UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2015 |
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 001-34530
U.S. CONCRETE, INC.
(Exact name of registrant as specified in its charter)
Delaware | 76-0586680 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
331 N. Main Street, Euless, Texas 76039
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (817) 835-4105
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $.001 | The Nasdaq Capital Market | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o Noþ
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the last reported sale price of $37.89 of the registrant’s common stock as of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter: $508,425,677. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No ¨
There were 15,194,236 shares of common stock, par value $.001 per share, of the registrant outstanding as of March 2, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Explanatory Note
We filed our Annual Report on Form 10-K for the year ended December 31, 2015 on March 4, 2016 (the “Original Report”). This Amendment No. 1 on Form 10-K/A (this “Amendment”) is being filed to restate our 2015 consolidated financial statements to:
• | eliminate from our consolidated balance sheet as of December 31, 2015, a $24.8 million deferred tax asset (the “Deferred Tax Asset”) related to our outstanding common stock purchase warrants (the “Warrants”, which Warrants are described more fully in Note 15 to our consolidated financial statements included with this Amendment), and increase income tax expense by $24.8 million in our consolidated statement of operations for the year ended December 31, 2015; and |
• | eliminate a $6.1 million tax deduction (the "Tax Deduction") included in income tax benefit in our consolidated statement of operations for the year ended December 31, 2015 and increase accrued liabilities by $5.9 million and decrease prepaid expenses by $0.2 million in our consolidated balance sheet as of December 31, 2015 related to the exercise of Warrants during 2015. |
Prior to the fourth quarter of 2015, we maintained a valuation allowance on our net deferred tax assets because we were still in a three year cumulative loss position. During the fourth quarter of 2015, we concluded that the valuation allowance on a portion of our net deferred tax assets could be reversed (as described more fully in Note 16 to our consolidated financial statements included with this Amendment). We reflected the reversal of the valuation allowance in our consolidated statement of operations for the year ended December 31, 2015 and, therefore, the Deferred Tax Asset had no valuation allowance recorded against it as of December 31, 2015. Due to the prior valuation allowance, there is no net impact from these adjustments to our consolidated balance sheets, consolidated statements of operations, consolidated statements of changes in equity, or consolidated statements of cash flow for any quarterly or annual period prior to December 31, 2015. As a result, we are not restating our consolidated financial statements for any periods prior to 2015, but will restate the prior periods tax footnote disclosures within our 2015 consolidated financial statements.
Management and the Audit Committee of the Company's Board of Directors concluded that the Deferred Tax Asset was based on a tax position that did not meet the required more likely than not threshold in order to be recorded on the consolidated balance sheet in accordance with the Financial Accounting Standards Board's Accounting Standards Codification Topic 740 (Income Taxes) ("ASC 740"), and that the Deferred Tax Asset and related Tax Deduction were accordingly recorded in error. Management and the Audit Committee further concluded that the Deferred Tax Asset and Tax Deduction should be reversed and a liability for resulting potential tax liabilities should be recorded, following generally accepted accounting principles based on ASC 740.
This Amendment includes restatements of the following financial statements:
• | consolidated balance sheet at December 31, 2015; |
• | consolidated statement of operations for the year ended December 31, 2015; |
• | consolidated statement of change in equity for the for the year ended December 31, 2015; and |
• | consolidated statement of cash flows for the year ended December 31, 2015. |
Management has evaluated the effect of the restatement on its prior conclusions on the effectiveness of the internal control over financial reporting and disclosure controls and procedures of the Company as of December 31, 2015. In connection with management’s re-evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, management determined that the Company did not maintain effective controls over the accuracy and presentation of the accounting for income taxes, including the income tax provision and related tax assets and liabilities. The Company has amended its disclosures pertaining to its evaluation of such controls and procedures in this Amendment to report a material weakness in those controls and procedures and will report that its internal control over financial reporting and its disclosure controls and procedures were not effective as of December 31, 2015.
Additionally, during the fourth quarter of 2015, we acquired two entities that have been designated as non-guarantor subsidiaries for purposes of our 8.50% Senior Secured Notes due 2018 (the “2018 Notes”) (as described more fully in Note 9 to our consolidated financial statements included in this Amendment). As such, at December 31, 2015, we are required to provide condensed consolidating financial information in accordance with Rule 3-10 of Regulation S-X. We had no non-guarantor subsidiaries for any quarterly or annual period prior to December 31, 2015. This Amendment includes the previously omitted condensed consolidating footnote disclosure required by Rule 3-10 of Regulation S-X relating to our outstanding 2018 Notes.
We have made no attempt in this Amendment to modify or update the disclosures presented in the Original Report, other than Items 1, 1A, 6, 7, 8 and 9A of the Original Report. In addition, we have filed updated management certifications as exhibits 31.1, 31.2, 32.1 and 32.2.
Other than as noted above, no other changes have been made to the Original Report. In addition, this Amendment does not reflect events occurring after the filing of the Original Report. Accordingly, this Amendment should be read in conjunction with the Original Report and our other filings subsequent to the filing of the Original Report.
U.S. CONCRETE, INC.
FORM 10-K/A
For the Year Ended December 31, 2015
TABLE OF CONTENTS
Page | ||
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Cautionary Statement Concerning Forward-Looking Statements
Certain statements and information in this Amendment No. 1 to our Annual Report on Form 10-K/A may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections.
Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
• | general economic and business conditions, which will, among other things, affect demand for new residential and commercial construction; |
• | our ability to successfully identify, manage, and integrate acquisitions; |
• | the cyclical nature of, and changes in, the real estate and construction markets, including pricing changes by our competitors; |
• | governmental requirements and initiatives, including those related to mortgage lending or mortgage financing, funding for public or infrastructure construction, land usage, and environmental, health, and safety matters; |
• | disruptions, uncertainties or volatility in the credit markets that may limit our, our suppliers' and our customers' access to capital; |
• | our ability to successfully implement our operating strategy; |
• | weather conditions; |
• | our substantial indebtedness and the restrictions imposed on us by the terms of our indebtedness; |
• | our ability to maintain favorable relationships with third parties who supply us with equipment and essential supplies; |
• | our ability to retain key personnel and maintain satisfactory labor relations; and |
• | product liability, property damage, and other claims and insurance coverage issues. |
Known material factors that could cause our actual results to differ from those in the forward-looking statements include those described in “Risk Factors” in Part I, Item 1A of this Amendment.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except as required by federal securities laws.
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PART I
Item 1. Business
In this report, we refer to U.S. Concrete, Inc. and its subsidiaries as "we," "us," the "Company," or "U.S. Concrete," unless we specifically state otherwise or the context indicates otherwise. U.S. Concrete, Inc. is a Delaware corporation which was incorporated in 1997. We began operations in 1999, which is the year we completed our initial public offering.
General
We are a leading producer of ready-mixed concrete in select geographic markets in the United States. We operate our business through two primary segments: ready-mixed concrete and aggregate products. Ready-mixed concrete is an important building material that is used in the vast majority of commercial, residential and public works construction projects. Aggregates are a raw material used in the production of ready-mixed concrete.
We serve substantially all segments of the construction industry in our select geographic markets. Our customers include contractors for commercial and industrial, residential, street and highway and other public works construction. Concrete product revenue by type of construction activity for the year ended December 31, 2015 was approximately 57% commercial and industrial, 28% residential and 15% street, highway and other public works.
We operate principally in Texas, northern California and New York / New Jersey, with those markets representing approximately 40%, 29%, and 26%, respectively, of our consolidated revenue for the year ended December 31, 2015. We believe we are well positioned for strong growth in these attractive regions and segments. According to estimates from the Portland Cement Association ("PCA"), the states in which we operate represent a total of approximately 27% of the 2015 consumption of ready-mixed concrete in the United States, which favorably positions us to capture additional market share in this fragmented industry. Total revenue from continuing operations for the year ended December 31, 2015 was $974.7 million, of which we derived approximately 89.9% from our ready-mixed concrete segment, 3.5% from our aggregate products segment (excluding $26.2 million sold internally) and 6.6% from our other operations. For the year ended December 31, 2015, we had a net loss of $5.4 million, loss from continuing operations of $5.1 million, and Adjusted EBITDA (as defined herein) of $131.9 million. Please see "Basis of Presentation" in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 19, "Business Segments," to our consolidated financial statements in this Amendment for additional information regarding and a reconciliation of Adjusted EBITDA.
As of December 31, 2015, we operate 144 standard ready-mixed concrete plants, 16 volumetric ready-mixed concrete facilities, 14 producing aggregates facilities, three aggregates distribution terminals, two lime slurry facilities, and one recycled aggregates facility. During the year ended December 31, 2015, these plants and facilities produced approximately 7.0 million cubic yards of ready-mixed concrete and 4.7 million tons of aggregates. We lease two other aggregates facilities to third parties and retain a royalty on production from those facilities. As of December 31, 2015, we operated over 1,360 drum mixer trucks and 119 volumetric mixer trucks. For additional information related to our properties, see Item 2. Properties of this report.
Acquisitions
In the second quarter of 2015, we acquired Ferrara Bros. Building Materials Corp. ("Ferrara Bros."), located in New York, New York and Colonial Concrete Co. ("Colonial"), located in Newark, New Jersey. These acquisitions included ten ready-mixed concrete plants at seven locations and a fleet of 129 mixer trucks. These acquisitions expand our business in the New York metropolitan and northern New Jersey markets and allow us to more effectively serve construction projects in these areas.
In the fourth quarter of 2015, we acquired two strategically integrated ready-mixed concrete producers located in the U.S. Virgin Islands, Heavy Materials, LLC ("Heavy") and Spartan Concrete Products, LLC ("Spartan"). These acquisitions included five ready-mixed concrete plants, a fleet of 48 mixer trucks, and two quarries with total aggregates reserves of approximately 40 million tons. The Heavy acquisition also included leases for an industrial waterfront property that is utilized as a marine terminal and sales yard. These acquisitions expanded our ready-mixed concrete and aggregates operations into new markets in the Caribbean islands.
During 2015, we also expanded our ready-mixed concrete operations in our northern California market with the acquisition of Right Away Redy Mix, Inc. ("Right Away"), located in Oakland, California and in our Washington, D.C. market with the
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acquisition of DuBrook Concrete, Inc. ("DuBrook"), located in Chantilly, Virginia. The Right Away acquisition included four ready-mixed concrete facilities, 49 mixer trucks and a fleet of transfer trucks used to transport cement and aggregates. The DuBrook acquisition included three ready-mixed concrete plants and a fleet of 42 mixer trucks.
Also in 2015, we expanded our aggregates operations with the acquisition of Wantage Stone (“Wantage”) located in New Jersey and two sand and gravel operations in our west Texas and southern Oklahoma markets. The Wantage acquisition included an 80 acre quarry along with mining rights to an additional 77 acres of land located in Hamburg, New Jersey.
During 2014, we acquired New York Sand and Stone, LLC ("NYSS") which included the assignment of leases to operate two existing aggregate distribution terminals on the East River in Brooklyn, New York. This acquisition allowed us to more efficiently deliver raw materials to our ready-mixed concrete production facilities as well as to our customers. Our aggregates distribution operations are included in our non-reportable segments. Also during 2014, we completed two acquisitions in New York that increased our presence in the Staten Island ready-mixed concrete market.
Also in 2014, in our west Texas market, we acquired four ready-mixed operations in Abilene, Wichita Falls, and Brady, Texas. The addition of these operations expanded our footprint in the west Texas market. To further broaden our ready-mixed concrete delivery offerings in our Texas market, during the fourth quarter of 2014, we acquired the assets of Custom-Crete ("Custom-Crete"), with operations in Dallas / Fort Worth, Houston, San Antonio, and Austin, Texas from Oldcastle Architectural, Inc., a wholly owned subsidiary of CRH plc, and the assets of Mobile-Crete of South Texas, LLC and Scofield Construction Services, LLC, with operations in San Antonio, Austin, and south Texas. Through these acquisitions, we added 16 volumetric ready-mixed concrete facilities and approximately 109 volumetric mixer trucks. These operations expanded our presence into all of the major metropolitan markets in Texas and provide us with the capability to deliver ready-mixed concrete to our customers via on-site batching and mixing to customer specifications.
In March 2014, we commenced operations at our Red River sand facility on the Texas / Oklahoma border, which we green fielded during the fourth quarter of 2013. This facility provides sand to our Texas and Oklahoma ready-mixed concrete operations and customers.
In 2013, we completed one acquisition in our north Texas market that resulted in the addition of three ready-mixed concrete plants and related assets and inventory. This acquisition allowed us to expand our operations in our north Texas market.
Divestitures
In June 2015, we completed the sale of substantially all of our assets associated with our one remaining precast concrete operation in Pennsylvania, which were classified as held for sale as of December 31, 2014.
Recent Developments
On February 29, 2016, we completed the acquisition of all the assets of Greco Brothers Concrete of L.I., Inc. ("Greco"), in Brooklyn, New York. The purchase price was $15.8 million in cash, plus closing adjustments of $0.9 million. We funded the purchase through a combination of cash on hand and borrowings on our $250.0 million asset-based revolving credit facility (the "Revolving Facility"). Greco operates two ready-mixed concrete plants and a fleet of 37 mixer trucks. The Greco acquisition further expands our ready-mixed concrete operations in our existing New York market.
Competitive strengths
Large, high quality asset base in attractive markets with favorable construction environments. Our assets are primarily focused in the Texas / Oklahoma, northern California, New York / New Jersey / Washington, D.C., and U. S. Virgin Islands markets. Our high quality asset base is comprised of 81 ready-mixed concrete plants, 16 volumetric ready-mixed concrete plants, and eight aggregates facilities in Texas / Oklahoma, 22 ready-mixed concrete plants in northern California, 36 ready-mixed concrete plants, four aggregates facilities, three aggregates distribution terminals, and one recycled aggregates facility in New York / New Jersey / Washington, D.C., five ready-mixed concrete plants and two aggregates facilities in the U.S. Virgin Islands; as well as over 1,360 operated drum mixer trucks and 119 operated volumetric mixer trucks. We believe the scale and quality of our asset base, in addition to our product differentiation, on-time deliveries, competitive all-in delivered cost, servicing and reliability differentiate us and allow us to meet the needs of both large and small jobs for a wide range of clients in multiple end-use markets.
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Growth in our Texas / Oklahoma markets is largely driven by construction demand in the transportation, financial and other professional services, and manufacturing sectors; growth in our northern California market is driven largely by the technology sector; and growth in our New York / New Jersey / Washington, D.C. markets is driven by the financial services and government sectors, respectively. In addition, all of our markets currently exhibit healthy residential trends supported by a number of factors, including population growth, decreases in unemployment, low mortgage and other interest rates, rising home prices and increasing construction activity. We believe that our better-than-average growth is driven by key industry sectors within our markets, which generally benefit from year-round construction.
Favorable exposure to commercial projects with higher margins and barriers to entry. We bid for and routinely win supply contracts for some of the largest, most prestigious commercial projects. Some of the larger commercial projects we have worked on include:
• | The San Francisco Bay Bridge in Oakland, California |
• | Lyndon B. Johnson Expressway in Dallas / Fort Worth, Texas |
• | World Trade Center Complex in Manhattan, New York |
• | Tappan Zee Bridge, New York |
• | San Francisco 49er Stadium in Santa Clara, California |
• | Lucile Packard Children's Hospital at Stanford in Palo Alto, California |
• | Hudson Yards Complex in Manhattan, New York |
• | Pacific Park Brooklyn in Brooklyn, New York |
• | Toyota North American Headquarters in Frisco, Texas |
These types of projects have higher margins and barriers to entry due to rigorous specifications, increased complexity, high customization requirements and significant volume capacity needs.
We provide alternative solutions for designers and contractors by offering value-added concrete products such as color-conditioned, fiber-reinforced, steel-reinforced and high-performance concrete. We believe this enhances our ability to become exposed to, and win supply contracts for, some of the largest commercial projects that have high barriers to entry.
Long-term customer relationships. Our management and sales personnel develop and maintain successful long-term relationships with our key customers. Customer concentration in our key markets allows us to better serve our new and existing customers with expedited delivery and lower transportation costs and scale efficiencies. Key elements of our customer-focused approach include:
• | corporate-level marketing and sales expertise; |
• | technical service expertise to develop innovative new branded products; and |
• | training programs that emphasize successful marketing and sales techniques that focus on the sale of high-margin concrete mix designs. |
We estimate that the average length of our top 15 customer relationships is approximately 20 years. We further estimate that most of our top 35 customers have relationships that extend past five years, with many customer relationships surpassing 20 years of loyalty. Our customer engagement model results in contractors returning year-after-year to us as a supplier they can trust. Despite our concentrated and loyal customer base, in 2015, no single customer or project accounted for more than 10% of our total revenue. Our broad, yet targeted, customer base enables us to develop an efficient, stable business model and tap into the market in a variety of ways. Our 2015 revenue was split between (i) commercial and industrial, (ii) residential and (iii) street and highway construction contractors and other public works. We believe that by providing high quality, reliable services and customized products and solutions, we are able to continuously maintain important long-term relationships.
Focus on environmental sustainability. We are a leader in the sustainable concrete market, and we expect domestic and global sustainable demand to continue to grow at attractive rates. In 2008, we initiated our environmentally friendly concrete ("EF Technology") initiative which promotes green building and construction. Our EF Technology ready-mixed concrete products replace a portion of the traditional cement components with reclaimed fly ash, slag and other materials that results in lower carbon dioxide emissions. We believe this leads to an environmentally superior and sustainable alternative to traditional ready-mixed concrete for our customers’ consumption. We believe EF Technology reduces greenhouse gases and landfill space consumption and produces a highly durable product. Customers can also receive LEED credits for the use of this technology.
We believe our use of technology creates a competitive advantage over smaller concrete producers and larger vertically integrated aggregates and cement companies that do not focus on this as a first solution. We are positioned to take advantage
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of the growing demand for these products which could result in an increase in our revenue and profits and expansion of our operating margins, as these higher-priced value-added products are a lower cost alternative to cement. Today, we are a charter member of the Carbon Leadership Forum and the first ready-mixed concrete company in North America to adopt and receive verified Environmental Product Declarations for our concrete mixes, and we employ extensive sustainable operational practices across our enterprise. We are also a supporter of the National Ready Mixed Concrete Association ("NRMCA") Green-Star program, a plant-specific certification program that utilizes an environmental management system based on a model of continual improvement.
Conservative balance sheet and ample liquidity. We have successfully improved our financial performance by refocusing our financial objectives over the last five years. Our management team has extensive experience in the industry as does our board of directors. Our management team has focused on reducing our cost structure while expanding our existing and acquired businesses in our core operating regions to drive strong performance. As a result, we have grown revenue, improved profit margins and increased liquidity during the last five years. In addition to cash on hand, we benefit from significant liquidity through our revolving credit facility and cash flow from operations. We believe our conservative balance sheet and liquidity will allow us to take advantage of strategic opportunities as well as provide ample cushion against general downturns in economic activity.
Experienced management team. Our senior management team consists of ten executives with an average of 19 years of industry experience and is comprised of individuals with a proven track record in the construction materials industry. Our Chief Executive Officer, William J. Sandbrook, has approximately 24 years of experience in the construction materials industry. Our management team’s deep market knowledge enables us to effectively assess potential new opportunities in order to solidify our leading market presence. We will continue to focus on recruiting and retaining motivated and knowledgeable professional managers to continue to develop our business and maintain our leading market position.
Company strategy
Focus on core operations. We believe the best opportunities for future growth lie within our core ready-mixed concrete and aggregates businesses. We routinely evaluate our existing assets and business units to ensure we continue to maintain a best-in-class operation. During 2015, we divested the last of our precast businesses so as to continue our focus on ready-mixed concrete and aggregates. We will continue to invest in our business, both in physical plants and new technologies, and we will continue to evaluate both organic and strategic acquisition opportunities. We believe our focus on optimizing the performance of our ready-mixed concrete segment will continue to differentiate us from our larger, integrated competitors that focus principally on their aggregates or cement segments and treat ready-mixed concrete operations as a downstream outlet for their aggregates or cement products.
Pursue growth. In addition to our general organic growth initiative, we continuously evaluate both acquisition and partnership opportunities. We are focused on both strengthening our positions in existing markets as well as identifying attractive new markets. All of our acquisitions must meet our strict criteria, including fit with our strategic plan, investment return hurdles, capital requirements and attractive market attributes. During 2015, we completed eight acquisitions that expanded our operations in our existing markets and into the U.S. Virgin Islands market. Most notably, we acquired Ferrara, which significantly expanded our footprint in the New York metropolitan market and allows us to more effectively serve construction projects in Manhattan. In addition, we expanded into the U.S. Virgin Islands market with our acquisition of Heavy. We believe our significant experience, positive reputation and strong management team will allow us to continue our successful track record of identifying opportunities, integrating acquisitions, realizing synergies and enhancing asset value and cash flow.
Manage costs. We are consistently seeking opportunities to reduce costs and to improve margins through our focus on existing operations and new technologies. Additionally, our regional acquisitions allow for synergies such as selling, general, and administrative reductions, economies of scale, variable labor savings, and purchasing power. We believe by aggressively managing our cost structure we can best serve our clients with better pricing and continued best-in-class execution.
Business segments and products
We operate our business through two primary segments: ready-mixed concrete and aggregate products. For financial information about our operating segments, refer to the information set forth in Note 19, "Business Segments," to our consolidated financial statements included in this report. We derive all of our revenue from operations in the United States and its U.S. territories, and all of our long-lived assets are located within the United States and its U.S. territories.
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Ready-mixed concrete
General
Our ready-mixed concrete segment engages principally in the formulation, preparation and delivery of ready-mixed concrete to our customers’ job sites. We provide our ready-mixed concrete from our operations in Texas, northern California, New York, New Jersey, Washington, D.C., Oklahoma, and the U.S. Virgin Islands. Ready-mixed concrete is a highly versatile construction material that results from combining coarse and fine aggregates, such as gravel, crushed stone and sand, with water, various chemical admixtures and cement. We also provide services intended to reduce our customers’ overall construction costs by lowering the installed, or “in-place,” cost of concrete. These services include the formulation of mixtures for specific design uses, on-site and lab-based product quality control, and customized delivery programs to meet our customers’ needs. We generally do not provide paving or other finishing services, which construction contractors or subcontractors typically perform.
Products and services
Our standard ready-mixed concrete products consist of proportioned mixes we produce and deliver in an unhardened plastic state for placement and shaping into designed forms at the job site. Selecting the optimum mix for a job entails determining not only the ingredients that will produce the desired permeability, strength, appearance and other properties of the concrete after it has hardened and cured, but also the ingredients necessary to achieve a workable consistency considering the weather and other conditions at the job site. We believe we can achieve product differentiation for the mixes we offer because of the variety of mixes we can produce, our volume production capacity and our scheduling, delivery and placement reliability. Additionally, we believe EF Technology initiative, which utilizes alternative materials and mix designs that result in lower carbon dioxide, or CO2 emissions, helps differentiate us from our competitors. We also believe we distinguish ourselves with our value-added service approach that emphasizes reducing our customers’ overall construction costs by reducing the in-place cost of concrete and the time required for construction.
Our volumetric concrete operations, which we acquired in 2014, expanded our ready-mixed concrete delivery and service offerings in Texas. Volumetric ready-mixed concrete trucks mix concrete to the customer's specification on the job site, better serving smaller jobs and specialized applications, and allowing flexibility for servicing remote job locations. Because of their versatility, these trucks offer the contractor multiple options for a single job without the inconvenience or added costs typically associated with standard ready-mixed trucks delivering special or short-loads to a job site. Because of their unique on-demand production capabilities, these trucks minimize the amount of wasted concrete, which improves margins and reduces environmental impact.
From a contractor’s perspective, the in-place cost of concrete includes both the amount paid to the ready-mixed concrete manufacturer and the internal costs associated with the labor and equipment the contractor provides. A contractor’s unit cost of concrete is often only a small component of the total in-place cost that takes into account all the labor and equipment costs required to build the forms for the ready-mixed concrete and place and finish the ready-mixed concrete, including the cost of additional labor and time lost as a result of substandard products or delivery delays not covered by warranty or insurance. By carefully designing proper mixes and using advances in mixing technology, we can assist our customers in reducing the amount of reinforcing steel, time and labor they will require in various applications.
We provide a variety of services in connection with our sale of ready-mixed concrete that can help reduce our customers’ in-place cost of concrete. These services include:
• | production of formulations and alternative product recommendations that reduce labor and materials costs; |
• | quality control, through automated production and laboratory testing, that ensures consistent results and minimizes the need to correct completed work; and |
• | automated scheduling and tracking systems that ensure timely delivery and reduce the downtime incurred by the customer’s placing and finishing crews. |
We produce ready-mixed concrete by combining the desired type of cement, other cementitious materials (described below), sand, gravel, and crushed stone with water and, typically, one or more admixtures. These admixtures, such as chemicals, minerals and fibers, determine the usefulness of the product for particular applications.
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We use a variety of chemical admixtures to achieve one or more of the following five basic purposes:
• | relieve internal pressure and increase resistance to cracking; |
• | retard the hardening process to make concrete more workable in hot weather; |
• | strengthen concrete by reducing its water content; |
• | accelerate the hardening process and reduce the time required for curing; and |
• | facilitate the placement of concrete having low water content. |
We frequently use various mineral admixtures as supplements to cement, which we refer to as supplemental cementitious materials, to alter the permeability, strength and other properties of concrete. These materials include fly ash, ground granulated blast-furnace slag, silica fume and other natural pozzolans. These materials also reduce the amount of cement content used, which results in a reduction in CO2 emissions.
We also use fibers, such as steel, glass, synthetic and carbon filaments as additives in various formulations of concrete. Fibers help control shrinkage cracking, thus reducing permeability and improving abrasion resistance. In many applications, fibers can replace welded steel wire and reinforcing bars. Relative to the other components of ready-mixed concrete, these additives generate comparatively higher margins.
Marketing and sales
Our marketing efforts primarily target concrete sub-contractors, general contractors, governmental agencies, property owners and developers, architects, engineers, and home builders whose focus extends beyond the price of ready-mixed concrete to product quality, on-time delivery and reduction of in-place costs.
General contractors typically select their suppliers of ready-mixed concrete. In large, complex projects, an engineering firm or division within a state transportation or public works department may influence the purchasing decision, particularly if the concrete has complicated design specifications. In connection with large, complex projects and in government-funded projects generally, the general contractor or project engineer usually awards supply orders on the basis of either direct negotiation or a competitive bidding process. We believe the purchasing decision for many jobs ultimately is relationship and reputation-based.
Our marketing and sales strategy emphasizes the sale of value-added products and solutions to customers more focused on reducing their in-place building material costs than on the price per cubic yard of ready-mixed concrete. Key elements of our customer-focused approach include:
• | corporate-level marketing and sales expertise; |
• | technical service expertise to develop innovative, new branded products; and |
• | training programs that emphasize successful marketing and sales techniques that focus on the sale of high-margin concrete mix designs. |
Operations
Our standard ready-mixed concrete plants consist of fixed and portable facilities that produce ready-mixed concrete in wet or dry batches. Our fixed-plant facilities produce ready-mixed concrete that we transport to job sites by drum mixer trucks. Our portable plant operations deploy our portable plant facilities to produce ready-mixed concrete at the job site that we direct into place using a series of conveyor belts or drum mixer trucks. We use our portable plants to service high-volume projects or projects in remote locations. Our volumetric ready-mixed concrete plants consist of fixed and portable facilities that are used to load raw materials into our volumetric mixer trucks throughout the day. Batching occurs at the job site based on customer specifications. Several factors govern the choice of plant type, including:
• | production consistency requirements; |
• | daily production capacity requirements; |
• | job site proximity to fixed plants; and |
• | capital and financing. |
We construct both wet batch plants and dry batch plants. A wet batch plant generally has a higher initial cost and daily operating expenses, but (i) yields greater consistency with less time required for quality control in the concrete produced, and
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(ii) generally has greater daily production capacity than a dry batch plant. We believe that construction of a wet batch plant having an hourly capacity of 250 cubic yards currently would cost approximately $1.6 million, while a dry batch plant having an hourly capacity of 150 cubic yards currently would cost approximately $0.7 million. As of December 31, 2015, our batch plants included 23 wet batch plants and 121 dry batch plants.
We maintain two types of load facilities for our volumetric ready-mixed concrete — main load sites and reload facilities. Both types of facilities typically include blending silos, a load-out pit, and a storm water system. A main load facility typically also includes a maintenance shop. We estimate that constructing a main load site would cost approximately $0.7 million, while constructing a reload facility would cost approximately $0.1 million.
Our batch operator at a dry batch plant simultaneously loads the dry components of stone, sand and cement with water and admixtures in a drum mixer truck that begins the mixing process during loading and continues that process en route to our customers' job sites. In a wet batch plant, the batch operator blends the dry components and water in a plant mixer from which an operator loads the mixed concrete into a drum mixer truck, which leaves for the job site promptly after loading. At a volumetric facility, our loader operator or mixer operator coordinates loading of the dry components of sand, course aggregates, and cement into the bins on the truck. Water and liquid admixtures are separately loaded into the tanks on the trucks before leaving the facility for the job site.
Any future decisions we make regarding the construction of additional plants will be impacted by market factors, including:
• | the expected production demand for the plant; |
• | capital and financing; |
• | the expected types of projects the plant will service; and |
• | the desired location of the plant. |
Drum mixer trucks continuously rotate their loads en route to job sites in order to produce concrete at the desired consistency. Our drum mixer trucks typically have load capacities of 10 cubic yards, or approximately 20 tons, and a typical operating life of between 15 and 20 years, depending on total truck hours and miles. A new truck of this size currently costs between $160,000 and $225,000, depending on the geographic location and design specifications. Depending on the type of batch plant from which the drum mixer trucks generally are loaded, some components of the drum mixer trucks usually require refurbishment after three to five years. As of December 31, 2015, we operated a fleet of over 1,360 owned and leased drum mixer trucks, which had an average age of approximately 10 years.
Volumetric mixer trucks include individual bins and tanks, which are used to mix the raw materials at the customer's job site based on the customer's specifications. The volumetric mixing method provides only the concrete needed for the job, eliminating wasted materials and short load charges. Our volumetric mixer trucks typically have load capacities of eight cubic yards, or approximately 16 tons, and a typical operating life of between seven to nine years, depending on total truck hours and miles. A new truck of this size currently costs between $220,000 and $250,000, depending on the design specifications. Typically the truck's mixer unit will be rebuilt after the initial truck life, extending the operating life of the truck an additional five years. As of December 31, 2015, we operated a fleet of 119 owned volumetric mixer trucks, which had an average age of approximately eight years.
In our ready-mixed concrete operations, we emphasize quality control, pre-job planning, customer service and coordination of supplies and delivery. We obtain orders for ready-mixed concrete in advance of actual delivery. A typical order contains specifications the contractor requires the concrete to meet. After receiving the specifications for a particular job, we use computer modeling, industry information and information from previous similar jobs to formulate a variety of mixtures of cement, aggregates, water and admixtures which meet or exceed the contractor’s specifications. We perform testing to determine which mix design is most appropriate to meet the required specifications. The test results enable us to select the mixture that has the lowest cost and meets or exceeds the job specifications. The testing center creates and maintains a project file that details the mixture we will use when we produce the concrete for the job. For quality control purposes, the testing center also is responsible for maintaining batch samples of concrete we have delivered to a job site.
We use computer modeling to prepare bids for particular jobs based on the size of the job, location, desired margin, cost of raw materials and the design mixture identified in our testing process. If the job is large enough and has a projected duration beyond the supply arrangement in place at that time, we obtain quotes from our suppliers as to the cost of raw materials we use in preparing the bid. Once we obtain a quotation from our suppliers, the price of the raw materials for the specified job is informally established. Several months may elapse from the time a contractor has accepted our bid until actual delivery of the ready-mixed concrete begins.
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During this time, we maintain regular communication with the contractor concerning the status of the job and any changes in the job’s specifications in order to coordinate the multisourced purchases of cement and other materials we will need to fill the job order and meet the contractor’s delivery requirements. We confirm that our customers are ready to take delivery of manufactured products throughout the placement process. On any given day, one of our plants may have production orders for dozens of customers at various locations throughout its area of operation. To fill an order:
• | the customer service office coordinates the timing and delivery of the concrete to the job site; |
• | a load operator supervises and coordinates the receipt of the necessary raw materials and operates the hopper that dispenses those materials into the appropriate storage bins; |
• | a batch operator, using a computerized batch panel, prepares the specified mixture from the order and oversees the loading of the drum mixer truck with either dry ingredients and water in a dry batch plant or the premixed concrete in a wet batch plant; and |
• | the driver of the drum mixer truck delivers the load to the job site, discharges the load and, after washing the truck, departs at the direction of the dispatch office. |
Our central dispatch system, where available, tracks the status of each drum mixer truck as to whether a particular truck is:
• | loading concrete; |
• | en route to a particular job site; |
• | on the job site; |
• | discharging concrete; |
• | being rinsed down; or |
• | en route to a particular plant. |
The system is updated continuously on the trucks’ status via signals received from sensors. In this manner, the dispatcher can determine the optimal routing and timing of subsequent deliveries by each drum mixer truck and monitor the performance of each driver.
Our plant managers oversee the operations of each of our plants. Our operational employees also include:
• | maintenance personnel who perform routine maintenance work throughout our plants; |
• | mechanics who perform the maintenance and repair work on our rolling stock; |
• | testing center staff who prepare mixtures for particular job specifications and maintain quality control; |
• | various clerical personnel who perform administrative tasks; and |
• | sales personnel who are responsible for identifying potential customers, pricing mixes for projects, and maintaining existing customer relationships. |
We generally operate each of our plants on an extended single shift, with some overtime operation during the year. On occasion, however, we may have projects that require deliveries around the clock.
Aggregate products
Our aggregate products segment produces crushed stone, sand and gravel from 14 aggregates facilities located in New Jersey, Texas, Oklahoma, and the U.S. Virgin Islands. We sell these aggregates for use in commercial, industrial and public works projects in the markets they serve, as well as consume them internally in the production of ready-mixed concrete in those markets. We produced approximately 4.7 million tons of aggregates during the year ended December 31, 2015, with Texas representing 51% and New Jersey representing 47% of the total production. We believe our aggregates reserves provide us with additional raw material sourcing flexibility and supply availability. In addition, we own sand pit operations in Michigan and one quarry in west Texas which we lease to third parties and receive a royalty based on the volumes produced and sold during the terms of the leases.
Other
Other products not associated with a reportable segment include our building materials stores, hauling operations, aggregates distribution terminals, lime slurry, ARIDUS® Rapid Drying Concrete technology, brokered product sales, a recycled aggregates operation, and concrete blocks.
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Industry overview
Concrete has many attributes that make it a highly versatile construction material. In recent years, industry participants have developed various uses for concrete products, including:
• | high-strength engineered concrete to compete with steel-frame construction; |
• | concrete housing; |
• | flowable fill for backfill applications; |
• | continuous-slab rail-support systems for rapid transit and heavy-traffic rail lines; and |
• | concrete bridges, tunnels and other structures for rapid transit systems. |
Other examples of successful innovations that have opened new markets for concrete include:
• | sustainable construction; |
• | concrete paving over asphalt, or “white topping”; |
• | paved concrete shoulders to replace less permanent and increasingly costly asphalt shoulders; |
• | pervious concrete parking lots for water drainage management, as well as providing a long-lasting and aesthetically pleasing urban environment; |
• | colored pavements to mark entrance and exit ramps and lanes of expressways; and |
• | colored, stamped concrete for decorative applications. |
The U.S. ready-mixed concrete market is a large, highly competitive and fragmented market, with no one producer holding a dominant market position. The NRMCA currently estimates that the ready-mixed concrete industry generates total annual revenue of approximately $30 billion.
Based on information from the NRMCA, we estimate that, in addition to vertically integrated manufacturers of cement and aggregates, ready-mixed concrete producers currently operate approximately 5,500 plants in the United States. Larger markets generally have several producers competing for business on the basis of product quality, service, on-time delivery and price.
According to information available from the NRMCA, total volumes (measured in cubic yards) from the production and delivery of ready-mixed concrete in the United States over the past three years were as follows (in millions of cubic yards):
2015 | 2014 | 2013 | |||||||
Total ready-mixed concrete volumes | 336 | 326 | 301 | ||||||
According to recently published Dodge Construction data, the four major segments of the construction industry accounted for the following approximate percentages of the total volume of ready-mixed concrete produced in the United States in the past three years:
2015 | 2014 | 2013 | |||||||
Commercial and industrial construction | 18 | % | 16 | % | 16 | % | |||
Residential construction | 22 | % | 19 | % | 19 | % | |||
Street and highway construction and paving | 20 | % | 23 | % | 23 | % | |||
Other public works and infrastructure construction | 40 | % | 42 | % | 42 | % | |||
According to FMI Corp. ("FMI"), spending on total residential, non-residential, and non-building construction is projected to grow at a steady rate through 2019. FMI projects the following growth rates in 2016: residential construction of 10-12%, commercial and office construction of 7%, and street and highway construction of 2%. According to the PCA, annual ready-mixed concrete usage is expected to strengthen in our key markets in Texas, northern California, and New York / New Jersey, with 2016 to 2019 estimated compound annual growth rates of 4.7%, 7.0%, and 4.5%, respectively. Moreover, the National Association of Home Builders and Fannie Mae predict U.S. residential construction will continue to recover with a median estimate of approximately 834,000 and 411,000 single-family and multi-family housing starts in 2016, respectively. Other industry experts agree predicting total housing starts will exceed 1.2 million, with a shift to single-family.
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Barriers to the start-up of new ready-mixed concrete manufacturing operations have been increasing. During the past decade, public concerns about dust, process water runoff, noise and heavy mixer and other truck traffic associated with the operation of these types of plants and their general appearance have made obtaining the permits and licenses required for new plants more difficult. Delays in the regulatory process, coupled with the capital investment that start-up operations entail, have raised the barriers to entry for those operations.
Cement and other raw materials
We obtain most of the materials necessary to manufacture ready-mixed concrete on a daily basis. These materials include cement, other cementitious materials (such as fly ash and blast furnace slag) and aggregates (stone, gravel and sand), in addition to certain chemical admixtures. With the exception of chemical admixtures, each plant typically maintains an inventory level of these materials sufficient to satisfy its operating needs for a few days. Our inventory levels do not decline significantly or comparatively with declines in revenue during seasonally low periods. We generally maintain inventory at specified levels to maximize purchasing efficiencies and to be able to respond quickly to customer demand.
Typically, cement, other cementitious materials and aggregates represent the highest-cost materials used in manufacturing a cubic yard of ready-mixed concrete. We purchase cement from a few suppliers in each of our major geographic markets. Chemical admixtures are generally purchased from suppliers under national purchasing agreements.
Overall, prices for cement and aggregates increased in 2015, compared to 2014, in all of our major geographic markets. Generally, we negotiate with suppliers on a company-wide basis and at the local market level to obtain the most competitive pricing available for cement and aggregates. We believe the demand for cement is increasing and will warrant scrutiny as construction activity increases. Today, in most of our markets, we believe there is an adequate supply of cement and aggregates.
We recognize the value in advocating green building and construction as part of our strategy. We initiated EF Technology, our commitment to environmentally friendly concrete technologies that significantly reduce potential CO2 emissions. Our EF Technology ready-mixed concrete products replace a portion of cement with reclaimed fly ash, blast furnace slag and other materials. We believe this results in an environmentally superior and sustainable alternative to traditional ready-mixed concrete. EF Technology reduces greenhouse gases and landfill space consumption and produces a highly durable product. Customers can also obtain LEED credits through the use of this technology. We believe our use of this technology creates a competitive advantage over smaller concrete producers and larger vertically integrated aggregate and cement companies that may not focus on this as a first solution. We are positioned to take advantage of the growing demand for these products which could expand our operating margins as they are a lower cost alternative to cement. We are also a supporter of the NRMCA Green-Star program, a plant-specific certification that utilizes an environmental management system based on a model of continual improvement.
Customers
Of our concrete product revenue for the year ended December 31, 2015, commercial and industrial construction represented approximately 57%, residential construction represented approximately 28% and street, highway construction and other public works represented approximately 15%. For the year ended December 31, 2015, no single customer or project accounted for more than 10% of our total revenue.
We rely heavily on repeat customers. Our management and sales personnel are responsible for developing and maintaining successful long-term relationships with our key customers.
Competition
The ready-mixed concrete industry is highly competitive. Our leadership position in a market depends largely on the location and operating costs of our plants and prevailing prices in that market. Price is the primary competitive factor among suppliers for small or less complex jobs, such as residential construction. However, the ability to meet demanding specifications for strength or sustainability, timeliness of delivery and consistency of quality and service, in addition to price, are the principal competitive factors among suppliers for large or complex jobs. Our competitors range from small, owner-operated private companies to subsidiaries of operating units of large, vertically integrated manufacturers of cement and aggregates. Our vertically integrated competitors generally have greater financial and marketing resources than we have, providing them with a competitive advantage. Competitors having lower operating costs than we do or having the financial resources to enable them to accept lower margins than we do will have a competitive advantage over us for jobs that are particularly price-sensitive. Competitors having greater financial resources or less financial leverage than we do may be able to invest more in new mixer
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trucks, ready-mixed concrete plants and other production equipment or pay for acquisitions which could provide them a competitive advantage over us. See “Risk factors - We may lose business to competitors who underbid us, and we may be otherwise unable to compete favorably in our highly competitive industry.”
