inc. anticipates using certain distributions from Summit Holdings to acquire additional LP Units.
As described in “Certain Relationships and Related Transactions, and Director Independence—Summit Materials Holdings L.P. Amended and Restated Limited Partnership Agreement,” the
The limited partnership agreement of Summit Holdings provides for cash distributions, which we refer to as “tax distributions,” to be made to the holders of the LP Units if it is determined that the income of Summit Holdings will give rise to net taxable income allocable to holders of LP Units. To the extent that future tax distributions Summit Inc. receives exceed the amounts it actually requires to pay taxes and make payments under the tax receivable agreement,TRA, we expect that our board of directors will cause Summit Inc. to use such excess cash to acquire additional newly-issued LP Units at a per unit price determined by reference to the volume weighted average price per share of the Class A common stock during the five trading days immediately preceding the date of the relevant board action. During the fourth quarter of 2015,2017, Summit Inc. used approximately $16.8$47.5 million of prior taxsuch distributions to purchase LP Units. See “Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities–Dividends.” Although we anticipate that any such decision by our board of directors would be approved by a majority of our independent directors, any cash used by Summit Inc. to acquire additional LP Units would not then be available to fund cash dividends on the Class A common stock.
Summit Inc. is required to pay exchanging holders of LP Units and certain other indirect pre-IPO owners for most of the benefits relating to any additional tax depreciation or amortization deductions that we may claim as a result of the tax basis step-up we receive in connection with sales or exchanges of LP Units and related transactions and our utilization of certain net operating losses of the pre-IPO owners (“Investor Entities”).transactions.
Holders of LP Units (other than Summit Inc.) may, subject to the vesting and minimum retained ownership requirements and transfer restrictions applicable to such holders as set forth in the limited partnership agreement of Summit Holdings, from and after March 17, 2016 (subject to the terms of the exchange agreement), exchange their LP Units for Class A common stock on a one-for-one basis. Notwithstanding the foregoing, Blackstone is generally permitted to exchange LP Units at any time. The exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Summit Holdings. These increases in tax basis may increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of tax that Summit Inc. would otherwise be required to pay in the future, although the Internal Revenue Service (the “IRS”) may challenge all or part of the tax basis increase, and a court could sustain such a challenge.
In connection with the IPO, we entered into a tax receivable agreementTRA with the holders of LP Units that provides for the payment by Summit Inc. to exchanging holders of LP Units and certain other indirect pre-IPO owners of 85% of the benefits, if any, that Summit Inc. is deemed to realize as a result of (i) the increases in tax basis described above and (ii) our utilization of certain net operating losses of the Investor Entities and certain
other tax benefits related to entering into the tax receivable agreement,TRA, including tax benefits attributable to payments under the tax receivable agreement.TRA. This payment obligation is an obligation of Summit Inc. and not of Summit Holdings. While the actual increase in tax basis and the actual amount and utilization of net operating losses, as well as the amount and timing of any payments under the tax receivable agreement,TRA, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of our income, we expect that as a result of the size of the transfers and increases in the tax basis of the tangible and intangible assets of Summit Holdings and our possible utilization of net operating losses, the payments that Summit Inc. may make under the tax receivable agreementTRA will be substantial. The payments under the tax receivable agreement are not conditioned upon continued ownership of us by the holders of LP Units. See “Certain Relationships and Related Transactions, and Director Independence—Tax Receivable Agreement.”
In certain cases, payments under the tax receivable agreementTRA may be accelerated and/or significantly exceed the actual benefits Summit Inc. realizes in respect of the tax attributes subject to the tax receivable agreement.TRA.
The tax receivable agreementTRA provides that upon certain changes of control, or if, at any time, Summit Inc. elects an early termination of the tax receivable agreement,TRA, Summit Inc.’s obligations under the tax receivable agreement wouldTRA may be calculated by reference to the present value (at a discount rate equal to one year LIBOR plus 100 basis points) of all future payments that holders of LP Units or other recipients would have been entitled to receive under the tax receivable agreement using certain valuation assumptions, including that Summit Inc. will have sufficient taxable income to fully utilize the deductions arising from the tax deductions, tax basis and other tax attributes subject to the tax receivable agreement and sufficient taxable income to fully utilize any remaining net operating losses subject to the tax receivable agreement on a straight line basis over the shorter of the statutory expiration period for such net operating losses or the five-year period after the early termination or change of control. In the case of an early termination election by Summit Inc., such payments will be calculated assuming that all unexchanged LP Units were exchanged at the time of such election. Our obligations under the tax receivable agreement in such circumstance, in the case of a change of control, applies to previously exchanged or acquired LP Units and in the case of an early termination election, to all LP Units. In addition, holders of LP Units will not reimburse us for any payments previously made under the tax receivable agreement if such tax basis increase and our utilization of certain net operating losses is successfully challenged by the IRS (although any such detriment would be taken into account in calculating future payments under the tax receivable agreement).accelerated. Summit Inc.’s ability to achieve benefits from any tax basis increase or net operating losses, and the payments to be made under the tax receivable agreement,TRA, will depend upon a number of factors, including the timing and amount of our future income. As a result, even in the absence of a change of control or an election to terminate the tax receivable agreementTRA, payments under the tax receivable agreementTRA could be in excess of 85% of Summit Inc.’s actual cash tax savings.
Accordingly, it is possible that, with respect to a particular year, the
The actual cash tax savings realized by Summit Inc. under the TRA may be less than the corresponding tax receivable agreement payments or that theTRA payments. Further, payments under the tax receivable agreementTRA may be made years in advance of when the actual realization,benefits, if any, of the anticipated future tax benefits. Dependingare realized on our ability to take such detriments into account in making future payments,federal and state income tax returns. Accordingly, there may be a material negative effect on our liquidity if the payments under the tax receivable agreementTRA exceed the actual cash tax savings that Summit Inc. realizes in respect of the tax attributes
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subject to the tax receivable agreementTRA and/or distributions to Summit Inc. by Summit Holdings are not sufficient to permit Summit Inc. to make payments under the tax receivable agreement after it has paid taxes and other expenses.TRA. Based upon a $20.04$31.44 share price of our Class A common stock, which was the closing price on December 31, 2015,29, 2017, and thata LIBOR were to be 1.2%rate of 3.11%, we estimate that if Summit Inc. were to exercise its termination right, the aggregate amount of these termination payments would be approximately $607.0$282 million. The foregoing number is merely an estimate and the actual payments could differ materially. We may need to incur debt to finance payments under the tax receivable agreementTRA to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreementTRA as a result of timing discrepancies or otherwise.
Ownership of Our Class A Common Stock Risks
We incur increased costs and are subject to additional regulations and requirements as a public company, which could lower our profits or make it more difficult to run our business.
As a public company, we incur significant legal, accounting and other expenses, including costs associated with public company reporting requirements. We also have incurred and will continue to incur costs associated with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), and related rules implemented by the Securities and Exchange Commission (“SEC”) and the NYSE. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. These rules and regulations have and will increase our legal and financial compliance costs and to make some activities more time-consuming and costly. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock may be negatively affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form10-K, we will be required to furnish reports by management and our independent registered public accounting firm on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. The process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation is time consuming, costly, and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
The market price of shares of our Class A common stock may be volatile, which could cause the value of your investment to decline.
The market price of our Class A common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our Class A common stock regardless of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results or dividends, if any, to stockholders, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals, and in response the market price of shares of our Class A common stock could decrease significantly. You may be unable to resell your shares of Class A common stock for a profit.
In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Because we have no current plans to pay cash dividends on our Class A common stock, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.
We have no current plans to pay any cash dividends. The declaration, amount and payment of any future dividends on shares of Class A common stock will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant. In addition, our ability to pay dividends is limited by our senior secured credit facilities and our senior notesSenior Notes and may be limited by covenants of other indebtedness we or our subsidiaries incur in the future. As a result, you may not receive any return on an investment in our Class A common stock unless you sell our Class A common stock for a price greater than that which you paid for it.
You may be diluted by the future
Future issuance of additional Class A common stock, in connection withor securities convertible or exchangeable for Class A common stock, may adversely affect the market price of the shares of our incentive plans, acquisitions or otherwise.Class A common stock.
As of January 2, 2016,December 30, 2017, we had 950,254,056110,350,594 shares of Class A common stock issued and outstanding, and had 889,649,406 shares authorized but unissued. The number of unissued including 50,275,825 shares of Class A common stockincludes 3,689,620 shares available for issuance upon exchange of LP units that areUnits held by limited partners of Summit Holdings. Our amended and restated certificate of incorporation authorizes us to issue these shares of Class A common stock and options, rights, warrants and appreciation rights relating to Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion. We may need to raise significant additional equity capital in connection with acquisitions or otherwise. Similarly, the limited partnership agreement of Summit Holdings permits Summit Holdings to issue an unlimited number of additional limited partnership interests of Summit Holdings with designations, preferences,
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rights, powers and duties that are different from, and may be senior to, those applicable to the LP Units, and which may be exchangeable for shares of our Class A common stock. Additionally, anSales of substantial amounts of Class A common stock, or securities convertible or exchangeable for Class A common stock, or the perception that such sales could occur may adversely affect the prevailing market price for the shares of our Class A common stock. Thus holders of our Class A common stock will bear the risk of our future issuances reducing the market price of our Class A common stock and diluting the value of their stock holdings in us.
An aggregate of 13,500,000 shares of Class A common stock and LP Units may be granted under the Summit Materials, Inc. 2015 Omnibus Incentive Plan (the “Omnibus Incentive Plan”). As of January 2, 2016, awards relating to 4,550,061 shareswhich 4,873,654 have been granted as of Class A common stock had been made under the Omnibus Incentive Plan.December 30, 2017. In addition, as of January 2, 2016December 30, 2017 we had outstanding warrants to purchase an aggregate of 160,333102,778 shares of Class A common stock. Any Class A common stock that we issue, including under our Omnibus Incentive Plan or other equity incentive plans that we may adopt in the future, or upon exercise of outstanding options or warrants, or other securities convertible or exchangeable for Class A common stock would dilute the percentage ownership held by the investors of our Class A common stock.
If we or our existing investors sellstock and may adversely affect the market price of the shares of our Class A common stock, the market price of our Class A common stock could decline.stock.
The sale of substantial amounts of shares of our Class A common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. As of February 17, 2016, we have a total of 49,746,982 shares of our Class A common stock outstanding. Substantially all of our outstanding shares of Class A common stock are freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with certain limitations applicable to affiliates and the shares of Class A common stock held by Summit Owner Holdco are subject to certain restrictions on resale.
We have filed a registration statement on Form S-8 under the Securities Act to register shares of our Class A common stock or securities convertible into or exchangeable for shares of our Class A common stock issued pursuant to our Omnibus Incentive Plan. Accordingly, shares registered under such registration statement will be available for sale in the open market.
As restrictions on resale end, the market price of our shares of Class A common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of Class A common stock or other securities.
Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the merger or acquisition of our company more difficult without the approval of our board of directors. Among other things, these provisions:
· | would allow us to authorize the issuance of undesignated preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of Class A common stock; |
· | prohibit stockholder action by written consent |
· | provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws and that our stockholders may only amend our bylaws with the approval of 662⁄3% or more in voting power of all outstanding shares of our capital |
· | establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our Class A common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
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Properties
Our headquarters are located in a 16,65321,615 square foot office space, which we lease in Denver, Colorado, under a lease expiring on November 30, 2020.January 31, 2024.
As of January 2, 2016,December 30, 2017, we alsohad 3.3 billion tons of proven and probable aggregates reserves serving our aggregates and cement businesses and operated 145 quarriesover 400 sites and sand deposits, 47 asphalt paving mix plants, to which we believe we have adequate road, barge and/or railroad access. By segment, our estimate of proven and 74 fixedprobable reserves as of December 30, 2017 for which we have permits for extraction and portable ready-mixed concrete plants, two cement plantsthat we consider to be recoverable aggregates of suitable quality for economic extraction are shown in the table below along with average annual production.
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| at current |
| percent leased |
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Segment |
| quarries |
| Hard rock(1) |
| gravel(1) |
| production(1) |
| production(2) |
| Owned |
| Leased(3) |
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West |
| 81 |
| 353,201 |
| 772,085 |
| 22,965 |
| 49 |
| 33 | % | 67 | % |
East |
| 121 |
| 1,345,340 |
| 334,522 |
| 16,309 |
| 103 |
| 61 | % | 39 | % |
Cement |
| 3 |
| 508,965 |
| — |
| 1,858 |
| 274 |
| 100 | % | — |
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Total |
| 205 |
| 2,207,506 |
| 1,106,607 |
| 41,132 |
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(1) | Hard rock, sand and gravel and annual production tons are shown in thousands. |
(2) | Calculated based on total reserves divided by our average of 2017 and 2016 annual production |
(3) | Lease terms range from monthly to on-going with an average lease expiry of 2024. |
As of December 30, 2017, we operated the following production and eight cement distribution terminals, and had 50 office locations.facilities:
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| Quarries and Sand Deposits |
| Cement Plants |
| Cement Distribution Terminals |
| Fixed and portable ready-mix concrete plants |
| Asphalt paving mix plants |
Owned |
| 76 |
| 2 |
| 6 |
| 98 |
| 26 |
Leased |
| 115 |
| — |
| 4 |
| 24 |
| 21 |
Partially owned and leased |
| 14 |
| — |
| — |
| — |
| 4 |
Total |
| 205 |
| 2 |
| 10 |
| 122 |
| 51 |
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The following chart sets forth specifics ofsummarizes our production and distribution facilities by state as of January 2, 2016:December 30, 2017:
*Other primarily consists of office space. |
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The information set forth under “—Legal Proceedings” in Item 1, “Business,” is incorporated herein by reference.
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 (17 CFR 229.104) is included in Exhibit 95.1 to this report.
PART II
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G(3) to Form 10-K, certain of the information regarding our executive officers required by Items 401(b) and (e) of Regulation S-K is hereby included in Part I of this report.
Thomas W. Hill, 62, President and Chief Executive Officer. Mr. Hill is the founder of Summit Materials and has been President and Chief Executive Officer since its inception. He has been a member of our Board of Directors since August 2009. From 2006 to 2008, he was the Chief Executive Officer of Oldcastle, Inc. (“Oldcastle”), the North American arm of CRH plc, one of the world's leading construction materials companies. Mr. Hill served on the CRH plc Board of Directors from 2002 to 2008 and, from 1992 to 2006, ran the Materials division of Oldcastle. Mr. Hill served as Chairman of the American Road and Transportation Builders Association (“ARTBA”) from 2002 to 2004, during congressional consideration of the multi-year transportation bill “SAFETEA-LU.” Mr. Hill has been Treasurer of both the National Asphalt Pavement Association and the National Stone Association, and he remains active with ARTBA’s Executive Committee. Mr. Hill received a Bachelor of Arts in Economics and History from Duke University and a Masters of Business Administration from Trinity College in Dublin, Ireland.
Thomas A. Beck, 60, Executive Vice President and Cement Division President. Mr. Beck joined the Company in May 2010 when the Company purchased a controlling interest in Continental Cement. Mr. Beck is Executive Vice President and Cement Division President, a position he has held since January 2013. He was a Senior Vice President with Continental Cement from 2005 to 2013 and its VP, Sales & Marketing, from l 996 to 2005. Mr. Beck also held
35
various positions with Holnam (predecessor to Holcim (US) Inc.) from 1987 to 1996. Mr. Beck currently serves on the Executive Committee and is Vice Chairman of the Portland Cement Association and is active on several cement and concrete industry boards. Mr. Beck received a Bachelor of Science degree in Civil Engineering from the University of Illinois.
Anne Lee Benedict, 45, Executive Vice President, Chief Legal Officer and Secretary. Ms. Benedict joined the Company in October 2013. Prior to joining the Company, Ms. Benedict was a corporate partner in the Washington, D.C. office of Gibson, Dunn & Crutcher LLP, where she had practiced since 2000. Ms. Benedict's practice involved a wide range of corporate law matters, including mergers and acquisitions, joint ventures and other strategic transactions, securities offerings, securities regulation and corporate governance matters. Ms. Benedict received a Bachelor of Arts degree in English and Psychology from the University of Michigan and a Juris Doctor from the University of Pennsylvania Law School.
Michael J. Brady, 50, Executive Vice President and Chief Business Development Officer. Mr. Brady joined the Company in April 2009 after having been a Senior Vice President at CRH Plc’s U.S. subsidiary, Oldcastle, with overall responsibility for acquisitions and business development, having joined Oldcastle in 2000. Prior to that, Mr. Brady worked in several operational and general management positions in the paper and packaging industry in Ireland, the United Kingdom and Asia Pacific with the Jefferson Smurfit Group, plc (now Smurfit Kappa Group plc). Mr. Brady received a Bachelor of Engineering (Electrical) and a Master of Engineering Science (Microelectronics) from University College, Cork in Ireland and a Master of Business Administration degree from INSEAD in France.
M. Shane Evans, 47, Executive Vice President and West Division President. Mr. Evans joined the Company as West Region President in August 2010 with over 20 years of experience in the construction materials industry. Prior to joining the Company, Mr. Evans worked at Oldcastle for 12 years, most recently as a Division President. He started his career working in his family's construction and materials business where he held various operational and executive positions. Mr. Evans received a Bachelor of Science degree from Montana State University.
Brian J. Harris, 61, Executive Vice President and Chief Financial Officer. Mr. Harris joined the Company as Chief Financial Officer in October 2013 after having been Executive Vice President and Chief Financial Officer of Bausch & Lomb Holdings Incorporated, a leading global eye health company, from 2009 to 2013. From 1990 to 2009, Mr. Harris held positions of increasing responsibility with industrial, automotive, building products and engineering manufacturing conglomerate Tomkins plc, including President of the $2 billion worldwide power transmission business for Gates Corporation, and Senior Vice President for Strategic Business Development and Business Administration, Chief Financial Officer and Secretary of Gates Corporation. Mr. Harris received a Bachelor of Accountancy from Glasgow University and is qualified as a Scottish Chartered Accountant.
Damian J. Murphy, 48, Executive Vice President and East Division President. Mr. Murphy joined the Company in August 2009 with over 20 years of experience in the construction materials and mining industries, working with both public and privately held companies. Prior to joining the Company, Mr. Murphy served roles as regional president and company president for Oldcastle starting in 2004. Prior to that Mr. Murphy served as vice president of Aggregate Industries' Rocky Mountain region, responsible for aggregates and hot mix asphalt production and sales. Before joining Aggregate Industries, Mr. Murphy worked in the mid-Atlantic for a top 10 privately held aggregate supplier and began his career in the industry in Europe. Mr. Murphy received a Bachelor of Engineering degree with a concentration in Minerals Engineering from the Cambome School of Mines/ Exeter University in the United Kingdom. Mr. Murphy is not related to Summit Inc. director John R. Murphy. Mr. Murphy will be leaving his role at the Company effective March 31, 2018.
Karl H. Watson Jr., 53,Executive Vice President and Chief Operating Officer. Mr. Watson joined the Company in January 2018 with over 25 years of experience in the construction materials industry. From January 2017 to December 2017, Mr. Watson served as President, Cement & Southwest Ready Mix at Martin Marietta. Prior to joining Martin Marietta, Mr. Watson served in various leadership positions at CEMEX, and Rinker Group Ltd., an Australian building materials supplier that was acquired by CEMEX in 2007. From January 2016 to June 2016, Mr. Watson served as an advisor to CEMEX, where he was previously the President of CEMEX USA and Global Relation Manager, Network Leader, from 2011 to 2015. From 2008 to 2011, Mr. Watson served as President of CEMEX, Florida and CEMEX, East, USA. From 1988 to 2008, Mr. Watson served in various positions at Rinker Group Ltd., including, most recently, Regional President, Rinker Materials West from 2004 to 2008. Mr. Watson is currently on the board of directors of the Texas Aggregates & Concrete Association and on the executive committee of the Portland Cement Association where he served as the vice chairman from 2013 to 2015. Mr. Watson has received a Bachelor of Science degree in Business Administration from Palm Beach Atlantic University.
36
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Summit Inc.’s Class A common stock began publicly trading on the NYSE under the symbol “SUM” on March 11, 2015. Prior to that time, there was no public market for our Class A common stock. Our Class B common stock is not publicly traded.
As of February 15, 2016,7, 2018, there were twofive holders of record of our Class A common stock and 31 holders of record of our Class B common stock. This
The above stockholder figure does not include a substantially greater number of holders whose shares are held of record by banks, brokers and other financial institutions. As of February 15, 2016, there was one holder of record of our Class B common stock. As of February 15, 2016, 100% of the outstanding limited liability company interests of Summit LLC were held by Summit Materials Intermediate Holdings, LLC, an indirect subsidiary of Summit Inc.
The following table sets forth, for the periods indicated, the high and low sales prices of our Class A common stock as reported by the NYSE from March 11, 2015, the first day of trading following our initial public offering,January 3, 2016, through January 2, 2016.December 30, 2017.
Year Ended January 2, 2016 | High | Low | ||||||
First Quarter ended March 28, 2015 (from March 11, 2015) | $ | 22.33 | $ | 19.65 | ||||
Second Quarter ended June 27, 2015 | $ | 29.00 | $ | 20.60 | ||||
Third Quarter ended September 26, 2015 | $ | 27.89 | $ | 20.63 | ||||
Fourth Quarter ended January 2, 2016 | $ | 24.97 | $ | 17.79 |
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Year ended December 31, 2016 |
| High |
| Low |
| ||
First Quarter ended April 2, 2016 |
| $ | 20.14 |
| $ | 12.94 |
|
Second Quarter ended July 2, 2016 |
| $ | 22.69 |
| $ | 18.14 |
|
Third Quarter ended October 1, 2016 |
| $ | 22.39 |
| $ | 17.24 |
|
Fourth Quarter ended December 31, 2016 |
| $ | 24.72 |
| $ | 17.80 |
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Year ended December 30, 2017 |
| High |
| Low |
| ||
First Quarter ended April 1, 2017 |
| $ | 26.09 |
| $ | 21.88 |
|
Second Quarter ended July 1, 2017 |
| $ | 28.87 |
| $ | 23.39 |
|
Third Quarter ended September 30, 2017 |
| $ | 32.04 |
| $ | 26.00 |
|
Fourth Quarter ended December 30, 2017 |
| $ | 32.59 |
| $ | 28.45 |
|
As of February 14, 2018, 100% of the outstanding limited liability company interests of Summit LLC were held by Summit Materials Intermediate Holdings, LLC, an indirect subsidiary of Summit Inc. There is no established public trading market for limited liability company interests of Summit LLC.
Dividends
Dividends
On December 22, 2017 and December 28, 2015,2016, Summit Inc. paid a stock dividend of 0.0150.014 shares and 0.012 shares, respectively, of its Class A common stock for each then outstanding share of Class A common stock. In accordance with its limited partnership agreement,stock as of the applicable record dates. Summit Holdings makes cash distributions to the holders of Summit Holdings’ LP UnitsUnit holders to cover tax obligations arising from any netallocated taxable income of Summit Holdings allocable to holders of LP Units.income. As an LP Unit holder, Summit Inc. received such cash distributions from Summit Holdings in excess of the amount required to satisfy the Company’s associatedSummit Inc.’s tax obligations. As a result,In fiscal 2017 and 2016, Summit Inc. primarily used the excess cash of approximately $16.8$45.0 million in the aggregateand $26.9 million, respectively, to acquire newly-issued LP Units from Summit Holdings and to make cash payments in lieu of issuing any fractional shares in connection with the related stock dividend. The stock dividend was declared in order to maintain an equal number of shares of Class A common stock outstanding to the LP Units held by Summit Inc., and the aggregate number of Class A common stock issued in the stock dividend equaled the number of additional LP Units Summit Inc. purchased from Summit Holdings. The LP Units were purchased at a per unit price of $22.92,$29.60 and $23.72, respectively, which is the volume weighted average price per share of the Class A common stock for the five trading days ended November 30, 2015. Cash27, 2017 and December 1, 2016, respectively. Immaterial cash payments were made in lieu of fractional shares were also made on the basis of a value per share of Class A common stock of $22.92 per share.shares.
If Summit Inc. acquiresuses future excess tax distributions to purchase additional LP Units, in this manner, we anticipate that in order to maintain the relationship between the shares of Class A common stock and the LP Units, our board of directors willmay continue to declare stock dividends on the Class A common stock of an aggregate number of additional newly-issued shares that corresponds to the number of additional LP Units that Summit Inc. acquires.stock.
Summit Inc. has no current plans to pay cash dividends on its Class A common stock. The declaration, amount and payment of any future dividends on shares of Class A common stock is at the sole discretion of our board of directors and we may reduce or discontinue entirely the payment of any such dividends at any time. Our board of directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant.
37
Summit Inc. is a holding company and has no material assets other than its ownership of LP Units in Summit Holdings.Units. Should we decide to pay a cash dividend on our Class A common stock in the future, we anticipate funding this cash dividend by causing Summit Holdings to make distributions to Summit Inc. in an amount sufficient to cover such dividend, whereupon the other holders of LP Units will also be entitled to receive distributions pro rata in accordance with the percentages of their respective limited partnership interests. Because Summit Inc. must pay taxes and make payments under the tax receivable agreement,TRA, any amounts ultimately distributed as dividends to holders of our Class A common stock are expected to be less on a per share basis than the amounts distributed by Summit Holdings to its partners on a per LP Unit basis.
The agreements governing our senior secured credit facilities and the 2023Senior Notes contain a number of covenants that restrict, subject to certain exceptions, Summit LLC’s ability to pay dividendsdistributions to us.its parent company and ultimately to Summit Inc. See Note 8, Debt, to our consolidated financial statements.
Any financing arrangements that we enter into in the future may include restrictive covenants that limit our ability to pay dividends. In addition, Summit Holdings is generally prohibited under Delaware law from making a distribution to a limited partner to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of Summit Holdings (with certain exceptions) exceed the fair value of its assets.
Subsidiaries of Summit Holdings are generally subject to similar legal limitations on their ability to make distributions to Summit Holdings.
Issuer Purchases of Equity Securities
During the quarter and year ended January 2, 2016,December 30, 2017, we did not purchase any of our equity securities that are registered under Section 12(b) of the Securities Exchange Act.
Securities Authorized for Issuance Under Equity Compensation PlansAct of 1934, as amended (the “Exchange Act”).
As of January 2, 2016 | ||||||||||||
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | ||||||||||
Equity compensation plan approved by stockholders(1) | 13,500,000 | $ | 18.08 | 8,949,939 |
In connection with our IPO, the Board of Directors and our then sole voting stockholder adopted the Omnibus Incentive Plan under which 13,500,000 shares of common stock were reserved. The Omnibus Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based and performance compensation awards to eligible employees, officers, directors, consultants and advisors of the Company. If an award under the Omnibus Incentive Plan terminates, lapses or is settled without the payment of the full number of shares subject to the award, the undelivered shares may be granted again under the Omnibus Incentive Plan. As of January 2, 2016, there were no equity compensation plans not approved by stockholders of Summit Inc.
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities which have not been previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K during the year ended January 2, 2016.December 30, 2017.
ITEM 6.SELECTED FINANCIAL DATA.
The following selected financial data should be read together with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere in this report. Summit Holdings, which commenced operations on August 26, 2009, is considered ourSummit Inc.’s predecessor for accounting purposes, and its consolidated financial statements are ourSummit Inc.’s historical financial statements. Under U.S. GAAP, Summit Holdings meets the definition of a variable interest entity.
The following tables set forth consolidated financial data for the five most recent years, derived from ourSummit Inc.’s and Summit LLC’s audited consolidated financial statements. The selected statements of operations data for the three years ended December 30, 2017, December 31, 2016 and January 2, 2016 December 27, 2014 and December 28, 2013 and the selected balance sheet data as of January 2, 2016December 30, 2017 and December 27, 201431, 2016 are derived from our audited consolidated financial statements included elsewhere in this report. The selected statements of operations data for the years ended December 29, 201227, 2014 and the December 31, 201128, 2013 and the selected balance sheet data as of January 2, 2016, December 27, 2014 and December 28, 2013 December 29, 2012 and December 31, 2011 are derived from audited consolidated financial statements not included in this report.
In 2011, Summit LLC adopted
Our fiscal year is based on a 52-53 week year with each quarter consisting of 13 weeks ending on a Saturday. The 53-week year occurs approximately once every seven years, including 2015. The additional week in the 53-week year iswas included in the fourth quarter. Historical results are not necessarily indicative of the results to be expected in the future.
38
Summit Materials, Inc.
Year Ended | ||||||||||||||||||||
(in thousands) | January 2, 2016 | December 27, 2014 | December 28, 2013 | December 29, 2012 | December 31, 2011 | |||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Total revenue | $ | 1,432,297 | $ | 1,204,231 | $ | 916,201 | $ | 926,254 | $ | 789,076 | ||||||||||
Total cost of revenue (excluding items shown separately below) | 990,645 | 887,160 | 677,052 | 713,346 | 597,654 | |||||||||||||||
General and administrative expenses | 177,769 | 150,732 | 142,000 | 127,215 | 95,826 | |||||||||||||||
Goodwill impairment | — | — | 68,202 | — | — | |||||||||||||||
Depreciation, depletion, amortization and accretion | 119,723 | 87,826 | 72,934 | 68,290 | 61,377 | |||||||||||||||
Transaction costs | 9,519 | 8,554 | 3,990 | 1,988 | 9,120 | |||||||||||||||
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Operating income (loss) | 134,641 | 69,959 | (47,977 | ) | 15,415 | 25,099 | ||||||||||||||
Other (income), net | (2,425 | ) | (3,447 | ) | (1,737 | ) | (1,182 | ) | (21,244 | ) | ||||||||||
Loss on debt financings | 71,631 | — | 3,115 | 9,469 | — | |||||||||||||||
Interest expense | 84,629 | 86,742 | 56,443 | 58,079 | 47,784 | |||||||||||||||
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Loss from continuing operations before tax | (19,194 | ) | (13,336 | ) | (105,798 | ) | (50,951 | ) | (1,441 | ) | ||||||||||
Income tax (benefit) expense | (18,263 | ) | (6,983 | ) | (2,647 | ) | (3,920 | ) | 3,408 | |||||||||||
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Loss from continuing operations | $ | (931 | ) | $ | (6,353 | ) | $ | (103,151 | ) | $ | (47,031 | ) | $ | (4,849 | ) | |||||
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Net income per share of Class A common stock: | ||||||||||||||||||||
Basis | $ | 0.73 | ||||||||||||||||||
Diluted | $ | 0.52 | ||||||||||||||||||
Cash Flow Data | ||||||||||||||||||||
Net cash provided by (used for): | ||||||||||||||||||||
Operating activities | $ | 98,203 | $ | 79,238 | $ | 66,412 | $ | 62,279 | $ | 23,253 | ||||||||||
Investing activities | (584,347 | ) | (461,280 | ) | (111,515 | ) | (85,340 | ) | (192,331 | ) | ||||||||||
Financings activities | 660,337 | 377,222 | 32,589 | 7,702 | 146,775 | |||||||||||||||
Balance Sheet Data (as of period end): | ||||||||||||||||||||
Cash | $ | 186,405 | $ | 13,215 | $ | 18,183 | $ | 30,697 | $ | 46,056 | ||||||||||
Total assets | 2,396,179 | 1,712,653 | 1,237,680 | 1,272,415 | 1,274,137 | |||||||||||||||
Total debt, including current portion of long-term debt, excluding original issuance premium or discount and deferred financing costs | 1,296,750 | 1,040,670 | 695,890 | 648,000 | 608,981 | |||||||||||||||
Capital leases | 44,822 | 31,210 | 8,026 | 3,092 | 3,158 | |||||||||||||||
Total stockholders’ equity/partners’ interest | 767,860 | 286,983 | 286,817 | 385,694 | 439,638 | |||||||||||||||
Other Financial Data (as of period end): | ||||||||||||||||||||
Total hard assets | $ | 1,399,088 | $ | 1,062,154 | $ | 928,210 | $ | 906,584 | $ | 906,166 | ||||||||||
Ratio of earnings to fixed charges(1) | 0.8x | 0.8x | N/A | 0.1x | 1.0x |
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| |||||||||||||
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| December 30, |
| December 31, |
| January 2, |
| December 27, |
| December 28, |
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($ in thousands) |
| 2017 |
| 2016 |
| 2016 |
| 2014 |
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Statement of Operations Data: |
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Total revenue |
| $ | 1,932,575 |
| $ | 1,626,063 |
| $ | 1,432,297 |
| $ | 1,204,231 |
| $ | 916,201 |
|
Income (loss) from continuing operations |
| $ | 125,777 |
| $ | 46,126 |
| $ | (931) |
| $ | (6,353) |
| $ | (103,151) |
|
Net income per share of Class A common stock: |
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|
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|
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|
|
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|
|
|
Basic |
| $ | 1.12 |
| $ | 0.52 |
| $ | 0.68 |
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|
|
|
|
|
Diluted |
| $ | 1.11 |
| $ | 0.52 |
| $ | 0.50 |
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Balance Sheet Data (as of period end): |
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|
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|
|
|
|
|
|
|
Total assets |
|
| 3,787,333 |
|
| 2,781,466 |
|
| 2,396,179 |
|
| 1,712,653 |
|
| 1,237,680 |
|
Total debt, including current portion of long-term debt, excluding original issuance premium or discount and deferred financing costs |
|
| 1,835,375 |
|
| 1,540,250 |
|
| 1,296,750 |
|
| 1,040,670 |
|
| 695,890 |
|
Capital leases |
|
| 35,723 |
|
| 39,314 |
|
| 44,822 |
|
| 31,210 |
|
| 8,026 |
|
Other Financial Data (as of period end): |
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|
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|
|
|
|
|
Ratio of earnings to fixed charges(1) |
|
| 2.0 x |
|
| 1.6 x |
|
| 0.8 x |
|
| 0.8 x |
|
| N/A |
|
(1) | The ratio of earnings to fixed charges is determined by dividing adjusted earnings, as |
Summit Materials, LLC
Year Ended | ||||||||||||||||||||
(in thousands) | January 2, 2016 | December 27, 2014 | December 28, 2013 | December 29, 2012 | December 31, 2011 | |||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Total revenue | $ | 1,432,297 | $ | 1,204,231 | $ | 916,201 | $ | 926,254 | $ | 789,076 | ||||||||||
Total cost of revenue (excluding items shown separately below) | 990,645 | 887,160 | 677,052 | 713,346 | 597,654 | |||||||||||||||
General and administrative expenses | 177,769 | 150,732 | 142,000 | 127,215 | 95,826 | |||||||||||||||
Goodwill impairment | — | — | 68,202 | — | — | |||||||||||||||
Depreciation, depletion, amortization and accretion | 119,723 | 87,826 | 72,934 | 68,290 | 61,377 | |||||||||||||||
Transaction costs | 9,519 | 8,554 | 3,990 | 1,988 | 9,120 | |||||||||||||||
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| |||||||||||
Operating income (loss) | 134,641 | 69,959 | (47,977 | ) | 15,415 | 25,099 | ||||||||||||||
Other (income), net | (2,425 | ) | (3,447 | ) | (1,737 | ) | (1,182 | ) | (21,244 | ) | ||||||||||
Loss on debt financings | 71,631 | — | 3,115 | 9,469 | — | |||||||||||||||
Interest expense | 83,757 | 86,742 | 56,443 | 58,079 | 47,784 | |||||||||||||||
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| |||||||||||
Loss from continuing operations before tax | (18,322 | ) | (13,336 | ) | (105,798 | ) | (50,951 | ) | (1,441 | ) | ||||||||||
Income tax (benefit) expense | (18,263 | ) | (6,983 | ) | (2,647 | ) | (3,920 | ) | 3,408 | |||||||||||
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| |||||||||||
Loss from continuing operations | $ | (59 | ) | $ | (6,353 | ) | $ | (103,151 | ) | $ | (47,031 | ) | $ | (4,849 | ) | |||||
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| |||||||||||
Cash Flow Data | ||||||||||||||||||||
Net cash provided by (used for): | ||||||||||||||||||||
Operating activities | $ | 98,203 | $ | 79,238 | $ | 66,412 | $ | 62,279 | $ | 23,253 | ||||||||||
Investing activities | (584,347 | ) | (461,280 | ) | (111,515 | ) | (85,340 | ) | (192,331 | ) | ||||||||||
Financings activities | 659,320 | 380,489 | 32,589 | 7,702 | 146,775 | |||||||||||||||
Balance Sheet Data (as of period end): | ||||||||||||||||||||
Cash | $ | 185,388 | $ | 13,215 | $ | 14,917 | $ | 27,431 | $ | 42,790 | ||||||||||
Total assets | 2,395,162 | 1,712,653 | 1,234,414 | 1,269,149 | 1,270,871 | |||||||||||||||
Total debt, including current portion of long-term debt, excluding original issuance premium or discount and deferred financing costs | 1,296,750 | 1,040,670 | 695,890 | 648,000 | 608,981 | |||||||||||||||
Capital leases | 44,822 | 31,210 | 8,026 | 3,092 | 3,158 | |||||||||||||||
Total member’s interest | 778,292 | 286,983 | 283,551 | 382,428 | 436,372 | |||||||||||||||
Other Financial Data (as of period end): | ||||||||||||||||||||
Total hard assets | $ | 1,399,088 | $ | 1,062,154 | $ | 928,210 | $ | 906,584 | $ | 906,166 | ||||||||||
Ratio of earnings to fixed charges(1) | 0.8x | 0.8x | N/A | 0.1x | 1.0x |
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| Year Ended |
| |||||||||||||
|
| December 30, |
| December 31, |
| January 2, |
| December 27, |
| December 28, |
| |||||
(in thousands) |
| 2017 |
| 2016 |
| 2016 |
| 2014 |
| 2013 |
| |||||
Statement of Operations Data: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
| $ | 1,932,575 |
| $ | 1,626,063 |
| $ | 1,432,297 |
| $ | 1,204,231 |
| $ | 916,201 |
|
Income (loss) from continuing operations |
| $ | 134,041 |
| $ | 62,087 |
| $ | (59) |
| $ | (6,353) |
| $ | (103,151) |
|
Balance Sheet Data (as of period end): |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
| 3,504,241 |
|
| 2,776,420 |
|
| 2,395,162 |
|
| 1,712,653 |
|
| 1,234,414 |
|
Total debt, including current portion of long-term debt, excluding original issuance premium or discount and deferred financing costs |
|
| 1,835,375 |
|
| 1,540,250 |
|
| 1,296,750 |
|
| 1,040,670 |
|
| 695,890 |
|
Capital leases |
|
| 35,723 |
|
| 39,314 |
|
| 44,822 |
|
| 31,210 |
|
| 8,026 |
|
Other Financial Data (as of period end): |
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|
|
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|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges(1) |
|
| 2.0 x |
|
| 1.6 x |
|
| 0.8 x |
|
| 0.8 x |
|
| N/A |
|
(1) | The ratio of earnings to fixed charges is determined by dividing adjusted earnings, as |
You should read
39
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the following discussiontrends and analysis ofsignificant changes in our results of operations and financial conditioncondition. Historical results may not be indicative of future performance. Forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in the section entitled “Risk Factors” and any factors discussed in the sections entitled “Disclosure Regarding Forward-Looking Statements” and “Risk Factors” of this report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the “Selected Historical Consolidated Financial Data” section of this report andData,” our audited consolidated annual financial statements and the related notes thereto and other information included elsewhere in this report. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of this report. Our actual results may differ materially from those contained in any forward-looking statements.
Overview
We are one of the fastest growing construction materials companies in the United States, with a 82%111% increase in revenue between the year ended December 31, 201128, 2013 and the year ended January 2, 2016, as compared to an average increase of approximately 38% in revenue reported by our competitors over the same period. Our materials include aggregates, which we supply across the country, with a focus on Texas, Kansas, Utah, Missouri and Kentucky, and cement, which we supply primarily in Missouri, Iowa and along the Mississippi River.December 30, 2017. Within our markets, we offer customers a single-source provider for construction materials and related downstream products through our vertical integration. Our materials include aggregates, which we supply across the United States, and in British Columbia, Canada, and cement, which we supply to surrounding states along the Mississippi River from Minneapolis to New Orleans. In addition to supplying aggregates to customers, we use our materials internally to produce ready-mixedready-mix concrete and asphalt paving mix, which may be sold externally or used in our paving and related services businesses. Our vertical integration creates opportunities to increase aggregates volumes, optimize margin at each stage of production and provide customers with efficiency gains, convenience and reliability, which we believe gives us a competitive advantage.
We
Since our inception in 2009, we have completed 38dozens of acquisitions, which are organized into 1112 operating companies that make up our three distinct operating segments—West, East and Cement—spanning 21Cement. We operate in 23 U.S. states and British Columbia, Canada and 33 metropolitan statistical areas. We believe each of our operating companies has a top three market share position in its local market area achieved through their respective, extensive operating histories, averaging over 35 years.Canada. Our highly experienced management team, led by our President and Chief Executive Officer, Tom Hill, a 30-yearwho has over 35 years of industry veteran,experience, has successfully enhanced the operations of acquired companies by focusing on scale advantages, cost efficiencies and pricing discipline to improve profitability and cash flow.
As
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Tonnage of reserves for each general type of aggregate | ||||||||||||||||||||||||||||
Average years until depletion at current production(2) | Percent of reserves owned and percent leased | |||||||||||||||||||||||||||
Number of producing quarries | ||||||||||||||||||||||||||||
Sand and gravel(1) | Annual production(1) | |||||||||||||||||||||||||||
Segment | Hard rock(1) | Owned | Leased(3) | |||||||||||||||||||||||||
West | 59 | 328,049 | 381,201 | 21,492 | 33 | 34 | % | 66 | % | |||||||||||||||||||
East | 83 | 820,789 | 91,706 | 9,505 | 96 | 39 | % | 61 | % | |||||||||||||||||||
Cement | 3 | 515,378 | — | 2,895 | 178 | 100 | % | — | ||||||||||||||||||||
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Total | 145 | 1,664,216 | 472,907 | 33,892 | ||||||||||||||||||||||||
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We operate in 2123 U.S. states and in British Columbia, Canada and currently have assets in 1922 U.S. states and British Columbia, Canada. The map below illustrates our geographic footprint:
Business Trends and Conditions
The U.S. construction materials industry is composed of four primary sectors: aggregates; cement; ready-mixedready-mix concrete; and asphalt paving mix. Each of these materials is widely used in most forms of construction activity. Competition is limited in part by the distance materials can be transported efficiently, resulting in predominantly local or regional operations. Participants in these sectors typically range from small, privately-held companies focused on a single material, product or market to multinational companiescorporations that offer a wide array of construction materials and services. Competition is constrained in part by the distance materials can be transported efficiently, resulting in predominantly local or regional operations. Due to the lack of product differentiation, competition for all of our products is predominantly based on price and, to a lesser extent, quality of products and related services. We estimate that approximately 65% ofservice. As a result, the aggregatesprices we charge our customers are not likely to be materially different from the prices charged by other producers in the United States are held by private companies.same markets. Accordingly, our profitability is generally dependent on the level of demand for our products and our ability to control operating costs.
Our revenue is derived from multiple end-use markets including public infrastructure construction and private residential and nonresidential construction, as well as publicconstruction. Public infrastructure construction.includes spending by federal, state, provincial and local governments for roads, highways, bridges, airports and other infrastructure projects. Public infrastructure projects have
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historically been a relatively stable portion of state and federal budgets. Residential and nonresidential construction consists of new construction and repair and remodel markets. The construction sectors in the local economies in which we operate have begun to show signs of recovery. However, we could still be affected by anyAny economic stagnation or decline, which could vary by local region and market.market, could affect our results of operations. Our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical changes in construction spending, especially in the private sector. From a macroeconomic view, we see positive indicators for the construction sector, including upward trends in highway obligations, housing starts and construction employment and highway obligations.employment. All of these factors should result in increased construction activity in the
private sector. However, we doconstruction activity is not expect this recovery to be consistent across the United States. Certain of our markets are showing greater, more rapid signs of recovery. Increased construction activity in the private sector could lead to increased public infrastructure spending in the relatively near future. Public infrastructure includes spending by federal, state and local governments for roads, highways, bridges, airports andsolid growth, other infrastructure projects. Public infrastructure projectsmarkets, notably Kansas, have historically beenexperienced a relatively stable portion of state and federal budgets. Our acquisitions to date have been primarily focused in states with certain constitutional protections for transportation funding sources, which we believe limits our exposure to state and local budgetary uncertainties.decrease.
Transportation infrastructure projects, driven by both federal and state funding programs, represent a significant share of the U.S. construction materials market. Federal funds are allocated to the states, which are required to match a portion of the federal funds they receive. Federal highway spending uses funds predominantly from the Federal Highway Trust Fund, which derives its revenue from taxes on diesel fuel, gasoline and other user fees. The dependability of federal funding allows the state departments of transportation to plan for their long term highway construction and maintenance needs. The FAST Act was signed into law on December 4, 2015 and authorizes $305 billion ofFunding for the existing federal transportation funding between 2016 andprogram extends through 2020. It extends five years and provides funding for surface transportation infrastructure, including roads, bridges, transit systems, and the rail transportation network. With the nation’s infrastructure aging, we expectthere is increased demand by states and municipalities for long-term federal funding to support the construction of new roads, highways and bridges in addition to the maintaining the existing infrastructure. The U.S. President and his administration have called for, among other things, an infrastructure spending to grow overstimulus plan. However, there is currently a lack of clarity around both the long term,timing and we believe we are well positioned to capitalize ondetails of any such increase.infrastructure plan and the impact, if any, it or other proposed changes in law and regulations may have on our business.
In addition to federal funding, state, county and local agencies provide highway construction and maintenance funding is also available through state, county and local agencies.funding. Our fivefour largest states by revenue, (Texas,Texas, Utah, Kansas Utah,and Missouri, and Kentucky, which represented approximately 33%21%, 16%13%, 11%, 10%12% and 8%9%, respectively, of our total revenue in 2015) each have funds whose revenue sources have certain constitutional protections and are dedicated for transportation projects.2017. The following is a summary of key funding initiatives in those states:
· | According to the Texas Department of Transportation (“TXDOT”) total annual funding available for transportation infrastructure, including state and federal funding, is estimated to be approximately $10.3 billion in fiscal year 2018 (commencing September 1, 2017), increasing to $14.3 billion by fiscal year 2020. Texas’ Unified Transportation Program plans for $70 billon to fund transportation projects from 2017 through 2026. |
o | In November 2014, Texas voters approved a ballot measure known as Proposition 1, which authorized a portion of the severance taxes on oil and natural gas to be redirected to the State Highway Fund each year. As of November 2017, TXDOT anticipates that funding from Proposition 1 for fiscal year 2018 will be in excess of $550 million, increasing to more than $800 million by fiscal year 2020. |
o | In November 2015, voters approved the ballot measure known as Proposition 7, authorizing a constitutional amendment for transportation funding. The amendment dedicates a portion of the state’s general sales and use taxes and motor vehicle sales and rental taxes to the State Highway Fund for use on non-tolled projects. Beginning in September 2017 (fiscal year 2018), if general state sales and use tax revenue exceeds $28 billion in a fiscal year, the next $2.5 billion will be directed to the State Highway Fund. Additionally, beginning in September 2019 (fiscal year 2020), if state motor vehicle sales and rental tax revenue exceeds $5 billion in a fiscal year, 35% of the amount above $5 billion will be directed to the State Highway Fund. As of November 2017, TXDOT anticipated that funding from Proposition 7 for fiscal year 2019 would be approximately $2.9 billion dollars, increasing to more than $4.7 billion by fiscal year 2020. |
· | Utah’s transportation investment fund has $2.3 billion programmed for 2017 through 2022. In early 2017, Utah’s governor signed into law a measure to allow the state to issue up to $1 billion in highway general obligation bonds to accelerate funding for a number of projects that the Utah Transportation Commission already approved. |
Within many of our markets, state and local governments have taken actions to maintain or grow highway funding during a time of uncertainty with respect to federal funding. For example:
· | Kansas has a 10‑year $8.2 billion highway bill that was passed in May 2010. Kansas public spending in 2018 is expected to approximate 2017 levels, and may decrease below those levels in 2019 given austerity measures put into effect under the most recent gubernatorial administration. |
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· | Missouri’s Statewide Transportation Improved Program for 2017 through 2021 states that $4.0 billion is available for awards for highway and bridge construction. |
The table below sets forth additional details regarding our fivefour key states, including growth rates as compared to the U.S. as a whole:
Revenue by End Market(1) | Projected Industry Growth by End Market 2016 to 2018(2) | |||||||||||||||||||||||
Percentage of Our Total Revenue | Residential and Nonresidential Construction | Public Infrastructure Construction | Residential Construction | Nonresidential Construction | Public Infrastructure Construction | |||||||||||||||||||
State | ||||||||||||||||||||||||
Texas | 33 | % | 58 | % | 42 | % | 8.2 | % | 7.2 | % | 5.2 | % | ||||||||||||
Kansas | 16 | % | 48 | % | 52 | % | 10.3 | % | 6.4 | % | 6.2 | % | ||||||||||||
Utah | 11 | % | 84 | % | 16 | % | 5.6 | % | 5.2 | % | 6.6 | % | ||||||||||||
Missouri | 10 | % | 72 | % | 28 | % | 9.9 | % | 5.4 | % | 4.9 | % | ||||||||||||
Kentucky | 8 | % | 7 | % | 93 | % | 10.3 | % | 4.9 | % | 6.9 | % | ||||||||||||
Weighted average(3) | 8.7 | % | 6.3 | % | 5.7 | % | ||||||||||||||||||
United States(2) | 1.1 | % | 1.0 | % | 0.5 | % |
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| Projected Industry Growth by End Market |
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| Revenue by End Market(1) |
| 2018 to 2020(2) |
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| Percentage of |
| Residential and |
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| Our Total |
| Nonresidential |
| Residential |
| Nonresidential |
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State |
| Revenue |
| Construction |
| Construction |
| Construction |
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Texas |
| 21 | % | 59 | % | 4.0 | % | 6.7 | % |
Utah |
| 13 | % | 92 | % | 6.5 | % | 17.5 | % |
Kansas |
| 12 | % | 52 | % | 8.3 | % | 5.2 | % |
Missouri |
| 9 | % | 73 | % | 11.6 | % | 8.1 | % |
Weighted average(3) |
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| 6.8 | % | 9.2 | % |
United States(2) |
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| 9.1 | % | 5.5 | % |
(1) | Percentages based on our revenue by state for the year ended |
(2) | Source: |
(3) | Calculated using a weighted average based on each state’s percentage contribution to our total revenue. |
Use and consumption of our products fluctuate due to seasonality. Nearly all of the products used by us, and by our customers, in the private construction and public infrastructure industries are used outdoors. Our highway operations and production and distribution facilities are also located outdoors. Therefore, seasonal changes and other weather-related conditions, in particular extended rainy and cold weather in the spring and fall and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect our business and operations through a decline in both the use of our products and demand for our services. In addition, construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall. Warmer and drier weather during the second and third quarters of our fiscal year typically result in higher activity and revenue levels during those quarters.
We are subject to commodity price risk with respect to price changes in liquid asphalt and energy, including fossil fuels and electricity for aggregates, cement, ready-mixed concrete and asphalt paving mix production, natural gas for hot mix asphalt production and diesel fuel for distribution vehicles and production related mobile equipment. Liquid asphalt escalator provisions in most of our private and commercial contracts limit our exposure to price fluctuations in this commodity. We often obtain similar escalators on public infrastructure contracts. In addition, we enter into various firm purchase commitments, with terms generally approximating one year, for certain raw materials. Through effective use of our purchase commitments, and a year on year decline in prices, our costs associated with liquid asphalt and energy have decreased $13.8 million for the year ended January 2, 2016 as compared to the year ended December 27, 2014, taking into consideration organic and acquisition-related volume increases.
Our acquisition strategy requireshas historically required us to raise capital through equity issuances or debt financings. As of January 2, 2016December 30, 2017 and December 27, 2014,31, 2016, our long-term borrowings, including the current portion, totaled $1.8 billion and less original issue premium and discount, totaled $1,296.8 million and $1,040.7 million, respectively, and we incurred $84.6 million and $86.7 million of interest expense for the years ended January 2, 2016 and December 27, 2014, respectively. Although the amounts borrowed and related interest expense are relatively material to us, we have been in compliance with our debt covenants and, when we have made additional issuances of senior notes to fund acquisitions, we have complied with the incurrence tests in the indentures governing our senior notes.$1.5 billion. In addition, our cash flows provided by operating activities were $98.2was $292.2 million in the year ended January 2, 2016, which is net of interest payments, all of which have been paid when due, along with principal payments.December 30, 2017. Our senior secured revolving credit facility, provides us with up to $210.6which has maximum availability of $235.0 million, of borrowing capacity, which $218.9 million is net of $24.4currently available to us after deducting $16.1 million of outstanding letters of credit. Our senior secured revolving credit facility has been adequate to fund our seasonal working capital needs and certain acquisitions.
Financial Highlights—Year Ended January 2, 2016December 30, 2017
The principal factors in evaluating our financial condition and operating results for the year ended January 2, 2016, as compared to the year ended December 27, 2014,30, 2017 are:
· | Net revenue increased $264.1 million in 2017, as a result of pricing and volume increases across our product lines, which includes |
· | Our operating income increased $66.2 million in 2017, primarily due to increases in net revenue from acquisitions, and to a lesser extent, organic growth, partially offset by increases in the related costs of revenue. Our general and administrative expenses in 2017 are lower than the comparable periods in 2016. Our 2016 results included $37.3 million of stock-based compensation charges related to the modification of LP Units and stock options that had been granted prior to our IPO. Excluding those one time equity modification expenses, our general and administrative expenses are essentially flat as a percentage of net revenue. |
· | We paid $374.9 million in cash for 14 acquisitions, net of cash acquired. |
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· | In |
· | In January 2017, we raised $237.6 million, net of underwriting discounts, through the issuance of 10,000,000 shares of Class A common stock at a public offering price of $24.05 per share. |
· | For the year ended December 30, 2017, we recorded an income tax benefit of $284.0 million, primarily due to a $532.0 million reduction of our valuation allowance against our deferred tax assets during 2017, offset by a reduction in the carrying value of our deferred tax assets of $235.2 million in the fourth quarter of 2017 as a result of Tax Cuts and Jobs Act of 2017 (the “TCJA”). |
· | As those deferred tax assets referred to above were also subject to our TRA, we recorded TRA expense of $271.0 million of which $501.8 million was in the third quarter of 2017 when we released our valuation allowance, offset by a reduction in the fourth quarter of 2017 in our estimated TRA liability of $216.9 million primarily due to the reduced federal corporate tax rate. |
Acquisitions
In addition to our organic growth, we continued to grow our business through acquisitions, completing a total of 14 acquisitions in 2017, of which six were in the following transactions from 2013:West segment and eight were in the East segment.
Components of Operating Results
Total Revenue
We derive our revenue predominantly by selling construction materials and products and providing paving and related services. Construction materials consist of aggregates and cement. Products consist of related downstream products, including ready-mixedready-mix concrete, asphalt paving mix and concrete products. Paving and related services that we provide are primarily asphalt paving services.
Revenue derived from the sale of construction materials sales are recognized when risks associated with ownership have passed to unaffiliated customers. Typically this occurs when products are shipped. Product revenue generally includes sales of aggregates, cement and related downstream products and other materials to customers, net of discounts or allowances and taxes, if any.
Revenue derived from paving and related services are recognized on the percentage-of-completion basis, measured by the cost incurred to date compared to estimated total cost of each project. This method is used because management considers cost incurred to be the best available measure of progress on these contracts. Due to the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change over the life of the contract.
Operating Costs and Expenses
The key components of our operating costs and expenses consist of the following:
Cost of Revenue (excluding items shown separately)
Cost of revenue consists of all production and delivery costs and primarily includes labor, repair and maintenance, utilities, raw materials, fuel, transportation, subcontractor costs, royalties and other direct costs incurred in the production and delivery of our products and services. Our cost of revenue is directly affected by
fluctuations in commodity energy prices, primarily diesel fuel, liquid asphalt and other petroleum-based resources. As a result, our operating profit margins can be significantly affected by changes in the underlying cost of certain raw materials if they are not recovered through corresponding changes in revenue. We attempt to limit our exposure to changes in commodity energy prices by entering into forward purchase commitments when appropriate. In addition, we have sales price adjustment provisions that provide for adjustments based on fluctuations outside a limited range in certain energy-related production costs. These provisions are in place for most of our public infrastructure contracts, and we aggressively seek to include similar price adjustment provisions in our private contracts.
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General and Administrative Expenses
General and administrative expenses consist primarily of salaries and personnel costs, including stock-based compensation charges, for our sales and marketing, administration, finance and accounting, legal, information systems, human resources and certain managerial employees. Additional expenses include audit, consulting and professional fees, travel, insurance, rental costs, property taxes and other corporate and overhead expenses.
Goodwill Impairment
Goodwill impairment charges consist of the amount by which the carrying value of a reporting unit exceeds its fair value. See “—Critical Accounting Policies—Goodwill and Goodwill Impairment.”
Depreciation, Depletion, Amortization and Accretion
Our business is capital intensive. We carry property, plant and equipment on our balance sheet at cost, net of applicable depreciation, depletion and amortization. Depreciation on property, plant and equipment is computed on a straight-line basis or based on the economic usage over the estimated useful life of the asset. The general range of depreciable lives by category, excluding mineral reserves, which are depleted based on the units of production method on a site-by-site basis, is as follows:
Buildings and improvements | 10 - 30 | years | ||
Plant, machinery and equipment | 15 - 20 | years | ||
Office equipment | 3 - | years | ||
Truck and auto fleet | 5 - | years | ||
Mobile equipment and barges | 6 - 8 | years | ||
Landfill airspace and improvements | 10 - 30 | years | ||
Other | 4 - 20 | years |
Amortization expense is the periodic expense related to leasehold improvements and intangible assets. The intangible assets which were acquiredrecognized with certain acquisitions. The intangible assetsacquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term.
Accretion expense is the periodic expense recorded for the accrued mining reclamation liabilities and landfill closure and post-closure liabilities using the effective interest method.
Transaction Costs
Transaction costs consist primarily of third party accounting, legal, valuation and financial advisory fees incurred in connection with acquisitions.
Results of Operations
The following discussion of our results of operations is focused on the key financial measures we use to evaluate the performance of our business from both a consolidated and operating segment perspective. Operating income and margins are discussed in terms of changes in volume, pricing and mix of revenue source (i.e., type of product sales or service revenue). We focus on operating margin, which we define as operating income as a percentage of net revenue, as a key metric when assessing the performance of the business, as we believe that analyzing changes in costs in relation to changes in revenue provides more meaningful insight into the results of operations than examining operating costs in isolation.
Operating income (loss) reflects our profit (loss) from continuing operations after taking into consideration cost of revenue, general and administrative expenses, depreciation, depletion, amortization and accretion and transaction costs. Cost of revenue generally increases ratably with revenue, as labor, transportation costs and subcontractor costs are recorded in cost of revenue. As a result of our revenue growth occurring primarily through acquisitions, general and administrative expenses and depreciation, depletion, amortization and accretion have historically grown ratably with revenue. However, as organic volumes increase, we expect these costs, as a percentage of revenue, to decrease. General and administrative costsexpenses as a percentage of revenue vary throughout the year due to the seasonality of our business. As a result of our revenue growth occurring primarily through acquisitions, general and administrative costs and depreciation, depletion, amortization and accretion have historically grown ratably with revenue. However, as volumes increase, we expect these costs, as a percentage of revenue, to decrease. Our transaction costs fluctuate with the number and sizelevel acquisition activity each year.
45
The table below includes revenue and operating income (loss) by segment for the periods indicated. Operating income (loss) by segment is computed as earnings before interest, taxes and other income / expense.
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| Year ended | ||||||||||||||||||||||||||||||||||||||||
| December 30, 2017 |
| December 31, 2016 |
| January 2, 2016 | |||||||||||||||||||||||||||||||||||||
Year Ended January 2, 2016 | Year Ended December 27, 2014 | Year Ended December 28, 2013 |
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(in thousands) | Revenue | Operating income (loss) | Revenue | Operating income (loss) | Revenue | Operating income (loss) |
| Revenue |
| income (loss) |
| Revenue |
| income (loss) |
| Revenue |
| income (loss) | ||||||||||||||||||||||||
West | $ | 804,503 | $ | 96,498 | $ | 665,716 | $ | 61,882 | $ | 426,195 | $ | (47,476 | ) |
| $ | 998,843 |
| $ | 130,334 |
| $ | 813,682 |
| $ | 100,659 |
| $ | 804,503 |
| $ | 96,498 | |||||||||||
East | 432,310 | 49,445 | 432,942 | 26,663 | 398,302 | 4,210 |
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| 629,919 |
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| 67,739 |
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| 531,294 |
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| 65,424 |
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| 432,310 |
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| 49,445 | ||||||||||||||||||
Cement | 195,484 | 64,567 | 105,573 | 19,705 | 91,704 | 20,829 |
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| 303,813 |
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| 89,360 |
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| 281,087 |
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| 82,521 |
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| 195,484 |
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| 64,950 | ||||||||||||||||||
Corporate(1) | — | (75,869 | ) | — | (38,291 | ) | — | (25,540 | ) | |||||||||||||||||||||||||||||||||
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Corporate (1) |
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| (66,556) |
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| (93,942) |
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| — |
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| (75,869) | ||||||||||||||||||||||||
Total | $ | 1,432,297 | $ | 134,641 | $ | 1,204,231 | $ | 69,959 | $ | 916,201 | $ | (47,977 | ) |
| $ | 1,932,575 |
| $ | 220,877 |
| $ | 1,626,063 |
| $ | 154,662 |
| $ | 1,432,297 |
| $ | 135,024 | |||||||||||
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(1) | Corporate results primarily consist of compensation and office expenses for employees included in the Company's headquarters. For the year ended December 31, 2016, we recognized $37.3 million of stock-based compensation charges associated with certain LP Units converted and options granted at the time of the IPO for which the performance metrics were met or waived in 2016. Approximately $28.3 million of costs associated with the IPO were included in |
Non-GAAP Performance Measures
We evaluate our operating performance using metrics that we refer to as “Adjusted EBITDA”, “Further Adjusted EBITDA” and “gross margin” which are not defined by U.S. GAAP and should not be considered as an alternative to earnings measures defined by U.S. GAAP. We define Adjusted EBITDA as EBITDA, as adjusted to exclude accretion, loss on debt financings, IPO costs, loss from discontinued operations and certain non-cash and non-operating items. We define Further Adjusted EBITDA as Adjusted EBITDA plus the EBITDA contribution of certain recent acquisitions, to measure our compliance with debt covenants and to evaluate flexibility under certain restrictive covenants. See “—Liquidity and Capital Resources—Our Long-Term Debt” for more information. We do not use this metric as a measure to allocate resources. We define gross profit as operating income (loss) before general and administrative costs, depreciation, depletion, amortization and accretion and transaction costs and gross margin as gross profit as a percentage of revenue.
