UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
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)
|(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|| Trading Symbol||Name of each exchange on which registered|
|Common Stock, par value $0.001|| USCR||The Nasdaq Stock Market LLC|
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 ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☐||Accelerated filer||☑||Non-accelerated filer||☐||Smaller reporting company||☐||Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ☐ No ☑
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 $24.80 of the registrant’s common stock as of June 30, 2020: $392,146,454. 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.
As of February 16, 2021, there were 16,769,126 shares of the registrant's common stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement related to the registrant's 2021 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
Cautionary Statement Concerning Forward-Looking Statements
Certain statements and information in this Annual Report on Form 10-K 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,” “intend,” “should,” “expect,” “plan,” “target,” “anticipate,” “believe,” “estimate,” “outlook,” “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 revenue 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 commercial and residential construction;
•our ability to successfully implement our operating strategy;
•our ability to successfully identify, manage, and integrate acquisitions;
•governmental requirements and initiatives, including those related to mortgage lending, financing or deductions, funding for public or infrastructure construction, land usage, and environmental, health and safety matters;
•seasonal and inclement weather conditions, which impede the placement of ready-mixed concrete;
•the cyclical nature of, and changes in, the real estate and construction markets, including pricing changes by our competitors;
•our ability to maintain favorable relationships with third parties who supply us with equipment and essential materials;
•our ability to retain key personnel and maintain satisfactory labor relations;
•disruptions, uncertainties or volatility in the credit markets that may limit our, our suppliers' and our customers' access to capital;
•product liability, property damage, results of litigation and other claims and insurance coverage issues;
•our substantial indebtedness and the restrictions imposed on us by the terms of our indebtedness;
•the effects of currency fluctuations on our results of operations and financial condition;
•the length and severity of the coronavirus (“COVID-19”) pandemic;
•the pace of recovery following the COVID-19 pandemic;
•our ability to implement cost containment strategies; and
•the adverse effects of the COVID-19 pandemic on our business, the economy and the markets we serve.
Known material factors that could cause our actual results to differ from those in the forward-looking statements also include those described in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
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.
Item 1. Business
In this Annual Report on Form 10-K, we refer to U.S. Concrete, Inc. and its subsidiaries as “we,” “us,” “our,” the “Company,” or “U.S. Concrete,” unless we specifically state otherwise, or the context or content indicates otherwise.
U.S. Concrete is a leading heavy building materials supplier of aggregates and ready-mixed concrete in select geographic markets in the United States, the U.S. Virgin Islands and Canada. The Company is focused on growing both organically and through strategic acquisitions in our target markets, particularly within our aggregate products segment. We are a leading supplier for large-scale commercial and industrial, residential and infrastructure (including streets, highways and other public works) construction projects in high-growth markets across the U.S. We hold leading vertically integrated (aggregates and ready-mixed concrete) market positions in New York City, New Jersey, Dallas-Fort Worth, West Texas, the San Francisco Bay Area and the U.S. Virgin Islands.
We operate principally in our East Region (which we define to include New York City, New Jersey, Washington, D.C. and Philadelphia), our Central Region (which we define as Texas, Oklahoma and the U.S. Virgin Islands), and our West Region (which we define to include California and British Columbia, Canada). Our percentage of total revenue by region for 2020 was:
Our total revenue for 2020 was $1.4 billion, of which we derived approximately 85.0% from our ready-mixed concrete segment, 11.1% from our aggregate products segment (excluding $64.2 million sold internally) and 3.9% from our other operations. For 2020, we had net income attributable to U.S. Concrete of $25.5 million.
We serve substantially all segments of the construction industry in our select geographic markets. Our customers include contractors for commercial and industrial, residential and infrastructure sectors. Ready-mixed concrete product revenue percentage by type of construction activity for 2020 was approximately:
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.
A more detailed discussion of our business, competitive strengths, business strategy and our industry can be found in Part I, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2019, which is hereby incorporated by reference into this Annual Report on Form 10-K. The discussion that follows is intended to only update material changes to that discussion, as well as address the 2020 amendments to Regulation S-K that were designed to modernize reporting.
On February 24, 2020, we acquired all of the equity of Coram Materials Corp. and certain of its affiliates (collectively, “Coram Materials”), a sand and gravel producer in New York, for total fair value consideration of $142.9 million. This acquisition expanded our aggregate products operations in our East Region and increased the vertical integration of our New York City operations. Through this acquisition, we acquired an aggregates facility with 330 acres of land, including 180 mining acres containing approximately 41.9 million tons of in-place, proven and permitted aggregate reserves. In November 2020, we acquired certain assets of Sugar City Building Materials Co. that expanded our ready-mixed concrete operations in our West Region for total cash consideration of $7.6 million. The assets acquired primarily included inventory and property, plant and equipment.
We produce crushed stone, sand and gravel from 20 aggregates facilities located in New Jersey, New York, Oklahoma, Texas, the U.S. Virgin Islands and British Columbia, Canada. We sell these aggregates for use in commercial, industrial and public works projects in the markets we serve, as well as consume them internally in the production of ready-mixed concrete. We produced approximately 13.7 million tons of aggregates during the year ended December 31, 2020, with British Columbia, Canada representing 39%, Texas and Oklahoma representing 32%, New Jersey and New York representing 27%, and the U.S. Virgin Islands representing 2% of the total production. While we consumed 34% of this production internally in 2020, we currently sell the majority of our aggregate products to third parties. We believe our aggregates reserves provide us with additional raw materials sourcing flexibility and supply availability.
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 our environmentally friendly technology initiative, which utilizes alternative materials and mix designs that result in lower 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, one of the largest volumetric operations in the U.S., expand our ready-mixed concrete delivery and service offerings primarily 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.
We also provide portable and mobile concrete plants for high-volume or remote projects. While currently operating predominantly in our existing regions, our fast-track mobilization business unit, U.S. Concrete On-Site, Inc., can dispatch a portable or mobile ready-mixed concrete plant anywhere in the continental U.S. These mobile solutions have reached an exceptional level of turnkey operations customized to deliver outstanding on-site solutions for all types of concrete construction. Not only are we providing industry leading concrete production operations to our customers, we are providing technical services and a substantial mitigation of risk with on-site production.
Other products include our building materials stores, hauling operations, aggregates distribution terminals, a recycled aggregates operation and concrete blocks. Two specific products included in this category are ARIDUS® Rapid Drying Concrete technology and the Where’s My Concrete?® family of web and mobile applications.
ARIDUS Rapid Drying Concrete reduces the drying time and risks associated with excess moisture vapor in concrete slabs, enabling faster, more effective floor topping installations. ARIDUS was developed and patented by U.S. Concrete’s National Research Laboratory, USC Technologies, Inc., to address changes in environmental government regulations that limit or restrict volatile organic compounds in flooring adhesives.
Where’s My Concrete? is our real-time cloud-based data delivery program that provides value-added service and transparency to our customers, while improving our business through critical analytics and operational efficiencies.
Sources and Availability of Raw Materials
We obtain most of the raw materials necessary to manufacture ready-mixed concrete on a daily basis. These materials include water, cement and other cementitious materials (such as fly ash and slag), aggregates (stone, gravel, and sand), and chemical admixtures. A standard cubic yard of concrete typically weighs 4,125 pounds and includes approximately 250 pounds of water, 550 pounds of cementitious material, 1,525 pounds of sand, and 1,800 pounds of stone.
Cement is the binding agent used to bind water, crushed stone, and sand, in the production of ready-mixed concrete. Other industrial byproducts such as fly ash from coal burning power plants and slag from the manufacture of iron and silica fume have cementitious properties that allow it to be used as a substitute for cement, depending on specification. We purchase cementitious materials from a few suppliers in each of our major geographic markets. Aggregates are typically produced locally and are procured from a network of internal and external suppliers in each of our markets. In 2020, our ready-mixed concrete businesses purchased 42% of their aggregate products needs from internally operated quarries and sites. Chemical admixtures are generally purchased from suppliers under national purchasing agreements.
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. Inventory levels do not decline significantly or comparatively with declines in revenue during seasonally lower periods. We generally maintain inventory at specified levels to maximize purchasing efficiencies and to be able to respond quickly to customer demand. Generally, we negotiate with suppliers on a company-wide basis and at the local market level to obtain the most competitive pricing available.
Because of the impact of transportation costs on the aggregates industry, our competition in the aggregates product segment tends to be limited to producers in proximity to each of our facilities. The industry is highly fragmented and includes smaller private aggregates producers in addition to large, national companies. All of our locations experience competition from local companies in addition to larger public companies. Competition is based on location, price, quality of aggregates and level of customer service. Our primary public company competitors are Cemex S.A.B. de C.V., CRH PLC, Colas SA, Heidelberg Cement AG, LafargeHolcim Ltd., Martin Marietta Materials, Inc., MDU Resources Group, Inc., Summit Materials, Inc. and Vulcan Materials Company. Companies in the industry tend to grow by acquiring existing facilities to enter new markets or expand their existing market positions.
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 trucks, ready-mixed concrete plants and other production equipment or pay for acquisitions, which could provide them a competitive advantage over us.
Our strength is the character of our people. As of December 31, 2020, we had 631 salaried employees, including executive officers and management, sales, technical, administrative and clerical personnel and 2,336 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.
We endeavor to operate in accordance with high standards of fair, ethical and moral business conduct. A reputation of integrity is one of the most important assets of any individual or company and is key to achieving our core mission. Our Code of Ethics and Business Conduct (“Code of Conduct”) ensures that our core value of integrity is applied throughout our operations. Our Code of Conduct also serves as a critical tool to assist with recognizing and reporting unethical conduct, while preserving and nurturing our culture of integrity. Our Code of Conduct is provided to all employees and remains accessible to all employees on the Company's internal website.
Human resources and hiring
We are committed to hiring, developing and supporting a diverse and inclusive workplace. We recruit the best people for the job regardless of gender, ethnicity or other protected traits, and it is our policy to fully comply with all applicable laws (domestic and foreign) regarding discrimination in the workplace. Our management teams and all of our employees are expected to exhibit and promote ethical and respectful conduct in the workplace. All of our employees must adhere to our Code of Conduct that sets standards for appropriate behavior. We believe the compensation we provide to our employees is competitive with others in our industry.
As of December 31, 2020, approximately 35% of our employees were represented by labor unions having collective bargaining agreements. We have not experienced a strike or significant work stoppage in the past ten years. We interact with our labor unions in an atmosphere of mutual respect and seek to resolve disputes in an equitable manner. We believe our relationships with our employees and union representatives are very good.
