10-K 1 nesl-20160229x10xk.htm 10-K NESL SEC Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
 
ý      Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
 
For the fiscal year ended February 29, 2016
 
or
 
o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
 
For the transition period from                to                
 
Commission File Number 333-176538
 
NEW ENTERPRISE STONE & LIME CO., INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
23-1374051
(State or other jurisdiction
of incorporation or organization)
 
(IRS employer
identification number)
 
3912 Brumbaugh Road
P.O. Box 77
New Enterprise, PA
 
16664
(Address of principal executive offices)
 
(Zip code)
 
Registrant’s telephone number, including area code:  (814) 766-2211
 
Securities registered pursuant to Section 12(b) of the Act:  None
 
Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No ý 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes ý  No o
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o  No ý
 
The  registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý No o






Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:  ý
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
 
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer x
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes o  No ý
 
As of February 29, 2016, there was no established public market for the registrant’s Class A Voting and Class B Non-Voting Common Stock and therefore the aggregate market value of the voting and non-voting common equity held by non-affiliates is not determinable.
 
As of May 23, 2016, the number of outstanding shares of the registrant’s Class A Voting Common Stock, $1.00 par value was 500 shares and the number of outstanding shares outstanding of the registrant’s Class B Non-Voting Stock, $1.00 par value, was 273,285.
 
DOCUMENTS INCORPORATED BY REFERENCE
None
 





 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K for our period ended February 29, 2016 (“fiscal year 2016”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to our financial condition, results of operations and business and our expectations or beliefs concerning future events. Such statements include, in particular, statements about our plans, strategies and prospects under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” You can identify certain forward-looking statements by our use of forward-looking terminology such as, but not limited to, “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “likely,” “will,” “would,” “could” and similar expressions that identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Many risks and uncertainties are inherent in our industry and markets. Others are more specific to our operations. The occurrence of the events described and the achievement of the expected results depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from the forward-looking statements contained in this Annual Report on Form 10-K.  Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:
 
material weaknesses and significant deficiencies in our internal control over financial reporting;
risks associated with the cyclical nature of our business and dependence on activity within the construction industry;
declines in public sector construction and reductions in governmental funding which continue to adversely affect our operations and results;
our reliance on private investment in infrastructure and a slower than normal recovery which continue to adversely affect our results;
a decline in the funding of the Pennsylvania Department of Transportation, which we refer to as PennDOT, the Pennsylvania Turnpike Commission, the New York State Thruway Authority or other state agencies;
difficult and volatile conditions in the credit markets may adversely affect our financial position, results of operations and cash flows;
our substantial debt and the risk of default of our existing and future indebtedness, which may result in an acceleration of our indebtedness thereunder;
impact of our credit rating on our cost of capital and ability to refinance;
the potential to inaccurately estimate the overall risks, requirements or costs when we bid on or negotiate a contract that is ultimately awarded to us;
the weather and seasonality;
our operation in a highly competitive industry within our local markets;
rising costs of healthcare;
our dependence upon securing and permitting aggregate reserves in strategically located areas;
risks related to our ability to acquire other businesses in our industry and successfully integrating them with our existing operations;
risks associated with our capital-intensive business;
risks related to our ability to meet schedule or performance requirements of our contracts;
changes to environmental, health and safety laws;
our dependence on our senior management;
our ability to recruit additional management and other personnel and our ability to grow our business effectively or successfully implement our growth plans;
the potential for labor disputes to disrupt operations of our businesses;
special hazards related to our operations that may cause personal injury or property damage;
unexpected self-insurance claims and reserve estimates;
material costs and losses as a result of claims that our products do not meet regulatory requirements or contractual specifications;
our ability to permit additional reserves in select locations;
cancellation of significant contracts or our disqualification from bidding for new contracts;
general business and economic conditions, particularly an economic downturn;
our new regional alignment and restructuring of our accounting and certain administrative functions may not yield the anticipated efficiencies and may result in a loss of key personnel; and
the other factors discussed in the section of this Annual Report on Form 10-K titled “Item 1A—Risk Factors.”

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We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Annual Report on Form 10-K may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I
Item 1.                                    BUSINESS.
 
Overview
 
We are a leading privately held, vertically integrated construction materials supplier and heavy/highway construction contractor in Pennsylvania and western New York and a national traffic safety services and equipment provider. Founded in 1924, we are one of the top 20 crushed stone producers based on tonnage of crushed stone produced in the United States, according to industry surveys.
 
We operate in three segments based upon the nature of our products and services: construction materials, heavy/highway construction and traffic safety services and equipment. Our construction materials operations are comprised of: aggregate production, including crushed stone and construction sand and gravel; hot mix asphalt production; and ready mixed concrete production. Another of our core businesses, heavy/highway construction, includes heavy construction, blacktop paving and other site preparation services. Our heavy/highway construction operations are primarily supplied with construction materials from our construction materials operation. Our third core business, traffic safety services and equipment, consists primarily of sales, leasing and servicing of general and specialty traffic control and work zone safety equipment and devices to industrial construction end-users.
 
Our core businesses operate primarily in Pennsylvania and western New York, except for our traffic safety services and equipment business, which maintains a national sales network for our traffic safety products and provides traffic maintenance and protection services primarily in the eastern United States.
 
Our revenue is derived from sales to customers that serve multiple end-use markets. Because of the diversity of construction materials and services that we offer, we are able to meet a wide range of customer requirements on a local scale.  We may not always know the end-use for our materials due to the diversity of our product offerings and the fact that our customers serve the various end-use markets, such as public or private sector. However, we believe based upon reasonable assumptions and knowledge of our customers and the possible end-use of particular materials and services, that in the fiscal year ended February 29, 2016 approximately 50% to 55% of our revenue was derived from public sector end-use markets with the balance of our revenue derived from private sector end-use markets, with approximately three-fourths of our private sector revenue from non-residential construction.

Through four generations of family management, we have grown both organically and by acquisitions and operate, own or lease, 55 quarries and sand deposits (42 active), 28 hot mix asphalt plants, 15 fixed and portable ready mixed concrete plants, three lime distribution centers and two construction supply centers. Our traffic safety services and equipment business operates four manufacturing facilities and has sales facilities throughout the continental United States. We believe our extensive operating history and industry expertise, combined with strategically located operations and substantial aggregate reserves throughout Pennsylvania and western New York, enable us to be a low-cost supplier, as well as an operator with an established execution track record.

Corporate Information
 
New Enterprise Stone & Lime Co., Inc. (which we refer to as "NESL" or the "Company") is a Delaware corporation initially formed as a partnership in 1924. Our principal executive offices are located at 3912 Brumbaugh Road, P.O. Box 77, New Enterprise, PA 16664, and our telephone number is (814) 766-2211.
 
Our Markets
 
Our vertically integrated construction materials and heavy/highway construction businesses operate in competitive regional markets. Many of our contracts are awarded based on a “sealed bid” process, which dictates that the lowest price bidder must be chosen. This dynamic forces us to compete against major, national suppliers and smaller, local operators. We believe that our extensive operational footprint and local market knowledge allow us to bid effectively on jobs, to obtain a unique understanding of our customers’ evolving needs and, most critically, to maintain favorable positions in the markets for our products and services, enabling us to submit lower price bids while maintaining our profitability.
 

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We maintain strategically located construction materials operations across Pennsylvania and western New York. We also provide heavy/highway construction services, primarily in Pennsylvania and, to a lesser degree, into Maryland, West Virginia and Virginia. We operate traffic safety equipment manufacturing facilities and sell these products across the United States and we provide maintenance and traffic protection services primarily in the eastern United States.

Pennsylvania and Western New York
 
We operate primarily throughout Pennsylvania and western New York. The geography and natural resources of this area contribute to this region being one of the largest consumers of construction aggregates in the United States.
 
Pennsylvania, which was the second largest producer of construction aggregates and the sixth largest producer of ready mixed concrete in the United States in 2015, is located between the major consumer markets of the eastern United States and the large agricultural and industrial regions of the Midwestern United States, with an extensive and heavily utilized interstate system connecting the two. In addition, the commonwealth has a widely dispersed and dense rural population that has approximately 120,000 miles of paved roads throughout the commonwealth that must be maintained on a regular basis. A high percentage of the commonwealth’s roads are built in frost susceptible areas which, when subject to the typical freeze-thaw cycles of Pennsylvania’s climate, create excess pavement stresses, deformation and surface degradation, all requiring road maintenance.
 
The geography and natural resources of Pennsylvania, western New York and the surrounding states provide a robust market for our product offerings. Geographically, the locations of our quarries allow us to reach a large market area in Pennsylvania and the western part of New York. Our highway construction division can perform work throughout Pennsylvania and is able to respond to this market with aggregates, concrete, blacktop paving and highway construction services. Furthermore, our geographically diverse facilities are situated to maximize the consumption trends in this region. Our western and central Pennsylvania and New York locations are focused on the less cyclical core highway maintenance and heavy/highway construction, as well as the more stable residential and agricultural needs in these areas.
 
Public Sector
 
Public sector construction includes spending by federal, state and local governments for highways, bridges and airports, as well as other infrastructure construction for sewer and waste disposal systems, water supply systems, dams, reservoirs and other public construction projects. Generally, public sector construction spending is more stable than private sector construction. Public sector spending is less sensitive to interest rates and often is supported by multi-year legislation and programs. A significant portion of our revenue is from public highway construction projects. As a result, the funding for public highway construction significantly impacts our market.
 
The level of state spending on infrastructure varies across the United States and depends on the needs and economies of individual states. However, a large part of any state’s public expenditure on transportation infrastructure is a factor of the amount of federal funds it receives for such purposes. During its fiscal year ended June 30, 2015, PennDOT spent approximately $7.2 billion on transportation projects and administration. In addition, the Pennsylvania Turnpike Commission, the roads of which are located near many of our facilities, receives toll revenue less susceptible to variations in state funding which it utilizes for its maintenance and construction operations. The Pennsylvania Turnpike Commission’s Ten-Year Capital Plan for the fiscal year ending May 31, 2016 is $6.5 billion, approximately 88% of the amount is allocated to the cost of resurfacing, replacing or reconstructing the existing turnpike system. The New York Thruway, also in our market area, is a toll road with dedicated funding outside of the New York Department of Transportation.

On November 25, 2013, Governor Tom Corbett signed into law the Senate Bill 89 (the "Transportation Bill") which we believe is one of the most significant transportation funding package the Commonwealth of Pennsylvania has enacted in recent times. In summary, the Transportation Bill provides $2.3 billion of funding per year by fiscal year 2017/18, for the Commonwealth’s highway, bridge, public transit and local government’s infrastructure. Of this amount, $1.65 billion per year is earmarked for highways and bridges by 2017, with an additional $220 million per year for local government highway and bridge projects.     The amounts available for lettings will increase over the course of the next several years, as PennDOT evaluates on which additional projects they can commence construction.


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Private Sector
 
This market includes both non-residential and residential construction and is more cyclical than public construction.
 
Private non-residential construction includes a wide array of project types. Overall demand in private non-residential construction is generally driven by job growth, vacancy rates, private infrastructure needs and demographic trends. The growth of the private workforce creates a demand for offices, hotels and restaurants. Likewise, population growth generates demand for stores, shopping centers, warehouses and parking decks as well as hospitals, schools and entertainment facilities. Large industrial projects, such as a new manufacturing facility, can increase the need for other manufacturing plants to supply parts and assemblies, as well as the need for additional residential construction. Construction activity in this end-market is influenced by the ability to finance a project and the cost of such financing.
 
The majority of residential construction is for single-family houses with the remainder consisting of multi-family construction (i.e., two family houses, apartment buildings and condominiums). Public housing comprises a small portion of housing demand. Construction activity in this end-market is influenced by the cost and availability of mortgage financing. Demand for our products generally occurs early in the infrastructure phase of subdivision development and residential construction, and later as part of driveways or parking lots.
 
United States housing starts began to increase modestly in 2010 and 2011, with an approximate 6% and 4%, increase, respectively, and then increased significantly at a rate of 18%, 21%, 12.9% and 24.5%, in 2012, 2013, 2014 and 2015, respectively, according to the National Association of Homebuilders. The housing starts in the Pennsylvania market in which we operate had a similar decline and rebound. We believe lower home prices and attractive mortgage interest rates are positive factors that should continue to impact single-family housing construction.
 
Consistent with past cycles of private sector construction, private non-residential construction favorably strengthened in 2014 and 2015. By April 2015, contract awards for non-residential construction had increased approximately 169% from its lowest point in February 2014, and continued to grow through 2015.
 
Our Competitive Strengths
 
The following characteristics provide us with competitive advantages relative to others that operate in our markets. While our competitors may possess one or more of these strengths, we believe we are a leader in our markets because of our full complement of these attributes. Our strengths include:
 
Leading Market Positions
 
We are one of the top 20 crushed stone producers based on tonnage of crushed stone produced in the United States, according to a national industry survey published by Aggregates Managers. These leading market positions are driven by our regionally focused operational footprint, which facilitates efficient, low-cost product delivery and responsiveness to customer demands, which are essential to maintaining existing customers and securing new business.
 
Vertically Integrated Business Model
 
We generate revenue across a spectrum of related products and services. We are able to mine our quarries to extract aggregates that we use to produce ready mixed concrete and hot mix asphalt materials, which may be utilized by our heavy/highway construction business to service our customers. Our vertically integrated business model enables us to operate as a single source provider of materials and construction capabilities, creating economic, convenience and reliability advantages for our customers, while at the same time creating significant cross-marketing opportunities among our interrelated businesses. Our vertical integration model, combined with the breadth of our construction materials offerings, enhances our position as a construction materials supplier and as a bidder on complex multi-discipline construction projects. In instances where we may not win a local construction contract, for example, we may often serve as a subcontractor or significant supplier to the winning bidder, creating additional revenue opportunities.
 

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Favorable Market Fundamentals
 
We work extensively for PennDOT and other governmental entities within Pennsylvania which are responsible for the Commonwealth’s roads and highways. Pennsylvania’s diversified economy is heavily reliant on the Commonwealth’s approximately 120,000 miles of interstate, state and local roads, and approximately 32,000 Commonwealth and local bridges. Pennsylvania has the nation’s fifteenth largest gross state product and the nation’s eleventh largest road network, which serves as a critical highway transportation route connecting Midwestern manufacturing centers and the northeast corridor. The Pennsylvania State Transportation Advisory Committee, in its most recent study, identified over $3.5 billion of annual unmet state and local highway and bridge funding needs in excess of currently available funding levels. We believe our construction materials locations, understanding of various specifications, project management and skilled labor position us to take advantage of these favorable dynamics and enable us to provide competitive bids on most public sector projects in Pennsylvania.
 
Substantial Reserve Life

We estimate that we currently own or have under lease approximately 2.0 billion tons of permitted proven recoverable and probable recoverable aggregate reserves.
 
High Barriers to Entry
 
We benefit from barriers to entry that affects both potential new market entrants and existing competitors operating within or near our markets. The high weight-to-value ratio of aggregates and concrete products and the time in which hot mix asphalt and ready mixed concrete begin to set limit the efficient distribution range for these products to roughly a one-hour haul time. Our regionally focused operational footprint allows us to maintain lower transportation costs and compete effectively against large and small players in our local markets.
 
Quarry and construction operations are inherently asset intensive and require significant investments in land, high-cost equipment and machinery, resulting in significant start-up costs for a new business. We own most of the equipment and machinery used at our facilities, creating an advantage over potential market entrants. The complex regulatory environment and time-consuming permitting process, especially for opening new quarries, add further start-up costs and uncertainty for new market entrants.
 
Our regional focus and local knowledge, acquired through decades of operating experience, enhance our ability to bid effectively and win profitable contracts. We believe our experience allows us to distinguish ourselves from other competitors in this regard.
 

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Experienced and Dedicated Management Team
Our senior management team includes certain third and fourth generation members of our founding family, the Detwiler family, who have spent a significant portion of their professional careers in the aggregate and heavy construction businesses and are complemented and supported by highly trained and experienced senior managers who came to us through various acquisitions and internal advancement. Our Chairman, Paul I. Detwiler, Jr., and our Vice Chairman, Donald L. Detwiler, have spent their entire careers working at NESL (57 and 50 years, respectively), with Paul’s expertise centered on the operation of the plants and quarries and Donald’s focused on the heavy/highway construction business. Two of Paul, Jr.’s sons, Paul I. Detwiler, III and Jeffrey D. Detwiler, hold senior management positions, with Paul I. Detwiler, III serving on our Board of Directors, our Executive Committee, and as our Chief Executive Officer and President, having joined us in 1981. Robert J. Schmidt began with us in September 2014 and was appointed as our Chief Operating Officer in April 2015. Mr. Schmidt has almost thirty years' experience as a senior executive in the construction materials industry. Albert L. Stone became our Chief Financial Officer on March 22, 2013. Mr. Stone has been in the aggregates and heavy/highway construction business since 1985. Our senior management team is complemented and supported by a large number of talented, highly trained and experienced senior managers. Our senior management team makes joint decisions on all major operating issues including capital deployments, acquisitions and expansions. Other corporate responsibilities are divided among the senior management group to ensure adequate contingency planning and leadership across all of our segments and divisions. We continue to focus on succession planning and focus on growing our company management from our internal ranks. Accordingly, we believe our management team has served and will continue to serve a critical role in our growth and profitability. Management remains dedicated to continuing to develop our operations and executing our business strategy as we continue to grow the business. We have management and leadership training programs in place and have trained hundreds of employees over the years so that we are not dependent on the outside market place to fill open positions. Members of the Detwiler family, who control all of the voting equity of NESL, have demonstrated a commitment to continued reinvestment in NESL. With the exception of certain tax-related dividends, we have not issued a dividend to any of our equity holders in over 20 years.
 
Our Business Strategy
 
We are focused on growing our sales, profitability and cash flow and strengthening our balance sheet by capitalizing on our competitive strengths and reinvesting in our core businesses. Key elements of our business strategy include:
 
Leverage Our Vertically Integrated Business Model
 
We generate revenue across a spectrum of related products and services, many of which comprise a vertically integrated business that provides both raw materials and construction services. By maintaining production and cost control over this vertically integrated supply chain, we believe we are better able to serve our customers and be a low-cost supplier. We intend to leverage this vertical integration to continue to minimize our costs, improve our customer service and win profitable new business.

Maintain a Competitive Position in Our Markets
 
We are competitive in the areas we serve due to our extensive network of quarries and related operations that facilitate efficient distribution throughout our geographical market area. We believe that our vertically integrated model, including our network of operational facilities, as well as our tightly managed costs, project management, safety and educational training, technological improvements and value engineering focus helps us achieve our low-cost position. We continuously work to exploit new technologies, such as implementing improved global positioning systems to monitor truck delivery activity and increase precision in construction projects. These technological improvements, coupled with our comprehensive employee training program and health and safety training programs and policies, allow us to make optimal use of our employees and equipment, operate safely and lower our insurance claims. Our extensive operating experience allows us to identify value engineering opportunities on certain projects, allowing us to propose enhancements to project specifications which we believe save our customers money and enhance our profitability. The mechanics of the “sealed bid” process that govern many of our contract awards require that we submit a bid that is low enough to win the business, but also includes a margin sufficient to maintain profitability. We will continue to manage our business aggressively to minimize costs to ensure that we are positioned to continue to win competitive, profitable new business in our markets.
 

