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" and any factors discussed in the sections entitled "Disclosure 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 the "Selected Historical Consolidated Financial Data," our audited consolidated annual financial statements and the related notes thereto and other information included in this report. A discussion and analysis of our results of operations and changes in financial condition for fiscal 2019 compared to 2018 may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the year endedDecember 29, 2019 , filed with theSEC onFebruary 5, 2020 , which discussion is incorporated herein by reference.
Overview
We are one of the fastest growing construction materials companies inthe United States , with a 63% increase in revenue between the year endedJanuary 2, 2016 (the year of our initial public offering) and the year endedJanuary 2, 2021 . 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 acrossthe United States , and inBritish Columbia, Canada , and cement, which we supply to surrounding states along theMississippi River fromMinnesota toLouisiana . 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, which are organized into 11 operating companies that make up our three distinct operating segments-West, East and Cement. We operate in 21 U.S. states and inBritish Columbia, Canada and currently have assets in 23 U.S. states andBritish Columbia, Canada . The map below illustrates our geographic footprint: 39
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Business Trends and Conditions
TheU.S. construction materials industry is composed of four primary sectors: aggregates; cement; ready-mix concrete; and asphalt paving mix. Each of these materials is widely used in most forms of construction activity. Participants in these sectors typically range from small, privately-held companies focused on a single material, product or market to publicly traded multinational corporations that offer a wide array of construction materials and services. Competition is constrained in part by the distance materials can be transported efficiently, resulting in predominantly local or regional operations. Due to the lack of 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. 40 -------------------------------------------------------------------------------- Table of Contents Transportation infrastructure projects, driven by both federal and state funding programs, represent a significant share of theU.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 theFederal 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 was extended in late 2020 through 2021. 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 maintenance of 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 andMissouri , represented approximately 25%, 14%, 13% and 9%, respectively, of our total revenue in 2020. The following is a summary of key funding initiatives in those states: •According to theTexas Department of Transportation ("TXDOT"), annual funding available for transportation infrastructure, including state and federal funding, is estimated to average$14.9 billion in total for fiscal year 2021 (which commencedSeptember 1, 2020 ) and fiscal year 2022 combined. Further, the 2021 Unified Transportation Program ("UTP") approved by theTexas Transportation Commission inSeptember 2020 provides for$75 billion through fiscal year 2030 to fund transportation projects; more than double the fiscal year 2016 level, which was prior to the Proposition 1 and Proposition 7 funding initiatives. 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. InJanuary 2021 , TXDOT updated its fiscal year 2021 lettings estimate to$9.6 billion up from$7.5 billion in fiscal year 2020 and$8.9 billion in fiscal year 2019. Longer term, TXDOT has indicated a target of$8 billion per year in total state and local lettings. The Texas Comptroller released its biennial revenue estimate for fiscal year 2022 - 2023 inJanuary 2021 and expects economic output to return to pre-pandemic levels in 2022, and despite revenue shortfalls due to COVID-19 it is expected that the state highway fund will be granted its full allotment of$2.5 billion for fiscal year 2021 and 2022 from Proposition 7 funding. •InDecember 2020 ,Utah updated its revenue estimate for transportation funding to$639 million in fiscal year 2021 (which commencedJuly 1, 2020 ) up from$614 million in fiscal year 2020, with growth driven by increases in vehicle registration fees, diesel fuel tax and other revenue sources. InJanuary 2020 , theUtah Department of Transportation increased fees on electric and hybrid vehicles by 50% in 2020 and another 33% in 2021 and launched an alternative to a road usage charge program for those vehicles in the form of a pay per mile charge. InDecember 2019 ,Utah passed new legislation imposing a 4.85% sales tax on gas purchases and a6 cents per gallon increase to the diesel tax, with an additional4 cents per gallon diesel tax increase in 2022. The tax is estimated to generate an additional$170 million for transportation investment in 2021. •InJanuary 2021 , the Governor ofKansas submitted a revised budget for fiscal year 2021 (which commencedJuly 1, 2020 ) and an initial budget recommendation for fiscal year 2022 with$1.9 billion in transportation funding budgeted in 2021 and$2.2 billion for 2022. Transfers from theState Highway Fund ("SHF") to theState General Fund ("SGF") are expected to be eliminated by fiscal year 2023 with$134 million currently estimated to be transferred to the SGF in fiscal year 2021 and$67 million in fiscal year 2022. The elimination of transfers out of the SHF is expected to help pave the way for the issuance of new transportation bonds and keep funds available to continue moving forward the 10-year,$10 billion Eisenhower Legacy Plan that was approved by theKansas Legislature in early 2020. The Eisenhower Legacy Plan selects new modernization and expansion projects every two years, requires previously selected projects under the prior T-Works program to be let prior toJuly 1, 2023 and levies 16.2% of the state sales tax for the benefit of the SHF. •InDecember 2020 , newMissouri legislation was submitted that calls for five consecutive years of atwo-cent gas tax increase starting inJanuary 2022 , which would raise an incremental$100 million of revenue annually;Missouri currently has the second-lowest motor fuel tax inthe United States at17 cents per gallon. Despite the impact of COVID-19, theMissouri Department of Transportation had one of its strongest construction programs on record with payments to contractors of$821 million in calendar year-to-dateNovember 2020 versus$662 million in the prior period and has now scheduled or is scheduled to let during the remainder of fiscal year 2021 (which commencedJuly 1, 2020 ) the entire$360 million of construction projects delayed in early 2020 as a result of COVID-19.
The table below sets forth additional details regarding our four key states,
including growth rates as compared to the
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Projected Industry Growth by End Market
Revenue by End Market(1) 2021 to 2023(2)
Percentage of Residential and
Our Total Nonresidential Residential Nonresidential
State Revenue Construction Construction Construction
Texas 25 % 56 % 2.4 % 1.1 %
Utah 14 % 82 % 4.1 % 4.4 %
Kansas 13 % 44 % 5.1 % 1.4 %
Missouri 9 % 69 % 2.5 % 2.9 %
Weighted average(3) 3.4 % 2.2 %
United States (2) 1.9 % 2.2 %
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(1)Percentages based on our revenue by state for the year ended January 2, 2021
and management's estimates as to end markets.
(2)Source: 2019 PCA
(3)Calculated using a weighted average based on each state's percentage
contribution to our total revenue.
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 or
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, 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.
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.
Financial Highlights- Year ended
The principal factors in evaluating our financial condition and operating
results for the year ended
•Net revenue increased 5.1% or$104.1 million in 2020 as compared to 2019, primarily resulting from organic growth and to a lesser extent, contributions from our acquisitions. •Our operating income increased 5.4% or$11.6 million in 2020 as compared to 2019, as pricing and volume increases exceeded the increases in cost of revenue. •InAugust 2020 , we issued$700.0 million of 5.250% 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$650.0 million of 6.125% senior notes due 2023 (the "2023 Notes") at par.
Components of Operating Results
Total Revenue
We derive our revenue predominantly by selling construction materials and 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 services that we provide are primarily asphalt paving services.
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Revenue derived from the sale of construction materials is recognized when risks
associated with ownership have passed to unaffiliated customers. Typically this
occurs when products are shipped. Product revenue generally includes sales of
aggregates, cement and related downstream products and other materials to
customers, net of discounts or allowances and taxes, if any.
Revenue derived from paving and related services is recognized on the
percentage-of-completion basis, measured by the cost incurred to date compared
to estimated total cost of each project. This method is used because management
considers cost incurred to be the best available measure of progress on these
contracts. Due to the inherent uncertainties in estimating costs, it is at least
reasonably possible that the estimates used will change over the life of the
contract.
Operating Costs and Expenses
The key components of our operating costs and expenses consist of the following:
Cost of Revenue (excluding items shown separately)
Cost of revenue consists of all direct production and delivery costs and primarily includes labor, repair and maintenance, utilities, raw materials, fuel, transportation, subcontractor costs, and royalties. Our cost of revenue is directly affected by fluctuations in commodity energy prices, primarily diesel fuel, liquid asphalt and other petroleum-based resources. As a result, our adjusted cash gross profit margins can be significantly affected by changes in the underlying cost of certain raw materials if they are not recovered through corresponding changes in revenue. We attempt to limit our exposure to changes in commodity energy prices by entering into forward purchase commitments when appropriate. In addition, we have sales price adjustment provisions that provide for adjustments based on fluctuations outside a limited range in certain energy-related production costs. These provisions are in place for most of our public infrastructure contracts, and we seek to include similar price adjustment provisions in our private contracts.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and personnel costs, including stock-based compensation charges, for our sales and marketing, administration, finance and accounting, legal, information systems, human resources and certain managerial employees. Additional expenses include audit, consulting and professional fees, travel, insurance, rental costs, property taxes and other corporate and overhead expenses.