We present Adjusted EBITDA and gross margin for the convenience of investment professionals who use such metrics in their analyses. The investment community often uses Adjusted EBITDA to assess the operating
performance of a company’s business and to provide a more consistent comparison of performance from period to period. We use Adjusted EBITDA and gross margin, among other metrics, to assess the operating performance of our individual segments andloss in the consolidated company. Adjusted EBITDA and gross margin are used for certain items to provide a more consistent comparison of performance from period to period.
Non-GAAP financial measures are not standardized; therefore, it may not be possible to compare such financial measures with other companies’ non-GAAP financial measures having the same or similar names. We strongly encourage investors to review our consolidated interim and audited financial statements in their entirety and not rely on any single financial measure.
The tables below reconcile our net income (loss) to EBITDA and Adjusted EBITDA and present Adjusted EBITDA by segment for the periods indicated:year ended January 2, 2016.
Reconciliation of Net Income (Loss) to Adjusted EBITDA | 2015 | 2014 | 2013 | |||||||||
(in thousands) | ||||||||||||
Net income (loss)(1) | $ | 1,484 | $ | (6,282 | ) | $ | (103,679 | ) | ||||
Interest expense(1) | 84,629 | 86,742 | 56,443 | |||||||||
Income tax benefit | (18,263 | ) | (6,983 | ) | (2,647 | ) | ||||||
Depreciation, depletion and amortization | 118,321 | 86,955 | 72,217 | |||||||||
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EBITDA | $ | 186,171 | $ | 160,432 | $ | 22,334 | ||||||
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Accretion | 1,402 | 871 | 717 | |||||||||
Initial public offering costs | 28,296 | — | — | |||||||||
Loss on debt financings | 71,631 | — | 3,115 | |||||||||
Goodwill impairment | — | — | 68,202 | |||||||||
Discontinued operations | (2,415 | ) | (71 | ) | 528 | |||||||
Acquisition transaction expenses | 9,519 | 8,554 | 3,990 | |||||||||
Management fees and expenses | 1,046 | 4,933 | 2,620 | |||||||||
Non-cash compensation | 5,448 | 2,235 | 2,315 | |||||||||
(Gain) loss on disposal and impairment of assets | (16,561 | ) | 8,735 | 12,419 | ||||||||
Other | 2,991 | 3,344 | 13,807 | |||||||||
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Adjusted EBITDA(1) | $ | 287,528 | $ | 189,033 | $ | 130,047 | ||||||
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Adjusted EBITDA by Segment | ||||||||||||
(in thousands) | ||||||||||||
West | $ | 150,764 | $ | 102,272 | $ | 42,300 | ||||||
East | 92,303 | 73,822 | 67,146 | |||||||||
Cement | 74,845 | 35,133 | 36,647 | |||||||||
Corporate | (30,384 | ) | (22,194 | ) | (16,046 | ) | ||||||
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Adjusted EBITDA | $ | 287,528 | $ | 189,033 | $ | 130,047 | ||||||
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Operating income (loss) General and administrative expenses Goodwill impairment Depreciation, depletion, amortization and accretion Transaction costs Gross Profit Gross Margin(1)Reconciliation of Operating Income (Loss) to Gross Profit 2015 2014 2013 (in thousands) $ 134,641 $ 69,959 $ (47,977 ) 177,769 150,732 142,000 — — 68,202 119,723 87,826 72,934 9,519 8,554 3,990 $ 441,652 $ 317,071 $ 239,149 34.2 % 29.6 % 29.0 %
Consolidated Results of Operations
The table below sets forth our consolidated results of operations for the periods indicated:
2015 | 2014 | 2013 | ||||||||||
(in thousands) | ||||||||||||
Net revenue | $ | 1,289,966 | $ | 1,070,605 | $ | 824,364 | ||||||
Delivery and subcontract revenue | 142,331 | 133,626 | 91,837 | |||||||||
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Total revenue | 1,432,297 | 1,204,231 | 916,201 | |||||||||
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Cost of revenue (excluding items shown separately below): | 990,645 | 887,160 | 677,052 | |||||||||
General and administrative expenses | 177,769 | 150,732 | 142,000 | |||||||||
Goodwill impairment | — | — | 68,202 | |||||||||
Depreciation, depletion, amortization and accretion | 119,723 | 87,826 | 72,934 | |||||||||
Transaction costs | 9,519 | 8,554 | 3,990 | |||||||||
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Operating income (loss) | 134,641 | 69,959 | (47,977 | ) | ||||||||
Other income, net | (2,425 | ) | (3,447 | ) | (1,737 | ) | ||||||
Loss on debt financings | 71,631 | — | 3,115 | |||||||||
Interest expense(1) | 84,629 | 86,742 | 56,443 | |||||||||
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Loss from continuing operations before taxes | (19,194 | ) | (13,336 | ) | (105,798 | ) | ||||||
Income tax benefit | (18,263 | ) | (6,983 | ) | (2,647 | ) | ||||||
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Loss from continuing operations | (931 | ) | (6,353 | ) | (103,151 | ) | ||||||
(Income) loss from discontinued operations | (2,415 | ) | (71 | ) | 528 | |||||||
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Net income (loss)(1) | $ | 1,484 | $ | (6,282 | ) | $ | (103,679 | ) | ||||
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| 2017 |
| 2016 |
| 2015 | |||
(in thousands) |
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Net revenue |
| $ | 1,752,409 |
| $ | 1,488,274 |
| $ | 1,289,966 |
Delivery and subcontract revenue |
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| 180,166 |
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| 137,789 |
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| 142,331 |
Total revenue |
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| 1,932,575 |
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| 1,626,063 |
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| 1,432,297 |
Cost of revenue (excluding items shown separately below) |
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| 1,281,777 |
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| 1,071,792 |
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| 990,262 |
General and administrative expenses |
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| 242,670 |
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| 243,512 |
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| 177,769 |
Depreciation, depletion, amortization and accretion |
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| 179,518 |
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| 149,300 |
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| 119,723 |
Transaction costs |
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| 7,733 |
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| 6,797 |
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| 9,519 |
Operating income |
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| 220,877 |
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| 154,662 |
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| 135,024 |
Interest expense (1) |
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| 108,549 |
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| 97,536 |
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| 84,629 |
Loss on debt financings |
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| 4,815 |
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| — |
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| 71,631 |
Tax receivable agreement expense (1) |
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| 271,016 |
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| 14,938 |
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| — |
Other (income) expense, net |
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| (5,303) |
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| 1,361 |
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| (2,042) |
(Loss) income from operations before taxes (1) |
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| (158,200) |
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| 40,827 |
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| (19,194) |
Income tax benefit |
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| (283,977) |
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| (5,299) |
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| (18,263) |
Income (loss) from continuing operations |
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| 125,777 |
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| 46,126 |
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| (931) |
Income from discontinued operations |
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| — |
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| — |
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| (2,415) |
Net income (1) |
| $ | 125,777 |
| $ | 46,126 |
| $ | 1,484 |
(1) | The statement of operations above is based on the financial results of Summit Inc. |
46
Fiscal Year 2017 Compared to 2016
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($ in thousands) |
| 2017 |
| 2016 |
| Variance |
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Net revenue |
| $ | 1,752,409 |
| $ | 1,488,274 |
| $ | 264,135 |
| 17.7 | % |
Operating income |
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| 220,877 |
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| 154,662 |
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| 66,215 |
| 42.8 | % |
Operating margin percentage |
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| 12.6 | % |
| 10.4 | % |
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Adjusted EBITDA (1) |
| $ | 435,777 |
| $ | 371,347 |
| $ | 64,430 |
| 17.4 | % |
(1) | Adjusted EBITDA is a non-GAAP measure that we find helpful in monitoring the performance of our business. See the definition of and the reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income, |
Fiscal Year 2015 Compared to 2014
($ in thousands) | 2015 | 2014 | Variance | |||||||||||||
Net Revenue | $ | 1,289,966 | $ | 1,070,605 | 219,361 | 20.5 | % | |||||||||
Operating income | 134,641 | 69,959 | 64,682 | 92.5 | % | |||||||||||
Operating margin | 10.4 | % | 6.5 | % | ||||||||||||
Adjusted EBITDA | $ | 287,528 | $ | 189,033 | 98,495 | 52.1 | % |
Net revenue increased $219.4$264.1 million duringfor the year ended January 2, 2016 driven by a $57.5 millionDecember 30, 2017, primarily resulting from our acquisition program. Of the increase in aggregate net revenue, $85.8$80.5 million in cementwas from increased sales of materials, $146.4 million was from increased sales of products and $94.2$37.2 million was from products, which was partially offset by an $18.1 million decrease inincreased service revenue. VolumesWe generated organic volume growth in our aggregates, cement and ready-mixed concreteasphalt lines of business all improvedin 2017 over the prior year. Additional discussion about the impact of acquisitions on each segment is presented in more detail below.
For the year ended December 30, 2017, our net revenue growth was $212.1 million and $52.0 million from both acquisitions and organic growth. Organic growth is definedrevenue, respectively. Operating income increased by $66.2 million in 2017 as incremental revenue that was not derived from acquisitions.
In the West segment, revenue from organic growth was $25.1 million from acquisitions. The Davenport Assets acquired in July 2015 were immediately integrated with our existing cement operations such that it is impracticablecompared to bifurcate the $89.9 million increase in cement revenue between organic and acquisition growth. However, a significant portion of the 85.2% increase in Cement revenue is estimated to be2016 as a result of a decrease in our general administrative expenses items referred to above, offset by an increase in our depreciation, depletion, amortization and accretion, and transaction costs. In 2017, we recognized $21.1 million of stock-based compensation compared to $49.9 million in 2016, of which $37.3 million were charges associated with certain LP Units exchanged and options granted at the acquisitiontime of the Davenport AssetsIPO for which the performance metrics were met or waived. Our depreciation, depletion, amortization and accretion increased $30.2 million largely due to acquisitions completed in July 2015.2017 and 2016.
Our operating margin percentage improved from 10.4% to 12.6% for the year ended December 30, 2017, due to pricing on materials and cement volume growth. Adjusted EBITDA, as defined below, increased by $64.4 million in the year ended December 30, 2017 as compared to the year ended December 31, 2016.
During 2017 and 2016, certain limited partners of Summit Holdings exchanged their LP Units for shares of Class A common stock of Summit Inc. The following table summarizes the changes in our ownership of Summit Holdings:
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| Summit Inc. Shares (Class A) |
| LP Units |
| Total |
| Summit Inc. Ownership Percentage |
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Balance — January 2, 2016 (1) |
| 52,402,692 |
| 50,275,825 |
| 102,678,517 |
| 51.0 | % |
Issuance of Class A shares |
| 1,038 |
| - |
| 1,038 |
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Exchanges during period |
| 45,124,528 |
| (45,124,528) |
| - |
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Other equity transactions |
| 26,020 |
| - |
| 26,020 |
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Balance — December 31, 2016 (1) |
| 97,554,278 |
| 5,151,297 |
| 102,705,575 |
| 95.0 | % |
January 2017 public offering |
| 10,000,000 |
| - |
| 10,000,000 |
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Exchanges during period |
| 1,461,677 |
| (1,461,677) |
| - |
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Other equity transactions |
| 1,334,639 |
| - |
| 1,334,639 |
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Balance — December 30, 2017 |
| 110,350,594 |
| 3,689,620 |
| 114,040,214 |
| 96.8 | % |
(1) | The January 2, 2016 balance of Summit Inc. Class A Shares of 52,402,692 is shown to reflect the retroactive application of 1,135,692 and 1,521,056 shares of Class A common stock issued as a stock dividend on December 28, 2016 and December 22, 2017, respectively. The December 31, 2016 balance of Summit Inc. Class A Shares of |
47
97,554,278 is shown to reflect the retroactive application of 1,521,056 shares of Class A common stock issued as a stock dividend on December 22, 2017. |
During 2016, a significant number of LP Units were exchanged for shares of Class A common stock. As a result, the ownership percentage of the noncontrolling interest decreased from 49.0% as of January 2, 2016 to 5.0% as of December 31, 2016. Although LP Units continued to be exchanged for shares of Class A common stock during 2017, the change in the ownership percentage of the noncontrolling interest was from 5.0% at the beginning of 2017 to 3.2% as of December 30, 2017. As a result of this exchange activity in 2017 and 2016, although net income increased by $79.7 million for the year ended December 30, 2017, the amount of net income attributable to Summit Holdings decreased from $9.3 million in 2016 to $4.0 million in 2017.
As a vertically-integrated company, we include intercompany sales from materials to products and from products to services when assessing the operating results of our business. We refer to revenue inclusive of intercompany sales as gross revenue. These intercompany transactions are eliminated in the consolidated financial statements. Gross revenue by line of business was as follows:
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(in thousands) | 2015 | 2014 | Variance | |||||||||||||||||||||
Revenue by product:* | ||||||||||||||||||||||||
($ in thousands) |
| 2017 |
| 2016 |
| Variance | ||||||||||||||||||
Revenue by product*: |
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Aggregates | $ | 296,960 | $ | 227,885 | $ | 69,075 |
| $ | 415,873 |
| $ | 355,617 |
| $ | 60,256 |
| 16.9 | % | ||||||
Cement | 181,901 | 94,402 | 87,499 |
| 286,360 |
| 256,046 |
| 30,314 |
| 11.8 | % | ||||||||||||
Ready-mixed concrete | 350,554 | 274,970 | 75,584 | |||||||||||||||||||||
Ready-mix concrete |
| 493,089 |
| 396,597 |
| 96,492 |
| 24.3 | % | |||||||||||||||
Asphalt | 292,193 | 278,867 | 13,326 |
| 307,654 |
| 263,652 |
| 44,002 |
| 16.7 | % | ||||||||||||
Paving and related services | 504,459 | 530,297 | (25,838 | ) |
| 599,378 |
| 502,458 |
| 96,920 |
| 19.3 | % | |||||||||||
Other | (193,770 | ) | (202,190 | ) | 8,420 |
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| (169,779) |
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| (148,307) |
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| (21,472) |
| (14.5) | % | |||||||
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Total revenue | $ | 1,432,297 | $ | 1,204,231 | $ | 228,066 |
| $ | 1,932,575 |
| $ | 1,626,063 |
| $ | 306,512 |
| 18.8 | % | ||||||
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* Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of intracompany transactions is included in Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
Gross revenue for paving and related services decreased $25.8 million for the year ended January 2, 2016, primarily as a result of decreased activity in Kansas, our exit of grading operations in Kentucky, weather delays on jobs in Texas, partially offset by increased activity in Utah. Detail of our volumes and average selling prices by product for the years ended January 2, 2016December 30, 2017 and December 27, 201431, 2016 were as follows:
2015 | 2014 | Percentage Change in | ||||||||||||||||||||||
Volume(1) (in thousands) | Pricing(2) | Volume(1) (in thousands) | Pricing(2) | Volume | Pricing | |||||||||||||||||||
Aggregates | 32,297 | $ | 9.19 | 25,413 | $ | 8.97 | 27.1 | % | 2.5 | % | ||||||||||||||
Cement | 1,733 | 104.94 | 1,049 | 90.01 | 65.2 | % | 16.6 | % | ||||||||||||||||
Ready-mixed concrete | 3,406 | 102.92 | 2,814 | 97.72 | 21.0 | % | 5.3 | % | ||||||||||||||||
Asphalt | 4,359 | 57.67 | 4,271 | 55.62 | 2.1 | % | 3.7 | % |
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| 2017 |
| 2016 |
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| Volume(1) |
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| Volume(1) |
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| Percentage Change in |
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| (in thousands) |
| Pricing(2) |
| (in thousands) |
| Pricing(2) |
| Volume |
| Pricing |
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Aggregates |
| 41,712 |
| $ | 9.97 |
| 36,092 |
| $ | 9.85 |
| 15.6 | % | 1.2 | % |
Cement |
| 2,547 |
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| 112.42 |
| 2,357 |
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| 108.63 |
| 8.1 | % | 3.5 | % |
Ready-mix concrete |
| 4,680 |
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| 105.37 |
| 3,823 |
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| 103.74 |
| 22.4 | % | 1.6 | % |
Asphalt |
| 5,263 |
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| 54.19 |
| 4,359 |
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| 54.74 |
| 20.7 | % | (1.0) | % |
(1) | Volumes are shown in tons for aggregates, cement and asphalt and in cubic yards for |
(2) | Pricing is shown on a per ton basis for aggregates, cement and asphalt and on a per cubic yard basis for |
Aggregate volumes
Revenue from aggregates increased in each of our five key states, Texas, Kansas, Utah, Missouri and Kansas as well as at our operations in British Columbia, Canada, which was acquired in September 2014. All of the 2014 and 2015 acquisitions in the West and East segments contributed to the growth in aggregate volumes. Aggregates pricing improved 2.5% despite the effects from the U.S./Canadian exchange rate. Absent the effect of foreign currency fluctuations, aggregates pricing would have increased 3.9%$60.3 million for the year ended January 2, 2016.
Our cement volumesDecember 30, 2017, primarily due to increased as a result of the July 2015 acquisition of the Davenport Assets and prices increased as a result of an improved market and a higher proportion of sales to low-volume customers. Ready-mixed concretevolumes. Aggregate volumes were positively affected by the 2014 acquisitions completed in late 2016 and 2017, together with broad based growth in most of our markets, partially offset by declines in our Missouri and Houston markets. Organic aggregate volumes increased 3.4% in 2017 as compared to the prior year primarily from Austin, northeast Texas and Utah, offset by a decline in Houston, Texas. In Houston, 2017 volumes were affected by temporary disruptions related to Hurricane Harvey. Aggregate pricing of $9.97 per ton slightly increased compared to 2016.
Revenue from cement increased $30.3 million in the year ended December 30, 2017, due primarily to increased volume and improved average selling price. Our organic cement volumes increased 5.8% due to increased volumes to our existing customers. During 2017, pricing for cement improved by 3.5% to $112.42 per ton, primarily resulting from price increases implemented in early 2017.
48
Revenue from ready-mix concrete increased $96.5 million for the year ended December 30, 2017, primarily from the acquisitions referred to above. Ready-mix concrete pricing of $105.37 per cubic yard ton in 2017 increased slightly as compared to 2016.
Revenue from asphalt increased $44.0 million for the year ended December 30, 2017. Our organic asphalt volumes increased 10.9% with the balance of the increased volumes coming from acquisitions. Our revenue in Austin, Texas, was higher in 2017 as an aggressive competitor impacted our paving and related services revenue in 2016. In 2017, our marketing efforts were able to improve our market share over 2016 levels in the Austin market.
Other Financial Information
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”) was enacted. Among other things, the TCJA, beginning January 1, 2018, reduced the federal statutory rate from 35% to 21% and extended bonus depreciation provisions. In addition, the application of net operating loss carryforwards generated in 2018 and beyond will be limited, 100% asset expensing will be allowed through 2022 and begin to phase out in 2023, and the amount of interest expense we are able deduct may also be limited in future years. As a result of the enactment of TCJA and other state effective rate changes, we reduced the carrying value of our net deferred tax assets by $216.9 million to reflect the revised federal statutory rate and other state statutory rates which will be in effect at the time those deferred tax assets are expected to be realized. Further, we evaluated the realizability of our net operating loss carryforwards, and determined a valuation allowance of $1.7 million was still appropriate as of December 30, 2017. The TCJA contains many provisions which will be clarified through new regulations expected to be issued during 2018. As of December 30, 2017, we have not completed the accounting for the tax effects of the TCJA; however, we have made reasonable estimates on our existing deferred tax balances, as permitted by Staff Accounting Bulletin 118 issued by the SEC on December 22, 2017. In addition, we expect the states to consider new statutory provisions related to the enactment of the TCJA during 2018 as well. We will record the impact, if any, of any newly issued regulations, as well as clarifications of the TCJA, as a discrete adjustment to our income tax provision in 2018.
Tax Receivable Agreement Expense
Our TRA expense for the year ended December 30, 2017 was $271.0 million as compared to $14.9 million in the year ended December 31, 2016. In the third quarter of 2017, based on a release of the valuation allowance related to the TRA deferred tax assets discussed below, we further determined payment of those benefits has become probable under our TRA agreement. As a result, in the third quarter of 2017, we recorded $501.8 million of TRA expense as our estimate of the realization of our deferred tax assets subject to the TRA had become more likely than not. In the fourth quarter of 2017, after the enactment of the TCJA and other exchanges and adjustments, our estimated liability under the TRA was reduced by $216.9 million primarily due to a lesser extent,decrease in Kansas, and prices increasedthe federal corporate tax rate. This reduction in our TRA liability was recorded as a reduction in our TRA expense during the fourth quarter 2017.
Income Tax Benefit
Our income tax benefit was $284.0 million for the year ended December 30, 2017 as compared to income tax benefit of $5.3 million for the year ended December 31, 2016. We recorded an income tax benefit of $498.3 million in the three months ended September 30, 2017 primarily related to the release of the valuation allowance against our deferred tax assets as discussed below. In the fourth quarter of 2017, we recorded deferred income expense of $216.9 million related to the reduction in carrying value of our deferred tax assets as a result of the decreased federal corporate tax rate as enacted by the TCJA and other state effective rate changes. Our effective income tax rate was higher in 2017 as compared to 2016 primarily due to the benefit associated with the release of the valuation allowance discussed below, the accrual of the TRA expense, the statutory rate change resulting from the TCJA and depletion in excess of U.S. GAAP depletion recognized for the year ended December 30, 2017. The effective tax rate for Summit Inc. differs from the federal rate primarily due to (1) the change in valuation allowance, (2) changes in statutory tax rates, (3) deductions related to TRA expense, (4) tax depletion expense in excess of the expense recorded under U.S. GAAP, (5) the minority interest in the Summit Holdings partnership that is allocated outside of the Company and (6) various other items such as limitations on meals and entertainment, certain stock compensation and other costs.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, as well as consideration of tax-planning strategies we may seek to utilize net operating loss carryforwards that are scheduled to expire in the near future. Due to our limited
49
operating history as of December 31, 2016, during which we incurred only a small amount of pre-tax income over the previous three years, as well as our acquisitive business strategy, after considering both positive and negative evidence, we concluded that it was not more likely than not that we would fully realize those deferred tax assets, and therefore recorded a partial valuation allowance against those deferred tax assets as of December 31, 2016. However, the amount of cumulative income increased significantly during the year ended December 30, 2017 and we expect to generate additional income in 2018 and for the foreseeable future that will allow us to utilize the deferred tax assets. As a result of this significant positive evidence, we determined that the deferred tax assets had become more likely than not of becoming realizable and therefore released the majority of the valuation allowance in the third quarter of 2017. The Company updated the analysis as of December 30, 2017. Further, the remaining valuation allowance was adjusted for the impact of the TCJA on certain net operating loss deferred tax assets within the C corporation entities that the Company does not expect to be realized.
As of December 30, 2017 and December 31, 2016, Summit Inc. had a valuation allowance of $1.7 million and $502.8 million, respectively.
Segment Results of Operations
West Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| 2017 |
| 2016 |
| Variance |
| |||||
Net revenue |
| $ | 899,992 |
| $ | 736,573 |
| $ | 163,419 |
| 22.2 | % |
Operating income |
|
| 130,334 |
|
| 100,659 |
|
| 29,675 |
| 29.5 | % |
Operating margin percentage |
|
| 14.5 | % |
| 13.7 | % |
|
|
|
|
|
Adjusted EBITDA (1) |
| $ | 203,590 |
| $ | 167,434 |
| $ | 36,156 |
| 21.6 | % |
(1) | Adjusted EBITDA is a non-GAAP measure that we find helpful in monitoring the performance of our business. See the reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income, below. |
Net revenue in the West segment increased $163.4 million for the year ended December 30, 2017, primarily due to incremental revenue from acquisitions. Net revenue growth from acquisitions in 2017 increased $131.7 million, with the balance attributable to organic operations.
The West segment’s operating income improved cement pricing. Asphalt$29.7 million and Adjusted EBITDA improved $36.2 million in 2017. The improvement in West segment operating income and Adjusted EBITDA was primarily due to improved organic volume growth in aggregates and asphalt, as well as contributions from the acquisitions mentioned above. The operating margin percentage in the West segment increased slightly in 2017 to 14.5% as compared to 13.7% in 2016, despite the impact of Hurricane Harvey, due to the same factors mentioned above. Those same factors also contributed to similar improvements in net revenue, operating income and Adjusted EBITDA in the respective year ends.
Gross revenue by product/ service was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| 2017 |
| 2016 |
| Variance | ||||||
Revenue by product*: |
|
|
|
|
|
|
|
|
|
|
|
|
Aggregates |
| $ | 191,851 |
| $ | 159,824 |
| $ | 32,027 |
| 20.0 | % |
Ready-mix concrete |
|
| 362,042 |
|
| 294,961 |
|
| 67,081 |
| 22.7 | % |
Asphalt |
|
| 214,561 |
|
| 182,739 |
|
| 31,822 |
| 17.4 | % |
Paving and related services |
|
| 375,036 |
|
| 314,079 |
|
| 60,957 |
| 19.4 | % |
Other |
|
| (144,647) |
|
| (137,921) |
|
| (6,726) |
| (4.9) | % |
Total revenue |
| $ | 998,843 |
| $ | 813,682 |
| $ | 185,161 |
| 22.8 | % |
* Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of intracompany transactions is included in Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
50
The West segment’s percent changes in sales volumes and pricespricing in 2017 from 2016 were as follows:
|
|
|
|
|
| Percentage Change in |
| ||
| Volume |
| Pricing |
|
Aggregates | 18.3 | % | 1.4 | % |
Ready-mix concrete | 20.6 | % | 1.8 | % |
Asphalt | 22.8 | % | (1.7) | % |
Gross revenue from aggregates in the West segment increased $32.0 million in 2017, primarily due to an increase in volumes. Aggregates volume increased in 2017 mainly due acquisitions occurring in 2016, as well as organic growth in Austin, Texas and Vancouver, British Columbia, partially offset by a decrease in organic volumes in Houston resulting from the comparable periods. In 2014,impact of Hurricane Harvey. Aggregates pricing in 2017 remained consistent with 2016.
Revenue from ready-mix concrete in the West segment increased $67.1 million in 2017, primarily as a result of acquisitions.
Revenue from asphalt in the West segment increased $31.8 million in 2017, primarily due to higher volumes partially offset by slightly lower pricing. Organic asphalt volumes included a higher percentage of base materials, which is thicker than intermediate or surface mix and has a lower selling price per ton. The increased pricing was largely10.0% due to a shiftimprovement in product mix. our Austin, Texas market in 2017. In 2017, asphalt pricing decreased consistent with lower input prices. Revenue for paving and related services in the West segment increased by $61.0 million in 2017 due to organic growth and acquisitions.
Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue in 2015for the year ended December 30, 2017 was approximately $196.1$126.3 million and $49.4$4.6 million, respectively.
Our Houston operations were negatively impacted by Hurricane Harvey in the third and fourth quarters of 2017. After temporary interruptions, our operations have resumed. We expect our volumes in the Houston area to return to normal levels in the future. Our Austin business operates a liquid asphalt terminal in the Houston area which was also damaged by Hurricane Harvey. The terminal will be shut down until mid-2018 while undergoing significant repairs. We have received proceeds from claims for damaged property, plant and equipment, and are in the process of filing additional claims under our business interruption policy.
Our reporting unit based in Austin, Texas, has seen new market entrants, one of which aggressively sought market share, which negatively impacted Adjusted EBITDA in the West segment in 2016. Our efforts to improve our profitability in that area are showing positive results in 2017, as organic volume growth occurred in 2017 as compared to the prior year.
East Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| 2017 |
| 2016 |
| Variance |
| |||||
Net revenue |
| $ | 548,604 |
| $ | 470,614 |
| $ | 77,990 |
| 16.6 | % |
Operating income |
|
| 67,739 |
|
| 65,424 |
|
| 2,315 |
| 3.5 | % |
Operating margin percentage |
|
| 12.3 | % |
| 13.9 | % |
|
|
|
|
|
Adjusted EBITDA (1) |
| $ | 139,108 |
| $ | 126,007 |
| $ | 13,101 |
| 10.4 | % |
(1) | Adjusted EBITDA is a non-GAAP measure that we find helpful in monitoring the performance of our business. See the reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income, below. |
Net revenue in the East segment increased $78.0 million for the year ended December 30, 2017, primarily due to acquisitions contributing $74.0 million and organic growth of $4.0 million.
Operating income increased $2.3 million and Adjusted EBITDA improved $13.1 million in 2017, due to increased pricing and acquisitions.
Operating margin percentage for the year ended December 30, 2017 decreased to 12.3% from 13.9% in the prior year, as revenue from paving and related services, which generally have lower operating margins than materials and products, accounted for about a third of our gross revenue increase, as well as the other factors mentioned above.
51
Gross revenue by product/ service was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| 2017 |
| 2016 |
| Variance | ||||||
Revenue by product*: |
|
|
|
|
|
|
|
|
|
|
|
|
Aggregates |
| $ | 224,022 |
| $ | 195,793 |
| $ | 28,229 |
| 14.4 | % |
Ready-mix concrete |
|
| 131,047 |
|
| 101,636 |
|
| 29,411 |
| 28.9 | % |
Asphalt |
|
| 93,093 |
|
| 80,913 |
|
| 12,180 |
| 15.1 | % |
Paving and related services |
|
| 224,342 |
|
| 188,379 |
|
| 35,963 |
| 19.1 | % |
Other |
|
| (42,585) |
|
| (35,427) |
|
| (7,158) |
| (20.2) | % |
Total revenue |
| $ | 629,919 |
| $ | 531,294 |
| $ | 98,625 |
| 18.6 | % |
* Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of intracompany transactions is included in Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
The East segment’s percent changes in sales volumes and pricing in 2017 from 2016 were as follows:
|
|
|
|
|
| Percentage Change in |
| ||
| Volume |
| Pricing |
|
Aggregates | 13.0 | % | 1.3 | % |
Ready-mix concrete | 27.9 | % | 0.8 | % |
Asphalt | 16.4 | % | 0.1 | % |
Gross revenue from aggregates in the East segment increased $28.2 million in 2017, due primarily to acquisitions. Aggregate volumes in 2017 increased 13.0%, primarily as a result of those acquisitions. Aggregates pricing increased in 2017 as a result of a shift in product mix.
Revenue from ready-mix concrete in the East segment increased $29.4 million in 2017, primarily as a result of the acquisitions mentioned above. In 2017, ready-mix volumes increased due to acquisitions, offset by an organic volumes decline of 8.0%.
Revenue from asphalt increased $12.2 million in 2017, due to an increase in asphalt volumes, offset by pricing decline, primarily in the Kentucky and Kansas markets. The $36.0 million increase in paving and related service revenue in 2017 was primarily a result of acquisitions in Kansas and Virginia.
Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue for the year ended December 30, 2017 was approximately $66.4 million and $3.5 million, respectively.
Cement Segment
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|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| 2017 |
| 2016 |
| Variance |
| |||||
Net revenue |
| $ | 303,813 |
| $ | 281,087 |
| $ | 22,726 |
| 8.1 | % |
Operating income |
|
| 89,360 |
|
| 82,521 |
|
| 6,839 |
| 8.3 | % |
Operating margin percentage |
|
| 29.4 | % |
| 29.4 | % |
|
|
|
|
|
Adjusted EBITDA (1) |
| $ | 127,547 |
| $ | 112,991 |
| $ | 14,556 |
| 12.9 | % |
(1) | Adjusted EBITDA is a non-GAAP measure that we find helpful in monitoring the performance of our business. See the reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income, below. |
Net revenue in the Cement segment increased $22.7 million for the year ended December 30, 2017, primarily due to organic growth within existing operations and the acquisition of two cement terminal operations located in Port Allen and LaPlace, Louisiana, which contributed incremental net revenue of $6.4 million in 2017.
The Cement segment’s operating income improved $6.8 million and Adjusted EBITDA improved $14.6 million in 2017. The increase in operating income and Adjusted EBITDA was primarily due to increased organic cement volumes and pricing. Continued production efficiencies and price improvement grew operating margins, but this improvement
52
was offset by a higher cost basis on purchased cement needed to satisfy the higher demand, resulting in consistent operating margins for the year ended December 30, 2017 when compared to 2016.
Gross revenue by product was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| 2017 |
| 2016 |
| Variance | ||||||
Revenue by product*: |
|
|
|
|
|
|
|
|
|
|
|
|
Cement |
| $ | 286,360 |
| $ | 256,046 |
| $ | 30,314 |
| 11.8 | % |
Other |
|
| 17,453 |
|
| 25,041 |
|
| (7,588) |
| (30.3) | % |
Total revenue |
| $ | 303,813 |
| $ | 281,087 |
| $ | 22,726 |
| 8.1 | % |
* Revenue from waste processing and the elimination of intracompany transactions are included in Other.
The Cement segment’s percent changes in sales volumes and pricing in 2017 from 2016 were as follows:
|
|
|
|
|
| Percentage Change in |
| ||
| Volume |
| Pricing |
|
Cement | 8.1 | % | 3.5 | % |
Revenue from cement increased $30.3 million in 2017, due primarily to increased organic cement volumes and pricing. In 2017, organic cement volumes and pricing increased 5.8% and 3.3%, respectively, with the remainder of the increase due to the acquisition of two cement terminal operations in 2016.
Fiscal Year 2016 Compared to 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| 2016 |
| 2015 |
| Variance |
| |||||
Net revenue |
| $ | 1,488,274 |
| $ | 1,289,966 |
| $ | 198,308 |
| 15.4 | % |
Operating income |
|
| 154,662 |
|
| 135,024 |
|
| 19,638 |
| 14.5 | % |
Operating margin percentage |
|
| 10.4 | % |
| 10.5 | % |
|
|
|
|
|
Adjusted EBITDA |
| $ | 371,347 |
| $ | 287,528 |
| $ | 83,819 |
| 29.2 | % |
Net revenue increased $198.3 million for the year ended December 31, 2016, of which $128.2 million was from increased sales of materials, $51.0 million was from increased sales of products and $19.1 million was from increased service revenue. We had volume growth in our aggregates, cement and ready-mix concrete lines of business, driven by our 2016 and 2015 acquisitions. Excluding the cement segment, for the year ended December 31, 2016, $182.3 million of the net revenue growth was from acquisitions, partially offset by a $69.6 million reduction in organic revenue. Organic revenue growth is defined as incremental revenue that was not derived from acquisitions. For the year ended December 31, 2016, approximately $85.6 million of the revenue growth was attributable to our cement operations. In July 2015, we acquired the Davenport Assets, which were immediately integrated with our existing cement operations such that it is impracticable to bifurcate growth in the segment between organic and acquisition growth.
As a vertically-integrated company, we include intercompany sales from materials to products and from products to services when assessing the operating results of our business. We refer to revenue inclusive of intercompany sales as gross revenue. These intercompany transactions are eliminated in the consolidated financial statements. Gross revenue by line of business was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| 2016 |
| 2015 |
| Variance | ||||||
Revenue by product*: |
|
|
|
|
|
|
|
|
|
|
|
|
Aggregates |
| $ | 355,617 |
| $ | 296,960 |
| $ | 58,657 |
| 19.8 | % |
Cement |
|
| 256,046 |
|
| 173,845 |
|
| 82,201 |
| 47.3 | % |
Ready-mix concrete |
|
| 396,597 |
|
| 350,554 |
|
| 46,043 |
| 13.1 | % |
Asphalt |
|
| 263,652 |
|
| 292,193 |
|
| (28,541) |
| (9.8) | % |
Paving and related services |
|
| 502,458 |
|
| 504,459 |
|
| (2,001) |
| (0.4) | % |
Other |
|
| (148,307) |
|
| (185,714) |
|
| 37,407 |
| 20.1 | % |
Total revenue |
| $ | 1,626,063 |
| $ | 1,432,297 |
| $ | 193,766 |
| 13.5 | % |
* Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of intracompany transactions is included in Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
53
Gross revenue for paving and related services decreased $2.0 million for the year ended December 31, 2016. This decrease was primarily due to declines in the Austin, Texas market. The economy in Austin, Texas attracted a new aggressive entrant in 2016 who attracted a number of our employees, which has collectively resulted in a decrease in our paving and related services revenue as compared to 2015 levels.
Detail of our volumes and average selling prices by product for the years ended December 31, 2016 and January 2, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
|
|
|
|
| ||||||
|
| Volume(1) |
|
|
| Volume(1) |
|
|
| Percentage Change in |
| ||||
|
| (in thousands) |
| Pricing(2) |
| (in thousands) |
| Pricing(2) |
| Volume |
| Pricing |
| ||
Aggregates |
| 36,092 |
| $ | 9.85 |
| 32,297 |
| $ | 9.19 |
| 11.8 | % | 7.2 | % |
Cement |
| 2,357 |
|
| 108.63 |
| 1,720 |
|
| 101.05 |
| 37.0 | % | 7.5 | % |
Ready-mix concrete |
| 3,823 |
|
| 103.74 |
| 3,406 |
|
| 102.92 |
| 12.2 | % | 0.8 | % |
Asphalt |
| 4,359 |
|
| 54.74 |
| 4,359 |
|
| 57.67 |
| — | % | (5.1) | % |
(1) | Volumes are shown in tons for aggregates, cement and asphalt and in cubic yards for ready-mix concrete. |
(2) | Pricing is shown on a per ton basis for aggregates, cement and asphalt and on a per cubic yard basis for ready-mix concrete. |
Aggregates volumes were positively affected by the 2016 and 2015 acquisitions as well as strength in the Kansas and South Carolina markets. This growth was partially offset by declines in the British Columbia and Austin and Houston, Texas markets. The decline in aggregate volumes in British Columbia was the result of a large sand river project that has been completed in 2015. Sand is a lower-priced, lower-margin product as compared to hard rocks. In Austin, Texas, a new aggressive competitor contributed to the decrease in our paving and related services revenue, in addition to the upstream aggregate and asphalt products. In Houston, Texas, volumes were affected by flooding during 2016. We had strong aggregates price increases across our markets, which would have been greater absent the effect from the U.S./Canadian exchange rate. The U.S. dollar was stronger as compared to the Canadian dollar for the year ended December 31, 2016. Absent the effect of foreign currency fluctuations, aggregates pricing would have increased 7.5% for the year ended December 31, 2016.
Our cement volumes increased primarily as a result of the July 2015 acquisition of the Davenport Assets and prices increased consistent with the market.
The increase in ready-mix concrete volumes was primarily a result of the 2016 and 2015 acquisitions and pricing generally increased by mid-single digit percentages in the organic operations, but was affected by the geographic mix as ready-mix concrete producers acquired in 2015 were in lower-priced markets.
The flat asphalt volumes for the year ended December 31, 2016 from the year ended January 2, 2016 resulted from declines in the Austin, Texas, Wichita, Kansas and Kentucky markets, offset by increases from the 2016 and 2015 acquisitions. The decrease in Wichita, Kansas was primarily due to a shift in state work away from asphalt paving in that market. The decrease in Kentucky was primarily due to a decreased level of state contracts for the fiscal year. Asphalt pricing decreased primarily due to lower input prices. Prior to eliminations, the net increase from these volume and pricing changes on gross revenue for the year ended December 31, 2016 was approximately $138.4 million and $20.1 million, respectively.
54
Operating income increased from 6.5%$20.0 million for the year ended December 31, 2016, and Adjusted EBITDA improved $83.8 million. For the year ended December 31, 2016, operating margin remained flat at 10.4% compared to 10.4%, in the year ended January 2, 2016, which was attributable to the following:
| ||||
| ||||
| ||||
| ||||
| ||||
|
| |||
Operating margin—2015 | 10.4 | % | ||
Gross margin(1) |
| 3.0 | % | |
Gain on asset disposals(2) | (1.6) | % | ||
IPO costs(3) | 2.2 | % | ||
Legacy equity modification charges(4) | (2.5) | % | ||
Other | (1.2) | % | ||
Operating margin—2016 | 10.3 | % |
| The gross margin |
(2) | In the year ended December |
(3) | In the year ended December 31, 2016, we did not have any IPO related costs compared to $28.3 million in the year ended January 2, 2016. |
(4) | In the year ended December 31, 2016, we recognized $37.3 million of stock-based compensation charges associated with certain LP Units converted and options granted at the time of the IPO for which the performance metrics were met or waived in 2016. We did not recognize any charges in the year ended January 2, 2016. |
Other Financial Information
Loss on Debt Financings
In the year ended January 2, 2016, we recognized $71.6 million of losses associated with the: (1) March 2015 amendment to the credit agreement;Credit Agreement; (2) April 2015 $288.2 million redemption of 10 ½% senior notes due 2020 Notes;(the “2020 Notes”); (3) August 2015 term loan refinancing, $350.0 million issuance of 2023 Notes and $183.0 million redemption of 2020 Notes; and (4) November 2015 $153.8 million redemption of 2020 Notes. The write-off of deferred financingsfinancing fees and original issuance discounts and premiums and the incurrence of prepayment premiums, all associated with the redemption of the 2020 Notes, are includedincluding in the loss on debt financings.
Income Tax Benefit
The income tax benefit increased $18.3decreased $13.0 million for the year ended January 2,December 31, 2016, reflective ofdue to the tax benefit associated with the loss on debt financings that was recognized in our C corporations.corporation subsidiaries in the year ended January 2, 2016.
Segment Results of Operations
West Segment
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
($ in thousands) | 2015 | 2014 | Variance |
| 2016 |
| 2015 |
| Variance |
| ||||||||||||||||||
Net Revenue | $ | 719,485 | $ | 608,671 | $ | 110,814 | 18.2 | % | ||||||||||||||||||||
Net revenue |
| $ | 736,573 |
| $ | 719,485 |
| $ | 17,088 |
| 2.4 | % | ||||||||||||||||
Operating income | 96,498 | 61,882 | 34,616 | 55.9 | % |
|
| 100,659 |
|
| 96,498 |
|
| 4,161 |
| 4.3 | % | |||||||||||
Operating margin | 13.4 | % | 10.2 | % | ||||||||||||||||||||||||
Operating margin percentage |
|
| 13.7 | % |
| 13.4 | % |
|
|
|
|
| ||||||||||||||||
Adjusted EBITDA | $ | 150,764 | $ | 102,272 | $ | 48,492 | 47.4 | % |
| $ | 167,434 |
| $ | 150,764 |
| $ | 16,670 |
| 11.1 | % |
Net
55
The West segment’s net revenue in the West segment increased approximately 18.2% in 20152.4% due to both acquisitions2016 and organic growth.2015 acquisitions. Incremental net revenue from acquisitions totaled $85.7$66.0 million in 2015 and organic net revenue increased $25.1 million.decreased $48.9 million, $36.8 million of which occurred in our Austin, Texas operations. Gross revenue by product/service was as follows:
|
|
|
|
|
|
|
|
|
| |||||||||||||||
(in thousands) | 2015 | 2014 | Variance |
| 2016 |
| 2015 |
| Variance | |||||||||||||||
Revenue by product:* | ||||||||||||||||||||||||
Revenue by product*: |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Aggregates | $ | 156,873 | $ | 105,178 | $ | 51,695 |
| $ | 159,824 |
| $ | 156,873 |
| $ | 2,951 |
| 1.9 | % | ||||||
Ready-mixed concrete | 266,210 | 213,587 | 52,623 | |||||||||||||||||||||
Ready-mix concrete |
|
| 294,961 |
| 266,210 |
| 28,751 |
| 10.8 | % | ||||||||||||||
Asphalt | 194,155 | 168,227 | 25,928 |
|
| 182,739 |
| 194,155 |
| (11,416) |
| (5.9) | % | |||||||||||
Paving and related services | 315,573 | 296,186 | 19,387 |
|
| 314,079 |
| 315,573 |
| (1,494) |
| (0.5) | % | |||||||||||
Other | (128,308 | ) | (117,462 | ) | (10,846 | ) |
|
| (137,921) |
|
| (128,308) |
|
| (9,613) |
| (7.5) | % | ||||||
|
|
| ||||||||||||||||||||||
Total revenue | $ | 804,503 | $ | 665,716 | $ | 138,787 |
| $ | 813,682 |
| $ | 804,503 |
| $ | 9,179 |
| 1.1 | % | ||||||
|
|
|
* Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of intracompany transactions is included in Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
Gross revenue for paving and related services increased $19.4decreased $1.5 million for the year ended December 31, 2016. This decrease primarily occurred in 2015, which was primarily a result of increased activity in Utah, partially offset by weather delays in Texas.the Austin, Texas operations. The West segment’s percent changes in sales volumes and pricing in 20152016 from 20142015 were as follows:
|
|
|
|
|
|
|
| Percentage Change in |
| ||
|
| Volume |
| Pricing |
|
Aggregates |
| (4.2) | % | 6.4 | % |
Ready-mix concrete |
| 11.1 | % | (0.3) | % |
Asphalt |
| 1.2 | % | (4.0) | % |
Percentage Change in | ||||||||
Volume | Pricing | |||||||
Aggregates | 43.0 | % | 4.2 | % | ||||
Ready-mixed concrete | 17.2 | % | 6.3 | % | ||||
Asphalt | 7.8 | % | 7.6 | % |
AggregatesThe decline in aggregates volumes increased across all of our marketswas primarily in the West segment, Texas, Utah and British Columbia Canada.and Austin and Houston, Texas markets, which was partially offset by volume increases from the 2016 and 2015 acquisitions. Aggregates pricing improved 4.2% despiteacross our markets and would have been greater, absent the effectseffect from the U.S./Canadian exchange rate. The U.S. dollar was stronger as compared to the Canadian dollar for the year ended December 31, 2016 compared to the year ended January 2, 2016. Absent the effect of foreign currency fluctuations, aggregates pricing would have increased 6.9%7.1% for the year ended December 31, 2016.
The increase in ready-mix concrete volumes was primarily a result of the 2016 and 2015 acquisitions and pricing generally increased by mid-single digit percentages in the organic operations, but was affected by the geographic mix as ready-mix concrete producers acquired in 2015 were in lower-priced markets.
Asphalt pricing decreased consistent with lower input prices. Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue for the year ended December 31, 2016 was approximately $18.7 million and $1.6 million, respectively.
The West segment’s operating income increased $4.3 million in 2016 and Adjusted EBITDA improved $16.7 million. The improvement was driven by acquisitions, partially offset by a decline in the British Columbia and Austin and Houston, Texas operations. Operating margin for the year ended December 31, 2016 was relatively flat from 13.4% to 13.7% for the year ended January 2, 2016. Volumes also
East Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| 2016 |
| 2015 |
| Variance |
| |||||
Net revenue |
| $ | 470,614 |
| $ | 374,997 |
| $ | 95,617 |
| 25.5 | % |
Operating income |
|
| 65,424 |
|
| 49,445 |
|
| 15,979 |
| 32.3 | % |
Operating margin percentage |
|
| 13.9 | % |
| 13.2 | % |
|
|
|
|
|
Adjusted EBITDA |
| $ | 126,007 |
| $ | 92,303 |
| $ | 33,704 |
| 36.5 | % |
56
The East segment’s net revenue increased 25.5% in all2016 due to acquisitions. Incremental net revenue from acquisitions totaled $116.3 million and organic net revenue decreased $20.7 million. Gross revenue by product/service was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| 2016 |
| 2015 |
| Variance | ||||||
Revenue by product*: |
|
|
|
|
|
|
|
|
|
|
|
|
Aggregates |
| $ | 195,793 |
| $ | 140,087 |
| $ | 55,706 |
| 39.8 | % |
Ready-mix concrete |
|
| 101,636 |
|
| 84,344 |
|
| 17,292 |
| 20.5 | % |
Asphalt |
|
| 80,913 |
|
| 98,038 |
|
| (17,125) |
| (17.5) | % |
Paving and related services |
|
| 188,379 |
|
| 188,886 |
|
| (507) |
| (0.3) | % |
Other |
|
| (35,427) |
|
| (79,045) |
|
| 43,618 |
| 55.2 | % |
Total revenue |
| $ | 531,294 |
| $ | 432,310 |
| $ | 98,984 |
| 22.9 | % |
* Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of our West segment markets that sell ready-mixed concrete (i.e., Texasintracompany transactions is included in Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
The East segment’s percent changes in sales volumes and Utah). Ready-mixed concrete pricespricing in 2016 from 2015 were as follows:
|
|
|
|
|
|
|
| Percentage Change in |
| ||
|
| Volume |
| Pricing |
|
Aggregates |
| 32.5 | % | 5.5 | % |
Ready-mix concrete |
| 15.7 | % | 4.1 | % |
Asphalt |
| (2.4) | % | (8.0) | % |
Aggregates volumes in 2016 increased 32.5% as a result of the 2016 acquisitions in Kansas, Virginia, and the Carolinas. Aggregates pricing increased as a result of higher cement prices in our markets.
The increase in asphalt volumes was primarily realized in Utahan improved market and the increased asphalt pricing was largely due to a shift in product mixmix. Ready-mix concrete volumes improved in Texas. In 2014, Texas asphaltKansas and Missouri and pricing increased across the East segment’s markets. Asphalt volumes included a higher percentage of base materials.decreased in Kentucky and Wichita, Kansas, as discussed above. Asphalt pricing decreased due to lower input costs. Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue in 20152016 was approximately $99.1$51.2 million and $31.1$4.6 million, respectively.
The West segment’s operating income increased $34.6 million in 2015 and Adjusted EBITDA improved $48.5 million. The improvement was driven by the 2015 acquisitions of Lewis & Lewis, LeGrand and Pelican, the inclusion of a full year of the 2014 acquisitions in the Houston and Midland/Odessa, Texas and British Columbia, Canada markets and organic volume growth.
Operating margin for the year ended January 2, 2016 increased from 10.2% to 13.4%, which was attributable to the following:
| ||||
| ||||
| ||||
| ||||
| ||||
East Segment
($ in thousands) | 2015 | 2014 | Variance | |||||||||||||
Net Revenue | $ | 374,997 | $ | 356,361 | $ | 18,636 | 5.2 | % | ||||||||
Operating income | 49,445 | 26,663 | 22,782 | 85.4 | % | |||||||||||
Operating margin | 13.2 | % | 7.5 | % | ||||||||||||
Adjusted EBITDA | $ | 92,303 | $ | 73,822 | $ | 18,481 | 25.0 | % |
The East segment’s net revenue increased 5.2% in 2015 due to both acquisitions and organic growth. Incremental net revenue from acquisitions totaled $22.6 million and organic net revenue decreased $4.0 million. Gross revenue by product/service was as follows:
(in thousands) | 2015 | 2014 | Variance | |||||||||
Revenue by product:* | ||||||||||||
Aggregates | $ | 140,087 | $ | 122,707 | $ | 17,380 | ||||||
Ready-mixed concrete | 84,344 | 61,383 | 22,961 | |||||||||
Asphalt | 98,038 | 110,640 | (12,602 | ) | ||||||||
Paving and related services | 188,886 | 234,111 | (45,225 | ) | ||||||||
Other | (79,045 | ) | (95,899 | ) | 16,854 | |||||||
|
|
|
|
|
| |||||||
Total revenue | $ | 432,310 | $ | 432,942 | $ | (632 | ) | |||||
|
|
|
|
|
|
The $45.2 million decrease in paving and related services primarily was a result of decreased activity in Kansas and our exit of grading operations in Kentucky in 2015. The East segment’s percent changes in sales volumes and pricing in 2015 from 2014 were as follows:
Percentage Change in | ||||||||
Volume | Pricing | |||||||
Aggregates | 11.0 | % | 2.8 | % | ||||
Ready-mixed concrete | 34.5 | % | 2.1 | % | ||||
Asphalt | (7.9 | )% | (4.8 | )% |
Aggregate volumes in 2015 increased 11.0% as a result of the Buckhorn Materials acquisition on April 1, 2014 and Concrete Supply on October 3, 2014. Aggregates pricing increased as a result of an improved market and shift in product mix. Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue in 2015 was approximately $27.1 million and $0.6 million, respectively.
Aggregates volumes increased across all of our markets in the East segment, Kansas, Missouri and Kentucky. Aggregates pricing increased as a result of an improved market and shift in product mix. The increase in ready-mixed concrete volumes is a result of the Concrete Supply acquisition in October 2014 and a shift to concrete paving jobs in Kansas. Asphalt volumes decreased primarily due to a shift from asphalt to concrete
paving jobs in Kansas. The decrease in asphalt prices reflects the decrease in liquid asphalt. Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue in 2015 was approximately $27.1 million and $0.6 million, respectively.
The East segment’s operating income increased $22.8$16.0 million in 20152016 and Adjusted EBITDA improved $18.5$33.7 million. Operating margin for the year ended December 31, 2016 was 13.9% and was relatively consistent with 13.2% for the year ended January 2, 2016 increased from 7.5% to 13.2%, which was attributable to the following:2016.
| ||||
| ||||
| ||||
|
Cement Segment
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
($ in thousands) | 2015 | 2014 | Variance |
| 2016 |
| 2015 |
| Variance |
| ||||||||||||||||||
Net Revenue | $ | 195,484 | $ | 105,573 | $ | 89,911 | 85.2 | % | ||||||||||||||||||||
Net revenue |
| $ | 281,087 |
| $ | 195,484 |
| $ | 85,603 |
| 43.8 | % | ||||||||||||||||
Operating income | 64,567 | 19,705 | 44,862 | 227.7 | % |
|
| 82,521 |
|
| 64,950 |
|
| 17,571 |
| 27.1 | % | |||||||||||
Operating margin | 33.0 | % | 18.7 | % | ||||||||||||||||||||||||
Operating margin percentage |
|
| 29.4 | % |
| 33.2 | % |
|
|
|
|
| ||||||||||||||||
Adjusted EBITDA | $ | 74,845 | $ | 35,133 | $ | 39,712 | 113.0 | % |
| $ | 112,991 |
| $ | 74,845 |
| $ | 38,146 |
| 51.0 | % |
Net revenue in the Cement segment increased $89.9$85.6 million in 20152016 primarily as a result of the acquisition of the Davenport Assets in July 2015. The Davenport Assets were immediately integrated with our existing cement operations such that it is impracticable to bifurcate the $89.9 million increase in cement revenue between organic and acquisition growth. However, a significant portion of the 85.2% increase in Cement revenue is estimated to be a result of the acquisition of the Davenport Assets in July 2015. Gross revenue by product/service was as follows:
|
|
|
|
|
|
|
|
|
| |||||||||||||||
(in thousands) | 2015 | 2014 | Variance |
| 2016 |
| 2015 |
| Variance | |||||||||||||||
Revenue by product:* | ||||||||||||||||||||||||
Revenue by product*: |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Cement | $ | 181,901 | $ | 94,402 | $ | 87,499 |
| $ | 256,046 |
| $ | 173,845 |
| $ | 82,201 |
| 47.3 | % | ||||||
Other | 13,583 | 11,171 | 2,412 |
|
| 25,041 |
|
| 21,639 |
|
| 3,402 |
| 15.7 | % | |||||||||
|
|
| ||||||||||||||||||||||
Total revenue | $ | 195,484 | $ | 105,573 | $ | 89,911 |
| $ | 281,087 |
| $ | 195,484 |
| $ | 85,603 |
| 43.8 | % | ||||||
|
|
|
* Revenue from waste processing and the elimination of intracompany transactions are included in Other.
57
The Cement segment’s percent changes in sales volumes and pricing in 20152016 from 20142015 were as follows:
Percentage Change in | ||||||||
Volume | Pricing | |||||||
Cement | 65.2 | % | 16.6 | % |
|
|
|
|
|
|
|
| Percentage Change in |
| ||
|
| Volume |
| Pricing |
|
Cement |
| 37.0 | % | 7.5 | % |
In 2015,2016, cement volumes and pricing increased primarily as a result of the acquisition of the Davenport Assets. With the acquisition of the Davenport Assets, we expanded our markets from Minnesota to Louisiana, which included higher-priced markets than St. Louis and Hannibal, Missouri. Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue in 20152016 was approximately $69.9$68.4 million and $17.7 million.$13.9 million, respectively.
The Cement segment’s operating income increased $44.9$17.3 million in 20152016 and Adjusted EBITDA improved $39.7$38.1 million. Included in operating income was a $7.2 million increase in fuel costs as a result of acquiringOperating margin for the Davenport Assets in July 2015. Operating marginyear ended December 31, 2016 decreased from 33.0% for the year ended January 2, 2016 increased from 18.7% to 33.0%29.1%, which was attributable to the following:
Operating margin— | ||||
| 33.0 | % | ||
Gain on disposal of Bettendorf | (8.5) | % | ||
| 4.9 | % | ||
Other | (0.3) | % | ||
Operating margin—2016 |
| |||
| ||||
29.1 | % |
(1)
In the year ended January 2, 2016, we recognized a net $16.6 million gain on the cement terminal and related assets in Bettendorf, Iowa, which were part of the purchase consideration paid to acquire the Davenport Assets. |
Fiscal Year 2014 Compared to 2013
($ in thousands) | 2014 | 2013 | Variance | |||||||||||||
Net Revenue | $ | 1,070,605 | $ | 824,364 | $ | 246,241 | 29.9 | % | ||||||||
Operating income (loss) | 69,959 | (47,977 | ) | 117,936 | 245.8 | % | ||||||||||
Operating margin | 6.5 | % | (5.8 | )% | ||||||||||||
Adjusted EBITDA | $ | 189,033 | $ | 130,047 | $ | 58,986 | 45.4 | % |
Net revenue increased $246.2 million in 2014 due to a $232.6 million and $13.6 million increase in product and service revenue, respectively. We had volume growth in each of our lines of business, driven primarily by the 2014 and 2013 acquisitions and organic growth. Organic net revenue increased by $50.2 million, or 6.1%, while the remaining 23.8% of our net revenue increase, or $196.0 million, was from acquisitions. Gross revenue by product/service was as follows:
(in thousands) | 2014 | 2013 | Variance | |||||||||
Revenue by product:* | ||||||||||||
Aggregates | $ | 227,885 | $ | 159,508 | $ | 68,377 | ||||||
Cement | 94,402 | 80,757 | 13,645 | |||||||||
Ready-mixed concrete | 274,970 | 112,878 | 162,092 | |||||||||
Asphalt | 278,867 | 220,060 | 58,807 | |||||||||
Paving and related services | 530,297 | 478,280 | 52,017 | |||||||||
Other | (202,190 | ) | (135,282 | ) | (66,908 | ) | ||||||
|
|
|
|
|
| |||||||
Total revenue | $ | 1,204,231 | $ | 916,201 | $ | 288,030 | ||||||
|
|
|
|
|
|
Gross revenue for paving and related services increased $52.0 million primarily as a result of increased activity in Texas, Utah and Kansas. Detail of consolidated percent changes in sales volumes and pricing in 2014 from 2013 were as follows:
2014 | 2013 | Percentage Change in | ||||||||||||||||||||||
Volume(1) (in thousands) | Pricing(2) | Volume(1) (in thousands) | Pricing(2) | Volume | Pricing | |||||||||||||||||||
Aggregates | 25,413 | $ | 8.97 | 17,488 | $ | 9.12 | 45.3 | % | (1.6 | )% | ||||||||||||||
Cement | 1,049 | 90.01 | 962 | 83.96 | 9.0 | % | 7.2 | % | ||||||||||||||||
Ready-mixed concrete | 2,814 | 97.72 | 1,194 | 94.51 | 135.7 | % | 3.4 | % | ||||||||||||||||
Asphalt | 4,271 | 55.62 | 3,926 | 55.87 | 8.8 | % | (0.4 | )% |
In the year ended December 27, 2014, volumes increased in all of our product lines. Aggregates and ready-mixed concrete volumes were positively affected by our 2014 and 2013 acquisitions. The 1.6% decrease in aggregates pricing was due to lower average prices from our acquisitions, partially offset by increased pricing in our organic aggregates sales. In addition, the 3.4% increase in ready-mixed concrete pricing was constrained by different pricing structures across our markets. The majority of the increase in ready-mixed volumes occurred in Texas, which has lower average selling prices than our ready-mixed concrete operations outside of Texas.
Cement volumes grew 9.0% and pricing increased 7.2% due to overall price improvements and a shift in customer mix. Cement sales in 2014 included a greater percentage of low volume, or retail, sales, which generally are sold at a higher price than sales to high-volume customers. Customer mix varies each year based on demand in the applicable markets. Asphalt volumes increased 8.8% and pricing decreased slightly by 0.4%, due to product mix and despite an increase in underlying prices. Asphalt sales in 2014 included a greater percentage of asphalt base mix, which is thicker than intermediate or surface mix, and has a lower selling price per ton. Prior to eliminations, the net effect of the volume and pricing changes on revenue was approximately $286.1 million and $16.8 million, respectively.
