Table of Contents

 

 

 

**UNITED STATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended November 30, 2012**

 ** **

**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**

 

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**NEW ENTERPRISE STONE & LIME CO., INC.**

(Exact name of registrant as specified in its charter)

 

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| **Delaware**                               | ** ** | **23-1374051**         |
|--------------------------------------------|------------|------------------------|
| (State or other jurisdiction of            |       | (I.R.S. Employer       |
| incorporation or organization)             | ** ** | 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**

 

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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 x

 

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 o  No x

 

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 Exchange Act.

 
| Large accelerated filer o             |   | Accelerated filer o              |
|-------------------------------------------------|--------|---------------------------------------|
|                                            |   |                                  |
| Non-accelerated filer x                         |   | Smaller reporting company o |
| (Do not check if a smaller reporting   company) |   |                                  |

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

As of April 1, 2013, the number of shares outstanding of the registrant’s Class A Voting Common Stock, $1.00 par value, was 500 shares and the number of shares outstanding of the registrant’s Class B Non-Voting Common Stock, $1.00 par value, was 273,285 shares.

 

 

 

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Table of Contents

 

**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Table of Contents**

**Quarter Ended November 30, 2012**

 
| ** **                                                                                                                                           | ** ** | **Page(s)** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|
|                                                                                                                                                 |       |        |
| **PART I -   FINANCIAL INFORMATION**                                                                                                            |       |        |
|                                                                                                                                                 |       |        |
| Item 1.   Condensed Consolidated Financial Statements (unaudited)                                                                                    |       |        |
|                                                                                                                                                 |       |        |
|  Condensed   Consolidated Balance Sheets at November 30, 2012 and February 29,   2012                                                 |       | 3           |
|                                                                                                                                                 |       |        |
|  Condensed Consolidated Statements of Comprehensive   Income (Loss) for the three and nine months ended November  30, 2012   and 2011 |       | 4           |
|                                                                                                                                                 |       |        |
|  Condensed Consolidated Statements of Cash Flows for   the nine months ended November 30, 2012 and 2011                                    |       | 5           |
|                                                                                                                                                 |       |        |
|  Notes to   Unaudited Condensed Consolidated Financial Statements                                                                               |       | 6-25        |
|                                                                                                                                                 |       |        |
| Item 2. Management’s Discussion and Analysis of   Financial Condition and Results of Operations                                                 |       | 26-37       |
|                                                                                                                                                 |       |        |
| Item 3. Quantitative and Qualitative Disclosures About   Market Risk                                                                                 |       | 37          |
|                                                                                                                                                 |       |        |
| Item 4. Controls and Procedures                                                                                                                      |       | 38          |
|                                                                                                                                                 |       |        |
| **PART II   - OTHER INFORMATION**                                                                                                               |       |        |
|                                                                                                                                                 |       |        |
| Item   1. Legal Proceedings                                                                                                                          |       | 41          |
|                                                                                                                                                 |       |        |
| Item   1A. Risk Factors                                                                                                                              |       | 41          |
|                                                                                                                                                 |       |        |
| Item 2. Unregistered Sales of Equity in Securities and   Use of Proceeds                                                                             |       | 42          |
|                                                                                                                                                 |       |        |
| Item 3. Defaults Upon Senior Securities                                                                                                              |       | 42          |
|                                                                                                                                                 |       |        |
| Item 4. Mine Safety Disclosure                                                                                                                       |       | 42          |
|                                                                                                                                                 |       |        |
| Item   5. Other Information                                                                                                                          |       | 42          |
|                                                                                                                                                 |       |        |
| Item 6.   Exhibits                                                                                                                                   |       | 43          |
|                                                                                                                                                 |       |        |
|  Signature                                                                                                                                      |       | 44          |
|                                                                                                                                                 |       |        |
|  Exhibit Index                                                                                                                             |       | 45          |

 

2

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Table of Contents

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets (unaudited)**

 
| ** **                                                                                                                      | ** ** | **November 30,** | ** ** | **February 29,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| **(In thousands, except share and per share data)**                                          | ** ** | **2012**         | ** ** | **2012**         | ** ** |
|                                                                                                                            |       |             |       |             |       |
| **Assets**                                                                                                                      |       |             |       |             |       |
| Current   assets                                                                                                                |       |             |       |             |       |
| Cash   and cash equivalents                                                                                                     |       | $                | 8,481      |             | $          | 15,032 |   |
| Restricted   cash                                                                                                               |       | 10,456           |       | 10,322           |       |
| Accounts   receivable (less allowance for doubtful accounts of $3,956 in   November 2012 and $3,259 in February 2012) |       | 110,279          |       | 76,841           |       |
| Inventories                                                                                                                     |       | 129,890          |       | 132,195          |       |
| Deferred   income taxes                                                                                                         |       | 15,393           |       | 16,019           |       |
| Other   current assets                                                                                                          |       | 9,063            |       | 7,788            |       |
| Total   current assets                                                                                                          |       | 283,562          |       | 258,197          |       |
| Property,   plant and equipment, net                                                                                            |       | 373,808          |       | 371,574          |       |
| Goodwill                                                                                                                        |       | 90,847           |       | 90,847           |       |
| Other   intangible assets                                                                                                       |       | 25,564           |       | 26,344           |       |
| Other   assets                                                                                                                  |       | 35,769           |       | 29,360           |       |
| Total   assets                                                                                                                  |       | $                | 809,550    |             | $          | 776,322 |   |
| **Liabilities and Equity**                                                                                                      |       |             |       |             |       |
| Current   liabilities                                                                                                           |       |             |       |             |       |
| Current   maturities of long-term debt                                                                                          |       | $                | 16,219     |             | $          | 7,538 |   |
| Accounts   payable — trade                                                                                                 |       | 27,052           |       | 27,558           |       |
| Accrued   liabilities                                                                                                           |       | 43,839           |       | 51,631           |       |
| Total   current liabilities                                                                                                     |       | 87,110           |       | 86,727           |       |
| Long-term   debt, less current maturities                                                                                       |       | 578,586          |       | 521,475          |       |
| Deferred   income taxes                                                                                                         |       | 83,230           |       | 96,674           |       |
| Other   liabilities                                                                                                             |       | 30,143           |       | 21,578           |       |
| Total   liabilities                                                                                                             |       | 779,069          |       | 726,454          |       |
| Commitments   and contingencies (Note 7)                                                                                        |       |             |       |             |       |
| Equity                                                                                                                          |       |             |       |             |       |
| Common   stock, Class A, voting, $1 par value                                                                              |       | 21               |       | 21               |       |
| Common   stock, Class B, nonvoting, $1 par value                                                                           |       | 251              |       | 251              |       |
| Accumulated   deficit                                                                                                           |       | (96,223          | )          | (76,779          | )          |
| Additional   paid in capital                                                                                                    |       | 126,964          |       | 126,964          |       |
| Accumulated   other comprehensive loss                                                                                          |       | (2,044           | )          | (2,181           | )          |
| Total   New Enterprise Stone & Lime Co., Inc. equity                                                              |       | 28,969           |       | 48,276           |       |
| Noncontrolling   interest in consolidated subsidiaries                                                                          |       | 1,512            |       | 1,592            |       |
| Total   equity                                                                                                                  |       | 30,481           |       | 49,868           |       |
| Total   liabilities and equity                                                                                                  |       | $                | 809,550    |             | $          | 776,322 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)**

** **
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                        | ** ** | **November 30,**            | ** ** | **November 30,**           | ** ** |
| **(In thousands)**                                                                           | ** ** | **2012**                         | ** ** | **2011**                        | ** ** | **2012** | ** ** | **2011** | ** ** |
| Revenue                                                                                           |       |                             |       |                            |       |   |   |   |   |
| Construction   materials                                                                          |       | $                                | 97,856     |                            | $          | 108,469 |   | $ | 314,633 |   | $ | 313,902 |   |
| Heavy/highway   construction                                                                      |       | 71,012                           |       | 85,128                          |       | 228,138 |   | 247,296 |   |
| Traffic   safety services and equipment                                                           |       | 19,440                           |       | 18,624                          |       | 59,928 |   | 59,262 |   |
| Other   revenues                                                                                  |       | 1,928                            |       | 1,666                           |       | 6,060 |   | 6,910 |   |
| Total   revenue                                                                                   |       | 190,236                          |       | 213,887                         |       | 608,759 |   | 627,370 |   |
|                                                                                              |       |                             |       |                            |       |   |   |   |   |
| Cost   of revenue (exclusive of items shown separately below)                                     |       |                             |       |                            |       |   |   |   |   |
| Construction   materials                                                                          |       | 68,514                           |       | 71,718                          |       | 210,432 |   | 200,924 |   |
| Heavy/highway   construction                                                                      |       | 68,464                           |       | 75,702                          |       | 217,749 |   | 231,754 |   |
| Traffic   safety services and equipment                                                           |       | 14,941                           |       | 13,123                          |       | 48,221 |   | 43,434 |   |
| Other   expenses                                                                                  |       | 840                              |       | 980                             |       | 4,301 |   | 5,313 |   |
| Total   cost of revenue                                                                           |       | 152,759                          |       | 161,523                         |       | 480,703 |   | 481,425 |   |
|                                                                                              |       |                             |       |                            |       |   |   |   |   |
| Depreciation,   depletion and amortization                                                        |       | 13,381                           |       | 12,156                          |       | 38,504 |   | 35,789 |   |
| Intangible   asset impairment                                                                     |       | —                           |       | —                          |       | 300 |   | — |   |
| Pension   and profit sharing                                                                      |       | 2,384                            |       | 2,385                           |       | 6,484 |   | 6,387 |   |
| Selling,   administrative, and general expenses                                                   |       | 19,713                           |       | 15,231                          |       | 55,733 |   | 46,485 |   |
| Loss   (gain) on sales of property and equipment                                                  |       | 22                               |       | 273                             |       | (6 | ) | (1,232 | ) |
| Operating   income                                                                                |       | 1,977                            |       | 22,319                          |       | 27,041 |   | 58,516 |   |
| Interest   expense, net                                                                           |       | (17,734                          | )          | (11,337                         | )          | (58,306 | ) | (34,915 | ) |
| (Loss)   income before income taxes                                                               |       | (15,757                          | )          | 10,982                          |       | (31,265 | ) | 23,601 |   |
| Income   tax (benefit) expense                                                                    |       | (6,909                           | )          | 5,302                           |       | (12,825 | ) | 10,749 |   |
| Net   (loss) income                                                                               |       | (8,848                           | )          | 5,680                           |       | (18,440 | ) | 12,852 |   |
| Unrealized   acturial gains and amortization of prior service costs, net of income taxes          |       | 46                               |       | 17                              |       | 137 |   | 80 |   |
| Comprehensive   (loss) income                                                                     |       | (8,802                           | )          | 5,697                           |       | (18,303 | ) | 12,932 |   |
| Less:   Comprehensive (income) loss attributable to noncontrolling interest                       |       | (365                             | )          | 81                              |       | (1,004 | ) | (518 | ) |
| Comprehensive   (loss) income attributable to New Enterprise Stone & Lime Co., Inc. |       | $                                | (9,167     | )                               | $          | 5,778 |   | $ | (19,307 | ) | $ | 12,414 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows (unaudited)**

** **
| ** **                                                                            | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **November 30,**           | ** ** |
| **(In thousands)**                                                               | ** ** | **2012**                        | ** ** | **2011** | ** ** |
| ** **                                                                            | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Reconciliation of net (loss) income to net cash used in   operating activities**    |       |                            |       |   |   |
| Net   (loss) income                                                                   |       | $                               | (18,440    | ) | $ | 12,852 |   |
| Adjustments   to reconcile net (loss) income to net cash used in operating activities |       |                            |       |   |   |
| Depreciation,   depletion and amortization                                            |       | 38,504                          |       | 35,789 |   |
| Intangible   asset impairment                                                         |       | 300                             |       | — |   |
| Gain   on disposal of property and equipment                                          |       | (6                              | )          | (1,232 | ) |
| Non-cash   payment-in-kind interest accretion                                         |       | 17,117                          |       | — |   |
| Amortization   and write-off of debt issuance costs                                   |       | 9,145                           |       | 3,255 |   |
| Deferred   income taxes                                                               |       | (12,818                         | )          | 9,734 |   |
| Bad   debt expense                                                                    |       | 1,249                           |       | 1,837 |   |
| Changes   in assets and liabilities:                                                  |       |                            |       |   |   |
| Accounts   receivable                                                                 |       | (34,687                         | )          | (90,054 | ) |
| Inventories                                                                           |       | 2,908                           |       | (11,014 | ) |
| Other   assets                                                                        |       | (3,121                          | )          | 3,966 |   |
| Accounts   payable                                                                    |       | 827                             |       | 15,864 |   |
| Other   liabilities                                                                   |       | (9,211                          | )          | (6,655 | ) |
| Net   cash used in operating activities                                               |       | (8,233                          | )          | (25,658 | ) |
| **Cash flows from investing activities**                                              |       |                            |       |   |   |
| Capital   expenditures                                                                |       | (31,887                         | )          | (26,677 | ) |
| Capitalized   software                                                                |       | (23                             | )          | (5,978 | ) |
| Proceeds   from sale of property and equipment                                        |       | 194                             |       | 2,603 |   |
| Change   in cash value of life insurance                                              |       | (3,013                          | )          | 2,968 |   |
| Change   in restricted cash                                                           |       | (133                            | )          | (8,492 | ) |
| Net   cash used in investing activities                                               |       | (34,862                         | )          | (35,576 | ) |
| **Cash flows from financing activities**                                              |       |                            |       |   |   |
| Proceeds   from revolving credit                                                      |       | 224,413                         |       | 108,717 |   |
| Repayment   of revolving credit                                                       |       | (283,361                        | )          | (42,500 | ) |
| Repayment   of long-term debt                                                         |       | (154,029                        | )          | (24,484 | ) |
| Payments   on capital leases                                                          |       | (3,846                          | )          | (3,975 | ) |
| Proceeds   from issuance of long-term debt                                            |       | 268,513                         |       | 12,398 |   |
| Debt   issuance costs                                                                 |       | (14,062                         | )          | (1,663 | ) |
| Distribution   to noncontrolling interest                                             |       | (1,084                          | )          | (1,095 | ) |
| Net   cash provided by financing activities                                           |       | 36,544                          |       | 47,398 |   |
| Net   decrease in cash and cash equivalents                                           |       | (6,551                          | )          | (13,836 | ) |
| **Cash and cash equivalents**                                                         |       |                            |       |   |   |
| Beginning   of period                                                                 |       | 15,032                          |       | 20,029 |   |
| End   of period                                                                       |       | $                               | 8,481      |   | $ | 6,193 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

**1.****             ****Nature of Operations and Summary of Significant Accounting Policies**

 

**Company Activities**

 

New Enterprise Stone & Lime Co., Inc., a Delaware corporation, is 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, the Company operates in three segments based upon the nature of its products and services: construction materials, heavy/highway construction and traffic safety services and equipment.  As used herein, the terms (“we,” “us,” “our,” “NESL,” or the “Company”) refer to New Enterprise Stone & Lime Co., Inc., and/or one or more of its subsidiaries.  Almost all of our products are produced and consumed outdoors.  Normally, our highest sales and earnings are in the second and third fiscal quarters and our lowest are in the first and fourth fiscal quarters.  As a result of this seasonality, our significant net working capital items, which are accounts receivable, inventories, accounts payable - trade and accrued liabilities, are typically higher as of interim period ends compared to fiscal year end.