Depreciation, Depletion, Amortization and Accretion
Our business is capital intensive. We carry property, plant and equipment on our balance sheet at cost, net of applicable depreciation, depletion and amortization. Depreciation on property, plant and equipment is computed on a straight-line basis or based on the economic usage over the estimated useful life of the asset. The general range of depreciable lives by category, excluding mineral reserves, which are depleted based on the units of production method on a site-by-site basis, is as follows: Buildings and improvements 10 - 30 years Plant, machinery and equipment 7 - 20 years Office equipment 3 - 7 years Truck and auto fleet 5 - 8 years Mobile equipment and barges 6 - 8 years Landfill airspace and improvements 10 - 30 years Other 4 - 20 years Amortization expense is the periodic expense related to leasehold improvements and intangible assets. The intangible assets were recognized with certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term.
Accretion expense is the periodic expense recorded for the accrued mining reclamation liabilities and landfill closure and post-closure liabilities using the effective interest method.
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Results of Operations
In late 2019, a novel strain of the coronavirus ("COVID-19") virus was first
reported to have surfaced. COVID-19 has since spread globally, including to
every state in the United States . In March 2020 , the World Health Organization
declared the COVID-19 outbreak a global pandemic and the United States declared
a national emergency with respect to COVID-19. As construction activities were
deemed essential businesses in all of our markets, we continued to operate while
many businesses were forced to close or reduce operations. During 2020, our
operating markets remained substantially unaffected by COVID-19, except for
Kentucky and to a lesser degree, Vancouver, British Columbia . However, we
believe its impact may negatively affect our operations in subsequent periods if
construction activity in future periods slows due to COVID-19. Residential
construction activity remains strong, particularly in the Houston and Salt Lake
City areas, two of the largest metro areas in which we operate. We believe
residential activity in our key markets will continue to be a driver for volumes
in future periods. While Kentucky had experienced fiscal shortfalls prior to
COVID-19, those shortfalls were extended by COVID-19, and subsequently, Kentucky
suspended lettings of department of transportation projects for May and June,
and subsequent lettings have been significantly reduced from prior levels. In
the Vancouver, British Columbia area, the provincial government has cancelled or
delayed certain infrastructure projects. Our cement segment has also been
impacted by lower sales demand, which we believe to be related to COVID-19,
notably in our southern markets. In most of our other markets, we have not
experienced any significant delays or cancellations of projects. Typically,
state revenues decrease as the economy slows, and ultimately, some
infrastructure projects may be delayed or cancelled, which would reduce our
revenues in future periods. In 2020, approximately 61% of our revenue was
derived from the private construction market, and the remaining revenue from the
public markets. In addition to the volume impact on the cement segment, our
annual cement price increases were delayed in 2020 from April 1 to June 1 due to
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.
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 after taking into consideration cost
of revenue, general and administrative expenses, depreciation, depletion,
amortization and accretion and gain on sale of property, plant and equipment.
Cost of revenue generally increases ratably with revenue, as labor,
transportation costs and subcontractor costs are recorded in cost of revenue. 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.
The table below includes revenue and operating income by segment for the periods
indicated. Operating income (loss) by segment is computed as earnings before
interest, loss on debt financings, tax receivable agreement expense, gain on
sale of business, other income / expense and taxes.
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Year ended
January 2, 2021 December 28, 2019 December 29, 2018
Operating Operating Operating
(in thousands) Revenue income (loss) Revenue income (loss) Revenue income (loss)
West $ 1,262,196 $ 176,528 $ 1,122,338 $ 109,182 $ 1,117,066 $ 92,068
East 799,633 69,796 809,098 101,775 703,147 59,554
Cement 270,622 55,335 290,704 64,697 280,789 75,843
Corporate (1) - (76,486) - (62,096) - (64,999)
Total $ 2,332,451 $ 225,173 $ 2,222,140 $ 213,558 $ 2,101,002 $ 162,466 ______________________
(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
periods indicated:
2020 2019 2018
($ in thousands)
Net revenue $
2,134,754
197,697 191,493 191,744
Total revenue 2,332,451 2,222,140 2,101,002
Cost of revenue (excluding items shown separately below) 1,583,996 1,526,332 1,475,779
General and administrative expenses 309,531 275,813 270,402
Depreciation, depletion, amortization and accretion 221,320 217,102 204,910
Gain on sale of property, plant and equipment (7,569) (10,665) (12,555)
Operating income 225,173 213,558 162,466
Interest expense (1) 103,595 116,509 116,548
Loss on debt financings 4,064 14,565 149
Tax receivable agreement (benefit) expense (7,559) 16,237 (22,684)
Gain on sale of business - - (12,108)
Other income, net (3,982) (11,977) (15,516)
Income from operations before taxes 129,055 78,224 96,077
Income tax expense (benefit) (12,185) 17,101 59,747
Net income $ 141,240 $ 61,123 $ 36,330 ______________________
(1)The statement of operations above is based on the financial results ofSummit Inc. and its subsidiaries, which was$20.5 million greater,$27.5 million less and$27.5 million less thanSummit LLC and its subsidiaries in the years endedJanuary 2, 2021 ,December 28, 2019 andDecember 29, 2018 , respectively, due to interest expense associated with a deferred consideration obligation, TRA expense and income tax benefit are obligations ofSummit Holdings andSummit Inc. , respectively and are thus excluded fromSummit LLC's consolidated net income. 45 -------------------------------------------------------------------------------- Table of Contents Fiscal Year 2020 Compared to 2019 ($ in thousands) 2020 2019 Variance Net revenue$ 2,134,754 $ 2,030,647 $ 104,107 5.1 % Operating income 225,173 213,558 11,615 5.4 % Operating margin percentage 10.5 % 10.5 % Adjusted EBITDA (1)$ 485,036 $ 461,462 $ 23,574 5.1 % ______________________ (1)Adjusted EBITDA is a non-GAAP measure that we find helpful in monitoring the performance of our business. See the definition of and the reconciliation below of Adjusted EBITDA to net income, which is the most directly comparable GAAP measure. Net revenue increased$104.1 million in the year endedJanuary 2, 2021 , primarily resulting from organic growth in our aggregates and ready-mix concrete operations. Of the increase in net revenue,$80.5 million was from increased sales of products,$19.7 million from increased sales of materials and$3.9 million from increased service revenue. We generated organic volume growth of 3.6%, 5.0% and 4.7% in aggregates, ready-mix concrete and asphalt, respectively, during 2020 over the prior year period, while our organic cement volumes declined 4.6% compared to 2019. We had organic price growth in our cement, ready-mix and asphalt lines of business of 1.5%, 4.7% and 1.4%, respectively, during 2020. Operating income increased by$11.6 million in 2020 as compared to 2019, primarily as net revenue gains exceeded increases in costs of revenue and general and administrative expenses. For the year endedJanuary 2, 2021 , our operating margin percentage remained flat as compared to the year endedDecember 28, 2019 , due to the items noted above. Adjusted EBITDA, as defined below, increased by$23.6 million in the year endedJanuary 2, 2021 as compared to the year endedDecember 28, 2019 . As a vertically-integrated company, we include intercompany sales from materials to products and from products to services when assessing the operating results of our business. We refer to revenue inclusive of intercompany sales as gross revenue. These intercompany transactions are eliminated in the consolidated financial statements. Gross revenue by line of business was as follows: ($ in thousands) 2020 2019 Variance Revenue by product*: Aggregates$ 636,254 $ 593,027 $ 43,227 7.3 % Cement 266,989 275,530 (8,541) (3.1) % Ready-mix concrete 668,488 608,168 60,320 9.9 % Asphalt 377,742 369,650 8,092 2.2 % Paving and related services 639,493 603,271 36,222 6.0 % Other (256,515) (227,506) (29,009) (12.8) % Total revenue$ 2,332,451 $ 2,222,140 $ 110,311 5.0 % ______________________ * Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of intracompany transactions is included in Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
Detail of our volumes and average selling prices by product for the years ended
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2020 2019
Volume(1) Volume(1) Percentage Change in
(in thousands) Pricing(2) (in thousands) Pricing(2) Volume Pricing
Aggregates 59,098 $ 10.77 53,954 $ 10.99 9.5 % (2.0) %
Cement 2,286 116.80 2,395 115.03 (4.6) % 1.5 %
Ready-mix concrete 5,740 116.47 5,466 111.27 5.0 % 4.7 %
Asphalt 5,831 59.76 5,568 58.93 4.7 % 1.4 %
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(1)Volumes are shown in tons for aggregates, cement and asphalt and in cubic yards for ready-mix concrete. (2)Pricing is shown on a per ton basis for aggregates, cement and asphalt and on a per cubic yard basis for ready-mix concrete. Revenue from aggregates increased$43.2 million in the year endedJanuary 2, 2021 . In 2020, increases in our northernTexas andVirginia markets were partially offset by organic aggregate volumes declines inMissouri as flood repair work in 2020 was less than in 2019 andKentucky due to COVID-19 impacts. Overall, our average sales price in 2020 decreased over 2019 primarily as the product mix shifted away from higher priced flood repair products to lower priced products and the impact of lower priced acquisition related sales volumes inTexas . For the year endedJanuary 2, 2021 , our aggregate volumes increased primarily due to acquisition volumes, and to a lesser extent, due to increased organic volumes. Aggregate volumes growth was attributable to organic growth in both the West and East segments. Organic aggregate volumes increased 3.6% in 2020 as compared to 2019, primarily due to increases in ourNorth Texas ,Intermountain West andKansas markets. Aggregate average sales prices of$10.77 per ton decreased 2.0% in 2020 as compared to 2019, primarily due to lower priced products in ourMissouri markets and acquisition related volumes noted above. Revenue from cement decreased$8.5 million in the year endedJanuary 2, 2021 . In 2020, organic cement volumes decreased 4.6% and organic cement average sales prices increased 1.5%, respectively, as compared to 2019. Revenue from ready-mix concrete increased$60.3 million in the year endedJanuary 2, 2021 . In 2020, our ready-mix volumes increased 5.0% and our average sales prices increased 4.7%. These volume and price increases in 2020 occurred in both the West and East segments. Volumes in the Intermountain,Texas andKansas geographies were impacted by more favorable weather conditions during 2020 as compared to 2019. Revenue from asphalt increased$8.1 million in the year endedJanuary 2, 2021 . In 2020, organic pricing increased 1.4%, with strong pricing gains in theKansas andNorth Texas geographies. Further, in 2020, we had strong volume increases inNorth Texas offset by decreases inKentucky due to COVID-19 impacts.