Safe working environment and training
The safety of our workforce is fundamental to the success of our business. The cornerstone of our risk management and safety program is safety awareness. We have established a “safety-first” culture through various programs and initiatives. We employ a national safety director whose responsibilities include managing and executing a unified, company-wide safety program. We require all field employees to attend periodic safety training meetings and all drivers to participate in training seminars. Employee safety is a factor used in evaluating performance in our annual incentive plan for certain 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:
•street and highway usage;
•operating hours; 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 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, our compliance with any amended, new or more stringent laws, stricter interpretations of existing laws, or the future discovery of environmental conditions could 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. We have certain emissions credits that expand our sales capacity in California for aggregate products.
We file or furnish annual, quarterly and current reports, proxy statements and amendments to these reports pursuant to Section 13(a) or 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and other information with the Securities Exchange Commission (the “SEC”). Our SEC filings are available to the public over the internet at the SEC's website address, www.sec.gov. Our SEC filings are also available on our website, free of charge, at www.us-concrete.com as soon as reasonably practicable after we electronically file those materials with, or furnish them to, the SEC.
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. These important factors, among others, sometimes have affected, or in the future could affect, our actual results and could cause our actual consolidated results during 2021 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, common stock price and the price of our debt. 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 discussion includes a number of forward-looking statements. Please see “Cautionary Statement Concerning Forward-Looking Statements” preceding Item 1 of this report.
Strategic and Acquisition Risks
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 minimize 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, complete, manage and integrate acquisitions could reduce our earnings and slow our growth.
We have completed numerous 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 acquired company management team may resign, which could 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.
Economic and Construction Market Risks
Our business depends on activity within the construction industry and the economic strength of our principal markets.
We serve substantially all end markets 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 a slowdown in economic activity results in delays or cancellations of projects. During 2020, commercial and industrial construction and residential construction accounted for 57% and 25%, respectively, of our ready-mixed concrete revenue. In addition, federal and state budget issues may limit the funding available for infrastructure spending, particularly street, highway and other public works projects, which accounted for 18% of our revenue in 2020.
We operate on a regional basis, principally in the East, Central and West Regions with those markets representing approximately 33%, 37% and 30%, respectively, of our consolidated revenue for 2020. Our earnings depend on the economic strength of these markets because of the high cost to transport our products relative to their price. If economic and construction activity diminishes in our principal markets, our results of operations and liquidity could be materially adversely affected.
Tightening of mortgage lending or mortgage financing requirements, higher interest rates or the limitation of the home mortgage interest deduction and the property tax deduction could adversely affect the residential construction market and reduce the demand for new home construction.
Approximately 25% of our revenue for 2020 was from residential construction contractors. Tightening of mortgage lending, mortgage financing requirements or higher interest rates 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. In addition, the limitation of the home mortgage interest and property tax deductions could reduce the demand for new home construction, which could have a material adverse effect on our business and results of operations. A 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 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 on 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;
•pricing pressure due to changes in asset utilization or economic weakness;
•employment levels; and
•regional or general economic conditions.
Accordingly, 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 or aggregates industries or in our geographic markets could have material adverse effects on our business, financial condition, results of operations, liquidity and cash flows.
Significant downturn in the construction industry may result in an impairment of our goodwill.
We test goodwill for impairment on an annual basis or more frequently if events or circumstances change in a manner that would more likely than not reduce the fair value of a reporting unit below its carrying value. During our annual impairment test, we may identify events or changes in circumstances that could indicate the fair value of one or more of our reporting units is below its carrying value. For example, a significant downturn in the construction industry may have an adverse effect on the fair value of our reporting units. A decrease in the estimated fair value of one or more of our reporting units could result in the recognition of a material, non-cash write-down of goodwill.
We completed our annual impairment assessment during the fourth quarter of 2020 as of October 1, 2020 and determined there was no impairment of goodwill. While the amounts by which the fair values of the reporting units exceeded their carrying values (the “cushions”) have generally decreased from our prior year review due to the impact of the COVID-19 pandemic, our major reporting units still had ample cushion. Our smallest reporting unit, which has only $3.3 million of goodwill, had the lowest cushion, 9.3%.
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 $300.0 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. Similarly, if one or more of the lenders under our Term Loan Facility, which provides for borrowings up to $179.1 million, were to become unable or unwilling to perform their obligations under that facility, our borrowing capacity could also be reduced. Our inability to borrow additional amounts under either our Revolving Facility or Term Loan Facility could limit our ability to fund our operations and growth.
Risk of Disruption
Our business could be materially and adversely disrupted by an epidemic or pandemic, or similar public threat, or fear of such an event, and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it.
An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period. Such an epidemic, pandemic, or similar serious public health issue, and any associated economic and/or social instability or distress may have a material adverse impact on our consolidated financial statements.
On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures. On March 13, 2020, the United States declared a national emergency concerning the outbreak, and several states and municipalities have declared public health emergencies. Along with these declarations, there have been extraordinary and wide-ranging actions taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including quarantines, and “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
The limiting of construction operations largely to authorized activities and a reduction in the availability, capacity and efficiency of municipal and private services necessary in the construction industry, which in each case has varied by market depending on the scope of the restrictions local authorities have established, have reduced our sales and delayed certain construction projects since mid-March 2020. While we have generally remained operational in the regions in which we serve with the implementation of new enhanced safety and health protocols, certain of our operations were more negatively impacted particularly in April and May of 2020 in states with more stringent restrictions. For example, our ready-mixed concrete sales decreased $117.2 million during 2020 compared to 2019, resulting in part from a decline in ready-mixed concrete operations in New York City and California, both of which had more stringent restrictions relating to COVID-19.
If a significant portion of our workforce becomes unable to work or travel to our operations due to illness or state or federal government restrictions (including travel restrictions and “shelter-in-place” and similar orders restricting certain activities that may be issued or extended by authorities), we may be forced to reduce or suspend operations at one or more of our facilities, which could reduce production and negatively impact liquidity and financial results. We continue to monitor legislative initiatives in the United States and Canada to provide relief to businesses impacted by COVID-19, such as the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, to determine their potential impacts or benefits (if any) to our business.
We are uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, which include, among other things, significant volatility in financial markets and a sharp decrease in the value of equity securities, including our common stock. In addition, we can provide no assurance as to whether the COVID-19 public health effort will be intensified to such an extent that we will not be able to conduct any business operations in certain of our markets or at all for an indefinite period.
We expect our business to continue to be negatively impacted during the COVID-19 disruptions. The inherent uncertainty surrounding COVID-19, due in part to rapidly changing governmental directives, public health challenges and progress and market reactions thereto, also makes it more challenging for our management to estimate the future performance of our business and develop strategies to generate growth or achieve our initial or any revised objectives.
Should the adverse impacts described above (or others that are currently unknown) continue to occur, whether individually or collectively, we would expect to continue to experience, among other things, decreases in revenues and profitability. In addition, should the COVID-19 public health effort intensify to such an extent that we cannot operate in most or all of our markets, we could generate less or no revenue, which could be prolonged. Along with a potential increase in cancellations of projects, if there are prolonged government restrictions on our business and our customers, and/or an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business, meet the terms of our covenants and other requirements under our 6.375% senior unsecured notes due 2024 (the “2024 Notes”) and our 5.125% senior unsecured notes due 2029 (the “2029 Notes” and together with the 2024 Notes, the “Senior Unsecured Notes”) and related Indentures, (the “Senior Indentures”), our asset-based revolving credit facility (the “Revolving Facility”), and our delayed draw term loan facility (the “Term Loan Facility”), or service our outstanding debt. Such a circumstance could, among other things, exhaust our available liquidity (and ability to access liquidity sources) and/or trigger an acceleration to pay a significant portion or all of our then-outstanding debt obligations, which we may be unable to do.
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, during periods of extended adverse weather or other operational delays, we may elect to continue to pay certain hourly employees to maintain our workforce, which may adversely impact our results of operations. Severe drought conditions can also restrict available water supplies and restrict production. Consequently, these events could adversely affect our business, financial condition, results of operations, liquidity and cash flows.
Our business depends on the availability of aggregate reserves or deposits and our ability to mine them economically.
Aggregates are a key component of ready-mixed concrete. In 2020, our ready-mixed concrete businesses purchased 34% of their aggregates needs from internally operated quarries and sites and 66% from third parties. In addition, in 2020, our aggregates segment sold $105.7 million of aggregates to third parties and $64.2 million of aggregates to our ready-mixed concrete operations, generating a total Adjusted EBITDA of $80.9 million.
Because aggregates are inexpensive, they are generally cost prohibitive to transport long distances, except in large quantities by water. As a result, access to local supplies of aggregates, whether mined locally or shipped there by water, is critical to the operations of our ready-mixed concrete business. One of our most significant challenges is finding aggregate deposits that we can mine economically with appropriate permits, either within our markets or in long-haul transportation corridors that can economically serve our markets. Due to urban growth, available quarrying locations have been reduced, and communities have imposed restrictions on mining, making aggregates supplies scarce in certain markets. If we are unable to access economical sources of aggregates either internally or from third parties, our business, financial condition, results of operations, liquidity and cash flows might be materially and adversely affected.
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 may 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 may have competitive advantages over us.
We depend on third parties for concrete equipment and materials 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 materials, including cement, aggregates and other materials, necessary for our operations. We cannot provide assurance 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.
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.
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.
Delays or interruptions of our transportation logistics could affect operating results.
Our products are distributed to our markets either by trucks, which are primarily Company-owned and/or Company-managed, or ships. Transportation logistics play an important role in allowing us to supply products to our customers. Any significant delays, disruptions, or the non-availability of our transportation support system could negatively affect our operations. Transportation operations are subject to factors outside of our control, including capacity constraints, high fuel costs and various hazards, including extreme weather conditions and slowdowns due to labor strikes and other work stoppages. If there are material changes in the availability or cost of transportation services, we may not be able to arrange alternative and timely means to transport our products or fuels at a reasonable cost, which could materially affect our financial position and results of operations.
A significant disruption of our information technology systems may harm our business.
We are dependent on our own and our third-party providers’ information technology to support many facets of our business. If our information technology 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 negatively impacted, proprietary information could be lost, stolen or destroyed, and our reputation could be damaged. We take measures to protect our information technology 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. Further, while we maintain cyber insurance, it may not be sufficient to cover all losses that result from interruptions or breaches of our information technology systems. Any such disruptions could have a material adverse effect on our financial condition, results of operations and liquidity.
Our overall profitability is sensitive to price changes and 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. Our overall profitability is sensitive to price changes, and variations in sales volumes and pricing could have a material adverse effect.
Any material nonpayment or nonperformance by any of our key customers could have a material adverse effect on our results of operations and cash flows.
Any material nonpayment or nonperformance by any of our key customers could have a material adverse effect on our results of operations and cash flows. Remedies are available to us in the event of nonpayment, including liens or other legal remedies; however, cash flows may be delayed or we may receive significantly less than the amount owed to us. In the event of any customer's breach, we may also choose to renegotiate any agreement on less favorable terms for us to preserve the customer relationship.
