UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM | 10-Q | ||||
(Mark One) | |||||||||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
For the quarterly period ended September 30, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file numbers:
001-36873 (Summit Materials, Inc.)
333-187556 (Summit Materials, LLC)
| SUMMIT MATERIALS, INC. | ||
SUMMIT MATERIALS, LLC | ||
(Exact name of registrants as specified in their charters) | ||
Delaware (Summit Materials, Inc.) | 47-1984212 | |||||||
Delaware (Summit Materials, LLC) | 26-4138486 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
1801 California Street, Suite 3500 | 80202 | |||||||
Denver, Colorado | (Zip Code) | |||||||
| (Address of principal executive offices) | ||||||||
Registrants’ telephone number, including area code: (303) 893-0012
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
| Class A Common Stock (par value $.01 per share) | SUM | New York Stock Exchange | ||||||||||||
As of October 31, 2023, the number of shares of Summit Materials, Inc.’s outstanding Class A and Class B common stock, par value $0.01 per share for each class, was 119,460,587 and 99, respectively.
As of October 31, 2023, 100% of Summit Materials, LLC’s outstanding limited liability company interests were held by Summit Materials Intermediate Holdings, LLC, its sole member and an indirect subsidiary of Summit Materials, Inc.
EXPLANATORY NOTE
This quarterly report on Form 10-Q (this “report”) is a combined quarterly report being filed separately by two registrants: Summit Materials, Inc. and Summit Materials, LLC. Each registrant hereto is filing on its own behalf all of the information contained in this report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information. We believe that combining the quarterly reports on Form 10-Q of Summit Materials, Inc. and Summit Materials, LLC into this single report eliminates duplicative and potentially confusing disclosure and provides a more streamlined presentation since a substantial amount of the disclosure applies to both registrants.
Unless stated otherwise or the context requires otherwise, references to “Summit Inc.” mean Summit Materials, Inc., a Delaware corporation, and references to “Summit LLC” mean Summit Materials, LLC, a Delaware limited liability company. The references to Summit Inc. and Summit LLC are used in cases where it is important to distinguish between them. We use the terms “we,” “our,” “us” or “the Company” to refer to Summit Inc. and Summit LLC together with their respective subsidiaries, unless otherwise noted or the context otherwise requires.
Summit Inc. was formed on September 23, 2014 to be a holding company. As of September 30, 2023, its sole material asset was a 99.1% economic interest in Summit Materials Holdings L.P., a Delaware limited partnership (“Summit Holdings”). Summit Inc. has 100% of the voting rights of Summit Holdings, which is the indirect parent of Summit LLC. Summit LLC is a co-issuer of our outstanding 6 1/2 % senior notes due 2027 (“2027 Notes”) and our 5 1/4% senior notes due 2029 (“2029 Notes” and collectively with the 2027 Notes, the “Senior Notes”). Summit Inc.’s only revenue for the three and nine months ended September 30, 2023 was that generated by Summit LLC and its consolidated subsidiaries. Summit Inc. controls all of the business and affairs of Summit Holdings and, in turn, Summit LLC.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties. Forward-looking statements include all statements that do not relate solely to historical or current facts, and you can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “trends,” “plans,” “estimates,” “projects” or “anticipates” or similar expressions that concern our strategy, plans, expectations or intentions. All statements made relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, it is very difficult to predict the effect of known factors, and, of course, it is impossible to anticipate all factors that could affect our actual results. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be realized. Important factors could affect our results and could cause results to differ materially from those expressed in our forward-looking statements, including but not limited to the factors discussed in the section entitled “Risk Factors” in Summit Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report”), as filed with the Securities and Exchange Commission (the “SEC”), the factors discussed in the section entitled “Risk Factors” of this report and the following:
•our dependence on the construction industry and the strength of the local economies in which we operate, including residential;
•the cyclical nature of our business;
•risks related to weather and seasonality;
•risks associated with our capital-intensive business;
•competition within our local markets;
•our ability to execute on our acquisition strategy and portfolio optimization strategy, successfully integrate acquisitions with our existing operations and retain key employees of acquired businesses;
•our dependence on securing and permitting aggregate reserves in strategically located areas;
•the impact of rising interest rates, and diminished liquidity and credit availability in the market broadly;
•declines in public infrastructure construction and delays or reductions in governmental funding, including the funding by transportation authorities, the federal government and other state agencies particularly;
•our reliance on private investment in infrastructure, which may be adversely affected by periods of economic stagnation and recession;
•environmental, health, safety and climate change laws or governmental requirements or policies concerning zoning and land use;
•rising prices for, or more limited availability of, commodities, labor and other production and delivery inputs as a result of inflation, supply chain challenges or otherwise;
•conditions in the credit markets;
•our ability to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us;
•material costs and losses as a result of claims that our products do not meet regulatory requirements or contractual specifications;
•cancellation of a significant number of contracts or our disqualification from bidding for new contracts;
•special hazards related to our operations that may cause personal injury or property damage not covered by insurance;
•unexpected factors affecting self-insurance claims and reserve estimates;
•our current level of indebtedness, including our exposure to variable interest rate risk;
•our dependence on senior management and other key personnel, and our ability to retain and attract qualified personnel;
•supply constraints or significant price fluctuations in the electricity and petroleum-based resources that we use, including diesel and liquid asphalt;
•climate change and climate change legislation or other regulations;
•unexpected operational difficulties;
•costs associated with pending and future litigation;
•interruptions in our information technology systems and infrastructure, including cybersecurity and data leakage risks;
•potential labor disputes, strikes, other forms of work stoppage or other union activities;
•the impact of the COVID-19 pandemic, and responses to it, including vaccine mandates, or any similar crisis, on our activities; and
•material or adverse effects related to the pending Argos USA combination.
All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.
Any forward-looking statement that we make herein speaks only as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.
CERTAIN DEFINITIONS
As used in this report, unless otherwise noted or the context otherwise requires:
•“EBITDA” refers to net income (loss) before interest expense (income), income tax expense (benefit) and depreciation, depletion and amortization;
•“Finance Corp.” refers to Summit Materials Finance Corp., an indirect wholly-owned subsidiary of Summit LLC and the co-issuer of the Senior Notes;
•“LP Units” refers to the Class A limited partnership units of Summit Holdings; and
•“TRA” refers to a tax receivable agreement between Summit Inc. and certain current and former holders of LP Units and their permitted assignees.
Corporate Structure
The following chart summarizes our organizational structure, equity ownership and our principal indebtedness as of September 30, 2023. This chart is provided for illustrative purposes only and does not show all of our legal entities or all obligations of such entities.
(1)SEC registrant.
(2)The shares of Class B Common Stock are currently held by pre-IPO investors, including certain members of management or their family trusts that directly hold LP Units. A holder of Class B Common Stock is entitled, without regard to the number of shares of Class B Common Stock held by such holder, to a number of votes that is equal to the aggregate number of LP Units held by such holder.
(3)Guarantor under the senior secured credit facilities, but not the Senior Notes.
(4)Summit LLC and Finance Corp are the issuers of the Senior Notes and Summit LLC is the borrower under our senior secured credit facilities. Finance Corp. was formed solely for the purpose of serving as co-issuer or guarantor of certain indebtedness, including the Senior Notes. Finance Corp. does not and will not have operations of any kind and does not and will not have revenue or assets other than as may be incidental to its activities as a co-issuer or guarantor of certain indebtedness.
SUMMIT MATERIALS, INC.
SUMMIT MATERIALS, LLC
FORM 10-Q
TABLE OF CONTENTS
| Page No. | ||||||||
PART I—Financial Information | ||||||||
Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 | ||||||||
Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and October 1, 2022 | ||||||||
Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and October 1, 2022 | ||||||||
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and October 1, 2022 | ||||||||
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2023 and October 1, 2022 | ||||||||
PART II — Other Information | ||||||||
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| September 30, 2023 | December 31, 2022 | ||||||||||
| (unaudited) | (audited) | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 197,475 | $ | 520,451 | |||||||
| Accounts receivable, net | 375,929 | 256,669 | |||||||||
| Costs and estimated earnings in excess of billings | 40,985 | 6,510 | |||||||||
| Inventories | 243,136 | 212,491 | |||||||||
| Other current assets | 17,976 | 20,787 | |||||||||
| Current assets held for sale | 1,702 | 1,468 | |||||||||
| Total current assets | 877,203 | 1,018,376 | |||||||||
Property, plant and equipment, less accumulated depreciation, depletion and amortization (September 30, 2023 - $1,387,348 and December 31, 2022 - $1,267,557) | 1,974,532 | 1,813,702 | |||||||||
| Goodwill | 1,241,472 | 1,132,546 | |||||||||
Intangible assets, less accumulated amortization (September 30, 2023 - $18,115 and December 31, 2022 - $15,503) | 68,814 | 71,384 | |||||||||
Deferred tax assets, less valuation allowance (September 30, 2023 - $1,113 and December 31, 2022 - $1,113) | 113,362 | 136,986 | |||||||||
| Operating lease right-of-use assets | 38,380 | 37,889 | |||||||||
| Other assets | 51,201 | 44,809 | |||||||||
| Total assets | $ | 4,364,964 | $ | 4,255,692 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of debt | $ | 3,822 | $ | 5,096 | |||||||
| Current portion of acquisition-related liabilities | 7,028 | 13,718 | |||||||||
| Accounts payable | 173,127 | 104,031 | |||||||||
| Accrued expenses | 147,619 | 119,967 | |||||||||
| Current operating lease liabilities | 8,745 | 7,296 | |||||||||
| Billings in excess of costs and estimated earnings | 8,539 | 5,739 | |||||||||
| Total current liabilities | 348,880 | 255,847 | |||||||||
| Long-term debt | 1,488,069 | 1,488,569 | |||||||||
| Acquisition-related liabilities | 27,633 | 29,051 | |||||||||
| Tax receivable agreement liability | 52,143 | 327,812 | |||||||||
| Noncurrent operating lease liabilities | 34,838 | 35,737 | |||||||||
| Other noncurrent liabilities | 105,668 | 106,686 | |||||||||
| Total liabilities | 2,057,231 | 2,243,702 | |||||||||
| Commitments and contingencies (see note 12) | |||||||||||
| Stockholders’ equity: | |||||||||||
Class A common stock, par value $0.01 per share; 1,000,000,000 shares authorized, 119,112,950 and 118,408,655 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | 1,192 | 1,185 | |||||||||
Class B common stock, par value $0.01 per share; 250,000,000 shares authorized, 99 shares issued and outstanding as of September 30, 2023 and December 31, 2022 | — | — | |||||||||
| Additional paid-in capital | 1,415,320 | 1,404,122 | |||||||||
| Accumulated earnings | 873,773 | 590,895 | |||||||||
| Accumulated other comprehensive income | 3,296 | 3,084 | |||||||||
| Stockholders’ equity | 2,293,581 | 1,999,286 | |||||||||
| Noncontrolling interest in Summit Holdings | 14,152 | 12,704 | |||||||||
| Total stockholders’ equity | 2,307,733 | 2,011,990 | |||||||||
| Total liabilities and stockholders’ equity | $ | 4,364,964 | $ | 4,255,692 | |||||||
See notes to unaudited consolidated financial statements.
1
SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except share and per share amounts)
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Product | $ | 641,778 | $ | 587,138 | $ | 1,609,664 | $ | 1,485,746 | |||||||||||||||
| Service | 100,182 | 98,871 | 219,939 | 224,676 | |||||||||||||||||||
| Net revenue | 741,960 | 686,009 | 1,829,603 | 1,710,422 | |||||||||||||||||||
| Delivery and subcontract revenue | 52,837 | 66,738 | 129,732 | 149,826 | |||||||||||||||||||
| Total revenue | 794,797 | 752,747 | 1,959,335 | 1,860,248 | |||||||||||||||||||
| Cost of revenue (excluding items shown separately below): | |||||||||||||||||||||||
| Product | 412,784 | 392,187 | 1,086,299 | 1,042,888 | |||||||||||||||||||
| Service | 77,538 | 76,011 | 173,568 | 179,807 | |||||||||||||||||||
| Net cost of revenue | 490,322 | 468,198 | 1,259,867 | 1,222,695 | |||||||||||||||||||
| Delivery and subcontract cost | 52,837 | 66,738 | 129,732 | 149,826 | |||||||||||||||||||
| Total cost of revenue | 543,159 | 534,936 | 1,389,599 | 1,372,521 | |||||||||||||||||||
| General and administrative expenses | 50,895 | 39,232 | 150,731 | 136,897 | |||||||||||||||||||
| Depreciation, depletion, amortization and accretion | 57,452 | 52,133 | 163,133 | 150,483 | |||||||||||||||||||
| Transaction costs | 17,442 | 727 | 19,518 | 2,637 | |||||||||||||||||||
| Gain on sale of property, plant and equipment | (2,134) | (1,343) | (5,787) | (6,293) | |||||||||||||||||||
| Operating income | 127,983 | 127,062 | 242,141 | 204,003 | |||||||||||||||||||
| Interest expense | 28,013 | 21,980 | 83,335 | 62,728 | |||||||||||||||||||
| Loss on debt financings | — | — | 493 | — | |||||||||||||||||||
| Tax receivable agreement (benefit) expense | (153,080) | — | (153,080) | 954 | |||||||||||||||||||
| Gain on sale of businesses | — | (4,115) | — | (174,373) | |||||||||||||||||||
| Other income, net | (3,583) | (3,283) | (14,771) | (4,956) | |||||||||||||||||||
| Income from operations before taxes | 256,633 | 112,480 | 326,164 | 319,650 | |||||||||||||||||||
| Income tax expense | 23,908 | 24,829 | 39,923 | 74,033 | |||||||||||||||||||
| Net income | 232,725 | 87,651 | 286,241 | 245,617 | |||||||||||||||||||
| Net income attributable to noncontrolling interest in Summit Holdings | 2,680 | 1,162 | 3,363 | 3,307 | |||||||||||||||||||
| Net income attributable to Summit Inc. | $ | 230,045 | $ | 86,489 | $ | 282,878 | $ | 242,310 | |||||||||||||||
| Earnings per share of Class A common stock: | |||||||||||||||||||||||
| Basic | $ | 1.93 | $ | 0.72 | $ | 2.38 | $ | 2.01 | |||||||||||||||
| Diluted | $ | 1.92 | $ | 0.72 | $ | 2.37 | $ | 2.00 | |||||||||||||||
| Weighted average shares of Class A common stock: | |||||||||||||||||||||||
| Basic | 119,013,331 | 119,896,272 | 118,874,967 | 120,345,015 | |||||||||||||||||||
| Diluted | 119,725,693 | 120,383,312 | 119,558,974 | 121,078,150 | |||||||||||||||||||
See notes to unaudited consolidated financial statements.
2
SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Comprehensive Income
(In thousands)
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Net income | $ | 232,725 | $ | 87,651 | $ | 286,241 | $ | 245,617 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustment | (3,810) | (10,247) | 295 | (14,113) | |||||||||||||||||||
| Less tax effect of other comprehensive income (loss) items | 738 | 2,470 | (80) | 3,404 | |||||||||||||||||||
| Other comprehensive (loss) income | (3,072) | (7,777) | 215 | (10,709) | |||||||||||||||||||
| Comprehensive income | 229,653 | 79,874 | 286,456 | 234,908 | |||||||||||||||||||
| Less comprehensive income attributable to Summit Holdings | 2,638 | 1,048 | 3,366 | 3,151 | |||||||||||||||||||
| Comprehensive income attributable to Summit Inc. | $ | 227,015 | $ | 78,826 | $ | 283,090 | $ | 231,757 | |||||||||||||||
See notes to unaudited consolidated financial statements.
3
SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
| Nine months ended | |||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 286,241 | $ | 245,617 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation, depletion, amortization and accretion | 168,758 | 160,162 | |||||||||
| Share-based compensation expense | 15,116 | 15,058 | |||||||||
| Net gain on asset and business disposals | (5,790) | (180,240) | |||||||||
| Non-cash loss on debt financings | 161 | — | |||||||||
| Change in deferred tax asset, net | 23,540 | 58,318 | |||||||||
| Other | (105) | (396) | |||||||||
| Decrease (increase) in operating assets, net of acquisitions and dispositions: | |||||||||||
| Accounts receivable, net | (107,349) | (96,724) | |||||||||
| Inventories | (23,935) | (53,762) | |||||||||
| Costs and estimated earnings in excess of billings | (34,463) | (32,042) | |||||||||
| Other current assets | 4,438 | (6,961) | |||||||||
| Other assets | 2,208 | 3,432 | |||||||||
| (Decrease) increase in operating liabilities, net of acquisitions and dispositions: | |||||||||||
| Accounts payable | 48,524 | 44,510 | |||||||||
| Accrued expenses | 19,034 | (21,780) | |||||||||
| Billings in excess of costs and estimated earnings | 2,812 | 646 | |||||||||
| Tax receivable agreement benefit | (153,080) | 954 | |||||||||
| Other liabilities | (2,486) | (4,601) | |||||||||
| Net cash provided by operating activities | 243,624 | 132,191 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions, net of cash acquired | (239,508) | (1,933) | |||||||||
| Purchases of property, plant and equipment | (182,182) | (189,008) | |||||||||
| Proceeds from the sale of property, plant and equipment | 9,760 | 8,298 | |||||||||
| Proceeds from sale of businesses | — | 373,790 | |||||||||
| Other | (3,602) | (2,214) | |||||||||
| Net cash (used in) provided by investing activities | (415,532) | 188,933 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Debt issuance costs | (1,566) | — | |||||||||
| Payments on debt | (8,520) | (113,769) | |||||||||
| Purchase of tax receivable agreement interests | (122,935) | — | |||||||||
| Payments on acquisition-related liabilities | (12,203) | (12,964) | |||||||||
| Distributions from partnership | (60) | (399) | |||||||||
| Repurchases of common stock | — | (100,980) | |||||||||
| Proceeds from stock option exercises | 112 | 199 | |||||||||
| Other | (6,011) | (774) | |||||||||
| Net cash used in financing activities | (151,183) | (228,687) | |||||||||
| Impact of foreign currency on cash | 115 | (1,732) | |||||||||
| Net (decrease) increase in cash | (322,976) | 90,705 | |||||||||
| Cash and cash equivalents—beginning of period | 520,451 | 380,961 | |||||||||
| Cash and cash equivalents—end of period | $ | 197,475 | $ | 471,666 | |||||||
See notes to unaudited consolidated financial statements.
