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Summit Materials, Inc. - Quarter Report: 2019 September (Form 10-Q)


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 28, 2019
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.)
Delaware (Summit Materials, LLC)
(State or other jurisdiction of incorporation or organization)
1550 Wynkoop Street, 3rd Floor
Denver, Colorado
(Address of principal executive offices)
                            


 
47-1984212
26-4138486
(I.R.S. Employer Identification No.)
80202
(Zip Code)




Registrants’ telephone number, including area code: (303893-0012
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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Summit Materials, Inc.
 
 
 
Yes
No
Summit Materials, LLC
 
 
 
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
Summit Materials, Inc.
 
 
 
Yes
No
Summit Materials, LLC
 
 
 
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Summit Materials, Inc.
 
 
 
 
 
 
 
Large accelerated filer
 
Accelerated filer
 
 
Non-accelerated filer
 
Smaller reporting company
 

 
 
 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
Summit Materials, LLC
 
 
 
 
 
 
 
Large accelerated filer
 
Accelerated filer
 
 
Non-accelerated filer
 
Smaller reporting company
 

 
 
 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Summit Materials, Inc.
 
 
 
Yes
No
Summit Materials, LLC
 
 
 
Yes
No
As of October 28, 2019, 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 112,279,406 and 99, respectively.
As of October 28, 2019, 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 28, 2019, its sole material asset was a 97.1% 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 1/8% senior notes due 2023 (“2023 Notes”), our 5 1/8% senior notes due 2025 (“2025 Notes”) and our 6 1/2 % senior notes due 2027 (“2027 Notes” and collectively with the 2023 Notes and 2025 Notes, the “Senior Notes”). Summit Inc.’s only revenue for the three and nine months ended September 28, 2019 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 29, 2018 (the “Annual Report”), as filed with the Securities and Exchange Commission (the “SEC”), any 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;
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, 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;



declines in public infrastructure construction and delays or reductions in governmental funding, including the funding by transportation authorities and other state agencies;
environmental, health, safety and climate change laws or governmental requirements or policies concerning zoning and land use;
rising prices for commodities, labor and other production and delivery costs as a result of inflation 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;
our substantial current level of indebtedness;
our dependence on senior management and other key 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 regulations;
unexpected operational difficulties;
interruptions in our information technology systems and infrastructure; and
potential labor disputes.
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;
“Issuers” refers to Summit LLC and Finance Corp. as co‑issuers of the Senior Notes;  
“IPO” refers to the March 2015 initial public offering of Summit Inc.;
“LP Units” refers to the Class A limited partnership units of Summit Holdings; and
“TRA” refers to 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 28, 2019. This chart is provided for illustrative purposes only and does not show all of our legal entities or all obligations of such entities.
corpstructurea12.jpg
                                                                                         
(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.


Table of Contents

SUMMIT MATERIALS, INC.
SUMMIT MATERIALS, LLC 
FORM 10-Q 
TABLE OF CONTENTS  
 
 
Page No.
PART I—Financial Information 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II — Other Information 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

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 28, 2019
 
December 29, 2018
 
(unaudited)
 
(audited)
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
182,589

 
$
128,508

Accounts receivable, net
337,060

 
214,518

Costs and estimated earnings in excess of billings
49,715

 
18,602

Inventories
197,015

 
213,851

Other current assets
12,037

 
16,061

Total current assets
778,416

 
591,540

Property, plant and equipment, less accumulated depreciation, depletion and amortization (September 28, 2019 - $923,439 and December 29, 2018 - $794,251)
1,762,307

 
1,780,132

Goodwill
1,198,496

 
1,192,028

Intangible assets, less accumulated amortization (September 28, 2019 - $9,666 and December 29, 2018 - $8,247)
24,446

 
18,460

Deferred tax assets, less valuation allowance (September 28, 2019 - $29,472 and December 29, 2018 - $19,366)
193,632

 
225,397

Operating lease right-of-use assets
33,045

 

Other assets
51,772

 
50,084

Total assets
$
4,042,114

 
$
3,857,641

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of debt
$
6,354

 
$
6,354

Current portion of acquisition-related liabilities
34,398

 
34,270

Accounts payable
152,232

 
107,702

Accrued expenses
118,003

 
100,491

Current operating lease liabilities
8,609

 

Billings in excess of costs and estimated earnings
12,476

 
11,840

Total current liabilities
332,072

 
260,657

Long-term debt
1,853,414

 
1,807,502

Acquisition-related liabilities
40,662

 
49,468

Tax receivable agreement liability
310,098

 
309,674

Noncurrent operating lease liabilities
25,329

 

Other noncurrent liabilities
93,761

 
88,195

Total liabilities
2,655,336

 
2,515,496

Commitments and contingencies (see note 12)


 


Stockholders’ equity:
 
 
 
Class A common stock, par value $0.01 per share; 1,000,000,000 shares authorized, 112,275,998 and 111,658,927 shares issued and outstanding as of September 28, 2019 and December 29, 2018, respectively
1,124

 
1,117

Class B common stock, par value $0.01 per share; 250,000,000 shares authorized, 99 shares issued and outstanding as of September 28, 2019 and December 29, 2018

 

Additional paid-in capital
1,212,240

 
1,194,204

Accumulated earnings
153,134

 
129,739

Accumulated other comprehensive income
4,938

 
2,681

Stockholders’ equity
1,371,436

 
1,327,741

Noncontrolling interest in Summit Holdings
15,342

 
14,404

Total stockholders’ equity
1,386,778

 
1,342,145

Total liabilities and stockholders’ equity
$
4,042,114

 
$
3,857,641

See notes to unaudited consolidated financial statements.

1

Table of Contents

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 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Revenue:
 
 
 
 
 
 
 
Product
$
554,721

 
$
512,822

 
$
1,293,999

 
$
1,229,596

Service
111,126

 
112,195

 
230,389

 
234,572

Net revenue
665,847

 
625,017

 
1,524,388

 
1,464,168

Delivery and subcontract revenue
66,235

 
69,644

 
141,224

 
145,804

Total revenue
732,082

 
694,661

 
1,665,612

 
1,609,972

Cost of revenue (excluding items shown separately below):
 
 
 
 
 
 
 
Product
338,119

 
321,586

 
846,702

 
814,166

Service
78,625

 
80,573

 
167,550

 
170,626

Net cost of revenue
416,744

 
402,159

 
1,014,252

 
984,792

Delivery and subcontract cost
66,235

 
69,644

 
141,224

 
145,804

Total cost of revenue
482,979

 
471,803

 
1,155,476

 
1,130,596

General and administrative expenses
62,344

 
59,457

 
190,915

 
190,975

Depreciation, depletion, amortization and accretion
55,127

 
53,974

 
164,140

 
150,663

Transaction costs
751

 
1,260

 
1,449

 
3,817

Operating income
130,881

 
108,167

 
153,632

 
133,921

Interest expense
28,917

 
28,889

 
88,423

 
86,616

Loss on debt financings

 

 
14,565

 
149

Gain on sale of business

 
(12,108
)
 

 
(12,108
)
Other income, net
(1,875
)
 
(3,371
)
 
(8,354
)
 
(11,942
)
Income from operations before taxes
103,839

 
94,757

 
58,998

 
71,206

Income tax expense
45,602

 
20,765

 
34,272

 
16,249

Net income
58,237

 
73,992

 
24,726

 
54,957

Net income attributable to Summit Holdings
2,480

 
2,703

 
1,331

 
1,888

Net income attributable to Summit Inc.
$
55,757

 
$
71,289

 
$
23,395

 
$
53,069

Earnings per share of Class A common stock:
 
 
 
 
 
 
 
Basic
$
0.50

 
$
0.64

 
$
0.21

 
$
0.48

Diluted
$
0.48

 
$
0.64

 
$
0.21

 
$
0.47

Weighted average shares of Class A common stock:
 
 
 
 
 
 
 
Basic
112,179,137

 
111,641,344

 
112,020,275

 
111,288,211

Diluted
115,505,122

 
111,940,067

 
112,497,610

 
112,472,724


See notes to unaudited consolidated financial statements.