There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. These provisions provide for the identification of material weaknesses in internal control over financial reporting. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the Company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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 our financial reporting could result in investigations or sanctions by regulatory authorities. In addition, discovery and disclosure of a material weakness, by definition, could have a material adverse impact on our financial statements. Such an occurrence could discourage certain customers or suppliers from doing business with us, result in higher borrowing costs and affect how our stock trades. This could in turn affect our ability to access public debt or equity markets for capital.
The departure of key personnel could affect our financial results.
We depend on the efforts of our officers and, in many cases, on senior management of our businesses. Our success depends 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 their departure to our competitors or other industries. Effective succession planning is also important for our long-term success. Our failure to ensure effective transfers of knowledge and smooth transitions involving senior-level management could adversely affect our strategic planning and execution. To the extent we are unable to attract or retain qualified management personnel, or effectively implement succession plans, 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.
Risks Involving Our Relationships with Labor Unions
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, 2020, approximately 35% of our employees were covered by collective bargaining agreements, which expire between 2021 and 2024. 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 and cash flows. Also, labor relations matters affecting our suppliers of cement and aggregates could adversely impact our business from time to time.
Our obligation to fund multi-employer defined benefit plans in which we participate may impact our financial condition, results of operations and cash flows.
We actively contribute to 17 separate multi-employer defined benefit plans that cover current union employees under various collective bargaining agreements. The risk of participating in multi-employer plans are different from single-employer plans in that assets contributed are pooled and may be used to provide benefits to current and former employees of other participating employers. Several factors could require us to make significantly higher future contributions to these plans, including the funding status of the plan, unfavorable investment performance, insolvency or withdrawal of participating employers, changes in demographics and increased benefits to participants. Several of these multi-employer plans to which we contribute are underfunded, meaning that the value of such plans' assets are less than the actuarial value of the plans' benefit obligations.
We may be subject to additional liabilities imposed by the Multiemployer Pension Reform Act of 2014, as amended, (“MEPRA”), as a result of our participation in multi-employer defined benefit pension plans. The MEPRA imposes certain liabilities upon an employer who is a contributor to a multi-employer pension plan if the employee withdraws from the plan or the plan is terminated or experiences a mass withdrawal, potentially including an allocable share of the unfunded vested benefits in the plan for all plan participants, not just our retirees. Accordingly, we could be assessed our share of unfunded vested benefits should we terminate participation in these plans, or should there be a mass withdrawal from these plans, or if the plans become insolvent or otherwise terminate.
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 would be material to our financial condition, results of operations and cash flows. Legislative changes could also affect our funding obligations or the amount of withdrawal liability we would incur if a withdrawal were to occur.
As of December 31, 2020, the Company had accrued $1.5 million for a withdrawal liability assessment related to a multi-employer pension plan in which the Company participated. The Company disputes and continues to negotiate the assessment.
Government Spending, Legislative and Regulatory Risks
Our ready-mixed concrete segment's revenue attributable to street, highway and other public works projects could be negatively impacted by a decrease or delay in governmental spending.
During 2020, approximately 18% 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, prolonged government shutdowns or reductions in government spending, may result in us experiencing delayed orders, delayed payments and declines in revenue, profitability 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.
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 water usage;
land usage; street and highway usage; noise levels; operating hours; and health, safety and environmental matters.
In many instances, we must have various certificates, permits, or licenses 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. The Biden administration may enact and implement new laws and enhanced regulations that could adversely and materially affect us. Certain laws, such as the Comprehensive Environmental Response, Compensation and Liability Act, 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.
U.S. tax legislation enacted in 2017 may adversely affect our business, results of operations, financial condition and cash flows.
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, the following that impact us: (1) reduction of the U.S. federal corporate income tax rate from 35% to 21%; (2) extension and expansion of the bonus depreciation provisions; (3) creation of a new limitation on deductible interest expense; (4) repeal of the domestic production activities deduction; (5) enactment of a provision designed to tax global intangible low-taxed income of foreign subsidiaries; (6) further limitation of the deductibility of certain executive compensation; and (7) limitation of certain other deductions. Certain provisions of the Tax Act, primarily the interest expense limitation, may result in our effective income tax rate being substantially higher than the U.S. federal statutory rate of 21.0% after certain statutory changes with respect to the interest expense limitation take effect in 2022.
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.
The adoption of new accounting standards may affect our financial results.
The accounting standards we apply in preparing our financial statements are reviewed by regulatory bodies and are changed from time to time. New or revised accounting standards could, either positively or negatively, affect results reported for periods after adoption of the standards as compared to the prior periods, or require retrospective application changing results reported for prior periods.
The Sarbanes-Oxley Act of 2002 and other related rules and regulations, have increased the scope, complexity and cost of corporate governance. Reports from the Public Company Accounting Oversight Board’s PCAOB inspections of public accounting firms continue to outline findings and recommendations that could require these firms to perform additional work as part of their financial statement audits. The Company’s costs to respond to these additional requirements may increase.
Our operations are subject to various hazards, including natural disasters, that may cause personal injury or property damage for which we have a limited amount of insurance, and our business, operating costs and profitability could be adversely affected.
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 against certain workers' compensation, automobile and general liability 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. 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.
We maintain only a limited amount of insurance for natural disasters. A natural disaster or other serious disruption to our facilities due to earthquake, hurricane, fire, flood, severe weather or any other cause could substantially disrupt our operations. In addition, we could incur significantly higher costs during the time it takes us to reopen or replace one or more of our facilities, which may not be reimbursed by insurance.
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.
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, business interruption, personal injury and workers’ compensation claims. Increased premiums charged by insurance carriers may further increase our expenses as coverage expires or otherwise cause us to raise our self-insured retention amounts. 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 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 may be 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.
Finance and Liquidity Risks
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations.
As of December 31, 2020, we had $600.0 million aggregate principal amount of Senior Unsecured Notes outstanding.
We and certain of our subsidiaries are also parties to a Third Amended and Restated Loan and Security Agreement (the “Third 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 Third Loan Agreement provides for aggregate borrowings of up to $300.0 million subject to a borrowing base under the Revolving Facility. As of December 31, 2020, we had borrowings of $6.5 million outstanding under the Revolving Facility.
We and certain of our subsidiaries are also parties to a secured delayed draw term loan credit and guaranty agreement (the “Term Loan Agreement” and, together with the Third Loan Agreement, the “Debt Agreements”) with certain lenders and other parties named therein, as lenders (the “Term Loan Lenders”), and Bank of America, N.A. as administrative agent and collateral agent, that is secured by certain assets of the Company and the guarantors. As of December 31, 2020, the Term Loan Agreement provided for commitments of up to $179.1 million under the Term Loan Facility, of which there were no outstanding borrowings.
The covenants in the Debt Agreements and the Senior Indentures 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 or Term Loan Facility, to enable us to repay our indebtedness, including the Senior Unsecured 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 assets to fund our working capital, capital expenditures, acquisitions and debt service requirements;
•our interest expense could increase if interest rates in general increase, because borrowings under our Revolving Facility and Term Loan Facility bear 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;
•debt service requirements could make it more difficult for us to make payments on the Senior Unsecured Notes and our other indebtedness;
•the interest limitation enacted as part of the Tax Act, particularly with respect to statutory changes that take effect in 2022, could increase our effective tax rate and income taxes payable; and
•there would be a material adverse effect on our business and financial condition, if we were unable to refinance, 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 and Term Loan Facility or 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, the Term Loan Facility, or the Senior Unsecured 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 Senior Indentures and Debt Agreements restrict our ability to conduct asset sales and to 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.
We may incur significantly more debt, including secured debt. This could intensify already-existing risks related to our indebtedness.
The terms of the Senior Indentures and Debt Agreements 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, 2020, our Revolving Facility and Term Loan Facility provided for total unused borrowing capacity of up to $409.3 million.
The Senior Indentures permit 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 applicable Senior Indenture. The Senior Indentures also, under certain circumstances, allow 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 Senior Indentures, and, therefore will be able to incur indebtedness beyond the limitations specified in the Senior Indentures 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 Senior Indentures and Debt Agreements 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 and Term Loan Facility may fluctuate significantly and/or subject us to interest rate risk, 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 eligible accounts receivable, inventory and mixer trucks and, under certain circumstances, our machinery. 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 of the calculation of such borrowing base value. Our inability to borrow at current advance rates or at all under the Revolving Facility, or the early termination of our Revolving Facility or Term Loan Facility may adversely affect our liquidity, results of operations and financial position.
Further, borrowings under our Revolving Facility and Term Loan Facility are at variable rates of interest based on the base rate or the London interbank offered rate (“LIBOR”) 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.
To the extent we make borrowings based on LIBOR, LIBOR tends to fluctuate based on multiple factors, including general short-term interest rates, rates set by the U.S. Federal Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic conditions. It is unclear whether new methods of calculating LIBOR will be established or if LIBOR continues to exist after 2021 when the U.K. Financial Conduct Authority (the authority that regulates LIBOR) plans to stop compelling banks to submit rates for the calculation of LIBOR. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR (“USD LIBOR”) with a new index calculated by short-term repurchase agreements, backed by Treasury securities (“SOFR”). Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question. However, the ICE Benchmark Administration, in its capacity as administrator of USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other than one-week and two-month tenors) by 18 months to June 2023, which would allow time for most legacy contracts to mature before USD LIBOR is no longer available, and would also allow for more time for SOFR to develop. If LIBOR ceases to exist prior to the maturity of our contracts, we may need to renegotiate our credit agreements that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established.
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 flows 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 or our indefinitely reinvested assertion with respect to our Canadian subsidiaries may limit our ability to obtain cash from our subsidiaries. While the terms of the Senior Indentures and Debt Agreements 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.
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 Senior Unsecured Notes. Credit ratings are not recommendations to purchase, hold or sell the Senior Unsecured Notes. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure of the Senior Unsecured Notes.
Our debt agreements may restrict our ability to operate our business and to pursue our business strategies. Our failure to comply with the covenants contained in the Senior Indentures and Debt Agreements or any agreement under which we have incurred 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 Senior Indentures and Debt Agreements 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;
•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; and
•with respect to the Senior Indentures and the Term Loan Facility, designate our subsidiaries as unrestricted subsidiaries.
The restrictive covenants in the Third 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 Third Loan Agreement or Term Loan Agreement would permit the Lenders to terminate all commitments to extend further credit under the Revolving Facility or the Term Loan Facility, as applicable. Furthermore, if we were unable to repay the amounts due and payable under our Revolving Facility or the Term Loan 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.
