UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2013
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 333-176538
NEW ENTERPRISE STONE & LIME CO., INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 23-1374051 |
(State or other jurisdiction of |
| (I.R.S. Employer |
3912 Brumbaugh Road |
| 16664 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (814) 766-2211
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
This registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated filer o |
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|
|
Non-accelerated filer x |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of July 15, 2013, the number of shares outstanding of the registrant’s Class A Voting Common Stock, $1.00 par value, was 500 shares and the number of shares outstanding of the registrant’s Class B Non-Voting Common Stock, $1.00 par value, was 273,285 shares.
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Quarter Ended May 31, 2013
PART I - FINANCIAL INFORMATION
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
|
| May 31, |
| February 28, |
| ||
(In thousands, except share and per share data) |
| 2013 |
| 2013 |
| ||
|
|
|
|
|
| ||
Assets |
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 3,256 |
| $ | 9,534 |
|
Restricted cash |
| 14,751 |
| 10,123 |
| ||
Accounts receivable, less reserves of $4,584 and $3,515 respectively |
| 107,564 |
| 52,271 |
| ||
Inventories |
| 124,812 |
| 125,144 |
| ||
Deferred income taxes |
| 12,726 |
| 12,386 |
| ||
Other current assets |
| 8,106 |
| 8,337 |
| ||
Total current assets |
| 271,215 |
| 217,795 |
| ||
Property, plant and equipment, net |
| 370,089 |
| 371,868 |
| ||
Goodwill |
| 89,073 |
| 89,073 |
| ||
Other intangible assets |
| 20,771 |
| 21,000 |
| ||
Other assets |
| 29,459 |
| 34,452 |
| ||
Total assets |
| $ | 780,607 |
| $ | 734,188 |
|
Liabilities and Deficit |
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Current maturities of long-term debt |
| $ | 9,708 |
| $ | 11,342 |
|
Accounts payable — trade |
| 55,829 |
| 20,608 |
| ||
Accrued liabilities |
| 50,155 |
| 54,007 |
| ||
Total current liabilities |
| 115,692 |
| 85,957 |
| ||
Long-term debt, less current maturities |
| 622,738 |
| 566,645 |
| ||
Deferred income taxes |
| 49,159 |
| 52,443 |
| ||
Other liabilities |
| 30,226 |
| 36,733 |
| ||
Total liabilities |
| 817,815 |
| 741,778 |
| ||
Commitments and contingencies (Note 7) |
|
|
|
|
| ||
Deficit |
|
|
|
|
| ||
Common stock, Class A, voting, $1 par value |
| 1 |
| 1 |
| ||
Common stock, Class B, nonvoting, $1 par value |
| 273 |
| 273 |
| ||
Accumulated deficit |
| (164,273 | ) | (134,297 | ) | ||
Additional paid-in capital |
| 126,962 |
| 126,962 |
| ||
Accumulated other comprehensive loss |
| (2,353 | ) | (2,422 | ) | ||
Total New Enterprise Stone & Lime Co., Inc. deficit |
| (39,390 | ) | (9,483 | ) | ||
Noncontrolling interest in consolidated subsidiaries |
| 2,182 |
| 1,893 |
| ||
Total deficit |
| (37,208 | ) | (7,590 | ) | ||
Total liabilities and deficit |
| $ | 780,607 |
| $ | 734,188 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
|
| Three Months Ended |
| ||||
|
| May 31, |
| May 31, |
| ||
(In thousands) |
| 2013 |
| 2012 |
| ||
Revenue |
|
|
|
|
| ||
Construction materials |
| $ | 79,953 |
| $ | 87,887 |
|
Heavy/highway construction |
| 47,893 |
| 51,031 |
| ||
Traffic safety services and equipment |
| 19,898 |
| 19,063 |
| ||
Total net revenue |
| 147,744 |
| 157,981 |
| ||
|
|
|
|
|
| ||
Cost of revenue (exclusive of items shown separately below) |
|
|
|
|
| ||
Construction materials |
| 64,076 |
| 66,607 |
| ||
Heavy/highway construction |
| 47,404 |
| 51,926 |
| ||
Traffic safety services and equipment |
| 16,238 |
| 14,898 |
| ||
Total cost of revenue |
| 127,718 |
| 133,431 |
| ||
|
|
|
|
|
| ||
Depreciation, depletion and amortization |
| 12,118 |
| 11,843 |
| ||
Pension and profit sharing |
| 1,878 |
| 1,841 |
| ||
Selling, administrative and general expenses |
| 19,413 |
| 17,682 |
| ||
Loss (gain) on disposals of property, equipment and software |
| 152 |
| (35 | ) | ||
Operating loss |
| (13,535 | ) | (6,781 | ) | ||
Interest expense, net |
| (19,177 | ) | (22,820 | ) | ||
Loss before income taxes |
| (32,712 | ) | (29,601 | ) | ||
Income tax benefit |
| (3,475 | ) | (11,487 | ) | ||
Net loss |
| (29,237 | ) | (18,114 | ) | ||
Unrealized actuarial gains and amortization of prior service costs, net of income taxes |
| 69 |
| 77 |
| ||
Comprehensive loss |
| (29,168 | ) | (18,037 | ) | ||
Less: Comprehensive income attributable to noncontrolling interest |
| (739 | ) | (305 | ) | ||
Comprehensive loss attributable to New Enterprise Stone & Lime Co., Inc. |
| $ | (29,907 | ) | $ | (18,342 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
|
| Three Months Ended |
| ||||
|
| May 31, |
| May 31, |
| ||
(In thousands) |
| 2013 |
| 2012 |
| ||
|
|
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|
|
| ||
Reconciliation of net loss to net cash from operating activities |
|
|
|
|
| ||
Net loss |
| $ | (29,237 | ) | $ | (18,114 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities |
|
|
|
|
| ||
Depreciation, depletion and amortization |
| 12,118 |
| 11,843 |
| ||
Loss (gain) on disposals of property, equipment and software |
| 152 |
| (35 | ) | ||
Non-cash payment-in-kind interest accretion |
| 5,862 |
| 4,969 |
| ||
Amortization and write-off of debt issuance costs |
| 1,570 |
| 7,313 |
| ||
Deferred income taxes |
| (3,630 | ) | (11,509 | ) | ||
Bad debt expense |
| 1,117 |
| 813 |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
| (56,410 | ) | (43,464 | ) | ||
Inventories |
| 333 |
| (3,632 | ) | ||
Other assets |
| 336 |
| (867 | ) | ||
Accounts payable |
| 35,221 |
| 14,457 |
| ||
Other liabilities |
| (3,685 | ) | (3,729 | ) | ||
Net cash used in operating activities |
| (36,253 | ) | (41,955 | ) | ||
Cash flows from investing activities |
|
|
|
|
| ||
Capital expenditures |
| (9,491 | ) | (14,775 | ) | ||
Proceeds from sale of property and equipment |
| 67 |
| 221 |
| ||
Change in cash value of life insurance |
| 3,089 |
| (2,573 | ) | ||
Change in restricted cash |
| (4,628 | ) | 125 |
| ||
Net cash used in investing activities |
| (10,963 | ) | (17,002 | ) | ||
Cash flows from financing activities |
|
|
|
|
| ||
Proceeds from revolving credit |
| 49,419 |
| 118,863 |
| ||
Repayment of revolving credit |
| (6,324 | ) | (170,383 | ) | ||
Proceeds from issuance of long-term debt |
| 481 |
| 268,535 |
| ||
Repayment of long-term debt |
| (1,091 | ) | (152,768 | ) | ||
Payments on capital leases |
| (1,096 | ) | (1,290 | ) | ||
Debt issuance costs |
| — |
| (14,062 | ) | ||
Distribution to noncontrolling interest |
| (451 | ) | (438 | ) | ||
Net cash provided by financing activities |
| 40,938 |
| 48,457 |
| ||
Net decrease in cash and cash equivalents |
| (6,278 | ) | (10,500 | ) | ||
Cash and cash equivalents |
|
|
|
|
| ||
Beginning of period |
| 9,534 |
| 15,032 |
| ||
End of period |
| $ | 3,256 |
| $ | 4,532 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
1. Nature of Operations and Summary of Significant Accounting Policies
Company Activities
New Enterprise Stone & Lime Co., Inc., a Delaware corporation, is a privately held, vertically integrated construction materials supplier and heavy/highway construction contractor in Pennsylvania and western New York and a national traffic safety services and equipment provider. Founded in 1924, the Company operates in three segments based upon the nature of its products and services: construction materials, heavy/highway construction and traffic safety services and equipment. As used herein, the terms (“we,” “us,” “our,” “NESL,” or the “Company”) refer to New Enterprise Stone & Lime Co., Inc., and/or one or more of its subsidiaries. Almost all of our products are produced and consumed outdoors. Normally, our highest sales and earnings are in the second and third fiscal quarters and our lowest are in the first and fourth fiscal quarters. As a result of this seasonality, our significant net working capital items, which are accounts receivable, inventories, accounts payable - trade and accrued liabilities, are typically higher as of interim period ends compared to fiscal year end.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and notes included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All adjustments (all of which are of a normal recurring nature) that are necessary for a fair presentation are reflected in the condensed consolidated financial statements. The condensed consolidated financial statements do not include all of the information or disclosures required for a complete presentation in accordance with GAAP. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2013 filed with the Securities and Exchange Commission (“SEC”). The results for interim periods are not necessarily indicative of the results for a full fiscal year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and entities where the Company has a controlling equity interest. Intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain items previously reported in prior period financial statement captions have been conformed to agree with current presentation.
Use of Estimates
The preparation of the condensed consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment; valuation of receivables, inventories, goodwill and other intangible assets; recognition of revenue and loss contract reserves under the percentage-of-completion method; assets and obligations related to employee benefit plans; asset retirement obligations; income tax valuation; and self-insurance reserves. Actual results could differ from those estimates.
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash balances were restricted in certain consolidated subsidiaries for bond sinking fund and insurance requirements as well as collateral on outstanding letters of credit or rentals.
We use a cash pooling arrangement with a single financial institution with specific provisions for the right to offset positive and negative cash balances. Accordingly, we classify net aggregate bank overdraft positions as other obligations within the current maturities of long-term debt as of May 31, 2013, based on the short-term nature of these positions.
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
Trade Accounts Receivable
Trade accounts receivable, less allowance for doubtful accounts, are recorded at the invoiced amount plus service charges related to past due accounts. The Company’s total accounts receivable consisted of the following:
|
| May 31, |
| February 28, |
| ||
(In thousands) |
| 2013 |
| 2013 |
| ||
|
|
|
|
|
| ||
Costs and estimated earnings in excess of billings |
| $ | 12,588 |
| $ | 4,265 |
|
Trade |
| 96,153 |
| 48,392 |
| ||
Retainages |
| 3,407 |
| 3,129 |
| ||
|
| 112,148 |
| 55,786 |
| ||
Allowance for doubtful accounts |
| (4,584 | ) | (3,515 | ) | ||
Accounts receivable, net |
| $ | 107,564 |
| $ | 52,271 |
|
Costs and estimated earnings in excess of billings relate to revenue recognized and not yet billed due to contract terms. State and local agencies often require several approvals to process billings or payments and this may cause a lag in payment times.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using either first-in, first-out (“FIFO”) or weighted average method based on the applicable category of inventories.
The Company’s total inventory consists of the following:
|
| May 31, |
| February 28, |
| ||
(In thousands) |
| 2013 |
| 2013 |
| ||
|
|
|
|
|
| ||
Crushed stone, agricultural lime, and sand |
| $ | 74,945 |
| $ | 76,927 |
|
Safety equipment |
| 16,499 |
| 16,057 |
| ||
Parts, tires, and supplies |
| 11,373 |
| 11,331 |
| ||
Raw materials |
| 10,856 |
| 9,247 |
| ||
Concrete blocks |
| 3,654 |
| 4,210 |
| ||
Building materials |
| 4,214 |
| 3,921 |
| ||
Other |
| 3,271 |
| 3,451 |
| ||
|
| $ | 124,812 |
| $ | 125,144 |
|
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Assets under capital leases are stated at the lesser of the present value of minimum lease payments or the fair value of the leased item. Provision for depreciation is generally computed over estimated service lives by the straight-line method.
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
The Company’s property, plant and equipment consist of the following:
|
| May 31, |
| February 28, |
| ||
(In thousands) |
| 2013 |
| 2013 |
| ||
|
|
|
|
|
| ||
Limestone and sand acreage |
| $ | 144,076 |
| $ | 144,076 |
|
Land, buildings and building improvements |
| 100,669 |
| 100,074 |
| ||
Crushing, prestressing, and manufacturing plants |
| 327,449 |
| 326,066 |
| ||
Contracting equipment, vehicles and other |
| 302,515 |
| 300,450 |
| ||
Construction in progress |
| 9,501 |
| 5,680 |
| ||
Property, plant and equipment |
| 884,210 |
| 876,346 |
| ||
Less: Accumulated depreciation and depletion |
| (514,121 | ) | (504,478 | ) | ||
Property, plant and equipment, net |
| $ | 370,089 |
| $ | 371,868 |
|
Depreciation expense was $11.1 and $10.8 million for three months ended May 31, 2013 and May 31, 2012 respectively.
Goodwill and Other Intangible Assets
Goodwill
The Company tests goodwill for impairment on an annual basis or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. There were no changes to the carrying value of goodwill during the three months ended May 31, 2013. Management continues to monitor the impact of market and economic events to determine if it is more likely than not that the carrying value of these reporting units has been impaired. The timing of a sustained recovery in the construction industry may have a significant effect on the fair value of our reporting units. A decrease in the estimated fair value of one or more of the Company’s reporting units as a result of changes in future earnings, interest rates, market trends and/or cash flows could result in the recognition of goodwill impairment.
In the fourth quarter of fiscal year 2013 we completed our annual goodwill impairment testing. The estimated fair value of each of the reporting units was in excess of its carrying value, even after conducting various sensitivity analyses on key assumptions, such that no adjustment to the carrying values of goodwill was required.
Other Intangible Assets
Other intangible assets consist of technology, customer relationships and trademarks acquired in previous acquisitions. The technology is being amortized over a straight-line basis of 15 years. The customer relationships are being amortized on a straight-line basis over 20 years. Beginning fiscal year 2014, our trademarks, which were previously considered indefinite lived, are being amortized over 30 and 50 years.
Amortization of intangible assets for each of the three months ended May 31, 2013 and May 31, 2012 was $0.2 million.
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
Other Assets
The Company’s long term other assets consist of the following:
|
| May 31, |
| February 28, |
| ||
(In thousands) |
| 2013 |
| 2013 |
| ||
|
|
|
|
|
| ||
Deferred financing fees (less current portion of $3,522 and $3,658, respectively) |
| $ | 12,953 |
| $ | 14,523 |
|
Capitalized software (net of accumulated amortization of $1,314 and $1,080, respectively) |
| 8,947 |
| 9,211 |
| ||
Cash surrender value of life insurance (net of loans of $3,204 and $0, respectively) |
| 1,249 |
| 4,338 |
| ||
Deferred stripping costs |
| 3,873 |
| 3,868 |
| ||
Other |
| 2,437 |
| 2,512 |
| ||
Total other assets |
| $ | 29,459 |
| $ | 34,452 |
|
On May 29, 2013, we entered into the third amendment to our asset-based revolving loan facility, which we refer to as the ABL Facility, and as a result of the reduction in the maximum borrowings of the ABL Facility, the Company recognized $0.7 million of unamortized deferred financing fees as interest expense during the three months ended May 31, 2013.