We continue to focus on developing new competitive advantages that will differentiate us from our competitors, such as our high-performing, low-CO2 concrete, ARIDUS® Rapid Drying Concrete technology and EF Technology ready-mixed concrete products. For example, Central Concrete Supply Co., Inc. (“Central Concrete”), one of our subsidiaries, differentiated itself from its competitors to supply its high-performing, low-CO2 concrete for the SF Public Utilities Commission (“SFPUC”) headquarters. During the redesign phase, SFPUC invited Central Concrete to suggest solutions for SFPUC’s goal to use a set of concrete mixes that delivered up to 70% cement replacement materials, with no compromises on cost, finish or cure time for the mat foundation, slabs, columns and cores. SFPUC selected Central Concrete for the job in an open bidding process because its six different mixes met SFPUC’s demanding specifications by significantly cutting the cement content while delivering a net savings for SFPUC of 7.4 million pounds in CO2 emissions from embodied carbon, nearly 50% better than traditional concrete mixes.
Employees
As of December 31, 2015, we had 603 salaried employees, including executive officers and management, sales, technical, administrative and clerical personnel, and 2,097 hourly personnel. The number of employees fluctuates depending on the number and size of projects ongoing at any particular time, which may be impacted by variations in weather conditions throughout the year.
As of December 31, 2015, 976 of our employees were represented by labor unions having collective bargaining agreements with us. Generally, these agreements have multi-year terms and expire on a staggered basis between 2016 and 2019. Under these agreements, we pay specified wages to covered employees and in most cases make payments to multi-employer pension plans and employee benefit trusts rather than administering the funds on behalf of these employees.
We have not experienced any strikes or significant work stoppages in the past five years. We believe our relationships with our employees and union representatives are very good.
Training and safety
Our future success will depend, in part, on the extent to which we can attract, retain and motivate qualified employees. We believe that our ability to do so will depend, in part, on providing a work environment that allows employees the opportunity to develop and maximize their capabilities. We require all field employees to attend periodic safety training meetings and all drivers to participate in training seminars. We employ a national safety director whose responsibilities include managing and executing a unified, company-wide safety program. Employee development and safety are criteria used in evaluating performance in our annual incentive plan for salaried employees.
Governmental regulation and environmental matters
A wide range of federal, state and local laws, ordinances and regulations apply to our operations, including the following matters:
• | water usage; |
• | land usage; |
• | street and highway usage; |
• | noise levels; and |
• | health, safety and environmental matters. |
In many instances, we are required to have various certificates, permits or licenses to conduct our business. Our failure to maintain these required authorizations or to comply with applicable laws or other governmental requirements could result in substantial fines or possible revocation of our authority to conduct some of our operations. Delays in obtaining approvals for the transfer or grant of authorizations, or failures to obtain new authorizations, could impede acquisition efforts.
Environmental laws that impact our operations include those relating to air quality, solid waste management and water quality. These laws are complex and subject to frequent change. They impose strict liability in some cases without regard to negligence or fault. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative
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or civil penalties and criminal prosecution. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances. In addition, businesses may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, as well as damage to natural resources. These laws also may expose us to liability for the conduct of, or conditions caused by, others or for acts that complied with all applicable laws when performed.
We have conducted Phase I environmental site assessments, which are non-intrusive investigations conducted to evaluate the potential for significant on-site environmental impacts, on substantially all the real properties we own or lease and have engaged independent environmental consulting firms to complete those assessments. We have not identified any environmental concerns associated with those properties that we believe are likely to have a material adverse effect on our business, financial position, results of operations or cash flows, but we can provide no assurance material liabilities will not occur. In addition, we can provide no assurance that our compliance with amended, new or more stringent laws, stricter interpretations of existing laws or the future discovery of environmental conditions will not require additional, material expenditures.
We believe we have all material permits and licenses we need to conduct our operations and are in substantial compliance with applicable regulatory requirements relating to our operations. Our capital expenditures relating to environmental matters were not material in 2015.
Product warranties
Our operations involve providing ready-mixed concrete that must meet building codes or other regulatory requirements and contractual specifications for durability, stress-level capacity, weight-bearing capacity and other characteristics. If we fail or are unable to provide products meeting these requirements and specifications, material claims may arise against us and our reputation could be damaged. In the past, we have had significant claims of this kind asserted against us that we have resolved. There currently are, and we expect that in the future there may be, additional claims of this kind asserted against us. If a significant product-related claim is resolved against us in the future, that resolution may have a material adverse effect on our business, financial condition, results of operations and cash flows.
Insurance
Our employees perform a significant portion of their work moving and storing large quantities of heavy raw materials, driving large mixer and other trucks in heavy traffic conditions and delivering concrete at construction sites or in other areas that may be hazardous. These operating hazards can cause personal injury and loss of life, damage to or destruction of properties and equipment and environmental damage. We maintain insurance coverage in amounts and against the risks we believe are in accordance with industry practice, but this insurance may not be adequate to cover all losses or liabilities we may incur in our operations, and we may be unable to maintain insurance of the types or at levels we deem necessary or adequate or at rates we consider reasonable.
Legal proceedings
From time to time, and currently, we are subject to various claims and litigation brought by employees, customers and other third parties for, among other matters, personal injuries, property damage, product defects and delay damages that have, or allegedly have, resulted from the conduct of our operations. As a result of these types of claims and litigation, we must periodically evaluate the probability of damages being assessed against us and the range of possible outcomes. In each reporting period, if we determine that the likelihood of damages being assessed against us is probable, and, if we believe we can estimate a range of possible outcomes, then we will record a liability. The amount of the liability will be based upon a specific estimate, if we believe a specific estimate to be likely, or it will reflect the low end of our range. Currently, there are no material legal proceedings pending against us.
In the future, we may receive funding deficiency demands related to multi-employer plans to which we contribute. We are unable to estimate the amount of any potential future funding deficiency demands because the actions of each of the other contributing employers in the plans has an effect on each of the other contributing employers, and the development of a rehabilitation plan by the trustees and subsequent submittal to and approval by the Internal Revenue Service is not predictable. Further, the allocation of fund assets and return assumptions by trustees are variable, as are actual investment returns relative to the plan assumptions.
As of March 3, 2016, there are no material product defect claims pending against us. Accordingly, our existing accruals for claims against us do not reflect any material amounts relating to product defect claims. While our management is not aware
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of any facts that would reasonably be expected to lead to material product defect claims against us that would have a material adverse effect on our business, financial condition or results of operations, it is possible that claims could be asserted against us in the future. We do not maintain insurance that would cover all damages resulting from product defect claims. In particular, we generally do not maintain insurance coverage for the cost of removing and rebuilding structures. In addition, our indemnification arrangements with contractors or others, when obtained, generally provide only limited protection against product defect claims. Due to inherent uncertainties associated with estimating unasserted claims in our business, we cannot estimate the amount of any future loss that may be attributable to unasserted product defect claims related to ready-mixed concrete we have delivered prior to December 31, 2015.
We believe that the resolution of all litigation currently pending or threatened against us or any of our subsidiaries will not materially exceed our existing accruals for those matters. However, because of the inherent uncertainty of litigation, there is a risk that we may have to increase our accruals for one or more claims or proceedings to which we or any of our subsidiaries is a party as more information becomes available or proceedings progress, and any such increase in accruals could have a material adverse effect on our consolidated financial condition or results of operations. We expect in the future that we and our operating subsidiaries will, from time to time, be a party to litigation or administrative proceedings that arise in the normal course of our business.
We are subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions and wastewater discharge. Our management believes we are in substantial compliance with applicable environmental laws and regulations. From time to time, we receive claims from federal and state environmental regulatory agencies and entities asserting that we may be in violation of environmental laws and regulations. Based on experience and the information currently available, our management does not believe that these claims will materially exceed our related accruals. Despite compliance and experience, it is possible that we could be held liable for future charges, which might be material, but are not currently known to us or cannot be estimated by us. In addition, changes in federal or state laws, regulations or requirements, or discovery of currently unknown conditions, could require additional expenditures.
As permitted under Delaware law, we have agreements that provide indemnification of officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The maximum potential amount of future payments that we could be required to make under these indemnification agreements is not limited; however, we have a director and officer insurance policy that potentially limits our exposure and enables us to recover a portion of future amounts that may be paid. As a result of the insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of December 31, 2015.
We and our subsidiaries are parties to agreements that require us to provide indemnification in certain instances when we acquire businesses and real estate and in the ordinary course of business with our customers, suppliers, lessors and service providers.
Available Information
Our web site address is www.us-concrete.com. We make available on this web site under the “Investor Relations” section, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file those materials with, or furnish them to, the SEC. Alternatively, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s web site address is www.sec.gov.
Item 1A. Risk Factors
The following risk factors represent our current view of the known material risks facing our businesses and are important to understanding our business. The important factors, among others, sometimes have affected, or in the future could affect, our actual results and could cause our actual consolidated results during 2016, and beyond, to differ materially from those expressed in any forward-looking statements made by us or on our behalf. In addition, these risks and uncertainties could adversely impact our business, financial condition, results of operations, cash flows and common stock price. Further, the risk factors described below are not the only risks we face. Our business, financial condition and results of operations may also be affected by additional risks and uncertainties that are not currently known to us, that we currently consider immaterial or that are not specific to us. This
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discussion includes a number of forward-looking statements. Please see “Cautionary Statement Concerning Forward-Looking Statements” preceding Item 1 of this report.
Business Risks
Our business depends on activity within the construction industry and the economic strength of our principal markets.
We serve substantially all segments of the construction industry, and our results of operations are directly affected by the level of activity in the construction industry in the geographic markets we serve. Demand for our products, particularly in the commercial and industrial and residential construction markets, could decline if companies and consumers cannot obtain credit for construction projects or if the slow pace of economic activity results in delays or cancellations of projects. During 2015, commercial and industrial and residential construction accounted for 57% and 28% of our consolidated revenue, respectively. In addition, federal and state budget issues may hurt the funding available for infrastructure spending, particularly street, highway and other public works projects, which accounted for 15% of our revenue in 2015.
We operate principally in Texas, northern California and New York / New Jersey, with those markets representing approximately 40%, 29%, and 26%, respectively, of our consolidated revenue for 2015. Our earnings depend on the economic strength of these markets because of the high cost to transport our products relative to their price. Recently, the decline in the price of crude oil and natural gas has had an adverse impact on activity in the oil and natural gas industry in Texas, which has resulted in lower demand for construction services in Texas and consequently lower demand for ready-mixed concrete in Texas. For the year ended December 31, 2015, we estimate that there was no direct impact and less than a 3.0% indirect impact on revenue in our Texas markets by the decline in West Texas Intermediate Crude Oil ("WTI") prices. If economic and construction activity diminishes in our principal markets or if lower demand persists in Texas, our results of operations and liquidity could be materially adversely affected.
Tightening of mortgage lending or mortgage financing requirements could adversely affect the residential construction market and reduce the demand for new home construction.
Commencing in 2006, the mortgage lending and mortgage finance industries experienced significant instability due to, among other things, defaults on subprime loans and adjustable rate mortgages. In light of these events, lenders, investors, regulators and other third parties have questioned the adequacy of lending standards and other credit requirements for a variety of loan programs. This has led to reduced investor demand for mortgage loans and mortgage-backed securities, reduced market values for those securities, tightened credit requirements, reduced liquidity, increased credit risk premiums and increased regulatory actions. Deterioration in credit quality among subprime and other loans has caused many lenders to eliminate subprime mortgages and other loan products that do not conform to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, Federal Housing Administration or Veterans Administration standards. While mortgage lending conditions have improved since 2010, fewer loan products and tighter loan qualifications continue to make it difficult for some categories of borrowers to finance the purchase of new homes. In general, these developments have been a significant factor in the downturn of, and have delayed the recovery of, the housing market.
Approximately 28% of our revenue for the year ended December 31, 2015 was from residential construction contractors. While mortgage lending conditions have improved and lending volumes have increased since 2010, tightening of mortgage lending or mortgage financing requirements could adversely affect the ability to obtain credit for some borrowers, or reduce the demand for new home construction, which could have a material adverse effect on our business and results of operations. Another downturn in new home construction could also adversely affect our customers focused in residential construction, possibly resulting in slower payments, higher default rates in our accounts receivable, and an overall increase in working capital.
Our net revenue attributable to street, highway and other public works projects could be negatively impacted by a decrease or delay in governmental spending.
During the year ended December 31, 2015, approximately 15% of our ready-mixed concrete revenue was from street, highway and other public works projects. Construction activity on streets, highways and other public works projects is directly related to the amount of government funding available for such projects, which is affected by budget constraints currently being experienced by federal, state and local governments. In addition, if the U.S. government budget process results in a prolonged shutdown or reductions in government spending, we may experience delayed orders, delayed payments, and declines in revenues, profitability,
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and cash flows. Reduced levels of governmental funding for public works projects or delays in that funding could adversely affect our business, financial condition, results of operations and cash flows.
There are risks related to our internal growth and operating strategy.
Our ability to generate internal growth will be affected by, among other factors, our ability to:
•attract new customers;
•differentiate ourselves in a competitive market by emphasizing new product development and value added services;
•hire and retain employees; and
•reduce operating and overhead expenses.
Our inability to achieve internal growth could materially and adversely affect our business, financial condition, results of operations, liquidity, and cash flows.
One key component of our operating strategy is to operate our businesses on a decentralized basis, with local or regional management retaining responsibility for day-to-day operations, profitability and the internal growth of the individual business. If we do not implement and maintain proper overall business controls, this decentralized operating strategy could result in inconsistent operating and financial practices and our overall profitability could be adversely affected.
Our failure to successfully identify, manage and integrate acquisitions could reduce our earnings and slow our growth.
In the last two years, we completed 17 acquisitions. On an ongoing basis, as part of our strategy to pursue growth opportunities, we continue to evaluate strategic acquisition opportunities that have the potential to support and strengthen our business. There is intense competition for acquisition opportunities in our industry. Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, the willingness of acquisition candidates we identify to sell; our ability to obtain financing or capital, if needed, on satisfactory terms; and, in some cases, regulatory approvals. The investigation of acquisition candidates and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys and others. If we fail to complete any acquisition for any reason, including events beyond our control, the costs incurred up to that point for the proposed acquisition likely would not be recoverable.
Potential acquisition targets may be in geographic regions in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically dispersed operations, personnel and facilities. In addition, if we enter into new geographic markets, we may be subject to additional and unfamiliar legal and regulatory requirements. Compliance with regulatory requirements may impose substantial additional obligations on us and our management, cause us to expend additional time and resources in compliance activities and increase our exposure to penalties or fines for non-compliance with such additional legal requirements. Our recently completed acquisitions and any future acquisitions could cause us to become involved in labor, commercial or regulatory disputes or litigation related to any new enterprises and could require us to invest further in operational, financial and management information systems and to attract, retain, motivate and effectively manage local or regional management and additional employees. Upon completion of an acquisition, key members of the management of the acquired company may resign, which would require us to attract and retain new management and could make it difficult to maintain customer relationships. Our inability to effectively manage the integration of our completed and future acquisitions could prevent us from realizing expected rates of return on an acquired business and could have a material and adverse effect on our business, financial condition, results of operations, liquidity, and cash flows.
Our business is seasonal and subject to adverse weather.
Since our business is primarily conducted outdoors, erratic weather patterns, seasonal changes and other weather-related conditions affect our business. Adverse weather conditions, including hurricanes and tropical storms, cold weather, snow, and heavy or sustained rainfall, reduce construction activity, restrict the demand for our products, and impede our ability to efficiently deliver concrete. Adverse weather conditions could also increase our costs and reduce our production output as a result of power loss, needed plant and equipment repairs, delays in obtaining permits, time required to remove water from flooded operations, and similar events. In addition, severe drought conditions can restrict available water supplies and restrict production. Consequently,
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these events could adversely affect our business, financial condition, results of operations, liquidity, and cash flows.
Our operating results may vary significantly from one reporting period to another and may be adversely affected by the cyclical nature of the markets we serve.
The relative demand for our products is a function of the highly cyclical construction industry. As a result, our revenue may be adversely affected by declines in the construction industry generally and in our regional markets. Our results also may be materially affected by:
• | the level of commercial and residential construction in our regional markets, including reductions in the demand for new residential housing construction below current or historical levels; |
• | the availability of funds for public or infrastructure construction from local, state and federal sources; |
• | unexpected events that delay or adversely affect our ability to deliver concrete according to our customers’ requirements; |
• | changes in interest rates and lending standards; |
• | changes in the mix of our customers and business, which result in periodic variations in the margins of jobs performed during any particular quarter; |
• | the timing and cost of acquisitions and difficulties or costs encountered when integrating acquisitions; |
• | the budgetary spending patterns of customers; |
• | increases in construction and design costs; |
• | power outages and other unexpected delays; |
• | our ability to control costs and maintain quality; |
• | employment levels; and |
• | regional or general economic conditions. |
As a result, our operating results in any particular quarter may not be indicative of the results that you can expect for any other quarter or for the entire year. Furthermore, negative trends in the ready-mixed concrete industry or in our geographic markets could have material adverse effects on our business, financial condition, results of operations, liquidity, and cash flows.
We may lose business to competitors who underbid us, and we may be otherwise unable to compete favorably in our highly competitive industry.
Our competitive position in a given market depends largely on the location and operating costs of our plants and prevailing prices in that market. Price is the primary competitive factor among suppliers for small or less complex jobs, principally in residential construction. However, timeliness of delivery and consistency of quality and service, as well as price, are the principal competitive factors among suppliers for large or complex jobs. Concrete manufacturers like us generally obtain customer contracts through local sales and marketing efforts directed at general contractors, developers, governmental agencies and homebuilders. As a result, we depend on local relationships. We generally do not have long-term sales contracts with our customers.
Our competitors range from small, owner-operated private companies to subsidiaries or operating units of large, vertically integrated manufacturers of cement and aggregates. Our vertically integrated competitors generally have greater manufacturing, financial and marketing resources than we have, providing them with competitive advantages. Competitors having lower operating costs than we do or having the financial resources to enable them to accept lower margins than we do will have competitive advantages over us for jobs that are particularly price-sensitive. Competitors having greater financial resources or less financial leverage than we do to invest in new mixer trucks, build plants in new areas or pay for acquisitions also will have competitive advantages over us.
We depend on third parties for concrete equipment and supplies essential to operate our business.
We rely on third parties to sell or lease property, plant and equipment to us and to provide us with supplies, including cement and other raw materials, necessary for our operations. We cannot assure you that our favorable working relationships with our suppliers will continue in the future. Also, there have historically been periods of supply shortages in the concrete industry, particularly in a strong economy.
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If we are unable to purchase or lease necessary properties or equipment, our operations could be severely impacted. If we lose our supply contracts and receive insufficient supplies from third parties to meet our customers’ needs or if our suppliers experience price increases or disruptions to their business, such as labor disputes, supply shortages or distribution problems, our business, financial condition, results of operations, liquidity, and cash flows could be materially and adversely affected.
Residential construction and related demand for ready-mixed concrete has increased between 2012 and 2015. While cement prices increased as a result of this increased demand, cement supplies were at levels that indicated a very low risk of cement shortages in most of our markets. Should demand increase substantially beyond our current expectations, we could experience shortages of cement in future periods, which could adversely affect our operating results by decreasing sales of ready-mixed concrete and increasing our costs of raw materials.
We use large amounts of electricity and diesel fuel that are subject to potential reliability issues, supply constraints and significant price fluctuation, which could affect our financial position, operating results and liquidity.
In our production and distribution processes, we consume significant amounts of electricity and diesel fuel. The availability and pricing of these resources are subject to market forces that are beyond our control. Furthermore, we are vulnerable to any reliability issues experienced by our suppliers, which also are beyond our control. Our suppliers contract separately for the purchase of such resources and our sources of supply could be interrupted should our suppliers not be able to obtain these materials due to higher demand or other factors that interrupt their availability. Variability in the supply and prices of these resources could materially affect our financial position, results of operations and liquidity from period to period.
We are dependent on information technology to support many facets of our business.
If our information systems are breached, shutdown, destroyed or fail due to cyberattack, unauthorized access, natural disaster or equipment breakdown, by employees, malicious third parties or other unauthorized persons, our business could be interrupted, proprietary information could be lost, stolen or destroyed and our reputation could be damaged. We take measures to protect our information systems and data from such occurrences, but as cyberattacks become increasingly sophisticated, there can be no guarantee that our actions, efforts and security measures adopted will always prevent them. Our business could be negatively affected by any such occurrences.
The departure of key personnel could disrupt our business.
We depend on the efforts of our officers and, in many cases, on senior management of our businesses. Our success will depend on retaining our officers and senior-level managers. We need to ensure that key personnel are compensated fairly and competitively to reduce the risk of departure of key personnel to our competitors or other industries. To the extent we are unable to attract or retain qualified management personnel, our business, financial condition, results of operations, liquidity, and cash flows could be materially and adversely affected. We do not carry key personnel life insurance on any of our employees.
Shortages of qualified employees may harm our business.
Our ability to provide high-quality products and services on a timely basis depends on our success in employing an adequate number of skilled plant managers, technicians and drivers. Like many of our competitors, we experience shortages of qualified personnel from time to time. We may not be able to maintain an adequate skilled labor force necessary to operate efficiently and to support our growth strategy, and our labor expenses may increase as a result of a shortage in the supply of skilled personnel.
Collective bargaining agreements, work stoppages and other labor relations matters may result in increases in our operating costs, disruptions in our business and decreases in our earnings.
As of December 31, 2015, approximately 36% of our employees were covered by collective bargaining agreements, which expire between 2016 and 2019. Our inability to negotiate acceptable new contracts or extensions of existing contracts with these unions could cause work stoppages by the affected employees. In addition, any new contracts or extensions could result in increased operating costs attributable to both union and nonunion employees. If any such work stoppages were to occur, or if other of our employees were to become represented by a union, we could experience a significant disruption of our operations and higher ongoing labor costs, which could materially and adversely affect our business, financial condition, results of operations, liquidity,
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and cash flows. Also, labor relations matters affecting our suppliers of cement and aggregates could adversely impact our business from time to time.
Participation in multi-employer defined benefit plans may impact our financial condition, results of operations and cash flows.
We contribute to 15 multi-employer defined benefit plans, which are subject to the requirements of the Pension Protection Act of 2006 (the “PPA”). For multi-employer defined benefit plans, the PPA established new funding requirements or rehabilitation requirements, additional funding rules for plans that are in endangered or critical status, and enhanced disclosure requirements to participants regarding a plan’s funding status. The Worker, Retiree, and Employer Recovery Act of 2008 (the “WRERA”) provided some funding relief to defined benefit plan sponsors affected by recent market conditions. The WRERA allowed multi-employer plan sponsors to elect to freeze their current funded status at the same funding status as the preceding plan year (for example, a calendar year plan that was not in critical or endangered status for 2008 was able to elect to retain that status for 2009), and sponsors of multi-employer plans in endangered or critical status in plan years beginning in 2008 or 2009 were allowed a three-year extension of funding improvement or rehabilitation plans (extending the timeline for these plans to achieve their goals from 10 years to 13 years, or from 15 years to 18 years for seriously endangered plans). A number of the multi-employer pension plans to which we contribute are underfunded and are currently subject to funding improvement or rehabilitation requirements. Additionally, if we were to withdraw partially or completely from any plan that is underfunded, we would be liable for a proportionate share of that plan’s unfunded vested benefits. Based on the information available from plan administrators, we believe that our portion of the contingent liability in the case of a full or partial withdrawal from or termination of several of these plans or the inability of plan sponsors to meet the funding or rehabilitation requirements would be material to our financial condition, results of operations and cash flows.
Our overall profitability is sensitive to price changes and minor variations in sales volumes.
Generally, our customers are price-sensitive. Prices for our products are subject to changes in response to relatively minor fluctuations in supply and demand, general economic conditions and market conditions, all of which are beyond our control. Because of the fixed-cost nature of our business, our overall profitability is sensitive to price changes and minor variations in sales volumes.
Instability in the financial and credit sectors may impact our business and financial condition in ways that we currently cannot predict.
Adverse or worsening economic trends could have a negative impact on our suppliers and our customers and their financial condition and liquidity, which could cause them to fail to meet their obligations to us and could have a material adverse effect on our revenue, income from operations and cash flows. The uncertainty and volatility of the financial and credit sectors could have further impacts on our business and financial condition that we currently cannot predict or anticipate.
Turmoil in the global financial system could have an impact on our business and our financial condition. Accordingly, our ability to access the capital markets could be restricted or be available only on unfavorable terms. Limited access to the capital markets could adversely impact our ability to take advantage of business opportunities or react to changing economic and business conditions and could adversely impact our ability to execute our long-term growth strategy. Ultimately, we could be required to reduce our future capital expenditures substantially. Such a reduction could have a material adverse effect on our revenue, income from operations and cash flows.
If one or more of the lenders under our Revolving Facility, which provides for aggregate borrowings of up to $250.0 million, subject to the borrowing base, were to become unable or unwilling to perform their obligations under that facility, our borrowing capacity could be reduced. Our inability to borrow additional amounts under our Revolving Facility could limit our ability to fund our future operations and growth.
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Governmental regulations, including environmental regulations, may result in increases in our operating costs and capital expenditures and decreases in our earnings.
A wide range of federal, state and local laws, ordinances and regulations apply to our operations, including the following matters:
•land usage;
•street and highway usage;
•noise levels; and
•health, safety and environmental matters.
In many instances, we must have various certificates, permits or licenses in order to conduct our business. Our failure to maintain required certificates, permits or licenses or to comply with applicable governmental requirements could result in substantial fines or possible revocation of our authority to conduct some of our operations. Delays in obtaining approvals for the transfer or grant of certificates, permits or licenses, or failure to obtain new certificates, permits or licenses, could impede the implementation of any acquisitions.
Governmental requirements that impact our operations include those relating to air quality, solid and hazardous waste management and cleanup and water quality. These requirements are complex and subject to change. Certain laws, such as the U.S. law known as Superfund, can impose strict liability in some cases without regard to negligence or fault, including for the conduct of or conditions caused by others, or for our acts that complied with all applicable requirements when we performed them. Our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements, or the future discovery of environmental conditions may require us to make unanticipated material expenditures. In addition, we may fail to identify, or obtain indemnification for, environmental liabilities of acquired businesses. We generally do not maintain insurance to cover environmental liabilities.
Our operations are subject to various hazards that may cause personal injury or property damage and increase our operating costs.
Operating mixer trucks, particularly when loaded, exposes our drivers and others to traffic hazards. Our drivers are subject to the usual hazards associated with providing services on construction sites, while our plant personnel are subject to the hazards associated with moving and storing large quantities of heavy raw materials. Operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. Although we conduct training programs designed to reduce these risks, we cannot eliminate these risks. We maintain insurance coverage in amounts we believe are consistent with industry practice; however, this insurance may not be adequate to cover all losses or liabilities we may incur in our operations, and we may not be able to maintain insurance of the types or at levels we deem necessary or adequate, or at rates we consider reasonable. A partially or completely uninsured claim, if successful and of sufficient magnitude, could have a material adverse effect on us.
The insurance policies we maintain are subject to varying levels of deductibles. Losses up to the deductible amounts are accrued based on our estimates of the ultimate liability for claims incurred and an estimate of claims incurred but not reported. If we were to experience insurance claims or costs above our estimates, our business, financial condition, results of operations, liquidity, and cash flows might be materially and adversely affected.
We have identified a material weakness in our internal control over financial reporting. This material weakness, if not corrected, could affect the reliability of our financial statements and have other adverse consequences.
Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on internal control over financial reporting. This report must contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by our management. 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 a company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
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We have identified a material weakness in our internal control over financial reporting as of December 31, 2015 relating to the accuracy and presentation of the accounting for income taxes, including the income tax provision and related tax assets and liabilities. Failure to have effective internal controls could lead to a misstatement of our financial statements. If, as a result of deficiencies in our internal controls, we cannot provide reliable financial statements, our business decision process may be adversely affected, our business and operating results could be harmed, investors could lose confidence in our reported financial information, the market price of our securities could decrease and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected. In addition, failure to maintain effective internal control over financial reporting could result in investigations or sanctions by regulatory authorities.
We intend to take action to remediate the material weakness and improve the effectiveness of our internal control over financial reporting. However, we can give no assurances that the measures we take will remediate the material weakness identified or that any additional material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control over financial reporting. In addition, even if we are successful in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of our financial statements included in our periodic reports filed with the SEC.
We may incur material costs and losses as a result of claims that our products do not meet regulatory requirements or contractual specifications.
Our operations involve providing products that must meet building code or other regulatory requirements and contractual specifications for durability, stress-level capacity, weight-bearing capacity and other characteristics. If we fail or are unable to provide products meeting these requirements and specifications, material claims may arise against us and our reputation could be damaged. In the past, we have had significant claims of this kind asserted against us that we have resolved. There currently are claims, and we expect that in the future there will be additional claims, of this kind asserted against us. If a significant product-related claim or claims are resolved against us in the future, that resolution may have a material adverse effect on our business, financial condition, results of operations, liquidity, and cash flows.
Some of our plants are susceptible to damage from earthquakes, for which we have a limited amount of insurance.
We maintain only a limited amount of earthquake insurance and, therefore, we are not fully insured against earthquake risk. Any significant earthquake damage to our plants could materially and adversely affect our business, financial condition, results of operations, liquidity, and cash flows.
Increasing insurance claims and expenses could lower our profitability and increase our business risk.
The nature of our business subjects us to product liability, property damage, personal injury claims and workers’ compensation claims from time to time. Increased premiums charged by insurance carriers may further increase our insurance expense as coverage expires or otherwise cause us to raise our self-insured retention. If the number or severity of claims within our self- insured retention increases, we could suffer losses in excess of our reserves. An unusually large liability claim or a string of claims based on a failure repeated throughout our mass production process may exceed our insurance coverage or result in direct damages if we were unable or elected not to insure against certain hazards because of high premiums or other reasons. In addition, the availability of, and our ability to collect on, insurance coverage is often subject to factors beyond our control. Further, allegations relating to workers’ compensation violations may result in investigations by insurance regulatory or other governmental authorities, which investigations, if any, could have a direct or indirect material adverse effect on our ability to pursue certain types of business which, in turn, could have a material adverse effect on our business, financial position, results of operations, liquidity, and cash flows.
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations.
As of December 31, 2015, we had $200.0 million of outstanding senior indebtedness represented by our 8.5% senior secured notes due 2018 (the “2018 Notes”). The 2018 Notes are governed by an indenture (the “Indenture”). We and certain of our subsidiaries are parties to a Second Amended and Restated Loan and Security Agreement (the “Second A/R Loan Agreement”), with certain financial institutions named therein, as lenders (the “Lenders”), and Bank of America, N.A. as agent and sole lead arranger, that is secured by certain assets of the Company and the guarantors. The Second A/R Loan Agreement provides for
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aggregate borrowings of up to $250.0 million subject to a borrowing base, under the Revolving Facility. As of December 31, 2015, we had $45.0 million in outstanding borrowings under the Revolving Facility.
The negative covenants in the 2018 Notes and the Second A/R Loan Agreement allow us to incur additional indebtedness from other sources in certain circumstances.
As a result of our existing indebtedness and our capacity to incur additional indebtedness, we are, and anticipate continuing to be, a highly leveraged company. A significant portion of our cash flow will be required to pay interest and principal on our outstanding indebtedness, and we may be unable to generate sufficient cash flow from operations, or have future borrowings available under our Revolving Facility, to enable us to repay our indebtedness, including the 2018 Notes, or to fund other liquidity needs. This level of indebtedness could have important consequences, including the following:
• | it requires us to use a significant percentage of our cash flow from operations for debt service and the repayment of our indebtedness, including indebtedness we may incur in the future, and such cash flow may not be available for other purposes; |
• | it limits our ability to borrow money or sell stock to fund our working capital, capital expenditures, acquisitions and debt service requirements; |
• | our interest expense could increase if interest rates in general increase because a portion of our indebtedness bears interest at floating rates; |
• | it may limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities; |
• | we are more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; |
• | it may make us more vulnerable to a downturn in our business or the economy; |
• | it may increase our cost of borrowing; |
• | it may restrict us from exploiting business opportunities; |
• | the debt service requirements of our indebtedness could make it more difficult for us to make payments on the 2018 Notes and our other indebtedness; and |
• | there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed. |
We may not be able to generate sufficient cash flows to meet our debt service obligations and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash from our operations in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
Our business may not generate sufficient cash flow from operations and future sources of capital under the Revolving Facility otherwise may not be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. If we complete an acquisition, our debt service requirements could increase. We may need to refinance or restructure all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness, including the Revolving Facility and the 2018 Notes, on commercially reasonable terms, or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity, reducing or delaying capital expenditures, strategic acquisitions, investments and alliances or restructuring or refinancing our indebtedness. We may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all.
Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. The Second A/R Loan Agreement and the Indenture restrict our ability to conduct asset sales and / or use the proceeds from asset sales. We may not be able to consummate these asset sales to raise capital or sell assets at prices and on terms that we believe are fair and any proceeds that we do receive may not be adequate to meet any debt service obligations then due. If we cannot meet our debt service obligations, the holders of our debt may accelerate our debt and, to the extent such debt is secured, foreclose on our assets. In such an event, we may not have sufficient assets to repay all of our debt.
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We may still be able to incur significantly more debt or make certain restricted payments in the future. This could intensify already-existing risks related to our indebtedness.
The terms of the Indenture and the Second A/R Loan Agreement contain restrictions on our and the guarantors’ ability to incur additional indebtedness. However, these restrictions are subject to a number of important qualifications and exceptions and the indebtedness incurred in compliance with these restrictions could be substantial. Accordingly, we or the guarantors could incur significant additional indebtedness in the future, much of which could constitute secured, senior or pari passu indebtedness. As of December 31, 2015, our Revolving Facility provided for unused borrowing capacity of up to $131.2 million (after taking into account $11.3 million of undrawn letters of credit, $4.0 million of other availability reserves, and $45.0 million in outstanding borrowings under the Revolving Facility).
The Indenture permits us to incur certain additional secured debt, allows our non-guarantor subsidiaries to incur additional debt, and does not prevent us from incurring other liabilities that do not constitute indebtedness as defined in the Indenture.
The Indenture also, under certain circumstances, allows us to designate some of our restricted subsidiaries as unrestricted subsidiaries. Those unrestricted subsidiaries will not be subject to many of the restrictive covenants in the Indenture and therefore will be able to incur indebtedness beyond the limitations specified in the Indenture and engage in other activities in which restricted subsidiaries may not engage. If new debt is added to our currently anticipated debt levels, the related risks that we and the guarantors now face could intensify.
We may also consider investments in joint ventures or acquisitions, which may increase our indebtedness. Moreover, although the Second A/R Loan Agreement and the Indenture contain restrictions on our ability to make restricted payments, including the declaration and payment of dividends, we will be able to make substantial restricted payments under certain circumstances.
The amount of borrowings permitted under our Revolving Facility may fluctuate significantly, which may adversely affect our liquidity, results of operations and financial position.
The amount of borrowings permitted at any time under our Revolving Facility is limited to a periodic borrowing base valuation of, among other things, our accounts receivable, inventory, and mixer trucks. As a result, our access to credit under our Revolving Facility is potentially subject to significant fluctuations depending on the value of the borrowing base eligible assets as of any measurement date, as well as certain discretionary rights of the administrative agent of our Revolving Facility in respect to the calculation of such borrowing base value. Our inability to borrow under, or the early termination of, our Revolving Facility may adversely affect our liquidity, results of operations and financial position.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our Revolving Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness could increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
Repayment of our debt is dependent on cash flow generated by our subsidiaries.
We are a holding company and substantially all of our tangible assets are owned by our subsidiaries. As such, repayment of our indebtedness, to a certain degree, is dependent on the generation of cash flow by our subsidiaries (including any subsidiaries that are not guarantors) and their ability to make such cash available to us, by dividend, loan, debt repayment or otherwise. Our subsidiaries may not be able to, or be permitted to, make distributions or other payments to enable us to make payments in respect of our indebtedness. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the terms of the Indenture and the Second A/R Loan Agreement limit the ability of certain of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments, these limitations are subject to important qualifications and exceptions. In the event that we do not receive distributions or other payments from our subsidiaries, we may be unable to make required payments on our indebtedness.
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We may be unable to refinance our indebtedness.
We may need to refinance all or a portion of our indebtedness, including the Revolving Facility and the 2018 Notes, before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all or that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all.
A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
Our debt currently has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the 2018 Notes. Credit ratings are not recommendations to purchase, hold or sell the 2018 Notes. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure of the 2018 Notes.
Our debt agreements may restrict our ability to operate our business and to pursue our business strategies.
The Second A/R Loan Agreement and the Indenture impose, and future financing agreements are likely to impose, operating and financial restrictions on our activities. These restrictions require us to comply with or maintain certain financial tests and limit or prohibit our ability to, among other things:
• | incur additional indebtedness or issue disqualified stock or preferred stock; |
• | pay dividends or make other distributions, repurchase or redeem our stock or subordinated indebtedness or make certain investments; |
• | prepay, redeem or repurchase certain debt; |
• | sell assets and issue capital stock of our restricted subsidiaries; |
• | incur liens; |
• | enter into agreements restricting our restricted subsidiaries’ ability to pay dividends, make loans to other U.S. Concrete entities or restrict the ability to provide liens; |
• | enter into transactions with affiliates; |
• | consolidate, merge or sell all or substantially all of our assets; |
• | engage in certain sale / leaseback transactions; and |
• | with respect to the Indenture, designate our subsidiaries as unrestricted subsidiaries. |
The restrictive covenants in the Second A/R Loan Agreement also require us to maintain specified financial ratios and satisfy other financial condition tests in certain circumstances.
These restrictions on our ability to operate our business could seriously harm our business by, among other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate opportunities.
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants and maintain these financial tests. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. We cannot assure you that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all. In addition, an event of default under the Second A/R Loan Agreement would permit the lenders under our Revolving Facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the
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amounts due and payable under our Revolving Facility, those lenders could proceed against the collateral granted to them to secure that indebtedness.
As a result of these restrictions, we may be:
•limited in how we conduct our business;
•unable to raise additional debt or equity financing to operate during general economic or business downturns; or
•unable to compete effectively or to take advantage of new business opportunities.
These restrictions, along with restrictions that may be contained in agreements evidencing or governing future indebtedness, may affect our ability to grow in accordance with our growth strategy.
Our failure to comply with the covenants contained in the Second A/R Loan Agreement, the Indenture or any other indebtedness, including as a result of events beyond our control, could result in an event of default which could materially and adversely affect our operating results and our financial condition.
The Revolving Facility contains certain covenants, including compliance with a fixed charge coverage ratio if our Availability (as defined in the Second A/R Loan Agreement) falls below a certain threshold. In addition, the Revolving Facility requires us to comply with various operational and other covenants. See Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Liquidity and Capital Resources” for a discussion of the financial covenants contained in the Second A/R Loan Agreement. Agreements governing our other indebtedness may also contain various covenants. If there were an event of default under any of our debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt to be due and payable immediately. Our assets and cash flow may not be sufficient to fully repay all obligations under our outstanding debt instruments, either upon maturity or if accelerated upon an event of default. If we were required to repurchase any of our debt securities upon a change of control, we may not be able to refinance or restructure the payments on those debt securities. If, as or when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, the Second A/R Loan Agreement, the lenders thereunder could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against the collateral that secures the obligations under the Revolving Facility on a first-priority basis and secures the 2018 Notes on a second-priority basis. If, as or when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, the Indenture, the holders of the 2018 Notes could institute foreclosure proceedings against the collateral that secures the 2018 Notes on a first-priority basis and secures the obligations under the Revolving Facility on a second-priority basis. Any such actions could force us into bankruptcy or liquidation.
Moreover, the Second A/R Loan Agreement provides the lenders considerable discretion to impose reserves or availability blocks, which could materially impair the amount of borrowings that would otherwise be available to us. There can be no assurance that the lenders under the Revolving Facility will not take such actions during the term of that facility and, further, were they to do so, the resulting impact of such actions could materially and adversely impair our ability to make interest payments on the 2018 Notes, among other matters.
Common Stock Investment Risks
We do not intend to pay dividends on our common stock.
We have not declared or paid any dividends on our common stock to date, and we do not anticipate paying any dividends on our common stock in the foreseeable future. We intend to reinvest all future earnings in the development and growth of our business. In addition, our Second A/R Loan Agreement and the Indenture prohibit us from paying dividends and future loan agreements may also prohibit the payment of dividends. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements, business opportunities, contractual restrictions and other factors deemed relevant. To the extent we do not pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment in our common stock.
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Our stock price may be volatile.
In recent years, the stock market has experienced significant price and volume fluctuations that are often unrelated to the operating performance of specific companies. The market price of our common stock may fluctuate based on a number of factors, including:
•our operating performance and the performance of other similar companies;
•news announcements relating to us or our competitors, the job market in general and unemployment data;
•changes in earnings estimates or recommendations by research analysts;
•changes in general economic conditions;
•the arrival or departure of key personnel;
•acquisitions or other transactions involving us or our competitors; and
•other developments affecting us, our industry or our competitors.
Our amended and restated certificate of incorporation, third amended and restated bylaws and Delaware law contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock.
Provisions in our amended and restated certificate of incorporation, our third amended and restated bylaws and applicable provisions of the General Corporation Law of the State of Delaware may make it more difficult or expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. In addition, Delaware law prohibits us from engaging in any business combination with any “interested stockholder,” meaning generally that a stockholder who beneficially owns more than 15% of our common stock cannot acquire us for a period of three years from the date this person became an interested stockholder, unless various conditions are met, such as approval of the transaction by our board of directors.
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PART II
Item 6. Selected Financial Data
The following table provides selected condensed consolidated financial data for the periods shown (in thousands). The data has been derived from our audited consolidated financial statements. Our results are not necessarily indicative of future performance or results of operations. All of the data in the table should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included in this Amendment.