 

**Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statements and notes included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  All adjustments (all of which are of a normal recurring nature) that are necessary for a fair presentation are reflected in the condensed consolidated financial statements.  The condensed consolidated financial statements do not include all of the information or disclosures required for a complete presentation in accordance with GAAP.  Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2012 filed with the Securities and Exchange Commission (“SEC”). The results for interim periods are not necessarily indicative of the results for a full fiscal year.

 

**Principles of Consolidation**

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and entities where the Company has a controlling equity interest. Intercompany balances and transactions have been eliminated in consolidation.

 

**Reclassifications**

 

Certain items previously reported in prior period financial statement captions have been conformed to agree with current presentation.

 

**Use of Estimates**

 

The preparation of the condensed consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.  Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment; valuation of receivables, inventories and goodwill; recognition of revenue and loss contract reserves under the percentage-of-completion method; assets and obligations related to employee benefit plans; asset retirement obligations; income tax valuation; and self-insurance reserves.  Actual results could differ from those estimates.

 

**Cash and Cash Equivalents and Restricted Cash**

 

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash balances were restricted in certain consolidated subsidiaries for bond sinking fund and insurance requirements as well as collateral on outstanding letters of credit or rentals.

 

In May 2012, the Company started using a cash pooling arrangement with a single financial institution with specific provisions for the right to offset positive and negative cash balances.  Accordingly, we classify net aggregate bank overdraft positions as

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

other obligations within the current maturities of long-term debt as of November 30, 2012, based on the short-term nature of these positions.

 

**Trade Accounts Receivable**

 

Trade accounts receivable, less allowance for doubtful accounts, are recorded at the invoiced amount plus service charges related to past due accounts.  The Company’s total accounts receivable consisted of the following:

 
| **(In thousands)**                              | ** ** | **November 30,   2012** | ** ** | **February 29,   2012** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                                 |       |                         |       |                         |       |
| Costs   and estimated earnings in excess of billings |       | $                            | 11,844     |                         | $          | 14,570 |   |
| Trade                                                |       | 97,447                       |       | 60,172                       |       |
| Retainages                                           |       | 4,944                        |       | 5,358                        |       |
|                                                 |       | 114,235                      |       | 80,100                       |       |
| Allowance   for doubtful accounts                    |       | (3,956                       | )          | (3,259                       | )          |
| Accounts   receivable, net                           |       | $                            | 110,279    |                         | $          | 76,841 |   |

 

Costs and estimated earnings in excess of billings relate to uncompleted contracts and amounts not processed by governmental agencies.  State and local agencies often require several approvals to process billings or payments and this may cause a lag in payment times.

 

**Concentrations of Credit Risk**

 

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash and temporary investments with high-quality financial institutions. At times, such balances and investments may be in excess of Federal Deposit Insurance Corporation insured limits; however the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk to its cash and cash equivalents. The Company conducts business with various governmental entities within the Commonwealth of Pennsylvania. These entities include the Pennsylvania Department of Transportation, the Pennsylvania Turnpike Commission and various townships, municipalities, school districts and universities within Pennsylvania. The Company has not experienced any material losses with these governmental agencies and does not believe it is exposed to any significant credit risk related to its outstanding accounts receivable.

 

**Inventories**

 

Inventories are stated at the lower of cost or market.  Cost is determined using either first-in, first-out (“FIFO”) or weighted average method based on the applicable category of inventories.

 

The Company’s total inventory consists of the following:

 
| **(In thousands)**                      | ** ** | **November 30,   2012** | ** ** | **February 29,   2012** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                         |       |                         |       |                         |       |
| Crushed   stone, agricultural lime, and sand |       | $                            | 82,045     |                         | $          | 84,016 |   |
| Raw   materials                              |       | 8,901                        |       | 9,400                        |       |
| Parts,   tires, and supplies                 |       | 11,724                       |       | 11,313                       |       |
| Concrete   blocks                            |       | 3,945                        |       | 4,547                        |       |
| Building   materials                         |       | 4,018                        |       | 3,982                        |       |
| Safety   equipment                           |       | 16,076                       |       | 16,901                       |       |
| Other                                        |       | 3,181                        |       | 2,036                        |       |
|                                         |       | $                            | 129,890    |                         | $          | 132,195 |   |

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

**Property, Plant and Equipment**

 

Property, plant and equipment are carried at cost.  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 Company’s property, plant and equipment consist of the following:

 
| **(In thousands)**                            | ** ** | **November 30,   2012** | ** ** | **February 29,   2012** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                               |       |                         |       |                         |       |
| Limestone   and sand acreage                       |       | $                            | 144,931    |                         | $          | 142,034 |   |
| Land,   buildings and building improvements        |       | 99,553                       |       | 96,504                       |       |
| Crushing,   prestressing, and manufacturing plants |       | 322,873                      |       | 310,130                      |       |
| Contracting   equipment, vehicles and other        |       | 298,256                      |       | 281,543                      |       |
| Construction   in progress                         |       | 7,007                        |       | 8,829                        |       |
| Property,   plant and equipment                    |       | 872,620                      |       | 839,040                      |       |
| Less:   Accumulated depreciation and depletion     |       | (498,812                     | )          | (467,466                     | )          |
| Property,   plant and equipment, net               |       | $                            | 373,808    |                         | $          | 371,574 |   |

 

Repairs and maintenance are charged to operations as incurred. Renewals or betterments, which materially add to the useful lives of property and equipment, are capitalized.

 

Depreciation expense was $12.5 million and $10.7 million for three months ended November 30, 2012 and 2011, respectively.  Depreciation expense was $35.4 million and $33.3 million for the nine months ended November 30, 2012 and 2011, respectively.  Included in the contracting equipment, vehicles and other asset category above are capital leases with a cost basis of $28.0 million and $25.8 million as of November 30, 2012 and February 29, 2012, respectively.

 

**Goodwill and Other Intangible Assets**

 

*Goodwill*

 

The Company tests goodwill for impairment on an annual basis or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  There were no changes to the carrying value of goodwill during the nine months ended November 30, 2012.  Management continues to monitor the impact of market and economic events to determine if it is more likely than not that the carrying value of these reporting units has been impaired.  The timing of a sustained recovery in the construction industry may have a significant effect on the fair value of our reporting units. A decrease in the estimated fair value of one or more of the Company’s reporting units as a result of changes in future earnings, interest rates, market trends and/or cash flows could result in the recognition of goodwill impairment.

 

In January 2013, we began the process of completing our annual goodwill impairment assessment.  During our initial review, we identified indications that there may be significant decreases in the fair values of our Traffic Safety Services and Equipment reporting unit with goodwill of $5.8 million and a reporting unit in our Construction Materials segment with goodwill of $68.4 million as of November 30, 2012.  As of the date of issuance of this Quarterly Report on Form 10-Q, we have not completed our annual impairment assessment and we currently do not expect an impairment charge.

 

*Other Intangible Assets*

 

The Company’s other intangible assets consist of the following:

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 
| **(In thousands)**            | ** ** | **Gross   Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Net   Carrying   Amount   February 29,   2012** | ** ** | **Current   Impairment** | ** ** | **Current   Amortization** | ** ** | **Net   Carrying   Amount   November 30,   2012** | ** ** |
|------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|--------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|
|                               |       |                          |       |                           |       |                                                   |       |                     |       |                       |       |                                                   |       |
| Amortizable   intangible assets    |       |                          |       |                           |       |                                                   |       |                     |       |                       |       |                                                   |       |
| Customer   relationships           |       | $                             | 12,000     |                           | $          | (2,400                                                 | )          | $                        | 9,600      |                       | $          | —                                                 |       | $ | (450 | ) | $ | 9,150 |   |
| Technology                         |       | 600                           |       | (160                           | )          | 440                                                    |       | —                   |       | (30                        | )          | 410                                                    |       |
|                               |       | 12,600                        |       | (2,560                         | )          | 10,040                                                 |       | —                   |       | (480                       | )          | 9,560                                                  |       |
| Nonamortizable   intangible assets |       |                          |       |                           |       |                                                   |       |                     |       |                       |       |                                                   |       |
| Trademarks                         |       | 16,304                        |       | —                         |       | 16,304                                                 |       | (300                     | )          | —                     |       | 16,004                                                 |       |
| Total   other intangible assets    |       | $                             | 28,904     |                           | $          | (2,560                                                 | )          | $                        | 26,344     |                       | $          | (300                                                   | )          | $ | (480 | ) | $ | 25,564 |   |

 

Other intangible assets consist of technology, customer relationships and trademarks acquired in previous acquisitions. The technology is being amortized over a straight-line basis of 15 years. The customer relationships are being amortized on a straight-line basis over 20 years. The trademarks are considered to have indefinite-life and are not amortized, but tested for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company performs its annual impairment analysis of intangible assets as of fiscal year end. The Company uses a variety of methodologies in conducting the impairment assessment of its intangible assets, including, but not limited to, discounted cash flow models, which are based on the assumptions we believe hypothetical marketplace participants would use. For intangible assets, other than goodwill, if the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess.

 

We recorded a $1.1 million impairment of our Traffic Safety Services and Equipment reporting unit’s trademark in the fourth quarter of the fiscal year ended February 29, 2012 due to a decline in revenues and a $0.3 million impairment of our Traffic Safety Services and Equipment reporting unit’s trademark in the  quarter ended August 31, 2012 due to changes in underlying assumptions.  The remaining balance of our Traffic Safety Services and Equipment reporting unit’s trademark is $5.1 million as of November 30, 2012.  The timing of a sustained recovery in the construction industry, our ability to meet our expected operating results and changes in interest rates requires us to continuously evaluate the fair value of our trademarks.  A decrease in the estimated fair value of our trademarks could result in the recognition of additional impairments.

 

Amortization of intangible assets for each of the nine months ended November 30, 2012 and November 30, 2011 was $0.5 million.

 

**Other Assets**

 

The Company’s long term other assets consist of the following:

 
| **(In thousands)**                                                                                              | ** ** | **November 30,   2012** | ** ** | **February 29,   2012** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                                                                                                 |       |                         |       |                         |       |
| Deferred   financing fees (less current portion of $3,658 at November 2012 and   $4,882 at February 2012)  |       | $                            | 15,438     |                         | $          | 10,409 |   |
| Cash   value of life insurance (net of loans of $0 at November 2012 and $3,000   at February 2012)         |       | 4,019                        |       | 1,006                        |       |
| Capitalized   software (net of accumulated amortization $974 at November 2012 and $160   at February 2012) |       | 9,594                        |       | 11,719                       |       |
| Deferred   stripping costs                                                                                           |       | 3,848                        |       | 2,994                        |       |
| Other                                                                                                                |       | 2,870                        |       | 3,232                        |       |
| Total   other assets                                                                                                 |       | $                            | 35,769     |                         | $          | 29,360 |   |

 

As part of our debt refinancing transactions on March 15, 2012, we incurred and capitalized $15.0 million of deferred financing fees.  The Company recognized a loss on debt retirement of approximately $6.4 million related to the write-off of unamortized debt issuance costs.  The write-off of the debt issuance costs were recorded as a component of net interest expense.

 

During the second fiscal quarter ended August 31, 2012, the Company recorded a $1.3 million reduction to capitalized software related to our new ERP system.

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

**Asset Retirement Obligations**

 

The change in the asset retirement obligations for the nine months ended November 30, 2012 consists of the following:

 
| **(In thousands)**             | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
|                                |       |       |       |
| Balance   at February 29, 2012 |       | $          | 11,360     |   |
| Accretion   expense                 |       | 482        |       |
| Change   in estimated obligations   |       | 6,420      |       |
| Liabilities   settled               |       | (4,123     | )          |
| Balance   at November 30, 2012 |       | $          | 14,139     |   |

 

**New Accounting Standards**

 

*Recently Issued Accounting Standards*

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU requires companies to disclose both gross and net information about financial instruments that have been offset on the consolidated balance sheet. This ASU will be effective commencing with the three months ending May 31, 2013. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

 

In July 2012, the FASB issued ASU No. 2012-02, *Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment*. This ASU gives companies the option to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If it is determined that it is more likely than not the indefinite-lived intangible asset is impaired, a quantitative impairment test is required. However, if it is concluded otherwise, the quantitative test is not necessary. This ASU will be effective commencing with the three months ending May 31, 2013. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

 

*Recently Adopted Accounting Standards*

 

In May, 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”.  The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRSs”) and change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, it is not intended for the amendments to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. We adopted this standard on March 1, 2012, which did not have a material impact on the consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update also eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  We adopted this standard on March 1, 2012, which did not have a material impact on the consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08 “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment” which amends the goodwill impairment testing guidance in ASC 350-20, “Goodwill.” Under the amended standard, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  We adopted this standard on March 1, 2012, which did not have a material impact on the consolidated financial statements.

 

**2.****             ****Risks and Uncertainties**

 

Our business is heavily impacted by several factors which are outside the control of management, including the overall health of the economy, the level of commercial and residential construction, the level of federal, state and local publicly funded construction projects and seasonal variations generally attributable to weather conditions.  These factors impact the amount and timing of our revenues and our overall performance.