2

Table of Contents

SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Comprehensive Income
(In thousands) 
 
Three months ended
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net income
$
58,237

 
$
73,992

 
$
24,726

 
$
54,957

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(1,328
)
 
1,970

 
3,263

 
(3,179
)
Income (loss) on cash flow hedges
155

 
87

 
(148
)
 
1,443

Less tax effect of other comprehensive income (loss) items
284

 
(507
)
 
(766
)
 
428

Other comprehensive (loss) income
(889
)
 
1,550

 
2,349

 
(1,308
)
Comprehensive income
57,348

 
75,542

 
27,075

 
53,649

Less comprehensive income attributable to Summit Holdings
2,444

 
2,764

 
1,423

 
1,832

Comprehensive income attributable to Summit Inc.
$
54,904

 
$
72,778

 
$
25,652

 
$
51,817


See notes to unaudited consolidated financial statements.

3

Table of Contents

SUMMIT MATERIALS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands) 
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
Cash flow from operating activities:
 
 
 
Net income
$
24,726

 
$
54,957

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion, amortization and accretion
166,997

 
152,829

Share-based compensation expense
15,424

 
19,833

Net gain on asset disposals
(8,030
)
 
(27,261
)
Non-cash loss on debt financings
2,850

 

Change in deferred tax asset, net
32,736

 
12,577

Other
(1,609
)
 
873

(Increase) decrease in operating assets, net of acquisitions and dispositions:
 
 
 
Accounts receivable, net
(121,196
)
 
(90,481
)
Inventories
16,296

 
(26,027
)
Costs and estimated earnings in excess of billings
(31,085
)
 
(37,643
)
Other current assets
5,635

 
(6,819
)
Other assets
4,992

 
(1,217
)
(Decrease) increase in operating liabilities, net of acquisitions and dispositions:
 
 
 
Accounts payable
52,423

 
24,978

Accrued expenses
8,447

 
(2,197
)
Billings in excess of costs and estimated earnings
618

 
(3,850
)
Tax receivable agreement liability
424

 
1,812

Other liabilities
(5,805
)
 
(1,807
)
Net cash provided by operating activities
163,843

 
70,557

Cash flow from investing activities:
 
 
 
Acquisitions, net of cash acquired
(2,842
)
 
(210,894
)
Purchases of property, plant and equipment
(139,762
)
 
(183,752
)
Proceeds from the sale of property, plant and equipment
13,035

 
18,426

Proceeds from sale of business

 
21,564

Other
(207
)
 
2,660

Net cash used for investing activities
(129,776
)
 
(351,996
)
Cash flow from financing activities:
 
 
 
Proceeds from debt issuances
300,000

 
64,500

Debt issuance costs
(6,312
)
 
(550
)
Payments on debt
(264,906
)
 
(79,027
)
Payments on acquisition-related liabilities
(11,000
)
 
(35,321
)
Distributions from partnership

 
(69
)
Proceeds from stock option exercises
2,559

 
15,615

Other
(501
)
 
(1,913
)
Net cash provided by (used in) financing activities
19,840

 
(36,765
)
Impact of foreign currency on cash
174

 
(422
)
Net increase (decrease) in cash
54,081

 
(318,626
)
Cash and cash equivalents—beginning of period
128,508

 
383,556

Cash and cash equivalents—end of period
$
182,589

 
$
64,930

See notes to unaudited consolidated financial statements.

4

Table of Contents

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 29, 2018
$
129,739

 
$
2,681

 
111,658,927

 
$
1,117

 
99

 
$

 
$
1,194,204

 
$
14,404

 
$
1,342,145

Net loss
(68,772
)
 

 

 

 

 

 

 
(2,729
)
 
(71,501
)
LP Unit exchanges

 

 
17,500

 

 

 

 
122

 
(122
)
 

Other comprehensive income, net of tax

 
1,584

 

 

 

 

 

 
66

 
1,650

Stock option exercises

 

 
43,142

 
1

 

 

 
766

 

 
767

Share-based compensation

 

 

 

 

 

 
5,906

 

 
5,906

Shares redeemed to settle taxes and other

 

 
347,962

 
3

 

 

 
(495
)
 

 
(492
)
Balance — March 30, 2019
$
60,967

 
$
4,265

 
112,067,531

 
$
1,121

 
99

 
$

 
$
1,200,503

 
$
11,619

 
$
1,278,475

Net loss
36,410

 

 

 

 

 

 

 
1,580

 
37,990

Other comprehensive income, net of tax

 
1,526

 

 

 

 

 

 
62

 
1,588

Stock option exercises

 

 
1,019

 

 

 

 
17

 

 
17

Share-based compensation

 

 

 

 

 

 
4,699

 

 
4,699

Shares redeemed to settle taxes and other

 

 
4,944

 
1

 

 

 
2

 
(1
)
 
2

Balance — June 29, 2019
$
97,377

 
$
5,791

 
112,073,494

 
$
1,122

 
99

 
$

 
$
1,205,221

 
$
13,260

 
$
1,322,771

Net income
55,757

 

 

 

 

 

 

 
2,480

 
58,237

LP Unit exchanges

 

 
89,836

 
1

 

 

 
361

 
(362
)
 

Other comprehensive income, net of tax

 
(853
)
 

 

 

 

 

 
(36
)
 
(889
)
Stock option exercises

 

 
99,344

 
1

 

 

 
1,774

 

 
1,775

Share-based compensation

 

 

 

 

 

 
4,819

 

 
4,819

Shares redeemed to settle taxes and other

 

 
13,324

 

 

 

 
65

 

 
65

Balance - September 28, 2019
$
153,134

 
$
4,938

 
112,275,998

 
$
1,124

 
99

 
$

 
$
1,212,240

 
$
15,342

 
$
1,386,778


5

Table of Contents

 
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 30, 2017
$
95,833

 
$
7,386

 
110,350,594

 
$
1,104

 
100

 
$

 
$
1,154,220

 
$
13,178

 
$
1,271,721

Net loss
(53,729
)
 

 

 

 

 

 

 
(2,219
)
 
(55,948
)
LP Unit exchanges

 

 
104,104

 
1

 

 

 
485

 
(486
)
 

Other comprehensive loss, net of tax

 
(2,563
)
 

 

 

 

 

 
(66
)
 
(2,629
)
Stock option exercises

 

 
856,915

 
9

 

 

 
15,468

 

 
15,477

Share-based compensation

 

 

 

 

 

 
8,507

 

 
8,507

Distributions from partnership

 

 

 

 

 

 

 
(9
)
 
(9
)
Shares redeemed to settle taxes and other

 

 
176,960

 
2

 

 

 
(1,774
)
 

 
(1,772
)
Balance — March 31, 2018
$
42,104

 
$
4,823

 
111,488,573

 
$
1,116

 
100

 
$

 
$
1,176,906

 
$
10,398

 
$
1,235,347

Net income
35,509

 

 

 

 

 

 

 
1,404

 
36,913

LP Unit exchanges

 

 
125,554

 
1

 

 

 
365

 
(366
)
 

Other comprehensive loss, net of tax

 
(178
)
 

 

 

 

 

 
(51
)
 
(229
)
Stock option exercises

 

 

 

 

 

 
139

 

 
139

Share-based compensation

 

 

 

 

 

 
5,683

 

 
5,683

Distributions from partnership

 

 

 

 

 

 

 
(60
)
 
(60
)
Shares redeemed to settle taxes and other

 

 
15,111

 

 

 

 
(22
)
 

 
(22
)
Balance — June 30, 2018
$
77,613

 
$
4,645

 
111,629,238

 
$
1,117

 
100

 
$

 
$
1,183,071

 
$
11,325

 
$
1,277,771

Net income
71,289

 

 

 

 

 

 

 
2,703

 
73,992

LP Unit exchanges

 

 
24,444

 

 

 

 
79

 
(79
)
 

Other comprehensive loss, net of tax

 
1,489

 

 

 

 

 

 
61

 
1,550

Stock option exercises

 

 
6,983

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 
5,643

 

 
5,643

Distributions from partnership

 

 

 

 

 

 

 

 

Shares redeemed to settle taxes and other

 

 
(6,113
)
 

 
(1
)
 

 
(86
)
 

 
(86
)
Balance — September 29, 2018
$
148,902

 
$
6,134

 
111,654,552

 
$
1,117

 
99

 
$

 
$
1,188,707

 
$
14,010

 
$
1,358,870


See notes to unaudited consolidated financial statements.

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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 29, 2018. 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 28, 2019, the results of operations for the three and nine months ended September 28, 2019 and September 29, 2018 and cash flows for the nine months ended September 28, 2019 and September 29, 2018.
 