New Accounting Standards
Recently Adopted Accounting Standards
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220). This ASU requires companies to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, companies are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. This ASU does not change the current requirements for reporting net income or other comprehensive income in the financial statements. This ASU was effective commencing with the three months ending May 31, 2013. We adopted this standard on March 1, 2103, which did not have a material impact on our consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU gives companies the option to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If it is determined that it is more likely than not the indefinite-lived intangible asset is impaired, a quantitative impairment test is required. However, if it is concluded otherwise, the quantitative test is not necessary. This ASU was effective commencing with the three months ending May 31, 2013. We adopted this standard on March 1, 2103, which did not have a material impact on our consolidated financial statements.
2. Risks and Uncertainties
Our business is heavily impacted by several factors which are outside the control of management, including the overall health of the economy, the level of commercial and residential construction, the level of federal, state and local publicly funded construction projects and seasonal variations generally attributable to weather conditions. These factors impact the amount and timing of our revenues and our overall performance.
We believe we have sufficient financial resources, including cash and cash equivalents, cash from operations and amounts available for borrowing under our ABL Facility, to fund our business and operations for at least the next twelve months, including capital expenditures and debt service obligations. However, in the past we have failed to meet certain operating performance measures as well as the financial covenant requirements set forth under our previous credit facilities and our ABL Facility, which resulted in the need to obtain several amendments, and should we fail in the future to meet certain covenants as applicable, we cannot guarantee that we will be able to obtain such amendments. A failure to obtain such amendments could result in an acceleration of our indebtedness under the ABL Facility and a cross default under our other indebtedness, including the Company’s $250.0 million 11% senior notes due 2018 (the “Notes”) and the Company’s $265.0 million 13% senior secured notes due 2018 (the “Secured Notes”). If the lenders were to accelerate the due dates of our indebtedness or if current sources of liquidity prove to be insufficient, there can be no assurance that the Company would be
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
able to repay or refinance such indebtedness or to obtain sufficient funding. This could require the Company to restructure or alter its operations and capital structure. Refer to Note 4 for disclosure of recent changes to the ABL facility.
We were required to register and exchange the Secured Notes by March 10, 2013 or be subject to penalty interest. Since the exchange has not yet been completed, penalty interest is 25 basis points for the first 90 days and each 90 days thereafter until the aggregate penalty interest rate reaches 1% and will remain at 1% until we complete the exchange of the Secured Notes.
3. Accrued Liabilities
Accrued liabilities consisted of the following:
|
| May 31, |
| February 28, |
| ||
(In thousands) |
| 2013 |
| 2013 |
| ||
|
|
|
|
|
| ||
Insurance |
| $ | 21,588 |
| $ | 19,715 |
|
Interest |
| 10,127 |
| 18,962 |
| ||
Payroll and vacation |
| 9,393 |
| 8,281 |
| ||
Other |
| 2,354 |
| 3,671 |
| ||
Withholding taxes |
| 3,375 |
| 1,640 |
| ||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 3,075 |
| 1,529 |
| ||
Contract expenses |
| 243 |
| 209 |
| ||
Total accrued liabilities |
| $ | 50,155 |
| $ | 54,007 |
|
4. Long-Term Debt
|
| May 31, |
| February 28, |
| ||
(In thousands) |
| 2013 |
| 2013 |
| ||
|
|
|
|
|
| ||
ABL Facility |
| $ | 68,733 |
| $ | 24,314 |
|
Notes due 2018 |
| 250,000 |
| 250,000 |
| ||
Secured Notes due 2018 |
| 289,387 |
| 276,925 |
| ||
Land, equipment and other obligations |
| 17,071 |
| 19,005 |
| ||
Obligations under capital leases |
| 7,255 |
| 7,743 |
| ||
Total debt |
| 632,446 |
| 577,987 |
| ||
Less: Current portion |
| (9,708 | ) | (11,342 | ) | ||
Total long-term debt |
| $ | 622,738 |
| $ | 566,645 |
|
Asset-Based Loan Facility
Original Terms
On March 15, 2012, the Company entered into the ABL Facility with M&T, as the issuing bank, a lender, the swing lender, the agent and the arranger. The ABL Facility originally provided for maximum borrowings on a revolving basis of up to $170.0 million from time to time for general corporate purposes, including working capital. As discussed below, as a result of the third amendment to the ABL Facility, a maximum of $145.0 million may be borrowed under the ABL Facility. The ABL Facility includes a $15.0 million letter of credit sub-facility and a $20.0 million swing line sub-facility for short-term borrowings. The ABL Facility will mature on March 15, 2017. We classify borrowings under the ABL Facility as long-term due to our ability to maintain such borrowings on a long-term basis.
Borrowings under the ABL Facility (except swing line loans) bear interest at a rate per annum equal to, at the Company’s option, either (a) a base rate or (b) a LIBOR rate, in each case plus an applicable margin. Swing line loans bear interest at the base rate plus the applicable margin. The LIBOR margin for the ABL Facility is fixed at 5.00% (as of the date of the third amendment, discussed below) and the base rate margin is fixed at 3.00% (as of the date of the third amendment, discussed below). The ABL Facility also contains a commitment fee that is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement as the borrowing base less the sum of letter of credit obligations and outstanding loans thereunder. The commitment fee ranges from 0.25% to 0.625%. From the commencement of the ABL Facility Agreement until September 7, 2012 (date of the first amendment, discussed below), the LIBOR margin was 2.75%, the base rate margin was 0.75% and the commitment fee was 0.50%.
Borrowings under the ABL Facility are guaranteed on a full and unconditional and joint and several basis by certain of the Company’s existing and future domestic subsidiaries and are secured, subject to certain permitted liens, by first-priority liens on the ABL Priority Collateral and by second-priority liens on the collateral securing the Secured Notes on a first-priority basis, except for certain real property.
Availability of ABL Facility and Covenants
The ABL Facility includes affirmative and negative covenants that, subject to significant exceptions, limit our ability and the ability of our guarantors to undertake certain actions, including, among other things, limitations on (i) the incurrence of indebtedness and liens, (ii) asset sales, (iii) dividends and other payments with respect to capital stock, (iv) acquisitions, investments and loans, (v) affiliate transactions, (vi) altering the business, (vii) issuances of equity that have mandatory redemption or put rights prior to the maturity of the ABL Facility and (viii) providing negative pledges to third parties. As of May 31, 2013, the Company was in compliance with these affirmative and negative covenants.
Prior to the third amendment to the ABL Facility, if the Company had less than $25.0 million of availability under the ABL Facility at any point in time, it would be obligated to comply with a fixed charge coverage ratio. The third amendment to the ABL Facility, among other things, reduced the minimum excess availability threshold for the fixed charge coverage ratio until November 30, 2014, effectively increasing the Company’s short-term borrowing availability by allowing it to borrow up to the entire amount of the ABL Facility without needing to comply with a fixed charge coverage ratio.
If at any time after November 30, 2014 Excess Availability is less than the greater of (i) $25.0 million or (ii) 15% of the lesser of the commitments and the borrowing base, the Company must comply with a minimum fixed charge coverage ratio test of at least 1.0 to 1.0 for the immediately preceding four fiscal quarters or twelve consecutive months, as applicable. As of May 31, 2013, the Company’s Fixed Charge Coverage Ratio was below 1.0 to 1.0. The practical result will be that after November 30, 2014, so long as our fixed charge coverage ratio as calculated pursuant to the covenant remains less than 1.0 to 1.0, our available borrowings under the ABL Facility will be reduced by $25.0 million.
A fixed charge covenant ratio is also used to determine what advance rates apply in calculating the borrowing base under the ABL Facility, as well as whether the Company can make certain investments, acquisitions, restricted payments, repurchases or increases in the amount of cash interest payments on other indebtedness. As part of the first amendment to the ABL Facility entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent fixed charge coverage ratio. If the calculation of the fixed charge coverage ratio is less than 1.0 to 1.0, the borrowing base will be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property, plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus, (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.
The applicability of the Company’s fixed charge coverage ratio is conditional upon reaching the minimum excess availability. As a result of the third amendment, the Company has a minimum excess availability of zero (reduced from $25.0 million) until November 30, 2014, effectively eliminating the need to comply with a fixed charge coverage ratio. After this date, the Company may be subject to a fixed charge coverage ratio of 1.0 to 1.0, if its minimum excess availability reaches $25.0 million.
Amendment of ABL Facility
The ABL Facility contained a covenant that required us to deliver our fiscal year 2012 annual financial statements to the lender by May 29, 2012. On September 7, 2012, we entered into the first amendment to the ABL Facility to change the required delivery date of our audited February 29, 2012 financial statements and the required delivery date of our first and second quarter results and financial statements. Subsequent to the date of the first amendment, we required multiple extensions of time and ultimately filed our audited February 29, 2012 financial statements, our fiscal year 2013 first and second quarter results and financial statements on December 15, 2012, January 1, 2013 and February 28, 2013, respectively.
As part of the first amendment to the ABL Facility entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio as described above. We were subject to the adjusted borrowing base calculation as of February 28, 2013 and May 31, 2013. The first amendment added a 1.25% floor to LIBOR for purposes of determining the interest rate applicable to LIBOR based borrowings, which was later removed in the third amendment discussed below.
In connection with the first amendment to the ABL Facility, we also agreed with M&T that, in the event M&T is unable to reduce its final participation in the ABL Facility to no more than $75.0 million during the primary syndication of the ABL Facility by December 15, 2012, M&T would be entitled to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, certain covenants and the interest and fees payable. As of May 31, 2013, M&T has not syndicated the ABL Facility and has not modified the terms of the ABL Facility. See the discussion below concerning the potential modifications by M&T.
On December 7, 2012, we entered into the second amendment to the ABL Facility to change the required delivery date of our third quarter results and financial statements. Subsequent to the date of the second amendment, we required an extension of time and ultimately filed our third quarter results and financial statements on April 1, 2013. There can be no guarantee that the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes and Secured Notes.
On May 29, 2013, we entered into the third amendment to the ABL Facility. As discussed above, prior to the third amendment, if the Company had less than $25.0 million of availability under the ABL Facility at any point in time, it would be obligated to comply with a fixed charge coverage ratio. The third amendment, among other things, reduced the minimum excess availability to zero until November 30, 2014, effectively increasing the Company’s short-term borrowing availability by allowing it to borrow up to the entire amount of the ABL Facility without needing to comply with a fixed charge coverage ratio. The Company also agreed to the following additional amendments to the ABL Facility in the third amendment: (i) the aggregate overall amount available for borrowing
under the ABL Facility was reduced from $170.0 million to $145.0 million; (ii) the interest rate margin added to applicable LIBOR based borrowings was increased to a fixed 5%; (iii) the interest rate margin added to applicable Base Rate borrowings was increased to a fixed 3%; (iv) the 1.25% floor applicable to LIBOR based borrowings was removed; and (v) to the extent that the Company disposes of assets that are ABL priority collateral and certain unencumbered assets, the net cash proceeds will be used to prepay outstanding borrowings under the ABL Facility and the overall ABL Facility will be reduced by $1 for each $1 of assets sold up to $15 million. The third amendment did not change other significant terms of the ABL Facility such as the maturity, borrowing base formula, and covenants, as applicable. Although the overall commitment was reduced from $170.0 million to $145.0 million, because the Company’s borrowing base was below $145.0 million at the time of the third amendment, such reduction had no impact on the Company’s short-term ability to borrow under the ABL Facility.
In connection with the third amendment, we also agreed with M&T that our board of directors will create a special committee consisting of our four non-employee directors, which we refer to as the special committee, that will engage an advisor to develop a business plan that focuses on cost reductions and operational efficiencies, which we refer to as the Plan. Upon the approval of the Plan by a majority of the members of the special committee, the Plan will be submitted to the entire board of directors for approval. The vote of more than seven directors will be required to reject the Plan. The Plan must also be reasonably acceptable in scope and process to M&T. Once the Plan is approved by the board of directors, the special committee will be authorized to oversee the implementation of the Plan by our management.
Potential Modification by M&T
In connection with the first amendment to the ABL Facility described above, in order to facilitate the syndication of the ABL Facility amongst additional lenders, the Company and M&T agreed that if M&T were unable to reduce its final loan commitments under the ABL Facility to no more than $75.0 million prior to December 15, 2012, M&T would be entitled to add to or modify the terms of the ABL Facility on a unilateral basis, including but not limited to adjusting the advance rates, adding or modifying certain covenants and increasing the interest and fees payable in order to facilitate its syndication efforts. Notwithstanding these rights, M&T would not be able to do the following without the Company’s consent:
· | reduce the ABL Facility’s total amount to less than $170.0 million (as discussed above, this has been reduced to $145.0 million due to the third amendment); |
· | impose a permanent fixed charge coverage ratio; |
· | cause the springing fixed charge coverage ratio covenant in the ABL Facility to be greater than 1.00 to 1.00; |
· | add a senior or total debt to EBITDA covenant with a less than 20% cushion from management projections; |
· | add a net worth covenant with a less than 20% cushion from management projections; |
· | restrict the Company’s ability to incur additional permitted indebtedness and related permitted liens for capital leases, purchase debt and sale-leaseback transactions to less than $35.0 million in the aggregate at any time; |
· | if the Company’s fixed charge coverage ratio is 1.00 to 1.00 or greater, cause the advance rate for (a) eligible inventory to be less than 60%; (b) eligible accounts to be less than 85%; or (c) eligible real property to be less than the lower of (1) 75% of the appraised value thereof and (2) $65.0 million; |
· | if the Company’s fixed charge coverage ratio is less than 1.00 to 1.00, cause the advance rate for (a) eligible inventory to be less than 40%; (b) eligible accounts to be less than 70%; or (c) eligible real property to be less than the lower of (1) 75% of the appraised value thereof and (2) $56.0 million; or |
· | require that any of (a) Rock Solid Insurance Company, (b) South Woodbury L.P., (c) NESL II, LLC, (d) Kettle Creek Partners L.P. or (e) Kettle Creek Partners G.P., LLC guaranty the ABL Facility. |
As of May 31, 2013, despite M&T’s inability to successfully syndicate the ABL Facility, the terms of the ABL Facility have not been modified by M&T. However, should M&T choose to exercise its right to add or modify terms of the ABL Facility, borrowings under the ABL Facility may be subject to terms less favorable than the current terms of the ABL Facility which could negatively impact our financial position, cash flows and results of operations. Furthermore, such modifications may require us to renegotiate the terms of the ABL Facility or obtain additional financing. We may not be able to obtain such modifications or additional financing on commercially
reasonable terms or at all. If we are unable to obtain such modifications or additional financing, we would have to consider other options, such as the sale of certain assets, sales of equity, and negotiations with our lenders to restructure our debt. The terms of our indebtedness may restrict, or market or business conditions may limit, our ability to do any or all of these things.