 

On March 15, 2012, the Company sold $265.0 million aggregate principal amount of its 13.0% senior secured notes due 2018 (the “Secured Notes”) at par and entered into a new $170.0 million asset-based secured revolving credit facility (the “ABL Facility”) with Manufacturers and Traders Trust Company (“M&T”).  The Company used the net proceeds of this issuance of Secured Notes and borrowings under the ABL Facility to repay and terminate all of its outstanding indebtedness under its second amended and restated credit agreement dated January 11, 2008 (the “Credit Agreement”) and certain other debt.  See further discussion of the ABL Facility in Note 4, “Long-Term Debt - *Asset-Based Loan Facility*”.

 

The Company was unable to timely file its Form 10-K, its first quarter Form 10-Q, its second quarter Form 10-Q and its third quarter Form 10-Q as a result of complications in the ERP implementation and the material weaknesses in the Company’s internal control over financial reporting previously reported in the Company’s filings with the SEC.  The ABL Facility required the Company’s audited financial statements to be issued by May 29, 2012 and the Company’s first quarter Form 10-Q to be issued by July 16, 2012, and the Company’s second quarter Form 10-Q to be issued by October 15, 2012.  The indenture for the Secured Notes and the indenture for the Company’s $250.0 million 11% senior notes due 2018 (the “Notes”) required financial statements to be issued within 15 days of these aforementioned dates.  As a result, the Company obtained an amendment of the ABL Facility on September 7, 2012 and extensions to file its Form 10-K and first and second quarter Form 10-Q on September 28, 2012, November 9, 2012 and December 7, 2012. The Company filed its Form 10-K on December 17, 2012 and its Form 10-Q for the first quarter on December 26, 2012.  Also, the first amendment to the ABL Facility required the Company to develop a Profit and Liquidity Enhancement Plan and a Reporting Enhancement Plan (together, the “Plans”) as defined in the amendment, by October 1, 2012 and October 15, 2012, respectively. The Company submitted the Plans to the bank in accordance with the first amendment. The first amendment also allows M&T, in the event they cannot syndicate the ABL Facility by December 15, 2012, to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, certain covenants and the interest and fees payable. M&T has not syndicated the ABL Facility. However, there have been no further modifications to the terms of the ABL Facility.

 

As part of the first amendment entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio.  If the calculation of the Fixed Charge Coverage Ratio was less than 1.0 to 1.0, the borrowing base would be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property, plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus, (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.

 

On September 5 and 6, 2012 the Company received notices of default from the trustee under the Secured Notes and the Notes (as defined in Note 4, “Long-Term Debt”), respectively. The notices of default were related to the Company’s inability to provide the trustee with copies of the Company’s Annual Report on Form 10-K for the year ended February 29, 2012 and Quarterly Report on Form10-Q for the period ended May 31, 2012 in a timely manner as required by the underlying indentures. In accordance with the terms and conditions of the underlying indentures, the Company had 120 days from the date of those notices to cure such default by complying with its reporting requirements and related filings.  The Company filed its Annual Report on Form 10-K for the year ended February 29, 2012 and its Quarterly Report on Form 10-Q for the period ended May 31, 2012 within the 120 day period and therefore has cured such defaults under the indentures.

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

On January 14, 2013, the Company received a notice of default from the trustee under the indentures for the Secured Notes and Notes due to the Company’s  inability to provide its Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 in compliance with the indentures.  We filed our Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 within the 120 day period and therefore cured such default under the indentures.

 

On February 14, 2013, the Company received an additional extension of time to issue its Quarterly Report on Form 10-Q for the third quarter of fiscal 2013 to April 1, 2013.  There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes and Secured Notes.

 

This Quarterly Report on Form 10-Q for the third fiscal quarter ended November 30, 2012 was due on January 14, 2013. We have not received a notice of default from the trustee under the indentures for the Notes or Secured Notes.

 

**3.****             ****Accrued Liabilities**

 

Accrued liabilities consisted of the following:

 
| ** **                                                                    | ** ** | **November 30,** | ** ** | **February 29,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In thousands)**                                                       | ** ** | **2012**              | ** ** | **2012**              | ** ** |
|                                                                          |       |                  |       |                  |       |
| Payroll and vacation                                                          |       | $                     | 7,851      |                  | $          | 8,496 |   |
| Contract expenses                                                             |       | 796                   |       | 518                   |       |
| Withholding taxes                                                             |       | 1,786                 |       | 2,862                 |       |
| Interest                                                                      |       | 9,384                 |       | 14,055                |       |
| Insurance                                                                     |       | 17,398                |       | 18,353                |       |
| Deferred acquisition   liability                                              |       | 3,000                 |       | 3,610                 |       |
| Billings in excess of   costs and estimated earnings on uncompleted contracts |       | 2,137                 |       | 255                   |       |
| Other                                                                         |       | 1,487                 |       | 3,482                 |       |
| Total   accrued liabilities                                                   |       | $                     | 43,839     |                  | $          | 51,631 |   |

 

**4.****             ****Long-Term Debt**

 
| ** **                              | ** ** | **November 30,** | ** ** | **February 29,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In thousands)**                 | ** ** | **2012**              | ** ** | **2012**              | ** ** |
| ** **                              | ** ** | ** **            | ** ** | ** **            | ** ** |
| Land, equipment and   other obligations |       | $                     | 23,374     |                  | $          | 23,016 |   |
| First lien term loan   A & B   |       | —                |       | 145,383               |       |
| First lien revolving   credit facility  |       | —                |       | 100,113               |       |
| ABL Facility                            |       | 35,673                |       | —                |       |
| Notes due 2018                          |       | 250,000               |       | 250,000               |       |
| Secured notes due 2018                  |       | 276,925               |       | —                |       |
| Obligations under   capital leases      |       | 8,833                 |       | 10,501                |       |
| Total   debt                            |       | 594,805               |       | 529,013               |       |
| Less: Current portion                   |       | (16,219               | )          | (7,538                | )          |
| Total   long-term debt                  |       | $                     | 578,586    |                  | $          | 521,475 |   |

 

*Refinancing*

 

On March 15, 2012, the Company completed the sale of $265.0 million of its 13.0% Secured Notes due 2018 at par.  In connection with the sale of the Secured Notes, the Company also entered into the ABL Facility.  The Company utilized the proceeds from the sale of the Secured Notes and borrowings under the ABL Facility to repay all amounts outstanding under, and terminate, the Credit Agreement and certain other debt.  See Note 2, “Risks and Uncertainties” and Note 10, “Subsequent Events” for additional discussion of the Secured Notes, the ABL Facility and details on ABL Facility amendments received and notice of default received from the trustee.  The Company classified the components of the debt refinanced on March 15, 2012 as long-term in the condensed consolidated balance sheet as of February 29, 2012.

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

*Land, equipment and other obligations*

 

The Company has various notes, mortgages and other financing arrangements resulting from the purchase of principally land and equipment.  All loans provide for at least annual payments, which include interest ranging up to 10.0% per annum.  Principally all loans are secured by the land and equipment acquired.

 

Obligations include three revenue bonds to different industrial development authorities with counties in Pennsylvania with a total amount outstanding of $5.8 million as of November 30, 2012 and four revenue bonds with a total amount outstanding of $10.6 million as of February 29, 2012. The effective interest rate on the industrial development bonds ranged from 0.30% to 0.41% for the three months ended November 30, 2012 and 0.28% to 0.46% for the year ended February 29, 2012.  The Company prepaid $3.8 million of industrial development bonds during the first quarter of fiscal year 2012 with the proceeds from an unsecured borrowing which was subsequently refinanced on March 15, 2012.

 

Obligations include the cash overdrafts liability of $5.5 million; as disclosed in Note 1, “Nature of Operations and Summary of Significant Accounting Policies - Cash and Cash Equivalents and Restricted Cash”; which is included within the current portion of long-term debt as of November 30, 2012.

 

*First lien term loan A & B*

 

The Company repaid all borrowings under the first lien term loan A & B and terminated the associated Credit Agreement on March 15, 2012.

 

*First lien revolving credit facility*

 

The Company repaid all borrowings under the first lien revolving credit facility and terminated the associated Credit Agreement on March 15, 2012.

 

*Asset-Based Loan Facility*

 

Original Terms

 

On March 15, 2012, the Company entered into a credit agreement for the ABL Facility (the “ABL Facility Agreement”) with M&T, as the issuing bank, a lender, the swing lender, the agent and the arranger. The ABL Facility provides for maximum borrowings on a revolving basis of up to $170.0 million from time to time for general corporate purposes, including working capital.  The ABL Facility includes a $15.0 million letter of credit sub-facility and a $20.0 million swing line sub-facility for short-term borrowings. The ABL Facility will mature on March 15, 2017.  At November 30, 2012, the Company classified borrowings under the ABL Facility as long-term due to its ability to maintain such borrowings on a long term basis.  As of November 30, 2012, the weighted average interest rate on the ABL facility was 4.0% and the borrowing base was $130.6 million.

 

Borrowings under the ABL Facility (except swing line loans) bear interest at a rate per annum equal to, at the Company’s option, either (a) a base rate or (b) a LIBOR rate, in each case plus an applicable margin.  Swing line loans bear interest at the base rate plus the applicable margin. Pricing on the ABL Facility is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. LIBOR margins for the ABL Facility range from 2.50% to 3.50% and base rate margins range from 0.50% to 1.50%.  The ABL Facility also contains a commitment fee that is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. The commitment fee ranges from 0.25% to 0.63%.  From the commencement of the ABL Facility Agreement until September 7, 2012 (date of amendment, discussed below), the LIBOR margin was 2.75%, the base rate margin was 0.75% and the commitment fee was 0.50%.

 

Borrowings under the ABL Facility are guaranteed by all of the Company’s subsidiaries that guarantee the Secured Notes and the Notes and are secured, subject to certain permitted liens, by first-priority liens on the ABL Priority Collateral and by second-priority liens on the collateral securing the Secured Notes on a first-priority basis, except for certain real property.

 

Covenants

 

The ABL Facility provides that if excess availability is less than the greater of (i) $25.0 million or (ii) 15% of the lesser of the commitments and the borrowing base, the Company must comply with a minimum fixed charge coverage ratio test of at least 

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

1.0 to 1.0 for the immediately preceding four fiscal quarters or twelve consecutive months, as applicable. In addition, the ABL Facility includes affirmative and negative covenants that, subject to significant exceptions, limit the ability of the Company and the Guarantors 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) issuances of equity that have mandatory redemption or put rights prior to the maturity of the ABL Facility and (viii) providing negative pledges to third parties.  As of November 30, 2012 the Company was in compliance with these affirmative and negative covenants.

 

Amendment of ABL Facility

 

The ABL Facility contained a covenant that required the Company to deliver its fiscal year 2012 annual financial statements to the lender by May 29, 2012.  On September 7, 2012, the Company entered into the first amendment to the ABL Facility, and subsequent letters on September 28, 2012, November 9, 2012, December 7, 2012 and February 14, 2013 to change the required delivery date of the audited February 29, 2012 financial statements and the required delivery date of its first and second quarter results and financial statements to December 15, 2012, January 1, 2013, and February 28, 2013, respectively.

 

Availability under the ABL Facility is restricted to a borrowing base formula. As part of the first amendment entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio.  If the calculation of the Fixed Charge Coverage Ratio was less than 1.0 to 1.0, the borrowing base would be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.

 

The first amendment also allows M&T, in the event M&T is unable to reduce its final participation in the ABL Facility to no more than $75.0 million during the primary syndication of the ABL Facility by December 15, 2012, to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, and certain covenants and the interest and fees payable.  M&T has not syndicated the ABL Facility. However, there have been no further modifications of the terms of the ABL Facility.

 

On February 14, 2013, the Company received an additional extension of time to issue this Quarterly Report on Form 10-Q for the third quarter of fiscal 2013 to April 1, 2013.  There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes and Secured Notes.

 

*Notes due 2018*

 

In August 2010, the Company sold $250.0 million aggregate principal amount of Notes at par value.  Interest on the Notes is payable semi-annually in cash in arrears on March 1 and September 1 of each year.  The proceeds from the issuance of the Notes were used to pay down debt.

 

*Secured Notes due 2018*

 

Interest on the Secured Notes is initially payable at 13.0% per annum, semi-annually in arrears on March 15 and September 15.  The Company will make each interest payment to the holders of record of the Secured Notes as of the immediately preceding March 1 and September 1. The Company 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, the Company may, at its 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.  At November 30, 2012, PIK interest was $17.1 

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

million ($11.9 million was recorded as an increase to the Secured Notes and $5.2 million was recorded as a long-term obligation in Other liabilities).

 

With respect to any interest payment payable after March 15, 2017, interest will be payable solely in cash. In addition, at the beginning of and with respect to each 12-month period that begins on March 15, 2013, March 15, 2014 and March 15, 2015, the interest rate on the Secured Notes as of such date shall permanently increase by an additional 1.0% per annum (an ‘‘Interest Rate Increase’’) unless the Company delivers a written notice to the Trustee of the Company’s election for such 12-month period to either (x) alter the manner of interest payment on the Secured Notes going forward by increasing the Cash Interest Portion and decreasing the PIK Interest Portion in each case in effect with respect to the immediately preceding interest period for which any PIK Interest was paid prior to each such election by, in each case, 1.0% per annum or (y) pay interest on the Secured Notes for such 12-month period entirely in cash (a ‘‘12-Month Cash Election’’). In the event of a 12-Month Cash Election for any 12-month period prior to March 15, 2017, the interest rate on the Secured Notes applicable for such 12-month period shall be 1.0% less than the total interest rate applicable to the Secured Notes in effect with respect to the immediately preceding interest period for which any PIK Interest was paid. Any Interest Rate Increase shall be affected by increasing the PIK Interest Portion in effect with respect to the immediately preceding interest period for which any PIK Interest was paid prior to each such Interest Rate Increase. If the Company makes a 12-Month Cash Election for and in respect of the 12-month period beginning on March 15, 2016, the same interest rate will apply for and in respect of the 12-month period beginning on March 15, 2017.  The additional 1.0% per annum Interest Rate Increase will only apply to the three consecutive annual periods beginning March 15, 2013.