4
SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share amounts)
| Summit Materials, Inc. | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | Class A | Class B | Additional | Noncontrolling | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Comprehensive | Common Stock | Common Stock | Paid-in | Interest in | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||
| Earnings | income | Shares | Dollars | Shares | Dollars | Capital | Summit Holdings | Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2022 | $ | 590,895 | $ | 3,084 | 118,408,655 | $ | 1,185 | 99 | $ | — | $ | 1,404,122 | $ | 12,704 | $ | 2,011,990 | |||||||||||||||||||||||||||||||||||||
| Net loss | (30,804) | — | — | — | — | — | — | (408) | (31,212) | ||||||||||||||||||||||||||||||||||||||||||||
| LP Unit exchanges | — | — | 2,000 | — | — | — | 21 | (21) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | 161 | — | — | — | — | — | 3 | 164 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | 902 | — | — | — | 15 | — | 15 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | 4,708 | — | 4,708 | ||||||||||||||||||||||||||||||||||||||||||||
| Shares redeemed to settle taxes and other | — | — | 407,114 | 4 | — | — | (5,680) | (43) | (5,719) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance — April 1, 2023 | $ | 560,091 | $ | 3,245 | 118,818,671 | $ | 1,189 | 99 | $ | — | $ | 1,403,186 | $ | 12,235 | $ | 1,979,946 | |||||||||||||||||||||||||||||||||||||
| Net income | 83,637 | — | — | — | — | — | — | 1,091 | 84,728 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | 3,081 | — | — | — | — | — | 42 | 3,123 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | 3,338 | — | — | — | 69 | — | 69 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | 5,216 | — | 5,216 | ||||||||||||||||||||||||||||||||||||||||||||
| Shares redeemed to settle taxes and other | — | — | 64,265 | 1 | — | — | 893 | (12) | 882 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance — July 1, 2023 | $ | 643,728 | $ | 6,326 | 118,886,274 | $ | 1,190 | 99 | $ | — | $ | 1,409,364 | $ | 13,356 | $ | 2,073,964 | |||||||||||||||||||||||||||||||||||||
| Net income | 230,045 | — | — | — | — | — | — | 2,680 | 232,725 | ||||||||||||||||||||||||||||||||||||||||||||
| LP Unit exchanges | — | — | 174,258 | 2 | — | — | 1,776 | (1,778) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | (3,030) | — | — | — | — | — | (42) | (3,072) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | 1,167 | — | — | — | 28 | — | 28 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | 5,192 | — | 5,192 | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions from partnership | — | — | — | — | — | — | — | (60) | (60) | ||||||||||||||||||||||||||||||||||||||||||||
| Shares redeemed to settle taxes and other | — | — | 51,251 | — | — | — | (1,040) | (4) | (1,044) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2023 | $ | 873,773 | $ | 3,296 | 119,112,950 | $ | 1,192 | 99 | $ | — | $ | 1,415,320 | $ | 14,152 | $ | 2,307,733 | |||||||||||||||||||||||||||||||||||||
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| Summit Materials, Inc. | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | Class A | Class B | Additional | Noncontrolling | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Comprehensive | Common Stock | Common Stock | Paid-in | Interest in | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||
| Earnings | income | Shares | Dollars | Shares | Dollars | Capital | Summit Holdings | Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance — January 1, 2022 | $ | 478,956 | $ | 7,083 | 118,705,108 | $ | 1,188 | 99 | $ | — | $ | 1,326,340 | $ | 9,645 | $ | 1,823,212 | |||||||||||||||||||||||||||||||||||||
| Net loss | (34,292) | — | — | — | — | — | — | (508) | (34,800) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | 1,306 | — | — | — | — | — | 19 | 1,325 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | 1,589 | — | — | — | 27 | — | 27 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | 5,422 | — | 5,422 | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (47,494) | — | (1,506,878) | (15) | — | — | (121) | 121 | (47,509) | ||||||||||||||||||||||||||||||||||||||||||||
| Shares redeemed to settle taxes and other | — | — | 842,029 | 8 | — | — | (1,120) | (68) | (1,180) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance — April 2, 2022 | $ | 397,170 | $ | 8,389 | 118,041,848 | $ | 1,181 | 99 | $ | — | $ | 1,330,548 | $ | 9,209 | $ | 1,746,497 | |||||||||||||||||||||||||||||||||||||
| Net income | 190,113 | — | — | — | — | — | — | 2,653 | 192,766 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | (4,196) | — | — | — | — | — | (61) | (4,257) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | 4,929 | — | — | — | 96 | — | 96 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | 4,734 | — | 4,734 | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions from partnership | — | — | — | — | — | — | — | (25) | (25) | ||||||||||||||||||||||||||||||||||||||||||||
| Shares redeemed to settle taxes and other | — | — | 67,835 | 1 | — | — | 997 | (7) | 991 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance — July 2, 2022 | $ | 587,283 | $ | 4,193 | 118,114,612 | $ | 1,182 | 99 | $ | — | $ | 1,336,375 | $ | 11,769 | $ | 1,940,802 | |||||||||||||||||||||||||||||||||||||
| Net income | 86,489 | — | — | — | — | — | — | 1,162 | 87,651 | ||||||||||||||||||||||||||||||||||||||||||||
| LP Unit exchanges | — | — | 2,000 | — | — | — | 34 | (34) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | (7,663) | — | — | — | — | — | (114) | (7,777) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | 3,580 | — | — | — | 76 | — | 76 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | 4,902 | — | 4,902 | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (53,452) | — | (1,920,632) | (19) | — | — | (198) | 198 | (53,471) | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions from partnership | — | — | — | — | — | — | — | (374) | (374) | ||||||||||||||||||||||||||||||||||||||||||||
| Shares redeemed to settle taxes and other | — | — | 187,409 | 2 | — | — | (587) | — | (585) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance — October 1, 2022 | $ | 620,320 | $ | (3,470) | 116,386,969 | $ | 1,165 | 99 | $ | — | $ | 1,340,602 | $ | 12,607 | $ | 1,971,224 | |||||||||||||||||||||||||||||||||||||
See notes to unaudited consolidated financial statements.
6
SUMMIT MATERIALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables in thousands, except per share amounts or otherwise noted)
1.SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Summit Materials, Inc. (“Summit Inc.” and, together with its subsidiaries, “Summit,” “we,” “us,” “our” or the “Company”) is a vertically-integrated construction materials company. The Company is engaged in the production and sale of aggregates, cement, ready-mix concrete, asphalt paving mix and concrete products and owns and operates quarries, sand and gravel pits, two cement plants, cement distribution terminals, ready-mix concrete plants, asphalt plants and landfill sites. It is also engaged in paving and related services. The Company’s three operating and reporting segments are the West, East and Cement segments.
Substantially all of the Company’s construction materials, products and services are produced, consumed and performed outdoors, primarily in the spring, summer and fall. Seasonal changes and other weather-related conditions can affect the production and sales volumes of its products and delivery of services. Therefore, the financial results for any interim period are typically not indicative of the results expected for the full year. Furthermore, the Company’s sales and earnings are sensitive to national, regional and local economic conditions, weather conditions and to cyclical changes in construction spending, among other factors.
Summit Inc. is a holding corporation operating and controlling all of the business and affairs of Summit Materials Holdings L.P. (“Summit Holdings”) and its subsidiaries, and through Summit Holdings conducts its business. Summit Inc. owns the majority of the partnership interests of Summit Holdings (see Note 9, Stockholders’ Equity). Summit Materials, LLC (“Summit LLC”), an indirect wholly owned subsidiary of Summit Holdings, conducts the majority of our operations. Summit Materials Finance Corp. (“Summit Finance”), an indirect wholly owned subsidiary of Summit LLC, has jointly issued our Senior Notes as described below.
Basis of Presentation—These unaudited consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures typically included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2022. The Company continues to follow the accounting policies set forth in those audited consolidated financial statements.
Management believes that these consolidated interim financial statements include all adjustments, normal and recurring in nature, that are necessary to present fairly the financial position of the Company as of September 30, 2023, the results of operations for the three and nine months ended September 30, 2023 and October 1, 2022 and cash flows for the nine months ended September 30, 2023 and October 1, 2022.
Principles of Consolidation—The consolidated financial statements include the accounts of Summit Inc. and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated.
For a summary of the changes in Summit Inc.’s ownership of Summit Holdings, see Note 9, Stockholders’ Equity.
Use of Estimates—Preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenue and expenses. Such estimates include the valuation of accounts receivable, inventories, valuation of deferred tax assets, goodwill, intangibles and other long-lived assets, tax receivable agreement ("TRA") liability, pension and other postretirement obligations and asset retirement obligations. Estimates also include revenue earned on contracts and costs to complete contracts. Most of the Company’s paving and related services are performed under fixed unit-price contracts with state and local governmental entities. Management regularly evaluates its estimates and assumptions based on historical experience and other factors, including the current economic environment. As future events and their effects cannot be determined with precision, actual results can differ significantly from estimates made. Changes in estimates, including
7
those resulting from continuing changes in the economic environment, are reflected in the Company’s consolidated financial statements when the change in estimate occurs.
Business and Credit Concentrations—The Company’s operations are conducted primarily across 21 U.S. states and in British Columbia, Canada, with the most significant revenue generated in Texas, Utah, Kansas and Missouri. The Company’s accounts receivable consist primarily of amounts due from customers within these areas. Therefore, collection of these accounts is dependent on the economic conditions in the aforementioned states, as well as specific situations affecting individual customers. Credit granted within the Company’s trade areas has been granted to many customers, and management does not believe that a significant concentration of credit exists with respect to any individual customer or group of customers. No single customer accounted for more than 10% of the Company’s total revenue in the three and nine months ended September 30, 2023 or October 1, 2022.
Revenue Recognition—We earn revenue from the sale of products, which primarily include aggregates, cement, ready-mix concrete and asphalt, but also include concrete products and plastics components, and from the provision of services, which are primarily paving and related services, but also include landfill operations, the receipt and disposal of waste that is converted to fuel for use in our cement plants.
Products: Revenue for product sales is recognized when the performance obligation is satisfied, which generally is when the product is shipped.
Services: We earn revenue from the provision of services, which are primarily paving and related services, which are typically calculated using monthly progress based on a method similar to percentage of completion or a customer’s engineer review of progress.
The majority of our construction service contracts are completed within one year, but may occasionally extend beyond this time frame. The majority of our construction service contracts are for work that occurs mostly during the spring, summer and fall. We generally measure progress toward completion on long-term paving and related services contracts based on the proportion of costs incurred to date relative to total estimated costs at completion.
Estimating costs to be incurred for revenue recognition involves the use of various estimating techniques to project costs at completion, and in some cases includes estimates of recoveries asserted against the customer for changes in specifications or other disputes.
Earnings per Share—The Company computes basic earnings per share attributable to stockholders by dividing income attributable to Summit Inc. by the weighted-average shares of Class A common stock outstanding. Diluted earnings per share reflects the potential dilution beyond shares for basic earnings per share that could occur if securities or other contracts to issue common stock were exercised, converted into common stock, or resulted in the issuance of common stock that would have shared in the Company’s earnings. Since the Class B common stock has no economic value, those shares are not included in the weighted-average common share amount for basic or diluted earnings per share. In addition, as the shares of Class A common stock are issued by Summit Inc., the earnings and equity interests of noncontrolling interests are not included in basic earnings per share.
Prior Year Reclassifications — We have reclassified transaction costs of $0.7 million and $2.6 million for the three and nine months ended October 1, 2022, respectively, from general and administrative expenses to a separate line item included in operating income to conform to the current year presentation.
2.ACQUISITIONS, DISPOSITIONS, GOODWILL AND INTANGIBLES
The financial results of each acquisition have been included in the Company’s consolidated results of operations beginning on the respective closing dates of the acquisitions. The Company measures all assets acquired and liabilities assumed at their acquisition-date fair value. Goodwill acquired during a business combination has an indefinite life and is not amortized.
The following table summarizes the Company’s acquisitions by region and period:
| Nine months ended | Year ended | ||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| West | 3 | — | |||||||||
| East | 1 | 2 | |||||||||
8
The purchase price allocation, primarily the valuation of property, plant and equipment for the acquisitions completed during the nine months ended September 30, 2023, as well as the acquisitions completed during 2022 that occurred after October 1, 2022, have not yet been finalized due to the recent timing of the acquisitions, status of the valuation of property, plant and equipment and finalization of related tax returns. The following table summarizes aggregated information regarding the fair values of the assets acquired and liabilities assumed as of the respective acquisition dates:
| Nine months ended | Year ended | ||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Financial assets | $ | 12,747 | $ | 297 | |||||||
| Inventories | 6,694 | 161 | |||||||||
| Property, plant and equipment | 124,051 | 30,041 | |||||||||
| Other assets | 1,550 | 1,116 | |||||||||
| Financial liabilities | (11,973) | (1,120) | |||||||||
| Other long-term liabilities | (768) | (1,589) | |||||||||
| Net assets acquired | 132,301 | 28,906 | |||||||||
| Goodwill | 108,803 | — | |||||||||
| Purchase price | 241,104 | 28,906 | |||||||||
| Acquisition-related liabilities | — | (6,176) | |||||||||
| Other | (1,596) | — | |||||||||
| Net cash paid for acquisitions | $ | 239,508 | $ | 22,730 | |||||||
Changes in the carrying amount of goodwill, by reportable segment, from December 31, 2022 to September 30, 2023 are summarized as follows:
| West | East | Cement | Total | ||||||||||||||||||||
| Balance—December 31, 2022 | $ | 566,389 | $ | 361,501 | $ | 204,656 | $ | 1,132,546 | |||||||||||||||
| Acquisitions (1) | 108,803 | — | — | 108,803 | |||||||||||||||||||
| Foreign currency translation adjustments | 123 | — | — | 123 | |||||||||||||||||||
| Balance—September 30, 2023 | $ | 675,315 | $ | 361,501 | $ | 204,656 | $ | 1,241,472 | |||||||||||||||
_______________________________________________________________________
(1) Reflects goodwill from 2023 acquisitions.
The Company’s intangible assets subject to amortization are primarily composed of operating permits, mineral lease agreements and reserve rights. Operating permits relate to permitting and zoning rights acquired outside of a business combination. The assets related to mineral lease agreements reflect the submarket royalty rates paid under agreements, primarily for extracting aggregates. The values were determined as of the respective acquisition dates by a comparison of market-royalty rates. The reserve rights relate to aggregate reserves to which the Company has certain rights of ownership, but does not own the reserves. The intangible assets are amortized on a straight-line basis over the lives of the leases or permits. The following table shows intangible assets by type and in total:
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Operating permits | $ | 38,677 | $ | (5,291) | $ | 33,386 | $ | 38,677 | $ | (4,109) | $ | 34,568 | |||||||||||||||||||||||
| Mineral leases | 17,778 | (7,452) | 10,326 | 18,091 | (7,056) | 11,035 | |||||||||||||||||||||||||||||
| Reserve rights | 25,586 | (4,814) | 20,772 | 25,242 | (3,872) | 21,370 | |||||||||||||||||||||||||||||
| Other | 4,888 | (558) | 4,330 | 4,877 | (466) | 4,411 | |||||||||||||||||||||||||||||
| Total intangible assets | $ | 86,929 | $ | (18,115) | $ | 68,814 | $ | 86,887 | $ | (15,503) | $ | 71,384 | |||||||||||||||||||||||
Amortization expense totaled $0.8 million and $2.6 million for the three and nine months ended September 30, 2023, respectively, and $0.8 million and $2.6 million for the three and nine months ended October 1, 2022, respectively. The estimated amortization expense for the intangible assets for each of the five years subsequent to September 30, 2023 is as follows:
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| 2023 (three months) | $ | 1,001 | |||
| 2024 | 4,011 | ||||
| 2025 | 3,969 | ||||
| 2026 | 3,920 | ||||
| 2027 | 3,908 | ||||
| 2028 | 3,910 | ||||
| Thereafter | 48,095 | ||||
| Total | $ | 68,814 | |||
In September 2023, the Company entered into a definitive agreement to acquire all of the outstanding equity interests of Argos North America Corp. (“Argos USA”) in a cash and stock transaction valued at $3.2 billion. Argos USA is among the largest cement producers with four integrated cement plants and approximately 140 ready-mix plants in the Southeast, Mid-Atlantic and Texas geographies. Under the terms of the agreement, the shareholders of Argos USA will receive approximately $1.2 billion in cash subject to closing adjustments and approximately 54.7 million shares of the Company's Class A common stock. In connection with the agreement, the Company has obtained committed financing in the form of a $1.3 billion 364-day term loan bridge facility to finance the cash consideration to be paid to the shareholders of Argos USA. The Company expects to enter into permanent financing agreements prior to the transaction closing, which would reduce any amounts that may ultimately be borrowed under the term loan bridge facility. The transaction closing is expected to occur prior to the end of the first quarter of 2024, subject to customary closing conditions, including regulatory approvals and approval by the Company's stockholders.
3.REVENUE RECOGNITION
We derive our revenue predominantly by selling construction materials, products and providing paving and related services. Construction materials consist of aggregates and cement. Products consist of related downstream products, including ready-mix concrete, asphalt paving mix and concrete products. Paving and related service revenue is generated primarily from the asphalt paving services that we provide.
Revenue by product for the three and nine months ended September 30, 2023 and October 1, 2022 is as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Revenue by product*: | |||||||||||||||||||||||
| Aggregates | $ | 179,819 | $ | 163,524 | $ | 505,984 | $ | 448,397 | |||||||||||||||
| Cement | 115,135 | 112,489 | 267,755 | 241,858 | |||||||||||||||||||
| Ready-mix concrete | 213,325 | 189,081 | 551,673 | 530,001 | |||||||||||||||||||
| Asphalt | 117,896 | 106,804 | 236,340 | 218,083 | |||||||||||||||||||
| Paving and related services | 110,370 | 120,327 | 226,928 | 249,547 | |||||||||||||||||||
| Other | 58,252 | 60,522 | 170,655 | 172,362 | |||||||||||||||||||
| Total revenue | $ | 794,797 | $ | 752,747 | $ | 1,959,335 | $ | 1,860,248 | |||||||||||||||
*Revenue from liquid asphalt terminals is included in asphalt revenue.
Accounts receivable, net consisted of the following as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Trade accounts receivable | $ | 305,436 | $ | 215,766 | |||||||
| Construction contract receivables | 64,438 | 37,067 | |||||||||
| Retention receivables | 13,165 | 11,048 | |||||||||
| Accounts receivable | 383,039 | 263,881 | |||||||||
| Less: Allowance for doubtful accounts | (7,110) | (7,212) | |||||||||
| Accounts receivable, net | $ | 375,929 | $ | 256,669 | |||||||
Retention receivables are amounts earned by the Company but held by customers until paving and related service contracts and projects are near completion or fully completed. Amounts are generally billed and collected within one year.