The Third Loan Agreement contains a fixed charge coverage ratio covenant if our Availability (as defined in the Third 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 Third Loan Agreement. 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 Third Loan Agreement, the Lenders could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against the assets securing their borrowings.
The Third Loan Agreement provides the Lenders considerable discretion to impose reserves or availability blocks or reduce the advance rates used to calculate the value of our borrowing base, which could materially impair the amount of borrowings that would otherwise be available to us. There can be no assurance that the Lenders 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 Term Loan Facility, the Senior Unsecured Notes or meet our other obligations as they become due, among other matters.
Additional Risk Related to Our Canadian Operations
Our subsidiary, Polaris Materials Corporation (“Polaris”), exposes us to legal, political and economic risks in Canada as well as currency exchange rate fluctuations that could negatively impact our business and financial results.
International business is subject to a variety of risks, including:
•imposition of governmental controls and changes in laws, regulations or policies;
•currency exchange rate fluctuations, devaluations and other conversion restrictions;
•uncertain and changing tax rules, regulations and rates;
•changes in regulatory practices, including tariffs and taxes;
•changes in labor conditions;
•general economic, political and financial conditions in foreign markets; and
•exposure to civil or criminal liability under the U.S. Foreign Corrupt Practices Act, the Canadian Corruption of Foreign Public Officials Act, anti-boycott rules, trade and export control regulations, as well as other international regulations.
U.S. international trade policy is subject to change. For example, the U.S. negotiated and signed a trade deal with Canada and Mexico known in the U.S. as the United States-Mexico-Canada-Agreement (the “USMCA”), aimed at re-negotiating and updating the terms of the North American Free Trade Agreement. The USMCA was effective on July 1, 2020. If the U.S. were to engage in trade disputes or the imposition of tariffs, such actions could cause an increase in customs duties that, in turn, could adversely affect intercompany transactions among our operating subsidiaries in Canada and the U.S. and increase transaction costs with third-party suppliers and customers.
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 doing so in the foreseeable future. We intend to reinvest all future earnings in the development and growth of our business. In addition, the Senior Indentures and Debt Agreements limit our ability to pay 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.
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; changes in interest rates and inflation; 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.
Failure to meet our financial guidance or achieve other forward-looking statements we have provided to the public could result in a decline in our stock price.
From time to time, we provide public guidance on our expected financial results or disclose other forward-looking information for future periods. We manage our business to maximize our growth and profitability and not to achieve financial or operating targets for any particular reporting period. Although we believe that public guidance may provide investors with a better understanding of our expectations for the future and is useful to our existing and potential shareholders, such guidance is subject to risks, uncertainties and assumptions. Any such guidance or other forward-looking statements are predictions based on our then existing expectations and projections about future events that we believe are reasonable. Actual events or results may differ materially from our expectations, and as such, our actual results may not be in line with guidance we have provided. We are under no duty to update any of our forward-looking statements to conform to actual results or to changes in our expectations, except as required by federal securities laws. If our financial results do not meet our guidance or the expectations of investors, or if we reduce our guidance for future periods, the market price of our common stock may decline and stockholders could be adversely affected. Investors who rely on these predictions when making investment decisions with respect to our securities do so at their own risk.
Item 1B. Unresolved Staff Comments
Item 2. Properties
We operate in select geographic markets, with a focus on vertically integrating our ready-mixed concrete operations through our aggregate products. The following map depicts our locations:
Ready-mixed concrete segment
The table below lists our concrete plant facilities as of December 31, 2020. While these plants are of varying ages, we believe they are generally in good condition, well maintained and sufficient for our current needs.
| ||Owned||Leased|| |
of cubic yards)
|Locations||Fixed Standard||Volumetric||Portable||Fixed Standard||Portable||Total|
|Texas/Oklahoma||90 ||16 ||16 ||1 ||1 ||124 ||3,764 |
|New Jersey/New York City/Washington, D.C./Pennsylvania||35 ||— ||1 ||1 ||1 ||38 ||2,599 |
|Northern California||22 ||— ||4 ||2 ||— ||28 ||1,799 |
|U.S. Virgin Islands||3 ||— ||— ||1 ||— ||4 ||81 |
|Total||150 ||16 ||21 ||5 ||2 ||194 ||8,243 |
Aggregate products segment
The table below lists our aggregate facilities as of December 31, 2020.
|Percent of Reserves Owned and Leased|
|Locations||Number of Producing Quarries|
Total Estimated Minimum Reserves
(in thousand tons)(1)
(in thousand tons)
|British Columbia, Canada||1 ||91,900 ||5,311 ||— ||%||100 ||%|
|Texas/Oklahoma||12 ||50,100 ||4,450 ||27 ||%||73 ||%|
|New Jersey/New York||5 ||99,700 ||3,677 ||100 ||%||— ||%|
|U.S. Virgin Islands||2 ||29,400 ||285 ||42 ||%||58 ||%|
|Total ||20 ||271,100 ||13,723 |
(1) All reserves are permitted for extraction, considered to be proven and probable and considered to be recoverable aggregates of suitable quality for economic extraction. The degree of assurance between proven and probable reserves cannot be readily defined for our reserves.
We produce crushed stone aggregates, sand and gravel from 20 aggregates facilities located in Canada, Texas, Oklahoma, New Jersey, New York and the U.S. Virgin Islands. We also lease another quarry to a third party who remits a royalty to us based on the volume of product produced and sold from the quarry. We sell our aggregates for use in commercial, industrial and public works projects or consume them internally in the production of ready-mixed concrete in the markets we serve. Also included in our aggregate products segment are two distribution terminals in California to which we ship the aggregates we produce from our Canadian quarry. We believe our aggregates reserves provide us with additional raw materials sourcing flexibility and supply availability. We do not believe any of our quarries are individually material to our business or results of operations.
We also have undeveloped quarries with reserves acquired in recent years that are not yet permitted in New Jersey and British Columbia, Canada. These reserves are not included in the table or narrative above.
As of December 31, 2020, we also leased four aggregates distribution terminals in New York and one in New Jersey, the operations of which are not in a reportable segment.
Item 3. Legal Proceedings
The information set forth under the heading “Legal Proceedings” in Note 16, “Commitments and Contingencies,” to our consolidated financial statements included in this report is incorporated by reference into this Item 3.
Item 4. Mine Safety Disclosures
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in exhibit 95.1 to this Annual Report on Form 10-K.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Capital Market under the ticker symbol “USCR.”
As of February 16, 2021, we had 116 holders of record of our common stock and approximately 28,300 beneficial holders of our common stock.
Issuer Purchases of Equity Securities
The following table provides information with respect to our purchases of shares of our common stock during the three-month period ended December 31, 2020:
Total Number of Shares Purchased(1)
|Average Price Paid per Share||Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs||Approximate Dollar Value of Shares That May Yet Be Purchased Under Plans or Programs|
|October 1 - October 31, 2020||216 ||$||29.54 ||— ||$||— |
|November 1 - November 30, 2020||— ||— ||— ||— |
|December 1 - December 31, 2020||366 ||38.61 ||— ||— |
|Total||582 ||$||35.24 ||— ||$||— |
(1)Represents shares acquired from employees who elected for us to make their required tax payments upon vesting of certain restricted shares by withholding a number of those shares having a value on the date of vesting equal to their tax obligations.
The following performance graph compares the cumulative total return to holders of our common stock since the last trading day of 2015 with the cumulative total returns of the Russell 2000 index and a peer group selected by us (the “Peer Group”). The companies included in the Peer Group are Cemex, S.A.B. de C.V., Eagle Materials Inc., Martin Marietta Materials Inc., Summit Materials, Inc. and Vulcan Materials Company. The graph assumes that the value of the investment in our common stock, the Russell 2000 index and each peer group was $100 on December 31, 2015 and is calculated assuming the quarterly reinvestment of dividends, as applicable.
Comparison of 5 Year Cumulative Total Return
|U.S. Concrete, Inc.||$||100.00 ||$||124.38 ||$||158.85 ||$||67.00 ||$||79.11 ||$||75.90 |
|Russell 2000||$||100.00 ||$||121.31 ||$||139.08 ||$||123.76 ||$||155.35 ||$||186.36 |
|Peer Group||$||100.00 ||$||146.37 ||$||152.12 ||$||106.25 ||$||149.40 ||$||159.70 |
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The above performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Exchange Act, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion, which presents our results, should be read in conjunction with the accompanying consolidated financial statements and notes thereto, along with Item 1A. Risk Factors and “Cautionary Statement Concerning Forward-Looking Statements” preceding Item 1 of this report. In addition, a detailed discussion of the 2019 year-over-year changes from 2018 can be found in Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2019 and is hereby incorporated by reference into this Annual Report on Form 10-K. The following discussion reflects 2020 (current year) results compared to 2019 (prior year), unless otherwise noted.
We are a leading heavy building materials supplier of aggregates and ready-mixed concrete in select geographic markets in the United States, the U.S. Virgin Islands and Canada. We operate through two primary segments, which are ready-mixed concrete and aggregate products.
Ready-mixed concrete. Our ready-mixed concrete segment (which represented 85.0% of our revenue in 2020) 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, New Jersey, New York City, Washington, D.C., Philadelphia, Northern California, Oklahoma and the U.S. Virgin Islands.
Aggregate products. Our aggregate products segment (which represented 11.1% of our revenue, excluding $64.2 million of intersegment sales) produces crushed stone, sand and gravel from 20 aggregates facilities located in British Columbia, Canada, Texas, Oklahoma, New Jersey, New York, and the U.S. Virgin Islands. We sell 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 13.7 million tons of aggregates in 2020, with British Columbia, Canada representing 39%, Texas and Oklahoma representing 32%, New Jersey and New York representing 27% and the U.S. Virgin Islands representing 2% of the total production. During 2020, we consumed 34% of our aggregate production internally and sold 66% to third-party customers. We believe our aggregates reserves provide us with additional raw materials sourcing flexibility and supply availability.
The geographic markets for our products are generally local, except for our Canadian aggregate products operation, Polaris, which primarily serves markets in California. 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.
Our ready-mixed concrete sales volume decreased 10.2% to 8.2 million cubic yards and generated revenue of $1.2 billion. Ready-mixed concrete sales volume was down primarily due to delayed projects and regional demand, which were both heavily impacted by the COVID-19 pandemic in 2020. Partially offsetting the volume decline, our ready-mixed concrete average selling price (“ASP”) increased 1.2%, resulting in the 10th consecutive year of increased ASP. Our aggregate products sales volume increased 10.8%, and ASP increased 9.6%, resulting in record total aggregate products revenue of $216.4 million, including intersegment sales of $64.2 million.