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Capitalize on Our Strategically Located Operations to Expand Market Share
 
We believe our existing operational footprint places us in proximity to some of the strongest market opportunities in the mid-Atlantic and western New York regions. Our proximity to areas of high construction activity, including the extensive Pennsylvania and western New York road networks and the Pennsylvania coal and gas industries, creates attractive revenue opportunities for which we are particularly well positioned relative to both major, national and smaller, local competitors. We believe our strategically situated construction materials locations create an inherent competitive advantage for us in our markets. We intend to continue to capitalize on these advantages to increase revenue and drive profitability. In those instances where our construction materials locations do not create an inherent competitive advantage, we remain competitive through our local knowledge of required specifications and industry expertise.
 
Drive Profitable Growth Through Reinvestment
 
Through over 90 years of operations, we have developed significant experience and expertise in identifying and executing new growth opportunities. We expect to continue to enhance our overall competitive position and customer base by reinvesting in our business. We also anticipate that we will leverage our experience to develop more greenfield quarry locations within or adjacent to our current markets.
 
Our Industry
 
Our core construction materials, heavy/highway construction and traffic safety services and equipment businesses are organized to deliver customers products and services from several interrelated industry sectors:
 
aggregates;
 
hot mix asphalt;

ready mixed concrete;

heavy/highway construction; and

traffic safety services and equipment.
 
Competitors in these industries range from small, privately held firms that produce a single product, to multinational corporations that offer a comprehensive suite of construction materials and services, including design, engineering, construction and installation. However, day-to-day execution for construction materials for all competitors remains local or regional in nature based upon typical value-to-weight ratios which limit the distance construction materials can be transported in a cost effective manner.
 
The Fixing American's Surface Transportation Act ("FAST Act"), released December 1, 2015, by the conference committee appointed to reconcile the different surface transportation reauthorization bills passed by the House and Senate, will reauthorize federal highway and public transportation programs and stabilize the Highway Trust Fund for fiscal years 2016-2020. The FAST Act will provide stability as it relates to funding and should allow states to let an increased number of multi-year projects.

The FAST Act will provide $207.4 billion of funding to be apportioned to the states by formula, with a 5.1% increase over actual fiscal year 2015 apportionments in 2016 and then inflationary increases in subsequent years. Meaningful impact from the FAST Act is not expected before the second half of 2016. Allocations for Pennsylvania and New York for 2016 are estimated to be $1.7 billion for each state.

The federal highway bill provides spending authorizations, which represent the maximum financial obligation that will result from the immediate or future outlays of federal funds for highway and transit programs. The federal government’s surface transportation programs are financed mostly through the receipts of highway user taxes placed in the Highway Trust Fund, which is divided into the Highway Account and the Mass Transit Account. Revenues credited to the Highway Trust Fund are primarily derived from a federal gas tax, a federal tax on certain other motor fuels and interest on the accounts’ accumulated balances. Moving Ahead for Progress, or MAP-21 extended federal motor fuel taxes through September 30, 2016 and truck excise taxes through September 30, 2017. Of the currently imposed federal gas tax of $0.184 per gallon, which has been static since 1993, $0.15 is allocated to the Highway Account of the Highway Trust Fund.

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In addition to federal funding, highway construction and maintenance funding is also available through state agencies. In Pennsylvania, new highway and bridge construction and maintenance is coordinated by PennDOT. During its fiscal year ended June 30, 2015, PennDOT spent approximately $7.2 billion on transportation projects and administration. Typically the federal government funds a portion of PennDOT’s annual budget, while Pennsylvania funds the balance through the Motor License Fund ("MLF"). MLF funds are mandated per the state constitution to fund expenditures on highways and bridges and may not be reallocated to other state funding needs in the annual budgeting process. The Pennsylvania Turnpike Commission has a budget that is currently separate from PennDOT. The Pennsylvania Turnpike Commission’s Ten-Year Capital Plan for the fiscal year ending May 31, 2016 is $6.5 billion, approximately 88% of the amount is allocated to the cost of resurfacing, replacing or reconstructing the existing turnpike system.

In 2013, Governor Tom Corbett signed into law Act 89, also known as the Transportation Bill, which we believe is one of the most significant transportation funding packages the Commonwealth of Pennsylvania has enacted in recent times. In summary, the Transportation Bill provides an additional $2.3 billion per year by fiscal year 2017/2018, for the Commonwealth's highway, bridge, public transit and local government's infrastructure. By 2018, the Transportation Bill will enable the Commonwealth to generate an additional $1.3 billion a year to be used for state road and bridge improvement projects, in addition to the $1.5 billion of federal funding provided in the Bill.

PennDOT and the Pennsylvania Turnpike Commission have historically provided consistent demand for construction materials and projects in our markets. In addition, we also bid on purchase order contracts for hot mix asphalt and aggregates supplied directly to PennDOT maintenance districts and municipalities.
 
Construction Materials
 
Aggregates
 
The aggregates industry generated over $13.8 billion in sales through the production and shipment of 1.3 billion metric tons in 2015 in the United States, according to the United States Geological Survey, which we refer to as USGS. Aggregates include materials such as gravel, crushed stone, limestone and sand, which are primarily incorporated into construction materials, such as hot mix asphalt, cement and ready mixed concrete. Aggregates are also used for various applications and products, such as railroad ballast, filtration, roofing granules and in solutions for snow and ice control. The U.S. aggregate industry is highly fragmented with numerous participants operating in localized markets. The USGS reported that a total of 1,430 companies operating 3,700 quarries and 82 underground mines produced or sold crushed stone valued at $13.8 billion in 2015 in the United States.
 
Transportation cost is a major variable in determining aggregate pricing and marketing radius. The cost of transporting aggregate products from the plant to the market often equates to or exceeds the sale price of the product at the plant. As a result of the high transportation costs and the large quantities of bulk material that have to be shipped, finished products are typically marketed locally. High transportation costs are responsible for the wide dispersion of production sites. Where possible, construction material producers maintain operations adjacent to highly populated areas to reduce transportation costs and enhance margins.
 

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The demand for aggregates is a function of several factors, including transportation infrastructure spending and changes in population density. Crushed stone production was about 1.32 billion tons in 2015, an increase of 6% compared with that of 2014. Apparent consumption also increased to about 1.39 billion tons. Demand for crushed stone was slightly higher in 2015 with an increase in demand in every quarter since the second quarter of 2013. Long-term increases in construction aggregates demand will be influenced by activity in the public and private construction sectors, as well as by construction work related to security measures being implemented around the nation. The crushed stone industry continues to be concerned with environmental, health, and safety regulations. Shortages of crushed stone in some urban and industrialized areas are expected to continue to increase owing to local zoning regulations and land-development alternatives. These issues are expected to continue and to cause new crushed stone quarries to be located away from large population centers. The five leading states, in descending order of total annual output for 2015, were Texas, Pennsylvania, Missouri, Florida and Ohio. With U.S. economic activity slowly improving, construction sand and gravel output for 2015 increased about 5% compared with that of 2014. Construction spending in the United States for the first ten months of 2015 increased by about 3% compared to the same period in 2014. Growth in housing starts in 2015 is increasing demand for construction sand and gravel in many states. Growth was also seen in some nonresidential construction, especially within the sectors of communications, power generation, and non-highway transportation. The marginal improvement in the overall economy as well as the benefits of an infrastructure program funded specific by the Commonwealth of Pennsylvania has contributed to improvements in our markets, albeit at a slower pace than we have experienced in previous recoveries.
 
We believe that the long-term growth of the market for aggregates is largely driven by growth in population, jobs and households. While short-term and medium-term demand for aggregates fluctuates with economic cycles, the declines have historically been followed by strong recovery, with each peak establishing a new historical high.
 
A significant portion of our aggregates is utilized in heavy/highway construction projects. Highways located in our markets are particularly vulnerable to freeze-thaw conditions that lead to excessive pavement stress and surface degradation conditions. The highway pavement deterioration in our markets is accelerated by the large volume of intrastate and interstate trucking in Pennsylvania given its location between the eastern United States consumer markets and other agricultural and industrial regions of the United States. Surface maintenance repairs, as well as general highway construction and repair, occur in the warmer months. Heavy/highway construction in our target markets tends to be similarly seasonal. As a result, our aggregate business is seasonal in nature as the majority of production and sales occur in the eight months between April and November.

Hot Mix Asphalt
 
Hot mix asphalt is the most commonly utilized pavement surface. Hot mix asphalt is produced by mixing asphalt cement and aggregate. The asphalt cement is heated to increase its viscosity and the aggregate is dried to remove moisture from it prior to mixing. Paving and compaction must be performed while the asphalt is sufficiently hot, typically within a one-hour haul from the production facility. In many parts of the country, including the market in which we operate, paving is generally not performed in the winter months because of cold temperatures.
 
Asphalt pavement is one of the building blocks of the United States. The United States has about 4.1 million miles of paved roads and highways, 68% of which are surfaced with asphalt.
 
The United States has approximately 3,500 asphalt plants in operation. Each year, these plants produce 500 million tons of asphalt pavement material worth in excess of $30 billion. Asphalt pavement material is a precisely engineered product composed of approximately 95% stone, sand and gravel by weight, and approximately 5% asphalt cement, a petroleum product. Asphalt cement acts as the glue to hold the pavement together.
 
Asphalt is the United States’ most recycled material. Reclaimed asphalt pavement is reusable as an aggregate mixture. In addition, the asphalt cement in the reclaimed pavement when reheated is reactivated to become an integral part of the new pavement. The recycled asphalt pavement replaces part of the new liquid asphalt cement required for the mixture, thereby reducing costs for asphalt mixtures.
 

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Ready Mixed Concrete
 
Demand for ready mixed concrete is driven by its highly versatile end use applications. The ready mixed concrete industry generated approximately $30 billion in sales in 2015, according to the National Ready Mixed Concrete Association. Ready mixed concrete is created through the combination of coarse and fine aggregates with water, various chemical admixtures and cement. Given the high weight-to-value ratio, delivery of ready mixed concrete is typically limited to a one-hour haul from a production plant location and is further limited by a 90 - minute window in which newly mixed concrete must be poured to maintain quality and desired performance characteristics. Most industry participants produce ready mixed concrete in batch plants and use concrete mixer trucks to deliver the concrete to customers’ job sites. Ready mixed concrete, which is poured in place at a construction site, can compete with other precast concrete products and concrete masonry block products.
 
According to the National Ready Mixed Concrete Association, it is estimated that there are approximately 5,500 ready mixed concrete plants in the United States. The North American ready mixed concrete industry is highly fragmented. Given that the concrete industry has historically consumed approximately 75% of all cement produced annually in the United States, many cement companies choose to be vertically integrated. Additionally, we face competition from precast concrete manufacturers.
 
Heavy/Highway Construction
 
Heavy/highway construction businesses provide a broad range of transportation and site preparation construction services, including grading and drainage, building bridge structures and concrete and blacktop paving services. While we provide services for a range of projects from driveway construction to the construction of new interstate highways, our business is primarily focused on structures, road construction and maintenance and blacktop/concrete paving. We focus on contracts that maximize the pull through on construction materials. In general, the highway construction industry’s growth rate is directly related to federal and state transportation agencies’ funding of road, highway and bridge maintenance and construction. Public spending on third-party highway construction for 2016 is budgeted at approximately $2.6 billion.

We stand to benefit from the multi year federal investments of the FAST Act in our core Pennsylvania and western New York markets as municipal, state, and federal agencies represent our largest customer base. We believe we will also benefit from the renewed emphasis on investments in Pennsylvania’s transportation and highway systems provided by the Transportation Bill at the state level. Along with the rest of the country, Pennsylvania has increased its highway construction, but it has not kept pace with its growing investment needs.
 
With the 2013 enactment of the transportation funding bill (Act 89) there is reason to see increased lettings. Act 89, which will implement a $2.3 billion comprehensive transportation funding plan over the next five years, will result in PennDot exceeding the $2 billion construction letting mark for years to come. The official 2015 year end total was $2.549 billion just shy of PennDot's $2.6 billion forecast. PennDot reported at the annual meeting of the Associated Pennsylvania Constructors (APC) that 2016 lettings are expected to be $2.4 billion.

Traffic Safety Services and Equipment
 
The traffic safety services and equipment industry comprises companies that produce, sell and set up traffic safety equipment in the United States. Traffic safety products generally consist of portable products such as message boards, arrow boards and speed awareness monitors, as well as traffic cones, barrels and signs. Demand for traffic safety services and equipment is particularly sensitive to changes in activity in the highway construction end-market. While significant challenges to the traffic safety equipment industry remain due to the recent economic downturn, we believe that the long-term growth prospects for the industry are favorable, given increasingly stringent highway and workplace safety regulations and standards, in addition to an anticipated cyclical recovery in highway spending.
 
Our Operations
 
We operate our construction materials, heavy/highway construction and traffic safety services and equipment businesses through local operations and marketing teams, which work closely with our end customers in the local markets where we operate. We believe that this strong local presence gives us a competitive advantage by keeping our costs low and allows us to obtain a unique understanding for the evolving needs of our customers.
 
We have construction material operations across Pennsylvania and western New York. We provide heavy/highway construction services in these markets and, to a lesser degree, Maryland, West Virginia and Virginia. We operate traffic safety

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equipment manufacturing facilities and sell these products across the United States. Additionally, we provide maintenance and traffic protection services primarily in the eastern United States.
 
Construction Materials
 
We are a leading provider of construction materials in Pennsylvania and western New York. Our construction materials operations are comprised of aggregate production, including crushed stone and construction sand and gravel; hot mix asphalt production; and ready mixed concrete production during the fiscal year ended February 29, 2016. We also operate transportation facilities complete with deep water port facilities for bulk cargo storage, railroad transportation and other transportation and distribution at the Port of Buffalo.

Our largest construction materials customer is our heavy/highway construction operations which are almost wholly supplied with our construction materials.  PennDOT and the PA Turnpike Commission are the Company's two largest external customers.
 
Our Aggregate Operations
 
Aggregate Products
 
We mine limestone, sandstone, dolomite, clay, gravel, white quartzite and other natural resources from 42 active quarries and sand deposits throughout Pennsylvania and western New York. These raw materials are then used in our downstream products. Aggregates are produced mainly from blasting hard rock from quarries and then crushing and screening it to various sizes to meet our customers’ needs. The production of aggregates also involves the extraction of sand and gravel, which requires less crushing, but still requires screening for different sizes. Aggregate production utilizes capital intensive heavy equipment which includes the use of loaders, large haul trucks, crushers, screens and other heavy equipment at quarries.  According to the USGS, we were the eleventh largest crushed stone producer in the United States in 2015.
 
Once extracted, the minerals are processed and/or crushed on site into crushed stone, concrete and masonry sand, specialized sand, pulverized lime or agricultural lime. The minerals are processed to meet customer specifications or to meet industry standard sizes. Crushed stone is used in ready mixed concrete, hot mix asphalt, the construction of road base for highways, ditch and pipe bedding, drainage channels, retaining walls and backfill. Our crushed stone almost wholly supplies our vertically integrated products. Our sand products are used in the production of masonry grout, ready mixed concrete and hot mix asphalt as well as sand traps on golf courses, baseball fields and landfill cover. Pulverized limestone is primarily used as an absorbent for sulfur dioxide gases in power generation. Farmers use agricultural lime to reduce the acidity level in soil and enhance crop growth.
 
Transportation cost is a major variable in determining aggregate pricing and marketing radius. The cost of transporting aggregate products from the plant to the market often equates to or exceeds the sale price of the products at the plant. As a result of high transportation costs and the large quantities of bulk material that have to be shipped, finished products are typically marketed locally. High transportation costs are responsible for the wide dispersion of production sites. Where possible, construction material producers maintain operations adjacent to highly populated areas to reduce transportation costs and enhance margins. Our operations near Allentown, Pennsylvania are located in a strategic position of the densely populated eastern Pennsylvania corridor and our Buffalo, New York operations are also in an area of high population density.
 
However, more recently, rising land values combined with local environmental concerns are forcing production sites to move further away from the end-use locations. Our extensive network of quarries, plants and facilities, located throughout Pennsylvania, New York and Delaware ensures that we have a nearby operation to meet the needs of customers in Pennsylvania, New York, Delaware, Maryland, West Virginia, Virginia and New Jersey.
 
Aggregate Markets
 
The shipping distance from each quarry and the proximity to competitors are key factors that determine the geographic market area for each quarry. Each quarry location is unique in that demand for each product, proximity to competition and truck availability are different. Accordingly, our aggregate customers are generally located within Pennsylvania, Delaware, northern Maryland and western New York.
 

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Aggregate Reserves 
Through acquisitions of raw land and existing quarries, we have assembled significant operating reserves throughout our geographic market area. We estimate that we currently own or have under lease approximately 2.0 billion tons of permitted proven recoverable and probable recoverable aggregate reserves, with an average estimated useful life of 122 years at current production levels. See “Item 2 - Properties.”

Aggregate Sales and Marketing
 
Each of our aggregate operations is responsible for the sale and marketing of its aggregate products. The method that each entity employs to sell aggregates is similar and varies by customer type. Standard price lists are developed for each construction season. This list is used to establish a list price and is typically discounted for contractors or special customers. Large orders are quoted to each contractor in a bidding process and pricing is established based on plant and haul costs, plus appropriate margins.
 
Most bids to non-governmental agencies are either accepted or negotiated with the end result being a purchase order at a fixed price for a specified amount during a given period of time. Bids submitted directly to a governmental agency generally utilize the low bid process. The low bidder is responsible for providing the material within specifications at a specific location for the bid price. We will also negotiate long-term (greater than one year) supply contract agreements at predetermined prices.
 
Aggregate Competition
Because the U.S. aggregates industry is highly fragmented, with over 1,430 companies managing over 3,700 operations during 2015, many opportunities for consolidation exist. Therefore, companies in the industry tend to grow by acquiring existing facilities to enter new markets or by extending their existing market positions. 

Lehigh Hanson Building Materials America, PLC (a unit of Heidelberg Cement Group), Oldcastle, Inc., Glenn O. Hawbaker, Inc., and Lafarge Corporation are our largest aggregate producer competitors across all of our market areas.

Our Hot Mix Asphalt Operations
 
Hot Mix Asphalt Products
 
Our hot mix asphalt products are produced by heating asphalt cement to increase its viscosity and drying the aggregate to remove moisture from it prior to mixing. Hot mix asphalt consists of approximately 95% stone, sand and gravel by weight, and approximately 5% of asphalt cement that serves as a binder. The aggregates used for our production of these products are generally supplied from internal sources through our construction materials division and through purchases of bitumen from third party suppliers. Since bitumen is a by-product of petroleum refining, the price of this material is aligned with the price of oil. The asphalt and aggregates mixture is heated to a temperature of approximately 300 degrees Fahrenheit. While still hot, the paving mixture is transported by truck to a mechanical spreader where it is placed in a smooth layer and compacted by rollers.
 