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
(Restated) | ||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
FOR THE YEAR | ||||||||||||||||||||
Revenue | $ | 974,717 | $ | 703,714 | $ | 598,155 | $ | 517,221 | $ | 428,036 | ||||||||||
(Loss) income from continuing operations | $ | (5,094 | ) | $ | 21,575 | $ | (18,273 | ) | $ | (24,351 | ) | $ | (7,925 | ) | ||||||
Loss from discontinued operations, net of taxes (1) | $ | (320 | ) | $ | (993 | ) | $ | (1,856 | ) | $ | (1,388 | ) | $ | (3,778 | ) | |||||
Net (loss) income | $ | (5,414 | ) | $ | 20,582 | $ | (20,129 | ) | $ | (25,739 | ) | $ | (11,703 | ) | ||||||
PER SHARE INFORMATION | ||||||||||||||||||||
Basic (loss) income per share: | ||||||||||||||||||||
(Loss) income from continuing operations | $ | (0.36 | ) | $ | 1.59 | $ | (1.42 | ) | $ | (2.00 | ) | $ | (0.66 | ) | ||||||
Loss from discontinued operations, net of taxes | (0.02 | ) | (0.07 | ) | (0.14 | ) | (0.11 | ) | (0.31 | ) | ||||||||||
Net (loss) income per share - basic | $ | (0.38 | ) | $ | 1.52 | $ | (1.56 | ) | $ | (2.11 | ) | $ | (0.97 | ) | ||||||
Diluted (loss) income per share: | ||||||||||||||||||||
(Loss) income from continuing operations | $ | (0.36 | ) | $ | 1.55 | $ | (1.42 | ) | $ | (2.00 | ) | $ | (0.66 | ) | ||||||
Loss from discontinued operations, net of taxes | (0.02 | ) | (0.07 | ) | (0.14 | ) | (0.11 | ) | (0.31 | ) | ||||||||||
Net (loss) income per share - diluted | $ | (0.38 | ) | $ | 1.48 | $ | (1.56 | ) | $ | (2.11 | ) | $ | (0.97 | ) | ||||||
POSITION AS OF END OF YEAR | ||||||||||||||||||||
Total assets | $ | 687,846 | $ | 460,528 | $ | 413,990 | $ | 279,724 | $ | 269,654 | ||||||||||
Total debt | $ | 281,749 | $ | 220,437 | $ | 214,144 | $ | 63,459 | $ | 61,086 | ||||||||||
(1) Our results for 2011 - 2013 have been recast to reflect our Pennsylvania precast operation as discontinued operations, as a result of its reclassification to held for sale effective as of December 31, 2014. We completed the sale of this operation in June 2015. | ||||||||||||||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statements we make in the following discussion that express a belief, expectation or intention, as well as those that are not historical fact are forward-looking statements that are subject to various risks, uncertainties and assumptions. Our actual results, performance or achievements, or market conditions or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks and uncertainties to which we refer under the headings “Cautionary Statement Concerning Forward-Looking Statements” preceding Item 1 of this report and “Risk Factors” in Item 1A of this Amendment.
Restatement
We filed our Annual Report on Form 10-K for the year ended December 31, 2015 on March 4, 2016 (the “Original Report”). This Amendment No. 1 on Form 10-K/A (this “Amendment”) is being filed to restate our 2015 consolidated financial statements to:
• | eliminate from our consolidated balance sheet as of December 31, 2015, a $24.8 million deferred tax asset (the “Deferred Tax Asset”) related to our outstanding common stock purchase warrants (the “Warrants”, which Warrants are described more fully in note 15 to our consolidated financial statements included with this Amendment), and increase income tax expense by $24.8 million in our consolidated statement of operations for the year ended December 31, 2015; and |
• | eliminate a $6.1 million tax deduction (the "Tax Deduction") included in income tax benefit in our consolidated statement of operations for the year ended December 31, 2015 and increase accrued liabilities by $5.9 million and decrease prepaid expenses by $0.2 million in our consolidated balance sheet as of December 31, 2015 related to the exercise of Warrants during 2015. |
Prior to the fourth quarter of 2015, we maintained a valuation allowance on our net deferred tax assets because we were still in a three year cumulative loss position. During the fourth quarter of 2015, we concluded that the valuation allowance on a portion of our net deferred tax assets could be reversed (as described more fully in Note 16 to our consolidated financial statements included with this Amendment). We reflected the reversal of the valuation allowance in our consolidated statement of operations for the year ended December 31, 2015 and, therefore, the Deferred Tax Asset had no valuation allowance recorded against it as of December 31, 2015. Due to the prior valuation allowance, there is no net impact from these adjustments to our consolidated balance sheets, consolidated statements of operations, consolidated statements of changes in equity, or consolidated statements of cash flow for any quarterly or annual period prior to December 31, 2015. As a result, we will not restate our consolidated financial statements for any periods prior to 2015, but will restate the prior periods tax footnote disclosures within our 2015 consolidated financial statements.
Management and the Audit Committee of the Company's Board of Directors concluded that the Deferred Tax Asset was based on a tax position that did not meet the required more likely than not threshold in order to be recorded on the consolidated balance sheet in accordance with the Financial Accounting Standards Board's Accounting Standards Codification Topic 740 (Income Taxes) ("ASC 740"), and that the Deferred Tax Asset and related Tax Deduction were accordingly recorded in error. Management and the Audit Committee further concluded that the Deferred Tax Asset and Tax Deduction should be reversed and a liability for resulting potential tax liabilities should be recorded, following generally accepted accounting principles based on ASC 740.
Management has evaluated the effect of the restatement on its prior conclusions on the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures as of December 31, 2015. In connection with management’s re-evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, management determined that the Company did not maintain effective controls over the accuracy and presentation of the accounting for income taxes, including the income tax provision and related tax assets and liabilities. We have amended our disclosures pertaining to management’s evaluation of such controls and procedures in this Amendment to report a material weakness in those controls.
Our Business
We are a leading producer of ready-mixed concrete in select geographic markets in the United States. We operate our business through two primary segments: (i) ready-mixed concrete and (ii) aggregate products. The results of operations for our Pennsylvania precast operation, which was sold on June 2, 2015, have been included in discontinued operations for the periods presented.
Ready-mixed concrete. Our ready-mixed concrete segment (which represented 89.9% of our revenue for the year ended December 31, 2015) engages principally in the formulation, production and delivery of ready-mixed concrete to our customers’ job sites. We provide our ready-mixed concrete from our operations in Texas, northern California, New Jersey, New York,
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Washington, D.C., Oklahoma, and the U.S. Virgin Islands. Ready-mixed concrete is a highly versatile construction material that results from combining coarse and fine aggregates, such as gravel, crushed stone and sand, with water, various chemical admixtures and cement. We also provide services intended to reduce our customers’ overall construction costs by lowering the installed, or “in-place,” cost of concrete. These services include the formulation of mixtures for specific design uses, on-site and lab-based product quality control, and customized delivery programs to meet our customers’ needs.
Aggregate products. Our aggregate products segment (which represented 3.5% of our revenue for the year ended December 31, 2015, excluding $26.2 million of intersegment sales) produces crushed stone, sand and gravel from 14 aggregates facilities located in New Jersey, Texas, Oklahoma, and the U.S. Virgin Islands. We sell these aggregates for use in commercial, industrial and public works projects, as well as consume them internally in the production of ready-mixed concrete. We produced approximately 4.7 million tons of aggregates during the year ended December 31, 2015, with Texas representing 51%, New Jersey representing 47%, and the U.S. Virgin Islands representing 2% of the total production. We consumed 50% of our aggregate production internally and sold 50% to third-party customers in 2015. We believe our aggregates reserves provide us with additional raw materials sourcing flexibility and supply availability. In addition, we own sand pit operations in Michigan and one quarry in west Texas, which we lease to third parties and receive a royalty based on the volumes produced and sold during the terms of the leases.
Overview
The geographic markets for our products are generally local, and our operating results are subject to fluctuations in the level and mix of construction activity that occur in our markets. The level of activity affects the demand for our products, while the product mix of activity among the various segments of the construction industry affects both our relative competitive strengths and our operating margins. Commercial and industrial projects generally provide more opportunities to sell value-added products that are designed to meet the high-performance requirements of those types of projects.
Our customers are generally involved in the construction industry, which is a cyclical business and is subject to general and more localized economic conditions. In addition, our business is impacted by seasonal variations in weather conditions, which vary by regional market. Accordingly, because of inclement weather, demand for our products and services during the winter months are typically lower than in other months of the year. Also, sustained periods of inclement weather and other adverse weather conditions could cause the delay of construction projects during other times of the year.
From 2007 through 2011, construction slowed significantly, which resulted in a decline in the demand for ready-mixed concrete. However, construction and related demand for ready-mixed concrete has improved since 2011. For the year ended December 31, 2015, our ready-mixed concrete sales volume increased 23.6% to 7.0 million cubic yards from 5.7 million cubic yards for the year ended December 31, 2014. Sales volume for the year ended December 31, 2015 was up in all of our major markets, except west Texas, as compared to the year ended December 31, 2014 primarily due to increased construction activity and ready-mixed segment acquisitions completed in 2015 and 2014. Volume in our west Texas market has decreased slightly due to the decline in WTI prices. For the year ended December 31, 2015, we estimate that there was no direct impact and less than a 3.0% indirect impact on revenue in our Texas markets by the decline in WTI prices.
Total ready-mixed concrete revenue in all of our markets rose due to recent acquisitions and increased average selling price. Our consolidated average ready-mixed concrete sales prices rose 11.8% from 2014 to 2015, resulting in the 5th consecutive fiscal year of increased average selling prices. Higher volumes have allowed us to spread our fixed costs over more cubic yards. However, we also experienced higher cement and aggregate costs during fiscal year 2015, which have partially offset these improvements. We continue to closely monitor our operating costs and capital expenditures.
Basis of Presentation
We operate our business in two reportable segments: (1) ready-mixed concrete and (2) aggregate products. Our ready-mixed concrete segment produces and sells ready-mixed concrete. This segment serves the following principal markets: Texas, northern California, New York, New Jersey, Washington, D.C., Oklahoma, and the U.S. Virgin Islands. Our aggregate products segment sells crushed stone, sand and gravel products and serves north and west Texas, southern Oklahoma, New York, New Jersey, and the U.S. Virgin Islands markets in which our ready-mixed concrete segment operates.
Our chief operating decision maker evaluates segment performance and allocates resources based on Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) from continuing operations excluding interest, income taxes, depreciation, depletion and amortization, derivative gain (loss), gain (loss) on revaluation of contingent consideration, and gain (loss) on extinguishment of debt. Additionally, Adjusted EBITDA is adjusted for items similar to certain of those used in calculating the Company’s compliance with debt covenants. The additional items that are adjusted to determine our Adjusted EBITDA are:
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• | non-cash stock compensation expense; |
• | corporate officer severance expense; and |
• | acquisition-related professional fees. |
We consider Adjusted EBITDA an indicator of the operational strength and performance of our business. We have included Adjusted EBITDA because it is a key financial measure used by our management to (i) internally measure our operating performance and (ii) assess our ability to service our debt, incur additional debt and meet our capital expenditure requirements.
Adjusted EBITDA should not be construed as an alternative to, or a better indicator of, net income or loss, is not based on accounting principles generally accepted in the United States of America ("U.S. GAAP"), and is not necessarily a measure of our cash flows or ability to fund our cash needs. Our measurements of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. See Note 19, "Business Segments," to our consolidated financial statements included in this Amendment for additional information regarding our segments and the reconciliation of Adjusted EBITDA to income (loss) from continuing operations before taxes.
In June 2015, we completed the sale of our one remaining precast concrete operation in Pennsylvania. This operation's assets and liabilities were classified as held for sale in the accompanying consolidated balance sheet effective as of December 31, 2014. The results of operations for our Pennsylvania precast operations are included in discontinued operations for the periods presented.
Liquidity and Capital Resources
Our primary liquidity needs over the next 12 months consist of (i) financing seasonal working capital requirements; (ii) servicing our indebtedness; (iii) purchasing property and equipment; and (iv) payments related to strategic acquisitions. Our portfolio strategy includes strategic acquisitions and divestitures in various regions and markets; and we may seek financing for acquisitions, including additional debt or equity capital.
Our working capital needs are typically at their lowest level in the first quarter, increase in the second and third quarters to fund increases in accounts receivable and inventories during those periods, and then decrease in the fourth quarter. Availability under the Second A/R Loan Agreement is governed by a borrowing base primarily determined by our eligible accounts receivable, inventory, mixer trucks and, after the occurrence of certain events, machinery (described below). While our working capital needs are typically at their lowest in the first quarter, our borrowing base also typically declines during the first quarter due to lower accounts receivable balances as a result of normal seasonality of our business caused by weather.
Our availability under the Second A/R Loan Agreement at December 31, 2015 increased to $131.2 million from $109.8 million at December 31, 2014 under the 2013 Loan Agreement (as defined below), primarily due to increases in eligible accounts receivable and eligible truck balances as well as changes in the Second A/R Loan Agreement in November 2015 which increased the revolving commitments from $175.0 million to $250.0 million. These increases were partially offset by increased borrowings under the Revolving Facility. Borrowings outstanding under the Revolving Facility were $45.0 million as of December 31, 2015. We had no borrowings outstanding under the Revolving Facility as of December 31, 2014.
Our projection of our cash needs is based upon many factors, including without limitation, our forecasted volume, pricing, cost of materials and capital expenditures. Based on our projected cash needs, we believe that the Revolving Facility and cash generated from operations will provide us with sufficient liquidity in the ordinary course of business, not including potential acquisitions. If, however, the Revolving Facility and our operating cash flows are not adequate to fund our operations, we would need to obtain an amendment to the Second A/R Loan Agreement, seek other equity or debt financing to provide additional liquidity, or sell assets.
The principal factors that could adversely affect the amount of our internally generated funds include:
• | deterioration of revenue, due to lower volume and / or pricing, because of weakness in the markets in which we operate; |
• | declines in gross margins due to shifts in our product mix or increases in the cost of our raw materials and fuel; |
• | any deterioration in our ability to collect our accounts receivable from customers as a result of weakening in construction demand or payment difficulties experienced by our customers; and |
• | inclement weather beyond normal patterns that could affect our sales volumes. |
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The following key financial measurements reflect our financial position and capital resources as of December 31, 2015 and 2014 (dollars in thousands):
2015 | 2014 | |||||||
(Restated) | ||||||||
Cash and cash equivalents | $ | 3,925 | $ | 30,202 | ||||
Working capital | $ | (16,771 | ) | $ | 62,929 | |||
Total debt | $ | 281,749 | $ | 220,437 | ||||
Our cash and cash equivalents consist of highly liquid investments and deposits we hold at major financial institutions.
The discussion that follows provides a description of our arrangements relating to our outstanding indebtedness.
Senior Secured Notes due 2018
On November 22, 2013, we sold $200.0 million of 2018 Notes. We used a portion of the net proceeds from the 2018 Notes to repay all of the outstanding borrowings under the Revolving Facility and to redeem all our outstanding 9.5% senior secured notes due 2015 (the "2013 Notes").
The 2018 Notes are governed by the Indenture dated as of November 22, 2013, by and among the Company and U.S. Bank National Association, as trustee and noteholder collateral agent (the “Notes Collateral Agent”). We are obligated to pay interest on the 2018 Notes on June 1 and December 1 of each year. The 2018 Notes mature on December 1, 2018, and are redeemable at our option prior to maturity at prices specified in the Indenture. The Indenture contains negative covenants that restrict our ability and our restricted subsidiaries' ability to engage in certain transactions, as described below, and also contains customary events of default.
The Indenture contains covenants that restrict or limit our ability to, among other things:
• | incur additional indebtedness or issue disqualified stock or preferred stock; |
• | pay dividends or make other distributions or repurchase or redeem our stock or subordinated indebtedness or make investments; |
• | prepay, redeem or repurchase certain debt; |
• | sell assets or issue capital stock of our restricted subsidiaries; |
• | incur liens; |
• | enter into agreements restricting our restricted subsidiaries’ ability to pay dividends, make loans to other U.S. Concrete entities or restrict the ability to provide liens; |
• | enter into transactions with affiliates; |
• | consolidate, merge or sell all or substantially all of our assets; |
• | engage in certain sale / leaseback transactions; and |
• | designate our subsidiaries as unrestricted subsidiaries. |
As defined in the Indenture, we are entitled to incur indebtedness if, on the date of such incurrence and given effect thereto on a pro forma basis, the consolidated coverage ratio exceeds 2.0 to 1.0.
Our obligations under the 2018 Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by all of our domestic subsidiaries that guarantee the indebtedness under our Revolving Facility. Each guarantee is subject to release in the following customary circumstances:
• | a disposition of all or substantially all of the assets of the guarantor subsidiary, by way of merger, consolidation or otherwise; provided the proceeds of the disposition are applied in accordance with the Indenture; |
• | a disposition of the capital stock of the guarantor subsidiary to a third person, if the disposition complies with the Indenture and as a result the guarantor subsidiary ceases to be a restricted subsidiary; |
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• | the designation by us of the guarantor subsidiary as an unrestricted subsidiary or the guarantor subsidiary otherwise ceases to be a restricted subsidiary, in each case in accordance with the Indenture; or |
• | legal or covenant defeasance of the 2018 Notes and discharge of our obligations under the Indenture. |
The 2018 Notes were issued by U.S. Concrete, Inc., the parent company, and are guaranteed on a full and unconditional basis by each of its domestic wholly owned subsidiaries. The guarantees are joint and several. U.S. Concrete, Inc. does not have any independent assets or operations, and none of its foreign subsidiaries guarantee the 2018 Notes. There are no significant restrictions on the ability of the Company or any guarantor to obtain funds from its subsidiaries by dividend or loan. For additional information regarding our guarantor and non-guarantor subsidiaries, see the information set forth in Note 24, “Supplemental Condensed Consolidating Financial Statements,” to our consolidated financial statements included in this Amendment.
The 2018 Notes and the guarantees thereof rank equally in right of payment with all of our existing and future senior indebtedness. The 2018 Notes and the guarantees thereof are secured by first-priority liens on certain of the property and assets directly owned by us, including material owned real property, fixtures, intellectual property, capital stock of subsidiaries and certain equipment, subject to permitted liens and certain exceptions, and by a second-priority lien on our assets securing the Revolving Facility on a first-priority basis, including inventory (including as-extracted collateral), accounts, certain specified mixer trucks, chattel paper, general intangibles (other than collateral securing the 2018 Notes on a first-priority basis), instruments, documents, cash, deposit accounts, securities accounts, commodities accounts, letter of credit rights and all supporting obligations and related books and records and all proceeds and products of the foregoing, subject to permitted liens and certain exceptions. The 2018 Notes and the guarantees thereof are effectively subordinated to all indebtedness and other obligations, including trade payables, of each of our future subsidiaries that are not guarantors.
Senior Secured Credit Facility
On October 29, 2013, we entered into a Loan and Security Agreement (the "2013 Loan Agreement") with the Lenders and the administrative agent, which amended and restated our existing credit agreement and provides us with the Revolving Facility. On November 18, 2015, we entered into the Second A/R Loan Agreement which amended and restated the 2013 Loan Agreement. Among other things, the Second A/R Loan Agreement increased the revolving commitments from $175.0 million to $250.0 million and extended the maturity date to the earlier of (i) November 18, 2020 or (ii) sixty days prior to the maturity date of the 2018 Notes (if then outstanding) or the refinancing of debt thereof, as applicable. The Second A/R Loan Agreement also included an accordion feature that allows for increases in the total revolving commitments by as much as $100.0 million. Additionally, the applicable margin for each of the LIBOR loans and base rate loans was lowered so that, depending on the average availability under the Second A/R Loan Agreement, the applicable margin ranges from 1.25% to 1.75% for LIBOR loans and 0.00% to 0.50% for base rate loans. As of December 31, 2015, we had $45.0 million of outstanding borrowings on the Second A/R Loan Agreement. The weighted average interest rate for the Second A/R Loan Agreement was 1.77% as of December 31, 2015. As of December 31, 2014, we had no outstanding borrowings under the Revolving Facility. As of both December 31, 2015 and 2014, we had $11.3 million of undrawn standby letters of credit under the Revolving Facility.
Our actual maximum credit availability under the Revolving Facility varies from time to time and is determined by calculating the value of our eligible accounts receivable, inventory, mixer trucks and, after the occurrence of certain events, machinery, which serve as priority collateral on the facility, minus reserves imposed by the Lenders and other adjustments, all as specified in the Second A/R Loan Agreement and discussed further below. Our availability under the Revolving Facility at December 31, 2015 increased to $131.2 million from $109.8 million at December 31, 2014. The Second A/R Loan Agreement also contains a provision for discretionary over-advances and involuntary protective advances by Lenders of up to $25.0 million in excess of calculated borrowing base levels. The Second A/R Loan Agreement provides for swingline loans, up to a $15.0 million sublimit, and letters of credit, up to a $30.0 million sublimit.
Advances under the Revolving Facility are in the form of either base rate loans or “LIBOR loans” denominated in U.S. dollars. The interest rate for base rate loans denominated in U.S. dollars fluctuates and is equal to the greater of (a) Bank of America’s prime rate; (b) the Federal funds rate, plus 0.50%; or (c) the rate per annum for a 30 days interest period equal to the British Bankers Association LIBOR Rate, as published by Reuters at approximately 11:00 a.m. (London time) two business days prior (“LIBOR”), plus 1.0%; in each case plus the Applicable Margin, as defined in the Second A/R Loan Agreement. The interest rate for LIBOR loans denominated in U.S. dollars is equal to the rate per annum for the applicable interest period equal to LIBOR, plus the Applicable Margin, as defined in the Second A/R Loan Agreement. Issued and outstanding letters of credit are subject to a fee equal to the Applicable Margin, as defined in the Second A/R Loan Agreement, a fronting fee equal to 0.125% per annum on the stated amount of such letter of credit, and customary charges associated with the issuance and administration of letters of credit. Among other fees, we pay a commitment fee of either 0.25% or 0.375% per annum (due monthly) on the aggregate unused revolving commitments under the Revolving Facility. The fee we pay is determined by whether the amount of the unused line is
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above or below 50% of the aggregate Revolver Commitments, as defined in the Second A/R Loan Agreement. The Applicable Margin ranges from 0.00% to 0.50% for base rate loans and from 1.25% to 1.75% for LIBOR loans, and is determined based on Average Availability for the most recent fiscal quarter, as defined in the Second A/R Loan Agreement.
Up to $30.0 million of the Revolving Facility is available for the issuance of letters of credit, and any such issuance of letters of credit will reduce the amount available for loans under the Revolving Facility. Advances under the Revolving Facility are limited by a borrowing base which is equal to the least of (a) the aggregate amount of Revolver Commitments minus the LC Reserve, the Senior Notes Availability Reserve, and the Tax Amount, all as defined in the Second A/R Loan Agreement, (b) the sum of (i) 90% of the face amount of eligible accounts receivable (reduced to 85% under certain circumstances), plus (ii) the lesser of (x) 70% of the value of eligible inventory or (y) 90% of the product of (A) the net orderly liquidation value of inventory divided by the value of the inventory and (B) multiplied by the value of eligible inventory, and (iii) the sum of (x) (A) 85% of the net orderly liquidation value (as determined by the most recent appraisal) of eligible trucks and machinery plus (B) 80% of the cost of newly acquired eligible trucks since the date of the latest appraisal of eligible trucks minus (C) 85% of the net orderly liquidation value of eligible trucks and machinery that have been sold since the latest appraisal date and 85% of the depreciation amount applicable to eligible trucks and machinery since the date of the latest appraisal of eligible trucks and machinery, plus (y) (A) 85% of the net orderly liquidation value of eligible machinery (as determined by the most recent appraisal), minus (B) 85% of the net orderly liquidation value of eligible machinery that have been sold since the date of the latest appraisal of eligible machinery, minus (C) 85% of the depreciation amount applicable to eligible machinery, minus the Availability Reserve, minus the Tax Amount; provided, notwithstanding anything herein to the contrary, in determining the Borrowing Base pursuant to this clause (b), the value of machinery shall only be included after a refinancing of, or amendment to, the 2018 Notes such that the Revolving Facility will have a first lien on machinery, and the Borrowing Base attributable to the eligible truck and eligible machinery shall not exceed the amount equal to thirty percent (30%) of the Borrowing Base as of such date of determination; or (c) the amount of a borrowing base set forth in the 2018 Notes, minus the greater of (i) $10.0 million and (ii) the amount equal to 5% of such borrowing base set forth in the 2018 Notes; provided however, in any event, clause (c) of the definition of borrowing base shall be permanently terminated if the 2018 Senior Notes have been amended or refinanced, in each case with the effect that the ABL cap amount in the applicable intercreditor agreement and/or the documentation governing such refinancing debt shall be no less than 110% of the aggregate Revolver Commitments (terms used in the foregoing description of borrowing base shall have the definitions provided in the Second A/R Loan Agreement). The administrative agent may, in its permitted discretion, reduce the advance rates set forth above, adjust reserves or reduce one or more of the other elements used in computing the borrowing base.
The Second A/R Loan Agreement contains usual and customary negative covenants including, but not limited to, restrictions on our ability to consolidate or merge; substantially change the nature of our business; sell, lease or otherwise transfer any of our assets; create or incur indebtedness; create liens; pay dividends; and make investments or acquisitions. The negative covenants are subject to certain exceptions as specified in the Second A/R Loan Agreement. The Second A/R Loan Agreement also requires that we, upon the occurrence of certain events, maintain a fixed charge coverage ratio of at least 1.0 to 1.0 for each period of 12 calendar months, as determined in accordance with the Second A/R Loan Agreement. For the trailing 12 month period ended December 31, 2015, our fixed charge coverage ratio was 3.58 to 1.0. As of December 31, 2015, we were in compliance with all covenants under the Second A/R Loan Agreement.
The Second A/R Loan Agreement also includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, change of control, material money judgments and failure to maintain subsidiary guarantees.
The Second A/R Loan Agreement is secured by a first-priority lien on certain assets of the Company and our guarantors, including inventory (including as-extracted collateral), accounts receivable, certain specified mixer trucks, general intangibles (other than collateral securing the 2018 Notes on a first-priority basis, as described above), instruments, documents, chattel paper, cash, deposit accounts, securities accounts, commodities accounts, letter of credit rights and all supporting obligations and related books and records and all proceeds and products of the foregoing, subject to permitted liens and certain exceptions. The Second A/R Loan Agreement is also secured by a second-priority lien on the collateral securing the 2018 Notes as defined below on a first-priority basis (see “Senior Secured Notes due 2018” above).
Other Debt
From 2013 through 2015, we signed a series of promissory notes with Daimler Truck Financial for the purchase of drum mixer trucks and other machinery and equipment totaling $25.3 million aggregate principal with fixed annual interest rates ranging from 2.50% to 3.18%, payable monthly for a term of five years. Also, from 2013 through 2015, we entered into lease agreements with various lenders for the purchase of mixer trucks and other machinery and equipment for a total commitment of $20.2 million, with fixed annual interest rates ranging from 2.60% to 4.80%, payable monthly for a term ranging from four to five years. The lease
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agreements include a one dollar buyout option at the end of the lease term. Accordingly, these financings have been classified as capital leases.
On August 31, 2010, we issued $55.0 million aggregate principal amount of 9.5% Convertible Notes due 2015 (the "Convertible Notes") pursuant to a subscription offering contemplated by our plan of reorganization (the "Plan"). Under the terms of the indenture governing the Convertible Notes, interest accrued at a rate of 9.5% per annum and was payable quarterly in cash in arrears. The notes matured and were paid on August 31, 2015. Concurrently with the issuance of the notes, we recorded a discount of approximately $13.6 million related to an embedded derivative that was bifurcated and separately valued (see Note 11, "Derivatives" to our consolidated financial statements included in this report). This discount was accreted over the term of the Convertible Notes and included in interest expense prior to the Conversion Event, as described below.
On March 22, 2013, we completed our offer to exchange (the “Exchange Offer”) up to $69.3 million aggregate principal amount of newly issued 2013 Notes for all $55.0 million aggregate principal amount of our Convertible Notes. At the time of settlement, we issued $61.1 million aggregate principal amount of 2013 Notes in exchange for $48.5 million of Convertible Notes, plus approximately $0.3 million in cash for accrued and unpaid interest on the Convertible Notes exchanged in the Exchange Offer. After giving effect to the exchange, $6.5 million aggregate principal amount of Convertible Notes remained outstanding as of March 22, 2013. In November 2013, we used a portion of the proceeds from our 2018 Notes offering to redeem all $61.1 million of our outstanding 2013 Notes.
In accordance with the indenture governing the Convertible Notes, we provided a Conversion Event Notice, as defined in the indenture, to the remaining holders of Convertible Notes on June 18, 2013. Holders had until the close of business on August 2, 2013 (as defined in the indenture, the "Conversion Termination Date") to tender their Convertible Notes for shares of common stock. Prior to August 3, 2013, holders tendered $6.4 million of Convertible Notes and were issued 0.6 million shares of our common stock. As of August 3, 2013, the remaining Convertible Notes no longer include a conversion feature and ceased to accrue interest. Our remaining Convertible Notes of $0.1 million were repaid on August 31, 2015.
For additional information regarding our arrangements relating to outstanding indebtedness, see the information set forth in Note 9, "Debt," to our consolidated financial statements included in this Amendment.
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, trade receivables, trade payables, long-term debt, other long-term obligations, and derivative liabilities. We consider the carrying values of cash and cash equivalents, trade receivables and trade payables to be representative of their respective fair values because of their short-term maturities or expected settlement dates. The carrying value of outstanding amounts under our Revolving Facility approximates fair value due to the floating interest rate. The fair value of our 2018 Notes was estimated to be $207.0 million and $209.0 million as of December 31, 2015 and 2014, respectively, based on broker / dealer quoted market prices. Our Convertible Notes were repaid on August 31, 2015.
The fair value of our warrants that were issued on August 31, 2010 (the "Warrants") was $67.4 million and $25.2 million at December 31, 2015 and 2014, respectively. The fair value of our contingent consideration obligations associated with acquisitions was $30.1 million at December 31, 2015 and $5.3 million at December 31, 2014. See (i) Note 11, "Derivatives," to our consolidated financial statements included in this Amendment for further information regarding our derivative liabilities, (ii) Note 12, "Other Long-Term Obligations and Deferred Credits," regarding our contingent consideration obligations, (iii) Note 13, "Fair Value Disclosures," regarding our fair value disclosure and (iv) Note 15, "Warrants," regarding the Warrants.
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Cash Flow
The net cash provided by or used in our operating, investing and financing activities is presented below (in thousands):
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(Restated) | ||||||||||||
Net cash provided by (used in): | ||||||||||||
Operating activities | $ | 104,261 | $ | 50,915 | $ | 24,180 | ||||||
Investing activities | (157,835 | ) | (118,478 | ) | (26,104 | ) | ||||||
Financing activities | 27,297 | (14,902 | ) | 109,840 | ||||||||
Net (decrease) increase in cash | $ | (26,277 | ) | $ | (82,465 | ) | $ | 107,916 | ||||
Our net cash provided by operating activities generally reflects the cash effects of transactions and other events used in the determination of net income or loss.
Net cash provided by operating activities was $104.3 million for the year ended December 31, 2015, compared to $50.9 million for the year ended December 31, 2014 and $24.2 million for the year ended December 31, 2013. Our cash provided by operating activities in 2015 was favorably impacted by significant non-cash expenses included in our 2015 net loss; primarily $60.0 million of non-cash loss on derivative, $43.6 million of depreciation, depletion and amortization, and $5.8 million of non-cash stock compensation expense. Partially offsetting this was $12.6 million of deferred income tax benefit and $5.8 million provided by working capital changes.
Our cash provided by operating activities in 2014 of $50.9 million was favorably impacted by our net income for the year of $20.6 million as well as the impact of significant non-cash expenses that were included in our 2014 net income; primarily $23.8 million of depreciation, depletion and amortization, $3.7 million of non-cash stock compensation expense, and $3.6 million of non-cash loss on derivative. Partially offsetting this was $4.9 million used to fund working capital changes.
Our cash provided by operating activities in 2013 was $24.2 million which was also favorably impacted by significant non-cash expenses included in our 2013 net loss; primarily $30.0 million of non-cash loss on derivative, $19.0 million of depreciation, depletion and amortization, $5.4 million of non-cash stock compensation expense, and $2.2 million of non-cash amortization of debt issuance costs, partially offset by $1.0 million of non-cash gain on extinguishment of debt, and $14.1 million used to fund working capital changes.
We used $157.8 million to fund investing activities in 2015, $118.5 million in 2014, and $26.1 million in 2013. During 2015, we paid $135.3 million to fund eight acquisitions compared to $89.6 million paid to fund nine acquisition in 2014 and $4.4 million paid to fund one acquisition in 2013. In addition, we paid $25.0 million in 2015 for purchases of plant improvements, plant equipment, drum mixer trucks, and other rolling stock compared to $32.6 million in 2014 and $20.0 million in 2013. Additionally, in 2015, we received $1.2 million related to the disposal of business units, primarily for the sale of assets in west Texas and the sale of our one remaining precast concrete operation in Pennsylvania. There were no proceeds from disposal of business units in 2014, and we paid $2.3 million in 2013 to Oldcastle Precast, Inc. and Jensen Enterprises, Inc., dba Jensen Precast related to the re-acquisition of certain assets and settlement of certain liabilities associated with the disposal of our California and Arizona precast operations in 2012.
Our net cash provided by financing activities was $27.3 million in 2015 compared to $14.9 million used in financing activities in 2014 and $109.8 million provided by financing activities in 2013. Financing activities in 2015 included $45.0 million of net borrowings under our Revolving Facility to operate our business and fund acquisitions. In addition, we repaid $8.6 million of capital leases and notes used to fund capital expenditures, paid $6.3 million for the purchase of treasury shares related to our restricted stock grants, and made the second earn-out payment to the former owners of Bode Gravel Co. and Bode Concrete LLC (the "Bode Earn-out") for $2.3 million. Financing activities in 2014 included the repayment of $5.2 million of capital leases and notes used to fund capital expenditures, $4.8 million for the repurchase of our common stock under our share repurchase program, and $2.3 million for the first payment on the Bode Earn-out. Financing activities in 2013 included the proceeds from our $200.0 million 2018 Notes offering, net of related debt issuance costs, redemption of $61.1 million aggregate principal of our 2013 Notes, and repayment of existing borrowings under our Revolving Facility.
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Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. From time to time, we may enter into noncancelable operating leases that would not be reflected on our balance sheet. For additional discussion on our operating leases, see Note 22, "Commitments and Contingencies," to our consolidated financial statements included in this Amendment.
Commitments
The following are our contractual commitments associated with our indebtedness, lease obligations, and contingent consideration and deferred payment obligations related to our acquisitions as of December 31, 2015 (in millions):
Contractual obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||
Principal on debt | $ | 281.7 | $ | 9.4 | $ | 263.4 | $ | 8.8 | $ | 0.1 | ||||||||||
Interest on debt (1) | 53.5 | 18.2 | 35.1 | 0.2 | — | |||||||||||||||
Operating leases | 65.6 | 13.5 | 23.2 | 10.7 | 18.2 | |||||||||||||||
Contingent consideration(2) | 41.3 | 3.0 | 12.7 | 16.8 | 8.8 | |||||||||||||||
Deferred consideration payments (3) | 10.6 | 4.9 | 4.8 | 0.3 | 0.6 | |||||||||||||||
Total | $ | 452.7 | $ | 49.0 | $ | 339.2 | $ | 36.8 | $ | 27.7 | ||||||||||
(1) | Consists of estimated interest payments due under the 2018 Notes, capital leases, and other borrowings. |
(2) | Consists of estimated fair value of contingent consideration obligations, including accretion, associated with acquisitions completed from 2012 through 2015. The fair value of estimated payouts is based on probability weighted assumptions related to the achievement of various contractual provisions. As more fully described in Note 13, "Fair Value Disclosures," to our consolidated financial statements, changes in the fair value of these obligations will occur prior to the final payment in 2021. |
(3) | Consists of deferred consideration obligations, including accretion, associated with acquisitions completed in 2014 and 2015 with terms ranging from one to 10 years. |
The following are our commercial commitments as of December 31, 2015 (in millions):
Other commercial commitments | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||
Standby letters of credit | $ | 11.3 | $ | 11.3 | $ | — | $ | — | $ | — | ||||||||||
Performance bonds | 16.4 | 4.8 | 11.6 | — | — | |||||||||||||||
Total | $ | 27.7 | $ | 16.1 | $ | 11.6 | $ | — | $ | — | ||||||||||
The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued employment costs, income tax contingencies, insurance accruals and other accruals. Due to the nature of these accruals, the estimated timing of such payments (or contributions in the case of certain accrued employment costs) for these items is not predictable. As of December 31, 2015, the total unrecognized tax benefit related to uncertain tax positions was $35.0 million. We believe it is unlikely a reduction in our uncertain tax positions will occur within the next 12 months.
Acquisitions
On February 23, 2015, we acquired the equity of Right Away, located in Oakland, California. The purchase price was $18.0 million in cash, plus closing adjustments of $0.8 million, final working capital adjustments of $1.1 million, and potential future earn-out payments of up to $6.0 million based on the achievement of certain defined annual volume thresholds over a six-year period (the "Right Away Earn-out"). We funded the purchase with cash on hand. The acquisition included four ready-mixed concrete facilities, 49 mixer trucks and a fleet of transfer trucks used to transport cement and aggregates. The acquisition expanded our business in our existing northern California market.
On April 1, 2015, we acquired the equity of Ferrara Bros., located in New York, New York. We acquired the equity of Ferrara Bros. for $45.0 million in cash, approximately 442,000 shares of our common stock, calculated in accordance with the terms of the share purchase agreement ("SPA"), and valued at approximately $15.1 million on the date of issuance, less final working capital adjustments of $0.9 million, plus potential incentive awards in the form of equity of up to $35.0 million based on the achievement
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of certain EBITDA thresholds, as defined in the SPA, over a four-year period beginning in 2017 ("Ferrara Bros. Contingent Consideration"). We funded the purchase through a combination of cash on hand and borrowings under our Revolving Facility. Ferrara Bros. operates six ready-mixed concrete plants at its four facilities in New York and New Jersey and a fleet of 89 mixer trucks. The acquisition expanded our presence in the New York metropolitan market and allows us to more effectively serve construction projects in Manhattan.
On May 21, 2015, we acquired the equity of Colonial, located in Newark, New Jersey. The purchase price was $15.0 million in cash, plus closing adjustments of $0.2 million. We funded the purchase through a combination of cash on hand and borrowings under our Revolving Facility. The acquisition included four ready-mixed concrete plants at three locations and a fleet of approximately 40 mixer trucks. The acquisition expanded our business in the New York metropolitan and northern New Jersey markets.
On May 29, 2015, we acquired the assets of DuBrook, located in Chantilly, Virginia, part of the greater Washington, D.C. metropolitan area. The purchase price was $11.5 million in cash, plus potential future earn-out payments based on volumes sold over a four-year period (the "DuBrook Earn-out"). The DuBrook Earn-out payments are not capped; however, we do not expect total payments to be in excess of $1.0 million. We funded the purchase through a combination of cash on hand and borrowings under our Revolving Facility. The acquisition included three ready-mixed concrete plants and a fleet of 42 mixer trucks. The purchase of these assets expanded our existing business in the Washington, D.C. metropolitan area.
On September 24, 2015, we acquired Wantage reserves, a site development quarry including an 80 acre quarry along with mining rights to an additional 77 acres of land located in Hamburg, New Jersey, from Bicsak Brothers Realty, LLC and Wantage Stone, LLC. We have operated the Wantage quarry under a lease agreement since October 2014. The purchase price was $15.2 million in cash plus deferred payments of $3.0 million payable over a three-year period. We funded the purchase through a combination of cash on hand and borrowings under our Revolving Facility. This acquisition expanded our aggregates operations in our New York and New Jersey markets.
On October 27, 2015, we acquired the equity of Heavy, a vertically integrated ready-mixed concrete producer located in the U.S. Virgin Islands. We acquired the equity of Heavy for $21.7 million in cash, less purchase adjustments of $0.8 million, plus deferred payments of $5.0 million, which will be paid over a two year period. We funded the purchase through a combination of cash on hand and borrowings on our Revolving Facility. Heavy operates four ready-mixed concrete plants, a fleet of 32 mixer trucks, and two quarries. Heavy also leases an industrial waterfront property that it utilizes as a marine terminal and sales yard. This acquisition expands our ready-mixed concrete and aggregates operations into new markets in the Caribbean islands.
During the year ended December 31, 2015, we also completed two other individually immaterial acquisitions comprised of two sand and gravel operations near Vernon, Texas and Waurika, Oklahoma and a ready-mixed concrete operation in the U.S. Virgin Islands. The aggregate consideration paid consisted of $12.9 million in cash and $1.9 million in deferred payments payable within ten years. We funded these purchases through a combination of cash on hand and borrowings under our Revolving Facility. The acquisition of these assets expanded our business in our existing markets and the Caribbean markets.
Divestitures
Sale of Pennsylvania Precast Operations
On June 2, 2015, we completed the sale of substantially all of our assets associated with our one remaining precast concrete operation in Pennsylvania. We sold the operation's fixed assets and inventory for net proceeds of $0.3 million in cash and a promissory note of $1.2 million, net of a $0.1 million discount, and recorded a pre-tax loss on the transaction of $0.2 million. The pre-tax loss is included in discontinued operations in the accompanying condensed consolidated statements of operations. This sale represented the final divestiture of the Company's owned assets related to precast concrete operations, which were classified as held for sale as of December 31, 2014.
For additional discussion on our acquisitions and divestitures, see Note 2, "Acquisitions and Dispositions" to our consolidated financial statements included in this Amendment.
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Results of Operations
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
The following table sets forth selected historical statement of operations information and that information as a percentage of revenue for each of the periods indicated, as well as the increase or decrease from the prior year in dollars and percent.