 

At any time prior to March 15, 2015, the Company may redeem at its option up to 35% of the Secured Notes with the net cash proceeds from certain public equity offerings at a redemption price equal to 113.0% of the principal amount outstanding, plus accrued and unpaid interest. The Company may also redeem some or all of the Secured Notes at any time prior to March 15, 2015 at a redemption price equal to 100.0% of the principal amount of the outstanding Secured Notes, plus accrued and unpaid interest, plus a ‘‘make-whole’’ premium. On and after March 15, 2015, the Secured Notes will be redeemable, in whole or in part, at the redemption prices specified as follows:

 
| **Year**   | ** ** | **Percentage** | ** ** |
|------------|------------|----------------|------------|
| ** ** | ** ** | ** **     | ** ** |
| 2015       |       | 106.50         | %          |
| 2016       |       | 103.25         | %          |
| 2017       |       | 100.00         | %          |

 

In addition, the Company may be required to make an offer to purchase the Secured Notes upon the sale of certain assets or upon a change of control. The Company will be required to redeem certain portions of the Secured Notes for tax purposes at the end of the first accrual period ending after the fifth anniversary of the Secured Notes issuance and each accrual period thereafter.

 

The Secured Notes are guaranteed on a joint and several basis by the Company’s existing and future domestic subsidiaries (the “Guarantors” as described in Note 9, “Condensed Issuer, Guarantor and Non Guarantor Financial Information”) that currently guarantee the Company’s Notes and the ABL Facility. The Secured Notes and related guarantees are senior secured obligations of the Company and the Guarantors that rank equally in right of payment with all existing and future senior debt of the Company and the Guarantors, including the Notes and ABL Facility, and senior to all existing and future subordinated debt of the Company and Guarantors.  The Secured Notes and related guarantees are secured, subject to certain permitted liens and except for certain excluded assets, by first-priority liens on substantially all of the Company’s and Guarantors’ personal property and certain owned and leased real property and second-priority liens on certain real property and substantially all of the Company’s and Guarantors’ accounts receivable, inventory and deposit accounts and related assets and proceeds of the foregoing that secure the ABL Facility on a first-priority basis (the “ABL Priority Collateral”).

 

The indenture for the Secured Notes contains restrictive covenants that limit the Company’s ability and the ability of its subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with affiliates.

 

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Table of Contents

 

**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

In accordance with the indenture for the Secured Notes, the Company was required to file a registration statement with the Securities and Exchange Commission and consummate a registered offer to exchange the Secured Notes for new Secured Notes having terms substantially identical in all material respects to the Secured Notes by March 11, 2013.  We have not filed the registration statement or completed the exchange offer.  Due to the failure to consummate the exchange offer within the required time period, the interest rate on the Secured Notes will increase by 0.25% per annum for the first 90-day period following the default and by an additional 0.25% per annum with respect to each subsequent 90-day period, up to a maximum additional rate of 1.0% per annum until such exchange offer is completed or the Secured Notes are redeemed.

 

*Obligations under capital leases*

 

The Company has various arrangements for the lease of machinery and equipment which qualify as capital leases. These arrangements typically provide for monthly payments, some of which include residual value guarantees if the Company were to terminate the arrangement during certain specified periods of time for each underlying asset under lease.

 

**5.****             ****Income Taxes**

 

The Company’s tax provision and the corresponding effective tax rate are based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. For interim financial reporting the Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly tax provision in accordance with the anticipated annual rate. As the year progresses, the Company refines the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to the Company’s expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining the Company’s effective interim tax rate and in evaluating its tax positions.

 

The Company’s effective income tax rate was 43.8% and 48.3% for the three months ended November 30, 2012 and 2011, respectively.  The Company’s effective tax rate was 41.0% and 45.5% for the nine months ended November 30, 2012 and 2011, respectively.  The principal factor affecting the comparability of the effective income tax rate for the respective periods is a result of increased projected pre-tax book loss of the Company for the year ended February 28, 2013, when compared to projected pre-tax book loss of the Company for the year ended February 29, 2012. When pre-tax book income is projected for the year, favorable permanent items can decrease the Company’s effective tax rate well below the statutory rate of 35%.  In the case where a pre-tax book loss is projected for the year, favorable permanent differences will increase this loss for tax purposes, and subsequently increase the effective tax rate projected for the year.  The substantial increase in the estimated full year pre-tax book loss when compared to the prior period was the primary driver of the decrease in tax expense.  The significant pre-tax loss reduces the impact of permanent adjustments which did not materially change period over period.  The state tax impact on the effective tax rate was minimal because of anticipated valuation allowance needs for deferred tax assets relating to state losses originating in the current period.  Our income tax benefits for the three and nine months ended November 30, 2012 are based on an estimated annual effective income tax rate of 36.7%.  Included in the income tax benefits for these periods is a discrete out-of-period tax benefit of $1.2 million due to differences in our state apportionment calculation when we finalized our tax returns for the year ended February 29, 2012 in November 2012.  This out-of-period adjustment is not material to the prior or current condensed consolidated financial statements.

 

The cash taxes paid were not material for the three and nine months ended November 30, 2012 and November 30, 2011, respectively, primarily as a result of the net operating losses.

 

**6.****             ****Retirement and Benefit Programs**

 

Substantially all employees are covered by a defined contribution plan, a defined benefit plan, a collectively bargained multiemployer plan, or a noncontributory profit sharing plan.  The expense associated with these programs, excluding defined benefit plans, was $2.3 million for the three months ended November 30, 2012 and 2011, and $6.2 million for the nine months ended November 30, 2012 and 2011.

 

The Company has two defined benefit pension plans covering certain union employees covered by labor union contracts. The benefits are based on years of service. Actuarial gains and losses are generally amortized over the average remaining service life of the Company’s active employees.  Net periodic pension expense recognized for the three and nine months ended November 30, 2012 and 2011, was as follows:

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 
| ** **                                  | ** ** | **Three Months    Ended November 30,** | ** ** | **Nine Months    Ended November 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(In thousands)**                     | ** ** | **2012**                                                   | ** ** | **2011**                                                  | ** ** | **2012** | ** ** | **2011** | ** ** |
| **Components of net periodic benefit cost** |       |                                                       |       |                                                      |       |   |   |   |   |
| Service   cost                              |       | $                                                          | 68         |                                                      | $          | 53 |   | $ | 203 |   | $ | 162 |   |
| Interest   cost                             |       | 99                                                         |       | 109                                                       |       | 297 |   | 329 |   |
| Expected   return on plan assets            |       | (146                                                       | )          | (153                                                      | )          | (439 | ) | (463 | ) |
| Amortization   of prior service cost        |       | 15                                                         |       | 15                                                        |       | 45 |   | 46 |   |
| Recognized   net actuarial loss             |       | 62                                                         |       | 29                                                        |       | 186 |   | 87 |   |
| Total   pension expense                     |       | $                                                          | 98         |                                                      | $          | 53 |   | $ | 292 |   | $ | 161 |   |

 

The Company made contributions to the defined benefit pension plans of $0.2 million during the nine months ended November 30, 2012 and expects to make additional contributions of $0.1 million in the remainder of fiscal year 2013.

 

**7.****             ****Commitments and Contingencies**

 

In the normal course of business, the Company has commitments, lawsuits, claims and contingent liabilities. The ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, statement of comprehensive income (loss) or liquidity.

 

The Company maintains a captive insurance company, Rock Solid Insurance Company (“Rock Solid”), for workers’ compensation (non-Pennsylvania employees), general liability, auto, health, and property coverage. On April 8, 2011, Rock Solid entered into a Collateral Trust Agreement with an insurer to eliminate a letter of credit that was required to maintain coverage of the deductible portion of its liability coverage.  The total amount of collateral provided in the arrangement was $8.8 million and is recorded as part of restricted cash as of November 30, 2012 and February 29, 2012 in our condensed consolidated balance sheets.   Reserves for retained losses within this captive, which are recorded in accrued liabilities in our condensed consolidated balance sheets, were approximately $8.5 million and $9.7 million as of November 30, 2012 and February 29, 2012, respectively.  Exposures for periods prior to the inception of the captive are covered by pre-existing insurance policies.  Other accrued amounts included as insurance, which mostly relates to worker’s compensation, included in Note 3, “Accrued Liabilities” totaled $8.7 million as of November 30, 2012 and February 29, 2012.

 

**8.****             ****Segment Reporting**

 

The Company reports information about its operating segments using the “management approach,” which is based on the way management organizes and reports the segments within the organization for making operating decisions and assessing performance to the chief operating decision maker. The Company’s three reportable segments are: (i) construction materials; (ii) heavy/highway construction; and (iii) traffic safety services and equipment.  Almost all activity of the Company is domestic.  Segment information includes both intersegment and certain intrasegment activities.

 

The Company reviews earnings of the segments principally at the operating profit level and accounts for intersegment and certain intrasegment sales at prices that range from negotiated rates to those that approximate fair market value. Segment operating profit consists of revenue less operating costs and expenses. Corporate and unallocated costs include those administrative and financial costs which are not allocated to segment operations and are excluded from segment operating profit.  These costs include corporate administrative functions, unallocated corporate functions and divisional administrative functions.

 

The Company’s segment revenue presentation for the three and nine months ended November 30, 2011 has been revised to conform to the current presentation. The revisions resulted in decreases to heavy/highway construction revenue and eliminations of $11.3 million and $23.0 million for the three and nine months ended November 30, 2011, respectively.  These revisions were made to align with the current management approach related to this segment.

 

The following is a summary of certain financial data for the Company’s operating segments:

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 
| ** **                              | ** ** | **Three Months Ended   November 30,** | ** ** | **Nine Months Ended   November 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                 | ** ** | **2012**                                             | ** ** | **2011**                                            | ** ** | **2012** | ** ** | **2011** | ** ** |
| **Revenue**                             |       |                                                 |       |                                                |       |   |   |   |   |
| Construction   materials                |       | $                                                    | 141,831    |                                                | $          | 161,788 |   | $ | 458,257 |   | $ | 469,826 |   |
| Heavy/highway   construction            |       | 71,969                                               |       | 86,402                                              |       | 234,915 |   | 251,832 |   |
| Traffic   safety services and equipment |       | 21,104                                               |       | 21,155                                              |       | 69,219 |   | 69,015 |   |
| Other   revenues                        |       | 6,735                                                |       | 4,674                                               |       | 13,885 |   | 13,584 |   |
| Segment   totals                        |       | 241,639                                              |       | 274,019                                             |       | 776,276 |   | 804,257 |   |
| Eliminations                            |       | (51,403                                              | )          | (60,132                                             | )          | (167,517 | ) | (176,887 | ) |
| Total   revenue                         |       | $                                                    | 190,236    |                                                | $          | 213,887 |   | $ | 608,759 |   | $ | 627,370 |   |
| ** **                              | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating income (loss)**             |       |                                                 |       |                                                |       |   |   |   |   |
| Construction   materials                |       | $                                                    | 11,621     |                                                | $          | 22,340 |   | $ | 47,710 |   | $ | 60,439 |   |
| Heavy/highway   construction            |       | (3,632                                               | )          | 4,634                                               |       | (1,693 | ) | 5,363 |   |
| Traffic   safety services and equipment |       | 875                                                  |       | 1,366                                               |       | (400 | ) | 4,544 |   |
| Corporate   and unallocated             |       | (6,887                                               | )          | (6,021                                              | )          | (18,576 | ) | (11,830 | ) |
| Total   operating income                |       | $                                                    | 1,977      |                                                | $          | 22,319 |   | $ | 27,041 |   | $ | 58,516 |   |

 
| ** **                                       | ** ** | **Three Months Ended   November 30,** | ** ** | **Nine Months Ended   November 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                          | ** ** | **2012**                                             | ** ** | **2011**                                            | ** ** | **2012** | ** ** | **2011** | ** ** |
| **Product and services revenue**                 |       |                                                 |       |                                                |       |   |   |   |   |
| Construction   materials                         |       |                                                 |       |                                                |       |   |   |   |   |
| Aggregates                                       |       | $                                                    | 50,864     |                                                | $          | 58,677 |   | $ | 163,785 |   | $ | 170,341 |   |
| Hot   mix asphalt                                |       | 57,636                                               |       | 67,417                                              |       | 193,526 |   | 197,795 |   |
| Ready   mixed concrete                           |       | 18,901                                               |       | 18,921                                              |       | 54,785 |   | 52,627 |   |
| Precast/prestressed   structural concrete        |       | 6,698                                                |       | 8,602                                               |       | 21,318 |   | 22,695 |   |
| Masonry   products                               |       | 4,056                                                |       | 4,312                                               |       | 12,684 |   | 13,901 |   |
| Construction   supply centers                    |       | 3,676                                                |       | 3,859                                               |       | 12,159 |   | 12,467 |   |
| Heavy/highway   construction                     |       | 71,969                                               |       | 86,402                                              |       | 234,915 |   | 251,832 |   |
| Traffic   safety services and equipment          |       | 21,104                                               |       | 21,155                                              |       | 69,219 |   | 69,015 |   |
| Other   revenues                                 |       | 6,735                                                |       | 4,674                                               |       | 13,885 |   | 13,584 |   |
| Eliminations                                     |       | (51,403                                              | )          | (60,132                                             | )          | (167,517 | ) | (176,887 | ) |
| Total   revenue                                  |       | $                                                    | 190,236    |                                                | $          | 213,887 |   | $ | 608,759 |   | $ | 627,370 |   |
|                                             |       |                                                 |       |                                                |       |   |   |   |   |
| **Product and services operating income (loss)** |       |                                                 |       |                                                |       |   |   |   |   |
| Construction   materials                         |       |                                                 |       |                                                |       |   |   |   |   |
| Aggregates                                       |       | $                                                    | 5,533      |                                                | $          | 13,174 |   | $ | 22,541 |   | $ | 35,549 |   |
| Hot   mix asphalt                                |       | 5,440                                                |       | 7,221                                               |       | 21,938 |   | 20,394 |   |
| Ready   mixed concrete                           |       | 864                                                  |       | 1,509                                               |       | 3,622 |   | 4,012 |   |
| Precast/prestressed   structural concrete        |       | (445                                                 | )          | (11                                                 | )          | (939 | ) | (461 | ) |
| Masonry   products                               |       | (129                                                 | )          | 212                                                 |       | (592 | ) | 27 |   |
| Construction   supply centers                    |       | 358                                                  |       | 235                                                 |       | 1,140 |   | 918 |   |
| Heavy/highway   construction                     |       | (3,632                                               | )          | 4,634                                               |       | (1,693 | ) | 5,363 |   |
| Traffic   safety services and equipment          |       | 875                                                  |       | 1,366                                               |       | (400 | ) | 4,544 |   |
| Corporate   and unallocated                      |       | (6,887                                               | )          | (6,021                                              | )          | (18,576 | ) | (11,830 | ) |
| Total   operating income                         |       | $                                                    | 1,977      |                                                | $          | 22,319 |   | $ | 27,041 |   | $ | 58,516 |   |