4.INVENTORIES
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Inventories consisted of the following as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Aggregate stockpiles | $ | 165,071 | $ | 148,347 | |||||||
| Finished goods | 43,316 | 33,622 | |||||||||
| Work in process | 11,220 | 8,191 | |||||||||
| Raw materials | 23,529 | 22,331 | |||||||||
| Total | $ | 243,136 | $ | 212,491 | |||||||
5.ACCRUED EXPENSES
Accrued expenses consisted of the following as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Interest | $ | 10,677 | $ | 24,625 | |||||||
| Payroll and benefits | 48,595 | 34,485 | |||||||||
| Finance lease obligations | 3,399 | 6,959 | |||||||||
| Insurance | 23,874 | 18,127 | |||||||||
| Current portion of TRA liability and non-income taxes | 14,349 | 4,360 | |||||||||
| Deferred asset purchase payments | 5,892 | 5,131 | |||||||||
| Professional fees | 11,980 | 924 | |||||||||
| Other (1) | 28,853 | 25,356 | |||||||||
| Total | $ | 147,619 | $ | 119,967 | |||||||
(1)Consists primarily of current portion of asset retirement obligations and miscellaneous accruals.
6.DEBT
Debt consisted of the following as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Term Loan, due 2027: | |||||||||||
$505.7 million and $509.6 million, net of $4.2 million and $5.0 million discount at September 30, 2023 and December 31, 2022, respectively | $ | 501,492 | $ | 504,549 | |||||||
61⁄2% Senior Notes, due 2027 | 300,000 | 300,000 | |||||||||
51⁄4% Senior Notes, due 2029 | 700,000 | 700,000 | |||||||||
| Total | 1,501,492 | 1,504,549 | |||||||||
| Current portion of long-term debt | 3,822 | 5,096 | |||||||||
| Long-term debt | $ | 1,497,670 | $ | 1,499,453 | |||||||
The contractual payments of long-term debt, including current maturities, for the five years subsequent to September 30, 2023, are as follows:
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| 2023 (three months) | $ | 1,274 | |||
| 2024 | 3,822 | ||||
| 2025 | 6,369 | ||||
| 2026 | 5,096 | ||||
| 2027 | 789,177 | ||||
| 2028 | — | ||||
| Thereafter | 700,000 | ||||
| Total | 1,505,738 | ||||
| Less: Original issue net discount | (4,246) | ||||
| Less: Capitalized loan costs | (9,601) | ||||
| Total debt | $ | 1,491,891 | |||
Senior Notes— On August 11, 2020, Summit LLC and Summit Finance (together, the “Issuers”) issued $700.0 million in aggregate principal amount of 5.250% senior notes due January 15, 2029 (the “2029 Notes”). The 2029 Notes were issued at 100.0% of their par value with proceeds of $690.4 million, net of related fees and expenses. The 2029 Notes were issued under an indenture dated August 11, 2020 (the "2029 Notes Indenture"). The 2029 Notes Indenture contains covenants limiting, among other things, Summit LLC and its restricted subsidiaries’ ability to incur additional indebtedness or issue certain preferred shares, pay dividends, redeem stock or make other distributions, make certain investments, sell or transfer certain assets, create liens, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets, enter into certain transactions with affiliates, and designate subsidiaries as unrestricted subsidiaries. The 2029 Notes Indenture also contains customary events of default. Interest on the 2029 Notes is payable semi-annually on January 15 and July 15 of each year commencing on January 15, 2021.
On March 15, 2019, the Issuers issued $300.0 million in aggregate principal amount of 6.500% senior notes due March 15, 2027 (the “2027 Notes”). The 2027 Notes were issued at 100.0% of their par value with proceeds of $296.3 million, net of related fees and expenses. The 2027 Notes were issued under an indenture dated March 25, 2019, the terms of which are generally consistent with the 2029 Notes Indenture. Interest on the 2027 Notes is payable semi-annually on March 15 and September 15 of each year commencing on September 15, 2019.
As of September 30, 2023 and December 31, 2022, the Company was in compliance with all covenants under the applicable indentures.
Senior Secured Credit Facilities— Summit LLC has credit facilities that provide for term loans in an aggregate amount of $505.7 million and revolving credit commitments in an aggregate amount of $395.0 million (the “Senior Secured Credit Facilities”). Under the Senior Secured Credit Facilities, required principal repayments of 0.25% of the refinanced aggregate amount of term debt are due on the last business day of each March, June, September and December commencing with the March 2023 payment. The interest rate on the term loan is a variable rate, it was 8.57% as of September 30, 2023. In 2022, the Company repaid $95.6 million of its term loan under provisions related to divestitures of businesses.
On December 14, 2022, Summit Materials, LLC entered into Amendment No. 5 to the credit agreement governing the Senior Secured Credit Facilities (the “Credit Agreement”), which among other things, (a) refinanced the existing $509.6 million of existing term loans with new term loans under the Term Loan Facility bearing interest, at Summit LLC’s option, based on either the base rate or Term Secured Overnight Financing Rate ("SOFR") rate and an applicable margin of (i) 2.00% per annum with respect to base rate borrowings and a floor of 1.00% per annum or (ii) 3.00% per annum with respect to Term SOFR borrowings, with a SOFR adjustment of 0.10% per annum and a floor of zero, and (b) extended the maturity date to December 14, 2027.
On January 10, 2023, Summit Materials, LLC entered into Amendment No. 6 to the Credit Agreement, which among other things, increased the maximum amount available to $395.0 million and extended the maturity date to January 10, 2028. The revolving credit agreement bears interest per annum equal to a Term SOFR Rate with a SOFR adjustment of 0.10% per annum and a floor of zero.
There were no outstanding borrowings under the revolving credit facility as of September 30, 2023 and December 31, 2022, with borrowing capacity of $374.1 million remaining as of September 30, 2023, which is net of $20.9 million of outstanding letters of credit. The outstanding letters of credit are renewed annually and support required bonding on construction projects, large leases, workers compensation claims and the Company’s insurance liabilities.
12
Summit LLC’s Consolidated First Lien Net Leverage Ratio, as such term is defined in the Credit Agreement, should be no greater than 4.75:1.0 as of each quarter-end. As of September 30, 2023 and December 31, 2022, Summit LLC was in compliance with all financial covenants.
Summit LLC’s wholly-owned domestic subsidiary companies, subject to certain exclusions and exceptions, are named as subsidiary guarantors of the Senior Notes and the Senior Secured Credit Facilities. In addition, Summit LLC has pledged substantially all of its assets as collateral, subject to certain exclusions and exceptions, for the Senior Secured Credit Facilities.
In September 2023, in connection with our agreement to combine with Argos USA, we obtained a $1.3 billion 364-day term loan bridge facility commitment from various financial institutions. The term loan bridge facility may only be drawn to close the transaction. We expect to obtain permanent financing prior to our combination with Argos USA, at which time the term loan bridge facility commitment will expire.
The following table presents the activity for the deferred financing fees for the nine months ended September 30, 2023 and October 1, 2022:
| Deferred financing fees | |||||
| Balance—December 31, 2022 | $ | 11,489 | |||
| Loan origination fees | 1,566 | ||||
| Amortization | (1,838) | ||||
| Write off of deferred financing fees | (160) | ||||
| Balance—September 30, 2023 | $ | 11,057 | |||
| Balance—January 1, 2022 | $ | 13,049 | |||
| Amortization | (2,028) | ||||
| Balance—October 1, 2022 | $ | 11,021 | |||
Other—On January 15, 2015, the Company’s wholly-owned subsidiary in British Columbia, Canada entered into an agreement with HSBC Bank Canada, which was amended on November 30, 2020, for a (i) $6.0 million Canadian dollar (“CAD”) revolving credit commitment to be used for operating activities that bears interest per annum equal to the bank’s prime rate plus 0.20%, (ii) $0.5 million CAD revolving credit commitment to be used for capital equipment that bears interest per annum at the bank’s prime rate plus 0.20% and (iii) $1.5 million CAD revolving credit commitment to provide guarantees on behalf of that subsidiary and (iv) $10.0 million CAD revolving foreign exchange facility available to purchase foreign exchange forward contracts. There were no amounts outstanding under this agreement as of September 30, 2023 or December 31, 2022, which may be terminated upon demand.
7.INCOME TAXES
Summit Inc.’s tax provision includes its proportional share of Summit Holdings’ tax attributes. Summit Holdings’ subsidiaries are primarily limited liability companies but do include certain entities organized as C corporations and a Canadian subsidiary. The tax attributes related to the limited liability companies are passed on to Summit Holdings and then to its partners, including Summit Inc. The tax attributes associated with the C corporation and Canadian subsidiaries are fully reflected in the Company’s accounts.
Our income tax expense was $23.9 million and $39.9 million in the three and nine months ended September 30, 2023, respectively, and our income tax expense was $24.8 million and $74.0 million in the three and nine months ended October 1, 2022, respectively. The effective tax rate for Summit Inc. differs from the federal statutory tax rate primarily due to (1) the non-taxability of the tax receivable agreement benefit (2) tax depletion expense in excess of the expense recorded under U.S. GAAP, (3) basis differences in assets divested, (4) state taxes, (5) the minority interest in the Summit Holdings partnership that is allocated outside of the Company and (6) various other items such as limitations on meals and entertainment, certain stock compensation and other costs.
As of September 30, 2023 and December 31, 2022, Summit Inc. had a valuation allowance of $1.1 million in both periods, which relates to certain deferred tax assets in taxable entities where realization is not more likely than not.
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No material interest or penalties were recognized in income tax expense during the three and nine months ended September 30, 2023 and October 1, 2022.
Tax Receivable Agreement—The Company is party to a TRA with certain current and former holders of LP Units that provides for the payment by Summit Inc. to exchanging holders of LP Units of 85% of the benefits, if any, that Summit Inc. actually realizes (or, under certain circumstances such as an early termination of the TRA, is deemed to realize) as a result of increases in the tax basis of tangible and intangible assets of Summit Holdings and certain other tax benefits related to entering into the TRA, including tax benefits attributable to payments under the TRA.
In the third quarter of 2023, Summit LLC reached an agreement to acquire all of the rights and interests in the TRA from affiliates of Blackstone Inc. and certain other TRA holders for cash consideration of $122.9 million. In connection with these transactions, Summit LLC and Summit Inc. reached an agreement whereby the maximum amount Summit Inc. is obligated to pay Summit LLC for the TRA interests acquired is limited to the amount Summit LLC paid for the TRA interests. As the cash paid for TRA interests acquired was less than their carrying value, Summit Inc. recognized a tax receivable agreement benefit of $153.1 million in the accompanying consolidated statement of operations.
In the nine months ended September 30, 2023, 176,258 LP Units were acquired by Summit Inc. in exchange for an equal number of newly-issued shares of Summit Inc.’s Class A common stock. Subsequent to quarter end, an additional 345,554 LP units were exchanged for an equal amount of newly issued shares of Summit Inc.'s Class A common stock, and Summit LLC. Summit LLC then acquired the interest in the TRA interests from certain of those holders for aggregate cash consideration of $9.5 million, resulting in further reduction of the TRA liability of approximately $19.3 million.
Changes in the balance of the TRA liability, from December 31, 2022 to September 30, 2023 are summarized as follows:
| TRA Liability | |||||
| Balance — December 31, 2022 | $ | 328,356 | |||
| LP unit exchanges during period | 1,146 | ||||
| Purchase of TRA interests | (122,935) | ||||
| TRA liability reduction | (153,080) | ||||
| TRA liability payments | (544) | ||||
| Total | 52,943 | ||||
| Less current portion | 800 | ||||
| Balance — September 30, 2023 | $ | 52,143 | |||
Tax Distributions – The holders of Summit Holdings’ LP Units, including Summit Inc., incur U.S. federal, state and local income taxes on their share of any taxable income of Summit Holdings. The limited partnership agreement of Summit Holdings provides for pro rata cash distributions (“tax distributions”) to the holders of the LP Units in an amount generally calculated to provide each holder of LP Units with sufficient cash to cover its tax liability in respect of the LP Units. In general, these tax distributions are computed based on Summit Holdings’ estimated taxable income allocated to Summit Inc. multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate in New York, New York. In the nine months ended September 30, 2023, Summit Holdings paid tax distributions of approximately $4.5 million, of which $0.1 million was paid to holders of its LP Units not owned by Summit Inc. In the nine months ended October 1, 2022, Summit Holdings made a tax distribution of approximately $34.2 million, of which $0.4 million went to LP units not owned by Summit Inc.
8.EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the weighted average common shares outstanding and diluted net earnings is computed by dividing net earnings, adjusted for changes in the earnings allocated to Summit Inc. as a result of the assumed conversion of LP Units, by the weighted-average common shares outstanding assuming dilution.
The following table shows the calculation of basic and diluted earnings per share:
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| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Net income attributable to Summit Inc. | $ | 230,045 | $ | 86,489 | $ | 282,878 | $ | 242,310 | |||||||||||||||
| Weighted average shares of Class A stock outstanding | 118,928,799 | 119,753,806 | 118,780,523 | 120,196,211 | |||||||||||||||||||
| Add: Nonvested restricted stock awards of retirement eligible shares | 84,532 | 142,466 | 94,444 | 148,804 | |||||||||||||||||||
| Weighted average shares outstanding | 119,013,331 | 119,896,272 | 118,874,967 | 120,345,015 | |||||||||||||||||||
| Basic earnings per share | $ | 1.93 | $ | 0.72 | $ | 2.38 | $ | 2.01 | |||||||||||||||
| Diluted net income attributable to Summit Inc. | $ | 230,045 | $ | 86,489 | $ | 282,878 | $ | 242,310 | |||||||||||||||
| Weighted average shares outstanding | 119,013,331 | 119,896,272 | 118,874,967 | 120,345,015 | |||||||||||||||||||
| Add: stock options | 122,753 | 78,799 | 108,024 | 93,993 | |||||||||||||||||||
| Add: warrants | 15,578 | 10,790 | 13,943 | 12,202 | |||||||||||||||||||
| Add: restricted stock units | 356,286 | 279,684 | 376,221 | 485,174 | |||||||||||||||||||
| Add: performance stock units | 217,745 | 117,767 | 185,819 | 141,766 | |||||||||||||||||||
| Weighted average dilutive shares outstanding | 119,725,693 | 120,383,312 | 119,558,974 | 121,078,150 | |||||||||||||||||||
| Diluted earnings per share | $ | 1.92 | $ | 0.72 | $ | 2.37 | $ | 2.00 | |||||||||||||||
Excluded from the above calculations were the shares noted below as they were antidilutive:
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Antidilutive shares: | |||||||||||||||||||||||
| LP Units | 1,303,990 | 1,312,795 | 1,308,417 | 1,313,601 | |||||||||||||||||||
9.STOCKHOLDERS’ EQUITY
During 2023, certain limited partners of Summit Holdings exchanged their LP Units for shares of Class A common stock of Summit Inc. Subsequent to September 30, 2023, an additional 345,554 LP units were exchanged for shares of Class A common stock.
In March 2022, our Board of Directors authorized a share repurchase program, whereby we can repurchase up to $250 million of our Class A common stock. As of September 30, 2023, there was $149.0 million available for purchase, upon which they will be retired.
The following table summarizes the changes in our ownership of Summit Holdings:
| Summit Inc. Shares (Class A) | LP Units | Total | Summit Inc. Ownership Percentage | ||||||||||||||||||||
| Balance — December 31, 2022 | 118,408,655 | 1,312,004 | 119,720,659 | 98.9 | % | ||||||||||||||||||
| Exchanges during period | 176,258 | (176,258) | — | ||||||||||||||||||||
| Stock option exercises | 5,407 | — | 5,407 | ||||||||||||||||||||
| Other equity transactions | 522,630 | — | 522,630 | ||||||||||||||||||||
| Balance — September 30, 2023 | 119,112,950 | 1,135,746 | 120,248,696 | 99.1 | % | ||||||||||||||||||
| Balance — January 1, 2022 | 120,684,322 | 1,314,006 | 121,998,328 | 98.9 | % | ||||||||||||||||||
| Exchanges during period | 2,000 | (2,000) | — | ||||||||||||||||||||
| Stock option exercises | 10,098 | — | 10,098 | ||||||||||||||||||||
| Repurchases of common stock | (3,427,510) | — | (3,427,510) | ||||||||||||||||||||
| Other equity transactions | 1,097,273 | — | 1,097,273 | ||||||||||||||||||||
| Balance — October 1, 2022 | 118,366,183 | 1,312,006 | 119,678,189 | 98.9 | % | ||||||||||||||||||
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Summit Inc. is Summit Holdings’ primary beneficiary and thus consolidates Summit Holdings in its consolidated financial statements with a corresponding noncontrolling interest reclassification, which was 0.9% and 1.1% as of September 30, 2023 and December 31, 2022, respectively.
Accumulated other comprehensive income (loss) —The changes in each component of accumulated other comprehensive income (loss) consisted of the following:
| Change in retirement plans | Foreign currency translation adjustments | Accumulated other comprehensive income (loss) | |||||||||||||||
| Balance — December 31, 2022 | $ | 6,356 | $ | (3,272) | $ | 3,084 | |||||||||||
| Foreign currency translation adjustment, net of tax | — | 212 | 212 | ||||||||||||||
| Balance — September 30, 2023 | $ | 6,356 | $ | (3,060) | $ | 3,296 | |||||||||||
| Balance — January 1, 2022 | $ | 1,508 | $ | 5,575 | $ | 7,083 | |||||||||||
| Foreign currency translation adjustment, net of tax | — | (10,553) | (10,553) | ||||||||||||||
| Balance — October 1, 2022 | $ | 1,508 | $ | (4,978) | $ | (3,470) | |||||||||||
10.SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
| Nine months ended | |||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||
| Cash payments: | |||||||||||
| Interest | $ | 88,400 | $ | 70,184 | |||||||
| Payments for income taxes, net | 13,602 | 15,888 | |||||||||
| Operating cash payments on operating leases | 7,578 | 7,112 | |||||||||
| Operating cash payments on finance leases | 400 | 890 | |||||||||
| Finance cash payments on finance leases | 6,137 | 13,465 | |||||||||
| Non cash investing and financing activities: | |||||||||||
| Accrued liabilities for purchases of property, plant and equipment | $ | 22,244 | $ | 16,778 | |||||||
| Right of use assets obtained in exchange for operating lease obligations | 6,371 | 13,302 | |||||||||
| Right of use assets obtained in exchange for finance leases obligations | 413 | 258 | |||||||||
| Exchange of LP Units to shares of Class A common stock | 5,527 | 62 | |||||||||
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11.LEASES
We lease construction and office equipment, distribution facilities and office space. Leases with an initial term of 12 months or less, including month to month leases, are not recorded on the balance sheet. Lease expense for short-term leases is recognized on a straight line basis over the lease term. For lease agreements we have entered into or reassessed, we combine lease and nonlease components. While we also own mineral leases for mining operations, those leases are outside the scope of Accounting Standards Update No. 2016-2, Leases (Topic 842). Assets acquired under finance leases are included in property, plant and equipment.