In 2014, operating income increased $117.9 million and Adjusted EBITDA increased $59.0 million as a result of the increase in net revenue discussed above and the improvement in operating margin from (5.8)% to 6.5%. The increase in operating margin was primarily attributable to the following:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
(2) |
Revenue generated from the Utah-based operations declined 7.2% from $204.1 million in 2012 to $189.4 million in 2013, compared to $215.1 million, or an 5.4% increase, adjusted for acquisitions, that was assumed in the 2012 goodwill impairment analysis. The Utah operations incurred an operating loss of $4.5 million, excluding the goodwill impairment charge, and $13.3 million in 2013 and 2012, respectively, demonstrating an improvement in operating loss, but not yet earning operating income. The fair value estimates used in this assessment were dependent upon assumptions and estimates about the future profitability and other financial metrics of our reporting units, as well as relevant financial data, recent transactions and market valuations of comparable public companies. The increase in cash flows from 2012 to 2013 projected in the 2012 goodwill analysis assumed that an increase in housing permits and infrastructure spending in Utah would result in increased revenue for our operations. However, our revenue, and the private construction and public infrastructure spending, did not increase as projected. In the 2013 goodwill analysis, we assumed that an economic recovery in this market would be delayed beyond 2014, which resulted in a decrease in the overall valuation of the Utah operations. Subsequent to the 2013 goodwill analysis, management determined that certain cost savings measures would be required for 2014, including a reduction in G&A. Any benefits from such cost reductions were not assumed in the 2013 goodwill analysis, as they had not been fully quantified when it was completed. During the year ended December 27, 2014, the Utah-based operations’ earnings exceeded the 2014 full year earnings that were forecast in the 2013 goodwill analysis. This earnings improvement was driven by $11.5 million of G&A reductions, which was primarily a result of a 20% headcount reduction of Utah’s G&A operations and a $4.4 million loss on the disposition of certain assets in Colorado that was recognized in 2013. We believe that the risk of additional impairment of the $36.6 million of the Utah operation’s remaining goodwill is low given that the 2013 analysis assumed a delayed market recovery and did not take into consideration cost cutting measures that could be, and were, implemented in 2014.
The operating loss in the East segment, which is the Kentucky reporting unit, improved from a loss of $0.2 million in 2012 to approximately break-even in 2013, excluding the goodwill impairment charge. An operating loss was incurred despite a 15.2% increase in revenue. We had expected revenue growth from public infrastructure projects to exceed
that which has been realized and is expected in the near term. We also had expected operating income improvements at a greater rate than was projected at the time the 2013 goodwill analysis was performed.
After recognizing these impairment charges, the goodwill attributable to the Utah and Kentucky reporting units was $36.6 million and zero, respectively. We do not believe material uncertainty that could result in an additional impairment charge exists in these reporting units.
Other Financial Information
Loss on Debt Financings
In February 2013, we completed a repricing of our credit facilities, which provide for term loans in an aggregate amount of $422.0 million and revolving credit commitments in an aggregate amount of $150.0 million (the “senior secured credit facilities”), which reduced our stated term-loan interest rate by 1.0% and provided additional borrowing capacity of $25.0 million. As a result of the repricing, we recognized a loss of $3.1 million for related bank fees. We did not refinance our debt in 2014.
Segment Results of Operations
West Segment
($ in thousands) | 2014 | 2013 | Variance | |||||||||||||
Net Revenue | $ | 608,671 | $ | 394,933 | $ | 213,738 | 54.1 | % | ||||||||
Operating income (loss) | 61,882 | (47,476 | ) | 109,358 | 230.3 | % | ||||||||||
Operating margin | 10.2 | % | (12.0 | )% | ||||||||||||
Adjusted EBITDA | $ | 102,272 | $ | 42,300 | $ | 59,972 | 141.8 | % |
Net revenue in the West segment increased $213.7 million, or 54.1%, in 2014 due primarily to acquisitions and organic revenue growth. Organic revenue growth accounted for approximately 8.5%, or $33.6 million, of the increase in net revenue, and acquisitions accounted for 45.6%, or $180.1 million, of the increase in net revenue. Of the total $213.7 million net revenue increase, $198.5 million was attributable to product revenue and $15.2 million was attributable to increased service revenue, which is primarily paving and related services, but also includes certain other revenues earned. Prior to eliminations, the gross revenue changes by product/service were as follows:
(in thousands) | 2014 | 2013 | Variance | |||||||||
Revenue by product:* | ||||||||||||
Aggregates | $ | 105,178 | $ | 46,645 | $ | 58,533 | ||||||
Ready-mixed concrete | 213,587 | 61,780 | 151,807 | |||||||||
Asphalt | 168,227 | 141,520 | 26,707 | |||||||||
Paving and related services | 296,186 | 259,630 | 36,556 | |||||||||
Other | (117,462 | ) | (83,380 | ) | (34,082 | ) | ||||||
|
|
|
|
|
| |||||||
Total revenue | $ | 665,716 | $ | 426,195 | $ | 239,521 | ||||||
|
|
|
|
|
|
In 2014, the West segment’s aggregates, ready-mixed concrete and asphalt volumes increased and pricing of aggregates improved. Ready-mixed concrete pricing declined as a result of the 2014 acquisitions in Texas, as ready-mixed concrete prices in the Texas markets are lower than in our markets outside of Texas. Asphalt pricing declined 0.5% due to product mix and despite an increase in underlying prices. Asphalt sales in 2014 included a greater percentage of asphalt base mix, which is thicker than intermediate or surface mix, and has a lower selling price. The West segment’s percent changes in sales volumes and pricing in 2014 from 2013 were as follows:
Percentage Change in | ||||||||
Volume | Pricing | |||||||
Aggregates | 125.8 | % | (0.1 | )% | ||||
Ready-mixed concrete | 247.2 | % | (0.3 | )% | ||||
Asphalt | 8.0 | % | (0.5 | )% |
The West segment’s operating income increased $109.4 million and operating margin improved from (12.0)% in 2013 to 10.2% in 2014. The improvement was primarily driven by the 2014 acquisitions in the Houston and Midland/Odessa Texas markets and organic volume growth. The increase in operating margin was primarily attributable to the following:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
East Segment
($ in thousands) | 2014 | 2013 | Variance | |||||||||||||
Net Revenue | $ | 356,361 | $ | 337,727 | $ | 18,634 | 5.5 | % | ||||||||
Operating income (loss) | 26,663 | 4,210 | 22,453 | 533.3 | % | |||||||||||
Operating margin | 7.5 | % | 1.2 | % | ||||||||||||
Adjusted EBITDA | $ | 73,822 | $ | 67,146 | $ | 6,676 | 9.9 | % |
The East segment’s net revenue increased $18.6 million, or 5.5%, in 2014 due primarily to organic revenue growth and acquisitions. Organic growth accounted for approximately $2.7 million of the increase in 2014, and incremental net revenue from acquisitions accounted for approximately $15.9 million in 2014. Of the total $18.6 million net revenue increase, $20.4 million was attributable to increased product revenue offset by $(1.8) million of decreased service revenue, which is primarily paving and related services. The $15.5 million increase in paving and related services was primarily driven by increased demand for our services in Kansas. Prior to eliminations, the gross revenue changes by product/service were as follows:
(in thousands) | 2014 | 2013 | Variance | |||||||||
Revenue by product:* | ||||||||||||
Aggregates | $ | 122,707 | $ | 112,863 | $ | 9,844 | ||||||
Ready-mixed concrete | 61,383 | 51,098 | 10,285 | |||||||||
Asphalt | 110,640 | 78,540 | 32,100 | |||||||||
Paving and related services | 234,111 | 218,650 | 15,461 | |||||||||
Other | (95,899 | ) | (62,849 | ) | (33,050 | ) | ||||||
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Total revenue | $ | 432,942 | $ | 398,302 | $ | 34,640 | ||||||
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The East segment’s percent changes in sales volumes and pricing in 2014 from 2013 were as follows:
Percentage Change in | ||||||||
Volume | Pricing | |||||||
Aggregates | 6.9 | % | 1.7 | % | ||||
Ready-mixed concrete | 10.3 | % | 8.8 | % | ||||
Asphalt | 10.2 | % | (0.3 | )% |
In 2014, volumes increased among all of the East segment’s product lines. The increase in aggregates and asphalt volumes were due to strong, primarily organic, demand in our Kansas markets. Ready-mixed concrete volumes increased primarily as a result of the October 2014 acquisition of Concrete Supply. Aggregate and ready-mixed concrete product pricing increased, while asphalt pricing declined due to a change in product mix.
In 2014, the East segment’s operating income increased $22.5 million and Adjusted EBITDA increased $6.7 million as a result of an increase in operating margin from 1.2% in 2013 to 7.5% in 2014. The increase in operating margin was primarily attributable to the following:
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Cement Segment
($ in thousands) | 2014 | 2013 | Variance | |||||||||||||
Net Revenue | $ | 105,573 | $ | 91,704 | $ | 13,869 | 15.1 | % | ||||||||
Operating income | 19,705 | 20,829 | (1,124 | ) | (5.4 | )% | ||||||||||
Operating margin | 18.7 | % | 22.7 | % | ||||||||||||
Adjusted EBITDA | $ | 35,133 | $ | 36,647 | $ | (1,514 | ) | (4.1 | )% |
Net revenue in the Cement segment grew organically by $13.9 million, or 15.1%, in 2014. Of the total $13.9 million net revenue increase, $13.7 million was attributable to increased product revenue (i.e., sales of cement) and $0.2 million was attributable to increased service revenue (i.e., processing of hazardous and non-hazardous waste for use as an alternative fuel at the cement plants). Prior to eliminations, the net effect of the volume and pricing changes on gross revenue was approximately $7.6 million and $6.1 million, respectively. The Cement segment’s percent changes in sales volumes and pricing in 2014 from 2013 were as follows:
Percentage Change in | ||||||||
Volume | Pricing | |||||||
Cement | 9.0 | % | 7.2 | % |
In 2014, cement volumes increased 9.0% and prices increased 7.2% due to overall price improvements and a shift in customer mix. Customer mix varies each year based on demand in the applicable markets. In 2014, cement sales in 2014 included a greater percentage of low volume, or retail, sales, which generally are sold at a higher price than sales to high-volume customers.
The Cement segment’s operating income decreased $1.1 million and Adjusted EBITDA decreased $1.5 million as a result of a decrease in operating margin from 22.7% in 2013 to 18.7% in 2014. The decrease in operating margin was primarily attributable to the following:
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Liquidity and Capital Resources
Our primary sources of liquidity include cash on-hand, cash provided by our operations and amounts available for borrowing under our credit facilities and capital- raisingcapital-raising activities in the debt capital markets. In addition to our current sources of liquidity, we have access to liquidity through public offerings of shares of our Class A common stock. To facilitate such offerings, in January 2017, we filed a shelf registration statement with the SEC that is effective for a term of three years and will expire in January 2020. The amount of Class A common stock to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific limit on the amount we may issue. The specifics of any future offerings, along with the use of the proceeds thereof, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.
As of January 2, 2016,December 30, 2017, we had $186.4$383.6 million in cash and working capital of $258.0$533.6 million as compared to cash and working capital of $13.2$143.4 million and $79.3$244.4 million, respectively, at December 27, 2014.31, 2016. Working capital is calculated as current assets less current liabilities. There were no restricted cash balances as of January 2, 2016December 30, 2017 or December 27, 2014. 31, 2016.
Our remaining borrowing capacity on our $235 million senior secured revolving credit facility as of January 2, 2016December 30, 2017 was $210.6$218.9 million, which is net of $24.4$16.1 million of outstanding letters of credit, and is fully available to us within the terms and covenant requirements of our credit agreement.
Given the seasonality of our business, we typically experience significant fluctuations in working capital needs and balances throughout the year. Our working capital requirements generally increase during the first half of the year as we build up inventory and focus on repair and maintenance and other set-up costs for the upcoming season. Working capital levels then decrease as the construction season winds down and we enter the winter months, which is when we see significant inflows of cash from the collection of receivables.
We believe we have access to sufficient financial resources from our liquidity sources to fund our business and operations, including contractual obligations, capital expenditures and debt service obligations, for at least the next twelve months. Our growth strategy contemplates future acquisitions for which we believe we have sufficient access to capital.
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As market conditions warrant and subject to our contractual restrictions and liquidity position, we our affiliates and/or our major equityholders, including our Sponsors and their respective affiliates, may, from time to time, repurchaseseek to purchase our outstanding equity and/or debt securities or loans, including the 2023Senior Notes and/orand borrowings under our outstanding bank loans insenior secured credit facilities. Such transactions could be privately negotiated, or open market transactions, by tender offeroffers or otherwise. Any such repurchasesSubject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by incurring new debt, including additional borrowings under our senior secured
credit facilities. Any new debt may be secured debt. We may alsothe use availableof cash on our balance sheet.sheet or the incurrence of new secured or unsecured debt. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Further, since some of our debt may trade at a discount to the face amount, anyAny such purchases may result in our acquiring and retiringequate to a substantial amount of anya particular series. Anyclass or series of debt, which may reduce the trading liquidity of such reduction in the series may affect trading liquidity. Depending on conditions in the credit and capital markets and other factors, we will, from time to time, consider other financing transactions, the proceeds of which could be used to refinance our indebtednessclass or for other purposes.series.
Our Long-Term Debt
Please refer to the notes to the consolidated financial statements found elsewhere in this report for detailed information regarding our long-term debt and senior secured revolving credit facility, scheduled maturities of long-term debt and affirmative and negative covenants. Among other things, we are required to maintain a Consolidated First Lien Net Leverage Ratio that is no greater than 4.75 to 1.00. Our first lien net leverage ratio, for purposes of this maintenance requirement, is calculated following each quarter based on information for the most recently ended four fiscal quarters for which internal financial information is available by dividing our Consolidated First Lien Net Debt as of the end of such period by our Consolidated EBITDA for such period. Consolidated EBITDA for purposes of our senior secured credit facility is calculated in accordance with our presentation of Further Adjusted EBITDA below. We define Further Adjusted EBITDA as Adjusted EBITDA plus the EBITDA contribution of certain recent acquisitions.
For the years ended January 2, 2016December 30, 2017 and December 27, 2014,31, 2016, our Consolidated First Lien Net Leverage Ratio was 1.640.64 to 1.00 and 2.051.40 to 1.00, respectively, based on consolidated first lien net debt of $506.2$287.5 million and $434.0$536.9 million as of January 2, 2016December 30, 2017 and December 27, 2014,31, 2016, respectively, divided by Further Adjusted EBITDA of $308.0$452.7 million and $212.1$382.4 million for the years ended January 2, 2016December 30, 2017 and December 27, 2014,31, 2016, respectively. As of January 2, 2016December 30, 2017 and December 27, 2014,31, 2016, we were in compliance with all debt covenants.
The following table sets forth a reconciliation of net income (loss) to Adjusted EBITDA and Further Adjusted EBITDA for the periods indicated. Adjusted EBITDA and Further Adjusted EBITDA are not U.S. GAAP measures and should not be considered in isolation, or as a substitute for our results as reported under U.S. GAAP.
($ in thousands) | 2015 | 2014 | 2013 | |||||||||
Net income (loss) | $ | 1,484 | $ | (6,282 | ) | $ | (103,679 | ) | ||||
Interest expense | 84,629 | 86,742 | 56,443 | |||||||||
Income tax expense | (18,263 | ) | (6,983 | ) | (2,647 | ) | ||||||
Depreciation, depletion, and amortization expense | 118,321 | 86,955 | 72,217 | |||||||||
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EBITDA | $ | 186,171 | $ | 160,432 | $ | 22,334 | ||||||
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Accretion | 1,402 | 871 | 717 | |||||||||
Initial public offering costs | 28,296 | — | — | |||||||||
Loss on debt financings | 71,631 | — | 3,115 | |||||||||
Goodwill impairment | — | — | 68,202 | |||||||||
Discontinued operations(a) | (2,415 | ) | (71 | ) | 528 | |||||||
Acquisition transaction expenses(b) | 9,519 | 8,554 | 3,990 | |||||||||
Management fees and expenses(c) | 1,046 | 4,933 | 2,620 | |||||||||
Non-cash compensation(d) | 5,448 | 2,235 | 2,315 | |||||||||
(Gain) loss on disposal and impairment of assets(e) | (16,561 | ) | 8,735 | 12,419 | ||||||||
Other(f) | 2,991 | 3,344 | 13,807 | |||||||||
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Adjusted EBITDA | $ | 287,528 | $ | 189,033 | $ | 130,047 | ||||||
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EBITDA for certain acquisitions(g) | 20,450 | 23,105 | (1,596 | ) | ||||||||
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Further Adjusted EBITDA | $ | 307,978 | $ | 212,138 | $ | 128,451 | ||||||
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($ in thousands) |
| 2017 |
| 2016 |
| 2015 |
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Net income |
| $ | 125,777 |
| $ | 46,126 |
| $ | 1,484 |
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Interest expense |
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| 108,549 |
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| 97,536 |
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| 84,629 |
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Income tax benefit |
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| (283,977) |
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| (5,299) |
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| (18,263) |
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Depreciation, depletion, and amortization |
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| 177,643 |
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| 147,736 |
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| 118,321 |
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EBITDA |
| $ | 127,992 |
| $ | 286,099 |
| $ | 186,171 |
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Accretion |
|
| 1,875 |
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| 1,564 |
|
| 1,402 |
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IPO/Legacy equity modification costs(a) |
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| — |
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| 37,257 |
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| 28,296 |
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Loss on debt financings |
|
| 4,815 |
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| — |
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| 71,631 |
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Tax receivable agreement expense |
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| 271,016 |
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| 14,938 |
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| — |
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Income from discontinued operations(b) |
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| — |
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| — |
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| (2,415) |
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Transaction costs(c) |
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| 7,733 |
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| 6,797 |
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| 9,519 |
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Management fees and expenses(d) |
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| — |
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| (1,379) |
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| 1,046 |
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Non-cash compensation(e) |
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| 21,140 |
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| 12,683 |
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| 5,448 |
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Other(f) |
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| 1,206 |
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| 13,388 |
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| (13,570) |
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Adjusted EBITDA |
| $ | 435,777 |
| $ | 371,347 |
| $ | 287,528 |
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EBITDA for certain acquisitions(g) |
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| 16,919 |
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| 11,074 |
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| 20,450 |
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Further Adjusted EBITDA |
| $ | 452,696 |
| $ | 382,421 |
| $ | 307,978 |
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(a) | The 2016 results included $49.9 million of stock-based compensation charges in general and administrative expenses. Prior to the IPO, certain investors had equity in the company that vested only if performance objectives of either a 1.75 or 3.00 times return on the initial investment by investment funds associated with or designated by The Blackstone Group L.P. and its affiliates (“Blackstone”) were met. At the IPO Date, this equity converted to LP Units and stock options. Prior to 2016, we did not recognize any expense associated with these awards as achievement of the multiples was not deemed probable. The 1.75 times return threshold was met following completion of Blackstone’s secondary offering of shares of our Class A common stock on July 19, 2016 and, in |
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August 2016, our board of directors waived the 3.00 times return threshold. As a result, in 2016, we recognized $37.3 million of cumulative catch up expense from the IPO date through September 2016. We will continue to recognize expense on the options over the remaining 4-year vesting period. The 2015 results included $28.3 million of costs associated with Summit Inc.’s IPO. |
(b) | Represents certain |
(c) | Represents the transaction expenses associated with |
(d) | Represents certain fees paid and expenses reimbursed to affiliates of our |
(e) | Represents non-cash equity-based compensation granted to employees. |
(f) | Represents the net (gain) loss recognized on assets identified for disposal. |
Includes non-recurring or one time income and expense items that were incurred outside normal operating activities such as integration costs, unrealized currency gains and losses and interest, tax, |
(g) | Under the terms of our credit facilities, we |
At January 2, 2016December 30, 2017 and December 27, 2014, $1,296.8 million31, 2016, $1.8 billion and $1,040.7 million,$1.5 billion, respectively, of total debt without giving effect to original issuance discount or premium, were outstanding.outstanding under our respective debt agreements. Summit LLC hasLLC’s senior secured credit facilities that provide for term loans in an aggregate amount of $650.0 million and revolving credit commitments in an aggregate amount of $235.0 million.million (the “Senior Secured Credit Facilities”). Summit LLC’s domestic wholly-owned subsidiary companies are named as guarantors of the senior notesSenior Notes and the senior secured credit facilities.Senior Secured Credit Facilities. Certain other partially-owned subsidiaries, and the wholly-owned Canadian subsidiary, Mainland, do not guarantee the senior notes.Senior Notes or Senior Secured Credit Facilities. Summit LLC has pledged substantially all of its assets as collateral for the Senior Secured Credit Facilities.
On January 19, 2017, Summit LLC entered into Amendment No. 1 (“Amendment No. 1”) to the Credit Agreement, which, among other things, reduced the applicable margin in respect of the $640.3 million outstanding principal amount of term loans thereunder. All other material terms and provisions remain substantially identical to the terms and provisions in place immediately prior to the effectiveness of Amendment No. 1. On November 21, 2017, Summit LLC entered into Amendment No. 2 to the Amended and Restated Credit Agreement, which, among other things, extended the maturity date from 2022 to 2024 and reduced the applicable margin in respect of the $635.4 million outstanding principal amount of term loans thereunder.
On June 1, 2017, the Issuers issued $300.0 million in aggregate principal amount of 5 1/8% senior secured credit facilities.notes due June 1, 2025. The 2025 Notes were issued at par value, resulting in proceeds of $295.4 million, net of related fees and expenses. Interest on the 2025 Notes is payable semi-annually on June 1 and December 1 of each year commencing on December 1, 2017.
On March 8, 2016, the Issuers issued $250.0 million in aggregate principal amount of 2022 Notes. The 2022 Notes were issued at par and interest on the 2022 Notes is payable semi-annually in arrears on April 15 and October 15 of each year commencing on October 15, 2016. The net proceeds of the 2022 Notes were used to fund the acquisition of Boxley Materials Company, replenish cash used for the acquisition of American Materials Company and pay expenses incurred therewith.
In 2015, the Issuers issued $650.0 million aggregate principal amount of 2023 Notes due July 15, 2023 under an indenture dated as of July 8, 2015 –$350.0– $350.0 million on July 8, 2015 and $300.0 million on November 19, 2015. The July issuance of the 2023 notes werewas issued at par and the November add-on was issued at a discount. Interest on the 2023 notes is payable semi-annually in arrears on January 15 and July 15 of each year commencing on January 15, 2016.
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In 2015, $625.0 million aggregate principal amount of outstanding 2020 Notes due January 31, 2020, were redeemed – $288.2 million in April 2015 using proceeds from the IPO, $183.0 million in August 2015 and $153.8 million in December 2015.
On July 17, 2015, we refinanced our term loan under the senior secured credit facilitiesSenior Secured Credit Facilities (the “Refinancing”). The Refinancing, among other things: (i) reduced the applicable margins used to calculate interest rates for term loans under our senior secured credit facilitiesSenior Secured Credit Facilities to 3.25% for LIBOR rate loans and 2.25% for base rate loans, subject to a LIBOR floor of 1.00% (and one 25 basis point step down upon Summit LLC achieving a certain first lien net leverage ratio); (ii) increased term loans borrowed under our term loan facility from $422.0 million to $650.0 million; and (iii) created additional flexibility under the financial maintenance covenants, which are tested quarterly, by increasing the applicable maximum Consolidated First Lien Net Leverage Ratio (as defined in the amended and restated credit agreement that governs the senior secured credit facilities)Credit Agreement).
We used the net proceeds from the 2023 notesNotes and the Refinancing to finance the initial $370.0 million cash to purchase price for the Davenport Acquisition,Assets, to refinance our existing senior secured term loan facility, to redeem $183.0 million aggregate principal amount of theour then outstanding 2020 notesNotes and to pay related fees and expenses.
Cash Flows
The following table summarizes our net cash provided by and used for operating, investing and financing activities and our capital expenditures for the periods indicated:
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(in thousands) | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 |
| 2017 |
| 2016 |
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Net cash provided by (used for): |
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Operating activities | $ | 98,203 | $ | 79,238 | $ | 66,412 | $ | 98,203 | $ | 79,238 | $ | 66,412 |
| $ | 292,183 |
| $ | 244,863 |
| $ | 98,203 |
| $ | 295,132 |
| $ | 244,877 |
| $ | 98,203 | ||||||||||||
Investing activities | (584,347 | ) | (461,280 | ) | (111,515 | ) | (584,347 | ) | (461,280 | ) | (111,515 | ) |
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| (552,475) |
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| (470,652) |
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| (584,347) |
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| (552,475) |
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| (470,652) |
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| (584,347) | ||||||||||||
Financing activities | 660,337 | 377,222 | 32,589 | 659,320 | 380,489 | 32,589 |
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| 499,755 |
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| 182,707 |
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| 660,337 |
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| 497,526 |
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| 182,990 |
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| 659,320 | ||||||||||||||||||
Cash paid for capital expenditures | $ | (88,950 | ) | $ | (76,162 | ) | $ | (65,999 | ) | $ | (88,950 | ) | $ | (76,162 | ) | $ | (65,999 | ) |
Operating Activities
During the year ended December 30, 2017, cash provided by operating activities was $292.2 million primarily as a result of:
· | Net income of |
· | Billed and unbilled accounts receivable increased by $5.5 million in fiscal 2017 as a result of increased revenue from our acquisitions as compared to fiscal 2016. |
· | Tax receivable agreement liability increased $273.2 million as noted above. |
· | The timing of payments associated with accounts payable and accrued expenses of cash, which is consistent with the seasonality of our business whereby we build-up inventory levels and incur repairs and maintenance costs to ready the business for increased sales volumes in the summer and fall. These costs are typically incurred in the first half of the year and paid |
Operating Activities
During the year ended December 31, 2016, cash provided by operating activities was $244.9 million primarily as a result of:
· | Net income of $46.1 million, adjusted for $201.9 million of non-cash expenses, including $160.6 million of depreciation, depletion, amortization and accretion and $49.9 million of share-based compensation. |
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During the year ended January 2, 2016, cash provided by operating activities was $98.2 million primarilymillion-primarily as a result of:
· | Net income of $1.5 million, adjusted for $90.5 million of non-cash expenses, including $125.0 million of depreciation, depletion, amortization and accretion and $19.9 million of share-based compensation expense, partially offset by $23.1 million of net gain on asset disposals. |
· | $10.5 million of proceeds from improved collections of accounts receivable (billed and unbilled). |
· | Approximately $18.6 million as a use of cash associated with the timing of accounts payable and accrued expense payments, including a $12.9 million decrease in interest payable as the 2015 year-end interest payment was made in fiscal 2015. We made $89.1 million of interest payments in 2015, including |
Investing Activities
During the year ended December 27, 2014,30, 2017, cash provided by operatingused for investing activities was $79.2$552.5 million, primarily as a result of:of which $374.9 million related to the 14 acquisitions completed in the period and $194.1 million was invested in capital expenditures, which was partially offset by $17.1 million of proceeds from asset sales.
During the year ended December 28, 2013,31, 2016, cash provided by operatingused for investing activities was $66.4 million primarily as a result of:
Investing Activities
During the year ended January 2, 2016, cash used for investing activities was $584.3 million, of which $510.0 million related to the 2015 acquisitions of the Davenport Assets, Lewis & Lewis, LeGrand and Pelican.acquisitions. In addition, we invested $89.0 million in capital expenditures, partially offset by $13.1 million of proceeds from asset sales.
During the year ended December 27, 2014, cash used for investing activities was $461.3 million, $397.9 million of which related to the Alleyton, Troy Vines, Buckhorn Materials, Canyon Redi-Mix, Mainland, Southwest Ready Mix, Colorado County S&G and Concrete Supply acquisitions. In addition, we invested $76.2 million in capital expenditures, partially offset by $13.4 million of proceeds from asset sales.
Financing Activities
During the year ended December 28, 2013,30, 2017, cash used for investingprovided by financing activities was $111.5$499.8 million, which was primarily composed of $237.6 million of which $61.6 million related tonet proceeds from the April 1, 2013 acquisitionsJanuary 2017 issuance of certain Lafarge assets in10,000,000 shares of Class A common stock and around Wichita, Kansas and Westroc. In addition, we invested $66.0 million in capital expenditures, offset by $16.1$295.4 million of proceeds from asset sales.the 2025 Notes, net of related fees and expenses. We made $34.7 million of payments on acquisition related liabilities, and $16.4 million in debt payments.
Financing Activities
During the year ended December 31, 2016, cash provided by financing activities was $182.7 million, which was primarily composed of $246.3 million of proceeds from the 2022 Notes, net of fees. We made $32.0 million of payments on acquisition related liabilities, and $5.8 million in debt issuance costs.
During the year ended January 2, 2016, cash provided by financing activities was $660.3 million, which was primarily composed of the following:
· | $1,037.4 million of proceeds from Summit Inc.’s IPO and the August 2015 follow-on offering of shares of its Class A Common Stock; |
· | less $61.6 million of equity issuance fees; |
· | plus $648.1 million of proceeds from issuance of the 2023 Notes; |
· | plus $231.1 million of net proceeds from refinancing of our term loan under the senior secured credit facilities; |
· | less $35.0 million to purchase the noncontrolling interest of Continental Cement; |
· | less $462.8 million to purchase an aggregate 18,675,000 LP Units from certain of our pre-IPO owners; |
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· | less $625.0 million to redeem the outstanding 2020 notes; |
· | less $14.2 million of debt issuance costs; |
· | less $18.1 million of payments on acquisition related liabilities; and |
· | less $28.7 million of distributions to pre-IPO owners. |
Cash Paid for Capital Expenditures
We expended approximately $194.1 million of distributions to pre-IPO owners.
Duringin capital expenditures for the year ended December 27, 2014, cash provided by financing activities was $377.2 million, which was primarily composed of $363.9 million of net borrowings on debt. The Company issued $375.0 million of Senior Notes in 2014 at a premium, receiving $409.3 million of aggregate proceeds. The funds from the borrowings were primarily used30, 2017 compared to purchase Alleyton and Mainland, make payments on the revolving credit facility and for general corporate purposes. In addition, we received contributions from our sole member of $24.5$153.5 million and made $10.9$89.0 million of payments on our acquisition related liabilities.
Duringin the yearyears ended December 28, 2013, cash provided by financing activities was $32.631, 2016 and January 2, 2016, respectively.
We estimate that we will invest between $210.0 million which was primarily composed of $42.4and $225.0 million in netcapital expenditures in 2018, which we expect to fund through cash on hand, cash from operations, outside financing arrangements and available borrowings onunder our revolving credit facility and proceeds from the February 2013 repricing transaction, through which our outstanding borrowings increased $25.0 million. Approximately $61.6 million of the funds from the borrowings were used on April 1, 2013facility. We expect to purchase certain assets of Lafarge in and around Wichita, Kansas and all of the membership interests in Westroc. The remaining funds have been used for seasonal working capital requirements. In addition, we made $9.8 million of payments on our acquisition-related liabilities.
Cash Paid for Capital Expenditures
In 2015, we expended approximately $89.0 million compared to $76.2 million in 2014. In 2015, we invested approximately $7.2invest $32 million on the installationcompletion of a new aggregates plant in Vancouver and a cement terminal along the Mississippi River, which were started in 2017. We also plan to invest $7 million in a new aggregates plant in Georgia and $5 million to replace an asphalt plant in Texas and $2.8 million on the expansion of a sand and gravel plant in Kansas.Northeast Texas.
We expended approximately $76.2 million in 2014 compared to $66.0 million in 2013. Of this increase, it included continued development of an underground mine to extract limestone on our Hannibal, Missouri property where our cement plant is located ($6.3 million), which was substantially completed in 2014, $2.6 million of land purchases in Kansas and Kentucky and various other pieces of equipment and rolling stock.
Tax Receivable Agreement
Exchanges of LP Units for shares of Class A common stock are expected to result in increases in the tax basis of the tangible and intangible assets of Summit Holdings. These increases in tax basis may increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of tax that Summit Inc. would otherwise be required to pay in the future. In connection with the IPO, we entered into a tax receivable agreementTRA with the holders of LP Units and the Investor Entities that provides for the payment by Summit Inc. to exchanging holders of LP Units and such other owners of 85% of the benefits, if any, that Summit Inc. is deemed to realize as a result of (i) these increases in tax basis and (ii) our utilization of certain net operating losses of the Investor Entities and certain other tax benefits related to entering into the tax receivable agreement,TRA, including tax benefits attributable to payments under the tax receivable agreement.TRA. The increases in tax basis as a result of an exchange of LP Units for shares of Class A common stock, as well as the amount and timing of any payments under the tax receivable agreement,TRA, are difficult to accurately estimate as they will vary depending upon a number of factors, including:
· | the timing of exchanges—for instance, the increase in any tax deductions will vary depending on the fair market value, which may fluctuate over time, of the depreciable or amortizable assets of Summit Holdings at the time of each exchange; |
· | the price of shares of our ClassA common stock at the time of the exchange—the increase in any tax deductions, as well as the tax basis increase in other assets, of Summit Holdings, is directly proportional to the price of shares of our Class A common stock at the time of the exchange; |
· | the extent to which such exchanges are taxable—if an exchange is not taxable for any reason, increased deductions will not be available; |
· |
the amount and timing of our income—Summit Inc. is required to pay 85% of the cash tax savings as and when realized, if any. If Summit Inc. does not have taxable income, Summit Inc. is not required (absent a change of control or circumstances requiring an early termination payment) to make payments under the |
· | the effective tax rate – The benefit that Summit Inc. realizes is dependent on the tax rate in effect at the time taxable income is generated. For example, at the end of 2017, the TCJA was enacted into law. Among other things, the federal corporate tax rate was reduced from 35% to 21%. As a result, the value of the additional benefits generated from the exchanges was reduced, and therefore, the TRA liability recorded by Summit Inc. was also reduced. |
We anticipate funding payments under the tax receivable agreementTRA from cash flowflows from operations, of our subsidiaries, available cash and available borrowings under our senior secured revolving credit facilities.Senior Secured Revolving Credit Facilities. As of December 30, 2017, we had accrued $331.9
63
million as TRA liability. Other than $0.6 million which was paid in January 2018, the TRA liability is a long term liability as no additional payments are expected in the next twelve months.
In addition, the tax receivable agreementTRA provides that upon certain changes of control, Summit Inc.’s (or its successor’s) obligations would be based on certain assumptions, including that Summit Inc. would have sufficient taxable income to fully utilize the deductions arising from tax basis and other tax attributes subject to the tax receivable agreement.TRA. With respect to our obligations under the tax receivable agreementTRA relating to previously exchanged or acquired LP Units and certain net operating losses, we would be required to make a payment equal to the present value (at a discount rate equal to one year LIBOR plus 100 basis points) of the anticipated future tax benefits determined using assumptions (ii) through (v) of the following paragraph.
Furthermore, Summit Inc. may elect to terminate the tax receivable agreementTRA early by making an immediate payment equal to the present value of the anticipated future cash tax savings. In determining such anticipated future cash tax savings, the tax receivable agreementTRA includes several assumptions, including that (i) any LP Units that have not been exchanged are deemed exchanged for the market value of the shares of Class A common stock at the time of termination, (ii) Summit Inc. will have sufficient taxable income in each future taxable year to fully realize all potential tax savings, (iii) Summit Inc. will have sufficient taxable income to fully utilize any remaining net operating losses subject to the tax receivable agreementTRA on a straight line basis over the shorter of the statutory expiration period for such net operating losses or the five-year period after the early termination or change of control, (iv) the tax rates for future years will be those specified in the law as in effect at the time of termination and (v) certain non-amortizable assets are deemed disposed of within specified time periods. In addition, the present value of such anticipated future cash tax savings are discounted at a rate equal to LIBOR plus 100 basis points.
As a result of the change in control provisions and the early termination right, Summit Inc. could be required to make payments under the tax receivable agreementTRA that are greater than or less than the specified percentage of the actual cash tax savings that Summit Inc. realizes in respect of the tax attributes subject to the tax receivable agreementTRA (although any such overpayment would be taken into account in calculating future payments, if any, under the tax receivable agreement)TRA) or that are prior to the actual realization, if any, of such future tax benefits. Also, the obligations of Summit Inc. would be automatically accelerated and be immediately due and payable in the event that Summit Inc. breaches any of its material obligations under the agreement and in certain events of bankruptcy or liquidation. In these situations, our obligations under the tax receivable agreementTRA could have a substantial negative impact on our liquidity.
Under the terms of the TRA, we can terminate the TRA at any time, which would trigger a cash payment to the pre-IPO owners. Based upon a $31.44 per share price of our Class A common stock, the closing price of our stock on December 30, 2017 and a contractually defined discount rate of 3.11%, we estimate that if we were to exercise our right to terminate the TRA, the aggregate amount required to settle the TRA would be approximately $282 million.
Contractual Obligations
The following table presents, as of January 2, 2016,December 30, 2017, our obligations and commitments to make future payments under contracts and contingent commitments (in thousands).
Contractual Obligations | Total | 2016 | 2017-2018 | 2019-2020 | Thereafter | |||||||||||||||
Long-term debt, including current portion | $ | 1,296,750 | $ | 6,500 | $ | 11,375 | $ | 14,625 | $ | 1,264,250 | ||||||||||
Capital lease obligations | 44,712 | 15,369 | 20,505 | 4,216 | 4,622 | |||||||||||||||
Operating lease obligations | 21,930 | 6,280 | 8,659 | 4,946 | 2,045 | |||||||||||||||
Interest(1) | 496,390 | 68,689 | 127,406 | 140,241 | 160,054 | |||||||||||||||
Acquisition-related liabilities | 77,483 | 20,803 | 26,882 | 15,757 | 14,041 | |||||||||||||||
Royalty payments | 73,584 | 3,963 | 9,266 | 7,956 | 52,399 | |||||||||||||||
Defined benefit plans(2) | 10,553 | 1,851 | 2,582 | 2,621 | 3,499 | |||||||||||||||
Asset retirement obligation | 56,669 | 3,752 | 5,794 | 2,137 | 44,986 | |||||||||||||||
Purchase commitments(3) | 31,526 | 28,772 | 2,754 | — | — | |||||||||||||||
Other | 2,260 | 639 | 1,223 | 398 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total contractual obligations(4) | $ | 2,111,857 | $ | 156,618 | $ | 216,446 | $ | 192,897 | $ | 1,545,896 | ||||||||||
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
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|
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|
|
|
| Payments Due by Period | |||||||||||||||||||
|
| Total |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Thereafter | |||||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term borrowings and long-term debt, including current portion |
| $ | 1,835,375 |
| $ | 4,765 |
| $ | 6,354 |
| $ | 7,942 |
| $ | 6,354 |
| $ | 256,354 |
| $ | 1,553,606 |
Capital lease obligations |
|
| 39,369 |
|
| 20,506 |
|
| 7,608 |
|
| 5,936 |
|
| 1,394 |
|
| 596 |
|
| 3,329 |
Operating lease obligations |
|
| 32,754 |
|
| 8,627 |
|
| 7,077 |
|
| 5,826 |
|
| 4,650 |
|
| 2,475 |
|
| 4,099 |
Interest payments (1) |
|
| 613,957 |
|
| 99,007 |
|
| 96,681 |
|
| 106,613 |
|
| 100,209 |
|
| 89,273 |
|
| 122,174 |
Acquisition-related liabilities |
|
| 86,205 |
|
| 14,354 |
|
| 42,905 |
|
| 12,423 |
|
| 7,958 |
|
| 1,803 |
|
| 6,762 |
Royalty payments |
|
| 107,231 |
|
| 6,450 |
|
| 6,017 |
|
| 5,833 |
|
| 5,550 |
|
| 5,431 |
|
| 77,950 |
Defined benefit plans (2) |
|
| 9,148 |
|
| 1,402 |
|
| 1,020 |
|
| 109 |
|
| 1,696 |
|
| 1,259 |
|
| 3,662 |
Asset retirement obligation payments |
|
| 67,873 |
|
| 4,626 |
|
| 2,858 |
|
| 2,560 |
|
| 1,199 |
|
| 1,949 |
|
| 54,681 |
Purchase commitments (3) |
|
| 25,501 |
|
| 17,090 |
|
| 2,910 |
|
| 3,120 |
|
| 2,381 |
|
| — |
|
| — |
Payments pursuant to tax receivable agreement (4) |
|
| 331,926 |
|
| 587 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 331,339 |
Other |
|
| 9,532 |
|
| 5,008 |
|
| 2,433 |
|
| 1,832 |
|
| 173 |
|
| 86 |
|
| — |
Total contractual obligations |
| $ | 3,158,871 |
| $ | 182,422 |
| $ | 175,863 |
| $ | 152,194 |
| $ | 131,564 |
| $ | 359,226 |
| $ | 2,157,602 |
(1) | Future interest payments were calculated using the applicable fixed and floating rates charged by our lenders in effect as of |
64
(2) | Future payments to fund our defined benefit |
(3) | Amounts represent purchase commitments entered into in the normal course of business, primarily for fuel purchases, the terms of which are generally |
(4) | The total amount payable under our TRA is estimated at $331.9 million as of December 30, 2017. Under the |
In addition to the tax receivable agreement, the holders of Summit Holdings’ LP Units, including Summit Inc., incur U.S. federal, state and local income taxes on their share of any taxable income of Summit Holdings. The limited partnership agreement of Summit Holdings provides for tax distributions to the holders of the LP Units in an amount generally calculated to provide each holder of LP Units with sufficient cash to cover its tax liability in respect of the LP Units. In general, these tax distributions are computed based on Summit Inc.’s estimate of the net taxable income of Summit Holdings allocated to each holder of LP Units multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate applicable to an individual or corporate resident in New York, New York (or a corporate resident in certain circumstances). We estimate the cash tax distribution payments to be $15.6 million in 2016 and $10.4 million in 2017. Estimating the tax distributions required under the limited partnership agreement is imprecise by its nature as the calculation depends on a variety of factors, including, but not limited to, projected taxable income of Summit Holdings and changes in ownership as a result of LP Units exchanges for shares of Class A common stock.
Commitments and Contingencies
We are party to certain legal actions arising from the ordinary course of business activities. Accruals are recorded when the outcome is probable and can be reasonably estimated. While the ultimate results of claims and litigation cannot be predicted with certainty, management expects that the ultimate resolution of all current pending or threatened claims and litigation will not have a material effect on our consolidated financial condition, results of operations, financial position or liquidity. We record legal fees as incurred.
Litigation and Claims—We are obligated under an indemnification agreement entered into with the sellers of Harper Contracting, Inc., Harper Sand and Gravel, Inc., Harper Excavating, Inc., Harper Ready Mix Company, Inc. and Harper Investments, Inc. for the sellers’ 40% ownership interests in a joint venture agreement. We have the rights to any benefits under the joint venture as well as the assumption of any obligations, but do not own equity interests in the joint venture. The joint venture has incurred significant losses on a highway project in Utah, which have resulted in requests for funding from the joint venture partners and ultimately from us. Through January 2, 2016December 30, 2017, we have funded $8.8$12.3 million. In the third quarter of 2017, we settled our remaining obligations under the indemnification agreement for $3.5 million, which was $0.8 million less than amounts previously accrued.
Environmental Remediation—Our operations are subject to and affected by federal, state, provincial and local laws and regulations relating to the environment, health and safety and other regulatory matters. These operations require environmental operating permits, which are subject to modification, renewal and revocation. We regularly monitor and review its operations, procedures and policies for compliance with these laws and regulations. Despite these compliance efforts, risk of which $4.0 million was funded in 2012 and $4.8 million was funded in 2011. On April 2, 2015, the Utah Department of Transportation filed suitenvironmental liability is inherent in the Fourth District Courtoperation of Utah County, Utah against the joint ventureour business, as it is with other companies engaged in similar businesses and the parties to the joint venture seeking damages of at least $29.4 million. As of January 2, 2016there can be no assurance that environmental liabilities and December 27, 2014, an accrual of $4.3 million was recorded in other noncurrent liabilities as management’s best estimate of loss related to this matter.
In 2013,noncompliance will not have a dispute with the sellers of Harper Contracting related to the calculation of working capital from the August 2010 acquisition was settled. The working capital dispute was submitted to binding arbitration, the outcome of which resulted in the payment of $1.9 million to the sellers. In addition, various other acquisition-related disputes with the sellers were settled for approximately $0.8 million. The total payments of $2.7 million were made in 2013. There was no material adverse effect on 2013 earnings as a resultour consolidated financial condition, results of these settlements.operations or liquidity.
Other—We are obligated under various firm purchase commitments for certain raw materials and services that are in the ordinary course of business. The terms of these firm purchase agreements generally approximate one year. Management does not expect any significant changes in the market value of these goods and services during the commitment period that would have a material adverse effect on the financial condition, results of operations, or liquidityand cash flows of the Company. The terms of the purchase commitments generally approximate one year.
Off-Balance Sheet Arrangements
As of January 2, 2016,December 30, 2017, we had no material off-balance sheet arrangements.
Non-GAAP Performance Measures
We evaluate our operating performance using metrics that we refer to as “Adjusted EBITDA,” “Adjusted Cash Gross Profit” and “Adjusted Cash Gross Margin” which are not defined by U.S. GAAP and should not be considered as an alternative to earnings measures defined by U.S. GAAP. We define Adjusted EBITDA as EBITDA, adjusted to exclude accretion, loss on debt financings, loss from discontinued operations and certain non-cash and non-operating items. We define Adjusted Cash Gross Profit as operating income before general and administrative expenses, depreciation, depletion, amortization and accretion and transaction costs and Adjusted Cash Gross Margin as Adjusted Cash Gross Profit as a percentage of net revenue.
65
We present Adjusted EBITDA, Adjusted Cash Gross Profit and Adjusted Cash Gross Margin for the convenience of investment professionals who use such metrics in their analyses. The investment community often uses these metrics to assess the operating performance of a company’s business and to provide a consistent comparison of performance from period to period. We use these metrics, among others, to assess the operating performance of our individual segments and the consolidated company.
Non-GAAP financial measures are not standardized; therefore, it may not be possible to compare such financial measures with other companies’ non-GAAP financial measures having the same or similar names. We strongly encourage investors to review our consolidated financial statements in their entirety and not rely on any single financial measure.
The tables below reconcile our net income (loss) to EBITDA and Adjusted EBITDA and present Adjusted EBITDA by segment and reconcile operating income to Adjusted Cash Gross Profit for the periods indicated:
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|
|
|
|
|
|
|
|
Reconciliation of Net Income (Loss) to Adjusted EBITDA |
| Year ended December 30, 2017 | |||||||||||||
by Segment |
| West |
| East |
| Cement |
| Corporate |
| Consolidated | |||||
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (1) |
| $ | 121,390 |
| $ | 68,361 |
| $ | 92,956 |
| $ | (156,930) |
| $ | 125,777 |
Interest expense (income) (1) |
|
| 6,924 |
|
| 3,082 |
|
| (3,760) |
|
| 102,303 |
|
| 108,549 |
Income tax expense (benefit) |
|
| 1,910 |
|
| (864) |
|
| — |
|
| (285,023) |
|
| (283,977) |
Depreciation, depletion and amortization |
|
| 70,499 |
|
| 66,436 |
|
| 38,107 |
|
| 2,601 |
|
| 177,643 |
EBITDA |
| $ | 200,723 |
| $ | 137,015 |
| $ | 127,303 |
| $ | (337,049) |
| $ | 127,992 |
Accretion |
|
| 815 |
|
| 816 |
|
| 244 |
|
| — |
|
| 1,875 |
Loss on debt financings |
|
| — |
|
| — |
|
| — |
|
| 4,815 |
|
| 4,815 |
Tax receivable agreement expense (1) |
|
| — |
|
| — |
|
| — |
|
| 271,016 |
|
| 271,016 |
Transaction costs |
|
| (76) |
|
| — |
|
| — |
|
| 7,809 |
|
| 7,733 |
Non-cash compensation |
|
| — |
|
| — |
|
| — |
|
| 21,140 |
|
| 21,140 |
Other |
|
| 2,128 |
|
| 1,277 |
|
| — |
|
| (2,199) |
|
| 1,206 |
Adjusted EBITDA (1) |
| $ | 203,590 |
| $ | 139,108 |
| $ | 127,547 |
| $ | (34,468) |
| $ | 435,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Net Income (Loss) to Adjusted EBITDA |
| Year ended December 31, 2016 | |||||||||||||
by Segment |
| West |
| East |
| Cement |
| Corporate |
| Consolidated | |||||
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (1) |
| $ | 86,040 |
| $ | 66,661 |
| $ | 79,280 |
| $ | (185,855) |
| $ | 46,126 |
Interest expense (1) |
|
| 9,195 |
|
| 4,930 |
|
| 2,741 |
|
| 80,670 |
|
| 97,536 |
Income tax expense (benefit) |
|
| 269 |
|
| (2,156) |
|
| — |
|
| (3,412) |
|
| (5,299) |
Depreciation, depletion and amortization |
|
| 64,558 |
|
| 50,866 |
|
| 29,903 |
|
| 2,409 |
|
| 147,736 |
EBITDA |
| $ | 160,062 |
| $ | 120,301 |
| $ | 111,924 |
| $ | (106,188) |
| $ | 286,099 |
Accretion |
|
| 787 |
|
| 674 |
|
| 103 |
|
| — |
|
| 1,564 |
IPO/ Legacy equity modification costs |
|
| — |
|
| — |
|
| — |
|
| 37,257 |
|
| 37,257 |
Tax receivable agreement expense (1) |
|
| — |
|
| — |
|
| — |
|
| 14,938 |
|
| 14,938 |
Transaction costs |
|
| 382 |
|
| 25 |
|
| — |
|
| 6,390 |
|
| 6,797 |
Management fees and expenses |
|
| — |
|
| — |
|
| — |
|
| (1,379) |
|
| (1,379) |
Non-cash compensation |
|
| — |
|
| — |
|
| — |
|
| 12,683 |
|
| 12,683 |
Other |
|
| 6,203 |
|
| 5,007 |
|
| 964 |
|
| 1,214 |
|
| 13,388 |
Adjusted EBITDA (1) |
| $ | 167,434 |
| $ | 126,007 |
| $ | 112,991 |
| $ | (35,085) |
| $ | 371,347 |
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Net Income (Loss) to Adjusted EBITDA |
| Year ended January 2, 2016 | |||||||||||||
by Segment |
| West |
| East |
| Cement |
| Corporate |
| Consolidated | |||||
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (1) |
| $ | 69,282 |
| $ | 29,565 |
| $ | 48,673 |
| $ | (146,036) |
| $ | 1,484 |
Interest expense (income) (1) |
|
| 22,806 |
|
| 21,213 |
|
| 15,965 |
|
| 24,645 |
|
| 84,629 |
Income tax expense (benefit) |
|
| 558 |
|
| 10 |
|
| — |
|
| (18,831) |
|
| (18,263) |
Depreciation, depletion and amortization |
|
| 53,118 |
|
| 38,242 |
|
| 24,646 |
|
| 2,315 |
|
| 118,321 |
EBITDA |
| $ | 145,764 |
| $ | 89,030 |
| $ | 89,284 |
| $ | (137,907) |
| $ | 186,171 |
Accretion |
|
| 609 |
|
| 681 |
|
| 112 |
|
| — |
|
| 1,402 |
IPO/ Legacy equity modification costs |
|
| — |
|
| — |
|
| 241 |
|
| 28,055 |
|
| 28,296 |
Loss on debt financings |
|
| 3,238 |
|
| 4,035 |
|
| — |
|
| 64,358 |
|
| 71,631 |
Income from discontinued operations |
|
| — |
|
| (2,415) |
|
| — |
|
| — |
|
| (2,415) |
Transaction costs |
|
| 360 |
|
| — |
|
| — |
|
| 9,159 |
|
| 9,519 |
Management fees and expenses |
|
| — |
|
| — |
|
| — |
|
| 1,046 |
|
| 1,046 |
Non-cash compensation |
|
| — |
|
| — |
|
| 16 |
|
| 5,432 |
|
| 5,448 |
Other |
|
| 793 |
|
| 972 |
|
| (14,808) |
|
| (527) |
|
| (13,570) |
Adjusted EBITDA (1) |
| $ | 150,764 |
| $ | 92,303 |
| $ | 74,845 |
| $ | (30,384) |
| $ | 287,528 |
(1) | The reconciliation of net income (loss) to Adjusted EBITDA is based on the financial results of Summit Inc. and its subsidiaries, which was $8.3 million, $16.0 million and $0.9 million less than Summit LLC and its subsidiaries in the years ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively, due to interest expense associated with a deferred consideration obligation, TRA expense and income tax benefit are obligations of Summit Holdings and Summit Inc., respectively, and are thus excluded from Summit LLC’s consolidated net income. |
|
|
|
|
|
|
|
Reconciliation of Working Capital |
| 2017 |
| 2016 | ||
($ in thousands) |
|
|
|
|
|
|
Total current assets |
| $ | 783,601 |
| $ | 483,698 |
Less total current liabilities |
|
| (249,975) |
|
| (239,288) |
Working capital |
| $ | 533,626 |
| $ | 244,410 |
|
|
|
|
|
|
|
|
|
|
Reconciliation of Operating Income to Adjusted Cash Gross Profit | 2017 |
| 2016 |
| 2015 |
| |||
($ in thousands) |
|
|
|
|
|
|
|
|
|
Operating income | $ | 220,877 |
| $ | 154,662 |
| $ | 135,024 |
|
General and administrative expenses |
| 242,670 |
|
| 243,512 |
|
| 177,769 |
|
Depreciation, depletion, amortization and accretion |
| 179,518 |
|
| 149,300 |
|
| 119,723 |
|
Transaction costs |
| 7,733 |
|
| 6,797 |
|
| 9,519 |
|
Adjusted Cash Gross Profit (exclusive of items shown separately) | $ | 650,798 |
| $ | 554,271 |
| $ | 442,035 |
|
Adjusted Cash Gross Profit Margin (exclusive of items shown separately) (1) |
| 37.1 | % |
| 37.2 | % |
| 34.3 | % |
(1) | Adjusted Cash Gross Margin, is defined as Adjusted Cash Gross Profit as a percentage of net revenue. |
Critical Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated 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 consolidated 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 valuation of accounts receivable, inventories, goodwill, intangibles and other long-lived assets, pension and other postretirement obligations and asset retirement obligations. 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.
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Acquisitions—Purchase Price Allocation
We regularly review strategic long-term plans, including potential investments in value-added acquisitions of related or similar businesses, which would increase our market share and/or are related to our existing markets. When an acquisition is completed, our consolidated statement of operations includes the operating results of the acquired business starting from the date of acquisition, which is the date that control is obtained. The purchase price is determined based on the fair value of assets given to and liabilities assumed from the seller as of the date of acquisition. We allocate the purchase price to the fair values of the tangible and intangible assets acquired and liabilities assumed as valued at the date of acquisition. Goodwill is recorded for the excess of the purchase price over the net of the fair value of the identifiable assets acquired and liabilities assumed as of the acquisition date. The estimation of fair values of acquired assets and assumed liabilities is judgmental and requires various assumptions and the amounts and useful lives assigned to depreciable and amortizable assets compared to amounts assigned to goodwill, which is not amortized, can significantly affect the results of operations in the period of and periods subsequent to a business combination.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, and therefore represents an exit price. A fair value measurement assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. We assign the highest level of fair value available to assets acquired and liabilities assumed based on the following options:
· | Level 1—Quoted prices in active markets for identical assets and liabilities. |
· | Level 2—Observable inputs, other than quoted prices, for similar assets or liabilities in active markets. |
· | Level 3—Unobservable inputs, which includes the use of valuation models. |
Level 2 inputs are typically used to estimate the fair value of acquired machinery, equipment and land and assumed liabilities for asset retirement obligations, environmental remediation and compliance obligations and contingencies.
Level 3 inputs are used to estimate the fair value of acquired mineral reserves, mineral interests and separately-identifiable intangible assets.
There is a measurement period after the acquisition date during which we may adjust the amounts recognized for a business combination. Any such adjustments are based on us obtaining additional information that existed at the acquisition date regarding the assets acquired or the liabilities assumed. Measurement period adjustments are generally recorded as increases or decreases to the goodwill recognized in the transaction. The measurement period ends once we have obtained all necessary information that existed as of the acquisition date, but does not extend beyond one year from the date of acquisition. Any adjustments to assets acquired or liabilities assumed beyond the measurement period are recorded in earnings.
We invested $510.0paid cash of $374.9 million and $397.9$337.0 million, net of cash acquired, in business combinations and allocated this amount to assets acquired and liabilities assumed during the years ended January 2, 2016December 30, 2017 and December 27, 2014,31, 2016, respectively.
Goodwill and Goodwill Impairment
Goodwill is tested annually for impairment and in interim periods if events occur indicating that the carrying amounts may be impaired. The evaluation involves the use of significant estimates and assumptions and considerable management judgment. Our judgments regarding the existence of impairment indicators and future cash flows are based on operational performance of our businesses, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use, including estimates of future cash flows, volumes, market penetration and discount rates, are consistent with our internal planning. The estimated future cash flows are derived from internal operating budgets and forecasts for
long-term demand and pricing in our industry and markets. If these estimates or their related assumptions change in the future, we may be required to record an impairment charge on all or a portion of our goodwill. Furthermore, we cannot predict the occurrence of future impairment-triggering events nor the affect such events might have on our reported values. Future events could cause us to conclude
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that impairment indicators exist and that goodwill associated with our acquired businesses are impaired. Any resulting impairment loss could have an adverse effect on our financial condition and results of operations.
The annual goodwill test is performed by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If, as a result of the qualitative assessment, it is determined that an impairment is more likely than not, we are then required to perform the two-step quantitative impairment test, otherwise further analysis is not required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether we choose to perform the qualitative assessment or proceed directly to the two-step quantitative impairment test.
Under the two-step quantitative impairment test, step one of the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. We use a discounted cash flow (“DCF”) model to estimate the current fair value of our reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including macroeconomic trends in the reporting unit’s geographic area impacting private construction and public infrastructure industries, the timing of work embedded in our backlog, our performance and profitability under our contracts, our success in securing future sales and the appropriate interest rate used to discount the projected cash flows. Most of these assumptions vary significantly among the reporting units. This discounted cash flow analysis is corroborated by “top-down” analyses, includingWe also perform a market assessment of our enterprise value. We believe the estimates and assumptions used in the valuations are reasonable.
In conjunction with our annual review of goodwill on the first day of the fourth quarter, we performed the qualitative assessment for four of ourtwelve reporting units. As a result of this analysis, we determined that it is more likely than not that the fair value of the fourfive reporting units was greater than its carrying value. We performed Step 1 of the impairment test for the remaining seven reporting units, for which all but one had estimated fair values substantially in excess ofexceeding carrying values ranging from 9% to 188%by at least 10%.
One of our reporting units is based in Midland/Odessa, Texas where the economy is largely exposed to the oil and gas sector. Beginning in 2014 and continuing throughout 2015, global oil prices declined. An extended period of low oil prices could have a material adverse effect on this reporting unit. However, we are unable to predict long term macroeconomic trends. We will continue to monitor demand for our products in this market to assess whether an event occurs that indicates the carrying amount of the reporting unit may be impaired requiring a goodwill impairment analysis. We did not recognize a goodwill impairment charge on the reporting unit’s $19.5 million of goodwill as of January 2, 2016. The estimated fair value of the reporting unit was 6.2% greater than its carrying value as of the date of the 2015 impairment test. The key assumptions in the impairment analysis were declining cash flows through 2018 with modest growth thereafter and an 11% discount rate.
As a result of the impairment test in 2013, we concluded that the book values of two of our reporting units, the Utah-based operations in the West segment and our Kentucky-based operations in the East segment exceeded their estimated fair values. For the Utah-based and Kentucky-based reporting units, we performed the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. The second step of the test requires the allocation of the reporting unit’s fair value to its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as an impairment loss. Based on the results of the step two analyses, we
recorded impairment charges to goodwill of $53.3 million and $14.9 million for the Utah-based and Kentucky-based region reporting units, respectively. After recognizing these impairment charges, the goodwill attributable to the Utah and Kentucky reporting units was $36.6 million and zero, respectively.
As of January 2, 2016,December 30, 2017, we determined that no events or circumstances from September 27, 2015October 2, 2017 through January 2, 2016December 30, 2017 indicated that a further assessment was necessary.
Impairment of Long-Lived Assets, Excluding Goodwill
Revenue Recognition
We evaluate the carrying value of long-lived assets, including intangible assets subject to amortization, when events and circumstances indicate that the carrying value may not be recoverable. Long-lived assets are material to our total assets; as of January 2, 2016, net property, plant and equipment, represented 53.0% of total assets. The evaluation involves the use of significant estimates and assumptions and considerable management judgment. Such indicators may include deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. A one year increase or decrease in the average useful lives of our property, plant and equipment would have affected 2015 depreciation expense by ($7.1) million or $8.2 million, respectively. An impairment charge could be material to our financial condition and results of operations. The carrying value of long-lived assets is considered impaired when the estimated undiscounted cash flowsearn revenue from such assets are less than their carrying value. In that event, we recognize a loss equal to the amount by which the carrying value exceeds the fair value of the long-lived assets.
Fair value is determined by primarily using a cash flow methodology that requires considerable management judgment and long-term assumptions. Our estimate of net future cash flows is based on historical experience and assumptions of future trends, which may be different from actual results.
We consider the identification of an asset for disposal to be an event requiring evaluation of the asset’s fair value. Fair value is often determined to be the estimated sales price, less selling costs. If the carrying value exceeds the fair value, then an impairment charge is recognized equal to the expected loss on disposal. Throughout 2015, we recognized $23.1 million of net gains on asset dispositions, which include a $16.6 million gain on a cement terminal included as consideration for the purchase of the Davenport Assets. The net gain on asset dispositions includes both gains and losses on disposed assets and losses on assets identified for disposition in the succeeding twelve months. The losses commonly occur because the cash flows expected from selling the asset are less than the cash flows that could be generated from holding the asset for use. Gains (losses) from asset dispositions are included in general and administrative expenses.
The 2013 goodwill impairment recognized at two reporting units was considered to be an indication that the carrying value of long-lived assets may not be recoverable at those reporting units requiring further evaluation, despite positive cash flows in the year ended December 28, 2013 at both the Utah and Kentucky reporting units. The net book value of the long-lived assets at the Utah and Kentucky reporting units, as of the first day of the fourth quarter, was $117.3 million and $127.8 million, respectively. The evaluation indicated that the carrying value of the reporting units’ long-lived assets was less than the undiscounted future cash flows, resulting in no impairment of the evaluated long-lived assets. The type of long-lived assets at the reporting units, primarily plant and equipment, when purchased new, had generally increased in valuepredominately from the datesale of construction materials, products and providing paving and related services. Construction materials consist primarily of aggregates and cement. Products consist of related downstream products, including ready-mix concrete, asphalt paving mix and concrete products. Paving and related service revenue is generated primarily from the long-lived assets at these reporting units were purchased. Asasphalt paving services that we provide. To a result, management does not believelesser degree, we also generate revenue from landfill operations, the receipt and disposal of waste that there is a risk that a material impairment charge will be recognized at these reporting unitsconverted to fuel for use in the near futureour cement plants, and there has not been a significant impairment charge in the years ended January 2, 2016 or December 27, 2014.underground storage space rental.
