SUMMIT MATERIALS, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. Forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in the section entitled "Risk Factors" in the Annual Report, and factors discussed in the section entitled "Cautionary Note Regarding Forward-Looking Statements." This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated interim financial statements and the related notes and other information included in this report.
Overview
Summit's vision is to be the most socially responsible, integrated construction
materials solution provider, collaborating with stakeholders to deliver
differentiated innovations and solve our customers' challenges. Within our
markets, we strive to be a market leader by offering customers a single-source
provider for construction materials and related downstream products through our
vertical integration. Our materials include aggregates, which we supply across
Since our inception in 2009, we have completed dozens of acquisitions, which are
organized into 11 operating companies that make up our three distinct operating
segments: West, East and Cement, which are also our reporting segments. We
operate in 21 U.S. states and in
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Business Trends and Conditions
The
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. We continue to see positive indicators for the construction sector, including positive trends in housing starts, and highway construction letting
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Table of Contents activity in many of the states in which we operate. However, given the ongoing nature of the COVID-19 pandemic discussed below, we continue to closely monitor these indicators for the impact on our business in subsequent quarters.
Transportation infrastructure projects, driven by both federal and state funding
programs, represent a significant share of the
In addition to federal funding, state, county and local agencies provide highway
construction and maintenance funding. Our four largest states by revenue,
•The Texas Department of Transportation ("TXDOT") updated its fiscal year 2022
lettings estimate to
•The state of
•The state of
•The state of
Use and consumption of our products fluctuate due to seasonality. Nearly all of the products used by us, and by our customers, in the private construction and public infrastructure industries are used outdoors. Our highway operations and production and distribution facilities are also located outdoors. Therefore, seasonal changes and other weather-related conditions, in particular extended rainy and cold weather in the spring and fall, as well as major weather events such as hurricanes, tornadoes, tropical storms, heavy snows and flooding, can adversely affect our business and operations through a decline in both the use of our products and demand for our services. In addition, construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall. Warmer and drier weather during the second and third quarters of our fiscal year typically result in higher activity and revenue levels during those quarters. The first quarter of our fiscal year typically has lower levels of activity due to weather conditions, and the third quarter of our fiscal year typically has the highest levels of activity.
We are subject to commodity price risk with respect to price changes in liquid asphalt and energy, including fossil fuels and electricity for aggregates, cement, ready-mix concrete and asphalt paving mix production, natural gas for hot mix asphalt production and diesel fuel for distribution vehicles and production related mobile equipment. Liquid asphalt escalator provisions in most of our private and commercial contracts limit our exposure to price fluctuations in this commodity. We often obtain similar escalators on public infrastructure contracts. In addition, we enter into various firm purchase commitments, with terms generally less than one year, for certain raw materials, including diesel fuel.
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
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Table of Contents of our business. Our backlog includes only those products and projects for which we have obtained a purchase order or a signed contract with the customer and does not include products purchased and sold or services awarded and provided within the period.
Financial Highlights
The principal factors in evaluating our financial condition and operating
results as of and for the three and nine months ended
•Net revenue increased$17.0 million and$116.4 million in the three and nine months endedOctober 2, 2021 , respectively, primarily resulting from organic growth. •Our operating income increased$24.4 million and$36.9 million in the three and nine months endedOctober 2, 2021 , respectively, as revenue exceeded the increases in cost of revenue. •In the nine months endedOctober 2, 2021 , the Company sold four businesses in the East segment and one in the West segment, resulting in cash proceeds of$103.6 million and a total gain on disposition of$15.3 million . •In the three and nine months endedOctober 2, 2021 , sales volume increased 9.2% and 14.1% in aggregates, 2.0% and 6.5% in cement, declined (1.4)% and increased 3.9% in ready-mix concrete and declined (11.2)% and (8.6)% in asphalt, respectively. •InSeptember 2021 , we redeemed all$300.0 million of 5.125% Senior Notes due 2025 (the "2025 Notes") using existing cash on hand. We recognized a loss on debt financing of$6.0 million on this redemption. •InAugust 2020 , we issued$700 million of 5.25% Senior Notes due 2029 (the "2029 Notes"), resulting in net proceeds of$690.4 million , after related fees and expenses. The proceeds from the 2029 Notes were used to redeem the$650 million of 6.125% Senior Notes due 2023 (the "2023 Notes") at par.
Results of Operations
In late 2019, the COVID-19 virus was first reported to have surfaced, and began impacting countries around the world. However, in all of our markets, construction activities were deemed essential businesses and we continued to operate while many businesses were forced to close or reduce operations. During the first nine months of each of 2021 and 2020, our operating markets remained substantially unaffected by COVID-19. We continue to monitor our operations, the operations of our customers, and the recommendations of the various national, state and local governments in the areas in which we operate. We implemented work-from-home protocols at all of our administrative locations late in the first quarter of 2020, and while some locations have returned, other locations, including our headquarters location, continue to work remotely. In addition, we implemented additional safety measures specific to COVID-19 at all of our operating locations, which did not significantly increase our costs. The extent to which the COVID-19 pandemic impacts the national and local economies in which we operate, and ultimately our business, will depend on numerous developments, which are highly uncertain and difficult to predict. These events, as they continue to develop, could result in business disruption, including reduced revenues, profitability and cash flow.
In 2020, approximately 61% of our revenue was derived from the private construction market, and the remaining revenue from the public markets. We believe residential activity in our key markets will continue to be a driver for volumes in future periods. Funding for public infrastructure projects as been announced as a high priority for the federal government in 2021, but no action has been taken to date.
As of
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 reflects our profit from operations after taking into consideration cost of revenue, general and administrative expenses, depreciation, depletion, amortization and accretion and gain on sale of property, plant and equipment.
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Table of Contents Cost of revenue generally increases ratably with revenue, as labor, transportation costs and subcontractor costs are recorded in cost of revenue. As organic volumes increase, we expect our general and administrative costs as a percentage of revenue to decrease. General and administrative expenses as a percentage of revenue vary throughout the year due to the seasonality of our business.
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