(amounts in thousands, except selling prices) | |||||||||||||||||||||
Years Ended December 31, | Increase / (Decrease) | ||||||||||||||||||||
2015 | 2014 | $ | % | ||||||||||||||||||
(Restated) | |||||||||||||||||||||
Revenue | $ | 974,717 | 100.0 | % | $ | 703,714 | 100.0 | % | $ | 271,003 | 38.5 | % | |||||||||
Cost of goods sold before depreciation, depletion and amortization | 768,839 | 78.9 | 573,318 | 81.5 | 195,521 | 34.1 | |||||||||||||||
Selling, general and administrative expenses | 87,978 | 9.0 | 61,850 | 8.8 | 26,128 | 42.2 | |||||||||||||||
Depreciation, depletion and amortization | 43,570 | 4.5 | 23,849 | 3.4 | 19,721 | 82.7 | |||||||||||||||
Loss on revaluation of contingent consideration | 932 | 0.1 | — | — | 932 | NM | |||||||||||||||
Gain on sale of assets, net | (468 | ) | 0.0 | (625 | ) | (0.1 | ) | (157 | ) | (25.1 | ) | ||||||||||
Income from operations | 73,866 | 7.6 | 45,322 | 6.4 | 28,544 | 63.0 | |||||||||||||||
Interest expense, net | (21,734 | ) | (2.2 | ) | (20,431 | ) | (2.9 | ) | 1,303 | 6.4 | |||||||||||
Derivative loss | (60,016 | ) | (6.2 | ) | (3,556 | ) | (0.5 | ) | 56,460 | NM | |||||||||||
Gain on early extinguishment of debt | — | — | 11 | — | (11 | ) | (100.0 | ) | |||||||||||||
Other income, net | 3,569 | 0.4 | 2,385 | 0.3 | 1,184 | 49.6 | |||||||||||||||
Income (loss) from continuing operations before income taxes | (4,315 | ) | (0.4 | ) | 23,731 | 3.4 | (28,046 | ) | (118.2 | ) | |||||||||||
Income tax expense | 779 | 0.1 | 2,156 | 0.3 | (1,377 | ) | (63.9) | ||||||||||||||
(Loss) income from continuing operations | (5,094 | ) | (0.5 | ) | 21,575 | 3.1 | (26,669 | ) | (123.6 | ) | |||||||||||
Loss from discontinued operations, net of taxes | (320 | ) | 0.0 | (993 | ) | (0.1 | ) | (673 | ) | (67.8 | ) | ||||||||||
Net (loss) income | $ | (5,414 | ) | (0.6 | )% | $ | 20,582 | 2.9 | % | $ | (25,996 | ) | (126.3 | )% | |||||||
Ready-mixed Concrete Data: | |||||||||||||||||||||
Average selling price per cubic yard | $ | 123.98 | $ | 110.85 | $ | 13.13 | 11.8 | % | |||||||||||||
Sales volume in cubic yards | 7,038 | 5,696 | 1,342 | 23.6 | % | ||||||||||||||||
Aggregates Data: | |||||||||||||||||||||
Average selling price per ton | $ | 10.54 | $ | 9.40 | $ | 1.14 | 12.1 | % | |||||||||||||
Sales volume in tons | 4,919 | 4,650 | 269 | 5.8 | % | ||||||||||||||||
Revenue. Our 2015 total revenue grew by $271.0 million, or 38.5%, from $703.7 million in 2014 to $974.7 million in 2015, primarily due to increased sales of ready-mixed concrete. We estimate that approximately $215.9 million, or 79.7%, of our 2015 revenue increase was the result of acquisitions completed during 2014 and 2015. Ready-mixed concrete sales rose $243.8 million, or 38.5%, from $632.8 million in 2014 to $876.6 million in 2015, driven by a 23.6% increase in volume and an 11.8% increase in our average selling price. Sales of aggregates rose to $60.4 million in 2015 from $52.6 million in 2014, an increase of $7.8 million, or 14.9%, due to a 12.1% increase in average selling price and a 5.8% increase in volume. Other product revenues and eliminations, which includes our building materials, aggregate distribution, aggregate recycling, lime slurry, hauling business, concrete block, and eliminations of our intersegment sales, increased by $19.3 million, or 105.6%, to $37.6 million in 2015 from $18.3 million in 2014, primarily due to the addition of the aggregates distribution business in the fourth quarter of 2014.
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Cost of goods sold before depreciation, depletion and amortization. Cost of goods sold before depreciation, depletion and amortization ("DD&A"), increased $195.5 million, or 34.1%, from $573.3 million in 2014 to $768.8 million in 2015. Our costs were higher primarily due to volume growth in our two segments - ready-mixed concrete and aggregates - resulting in higher material costs, delivery costs, and plant variable costs, which includes primarily labor and benefits, utilities, and repairs and maintenance. Our raw material costs also increased as a result of higher cement and aggregate prices; however, we were generally able to pass these increases on to our customers. Our plant fixed costs, which primarily consist of leased equipment costs, property taxes, dispatch costs, and plant management, increased over the prior year due to higher personnel and equipment costs needed to operate our facilities, as well as higher overall fixed costs to operate more locations and trucks than in 2014. As a percentage of revenue, cost of goods sold before DD&A decreased to 78.9% in 2015 from 81.5% in 2014, as we were able to achieve greater efficiencies from our increased sales volume.
Selling, general and administrative expenses. Selling, general and administrative, ("SG&A"), expenses increased $26.1 million, or 42.2%, in 2015 from $61.9 million in 2014 to $88.0 million in 2015. Approximately $16.7 million of this increase was attributable to personnel and other general administrative costs incurred by our regional operations to support growth and acquisition infrastructure. In addition, we incurred $1.2 million in higher corporate legal and professional fees related to our acquisitions and divestitures and $3.8 million in higher non-cash stock and incentive compensation expense. The increase in non-cash stock compensation expense was primarily due to the increase in the fair value of awards granted in 2015. The remainder of the increase was primarily attributable to corporate-related personnel and other general expenses to support our growth initiatives. As a percentage of total revenue, SG&A expenses increased to 9.0% in 2015 from 8.8% in 2014.
Depreciation, depletion and amortization. DD&A expense for 2015 increased $19.7 million, or 82.7%, to $43.6 million from $23.8 million in 2014, primarily reflecting depreciation on additional plants, equipment and mixer trucks purchased to service demand and acquired through recent acquisitions as well as incremental intangible amortization expense of $9.1 million related to our acquisitions.
Loss on revaluation of contingent consideration. We recorded a non-cash loss on revaluation of contingent consideration of $0.9 million related to the fair value changes in contingent consideration associated with certain of our acquisitions in 2015. The key inputs in determining the fair value of our contingent consideration of $0.9 million in 2015 include discount rates ranging from 3.50% to 15.75%, a forecasted average of WTI prices from December 8, 2014 through December 7, 2016 from quoted sources, and management's estimates of future sales volumes and EBITDA. Changes in these inputs impact the valuation of our contingent consideration and result in gain or loss each quarterly period. The non-cash loss from fair value changes in contingent consideration in 2015 was primarily due to accretion of interest for the passage of time as well as changes in the probability-weighted assumptions related to the achievement of sales volumes partially offset by the decline in WTI prices. We had no gain or loss on revaluation of contingent consideration during 2014.
Income from operations. Income from operations rose $28.5 million to $73.9 million in 2015 from $45.3 million in 2014. Increased ready-mixed concrete revenue driven by higher volume and pricing resulted in efficiencies that led to improvements in income from operations as a percentage of revenue, which we refer to as operating margins. In addition, we estimate that approximately $12.5 million, or 43.9%, of our increase in income from operations was attributable to 2015 and 2014 acquisitions. Operating margins increased to 7.6% for 2015 compared to 6.4% for 2014.
Interest expense, net. Net interest expense increased by $1.3 million, or 6.4%, to $21.7 million in 2015 from $20.4 million in 2014, primarily related to interest on our Revolving Facility borrowings in 2015.
Derivative loss. For the 2015 period, we recorded a non-cash loss on derivative of $60.0 million related to fair value changes in our Warrants. All derivatives are required to be recorded on the balance sheet at their fair value in accordance with U.S. GAAP. Each quarter, we determine the fair value of our derivative liabilities, and changes result in income or loss for the period. The key inputs in determining the fair value of our derivative liabilities of $67.4 million at December 31, 2015 include our stock price, stock price volatility, and risk-free interest rates. Changes in these inputs impact the fair value of our derivative liability and result in income or loss each quarterly period.
The non-cash loss from fair value changes in the Warrants for the 2015 period was primarily due to an increase in the price of our common stock and changes in our stock price volatility.
Other income, net. Other income for the 2015 period was $3.6 million compared to $2.4 million for the 2014 period. The increase from 2014 was primarily due to $0.5 million of additional income in 2015 from state and local tax incentive programs and $0.4 million for an insurance settlement.
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Income tax expense. We recorded income tax expense allocated to continuing operations of approximately $0.8 million and $2.2 million for the years ended December 31, 2015 and 2014, respectively. For 2014, our effective tax rate differs substantially from the federal statutory rate primarily due to the reduction of the valuation allowance that reduced the recognized expense. For 2015, our effective tax rate differs substantially from the federal statutory rate primarily due to the tax impact of our Warrants, for which we recorded a non-cash $60.0 million derivative loss. The derivative loss is excluded from the calculation of our income tax provision, thus increasing our tax expense in periods when we record a derivate loss. Substantially offsetting our 2015 tax expense was the impact of the reversal of the Company's valuation allowance on its deferred tax assets during the fourth quarter of 2015. In addition, certain state income taxes are calculated on bases different than pre-tax income (loss) which resulted in recording income tax expense in certain states that experience a pre-tax loss.
As of each reporting date, management considers all new evidence, both positive and negative, that could impact management's view with regard to future realization of deferred tax assets. As of December 31, 2015, we achieved a history of positive pre-tax income and anticipate significant additional future pre-tax income to be generated in part from our recently acquired businesses, which will result in higher U.S. Federal taxable income. For these reasons, management determined that sufficient positive evidence existed as of December 31, 2015 to conclude that it is more likely than not that additional deferred taxes of $21.1 million are realizable, and therefore, reversed a majority of the valuation allowance accordingly.
In accordance with U.S. GAAP, the recognized value of deferred tax assets must be reduced to the amount that is more likely than not to be realized in future periods. The ultimate realization of the benefit of deferred tax assets from deductible temporary differences or tax carryovers depends on the generation of sufficient taxable income during the periods in which those temporary differences become deductible. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on these considerations, we relied upon the reversal of certain deferred tax liabilities to realize a portion of our deferred tax assets and established a valuation allowance as of December 31, 2015 and 2014 for other deferred tax assets because of uncertainty regarding their ultimate realization. Our total net deferred tax asset as of December 31, 2015 was $6.0 million and our total net deferred tax liability as of December 31, 2014 was $4.5 million.
In accordance with U.S. GAAP, intra-period tax allocation provisions require allocation of a tax expense or benefit to continuing operations due to current income (loss) from discontinued operations. We recorded income tax expense of approximately $0.8 million and $2.2 million in income from continuing operations for the years ended December 31, 2015 and 2014, respectively. We recorded a tax benefit of $0.2 million and tax expense of $0.2 million, allocated to discontinued operations for the years ended December 31, 2015 and 2014, respectively. The income tax amounts for continuing operations referred to above include the offsetting intra-period allocations. The intra-period tax allocation between the results from continuing operations and discontinued operations in the years ended December 31, 2015 and 2014 nets to $0.
Under U.S. tax law, we have elected to treat our U.S. Virgin Island subsidiaries as controlled foreign corporations. As such, we consider the undistributed earnings of our U.S. Virgin Island subsidiaries as of December 31, 2015 to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. As of December 31, 2015, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $0.1 million. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.
We reorganized pursuant to Chapter 11 of the bankruptcy code under the terms of our Plan, with an effective date of August 31, 2010. Under our Plan, our previously outstanding 8.375% Senior Subordinated Notes due 2014 were cancelled, giving rise to cancellation of indebtedness income ("CODI"). The Internal Revenue Code ("IRC"), provides that CODI arising under a plan of bankruptcy reorganization is excludible from taxable income, but the debtor must reduce certain of its tax attributes by the amount of CODI realized under the Plan. Our CODI and required tax attribute reduction did not cause a significant change in our recorded deferred tax liability. Our required reduction in tax attributes, or deferred tax assets, was accompanied by a corresponding release of valuation allowance in prior years.
We underwent a change in ownership for purposes of Section 382 of the IRC as a result of our Plan and emergence from Chapter 11 on August 31, 2010. As a result, the amount of our pre-change net operating losses ("NOL's"), and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the corporation as of the effective date of the Plan. The ownership change and the resulting annual limitation on use of NOL's are not expected to result in the expiration of our NOL carryforwards if we are able to generate sufficient future taxable income within the carryforward periods. However, the limitation on the amount of NOL's available to offset taxable income in a specific year may result in the payment of income taxes before all NOL's have been utilized.
Loss from discontinued operations, net of taxes. The results of operations for our sold precast units located in California, Arizona, and Pennsylvania, have been included in discontinued operations for all periods presented. During 2015, we recorded a
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pre-tax loss of $0.2 million related to the sale of fixed assets and inventory for our Pennsylvania precast operation. During 2014, we completed the sale of our remaining owned assets related to our California precast operations disposed of in 2012. We sold land and a building for net proceeds of $1.5 million in cash and recorded a pre-tax gain on the transaction of $0.6 million. Also in 2014, we recorded an impairment loss on long-lived assets of $0.9 million related to our Pennsylvania precast concrete operation as the carrying value exceeded the net realizable value of the related long-lived assets.
Segment information
For a discussion of our segments and segment Adjusted EBITDA, see "Basis of Presentation", under this Item 7, earlier in this report. For a discussion and reconciliation of our segment Adjusted EBITDA, see Note 19, "Business Segments," to our consolidated financial statements in this report.
Ready-mixed concrete
The following table sets forth key financial information for our ready-mixed concrete segment for the periods indicated:
(amounts in thousands, except selling prices) | |||||||||||||||
Years Ended December 31, | Increase / (Decrease) | ||||||||||||||
2015 | 2014 | $ or cubic yards, as applicable | % | ||||||||||||
Ready-mixed Concrete Segment: | |||||||||||||||
Revenue | $ | 876,633 | $ | 632,787 | $ | 243,846 | 38.5 | % | |||||||
Segment revenue as a percentage of total revenue | 89.9 | % | 89.9 | % | |||||||||||
Adjusted EBITDA | $ | 131,940 | $ | 84,706 | $ | 47,234 | 55.8 | % | |||||||
Adjusted EBITDA as a percentage of segment revenue | 15.1 | % | 13.4 | % | |||||||||||
Ready-mixed Concrete Data: | |||||||||||||||
Average selling price per cubic yard | $ | 123.98 | $ | 110.85 | $ | 13.13 | 11.8 | % | |||||||
Sales volume in thousands of cubic yards | 7,038 | 5,696 | 1,342 | 23.6 | % | ||||||||||
Revenue. Our ready-mixed concrete sales provided 89.9% of our total revenue in 2015 and 2014. Segment revenue for 2015 rose $243.8 million, or 38.5%, over 2014 levels. We estimate that approximately $188.6 million of this increase, or 77.3%, was due to segment acquisitions during 2014 and 2015. The 2015 revenue increase was driven primarily by a 23.6% increase in sales volume, or 1.3 million cubic yards. Increased volume provided $148.8 million, or 61.0%, of our ready-mixed concrete revenue growth. Our sales volume was higher in all of our major markets, except west Texas, due to increased construction activity and recent acquisitions. Volume in our west Texas market decreased slightly due to the decline in WTI prices. However, total revenue was higher in all our major markets, primarily due to higher average selling price and the impact of recent acquisitions. Our ready-mixed concrete average selling price per cubic yard increased approximately 11.8% during 2015 as compared to 2014. Increased selling price contributed approximately $92.4 million, or 37.9%, of our revenue growth. Our average selling price increased in all of our markets.
Adjusted EBITDA. Adjusted EBITDA for our ready-mixed concrete segment rose from $84.7 million in 2014 to $131.9 million in 2015, an increase of $47.2 million, or 55.8%. We estimate that approximately $24.4 million, or 51.7%, of our 2015 Adjusted EBITDA increase resulted from our 2014 and 2015 segment acquisitions. Driving the growth in Adjusted EBITDA was a 23.6% increase in sales volume plus an 11.8% increase in our average selling price, which resulted in $243.8 million in higher revenue. Partially offsetting the growth in revenue was the increased cost of goods sold associated with the higher volume of sales. Our variable costs, which include primarily raw material costs, labor and benefits costs, utilities, and delivery costs, were all higher primarily due to the increased volume. We also saw higher raw materials prices from our vendors during 2015, which increased our cost of goods sold for 2015. However, we were generally able to pass these price increases along to our customers. Our fixed plant costs, which consist primarily of property taxes, equipment rental, and plant management costs, increased during 2015 due to higher personnel and equipment costs needed to operate our facilities, as well as higher overall fixed costs to operate more locations and trucks than in the previous year. Segment Adjusted EBITDA as a percentage of segment revenues rose to 15.1% in 2015 from 13.4% in the 2014 period, reflecting primarily the higher revenues and greater efficiencies.
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Aggregate products
The following table sets forth key financial information for our aggregate products segment for the periods indicated:
(amounts in thousands, except selling prices) | |||||||||||||||
Years Ended December 31, | Increase / (Decrease) | ||||||||||||||
2015 | 2014 | $ or tons, as applicable | % | ||||||||||||
Aggregate Products Segment: | |||||||||||||||
Revenue | $ | 60,439 | $ | 52,618 | $ | 7,821 | 14.9 | % | |||||||
Segment revenue, excluding intersegment sales, as a percentage of total revenue | 3.5 | % | 4.5 | % | |||||||||||
Adjusted EBITDA | $ | 14,996 | 10,549 | $ | 4,447 | 42.2 | % | ||||||||
Adjusted EBITDA as a percentage of segment revenue | 24.8 | % | 20.0 | % | |||||||||||
Aggregates Data: | |||||||||||||||
Average selling price per ton | $ | 10.54 | $ | 9.40 | $ | 1.14 | 12.1 | % | |||||||
Sales volume in thousands of tons | 4,919 | 4,650 | 269 | 5.8 | % | ||||||||||
Revenue. Sales of our aggregate products, excluding intersegment sales of $26.2 million, provided 3.5% of our total revenue in 2015, compared to 4.5%, excluding intersegment sales of $21.0 million, in 2014. Segment revenue rose $7.8 million, or 14.9%, over prior year levels. We sell our aggregates to external customers and also sell them internally to our ready-mixed concrete segment at a market price. Approximately 43.4% of our 2015 aggregates sales, or $26.2 million, were to our ready-mixed concrete segment, versus 39.8%, or $21.0 million, in 2014. Contributing to our overall aggregates revenue growth was an increase in our average selling price of 12.1%, which provided approximately $5.6 million, or 71.7%, of our increase in aggregates revenue. Our volume rose 0.3 million tons, which provided approximately $2.5 million, or 32.3%, of our aggregates revenue increase. Freight charges to deliver the aggregates to the external customer, as well as other charges, all of which are included in revenue, decreased approximately $0.5 million during 2015 as compared to 2014, offsetting our aggregates revenue growth by 5.8%.
Adjusted EBITDA. Adjusted EBITDA for our aggregates segment increased to $15.0 million in the 2015 period from $10.5 million in the 2014 period, primarily reflecting the higher sales volume and higher average selling price, partially offset by the related higher cost of goods sold associated with the increased volume. Our variable costs associated with cost of goods sold, which includes quarry labor and benefits, utilities, repairs and maintenance, pit costs to prepare the stone and gravel for use, and delivery costs, all rose due to the higher sales volumes. Our quarry fixed costs, which include primarily property taxes, equipment rental, and plant management costs, were higher compared to the previous year, primarily due to operating costs associated with one quarry that commenced production during the fourth quarter of 2014 as well as three additional quarries that commenced production during 2015. Overall, our segment Adjusted EBITDA as a percentage of segment revenue increased to 24.8% in 2015 from 20.0% in 2014, primarily due to the increase in revenue and increased efficiencies.
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Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
The following table sets forth selected historical statement of operations information and that information as a percentage of revenue for each of the periods indicated, as well as the increase or decrease from the prior year in dollars and percent.
(amounts in thousands, except selling prices) | |||||||||||||||||||||
Years Ended December 31, | Increase / (Decrease) | ||||||||||||||||||||
2014 | 2013 | $ | % | ||||||||||||||||||
Revenue | $ | 703,714 | 100.0 | % | $ | 598,155 | 100.0 | % | $ | 105,559 | 17.6 | % | |||||||||
Cost of goods sold before depreciation, depletion and amortization | 573,318 | 81.5 | 498,660 | 83.4 | 74,658 | 15.0 | |||||||||||||||
Selling, general and administrative expenses | 61,850 | 8.8 | 59,424 | 9.9 | 2,426 | 4.1 | |||||||||||||||
Depreciation, depletion and amortization | 23,849 | 3.4 | 18,868 | 3.2 | 4,981 | 26.4 | |||||||||||||||
Gain on sale of assets, net | (625 | ) | (0.1 | ) | (232 | ) | — | 393 | 169.4 | ||||||||||||
Income from operations | 45,322 | 6.4 | 21,435 | 3.6 | 23,887 | 111.4 | |||||||||||||||
Interest expense, net | (20,431 | ) | (2.9 | ) | (11,332 | ) | (1.9 | ) | 9,099 | 80.3 | |||||||||||
Derivative loss | (3,556 | ) | (0.5 | ) | (29,964 | ) | (5.0 | ) | (26,408 | ) | (88.1 | ) | |||||||||
Gain on early extinguishment of debt | 11 | — | 985 | 0.2 | (974 | ) | (98.9 | ) | |||||||||||||
Other income, net | 2,385 | 0.3 | 1,771 | 0.3 | 614 | 34.7 | |||||||||||||||
Income (loss) from continuing operations before income taxes | 23,731 | 3.4 | (17,105 | ) | (2.9 | ) | 40,836 | 238.7 | |||||||||||||
Income tax expense | 2,156 | 0.3 | 1,168 | 0.2 | 988 | 84.6 | |||||||||||||||
Net income (loss) from continuing operations | 21,575 | 3.1 | (18,273 | ) | (3.1 | ) | 39,848 | 218.1 | |||||||||||||
Loss from discontinued operations, net of taxes | (993 | ) | (0.1 | ) | (1,856 | ) | (0.3 | ) | (863 | ) | (46.5) | ||||||||||
Net income (loss) | $ | 20,582 | 2.9 | % | $ | (20,129 | ) | (3.4 | )% | $ | 40,711 | 202.3 | % | ||||||||
Ready-mixed Concrete Data: | |||||||||||||||||||||
Average selling price per cubic yard | $ | 110.85 | $ | 104.03 | $ | 6.82 | 6.6 | % | |||||||||||||
Sales volume in cubic yards | 5,696 | 5,225 | 471 | 9.0 | % | ||||||||||||||||
Aggregates Data: | |||||||||||||||||||||
Average selling price per ton | $ | 9.40 | $ | 8.84 | $ | 0.56 | 6.3 | % | |||||||||||||
Sales volume in tons | 4,650 | 3,597 | 1,053 | 29.3 | % | ||||||||||||||||
Revenue. Our 2014 total revenue grew by $105.6 million, or 17.6%, from $598.2 million in 2013 to $703.7 million in 2014, primarily due to increased sales of ready-mixed concrete. We estimate that approximately $16.6 million, or 15.7%, of our 2014 revenue increase was the result of acquisitions completed during 2014. Ready-mixed concrete sales rose $87.5 million, or 16.0%, from $545.3 million in 2013 to $632.8 million in 2014, driven by a 9.0% volume increase and a 6.6% increase in our average selling price. Sales of aggregates rose to $52.6 million in 2014 from $38.2 million in 2013, an increase of $14.4 million, or 37.7%, due to a 29.3% increase in volume and a 6.3% increase in average selling price. Other product revenues and eliminations, which includes our building materials, aggregates distribution, lime slurry, hauling business, and eliminations of our intersegment sales, increased by $3.7 million, or 25.1%, to $18.3 million in 2014 from $14.6 million in 2013, primarily due to the addition of the aggregates distribution business in the fourth quarter of 2014.
Cost of goods sold before depreciation, depletion and amortization. Cost of goods sold before DD&A, increased $74.7 million, or 15.0%, from $498.7 million in 2013 to $573.3 million in 2014. Our costs were higher primarily due to volume growth
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in our two segments - ready-mixed concrete and aggregates - resulting in higher material costs, delivery costs, and plant variable costs, which includes primarily labor and benefits, utilities, and repairs and maintenance. Our material costs also increased as a result of higher cement and aggregate prices; however, we were generally able to pass these increases on to our customers. Our plant fixed costs, which primarily consists of leased equipment costs, property taxes, dispatch costs, and plant management, increased over the prior year due to higher personnel and equipment costs needed to operate our facilities, as well as higher overall fixed costs to operate more locations and trucks than in 2013. As a percentage of revenue, cost of goods sold before DD&A decreased to 81.5% in 2014 from 83.4% in 2013, as we were able to achieve greater efficiencies from our increased sales volume.
Selling, general and administrative expenses. SG&A expenses increased $2.4 million, or 4.1%, in 2014 from $59.4 million in 2013 to $61.9 million in 2014. Our increased 2014 SG&A costs primarily resulted from $2.9 million in higher bonus accruals and $1.8 million in higher legal and professional fees related to our acquisitions and divestitures. These increases were partially offset by a $1.8 million decrease in non-cash stock compensation expense. Non-cash stock compensation expense in 2013 included compensation expense resulting from achievement of the performance goal associated with delivery of a Conversion Event Notice (as defined in the indenture governing the Convertible Notes), which occurred on June 18, 2013, triggering the conversion of certain previously vested incentive restricted stock units to common shares. No compensation expense had previously been recognized for these grants, as achievement of the performance goal was not considered probable. Additional non-cash stock compensation expense was recorded in 2013 associated with certain restricted stock units that were contingent upon shareholder approval of the plan under which they were granted. The approval was obtained in May 2013. Furthermore, in 2013, we incurred $0.5 million of corporate relocation expenses. No such expenses were incurred in 2014. As a percentage of total revenue, SG&A expenses decreased to 8.8% in 2014 from 9.9% in 2013.
Gain on sale of assets. We recorded a gain on sale of assets of $0.6 million in 2014 versus $0.2 million in 2013. Our gain on sale of assets in 2014 and 2013 included sales of excess vehicles and equipment.
Depreciation, depletion and amortization. DD&A expense for 2014 increased $5.0 million, or 26.4%, to $23.8 million from $18.9 million in 2013, primarily reflecting depreciation on additional plants, equipment, and mixer trucks purchased to service demand.
Income from operations. Income from operations rose $23.9 million to $45.3 million in 2014 from $21.4 million in 2013. Increased ready-mixed concrete revenue driven by higher volume and pricing resulted in efficiencies that led to improvements in income from operations as a percentage of revenue, which we refer to as operating margins. In addition, we estimate that approximately $0.8 million, or 3.3%, of our increase in income from operations was attributable to 2014 acquisitions. Operating margins increased to 6.4% for 2014 compared to 3.6% for 2013.
Interest expense, net. Net interest expense increased by $9.1 million, or 80.3%, to $20.4 million in 2014 from $11.3 million in 2013, reflecting primarily the impact of the issuance of our 2018 Notes during the fourth quarter of 2013.
Derivative loss. For the 2014 period, we recorded a non-cash loss on derivatives of $3.6 million related to fair value changes in our Warrants. All derivatives are required to be recorded on the balance sheet at their fair values in accordance with U.S. GAAP. Each quarter, we determine the fair value of our derivative liabilities and any changes result in income or loss for the period. The key inputs in determining the fair value of our derivative liabilities of $25.2 million at December 31, 2014 include our stock price, stock price volatility, and risk-free interest rates. Changes in these inputs impact the fair value of our derivative liability and result in income or loss each quarterly period.
The non-cash loss from fair value changes in the Warrants for the 2014 period was primarily due to an increase in the price of our common stock and changes in our stock price volatility. This compares to the 2013 period, during which we recorded a non-cash loss from fair value changes in our Convertible Notes embedded derivative of approximately $13.1 million and $16.9 million related to fair value changes in our Warrants. These non-cash losses were primarily due to an increase in the price of our common stock and our stock price volatility. As of August 3, 2013, the conversion feature of our Convertible Notes terminated, which eliminated the embedded derivative.
Gain (loss) on extinguishment of debt. In 2013, we recorded a net $1.0 million non-cash gain on extinguishment of debt. This consisted of $4.3 million of non-cash gain related to the Exchange Offer of our Convertible Notes that were exchanged for 2013 Notes in March 2013, $1.7 million in non-cash loss associated with the Conversion Event, and $1.6 million in non-cash loss associated with the subsequent extinguishment of our 2013 Notes following receipt of the proceeds of our 2018 Notes offering.
Other income, net. Other income for the 2014 period was $2.4 million compared to $1.8 million for the 2013 period. The increase from 2013 was primarily due to $0.3 million of additional income in 2014 from state and local tax incentive programs and $0.1 million from higher finance charge income received from our customers in 2014.
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Income tax expense. We recorded income tax expense allocated to continuing operations of approximately $2.2 million and $1.2 million for the years ended December 31, 2014 and December 31, 2013, respectively. Our effective tax rate differs substantially from the federal statutory rate primarily due to the application of a valuation allowance that reduced the recognized benefit of our deferred tax assets. In addition, certain state income taxes are calculated on bases different than pre-tax income (loss) which resulted in recording income tax expense in certain states that experience a pre-tax loss.
In accordance with U.S. GAAP, the recognized value of deferred tax assets must be reduced to the amount that is more likely than not to be realized in future periods. The ultimate realization of the benefit of deferred tax assets from deductible temporary differences or tax carryovers depends on the generation of sufficient taxable income during the periods in which those temporary differences become deductible. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on these considerations, we relied upon the reversal of certain deferred tax liabilities to realize a portion of our deferred tax assets and established a valuation allowance as of December 31, 2014 and 2013 for other deferred tax assets because of uncertainty regarding their ultimate realization. Our total net deferred tax liability as of December 31, 2014 and 2013 was $4.5 million and $4.3 million, respectively.
In accordance with U.S. GAAP, intra-period tax allocation provisions require allocation of a tax expense or benefit to continuing operations due to current income (loss) from discontinued operations. We recorded tax expense of $2.2 million and $1.2 million in income from continuing operations for the years ended December 31, 2014 and 2013, respectively. We recorded tax expense of $0.2 million, allocated to discontinued operations for the year ended December 31, 2014 and a tax benefit of less than $0.1 million allocated to discontinued operations for the year ended December 31, 2013. The income tax amounts for continuing operations referred to above include the offsetting intra-period allocations. The intra-period tax allocation between the results from continuing operations and discontinued operations in the years ended December 31, 2014 and 2013 nets to $0.
Loss from discontinued operations. The results of operations for our sold precast units located in Pennsylvania, California, and Arizona, have been included in discontinued operations for 2014 and 2013. During 2014, we completed the sale of our remaining owned assets related to our California precast operations disposed of in 2012. We sold land and a building for net proceeds of $1.5 million in cash and recorded a pre-tax gain on the transaction of $0.6 million. Also in 2014, we recorded an impairment loss on long-lived assets of $0.9 million related to our Pennsylvania precast concrete operation as the carrying value exceeded the net realizable value of the related long-lived assets. During 2013, pursuant to the terms of the related asset purchase agreements, we paid Oldcastle Architectural, Inc. and Jensen Enterprises, Inc. $1.9 million and $0.5 million, respectively, related to the reacquisition of certain uncollected receivables and settlement of certain accrued liabilities. Of these amounts, a total of $0.7 million was included as a charge to discontinued operations for 2013.
Segment information
For a discussion of our segments and segment Adjusted EBITDA, see "Basis of Presentation", under this Item 7, earlier in this report. For a discussion and reconciliation of our segment Adjusted EBITDA, see Note 19, "Business Segments," to our consolidated financial statements in this report.
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Ready-mixed concrete
The following table sets forth key financial information for our ready-mixed concrete segment for the periods indicated:
(amounts in thousands, except selling prices) | |||||||||||||||
Years Ended December 31, | Increase / (Decrease) | ||||||||||||||
2014 | 2013 | $ or cubic yards, as applicable | % | ||||||||||||
Ready-mixed Concrete Segment: | |||||||||||||||
Revenue | $ | 632,787 | $ | 545,302 | $ | 87,485 | 16.0 | % | |||||||
Segment revenue as a percentage of total revenue | 89.9 | % | 91.2 | % | |||||||||||
Adjusted EBITDA | $ | 84,706 | $ | 58,583 | $ | 26,123 | 44.6 | % | |||||||
Adjusted EBITDA as a percentage of segment revenue | 13.4 | % | 10.7 | % | |||||||||||
Ready-mixed Concrete Data: | |||||||||||||||
Average selling price per cubic yard | $ | 110.85 | $ | 104.03 | $ | 6.82 | 6.6 | % | |||||||
Sales volume in thousands of cubic yards | 5,696 | 5,225 | 471 | 9.0 | % | ||||||||||
Revenue. Our ready-mixed concrete sales provided 89.9% of our total revenue in 2014, versus 91.2% in 2013. Segment revenue for 2014 rose $87.5 million, or 16.0%, over 2013 levels. We estimate that approximately $11.7 million of this increase, or 13.4%, was due to segment acquisitions during 2014. The 2014 revenue increase was driven primarily by a 9.0% increase in sales volume, or 0.5 million cubic yards. We estimate that approximately 20.0% of our volume increase was due to 2014 acquisitions. Increased volume provided $48.9 million, or approximately 55.9%, of our ready-mixed concrete revenue growth. We also experienced an approximate 6.6% increase in our ready-mixed concrete average selling price per cubic yard during 2014 as compared to 2013. Increased selling price contributed $38.6 million, or 44.1%, of our revenue growth. Our sales volume was higher in our Texas, New York, and New Jersey markets due to increased construction activity. Volume in our northern California market was down slightly during 2014 as compared to 2013 partially due to significant lost weather days in December 2014 due to rain. However, overall revenue in our northern California market rose due to increased average selling price. We also saw a volume decline in our Washington, D.C. market due primarily to the timing of certain projects, partially offset by increased average selling price. Our average selling price increased in all of our markets.
Adjusted EBITDA. Adjusted EBITDA for our ready-mixed concrete segment rose from $58.6 million in 2013 to $84.7 million in 2014, an increase of $26.1 million, or 44.6%. We estimate that approximately $1.6 million, or 6.1%, of our 2014 Adjusted EBITDA increase resulted from our 2014 segment acquisitions. Driving the growth in Adjusted EBITDA was a 9.0% increase in sales volume plus a 6.6% increase in our average selling price, which resulted in $87.5 million in higher revenue. Partially offsetting the growth in revenue was the increased cost of goods sold associated with the higher volume of sales. Our variable costs, which include primarily material costs, labor and benefits costs, utilities, and delivery costs, were all higher due to the higher volume. We also saw higher raw materials prices from our vendors during 2014, which increased our cost of goods sold for 2014. However, we were generally able to pass these price increases along to our customers. Our fixed plant costs, which consist primarily of property taxes, equipment rental, and plant management costs, increased during 2014 due to higher personnel and equipment costs needed to operate our facilities, as well as higher overall fixed costs to operate more locations and trucks than in the previous year. Segment Adjusted EBITDA as a percentage of segment revenue rose to 13.4% in 2014 from 10.7% in the 2013 period, reflecting primarily the higher revenues and greater efficiencies.
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Aggregate products
The following table sets forth key financial information for our aggregate products segment for the periods indicated:
(amounts in thousands, except selling prices) | |||||||||||||||
Year Ended December 31, | Increase / (Decrease) | ||||||||||||||
2014 | 2013 | $ or tons, as applicable | % | ||||||||||||
Aggregate Products Segment: | |||||||||||||||
Revenue | $ | 52,618 | $ | 38,213 | $ | 14,405 | 37.7 | % | |||||||
Segment revenue, excluding intersegment sales, as a percentage of total revenue | 4.5 | % | 3.6 | % | |||||||||||
Adjusted EBITDA | $ | 10,549 | $ | 7,192 | $ | 3,357 | 46.7 | % | |||||||
Adjusted EBITDA as a percentage of segment revenue | 20.0 | % | 18.8 | % | |||||||||||
Aggregates Data: | |||||||||||||||
Average selling price per ton | $ | 9.40 | $ | 8.84 | $ | 0.56 | 6.3 | % | |||||||
Sales volume in thousands of tons | 4,650 | 3,597 | 1,053 | 29.3 | % | ||||||||||
Revenue. Sales of our aggregate products, excluding intersegment sales of $21.0 million, provided 4.5% of our total revenue in 2014, compared to 3.6%, excluding intersegment sales of $16.5 million, in 2013. Segment revenue rose $14.4 million, or 37.7%, over prior year levels. We sell our aggregates to external customers and also sell them internally to our ready-mixed concrete segment at a market price. Approximately 39.8% of our 2014 aggregates sales, or $21.0 million, were to our ready-mixed concrete segment, versus 43.2%, or $16.5 million, in 2013. Contributing to our overall aggregates revenue growth was an increase in volume of 1.1 million tons, which provided $9.3 million, or 64.6%, of our aggregates revenue increase. Our average selling price rose 6.3%, which provided $2.6 million, or 18.1%, of our increase in aggregates revenue. In addition, freight charges to deliver the aggregates to the external customer, as well as other charges, all of which are included in revenue, increased $2.4 million during 2014 and contributed 16.7% to our aggregates revenue growth.
Adjusted EBITDA. Adjusted EBITDA for our aggregates segment increased to $10.5 million in the 2014 period from $7.2 million in the 2013 period, primarily reflecting the higher sales volume and higher average selling price, partially offset by the related higher cost of goods sold associated with the increased volume. Our variable costs associated with cost of goods sold, which includes quarry labor and benefits, utilities, repairs and maintenance, pit costs to prepare the stone and gravel for use, and delivery costs, all rose due to the higher sales volumes. Our quarry fixed costs, which include primarily property taxes, equipment rental, and plant management costs, were higher compared to the previous year, primarily due to operating costs associated with two additional quarries that commenced production during 2014. Overall, our segment Adjusted EBITDA as a percentage of segment revenue increased to 20.0% in 2014 from 18.8% in 2013, primarily due to the increase in revenue and increased efficiencies.
Critical Accounting Policies and Estimates
Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1, "Organization and Summary of Significant Accounting Policies," to our consolidated financial statements included in this report describes the significant accounting policies we use in preparing those statements. We believe the most complex and sensitive judgments, because of their significance to our financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. We have listed below those policies which we believe are critical and involve complex judgment in their application to our financial statements. Actual results in these areas could differ from our estimates.
Goodwill
We record as goodwill the amount by which the total purchase price we pay in our acquisition transactions exceeds our estimated fair value of the identifiable net assets we acquire. We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. We generally test for goodwill impairment in the fourth quarter
50
of each year, using a two-step process, which requires us to make certain judgments and assumptions in our calculations. The first step of the process involves estimating the fair value of our reporting units and comparing the result to the reporting unit's carrying value. We estimate fair value using an equally weighted combination of discounted cash flows and multiples of invested capital to EBITDA. The discounted cash flow model includes forecasts for revenue and cash flows discounted at our weighted average cost of capital. Multiples of invested capital to EBITDA are calculated using a weighted average of two selected 12 month periods results by reporting unit compared to the enterprise value of the Company, which is determined based on the combination of the market value of our common stock and total outstanding debt. If the fair value exceeds the carrying value, the second step is not performed and no impairment is recorded. If however, the fair value is below the carrying value, a second step is performed to calculate the amount of the impairment by measuring the goodwill at an implied fair value. We completed our annual assessment of impairment during the fourth quarter of 2015 for those units with goodwill as of October 1, 2015, and there was no impairment. In the absence of any evidence to the contrary, we consider goodwill resulting from acquisitions in the fourth quarter of 2015 to be recorded at fair value and not impaired, as the arm's length transactions that generated the goodwill were completed at a market rate. Our fair value estimates were determined using estimates and assumptions we believed to be reasonable at the time. Changes in those assumptions or estimates could impact the calculated fair value of the reporting units. See Note 4, "Goodwill and Intangible Assets, Net," to our consolidated financial statements included in this report for additional information about our goodwill.
Impairment of Long-Lived Assets
We evaluate the recoverability of our long-lived assets when changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with authoritative accounting guidance related to the impairment or disposal of long-lived assets. We compare the carrying values of long-lived assets to our projection of future undiscounted cash flows attributable to those assets. If the carrying value of a long-lived asset exceeds the future undiscounted cash flows we project will be derived from that asset, we record an impairment loss equal to the excess of the carrying value over the fair value. Actual useful lives and future cash flows could be different from those we estimate. These differences could have a material effect on our future operating results.
Insurance Programs
We maintain third-party insurance coverage in amounts and against the risks we believe are reasonable. We share the risk of loss with our insurance underwriters by maintaining high deductibles subject to aggregate annual loss limitations. We believe our workers’ compensation, automobile and general liability per occurrence retentions are consistent with industry practices, although there are variations among our business units. We fund these deductibles and record an expense for losses we expect under the programs. We determine the expected losses using a combination of our historical loss experience and subjective assessments of our future loss exposure. The estimated losses are subject to uncertainty from various sources, including changes in claims reporting and settlement patterns, judicial decisions, new legislation and economic conditions. Although we believe the estimated losses are reasonable, significant differences related to the items we have noted above could materially affect our insurance obligations and future expense. The amount accrued for self-insurance claims was $12.0 million as of December 31, 2015, compared to $9.5 million as of December 31, 2014, which is classified in accrued liabilities. The increase in 2015 was primarily attributable to increased loss reserves.