There were no changes to the useful lives of assets having a material effect on our financial condition or results of operations in 2015 or 2014.
Products
Revenue Recognition
We earn revenue from the sale of products, which primarily include aggregates, cement, ready-mixedready-mix concrete and asphalt, but also include concrete products and plastics components, net of discounts or allowances, if any, and freight and delivery charges billed to customers. Freight and delivery charges associated with cement sales are recorded on a net basis together with freight costs within cost of sales. Revenue for product sales is recognized when evidence of an arrangement exists, the fee is fixed or determinable, title passes, which is generally when the product is shipped, and collection is reasonably assured.
Aggregates and cement products are sold point-of-sale through purchase orders. When the product is sold on account, collectability typically occurs 30-60 days after the sale. Revenue is recognized when cash is received from the customer at the point of sale or when the products are delivered or collected on site. There are no other timing implications that will create a contract asset or liability, and contract modifications are unlikely given the timing and nature of the transaction. Material sales are likely to have multiple performance obligations if the product is sold with delivery. In these instances, delivery most often occurs on the same day as the control of the product transfers to the customer. As a result, even in the case of multiple performance obligations, the performance obligations are satisfied concurrently and revenue is recognized simultaneously.
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Services
We earn revenue from the provision of services, which are primarily paving and related services, but also include landfill operations, the receipt and disposal of waste that is converted to fuel for use in our cement plants, and underground storage space rental.
Revenue for product sales is recognized when evidence of an arrangement exists, the fee is fixed or determinable, title passes, which generally is when the product is shipped, and collection is reasonably assured. Product revenue generally includes sales of aggregates, cement and other materials to customers, net of discounts or allowances, if any, and freight and delivery charges billed to customers. Freight and delivery charges associated with cement sales are recorded on a net basis together with freight costs within cost of sales.
Revenue from the receipt of waste fuels is recognized when the waste is accepted and a corresponding liability is recognized for the costs to process the waste into fuel for the manufacturing of cement or to ship the waste offsite for disposal in accordance with applicable regulations. Collectability of service contracts is due reasonably after certain milestones in the contract are performed. Milestones vary by project, but are typically calculated using monthly progress based on the percentage of completion or a customer’s engineered review of progress. The majority of the time, collection occurs within 90 days of billing and cash is received within the same fiscal year as services performed. On most projects, the customer will withhold a portion of the invoice for retainage, which may last longer than a year depending on the job.
We account for revenue and earnings on our long-term
Revenue derived from paving and related services contracts as service revenueare recognized using the percentage-of-completion method of accounting. Under the percentage-of-completion method, we recognize paving and related services revenue as services are rendered. The majority of our construction service contracts are completed within one year, but may occasionally extend beyond this time frame. We estimate profit as the difference between total estimated revenue and total estimated cost of a contract and recognize that profit over the life of the contract based on input measures. We generally measure progress toward completion on long-term paving and related services contracts based on the proportion of costs incurred to date relative to total estimated costs at completion. We include revisions of estimated profits on contracts in earnings under the cumulative catch-up method, under which the effect of revisions in estimates is recognized immediately. If a revised estimate of contract profitability reveals an anticipated loss on the contract, we recognize the loss in the period it is identified.
The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at completion, and in some cases includes estimates of recoveries asserted against the customer for changes in specifications or other disputes. Contract estimates involve various assumptions and projections relative to the outcome of future events over multiple periods, including future labor productivity and availability, the nature and complexity of the work to be performed, the cost and availability of materials, the effect of delayed performance, and the availability and timing of funding from the customer. These estimates are based on our best judgment. A significant change in one or more of these estimates could affect the profitability of one or more of our contracts. We review our contract estimates regularly to assess revisions in contract values and estimated costs at completion. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts. No material adjustments to a contract were recognized between 20132016 and the year ended January 2, 2016.2018.
We recognize revenue arising from litigation and claims either as income or as an offset against a potential loss only when the amount of the claim can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legalcontractual basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim.
Mining Reclamation Obligations
We incur reclamation obligations asThe majority of contract modifications relate to the original contract and are often an extension of the original performance obligation. Predominately, modifications are not distinct from those in the original contract; therefore, they are part of our mining activities. Our quarry activities requirea single performance obligation. Summit accounts for the removalmodification using a cumulative catch-up adjustment. However, there are instances where goods or services in a modification are distinct from those transferred prior to the modification. In these situations, Summit accounts for the modifications as either a separate contract or prospectively depending on the facts and relocationcircumstances of significant levelsthe modification.
Generally, construction contracts contain mobilization costs which are categorized as costs to fulfill a contract. These costs are excluded from any measure of overburdenprogress toward contract fulfillment. These costs do not result in the transfer of control of a good or service to access stonethe customer and are amortized over the life of usable quantitythe contract.
Costs and quality.estimated earnings in excess of billings are composed principally of revenue recognized on contracts on the percentage of completion method for which billings had not been presented to customers because the amounts were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, the unbilled receivables at the balance sheet date are expected to be billed in following periods. Billings in excess of costs and
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estimated earnings represent billings in excess of revenue recognized. Contract assets and liabilities are netted on a contract-by-contract basis.
Income Taxes
Summit Inc. is a corporation subject to income taxes in the United States. Certain subsidiaries, including Summit Holdings, or subsidiary groups of the Company are taxable separate from Summit Inc. The same overburden material is used to reclaim depleted mine areas, which must be sloped to a certain gradientprovisions for income taxes, or Summit Inc.’s proportional share of the provision, are included in the Company’s consolidated financial statements.
The Company’s deferred income tax assets and seeded to prevent erosionliabilities are computed for differences between the tax basis and financial statement amounts that will result in taxable or deductible amounts in the future. Reclamation methodsThe ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, as well as consideration of tax-planning strategies to determine whether we may seek to utilize any net operating loss carryforwards scheduled to expire in the near future. The computed deferred balances are based on enacted tax laws and requirements can differ dependingapplicable rates for the periods in which the differences are expected to affect taxable income. A valuation allowance is recognized for deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines it would be able to realize its deferred tax assets for which a valuation allowance had been recorded, then an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company evaluates the tax positions taken on the quarryincome tax returns that remain open and state rules and regulations in existence for certain locations. This differentiation affects the potential obligation required at each individual subsidiary. As of January 2, 2016, our undiscounted reclamation obligations totaled $36.1 million, of which 18.8% ispositions expected to be settled withintaken on the next five yearscurrent year tax returns to identify uncertain tax positions. Unrecognized tax benefits on uncertain tax positions are recorded on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is more than 50 percent likely to be realized is recognized. Interest and penalties related to unrecognized tax benefits are recorded in income tax benefit.
Tax Receivable Agreement
Tax Receivable Agreement— When Summit Inc. purchases LP Units for cash or LP Units are exchanged for shares of Class A common stock, this results in increases in Summit Inc.’s share of the tax basis of the tangible and intangible assets of Summit Holdings, which increases the tax depreciation and amortization deductions that otherwise would not have been available to Summit Inc. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of cash taxes that we would otherwise be required to pay in the future. In connection with our IPO, we entered into a TRA with the holders of the LP Units and the remaining 81.2% thereafter.
Reclamation costs
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We periodically evaluate the realizability of the deferred tax assets resulting from the normal useexchange of long-livedLP Units for Class A common stock. Our evaluation considers all sources of taxable income; all evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of the deferred tax assets. If the deferred tax assets either owned or leased, are recognized overdetermined to be realizable, we then assess whether payment of amounts under the TRA have become probable. If so, we record a TRA liability of 85% of such deferred tax assets. In subsequent periods, we assess the realizability of all of our deferred tax assets subject to the TRA. Should we determine a deferred tax asset with a valuation allowance is realizable in a subsequent period, the assetrelated valuation allowance will be released and consideration of a corresponding TRA liability will be assessed. The realizability of deferred tax assets, including those subject to the TRA, is dependent upon the generation of future taxable income during the periods in use. which those deferred tax assets become deductible and consideration of prudent and feasible tax-planning strategies.
The obligation,measurement of the TRA is accounted for as a contingent liability. Therefore, once we determine that a payment to a pre-IPO owner has become probable and can be estimated, the estimate of payment is accrued.
New Accounting Pronouncements Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which cannotprescribes a five-step model for revenue recognition that will replace most existing revenue recognition guidance in U.S. GAAP. The ASU will supersede nearly all existing revenue recognition guidance under U.S. GAAP and provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be reduced by estimated offsettingentitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB postponed the effective date of the new revenue standard by one year to the first quarter of 2018. In applying these ASUs, an entity is recorded atpermitted to use either the full retrospective or cumulative effect transition approach. We plan to adopt these ASU’s using the modified retrospective approach. We have evaluated the impact of adoption of these standards on our consolidated financial statements, which was not material.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the definition of a business. This ASU provides a screen to determine whether a group of assets constitutes a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated as acquisitions. If the screen is not met, this ASU (1) requires that to be considered a liabilitybusiness, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the obligating event dateability to create an output and (2) removes the evaluation of whether a market participant could replace missing elements. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. The ASU is accreted through chargeseffective for public companies for annual periods beginning after December 15, 2017. The adoption of this ASU will not have a material impact on the consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to operating expenses.Accounting for Hedging Activities, allowing more financial and nonfinancial hedging strategies to be eligible for hedge accounting. The fair valueASU is basedeffective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The adoption of this ASU is not expected to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which will result in lessees recognizing most leases on the balance sheet. Lessees are required to disclose more quantitative and qualitative information about their leases than current U.S. GAAP requires. The ASU is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are evaluating the new requirements, but have not yet determined the impact on our estimate for a third party to perform the legally required reclamation tasks including a reasonable profit margin. This fair value is also capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset.
The mining reclamation reserve is based on management’s estimate of future cost requirements to reclaim property at both currently operating and closed quarry sites. Costs are estimated in current dollars and inflated until the expected time of payment using a future estimated inflation rate and then discounted back to present value using a credit-adjusted, risk-free rate on obligations of similar maturity adjusted to reflect our credit rating. We review reclamation obligations at least every three years for a revision to the cost or a change in the estimated settlement date. Additionally, reclamation obligations are reviewed in the period that a triggering event occurs that would result in either a revision to the cost or a change in the estimated settlement date. Examples of events that would trigger a change in the cost include a new reclamation law or amendment to an existing mineral lease. Examples of events that would cause a change in the estimated settlement date include the acquisition of additional reserves or early or delayed closure of a site. Any affect to earnings from cost revisions is included in cost of revenue.consolidated financial statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to certain market risks arising from transactions that are entered into in the normal course of business. Our operations are highly dependent upon the interest rate-sensitiverate‑sensitive construction industry as well as the general economic environment. Consequently, these marketplaces could experience lower levels of economic activity in an environment of rising interest rates or escalating costs. Management has considered the current economic environment and its potential effect to our business. Demand for materials-basedmaterials‑based products, particularly in the residential and nonresidential construction markets, could decline if companies and consumers are unable to obtain financing for construction projects or if an economic recession causes delays or cancellations to capital projects. Additionally, in preceding years, declining tax revenue, state budget deficits and unpredictable or inconsistent federal funding have negatively affected states’ abilities to finance infrastructure construction projects.
Commodity and Energy Price Risk
We are subject to commodity price risk with respect to price changes in liquid asphalt and energy, including fossil fuels and electricity for aggregates, cement, ready-mixedready‑mix concrete and asphalt paving mix production, natural gas for hot mix asphalt production and diesel fuel for distribution vehicles and production related mobile equipment. Liquid asphalt escalators in most of our public infrastructure contracts limit our exposure to price fluctuations in this commodity, and we seek to obtain escalators on private and commercial contracts. Similarly, in periods of decreasing oil prices, a portion of the cost savings will be recouped by our end customers. DecreasingChanges in oil prices also could affect demand in certain of our markets, particularly in Midland/Odessa, Texas and indirectly in Houston, Texas, which collectively representrepresented approximately 16.9%11.5% of our consolidated revenue in 2015.2017. In addition, we enter into various firm purchase commitments, with terms generally less than one year, for certain raw materials.
For the year ended January 2, 2016,December 30, 2017, our costs associated with liquid asphalt and energy amounted to approximately $186.8$198.5 million. Accordingly, a 10% increase or decrease in the total cost of liquid asphalt and energy would have decreased or increased, respectively, our operating results for the year by approximately $18.7$19.9 million. However, this does not take into consideration liquid asphalt escalators in certain contracts or forward purchase commitments put into place before January 2, 2016.
Inflation Risk
Inflation rates in recent years have not been a significant factor in our revenue or earnings due to relatively low inflation and our ability to recover increasing costs by obtaining higher prices for our products, including sale price escalators in place for most public infrastructure sector contracts. Inflation risk varies with the level of activity in the construction industry, the number, size and strength of competitors and the availability of products to supply a local market.
Foreign Currency Risk
In 2014, we expanded our operations into Canada with the acquisition of Mainland. With this expansion, we arebecame subject to foreign currency risk related to changes in the U.S. dollar/Canadian dollar exchange rates. A 10% adverse change in foreign currency rates from December 20152017 levels would not have had a material effect on our financial condition, results of operations or liquidity.
Interest Rate Risk
At January 2, 2016,
As of December 30, 2017, we had $235.0$635 million of revolving credit commitments and $650.0 million ofin term loans under the senior secured credit facilities,outstanding which bear interest at a variable rate. A hypothetical 100 basis point increase in interest rates onAs of December 30, 2017, the 2015 quarterly average outstanding revolver balance of $44.7 million would increase interest expense by $0.4 million on an annual basis.
The interest rate on the term loans has a floor of 1.00%. The rate in effect at January 2, 2016 for one-month LIBOR was 0.42% and 0.61% for three-month LIBOR and, thus, the rate applicable to us was the floor rateone‑month LIBOR of 1.00%1.57%. Therefore, a 100 basis point increase in the interest rate at January 2, 2016December 30, 2017 would only have increased the rate from 1.00%1.57% to 1.61%2.57%, the effect of which would have been an increase of $0.5$6.4 million on annual interest expense. In 2015, our revolving credit commitments increased
On January 19, 2017, we amended the Credit Agreement and, as a result, the floor decreased from 1.00% to $235.00.75%. On November 21, 2017, Summit LLC entered into Amendment No. 2 to the Amended and Restated Credit Agreement, which, among other things, extended the maturity date from 2022 to 2024 and reduced the applicable margin in respect of the $635.4 million and ouroutstanding principal amount of term loans increased to $650.0 million with a floorthereunder.
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The Company has entered into an interest rate derivativederivatives on $200.0 million of ourits term loan borrowings to add stability to our interest expense and to manage ourits exposure to interest rate movements. The derivative is set to expire in September 2019.
At our cement plants, we sponsored two non-contributorynon‑contributory defined benefit pension plans for certain hourly and salaried employees and one healthcare and life insurance benefits plan for certain eligible retired employees as of the end of fiscal 2014.employees. As of January 2014, the two pension plans had been frozen to new participants and future benefit accruals and the healthcare and life insurance benefit plan has been amended to eliminate all future retiree health and life coverage for current employees. As a result of the acquisition of the Davenport Iowa unitAssets in 2015, the hourly defined benefit pension plan was amended to permit a new group of participants into the plan to accrue benefits in accordance with the terms of the collective bargaining agreement covering such Davenport employees. As a result of the collective bargaining unit negotiations in 2017, the hourly defined benefit pension plan was amended to stop future benefit accruals for the Davenport employees effective December 31, 2017. In addition, the company adopted twoone new retiree healthcare and life insurance plansplan to provide benefits prior to Medicare eligibility for certain salaried and hourly Davenport employees respectively.employees. Our results of operations are affected by our net periodic benefit cost from these plans, which was $0.8$1.0 million in 2015.2017. Assumptions that affect this expense include the discount rate and, for the pension plans only, the expected long-termlong‑term rate of return on assets. Therefore, we have interest rate risk associated with these factors.
The healthcare and life insurance benefit plans are exposed to changes in the cost of healthcare services. A one percentage-pointpercentage‑point increase or decrease in assumed health care cost trend rates would have affected the accumulated postretirement benefit obligation by approximately $1.3$0.9 million or $(1.1)$(0.8) million, respectively, at January 2, 2016.December 30, 2017.
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Report of Independent Registered Public Accounting Firm
The Board
To the stockholders and board of Directors and Stockholders
directors
Summit Materials, Inc.:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets of Summit Materials, Inc. and subsidiaries (the “Company”) as of January 2, 2016December 30, 2017 and December 27, 2014, and31, 2016, the related consolidated statements of operations, comprehensive loss, cash flows and changes in redeemable noncontrolling interest and stockholders’ equity, and cash flows for each of the fiscal years in the three-year period ended December 30, 2017, December 31, 2016 and January 2, 2016. 2016 and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the fiscal years ended December 30, 2017, December 31, 2016 and January 2, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 30, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 14, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Summit Materials, Inc. and subsidiaries as of January 2, 2016 and December 27, 2014, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended January 2, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
We have served as the Company’s auditor since2012.
Denver, Colorado
February 18, 2016
75
SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 2, 2016December 30, 2017 and December 27, 201431, 2016
(In thousands, except share and per share amounts)
|
|
|
|
|
|
| |||||||||
2015 | 2014 |
| 2017 |
| 2016 |
| |||||||||
Assets |
|
|
|
|
|
|
| ||||||||
Current assets: |
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents | $ | 186,405 | $ | 13,215 |
| $ | 383,556 |
| $ | 143,392 |
| ||||
Accounts receivable, net | 145,544 | 141,302 |
|
| 198,330 |
|
| 162,377 |
| ||||||
Costs and estimated earnings in excess of billings | 5,690 | 10,174 |
|
| 9,512 |
|
| 7,450 |
| ||||||
Inventories | 130,082 | 111,553 |
|
| 184,439 |
|
| 157,679 |
| ||||||
Other current assets | 4,807 | 16,005 |
|
| 7,764 |
|
| 12,800 |
| ||||||
|
| ||||||||||||||
Total current assets | 472,528 | 292,249 |
|
| 783,601 |
|
| 483,698 |
| ||||||
Property, plant and equipment, net | 1,269,006 | 950,601 | |||||||||||||
Property, plant and equipment |
|
| 1,615,424 |
|
| 1,446,452 |
| ||||||||
Goodwill | 596,397 | 419,270 |
|
| 1,036,320 |
|
| 782,212 |
| ||||||
Intangible assets, net | 15,005 | 17,647 | |||||||||||||
Intangible assets |
|
| 16,833 |
|
| 17,989 |
| ||||||||
Deferred tax assets |
|
| 284,092 |
|
| 4,326 |
| ||||||||
Other assets | 43,243 | 32,886 |
|
| 51,063 |
|
| 46,789 |
| ||||||
|
| ||||||||||||||
Total assets | $ | 2,396,179 | $ | 1,712,653 |
| $ | 3,787,333 |
| $ | 2,781,466 |
| ||||
|
| ||||||||||||||
Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity/Partners’ Interest | |||||||||||||||
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
| ||||||||
Current liabilities: |
|
|
|
|
|
|
| ||||||||
Current portion of debt | $ | 6,500 | $ | 5,275 |
| $ | 4,765 |
| $ | 6,500 |
| ||||
Current portion of acquisition-related liabilities | 20,584 | 18,402 |
|
| 14,087 |
|
| 24,162 |
| ||||||
Accounts payable | 81,397 | 78,854 |
|
| 98,744 |
|
| 81,565 |
| ||||||
Accrued expenses | 92,942 | 101,496 |
|
| 116,629 |
|
| 111,605 |
| ||||||
Billings in excess of costs and estimated earnings | 13,081 | 8,958 |
|
| 15,750 |
|
| 15,456 |
| ||||||
|
| ||||||||||||||
Total current liabilities | 214,504 | 212,985 |
|
| 249,975 |
|
| 239,288 |
| ||||||
Long-term debt | 1,273,652 | 1,043,685 |
|
| 1,810,833 |
|
| 1,514,456 |
| ||||||
Acquisition-related liabilities | 39,977 | 42,736 |
|
| 58,135 |
|
| 32,664 |
| ||||||
Tax receivable agreement liability |
|
| 331,340 |
|
| 58,145 |
| ||||||||
Other noncurrent liabilities | 100,186 | 92,524 |
|
| 65,329 |
|
| 76,874 |
| ||||||
|
| ||||||||||||||
Total liabilities | 1,628,319 | 1,391,930 |
|
| 2,515,612 |
|
| 1,921,427 |
| ||||||
|
| ||||||||||||||
Commitments and contingencies (see note 14) | |||||||||||||||
Redeemable noncontrolling interest | — | 33,740 | |||||||||||||
Stockholders’ equity/partners’ interest: | |||||||||||||||
Class A common stock, par value $0.01 per share; 1,000,000,000 shares authorized, 49,745,944 shares issued and outstanding as of January 2, 2016 | 497 | — | |||||||||||||
Class B common stock, par value $0.01 per share; 250,000,000 shares authorized, 69,007,297 shares issued and outstanding as of January 2, 2016 | 690 | — | |||||||||||||
Partners’ interest | — | 285,685 | |||||||||||||
Commitments and contingencies (see note 16) |
|
|
|
|
|
|
| ||||||||
Stockholders’ equity: |
|
|
|
|
|
|
| ||||||||
Class A common stock, par value $0.01 per share; 1,000,000,000 shares authorized, 110,350,594 and 96,033,222 shares issued and outstanding as of December 30, 2017 and December 31, 2016, respectively |
|
| 1,104 |
|
| 961 |
| ||||||||
Class B common stock, par value $0.01 per share; 250,000,000 shares authorized, 100 shares issued and outstanding as of December 30, 2017 and December 31, 2016 |
|
| — |
|
| — |
| ||||||||
Additional paid-in capital | 619,003 | — |
|
| 1,154,220 |
|
| 824,304 |
| ||||||
Accumulated earnings | 10,870 | — |
|
| 95,833 |
|
| 19,028 |
| ||||||
Accumulated other comprehensive loss | (2,795 | ) | — | ||||||||||||
|
| ||||||||||||||
Stockholders’ equity/partners’ interest: | 628,265 | 285,685 | |||||||||||||
Accumulated other comprehensive income (loss) |
|
| 7,386 |
|
| (2,249) |
| ||||||||
Stockholders’ equity |
|
| 1,258,543 |
|
| 842,044 |
| ||||||||
Noncontrolling interest in consolidated subsidiaries | 1,362 | 1,298 |
|
| — |
|
| 1,378 |
| ||||||
Noncontrolling interest in Summit Materials, Inc. | 138,233 | — | |||||||||||||
|
| ||||||||||||||
Total stockholders’ equity/partners’ interest | 767,860 | 286,983 | |||||||||||||
|
| ||||||||||||||
Total liabilities, redeemable noncontrolling interest and stockholders’ equity/partners’ interest | $ | 2,396,179 | $ | 1,712,653 | |||||||||||
|
| ||||||||||||||
Noncontrolling interest in Summit Holdings |
|
| 13,178 |
|
| 16,617 |
| ||||||||
Total stockholders’ equity |
|
| 1,271,721 |
|
| 860,039 |
| ||||||||
Total liabilities and stockholders’ equity |
| $ | 3,787,333 |
| $ | 2,781,466 |
|
See accompanying notes to consolidated financial statements.
76
SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 30, 2017, December 31, 2016 and January 2, 2016 December 27, 2014 and December 28, 2013
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
| |||||||||||||
2015 | 2014 | 2013 |
| 2017 |
| 2016 |
| 2015 | |||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
| ||||||||||||
Product | $ | 1,043,843 | $ | 806,280 | $ | 573,684 |
| $ | 1,449,936 |
| $ | 1,223,008 |
| $ | 1,043,843 | ||||||
Service | 246,123 | 264,325 | 250,680 |
|
| 302,473 |
|
| 265,266 |
|
| 246,123 | |||||||||
|
|
| |||||||||||||||||||
Net revenue | 1,289,966 | 1,070,605 | 824,364 |
|
| 1,752,409 |
|
| 1,488,274 |
|
| 1,289,966 | |||||||||
Delivery and subcontract revenue | 142,331 | 133,626 | 91,837 |
|
| 180,166 |
|
| 137,789 |
|
| 142,331 | |||||||||
|
|
| |||||||||||||||||||
Total revenue | 1,432,297 | 1,204,231 | 916,201 |
|
| 1,932,575 |
|
| 1,626,063 |
|
| 1,432,297 | |||||||||
|
|
| |||||||||||||||||||
Cost of revenue (excluding items shown separately below): |
|
|
|
|
|
|
|
|
| ||||||||||||
Product | 676,457 | 566,986 | 410,286 |
|
| 898,281 |
|
| 751,419 |
|
| 676,074 | |||||||||
Service | 171,857 | 186,548 | 174,929 |
|
| 203,330 |
|
| 182,584 |
|
| 171,857 | |||||||||
|
|
| |||||||||||||||||||
Net cost of revenue | 848,314 | 753,534 | 585,215 |
|
| 1,101,611 |
|
| 934,003 |
|
| 847,931 | |||||||||
Delivery and subcontract cost | 142,331 | 133,626 | 91,837 |
|
| 180,166 |
|
| 137,789 |
|
| 142,331 | |||||||||
|
|
| |||||||||||||||||||
Total cost of revenue | 990,645 | 887,160 | 677,052 |
|
| 1,281,777 |
|
| 1,071,792 |
|
| 990,262 | |||||||||
|
|
| |||||||||||||||||||
General and administrative expenses | 177,769 | 150,732 | 142,000 |
|
| 242,670 |
|
| 243,512 |
|
| 177,769 | |||||||||
Goodwill impairment | — | — | 68,202 | ||||||||||||||||||
Depreciation, depletion, amortization and accretion | 119,723 | 87,826 | 72,934 |
|
| 179,518 |
|
| 149,300 |
|
| 119,723 | |||||||||
Transaction costs | 9,519 | 8,554 | 3,990 |
|
| 7,733 |
|
| 6,797 |
|
| 9,519 | |||||||||
|
|
| |||||||||||||||||||
Operating income (loss) | 134,641 | 69,959 | (47,977 | ) | |||||||||||||||||
Other income, net | (2,425 | ) | (3,447 | ) | (1,737 | ) | |||||||||||||||
Operating income |
|
| 220,877 |
|
| 154,662 |
|
| 135,024 | ||||||||||||
Interest expense |
|
| 108,549 |
|
| 97,536 |
|
| 84,629 | ||||||||||||
Loss on debt financings | 71,631 | — | 3,115 |
|
| 4,815 |
|
| — |
|
| 71,631 | |||||||||
Interest expense | 84,629 | 86,742 | 56,443 | ||||||||||||||||||
|
|
| |||||||||||||||||||
Loss from continuing operations before taxes | (19,194 | ) | (13,336 | ) | (105,798 | ) | |||||||||||||||
Tax receivable agreement expense |
|
| 271,016 |
|
| 14,938 |
|
| — | ||||||||||||
Other (income) expense, net |
|
| (5,303) |
|
| 1,361 |
|
| (2,042) | ||||||||||||
(Loss) income from operations before taxes |
|
| (158,200) |
|
| 40,827 |
|
| (19,194) | ||||||||||||
Income tax benefit | (18,263 | ) | (6,983 | ) | (2,647 | ) |
|
| (283,977) |
|
| (5,299) |
|
| (18,263) | ||||||
|
|
| |||||||||||||||||||
Loss from continuing operations | (931 | ) | (6,353 | ) | (103,151 | ) | |||||||||||||||
(Income) loss from discontinued operations | (2,415 | ) | (71 | ) | 528 | ||||||||||||||||
|
|
| |||||||||||||||||||
Net income (loss) | 1,484 | (6,282 | ) | (103,679 | ) | ||||||||||||||||
Net (loss) income attributable to noncontrolling interest in subsidiaries | (1,826 | ) | 2,495 | 3,112 | |||||||||||||||||
|
| ||||||||||||||||||||
Net loss attributable to Summit Holdings | (24,408 | ) | $ | (8,777 | ) | $ | (106,791 | ) | |||||||||||||
|
|
| |||||||||||||||||||
Net income attributable to Summit Materials, Inc. | $ | 27,718 | |||||||||||||||||||
| |||||||||||||||||||||
Net income per share of Class A common stock: | |||||||||||||||||||||
Income (loss) from continuing operations |
|
| 125,777 |
|
| 46,126 |
|
| (931) | ||||||||||||
Income from discontinued operations |
|
| — |
|
| — |
|
| (2,415) | ||||||||||||
Net income |
|
| 125,777 |
|
| 46,126 |
|
| 1,484 | ||||||||||||
Net income (loss) attributable to noncontrolling interest in subsidiaries |
|
| (27) |
|
| 16 |
|
| (1,826) | ||||||||||||
Net income (loss) attributable to Summit Holdings |
|
| 3,974 |
|
| 9,327 |
|
| (24,408) | ||||||||||||
Net income attributable to Summit Inc. |
| $ | 121,830 |
| $ | 36,783 |
| $ | 27,718 | ||||||||||||
Income per share of Class A common stock: |
|
|
|
|
|
|
|
|
| ||||||||||||
Basic | $ | 0.73 |
| $ | 1.12 |
| $ | 0.52 |
| $ | 0.68 | ||||||||||
Diluted | $ | 0.52 |
| $ | 1.11 |
| $ | 0.52 |
| $ | 0.50 | ||||||||||
Weighted average shares of Class A common stock: |
|
|
|
|
|
|
|
|
| ||||||||||||
Basic | 38,231,689 |
|
| 108,696,438 |
|
| 70,355,042 |
|
| 40,888,437 | |||||||||||
Diluted | 88,336,574 |
|
| 109,490,898 |
|
| 70,838,508 |
|
| 90,993,322 |
See accompanying notes to consolidated financial statements.
77
SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
Years ended December 30, 2017, December 31, 2016 and January 2, 2016 December 27, 2014 and December 28, 2013
(In thousands)
2015 | 2014 | 2013 | ||||||||||
Net income (loss) | $ | 1,484 | $ | (6,282 | ) | $ | (103,679 | ) | ||||
Other comprehensive (loss) income: | ||||||||||||
Postretirement curtailment adjustment | — | (1,346 | ) | — | ||||||||
Postretirement liability adjustment | 2,123 | (3,919 | ) | 4,407 | ||||||||
Foreign currency translation adjustment | (14,099 | ) | (5,816 | ) | — | |||||||
Loss on cash flow hedges | (944 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
Other comprehensive (loss) income | (12,920 | ) | (11,081 | ) | 4,407 | |||||||
|
|
|
|
|
| |||||||
Comprehensive loss | (11,436 | ) | (17,363 | ) | (99,272 | ) | ||||||
Less comprehensive (loss) income attributable to the noncontrolling interest in consolidated subsidiaries | (1,826 | ) | 915 | 4,434 | ||||||||
|
|
|
| |||||||||
Less comprehensive loss attributable to Summit Holdings | (34,533 | ) | $ | (18,278 | ) | $ | (103,706 | ) | ||||
|
|
|
|
|
| |||||||
Comprehensive income attributable to Summit Materials, Inc. | $ | 24,923 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
Net income |
| $ | 125,777 |
| $ | 46,126 |
| $ | 1,484 |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
Postretirement curtailment adjustment |
|
| 429 |
|
| — |
|
| — |
Postretirement liability adjustment |
|
| 699 |
|
| 426 |
|
| 2,123 |
Foreign currency translation adjustment |
|
| 7,768 |
|
| 2,125 |
|
| (14,099) |
Income (loss) on cash flow hedges |
|
| 1,413 |
|
| (1,529) |
|
| (944) |
Less tax effect of other comprehensive income (loss) items |
|
| (288) |
|
| — |
|
| — |
Other comprehensive income (loss): |
|
| 10,021 |
|
| 1,022 |
|
| (12,920) |
Comprehensive income (loss) |
|
| 135,798 |
|
| 47,148 |
|
| (11,436) |
Less comprehensive (loss) income attributable to the noncontrolling interest in consolidated subsidiaries |
|
| (27) |
|
| 16 |
|
| (1,826) |
Less comprehensive income (loss) attributable to Summit Holdings |
|
| 4,360 |
|
| 9,803 |
|
| (34,533) |
Comprehensive income attributable to Summit Inc. |
| $ | 131,465 |
| $ | 37,329 |
| $ | 24,923 |
See accompanying notes to consolidated financial statements.
78
SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 30, 2017, December 31, 2016 and January 2, 2016 December 27, 2014 and December 28, 2013
(In thousands)
|
|
|
|
|
|
|
|
| |||||||||||||
2015 | 2014 | 2013 |
| 2017 |
| 2016 |
| 2015 | |||||||||||||
Cash flow from operating activities: |
|
|
|
|
|
|
|
|
| ||||||||||||
Net income (loss) | $ | 1,484 | $ | (6,282 | ) | $ | (103,679 | ) | |||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||||||
Net income |
| $ | 125,777 |
| $ | 46,126 |
| $ | 1,484 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| ||||||||||||
Depreciation, depletion, amortization and accretion | 125,019 | 95,463 | 79,183 |
|
| 193,107 |
|
| 160,633 |
|
| 125,019 | |||||||||
Share-based compensation expense | 19,899 | 2,235 | 2,315 |
|
| 21,140 |
|
| 49,940 |
|
| 19,899 | |||||||||
Deferred income tax benefit | (19,838 | ) | (5,927 | ) | (4,408 | ) | |||||||||||||||
Net (gain) loss on asset disposals | (23,087 | ) | 6,500 | 12,419 | |||||||||||||||||
Goodwill impairment | — | — | 68,202 | ||||||||||||||||||
Net (gain) loss on debt financings | (9,877 | ) | — | 2,989 | |||||||||||||||||
Net gain on asset disposals |
|
| (7,638) |
|
| (3,102) |
|
| (23,087) | ||||||||||||
Non-cash loss on debt financings |
|
| 3,856 |
|
| — |
|
| (9,877) | ||||||||||||
Change in deferred tax asset, net |
|
| (289,219) |
|
| (4,263) |
|
| (19,838) | ||||||||||||
Other | (1,629 | ) | (957 | ) | (1,098 | ) |
|
| (2,359) |
|
| (1,282) |
|
| (1,629) | ||||||
Decrease (increase) in operating assets, net of acquisitions: | |||||||||||||||||||||
(Increase) decrease in operating assets, net of acquisitions: |
|
|
|
|
|
|
|
|
| ||||||||||||
Accounts receivable, net | 3,852 | (10,366 | ) | 9,884 |
|
| (3,720) |
|
| 2,511 |
|
| 3,852 | ||||||||
Inventories | 4,275 | (3,735 | ) | 499 |
|
| (18,609) |
|
| (10,297) |
|
| 4,275 | ||||||||
Costs and estimated earnings in excess of billings | 6,604 | 1,359 | 196 |
|
| (1,825) |
|
| (2,684) |
|
| 6,604 | |||||||||
Other current assets | 11,438 | (3,997 | ) | (453 | ) |
|
| 8,703 |
|
| (5,518) |
|
| 11,438 | |||||||
Other assets | (1,369 | ) | 4,767 | (1,708 | ) |
|
| (3,103) |
|
| (2,350) |
|
| (1,369) | |||||||
(Decrease) increase in operating liabilities, net of acquisitions: | |||||||||||||||||||||
Increase (decrease) in operating liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
| ||||||||||||
Accounts payable | (4,241 | ) | (6,455 | ) | 4,067 |
|
| 6,192 |
|
| (5,751) |
|
| (4,241) | |||||||
Accrued expenses | (14,354 | ) | 13,311 | (742 | ) |
|
| (7,006) |
|
| 13,196 |
|
| (14,354) | |||||||
Billings in excess of costs and estimated earnings | 1,313 | (305 | ) | 1,998 |
|
| 109 |
|
| 700 |
|
| 1,313 | ||||||||
Tax receivable agreement liability |
|
| 273,194 |
|
| 58,145 |
|
| — | ||||||||||||
Other liabilities | (1,286 | ) | (6,373 | ) | (3,252 | ) |
|
| (6,416) |
|
| (51,141) |
|
| (1,286) | ||||||
|
|
| |||||||||||||||||||
Net cash provided by operating activities | 98,203 | 79,238 | 66,412 |
|
| 292,183 |
|
| 244,863 |
|
| 98,203 | |||||||||
|
|
| |||||||||||||||||||
Cash flow from investing activities: |
|
|
|
|
|
|
|
|
| ||||||||||||
Acquisitions, net of cash acquired | (510,017 | ) | (397,854 | ) | (61,601 | ) |
|
| (374,930) |
|
| (336,958) |
|
| (510,017) | ||||||
Purchases of property, plant and equipment | (88,950 | ) | (76,162 | ) | (65,999 | ) |
|
| (194,146) |
|
| (153,483) |
|
| (88,950) | ||||||
Proceeds from the sale of property, plant and equipment | 13,110 | 13,366 | 16,085 |
|
| 17,072 |
|
| 16,868 |
|
| 13,110 | |||||||||
Other | 1,510 | (630 | ) | — |
|
| (471) |
|
| 2,921 |
|
| 1,510 | ||||||||
|
|
| |||||||||||||||||||
Net cash used for investing activities | (584,347 | ) | (461,280 | ) | (111,515 | ) |
|
| (552,475) |
|
| (470,652) |
|
| (584,347) | ||||||
|
|
| |||||||||||||||||||
Cash flow from financing activities: |
|
|
|
|
|
|
|
|
| ||||||||||||
Proceeds from equity offerings | 1,037,444 | — | — |
|
| 237,600 |
|
| — |
|
| 1,037,444 | |||||||||
Capital issuance costs | (61,609 | ) | — | — |
|
| (627) |
|
| (136) |
|
| (61,609) | ||||||||
Capital contributions by partners | — | 24,350 | — | ||||||||||||||||||
Proceeds from debt issuances | 1,748,875 | 762,250 | 234,681 |
|
| 302,000 |
|
| 354,000 |
|
| 1,748,875 | |||||||||
Debt issuance costs | (14,246 | ) | (9,085 | ) | (3,864 | ) |
|
| (6,416) |
|
| (5,801) |
|
| (14,246) | ||||||
Payments on debt | (1,505,486 | ) | (389,270 | ) | (188,424 | ) |
|
| (16,438) |
|
| (120,702) |
|
| (1,505,486) | ||||||
Purchase of noncontrolling interests | (497,848 | ) | — | — |
|
| (532) |
|
| — |
|
| (497,848) | ||||||||
Payments on acquisition-related liabilities | (18,056 | ) | (10,935 | ) | (9,801 | ) |
|
| (34,650) |
|
| (32,040) |
|
| (18,056) | ||||||
Distributions from partnership | (28,736 | ) | — | — |
|
| (1,974) |
|
| (13,034) |
|
| (28,736) | ||||||||
Proceeds from stock option exercises |
|
| 21,661 |
|
| 440 |
|
| — | ||||||||||||
Other | (1 | ) | (88 | ) | (3 | ) |
|
| (869) |
|
| (20) |
|
| (1) | ||||||
|
|
| |||||||||||||||||||
Net cash provided by financing activities | 660,337 | 377,222 | 32,589 |
|
| 499,755 |
|
| 182,707 |
|
| 660,337 | |||||||||
|
|
| |||||||||||||||||||
Impact of cash on foreign currency | (1,003 | ) | (149 | ) | — | ||||||||||||||||
Impact of foreign currency on cash |
|
| 701 |
|
| 69 |
|
| (1,003) | ||||||||||||
Net increase (decrease) in cash | 173,190 | (4,969 | ) | (12,514 | ) |
|
| 240,164 |
|
| (43,013) |
|
| 173,190 | |||||||
|
|
| |||||||||||||||||||
Cash and cash equivalents—beginning of period | 13,215 | 18,184 | 30,698 |
|
| 143,392 |
|
| 186,405 |
|
| 13,215 | |||||||||
|
|
| |||||||||||||||||||
Cash and cash equivalents—end of period | $ | 186,405 | $ | 13,215 | $ | 18,184 |
| $ | 383,556 |
| $ | 143,392 |
| $ | 186,405 | ||||||
|
|
|
See accompanying notes to consolidated financial statements.
79
SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Redeemable Noncontrolling Interest and Stockholders’ Equity
Years ended December 30, 2017, December 31, 2016 and January 2, 2016 December 27, 2014, and December 28, 2013
(In thousands, except share amounts)
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Summit Materials, Inc. |
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| Summit Materials, Inc. |
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Accumulated Other Comprehensive Loss | Total Stockholders’ Equity/ Partners’ Interest |
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Redeemable Noncontrolling Interest | Partners’ Interest | Noncontrolling Interest in Subsidiaries | Accumulated Earnings | Additional Paid-in Capital | Noncontrolling Interest in Summit Inc. |
|
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| Accumulated |
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Class A Common Stock | Class B Common Stock | Accumulated Other Comprehensive Loss | Class B Common Stock |
| Redeemable |
|
|
|
| Noncontrolling |
|
|
| Other |
| Class A |
| Class B |
| Additional |
| Noncontrolling |
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dollars | Shares | Dollars |
| Noncontrolling |
| Partners’ |
| Interest in |
| Accumulated |
| Comprehensive |
| Common Stock |
| Common Stock |
| Paid-in |
| Interest in |
| Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest |
| Interest |
| Subsidiaries |
| Earnings |
| (Loss) Income |
| Shares |
| Dollars |
| Shares |
| Dollars |
| Capital |
| Summit Holdings |
| Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance—December 29, 2012 | $ | 22,850 | $ | 384,635 | $ | 1,059 | $ | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | $ | 385,694 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance — December 27, 2014 |
| $ | 33,740 |
| $ | 285,685 |
| $ | 1,298 |
| $ | — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | — |
| $ | — |
| $ | 286,983 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Accretion/ redemption value adjustment | (2,365 | ) | 2,365 | — | — | — | — | — | — | — | — | — | 2,365 |
|
| 32,252 |
|
| (32,252) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (32,252) | ||||||||||||||||||||||||||||||||||||
Net loss |
|
| (1,890) |
|
| (41,338) |
| (77) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (41,415) | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
|
| — |
|
| (5,249) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (5,249) | |||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation |
|
| — |
|
| 424 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 424 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance — March 11, 2015 |
| $ | 64,102 |
| $ | 207,270 |
| $ | 1,221 |
| $ | — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | — |
| $ | — |
| $ | 208,491 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Recording of noncontrolling interest upon reorganization |
|
| — |
|
| (207,270) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 207,270 |
|
| — | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income |
|
| — |
|
| — |
| 141 |
|
| 27,718 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 16,930 |
|
| 44,789 | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A Shares |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 47,981,653 |
|
| 480 |
|
| — |
|
| — |
|
| 975,355 |
|
| — |
|
| 975,835 | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class B Shares |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 69,007,397 |
|
| 690 |
|
| (690) |
|
| — |
|
| — | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
|
| — |
|
| — |
| — |
|
| — |
|
| (2,795) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (4,876) |
|
| (7,671) | |||||||||||||||||||||||||||||||||||||||||||||||||
Share repurchase |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (100) |
|
| — |
|
| — |
|
| — |
|
| — | |||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of redeemable noncontrolling interest |
|
| (64,102) |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,029,183 |
|
| 10 |
|
| — |
|
| — |
|
| 18,515 |
|
| — |
|
| 18,525 | |||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of LP Units |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (411,532) |
|
| (51,315) |
|
| (462,847) | |||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 19,475 |
|
| — |
|
| 19,475 | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividend (0.015/share) |
|
| — |
|
| — |
| — |
|
| (16,848) |
|
| — |
|
| 735,108 |
|
| 7 |
|
| — |
|
| — |
|
| 17,880 |
|
| (1,040) |
|
| (1) | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions from partnership |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (28,736) |
|
| (28,736) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance — January 2, 2016 |
| $ | — |
| $ | — |
| $ | 1,362 |
| $ | 10,870 |
| $ | (2,795) |
|
| 49,745,944 |
| $ | 497 |
|
| 69,007,297 |
| $ | 690 |
|
| 619,003 |
| $ | 138,233 |
| $ | 767,860 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||
Net income |
|
| — |
|
| — |
| 16 |
|
| 36,783 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 9,327 |
|
| 46,126 | |||||||||||||||||||||||||||||||||||||||||||||||||
LP Unit exchanges |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 45,124,528 |
|
| 451 |
|
| — |
|
| — |
|
| 117,813 |
|
| (118,264) |
|
| — | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
|
| — |
|
| — |
| — |
|
| — |
|
| 546 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 476 |
|
| 1,022 | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 24,354 |
|
| 2 |
|
| — |
|
| — |
|
| 438 |
|
| — |
|
| 440 | |||||||||||||||||||||||||||||||||||||||||||||||||
Class B share cancellation |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (69,007,197) |
|
| (690) |
|
| 690 |
|
| — |
|
| — | |||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation |
|
| — |
|
| — |
| — |
|
| (1,684) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 51,624 |
|
| — |
|
| 49,940 | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividend (0.012/share) |
|
| — |
|
| — |
| — |
|
| (26,941) |
|
| — |
|
| 1,135,692 |
|
| 11 |
|
| — |
|
| — |
|
| 27,047 |
|
| (121) |
|
| (4) | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions from partnership |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (13,034) |
|
| (13,034) | |||||||||||||||||||||||||||||||||||||||||||||||||
Other |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,704 |
|
| — |
|
| — |
|
| — |
|
| 7,689 |
|
| — |
|
| 7,689 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance — December 31, 2016 |
| $ | — |
| $ | — |
| $ | 1,378 |
| $ | 19,028 |
| $ | (2,249) |
|
| 96,033,222 |
| $ | 961 |
|
| 100 |
| $ | — |
| $ | 824,304 |
| $ | 16,617 |
| $ | 860,039 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income | 2,960 | (106,791 | ) | 152 | — | — | — | — | — | — | — | — | (106,639 | ) |
|
| — |
|
| — |
| (27) |
|
| 121,830 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,974 |
|
| 125,777 | |||||||||||||||||||||||||||||||||||
Other comprehensive income | 1,322 | 3,085 | — | — | — | — | — | — | — | — | — | 3,085 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A Shares |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 10,000,000 |
|
| 100 |
|
| — |
|
| — |
|
| 238,367 |
|
| (1,496) |
|
| 236,971 | |||||||||||||||||||||||||||||||||||||||||||||||||
LP Unit exchanges |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,461,677 |
|
| 15 |
|
| — |
|
| — |
|
| 4,159 |
|
| (4,174) |
|
| — | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
|
| — |
|
| — |
| — |
|
| — |
|
| 9,635 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 386 |
|
| 10,021 | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,203,121 |
|
| 12 |
|
| — |
|
| — |
|
| 21,649 |
|
| — |
|
| 21,661 | |||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | 2,315 | — | — | — | — | — | — | — | — | — | 2,315 |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 21,140 |
|
| — |
|
| 21,140 | |||||||||||||||||||||||||||||||||||||
Repurchase of member’s interest | — | (3 | ) | — | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend (0.014/share) |
|
| — |
|
| — |
| — |
|
| (45,025) |
|
| — |
|
| 1,521,056 |
|
| 15 |
|
| — |
|
| — |
|
| 45,163 |
|
| (155) |
|
| (2) | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions from partnership |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,974) |
|
| (1,974) | |||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of noncontrolling interest |
|
| — |
|
| — |
| (1,148) |
|
| — |
|
| — |
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| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,148) | |||||||||||||||||||||||||||||||||||||||||||||||||
Other |
|
| — |
|
| — |
|
| (203) |
|
| — |
|
| — |
|
| 131,518 |
|
| 1 |
|
| — |
|
| — |
|
| (562) |
|
| — |
|
| (764) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance — December 30, 2017 |
| $ | — |
| $ | — |
| $ | — |
| $ | 95,833 |
| $ | 7,386 |
|
| 110,350,594 |
| $ | 1,104 |
|
| 100 |
| $ | — |
| $ | 1,154,220 |
| $ | 13,178 |
| $ | 1,271,721 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Balance—December 28, 2013 | 24,767 | 285,606 | 1,211 | — | — | — | — | — | — | — | — | 286,817 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contributed capital | — | 24,351 | — | — | — | — | — | — | — | — | — | 24,351 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accretion/ redemption value adjustment | 8,145 | (8,145 | ) | — | — | — | — | — | — | — | — | — | (8,145 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income | 2,408 | (8,777 | ) | 87 | — | — | — | — | — | — | — | — | (8,690 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | (1,580 | ) | (9,501 | ) | — | — | — | — | — | — | — | — | — | (9,501 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | 2,239 | — | — | — | — | — | — | — | — | — | 2,239 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of member’s interest | — | (88 | ) | — | — | — | — | — | — | — | — | — | (88 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance—December 27, 2014 | 33,740 | 285,685 | 1,298 | — | — | — | — | — | — | — | — | 286,983 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contributed capital | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accretion/ redemption value adjustment | 32,252 | (32,252 | ) | — | — | — | — | — | — | — | — | — | (32,252 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (1,890 | ) | (41,338 | ) | (77 | ) | — | — | — | — | — | — | — | — | (41,415 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | (5,249 | ) | — | — | — | — | — | — | — | — | — | (5,249 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | 424 | — | — | — | — | — | — | — | — | — | 424 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance—March 11, 2015 | 64,102 | 207,270 | 1,221 | — | — | — | — | — | — | — | — | 208,491 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Recording of noncontrolling interest upon reorganization Net income Issuance of Class A Shares Issuance of Class B Shares Other comprehensive income Share repurchase Purchase of redeemable noncontrolling interests Purchase of noncontrolling interests December 2015 purchase of LP Units Share-based compensation Dividend Distributions from partnership Balance—January 2, 2016 Summit Materials, Inc. Accumulated
Other
Comprehensive
Loss Total
Stockholders’
Equity/
Partners’
Interest Redeemable
Noncontrolling
Interest Partners’
Interest Noncontrolling
Interest in
Subsidiaries Accumulated
Earnings Additional
Paid-in
Capital Noncontrolling
Interest in
Summit Inc. Class A
Common Stock Class B
Common Stock Shares Dollars Shares Dollars — (207,270 ) — — — — — — — — 207,270 — — — 141 27,718 — — — — — — 16,930 44,789 — — — — — 47,981,653 480 — — 512,508 — 512,988 — — — — — — — 69,007,397 690 (690 ) — — — — — — (2,795 ) — — — — — (4,876 ) (7,671 ) — — — — — — — (100 ) — — — — (64,102 ) — — — — 1,029,183 10 — — 18,515 — 18,525 — — — — — — — — — 51,315 (51,315 ) — — — — — — — — — 1,040 (1,040 ) — — — — — — — — — — 19,475 — 19,475 — — — (16,848 ) — 735,108 7 — — 16,840 — (1 ) — — — — — — — — — — (28,736 ) (28,736 ) $ — $ — $ 1,362 $ 10,870 $ (2,795 ) 49,745,944 $ 497 69,007,297 $ 690 $ 619,003 $ 138,233 $ 767,860
See accompanying notes to consolidated financial statements.
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SUMMIT MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables in thousands, unless otherwise noted)
(1) Summary of Organization and Significant Accounting Policies
Summit Materials, Inc. (“Summit Inc.” and, together with its subsidiaries, the “Company”) is a vertically-integrated construction materials company. The Company is engaged in the production and sale of aggregates, cement, ready-mixedready-mix concrete, asphalt paving mix and concrete products and owns and operates quarries, sand and gravel pits, two cement plants, cement distribution terminals, ready-mixedready-mix concrete plants, asphalt plants and landfill sites. It is also engaged in paving and related services. The Company is organized by geographic region and hasCompany’s three operating and reporting segments which are also its reporting segments: the West; East;West, East and Cement segments.
Substantially all of the Company’s products and services are produced, consumed and performed outdoors, primarily in the spring, summer and fall. Seasonal changes and other weather-related conditions can affect the production and sales volumes of its products and delivery of services. Therefore, the financial results for any interim period are typically not indicative of the results expected for the full year. Furthermore, the Company’s sales and earnings are sensitive to national, regional and local economic conditions and to cyclical changes in construction spending, among other factors.
On September 23, 2014, Summit Inc. was formed as a Delaware corporation.corporation to be a holding company. Its sole material asset is a controlling equity interest in Summit Materials Holdings L.P. (“Summit Holdings”). Pursuant to a reorganization into a holding company structure (the “Reorganization”) consummated in connection with Summit Inc.’s March 2015 initial public offering, Summit Inc. became a holding corporation operating and controlling all of the business and affairs of Summit Holdings and its subsidiaries and, throughsubsidiaries. Summit Inc. owns the majority of the partnership interests of Summit Holdings (see note 11, Stockholders’ Equity). Summit Materials, LLC (“Summit LLC”) an indirect wholly owned subsidiary of Summit Holdings, conducts its business. Together with Summit Inc., certain investment funds affiliated with Blackstone Capital Partners V L.P. and Silverhawk Summit, L.P. (collectively, the “Sponsors”) are the primary ownersmajority of Summit Holdings.
Initial Public Offering—Summit Inc. commenced operations on March 11, 2015 upon the pricing of the initial public offering of its Class A common stock (“IPO”). Summit Inc. raised $433.0 million, net of underwriting discounts, through the issuance of 25,555,555 shares of Class A common stock at a public offering price of $18.00 per share. Summit Inc. used the offering proceeds to purchase a number of newly-issued Class A Units (“LP Units”) from Summit Holdings equal to the number of shares of Class A common stock issued to the public. Summit Inc. caused Summit Holdings to use these proceeds: (i) to redeem $288.2 million in aggregate principal amount of outstanding 10 1⁄2% senior notes due January 31, 2020 (“2020 Notes”); (ii) to purchase 71,428,571 Class B Units ofour operations. Continental Cement Company, L.L.C. (“Continental Cement”); (iii) to pay is also a one-time termination feewholly owned subsidiary of $13.8 million primarily to affiliatesSummit LLC. Summit Materials Finance Corp. (“Summit Finance”), an indirect wholly owned subsidiary of the Sponsors in connection with the termination of a transaction and management fee agreement; and (iv) for general corporate purposes. The $288.2 million redemption of 2020Summit LLC, has jointly issued our Senior Notes was completed at a redemption price equal to par plus an applicable premium of $38.2 million and $5.2 million of accrued and unpaid interest.as described below.
Follow-On Offering—On August 11, 2015, Summit Inc. raised $555.8 million, net of underwriting discounts, through the issuance of 22,425,000 shares of Class A common stock at a public offering price of $25.75 per share. Summit Inc. used the offering proceeds to purchase 3,750,000 newly-issued LP Units from Summit Holdings and 18,675,000 LP Units from certain pre-IPO owners, at a purchase price per LP Unit equal to the public offering price per share of Class A common stock, less underwriting discounts and commissions. Summit Inc. caused Summit Holdings to use the proceeds from the newly-issued LP Units to pay all of the $80.0 million deferred purchase price related to the July 17, 2015 acquisition of a cement plant and a quarry in Davenport, Iowa, and seven cement terminals along the Mississippi River (the “Davenport Assets”) and for general corporate purposes.
Principles of Consolidation—The consolidated financial statements include the accounts of Summit Inc. and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated. As a result of the Reorganization, Summit Holdings became a variable interest entity.entity over which Summit Inc. is the primary beneficiary of Summit Holdings as a result of itshas 100% voting power and control overand for which Summit Holdings and itsInc. has the obligation to absorb losses and itsthe right to receive benefitsbenefits.
The Company’s fiscal year is based on a 52-53 week year with each quarter composed of 13 weeks ending on a Saturday. The 53-week year occurs approximately once every seven years and occurred in 2015. The additional week in the 53-week year was included in the fourth quarter of 2015.
For a summary of the changes in Summit Inc.’s ownership of Summit Holdings, and thus consolidates Summit Holdings in its consolidated financial statements with a corresponding noncontrolling interest elimination of 72.2% between Marchsee Note 11, 2015 and August 10, 2015, 50.7% between August 11, 2015 and December 27, 2015 and 50.3% between December 28, 2015 and January 2, 2106. Summit Inc.’s August 2015 purchase of 22,425,000 LP Units, 18,675,000 of which were previously held by certain pre-IPO owners, decreased the noncontrolling interest’s economic interest from 72.2% to 50.7%.
Noncontrolling interests in consolidated subsidiaries represent a 20% ownership in Ohio Valley Asphalt, LLC and, prior to the IPO and concurrent purchase of the noncontrolling interests of Continental Cement, a 30% redeemable ownership in Continental Cement. All intercompany balances and transactions have been eliminated. The Company attributes consolidated member’s intereststockholders’ equity and net income separately to the controlling and noncontrolling interests. The Company accounts for investments in entities for which it has an ownership of 20% to 50% using the equity method of accounting.
Use of Estimates—ThePreparation of these consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which require requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements.assumptions. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenue and expenses. Such estimates include the valuation of accounts receivable, inventories, valuation of deferred tax assets, goodwill, intangibleintangibles and other long-lived assets, the tax receivable agreement (“TRA”) liability, pension and other postretirement obligations, and asset retirement obligations. Estimates also include revenue earned on contracts and costs to complete open contracts. Most of the Company’s paving and related services are performed under fixed unit-price contracts with state and local governmental entities. Management regularly evaluates its estimates and assumptions based on an ongoing basis using historical experience and other factors,
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including the current economic environment. Management adjusts such estimates and assumptions when circumstances dictate. As future events and their effects cannot be determined with precision, actual results couldcan differ significantly from estimates made. Changes in estimates, including those resulting from continuing changes in the economic environment, will beare reflected in the Company’s consolidated financial statements in the period in whichwhen the change in estimate occurs.
Business and Credit Concentrations—Concentrations—The majority ofCompany’s operations are conducted primarily across 23 U.S. states and in British Columbia, Canada, with the Company’s customers are locatedmost significant revenue generated in Texas, Utah, Kansas Utah, Missouri and Kentucky andMissouri. The Company’s accounts receivable consist primarily of amounts due from customers within these states. Collectionareas. Therefore, collection of these accounts is therefore, dependent on the economic conditions in the aforementioned states. However, creditstates, as well as specific situations affecting individual customers. Credit granted within the Company’s trade areas has been granted to many customers and management does not believe that a wide varietysignificant concentration of credit exists with respect to any individual customer or group of customers. No single customer accounted for more than 10% of the Company’s total revenue in 2015, 20142017, 2016 or 2013. Management does not believe that any significant concentrations of credit exist with respect to individual customers or groups of customers.2015.
Accounts Receivable—Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the collectability of individual accounts. In establishing the allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, the current receivables aging and current payment terms. Balances that remain outstanding after reasonable collection efforts are exercised are written off through a charge to the valuation allowance.
The balances billed but not paid by customers, pursuant to retainage provisions included in contracts, are generally due upon completion of the contracts.
Revenue Recognition—We earn revenue from the sale of products, which primarily include aggregates, cement, ready-mix concrete and Cost Recognition—asphalt, but also include concrete products and plastics components, and from the provision of services, which are primarily paving and related services, but also include landfill operations, the receipt and disposal of waste that is converted to fuel for use in our cement plants and underground storage space rental.
Revenue for product sales areis recognized when evidence of an arrangement exists, the fee is fixed or determinable, title passes, which is generally when the product is shipped, and collection is reasonably assured. Product revenue generally includes sales of aggregates, cement and other materials to customers, net of discounts or allowances or taxes, as applicable.
Revenue from construction contractsif any, and freight and delivery charges billed to customers. Freight and delivery charges associated with cement sales are included in service revenue and are recognized under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to the estimated totalrecorded on a net basis together with freight costs within cost of each project. This method is used as management considers expended cost to be the best available measure of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are estimable. General and administrative costs are charged to expense as incurred.
Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. An amount equal to contract costs incurred that are attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.
Costs and estimated earnings in excess of billings are composed principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings had not been presented to customers because the amount were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, the unbilled receivables at January 2, 2016 will be billed in 2016. Billings in excess of costs and estimated earnings represent billings in excess of revenue recognized.
Revenue from the receipt of waste fuels is classified as service revenue and is based on fees charged for the waste disposal, which are recognized when the waste is accepted.accepted and a corresponding liability is recognized for the costs to process the waste into fuel for the manufacturing of cement or to ship the waste offsite for disposal in accordance with applicable regulations.
We account for revenue and earnings on our long-term paving and related services contracts as service revenue using the percentage-of-completion method of accounting. Under the percentage-of-completion method, we recognize paving and related services revenue as services are rendered. We estimate profit as the difference between total estimated revenue and total estimated cost of a contract and recognize that profit over the life of the contract based on input measures. We generally measure progress toward completion on long-term paving and related services contracts based on the proportion of costs incurred to date relative to total estimated costs at completion. We include revisions of estimated profits on contracts in earnings under the cumulative catch-up method, under which the effect of revisions in estimates is recognized immediately. If a revised estimate of contract profitability reveals an anticipated loss on the contract, we recognize the loss in the period it is identified.
The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at completion, and in some cases includes estimates of recoveries asserted against the customer for changes in specifications or other disputes. Contract estimates involve various assumptions and projections relative to the outcome of future events over multiple periods, including future labor productivity and availability, the nature and complexity of the work to be performed, the cost and availability of materials, the effect of delayed performance, and the availability and timing of funding from the customer. These estimates are based on our best judgment. A significant change in one or
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more of these estimates could affect the profitability of one or more of our contracts. We review our contract estimates regularly to assess revisions in contract values and estimated costs at completion.
We recognize revenue arising from claims either as income or as an offset against a potential loss only when the amount of the claim can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim.
Inventories—Inventories consist of stone that has been removed from quarries and processed for future sale, cement, raw materials and finished concrete blocks. Inventories are valued at the lower of cost or market and are accounted for on a first-in first-out basis or an average cost basis. If items become obsolete or otherwise unusable or if quantities exceed what is projected to be sold within a reasonable period of time, they will be charged to costs of production in the period that the items are designated as obsolete or excess inventory. Stripping costs are costs of removing overburden and waste material to access aggregate materials and are recognized in cost of revenue in the same period that the stripping costs areexpensed as incurred.