Many of our leases include options to purchase the leased equipment. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The components of lease expense were as follows:
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| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Operating lease cost | $ | 2,903 | $ | 2,398 | $ | 8,241 | $ | 7,181 | |||||||||||||||
| Variable lease cost | 39 | 70 | 103 | 225 | |||||||||||||||||||
| Short-term lease cost | 13,238 | 11,916 | 30,692 | 31,097 | |||||||||||||||||||
| Financing lease cost: | |||||||||||||||||||||||
| Amortization of right-of-use assets | 483 | 1,235 | 2,015 | 4,598 | |||||||||||||||||||
| Interest on lease liabilities | 118 | 239 | 399 | 879 | |||||||||||||||||||
| Total lease cost | $ | 16,781 | $ | 15,858 | $ | 41,450 | $ | 43,980 | |||||||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Supplemental balance sheet information related to leases: | |||||||||||||||||||||||
| Operating leases: | |||||||||||||||||||||||
| Operating lease right-of-use assets | $ | 38,380 | $ | 37,889 | |||||||||||||||||||
| Current operating lease liabilities | $ | 8,745 | $ | 7,296 | |||||||||||||||||||
| Noncurrent operating lease liabilities | 34,838 | 35,737 | |||||||||||||||||||||
| Total operating lease liabilities | $ | 43,583 | $ | 43,033 | |||||||||||||||||||
| Finance leases: | |||||||||||||||||||||||
| Property and equipment, gross | $ | 20,030 | $ | 32,119 | |||||||||||||||||||
| Less accumulated depreciation | (9,893) | (14,992) | |||||||||||||||||||||
| $ | 10,137 | $ | 17,127 | ||||||||||||||||||||
| $ | 3,399 | $ | 6,959 | ||||||||||||||||||||
| 5,180 | 7,167 | ||||||||||||||||||||||
| Total finance lease liabilities | $ | 8,579 | $ | 14,126 | |||||||||||||||||||
| Weighted average remaining lease term (years): | |||||||||||||||||||||||
| Operating leases | 8.4 | 9.1 | |||||||||||||||||||||
| Finance lease | 3.4 | 2.8 | |||||||||||||||||||||
| Weighted average discount rate: | |||||||||||||||||||||||
| Operating leases | 5.1 | % | 4.7 | % | |||||||||||||||||||
| Finance leases | 5.9 | % | 5.3 | % | |||||||||||||||||||
Maturities of lease liabilities, as of September 30, 2023, were as follows: | |||||||||||||||||||||||
| Operating Leases | Finance Leases | ||||||||||||||||||||||
| 2023 (three months) | $ | 2,739 | $ | 1,283 | |||||||||||||||||||
| 2024 | 10,294 | 3,052 | |||||||||||||||||||||
| 2025 | 8,165 | 2,435 | |||||||||||||||||||||
| 2026 | 6,414 | 990 | |||||||||||||||||||||
| 2027 | 4,760 | 760 | |||||||||||||||||||||
| 2028 | 3,450 | 513 | |||||||||||||||||||||
| Thereafter | 17,600 | 570 | |||||||||||||||||||||
| Total lease payments | 53,422 | 9,603 | |||||||||||||||||||||
| Less imputed interest | (9,839) | (1,024) | |||||||||||||||||||||
| Present value of lease payments | $ | 43,583 | $ | 8,579 | |||||||||||||||||||
12.COMMITMENTS AND CONTINGENCIES
The Company is party to certain legal actions arising from the ordinary course of business activities. Accruals are recorded when the outcome is probable and can be reasonably estimated. While the ultimate results of claims and litigation cannot be predicted with certainty, management expects that the ultimate resolution of all current pending or threatened claims and
18
litigation will not have a material effect on the Company’s consolidated financial position, results of operations or liquidity. The Company records legal fees as incurred.
In March 2018, we were notified of an investigation by the Canadian Competition Bureau (the “CCB”) into pricing practices by certain asphalt paving contractors in British Columbia, including Winvan Paving, Ltd. (“Winvan”). We believe the investigation is focused on time periods prior to our April 2017 acquisition of Winvan and we are cooperating with the CCB. Although we currently do not believe this matter will have a material adverse effect on our business, financial condition or results of operations, we are currently not able to predict the ultimate outcome or cost of the investigation.
Environmental Remediation and Site Restoration —The Company’s operations are subject to and affected by federal, state, provincial and local laws and regulations relating to the environment, health and safety and other regulatory matters. These operations require environmental operating permits, which are subject to modification, renewal and revocation. The Company regularly monitors and reviews its operations, procedures and policies for compliance with these laws and regulations. Despite these compliance efforts, risk of environmental liability is inherent in the operation of the Company’s business, as it is with other companies engaged in similar businesses and there can be no assurance that environmental liabilities or noncompliance will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.
The Company has asset retirement obligations arising from regulatory and contractual requirements to perform reclamation activities at the time certain quarries and landfills are closed. As of September 30, 2023 and December 31, 2022, $36.3 million and $36.3 million, respectively, were included in other noncurrent liabilities on the consolidated balance sheets and $5.3 million and $4.0 million, respectively, were included in accrued expenses for future reclamation costs. The total undiscounted anticipated costs for site reclamation as of September 30, 2023 and December 31, 2022 were $123.1 million and $124.9 million, respectively.
Other—The Company is obligated under various firm purchase commitments for certain raw materials and services that are in the ordinary course of business. Management does not expect any significant changes in the market value of these goods and services during the commitment period that would have a material adverse effect on the financial condition, results of operations and cash flows of the Company. The terms of the purchase commitments generally approximate one year.
13.FAIR VALUE
Fair Value Measurements—Certain acquisitions made by the Company require the payment of contingent amounts of purchase consideration. These payments are contingent on specified operating results being achieved in periods subsequent to the acquisition and will only be made if earn-out thresholds are achieved. Contingent consideration obligations are measured at fair value each reporting period. Any adjustments to fair value are recognized in earnings in the period identified.
The fair value of contingent consideration as of September 30, 2023 and December 31, 2022 was:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Current portion of acquisition-related liabilities and Accrued expenses: | |||||||||||
| Contingent consideration | $ | 139 | $ | 336 | |||||||
| Acquisition-related liabilities and Other noncurrent liabilities: | |||||||||||
| Contingent consideration | $ | 9,296 | $ | 4,981 | |||||||
The fair value of contingent consideration was based on unobservable, or Level 3, inputs, including projected probability-weighted cash payments and a 10.0% discount rate, which reflects a market discount rate. Changes in fair value may occur as a result of a change in actual or projected cash payments, the probability weightings applied by the Company to projected payments or a change in the discount rate. Significant increases or decreases in any of these inputs in isolation could result in a lower, or higher, fair value measurement. There were no material valuation adjustments to contingent consideration as of September 30, 2023 and October 1, 2022.
Financial Instruments—The Company’s financial instruments include debt and certain acquisition-related liabilities (deferred consideration and noncompete obligations). The carrying value and fair value of these financial instruments as of September 30, 2023 and December 31, 2022 was:
19
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||||||||||
| Level 1 | |||||||||||||||||||||||
| Long-term debt(1) | $ | 1,434,238 | $ | 1,501,492 | $ | 1,447,673 | $ | 1,504,549 | |||||||||||||||
| Level 3 | |||||||||||||||||||||||
| Current portion of deferred consideration and noncompete obligations(2) | 6,889 | 6,889 | 13,382 | 13,382 | |||||||||||||||||||
| Long term portion of deferred consideration and noncompete obligations(3) | 18,337 | 18,337 | 24,070 | 24,070 | |||||||||||||||||||
(1)$3.8 million and $5.1 million was included in current portion of debt as of September 30, 2023 and December 31, 2022, respectively.
(2)Included in current portion of acquisition-related liabilities on the consolidated balance sheets.
(3)Included in acquisition-related liabilities on the consolidated balance sheets.
The fair value of debt was determined based on observable, or Level 1, inputs, such as interest rates, bond yields and quoted prices in inactive markets. The fair values of the deferred consideration and noncompete obligations were determined based on unobservable, or Level 3, inputs, including the cash payment terms in the purchase agreements and a discount rate reflecting the Company’s credit risk. The discount rate used is generally consistent with that used when the obligations were initially recorded.
Securities with a maturity of three months or less are considered cash equivalents and the fair value of these assets approximates their carrying value.
14.SEGMENT INFORMATION
The Company has three operating segments: West, East and Cement, which are its reporting segments. These segments are consistent with the Company’s management reporting structure.
The operating results of each segment are regularly reviewed and evaluated by the Chief Executive Officer, our Company’s Chief Operating Decision Maker (“CODM”). The CODM primarily evaluates the performance of the Company’s segments and allocates resources to them based on a segment profit metric that we call Adjusted EBITDA, which is computed as earnings from operations before interest, taxes, depreciation, depletion, amortization, accretion and share-based compensation, as well as various other non-recurring, non-cash amounts.
The West and East segments have several subsidiaries that are engaged in various activities including quarry mining, aggregate production and contracting. The Cement segment is engaged in the production of Portland cement. Assets employed by each segment include assets directly identified with those operations. Corporate assets consist primarily of cash, property, plant and equipment for corporate operations and other assets not directly identifiable with a reportable business segment. The accounting policies applicable to each segment are consistent with those used in the consolidated financial statements.
The following tables display selected financial data for the Company’s reportable business segments as of September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and October 1, 2022:
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Revenue*: | |||||||||||||||||||||||
| West | $ | 496,638 | $ | 439,411 | $ | 1,178,258 | $ | 1,075,393 | |||||||||||||||
| East | 176,840 | 193,421 | 493,766 | 525,064 | |||||||||||||||||||
| Cement | 121,319 | 119,915 | 287,311 | 259,791 | |||||||||||||||||||
| Total revenue | $ | 794,797 | $ | 752,747 | $ | 1,959,335 | $ | 1,860,248 | |||||||||||||||
*Intercompany sales are immaterial and the presentation above only reflects sales to external customers.
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| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Income from operations before taxes | $ | 256,633 | $ | 112,480 | $ | 326,164 | $ | 319,650 | |||||||||||||||
| Interest expense | 28,013 | 21,980 | 83,335 | 62,728 | |||||||||||||||||||
| Depreciation, depletion and amortization | 56,691 | 51,439 | 160,921 | 148,373 | |||||||||||||||||||
| Accretion | 761 | 694 | 2,212 | 2,110 | |||||||||||||||||||
| Loss on debt financings | — | — | 493 | — | |||||||||||||||||||
| Tax receivable agreement (benefit) expense | (153,080) | — | (153,080) | 954 | |||||||||||||||||||
| Gain on sale of businesses | — | (4,115) | — | (174,373) | |||||||||||||||||||
| Non-cash compensation | 5,192 | 4,902 | 15,116 | 15,058 | |||||||||||||||||||
| Argos USA acquisition and integration costs | 17,859 | — | 17,859 | — | |||||||||||||||||||
| Other | (3,550) | (2,492) | (11,555) | (2,315) | |||||||||||||||||||
| Total Adjusted EBITDA | $ | 208,519 | $ | 184,888 | $ | 441,465 | $ | 372,185 | |||||||||||||||
| Total Adjusted EBITDA by Segment: | |||||||||||||||||||||||
| West | $ | 117,846 | $ | 98,281 | $ | 255,041 | $ | 215,617 | |||||||||||||||
| East | 50,089 | 44,119 | 116,558 | 98,949 | |||||||||||||||||||
| Cement | 50,355 | 46,597 | 103,237 | 84,019 | |||||||||||||||||||
| Corporate and other | (9,771) | (4,109) | (33,371) | (26,400) | |||||||||||||||||||
| Total Adjusted EBITDA | $ | 208,519 | $ | 184,888 | $ | 441,465 | $ | 372,185 | |||||||||||||||
| Nine months ended | |||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||
| Purchases of property, plant and equipment | |||||||||||
| West | $ | 98,025 | $ | 85,462 | |||||||
| East | 45,754 | 65,116 | |||||||||
| Cement | 28,914 | 30,503 | |||||||||
| Total reportable segments | 172,693 | 181,081 | |||||||||
| Corporate and other | 9,489 | 7,927 | |||||||||
| Total purchases of property, plant and equipment | $ | 182,182 | $ | 189,008 | |||||||
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Depreciation, depletion, amortization and accretion: | |||||||||||||||||||||||
| West | $ | 28,701 | $ | 24,908 | $ | 83,218 | $ | 71,495 | |||||||||||||||
| East | 15,586 | 15,445 | 46,839 | 48,655 | |||||||||||||||||||
| Cement | 12,143 | 10,959 | 30,032 | 27,993 | |||||||||||||||||||
| Total reportable segments | 56,430 | 51,312 | 160,089 | 148,143 | |||||||||||||||||||
| Corporate and other | 1,022 | 821 | 3,044 | 2,340 | |||||||||||||||||||
| Total depreciation, depletion, amortization and accretion | $ | 57,452 | $ | 52,133 | $ | 163,133 | $ | 150,483 | |||||||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Total assets: | |||||||||||
| West | $ | 1,932,418 | $ | 1,565,776 | |||||||
| East | 1,191,237 | 1,151,223 | |||||||||
| Cement | 914,416 | 873,604 | |||||||||
| Total reportable segments | 4,038,071 | 3,590,603 | |||||||||
| Corporate and other | 326,893 | 665,089 | |||||||||
| Total | $ | 4,364,964 | $ | 4,255,692 | |||||||
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SUMMIT MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements and notes thereto for Summit Materials, LLC and subsidiaries are included as Exhibit 99.1 to this Quarterly Report on Form 10-Q and are incorporated by reference herein.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. Forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in the section entitled “Risk Factors” in the Annual Report, and factors discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated interim financial statements and the related notes and other information included in this report.
Overview
Summit’s vision is to be the most socially responsible, integrated construction materials solution provider, collaborating with stakeholders to deliver differentiated innovations and solve our customers’ challenges. Within our markets, we strive to be a market leader by offering customers a single-source provider for construction materials and related downstream products through our vertical integration. Our materials include aggregates, which we supply across the United States, and in British Columbia, Canada, and cement, which we supply to surrounding states along the Mississippi River from Minnesota to Louisiana. In addition to supplying aggregates to customers, we use a portion of our materials internally to produce ready-mix concrete and asphalt paving mix, which may be sold externally or used in our paving and related services businesses. Our vertical integration creates opportunities to increase aggregates volumes, optimize margin at each stage of production and provide customers with efficiency gains, convenience and reliability, which we believe gives us a competitive advantage.
We are organized into 10 operating companies that make up our three distinct operating segments: West, East and Cement, which are also our reporting segments. We operate in 21 U.S. states and in British Columbia, Canada and currently have assets in 22 U.S. states and in British Columbia, Canada. The map below illustrates our geographic footprint.
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Business Trends and Conditions
The U.S. construction materials industry is composed of four primary sectors: aggregates; cement; ready-mix concrete; and asphalt paving mix. Each of these materials is widely used in most forms of construction activity. Participants in these sectors typically range from small, privately-held companies focused on a single material, product or market to publicly traded multinational corporations that offer a wide array of construction materials and services. Competition is constrained in part by the distance materials can be transported efficiently, resulting in predominantly local or regional operations. Due to the lack of significant product differentiation, competition for all of our products is predominantly based on price, product availability and service. Accordingly, our profitability is generally dependent on the level of demand for our materials and products and our ability to control operating costs. We continue to monitor supply chain issues, as well as inflationary pressures on our raw material inputs as well as labor costs.
Our revenue is derived from multiple end-use markets including public infrastructure construction and private residential and nonresidential construction. Public infrastructure includes spending by federal, state, provincial and local governments for roads, highways, bridges, airports and other infrastructure projects. Public infrastructure projects have historically been a relatively stable portion of state and federal budgets. Residential and nonresidential construction consists of new construction and repair and remodel markets. Any economic stagnation or decline, which could vary by local region and market, could affect our results of operations. Our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical changes in construction spending, especially in the private sector. From a macroeconomic view, we continue to see positive indicators for highway obligations as funds from the Infrastructure Investment and Jobs Act (“IIJA”) are beginning to be spent in our markets. We are seeing the impact of rising interest rates and inflation on residential
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markets in our geographies. Rising interest rates and inflation may also impact our non-residential construction activity in the future as non-residential activity tends to lag behind residential activity by a year or so.
Transportation infrastructure projects, driven by both federal and state funding programs, represent a significant share of the U.S. construction materials market. Federal funds are allocated to the states, which are required to match a portion of the federal funds they receive. Federal highway spending uses funds predominantly from the Federal Highway Trust Fund, which derives its revenue from taxes on diesel fuel, gasoline and other user fees. The dependability of federal funding allows state departments of transportation to plan for their long-term highway construction and maintenance needs. The IIJA provides $1.2 trillion in funding over five years from 2022 through 2026, which includes $347.8 billion for highways, and $91.0 billion for transit.
In 2022, approximately 65% of our revenue was derived from the private construction market, and the remaining revenue from the public markets. We believe residential activity in our key markets will continue to be a driver for volumes in future periods. Funding for public infrastructure projects is expected to remain a high priority.
In addition to federal funding, state, county and local agencies provide highway construction and maintenance funding. Our four largest states by revenue, Texas, Utah, Kansas and Missouri, represented approximately 24%, 17%, 10% and 10%, respectively, of our total revenue in 2022. The following is a summary of key funding initiatives in those states:
•The Texas Department of Transportation (“TXDOT”) fiscal year 2024-2025 biennial state budget bill was signed by the Governor on June 18, 2023. The TXDOT budget for fiscal year 2024 totals $18.54 billion, a 24% increase over fiscal year 2023 of $14.96 billion. Since the biennial budget for fiscal year 2023 was determined in 2021, prior to passage of the IIJA, the new bill is the first biennial state budget to incorporate increased federal funding under the IIJA.
•The state of Utah anticipates transportation funding of approximately $2.9 billion in fiscal year 2024.
•The Governor's Budget for the Kansas Department of Transportation totals $2.32 billion for fiscal year 2024.
•The state budget for the Missouri Department of Transportation grew by 17% between fiscal year 2023 and fiscal year 2024, from $3.51 billion to $4.11 billion.