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. As a result of the reorganization into a holding company structure (the “Reorganization”), Summit Holdings became a variable interest entity over which Summit Inc. has 100% voting power and control and for which Summit Inc. has the obligation to absorb losses and the right to receive benefits.
 
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, the 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

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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 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 23 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 28, 2019 or September 29, 2018.

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 and underground storage space rental.
 
Products
 
We earn revenue from the sale of products, which primarily include aggregates, cement, ready-mix concrete and asphalt, but also include concrete products, net of discounts or allowances, if any, and freight and delivery charges billed to customers. Freight and delivery charges associated with cement sales are recorded on a net basis together with freight costs within cost of sales. Revenue for product sales is recognized when evidence of an arrangement exists and when control passes, which generally is when the product is shipped.
 
Services
 
We earn revenue from the provision of services, which are primarily paving and related services, but also include landfill operations, and the receipt and disposal of waste that is converted to fuel for use in our cement plants. Revenue from the receipt of waste fuels is recognized when the waste is accepted and a corresponding liability is recognized for the costs to process the waste into fuel for the manufacturing of cement or to ship the waste offsite for disposal in accordance with applicable regulations.
 
Revenue derived from paving and related services is recognized using the percentage of completion method, which approximates progress towards completion. Under the percentage of completion method, we recognize paving and related services revenue as services are rendered. The majority of our construction service contracts are completed within one year, but may occasionally extend beyond this time frame. We estimate profit as the difference between total estimated revenue and total estimated cost of a contract and recognize that profit over the life of the contract based on input measures. We generally measure progress toward completion on long-term paving and related services contracts based on the proportion of costs incurred to date relative to total estimated costs at completion. We include revisions of estimated profits on contracts in earnings under the cumulative catch-up method, under which the effect of revisions in estimates is recognized immediately. If a revised estimate of contract profitability reveals an anticipated loss on the contract, we recognize the loss in the period it is identified.
 
The percentage of completion method of accounting involves the use of various estimating techniques to project costs at completion, and in some cases includes estimates of recoveries asserted against the customer for changes in specifications or other disputes. Contract estimates involve various assumptions and projections relative to the outcome of future events over multiple periods, including future labor productivity and availability, the nature and complexity of the work to be performed, the cost and availability of materials, the effect of delayed performance, and the availability and timing of funding from the customer. These estimates are based on our best judgment. A significant change in one or more of these estimates could affect the profitability of one or more of our contracts. We review our contract estimates regularly to assess revisions in contract values and estimated costs at completion. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts. No material adjustments to a contract were recognized in the three and nine months ended September 28, 2019.
 
Costs and estimated earnings in excess of billings are composed principally of revenue recognized on contracts on the percentage of completion method for which billings had not been presented to customers because the amounts were not

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billable under the contract terms at the balance sheet date. In accordance with the contract terms, the unbilled receivables at the balance sheet date are expected to be billed in following periods. Billings in excess of costs and estimated earnings represent billings in excess of revenue recognized. Contract assets and liabilities are netted on a contract-by-contract basis.
 
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.
 
Tax Receivable Agreement— When Class A limited partnership units of Summit Holdings (“LP Units”) are exchanged for shares of Class A common stock of Summit Inc. or Summit Inc. purchases LP Units for cash, this results in increases in Summit Inc.’s share of the tax basis of the tangible and intangible assets, which increases the tax depreciation and amortization deductions that otherwise would not have been available to Summit Inc. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of cash taxes that we would otherwise be required to pay in the future. Prior to our initial public offering (“IPO”), we entered into a TRA with the pre-IPO owners that requires us to pay the pre-IPO owners or their permitted assignees 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax that we actually realize as a result of these exchanges. These benefits include (1) increases in the tax basis of tangible and intangible assets of Summit Holdings and certain other tax benefits related to entering into the TRA, (2) tax benefits attributable to payments under the TRA, or (3) under certain circumstances such as an early termination of the TRA, we are deemed to realize, as a result of the increases in tax basis in connection with exchanges by the pre-IPO owners described above and certain other tax benefits attributable to payments under the TRA.
 
We periodically evaluate the realizability of the deferred tax assets resulting from the exchange of LP Units for Class A common stock. If the deferred tax assets are determined to be realizable, we then assess whether payment of amounts under the TRA have become probable. If so, we record a TRA liability equal to 85% of such deferred tax assets, and the remaining 15% as an increase to additional paid-in capital. If a deferred tax asset subject to the TRA is determined not to be realizable and therefore subject to a valuation allowance, we do not record a TRA liability for such deferred tax assets. In subsequent periods, we assess the realizability of all of our deferred tax assets subject to the TRA. Should we determine a deferred tax asset with a valuation allowance is realizable in a subsequent period, the related valuation allowance will be released and consideration of a corresponding TRA liability will be assessed. The realizability of deferred tax assets, including those subject to the TRA, is dependent upon the generation of future taxable income during the periods in which those deferred tax assets become deductible and consideration of prudent and feasible tax-planning strategies.
 
The measurement of the TRA liability is accounted for as a contingent liability. Therefore, once we determine that a payment to a pre-IPO owner has become probable and can be estimated, the estimate of payment will be accrued.
 
New Accounting Standards — In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. Lessees are required to disclose more quantitative and qualitative information about the leases than current U.S. GAAP requires. The ASU and subsequent amendments issued in 2018 are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We adopted the standard effective December 30, 2018 using the modified retrospective approach.

The modified retrospective approach provides a method for recording existing leases at adoption. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. In addition, we elected the hindsight practical expedient to determine the lease term for existing leases.

The most significant impact upon adoption was the recognition of $36.8 million of operating lease right-of-use assets and $36.8 million operating lease liabilities. The standard had no material impact on our statement of cash flows.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, allowing more financial and nonfinancial hedging strategies to be eligible for hedge accounting. The ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The adoption of this new ASU did not have a material impact on our consolidated financial results.

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In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, increasing the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The adoption of this new ASU did not have a material impact on our consolidated financial results.

2.
GOODWILL AND INTANGIBLES
 
The Company has completed numerous acquisitions since its formation, which have been financed through a combination of debt and equity funding. The operations of each acquisition have been included in the Company’s consolidated results of operations since the respective closing dates of the acquisitions. The Company measures all assets acquired and liabilities assumed at their acquisition-date fair value.
 
Changes in the carrying amount of goodwill, by reportable segment, from December 29, 2018 to September 28, 2019 are summarized as follows: 
 
West
 
East
 
Cement
 
Total  
Balance, December 29, 2018
$
580,567

 
$
406,805

 
$
204,656

 
$
1,192,028

Acquisitions (1)
1,167

 
3,621

 

 
4,788

Foreign currency translation adjustments
1,680

 

 

 
1,680

Balance, September 28, 2019
$
583,414

 
$
410,426

 
$
204,656

 
$
1,198,496

_____________________________________________________________________________________________
(1)
Reflects goodwill from 2019 acquisitions and working capital adjustments from prior year acquisitions.

The Company’s intangible assets are primarily composed of goodwill, mineral lease agreements and reserve rights. 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 the 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. The following table shows intangible assets by type and in total:
 
September 28, 2019
 
December 29, 2018
 
Gross
 Carrying
 Amount
 
Accumulated
 Amortization
 
Net
 Carrying
 Amount
 
Gross
 Carrying
 Amount
 
Accumulated
 Amortization
 
Net
 Carrying
 Amount
Mineral leases
$
19,064

 
$
(6,124
)
 
$
12,940

 
$
19,064

 
$
(5,259
)
 
$
13,805

Reserve rights
6,234

 
(2,174
)
 
4,060

 
6,234

 
(1,940
)
 
4,294

Trade names
1,000

 
(933
)
 
67

 
1,000

 
(858
)
 
142

Other
7,814

 
(435
)
 
7,379

 
409

 
(190
)
 
219

Total intangible assets
$
34,112

 
$
(9,666
)
 
$
24,446

 
$
26,707

 
$
(8,247
)
 
$
18,460


 
Amortization expense totaled $0.6 million and $1.4 million for the three and nine months ended September 28, 2019, respectively, and $0.5 million and $1.1 million for the three and nine months September 29, 2018, respectively. The estimated amortization expense for the intangible assets for each of the five years subsequent to September 28, 2019 is as follows:
2019 (three months)
$
711

2020
2,552

2021
2,164

2022
2,168

2023
2,035

2024
1,940

Thereafter
12,876

Total
$
24,446


In September 2018, the Company sold a non-core business in the West segment, resulting in cash proceeds of $21.6 million, and a total gain on the disposition of the business of $12.1 million.