Other Financial Information
General and Administrative Expense
Our general and administrative expenses in 2020 increased$32.2 million over 2019, due primarily to increased incentive compensation expenses, and expenses recognized in connection with the transition of our chief executive officer. Our stock based compensation expense increased$8.5 million over 2019, primarily due to additional equity grants related to the transition of our chief executive officer. Loss on Debt Financings InAugust 2020 , we used the net proceeds from the offering of the 2029 Notes to redeem all of the outstanding 2023 Notes. In connection with that transaction, charges of$4.1 million were recognized in fiscal 2020. The charges included$0.8 million for the write-off of unamortized original issue discount and$3.3 million for the write-off of unamortized deferred financing fees. InMarch 2019 , we used the net proceeds from the offering of the 6.500% senior notes dueMarch 15, 2027 (the "2027 Notes") to redeem all of the outstanding 8.500% senior notes due 2022 (the "2022 Notes"). In connection with this transaction, charges of$14.6 million were recognized in fiscal 2019. The charges included$11.7 million for the applicable prepayment premium and$2.9 million for the write-off of unamortized deferred financing fees. 47 -------------------------------------------------------------------------------- Table of Contents Tax Receivable Agreement (Benefit) Expense Our TRA benefit for the year endedJanuary 2, 2021 was$7.6 million as compared to TRA expense of$16.2 million in the year endedDecember 28, 2019 . Each year, we update our estimate as to when TRA payments will be made. When payments are made under the TRA, a portion of the payment made will be characterized as imputed interest underIRS regulations. We also updated our estimate of the state income tax rate that will be in effect at the date the TRA payments are made. As a result of updated state income tax rate, and the imputed interest limitation noted above, we decreased our TRA liability by$7.6 million as ofJanuary 2, 2021 and increased our TRA liability by$16.2 million as ofDecember 28, 2019 .
Income Tax Expense (Benefit)
Our income tax benefit was$12.2 million for the year endedJanuary 2, 2021 as compared to income tax expense of$17.1 million for the year endedDecember 28, 2019 . Our effective tax rate forSummit Inc. differs from the federal statutory tax rate primarily due to (1) unrecognized tax benefits, (2) changes in the valuation allowance, (3) state taxes, (4) tax depletion expense in excess of the expense recorded underU.S. GAAP, (5) the minority interest in theSummit Holdings partnership that is allocated outside of the Company and (6) various other items such as limitations on meals and entertainment, certain stock compensation and other costs. The Company's income tax provision is calculated under the provisions of the final regulations related to tax reform legislation, which may limit our ability to deduct interest expense in calculating our taxable income. All adjustments resulting from the issuance of the final regulations have been recorded.
As of
Segment Results of Operations
West Segment ($ in thousands) 2020 2019 Variance Net revenue$ 1,147,921 $ 1,022,730 $ 125,191 12.2 % Operating income 176,528 109,182 67,346 61.7 % Operating margin percentage 15.4 % 10.7 % Adjusted EBITDA (1)$ 271,052 $ 204,964 $ 66,088 32.2 % ______________________ (1)Adjusted EBITDA is a non-GAAP measure that we find helpful in monitoring the performance of our business. See the reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure below. Net revenue in the West segment increased$125.2 million in the year endedJanuary 2, 2021 , due to increases in net revenues in all lines of business. Organic aggregate volumes increased 4.4% in 2020 as compared to 2019, and organic aggregates average sales prices increased 1.8%, primarily due to product mix. Organic ready-mix concrete volumes increased 3.0% and our organic ready-mix concrete average sales prices increased 4.7%. The West segment's operating income increased$67.3 million in the year endedJanuary 2, 2021 . Adjusted EBITDA increased$66.1 million in the year endedJanuary 2, 2021 . The increases in operating income and Adjusted EBITDA occurred as the weather conditions in 2020 have been generally more favorable as compared to 2019, which has resulted in operational efficiencies and increased sales volumes. The operating margin percentage in the West segment increased in 2020 as compared to 2019, due to the impact of the same factors noted above. Gross revenue by product/service was as follows: ($ in thousands) 2020 2019 Variance Revenue by product*: Aggregates$ 282,989 $ 244,138 $ 38,851 15.9 % Ready-mix concrete 496,118 460,137 35,981 7.8 % Asphalt 277,522 246,301 31,221 12.7 % Paving and related services 436,018 359,577 76,441 21.3 % Other (230,451) (187,815) (42,636) (22.7) % Total revenue$ 1,262,196 $ 1,122,338 $ 139,858 12.5 % 48
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* Revenue by product includes intercompany and intracompany sales transferred
at market value. The elimination of intracompany transactions is included in
Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
The West segment's percent changes in sales volumes and pricing comparing 2020
to 2019 were as follows:
Percentage Change in
Volume Pricing
Aggregates 16.9 % (0.8) %
Ready-mix concrete 3.0 % 4.7 %
Asphalt 10.3 % 2.9 %
Gross revenue from aggregates in the West segment increased $38.9 million in
2020 over 2019, primarily due to an increase in sales volumes that more than
offset a slight decrease in average sales price. Aggregates volumes increased in
2020 mainly in our Texas markets which had organic growth coupled with increased
acquisition volumes, and increased organic volumes in our Intermountain markets.
In 2020, organic aggregate volumes decreased in the Vancouver, British Columbia
area due to COVID-19 related delays in projects. Aggregates pricing in 2020
decreased 0.8% when compared to 2019, due to product mix primarily in our Texas
markets, resulting primarily from the impact of lower prices on acquisition
related volumes.
Gross revenue from ready-mix concrete in the West segment increased $36.0
million in 2020 over 2019. For the year ended January 2, 2021 , organic ready-mix
concrete prices increased 4.7%. For the year ended January 2, 2021 , our
ready-mix concrete organic volumes increased 3.0%, as volume increases in the
Intermountain geographies were offset by volume decreases in North Texas . We
continue to see strong residential volumes in the Salt Lake City and Houston
areas, while volumes in the Permian basin area have decreased due to an economic
slowdown in that area.
Gross revenue from asphalt in the West segment increased $31.2 million and
asphalt volumes increased 10.3% in 2020, due to organic volume and price
increases. Average sales prices for asphalt increased 2.9% in 2020. Gross
revenue for paving and related services in the West segment increased by $76.4
million in 2020 due to greater activity in our North Texas markets, partially
offset by our Intermountain geography and in Vancouver, British Columbia .
