Delaware (Summit Materials, Inc.)
Delaware (Summit Materials, LLC)
(State or other jurisdiction of incorporation or organization)
1550 Wynkoop Street, 3rd Floor
Denver, Colorado
(Address of principal executive offices)
47-1984212 26-4138486 (I.R.S. Employer Identification No.) 80202 (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 | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Class A Common Stock (par value $.01 per share) | SUM | 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, 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 every Interactive Data File required to be submitted 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 such files). | |||||||||||||||||||||||
| Yes | ☒ | No | ☐ | ||||||||||||||||||||
| Summit Materials, LLC | Yes | ☒ | No | ☐ | |||||||||||||||||||
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | ||||||||||||||
| Summit Materials, Inc. | ||||||||||||||
| Large accelerated filer | Accelerated filer | |||||||||||||
| Non-accelerated filer | Smaller reporting company | |||||||||||||
| Emerging growth company | ||||||||||||||
| Summit Materials, LLC | ||||||||||||||
| Large accelerated filer | Accelerated filer | |||||||||||||
| Non-accelerated filer | Smaller reporting company | |||||||||||||
| Emerging growth company | ||||||||||||||
| Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. | |||||||||||||||||||||||
| Summit Materials, Inc. | Yes | ☒ | No | ☐ | |||||||||||||||||||
| Summit Materials, LLC | Yes | ☒ | No | ☐ | |||||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 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. | |||||||||||||||||||||||
| 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 July 1, 2017June 27, 2020 was approximately $3.1$1.7 billion.
As of January 30, 2019,February 22, 2021, 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 111,671,837114,796,060 and 99, respectively.
As of January 30, 2019,February 22, 2021, 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
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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 20192021 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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| PART | ITEM | PAGE | ||||||||||||||||||
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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,” “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, 2021, its sole material asset was a 97.5% 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 5 1/8% senior notes due 2025 (“2025 Notes”), our 6 1/2% senior notes due 2027 (“2027 Notes”) and our 5 1/4% senior notes due 2029 (“2029 Notes” and collectively with the 2025 Notes and 2027 Notes, the “Senior Notes”). Summit Inc.’s only revenue for the year ended January 2, 2021 is that generated by Summit LLC and its consolidated subsidiaries. Summit Inc. controls all of the business and affairs of Summit Holdings and, in turn, Summit LLC.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “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 statements made 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, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. 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, of course, 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:
•“Continental Cement” refers to Continental Cement Company, L.L.C.;
•“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;
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•“LP Units” refers to the Class A limited partnership units of Summit Holdings;
•“Mainland” refers to Mainland Construction Materials 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.;
•"APAC Assets" refers to two quarries, one landfill and two asphalt plants located in northeast Kansas;
•"Blake and Augusta Assets" refers to two quarries located in southeast Kansas; and
•“TRA” refers to a tax receivable agreement between Summit Inc. and holders of LP Units.
See “Business—Acquisition History” for a table of acquisitions we have completed since January 2018.
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Corporate Structure
The following chart summarizes our organizational structure, equity ownership and our principal indebtedness as of January 2, 2021. This chart is provided for illustrative purposes only and does not show all of our legal entities or all obligations of such entities.
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(1)U.S. Securities and Exchange Commission (“SEC”) registrant.
(2)The shares of Class B Common Stock are currently held by pre-initial public offering 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 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.
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PART I
ITEM 1. BUSINESS.
Overview
We are one of the fastest growing construction materials companies in the United States, with a 63% increase in revenue between the year ended January 2, 2016 (the year of our initial public offering) and the year ended January 2, 2021. 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 Minnesota to Louisiana. In addition to supplying aggregates to customers, we use a portion of our materials internally to produce ready‑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 inception in 2009, we have 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‑mix concrete and asphalt paving mix. Our proven and probable aggregates reserves were 4.1 billion tons as of January 2, 2021. In the year ended January 2, 2021 we sold 59.1 million tons of aggregates, 2.3 million tons of cement, 5.7 million cubic yards of ready-mix concrete and 5.8 million tons of asphalt paving mix across our more than 400 sites and plants.
The rapid growth we have achieved over the years has been due in large part to our acquisitions, which we funded through equity issuances, debt financings and cash from operations. Over the past decade, the U.S. economy witnessed a cyclical decline followed by a gradual recovery in the private construction market and modest growth in public infrastructure spending. The U.S. private construction market has grown in recent years both nationally and in our markets. During 2020, although the overall U.S. economy experienced a decline related to the COVID-19 pandemic, we continued to see positive indicators for the construction market, including positive trends in housing starts and highway construction letting. We believe we are well positioned to capitalize on growth in the construction market to continue to expand our business.
Our revenue in 2020 was $2.3 billion with net income of $141.2 million. As of January 2, 2021, our total indebtedness outstanding was approximately $1.9 billion.
We anticipate continued growth in our primary end markets, public infrastructure and the private construction market. 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 Portland Cement Association (“PCA”) to grow approximately 8% in the U.S. from 2021 to 2025. We 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. Economic conditions in our markets do vary by state, and public infrastructure funding has been impacted by COVID -19, particularly in Kentucky and Vancouver, British Columbia. The public infrastructure market represented 39% of our revenue in 2020.
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 8% from 2021 to 2025. In addition, the PCA projects that spending in private nonresidential construction will grow 3% over the same period. Growth in private construction spending is influenced by changes in population, employment and general economic activity, among other factors which vary by geography across the United States. Residential activity in our key markets remains strong, particularly in the Houston and Salt Lake City areas, two of the largest metro areas where we operate. We believe residential activity in our key markets will continue to be a driver for volumes in future periods. The private construction market represented 61% of our revenue in 2020.
In addition to anticipated demand growth in our end markets, we expect continued improvement in pricing, especially in our materials businesses. The United States Geological Survey ("USGS") reports that aggregates pricing has increased in 70 of the last 75 years. Accordingly, we believe that this trend will continue in the future. The PCA estimates that cement consumption will increase approximately 10% in the U.S. from 2021 to 2025, reflecting rising demand in the major end markets. We believe that the increased demand will drive higher cement pricing as production capacity in the United States tightens.
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Historically, we have supplemented organic growth with acquisitions by strategically targeting attractive, new markets and expanding in existing markets. We consider population trends, employment rates, competitive landscape, private and public construction outlook, public funding and various other factors prior to entering a new market. In addition to considering 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. This positioning provides local economies of scale and synergies, which benefits our profitability. In addition, we also focus on developing greenfield and brownfield sites in our existing markets.
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. Our management team maintains contact with hundreds of private companies. These long‑standing relationships, cultivated over decades, have been the primary source for our past acquisitions and, we believe, will continue to be an important source for future acquisitions. We believe we offer a compelling value proposition for private company sellers, including secure ongoing stewardship of their legacy businesses.
Our Business Segments
We operate in 21 U.S. states and in British Columbia, Canada and have assets in 23 U.S. states and in British Columbia, Canada through our platforms that make up our operating segments: West; East; and Cement. The 10 platform businesses in the West and East segments have their own management teams. The platform management teams are responsible for overseeing the operating platforms, implementing best practices, developing growth opportunities and integrating acquired businesses. 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 January 2, 2021, the West segment controlled approximately 1.3 billion tons of proven and probable aggregates reserves and $602.6 million of net property, plant and equipment and inventories (“hard assets”). During the year ended January 2, 2021, approximately 54% 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, Georgia, Arkansas and Nebraska where we supply aggregates, ready‑mix concrete, asphalt paving mix and paving and related services. As of January 2, 2021, the East segment controlled approximately 2.3 billion tons of proven and probable aggregates reserves and $745.5 million of hard assets. During the year ended January 2, 2021, approximately 34% 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 nine 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 for the plants, which can reduce the plants’ fuel costs by up to 50%. The Hannibal, Missouri plant is one of very few cement facilities in the United States that can process both hazardous and non-hazardous solid and liquid waste into fuel. As of January 2, 2021, the Cement segment controlled approximately 0.5 billion tons of proven and probable aggregates reserves, which serve its cement business, and $584.7 million of hard assets. During the year ended January 2, 2021, approximately 12% of our revenue was generated in the Cement segment.
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Acquisition History
The following table lists acquisitions we have completed in the last three years:
| Company | Date of Acquisition | Segment | ||||||||||||
| 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 | ||||||||||||
| Stoner Sand, LLC | February 16, 2018 | East | ||||||||||||
| Day Concrete Block Company, Inc. and affiliate | April 2, 2018 | West | ||||||||||||
| Midwest Minerals, LLC | April 27, 2018 | East | ||||||||||||
| Superior Ready Mix, Inc. | April 27, 2018 | East | ||||||||||||
| Buckingham Slate Company, LLC | June 1, 2018 | East | ||||||||||||
| Buildex, LLC | July 1, 2018 | East | ||||||||||||
| APAC Assets | July 2, 2018 | East | ||||||||||||
| XIT Sand and Gravel, LLC and affiliate | July 16, 2018 | West | ||||||||||||
| Walker Sand and Gravel Ltd. Co. | October 1, 2018 | West | ||||||||||||
| Jefferson Quarry, LLC and affiliate | October 10, 2018 | East | ||||||||||||
| Pete Lien & Sons, Inc. | January 4, 2019 | West | ||||||||||||
| Tomball Ready Mix, LLC and affiliate | November 8, 2019 | West | ||||||||||||
| Blake and Augusta Assets | July 2, 2020 | East | ||||||||||||
| Multisources, LTD. and affiliates | July 10, 2020 | West | ||||||||||||
| Valley Gravel Sales LTD. and affiliates | August 21, 2020 | West | ||||||||||||
Our End Markets
Public 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‑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 was signed into law on December 4, 2015 and authorized $305 billion of funding from 2016 through 2020. Through a continuing resolution signed by the President in October 2020, funding for the existing federal transportation funding program now extends through September 2021. It 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 primarily 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. As a result of the COVID-19 pandemic, migration trends towards rural and exurban U.S. markets has begun, including a notable influx in our Texas and Utah markets.
Nonresidential Construction. Nonresidential construction encompasses all privately financed construction other than residential structures. Demand for nonresidential construction is driven primarily by population and economic growth, and activity tends to following residential activity by 12-24 months. Population growth spurs demand for stores, shopping centers and restaurants. Economic growth creates demand for projects such as hotels, office buildings, warehouses and factories,
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although growth rates vary across the U.S. The supply of nonresidential construction projects is also affected by interest rates and the availability of credit to finance these projects.
Our Competitive Strengths
Leading market 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 30 years. We believe we are a top 10 supplier of aggregates, a top 15 producer of cement and a major producer of 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, which we seek to enhance by building scale through additional bolt-on acquisitions. The construction materials industry is highly local in nature due to transportation costs from the high weight‑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, rapidly integrate and improve multiple businesses has enabled, and will continue to enable, us to become market leaders.
Operations positioned to benefit from attractive industry 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‑consuming and complex regulatory and permitting process. According to a January 2020 U.S. Geological Survey, aggregates pricing in the United States had increased in 70 of the previous 75 years, with growth accelerating since 2002 as continuing resource scarcity in the industry has led companies to focus increasingly on improved pricing strategies.
One contributing factor that supports pricing growth through 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. Texas, Utah, Kansas and Missouri, four of the states in which we 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 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 business model. We generate revenue across a spectrum of related products and services. Approximately 21% of the aggregates used in our products and services are internally supplied. Our vertically‑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‑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 providing a greater population of target companies.
Attractive diversity, scale and product portfolio. We operate in dozens of metropolitan statistical areas across 23 U.S. states and in British Columbia, Canada. Between the year ended January 2, 2016 (the year of our initial public offering) and the year ended January 2, 2021, we grew our revenue by 63% and brought substantial additional scale and geographic diversity to our operations. In the year ended January 2, 2021, 59% of our operating income increase came from the West segment, 23% from East segment and 18% from the Cement segment, excluding corporate charges. As of January 2, 2021, we had approximately 4.1 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 74 years and 273 years, respectively, based on the average production rates in 2020 and 2019.
Our dry process cement plants in Hannibal, Missouri and Davenport, Iowa were commissioned in 2008 and 1981, respectively. These low-cost cement plants have efficient manufacturing 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. Due to the location of our Hannibal and Davenport plants on the Mississippi River, in 2020, approximately 66% of cement distributed to our terminals was shipped by barge, which is generally more cost-effective than truck transport.
Proven ability to incorporate new acquisitions and grow businesses. Since our inception, we have acquired dozens of businesses, successfully integrating them into three segments through the implementation of operational improvements, industry‑proven information technology systems, a comprehensive safety program and best in class management programs. A
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typical acquisition and subsequent integration generally involves implementing common safety and financial back office systems, driving best practices in pricing and productivity. In addition, we seek to leverage scale while maintaining local branding and management decision-making and providing management support, strategic direction and financial capital for investment. These acquisitions have helped us achieve significant revenue growth, from $0.4 billion in 2010 to $2.3 billion in 2020.
Experienced and proven leadership driving organic growth and acquisition strategy. Our management team, including corporate and segment managers, corporate development, finance executives and other heavy side industry operators, has extensive experience in the industry. Our management team has successfully enhanced the operations of acquired companies, focusing on scale advantages, cost efficiencies and price optimization to improve profitability and cash flow.
Our Business Strategy
Utilize vertically‑integrated and strategically located operations for growth. We believe that our vertical integration of construction materials, products and services is a significant competitive advantage that we will utilize 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. This creates cost, convenience and reliability advantages for our customers and enables us to capture additional value throughout the supply chain, while at the same time creating significant cross‑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, managed working capital and achieved scale‑driven purchasing synergies and fixed overhead control and reduction. Our platform management teams, 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. These integration and improvement plans typically include, among other things, implementation of a common pricing strategy, safety and financial systems, systematic 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. In addition to our greenfield and brownfield project initiatives, 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 continue our growth as we expand in our existing markets. In pursuing our growth strategy, 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.
Drive profitable growth through strategic acquisitions. Based on aggregates sales, by volume, we believe that we are currently one of the ten largest producers in the United States. Our growth has been a result of the successful execution of our acquisition strategy and implementation of best practices to drive organic growth. 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. We believe we have opportunity for further growth 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 permit.
Capitalize on growth 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 PCA forecasts total housing starts to accelerate to 1.48 million in the United States by 2025. The American Institute of Architects’ Consensus Construction Forecast projects nonresidential construction to shrink 4.8% in 2021. We believe nonresidential activity tends to follow residential activity after about 12 to 24 months. However, the COVID-19 pandemic may impact these trends in ways we cannot foresee.We believe that exposure to the public infrastructure, residential and nonresidential end markets across our markets will benefit us if the U.S. economy improves.