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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 28, 2019 and September 29, 2018 is as follows:
 
Three months ended
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Revenue by product*:
 
 
 
 
 
 
 
Aggregates
$
137,528

 
$
109,621

 
$
354,050

 
$
280,761

Cement
92,482

 
87,909

 
202,780

 
197,439

Ready-mix concrete
172,758

 
164,866

 
444,258

 
447,490

Asphalt
137,753

 
125,153

 
254,156

 
231,666

Paving and related services
138,083

 
146,477

 
267,732

 
288,119

Other
53,478

 
60,635

 
142,636

 
164,497

Total revenue
$
732,082

 
$
694,661

 
$
1,665,612

 
$
1,609,972

                                                                                         
*Revenue from liquid asphalt terminals is included in asphalt revenue.
The following table outlines the significant changes in contract assets and contract liability balances from December 29, 2018 to September 28, 2019. Also included in the table is the net change in estimate as a percentage of aggregate revenue for such contracts:
 
Costs and estimated earnings in excess of billings
 
Billings in excess of costs and estimated earnings
Balance - December 29, 2018
$
18,602

 
$
11,840

Changes in revenue billed, contract price or cost estimates
31,085

 
618

Other
28

 
18

Balance - September 28, 2019
$
49,715

 
$
12,476


 
Accounts receivable, net consisted of the following as of September 28, 2019 and December 29, 2018
 
September 28, 2019
 
December 29, 2018
Trade accounts receivable
$
251,426

 
$
157,601

Construction contract receivables
71,903

 
47,994

Retention receivables
17,227

 
15,010

Receivables from related parties
1,783

 
629

Accounts receivable
342,339

 
221,234

Less: Allowance for doubtful accounts
(5,279
)
 
(6,716
)
Accounts receivable, net
$
337,060

 
$
214,518


 
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.


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4.
INVENTORIES
 
Inventories consisted of the following as of September 28, 2019 and December 29, 2018
 
September 28, 2019
 
December 29, 2018
Aggregate stockpiles
$
142,618

 
$
151,300

Finished goods
25,240

 
34,993

Work in process
7,478

 
7,478

Raw materials
21,679

 
20,080

Total
$
197,015

 
$
213,851



5.
ACCRUED EXPENSES
 
Accrued expenses consisted of the following as of September 28, 2019 and December 29, 2018:
 
September 28, 2019
 
December 29, 2018
Interest
$
16,178

 
$
26,223

Payroll and benefits
27,860

 
15,952

Finance lease obligations
17,288

 
15,557

Insurance
17,035

 
13,625

Non-income taxes
16,264

 
7,442

Professional fees
1,051

 
1,408

Other (1)
22,327

 
20,284

Total
$
118,003

 
$
100,491

                                                                                         
(1)
Consists primarily of subcontractor and working capital settlement accruals.

6.
DEBT
 
Debt consisted of the following as of September 28, 2019 and December 29, 2018
 
September 28, 2019
 
December 29, 2018
Term Loan, due 2024:
 
 
 
$625.8 million and $630.6 million, net of $1.2 million and $1.3 million discount at September 28, 2019 and December 29, 2018, respectively
$
624,672

 
$
629,268

812% Senior Notes, due 2022

 
250,000

618% Senior Notes, due 2023:
 
 
 
$650.0 million, net of $1.0 million and $1.1 million discount at September 28, 2019 and December 29, 2018, respectively
649,073

 
648,891

518% Senior Notes, due 2025
300,000

 
300,000

612% Senior Notes, due 2027
300,000

 

Total
1,873,745

 
1,828,159

Current portion of long-term debt
6,354

 
6,354

Long-term debt
$
1,867,391

 
$
1,821,805


 
The contractual payments of long-term debt, including current maturities, for the five years subsequent to September 28, 2019, are as follows: 


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2019 (three months)
$
1,588

2020
7,942

2021
6,354

2022
6,354

2023
656,354

2024
597,252

Thereafter
600,000

Total
1,875,844

Less: Original issue net discount
(2,099
)
Less: Capitalized loan costs
(13,977
)
Total debt
$
1,859,768


 
Senior Notes—On March 15, 2019, Summit LLC and Summit Finance (together, 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 "2019 Indenture"). The 2019 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 2019 Indenture also contains customary events of default. Interest on the 2027 Notes is payable semi-annually on March 15 and September 15 of each year commencing on September 15, 2019.

In March 2019, using the proceeds from the 2027 Notes, all of the outstanding $250.0 million 8.500% senior notes due 2022 (the “2022 Notes”) were redeemed at a price equal to par plus an applicable premium and the indenture under which the 2022 Notes were issued was satisfied and discharged. As a result of the extinguishment, charges of $14.6 million were recognized in the quarter ended March 30, 2019, which included charges of $11.7 million for the applicable redemption premium and $2.9 million for the write-off of deferred financing fees.

In 2017, the Issuers issued $300.0 million of 5.125% senior notes due June 1, 2025 (the “2025 Notes”). The 2025 Notes were issued at 100.0% of their par value with proceeds of $295.4 million, net of related fees and expenses. The 2025 Notes were issued under an indenture dated June 1, 2017, the terms of which are generally consistent with the 2019 Indenture. Interest on the 2025 Notes is payable semi-annually on June 1 and December 1 of each year commencing on December 1, 2017.
 
In 2015, the Issuers issued $650.0 million of 6.125% senior notes due July 2023 (the “2023 Notes” and collectively with the 2025 Notes and the 2027 Notes, the “Senior Notes”). Of the aggregate $650.0 million of 2023 Notes, $350.0 million were issued at par and $300.0 million were issued at 99.375% of par. The 2023 Notes were issued under an indenture dated July 8, 2015, the terms of which are generally consistent with the 2019 Indenture. Interest on the 2023 Notes is payable semi-annually in arrears on January 15 and July 15 of each year.

As of September 28, 2019 and December 29, 2018, the Company was in compliance with all financial covenants under the applicable indentures.
 
Senior Secured Credit Facilities— Summit LLC has credit facilities that provide for term loans in an aggregate amount of $650.0 million and revolving credit commitments in an aggregate amount of $345.0 million (the “Senior Secured Credit Facilities”). 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 2018 payment. The unpaid principal balance is due in full on the maturity date, which is November 21, 2024.

On February 25, 2019, Summit LLC entered into Incremental Amendment No. 4 to the credit agreement governing the Senior Secured Credit Facilities (the “Credit Agreement”) which, among other things, increased the total amount available under the revolving credit facility to $345.0 million and extended the maturity date of the Credit Agreement with respect to the revolving credit commitments to February 25, 2024. During 2018 and 2017, Summit LLC entered into three different amendments to the Credit Agreement, which among other things, reduced the applicable margin in respect to the outstanding principal amount at the time of the respective amendments.

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The revolving credit facility bears interest per annum equal to, at Summit LLC’s option, either (i) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) LIBOR plus 1.00%, plus an applicable margin of 2.00% for base rate loans or (ii) a LIBOR rate determined by reference to Reuters prior to the interest period relevant to such borrowing adjusted for certain additional costs plus an applicable margin of 3.00% for LIBOR rate loans.
 
There were no outstanding borrowings under the revolving credit facility as of September 28, 2019 and December 29, 2018, with borrowing capacity of $329.8 million remaining as of September 28, 2019, which is net of $15.2 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.
 
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 28, 2019 and December 29, 2018, 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.
The following table presents the activity for the deferred financing fees for the nine months ended September 28, 2019 and September 29, 2018:
 
Deferred financing fees
Balance—December 29, 2018
$
15,475

Loan origination fees
6,312

Amortization
(2,668
)
Write off of deferred financing fees
(2,851
)
Balance—September 28, 2019
$
16,268

 
 
 
 
Balance - December 30, 2017
$
19,033

Loan origination fees
550

Amortization
(3,074
)
Balance - September 29, 2018
$
16,509

 
Other—On January 15, 2015, the Company’s wholly-owned subsidiary in British Columbia, Canada entered into an agreement with HSBC 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 0.90% and (iii) $0.3 million CAD revolving credit commitment to provide guarantees on behalf of that subsidiary. There were no amounts outstanding under this agreement as of September 28, 2019 or December 29, 2018.