Interest Rate and Availability
As of May 31, 2013, the weighted average interest rate on the ABL Facility was 4.0%. The effective interest rate, including all fees, for the ABL Facility was approximately 6.2% for fiscal year 2013. As discussed above, we recently amended our ABL Facility to fix the interest rate margin added to LIBOR based borrowings at 5.0%, fix the interest rate margin added to base rate borrowings at 3.0% and remove the 1.25% floor applicable to LIBOR based borrowings.
As of May 31, 2013, we had borrowed $68.7 million under the ABL Facility with $64.6 million available. As discussed above, we recently amended our ABL Facility to, among other things, reduce the overall commitment to $145.0 million and waive the $25.0 million minimum excess availability threshold for the fixed charge coverage ratio until November 30, 2014.
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
The third amendment did not change other significant terms of the ABL Facility such as the maturity, borrowing base formula, and covenants, as applicable.
The Company paid $0.3 million in fees to effect the third amendment to the ABL Facility and as a result of the reduction in the maximum borrowings of the ABL Facility the Company also recognized $0.7 million of unamortized deferred financing fees as interest expense during the three months ended May 31, 2013.
Notes Due 2018
In August 2010, the Company sold $250.0 million aggregate principal amount of the Notes. Interest on the Notes is payable semi-annually in arrears on March 1 and September 1 of each year. The proceeds from the issuance of Notes were used to pay down debt.
At any time prior to September 1, 2014, the Company may redeem all or part of the Notes at a redemption price equal to 100.0% of the principal amount plus accrued and unpaid interest and an applicable “make-whole” premium which is set forth in the indenture governing the Notes. On or after September 1, 2014, the Company may redeem all or a part of the Notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest if redeemed during the twelve-month period beginning on September 1 of the years indicated below:
Year |
| Percentage |
|
|
|
|
|
2014 |
| 105.50 | % |
2015 |
| 102.75 | % |
2016 and thereafter |
| 100.00 | % |
In addition, prior to September 1, 2013, the Company may redeem up to 35.0% of the aggregate principal Notes outstanding with the net cash proceeds from certain equity offerings at a redemption price equal to 111.0% of the principal amount thereof, together with accrued and unpaid interest. If the Company experiences a change of control, as outlined in the indenture, the Company may be required to offer to purchase the Notes at a purchase price equal to 101.0% of the principal amount, plus accrued interest.
The Notes are guaranteed on a full and unconditional, and joint and several basis, by certain of the Company’s existing and future domestic subsidiaries (the “Guarantors” as described in Note 9, “Condensed Issuer, Guarantor and Non-Guarantor Financial
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
Information”). The indenture governing the Notes contains affirmative and negative covenants that, among other things, limit the Company’s and its subsidiaries’ ability to incur additional debt, make restricted payments, dividends or other payments from subsidiaries to the Company, create liens, engage in the sale or transfer of assets and engage in transactions with affiliates. The Company is not required to maintain any affirmative financial ratios or covenants.
Secured Notes due 2018
Interest on the Secured Notes is initially payable at 13.0% per annum, semi-annually in arrears on March 15 and September 15. The Company will make each interest payment to the holders of record of the Secured Notes as of the immediately preceding March 1 and September 1. The Company used the proceeds from this offering to repay certain existing indebtedness and to pay related fees and expenses. The Secured Notes will mature on March 15, 2018.
With respect to any interest payment date on or prior to March 15, 2017, the Company may, at its option, elect (an ‘‘Interest Form Election’’) to pay interest on the Secured Notes (i) entirely in cash (‘‘Cash Interest’’) or (ii) subject to any Interest Rate Increase (as defined below), initially at the rate of 4% per annum in cash (‘‘Cash Interest Portion’’) and 9% per annum by increasing the outstanding principal amount of the Secured Notes or by issuing additional paid in kind notes under the indenture on the same terms as the Secured Notes (‘‘PIK Interest Portion’’ or “PIK Interest”); provided that in the absence of an Interest Form Election, interest on the Secured Notes will be payable as PIK Interest. At May 31, 2013, PIK interest was $29.2 million ($24.4 million was recorded as an increase to the Secured Notes and $4.8 million was recorded as a long-term obligation in Other liabilities).
With respect to any interest payment payable after March 15, 2017, interest will be payable solely in cash. In addition, at the beginning of and with respect to each 12-month period that begins on March 15, 2013, March 15, 2014 and March 15, 2015, the interest rate on the Secured Notes as of such date shall permanently increase by an additional 1.0% per annum (an ‘‘Interest Rate Increase’’) unless the Company delivers a written notice to the Trustee of the Company’s election for such 12-month period to either (x) alter the manner of interest payment on the Secured Notes going forward by increasing the Cash Interest Portion and decreasing the PIK Interest Portion in each case in effect with respect to the immediately preceding interest period for which any PIK Interest was paid prior to each such election by, in each case, 1.0% per annum or (y) pay interest on the Secured Notes for such 12-month period entirely in cash (a ‘‘12-Month Cash Election’’). In the event of a 12-Month Cash Election for any 12-month period prior to March 15, 2017, the interest rate on the Secured Notes applicable for such 12-month period shall be 1.0% less than the total interest rate applicable to the Secured Notes in effect with respect to the immediately preceding interest period for which any PIK Interest was paid. Any Interest Rate Increase shall be affected by increasing the PIK Interest Portion in effect with respect to the immediately preceding interest period for which any PIK Interest was paid prior to each such Interest Rate Increase. If the Company makes a 12-Month Cash Election for and in respect of the 12-month period beginning on March 15, 2016, the same interest rate will apply for and in respect of the 12-month period beginning on March 15, 2017. The additional 1.0% per annum Interest Rate Increase will only apply to the three consecutive annual periods beginning March 15, 2013.
On March 4, 2013, the Company notified the trustee of its Secured Notes that it had selected to pay interest on the Secured Notes for the 12-month period commencing March 15, 2013 in the form of 5% cash payment and 8% payment in kind, which represents $14.9 million and $23.6 million, respectively.
At any time prior to March 15, 2015, the Company may redeem, at its option, up to 35% of the Secured Notes with the net cash proceeds from certain public equity offerings at a redemption price equal to 113.0% of the principal amount outstanding, plus accrued and unpaid interest. The Company may also redeem some or all of the Secured Notes at any time prior to March 15, 2015 at a redemption price equal to 100.0% of the principal amount of the outstanding Secured Notes, plus accrued and unpaid interest, plus a ‘‘make-whole’’ premium. On and after March 15, 2015, the Secured Notes will be redeemable, in whole or in part, at the redemption prices specified as follows:
Year |
| Percentage |
|
|
|
|
|
2015 |
| 106.50 | % |
2016 |
| 103.25 | % |
2017 and thereafter |
| 100.00 | % |
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
In addition, the Company may be required to make an offer to purchase the Secured Notes upon the sale of certain assets or upon a change of control. The Company will be required to redeem certain portions of the Secured Notes for tax purposes at the end of the first accrual period ending after the fifth anniversary of the Secured Notes issuance and each accrual period thereafter.
The Secured Notes are guaranteed on a full and unconditional, and joint and several basis, by certain of the Company’s existing and future domestic subsidiaries (the “Guarantors” as described in Note 9, “Condensed Issuer, Guarantor and Non-Guarantor Financial Information”). The Secured Notes and related guarantees are senior secured obligations of the Company and the Guarantors that rank equally in right of payment with all existing and future senior debt of the Company and the Guarantors, including the Notes and ABL Facility, and senior to all existing and future subordinated debt of the Company and Guarantors. The Secured Notes and related guarantees are secured, subject to certain permitted liens and except for certain excluded assets, by first-priority liens on substantially all of the Company’s and Guarantors’ personal property and certain owned and leased real property and second-priority liens on certain real property and substantially all of the Company’s and Guarantors’ accounts receivable, inventory and deposit accounts and related assets and proceeds of the foregoing that secure the ABL Facility on a first-priority basis.
The indenture for the Secured Notes contains restrictive covenants that limit the Company’s ability and the ability of its subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with affiliates.
We were required to file a registration statement with the Securities and Exchange Commission (“SEC”) with respect to a registered offer to exchange the Secured Notes for new Secured Notes having terms substantially identical in all material respects to the Secured Notes (the “Secured Notes Registration Statement”) by March 10, 2013 or we will be subject to penalty interest. The penalty interest will increase 25 basis points each quarter for four consecutive quarters until it reaches 1% and will remain at 1% until we complete the registration of the Secured Notes. On June 13, 2013, we filed the Secured Notes Registration Statement with the SEC and we are currently in the process of registering the exchange notes, therefore paying penalty interest.
Land, equipment and other obligations
The Company has various notes, mortgages and other financing arrangements resulting from the purchase of principally land and equipment. All loans provide for at least annual payments, which include interest ranging up to 10.0% per annum, and are principally secured by the land and equipment acquired.
From 1998 through 2005, the Company issued four revenue bonds to different industrial development authorities for counties in Pennsylvania in order to fund the acquisition and installation of plant and equipment. The original issuance of these bonds totaled $25.3 million with dates of maturity through May 2022. The Company maintains irrevocable, transferable letters of credit equal to the approximate carrying value of each bond, in total for $5.4 million as of May 31, 2013 and February 28, 2013, respectively. The effective interest rate on these bonds ranged from 0.25% to 0.43% for three months ended May 31, 2013 and 0.23% to 0.46% for the three months ended May 31, 2012. The Company is subject to annual principal maturities each year which, is funded on either a quarterly or monthly basis, depending upon the terms of the original agreement. The Company’s plant and equipment provide collateral under these borrowings and for the letters of credit.
Obligations include a cash overdrafts liability of $0.8 million and $2.2 million, which is included within the current portion of long-term debt as of May 31, 2103 and February 28, 2013, respectively.
Obligations under capital lease
The Company has various arrangements for the lease of machinery and equipment which qualify as capital leases. These arrangements typically provide for monthly payments, some of which include residual value guarantees if the Company were to terminate the arrangement during certain specified periods of time for each underlying asset under lease.
5. Income Taxes
The Company’s tax provision and the corresponding effective tax rate are based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. For interim financial reporting, the Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly tax provision in
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
accordance with the anticipated annual rate. As the year progresses, the Company refines the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to the Company’s expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining the Company’s effective interim tax rate and in evaluating its tax positions.
The Company’s effective income tax rate was 10.62% and 38.8% for the three months ended May 31, 2013 and May 31, 2012, respectively. The principal factor affecting the comparability of the effective income tax rate for the respective periods is the result of the Company’s assessment of the realizability of the current year projected tax loss. The Company recorded a valuation allowance on the portion of the current year federal and state losses that it believes are not more likely than not to be realized. Our benefit from income taxes for the three months ended May 31, 2013 is based on an estimated annual effective tax rate for fiscal year 2014 of 10.62%.
The cash taxes paid were not material for the three months ended May 31, 2013 and May 31, 2012, respectively, primarily as a result of a net operating loss.
6. Retirement and Benefit Programs
Substantially all employees are covered by a defined contribution plan, a defined benefit plan, a collectively bargained multiemployer plan, or a noncontributory profit sharing plan. The expense associated with these programs, excluding defined benefit plans, was $1.8 million and $1.7 million for the three months ended May 31, 2013 and 2012, respectively.
The Company has two defined benefit pension plans covering certain union employees covered by labor union contracts. The benefits are based on years of service. Actuarial gains and losses are generally amortized over the average remaining service life of the Company’s active employees. Net periodic pension expense recognized for the three months ended May 31, 2013 and 2012, was as follows:
|
| Three Months Ended |
| ||||
|
| May 31, |
| May 31, |
| ||
(In thousands) |
| 2013 |
| 2012 |
| ||
|
|
|
|
|
| ||
Net periodic benefit cost |
|
|
|
|
| ||
Service cost |
| $ | 86 |
| $ | 68 |
|
Interest cost |
| 100 |
| 99 |
| ||
Expected return on plan assets |
| (143 | ) | (146 | ) | ||
Amortization of prior service cost |
| 16 |
| 15 |
| ||
Recognized net actuarial loss |
| 66 |
| 62 |
| ||
Total pension expense |
| $ | 125 |
| $ | 98 |
|
The Company did not make any contributions to the defined benefit pension plans during the three months ended May 31, 2013.
7. Commitments and Contingencies
In the normal course of business, the Company has commitments, lawsuits, claims and contingent liabilities. The ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, statement of comprehensive income (loss) or liquidity.
The Company maintains a captive insurance company, Rock Solid Insurance Company (“Rock Solid”), for workers’ compensation (non-Pennsylvania employees), general liability, auto, health, and property coverage. On April 8, 2011, Rock Solid entered into a Collateral Trust Agreement with an insurer to eliminate a letter of credit that was required to maintain coverage of the deductible portion of its liability coverage. The total amount of collateral provided in the arrangement is $13.6 million and is recorded as part of restricted cash as of May 31, 2013. Reserves for retained losses within this captive, which are recorded in accrued liabilities in our condensed consolidated balance sheets, were approximately $12.5 million and $10.8
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
million as of May 31, 2013 and February 28, 2013, respectively. Exposures for periods prior to the inception of the captive are covered by pre-existing insurance policies.
8. Segment Reporting
The Company reports information about its operating segments using the “management approach,” which is based on the way management organizes and reports the segments within the organization for making operating decisions and assessing performance to the chief operating decision maker. The Company’s three reportable segments are: (i) construction materials; (ii) heavy/highway construction; and (iii) traffic safety services and equipment. Almost all activity of the Company is domestic. Segment information includes both inter-segment and certain intra-segment activities.
The Company reviews earnings of the segments principally at the operating income level less indirect costs and accounts for inter-segment and certain intra-segment sales at prices that range from negotiated rates to those that approximate fair market value. Segment operating income consists of revenue less direct costs and expenses. Corporate and unallocated costs include those administrative and financial costs which are not allocated to segment operations and are excluded from segment operating income. These costs include corporate administrative functions such as trade receivable billings and collections, payment processing, accounting, legal and other administrative costs, unallocated corporate functions and divisional administrative functions.
In prior fiscal periods the Company reported other revenues separately, which management now includes within the construction materials segment consistent with managements business assessment. Additionally in the first quarter of fiscal 2014, management began assessing performance of its operations without the allocation of indirect costs of its Selling, administrative and general expense. Indirect costs include trade receivable billings and collections, payment processing, accounting, legal and other administrative costs. Financial data for the three months ended May 31, 2012 has been revised to reflect the current segment presentation.