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **November 30,**            | ** ** | **November 30,**           | ** ** |
| **(In thousands)**                          | ** ** | **2012**                         | ** ** | **2011**                        | ** ** | **2012** | ** ** | **2011** | ** ** |
| **Depreciation, depletion and amortization**     |       |                             |       |                            |       |   |   |   |   |
| Construction   materials                         |       | $                                | 5,831      |                            | $          | 5,902 |   | $ | 21,132 |   | $ | 21,916 |   |
| Heavy/highway   construction                     |       | 4,037                            |       | 3,853                           |       | 8,854 |   | 7,234 |   |
| Traffic   safety services and equipment          |       | 2,128                            |       | 1,907                           |       | 5,542 |   | 5,377 |   |
| Corporate   and unallocated                      |       | 1,385                            |       | 494                             |       | 2,976 |   | 1,262 |   |
| Total   depreciation, depletion and amortization |       | $                                | 13,381     |                            | $          | 12,156 |   | $ | 38,504 |   | $ | 35,789 |   |

 

**9.****             ****Condensed Issuer, Guarantor and Non Guarantor Financial Information**

 

The Company’s Secured Notes and Notes are guaranteed by certain subsidiaries.  Except for Rock Solid, NESL, II LLC, and Kettle Creek Partners GP, LLC, all existing consolidated subsidiaries of the Company are 100% owned and provide a joint and several, full and unconditional guarantee of the securities. These entities include Gateway Trade Center Inc., EII Transport Inc., Protections Services Inc., Work Area Protection Corp., SCI Products Inc., ASTI Transportation Systems, Inc., and Precision Solar Controls Inc. (“Guarantor Subsidiaries”).  There are no significant restrictions on the parent Company’s ability to obtain funds from any of the Guarantor Subsidiaries in the form of a dividend or loan.  Additionally, there are no significant restrictions on a Guarantor Subsidiary’s ability to obtain funds from the parent Company or its direct or indirect subsidiaries. Certain other wholly owned subsidiaries and consolidated partially owned partnerships do not guarantee the Secured Notes or the Notes.  These entities include Rock Solid, South Woodbury, L.P., NESL, II LLC, Kettle Creek Partners L.P., and Kettle Creek Partners GP, LLC (“Non Guarantors”).

 

The following condensed consolidating balance sheets, statements of comprehensive income (loss) and statements of cash flows are provided for the Company, all Guarantor Subsidiaries and Non Guarantors. The information has been presented as if the parent Company accounted for its ownership of the Guarantor Subsidiaries and Non Guarantors using the equity method of accounting.

 

The Company revised its condensed consolidating statements of comprehensive income for the three and nine months ended November 30, 2011, to correct certain errors in noncontrolling interest and certain other eliminating adjustments.  The revisions were made to accurately present parent company and eliminating activity in the appropriate columns of the consolidating schedules. For the three and nine months ended November 30, 2011, the revisions resulted in an increase of $0.1 million and a decrease of $0.5 million, respectively, to “Income before income taxes” in the Eliminations columns and an offsetting amounts in the New Enterprise Stone & Lime Co., Inc. columns.  In addition, a decrease of $0.1 million and an increase of $0.5 million for the three and nine months ended November 30, 2011, respectively, were made to “Less: comprehensive income attributable to noncontrolling interest” in the Eliminations columns with offsetting amounts in the Non Guarantors columns.

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

**Condensed Consolidating Balance Sheet at November 30, 2012**

(In thousands)

 
| ** **                                                    | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
| **Assets**                                                    |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current   assets                                              |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Cash   and cash equivalents                                   |       | $                                                                     | 25         |                         | $          | 20                   |       | $                | 8,436      |      | $          | — |   | $ | 8,481 |   |
| Restricted   cash                                             |       | 1,507                                                                 |       | 106                          |       | 8,843                |       | —           |       | 10,456    |       |
| Accounts   receivable                                         |       | 93,254                                                                |       | 17,011                       |       | 14                   |       | —           |       | 110,279   |       |
| Inventories                                                   |       | 113,758                                                               |       | 16,132                       |       | —               |       | —           |       | 129,890   |       |
| Net   investment in lease                                     |       | —                                                                |       | —                       |       | 634                  |       | (634             | )          | —    |       |
| Deferred   income taxes                                       |       | 14,353                                                                |       | 1,040                        |       | —               |       | —           |       | 15,393    |       |
| Other   current assets                                        |       | 7,593                                                                 |       | 1,445                        |       | 25                   |       | —           |       | 9,063     |       |
| Total   current assets                                        |       | 230,490                                                               |       | 35,754                       |       | 17,952               |       | (634             | )          | 283,562   |       |
| Property,   plant and equipment, net                          |       | 351,220                                                               |       | 22,588                       |       | 7,741                |       | (7,741           | )          | 373,808   |       |
| Goodwill                                                      |       | 85,002                                                                |       | 5,845                        |       | —               |       | —           |       | 90,847    |       |
| Other   intangible assets                                     |       | 10,797                                                                |       | 14,767                       |       | —               |       | —           |       | 25,564    |       |
| Investment   in subsidiaries                                  |       | 86,276                                                                |       | —                       |       | —               |       | (86,276          | )          | —    |       |
| Intercompany   receivables                                    |       | 279                                                                   |       | 17,176                       |       | —               |       | (17,455          | )          | —    |       |
| Other   assets                                                |       | 34,549                                                                |       | 1,220                        |       | —               |       | —           |       | 35,769    |       |
| Total   assets                                                |       | $                                                                     | 798,613    |                         | $          | 97,350               |       | $                | 25,693     |      | $          | (112,106 | ) | $ | 809,550 |   |
| **Liabilities and Equity**                                    |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current   liabilities                                         |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current   maturities of long-term debt                        |       | $                                                                     | 16,052     |                         | $          | —               |       | $                | 801        |      | $          | (634 | ) | $ | 16,219 |   |
| Accounts   payable - trade                                    |       | 24,673                                                                |       | 2,221                        |       | 158                  |       | —           |       | 27,052    |       |
| Accrued   liabilities                                         |       | 30,692                                                                |       | 4,228                        |       | 8,919                |       | —           |       | 43,839    |       |
| Total   current liabilities                                   |       | 71,417                                                                |       | 6,449                        |       | 9,878                |       | (634             | )          | 87,110    |       |
| Intercompany   payables                                       |       | 17,176                                                                |       | —                       |       | 279                  |       | (17,455          | )          | —    |       |
| Long-term   debt, less current maturities                     |       | 571,592                                                               |       | —                       |       | 6,994                |       | —           |       | 578,586   |       |
| Obligations   under capital leases, less current installments |       | 7,741                                                                 |       | —                       |       | —               |       | (7,741           | )          | —    |       |
| Deferred   income taxes                                       |       | 72,599                                                                |       | 10,631                       |       | —               |       | —           |       | 83,230    |       |
| Other   liabilities                                           |       | 29,119                                                                |       | 1,024                        |       | —               |       | —           |       | 30,143    |       |
| Total   liabilities                                           |       | 769,644                                                               |       | 18,104                       |       | 17,151               |       | (25,830          | )          | 779,069   |       |
| Equity                                                        |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| New   Enterprise Stone & Lime Co., Inc. equity  |       | 28,969                                                                |       | 79,246                       |       | 7,030                |       | (86,276          | )          | 28,969    |       |
| Noncontrolling   interest                                     |       | —                                                                |       | —                       |       | 1,512                |       | —           |       | 1,512     |       |
| Total   equity                                                |       | 28,969                                                                |       | 79,246                       |       | 8,542                |       | (86,276          | )          | 30,481    |       |
| Total   liabilities and equity                                |       | $                                                                     | 798,613    |                         | $          | 97,350               |       | $                | 25,693     |      | $          | (112,106 | ) | $ | 809,550 |   |

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

**Condensed Consolidating Balance Sheet at February 29, 2012**

(In thousands)

 
| ** **                                                    | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
| **Assets**                                                    |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current   assets                                              |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Cash   and cash equivalents                                   |       | $                                                                     | 7,106      |                         | $          | 476                  |       | $                | 7,450      |      | $          | — |   | $ | 15,032 |   |
| Restricted   cash                                             |       | 1,379                                                                 |       | 102                          |       | 8,841                |       | —           |       | 10,322    |       |
| Accounts   receivable                                         |       | 61,891                                                                |       | 14,933                       |       | 17                   |       | —           |       | 76,841    |       |
| Inventories                                                   |       | 114,888                                                               |       | 17,307                       |       | —               |       | —           |       | 132,195   |       |
| Net   investment in lease                                     |       | —                                                                |       | —                       |       | 610                  |       | (610             | )          | —    |       |
| Deferred   income taxes                                       |       | 14,912                                                                |       | 1,107                        |       | —               |       | —           |       | 16,019    |       |
| Other   current assets                                        |       | 7,434                                                                 |       | 326                          |       | 28                   |       | —           |       | 7,788     |       |
| Total   current assets                                        |       | 207,610                                                               |       | 34,251                       |       | 16,946               |       | (610             | )          | 258,197   |       |
| Property,   plant and equipment, net                          |       | 345,461                                                               |       | 25,947                       |       | 7,451                |       | (7,285           | )          | 371,574   |       |
| Goodwill                                                      |       | 85,002                                                                |       | 5,845                        |       | —               |       | —           |       | 90,847    |       |
| Other   intangible assets                                     |       | 10,904                                                                |       | 15,440                       |       | —               |       | —           |       | 26,344    |       |
| Investment   in subsidiaries                                  |       | 82,166                                                                |       | —                       |       | —               |       | (82,166          | )          | —    |       |
| Intercompany   receivables                                    |       | 280                                                                   |       | 16,310                       |       | —               |       | (16,590          | )          | —    |       |
| Other   assets                                                |       | 29,360                                                                |       | —                       |       | —               |       | —           |       | 29,360    |       |
| Total   assets                                                |       | $                                                                     | 760,783    |                         | $          | 97,793               |       | $                | 24,397     |      | $          | (106,651 | ) | $ | 776,322 |   |
| **Liabilities and Equity**                                    |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current   liabilities                                         |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current   maturities of long-term debt                        |       | $                                                                     | 7,671      |                         | $          | —               |       | $                | 477        |      | $          | (610 | ) | $ | 7,538 |   |
| Accounts   payable - trade                                    |       | 24,239                                                                |       | 3,166                        |       | 153                  |       | —           |       | 27,558    |       |
| Accrued   liabilities                                         |       | 38,594                                                                |       | 3,309                        |       | 9,728                |       | —           |       | 51,631    |       |
| Total   current liabilities                                   |       | 70,504                                                                |       | 6,475                        |       | 10,358               |       | (610             | )          | 86,727    |       |
| Intercompany   payables                                       |       | 16,310                                                                |       | —                       |       | 280                  |       | (16,590          | )          | —    |       |
| Long-term   debt, less current maturities                     |       | 514,191                                                               |       | —                       |       | 7,284                |       | —           |       | 521,475   |       |
| Obligations   under capital leases, less current installments |       | 7,285                                                                 |       | —                       |       | —               |       | (7,285           | )          | —    |       |
| Deferred   income taxes                                       |       | 82,772                                                                |       | 13,902                       |       | —               |       | —           |       | 96,674    |       |
| Other   liabilities                                           |       | 21,445                                                                |       | 133                          |       | —               |       | —           |       | 21,578    |       |
| Total   liabilities                                           |       | 712,507                                                               |       | 20,510                       |       | 17,922               |       | (24,485          | )          | 726,454   |       |
| Equity                                                        |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| New   Enterprise Stone & Lime Co., Inc. equity  |       | 48,276                                                                |       | 77,283                       |       | 4,883                |       | (82,166          | )          | 48,276    |       |
| Noncontrolling   interest                                     |       | —                                                                |       | —                       |       | 1,592                |       | —           |       | 1,592     |       |
| Total   equity                                                |       | 48,276                                                                |       | 77,283                       |       | 6,475                |       | (82,166          | )          | 49,868    |       |
| Total   liabilities and equity                                |       | $                                                                     | 760,783    |                         | $          | 97,793               |       | $                | 24,397     |      | $          | (106,651 | ) | $ | 776,322 |   |

 

21

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Table of Contents

 

**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

**Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ending November 30, 2012**

(In thousands)

 
| ** **                                                                                          | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
| Revenue                                                                                             |       | $                                                                     | 168,021    |                         | $          | 22,644               |       | $                | 1,974      |      | $          | (2,403 | ) | $ | 190,236 |   |
| Cost   of revenue (exclusive of items shown separately below)                                       |       | 136,264                                                               |       | 18,091                       |       | 807                  |       | (2,403           | )          | 152,759   |       |
| Depreciation,   depletion and amortization                                                          |       | 10,454                                                                |       | 2,927                        |       | —               |       | —           |       | 13,381    |       |
| Pension   and profit sharing                                                                        |       | 2,297                                                                 |       | 87                           |       | —               |       | —           |       | 2,384     |       |
| Selling,   administrative, and general expenses                                                     |       | 17,189                                                                |       | 2,429                        |       | 95                   |       | —           |       | 19,713    |       |
| Loss   on sales of property and equipment                                                           |       | 15                                                                    |       | 7                            |       | —               |       | —           |       | 22        |       |
| Operating   income (loss)                                                                           |       | 1,802                                                                 |       | (897                         | )          | 1,072                |       | —           |       | 1,977     |       |
| Interest   expense, net                                                                             |       | (17,597                                                               | )          | (69                          | )          | (68                  | )          | —           |       | (17,734   | )          |
| (Loss)   income before income taxes                                                                 |       | (15,795                                                               | )          | (966                         | )          | 1,004                |       | —           |       | (15,757   | )          |
| Income   tax benefit                                                                                |       | (5,551                                                                | )          | (1,358                       | )          | —               |       | —           |       | (6,909    | )          |
| Equity   in earnings of subsidiaries                                                                |       | 1,031                                                                 |       | —                       |       | —               |       | (1,031           | )          | —    |       |
| Net   (loss) income                                                                                 |       | (9,213                                                                | )          | 392                          |       | 1,004                |       | (1,031           | )          | (8,848    | )          |
| Unrealized   actuarial gains and amortization of prior service costs, net of income tax             |       | 46                                                                    |       | —                       |       | —               |       | —           |       | 46        |       |
| Comprehensive   (loss) income                                                                       |       | (9,167                                                                | )          | 392                          |       | 1,004                |       | (1,031           | )          | (8,802    | )          |
| Less:   comprehensive income attributable to noncontrolling interest                                |       | —                                                                |       | —                       |       | (365                 | )          | —           |       | (365      | )          |
| Comprehensive   (loss) income attributable to New Enterprise Stone & Lime   Co., Inc. |       | $                                                                     | (9,167     | )                            | $          | 392                  |       | $                | 639        |      | $          | (1,031 | ) | $ | (9,167 | ) |