Record sales of aggregate products in 2020 helped partially offset the decrease in ready-mixed concrete sales, as total Company revenue declined 7.6%. Despite the decline in revenue, the successful implementation of our business contingency plans during the year, as well as a gain from the value of our contingent consideration, resulted in an $11.1 million increase in operating income.
On January 30, 2020, the World Health Organization declared a global emergency with respect to the outbreak of COVID-19. On March 13, 2020, then President Trump declared the COVID-19 pandemic a national emergency. Residents throughout the U.S. have spent varying periods under “stay-at-home” or “shelter-in-place” orders. The full, long-term impacts of the pandemic are unknown and evolving. Construction has generally been considered an “essential” service and thus excluded from many “stay-at-home” orders. While we have generally remained operational during this time in the regions we serve with the implementation of new, enhanced safety and health protocols, certain of our operations were more negatively impacted, particularly in April and May, in states with stringent restrictions. For example, our ready-mixed concrete sales decreased $117.2 million during 2020, resulting in part from lower ready-mixed concrete operations in New York City and California, both of which have had more stringent restrictions related to COVID-19. As restrictions have gradually evolved, construction levels have begun improving in many of those areas. We continue to monitor the impact on our customers and our ongoing projects and pipeline. The business contingency plans and cost-cutting measures we implemented across our operations, which are continually reviewed and updated in response to the evolving pandemic, helped to mitigate the impact from the decrease in ready-mixed concrete sales volumes on our operating income in 2020. Given the unprecedented uncertainty surrounding the pandemic, we are currently unable to project the full impact the pandemic will have on our results of operations in 2021 and beyond.
On February 24, 2020, we acquired all of the equity of Coram Materials, a sand and gravel producer in New York (the “Coram Acquisition”). The Coram Acquisition expanded our aggregate products operations in our East Region. Coram Materials' operations supply natural sand used in concrete and other applications to the New York City area. In November 2020, we acquired certain assets of Sugar City Building Materials Co. that expanded our ready-mixed concrete operations in our West Region. We funded both of these acquisitions through borrowings under the Revolving Facility.
Results of Operations
|($ in millions except selling prices)||2020||2019||Increase/(Decrease)|
|Revenue||$||1,365.7 ||100.0 ||%||$||1,478.7 ||100.0 ||%||$||(113.0)||(7.6)||%|
|Cost of goods sold before depreciation, depletion and amortization||1,070.6 ||78.4 ||1,187.6 ||80.3 ||(117.0)||(9.9)|
|Selling, general and administrative expenses||127.0 ||9.3 ||130.0 ||8.8 ||(3.0)||(2.3)|
|Depreciation, depletion and amortization||99.7 ||7.3 ||93.2 ||6.3 ||6.5 ||7.0 |
|Change in value of contingent consideration||(7.3)||(0.5)||2.8 ||0.2 ||(10.1)||NM|
|Gain on sale/disposal of assets and businesses, net||(0.6)||— ||(0.1)||— ||0.5 ||(500.0)|
|Operating income||76.3 ||5.6 ||65.2 ||4.4 ||11.1 ||17.0 |
|Interest expense, net||45.9 ||3.4 ||46.1 ||3.1 ||(0.2)||(0.4)|
|Loss on extinguishment of debt||12.4 ||0.9 ||— ||— ||12.4 ||NM|
|Other income, net||(1.5)||(0.1)||(9.5)||(0.6)||(8.0)||(84.2)|
|Income before income taxes||19.5 ||1.4 ||28.6 ||1.9 ||(9.1)||(31.8)|
|Income tax expense (benefit)||(5.0)||(0.4)||12.3 ||0.8 ||(17.3)||(140.7)|
|Net income ||24.5 ||1.8 ||16.3 ||1.1 ||8.2 ||50.3 |
|Amounts attributable to non-controlling interest ||1.0 ||0.1 ||(1.4)||(0.1)||(2.4)||(171.4)|
|Net income attributable to U.S. Concrete||$||25.5 ||1.9 ||%||$||14.9 ||1.0 ||%||$||10.6 ||71.1 ||%|
|Ready-Mixed Concrete Data:|| || || || || || |
ASP per cubic yard
|$||140.69 || ||$||138.97 || ||$||1.72 ||1.2 ||%|
|Sales volume in thousand cubic yards||8,242 || ||9,181 || ||(939)||(10.2)||%|
|Aggregate Products Data:|| || || || || || |
ASP per ton(2)
|$||13.08 || ||$||11.93 || ||$||1.15 ||9.6 ||%|
| Sales volume in thousand tons||12,622|| ||11,392|| ||1,230 ||10.8 ||%|
(1) “NM” is defined as “not meaningful.”
(2) Our calculation excludes freight and certain other ancillary revenue. Our definition and calculation of ASP may differ from other companies in the construction materials industry.
Revenue. Our consolidated revenue declined by $113.0 million, or 7.6%, primarily due to lower sales of ready-mixed concrete, partially offset by record sales of aggregate products. As our business is seasonal and subject to adverse weather, our results in both years were negatively impacted by inclement weather in various regions and during various periods of the year, while 2020 was also impacted by the regional effects of the COVID-19 pandemic. Ready-mixed concrete sales declined by $117.2 million, or 9.2%, due to a 10.2% decline in sales volume partially offset by a 1.2% increase in ASP. Our ready-mixed concrete operations experienced sales declines in all markets, with the most significant impact in our East Region. New York and California both had more stringent restrictions related to COVID-19, and our operations in those states as well as elsewhere are still recovering from the impacts of the pandemic-related construction job delays. In addition, during 2020, our California operations were negatively impacted by supply shortages of cement resulting from temporary closures of a cement supplier's plant. Sales of aggregate products increased 10.9% to an all-time high of $216.4 million, driven by a 9.6% increase in ASP and a 10.8% increase in volume. Aggregate product sales increased due to a $27.4 million contribution from Coram Materials, as well as increased sales in our Central Region, partially offset by lower sales in other markets due to lower demand. Other product revenue decreased primarily due to lower aggregate distribution and hauling revenue.
Cost of goods sold before depreciation, depletion and amortization (“DD&A”). Cost of goods sold before DD&A decreased $117.0 million, or 9.9%. As a percentage of sales, cost of goods sold before DD&A was 190 basis points lower in 2020. The improvement was due to optimizing concrete mixes, more efficient operations of our plants and lower delivery costs as a result of lower volumes in addition to the benefit of lower diesel costs and less congested traffic patterns for most of the year, partially offset by higher insurance costs. Our variable costs in our ready-mixed concrete segment, which include primarily raw material costs, labor and benefits costs, utilities and delivery costs, were lower overall primarily related to the lower sales volume. Despite record sales volumes in our aggregate products segment, variable costs in the segment, which include quarry labor and benefits, utilities, repairs and maintenance, pit costs to prepare the stone and gravel for use, and delivery costs, actually decreased primarily due to lower freight expense and more efficient operation of our facilities. Total fixed costs in our aggregate products segment, which include primarily property taxes, equipment rental and plant management costs, were higher, due in part to the Coram Acquisition as well as incremental costs to manage our aggregate inventories.
Selling, general and administrative (“SG&A”) expenses. SG&A expenses decreased $3.0 million, primarily as a result of a $7.5 million decrease in stock-based compensation expense and the positive impact of additional cost-saving measures in response to the COVID-19 pandemic, partially offset by certain personnel-related expenses, including incentive compensation, severance costs and a pension withdrawal liability.
Depreciation, depletion and amortization. DD&A expense increased $6.5 million, or 7.0%, primarily related to depreciation on additional plants and equipment purchased for our existing business or acquired through acquisitions and depletion on acquired mineral deposits.
Change in value of contingent consideration. We recorded a $7.3 million net gain on revaluation of contingent consideration in 2020 compared to a $2.8 million loss in 2019. These amounts were related to fair value changes in contingent consideration associated with certain acquisitions. The 2020 non-cash net gain from fair value changes in contingent consideration was primarily due to the EBITDA performance for a previous acquisition being lower than contractual targets. The 2019 non-cash expense was primarily due to changes in the probability-weighted assumptions related to future EBITDA performance.
Loss on extinguishment of debt. In connection with our October 2020 redemption of $400.0 million of the 2024 Notes, we recognized a $12.4 million loss, primarily due to the early redemption premium. Also included in the loss were essentially offsetting amounts to write off the related unamortized original issuance premium and debt issuance costs from the redeemed notes.
Other income, net. Other income, net, in 2019 included a gain from an eminent domain proceeding in Washington, D.C. and insurance proceeds from prior hurricane losses in our U.S. Virgin Island operations, neither of which was repeated in 2020.
Income taxes. We recorded an income tax benefit of $5.0 million for 2020 and expense of $12.3 million for 2019. For 2020, our effective tax rate differed substantially from the federal statutory tax rate primarily due to (1) additional tax benefits recognized related to the CARES Act enacted on March 27, 2020 and (2) final Treasury regulations regarding the business interest deduction limitation (“Final 163(j) Regulations”) published in the Federal Register on September 14, 2020.
The CARES Act, among other things, modified the business interest deduction limitation for tax years beginning in 2019 and 2020 from 30% of adjusted taxable income (“ATI”) to 50% of ATI. As a result, we recorded an additional tax benefit of $3.2 million in 2020 to reflect the CARES Act change to our estimated interest limitation for the year ended December 31, 2019. The Final 163(j) Regulations removed an unfavorable interpretation of the computation of ATI, which negatively impacted our business interest deduction for the tax years ended December 31, 2018 and 2019. The guidance provided in the Final 163(j) Regulations eliminated our business interest deduction limitation for those tax years, and we recognized an additional tax benefit of $10.2 million in 2020, which included amounts related to the CARES Act net operating loss carryback provision. In addition, we recognized a CARES Act benefit of $2.1 million in 2020 related to employee retention credits, which are intended to be a reimbursement for certain wage and benefit costs we would have otherwise not incurred.
For 2019, our effective tax rate differed substantially from the federal statutory rate primarily due to a $5.8 million valuation allowance we recorded for (1) an interest expense limitation carryforward attribute resulting from the Tax Act, which we did not believe was more likely than not to be realized under the then-existing interpretation of the applicable statute and (2) certain foreign losses generated for which we do not believe the tax benefits are more likely than not to be realized.
Our chief operating decision maker reviews operating results based on our two reportable segments, which are ready-mixed concrete and aggregate products, and evaluates segment performance and allocates resources based on Adjusted EBITDA. We define Adjusted EBITDA as our net income, excluding the impact of income taxes, depreciation, depletion and amortization, net interest expense, the loss on extinguishment of debt, and certain other non-cash, non-recurring and/or unusual, non-operating items including, but not limited to: non-cash stock compensation expense, non-cash change in value of contingent consideration, acquisition-related costs, officer transition expenses, purchase accounting adjustments for inventory, pension withdrawal liability and realignment initiative costs. Acquisition-related costs consist of fees and expenses for accountants, lawyers and other professionals incurred during the negotiation and closing of strategic acquisitions. Acquisition-related costs do not include fees or expenses associated with post-closing integration of strategic acquisitions. Many of the impacts excluded to derive Adjusted EBITDA are similar to those excluded in calculating our compliance with our debt covenants.