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 $45.6 million and $34.3 million in the three and nine months ended September 28, 2019, respectively, and our income tax expense was $20.8 million and $16.2 million in the three and nine months ended September 29, 2018, respectively. The effective tax rate for Summit Inc. differs from the federal rate primarily due to (1) unrecognized tax benefits related in the deductibility of interest expense as noted below, (2) state taxes, (3) tax depletion expense in excess of the expense recorded under U.S. GAAP, (4) the minority interest in the Summit Holdings partnership that is allocated outside of the Company and (5) various other items such as limitations on meals and entertainment, certain stock compensation

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and other costs. In the three and nine months ended September 28, 2019, the increase in the Company's effective tax rate, and related income tax expense, over the prior year is in response to the adoption of proposed regulations issued in late 2018 related to tax reform legislation. The Company’s income tax provision is calculated under the provisions of the proposed regulations, which will limit our ability to deduct interest expense in calculating our taxable income. Once the final regulations are issued, the Company will adjust its calculations, if necessary.
  
As of September 28, 2019 and December 29, 2018, Summit Inc. had a valuation allowance of $29.5 million and $19.4 million, respectively, which relates to certain deferred tax assets in taxable entities where realization is not more likely than not.

Summit Inc. and its subsidiaries expect additional unrecognized tax benefits related to the deductibility of interest expense in 2019 that if recognized would affect the annual effective tax rate, and included that in its estimate of those amounts in its annual effective tax rate. We did not recognize interest or penalties related to this amount as it is offset by other attributes. No material interest or penalties were recognized in income tax expense during the three and nine months ended September 28, 2019 and September 29, 2018. No uncertain tax benefits were recognized in the three and nine months ended September 29, 2018.

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 nine months ended September 28, 2019, 107,336 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. These exchanges resulted in net new deferred tax assets of approximately $0.4 million. As we determined that the deferred tax assets created from these exchanges are realizable and payment under the TRA is considered probable, we have recorded 85% of the increase in deferred tax assets as TRA liability and the remainder as an increase in additional paid in capital. As of September 28, 2019 and December 29, 2018, we had recorded $310.1 million and $310.3 million of TRA liability, respectively, of which $0.6 million was classified as accrued expenses as of December 29, 2018.
 
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. Summit Holdings did not make any tax distributions in the nine months ended September 28, 2019 and made $0.1 million in tax distributions in the nine months ended September 29, 2018.

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 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net income attributable to Summit Inc.
$
55,757

 
$
71,289

 
$
23,395

 
$
53,069

Weighted average shares of Class A stock outstanding
112,179,137

 
111,641,344

 
112,020,275

 
111,288,211

Basic earnings per share
$
0.50

 
$
0.64

 
$
0.21

 
$
0.48

 
 
 
 
 
 
 
 
Diluted net income attributable to Summit Inc.
$
55,757

 
$
71,289

 
$
23,395

 
$
53,069

 
 
 
 
 
 
 
 
Weighted average shares of Class A stock outstanding
112,179,137

 
111,641,344

 
112,020,275

 
111,288,211

Add: stock options
2,788,221

 
204,085

 
216,165

 
574,739

Add: warrants
100,037

 
18,631

 

 
34,134

Add: restricted stock units
384,571

 
4,515

 
222,533

 
402,950

Add: performance stock units
53,156

 
71,492

 
38,637

 
172,690

Weighted average dilutive shares outstanding
115,505,122

 
111,940,067

 
112,497,610

 
112,472,724

Diluted earnings per share
$
0.48

 
$
0.64

 
$
0.21

 
$
0.47


 
Excluded from the above calculations were the shares noted below as they were antidilutive:
 
 
Three months ended
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Antidilutive shares:
 
 
 
 
 
 
 
LP Units
3,368,058

 
3,448,343

 
3,404,231

 
3,538,385

Warrants

 

 
100,037

 



9.
STOCKHOLDERS’ EQUITY
During 2019 and 2018, certain limited partners of Summit Holdings exchanged their LP Units for shares of Class A common stock of Summit Inc. 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 29, 2018
111,658,927

 
3,435,518

 
115,094,445

 
97.0
%
Exchanges during period
107,336

 
(107,336
)
 

 
 
Other equity transactions
509,735

 

 
509,735

 
 
Balance — September 28, 2019
112,275,998

 
3,328,182

 
115,604,180

 
97.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance — December 30, 2017
110,350,594

 
3,689,620

 
114,040,214

 
96.8
%
Exchanges during period
254,102

 
(254,102
)
 

 
 
Other equity transactions
1,049,856

 

 
1,049,856

 
 
Balance — September 29, 2018
111,654,552

 
3,435,518

 
115,090,070

 
97.0
%

 
As a result of the Reorganization, 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 2.9% as of September 28, 2019 and December 29, 2018.
 
Accumulated other comprehensive income (loss) —The changes in each component of accumulated other comprehensive income (loss) consisted of the following:

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Change in
 retirement plans
 
Foreign currency
 translation
 adjustments
 
Cash flow hedge
 adjustments
 
Accumulated
 other
 comprehensive
 income (loss)
Balance — December 29, 2018
$
3,573

 
$
(2,147
)
 
$
1,255

 
$
2,681

Foreign currency translation adjustment, net of tax

 
2,364

 

 
2,364

Loss on cash flow hedges, net of tax

 

 
(107
)
 
(107
)
Balance — September 28, 2019
$
3,573

 
$
217

 
$
1,148

 
$
4,938

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance — December 30, 2017
$
2,364

 
$
4,637

 
$
385

 
$
7,386

Foreign currency translation adjustment, net of tax

 
(2,295
)
 

 
(2,295
)
Income on cash flow hedges, net of tax

 

 
1,043

 
1,043

Balance — September 29, 2018
$
2,364

 
$
2,342

 
$
1,428

 
$
6,134



10.
SUPPLEMENTAL CASH FLOW INFORMATION
 
Supplemental cash flow information is as follows:
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
Cash payments:
 
 
 
Interest
$
89,759

 
$
79,367

(Refund) payments for income taxes, net
(912
)
 
3,362

Operating cash payments on operating leases
8,188

 
N/A

Operating cash payments on finance leases
2,322

 
N/A

Finance cash payments on finance leases
9,806

 
N/A

Non cash financing activities:
 
 
 
Right of use assets obtained in exchange for operating lease obligations
$
4,387

 
N/A

Right of use assets obtained in exchange for finance leases obligations
18,586

 
N/A

Exchange of LP Units to shares of Class A common stock
1,995

 
7,499



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 entered into or reassessed after the adoption of Topic 842, we combine lease and nonlease components. While we also own mineral leases for mining operations, those leases are outside the scope of 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 28, 2019
September 28, 2019
Operating lease cost
$
2,608

$
7,757

Variable lease cost
151

366

Short-term lease cost
11,871

28,043

Financing lease cost:
 
 
Amortization of right-of-use assets
2,612

7,905

Interest on lease liabilities
773

2,404

Total lease cost
$
18,015

$
46,475

 
 
 
September 28, 2019
Supplemental balance sheet information related to leases:
 
Operating leases:
 
Operating lease right-of-use assets
$
33,045

 
 
Current operating lease liabilities
$
8,609

Noncurrent operating lease liabilities
25,329

Total operating lease liabilities
$
33,938

Finance leases:
 
Property and equipment, gross
$
80,197

Less accumulated depreciation
(23,552
)
Property and equipment, net
$
56,645

 
 
Current finance lease liabilities
$
17,288

Long-term finance lease liabilities
39,093

Total finance lease liabilities
$
56,381

 
 
 
September 28, 2019
 
Lease Term
Discount Rate
 
(years)
(%)
Weighted average:
 
 
Operating leases
7.7

5.6
%
Finance lease
2.7

5.5
%
 
 
 
Maturities of lease liabilities were as follows:
 
 
 
Operating Leases
Finance Leases
2019 (three months)
$
2,551

$
5,372

2020
9,800

17,870

2021
7,813

20,578

2022
4,717

12,240

2023
3,570

1,629

2024
1,901

2,131

Thereafter
11,820

2,662

Total lease payments
42,172

62,482

Less imputed interest
(8,234
)
(6,101
)
Present value of lease payments
$
33,938

$
56,381



As previously disclosed, our future minimum lease payment obligations as of December 29, 2018 were as follows:


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Operating Leases
2019
$
9,479

2020
8,101

2021
6,701

2022
4,279

2023
3,411



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 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.