The following is a summary of certain financial data for the Company’s operating segments:
|
| Three Months Ended |
| ||||
|
| May 31, |
| May 31, |
| ||
(In thousands) |
| 2013 |
| 2012 |
| ||
|
|
|
|
|
| ||
Revenue |
|
|
|
|
| ||
Construction materials |
| $ | 111,217 |
| $ | 126,004 |
|
Heavy/highway construction |
| 48,416 |
| 53,983 |
| ||
Traffic safety services and equipment |
| 24,089 |
| 23,254 |
| ||
Segment totals |
| 183,722 |
| 203,241 |
| ||
Eliminations |
| (35,978 | ) | (45,260 | ) | ||
Total net revenue |
| $ | 147,744 |
| $ | 157,981 |
|
Operating loss |
|
|
|
|
| ||
Construction materials |
| $ | 7,357 |
| $ | 9,215 |
|
Heavy/highway construction |
| (2,524 | ) | (1,652 | ) | ||
Traffic safety services and equipment |
| (676 | ) | (347 | ) | ||
Corporate and unallocated |
| (17,692 | ) | (13,997 | ) | ||
Total operating loss |
| $ | (13,535 | ) | $ | (6,781 | ) |
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
|
| Three Months Ended |
| ||||
|
| May 31, |
| May 31, |
| ||
(In thousands) |
| 2013 |
| 2012 |
| ||
|
|
|
|
|
| ||
Depreciation, depletion and amortization |
|
|
|
|
| ||
Construction materials |
| $ | 8,089 |
| $ | 7,716 |
|
Heavy/highway construction |
| 2,076 |
| 1,897 |
| ||
Traffic safety services and equipment |
| 1,514 |
| 1,692 |
| ||
Corporate and unallocated |
| 439 |
| 538 |
| ||
Total depreciation, depletion and amortization |
| $ | 12,118 |
| $ | 11,843 |
|
9. Condensed Issuer, Guarantor and Non Guarantor Financial Information
The Company’s Secured Notes and Notes are guaranteed by certain subsidiaries. Except for Rock Solid, NESL, II LLC, and Kettle Creek Partners GP, LLC, all existing consolidated subsidiaries of the Company are 100% owned and provide a joint and several, full and unconditional guarantee of the securities. These entities include Gateway Trade Center Inc., EII Transport Inc., Protections Services Inc., Work Area Protection Corp., SCI Products Inc., ASTI Transportation Systems, Inc., and Precision Solar Controls Inc. (“Guarantor Subsidiaries”). There are no significant restrictions on the parent Company’s ability to obtain funds from any of the Guarantor Subsidiaries in the form of a dividend or loan. Additionally, there are no significant restrictions on a Guarantor Subsidiary’s ability to obtain funds from the parent Company or its direct or indirect subsidiaries. Certain other wholly owned subsidiaries and consolidated partially owned partnerships do not guarantee the Secured Notes or the Notes. These entities include Rock Solid, South Woodbury, L.P., NESL, II LLC, Kettle Creek Partners L.P., and Kettle Creek Partners GP, LLC (“Non Guarantors”).
The following condensed consolidating balance sheets, statements of comprehensive income (loss) and statements of cash flows are provided for the Company, all Guarantor Subsidiaries and Non Guarantors. The information has been presented as if the parent Company accounted for its ownership of the Guarantor Subsidiaries and Non Guarantors using the equity method of accounting.
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
Condensed Consolidating Balance Sheet at May 31, 2013
(In thousands) |
| New Enterprise |
| Guarantor |
| Non |
| Eliminations |
| Total |
| |||||
Assets |
|
|
|
|
|
|
| �� |
|
|
| |||||
Current assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 22 |
| $ | 19 |
| $ | 3,215 |
| $ | — |
| $ | 3,256 |
|
Restricted cash |
| 1,051 |
| 105 |
| 13,595 |
| — |
| 14,751 |
| |||||
Accounts receivable |
| 91,380 |
| 16,170 |
| 215 |
| (201 | ) | 107,564 |
| |||||
Inventories |
| 107,874 |
| 16,938 |
| — |
| — |
| 124,812 |
| |||||
Net investment in lease |
| — |
| — |
| 647 |
| (647 | ) | — |
| |||||
Deferred income taxes |
| 11,750 |
| 976 |
| — |
| — |
| 12,726 |
| |||||
Other current assets |
| 6,622 |
| 1,401 |
| 83 |
| –– |
| 8,106 |
| |||||
Total current assets |
| 218,699 |
| 35,609 |
| 17,755 |
| (848 | ) | 271,215 |
| |||||
Property, plant and equipment, net |
| 349,483 |
| 20,606 |
| 7,424 |
| (7,424 | ) | 370,089 |
| |||||
Goodwill |
| 83,228 |
| 5,845 |
| — |
| — |
| 89,073 |
| |||||
Other intangible assets |
| 8,159 |
| 12,612 |
| — |
| — |
| 20,771 |
| |||||
Investment in subsidiaries |
| 78,110 |
| — |
| — |
| (78,110 | ) | — |
| |||||
Intercompany receivables |
| 965 |
| 17,978 |
| — |
| (18,943 | ) | — |
| |||||
Other assets |
| 28,292 |
| 1,167 |
| — |
| — |
| 29,459 |
| |||||
|
| $ | 766,936 |
| $ | 93,817 |
| $ | 25,179 |
| $ | (105,325 | ) | $ | 780,607 |
|
Liabilities and (Deficit) Equity |
|
|
|
|
|
|
|
|
|
|
| |||||
Current liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Current maturities of long-term debt |
| $ | 9,533 |
| $ | — |
| $ | 822 |
| $ | (647 | ) | $ | 9,708 |
|
Accounts payable - trade |
| 49,751 |
| 6,080 |
| 199 |
| (201 | ) | 55,829 |
| |||||
Accrued liabilities |
| 34,273 |
| 2,987 |
| 12,895 |
| — |
| 50,155 |
| |||||
Total current liabilities |
| 93,557 |
| 9,067 |
| 13,916 |
| (848 | ) | 115,692 |
| |||||
Intercompany payables |
| 18,664 |
| — |
| 279 |
| (18,943 | ) | — |
| |||||
Long-term debt, less current maturities |
| 616,364 |
| — |
| 6,374 |
| — |
| 622,738 |
| |||||
Obligations under capital leases, less current installments |
| 7,424 |
| — |
| — |
| (7,424 | ) | — |
| |||||
Deferred income taxes |
| 40,868 |
| 8,291 |
| — |
| — |
| 49,159 |
| |||||
Other liabilities |
| 29,449 |
| 777 |
| — |
| — |
| 30,226 |
| |||||
Total liabilities |
| 806,326 |
| 18,135 |
| 20,569 |
| (27,215 | ) | 817,815 |
| |||||
(Deficit) equity |
|
|
|
|
|
|
|
|
|
|
| |||||
New Enterprise Stone & Lime Co., Inc. (deficit) equity |
| (39,390 | ) | 75,682 |
| 2,428 |
| (78,110 | ) | (39,390 | ) | |||||
Noncontrolling interest |
| — |
| — |
| 2,182 |
| — |
| 2,182 |
| |||||
Total (deficit) equity |
| (39,390 | ) | 75,682 |
| 4,610 |
| (78,110 | ) | (37,208 | ) | |||||
|
| $ | 766,936 |
| $ | 93,817 |
| $ | 25,179 |
| $ | (105,325 | ) | $ | 780,607 |
|
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
Condensed Consolidating Balance Sheet at February 28, 2013
(In thousands) |
| New Enterprise |
| Guarantor |
| Non |
| Eliminations |
| Total |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 31 |
| $ | 19 |
| $ | 9,484 |
| $ | — |
| $ | 9,534 |
|
Restricted cash |
| 1,174 |
| 105 |
| 8,844 |
| — |
| 10,123 |
| |||||
Accounts receivable |
| 39,128 |
| 13,129 |
| 14 |
| — |
| 52,271 |
| |||||
Inventories |
| 109,032 |
| 16,112 |
| — |
| — |
| 125,144 |
| |||||
Net investment in lease |
| — |
| — |
| 634 |
| (634 | ) | — |
| |||||
Deferred income taxes |
| 11,425 |
| 961 |
| — |
| — |
| 12,386 |
| |||||
Other current assets |
| 6,992 |
| 1,317 |
| 28 |
| — |
| 8,337 |
| |||||
Total current assets |
| 167,782 |
| 31,643 |
| 19,004 |
| (634 | ) | 217,795 |
| |||||
Property, plant and equipment, net |
| 350,656 |
| 21,212 |
| 7,589 |
| (7,589 | ) | 371,868 |
| |||||
Goodwill |
| 83,228 |
| 5,845 |
| — |
| — |
| 89,073 |
| |||||
Other intangible assets |
| 8,093 |
| 12,907 |
| — |
| — |
| 21,000 |
| |||||
Investment in subsidiaries |
| 81,430 |
| — |
| — |
| (81,430 | ) | — |
| |||||
Intercompany receivables |
| 279 |
| 19,984 |
| — |
| (20,263 | ) | — |
| |||||
Other assets |
| 33,252 |
| 1,200 |
| — |
| — |
| 34,452 |
| |||||
|
| $ | 724,720 |
| $ | 92,791 |
| $ | 26,593 |
| $ | (109,916 | ) | $ | 734,188 |
|
Liabilities and (Deficit) Equity |
|
|
|
|
|
|
|
|
|
|
| |||||
Current liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Current maturities of long-term debt |
| $ | 11,175 |
| $ | — |
| $ | 801 |
| $ | (634 | ) | $ | 11,342 |
|
Accounts payable - trade |
| 18,343 |
| 2,044 |
| 221 |
| — |
| 20,608 |
| |||||
Accrued liabilities |
| 37,640 |
| 5,135 |
| 11,232 |
| — |
| 54,007 |
| |||||
Total current liabilities |
| 67,158 |
| 7,179 |
| 12,254 |
| (634 | ) | 85,957 |
| |||||
Intercompany payables |
| 19,984 |
| — |
| 279 |
| (20,263 | ) | — |
| |||||
Long-term debt, less current maturities |
| 559,915 |
| — |
| 6,730 |
| — |
| 566,645 |
| |||||
Obligations under capital leases, less current installments |
| 7,589 |
| — |
| — |
| (7,589 | ) | — |
| |||||
Deferred income taxes |
| 43,834 |
| 8,609 |
| — |
| — |
| 52,443 |
| |||||
Other liabilities |
| 35,723 |
| 1,010 |
| — |
| — |
| 36,733 |
| |||||
Total liabilities |
| 734,203 |
| 16,798 |
| 19,263 |
| (28,486 | ) | 741,778 |
| |||||
(Deficit) equity |
|
|
|
|
|
|
|
|
|
|
| |||||
New Enterprise Stone & Lime Co., Inc. (deficit) equity |
| (9,483 | ) | 75,993 |
| 5,437 |
| (81,430 | ) | (9,483 | ) | |||||
Noncontrolling interest |
| — |
| — |
| 1,893 |
| — |
| 1,893 |
| |||||
Total (deficit) equity |
| (9,483 | ) | 75,993 |
| 7,330 |
| (81,430 | ) | (7,590 | ) | |||||
|
| $ | 724,720 |
| $ | 92,791 |
| $ | 26,593 |
| $ | (109,916 | ) | $ | 734,188 |
|
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ended May 31, 2013
(In thousands) |
| New Enterprise |
| Guarantor |
| Non |
| Eliminations |
| Total |
| |||||
Revenue |
| $ | 125,738 |
| $ | 23,212 |
| $ | 2,416 |
| $ | (3,622 | ) | $ | 147,744 |
|
Cost of revenue (exclusive of items shown separately below) |
| 110,422 |
| 18,962 |
| 1,505 |
| (3,171 | ) | 127,718 |
| |||||
Depreciation, depletion and amortization |
| 10,564 |
| 1,554 |
| — |
| — |
| 12,118 |
| |||||
Pension and profit sharing |
| 1,795 |
| 83 |
| — |
| — |
| 1,878 |
| |||||
Selling, administrative and general expenses |
| 16,679 |
| 3,004 |
| 74 |
| (344 | ) | 19,413 |
| |||||
Loss on disposals of property, equipment and software |
| 138 |
| 14 |
| — |
| — |
| 152 |
| |||||
Operating (loss) income |
| (13,860 | ) | (405 | ) | 837 |
| (107 | ) | (13,535 | ) | |||||
Interest expense, net |
| (19,118 | ) | (61 | ) | (105 | ) | 107 |
| (19,177 | ) | |||||
(Loss) income before income taxes |
| (32,978 | ) | (466 | ) | 732 |
| — |
| (32,712 | ) | |||||
Income tax benefit |
| (3,322 | ) | (153 | ) | — |
| — |
| (3,475 | ) | |||||
Equity in earnings of subsidiaries |
| (320 | ) | — |
| — |
| 320 |
| — |
| |||||
Net (loss) income |
| (29,976 | ) | (313 | ) | 732 |
| 320 |
| (29,237 | ) | |||||
Unrealized actuarial losses and amortization of prior service costs, net of income tax |
| 69 |
| — |
| — |
| — |
| 69 |
| |||||
Comprehensive (loss) income |
| (29,907 | ) | (313 | ) | 732 |
| 320 |
| (29,168 | ) | |||||
Less: comprehensive income attributable to noncontrolling interest |
| — |
| — |
| (739 | ) | — |
| (739 | ) | |||||
Comprehensive (loss) income attributable to New Enterprise Stone & Lime Co., Inc. |
| $ | (29,907 | ) | $ | (313 | ) | $ | (7 | ) | $ | 320 |
| $ | (29,907 | ) |
Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ended May 31, 2012
(In thousands) |
| New Enterprise |
| Guarantor |
| Non |
| Eliminations |
| Total |
| |||||
Revenue |
| $ | 148,256 |
| $ | 21,620 |
| $ | 1,978 |
| $ | (13,873 | ) | $ | 157,981 |
|
Cost of revenue (exclusive of items shown separately below) |
| 129,123 |
| 17,113 |
| 614 |
| (13,419 | ) | 133,431 |
| |||||
Depreciation, depletion and amortization |
| 9,961 |
| 1,882 |
| — |
| — |
| 11,843 |
| |||||
Pension and profit sharing |
| 1,762 |
| 79 |
| — |
| — |
| 1,841 |
| |||||
Selling, administrative and general expenses |
| 15,677 |
| 2,249 |
| 100 |
| (344 | ) | 17,682 |
| |||||
Gain on disposals of property, equipment and software |
| (35 | ) | — |
| — |
| — |
| (35 | ) | |||||
Operating income (loss) |
| (8,232 | ) | 297 |
| 1,264 |
| (110 | ) | (6,781 | ) | |||||
Interest expense, net |
| (22,710 | ) | (72 | ) | (148 | ) | 110 |
| (22,820 | ) | |||||
(Loss) income before income taxes |
| (30,942 | ) | 225 |
| 1,116 |
| — |
| (29,601 | ) | |||||
Income tax benefit |
| (10,812 | ) | (675 | ) | — |
| — |
| (11,487 | ) | |||||
Equity in earnings of subsidiaries |
| 1,711 |
| — |
| — |
| (1,711 | ) | — |
| |||||
Net (loss) income |
| (18,419 | ) | 900 |
| 1,116 |
| (1,711 | ) | (18,114 | ) | |||||
Unrealized actuarial losses and amortization of prior service costs, net of income tax |
| 77 |
| — |
| — |
| — |
| 77 |
| |||||
Comprehensive (loss) income |
| (18,342 | ) | 900 |
| 1,116 |
| (1,711 | ) | (18,037 | ) | |||||
Less: comprehensive income attributable to noncontrolling interest |
| — |
| — |
| (305 | ) | — |
| (305 | ) | |||||
Comprehensive (loss) income attributable to New Enterprise Stone & Lime Co., Inc. |
| $ | (18,342 | ) | $ | 900 |
| $ | 811 |
| $ | (1,711 | ) | $ | (18,342 | ) |
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
Condensed Consolidating Statement of Cash Flows for the three months ended May 31, 2013
(In thousands) |
| New Enterprise |
| Guarantor |
| Non |
| Eliminations |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from operating activities |
| $ | (36,279 | ) | $ | 758 |
| $ | 2,268 |
| $ | (3,000 | ) | $ | (36,253 | ) |
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| (8,718 | ) | (773 | ) | — |
| — |
| (9,491 | ) | |||||
Proceeds from sale of property and equipment |
| 52 |
| 15 |
| — |
| — |
| 67 |
| |||||
Change in cash value of life insurance |
| 3,089 |
| — |
| — |
| — |
| 3,089 |
| |||||
Change in restricted cash |
| 123 |
| — |
| (4,751 | ) | — |
| (4,628 | ) | |||||
Net cash used in investing activities |
| (5,454 | ) | (758 | ) | (4,751 | ) | — |
| (10,963 | ) | |||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Proceeds from revolving credit |
| 49,419 |
| — |
| — |
| — |
| 49,419 |
| |||||
Repayment of revolving credit |
| (6,324 | ) | — |
| — |
| — |
| (6,324 | ) | |||||
Proceeds from issuance of long-term debt |
| 481 |
| — |
| — |
| — |
| 481 |
| |||||
Repayment of long-term debt |
| (756 | ) | — |
| (335 | ) | — |
| (1,091 | ) | |||||
Payments on capital leases |
| (1,096 | ) | — |
| — |
| — |
| (1,096 | ) | |||||
Debt issuance costs |
| — |
| — |
| — |
| — |
| — | �� | |||||
Dividends received (paid) |
| — |
| — |
| (3,000 | ) | 3,000 |
| — |
| |||||
Distribution to noncontrolling interest |
| — |
| — |
| (451 | ) | — |
| (451 | ) | |||||
Net cash provided by (used in) financing activities |
| 41,724 |
| — |
| (3,786 | ) | 3,000 |
| 40,938 |
| |||||
Net decrease in cash and cash equivalents |
| (9 | ) | — |
| (6,269 | ) | — |
| (6,278 | ) | |||||
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning of period |
| 31 |
| 19 |
| 9,484 |
| — |
| 9,534 |
| |||||
End of period |
| $ | 22 |
| $ | 19 |
| $ | 3,215 |
| $ | — |
| $ | 3,256 |
|
Condensed Consolidating Statement of Cash Flows for the three months ended May 31, 2012
(In thousands) |
| New Enterprise |
| Guarantor |
| Non |
| Eliminations |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from operating activities |
| $ | (39,008 | ) | $ | (543 | ) | $ | (2,404 | ) | $ | — |
| $ | (41,955 | ) |
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| (14,358 | ) | (417 | ) | — |
| — |
| (14,775 | ) | |||||
Proceeds from sale of property and equipment |
| 221 |
| — |
| — |
| — |
| 221 |
| |||||
Change in cash value of life insurance |
| (2,573 | ) | — |
| — |
| — |
| (2,573 | ) | |||||
Change in restricted cash |
| 126 |
| — |
| (1 | ) | — |
| 125 |
| |||||
Net cash used in investing activities |
| (16,584 | ) | (417 | ) | (1 | ) | — |
| (17,002 | ) | |||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Proceeds from revolving credit |
| 118,377 |
| 486 |
| — |
| — |
| 118,863 |
| |||||
Repayment of revolving credit |
| (170,383 | ) | — |
| — |
| — |
| (170,383 | ) | |||||
Proceeds from issuance of long-term debt |
| 268,535 |
| — |
| — |
| — |
| 268,535 |
| |||||
Repayment of long-term debt |
| (152,652 | ) | — |
| (116 | ) | — |
| (152,768 | ) | |||||
Payments on capital leases |
| (1,290 | ) | — |
| — |
| — |
| (1,290 | ) | |||||
Debt issuance costs |
| (14,062 | ) | — |
| — |
| — |
| (14,062 | ) | |||||
Dividends paid |
| — |
| — |
| — |
| — |
| — |
| |||||
Distribution to noncontrolling interest |