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Our Industry
The U.S. construction materials industry is composed of four primary sectors: aggregates; cement; ready‑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‑held companies focused on a single material, product or market to publicly traded 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 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 materials 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 September 2021. With the nation’s infrastructure aging, there 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 maintenance of existing infrastructure.
In addition to federal funding, state, county and local agencies provide highway construction and maintenance funding. Our four largest states by revenue, Texas, Utah, Kansas and Missouri, represented approximately 25%, 14%, 13% and 9%, respectively, of our total revenue in 2020.
Our Industry and Operations
Demand for our materials and products is observed to have low elasticity in relation to prices. We believe this is partially explained by the absence of competitive replacement products. We do not believe that increases in our prices of materials or products 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, 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 January 2, 2021, approximately 79% 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.
Approximately 69% of our asphalt paving mix was installed by our paving and related services businesses in the year ended January 2, 2021. 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:
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Aggregates
Aggregates are key material components used in the production of cement, ready‑mix concrete and asphalt paving mixes for the 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 and sand and gravel pits. Once extracted, processed and/or crushed and graded on-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‑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, residential 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 mine limestone, gravel, and other natural resources from 132 crushed stone quarries and 116 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 January 2, 2021, we had approximately 4.1 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 4.1 billion tons of proven and probable aggregates reserves, 2.4 billion, or 58%, are located on owned land and 1.7 billion are located on leased land.
According to the September 2020 U.S. Geological Survey, approximately 1.7 billion tons of crushed stone with a value of approximately $18.4 billion was produced in the United States in 2019, which was an increase from the 1.5 billion tons produced in 2018. Sand and gravel production was approximately 1.1 billion tons in 2019 and 2018, valued at approximately $9.0 billion in 2019. 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 35% of the national market in 2020. In February 2020, the U.S. Geological Survey reported that a total of 1,430 companies operating 3,440 quarries
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and 176 sales/distribution yards produced or sold crushed stone in 2019 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 the marketing radius for our products. 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‑use locations.
Each of our aggregates operations is responsible for the sale and marketing of its aggregates products. Approximately 79% 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.
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‑lane interstate highway. Highways located in markets with significant seasonal temperature variances are particularly vulnerable to freeze‑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.
Our competitors in aggregates supply include large vertically‑integrated companies, that have a combined estimated market share of approximately 30%, in addition to 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 public infrastructure, residential and nonresidential projects. It is a binding agent that, when mixed with sand or aggregates and water, produces either ready‑mix concrete or mortar and is an important component of other essential construction materials. 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‑mix concrete operators. Sales are made on the basis of competitive terms and prices in each market. Nearly two‑thirds of U.S. consumption occurs between May and November, coinciding with end‑market construction activity.
Cement production in the United States is distributed among over 90 production facilities located across a majority of the states and is a capital‑intensive business with variable costs dominated by raw materials and energy required to fuel the kiln. Most U.S. cement producers are owned by large foreign companies operating in multiple international markets. Our largest competitors include large vertically integrated companies. 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.
As reported by the PCA, consumption is up from the industry trough of approximately 77.6 million tons in 2010, to approximately 112.6 million tons in 2019, consistent with an increase in U.S. construction activity. Cement sales are still below their peak, but we believe there will be additional growth in the cement industry. U.S. cement consumption has at times outpaced domestic production capacity with the shortfall being supplied with imports, primarily from Canada, Turkey, Greece, Mexico and China. The PCA reports that cement imports are above their trough of approximately 7.2 million tons in 2011 versus approximately 17.8 million tons in 2019.
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We operate a highly‑efficient, low-cost integrated cement manufacturing and distribution network through our cement plants in Hannibal, Missouri, and Davenport, Iowa and our nine 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 up to 50%. Our Hannibal plant is one of very few with hazardous waste fuel facilities permitted and operating out of over 90 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 with truck transportation 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 on the Mississippi River, we are able to cost effectively distribute cement from both of our plants by truck, rail and barge directly to customers or to our nine storage and distribution terminals along the Mississippi River. Our Hannibal and Davenport plants are located on the Mississippi River and, consequently, in 2020, approximately 66% of cement distributed to our terminals was shipped by barge, which is significantly more cost‑effective than truck transport.
The majority of U.S. cement plants are subject to the Portland Cement – Maximum Achievable Control Technology (“PC‑MACT”). Our Hannibal and Davenport cement plants utilize alternative fuels, hazardous and non‑hazardous at Hannibal and non‑hazardous at Davenport, as well as coal, natural gas and petroleum coke and, as a result, are subject to the Hazardous Waste Combustor – Maximum Achievable Control Technology (“HWC-MACT”) and Commercial/Industrial Solid Waste Incinerators (“CISWI”) standards, respectively, rather than PC‑MACT standards.
Ready‑mix Concrete
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‑mix concrete gives engineers significant flexibility when designing these projects.
Cement, coarse aggregate, fine aggregate, water and admixtures are the primary ingredients in ready‑mix concrete. Other materials commonly used in the production of ready‑mix concrete include fly‑ash, a waste by‑product from coal burning power plants, silica fume, a waste by‑product generated from the manufacture of silicon and ferro‑silicon metals, and ground granulated blast furnace slag, a by‑product of the iron and steel manufacturing process. These materials are available directly from the producer or via specialist distributors who intermediate between the ready‑mix concrete producers and the users.
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.
Given the high weight‑to‑value ratio, delivery of ready‑mix concrete is typically limited to a one‑hour haul from a production plant and is further limited by a 90 minute window in which newly‑mixed concrete must be poured to maintain quality and performance. As a result of the transportation constraints, the ready‑mix concrete market is highly localized, with an estimated 5,500 ready‑mix concrete plants in the United States according to the NRMCA. According to the NRMCA, 371.2 million cubic yards of ready‑mix concrete were produced in 2019, which is a 4% increase from the 358.2 million cubic yards produced in 2018 but a 19% 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, North Carolina, South Carolina, Kentucky and Virginia markets and surrounding areas. We operated 69 ready-mix concrete plants and over 700 concrete delivery trucks in the West segment and 55 ready-mix concrete plants and almost 350 concrete delivery trucks in the East segment as of January 2,
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2021. 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.
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 94% of the more than 2.7 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.
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 89.2 million tons of used asphalt is recycled annually by the industry according to a September 2020 NAPA survey.As of January 2, 2021, we operated 26 and 23 asphalt paving mix plants in the West and East segments, respectively. Approximately 98% 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 mixing temperature by 50°F to 70°F, resulting in lower emissions, fumes and odors generated at the plant and the paving site.
Approximately 69% 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.
According to NAPA, there were approximately 3,500 asphalt paving mix plants in the United States in 2019 and an estimated 421.9 million tons of asphalt paving mix was produced in 2019 compared to 389.3 million tons produced in 2018. 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‑à‑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‑owned and hired haulers to deliver materials to job sites.
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. These services complement our construction materials and products businesses by providing a reliable downstream outlet, in addition to our external distribution channels.
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 adjustment provisions to account for changes in liquid asphalt prices.
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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 2020 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‑related conditions, in particular extended rainy and cold weather in the spring and fall and major weather events, such as hurricanes, tornadoes, tropical storms, heavy snows and flooding, 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 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 canceled or modified by our customers. Historically, we have not been materially adversely affected by significant contract cancellations or modifications.
Intellectual Property
We do not own or have a license or other rights under any patents that are material to our business.
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. Our telephone number is (303) 893-0012.
Human Capital Resources
As of January 2, 2021, we employed approximately 6,000 employees, of which approximately 5,700 were employed in the United States with the remainder being employed in Canada. Approximately 80% of our employees are hourly workers, with the remainder being salaried. Approximately 7% of our employees are union members, substantially all in our cement division and at our Canadian operations, with whom we believe we enjoy a satisfactory working relationship. Our collective bargaining agreements for employees who are union members generally expire between 2022 and 2026. 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.
Health and Safety: We maintain a safety culture grounded on the premise of striving to eliminate workplace incidents, risks and hazards. We have created and implemented processes to help eliminate safety events by reducing their frequency and severity. We also review and monitor our performance closely. Our goal is to reduce Occupational Safety and Health Administration ("OSHA") recordable incidents each year. During fiscal 2020, our recordable incident rate declined 6% compared to fiscal 2019.
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As a result of the COVID-19 pandemic, we have implemented safety protocols to protect our employees, contractors and customers. These protocols include complying with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities. We continue to provide personal protective equipment and additional cleaning supplies. Many of our administrative and operational functions during this time have required modification, including some of our workforce working remotely. Our experienced employees adapted to the changes in our work environment and continued to successfully manage our business successfully during this challenging time.
Inclusion and Diversity: We embrace the diversity of our team members, customers, stakeholders and consumers, including their unique backgrounds, experiences, thoughts and talents. Everyone is valued and appreciated for their distinct contributions to the growth and sustainability of our business. We strive to cultivate a culture and vision that supports and enhances our ability to recruit, develop and retain diverse talent at every level. We have a goal to build a highly engaged team by increasing retention year over year.
Talent Development: We prioritize and invest in creating opportunities to help employees grow and build their careers, through various training and development programs. These include on-the-job learning formats as well as executive talent and succession planning paired with an individualized development approach.
Compensation and Benefits: We provide compensation and benefit programs to help meet the needs of our employees. In addition to base compensation, we offer incentive plans for both safety and operational results, stock awards, a 401(k) plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave programs, employee assistance programs, among others. Our 401(k) plan covers all U.S. employees, and provides for matching contributions to the plan, including 100% of pre‑tax employee contributions, up to 4% of eligible compensation. Employer contributions vest immediately.
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.
In March 2018, we were notified of an investigation by the Canadian Competition Bureau (the “Company) files“CCB”) into pricing practices by certain asphalt paving contractors in British Columbia, including Winvan Paving, Ltd. (“Winvan”). We believe the investigation is focused on time periods prior to our April 2017 acquisition of Winvan and we are cooperating with the CCB. Although we currently do not believe this Amendment No.matter will have a material adverse effect on our business, financial condition or results of operations, we are not able to predict the ultimate outcome or cost of the investigation at this time.
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 cement plants, remediation of contaminated sites, mine reclamation, operation and closure of landfills and dust control and 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 operating hours, require additional investment by us in pollution control equipment or impede our opening new, expanding or maintaining 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
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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.
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 cement plants are subject to HWC-MACT and CISWI standards, respectively, for which we do not expect any material incremental costs to 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 four construction and demolition debris landfills, one of which has been closed and in Colorado, we have a construction and demolition debris landfill. In Vancouver, British Columbia, we operate a landfill site that accepts environmentally clean soil deposits. 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‑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‑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.
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.
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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ITEM 1A. RISK FACTORS
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 funding for construction projects. In addition, a slow pace of economic activity typically results in delays or cancellations of capital projects.
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. Although some states in recent years, such as Texas, have increased their budgets for road construction, maintenance, rehabilitation and acquiring right of way for public roads, certain other states, such as Kentucky, have reduced their construction spending due to budget shortfalls from lower tax revenue and other factors. 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‑generating markets of Texas, Utah, Kansas and Missouri, 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‑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 heavy or sustained rainy and cold weather in the spring and fall can reduce demand for our products and reduce sales, render our contracting operations less efficient or restrict our ability to ship our products. For example, unusually severe flooding conditions on the Mississippi River during the first half of 2019, negatively impacted our operations which affected our financial results. Major weather events such as hurricanes, tornadoes, tropical storms and heavy snows have adversely affected and could adversely affect sales in the near term and may be more severe due to climate change. 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. Such adverse weather conditions can adversely affect our business, financial condition and results of operations if they occur with unusual intensity, during abnormal periods or last longer than usual in our major markets, especially during peak construction periods.
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Our industry is capital intensive and we have significant fixed and semi‑fixed costs. Therefore, our profitability is sensitive to changes in volume.
The property and machinery needed to produce our materials and 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‑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. 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.
A significant portion of our historical growth has occurred through acquisitions, and we will likely execute acquisition transactions 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‑binding acquisition proposals, and we may enter into letters of intent, in each case allowing us to conduct due diligence on a confidential basis. In addition, from time to time we may enter into dispositions or other transactions involving certain of our assets or businesses. 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 issuances, additional indebtedness, or a combination of equity and 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 acquisition related growth has placed, and will continue to place, significant demands on our management and operational and financial resources. Acquisitions involve risks that, among other things, the businesses acquired will not perform as expected.
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 depends on our ability to successfully integrate acquisitions.
Acquisitions may require integration of the acquired companies’ sales and marketing, distribution, production, purchasing, information technology, 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 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 be significant.
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•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.
•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 business depends on our ability to retain key employees of our acquired businesses.
We cannot assure you we will be able to retain local managers and employees who are important to the operations of our acquired businesses. The loss of key employees may have an adverse effect on the acquired business and on our business as a whole.
Our long‑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 condition, results of operations and liquidity could be materially adversely affected.
Economic Risks
The ongoing outbreak of the novel coronavirus (COVID-19) has caused severe disruptions in the U.S. and global economy and is expected to continue to adversely impact the economy, at least for the near term. While the full scale and scope of the long-term effects of the COVID-19 outbreak are unknown at this time, the overall impact on our business, operating results, cash flows and/or financial condition could be material.
As of the date of this report, there is an ongoing outbreak of COVID-19, which has spread to over 200 countries and territories, including the United States, and to every state in the United States. The United States and other countries have reacted to the COVID-19 outbreak with unprecedented government intervention. The global impact of the outbreak has been rapidly evolving, and many countries have reacted by instituting, or strongly encouraging quarantines and restrictions on travel, closing financial markets and/or restricting trading, limiting operations of non-essential businesses, and taking other restrictive measures designed to help slow the spread of COVID-19. Such actions are disrupting global supply chains, increasing rates of unemployment and adversely impacting many industries. The outbreak has had an adverse impact on economic and market conditions.The outbreak of COVID-19 caused significant volatility on the market price of our Class A common stock and the extent of its impact on our future results of operations and overall financial performance remains uncertain.
The scale and scope of the COVID-19 pandemic may heighten the potential adverse effects on our business, operating results, cash flows and/or financial condition of the risks described in this report, including the impact of:
•potentially unfavorable economic conditions for our clients and customers, particularly in the residential and non-residential sectors, and the construction industry generally;
•delays or cancellation of projects and delays in collecting on certain of our accounts receivable from our customers;
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•increased costs associated with compliance with new government regulations or restrictions, such as quarantines or social distancing mandates, which regulations or restrictions may curtail our normal operations in one or more of the markets in which we operate;
•significant disruptions at one or more of our locations, which could disrupt our operations, raise costs and reduce revenue and earnings in the affected areas;
•fluctuations in equity market prices (including that of our Class A common stock), interest rates and credit spreads limiting our ability to raise or deploy capital and affecting our overall liquidity: and
•a sustained longer term reduction in cash flows may be an indication some or all of our goodwill may not be realizable.