As part of our vertically integrated structure, we operate, own or lease 28 hot mix asphalt plants and multiple blacktop paving crews.
 
Hot Mix Asphalt Markets
 
Our hot mix asphalt businesses operate independent paving crews that service various markets. Our Pennsylvania hot mix asphalt plants generate the majority of their revenue through sales to our heavy/highway construction division, which then places the material under contract with the owner, typically a governmental agency such as PennDOT or the Pennsylvania Turnpike Commission. Our New York operation does not operate any paving crews, but does sell hot mix asphalt to paving contractors.
 
Each hot mix asphalt plant is unique in that demand for hot mix asphalt, proximity to competition; transportation costs and supply of aggregates are different. Most of our hot mix asphalt operations use a combination of company- owned and hired haulers to deliver materials. Hauling costs can range from 5% to 20% of the total cost of the materials. To optimize crew demand and costs, each hot mix asphalt operation has a fleet manager and plant dispatchers. Our New York operations contract for delivery and do not have their own delivery trucks.
 

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Aggregates are another major factor in the cost of producing hot mix asphalt. In an effort to reduce cost, we have located the majority of our hot mix asphalt plants in our aggregate quarries. This is the most efficient production method because costs associated with transporting the raw materials are minimized. However, we do operate facilities that are not at quarries. These facilities are situated to meet market demand due to the constraint that the hot mix asphalt material can only be in a truck for one hour before it cools too much to compact correctly on the job site.
 
The preparation and placement of the hot mix asphalt is also a major cost. Most of our hot mix asphalt operations operate paving crews. The management of these crews is regionalized and is typically located near a plant. We operate multiple blacktop paving crews throughout Pennsylvania, Maryland and West Virginia. In addition to paving crews, each hot mix asphalt operation also operates a number of grading/preparation crews. Depending on project size, we will hire subcontractors or, in certain cases, will utilize our heavy/highway construction division to prepare a site for paving.
 
We also generate revenue by selling material freight on board from a plant or quarry. On many Pennsylvania highway projects, we will quote hot mix asphalt freight on board, or in place to the competition, as well as bid a project directly as the prime contractor.
 
Hot Mix Asphalt Sales and Marketing
 
Hot mix asphalt customers include our own heavy/highway construction, other heavy/highway contractors and state and federal agencies, building contractors and homeowners. One of our largest hot mix asphalt customers is PennDOT. Each individual hot mix asphalt operation estimates, markets and performs its own work. The sales and marketing process is divided into two categories: PennDOT and other government projects and private projects. Our hot mix asphalt operations will bid on state, township, county or other governmental entities’ projects under the “sealed” bid system. Each project is estimated and quoted to the requesting municipality. This is most often the case for hot mix asphalt put in place, however, some municipalities and department of transportation maintenance districts have their own paving crews and in those instances, the project is bid freight on board plant or delivered to PennDOT crews.
 
Sales to private entities are typically submitted to the owner as a quoted price. Key factors for obtaining sales from private entities are the relationship with the owner or contractor and price. Our sales and estimating staff are responsible for maintaining and enhancing customer relationships and prospecting new customers and projects.
 
Our New York hot mix asphalt business is based predominantly on its relationships with paving contractors and pricing projects competitively. It also provides material quotes directly to those government agencies that have their own paving crews.

There are approximately 3,500 asphalt plants in the United States, and in each year these plants collectively produce approximately 500 million tons of asphalt pavement material.
 
Our Ready Mixed Concrete Operations
 
Ready Mixed Concrete Products
 
We are one of the leading suppliers of ready mixed concrete in Pennsylvania and western New York according to recent industry surveys. We produce ready mixed concrete by blending aggregates, cement, chemical admixtures in various ratios and water at our concrete production plants and placing the resulting product in ready mixed concrete trucks where it is then delivered to our customers. Our construction aggregates region serves as the primary source of the raw materials for our concrete production, functioning essentially as a supplier to our ready mixed concrete operations. Aggregates are a major component in ready mixed concrete, comprising approximately 60%-75% of ready mixed concrete by volume. Our wide variety of mixes, which are certified for use by PennDOT, the New York Department of Transportation and other state and federal agencies, are used in activities ranging from building construction to highway paving.
 
We operate 15 fixed and portable ready mixed concrete plants for highway paving and bridge construction.
 
Each plant’s capacity is determined, to a large degree, by the local plants production capacity and the number of ready mixed concrete trucks dispatched out of each location. However, trucks can be re-routed to accommodate demand fluctuations at a given plant. Currently, we operate a fleet of approximately 168 ready mixed concrete trucks.
 

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Ready Mixed Concrete Markets
 
Due to the finite time before concrete hardens, our market area is limited to an approximate one-hour hauling radius around a plant. Portable ready mixed concrete plants allow for an extended marketing area, but are only cost effective for larger projects in excess of 5,000 cubic yards. Our ready mixed concrete customers are generally located within Pennsylvania, northern Maryland and western New York. One of our largest ready mixed concrete customers was our precast concrete products division, which we lease to MacInnis Group, LLC, a related party, and is operating as PennStress in Roaring Spring, PA (see "Item 13, Certain Relationships and Related Transactions and Director Independence - Related Party Transactions").
 
Ready Mixed Concrete Sales and Marketing
 
Each of our ready mixed concrete operations is responsible for the sale and marketing of its ready mixed concrete products. The method that each operation employs to sell ready mixed concrete is similar and varies by customer type. Standard price lists are developed for each construction season. This list is used to establish a list price and is typically discounted for contractors or special customers. The majority of direct bids are either accepted or negotiated with the end result being a purchase order at a fixed price for a specified amount during a given period of time. Larger projects with multi-year construction phases have price increases built into the bids.
 

Our Heavy/Highway Construction Operations
 
Heavy/Highway Construction
 
Our heavy/highway operations are separated into two basic categories: (i) large heavy/highway projects, which are typically complex roadway and bridge rehabilitation or new construction projects that incorporate all or most of our construction operation disciplines, including grading, drainage, paving, structure work and civil engineering and project management, and (ii) private and non-residential blacktop paving projects or small- and mid-size maintenance projects, which are typically less complex roadway and bridge rehabilitation projects and involve minor bridgework, roadway patching and blacktop paving. In addition, we also provide gas and fiber optic line installation and repair services.
 
Heavy/highway projects are managed by our contract division located at our New Enterprise, Pennsylvania headquarters. This division manages projects across the Commonwealth ranging in size up to $110.0 million.  This division typically manages 15 to 25 projects at any given time. Our seasoned contract division management team is comprised of project managers, estimators, production supervisors and field superintendents and foremen. These projects may or may not be located near our construction material locations. The construction teams operate competitively both with our construction materials as well as with materials purchased from third parties when the projects are not within the economic reach of our construction materials production facilities. We focus on projects that provide the greatest vertical integration.

Our blacktop paving and maintenance projects are located within the economic shipping radius of our hot mix asphalt plants and quarries as they are generally very highly construction materials dependent projects. These projects include driveways, parking lots, race tracks and roadways and are typically one construction season in duration, although some of the larger projects may span two seasons. Our blacktop paving and maintenance projects are all bid and managed across our markets through our regional offices. These operations manage projects in their localities, ranging in size from tens of thousands of dollars to upwards of several million dollars. The largest and most construction materials intense projects can exceed $10.0 million. Collectively, there are hundreds of projects per year ranging from driveways to large maintenance projects that we perform. The number of these projects for governmental agencies typically ranges from 50 to 100 per year. Management teams for these projects generally consist of salesmen, production supervisors, estimators and field foremen.
 
The bulk of our contracted jobs are public projects, which have replaced some of the private spending shortfall. The procedures and bid documents governing the contracts with our public sector customers typically allow the customers to terminate the project at their discretion. Cancellation of a few of our very large contracts could have a materially adverse impact on our revenue and results of operations. See “Item 1A—Risk Factors—The Cancellation Of Significant Contracts Or Our Disqualification from Bidding for New Contracts Could Reduce Revenues and Have a Material Adverse Effect On Our Results Of Operations.”
 

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Heavy/Highway Construction Markets
 
Our largest heavy/highway construction customer is PennDOT. We also work with municipalities, state and national parks, the Army Corps of Engineers, industrial facilities, other contractors and private customers. Along with the local county and municipal governments, PennDOT controls and maintains its approximately 40,000 mile system, with the remaining approximately 80,000 miles maintained by local county and municipal governments. Our extensive network of quarries, hot mix asphalt plants, paving crews and traffic safety services and equipment sales, in combination with our unlimited prequalification bid capacity for PennDOT projects, ensures a broad marketing area. Our core heavy/highway construction market extends throughout Pennsylvania. Our core blacktop paving and maintenance and highway construction market is located within an approximately 50 mile radius from each hot mix asphalt plant, which covers a large portion of Pennsylvania.
 
For our heavy construction market we operate with a non-union workforce that will travel to each project. This enables construction project staffing with a predictable stable workforce. It also allows predictable production rates when market forces require us to look for work beyond our core market. The hot mix asphalt and maintenance markets also operate with non-union workforces throughout our market area, with the exception of one crew in the Eastern Region primarily working in the Delaware Valley market. These projects are generally local crews, so overnight stays are unnecessary.
 
We act as the prime contractor on the majority of our projects, with 15% to 20% of a project performed by subcontractors. We will subcontract larger pieces of a project if necessary to manage labor and equipment costs. Subcontractors typically perform specialized services such as line stripping, guide rail installation, clearing, signing, lighting and providing traffic protection services.
 
For our blacktop paving and maintenance operations we will serve either as the prime contractor when we are the low bidder or as a subcontractor for another general contractor when we are either not the low bidder or we chose not to bid on the project.
 
Heavy/Highway Construction Sales and Marketing
 
All public work is awarded in a “sealed bid.” Estimators and engineers review the work to be performed and estimate the cost to complete the project. On heavy/highway construction projects, a designated team of takeoff estimators, estimators, and project managers, develop the estimate. The majority of our estimators are also project managers, which allows for greater accuracy in estimating crew sizes and production capabilities. Typically, each project has approximately four to eight bidders.
 
With respect to blacktop paving and maintenance work, the sales effort varies significantly depending on the project scope. All projects are staffed with an estimating or sales person or team, depending on the size, and generally reviewed by a manager. For private and subcontracted public work, salesmen will negotiate both the project scope and price. For low bid public work, the estimating team will submit a sealed bid.
 
Heavy/Highway Construction Competition
 
The competition for our heavy/highway work is complex. On the heavy side, competition varies by the work discipline on the project, the amount of each discipline on the project and the location. Our competition for blacktop paving and maintenance work is much more localized, since these projects are typically material-intensive and the competition is generally vertically integrated construction materials suppliers and local contractors that specialize in roadway rehabilitation, site development or paving.

Our Traffic Safety Services and Equipment Operations
 
Traffic Safety Services and Equipment
 
Our traffic safety services and equipment business consists primarily of traffic cones, barricades, plastic drums, arrow boards, construction signs and crash attenuators, which are sold and rented throughout the United States through our safety products operations.
 

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We manufacture, sell and install a complete line of traffic control devices, including traffic cones, plastic drums, channelizers, barricades, arrow boards, crash attenuators, construction/permanent signs and posts, message boards, speed awareness monitors and strobe/warning lights. Traffic cones are produced using a polyvinyl chloride material that enhances the cone’s durability and coloring. The cones are differentiated by size, wall thickness and weight in order to meet customer specifications and state safety requirements. Our plastic drums and drum bases are used in a variety of roadwork settings. The drum’s design features a snap-locking mechanism that connects the drum and the base to assure a sturdy connection. The drums are made from flexible low-density polyethylene plastic and can be used with plastic or rubber bases. We offer a wide range of drum sizes that are used in highway or residential road construction. We also offer a complete line of traffic channelizers for the work zone environment, including barricades, channelizers and vertical panels. Our crash attenuators are designed to enhance driver safety and to reduce maintenance and repair costs. We manufacture a complete line of traffic control signs for use in long and short term construction patterns, as well as for temporary roadway use.
 
We manufacture solar powered traffic safety devices. Our products include a full line of arrow boards, message centers and speed awareness monitors. These are powered by batteries that are recharged through the use of solar panels, making the units environmentally friendly, convenient to locate and cost efficient to operate.
 
We also provide intelligent transportation systems equipment and a proprietary Computerized Highway Information Processing System, which we refer to as CHIPS, to DOTs, universities and paving and construction companies. Our products include queue detectors, over-height vehicle detectors, flooded roadway detectors, trailer mounted cameras and variable speed limits systems. The information collected from sensors along the highways is stored and processed through the CHIPS traffic management software program.
Our manufacturing and assembly facilities located in Lake City, FL, St. Charles, IL, New Castle, DE and Garland, TX produce traffic cones, barricades, temporary and permanent signs, message boards, monitors, lighting, CHIPS and solar assisted devices. We use a variety of materials suppliers in various geographic areas and we are not dependent on any one or small group of suppliers.
We purchase products from third party manufacturers such as plastic drums, channelizers, sign posts and stands, attenuators, reflective materials and other resale items and resell them to a network of independent distributors. A third party manufactures the barrels and channelizers and the reflective striping is applied at our facilities. The channelizers are produced by a third party vendor on a verbal contract or on a purchase order basis. The attenuators are manufactured by third parties in Morgan Valley, Utah, Somerset, Pennsylvania and Fort Worth, Texas. We are not dependent on any one supplier for our purchased products with competitive options for sources of products. No single supplier accounted for more than 6% of total external purchases for our products.
For more discussion on the Company's manufacturing facilities see the section of this Annual Report on Form 10-K titled "Item 2 Properties".

Traffic Safety Services and Equipment Markets and Sales and Marketing
 
Our traffic safety equipment is sold nationwide through a network of distributors as well as through our own sales force. Distributors include highway traffic control companies, “Do-It-Yourself” home centers, safety supply, industrial supply, telecommunication supply, contractor equipment and supply.
 
We have a dedicated team of sales professionals for our traffic safety equipment including sales managers, territory managers, customer service representatives and products specialists. Each territory manager is responsible for marketing to end-users and DOTs in our geographic regions. Customer service representatives are responsible for providing customers with product information, entering orders and developing relationships with distributors. The sales force is managed from our St. Charles, IL office.
 
In addition to product sales, we provide maintenance and traffic protection services primarily in the eastern United States, to highway contractors, DOTs and municipal government agencies. Under traffic pattern management contracts, we provide all aspects of management and maintenance of traffic control patterns for work sites. We maintain an inventory of products used for our rental business and traffic pattern management contracts. The contracts are bid based on a “Daily Rental Rate” or a “Lump Sum Price.” Sales are primarily the result of competitive bidding.
As of February 29, 2016, we had 24 branch offices and sub-offices in the eastern United States. Each location varies slightly in the services they provide so as to best compete in the local market. Generally all regions sell products and install

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traffic patterns or rent equipment to contractors so they can set their own traffic patterns. Branch offices are overseen by three regional managers who report to our Harrisburg, PA office.
 
For traffic safety services, we compete with many local maintenance and traffic protection contractors, many of which are small businesses or minority-owned firms that get bidding preference through various government programs.

Other Operations
 
We operate several additional non-core businesses, including port operations, clay fillers and retail construction supply sales.
 
Gateway Trade Center
 
We operate the Port of Buffalo under the trade name Gateway Trade Center. The port is comprised of an approximately 3,900-foot long shipping canal with a depth of approximately 27 feet and approximately 71 acres of storage. The primary product through the port is de-icing salt, which is unloaded in the summer and fall and stored at the port until it is used throughout the winter. Other materials that are unloaded and transported to their final destination include: limestone, coal, coke, steel and specialty products.
 
Construction Supply Centers
 
We operate two construction supply centers in Pennsylvania, which sell retail construction supplies to contractors and homeowners. The four primary product lines sold are masonry, grading and drainage, small tools and rentals and highway contractor supplies.
 
Bonding
 
We generally are required to provide various types of surety bonds that provide an additional measure of security for our performance under certain public and private sector contracts as well as for various regulatory requirements. We obtain bonding for highway work, any bonding required for certain blacktop paving projects, workers compensation in the Commonwealth of Pennsylvania, reclamation bonds for quarries and other miscellaneous bonds. Our ability to obtain surety bonds depends upon our working capital, financial performance, past performance on projects, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our contract backlog that we have currently bonded and their current underwriting standards, which may change from time to time. We use multiple surety providers to provide our surety bonding program. Additionally, in order to better manage the fluctuations in the surety market, we utilize a co-surety structure on certain projects.  Although we do not believe that fluctuations in surety market capacity have significantly affected our ability to manage our business, there is no assurance that it will not significantly affect our ability to obtain new contracts in the future.  See “Item 1A. Risk Factors.”
 
Construction Backlog
 
Backlog is our estimate of the revenue that we expect to earn in future periods on projects performed by our heavy/highway construction civil business.  We generally include a project in our contract backlog at the time a contract is awarded.  At February 29, 2016, our backlog was $143.2 million, as compared to $245.3 million at February 28, 2015. However, due to recent bidding activity, our backlog has increased to $270.1 million as of April 30, 2016.

Although we have not experienced material contract cancellations or modifications in the past, most of the contracts in our backlog may be canceled or modified at the election of the customer. Backlog measures all remaining work; and as such, a rise or fall in backlog is not a true measure of work to be performed in a fiscal year as some projects will span multiple fiscal years while other projects will be added and completed within the same fiscal year.
 
Seasonality
 
Almost all of our products are produced and consumed outdoors. Our financial results for any quarter do not necessarily indicate the results expected for the year because seasonal changes and other weather-related conditions can affect the production and sales volumes of our products. Normally, the highest sales and earnings are in the second and third quarters and the lowest are in the first and fourth quarters.
 

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Employment 
At February 29, 2016, we had approximately 2,415 employees of which approximately 11% are full time salary employees and approximately 89% are hourly. Since most of our work is seasonal, many of our hourly and certain of our full time employees are subject to seasonal layoffs. Since layoffs are determined by the type of work and weather in the late fall through early spring, they vary greatly.

At February 29, 2016, approximately 21% of our total hourly employees were union members. We have no unionized full time salary employees. We believe that we enjoy an excellent working relationship with all of our employees and unions. The following is a list of all our unions and their contract status as of February 29, 2016:

Union
 
Contract Status
 
Number of
Employees
New Enterprise Stone & Lime Co., Inc.
 
 
 
 
 
 
 
 
 
The International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America Local 110 and 453. Select quarries, hot mix asphalt and ready mixed concrete plants
 
Expires January 31, 2019.
 
249

 
 
 
 
 
Truck Drivers Local Union No. 449, affiliated with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America
 
Expired June 30, 2014; negotiations are in progress.
 
2

 
 
 
 
 
International Union of Operating Engineers—Local 17
 
The Franklinville contract expired March 31, 2016, the Gateway contract expires June 30, 2017 and the ABC Paving contract expires March 31, 2019.
 
33

 
 
 
 
 
Cement, Lime, Gypsum and Allied Workers Division of International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers Local 308
 
The Wehrle Drive and Barton Road contract expires May 31, 2018.
 