Use and consumption of our products fluctuate due to seasonality. Nearly all of the products used by us, and by our customers, in the private construction and public infrastructure industries are used outdoors. Our highway operations and production and distribution facilities are also located outdoors. Therefore, seasonal changes and other weather-related conditions, in particular extended rainy and cold weather in the spring and fall, as well as major weather events such as hurricanes, tornadoes, tropical storms, heavy snows and flooding, can adversely affect our business and operations through a decline in both the use of our products and demand for our services. In addition, construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall. Warmer and drier weather during the second and third quarters of our fiscal year typically result in higher activity and revenue levels during those quarters. The first quarter of our fiscal year typically has lower levels of activity due to weather conditions, and the third quarter of our fiscal year typically has the highest levels of activity.
We are subject to commodity price risk with respect to price changes in liquid asphalt and energy, including fossil fuels and electricity for aggregates, cement, ready-mix concrete and asphalt paving mix production, natural gas for hot mix asphalt production and diesel fuel for distribution vehicles and production related mobile equipment. Liquid asphalt escalator provisions in most of our private and commercial contracts limit our exposure to price fluctuations in this commodity. We often obtain similar escalators on public infrastructure contracts. In addition, we enter into various firm purchase commitments, with terms generally less than one year, for certain raw materials, including diesel fuel.
Combination with Argos North America Corp.
In September 2023, the Company entered into a definitive agreement with Cementos Argos S.A. (“Cementos Argos”) under which it will combine with Argos North America Corp. (“Argos USA”) to acquire the U.S. operations of Cementos Argos in a cash and stock transaction valued at $3.2 billion. Argos USA is among the largest cement producers with four integrated cement plants and approximately 140 ready-mix plants in the Southeast, Mid-Atlantic and Texas geographies. Under the terms of the agreement, Cementos Argos will receive approximately $1.2 billion in cash subject to closing adjustments and approximately 54.7 million shares of the Company's Class A common stock. In connection with the agreement, the Company has obtained committed financing in the form of a $1.3 billion 364-day term loan bridge facility to finance the cash
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consideration to be paid to Cementos Argos. The Company expects to enter into permanent financing agreements prior to the transaction closing, which would reduce any amounts that may ultimately be borrowed under the term loan bridge facility. The transaction closing is expected to occur prior to the end of the first quarter of 2024, subject to customary closing conditions, including regulatory approvals and approval by the Company's stockholders.
Backlog
Our products are generally delivered upon receipt of orders or requests from customers, or shortly thereafter. Accordingly, the backlog associated with product sales is converted into revenue within a relatively short period of time. Inventory for products is generally maintained in sufficient quantities to meet rapid delivery requirements of customers. Therefore, a period-over-period increase or decrease of backlog does not necessarily result in an improvement or a deterioration of our business. Our backlog includes only those products and projects for which we have obtained a purchase order or a signed contract with the customer and does not include products purchased and sold or services awarded and provided within the period.
Financial Highlights
The principal factors in evaluating our financial condition and operating results as of and for the three and nine months ended September 30, 2023 as compared to the three and nine months ended October 1, 2022, and certain other highlights include:
•Net revenue increased $56.0 million and $119.2 million in the three and nine months ended September 30, 2023, respectively, primarily resulting from increases in average sales prices and our acquisition program, which more than offset reduced volumes due to divestitures completed in 2022.
•Our operating income increased $0.9 million and $38.1 million in the three and nine months ended September 30, 2023, respectively. We incurred $17.9 million of transaction and integration costs related to our agreement to combine with Argos USA, which reduced our operating income.
•In the three and nine months ended September 30, 2023, average sales price increased 14.4% and 16.1% in aggregates, 13.9% and 14.6% in cement, 8.2% and 12.5% in ready-mix concrete and 16.3% and 17.6% in asphalt, respectively.
•In the three and nine months ended September 30, 2023, sales volume decreased 3.8% and 4.0% in aggregates, 11.3% and 5.3% in cement, increased 4.3% and decreased 7.4% in ready-mix concrete and decreased 5.1% and 7.8% in asphalt, respectively.
•In the first nine months of 2023, we closed on three acquisitions in the West segment, including one in the Phoenix, Arizona market, and one in the East segment, for a total of $239.5 million using existing cash balances.
•In the third quarter of 2023, we paid $122.9 million to reacquire certain TRA interests, and recorded a tax receivable agreement benefit of $153.1 million as the cash paid to acquire the interests was less than the carrying value of the TRA liability.
Results of Operations
The following discussion of our results of operations is focused on the key financial measures we use to evaluate the performance of our business from both a consolidated and operating segment perspective. Operating income and margins are discussed in terms of changes in volume, pricing and mix of revenue source (i.e., type of product, sales or service revenue). We focus on operating margin, which we define as operating income as a percentage of net revenue, as a key metric when assessing the performance of the business, as we believe that analyzing changes in costs in relation to changes in revenue provides more meaningful insight into the results of operations than examining costs in isolation.
Operating income (loss) reflects our profit from operations after taking into consideration cost of revenue, general and administrative expenses, depreciation, depletion, amortization and accretion and gain on sale of property, plant and equipment. Cost of revenue generally increases ratably with revenue, as labor, transportation costs and subcontractor costs are recorded in cost of revenue. As organic volumes increase, we expect our general and administrative costs as a percentage of revenue to decrease. General and administrative expenses as a percentage of revenue vary throughout the year due to the seasonality of our business.
Consolidated Results of Operations
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The table below sets forth our consolidated results of operations for the three and nine months ended September 30, 2023 and October 1, 2022.
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Net revenue | $ | 741,960 | $ | 686,009 | $ | 1,829,603 | $ | 1,710,422 | |||||||||||||||
| Delivery and subcontract revenue | 52,837 | 66,738 | 129,732 | 149,826 | |||||||||||||||||||
| Total revenue | 794,797 | 752,747 | 1,959,335 | 1,860,248 | |||||||||||||||||||
| Cost of revenue (excluding items shown separately below) | 543,159 | 534,936 | 1,389,599 | 1,372,521 | |||||||||||||||||||
| General and administrative expenses | 50,895 | 39,232 | 150,731 | 136,897 | |||||||||||||||||||
| Depreciation, depletion, amortization and accretion | 57,452 | 52,133 | 163,133 | 150,483 | |||||||||||||||||||
| Transaction costs | 17,442 | 727 | 19,518 | 2,637 | |||||||||||||||||||
| Gain on sale of property, plant and equipment | (2,134) | (1,343) | (5,787) | (6,293) | |||||||||||||||||||
| Operating income | 127,983 | 127,062 | 242,141 | 204,003 | |||||||||||||||||||
| Interest expense | 28,013 | 21,980 | 83,335 | 62,728 | |||||||||||||||||||
| Loss on debt financings | — | — | 493 | — | |||||||||||||||||||
| Tax receivable agreement (benefit) expense | (153,080) | — | (153,080) | 954 | |||||||||||||||||||
| Gain on sale of businesses | — | (4,115) | — | (174,373) | |||||||||||||||||||
| Other income, net | (3,583) | (3,283) | (14,771) | (4,956) | |||||||||||||||||||
| Income from operations before taxes | 256,633 | 112,480 | 326,164 | 319,650 | |||||||||||||||||||
| Income tax expense | 23,908 | 24,829 | 39,923 | 74,033 | |||||||||||||||||||
| Net income | $ | 232,725 | $ | 87,651 | $ | 286,241 | $ | 245,617 | |||||||||||||||
Three and nine months ended September 30, 2023 compared to the three and nine months ended October 1, 2022
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | September 30, 2023 | October 1, 2022 | Variance | September 30, 2023 | October 1, 2022 | Variance | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 741,960 | $ | 686,009 | $ | 55,951 | 8.2 | % | $ | 1,829,603 | $ | 1,710,422 | $ | 119,181 | 7.0 | % | |||||||||||||||||||||||||||||||
| Operating income | 127,983 | 127,062 | 921 | 0.7 | % | 242,141 | 204,003 | 38,138 | 18.7 | % | |||||||||||||||||||||||||||||||||||||
| Operating margin percentage | 17.2 | % | 18.5 | % | 13.2 | % | 11.9 | % | |||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA (1) | $ | 208,519 | $ | 184,888 | $ | 23,631 | 12.8 | % | $ | 441,465 | $ | 372,185 | $ | 69,280 | 18.6 | % | |||||||||||||||||||||||||||||||
| Adjusted EBITDA Margin (1) | 28.1 | % | 27.0 | % | 24.1 | % | 21.8 | % | |||||||||||||||||||||||||||||||||||||||
(1)Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures that we find helpful in monitoring the performance of our business. See "Non-GAAP Performance Measures" below for a reconciliation of Adjusted EBITDA to net income (loss), which is the most directly comparable GAAP measure.
Net revenue increased $56.0 million in the three months ended September 30, 2023, due to organic revenue increases in the West, East and Cement segments, as well as growth from acquisitions. In the three months ended September 30, 2023, we recognized $48.1 million of revenue from our recent acquisitions which more than offset a decrease of $18.5 million in net revenue related to divestitures that occurred in 2022. Of the increase in net revenue, $18.9 million was from increased revenue of materials, $35.7 million from increased revenue from products and $1.3 million from increased service revenue. We experienced organic volume decline of 7.5%, 11.3% and 12.2% in our aggregates, cement and ready-mix concrete lines of business, respectively, while our organic asphalt volumes increased 2.5%. Our organic volume declines in aggregates and ready-mix concrete occurred primarily in the West segment, due to volume decreases in residential markets as well as weather related impacts. We achieved organic price growth across all lines of business during the third quarter of 2023. Additional detail about the impact of acquisitions and divestitures on each segment is presented below where material.
Net revenue increased $119.2 million in the nine months ended September 30, 2023, primarily resulting from organic price increases across all lines of business. In the nine months ended September 30, 2023, we recognized $79.1 million of revenue from our recent acquisitions which more than offset a decrease of $74.2 million in net revenue related to divestitures that occurred in 2022. Of the increase in net revenue, $83.5 million was from increased sales of materials, $40.4 million from increased sales of products, partially offset by $4.7 million from decreased service revenue. Our organic volumes declined
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4.4%, 5.3% and 13.9% in aggregates, cement and ready-mix concrete, respectively, while our organic asphalt volumes increased 5.5%. The organic volume decreases for aggregates and ready-mix were primarily attributable to unfavorable winter weather and reduced activity in residential markets in our West segment. We had organic price growth in our aggregate, cement, ready-mix and asphalt lines of business of 15.7%, 14.6%, 12.1% and 15.1%, respectively, during the first nine months of 2023.
Operating income increased by $0.9 million and $38.1 million in the three and nine months ended September 30, 2023, respectively. In the three and nine months ended September 30, 2023, we incurred $17.4 million and $19.5 million, respectively, of transaction costs, of which $17.9 million related to acquisition and integration costs associated with our agreement to combine with Argos USA.
Our operating margin percentage for the three and nine months ended September 30, 2023 decreased from 18.5% to 17.2% and increased from 11.9% to 13.2%, respectively, from the comparable period a year ago, due to the factors noted above. Adjusted EBITDA, as defined in "Non-GAAP Performance Measures" below, increased by $23.6 million and $69.3 million in the three and nine months ended September 30, 2023, respectively, due to the factors noted above.
As a vertically-integrated company, we include intercompany sales from materials to products and from products to services when assessing the operating results of our business. We refer to revenue inclusive of intercompany sales as gross revenue. These intercompany transactions are eliminated in the consolidated financial statements. Gross revenue by product was as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | September 30, 2023 | October 1, 2022 | Variance | September 30, 2023 | October 1, 2022 | Variance | |||||||||||||||||||||||||||||||||||||||||
| Revenue by product*: | |||||||||||||||||||||||||||||||||||||||||||||||
| Aggregates | $ | 223,593 | $ | 202,982 | $ | 20,611 | 10.2 | % | $ | 616,257 | $ | 552,943 | $ | 63,314 | 11.5 | % | |||||||||||||||||||||||||||||||
| Cement | 116,285 | 115,022 | 1,263 | 1.1 | % | 270,916 | 249,517 | 21,399 | 8.6 | % | |||||||||||||||||||||||||||||||||||||
| Ready-mix concrete | 213,546 | 189,151 | 24,395 | 12.9 | % | 552,516 | 530,178 | 22,338 | 4.2 | % | |||||||||||||||||||||||||||||||||||||
| Asphalt | 117,981 | 106,897 | 11,084 | 10.4 | % | 236,624 | 222,399 | 14,225 | 6.4 | % | |||||||||||||||||||||||||||||||||||||
| Paving and related services | 195,012 | 191,815 | 3,197 | 1.7 | % | 386,740 | 400,841 | (14,101) | (3.5) | % | |||||||||||||||||||||||||||||||||||||
| Other | (71,620) | (53,120) | (18,500) | (34.8) | % | (103,718) | (95,630) | (8,088) | (8.5) | % | |||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 794,797 | $ | 752,747 | $ | 42,050 | 5.6 | % | $ | 1,959,335 | $ | 1,860,248 | $ | 99,087 | 5.3 | % | |||||||||||||||||||||||||||||||
*Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of intracompany transactions is included in Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
Detail of our volumes and average selling prices by product in the three and nine months ended September 30, 2023 and October 1, 2022 were as follows:
| Three months ended | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||||||||||||||
| Volume(1) | Volume(1) | Percentage Change in | |||||||||||||||||||||||||||||||||
| (in thousands) | Pricing(2) | (in thousands) | Pricing(2) | Volume | Pricing | ||||||||||||||||||||||||||||||
| Aggregates | 15,654 | $ | 14.28 | 16,267 | $ | 12.48 | (3.8) | % | 14.4 | % | |||||||||||||||||||||||||
| Cement | 746 | 155.79 | 841 | 136.83 | (11.3) | % | 13.9 | % | |||||||||||||||||||||||||||
| Ready-mix concrete | 1,383 | 154.39 | 1,326 | 142.66 | 4.3 | % | 8.2 | % | |||||||||||||||||||||||||||
| Asphalt | 1,385 | 85.20 | 1,459 | 73.26 | (5.1) | % | 16.3 | % | |||||||||||||||||||||||||||
| Nine months ended | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||||||||||||||
| Volume(1) | Volume(1) | Percentage Change in | |||||||||||||||||||||||||||||||||
| (in thousands) | Pricing(2) | (in thousands) | Pricing(2) | Volume | Pricing | ||||||||||||||||||||||||||||||
| Aggregates | 44,622 | $ | 13.81 | 46,489 | $ | 11.89 | (4.0) | % | 16.1 | % | |||||||||||||||||||||||||
| Cement | 1,787 | 151.58 | 1,887 | 132.22 | (5.3) | % | 14.6 | % | |||||||||||||||||||||||||||
| Ready-mix concrete | 3,667 | 150.66 | 3,960 | 133.87 | (7.4) | % | 12.5 | % | |||||||||||||||||||||||||||
| Asphalt | 2,805 | 84.36 | 3,041 | 71.74 | (7.8) | % | 17.6 | % | |||||||||||||||||||||||||||
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(1)Volumes are shown in tons for aggregates, cement and asphalt and in cubic yards for ready-mix concrete.
(2)Pricing is shown on a per ton basis for aggregates, cement and asphalt and on a per cubic yard basis for ready-mix concrete.
Revenue from aggregates increased $20.6 million and $63.3 million in the three and nine months ended September 30, 2023, respectively. In the three months ended September 30, 2023 we had strong organic price increases which were partially offset by a decrease in organic aggregate volumes. Organic aggregate volumes decreased 4.4% in the first nine months of 2023 as compared to the same period a year ago, primarily due to residential demand conditions, as well as unfavorable weather in certain geographies as noted below. Aggregate average sales price of $13.81 per ton increased 16.1% in the first nine months of 2023 as compared to the first nine months of 2022, due to pricing actions designed to more than offset current inflationary conditions. We continue to focus on pricing to what local market conditions will allow.
Revenue from cement increased $1.3 million and $21.4 million in the three and nine months ended September 30, 2023, respectively. In the three and nine months ended September 30, 2023, organic cement average sales prices increased 13.9% and 14.6%, respectively.
Revenue from ready-mix concrete increased $24.4 million and increased $22.3 million in the three and nine months ended September 30, 2023, respectively. In the three and nine months ended September 30, 2023, our ready-mix volumes increased 4.3% and decreased 7.4%, respectively, and our average sales prices increased 8.2% and 12.5%, respectively. The volume decrease in the nine months ended September 30, 2023 occurred primarily in our South Texas market due to moderating demand in our residential markets, while our price increases occurred across all of our major markets.
Revenue from asphalt increased $11.1 million and $14.2 million in the three and nine months ended September 30, 2023, respectively. In the first nine months of 2023, organic volumes increased by 5.5% due to increases in our North Texas and Intermountain West markets. In the first nine months of 2023, organic pricing increased 15.1%, with strong pricing gains across all our major markets.
Other Financial Information
Transaction Costs
Our transaction costs were $17.4 million and $19.5 million in the three and nine months ended September 30, 2023, respectively, and $0.7 million and $2.6 million in the three and nine months ended October 1, 2022, respectively. In the nine months ended September 30, 2023, $17.9 million of the transaction costs were related to our acquisition and integration costs associated with the agreement to combine with Argos USA, which was announced in September 2023.
Tax receivable agreement (benefit) expense
In the third quarter 2023, we acquired certain interests in our TRA agreement for $122.9 million, and recognized a benefit of $153.1 million reflecting the difference between the carrying value of the related TRA liability and the cash payment made to acquire the interests.
Interest Expense
Our interest expense was $28.0 million and $83.3 million in the three and nine months ended September 30, 2023, respectively, and $22.0 million and $62.7 million in the three and nine months ended October 1, 2022, respectively. Although our total debt balance has decreased period over period, rising interest rates led to higher interest expense in 2023, which is expected to continue during the rest of 2023.
Income Tax Expense
Our income tax expense was $23.9 million and $39.9 million in the three and nine months ended September 30, 2023, respectively, and our income tax expense was $24.8 million and $74.0 million in the three and nine months ended October 1, 2022, respectively. The effective tax rate for Summit Inc. differs from the federal statutory tax rate primarily due to (1) the non-taxability of the tax receivable agreement benefit (2) tax depletion expense in excess of the expense recorded under U.S. GAAP, (3) basis differences in assets divested, (4) state taxes, (5) the minority interest in the Summit Holdings partnership that is allocated outside of the Company and (6) various other items such as limitations on meals and entertainment, certain stock compensation and other costs.
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The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, as well as consideration of tax-planning strategies we may seek to utilize net operating loss carryforwards that begin to expire in 2030.