In addition, the COVID-19 pandemic has to date and may further adversely impact our business and financial condition in other areas, including as a result of:
•increased costs, including as a result of implementing health and safety protocols at our locations;
•disruptions to our supply and distribution channels, including delivery trucks;
•lower sales volumes due to reduced demand; and
•reduced state and local transportation budgets, particularly if such are not augmented by federal funding or if the federal government fails to act on a highway infrastructure bill.
The fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to our business. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, the success of vaccination efforts and the impact of these and other factors on our employees, customers, suppliers and partners. It is also possible that negative consequences of the pandemic may continue once the pandemic is controlled.
The adverse impact on our business, financial condition, operating results or liquidity or future results from the COVID-19 pandemic, or any similar future crisis could be material. The inherent uncertainty surrounding COVID-19, and likewise any similar crisis, also makes it more challenging for our management to estimate the future performance of our business and develop strategies to generate growth or achieve our objectives for fiscal 2021.
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‑funded construction projects. As a result, if publicly‑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.
Under U.S. law, annual funding levels for highways is subject to yearly appropriation reviews. This annual review of funding 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‑year highway projects which could, in turn, negatively affect our sales. 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‑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‑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.
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 sales are for projects with non‑public owners whose 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 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.
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Environmental, health and safety laws and regulations and any changes to, or liabilities or litigation arising under, such laws and regulations could have a material adverse effect on our financial 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 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‑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.
There is an inherent risk of liability in the operation of our business, and despite our compliance efforts, we may be in noncompliance with environmental, health and safety laws and 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 could 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, often in connection with changes in the presidential administration. 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, and in some cases we have been or could be named as a defendant in litigation brought by governmental agencies or private parties. 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 estimates. The cost of complying with such laws and defending against any litigation could have a material adverse effect on our financial condition, results of operations and liquidity.
We may incur significant costs in connection with pending and future litigation.
We have seen increases in litigation as the scope of our business and operations has grown. We are, or may become, party to various lawsuits, claims, investigations, and proceedings, including but not limited to personal injury, environmental, property entitlements and land use, commercial, contract, product liability, health and safety, and employment matters. The outcome of pending or future lawsuits, claims, investigations, or proceedings is often difficult to predict and could be adverse and material in amount. Development in these proceedings can lead to changes in management’s estimates of liabilities associated with these proceedings including the judge’s rulings or judgments, jury verdicts, settlements, or changes in applicable law. Future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on our results of operations and cash flows in a particular period. In addition, the defense of these lawsuits, claims, investigations, and proceedings may divert our management’s attention, and we may incur significant costs in defending these matters.
Shortages of, or increases in prices for, commodities, labor and other production and delivery inputs could restrict our ability to operate our business and could have significant impacts on our operating costs.
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Shortages of, or increases in prices for, production and delivery inputs, including commodities and labor, and other inputs related to the production and delivery of our products, could adversely affect our business. Our cost of revenue consists of production and delivery inputs, which primarily include labor, utilities, raw materials, fuel, transportation, royalties and other direct costs incurred in the production and delivery of our products and services. Increases in these costs, as a result of general economic conditions, inflationary pressures or otherwise, may reduce our operating margin and adversely affect our financial position if we are unable to hedge or otherwise offset such increases. Specifically, significant increases or fluctuations in the prices of certain energy commodities, including diesel fuel, liquid asphalt and other petroleum-based resources, which we consume significant amounts of in our production and distribution processes, could negatively affect the results of our business operations or cause our results to suffer. Additionally, labor is a meaningful component in our ability to operate our business and can have a significant impact on the cost of operating our business. Labor shortages could restrict our ability to operate our business or result in increased labor costs as a result of wage increases due to competition for qualified workers. Increased labor costs, whether due to labor shortages, changing demographics of the overall work force or otherwise may reduce our operating margin and adversely affect our financial position.
Availability of and pricing for raw materials and labor can be affected by various national, regional, local, economic and political factors. For example, recent government-imposed tariffs and trade regulations on imported raw materials could have significant impacts on our costs to operate our business.
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.
There is a likelihood that we will not be able to collect on certain of our accounts receivable from our customers. If our customers are 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 input material 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;
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•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 OSHA and MSHA;
•difficulties in obtaining required governmental permits or approvals;
•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 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‑indemnified or product‑related claim is resolved against us in the future, that resolution could have a material adverse effect on our financial 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 government contracts if we fail to maintain qualifications required by the 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. 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, our financial condition, results of operations and liquidity could be materially adversely affected.
Unexpected factors affecting self‑insurance claims and reserve estimates could adversely affect our business.
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We use a combination of third‑party insurance and self‑insurance to provide for potential liabilities for workers’ compensation, general liability, vehicle accident, property and medical benefit claims. Although we seek 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.
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, which could divert our cash flow from operations to debt payments.
We are highly leveraged. As of January 2, 2021, our total debt was approximately $1.9 billion, which includes $1.3 billion of Senior Notes and $616.3 million of senior secured indebtedness under our senior secured credit facilities and we had an additional $329.1 million of unutilized capacity under our senior secured revolving credit facility (after giving effect to approximately $15.9 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;
•the deductibility of our interest expense is currently limited under existing law and would be further limited if proposed regulations are finalized in their current form;
•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 historically 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, certain of our variable rate indebtedness uses London Inter-bank Offered Rate (“LIBOR”) as a benchmark for establishing the rate of interest. LIBOR has been the subject of national, international and other regulatory guidance and proposals for reform. The United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced in 2017 that it intends to stop encouraging banks to submit LIBOR rates after 2021. However, the ICE Benchmark Administration, in its capacity as administrator of USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other than one-week and two-month tenors) by 18 months to June 2023. Notwithstanding this possible extension, a joint statement by key regulatory authorities calls on banks to cease entering into new contracts that use USD LIBOR as a reference rate by no later than December 31, 2021. The consequences of these developments cannot be entirely predicted, but could include an increase in the cost of our variable rate indebtedness. If LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, we may also need to renegotiate our variable rate indebtedness that utilizes LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. In addition, the
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indentures that govern the Senior 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.
Despite our current level of indebtedness, we and our subsidiaries may still 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 incur significant additional indebtedness in the future to fund acquisitions as part of our growth strategy. Although the indentures governing the Senior Notes and the Credit 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 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.
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 our debt obligations, refinance our debt obligations and 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. We are also subject to certain financial, business, legislative, regulatory and legal restrictions on the payment of distributions and 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, 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 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 Credit Agreement and the indentures governing the Senior 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 indentures governing the Senior Notes and the Credit Agreement contain covenants and provisions that are restrictive.
The indentures governing the Senior Notes and 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, including purchasing our Class A common stock;
•make investments, loans or advances;
•incur additional liens;
•transfer or sell assets;
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•merge or engage in consolidations;
•enter into certain transactions with our affiliates;
•designate subsidiaries as unrestricted subsidiaries;
•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 Credit 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 indentures governing the Senior Notes and the Credit Agreement may result in an event of default under the indenture or the amended and restated Credit Agreement. A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we may not have sufficient funds available to pay the accelerated indebtedness or the ability to refinance the accelerated indebtedness on terms favorable to us or at all.
Other Risks
Our success is dependent on our senior management team and our ability to retain and attract qualified personnel.
Our success depends on the continuing services of key members of our management team. We believe our senior management team possesses valuable knowledge and skills that are crucial to our success and would be difficult to replicate or replace.
Competition for senior management is intense, and we may not be able to retain our management team or attract additional qualified personnel. The unexpected loss of a member of senior management has in the past and could in the future require certain of our remaining senior officers to divert immediate attention, which can be substantial or require costly external resources in the short term. While we are developing plans for key management succession and have long-term compensation plans designed to retain our senior employees, if our retention and succession plans do not operate effectively, our business could be adversely affected. 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‑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‑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, proposed or are contemplating legislative and regulatory changes in response to the potential effects of climate change, and Canada and the United States have agreed to the Paris Agreement, the successor to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which could lead to additional legislative and regulatory changes in those countries. In addition, in the United States, there may be additional legislative and regulatory changes in connection with the recent change in presidential administration. 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
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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 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 to carry out important operational activities and to maintain our business records. In addition, we rely on the systems of third parties, such as third-party vendors. As part of our normal business activities, we collect and store certain personal identifying and confidential information relating to our customers, employees, vendors and suppliers, and maintain operational and financial information related to our business. We may share some of this confidential information with our vendors. We rely on our vendors and third-party service providers to maintain effective cybersecurity measures to keep our information secure. Any significant breakdown, invasion, destruction or interruption of our existing or future systems by employees, third parties, vendors, others with authorized access to our systems, or unauthorized persons could negatively affect operations. In addition, future systems upgrades or changes could be time consuming, costly and result in unexpected interruptions or other adverse effects on our business. 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‑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. Our or our vendors’ and third-party service providers’ failure to maintain the security of the data we are required to protect could result in damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also in deterioration in customers’ confidence in us and other competitive disadvantages. While, to date, we have not had a significant cybersecurity breach or attack that has a material impact on our business or results of operations, there can be no assurance that our efforts to maintain the security and integrity of our information technology networks and related systems will be effective or that attempted security breaches or disruptions would not be successful or damaging.
Labor disputes, strikes, other forms of work stoppage or slowdown or other union activities could disrupt operations of our businesses.
As of January 2, 2021, labor unions represented approximately 7% of our total employees, substantially all in our cement division and at our Canadian operations. Our collective bargaining agreements for employees generally expire between
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2022 and 2026. 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 or adverse labor relations at any of our locations, could lead to strikes, other forms of work stoppage, slowdowns or other actions that could disrupt our operations and, consequently, have a material adverse effect on our financial condition, results of operations and liquidity.
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 TRA 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 TRA and cash 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 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.
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 Inc. 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 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. 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 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.
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, and subject to the terms of an exchange agreement, exchange their LP Units for Class A common stock on a one-for-one basis. 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 initial public offering ("IPO"), we entered into a TRA with the holders of LP Units that provides for the payment by Summit Inc. to exchanging holders of LP Units of 85% of the benefits, if any, that Summit Inc. is deemed to realize as a result of the increases in tax basis described above and certain other tax benefits related to entering into the TRA, including tax benefits attributable to payments under the TRA. This payment obligation is an obligation of Summit
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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 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 TRA will be substantial.
In certain cases, payments under the TRA may be accelerated or significantly exceed the actual benefits Summit Inc. realizes in respect of the tax attributes subject to the TRA.
The TRA provides that upon certain changes of control, or if, at any time, Summit Inc. elects an early termination of the TRA, Summit Inc.’s obligations under the TRA may be 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 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 TRA, payments under the TRA could be in excess of 85% of Summit Inc.’s actual cash tax savings.
The actual cash tax savings realized by Summit Inc. under the TRA may be less than the corresponding TRA payments. Further, payments under the TRA may be made years in advance of when the benefits, if any, are realized on our federal and state income tax returns. Accordingly, there may be a material negative effect on our liquidity if the payments under the TRA exceed the actual cash tax savings that Summit Inc. realizes in respect of the tax attributes subject to the TRA and/or distributions to Summit Inc. by Summit Holdings are not sufficient to permit Summit Inc. to make payments under the TRA. Based upon a $20.08 share price of our Class A common stock, which was the closing price on December 31, 2020, and a contractually defined discount rate of 1.34%, we estimate that if Summit Inc. were to exercise its termination right, the aggregate amount of these termination payments would be approximately $312 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 TRA to the extent our cash resources are insufficient to meet our obligations under the TRA as a result of timing discrepancies or otherwise.
Ownership of Our Class A Common Stock Risks
The market price of shares of our Class A common stock has fluctuated significantly, which could cause the value of your investment to decline.
The market price of our Class A common stock has fluctuated significantly in the past and could be subject to wide fluctuations in the future. During the year ended January 2, 2021, the closing price of our Class A common stock on the New York Stock Exchange has fluctuated from a low of $8.48 per share to a high of $24.59 per share.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 recent 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.
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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 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.
Future issuance of additional Class A common stock, or securities convertible or exchangeable for Class A common stock, may adversely affect the market price of the shares of our Class A common stock.
As of January 2, 2021, we had 114,390,595 shares of Class A common stock issued and outstanding, and 885,609,405 shares authorized but unissued. The number of unissued shares includes 2,873,170 shares available for issuance upon exchange of LP Units held by limited partners of Summit Holdings. Our amended and restated certificate of incorporation authorizes us to issue 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, 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. Sales 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 may be granted under the Summit Materials, Inc. 2015 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) of which 4.3 million shares were available for grant as of January 2, 2021. In addition, as of January 2, 2021 we had outstanding warrants to purchase an aggregate of 100,037 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 and may adversely affect the market price of the shares of our Class A common stock.
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 unless such action is recommended by all directors then in office;
•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 66 2/3% or more in voting power of all outstanding shares of our capital stock.
•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 impede or discourage 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
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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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES.
Properties
Our headquarters are located in a 21,615 square foot office space, which we lease in Denver, Colorado, under a lease expiring on January 31, 2024.
As of January 2, 2021, we had 4.1 billion tons of proven and probable aggregates reserves serving our aggregates and cement businesses and operated over 400 sites and plants, to which we believe we have adequate road, barge and/or railroad access. By segment, our estimate of proven and probable reserves as of January 2, 2021 for which we have permits for extraction and that we consider to be recoverable aggregates of suitable quality for economic extraction are shown in the table below along with average annual production.
| Tonnage of reserves for | ||||||||||||||||||||||||||||||||||||||||||||
| each general type of | Average years | Percent of | ||||||||||||||||||||||||||||||||||||||||||
| Number of | aggregate | until depletion | reserves owned and | |||||||||||||||||||||||||||||||||||||||||
| producing | Sand and | Annual | at current | percent leased | ||||||||||||||||||||||||||||||||||||||||
| Segment | quarries | Hard rock(1) | gravel(1) | production(1) | production(2) | Owned | Leased(3) | |||||||||||||||||||||||||||||||||||||
| West | 85 | 351,127 | 922,799 | 28,953 | 44 | 30 | % | 70 | % | |||||||||||||||||||||||||||||||||||
| East | 160 | 1,984,747 | 309,582 | 25,493 | 90 | 65 | % | 35 | % | |||||||||||||||||||||||||||||||||||
| Cement | 3 | 500,468 | — | 1,833 | 273 | 100 | % | — | ||||||||||||||||||||||||||||||||||||
| Total | 248 | 2,836,342 | 1,232,381 | 56,279 | ||||||||||||||||||||||||||||||||||||||||
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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 2020 and 2019 annual production
(3)Lease terms range from monthly to on-going with an average lease expiry of 2027.