Income Taxes
We use the liability method of accounting for income taxes. Under this method, we record deferred income taxes based on temporary differences between the financial reporting and tax bases of assets and liabilities and use enacted tax rates and laws that we expect will be in effect when we recover those assets or settle those liabilities, as the case may be, to measure those taxes. In cases where the expiration date of tax loss carryforwards or the projected operating results indicate that realization is not likely, we provide for a valuation allowance.
We have deferred tax assets, resulting from deductible temporary differences that may reduce taxable income in future periods. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax-planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be impacted by changes in tax laws, changes in statutory tax rates and future taxable income levels. If we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. Based on the assessment, we recorded a valuation allowance of $4.1 million at December 31, 2015 and $26.5 million at December 31, 2014. In determining the valuation allowance in 2015 and 2014, we used such factors as (i) cumulative federal taxable losses, (ii) the amount of deferred tax liabilities that we
51
generally expect to reverse in the same period and jurisdiction that are of the same character as the temporary differences giving rise to our deferred tax assets and (iii) certain tax contingencies under authoritative accounting guidance related to accounting for uncertainty in income taxes which, should they materialize, would be offset by our net operating loss generated in 2008 through 2013. We provided a valuation allowance in 2015 and 2014 related to certain federal and state income tax attributes we did not believe we could utilize within the tax loss carryforward periods.
In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the highest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. See Note 16, "Income Taxes," to our consolidated financial statements included in this report for further discussion.
Derivative Instruments
We are exposed to certain risks relating to our ongoing business operations. However, derivative instruments are not used to hedge these risks. We are required to account for derivative instruments as a result of the issuance of the Warrants. Our warrant derivatives do not manage business risk nor are they executed for speculative purposes. All derivatives are required to be recorded on the balance sheet at their fair value. Each quarter, we determine the fair value of our derivative liabilities, and changes result in gain or loss. Fair value is estimated using a Black-Scholes model for the Warrants. The key inputs in determining fair value of our derivative liabilities of $67.4 million and $25.2 million at December 31, 2015 and 2014, respectively, include our stock price, stock price volatility, and risk-free interest rates. Changes in these inputs will impact the valuation of our derivatives and result in gain or loss each quarterly period. See Note 11, "Derivatives," to our consolidated financial statements included in this report for additional information about our derivatives.
Contingent Consideration
We record an estimate of the fair value of contingent consideration within accrued liabilities and other long-term obligations. On a quarterly basis, we revalue the liability and record increases or decreases in the fair value as an adjustment to earnings. Changes to the contingent consideration liability can result from adjustments to the discount rate, accretion of interest expense due to the passage of time, or changes in the assumptions regarding probabilities of successful achievement of related milestones and the estimated timing in which the milestones are achieved. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. The key inputs in determining fair value of our contingent consideration obligations of $30.1 million and $5.3 million at December 31, 2015 and 2014, respectively, include discount rates ranging from 3.50% to 15.75%, a forecasted average of WTI prices from December 8, 2014 through December 7, 2016 from quoted sources, and management's estimates of future sales volumes and EBITDA. For further information, see Note 13, "Fair Value Disclosures," to our consolidated financial statements included in this report for additional information about our contingent consideration obligations.
Other
We record accruals for legal and other contingencies when estimated future expenditures associated with those contingencies become probable and the amounts can be reasonably estimated. However, new information may become available, or circumstances (such as applicable laws and regulations) may change, thereby resulting in an increase or decrease in the amount required to be accrued for such matters (and, therefore, a decrease or increase in reported net income in the period of such change).
Recent Accounting Pronouncements
For a discussion of recently adopted accounting standards, see Note 1, "Organization and Summary of Significant Accounting Policies," to our consolidated financial statements included in this report.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
53
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
U.S. Concrete, Inc.
We have audited the accompanying consolidated balance sheets of U.S. Concrete, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Concrete, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1, the 2015 consolidated financial statements have been restated to correct an error.
Also as discussed in Note 1, the Company adopted new accounting guidance in 2015 related to the presentation of deferred income taxes.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2016 (except for the material weakness discussed in Management’s Report on Internal Control over Financial Reporting, as to which the date is April 27, 2016), expressed an adverse opinion.
/s/ GRANT THORNTON LLP
Dallas, Texas
March 4, 2016 (except for the 2015 Restatement described in Note 1 and the effects thereof, as to which the date is April 27, 2016)
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U.S. CONCRETE, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, including share amounts but excluding per share amounts)
December 31, | ||||||||
2015 | 2014 | |||||||
(Restated) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,925 | $ | 30,202 | ||||
Trade accounts receivable, net | 171,256 | 114,902 | ||||||
Inventories | 36,726 | 31,722 | ||||||
Deferred income taxes | — | 1,887 | ||||||
Prepaid expenses | 4,243 | 3,965 | ||||||
Other receivables | 7,765 | 6,519 | ||||||
Assets held for sale | — | 3,779 | ||||||
Other current assets | 2,374 | 301 | ||||||
Total current assets | 226,289 | 193,277 | ||||||
Property, plant and equipment, net | 248,123 | 176,524 | ||||||
Goodwill | 100,204 | 50,757 | ||||||
Intangible assets, net | 95,754 | 31,720 | ||||||
Deferred income taxes | 6,026 | — | ||||||
Other assets | 11,450 | 8,250 | ||||||
Total assets | $ | 687,846 | $ | 460,528 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 80,419 | $ | 48,705 | ||||
Accrued liabilities | 85,854 | 50,391 | ||||||
Current maturities of long-term debt | 9,386 | 5,104 | ||||||
Derivative liabilities | 67,401 | 25,246 | ||||||
Liabilities held for sale | — | 902 | ||||||
Total current liabilities | 243,060 | 130,348 | ||||||
Long-term debt, net of current maturities | 272,363 | 215,333 | ||||||
Other long-term obligations and deferred credits | 38,416 | 6,940 | ||||||
Deferred income taxes | — | 6,427 | ||||||
Total liabilities | 553,839 | 359,048 | ||||||
Commitments and contingencies (Note 22) | ||||||||
Equity: | ||||||||
Preferred stock, $0.001 par value per share (10,000 shares authorized; none issued) | — | — | ||||||
Common stock, $0.001 par value per share (100,000 shares authorized; 15,713 and 14,675 shares issued, respectively; and 14,871 and 13,978 shares outstanding, respectively) | 16 | 15 | ||||||
Additional paid-in capital | 201,015 | 156,745 | ||||||
Accumulated deficit | (48,157 | ) | (42,743 | ) | ||||
Treasury stock, at cost (842 and 697 common shares, respectively) | (18,867 | ) | (12,537 | ) | ||||
Total equity | 134,007 | 101,480 | ||||||
Total liabilities and equity | $ | 687,846 | $ | 460,528 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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U.S. CONCRETE, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(Restated) | ||||||||||||
Revenue | $ | 974,717 | $ | 703,714 | $ | 598,155 | ||||||
Cost of goods sold before depreciation, depletion and amortization | 768,839 | 573,318 | 498,660 | |||||||||
Selling, general and administrative expenses | 87,978 | 61,850 | 59,424 | |||||||||
Depreciation, depletion and amortization | 43,570 | 23,849 | 18,868 | |||||||||
Loss on revaluation of contingent consideration, net | 932 | — | — | |||||||||
Gain on sale of assets, net | (468 | ) | (625 | ) | (232 | ) | ||||||
Income from operations | 73,866 | 45,322 | 21,435 | |||||||||
Interest expense, net | (21,734 | ) | (20,431 | ) | (11,332 | ) | ||||||
Derivative loss | (60,016 | ) | (3,556 | ) | (29,964 | ) | ||||||
Gain on early extinguishment of debt | — | 11 | 985 | |||||||||
Other income, net | 3,569 | 2,385 | 1,771 | |||||||||
(Loss) income from continuing operations before income taxes | (4,315 | ) | 23,731 | (17,105 | ) | |||||||
Income tax expense | 779 | 2,156 | 1,168 | |||||||||
(Loss) income from continuing operations | (5,094 | ) | 21,575 | (18,273 | ) | |||||||
Loss from discontinued operations, net of taxes | (320 | ) | (993 | ) | (1,856 | ) | ||||||
Net (loss) income | $ | (5,414 | ) | $ | 20,582 | $ | (20,129 | ) | ||||
Basic (loss) income per share: | ||||||||||||
(Loss) income from continuing operations | $ | (0.36 | ) | $ | 1.59 | $ | (1.42 | ) | ||||
Loss from discontinued operations, net of income tax | (0.02 | ) | (0.07 | ) | (0.14 | ) | ||||||
Net (loss) income per share - basic | $ | (0.38 | ) | $ | 1.52 | $ | (1.56 | ) | ||||
Diluted (loss) income per share: | ||||||||||||
(Loss) income from continuing operations | $ | (0.36 | ) | $ | 1.55 | $ | (1.42 | ) | ||||
Loss from discontinued operations, net of taxes | (0.02 | ) | (0.07 | ) | (0.14 | ) | ||||||
Net (loss) income per share - diluted | $ | (0.38 | ) | $ | 1.48 | $ | (1.56 | ) | ||||
Weighted average shares outstanding: | ||||||||||||
Basic | 14,080 | 13,541 | 12,917 | |||||||||
Diluted | 14,080 | 13,898 | 12,917 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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U.S. CONCRETE, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
Common Stock | |||||||||||||||||||||||
# of Shares | Par Value | Additional Paid-In Capital | Accumulated Deficit | Treasury Stock | Total Equity (Deficit) | ||||||||||||||||||
BALANCE, January 1, 2013 | 13,358 | $ | 13 | $ | 136,451 | $ | (43,196 | ) | $ | (744 | ) | $ | 92,524 | ||||||||||
Stock-based compensation | — | — | 5,429 | — | — | 5,429 | |||||||||||||||||
Restricted stock vesting | 183 | — | — | — | — | — | |||||||||||||||||
Restricted stock grants, net of cancellations | 166 | — | — | — | — | — | |||||||||||||||||
Stock options exercised | 17 | — | 224 | — | — | 224 | |||||||||||||||||
Conversion of convertible debt | 608 | 1 | 10,591 | — | — | 10,592 | |||||||||||||||||
Other treasury share purchases | (296 | ) | — | — | — | (4,913 | ) | (4,913 | ) | ||||||||||||||
Net loss | — | — | — | (20,129 | ) | — | (20,129 | ) | |||||||||||||||
BALANCE, December 31, 2013 | 14,036 | $ | 14 | $ | 152,695 | $ | (63,325 | ) | $ | (5,657 | ) | $ | 83,727 | ||||||||||
Stock-based compensation | — | — | 3,655 | — | — | 3,655 | |||||||||||||||||
Restricted stock vesting | 28 | — | — | — | — | — | |||||||||||||||||
Restricted stock grants, net of cancellations | 169 | 1 | — | — | — | 1 | |||||||||||||||||
Stock options exercised | 27 | — | 377 | — | — | 377 | |||||||||||||||||
Warrants exercised | 1 | — | 18 | — | — | 18 | |||||||||||||||||
Share repurchase program | (200 | ) | — | — | — | (4,824 | ) | (4,824 | ) | ||||||||||||||
Other treasury share purchases | (83 | ) | — | — | — | (2,056 | ) | (2,056 | ) | ||||||||||||||
Net income | — | — | — | 20,582 | — | 20,582 | |||||||||||||||||
BALANCE, December 31, 2014 | 13,978 | $ | 15 | $ | 156,745 | $ | (42,743 | ) | $ | (12,537 | ) | $ | 101,480 | ||||||||||
Stock-based compensation | — | — | 5,824 | — | — | 5,824 | |||||||||||||||||
Excess tax benefits from share-based compensation | — | — | 4,952 | — | — | 4,952 | |||||||||||||||||
Restricted stock vesting | 22 | — | — | — | — | — | |||||||||||||||||
Restricted stock grants, net of cancellations | 200 | — | — | — | — | — | |||||||||||||||||
Stock options exercised | 15 | — | 315 | — | — | 315 | |||||||||||||||||
Warrants exercised | 359 | — | 18,091 | — | — | 18,091 | |||||||||||||||||
Other treasury share purchases | (145 | ) | — | — | — | (6,330 | ) | (6,330 | ) | ||||||||||||||
Common stock issuance | 442 | 1 | 15,088 | — | — | 15,089 | |||||||||||||||||
Net loss (as restated) | — | — | — | (5,414 | ) | — | (5,414 | ) | |||||||||||||||
BALANCE, December 31, 2015 (as restated) | 14,871 | $ | 16 | $ | 201,015 | $ | (48,157 | ) | $ | (18,867 | ) | $ | 134,007 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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U.S. CONCRETE, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(Restated) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net (loss) income | $ | (5,414 | ) | $ | 20,582 | $ | (20,129 | ) | ||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||
Depreciation, depletion and amortization | 43,570 | 23,849 | 19,016 | |||||||||
Debt issuance cost amortization | 1,795 | 1,679 | 2,164 | |||||||||
Gain on extinguishment of debt | — | (11 | ) | (985 | ) | |||||||
Amortization of facility exit costs | — | — | (142 | ) | ||||||||
Amortization of discount on long-term incentive plan and other accrued interest | 427 | 425 | 512 | |||||||||
Net loss on derivative | 60,016 | 3,556 | 29,964 | |||||||||
Net loss on revaluation of contingent consideration | 932 | — | — | |||||||||
Loss on impairment of long-lived assets | — | 900 | — | |||||||||
Net gain on sale of assets | (275 | ) | (1,265 | ) | (13 | ) | ||||||
Deferred income taxes | (12,579 | ) | 864 | 818 | ||||||||
Deferred rent | — | — | 510 | |||||||||
Provision for doubtful accounts and customer disputes | 4,198 | 1,533 | 1,103 | |||||||||
Stock-based compensation | 5,824 | 3,655 | 5,429 | |||||||||
Changes in assets and liabilities, excluding effects of acquisitions: | ||||||||||||
Accounts receivable | (37,766 | ) | (13,466 | ) | (8,982 | ) | ||||||
Inventories | (383 | ) | (2,534 | ) | (2,574 | ) | ||||||
Prepaid expenses and other current assets | (886 | ) | 217 | 2,497 | ||||||||
Other assets and liabilities, net | (1,341 | ) | (380 | ) | (2,732 | ) | ||||||
Accounts payable and accrued liabilities | 46,143 | 11,311 | (2,276 | ) | ||||||||
Net cash provided by operating activities | 104,261 | 50,915 | 24,180 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Purchases of property, plant and equipment | (24,977 | ) | (32,584 | ) | (19,988 | ) | ||||||
Payments for acquisitions, net of cash acquired | (135,347 | ) | (89,602 | ) | (4,410 | ) | ||||||
Proceeds from disposals of property, plant and equipment | 1,312 | 3,708 | 627 | |||||||||
Proceeds from (payments for) disposals of business units | 1,177 | — | (2,333 | ) | ||||||||
Net cash used in investing activities | (157,835 | ) | (118,478 | ) | (26,104 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Proceeds from revolver borrowings | 206,809 | 213 | 137,302 | |||||||||
Repayments of revolver borrowings | (161,809 | ) | (213 | ) | (150,602 | ) | ||||||
Proceeds from debt issuance | — | — | 200,000 | |||||||||
Repayments of debt | (117 | ) | — | (61,113 | ) | |||||||
Proceeds from exercise of stock options and warrants | 546 | 396 | 224 | |||||||||
Payments of other long-term obligations | (2,298 | ) | (2,250 | ) | — | |||||||
Payments for other financing | (8,611 | ) | (5,194 | ) | (1,995 | ) | ||||||
Debt issuance costs | (893 | ) | (974 | ) | (9,063 | ) | ||||||
Payments for share repurchases | — | (4,824 | ) | — | ||||||||
Other treasury share purchases | (6,330 | ) | (2,056 | ) | (4,913 | ) | ||||||
Net cash provided by (used in) financing activities | 27,297 | (14,902 | ) | 109,840 | ||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (26,277 | ) | (82,465 | ) | 107,916 | |||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 30,202 | 112,667 | 4,751 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 3,925 | $ | 30,202 | $ | 112,667 | ||||||
58
U.S. CONCRETE, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||||||
Cash paid for interest | $ | 19,503 | $ | 18,636 | $ | 7,324 | ||||||
Cash paid for income taxes | $ | 1,949 | $ | 1,464 | $ | 305 | ||||||
Supplemental Disclosure of Non-cash Investing and Financing Activities: | ||||||||||||
Conversion of convertible debt to equity | $ | — | $ | — | $ | 6,381 | ||||||
Capital expenditures funded by capital leases and promissory notes | $ | 23,450 | $ | 11,161 | $ | 11,891 | ||||||
Acquisitions funded by stock issuance, contingent consideration and deferred payments | $ | 50,805 | $ | — | $ | — | ||||||
Dispositions funded through promissory note and deferred payments | $ | 3,380 | $ | — | $ | — | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (restated)
Nature of Operations
U.S. Concrete, Inc., a Delaware corporation, provides ready-mixed concrete, aggregates and concrete-related products and services to the construction industry in several major markets in the United States. U.S. Concrete, Inc. is a holding company and conducts its businesses through its consolidated subsidiaries. In these notes to the consolidated financial statements (these "Notes"), we refer to U.S. Concrete, Inc. and its subsidiaries as "we," "us," the "Company," or "U.S. Concrete" unless we specifically state otherwise or the context indicates otherwise.
2015 Restatement
We are restating our 2015 consolidated financial statements to:
• | eliminate from our consolidated balance sheet as of December 31, 2015, a $24.8 million deferred tax asset (the “Deferred Tax Asset”) related to our outstanding common stock purchase warrants (the “Warrants”, which Warrants are described more fully in Note 15), and increase income tax expense by $24.8 million in our consolidated statement of operations for the year ended December 31, 2015; and |
• | eliminate a $6.1 million tax deduction (the "Tax Deduction") included in income tax benefit in our consolidated statement of operations for the year ended December 31, 2015 and increase accrued liabilities by $5.9 million and decrease prepaid expenses by $0.2 million in our consolidated balance sheet as of December 31, 2015 related to the exercise of Warrants during 2015. |
Prior to the fourth quarter of 2015, we maintained a valuation allowance on our net deferred tax assets because we were still in a three year cumulative loss position. During the fourth quarter of 2015, we concluded that the valuation allowance on a portion of our net deferred tax assets could be reversed (as described more fully in Note 16). We reflected the reversal of the valuation allowance in our consolidated statement of operations for the year ended December 31, 2015 and, therefore, the Deferred Tax Asset had no valuation allowance recorded against it as of December 31, 2015. Due to the prior valuation allowance, there is no net impact from these adjustments to our consolidated balance sheets, consolidated statements of operations, consolidated statements of changes in equity, or consolidated statements of cash flow for any quarterly or annual period prior to December 31, 2015. As a result, we are not restating our consolidated financial statements for any periods prior to 2015, but will restate the prior periods tax footnote disclosures within our 2015 consolidated financial statements.
Management and the Audit Committee of the Company's Board of Directors concluded that the Deferred Tax Asset was based on a tax position that did not meet the required more likely than not threshold in order to be recorded on the consolidated balance sheet in accordance with the Financial Accounting Standards Board's Accounting Standards Codification Topic 740 (Income Taxes) ("ASC 740"), and that the Deferred Tax Asset and related Tax Deduction were accordingly recorded in error. Management and the Audit Committee further concluded that the Deferred Tax Asset and Tax Deduction should be reversed and a liability for resulting potential tax liabilities should be recorded, following generally accepted accounting principles in ASC 740.
Additionally, during the fourth quarter of 2015, we acquired two entities that have been designated as non-guarantor subsidiaries for purposes of our 8.50% Senior Secured Notes due 2018 (the “2018 Notes”) (as described more fully in Note 9). As such, at December 31, 2015, we are required to provide condensed consolidating financial information in accordance with Rule 3-10 of Regulation S-X. We had no non-guarantor subsidiaries for any quarterly or annual period prior to December 31, 2015. These restated consolidated financial statements include the previously omitted condensed consolidating footnote disclosure required by Rule 3-10 of Regulation S-X relating to our outstanding 2018 Notes (see Note 24).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following schedules reconcile the amounts as previously reported in the applicable financial statement to the corresponding restated amounts (in thousands):
U.S. CONCRETE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2015 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Prepaid expenses | $ | 4,450 | $ | (207 | ) | $ | 4,243 | |||||
Total current assets | 226,496 | (207 | ) | 226,289 | ||||||||
Deferred income taxes, non-current | 30,875 | (24,849 | ) | 6,026 | ||||||||
Total assets | 712,902 | (25,056 | ) | 687,846 | ||||||||
Accrued liabilities | 79,996 | 5,858 | 85,854 | |||||||||
Total current liabilities | 237,202 | 5,858 | 243,060 | |||||||||
Total liabilities | 547,981 | 5,858 | 553,839 | |||||||||
Accumulated deficit | (17,243 | ) | (30,914 | ) | (48,157 | ) | ||||||
Total equity | 164,921 | (30,914 | ) | 134,007 | ||||||||
Total liabilities and equity | 712,902 | (25,056 | ) | 687,846 | ||||||||
U.S. CONCRETE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2015 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Income tax (benefit) expense | $ | (30,135 | ) | $ | 30,914 | $ | 779 | |||||
Income (loss) from continuing operations | 25,820 | (30,914 | ) | (5,094 | ) | |||||||
Net income (loss) | 25,500 | (30,914 | ) | (5,414 | ) | |||||||
Basic income (loss) per share: | ||||||||||||
Income (loss) from continuing operations | 1.83 | (2.19 | ) | (0.36 | ) | |||||||
Net income (loss) per share - basic | 1.81 | (2.19 | ) | (0.38 | ) | |||||||
Diluted income (loss) per share: | ||||||||||||
Income (loss) from continuing operations | 1.66 | (2.02 | ) | (0.36 | ) | |||||||
Net income (loss) per share - diluted | 1.64 | (2.02 | ) | (0.38 | ) | |||||||
U.S. CONCRETE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
December 31, 2015 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Net income (loss) | $ | 25,500 | $ | (30,914 | ) | $ | (5,414 | ) | ||||
BALANCE, December 31, 2015 | 164,921 | (30,914 | ) | 134,007 | ||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
U.S. CONCRETE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2015 | ||||||||||||
As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
Net income (loss) | $ | 25,500 | $ | (30,914 | ) | $ | (5,414 | ) | ||||
Deferred income taxes | (37,428 | ) | 24,849 | (12,579 | ) | |||||||
Prepaid expenses and other current assets | (1,094 | ) | 208 | (886 | ) | |||||||
Accounts payable and accrued liabilities | 40,286 | 5,857 | 46,143 | |||||||||
Basis of Presentation
The consolidated financial statements consist of the accounts of U.S. Concrete, Inc. and its wholly owned subsidiaries. All significant intercompany account balances and transactions have been eliminated.
During 2015, we completed eight acquisitions consisting of 22 standard ready-mixed concrete plants, five quarries (one of which we have operated under a lease agreement since October 2014), and related assets and liabilities (see Note 2). All of the assets acquired and liabilities assumed were recorded at their respective fair value as of the date of the acquisition, and the results of operations are included in the consolidated financial statements from the respective date of acquisition.
On June 2, 2015, we completed the sale of our one remaining precast operation in Pennsylvania. This sale represented the final divestiture of the Company's owned assets related to precast operations, which were classified as held for sale as of December 31, 2014. The results of operations for this unit have been included in discontinued operations for the periods presented.
During 2014, we completed nine acquisitions consisting of seven standard ready-mixed concrete plants and related assets, 16 volumetric ready-mixed concrete facilities, 109 volumetric ready-mixed concrete trucks and related assets, and leases to operate two aggregate distribution terminals in New York and related assets and liabilities (see Note 2). All of the assets acquired and liabilities assumed were recorded at their respective fair value as of the date of the acquisition, and the results of operations are included in the consolidated financial statements from the respective date of acquisition.
On July 26, 2013, we acquired three ready-mixed concrete plants and related assets in our north Texas market from Bodin Concrete, L.P. All of the assets acquired were recorded at their respective fair value as of the date of the acquisition, and the results of operations are included in the consolidated financial statements from the date of acquisition.
Business Combinations
We have acquired a number of businesses in recent years. We record the operating results of our acquired businesses in our consolidated statements of operations from the date of acquisition. Acquisitions are accounted for using the purchase method of accounting in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805 "Business Combinations." We allocate the purchase price to the assets acquired, including identifiable intangible assets, liabilities assumed, and contingent consideration obligations based on their estimated fair value on the date of the acquisition. These allocations require the significant use of estimates and are based on information that was available to management at the time these consolidated financial statements were prepared. We utilized recognized valuation techniques, including the income approach, sales approach, and cost approach to value the net assets acquired. The excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Final valuations of assets and liabilities are obtained and recorded within one year from the date of the acquisition. See Note 13 for additional information regarding valuation of contingent consideration.
Assets and Liabilities Held for Sale
We classify long-lived assets (disposal groups) to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the asset (disposal group); the asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
assets (disposal groups); an active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated; the sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset (disposal group) beyond one year; the asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
We initially measure a long-lived asset (disposal group) that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset (disposal group) until the date of sale. We assess the fair value of a long-lived asset (disposal group) less any costs to sell each reporting period it remains classified as held for sale and report any subsequent changes as an adjustment to the carrying value of the asset (disposal group), as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale.
Upon determining that a long-lived asset meets the criteria to be classified as held for sale, we report the assets and liabilities of the disposal group, if material, in the line items assets held for sale and liabilities held for sale, respectively, in our consolidated balance sheets.
Cash and Cash Equivalents
We record as cash equivalents all highly liquid investments having maturities of three months or less at the original date of purchase. Our cash equivalents may include money market accounts, certificates of deposit and commercial paper of highly rated corporate or government issuers. We classify our cash equivalents as held-to-maturity. Cash equivalents are stated at cost plus accrued interest, which approximates market value. The maximum amount placed in any one financial institution is limited in order to reduce risk. At times, our investments may be in excess of amounts insured by the Federal Deposit Insurance Corporation. We have not experienced any losses on these accounts. Cash held as collateral or escrowed for contingent liabilities is included in other current and noncurrent assets based on the expected release date of the underlying obligation.
Accounts Receivable
Accounts receivables are reported net of allowance for doubtful accounts and customer disputes. We maintain an allowance for accounts receivable that we believe may not be collected in full. A provision for bad debt expense recorded to selling, general and administrative expenses increases the allowance. A provision for customer disputes recorded as a reduction to revenue also increases the allowance. Accounts receivable are written off when we determine the receivable will not be collected. Accounts receivable that we write off our books decrease the allowance. We determine the amount of bad debt expense and customer dispute losses we record each period and the resulting adequacy of the allowance at the end of each period by using a combination of historical loss experience, a customer-by-customer analysis of our accounts receivable balances each period, and subjective assessments of our loss exposure.
Inventories
Inventories consist primarily of cement and other raw materials, aggregates at our pits and quarries, and building materials that we hold for sale or use in the ordinary course of business. Inventories are stated at the lower of cost or fair market value using the average cost and first-in, first-out methods. We reduce the carrying value of our inventories for estimated excess and obsolete inventories equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future product demand and market conditions. Once the new cost basis is established, the value is not increased with any changes in circumstances that would indicate an increase after the remeasurement. If actual product demand or market conditions are less favorable than those projected by management, inventory write-downs may be required that could result in a material change to our consolidated results of operations or financial position.
Prepaid Expenses
Prepaid expenses primarily include amounts we have paid for insurance, licenses, taxes, rent, and maintenance contracts. We expense or amortize all prepaid amounts as used or over the period of benefit, as applicable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Property, Plant and Equipment, Net
We state property, plant and equipment at cost and use the straight-line method to compute depreciation of these assets other than mineral deposits over the following estimated useful lives: buildings and land improvements, from 10 to 40 years; machinery and equipment, from 10 to 30 years; mixers, trucks and other vehicles, from one to 12 years; and other, from three to 10 years. We capitalize leasehold improvements on properties held under operating leases and amortize those costs over the lesser of their estimated useful lives or the applicable lease term. We compute depletion of mineral deposits as such deposits are extracted utilizing the unit-of-production method. We expense maintenance and repair costs when incurred and capitalize and depreciate expenditures for major renewals and betterments that extend the useful lives of our existing assets. When we retire or dispose of property, plant or equipment, we remove the related cost and accumulated depreciation from our accounts and reflect any resulting gain or loss in our consolidated statements of operations.
Impairment of Long-lived assets
We evaluate the recoverability of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Such evaluations for impairment are significantly impacted by estimates of future prices for our products, capital needs, economic trends in the applicable construction sector and other factors. If we consider such assets to be impaired, the impairment we recognize is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of by sale are reflected at the lower of their carrying amounts, or fair values, less cost to sell. We test for impairment using a multi-tiered approach that incorporates an equal weighting to a multiple of earnings and an equal weighting to undiscounted estimated future cash flows.
Intangible Assets Including Goodwill
We amortize identifiable intangible assets with finite lives over their estimated useful lives using a straight-line approach. We record as goodwill the amount by which the total purchase price we have paid for acquisitions exceeds our estimated fair value of the net tangible and identifiable intangible assets acquired. We do not amortize goodwill but instead evaluate it for impairment within the reporting unit on an annual basis, or more often if events or circumstances indicate that there may be impairment. We generally test for intangible asset impairment in the fourth quarter of each year, because this period gives us the best visibility of the reporting units’ operating performances for the current year (seasonally, April through October are our highest revenue and production months), and our outlook for the upcoming year, since much of our customer base is finalizing operating and capital budgets during the fourth quarter. The impairment test we use involves estimating the fair value of our reporting units and comparing the result to the reporting unit's carrying value. We estimate fair value using an equally weighted combination of discounted cash flows and multiples of invested capital to EBITDA. The discounted cash flow model includes forecasts for revenue and cash flows discounted at our weighted average cost of capital. Multiples of invested capital to EBITDA are calculated using a weighted average of two selected 12 month periods results by reporting unit compared to the enterprise value of the Company, which is determined based on the combination of the market value of our capital stock and total outstanding debt. If the fair value exceeds the carrying value, the second step is not performed and no impairment is recorded. If however, the fair value is below the carrying value, a second step is performed to calculate the amount of the impairment by measuring the goodwill at an implied fair value. See Note 4 for further discussion of our goodwill and purchased intangible assets.
Debt Issue Costs
We amortize debt issue costs related to our $250.0 million asset-based revolving credit facility (the "Revolving Facility"), our 2018 Notes, and our 9.5% Convertible Secured Notes due 2015 (the "Convertible Notes") as interest expense over the scheduled maturity period of the debt. Unamortized debt issuance costs were $6.1 million and $6.8 million as of December 31, 2015 and 2014, respectively. We include unamortized debt issuance costs in other assets. See Note 9 for additional information regarding our debt, and Note 10 regarding our extinguishment of debt during 2013.
Revenue and Expenses
We derive substantially all of our revenue from the production and delivery of ready-mixed concrete, aggregates, and related building materials. We recognize revenue, net of sales tax, when products are delivered, selling price is fixed or determinable, persuasive evidence of an arrangement exists, and collection is reasonably assured. Amounts billed to customers for delivery costs are classified as a component of total revenues and the related delivery costs (excluding depreciation) are classified as a component
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
of total cost of goods sold. Cost of goods sold consists primarily of product costs and operating expenses (excluding depreciation, depletion and amortization). Operating expenses consist primarily of wages, benefits, insurance and other expenses attributable to plant operations, repairs and maintenance, and delivery costs. Selling expenses consist primarily of sales commissions, salaries of sales managers, travel and entertainment expenses, and trade show expenses. General and administrative expenses consist primarily of executive and administrative compensation and benefits, office rent, utilities, communication and technology expenses, provision for doubtful accounts, and legal and professional fees.
Deferred Rent
We recognize escalating lease payments on a straight-line basis over the term of each respective lease with the difference between cash payment and rent expense recognized being recorded as deferred rent in accrued liabilities in the accompanying consolidated balance sheets.
Insurance Programs
We maintain third-party insurance coverage against certain risks. Under our insurance programs, we share the risk of loss with our insurance underwriters by maintaining high deductibles subject to aggregate annual loss limitations. In connection with these automobile, general liability and workers’ compensation insurance programs, we have entered into standby letters of credit agreements totaling $11.3 million as of both December 31, 2015 and 2014. We fund our deductibles and record an expense for losses we expect under the programs. We determine expected losses using a combination of our historical loss experience and subjective assessments of our future loss exposure. The estimated losses are subject to uncertainty from various sources, including changes in claim reporting patterns, claim settlement patterns, judicial decisions, legislation and economic conditions. The amounts accrued for self-insured claims were $12.0 million and $9.5 million as of December 31, 2015 and 2014, respectively. We include these accruals in accrued liabilities on our consolidated balance sheets.
Income Taxes
In accordance with ASC 740 - Income Taxes, we use the liability method of accounting for income taxes. Under this method, we record deferred income taxes based on temporary differences between the financial reporting and tax bases of assets and liabilities and use enacted tax rates and laws that we expect will be in effect when we recover those assets or settle those liabilities, as the case may be, to measure those taxes. We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. We have a valuation allowance of $4.1 million and $26.5 million as of December 31, 2015 and 2014, respectively. In previous years, we netted our uncertain tax positions against our net operating loss carryforwards in accordance with FASB guidelines. As a result of the utilization of those loss carryforwards, we now present the uncertain tax benefits in other long-term obligations and deferred credits on our consolidated balance sheets.
Contingent Consideration
We record an estimate of the fair value of contingent consideration within accrued liabilities and other long-term obligations on our consolidated balance sheets. On a quarterly basis, we revalue the liability and record increases or decreases in the fair value as an adjustment to earnings. Changes to the contingent consideration liability can result from adjustments to the discount rate, accretion of interest expense due to the passage of time, or changes in the assumptions regarding probabilities of successful achievement of related milestones and the estimated timing in which the milestones are achieved. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. For further information, see Note 13 regarding our fair value disclosures.
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, trade receivables, trade payables, long-term debt, other long-term obligations, and derivative liabilities. We consider the carrying values of cash and cash equivalents, trade receivables and trade payables to be representative of their respective fair values because of their short-term maturities or expected settlement dates. The fair value of our 2018 Notes, estimated based on broker / dealer quoted market prices, was $207.0 million and $209.0 million as of December 31, 2015 and 2014, respectively. The carrying value of outstanding amounts under our Revolving Facility approximates fair value due to the floating interest rate. Our Convertible Notes were repaid on August 31, 2015 and had no fair value as of December 31, 2015. The fair value of the Convertible Notes was $0.1 million at December 31, 2014, with no embedded derivative. The fair value of issued Warrants (as defined herein) was $67.4 million and $25.2 million at December 31, 2015 and 2014, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The fair value of our contingent consideration obligations associated with acquisitions was $30.1 million at December 31, 2015 and $5.3 million at December 31, 2014. For further information, see Note 11 regarding our derivative liabilities, Note 12 regarding our other long-term obligations, and Note 13 regarding our fair value disclosures.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions that we consider significant in the preparation of our financial statements include those related to our allowance for doubtful accounts, goodwill, intangibles, valuation of derivatives, valuation of contingent consideration, accruals for self-insurance, income taxes, the valuation of inventory and the valuation and useful lives of property, plant and equipment.
Stripping Costs
We include post-production stripping costs in the cost of inventory produced during the period as these costs are incurred. Post-production stripping costs represent stripping costs incurred after the first salable minerals are extracted from the mine.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period after giving effect to all potentially dilutive securities outstanding during the period. See Note 18 for additional information regarding our earnings (loss) per share.
Comprehensive Income (Loss)
Comprehensive income (loss) represents all changes in equity of an entity during the reporting period, except those resulting from investments by and distributions to stockholders. For the years ended December 31, 2015, 2014 and 2013, no differences existed between our consolidated net income (loss) and our consolidated comprehensive income (loss).
Stock-based Compensation
Stock-based employee compensation cost is measured at the grant date based on the calculated fair value of the award. We recognize expense over the employee’s requisite service period, generally the vesting period of the award, or in the case of performance-based awards, over the life of the derived service period. The related excess tax benefit received upon exercise of stock options or vesting of restricted stock, if any, is reflected in the statement of cash flows as a financing activity rather than an operating activity. See Note 17 for additional information regarding our stock-based compensation plans.
Recent Accounting Pronouncements
In November 2015, the FASB issued an amendment which simplifies the presentation of deferred income taxes. The amendment requires that deferred tax assets and liabilities be classified as non-current in the balance sheet. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We early adopted the provisions of this new standard effective with the annual period ended December 31, 2015 on a prospective basis. Adoption of this new standard resulted in a reclassification of our net current deferred tax asset to net non-current deferred tax asset in our consolidated balance sheets. No prior periods were retrospectively adjusted.
In September 2015, the FASB issued an amendment on measurement period adjustments related to business combinations. The new guidance requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified. Entities should apply the new guidance prospectively to measurement period adjustments that occur after the effective date. The amendment is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. We early adopted the provisions of this new standard effective with the interim period ended September 30, 2015. Accordingly, we applied the amendment prospectively, and it did not result in any material impact on our consolidated financial statements or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In April 2015, the FASB issued an amendment related to debt issuance costs. The amendment requires that all costs incurred to issue debt be presented in the balance sheet as a direct reduction from the carrying value of the debt, similar to the presentation of debt discounts. Entities should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. In August 2015, the FASB issued a second amendment related to debt issuance costs clarifying that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The amendment is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods, with early adoption permitted. We do not expect the adoption of this amendment in fiscal year 2016 to have a material impact on our consolidated financial statements and results of operations.
In May 2014, the FASB issued an amendment related to revenue recognition. The new guidance sets forth a new five step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed under U.S. GAAP. The underlying principle of the new amendment is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it ultimately expects to receive in exchange for the goods or services. The amendment also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. In August 2015, the FASB issued a second amendment related to revenue recognition to delay the effective date of the new revenue recognition guidance by one year. The amendment is effective for annual periods beginning after December 15, 2017 and interim periods within those periods. Early adoption will be permitted for annual periods beginning after December 15, 2016 and interim periods within those periods. We are currently evaluating the impact that this standard will have on our consolidated financial statements and results of operations.
In April 2014, the FASB issued an amendment on reporting discontinued operations and disclosures of disposals of components of an entity. Specifically, the amendment revises the definition of a discontinued operation, expands disclosure requirements for transactions that meet the definition of a discontinued operation and requires entities to disclose additional information about individually significant components that are disposed of or held for sale and do not qualify as discontinued operations. Additionally, entities will be required to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the statement of financial position and to separately present certain information related to the operating and investing cash flows of the discontinued operation, for all comparative periods, in the statement of cash flows. The amendment is effective for annual and interim periods beginning after December 15, 2014 and is to be adopted on a prospective basis for all disposals (except disposals classified as held for sale prior to the adoption date) or components initially classified as held for sale in periods beginning on or after the adoption date. We adopted this guidance effective January 1, 2015, and there was no material impact on our consolidated financial statements or results of operations.
2. ACQUISITIONS AND DISPOSITIONS (restated)
2015 Acquisitions
On February 23, 2015, we acquired the equity of Right Away Redy Mix, Inc. ("Right Away"), located in Oakland, California. The purchase price was $18.0 million in cash, plus closing adjustments of $0.8 million, final working capital adjustments of $1.1 million, and potential future earn-out payments of up to $6.0 million based on the achievement of certain defined annual volume thresholds over a six-year period (the "Right Away Earn-out"). We funded the purchase with cash on hand. The acquisition included four ready-mixed concrete facilities, 49 mixer trucks and a fleet of transfer trucks used to transport cement and aggregates. The acquisition expands our business in our existing northern California market. The fair value of the assets acquired and liabilities assumed in the Right Away acquisition is preliminary and remains subject to adjustments, including, but not limited to, adjustments related to determination of the conclusion of tax attributes as of the acquisition date and the fair value of identifiable intangible assets and the Right Away Earn-out.
On April 1, 2015, we acquired the equity of Ferrara Bros. Building Materials Corp. ("Ferrara Bros."), located in New York, New York. We acquired the equity of Ferrara Bros. for $45.0 million in cash, approximately 442,000 shares of our common stock, calculated in accordance with the terms of the share purchase agreement ("SPA"), and valued at approximately $15.1 million on the date of issuance, less final working capital adjustments of $0.9 million, plus potential incentive awards in the form of equity of up to $35.0 million based on the achievement of certain EBITDA thresholds, as defined in the SPA, over a four-year period beginning in 2017 ("Ferrara Bros. Contingent Consideration"). We funded the purchase through a combination of cash on hand and borrowings under our Revolving Facility. Ferrara Bros. operates six ready-mixed concrete plants at its four facilities in New
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
York and New Jersey and a fleet of 89 mixer trucks. The acquisition expands our presence in the New York metropolitan market and allows us to more effectively serve construction projects in Manhattan. The fair value of the assets acquired and liabilities assumed in the Ferrara Bros. acquisition is preliminary and remains subject to adjustments, including, but not limited to, adjustments related to the fair value of the Ferrara Bros. Contingent Consideration and identifiable intangible assets.
On May 21, 2015, we acquired the equity of Colonial Concrete Co. ("Colonial"), located in Newark, New Jersey. The purchase price was $15.0 million in cash, plus closing adjustments of $0.2 million. We funded the purchase through a combination of cash on hand and borrowings under our Revolving Facility. The acquisition included four ready-mixed concrete plants at three locations and a fleet of approximately 40 mixer trucks. The acquisition expanded our business in the New York metropolitan and northern New Jersey markets. The fair value of the assets acquired and liabilities assumed in the Colonial acquisition is preliminary and remains subject to adjustments, including, but not limited to, adjustments related to working capital, certain accrued liabilities, and the fair value of identifiable intangible assets.