As of September 30, 2023 and December 31, 2022, Summit Inc. had a valuation allowance of $1.1 million and $1.1 million, respectively, which relates to certain deferred tax assets in taxable entities where realization is not more likely than not.
Segment results of operations
West Segment
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | September 30, 2023 | October 1, 2022 | Variance | September 30, 2023 | October 1, 2022 | Variance | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 461,094 | $ | 394,648 | $ | 66,446 | 16.8 | % | $ | 1,095,502 | $ | 983,160 | $ | 112,342 | 11.4 | % | |||||||||||||||||||||||||||||||
| Operating income | 89,608 | 73,087 | 16,521 | 22.6 | % | 170,001 | 143,659 | 26,342 | 18.3 | % | |||||||||||||||||||||||||||||||||||||
| Operating margin percentage | 19.4 | % | 18.5 | % | 15.5 | % | 14.6 | % | |||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA (1) | $ | 117,846 | $ | 98,281 | $ | 19,565 | 19.9 | % | $ | 255,041 | $ | 215,617 | $ | 39,424 | 18.3 | % | |||||||||||||||||||||||||||||||
| Adjusted EBITDA Margin (1) | 25.6 | % | 24.9 | % | 23.3 | % | 21.9 | % | |||||||||||||||||||||||||||||||||||||||
(1)Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures that we find helpful in monitoring the performance of our business. See "Non-GAAP Performance Measures" below for a reconciliation of Adjusted EBITDA to net income (loss), which is the most directly comparable GAAP measure.
Net revenue in the West segment increased $66.4 million and $112.3 million for the three and nine months ended September 30, 2023, respectively, due to net revenue increases across all lines of business and from the impact of acquisitions of $42.7 million and $68.1 million, respectively. Organic aggregates average sales prices increased 14.7% and 18.7% in the three and nine months ended September 30, 2023, respectively, as price increases were implemented across all geographies. Organic aggregate volumes decreased 10.0% in the nine month period due, in part, to unfavorable weather conditions in our Intermountain West market primarily in the first quarter of 2023, as well a slowdown in residential market activity, as compared to the first nine months of 2022. Organic ready-mix concrete volumes decreased 15.0% and our organic ready-mix concrete average sales prices increased 12.3% in the first nine months of 2023. Higher mortgage interest rates are negatively impacting residential demand and, by extension limiting residential construction activity. These conditions are affecting, to varying degrees, our two largest markets, Houston and Salt Lake City.
The West segment’s operating income increased $16.5 million and $26.3 million in the three and nine months ended September 30, 2023, respectively. Adjusted EBITDA increased $19.6 million and $39.4 million in the three and nine months ended September 30, 2023, respectively, due to the price increases noted above and from the impact of acquisitions of $10.1 million and $17.9 million, respectively. Adjusted EBITDA margin increased to 25.6% from 24.9% and to 23.3% from 21.9% during the three and nine months ended September 30, 2023, respectively. The operating margin percentage in the West segment increased in the three and nine months ended September 30, 2023 due to increases in our average sales prices which exceeded our costs of revenue.
Gross revenue by product/ service was as follows:
*Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of intracompany transactions is included in “Other.” Revenue from the liquid asphalt terminals is included in asphalt revenue.
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The West segment’s percent changes in sales volumes and pricing in the three and nine months ended September 30, 2023 from the three and nine months ended October 1, 2022 were as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||
| Percentage Change in | Percentage Change in | ||||||||||||||||||||||
| Volume | Pricing | Volume | Pricing | ||||||||||||||||||||
| Aggregates | (3.0) | % | 15.2 | % | (8.0) | % | 19.4 | % | |||||||||||||||
| Ready-mix concrete | 7.8 | % | 7.7 | % | (5.1) | % | 12.6 | % | |||||||||||||||
| Asphalt | 9.1 | % | 14.7 | % | 11.5 | % | 15.9 | % | |||||||||||||||
Revenue from aggregates in the West segment increased $12.1 million and $27.3 million in the three and nine months ended September 30, 2023, respectively. Aggregates pricing for the three and nine months ended September 30, 2023 increased 15.2% and 19.4%, respectively, when compared to the same period in 2022. Increased average sales prices more than offset a 3.0% decrease in sales volumes in the third quarter of 2023. In the three and nine months ended September 30, 2023, aggregate volumes decreased in our British Columbia, South Texas and Intermountain West markets.
Revenue from ready-mix concrete in the West segment increased $26.4 million and $31.0 million in the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2023, our organic ready-mix concrete volumes decreased 11.6% and 15.0%, respectively, which was more than offset by increased organic ready-mix concrete prices of 7.8% and 12.3%, respectively. For the three and nine months ended September 30, 2023, our organic ready-mix concrete volumes decreased due to unfavorable weather in our Intermountain West geography in the first quarter of 2023 and reduced residential demand.
Revenue from asphalt in the West segment increased $22.0 million and $49.0 million in the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2023, asphalt volumes increased 9.1% and 11.5%, respectively, due primarily to growth in our North Texas, Intermountain West and British Columbia markets. Average sales prices for asphalt increased 14.7% and 15.9% in the three and nine months ended September 30, 2023, respectively. Revenue for paving and related services in the West segment increased by $25.5 million and $45.1 million in the three and nine months ended September 30, 2023, respectively.
Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue in the nine months ended September 30, 2023 was approximately $(25.3) million and $132.7 million, respectively.
East Segment
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | September 30, 2023 | October 1, 2022 | Variance | September 30, 2023 | October 1, 2022 | Variance | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 159,547 | $ | 171,446 | $ | (11,899) | (6.9) | % | $ | 446,790 | $ | 467,471 | $ | (20,681) | (4.4) | % | |||||||||||||||||||||||||||||||
| Operating income | 34,221 | 28,475 | 5,746 | 20.2 | % | 68,788 | 49,373 | 19,415 | 39.3 | % | |||||||||||||||||||||||||||||||||||||
| Operating margin percentage | 21.4 | % | 16.6 | % | 15.4 | % | 10.6 | % | |||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA (1) | $ | 50,089 | $ | 44,119 | $ | 5,970 | 13.5 | % | $ | 116,558 | $ | 98,949 | $ | 17,609 | 17.8 | % | |||||||||||||||||||||||||||||||
| Adjusted EBITDA Margin (1) | 31.4 | % | 25.7 | % | 26.1 | % | 21.2 | % | |||||||||||||||||||||||||||||||||||||||
(1)Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures that we find helpful in monitoring the performance of our business. See "Non-GAAP Performance Measures" below for a reconciliation of Adjusted EBITDA to net income (loss), which is the most directly comparable GAAP measure.
Net revenue in the East segment decreased $11.9 million and $20.7 million in the three and nine months ended September 30, 2023, respectively, as compared to the same period a year ago, primarily due to the impact from divestitures of $18.5 million and $74.2 million, respectively. Operating income increased $5.7 million and $19.4 million in the three and nine months ended September 30, 2023, respectively, as increases in average sales prices exceeded inflationary increases in our cost of revenue. Adjusted EBITDA increased $6.0 million and $17.6 million in the three and nine months ended September 30, 2023, respectively, which more than offset the negative impact to Adjusted EBITDA from divestitures of $3.7 million and $3.1 million, respectively. Operating income margin increased to 21.4% from 16.6% and to 15.4% from 10.6% in the three and nine months ended September 30, 2023, respectively, as compared to the same period a year ago. Adjusted EBITDA Margin increased to 31.4% from 25.7% and to 26.1% from 21.2% in the three and nine months ended September 30, 2023, respectively, as compared to the same period a year ago.
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Gross revenue by product/ service was as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | September 30, 2023 | October 1, 2022 | Variance | September 30, 2023 | October 1, 2022 | Variance | |||||||||||||||||||||||||||||||||||||||||
| Revenue by product*: | |||||||||||||||||||||||||||||||||||||||||||||||
| Aggregates | $ | 109,156 | $ | 100,666 | $ | 8,490 | 8.4 | % | $ | 311,048 | $ | 275,073 | $ | 35,975 | 13.1 | % | |||||||||||||||||||||||||||||||
| Ready-mix concrete | 23,125 | 25,101 | (1,976) | (7.9) | % | 66,185 | 74,844 | (8,659) | (11.6) | % | |||||||||||||||||||||||||||||||||||||
| Asphalt | 7,809 | 18,764 | (10,955) | (58.4) | % | 19,939 | 54,760 | (34,821) | (63.6) | % | |||||||||||||||||||||||||||||||||||||
| Paving and related services | 17,821 | 40,091 | (22,270) | (55.5) | % | 41,055 | 100,249 | (59,194) | (59.0) | % | |||||||||||||||||||||||||||||||||||||
| Other | 18,929 | 8,799 | 10,130 | 115.1 | % | 55,539 | 20,138 | 35,401 | 175.8 | % | |||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 176,840 | $ | 193,421 | $ | (16,581) | (8.6) | % | $ | 493,766 | $ | 525,064 | $ | (31,298) | (6.0) | % | |||||||||||||||||||||||||||||||
*Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of intracompany transactions is included in Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
The East segment’s percent changes in sales volumes and pricing in the three and nine months ended September 30, 2023 from the three and nine months ended October 1, 2022 were as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||
| Percentage Change in | Percentage Change in | ||||||||||||||||||||||
| Volume | Pricing | Volume | Pricing | ||||||||||||||||||||
| Aggregates | (4.7) | % | 13.7 | % | 0.7 | % | 12.3 | % | |||||||||||||||
| Ready-mix concrete | (15.8) | % | 9.5 | % | (20.3) | % | 10.9 | % | |||||||||||||||
| Asphalt | (64.9) | % | 17.9 | % | (65.8) | % | 15.6 | % | |||||||||||||||
Revenue from aggregates in the East segment increased $8.5 million and $36.0 million in the three and nine months ended September 30, 2023, respectively, as compared to the same period a year ago. Aggregate volumes in the three and nine months of 2023 decreased 4.7% and increased 0.7%, respectively, noting the three month period decrease primarily due to decreased demand in our East Kansas and Missouri markets was more than offset in the nine month period by favorable weather and increased demand in our remaining East segment markets. Excluding the impact of the divestitures in 2022, aggregate volumes in the nine months ended September 30, 2023 increased 5.8%. Aggregates organic pricing increased 12.6% and 11.6% in the three and nine months ended September 30, 2023, respectively, as compared to the same period a year ago.
Revenue from ready-mix concrete in the East segment decreased $2.0 million and $8.7 million as ready-mix concrete volumes decreased 15.8% and 20.3% in the three and nine months ended September 30, 2023, respectively, as compared to the same period in 2022, primarily due to our divestiture program. In the nine months ended September 30, 2023, our ready-mix concrete average sales prices increased 10.9%.
Revenue from asphalt decreased $11.0 million and $34.8 million in the three and nine months ended September 30, 2023, respectively, when compared to the same period in 2022. Asphalt pricing increased 15.6% in the nine months ended September 30, 2023. Paving and related service revenue decreased $22.3 million and $59.2 million in the three and nine months ended September 30, 2023, respectively, primarily due to divestitures noted above.
Prior to eliminations of intercompany transactions, the net effect of volume and pricing changes on gross revenue in the nine months ended September 30, 2023 was approximately $(111.9) million and $104.4 million, respectively.
Cement Segment
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| Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | September 30, 2023 | October 1, 2022 | Variance | September 30, 2023 | October 1, 2022 | Variance | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 121,319 | $ | 119,915 | $ | 1,404 | 1.2 | % | $ | 287,311 | $ | 259,791 | $ | 27,520 | 10.6 | % | |||||||||||||||||||||||||||||||
| Operating income | 38,250 | 35,459 | 2,791 | 7.9 | % | 73,343 | 55,671 | 17,672 | 31.7 | % | |||||||||||||||||||||||||||||||||||||
| Operating margin percentage | 31.5 | % | 29.6 | % | 25.5 | % | 21.4 | % | |||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA (1) | $ | 50,355 | $ | 46,597 | $ | 3,758 | 8.1 | % | $ | 103,237 | $ | 84,019 | $ | 19,218 | 22.9 | % | |||||||||||||||||||||||||||||||
| Adjusted EBITDA Margin (1) | 41.5 | % | 38.9 | % | 35.9 | % | 32.3 | % | |||||||||||||||||||||||||||||||||||||||
(1)Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures that we find helpful in monitoring the performance of our business. See "Non-GAAP Performance Measures" below for a reconciliation of Adjusted EBITDA to net income (loss), which is the most directly comparable GAAP measure.
Net revenue in the Cement segment increased $1.4 million and $27.5 million primarily due to average price increases of 13.9% and 14.6% in the three and nine months ended September 30, 2023, respectively.
Operating income increased $2.8 million and $17.7 million during the three and nine months ended September 30, 2023, respectively. Operating margin percentage for the three and nine months ended September 30, 2023 increased to 31.5% from 29.6% and to 25.5% from 21.4%, respectively, from the comparable period a year ago. Adjusted EBITDA margin increased to 41.5% from 38.9% and to 35.9% from 32.3% in the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2023, operating income margin and Adjusted EBITDA margin benefited from higher average sales prices that exceeded inflationary pressures and increased product mix of internally produced cement over imported.
Gross revenue by product was as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | September 30, 2023 | October 1, 2022 | Variance | September 30, 2023 | October 1, 2022 | Variance | |||||||||||||||||||||||||||||||||||||||||
| Revenue by product*: | |||||||||||||||||||||||||||||||||||||||||||||||
| Cement | $ | 116,285 | $ | 115,022 | $ | 1,263 | 1.1 | % | $ | 270,916 | $ | 249,517 | $ | 21,399 | 8.6 | % | |||||||||||||||||||||||||||||||
| Other | 5,034 | 4,893 | 141 | 2.9 | % | 16,395 | 10,274 | 6,121 | 59.6 | % | |||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 121,319 | $ | 119,915 | $ | 1,404 | 1.2 | % | $ | 287,311 | $ | 259,791 | $ | 27,520 | 10.6 | % | |||||||||||||||||||||||||||||||
*Revenue by product includes intercompany and intracompany sales transferred at market value. Revenue from waste processing and the elimination of intracompany transactions is included in Other.
The Cement segment’s percent changes in sales volumes and pricing in the three and nine months ended September 30, 2023 from the three and nine months ended October 1, 2022 were as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||
| Percentage Change in | Percentage Change in | ||||||||||||||||||||||
| Volume | Pricing | Volume | Pricing | ||||||||||||||||||||
| Cement | (11.3) | % | 13.9 | % | (5.3) | % | 14.6 | % | |||||||||||||||
Revenue from cement increased $1.3 million and $21.4 million in the three and nine months ended September 30, 2023, respectively, due to organic cement pricing gains of 13.9% and 14.6%, partially offset by volume decreases of 11.3% and 5.3%, respectively. The volume decreases in the three and nine months ended September 30, 2023 were primarily due to reduced import volume and, more recently, wet conditions in our northern markets.
Liquidity and Capital Resources
Our primary sources of liquidity include cash on-hand, cash provided by operations, amounts available for borrowing under our senior secured credit facilities and capital-raising activities in the debt and capital markets. In addition to our current sources of liquidity, we have access to liquidity through public offerings of shares of our Class A common stock. To facilitate such offerings, in January 2023, we filed a shelf registration statement with the SEC that will expire in January 2026. The amount of Class A common stock to be issued pursuant to this shelf registration statement was not specified when it was filed
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and there is no specific limit on the amount we may issue. The specifics of any future offerings, along with the use of the proceeds thereof, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.
As of September 30, 2023, we had $197.5 million in cash and cash equivalents and $528.3 million of working capital compared to $520.5 million and $762.5 million, respectively, at December 31, 2022. Working capital is calculated as current assets less current liabilities. There were no restricted cash balances as of September 30, 2023 or December 31, 2022. In January 2023, we amended our senior secured revolving credit facility, increasing the total availability to $395.0 million and extending the maturity date to January 2028. We had no outstanding borrowings on our senior secured revolving credit facility, which had borrowing capacity of $374.1 million as of September 30, 2023, which is net of $20.9 million of outstanding letters of credit and is fully available to us within the terms and covenant requirements of our credit agreement governing the senior secured credit facilities (the “Credit Agreement”).
In March 2022, our Board of Directors authorized a share repurchase program, whereby we can repurchase up to $250.0 million of our Class A common stock. During the fiscal year 2022, we repurchased 3.4 million shares of Class A common stock for $101.0 million. No repurchases were made during the nine month period ended September 30, 2023. As of September 30, 2023, approximately $149.0 million remained available for share repurchases under the share repurchase program.
Given the seasonality of our business, we typically experience significant fluctuations in working capital needs and balances throughout the year. Our working capital requirements generally increase during the first half of the year as we build up inventory and focus on repair and maintenance and other set-up costs for the upcoming season. Working capital levels then decrease as the construction season winds down and we enter the winter months, which is when we see significant inflows of cash from the collection of receivables.
As of September 30, 2023 and December 31, 2022, our long-term borrowings totaled $1.5 billion and $1.5 billion, respectively, for which we incurred $24.8 million and $74.0 million of interest expense for the three and nine months ended September 30, 2023, respectively, and $19.6 million and $55.4 million for the three and nine months ended October 1, 2022, respectively. We expect that normal operating cash flow will be sufficient to fund our seasonal working capital needs. We had no outstanding borrowings on the revolving credit facility as of September 30, 2023.
In September 2023, the Company entered into a definitive agreement to acquire all of the outstanding equity interests of Argos North America Corp. (“Argos USA”) in a cash and stock transaction valued at $3.2 billion. Argos USA is among the largest cement producers with four integrated cement plants and approximately 140 ready-mix plants in the Southeast, Mid-Atlantic and Texas geographies. Under the terms of the agreement, the shareholders of Argos USA will receive approximately $1.2 billion in cash subject to closing adjustments and approximately 54.7 million shares of the Company's Class A common stock. In connection with the agreement, the Company has obtained committed financing in the form of a $1.3 billion 364-day term loan bridge facility to finance the cash consideration to be paid to the shareholders of Argos USA. The Company expects to enter into permanent financing agreements prior to the transaction closing, which would reduce any amounts that may ultimately be borrowed under the term loan bridge facility. The transaction closing is expected to occur prior to the end of the first quarter of 2024, subject to customary closing conditions, including regulatory approvals and approval by the Company's stockholders.
We believe we have access to sufficient financial resources from our liquidity sources to fund our business and operations, including contractual obligations, capital expenditures and debt service obligations, for at least the next twelve months. Our growth strategy contemplates future acquisitions for which we believe we have sufficient access to capital. We also plan to divest of certain dilutive businesses as we rationalize our portfolio, which will also generate additional capital.