 

**Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ending November 30, 2011**

(In thousands)

 
| ** **                                                                                 | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
| Revenue                                                                                    |       | $                                                                     | 198,870    |                         | $          | 21,344               |       | $                | 1,028      |      | $          | (7,355 | ) | $ | 213,887 |   |
| Cost   of revenue (exclusive of items shown separately below)                              |       | 152,833                                                               |       | 15,597                       |       | 448                  |       | (7,355           | )          | 161,523   |       |
| Depreciation,   depletion and amortization                                                 |       | 10,282                                                                |       | 1,874                        |       | —               |       | —           |       | 12,156    |       |
| Pension   and profit sharing                                                               |       | 2,338                                                                 |       | 47                           |       | —               |       | —           |       | 2,385     |       |
| Selling,   administrative, and general expenses                                            |       | 12,874                                                                |       | 2,289                        |       | 68                   |       | —           |       | 15,231    |       |
| Loss   on sales of property and equipment                                                  |       | 273                                                                   |       | —                       |       | —               |       | —           |       | 273       |       |
| Operating   income                                                                         |       | 20,270                                                                |       | 1,537                        |       | 512                  |       | —           |       | 22,319    |       |
| Interest   expense, net                                                                    |       | (11,135                                                               | )          | (45                          | )          | (157                 | )          | —           |       | (11,337   | )          |
| Income   before income taxes                                                               |       | 9,135                                                                 |       | 1,492                        |       | 355                  |       | —           |       | 10,982    |       |
| Income   tax expense (benefit)                                                             |       | 5,421                                                                 |       | (119                         | )          | —               |       | —           |       | 5,302     |       |
| Equity   in earnings of subsidiaries                                                       |       | 2,047                                                                 |       | —                       |       | —               |       | (2,047           | )          | —    |       |
| Net   income                                                                               |       | 5,761                                                                 |       | 1,611                        |       | 355                  |       | (2,047           | )          | 5,680     |       |
| Unrealized   actuarial gains and amortization of prior service costs, net of income tax    |       | 17                                                                    |       | —                       |       | —               |       | —           |       | 17        |       |
| Comprehensive   income                                                                     |       | 5,778                                                                 |       | 1,611                        |       | 355                  |       | (2,047           | )          | 5,697     |       |
| Less:   comprehensive loss attributable to noncontrolling interest                         |       | —                                                                |       | —                       |       | 81                   |       | —           |       | 81        |       |
| Comprehensive   income attributable to New Enterprise Stone & Lime Co., Inc. |       | $                                                                     | 5,778      |                         | $          | 1,611                |       | $                | 436        |      | $          | (2,047 | ) | $ | 5,778 |   |

 

22

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Table of Contents

 

**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

**Condensed Consolidating Statement of Comprehensive Income (Loss) for the nine months ending November 30, 2012**

(In thousands)

 
| ** **                                                                                          | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
| Revenue                                                                                             |       | $                                                                     | 540,013    |                         | $          | 71,343               |       | $                | 5,927      |      | $          | (8,524 | ) | $ | 608,759 |   |
| Cost   of revenue (exclusive of items shown separately below)                                       |       | 429,734                                                               |       | 57,358                       |       | 2,135                |       | (8,524           | )          | 480,703   |       |
| Depreciation,   depletion and amortization                                                          |       | 31,875                                                                |       | 6,629                        |       | —               |       | —           |       | 38,504    |       |
| Intangible   asset impairment                                                                       |       | —                                                                |       | 300                          |       | —               |       | —           |       | 300       |       |
| Pension   and profit sharing                                                                        |       | 6,213                                                                 |       | 271                          |       | —               |       | —           |       | 6,484     |       |
| Selling,   administrative, and general expenses                                                     |       | 48,107                                                                |       | 7,328                        |       | 298                  |       | —           |       | 55,733    |       |
| (Gain)   loss on sales of property and equipment                                                    |       | (107                                                                  | )          | 101                          |       | —               |       | —           |       | (6        | )          |
| Operating   income (loss)                                                                           |       | 24,191                                                                |       | (644                         | )          | 3,494                |       | —           |       | 27,041    |       |
| Interest   expense, net                                                                             |       | (57,751                                                               | )          | (212                         | )          | (343                 | )          | —           |       | (58,306   | )          |
| (Loss)   income before income taxes                                                                 |       | (33,560                                                               | )          | (856                         | )          | 3,151                |       | —           |       | (31,265   | )          |
| Income   tax benefit                                                                                |       | (10,006                                                               | )          | (2,819                       | )          | —               |       | —           |       | (12,825   | )          |
| Equity   in earnings of subsidiaries                                                                |       | 4,110                                                                 |       | —                       |       | —               |       | (4,110           | )          | —    |       |
| Net   (loss) income                                                                                 |       | (19,444                                                               | )          | 1,963                        |       | 3,151                |       | (4,110           | )          | (18,440   | )          |
| Unrealized   actuarial gains and amortization of prior service costs, net of income tax             |       | 137                                                                   |       | —                       |       | —               |       | —           |       | 137       |       |
| Comprehensive   (loss) income                                                                       |       | (19,307                                                               | )          | 1,963                        |       | 3,151                |       | (4,110           | )          | (18,303   | )          |
| Less:   comprehensive income attributable to noncontrolling interest                                |       | —                                                                |       | —                       |       | (1,004               | )          | —           |       | (1,004    | )          |
| Comprehensive   (loss) income attributable to New Enterprise Stone & Lime   Co., Inc. |       | $                                                                     | (19,307    | )                            | $          | 1,963                |       | $                | 2,147      |      | $          | (4,110 | ) | $ | (19,307 | ) |

 

**Condensed Consolidating Statement of Comprehensive Income (Loss) for the nine months ending November 30, 2011**

(In thousands)

 
| ** **                                                                                 | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
| Revenue                                                                                    |       | $                                                                     | 572,771    |                         | $          | 67,049               |       | $                | 4,856      |      | $          | (17,306 | ) | $ | 627,370 |   |
| Cost   of revenue (exclusive of items shown separately below)                              |       | 447,536                                                               |       | 49,446                       |       | 1,749                |       | (17,306          | )          | 481,425   |       |
| Depreciation,   depletion and amortization                                                 |       | 30,111                                                                |       | 5,678                        |       | —               |       | —           |       | 35,789    |       |
| Pension   and profit sharing                                                               |       | 6,231                                                                 |       | 156                          |       | —               |       | —           |       | 6,387     |       |
| Selling,   administrative, and general expenses                                            |       | 39,298                                                                |       | 6,836                        |       | 351                  |       | —           |       | 46,485    |       |
| Gain   on sales of property and equipment                                                  |       | (1,232                                                                | )          | —                       |       | —               |       | —           |       | (1,232    | )          |
| Operating   income                                                                         |       | 50,827                                                                |       | 4,933                        |       | 2,756                |       | —           |       | 58,516    |       |
| Interest   expense, net                                                                    |       | (34,262                                                               | )          | (171                         | )          | (482                 | )          | —           |       | (34,915   | )          |
| Income   before income taxes                                                               |       | 16,565                                                                |       | 4,762                        |       | 2,274                |       | —           |       | 23,601    |       |
| Income   tax expense (benefit)                                                             |       | 11,011                                                                |       | (262                         | )          | —               |       | —           |       | 10,749    |       |
| Equity   in earnings of subsidiaries                                                       |       | 6,780                                                                 |       | —                       |       | —               |       | (6,780           | )          | —    |       |
| Net   income                                                                               |       | 12,334                                                                |       | 5,024                        |       | 2,274                |       | (6,780           | )          | 12,852    |       |
| Unrealized   actuarial gains and amortization of prior service costs, net of income tax    |       | 80                                                                    |       | —                       |       | —               |       | —           |       | 80        |       |
| Comprehensive   income                                                                     |       | 12,414                                                                |       | 5,024                        |       | 2,274                |       | (6,780           | )          | 12,932    |       |
| Less:   comprehensive income attributable to noncontrolling interest                       |       | —                                                                |       | —                       |       | (518                 | )          | —           |       | (518      | )          |
| Comprehensive   income attributable to New Enterprise Stone & Lime Co., Inc. |       | $                                                                     | 12,414     |                         | $          | 5,024                |       | $                | 1,756      |      | $          | (6,780 | ) | $ | 12,414 |   |

 

23

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Table of Contents

 

**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

**Condensed Consolidating Statement of Cash Flows for the nine months ending November 30, 2012**

(In thousands)

 
| ** **                                             | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
|                                                   |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| **Cash   flows from operating activities**             |       | $                                                                     | (13,020    | )                            | $          | 2,325                |       | $                | 2,462      |      | $          | — |   | $ | (8,233 | ) |
| **Cash   flows from investing activities**             |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Capital expenditures                                   |       | (29,110                                                               | )          | (2,777                       | )          | —               |       | —           |       | (31,887   | )          |
| Capitalized software                                   |       | (23                                                                   | )          | —                       |       | —               |       | —           |       | (23       | )          |
| Proceeds from sale of   property and equipment         |       | 194                                                                   |       | —                       |       | —               |       | —           |       | 194       |       |
| Change in cash value of   life insurance               |       | (3,013                                                                | )          | —                       |       | —               |       | —           |       | (3,013    | )          |
| Change in restricted   cash                            |       | (127                                                                  | )          | (4                           | )          | (2                   | )          | —           |       | (133      | )          |
| Net   cash used in investing activities                |       | (32,079                                                               | )          | (2,781                       | )          | (2                   | )          | —           |       | (34,862   | )          |
| **Cash   flows from financing activities**             |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Proceeds from revolving   credit                       |       | 224,413                                                               |       | —                       |       | —               |       | —           |       | 224,413   |       |
| Repayment of revolving   credit                        |       | (283,361                                                              | )          | —                       |       | —               |       | —           |       | (283,361  | )          |
| Repayment of long-term   debt                          |       | (153,639                                                              | )          | —                       |       | (390                 | )          | —           |       | (154,029  | )          |
| Payments on capital   leases                           |       | (3,846                                                                | )          | —                       |       | —               |       | —           |       | (3,846    | )          |
| Proceeds from issuance   of long-term debt             |       | 268,513                                                               |       | —                       |       | —               |       | —           |       | 268,513   |       |
| Debt issuance costs                                    |       | (14,062                                                               | )          | —                       |       | —               |       | —           |       | (14,062   | )          |
| Distribution to   noncontrolling interest              |       | —                                                                |       | —                       |       | (1,084               | )          | —           |       | (1,084    | )          |
| Net   cash provided by (used in) financing activities  |       | 38,018                                                                |       | —                       |       | (1,474               | )          | —           |       | 36,544    |       |
| Net   (decrease) increase in cash and cash equivalents |       | (7,081                                                                | )          | (456                         | )          | 986                  |       | —           |       | (6,551    | )          |
| **Cash   and cash equivalents**                        |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Beginning of period                                    |       | 7,106                                                                 |       | 476                          |       | 7,450                |       | —           |       | 15,032    |       |
| End of period                                          |       | $                                                                     | 25         |                         | $          | 20                   |       | $                | 8,436      |      | $          | — |   | $ | 8,481 |   |

 

**Condensed Consolidating Statement of Cash Flows for the nine months ending November 30, 2011**

(In thousands)

 
| ** **                                            | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
|                                                  |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| **Cash   flows from operating activities**            |       | $                                                                     | (26,219    | )                            | $          | 1,329                |       | $                | 432        |      | $          | (1,200 | ) | $ | (25,658 | ) |
| **Cash   flows from investing activities**            |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Capital expenditures                                  |       | (23,471                                                               | )          | (3,206                       | )          | —               |       | —           |       | (26,677   | )          |
| Capitalized software                                  |       | (5,978                                                                | )          | —                       |       | —               |       | —           |       | (5,978    | )          |
| Proceeds from sale of   property and equipment        |       | 1,208                                                                 |       | 405                          |       | 990                  |       | —           |       | 2,603     |       |
| Change in cash value of   life insurance              |       | 2,968                                                                 |       | —                       |       | —               |       | —           |       | 2,968     |       |
| Change in restricted   cash                           |       | 348                                                                   |       | —                       |       | (8,840               | )          | —           |       | (8,492    | )          |
| Net   cash used in investing activities               |       | (24,925                                                               | )          | (2,801                       | )          | (7,850               | )          | —           |       | (35,576   | )          |
| **Cash   flows from financing activities**            |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Proceeds from revolving   credit                      |       | 108,717                                                               |       | —                       |       | —               |       | —           |       | 108,717   |       |
| Repayment of revolving   credit                       |       | (42,500                                                               | )          | —                       |       | —               |       | —           |       | (42,500   | )          |
| Repayment of long-term   debt                         |       | (22,526                                                               | )          | —                       |       | (1,958               | )          | —           |       | (24,484   | )          |
| Payments on capital   leases                          |       | (3,975                                                                | )          | —                       |       | —               |       | —           |       | (3,975    | )          |
| Proceeds from issuance   of long-term debt            |       | 12,398                                                                |       | —                       |       | —               |       | —           |       | 12,398    |       |
| Debt issuance costs                                   |       | (1,663                                                                | )          | —                       |       | —               |       | —           |       | (1,663    | )          |
| Dividends paid                                        |       | —                                                                |       | —                       |       | (1,200               | )          | 1,200            |       | —    |       |
| Distribution to   noncontrolling interest             |       | —                                                                |       | —                       |       | (1,095               | )          | —           |       | (1,095    | )          |
| Net   cash provided by (used in) financing activities |       | 50,451                                                                |       | —                       |       | (4,253               | )          | 1,200            |       | 47,398    |       |
| Net   decrease in cash and cash equivalents           |       | (693                                                                  | )          | (1,472                       | )          | (11,671              | )          | —           |       | (13,836   | )          |
| **Cash   and cash equivalents**                       |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Beginning of period                                   |       | 5,058                                                                 |       | 1,472                        |       | 13,499               |       | —           |       | 20,029    |       |
| End of period                                         |       | $                                                                     | 4,365      |                         | $          | —               |       | $                | 1,828      |      | $          | — |   | $ | 6,193 |   |

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Notes to the Unaudited Condensed Consolidated Financial Statements**

**For the Quarter ended November 30, 2012**

 

**10.****      ****Subsequent Events**

 

*Amendment of ABL Facility*

 

On December 7, 2012, the Company entered into the second amendment to the ABL Facility to change the required January 14, 2013 delivery date of its third quarter Form 10-Q to March 15, 2013.