Property, Plant and Equipment, net—Property, plant and equipment are recorded at cost, less accumulated depreciation, depletion and amortization. Expenditures for additions and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Repair and maintenance costs that do not substantially expand productive capacity or extend the life of property, plant and equipment are expensed as incurred.
Landfill airspace is included in property, plant and equipment at cost and is amortized based on utilizationthe portion of the asset.airspace used during the period compared to the gross estimated value of available airspace, which is updated periodically as circumstances dictate. Management reassesses the landfill airspace capacity with any changes in value recorded in cost of revenue. Capitalized landfill costs include expenditures for the acquisition of land and related airspace, engineering and permitting costs, cell construction costs and direct site improvement costs.
Upon disposal of an asset, the cost and related accumulated depreciation are removed from the Company’s accounts and any gain or loss is included in general and administrative expenses.
Depreciation on property, plant and equipment, including assets subject to capital leases, is computed on a straight-line basis or based on the economic usage over the estimated useful life of the asset. The estimated useful lives are generally as follows:
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Depletion of mineral reserves is calculated for proven and probable reserves by the units of production method on a site-by-site basis. Leasehold improvements are amortized on a straight-line basis over the lesser of the asset’s useful life or the remaining lease term.
The Company reviews the carrying value of property, plant and equipment for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. Such indicators may include, among others, deterioration in general economic conditions, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows or a trend of negative or declining cash flows over multiple periods.
Property, plant and equipment is tested for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. As a result, the property, plant and equipment impairment test is at a significantly lower level than the level at which goodwill is tested for impairment. In markets where the Company does not produce downstream products, (e.g., ready-mixedsuch as ready-mix concrete, asphalt paving mix and paving and related services),services, the lowest level of largely independent identifiable cash flows is at the individual aggregates operation or a group of aggregates operations collectively serving a local market or the cement operations, as a whole.operations. Conversely, in vertically-integrated markets, the cash flows of the downstream and upstream businesses are not largely independently identifiable and the vertically-integrated operations are considered the lowest level of largely independent identifiable cash flows.
Assets are assessed for impairment charges when identified for disposition. Projected losses from disposition are recognized in the period in which they become estimable, which may be in advance of the actual disposition. The net gain (loss) from asset dispositions recognized in general and administrative expenses in fiscal years 2015, 2014 and 2013 was $23.1 million, ($6.5 million) and ($12.4 million), respectively. No material impairment charges have been recognized on assets held for use in 2015, 2014 or 2013. The losses are commonly a result of the cash flows expected from selling the asset being less than the expected cash flows that could be generated from holding the asset for use.
Accrued Mining and Landfill Reclamation—The mining reclamation reserve and financial commitments for landfill closure and post-closure activities are based on management’s estimate of future cost requirements to reclaim property at both currently operating and closed sites. Estimates of these obligations have been developed based on management’s interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. Costs are estimated in current dollars, inflated until the expected time of payment, using an inflation rate of 2.5%, and then discounted back to present value using a credit-adjusted, risk-free rate on obligations of similar maturity, adjusted to reflect the Company’s credit rating. Changes in the credit-adjusted, risk-free rate do not change recorded liabilities. However, subsequent increases in the recognized obligations are measured using a current credit-adjusted, risk-free rate. Decreases in the recognized obligations are measured at the initial credit-adjusted, risk-free rate.
Significant changes in inflation rates or the amount or timing of future cost estimates typically result in both (1) a current adjustment to the recorded liability (and corresponding adjustment to the asset) and (2) a change in accretion of
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the liability and depreciation of the asset to be recorded prospectively over the remaining capacity of the unmined quarry or landfill.
Intangible Assets—The Company’s intangible assets are primarily composed of lease agreements and reserve rights. The assets related to lease agreements reflect the submarket royalty rates paid under agreements, primarily, for extracting aggregates. The values were determined as of the respective acquisition dates by a comparison of market-royalty rates to contract-royalty rates. The reserve rights relate to aggregate reserves to which the Company has the rights of ownership, but do not own the reserves. The intangible assets are amortized on a straight-line basis over the lives of the leases. The following table shows intangible assets by type and in total:
January 2, 2016 | December 27, 2014 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
Leases | $ | 10,357 | $ | (2,531 | ) | $ | 7,826 | $ | 10,357 | $ | (2,031 | ) | $ | 8,326 | ||||||||||
Reserve rights | 8,636 | (2,078 | ) | 6,558 | 9,094 | (540 | ) | 8,554 | ||||||||||||||||
Trade names | 1,000 | (558 | ) | 442 | 1,020 | (470 | ) | 550 | ||||||||||||||||
Other | 249 | (70 | ) | 179 | 249 | (32 | ) | 217 | ||||||||||||||||
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Total intangible assets | $ | 20,242 | $ | (5,237 | ) | $ | 15,005 | $ | 20,720 | $ | (3,073 | ) | $ | 17,647 | ||||||||||
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Amortization expense in 2015, 2014, and 2013 was $2.2 million, $0.9 million, and $0.8 million, respectively. The estimated amortization expense for intangible assets for each of the next five years and thereafter is as follows:
2016 | 2,167 | |||
2017 | 959 | |||
2018 | 959 | |||
2019 | 959 | |||
2020 | 901 | |||
Thereafter | 9,060 | |||
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Total | �� | $ | 15,005 | |
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Goodwill—Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired. Goodwill recorded in connection with the Company’s acquisitions is primarily attributable to the expected profitability, assembled workforces of the acquired businesses and the synergies expected to arise after the Company’s acquisition of those businesses. Goodwill is not amortized, but is tested annually for impairment as of the first day of the fourth quarter and at any time that events or circumstances indicate that goodwill may be impaired. A qualitative approach may first be applied to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If, as a result of the qualitative assessment, it is determined that an impairment is more likely than not, the two-step quantitative impairment test is then performed, otherwise further analysis is not required. The two-step impairment test first identifies potential goodwill impairment for each reporting unit and then, if necessary, measures the amount of the impairment loss.
Income Taxes—The CompanySummit Inc. is a corporation subject to income taxes in the United States. Certain subsidiaries, including Summit Holdings, or subsidiary groups of the Company are subject to income taxes intaxable separate from Summit Inc. The provisions, or Summit Inc.’s proportional share of the United States and Canada, the provisions for whichprovision, are included in the Company’s consolidated financial statements. Significant judgments and estimates are required in the determination of the consolidated income tax expense.
The Company’s deferred income tax assets and liabilities are computed for differences between the tax basis and financial statement amounts that will result in taxable or deductible amounts in the futurefuture. The computed deferred balances are based on enacted tax laws and applicable rates applicable tofor the jurisdictions in which they arise and periods in which the differences are expected to affect taxable income. A valuation allowance is recognized for deferred tax assets if it is more likely
than not that some portion or all of the net deferred tax assets will not be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines it would be able to realize its deferred tax assets for which a valuation allowance had been recorded then an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company evaluates the tax positions taken on income tax returns that remain open to examination by the respective tax authorities from prior years and positions expected to be taken on the current year tax returns to identify uncertain tax positions. Unrecognized tax benefits on uncertain tax positions are recorded on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority is recognized. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense.benefit.
Tax Receivable Agreement— When Summit Inc. purchases LP Units for cash or LP Units are exchanged for shares of Class A common stock, this results in increases in Summit Inc.’s share of the tax basis of the tangible and intangible assets, which increases the tax depreciation and amortization deductions that otherwise would not have been available to Summit Inc. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of cash taxes that we would otherwise be required to pay in the future. Prior to our IPO, we entered into a TRA with the pre-IPO owners that require us to pay the pre-IPO owners 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax that we actually realize as a result of these exchanges. These benefits include (1) increases in the tax basis of tangible and intangible assets of Summit Holdings and certain other tax benefits related to entering into the TRA, (2) tax benefits attributable to payments under the TRA, or (3) under certain circumstances such as an early termination of the TRA, we are deemed to realize, as a result of the increases in tax basis in connection with exchanges by the pre-IPO owners described above and certain other tax benefits attributable to payments under the TRA.
84
As noted above, we periodically evaluate the realizability of the deferred tax assets resulting from the exchange of LP Units for Class A common stock. If the deferred tax assets are determined to be realizable, we then assess whether payment of amounts under the TRA have become probable. If so, we record a TRA liability equal to 85% of such deferred tax assets. In subsequent periods, we assess the realizability of all of our deferred tax assets subject to the TRA. Should we determine a deferred tax asset with a valuation allowance is realizable in a subsequent period, the related valuation allowance will be released and consideration of a corresponding TRA liability will be assessed. The realizability of deferred tax assets, including those subject to the TRA, is dependent upon the generation of future taxable income during the periods in which those deferred tax assets become deductible and consideration of prudent and feasible tax-planning strategies.
The measurement of the TRA is accounted for as a contingent liability. Therefore, once we determine that a payment to a pre-IPO owner has become probable and can be estimated, the estimate of payment will be accrued.
Earnings per Share—The Company computes basic earnings per share attributable to stockholders by dividing income attributable to Summit Inc. by the weighted-average shares of Class A common stock outstanding. Diluted earnings per share reflects the potential dilution beyond shares for basic earnings per share that could occur if securities or other contracts to issue common stock were exercised, converted into common stock, or resulted in the issuance of common stock that would have shared in the Company’s earnings. Since the Class B common stock has no economic value, those shares are not included in the weighted-average common share amount for basic or diluted earnings per share. In addition, as the shares of Class A common stock are issued by Summit Inc., the earnings and equity interests of noncontrolling interests including those of Summit Holdings, are not included in basic or diluted earnings per share.
Fair Value Measurements—Certain acquisitions made by the Company require the payment of contingent amounts of purchase consideration. These payments are contingent on specified operating results being achieved in periods subsequent to the acquisition and will only be made if earn-out thresholds are achieved. Contingent consideration obligations are measured at fair value each reporting period. Any adjustments to fair value are recognized in earnings in the period identified.
In 2015, the Company entered into interest rate derivatives on $200.0 million of its term loan borrowings to add stability to interest expense and to manage its exposure to interest rate movements. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and will be subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The fair value of contingent consideration and derivatives as of January 2, 2016 and December 27, 2014 was:
2015 | 2014 | |||||||
Current portion of acquisition-related liabilities and derivatives: | ||||||||
Contingent consideration | $ | 4,918 | $ | 2,375 | ||||
Cash flow hedge | 224 | — | ||||||
Acquisition- related liabilities and derivatives: | ||||||||
Contingent consideration | $ | 2,475 | $ | 5,379 | ||||
Cash flow hedge | 681 | — |
The fair value accounting guidance establishes the following fair value hierarchy that prioritizes the inputs used to measure fair value:
The fair value of contingent consideration was based on unobservable, or Level 3, inputs, including projected probability-weighted cash payments and an 11.0% discount rate, which reflects a market discount rate. Changes in fair value may occur as a result of a change in actual or projected cash payments, the probability weightings applied by the Company to projected payments or a change in the discount rate. Significant increases or decreases in any of these inputs in isolation could result in a lower, or higher, fair value measurement. In 2015 and 2014, we recognized immaterial reductions to contingent consideration.
The fair value of the derivatives are based on observable, or Level 2, inputs, including interest rates, bond yields and prices in inactive markets. There was no material adjustments to the fair value of derivatives recognized in 2015.
Financial Instruments—The Company’s financial instruments include debt and certain acquisition-related liabilities (deferred consideration and noncompete obligations). The carrying value and fair value of these financial instruments as of January 2, 2016 and December 27, 2014 was:
January 2, 2016 | December 27, 2014 | |||||||||||||||
Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||
Level 2 | ||||||||||||||||
Long-term debt(1) | $ | 1,283,799 | $ | 1,291,858 | $ | 1,101,873 | $ | 1,048,960 | ||||||||
Level 3 | ||||||||||||||||
Current portion of deferred consideration and noncompete obligations(2) | 15,666 | 15,666 | 16,027 | 16,027 | ||||||||||||
Long term portion of deferred consideration and noncompete obligations(3) | 37,502 | 37,502 | 37,357 | 37,357 |
The fair value of debt was determined based on observable, or Level 2 inputs, such as interest rates, bond yields and quoted prices in inactive markets. The fair values of the deferred consideration and noncompete obligations were determined based on unobservable, or Level 3, inputs, including the cash payment terms in the purchase agreements and a discount rate reflecting the Company’s credit risk.
Securities with a maturity of three months or less are considered cash equivalents and the fair value of these assets approximates their carrying value.
New Accounting Standards—Standards — In November 2015,May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued a new accounting standard to simplify the presentation of deferred income taxes. Accounting Standards Update (“ASU”) 2015-17,Balance Sheet Classification of Deferred Taxes, requires that all deferred tax liabilities and assets of the same tax jurisdiction or
a tax filing group, as well as any related valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. The ASU is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. However, the Company adopted this ASU in 2015 and applied it retrospectively to all prior periods (i.e., the balance sheet for each period was adjusted), resulting in $1.1 million decrease to both Other Current Assets and Other Noncurrent Liabilities as of December 27, 2014.
In October 2015, the FASB issued a new accounting standard to simplify the accounting for measurement-period adjustments. ASU 2015-16,Simplifying the Accounting for Measurement-Period Adjustments, requires adjustments to provisional amounts during the measurement period, including the cumulative effect of changes in depreciation, amortization, or other income effects to be recognized in the current-period financial statements. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the acquisition occurs, an acquirer should report provisional amounts related to items for which the accounting is incomplete. During the measurement period, the provisional amounts are then adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. The measurement period ends as soon as the acquirer receives the information it was seeking or learns that more information is not obtainable. However, the measurement period cannot exceed one year from the acquisition date. In addition, the amendments require an entity to disclose (either on the face of the income statement or in the notes) the nature and amount of measurement-period adjustments recognized in the current period by income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The ASU is effective for public business entities for financial statements issued for fiscal years beginning after December 31, 2015, and interim periods within those fiscal years. However, the Company adopted this ASU in 2015, resulting in an immaterial effect on the consolidated financial statements.
In April 2015, the FASB issued a new accounting standard to simplify the presentation of debt issuance costs. ASU 2015-03,Simplifying the Presentation of Debt Issuance Costs, changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity will present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. The ASU is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. However, the Company adopted this ASU in 2015 and applied it retrospectively to all prior periods (i.e., the balance sheet for each period will be adjusted), resulting in $16.8 million decrease to both Other Assets (noncurrent) and Long-term Debt as of December 27, 2014.
In April 2015, the FASB issued a new accounting standard, ASU 2015-04,Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, which gives an employer whose fiscal year-end does not coincide with a calendar month-end (e.g., an entity that has a 52- or 53-week fiscal year) the ability, as a practical expedient, to measure defined benefit retirement obligations and related plan assets as of the month-end that is closest to its fiscal year-end. The ASU is effective for public business entities for financial statements issued for fiscal years beginning after December 31, 2015, and interim periods within those fiscal years. However, the Company adopted this ASU in 2015, resulting in an immaterial effect on the consolidated financial statements.
In May 2014, the FASB issued a new accounting standard to improve and converge the financial reporting requirements for revenue from contracts with customers. ASU No. 2014-09,Revenue from Contracts with Customers, which prescribes a five-step model for revenue recognition that will replace most existing revenue recognition guidance in U.S. GAAP. The ASU will supersede nearly all existing revenue recognition guidance under U.S. GAAP and provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09
allows for either full retrospective or modified retrospective adoption. In July 2015, the FASB postponed the effective date of the new revenue standard by one year to the first quarter of 2018. Early adoptionIn applying these ASUs, an entity is permitted but no earlier thanto use either the full retrospective or cumulative effect transition approach. We plan to adopt these ASU’s using the modified retrospective approach. We have evaluated the impact of adoption of these standards on our consolidated financial statements, which was not material.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the definition of a business. This ASU provides a screen to determine whether a group of assets constitutes a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated as acquisitions. If the screen is not met, this ASU (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output and (2) removes the evaluation of whether a market participant could replace missing elements. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. The ASU is effective for public companies for annual periods beginning after December 15, 2017. Management is currently assessing the effect that theThe adoption of this standardASU will not have a material impact on the consolidated financial statements.
Reclassifications—Certain amounts
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that the service cost component be reported in the priorsame line item as employer compensation costs and that the other components of periodic pension costs be reported outside of operating income. The ASU also restricts capitalization of costs to the service cost component. The ASU is effective for public companies for annual periods beginning after December 15, 2017. The Company early adopted this ASU as of the beginning of fiscal year have been2017 on a retrospective basis; accordingly, the Company reclassified $278,000 and $383,000 from product cost of revenue to other income for the year ended December 31, 2016 and January 2, 2016, respectively, and $350,000 from general and administrative expenses to other income for the year ended December 31, 2016, to conform to the presentationcurrent year presentation.
85
In January 2017, the FASB issued a new ASU No. 2017-04 Intangibles - Goodwill and Other (Topic 350), which simplifies the test for goodwill impairment. The ASU eliminates the two step goodwill impairment test and replaces it with a single step test. The single step test compares the carrying amount of a reporting unit to its fair value; if the carrying amount is greater than the fair value the difference is the amount of the goodwill impairment. Step zero is left unchanged. Therefore, entities that wish do a qualitative assessment are still permitted to do so. The ASU is effective for Securities and Exchange Commission (“SEC”) filers for fiscal years beginning after December 15, 2020. The Company early adopted this ASU as of the beginning of fiscal year 2017 which adoption did not have a material impact on our consolidated financial statements.
In March 2016, the FASB issued a new accounting standard with targeted amendments to the accounting for employee share-based payments. ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, requires that the income tax effect of share-based awards be recognized in the current period.income statement and allows entities to elect an accounting method to recognize forfeitures as they occur or to estimate forfeitures, as is currently required. The ASU is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. However, the Company early adopted this ASU as of the beginning of fiscal year 2016 and made an election to recognize forfeitures as they occur. The ASU adoption was applied using a modified retrospective method by means of a $1.7 million cumulative-effect adjustment to accumulated earnings as of the beginning of the fiscal year.
(2) Acquisitions
The Company has completed numerous acquisitions since its formation, in 2009, which werehave been financed through a combination of debt and equity funding. The operations of each acquisition have been included in the Company’s consolidated results of operations since the respective closing dates of the acquisitions. The Company measures all assets acquired and liabilities assumed at their acquisition-date fair value.
West segment The following table summarizes the Company’s acquisitions by region and year:
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
West |
|
| 6 |
|
| 3 |
|
| 3 |
East |
|
| 8 |
|
| 5 |
|
| — |
Cement |
|
| — |
|
| 1 |
|
| 1 |
Cement segment
Pro Forma Financial Information (unaudited)—The following unaudited supplemental pro forma information presents the financial results as if the Davenport Assets had been acquired on the first day of the 2014 fiscal year. This information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on the first day of the preceding fiscal year, nor is it indicative of any future results. The pro forma adjustments include a reduction of transaction costs of $6.6 million and additional depreciation, depletion, amortization and accretion of $5.9 million in the year ended January 2, 2016 and an increase of transaction costs of $6.6 million and additional depreciation, depletion, amortization and accretion of $11.8 million in the year ended December 27, 2014.
Year ended | ||||||||
January 2, 2016 | December 27, 2014 | |||||||
Revenue | $ | 1,482,635 | $ | 1,317,911 | ||||
Net income | 42,114 | (33,373 | ) | |||||
Net income per share | 1.10 | N/A |
The purchase price allocation primarily the valuation of property, plant and equipment, for the Davenport Assets, Lewis & Lewis, LeGrand and Pelican2017 acquisitions has not yet been finalized due to the recent timing of the acquisitions.acquisitions and status of the valuation of property, plant and equipment. The following table below summarizes aggregated information regarding the fair values of the assets acquired and liabilities assumed as of the respective acquisition dates in 2015:dates. Information related to the 2017 acquisitions is shown on an aggregated basis as the acquisitions were not material individually, or collectively.
|
|
|
|
|
| |||||||||
Davenport July 17, 2015 | Year Ended January 2, 2016 (excluding Davenport) |
| 2017 |
| 2016 | |||||||||
Financial assets | $ | — | $ | 12,555 | ||||||||||
Financial assets (1) |
| $ | 31,615 |
| $ | 22,204 | ||||||||
Inventories | 21,776 | 2,036 |
|
| 8,300 |
|
| 17,215 | ||||||
Property, plant and equipment | 275,436 | 57,817 |
|
| 160,975 |
|
| 180,321 | ||||||
Intangible assets | — | — |
|
| 161 |
|
| 5,531 | ||||||
Other assets | 6,450 | (745 | ) |
|
| 4,200 |
|
| 6,757 | |||||
Financial liabilities | (2,190 | ) | (13,733 | ) | ||||||||||
Financial liabilities (1) |
|
| (15,501) |
|
| (20,248) | ||||||||
Other long-term liabilities | (4,086 | ) | (11,289 | ) |
|
| (17,610) |
|
| (36,074) | ||||
|
| |||||||||||||
Net assets acquired | 297,386 | 46,641 |
|
| 172,140 |
|
| 175,706 | ||||||
Goodwill | 170,067 | 15,710 |
|
| 247,536 |
|
| 176,319 | ||||||
|
| |||||||||||||
Purchase price | 467,453 | 62,351 |
|
| 419,676 |
|
| 352,025 | ||||||
|
| |||||||||||||
Acquisition related liabilities | — | (1,044 | ) | |||||||||||
Bettendorf assets | (18,743 | ) | — | |||||||||||
|
| |||||||||||||
Acquisition-related liabilities |
|
| (43,452) |
|
| (17,034) | ||||||||
Other |
|
| (1,294) |
|
| 1,967 | ||||||||
Net cash paid for acquisitions | $ | 448,710 | $ | 61,307 |
| $ | 374,930 |
| $ | 336,958 | ||||
|
|
(1) | In the first quarter of 2017, we reclassified $1.2 million of accounts payable overdrafts from financial assets to financial liabilities for the year ended December 31, 2016. |
86
Acquisition-Related Liabilities—A number of acquisition-related liabilities have been recorded subject to terms in the relevant purchase agreements, including deferred consideration and noncompete payments. Noncompete payments have been accrued where certain former owners of newly acquired companies have entered into standard noncompete arrangements. Subject to terms and conditions stated in these noncompete agreements, payments are generally made over a five-year period. Deferred consideration is purchase price consideration paid in the future as agreed to in the purchase agreement and is not contingent on future events. Deferred consideration is generally scheduled to be paid in years ranging from five to 20 years in annual installments. The remaining payments due under these noncompete and deferred consideration agreements are as follows:
|
|
|
|
|
2018 |
| $ | 13,760 |
|
2019 |
|
| 9,187 |
|
2020 |
|
| 7,973 |
|
2021 |
|
| 7,958 |
|
2022 |
|
| 1,803 |
|
Thereafter |
|
| 6,763 |
|
Total scheduled payments |
|
| 47,444 |
|
Present value adjustments |
|
| (10,117) |
|
Total noncompete obligations and deferred consideration |
| $ | 37,327 |
|
Accretion on the deferred consideration and noncompete obligations is recorded in interest expense.
(3) Goodwill
As of January 2, 2016,December 30, 2017, the Company had 1112 reporting units with goodwill for which the annual goodwill impairment test was completed. ToWe perform the annual impairment test on the first day of the fourth quarter of 2015, four of our reporting units were assessed undereach year. We initially perform a qualitative assessment.analysis. As a result of this analysis, it was determined that it is more likely than not that the fair value of the fourfive reporting units were greater than its carrying value. Accordingly, for those reporting units, the two-step quantitative impairment test was not performed. For the remaining reporting units we perform a two-step quantitative analysis. Step 1 of that analysis compares the impairment test was performed. The Company estimated the fair value of the reporting units using an income approach (i.e., a discounted cash flow technique) and a market approach. approach to the carrying value of the reporting unit. If the estimated fair value exceeds its carrying value, the goodwill of the reporting unit is not considered impaired. If the carrying value of the reporting unit exceeds its fair value, we proceed to the second step to measure the amount of potential impairment loss. Based on this analysis, it was determined that the reporting units’ fair values were greater than their carrying values and no impairment charges were recognized in 2017. The accumulated impairment charges recognized in periods prior to 2015 totaled $68.2 million.
These valuation methods used Level 2estimates of a reporting unit’s fair value involve significant management estimates and Level 3 assumptions, including but not limited to sales prices of similar assets, assumptions related to future profitability, cash flows, and discount rates. These estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential. Developing discounted future cash flow estimates in applying the income approach required management to evaluate its intermediate to longer-term strategies, including, but not limited to, estimates about revenue growth, acquisition strategies, operating margins, capital requirements, inflation and working capital management. The development of appropriate rates to discount the estimated future cash flows required the selection of risk premiums, which can materially affect the present value of estimated future cash flows. Based on this analysis, it was determined that the reporting units’ fair values were greater than their carrying values and no impairment charges were recognized in 2015. The accumulated impairment charges recognized in prior periods totaled $68.2 million.
The following table presents goodwill by reportable segments and in total:
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| |||||||||||||||||
West | East | Cement | Total |
| West |
| East |
| Cement |
| Total | |||||||||||||||||
Balance, December 28, 2013 | $ | 54,249 | $ | 48,693 | $ | 24,096 | $ | 127,038 | ||||||||||||||||||||
Balance, January 2, 2016 |
| $ | 303,926 |
| $ | 98,308 |
| $ | 194,163 |
| $ | 596,397 | ||||||||||||||||
Acquisitions | 246,506 | 49,396 | 295,902 |
|
| 29,006 |
|
| 145,109 |
|
| 10,375 |
|
| 184,490 | |||||||||||||
Foreign currency translation adjustments | (3,670 | ) | — | — | (3,670 | ) |
|
| 1,325 |
|
| — |
|
| — |
|
| 1,325 | ||||||||||
|
|
|
| |||||||||||||||||||||||||
Balance, December 27, 2014 | 297,085 | 98,089 | 24,096 | 419,270 | ||||||||||||||||||||||||
Acquisitions(1) | 15,491 | 219 | 170,067 | 185,777 | ||||||||||||||||||||||||
Balance, December 31, 2016 |
| $ | 334,257 |
| $ | 243,417 |
| $ | 204,538 |
| $ | 782,212 | ||||||||||||||||
Acquisitions (1) |
|
| 187,883 |
|
| 61,957 |
|
| 118 |
|
| 249,958 | ||||||||||||||||
Foreign currency translation adjustments | (8,650 | ) | — | — | (8,650 | ) |
|
| 4,150 |
|
| — |
|
| — |
|
| 4,150 | ||||||||||
|
|
|
| |||||||||||||||||||||||||
Balance, January 2, 2016 | $ | 303,926 | $ | 98,308 | $ | 194,163 | $ | 596,397 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
Balance, December 30, 2017 |
| $ | 526,290 |
| $ | 305,374 |
| $ | 204,656 |
| $ | 1,036,320 |
(1) | Reflects goodwill from 2017 acquisitions and working capital adjustments from prior year acquisitions. |
87
(4) Accounts Receivable, NetRevenue Recognition
Revenue for product sales are recognized when evidence of an arrangement exists, the fee is fixed or determinable, title passes, which is generally when the product is shipped, and collection is reasonably assured. Product revenue includes sales of aggregates, cement and other materials to customers, net of discounts, allowances or taxes, as applicable.
Revenue from construction contracts are included in service revenue and are recognized under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are estimable. General and administrative costs are charged to expense as incurred.
Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. An amount equal to contract costs incurred that are attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.
Costs and estimated earnings in excess of billings are composed principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings had not been presented to customers because the amount were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, the unbilled receivables at the balance sheet date will be billed in the subsequent year. Billings in excess of costs and estimated earnings represent billings in excess of revenue recognized.
Revenue from the receipt of waste fuels is classified as service revenue and is based on fees charged for the waste disposal, which is recognized when the waste is accepted.
Accounts receivable, net consisted of the following as of January 2, 2016December 30, 2017 and December 27, 2014:31, 2016:
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|
|
| |||||||||
2015 | 2014 |
| 2017 |
| 2016 | |||||||||
Trade accounts receivable | $ | 133,418 | $ | 131,060 |
| $ | 187,528 |
| $ | 152,845 | ||||
Retention receivables | 13,217 | 12,053 |
|
| 14,973 |
|
| 12,117 | ||||||
Receivables from related parties | 635 | 333 |
|
| 468 |
|
| 721 | ||||||
|
| |||||||||||||
Accounts receivable | 147,270 | 143,446 |
|
| 202,969 |
|
| 165,683 | ||||||
Less: Allowance for doubtful accounts | (1,726 | ) | (2,144 | ) |
|
| (4,639) |
|
| (3,306) | ||||
|
| |||||||||||||
Accounts receivable, net | $ | 145,544 | $ | 141,302 |
| $ | 198,330 |
| $ | 162,377 | ||||
|
|
Retention receivables are amounts earned by the Company but held by customers until paving and related service contracts and projects have beenare near completion or fully completed or near completion.completed. Amounts are expected to begenerally billed and collected within aone year.
(5) Inventories
Inventories consisted of the following as of January 2, 2016December 30, 2017 and December 27, 2014:31, 2016:
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|
|
|
|
| |||||||||
2015 | 2014 |
| 2017 |
| 2016 | |||||||||
Aggregate stockpiles | $ | 86,236 | $ | 88,211 |
| $ | 126,791 |
| $ | 103,073 | ||||
Finished goods | 14,840 | 8,826 |
|
| 34,667 |
|
| 35,071 | ||||||
Work in process | 5,141 | 1,801 |
|
| 7,729 |
|
| 6,440 | ||||||
Raw materials | 23,865 | 12,715 |
|
| 15,252 |
|
| 13,095 | ||||||
|
| |||||||||||||
Total | $ | 130,082 | $ | 111,553 |
| $ | 184,439 |
| $ | 157,679 | ||||
|
|
88
(6) Property, Plant and Equipment, net and Intangibles, net
Property, plant and equipment, net consisted of the following as of January 2, 2016December 30, 2017 and December 27, 2014:31, 2016:
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|
|
|
|
| |||||||||
2015 | 2014 |
| 2017 |
| 2016 |
| |||||||||
Land (mineral bearing) and asset retirement costs | $ | 142,645 | $ | 129,957 |
| $ | 274,083 |
| $ | 227,558 |
| ||||
Land (non-mineral bearing) | 151,008 | 112,932 |
|
| 168,501 |
|
| 146,099 |
| ||||||
Buildings and improvements | 133,043 | 86,702 |
|
| 170,615 |
|
| 160,638 |
| ||||||
Plants, machinery and equipment | 860,085 | 622,466 |
|
| 1,068,007 |
|
| 965,522 |
| ||||||
Mobile equipment and barges | 231,523 | 182,334 |
|
| 391,256 |
|
| 307,885 |
| ||||||
Office equipment | 17,708 | 14,087 | |||||||||||||
Truck and auto fleet | 24,539 | 22,821 |
|
| 47,270 |
|
| 32,236 |
| ||||||
Landfill airspace and improvements | 48,513 | 48,513 |
|
| 49,480 |
|
| 48,513 |
| ||||||
Office equipment |
|
| 33,314 |
|
| 26,096 |
| ||||||||
Construction in progress | 26,447 | 8,445 |
|
| 44,739 |
|
| 16,459 |
| ||||||
Other | — | 1,719 | |||||||||||||
|
| ||||||||||||||
Property, plant and equipment | 1,635,511 | 1,229,976 |
|
| 2,247,265 |
|
| 1,931,006 |
| ||||||
Less accumulated depreciation, depletion and amortization | (366,505 | ) | (279,375 | ) |
|
| (631,841) |
|
| (484,554) |
| ||||
|
| ||||||||||||||
Property, plant and equipment, net | $ | 1,269,006 | $ | 950,601 |
| $ | 1,615,424 |
| $ | 1,446,452 |
| ||||
|
|
Depreciation on property, plant and equipment, including assets subject to capital leases, is generally computed on a straight-line basis. Depletion of mineral reserves is computed based on the portion of the reserves used during the period compared to the gross estimated value of proven and probable reserves, which is updated periodically as circumstances dictate. Leasehold improvements are amortized on a straight-line basis over the lesser of the asset’s useful life or the remaining lease term. The estimated useful lives are generally as follows:
Buildings and improvements | 10 - 30 | years | |
Plant, machinery and equipment | 15 - 20 | years | |
Office equipment | 3 - 7 | years | |
Truck and auto fleet | 5 - 8 | years | |
Mobile equipment and barges | 6 - 8 | years | |
Landfill airspace and improvements | 10 - 30 | years | |
Other | 4 - 20 | years |
Depreciation, depletion and amortization expense of property, plant and equipment was $111.6$174.4 million, $85.8$144.2 million and $71.4$111.6 million in the years ended December 30, 2017, December 31, 2016 and January 2, 2016, December 27, 2014 and December 28, 2013, respectively.
Property, plant and equipment at January 2, 2016December 30, 2017 and December 27, 201431, 2016 included $47.0$51.2 million and $30.0$49.8 million, respectively, of capital leases for certain equipment and a building with accumulated amortization of $7.0$18.5 million and $3.6$10.6 million, respectively. The equipment leases generally have terms of less than five years and the building lease had an original term of 30 years. Approximately $15.3$19.3 million and $17.5$11.8 million of the future obligations associated with the capital leases are included in accrued expenses as of January 2, 2016December 30, 2017 and December 27, 2014,31, 2016, respectively, and the present value of the remaining capital lease payments, $29.5$16.4 million and $13.7$27.5 million, respectively, is included in other noncurrent liabilities on the consolidated balance sheets. Future minimum rental commitments under long-term capital leases are $15.4$20.5 million, $10.0$7.6 million, $10.5$5.9 million, $1.7$1.4 million, and $2.6$0.6 million for the years ended 2016, 2017, 2018, 2019, 2020, 2021 and 2020,2022, respectively.
Assets are assessed for impairment charges when identified for disposition. Projected losses from disposition are recognized in the period in which they become estimable, which may be in advance of the actual disposition. The net gain from asset dispositions recognized in general and administrative expenses in fiscal years 2017, 2016 and 2015 was $7.5 million, $6.8 million and $23.5 million, respectively. No material impairment charges have been recognized on assets held for use in fiscal 2017, 2016 or 2015. The losses are commonly a result of the cash flows expected from selling the asset being less than the expected cash flows that could be generated from holding the asset for use.
89
Intangible Assets—The Company’s intangible assets are primarily composed of lease agreements and reserve rights. The assets related to lease agreements reflect the submarket royalty rates paid under agreements, primarily, for extracting aggregates. The values were determined as of the respective acquisition dates by a comparison of market-royalty rates to contract-royalty rates. The reserve rights relate to aggregate reserves to which the Company has the rights of ownership, but do not own the reserves. The intangible assets are amortized on a straight-line basis over the lives of the leases. The following table shows intangible assets by type and in total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 30, 2017 |
| December 31, 2016 | ||||||||||||||
|
| Gross |
|
|
|
| Net |
| Gross |
|
|
|
| Net | ||||
|
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying | ||||||
|
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | ||||||
Leases |
| $ | 15,888 |
| $ | (4,178) |
| $ | 11,710 |
| $ | 15,888 |
| $ | (3,382) |
| $ | 12,506 |
Reserve rights |
|
| 6,234 |
|
| (1,625) |
|
| 4,609 |
|
| 8,706 |
|
| (3,710) |
|
| 4,996 |
Trade names |
|
| 1,000 |
|
| (758) |
|
| 242 |
|
| 1,000 |
|
| (658) |
|
| 342 |
Other |
|
| 409 |
|
| (137) |
|
| 272 |
|
| 249 |
|
| (104) |
|
| 145 |
Total intangible assets |
| $ | 23,531 |
| $ | (6,698) |
| $ | 16,833 |
| $ | 25,843 |
| $ | (7,854) |
| $ | 17,989 |
Amortization expense in fiscal 2017, 2016 and 2015 was $1.3 million, $2.6 million and $2.2 million, respectively. The estimated amortization expense for intangible assets for each of the next five years and thereafter is as follows:
|
|
|
|
2018 |
| $ | 1,281 |
2019 |
|
| 1,268 |
2020 |
|
| 1,185 |
2021 |
|
| 1,142 |
2022 |
|
| 1,113 |
Thereafter |
|
| 10,844 |
Total |
| $ | 16,833 |
(7) Accrued Expenses
Accrued expenses consisted of the following as of January 2, 2016December 30, 2017 and December 27, 2014:31, 2016:
2015 | 2014 | |||||||
Interest | $ | 19,591 | $ | 32,475 | ||||
Payroll and benefits | 24,714 | 20,326 | ||||||
Capital lease obligations | 15,263 | 17,530 | ||||||
Insurance | 9,824 | 11,402 | ||||||
Non-income taxes | 4,618 | 5,520 | ||||||
Professional fees | 2,528 | 3,299 | ||||||
Other(1) | 16,404 | 10,944 | ||||||
|
|
|
| |||||
Total | $ | 92,942 | $ | 101,496 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
Interest |
| $ | 24,095 |
| $ | 22,991 |
Payroll and benefits |
|
| 33,915 |
|
| 30,546 |
Capital lease obligations |
|
| 19,276 |
|
| 11,766 |
Insurance |
|
| 11,455 |
|
| 11,966 |
Non-income taxes |
|
| 7,236 |
|
| 5,491 |
Professional fees |
|
| 1,717 |
|
| 2,459 |
Other (1) |
|
| 18,935 |
|
| 26,386 |
Total |
| $ | 116,629 |
| $ | 111,605 |
(1) | Consists primarily of subcontractor and working capital settlement |
90
(8) Debt
Debt consisted of the following as of January 2, 2016December 30, 2017 and December 27, 2014:31, 2016:
2015 | 2014 | |||||||
Term Loan, due 2022: | ||||||||
$646.8 million term loan, net of $3.1 million discount at January 2, 2016 and $415.7 million term loan, net of $2.3 million discount at December 27, 2014 | 643,693 | 413,369 | ||||||
6 1⁄8% Senior Notes, due 2023: | ||||||||
$650.0 million senior notes, including a $1.8 million discount at January 2, 2016 | 648,165 | |||||||
10 1⁄2% Senior Notes, due 2020: | ||||||||
$625.0 million senior notes, including a $26.5 million net premium at December 27, 2014 | — | 651,548 | ||||||
|
|
|
| |||||
Total | 1,291,858 | 1,064,917 | ||||||
Current portion of long-term debt | 6,500 | 5,275 | ||||||
|
|
|
| |||||
Long-term debt | $ | 1,285,358 | $ | 1,059,642 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
Term Loan, due 2024: |
|
|
|
|
|
|
$635.4 million and $640.3 million, net of $1.6 million and $2.6 million discount at December 30, 2017 and December 31, 2016, respectively |
| $ | 633,805 |
| $ | 637,658 |
81⁄2% Senior Notes, due 2022 |
|
| 250,000 |
|
| 250,000 |
61⁄8% Senior Notes, due 2023: |
|
|
|
|
|
|
$650.0 million, net of $1.4 million and $1.6 million discount at December 30, 2017 and December 31, 2016, respectively |
|
| 648,650 |
|
| 648,407 |
51⁄8% Senior Notes, due 2025 |
|
| 300,000 |
|
| — |
Total |
|
| 1,832,455 |
|
| 1,536,065 |
Current portion of long-term debt |
|
| 4,765 |
|
| 6,500 |
Long-term debt |
| $ | 1,827,690 |
| $ | 1,529,565 |
The contractual payments of long-term debt, including current maturities, for the five years subsequent to January 2, 2016,December 30, 2017, are as follows:
|
|
| |||||
2016 | $ | 6,500 | |||||
2017 | 6,500 | ||||||
2018 | 4,875 |
| $ | 4,765 | |||
2019 | 6,500 |
|
| 6,354 | |||
2020 | 8,125 |
|
| 7,942 | |||
2021 |
|
| 6,354 | ||||
2022 |
|
| 256,354 | ||||
Thereafter | 1,264,250 |
|
| 1,553,606 | |||
| |||||||
Total | 1,296,750 |
|
| 1,835,375 | |||
Less: Original issue net discount | (4,892 | ) |
|
| (2,920) | ||
Less: Capitalized loan costs | (11,706 | ) |
|
| (16,857) | ||
| |||||||
Total debt | $ | 1,280,152 |
| $ | 1,815,598 | ||
|
Senior Notes—The 6.125% On June 1, 2017, Summit LLC and Summit Finance (together, the “Issuers”) issued $300.0 million of 51⁄8% senior notes due July 15, 2023June 1, 2025 (the “2023“2025 Notes”). The 2025 Notes were issued at 100.0% of their par value with proceeds of $295.4 million, net of related fees and expenses. The 2025 Notes were issued under an indenture dated July 15, 2015June 1, 2017 (as amended and supplemented, the “2015“2017 Indenture”) by Summit Materials, LLC (“Summit LLC”) and Summit Materials Finance Corp. (collectively, the “Issuers”). The 2017 Indenture contains covenants limiting, among other things, Summit LLC and its restricted subsidiaries’ ability to incur additional indebtedness or issue certain preferred shares, pay dividends, redeem stock or make other distributions, make certain investments, sell or transfer certain assets, create liens, consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’sits assets, enter intointer certain transactions with affiliates, and designate subsidiaries as unrestricted subsidiaries. The 20152017 Indenture also contains customary events of default. Interest on the 2025 Notes is payable semi-annually on June 1 and December 1 of each year commencing on December 1, 2017.
In 2016, the Issuers issued $250.0 million of 8.500% senior notes due April 15, 2022 (the “2022 Notes”). The 2022 Notes were issued at 100.0% of their par value with proceeds of $246.3 million, net of related fees and expenses. The proceeds from the sale of the 2022 Notes were used to fund the acquisition of Boxley Materials Company, replenish cash used for the acquisition of American Materials Company and pay expenses incurred in connection with these acquisitions. The 2022 Notes were issued under an indenture dated March 8, 2016, the terms of which are generally consistent with the 2017 Indenture. Interest on the 2022 Notes is payable semi-annually in arrears on April 15 and October 15 of each year.
In 2015, the Issuers issued $650.0 million of 6.125% senior notes due July 2023 (the “2023 Notes” and collectively with the 2022 Notes and the 2025 Notes, the “Senior Notes”). Of the aggregate $650.0 million of 2023 Notes, $350.0 million were issued at par and $300.0 million were issued at 99.375% of par. The 2023 Notes were issued under an indenture dated July 8, 2015, the terms of which are generally consistent with the 2017 Indenture. Interest on the 2023 Notes is payable semi-annually in arrears on January 15 and July 15 of each year commencing on January 15, 2016.year.
The Issuers issued $350.0 million in July 2015 and an additional $300.0 million in November 2015
91
Through December 27, 2014, the Issuers had issued an aggregate $625.0 million of 2020 Notes under an indenture dated January 30, 2012 (as amended and supplemented, the “2012 Indenture”). The 2012 Indenture contained covenants and events of default generally consistent with the 2015 Indenture. On September 8, 2014 and January 17, 2014, the Issuers issued $115.0 million and $260.0 million, respectively, aggregate principal
amount of 2020 Notes (the “Additional Notes”), receiving proceeds of $409.3 million, before payment of fees and expenses and including an aggregate $34.3 million premium. The proceeds from the sale of the Additional Notes were used to fund acquisitions, to make payments on the revolving credit facility and for general corporate purposes. The Additional Notes were treated as a single series with the $250.0 million of 2020 Notes issued in January 2012 (the “Existing Notes”) and had substantially the same terms as those of the Existing Notes. The Additional Notes and the Existing Notes were treated as one class under the 2012 Indenture.
In April, August and November 2015, using proceeds from the IPO, the refinancing of the term loan described below and the proceeds from the 2023 Notes, $288.2 million, $183.0 million and $153.8 million, respectively, in aggregate principal amount of the then outstanding 10 1/2% senior notes due January 31, 2020 Notes(the “2020 Notes”) were redeemed at a price equal to par plus an applicable premium and the 2012 Indentureindenture under which the 2020 Notes were issued was satisfied and discharged. As a result of the redemptions, net charges of $56.5 million were recognized infor the year ended January 2, 2016. The fees included $66.6 million for the applicable prepayment premium and $11.9 million for the write-off of deferred financing fees, partially offset by $22.0 million of net benefit from the write-off of the original issuance net premium in the year ended January 2, 2016.premium.
As of January 2, 2016December 30, 2017 and December 27, 2014,31, 2016, the Company was in compliance with all financial covenants under the indenture applicable as of each date.indentures.
Senior Secured Credit Facilities—Summit LLC has credit facilities that provide for term loans in an aggregate amount of $650.0 million and revolving credit commitments in an aggregate amount of $235.0 million (the “Senior Secured Credit Facilities”). Under the Senior Secured Credit Facilities, required principal repayments of 0.25% of the refinanced aggregate amount of term debt are due on the last business day of each March, June, September and December.December commencing with the March 2018 payment. The unpaid principal balance is due in full on the maturity date, which is July 17, 2022. November 21, 2024.
On July 17, 2015,January 19, 2017, Summit LLC refinanced its term loan under the Senior Secured Credit Facilities (the “Refinancing”entered into Amendment No. 1 (“Amendment No. 1”). The Refinancing, among other things: (i) reduced the applicable margins used to calculate interest rates for term loans under the Senior Secured Credit Facilities to 3.25% for LIBOR rate loans and 2.25% for base rate loans, subject to a LIBOR floor of 1.00% (and one 25 basis point step down upon Summit LLC achieving a certain first lien net leverage ratio); (ii) increased term loans borrowed under the term loan facility from $422.0 million to an aggregate $650.0 million; and (iii) created additional flexibility under the financial maintenance covenants, which are tested quarterly, by increasing the applicable maximum Consolidated First Lien Net Leverage Ratio (as defined in the credit agreement governing the Senior Secured Credit Facilities the(the “Credit Agreement”).
, which, among other things, reduced the applicable margin in respect of then outstanding $640.3 million principal amount of term loans thereunder. All other material terms and provisions remain substantially identical to the terms and provisions in place immediately prior to the effectiveness of Amendment No. 1. On March 11, 2015,November 21, 2017, Summit LLC entered into Amendment No. 32 to the Credit Agreement, which, became effective on March 17, 2015 upon the consummation of the IPO. The amendment: (i) increased the size of the revolving credit facility from $150.0 million to $235.0 million; (ii)among other things, extended the maturity date from 2022 to 2024 and reduced the applicable margin in respect of the revolving credit facility to March 11, 2020; (iii) amended certain covenants; and (iv) permits periodic tax distributions as contemplated in a tax receivable agreement, dated March 11, 2015. As a result$635.4 million outstanding principal amount of this amendment, $0.4 million of deferred financing charges were recognized in the year ended January 2, 2016.term loans thereunder.
The revolving credit facility bears interest per annum equal to, at Summit LLC’s option, either (i) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) LIBOR plus 1.00%, plus an applicable margin of 2.25% for base rate loans or (ii) a LIBOR rate determined by reference to Reuters prior to the interest period relevant to such borrowing adjusted for certain additional costs plus an applicable margin of 3.25% for LIBOR rate loans. The interest rate in effect at January 2, 2016 was 4.3%.
There were no outstanding borrowings under the revolving credit facility as of January 2, 2016, leavingDecember 30, 2017 or December 31, 2016. As of December 30, 2017 we had remaining borrowing capacity of $210.6$218.9 million under the revolving credit facility, which is net of $24.4$16.1 million of outstanding letters of credit. The outstanding letters of credit are renewed annually and support required bonding on construction projects and the Company’s insurance liabilities.
Summit LLC’s Consolidated First Lien Net Leverage Ratio, as such term is defined in the Senior Secured Credit Facilities,Agreement, should be no greater than 4.75:1.0 as of each quarter-end. As of January 2, 2016December 30, 2017 and December 27, 2014,31, 2016, Summit LLC was in compliance with all covenants.financial covenants under the Credit Agreement.
Summit LLC’s wholly-owned domestic subsidiary companies, subject to certain exclusions and exceptions, are named as subsidiary guarantors of the 2023Senior Notes and the Senior Secured Credit Facilities. In addition, Summit LLC has pledged substantially all of its assets as collateral, subject to certain exclusions and exceptions, for the Senior Secured Credit Facilities.
Interest expense related to debt totaled $73.6 million, $78.6 million and $50.1 million for the years ended January 2, 2016, December 27, 2014 and December 28, 2013, respectively.
92
The following table presents the activity for the deferred financing fees for the yearyears ended January 2, 2016December 30, 2017 and December 27, 2014:31, 2016:
|
|
| |||||
Deferred financing fees |
| Deferred financing fees | |||||
Balance—December 28, 2013 | $ | 11,485 | |||||
| |||||||
Balance—January 2, 2016 |
| $ | 15,892 | ||||
Loan origination fees | 9,713 |
|
| 5,801 | |||
Amortization | (3,983 | ) |
|
| (3,403) | ||
| |||||||
Balance—December 27, 2014 | $ | 17,215 | |||||
| |||||||
Balance—December 31, 2016 |
| $ | 18,290 | ||||
Loan origination fees | 14,246 |
|
| 6,416 | |||
Amortization | (3,390 | ) |
|
| (3,990) | ||
Write off of deferred financing fees | (12,179 | ) |
|
| (1,683) | ||
| |||||||
Balance—January 2, 2016 | $ | 15,892 | |||||
| |||||||
Balance—December 30, 2017 |
| $ | 19,033 |
Other—On January 15, 2015, the Company’s wholly-owned subsidiary in British Columbia, Canada entered into an agreement with HSBC for a (i) $6.0 million Canadian dollar (“CAD”) revolving credit commitment to be used for operating activities that bears interest per annum equal to the bank’s prime rate plus 0.20%, (ii) $0.5 million CAD revolving credit commitment to be used for capital equipment that bears interest per annum at the bank’s prime rate plus 0.90% and (iii) $0.4 million CAD revolving credit commitment to provide guarantees on behalf of that subsidiary. There were no amounts outstanding under this agreement as of January 2,December 30, 2017 or December 31, 2016.
(9) Accumulated Other Comprehensive Loss
The changes in each component of accumulated other comprehensive loss consisted of the following:Income Taxes
Change in retirement plans | Foreign currency translation adjustments | Cash flow hedge adjustments | Accumulated other comprehensive loss | |||||||||||||
Balance—December 27, 2014 | $ | — | $ | — | $ | — | $ | — | ||||||||
Postretirement liability adjustment | 1,049 | — | 1,049 | |||||||||||||
Foreign currency translation adjustment | — | (3,379 | ) | — | (3,379 | ) | ||||||||||
Loss on cash flow hedges | — | — | (465 | ) | (465 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance—January 2, 2016 | $ | 1,049 | $ | (3,379 | ) | $ | (465 | ) | $ | (2,795 | ) | |||||
|
|
|
|
|
|
|
|
(10) Income Taxes
Summit Inc.’s tax provision includes its proportional share of Summit Holdings’ tax attributes. Summit Holdings’ subsidiaries are primarily limited liability companies, but do include certain entities organized as C corporations.corporations and a Canadian subsidiary. The tax attributes related to the limited liability companies are passed on to Summit Holdings and then to its partners, including Summit Inc. The tax attributes associated with the C corporation and Canadian subsidiaries are fully reflected in the Company’s accounts.
As of January 2, 2016, Summit Inc. and its subsidiaries had not recognized any liabilities for uncertain tax positions. The Company records interest and penalties as a component of the income tax provision. No material interest or penalties were recognized in income tax expense during the year ended January 2, 2016. As of the IPO, Summit Inc. had a net deferred tax asset of $50.5 million, which primarily consisted of a $69.0 million temporary difference related to the tax intangible assets basis in excess of book, offset by the $6.9 million and $10.9 million book aggregate reserves and fixed assets in excess of tax basis, respectively.
consolidated financial statements. For the years ended December 30, 2017, December 31, 2016 and January 2, 2016, December 27, 2014, and December 28, 2013, income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
| |||||||||||||
2015 | 2014 | 2013 |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||||||||
Provision for income taxes: |
|
|
|
|
|
|
|
|
|
| ||||||||||||
Current | $ | 1,605 | (906 | ) | 1,761 |
| $ | 2,530 |
| $ | 2,835 |
| $ | 1,605 |
| |||||||
Deferred | (19,868 | ) | (6,077 | ) | (4,408 | ) |
|
| (286,507) |
|
| (8,134) |
|
| (19,868) |
| ||||||
|
|
| ||||||||||||||||||||
Income tax benefit | $ | (18,263 | ) | (6,983 | ) | (2,647 | ) |
| $ | (283,977) |
| $ | (5,299) |
| $ | (18,263) |
| |||||
|
|
|
The effective tax rate on pre-tax income differs from the U.S. statutory rate of 35% due to the following:
2015 | 2014 | 2013 | ||||||||||
Income tax benefit at federal statutory tax rate | $ | (6,718 | ) | $ | (4,643 | ) | $ | (37,160 | ) | |||
Less: Income tax (benefit) expense at federal statutory tax rate for LLC entities | (10,747 | ) | (2,272 | ) | 32,801 | |||||||
State and local income taxes | (2,389 | ) | (224 | ) | 130 | |||||||
Permanent Differences | 2,147 | (129 | ) | (411 | ) | |||||||
Goodwill impairment | — | — | 1,046 | |||||||||
Valuation allowance | — | 1,693 | 729 | |||||||||
Other | (556 | ) | (1,408 | ) | 218 | |||||||
|
|
|
|
|
| |||||||
Income tax benefit | $ | (18,263 | ) | $ | (6,983 | ) | $ | (2,647 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Income tax expense (benefit) at federal statutory tax rate |
| $ | (55,365) |
| $ | 14,290 |
| $ | (6,718) |
|
Less: Income tax benefit at federal statutory tax rate for LLC entities |
|
| (2,123) |
|
| (10,608) |
|
| (22,649) |
|
State and local income taxes |
|
| (5,209) |
|
| 2,490 |
|
| (2,389) |
|
Permanent differences |
|
| (4,410) |
|
| (5,902) |
|
| 2,147 |
|
Effective tax rate change |
|
| 216,904 |
|
| (1,432) |
|
| 10 |
|
Tax receivable agreement expense |
|
| 104,804 |
|
| 5,228 |
|
| — |
|
Change in valuation allowance |
|
| (500,162) |
|
| 239,008 |
|
| 261,302 |
|
Impact of LP Unit ownership change |
|
| (31,790) |
|
| (252,456) |
|
| (249,400) |
|
Other |
|
| (6,626) |
|
| 4,083 |
|
| (566) |
|
Income tax benefit |
| $ | (283,977) |
| $ | (5,299) |
| $ | (18,263) |
|
93
The following table summarizes the components of the net deferred income tax liabilityasset (liability) as January 2, 2016December 30, 2017 and December 27, 2014:31, 2016:
|
|
|
|
|
| |||||||||
2015 | 2014 |
| 2017 |
| 2016 | |||||||||
Deferred tax (liabilities) assets: |
|
|
|
|
|
| ||||||||
Imputed interest deduction pursuant to tax receivable agreement | $ | 68,840 | $ | — | ||||||||||
Net intangible assets |
| $ | 316,950 |
| $ | 591,464 | ||||||||
Accelerated depreciation | (23,781 | ) | (40,141 | ) |
|
| (147,943) |
|
| (184,794) | ||||
Net operating loss |
|
| 94,751 |
|
| 71,379 | ||||||||
Investment in limited partnership |
|
| (14,467) |
|
| (13,633) | ||||||||
Mining reclamation reserve | 3,476 | 2,180 |
|
| 1,239 |
|
| 1,220 | ||||||
Net operating loss | 38,279 | 7,106 | ||||||||||||
Net intangible assets | 158,666 | (1,072 | ) | |||||||||||
Inventory purchase accounting adjustments | 1,275 | 1,275 | ||||||||||||
Investment in limited partnership | (14,304 | ) | — | |||||||||||
Working capital (e.g., accrued compensation, prepaid assets) | 9,455 | (10 | ) |
|
| 35,237 |
|
| 41,529 | |||||
|
| |||||||||||||
Deferred tax liabilities, net | 241,906 | (30,662 | ) | |||||||||||
Less valuation allowance on loss carryforwards | (263,825 | ) | (2,523 | ) | ||||||||||
|
| |||||||||||||
Total | $ | (21,919 | ) | $ | (33,185 | ) | ||||||||
|
| |||||||||||||
Less valuation allowance |
|
| (1,675) |
|
| (502,839) | ||||||||
Deferred tax assets |
|
| 284,092 |
|
| 4,326 | ||||||||
Less foreign deferred tax liability (included in other noncurrent liabilities) |
|
| (3,992) |
|
| — | ||||||||
Net deferred tax asset |
| $ | 280,100 |
| $ | 4,326 |
The net deferred income tax liability as
As of January 2, 2016, and December 27, 2014, are included in other noncurrent liabilities on the consolidated balance sheets.
Valuation Allowance—In assessing the realizability30, 2017, $390 million of our deferred tax assets including thewere subject to our TRA, and after amortization and netting other deferred tax liabilities related to intangible assets, resultingare carried at a net book value of $317 million in the above table.
Our income tax benefit was $284.0 million, $5.3 and $18.3 million in the fiscal years ended 2017, 2016 and 2015, respectively. We recorded an income tax benefit in fiscal 2017, primarily related to the release of the valuation allowance as discussed below, partially offset by charge related to the decrease in the federal statutory corporate tax rate. Our effective income tax rate was higher in 2017 as compared to 2016, primarily due to the benefit associated with the release of the valuation allowance discussed below, the accrual of the TRA expense, the statutory rate change referred to below and depletion in excess of U.S. GAAP depletion recognized in 2017. During the year ended 2016, our income tax benefit was $5.3 million. The effective tax rate for Summit Inc. differs from the expected taxable lossfederal rate primarily due to (1) the change in 2015valuation allowance, (2) changes in statutory tax rates, (3) deductions related to our TRA, (4) tax depletion expense in excess of the expense recorded under U.S. GAAP, (5) the minority interest in the Summit Holdings partnership that is allocated outside of the Company and those generated under the tax receivable agreement, management determined that it was more likely than not that the deferred tax assets will not be realized. (6) various other items such as limitations on meals and entertainment, certain stock compensation and other costs.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, (including the effectas well as consideration of available carryback and carryforward periods) and tax-planning strategies. The deferred income tax asset relatedstrategies we may seek to utilize net operating losses resides with three separate tax paying entities (or subsidiary groups) of Summit Inc. Two of these tax payers have historically generated taxable income andloss carryforwards that are forecastscheduled to continue generating taxable income. However, management anticipates that Summit’s Inc.’s deferred income tax asset related to its proportional share of Summit Holdings’ net operating losses will not be fully utilized before its expirationexpire in 2035.the near future. Due to thisour limited operating history as of December 31, 2016, during which we incurred only a small amount of pre-tax income over the previous three years, as well as our acquisitive business strategy, after considering both positive and other negative evidence, we concluded that it was not more likely than not that we would fully realize those deferred tax assets, and therefore recorded a partial valuation allowance has been recorded on Summit Inc.’s netagainst those deferred tax assets as of January 2,December 31, 2016. TheHowever, the amount of cumulative income increased significantly during the year ended December 30, 2017, and we expect to generate additional income in 2018 and for the foreseeable future that will allow us to utilize the deferred tax assets. As a result of this significant positive evidence, we determined that the deferred tax assets had become more likely than not of becoming realizable and therefore released the majority of the valuation allowance in the third quarter of 2017. The Company updated the analysis as of December 30, 2017, and adjusted the remaining valuation allowance for certain net operating loss deferred tax assets within the C corporation entities that the Company does not expect to be realized.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”) was enacted. Among other things, the TCJA, beginning January 1, 2018, reduced the federal statutory rate from 35% to 21% and extended bonus depreciation provisions. In addition, the application of net operating loss carryforwards generated in 2018 and beyond will be limited, 100% asset considered realizable couldexpensing will be adjustedallowed through 2022 and begin to phase out in 2023, and the amount of interest expense we are able deduct may also be limited in future years. As a result of the enactment of TCJA and other state effective rate changes, we reduced the carrying value of our net deferred tax assets by $216.9 million to reflect the revised federal statutory rate which will be in effect at the time those deferred tax assets are expected to be realized. Further, we evaluated the realizability of our net operating loss carryforwards, and determined a valuation allowance of $1.7 million was appropriate as of December 30, 2017. The TCJA contains many provisions which will be clarified through new regulations expected to be issued during 2018. As of December 30, 2017, we have not completed the accounting for the tax effects of the TCJA; however, we have made reasonable estimates on our existing deferred tax balances, as permitted
94
by Staff Accounting Bulletin 118 issued by the SEC on December 22, 2017. In addition, we expect the states in which we operate to consider new statutory provisions related to the enactment of the TCJA during 2018 as well. We will record the impact, if estimatesany, of any newly issued regulations, as well as clarifications of the TCJA, as a discrete adjustment to our income tax provision in 2018.
Our net operating loss carryforward deferred tax assets begin to expire in 2030 and are expected to reverse before expiration. Therefore, we have not given consideration to any potential tax planning strategies as a source of future taxable income duringto monetize those net operating loss carryforwards. The Company will continue to monitor facts and circumstances, including our analysis of other sources of taxable income, in the carryforward period changereassessment of the likelihood that the tax benefit of our deferred tax assets will be realized.
As of December 30, 2017 and additional weightDecember 31, 2016, after the release of the valuation allowance referred to above, Summit Inc. had a valuation allowance of $1.7 million and $502.8 million, respectively, which relates to certain deferred tax assets in taxable entities where realization is givennot more likely than not. The remaining valuation allowance as of December 30, 2017 relates to subjective evidence such as our projectionscertain net operating loss deferred tax assets in a subsidiary that is not expected to generate future taxable income for growth. At January 2, 2016, the Companyforeseeable future.
As of December 30, 2017, Summit Inc. had federal net operating loss carryforwards forof $374.5 million, which expire between 2030 and 2037. As of December 30, 2017, $250 million of our federal net operating losses were under the terms of our TRA. In addition, Summit Inc. has alternative minimum tax credits of $0.2 million as of December 30, 2017, which do not expire. As of December 30, 2017 and state incomeDecember 31, 2016, Summit Inc. had a valuation allowance on net deferred tax purposesassets of $96.2$1.7 million and $100.2$502.8 million, respectively, which are availablerespectively. The deferred tax assets primarily relate to offset future federaltax basis in intangible assets that exceeds book basis. The intangible asset tax basis was largely recognized as a result of the LP Unit exchanges in 2017 and state taxable income, if any, through 2035.2016.