On May 29, 2015, we acquired the assets of DuBrook Concrete, Inc. ("DuBrook"), located in Chantilly, Virginia, part of the greater Washington, D.C. metropolitan area. The purchase price was $11.5 million in cash, plus potential future earn-out payments based on volumes sold over a four-year period (the "DuBrook Earn-out"). The DuBrook Earn-out payments are not capped; however, we do not expect total payments to be in excess of $1.0 million. We funded the purchase through a combination of cash on hand and borrowings under our Revolving Facility. The acquisition included three ready-mixed concrete plants and a fleet of 42 mixer trucks. The purchase of these assets expanded our existing business in the Washington, D.C. metropolitan area. The fair value of the assets acquired and liabilities assumed in the DuBrook acquisition is preliminary and remains subject to adjustments, including, but not limited to, adjustments related to working capital and the fair value of identifiable intangible assets and the DuBrook Earn-out.
On September 24, 2015, we acquired the Wantage Stone (“Wantage”) reserves, a site development quarry including an 80 acre quarry along with mining rights to an additional 77 acres of land located in Hamburg, New Jersey, from Bicsak Brothers Realty, LLC and Wantage Stone, LLC. We have operated the Wantage quarry under a lease agreement since October 2014. The purchase price was $15.2 million in cash, plus deferred payments of $3.0 million payable over a three-year period. We funded the purchase through a combination of cash on hand and borrowings under our Revolving Facility. This acquisition expanded our aggregates operations in our New York and New Jersey markets. The fair value of the assets acquired and liabilities assumed in the Wantage acquisition is preliminary and remains subject to adjustments, including, but not limited to, adjustments related to the fair value of identifiable intangible assets and property, plant and equipment.
On October 27, 2015, we acquired the equity of Heavy Materials, LLC ("Heavy"), a vertically integrated ready-mixed concrete producer located in the U.S. Virgin Islands. The purchase price was $21.7 million in cash, less purchase adjustments of $0.8 million, plus deferred payments of $5.0 million, which will be paid over a two year period. We funded the purchase through a combination of cash on hand and borrowings on our Revolving Facility. Heavy operates four ready-mixed concrete plants, a fleet of 32 mixer trucks, and two quarries. Heavy also leases an industrial waterfront property that it utilizes as a marine terminal and sales yard. This acquisition expands our ready-mixed concrete and aggregates operations into new markets in the Caribbean islands. The fair value of the assets acquired and liabilities assumed in the Heavy acquisition is preliminary and remains subject to adjustments, including, but not limited to, adjustments related to working capital and the fair value of identifiable intangible assets and property, plant and equipment.
During the year ended December 31, 2015, we also completed two other individually immaterial acquisitions comprised of two sand and gravel operations near Vernon, Texas and Waurika, Oklahoma and one ready-mixed concrete operation in the U.S. Virgin Islands. The aggregate consideration paid consisted of $12.9 million in cash and $1.9 million in deferred payments payable within ten years. We funded these purchases through a combination of cash on hand and borrowings under our Revolving Facility. The acquisition of these assets expanded our business in our existing west Texas market and in the Caribbean market. The purchase price allocation for these two acquisitions is preliminary and remains subject to adjustments, including, but not limited to, the fair value of identifiable intangible assets and property, plant and equipment.
We have made changes to the preliminary purchase price allocations for the 2015 acquisitions during the year ended December 31, 2015 primarily related to (i) fair value estimates of assets acquired and liabilities assumed for Right Away, Ferrara Bros., Colonial, DuBrook, and Wantage, (ii) working capital adjustments for Right Away, Ferrara Bros., and DuBrook, (iii) valuation of the Right Away Earn-out, Ferrara Bros. Contingent Consideration and DuBrook Earn-out, and (iv) valuation of identifiable intangible assets for the Right Away, Ferrara Bros., Colonial, and DuBrook acquisitions. The following table summarizes the total
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
consideration for the 2015 acquisitions and presents the allocation of these amounts to the net tangible and intangible assets acquired and liabilities assumed based on the estimated fair values as of the respective acquisition date (in thousands).
2015 Acquisitions | |||||||||||||||||||||||||||
Right Away(1) | Ferrara Bros.(2)(3) | Colonial(2) | DuBrook(2)(4) | Wantage(2)(5) | Heavy(2)(6) | All Other(7) | |||||||||||||||||||||
Cash | $ | 928 | $ | 67 | $ | 888 | $ | — | $ | — | $ | 20 | $ | — | |||||||||||||
Accounts receivable | 1,832 | 13,224 | 4,305 | 1,218 | — | 975 | — | ||||||||||||||||||||
Inventory | 348 | 1,434 | 378 | 349 | — | 1,449 | 668 | ||||||||||||||||||||
Other current assets | 196 | 608 | 126 | 739 | — | 92 | — | ||||||||||||||||||||
Property, plant and equipment | 9,696 | 13,147 | 6,325 | 2,394 | 12,694 | 6,095 | 5,153 | ||||||||||||||||||||
Definite-lived intangible assets | 7,036 | 50,310 | 4,640 | 4,473 | — | — | — | ||||||||||||||||||||
Other long-term assets | — | — | 153 | — | — | 47 | — | ||||||||||||||||||||
Total assets acquired | $ | 20,036 | $ | 78,790 | $ | 16,815 | $ | 9,173 | $ | 12,694 | $ | 8,678 | $ | 5,821 | |||||||||||||
Current liabilities | 1,399 | 6,944 | 5,299 | 910 | — | 3,269 | 91 | ||||||||||||||||||||
Long-term deferred income tax | 5,929 | — | — | — | — | — | — | ||||||||||||||||||||
Other long-term liabilities | — | — | — | 59 | — | — | — | ||||||||||||||||||||
Total liabilities assumed | $ | 7,328 | $ | 6,944 | $ | 5,299 | $ | 969 | $ | — | $ | 3,269 | $ | 91 | |||||||||||||
Goodwill | 11,086 | 6,916 | 3,680 | 3,887 | 5,301 | $ | 20,243 | 8,933 | |||||||||||||||||||
Total consideration | $ | 23,794 | $ | 78,762 | $ | 15,196 | $ | 12,091 | $ | 17,995 | $ | 25,652 | $ | 14,663 | |||||||||||||
(1) | The purchase price allocation for the Right Away acquisition is subject to change pending determination of the conclusion of tax attributes as of the acquisition date and the fair value of identifiable intangible assets and the Right Away Earn-out. The fair value of the Right Away acquired accounts receivable is $1.8 million, with a gross contractual amount of $2.2 million. We do not expect to collect $0.4 million of the Right Away acquired accounts receivable. Total consideration for the Right Away acquisition includes $19.9 million of cash and $3.9 million for the fair value of the Right Away Earn-out as of the acquisition date. |
(2) | The purchase price allocations for the Ferrara Bros., Colonial, DuBrook, Wantage, and Heavy acquisitions are preliminary and remain subject to adjustments, including, but not limited to, adjustments related to working capital, the fair value of the Ferrara Bros. Contingent Consideration, identifiable intangible assets, property, plant and equipment, and certain accrued liabilities. The fair value of the DuBrook and Colonial acquired accounts receivable approximate the gross contractual amounts as of the respective acquisition dates. The fair value of the Ferrara Bros. acquired accounts receivable is $13.2 million, with a gross contractual amount of $14.3 million. We do not expect to collect $1.1 million of the Ferrara Bros. acquired accounts receivable. The fair value of the Heavy acquired accounts receivable is $1.0 million, pending further analysis, with a gross contractual amount of $4.3 million. We do not expect to collect $3.3 million of the Heavy acquired accounts receivable, pending further review. |
(3) | Total consideration for the Ferrara Bros. acquisition includes $44.1 million of cash, approximately 442,000 shares of our common stock valued at approximately $15.1 million on the date of issuance, and $19.6 million for the fair value of the Ferrara Bros. Contingent Consideration as of the acquisition date. |
(4) | Total consideration for the DuBrook acquisition includes $11.5 million of cash and $0.6 million for the fair value of the Dubrook Earn-out as of the acquisition date. |
(5) | Total consideration for the Wantage acquisition includes $15.2 million of cash and $2.8 million for the fair value of deferred payments due to the previous owners. |
(6) | Total consideration for the Heavy acquisition includes $20.9 million of cash and $4.8 million for the fair value of deferred payments due to the previous owners. |
(7) | The purchase price allocation for the acquisitions included in the caption "All Other" above are preliminary and remain subject to adjustments, including, but not limited to, the fair value of identifiable intangible assets and property, plant and equipment. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Total consideration for acquisitions included in the caption "All Other" above includes $13.0 million of cash and $1.7 million for the fair value of deferred payments due to the previous owners.
2014 Acquisitions
On October 20, 2014, we acquired the assets of Custom-Crete ("Custom-Crete"), with operations in Dallas / Fort Worth, Houston, San Antonio, and Austin, Texas from Oldcastle Architectural, Inc., a wholly owned subsidiary of CRH plc ("Oldcastle Architectural") for $37.4 million in cash, plus a deferred payment of $0.8 million to be paid upon the division of certain shared properties, less final working capital adjustments of $1.6 million. The fair value of the assets acquired and liabilities assumed in the Custom-Crete acquisition is final.
On December 5, 2014, we acquired the assets of Mobile-Crete of South Texas, LLC and Scofield Construction Services, LLC (collectively, "Mobile-Crete") with operations in San Antonio, Austin, and south Texas for $21.5 million in cash, plus potential earn-out payments of up to $3.0 million in cash (the "Mobile-Crete Earn-out"). The earn-out payments of up to $1.5 million, which are due on the first and second anniversary of the acquisition date, are tied to the applicable year's average daily closing price of West Texas Intermediate crude oil ("WTI") reaching certain predetermined levels. The fair value of the assets acquired and liabilities assumed in the Mobile-Crete acquisition is final.
The Custom-Crete and Mobile-Crete acquisitions included 16 volumetric ready-mixed concrete facilities and 109 volumetric ready-mixed concrete trucks. The addition of these operations expanded our presence into all of the major metropolitan markets in Texas and provided us with the capability to deliver ready-mixed concrete to our customers via on-site batching and mixing to customer specifications.
On October 20, 2014, we acquired the equity of New York Sand and Stone, LLC ("NYSS") for $15.2 million in cash, less final working capital adjustments of $0.8 million. The NYSS acquisition included leases to operate two aggregate distribution terminals in New York. These terminals allow us to deliver raw materials more efficiently to our New York and New Jersey markets. The fair value of the assets acquired and liabilities assumed in the NYSS acquisition are final.
During the year ended December 31, 2014, we also completed six other individually immaterial acquisitions comprised of seven ready-mixed concrete plants and related assets in our New York and west Texas markets. The aggregate consideration paid consisted of $15.5 million in cash and $1.1 million in promissory notes. The acquisition of these assets expanded our business in our existing markets. The fair values of the assets acquired and liabilities assumed from these six ready-mixed concrete acquisitions are final.
We have made changes to the preliminary purchase price allocations for the 2014 acquisitions during the year ended December 31, 2015 primarily related to (i) fair value estimates of assets acquired and liabilities assumed for Mobile-Crete and Custom-Crete, (ii) working capital adjustments for Custom-Crete, Mobile-Crete, and NYSS, (iii) valuation of the Mobile-Crete Earn-out and Mobile-Crete identifiable intangible assets, (iv) valuation of Custom-Crete land rights and deferred payment, and (v) changes in the valuation of identifiable intangible assets for three of the six acquisitions included in "All Other" in the table below. The following table summarizes the total consideration for the 2014 acquisitions and presents the allocation of these amounts to the net tangible and intangible assets acquired and liabilities assumed based on the estimated fair values as of the respective acquisition dates (in thousands).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2014 Acquisitions | |||||||||||||||
Custom-Crete(1) | NYSS | Mobile-Crete(2) | All Other(3) | ||||||||||||
Accounts receivable(4) | $ | 3,669 | $ | 5,898 | $ | 2,578 | $ | — | |||||||
Inventory | 522 | 1,161 | 336 | 295 | |||||||||||
Other current assets | — | 134 | — | 102 | |||||||||||
Property, plant and equipment | 11,802 | 1,442 | 4,156 | 7,400 | |||||||||||
Intangible assets | 11,078 | 5,042 | 8,630 | 4,722 | |||||||||||
Total assets acquired | $ | 27,071 | $ | 13,677 | $ | 15,700 | $ | 12,519 | |||||||
Current liabilities | 2,598 | 2,539 | 1,284 | — | |||||||||||
Long-term liabilities | 473 | — | — | — | |||||||||||
Total liabilities assumed | $ | 3,071 | $ | 2,539 | $ | 1,284 | $ | — | |||||||
Goodwill | 12,513 | 3,260 | 8,685 | 4,050 | |||||||||||
Total consideration | $ | 36,513 | $ | 14,398 | $ | 23,101 | $ | 16,569 | |||||||
(1) | Total consideration for the Custom-Crete acquisition includes $35.8 million of cash and $0.7 million for the fair value of a deferred payment as of the acquisition date to be paid upon the division of certain shared properties. |
(2) | Total consideration for the Mobile-Crete acquisition includes $21.5 million of cash and $1.6 million for the fair value of the Mobile-Crete Earn-out as of the acquisition date. |
(3) | Total consideration for acquisitions included in the caption "All Other" above includes $15.5 million of cash and $1.1 million for the fair value of notes payable due to the previous owners as of the acquisition date. |
These allocations require the significant use of estimates and are based on information that was available to management at the time these consolidated financial statements were prepared. We utilized recognized valuation techniques, including the income approach, sales approach, and cost approach to value the net assets acquired. See Note 13 for additional information regarding valuation of contingent consideration.
Acquired Intangible Assets and Goodwill
Acquired intangible assets in 2015 and 2014 of $95.9 million consisted of trade names, customer relationships, non-compete agreements, leasehold interests, a favorable contract, backlog, and land rights. With the exception of land rights, the amortization period of these intangible assets range from one year to 25 years. The land rights have an indefinite life. The major classes of intangible assets acquired in the 2015 and 2014 acquisitions were as follows (in thousands):
Weighted Average Amortization Period (In Years) | Fair Value At Acquisition Date | ||||
Trade names | 22.98 | $ | 39,002 | ||
Customer relationships | 8.29 | 32,469 | |||
Non-compete agreements | 4.92 | 10,167 | |||
Leasehold interests | 12.24 | 7,525 | |||
Favorable contract | 3.50 | 3,650 | |||
Backlog | 1.00 | 1,640 | |||
Land rights | indefinite-lived | 1,478 | |||
Total | $ | 95,931 | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During the year ended December 31, 2015, we recorded $9.7 million of amortization expense related to these intangible assets. As of December 31, 2015, the estimated future aggregate amortization expense of intangible assets from the 2015 and 2014 acquisitions was as follows (in thousands):
Year Ending December 31, | |||
2016 | $ | 10,476 | |
2017 | 9,870 | ||
2018 | 9,422 | ||
2019 | 8,013 | ||
2020 | 6,377 | ||
Thereafter | 40,005 | ||
Total | $ | 84,163 | |
The goodwill ascribed to each of these acquisitions is related to the synergies we expect to achieve with expansion in the markets in which we already operate as well as entry into new metropolitan areas of our existing geographic markets. The goodwill relates to our ready-mixed concrete reportable segment with the exception of Heavy, Wantage, NYSS, and one of the two 2015 acquisitions included in the caption "All Other." Goodwill resulting from the Heavy acquisition relates to our ready-mixed concrete reportable segment and our aggregate products reportable segment. Goodwill resulting from the Wantage acquisition and one of the two 2015 acquisitions included in the caption "All Other" relates to our aggregate products reportable segment. Goodwill resulting from the NYSS acquisition relates to our other non-reportable segments. See Note 4 for the allocation of goodwill from our 2014 and 2015 acquisitions to our segments. We expect the goodwill to be deductible for tax purposes, with the exception of the Right Away acquisition. See Note 16 for additional information regarding income taxes.
Actual and Pro Forma Impact of Acquisitions
We recorded approximately $232.5 million of revenue and $13.4 million of income from operations in our consolidated results of operations for the year ended December 31, 2015 related to the 2014 and 2015 acquisitions following their respective dates of acquisition. We recorded approximately $16.6 million of revenue and $0.8 million of income from operations in our consolidated results of operations for the year ended December 31, 2014 related to the 2014 acquisitions following their respective dates of acquisition.
The unaudited pro forma information presented below reflects the combined financial results for all of the acquisitions completed during 2014 excluding three of the six acquisitions that are included in the caption "All Other" in the table captioned "2014 Acquisitions" above, as historical financial results for these operations was not material and impractical to obtain from the former owners. Additionally, one of the two 2015 acquisitions that are included in the caption "All Other" in the table captioned "2015 Acquisitions" above was excluded as historical financial results for this operation was not material and impractical to obtain from the former owners. All other acquisitions have been included and represent our estimate of the results of operations for the years ended December 31, 2015 and 2014 as if the 2014 acquisitions had been completed on January 1, 2013 and the 2015 acquisitions had been completed on January 1, 2014 (in thousands, except per share information):
For the Years Ended December 31, | |||||||
(unaudited) | |||||||
2015 | 2014 | ||||||
(Restated) | |||||||
Revenue from continuing operations | $ | 1,033,058 | $ | 947,357 | |||
Net income | $ | 307 | $ | 23,317 | |||
Income per share, basic | $ | 0.02 | $ | 1.72 | |||
Income per share, diluted | $ | 0.02 | $ | 1.68 | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The above pro forma results are unaudited and were prepared based on the historical U.S. GAAP results of the Company and the historical results of the 12 acquired companies for which financial information was available, based on data provided by the former owners. These results are not necessarily indicative of what the Company's actual results would have been had the 2014 acquisitions occurred on January 1, 2013 and the 2015 acquisitions occurred on January 1, 2014.
The unaudited pro forma net income (loss) and net income (loss) per share amounts above reflect the following adjustments:
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(Restated) | |||||||
Decrease in intangible amortization expense | $ | (243 | ) | $ | (11,040 | ) | |
Increase in depreciation expense | 231 | 755 | |||||
Exclusion of buyer transaction costs | 2,774 | 1,941 | |||||
Exclusion of seller transaction costs | 46 | — | |||||
Exclusion of pension expense for pension plan acquired | 212 | 737 | |||||
Exclusion of segment results for segment not acquired | (99 | ) | (547 | ) | |||
Increase in interest expense | (243 | ) | (980 | ) | |||
Decrease in income tax expense | (592 | ) | (3,550 | ) | |||
Net adjustments | $ | 2,086 | $ | (12,684 | ) | ||
As the purchase price allocations for Wantage, Heavy, and one of the two 2015 acquisitions that are included in the caption "All Other" in the table captioned "2015 Acquisitions" above are still preliminary and the fair value measurements for the related intangible assets has not been determined, no amortization of these intangible assets was included in the pro forma results. The unaudited pro forma results do not reflect any operational efficiencies or potential cost savings that may occur as a result of consolidation of the operations.
Sale of Pennsylvania Precast Operations
On June 2, 2015, we sold the fixed assets and inventory and assigned all open contracts associated with our one remaining precast concrete operation in Pennsylvania, to Architectural Precast Innovations, Inc. for net proceeds of $0.3 million in cash and a $1.2 million promissory note, net of a $0.1 million discount. Note repayments are due quarterly for a term of two years with an effective interest rate of 3.19%. This sale represented the final divestiture of the Company's owned assets related to precast concrete operations, which were classified as held for sale as of December 31, 2014.
3. DISCONTINUED OPERATIONS
As disclosed in Note 2, in June 2015, we completed the sale of substantially all of our assets associated with our one remaining precast concrete operation in Pennsylvania. We sold the operation's fixed assets and inventory for net proceeds of $0.3 million in cash and a promissory note of $1.2 million, net of a $0.1 million discount, and recorded a pre-tax loss on the transaction of $0.2 million. The pre-tax loss is included in discontinued operations in the accompanying condensed consolidated statements of operations.
During 2014, we completed the sale of our remaining owned assets related to our California precast operations disposed of in 2012. We sold land and a building for net proceeds of $1.5 million in cash and recorded a pre-tax gain on the transaction of $0.6 million. Also in 2014, we recorded an impairment loss on long-lived assets of $0.9 million related to our Pennsylvania precast concrete operation as the carrying value exceeded the net realizable value of the related long-lived assets. The pre-tax gain on disposal of assets and the loss on impairment of long-lived assets are included in discontinued operations for the year ended December 31, 2014.
We have presented the results of operations for these units for all periods as discontinued operations in the accompanying consolidated statements of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The results of these discontinued operations were as follows (in thousands):
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Revenue | $ | 5,523 | $ | 8,920 | $ | 16,914 | ||||||
Depreciation, depletion and amortization, or DD&A | — | — | (148 | ) | ||||||||
Operating expenses, excluding DD&A, and other income | (5,830 | ) | (9,481 | ) | (18,448 | ) | ||||||
Loss from discontinued operations | (307 | ) | (561 | ) | (1,682 | ) | ||||||
(Loss) gain on disposal of assets | (193 | ) | 640 | (219 | ) | |||||||
Loss on impairment of long-lived assets | — | (900 | ) | — | ||||||||
Loss from discontinued operations, before income taxes | (500 | ) | (821 | ) | (1,901 | ) | ||||||
Income tax (benefit) expense | (180 | ) | 172 | (45 | ) | |||||||
Loss from discontinued operations | $ | (320 | ) | $ | (993 | ) | $ | (1,856 | ) | |||
Cash flows from operating activities included operating cash flows used in discontinued operations of $0.4 million and $1.5 million for the years ended December 31, 2015 and 2014, respectively, and $2.3 million of operating cash flows provided by discontinued operations for the year ended December 31, 2013. Cash flows from investing activities included investing cash flows provided by discontinued operations of $0.4 million and $1.5 million, for the years ended December 31, 2015 and 2014, respectively, and $2.3 million of investing cash flows used in discontinued operations for the year ended December 31, 2013.
Below is a summary of the assets and liabilities associated with our one remaining precast concrete operation sold in June 2015, which was classified as held for sale as of December 31, 2014 (in thousands):
December 31, | |||
2014 | |||
Trade accounts receivable, net | $ | 1,337 | |
Inventories | 704 | ||
Other current assets | 897 | ||
Property, plant, and equipment, net | 841 | ||
Total assets held for sale | $ | 3,779 | |
Accounts payable | $ | 398 | |
Accrued liabilities | 504 | ||
Total liabilities held for sale | $ | 902 | |
4. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
We completed our annual assessment of goodwill impairment during the fourth quarter of 2015 for those units with goodwill as of October 1, 2015, and there was no impairment. In the absence of any evidence to the contrary, we consider goodwill resulting from acquisitions in the fourth quarter of 2015 to be recorded at fair value and not impaired, as the arm's length transactions that generated the goodwill were completed at a market rate.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The changes in goodwill by reportable segment from January 1, 2014 to December 31, 2015 were as follows (in thousands):
Ready-mixed Concrete Segment | Aggregate Products Segment | Other Non-Reportable Segments | Total | |||||||||||||
Balance at January 1, 2014 | $ | 11,646 | $ | — | $ | — | $ | 11,646 | ||||||||
Acquisitions (See Note 2) | 36,111 | — | 3,000 | 39,111 | ||||||||||||
Balance at December 31, 2014 | 47,757 | — | 3,000 | 50,757 | ||||||||||||
Acquisitions (See Note 2) | 46,062 | 13,984 | — | 60,046 | ||||||||||||
All other purchase price allocation adjustments (See Note 2) | (10,861 | ) | — | 262 | (10,599 | ) | ||||||||||
Balance at December 31, 2015 | $ | 82,958 | $ | 13,984 | $ | 3,262 | $ | 100,204 | ||||||||
Goodwill acquired during 2015 and 2014 resulted from our acquisitions in those respective years and which are more fully described in Note 2.
Intangible Assets
Our purchased intangible assets were as follows (in thousands) as of December 31, 2015 and 2014:
December 31, 2015 | ||||||||||||||
Gross | Accumulated Amortization | Net | Weighted Average Remaining Life (in years) | |||||||||||
Definite-lived intangible assets | ||||||||||||||
Trade names | $ | 40,302 | $ | (2,060 | ) | $ | 38,242 | 22.04 | ||||||
Customer relationships | 45,969 | (7,939 | ) | 38,030 | 7.34 | |||||||||
Non-competes | 10,167 | (2,211 | ) | 7,956 | 3.87 | |||||||||
Leasehold interests | 7,525 | (668 | ) | 6,857 | 10.49 | |||||||||
Favorable contract | 3,650 | (869 | ) | 2,781 | 2.67 | |||||||||
Backlog | 1,640 | (1,230 | ) | 410 | 0.25 | |||||||||
Total definite-lived intangible assets | 109,253 | (14,977 | ) | 94,276 | 13.07 | |||||||||
Indefinite-lived intangible assets | ||||||||||||||
Land rights(1) | 1,478 | — | 1,478 | |||||||||||
Total purchased intangible assets | $ | 110,731 | $ | (14,977 | ) | $ | 95,754 | |||||||
(1) Land rights acquired in the Custom-Crete acquisition will be reclassified to property, plant and equipment upon the division of certain shared properties and settlement of the associated deferred payment. For further information, see Note 2.
December 31, 2014 | ||||||||||||||
Gross | Accumulated Amortization | Net | Weighted Average Remaining Life (in years) | |||||||||||
Trade names | $ | 4,200 | $ | (330 | ) | $ | 3,870 | 9.31 | ||||||
Customer relationships | 23,540 | (3,214 | ) | 20,326 | 8.06 | |||||||||
Non-competes | 4,421 | (218 | ) | 4,203 | 4.58 | |||||||||
Leasehold interest | 3,382 | (61 | ) | 3,321 | 9.63 | |||||||||
Total purchased intangible assets | $ | 35,543 | $ | (3,823 | ) | $ | 31,720 | 7.91 | ||||||
We recorded $11.2 million, $2.1 million and $2.0 million of amortization expense on our intangibles for the years ended December 31, 2015, 2014 and 2013, respectively, which is included in our consolidated statements of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2015, the estimated remaining amortization of our definite-lived intangible assets was as follows (in thousands):
Year Ending December 31, | ||||
2016 | $ | 11,956 | ||
2017 | 11,350 | |||
2018 | 10,902 | |||
2019 | 9,493 | |||
2020 | 7,857 | |||
Thereafter | 42,718 | |||
Total | $ | 94,276 | ||
5. INVENTORIES
Inventory as of December 31, 2015 and 2014 consisted of the following (in thousands):
December 31, | ||||||||
2015 | 2014 | |||||||
Raw materials | $ | 33,792 | $ | 29,263 | ||||
Building materials for resale | 1,736 | 1,479 | ||||||
Other | 1,198 | 980 | ||||||
$ | 36,726 | $ | 31,722 | |||||
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net as of December 31, 2015 and 2014 consisted of the following (in thousands):
December 31, | ||||||||
2015 | 2014 | |||||||
Land and mineral deposits | $ | 69,265 | $ | 47,618 | ||||
Buildings and improvements | 17,198 | 16,648 | ||||||
Machinery and equipment | 131,209 | 95,710 | ||||||
Mixers, trucks and other vehicles | 117,448 | 80,001 | ||||||
Other | 227 | 242 | ||||||
Construction in progress | 15,255 | 9,267 | ||||||
350,602 | 249,486 | |||||||
Less: accumulated depreciation and depletion | (102,479 | ) | (72,962 | ) | ||||
$ | 248,123 | $ | 176,524 | |||||
As of December 31, 2015 and 2014, the net carrying amounts of mineral deposits were $28.1 million and $11.3 million, respectively. As of December 31, 2015 and 2014, gross assets recorded under capital leases, consisting primarily of drum mixer trucks, were $20.5 million and $8.6 million, respectively, and accumulated amortization was $1.3 million and $0.6 million, respectively. We recorded $32.4 million, $21.8 million and $16.9 million of depreciation and depletion expense on our property, plant and equipment for the years ended December 31, 2015, 2014 and 2013, respectively, which is included in our consolidated statements of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
7. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CUSTOMER DISPUTES
Activity in our allowance for doubtful accounts receivable and customer disputes consisted of the following (in thousands):
December 31, | ||||||||
2015 | 2014 | |||||||
Balance, beginning of period | $ | 3,726 | $ | 2,813 | ||||
Provision for doubtful accounts and customer disputes | 4,198 | 1,924 | ||||||
Uncollectible receivables written off, net of recoveries | (1,799 | ) | (1,011 | ) | ||||
Balance, end of period | $ | 6,125 | $ | 3,726 | ||||
8. ACCRUED LIABILITIES (restated)
Our accrued liabilities were as follows (in thousands):
December 31, | ||||||||
2015 | 2014 | |||||||
(Restated) | ||||||||
Accrued materials | $ | 22,428 | $ | 14,319 | ||||
Accrued insurance reserves | 15,341 | 10,512 | ||||||
Accrued compensation and benefits | 15,024 | 11,251 | ||||||
Accrued property, sales and other taxes | 14,916 | 5,235 | ||||||
Deferred consideration | 4,774 | — | ||||||
Contingent consideration, current portion | 2,635 | 2,250 | ||||||
Deferred rent | 1,838 | 2,126 | ||||||
Accrued interest | 1,500 | 1,487 | ||||||
Other | 7,398 | 3,211 | ||||||
$ | 85,854 | $ | 50,391 | |||||
9. DEBT (restated)
A summary of our debt and capital leases as of December 31, 2015 and 2014 was as follows (in thousands):
December 31, | ||||||||
2015 | 2014 | |||||||
Senior secured notes due 2018 | $ | 200,000 | $ | 200,000 | ||||
Senior secured credit facility | 45,000 | — | ||||||
Convertible secured notes due 2015 | — | 117 | ||||||
Capital leases | 16,555 | 7,395 | ||||||
Other financing | 20,194 | 12,925 | ||||||
Total debt | 281,749 | 220,437 | ||||||
Less: current maturities | 9,386 | 5,104 | ||||||
Long-term debt, net of current maturities | $ | 272,363 | $ | 215,333 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2015, the principal amounts due under our debt agreements for the next five years and thereafter were as follows (in thousands):
Year Ending December 31, | ||||
2016 | $ | 9,386 | ||
2017 | 9,389 | |||
2018 | 254,037 | |||
2019 | 6,191 | |||
2020 | 2,633 | |||
Thereafter | 113 | |||
$ | 281,749 | |||
Senior Secured Notes due 2018
On November 22, 2013, we completed an offering of $200.0 million aggregate principal amount of 2018 Notes at an offering price of 100%. We used a portion of the net proceeds from the 2018 Notes to repay all of our outstanding borrowings under the Revolving Facility and to redeem all of our outstanding 9.5% senior secured notes due 2015 (the "2013 Notes").
The 2018 Notes are governed by an indenture (the “Indenture”) dated as of November 22, 2013, by and among us and U.S. Bank National Association, as trustee and noteholder collateral agent. We are obligated to pay interest at 8.5% on the 2018 Notes on June 1 and December 1 of each year. The 2018 Notes mature on December 1, 2018, and are redeemable at our option prior to maturity at prices specified in the Indenture. The Indenture contains negative covenants that restrict our ability and our restricted subsidiaries' ability to engage in certain transactions, as described below, and also contains customary events of default.
The Indenture contains covenants that restrict or limit our ability to, among other things:
• | incur additional indebtedness or issue disqualified stock or preferred stock; |
• | pay dividends or make other distributions or repurchase or redeem our stock or subordinated indebtedness or make investments; |
• | prepay, redeem or repurchase certain debt; |
• | sell assets or issue capital stock of our restricted subsidiaries; |
• | incur liens; |
• | enter into agreements restricting our restricted subsidiaries’ ability to pay dividends, make loans to other U.S. Concrete entities or restrict the ability to provide liens; |
• | enter into transactions with affiliates; |
• | consolidate, merge or sell all or substantially all of our assets; |
• | engage in certain sale / leaseback transactions; and |
• | designate our subsidiaries as unrestricted subsidiaries. |
As defined in the Indenture, we are entitled to incur indebtedness if, on the date of such incurrence and given effect thereto on a proforma basis, the consolidated coverage ratio exceeds 2.0 to 1.0.
Our obligations under the 2018 Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by all of our domestic subsidiaries that guarantee the indebtedness under the Revolving Facility. Each guarantee is subject to release in the following customary circumstances:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
• | a disposition of all or substantially all of the assets of the guarantor subsidiary, by way of merger, consolidation or otherwise; provided the proceeds of the disposition are applied in accordance with the Indenture; |
• | a disposition of the capital stock of the guarantor subsidiary to a third person, if the disposition complies with the Indenture and as a result the guarantor subsidiary ceases to be a restricted subsidiary; |
• | the designation by us of the guarantor subsidiary as an unrestricted subsidiary or the guarantor subsidiary otherwise ceases to be a restricted subsidiary, in each case in accordance with the Indenture; or |
• | legal or covenant defeasance of the 2018 Notes and discharge of our obligations under the Indenture. |
The 2018 Notes are issued by U.S. Concrete, Inc. (the "Parent"), and are guaranteed on a full and unconditional basis by each of its domestic wholly owned subsidiaries. The guarantees are joint and several. U.S. Concrete, Inc. does not have any independent assets or operations, and none of its foreign subsidiaries guarantee the 2018 Notes. There are no significant restrictions on the ability of the Company or any guarantor to obtain funds from its subsidiaries by dividend or loan. For additional information regarding our guarantor and non-guarantor subsidiaries see Note 24.
The 2018 Notes and the guarantees thereof rank equally in right of payment with all of our existing and future senior indebtedness. The 2018 Notes and the guarantees thereof are secured by first-priority liens on certain of the property and assets directly owned by us, including material owned real property, fixtures, intellectual property, capital stock of subsidiaries and certain equipment, subject to permitted liens and certain exceptions, and by a second-priority lien on our assets securing the Revolving Facility on a first-priority basis, including inventory (including as-extracted collateral), accounts, certain specified mixer trucks, chattel paper, general intangibles (other than collateral securing the 2018 Notes on a first-priority basis), instruments, documents, cash, deposit accounts, securities accounts, commodities accounts, letter of credit rights and all supporting obligations and related books and records and all proceeds and products of the foregoing, subject to permitted liens and certain exceptions. The 2018 Notes and the guarantees thereof are effectively subordinated to all indebtedness and other obligations, including trade payables, of each of our future subsidiaries that are not guarantors.
As of both December 31, 2015 and 2014, we recorded interest expense related to our 2018 Notes of $17.0 million. As of December 31, 2015 and 2014, we had unamortized deferred financing fees on our 2018 Notes of $4.1 million and $5.5 million, respectively, which are included in other assets on the consolidated balance sheets.
Senior Secured Credit Facility
On October 29, 2013, we entered into a Loan and Security Agreement (the "2013 Loan Agreement") with the Lenders and the Administrative Agent, which amended and restated our existing credit agreement and provides us with the Revolving Facility. On November 18, 2015, we entered into a Second Amended and Restated Loan and Security Agreement (the “Second A/R Loan Agreement”) which amended and restated the 2013 Loan Agreement. Among other things, the Second A/R Loan Agreement increased the revolving commitments of the Revolving Facility from $175.0 million to $250.0 million and extended the maturity date to the earlier of (i) November 18, 2020 or (ii) sixty days prior to the maturity date of the Company’s 8.5% Senior Secured Notes due 2018 (if then outstanding) or the refinancing of debt thereof, as applicable. The Second A/R Loan Agreement also included an accordion feature that allows for increases in the total revolving commitments by as much as $100.0 million. Additionally, the applicable margin for each of the LIBOR loans and base rate loans was lowered so that, depending on the average availability under the Second A/R Loan Agreement, the applicable margin ranges from 1.25% to 1.75% for LIBOR loans and 0.00% to 0.50% for base rate loans. As of December 31, 2015, we had $45.0 million of outstanding borrowings on the Second A/R Loan Agreement. The weighted average interest rate for the Second A/R Loan Agreement was 1.77% as of December 31, 2015. As of December 31, 2014, we had no outstanding borrowings under the Revolving Facility. As of both December 31, 2015 and 2014, we had $11.3 million of undrawn standby letters of credit under the Revolving Facility.
Our actual maximum credit availability under the Second A/R Loan Agreement varies from time to time and is determined by calculating the value of our eligible accounts receivable, inventory, mixer trucks and, after the occurrence of certain events, machinery, which serve as priority collateral on the facility, minus reserves imposed by the Lenders and other adjustments, all as specified in the Second A/R Loan Agreement and discussed further below. Our availability under the Revolving Facility at December 31, 2015 increased to $131.2 million from $109.8 million at December 31, 2014. The Second A/R Loan Agreement also contains a provision for discretionary over-advances and involuntary protective advances by Lenders of up to $25.0 million
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
in excess of borrowing base levels. The Second A/R Loan Agreement provides for swingline loans, up to a $15.0 million sublimit, and letters of credit, up to a $30.0 million sublimit.
Advances under the Revolving Facility are in the form of either base rate loans or “LIBOR loans” denominated in U.S. dollars. The interest rate for base rate loans denominated in U.S. dollars fluctuates and is equal to the greater of (a) Bank of America’s prime rate; (b) the Federal funds rate, plus 0.50%; or (c) the rate per annum for a 30 days interest period equal to the British Bankers Association LIBOR Rate, as published by Reuters at approximately 11:00 a.m. (London time) two business days prior (“LIBOR”), plus 1.0%; in each case plus the Applicable Margin, as defined in the Second A/R Loan Agreement. The interest rate for LIBOR loans denominated in U.S. dollars is equal to the rate per annum for the applicable interest period equal to LIBOR, plus the Applicable Margin, as defined in the Second A/R Loan Agreement. Issued and outstanding letters of credit are subject to a fee equal to the Applicable Margin, as defined in the Second A/R Loan Agreement, a fronting fee equal to 0.125% per annum on the stated amount of such letter of credit, and customary charges associated with the issuance and administration of letters of credit. Among other fees, we pay a commitment fee of either 0.25% or 0.375% per annum (due monthly) on the aggregate unused revolving commitments under the Revolving Facility. The fee we pay is determined by whether the amount of the unused line is above or below 50% of the aggregate Revolver Commitments, as defined in the Second A/R Loan Agreement. The Applicable Margin ranges from 0.00% to 0.50% for base rate loans and from 1.25% to 1.75% for LIBOR loans, and is determined based on Average Availability for the most recent fiscal quarter, as defined in the Second A/R Loan Agreement.
Up to $30.0 million of the Revolving Facility is available for the issuance of letters of credit, and any such issuance of letters of credit will reduce the amount available for loans under the Revolving Facility. Advances under the Revolving Facility are limited by a borrowing base which is equal to the least of (a) the aggregate amount of Revolver Commitments minus the LC Reserve, the Senior Notes Availability Reserve, and the Tax Amount, all as defined in the Second A/R Loan Agreement, (b) the sum of (i) 90% of the face amount of eligible accounts receivable (reduced to 85% under certain circumstances), plus (ii) the lesser of (i) 70% of the value of eligible inventory or (y) 90% of the product of (A) the net orderly liquidation value of inventory divided by the value of the inventory and (B) multiplied by the value of eligible inventory, and (iii) the sum of (x) (A) 85% of the net orderly liquidation value (as determined by the most recent appraisal) of eligible trucks and machinery plus (B) 80% of the cost of newly acquired eligible trucks since the date of the latest appraisal of eligible trucks minus (C) 85% of the net orderly liquidation value of eligible trucks and machinery that have been sold since the latest appraisal date and 85% of the depreciation amount applicable to eligible trucks and machinery since the date of the latest appraisal of eligible trucks and machinery, plus (y) (A) 85% of the net orderly liquidation value of eligible inventory (as determined by the most recent appraisal), minus (B) 85% of the net orderly liquidation value of eligible machinery that have been sold since the date of the latest appraisal of eligible machinery, minus (C) 85% of the depreciation amount applicable to eligible machinery, minus the Availability Reserve, minus the Tax Amount; provided, notwithstanding anything herein to the contrary, in determining the Borrowing Base pursuant to this clause (b), the value of machinery shall only be included after a refinancing of, or amendment to, the 2018 Notes such that the Revolving Facility will have a first lien on machinery, and the Borrowing Base attributable to the eligible truck and eligible machinery shall not exceed the amount equal to thirty percent (30%) of the Borrowing Base as of such date of determination; or (c) the amount of a borrowing base set forth in the 2018 Notes, minus the greater of (i) $10.0 million and (ii) the amount equal to 5% of such borrowing base set forth in the 2018 Notes; provided however, in any event, clause (c) of the definition of borrowing base shall be permanently terminated if the 2018 Senior Notes have been amended or refinanced, in each case with the effect that the ABL cap amount in the applicable intercreditor agreement and/or the documentation governing such refinancing debt shall be no less than 110% of the aggregate Revolver Commitments (terms used in the foregoing description of borrowing base shall have the definitions provided in the Second A/R Loan Agreement). The administrative agent may, in its permitted discretion, reduce the advance rates set forth above, adjust reserves or reduce one or more of the other elements used in computing the borrowing base.
The Second A/R Loan Agreement contains usual and customary negative covenants including, but not limited to, restrictions on our ability to consolidate or merge; substantially change the nature of our business; sell, lease or otherwise transfer any of our assets; create or incur indebtedness; create liens; pay dividends; and make investments or acquisitions. The negative covenants are subject to certain exceptions as specified in the Second A/R Loan Agreement. The Second A/R Loan Agreement also requires that we, upon the occurrence of certain events, maintain a fixed charge coverage ratio of at least 1.0 to 1.0 for each period of 12 calendar months, as determined in accordance with the Second A/R Loan Agreement. For the trailing 12 month period ended December 31, 2015, our fixed charge coverage ratio was 3.58 to 1.0. As of December 31, 2015, we were in compliance with all covenants under the Second A/R Loan Agreement.
The Second A/R Loan Agreement also includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, change of control, material money judgments and failure to maintain subsidiary guarantees.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Second A/R Loan Agreement is secured by a first-priority lien on certain assets of the Company and our guarantors, including inventory (including as-extracted collateral), accounts receivable, certain specified mixer trucks, general intangibles (other than collateral securing the 2018 Notes on a first-priority basis, as described above), instruments, documents, chattel paper, cash, deposit accounts, securities accounts, commodities accounts, letter of credit rights and all supporting obligations and related books and records and all proceeds and products of the foregoing, subject to permitted liens and certain exceptions. The Second A/R Loan Agreement is also secured by a second-priority lien on the collateral securing the 2018 Notes as defined below on a first-priority basis (see “Senior Secured Notes due 2018” above).