 

On February 14, 2013, the Company received additional extensions of time to issue its Quarterly Report on Form 10-Q for the second quarter of fiscal 2013 to February 28, 2013 and to issue this Quarterly Report on Form 10-Q for the third quarter of fiscal 2013 to April 1, 2013.  There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes and Secured Notes.

 

*Notice of Default*

 

On January 14, 2013, the Company received a notice of default from the trustee under the indentures for the Secured Notes and Notes due to the Company’s inability to provide its Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 in compliance with the indentures.  We filed our Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 within the 120 day period and therefore cured such default under the indentures.

 

This Quarterly Report on Form 10-Q for the third fiscal quarter ended November 30, 2012 was due on January 14, 2013. We have not received a notice of default from the trustee under the indentures for the Notes or Secured Notes.

 

*Exchange of Common Stock*

 

On December 28, 2012, each of Paul I. Detwiler, Jr. and Donald L. Detwiler exchanged 10,000 shares of Class A voting common stock of the Company for 11,180 shares of Class B non-voting common stock of the Company.  The shares of the exchanged Class B non-voting common stock were then gifted by such individuals to their family members, each of whom is an existing shareholder.  As a result of the exchange for Class B non-voting common stock, the gifting of such equity securities did not affect the voting control of the Company.

 

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**ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**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 10 construction aggregates producers based on tonnage of crushed stone produced and one of the top 15 highway contractors based on revenues 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.  Construction materials is comprised of aggregate production (crushed stone and construction sand and gravel), hot mix asphalt production, ready mixed concrete production, and the production of concrete products, including precast/prestressed structural concrete components and masonry blocks.  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.  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.

 

Market conditions remained challenging through the first three quarters of fiscal year 2013.  Our business continues to be impacted by the slow pace of economic recovery and the continued pressure on state budgets which has limited state spending on public highway construction projects. The overall housing market remains weak and private non-residential construction is still experiencing a slow recovery.  Competition remains strong as a result of the weak public and private sector demand, with residential and commercial contractors bidding aggressively on projects, which continues to affect our profitability.  Our margins also remain under pressure as a result of higher fuel and liquid asphalt costs.  We expect that the challenges to our business environment will persist throughout the remainder of fiscal year 2013, which will continue to affect our heavy/highway construction and traffic safety services and equipment businesses, which constitute a significant portion of our overall business.  We expect that these conditions will continue to negatively impact our financial position, results of operations, cash flows and liquidity throughout the remainder of fiscal year 2013.  To address these challenges, we are continuing our efforts to monitor and adjust our cost structure in our operating plants and control administrative and general spending.  We also actively review our assets and properties on an ongoing basis for strategic disposals of lesser performing or non-core assets.

 

**RESULTS OF OPERATIONS**

 

The following table summarizes our operating results on a consolidated basis:

 
| ** **                                                    | ** ** | **Three Months    Ended November 30,** | ** ** | **Nine Months   Ended November 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                       | ** ** | **2012**                                                   | ** ** | **2011**                                            | ** ** | **2012** | ** ** | **2011** | ** ** |
|                                                          |       |                                                       |       |                                                |       |   |   |   |   |
| Revenue                                                       |       | $                                                          | 190,236    |                                                | $          | 213,887 |   | $ | 608,759 |   | $ | 627,370 |   |
| Cost   of revenue (exclusive of items shown separately below) |       | 152,759                                                    |       | 161,523                                             |       | 480,703 |   | 481,425 |   |
| Depreciation, depletion   and amortization                    |       | 13,381                                                     |       | 12,156                                              |       | 38,504 |   | 35,789 |   |
| Intangible asset   impairment                                 |       | —                                                     |       | —                                              |       | 300 |   | — |   |
| Pension and profit   sharing                                  |       | 2,384                                                      |       | 2,385                                               |       | 6,484 |   | 6,387 |   |
| Selling,   administrative, and general expenses               |       | 19,713                                                     |       | 15,231                                              |       | 55,733 |   | 46,485 |   |
| Loss (gain) on sales of   property and equipment              |       | 22                                                         |       | 273                                                 |       | (6 | ) | (1,232 | ) |
| Operating   income                                            |       | 1,977                                                      |       | 22,319                                              |       | 27,041 |   | 58,516 |   |
| Interest expense, net                                         |       | (17,734                                                    | )          | (11,337                                             | )          | (58,306 | ) | (34,915 | ) |
| (Loss)   income before income taxes                           |       | (15,757                                                    | )          | 10,982                                              |       | (31,265 | ) | 23,601 |   |
| Income tax (benefit)   expense                                |       | (6,909                                                     | )          | 5,302                                               |       | (12,825 | ) | 10,749 |   |
| Net   (loss) income                                           |       | $                                                          | (8,848     | )                                                   | $          | 5,680 |   | $ | (18,440 | ) | $ | 12,852 |   |

 

The tables below disclose revenue and operating income data for our reportable segments on a gross basis.  We include intersegment and certain intrasegment 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.  Total net revenue and total operating income exclude inter-segment sales and delivery revenues and costs.  We also operate ancillary port operations and certain rental operations, which are included in our other

 

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non-core business operations line items presented below.  We include all non-allocated operating costs in the eliminations line item presented below.

 

The Company’s segment revenue presentation for the three and nine months ended November 30, 2011 has been revised to conform to the current presentation. The revisions resulted in decreases to heavy/highway construction revenue and eliminations of $11.3 million and $23.0 million for the three and nine months ended November 30, 2011, respectively.  These revisions were made to align with the current management approach related to this segment.

 
| ** **                              | ** ** | **Three Months    Ended November 30,** | ** ** | **Nine Months   Ended November 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                 | ** ** | **2012**                                                   | ** ** | **2011**                                            | ** ** | **2012** | ** ** | **2011** | ** ** |
| **Revenue:**                            |       |                                                       |       |                                                |       |   |   |   |   |
| Construction   materials                |       | $                                                          | 141,831    |                                                | $          | 161,788 |   | $ | 458,257 |   | $ | 469,826 |   |
| Heavy/highway   construction            |       | 71,969                                                     |       | 86,402                                              |       | 234,915 |   | 251,832 |   |
| Traffic   safety services and equipment |       | 21,104                                                     |       | 21,155                                              |       | 69,219 |   | 69,015 |   |
| Other   revenues                        |       | 6,735                                                      |       | 4,674                                               |       | 13,885 |   | 13,584 |   |
| Segment   totals                        |       | 241,639                                                    |       | 274,019                                             |       | 776,276 |   | 804,257 |   |
| Eliminations                            |       | (51,403                                                    | )          | (60,132                                             | )          | (167,517 | ) | (176,887 | ) |
| Total   revenue                         |       | $                                                          | 190,236    |                                                | $          | 213,887 |   | $ | 608,759 |   | $ | 627,370 |   |

 

The following tables summarize the percentage of revenue and operating income (loss) from our primary lines of business:

 
| ** **                              | ** ** | **Three Months    Ended November 30,** | ** ** | **Nine Months   Ended November 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                 | ** ** | **2012**                                                   | ** ** | **2011**                                            | ** ** | **2012** | ** ** | **2011** | ** ** |
| ** **                              | ** ** | ** **                                                 | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue:**                            |       |                                                       |       |                                                |       |   |   |   |   |
| Construction   materials                |       | 58.7                                                       | %          | 59.0                                                | %          | 59.0 | % | 58.4 | % |
| Heavy/highway   construction            |       | 29.8                                                       | %          | 31.5                                                | %          | 30.3 | % | 31.3 | % |
| Traffic   safety services and equipment |       | 8.7                                                        | %          | 7.7                                                 | %          | 8.9 | % | 8.6 | % |
| Other   revenues                        |       | 2.8                                                        | %          | 1.8                                                 | %          | 1.8 | % | 1.7 | % |
| Segment   totals                        |       | 100.0                                                      | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |

 
| ** **                              | ** ** | **Three Months    Ended November 30,** | ** ** | **Nine Months   Ended November 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                 | ** ** | **2012**                                                   | ** ** | **2011**                                            | ** ** | **2012** | ** ** | **2011** | ** ** |
| ** **                              |       |                                                       |       |                                                |       |   |   |   |   |
| **Operating income:**                   |       |                                                       |       |                                                |       |   |   |   |   |
| Construction   materials                |       | $                                                          | 11,621     |                                                | $          | 22,340 |   | $ | 47,710 |   | $ | 60,439 |   |
| Heavy/highway   construction            |       | (3,632                                                     | )          | 4,634                                               |       | (1,693 | ) | 5,363 |   |
| Traffic   safety services and equipment |       | 875                                                        |       | 1,366                                               |       | (400 | ) | 4,544 |   |
| Other   non-core business operations    |       | 827                                                        |       | 324                                                 |       | 538 |   | 551 |   |
| Segment   totals                        |       | 9,691                                                      |       | 28,664                                              |       | 46,155 |   | 70,897 |   |
| Corporate   and unallocated             |       | (7,714                                                     | )          | (6,345                                              | )          | (19,114 | ) | (12,381 | ) |
| Total   operating income                |       | $                                                          | 1,977      |                                                | $          | 22,319 |   | $ | 27,041 |   | $ | 58,516 |   |

 

***Three Months Ended November 30, 2012 Compared to Three Months Ended November 30, 2011***

 

*Revenue*

 

Revenue for our construction materials business decreased $20.0 million, or 12.4%, to $141.8 million for the three months ended November 30, 2012 compared to $161.8  million for the three months ended November 30, 2011.  This decrease was primarily attributable to the decrease in sales of aggregates, hot mix asphalt and precast/prestressed structural concrete in the amount of $7.8 million, $9.8  million and $1.9 million, respectively.  Sales volumes of aggregates decreased 18.1% to 4.3 million tons shipped and consumed and the average price per ton shipped and consumed increased 5.9% to $11.76 for the three months ended November 30, 2012.  Sales volumes of hot mix asphalt decreased 14.8% to 1.1 million tons shipped and consumed while the average price per ton

 

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shipped and consumed increased 0.3% to $54.04.  Sales volumes of precast/prestressed structural concrete decreased 38.9%.  The price and demand for our materials is largely based upon local markets and varies across the Company.

 

Revenue for our heavy/highway construction business decreased $14.4  million, or 16.7%, to $72.0 million for the three months ended November 30, 2012 compared to $86.4  million for the three months ended November 30, 2011.  We continue to experience strong competition, as well as a reduced number of projects, in the public and commercial markets.  Further, we believe that the lack of a federal multi-year surface transportation bill over the past several construction seasons has caused the number of larger, heavy, multidiscipline, multiyear highway and bridge construction projects to decrease in favor of smaller, shorter jobs such as road resurfacing and bridge replacement and rehabilitation.

 

Revenue for our traffic safety services and equipment businesses decreased $0.1 million, or 0.5%, to $21.1  million for the three months ended November 30, 2012 compared to $21.2 million for the three months ended November 30, 2011.  The decrease was the result of decreased rental service activity, which was offset by increased equipment sales.  The increase in equipment sales can be attributed primarily to the continued benefits associated with the enhancement of our product offerings.  Overall rental service activity decreased compared to the prior period as a result of increased competition.

 

*Cost of Revenue*

 

Cost of revenue decreased $8.7 million, or 5.4% to $152.8 million for the three months ended November 30, 2012 compared to $161.5 million for the three months ended November 30, 2011. Cost of revenue as a percentage of revenue increased for the three months ended November 30, 2012 to 80.3% from 75.5% for the three months ended November 30, 2011, due to reduced profitability in all three of our businesses.

 

*Depreciation, Depletion and Amortization*

 

Depreciation, depletion and amortization increased $1.2 million, or 9.8%, to $13.4 million for the three months ended November 30, 2012 compared to $12.2 million for the three months ended November 30, 2011. The increase is primarily due to $0.3 million of capitalized software amortization in the current period related to our new ERP system and other new assets placed in service.  Amortization of capitalized software began during the fourth quarter of fiscal year 2012.

 

*Selling, Administrative and General Expenses*

 

Selling, administrative and general expenses increased  $4.5 million, or 29.6%, to $19.7 million for the three months ended November 30, 2012 compared to $15.2 million for the three months ended November 30, 2011, which was primarily attributable to higher legal and accounting fees of $2.8 million and $1.0 million in costs associated with the remediation of our ERP system.

 

*Operating Income*

 

Operating income for our construction materials business decreased $10.7 million, or 48.0%, to $11.6  million for the three months ended November 30, 2012 compared to $22.3 million for the three months ended November 30, 2011. Operating income as a percentage of construction materials revenue was 8.2% in the current period compared to 13.8% in the prior period.  Income from the sale of aggregates decreased $7.7 million, or 58.3%, to $5.5  million for the three months ended November 30, 2012 compared to $13.2 million for the three months ended November 30, 2011.  Additionally, operating income for hot mix asphalt also decreased $1.8 million, or 25.0%, to $5.4  million for the three months ended November 30, 2012 compared to $7.2  million for the three months ended November 30, 2011.    The overall decrease in operating income from our construction material business was primarily attributable to reduced sales volume without a commensurate reduction in costs.  The price and demand for our materials is largely based upon local markets and varies across the Company.