Prior to eliminations of intercompany transactions, the net effect of volume and
pricing changes on gross revenue for the year ended
East Segment ($ in thousands) 2020 2019 Variance Net revenue$ 716,211 $ 717,213 $ (1,002) (0.1) % Operating income 69,796 101,775 (31,979) (31.4) % Operating margin percentage 9.7 % 14.2 % Adjusted EBITDA (1)$ 162,275 $ 187,625 $ (25,350) (13.5) % ______________________ (1)Adjusted EBITDA is a non-GAAP measure that we find helpful in monitoring the performance of our business. See the reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income, below. Net revenue in the East segment decreased$1.0 million in 2020 over 2019, as the decrease in asphalt and paving and services revenues exceeded the increase in aggregates and ready-mix concrete revenues. Organic aggregate volumes increased 3.0% in 2020 over 2019 levels, while organic aggregate pricing decreased 2.1%. Organic ready mix volumes and pricing increased 11.2% and 4.6%, respectively. Due to weakness in ourKentucky market, organic asphalt volumes decreased (7.9)% in 2020 over 2019 levels, and paving and related services revenue decreased$40.2 million . Operating income in the East segment decreased$32.0 million and Adjusted EBITDA decreased$25.4 million in 2020 over 2019, primarily due to lower margins on our asphalt and paving business, which resulted from decreased activity inKentucky . In addition, our organic sales prices decreased inMissouri as 2019 included more higher priced flood and levy volumes. Further, ourKentucky operations worked to sell lower priced inventory to generate cash flow. Operating margin percentage in 2020 decreased to 9.7% from 14.2% in 2019, due to the items noted above.
Gross revenue by product/service was as follows:
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--------------------------------------------------------------------------------Table of Contents ($ in thousands) 2020 2019 Variance Revenue by product*: Aggregates$ 353,265 $ 348,889 $ 4,376 1.3 % Ready-mix concrete 172,370 148,031 24,339 16.4 % Asphalt 100,220 123,349 (23,129) (18.8) % Paving and related services 203,475 243,694 (40,219) (16.5) % Other (29,697) (54,865) 25,168 45.9 % Total revenue$ 799,633 $ 809,098 $ (9,465) (1.2) % ______________________ * Revenue by product includes intercompany and intracompany sales transferred at market value. The elimination of intracompany transactions is included in Other. Revenue from the liquid asphalt terminals is included in asphalt revenue.
The East segment's percent changes in sales volumes and pricing in 2020 as compared to 2019 were as follows:
Percentage Change in
Volume Pricing
Aggregates 3.5 % (2.2) %
Ready-mix concrete 11.2 % 4.6 %
Asphalt (7.9) % (3.3) %
Revenue from aggregates in the East segment increased $4.4 million in the year
ended January 2, 2021 . Aggregate volumes in 2020 increased 3.5%, primarily due
to organic growth in our Kansas markets from wind farm and other large
non-residential project activity, offset by volume decreases in our Missouri and
Kentucky markets. Our volumes decreased in Kentucky as the state continues to
deal with lower tax revenues that preceded COVID-19, and those revenues further
decreased after the onset of COVID-19. Aggregates pricing decreased 2.1% in 2020
due primarily to product mix in Missouri and Kentucky .
Revenue from ready-mix concrete in the East segment increased $24.3 million in
2020, as we realized higher organic volumes and pricing in all of our markets
except Virginia . In 2020, ready-mix concrete volumes increased 11.2%, and
average sales prices increased 4.6%.
Revenue from asphalt decreased $23.1 million in 2020, which was mainly
attributable to lower volumes in Kentucky , due to the items mentioned above,
which more than offset strong asphalt volumes in Kansas . Asphalt pricing
decreased 3.3% in 2020, as lower prices occurred in most of our markets. Paving
and related service revenue decreased $40.2 million in 2020, primarily due to
lower activity in Kentucky as noted above.
Prior to eliminations of intercompany transactions, the net effect of volume and
pricing changes on gross revenue for the year ended
Cement Segment ($ in thousands) 2020 2019 Variance Net revenue$ 270,622 $ 290,704 $ (20,082) (6.9) % Operating income 55,335 64,697 (9,362) (14.5) % Operating margin percentage 20.4 % 22.3 % Adjusted EBITDA (1)$ 92,956 $ 103,438 $ (10,482) (10.1) % ______________________ (1)Adjusted EBITDA is a non-GAAP measure that we find helpful in monitoring the performance of our business. See the reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income, below.
Net revenue in the Cement segment decreased
The Cement segment's operating income decreased
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international producers as we did in 2019. As such, our overall operating costs
increased in 2020 over 2019. We believe our lower sales volumes are related to
COVID-19, notably in our southern markets. Additionally, our solid waste
processing facility that provides fuel for one of our plants remained closed to
processing solid waste due to an explosion in April 2020 , which also increased
our operating costs. We expect to receive the necessary approvals to reopen that
facility sometime late in the first quarter 2021.
Operating margin percentage for the year ended
Gross revenue by product was as follows: ($ in thousands) 2020 2019 Variance Revenue by product*: Cement$ 266,989 $ 275,530 $ (8,541) (3.1) % Other 3,633 15,174 (11,541) (76.1) % Total revenue$ 270,622 $ 290,704 $ (20,082) (6.9) %
______________________
* Revenue from waste processing and the elimination of intracompany transactions are included in Other.
The Cement segment's percent changes in sales volumes and pricing in 2020 from 2019 were as follows:
Percentage Change in
Volume Pricing
Cement (4.6) % 1.5 %
Revenue from cement decreased $8.5 million in 2020, as volume decreases of 4.6%
were only partially offset by small organic cement pricing gains. We have
historically implemented cement pricing increases in April each year; however,
in 2020, those increases were deferred until June 1 as a result of COVID-19. We
believe the decreases in volume are the result of COVID-19, primarily in
southern markets, where the demand for cement is partially driven by the energy
industry.
Liquidity and Capital Resources
Our primary sources of liquidity include cash on-hand, cash provided by our operations and amounts available for borrowing under our credit facilities and capital-raising activities in the debt capital markets. In addition to our current sources of liquidity, we have access to liquidity through public offerings of shares of our Class A common stock. To facilitate such offerings, inJanuary 2020 , we filed a shelf registration statement with theSEC that is effective for a term of three years and will expire inJanuary 2023 . The amount of Class A common stock to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific limit on the amount we may issue. The specifics of any future offerings, along with the use of the proceeds thereof, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. As ofJanuary 2, 2021 , we had$418.2 million in cash and cash equivalents and$570.6 million of working capital as compared to$311.3 million and$497.0 million , respectively, atDecember 28, 2019 . Working capital is calculated as current assets less current liabilities. There were no restricted cash balances as ofJanuary 2, 2021 orDecember 28, 2019 . Our remaining borrowing capacity on our$345.0 million senior secured revolving credit facility as ofJanuary 2, 2021 was$329.1 million , which is net of$15.9 million of outstanding letters of credit, and is fully available to us within the terms and covenant requirements of our credit agreement. Given the seasonality of our business, we typically experience significant fluctuations in working capital needs and balances throughout the year. Our working capital requirements generally increase during the first half of the year as we build up inventory and focus on repair and maintenance and other set-up costs for the upcoming season. Working capital levels then decrease as the construction season winds down and we enter the winter months, which is when we see significant inflows of cash from the collection of receivables. Our acquisition strategy has historically required us to raise capital through equity issuances or debt financings. As ofJanuary 2, 2021 andDecember 28, 2019 , our long-term borrowings totaled$1.9 billion , for which we incurred$91.2 million and$102.0 million of interest expense, respectively. Our senior secured revolving facility has been adequate to fund our 51 -------------------------------------------------------------------------------- Table of Contents seasonal working capital needs and certain acquisitions. We had no outstanding borrowings on the revolving credit facility as ofJanuary 2, 2021 . We believe we have access to sufficient financial resources from our liquidity sources to fund our business and operations, including contractual obligations, capital expenditures and debt service obligations, for at least the next twelve months. Our growth strategy contemplates future acquisitions for which we believe we have sufficient access to capital. As market conditions warrant we may, from time to time, seek to purchase our outstanding debt securities or loans, including Senior Notes and borrowings under our senior secured credit facilities. Such transactions could be privately negotiated, open market transactions, tender offers or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may equate to a substantial amount of a particular class or series of debt, which may reduce the trading liquidity of such class or series.