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| ||
Valuation Allowance: |
|
|
|
|
|
|
|
Beginning balance |
| $ | (502,839) |
| $ | (263,825) |
|
Additional basis from exchanged LP Units |
|
| (31,790) |
|
| (252,456) |
|
Change in valuation allowance |
|
| 531,952 |
|
| 13,448 |
|
Other |
|
| 1,002 |
|
| (6) |
|
Ending balance |
| $ | (1,675) |
| $ | (502,839) |
|
TheWe have reclassified $4.3 million of deferred tax years 2012assets from other assets to 2015 remain open and subject to audit by federal, Canada, and statedeferred tax authorities. No income tax expense or benefit was recognized in other comprehensive lossassets in the years ended January 2,December 31, 2016 December 27, 2014 and December 28, 2013.consolidated balance sheet to conform to the current year presentation.
Tax Receivable Agreement—Upon the consummation of the Reorganization, During 2015, the Company entered into a tax receivable agreementTRA with the holders of LP Units and certain other indirect pre-IPOpre-initial public offering owners (“Investor Entities”) that provides for the payment by Summit Inc. to exchanging holders of LP Units of 85% of the benefits, if any, that Summit Inc. actually realizes (or, under certain circumstances such as an early termination of the TRA, is deemed to realizerealize) as a result of (i) increases in the tax basis of tangible and intangible assets of Summit Holdings and (ii) the utilization of certain net operating losses of the Investor Entities and certain other tax benefits related to entering into the tax receivable agreement,TRA, including tax benefits attributable to payments under the tax receivable agreement. In August 2015, 18,675,000TRA.
When LP units were purchased byUnits are exchanged for an equal number of newly-issued shares of Summit Inc. resulting’s Class A common stock, these exchanges result in an estimated $249.4 millionnew deferred tax asset, approximatelyassets. Using tax rates in effect as of each year end, $12.4 million, $422.5 million and $216.3 million of deferred tax assets were created during the years ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively, when LP Units were exchanged for shares of Class A common stock. As a result of the analysis of the realizability of our deferred tax assets as indicated above, in the third quarter of 2017, we reduced the valuation allowance against our deferred tax assets, including those deferred tax assets subject to the TRA. Further, we determined the TRA liability to be probable of being payable and, as such, we recorded 85% of which is a liability duethe deferred tax assets subject to the holdersTRA, or $501.8 million, as TRA liability. We recorded $331.9 million and $59.3 million of TRA liability of which $0.6 million and $1.1 million was classified as accrued expenses as of December 30, 2017 and December 31, 2016, respectively. We have reclassified $58.1 million of other noncurrent liabilities to TRA liability in the exchanged LP Units. As discussed above, a full valuation allowance was recognized on the net deferred tax asset. As realization of the tax benefit is not currently deemed probable, the related liabilityDecember 31, 2016 consolidated balance sheet to conform to the former LP Unit holders is not considered probable and is not included in the consolidated balance sheet.current year presentation
Tax Distributions— – The holders of Summit Holdings’ LP Units, including Summit Inc., incur U.S. federal, state and local income taxes on their share of any taxable income of Summit Holdings. The limited partnership agreement of
95
Summit Holdings provides for pro rata cash distributions (“tax distributions”) to the holders of the LP Units in an amount generally calculated to provide each holder of LP Units with sufficient cash to cover its tax liability in respect of the LP Units. In general, these tax distributions are computed based on Summit Holdings’ estimated taxable income allocated to each holder of LP Units multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate applicable to an individual or corporate resident in New York, New York (or a corporate resident in certain circumstances). InFor the yearyears ended January 2,December 30, 2017 and December 31, 2016, Summit Holdings paid tax distributions totaling $1.8 million and $13.0 million, respectively, to holders of its partnersLP Units, other than Summit Inc. totaling $28.7 million.
C Corporation Subsidiaries — The effective income tax rate for the C corporations differ from the statutory federal rate primarily due to (1) tax depletion expense (benefit) in excess of the expense recorded under U.S. GAAP, (2) state income taxes and the effect of graduated tax rates and (3) various other items such as limitations on meals and entertainment and other costs. The effective income tax rate for the Canadian subsidiary is not significantly different from its historical effective tax rate.
As of December 30, 2017, and December 31, 2016, Summit Inc. and its subsidiaries had not recognized any liabilities for uncertain tax positions. No material interest or penalties were recognized in income tax expense during the years ended December 30, 2017, December 31, 2016 or January 2, 2016. Tax years from 2013 to 2017 remain open and subject to audit by federal, Canadian, and state tax authorities.
(10) Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the weighted average common shares outstanding and diluted net earnings is computed by dividing net earnings, adjusted for changes in the earnings allocated to Summit Inc. as a result of the assumed conversion of LP Units, by the weighted-average common shares outstanding assuming dilution.
The following table shows the calculation of basic income per share:
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
Net income attributable to Summit Inc. |
| $ | 121,830 |
| $ | 36,783 |
| $ | 27,718 |
Weighted average shares of Class A stock outstanding |
|
| 108,696,438 |
|
| 70,355,042 |
|
| 40,888,437 |
Basic income per share |
| $ | 1.12 |
| $ | 0.52 |
| $ | 0.68 |
|
|
|
|
|
|
|
|
|
|
Net income attributable to Summit Inc. |
| $ | 121,830 |
| $ | 36,783 |
| $ | 27,718 |
Add: Noncontrolling interest impact of LP Unit conversion |
|
| — |
|
| — |
|
| 17,803 |
Diluted net income attributable to Summit Inc. |
|
| 121,830 |
|
| 36,783 |
|
| 45,521 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares of Class A stock outstanding |
|
| 108,696,438 |
|
| 70,355,042 |
|
| 40,888,437 |
Add: weighted average of LP Units |
|
| — |
|
| — |
|
| 50,059,648 |
Add: stock options |
|
| 308,355 |
|
| 140,142 |
|
| — |
Add: warrants |
|
| 42,035 |
|
| 16,123 |
|
| 37,714 |
Add: restricted stock units |
|
| 308,221 |
|
| 240,633 |
|
| 7,523 |
Add: performance stock units |
|
| 135,849 |
|
| 86,568 |
|
|
|
Weighted average dilutive shares outstanding |
|
| 109,490,898 |
|
| 70,838,508 |
|
| 90,993,322 |
Diluted earnings per share |
| $ | 1.11 |
| $ | 0.52 |
| $ | 0.50 |
Excluded from the above calculations were the shares noted below as they were antidilutive:
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
Antidilutive shares: |
|
|
|
|
|
|
|
|
|
LP Units |
|
| 4,371,705 |
|
| 32,327,907 |
|
| — |
Time-vesting stock options |
|
| — |
|
| — |
|
| 2,265,584 |
Warrants |
|
| — |
|
| — |
|
| — |
Time-vesting restricted stock units |
|
| — |
|
| — |
|
| — |
Market-based restricted stock units |
|
| — |
|
| — |
|
|
|
96
(11) Stockholders’ Equity
Equity Offerings—Summit Inc. commenced operations on March 11, 2015 upon the pricing of the initial public offering of its Class A common stock (“IPO”). Summit Inc. raised $433.0 million, net of underwriting discounts, through the issuance of 25,555,555 shares of Class A common stock at a public offering price of $18.00 per share. Summit Inc. used the offering proceeds to purchase a number of newly-issued Class A Units (“LP Units”) from Summit Holdings equal to the number of shares of Class A common stock issued to the public. Summit Inc. caused Summit Holdings to use these proceeds: (i) to redeem $288.2 million in aggregate principal amount of outstanding 10 1/2% 2020 Notes; (ii) to purchase 71,428,571 Class B Units of Continental Cement; (iii) to pay a one-time termination fee of $13.8 million in connection with the termination of a transaction and management fee agreement with Blackstone Capital Partners V L.P.; and (iv) for general corporate purposes. The $288.2 million redemption of 2020 Notes was completed at a redemption price equal to par plus an applicable premium of $38.2 million plus $5.2 million of accrued and unpaid interest.
In connection with the IPO, Summit Inc. issued 69,007,297 shares of its Class B common stock to an entity owned by certain pre-IPO owners and the former holders of Class B Units of Continental Cement. The Class B common stock entitled that entity, without regard to the number of shares of Class B common stock held by it, to a number of votes that is equal to the aggregate number of LP Units held by all limited partners of Summit Holdings (excluding Summit Inc.). During 2016, all but 100 shares of Class B common stock were cancelled. The Class B common stock entitles holders thereof, who are also holders of LP Units, with a number of votes that is equal to the number of LP Units they hold. The Class B common stock does not participate in dividends and does not have any liquidation rights.
On August 11, 2015, Summit Inc. raised $555.8 million, net of underwriting discounts, through the issuance of 22,425,000 shares of Class A common stock at a public offering price of $25.75 per share ("the August 2015 follow-on offering"). Summit Inc. used these proceeds to purchase 3,750,000 newly-issued LP Units from Summit Holdings and 18,675,000 LP Units from certain pre-IPO owners, at a purchase price per LP Unit equal to the public offering price per share of Class A common stock, less underwriting discounts and commissions. Summit Holdings used the proceeds from the 3,750,000 newly-issued LP Units to pay the deferred purchase price of $80.0 million related to the July 17, 2015 acquisition of a cement plant and quarry in Davenport, Iowa, and seven cement terminals along the Mississippi River and for general corporate purposes.
On January 10, 2017, Summit Inc. raised $237.6 million, net of underwriting discounts, through the issuance of 10,000,000 shares of Class A common stock at a public offering price of $24.05 per share. Summit Inc. used these proceeds to purchase an equal number of LP Units.
During 2016 and 2017, certain limited partners of Summit Holdings exchanged their LP Units for shares of Class A common stock of Summit Inc. The following table summarizes the changes in our ownership of Summit Holdings:
|
|
|
|
|
|
|
|
|
|
|
| Summit Inc. Shares (Class A) |
| LP Units |
| Total |
| Summit Inc. Ownership Percentage |
|
Balance — January 2, 2016 (1) |
| 52,402,692 |
| 50,275,825 |
| 102,678,517 |
| 51.0 | % |
Issuance of Class A shares |
| 1,038 |
| - |
| 1,038 |
|
|
|
Exchanges during period |
| 45,124,528 |
| (45,124,528) |
| - |
|
|
|
Other equity transactions |
| 26,020 |
| - |
| 26,020 |
|
|
|
Balance — December 31, 2016 (1) |
| 97,554,278 |
| 5,151,297 |
| 102,705,575 |
| 95.0 | % |
January 2017 public offering |
| 10,000,000 |
| - |
| 10,000,000 |
|
|
|
Exchanges during period |
| 1,461,677 |
| (1,461,677) |
| - |
|
|
|
Other equity transactions |
| 1,334,639 |
| - |
| 1,334,639 |
|
|
|
Balance — December 30, 2017 |
| 110,350,594 |
| 3,689,620 |
| 114,040,214 |
| 96.8 | % |
(1) | The January 2, 2016 balance of Summit Inc. Class A Shares of 52,402,692 is shown to reflect the retroactive application of 1,135,692 and 1,521,056 of Class A common stock issued as a stock dividend on December 28, 2016 and December 22, 2017, respectively. The December 31, 2016 balance of Summit Inc. Class A Shares of 97,554,278 is shown to reflect the retroactive application of 1,521,056 of Class A common stock issued as a stock dividend on December 22, 2017. |
97
As a result of reorganization into a holding company structure (the “Reorganization”) consummated in connection with Summit Inc.’s March 2015 initial public offering, Summit Inc. is Summit Holdings’ primary beneficiary and thus consolidates Summit Holdings in its consolidated financial statements with a corresponding noncontrolling interest elimination, which was 3.2% and 5.0% as of December 30, 2017 and December 31, 2016, respectively.
On March 17, 2015, upon the consummation of the IPO and the transactions contemplated by a contribution and purchase agreement entered into with the holders of all of the outstanding Class B Units of Continental Cement, Continental Cement became a wholly-owned indirect subsidiary of Summit Inc. The noncontrolling interests of Continental Cement were acquired for aggregate consideration of $64.1 million, consisting of $35.0 million of cash, 1,029,183 shares of Summit Inc.’s Class A common stock and $15.0 million aggregate principal amount of non-interest bearing notes payable in six annual installments of $2.5 million, beginning on March 17, 2016.
Prior to the March 17, 2015 purchase of the noncontrolling interest, the Company owned 100 Class A Units of Continental Cement, which represented an approximately 70% economic interest and had a preference in liquidation to the Class B Units. Continental Cement issued 100,000,000 Class B Units in May 2010, which remained outstanding until March 17, 2015 and represented an approximately 30% economic interest.
Accumulated other comprehensive income (loss) - The changes in each component of accumulated other comprehensive income (loss) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated | |
|
|
|
|
| Foreign currency |
|
|
|
| other | ||
|
| Change in |
| translation |
| Cash flow hedge |
| comprehensive | ||||
|
| retirement plans |
| adjustments |
| adjustments |
| income (loss) | ||||
Balance — January 2, 2016 |
| $ | 1,049 |
| $ | (3,379) |
| $ | (465) |
| $ | (2,795) |
Postretirement liability adjustment |
|
| 401 |
|
| — |
|
| — |
|
| 401 |
Foreign currency translation adjustment |
|
| — |
|
| 273 |
|
| — |
|
| 273 |
Loss on cash flow hedges |
|
| — |
|
| — |
|
| (128) |
|
| (128) |
Balance — December 31, 2016 |
| $ | 1,450 |
| $ | (3,106) |
| $ | (593) |
| $ | (2,249) |
Postretirement curtailment adjustment, net of tax |
|
| 309 |
|
| — |
|
| — |
|
| 309 |
Postretirement liability adjustment, net of tax |
|
| 605 |
|
| — |
|
| — |
|
| 605 |
Foreign currency translation adjustment, net of tax |
|
| — |
|
| 7,743 |
|
| — |
|
| 7,743 |
Income on cash flow hedges, net of tax |
|
| — |
|
| — |
|
| 978 |
|
| 978 |
Balance — December 30, 2017 |
| $ | 2,364 |
| $ | 4,637 |
| $ | 385 |
| $ | 7,386 |
(12) Supplemental Cash Flow Information
Supplemental cash flow information for the years ended December 30, 2017, December 31, 2016 and January 2, 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
Cash payments: |
|
|
|
|
|
|
|
|
|
Interest |
| $ | 96,320 |
| $ | 82,540 |
| $ | 89,102 |
Income taxes |
|
| 1,711 |
|
| 2,645 |
|
| 1,685 |
Non cash financing activities: |
|
|
|
|
|
|
|
|
|
Purchase of noncontrolling interest |
| $ | (716) |
| $ | — |
| $ | (29,102) |
Stock Dividend |
|
| (45,023) |
|
| (26,939) |
|
| (16,847) |
Exchange of LP Units to shares of Class A common stock |
|
| 41,126 |
|
| 953,752 |
|
| — |
(13) Stock-Based Compensation
Prior to the IPO and related Reorganization, the capital structure of Summit Holdings consisted of six different classes of limited partnership units, each of which was subject to unique distribution rights. In connection with the IPO and the related Reorganization, the limited partnership agreement of Summit Holdings was amended and restated to,
98
among other things, modify its capital structure by creating LP Units (“the Reclassification”). Immediately after the Reclassification, 69.0 million LP Units were outstanding, of which 575,256 time vesting interests had not yet vested, and 2.4 million of performance vesting interests had not yet vested. As of December 30, 2017, approximately 40,000 of the time-vesting units remained outstanding and unvested.
Further in 2015, warrants to purchase 160,333 shares of Class A common stock were issued to holders of Class C interests, and options to purchase 4.4 million shares of Class A common stock were issued to holders of Class D interests as leverage restoration options. The exercise price of the warrants and the leverage restoration options is $18.00 per share. In connection with the Reclassification of the equity-based awards, we recognized $14.5 million modification charge in general and administrative expenses in the year ended January 2, 2016.
The leverage restoration options were granted under the Summit Materials, Inc. 2015 Omnibus Incentive Plan (the “Plan”), and would vest when both the applicable return multiple is achieved and a four year time-vesting condition is satisfied. Subsequently, in August 2016, the Board of Directors determined that it was in the best interest of the Company to waive the 3.0 times threshold on the remaining unvested performance-based LP Units and leverage restoration options. This waiver was accounted for as a modification of both interests. The fair value of the LP Units was based on the closing stock price of Summit Inc.’s shares of Class A common stock on the modification date and the fair value of the leverage restoration options was determined using the Black-Scholes, Merton model. The Company recognized $37.7 million in general and administrative expenses in the year ended December 31, 2016 related to the vesting of these performance-based awards. In addition, as of December 30, 2017, we have $2.3 million of unamortized deferred compensation related to the LP Units and unvested leverage restoration options, which will be amortized through March 2019.
In connection with the IPO, we granted 240,000 options to purchase Class A common stock under the Plan to certain employees. These options vest subject to continuous employment over a four year service period, and are exercisable at $18.00 per share.
Omnibus Incentive Plan
In 2015, our Board of Directors and stockholders adopted a long-term incentive plan in connection with our IPO under the Plan, which allows for grants of equity-based awards in the form of stock options, stock appreciation rights, restricted stock and restricted stock units, performance units, and other stock-based awards. The Plan authorizes the issuance of up to 13,500,000 shares of Class A common stock in the form of restricted stock units and stock options, of which 8.6 million shares were available for future grants as of December 30, 2017.
Restricted Stock
Restricted Stock with Service-Based Vesting—Under the Plan, the Compensation Committee of the Board of Directors (“the Compensation Committee”) has granted restricted stock to members of the Board of Directors, executive officers and other key employees. These awards contain service conditions associated with continued employment or service. The terms of the restricted stock provide voting and regular dividend rights to holders of the awards. Upon vesting, the restrictions on the restricted stock lapse and the shares are considered issued and outstanding for accounting purposes.
In 2017 and 2016, the Compensation Committee granted restricted stock to executives and key employees under the Plan as part of our annual equity award program, which vest over a three year period, subject to continued employment or service. From time to time, the Compensation Committee grants restricted stock to newly hired or promoted employees or other employees or consultants who have achieved extraordinary personal performance objectives.
In 2017 and 2016, the Compensation Committee granted 34,928 and 28,140 shares, respectively, to non-employee members of the Board of Directors for their annual service as directors. These restricted stock grants vest over a one year period.
In measuring compensation expense associated with the grant of restricted stock, we use the fair value of the award, determined as the closing stock price for our common stock on the date of grant. Compensation expense is recorded monthly over the vesting period of the award.
99
Restricted stock with Service- and Market-Condition-Based Vesting—In 2017 and 2016, the Compensation Committee granted restricted stock to certain members of our executive team as part of their annual compensation package. The restricted stock vest at the end of a three year performance period, based on our total stock return (“TSR”) ranking relative to companies in the S&P Building & Construction Select Industry Index, subject to continued employment.
In measuring compensation expense associated with these grants, we use the fair value of the award at the date of grant, determined using a Monte Carlo simulation model. Compensation expense is recorded monthly over the vesting period of the awards. The following table summarizes information for the equity awards granted in 2017:
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|
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|
|
| Options |
| Restricted Stock Units |
| Performance Stock Units |
| Warrants | ||||||||||||
|
|
|
| Weighted |
|
|
| Weighted |
|
|
| Weighted |
|
|
| Weighted | ||||
|
|
|
| average grant- |
| Number of |
| average grant- |
| Number of |
| average grant- |
| Number of |
| average grant- | ||||
|
| Number of |
| date fair value |
| restricted |
| date fair value |
| performance |
| date fair value |
| performance |
| date fair value | ||||
|
| options |
| per unit |
| stock units |
| per unit |
| stock units |
| per unit |
| stock units |
| per unit | ||||
Beginning balance—December 31, 2016 |
| 4,990,443 |
| $ | 8.95 |
| 352,602 |
| $ | 17.77 |
| 130,691 |
| $ | 18.71 |
| 160,333 |
| $ | 18.00 |
Granted |
| 377,630 |
|
| 12.13 |
| 307,905 |
|
| 24.01 |
| 85,530 |
|
| 31.58 |
| — |
|
| — |
Forfeited |
| (11,339) |
|
| 10.91 |
| (6,109) |
|
| 20.37 |
| (4,766) |
|
| 18.71 |
| — |
|
| — |
Exercised |
| (1,203,121) |
|
| 8.90 |
| — |
|
| — |
| — |
|
| — |
| (57,555) |
|
| 18.00 |
Vested |
| — |
|
| — |
| (145,812) |
|
| 17.68 |
| — |
|
| — |
| — |
|
| — |
Balance—December 30, 2017 |
| 4,153,613 |
| $ | 9.13 |
| 508,586 |
| $ | 20.14 |
| 211,455 |
| $ | 23.69 |
| 102,778 |
| $ | 18.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the time-vesting options granted in 2017, 2016 and 2015 was estimated as of the grant date using the Black-Scholes-Merton model, which requires the input of subjective assumptions, including the expected volatility and the expected term. The fair value of the performance stock units granted in 2017 and 2016 was estimated as of the grant date using Monte Carlo simulations, which requires the input of subjective assumptions, including the expected volatility and the expected term. The following table presents the weighted average assumptions used to estimate the fair value of grants in 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options |
| Performance Stock Units | ||||||
|
| 2017 |
| 2016 |
| 2015 |
| 2017 |
| 2016 |
Risk-free interest rate |
| 2.06% - 2.31% |
| 1.75% - 1.97% |
| 1.68% - 1.92% |
| 1.45% |
| 0.88% |
Dividend yield |
| None |
| None |
| None |
| None |
| None |
Volatility |
| 47% |
| 48% |
| 50% |
| 39% |
| 37% |
Expected term |
| 7 Years |
| 10 Years |
| 7 - 10 years |
| 3 Years |
| 3 Years |
The risk-free rate is based on the yield at the date of grant of a U.S. Treasury security with a maturity period approximating the expected term. As Summit Holdings has not historically and does not plan to issue regular dividends, a dividend yield of zero was used. The volatility assumption is based on reported data of a peer group of publically traded companies for which historical information was available adjusted for the Company’s capital structure. The expected term is based on expectations about future exercises and represents the period of time that the units granted are expected to be outstanding.
Compensation expense for time-vesting interests granted is based on the grant date fair value. The Company recognizes compensation costs on a straight-line basis over the service period, which is generally the vesting period of the award. Forfeitures are recognized as they occur. Share-based compensation expense, which is recognized in general and administrative expenses, totaled $21.1 million, $49.9 million and $19.9 million in the years ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively. As of December 30, 2017, unrecognized compensation cost totaled $23.7 million. The weighted average remaining contractual term over which the unrecognized compensation cost is to be recognized is 1.6 years as of year-end 2017.
As of December 30, 2017, the intrinsic value of outstanding options, restricted stock units and performance stock units was $53.9 million, $16.0 million and $6.6 million, respectively, and the remaining contractual term was 7.5 years, 8.8 years and 8.6 years, respectively. The weighted average strike price of stock options outstanding as of December 30,
100
2017 was $18.46 per share. The intrinsic value of 1.2 million exercisable stock options as of December 30, 2017 was $16.8 million with a weighted average strike price of $17.92 and a weighted average remaining vesting period of 7.3 years.
(14) Employee Benefit Plans
Defined Contribution Plan—The Company sponsors an employee 401(k) savings planplans for its employees, andincluding certain union employees. The plan providesplans provide for various required and discretionary Company matches of employees’ eligible compensation contributed to the plans. The expense for the defined contribution plans was $7.1$9.3 million, $3.8$8.6 million and $2.3$7.1 million for the years ended December 30, 2017, December 31, 2016 and January 2, 2016, December 27, 2014 and December 28, 2013, respectively.
Defined Benefit and Other Postretirement Benefits Plans—The Company’s subsidiary, Continental Cement, sponsors two noncontributory defined benefit pension plans for hourly and salaried employees. The salaried plan is closed to new participants and benefits are frozen. The hourly plan is also frozen except that new hourly participants from the Davenport, Iowa location accrue new benefits in the hourly plan. As a result of the collective bargaining unit negotiations in 2017, the hourly defined benefit pension plan was amended to stop future benefit accruals for the Davenport employees effective December 31, 2017. Pension benefits for eligible hourly employees are based on a monthly pension factor for each year of credited service. Pension benefits for eligible salaried employees are generally based on years of service and average eligible compensation.
Continental Cement also sponsors threetwo unfunded healthcare and life insurance benefits plans for certain eligible retired employees. Effective January 1, 2014, the plan covering employees of the Hannibal, Missouri location was amended to eliminate all future retiree health and life coverage for current employees. During 2015, Continental Cement adopted twoone new unfunded healthcare and life insurance plansplan to provide benefits prior to Medicare eligibility for certain salaried and hourly employees of the Davenport, Iowa location.
The funded status of the pension and other postretirement benefit plans is recognized in the consolidated balance sheets as the difference between the fair value of plan assets and the benefit obligations. For defined benefit pension plans, the benefit obligation is the projected benefit obligation (“PBO”) and for the healthcare and life insurance benefits plans, the benefit obligation is the accumulated postretirement benefit obligation (“APBO”). The PBO represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels. However, since the plans’ participants are not subject to future compensation increases, the plans’ PBO equals the APBO.accumulated benefit obligation (“ABO”). The APBO represents the actuarial present value of postretirement benefits attributed to employee services already rendered. The fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants. The measurement of the benefit obligations are based on the Company’s estimates and actuarial valuations. These valuations reflect the terms of the plan and use participant-specific information, such as compensation, age and years of service, as well as certain assumptions that require significant judgment, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest-crediting rates and mortality rates.
Effective in 2015, the
The Company uses December 31 as the measurement date for its defined benefit pension and other postretirement benefit plans.
101
Obligations and Funded Status—The following information is as of December 31, 20152017 and December 27, 201431, 2016 and for the years ended December 31, 2015,2017, December 27, 201431, 2016 and December 28, 2013:31, 2015:
|
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|
|
|
|
|
|
|
| ||||||||||||||||
| 2017 |
| 2016 |
| |||||||||||||||||||||||||
2015 | 2014 |
| Pension |
| Healthcare |
| Pension |
| Healthcare |
| |||||||||||||||||||
Pension benefits | Healthcare & Life Ins. | Pension benefits | Healthcare & Life Ins. |
| benefits |
| & Life Ins. |
| benefits |
| & Life Ins. |
| |||||||||||||||||
Change in benefit obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Beginning of period | $ | 28,909 | $ | 13,356 | $ | 25,644 | $ | 14,155 |
| $ | 27,608 |
| $ | 12,770 |
| $ | 27,914 |
| $ | 13,458 |
| ||||||||
Service cost | 159 | 149 | 75 | 106 |
|
| 285 |
|
| 184 |
|
| 279 |
|
| 230 |
| ||||||||||||
Interest cost | 1,041 | 447 | 1,081 | 493 |
|
| 998 |
|
| 365 |
|
| 1,049 |
|
| 470 |
| ||||||||||||
Actuarial (gain) loss | (1,465 | ) | (1,720 | ) | 3,798 | 1,992 | |||||||||||||||||||||||
Actuarial loss (gain) |
|
| 1,182 |
|
| (338) |
|
| 22 |
|
| (682) |
| ||||||||||||||||
Curtailments |
|
| (430) |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Change in plan provision | 908 | 1,896 | — | (2,553 | ) |
|
| — |
|
| (2,325) |
|
| — |
|
| 65 |
| |||||||||||
Benefits paid | (1,638 | ) | (670 | ) | (1,689 | ) | (837 | ) |
|
| (1,659) |
|
| (863) |
|
| (1,656) |
|
| (771) |
| ||||||||
|
|
|
| ||||||||||||||||||||||||||
End of period | 27,914 | 13,458 | 28,909 | 13,356 |
| $ | 27,984 |
| $ | 9,793 |
| $ | 27,608 |
| $ | 12,770 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Change in fair value of plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Beginning of period | $ | 18,872 | $ | — | $ | 19,074 | $ | — |
| $ | 18,395 |
| $ | — |
| $ | 18,336 |
| $ | — |
| ||||||||
Actual return on plan assets | (63 | ) | 526 | — |
|
| 1,415 |
|
|
|
|
| 719 |
|
|
|
| ||||||||||||
Employer contributions | 1,166 | 670 | 961 | 837 |
|
| 861 |
|
| 863 |
|
| 996 |
|
| 771 |
| ||||||||||||
Benefits paid | (1,639 | ) | (670 | ) | (1,689 | ) | (837 | ) |
|
| (1,659) |
|
| (863) |
|
| (1,656) |
|
| (771) |
| ||||||||
|
|
|
| ||||||||||||||||||||||||||
End of period | 18,336 | — | 18,872 | — |
| $ | 19,012 |
| $ | — |
| $ | 18,395 |
| $ | — |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Funded status of plans | $ | (9,578 | ) | $ | (13,458 | ) | $ | (10,037 | ) | $ | (13,356 | ) |
| $ | (8,972) |
| $ | (9,793) |
| $ | (9,213) |
| $ | (12,770) |
| ||||
|
|
|
| ||||||||||||||||||||||||||
Current liabilities | $ | — | $ | (964 | ) | $ | — | $ | (1,041 | ) |
| $ | — |
| $ | (702) |
| $ | — |
| $ | (844) |
| ||||||
Noncurrent liabilities | (9,578 | ) | (12,494 | ) | (10,037 | ) | (12,315 | ) |
|
| (8,972) |
|
| (9,091) |
|
| (9,213) |
|
| (11,926) |
| ||||||||
|
|
|
| ||||||||||||||||||||||||||
Liability recognized | $ | (9,578 | ) | $ | (13,458 | ) | $ | (10,037 | ) | $ | (13,356 | ) |
| $ | (8,972) |
| $ | (9,793) |
| $ | (9,213) |
| $ | (12,770) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Amounts recognized in accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net actuarial loss | $ | 9,024 | $ | 3,949 | $ | 9,365 | $ | 5,904 |
| $ | 9,341 |
| $ | 2,285 |
| $ | 9,248 |
| $ | 3,060 |
| ||||||||
Prior service cost | — | (2,206 | ) | — | (2,380 | ) |
|
| — |
|
| (2,413) |
|
| — |
|
| (1,968) |
| ||||||||||
|
|
|
| ||||||||||||||||||||||||||
Total amount recognized | $ | 9,024 | $ | 1,743 | $ | 9,365 | $ | 3,524 |
| $ | 9,341 |
| $ | (128) |
| $ | 9,248 |
| $ | 1,092 |
| ||||||||
|
|
|
|
102
The amount recognized in accumulated other comprehensive income (“AOCI”) is the actuarial loss (credit) and prior service cost, which has not yet been recognized in periodic benefit cost, adjusted for amounts allocated to the redeemable noncontrolling interest.cost. At January 2, 2016,December 30, 2017, the actuarial loss (credit) and prior service cost (credit) expected to be amortized from AOCI to periodic benefit cost in 20162018 is $16 thousand$0.3 million and $1.7$(0.2) million for the pension and postretirement obligations, respectively.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| 2017 |
| 2016 |
| 2015 |
| |||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 |
| Pension |
| Healthcare |
| Pension |
| Healthcare |
| Pension |
| Healthcare |
| ||||||||||||||||||||||||||||
Pension benefits | Healthcare & Life Ins. | Pension benefits | Healthcare & Life Ins. | Pension benefits | Healthcare & Life Ins. |
| benefits |
| & Life Ins. |
| benefits |
| & Life Ins. |
| benefits |
| & Life Ins. |
| |||||||||||||||||||||||||
Amounts recognized in other comprehensive (income) loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Net actuarial (loss) gain | $ | (16 | ) | $ | (1,720 | ) | $ | 4,650 | $ | 1,992 | $ | (2,838 | ) | $ | (1,048 | ) | |||||||||||||||||||||||||||
Net actuarial gain (loss) |
| $ | 1,068 |
| $ | (338) |
| $ | 688 |
| $ | (682) |
| $ | (16) |
| $ | (1,720) |
| ||||||||||||||||||||||||
Prior service cost | — | — | — | (2,553 | ) | — | — |
|
| — |
|
| (572) |
|
| — |
|
| 64 |
|
| — |
|
| — |
| |||||||||||||||||
Amortization of prior year service cost | — | 174 | — | 174 | — | 180 |
|
| — |
|
| 168 |
|
| — |
|
| 174 |
|
| — |
|
| 174 |
| ||||||||||||||||||
Curtailment benefit | — | — | — | 1,346 | — | — |
|
| (429) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| ||||||||||||||||||
Amortization of gain | (326 | ) | (235 | ) | (117 | ) | (227 | ) | (387 | ) | (314 | ) |
|
| (547) |
|
| (64) |
|
| (463) |
|
| (207) |
|
| (326) |
|
| (235) |
| ||||||||||||
Adjustment to Prior Service Cost due to purchase accounting | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||
Adjustment to plan benefits |
|
| — |
|
| (414) |
|
| — |
|
| — |
|
| — |
|
| — |
| ||||||||||||||||||||||||
Total amount recognized | $ | (342 | ) | $ | (1,781 | ) | $ | 4,533 | $ | 732 | $ | (3,225 | ) | $ | (1,182 | ) |
| $ | 92 |
| $ | (1,220) |
| $ | 225 |
| $ | (651) |
| $ | (342) |
| $ | (1,781) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Service cost | $ | 159 | $ | 149 | $ | 75 | $ | 106 | $ | 295 | $ | 236 |
| $ | 285 |
| $ | 184 |
| $ | 279 |
| $ | 230 |
| $ | 159 |
| $ | 149 |
| ||||||||||||
Interest cost | 1,041 | 447 | 1,081 | 493 | 963 | 513 |
|
| 998 |
|
| 365 |
|
| 1,049 |
|
| 470 |
|
| 1,041 |
|
| 447 |
| ||||||||||||||||||
Amortization of loss | 326 | 235 | 117 | 227 | 387 | 314 | |||||||||||||||||||||||||||||||||||||
Amortization of gain |
|
| 547 |
|
| 64 |
|
| 463 |
|
| 207 |
|
| 326 |
|
| 235 |
| ||||||||||||||||||||||||
Expected return on plan assets | (1,385 | ) | — | (1,378 | ) | — | (1,348 | ) | — |
|
| (1,302) |
|
| — |
|
| (1,386) |
|
| — |
|
| (1,385) |
|
| — |
| |||||||||||||||
Curtailments | — | — | — | (1,346 | ) | — | — | ||||||||||||||||||||||||||||||||||||
Special termination benefits | — | — | — | — | — | 39 | |||||||||||||||||||||||||||||||||||||
Amortization of prior service credit | — | (174 | ) | — | (174 | ) | — | (180 | ) |
|
| — |
|
| (168) |
|
| — |
|
| (174) |
|
| — |
|
| (174) |
| |||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||
Net periodic benefit cost | $ | 141 | $ | 657 | $ | (105 | ) | $ | (694 | ) | $ | 297 | $ | 922 |
| $ | 528 |
| $ | 445 |
| $ | 405 |
| $ | 733 |
| $ | 141 |
| $ | 657 |
| ||||||||||
|
|
|
|
|
|
Assumptions—Weighted-average assumptions used to determine the benefit obligations as of year-end 20152017 and 20142016 are:
|
|
|
|
|
|
|
|
|
| ||||||||
| 2017 |
| 2016 |
| |||||||||||||
2015 | 2014 |
|
|
| Healthcare |
|
|
| Healthcare |
| |||||||
Pension benefits | Healthcare & Life Ins. | Pension benefits | Healthcare & Life Ins. |
| Pension benefits |
| & Life Ins. |
| Pension benefits |
| & Life Ins. |
| |||||
Discount rate | 3.74% - 3.97% | 3.34% - 3.80% | 3.50% - 3.65% | 3.52% |
| 3.23% - 3.37% |
| 3.20% - 3.25% |
| 3.61% - 3.81% |
| 3.32% - 3.65% |
| ||||
Expected long-term rate of return on plan assets | 7.30% | N/A | 7.30% | N/A |
| 7.00% |
| N/A |
| 7.00% |
| N/A |
|
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 30, 2017, December 31, 2016 and January 2, 2016, December 27, 2014 and December 28, 2013:2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| 2017 |
| 2016 |
| 2015 |
| |||||||||||||||||||
2015 | 2014 | 2013 |
|
|
| Healthcare |
|
|
| Healthcare |
|
|
| Healthcare |
| ||||||||||
Pension benefits | Healthcare & Life Ins. | Pension benefits | Healthcare & Life Ins. | Pension benefits | Healthcare & Life Ins. |
| Pension benefits |
| & Life Ins. |
| Pension benefits |
| & Life Ins. |
| Pension benefits |
| & Life Ins. |
| |||||||
Discount rate | 3.50% - 3.98% | 3.52% | 4.21% - 4.46% | 4.33% | 3.30% - 3.57% | 3.41% |
| 3.61% - 3.81% |
| 3.54% - 3.65% |
| 3.74% - 3.97% |
| 3.34% - 3.80% |
| 3.50% - 3.98% |
| 3.39% - 3.52% |
| ||||||
Expected long-term rate of return on plan assets | 7.30% | N/A | 7.50% | N/A | 7.50% | N/A |
| 7.00% |
| N/A |
| 7.30% |
| N/A |
| 7.30% |
| N/A |
|
The expected long-term return on plan assets is based upon the Plans’ consideration of historical and forward-looking returns and the Company’s estimation of what a portfolio, with the target allocation described below, will earn over a long-term horizon. The discount rate is derived using the Citigroup Pension Discount Curve.
103
Assumed health care cost trend rates are 8% grading to 4.5% and 7%were 8.0% grading to 4.5% as of year-end 20152017 and 2014, respectively.2016. Assumed health care cost trend rates have a significant effect on the amounts reported for the Company’s healthcare and life insurance benefits plans. A one percentage-point change in assumed health care cost trend rates would have the following effects as of year-end 20152017 and 2014:2016:
|
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
2015 | 2014 |
| 2017 |
| 2016 |
| |||||||||||||||||||||||
Increase | Decrease | Increase | Decrease |
| Increase |
| Decrease |
| Increase |
| Decrease |
| |||||||||||||||||
Total service cost and interest cost components | $ | 45 | $ | (36 | ) | $ | 39 | $ | (34 | ) |
| $ | 39 |
| $ | (33) |
| $ | 55 |
| $ | (47) |
| ||||||
APBO | 1,302 | (1,121 | ) | 1,333 | (1,136 | ) |
|
| 857 |
|
| (769) |
|
| 1,197 |
|
| (1,038) |
|
Plan Assets—The defined benefit pension plans’ (the “Plans”) investment strategy is to minimize investment risk while generating acceptable returns. The Plans currently invest a relatively high proportion of the plan assets in fixed income securities, while the remainder is invested in equity securities, cash reserves and precious metals. The equity securities are diversified into funds with growth and value investment strategies. The target allocation for plan assets is as follows: equity securities—30%; fixed income securities—63%; cash reserves—5%; and precious metals—2%. The Plans’ current investment allocations are within the tolerance of the target allocation. The Company had no Level 3 investments as of or for the years ended January 2, 2016December 30, 2017 and December 27, 2014.31, 2016.
At year-end 20152017 and 2014,2016, the Plans’ assets were invested predominantly in fixed-income securities and publicly traded equities, but may invest in other asset classes in the future subject to the parameters of the investment policy. The Plans’ investments in fixed-income assets include U.S. Treasury and U.S. agency securities and corporate bonds. The Plans’ investments in equity assets include U.S. and international securities and equity funds. The Company estimates the fair value of the Plans’ assets using various valuation techniques and, to the extent available, quoted market prices in active markets or observable market inputs. The descriptions and fair value methodologies for the Plans’ assets are as follows:
Fixed Income Securities—Corporate and government bonds are classified as Level 2 assets, as they are either valued at quoted market prices from observable pricing sources at the reporting date or valued based upon comparable securities with similar yields and credit ratings.
Equity Securities—Equity securities are valued at the closing market price reported on a U.S. exchange where the security is actively traded and are therefore classified as Level 1 assets.
Cash—The carrying amounts of cash approximate fair value due to the short-term maturity.
Precious Metals—Precious metals are valued at the closing market price reported on a U.S. exchange where the security is actively traded and are therefore classified as Level 1 assets.
104
The fair value of the Plans’ assets by asset class and fair value hierarchy level as of December 31, 20152017 and December 27, 201431, 2016 are as follows:
|
|
|
|
|
|
|
|
|
| |||||||||||||
2015 |
| 2017 |
| |||||||||||||||||||
Total fair value | Quoted prices in active markets for identical assets (Level 1) | Observable inputs (Level 2) |
|
|
|
| Quoted prices in active |
|
|
|
| |||||||||||
| Total fair |
| markets for identical |
| Observable |
| ||||||||||||||||
| value |
| assets (Level 1) |
| inputs (Level 2) |
| ||||||||||||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
| ||||||||||||
Intermediate—government | $ | 1,410 | $ | — | $ | 1,410 |
| $ | 3,620 |
| $ | 3,068 |
| $ | 552 |
| ||||||
Intermediate—corporate | 3,376 | — | 3,376 |
|
| 3,872 |
|
| — |
|
| 3,872 |
| |||||||||
Short-term—government | 390 | — | 390 |
|
| 497 |
|
| 497 |
|
| — |
| |||||||||
Short-term—corporate | 5,571 | — | 5,571 |
|
| 1,702 |
|
| — |
|
| 1,702 |
| |||||||||
Equity securities: |
|
|
|
|
|
|
|
|
|
| ||||||||||||
U.S. Large cap value | 1,148 | 1,148 | — |
|
| 1,765 |
|
| 1,765 |
|
| — |
| |||||||||
U.S. Large cap growth | 1,153 | 1,153 | — |
|
| 588 |
|
| 588 |
|
| — |
| |||||||||
U.S. Mid cap value | 557 | 557 | — |
|
| 586 |
|
| 586 |
|
| — |
| |||||||||
U.S. Mid cap growth | 569 | 569 | — |
|
| 586 |
|
| 586 |
|
| — |
| |||||||||
U.S. Small cap value | 554 | 554 | — |
|
| 571 |
|
| 571 |
|
| — |
| |||||||||
U.S. Small cap growth | 554 | 554 | — |
|
| 580 |
|
| 580 |
|
| — |
| |||||||||
Managed Futures |
|
| 392 |
|
| — |
|
| 392 |
| ||||||||||||
International | 1,118 | 1,118 | — |
|
| 1,547 |
|
| 677 |
|
| 870 |
| |||||||||
Commodities Broad Basket |
|
| 801 |
|
| — |
|
| 801 |
| ||||||||||||
Cash | 1,592 | 1,592 | — |
|
| 1,522 |
|
| — |
|
| 1,522 |
| |||||||||
Precious metals | 345 | 345 | — |
|
| 383 |
|
| 383 |
|
| — |
| |||||||||
|
|
| ||||||||||||||||||||
Total | $ | 18,337 | $ | 7,590 | $ | 10,747 |
| $ | 19,012 |
| $ | 9,301 |
| $ | 9,711 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
2014 |
| 2016 |
| |||||||||||||||||||
Total fair value | Quoted prices in active markets for identical assets (Level 1) | Observable inputs (Level 2) |
|
|
|
| Quoted prices in active |
|
|
|
| |||||||||||
| Total fair |
| markets for identical |
| Observable |
| ||||||||||||||||
| value |
| assets (Level 1) |
| inputs (Level 2) |
| ||||||||||||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
| ||||||||||||
Intermediate—government | $ | 1,468 | $ | — | $ | 1,468 |
| $ | 1,770 |
| $ | — |
| $ | 1,770 |
| ||||||
Intermediate—corporate | 3,342 | — | 3,342 |
|
| 2,658 |
|
| — |
|
| 2,658 |
| |||||||||
Short-term—government | 2,435 | — | 2,435 |
|
| 912 |
|
| — |
|
| 912 |
| |||||||||
Short-term—corporate | 3,700 | — | 3,700 |
|
| 3,613 |
|
| — |
|
| 3,613 |
| |||||||||
Equity securities: |
|
|
|
|
|
|
|
|
|
| ||||||||||||
U.S. Large cap value | 1,180 | 1,180 | — |
|
| 1,181 |
|
| 1,181 |
|
| — |
| |||||||||
U.S. Large cap growth | 1,173 | 1,173 | — |
|
| 1,103 |
|
| 1,103 |
|
| — |
| |||||||||
U.S. Mid cap value | 590 | 590 | — |
|
| 577 |
|
| 577 |
|
| — |
| |||||||||
U.S. Mid cap growth | 598 | 598 | — |
|
| 546 |
|
| 546 |
|
| — |
| |||||||||
U.S. Small cap value | 597 | 597 | — |
|
| 551 |
|
| 551 |
|
| — |
| |||||||||
U.S. Small cap growth | 611 | 611 | — |
|
| 540 |
|
| 540 |
|
| — |
| |||||||||
Managed Futures |
|
| 366 |
|
| 366 |
|
| — |
| ||||||||||||
International | 1,098 | 1,098 | — |
|
| 1,099 |
|
| 1,099 |
|
| — |
| |||||||||
Emerging Markets |
|
| 359 |
|
| 359 |
|
| — |
| ||||||||||||
Commodities Broad Basket |
|
| 707 |
|
| 707 |
|
| — |
| ||||||||||||
Cash | 1,712 | 1,712 | — |
|
| 2,094 |
|
| 2,094 |
|
| — |
| |||||||||
Precious metals | 368 | 368 | — |
|
| 319 |
|
| 319 |
|
| — |
| |||||||||
|
|
| ||||||||||||||||||||
Total | $ | 18,872 | $ | 7,927 | $ | 10,945 |
| $ | 18,395 |
| $ | 9,442 |
| $ | 8,953 |
| ||||||
|
|
|
Cash Flows—The Company expects to contribute approximately $1.0$1.4 million in 20162018 to both its pension plans and to its healthcare and life insurance benefits plans.
105
The estimated benefit payments for each of the next five years and the five-year period thereafter are as follows:
Pension benefits | Healthcare and Life Insurance Benefits | |||||||
2016 | 1,768 | 964 | ||||||
2017 | 1,768 | 913 | ||||||
2018 | 1,807 | 941 | ||||||
2019 | 1,812 | 918 | ||||||
2020 | 1,788 | 937 | ||||||
2021 - 2024 | 8,680 | 4,598 | ||||||
|
|
|
| |||||
Total | $ | 17,623 | $ | 9,271 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension |
| Healthcare and Life |
| ||
|
| benefits |
| Insurance Benefits |
| ||
2018 |
| $ | 1,835 |
| $ | 702 |
|
2019 |
|
| 1,830 |
|
| 667 |
|
2020 |
|
| 1,804 |
|
| 675 |
|
2021 |
|
| 1,771 |
|
| 655 |
|
2022 |
|
| 1,768 |
|
| 649 |
|
2023 - 2027 |
|
| 8,457 |
|
| 3,250 |
|
(12)
(15) Accrued Mining and Landfill Reclamation
The Company has asset retirement obligations arising from regulatory or contractual requirements to perform certain reclamation activities at the time that certain quarries and landfills are closed, which are primarily included in other noncurrent liabilities on the consolidated balance sheets. The current portion of the liabilities, $2.0$3.9 million and $1.6$5.1 million as of January 2, 2016December 30, 2017 and December 27, 2014,31, 2016, respectively, is included in accrued and other liabilitiesexpenses on the consolidated balance sheets. The total undiscounted anticipated costs for site reclamation as of December 30, 2017 and December 31, 2016 were $67.9 million and $63.6 million, respectively. The liabilities were initially measured at fair value and are subsequently adjusted for accretion expense, payments and changes in the amount or timing of the estimated cash flows. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s remaining useful life. The following table presents the activity for the asset retirement obligations for the years ended January 2, 2016December 30, 2017 and December 27, 2014:
2015 | 2014 | |||||||
Beginning balance | $ | 18,310 | $ | 15,781 | ||||
Acquired obligations | 745 | 140 | ||||||
Change in cost estimate | 907 | 2,233 | ||||||
Settlement of reclamation obligations | (689 | ) | (1,178 | ) | ||||
Additional liabilities incurred | 60 | 463 | ||||||
Accretion expense | 1,402 | 871 | ||||||
|
|
|
| |||||
Ending balance | $ | 20,735 | $ | 18,310 | ||||
|
|
|
|
(13) Earnings Per Share
Immediately prior to the consummation of the Company’s IPO, the Company did not have outstanding common stock. In conjunction with the IPO, Summit Inc. sold 25,555,555 shares of Class A shares common stock to the public and issued 1,029,183 shares of Class A common stock in conjunction with the purchase of the noncontrolling interest of Continental Cement. In connection with the follow on offering on August 11, 2015, Summit Inc. sold 22,425,000 shares of Class A common stock to the public. In the fourth quarter of 2015, the Company issued a stock dividend of 735,108 shares of Class A common stock, as well as 1,098 shares as equity compensation, resulting in 49,745,944 shares of Class A common stock outstanding as of January 2, 2016. Excluded from the diluted earnings per share calculation are 2,287,763 outstanding stock options because their inclusion would be antidilutive.
The following table reconciles basic to diluted loss per share for the year ended January 2,31, 2016:
(in thousands, except per share amounts) | 2015 | |||
Net income attributable to Summit Inc. | $ | 27,718 | ||
|
| |||
Weighted average shares of Class A common stock outstanding | 38,231,689 | |||
|
| |||
Basic earnings per share | $ | 0.73 | ||
|
| |||
Net income attributable to Summit Inc. | 27,718 | |||
Add: Reduction of noncontrolling interest from LP Unit conversion | 17,803 | |||
|
| |||
Diluted net income attributable to Summit Inc. | 45,521 | |||
Weighted average shares of Class A common stock outstanding | 38,231,689 | |||
Add: weighted average of LP Units | 50,059,648 | |||
Add: warrants | 37,714 | |||
Add: restricted stock units | 7,523 | |||
|
| |||
Weighted average dilutive shares outstanding | 88,336,574 | |||
|
| |||
Diluted earnings per share | $ | 0.52 | ||
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| ||
Beginning balance |
| $ | 23,906 |
| $ | 20,735 |
|
Acquired obligations |
|
| 2,303 |
|
| 835 |
|
Change in cost estimate |
|
| (1,764) |
|
| 3,055 |
|
Settlement of reclamation obligations |
|
| (1,996) |
|
| (2,283) |
|
Accretion expense |
|
| 1,880 |
|
| 1,564 |
|
Ending balance |
| $ | 24,329 |
| $ | 23,906 |
|
To determine the weighted-average number of shares outstanding, the stock dividend is assumed to be outstanding for the entire period.
(14)
(16) Commitments and Contingencies
Litigation and Claims—
The Company is party to certain legal actions arising from the ordinary course of business activities. InAccruals are recorded when the opinion of management, these actions are without merit oroutcome is probable and can be reasonably estimated. While the ultimate disposition resulting from themresults of claims and litigation cannot be predicted with certainty, management expects that the ultimate resolution of all pending or threatened claims and litigation will not have a material effect on the Company’s financial condition,consolidated results of operations, financial position or liquidity. The Company records legal fees as incurred.
Litigation and Claims—The Company is obligated under an indemnification agreement entered into with the sellers of Harper Contracting, Inc., Harper Sand and Gravel, Inc., Harper Excavating, Inc., Harper Ready Mix Company, Inc. and Harper Investments, Inc. (collectively, “Harper”) for the sellers’ ownership interests in a joint venture agreement. The Company has the rights to any benefits under the joint venture as well as the assumption of any obligations, but does not own equity interests in the joint venture. The joint venture has incurred significant losses on a highway project in Utah, which have resulted in requests for funding from the joint venture partners and ultimately from the Company. Through year-end 2015,In the third quarter of 2017, the Company has funded $8.8 million, $4.0 million in 2012 and $4.8 million in 2011. In 2012 and 2011, the Company recognized losses onsettled its remaining obligations under the indemnification agreement of $8.0for $3.5 million, and $1.9which was $0.8 million respectively. As of year-end 2015 and 2014, an accrual of $4.3 million was recorded in other noncurrent liabilities as management’s best estimate of future funding obligations.less than amounts previously accrued.
Environmental Remediation— and Site Restoration—The Company’s operations are subject to and affected by federal, state, provincial and local laws and regulations relating to the environment, health and safety and other regulatory matters. These operations require environmental operating permits, which are subject to modification, renewal and revocation. The Company regularly monitors and reviews its operations, procedures and policies for compliance with these laws and regulations. Despite these compliance efforts, risk of environmental liability is inherent in the operation of the Company’s business, as it is with other companies engaged in similar businesses and there can be no assurance that environmental liabilities or noncompliance will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.
Other—During the course
106
Other—The Company is obligated under various firm purchase commitments for certain raw materials and services that are in the ordinary course of business. Management does not expect any significant changes in the market value of these goods and services during the commitment period that would have a material adverse effect on the financial condition, results of operations and cash flows of the Company. The terms of the purchase commitments generally approximate one year.
(15)
(17) Leasing Arrangements
Rent expense, which primarily relates to land, plants and equipment, during the years ended December 30, 2017, December 31, 2016 and January 2, 2016 was $21.7 million, $18.6 million and $12.1 million, respectively. The Company has lease agreements associated with quarry facilities under which royalty payments are made. The payments are generally based on tons sold in a particular period; however, certain agreements have minimum annual payments. Royalty expense recorded in cost of revenue during the years ended December 30, 2017, December 31, 2016 and January 2, 2016 was $18.7 million, $15.6 million and $12.6 million, respectively. Minimum contractual commitments for the subsequent five years under long-term operating leases and under royalty agreements are as follows:
|
|
|
|
|
|
|
|
|
| Operating |
| Royalty |
| ||
|
| Leases |
| Agreements |
| ||
2018 |
| $ | 8,627 |
| $ | 6,450 |
|
2019 |
|
| 7,077 |
|
| 6,017 |
|
2020 |
|
| 5,826 |
|
| 5,833 |
|
2021 |
|
| 4,650 |
|
| 5,550 |
|
2022 |
|
| 2,475 |
|
| 5,431 |
|
(18) Related Party Transactions
Under the terms of a transaction and management fee agreement between Summit Holdings and Blackstone Management Partners L.L.C. (“BMP”), whose affiliates include controlling stockholders of the Company, BMP provided monitoring, advisory and consulting services to the Company through March 17, 2015. Under the terms of the agreement, BMP was permitted to assign, and had assigned, a portion of the fees to which it was entitled to Silverhawk Summit, L.P. and to certain other equity investors.
The management fee was calculated based on the greater of $300,000 or 2.0% of the Company’s annual consolidated profit, as defined in the agreement, and is included in general and administrative expenses. The Company incurred management fees totaling $1.0 million during the period between December 28, 2014 and March 17, 2015 and $4.4 million and $2.6 million in the years ended December 27, 2014 and December 28, 2013, respectively. During these periods, the Company paid immaterial amounts to Silverhawk Summit, L.P. and to other equity investors.
Also under the terms of the transaction and management fee agreement, BMP undertook financial and structural analysis, due diligence investigations, corporate strategy and other advisory services and negotiation assistance related to acquisitions for which the Company paid BMP transaction fees equal to 1.0% of the aggregate enterprise value of any acquired entity or, if such transaction was structured as an asset purchase or sale, 1.0% of the consideration paid for or received in respect of the assets acquired or disposed. The Company paid BMP $3.9 million during the year ended December 27, 2014 and immaterial amounts in 2013. During these periods, the Company paid immaterial amounts to Silverhawk Summit, L.P. and to other equity investors. The acquisition-related fees paid pursuant to this agreement are included in transaction costs.
In connection with the IPO, the transaction and management fee agreement with BMP was terminated on March 17, 2015 for a finaltermination payment of $13.8 million; $13.4 million was paid to affiliates of BMP and the remaining $0.4 million was paid to affiliates of Silverhawk Summit, L.P. and to certain other equity investors.
In addition to the transaction and management fees paid to BMP, the Company reimburses BMP for direct expenses incurred, which were not material in the years ended January 2, 2016, December 27, 2014 and December 28, 2013.
Blackstone Advisory Partners L.P., an affiliate of BMP, served as an initial purchaser of $18.8 million of the 2022 Notes issued in March 2016 and $22.5 million and $26.3 million of the 2023 Notes issued in November 2015 and July 2015, respectively and $5.75 million and $13.0 million principal amount of the 2020 Notes issued in September 2014 and January 2014, respectively, and received compensation in connection therewith. In addition, Blackstone Advisory Partners L.P. served as an underwriter of 1,681,875 shares of Class A common stock issued in connection with the August 2015 follow-on offering and received compensation in connection therewith.
On July 17, 2015, the Company purchased the Davenport Assets from Lafarge North America Inc. for a purchase price of $450.0 million in cash and a cement distribution terminal in Bettendorf, Iowa. At closing, $370.0 million of the purchase price was paid, and the remaining $80.0 million was paid on August 13, 2015. Summit Holdings entered into a commitment letter dated April 16, 2015, with Blackstone Capital Partners V L.P. (“BCP”) for equity financing up to $90.0 million in the form of a preferred equity interest (the “Equity Commitment Financing”), which would have been used to pay the $80.0 million deferred purchase price if other financing was not attainedsecured by December 31, 2015. For the Equity Commitment Financing, the Company paid a $1.8 million commitment fee to BCP for the year ended January 2, 2016.
(19) Fair Value of Financial Instruments
Cement sales
Fair Value Measurements—Certain acquisitions made by the Company require the payment of contingent amounts of purchase consideration. These payments are contingent on specified operating results being achieved in periods subsequent to companies owned by certain noncontrolling membersthe acquisition and will only be made if earn-out thresholds are achieved. Contingent consideration
107
obligations are measured at fair value each reporting period. Any adjustments to fair value are recognized in earnings in the period between December 28, 2014identified.
The Company has entered into interest rate derivatives on $200.0 million of its term loan borrowings to add stability to interest expense and March 17, 2015to manage its exposure to interest rate movements. The interest rate derivative expires in September 2019. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and will be subsequently reclassified into earnings in the years ended December 27, 2014period that the hedged forecasted transaction affects earnings. The fair value of contingent consideration and December 28, 2013, respectively, and accounts receivable due from these parties were approximately $1.2 millionderivatives as of December 27, 2014.30, 2017 and December 31, 2016 was:
In
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
Current portion of acquisition-related liabilities and Accrued expenses: |
|
|
|
|
|
|
Contingent consideration |
| $ | 594 |
| $ | 9,288 |
Cash flow hedges |
|
| 488 |
|
| 942 |
Acquisition-related liabilities and Other noncurrent liabilities |
|
|
|
|
|
|
Contingent consideration |
| $ | 34,301 |
| $ | 2,377 |
Cash flow hedges |
|
| 492 |
|
| 1,438 |
The fair value accounting guidance establishes the year ended December 27, 2014,following fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1 — Unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 — Inputs other than Level 1 that are based on observable market data, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs that are observable that are not prices and inputs that are derived from or corroborated by observable markets.
Level 3 — Valuations developed from unobservable data, reflecting the Company’s own assumptions, which market participants would use in pricing the asset or liability.
The fair value of contingent consideration was based on unobservable, or Level 3, inputs, including projected probability-weighted cash payments and an 11.0% discount rate, which reflects a market discount rate. Changes in fair value may occur as a result of a change in actual or projected cash payments, the probability weightings applied by the Company soldto projected payments or a change in the discount rate. Significant increases or decreases in any of these inputs in isolation could result in a lower, or higher, fair value measurement. The fair value of the cash flow hedges are based on observable, or Level 2, inputs such as interest rates, bond yields and prices in inactive markets. There were no material adjustments to the fair value of contingent consideration in 2017 or 2016, or to cash flow hedges in 2017 or 2016. In 2016, a $6.1 million increase in the fair value of contingent consideration was recognized as a result of a change in projected cash payments.
Financial Instruments—The Company’s financial instruments include debt and certain assets associated with the production of concrete blocks, including inventory and equipment, to a related party for $2.3 million.
(16) Acquisition-Related Liabilities
A number of acquisition-related liabilities have been recorded subject to terms in the relevant purchase agreements, including deferred(deferred consideration and noncompete payments. Noncompete payments have been accrued where certain former ownersobligations). The carrying value and fair value of newly acquired companies have entered into standard noncompete arrangements. Subject to termsthese financial instruments as of December 30, 2017 and conditions stated in these noncompete agreements, payments are generally made over a five-year period. Deferred consideration is purchase price consideration paid in the future as agreed to in the purchase agreement and is not contingent on future events. Deferred consideration is scheduled to be paid in years ranging from 5 to 20 years in either monthly, quarterly or annual installments. The remaining payments due under these noncompete and deferred consideration agreements are as follows:December 31, 2016 were:
2016 | 15,740 | |||
2017 | 12,700 | |||
2018 | 12,160 | |||
2019 | 7,695 | |||
2020 | 7,228 | |||
Thereafter | 14,041 | |||
|
| |||
Total scheduled payments | 69,564 | |||
Present value adjustments | (16,396 | ) | ||
|
| |||
Total noncompete obligations and deferred consideration | $ | 53,168 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 30, 2017 |
| December 31, 2016 | ||||||||
|
| Fair Value |
| Carrying Value |
| Fair Value |
| Carrying Value | ||||
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(1) |
| $ | 1,893,239 |
| $ | 1,832,455 |
| $ | 1,586,102 |
| $ | 1,536,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred consideration and noncompete obligations(2) |
|
| 13,493 |
|
| 13,493 |
|
| 14,874 |
|
| 14,874 |
Long term portion of deferred consideration and noncompete obligations(3) |
|
| 23,834 |
|
| 23,834 |
|
| 30,287 |
|
| 30,287 |
(1) | $4.8 million and $6.5 million included in current portion of debt as of December 30, 2017 and December 31, 2016, respectively. |
Accretion
108
(2) | Included in current portion of acquisition-related liabilities on the consolidated balance sheets. |
(3) | Included in acquisition-related liabilities on the consolidated balance sheets. |
The fair value of debt was determined based on observable, or Level 2 inputs, such as interest rates, bond yields and quoted prices in inactive markets. The fair values of the deferred consideration and noncompete obligations is recorded in interest expense.