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Cement, Lime, Gypsum and Allied Workers Division of International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers Local 328
 
The Olean and Como blacktop and quarry contract expires May 15, 2018.
 
9

 
 
 
 
 
International Brotherhood of Electrical Workers and Northeastern Line Constructors Chapter, NECA-Local 1249
 
Expires December 31, 2017.
 
31

 
 
 
 
 
Laborers International Union of North America Upstate New York Laborers District Council No. 210
 
Expires March 31, 2017.
 
3

 
 
 
 
 
Kutztown & Oley Quarries, United Steelworkers Local 00054
 
Expires March 31, 2019.
 
16

 
 
 
 
 
Whitehall, Ormrod and Nazareth Quarries, Teamster Local 773
 
Expired December 31, 2014; negotiations are in progress.
 
33

 
 
 
 
 

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Kutztown, Wescosville, Ormrod and Bethlehem Blacktop, Teamster Local 773
 
Expired January 31, 2016; negotiations are in progress.
 
10

 
 
 
 
 
Service Division and Eastern Trucking, Teamster Local 773
 
Expired May 31, 2014; negotiations are in progress.
 
19

 
 
 
 
 
Elco-Hausman Construction, International Union of Operating Engineers Local Union 542
 
Expired April 30, 2015; the contract is under cosignatory agreement.
 
4

 
 
 
 
 
Elco-Hausman Construction, Teamsters Local 773
 
Expired April 30, 2016; negotiations are in progress.
 
2

 
 
 
 
 
Elco-Hausman Construction, Laborers Local 158
 
Expires April 30, 2020.
 
2


 
Intellectual Property
 
We own trademarks and trade names related to our construction materials, concrete and construction businesses. We also own pending patent applications, issued patents, trademarks and trade names related to our construction materials business and our traffic safety services business, with specific patents relating to our attenuators and our CHIPS program. We believe that these patent applications, issued patents, trademarks and trade names are material to our traffic safety services and equipment business.
 
Environmental and Government Regulation
 
Our operations are subject to federal, state and local laws and regulations relating to the environment and to health and safety, including noise, discharges to air and water, waste management, remediation of contaminated sites, mine reclamation, dust control, zoning and permitting.

We regularly monitor and review our operations, procedures, and policies for compliance with existing environmental laws and regulations, changes in interpretations of existing laws and enforcement policies, new laws that are adopted, and new requirements that we anticipate will be adopted that could affect our operations. While we believe our operations are in substantial compliance with applicable requirements, there can be no assurance that compliance costs will not be significant.
 
We are frequently required by state and local regulations or contractual obligations to reclaim our former mining sites. These reclamations are recorded in our financial statements as a liability at the time the obligation arises. The fair value of such obligations is capitalized and depreciated over the estimated useful life of the owned or leased site. The liability is accreted through charges to operating expenses. To determine the fair value, we estimate the cost for a third party to perform the legally required reclamation, adjusted for inflation and risk and including a reasonable profit margin. All reclamation obligations are reviewed at least annually. Reclaimed quarries often have potential for use in non-residential or residential development or as reservoirs or landfills. However, no projected cash flows from these anticipated uses have been considered to offset or reduce the estimated reclamation liability. As of February 29, 2016, we have accrued approximately $19.1 million to cover our reclamation obligations.
 
Worker Health and Safety
 
Our operations are subject to a variety of worker health and safety requirements, particularly those administered by the federal Mine Safety and Health Administration and the Occupational Safety and Health Administration, which are likely to become stricter in the future. Failure to comply with these requirements can result in fines and penalties and claims for personal injury and property damage. These requirements may also result in increased operating and capital costs in the future. We believe we are in substantial compliance with such requirements but cannot guarantee that violations will not occur which could result in significant costs. We conduct approximately 16,000 hours of annual Mine Safety and Health Administration and Occupational Safety and Health Administration training sessions, as well as weekly tool box talks. In addition, we have safety professionals on staff, as well as a corporate risk manager.
 

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Insurance
 
We use a combination of third-party insurance and self-insurance to provide for potential liabilities for workers’ compensation, general liability, auto liability, property and medical benefit claims. We utilize an actuary to assist us with estimating the liabilities associated with the risks retained by us, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Any projection of losses concerning workers’ compensation and liability claims is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.
 
Although we have minimized our exposure on individual claims, for the benefit of costs savings we have accepted the risk of a large number of independent multiple material claims arising, which may have a significant impact on our earnings. Prior to January 1, 2016, we maintained a wholly-owned captive insurance company, Rock Solid Insurance Company, which we refer to as RSIC, for workers’ compensation (non-Pennsylvania employees), general liability, auto liability, medical, stop loss and property coverage. RSIC was made inactive on December 31, 2015, and accordingly the exposure for the deductible polices will be retained going forward by the Company. Our Pennsylvania workers compensation claims are self-insured for up to $1.0 million. Our non-Pennsylvania workers compensation claims, automobile claims and general liability claims are currently fully insured in the primary layer, with deductibles of $0.5 million, $0.5 million and $1.0 million, respectively per occurrence and $7.0 million limit in the aggregate.  We are also fully insured for member health care claims, with coverage from insurance carriers after the $0.5 million deductible. We are responsible for the first $2.0 million of every property claim.  Our property insurance coverage then carries a $15.0 million limit per occurrence. Our pollution liability coverage is a three year program with an aggregate $15.0 million limit (policy aggregate of $30.0 million) and a $1.0 million deductible.
 
In addition to the $5.0 million primary insurance coverage for auto and general liability claims, we have an additional $95.0 million of insurance coverage, which is insured by several non-affiliated insurance companies.

Item 1A.                           RISK FACTORS.
 
Risks Related to Our Business and Industry
 
Our business depends on activity within the construction industry.
 
We sell most of our construction materials and traffic safety equipment, and provide all of our heavy/highway construction services, to the construction industry, so our results depend on the strength of the construction industry. Demand for our products, particularly in the non-residential and residential construction markets, has not recovered fully. State and federal budget issues impact the funding available for infrastructure spending, particularly heavy/highway construction and traffic safety, which constitute a significant portion of our business. There has been a reduction in many states’ investment in highway maintenance that has not recovered to historical levels. Our earnings depend on the strength of the local economies in which we operate because of the high cost to transport our products relative to their price. If economic conditions and construction do not improve in our top revenue-generating markets of Pennsylvania and western New York, our business and results of operations could be materially adversely affected.
 
Our business is cyclical and requires significant working capital to fund operations.
 
The cyclicality of our business requires that we maintain significant working capital to fund our operations. Our ability to generate sufficient cash flow depends on future performance, which will be subject to general economic conditions, industry cycles and financial, business, and other factors affecting our operations, many of which are beyond our control. If we are unable to generate sufficient cash to operate our business and service our outstanding debt and other obligations, we may be required, among other things, to further reduce or delay planned capital or operating expenditures, sell assets or take other measures, including the restructuring of all or a portion of our debt, which may only be available, if at all, on unsatisfactory terms.
 
A decline in public sector construction and reductions in governmental funding could adversely affect our operations and results.
 
A significant portion of our revenue is generated from publicly funded construction projects. If, because of reduced federal or state funding or otherwise, spending on publicly funded construction continues to remain low, our earnings and cash flows could be negatively affected.  As a result of the foregoing, we cannot be assured of or predict the existence, amount and

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timing of appropriations for spending on federal, state or local projects. The federal support for the cost of highway maintenance and construction is dependent on congressional action. In addition, each state funds its infrastructure spending from specially allocated amounts collected from various taxes, typically gasoline taxes and vehicle fees, along with voter-approved bond programs. Shortages in state tax revenues can reduce the amounts spent on state infrastructure projects, even below amounts awarded under legislative bills. Nearly all states are now experiencing state-level funding pressures caused by lower tax revenues and an inability to finance approved projects. Delays or cancellations of state infrastructure spending have in the past hurt, and we anticipate in the immediate future will continue to hurt, our business because a significant portion of our business is dependent on state infrastructure spending.
 
A decline in the funding of PennDOT, the Pennsylvania Turnpike Commission, the New York State Thruway or other state agencies could adversely affect our operations and results.
 
A significant portion of our revenues, both through direct and indirect sales, are generated from PennDOT, the Pennsylvania Turnpike Commission, the New York State Thruway and other Pennsylvania state agencies. The spending of these agencies is governed by an annual budget which is approved by the relevant state. Our revenues have in the past been adversely affected and will continue to be adversely affected by any decreases by these entities in their annual budgets.
 
Our business relies on private investment in infrastructure and a slower than normal recovery will adversely affect our results.
 
A portion of our sales are for projects with non-public owners. Construction spending is affected by developers’ ability to finance projects. The current credit environment has negatively affected the United States economy and demand for our products. Non-residential and residential construction may not recover to previous levels if companies and consumers are unable to finance construction projects .  If housing starts and non-residential projects do not continue to rise steadily with the slow economic recovery as they normally do when recessions end, our construction materials and contracting services sales may fall and our business and results of operations may continue to be materially adversely affected.
 
Economic conditions have the ability to affect our financial position, results of operations and cash flows.

Demand for our products is primarily dependent on the overall health of the economy, and federal, state and local public funding levels. Although the current economic environment has begun to improve, should the economic environment become stagnant or decline, it could cause a decrease in demand for our construction materials. In addition, a stagnant or declining economy tends to produce less tax revenue for public agencies, thereby decreasing a source of funds available for spending on public infrastructure improvements, which constitute a substantial part of our business. 
 
With the slow pace of economic recovery, there is also the possibility that we will not be able to collect on certain of our accounts receivable from our customers. Although we are protected in part by payment bonds posted by some of our customers, we have in the past experienced payment delays from some of our customers recovering from the recent economic downturn. These adverse economic factors have in the past materially adversely affected our financial condition, results of operations, cash flows and liquidity resulting in our inability to meet our covenants under our debt facilities and necessitated our seeking numerous amendments and waivers.
 

We have substantial debt and a default may result in an acceleration of our indebtedness.
    
Our asset-based revolving credit agreement, dated as of February 12, 2014, among the Company and certain of its subsidiaries party thereto as borrowers, the lenders party thereto, PNC Bank, National Association, as issuer, swing loan lender, administrative agent and collateral agent (the "Revolving Credit Agreement" or "RCA"), and our term loan credit and guaranty agreement, dated as of February 12, 2014, among the Company as borrower, certain subsidiaries of the Company party thereto as guarantors, the lenders party thereto and Cortland Capital Market Services LLC as administrative agent (the "Term Loans" and, together with the RCA, the "Credit Facilities"), each contain certain financial covenants, and if we fail to meet these covenants then the lenders under the Credit Facilities can accelerate the indebtedness and exercise other remedies against us. Our ability to make payments on, or repay or refinance, our debt and to fund planned capital expenditures will depend largely upon the availability of financing and our future operating performance.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the Credit Facilities or from other sources in an amount sufficient to pay our debt or to fund our other liquidity needs and/or to comply with our financial and nonfinancial covenants. If we are unable to generate sufficient cash flow

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to meet our debt service requirements and/or to comply with our financial and nonfinancial covenants, we may have to renegotiate the terms of our indebtedness and obtain additional financing. We cannot assure you that we will be able to refinance any of our debt or obtain additional financing on commercially reasonable terms or at all. Adverse changes in the availability and cost of capital, interest rates, tax rates or regulations in the jurisdiction in which we operate may affect our ability to pay our debt. If we were unable to meet our debt service requirements or obtain new financing under these circumstances, we would have to consider other options, such as the sales of certain assets, sales of equity, and negotiations with our lenders to restructure our debt. The terms of our indebtedness may restrict, or market or business conditions may limit, our ability to do any or all of these things.

 
If we are unable to accurately estimate the overall risks, requirements or costs when we bid on or negotiate a contract that is ultimately awarded to us, we may achieve a lower than anticipated profit or incur a loss on the contract.
 
Even though the majority of our governmental contracts contain certain raw material escalators to protect us from certain price increases, a portion of the contracts are on a fixed cost basis. The fixed cost basis portion of these contracts requires us to perform the contract for a fixed unit price based on approved quantities irrespective of our actual costs. Lump sum contracts require that the total amount of work be performed for a single price irrespective of our actual costs. We realize a profit on our contracts only if: (i) we successfully estimate our costs and then successfully control actual costs and avoid cost overruns and (ii) our revenues exceed actual costs. If our cost estimates for a contract are inaccurate, or if we do not execute the contract within our cost estimates, then cost overruns may cause us to incur losses or cause the contract not to be as profitable as we expected. The final results under these types of contracts could negatively affect our cash flow, earnings and financial position. The costs incurred and gross profit realized, if any, on our contracts can vary, sometimes substantially, from our original projections due to a variety of factors, including, but not limited to:
 
failure to include materials or work in a bid, or the failure to estimate properly the quantities or costs needed to complete a lump sum contract;

delays caused by weather conditions;

contract or project modifications creating unanticipated costs not covered by change orders;

changes in availability, proximity and costs of materials, including steel, concrete, aggregates and other construction materials (such as stone, gravel, sand and oil for asphalt paving), as well as fuel and lubricants for our equipment;

to the extent not covered by contractual cost escalators, variability and inability to predict the costs of purchasing diesel, asphalt and cement;

availability and skill level of workers;

failure by our suppliers, subcontractors, designers, engineers or customers to perform their obligations;

fraud, theft or other improper activities by our suppliers, subcontractors, designers, engineers, customers or our own personnel;
 
mechanical problems with our machinery or equipment;

costs associated with 104 (a) citations issued by any governmental authority, including the Occupational Safety and Health Administration and Mine Safety and Health Administration;

difficulties in obtaining required governmental permits or approvals;

changes in applicable laws and regulations; and

uninsured claims or demands from third parties for alleged damages arising from the design, construction or use and operation of a project of which our work is part.
 

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Public sector customers may seek to impose contractual risk-shifting provisions more aggressively, and we could face increased risks, which may adversely affect our cash flow, earnings and financial position.
 
Weather can materially affect our business and we are subject to seasonality.
 
Nearly all of the products used by us, and by our customers, in the public or private construction industry are used outdoors. In addition, our heavy/highway operations and production and distribution facilities are located outdoors. Therefore, seasonal changes and other weather-related conditions can adversely affect our business and operations through a decline in both the demand for our services and use of our products. Adverse weather conditions such as extended rainy and cold weather in the spring and fall can reduce demand for our products by contractors and reduce sales or render our contracting operations less efficient.
 
Occasionally, major weather events such as hurricanes, tropical storms and heavy snows with quick rainy melts adversely affect revenues in the short term.
 
The construction materials business 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 last quarter of our fiscal year has typically lower levels of activity due to the weather conditions. Our first quarter varies greatly with the spring rains and wide temperature variations. A cool wet spring increases drying time on projects, possibly delaying sales until the second quarter, while a warm dry spring may enable earlier project startup.
 
Within our local markets, we operate in a highly competitive industry.
 
The U.S. aggregate industry is highly fragmented with numerous participants operating in localized markets. However, in most markets, we also compete against large private and public companies, some of which are as vertically integrated as we are. This results in intense competition in a number of markets in which we operate. Significant competition leads to lower prices and lower sales volumes, which can negatively affect our earnings and cash flows.

Our long-term success is dependent upon securing and permitting aggregate reserves in strategically located areas.
 
Construction aggregates are bulky and heavy and, therefore, difficult and costly to transport efficiently. Because of the nature of the products, the freight costs can quickly surpass the production costs. Therefore, except for geographic regions that do not possess commercially viable deposits of aggregates and are served by rail, barge or ship, the markets for our products tend to be localized around our quarry sites. New quarry sites often take a number of years to develop, so our strategic planning and new site development must stay ahead of actual growth. As is the case with the broader industry, we acquire existing quarries and, where practical, extend the permit boundaries at existing quarries and open greenfield sites to continue to grow our reserves. In a number of urban and suburban areas in which we operate, it is increasingly difficult to permit new sites or expand existing sites due to community resistance. Therefore, our future success is dependent, in part, on our ability to accurately forecast future areas of high growth in order to locate optimal facility sites and on our ability to either acquire existing quarries or secure operating and environmental permits to open new quarries. If we are unable to accurately forecast areas of future growth, acquire existing quarries or secure the necessary permits to open new quarries, our business and results of operations may be materially adversely affected.
 
Our future growth may depend in part on acquiring other businesses in our industry and successfully integrating them with our existing operations.
 
In the past, we have made acquisitions to strengthen our existing locations, expand our operations, grow our reserves and grow our market share. We expect to continue to make selective acquisitions in contiguous locations and geographic markets or other business arrangements we believe will help our company. However, the success of our acquisition program will depend on our ability to find and buy other attractive businesses at a reasonable price, the availability of financing and our ability to successfully integrate acquired businesses into our existing operations. We cannot assure you that there will be attractive acquisition opportunities at reasonable prices, that financing will be available or that we can successfully integrate such acquired businesses into our existing operations. In addition, acquisitions may require us to take an impairment charge in our financial statements. We had to take certain impairment charges in the past due to acquisitions and cannot assure you that we will not do it again in the future in connection with new acquisitions.
 

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Our business is a capital-intensive business.
 
The property and machinery needed to produce our products can be very expensive. Therefore, we need to spend a substantial amount of money to purchase and maintain the equipment necessary to operate our business. We believe that our current cash balance, along with our projected internal cash flows and our available financing resources, will be enough to give us the cash we need to support our currently anticipated operating and capital needs and service our outstanding debt and other obligations. If we are unable to generate sufficient cash to purchase and maintain the property and machinery necessary to operate our business, we may be required to reduce or delay planned capital expenditures, sell assets or take other measures, including restructuring all or a portion of our debt, which may only be available, if at all, on unsatisfactory terms.
 
Our failure to meet schedule or performance requirements of our contracts could adversely affect us.
 
In most cases, our contracts require completion by a scheduled acceptance date. Failure to meet any such schedule could result in additional costs, penalties or liquidated damages being assessed against us, and these could exceed projected profit margins on the contract. Performance problems on existing and future contracts could cause actual results of operations to differ materially from those anticipated by us and could cause us to suffer damage to our reputation within the industry and among our customers, which may have a material adverse effect on our business and results of operations.
 
Environmental, health and safety laws and any changes to such laws may have a material adverse effect on our business, financial condition and results of operations.
 
We are subject to a variety of environmental, health and safety laws, and the cost of complying and other liabilities associated with such laws may have a material adverse effect on our business, financial condition and results of operations.
 
We are subject to a variety of federal, state and local environmental laws and regulations relating to: (i) the release or discharge of materials into the environment; (ii) the management, use, processing, handling, storage, transport or disposal of hazardous materials; and (iii) the protection of public and employee health, safety and the environment. These laws and regulations expose us to liability for the environmental condition of our current or formerly owned or operated facilities, and may expose us to liability for the conduct of others or for our actions that complied with all applicable laws at the time these actions were taken. In particular, we may incur remediation costs and other related expenses because: (i) our facilities were constructed and operated before the adoption of current environmental laws and the institution of compliance practices and (ii) certain of our processes are regulated. These laws and regulations may also expose us to liability for claims of personal injury or property or natural resource damage related to alleged exposure to regulated materials.