Our Long-Term Debt
Please refer to the notes to the consolidated financial statements found elsewhere in this report for detailed information regarding our long-term debt and senior secured revolving credit facility, scheduled maturities of long-term debt and affirmative and negative covenants. Among other things, we are required to maintain a Consolidated First Lien Net Leverage Ratio that is no greater than 4.75 to 1.00. Our first lien net leverage ratio, for purposes of this maintenance requirement, is calculated following each quarter based on information for the most recently ended four fiscal quarters for which internal financial information is available by dividing our Consolidated FirstLien Net Debt as of the end of such period by our Consolidated EBITDA for such period. Consolidated EBITDA for purposes of our senior secured credit facility is calculated in accordance with our presentation of Further Adjusted EBITDA below. We define Further Adjusted EBITDA as Adjusted EBITDA plus the EBITDA contribution of certain recent acquisitions. For the years endedJanuary 2, 2021 andDecember 28, 2019 , our Consolidated First Lien Net Leverage Ratio was 0.51 to 1.00 and 0.80 to 1.00, respectively, based on consolidated first lien net debt of$254.5 million and$369.4 million as ofJanuary 2, 2021 andDecember 28, 2019 , respectively, divided by Further Adjusted EBITDA of$496.5 million and$461.5 million for the years endedJanuary 2, 2021 andDecember 28, 2019 , respectively. As ofJanuary 2, 2021 andDecember 28, 2019 , we were in compliance with all debt covenants. The following table sets forth a reconciliation of net income to Adjusted EBITDA and Further Adjusted EBITDA for the periods indicated. Adjusted EBITDA and Further Adjusted EBITDA are notU.S. GAAP measures and should not be considered in isolation, or as a substitute for our results as reported underU.S. GAAP. ($ in thousands) 2020 2019 2018 Net income$ 141,240 $ 61,123 $ 36,330 Interest expense 103,595 116,509 116,548 Income tax expense (benefit) (12,185) 17,101 59,747
Depreciation, depletion, and amortization 218,682 214,886
203,305
EBITDA $ 451,332 $ 409,619 $ 415,930
Accretion 2,638 2,216 1,605
Loss on debt financings 4,064 14,565 149Tax receivable agreement (benefit) expense (7,559) 16,237
(22,684)
Gain on sale of business - - (12,108)
Transaction costs(a) 2,747 2,222 4,238
Non-cash compensation(b) 28,857 20,403 25,378
Other(c) 2,957 (3,800) (6,247)
Adjusted EBITDA $ 485,036 $ 461,462 $ 406,261
EBITDA for certain acquisitions(d) 11,448 - 2,119
Further Adjusted EBITDA $ 496,484 $ 461,462 $ 408,380
______________________(a)Represents the transaction expenses associated with closed and probable acquisitions, consisting primarily of accounting, legal, valuation and financial advisory fees for the acquisitions.
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(b)Represents non-cash equity-based compensation granted to employees.
(c)Represents the net (gain) loss recognized on assets identified for disposal.
Includes non-recurring or one time income and expense items that were incurred
outside normal operating activities such as integration costs, unrealized
currency gains and losses and interest, tax, depreciation on unconsolidated
joint ventures and fair value adjustments to contingent consideration
obligations that originated with various acquisitions.
(d)Under the terms of our credit facilities, we include EBITDA from our
acquisitions, net of dispositions, in each fiscal year for periods prior to
acquisition. We believe this provides our lenders with a more meaningful view of
our EBITDA across all periods by making the information more comparable.
At January 2, 2021 and December 28, 2019 , $1.9 billion of total debt was
outstanding under our respective debt agreements. Summit LLC's senior secured
credit facilities 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"). Summit LLC's domestic
wholly-owned subsidiary companies are named as guarantors of the Senior Notes
and the Senior Secured Credit Facilities. Certain other partially-owned
subsidiaries, and the wholly-owned Canadian subsidiary, Mainland, do not
guarantee the Senior Notes or Senior Secured Credit Facilities. Summit LLC has
pledged substantially all of its assets as collateral for the Senior Secured
Credit Facilities.
On February 28, 2019 , Summit LLC entered into Incremental Amendment No. 4 to 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 to February 2024 .
Senior Notes
OnAugust 11, 2020 ,Summit LLC and Summit Finance (together, the "Issuers") issued$700.0 million in aggregate principal amount of 5.250% senior notes dueJanuary 15, 2029 . The 2029 Notes were issued at 100.0% of their par value with proceeds of$690.4 million , net of related fees and expenses. Interest on the 2029 Notes is payable semi-annually onJanuary 15 andJuly 15 of each year commencing onJanuary 15, 2021 . InAugust 2020 , using the proceeds from the 2029 Notes, all of the outstanding$650.0 million 6.125% senior notes due 2023 were redeemed at a price equal to par and the indenture under which the 2023 Notes were issued was satisfied and discharged. As a result of the extinguishment, charges of$4.1 million were recognized in the quarter endedSeptember 26, 2020 , which included charges of$0.8 million for the write-off of original issue discount and$3.3 million for the write-off of deferred financing fees. OnMarch 15, 2019 , the Issuers issued$300 million in aggregate principal amount of 6.500% senior notes dueMarch 15, 2027 . The 2027 Notes were issued at 100.0% of their par value with proceeds of$296.3 million , net of related fees and expenses. Interest on the 2027 Notes is payable semi-annually onMarch 15 andSeptember 15 of each year commencing onSeptember 15, 2019 . InMarch 2019 , using the proceeds from the 2027 Notes, all of 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 endedMarch 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.
On
Senior Secured Credit Facilities
Summit LLC has credit facilities that provide for term loans in an aggregate amount of$650 million and revolving credit commitments in an aggregate amount of$345 million (the "Senior Secured Credit Facilities"). Under the terms of Senior Secured Credit Facilities, as amended throughFebruary 2019 , required principal payments 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. The unpaid principal balance is due in full on the maturity date ofNovember 21, 2024 . The revolving credit facility bears interest per annum equal to, atSummit 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 ofBank 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 53 -------------------------------------------------------------------------------- Table of Contents 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 ofJanuary 2, 2021 orDecember 28, 2019 . As ofJanuary 2, 2021 , we had remaining borrowing capacity of$329.1 million under the revolving credit facility, which is net of$15.9 million of outstanding letters of credit. The outstanding letters of credit are renewed annually and support required bonding on construction projects and the Company's insurance liabilities.
The following table summarizes our net cash provided by and used for operating,
investing and financing activities and our capital expenditures for the periods
indicated:
Summit Inc. Summit LLC
($ in thousands) 2020 2019 2020 2019
Net cash provided by (used in):
Operating activities $ 408,869 $ 337,184 $ 408,869 $ 337,184
Investing activities (285,587) (162,809) (285,587) (162,809)
Financing activities (16,771) 8,150 (16,771) 8,150
Operating Activities
During the year ended
•Net income of$141.2 million , adjusted for$235.4 million of non-cash expenses, including$227.8 million of depreciation, depletion, amortization and accretion,$28.9 million of share-based compensation and$(18.4) million of change in deferred tax asset, net. •Billed and unbilled accounts receivable decreased by$10.0 million in fiscal 2020 as a result of the seasonality of our business. The majority of our sales occur in the spring, summer and fall and we typically incur an increase in accounts receivable (net billed and unbilled) during the second and third quarters of each year. This amount is typically converted to cash in the fourth and first quarters. •The timing of payments associated with accounts payable and accrued expenses of cash, which is consistent with the seasonality of our business whereby we build-up inventory levels and incur repairs and maintenance costs to ready the business for increased sales volumes in the summer and fall. These costs are typically incurred in the first half of the year and paid by year-end. In addition, we made$99.6 million of interest payments in 2020. Our cash interest payments are expected to decrease slightly from this amount in 2021 and beyond.
During the year ended
•Net income of$61.1 million , adjusted for$249.7 million of non-cash expenses, including$222.9 million of depreciation, depletion, amortization and accretion,$20.4 million of share-based compensation and$16.0 million of change in deferred tax asset, net.
•Billed and unbilled accounts receivable increased by
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•The timing of payments associated with accounts payable and accrued expenses of
cash, which is consistent with the seasonality of our business whereby we
build-up inventory levels and incur repairs and maintenance costs to ready the
business for increased sales volumes in the summer and fall. These costs are
typically incurred in the first half of the year and paid by year-end. In
addition, we made $104.6 million of interest payments in 2019.