(17) Supplemental Cash Flow Information
Supplemental cash flow information for the years ended January 2, 2016, December 27, 2014 and December 28, 2013 was as follows:
2015 | 2014 | 2013 | ||||||||||
Cash payments: | ||||||||||||
Interest | $ | 89,102 | $ | 64,097 | $ | 52,001 | ||||||
Income taxes | 1,685 | 1,361 | 4,567 | |||||||||
Non cash financing activities: | ||||||||||||
Purchase of noncontrolling interest in Continental Cement | $ | (29,102 | ) | $ | — | $ | — | |||||
Stock Dividend | (16,847 | ) | — | — |
(18) Leasing Arrangements
Rent expense, which primarily relate to land, plant and equipment, during the years ended January 2, 2016, December 27, 2014 and December 28, 2013 was $12.1 million, $5.5 million and $4.0 million, respectively. The Company has lease agreements associated with quarry facilities under which royalty payments are made. The
payments are generally based on tons sold in a particular period; however, certain agreements have minimum annual payments. Royalty expense recorded in cost of revenue during the years ended January 2, 2016, December 27, 2014 and December 28, 2013 was $12.6 million, $9.0 million and $4.5 million, respectively. Minimum contractual commitments for the subsequent five years under long-term operating leases and under royalty agreements are as follows:
Operating Leases | Royalty Agreements | |||||||
2016 | $ | 6,280 | $ | 3,963 | ||||
2017 | 5,050 | 4,828 | ||||||
2018 | 3,609 | 4,438 | ||||||
2019 | 2,915 | 4,085 | ||||||
2020 | 2,031 | 3,871 |
(19) Redeemable Noncontrolling Interest
On March 17, 2015, upon the consummation of the IPO and the transactions contemplated by a contribution and purchase agreement entered into with the holders of all of the outstanding Class B Units of Continental Cement, Continental Cement became a wholly-owned indirect subsidiary of the Company. The noncontrolling interests of Continental Cement were acquired for aggregate consideration of $64.1 million, consisting of $35.0 million of cash, 1,029,183 shares of Summit Inc.’s Class A common stock and $15.0 million aggregate principal amount of non-interest bearing notes payable in six annual installments of $2.5 million, beginning on March 17, 2016.
Prior to the March 17, 2015 purchase of the noncontrolling interest, the Company owned 100 Class A Units of Continental Cement, which represented an approximately 70% economic interest and had a preference in liquidation to the Class B Units. Continental Cement issued 100,000,000 Class B Units in May 2010, which remained outstanding until March 17, 2015 and represented an approximately 30% economic interest.
(20) Employee Long Term Incentive Plan
In connection with the IPO in March 2015, the limited partnership agreement of Summit Holdings was amended and restated to, among other things, modify its capital structure by creating the LP Units. Immediately following the Reclassification, 69,007,297 LP Units were outstanding, which were reclassified from the previously issued Class A-1, Class B-1, Class C, Class D-1 and Class D-2 units. The Class A-1, Class B-1 and Class C units were fully vested as of the Reclassification date. A portion, but not all, of the Class D-1 and D-2 units were vested. As of their respective grant date, approximately half of the Class D-1 units were subject to a vesting period of five years (“time-vesting interests”), 20% on the first anniversary of the grant date and the remaining 80% vested monthly over a period of four years following the first anniversary date. Approximately half of the D-1 units and all of the D-2 units vested upon Summit Holdings’ investors achieving certain investment returns (“performance-vesting interests”). The fair value of the time-vesting Class D units granted in 2014 and 2013 totaled $0.6 million and $1.6 million, respectively. The weighted-average grant-date fair value in 2014 and 2013 was $1,368, and $2,786, respectively.
As of the Reclassification date, there were 2,098,421 LP Units issued consistent with the original terms of the time-vesting interests, of which 575,256 were not fully vested, and 2,425,361 LP Units issued consistent with the original terms of the performance-vesting interests.
In addition, in substitution for part of the economic benefit of the Class C and Class D interests that was not reflected in the conversion of such interests to LP Units, warrants were issued to holders of Class C interests to purchase an aggregate of 160,333 shares of Class A common stock, and options were issued to holders of Class D interests to purchase an aggregate of 4,358,842 shares of Class A common stock (“leverage restoration options”). The exercise price of the warrants and leverage restoration options is the IPO price of $18.00 per share. In conjunction with the Reclassification of the equity-based awards, the Company recognized a $14.5 million modification charge in general and administrative costs.
The leverage restoration options were granted under the Summit Materials, Inc. 2015 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) and vest over four years at a rate of 25% of the award on each of the first four anniversaries, subject to the employee’s continued employment through the applicable vesting date, beginning on the Reclassification date. The leverage restoration options that correlate to performance-vesting interests vest only when both the relevant return multiple is achieved and the four year time-vesting condition is satisfied.
In conjunction with the IPO, the Company also granted 240,000 options to purchase shares of Class A common stock under the Omnibus Incentive Plan to certain employees some of whom had not previously been granted equity-based interests. These stock options have an exercise price of $18.00 per share and vest over four years at a rate of 25% of the award on each of the first four anniversaries, subject to the employee’s continued employment through the applicable vesting date, beginning on the Reclassification date.
In addition, 10,000 restricted stock units were granted in 2015, which vest over four years at a rate of 25% of the award on each of the first four anniversaries, subject to the employee’s continued employment through the applicable vesting date. The fair value of restricted stock units is determined based on unobservable, or Level 3, inputs, including the closing stock price of Summit Inc.’s Class A common shares oncash payment terms in the date of grant.
purchase agreements and a discount rate reflecting the Company’s credit risk. The outstanding warrants, restricted stock units and options granted have a ten year contractual term at which point any unexercised awards are cancelled. As of January 2, 2016, 4,550,061 awards have been granted underdiscount rate used is generally consistent with that used when the Omnibus Incentive Plan of the 13,500,000 shares of Class A common stock authorized for issuance. The following table summarizes information for the equity awards granted in 2015:obligations were initially recorded.
LP Units | Warrants | |||||||||||||||
Number of units | Weighted average fair value per unit | Number of warrants | Weighted average grant- date fair value per unit | |||||||||||||
Beginning balance—December 27, 2014 | — | $ | — | — | $ | — | ||||||||||
LP Unit Reclassification (1) | 1,523,165 | 18.00 | — | — | ||||||||||||
Granted | — | — | 160,333 | 18.00 | ||||||||||||
Vested | 253,829 | 18.00 | — | — | ||||||||||||
Forfeited | (22,644 | ) | 18.00 | — | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance—January 2, 2016 | 1,754,350 | $ | 18.00 | 160,333 | $ | 18.00 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
LP Units exercisable | 1,754,350 | 20.04 |
Options | Restricted Stock Units | |||||||||||||||
Number of options | Weighted average grant- date fair value per unit | Number of restricted stock units | Weighted average grant- date fair value per unit | |||||||||||||
Beginning balance—December 27, 2014 | — | $ | — | — | $ | — | ||||||||||
Granted | 2,300,314 | 9.00 | 10,000 | 23.79 | ||||||||||||
Forfeited | (34,730 | ) | 8.95 | — | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance—January 2, 2016 | 2,265,584 | $ | 9.00 | 10,000 | $ | 23.79 | ||||||||||
|
|
|
|
|
|
|
|
The fair valueSecurities with a maturity of the time-vesting options granted in 2015 was estimated as of the grant date using the Black-Scholes-Merton model, which requires the input of subjective assumptions, including the expected volatilitythree months or less are considered cash equivalents and the expected term. The fair value of the Class D units granted in 2014 and 2013 was estimated as of the grant date using Monte Carlo simulations, which requires the input of subjective assumptions, including the expected
volatility and the expected term. The following table presents the weighted average assumptions used to estimate the fair value of grants in 2015, 2014 and 2013:these assets approximates their carrying value.
2015 | 2014 | 2013 | ||||||||||
Class D Units | ||||||||||||
Risk-free interest rate | 1.68% - 1.92 | % | 0.50% - 0.68 | % | 0.50 | % | ||||||
Dividend yield | None | None | None | |||||||||
Volatility | 50 | % | 58 | % | 58 | % | ||||||
Expected term | 7 - 10 years | 3 - 4 years | 4 years |
The risk-free rate is based on the yield at the date of grant of a U.S. Treasury security with a maturity period approximating the expected term. As Summit Holdings has not historically and does not plan to issue regular dividends, a dividend yield of zero was used. The volatility assumption is based on reported data of a peer group of publically traded companies for which historical information was available adjusted for the Company’s capital structure. The expected term is based on expectations about future exercises and represents the period of time that the units granted are expected to be outstanding.
Compensation expense for time-vesting interests granted is based on the grant date fair value. The Company recognizes compensation costs on a straight-line basis over the service period, which is generally the vesting period of the award. A forfeiture rate assumption is factored into the compensation cost based on historical forfeitures. Compensation expense for performance-vesting interests would be recognized based on the grant date fair value. However, no compensation expense has been recognized for the performance-vesting interests, as management does not believe it is currently probable that certain investment returns, the performance criteria, will be achieved.
Share-based compensation expense, which is recognized in general and administrative expenses, totaled $19.9 million, $2.2 million and $2.3 million in the years ended January 2, 2016, December 27, 2014 and December 28, 2013, respectively. As of January 2, 2016, unrecognized compensation cost totaled $12.3 million. The weighted average remaining contractual term over which the unrecognized compensation cost is to be recognized is 3.1 years as of year-end 2015.
(21)(20) Segment Information
The Company has three operating segments: the West; East; and Cement, segments, which are its reportablereporting segments. These segments are consistent with the Company’s management reporting structure. In the fourth quarter of 2015, we reorganized the operations and management reporting structure of our cement business and East segment operations, resulting in a change to our reportable business segments. We now conduct our cement business separate from our regional segments. As a result, the cement business is a reportable business segment. In addition, we have combined the materials-based businesses centered in Kansas and Missouri with the Kentucky-based operations, creating an expanded East segment and eliminating what was the Central region. These changes did not affect the West segment. Amounts in prior periods have been revised to reflect the current reporting structure.
The operating results of each segment are regularly reviewed and evaluated by the Chief Executive Officer, the Company’s Chief Operating Decision Maker (“CODM”). The CODM primarily evaluates the performance of its segments and allocates resources to them based on a segment profit metric that we call Adjusted EBITDA, which is computed as earnings from continuing operations before interest, taxes, depreciation, depletion, amortization, accretion, goodwill impairment, management fees,share-based compensation, and transaction costs, as well as various other non-recurring, non-cash amounts.
The West and East segments have several acquired subsidiaries that are engaged in various activities including quarry mining, aggregate production and contracting. The Cement segment is engaged in the production of Portland cement. Assets employed by each segment include assets directly identified with those operations. Corporate assets consist primarily of cash, property, plant and equipment for corporate operations and other assets not directly identifiable with a reportable business segment. The accounting policies applicable to each segment are consistent with those used in the consolidated financial statements.
The following tables display selected financial data for the Company’s reportable business segments as of and for the years ended December 30, 2017, December 31, 2016 and January 2, 2016, December 27, 2014 and December 28, 2013:2016:
|
|
|
|
|
|
|
|
| |||||||||||||
2015 | 2014 | 2013 |
| 2017 |
| 2016 |
| 2015 | |||||||||||||
Revenue: | |||||||||||||||||||||
Revenue*: |
|
|
|
|
|
|
|
|
| ||||||||||||
West | $ | 804,503 | $ | 665,716 | $ | 426,195 |
| $ | 998,843 |
| $ | 813,682 |
| $ | 804,503 | ||||||
East | 432,310 | 432,942 | 398,302 |
|
| 629,919 |
|
| 531,294 |
|
| 432,310 | |||||||||
Cement | 195,484 | 105,573 | 91,704 |
|
| 303,813 |
|
| 281,087 |
|
| 195,484 | |||||||||
|
|
| |||||||||||||||||||
Total revenue | $ | 1,432,297 | $ | 1,204,231 | $ | 916,201 |
| $ | 1,932,575 |
| $ | 1,626,063 |
| $ | 1,432,297 | ||||||
|
|
|
* Intercompany sales are immaterial and the presentation above only reflects sales to external customers.
2015 | 2014 | 2013 | ||||||||||
Adjusted EBITDA | ||||||||||||
West | $ | 150,764 | $ | 102,272 | $ | 42,300 | ||||||
East | 92,303 | 73,822 | 67,146 | |||||||||
Cement | 74,845 | 35,133 | 36,647 | |||||||||
Corporate and other | (30,384 | ) | (22,194 | ) | (16,046 | ) | ||||||
|
|
|
|
|
| |||||||
Total reportable segments and corporate | 287,528 | 189,033 | 130,047 | |||||||||
Interest expense | 84,629 | 86,742 | 56,443 | |||||||||
Depreciation, depletion and amortization | 118,321 | 86,955 | 72,217 | |||||||||
Accretion | 1,402 | 871 | 717 | |||||||||
Initial public offering costs | 28,296 | — | — | |||||||||
Loss on debt financings | 71,631 | — | 3,115 | |||||||||
Goodwill impairment | — | — | 68,202 | |||||||||
Acquisition transaction expenses | 9,519 | 8,554 | 3,990 | |||||||||
Management fees and expenses | 1,046 | 4,933 | 2,620 | |||||||||
Non-cash compensation | 5,448 | 2,235 | 2,315 | |||||||||
(Gain) loss on disposal and impairment of assets | (16,561 | ) | 8,735 | 12,419 | ||||||||
Other | 2,991 | 3,344 | 13,807 | |||||||||
|
|
|
|
|
| |||||||
Loss from continuing operations before taxes | $ | (19,194 | ) | $ | (13,336 | ) | $ | (105,798 | ) | |||
|
|
|
|
|
|
109
2015 | 2014 | 2013 | ||||||||||
Cash paid for capital expenditures: | ||||||||||||
West | $ | 39,896 | $ | 31,968 | $ | 21,856 | ||||||
East | 26,268 | 23,702 | 15,189 | |||||||||
Cement | 17,151 | 15,959 | 25,594 | |||||||||
|
|
|
|
|
| |||||||
Total reportable segments | 83,315 | 71,629 | 62,639 | |||||||||
Corporate and other | 5,635 | 4,533 | 3,360 | |||||||||
|
|
|
|
|
| |||||||
Total capital expenditures | $ | 88,950 | $ | 76,162 | $ | 65,999 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
(Loss) income from continuing operations before taxes |
| $ | (158,200) |
| $ | 40,827 |
| $ | (19,194) |
Interest expense |
|
| 108,549 |
|
| 97,536 |
|
| 84,629 |
Depreciation, depletion and amortization |
|
| 177,643 |
|
| 147,736 |
|
| 118,321 |
Accretion |
|
| 1,875 |
|
| 1,564 |
|
| 1,402 |
IPO/ Legacy equity modification costs |
|
| — |
|
| 37,257 |
|
| 28,296 |
Loss on debt financings |
|
| 4,815 |
|
| — |
|
| 71,631 |
Tax receivable agreement expense |
|
| 271,016 |
|
| 14,938 |
|
| — |
Transaction costs |
|
| 7,733 |
|
| 6,797 |
|
| 9,519 |
Management fees and expenses |
|
| — |
|
| (1,379) |
|
| 1,046 |
Non-cash compensation |
|
| 21,140 |
|
| 12,683 |
|
| 5,448 |
Other |
|
| 1,206 |
|
| 13,388 |
|
| (13,570) |
Total Adjusted EBITDA |
| $ | 435,777 |
| $ | 371,347 |
| $ | 287,528 |
|
|
|
|
|
|
|
|
|
|
Total Adjusted EBITDA by Segment: |
|
|
|
|
|
|
|
|
|
West |
| $ | 203,590 |
| $ | 167,434 |
| $ | 150,764 |
East |
|
| 139,108 |
|
| 126,007 |
|
| 92,303 |
Cement |
|
| 127,547 |
|
| 112,991 |
|
| 74,845 |
Corporate and other |
|
| (34,468) |
|
| (35,085) |
|
| (30,384) |
Total Adjusted EBITDA |
| $ | 435,777 |
| $ | 371,347 |
| $ | 287,528 |
2015 | 2014 | 2013 | ||||||||||
Depreciation, depletion, amortization and accretion: | ||||||||||||
West | $ | 53,727 | $ | 33,271 | $ | 24,167 | ||||||
East | 38,923 | 38,035 | 36,489 | |||||||||
Cement | 24,758 | 15,052 | 11,812 | |||||||||
|
|
|
|
|
| |||||||
Total reportable segments | 117,408 | 86,358 | 72,468 | |||||||||
Corporate and other | 2,315 | 1,468 | 466 | |||||||||
|
|
|
|
|
| |||||||
Total depreciation, depletion, amortization and accretion | $ | 119,723 | $ | 87,826 | $ | 72,934 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
2015 | 2014 | 2013 |
| 2017 |
| 2016 |
| 2015 | |||||||||||||
Total assets: | |||||||||||||||||||||
Purchases of property, plant and equipment |
|
|
|
|
|
|
|
|
| ||||||||||||
West | $ | 821,479 | $ | 771,234 | $ | 376,190 |
| $ | 83,591 |
| $ | 77,335 |
| $ | 39,896 | ||||||
East | 545,187 | 553,843 | 482,380 |
|
| 68,556 |
|
| 45,492 |
|
| 26,268 | |||||||||
Cement | 843,941 | 364,351 | 361,079 |
|
| 35,803 |
|
| 25,408 |
|
| 17,151 | |||||||||
|
|
| |||||||||||||||||||
Total reportable segments | 2,210,607 | 1,689,428 | 1,219,649 |
|
| 187,950 |
|
| 148,235 |
|
| 83,315 | |||||||||
Corporate and other | 185,572 | 23,225 | 18,031 |
|
| 6,196 |
|
| 5,248 |
|
| 5,635 | |||||||||
|
|
| |||||||||||||||||||
Total | $ | 2,396,179 | $ | 1,712,653 | $ | 1,237,680 | |||||||||||||||
|
|
| |||||||||||||||||||
Total purchases of property, plant and equipment |
| $ | 194,146 |
| $ | 153,483 |
| $ | 88,950 |
2015 | 2014 | 2013 | ||||||||||
Revenue by product:* | ||||||||||||
Aggregates | $ | 296,960 | $ | 227,885 | $ | 159,508 | ||||||
Cement | 181,901 | 94,402 | 80,757 | |||||||||
Ready-mixed concrete | 350,554 | 274,970 | 112,878 | |||||||||
Asphalt | 292,193 | 278,867 | 220,060 | |||||||||
Paving and related services | 504,459 | 530,297 | 478,280 | |||||||||
Other | (193,770 | ) | (202,190 | ) | (135,282 | ) | ||||||
|
|
|
|
|
| |||||||
Total revenue | $ | 1,432,297 | $ | 1,204,231 | $ | 916,201 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
Depreciation, depletion, amortization and accretion: |
|
|
|
|
|
|
|
|
|
West |
| $ | 71,314 |
| $ | 65,345 |
| $ | 53,727 |
East |
|
| 67,252 |
|
| 51,540 |
|
| 38,923 |
Cement |
|
| 38,351 |
|
| 30,006 |
|
| 24,758 |
Total reportable segments |
|
| 176,917 |
|
| 146,891 |
|
| 117,408 |
Corporate and other |
|
| 2,601 |
|
| 2,409 |
|
| 2,315 |
Total depreciation, depletion, amortization and accretion |
| $ | 179,518 |
| $ | 149,300 |
| $ | 119,723 |
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
Total assets: |
|
|
|
|
|
|
|
|
|
West |
| $ | 1,225,463 |
| $ | 902,763 |
| $ | 821,479 |
East |
|
| 1,035,609 |
|
| 870,613 |
|
| 545,187 |
Cement |
|
| 870,652 |
|
| 868,440 |
|
| 843,941 |
Total reportable segments |
|
| 3,131,724 |
|
| 2,641,816 |
|
| 2,210,607 |
Corporate and other |
|
| 655,609 |
|
| 139,650 |
|
| 185,572 |
Total |
| $ | 3,787,333 |
| $ | 2,781,466 |
| $ | 2,396,179 |
(22)
110
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
Revenue by product*: |
|
|
|
|
|
|
|
|
|
Aggregates |
| $ | 313,383 |
| $ | 264,609 |
| $ | 219,040 |
Cement |
|
| 282,041 |
|
| 250,349 |
|
| 167,696 |
Ready-mix concrete |
|
| 492,302 |
|
| 395,917 |
|
| 350,262 |
Asphalt |
|
| 285,653 |
|
| 239,419 |
|
| 252,031 |
Paving and related services |
|
| 371,763 |
|
| 304,041 |
|
| 295,995 |
Other |
|
| 187,433 |
|
| 171,728 |
|
| 147,273 |
Total revenue |
| $ | 1,932,575 |
| $ | 1,626,063 |
| $ | 1,432,297 |
* Revenue from the liquid asphalt terminals is included in asphalt revenue.
(21) Supplementary Data (Unaudited)
Supplemental financial information (unaudited) by quarter is as followsshown below for the years ended January 2, 2016December 30, 2017 and December 27, 2014:31, 2016. The basic and diluted earnings per share amounts for each period shown reflect retroactive application of 1,521,056 and 1,135,962 shares of Class A common stock issued as stock dividends in 2017 and 2016, respectively.
2015 | 2014 | |||||||||||||||||||||||||||||||
4Q | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | |||||||||||||||||||||||||
Net revenue | $ | 359,532 | $ | 426,286 | $ | 329,009 | $ | 175,139 | $ | 294,040 | $ | 348,136 | $ | 292,410 | $ | 136,019 | ||||||||||||||||
Operating income (loss) | 67,990 | 83,357 | 42,300 | (59,006 | ) | 23,307 | 47,749 | 33,922 | (35,019 | ) | ||||||||||||||||||||||
Income (loss) from continuing operations | 45,816 | 33,815 | (725 | ) | (79,837 | ) | 4,753 | 28,110 | 13,832 | (53,048 | ) | |||||||||||||||||||||
Net income (loss) | 47,416 | 33,872 | 33 | (79,837 | ) | 285 | (7 | ) | (369 | ) | 20 | |||||||||||||||||||||
Net income (loss) attributable to Summit Inc. | 23,363 | 14,711 | (205 | ) | (10,151 | ) | ||||||||||||||||||||||||||
Basic earnings per share attributable to Summit Inc. | 0.47 | 0.38 | (0.01 | ) | (0.37 | ) | ||||||||||||||||||||||||||
Diluted earnings per share attributable to Summit Inc. | 0.47 | 0.38 | (0.01 | ) | (0.37 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| ||||||||||||||||||||
|
| 4Q |
| 3Q |
| 2Q |
| 1Q |
| 4Q |
| 3Q |
| 2Q |
| 1Q |
| ||||||||
Net revenue |
| $ | 440,610 |
| $ | 574,387 |
| $ | 478,368 |
| $ | 259,044 |
| $ | 387,389 |
| $ | 480,210 |
| $ | 412,636 |
| $ | 208,039 |
|
Operating income (loss) |
|
| 57,306 |
|
| 113,911 |
|
| 82,444 |
|
| (32,784) |
|
| 48,761 |
|
| 88,410 |
|
| 46,948 |
|
| (29,457) |
|
Net income (loss) (1) |
|
| 44,510 |
|
| 84,287 |
|
| 52,088 |
|
| (55,108) |
|
| 6,049 |
|
| 61,106 |
|
| 21,505 |
|
| (42,534) |
|
Net income (loss) attributable to Summit Inc. (1) |
|
| 43,010 |
|
| 81,264 |
|
| 50,000 |
|
| (52,444) |
|
| (290) |
|
| 44,820 |
|
| 13,371 |
|
| (21,118) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to Summit Inc. (1) |
| $ | 0.39 |
| $ | 0.74 |
| $ | 0.46 |
| $ | (0.49) |
| $ | (0.00) |
| $ | 0.59 |
| $ | 0.21 |
| $ | (0.40) |
|
Diluted earnings per share attributable to Summit Inc. (1) |
|
| 0.38 |
|
| 0.73 |
|
| 0.46 |
|
| (0.49) |
|
| (0.00) |
|
| 0.59 |
|
| 0.20 |
|
| (0.40) |
|
(1) | The third quarter of 2017 amounts are revised from prior disclosed amounts due to adjustments identified during the fourth quarter of 2017. |
(23) Subsequent Events
In February 2016, the Company acquired American Materials Company, an aggregates company headquartered in Wilmington, NC. The acquisition expanded the Company’s geographic reach into the consolidated, high-growth coastal North and South Carolina markets through five strategically positioned sand and gravel operation.
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SUMMIT MATERIALS, LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements and notes thereto for Summit Materials, LLC and subsidiaries are included as Exhibit 99.1 to this Annual Report on Form 10-K and are incorporated by reference herein.
None.
ITEM 9A.CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Summit Inc.
Summit Inc. maintainsand Summit LLC maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in Summit Inc.’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Summit Inc.’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Summit Inc.’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Summit Inc.’s disclosure controls and procedures as of January 2, 2016. Based upon that evaluation, Summit Inc.’s Chief Executive Officer and Chief Financial Officer concluded that, as of January 2, 2016, Summit Inc.’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Summit LLC
Summit LLC maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in Summit LLC’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Summit LLC’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Summit Inc.’s and Summit LLC’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Summit LLC’sInc.’s disclosure controls and procedures as of January 2, 2016.December 30, 2017. Based upon that evaluation, Summit Inc.’s and Summit LLC’s Chief Executive Officer and Chief Financial Officer concluded that, as of January 2, 2016,December 30, 2017, Summit Inc.’s and Summit LLC’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
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Management’s Report on Internal Control Over Financial Reporting
Summit Inc.
This annual report does not include a reportThe Stockholders of Summit Materials, Inc.’s management’s assessment regarding internal control over financial reporting or an attestation report:
The management of Summit Materials, Inc.’s registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.
and Summit Materials, LLC
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term isand for its assessment of the effectiveness of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for Summit LLC. InternalAct. Our internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and disposition of assets; providingsystem was designed to provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations ofto our management and directors;board of directors regarding the preparation and providing reasonable assurance regarding prevention or timely detectionfair presentation of unauthorized acquisition, use or disposition of our assets that could have a material effect on ourpublished financial statements.
Because of its inherent limitations, internal control over financial reporting ismay not intendedprevent or detect misstatements. Also, projections of any evaluation of effectiveness to provide absolute assurancefuture periods are subject to the risk that a misstatementcontrols may become inadequate because of our financial statements would be preventedchanges in conditions, or detected.that the degree of compliance with the policies or procedures may deteriorate.
With the participation of Summit LLC’s Chief Executive Officer and Chief Financial Officer,
Our management conducted an evaluation ofevaluated the effectiveness of our internal control over financial reporting as of January 2, 2016 based onDecember 30, 2017. In making this evaluation, we used the framework in Internal Control—Integrated Framework (2013) issuedcriteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO) in Internal Control – Integrated Framework (2013). Based on thisour evaluation management, under the supervisionwe believe that, as of Summit LLC’s Chief Executive Officer and Chief Financial Officer, concluded thatDecember 30, 2017 our internal control over financial reporting wasis effective asbased on those criteria.
KPMG LLP has issued an audit report on the effectiveness of January 2, 2016.
Summit Materials, Inc.’s internal control over financial reporting. The KPMG report immediately follows this report. This annual report does not include an attestation report of Summit Materials, LLC’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by Summit Materials, LLC’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission applicable to “non-accelerated filers.”
/s/ Thomas W. Hill | /s/ Brian J. Harris |
Chief Executive Officer | Chief Financial Officer |
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Report of Independent Registered Public Accounting Firm
To the stockholders and board of directors
Summit Materials, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Summit Materials, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 30, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 30, 2017 and December 31, 2016, the related consolidated statements of operations, comprehensive loss, cash flows and changes in redeemable noncontrolling interest and stockholders’ equity for each of the fiscal years ended December 30, 2017, December 31, 2016 and January 2, 2016 and the related notes (collectively, the consolidated financial statements), and our report dated February 14, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s 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.
/s/ KPMG LLP | |
Denver, Colorado | |
February 14, 2018 |
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Changes in Internal Control
Summit Inc.
There was no change in Summit Materials, Inc.’s or Summit Materials, LLC’s internal control over financial reporting that occurred during Summit Inc.’stheir last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Summit Inc.’s internal control over financial reporting.
Summit LLC
There was no change in Summit LLC’s internal control over financial reporting that occurred during Summit LLC’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Summit LLC’stheir internal control over financial reporting.
Pursuant to Section 219ITEM 9B.OTHER INFORMATION.
None.
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We are not presently aware that we and our subsidiaries have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act during the year ended January 2, 2016.
The Company will hold its first annual meeting of stockholders on May 26, 2016 and anticipates filing a definitive proxy statement relating to the meeting on or about April 12, 2016.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required to be set forth in Part III of this report shall be deemed modified or superseded to the extent a statementherein is included in Summit Inc.’sthe sections entitled “Item 1–Election of Directors”, “Corporate Governance—Board Meetings and Committees—Audit Committee”, “Corporate Governance—Code of Conduct” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement with respect to its 2016the 2018 annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A under the Exchange Act no later than May 1, 2016, which modifies such information.
The following table sets forth the names, ages and positions of the members of the board of directors of Summit Inc. (the “Board”“2018 Proxy Statement”) andis incorporated herein by reference, except that certain information regarding our executive officers ascalled for by Item 401(b) and (e) of the dateRegulation S–K has been included in Part 1 of this report.Annual Report on Form 10–K.
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Thomas W. HillThe information set forth under the heading “Executive Compensation” in our 2018 Proxy Statement is the Company’s founder and has been President and Chief Executive Officer since its inception. He has been a memberincorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required to be set forth herein pursuant to Item 403 of the board of directors since August 2009. From 2006 to 2008, he was the Chief Executive Officer of Oldcastle, Inc. (“Oldcastle”), the North American arm of CRH plc, one of the world’s leading construction materials companies. Mr. Hill served on the CRH plc Board of Directors from 2002 to 2008 and, from 1992 to 2006, ran the Materials division of Oldcastle. Mr. Hill served as Chairman of the American Road and Transportation Builders Association (“ARTBA”) from 2002 to 2004, during congressional consideration of the multi-year transportation bill “SAFETEA-LU.” Mr. Hill has been Treasurer of both the National Asphalt Pavement Association and the National Stone Association, and he remains active with ARTBA’s Executive Committee. Mr. Hill received a Bachelor of Arts in Economics and History from Duke University and a Masters of Business Administration from Trinity College in Dublin, Ireland.
Howard L. Lance began to serve on our board in October 2012 and was formally elected as a director and as the Chairman in February 2013. He serves as an Executive Advisor to The Blackstone Group L.P. and, as part of his duties, he serves on the boards of certain Blackstone portfolio companies. HeRegulation S–K is a director of Change Healthcare, Inc., a Blackstone portfolio company, and Ferrovial S.A. He was Chairman of the Board of Directors, President and Chief Executive Officer of Harris Corporation from 2003 to 2011. Before joining Harris
Corporation, Mr. Lance was president of NCR Corporation and Chief Operating Officer of its Retail and Financial Group. Previously, he spent 17 years with Emerson Electric Co., where he held senior management positions including Executive Vice President of its Electronics and Telecommunications segment, Chief Executive Officer and director of its Astec electronics subsidiary in Hong Kong, Group Vice President of its Climate Technologies segment and President of its Copeland Refrigeration division. Mr. Lance received a Bachelor of Science degree in Industrial Engineering from Bradley University and a Master of Science degree in Management from the Krannert School of Management at Purdue University.
Ted A. Gardner was elected as a director in August 2009. He is a Managing Partner of Silverhawk. Prior to co-founding Silverhawk in 2005, Mr. Gardner was a Managing Partner of Wachovia Capital Partners (formerly, First Union Capital Partners) from 1989 until 2002. He was a director and Chairman of the Compensation Committee of Kinder Morgan, Inc. from 1999 to 2007, a director and the Chairman of the Audit Committee of Encore Acquisition Company from 2001 to 2010, a director of Kinder Morgan Energy Partners from 2011 to 2014 and a director and the Chairman of the Audit Committee of Athlon Energy, Inc. from 2013 to 2014. He is currently a director of Kinder Morgan, Inc., Incline Niobrara Partners, LP and Spartan Energy Partners. Mr. Gardner received a Bachelor of Arts degree in Economics from Duke University and a Juris Doctor and Masters of Business Administration from the University of Virginia.
Julia C. Kahr was elected as a director in August 2009. She is a Senior Managing Director in Blackstone’s Corporate Private Equity group. In addition to the Company, since joining Blackstone in 2004, Ms. Kahr has been involvedincluded in the executionsection entitled “Beneficial Ownership of Blackstone’s investmentsShares” in SunGard, Summit Materials Encore Medical, DJ Orthopedics and Gates Corporation. Before joining Blackstone, she was a Project Leader at the Boston Consulting Group, where she worked with companies in a varietyour 2018 Proxy Statement is incorporated herein by reference. The information regarding certain Company equity compensation plans called for by Item 201(d) of industries, including health care, financial services, media and entertainment and consumer goods. SheRegulation S–K is also the sole author of Working Knowledge, a book published by Simon & Schuster in 1998. She currently serves on the Board of Directors of DJ Orthopedics, Gates Corporation and Barry-Wehmiller Companies, Inc. and is also a member of the Board of Directors of Episcopal Social Services. Ms. Kahr received a Bachelor of Arts in Classical Civilization from Yale University where she graduated summa cum laude and a Master of Business Administration from Harvard Business School.set forth below.
John R. Murphy was elected as a director and Chairman of the Audit Committee in February 2012. Since March 2015, he has also served as a member of the Nominating and Corporate Governance Committee. Mr. Murphy served as our Interim Chief Financial Officer from January 2013 to May 2013 and from July 2013 to October 2013. He was Senior Vice President and Chief Financial Officer of Smurfit-Stone Container Corporation from 2009 to 2010 and served in various senior management roles from 1998 to 2008, including Chief Financial Officer and President and Chief Operating Officer and as President and Chief Executive Officer of Accuride Corporation. Accuride Corporation filed
Securities Authorized for Chapter 11 bankruptcy protection in October 2009 and emerged in 2010. Since 2003, Mr. Murphy has served on the Board of Directors, the Governance Committee and as Chairman of the Audit Committee of O’Reilly Automotive, Inc. He has also served as a director and Audit Committee Chairman of DJO Global Inc. since January 2012. Mr. Murphy was elected as a director and Audit Committee member of Graham Packaging in February 2011. Graham Packaging was subsequently sold in September 2011. Mr. Murphy received a Bachelor of Science degree in Accounting from Pennsylvania State University and a Master of Business Administration degree from the University of Colorado and is a Certified Public Accountant.
Neil P. Simpkins was elected as a director in August 2009. Mr. Simpkins is a Senior Managing Director of Blackstone’s Corporate PrivateIssuance Under Equity Group. In addition to the Company, since joining Blackstone in 1998, Mr. Simpkins has led the acquisitions of TRW Automotive, Vanguard Health Systems, Team Health, LLC, Apria Healthcare Group, Change Healthcare, Inc. and Gates Corporation. Before joining Blackstone, Mr. Simpkins was a Principal at Bain Capital. While at Bain Capital, Mr. Simpkins was involved in the execution of investments in the consumer products, industrial, healthcare and information industries. Prior to joining Bain Capital, Mr. Simpkins was a consultant at Bain & Company in the Asia Pacific region and in London. He currently serves as a Director of Apria Healthcare Group, Gates Corporation and Change Healthcare, Inc. Mr. Simpkins graduated with honors from Oxford University and received a Master of Business Administration from Harvard Business School.
Anne K. Wade, was appointed by the board as a director in January 2016, at which time she was also appointed to the Audit Committee. From 1995-2012, Ms. Wade served as Senior Vice President and Director of Capital International, a part of the Capital Group Companies, the Los Angeles based investment management firm. Ms. Wade is currently a partner at Leaders’ Quest, an organization focused on culture, values, and driving social and financial impact in major corporations. In that capacity she is the co-Director of BankingFutures in the United Kingdom. Ms. Wade also currently serves on the Board of Directors of the John Laing Group plc, where she also chairs the Remuneration Committee. Ms. Wade also currently serves on the Board of Directors of Big Society Capital Ltd in London, and of the Heron Foundation in New York City. She previously served on the Board of Directors of Holcim Ltd from 2013 to 2015, and was a member of its Governance and Strategy Committee. Ms. Wade received a Bachelor of Arts degree, Magna cum Laude, from Harvard University and a Master of Science from the London School of Economics.
Thomas A. Beck joined the Company in May 2010 when Summit purchased a controlling interest in Continental Cement. Mr. Beck is the President of Continental Cement, a position he has held since January 2013. He was a Senior Vice President with Continental Cement from 2005 to 2013 and its VP, Sales & Marketing, from 1996 to 2005. Mr. Beck also held various positions with Holnam (predecessor to Holcim (US) Inc.) from 1987 to 1996. Mr. Beck currently serves on the Executive Committee of the Portland Cement Association and is active on several cement and concrete industry boards. Mr. Beck received a Bachelor of Science degree in Civil Engineering from the University of Illinois.
Anne Lee Benedict joined the Company in October 2013. Prior to joining the Company, Ms. Benedict was a corporate partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where she had practiced since 2000. Ms. Benedict’s practice involved a wide range of corporate law matters, including mergers and acquisitions, joint ventures and other strategic transactions, securities offerings, securities regulation, and corporate governance matters. Ms. Benedict received a Bachelor of Arts degree in English and Psychology from the University of Michigan and a Juris Doctor from the University of Pennsylvania Law School.
Michael J. Brady joined the Company in April 2009 after having been a Senior Vice President at Oldcastle with overall responsibility for acquisitions and business development, having joined Oldcastle in 2000. Prior to that, Mr. Brady worked in several operational and general management positions in the paper and packaging industry in Ireland, the United Kingdom and Asia Pacific with the Jefferson Smurfit Group, plc (now Smurfit Kappa Group plc). Mr. Brady received a Bachelor of Engineering (Electrical) and a Master of Engineering Science (Microelectronics) from University College, Cork in Ireland and a Master of Business Administration degree from INSEAD in Fontainebleau, France.
M. Shane Evans joined the Company in August 2010 with over 20 years of experience in the construction materials industry. Prior to joining the Company, Mr. Evans worked at Oldcastle for 12 years, most recently as a Division President. He started his career working in his family’s construction and materials business where he held various operational and executive positions. Mr. Evans received a Bachelor of Science degree from Montana State University.
Kevin A. Gill joined the Company in May 2013 after having been Human Resources Vice President for Guilford Performance Textiles, a Cerberus portfolio company, since November 2008. In this role, he provided Human Resources Leadership that fueled the monetization to Lear Corporation. Prior to Guilford, Mr. Gill held a variety of Human Resources leadership roles with companies such as Honeywell, Citibank and Monsanto Chemical. Mr. Gill received a Bachelor of Science in Business Administration from Villanova University and a Master of Arts in Industrial Relations from Wayne State in Detroit, Michigan.
Brian J. Harris joined the Company in October 2013 after having been Executive Vice President and Chief Financial Officer of Bausch & Lomb Holdings Incorporated, a leading global eye health company, from 2009 to 2013. Mr. Harris served as From 1990 to 2009, Mr. Harris held positions of increasing responsibility with
industrial, automotive, building products and engineering manufacturing conglomerate Tomkins plc, including President of the $2 billion worldwide power transmission business for Gates Corporation, and Senior Vice President for Strategic Business Development and Business Administration, Chief Financial Officer and Secretary of Gates Corporation. Mr. Harris received a Bachelor of Accountancy from Glasgow University and is qualified as a Scottish Chartered Accountant.
Damian J. Murphyjoined the Company in August 2009 with over 20 years of experience in the construction materials and mining industries, working with both public and privately held companies. Prior to joining the Company, Mr. Murphy served roles as regional president and company president for Oldcastle starting in 2004. Prior to that, Mr. Murphy served as vice president of Aggregate Industries’ Rocky Mountain region, responsible for aggregates and hot mix asphalt production and sales. Before joining Aggregate Industries, Mr. Murphy worked in the mid-Atlantic for a top 10 privately held aggregate supplier and began his career in the industry in Europe. Mr. Murphy received a Bachelor of Engineering degree with a concentration in Minerals Engineering from the Camborne School of Mines/ Exeter University in the United Kingdom.
Douglas C. Rauh joined the Company in January 2012 as the East Segment President. Effective March 1, 2013, Mr. Rauh, became the Chief Operating Officer. Prior to joining the Company, from 2000 to 2012, Mr. Rauh held positions of increasing responsibility with Oldcastle, including President and Chief Executive Officer of The Shelly Co. (“Shelly”), Oldcastle’s operations in Ohio. During Mr. Rauh’s tenure with Shelly, he was an integral part of the team that completed over 30 acquisitions. Mr. Rauh started his career working for his family’s business, Northern Ohio Paving Company (“NOPCO”), where he held roles of increasing responsibility from 1983 to 2000, including Vice President. Mr. Rauh received a Bachelor of Science degree with a concentration in Business Administration from The Ohio State University.
Corporate Governance Matters
Our business and affairs are managed under the direction of the Board. Our Board currently consists of seven directors, of whom Mr. Gardner, Mr. Murphy and Ms. Wade have been affirmatively determined to be independent. Our amended and restated certificate of incorporation and amended and restated bylaws provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms, as follows:Compensation Plans
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(1) | Relates only to the Omnibus Incentive Plan detailed below. |
Upon expiration of the term of a class of directors, directors for that class will be elected for three-year terms at the annual meeting of stockholders in the year in which that term expires. Each director’s term continues until the election and qualification of his or her successor or his or her earlier death, resignation or removal. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors may have the effect of delaying or preventing changes in control of our Company.
In addition, in connection with theour IPO, we entered into a stockholders’ agreement with affiliates of Blackstone. This agreement grants affiliates of Blackstone the right to designate nominees to our board of directors subject to the maintenance of certain ownership requirements in us. See “Certain Relationships and Related Transactions, and Director Independence—Stockholders’ Agreement” for additional information.
Background and Experience of Directors
When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable our Board to satisfy its oversight responsibilities effectively in light of our business and structure, the Board focuses primarily on each person’s background and experience as reflected in the information discussed in each of the director’s individual biographies set forth above. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business. In particular, the members of our Board considered the following important characteristics, among others:
Controlled Company Exception
As of the date of this report, Blackstone beneficially owned greater than 50% of the voting power of Summit Inc. As a result, Summit Inc. is a “controlled company” within the meaning of corporate governance standards. Under these corporate governance standards, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance standards, including the requirements (1) that a majority of Summit Inc.’s board of directors consist of independent directors, (2) that Summit Inc.’s board of directors have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) that Summit Inc.’s board of directors have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. For at least some period, Summit Inc. intends to utilize these exemptions. As a result, the majority of Summit Inc.’s directors are not independent and none of the committees of the board of directors are composed entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of these corporate governance requirements. In the event that Summit Inc. ceases to be a “controlled company” and its shares continue to be listed on the NYSE, Summit Inc. will be required to comply with these provisions within the applicable transition periods.
Board Committees
The Board has established an audit committee, a compensation committee and a corporate governance and nominating committee. The composition and responsibilities of each committee are described below. Summit Inc.’s board of directors may also establish from time to time any other committees that it deems necessary or desirable. Members serve on these committees until their resignation or until otherwise determined by Summit Inc.’s board of directors.
Audit Committee
The audit committee consists of Mr. Murphy, Mr. Gardner and Ms. Wade, with Mr. Murphy serving as chair. Ms. Kahr, previously a member of the audit committee, resigned from the committee effective as of the date of this report. The audit committee is responsible for, among other things:
Mr. Murphy, Mr. Gardner and Ms. Wade qualify as independent directors under the NYSE governance standards and the independence requirements of Rule 10A-3 of the Exchange Act. The Board has determined that each of the members of the audit committee is “financially literate” within the meaning of the listing standards of the NYSE. In addition, the Board has determined that Mr. Murphy qualifies as an “audit committee financial expert” as defined in the federal securities laws and regulations. The SEC rules and NYSE rules require Summit Inc. to have an audit committee composed entirely of independent members by March 11, 2017, which is the one year anniversary of the effective date of the registration statement filed in connection with Summit Inc.’s IPO.
Compensation Committee
The compensation committee consists of Mr. Simpkins, Mr. Lance and Mr. Gardner, with Mr. Simpkins serving as chair. The compensation committee is responsible for, among other things:
Corporate Governance and Nominating Committee
The corporate governance and nominating committee consists of Mr. Lance, Mr. Murphy and Mr. Simpkins, with Mr. Lance serving as chair. The corporate governance and nominating committee is responsible for, among other things:
Compensation Committee Interlocks and Insider Participation
During 2015, the members of the Compensation Committee were Messrs. Simpkins, Lance and Gardner, none of whom was, during the fiscal year, an officer or employee of the Company and none of whom has ever served as an officer advisors of the Company. Mr. SimpkinsIf an award under the Omnibus Incentive Plan terminates, lapses or is an affiliate of Blackstone. During 2015, none of our executive officers served as a director or membersettled without the payment of the compensation committee (or other committee serving an equivalent function)full number of any other entity whose executive officers served on our Compensation Committee or the Board. We are parties to certain transactions with Blackstone described under Item 13 “Certain Relationships and Related Transactions, and Director Independence” in this report.
Code of Ethics
Summit Inc.’s Code of Business Conduct and Ethics applies to all of our officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions and is posted on Summit Inc.’s website. The Code of Business Conduct and Ethics is a “code of ethics,” as defined in Item 406(b) of Regulation S-K. Summit Inc. intends to make any legally required disclosures regarding amendments to, or waivers of, provisions of its code of ethics on its website. The information contained on, or accessible from, Summit Inc.’s website is not part of this report by reference or otherwise.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires executive officers and directors, a company’s chief accounting officer and persons who beneficially own more than 10% of a company’s common stock (the “Reporting Persons”), to file initial reports of ownership and reports of changes in ownership with the SEC and the NYSE. Reporting Persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of copies of such reports and written representations from our executive officers, directors and Blackstone, we believe that our executive officers, directors and Blackstone complied with all Section 16(a) filing requirements during 2015.
Compensation Discussion and Analysis
Executive Summary
The following Compensation Discussion and Analysis (“CD&A”) describes our 2015 executive compensation structure, earned by or paidshares subject to the following named-executive officers (“NEOs”).
Executive Compensation Structure
In 2015, our executive compensation structure consisted of four primary components: base salary; annual bonus and non-equity incentives; long-term equity incentives; and our traditional benefits programs (e.g., limited perquisites and traditional benefits).
Corporate Governance Highlights
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Our Compensation Philosophy
Our executive compensation program is intended to attract, motivate, and retain executive officers and to alignaward, the interests of our executive officers with stockholders’ interests. The Board’s objectives for our program include, but are not limited to, the following:
Components of 2015 NEO Compensation
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Pre-IPO Compensation Elements
Prior to the Company’s IPO in March 2015, our executive compensation structure included predominantly the same elements as summarized in the table above. The equity-based long-term incentive program structure before the IPO consisted of Class D interests. Generally, 50% of the Class D-1 interests vested with the passage of time (“time-vesting interests”) and the remaining 50% of the Class D-1 interests and all Class D-2 interests vested if certain investment returns were achieved by Summit Holdings’ investors (“performance-vesting interests”). Time vesting interests generally vested as follows: 20% vested on the first anniversary of the grant date and the remaining 80% vested monthly over the four years following the first anniversary of the grant date. Performance-vesting interests would have vested if certain investment returns were achieved by Blackstone-affiliated investors while the employee continued to provide services to us or our subsidiaries. There were two performance levels at which performance-vesting interests generally would have vested: achievement of 1.75 times (as to the Class D-1 interests) and 3.00 times (as to the Class D-2 interests) the Blackstone-affiliated investors’ initial investment.
In connection with the IPO, the limited partnership agreement of Summit Holdings was amended and restated to, among other things, modify its capital structure by creating LP Units (the “Reclassification”). Immediately following the Reclassification, 69,007,297 LP Units were outstanding, which were reclassified from the previously issued Class A-1, Class B-1, Class C, Class D-1 and Class D-2 interests. The Class A-1, Class B-1 and Class C interests were fully vested as of the Reclassification date. A portion, but not all, of the Class D-1 interests were vested, and none of the Class D-2 interests were vested. Accordingly, vested and unvested Class D interests were converted into vested and unvested LP Units, respectively. The vesting terms are substantially similar to those applicable to the unvested Class D interests immediately prior to the Reclassification. As of their respective grant date, approximately half of the Class D-1 interests were subject to a vesting period of five years (“time-vesting interests”), 20% on the first anniversary of the grant date and the remaining 80% vested monthly over a period of four years following the first anniversary date. Approximately half of the D-1 interests and all of the D-2 interests vested upon Summit Holdings’ investors achieving certain investment returns (“performance-vesting interests”).
In addition, in substitution for part of the economic benefit of the Class C and Class D interests that was not reflected in the conversion of such interests to LP Units, warrants were issued to holders of Class C interests to purchase an aggregate of 160,333undelivered shares of Class A common stock, and options were issued to holders of Class D interests to purchase an aggregate of 4,358,842 shares of Class A common stock (“leverage restoration options”). The exercise price of the warrants and leverage restoration options is the IPO price of $18.00 per share. The leverage restoration options weremay be granted again under the Omnibus Incentive Plan. All leverage restoration options vest over four years at a rateAs of 25%December 30, 2017, there were no equity compensation plans not approved by stockholders of the award on each of the first four anniversaries of the Reclassification date, subject to the employee’s continued employment through the applicable vesting date. The leverage restoration options that correlate to performance-vesting interests vest only when both the relevant return multiple is achieved and the four year time-vesting condition is satisfied. All outstanding equity grants associated with the Reclassification are summarized in the table titled “Outstanding Equity Awards at 2015 Fiscal Year End.”
Throughout 2015, we worked closely with the Compensation Committee and our compensation consultant to develop an ongoing structure that is competitive with both broad U.S. market practice and our peer companies. The details of that program are described in “Long-Term Incentives.”
Compensation Decision Process
For our NEOs and select other senior executives, the Board employs a “pay-for-performance” philosophy that ties a significant portion of incentive compensation opportunity to our company-wide performance, primarily an EBITDA metric, cash flows, and certain safety metrics. In 2015, prior to the IPO, our long-term incentive
compensation was composed of time-based and performance-based Class D interests. See “—Annual Incentives” and “—Pre-IPO Compensation Elements” for detailed explanations of these plans.
Role of the Compensation Committee
The Compensation Committee is responsible to our Board of Directors for oversight of our executive compensation program. The Compensation Committee is responsible for the review and approval of all aspects of our program. Among its duties, the Compensation Committee is responsible for:Summit Inc.
Role of Management
For each NEO excluding himself, our CEO recommends to the Compensation Committee compensation levels based on a review of market data and individual performance. The Compensation Committee reviews and discusses all recommendations prior to approval, then approves or submits all recommendations to the Board for approval.
For the CEO, during executive session without management present, the Compensation Committee is solely responsible for assessing performance and approving or making compensation recommendations to the Board for approval. Management does not make compensation-related recommendations for the CEO.
Role of the Compensation Consultant
Management retained a compensation consultant, Aon Hewitt, to assist the Company with respect to the 2015 salaries and bonus and the 2015 non-equity incentive plan compensation. The compensation consultant was retained by and reported to management. Other than the following roles and services provided by Aon Hewitt, it performed no other services for us in 2015:ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Aon Hewitt provided management and the Compensation Committee with benchmarking studies, which were used in determining the 2015 salaries, bonuses and non-equity incentive plan compensation for executives.
The Compensation Committee expects to assess the independence of Aon Hewitt and retain Aon Hewitt as a compensation consultant to the Compensation Committee with respect to 2016 compensation.
Role of Peer Companies and Competitive Market Data
Aon Hewitt performed a competitive pay study in 2014 to assist with NEO compensation decisions in 2015. A specificbe set of peer companies was not used. Rather, Aon Hewitt accessed total compensation surveys
published by Aon Hewitt, and other compensation consultants, including Towers Watson and Mercer, LLC. Competitive market data for the Company’s executives was developed using compensation data for similar-sized manufacturing companies, based on annual revenues.
In December 2015, to assist with 2016 compensation decisions, Aon Hewitt performed another competitive pay study. To develop competitive market values for the NEOs, Aon Hewitt developed, and the Compensation Committee approved, a new peer group of eighteen companies. The peer group development criteria included:
The approved peer group had median and average annual revenues of approximately $1.9 billion. Summit’s annual revenues for fiscal 2015 were approximately $1.5 billion. The 2015 peer companies used for 2016 pay recommendations are:
In addition, as a supplement to the proxy data for NEOs and as a primary data source for non-NEO positions, Aon Hewitt accessed the 2015 surveys from Aon Hewitt, Towers Watson and Mercer for similar-sized manufacturing companies. The Compensation Committee uses competitive compensation data from the annual total compensation study to inform its decisions around overall total compensation levels. The Compensation Committee uses multiple reference points when establishing targeted compensation levels, including 50th percentile market values.
Timing of Compensation Decisions
Pay recommendations for our executives, including the NEOs, are typically made by the Compensation Committee at its first scheduled meeting of the fiscal year, typically held in February around the same time we report our fourth quarter and year-end financial results for the preceding fiscal year and provide our financial guidance for the upcoming year (the “annual meeting”). This timing allows the Compensation Committee to have a complete financial performance picture prior to making compensation decisions.
Decisions with respect to prior year performance, as well as annual equity awards, base salary increases and target performance levels for the current year are typically made at this annual meeting. Any equity awards recommended by the Compensation Committee at this meeting are reviewed by the Board and, if approved, are dated on the date of the Board meeting held later that day or the following day. As such, the Compensation Committee does not time the grants of equity incentives to the release of material non-public information.
The exceptionforth herein is grants to executives who are promoted or hired from outside the Company during the year. These executives may receive compensation changes or equity grants effective or dated, as applicable, as of the date of their promotion, hiring date, or other Board-approval date.
Determination of CEO Compensation
Typically, at the annual meeting, in executive session without management present, the Compensation Committee also reviews and evaluates CEO performance, and determines performance achievement levels, for the prior fiscal year. The Compensation Committee also reviews competitive compensation data. The Compensation Committee typically approves, or presents pay recommendations for the CEO to the Board, excluding the CEO, for approval. If applicable, during executive session, the Board conducts its own review and evaluation of the CEO’s performance taking into consideration the recommendations of the Compensation Committee.
2015 Compensation Elements
Base Salary
Annual base salaries compensate our executive officers for fulfilling the requirements of their respective positions and provide them with a level of cash income predictability and stability with respect to a portion of their total compensation. The Compensation Committee or the Board, as applicable, determines base salaries for the NEOs and other executives based on a number of factors, including but not limited to, the Compensation Committee or Board’s understanding of executive pay practices, individual performance, Company performance and management recommendations (except with respect to the Chief Executive Officer). The Board approved the following base salary amounts for 2015:
Base Salary | ||||
Thomas W. Hill | $ | 746,750 | ||
Michael J. Brady | $ | 371,315 | ||
Douglas C. Rauh | $ | 503,928 | ||
Brian J. Harris | $ | 503,928 | ||
Damian J. Murphy | $ | 367,500 |
Annual Incentives
Each NEO was eligible to earn an annual incentive based upon the achievement of performance targets established by the Board within the first three months of the fiscal year.
Annual Incentive Targets. At the start of each fiscal year the Board or the Compensation Committee approves annual incentive compensation targets, as a percentage of base salary, based on the understanding of the Board or the Compensation Committee of executive pay practices, management’s recommendations and other relevant factors. The 2015 annual incentive targets, as a percentage of base salary, for our NEOs follow:
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2015 Annual Incentive Metrics. For corporate NEOs (Mr. Hill, Mr. Harris, Mr. Rauh, and Mr. Brady), the performance metrics approved for fiscal 2015 were corporate EBITDA, as defined by the Board and comparable to further adjusted EBITDA, cash flow, which approximates annual cash flow exceeding capital transactions and
acquisitions, safety metrics, including various metrics related to the frequency and severity of reported incidents, and personal objectives, which vary by individual. For Mr. Murphy, the approved performance metrics included corporate EBITDA, segment EBITDA, segment cash flow, and safety/personal objectives. Mr. Murphy’s segment for this purpose includes the businesses for which he was the segment president for all of 2015 (the “Modified East Region Segment”). The Board has discretion to adjust the financial metrics to reflect merger, acquisition or divestiture activity during the fiscal year. In 2015, the metrics were adjusted to reflect acquisitions completed during the year. For 2015, the measures were weighted as follows:
EBITDA Metric | Cash Flow | Safety/ Discretionary | ||||||||||
Thomas W. Hill | 50 | % | 20 | % | 30 | % | ||||||
Michael J. Brady(1) | 70 | % | 20 | % | 10 | % | ||||||
Douglas C. Rauh | 50 | % | 20 | % | 30 | % | ||||||
Brian J. Harris | 50 | % | 20 | % | 30 | % | ||||||
Damian J. Murphy(2) | 60 | % | 20 | % | 20 | % |
Performance / Payout Leverage. The performance requirements and the payout opportunities associated with minimum, target and maximum performance levels were consistent across the EBITDA and cash flow performance metrics. The minimum payout opportunity is 10% of target if the minimum performance level of 91% of target is achieved, provided that the threshold level under the applicable EBITDA metric is achieved. Target is earned if targeted performance is achieved. The maximum payout opportunity is 150% of target if the maximum performance level of 110% of goal is achieved. The payout opportunities were as follows:
Payments for all of the performance metrics, both financial and non-financial, were contingent on the threshold level of corporate EBITDA being achieved.
2015 Actual Performance. Actual results for the 2015 annual incentive plan were certified by the Compensation Committee, as follows, based on the performance goals and funding scales approved in the first quarter of 2015:
The following table summarizes the 2015 bonuses earned based on actual performance, as compared to the target opportunity for each NEO:
Incentive Earned | Target Incentive | % of Target Earned | ||||||||||
Thomas W. Hill | $ | 1,134,127 | $ | 933,438 | 122 | % | ||||||
Michael J. Brady | $ | 271,803 | $ | 222,789 | 122 | % | ||||||
Douglas C. Rauh | $ | 459,204 | $ | 377,946 | 122 | % | ||||||
Brian J. Harris | $ | 459,204 | $ | 377,946 | 122 | % | ||||||
Damian J. Murphy | $ | 296,573 | $ | 220,500 | 135 | % |
Long-Term Incentives—2015
Our pre-IPO long-term incentive program consisted of Class D interests granted prior to the Reclassification that were converted to LP Units at the time of the Reclassification, and leverage restoration options that were granted at the time of the Reclassification. Please see the CD&A section titled “Pre-IPO Compensation Elements” for an overview of this program.
The Compensation Committee determined that the size, structure, and value of the pre-IPO interests were sufficient incentive for 2015 and therefore no additional equity grants were made in 2015. We expect to make annual compensation and other grants under the Omnibus Incentive Plan in 2016.
Retirement, Perquisites, and Other Benefits
We have a tax-qualified contributory retirement plan established to qualify as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”). The plan covers all employees, including our NEOs, who are limited to their annual tax deferred contribution limit as allowed by the IRS. We provide for matching contributions to the plan, including 100% of pre-tax employee contributions and up to 4% of eligible compensation. Employer contributions vest immediately. In 2015, employees outside of the corporate office were covered by a variety of other plans, all of which qualified as deferred salary arrangements under Section 401(k) of the Code.
Additional perquisites include car allowance, relocation expenses, club memberships and other business-related reimbursements.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussion with management, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Annual Report on Form 10-K for the fiscal year ended January 2, 2016.
Submittedsections entitled “Certain Relationships and Related Person Transactions”in our 2018 Proxy Statement is incorporated herein by the Compensation Committee of the Board.
Howard L. Lance
Ted A. Gardner
Neil P. Simpkins
Other Compensation Policies
Stock Ownership Guidelines
We have established stock ownership guidelines for our CEO, other NEOs and directors. The approved guidelines are as follows:reference.
Participants are expected to comply with the ownership requirements within five years of an appointment to a qualified position. As of January 2, 2016, all participants were in compliance with the ownership requirements. The following components satisfy the ownership guidelines: Equity interests owned directly or indirectly (e.g. by or with spouse or held in trust for the individual or one or more family members of the individual), equity interests, including LP Units, held in qualified or nonqualified savings, profit sharing, or deferred compensation accounts, after-tax value of in-the-money spread of shares underlying vested but unexercised stock options, and shares underlying vested but unexercised warrants. Annually, the Compensation Committee will monitor progress of participants.
Incentive Compensation Recoupment (“Clawback”) Policy
An award agreement may provide that the Compensation Committee may in its sole discretion cancel such award if the participant, while employed by or providing services to Summit Inc. or any affiliate or after termination of such employment or service, violates a non-competition, non-solicitation or non-disclosure covenant or agreement or otherwise has engaged in or engages in other detrimental activity that is in conflict with or adverse to the interests of any affiliate, including fraud or conduct contributing to any financial restatements or irregularities, as determined by the Compensation Committee in its sole discretion. The Compensation Committee may also provide in an award agreement that if the participant otherwise has engaged in or engages in any activity referred to in the preceding sentence, the participant will forfeit any gain realized on the vesting or exercise of such award and must repay the gain to Summit Inc. The Compensation Committee may also provide in an award agreement that if the participant receives any amount in excess of what the participant should have received under the terms of the award for any reason (including without limitation by reason of a financial restatement, mistake in calculations or other administrative error), then the participant shall be required to repay any such excess amount to Summit Inc. Without limiting the foregoing, all awards shall be subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply with applicable law. Our policy will be updated to comply with the SEC’s final regulations as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Compensation Risk Assessment
Our governance policies and compensation structure are not reasonably likely to have a material adverse effect on the Company. The following features of our program mitigate risk:ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES.
The Compensation Committee consults with a compensation consultant to assist with annual compensation decisions;
Limitations on Deductibility of Compensation
The Compensation Committee considers possible tax consequences and other factors when determining executive compensation, including the deductibility of compensation paid to the Company’s executive officers under Section 162(m) of the Code. In the event that Section 162(m) would apply to compensation paid to such individuals, the Compensation Committee may provide compensation that does not qualify under Section 162(m) if necessary to effectively attract, incentivize, and retain key personnel.