Despite our compliance efforts, there is the inherent risk of liability in the operation of our business, especially from an environmental standpoint. These potential liabilities could have an adverse impact on our operations and profitability. In many instances, we must have government approvals and certificates, permits or licenses in order to conduct our business, which often require us to make significant capital and maintenance expenditures to comply with zoning and environmental laws and regulations. Our failure to maintain required certificates, permits or licenses or to comply with applicable governmental requirements could result in substantial fines or possible revocation of our authority to conduct some of our operations. Governmental requirements that impact our operations also include those relating to air quality, waste management, water quality, mine reclamation, remediation of contaminated sites and worker health and safety. These requirements are complex and subject to frequent change. They impose strict liability in some cases without regard to negligence or fault and expose us to liability for the conduct of, or conditions caused by, others, or for our acts that may otherwise have complied with all applicable requirements when we performed them. Stricter laws and regulations, more stringent interpretations of existing laws or regulations or the future discovery of environmental conditions may impose new liabilities on us, reduce operating hours, require additional investment by us in pollution control equipment or impede our opening new or expanding existing plants or facilities.
 
We depend on our senior management and we may be materially harmed if we lose any member of our senior management.
 
We are dependent upon the services of our senior management. The loss of key management personnel or our inability to attract and retain qualified management personnel could have a material adverse effect on us. A decision by any of these individuals to leave us, to compete against us or to reduce his involvement could have a material adverse effect on our business.
 

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We may not be able to grow our business effectively or successfully implement our growth plans if we are unable to recruit additional management and other personnel.
 
Our ability to continue to grow our business effectively and successfully implement our growth strategy is partially dependent upon our ability to attract and retain qualified management employees and other key employees. We believe there are a limited number of qualified people in our business and the industry in which we compete. As such, there can be no assurance that we will be able to identify and retain the key personnel that may be necessary to grow our business effectively or successfully implement our growth strategy. Our inability to attract and retain talented personnel could limit our ability to grow our business.
 
Labor disputes could disrupt operations of our businesses.
 
As of February 29, 2016, labor unions represent approximately 21% of our total hourly employees. Our collective bargaining agreements for employees covered under contracts expire between 2016 and 2020. However, several union contracts are currently expired and are presently in negotiation. Although we have good relations with our employees and unions, disputes with our trade unions, or the inability to renew our labor agreements, could lead to strikes or other actions that could disrupt our business, raise costs, and reduce revenues and earnings from the affected locations.
 
Our operations are subject to special hazards that may cause personal injury or property damage, subjecting us to liabilities and possible losses which may not be covered by insurance.
 
Operating hazards inherent in our business can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. We maintain insurance coverage in amounts and against the risks we believe are consistent with industry practice, but this insurance may not be adequate or available to cover all losses or liabilities we may incur in our operations. Our insurance policies are subject to varying levels of deductibles. Losses up to our deductible amounts are accrued based upon our estimates of the ultimate liability for claims incurred and an estimate of claims incurred but not reported. However, liabilities subject to insurance are difficult to assess and estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety programs. If we were to experience insurance claims or costs above our estimates, we might also be required to use working capital to satisfy these claims rather than using working capital to maintain or expand our operations.
 
Unexpected factors affecting self-insurance claims and reserve estimates could adversely affect our business.
 
We use a combination of third-party insurance and self-insurance to provide for potential liabilities for workers’ compensation, general liability, vehicle accident, property and medical benefit claims. Although we believe we have minimized our exposure on individual claims, for the benefit of costs savings we have accepted the risk of a large amount of independent multiple material claims arising, which could have a significant impact on our earnings. We are self-insured for Pennsylvania workers’ compensation claims up to $1.0 million per occurrence. Our non-Pennsylvania workers compensation claims, automobile claims and general liability claims are currently fully insured in the primary layer, with deductibles of $0.5 million, $0.5 million and $1.0 million, respectively per occurrence and $7.0 million limit in the aggregate. We are also fully insured for member health care claims, with coverage from insurance carriers after the $0.5 million deductible. We are responsible for the first $2.0 million of every property and casualty claim.
 
We estimate the liabilities associated with the risks retained by us, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Any projection of losses concerning workers’ compensation and general liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.
 

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We may incur material costs and losses as a result of claims that our products do not meet regulatory requirements or contractual specifications.
 
We provide to our customers specified product designs that meet building code or other regulatory requirements and contractual specifications for measurements such as durability, compressive strength, weight-bearing capacity and other characteristics. If we fail or are unable to provide products meeting these requirements and specifications, material claims may arise against us and our reputation could be damaged. Additionally, if a significant uninsured, non-indemnified or product-related claim is resolved against us in the future, that resolution may increase our costs and reduce our profitability and cash flows.
 
We identified material weaknesses and significant deficiencies in our internal control over financial reporting during the fiscal years ended February 29, 2016 and February 28, 2015 and have a history of material weaknesses and significant deficiencies in our internal control in prior years as well. If we fail to maintain an effective system of internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected. In addition, if we are unable to maintain and complete the testing of our documentation related to our control policies, procedures and systems, we may fail to comply in the future with our SEC reporting obligations, including the requirement to provide management’s assessment of our internal control on financial reporting.
 
Effective internal controls are necessary for us to provide timely and reliable financial reports and effectively prevent fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. If we fail to maintain the adequacy of our internal controls, our financial statements may not accurately reflect our financial condition. We have identified certain material weaknesses in our internal control over financial reporting in current and prior years, including those described in Item 9A of this Annual Report on Form 10-K.

Additionally, if we fail to remediate any material weakness, maintain effective internal control over our financial reporting or comply with the federal securities rules and regulations applicable to us, including our SEC reporting obligations related to our internal control over financial reporting, our financial statements may be inaccurate, our ability to report our financial results on a timely and accurate basis may be adversely affected, we may be unable to obtain an unqualified audit opinion, and our access to the capital markets may be restricted. In addition, we may, in the future, identify further material weaknesses in our internal control over financial reporting. Each of the foregoing could impact the reliability and timeliness of our financial reports and could cause investors to lose confidence in our reported financial information, which could have a negative effect on our business and the value of our securities. We may also be required to restate our financial statements from prior periods.

The cancellation of significant contracts or our disqualification from bidding for, or being awarded, new contracts could reduce revenues and have a material adverse effect on our results of operations.
 
Contracts that we enter into with governmental entities can usually be canceled at any time by them with payment only for the work already completed. In addition, we could be prohibited from bidding on or being awarded certain governmental contracts and other contracts if we fail to maintain qualifications required by those entities, including failing to post required surety bonds or meet disadvantaged business or minority business requirements, bidding on an amount outside of the government entity’s estimate or including a bid item which the government entity determines is unacceptable. A cancellation of an unfinished contract or our disqualification from the bidding process could cause our equipment to be idled for a significant period of time until other comparable work became available, which could have a material adverse effect on our business and results of operations.
 
We may incur increased costs due to fluctuation in commodity prices.
 
We are subject to commodity price risk with respect to price changes in energy, including fossil fuels, electricity and natural gas for production of hot mix asphalt and cement and diesel fuel for distribution and production related vehicles. See “Item 7A —Quantitative and Qualitative Disclosures About Market Risk.”
 
We may incur increased costs due to fluctuation in interest rates.
 
We are exposed to risks associated with fluctuations in interest rates in connection with our variable rate debt, including under the Credit Facilities. Any material and untimely changes in interest rates could result in significant losses to us. See “Item 7A —Quantitative and Qualitative Disclosures About Market Risk.”


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We are dependent on information technology and our systems and infrastructure face certain risks, including cybersecurity risks and data leakage risks.
 
We are dependent on information technology systems and infrastructure. Any significant breakdown, invasion, destruction or interruption of these systems by employees, others with authorized access to our systems, or unauthorized persons could negatively impact operations. There is also a risk that we could experience a business interruption, theft of information, or reputational damage as a result of a cyber-attack, such as an infiltration of a data center, or data leakage of confidential information either internally or at our third-party providers. While we have invested in the protection of our data and information technology to reduce these risks and periodically test the security of our information systems network, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could adversely affect our business. Management is not aware of a cybersecurity incident that has had a material impact on our operations.

Our new regional/product line alignment and restructuring of our accounting and certain administrative functions may not yield the anticipated efficiencies and may result in a loss of key personnel.

We have finalized the re-alignment of our organizational structure which combined our Lancaster, Pennsylvania and Northeastern Pennsylvania operations into our Eastern Region, our Central Pennsylvania, Chambersburg, Shippensburg and Gettysburg Pennsylvania operations into our Western Region, and streamlining our New York Region. We have taken steps to consolidate the operations, sales, accounting, human resources, information technology and geologic services functions. This consolidation is expected to reduce the cost of overhead support functions going forward. Additionally, key personnel may be affected by the consolidation and may leave us due to uncertainty, which may slow the restructuring process and increase its cost.

A significant portion of our business depends on our ability to provide surety bonds. We may be unable to compete for or work on certain projects if we are not able to obtain the necessary surety bonds.

Our construction contracts frequently require that we obtain from surety companies and provide to our customers' payment and performance bonds as a condition to the award of such contracts. Such surety bonds secure our payment and performance obligations.

Surety market conditions have in recent years become more difficult due to the economy and the regulatory environment. Consequently, less overall bonding capacity is available in the market than in the past, and surety bonds have become more expensive and restrictive. Further, under standard terms in the surety market, surety companies issue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of additional collateral as a condition to issuing any bonds.

Current or future market conditions, as well as changes in our sureties' assessment of our or their own operating and financial risk, could cause our surety companies to decline to issue, or substantially reduce the amount of, bonds for our work and could increase our bonding costs. These actions can be taken on short notice. If our surety companies were to limit or eliminate our access to bonding, our alternatives would include seeking bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding capacity, we may be unable to compete for or work on certain projects.



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Item 1B.                           UNRESOLVED STAFF COMMENTS.
 
Not applicable.


Item 2.                                    PROPERTIES.
 
Our headquarters are located in a 70,000 square foot building which we lease in New Enterprise, Pennsylvania, under a lease expiring in 2023. See “Item 13—Certain Relationships and Related Transactions, and Director Independence.”
 
We also operate, own or lease 55 quarries and sand deposits (42 active), 28 hot mix asphalt plants, 15 fixed and portable ready mixed concrete plants, three lime distribution centers and two construction supply centers. For our safety services and equipment business, we conduct operations through four manufacturing facilities and 24 branch offices.
Through acquisitions of raw land and existing quarries, we have assembled significant operating reserves throughout our geographic market area. We estimate that we currently own or have under lease approximately 2.0 billion tons of permitted proven recoverable and probable recoverable aggregate reserves, with an average estimated useful life of 122 years at current production levels.

Proven reserves are determined through the testing of samples obtained from closely spaced subsurface drilling and/or exposed pit faces. Proven reserves are sufficiently understood so that quantity, quality, and engineering conditions are known with sufficient accuracy to be mined without the need for any further subsurface work. Actual required spacing is based on geologic judgment about the predictability and continuity of each deposit.
 
Probable reserves are determined through the testing of samples obtained from subsurface drilling, but the sample points are too widely spaced to allow detailed prediction of quantity, quality, and engineering conditions. Additional subsurface work may be needed prior to mining the reserve.
 
Our reserve estimates were made by our geologists and engineers. Reserve estimates are based on various assumptions and any material inaccuracies in these assumptions could have a material impact on the accuracy of our reserve estimates. All of our quarries are open pit and are primarily accessible by road.
 

31

 


The following map shows the approximate locations of our permitted construction materials properties in New York, Pennsylvania and Delaware as of February 29, 2016:



32

 



The following chart sets forth specifics of our production and distribution facilities as of February 29, 2016:
Location
Owned/leased
Type of Aggregate
 Proven and Probable Recoverable Reserves (millions of tons)
 Expected Life (Years)
 FY 2016 Annual Production (million tons)
Hot Asphalt Mix
Ready Mixed Concrete
Lime Distribution and CSC
Alfred Station, NY
Owned
Sand and gravel
10

66

0.2




Allentown, PA
Owned



X


Ashcom, PA
Owned
Dolomite, Limestone
88

149

0.8

X
X

Ashford, NY
Owned



X


Bakersville, PA
Owned
Limestone
28

54

0.5

X


Bath, PA
Owned



X


Bedford, PA
Owned





X
Central City, PA
Owned
Sandstone
14

104

0.2




Chambersburg, PA
Owned
Limestone
45

58

0.6

X
X

Clayton, DE
Owned






Coal Twp, PA
Owned/Leased (1)
Sandstone
7

99


X


Como Park, NY (11)
Owned
Limestone
22

102


X


Coplay, PA
Owned/Leased (2)
Limestone, Dolomite
33

54

0.7

X


Cowlesville, NY
(10)




X

Delmar, DE
Owned





X
Denver, PA
Owned
Limestone
33

66

0.7

X
X

Dry Run, PA
Leased/Owned (3)
Limestone
12

118

0.1


X

Ebensburg, PA
Owned/ Leased (4)
Processing Facility




X
X
Egypt, PA
Leased (5)
Limestone
16

52

0.3




Elizabethville, PA
Owned
Sandstone
27

206

0.2

X


Ephrata, PA
Owned
Limestone
77

97

1.1

X


Fairfield, PA
Owned
Limestone
103

934

0.1




Franklinville, NY
Owned
Sand and gravel
32

51

0.6




Gap, PA
Owned
Limestone
25

98

0.3




Gettysburg, PA
Owned
Traprock
63

121

0.5

X


Greencastle, PA
Owned




X

Honey Brook, PA
Owned
Sand
87

282

0.4




Kutztown, PA
Owned/Leased (6)
Dolomite
21

35

0.8

X


Lackawanna, NY
Owned
Port




X

Ledge, NY
Owned
Limestone/Dolomite
16

40





Lenoxville, PA
Owned
Sandstone
18

52

0.4

X


Lewisburg, PA
Owned
Limestone
23

28

0.8

X


Lewistown, PA
Owned
Sandstone






Mainsville, PA
Owned
Sand and gravel
1

11





Martins Creek, PA
Owned
Limestone
92

1,309

0.3




McConnellstown, PA
Owned
Limestone
2






Middlebury Center, PA
Leased (7)
Sandstone
3

8






33

 


Location
Owned/leased
Type of Aggregate
 Proven and Probable Recoverable Reserves (millions of tons)

 Expected Life (Years)

 FY 2016 Annual Production (million tons)

Hot Asphalt Mix
Ready Mixed Concrete
Lime Distribution and CSC (1)
 
 
 
 
 
 
 
 
 
Mount Cydonia 1, PA
Owned
Sandstone
24

98

0.4




Mount Cydonia III, PA
Owned
Sandstone
7

53





Narvon, PA
Owned
Clay and Limestone
2

200





Nazareth, PA
Owned
Dolomite
4

7

0.5




New Holland, PA
Owned
Limestone
68

100

0.5


X

New Paris, PA
Owned
Limestone
22






Nottingham, PA
Owned




X

Ogletown, PA
Owned/Leased (8)
Sandstone, Limestone
27






Olean, NY (11)
Owned



X


Oley, PA
Owned
Limestone
53

240


X


Orbisonia, PA
Owned
Limestone
38

236

0.1




Roaring Spring, PA
Owned
Dolomite, Limestone
52

43

1.2

X
X
X
Shippensburg, PA
Owned
Limestone
164

454

0.5

X
X

Somerset, PA
Owned




X

Stevens, PA
Owned
Limestone, Dolomite, High Calcium
64

248

0.4




Tunkhannock, PA
Leased (9)
Sand and gravel
1

6





Tyrone Forge, PA
Owned
Dolomite, Limestone
90

98

1.4

X
X

Union Furnace, PA
Owned
Dolomite, Limestone
271

730

0.2




Viola, DE
Owned





X
Wehrle Drive, NY (11)
Owned
Limestone
161

131

1.6

X
X

Williamson, PA
Owned
Limestone
43

708






 
(1)
The initial term of this lease was May 1, 1989 through May 1, 1990, but the lease automatically renews on a year-to-year basis.

(2)
The term of this lease is March 1, 2002 through February 28, 2020. After the expiration of the term, the lease will continue on a year-to-year basis.

(3)
The term of this lease is April 4, 1996 through April 19, 2026. There are no renewal rights.

(4)
The term of this lease expires December 31, 2021. The lease may be renewed for up to an additional five (5) years.

(5)
The term of this lease is January 1, 2010 through January 1, 2020.  The lease will automatically renew for five additional periods of five (5) years each.

(6)
The term of this lease is November 19, 1976 through November 19, 2056. The leases are cancellable at the earlier of the extraction of all materials able to be mined or the lease termination date and there are no renewal rights.

(7)
The initial term of this lease was June 1, 1986 through June 1, 1991. The lease may be renewed for successive periods of five (5) years. The current term of this lease will expire on May 31, 2016.

(8)
The term of this lease is January 1, 1999 through January 1, 2019. The lease may be renewed for three (3) additional terms of five (5) years each after the expiration of the initial term.


34

 


(9)
The term of this lease is September 8, 1992 through September 8, 2042. The leases are cancellable at the earlier of the extraction of all mineable materials or the lease termination date and there are no renewal rights.
(10)
Cowlesville, NY is owned by a third party who leases the concrete batch plant to the Company.  Pursuant to a batch agreement, Area Ready-Mix provides batching services at this plant.

(11)
The Como Park, NY, Olean, NY, and Wehrle Drive, NY locations have three, two and three hot mix plants on each site, respectively.


In addition, we operate three portable ready mixed concrete plants.
 
The following chart sets forth specifics of our traffic safety equipment manufacturing facilities:
Facility
 
Owned/Leased
 
Square Footage
St Charles, Illinois manufacturing facility, warehouse and office space
 
Owned
 
49,000 sq. ft.
Lake City, Florida manufacturing facility
 
Owned
 
28,632 sq. ft.
New Castle, Delaware facility and office space
 
Leased
 
12,110 sq. ft.
Garland, Texas manufacturing facility
 
Leased
 
40,050 sq. ft.


Item 3.                                    LEGAL PROCEEDINGS.
 
We are a party from time to time to legal proceedings relating to our operations. Our ultimate legal and financial liability in respect to all legal proceeding in which we are involved at any given time cannot be estimated with any certainty. However, based upon examination of such matters and consultation with counsel, management currently believes that the ultimate outcome of these contingencies, net of liabilities already accrued on our Consolidated Balance Sheets, will not have a material adverse effect on our consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and/or cash flows for that period. See "Note 17 - Commitments and Contingencies" to our Consolidated Financial Statements included in this Annual Report on Form 10-K for a discussion of our material legal proceedings.
 

Item 4.                                    MINE SAFETY DISCLOSURES.
 
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 of this report.

PART II

Item 5.                                    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
There is no established public trading market for any class of common stock of NESL. All of the issued and outstanding common stock of NESL is held by members of the Detwiler family or trusts established by and for members of the Detwiler family. See “Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” As of May 23, 2016, there were approximately 16 beneficial holders of the common stock.
 
With the exception of certain tax-related dividends, we have not issued a dividend to any of our equity holders in over twenty years. The indentures governing our notes and the Credit Facilities contain covenants that limit our ability to pay dividends. See “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 We have no equity compensation plans.