We and our affiliates may from time to time purchase our outstanding debt through open market purchases, privately negotiated transactions or otherwise. Purchases or retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Indebtedness
Please refer to the notes to the consolidated interim financial statements for detailed information about our long-term debt, scheduled maturities of long-term debt and affirmative and negative covenants, including the maximum allowable consolidated first lien net leverage ratio. As of September 30, 2023, we were in compliance with all debt covenants. At September 30, 2023 and December 31, 2022, $1.5 billion and $1.5 billion, respectively, of total debt was outstanding under our respective debt agreements. Due to our ongoing divestiture program, we have made prepayments on our term loan and may be required to do so again in the future.
Cash Flows
33
The following table summarizes our net cash used in or provided by operating, investing and financing activities and our capital expenditures in the nine months ended September 30, 2023 and October 1, 2022:
| Summit Inc. | |||||||||||
| ($ in thousands) | September 30, 2023 | October 1, 2022 | |||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 243,624 | $ | 132,191 | |||||||
| Investing activities | (415,532) | 188,933 | |||||||||
| Financing activities | (151,183) | (228,687) | |||||||||
Operating activities
During the nine months ended September 30, 2023, cash provided by operating activities was $243.6 million primarily as a result of:
•Net income of $286.2 million, decreased by non-cash expenses, including $168.8 million of depreciation, depletion, amortization and accretion expense and $15.1 million of share-based compensation, offset by the net gain on asset disposals of $5.8 million.
•Billed and unbilled accounts receivable increased by $141.8 million in the first nine months of 2023 as a result of the seasonality of our business. The majority of our sales occur in the spring, summer and fall and we typically incur an increase in accounts receivable (net billed and unbilled) during the second and third quarters of each year. This amount is typically converted to cash in the fourth and first quarters. Our inventory levels also increased during the first quarter as we prepared for the increase in activity over the warmer months.
•The timing of payments associated with accounts payable and accrued expenses of cash, which is consistent with the seasonality of our business whereby we build-up inventory levels and incur repairs and maintenance costs to ready the business for increased sales volumes in the summer and fall. These costs are typically incurred in the first half of the year and paid by year-end. In addition, we made $88.4 million of interest payments in the nine months ended September 30, 2023.
•We recognized a tax receivable benefit of $153.1 million related to acquiring certain tax receivable agreement interests at less than their carrying value.
During the nine months ended October 1, 2022, cash provided by operating activities was $132.2 million primarily as a result of:
•Net income of $245.6 million, decreased by non-cash expenses, including $160.2 million of depreciation, depletion, amortization and accretion expense and $15.1 million of share-based compensation, offset by the net gain on asset and business divestitures of $180.2 million.
•Billed and unbilled accounts receivable increased by $128.8 million in the first nine months of 2022 as a result of the seasonality of our business. The majority of our sales occur in the spring, summer and fall and we typically incur an increase in accounts receivable (net billed and unbilled) during the second and third quarters of each year. This amount is typically converted to cash in the fourth and first quarters. Our inventory levels decreased slightly during the third quarter as business activity increased during the quarter.
•The timing of payments associated with accounts payable and accrued expenses of cash, which is consistent with the seasonality of our business whereby we build-up inventory levels and incur repairs and maintenance costs to ready the business for increased sales volumes in the summer and fall. These costs are typically incurred in the first half of the year and paid by year-end. In addition, we made $70.2 million of interest payments in the nine months ended October 1, 2022.
Investing activities
During the nine months ended September 30, 2023, cash used for investing activities was $415.5 million, of which $182.2 million was invested in capital expenditures and $239.5 million was used for acquisitions in the West and East segments, and was partially offset by $9.8 million of proceeds from asset sales.
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During the nine months ended October 1, 2022, cash provided by investing activities was $188.9 million, of which $189.0 million was invested in capital expenditures, which was offset by $373.8 million of proceeds from the sale of three businesses in the East segment, as well as $8.3 million of proceeds from asset sales.
Financing activities
During the nine months ended September 30, 2023, cash used in financing activities was $151.2 million, primarily related to the purchase of certain TRA interests for $122.9 million. We also made $8.5 million of payments on debt, $12.2 million payments on acquisition-related liabilities and used $7.2 million on shares redeemed to settle taxes on restricted stock units.
During the nine months ended October 1, 2022, cash used in financing activities was $228.7 million. We made $113.8 million of payments on debt, including the $95.6 million prepayment of the term loan due to our divestiture program, $13.0 million payments on acquisition-related liabilities and used $101.0 million to repurchase shares of Class A common stock.
Cash paid for capital expenditures
We paid cash of approximately $182.2 million in capital expenditures in the nine months ended September 30, 2023 compared to $189.0 million in the nine months ended October 1, 2022.
We currently estimate that we will invest between $240 million to $260 million inclusive of spend associated with greenfield projects. The timing of our greenfield expenditures is dependent upon the timing of when permits may be issued. We expect to fund our capital expenditure program through cash on hand, cash from operations, and outside financing arrangements including our revolving credit facility.
Tax Receivable Agreement
When the Company purchases LP Units for cash or LP Units are exchanged for shares of Class A common stock, this results in increases in the Company’s share of the tax basis of the tangible and intangible assets of Summit Holdings. These increases in tax basis may increase, for tax purposes, depreciation and amortization deductions and therefore reduce the amount of tax that Summit Inc. would otherwise be required to pay in the future. In connection with our initial public offering, we entered into a TRA with the holders of the LP Units that provides for the payment by Summit Inc. to exchanging holders of LP Units of 85% of the benefits, if any, that Summit Inc. actually realizes (or, under certain circumstances such as an early termination of the TRA is deemed to realize) as a result of these increases in tax basis and certain other tax benefits related to entering into the TRA, including tax benefits attributable to payments under the TRA. The increases in tax basis as a result of an exchange of LP Units for shares of Class A common stock, as well as the amount and timing of any payments under the TRA, are difficult to accurately estimate, as they will vary depending upon a number of factors, including the timing of the exchanges, the price of our Class A common stock at the time of the exchange, the extent to which the exchanges are taxable, the amount and timing of our income and the effective tax rate.
We anticipate funding payments under the TRA from cash flows from operations, available cash and available borrowings under our Senior Secured Revolving Credit Facilities. As of September 30, 2023, we had accrued $52.9 million as TRA liability in our consolidated financial statements. Of the total TRA liability, $0.8 million is expected to be paid in the next twelve months.
In the third quarter of 2023, Summit LLC reached an agreement to acquire all of the rights and interests in the TRA from affiliates of Blackstone Inc. and other TRA holders for cash consideration of $122.9 million. In connection with these transactions, Summit LLC and Summit Inc. reached an agreement whereby the maximum amount Summit Inc is obligated to pay Summit LLC for the TRA interest is limited to the amount Summit LLC paid for the TRA interests. The cash paid for TRA interests acquired was less than their carrying value, accordingly Summit Inc. recognized a tax receivable agreement benefit of $153.1 million in the accompanying consolidated statement of operations.
In the nine months ended September 30, 2023, 176,258 LP Units were acquired by Summit Inc. in exchange for an equal number of newly-issued shares of Summit Inc.’s Class A common stock. As of September 30, 2023 and December 31, 2022, we had recorded $52.9 million and $328.4 million of TRA liability, respectively. Subsequent to quarter end, an additional 345,554 LP units were exchanged for an equal amount of newly issued shares of Summit Inc.'s Class A common stock, and Summit LLC. Summit LLC then acquired the interest in the TRA interests from certain of those holders for aggregate cash consideration of $9.5 million, resulting in further reduction of the TRA liability of approximately $19.3 million.
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In the second quarter 2023, the TRA agreement was amended to change the early termination calculation from a LIBOR based rate to a SOFR rate. Based upon a $31.14 per share price of our Class A common stock, the closing price of our stock on the last trading day of the three months ended September 30, 2023, and a contractually defined discount rate of 6.37%, if the early termination provisions of the TRA were triggered, the aggregate amount required to settle the TRA would be approximately $40.9 million. Estimating the amount and the timing of payments that may be made under the TRA is by its nature difficult and imprecise, insofar as the amounts payable depends on a variety of factors, including, but not limited to, the timing of future exchanges, our stock price at the date of the exchange and the timing of the generation of future taxable income. The increases in tax basis as a result of an exchange, as well as the amount and timing of any payments under the TRA, will vary depending on a variety of factors.
Commitments and contingencies
We are party to certain legal actions arising from the ordinary course of business activities. Accruals are recorded when the outcome is probable and can be reasonably estimated. While the ultimate results of claims and litigation cannot be predicted with certainty, management expects that the ultimate resolution of all pending or threatened claims and litigation will not have a material effect on our consolidated financial position, results of operations or liquidity. We record legal fees as incurred.
Environmental Remediation—Our operations are subject to and affected by federal, state, provincial and local laws and regulations relating to the environment, health and safety and other regulatory matters. These operations require environmental operating permits, which are subject to modification, renewal and revocation. We regularly monitor and review its operations, procedures and policies for compliance with these laws and regulations. Despite these compliance efforts, risk of environmental liability is inherent in the operation of our business, as it is with other companies engaged in similar businesses and there can be no assurance that environmental liabilities and noncompliance will not have a material adverse effect on our consolidated financial condition, results of operations or liquidity.
Other—We are obligated under various firm purchase commitments for certain raw materials and services that are in the ordinary course of business. Management does not expect any significant changes in the market value of these goods and services during the commitment period that would have a material adverse effect on the financial condition, results of operations, and cash flows of the Company. The terms of the purchase commitments generally approximate one year.
Off-Balance sheet arrangements
As of September 30, 2023, we had no material off-balance sheet arrangements.
Non-GAAP Performance Measures
We evaluate our operating performance using metrics that we refer to as “Adjusted EBITDA,” “Adjusted EBITDA Margin,” “Adjusted Cash Gross Profit” and “Adjusted Cash Gross Profit Margin” which are not defined by U.S. GAAP and should not be considered as an alternative to earnings measures defined by U.S. GAAP. We define Adjusted EBITDA as EBITDA, adjusted to exclude accretion, loss on debt financings, acquisition and integration costs related to combination with Argos USA, gain on sale of business, non-cash compensation and certain other non-cash and non-operating items. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by net revenue. We define Adjusted Cash Gross Profit as operating income before general and administrative expenses, depreciation, depletion, amortization and accretion and Adjusted Cash Gross Profit Margin as Adjusted Cash Gross Profit as a percentage of net revenue.
We present Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Cash Gross Profit and Adjusted Cash Gross Profit Margin for the convenience of investment professionals who use such metrics in their analyses. The investment community often uses these metrics to assess the operating performance of a company’s business and to provide a consistent comparison of performance from period to period. We use these metrics, among others, to assess the operating performance of our individual segments and the consolidated company.
Non-GAAP financial measures are not standardized; therefore, it may not be possible to compare such financial measures with other companies’ non-GAAP financial measures having the same or similar names. We strongly encourage investors to review our consolidated financial statements in their entirety and not rely on any single financial measure.
The tables below reconcile our net income (loss) to EBITDA and Adjusted EBITDA, present Adjusted EBITDA by segment and reconcile operating income to Adjusted Cash Gross Profit for the periods indicated:
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| Reconciliation of Net Income to Adjusted EBITDA | Three months ended September 30, 2023 | ||||||||||||||||||||||||||||
| by Segment | West | East | Cement | Corporate | Consolidated | ||||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||||||||
| Net income | $ | 92,652 | $ | 37,350 | $ | 43,347 | $ | 59,376 | $ | 232,725 | |||||||||||||||||||
| Interest (income) expense | (4,068) | (3,055) | (5,135) | 40,271 | 28,013 | ||||||||||||||||||||||||
| Income tax expense (1) | 1,644 | — | — | 22,264 | 23,908 | ||||||||||||||||||||||||
| Depreciation, depletion and amortization | 28,443 | 15,103 | 12,123 | 1,022 | 56,691 | ||||||||||||||||||||||||
| EBITDA | $ | 118,671 | $ | 49,398 | $ | 50,335 | $ | 122,933 | $ | 341,337 | |||||||||||||||||||
| Accretion | 258 | 483 | 20 | — | 761 | ||||||||||||||||||||||||
| Tax receivable agreement benefit (1) | — | — | — | (153,080) | (153,080) | ||||||||||||||||||||||||
| Non-cash compensation | — | — | — | 5,192 | 5,192 | ||||||||||||||||||||||||
| Argos USA acquisition and integration costs (2) | — | — | — | 17,859 | 17,859 | ||||||||||||||||||||||||
| Other (3) | (1,083) | 208 | — | (2,675) | (3,550) | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 117,846 | $ | 50,089 | $ | 50,355 | $ | (9,771) | $ | 208,519 | |||||||||||||||||||
| Reconciliation of Net Income (Loss) to Adjusted EBITDA | Nine months ended September 30, 2023 | ||||||||||||||||||||||||||||
| by Segment | West | East | Cement | Corporate | Consolidated | ||||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||||||||
| Net income (loss) | $ | 179,928 | $ | 77,936 | $ | 88,193 | $ | (59,816) | $ | 286,241 | |||||||||||||||||||
| Interest (income) expense | (10,777) | (8,707) | (14,988) | 117,807 | 83,335 | ||||||||||||||||||||||||
| Income tax expense (1) | 3,861 | — | — | 36,062 | 39,923 | ||||||||||||||||||||||||
| Depreciation, depletion and amortization | 82,450 | 45,454 | 29,973 | 3,044 | 160,921 | ||||||||||||||||||||||||
| EBITDA | $ | 255,462 | $ | 114,683 | $ | 103,178 | $ | 97,097 | $ | 570,420 | |||||||||||||||||||
| Accretion | 768 | 1,385 | 59 | — | 2,212 | ||||||||||||||||||||||||
| Loss on debt financings | — | — | — | 493 | 493 | ||||||||||||||||||||||||
| Tax receivable agreement benefit (1) | — | — | — | (153,080) | (153,080) | ||||||||||||||||||||||||
| Non-cash compensation | — | — | — | 15,116 | 15,116 | ||||||||||||||||||||||||
| Argos USA acquisition and integration costs (2) | — | — | — | 17,859 | 17,859 | ||||||||||||||||||||||||
| Other (3) | (1,189) | 490 | — | (10,856) | (11,555) | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 255,041 | $ | 116,558 | $ | 103,237 | $ | (33,371) | $ | 441,465 | |||||||||||||||||||
| Reconciliation of Net Income (Loss) to Adjusted EBITDA | Three months ended October 1, 2022 | ||||||||||||||||||||||||||||
| by Segment | West | East | Cement | Corporate | Consolidated | ||||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||||||||
| Net income (loss) | $ | 76,350 | $ | 30,225 | $ | 40,748 | $ | (59,672) | $ | 87,651 | |||||||||||||||||||
| Interest (income) expense | (4,475) | (2,602) | (5,110) | 34,167 | 21,980 | ||||||||||||||||||||||||
| Income tax expense (1) | 1,384 | — | — | 23,445 | 24,829 | ||||||||||||||||||||||||
| Depreciation, depletion and amortization | 24,676 | 15,063 | 10,879 | 821 | 51,439 | ||||||||||||||||||||||||
| EBITDA | $ | 97,935 | $ | 42,686 | $ | 46,517 | $ | (1,239) | $ | 185,899 | |||||||||||||||||||
| Accretion | 232 | 382 | 80 | — | 694 | ||||||||||||||||||||||||
| Loss (gain) on sale of businesses | — | 1,005 | — | (5,120) | (4,115) | ||||||||||||||||||||||||
| Non-cash compensation | — | — | — | 4,902 | 4,902 | ||||||||||||||||||||||||
| Other (3) | 114 | 46 | — | (2,652) | (2,492) | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 98,281 | $ | 44,119 | $ | 46,597 | $ | (4,109) | $ | 184,888 | |||||||||||||||||||
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| Reconciliation of Net Income (Loss) to Adjusted EBITDA | Nine months ended October 1, 2022 | ||||||||||||||||||||||||||||
| by Segment | West | East | Cement | Corporate | Consolidated | ||||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||||||||
| Net income (loss) | $ | 153,857 | $ | 101,680 | $ | 70,958 | $ | (80,878) | $ | 245,617 | |||||||||||||||||||
| Interest (income) expense | (12,480) | (8,767) | (14,932) | 98,907 | 62,728 | ||||||||||||||||||||||||
| Income tax expense (benefit) (1) | 2,547 | (106) | — | 71,592 | 74,033 | ||||||||||||||||||||||||
| Depreciation, depletion and amortization | 70,803 | 47,470 | 27,760 | 2,340 | 148,373 | ||||||||||||||||||||||||
| EBITDA | $ | 214,727 | $ | 140,277 | $ | 83,786 | $ | 91,961 | $ | 530,751 | |||||||||||||||||||
| Accretion | 692 | 1,185 | 233 | — | 2,110 | ||||||||||||||||||||||||
| Tax receivable agreement expense (1) | — | — | — | 954 | 954 | ||||||||||||||||||||||||
| Gain on sale of businesses | — | (42,652) | — | (131,721) | (174,373) | ||||||||||||||||||||||||
| Non-cash compensation | — | — | — | 15,058 | 15,058 | ||||||||||||||||||||||||
| Other (3) | 198 | 139 | — | (2,652) | (2,315) | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 215,617 | $ | 98,949 | $ | 84,019 | $ | (26,400) | $ | 372,185 | |||||||||||||||||||
(1)The reconciliation of net income (loss) to Adjusted EBITDA is based on the financial results of Summit Inc. and its subsidiaries, which was $137.6 million and $128.3 million greater than Summit LLC and its subsidiaries in the three and nine months ended September 30, 2023, and $17.7 million and $55.4 million less in three and nine months ended October 1, 2022, due to TRA benefit and income tax expense which are obligations of Summit Holdings and Summit Inc. and are thus excluded from Summit LLC’s consolidated net income.
(2)The adjustment for acquisition and integration costs related to the agreement to combine with Argos USA is comprised of finder's fees, advisory, legal and professional fees incurred relating to our agreement to combine with Argos USA.