For the years ended December 31, 2015 and 2014, we recorded interest expense related to the Revolving Facility of $0.4 million and $0.3 million, respectively. As of December 31, 2015 and 2014, we had unamortized deferred financing fees on our Revolving Facility of $2.0 million and $1.3 million, respectively, which are included in other assets on the consolidated balance sheets.
Senior Secured Notes due 2015
On March 22, 2013, we completed our offer to exchange (the “Exchange Offer”) up to $69.3 million aggregate principal amount of newly issued 2013 Notes for all $55.0 million aggregate principal amount of our Convertible Notes. At the time of settlement, we issued $61.1 million aggregate principal amount of 2013 Notes in exchange for $48.5 million of Convertible Notes, plus approximately $0.3 million in cash for accrued and unpaid interest on the Convertible Notes exchanged in the Exchange Offer. After giving effect to the exchange, $6.5 million aggregate principal amount of Convertible Notes remained outstanding as of March 22, 2013 (see additional information under "Convertible Notes due 2015" below).
In November 2013, we used a portion of the proceeds from our 2018 Notes offering to redeem all $61.1 million of our outstanding 2013 Notes. See Note 10 for additional information regarding the extinguishment of this debt.
Convertible Notes due 2015
As described above, on August 31, 2010, we issued $55.0 million aggregate principal amount of Convertible Notes. During 2013, we exchanged $48.5 million of Convertible Notes for $61.1 million aggregate principal amount of 2013 Notes and $6.4 million of Convertible Notes for 0.6 million shares of common stock. The remaining Convertible Notes matured and were repaid on August 31, 2015.
For the year ended December 31, 2013, we recorded interest expense related to the interest rate and amortization of the discount on our Convertible Notes of $2.1 million. We recorded no interest expense for the Convertible Notes for the years ended December 31, 2015 and 2014.
Capital Leases and Other Financing
From 2013 through 2015, we signed a series of promissory notes with Daimler Truck Financial for the purchase of mixer trucks and other machinery and equipment in an aggregate principal amount of $25.3 million, with fixed annual interest rates ranging from 2.50% to 3.18%, payable monthly for a term of five years.
From 2013 through 2015, we entered into leasing agreements with various lenders for the purchase of mixer trucks and other machinery and equipment for a total commitment of $20.2 million, with fixed annual interest rates ranging from 2.60% to 4.80%, payable monthly for terms ranging from four to five years. The lease terms include one dollar buyout options at the end of the lease terms. Accordingly, these financings have been classified as capital leases.
The current portion of capital leases included in current maturities of long term debt was $4.0 million and $1.6 million as of December 31, 2015 and 2014, respectively.
As of December 31, 2015, we had four promissory notes outstanding that were issued primarily in connection with acquisitions completed between February 2014 and August 2014 in an aggregate principal amount of $1.4 million. These promissory notes are payable either monthly or annually over less than one year to nine years, with annual effective interest rates ranging from 3.49% to 3.75%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The weighted average interest rate of our capital leases and other financing was 3.07% as of December 31, 2015 and was 3.49% as of December 31, 2014.
10. EXTINGUISHMENT OF DEBT
As described in Note 9 above, concurrent with issuing the 2018 Notes in November 2013, we redeemed $61.1 million of our 2013 Notes issued in connection with the Exchange Offer. As such, during the fourth quarter of 2013, we wrote-off $1.6 million of previously deferred financing costs associated with the 2013 Notes and recorded the charge as loss on extinguishment of debt on the accompanying consolidated statements of operations.
In 2013, holders of our Convertible Notes tendered $6.4 million of Convertible Notes in exchange for 0.6 million shares of our common stock. As a result of this Conversion Event (as defined in the indenture governing the Convertible Notes) during the third quarter of 2013, we wrote-off $0.3 million of previously deferred financing costs, $3.7 million of derivative liabilities, and $0.8 million of unamortized discount. We recorded a loss on extinguishment of debt of $1.7 million, which is included on the accompanying consolidated statements of operations.
In March 2013, in connection with the Exchange Offer, described in Note 9 above, we exchanged $48.5 million of Convertible Notes for $61.1 million of 2013 Notes. As a result of the Exchange Offer, during the first quarter of 2013, we wrote-off $2.4 million of previously deferred financing costs, $26.6 million in derivative liabilities, and $7.3 million of unamortized discount. We recorded a gain on extinguishment of debt associated with this transaction of $4.3 million on the accompanying consolidated statements of operations.
In connection with issuing the 2018 Notes and entering into the Second A/R Loan Agreement, we incurred $8.4 million of deferred financing costs. Deferred financing costs are classified as other assets on the accompanying consolidated balance sheet. These deferred financing costs are being amortized over the terms of the related agreements using the straight line method, which approximates the effective interest method.
11. DERIVATIVES
General
We are exposed to certain risks relating to our ongoing business operations. However, derivative instruments are not used to hedge these risks. In accordance with ASC 815 - Derivatives and Hedging ("ASC 815"), we are required to account for derivative instruments as a result of the issuance of the Warrants and Convertible Notes on August 31, 2010. None of our derivative contracts manage business risk or are executed for speculative purposes.
The following table presents the fair value of our derivative instruments (in thousands) as of December 31, 2015 and 2014:
Fair Value | ||||||||||
December 31, | ||||||||||
Derivative Instruments Not Designated as Hedging Instruments under ASC 815 | Balance Sheet Location | 2015 | 2014 | |||||||
Warrants | Derivative liabilities | $ | 67,401 | $ | 25,246 | |||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the effect of derivative instruments (in thousands) on the accompanying consolidated statements of operations for the years ended December 31, 2015, 2014, and 2013, excluding income tax effects:
Years Ended December 31, | ||||||||||||||
Derivative Instruments Not Designated as Hedging Instruments under ASC 815 | Location of Loss Recognized | 2015 | 2014 | 2013 | ||||||||||
Warrants | Derivative loss | $ | (60,016 | ) | $ | (3,556 | ) | $ | (16,833 | ) | ||||
Convertible Note embedded derivative (1) | Derivative loss | — | — | (13,131 | ) | |||||||||
$ | (60,016 | ) | $ | (3,556 | ) | $ | (29,964 | ) | ||||||
(1) Our Convertible Notes embedded derivative was written-off in June 2013, as the remaining noteholders no longer had conversion rights after that date.
Warrant volume positions are presented as the number of shares underlying the instruments. The table below presents our volume positions (in thousands) as of December 31, 2015, 2014, and 2013:
Number of Shares | |||||||||
December 31, | |||||||||
Derivative Instruments Not Designated as Hedging Instruments under ASC 815 | 2015 | 2014 | 2013 | ||||||
Warrants | 2,361 | 2,999 | 3,000 | ||||||
We do not have any derivative instruments with credit features requiring the posting of collateral in the event of a credit downgrade or similar credit event.
12. OTHER LONG-TERM OBLIGATIONS AND DEFERRED CREDITS
Other long-term obligations and deferred credits are comprised primarily of contingent consideration obligations entered into with the former owners of acquired companies from 2012 through 2015 with terms ranging from two to six years. Our contingent consideration obligations are tied to varying thresholds of pre-determined sales volumes, WTI prices for the applicable year, and EBITDA and are recorded at their fair value (see Note 13). As of December 31, 2015 and 2014, our long-term contingent consideration obligations were $27.5 million and $3.0 million, respectively, and reflect the portion we expect to pay beyond one year of the balance sheet date. We expect our obligations to cease during 2021.
Our long-term deferred payment arrangements with the former owners of acquired companies range in terms from one to ten years. As of December 31, 2015, our long-term deferred payment obligation was $5.3 million, and reflects the portion we expect to pay beyond one year of the balance sheet date. We expect our obligations to cease during 2025. There were no long-term deferred payment arrangements as of December 31, 2014.
The remaining other long-term obligations and deferred credits balances consist primarily of our unrecognized tax benefits and related accrued interest and penalties (see Note 16).
13. FAIR VALUE DISCLOSURES
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Accounting guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities.
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Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain assets and liabilities within the fair value hierarchy.
The following tables present our fair value hierarchy for liabilities measured at fair value on a recurring basis as of December 31, 2015 and 2014 (in thousands):
As of December 31, 2015 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Derivative – Warrants | $ | 67,401 | $ | — | $ | 67,401 | $ | — | ||||||||
Contingent consideration, including current portion(1) (2) (3) (4) (5) (6) | 30,119 | — | — | 30,119 | ||||||||||||
$ | 97,520 | $ | — | $ | 67,401 | $ | 30,119 | |||||||||
As of December 31, 2014 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Derivative – Warrants | $ | 25,246 | $ | — | $ | — | $ | 25,246 | ||||||||
Contingent consideration(1) (2) | 5,344 | — | — | 5,344 | ||||||||||||
$ | 30,590 | $ | — | $ | — | $ | 30,590 | |||||||||
(1) | The current portion of contingent consideration is included in accrued liabilities in our consolidated balance sheets. The long-term portion of contingent consideration is included in other long-term obligations and deferred credits in our consolidated balance sheets. |
(2) | Includes the fair value of the earn-out payments associated with the 2012 acquisition of Bode Gravel Co. and Bode Concrete LLC. The fair value was determined based on expected payouts that will be due to the former owners based on the achievement of certain incremental sales volume milestones, using a contractual discount rate of 7.0%. These payments were capped at a fair value of $3.5 million as of December 31, 2015 and $5.3 million as of December 31, 2014. |
(3) | Includes the fair value of the Mobile-Crete Earn-out (see Note 2). The fair value was determined based on expected payouts that will be due to the former owners based on probability-weighted assumptions related to average annual WTI prices reaching certain predetermined levels from December 8, 2015 through December 7, 2016, using a discount rate of 3.50%. The fair value of the Mobile-Crete Earn-out was less than $0.1 million as of December 31, 2015. |
(4) | Includes the fair value of the Right Away Earn-out (see Note 2). The fair value was determined based on expected payouts that will be due to the former owners based on probability-weighted assumptions related to the achievement of sales volume milestones, using a discount rate of 8.50%. The fair value of the Right Away Earn-out was $4.7 million as of December 31, 2015. |
(5) | Includes the fair value of the Ferrara Bros. Contingent Consideration (see Note 2). The fair value was determined based on the expected vesting of incentive awards granted to the former owners at acquisition based on probability-weighted assumptions related to the achievement of certain EBITDA thresholds, using a discount rate of 10.53%. The fair value of the Ferrara Bros. Contingent Consideration was $21.2 million as of December 31, 2015. |
(6) | Includes the fair value of the DuBrook Earn-out (see Note 2). The fair value was determined based on the expected payouts that will be due to the former owners based on probability-weighted assumptions related to the achievement of sales volume milestones, using a discount rate of 15.75%. The fair value of the DuBrook Earn-out was $0.7 million as of December 31, 2015. |
The liability for the Warrants was valued utilizing a Black-Scholes-Merton model. Inputs into the model were based upon observable market data where possible. The key inputs in determining our derivative liabilities include our stock price, stock price
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volatility, and risk-free interest rates. As of December 31, 2015, observable market data existed for all of the key inputs in determining the fair value of our Warrants.
A reconciliation of the changes in Level 3 fair value measurements is as follows for December 31, 2015 and 2014 (in thousands):
Warrants | Contingent Consideration | |||||||
Balance at January 1, 2014 | $ | 21,690 | $ | 7,000 | ||||
Total losses included in earnings (1) | 3,560 | — | ||||||
Payment on contingent consideration | — | (1,656 | ) | |||||
Write-off of derivative on exercised Warrants (2) | (4 | ) | — | |||||
Balance at December 31, 2014 | 25,246 | 5,344 | ||||||
Acquisitions (3) | — | 25,707 | ||||||
Total losses included in earnings (1) | 19,551 | 932 | ||||||
Payment on contingent consideration | — | (1,864 | ) | |||||
Write-off of derivative on exercised Warrants (2) | (4 | ) | — | |||||
Issuances of equity, net of cash proceeds (4) | (56 | ) | — | |||||
Transfer out (5) | (44,737 | ) | — | |||||
Balance at December 31, 2015 | $ | — | $ | 30,119 | ||||
(1) | Represents the loss on revaluation of Warrants from January 1, 2014 through June 30, 2015, which is included in derivative loss in our consolidated statements of operations, and the net gain on revaluation of contingent consideration, which is included in gain on revaluation of contingent consideration in our consolidated statements of operations. We recorded a net loss on revaluation of contingent consideration of $0.9 million in the year ended December 31, 2015, as result of the estimate of future WTI prices offset by accretion of interest for the passage of time as well as changes in the probability-weighted assumptions related to the achievement of sales volumes and certain EBITDA thresholds. No gain or loss on revaluation of contingent consideration was recognized in the year ended December 31, 2014. |
(2) | Represents the pro rata portion of the derivative liability associated with exercised Warrants from January 1, 2014 through June 30, 2015 and measured at the date of share issuance, which is included in derivative loss in our consolidated statements of operations. |
(3) | The liabilities for earn-outs and contingent considerations for acquisitions from 2014 and 2015 were valued using Monte Carlo simulations which incorporated probability-weighted assumptions related to the achievement of varying thresholds of pre-determined sales volumes, WTI prices for the applicable year, and EBITDA. Inputs into the models were based upon observable market data where possible. Where observable market data did not exist, we modeled inputs based upon similar observable inputs. The key inputs included discount rates ranging from 3.50% to 15.75%, a forecasted average of WTI prices from December 8, 2014 through December 7, 2016 from quoted sources, and management's estimates of future sales volumes and EBITDA. |
(4) | Represents the pro rata portion of the derivative liability associated with exercised Warrants from January 1, 2014 through June 30, 2015 and measured at the date of share issuance, which is included in additional paid-in capital in our condensed consolidated balance sheets. |
(5) | Transfer out of Level 3 financial liabilities was due to changes in the observability of market inputs used in the valuation of our Warrants. The transfer was measured as of June 30, 2015, the end of the period in which the transfer occurred. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
14. STOCKHOLDERS’ EQUITY
Common Stock and Preferred Stock
The following table presents information regarding U.S. Concrete’s common stock (in thousands):
December 31, | ||||||
2015 | 2014 | |||||
Shares authorized | 100,000 | 100,000 | ||||
Shares outstanding at end of period | 14,871 | 13,978 | ||||
Shares held in treasury | 842 | 697 | ||||
Under our restated certificate of incorporation, we are authorized to issue 100.0 million shares of common stock, par value $0.001, and 10.0 million shares of preferred stock, $0.001 par value. Additionally, we are authorized to issue “blank check” preferred stock, which may be issued from time to time in one or more series upon authorization by our Board. The Board, without further approval of the stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences and restrictions applicable to each series of the preferred stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes could, among other things, adversely affect the voting power of the holders of our common stock and, under certain circumstances, make it more difficult for a third party to gain control of us, discourage bids for our common stock at a premium or otherwise affect the market price of our common stock. There was no preferred stock issued or outstanding as of December 31, 2015 and 2014.
Common Stock Issuance
During the second quarter of 2015, we issued approximately 442,000 shares of common stock with a total value of $15.1 million as part of the consideration for the Ferrara Bros. acquisition (see Note 2).
Share Repurchase Program
In May 2014, our Board authorized a program to repurchase up to $50.0 million of our outstanding common stock (the "Share Repurchase Program") until the earlier of March 31, 2017, or a determination by the Board to discontinue the repurchase program. We made no repurchases of our common stock during the year ended December 31, 2015 under the Share Repurchase Program. We made a related party share repurchase of our common stock during the second quarter of 2014 as discussed below.
Related Party Share Repurchase
During the second quarter of 2014, as part of the Share Repurchase Program, we paid $4.8 million in cash to Whippoorwill Associates, Inc. ("Whippoorwill") pursuant to a privately negotiated agreement to repurchase 200,000 shares of our common stock. We repurchased the shares for $24.12 per share, which was the closing price of our common stock on the NASDAQ stock market on the trading day prior to the repurchase. As of May 19, 2014, and prior to the transaction, Whippoorwill owned approximately 3.0 million shares, or approximately 21%, of our outstanding common stock and, as such, the transaction was considered a related party repurchase. In addition, we paid $0.1 million in legal fees associated with the Whippoorwill share repurchase. There were no related party share repurchases during the year ended December 31, 2015.
Treasury Stock
Employees may elect to satisfy their tax obligations on the vesting of their restricted stock by having the required tax payments withheld based on a number of vested shares having an aggregate value on the date of vesting equal to the tax obligation. As a result of such employee elections, we withheld approximately 145,000 shares during the year ended December 31, 2015, at a total value of approximately $6.3 million, and approximately 83,000 shares during the year ended December 31, 2014, at a total value of approximately $2.1 million. We accounted for the withholding of these shares as treasury stock.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
15. WARRANTS
On August 31, 2010 (the "Effective Date"), we issued warrants to acquire common stock in two tranches: Class A Warrants to purchase an aggregate of approximately 1.5 million shares of common stock, and Class B Warrants to purchase an aggregate of approximately 1.5 million shares of common stock (collectively, the "Warrants"). The Warrants were issued to holders of our predecessor common stock pro rata based on a holder’s stock ownership as of the Effective Date. The Warrants have been included in derivative liabilities on the consolidated balance sheets (see Note 11) and are recorded at their fair value (see Note 13). The Warrants are also included in the potentially dilutive securities included in the calculation of diluted earnings (loss) per share as shares of our common stock would be issued if the Warrants were exercised (see Note 18). The Warrants are classified as a current liability on the consolidated balance sheets as they can be exercised by the holders at any time. As of December 31, 2015, there were 1.1 million of Class A Warrants and 1.3 million of Class B Warrants outstanding.
In connection with the issuance of the Class A Warrants, we entered into a Class A Warrant Agreement with American Stock Transfer & Trust Company, LLC, as warrant agent ("AST"). Subject to the terms of the Class A Warrant Agreement, each holder of a Class A Warrant is entitled to purchase one share of common stock at an exercise price of $22.69 per share. In connection with the issuance of the Class B Warrants, the Company entered into a Class B Warrant Agreement (collectively with the Class A Warrant Agreement, the "Warrant Agreements") with AST. Subject to the terms of the Class B Warrant Agreement, each holder of a Class B Warrant is entitled to purchase one share of common stock at an exercise price of $26.68 per share. Subject to the terms of the Warrant Agreements, both classes of Warrants have a seven year term and will expire on the seventh anniversary of the Effective Date. The Warrants may be exercised for cash or on a net issuance basis.
If, at any time before the expiration date of the Warrants, we pay or declare a dividend or make a distribution on the common stock payable in shares of our capital stock, or make subdivisions or combinations of our outstanding shares of common stock into a greater or lesser number of shares or issue any shares of our capital stock by reclassification of common stock, then the exercise price and number of shares issuable upon exercise of the Warrants will be adjusted so that the holders of the Warrants will be entitled to receive the aggregate number and kind of shares that they would have received as a result of the event if their Warrants had been exercised immediately before the event. In addition, if we distribute to holders of the common stock an Extraordinary Distribution (defined in each Warrant Agreement to include assets, securities or warrants to purchase securities), then the exercise price of the Warrants will be decreased by the amount of cash and / or the fair market value of any securities or assets paid or distributed on each share of common stock. However, no adjustment to the exercise price will be made if, at the time of an Extraordinary Distribution, we make the same distribution to holders of Warrants as we make to holders of common stock pro rata based on the number of shares of common stock for which the Warrants are exercisable.
In the event of a Fundamental Change (defined in each Warrant Agreement to include transactions such as mergers, consolidations, sales of assets, tender offers, exchange offers, reorganizations, reclassifications, compulsory share exchanges or liquidations in which all or substantially all of the outstanding common stock is converted into or exchanged for stock, other securities, cash or assets), if the consideration paid consists 90% or more of publicly traded securities, each holder of a Warrant will have the right upon any subsequent exercise to receive the kind and amount of stock, other securities, cash and assets that such holder would have received if the Warrant had been exercised immediately prior to such Fundamental Change. If a Fundamental Change occurs (other than a Fundamental Change in which the consideration paid consists at least 90% of publicly traded securities), then each holder of a Warrant will be entitled to receive an amount equal to the Fair Market Value (as defined in each of the Warrant Agreements) of their Warrant on the date the Fundamental Change is consummated.
No adjustment in the exercise price of the Warrants shall be required unless such adjustment would require an increase or decrease of at least $0.05 in the exercise price; provided that any adjustments that are not required to be made shall be carried forward and taken into account in any subsequent adjustment.
16. INCOME TAXES (restated)
Our consolidated federal and state income tax returns include the results of operations of acquired businesses from their dates of acquisition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliation of our effective income tax rate to the amounts calculated by applying the federal statutory corporate tax rate of 35% is as follows (in thousands):
Years Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||
(Restated) | (Restated) | (Restated) | |||||||||||||||||||
Tax (benefit) expense at statutory rate | $ | (1,510 | ) | 35.0 | % | $ | 8,306 | 35.0 | % | $ | (5,987 | ) | 35.0 | % | |||||||
Add (deduct): | |||||||||||||||||||||
Rates different than statutory | (165 | ) | 3.8 | — | — | — | — | ||||||||||||||
State income taxes | (2,322 | ) | 53.8 | 2,792 | 11.8 | 1,693 | (9.9 | ) | |||||||||||||
Nondeductible items | 511 | (11.8 | ) | 1,304 | 5.5 | 970 | (5.7 | ) | |||||||||||||
Unrecognized tax benefit relating to Warrants | 21,006 | (486.8 | ) | 1,245 | 5.2 | 5,892 | (34.4 | ) | |||||||||||||
Valuation allowance | (21,057 | ) | 487.9 | (10,992 | ) | (46.3 | ) | (6,053 | ) | 35.4 | |||||||||||
Unrecognized tax benefit | 390 | (9.0 | ) | 369 | 1.5 | (3,732 | ) | 21.8 | |||||||||||||
Derivatives and note discount | — | — | (911 | ) | (3.8 | ) | 8,369 | (48.9 | ) | ||||||||||||
Capital loss carryforward expiration | 3,485 | (80.8 | ) | — | — | — | — | ||||||||||||||
Depletion | (47 | ) | 1.1 | — | — | — | — | ||||||||||||||
Other | 488 | (11.3 | ) | 43 | 0.2 | 16 | (0.1 | ) | |||||||||||||
Income tax expense from continuing operations | $ | 779 | (18.1 | )% | $ | 2,156 | 9.1 | % | $ | 1,168 | (6.8 | )% | |||||||||
The amounts of our consolidated federal and state income tax expense (benefit) from continuing operations were as follows (in thousands):
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(Restated) | ||||||||||||
Current: | ||||||||||||
Federal | $ | 10,685 | $ | 487 | $ | 130 | ||||||
State | 2,716 | 1,674 | 1,144 | |||||||||
Foreign | (43 | ) | — | — | ||||||||
13,358 | 2,161 | 1,274 | ||||||||||
Deferred: | ||||||||||||
Federal | $ | (8,031 | ) | $ | (5 | ) | $ | — | ||||
State | (4,611 | ) | — | (106 | ) | |||||||
Foreign | 63 | — | — | |||||||||
(12,579 | ) | (5 | ) | (106 | ) | |||||||
Income tax expense from continuing operations | $ | 779 | $ | 2,156 | $ | 1,168 | ||||||
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U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Income tax expense (benefit) was allocated between continuing operations and discontinued operations as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(Restated) | |||||||||||
Continuing operations | $ | 779 | $ | 2,156 | $ | 1,168 | |||||
Discontinued operations | (180 | ) | 172 | (45 | ) | ||||||
Income tax expense | $ | 599 | $ | 2,328 | $ | 1,123 | |||||
Deferred income tax provisions result from temporary differences in the recognition of expenses for financial reporting purposes and for tax reporting purposes. We present the effects of those differences as deferred income tax liabilities and assets, as follows (in thousands):
December 31, | ||||||||
2015 | 2014 | |||||||
(Restated) | (Restated) | |||||||
Deferred tax assets: | ||||||||
Goodwill and other intangibles | $ | 4,165 | $ | 6,747 | ||||
Receivables | 1,705 | 988 | ||||||
Inventory | 4,114 | 4,264 | ||||||
Accrued insurance | 5,170 | 4,021 | ||||||
Depletion | 366 | 490 | ||||||
Deferred revenue | 358 | 332 | ||||||
Stock compensation | 769 | 986 | ||||||
Charitable contribution carryover | — | 166 | ||||||
Other accrued expenses | 7,465 | 5,224 | ||||||
Capital loss carryforward expiration | — | 3,736 | ||||||
Net operating loss carryforwards | 5,699 | 10,039 | ||||||
Other | 2,024 | 1,507 | ||||||
Total gross deferred tax assets | 31,835 | 38,500 | ||||||
Valuation allowance | (4,131 | ) | (26,474 | ) | ||||
Net deferred tax assets | 27,704 | 12,026 | ||||||
Deferred income tax liabilities: | ||||||||
Property, plant and equipment, net | 21,678 | 16,566 | ||||||
Total gross deferred tax liabilities | 21,678 | 16,566 | ||||||
Net deferred tax asset (liability) | $ | 6,026 | $ | (4,540 | ) | |||
The allocation of deferred taxes between current and long-term as of December 31, 2015 and 2014 was as follows (in thousands):
December 31, | ||||||||
2015 | 2014 | |||||||
(Restated) | ||||||||
Current deferred tax asset, net | $ | — | $ | 1,887 | ||||
Long-term deferred tax asset, net | 6,026 | — | ||||||
Long-term deferred tax liability, net | — | 6,427 | ||||||
Net deferred tax asset (liability) | $ | 6,026 | $ | (4,540 | ) | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In accordance with U.S. GAAP, the recognized value of deferred tax assets must be reduced to the amount that is more likely than not to be realized in future periods. The ultimate realization of the benefit of deferred tax assets from deductible temporary differences or tax carryovers depends on the generation of sufficient taxable income during the periods in which those temporary differences become deductible. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on these considerations, we relied upon the reversal of certain deferred tax liabilities to realize a portion of our deferred tax assets and established valuation allowances as of December 31, 2015 and 2014 in the amount of $4.1 million and $26.5 million, respectively, for other deferred tax assets because of uncertainty regarding their ultimate realization. Our total net deferred tax asset as of December 31, 2015 was $6.0 million and our total net deferred tax liability as of December 31, 2014 was $4.5 million, respectively.
We record changes in the fair value of our Warrant derivative each quarterly period in accordance with U.S. GAAP, which results in non-cash income or loss each period. We do not recognize this income or loss for purposes of calculating our tax provision; instead it is treated as an unrecognized tax benefit. Further, exercises of the Warrants are treated as an unrecognized tax benefit for purposes of calculating our tax provision. For 2015, our tax provision excluded $22.5 million related to this unrecognized tax benefit for federal and state tax purposes. There was no tax effect to our tax provision in 2014 related to the Warrants due to a full valuation allowance on our deferred tax assets through the third quarter of 2015.
As of each reporting date, management considers all new evidence, both positive and negative, that could impact management's view with regard to future realization of deferred tax assets. As of December 31, 2015, we achieved a history of positive pre-tax income and anticipate significant additional future pre-tax income to be generated, in part from our recently acquired businesses, which will result in higher U.S. Federal taxable income. For these reasons, management determined that sufficient positive evidence existed as of December 31, 2015 to conclude that it is more likely than not that additional deferred taxes of $21.1 million are realizable, and therefore, reversed a majority of the valuation allowance accordingly.
Under U.S. tax law, we have elected to treat our U.S. Virgin Island subsidiaries as controlled foreign corporations. As such, we consider the undistributed earnings of our U.S. Virgin Island subsidiaries as of December 31, 2015 to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. As of December 31, 2015, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $0.1 million. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.
We reorganized pursuant to Chapter 11 of the bankruptcy code under the terms of our plan of reorganization (the "Plan"), with an effective date of August 31, 2010. Under our Plan, our previously outstanding 8.375% Senior Subordinated Notes due 2014 were cancelled, giving rise to cancellation of indebtedness income ("CODI"). The Internal Revenue Code ("IRC"), provides that CODI arising under a plan of bankruptcy reorganization is excludable from taxable income, but the debtor must reduce certain of its tax attributes by the amount of CODI realized under the Plan. Based on the estimate of CODI and required tax attribute reduction, the effects of the Plan did not cause a significant change in our recorded net deferred tax liability. Our required reduction in tax attributes, or deferred tax assets, was accompanied by a corresponding release of valuation allowance in prior years.
We underwent a change in ownership for purposes of Section 382 of the IRC as a result of our Plan and emergence from Chapter 11 on August 31, 2010. As a result, the amount of our pre-change net operating losses ("NOL's"), and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the corporation as of the effective date of the Plan. As of December 31, 2015, approximately $5.6 million of our federal NOL's are subject to annual Section 382 limitations. The ownership change and the resulting annual limitation on use of NOL's are not expected to result in the expiration of our NOL carryforwards if we are able to generate sufficient future taxable income within the carryforward periods. However, the limitation on the amount of NOL's available to offset taxable income in a specific year may result in the payment of income taxes before all NOL's have been utilized.
At December 31, 2015, we had unrecognized tax benefits of $35.0 million which, if recognized, would impact the effective tax rate. It is unlikely a reduction of unrecognized tax benefits will occur within the next 12 months. The unrecognized tax benefits relating to amounts taken or expected to be taken in 2015 and prior tax returns are included as a component of other long-term obligations. During the years ended December 31, 2015, 2014 and 2013, we recorded interest and penalties related to unrecognized tax benefits of $0.1 million, less than $0.1 million and $0.1 million, respectively, which are included in income tax expense in our consolidated statement of operations. Total accrued penalties and interest at December 31, 2015 and 2014 was approximately $0.3 million and $0.2 million, respectively.
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U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(Restated) | (Restated) | (Restated) | ||||||||||
Unrecognized tax benefits at January 1 | $ | 12,098 | $ | 10,711 | $ | 7,273 | ||||||
Additions for tax positions related to current year | 22,916 | 1,715 | 6,858 | |||||||||
Additions for tax positions related to prior years | — | 100 | 393 | |||||||||
Reductions due to lapse of statute of limitations | — | (63 | ) | (3,813 | ) | |||||||
Settlements | — | (365 | ) | — | ||||||||
Unrecognized tax benefits at December 31 | $ | 35,014 | $ | 12,098 | $ | 10,711 | ||||||
We recorded an unrecognized tax position in 2015 of $22.5 million related to the Warrants, due to uncertainty about their deductibility for federal and state income tax purposes. Approximately $30.9 million of our unrecognized tax benefits as of December 31, 2015 relate to the Warrants.
We recognize interest and penalties related to uncertain tax positions in income tax expense.
We conduct business domestically and, as a result, U.S. Concrete, Inc. or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. In the normal course of business, we are subject to examination in the U.S. federal jurisdiction, and generally in state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local tax examinations for years before 2012.
17. STOCK-BASED COMPENSATION
Management Equity Incentive Plan
As of December 31, 2015, there were 0.9 million shares remaining for future issuance under the Long Term Incentive Plan (the "LTI Plan"). The LTI Plan enables us to grant stock options, stock appreciation rights, restricted stock awards, restricted stock units, cash awards and performance awards to management, employees, and directors of the Company.
Stock-Based Compensation
Under authoritative accounting guidance, share-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized on a straight-line basis over the employee’s requisite service period, generally the vesting period of the award or, for performance-based awards, over the derived service period. We have elected to use the long-form method of determining our pool of windfall tax benefits as prescribed under authoritative accounting guidance.
For the years ended December 31, 2015, 2014, and 2013, we recognized stock-based compensation expense related to restricted stock, restricted stock units and stock options of $5.8 million, $3.7 million, and $5.4 million, respectively, with a net tax-effected excess tax benefit recognized in 2015 in the amount of $5.0 million. There was no related excess tax benefit recognized in 2014 or 2013. Stock-based compensation expense is reflected in selling, general and administrative expenses in our consolidated statements of operations.
As of December 31, 2015, there was approximately $5.0 million of unrecognized compensation cost related to restricted stock units and restricted stock awards, net of estimated forfeitures. As of December 31, 2015, we expect to recognize the related compensation cost over a weighted-average period of approximately 1.0 year.
Restricted Stock Units
Restricted stock units generally vest over a one to three year period on a quarterly basis. The restricted stock units are subject to restrictions on transfer and certain conditions to vesting. During the restriction period, the holders of restricted stock units are
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
not entitled to vote and receive dividends on those restricted units as the restricted stock units do not represent outstanding shares of our common stock.
Restricted stock unit activity for the year ended December 31, 2015 was as follows (shares in thousands):
Number of Units | Weighted- Average Grant Date Fair Value | ||||||
Unvested restricted stock units outstanding at beginning of period | 22 | $ | 25.57 | ||||
Granted | 16 | 50.11 | |||||
Vested | (22 | ) | 25.57 | ||||
Forfeited | — | — | |||||
Unvested restricted stock units outstanding at end of period | 16 | $ | 50.11 | ||||
During 2015, 2014, and 2013, the weighted-average grant date fair value of restricted stock units granted was $50.11, $25.57 and $16.89, respectively. The fair value of our restricted stock units was determined based upon the price of our common stock on the date of grant.
During 2015, 2014, and 2013, the total fair value of restricted stock units vested was $0.6 million, $0.6 million and $1.4 million, respectively.
Compensation expense associated with awards of restricted stock units was $0.6 million, $0.6 million and $2.7 million for the years ended December 31, 2015, 2014, and 2013, respectively. For restricted stock units that were granted prior to May 2013, there was an equivalent number of incentive restricted stock units, "IRSU's," issued. These IRSU's represented the right to receive 0.35020 of a share of common stock upon satisfaction of certain criteria. Compensation costs for 2013 associated with our restricted stock units included $1.2 million for achievement of the performance goal associated with delivery of a conversion event notice related to our Convertible Notes, which occurred on June 18, 2013, triggering the conversion of certain previously vested IRSU's into approximately 69,000 common shares. No compensation expense had previously been recognized for these grants, as achievement of the performance goal was not considered probable.
Restricted Stock Awards
Restricted stock awards are subject to restrictions on transfer and certain conditions to vesting. The restricted stock awards issued to date consist of a 60% time-vested component and a 40% stock performance hurdle component. The time-vested component vests annually over a two or three year period. The stock performance hurdle component triggers vesting upon our stock price reaching certain thresholds. During the restriction period, the holders of restricted stock are entitled to vote and receive dividends, thus these awards are included in our outstanding shares of common stock.
Restricted stock award activity for the year ended December 31, 2015 was as follows (shares in thousands):
Number of Shares | Weighted- Average Grant Date Fair Value | ||||||
Unvested restricted stock awards outstanding at beginning of period | 434 | $ | 13.30 | ||||
Granted | 219 | 30.50 | |||||
Vested | (418 | ) | 14.06 | ||||
Forfeited | (19 | ) | 27.64 | ||||
Unvested restricted stock awards outstanding at end of period | 216 | $ | 28.75 | ||||
During 2015, 2014, and 2013, the weighted-average grant date fair value of restricted stock awards granted was $30.50, $21.11 and $11.55, respectively. The fair value of restricted stock awards subject only to time-vesting restrictions was determined based upon the price of our common stock on the date of grant. The fair value of restricted stock subject to our common stock reaching
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
certain price thresholds was determined utilizing a Monte Carlo financial valuation model which is appropriate for path-dependent options. Compensation expense determined utilizing the Monte Carlo simulation is recognized regardless of whether the common stock reaches the defined thresholds. The range of assumptions used to estimate the fair value of performance-based restricted stock awards granted during the years ended December 31, 2015, 2014, and 2013 were as follows:
Years Ended December 31, | ||||||
2015 | 2014 | 2013 | ||||
Expected term (years) | 0.70 - 1.00 | 0.08 - 1.08 | 0.17 - 1.17 | |||
Expected volatility | 36.7% | 38.6% - 42.6% | 41.3% - 43.3% | |||
Risk-free interest rate | 0.93% | 0.87% - 1.17% | 0.38% - 0.68% | |||
Weighted-average grant date fair value | $21.47 - $24.94 | $14.18 - $26.42 | $5.51 - $16.32 | |||
During 2015, 2014, and 2013, the total fair value of restricted stock awards vested was $5.9 million, $1.5 million and $3.0 million, respectively.
Compensation expense associated with restricted stock awards under our incentive compensation plan was $5.2 million, $3.1 million and $2.7 million for the years ended December 31, 2015, 2014, and 2013, respectively. During 2015, we modified the terms of certain of our restricted stock awards issued during 2015, 2014, and 2013, resulting in the accelerated vesting of the time-vested component. The incremental compensation expense associated with the modification of these restricted stock awards was $0.2 million for 2015.
Stock Options
Proceeds from the exercise of stock options are credited to common stock at par value, and the excess is credited to additional paid-in capital. We estimated the fair value of each of our stock option awards on the date of grant using a Black-Scholes option pricing model. We determined the expected volatility using the historical and implied volatilities of a peer group of companies given the limited trading history of our common stock at the time. For each option awarded, the risk-free interest rate was based on the U.S. Treasury yield in effect at the time of grant for periods corresponding with the expected life of the option. The expected life of an option represents the weighted average period of time that an option grant is expected to be outstanding, giving consideration to its vesting schedule and historical exercise patterns. There were no stock option grants in 2015, 2014 or 2013. Options outstanding at December 31, 2015 relate to grants prior to 2013.
Compensation expense related to stock options was less than $0.1 million during the years ended December 31, 2014 and 2013. There was no compensation expense related to stock options for the year ended December 31, 2015. Stock option activity for the year ended December 31, 2015 was as follows (shares in thousands):
Number of Shares Underlying Options | Weighted- Average Exercise Price | ||||||
Options outstanding at beginning of year | 46 | $ | 18.46 | ||||
Granted | — | — | |||||
Exercised | (15 | ) | 20.84 | ||||
Forfeited and expired | — | — | |||||
Options outstanding at end of year | 31 | $ | 17.32 | ||||
Options exercisable at end of year | 31 | $ | 17.32 | ||||
The total intrinsic value of stock options exercised during the years ended December 31, 2015, 2014, and 2013 was $0.5 million, $0.2 million, and $0.1 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes information about stock options outstanding as of December 31, 2015 (shares in thousands):
Options Outstanding | Options Exercisable | |||||||||||||||
Range of exercise prices | Number of Shares Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number of Shares Outstanding | Weighted Average Exercise Price | |||||||||||
$12.00 - $12.00 | 10 | 4.51 | $ | 12.00 | 10 | $ | 12.00 | |||||||||
$15.00 - $15.00 | 11 | 4.52 | 15.00 | 11 | 15.00 | |||||||||||
$22.69 - $22.69 | 5 | 4.52 | 22.69 | 5 | 22.69 | |||||||||||
$26.68 - $26.68 | 5 | 4.52 | 26.68 | 5 | 26.68 | |||||||||||
$12.00 - $26.68 | 31 | 4.52 | $ | 17.32 | 31 | $ | 17.32 | |||||||||
The aggregate intrinsic value of outstanding and exercisable stock options was $1.1 million, $0.5 million, and $0.5 million at December 31, 2015, 2014, and 2013, respectively.
18. NET EARNINGS (LOSS) PER SHARE (restated)
Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period after giving effect to all potentially dilutive securities outstanding during the period.
The following is a reconciliation of the components of the basic and diluted earnings per share calculations for the year ended December 31, 2014, in thousands:
Year Ended December 31, | ||||
2014 | ||||
Numerator: | ||||
Income from continuing operations | $ | 21,575 | ||
Loss from discontinued operations, net of taxes | (993 | ) | ||
Numerator for basic and diluted earnings per share | $ | 20,582 | ||
Denominator: | ||||
Basic weighted average common shares outstanding | 13,541 | |||
Restricted stock and restricted stock units | 210 | |||
Warrants | 136 | |||
Stock options | 11 | |||
Denominator for diluted earnings per share | 13,898 | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We have not included a reconciliation of the components of the basic and diluted earnings per share calculations for the years ended December 31, 2015 and December 31, 2013 as we reported losses from continuing and discontinued operations in the accompanying consolidated statements of operations for those years, and thus the share count used in the basic and diluted calculation is the same.
For the years ended December 31, 2015, 2014, and 2013, our potentially dilutive shares excluded from the calculation of diluted earnings (loss) per share included shares underlying our restricted stock awards, restricted stock units, stock options, and Warrants. For the year ended December 31, 2013, our potentially dilutive shares also included the shares underlying our Convertible Notes. The following table shows the type and number (in thousands) of potentially dilutive shares excluded from the diluted earnings (loss) per share calculations for the periods presented as their effect would have been anti-dilutive or they have not met their performance target:
Years Ended December 31, | |||||||||
2015 | 2014 | 2013 | |||||||
(Restated) | |||||||||
Potentially dilutive shares: | |||||||||
Convertible Notes | — | — | 349 | ||||||
Unvested restricted stock awards and restricted stock units | 232 | 84 | 516 | ||||||
Stock options | 31 | 14 | 80 | ||||||
Warrants | 2,361 | 1,500 | 3,000 | ||||||
Total potentially dilutive shares | 2,624 | 1,598 | 3,945 | ||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
19. BUSINESS SEGMENTS
Our two reportable segments consist of ready-mixed concrete and aggregate products, as described below.