Investing Activities
During the year endedJanuary 2, 2021 , cash used for investing activities was$285.6 million , of which$123.5 million related to acquisitions completed in the period and$177.2 million was invested in capital expenditures, which was partially offset by$14.0 million of proceeds from asset sales. During the year endedDecember 28, 2019 , cash used for investing activities was$162.8 million , of which$5.4 million related to acquisitions completed in the period and$177.5 million was invested in capital expenditures, which was partially offset by$21.2 million of proceeds from asset sales.
Financing Activities
During the year endedJanuary 2, 2021 , cash used in financing activities was$16.8 million . We received$700.0 million from proceeds of debt issuance, which was offset by$33.3 million of payments on acquisition related liabilities and$674.0 million in debt payments, which includes$14.4 million of finance lease cash payments. Our future payments under our finance lease obligations are expected to decrease slightly from 2020 levels. During the year endedDecember 28, 2019 , cash provided by financing activities was$8.2 million . We received$19.1 million of proceeds from stock option exercises and$300.0 million from proceeds of debt issuance, which was offset by$33.9 million of payments on acquisition related liabilities and$270.2 million in debt payments. Cash Paid for Capital Expenditures We expended approximately$177.2 million in capital expenditures for the year endedJanuary 2, 2021 compared to$177.5 million and$220.7 million in the years endedDecember 28, 2019 andDecember 29, 2018 , respectively. We estimate that we will invest between$200 million and$220 million in capital expenditures in 2021, which includes$25 -$35 million for our greenfield development projects. The timing of our greenfield expenditures is dependent upon the timing of when permits may be issued. We expect to fund our capital expenditure program through cash on hand, cash from operations, outside financing arrangements and available borrowings under our revolving credit facility.
Tax Receivable Agreement
Exchanges of LP Units for shares of Class A common stock are expected to result in increases in the tax basis of the tangible and intangible assets ofSummit Holdings . These increases in tax basis may increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of tax thatSummit Inc. would otherwise be required to pay in the future. In connection with the IPO, we entered into a TRA with the holders of LP Units that provides for the payment bySummit Inc. to exchanging holders of LP Units of 85% of the benefits, if any, thatSummit Inc. is deemed to realize as a result of these increases in tax basis and certain other tax benefits related to entering into the TRA, including tax benefits attributable to payments under the TRA. The increases in tax basis as a result of an exchange of LP Units for shares of Class A common stock, as well as the amount and timing of any payments under the TRA, are difficult to accurately estimate as they will vary depending upon a number of factors, including: •the timing of exchanges-for instance, the increase in any tax deductions will vary depending on the fair market value, which may fluctuate over time, of the depreciable or amortizable assets ofSummit Holdings at the time of each exchange; •the price of shares of our Class A common stock at the time of the exchange-the increase in any tax deductions, as well as the tax basis increase in other assets, ofSummit Holdings , is directly proportional to the price of shares of our Class A common stock at the time of the exchange;
•the extent to which such exchanges are taxable-if an exchange is not taxable for any reason, increased deductions will not be available;
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•the amount and timing of our income-Summit Inc. is required to pay 85% of the
cash tax savings, if any, as and when realized. If Summit Inc. does not have
taxable income, Summit Inc. is not required (absent a change of control or
circumstances requiring an early termination payment) to make payments under the
TRA for that taxable year because no cash tax savings will have been realized.
However, any tax attributes that do not result in realized benefits in a given
tax year will likely generate tax attributes that may be utilized to generate
benefits in previous or future tax years. The utilization of such tax attributes
will result in cash tax savings that will result in payments under the tax
receivable agreement; and
•the effective tax rate - The benefit that
We anticipate funding payments under the TRA from cash flows from operations, available cash and available borrowings under our Senior Secured Revolving Credit Facilities. As ofJanuary 2, 2021 , we had accrued$321.7 million as TRA liability. The entire TRA liability is a long term liability as no additional payments are expected in the next twelve months. In addition, the TRA provides that upon certain changes of control,Summit Inc.'s (or its successor's) obligations would be based on certain assumptions, including thatSummit Inc. would have sufficient taxable income to fully utilize the deductions arising from tax basis and other tax attributes subject to the TRA. With respect to our obligations under the TRA relating to previously exchanged or acquired LP Units and certain net operating losses, we would be required to make a payment equal to the present value (at a discount rate equal to one year LIBOR plus 100 basis points) of the anticipated future tax benefits determined using assumptions (ii) through (v) of the following paragraph. Furthermore,Summit Inc. may elect to terminate the TRA early by making an immediate payment equal to the present value of the anticipated future cash tax savings. In determining such anticipated future cash tax savings, the TRA includes several assumptions, including that (i) any LP Units that have not been exchanged are deemed exchanged for the market value of the shares of Class A common stock at the time of termination, (ii)Summit Inc. will have sufficient taxable income in each future taxable year to fully realize all potential tax savings, (iii)Summit Inc. will have sufficient taxable income to fully utilize any remaining net operating losses subject to the TRA on a straight line basis over the shorter of the statutory expiration period for such net operating losses or the five-year period after the early termination or change of control, (iv) the tax rates for future years will be those specified in the law as in effect at the time of termination and (v) certain non-amortizable assets are deemed disposed of within specified time periods. In addition, the present value of such anticipated future cash tax savings are discounted at a rate equal to LIBOR plus 100 basis points. As a result of the change in control provisions and the early termination right,Summit Inc. could be required to make payments under the TRA that are greater than or less than the specified percentage of the actual cash tax savings thatSummit Inc. realizes in respect of the tax attributes subject to the TRA (although any such overpayment would be taken into account in calculating future payments, if any, under the TRA) or that are prior to the actual realization, if any, of such future tax benefits. Also, the obligations ofSummit Inc. would be automatically accelerated and be immediately due and payable in the event thatSummit Inc. breaches any of its material obligations under the agreement and in certain events of bankruptcy or liquidation. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity. Under the terms of the TRA, we can terminate the TRA at any time, which would trigger a cash payment to the pre-IPO owners. Based upon a$20.08 per share price of our Class A common stock, the closing price of our stock onJanuary 2, 2021 and a contractually defined discount rate of 1.34%, we estimate that if we were to exercise our right to terminate the TRA, the aggregate amount required to settle the TRA would be approximately$312 million .
Contractual Obligations
The following table presents, as of
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Payments Due by Period
Total 2021 2022 2023 2024 2025 Thereafter
(in thousands)
Short term borrowings and long-term debt,
including current portion $ 1,916,314 $ 6,354 $ 6,354 $ 6,354 $ 597,252 $ 300,000 $ 1,000,000
Finance lease obligations 61,009 26,742 18,603 7,053 3,207 2,573 2,831
Operating lease obligations 37,847 9,491 6,088 4,663 2,863 1,781 12,961
Interest payments (1) 556,898 82,360 84,803 84,665 83,257 63,938 157,875
Acquisition-related liabilities 31,956 10,360 3,522 2,774 2,742 2,696 9,862
Royalty payments 149,410 9,916 9,880 9,594 9,295 9,052 101,673
Defined benefit plans (2) 22,214 2,327 2,323 2,313 2,273 2,241 10,737
Asset retirement obligation payments 112,806 11,300 5,115 2,677 3,132 2,062 88,520
Purchase commitments (3) 29,200 29,037 163 - - - -
Payments pursuant to tax receivable
agreement (4) 321,679 - - 455 2,292 3,786 315,146
Other 12,334 6,209 3,379 2,746 - - -
Total contractual obligations $ 3,251,667 $ 194,096 $ 140,230 $ 123,294 $ 706,313 $ 388,129 $ 1,699,605
______________________
(1)Future interest payments were calculated using the applicable fixed and
floating rates charged by our lenders in effect as of January 2, 2021 and may
differ from actual results.
(2)Future payments to fund our defined benefit plans are estimated based on
multiple assumptions which are enumerated in Note 14 to the consolidated
financial statements included elsewhere in this report.
(3)Amounts represent purchase commitments entered into in the normal course of
business, primarily for fuel purchases, the terms of which are generally one
year.
(4)The total amount payable under our TRA is estimated at $321.7 million as of
January 2, 2021 . Under the terms of the TRA, payment of amounts benefiting us is
due to the pre-IPO owners within four months of the tax returns being submitted
to the respective regulatory agencies when the benefits are realized. We are
currently estimating benefits next being realized in the 2021 tax year, and paid
to TRA holders in early 2023. The estimated timing of TRA payments is subject to
a number of factors, primarily around the timing of the generation of future
taxable income in future years, which will be impacted by business activity in
those periods.