35

 


Item 6.                                    SELECTED FINANCIAL DATA.
 
The following selected financial data should be read in conjunction with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the Notes to Consolidated Financial Statements in “Item 8—Financial Statements and Supplementary Data.”  

(in thousands)
February 29, 2016
 
February 28, 2015
 
February 28, 2014
 
February 28, 2013
 
February 29,
  2012
 
Consolidated Statement of Comprehensive Loss
 

 
 

 
 

 
 

 
 

 
Revenue
$
651,931

 
$
661,830

(4
)
$
681,645

 
$
677,090

 
$
705,934

 
Operating costs and expenses:
 

 
 

 
 

 
 

 
 

 
Costs of revenue (11)
505,075

(8
)
540,743

(5
)
562,577

 
564,503

 
581,788

 
Depreciation, depletion and amortization
41,886

 
44,741

 
48,792

 
50,942

 
51,674

 
Asset impairment
193

 
5,249

 
7,636

 
4,704

 
1,100

 
Selling, administrative and general expenses (11)
50,709

(9
)
57,887

(6
)
78,309

 
78,463

(1
)
65,831

 
(Gain) loss on disposals of property, equipment and software
(5,097
)
(10
)
(1,065
)
 
(891
)
 
323

 
808

 
Operating income (loss)
59,165

 
14,275

 
(14,778
)
 
(21,845
)
 
4,733

 
Other income (expense):
 

 
 

 
 

 
 

 
 

 
Interest income
185

 
189

 
407

 
140

 
343

 
Interest expense
(85,552
)
 
(81,828
)
 
(86,871
)
(3
)
(75,987
)
(2
)
(46,902
)
 
Total other expense
(85,367
)
 
(81,639
)
 
(86,464
)
 
(75,847
)
 
(46,559
)
 
Loss before income taxes
(26,202
)
 
(67,364
)
 
(101,242
)
 
(97,692
)
 
(41,826
)
 
Income tax benefit
(5,131
)
 
(4,886
)
 
(9,099
)
 
(41,558
)
 
(16,397
)
 
Net loss
(21,071
)
 
(62,478
)
 
(92,143
)
 
(56,134
)
 
(25,429
)
 
Less: net income attributable to noncontrolling interest
(552
)
 
(713
)
 
(1,256
)
 
(1,384
)
 
(820
)
 
Net loss attributable to stockholders
$
(21,623
)
 
$
(63,191
)
 
$
(93,399
)
 
$
(57,518
)
 
$
(26,249
)
 
Other Financial Data:
 

 
 

 
 

 
 

 
 

 
Cash capital expenditures (7)
28,351

 
25,215

 
17,207

 
42,417

 
43,954

 
Consolidated Balance Sheet Data (end of period):
 

 
 

 
 

 
 

 
 

 
Cash, restricted cash and cash equivalents
$
63,272

 
$
30,470

 
$
51,576

 
$
19,657

 
$
25,354

 
Accounts receivable, net
48,296

 
49,901

 
61,319

 
52,271

 
76,841

 
Inventories
103,363

 
102,206

 
107,313

 
125,144

 
132,195

 
Property, plant, and equipment
307,421

 
310,274

 
333,819

 
371,868

 
371,574

 
Total assets
$
662,084

 
$
650,370

 
$
721,938

 
734,188

 
776,322

 
Long-term debt, including current portion
676,673

 
658,795

 
659,966

 
577,987

 
529,013

 
Total liabilities
847,482

 
814,328

 
823,274

 
741,778

 
726,454

 
Total (deficit) equity and redeemable common stock
$
(185,398
)
 
$
(163,958
)
 
$
(101,336
)
 
$
(7,590
)
 
$
49,868

 


36

 


(1)
The increase in selling, administrative and general expense from the fiscal year 2012 to the fiscal year 2013 was attributable to costs associated with the remediation of our enterprise resource planning, or ERP, system of approximately $4.3 million and higher legal and accounting fees of $7.1 million.

(2)
The increase in interest expense during the fiscal year 2013 was a result of an overall increase in borrowings and interest rates primarily related to the issuance of our Secured Notes and the write-off of $6.4 million of unamortized deferred financing fees associated with the debt repaid.

(3)
The increase in interest expense during the fiscal year 2014 was a result of the write-off of unamortized deferred financing fees and an overall increase in borrowings.

(4)
Decrease in revenue related primarily to the reduction of non-core operations.

(5)
Decrease in costs of revenue related primarily to the reduction of non-core operations.

(6)
Decrease selling, administrative and general expense was primarily attributable to lower costs from headcount reductions and benefit plans, and reduced fees associated with various consultants.

(7)
Cash paid for capitalized expenditures includes capitalized software expenditures.

(8)
The decrease in costs of revenue from fiscal year 2015 to fiscal year 2016 was primarily attributable to reduced costs resulting from non-core asset revenue, a decrease in the cost of commodities, and to a lesser extent lower costs resulting from lower sales volumes of our core products.

(9)
Selling, administrative and general expenses decreased due to reduced costs associated with consultants and severance.

(10)
The Company recognized gains of $3.9 million and $0.6 million on the sale of land at its New Holland and Naginey locations, respectively.

(11)
Pension and profit sharing was reclassed to costs of revenue of $6.3 million for fiscal year 2016, $5.4 million for fiscal year 2015, $6.3 million for fiscal year 2014, $7.0 million for fiscal 2013, and $6.3 million for fiscal year 2012, respectively, and to selling, administrative and general expenses of $0.4 million for fiscal year 2016, $0.7 million for fiscal year 2015, $1.0 million for fiscal year 2014, $1.3 million for fiscal year 2013, and $1.3 million for fiscal year 2012, respectively.

37

 


Item 7.                                    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
General
 
We are a leading privately held, vertically integrated construction materials supplier and heavy/highway construction contractor in Pennsylvania and western New York and a national traffic safety services and equipment provider.  Founded in 1924, we are one of the top 20 construction aggregates producers based on tonnage of crushed stone produced in the United States, according to industry surveys.
 
We operate in three segments based upon the nature of our products and services: construction materials, heavy/highway construction and traffic safety services and equipment. Our construction materials operations are comprised primarily of the production of aggregate (crushed stone and construction sand and gravel), hot mix asphalt, and ready mixed concrete.  Another of our core businesses, heavy/highway construction, includes heavy construction, blacktop paving and other site preparation services. Our heavy/highway construction operations are primarily supplied with construction materials from our construction materials operation. Accordingly, we favor construction activity that maximizes our ability to utilize our construction materials. Our third core business, traffic safety services and equipment, consists primarily of sales, leasing and servicing of general and specialty traffic control and work zone safety equipment and devices to industrial construction end-users.
 
Our core businesses operate primarily in Pennsylvania and western New York, except for our traffic safety services and equipment business, which maintains a national sales network for our traffic safety products and provides traffic maintenance and protection services primarily in the eastern United States.
 
Our revenue is derived from sales to customers that serve multiple end-use markets. Because of the diversity of construction materials and services that we offer, we are able to meet a wide range of customer requirements on a local scale.  We may not always know the end-use for our materials due to the diversity of our product offerings and the fact that our customers serve the various end-use markets, such as public or private sector. However, we believe based upon reasonable assumptions and knowledge of our customers and the possible end-use of particular materials and services, that in the fiscal year ended February 29, 2016 approximately 50% to 55% of our revenue was derived from public sector end-use markets with the balance of our revenue derived from private sector end-use markets, with approximately three-fourths of our private sector revenue being from non-residential construction.
 
The majority of our construction contracts are obtained through competitive bidding in response to advertisements and as a result of following the letting schedule provided by PennDOT. Our bidding activity is affected by such factors as the nature and volume of available jobs to bid, contract backlog, available personnel, current utilization of equipment and other resources, and competitive considerations. Bidding activity, contract backlog and revenue resulting from the award of new contracts may vary significantly from period to period.
 
Our typical construction project begins with the preparation and submission of a bid to a customer. If selected as the successful bidder, we generally enter into a contract with the customer that provides for payment upon completion of specified work or units of work as identified in the contract. Our contracts frequently call for retention; a specified percentage withheld from each payment until the contract is completed and the work accepted by the customer.
 
Demand for our products is primarily dependent on the overall health of the economy, and federal, state and local public funding levels. The primary end uses for our products include infrastructure projects such as highways, bridges, and other public institutions, as well as private residential and non-residential construction. A stagnant or declining economy will generally result in reduced demand for construction and construction materials in the private sector. This reduced demand increases competition for private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. Greater competition can reduce our revenues and/or have a downward impact on our gross profit margins. In addition, a stagnant or declining economy tends to produce less tax revenue for public agencies, thereby decreasing a source of funds available for spending on public infrastructure improvements. Some funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, are not as directly affected by a stagnant or declining economy, unless actual consumption is reduced.  While some states and localities may seek to redirect funds related to diesel and gasoline taxes in an effort to balance their budgets, the Commonwealth of Pennsylvania currently does not allow for such activities.  Funds earmarked for infrastructure purposes in the Commonwealth of Pennsylvania are constitutionally required to be used for that purpose.
 


38

 



Seasonality and Cyclical Nature of Our Business

Almost all of our products are produced and consumed outdoors. Our financial results for any quarter do not necessarily indicate the results expected for the year because seasonal changes and other weather-related conditions can affect the production and sales volumes of our products. Normally, the highest sales and earnings are in the second and third fiscal quarters and the lowest are in the first and fourth fiscal quarters. Our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical swings in construction spending, especially in the private sector.  Our primary balance sheet accounts, such as accounts receivable and accounts payable, vary greatly during these peak periods, but return to historical levels as our operating cycle is completed each fiscal year.

Market Developments

We believe that passage of the Transportation Bill, which became effective in January 2014, will continue to provide an increase in opportunities in our markets although we have yet to see significant benefits. Our margins remain under pressure as much of our performed work was secured during tighter economic conditions. Mitigating the potential compressed bid margins, we believe our new cost structure has significantly reduced our fixed cost base while targeting operational efficiencies. We believe the fiscal year ended February 29, 2016 results benefited from the new cost structure. We also discontinued various non-core operations during the year which reduced revenue but had little to no impact on our operating income. We believe this focus on our core products in conjunction with renewed emphasis on construction activity that favors maximum vertical integration will position us to be successful in our markets.
The Fixing America's Surface Transportation Act, or the FAST Act, will reauthorize federal highway and public transportation programs and stabilize the Highway Trust Fund. Under the FAST Act, $207.4 billion of the funding will be apportioned to the states by formula, with a 5.1% increase over actual fiscal year 2015 apportionments in 2016 and then inflationary increases in subsequent years. We do not expect a meaningful impact from the FAST Act before the second half of 2016. Allocations for Pennsylvania and New York for 2016 are estimated to be $1.7 billion for each state.

The previous federal highway bill provides spending authorizations, which represent the maximum financial obligation that will result from the immediate or future outlays of federal funds for highway and transit programs. The federal government’s surface transportation programs are financed mostly through the receipts of highway user taxes placed in the Highway Trust Fund, which is divided into the Highway Account and the Mass Transit Account. Revenues credited to the Highway Trust Fund are primarily derived from a federal gas tax, a federal tax on certain other motor fuels and interest on the accounts’ accumulated balances. MAP-21 extended federal motor fuel taxes through September 30, 2016 and truck excise taxes through September 30, 2017. Of the currently imposed federal gas tax of $0.184 per gallon, which has been static since 1993, $0.15 is allocated to the Highway Account of the Highway Trust Fund.

Operational Efficiency and Asset Utilization
 
During the fourth quarter of the fiscal year ended February 28, 2014, we initiated a cost savings and operational efficiency plan (the “Plan”). In most parts of our business we have completed the primary objectives of headcount reductions and administrative savings. In addition, we have successfully increased selling margins,finalized the re-alignment of our organizational structure which resulted in three regional divisions and we continue to leverage our shared service center. We are working to optimize the last component of our Plan related to operational efficiencies. Additionally, we are standardizing our operational procedures across the regions and enhancing best practices.

In addition to the actions related to our Plan, we have continued to focus on our core markets and products resulting in the sale of certain non-core assets and operations. We are vigilantly working to ensure we leverage and utilize our asset base to its fullest. For the fiscal year ended February 29, 2016, we sold certain assets and related inventory providing $19.5 million of additional cash. We have $5.6 million in assets held for sale as of February 29, 2016. The cash will be used to reinvest in the core business as well as provide flexibility in optimizing our capital structure.


39

 


Reclassifications

Certain items previously reported in prior period financial statement captions have been conformed to agree with the current presentation. The expenses associated with certain benefit programs previously disclosed within the Pension and profit sharing caption have been reclassified to the Cost of revenue and to the Selling, administrative and general captions in the Condensed Consolidated Statements of Comprehensive Loss in the amounts of $6.3 million and $0.4 million, for the fiscal year ended February 29, 2016, $5.4 million and $0.7 million, for the fiscal year ended February 28, 2015 and $6.2 million and $1.0 million, for the fiscal year ended February 28, 2014, respectively. The reclassification had no effect on Operating income, Comprehensive Loss within the Condensed Consolidated Statements of Comprehensive Loss, the Condensed Consolidated Statement of Cash Flows, or the Condensed Consolidated Balance Sheets.

Components of Operating Results
 
Revenue
 
We derive our revenues predominantly from the operations of our three core businesses: construction materials, heavy/highway construction and traffic safety services and equipment. Our construction materials business consists of aggregate production (crushed stone and construction sand and gravel), hot mix asphalt production, ready mixed concrete production and other miscellaneous products. Our heavy/highway construction business primarily relates to heavy construction, blacktop paving and other site preparation services. Our traffic safety services and equipment business consists primarily of sales, leasing and servicing of general and specialty traffic control and work zone equipment and devices, including traffic cones, flashing lights, barricades, plastic drums, arrow boards, construction signs and crash attenuators.
 
The following is a summary of how we recognize revenue in our core businesses:
 
Construction materials. We generally recognize revenue on the sale of construction materials when they are shipped and the customer takes title and assumes risk of loss.

Heavy/highway construction.  We recognize revenue on construction contracts under the percentage-of-completion method of accounting, as measured by the cost incurred to date over estimated total cost.  The typical contract life cycle for these projects can be up to two to four years in duration.  Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to revenues and costs. Revenue from contract change orders is recognized when the contract owner has agreed to the change order with the customer and the related costs are incurred. We do not recognize revenue on a basis of contract claims. Provisions for estimated losses on uncompleted contracts are made for the full amount of estimated loss in the period in which evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue. Contract costs include all direct material, labor, subcontract and other costs and those indirect costs related to contract performance, such as indirect salaries and wages, equipment repairs and depreciation, insurance and payroll taxes. Administrative and general expenses are charged to expense as incurred. Costs and estimated earnings in excess of billings on uncompleted contracts represent the excess of contract revenue recognized to date over billings to date. Billings in excess of costs and estimated earnings on uncompleted contracts represent the excess of billings to date over the amount of revenue recognized to date.

Traffic safety services and equipment. Our rental contract periods for our traffic safety products are daily, weekly or monthly and are recognized on a straight-line basis. We recognize revenues from the sale of rental equipment and new equipment at the time of transfer of title upon delivery to, or pick-up by, the customer. We also recognize sales of contractor supplies at the time of transfer of the title upon delivery to, or pick-up by, the customer.
 

40

 


Operating Costs and Expenses
 
The key components of our operating costs and expenses consist of the following:
 
Cost of revenue. Cost of revenue consists of all production and delivery costs related to our revenue and primarily includes all labor, raw materials, subcontractor costs, equipment rental and maintenance and manufacturing overhead. We participate in several multiemployer pension plans, which provide defined benefits to certain employees covered by labor union contracts. These amounts were determined by the union contracts and we do not administer or control the funds. Our cost of revenue is directly impacted by fluctuations in commodity prices. As a result, our operating profit margins can be significantly impacted by the underlying cost of raw materials. We attempt to limit our exposure to changes in commodity prices by entering into purchase commitments when appropriate. In addition, we have sales price escalators in place for most public contracts and we aggressively seek to obtain escalators on private and commercial contracts.

Depreciation, depletion, and amortization. Our business is relatively capital-intensive.  We carry property, plant and equipment at the lower of cost or fair value on our balance sheet and assets under capital leases are stated at the lesser of the present value of minimum lease payments or the fair value of the leased item. Provision for depreciation is generally computed over estimated service lives by the straight-line method.

The average depreciable lives by fixed asset category are as follows:
 
Land improvements
20 years
Buildings and improvements
8 - 40 years
Crushing, prestressing and manufacturing plants
5 - 33 years
Contracting equipment
3 - 12.5 years
Trucks and autos
3 - 8 years
Office equipment
5 - 10 years
Depletion of limestone deposits is calculated over proven and probable reserves by the units of production method on a quarry-by-quarry basis. Amortization expense is the periodic expense related to our other intangible assets, deferred stripping and capitalized software. Our intangible assets were primarily acquired as part of the Stabler acquisition and the amortization of software cost relates to our ERP. 


Selling, administrative and general expenses. Selling, administrative and general expenses consist primarily of salaries and personnel costs for our sales and marketing, administration, finance and accounting, legal, information systems and human resources employees. Additional expenses include marketing programs, consulting and professional fees, travel, insurance and other corporate expenses.
 
Executive Summary

The following is a financial summary for the fiscal years ending February 29, 2016, February 28, 2015 and February 28, 2014:

Total revenue decreased in the fiscal year ended February 29, 2016 by $9.9 million (1.5%) to $651.9 million over the fiscal year ended February 28, 2015, primarily due to the winding down of certain non-core operations;
Operating income returned to a positive $59.2 million in the fiscal year ended February 29, 2016, an increase of $44.9 million (314.0%) over the fiscal year ended February 28, 2015;
Current maturities of long-term debt have decreased $5.4 million from $8.5 million in 2015 to $3.2 million in 2016;
Fixed cost base was lower in the fiscal year ended February 29, 2016, including a reduction of selling, administrative, and general expenses of $7.2 million or (12.4%) to $50.7 million in the fiscal year ended February 29, 2016, compared to $57.9 million in the fiscal year ended February 28, 2015; and
Cash provided by operating activities increased in the fiscal year ended February 29, 2016 by $30.2 million over the fiscal year ended February 28, 2015.


41

 


Results of Operations
 
The following table summarizes our operating results on a consolidated basis:
 
 
 
Year Ended
(In thousands)
 
February 29,
2016
 
February 28,
2015
 
February 28,
2014
Revenue
 
$
651,931

 
$
661,830

 
$
681,645

Cost of revenue (exclusive of items shown separately below)
 
505,075

 
540,743

 
562,577

Depreciation, depletion and amortization
 
41,886

 
44,741

 
48,792

Asset impairment
 
193

 
5,249

 
7,636

Selling, administrative and general expenses
 
50,709

 
57,887

 
78,309

Gain on disposals of property, equipment and software
 
(5,097
)
 
(1,065
)
 
(891
)
Operating income (loss)
 
59,165

 
14,275

 
(14,778
)
Interest income
 
185

 
189

 
407

Interest expense
 
(85,552
)
 
(81,828
)
 
(86,871
)
Loss before income taxes
 
(26,202
)
 
(67,364
)
 
(101,242
)
Income tax benefit
 
(5,131
)
 
(4,886
)
 
(9,099
)
Net loss
 
(21,071
)
 
(62,478
)
 
(92,143
)
 
The tables below disclose revenue and operating data for our reportable segments before certain intra- and intercompany eliminations. We include inter-segment and certain intra-segment sales in our comparative analysis of revenue at the product line level and this presentation is consistent with the basis on which we review results of operations.  We also operate ancillary port operations and certain rental operations, which are included in our construction materials operations line items presented below. All non-allocated operating costs are reflected in the corporate and unallocated line item presented below.
 