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 (1) internally measure our operating performance and (2) 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 a measure of our cash flows or ability to fund our cash needs. Our measurement of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies and may not be comparable to similarly titled measures used in our various agreements, including the Third Loan Agreement, the Term Loan Agreement, the 2024 Indenture and the 2029 Indenture. See Note 8, “Debt” and Note 18, “Segment Information,” to our consolidated financial statements included in this report for definitions of certain debt agreements and additional information regarding our segments and a reconciliation of Adjusted EBITDA to net income.
|($ in millions except selling prices)||2020||2019||Increase/(Decrease)||% Change|
|Ready-Mixed Concrete Segment:|
| Revenue||$||1,161.4 ||$||1,278.6 ||$||(117.2)||(9.2)||%|
| Segment revenue as a percentage of total revenue||85.0 ||%||86.5 ||%|
| Adjusted EBITDA||$||149.6 ||$||157.7 ||$||(8.1)||(5.1)||%|
| Adjusted EBITDA as a percentage of segment revenue||12.9 ||%||12.3 ||%|
|Ready-Mixed Concrete Data:|| || || || |
ASP per cubic yard(1)
|$||140.69 ||$||138.97 ||$||1.72 ||1.2 ||%|
|Sales volume in thousand cubic yards||8,242 ||9,181 ||(939)||(10.2)||%|
(1) Calculation excludes certain ancillary revenue that is reported within the segment.
Adjusted EBITDA. The impact of lower volume of ready-mixed concrete, resulting from the impacts of inclement weather in various regions and during various periods of the year as well as the regional effects of the COVID-19 pandemic, was largely mitigated by actions taken as part of our business contingency plans in the form of labor management, concrete mix optimization, higher asset utilization and delivery efficiencies, which included lower fuel costs and generally less congested traffic patterns. Adjusted EBITDA as a percentage of segment revenue improved 60 basis points due to the benefits of these business contingency plans.
|($ in millions except selling prices)||2020||2019||Increase||% Change|
|Aggregate Products Segment:|
Sales to external customers
|$||105.7 ||$||89.5 |
|Freight revenue on sales to external customers||46.5 ||52.2 |
|64.2 ||53.5 |
|Total aggregate products revenue||$||216.4 ||$||195.2 ||$||21.2 ||10.9 ||%|
|Segment revenue, excluding intersegment sales, as a percentage of total Company revenue||11.1 ||%||9.6 ||%|
|Adjusted EBITDA||$||80.9 ||$||53.8 ||$||27.1 ||50.4 ||%|
|Adjusted EBITDA as a percentage of segment revenue||37.4 ||%||27.6 ||%|
|Aggregate Products Data:|| || || || |
|ASP per ton||$||13.08 ||$||11.93 ||$||1.15 ||9.6 ||%|
|Sales volume in thousand tons||12,622 ||11,392 ||1,230 ||10.8 ||%|
Adjusted EBITDA. Adjusted EBITDA for our aggregate products segment increased 50.4% to a record $80.9 million. Overall, our segment Adjusted EBITDA as a percentage of segment revenue improved 980 basis points, due in large part to the Coram Acquisition and increased volume in Texas, including the benefit of a new Texas greenfield operation. Our Adjusted EBITDA benefited from higher revenue, lower freight costs and our ability to leverage fixed costs on higher volumes through operating efficiencies.
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated from operations, available cash and cash equivalents, and access to our credit facilities, including (1) the Revolving Facility, which provides for borrowings of up to $300.0 million, subject to a borrowing base, and (2) the Term Loan Facility, which provided for borrowings of up to $179.1 million as of December 31, 2020.
We ended 2020 with $11.1 million of cash and cash equivalents, $230.2 million available for borrowing under the Revolving Facility and $179.1 million available for borrowing under the Term Loan Facility, providing total available liquidity of $420.4 million. Our total available liquidity increased in 2020 due primarily to the addition of the Term Loan Facility during 2020.
The following key financial measures reflect our financial condition as of the end of 2020 and 2019 ($ in millions):
|Cash and cash equivalents||$||11.1 ||$||40.6 |
|Working capital||$||56.3 ||$||103.7 |
|$||702.4 ||$||687.3 |
(1) Includes long-term debt, net of unamortized debt issuance costs, including current maturities, finance leases, promissory notes and any outstanding borrowings under the Revolving Facility and Term Loan Facility.
Our primary liquidity needs over the next 12 months consist of (1) financing working capital requirements; (2) servicing our indebtedness; (3) purchasing property, plant and equipment; and (4) payments related to strategic acquisitions. Our portfolio strategy includes acquisitions in various regions and markets. We may seek financing for additional acquisitions, which could include 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 Revolving Facility is governed by a borrowing base primarily determined by our eligible accounts receivable, inventory, mixer trucks and machinery. 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.
The projection of our cash needs is based upon many factors, including without limitation, our expected volume, pricing, cost of materials and capital expenditures. Based on our projected cash needs, we believe that cash on hand, availability under the Revolving Facility and Term Loan Facility, and cash generated from operations will provide us with sufficient liquidity in the ordinary course of business, not including potential acquisitions. We initiated business contingency planning and will continue to adjust those plans as needed to mitigate the impact of the COVID-19 pandemic on our cash needs. If, however, availability under the Revolving Facility, Term Loan Facility, cash on hand and our operating cash flows are not adequate to fund our operations, we would need to obtain other equity or debt financing or sell assets to provide additional liquidity.
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 or COVID-19 operating restrictions;
•declines in gross margins due to shifts in our product mix, increases in fixed or variable costs or the impact of COVID-19;
•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, including from COVID-19; and
•inclement weather beyond normal patterns that could adversely affect our sales volumes.
|($ in millions)||2020||2019||2018|
|Net cash provided by (used in):|| || |
|$||181.3 ||$||138.8 ||$||122.8 |
Effect of exchange rates on cash and cash equivalents
|Net increase (decrease) in cash||$||(29.5)||$||20.6 ||$||(2.6)|
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, including non-controlling interest. Overall, the 2020 improvement in cash generated from operations was driven primarily by management's cost control initiatives, the deferral of the remittance of $9.0 million of payroll taxes as permitted by the CARES Act, income tax refunds, and our ongoing initiatives to optimize working capital. The 2019 cash generated from operations was also aided by income tax refunds received.
Our net cash used to fund investing activities was higher in 2020 and 2018 because we paid $149.4 million in 2020 and $72.3 million in 2018 to fund acquisitions. In addition, we incurred $24.4 million, $42.7 million and $39.9 million in 2020, 2019 and 2018, respectively, primarily to fund purchases of machinery and equipment as well as mixer trucks and other vehicles to service our business. During 2019, we received $6.0 million of proceeds for an eminent domain matter and insurance proceeds relating to property damage suffered in 2017. Investing activities also included proceeds from the sale of businesses and/or property, plant and equipment of $1.7 million in 2020, $2.9 million in 2019 and $20.7 million in 2018. Proceeds were higher in 2018 primarily from the sale of our Dallas/Fort Worth area lime operations.
In 2021, we expect to invest between $40 million and $50 million in capital expenditures, excluding expenditures financed through finance leases as well as any acquisitions. These expenditures are planned primarily for maintenance and expansion, land purchases and new plants, as well as plant improvements, plant equipment, drum mixer trucks and other rolling stock. We expect to fund these expenditures with cash flows from operations, existing cash and cash equivalents and as needed, borrowings under our Revolving Facility. Our capital expenditure budget and allocation of it to the foregoing investments are estimates and are subject to change.
Financing activities in 2020 included $400.0 million of proceeds from our 2029 Notes offering, offset by related debt issuance costs, redemption of $400.0 million of our 2024 Notes including a $12.7 million redemption premium (see discussion below), $14.8 million of proceeds from finance lease and other transactions primarily for our Texas greenfield aggregates operation and $6.5 million of net borrowings under our Revolving Facility. In addition, in 2020, we made payments of $27.0 million primarily related to our finance leases and promissory notes and paid $10.0 million for contingent and deferred consideration obligations. Financing activities in 2019 included $15.0 million of net borrowings under our Revolving Facility to operate our business and fund acquisitions. In addition, we made payments of $32.8 million primarily related to our finance leases and promissory notes and paid $33.4 million for contingent and deferred consideration obligations. Financing activities in 2018 included $6.0 million of net borrowings under our Revolving Facility to operate our business and fund acquisitions. In addition, we made payments of $29.6 million primarily related to our finance leases and promissory notes and paid $5.9 million for contingent and deferred consideration obligations. We also repurchased 0.2 million shares of our common stock at a cost of $6.7 million during 2018 under the 2017 share repurchase program.
The discussion that follows provides a description of our arrangements relating to our outstanding indebtedness.
Asset Based Revolving Credit Facility (“Revolving Facility”)
We have a senior secured asset-based credit facility with certain Lenders and Bank of America, N.A., as agent for the Lenders that provides for up to $300.0 million of revolving borrowings. The Revolving Facility also permits the incurrence of other secured indebtedness not to exceed certain amounts as specified therein. The Revolving Facility provides for swingline loans up to a $15.0 million sublimit and letters of credit up to a $50.0 million sublimit. Loans under the Revolving Facility are in the form of either base rate loans or “LIBOR loans” denominated in U.S. dollars. As of December 31, 2020, we had $6.5 million outstanding under the Revolving Facility at an interest rate of 3.50%.
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 machinery, minus reserves imposed by the Lenders and other adjustments, as specified in the Third Loan Agreement, which matures August 31, 2022.
The Third Loan Agreement contains usual and customary 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 or make other distributions; make loans; prepay certain indebtedness; and make investments or acquisitions. The covenants are subject to certain exceptions as specified in the Third Loan Agreement. The Third 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 of December 31, 2020, we were in compliance with all covenants under the Third Loan Agreement.
Delayed Draw Term Loan Facility (“Term Loan Facility”)
On April 17, 2020, we entered into a secured delayed draw term loan credit and guaranty agreement with certain subsidiaries as guarantors thereto, Bank of America, N.A. as administrative agent, and the lenders and other parties named therein. The Term Loan Agreement provided for an initial $180.0 million delayed draw term loan facility, which was reduced to $179.1 million as of December 31, 2020. Commitments are reduced by approximately $0.4 million each quarter through September 30, 2021. The Term Loan Agreement permits borrowings until December 15, 2021. Any borrowings outstanding on December 15, 2021 will mature on May 1, 2025 (subject to a springing maturity on March 1, 2024 to the extent any of our 2024 Notes remain outstanding on such date). We entered into the Term Loan Agreement to enhance our liquidity and financial flexibility. Proceeds of the Term Loan Facility, if drawn, will be used for working capital and general corporate purposes, including to repay outstanding borrowings under our Revolving Facility.