Commitments and Contingencies
We are party to certain legal actions arising from the ordinary course of
business activities. Accruals are recorded when the outcome is probable and can
be reasonably estimated. While the ultimate results of claims and litigation
cannot be predicted with certainty, management expects that the ultimate
resolution of all current pending or threatened claims and litigation will not
have a material effect on our consolidated financial position, results of
operations or liquidity. We record legal fees as incurred.
In March 2018 , we were notified of an investigation by the CCB into pricing
practices by certain asphalt paving contractors in British Columbia , including
Winvan. We believe the investigation is focused on time periods prior to our
April 2017 acquisition of Winvan and we are cooperating with the CCB. Although
we currently do not believe this matter will have a material adverse effect on
our business, financial condition or results of operations, we are not able to
predict the ultimate outcome or cost of the investigation at this time.
Environmental Remediation and Site Restoration-Our operations are subject to and
affected by federal, state, provincial and local laws and regulations relating
to the environment, health and safety and other regulatory matters. These
operations require environmental operating permits, which are subject to
modification, renewal and revocation. We regularly monitor and review its
operations, procedures and policies for compliance with these laws and
regulations. Despite these compliance efforts, risk of environmental liability
is inherent in the operation of our business, as it is with other companies
engaged in similar businesses and there can be no assurance that environmental
liabilities and noncompliance will not have a material adverse effect on our
consolidated financial condition, results of operations or liquidity.
Other-We are obligated under various firm purchase commitments for certain raw
materials and services that are in the ordinary course of business. Management
does not expect any significant changes in the market value of these goods and
services during the commitment period that would have a material adverse effect
on the financial condition, results of operations and cash flows of the Company.
The terms of the purchase commitments generally approximate one year.
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Off-Balance Sheet Arrangements
As of
Non-GAAP Performance Measures
We evaluate our operating performance using metrics that we refer to as "Adjusted EBITDA," "Adjusted Cash Gross Profit" and "Adjusted Cash Gross Margin" which are not defined byU.S. GAAP and should not be considered as an alternative to earnings measures defined byU.S. GAAP. We define Adjusted EBITDA as EBITDA, adjusted to exclude accretion, loss on debt financings, loss from discontinued operations and certain non-cash and non-operating items. We define Adjusted Cash Gross Profit as operating income before general and administrative expenses, depreciation, depletion, amortization and accretion and transaction costs and Adjusted Cash Gross Margin as Adjusted Cash Gross Profit as a percentage of net revenue. We present Adjusted EBITDA, Adjusted Cash Gross Profit and Adjusted Cash Gross Margin for the convenience of investment professionals who use such metrics in their analyses. The investment community often uses these metrics to assess the operating performance of a company's business and to provide a consistent comparison of performance from period to period. We use these metrics, among others, to assess the operating performance of our individual segments and the consolidated company.
Non-GAAP financial measures are not standardized; therefore, it may not be possible to compare such financial measures with other companies' non-GAAP financial measures having the same or similar names. We strongly encourage investors to review our consolidated financial statements in their entirety and not rely on any single financial measure.
The tables below reconcile our net income (loss) to EBITDA and Adjusted EBITDA and present Adjusted EBITDA by segment and reconcile operating income to Adjusted Cash Gross Profit for the periods indicated: Reconciliation of Net Income (Loss) to Adjusted EBITDA Year ended January 2, 2021 by Segment West East Cement Corporate Consolidated ($ in thousands) Net income (loss)$ 178,460 $ 74,781 $ 69,484 $ (181,485) $ 141,240 Interest (income) expense (1) (5,447) (3,156) (13,795) 125,993 103,595 Income tax expense (benefit) 4,287 (283) - (16,189) (12,185) Depreciation, depletion and amortization 93,279 84,504 36,917 3,982 218,682 EBITDA$ 270,579 $ 155,846 $ 92,606 $ (67,699) $ 451,332 Accretion 587 1,701 350 - 2,638 Loss on debt financings - - - 4,064 4,064 Tax receivable agreement benefit (1) - - - (7,559) (7,559) Transaction costs - - - 2,747 2,747 Non-cash compensation - - - 28,857 28,857 Other (114) 4,728 - (1,657) 2,957 Adjusted EBITDA$ 271,052 $ 162,275 $ 92,956 $ (41,247) $ 485,036 58
-------------------------------------------------------------------------------- Table of Contents Reconciliation of Net Income (Loss) to Adjusted EBITDA Year ended December 28, 2019 by Segment West East Cement Corporate Consolidated ($ in thousands) Net income (loss)$ 108,751 $ 106,307 $ 75,480 $ (229,415) $ 61,123 Interest expense (income) (1) 1,734 1,774 (10,489) 123,490 116,509 Income tax expense (benefit) 1,918 (267) - 15,450 17,101 Depreciation, depletion and amortization 92,737 80,262 37,891 3,996 214,886 EBITDA$ 205,140 $ 188,076 $ 102,882 $ (86,479) $ 409,619 Accretion 519 1,141 556 - 2,216 Loss on debt financings - - - 14,565 14,565 Tax receivable agreement expense (1) - - - 16,237 16,237 Transaction costs 96 - - 2,126 2,222 Non-cash compensation - - - 20,403 20,403 Other (2) (791) (1,592) - (1,417) (3,800) Adjusted EBITDA$ 204,964 $ 187,625 $ 103,438 $ (34,565) $ 461,462 Reconciliation of Net Income (Loss) to Adjusted EBITDA Year ended December 29, 2018 by Segment West East Cement Corporate Consolidated ($ in thousands) Net income (loss)$ 109,363 $ 58,579 $ 83,148 $ (214,760) $ 36,330 Interest expense (income) (1) 5,064 3,491 (6,815) 114,808 116,548 Income tax expense 535 32 - 59,180 59,747 Depreciation, depletion and amortization 91,224 74,463 34,996 2,622 203,305 EBITDA$ 206,186 $ 136,565 $ 111,329 $ (38,150) $ 415,930 Accretion 570 970 65 - 1,605 Loss on debt financings - - - 149 149 Tax receivable agreement benefit - - - (22,684) (22,684) Gain on sale of business (12,108) - - - (12,108) Transaction costs (3) - - 4,241 4,238 Non-cash compensation - - - 25,378 25,378 Other (2) (5,646) 497 - (1,098) (6,247) Adjusted EBITDA$ 188,999 $ 138,032 $ 111,394 $ (32,164) $ 406,261 ______________________ (1)The reconciliation of net income (loss) to Adjusted EBITDA is based on the financial results ofSummit Inc. and its subsidiaries, which was$20.5 million greater,$27.5 million less and 27.5 million less thanSummit LLC and its subsidiaries in the years endedJanuary 2, 2021 ,December 28, 2019 andDecember 29, 2018 , respectively, due to interest expense associated with a deferred consideration obligation, TRA expense and income tax benefit are obligations ofSummit Holdings andSummit Inc. , respectively, and are thus excluded fromSummit LLC's consolidated net income. (2)For the year endedDecember 28, 2019 , we negotiated a$2.0 million reduction in the amount of a contingent liability from one of our acquisitions. For the year endedDecember 29, 2018 , we negotiated a$6.9 million reduction in the amount of a contingent liability from one of our acquisitions. As we had passed the period to revise the opening balance sheet for this acquisition, the adjustment was recorded as other income. Reconciliation of Working Capital 2020 2019 ($ in thousands) Total current assets$ 893,279 $ 796,281 Less total current liabilities (322,689) (299,297) Working capital$ 570,590 $ 496,984 59
-------------------------------------------------------------------------------- Table of Contents Reconciliation of Operating Income to Adjusted Cash Gross Profit 2020 2019 2018 ($ in thousands) Operating income
309,531 275,813 270,402
Depreciation, depletion, amortization and accretion 221,320 217,102 204,910
Gain on sale of property, plant and equipment (7,569) (10,665) (12,555)
Adjusted Cash Gross Profit (exclusive of items shown separately)
35.1 % 34.3 % 32.7 %
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(1)Adjusted Cash Gross Margin is defined as Adjusted Cash Gross Profit as a percentage of net revenue.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. On an ongoing basis, management evaluates its estimates, including those related to the valuation of accounts receivable, inventories, goodwill, intangibles and other long-lived assets, pension and other postretirement obligations and asset retirement obligations. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Acquisitions-Purchase Price Allocation
We regularly review strategic long-term plans, including potential investments in value-added acquisitions of related or similar businesses, which would increase our market share and/or are related to our existing markets. When an acquisition is completed, our consolidated statement of operations includes the operating results of the acquired business starting from the date of acquisition, which is the date that control is obtained. The purchase price is determined based on the estimated fair value of assets given to and liabilities assumed from the seller as of the date of acquisition. We allocate the purchase price to the estimated fair values of the tangible and intangible assets acquired and liabilities assumed as valued at the date of acquisition.Goodwill is recorded for the excess of the purchase price over the net of the fair value of the identifiable assets acquired and liabilities assumed as of the acquisition date. The estimation of fair values of acquired assets and assumed liabilities is judgmental and requires various assumptions and the amounts and useful lives assigned to depreciable and amortizable assets compared to amounts assigned to goodwill, which is not amortized, can significantly affect the results of operations in the period of and periods subsequent to a business combination. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, and therefore represents an exit price. A fair value measurement assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. We assign the highest level of fair value available to assets acquired and liabilities assumed based on the following options:
•Level 1-Quoted prices in active markets for identical assets and liabilities.