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 28, 2019 and December 29, 2018, $27.1 million and $26.9 million, respectively, were included in other noncurrent liabilities on the consolidated balance sheets and $4.8 million and $4.1 million, respectively, were included in accrued expenses for future reclamation costs. The total undiscounted anticipated costs for site reclamation as of September 28, 2019 and December 29, 2018 were $89.4 million and $92.5 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 Company entered into interest rate derivatives on $200.0 million of its term loan borrowings to add stability to interest expense and to manage its exposure to interest rate movements. The interest rate derivative expired in September 2019. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and will be subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The fair value of contingent consideration and derivatives as of September 28, 2019 and December 29, 2018 was:

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September 28, 2019
 
December 29, 2018
Current portion of acquisition-related liabilities and Accrued expenses:
 
 
 
Contingent consideration
$
2,674

 
$
1,394

Cash flow hedges

 

Acquisition-related liabilities and Other noncurrent liabilities:
 
 
 
Contingent consideration
$
1,270

 
$
5,175

Cash flow hedges

 


 
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. The fair value of the cash flow hedges is based on observable, or Level 2, inputs such as interest rates, bond yields and prices in inactive markets. There were no material valuation adjustments to contingent consideration or derivatives as of September 28, 2019 and September 29, 2018.
 
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 28, 2019 and December 29, 2018 was:
 
 
September 28, 2019
 
December 29, 2018
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Level 2
 
 
 
 
 
 
 
Long-term debt(1)
$
1,914,189

 
$
1,873,745

 
$
1,777,722

 
$
1,828,159

Level 3
 
 
 
 
 
 
 
Current portion of deferred consideration and noncompete obligations(2)
31,724

 
31,724

 
32,876

 
32,876

Long term portion of deferred consideration and noncompete obligations(3)
39,392

 
39,392

 
44,293

 
44,293

                                                                                         
(1)
$6.4 million were included in current portion of debt as of September 28, 2019 and December 29, 2018.
(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 2, 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 continuing operations before interest, taxes, depreciation, depletion, amortization, accretion, share-based compensation, and transaction costs, as well as various other non-recurring, non-cash amounts.
 
The West and East segments have several acquired 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.

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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 28, 2019 and December 29, 2018 and for the three and nine months ended September 28, 2019 and September 29, 2018:
 
 
Three months ended
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Revenue*:
 
 
 
 
 
 
 
West
$
366,504

 
$
367,912

 
$
848,661

 
$
871,338

East
266,587

 
232,777

 
596,107

 
525,270

Cement
98,991

 
93,972

 
220,844

 
213,364

Total revenue
$
732,082

 
$
694,661

 
$
1,665,612

 
$
1,609,972

                                                                                         
*Intercompany sales are immaterial and the presentation above only reflects sales to external customers.
 
 
Three months ended
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Income from operation before taxes
$
103,839

 
$
94,757

 
$
58,998

 
$
71,206

Interest expense
28,917

 
28,889

 
88,423

 
86,616

Depreciation, depletion and amortization
54,575

 
53,494

 
162,417

 
149,439

Accretion
552

 
480

 
1,723

 
1,224

Loss on debt financings

 

 
14,565

 
149

Gain on sale of business

 
(12,108
)
 

 
(12,108
)
Transaction costs
751

 
1,260

 
1,449

 
3,817

Non-cash compensation
4,819

 
5,643

 
15,424

 
19,833

Other
(136
)
 
(409
)
 
(2,628
)
 
(7,316
)
Total Adjusted EBITDA
$
193,317

 
$
172,006

 
$
340,371

 
$
312,860

 
 
 
 
 
 
 
 
Total Adjusted EBITDA by Segment:
 
 
 
 
 
 
 
West
$
81,936

 
$
73,916

 
$
151,054

 
$
151,316

East
76,825

 
58,305

 
134,479

 
100,497

Cement
42,683

 
44,299

 
75,537

 
82,626

Corporate and other
(8,127
)
 
(4,514
)
 
(20,699
)
 
(21,579
)
Total Adjusted EBITDA
$
193,317

 
$
172,006

 
$
340,371

 
$
312,860

 
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
Purchases of property, plant and equipment
 
 
 
West
$
61,679

 
$
104,217

East
61,830

 
51,968

Cement
15,087

 
21,621

Total reportable segments
138,596

 
177,806

Corporate and other
1,166

 
5,946

Total purchases of property, plant and equipment
$
139,762

 
$
183,752

 

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Three months ended
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Depreciation, depletion, amortization and accretion:
 
 
 
 
 
 
 
West
$
23,307

 
$
23,289

 
$
70,156

 
$
68,029

East
19,668

 
19,429

 
59,719

 
54,982

Cement
11,111

 
10,682

 
31,280

 
25,733

Total reportable segments
54,086

 
53,400

 
161,155

 
148,744

Corporate and other
1,041

 
574

 
2,985

 
1,919

Total depreciation, depletion, amortization and accretion
$
55,127

 
$
53,974

 
$
164,140

 
$
150,663


 
September 28, 2019
 
December 29, 2018
Total assets:
 
 
 
West
$
1,440,010

 
$
1,370,501

East
1,334,247

 
1,253,640

Cement
879,140

 
877,586

Total reportable segments
3,653,397

 
3,501,727

Corporate and other
388,717

 
355,914

Total
$
4,042,114

 
$
3,857,641



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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 any factors discussed in the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” of this report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated interim financial statements and the related notes and other information included in this report.
 
Overview
 
We are one of the fastest growing construction materials companies in the United States. Within our markets, we offer customers a single-source provider for construction materials and related downstream products through our vertical integration. Our materials include aggregates, which we supply across the United States, and in British Columbia, Canada, and cement, which we supply to surrounding states along the Mississippi River from Minnesota to Louisiana. In addition to supplying aggregates to customers, we use a portion of our materials internally to produce ready-mix concrete and asphalt paving mix, which may be sold externally or used in our paving and related services businesses. Our vertical integration creates opportunities to increase aggregates volumes, optimize margin at each stage of production and provide customers with efficiency gains, convenience and reliability, which we believe gives us a competitive advantage.
 
Since our inception in 2009, we have completed dozens of acquisitions that make up our three distinct operating segments: West, East and Cement, which are also our reporting segments. We operate in 23 U.S. states and 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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sum20180630x10q002a02.jpg
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 multinational corporations that offer a wide array of construction materials and services. Competition is constrained in part by the distance materials can be transported efficiently, resulting in predominantly local or regional operations. Due to the lack of product differentiation, competition for all of our products is predominantly based on price and, to a lesser extent, quality of products and service. As a result, the prices we charge our customers are not likely to be materially different from the prices charged by other producers in the same markets. Accordingly, our profitability is generally dependent on the level of demand for our materials and products and our ability to control operating costs.

Our revenue is derived from multiple end-use markets including public infrastructure construction and private residential and nonresidential construction. Public infrastructure includes spending by federal, state, provincial and local governments for roads, highways, bridges, airports and other infrastructure projects. Public infrastructure projects have historically been a relatively stable portion of state and federal budgets. Residential and nonresidential construction consists of new construction and repair and remodel markets. Any economic stagnation or decline, which could vary by local region and market, could affect our results of operations. Our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical changes in construction spending, especially in the private sector. From a macroeconomic view, we see positive indicators for the construction sector, including positive trends in highway obligations, housing starts and construction employment.

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Transportation infrastructure projects, driven by both federal and state funding programs, represent a significant share of the U.S. construction materials market. Federal funds are allocated to the states, which are required to match a portion of the federal funds they receive. Federal highway spending uses funds predominantly from the Federal Highway Trust Fund, which derives its revenue from taxes on diesel fuel, gasoline and other user fees. The dependability of federal funding allows the state departments of transportation to plan for their long-term highway construction and maintenance needs. Funding for the existing federal transportation funding program extends through 2020. With the nation’s infrastructure aging, there is increased demand by states and municipalities for long-term federal funding to support the construction of new roads, highways and bridges in addition to the maintaining the existing infrastructure.
 