Borrowings under the Term Loan Agreement bear interest at our option of either: (1) LIBOR (subject to a floor of 0.75%) plus a margin ranging from 2.75% to 3.75% or (2) a base rate (which is equal to the greatest of the prime rate, the Federal Funds effective rate plus 0.50% and LIBOR plus 1.00% and is subject to a floor of 1.75%) plus a margin ranging from 1.75% to 2.75%. The applicable margin depends on the aggregate amount borrowed. Additionally, each draw on the Term Loan Facility will be issued at a price of 99.0% of the amount drawn. The Term Loan Agreement is secured by a first priority lien and security interest on certain real property of the subsidiary guarantors and substantially all of the personal property of the Company and its subsidiary guarantors that is not secured by a first priority security interest under the Revolving Facility (the “Revolving Facility Collateral”) and a second priority security interest on the Revolving Facility Collateral. The Term Loan Agreement contains usual and customary covenants including, but not limited to, restrictions on our and our guarantor subsidiaries’ 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 or make other distributions; make loans; prepay certain indebtedness; and make investments or acquisitions, but it does not contain any financial maintenance covenants.
Senior Unsecured Notes
At December 31, 2020, we had outstanding $200.0 million aggregate principal amount of 2024 Notes and $400.0 million aggregate principal amount of 2029 Notes. The Senior Unsecured Notes are governed by similar indentures that contain customary covenants, including negative covenants that restrict our ability and our restricted subsidiaries' ability to engage in certain transactions, as described below, and also contain customary events of default.
During September 2020, we issued the 2029 Notes, and in October 2020 we used the proceeds from that issuance, in addition to borrowings from the Revolving Facility, to redeem $400.0 million aggregate principal amount of our 2024 Notes to extend the maturity of our debt portfolio consistent with the long-lived nature of our asset base. As a result of this early debt retirement, we recognized a redemption premium of $12.7 million offset by non-cash net credits (acceleration of unamortized premium, net of unamortized debt issuance costs) of $0.3 million. The net expense of $12.4 million was recognized as a loss on extinguishment of debt.
The 2024 Notes are governed by the 2024 Indenture, dated as of June 7, 2016, by and among U.S. Concrete, Inc., as issuer (the “Issuer”), the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee. The 2024 Notes accrue interest at a rate of 6.375% per annum, which is payable on June 1 and December 1 of each year. The 2024 Notes mature on June 1, 2024 and are redeemable at our option prior to maturity at prices specified in the 2024 Indenture.
The 2029 Notes are governed by the 2029 Indenture dated as of September 23, 2020, among the Issuer, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The 2029 Notes accrue interest at a rate of 5.125% per annum, which is payable on March 1 and September 1 of each year, beginning on March 1, 2021. The 2029 Notes mature on March 1, 2029 and are redeemable at our option prior to maturity at prices specified in the 2029 Indenture.
The Senior Unsecured Notes are guaranteed on a full and unconditional senior unsecured basis by each of the Issuer's restricted subsidiaries (each, a “Guarantor Subsidiary,” and collectively, the “Guarantor Subsidiaries”) that guarantee any obligations under the Revolving Facility and certain of the Issuer's other indebtedness or certain indebtedness of the Issuer's restricted subsidiaries (other than a foreign subsidiary or domestic subsidiary thereof that guarantees only indebtedness incurred by a foreign subsidiary or a domestic subsidiary thereof). Each Guarantor Subsidiary is directly or indirectly 100% owned by the Issuer. The guarantees are joint and several. The Issuer does not have any independent assets or operations. There are no significant restrictions in the 2024 Indenture or the 2029 Indenture on the ability of the Guarantor Subsidiaries to make distributions to the Issuer. The Senior Unsecured Notes are not guaranteed by any of the Issuer's direct or indirect foreign subsidiaries (or any domestic subsidiaries of any such foreign subsidiaries), U.S. Virgin Islands subsidiaries or domestic subsidiaries that are not wholly owned (collectively, the “Non-Guarantor Subsidiaries”).
The Senior Unsecured Notes and the guarantees thereof are effectively subordinated to all of the Issuer's and the Guarantor Subsidiaries' existing and future secured obligations, including obligations under the Revolving Facility, the Term Loan Facility, our finance leases and our promissory notes, to the extent of the value of the collateral securing such obligations; senior in right of payment to any of our and the Guarantor Subsidiaries' future subordinated indebtedness; pari passu in right of payment with any of our and the Guarantor Subsidiaries' existing and future senior indebtedness, including the Issuer's and the Guarantor Subsidiaries' obligations under the Revolving Facility, the Term Loan Facility and our finance leases; and structurally subordinated to all existing and future indebtedness and other claims and liabilities, including trade payables and preferred stock, of any Non-Guarantor Subsidiaries.
Supplemental Guarantor Financial Information
The following tables present summarized financial information for the Issuer and the Guarantor Subsidiaries on a combined basis after intercompany transactions have been eliminated, including adjustments to eliminate intercompany transactions between the Issuer and the Guarantor Subsidiaries. All assets and liabilities have been allocated to the Issuer and the Guarantor Subsidiaries generally based on legal entity ownership. Issuer investments in, and earnings of, Non-Guarantor Subsidiaries are excluded from the summarized financial information presented below.
Balance Sheets ($ in millions)
|December 31, 2020||December 31, 2019|
|Due from Non-Guarantor Subsidiaries, current||$||0.6 ||$||8.9 |
|Other current assets||285.8 ||320.2 |
|Property, plant and equipment, net||598.1 ||470.3 |
|Amount due from Non-Guarantor Subsidiaries, long-term||110.9 ||111.4 |
|Other long-term assets||299.2 ||307.7 |
|Current liabilities||$||258.6 ||$||245.9 |
|Long-term debt||667.2 ||653.3 |
|Other long-term liabilities||134.5 ||120.2 |
Statements of Operations ($ in millions)
|Revenue||$||1,259.6 ||$||1,361.2 |
|Cost of goods sold before depreciation, depletion and amortization||1,001.6 ||1,107.6 |
|Operating income||64.1 ||50.1 |
|Net income||16.6 ||5.5 |
We have financing agreements with various lenders primarily for the purchase of mixer trucks and other machinery and equipment with $101.7 million in outstanding principal as of December 31, 2020.
For additional information regarding our arrangements relating to outstanding indebtedness, see Note 8, “Debt,” to our consolidated financial statements included in this report.
Contingent Liabilities and Commitments
We have entered into standby letter of credit agreements in the normal course of business primarily relating to self-insurance. At December 31, 2020, the Company had a maximum financial exposure from these standby letters of credit totaling $25.9 million, of which $1.1 million reduces the Company's borrowing availability under its Revolving Facility. We are also contingently liable for performance under $11.8 million in performance bonds relating to our operations. In the Company's past experience, no material claims have been made against these financial instruments.
The following are our contractual commitments associated with our indebtedness, operating lease obligations and certain acquisition-related payment obligations as of December 31, 2020 ($ in millions):
|1-3 Years||3-5 Years||More Than|
|Principal on debt||$||708.2 ||$||33.7 ||$||54.6 ||$||218.5 ||$||401.4 |
|Interest on debt ||224.8 ||36.2 ||69.4 ||54.3 ||64.9 |
|Operating leases||95.5 ||17.8 ||30.9 ||25.1 ||21.7 |
Deferred consideration payments(1)
|12.0 ||9.9 ||1.3 ||0.8 ||— |
|Total||$||1,040.5 ||$||97.6 ||$||156.2 ||$||298.7 ||$||488.0 |
(1)Includes certain amounts previously reported as contingent consideration for which the performance period has concluded, the related contingency has been removed and payment will be made in 2021.
The following long-term liabilities included on the consolidated balance sheet are excluded from the contractual obligations table: accrued employment costs, contingent consideration, income tax contingencies, self-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.
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, revenue and expenses. See Note 1, “Organization and Summary of Significant Accounting Policies,” to our consolidated financial statements included in this report for more information about our significant accounting policies. 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 that 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.
The acquisition method of accounting requires that we recognize the net assets acquired in business combinations at their acquisition date fair value. Goodwill is measured as the consideration transferred at the acquisition date in excess of the net fair value of the net assets acquired and liabilities assumed. The measurement of the fair value of net assets acquired requires considerable judgment. Although independent appraisals may be used to assist in the determination of the fair value of certain assets and liabilities, the appraised values are usually based on significant estimates provided by management, such as forecasted revenue or profit.
In determining the fair value of intangible assets, we utilize the cost approach (primarily through the cost-to-recreate method), the market approach and the income approach. The income approach may incorporate the use of a discounted cash flow method. In applying the discounted cash flow method, the estimated future cash flows and residual values for each intangible asset are discounted to a present value using a discount rate based on an estimated weighted average cost of capital for the building materials industry. These cash flow projections are based on management’s estimates of economic and market conditions including revenue growth rates, operating margins, capital expenditures and working capital requirements.
While we use our best estimates and assumptions as part of the process to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. During the measurement period, which occurs before finalization of the purchase price allocation, changes in assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period they are determined, with the corresponding offset to goodwill. See Note 2, “Business Combinations,” to our consolidated financial statements included in this report for additional information about our acquisitions.
Goodwill and Goodwill Impairment
Goodwill represents the amount by which the purchase price of net assets acquired in a business combination exceeds the fair value of the acquired net identifiable tangible and intangible assets. We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. The impairment evaluation of goodwill is a critical accounting estimate because goodwill represented 15.8% of the Company's total assets at December 31, 2020, the evaluation requires the use of significant estimates and assumptions and considerable management judgment, and an impairment charge could be material to the Company's financial condition and its results of operations. We generally test for goodwill impairment in the fourth quarter of each year.