As of January 2, 2021, we operated the following production and distribution facilities:
| Quarries and Sand Deposits | Cement Plants | Cement Distribution Terminals | Fixed and portable ready-mix concrete plants | Asphalt paving mix plants | ||||||||||||||||||||||||||||
| Owned | 97 | 2 | 5 | 97 | 28 | |||||||||||||||||||||||||||
| Leased | 133 | — | 4 | 27 | 17 | |||||||||||||||||||||||||||
| Partially owned and leased | 18 | — | — | — | 4 | |||||||||||||||||||||||||||
| Total | 248 | 2 | 9 | 124 | 49 | |||||||||||||||||||||||||||
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The following chart summarizes our production and distribution facilities by state as of January 2, 2021:
| State | Sand & Gravel | Limestone | Cement | Ready-mix Concrete | Asphalt Plant | Landfill | Other* | |||||||||||||||||||||||||||||||||||||
| Arkansas | 5 | — | — | 17 | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||
| Colorado | 29 | 1 | — | 9 | 7 | — | 2 | |||||||||||||||||||||||||||||||||||||
| Georgia | 4 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Idaho | 4 | — | — | 3 | — | — | 2 | |||||||||||||||||||||||||||||||||||||
| Iowa | — | 1 | 2 | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||
| Kansas | 9 | 45 | — | 17 | 6 | 8 | 17 | |||||||||||||||||||||||||||||||||||||
| Kentucky | 1 | 18 | — | 10 | 13 | — | 9 | |||||||||||||||||||||||||||||||||||||
| Louisiana | — | — | 3 | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||
| Minnesota | — | — | 2 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Missouri | 2 | 47 | 2 | 6 | — | — | 7 | |||||||||||||||||||||||||||||||||||||
| Nebraska | — | 1 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Nevada | 1 | — | — | 3 | — | — | — | |||||||||||||||||||||||||||||||||||||
| North Carolina | 4 | — | — | — | — | — | 2 | |||||||||||||||||||||||||||||||||||||
| Oklahoma | 5 | 1 | — | 12 | — | — | 2 | |||||||||||||||||||||||||||||||||||||
| South Carolina | 14 | 1 | — | 1 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Tennessee | — | 1 | 1 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Texas | 17 | 3 | — | 22 | 12 | — | 20 | |||||||||||||||||||||||||||||||||||||
| Utah | 19 | 2 | — | 19 | 4 | — | 3 | |||||||||||||||||||||||||||||||||||||
| Virginia | 1 | 9 | — | 4 | 4 | — | 5 | |||||||||||||||||||||||||||||||||||||
| Wisconsin | — | — | 1 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Wyoming | 1 | — | — | 1 | — | — | 2 | |||||||||||||||||||||||||||||||||||||
| Total US | 116 | 130 | 11 | 124 | 48 | 8 | 75 | |||||||||||||||||||||||||||||||||||||
| British Columbia, Canada | — | 2 | — | — | 1 | — | 6 | |||||||||||||||||||||||||||||||||||||
| Total | 116 | 132 | 11 | 124 | 49 | 8 | 81 | |||||||||||||||||||||||||||||||||||||
______________________
*Other primarily consists of office space.
ITEM 3. LEGAL PROCEEDINGS.
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.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
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.
Anne P. Noonan, 57, President and Chief Executive Officer. Ms. Noonan joined the Company in September 2020. Prior to joining the Company, Ms. Noonan served as president and chief executive officer and as a director of OMNOVA Solutions Inc. (“Amendment No. 1”OMNOVA”), a global provider of emulsion polymers, specialty chemicals, and engineered surfaces for a variety of commercial, industrial, and residential end uses, with manufacturing, technical, and other facilities located in North America, Europe, China, and Thailand, from December 2016 until April 1, 2020 when OMNOVA was acquired by Synthomer plc. Before being appointed President and Chief Executive Officer, Ms. Noonan served as OMNOVA’s President, Performance Chemicals, from 2014 until December 2016. Ms. Noonan previously held several positions of increasing responsibility with Chemtura Corporation, a global specialty chemicals company, from 1987 through 2014, including most recently as senior vice
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president and president of Chemtura’s Industrial Engineered Products business and Corporate Development function. Ms. Noonan serves on the board of CF Industries Holdings, Inc., a global leader in nitrogen fertilizer manufacturing and distribution.
Anne Lee Benedict, 48, 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, 53, 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.
Brian J. Harris, 64, 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.
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PART II
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 22, 2021, there were five holders of record of our Class A common stock and 30 holders of record of our Class B common stock.
These stockholder figures do not include a substantially greater number of holders whose shares are held of record by banks, brokers and other financial institutions.
All of the outstanding limited liability company interests of Summit LLC are 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
If Summit Inc. uses future excess tax distributions to purchase additional LP Units, 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 may continue to declare stock dividends on the Class A common 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.
Summit Inc. is a holding company and has no material assets other than its ownership of LP 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 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 Senior Notes contain a number of covenants that restrict, subject to certain exceptions, Summit LLC’s ability to pay distributions to 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, 2021, we did not purchase any of our equity securities that are registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Unregistered Sales of Equity Securities
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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, 2021.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data previously required by Item 301 of Regulation S-K has been omitted in reliance on SEC Release No. 33-10890.
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 trends and significant changes in our results of operations and financial condition. 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,” our audited consolidated annual financial statements and the related notes thereto and other information included in this report. A discussion and analysis of our results of operations and changes in financial condition for fiscal 2019 compared to 2018 may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the year ended December 29, 20182019, filed with the Securities and Exchange Commission (“SEC”)SEC on February 5, 2020, which discussion is incorporated herein by reference.
Overview
We are one of the fastest growing construction materials companies in the United States, with a 63% increase in revenue between the year ended January 2, 2016 (the year of our initial public offering) and the year ended January 2, 2021. 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 Minnesota to Louisiana. In addition to supplying aggregates to customers, we use a portion of our materials internally to produce ready-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 inception in 2009, we have completed dozens of acquisitions, which are organized into 11 operating companies that make up our three distinct operating segments—West, East and Cement. We operate in 21 U.S. states and in British Columbia, Canada and currently have assets in 23 U.S. states and British Columbia, Canada. The map below illustrates our geographic footprint:
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Business Trends and Conditions
The U.S. construction materials industry is composed of four primary sectors: aggregates; cement; ready-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-held companies focused on a single material, product or market to publicly traded 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 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 materials and 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. Public infrastructure includes spending by federal, state, provincial and local governments for roads, highways, bridges, airports and other infrastructure projects. Public infrastructure projects have
historically been a relatively stable portion of state and federal budgets. Residential and nonresidential construction consists of new construction and repair and remodel markets. Any economic stagnation or decline, which could vary by local region and 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 positive trends in highway obligations, housing starts and construction employment.
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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 was extended in late 2020 through 2021. With the nation’s infrastructure aging, there 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 maintenance of the existing infrastructure.
In addition to federal funding, state, county and local agencies provide highway construction and maintenance funding. Our four largest states by revenue, Texas, Utah, Kansas and Missouri, represented approximately 25%, 14%, 13% and 9%, respectively, of our total revenue in 2020. The following is a summary of key funding initiatives in those states:
•According to the Texas Department of Transportation (“TXDOT”), annual funding available for transportation infrastructure, including state and federal funding, is estimated to average $14.9 billion in total for fiscal year 2021 (which commenced September 1, 2020) and fiscal year 2022 combined. Further, the 2021 Unified Transportation Program (“UTP”) approved by the Texas Transportation Commission in September 2020 provides for $75 billion through fiscal year 2030 to fund transportation projects; more than double the fiscal year 2016 level, which was prior to the Proposition 1 and Proposition 7 funding initiatives. The funding available in any given year is separate and distinct from lettings, or the process of providing notice, issuing proposals, receiving proposals, and awarding contracts. In January 2021, TXDOT updated its fiscal year 2021 lettings estimate to $9.6 billion up from $7.5 billion in fiscal year 2020 and $8.9 billion in fiscal year 2019. Longer term, TXDOT has indicated a target of $8 billion per year in total state and local lettings. The Texas Comptroller released its biennial revenue estimate for fiscal year 2022 – 2023 in January 2021 and expects economic output to return to pre-pandemic levels in 2022, and despite revenue shortfalls due to COVID-19 it is expected that the state highway fund will be granted its full allotment of $2.5 billion for fiscal year 2021 and 2022 from Proposition 7 funding.
•In December 2020, Utah updated its revenue estimate for transportation funding to $639 million in fiscal year 2021 (which commenced July 1, 2020) up from $614 million in fiscal year 2020, with growth driven by increases in vehicle registration fees, diesel fuel tax and other revenue sources. In January 2020, the Utah Department of Transportation increased fees on electric and hybrid vehicles by 50% in 2020 and another 33% in 2021 and launched an alternative to a road usage charge program for those vehicles in the form of a pay per mile charge. In December 2019, Utah passed new legislation imposing a 4.85% sales tax on gas purchases and a 6 cents per gallon increase to the diesel tax, with an additional 4 cents per gallon diesel tax increase in 2022. The tax is estimated to generate an additional $170 million for transportation investment in 2021.
•In January 2021, the Governor of Kansas submitted a revised budget for fiscal year 2021 (which commenced July 1, 2020) and an initial budget recommendation for fiscal year 2022 with $1.9 billion in transportation funding budgeted in 2021 and $2.2 billion for 2022. Transfers from the State Highway Fund (“SHF”) to the State General Fund (“SGF”) are expected to be eliminated by fiscal year 2023 with $134 million currently estimated to be transferred to the SGF in fiscal year 2021 and $67 million in fiscal year 2022. The elimination of transfers out of the SHF is expected to help pave the way for the issuance of new transportation bonds and keep funds available to continue moving forward the 10-year, $10 billion Eisenhower Legacy Plan that was approved by the Kansas Legislature in early 2020. The Eisenhower Legacy Plan selects new modernization and expansion projects every two years, requires previously selected projects under the prior T-Works program to be let prior to July 1, 2023 and levies 16.2% of the state sales tax for the benefit of the SHF.
•In December 2020, new Missouri legislation was submitted that calls for five consecutive years of a two-cent gas tax increase starting in January 2022, which would raise an incremental $100 million of revenue annually; Missouri currently has the second-lowest motor fuel tax in the United States at 17 cents per gallon. Despite the impact of COVID-19, the Missouri Department of Transportation had one of its strongest construction programs on record with payments to contractors of $821 million in calendar year-to-date November 2020 versus $662 million in the prior period and has now scheduled or is scheduled to let during the remainder of fiscal year 2021 (which commenced July 1, 2020) the entire $360 million of construction projects delayed in early 2020 as a result of COVID-19.
The table below sets forth additional details regarding our four key states, including growth rates as compared to the U.S. as a whole:
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| Projected Industry Growth by End Market | ||||||||||||||||||||||||||
| Revenue by End Market(1) | 2021 to 2023(2) | |||||||||||||||||||||||||
| Percentage of | Residential and | |||||||||||||||||||||||||
| Our Total | Nonresidential | Residential | Nonresidential | |||||||||||||||||||||||
| State | Revenue | Construction | Construction | Construction | ||||||||||||||||||||||
| Texas | 25 | % | 56 | % | 2.4 | % | 1.1 | % | ||||||||||||||||||
| Utah | 14 | % | 82 | % | 4.1 | % | 4.4 | % | ||||||||||||||||||
| Kansas | 13 | % | 44 | % | 5.1 | % | 1.4 | % | ||||||||||||||||||
| Missouri | 9 | % | 69 | % | 2.5 | % | 2.9 | % | ||||||||||||||||||
| Weighted average(3) | 3.4 | % | 2.2 | % | ||||||||||||||||||||||
| United States(2) | 1.9 | % | 2.2 | % | ||||||||||||||||||||||
______________________
(1)Percentages based on our revenue by state for the year ended January 2, 2021 and management’s estimates as to end markets.
(2)Source: 2019 PCA
(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 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-related conditions, in particular extended rainy and cold weather in the spring and fall and major weather events, such as hurricanes, tornadoes, tropical storms, heavy snows and flooding, 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 lower levels of activity due to weather conditions.
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-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 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 less than one year, for certain raw materials.
Financial Highlights— Year ended January 2, 2021
The principal factors in evaluating our financial condition and operating results for the year ended January 2, 2021 are:
•Net revenue increased 5.1% or $104.1 million in 2020 as compared to 2019, primarily resulting from organic growth and to a lesser extent, contributions from our acquisitions.
•Our operating income increased 5.4% or $11.6 million in 2020 as compared to 2019, as pricing and volume increases exceeded the increases in cost of revenue.
•In August 2020, we issued $700.0 million of 5.250% senior notes due 2029 (the “Original 10-K”“2029 Notes”), resulting in net proceeds of $690.4 million, after related fees and expenses. The proceeds from the 2029 Notes were used to redeem the $650.0 million of 6.125% senior notes due 2023 (the “2023 Notes”) at the requestpar.
Components of KPMG LLP toOperating 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-mix concrete, asphalt paving mix and concrete products. Paving and related services that we provide an amended reportare primarily asphalt paving services.
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Revenue derived from the previously filed version that confirmssale of construction materials is 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 is 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 Company’s independent registeredestimates 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 direct production and delivery costs and primarily includes labor, repair and maintenance, utilities, raw materials, fuel, transportation, subcontractor costs, and royalties. 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 adjusted cash gross 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 seek to include similar price adjustment provisions in our private contracts.
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, firmlegal, 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.
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 | 7 - 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 | |||||||||
Amortization expense is the periodic expense related to leasehold improvements and intangible assets. The intangible assets were recognized with certain acquisitions 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.
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Results of Operations
In late 2019, a novel strain of the coronavirus ("COVID-19") virus was first reported to have surfaced. COVID-19 has since spread globally, including to every state in the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic and the United States declared a national emergency with respect to COVID-19. As construction activities were deemed essential businesses in all of our markets, we continued to operate while many businesses were forced to close or reduce operations. During 2020, our operating markets remained substantially unaffected by COVID-19, except for Kentucky and to a lesser degree, Vancouver, British Columbia. However, we believe its impact may negatively affect our operations in subsequent periods if construction activity in future periods slows due to COVID-19. Residential construction activity remains strong, particularly in the Houston and Salt Lake City areas, two of the largest metro areas in which we operate. We believe residential activity in our key markets will continue to be a driver for volumes in future periods. While Kentucky had experienced fiscal shortfalls prior to COVID-19, those shortfalls were extended by COVID-19, and subsequently, Kentucky suspended lettings of department of transportation projects for May and June, and subsequent lettings have been significantly reduced from prior levels. In the Vancouver, British Columbia area, the provincial government has cancelled or delayed certain infrastructure projects. Our cement segment has also been impacted by lower sales demand, which we believe to be related to COVID-19, notably in our southern markets. In most of our other markets, we have not experienced any significant delays or cancellations of projects. Typically, state revenues decrease as the economy slows, and ultimately, some infrastructure projects may be delayed or cancelled, which would reduce our revenues in future periods. In 2020, approximately 61% of our revenue was derived from the private construction market, and the remaining revenue from the public markets. In addition to the volume impact on the cement segment, our annual cement price increases were delayed in 2020 from April 1 to June 1 due to COVID-19. We continue to monitor our operations, the operations of our customers, and the recommendations of the various national, state and local governments in the areas in which we operate. We implemented work-from-home protocols at all of our administrative locations late in the first quarter of 2020, and while some locations have returned, other locations, including our headquarters location, continue to work remotely. In addition, we implemented additional safety measures specific to COVID-19 at all of our operating locations, which did not auditsignificantly increase our costs. The extent to which the internal controlsCOVID-19 pandemic impacts the national and local economies in which we operate, and ultimately our business, will depend on numerous developments, which are highly uncertain and difficult to predict. These events, as they continue to develop, could result in business disruption, including reduced revenues, profitability and cash flow.