In addition to federal funding, state, county and local agencies provide highway construction and maintenance funding. Our four largest states by revenue, Texas, Utah, Kansas and Missouri, represented approximately 23%, 13%, 12% and 8%, respectively, of our total revenue in 2018. The following is a summary of key funding initiatives in those states:
 
According to the Texas Department of Transportation (“TXDOT”), annual funding available for transportation infrastructure, including state and federal funding, is estimated to average $16.2 billion over fiscal year 2020 (which commenced September 1, 2019) and fiscal year 2021.  Further, the 2020 Unified Transportation Program (“UTP”) was approved by the Texas Transportation Commission in September 2019 at $77 billion to fund transportation projects from 2020 through 2029; this is an increase from $71 billion in 2018, $75 billion in 2019, and more than double the fiscal year 2016 level, which was prior to the Proposition 1 and Proposition 7 funding initiatives, which are discussed in further detail below. The funding available in any given year is separate and distinct from lettings, or the process of providing notice, issuing proposals, receiving proposals, and awarding contracts. In August 2019, TXDOT announced fiscal year 2019 state and local lettings were $8.9 billion, up 21.9% from $7.3 billion in fiscal year 2018, updated its fiscal year 2020 lettings estimate to $6.9 billion, and provided a fiscal year 2021 lettings estimate of $13.9 billion. Longer-term, TXDOT has indicated a target of $8 billion per year in total state and local lettings.

In February 2018, the federal government approved approximately $89 billion in relief funding related to a series of natural disasters, including Hurricane Harvey, which impacted the Houston market in the second half of 2017.  Furthermore, in June 2019, Congress passed an additional $19.1 billion disaster aid package and released more than $4 billion to Texas that Congress originally allocated in early 2018. At the state-level, between December 2018 and January 2019, the Texas Land Commission and the City of Houston announced two federally funded programs, totaling $2.27 billion, to assist homeowners affected by Hurricane Harvey; and in July 2019, the Governor signed four bills aimed at improving the state’s emergency preparedness and disaster relief programs, including a framework that provides more than $1.6 billion for flood control projects and repairs across the state.  We believe that the federal and state-level funding stemming from these legislative actions will drive significant new water and transportation infrastructure construction in the Houston market over the coming years.

In November 2015, Texas voters approved the ballot measure known as Proposition 7, authorizing a constitutional amendment for transportation funding. The amendment dedicates a portion of the state’s general sales and use taxes and motor vehicle sales and rental taxes to the State Highway Fund (“SHF”) for use on non-tolled projects. Beginning in September 2017 (fiscal year 2018), if general state sales and use tax revenue exceeds $28 billion in a fiscal year, the next $2.5 billion will be directed to the SHF. Additionally, beginning in September 2019 (fiscal year 2020), if state motor vehicle sales and rental tax revenue exceeds $5 billion in a fiscal year, 35% of the amount above $5 billion will be directed to the SHF. In fiscal year 2018 sales tax revenue exceeded $30.5 billion, and as such, fiscal year 2019 was the first year in which the full Proposition 7 funding potential, $2.5 billion, was transferred to the SHF. Furthermore, as of October 2019, the Texas Office of the Comptroller expects $2.5 billion per annum to be transferred to the SHF in both fiscal year 2020 and 2021.

In November 2014, Texas voters approved a ballot measure known as Proposition 1, which authorized a portion of the severance taxes on oil and natural gas to be redirected to the SHF each year. In September 2018, TXDOT announced that it anticipated that funding from Proposition 1 for fiscal year 2019 would be $1.37 billion, up from $734 million received in fiscal year 2018. Furthermore, in May 2019, the Texas Office of the Comptroller increased its fiscal year 2020 Proposition 1 transfer estimate to $1.7 billion and in June 2019, the Texas State Legislature extended the sunset period on Proposition 1 to 2034 from 2024.

Utah’s transportation investment fund has $2.3 billion programmed for 2017 through 2022. In early 2017, Utah’s governor signed into law a measure to allow the state to issue up to $1 billion in highway general obligation bonds to accelerate funding for several projects that the Utah Transportation Commission already approved.  Furthermore, in January 2019, Utah’s Transportation Governance and Funding Task Force, appointed by the state legislature in 2017,

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released draft legislation that would increase fees on electric and hybrid vehicles and create a hotel room tax and local option sales tax to aid in transit development. The proposal would also authorize the Utah Department of Transportation to begin a study on a road usage charge pilot program. 

In May 2010, Kansas passed a 10-year $8.2 billion highway bill. In May 2018, a legislative task force was convened to evaluate the current transportation system’s condition and funding of the state’s transportation system. The task force released its formal report in January 2019, concluding that it is imperative that the State of Kansas provides consistent, stable funding in order to maintain a quality transportation system; highlighting the negative impacts of $2.1 billion in transfers out of the State Highway Fund since 2011; and recommending that the state legislature review new potential sources of additional funding, including increasing registration fees, motor fuels taxes and fees for oversize vehicles and implementing new fees specific to alternative-fuel vehicles.  Based on the task force’s recommendations, in March 2019, the Kansas State Legislature approved the Governor’s fiscal year 2020 budget with $1.5 billion in transportation funding, a 32% increase from the $1.1 billion in fiscal year 2019, with the further plan to eliminate all transfers out of the State Highway Fund by 2023, starting with a $108 million reduction in fiscal year 2020 transfers. Furthermore, within the Kansas Department of Transportation budget, the highway program was allocated $546 million, an increase of 138% or $317 million from fiscal year 2017. Most recently, in August 2019, the Governor authorized an additional $216 million in sales tax revenue to remain in the state highway fund in fiscal year 2020 to help restore the bridge replacement program.

In July 2019, the Missouri Highways and Transportation Commission approved the 2020 Statewide Transportation Improvement Program (“STIP”), which increased funding to $4.6 billion for highway and bridge construction through 2024 from $4.5 billion in the 2019 STIP and $4.2 billion in the 2018 STIP.

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 and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, 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.
 
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.
 
Backlog
 
Our products are generally delivered upon receipt of orders or requests from customers, or shortly thereafter. Accordingly, the backlog associated with product sales is converted into revenue within a relatively short period of time. Inventory for products is generally maintained in sufficient quantities to meet rapid delivery requirements of customers. Therefore, a period-over-period increase or decrease of backlog does not necessarily result in an improvement or a deterioration of our business. Our backlog includes only those products and projects for which we have obtained a purchase order or a signed contract with the customer and does not include products purchased and sold or services awarded and provided within the period. Subject to applicable contract terms, substantially all contracts in our backlog may be canceled or modified by our customers. Historically, we have not been materially adversely affected by contract cancellations or modifications.
 
As a vertically-integrated business, approximately 21% of aggregates sold were used internally in our ready-mix concrete and asphalt paving mixes and approximately 68% of the asphalt paving mixes were laid by our paving crews during the nine months ended September 28, 2019. Our backlog as of September 28, 2019, was 13.0 million tons of aggregates, 1.8 million cubic yards of ready-mix concrete, 3.8 million tons of asphalt and $495.1 million of construction services, which includes the value of the aggregate and asphalt tons and ready-mix concrete cubic yards that are expected to be sourced internally.

Financial Highlights
 

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The principal factors in evaluating our financial condition and operating results as of and for the three and nine months ended September 28, 2019 as compared to the three and nine months ended September 29, 2018, and certain other highlights include:
 
Net revenue increased $40.8 million and $60.2 million in the three and nine months ended September 28, 2019, respectively, primarily resulting from organic growth and contributions from our acquisitions.
Our operating income increased $22.7 million and $19.7 million in the three and nine months ended September 28, 2019, respectively, as revenue increases exceeded the increases in cost of revenue.
In March 2019, we issued $300.0 million of 6.500% senior notes due 2027 (the “2027 Notes”), resulting in net proceeds of $296.3 million, after related fees and expenses. The proceeds from the 2027 Notes were used to redeem the $250.0 million of 8.500% senior notes due 2022 (the “2022 Notes”).
In February 2019, we entered into Incremental Amendment No. 4 to the Credit Agreement (as defined below) increasing the size of our revolving credit facility to $345.0 million and extending the maturity date with respect to the revolving credit commitments to February 25, 2024.
In September 2018, the Company sold a non-core business in the West segment, resulting in cash proceeds of $21.6 million and a total gain on the disposition of the business of $12.1 million.

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 continuing operations after taking into consideration cost of revenue, general and administrative expenses, depreciation, depletion, amortization and accretion and transaction costs. Cost of revenue generally increases ratably with revenue, as labor, transportation costs and subcontractor costs are recorded in cost of revenue. In periods where our revenue growth occurs primarily through acquisitions, general and administrative expenses and depreciation, depletion, amortization and accretion have historically grown ratably with revenue. However, as organic volumes increase, we expect these costs as a percentage of revenue, to decrease. General and administrative expenses as a percentage of revenue vary throughout the year due to the seasonality of our business. Our transaction costs fluctuate with the level acquisition activity each year.
The table below includes revenue and operating income (loss) by segment for the three and nine months ended September 28, 2019 and September 29, 2018. Operating income (loss) by segment is computed as earnings before interest, taxes and other income/expense.
 