| — |
| — |
| (438 | ) | — |
| (438 | ) | |||||
Net cash provided by (used in) financing activities |
| 48,525 |
| 486 |
| (554 | ) | — |
| 48,457 |
| |||||
Net decrease in cash and cash equivalents |
| (7,067 | ) | (474 | ) | (2,959 | ) | — |
| (10,500 | ) | |||||
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning of period |
| 7,106 |
| 476 |
| 7,450 |
| — |
| 15,032 |
| |||||
End of period |
| $ | 39 |
| $ | 2 |
| $ | 4,491 |
| $ | — |
| $ | 4,532 |
|
New Enterprise Stone & Lime Co., Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the Quarter ended May 31, 2013
10. Subsequent Events
S-4 Filed June 13, 2013
On June 13, 2013 the Company filed a form S-4 with the SEC and is currently in the process of registering to exchange up to $289,387,000 in aggregate principal amount of its Secured Notes for up to $289,387,000 in aggregate principal amount of its Secured Notes. The aggregate principal amount includes the $265,000,000 in aggregate principal amount of Secured Notes initially issued in the private placement transaction on March 15, 2012 increased by an additional $24,387,000 in lieu of cash as payment-in-kind interest in respect of the Secured Notes on the September 15, 2012 and March 15, 2013 interest payment dates. We are also offering approximately $87,989,000 of additional Secured Notes and guarantees thereon, that may be issued, at our option, in lieu of cash interest payments on the Secured Notes.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading privately held, vertically integrated construction materials supplier and heavy/highway construction contractor in Pennsylvania and western New York and a national traffic safety services and equipment provider. Founded in 1924, we are one of the top 10 construction aggregates producers based on tonnage of crushed stone produced and one of the top 15 highway contractors based on revenues in the United States, according to industry surveys.
We operate in three segments based upon the nature of our products and services: construction materials, heavy/highway construction and traffic safety services and equipment. Construction materials is comprised of aggregate production (crushed stone and construction sand and gravel), hot mix asphalt production, ready mixed concrete production, and the production of concrete products, including precast/prestressed structural concrete components and masonry blocks. Heavy/highway construction includes heavy construction, blacktop paving and other site preparation services. Our heavy/highway construction operations are primarily supplied with construction materials from our construction materials operation. Traffic safety services and equipment consists primarily of sales, leasing, and servicing of general and specialty traffic control and work zone safety equipment and devices to industrial construction end-users.
Market conditions remained challenging through the first quarter of fiscal year 2014. Our business continues to be impacted by the slow pace of economic recovery and the continued pressure on state budgets which has limited state spending on public highway construction projects. The overall housing market remains weak and private non-residential construction is still experiencing a slow recovery. Competition remains strong as a result of the weak public and private sector demand, with residential and commercial contractors bidding aggressively on projects, which continues to affect our profitability. Our margins also remain under pressure as a result of higher fuel and liquid asphalt costs. We expect that the challenges to our business environment will persist throughout the remainder of fiscal year 2014, which will continue to affect our heavy/highway construction and traffic safety services and equipment businesses, which constitute a significant portion of our overall business. We expect that these conditions will continue to negatively impact our financial position, results of operations, cash flows and liquidity throughout the remainder of fiscal year 2014. To address these challenges, we are continuing our efforts to monitor and adjust our cost structure in our operating plants and control administrative and general spending. We also actively review our assets and properties on an ongoing basis for strategic disposals of lesser performing or non-core assets.
In addition to the overall economic trends affecting our financial position, results of operations and cash flows, we experienced a slow start to our construction season during the three months ended May 31, 2013 due to above average precipitation in the Pennsylvania markets that we operate, which impacted demand for our construction materials and delayed our heavy/highway construction operations.
Seasonality and Cyclical Nature of Our Business
Almost all of our products are produced and consumed outdoors. Our financial results for any quarter do not necessarily indicate the results expected for the year because seasonal changes and other weather-related conditions can affect the production and sales volumes of our products. Normally, the highest sales and earnings are in the second and third quarters and the lowest are in the first and fourth quarters. Our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical swings in construction spending, especially in the private sector. Our primary balance sheet accounts, such as accounts receivable and accounts payable, vary greatly during these peak periods, but return to historical levels as our operating cycle is completed each fiscal year.
EXECUTIVE SUMMARY
FINANCIAL SUMMARY FOR THREE MONTHS ENDED MAY 31, 2013
· Net revenue decreased $10.2 million (6.5%) due to delays in weather related job starts
· Cost of revenue decreased $5.7 million (4.3%) on lower sales and similar fixed costs
· Higher costs paid to accounting and management advisors caused selling, administrative and general (SA&G) costs to be higher than prior year
· Operating loss increased $6.8 million as a result of lower revenues and higher SA&G costs
· Interest expense decreased due to lower deferred financing fee write-off
· Net cash used in operating activities decreased $5.7 million as a result of improved working capital management
· Cash used in investing activities decreased $6.1 million with lower capital expenditures as the primary contributor
RESULTS OF OPERATIONS
The following table summarizes our operating results on a consolidated basis:
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| Three Months |
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| May 31, |
| May 31, |
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(In thousands) |
| 2013 |
| 2012 |
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|
|
|
| ||
Net revenue |
| $ | 147,744 |
| $ | 157,981 |
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Cost of revenue (exclusive of items shown separately below) |
| 127,718 |
| 133,431 |
| ||
Depreciation, depletion and amortization |
| 12,118 |
| 11,843 |
| ||
Pension and profit sharing |
| 1,878 |
| 1,841 |
| ||
Selling, administrative and general expenses |
| 19,413 |
| 17,682 |
| ||
Loss (gain) on disposals of property, equipment and software |
| 152 |
| (35 | ) | ||
Operating loss |
| (13,535 | ) | (6,781 | ) | ||
Interest expense, net |
| (19,177 | ) | (22,820 | ) | ||
Loss before income taxes |
| (32,712 | ) | (29,601 | ) | ||
Income tax benefit |
| (3,475 | ) | (11,487 | ) | ||
Net loss |
| $ | (29,237 | ) | $ | (18,114 | ) |
The tables below disclose revenue and operating income data for our reportable segments on a gross basis. We include inter-segment and certain intra-segment sales in our comparative analysis of revenue at the product line level and this presentation is consistent with the basis on which we review results of operations. Total net revenue and total operating income exclude inter-segment sales and delivery revenues and costs. We include all non-allocated operating costs in the eliminations line item presented below.
In prior fiscal periods the Company reported other revenues separately, which management now includes within the construction materials segment. Additionally in the first quarter of fiscal 2014, management began assessing performance of its operations without the allocation of indirect costs of its selling, administrative and general expense. Indirect costs include trade receivable billings and collections, payment processing, accounting, legal and other administrative costs. Financial data for the three months ended May 31, 2012 has been revised to reflect the current segment presentation.
The following table summarizes our revenue by segment:
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| Three Months Ended |
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| May 31, |
| May 31, |
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(In thousands) |
| 2013 |
| 2012 |
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Revenue |
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Construction materials |
| $ | 111,217 |
| $ | 126,004 |
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Heavy/highway construction |
| 48,416 |
| 53,983 |
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Traffic safety services and equipment |
| 24,089 |
| 23,254 |
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Segment totals |
| 183,722 |
| 203,241 |
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Eliminations |
| (35,978 | ) | (45,260 | ) | ||
Total net revenue |
| $ | 147,744 |
| $ | 157,981 |
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The following tables summarize the percentage of revenue and operating loss from our primary lines of business:
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| Three Months Ended |
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| May 31, |
| May 31, |
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| 2013 |
| 2012 |
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Revenue: |
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Construction materials |
| 60.5 | % | 62.0 | % |
Heavy/highway construction |
| 26.4 | % | 26.6 | % |
Traffic safety services and equipment |
| 13.1 | % | 11.4 | % |
Segment totals |
| 100.0 | % | 100.0 | % |
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| Three Months Ended |
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| May 31, |
| May 31, |
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(In thousands) |
| 2013 |
| 2012 |
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Operating loss: |
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Construction materials |
| $ | 7,357 |
| $ | 9,215 |
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Heavy/highway construction |
| (2,524 | ) | (1,652 | ) | ||
Traffic safety services and equipment |
| (676 | ) | (347 | ) | ||
Segment totals |
| 4,157 |
| 7,216 |
| ||
Corporate and unallocated |
| (17,692 | ) | (13,997 | ) | ||
Total operating loss |
| $ | (13,535 | ) | $ | (6,781 | ) |
Three Months Ended May 31, 2013 Compared to Three Months Ended May 31, 2012
Revenue
Revenue for our construction materials business decreased $14.8 million, or 11.7%, to $111.2 million for the three months ended May 31, 2013 compared to $126.0 million for the three months ended May 31, 2012. This decrease was reflected in all areas except masonry products which increased $0.7 million. Aggregates, hot mix asphalt and ready mix concrete revenue decreased $5.9 million, $6.6 million, $1.4 million, respectively. Sales volumes decreased 10.1% to 4.0 million tons for aggregates, 16.0% to 0.6 million tons for hot mix asphalt, 3.6% to 0.1 million cubic yards for ready mixed concrete. Aggregates prices decreased slightly 0.2% to $12.79 . Hot mix asphalt and ready mixed concrete prices decreased 2.2% to $52.99 and 5.4% to $115.65 respectively. This overall decrease in volume during the three months ended May 31, 2013 was due to weather related delays. The price and demand for our materials is largely based upon local markets and varies across the Company.
Revenue for our heavy/highway construction business decreased $5.6 million, or 10.4%, to $48.4 million for the three months ended May 31, 2013 compared to $54.0 million for the three months ended May 31, 2012. We continue to experience strong competition, as well as a reduced number of projects, in the public and commercial markets. The majority of our sales are government related projects; we are directly impacted as government funding is reduced for transportation spending. Further, we believe that the lack of a federal multi-year surface transportation bill over the past several construction seasons has caused the number of larger, heavy, multidiscipline, multiyear highway and bridge construction projects to decrease in favor of smaller, shorter jobs such as road resurfacing and bridge replacement and rehabilitation.
Revenue for our traffic safety services and equipment businesses increased $0.8 million, or 3.4% to $24.1 million for the three months ended May 31, 2013 compared to $23.3 million for the three months ended May 31, 2012. The increase was the result increased equipment sales, slightly offset by decrease in rental service activity. The increase in equipment sales can be attributed primarily to the continued benefits of previously introduced product offerings. Overall rental service activity decreased compared to the prior period as a result of increased competition.
Cost of Revenue
Cost of revenue decreased $5.7 million, or 4.3% to $127.7 million for the three months ended May 31, 2013 compared to $133.4 million for the three months ended May 31, 2012. Cost of revenue as a percentage of revenue increased for the three months ended May 31, 2013 to 86.5% from 84.4% for the three months ended May 31, 2012, due to reduced profitability in all three of our businesses.
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| Three Months Ended |
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| May 31, |
| May 31, |
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(In thousands) |
| 2013 |
| 2012 |
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Gross Cost of Revenue |
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Construction materials |
| $ | 95,340 |
| $ | 104,724 |
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Heavy/highway construction |
| 47,927 |
| 54,878 |
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Traffic safety services and equipment |
| 20,429 |
| 19,089 |
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Segment totals |
| 163,696 |
| 178,691 |
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Eliminations |
| (35,978 | ) | (45,260 | ) | ||
Total cost of revenue |
| $ | 127,718 |
| $ | 133,431 |
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| Three Months Ended |
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| May 31, |
| May 31, |
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| 2013 |
| 2012 |
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Segment Gross Cost of Revenue as Percent of Gross Revenue |
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Construction materials |
| 85.7 | % | 83.1 | % |
Heavy/highway construction |
| 99.0 | % | 101.7 | % |
Traffic safety services and equipment |
| 84.8 | % | 82.1 | % |
Gross cost of revenue for our construction materials business as a percentage of its gross revenue is up 2.6% to 85.7% for the three months ended May 31, 2013 compared to 83.1% for the three months ended May 31, 2012. The primary driver was the impact of inefficiencies caused by the adverse weather in the three months ended May 31, 2013.