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 costs in isolation.
Operating income (loss) reflects our profit after taking into consideration cost of revenue, general and administrative expenses, depreciation, depletion, amortization and accretion and gain on sale of property, plant and equipment. Cost of revenue generally increases ratably with revenue, as labor, transportation costs and subcontractor costs are recorded in cost of revenue. In periods where our revenue growth occurs 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 expenses as a percentage of revenue vary throughout the year due to the seasonality of our business.
The table below includes revenue and operating income by segment for the periods indicated. Operating income (loss) by segment is computed as earnings before interest, loss on debt financings, tax receivable agreement expense, gain on sale of business, other income / expense and taxes.
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| Year ended | ||||||||||||||||||||||||||||||||||||||
| January 2, 2021 | December 28, 2019 | December 29, 2018 | ||||||||||||||||||||||||||||||||||||
| Operating | Operating | Operating | ||||||||||||||||||||||||||||||||||||
| (in thousands) | Revenue | income (loss) | Revenue | income (loss) | Revenue | income (loss) | ||||||||||||||||||||||||||||||||
| West | $ | 1,262,196 | $ | 176,528 | $ | 1,122,338 | $ | 109,182 | $ | 1,117,066 | $ | 92,068 | ||||||||||||||||||||||||||
| East | 799,633 | 69,796 | 809,098 | 101,775 | 703,147 | 59,554 | ||||||||||||||||||||||||||||||||
| Cement | 270,622 | 55,335 | 290,704 | 64,697 | 280,789 | 75,843 | ||||||||||||||||||||||||||||||||
| Corporate (1) | — | (76,486) | — | (62,096) | — | (64,999) | ||||||||||||||||||||||||||||||||
| Total | $ | 2,332,451 | $ | 225,173 | $ | 2,222,140 | $ | 213,558 | $ | 2,101,002 | $ | 162,466 | ||||||||||||||||||||||||||
______________________
(1) Corporate results primarily consist of compensation and office expenses for employees included in the Company's headquarters.
Consolidated Results of Operations
The table below sets forth our consolidated results of operations for the periods indicated:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||
| Net revenue | $ | 2,134,754 | $ | 2,030,647 | $ | 1,909,258 | ||||||||||||||
| Delivery and subcontract revenue | 197,697 | 191,493 | 191,744 | |||||||||||||||||
| Total revenue | 2,332,451 | 2,222,140 | 2,101,002 | |||||||||||||||||
| Cost of revenue (excluding items shown separately below) | 1,583,996 | 1,526,332 | 1,475,779 | |||||||||||||||||
| General and administrative expenses | 309,531 | 275,813 | 270,402 | |||||||||||||||||
| Depreciation, depletion, amortization and accretion | 221,320 | 217,102 | 204,910 | |||||||||||||||||
| Gain on sale of property, plant and equipment | (7,569) | (10,665) | (12,555) | |||||||||||||||||
| Operating income | 225,173 | 213,558 | 162,466 | |||||||||||||||||
| Interest expense (1) | 103,595 | 116,509 | 116,548 | |||||||||||||||||
| Loss on debt financings | 4,064 | 14,565 | 149 | |||||||||||||||||
| Tax receivable agreement (benefit) expense | (7,559) | 16,237 | (22,684) | |||||||||||||||||
| Gain on sale of business | — | — | (12,108) | |||||||||||||||||
| Other income, net | (3,982) | (11,977) | (15,516) | |||||||||||||||||
| Income from operations before taxes | 129,055 | 78,224 | 96,077 | |||||||||||||||||
| Income tax expense (benefit) | (12,185) | 17,101 | 59,747 | |||||||||||||||||
| Net income | $ | 141,240 | $ | 61,123 | $ | 36,330 | ||||||||||||||
______________________
(1)The statement of operations above is based on the financial results of Summit Inc. and its subsidiaries, which was $20.5 million greater, $27.5 million less and $27.5 million less than Summit LLC and its subsidiaries in the years ended January 2, 2021, December 28, 2019 and December 29, 2018, respectively, due to interest expense associated with a deferred consideration obligation, TRA expense and income tax benefit are obligations of Summit Holdings and Summit Inc., respectively and are thus excluded from Summit LLC’s consolidated net income.
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Fiscal Year 2020 Compared to 2019
| ($ in thousands) | 2020 | 2019 | Variance | |||||||||||||||||||||||
| Net revenue | $ | 2,134,754 | $ | 2,030,647 | $ | 104,107 | 5.1 | % | ||||||||||||||||||
| Operating income | 225,173 | 213,558 | 11,615 | 5.4 | % | |||||||||||||||||||||
| Operating margin percentage | 10.5 | % | 10.5 | % | ||||||||||||||||||||||
| Adjusted EBITDA (1) | $ | 485,036 | $ | 461,462 | $ | 23,574 | 5.1 | % | ||||||||||||||||||
______________________
(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 below of Adjusted EBITDA to net income, which is the most directly comparable GAAP measure.
Net revenue increased $104.1 million in the year ended January 2, 2021, primarily resulting from organic growth in our aggregates and ready-mix concrete operations. Of the increase in net revenue, $80.5 million was from increased sales of products, $19.7 million from increased sales of materials and $3.9 million from increased service revenue. We generated organic volume growth of 3.6%, 5.0% and 4.7% in aggregates, ready-mix concrete and asphalt, respectively, during 2020 over the prior year period, while our organic cement volumes declined 4.6% compared to 2019. We had organic price growth in our cement, ready-mix and asphalt lines of business of 1.5%, 4.7% and 1.4%, respectively, during 2020. Operating income increased by $11.6 million in 2020 as compared to 2019, primarily as net revenue gains exceeded increases in costs of revenue and general and administrative expenses.
For the year ended January 2, 2021, our operating margin percentage remained flat as compared to the year ended December 28, 2019, due to the items noted above. Adjusted EBITDA, as defined below, increased by $23.6 million in the year ended January 2, 2021 as compared to the year ended December 28, 2019.
As a vertically-integrated company, we include intercompany sales from materials to products and from products to services when assessing the operating results of our business. We refer to revenue inclusive of intercompany sales as gross revenue. These intercompany transactions are eliminated in the consolidated financial reportingstatements. Gross revenue by line of business was as follows:
| ($ in thousands) | 2020 | 2019 | Variance | |||||||||||||||||||||||
| Revenue by product*: | ||||||||||||||||||||||||||
| Aggregates | $ | 636,254 | $ | 593,027 | $ | 43,227 | 7.3 | % | ||||||||||||||||||
| Cement | 266,989 | 275,530 | (8,541) | (3.1) | % | |||||||||||||||||||||
| Ready-mix concrete | 668,488 | 608,168 | 60,320 | 9.9 | % | |||||||||||||||||||||
| Asphalt | 377,742 | 369,650 | 8,092 | 2.2 | % | |||||||||||||||||||||
| Paving and related services | 639,493 | 603,271 | 36,222 | 6.0 | % | |||||||||||||||||||||
| Other | (256,515) | (227,506) | (29,009) | (12.8) | % | |||||||||||||||||||||
| Total revenue | $ | 2,332,451 | $ | 2,222,140 | $ | 110,311 | 5.0 | % | ||||||||||||||||||
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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.
Detail of our volumes and average selling prices by product for the years ended January 2, 2021 and December 28, 2019 were as follows:
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| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| Volume(1) | Volume(1) | Percentage Change in | ||||||||||||||||||||||||||||||||||||
| (in thousands) | Pricing(2) | (in thousands) | Pricing(2) | Volume | Pricing | |||||||||||||||||||||||||||||||||
| Aggregates | 59,098 | $ | 10.77 | 53,954 | $ | 10.99 | 9.5 | % | (2.0) | % | ||||||||||||||||||||||||||||
| Cement | 2,286 | 116.80 | 2,395 | 115.03 | (4.6) | % | 1.5 | % | ||||||||||||||||||||||||||||||
| Ready-mix concrete | 5,740 | 116.47 | 5,466 | 111.27 | 5.0 | % | 4.7 | % | ||||||||||||||||||||||||||||||
| Asphalt | 5,831 | 59.76 | 5,568 | 58.93 | 4.7 | % | 1.4 | % | ||||||||||||||||||||||||||||||
______________________
(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.
Revenue from aggregates increased $43.2 million in the year ended January 2, 2021. In 2020, increases in our northern Texas and Virginia markets were partially offset by organic aggregate volumes declines in Missouri as flood repair work in 2020 was less than in 2019 and Kentucky due to COVID-19 impacts. Overall, our average sales price in 2020 decreased over 2019 primarily as the product mix shifted away from higher priced flood repair products to lower priced products and the impact of lower priced acquisition related sales volumes in Texas. For the year ended January 2, 2021, our aggregate volumes increased primarily due to acquisition volumes, and to a lesser extent, due to increased organic volumes. Aggregate volumes growth was attributable to organic growth in both the West and East segments. Organic aggregate volumes increased 3.6% in 2020 as compared to 2019, primarily due to increases in our North Texas, Intermountain West and Kansas markets. Aggregate average sales prices of $10.77 per ton decreased 2.0% in 2020 as compared to 2019, primarily due to lower priced products in our Missouri markets and acquisition related volumes noted above.
Revenue from cement decreased $8.5 million in the year ended January 2, 2021. In 2020, organic cement volumes decreased 4.6% and organic cement average sales prices increased 1.5%, respectively, as compared to 2019.
Revenue from ready-mix concrete increased $60.3 million in the year ended January 2, 2021. In 2020, our ready-mix volumes increased 5.0% and our average sales prices increased 4.7%. These volume and price increases in 2020 occurred in both the West and East segments. Volumes in the Intermountain, Texas and Kansas geographies were impacted by more favorable weather conditions during 2020 as compared to 2019.
Revenue from asphalt increased $8.1 million in the year ended January 2, 2021. In 2020, organic pricing increased 1.4%, with strong pricing gains in the Kansas and North Texas geographies. Further, in 2020, we had strong volume increases in North Texas offset by decreases in Kentucky due to COVID-19 impacts.
Other Financial Information
General and Administrative Expense
Our general and administrative expenses in 2020 increased $32.2 million over 2019, due primarily to increased incentive compensation expenses, and expenses recognized in connection with the transition of our chief executive officer. Our stock based compensation expense increased $8.5 million over 2019, primarily due to additional equity grants related to the transition of our chief executive officer.
Loss on Debt Financings
In August 2020, we used the net proceeds from the offering of the 2029 Notes to redeem all of the outstanding 2023 Notes. In connection with that transaction, charges of $4.1 million were recognized in fiscal 2020. The charges included $0.8 million for the write-off of unamortized original issue discount and $3.3 million for the write-off of unamortized deferred financing fees.
In March 2019, we used the net proceeds from the offering of the 6.500% senior notes due March 15, 2027 (the "2027 Notes") to redeem all of the outstanding 8.500% senior notes due 2022 (the “2022 Notes”). In connection with this transaction, charges of $14.6 million were recognized in fiscal 2019. The charges included $11.7 million for the applicable prepayment premium and $2.9 million for the write-off of unamortized deferred financing fees.
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Tax Receivable Agreement (Benefit) Expense
Our TRA benefit for the year ended January 2, 2021 was $7.6 million as compared to TRA expense of $16.2 million in the year ended December 28, 2019. Each year, we update our estimate as to when TRA payments will be made. When payments are made under the TRA, a portion of the payment made will be characterized as imputed interest under IRS regulations. We also updated our estimate of the state income tax rate that will be in effect at the date the TRA payments are made. As a result of updated state income tax rate, and the imputed interest limitation noted above, we decreased our TRA liability by $7.6 million as of January 2, 2021 and increased our TRA liability by $16.2 million as of December 28, 2019.
Income Tax Expense (Benefit)
Our income tax benefit was $12.2 million for the year ended January 2, 2021 as compared to income tax expense of $17.1 million for the year ended December 28, 2019. Our effective tax rate for Summit Inc. differs from the federal statutory tax rate primarily due to (1) unrecognized tax benefits, (2) changes in the valuation allowance, (3) state taxes, (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 Company's income tax provision is calculated under the provisions of the final regulations related to tax reform legislation, which may limit our ability to deduct interest expense in calculating our taxable income. All adjustments resulting from the issuance of the final regulations have been recorded.
As of January 2, 2021 and December 28, 2019, Summit Inc. had a valuation allowance of $1.7 million and $1.7 million against our deferred tax assets, respectively.
Segment Results of Operations
West Segment
| ($ in thousands) | 2020 | 2019 | Variance | |||||||||||||||||||||||
| Net revenue | $ | 1,147,921 | $ | 1,022,730 | $ | 125,191 | 12.2 | % | ||||||||||||||||||
| Operating income | 176,528 | 109,182 | 67,346 | 61.7 | % | |||||||||||||||||||||
| Operating margin percentage | 15.4 | % | 10.7 | % | ||||||||||||||||||||||
| Adjusted EBITDA (1) | $ | 271,052 | $ | 204,964 | $ | 66,088 | 32.2 | % | ||||||||||||||||||
______________________
(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 net income, the most directly comparable GAAP measure below.
Net revenue in the West segment increased $125.2 million in the year ended January 2, 2021, due to increases in net revenues in all lines of business. Organic aggregate volumes increased 4.4% in 2020 as compared to 2019, and organic aggregates average sales prices increased 1.8%, primarily due to product mix. Organic ready-mix concrete volumes increased 3.0% and our organic ready-mix concrete average sales prices increased 4.7%.
The West segment’s operating income increased $67.3 million in the year ended January 2, 2021. Adjusted EBITDA increased $66.1 million in the year ended January 2, 2021. The increases in operating income and Adjusted EBITDA occurred as the weather conditions in 2020 have been generally more favorable as compared to 2019, which has resulted in operational efficiencies and increased sales volumes. The operating margin percentage in the West segment increased in 2020 as compared to 2019, due to the impact of the same factors noted above.