•Level 2-Observable inputs, other than quoted prices, for similar assets or liabilities in active markets.
•Level 3-Unobservable inputs, which includes the use of valuation models.
Level 1 fair values are used to value investments in publicly-traded entities and assumed obligations for publicly-traded long-term debt.
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Table of Contents Level 2 inputs are typically used to estimate the fair value of acquired machinery, equipment and land and assumed liabilities for asset retirement obligations, environmental remediation and compliance obligations and contingencies.
Level 3 fair values are used to value acquired mineral reserves and leased mineral interests and other identifiable intangible assets. The fair values of mineral reserves and leased mineral interests are determined using an excess earnings approach, which require management to estimate future cash flows. The estimate of future cash flows is based on available historical information and forecasts determined by management, but is inherently uncertain. Key assumptions in estimating future cash flows include sales price, volumes and expected profit margins, net of capital requirements. The present value of the projected net cash flows represents the fair value assigned to mineral reserves and mineral interests. The discount rate is a significant assumption used in the valuation model and is based on the required rate of return that a hypothetical market participant would assume if purchasing the acquired business. There is a measurement period after the acquisition date during which we may adjust the amounts recognized for a business combination. Any such adjustments are based on us obtaining additional information that existed at the acquisition date regarding the assets acquired or the liabilities assumed. Measurement period adjustments are generally recorded as increases or decreases to the goodwill recognized in the transaction. The measurement period ends once we have obtained all necessary information that existed as of the acquisition date, but does not extend beyond one year from the date of acquisition. Any adjustments to assets acquired or liabilities assumed beyond the measurement period are recorded in earnings.
We paid cash of
Goodwill is tested annually for impairment and in interim periods if events occur indicating that the carrying amounts may be impaired. The evaluation involves the use of significant estimates and assumptions and considerable management judgment. Our judgments regarding the existence of impairment indicators and future cash flows are based on operational performance of our businesses, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use, including estimates of future cash flows, volumes, market penetration and discount rates, are consistent with our internal planning. The estimated future cash flows are derived from internal operating budgets and forecasts for long-term demand and pricing in our industry and markets. If these estimates or their related assumptions change in the future, we may be required to record an impairment charge on all or a portion of our goodwill. Furthermore, we cannot predict the occurrence of future impairment-triggering events nor the affect such events might have on our reported values. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired businesses are impaired. Any resulting impairment loss could have an adverse effect on our financial condition and results of operations. The annual goodwill test is performed by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If, as a result of the qualitative assessment, it is determined that an impairment is more likely than not, we are then required to perform the two-step quantitative impairment test, otherwise further analysis is not required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether we choose to perform the qualitative assessment or proceed directly to the two-step quantitative impairment test. Under the two-step quantitative impairment test, step one of the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. We use a discounted cash flow ("DCF") model to estimate the current fair value of our reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including macroeconomic trends in the reporting unit's geographic area impacting private construction and public infrastructure industries, the timing of work embedded in our backlog, our performance and profitability under our contracts, our success in securing future sales and the appropriate interest rate used to discount the projected cash flows. We also perform a market assessment of our enterprise value. We believe the estimates and assumptions used in the valuations are reasonable. In conjunction with our annual review of goodwill on the first day of the fourth quarter, we performed the qualitative assessment for our reporting units. In 2020, we performed a two-step quantitative analysis on four of our reporting units. Step 1 of that analysis compares the estimated the fair value of the reporting units using an income approach (i.e., a discounted cash flow technique) and a market approach to the carrying value of the reporting unit. If the estimated fair value exceeds its 61 -------------------------------------------------------------------------------- Table of Contents carrying value, the goodwill of the reporting unit is not considered impaired. If the carrying value of the reporting unit exceeds its fair value, we proceed to the second step to measure the amount of potential impairment loss.
As of
Service Revenue Recognition 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. Collectability of service contracts is due reasonably after certain milestones in the contract are performed. Milestones vary by project, but are typically calculated using monthly progress based on the percentage of completion or a customer's engineer review of progress. The majority of the time, collection occurs within 90 days of billing and cash is received within the same fiscal year as services performed. On most projects the customer will withhold a portion of the invoice for retainage which may last longer than a year depending on the job. 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. The majority of our construction service contracts, and therefore, revenue, are opened and completed within one year, with most activity during the spring, summer and fall. 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 year endedJanuary 2, 2021 . We recognize claims when the amount of the claim can be estimated reliably and its legally enforceable. In evaluating these criteria, we consider the contractual basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. When the contract includes variable consideration, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. The amount of estimated variable consideration included in the transaction price is the amount for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Types of variable consideration include, but are not limited to, liquidated damages and other performance penalties and production and placement bonuses. The majority of contract modifications relate to the original contract and are often an extension of the original performance obligation. Predominately, modifications are not distinct from the terms in the original contract; therefore, they are considered part of a single performance obligation. We account for the modification using a cumulative catch-up adjustment. However, there are instances where goods or services in a modification are distinct from those transferred prior to the 62 -------------------------------------------------------------------------------- Table of Contents modification. In these situations, we account for the modifications as either a separate contract or prospectively depending on the facts and circumstances of the modification. Generally, construction contracts contain mobilization costs which are categorized as costs to fulfill a contract. These costs are excluded from any measure of progress toward contract fulfillment. These costs do not result in the transfer of control of a good or service to the customer and are amortized over the life of the contract. 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 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.
Income Taxes
Summit Inc. is a corporation subject to income taxes inthe United States . Certain subsidiaries, includingSummit Holdings , or subsidiary groups of the Company are taxable separate fromSummit Inc. The provisions for income taxes, orSummit Inc.'s proportional share of the provision, are included in the Company's consolidated financial statements. The Company's deferred income tax assets and liabilities are computed for differences between the tax basis and financial statement amounts that will result in taxable or deductible amounts in the future. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, as well as consideration of tax-planning strategies to determine whether we may seek to utilize any net operating loss carryforwards scheduled to expire in the near future. The estimates of future taxable income involves the use of significant estimates and assumptions and considerable management judgment. Our judgments regarding future taxable income and future cash flows are based on operational performance of our businesses, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use, including estimates of future cash flows, are consistent with our internal planning. The computed deferred balances are based on enacted tax laws and applicable rates for the periods in which the differences are expected to affect taxable income. A valuation allowance is recognized for deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines it would be able to realize its deferred tax assets for which a valuation allowance had been recorded, then an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company evaluates the tax positions taken on income tax returns that remain open and positions expected to be taken on the current year tax returns to identify uncertain tax positions. Unrecognized tax benefits on uncertain tax positions are recorded on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is more than 50 percent likely to be realized is recognized. Interest and penalties related to unrecognized tax benefits are recorded in income tax benefit.
Tax Receivable Agreement
Tax Receivable Agreement- When Summit Inc. purchases LP Units for cash or LP Units are exchanged for shares of Class A common stock, this results in increases inSummit Inc.'s share of the tax basis of the tangible and intangible assets ofSummit Holdings , which increases the tax depreciation and amortization deductions that otherwise would not have been available toSummit 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. In connection with our IPO, we entered into a TRA with the holders of the LP Units and the pre-IPO owners that provides for the payment bySummit Inc. to exchanging holders of LP Units of 85% of the benefits, if any, thatSummit Inc. actually realizes (or, under certain circumstances such as an early termination of the TRA is deemed to realize) as a result of (i) these increases in tax basis and (ii) our utilization of certain net operating losses of the pre-IPO owners and certain other tax benefits related to entering into the TRA, including 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. Our evaluation considers all sources of taxable income; all evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all 63 -------------------------------------------------------------------------------- Table of Contents of the deferred tax assets. 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 of 85% of 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.
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