Our ready-mixed concrete segment produces and sells ready-mixed concrete. This segment serves the following principal markets: Texas, northern California, New York, New Jersey, Washington, D.C., and Oklahoma. With the acquisition of the ready-mixed concrete businesses during the fourth quarter of 2015 (see Note 2), we have further expanded our ready-mixed concrete segment to serve the U.S Virgin Islands market. Our aggregate products segment includes crushed stone, sand and gravel products and serves the north and west Texas, New York, and New Jersey markets in which our ready-mixed concrete segment operates. With the acquisition of sand and gravel operations during the third quarter of 2015 (see Note 2), we have expanded our aggregate products segment to serve the southern Oklahoma market. Further, with the Heavy acquisition during the fourth quarter of 2015 (see Note 2), we have expanded our aggregates products segment to serve the U.S. Virgin Islands market. Other products not associated with a reportable segment include our building materials stores, hauling operations, lime slurry, ARIDUS® Rapid Drying Concrete technology, brokered product sales, a recycled aggregates operation, an aggregates distribution operation, and an industrial waterfront marine terminal and sales yard. The financial results of the acquisitions completed in 2015, 2014, and 2013 have been included in their respective reportable segment or in other products as of their respective acquisition dates.
Our customers are generally involved in the construction industry, which is a cyclical business and is subject to general and more localized economic conditions. In addition, our business is impacted by seasonal variations in weather conditions, which vary by regional market. Accordingly, demand for our products and services during the winter months are typically lower than in other months of the year because of inclement weather. Also, sustained periods of inclement weather and other adverse weather conditions could cause the delay of construction projects during other times of the year.
Our chief operating decision maker evaluates segment performance and allocates resources based on Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) from continuing operations excluding interest, income taxes, depreciation, depletion and amortization, derivative gain (loss), gain or loss on revaluation of contingent consideration, and gain or loss on extinguishment of debt. Additionally, we adjust Adjusted EBITDA for items similar to certain of those used in calculating the Company’s compliance with debt covenants. The additional items that are adjusted to determine our Adjusted EBITDA are:
• | non-cash stock compensation expense; |
• | acquisition-related professional fees; and |
• | corporate officer severance expense. |
We consider Adjusted EBITDA to be an indicator of the operational strength and performance of our business. We have included Adjusted EBITDA because it is a key financial measure used by our management to (i) internally measure our operating performance and (ii) assess our ability to service our debt, incur additional debt and meet our capital expenditure requirements.
Adjusted EBITDA should not be construed as an alternative to, or a better indicator of, net income or loss, is not based on U.S. GAAP, and is not necessarily a measure of our cash flows or ability to fund our cash needs. Our measurements of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
We account for inter-segment sales at market prices. Corporate includes executive, administrative, financial, legal, human resources, business development and risk management activities which are not allocated to reportable segments and are excluded from segment Adjusted EBITDA. Eliminations include transactions to account for intercompany activity.
In January 2014, our Board approved of the sale of our one remaining precast operation in Pennsylvania. Historical segment results have been recast to conform to this change.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables set forth certain financial information relating to our continuing operations by reportable segment (in thousands):
Years ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Revenue: | ||||||||||||
Ready-mixed concrete | ||||||||||||
Sales to external customers | $ | 876,633 | $ | 632,787 | $ | 545,302 | ||||||
Aggregate products | ||||||||||||
Sales to external customers | 34,191 | 31,662 | 21,715 | |||||||||
Intersegment sales | 26,248 | 20,956 | 16,498 | |||||||||
Total aggregate products | 60,439 | 52,618 | 38,213 | |||||||||
Total reportable segment revenue | 937,072 | 685,405 | 583,515 | |||||||||
Other products and eliminations | 37,645 | 18,309 | 14,640 | |||||||||
Total revenue | $ | 974,717 | $ | 703,714 | $ | 598,155 | ||||||
Reportable Segment Adjusted EBITDA: | ||||||||||||
Ready-mixed concrete | $ | 131,940 | $ | 84,706 | $ | 58,583 | ||||||
Aggregate products | 14,996 | 10,549 | 7,192 | |||||||||
Total reportable segment Adjusted EBITDA | $ | 146,936 | $ | 95,255 | $ | 65,775 | ||||||
Reconciliation of reportable segment Adjusted EBITDA to income (loss) from continuing operations before income taxes: | ||||||||||||
Total reportable segment Adjusted EBITDA | $ | 146,936 | $ | 95,255 | $ | 65,775 | ||||||
Other products and eliminations income from operations | 8,704 | 3,082 | 2,615 | |||||||||
Corporate overhead, net of insurance allocations | (39,012 | ) | (30,870 | ) | (29,957 | ) | ||||||
Depreciation, depletion and amortization for reportable segments | (38,767 | ) | (20,362 | ) | (15,777 | ) | ||||||
Interest expense, net | (21,734 | ) | (20,431 | ) | (11,332 | ) | ||||||
Corporate gain on early extinguishment of debt | — | 11 | 985 | |||||||||
Corporate derivative loss | (60,016 | ) | (3,556 | ) | (29,964 | ) | ||||||
Loss on revaluation of contingent consideration | (932 | ) | — | — | ||||||||
Corporate, other products and eliminations other income, net | 506 | 602 | 550 | |||||||||
(Loss) income from continuing operations before income taxes | $ | (4,315 | ) | $ | 23,731 | $ | (17,105 | ) | ||||
Capital Expenditures: | ||||||||||||
Ready-mixed concrete | $ | 12,321 | $ | 21,754 | $ | 12,236 | ||||||
Aggregate products | 7,859 | 9,128 | 5,773 | |||||||||
Other | 4,797 | 1,685 | 1,979 | |||||||||
Total capital expenditures | $ | 24,977 | $ | 32,567 | $ | 19,988 | ||||||
Revenue by Product: | ||||||||||||
Ready-mixed concrete | $ | 876,633 | $ | 632,787 | $ | 545,302 | ||||||
Aggregate products | 34,191 | 31,662 | 21,715 | |||||||||
Aggregate distribution | 28,393 | 4,892 | — | |||||||||
Building materials | 17,533 | 15,410 | 14,656 | |||||||||
Lime | 9,250 | 10,459 | 7,356 | |||||||||
Hauling | 5,425 | 4,221 | 4,533 | |||||||||
Other | 3,292 | 4,283 | 4,593 | |||||||||
Total revenue | $ | 974,717 | $ | 703,714 | $ | 598,155 | ||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Identifiable Assets: | ||||||||||||
Ready-mixed concrete and concrete-related products | $ | 166,837 | $ | 126,141 | $ | 91,776 | ||||||
Aggregate products | 65,937 | 40,878 | 36,819 | |||||||||
Other products and corporate | 15,349 | 9,505 | 9,965 | |||||||||
Total identifiable assets | $ | 248,123 | $ | 176,524 | $ | 138,560 | ||||||
20. RISK CONCENTRATION
We grant credit, generally without collateral, to our customers, which include general contractors, municipalities and commercial companies located primarily in Texas, northern California, New Jersey, New York, Pennsylvania, Washington D.C., Oklahoma, and the U.S. Virgin Islands. Consequently, we are subject to potential credit risk related to changes in business and economic factors in those states and territories. We generally have lien rights in the work we perform, and concentrations of credit risk are limited because of the diversity of our customer base. Further, our management believes that our contract acceptance, billing and collection policies are adequate to limit potential credit risk.
Several of our subsidiaries are parties to various collective bargaining agreements with labor unions having multi-year terms. As of December 31, 2015, approximately 976 of our employees, or 36.1% of our workforce, were represented by labor unions having collective bargaining agreements with us. Generally, these agreements have multi-year terms and expire on a staggered basis between 2016 and 2019. As of December 31, 2014, approximately 617 of our employees, or 28.8% of our workforce, were represented by agreements that expire on a staggered basis between 2015 and 2019.
21. SIGNIFICANT CUSTOMERS AND SUPPLIERS
We did not have any customers that accounted for more than 10% of our revenues or any suppliers that accounted for more than 10% of our cost of goods sold in 2015, 2014 or 2013. We did not have any customers that accounted for more than 10% of our accounts receivable as of December 31, 2015 or December 31, 2014.
22. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, and currently, we are subject to various claims and litigation brought by employees, customers and other third parties for, among other matters, personal injuries, property damages, product defects and delay damages that have, or allegedly have, resulted from the conduct of our operations. As a result of these types of claims and litigation, we must periodically evaluate the probability of damages being assessed against us and the range of possible outcomes. In each reporting period, if we determine that the likelihood of damages being assessed against us is probable, and, if we believe we can estimate a range of possible outcomes, then we will record a liability. The amount of the liability will be based upon a specific estimate, if we believe a specific estimate to be likely, or it will reflect the low end of our range. Currently, there are no material legal proceedings pending against us.
In the future, we may receive funding deficiency demands related to multi-employer pension plans to which we contribute. We are unable to estimate the amount of any potential future funding deficiency demands because the actions of each of the other contributing employers in the plans has an effect on each of the other contributing employers, and the development of a rehabilitation plan by the trustees and subsequent submittal to and approval by the Internal Revenue Service is not predictable. Further, the allocation of fund assets and return assumptions by trustees are variable, as are actual investment returns relative to the plan assumptions.
As of March 3, 2016, there are no material product defect claims pending against us. Accordingly, our existing accruals for claims against us do not reflect any material amounts relating to product defect claims. While our management is not aware of any facts that would reasonably be expected to lead to material product defect claims against us that would have a material adverse effect on our business, financial condition or results of operations, it is possible that claims could be asserted against us in the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
future. We do not maintain insurance that would cover all damages resulting from product defect claims. In particular, we generally do not maintain insurance coverage for the cost of removing and rebuilding structures. In addition, our indemnification arrangements with contractors or others, when obtained, generally provide only limited protection against product defect claims. Due to inherent uncertainties associated with estimating unasserted claims in our business, we cannot estimate the amount of any future loss that may be attributable to unasserted product defect claims related to ready-mixed concrete we have delivered prior to December 31, 2015.
We believe that the resolution of all litigation currently pending or threatened against us or any of our subsidiaries will not materially exceed our existing accruals for those matters. However, because of the inherent uncertainty of litigation, there is a risk that we may have to increase our accruals for one or more claims or proceedings to which we or any of our subsidiaries is a party as more information becomes available or proceedings progress, and any such increase in accruals could have a material adverse effect on our consolidated financial condition or results of operations. We expect in the future that we and our operating subsidiaries will, from time to time, be a party to litigation or administrative proceedings that arise in the normal course of our business.
We are subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions and wastewater discharge. Our management believes we are in substantial compliance with applicable environmental laws and regulations. From time to time, we receive claims from federal and state environmental regulatory agencies and entities asserting that we may be in violation of environmental laws and regulations. Based on experience and the information currently available, our management does not believe that these claims will materially exceed our related accruals. Despite compliance and experience, it is possible that we could be held liable for future charges, which might be material, but are not currently known to us or cannot be estimated by us. In addition, changes in federal or state laws, regulations or requirements, or discovery of currently unknown conditions, could require additional expenditures.
As permitted under Delaware law, we have agreements that provide indemnification of officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The maximum potential amount of future payments that we could be required to make under these indemnification agreements is not limited; however, we have a director and officer insurance policy that potentially limits our exposure and enables us to recover a portion of future amounts that may be paid. As a result of the insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of December 31, 2015.
We and our subsidiaries are parties to agreements that require us to provide indemnification in certain instances when we acquire businesses and real estate and in the ordinary course of business with our customers, suppliers, lessors and service providers.
Lease Payments
We lease certain mobile and other equipment, land, facilities, office space and other items which, in the normal course of business, are renewed or replaced by subsequent leases. Total consolidated expense for such operating leases amounted to $17.4 million in 2015, $11.9 million in 2014, and $11.2 million in 2013.
Future minimum rental payments with respect to our operating lease obligations as of December 31, 2015, are as follows (in thousands):
Year Ending December 31, | ||||
2016 | $ | 13,529 | ||
2017 | 12,575 | |||
2018 | 10,575 | |||
2019 | 7,446 | |||
2020 | 3,288 | |||
Thereafter | 18,157 | |||
$ | 65,570 | |||
Our annual lease expense differs from our future minimum rental payments as a result of month to month equipment leases to support our operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Insurance Programs
We maintain third-party insurance coverage against certain risks. Under certain components of our insurance program, we share the risk of loss with our insurance underwriters by maintaining high deductibles subject to aggregate annual loss limitations. Generally, our deductible retentions per occurrence for auto, workers’ compensation and general liability insurance programs are $1.0 million, although certain of our operations are self-insured for workers’ compensation. We fund these deductibles and record an expense for expected losses under the programs. The expected losses are determined using a combination of our historical loss experience and subjective assessments of our future loss exposure. The estimated losses are subject to uncertainty from various sources, including changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation and economic conditions. Although we believe that the estimated losses we have recorded are reasonable, significant differences related to the items noted above could materially affect our insurance obligations and future expense. The amount accrued for self-insurance claims was $12.0 million as of December 31, 2015, compared to $9.5 million as of December 31, 2014, which is recorded in accrued liabilities.
Performance Bonds
In the normal course of business, we and our subsidiaries are contingently liable for performance under $16.4 million in performance bonds that various contractors, states and municipalities have required as of December 31, 2015. The bonds principally relate to construction contracts, reclamation obligations and licensing and permitting. We and our subsidiaries have indemnified the underwriting insurance company against any exposure under the performance bonds. No material claims have been made against these bonds.
23. EMPLOYEE BENEFIT PLANS AND MULTI-EMPLOYER PENSION PLANS
Defined Contribution 401(k) Plan
We maintain a defined contribution 401(k) profit sharing plan for employees meeting various employment requirements. Eligible employees may contribute amounts up to the lesser of 60% of their annual compensation or the maximum amount IRS regulations permit. During 2015, we matched 100% of the first 4% of employee contributions. During 2014, we matched 100% of the first 1% of employee contributions and 50% of the next 5% of employee contributions. During 2013, we matched 50% of employee contributions up to a maximum of 6% of their compensation. We paid matching contributions of $2.9 million in 2015, $1.5 million in 2014, and $1.0 million in 2013.
Multi-Employer Pension Plans
Several of our subsidiaries are parties to various collective bargaining agreements with labor unions having multi-year terms that expire on a staggered basis. Under these agreements, our applicable subsidiaries pay specified wages to covered employees, observe designated workplace rules and make payments to multi-employer pension plans and employee benefit trusts rather than administering the funds on behalf of these employees. The risks of participating in these multi-employer pension plans are different from single-employer plans. Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. If we choose to stop participating in some of these multi-employer plans, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. We were not required to record a liability in fiscal 2015 or 2014 for full and partial withdrawals from any multi-employer pension plans. For additional information regarding our potential future obligations, see Note 22.
The required disclosures and our participation in significant multi-employer pension plans are presented in the table below. The EIN / Pension Plan Number column provides the Employer Identification Number (“EIN”) and the three-digit plan number, if applicable. The Pension Protection Act zone status is based on information available from the plan or the plan’s public filings. Among other factors, plans in the red zone are generally less than 65% funded, plans in the orange or yellow zones are less than 80% funded, and plans in the green zone are at least 80% funded. The FIP / RP Status Pending / Implemented column indicates plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. The last column lists the expiration date(s) of the collective-bargaining agreements to which the plans are subject. Our contributions did not represent more than 5% of total contributions to any of the significant plans shown below.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Pension Fund | EIN / PPN | Pension Protection Act Zone Status | FIP / RP Status Pending / Implemented | Contributions (in Thousands) | Surcharge Imposed | Expiration Date of Collective Bargaining Agreement | ||||||||||||||||||
2014 and 2015 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||||
Western Conference of Teamsters Pension Plan | 91-6145047/001 | Green | Green | No | $ | 4,357 | $ | 3,568 | $ | 3,204 | No | 6/30/2016 to 8/31/2018 | ||||||||||||
Operating Engineers Pension Trust Fund | 94-6090764/001 | Orange | Orange | Yes | 1,173 | 933 | 837 | No | 7/1/2017 | |||||||||||||||
Local 282 Pension Trust Fund | 11-6245313/001 | Green | Green | No | 829 | 819 | 650 | No | 6/30/2016 | |||||||||||||||
Trucking Employees of North Jersey Pension Fund | 22-6063702/001 | Red | Red | Yes | 615 | 559 | 513 | No | 4/30/2018 | |||||||||||||||
Pension Fund Local 445 | 13-1864489/001 | Green | Yellow | Yes | 200 | 184 | 193 | No | 6/30/2017 | |||||||||||||||
Operating Engineers 825 Pension Fund | 22-6033380/001 | Green | Orange | Yes | 178 | 161 | 151 | Yes | 3/31/2016 to 3/31/2019 | |||||||||||||||
Automotive Industries Pension Plan | 94-1133245/001 | Red | Red | Yes | 102 | 179 | 180 | No | 7/31/2016 | |||||||||||||||
Other | Various | Various | Various | Various | 604 | 540 | 495 | Various | 6/30/2016 to 6/30/19 | |||||||||||||||
$ | 8,058 | $ | 6,943 | $ | 6,223 | |||||||||||||||||||
Contributions to the Western Conference of Teamsters Pension Plan increased from 2014 to 2015 due primarily to the impact of employees added as part of the Right Away acquisition during 2015. At the date that these consolidated financial statements were issued, Forms 5500 were generally not available for the plan year ending in 2015.
24. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The 2018 Notes are fully and unconditionally and jointly and severally guaranteed on a senior secured basis by each direct and indirect domestic subsidiary of the Company, each a guarantor subsidiary. Each guarantor subsidiary is directly or indirectly 100% owned by the Company. The 2018 Notes are not guaranteed by any direct or indirect foreign subsidiaries of the Company, each a non-guarantor subsidiary.
During the fourth quarter of 2015, we acquired two entities that have been designated as non-guarantor subsidiaries under our 2018 Notes. As such, we are required to provide condensed consolidating financial information in accordance with Rule 3-10 of Regulation S-X. We had no non-guarantor subsidiaries for any quarterly or annual periods prior to December 31, 2015.
The following condensed consolidating financial information present, in separate columns, financial information for (i) the Parent on a parent only basis, (ii) the guarantor subsidiaries on a combined basis, (iii) the non-guarantor subsidiaries on a combined basis, (iv) the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis, and (v) the Company on a consolidated basis.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following condensed consolidating financial information of U.S. Concrete, Inc. and its subsidiaries present investments in consolidated subsidiaries using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
U.S. CONCRETE, INC. AND SUBSIDARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2015
(in thousands)
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations and Reclassifications | U.S. Concrete Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 3,854 | $ | 71 | $ | — | $ | 3,925 | ||||||||||
Trade accounts receivable, net | — | 170,133 | 1,123 | — | 171,256 | |||||||||||||||
Inventories | — | 34,149 | 2,577 | — | 36,726 | |||||||||||||||
Prepaid expenses | — | 4,091 | 152 | — | 4,243 | |||||||||||||||
Other receivables | — | 7,736 | 29 | — | 7,765 | |||||||||||||||
Other current assets | 24,152 | 2,371 | 44 | (24,193 | ) | 2,374 | ||||||||||||||
Total current assets | 24,152 | 222,334 | 3,996 | (24,193 | ) | 226,289 | ||||||||||||||
Property, plant and equipment, net | — | 242,048 | 6,075 | — | 248,123 | |||||||||||||||
Goodwill | — | 73,638 | 26,566 | — | 100,204 | |||||||||||||||
Intangible assets, net | — | 95,754 | — | — | 95,754 | |||||||||||||||
Deferred income taxes | — | 6,089 | — | (63 | ) | 6,026 | ||||||||||||||
Investment in subsidiaries | 308,346 | — | — | (308,346 | ) | — | ||||||||||||||
Intercompany receivables | 119,070 | — | — | (119,070 | ) | — | ||||||||||||||
Other assets | 6,150 | 5,253 | 47 | — | 11,450 | |||||||||||||||
Total assets | $ | 457,718 | $ | 645,116 | $ | 36,684 | $ | (451,672 | ) | $ | 687,846 | |||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | 274 | $ | 78,902 | $ | 1,243 | $ | — | $ | 80,419 | ||||||||||
Accrued liabilities | 4,507 | 103,247 | 2,293 | (24,193 | ) | 85,854 | ||||||||||||||
Current maturities of long-term debt | — | 9,386 | — | — | 9,386 | |||||||||||||||
Derivative liabilities | 67,401 | — | — | — | 67,401 | |||||||||||||||
Total current liabilities | 72,182 | 191,535 | 3,536 | (24,193 | ) | 243,060 | ||||||||||||||
Long-term debt, net of current maturities | 245,000 | 27,363 | — | — | 272,363 | |||||||||||||||
Other long-term obligations and deferred credits | 6,529 | 31,887 | — | — | 38,416 | |||||||||||||||
Deferred income taxes | — | — | 63 | (63 | ) | — | ||||||||||||||
Intercompany payables | — | 112,164 | 6,906 | (119,070 | ) | — | ||||||||||||||
Total liabilities | 323,711 | 362,949 | 10,505 | (143,326 | ) | 553,839 | ||||||||||||||
Total equity | 134,007 | 282,167 | 26,179 | (308,346 | ) | 134,007 | ||||||||||||||
Total liabilities and equity | $ | 457,718 | $ | 645,116 | $ | 36,684 | $ | (451,672 | ) | $ | 687,846 | |||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
U.S. CONCRETE, INC. AND SUBSIDARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2015
(in thousands)
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations and Reclassifications | U.S. Concrete Consolidated | ||||||||||||||||
Revenue | $ | — | $ | 970,701 | $ | 4,016 | $ | — | $ | 974,717 | ||||||||||
Cost of goods sold before depreciation, depletion and amortization | — | 765,714 | 3,125 | — | 768,839 | |||||||||||||||
Selling, general and administrative expenses | — | 87,674 | 304 | — | 87,978 | |||||||||||||||
Depreciation, depletion and amortization | — | 43,545 | 25 | — | 43,570 | |||||||||||||||
Loss on remeasurement of contingent consideration | 871 | 61 | — | — | 932 | |||||||||||||||
Gain on sale of assets, net | — | (468 | ) | — | — | (468 | ) | |||||||||||||
(Loss) income from operations | (871 | ) | 74,175 | 562 | — | 73,866 | ||||||||||||||
Interest expense, net | (20,452 | ) | (1,280 | ) | (2 | ) | — | (21,734 | ) | |||||||||||
Derivative loss | (60,016 | ) | — | — | — | (60,016 | ) | |||||||||||||
Other income (expense), net | — | 3,580 | (11 | ) | — | 3,569 | ||||||||||||||
(Loss) income from continuing operations before income taxes and equity in earnings of subsidiaries | (81,339 | ) | 76,475 | 549 | — | (4,315 | ) | |||||||||||||
Income tax (benefit) expense | (7,823 | ) | 8,581 | 21 | — | 779 | ||||||||||||||
Net (loss) income from continuing operations before equity in earnings of subsidiaries | (73,516 | ) | 67,894 | 528 | — | (5,094 | ) | |||||||||||||
Loss from discontinued operations, net of taxes and before equity in earnings of subsidiaries | (320 | ) | — | (320 | ) | |||||||||||||||
Net (loss) income before equity in earnings of subsidiaries | (73,516 | ) | 67,574 | 528 | — | (5,414 | ) | |||||||||||||
Equity in earnings of subsidiaries | 68,102 | — | — | (68,102 | ) | — | ||||||||||||||
Net (loss) income | $ | (5,414 | ) | $ | 67,574 | $ | 528 | $ | (68,102 | ) | $ | (5,414 | ) | |||||||
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U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
U.S. CONCRETE, INC. AND SUBSIDARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2015
(in thousands)
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | U.S. Concrete Consolidated | ||||||||||||||||
Net cash (used in) provided by operating activities | $ | (17,619 | ) | $ | 122,658 | $ | (778 | ) | $ | — | $ | 104,261 | ||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of property, plant and equipment | — | (24,977 | ) | — | — | (24,977 | ) | |||||||||||||
Payments for acquisitions, net of cash acquired | (39,858 | ) | (89,411 | ) | (6,078 | ) | — | (135,347 | ) | |||||||||||
Proceeds from disposals of property, plant and equipment | — | 1,312 | — | — | 1,312 | |||||||||||||||
Proceeds from disposals of business units | — | 1,177 | — | — | 1,177 | |||||||||||||||
Investment in subsidiaries | (785 | ) | — | — | 785 | — | ||||||||||||||
Net cash used in investing activities | (40,643 | ) | (111,899 | ) | (6,078 | ) | 785 | (157,835 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Proceeds from revolver borrowings | 206,809 | — | — | — | 206,809 | |||||||||||||||
Repayments of revolver borrowings | (161,809 | ) | — | — | — | (161,809 | ) | |||||||||||||
Repayments of debt | (117 | ) | — | — | — | (117 | ) | |||||||||||||
Proceeds from exercise of stock options and warrants | 546 | — | — | — | 546 | |||||||||||||||
Payments of other long-term obligations | (1,000 | ) | (1,298 | ) | — | — | (2,298 | ) | ||||||||||||
Payments for other financing | — | (8,611 | ) | — | — | (8,611 | ) | |||||||||||||
Debt issuance costs | (893 | ) | — | — | — | (893 | ) | |||||||||||||
Other treasury share purchases | (6,330 | ) | — | — | — | (6,330 | ) | |||||||||||||
Intercompany funding | 21,056 | (27,198 | ) | 6,927 | (785 | ) | — | |||||||||||||
Net cash used in financing activities | 58,262 | (37,107 | ) | 6,927 | (785 | ) | 27,297 | |||||||||||||
Net increase in cash and cash equivalents | — | (26,348 | ) | 71 | — | (26,277 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | — | 30,202 | — | 30,202 | ||||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 3,854 | $ | 71 | $ | — | $ | 3,925 | ||||||||||
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U.S. CONCRETE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
25. QUARTERLY SUMMARY (unaudited) (restated)
Year Ended December 31, 2015 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
(Restated) | ||||||||||||||||
Revenue - continuing operations | $ | 171,338 | $ | 244,695 | $ | 295,111 | $ | 263,573 | ||||||||
Net (loss) income | $ | (10,484 | ) | $ | 9,703 | $ | 1,619 | $ | (6,252 | ) | ||||||
Net (loss) income per share-basic | $ | (0.77 | ) | $ | 0.69 | $ | 0.11 | $ | (0.43 | ) | ||||||
Net (loss) income per share-diluted | $ | (0.77 | ) | $ | 0.64 | $ | 0.10 | $ | (0.43 | ) | ||||||
Year Ended December 31, 2014 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
Revenue - continuing operations | $ | 146,257 | $ | 180,358 | $ | 197,589 | $ | 179,510 | ||||||||
Net (loss) income | $ | (1,153 | ) | $ | 7,861 | $ | 13,007 | $ | 867 | |||||||
Net (loss) income per share-basic | $ | (0.09 | ) | $ | 0.58 | $ | 0.96 | $ | 0.06 | |||||||
Net (loss) income per share-diluted | $ | (0.09 | ) | $ | 0.57 | $ | 0.94 | $ | 0.06 | |||||||
Our customers are generally involved in the construction industry, which is a cyclical business and is subject to general and more localized economic conditions. In addition, our business is impacted by seasonal variations in weather conditions, which vary by regional market. Accordingly, demand for our products and services during the winter months are typically lower than in other months of the year because of inclement weather. Also, sustained periods of inclement weather and other adverse weather conditions could cause the delay of construction projects during other times of the year.
26. SUBSEQUENT EVENT
On February 29, 2016, we completed the acquisition of all the assets of Greco Brothers Concrete of L.I., Inc. ("Greco"), in Brooklyn, New York. The purchase price was $15.8 million in cash, plus closing adjustments of $0.9 million. We funded the purchase through a combination of cash on hand and borrowings under our Revolving Facility. Greco operates two ready-mixed concrete plants and a fleet of 37 mixer trucks. The Greco acquisition further expands our ready-mixed concrete operations in our existing New York market. We will prepare the preliminary purchase price allocation for this acquisition as soon as practical, but no later than one year from the acquisition date.
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Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of December 31, 2015, our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
In the Original Report, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2015. In connection with the restatement discussed in the Explanatory Note to this Amendment, our management, with the participation of our principal executive officer and our principal financial officer, re-evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2015. Based on that re-evaluation and due to the material weakness in our internal control over financial reporting discussed in detail below and other changes to the Original Report made in this Amendment, our principal executive officer and our principal financial officer have concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
On October 27, 2015, we acquired the equity of Heavy Materials, LLC ("Heavy") and Spartan Products, LLC ("Spartan"). Our management has acknowledged that it is responsible for establishing and maintaining a system of internal controls over financial reporting for Heavy and Spartan. We are in the process of integrating Heavy and Spartan, and, therefore, have excluded Heavy and Spartan from our December 31, 2015 assessment of the effectiveness of internal control over financial reporting. The impact of the Heavy and Spartan transactions have not, nor are they expected to, materially affect our internal control over financial reporting. Heavy and Spartan represented 5.1% of our consolidated total assets and 0.4% of our consolidated revenues included in our consolidated financial statements as of and for the year ended December 31, 2015. Management will include Heavy and Spartan in its fiscal 2016 assessment of internal control over financial reporting.
In the Original Report, our management concluded that, as of December 31, 2015, our internal control over financial reporting was effective. In April 2016, as discussed in the Explanatory Note to this Amendment, we determined that we had recorded the Deferred Tax Asset and a related income tax deduction in error. Management believes that this situation resulted from a material weakness in internal controls relating to the accuracy and presentation of the accounting for income taxes, including the income tax provision and related tax assets and liabilities. This material weakness resulted in this restatement of our consolidated financial statements as of and for the year ended December 31, 2015. 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 a company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
In connection with the restatement discussed in the Explanatory Note to this Amendment, under the supervision and with the participation of our management, including our principal executive, financial and accounting officers, we conducted a re-evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As a result of the material weakness described above, our management has revised its earlier assessment of internal control over financial reporting and has now concluded that our internal control over financial reporting was not effective as of December 31, 2015.
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Grant Thornton LLP, the Company's independent registered public accounting firm, has audited our consolidated financial statements included in this report and has issued an attestation report on the Company's internal control over financial reporting, which is included herein and expresses an adverse opinion on the effectiveness of our internal control over financial reporting.
Notwithstanding our material weakness, we have concluded that the financial statements and other financial information included in this Annual Report on Form 10-K/A fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the periods presented.
Remediation Steps to Address Material Weakness
We are in the process of remediating the material weakness in internal control over financial reporting referred to above by designing and implementing new procedures related to our accounting for and presentation of income taxes, including the tax provision and related tax assets and liabilities. The successful remediation of this material weakness will require review and evidence of the effectiveness of the related internal controls as part of our next annual assessment of our internal control over financial reporting as of December 31, 2016.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
U.S. Concrete, Inc.
We have audited the internal control over financial reporting of U.S. Concrete, Inc. (a Delaware Corporation) and subsidiaries (the "Company") as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Heavy Materials, LLC and Spartan Products, LLC, whose financial statements reflect total assets and revenues constituting 5.1 percent and 0.4 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2015. As indicated in Management’s Report, Heavy Materials, LLC and Spartan Products, LLC were acquired during 2015. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Heavy Materials, LLC and Spartan Products, LLC.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in Management’s Report. Management concluded that a material weakness in its internal control over financial reporting existed relating to the accuracy and presentation of the accounting for income taxes, including the income tax provision and related tax assets and liabilities.
In our report dated March 4, 2016, we expressed an unqualified opinion on the Company’s internal control over financial reporting. The material weakness discussed above was subsequently identified in connection with the restatement of the Company’s previously issued financial statements. Accordingly, management has revised its assessment about the effectiveness of the Company’s internal control over financial reporting, and our present opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, as presented herein, is different from that expressed in our previous report. The material weakness was considered in connection with the aforementioned restatement, and this report does not affect our opinion on the Company’s 2015 financial statements.
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In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2015. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated March 4, 2016 (except for the 2015 Restatement described in Note 1 and the effects thereof, as to which the date is April 27, 2016), which expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Dallas, Texas
March 4, 2016 (except for the material weakness discussed in Management's Report on Internal Control over Financial Reporting, as to which the date is April 27, 2016)
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements.
For the information this item requires, please see Index to Consolidated Financial Statements on page 53 of this report.
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are not required or the required information is shown in our consolidated financial statements or the notes thereto.
(3) Exhibits.
The information on exhibits required by this Item 15 is set forth in the Index to Exhibits appearing on pages 112-114 of this Report and is incorporated by reference herein.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.
U.S. CONCRETE, INC. | ||
Date: April 27, 2016 | By: | /s/ Joseph C. Tusa, Jr. |
Joseph C. Tusa, Jr. | ||
Senior Vice President and Chief Financial Officer | ||
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INDEX TO EXHIBITS
Exhibit Number | Description | |
2.1* | —Asset Purchase Agreement dated August 2, 2012 by and among U.S. Concrete, Inc. and Central Precast Concrete, Inc., San Diego Precast Concrete, Inc., Sierra Precast Inc. and Oldcastle Precast, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed August 3, 2012 (File No. 001-34530)). | |
2.2* | —Equity Purchase Agreement, dated as of October 17, 2012, by and between Randolph R. Boardman and Terri L. Boardman, Trustees under the Randolph R. Boardman and Terri L. Boardman Family Trust Agreement dated January 21, 1997, Douglas H. Boardman and Lauren Boardman, Trustees of the Douglas H. Boardman and Lauren Boardman Family Trust, Danvers M. Boardman, III, Trustee under the DMB III Trust Agreement dated July 12, 2008 and Kathy M. Boardman, Trustee under the KMSB Trust Agreement dated June 26, 2008, as Sellers, and Randolph R. Boardman, Terri L. Boardman, Douglas H. Boardman, Lauren Boardman, Danvers M. Boardman III and Kathy M. Boardman, on the one hand, and Central Concrete Supply Co., Inc., and U.S. Concrete, Inc., on the other hand (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed October 18, 2012 (File No. 001-34530.)) | |
2.3* | —Share Purchase Agreement, dated as of April 1, 2015, by and among USCF&B AcquisitionCo LLC, Ferrara Bros. Building Materials Corp., Ferrara Family Holdings, Inc. and Joseph J. Ferrara, in his capacity as Seller's Representative. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on April 2, 2015 (File No. 001-34530)). | |
3.1* | —Amended and Restated Certificate of Incorporation of U.S. Concrete, Inc. (incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A filed on August 31, 2010 (File No. 000-26025)). | |
3.2* | —Third Amended and Restated By-Laws of U.S. Concrete, Inc. (incorporated by reference to Exhibit 2 to the Company’s Registration Statement on Form 8-A filed on August 31, 2010 (File No. 000-26025)). | |
3.3* | —Amendment No. 1 to Third Amended and Restated Bylaws of U.S. Concrete, Inc (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 18, 2015 (File No. 001-34530)). | |
4.1* | —Form of common stock certificate (incorporated by reference to Exhibit 3 to the Company’s Registration Statement on Form 8-A filed August 31, 2010 (File No. 000-26025)). | |
4.2* | —Class A Warrant Agreement, dated as of August 31, 2010, by and among U.S. Concrete, Inc., subsidiaries named therein, and U.S. Bank National Association, as noteholder collateral agent (incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form 8-A filed on August 31, 2010 (File No. 000-26025)). | |
4.3* | —Class B Warrant Agreement, dated as of August 31, 2010, by and among U.S. Concrete, Inc., subsidiaries named therein, and U.S. Bank National Association, as noteholder collateral agent (incorporated by reference to Exhibit 5 to the Company’s Registration Statement on Form 8-A filed on August 31, 2010 (File No. 000-26025)). | |
4.4* | —First Amendment to Intercreditor Agreement, dated as of March 22, 2013, by and among Bank of America, N.A., as successor in interest to JPMorgan Chase Bank, N.A., as administrative agent for the ABL Secured Parties (as defined in the Intercreditor Agreement), U.S. Bank National Association, as trustee and noteholder collateral agent for the Convertible Note Parties (as defined therein), U.S. Bank, as trustee and noteholder collateral agent for the Senior Secured Parties (as defined therein), U.S. Concrete, Inc. and each of the other Loan Parties (as defined in the Intercreditor Agreement) (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K dated March 22, 2013 (File No. 001-34530)). | |
4.5* | —Indenture, dated as of November 22, 2013, by and among U.S. Concrete, Inc., the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee and noteholder collateral agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 22, 2013 (File No. 001-34530)). | |
4.6* | —Second Amendment to Intercreditor Agreement, dated as of November 22, 2013, by and among Bank of America, N.A., as administrative agent for the ABL Secured Parties, U.S. Bank National Association, as trustee and noteholder collateral agent, U.S. Concrete, Inc., and the other Loan Parties party thereto (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K dated November 22, 2013 (File No. 001-34530)). | |
10.1*† | —Severance Agreement, dated as of July 31, 2007, by and between U.S. Concrete, Inc. and Jeff L. Davis (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-34530)). | |
10.2*† | —First Amendment to Severance Agreement, effective as of December 31, 2008, by and between U.S. Concrete, Inc. and Jeff L. Davis (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-34530)). | |
112
10.3*† | —U.S. Concrete, Inc. Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on September 2, 2010 (File No. 000-26025)). | |
10.4*† | —U.S. Concrete, Inc. Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on September 2, 2010 (File No. 000-26025)). | |
10.5*† | —Form of Indemnification Agreement (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on September 2, 2010 (File No. 000-26025)). | |
10.6*† | —Executive Severance Agreement, effective as of August 22, 2011 between U.S. Concrete, Inc. and William J. Sandbrook (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 22, 2011 (File No. 001-34530)). | |
10.7*† | —Indemnification Agreement, effective as of August 22, 2011 between U.S. Concrete, Inc. and William J. Sandbrook (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 22, 2011 (File No. 001-34530)). | |
10.8*† | —Executive Severance Agreement dated January 23, 2013 by and between U.S. Concrete, Inc. and Niel L. Poulsen (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K dated March 8, 2013 (File No. 001-34530)). | |
10.9*† | —Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 6, 2013 (File No. 0001-34530)). | |
10.10*† | —U.S. Concrete, Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 17, 2013 (File No. 001-34530)). | |
10.11*† | —U.S. Concrete, Inc. Deferred Compensation Plan Adoption Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated April 17, 2013 (File No. 001-34530)). | |
10.12*† | —U.S. Concrete, Inc. Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 15, 2013 (File No. 001-34530)). | |
10.13*† | —Form of Restricted Stock Agreement (Employee Form) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 1, 2013 (File No. 001-34530)). | |
10.14* | —First Amended and Restated Loan and Security Agreement, dated as of October 29, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 29, 2013 (File No. 001-34530)). | |
10.15*† | —U.S. Concrete, Inc. Management Equity Incentive Plan effective January 1, 2013 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K dated March 7, 2014 (File No. 001-34530)). | |
10.16*† | —Executive Severance Agreement dated August 1, 2013 by and between U.S. Concrete, Inc. and Paul M. Jolas (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K dated March 7, 2014 (File No. 001-34530)). | |
10.17* | —Subscription Agreement, dated as of April 1, 2015, by and among U.S. Concrete Inc., Ferrara Family Holdings, Inc. and the beneficial owners of Ferrara Family Holdings, Inc. named therein. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 2, 2015 (File No. 001-34530). | |
10.18* | —U.S. Concrete, Inc. and Subsidiaries 2015 Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q dated May 8, 2015 (File No. 001-34530)). | |
10.19* | —Amended and Restated Limited Liability Company Agreement of Ferrara Bros., LLC, effective as of April 9, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q dated August 6, 2015 (File No. 001-34530)). | |
10.20*+ | —Ferrara Bros., LLC Class B Incentive Interests Award Agreement, effective as of April 11, 2015, between Ferrara Bros., LLC and 2G FB LLC (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q dated August 6, 2015 (File No. 001-34530)). | |
10.21*† | —Offer Letter to Ronnie Pruitt, dated October 6, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 23, 2015 (File No. 001-34530)). | |
10.22*† | —Executive Severance Agreement, by and between U.S. Concrete, Inc. and Ronnie Pruitt, dated October 26, 2015 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated October 23, 2015 (File No. 001-34530)). | |
10.23*† | —Indemnification Agreement, by and between U.S. Concrete, Inc. and Ronnie Pruitt, dated October 26, 2015 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated October 23, 2015 (File No. 001-34530)). | |
10.24* | —Second Amended and Restated Loan and Security Agreement, dated as of November 18, 2015, by and among U.S. Concrete, Inc., certain of its subsidiaries parties thereto, certain lender parties thereto, and Bank of America, N.A., as agent for the lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 18, 2015 (File No. 001-34530)). | |
113
10.25*† | —Offer Letter to Joseph Tusa, dated January 8, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 14, 2016 (File No. 001-34530)). | |
10.26*† | —Executive Severance Agreement, by and between U.S. Concrete, Inc. and Joseph C. Tusa, Jr., dated February 1, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 1, 2016 (File No. 001-34530)). | |
10.27*† | —Indemnification Agreement, dated February 1, 2016, by and between U.S. Concrete, Inc. and Joseph C. Tusa, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 1, 2016 (File No. 001-34530)). | |
10.28†+ | —U.S. Concrete, Inc. and Subsidiaries 2016 Annual Incentive Plan | |
12.1** | —Ratio of Earnings to Fixed Charges. | |
21.1** | —Subsidiaries. | |
23.1 | —Consent of Grant Thornton LLP, independent registered public accounting firm. | |
31.1 | —Rule 13a-14(a)/15d-14(a) Certification of William J. Sandbrook. | |
31.2 | —Rule 13a-14(a)/15d-14(a) Certification of Joseph C. Tusa, Jr. | |
32.1 | —Section 1350 Certification of William J. Sandbrook. | |
32.2 | —Section 1350 Certification of Joseph C. Tusa, Jr. | |
95.1** | —Mine Safety Disclosure. | |
101.INS | —Instance Document | |
101.SCH | —XBRL Taxonomy Extension Schema Document | |
101.CAL | —XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | —XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | —XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | —XBRL Taxonomy Extension Presentation Linkbase Document | |
* Incorporated by reference to the filing indicated.
** Previously filed
† Management contract or compensatory plan or arrangement.
+ Portions of this exhibit have been omitted pursuant to a request for confidential treatment with the SEC.
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