Gross revenue by product/service was as follows:
| ($ in thousands) | 2020 | 2019 | Variance | |||||||||||||||||||||||
| Revenue by product*: | ||||||||||||||||||||||||||
| Aggregates | $ | 282,989 | $ | 244,138 | $ | 38,851 | 15.9 | % | ||||||||||||||||||
| Ready-mix concrete | 496,118 | 460,137 | 35,981 | 7.8 | % | |||||||||||||||||||||
| Asphalt | 277,522 | 246,301 | 31,221 | 12.7 | % | |||||||||||||||||||||
| Paving and related services | 436,018 | 359,577 | 76,441 | 21.3 | % | |||||||||||||||||||||
| Other | (230,451) | (187,815) | (42,636) | (22.7) | % | |||||||||||||||||||||
| Total revenue | $ | 1,262,196 | $ | 1,122,338 | $ | 139,858 | 12.5 | % | ||||||||||||||||||
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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.
The West segment’s percent changes in sales volumes and pricing comparing 2020 to 2019 were as follows:
| Percentage Change in | ||||||||||||||
| Volume | Pricing | |||||||||||||
| Aggregates | 16.9 | % | (0.8) | % | ||||||||||
| Ready-mix concrete | 3.0 | % | 4.7 | % | ||||||||||
| Asphalt | 10.3 | % | 2.9 | % | ||||||||||
Gross revenue from aggregates in the West segment increased $38.9 million in 2020 over 2019, primarily due to an increase in sales volumes that more than offset a slight decrease in average sales price. Aggregates volumes increased in 2020 mainly in our Texas markets which had organic growth coupled with increased acquisition volumes, and increased organic volumes in our Intermountain markets. In 2020, organic aggregate volumes decreased in the Vancouver, British Columbia area due to COVID-19 related delays in projects. Aggregates pricing in 2020 decreased 0.8% when compared to 2019, due to product mix primarily in our Texas markets, resulting primarily from the impact of lower prices on acquisition related volumes.
Gross revenue from ready-mix concrete in the West segment increased $36.0 million in 2020 over 2019. For the year ended January 2, 2021, organic ready-mix concrete prices increased 4.7%. For the year ended January 2, 2021, our ready-mix concrete organic volumes increased 3.0%, as volume increases in the Intermountain geographies were offset by volume decreases in North Texas. We continue to see strong residential volumes in the Salt Lake City and Houston areas, while volumes in the Permian basin area have decreased due to an economic slowdown in that area.
Gross revenue from asphalt in the West segment increased $31.2 million and asphalt volumes increased 10.3% in 2020, due to organic volume and price increases. Average sales prices for asphalt increased 2.9% in 2020. Gross revenue for paving and related services in the West segment increased by $76.4 million in 2020 due to greater activity in our North Texas markets, partially offset by our Intermountain geography and in Vancouver, British Columbia.
Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue for the year ended January 2, 2021 was approximately $79.4 million and $26.7 million, respectively.
East Segment
| ($ in thousands) | 2020 | 2019 | Variance | |||||||||||||||||||||||
| Net revenue | $ | 716,211 | $ | 717,213 | $ | (1,002) | (0.1) | % | ||||||||||||||||||
| Operating income | 69,796 | 101,775 | (31,979) | (31.4) | % | |||||||||||||||||||||
| Operating margin percentage | 9.7 | % | 14.2 | % | ||||||||||||||||||||||
| Adjusted EBITDA (1) | $ | 162,275 | $ | 187,625 | $ | (25,350) | (13.5) | % | ||||||||||||||||||
______________________
(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 decreased $1.0 million in 2020 over 2019, as the decrease in asphalt and paving and services revenues exceeded the increase in aggregates and ready-mix concrete revenues. Organic aggregate volumes increased 3.0% in 2020 over 2019 levels, while organic aggregate pricing decreased 2.1%. Organic ready mix volumes and pricing increased 11.2% and 4.6%, respectively. Due to weakness in our Kentucky market, organic asphalt volumes decreased (7.9)% in 2020 over 2019 levels, and paving and related services revenue decreased $40.2 million.
Operating income in the East segment decreased $32.0 million and Adjusted EBITDA decreased $25.4 million in 2020 over 2019, primarily due to lower margins on our asphalt and paving business, which resulted from decreased activity in Kentucky. In addition, our organic sales prices decreased in Missouri as 2019 included more higher priced flood and levy volumes. Further, our Kentucky operations worked to sell lower priced inventory to generate cash flow. Operating margin percentage in 2020 decreased to 9.7% from 14.2% in 2019, due to the items noted above.
Gross revenue by product/service was as follows:
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| ($ in thousands) | 2020 | 2019 | Variance | |||||||||||||||||||||||
| Revenue by product*: | ||||||||||||||||||||||||||
| Aggregates | $ | 353,265 | $ | 348,889 | $ | 4,376 | 1.3 | % | ||||||||||||||||||
| Ready-mix concrete | 172,370 | 148,031 | 24,339 | 16.4 | % | |||||||||||||||||||||
| Asphalt | 100,220 | 123,349 | (23,129) | (18.8) | % | |||||||||||||||||||||
| Paving and related services | 203,475 | 243,694 | (40,219) | (16.5) | % | |||||||||||||||||||||
| Other | (29,697) | (54,865) | 25,168 | 45.9 | % | |||||||||||||||||||||
| Total revenue | $ | 799,633 | $ | 809,098 | $ | (9,465) | (1.2) | % | ||||||||||||||||||
______________________
* 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 2020 as compared to 2019 were as follows:
| Percentage Change in | ||||||||||||||
| Volume | Pricing | |||||||||||||
| Aggregates | 3.5 | % | (2.2) | % | ||||||||||
| Ready-mix concrete | 11.2 | % | 4.6 | % | ||||||||||
| Asphalt | (7.9) | % | (3.3) | % | ||||||||||
Revenue from aggregates in the East segment increased $4.4 million in the year ended January 2, 2021. Aggregate volumes in 2020 increased 3.5%, primarily due to organic growth in our Kansas markets from wind farm and other large non-residential project activity, offset by volume decreases in our Missouri and Kentucky markets. Our volumes decreased in Kentucky as the state continues to deal with lower tax revenues that preceded COVID-19, and those revenues further decreased after the onset of COVID-19. Aggregates pricing decreased 2.1% in 2020 due primarily to product mix in Missouri and Kentucky.
Revenue from ready-mix concrete in the East segment increased $24.3 million in 2020, as we realized higher organic volumes and pricing in all of our markets except Virginia. In 2020, ready-mix concrete volumes increased 11.2%, and average sales prices increased 4.6%.
Revenue from asphalt decreased $23.1 million in 2020, which was mainly attributable to lower volumes in Kentucky, due to the items mentioned above, which more than offset strong asphalt volumes in Kansas. Asphalt pricing decreased 3.3% in 2020, as lower prices occurred in most of our markets. Paving and related service revenue decreased $40.2 million in 2020, primarily due to lower activity in Kentucky as noted above.
Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue for the year ended January 2, 2021 was approximately $6.9 million and $(1.3) million, respectively.
Cement Segment
| ($ in thousands) | 2020 | 2019 | Variance | |||||||||||||||||||||||
| Net revenue | $ | 270,622 | $ | 290,704 | $ | (20,082) | (6.9) | % | ||||||||||||||||||
| Operating income | 55,335 | 64,697 | (9,362) | (14.5) | % | |||||||||||||||||||||
| Operating margin percentage | 20.4 | % | 22.3 | % | ||||||||||||||||||||||
| Adjusted EBITDA (1) | $ | 92,956 | $ | 103,438 | $ | (10,482) | (10.1) | % | ||||||||||||||||||
______________________
(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 decreased $20.1 million in 2020 over 2019, primarily due to decreased organic cement volumes of 4.6%. In addition, an explosion in April 2020 that shut down our solid waste processing facility contributed to the revenue decline in 2020 compared to 2019.
The Cement segment’s operating income decreased $9.4 million and Adjusted EBITDA decreased $10.5 million in 2020. Although our sales volumes decreased, our production volumes increased as we did not purchase as much cement from
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international producers as we did in 2019. As such, our overall operating costs increased in 2020 over 2019. We believe our lower sales volumes are related to COVID-19, notably in our southern markets. Additionally, our solid waste processing facility that provides fuel for one of our plants remained closed to processing solid waste due to an explosion in April 2020, which also increased our operating costs. We expect to receive the necessary approvals to reopen that facility sometime late in the first quarter 2021.
Operating margin percentage for the year ended January 2, 2021 decreased to 20.4% from 22.3% in the prior year, primarily due to the same factors noted above.
Gross revenue by product was as follows:
| ($ in thousands) | 2020 | 2019 | Variance | |||||||||||||||||||||||
| Revenue by product*: | ||||||||||||||||||||||||||
| Cement | $ | 266,989 | $ | 275,530 | $ | (8,541) | (3.1) | % | ||||||||||||||||||
| Other | 3,633 | 15,174 | (11,541) | (76.1) | % | |||||||||||||||||||||
| Total revenue | $ | 270,622 | $ | 290,704 | $ | (20,082) | (6.9) | % | ||||||||||||||||||
______________________
* 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 2020 from 2019 were as follows:
| Percentage Change in | ||||||||||||||
| Volume | Pricing | |||||||||||||
| Cement | (4.6) | % | 1.5 | % | ||||||||||
Revenue from cement decreased $8.5 million in 2020, as volume decreases of 4.6% were only partially offset by small organic cement pricing gains. We have historically implemented cement pricing increases in April each year; however, in 2020, those increases were deferred until June 1 as a result of COVID-19. We believe the decreases in volume are the result of COVID-19, primarily in southern markets, where the demand for cement is partially driven by the energy industry.
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-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 2020, we filed a shelf registration statement with the SEC that is effective for a term of three years and will expire in January 2023. 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, 2021, we had $418.2 million in cash and cash equivalents and $570.6 million of working capital as compared to $311.3 million and $497.0 million, respectively, at December 28, 2019. Working capital is calculated as current assets less current liabilities. There were no restricted cash balances as of January 2, 2021 or December 28, 2019.
Our remaining borrowing capacity on our $345.0 million senior secured revolving credit facility as of January 2, 2021 was $329.1 million, which is net of $15.9 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.
Our acquisition strategy has historically required us to raise capital through equity issuances or debt financings. As of January 2, 2021 and December 28, 2019, our long-term borrowings totaled $1.9 billion, for which we incurred $91.2 million and $102.0 million of interest expense, respectively. Our senior secured revolving facility has been adequate to fund our
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seasonal working capital needs and certain acquisitions. We had no outstanding borrowings on the revolving credit facility as of January 2, 2021.
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.
As market conditions warrant we may, from time to time, seek to purchase our outstanding debt securities or loans, including Senior Notes and borrowings under our senior secured credit facilities. Such transactions could be privately negotiated, open market transactions, tender offers or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by the use of cash on our balance 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. Any such purchases may equate to a substantial amount of a particular class or series of debt, which may reduce the trading liquidity of such class or 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, 2021 and December 28, 2019, our Consolidated First Lien Net Leverage Ratio was 0.51 to 1.00 and 0.80 to 1.00, respectively, based on consolidated first lien net debt of $254.5 million and $369.4 million as of January 2, 2021 and December 28, 2019, respectively, divided by Further Adjusted EBITDA of $496.5 million and $461.5 million for the years ended January 2, 2021 and December 28, 2019, respectively. As of January 2, 2021 and December 28, 2019, we were in compliance with all debt covenants.
The following table sets forth a reconciliation of net income to Adjusted EBITDA and Further Adjusted EBITDA for the periods indicated. Adjusted EBITDA and Further Adjusted EBITDA are not U.S. GAAP measures and should not be considered in isolation, or as a substitute for our results as reported under U.S. GAAP.
| ($ in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| Net income | $ | 141,240 | $ | 61,123 | $ | 36,330 | ||||||||||||||
| Interest expense | 103,595 | 116,509 | 116,548 | |||||||||||||||||
| Income tax expense (benefit) | (12,185) | 17,101 | 59,747 | |||||||||||||||||
| Depreciation, depletion, and amortization | 218,682 | 214,886 | 203,305 | |||||||||||||||||
| EBITDA | $ | 451,332 | $ | 409,619 | $ | 415,930 | ||||||||||||||
| Accretion | 2,638 | 2,216 | 1,605 | |||||||||||||||||
| Loss on debt financings | 4,064 | 14,565 | 149 | |||||||||||||||||
| Tax receivable agreement (benefit) expense | (7,559) | 16,237 | (22,684) | |||||||||||||||||
| Gain on sale of business | — | — | (12,108) | |||||||||||||||||
| Transaction costs(a) | 2,747 | 2,222 | 4,238 | |||||||||||||||||
| Non-cash compensation(b) | 28,857 | 20,403 | 25,378 | |||||||||||||||||
| Other(c) | 2,957 | (3,800) | (6,247) | |||||||||||||||||
| Adjusted EBITDA | $ | 485,036 | $ | 461,462 | $ | 406,261 | ||||||||||||||
| EBITDA for certain acquisitions(d) | 11,448 | — | 2,119 | |||||||||||||||||
| Further Adjusted EBITDA | $ | 496,484 | $ | 461,462 | $ | 408,380 | ||||||||||||||
______________________
(a)Represents the transaction expenses associated with closed and probable acquisitions, consisting primarily of accounting, legal, valuation and financial advisory fees for the acquisitions.
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(b)Represents non-cash equity-based compensation granted to employees.
(c)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, depreciation on unconsolidated joint ventures and fair value adjustments to contingent consideration obligations that originated with various acquisitions.
(d)Under the terms of our credit facilities, we include EBITDA from our acquisitions, net of dispositions, in each fiscal year for periods prior to acquisition. We believe this provides our lenders with a more meaningful view of our EBITDA across all periods by making the information more comparable.
At January 2, 2021 and December 28, 2019, $1.9 billion of total debt was outstanding under our respective debt agreements. Summit LLC’s senior secured credit facilities provide for term loans in an aggregate amount of $650.0 million and revolving credit commitments in an aggregate amount of $345.0 million (the “Senior Secured Credit Facilities”). Summit LLC’s domestic wholly-owned subsidiary companies are named as guarantors of the Senior Notes and the Senior Secured Credit Facilities. Certain other partially-owned subsidiaries, and the wholly-owned Canadian subsidiary, Mainland, do not guarantee the 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 February 28, 2019, Summit LLC entered into Incremental Amendment No. 4 to the Credit Agreement which, among other things, increased the total amount available under the revolving credit facility to $345.0 million and extended the maturity date of the Credit Agreement to February 2024.