The following table summarizes the segment revenue by our primary lines of business:
 
 
Year Ended
(In thousands)
 
February 29,
2016
 
February 28,
2015
 
February 28,
2014
Segment Revenue
 
 

 
 

 
 

Construction materials
 
$
452,973

 
$
464,245

 
$
507,957

Heavy/highway construction
 
255,301

 
253,804

 
252,310

Traffic safety services and equipment
 
93,631

 
88,058

 
88,834

Segment totals
 
801,905

 
806,107

 
849,101

Eliminations
 
(149,974
)
 
(144,277
)
 
(167,456
)
Total revenue
 
$
651,931

 
$
661,830

 
$
681,645

 
The following table summarizes the percentage of segment revenue by our primary lines of business:
 
 
 
Year Ended
 
 
February 29,
2016
 
February 28,
2015
 
February 28,
2014
Segment Revenue:
 
 

 
 

 
 

Construction materials
 
56.5
%
 
57.6
%
 
59.8
%
Heavy/highway construction
 
31.8
%
 
31.5
%
 
29.7
%
Traffic safety services and equipment
 
11.7
%
 
10.9
%
 
10.5
%
Segment totals
 
100.0
%
 
100.0
%
 
100.0
%
 




42

 







The following table summarizes the operating income (loss) by our primary lines of business:

 
 
Year Ended
(In thousands)
 
February 29,
2016
 
February 28,
2015
 
February 28,
2014
Segment Operating income (loss):
 
 

 
 

 
 

Construction materials
 
$
95,478

 
$
60,895

 
$
50,452

Heavy/highway construction
 
1,121

 
(1,947
)
 
2,633

Traffic safety services and equipment
 
6,706

 
4,019

 
444

Segment totals
 
103,305

 
62,967

 
53,529

Corporate and unallocated
 
(44,140
)
 
(48,692
)
 
(68,307
)
Total operating income (loss)
 
$
59,165

 
$
14,275

 
$
(14,778
)




Fiscal Year 2016 Compared to Fiscal Year 2015
 
Revenue

Total net revenue decreased $9.9 million or 1.5% to $651.9 million for the twelve months ended February 29, 2016, compared to $661.8 million for the twelve months ended February 28, 2015. The decrease in total revenue was driven primarily by approximately $18.0 million of reduced revenue related to certain non-core operations during the fiscal year ended February 29, 2016. After considering the exclusion of these revenues associated with these non-core business operations, revenue increased by approximately $8.1 million.
 
Segment revenue for our construction materials business decreased $11.2 million or 2.4%, to $453.0 million for the fiscal year ended February 29, 2016, compared to $464.2 million for the fiscal year ended February 28, 2015. A decrease in segment revenue of $19.8 million was primarily due to a decrease in certain non-core operations, which were mostly wound down by the end of fiscal year ended February 28, 2015. When the exclusion of these revenues associated with non-core business operations are considered, our revenue increased by $8.6 million on a comparable basis. Increases in aggregates revenue and hot mix asphalt revenue of $9.7 million and $2.3 million, respectively, were offset by a decrease in ready mixed concrete revenue of $0.6 million and other revenue of $3.1 million. The price of aggregates shipped and consumed increased by 9.1% while volumes decreased by 3.7% for the fiscal year end February 29, 2016, compared to fiscal year end February 28, 2015. The price of hot mix asphalt was up by 2.1% while volumes were down by approximately 0.7% for the fiscal year ended February 29, 2016, as compared to the fiscal year ended February 28, 2015. Other revenue decreased as a result of reduced fuel revenues attributable to the lower cost of fuel which is a pass through to hired haulers and other internal operations.

The table below represents sales volumes and average prices of our primary products:
 
 
 
2016
 
2015
 
 
Construction materials
 
 
Units **
 
Price per unit
 
% Sales*
 
Units **
 
Price per unit
 
% Sales*
Units Shipped and Consumed:
 
 

 
 

 
 

 
 

 
 

 
 

Stone, sand and gravel (tons)
 
15,884

 
$
12.76

 
45
%
 
16,497

 
$
11.70

 
42
%
Hot mix asphalt (tons)
 
3,055

 
$
55.42

 
37
%
 
3,077

 
$
54.29

 
36
%
Ready mixed concrete (cubic yards)
 
611

 
$
114.41

 
15
%
 
576

 
$
122.32

 
15
%
* Remaining percentage of sales are from non-core operations.
** Units are in thousands


43

 


 

Changes in Volume
 

February 29,
2016

February 28,
2015
Aggregates

(3.7
)%

(2.4
)%
Hot mix asphalt

(0.7
)%

(1.6
)%
Ready mixed concrete

6.1
 %

3.6
 %

Segment revenue for our heavy/highway construction business increased $1.5 million, or 0.6%, to $255.3 million for the fiscal year ended February 29, 2016, compared to $253.8 million for the fiscal year ended February 28, 2015. The slight increase was attributable to the timing of completion of change orders and contract adjustments during the prior year that did not recur in the current year.
 
Segment revenue for our traffic safety services and equipment businesses increased $5.5 million, or 6.2%, to $93.6 million for the fiscal year ended February 29, 2016, compared to $88.1 million for the fiscal year ended February 28, 2015. The increase in revenue was primarily attributable to increase in traffic cone sales in certain markets and service revenue associated with pavement markings.
 
Cost of Revenue

Total cost of revenue decreased $35.6 million, or 6.6% to $505.1 million for the fiscal year ended February 29, 2016, compared to $540.7 million for the fiscal year ended February 28, 2015. Our cost of revenue as a percentage of sales improved 4.2% to 77.5% for the fiscal year ended February 29, 2016, compared to 81.7% for the fiscal year ended February 28, 2015. This was primarily a result of the reduction of lower margin business and the impact of increased selling prices on a fixed cost base.

The following table summarizes the segment cost of revenue by our primary lines of business: 

 

For Year Ended
(in thousands)

February 29,
2016

February 28,
2015
Segment Cost of Revenue






Construction materials

$
332,081


$
365,507

Heavy/highway construction

246,914


247,497

Traffic safety services and equipment

76,054


72,016

Segment totals

655,049


685,020

Eliminations

(149,974
)

(144,277
)
Total

$
505,075


$
540,743


The following table summarizes each segment's cost of revenue as a percentage of its segment revenue by our primary lines of business:

 

For Year Ended
 

February 29,
2016

February 28,
2015
Cost of Revenue as Percent of Revenue (before elimination)






Construction materials

73.3
%

78.7
%
Heavy/highway construction

96.7
%

97.5
%
Traffic safety services and equipment

81.2
%

81.8
%


44

 


Segment cost of revenue for our construction materials business as a percentage of its segment revenue decreased 5.4% to 73.3% for the fiscal year ended February 29, 2016, compared to 78.7% for the fiscal year ended February 28, 2015.  Segment cost of revenue as a percentage of segment revenue improved as a result of reduced revenues associated with non-core operations which generally carried lower margins compared to other products, a decrease in the cost of commodities combined with price increases on a fixed cost base. The winding down of non-core operations contributed approximately $19.3 million to the decrease in cost of revenue for the fiscal year ended February 29, 2016. while the remaining decrease in cost of sales was primarily attributable to a decrease in commodity costs.

Segment cost of revenue for our heavy/highway construction business as a percentage of its segment revenue decreased to 96.7% for the fiscal year ended February 29, 2016, compared to 97.5% for the fiscal year ended February 28, 2015. The decrease in cost of sales as a percentage of sales was primarily due to unfavorable cost revisions on certain contracts in the prior year that did not recur in the current year.

Segment cost of revenue for our traffic services and equipment business as a percentage of its segment revenue remained flat changing approximately 0.6% to 81.2% for the fiscal year ended February 29, 2016, as compared to 81.8% for the fiscal year ended February 28, 2015
 
Depreciation, Depletion and Amortization
 
Depreciation, depletion and amortization decreased $2.8 million, or 6.3% to $41.9 million for the fiscal year ended February 29, 2016, compared to $44.7 million for the fiscal year ended February 28, 2015. The decrease was primarily attributable to less depreciation on a smaller depreciable asset base as a result of assets sold within the past year and additional assets becoming fully depreciated.

Asset Impairment
 
Asset impairment decreased $5.0 million to $0.2 million during the fiscal year ended February 29, 2016, compared to $5.2 million in the fiscal year ended February 28, 2015. In the fiscal year ended February 28, 2015, we recorded impairments related to the sale of certain non core operations which did not recur in the current year.

Selling, Administrative and General Expenses
 
Selling, administrative and general expenses decreased $7.2 million, or 12.4%, to $50.7 million for the fiscal year ended February 29, 2016, compared to $57.9 million for the fiscal year ended February 28, 2015. The decrease was attributable to lower costs of restructuring, primarily our advisor Capstone, lower professional costs related to the remediation of our material weaknesses and ERP and decreased labor and benefit costs.

Operating Income (Loss)
 
Operating income for our construction materials business increased $34.6 million, or 56.8%, to $95.5 million for the fiscal year ended February 29, 2016, compared to $60.9 million for the fiscal year ended February 28, 2015. Operating income for aggregates increased $14.2 million, or 35.3% to $54.4 million for the fiscal year ended February 29, 2016, compared to $40.2 million for the fiscal year ended February 28, 2015. This increase was primarily due to the combination of price increases and to a lesser extent commodity price decreases on a fixed cost base. Operating income for hot mix asphalt increased $7.5 million, or 44.4% to $24.4 million for the fiscal year ended February 29, 2016, compared to $16.9 million for the fiscal year ended February 28, 2015. This increase was primarily due to a combination of pricing discipline and favorable commodity prices on liquid asphalt cement, in the fiscal year ended February 29, 2016, compared to the fiscal year ended February 28, 2015. Operating income for ready mixed concrete increased $3.1 million, or 40.8% to $10.7 million for the fiscal year ended February 29, 2016, compared to $7.6 million for the fiscal year ended February 28, 2015, primarily due to increased volumes on the same fixed cost base. Operating income associated with other non-core operations improved by eliminating almost $0.3 million of losses for the fiscal year ended February 29, 2016, compared to the fiscal year ended February 28, 2015. The impact of asset sales increased operating profit by $9.3 million to a gain of $4.2 million in the fiscal year ended February 29, 2016, compared to a net loss of $5.1 million in the fiscal year ended February 28, 2015.

Operating income for our heavy/highway construction business increased $3.0 million to an operating profit of $1.1 million for the fiscal year ended February 29, 2016, compared to $1.9 million operating loss for the fiscal year ended February 28, 2015. This increase was primarily attributable to unfavorable cost revisions on certain contracts during the fiscal year ended February 28, 2015 that did not recur in the current year.


45

 


Operating income for our traffic safety services and equipment sales businesses increased $2.7 million to $6.7 million for the fiscal year ended February 29, 2016, compared to $4.0 million during the fiscal year ended February 28, 2015. The increase in profitability is attributable primarily to improved cost controls as well as pockets of increased sales which helped our manufacturing leverage.
 
Interest Expense
 
Net interest expense increased $3.8 million, or 4.7%, to $85.4 million for the fiscal year ended February 29, 2016, compared to $81.6 million for the fiscal year ended February 28, 2015.  This increase is primarily attributable to increased borrowings.
 
Income Tax Benefit
 
During the fiscal year ended February 29, 2016, we recorded $5.1 million of income tax benefit, which resulted in an annual effective rate of 19.6%. The benefit consists of $0.7 million federal tax benefit and $4.4 million state tax benefit. Our annual effective tax rate differs from the U.S. federal statutory rate of 35% primarily due to current year state income taxes, percentage depletion and an increase in the valuation allowance on deferred tax assets. Included in the fiscal year 2016 change in valuation allowance is the recording of valuation allowance on the portion of current period federal and state income tax losses that we believe are more likely than not to be realized. We reversed a valuation allowance related to a portion of our state net operating loss carryforward that we have determined is more likely than not to be realized as a result of a state income tax law change that occurred during the fiscal year ended February 29, 2016.

Our future effective tax rate may be materially impacted by the timing and extent of the realization of deferred tax assets and changes in the tax laws. Further, our effective tax rate may fluctuate within a fiscal year, including from quarter-to-quarter, due to items arising from discrete events, including the resolution or identification of tax uncertainties, or due to the changes in the valuation allowance.
 
Fiscal Year 2015 Compared to Fiscal Year 2014
 
Revenue

Total net revenue decreased $19.8 million or 2.9% to $661.8 million for the twelve months ended February 28, 2015 compared to $681.6 million for the twelve months ended February 28, 2014. The decrease in total revenue was driven primarily by approximately $32.0 million of reduced revenues related to certain non-core operations during the fiscal year ended February 28, 2015. When considering the exclusion of these revenues associated with these non-core business operations, revenues increased by $12.2 million.

Segment revenue for our construction materials business decreased $43.8 million or 8.6%, to $464.2 million for the fiscal year ended February 28, 2015 compared to $508.0 million for the fiscal year ended February 28, 2014. A decrease of revenue of $41.1 million was primarily due to a decrease in certain non-core operations, which were wound down during the fiscal year ended February 28, 2015. When the exclusion of these revenues associated with non-core business operations are considered, our revenues decreased by a net amount of approximately $2.7 million. Increases in ready mixed concrete revenues of $4.2 million, respectively, were offset by decreases in hot mix asphalt revenues of $3.4 million. The hot mix asphalt volumes were down by approximately 1.6% for the fiscal year ended February 28, 2015, as compared to the fiscal year ended February 28, 2014. Ready mixed concrete revenues increased due to an increase in sales volumes of 3.6% and an increase in sales price of 2.5%, for the fiscal year ended February 28, 2015, as compared to the fiscal year ended February 28, 2014.


46

 


The table below represents sales volumes and average prices of our primary products:

 
 
2015
 
2014
 
 
Construction materials
 
 
Units**
 
Price per unit
 
% Sales*
 
Units**
 
Price per unit
 
% Sales*
Units Shipped and Consumed:
 
 

 
 

 
 

 
 

 
 

 
 

Stone, sand and gravel (tons)
 
16,497

 
$
11.70

 
42
%
 
16,897

 
$
11.58

 
39
%
Hot mix asphalt (tons)
 
3,077

 
$
54.29

 
36
%
 
3,126

 
$
54.52

 
34
%
Ready mixed concrete (cubic yards)
 
576

 
$
122.32

 
15
%
 
556

 
$
119.38

 
13
%
* Remaining percentage of sales are from precast/prestressed structural concrete, block and construction supplies.
** Units are in thousands

 
 
Changes in Volume
 
 
February 28,
2015
 
February 28,
2014
Aggregates
 
(2.4
)%
 
(0.2
)%
Hot mix asphalt
 
(1.6
)%
 
(13.0
)%
Ready mixed concrete
 
3.6
 %
 
3.2
 %
 

Segment revenue for our heavy/highway construction business increased $1.5 million, or 0.6%, to $253.8 million for the fiscal year ended February 28, 2015 compared to $252.3 million for the fiscal year ended February 28, 2014.  We experienced delays due to the timing of completion of various projects during the fiscal year ended February 28, 2015 as compared to the fiscal year ended February 28, 2014.

Segment revenue for our traffic safety services and equipment sales businesses decreased $0.7 million, or 0.8%, to $88.1 million for the fiscal year ended February 28, 2015 compared to $88.8 million for the fiscal year ended February 28, 2014. The decrease in revenues was primarily attributable to the sale of certain branches in September 2013.

 
Cost of Revenue
 
Total cost of revenue decreased $21.8 million, or 3.8% to $540.7 million for the fiscal year ended February 28, 2015 compared to $562.6 million for the fiscal year ended February 28, 2014. Our cost of revenue as a percentage of sales improved 0.8% to 81.7% for the fiscal year ended February 28, 2015 compared to 82.5% for the fiscal year ended February 28, 2014, primarily as a result of the reduction of lower margin business.

The following table summarizes the cost of revenue by our primary lines of business 

 
 
For Period Ended
(in thousands)
 
February 28,
2015
 
February 28,
2014
Segment Cost of Revenue
 
 
 
 
Construction materials
 
$
365,507

 
$
413,882

Heavy/highway construction
 
247,497

 
242,442

Traffic safety services and equipment
 
72,016

 
73,709

Segment totals
 
685,020

 
730,033

Eliminations
 
(144,277
)
 
(167,456
)
Total
 
$
540,743

 
$
562,577



47

 


The following table summarizes the percentage of cost of revenue by our primary lines of business:

 
 
For Period Ended
 
 
February 28,
2015
 
February 28,
2014
Cost of Revenue as Percent of Revenue (before elimination)
 
 
 
 
Construction materials
 
78.7
%
 
81.5
%
Heavy/highway construction
 
97.5
%
 
96.1
%
Traffic safety services and equipment
 
81.8
%
 
83.0
%

Segment cost of revenue for our construction materials business as a percentage of its segment revenue decreased 2.8% to 78.7% for the fiscal year ended February 28, 2015 compared to 81.5% for the fiscal year ended February 28, 2014.  Segment cost of revenue as a percentage of segment revenue improved as a result of lower revenues associated with non-core operations which generally carried lower margins compared to other products. The winding down of non-core operations during the first quarter of the fiscal year ended February 28, 2015 contributed approximately $39.5 million to the decrease in cost of revenue for the fiscal year ended February 28, 2015. The remaining decrease in cost of sales was primarily attributable to a decrease in cost of revenues in hot mix asphalt and ready mixed concrete of $7.9 million and $1.0 million.

Segment cost of revenue for our heavy/highway construction business as a percentage of its segment revenue increased to 97.5% for the fiscal year ended February 28, 2015 compared to 96.1% for the fiscal year ended February 28, 2014. The increase in cost of sales as a percentage of sales was primarily due to unfavorable cost revisions on certain contracts during the fiscal year ended February 28, 2015, as well as completion of lower margin work bid in the fiscal year ended February 28, 2014.

Segment cost of revenue for our traffic services and equipment business as a percentage of its segment revenue improved by 1.2% to 81.8% for the fiscal year ended February 28, 2015 as compared to 83.0% for the fiscal year ended February 28, 2014 as a result of certain cost reductions. 

Depreciation, Depletion and Amortization
 
Depreciation, depletion and amortization decreased $4.1 million, or 8.4% to $44.7 million for the fiscal year ended February 28, 2015 compared to $48.8 million for the fiscal year ended February 28, 2014. The decrease was primarily attributable to less depreciation on a smaller depreciable asset base as a result of assets sold within the past year and additional assets becoming fully depreciated, partially offset by the amortization of certain deferred stripping costs of $0.9 million.