Goodwill is tested for impairment at the reporting unit level. We have three reporting units: one each for our ready-mixed- concrete and aggregate products operating segments and one for a small non-reportable operating segment. The components within the ready-mixed concrete and aggregate products operating segments have been aggregated and determined to be single reporting units. To perform the impairment analysis, we estimate the fair value of our reporting units and compare the result to the reporting unit's carrying value. If the fair value of a reporting unit does not exceed its carrying value, then the goodwill is deemed to be impaired. We generally estimate the 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. We calculate multiples of invested capital to EBITDA using a weighted average of two selected 12 month period 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. An impairment is determined to be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
We completed our annual impairment assessment during the fourth quarter of 2020 as of October 1, 2020 and determined there was no impairment of goodwill. While the amounts by which the fair values of the reporting units exceeded their carrying values (the “cushions”) have generally decreased from our 2019 review due to the impact of the COVID-19 pandemic, our major reporting units still had ample cushion. Our smallest reporting unit, which has only $3.3 million of goodwill, had the lowest cushion, 9.3%. Our fair value estimates were determined using estimates and assumptions that we believe were reasonable at the time, including assumptions regarding future operating results. Such estimates and assumptions are subject to inherent uncertainty. Actual results may differ materially from those estimates. Changes in those assumptions or estimates with respect to a reporting unit or its prospects, which may result from a change in market conditions, market trends, interest rates or other factors outside of our control, or significant underperformance relative to historical or projected future operating results, including further impacts of the COVID-19 pandemic, could significantly impact the calculated fair value of the reporting units, and could result in an impairment charge in the future. See Note 6, “Goodwill and Intangible Assets, Net,” to our consolidated financial statements included in this report for additional information about our goodwill.
We maintain third-party insurance coverage against certain workers' compensation, automobile and general liability risks 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 suitable for a company of our size and with our risk profile, although there are variations among our business units, and we regularly evaluate our retention levels and coverage limits. We have 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, claims development, retention levels, safety practices, 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 these self-insurance claims, which was classified in accrued liabilities and other long-term obligations and deferred credits, was $33.0 million as of December 31, 2020 and $23.3 million as of December 31, 2019.
We use the asset and 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 the temporary differences are expected to reverse. In cases where the expiration date of tax loss carryforwards or other tax attributes 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 consider all positive and negative evidence including reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. Valuation allowances related to deferred tax assets could be impacted by changes in tax laws, changes in statutory tax rates and future taxable income levels. If we were to determine that we are unable to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income tax expense in the period in which the determination is made. Conversely, if we were to determine that we can realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease to income tax expense in the period in which the determination is made. Based on these considerations, we had valuation allowances as of December 31, 2020 and 2019 of $6.2 million and $15.1 million, respectively, for certain deferred tax assets due to uncertainty regarding their ultimate realization. In 2020, we reduced our valuation allowance established for our interest limitation carryforward attribute by $10.4 million as a result of the CARES Act and Final 163(j) Regulations and increased the valuation allowance for certain foreign losses generated for which we do not believe the tax benefits are more likely than not to be realized. Much of the tax benefit normally associated with releasing a valuation allowance was offset by the elimination of the related deferred tax asset for the interest limitation carryforward attribute.
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. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of unrecognized tax benefits. These differences, should they occur, will be reflected as increases or decreases to income tax expense in the period in which new information is available. See Note 14, “Income Taxes,” to our consolidated financial statements included in this report for further discussion.
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).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss from adverse changes in interest rates, foreign exchange rates and market prices. Our exposure to market risk includes interest rate risk related to our Revolving Facility, the impact of interest rates as they impact the overall economy and foreign exchange risk due to certain transactions denominated in Canadian dollars related to our aggregate products operations in Canada.
We do not use derivative instruments to hedge risks relating to our ongoing business operations or for speculative purposes.
Interest Rate Risk
Borrowings under our Revolving Facility expose us to certain market risks. Interest on amounts drawn varies based on the floating rates under the Revolving Facility. Based on our $6.5 million of outstanding borrowings under the Revolving Facility as of December 31, 2020, a 100 basis-point change in the interest rate would increase or decrease annual interest expense by $0.1 million.
Our operations are subject to factors affecting the overall strength of the U.S. economy and economic conditions impacting financial institutions, including the level of interest rates, availability of funds for construction and level of general construction activity. A significant decrease in the level of general construction activity in any of our market areas may have a material adverse effect on our consolidated revenue and earnings.
Foreign Exchange Risk
Our primary exposure to foreign currency risk relates to our Canadian aggregate facility. Certain activities are transacted in Canadian dollars, but recorded in U.S. dollars. Changes in exchange rates between the U.S. dollar and the Canadian dollar result in transaction gains or losses, which we recognize in our consolidated statements of operations.
Future net transaction gains and losses are inherently difficult to predict as they are reliant on how the Canadian dollar fluctuates in relation to the U.S. dollar and the relative composition of current assets and liabilities denominated in the Canadian dollar each reporting period. We do not currently expect the economic impact to us of foreign exchange rates to be material.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of U.S. Concrete, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of U.S. Concrete, Inc. and subsidiaries (the Company) as of December 31, 2020 and December 31, 2019, and the related consolidated statements of operations, total equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and December 31, 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
|Acquisition of Coram Materials Corp. and certain of its affiliates|
|Description of the Matter||As disclosed in Note 2 to the consolidated financial statements, the Company completed the acquisition of the Coram Materials Corp. and certain of its affiliates for purchase consideration of $142.9 million during the year ended December 31, 2020. The acquisition was accounted for under the acquisition method of accounting for business combinations. |
|Auditing the Company's accounting for the acquisition of Coram Materials Corp. and certain of its affiliates was complex due to the significant assumptions that required the use of management specialists. Certain of these assumptions relate to the future performance of the acquired business, are forward-looking and could be affected by future economic and market conditions.|
|How We Addressed the Matter in Our Audit|
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's acquisition processes. For example, we tested certain internal controls over the Company's acquisition date valuation process, including controls over the selection of the valuation methodologies used as well as the key inputs and assumptions used to value the mineral reserve assets and other property, plant and equipment assets.
|Our audit procedures included, among others, assessing the appropriateness of the valuation methodology and testing the significant assumptions and the underlying data used by the Company. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. For example, we compared the significant assumptions used to value the mineral reserve assets to current industry, market and economic trends, historical results of the acquired businesses and to other relevant factors. For other property, plant and equipment assets, we assessed management’s estimates of the fair values using independently obtained external information and comparing it to the assumptions included in the Company’s fair value estimates. We also performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value resulting from changes in the assumptions.|
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2017.
February 24, 2021
U.S. CONCRETE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions except per share amounts)
| ||December 31,|
|Current assets:|| || |
|Cash and cash equivalents||$||11.1 ||$||40.6 |
|Trade accounts receivable, net||212.5 ||233.1 |
|Inventories||70.3 ||59.0 |
|Other receivables, net||13.2 ||8.4 |
|Prepaid expenses and other||11.1 ||7.9 |
|Total current assets||318.2 ||349.0 |
|Property, plant and equipment, net||788.2 ||673.5 |
|Operating lease assets||76.1 ||69.8 |
|Goodwill||238.2 ||239.5 |
|Intangible assets, net||70.9 ||92.4 |
|Other assets||14.7 ||9.1 |
|Total assets||$||1,506.3 ||$||1,433.3 |
|LIABILITIES AND EQUITY|| || |
|Current liabilities:|| || |
|Accounts payable||$||127.8 ||$||136.4 |
|Accrued liabilities||86.1 ||63.5 |
|Current maturities of long-term debt||33.7 ||32.5 |
|Current operating lease liabilities||14.3 ||12.9 |
|Total current liabilities||261.9 ||245.3 |
|Long-term debt, net of current maturities||668.7 ||654.8 |
|Long-term operating lease liabilities||65.5 ||59.7 |
|Other long-term obligations and deferred credits||51.9 ||49.1 |
|Deferred income taxes||56.6 ||54.8 |
|Total liabilities||1,104.6 ||1,063.7 |
Commitments and contingencies (Note 16)
|Equity:|| || |
Preferred stock, $0.001 par value per share (10,000,000 shares authorized; none issued)
|— ||— |
Common stock, $0.001 par value per share (100,000,000 shares authorized; 17,942,000 and 17,911,000 shares issued, respectively; and 16,675,000 and 16,696,000 shares outstanding, respectively)
|— ||— |
|Additional paid-in capital ||363.8 ||348.9 |
|Retained earnings ||53.3 ||31.1 |
Treasury stock, at cost (1,267,000 and 1,215,000 common shares, respectively)
|Total shareholders' equity||379.2 ||343.4 |
|Non-controlling interest||22.5 ||26.2 |
|Total equity||401.7 ||369.6 |
|Total liabilities and equity||$||1,506.3 ||$||1,433.3 |
The accompanying notes are an integral part of these consolidated financial statements.
U.S. CONCRETE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in millions except per share amounts)
|Revenue||$||1,365.7 ||$||1,478.7 ||$||1,506.4 |
|Cost of goods sold before depreciation, depletion and amortization||1,070.6 ||1,187.6 ||1,212.2 |
|Selling, general and administrative expenses||127.0 ||130.0 ||126.5 |
|Depreciation, depletion and amortization||99.7 ||93.2 ||91.8 |
|Change in value of contingent consideration||(7.3)||2.8 ||— |
|Asset impairment||— ||— ||1.3 |
|Gain on sale/disposal of assets and businesses, net||(0.6)||(0.1)||(15.3)|
|Operating income||76.3 ||65.2 ||89.9 |
|Interest expense, net||45.9 ||46.1 ||46.4 |
|Loss on extinguishment of debt||12.4 ||— ||— |
|Other income, net||(1.5)||(9.5)||(4.6)|
|Income before income taxes||19.5 ||28.6 ||48.1 |
|Income tax expense (benefit)||(5.0)||12.3 ||16.8 |
|Net income ||24.5 ||16.3 ||31.3 |
|Amounts attributable to non-controlling interest ||1.0 ||(1.4)||(1.3)|
|Net income attributable to U.S. Concrete||$||25.5 ||$||14.9 ||$||30.0 |
|Earnings per share attributable to U.S. Concrete:|| || |
|Basic||$||1.54 ||$||0.91 ||$||1.82 |
|Diluted||$||1.53 ||$||0.91 ||$||1.82 |
|Weighted average shares outstanding:|| || |
|Basic||16.6 ||16.4 ||16.5 |
|Diluted||16.6 ||16.4 ||16.5 |
The accompanying notes are an integral part of these consolidated financial statements.
U.S. CONCRETE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TOTAL EQUITY
| ||Shares of|
|Retained Earnings (Deficit)||Treasury|
|December 31, 2017||16.7 ||$||319.0 ||$||(13.8)||$||(24.8)||$||280.4 ||$||21.7 ||$||302.1 |
|Stock-based compensation||0.1 ||10.4 ||— ||(1.9)||8.5 ||— ||8.5 |
|Stock options exercised||— ||0.2 ||— ||— ||0.2 ||— ||0.2 |
|Adjustment for prior year business combination||— ||— ||— ||— ||— ||1.8 ||1.8 |
|Share repurchase program||(0.2)||— ||(6.7)||(6.7)||— ||(6.7)|
|Net income||— ||— |