Gross cost of revenue for our heavy/highway construction business as a percentage of its gross revenue is down 2.7% to 99.0% for the three months ended May 31, 2013 compared to 101.7% for the three months ended May 31, 2012. The margins are improved due to completion of lower margin jobs.
Gross cost of revenue for our traffic services and equipment business as a percentage of its gross revenue is up 2.7% to 84.8% for the three months ended May 31, 2013 compared to 82.1% for the three months ended May 31, 2012. The primary driver was increased sales in lower margin products for the quarter ended May 31, 2013.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased $0.3 million, or 2.5% to $12.1 for the three months ended May 31, 2013 compared to $11.8 for the three months ended May 31, 2012. The increase was primarily attributable to increased depreciation on assets associated with our capitalized asset retirement costs.
Selling, Administrative and General Expenses
Selling, administrative and general expenses increased $1.7 million, or 9.6% to $19.4 million for the three months ended May 31, 2013 compared to $17.7 million for the three months ended May 31, 2012. The increase was attributable to $3.1 million in professional fees related to our increased accounting support and financial reporting staffing and capabilities and $0.8 million of software service agreements. These increases were partially offset by a decrease of $2.7 million in our Enterprise Resource Planning (ERP) System expense.
Operating Income
Operating income for our construction materials business decreased $1.8 million, or 19.6% to $7.4 million for the three months ended May 31, 2013 compared to $9.2 million for the three months ended May 31, 2012. Operating income as a percentage of construction materials revenue was 6.7% in the current period compared to 7.3% in the prior period.. Income from the sale of aggregates decreased $0.1 million, or 2.2% to $4.5 million for the three months ended May 31, 2013 compared to $4.6 million for the three months ended May 31, 2012. Additionally, operating income for hot mix asphalt decreased $0.6 million, or 20.7% to $2.3 million for the three months ended May 31, 2013 compared to $2.9 million for the three months ended May 31, 2012 The overall decrease in operating income from our construction material business was primarily attributable to decreased sales volumes. The price and demand for our materials is largely based upon local markets and varies across the Company.
Operating results for our heavy/highway construction business decreased $0.8 million to a $2.5 million loss for the three months ended May 31, 2013 compared to loss of $1.7 million for the three months ended May 31, 2012. The change in profitability is primarily attributable to a decrease in activity without a commensurate reduction in costs, as well as continued strong competition.
Operating income for our traffic safety services and equipment businesses decreased $0.4 million to a $0.7 million loss for the three months ended May 31, 2013 compared to $0.3 million loss for three months ended May 31, 2012. The decrease in operating income is primarily due to increased competition in the rental service markets, partially offset by increased sales of highway safety equipment.
Interest Expense, net
Net interest expense decreased $3.6 million, or 15.8% to $19.2 million for the three months ended May 31, 2013 compared to $22.8 million for the three months ended May 31, 2012. This decrease was partially offset by higher interest expense incurred during the three months ended May 31, 2013 due to increased overall indebtedness. During the three months ended May 31, 2012, we incurred $6.4 million related to our refinancing, which we did not incur during the three months ended May 31, 2013. Additionally we expensed $0.9 million related to the third amendment of our ABL facility during the three months ended May 31, 2013 ($0.7 million of unamortized deferred financing fees and the remainder were other fees the Company paid to effect the third amendment).
Income Tax Benefit
Income tax benefit decreased $8.0 million to $3.5 million for the three months ended May 31, 2013 compared to $11.5 million for the three months ended May 31, 2012. The decrease in the tax benefit is primarily the result of the Company recording additional valuation allowance against certain federal and state net operating losses for the current fiscal year. The Company will continue to record additional valuation allowance against additions to our net deferred tax assets for fiscal year 2014 until management’s assurance for the realization of its deferred tax assets are deemed more likely than not to be recoverable. We estimate our annual tax rate based on projected taxable income for the full year and record a quarterly tax provision in accordance with the anticipated annual rate. As the year progresses, we refine our estimate of the year’s taxable income as new information becomes available, such as year-to-date financial results. This continuous estimation process may result in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining our effective interim tax rate. There may be large swings on a quarterly basis due to the seasonal nature of the Company’s business.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of liquidity include cash and cash equivalents, cash from operations and amounts available for borrowing under our credit facilities. As of May 31, 2013, we had borrowed $68.7 million under the ABL Facility with $64.6 million available under the third
amendment to the ABL Facility as discussed below. As of May 31, 2013, we had $3.3 million in cash and cash equivalents and working capital of $155.5 million as compared to $9.5 million in cash and cash equivalents and working capital of $131.8 million as of Feb 28, 2013. We maintain company owned life insurance policies with cash surrender values (“CSV”). During the three months ended May 31, 2013, we obtained $3.2 million of cash in the form of a loan against the $4.0 million of CSV which was used for working capital purposes. Additionally during the three months ended May 31, 2013, we transferred $3.0 million of cash in the form of a dividend from our captive insurance company to our operations, which was used to pay down a portion of the ABL Facility.
Given the nature and seasonality of our business, we typically experience significant fluctuations in working capital needs and balances during our peak summer season; these amounts are converted to cash over the course of our normal operating cycle.
Restricted cash balances of $14.8 million and $10.1 million as of May 31, 2013 and February 28, 2013, respectively, were restricted in certain consolidated subsidiaries for bond sinking fund and insurance requirements, as well as collateral on outstanding letters of credit or rentals.
Asset Based Loan Facility
Original Terms
On March 15, 2012, the Company entered into the ABL Facility with M&T, as the issuing bank, a lender, the swing lender, the agent and the arranger. The ABL Facility originally provided for maximum borrowings on a revolving basis of up to $170.0 million from time to time for general corporate purposes, including working capital. As discussed below, as a result of the third amendment to the ABL Facility, a maximum of $145.0 million may be borrowed under the ABL Facility. The ABL Facility includes a $15.0 million letter of credit sub-facility and a $20.0 million swing line sub-facility for short-term borrowings. The ABL Facility will mature on March 15, 2017. We classify borrowings under the ABL Facility as long-term due to our ability to maintain such borrowings on a long-term basis.
Borrowings under the ABL Facility (except swing line loans) bear interest at a rate per annum equal to, at the Company’s option, either (a) a base rate or (b) a LIBOR rate, in each case plus an applicable margin. Swing line loans bear interest at the base rate plus the applicable margin. The LIBOR margin for the ABL Facility is fixed at 5.00% (as of the date of the third amendment, discussed below) and the base rate margin is fixed at 3.00% (as of the date of the third amendment, discussed below). The ABL Facility also contains a commitment fee that is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement as the borrowing base less the sum of letter of credit obligations and outstanding loans thereunder. The commitment fee ranges from 0.25% to 0.625%. From the commencement of the ABL Facility Agreement until September 7, 2012 (date of the first amendment, discussed below), the LIBOR margin was 2.75%, the base rate margin was 0.75% and the commitment fee was 0.50%.
Borrowings under the ABL Facility are guaranteed on a full and unconditional and joint and several basis by certain of the Company’s existing and future domestic subsidiaries and are secured, subject to certain permitted liens, by first-priority liens on the ABL Priority Collateral and by second-priority liens on the collateral securing the Secured Notes on a first-priority basis, except for certain real property.
Availability of ABL Facility and Covenant
The ABL Facility includes affirmative and negative covenants that, subject to significant exceptions, limit our ability and the ability of our guarantors to undertake certain actions, including, among other things, limitations on (i) the incurrence of indebtedness and liens, (ii) asset sales, (iii) dividends and other payments with respect to capital stock, (iv) acquisitions, investments and loans, (v) affiliate transactions, (vi) altering the business, (vii) issuances of equity that have mandatory redemption or put rights prior to the maturity of the ABL Facility and (viii) providing negative pledges to third parties. As of May 31, 2013, the Company was in compliance with these affirmative and negative covenants.
Prior to the third amendment to the ABL Facility, if the Company had less than $25.0 million of availability under the ABL Facility at any point in time, it would be obligated to comply with a fixed charge coverage ratio. The third amendment to the ABL Facility, among other things, reduced the minimum excess availability threshold for the fixed charge coverage ratio until November 30, 2014, effectively increasing the Company’s short-term borrowing availability by allowing it to borrow up to the entire amount of the ABL Facility without needing to comply with a fixed charge coverage ratio.
If at any time after November 30, 2014 Excess Availability is less than the greater of (i) $25.0 million or (ii) 15% of the lesser of the commitments and the borrowing base, the Company must comply with a minimum fixed charge coverage ratio test of at least 1.0 to 1.0 for the immediately preceding four fiscal quarters or twelve consecutive months, as applicable. As of May 31, 2013, the Company’s Fixed Charge Coverage Ratio was below 1.0 to 1.0. The practical result will be that after November 30, 2014, so long as our fixed charge coverage ratio as calculated pursuant to the covenant remains less than 1.0 to 1.0, our available borrowings under the ABL Facility will be reduced by $25.0 million.
A fixed charge covenant ratio is also used to determine what advance rates apply in calculating the borrowing base under the ABL Facility, as well as whether the Company can make certain investments, acquisitions, restricted payments, repurchases or increases in the amount of cash interest payments on other indebtedness. As part of the first amendment to the ABL Facility entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent fixed charge coverage ratio. If the calculation of the fixed charge coverage ratio is less than 1.0 to 1.0, the borrowing base will be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property, plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus, (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.
The applicability of the Company’s fixed charge coverage ratio is conditional upon reaching the minimum excess availability. As a result of the third amendment, the Company has a minimum excess availability of zero (reduced from $25.0 million) until November 30, 2014, effectively eliminating the need to comply with a fixed charge coverage ratio. After this date, the Company may be subject to a fixed charge coverage ratio of 1.0 to 1.0, if its minimum excess availability reaches $25.0 million.
Amendment of ABL Facility
The ABL Facility contained a covenant that required us to deliver our fiscal year 2012 annual financial statements to the lender by May 29, 2012. On September 7, 2012, we entered into the first amendment to the ABL Facility to change the required delivery date of our audited February 29, 2012 financial statements and the required delivery date of our first and second quarter results and financial statements. Subsequent to the date of the first amendment, we required multiple extensions of time and ultimately filed our audited February 29, 2012 financial statements, our fiscal year 2013 first and second quarter results and financial statements on December 15, 2012, January 1, 2013 and February 28, 2013, respectively.
As part of the first amendment to the ABL Facility entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio as described above. We were subject to the adjusted borrowing base calculation as of February 28, 2013 and May 31, 2013. The first amendment added a 1.25% floor to LIBOR for purposes of determining the interest rate applicable to LIBOR based borrowings, which was later removed in the third amendment discussed below.
In connection with the first amendment to the ABL Facility, we also agreed with M&T that, in the event M&T is unable to reduce its final participation in the ABL Facility to no more than $75.0 million during the primary syndication of the ABL Facility by December 15, 2012, M&T would be entitled to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, certain covenants and the interest and fees payable. As of May 31, 2013, M&T has not syndicated the ABL Facility and has not modified the terms of the ABL Facility. See the discussion below concerning the potential modifications by M&T.
On December 7, 2012, we entered into the second amendment to the ABL Facility to change the required delivery date of our third quarter results and financial statements. Subsequent to the date of the second amendment, we required an extension of time and ultimately filed our third quarter results and financial statements on April 1, 2013. There can be no guarantee that the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes and Secured Notes.
On May 29, 2013, we entered into the third amendment to the ABL Facility. As discussed above, prior to the third amendment, if the Company had less than $25.0 million of availability under the ABL Facility at any point in time, it would be obligated to comply with a fixed charge coverage ratio. The third amendment, among other things, reduced the minimum excess availability to zero until November 30, 2014, effectively increasing the Company’s short-term borrowing availability by allowing it to borrow up to the entire amount of the ABL Facility without needing to comply with a fixed charge coverage ratio. The Company also agreed to the following additional amendments to the ABL Facility in the third amendment: (i) the aggregate overall amount available for borrowing
under the ABL Facility was reduced from $170.0 million to $145.0 million; (ii) the interest rate margin added to applicable LIBOR based borrowings was increased to a fixed 5%; (iii) the interest rate margin added to applicable Base Rate borrowings was increased to a fixed 3%; (iv) the 1.25% floor applicable to LIBOR based borrowings was removed; and (v) to the extent that the Company disposes of assets that are ABL priority collateral and certain unencumbered assets, the net cash proceeds will be used to prepay outstanding borrowings under the ABL Facility and the overall ABL Facility will be reduced by $1 for each $1 of assets sold up to $15 million. The third amendment did not change other significant terms of the ABL Facility such as the maturity, borrowing base formula, and covenants, as applicable. Although the overall commitment was reduced from $170.0 million to $145.0 million, because the Company’s borrowing base was below $145.0 million at the time of the third amendment, such reduction had no impact on the Company’s short-term ability to borrow under the ABL Facility.
In connection with the third amendment, we also agreed with M&T that our board of directors will create a special committee consisting of our four non-employee directors, which we refer to as the special committee, that will engage an advisor to develop a business plan that focuses on cost reductions and operational efficiencies, which we refer to as the Plan. Upon the approval of the Plan by a majority of the members of the special committee, the Plan will be submitted to the entire board of directors for approval. The vote of more than seven directors will be required to reject the Plan. The Plan must also be reasonably acceptable in scope and process to M&T. Once the Plan is approved by the board of directors, the special committee will be authorized to oversee the implementation of the Plan by our management.