Asset Impairment
 
Asset impairment decreased $2.4 million to $5.2 million during the fiscal year ended February 28, 2015 compared to $7.6 million in the fiscal year ended February 28, 2014. In the fiscal year ended February 28, 2015, we recorded impairments related to the sale of our Towanda CSC and Block operations of $1.9 million. In addition, we recorded impairments related to the sale of our Towanda and Sheshequin materials operations of $3.0 million and impaired inventory related to our precast/prestressed structural concrete operations of $0.2 million, and related to non-core properties and office buildings of $0.1 million.

Selling, Administrative and General Expenses
 
Selling, administrative and general expenses decreased $20.4 million, or 26.1%, to $57.9 million for the fiscal year ended February 28, 2015 compared to $78.3 million for the fiscal year ended February 28, 2014. The decrease was primarily attributable to lower costs from headcount reductions and benefit plans, and reduced fees associated with various consultants.


48

 


Operating Income (Loss)
 
Operating income for our construction materials business increased $10.4 million, or 20.6%, to $60.9 million for the fiscal year ended February 28, 2015 compared to $50.5 million for the fiscal year ended February 28, 2014. Operating income for aggregates increased $10.4 million, or 34.9% to $40.2 million for the fiscal year ended February 28, 2015 compared to $29.8 million for the fiscal year ended February 28, 2014. This increase was due to the impact of the cost reduction initiatives, partially offset by lower sales prices. Operating income for hot mix asphalt decreased $4.3 million, or 20.3% to $16.9 million for the fiscal year ended February 28, 2015 compared to $21.2 million for the fiscal year ended February 28, 2014. This decrease was primarily due to a less favorable sales mix as well as reduced volumes in the fiscal year ended February 28, 2015 compared to the fiscal year ended February 28, 2014. Operating income for ready mixed concrete increased $3.2 million, or 72.7% to $7.6 million for the fiscal year ended February 28, 2015 compared to $4.4 million for the fiscal year ended February 28, 2014, primarily due to increased volumes on the same fixed cost base. Operating income associated with other non-core operations decreased by $1.0 million for the fiscal year ended February 28, 2015 compared to the fiscal year ended February 28, 2014. Impairment on assets held for sale decreased $2.1 million to $5.1 million in the fiscal year ended February 28, 2015 from $7.2 million in the fiscal year ended February 28, 2014.

Operating income for our heavy/highway construction business decreased $4.5 million to an operating loss of $1.9 million for the fiscal year ended February 28, 2015 compared to $2.6 million operating income for the fiscal year ended February 28, 2014. This decrease was primarily attributable to unfavorable cost revisions on certain contracts during the fiscal year ended February 28, 2015 as well as completion of lower margin work bid in the fiscal year ended February 28, 2014.

Operating income for our traffic safety services and equipment sales businesses increased $3.6 million to $4.0 million for the fiscal year ended February 28, 2015 compared to $0.4 million during the fiscal year ended February 28, 2014. The increase in profitability is attributable primarily to improvements in cost controls as well as the sale of certain non-performing branches in September 2013.
 
Interest Expense
 
Net interest expense decreased $4.9 million, or 5.7%, to $81.6 million for the fiscal year ended February 28, 2015 compared to $86.5 million for the fiscal year ended February 28, 2014.  This decrease is primarily attributable to a decrease in write-offs of deferred financing costs in the fiscal year ended February 28, 2014.
 
Income Tax Benefit
 
During the fiscal year ended February 28, 2015, we recorded $4.9 million of income tax benefit, which resulted in an annual effective rate of 7.3%. The benefit consists of $3.6 million federal tax benefit and $1.3 million state tax benefit. Our annual effective tax rate differs from the U.S. federal statutory rate of 35% primarily due to current year state income taxes, percentage depletion and an increase in the valuation allowance on deferred tax assets. Included in the fiscal year 2015 change in valuation allowance is the recording of valuation allowance on the portion of current period federal and state income tax losses that we believe are more likely than not to be realized. We reversed a valuation allowance related to a portion of our state net operating loss carryforward that we have determined is more likely than not to be realized as a result of a state income tax law change that occurred during the fiscal year ended February 28, 2015.

During the fiscal year ended February 28, 2014, we recorded $9.1 million of income tax benefit, which resulted in an annual effective rate of 9.1%. The benefit consists of a $5.5 million federal tax benefit and a $3.6 million state tax benefit. Our annual effective tax rate differs from the U.S. federal statutory rate of 35% primarily due to current year state income taxes, percentage depletion and an increase in the valuation allowance on deferred tax assets. Included in the fiscal year ended February 28, 2014 change in valuation allowance is the recording of valuation allowance on the portion of current fiscal year federal and state income tax losses that we believe are more likely than not to be realized. We reversed a valuation allowance related to a portion of our state net operating loss carryforward that we have determined is more likely than not to be realized as a result of a state income tax law change that occurred during the fiscal year ended February 28, 2014.

Our future effective tax rate may be materially impacted by the timing and extent of the realization of deferred tax assets and changes in the tax laws. Further, our effective tax rate may fluctuate within a fiscal year, including from quarter-to-quarter, due to items arising from discrete events, including the resolution or identification of tax uncertainties, or due to the changes in the valuation allowance.


49

 


Liquidity and Capital Resources
 
Our sources of liquidity include cash and cash equivalents, cash from operations and amounts available for borrowing under the RCA with PNC Bank, National Association. As of February 29, 2016, we had no borrowings under the RCA with $80.6 million available to borrow. As of February 29, 2016, we had $40.6 million in cash and cash equivalents and working capital of $121.2 million compared to $13.3 million in cash and cash equivalents and working capital of $113.5 million as of February 28, 2015. We carried higher cash balances as a result of various asset sales, contributing almost $18.6 million, as well as increased profits. Further, additional cash balances of $22.7 million and $17.2 million as of February 29, 2016 and February 28, 2015, respectively, were restricted in certain consolidated subsidiaries for insurance requirements, as well as collateral on outstanding letters of credit, rentals and funds held for asset acquisitions with our trustee. The increase in restricted cash was primarily attributable to the cash held with our trustee associated with sale of our Naginey operations. Given the nature and seasonality of our business, we typically experience significant fluctuations in working capital needs and balances during our peak summer season; these amounts are converted to cash over the course of our normal operating cycle.

We believe we have sufficient financial resources, including cash and cash equivalents, cash from operations and amounts available for borrowing under the RCA, to fund our business and operations for at least the next twelve months, including capital expenditures and debt service obligations. Under the Credit Facilities we are subject to certain affirmative and negative convents, of which the minimum EBITDA covenant and the capital expenditure limitation are the primary financial covenants for the next twelve months. As of the end of each fiscal quarter, we are required to have trailing twelve-month EBITDA in an amount not less than certain amounts specified in the Credit Facilities. Our capital expenditure limitation for fiscal year 2016 was $40.0 million. As of February 29, 2016, we were in compliance with all of our covenant requirements through that date, and expect to remain in compliance for the next twelve months as applicable.

In the past, we have failed to meet certain operating performance measures as well as the financial covenant requirements set forth under our previous credit facilities, which resulted in the need to obtain several amendments, and should we fail in the future, we cannot guarantee that we will be able to obtain such amendments. A failure to obtain such amendments could result in an acceleration of our indebtedness under the Credit Facilities and a cross-default under our other indebtedness, including the Notes and Secured Notes. If the lenders were to accelerate the due dates of our indebtedness or if current sources of liquidity prove to be insufficient, there can be no assurance that we would be able to repay or refinance such indebtedness or to obtain sufficient funding. This could require us to restructure or alter its operations and capital structure. 

Cash Flows
 
The following table summarizes our net cash provided by or used by operating activities, investing activities and financing activities and our capital expenditures for the fiscal years ended February 29, 2016, February 28, 2015 and February 28, 2014:
 
 
 
Period Ended

(In thousands)
 
February 29,
2016
 
February 28,
2015
 
February 28,
2014
Net cash provided by (used in):
 
 

 
 

 
 

Operating activities
 
$
50,961

 
$
20,727

 
$
1,564

Investing activities
 
(14,017
)
 
(6,204
)
 
(28,613
)
Financing activities
 
(9,676
)
 
(25,122
)
 
41,407

Cash paid for capital expenditures and capitalized software
 
(28,351
)
 
(25,215
)
 
(17,207
)

Operating Activities
 
Net cash provided by operating activities increased $30.2 million to $51.0 million in the fiscal year ended February 29, 2016, compared to $20.7 million in the fiscal year ended February 28, 2015.  The increase in cash provided by operating activities was primarily the result of increased operating profit as well as positive working capital.

Net cash provided by operating activities increased $19.2 million to $20.7 million in fiscal year 2015, compared to $1.6 million in fiscal year 2014.  The increase in cash provided by operating activities was primarily the result of increased operating profit offset by lower working capital.


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Investing Activities
 
Net cash used in our investing activities increased $7.8 million to $14.0 million in the fiscal year ended February 29, 2016, compared to $6.2 million in the fiscal year ended February 28, 2015.  Net cash used in the fiscal year ended February 29, 2016 included cash capital expenditures of $28.4 million, a $3.1 million increase from the fiscal year ended February 28, 2015, offset by proceeds from sale of property and equipment. In addition, in the prior year we received cash previously used to collateralize letters of credit that did not recur in the current year. Furthermore, at February 29, 2016, approximately $5.6 million related to the sale of certain assets was being held in trust pending reinvestment pursuant to the asset sale provision in our credit agreement.

Net cash used in our investing activities improved $22.4 million to $6.2 million in fiscal year 2015, compared to $28.6 million in fiscal year 2014.  Net cash used in fiscal year 2015 included capital expenditures of $25.2 million, an $8.0 million increase from fiscal year 2014, partially offset by a return of restricted cash associated with the termination of collateralized letters of credit expended in the previous year.

Financing Activities
 
Net cash used in financing activities decreased by $15.4 million to $9.7 million for the fiscal year ended February 29, 2016, compared to net cash used by financing activities of $25.1 million in the fiscal year ended February 28, 2015. The change in cash associated with our financing activities in the fiscal year ended February 29, 2016 was primarily due to reduced payments on our ABL.
 
Net cash associated with financing activities changed by $66.5 million to a use of $25.1 million for fiscal year 2015, compared to net cash provided by financing activities of $41.4 million in fiscal year 2014. The change in cash associated with our financing activities in the fiscal year ended February 28, 2015 was primarily due to reduced borrowings in fiscal year 2015.

Capital Expenditures
 
Cash capital expenditures, including $0.7 million of deferred stripping and $0.9 million of capitalized software, increased $3.1 million to $28.4 million in the fiscal year ended February 29, 2016, compared to $25.2 million in the fiscal year ended February 28, 2015. We also purchased an additional $15.9 million of assets of which $10.0 million was in accounts payable at year end and $5.9 million directly financed. Total cash and non cash capital expenditures were $44.3 million in fiscal year end 2016, compared to $30.0 million for fiscal year end 2015. This increase was a result of higher spending on manufacturing and other plant related equipment.

Cash capital expenditures increased $8.0 million to $25.2 million in fiscal year 2015, compared to $17.2 million in fiscal year 2014. This increase was a result of higher spending on manufacturing and other plant related equipment.

Our Indebtedness

Credit Facility
 
On February 12, 2014, we entered into the RCA providing for revolving credit loans and letters of credit in an aggregate principal amount up to $105.0 million and the Term Loans providing for term loans in the aggregate principal amount of $70.0 million. We utilized the proceeds from borrowings under the Credit Facilities to repay amounts outstanding under, and terminate, the ABL Facility.
    
The RCA bears interest, at our option, at rates based upon LIBOR plus a margin of 4.0% (with a LIBOR floor of 1.0%) or the base rate plus a margin of 3.0%. The unused portion of the revolving credit commitment is subject to a commitment fee at a rate of 0.5%. At February 29, 2016, the weighted average interest rate on the RCA was 6.64%. The Term Loans bear interest, at our option, at rates based upon LIBOR plus a margin of 7.0% (with a LIBOR floor of 1.0%) or the base rate plus a margin of 6.0%.
    
Effective August 31, 2015, we obtained an amendment to the Credit Facility which allowed (i) certain assets to be added to a schedule of permitted asset sales and dispositions, and (ii) permitted the Company to incur additional capital expenditures equal to the unrestricted net cash proceeds received from the asset sales permitted under the terms of the Credit Agreements, as amended.


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The Credit Facilities contain a springing maturity date based upon certain events with a final maturity date of February 12, 2019. The Term Loans and the RCA will mature on December 14, 2017 unless we refinance our Secured Notes due 2018 by such date and will mature on June 2, 2018 unless we refinance our Notes by June 1, 2018.

Availability under the RCA is determined pursuant to a borrowing base formula based on eligible receivables and eligible inventory, subject to an availability block and to such other reserves as the Revolver Agent and the Syndication Agent may impose in accordance with the RCA. The availability block was initially $20.0 million but reduces to $10.0 million if we achieve a fixed charge coverage ratio of 1.00 to 1.00 as of the end of any fiscal quarter on a rolling four (4) quarter basis and further reduces to $0 if we achieve such fixed charge coverage ratio as of the end of the two immediately subsequent fiscal quarters. However, if at any time following the effectiveness of any of the reductions to the availability block the fixed charge coverage ratio as of the end of any quarter measured on a rolling four (4) quarter basis shall be less than 1.00:1.00, the availability block shall be increased back to $20.0 million, subject to further reduction as provided above; provided, that such reductions may occur no more than two (2) times, and if the availability block is increased back to $20.0 million following the second reduction, such increase shall be permanent and shall not be subject to further reduction. The Company achieved a fixed charge coverage ratio (as defined in the Credit Facilities) of greater than 1.00 to 1.00 as of the end of the fiscal quarters ended August 31, 2015 and November 30, 2015. As a result, the availability block was reduced to $0.0 million at February 29, 2016.

The RCA includes a $20.0 million letter of credit sub-facility and a $10.5 million swing loan sub-facility for short-term borrowings. As of February 29, 2016, we had $16.7 million of letters of credit outstanding under the sub-facility. We classify borrowings under the RCA as current due to the nature of the agreement.

As of February 29, 2016, the Company may redeem the Term Loans at Par.

As of the end of each fiscal quarter, we are required to have trailing twelve-month EBITDA in an amount not less than certain amounts specified in the Credit Facilities. As of February 29, 2016, we were required to have a minimum trailing twelve-month EBITDA, as defined in the credit agreement, of at least $64.0 million. Commencing with the fiscal quarter ending May 31, 2017, we will be required under the Credit Facilities to maintain as of the end of each fiscal quarter a fixed charge coverage ratio of not less than 1.00 to 1.00 measured on a rolling four quarter basis.

The Credit Facilities include affirmative and negative covenants that limit our ability and our subsidiaries to undertake certain actions, including, among other things, limitations on (i) the incurrence of indebtedness and liens, (ii) asset sales, (iii) dividends and other payments with respect to capital stock, (iv) acquisitions, investments and loans, (v) affiliate transactions, (vi) altering the business, (vii) prepaying indebtedness, (viii) making capital expenditures, and (ix) providing negative pledges to third parties. In addition, the Credit Facilities contain conditions to lending, representations and warranties and events of default, including, among other things: (i) payment defaults, (ii) cross-defaults to other material indebtedness, (iii) covenant defaults, (iv) certain events of bankruptcy, (v) the occurrence of a material adverse effect, (vi) material judgments, (vii) change in control, (viii) seizures of material property, (ix) involuntary interruptions of material operations, and (x) certain material events with respect to pension plans.

As of February 29, 2016, we were in compliance with all of our covenant requirements through that date.

11% Notes due 2018
 
In August 2010, we sold $250.0 million aggregate principal amount of the Notes.  Interest on the Notes is payable semi-annually in arrears on March 1 and September 1 of each year.  The proceeds from the issuance of Notes were used to pay down debt.  In connection with the issuance of the Notes, we incurred costs of approximately $8.3 million which were deferred and are being amortized on the effective interest method through the September 1, 2018 maturity date.

     We may redeem all or a part of the Notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest if redeemed during the twelve-month period beginning on September 1 of the years indicated below:
 
Year
 
Percentage
 
 
 

 
 
 
September 1, 2015 - August 31, 2016
 
102.75
%
September 1, 2016 and thereafter
 
100.00
%
 

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If we experience a change of control, as outlined in the indenture governing the Notes, we may be required to offer to purchase the Notes at a purchase price equal to 101.0% of the principal amount, plus accrued interest.
 
The Notes are guaranteed on a full and unconditional, and joint and several basis, by certain of our existing and future domestic subsidiaries (the “Guarantors” as described in Note 19, “Condensed Issuer, Guarantor and Non-Guarantor Financial Information”).  The indenture governing the Notes contains affirmative and negative covenants that, among other things, limit our and our subsidiaries’ ability to incur additional debt, make restricted payments, dividends or other payments from subsidiaries to us, create liens, engage in the sale or transfer of assets and engage in transactions with affiliates.  We are not required to maintain any affirmative financial ratios or covenants under the indenture governing the Notes.
 
The indenture governing the Notes required that we file a registration statement with the Securities and Exchange Commission and exchange the Notes for new Notes having terms substantially identical in all material respects to the Notes. We filed a registration statement with the SEC for the Notes on August 29, 2011. The registration statement became effective on September 13, 2011, and we concluded the exchange offer on October 12, 2011.
 
13% Secured Notes due 2018
 
In March 2012, we sold $265 million aggregate principal amount of the Secured Notes. Interest on the Secured Notes is initially payable at 13.0% per annum, semi-annually in arrears on March 15 and September 15.  We will make each interest payment to the holders of record of the Secured Notes as of the immediately preceding March 1 and September 1. We used the proceeds from this offering to repay certain existing indebtedness and to pay related fees and expenses.  The Secured Notes will mature on March 15, 2018.

With respect to any interest payment date on or prior to March 15, 2017, we may, at our option, elect (an ‘‘Interest Form Election’’) to pay interest on the Secured Notes (i) entirely in cash (‘‘Cash Interest’’) or (ii) subject to any Interest Rate Increase (as defined below), initially at the rate of 4% per annum in cash (‘‘Cash Interest Portion’’) and 9% per annum by increasing the outstanding principal amount of the Secured Notes or by issuing additional paid in kind notes under the indenture on the same terms as the Secured Notes (‘‘PIK Interest Portion’’ or “PIK Interest”); provided that in the absence of an Interest Form Election, interest on the Secured Notes will be payable as PIK Interest. 

For the interest period commencing on March 15, 2015, we elected to increase the cash interest portion to 6.0% and reduce the Payment-In-Kind ("PIK") interest portion to 7.0%. PIK interest accrued as of February 29, 2016 and February 28, 2015 was $9.5 million and $10.4 million, respectively, and it was recorded as a long-term obligation in other noncurrent liabilities. On March 3, 2016, we notified the trustee of our Secured Notes that we have selected to pay interest on the Secured Notes for the 12-month period commencing March 15, 2016 in the form of a 12% cash payment and