(3)Consists primarily of interest income earned on cash balances.
| Reconciliation of Working Capital | September 30, 2023 | December 31, 2022 | |||||||||
| ($ in thousands) | |||||||||||
| Total current assets | $ | 877,203 | $ | 1,018,376 | |||||||
| Less total current liabilities | (348,880) | (255,847) | |||||||||
| Working capital | $ | 528,323 | $ | 762,529 | |||||||
| Three months ended | Nine months ended | ||||||||||||||||||||||
| Reconciliation of Operating Income to Adjusted Cash Gross Profit | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Operating income | $ | 127,983 | $ | 127,062 | $ | 242,141 | $ | 204,003 | |||||||||||||||
| General and administrative expenses | 50,895 | 39,232 | 150,731 | 136,897 | |||||||||||||||||||
| Depreciation, depletion, amortization and accretion | 57,452 | 52,133 | 163,133 | 150,483 | |||||||||||||||||||
| Transaction costs | 17,442 | 727 | 19,518 | 2,637 | |||||||||||||||||||
| Gain on sale of property, plant and equipment | (2,134) | (1,343) | (5,787) | (6,293) | |||||||||||||||||||
| Adjusted Cash Gross Profit (exclusive of items shown separately) | $ | 251,638 | $ | 217,811 | $ | 569,736 | $ | 487,727 | |||||||||||||||
| Adjusted Cash Gross Profit Margin (exclusive of items shown separately) (1) | 33.9 | % | 31.8 | % | 31.1 | % | 28.5 | % | |||||||||||||||
(1)Adjusted Cash Gross Profit Margin, which we define as Adjusted Cash Gross Profit as a percentage of net revenue.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period.
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Please refer to “Critical Accounting Policies and Estimates” described in “Part II. Item 7. Management’s Discussion and Analysis of our Financial Condition and Results of Operations” of our annual report on Form 10-K filed with the SEC on February 16, 2023, from which there have been no material changes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from transactions that are entered into in the normal course of business. Our operations are highly dependent upon the interest rate-sensitive construction industry as well as the general economic environment. Consequently, these marketplaces could experience lower levels of economic activity in an environment of rising interest rates or escalating costs. For a discussion of quantitative and qualitative disclosures about market risk, please refer to the Annual Report from which our exposure to market risk has not materially changed.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Summit Inc. and Summit LLC maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in Summit Inc.’s and Summit LLC’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Summit Inc.’s and Summit LLC's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Summit Inc.’s and Summit LLC’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Summit Inc.’s disclosure controls and procedures as of September 30, 2023. Based upon that evaluation, Summit Inc.’s and Summit LLC’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, Summit Inc.’s and Summit LLC’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in Summit Inc.’s or Summit LLC’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during their last fiscal quarter that has materially affected, or is reasonably likely to materially affect, their internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under Note 12, "Commitments and Contingencies," to Summit Inc.’s unaudited consolidated financial statements is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in the Annual Report, which could materially affect the Company’s business, financial condition, operating results or liquidity or future results. The risks described in the Annual Report are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its results of operations, financial condition or liquidity. There have been no material changes to the risk factors disclosed in the Annual Report, other than the following risks related to our agreement to combine with Argos North America Corp ("Argos USA").
Risks Related to the Argos USA Transaction
On September 7, 2023, the Company entered into a definitive transaction agreement (the “Transaction Agreement”), with Cementos Argos S.A. (“Cementos Argos”), Argos North America Corp. (“Argos USA”) and the other parties thereto, pursuant to which the Company will purchase all of the issued and outstanding equity interests of Argos USA (the “Argos USA Transaction”). Pursuant to the terms and conditions of the Transaction Agreement, Cementos Argos will receive (i) $1.2 billion in cash (subject to closing adjustments), (ii) 54,720,000 shares of the Company’s Class A common stock (such amount, the “Class A Consideration”) and (iii) one share of the Company’s preferred stock (such share, the “Preferred Share,” and together with the Class A Consideration, the “Stock Consideration”).
The Argos USA Transaction is subject to conditions, including certain conditions that may not be satisfied or waived on a timely basis or at all. Failure to complete the Argos USA Transaction could have material and adverse effects on us.
Completion of the Argos USA Transaction is subject to a number of conditions, including, among other things, obtaining the approval of our stockholders of the issuance of 54,720,000 shares of our Class A common stock that constitute the Class A Consideration and the issuance of one share of preferred stock that constitutes the Preferred Share. Such conditions, some of which are beyond our control, may not be satisfied or waived in a timely manner or at all and therefore make the completion and timing of the completion of the Argos USA Transaction uncertain. In addition, the Argos USA Transaction Agreement contains certain termination rights for both us and Cementos Argos, which, if exercised, will also result in the Argos USA Transaction not being consummated. Furthermore, governmental authorities may impose conditions on the completion of the Argos USA Transaction or require changes to the terms thereof. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying or impeding consummation of the Argos USA Transaction or of imposing additional costs or limitations on us, Cementos Argos or Argos USA following completion of the Argos USA Transaction, any of which might have an adverse effect on us following completion of the Argos USA Transaction.
If the Argos USA Transaction is not completed, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Argos USA Transaction, we will be subject to a number of risks, including the following:
a.we will be required to pay our costs relating to the Argos USA Transaction, such as legal, accounting and financial advisory fees, whether or not the Argos USA Transaction is completed;
b.time and resources committed by our management to matters relating to the Argos USA Transaction could otherwise have been devoted to pursuing other beneficial opportunities; and
c.the market price of the Class A common stock could decline to the extent that the current market price reflects a market assumption that the Argos USA Transaction will be completed.
In addition to the above risks, if the Argos USA Transaction Agreement is terminated and our board of directors seeks another acquisition, our stockholders cannot be certain that we will be able to find a party willing to enter into a transaction as attractive to us as the Argos USA Transaction. Also, if the Argos USA Transaction Agreement is terminated under certain specified circumstances, Summit would be required to pay Cementos Argos a termination fee of $100,000,000.
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The market price of shares of Class A common stock may continue to fluctuate after the Argos USA Transaction.
Upon completion of the Argos USA Transaction, Cementos Argos will become the holder of the Class A Consideration and the Preferred Share. The market price of shares of our common stock may fluctuate significantly following completion of the Argos USA Transaction and holders of our common stock could lose some or all of the value of their investment in our common stock. In addition, the stock market has experienced significant price and volume fluctuations in recent times which, if they continue to occur, could have a material adverse effect on the market for, or liquidity of, our common stock, regardless of our actual operating performance.
We will be subject to business uncertainties while the Argos USA Transaction is pending, which could adversely affect our business.
In connection with the pendency of the Argos USA Transaction, it is possible that certain persons with whom we have a business relationship may delay or defer certain business decisions or decide to seek to terminate, change or renegotiate their relationships with us as a result of the Argos USA Transaction, which could negatively affect our or Argos USA’s revenues, earnings and cash flows as well as the market price of our Class A common stock, regardless of whether the Argos USA Transaction is completed. Also, our and Argos USA’s ability to attract, retain and motivate employees may be impaired until the Argos USA Transaction is completed, and our ability to do so may be impaired for a period of time thereafter, as current and prospective employees may experience uncertainty about their roles within the Company following the Argos USA Transaction.
Under the terms of the Transaction Agreement, we are subject to certain restrictions on the conduct of our business prior to the consummation of the Argos USA Transaction, which may adversely affect our ability to execute certain of our business strategies. Among other restrictions, we are restricted, in certain cases, from amending our governing documents in certain ways, paying cash dividends or granting certain equity awards to our employees. Such limitations could negatively affect our businesses and operations prior to the completion of the Argos USA Transaction.
We will incur significant transaction costs in connection with the Argos USA Transaction.
We have incurred and are expected to continue to incur a number of non-recurring costs associated with the Argos USA Transaction, combining the operations of Argos USA with ours and achieving desired synergies. These costs have been, and will continue to be, substantial and, in many cases, will be borne by us whether or not the Argos USA Transaction is completed. A substantial majority of non-recurring expenses will consist of transaction costs and include, among others, fees paid to financial, legal, accounting and other advisors and employee retention, severance and benefit costs. We will also incur costs related to formulating and implementing integration plans. Although we expect that the elimination of duplicative costs, as well as the realization of synergies and efficiencies related to the integration of Argos USA, should allow us to offset these transaction costs over time, this net benefit may not be achieved in the near-term or at all.
Securities class action and derivative lawsuits may be brought against us in connection with the Argos USA Transaction, which could result in substantial costs and may delay or prevent the Argos USA Transaction from being completed.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination or transaction agreements. Even if such a lawsuit is without merit, defending against these claims can result in substantial costs and divert management time and other resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition.
Lawsuits that may be brought against us, Argos USA or our or its directors could also seek, among other things, injunctive relief or other equitable relief, including a request to enjoin us from consummating the Argos USA Transaction. One of the conditions to the closing of the Argos USA Transaction is that there is no law, judgement, decree, writ, injunction, stipulation, ruling, award, decision, subpoena, determination, verdict or order has been entered, issued, made or rendered by any governmental authority or legally binding arbitrator of competent jurisdiction that would prohibit, enjoin, restrain or make illegal the consummation of the Argos USA Transaction or impose certain burdensome conditions. Consequently, if a plaintiff is successful in obtaining an order, award or judgment prohibiting completion of the Argos USA Transaction, that order, award or judgment may delay or prevent the Argos USA Transaction from being completed within the expected time frame or at all, which may adversely affect our business, financial position and results of operations.
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The Argos USA Transaction Agreement limits our ability to pursue alternatives to the Argos USA Transaction.
The Argos USA Transaction Agreement contains provisions that may discourage a third party from submitting an acquisition proposal to us that might result in greater value to our stockholders than the Argos USA Transaction, or may result in a potential acquirer of us proposing to pay a lower per share price to acquire us than it might otherwise have proposed to pay. These provisions include a general prohibition on us from soliciting or, subject to certain exceptions relating to the exercise of fiduciary duties by our board of directors, entering into discussions with any third party regarding any acquisition proposal or offer for a competing transaction.
Risks Related to the Company Following the Argos USA Transaction
The integration of Argos USA may not be as successful as anticipated, and we may not achieve the intended benefits or do so within the intended timeframe.
The Argos USA Transaction involves numerous operational, strategic, financial, accounting, legal, tax and other risks, including potential liabilities associated with the acquired business. Difficulties in integrating the business of Argos USA and our ability to manage the post-acquisition company may result in the post-acquisition company performing differently than expected, in operational challenges or in the delay or failure to realize anticipated expense-related efficiencies, and could have an adverse effect on our financial condition, results of operations or cash flows. Potential difficulties that may be encountered in the integration process include, among other factors:
a.the inability to successfully integrate the businesses of Argos USA, operationally and culturally, in a manner that permits us to achieve the full revenue anticipated from the Argos USA Transaction, which includes accurate assessment of new producing properties based upon several factors such as recoverable reserves, future cementitious materials and aggregate prices and their appropriate differentials, availability and cost of transportation of production to markets, availability and cost of equipment and of skilled personnel, development and operating costs and potential environmental and other liabilities and regulatory, permitting and similar matters;
b.complexities associated with managing a larger, more complex, integrated business, including the potential diversion of our management’s attention;
c.not realizing anticipated operating synergies;
d.the inability to retain key employees and otherwise integrate personnel from the two companies and the loss of key employees;
e.potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the Argos USA Transaction;
f.potential risk associated with our increased debt in the near-term following the Argos USA Transaction;
g.difficulty or inability to refinance the debt of the post-acquisition company or comply with the covenants thereof;
h.integrating relationships with customers, vendors and business partners;
i.performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the Argos USA Transaction and integrating Argos USA’s operations; and
j.the disruption of, or the loss of momentum in, each company’s ongoing business or inconsistencies in standards, controls, procedures and policies.
Additionally, the success of the Argos USA Transaction will depend, in part, on our ability to realize the anticipated benefits from combining Argos USA’s and our businesses, including operational and other synergies that we believe the post-transaction company will achieve. The anticipated benefits of the Argos USA Transaction may not be realized fully or at all, may take longer to realize than expected or could have other adverse effects that we do not currently foresee. Some of the assumptions that we have made, such as the achievement of operating synergies, may not be realized.
Cementos Argos will have significant influence over us following the consummation of the Argos USA Transaction, and its interests may conflict with ours or of our shareholders in the future.
Immediately following the consummation of the Argos USA Transaction, Cementos Argos will own, in the aggregate, approximately 31% of our outstanding common stock. As a result, Cementos Argos will have significant influence over us.
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Going forward, Cementos Argos’s degree of influence will depend on, among other things, its level of ownership of our common stock and its ability to exercise certain rights under the terms of the stockholder agreement that we will enter with Cementos Argos in connection with the Argos USA Transaction.
Under the stockholders agreement, for so long as Cementos Argos continues to beneficially own at greater than 25.0% of the then-outstanding shares of Class A common stock, neither the Company nor any of our subsidiaries may take any of the following actions without the prior written consent of Cementos Argos, such approval not to be unreasonably withheld, conditioned or delayed: (i) voluntarily incur ‘‘Indebtedness’’ (as defined in the amended and restated credit agreement, dated as of July 17, 2015 by and among Summit Materials, LLC, the guarantors party thereto, the lenders party thereto and Bank of America, N.A. (the “Credit Agreement”)) if immediately following such incurrence, either the Company’s (1) Consolidated First Lien Net Leverage Ratio (as defined in the Credit Agreement), or any substantially equivalent term in the Credit Agreement, would exceed 6.00:1.00 or (2) Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement), or any substantially equivalent term in the Credit Agreement, would exceed 8.00:1.00, (ii) enter into any material agreements or arrangements with affiliates of the Company or its subsidiaries providing for payments to such affiliates in excess of $20,000,000, subject to certain exceptions, (iii) fundamentally change the business of the Company and its subsidiaries, taken as a whole, in a manner that would constitute a significant departure from the construction materials industry or result in the Company and its subsidiaries, taken as a whole, ceasing to operate in the construction materials industry, (iv) voluntarily liquidate, dissolve or wind-up the business and affairs of the Company; or (v) authorize, agree or commit to do any of the foregoing.
Accordingly, Cementos Argos’s influence over us could have a negative impact on our business and business prospects and negatively impact the trading price of our common stock.
Our results may suffer if we do not effectively manage our expanded operations following the Argos USA Transaction.
Following completion of the Argos USA Transaction, the size of our business will increase significantly beyond its current size. Our future success will depend, in part, on our ability to manage this expanded business, which poses numerous risks and uncertainties, including with respect to the need to integrate the operations and business of Argos USA into our existing business in an efficient and timely manner, to combine systems and management controls and to integrate relationships with customers, vendors and business partners.
Our current stockholders will have a reduced ownership and voting interest after the Argos USA Transaction is completed compared to their current ownership and will exercise less influence over management.
Immediately after the Argos USA Transaction is completed, it is expected that, on a fully-diluted basis, our current stockholders will collectively own approximately 69% and Cementos Argos will own approximately 31% of the outstanding shares of Class A common stock. As a result of the Argos USA Transaction, our current stockholders will own a smaller percentage of the Company than they currently own, and as a result will have less influence over our management and policies.
Sales of substantial amounts of Class A common stock in the open market by Cementos Argos and its affiliates could depress our stock price.
Shares of Class A common stock that are issued to Cementos Argos in connection with the Argos USA Transaction will become freely tradable, following a two year lock-up period from the closing date of the transaction, once registered pursuant to the registration rights agreement to be entered into, among the Company, Cementos Argos and the other parties thereto, or sold in compliance with Rule 144 promulgated under the Securities Act of 1933, as amended (‘‘Rule 144’’). Pursuant to the registration rights agreement, all of the shares of Class A common stock issued as Stock Consideration to any of the parties to the registration rights agreement may be registered for resale. Once registered, the Class A common stock held by such party will not be subject to any restrictions or require further registration under the Securities Act of 1933, as amended.
Cementos Argos may wish to dispose of some or all of their interests in us, and as a result may seek to sell their shares of Class A common stock. These sales (or the perception that these sales may occur), coupled with the increase in the number of outstanding shares of Class A common stock, may affect the market for, and the market price of, the Class A common stock in an adverse manner.
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If the Argos USA Transaction is completed and our stockholders, including the parties to the registration rights agreement, sell substantial amounts of Class A common stock in the public market following the closing of the Argos USA Transaction, the market price of the Class A common stock may decrease. These sales might also make it more difficult for us to raise capital by selling equity or equity-related securities at a time and price that it otherwise would deem appropriate.
Other Risks
We may not obtain the expected benefits of streamlining our corporate structure, and the costs and detriments may exceed any benefits actually obtained.
In August 2023, we announced a significant step towards streamlining our corporate structure by reaching an agreement to acquire Tax Receivable Agreement rights from certain of our pre-IPO investors. As a result, certain Tax Receivable Agreement rights previously held by third parties are now held by Summit LLC. In addition, as of October 31, 2023, 99.3% of the economic interest in Summit Holdings were held by Summit Inc. with only the remaining 0.7% held by pre-IPO investors. We expect to take additional steps in order to ultimately simplify our overall corporate structure and financial reporting by eliminating our so-called “Up-C” structure after which time all equity holders will hold their equity interests in our business at the Summit Inc. parent entity. The benefits we expect to receive from a streamlined corporate structure may not materialize in part or in full, or the detriments may significantly outweigh the benefits that do materialize, due to an overestimation of such expected benefits or underestimation of detriments by management, market conditions or other circumstances. As a result, we may incur costs and detriments of the Reorganization significantly in excess of the actual benefits.
In addition, as a result of our efforts to streamline our corporate structure and the entry into of agreements relating to the Argos USA Transaction, we expect that Summit Inc. may have material assets and liabilities in addition to holding interests in Summit Holdings and tax-related obligations. As a result, the remaining LP Units and our outstanding shares of Class A common stock may, in the interim, be less economically equivalent and remaining holders of LP Units may.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
The information concerning mine safety violations and other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95.1 to this report.
ITEM 5. OTHER INFORMATION
During the three months ended September 30, 2023, no director or officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
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ITEM 6. EXHIBITS
| 2.1 | |||||
| 2.2 | |||||
| 3.1 | |||||
| 3.2 | |||||
| 3.3 | |||||
| 3.4 | |||||
| 10.1* | |||||
| 10.2* | |||||
| 31.1* | |||||
| 31.2* | |||||
| 31.3* | |||||
| 31.4* | |||||
| 32.1** | |||||
| 32.2** | |||||
| 32.3** | |||||
| 32.4** | |||||
| 95.1* | |||||
| 99.1* | |||||
| 101.INS* | Inline XBRL Instance Document - the instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document | ||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104.1* | Cover Page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (and contained in Exhibit 101). | ||||
* Filed herewith
** Furnished herewith
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The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them other than for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
| SUMMIT MATERIALS, INC. | ||||||||
| SUMMIT MATERIALS, LLC | ||||||||
| Date: November 2, 2023 | By: | /s/ Anne P. Noonan | ||||||
| Anne P. Noonan | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| Date: November 2, 2023 | By: | /s/ C. Scott Anderson | ||||||
| C. Scott Anderson | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial and Accounting Officer) | ||||||||
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