Three months ended
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
(in thousands)
Revenue
 
Operating
income (loss)
 
Revenue
 
Operating
income (loss)
 
Revenue
 
Operating
income (loss)
 
Revenue
 
Operating
income (loss)
West
$
366,504

 
$
58,501

 
$
367,912

 
$
48,196

 
$
848,661

 
$
78,503

 
$
871,338

 
$
80,479

East
266,587

 
55,521

 
232,777

 
37,984

 
596,107

 
71,927

 
525,270

 
44,035

Cement
98,991

 
31,504

 
93,972

 
33,513

 
220,844

 
44,074

 
213,364

 
56,503

Corporate (1)

 
(14,645
)
 

 
(11,526
)
 

 
(40,872
)
 

 
(47,096
)
Total
$
732,082

 
$
130,881

 
$
694,661

 
$
108,167

 
$
1,665,612

 
$
153,632

 
$
1,609,972

 
$
133,921

                                                                                         
(1)
Corporate results primarily consist of compensation and office expenses for employees included in the Company's headquarters.

Consolidated Results of Operations
 
The table below sets forth our consolidated results of operations for the three and nine months ended September 28, 2019 and September 29, 2018.
 

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Three months ended
 
Nine months ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
(in thousands)
 
 
 
 
 
 
 
Net revenue
$
665,847

 
$
625,017

 
$
1,524,388

 
$
1,464,168

Delivery and subcontract revenue
66,235

 
69,644

 
141,224

 
145,804

Total revenue
732,082

 
694,661

 
1,665,612

 
1,609,972

Cost of revenue (excluding items shown separately below)
482,979

 
471,803

 
1,155,476

 
1,130,596

General and administrative expenses
62,344

 
59,457

 
190,915

 
190,975

Depreciation, depletion, amortization and accretion
55,127

 
53,974

 
164,140

 
150,663

Transaction costs
751

 
1,260

 
1,449

 
3,817

Operating income
130,881

 
108,167

 
153,632

 
133,921

Interest expense (1)
28,917

 
28,889

 
88,423

 
86,616

Loss on debt financings

 

 
14,565

 
149

Gain on sale of business

 
(12,108
)
 

 
(12,108
)
Other income, net
(1,875
)
 
(3,371
)
 
(8,354
)
 
(11,942
)
Income from operation before taxes
103,839

 
94,757

 
58,998

 
71,206

Income tax expense (1)
45,602

 
20,765

 
34,272

 
16,249

Net income
$
58,237

 
$
73,992

 
$
24,726

 
$
54,957

                                                                                         
(1)
The statement of operations above is based on the financial results of Summit Inc. and its subsidiaries. The statement of operations of Summit LLC and its subsidiaries differs from Summit Inc. in that Summit LLC has $0.1 million and $0.4 million less interest expense than Summit Inc. in the three and nine months ended September 28, 2019, respectively. The additional interest expense for Summit Inc. is associated with a deferred consideration obligation of Summit Holdings, which is excluded from Summit LLC’s consolidated interest expense.

Three and nine months ended September 28, 2019 compared to the three and nine months ended September 29, 2018
 
 
Three months ended
 
 
 
 
 
Nine months ended
 
 
 
 
($ in thousands)
September 28, 2019
 
September 29, 2018
 
Variance
 
September 28, 2019
 
September 29, 2018
 
Variance
Net revenue
$
665,847

 
$
625,017

 
$
40,830

 
6.5
%
 
$
1,524,388

 
$
1,464,168

 
$
60,220

 
4.1
%
Operating income
130,881

 
108,167

 
22,714

 
21.0
%
 
153,632

 
133,921

 
19,711

 
14.7
%
Operating margin percentage
19.7
%
 
17.3
%
 
 
 
 
 
10.1
%
 
9.1
%
 
 
 
 
Adjusted EBITDA (1)
$
193,317

 
$
172,006

 
$
21,311

 
12.4
%
 
$
340,371

 
$
312,860

 
$
27,511

 
8.8
%
                                                                                         
(1)
Adjusted EBITDA is a non-GAAP measure 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, which is the most directly comparable GAAP measure.

Net revenue increased $40.8 million in the three months ended September 28, 2019, resulting primarily from organic growth, and to a lesser extent, our acquisition program. Of the increase in net revenue, $32.5 million was from increased sales of materials and $9.4 million from increased sales of products, offset by a $1.1 million decrease in service revenue. We generated organic volume growth of 11.4%, 3.8%, 1.3% and 2.3% in aggregates, cement, ready-mix concrete and asphalt, respectively. We had organic price growth in across all of our lines of business during the third quarter of 2019. Additional discussion about the impact of acquisitions on each segment is presented in more detail below.
 
Net revenue increased $60.2 million in the nine months ended September 28, 2019, primarily resulting from organic growth in our aggregates and asphalt operations, and to a lesser extent, our acquisition program. Of the increase in net revenue, $78.6 million was from increased sales of materials, offset by a $4.2 million decrease in sales of products and a $14.2 million decrease in service revenue. We generated organic volume growth of 7.7%, 2.9% and 2.0% in aggregates, cement and asphalt, respectively, during the first nine months of 2019 over the prior year period, while our organic ready-mix volumes decreased 3.7% compared to the first nine months of 2018. We had organic price growth in our aggregate, cement, ready-mix and asphalt lines of business of 7.3%, 1.4%, 2.2% and 6.8%, respectively, during the first nine months of 2019. Additional discussion about the impact of acquisitions on each segment is presented in more detail below.
 

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In the three months ended September 28, 2019, our net revenue growth was $3.1 million and $37.7 million from acquisitions and organic revenue, respectively. Weather conditions in the three months ended September 28, 2019 were more favorable than those in the same period in 2018, which also contributed to increases in volumes and net revenue. Operating income increased by $22.7 million in the third quarter of 2019 as compared to the third quarter of 2018 primarily as we produced net revenue gains in excess of increases in our cost of revenue. Our general and administrative expenses increased in the third quarter of 2019, as compared to the same period a year ago, as incentive compensation in the third quarter of 2018 was reduced to reflect lower levels of earnings. Our depreciation, depletion, amortization and accretion increased $1.2 million primarily because lower levels of cement production in our Cement segment led to less depreciation being capitalized into inventory, as well as due to higher depreciation levels from our acquisition program.

In the nine months ended September 28, 2019, our net revenue growth was $26.6 million and $33.6 million from acquisitions and organic revenue, respectively. Operating income increased by $19.7 million in the first nine months of 2019 as compared to the first nine months of 2018 primarily as we produced net revenue gains in excess of our costs of revenue, partially offset by a $13.5 million increase in depreciation, depletion, amortization and accretion expense, partially due to acquisitions completed in the second half of 2018, as well as less depreciation being capitalized into inventory as inventory levels are decreased.

Our operating margin percentage increased from 17.3% to 19.7% and increased from 9.1% to 10.1% in the three and nine months ended September 28, 2019, respectively, due to the items noted above. Adjusted EBITDA, as defined in "Non-GAAP Performance Measures" below, increased by $21.3 million and $27.5 million in the three and nine months ended September 28, 2019, 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 line of business was as follows: 
 
Three months ended
 
 
 
 
 
Nine months ended
 
 
 
 
($ in thousands)
September 28, 2019
 
September 29, 2018
 
Variance
 
September 28, 2019
 
September 29, 2018
 
Variance
Revenue by product*:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aggregates
$
176,929

 
$
146,913

 
$
30,016

 
20.4
 %
 
$
447,159

 
$
368,005

 
$
79,154

 
21.5
 %
Cement
95,486

 
89,224

 
6,262

 
7.0
 %
 
209,334

 
200,704

 
8,630

 
4.3
 %
Ready-mix concrete
173,035

 
165,204

 
7,831

 
4.7
 %
 
444,702

 
448,442

 
(3,740
)
 
(0.8
)%
Asphalt
152,821

 
133,747

 
19,074

 
14.3
 %
 
283,225

 
244,000

 
39,225

 
16.1
 %
Paving and related services
243,039

 
248,460

 
(5,421
)
 
(2.2
)%
 
451,133

 
467,941

 
(16,808
)
 
(3.6
)%
Other
(109,228
)
 
(88,887
)