Compensation Tables
Summary Compensation Table
The following table sets forth the compensation of our NEOs for the fiscal years ended 2015, 2014 and 2013, and their respective titles as of January 2, 2016.
Name and Principal | Year | Salary | Bonus(1) | Stock Awards(2) | Option Awards(3) | Non-Equity Incentive Plan Compensation(1) | All Other Compensation(4) | Total | ||||||||||||||||||||||||
Thomas W. Hill | 2015 | $ | 746,750 | $ | — | $ | 4,530,452 | $ | 5,535,004 | $ | 1,134,127 | $ | 22,170 | $ | 11,968,503 | |||||||||||||||||
President and Chief Executive Officer, Director |
| 2014 2013 |
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| 725,000 525,000 |
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| — — |
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| 55,390 — |
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| — — |
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| 999,141 563,850 |
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| 20,163 18,665 |
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| 1,799,694 1,107,515 |
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Michael J. Brady | 2015 | $ | 371,315 | $ | — | $ | 1,459,930 | $ | 1,707,379 | $ | 271,803 | $ | 10,975 | $ | 3,821,402 | |||||||||||||||||
Chief Business Development Officer | 2014 | 360,500 | — | 16,707 | — | 253,071 | 22,959 | 653,237 | ||||||||||||||||||||||||
Doug C. Rauh | 2015 | $ | 503,928 | $ | — | $ | 1,113,297 | $ | 1,150,299 | $ | 459,204 | $ | 34,121 | $ | 3,260,849 | |||||||||||||||||
Chief Operating Officer | 2014 | 489,250 | — | 17,586 | — | 404,549 | 44,132 | 955,517 | ||||||||||||||||||||||||
2013 | 475,000 | 29,212 | 103,553 | — | 382,073 | 68,496 | 1,058,334 | |||||||||||||||||||||||||
Brian J. Harris | 2015 | $ | 503,928 | $ | — | $ | 1,334,756 | $ | 905,740 | $ | 459,204 | $ | 24,730 | $ | 3,228,358 | |||||||||||||||||
Chief Financial Officer | 2014 | 489,250 | — | 322,700 | — | 404,549 | 24,667 | 1,241,166 | ||||||||||||||||||||||||
Damian J. Murphy | 2015 | $ | 367,500 | $ | — | $ | 990,358 | $ | 1,110,552 | $ | 296,573 | $ | 22,966 | $ | 2,787,949 | |||||||||||||||||
East Segment President |
The NEOs did not receive new equity grants in 2015. As described in “—Pre-IPO Compensation Elements,” in connection with the IPO, Class D interests were converted to LP Units. There was incremental fair value calculated in accordance with ASC 718 with respect to the time-vesting portion of the LP Units that were modified in connection with the IPO, which amounts are reflected in this column for 2015. The assumptions used in calculating the grant date fair value are discussed in Note 20,Employee Long Term Incentive Plan, to our audited consolidated financial statements included elsewhere in this report. With respect to the performance-vesting LP Units, there was no incremental fair value recognized in accordance with ASC 718 as a result of the modification since achievement of the performance conditions was not deemed probable before or after the modification.
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2015 Grants of Plan-Based Awards
The following table provides supplemental information relating to grants of plan-based awards to help explain information provided above in our Summary Compensation Table.
Estimated Possible Payouts under Non-Equity Incentive Plan Awards(1) | Estimated Possible Payouts under Equity Incentive Plan Awards(2) | All Other Option Awards: Number of Securities Underlying Options (#)(3) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($)(4) | ||||||||||||||||||||||||||||||||
Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | |||||||||||||||||||||||||||||
Thomas W. Hill | 3/17/2015 | — | — | — | 726,933 | 588,644 | 18 | 5,535,004 | ||||||||||||||||||||||||||||
466,179 | 933,438 | 1,400,156 | — | — | — | — | ||||||||||||||||||||||||||||||
Michael J. Brady | 3/17/2015 | — | — | — | 230,084 | 183,840 | 18 | 1,707,379 | ||||||||||||||||||||||||||||
155,952 | 222,789 | 334,184 | — | — | — | — | ||||||||||||||||||||||||||||||
Doug C. Rauh | 3/17/2015 | — | — | — | 167,083 | 128,525 | 18 | 1,150,299 | ||||||||||||||||||||||||||||
188,973 | 377,946 | 566,919 | — | — | — | — | ||||||||||||||||||||||||||||||
Brian J. Harris | 3/17/2015 | — | — | — | 131,560 | 101,200 | 18 | 905,740 | ||||||||||||||||||||||||||||
188,973 | 377,946 | 566,919 | — | — | — | — | ||||||||||||||||||||||||||||||
Damian J. Murphy | 3/17/2015 | — | — | — | 161,310 | 124,084 | 18 | 1,110,552 | ||||||||||||||||||||||||||||
132,300 | 220,500 | 330,750 | — | — | — | — |
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Employment Agreements
Messrs. Hill, Harris and Rauh each have employment agreements and Messrs. Brady and Murphy have signed offers of employment. Their employment agreements and offers of employment provide for base salary subject to annual adjustment by the Board, an annual incentive award, participation in Company-sponsored broad-based and executive benefit plans and such other compensation as may be approved by the Board. Generally, our employment agreements have an initial term of three years, unless earlier terminated or otherwise renewed pursuant to the terms thereof and are automatically extended for successive one-year periods following the expiration of each term unless notice is given by us or the executive not to renew.
Thomas W. Hill
Summit Holdings entered into an employment agreement with Mr. Hill, dated July 30, 2009, whereby Mr. Hill serves as the Chief Executive Officer of Summit Holdings and the Chief Executive Officer of the entity that served as the general partner of Summit Holdings prior to the consummation of the IPO. Mr. Hill also will continue to serve as a member of the Board so long as he serves in the foregoing capacities. Mr. Hill’s employment agreement had an initial term equal to three years commencing on July 30, 2009, which is automatically extended for additional one-year periods, unless Summit Holdings or Mr. Hill provides the other party 60 days’ prior written notice before the next extension date that the employment term will not be so extended. However, if Summit Holdings is dissolved pursuant to the terms of its limited partnership agreement, then the employment term shall automatically and immediately be terminated. On July 30, 2015, Mr. Hill’s employment agreement was automatically extended for an additional year.
Pursuant to the terms of his employment agreement, Mr. Hill’s initial annual base salary was $300,000, which amount is reviewed annually by the Board, and may be increased (but not decreased). His base salary in 2015 was $746,750. Mr. Hill is also eligible to earn an annual bonus of up to 125% of his base salary based upon the achievement of performance targets established by the Board within the first three months of each fiscal year during the employment term. The Board, in its sole discretion, may appropriately adjust such performance targets in any fiscal year to reflect any merger, acquisition or divestiture affected by Summit Holdings during such fiscal year. Mr. Hill is also entitled to participate in Summit Holdings’ employee benefit plans, as in effect from time to time, on the same basis as those benefits are generally made available to other senior executives of Summit Holdings.
If Mr. Hill’s employment is terminated (i) by Summit Holdings with “cause” (as defined in the employment agreement) or (ii) by him other than as a result of a “constructive termination” (as defined in the employment agreement), he will be entitled to certain accrued amounts. If Mr. Hill’s employment is terminated as a result of his death or “disability” (as defined in the employment agreement), he will be entitled to receive (a) certain accrued amounts and (b) a pro rata portion of the annual bonus, if any, that Mr. Hill would have been entitled to receive, payable when such annual bonus would have otherwise been payable to him had his employment not been terminated. If Mr. Hill’s employment is terminated (i) by Summit Holdings without “cause” or (ii) by him as a result of a “constructive termination,” subject to his continued compliance with certain restrictive covenants and his non-revocation of a general release of claims, he will be entitled to receive (a) certain accrued amounts, (b) continued payment of his base salary in accordance with Summit Holdings’ normal payroll practices, as in effect on the date of termination of his employment, until 18 months after the date of such termination and (c) an amount equal to one and one-half times his annual bonus in respect of the fiscal year immediately preceding the applicable year of his termination of employment; provided that the aggregate amounts shall be reduced by the present value of any other cash severance or termination benefits payable to him under any other plans, programs or arrangements of Summit Holdings or its affiliates.
If Mr. Hill’s employment was terminated on January 2, 2016 without “cause” or as a result of a “constructive termination” (each as defined in his employment agreement), he would have been entitled to (1) continued payment of his base salary for 18 months, or $1,120,125 and (2) an amount equal to one and one-half times his annual bonus in respect of 2014, or $499,571. If Mr. Hill’s employment was terminated as a result of his death or “disability” (as defined in his employment agreement), he would have been entitled to receive a bonus of $999,141. If Mr. Hill was terminated without “cause” (as defined in the LP Unit agreement) or as a result of a “constructive termination” (as defined in his employment agreement) within 12 months preceding a change in control or a public offering (each as defined in Summit Holdings’ limited partnership agreement), his performance-vesting LP Units and Leverage Restoration Options would be eligible to vest based on the proceeds of that transaction. In addition, upon a change in control, all of Mr. Hill’s unvested time-vesting LP Units and Leverage Restoration Options would vest. The value of his unvested time-vesting LP Units and his performance-vesting LP Units as of January 2, 2016 is reflected in the “Outstanding Equity Awards at 2015 Fiscal Year-end” table.
In the event (i) Mr. Hill elects not to extend the employment term or (ii) of a “dissolution” with a “negative return” (as such terms are defined in the employment agreement), unless Mr. Hill’s employment is earlier terminated as described above, Mr. Hill’s termination of employment shall be deemed to occur on the close of business on the earlier of the effective date of “dissolution” or the day immediately preceding the next scheduled extension date, and Mr. Hill shall be entitled to receive certain accrued amounts. In the event (i) that Summit Holdings elects not to extend the employment term or (ii) of a “dissolution” with a “positive return” (as such terms are defined in his employment agreement), Mr. Hill shall be treated as terminated without “cause” effective as of the close of business on the day immediately preceding the next scheduled extension date or the effective date of the “dissolution,” and shall be entitled to receive the amounts and benefits for termination without “cause” described above.
Pursuant to the terms of his employment agreement, Mr. Hill is subject to the following covenants: (i) a covenant not to disclose confidential information while employed and at all times thereafter; (ii) a covenant not to compete for a period of 18 months following his termination of employment for any reason; and (iii) a covenant not to solicit employees or customers for a period of 18 months following his termination of employment for any reason.
Michael J. Brady
Under the employment arrangement between the Company and Mr. Brady, Mr. Brady serves as an Executive Vice President and Chief Business Development Officer. Mr. Brady’s annual base salary in 2015 was $371,315. In addition, Mr. Brady is also eligible to earn an annual bonus of up to 60% of his base salary based upon the achievement of performance targets established by the Board within the first three months of each fiscal year during the employment term, and the Board, in its sole discretion, may appropriately adjust such performance targets in any fiscal year to reflect any merger, acquisition or divestiture effected by Summit Holdings during such fiscal year. Mr. Brady is also entitled to participate in employee benefit plans as in effect from time to time.
Upon a change in control, all of Mr. Brady’s unvested time-vesting LP Units would vest. In addition, if Mr. Brady was terminated without “cause” (as defined in the LP Unit agreement) within 12 months preceding a change in control or a public offering (each as defined in Summit Holdings’ limited partnership agreement), his performance-vesting LP Units and Leverage Restoration Options would be eligible to vest based on the proceeds of that transaction. The value of his unvested time-vesting LP Units and Leverage Restoration Options and his performance-vesting LP Units and Leverage Restoration Options as of January 2, 2016 is reflected in the “Outstanding Equity Awards at 2015 Fiscal Year-end” table.
Brian J. Harris
Summit Holdings entered into an employment agreement with Brian J. Harris on December 3, 2013, for a period of employment beginning on October 14, 2013, pursuant to which Mr. Harris became our Chief Financial Officer. Mr. Harris’s employment agreement has an initial term equal to three years, which will be automatically extended for additional one-year periods, unless Summit Holdings or Mr. Harris provides the other party with 60 days’ prior written notice before the next extension date that the employment term will not be so extended.
Pursuant to the terms of his employment agreement, Mr. Harris’s annual base salary was $475,000, which amount is reviewed annually by the board, and may be increased (but not decreased). Mr. Harris’s base salary for 2015 was $503,928. Mr. Harris is also eligible to earn an annual bonus of up to 75% of his base salary upon the achievement of performance targets established by the Board within the first three months of each fiscal year during the employment term. The Board, in its sole discretion, may appropriately adjust such performance targets in any fiscal year to reflect any merger, acquisition or divestiture affected by Summit Holdings during such fiscal year. Mr. Harris is entitled to a car allowance in the amount of $1,000 per month.
If Mr. Harris’s employment is terminated (i) by Summit Holdings with “cause” (as defined in the employment agreement) or (ii) by him other than as a result of a “constructive termination” (as defined in the employment agreement), he will be entitled to receive certain accrued amounts. If Mr. Harris’s employment is terminated as a result of his death or “disability” (as defined in his employment agreement), he will be entitled to receive (a) certain accrued amounts and (b) a pro rata portion of the annual bonus, if any, that Mr. Harris would have been entitled to receive, payable when such annual bonus would have otherwise been payable to him had his employment not terminated. If Mr. Harris’s employment is terminated (i) by Summit Holdings without “cause” or (ii) by him as a result of a “constructive termination,” subject to his continued compliance with certain restrictive covenants and his non-revocation of a general release of claims, he will be entitled to receive (a) certain accrued amounts, (b) continued payment of his base salary in accordance with Summit Holdings’ normal payroll practices, as in effect on the date of termination of his employment, until 12 months after the date of such termination, (c) an amount equal to Mr. Harris’s annual bonus in respect of the fiscal year immediately preceding the applicable year of Mr. Harris’s termination of employment, payable in equal monthly installments and (d) the costs of COBRA health continuation coverage for the lesser of 12 months after the date of such termination or until Mr. Harris is no longer eligible for COBRA health continuation coverage under applicable law.
If Mr. Harris’s employment was terminated without “cause” or as a result of a “constructive termination” (each as defined in his employment agreement), he would have been entitled to (1) continued payment of his base salary for 12 months, or $503,928, (2) an amount equal to his annual bonus in respect of 2014, or $404,549, and (3) the costs of COBRA health coverage for the lesser of 12 months after his date of termination or the date he is no longer eligible for such coverage under applicable law, or $11,928, based on 2015 rates. If Mr. Harris’s employment was terminated as a result of his death or “disability” (as defined in his employment agreement), he would be entitled to receive a bonus of $404,549. If Mr. Harris was terminated without “cause” (as defined in the LP Unit agreement) or as a result of a “constructive termination” (as defined in his employment agreement) within 12 months preceding a change in control or a public offering (each as defined in Summit Holdings’ limited partnership agreement), his performance-vesting LP Units and Leverage Restoration Options would be eligible to vest based on the proceeds of that transaction. In addition, upon a change in control, all of Mr. Harris’s unvested time-vesting LP Units and Leverage Restoration Options would vest. The value of his unvested time-vesting LP Units and his performance-vesting LP Units and Leverage Restoration Options as of January 2, 2016 is reflected in the “Outstanding Equity Awards at 2015 Fiscal Year-end” table.
In the event (i) Mr. Harris elects not to extend the employment term or (ii) of a “dissolution” (as defined in the employment agreement) in connection with which the Sponsors do not receive a return on their investment, unless Mr. Harris’ employment is earlier terminated as described above, Mr. Harris’ termination of employment shall be deemed to occur on the close of business on the earlier of the effective date of “dissolution” or the day
immediately preceding the next scheduled extension date, and Mr. Harris shall be entitled to receive certain accrued amounts. In the event (i) that Summit Holdings elects not to extend the employment term or (ii) of a “dissolution” in connection with which the Sponsors receive a return on their investment, Mr. Harris shall be treated as terminated without “cause” effective as of the close of business on the day immediately preceding the next scheduled extension date or the effective date of the “dissolution,” and shall be entitled to receive the amounts and benefits for termination without “cause” described above.
Pursuant to the terms of his employment agreement, Mr. Harris is subject to the following covenants: (i) a covenant not to disclose confidential information while employed and at all times thereafter; (ii) a covenant not to compete for a period of 12 months following his termination of employment for any reason; and (iii) a covenant not to solicit employees or customers for a period of 12 months following his termination of employment for any reason.
Damian J. Murphy
Under the employment arrangement between the Company and Mr. Murphy, Mr. Murphy serves as an Executive Vice President and East Segment President. Mr. Murphy’s annual base salary is $367,500. In addition, Mr. Murphy is also eligible to earn an annual bonus of up to 60% of his base salary based upon the achievement of performance targets established by the Board within the first three months of each fiscal year during the employment term, and the Board, in its sole discretion, may appropriately adjust such performance targets in any fiscal year to reflect any merger, acquisition or divestiture affected by Summit Holdings during such fiscal year. Mr. Murphy is entitled to a car allowance in the amount of $1,000 per month. Mr. Murphy is also entitled to participate in employee benefit plans as in effect from time to time.
If Mr. Murphy’s employment is terminated without “cause” (as defined in the LP Unit agreement), subject to the non-revocation or a release of claims, he will be entitled to a payment equal to two years of base salary, paid in accordance with our normal payroll practices. Upon a change in control, all of Mr. Murphy’s unvested time-vesting LP Units and Leverage Restoration Options would vest. In addition, if Mr. Murphy was terminated without “cause” (as defined in the LP Unit agreement) within 12 months preceding a change in control or a public offering (each as defined in Summit Holdings’ limited partnership agreement), his performance-vesting LP Units and Leverage Restoration Options would be eligible to vest based on the proceeds of that transaction. The value of his unvested time-vesting LP Units and Leverage Restoration Options and his performance-vesting LP Units and Leverage Restoration Options as of January 2, 2016 is reflected in the “Outstanding Equity Awards at 2015 Fiscal Year-end” table.
Douglas C. Rauh
Summit Holdings entered into an employment agreement with Mr. Rauh as of December 29, 2011, pursuant to which Mr. Rauh became our East Segment President. Effective April 1, 2013, Mr. Rauh assumed the role of Chief Operating Officer of the Company. His employment agreement otherwise remained in effect. Mr. Rauh’s employment agreement has an initial term equal to three years commencing on January 1, 2012 which will be automatically extended for additional one-year periods, unless Summit Holdings or Mr. Rauh provides the other party 60 days prior written notice before the next extension date that the employment term will not be so extended. The employment term will automatically and immediately be terminated upon a “dissolution” (as defined in the employment agreement).
Pursuant to the terms of his employment agreement, Mr. Rauh’s annual base salary is $450,000, which amount is reviewed annually by the Board, and may be increased (but not decreased). Mr. Rauh’s base salary for 2015 was $503,928. Mr. Rauh is also eligible to earn an annual bonus of up to 75% of his base salary based upon the achievement of performance targets established by the Board within the first three months of each fiscal year during the employment term. The Board, in its sole discretion, may appropriately adjust such performance targets in any fiscal year to reflect any merger, acquisition or divestiture effected by Summit Holdings during such fiscal
year. Mr. Rauh is entitled to a car allowance in the amount of $1,000 per month, in addition to reimbursement for Mr. Rauh’s actual expenditures for gasoline, upon submission of appropriate documentation. Mr. Rauh is also entitled to participate in Summit Holdings’ employee benefit plans as in effect from time to time, on the same basis as those benefits are generally made available to other senior executives of Summit Holdings.
If Mr. Rauh’s employment is terminated (i) by Summit Holdings with “cause” (as defined in the employment agreement) or (ii) by him other than as a result of a “constructive termination” (as defined in the employment agreement), he will be entitled to (a) certain accrued amounts (b) a pro rata portion of the annual bonus and (c) certain vested employee benefits, and if Mr. Rauh’s employment is terminated as a result of his death or “disability” (as defined in his employment agreement), he will be entitled to (a) certain accrued amounts, (b) a pro rata portion of the annual bonus, if any, that Mr. Rauh would have been entitled to receive, payable when such annual bonus would have otherwise been payable to him had his employment not terminated, and (c) the costs of COBRA health continuation coverage for 18 months (or, if shorter, until COBRA coverage ends under Summit Holdings’ group health plan). If Mr. Rauh’s employment is terminated (i) by Summit Holdings without cause or (ii) by him as a result of a “constructive termination” (as defined in the employment agreement), subject to his continued compliance with certain restrictive covenants and his non-revocation of a general release of claims, he will be entitled to receive, in addition to certain accrued amounts, (i) continued payment of his base salary in accordance with the Summit Holdings’ normal payroll practices, as in effect on the date of termination of his employment, until 12 months after the date of such termination (the “Severance Period”), (ii) an amount equal to Mr. Rauh’s annual bonus in respect of the fiscal year immediately preceding the applicable year of Mr. Rauh’s termination of employment, payable in equal monthly installments for 18 months after the date of such termination, and (iii) the costs of COBRA health continuation coverage for the lesser of the Severance Period or 18 months after the date of such termination (or, if shorter, until COBRA coverage ends under Summit Holdings’ group health plan); provided that the aggregate amounts shall be reduced by the present value of any other cash severance or termination benefits payable to Mr. Rauh under any other plans, programs or arrangements of the Summit Holdings or its affiliates.
If Mr. Rauh’s employment was terminated without “cause” or as a result of a “constructive termination” (each as defined in his employment agreement), he would have been entitled to (1) continued payment of his base salary for 12 months, or $503.928, (2) an amount equal to his annual bonus in respect of 2014,or $404,549 and (3) the costs of COBRA health coverage for 12 months after his date of termination, or $11,928, based on 2015 rates. If Mr. Rauh’s employment was terminated as a result of his death or “disability” (as defined in his employment agreement), he would be entitled to receive (1) a pro rata portion of his annual bonus that he would have been entitled to receive in respect of 2015, or $462,984, and (2) the costs of COBRA health care coverage for 18 months, or $17,893, based on 2015 rates. If Mr. Rauh was terminated without “cause” (as defined in the Class D unit subscription agreement) or as a result of a “constructive termination” within 12 months preceding a change in control or a public offering (each as defined in Summit Holdings’ limited partnership agreement), his performance-vesting Class D Units would be eligible to vest based on the proceeds of that transaction. In addition, upon a change in control, all of Mr. Rauh’s unvested time-vesting LP Units and Leverage Restoration Options would vest. The value of his unvested time-vesting LP Units and Leverage Restoration Options and his performance-vesting LP Units and Leverage Restoration Options as of January 2, 2016 is reflected in the “Outstanding Equity Awards at 2015 Fiscal Year-end” table.
In the event (i) Mr. Rauh elects not to extend the employment term or (ii) of a “dissolution” (as such term is defined in his employment agreement) in connection with which the Sponsors do not receive a return on their investment, unless Mr. Rauh’s employment is earlier terminated, Mr. Rauh’s termination of employment shall be deemed to occur on the close of business on the earlier of the effective date of “dissolution” or the day immediately preceding the next scheduled extension date, and Mr. Rauh shall be entitled to receive certain accrued amounts. In the event (i) that Summit Holdings elects not to extend the employment term or (ii) of a “dissolution” (as such term is defined in his employment agreement) in connection with which the Sponsors receive a return on their investment, Mr. Rauh shall be treated as terminated without cause effective as of the
close of business on the day immediately preceding the next scheduled extension date or the effective date of the “dissolution,” and shall be entitled to receive the amounts and benefits for termination without “cause” described above.
Pursuant to the terms of his employment agreement, Mr. Rauh is subject to the following covenants: (i) a covenant not to disclose confidential information while employed and at all times thereafter; (ii) a covenant not to compete for a period of 12 months following his termination of employment for any reason; and (iii) a covenant not to solicit employees or customers for a period of 12 months following his termination of employment for any reason.
Outstanding Equity Awards at 2015 Fiscal Year-end
A summary of the outstanding equity awards for each named executive officer as of January 2, 2016 is as follows:
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||||
Name | Grant Date | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable (1) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)(2) | Option Exercise Price ($) | Option Expiration Date(3) | Number of Shares or Units of Stock That Have Not Vested (#)(4) | Market Value of Shares or Units of Stock That Have Not Vested ($)(5) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(6) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(7) | ||||||||||||||||||||||||||||||
Thomas W. Hill | | 3/17/15 3/17/15 | | | — — | | | 559,181 29,463 | | | 726,933 — | | | 18.00 18.00 | | | 3/17/25 3/17/25 | | ||||||||||||||||||||||
7,665 | 153,607 | 742,456 | 14,878,818 | |||||||||||||||||||||||||||||||||||||
Michael J. Brady | | 3/17/15 3/17/15 | | | — — | | | 176,988 6,852 | | | 230,084 — | | | 18.00 18.00 | | | 3/17/25 3/17/25 | | ||||||||||||||||||||||
7,471 | 149,719 | 237,652 | 4,762,546 | |||||||||||||||||||||||||||||||||||||
Douglas C. Rauh | 3/17/15 | — | 128,525 | 167,083 | 18.00 | 3/17/25 | ||||||||||||||||||||||||||||||||||
28,398 | 569,096 | 165,578 | 3,318,183 | |||||||||||||||||||||||||||||||||||||
Brian J. Harris | 3/17/15 | — | 101,200 | 131,560 | 18.00 | 3/17/25 | ||||||||||||||||||||||||||||||||||
77,904 | 1,561,196 | 155,815 | 3,122,533 | |||||||||||||||||||||||||||||||||||||
Damian J. Murphy | 3/17/15 | — | 124,084 | 161,310 | 18.00 | 3/17/25 | ||||||||||||||||||||||||||||||||||
5,378 | 107,775 | 166,653 | 3,339,726 |
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2015 Option Exercises and Stock Vested
The following table provides information regarding the amounts recognized by our NEOs upon the vesting of time-vesting LP Units during 2015.
Name | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting($)(1) | ||||||
Thomas W. Hill | 80,786 | $ | 1,618,953 | |||||
Michael J. Brady | 25,382 | $ | 508,648 | |||||
Doug C. Rauh | 28,084 | $ | 562,796 | |||||
Brian J. Harris | 47,947 | $ | 960,853 | |||||
Damian J. Murphy | 13,062 | $ | 261,767 |
Director Compensation
In 2015, we paid compensation only to our directors who were not employed by us, Blackstone or Silverhawk for their services as directors. Following our IPO, these directors received annual cash compensation of $150,000. The chairperson of the Board received an additional $90,000 and the respective chairpersons of the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee received an additional $15,000, $10,000 and $10,000, respectively. Directors who were not employed by us may also receive compensation, from time to time, for service on any special committees of the Board. During 2015, directors could elect to receive a portion of their compensation, in an amount up to the lesser of 50% of their annual compensation or $100,000, in the form of equity. We reimburse our directors for any reasonable expenses incurred by them in connection with services provided in such capacity.
Howard L. Lance
Mr. Lance was paid $250,000 in 2015 for service on the Board as its chairman and as chair of the Corporate Governance and Nominating Committee. In connection with the IPO, the aggregate number of vested and unvested LP Units issued to Mr. Lance in respect of his Class D interests was 221,480, and the number of leverage restoration options was 246,611.
Ted A. Gardner
Mr. Gardner was paid $48,000 for his service on a special committee of the Board formed to evaluate aspects of the 2015 acquisition of the Davenport Assets. In connection with the IPO, Class C interests held by a limited liability company controlled by Mr. Gardner were converted to 94,692 LP Units and the limited liability company received 27,408 warrants.
John R. Murphy
Mr. Murphy was paid $196,750 in 2015 for his service on the Board, as chair of the Audit Committee and for his service on a special committee of the Board formed to evaluate aspects of the 2015 acquisition of the Davenport Assets. He received $41,224 of this compensation in shares of Summit Inc.’s Class A common stock, of which $20,615 was paid in 2016. In connection with the IPO, the aggregate number of vested and unvested LP Units issued to Mr. Murphy in respect of his Class D interests was 11,274 and the number of leverage restoration options was 10,220.
Director Compensation Table
The table below summarizes the compensation paid to non-employee directors for the year ended January 2, 2016.
Name | Fees Earned or Paid in Cash | Option Awards(1) | Stock Awards(2) | Total Compensation | ||||||||||||
Howard L. Lance | $ | 250,000 | $ | 2,207,168 | $ | 2,155,868 | $ | 4,756,696 | ||||||||
Ted A. Gardner | 48,000 | 493,344 | 195,072 | 48,000 | ||||||||||||
Julia C. Kahr | — | — | — | — | ||||||||||||
John R. Murphy | 196,750 | 91,469 | 127,985 | 400,564 | ||||||||||||
Neil P. Simpkins | — | — | — | — | ||||||||||||
Anne K. Wade(3) | — | — | — | — |
The following table sets forth the beneficial ownership of shares of our Class A common stock and LP Units by (1) each person known to us to beneficially own more than 5% of any class of the outstanding voting securities of Summit Inc., (2) each of our directors and named executive officers and (3) all of our directors and executive officers as a group. Percentage of beneficial ownership is based upon 100,022,807 votes represented by outstanding securities, consisting of (1) 49,746,982 shares of Class A common stock issued and outstanding and (2) 50,275,825 LP Units outstanding, excluding LP Units held by Summit Inc., in each case as of February 17, 2016. Summit Inc. is the general partner of Summit Holdings, which indirectly owns 100% of the limited liability interests of Summit LLC. Summit Inc. also holds 49,746,982 of the outstanding LP Units. Except as otherwise noted, (i) the information is as of February 17, 2016, and (ii) the address of each beneficial owner of is c/o Summit Materials, Inc., 1550 Wynkoop Street, 3rd floor, Denver, Colorado 80202. Beneficial ownership is determined in accordance with the rules and regulations of the SEC.
Name of Beneficial Owner | Class A Common Stock (1) | LP Units (1) | Combined Voting Power (2)(3) | |||||||||||||||||||||
Number | Percent | Number | Percent | Number | Percent | |||||||||||||||||||
Blackstone Funds (4) | — | — | 37,933,804 | 37.9 | % | 50,275,825 | 50.3 | % | ||||||||||||||||
BAMCO, Inc. (5) | 3,718,555 | 7.5 | % | — | — | 3,718,555 | 3.7 | % | ||||||||||||||||
Jennison Associates LLC (6) | 3,542,184 | 7.1 | % | — | — | 3,542,184 | 3.5 | % | ||||||||||||||||
Point72 Asset Management, L.P. (7) | 2,582,776 | 5.2 | % | — | — | 2,582,776 | 2.6 | % | ||||||||||||||||
Prudential Financial, Inc. (8) | 3,791,118 | 7.6 | % | — | — | 3,791,118 | 3.8 | % | ||||||||||||||||
Roystone Capital Management LP (9) | 1,692,509 | 3.4 | % | — | — | 1,692,509 | 1.7 | % | ||||||||||||||||
The Vanguard Group (10) | 3,300,294 | 6.6 | % | — | — | 3,300,294 | 3.3 | % | ||||||||||||||||
Thomas W. Hill (11) | 179,258 | * | 1,336,470 | 1.3 | % | 179,258 | * | |||||||||||||||||
Howard L. Lance (12) | 61,653 | * | 253,499 | * | 61,653 | * | ||||||||||||||||||
Ted A. Gardner (13) | 27,408 | * | 252,752 | * | 27,408 | * | ||||||||||||||||||
Julia C. Kahr (14) | — | — | — | — | — | — | ||||||||||||||||||
John R. Murphy (15) | 4,691 | * | 11,274 | * | 4,691 | * | ||||||||||||||||||
Neil P. Simpkins (16) | — | — | — | — | — | — | ||||||||||||||||||
Anne K. Wade | — | — | — | — | — | — | ||||||||||||||||||
Michael J. Brady (17) | 51,099 | * | 483,649 | * | 51,099 | * | ||||||||||||||||||
Brian J. Harris (18) | 80,300 | * | 547,951 | * | 80,300 | * | ||||||||||||||||||
Damian J. Murphy (19) | 34,021 | * | 259,042 | * | 34,021 | * | ||||||||||||||||||
Douglas C. Rauh (20) | 35,631 | * | 267,077 | * | 35,631 | * | ||||||||||||||||||
All Directors and Executive Officers as a Group (15 persons) (21) | 546,470 | 1.1 | % | 3,900,633 | 3.9 | % | 546,470 | * |
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Each of such persons disclaims beneficial ownership of the LP Units (and the shares underlying such units) directly held by the Blackstone Funds (other than the Blackstone Funds to the extent of their direct holdings). The address of each of the entities listed in this footnote is c/o The Blackstone Group L.P., 345 Park Avenue, New York, New York 10154.
Exchange Agreement
In connection with the IPO, we entered into an exchange agreement with the holders of LP Units pursuant to which each holder of LP Units (and certain permitted transferees thereof) may, from and after March 17, 2016 (subject to the terms of the exchange agreement) exchange their LP Units for shares of Class A common stock of Summit Inc. on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Notwithstanding the foregoing, Blackstone is generally permitted to exchange LP Units at any time. The exchange agreement also provides that a holder of LP Units will not have the right to exchange LP Units if Summit Inc. determines that such exchange would be prohibited by law or regulation or would violate other agreements with Summit Inc. or its subsidiaries to which such holder may be subject. Summit Inc. may impose additional restrictions on exchange that it determines to be necessary or advisable so that Summit Holdings is not treated as a “publicly traded partnership” for U.S. federal income tax purposes. As a holder exchanges LP Units for shares of Class A common stock, the number of LP Units held by Summit Inc. is correspondingly increased as it acquires the exchanged LP Units. In accordance with the exchange agreement, any holder other than Summit Owner Holdco who surrenders all of its LP Units for exchange must concurrently surrender all shares of Class B common stock held by it (including fractions thereof) to Summit Inc. For so long as affiliates of Blackstone collectively own at least 5% of the outstanding LP Units (excluding LP Units held by Summit Inc.), the consent of each Blackstone holder will be required to amend the exchange agreement.
Registration Rights Agreement
In connection with the IPO, we entered into a registration rights agreement with our pre-IPO owners and the Former Continental Cement Minority Holders pursuant to which we granted them, their affiliates and certain of their transferees the right, under certain circumstances and subject to certain restrictions, to require us to register under the Securities Act the offering of shares of Class A common stock delivered in exchange for LP Units. Under the registration rights agreement, we agreed to register the exchange of LP Units for shares of Class A common stock by our pre-IPO owners. In addition, Blackstone has the right to request an unlimited number of “demand” registrations, the Former Continental Cement Minority Holders have the right to request one “demand” registration and Blackstone, certain other pre-IPO owners and the Former Continental Cement Minority Holders have customary “piggyback” registration rights.
Tax Receivable Agreement
Holders of LP Units (other than Summit Inc.) may, subject to certain conditions, from and after March 17, 2016 (subject to the terms of the exchange agreement), exchange their LP Units for shares of Class A common stock of Summit Inc. on a one-for-one basis. Summit Holdings intends to make an election under Section 754 of the Code effective for each taxable year in which an exchange of LP Units for shares of Class A common stock occurs, which is expected to result in increases to the tax basis of the tangible and intangible assets of Summit Holdings at the time of an exchange of LP Units. These increases in tax basis may reduce the amount of tax that Summit Inc. would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. In addition, in the event the Investor Entities exercise their right to merge with us or be contributed to us (as described below under “—Stockholders’ Agreement,” we may be entitled to utilize the Investor Entities’ net operating losses, if any. The IRS may challenge all or part of the tax basis increase and increased deductions or net operating losses, and a court could sustain such a challenge.
In connection with the IPO, we entered into a tax receivable agreement with the holders of LP Units and certain other indirect pre-IPO owners that provides for the payment by Summit Inc. to exchanging holders of LP Units of 85% of the cash savings in income tax, if any, that Summit Inc. realizes as a result of (i) the increases in tax basis described above and (ii) our utilization of certain net operating losses of the Investor Entities described above and certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. This payment obligation is an obligation of Summit Inc. and not of Summit Holdings. Summit Inc. expects to benefit from the remaining 15% of cash savings, if any, in income tax it realizes. For purposes of the tax receivable agreement, the cash savings in income tax are computed by comparing the actual income tax liability of Summit Inc. (calculated with certain assumptions) to the amount of such taxes that Summit Inc. would have been required to pay had there been no increase to the tax basis of the assets of Summit Holdings as a result of the exchanges and no utilization of net operating losses of the Investor Entities and had Summit Inc. not entered into the tax receivable agreement. The term of the tax receivable agreement continues until all such tax benefits have been utilized or expired, unless Summit Inc. exercises its right to terminate the tax receivable agreement for an amount based on the agreed payments remaining to be made under the agreement (as described in more detail below) or Summit Inc. breaches any of its material obligations under the tax receivable agreement in which case all obligations generally will be accelerated and due as if Summit Inc. had exercised its right to terminate the tax receivable agreement. Estimating the amount of payments that may be made under the tax receivable agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The increases in tax basis as a result of an exchange, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including:
We anticipate that we will account for the effects of these increases in tax basis and payments for such increases under the tax receivable agreement arising from exchanges as follows:
All of the effects of changes in any of our estimates after the date of the exchange will be included in net (loss) income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net (loss) income. We expect that as a result of the size of the increases in the tax basis of the tangible and intangible assets of Summit Holdings and our possible utilization of net operating losses, the payments that we may make under the tax receivable agreement will be substantial. There may be a material negative effect on our liquidity if, as a result of timing discrepancies or otherwise, the payments under the tax receivable agreement exceed the actual cash tax savings that Summit Inc. realizes in respect of the tax attributes subject to the tax receivable agreement and/or distributions to Summit Inc. by Summit Holdings are not sufficient to permit Summit Inc. to make payments under the tax receivable agreement after it has paid taxes. Late payments under the tax receivable agreement generally accrue interest at an uncapped rate equal to LIBOR plus 500 basis points. The payments under the tax receivable agreement are not conditioned upon continued ownership of us by holders of LP Units.
In addition, the tax receivable agreement provides that upon certain changes of control, Summit Inc.’s (or its successor’s) obligations with respect to exchanged or acquired LP Units (whether exchanged or acquired before or after such transaction) and other recipients would be based on certain assumptions, including that Summit Inc. would have sufficient taxable income to fully utilize the deductions arising from the tax deductions, tax basis and other tax attributes subject to the tax receivable agreement. With respect to previously exchanged or acquired LP Units, we would be required to make a payment equal to the present value (at a discount rate equal to LIBOR plus 100 basis points) of the anticipated future tax benefits determined using assumptions (ii) through (v) of the following paragraph.
Furthermore, Summit Inc. may elect to terminate the tax receivable agreement early by making an immediate payment equal to the present value of the anticipated future cash tax savings. In determining such anticipated future cash tax savings, the tax receivable agreement includes several assumptions, including that (i) any LP Units that have not been exchanged are deemed exchanged for the market value of the shares of Class A common stock at the time of termination, (ii) Summit Inc. will have sufficient taxable income in each future taxable year to fully realize all potential tax savings, (iii) Summit Inc. will have sufficient taxable income to fully utilize any remaining net operating losses subject to the tax receivable agreement on a straight line basis over the shorter of the statutory expiration period for such net operating losses or the five-year period after the early termination or change of control, (iv) the tax rates for future years will be those specified in the law as in effect at the time of termination and (v) certain non-amortizable assets are deemed disposed of within specified time periods. Based upon a $20.04 share price of our Class A common stock, which was the closing price on December 31, 2015, and that LIBOR were to be 1.2%, we estimate that if Summit Inc. were to exercise its termination right, the aggregate amount of these termination payments would be approximately $607.0 million. The foregoing number is merely an estimate and the actual payments could differ materially.
As a result of the change in control provisions and the early termination right, Summit Inc. could be required to make payments under the tax receivable agreement that are greater than or less than the specified percentage of the actual cash tax savings that Summit Inc. realizes in respect of the tax attributes subject to the tax receivable agreement (although any such overpayment would be taken into account in calculating future payments, if any, under the tax receivable agreement) or that are prior to the actual realization, if any, of such tax benefits. Also, the obligations of Summit Inc. would be automatically accelerated and be immediately due and payable in the event that Summit Inc. breaches any of its material obligations under the agreement and in certain events of bankruptcy or liquidation. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity.
Decisions made by our pre-IPO owners may influence the timing and amount of payments that are received by an exchanging or selling existing owner under the tax receivable agreement. For example, the earlier disposition of assets following an exchange or acquisition transaction generally will accelerate payments under the tax receivable agreement and increase the present value of such payments, and the disposition of assets before an exchange or acquisition transaction will increase an existing owner’s tax liability without giving rise to any rights of an existing owner to receive payments under the tax receivable agreement.
Payments under the tax receivable agreement are based on the tax reporting positions that we will determine. Summit Inc. will not be reimbursed for any payments previously made under the tax receivable agreement if the tax basis increases or our utilization of net operating losses are successfully challenged by the IRS, although such amounts may reduce our future obligations, if any, under the tax receivable agreement. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of Summit Inc.’s cash tax savings.
Stockholders’ Agreement
In connection with the IPO, we entered into a stockholders’ agreement with Blackstone. This agreement requires us to, among other things, nominate a number of individuals designated by Blackstone for election as our directors at any meeting of our stockholders (each a “Sponsor Director”) such that, upon the election of each such individual, and each other individual nominated by or at the direction of our Board or a duly authorized committee of the Board, as a director of our company, the number of Sponsor Directors serving as directors of our company is equal to: (1) if our pre-IPO owners and their affiliates together continue to beneficially own at least 50% of the shares of our common stock entitled to vote generally in the election of our directors as of the record date for such meeting, the lowest whole number that is greater than 50% of the total number of directors comprising our Board; (2) if our pre-IPO owners and their affiliates together continue to beneficially own at least 40% (but less than 50%) of the shares of our common stock entitled to vote generally in the election of our directors as of the record date for such meeting, the lowest whole number that is at least 40% of the total number of directors comprising our Board; (3) if our pre-IPO owners and their affiliates together continue to beneficially own at least 30% (but less than 40%) of the total shares of our common stock entitled to vote generally in the election of our directors as of the record date for such meeting, the lowest whole number that is at least 30% of the total number of directors comprising our Board; (4) if our pre-IPO owners and their affiliates together continue to beneficially own at least 20% (but less than 30%) of the total shares of our common stock entitled to vote generally in the election of our directors as of the record date for such meeting, the lowest whole number that is at least 20% of the total number of directors comprising our Board; and (5) if our pre-IPO owners and their affiliates together continue to beneficially own at least 5% (but less than 20%) of the total shares of our common stock entitled to vote generally in the election of our directors as of the record date for such meeting, the lowest whole number that is at least 10% of the total number of directors comprising our Board. For so long as the stockholders’ agreement remains in effect, Sponsor Directors may be removed only with the consent of Blackstone. In the case of a vacancy on our Board created by the removal or resignation of a Sponsor Director, the stockholders’ agreement requires us to nominate an individual designated by our Sponsor for election to fill the vacancy. The above-described provisions of the stockholders’ agreement will remain in effect until Blackstone is no longer entitled to nominate a Sponsor Director pursuant to the stockholders’ agreement, unless Blackstone requests that it terminate at an earlier date.
The stockholders’ agreement also: (1) requires us to cooperate with Blackstone in connection with certain future pledges, hypothecations or grants of security interest in any or all of the shares of Class A common stock or LP Units held by Blackstone, including to banks or financial institutions as collateral or security for loans, advances or extensions of credit; and (2) entitles the Investor Entities to require us to implement either (x) the contribution of interests in the Investor Entities for an aggregate number of shares of Class A common stock that is equal to the number of LP Units held by such Investor Entity along with any rights holders of interests in the Investor Entity are entitled to under the tax receivable agreement following such contribution or (y) the merger of the applicable Investor Entity into Summit Inc. with Summit Inc. surviving in exchange for a number of shares of
Class A common stock that is equal to the number of LP Units along with any rights holders of interests in the Investor Entity are entitled to under the tax receivable agreement following such contribution.
Summit Materials Holdings L.P. Amended and Restated Limited Partnership Agreement
Summit, Inc. holds LP Units in Summit Holdings and is the sole general partner of Summit Holdings. Accordingly, Summit Inc. operates and controls all of the business and affairs of Summit Holdings and, through Summit Holdings and its operating entity subsidiaries, conducts our business.
Pursuant to the limited partnership agreement of Summit Holdings, Summit Inc. has the right to determine when distributions will be made to holders of LP Units and the amount of any such distributions. If a distribution is authorized, such distribution will be made to the holders of LP Units pro rata in accordance with the percentages of their respective limited partnership interests.
No distributions will be made in respect of unvested LP Units and instead such amounts will be distributed to holders of vested LP Units pro rata in accordance with their vested interests. If, from time to time, an unvested LP Unit becomes vested, then, on the next distribution date, all amounts that would have been distributed pro rata in respect of that LP Unit if it had been vested on prior distribution dates will be required to be “caught up” in respect of that LP Unit before any distribution is made in respect of other vested LP Units.
The holders of LP Units, including Summit Inc., incur U.S. federal, state and local income taxes on their share of any taxable income of Summit Holdings. The limited partnership agreement of Summit Holdings provides for tax distributions, to the holders of the LP Units in an amount generally calculated to provide each holder of LP Units with sufficient cash to cover its tax liability in respect of the LP Units. These tax distributions are generally only paid to the extent that other distributions made by Summit Holdings were otherwise insufficient to cover the estimated tax liabilities of all holders of LP Units. In general, these tax distributions are computed based on our estimate of the net taxable income of Summit Holdings allocated to each holder of LP Units multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate applicable to an individual or corporate resident in New York, New York (or a corporate resident in certain circumstances). In the year ended January 2, 2016, Summit LLC paid distributions to Summit Holdings totaling $46.6 million, of which $28.7 million was distributed to Summit Holdings’ partners, other than Summit Inc., and $17.9 million was paid to Summit Inc.
The limited partnership agreement of Summit Holdings also provides that substantially all expenses incurred by or attributable to Summit Inc., but not including obligations incurred under the tax receivable agreement by Summit Inc., income tax expenses of Summit Inc. and payments on indebtedness incurred by Summit Inc., will be borne by Summit Holdings.
The limited partnership agreement of Summit Holdings also provides that affiliates of Blackstone may transfer all or any portion of their LP Units or other interest in Summit Holdings without the prior consent of Summit Inc. as the general partner, subject to compliance with certain conditions, including that Summit Holdings not become a publicly traded partnership.
Summit Inc. as the general partner may (i) at any time, require all holders of LP Units, other than affiliates of Blackstone, to exchange their units for shares of our common stock or (ii) with the consent of partners in Summit Holdings whose vested interests exceed 66 2/3% of the aggregate vested interests in Summit Holdings, require all holders of interests in Summit Holdings to transfer their interests, provided that the prior written consent of each holder that is an affiliate of Blackstone affected by any such proposed transfer will be required. These provisions are designed to ensure that the general partner can, in the context of a sale of the company, sell Summit Holdings as a wholly-owned entity subject to the approval of the holders thereof, including specific approval by any Blackstone affiliates then holding such units. For so long as affiliates of Blackstone collectively
own at least 5% of the outstanding LP Units, the consent of each Blackstone holder will be required to amend the limited partnership agreement.
Contribution and Purchase Agreement
Pursuant to a contribution and purchase agreement, dated December 18, 2014, among Summit Inc., Summit Holdings, Summit GP, Summit Owner Holdco, the Former Continental Cement Minority Holders and Continental Cement, concurrently with the consummation of the IPO (v) the Former Continental Cement Minority Holders contributed 28,571,429 of the Class B Units of Continental Cement to Summit Owner Holdco in exchange for Series A Units of Summit Owner Holdco, (w) Summit GP, as the existing general partner of Summit Holdings contributed to Summit Owner Holdco its right to act as the general partner of Summit Holdings in exchange for Series B Units of Summit Owner Holdco, (x) Summit Owner Holdco in turn contributed the Class B Units of Continental Cement to us in exchange for shares of our Class A common stock and contributed to us its right to act as the general partner of Summit Holdings in exchange for shares of our Class B common stock, (y) we in turn contributed the Class B Units of Continental Cement we received to Summit Holdings in exchange for LP Units and (z) the Former Continental Cement Minority Holders delivered the remaining 71,428,571 Class B Units of Continental Cement to Summit Holdings in exchange for a payment made by Summit Holdings in March 2015 in the amount of $35.0 million in cash and $15.0 million aggregate principal amount of non-interest bearing notes that are payable in six aggregate annual installments, beginning on March 17, 2016, of $2.5 million. As a result of the foregoing transactions, Summit Owner Holdco holds 1,029,183 shares of Class A common stock and Continental Cement became a wholly-owned subsidiary of Summit Holdings on March 17, 2015.
Indemnification Agreements
We have entered into indemnification agreements with our directors and executive officers. These agreements require us to indemnify these individuals to the fullest extent permitted by Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors or executive officers, we have been informed that in the opinion of the SEC such indemnification is against public policy and is therefore unenforceable.
There is currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.
Transaction and Management Fee Agreement
Under the terms of a transaction and management fee agreement between Summit Holdings and Blackstone Management Partners L.L.C. (“BMP”), whose affiliates include controlling stockholders of the Company, BMP provided monitoring, advisory and consulting services to the Company through March 17, 2015. Under the terms of the agreement, BMP was permitted to assign, and had assigned, a portion of the fees to which it was entitled to Silverhawk Summit, L.P. and to certain other equity investors.
The management fee was calculated based on the greater of $300,000 or 2.0% of the Company’s annual consolidated profit, as defined in the agreement, and is included in general and administrative expenses. The Company incurred management fees totaling $1.0 million during the period between December 28, 2014 and March 17, 2015 and $4.4 million and $2.6 million in the years ended December 27, 2014 and December 28, 2013, respectively. During these periods, the Company paid immaterial amounts to Silverhawk Summit, L.P. and to other equity investors.
Also under the terms of the transaction and management fee agreement, BMP undertook financial and structural analysis, due diligence investigations, corporate strategy and other advisory services and negotiation assistance related to acquisitions for which the Company paid BMP transaction fees equal to 1.0% of the
aggregate enterprise value of any acquired entity or, if such transaction was structured as an asset purchase or sale, 1.0% of the consideration paid for or received in respect of the assets acquired or disposed. The Company paid BMP $3.9 million during the year ended December 27, 2014 and immaterial amounts in 2013. During these periods, the Company paid immaterial amounts to Silverhawk Summit, L.P. and to other equity investors. The acquisition-related fees paid pursuant to this agreement are included in transaction costs.
In connection with the IPO, the transaction and management fee agreement with BMP was terminated on March 17, 2015 for a final payment of $13.8 million; $13.4 million was paid to affiliates of BMP and the remaining $0.4 million was paid to affiliates of Silverhawk Summit, L.P. and to certain other equity investors.
In addition to the transaction and management fees paid to BMP, the Company reimburses BMP for direct expenses incurred, which were not material in 2015, 2014 and 2013.
Warrant Issuances
In connection with the modification of the capital structure of Summit Holdings, we issued warrants to purchase an aggregate of 160,333 shares of Class A common stock to limited partners of Summit Holdings who held Class C limited partnership interests of Summit Holdings. Holders of the Class C limited partnership interests include Thomas W. Hill, a limited liability company controlled by Ted A. Gardner and Michael J. Brady, who received warrants to purchase 29,463, 27,408, and 6,852 shares of Class A common stock, respectively. The warrants were issued in substitution for part of the economic benefit of the Class C interests that was not reflected in the conversion of the Class C interests to LP Units. The exercise price of the warrants is equal to the IPO price of $18.00 per share. The warrants will not be exercisable until March 17, 2016.
Commercial Transactions with Sponsor Portfolio Companies
Our Sponsors and their respective affiliates have ownership interests in a broad range of companies. We have entered and may in the future enter into commercial transactions in the ordinary course of our business with some of these companies, including the sale of goods and services and the purchase of goods and services. None of these transactions or arrangements is expected to be material to us.
Other
Thomas A. Beck was appointed President of the Company’s Cement Division effective January 3, 2016. Mr. Beck has served as President of Continental Cement since January 1, 2013. Mr. Beck, through the Thomas A. Beck Family, LLC (the “Beck LLC”), is a party to the Contribution and Purchase Agreement as a Former CCC Minority Holder. As described above under “Contribution and Purchase Agreement,” in connection with the Contribution and Purchase Agreement, Summit Holdings paid to the Former CCC Minority Holders cash consideration of $35 million and issued to the Former CCC Minority Holders $15 million in aggregate principal amount of non-interest bearing notes payable over six years. The pro rata share of the $35 million cash consideration that was distributed to the Beck LLC on March 17, 2015 was $600,855. The pro rata share of the $15 million in notes that is due to the Beck LLC is $208,344, payable in six equal annual installments of $34,724.08 on each anniversary of March 17, 2015. During 2015, tax distributions to the Beck LLC in connection with Mr. Beck’s interest in the Contribution and Purchase Agreement totaled $12,237.
On July 17, 2015, Continental Cement purchased the Davenport Assets from Lafarge for a purchase price of $450.0 million in cash and a cement distribution terminal in Bettendorf, Iowa. At closing, $370.0 million of the purchase price was paid, and the remaining $80.0 million was paid on August 13, 2015. Summit Holdings entered into a commitment letter dated April 16, 2015, with Blackstone Capital Partners V L.P. (“BCP”) for equity financing up to $90.0 million in the form of a preferred equity interest (the “Equity Commitment Financing”), which would have been used to pay the $80.0 million deferred purchase price if other financing was not attained by December 31, 2015. For this Equity Commitment Financing, Summit Holdings paid a $1.8 million commitment fee to BCP in the year ended January 2, 2016.
Blackstone Advisory Partners L.P., an affiliate of The Blackstone Group L.P., served as an initial purchaser of $13.0 million and $5.75 million principal amounts of the 2020 notes issued in January 2014 and September 2014, respectively, $26.25 million and $22.5 million principal amount of the existing notes and outstanding notes issued in July 2015 and November 2015, respectively, and received compensation in connection therewith. In addition, Blackstone Advisory Partners L.P. served as an underwriter of 1,681,875 shares of Class A common stock issued in connection with the August 2015 follow-on offering of its Class A common stock (the “August 2015 Follow-on Offering”), and received compensation in connection therewith.
Blackstone Holdings Finance Co. L.L.C., an affiliate of The Blackstone Group L.P., served as a co-manager and a lender for our term loan facility and received customary fees associated with its pro rata participation.
In the year ended January 2, 2016, Summit Inc. used a portion of the net proceeds from the August 2015 Follow-on Offering to purchase 18,675,000 LP Units at a purchase price per LP Unit of $24.784375 (equal to the public offering price per share of Class A common stock in the August 2015 Follow-on Offering, less underwriting discounts and commissions) from certain of its pre-IPO owners, including affiliates of The Blackstone Group L.P., Silverhawk Capital Partners, LLC and certain of its directors and officers. Such pre-IPO owners received approximately $462.8 million in the aggregate, and Summit Inc.’s directors and executive officers participating in the August 2015 Follow-on Offering received net proceeds in connection with their sale of LP Units in the following amounts: Ms. Benedict $165,758, Mr. Gill $100,426, Mr. Harris $2,496,951, Mr. Hill $6,166,774, Mr. Lance $747,298, Mr. Damian Murphy $887,429 and Mr. Rauh $641,147.
In addition to the fees paid to BMP pursuant to the agreements described above, Summit Materials reimburses BMP for direct expenses incurred, which were not material in the years ended January 2, 2016, December 27, 2014 or December 28, 2013.
In the year ended December 27, 2014, we sold certain assets associated with the production of concrete blocks, including inventory and equipment, to a related party for $2.2 million and sold a ready-mixed concrete plant to a related party in exchange for the related party performing the required site reclamation, estimated at approximately $0.2 million.
Cement sales to companies owned by certain noncontrolling members of Continental Cement were approximately $1.4 million, $14.3 million, and $12.7 million for the period between December 28, 2014 and March 17, 2015 and the years ended December 27, 2014 and December 28, 2013, respectively, and accounts receivable due from these parties were approximately $1.2 million as of December 27, 2014.
We paid $0.7 million of interest to a noncontrolling member of Continental Cement in the year ended December 27, 2014 on a related party note. The principal balance on the note had been repaid in January 2012.
Statement of Policy Regarding Transactions with Related Persons
In connection with Summit Inc.’s IPO, the Board adopted a written statement of policy regarding transactions with related persons, which we refer to as our “related person policy.” Our related person policy requires that a “related person” (as defined as in paragraph (a) of Item 404 of Regulation S-K) must promptly disclose to our Chief Legal Officer any “related person transaction” (defined as any transaction that is anticipated would be reportable by us under Item 404(a) of Regulation S-K in which we were or are to be a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest) and all material facts with respect thereto. The Chief Legal Officer will then promptly communicate that information to our board of directors. No related person transaction will be executed without the approval or ratification of our board of directors or a duly authorized committee of our board of directors. It is our policy that directors interested in a related person transaction will recuse themselves from any vote on a related person transaction in which they have an interest.
Director Independence
The disclosure included in Item 10 of the report under the heading “Corporate Governance”“Item 2—Ratification of Appointment of KPMG LLP” included in our 2018 Proxy Statement is incorporated herein by reference into this Item 13.reference.
Policy on audit committee Pre-Approval
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Consistent with SEC and Public Company Accounting Oversight Board requirements regarding auditor independence, the audit committee has responsibility for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the audit committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm.
Prior to engagement of the independent registered public accounting firm for the next year’s audit, management will submit a list of services and related fees expected to be rendered during that year within each of the four categories of services to the audit committee for approval.PART IV
Prior to engagement, the audit committee pre-approves independent public accounting firm services within each category and the fees of each category are budgeted. The audit committee requires the independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval categories. In those instances, the audit committee requires specific preapproval before engaging the independent registered public accounting firm.
The audit committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the audit committee at its next scheduled meeting. All of the services in the table above were pre-approved by the audit committee.ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(in thousands) | 2015 | 2014 | 2013 | |||||||||
Audit Fees | $ | 3,222 | $ | 2,836 | $ | 2,200 | ||||||
Tax Fees | 1,348 | 1,885 | 727 | |||||||||
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Total | $ | 4,570 | $ | 4,721 | $ | 2,927 | ||||||
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Audit Fees
The aggregate fees billed for professional services by KPMG LLP for the audit of our financial statements, reviews of our quarterly financial statements and services associated with other Securities and Exchange Commission filings, including registration statements. Fees related to registration statements totaled $1.0 million in both 2015 and 2014.
Tax Fees
The aggregate fees billed for professional services by KPMG LLP in connection with routine tax compliance, general tax consulting services and services related to state tax audits. Tax fees related to registration statements totaled $1.3 million in both 2015 and 2014.
PART IV1.Financial statements:
Financial statements for Summit Inc. and Summit LLC are included under Item 8 of this report, which incorporates Exhibit 99.1 with respect to Summit LLC.
2.Financial statement schedules:
Financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the financial statements or notes thereto.
3.Exhibits:
2.1 |
2.2 | ||
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
4.1 | ||
Indenture, dated as of July 8, 2015, among Summit Materials, LLC, Summit Materials Finance Corp., the guarantors named therein and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4.1 to Summit Materials, Inc.’s Current Report on Form 8-K filed on July 8, 2015 (File No. 001-36873)). | ||
4.2 |
4.3 | ||
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4.4 | ||
4.5 | ||
4.6 | ||
4.7 | ||
4.8 | ||
4.9 | ||
4.10 | ||
4.11* | ||
4.12* | ||
4.13* | ||
4.14 | Form of 6.125% Senior Note due 2023 (included in Exhibit | |
4.15 | ||
4.16 | ||
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4.17 | ||
4.18 | ||
4.19 | ||
4.20 | ||
4.21* | ||
4.22* | ||
4.23* | ||
4.24 | Form of 8.500% Senior Note due 2022 (included in Exhibit 4.12). | |
4.25 | ||
4.26 | Form of 5.125% Senior Note due 2025 (included in Exhibit 4.18). | |
4.27 | ||
4.28* | ||
4.29* | ||
4.30* | ||
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10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6+ | ||
10.7+ |
10.8+ | ||
10.9+ | ||
10.10+ | ||
10.11+ | ||
10.12+ | ||
10.13+ | ||
120
10.14 | ||
10.15 | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
10.20 |
10.21 | ||
10.22 |
121
10.23 | ||
10.24 | ||
10.25+ | ||
10.26+ | ||
10.27+ | ||
10.28+ | ||
10.29 | ||
10.30+ | ||
10.31+ | ||
10.32+ | ||
10.33+ | ||
10.34+ | ||
10.35+* | ||
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12.1* | ||
21* | Subsidiaries of Summit Materials, LLC and Summit Materials, Inc. | |
23.1* | Consent of KPMG, Independent Registered Public Accounting Firm. | |
31.1* | ||
31.2* | ||
31.3* | ||
31.4* | ||
32.1** | ||
32.2** | ||
32.3** | ||
32.4** | ||
95.1* | ||
99.1* | ||
101.1NS* | ||
XBRL Instance Document | ||
101.SCH* | XBRL Taxonomy Extension Schema Document. | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. |
* Filed herewith
** Furnished herewith
+ Indicates management or compensating plan or arrangement
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should
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not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
None.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
SUMMIT MATERIALS, INC. | ||||||||
SUMMIT MATERIALS, LLC | ||||||||
Date: February | By: | /s/ Thomas W. Hill | ||||||
Thomas W. Hill | ||||||||
Chief Executive Officer | ||||||||
(Principal Executive Officer) |
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities indicated on the 1914th day of February 2016.2018.
Signature | Title | ||
/s/ Thomas W. Hill
| President and Chief Executive Officer; Director of
| ||
Thomas W. Hill | |||
/s/ Brian J. Harris
| Chief Financial Officer
| ||
Brian J. Harris | |||
/s/ Joseph S. Cantie | Director of Summit Materials, Inc. | ||
Joseph S. Cantie | |||
/s/ Ted A. Gardner |
| Director of Summit Materials, Inc. | |
| |||
/s/ Howard L. Lance | Director of Summit Materials, Inc. | ||
Howard L. Lance | |||
/s/ John R. Murphy | Director of Summit Materials, Inc. | ||
John R. Murphy | |||
/s/ Neil P. Simpkins |
| Director of Summit Materials, Inc. | |
Neil P. Simpkins | |||
/s/ Anne K. Wade |
| Director of Summit Materials, Inc. | |
Anne K. Wade | |||
/s/ Steven H. Wunning | Director of Summit Materials, Inc. | ||
Steven H. Wunning |
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