Potential Modification by M&T
In connection with the first amendment to the ABL Facility described above, in order to facilitate the syndication of the ABL Facility amongst additional lenders, the Company and M&T agreed that if M&T were unable to reduce its final loan commitments under the ABL Facility to no more than $75.0 million prior to December 15, 2012, M&T would be entitled to add to or modify the terms of the ABL Facility on a unilateral basis, including but not limited to adjusting the advance rates, adding or modifying certain covenants and increasing the interest and fees payable in order to facilitate its syndication efforts. Notwithstanding these rights, M&T would not be able to do the following without the Company’s consent:
· | reduce the ABL Facility’s total amount to less than $170.0 million (as discussed above, this has been reduced to $145.0 million due to the third amendment); |
· | impose a permanent fixed charge coverage ratio; |
· | cause the springing fixed charge coverage ratio covenant in the ABL Facility to be greater than 1.00 to 1.00; |
· | add a senior or total debt to EBITDA covenant with a less than 20% cushion from management projections; |
· | add a net worth covenant with a less than 20% cushion from management projections; |
· | restrict the Company’s ability to incur additional permitted indebtedness and related permitted liens for capital leases, purchase debt and sale-leaseback transactions to less than $35.0 million in the aggregate at any time; |
· | if the Company’s fixed charge coverage ratio is 1.00 to 1.00 or greater, cause the advance rate for (a) eligible inventory to be less than 60%; (b) eligible accounts to be less than 85%; or (c) eligible real property to be less than the lower of (1) 75% of the appraised value thereof and (2) $65.0 million; |
· | if the Company’s fixed charge coverage ratio is less than 1.00 to 1.00, cause the advance rate for (a) eligible inventory to be less than 40%; (b) eligible accounts to be less than 70%; or (c) eligible real property to be less than the lower of (1) 75% of the appraised value thereof and (2) $56.0 million; or |
· | require that any of (a) Rock Solid Insurance Company, (b) South Woodbury L.P., (c) NESL II, LLC, (d) Kettle Creek Partners L.P. or (e) Kettle Creek Partners G.P., LLC guaranty the ABL Facility. |
As of May 31, 2013, despite M&T’s inability to successfully syndicate the ABL Facility, the terms of the ABL Facility have not been modified by M&T. However, should M&T choose to exercise its right to add or modify terms of the ABL Facility, borrowings under the ABL Facility may be subject to terms less favorable than the current terms of the ABL Facility which could negatively impact our financial position, cash flows and results of operations. Furthermore, such modifications may require us to renegotiate the terms of the ABL Facility or obtain additional financing. We may not be able to obtain such modifications or additional financing on commercially
reasonable terms or at all. If we are unable to obtain such modifications or additional financing, we would have to consider other options, such as the sale of certain assets, sales of equity, and negotiations with our lenders to restructure our debt. The terms of our indebtedness may restrict, or market or business conditions may limit, our ability to do any or all of these things.
Interest Rate and Availability
As of May 31, 2013, the weighted average interest rate on the ABL Facility was 4.0%. The effective interest rate, including all fees, for the ABL Facility was approximately 6.2% for fiscal year 2013. As discussed above, we recently amended our ABL Facility to fix the interest rate margin added to LIBOR based borrowings at 5.0%, fix the interest rate margin added to base rate borrowings at 3.0% and remove the 1.25% floor applicable to LIBOR based borrowings.
As of May 31, 2013, we had borrowed $68.7 million under the ABL Facility with $64.6 million available. As discussed above, we recently amended our ABL Facility to, among other things, reduce the overall commitment to $145.0 million and waive the $25.0 million minimum excess availability threshold for the fixed charge coverage ratio until November 30, 2014.
We believe we have sufficient financial resources, including cash and cash equivalents, cash from operations and amounts available for borrowing under our ABL Facility, to fund our business and operations for at least the next twelve months, including capital expenditures and debt service obligations. However, in the past we have failed to meet certain operating performance measures as well as the financial covenant requirements set forth under our previous credit facilities and our ABL Facility, which resulted in the need to obtain several amendments, and should we fail in the future, we cannot guarantee that we will be able to obtain such amendments. A failure to obtain such amendments could result in an acceleration of our indebtedness under the ABL Facility and a cross-default under our other indebtedness, including the Notes and Secured Notes. If the lenders were to accelerate the due dates of our indebtedness or if current sources of liquidity prove to be insufficient, there can be no assurance that the Company would be able to repay or refinance such indebtedness or to obtain sufficient funding. This could require the Company to restructure or alter its operations and capital structure.
Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing activities and financing activities and our capital expenditures for the three months ended May 31, 2013 and May 31, 2012.
|
| Three Months Ended |
| ||||
|
| May 31, |
| May 31, |
| ||
(In thousands) |
| 2013 |
| 2012 |
| ||
Net cash (used in) provided by: |
|
|
|
|
| ||
Operating activities |
| $ | (36,253 | ) | $ | (41,955 | ) |
Investing activities |
| (10,963 | ) | (17,002 | ) | ||
Financing activities |
| 40,938 |
| 48,457 |
| ||
Cash paid for capital expenditures |
| (9,491 | ) | (14,775 | ) | ||
Operating Activities
Net cash used in operating activities decreased $5.7 million to $36.3 million for the three months ended May 31, 2013 compared to $42.0 million for the three months ended May 31, 2012. Cash used in operating activities decreased primarily as a result of lower investments in working capital items of $13.2 million due to decreased activity and timing of collections of accounts receivable, partially offset by less cash generated from operations of $7.5 million.
Investing Activities
Net cash used in our investing activities decreased $6.0 million to $11.0 million in the three months ended May 31, 2013 compared to $17.0 million in the three months ended May 31, 2012. Net cash used in the three months ended May 31, 2012 included capital expenditures of $9.4 million and a $4.6 million of increased cash collateral related to our captive insurance arrangement, partially offset by proceeds of $3.2 million associated with our cash surrender value life insurance policies.
Financing Activities
Net cash provided by financing activities decreased $7.6 million to $40.9 million in the three months ended May 31, 2013 compared to $48.5 million in the three months ended May 31, 2012. The decrease in net cash provided by our financing activities was primarily due to less cash needed to support operating cash flows in the current period. The three months ended May 31, 2013 included the March 15, 2012 refinancing, including the ABL Facility and $265.0 million in Secured Notes which was offset by the repayment of our previous first lien term loan A & B, first lien revolving credit facility and other long-term debt.
Capital Expenditures
Cash capital expenditures decreased $5.3 million to $9.5 million for the three months ended May 31, 2013 compared to $14.8 million for the three months ended May 31, 2012. This decrease was a result of lower spending on limestone acreage, manufacturing and other plant related equipment.
Our Indebtedness
Long-Term Debt:
ABL and Senior Secured Notes:
On March 15, 2012 the Company completed the sale of $265.0 million 13.0% senior secured notes due 2018. In connection with the sale of the Secured Notes, we also entered into the ABL Facility. We utilized the proceeds from the sale of the Secured Notes and the ABL Facility to prepay all amounts outstanding under our prior credit agreement and certain other debt.
Notes Due 2018
In August 2010, the Company sold $250.0 million aggregate principal amount of the Notes. Interest on the Notes is payable semi-annually in arrears on March 1 and September 1 of each year. The proceeds from the issuance of Notes were used to pay down debt.
Refer to Note 4 “Long-Term Debt” to the condensed consolidated financial statements for more detail.
Land, equipment and other obligations:
The Company has various notes, mortgages and other financing arrangements resulting from the purchase of principally land and equipment. All loans provide for at least annual payments, which include interest ranging up to 10.0% per annum, and are principally secured by the land and equipment acquired.
From 1998 through 2005, the Company issued four revenue bonds to different industrial development authorities for counties in Pennsylvania in order to fund the acquisition and installation of plant and equipment. The original issuance of these bonds totaled $25.3 million with dates of maturity through May 2022. The Company maintains irrevocable, transferable letters of credit equal to the approximate carrying value of each bond, in total for $5.4 million as of May 31, 2013 and February 28, 2013, respectively. The effective interest rate on these bonds ranged from 0.25% to 0.43% for three months ended May 31, 2013 and 0.23% to 0.46% for the three months ended May 31, 2012. The Company is subject to annual principal maturities each year which, is funded on a monthly basis, depending upon the terms of the original agreement. The Company’s plant and equipment provide collateral under these borrowings and for the letters of credit.
Obligations under capital lease:
The Company has various arrangements for the lease of machinery and equipment which qualify as capital leases. These arrangements typically provide for monthly payments, some of which include residual value guarantees if the Company were to terminate the arrangement during certain specified periods of time for each underlying asset under lease.
Changes in Future Contractual Obligations
There were no material changes to the contractual obligations disclosed in our Annual Report on Form 10-K “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Debt and Contractual Obligations”.
Off Balance Sheet Arrangements
We utilize off-balance sheet arrangements in our outstanding letters of credit associated with our industrial development authority bonds totaling $12.0 million and $11.9 million at May 31, 2013 and February 28, 2013, respectively, which were not included in our Consolidated Balance Sheets.
Critical Accounting Policies and Significant Judgments and Estimates
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period.
On an ongoing basis, management evaluates its estimates, including those related to the carrying amount of property, plant and equipment; valuation of receivables, inventories, goodwill and intangible assets; recognition of revenue and loss contracts reserves under the percentage-of-completion method; assets and obligations related to employee benefit plans; asset retirement obligations; income tax valuation; and self-insurance reserves. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. We base our estimates and judgments on historical experience and on various
other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to Note 1 “Summary of Significant Accounting Policies” as reported in our notes to our financial statements for the fiscal year ended February 28, 2013 as filed as part of the Company’s Annual Report on Form 10-K and our financial statements herein.
Recently Issued Accounting Standards
Refer to Note 1, “Nature of Operations and Summary of Significant Accounting Policies” to the condensed consolidated financial statements for a discussion of recent accounting guidance and pronouncements.
Forward-looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, in particular, statements about our plans, strategies and prospects under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” You can identify certain forward-looking statements by our use of forward-looking terminology such as, but not limited to, “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “likely,” “will,” “would,” “could” and similar expressions that identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Many risks and uncertainties are inherent in our industry and markets. Others are more specific to our operations. The occurrence of the events described and the achievement of the expected results depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:
· material weaknesses and significant deficiencies in our internal controls over financial reporting;
· risks associated with the cyclical nature of our business and dependence on activity within the construction industry;
· declines in public sector construction and reductions in governmental funding which could continue to adversely affect our operations and results;
· our reliance on private investment in infrastructure and a slower than normal recovery which continue to adversely affect our results;
· a decline in the funding of Pennsylvania Department of Transportation, which we refer to as PennDot,, the Pennsylvania Turnpike Commission, the New York State Thruway Authority or other state agencies;
· difficult and volatile conditions in the credit markets may adversely affect our financial position, results of operations and cash flows;
· the potential for our lender to modify the terms of our asset-based loan facility;
· the risk of default of our existing and future indebtedness, which may result in an acceleration of our indebtedness hereunder;
· the potential to inaccurately estimate the overall risks, requirements or costs when we bid on or negotiate a contract that is ultimately awarded to us;
· the weather and seasonality;
· our operation in a highly competitive industry within our local markets;
· our dependence upon securing and permitting aggregate reserves in strategically located areas;
· risks related to our ability to acquire other businesses in our industry and successfully integrate them with our existing operations;
· risks associated with our capital-intensive business;
· risks related to our ability to meet schedule or performance requirements of our contracts;
· changes to environmental, health and safety laws;
· our dependence on our senior management;
· our ability to recruit additional management and other personnel and our ability to grow our business effectively or successfully implement our growth plans;
· the potential for labor disputes to disrupt operations of our businesses;
· special hazards related to our operations that may cause personal injury or property damage;
· unexpected self-insurance claims and reserve estimates;
· material costs and losses as a result of claims that our products do not meet regulatory requirements or contractual specifications;
· cancellation of significant contracts or our disqualification from bidding for new contracts;
· general business and economic conditions, particularly an economic downturn; and
· the other factors discussed under Item 1A-Risk Factors in our Annual Report on Form 10-K for our fiscal year ended February 28, 2013.
We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to financial market risks, including changes in commodity prices, interest rates and other relevant market prices.
Commodity Price Risk
We are subject to commodity price risk with respect to price changes in energy, including fossil fuels, electricity and natural gas for production of hot mix asphalt and cement and diesel fuel for distribution and production related vehicles. We attempt to limit our exposure to changes in commodity prices by putting sales price escalators in place for most public contracts, and we aggressively seek to obtain escalators on private and commercial contracts.
Interest Rate Risk
We are subject to interest rate risk in connection with borrowings under our indebtedness. As of May 31, 2013, we have $68.7 million in indebtedness outstanding under our ABL Facility subject to variable interest rates. Each change of 1.00% in interest rates would result in an approximate $0.7 million change in our annual interest expense in total on our ABL Facility. Any debt we incur in the future could also bear interest at floating rates.
ITEM 4 - CONTROLS AND PROCEDURES
This report includes the certifications attached as Exhibits 31.1 and 31.2 of our CEO and CFO required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of May 31, 2013. Based upon that evaluation, our CEO and CFO concluded that, as of May 31, 2013, our disclosure controls and procedures were not effective as the result of the material weaknesses in internal control over financial reporting described below.
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision of the Company’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). Internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our financial statements for the years ended February 28, 2013, 2012 and 2011, management identified certain material weaknesses in our internal control over financial reporting as further described below.
We did not maintain an effective control environment primarily attributable to the following:
· We did not maintain an effective control environment that consistently emphasized adherence to GAAP. This control deficiency, which was identified in 2011 by the Company’s independent auditors and elevated to a material weakness in fiscal 2012 in part because of difficulties encountered with the ERP implementation, led to adjustments identified by both management and the Company’s independent auditors during the fiscal year 2013, 2012 and 2011 financial closing and reporting process.
· In the areas of finance, tax, accounting and information technology departments, we did not ensure a sufficient complement of personnel with an appropriate level of knowledge, experience and training commensurate with our structure and accounting and financial reporting requirements, which was identified as a material weakness by management during the fiscal 2012 year-end financial reporting process.
· We did not ensure complete and accurate business documentation to support certain transactions and accounting records. The controls in these areas with respect to the creation, maintenance and retention of complete and accurate business records were not effective. This was primarily attributable to the ERP implementation in fiscal year 2012 and identified by management and the Company’s independent auditors during the 2012 year-end financial reporting process.
· We did not design, maintain or implement policies and procedures to adequately review and account for significant accounting transactions, which was identified as a material weakness during the 2012 fiscal year-end financial reporting process. Specifically, we did not maintain and communicate sufficient and consistent accounting policies, which limited our ability to make accounting decisions and to detect and correct accounting errors.
We did not maintain effective monitoring of controls:
· We did not maintain effective monitoring of controls in areas related to period end financial reporting process, revenue recognition, cash, contracts, inventory, property, plant and equipment and estimates in accruals. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls which was identified as a material weakness during the 2012 fiscal year-end financial reporting process by management and its independent auditors.
· We do not maintain an internal audit or similar function. As a result of this deficiency which was considered a material weakness during the 2012 year-end financial reporting process by management and its independent auditors, we did not have an adequate independent, objective body to assess, monitor, and evaluate the intended operating effectiveness of controls or to conduct operational audits for the identification of recommendations to improve operating effectiveness of the organization.
We did not maintain effective controls over risk assessment:
· We did not maintain processes to evaluate certain business and fraud risks. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls and was identified as a material weakness during the fiscal 2012 year-end financial reporting process by management.
We did not maintain effective controls over information and communication:
· We did not maintain effective controls over information and communication, specifically around reports and financial data, as we had several issues with our ERP implementation. Thus, we had issues in providing the identification, capture, and exchange of information in a form and time frame that enabled our employees to carry out their responsibilities. Specifically, due to the system implementation, there were issues revolving around the actual information/reports provided, which proved to be a pervasive issue. This deficiency which was identified by management and its independent auditors in Fiscal 2012, resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.
The material weaknesses in our control environment, monitoring of controls, information and communication, and risk assessments contributed to additional material weaknesses in various control activities as set forth below:
· We did not maintain effective controls over the implementation of a new ERP. Specifically, we did not implement appropriate logical security design and testing, perform sufficient data conversion testing, maintain appropriate system documentation, or provide sufficient end user training during the
implementation of the ERP. During the implementation of the ERP, management did not provide appropriate logical security design and testing, perform sufficient data conversion testing, and maintain appropriate system documentation. This material weakness was identified by management and the Company’s independent auditors during the fiscal year 2012 financial reporting process. This material weakness contributed to other control issues described below.