Senior Notes
On August 11, 2020, Summit LLC and Summit Finance (together, the “Issuers”) issued $700.0 million in aggregate principal amount of 5.250% senior notes due January 15, 2029. The 2029 Notes were issued at 100.0% of their par value with proceeds of $690.4 million, net of related fees and expenses. Interest on the 2029 Notes is payable semi-annually on January 15 and July 15 of each year commencing on January 15, 2021.
In August 2020, using the proceeds from the 2029 Notes, all of the outstanding $650.0 million 6.125% senior notes due 2023 were redeemed at a price equal to par and the indenture under which the 2023 Notes were issued was satisfied and discharged. As a result of the extinguishment, charges of $4.1 million were recognized in the quarter ended September 26, 2020, which included charges of $0.8 million for the write-off of original issue discount and $3.3 million for the write-off of deferred financing fees.
On March 15, 2019, the Issuers issued $300 million in aggregate principal amount of 6.500% senior notes due March 15, 2027. The 2027 Notes were issued at 100.0% of their par value with proceeds of $296.3 million, net of related fees and expenses. Interest on the 2027 Notes is payable semi-annually on March 15 and September 15 of each year commencing on September 15, 2019.
In March 2019, using the proceeds from the 2027 Notes, all of the 2022 Notes were redeemed at a price equal to par plus an applicable premium and the indenture under which the 2022 Notes were issued was satisfied and discharged. As a result of the extinguishment, charges of $14.6 million were recognized in the quarter ended March 30, 2019, which included charges of $11.7 million for the applicable redemption premium and $2.9 million for the write-off of deferred financing fees.
On June 1, 2017, the Issuers issued $300.0 million in aggregate principal amount of 5.125% senior 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.
Senior Secured Credit Facilities
Summit LLC has credit facilities that provide for term loans in an aggregate amount of $650 million and revolving credit commitments in an aggregate amount of $345 million (the "Senior Secured Credit Facilities"). Under the terms of Senior Secured Credit Facilities, as amended through February 2019, required principal payments 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. The unpaid principal balance is due in full on the maturity date of November 21, 2024.
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 2.00% for base rate loans or (ii) a LIBOR rate determined by reference to
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Reuters prior to the interest period relevant to such borrowing adjusted for certain additional costs plus an applicable margin of 3.00% for LIBOR rate loans.
There were no outstanding borrowings under the revolving credit facility as of January 2, 2021 or December 28, 2019. As of January 2, 2021, we had remaining borrowing capacity of $329.1 million under the revolving credit facility, which is net of $15.9 million of outstanding letters of credit. The outstanding letters of credit are renewed annually and support required bonding on construction projects and the Company’s insurance liabilities.
Summit LLC’s Consolidated First Lien Net Leverage Ratio, as such term is defined in the Credit Agreement, should be no greater than 4.75:1.0 as of each quarter-end. As of January 2, 2021 and December 28, 2019, Summit LLC was in compliance with all financial covenants under the Credit Agreement.
Summit LLC’s wholly-owned domestic subsidiary companies, subject to certain exclusions and exceptions, are named as subsidiary guarantors of the Senior Notes and the Senior Secured Credit Facilities. In addition, Summit LLC has pledged substantially all of its assets as collateral, subject to certain exclusions and exceptions, for the Senior Secured Credit Facilities.
Cash Flows
The following table summarizes our net cash provided by and used for operating, investing and financing activities and our capital expenditures for the periods indicated:
| Summit Inc. | Summit LLC | |||||||||||||||||||||||||||||||||||||
| ($ in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||||||||||||||||||||||||
| Operating activities | $ | 408,869 | $ | 337,184 | $ | 408,869 | $ | 337,184 | ||||||||||||||||||||||||||||||
| Investing activities | (285,587) | (162,809) | (285,587) | (162,809) | ||||||||||||||||||||||||||||||||||
| Financing activities | (16,771) | 8,150 | (16,771) | 8,150 | ||||||||||||||||||||||||||||||||||
Operating Activities
During the year ended January 2, 2021, cash provided by operating activities was $408.9 million primarily as a result of:
•Net income of $141.2 million, adjusted for $235.4 million of non-cash expenses, including $227.8 million of depreciation, depletion, amortization and accretion, $28.9 million of share-based compensation and $(18.4) million of change in deferred tax asset, net.
•Billed and unbilled accounts receivable decreased by $10.0 million in fiscal 2020 as a result of the seasonality of our business. The majority of our sales occur in the spring, summer and fall and we typically incur an increase in accounts receivable (net billed and unbilled) during the second and third quarters of each year. This amount is typically converted to cash in the fourth and first quarters.
•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 by year-end. In addition, we made $99.6 million of interest payments in 2020. Our cash interest payments are expected to decrease slightly from this amount in 2021 and beyond.
During the year ended December 28, 2019, cash provided by operating activities was $337.2 million primarily as a result of:
•Net income of $61.1 million, adjusted for $249.7 million of non-cash expenses, including $222.9 million of depreciation, depletion, amortization and accretion, $20.4 million of share-based compensation and $16.0 million of change in deferred tax asset, net.
•Billed and unbilled accounts receivable increased by $31.5 million in fiscal 2019 as a result of increased revenue from our acquisitions as compared to fiscal 2018.
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•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 by year-end. In addition, we made $104.6 million of interest payments in 2019.
Investing Activities
During the year ended January 2, 2021, cash used for investing activities was $285.6 million, of which $123.5 million related to acquisitions completed in the period and $177.2 million was invested in capital expenditures, which was partially offset by $14.0 million of proceeds from asset sales.
During the year ended December 28, 2019, cash used for investing activities was $162.8 million, of which $5.4 million related to acquisitions completed in the period and $177.5 million was invested in capital expenditures, which was partially offset by $21.2 million of proceeds from asset sales.
Financing Activities
During the year ended January 2, 2021, cash used in financing activities was $16.8 million. We received $700.0 million from proceeds of debt issuance, which was offset by $33.3 million of payments on acquisition related liabilities and $674.0 million in debt payments, which includes $14.4 million of finance lease cash payments. Our future payments under our finance lease obligations are expected to decrease slightly from 2020 levels.
During the year ended December 28, 2019, cash provided by financing activities was $8.2 million. We received $19.1 million of proceeds from stock option exercises and $300.0 million from proceeds of debt issuance, which was offset by $33.9 million of payments on acquisition related liabilities and $270.2 million in debt payments.
Cash Paid for Capital Expenditures
We expended approximately $177.2 million in capital expenditures for the year ended January 2, 2021 compared to $177.5 million and $220.7 million in the years ended December 28, 2019 and December 29, 2018, respectively.
We estimate that we will invest between $200 million and $220 million in capital expenditures in 2021, which includes $25 - $35 million for our greenfield development projects. The timing of our greenfield expenditures is dependent upon the timing of when permits may be issued. We expect to fund our capital expenditure program through cash on hand, cash from operations, outside financing arrangements and available borrowings under our revolving credit facility.
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 Materials, LLC whose consolidated financial statements were filedHoldings. 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 TRA with the holders of LP Units that provides for the payment by Summit Inc. to exchanging holders of LP Units of 85% of the benefits, if any, that Summit Inc. is deemed to realize as Exhibit 99.1a result of these increases in tax basis and certain other tax benefits related to entering into the TRA, including tax benefits attributable to payments under the 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 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 Class A 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 Company’s Original 10-K. The KPMG report,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;
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•the amount and timing of our income—Summit Inc. is required to pay 85% of the cash tax savings, if any, as replaced in Amendment No. 1,and when realized. If Summit Inc. does not modify KPMG LLP's unqualified opinionhave taxable income, Summit Inc. is not required (absent a change of control or circumstances requiring an early termination payment) to make payments under the TRA for that taxable year because no cash tax savings will have been realized. However, any tax attributes that do not result in realized benefits in a given tax year will likely generate tax attributes that may be utilized to generate benefits in previous or future tax years. The utilization of such tax attributes will result in cash tax savings that will result in payments under the tax receivable agreement; and
•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.
We anticipate funding payments under the TRA from cash flows from operations, available cash and available borrowings under our Senior Secured Revolving Credit Facilities. As of January 2, 2021, we had accrued $321.7 million as TRA liability. The entire TRA liability is a long term liability as no additional payments are expected in the next twelve months.
In addition, the TRA provides that upon certain changes of control, Summit Materials, LLCInc.’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 TRA. With respect to our obligations under the TRA 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 TRA 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 TRA 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 TRA 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 TRA 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 TRA (although any such overpayment would be taken into account in calculating future payments, if any, under the 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 TRA 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 $20.08 per share price of our Class A common stock, the closing price of our stock on January 2, 2021 and a contractually defined discount rate of 1.34%, 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 $312 million.
Contractual Obligations
The following table presents, as of January 2, 2021, our obligations and commitments to make future payments under contracts and contingent commitments (in thousands).
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| Payments Due by Period | ||||||||||||||||||||||||||||||||||||||||||||
| Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Short term borrowings and long-term debt, including current portion | $ | 1,916,314 | $ | 6,354 | $ | 6,354 | $ | 6,354 | $ | 597,252 | $ | 300,000 | $ | 1,000,000 | ||||||||||||||||||||||||||||||
| Finance lease obligations | 61,009 | 26,742 | 18,603 | 7,053 | 3,207 | 2,573 | 2,831 | |||||||||||||||||||||||||||||||||||||
| Operating lease obligations | 37,847 | 9,491 | 6,088 | 4,663 | 2,863 | 1,781 | 12,961 | |||||||||||||||||||||||||||||||||||||
| Interest payments (1) | 556,898 | 82,360 | 84,803 | 84,665 | 83,257 | 63,938 | 157,875 | |||||||||||||||||||||||||||||||||||||
| Acquisition-related liabilities | 31,956 | 10,360 | 3,522 | 2,774 | 2,742 | 2,696 | 9,862 | |||||||||||||||||||||||||||||||||||||
| Royalty payments | 149,410 | 9,916 | 9,880 | 9,594 | 9,295 | 9,052 | 101,673 | |||||||||||||||||||||||||||||||||||||
| Defined benefit plans (2) | 22,214 | 2,327 | 2,323 | 2,313 | 2,273 | 2,241 | 10,737 | |||||||||||||||||||||||||||||||||||||
| Asset retirement obligation payments | 112,806 | 11,300 | 5,115 | 2,677 | 3,132 | 2,062 | 88,520 | |||||||||||||||||||||||||||||||||||||
| Purchase commitments (3) | 29,200 | 29,037 | 163 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Payments pursuant to tax receivable agreement (4) | 321,679 | — | — | 455 | 2,292 | 3,786 | 315,146 | |||||||||||||||||||||||||||||||||||||
| Other | 12,334 | 6,209 | 3,379 | 2,746 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Total contractual obligations | $ | 3,251,667 | $ | 194,096 | $ | 140,230 | $ | 123,294 | $ | 706,313 | $ | 388,129 | $ | 1,699,605 | ||||||||||||||||||||||||||||||
______________________
(1)Future interest payments were calculated using the applicable fixed and floating rates charged by our lenders in effect as of January 2, 2021 and may differ from actual results.
(2)Future payments to fund our defined benefit plans are estimated based on multiple assumptions which are enumerated in Note 14 to the consolidated financial statements included elsewhere in this report.
(3)Amounts represent purchase commitments entered into in the Original 10-K.normal course of business, primarily for fuel purchases, the terms of which are generally one year.
(4)The total amount payable under our TRA is estimated at $321.7 million as of January 2, 2021. Under the terms of the TRA, payment of amounts benefiting us is due to the pre-IPO owners within four months of the tax returns being submitted to the respective regulatory agencies when the benefits are realized. We are currently estimating benefits next being realized in the 2021 tax year, and paid to TRA holders in early 2023. The estimated timing of TRA payments is subject to a number of factors, primarily around the timing of the generation of future taxable income in future years, which will be impacted by business activity in those periods.
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 position, results of operations or liquidity. We record legal fees as incurred.
In March 2018, we were notified of an investigation by the CCB into pricing practices by certain asphalt paving contractors in British Columbia, including Winvan. We believe the investigation is focused on time periods prior to our April 2017 acquisition of Winvan and we are cooperating with the CCB. Although we currently do not believe this matter will have a material adverse effect on our business, financial condition or results of operations, we are not able to predict the ultimate outcome or cost of the investigation at this time.
Environmental Remediation and Site Restoration—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 environmental liability is inherent in the operation of our business, as it is with other companies engaged in similar businesses and there can be no assurance that environmental liabilities and noncompliance will not have a material adverse effect on our consolidated financial condition, results of 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. 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.
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Off-Balance Sheet Arrangements
As requiredof January 2, 2021, 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 Rule 12b-15U.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.