· We did not implement appropriate information technology controls related to change management, data integrity, access and segregation of duties. This material weakness, which was previously identified as a significant deficiency in prior years by our independent auditors and elevated to a material weakness in fiscal 2012 due to issues with our ERP implementation, resulted in both not having adequate automated and manual controls designed and in place and not achieving the intended operating effectiveness of controls to ensure accuracy of our financial reporting. For example, we did not maintain adequate segregation of duties around most accounting processes and did not have adequate integrity verification of our subledgers.
· We did not maintain effective controls over the recording of journal entries, both recurring and non-recurring. Specifically, effective controls were not in place to ensure that journal entries were properly prepared, included sufficient supporting documentation, or were reviewed and approved to ensure the validity, accuracy and completeness of the journal entries. For example, due to data conversion issues during the Company’s ERP implementation, recurring and manual journal entries were recorded duplicate times, in wrong periods and/or in reverse. This material weakness which was identified by management and the Company’s independent auditors during the 2012 year-end reporting process, resulted in additional procedures performed by management and contributed to other deficiencies, some of which have resulted in additional material weaknesses and adjustments during the fiscal year 2013 and 2012 year-end financial closing processes.
· We did not maintain effective controls over the recording of intercompany transactions. Specifically, effective controls were not in place to ensure that intercompany balances were properly reconciled and eliminated on a timely basis. For example, due to certain subsidiaries being converted to a new ERP system in January 2012, we did not initially match and reconcile intercompany billings and expenses. This material weakness, which was identified by management and the Company’s independent auditors during the 2012 financial reporting process, resulted in additional procedures performed by management and adjustments during the fiscal year 2013 and 2012 year-end financial closing and reporting process.
· We did not maintain effective controls over accounting for contracts. Specifically, we did not design and maintain effective controls over the reconciliation of contract billings and accruals to the general ledger, or formally analyze the recognition of contract revenue, profit and loss. For example, as a result of the ERP conversion, intercompany contracts were incorrectly classified as third party contracts and contract expenses for certain multi-year contracts were underaccrued. This material weakness, which was identified by management during the 2012 financial reporting process, resulted in additional procedures performed by management and adjustments during the fiscal years 2013 and 2012 year-end financial closing and reporting processes.
· We did not maintain effective controls to ensure the completeness and accuracy of recorded revenue. Specifically, we did not design and maintain effective controls over pricing, billing practices and credit memos. For example, during conversion to the new ERP several customers were invoiced incorrect prices which resulted in significant billing adjustments credit memos. This material weakness which was identified during the fiscal 2012 year-end audit by management, in conjunction with our independent auditors resulted in additional procedures performed by management and adjustments in both fiscal 2013 and 2012.
· We did not maintain effective controls to ensure the completeness, accuracy, cutoff and valuation of accounts receivable. Specifically, we did not timely reconcile accounts receivable balances and did not implement and maintain a formal review process. Further, we did not have an effective process in place to determine and appropriately assess the adequacy of accounts receivable valuation reserves. There also is no required formal approval process to determine and write off uncollectible account balances.
This material weakness, which was identified by our independent auditors during the 2012 year-end audit, resulted in additional procedures performed by management and adjustments during the fiscal year 2013 and 2012 year-end financial closing and reporting processes.
· We did not maintain effective controls over the completeness and accuracy of property, plant and equipment and related depreciation expense. Specifically, we did not design and maintain effective controls to ensure that assets are properly capitalized on our books. For example, certain capital expenditures were inappropriately expensed while other expenditures were inappropriately capitalized as fixed assets. This material weakness, which was identified by our independent auditors during our fiscal 2012 year-end audit, resulted in additional procedures performed by management and adjustments during the fiscal years 2013 and 2012 year-end financial closing and reporting processes.
· We did not maintain effective controls over the completeness and accuracy of capitalized software costs and related amortization expense. Specifically, we did not design and maintain effective controls to ensure that capitalized software costs are properly capitalized on our books. For example, the company did not have a formal process in place to evaluate and determine the appropriate classification of costs incurred. This material weakness, which was identified by our independent auditors during the fiscal 2012 audit, resulted in additional procedures performed by management and adjustments during the fiscal years 2013 and 2012 year-end financial closing and reporting processes.
· We did not maintain effective controls over the completeness and accuracy of our accounting estimates related to inventory reserves. Specifically, we did not design and maintain effective controls with respect to the review and analysis of excess and obsolete inventory and lower of cost or market considerations due to lack of empirical data available upon converting to our new ERP. This material weakness, which was identified by management in conjunction with our independent auditors during the fiscal year 2012 audit, resulted in adjustments identified through additional procedures performed by management in fiscal years 2013 and 2012.
· We did not maintain effective controls over the estimation process related to changes in asset retirement obligations and related activity. Specifically, we did not design and maintain effective controls to ensure that changes in asset retirement obligations were properly estimated and recorded timely on our books. This material weakness, which was identified by the Company’s independent auditors during the year-end fiscal 2012 reporting process, resulted in additional procedures performed by management and adjustments during the fiscal year 2013 and 2012 year-end financial closing and reporting processes.
· We did not maintain effective controls over the completeness, accuracy and cutoff of our inventory counts. Specifically, we did not design and maintain effective controls and policies with respect to physical inventory counting procedures, including the appropriate level of review. For example, we did not ensure results of physical inventory counts were completely and accurately recorded in the newly implemented ERP system. We also did not initially capitalize inventory variances for materials, labor, and overhead. This material weakness, which was identified by the Company’s independent auditors during the fiscal 2012 year-end financial reporting process, resulted in adjustments identified through additional procedures performed by management in fiscal years 2013 and 2012.
· We did not maintain effective controls to ensure the completeness and timely recording of accounts payable and accrued liabilities. Specifically, we did not timely reconcile accounts payable and accrued liabilities or properly accrue for invoices payable in the period. For example, invoices for certain receipts of goods and services were improperly recorded in the period after they were received while other invoices were incorrectly recorded twice during the ERP implementation. This material weakness which was identified by management and the Company’s independent auditors during the year-end fiscal 2012 reporting process, resulted in additional procedures performed by management and adjustments identified by management and our independent auditors for fiscal year 2013 and 2012,
· We did not maintain effective controls over the completeness, accuracy and valuation of our deferred tax assets and liabilities. Specifically, we did not design and maintain effective controls with respect to accounting for the difference between the book and tax bases of the company’s property, plant and equipment and capital leases. This material weakness which was identified by management and our independent auditors in fiscal 2011 resulted in additional procedures performed by management and adjustments identified by management and our independent auditors during the fiscal year 2013, 2012, 2011 year-end and first quarter fiscal 2014 financial closing and reporting processes.
· We did not adequately segregate the duties of personnel within our Accounting Department, including those related to cash management, payroll processing, accounts payable processing, and accounts receivable and general ledger maintenance, due to an insufficient complement of staff. This material weakness which was identified by our independent auditors in prior years but elevated to a material weakness in fiscal year 2012, resulted in additional procedures performed by management and adjustments identified by management and our independent auditors during the fiscal year 2013, 2012 and 2011 year-end financial closing and reporting processes.
Misstatements could result in substantially all of the accounts and disclosures associated with the material weaknesses described above and as a result a material misstatement in our annual or interim consolidated financial statements would not be prevented or detected in a timely manner. Management has performed procedures designed to determine the reliability of our financial reporting and related financial statements and we believe the consolidated financial statements included in this report as of and for the period ended May 31, 2013, are fairly stated in all material respects.
Plans for Remediation of Material Weaknesses
At the direction and with the full support of executive management, we continue our efforts to improve our internal control over financial reporting. In the locations that operate our new ERP, we have provided further training and made configuration changes such that our ERP is operating in a more effective manner. In addition, over the past year, we have made progress in improving our internal control processes and procedures, including documenting our business processes. We have drafted a formal plan to remediate each of the identified material weaknesses which we anticipate will commence in the fiscal quarter ending August 31, 2013 and we expect to have remediation efforts finalized in fiscal year 2015. The remediation plan has been approved by our Board of Directors as of the date of this filing. As of the date of this filing, we have also established a steering committee that will provide oversight and direction, with accountability to the Board of Directors, for the remediation of the material weaknesses. Specific initiatives to date have been focused on the following:
·We have hired professional finance resources to enhance accounting and aid in financial reporting and internal control capabilities. Specifically, we hired a Director of Financial Reporting, Business Unit Controller, Internal Audit resource and have appointed a new Chief Financial Officer,
·We have hired a third party advisor, who is assisting management with its remediation efforts,
· We have hired new information technology personnel, who are responsible for overseeing the completion of the ERP implementation and assisting with information technology general controls remediation,
· We have provided internal control training to reinforce the importance of our control environment for Finance, Accounting, Information Technology Department personnel and all operations managers across the Company,
· We are instituting a formal code of ethics review annually to communicate, both internally and externally, our commitment to a strong effective control environment, high ethical standards and financial reporting integrity,
· We are implementing policies and procedures to ensure that we maintain appropriate business and accounting records and formally document the application of generally accepted accounting principles for business transactions,
· We are performing a review of existing Accounting, Tax and Information Technology Department personnel with the goals of enhancing our complement of resources with a higher degree of accounting and internal control knowledge, experience, and training,
· We are documenting and formalizing our period end financial reporting processes, including the implementation of a monthly close checklist and formal policies and procedures concerning journal entries, account reconciliations, accrued expenses and estimates. We anticipate this will increase the accuracy and efficiency of our monthly close process,
· We have implemented a series of management reports to augment our analytical processes,
· We are implementing policies and procedures to ensure revenue is properly valued and recognized,
· We have performed and informal risk assessment and will formalize this risk assessment as our remediation efforts progress.
We believe the plan described above, when implemented, will improve the design and operating effectiveness of our internal control over financial reporting. As we continue our remediation efforts over internal control over financial reporting, we will perform additional procedures to determine that our financial statements continue to be fairly stated in all material respects. We do not anticipate that we will be able to remediate all of the material weaknesses during our fiscal year ending February 28, 2014.
Changes in Internal Control Over Financial Reporting
We have evaluated the changes in our internal control over financial reporting that occurred during the fiscal quarter ended May 31, 2013 and concluded that the following matter has materially affected, or are reasonably likely to material affect, our internal control over financial reporting.
We have hired professional finance resources to enhance accounting and aid in financial reporting and internal control capabilities. Specifically, we hired a Director of Financial Reporting, Business Unit Controller, Internal Audit resource and have appointed a new Chief Financial Officer.
We are a party from time to time to legal proceedings relating to our operations. Our ultimate legal and financial liability in respect to all legal proceedings in which we are involved at any given time cannot be estimated with any certainty. However, based upon examination of such matters and consultation with counsel, management currently believes that the ultimate outcome of these contingencies will not have a material adverse effect on our consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and/or cash flows for that period.
You should carefully consider the risks described in our Annual Report on Form 10-K for the fiscal year ended February 28, 2013 (the “Form 10-K”), including those disclosed under the caption “Risk Factors,” which could materially affect our business, financial condition or future results. Additional regulatory and other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks
actually occur, our business, financial condition, and/or results of operations could be negatively affected. The risks described in our Form 10-K have not materially changed.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
There are no other defaults upon senior securities.
ITEM 4 - MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 of this Quarterly Report on Form 10-Q.
The Company received comments from the SEC staff on the Secured Notes Registration Statement on July 10, 2013. Some of the comments relate to the Company’s Form 10-K for the year ended February 28, 2013. As of the date of this quarterly report, the Secured Notes Registration Statement has not yet been declared effective and the comments relating to the Secured Notes Registration Statement and Form 10-K remain unresolved. The Company is currently preparing initial responses to the Staff’s comments.
Exhibit |
| Description |
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3.1 |
| Second Amended and Restated Bylaws of New Enterprise Stone & Lime Co., Inc (incorporated by reference from the Company’s current report on Form 8-K file no. 333-176538) filed on June 7, 2013. |
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|
|
10.1 |
| Employment Agreement, dated March 22, 2013, by and among Albert L. Stone and the Company (incorporated by reference from the Company’s current report on Form 8-K file no. 333-176538) filed on March 22, 2013. |
|
|
|
10.2 |
| Amendment No. 3 to Credit Agreement, dated as of May 29, 2013, by and among New Enterprise Stone & Lime Co., Inc., as Borrower, and Manufacturers and Traders Trust Company, as the Agent, the Issuing Bank, the Swing Lender, and a Lender (incorporated by reference from the Company’s current report on Form 8-K file No. 333-176538) filed on May 31, 2013. |
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|
31.1* |
| Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act, as amended. |
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|
31.2* |
| Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act, as amended. |
|
|
|
32.1** |
| Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. |
|
|
|
32.2** |
| Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
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|
|
95** |
| Mine Safety Disclosures |
|
|
|
101.INS XBRL*** |
| Instance document |
|
|
|
101.SCH XBRL*** |
| Taxonomy Extension Schema |
|
|
|
101.CAL XBRL*** |
| Taxonomy Extension Calculation Linkbase |
|
|
|
101.DEF XBRL*** |
| Taxonomy Extension Definition Linkbase |
|
|
|
101.LAB XBRL*** |
| Taxonomy Extension Label Linkbase |
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|
|
101.PRE XBRL*** |
| Taxonomy Extension Presentation Linkbase |
* Filed herewith.
** Furnished herewith.
*** Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NEW ENTERPRISE STONE & LIME CO., INC. | |
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| |
Date: July 15, 2013 | By: | /s/ Albert L. Stone |
|
| Albert L. Stone |
|
| Senior Vice President and Chief Financial Officer |
Exhibit |
| Description |
|
|
|
3.1 |
| Second Amended and Restated Bylaws of New Enterprise Stone & Lime Co., Inc (incorporated by reference from the Company’s current report on Form 8-K file no. 333-176538) filed on June 7, 2013. |
|
|
|
10.1 |
| Employment Agreement, dated March 22, 2013, by and among Albert L. Stone and the Company (incorporated by reference from the Company’s current report on Form 8-K file no. 333-176538) filed on March 22, 2013. |
|
|
|
10.2 |
| Amendment No. 3 to Credit Agreement, dated as of May 29, 2013, by and among New Enterprise Stone & Lime Co., Inc., as Borrower, and Manufacturers and Traders Trust Company, as the Agent, the Issuing Bank, the Swing Lender, and a Lender (incorporated by reference from the Company’s current report on Form 8-K file No. 333-176538) filed on May 31, 2013. |
|
|
|
31.1* |
| Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act, as amended. |
|
|
|
31.2* |
| Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act, as amended. |
|
|
|
32.1** |
| Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. |
|
|
|
32.2** |
| Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
|
|
|
95** |
| Mine Safety Disclosures |
|
|
|
101.INS XBRL*** |
| Instance document |
|
|
|
101.SCH XBRL*** |
| Taxonomy Extension Schema |
|
|
|
101.CAL XBRL*** |
| Taxonomy Extension Calculation Linkbase |
|
|
|
101.DEF XBRL*** |
| Taxonomy Extension Definition Linkbase |
|
|
|
101.LAB XBRL*** |
| Taxonomy Extension Label Linkbase |
|
|
|
101.PRE XBRL*** |
| Taxonomy Extension Presentation Linkbase |
* Filed herewith.
** Furnished herewith.
*** Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files.