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:
| Reconciliation of Net Income (Loss) to Adjusted EBITDA | Year ended January 2, 2021 | |||||||||||||||||||||||||||||||
| by Segment | West | East | Cement | Corporate | Consolidated | |||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 178,460 | $ | 74,781 | $ | 69,484 | $ | (181,485) | $ | 141,240 | ||||||||||||||||||||||
| Interest (income) expense (1) | (5,447) | (3,156) | (13,795) | 125,993 | 103,595 | |||||||||||||||||||||||||||
| Income tax expense (benefit) | 4,287 | (283) | — | (16,189) | (12,185) | |||||||||||||||||||||||||||
| Depreciation, depletion and amortization | 93,279 | 84,504 | 36,917 | 3,982 | 218,682 | |||||||||||||||||||||||||||
| EBITDA | $ | 270,579 | $ | 155,846 | $ | 92,606 | $ | (67,699) | $ | 451,332 | ||||||||||||||||||||||
| Accretion | 587 | 1,701 | 350 | — | 2,638 | |||||||||||||||||||||||||||
| Loss on debt financings | — | — | — | 4,064 | 4,064 | |||||||||||||||||||||||||||
| Tax receivable agreement benefit (1) | — | — | — | (7,559) | (7,559) | |||||||||||||||||||||||||||
| Transaction costs | — | — | — | 2,747 | 2,747 | |||||||||||||||||||||||||||
| Non-cash compensation | — | — | — | 28,857 | 28,857 | |||||||||||||||||||||||||||
| Other | (114) | 4,728 | — | (1,657) | 2,957 | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 271,052 | $ | 162,275 | $ | 92,956 | $ | (41,247) | $ | 485,036 | ||||||||||||||||||||||
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| Reconciliation of Net Income (Loss) to Adjusted EBITDA | Year ended December 28, 2019 | |||||||||||||||||||||||||||||||
| by Segment | West | East | Cement | Corporate | Consolidated | |||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 108,751 | $ | 106,307 | $ | 75,480 | $ | (229,415) | $ | 61,123 | ||||||||||||||||||||||
| Interest expense (income) (1) | 1,734 | 1,774 | (10,489) | 123,490 | 116,509 | |||||||||||||||||||||||||||
| Income tax expense (benefit) | 1,918 | (267) | — | 15,450 | 17,101 | |||||||||||||||||||||||||||
| Depreciation, depletion and amortization | 92,737 | 80,262 | 37,891 | 3,996 | 214,886 | |||||||||||||||||||||||||||
| EBITDA | $ | 205,140 | $ | 188,076 | $ | 102,882 | $ | (86,479) | $ | 409,619 | ||||||||||||||||||||||
| Accretion | 519 | 1,141 | 556 | — | 2,216 | |||||||||||||||||||||||||||
| Loss on debt financings | — | — | — | 14,565 | 14,565 | |||||||||||||||||||||||||||
| Tax receivable agreement expense (1) | — | — | — | 16,237 | 16,237 | |||||||||||||||||||||||||||
| Transaction costs | 96 | — | — | 2,126 | 2,222 | |||||||||||||||||||||||||||
| Non-cash compensation | — | — | — | 20,403 | 20,403 | |||||||||||||||||||||||||||
| Other (2) | (791) | (1,592) | — | (1,417) | (3,800) | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 204,964 | $ | 187,625 | $ | 103,438 | $ | (34,565) | $ | 461,462 | ||||||||||||||||||||||
| Reconciliation of Net Income (Loss) to Adjusted EBITDA | Year ended December 29, 2018 | |||||||||||||||||||||||||||||||
| by Segment | West | East | Cement | Corporate | Consolidated | |||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 109,363 | $ | 58,579 | $ | 83,148 | $ | (214,760) | $ | 36,330 | ||||||||||||||||||||||
| Interest expense (income) (1) | 5,064 | 3,491 | (6,815) | 114,808 | 116,548 | |||||||||||||||||||||||||||
| Income tax expense | 535 | 32 | — | 59,180 | 59,747 | |||||||||||||||||||||||||||
| Depreciation, depletion and amortization | 91,224 | 74,463 | 34,996 | 2,622 | 203,305 | |||||||||||||||||||||||||||
| EBITDA | $ | 206,186 | $ | 136,565 | $ | 111,329 | $ | (38,150) | $ | 415,930 | ||||||||||||||||||||||
| Accretion | 570 | 970 | 65 | — | 1,605 | |||||||||||||||||||||||||||
| Loss on debt financings | — | — | — | 149 | 149 | |||||||||||||||||||||||||||
| Tax receivable agreement benefit | — | — | — | (22,684) | (22,684) | |||||||||||||||||||||||||||
| Gain on sale of business | (12,108) | — | — | — | (12,108) | |||||||||||||||||||||||||||
| Transaction costs | (3) | — | — | 4,241 | 4,238 | |||||||||||||||||||||||||||
| Non-cash compensation | — | — | — | 25,378 | 25,378 | |||||||||||||||||||||||||||
| Other (2) | (5,646) | 497 | — | (1,098) | (6,247) | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 188,999 | $ | 138,032 | $ | 111,394 | $ | (32,164) | $ | 406,261 | ||||||||||||||||||||||
______________________
(1)The reconciliation of net income (loss) to Adjusted EBITDA is based on the financial results of Summit Inc. and its subsidiaries, which was $20.5 million greater, $27.5 million less and 27.5 million less than Summit LLC and its subsidiaries in the years ended January 2, 2021, December 28, 2019 and December 29, 2018, 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.
(2)For the year ended December 28, 2019, we negotiated a $2.0 million reduction in the amount of a contingent liability from one of our acquisitions. For the year ended December 29, 2018, we negotiated a $6.9 million reduction in the amount of a contingent liability from one of our acquisitions. As we had passed the period to revise the opening balance sheet for this acquisition, the adjustment was recorded as other income.
| Reconciliation of Working Capital | 2020 | 2019 | ||||||||||||
| ($ in thousands) | ||||||||||||||
| Total current assets | $ | 893,279 | $ | 796,281 | ||||||||||
| Less total current liabilities | (322,689) | (299,297) | ||||||||||||
| Working capital | $ | 570,590 | $ | 496,984 | ||||||||||
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| Reconciliation of Operating Income to Adjusted Cash Gross Profit | 2020 | 2019 | 2018 | |||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||
| Operating income | $ | 225,173 | $ | 213,558 | $ | 162,466 | ||||||||||||||
| General and administrative expenses | 309,531 | 275,813 | 270,402 | |||||||||||||||||
| Depreciation, depletion, amortization and accretion | 221,320 | 217,102 | 204,910 | |||||||||||||||||
| Gain on sale of property, plant and equipment | (7,569) | (10,665) | (12,555) | |||||||||||||||||
| Adjusted Cash Gross Profit (exclusive of items shown separately) | $ | 748,455 | $ | 695,808 | $ | 625,223 | ||||||||||||||
| Adjusted Cash Gross Profit Margin (exclusive of items shown separately) (1) | 35.1 | % | 34.3 | % | 32.7 | % | ||||||||||||||
_____________________
(1)Adjusted Cash Gross Margin is defined as Adjusted Cash Gross Profit as a percentage of net revenue.
Critical Accounting Policies and Estimates
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 Securities Exchange Actcircumstances, the results of 1934, as amended (the “Exchange Act”), currently-dated certificationswhich 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.
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 Company’s Chief Executive Officerdate of acquisition, which is the date that control is obtained. The purchase price is determined based on the estimated fair value of assets given to and Chief Financial Officer have been included as exhibits to this Amendment No. 1. Furthermore, pursuant to Rule 12b-15 promulgated underliabilities assumed from the Exchange Act, the Company has repeated the entire text of Item 8 and Item 15 of the Original 10-K in this Amendment No. 1, however, there have been no changes to the text of such items other than to replace the KPMG report as described above and to file an updated consent of KPMG LLP as Exhibit 23.1.
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 1 fair values are used to value investments in publicly-traded entities and assumed obligations for publicly-traded long-term debt.
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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 fair values are used to value acquired mineral reserves and leased mineral interests and other identifiable intangible assets. The fair values of mineral reserves and leased mineral interests are determined using an excess earnings approach, which require management to estimate future cash flows. The estimate of future cash flows is based on available historical information and forecasts determined by management, but is inherently uncertain. Key assumptions in estimating future cash flows include sales price, volumes and expected profit margins, net of capital requirements. The present value of the projected net cash flows represents the fair value assigned to mineral reserves and mineral interests. The discount rate is a significant assumption used in the valuation model and is based on the required rate of return that a hypothetical market participant would assume if purchasing the acquired business.
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 modifyextend beyond one year from the date of acquisition. Any adjustments to assets acquired or updateliabilities assumed beyond the measurement period are recorded in any wayearnings.
We paid cash of $123.5 million and $5.4 million, net of cash acquired, in business combinations and allocated this amount to assets acquired and liabilities assumed during the disclosures madeyears ended January 2, 2021 and December 28, 2019, respectively.
Goodwill
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 Original 10-K, exceptfuture, 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 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 described above. Accordingly, Amendment No. 1a 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 readthe 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. We 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 Original 10-Kfirst day of the fourth quarter, we performed the qualitative assessment for our reporting units. In 2020, we performed a two-step quantitative analysis on four of our reporting units. Step 1 of that analysis compares the estimated the fair value of the reporting units using an income approach (i.e., a discounted cash flow technique) and a market approach to the carrying value of the reporting unit. If the estimated fair value exceeds its
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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.
As of January 2, 2021, we determined that no events or circumstances from September 28, 2020 through January 2, 2021 indicated that a further assessment was necessary.
Service Revenue Recognition
We earn revenue from the provision of services, which are primarily paving and related services, but also include landfill operations and the receipt and disposal of waste that is converted to fuel for use in our cement plants. 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 engineer 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.
Revenue derived from paving and related services is recognized using the percentage of completion method, which approximates progress towards completion. 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. The majority of our construction service contracts, and therefore, revenue, are opened and completed within one year, with most activity during the spring, summer and fall. 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 in the year ended January 2, 2021.
We recognize claims when the amount of the claim can be estimated reliably and its legally enforceable. 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.
When the contract includes variable consideration, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. The amount of estimated variable consideration included in the transaction price is the amount for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the Company’svariable consideration is subsequently resolved. Types of variable consideration include, but are not limited to, liquidated damages and other filingsperformance penalties and production and placement bonuses.
The 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 the terms in the original contract; therefore, they are considered part of a single performance obligation. We account for the modification 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
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modification. In these situations, we account for the modifications as either a separate contract or prospectively depending on the facts and circumstances of the modification.
Generally, construction contracts contain mobilization costs which are categorized as costs to fulfill a contract. These costs are excluded from any measure of progress toward contract fulfillment. These costs do not result in the transfer of control of a good or service to the customer and are amortized over the life of the contract.
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 amounts were not billable under the contract terms at the balance sheet date. In accordance with the SEC subsequentcontract terms, the unbilled receivables at the balance sheet date are expected to be billed in following periods. Billings in excess of costs and estimated earnings represent billings in excess of revenue recognized.
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 provisions 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 liabilities are computed for differences between the tax basis and financial statement amounts that will result in taxable or deductible amounts in the future. 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 to determine whether we may seek to utilize any net operating loss carryforwards scheduled to expire in the near future. The estimates of future taxable income involves the use of significant estimates and assumptions and considerable management judgment. Our judgments regarding future taxable income 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, are consistent with our internal planning. The computed deferred balances are based on enacted tax laws and applicable 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 filingdeferred 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 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 Original 10-K,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 pre-IPO owners 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 realize) as a result of (i) these increases in tax basis and (ii) our utilization of certain net operating losses of the pre-IPO owners and certain other tax benefits related to entering into the TRA, including any amendments thereto.tax benefits attributable to payments under the TRA.
We periodically evaluate the realizability of the deferred tax assets resulting from the exchange of LP 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
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of the deferred tax assets. 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 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 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 liability 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.
ITEM 7A. QUANTITATIVE AND SUBSIDIARIESQUALITATIVE 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‑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‑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‑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. Changes in oil prices also could affect demand in certain of our markets, particularly in Midland/Odessa, Texas and indirectly in Houston, Texas, which collectively represented approximately 13.0% of our consolidated revenue in 2020. In addition, we enter into various firm purchase commitments, with terms generally less than one year, for certain raw materials.
For the Fiscal Yearyear ended December 29, 2018
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January 2, 2021, our costs associated with liquid asphalt and energy amounted to approximately $257.3 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 $25.7 million. However, this does not take into consideration liquid asphalt escalators in certain contracts or forward purchase commitments put into place before January 2, 2021.
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 became 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 2020 levels would not have had a material effect on our financial condition, results of operations or liquidity.
Interest Rate Risk
As of January 2, 2021, we had $616.3 million in term loans outstanding which bear interest at a variable rate. As of January 2, 2021, the rate in effect was the one‑month LIBOR of 0.15%, plus the Applicable Rate of 200 basis points. Therefore,
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a 100 basis point increase in the interest rate at January 2, 2021 would only have increased the all-in rate from 2.15% to 3.15%, the effect of which would have been an increase of $6.2 million on annual interest expense.
On January 19, 2017, we amended the Credit Agreement and, as a result, the floor decreased from 1.00% to 0.75% and the applicable margin was reduced. 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, brought the floor to zero and reduced the applicable margin in respect of the $635.4 million outstanding principal amount of term loans thereunder. On May 22, 2018, Summit LLC entered into Amendment No. 3 to the Amended and Restated Credit Agreement, which further reduced the applicable margin in respect of the $633.8 million outstanding principal amount of term loans thereunder.
We have entered into interest rate derivatives on $200.0 million of our term loan borrowings to add stability to interest expense and to manage exposure to interest rate movements. The derivative expired in September 2019.
At our cement plants, we sponsored two non‑contributory defined benefit pension plans for certain hourly and salaried employees and two healthcare and life insurance benefits plans for certain eligible retired 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 a cement and quarry in Davenport, Iowa and cement distribution terminals along the Mississippi River 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 2015, the company adopted one new retiree healthcare plan to provide benefits prior to Medicare eligibility for certain hourly Davenport employees. As a result of the collective bargaining unit negotiations in 2017, hourly Davenport employees hired on or after January 1, 2018 are no longer eligible for retiree medical benefits. Our results of operations are affected by our net periodic benefit cost from these plans, which was $0.2 million in 2019. Assumptions that affect this expense include the discount rate and, for the pension plans only, the expected long‑term rate of return on assets. Beginning in 2021, we decreased our estimated rate of return on assets from 7% to 5%, to better align with actual returns. Therefore, we have interest rate risk associated with these factors. Our cash flow obligations related to this change in estimate are not expected to change materially over the next five years.
The healthcare and life insurance benefit plans are exposed to changes in the cost of healthcare services. A one percentage‑point increase or decrease in assumed health care cost trend rates would have affected the accumulated postretirement benefit obligation by approximately $0.8 million or $(0.7) million, respectively, at January 2, 2021.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of 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 December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, the related consolidated statements of operations, comprehensive loss, changes in redeemable noncontrolling interest andincome, stockholders’ equity, and cash flows for each of the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018 December 30, 2017 and December 31, 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 29, 2018January 2, 2021 and December 30, 2017,28, 2019, and the results of its operations and its cash flows for each of the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018 December 30, 2017 and December 31, 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 29, 2018,January 2, 2021, 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 6, 201924, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of December 30, 2018 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 842, Leases.
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 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, 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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognized over time on paving and related services contracts
As discussed in Notes 1 and 4 to the consolidated financial statements, the Company earns revenue from providing paving and related services, which are recognized over time as performance obligations are satisfied. The Company recognizes paving and related services revenue as services are rendered based on the proportion of costs incurred to date relative to total estimated costs to complete. For the year ended January 2, 2021, the Company recognized service revenue related to paving and related services of $310 million.
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We identified the assessment of revenue recognized over time on paving and related services contracts in-progress as a critical audit matter. Paving and related services contracts in-progress required challenging auditor judgment to evaluate the forecast of remaining costs to complete, which had a significant impact on the amount of revenue recognized during the period.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s revenue recognition process related to paving and related services, including controls over the forecasting of estimated costs to complete. We selected a sample of in-progress paving and related services costs incurred and compared the amounts and dates incurred to underlying supporting documentation. We analyzed prior year end in-progress contracts that were completed in the current year to evaluate the Company’s ability to accurately estimate paving and related services contract forecasted costs to complete. For certain contracts, we evaluated the estimated costs to complete by performing project manager interviews to obtain an understanding of the facts and circumstances of each selected contract, including changes in scope to the contract, additional estimated costs to complete, and expected completion date. For certain contracts, we also confirmed with the Company’s customers that the original contract amount, terms of the contact, modifications and billings to the customer were accurate.
/s/ KPMG LLP
We have served as the Company’s auditor since2012.
Denver, Colorado
February 6, 201924, 2021
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