 

Operating income for our heavy/highway construction business decreased $8.2 million to a $3.6 million loss for the three months ended November 30, 2012 compared to income of $4.6 million for the three months ended November 30, 2011.  The change in profitability for the third quarter is primarily attributable to a decrease in activity without a commensurate reduction in costs and the general timing of the completion of various jobs.

 

Operating income for our traffic safety services and equipment businesses decreased $0.5 million to $0.9 million for the three months ended November 30, 2012 compared to $1.4 million for three months ended November 30, 2011.  The decrease in operating income is primarily due to decreased rental service activity due to increased competition, partially offset by increased sales of highway safety equipment.

 

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*Interest Expense, net*

 

Net interest expense increased $6.4 million, or 56.6%, to $17.7 million for the three months ended November 30, 2012 compared to $11.3 million for the three months ended November 30, 2011. This increase is due to the increase in the Company’s net effective interest rate associated with the issuance of the Secured Notes as well as an overall increase in the average debt outstanding in the current period.

 

*Income Tax Expense*

 

Our effective tax rates for the three months ended November 30, 2012 and 2011 were 43.8% and 48.3%, respectively.  We estimate our annual tax rate based on projected taxable income for the full year and record a quarterly tax provision in accordance with the anticipated annual tax rate.  As the year progresses, we refine our estimate of the year’s taxable income as new information becomes available such as year-to-date financial results.  The swing from tax expense to tax benefit for the nine months ended November 30, 2012 compared to the nine months ended November 30, 2011 is a result of a swing from pre-tax book earnings to a pre-tax book loss.  The projected loss year over year has increased significantly which reduces the impact of the permanent adjustments which have not materially changed year over year.  This continual estimation process may result in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate.  Significant judgment is required in determining the Company’s effective interim tax rate and there may be large swings on a quarterly basis due to the seasonal nature of the Company’s business.  Our income tax benefit for the current period is based on an estimated annual effective income tax rate of 36.7%.  Included in the income tax benefit for this period is a discrete out-of-period tax benefit of $1.2 million due to differences in our state apportionment calculation when we finalized our tax returns for the year ended February 29, 2012 in November 2012.  This out-of-period adjustment is not material to the prior or current condensed consolidated financial statements.

 

***Nine Months Ended November 30, 2012 Compared to Nine Months Ended November 30, 2011***

 

*Revenue*

 

Revenue for our construction materials business decreased $11.5 million, or 2.4%, to $458.3 million for the nine months ended November 30, 2012 compared to $469.8 million for the nine months ended November 30, 2011. This decrease was primarily attributable to the decrease in sales of aggregates, hot mix asphalt and precast/prestressed structural concrete in the amount of $6.5  million, $4.3 million and $1.4 million respectively, which was partially offset by a $2.2 million increase in ready mixed concrete. Sales volumes of aggregates decreased 4.7% to 14.81 million tons shipped and consumed and the average price per ton shipped and consumed increased 0.9% to $11.06 for the nine months ended November 30, 2012.  Sales volumes of hot mix asphalt decreased 3.3% to 3.54 million tons shipped and consumed and partially offset by an increase in the average price per ton shipped and consumed of 1.2% to $54.66.  Precast/prestressed structural concrete sales volume decreased 32.0%.  The price and demand for our materials is largely based upon local markets and varies across the Company.

 

Revenue for our heavy/highway construction business decreased $16.9 million, or 6.7%, to $234.9  million for the nine months ended November 30, 2012 compared to $251.8 million for the nine months ended November 30, 2011.  We continue to experience strong competition in the public and commercial markets.  Further, we believe that the lack of a federal multi-year surface transportation bill over the past several construction seasons has caused the number of larger, heavy, multidiscipline, multiyear highway and bridge construction projects to decrease in favor of smaller, shorter jobs such as road resurfacing and bridge replacement and rehabilitation.

 

Revenue for our traffic safety services and equipment business increased $0.2 million, or 0.3%, to $69.2 million for the nine months ended November 30, 2012 as compared to $69.0 million for the nine months ended November 30, 2011.  The increase is attributable to increased equipment sales, offset by decreased rental service activity and a $1.1 million state use tax refund included in the nine months ended November 30, 2011.

 

*Cost of Revenue*

 

Cost of revenue decreased $0.7 million to $480.7 million for the nine months ended November 30, 2012 compared to $481.4 million for the nine months ended November 30, 2011. Cost of revenue as a percentage of revenue increased to 79.0% for the nine months ended November 30, 2012 compared to 76.7% for the nine months ended November 30, 2011, due to reduced profitability in all three of our businesses.

 

*Depreciation, Depletion and Amortization*

 

Depreciation, depletion and amortization increased $2.7 million, or 7.5%, to $38.5 million for the nine months ended November 30, 2012 compared to $35.8 million for the nine months ended November 30, 2011.  The increase is primarily due to increased depreciation related to capitalized asset retirement obligations of approximately $1.2 million, $0.8 million of capitalized software

 

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amortization in the current period related to our new ERP system and other new assets placed in service.  Amortization of capitalized software began during the fourth quarter of fiscal year 2012.

 

*Selling, Administrative and General Expenses*

 

Selling, administrative and general expenses increased $9.2 million, or 19.8%, to $55.7 million for the nine months ended November 30, 2012 compared to $46.5 million for the nine months ended November 30, 2011. The increase was primarily attributable to costs associated with the remediation of our ERP system of approximately $5.2 million and higher legal and accounting fees of $3.8 million.

 

*Operating Income*

 

Operating income for our construction materials business decreased $12.7 million, or 21.0%, to $47.7 million for the nine months ended November 30, 2012 compared to $60.4 million for the nine months ended November 30, 2011. Operating income for construction materials as a percentage of construction materials revenue was 10.4% in the current period compared to 12.9% in the prior period.  The decrease in aggregates income of $13.0 million, or 36.6%, to $22.5 million was partially offset by an increase in income of hot mix asphalt of $1.5 million.  The overall decrease in income from our construction material business was primarily attributable to the reduced sales volume without a commensurate reduction in costs and $2.2 million of higher stripping costs associated with uncovering additional reserves.

 

Operating income for our heavy/highway construction business decreased $7.1 million to a $1.7 million loss for the nine months ended November 30, 2012 compared to $5.4 million of income for the nine months ended November 30, 2011.  The change in profitability for the third quarter is primarily attributable to a decrease in activity without a commensurate reduction in costs and the general timing of the completion of various jobs.

 

The operating results for our traffic safety services and equipment business decreased $4.9 million to a $0.4 million loss during the nine months ended November 30, 2012 compared to income of $4.5 million during the nine months ended November 30, 2011. The decrease was attributable primarily to a decrease in rental service activity and the fact that prior year included a $1.1 million state use tax refund.  The decrease in rental service activity was due to increased competition as well as decreased Marcellus Shale related activity.

 

*Interest Expense, net*

 

Net interest expense increased $23.4 million, or 67.0%, to $58.3 million for the nine months ended November 30, 2012 compared to $34.9 million for the nine months ended November 30, 2011.  For the nine months ended November 30, 2012, we recognized a $6.4 million loss on extinguishment of debt associated with the write-off of unamortized deferred financing fees.  The remaining increase was attributable to higher interest rates associated with the Secured Notes issued on March 15, 2012 as well an overall increase in the average debt outstanding in the current period.

 

*Income Tax Expense*

 

Our effective tax rates for the nine months ended November 30, 2012 and 2011 were 41.0% and 45.5%, respectively. We estimate our annual tax rate based on projected taxable income for the full year and record a quarterly tax provision in accordance with the anticipated annual tax rate. As the year progresses, we refine our estimate of the year’s taxable income as new information becomes available such as year-to-date financial results. The swing from tax expense to tax benefit for the nine months ended November 30, 2012 compared to the nine months ended November 30, 2011 is a result of a swing from pre-tax book earnings to a pre-tax book loss.    The effective tax rate decreased as a result of the effect of the permanent adjustments, which did not materially change year over year, are reduced with the substantial increase in projected pre-tax book loss year over year.  This continual estimation process may result in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining the Company’s effective interim tax rate and there may be large swings on a quarterly basis due to the seasonal nature of the Company’s business.  Our income tax benefit for the current period is based on an estimated annual effective income tax rate of 36.7%.  Included in the income tax benefit for this period is a discrete out-of-period tax benefit of $1.2 million due to differences in our state apportionment calculation when we finalized our tax returns for the year ended February 29, 2012 in November 2012.  This out-of-period adjustment is not material to the prior or current condensed consolidated financial statements.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our sources of liquidity include cash and cash equivalents, cash from operations and amounts available for borrowing under our credit facilities. As of November 30, 2012, we had $8.5 million in cash and cash equivalents and working capital of $196.5 million as

 

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compared to $15.0 million in cash and cash equivalents and working capital of $171.5 million as of February 29, 2012.  In May 2012, we began managing our cash and cash equivalents through a cash pooling arrangement with a single financial institution, which has resulted in lower overall cash and cash equivalents balances as excess cash is applied daily to our ABL Facility.

 

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.

 

Restricted cash balances of $10.5 million and $10.3 million as of November 30, 2012 and February 29, 2012, respectively, were restricted in certain consolidated subsidiaries for bond sinking fund and insurance requirements, as well as collateral on outstanding letters of credit or rentals.

 

On March 15, 2012, the Company completed the sale of its Secured Notes at par.  In connection with the sale of the Secured Notes, the Company also entered into the ABL Facility. The Company utilized the proceeds from the sale of the Secured Notes and the new ABL Facility to repay all amounts outstanding under, and terminate, the Credit Agreement and certain other debt.

 

As of November 30, 2012, the ABL Facility had $35.7 million outstanding and a borrowing base of $130.6 million. On September 7, 2012, we entered into the first amendment to the ABL Facility. Among certain other things, the amendment changed the reserve percentages used for calculating the borrowing base.   The amendment also added a minimum LIBOR borrowing rate of 1.25%.

 

We believe that we have sufficient financial resources, including cash and cash equivalents, cash from operations and available borrowings under our ABL Facility, to fund our business and operations for at least the next twelve months, including capital expenditures and debt service obligations. However, 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 we cannot guarantee that we will be able to comply with our covenants in the future. Any default under our ABL Facility, the indenture for our Notes, or the indenture for our Secured Notes would result in a cross-default and acceleration of indebtedness under the other.

 

On September 5, 2012, we received a notice of default from the trustee under the indenture for the Secured Notes, and on September 6, 2012, we received a notice of default from the trustee under the indenture for the Notes, each to the effect that we had failed to provide to the trustee our Annual Report on Form 10-K for our fiscal year ended February 29, 2012 and Quarterly Report on Form 10-Q for our fiscal quarter ended May 31, 2012 in compliance with the indentures. In accordance with the terms and conditions of the indentures for the Secured Notes and the Notes, we had 120 days from the date of those notices to cure such default by providing the required filings. We filed our Form 10-K for the year ended February 29, 2012 and our Form 10-Q for the first fiscal quarter ended May 31, 2012 within the 120 day period and therefore has cured such defaults under the indentures.

 

On January 14, 2013, the Company received a notice of default from the trustee under the indentures for the Secured Notes and Notes due to the Company’s  inability to provide its Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 in compliance with the indentures.  We filed our Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 within the 120 day period and therefore cured such default under the indentures.

 

This Quarterly Report on Form 10-Q for the third fiscal quarter ended November 30, 2012 was due on January 14, 2013. We have not received a notice of default from the trustee under the indentures for the Notes or Secured Notes.

 

*Cash Flows*

 

The following table summarizes our net cash provided by or used in operating activities, investing activities and financing activities and our capital expenditures for the nine months ended November 30, 2012 and November 30, 2011.

 
| ** **                           | ** ** | **Nine Months**             | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **Ended November 30,** | ** ** |
| **(In thousands)**              | ** ** | **2012**                         | ** ** | **2011** | ** ** |
| Net   cash provided by (used in):    |       |                             |       |   |   |
| Operating   activities               |       | $                                | (8,233     | ) | $ | (25,658 | ) |
| Investing   activities               |       | (34,862                          | )          | (35,576 | ) |
| Financing   activities               |       | 36,544                           |       | 47,398 |   |
| Cash   paid for capital expenditures |       | (31,910                          | )          | (32,655 | ) |
|                                      |            |                                  |            |  |  |  |  |

 

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*Operating Activities*

 

Net cash used in operating activities decreased $17.5 million to $8.2 million for the nine months ended November 30, 2012 compared to $25.7 million for the nine months ended November 30, 2011.  Cash used in operating activities decreased primarily as a result of lower investments in working capital items of $44.6 million due to decreased activity and timing of collections of accounts receivable, partially offset by less cash generated from operations of $27.1 million.  Operating cash flow in the current period included the favorable impact of the payment-in-kind interest election of $17.1 million.

 

*Investing Activities*

 

Net cash used in our investing activities decreased $0.7 million to $34.9 million in the nine months ended November 30, 2012 compared to $35.6 million in the nine months ended November 30, 2011. Net cash used in the nine months ended November 30, 2012 included capital expenditures of $31.9 million and a $3.0 million payment associated with our cash surrender value life insurance policies.  Net cash used in the nine months ended November 30, 2011 included uses for capital expenditures of $32.7 million and the commitment of $8.8 million of cash collateral related to our captive insurance arrangement, offset by proceeds from the sale of property and equipment of $2.6 million and $3.0 million related to our cash surrender value  life insurance policies.

 

*Financing Activities*

 

Net cash provided by financing activities decreased $10.9 million to $36.5 million in the nine months ended November 30, 2012 compared to $47.4 million in the nine months ended November 30, 2011.  Net cash provided by our financing activities in the nine months ended November 30, 2012 were primarily driven by the March 15, 2012 refinancing, which included a new ABL Facility and $265.0 million in Secured Notes which was offset by the repayment of our previous first lien term loan A & B, first lien revolving credit facility and other long-term debt.  The period over period decrease in cash provided was primarily due to less cash needed to support operating cash flows in the current period.

 

*Capital Expenditures*

 

Cash capital expenditures decreased $0.8 million to $31.9 million for the nine months ended November 30, 2012 compared to $32.7 million for the nine months ended November 30, 2011.  This decrease is a result of $6.0 million lower capitalized software spend, offset by higher spending on existing manufacturing and other plant related equipment of $5.2 million.

 

**Our Indebtedness**

 

**Refinancing Transactions**

 

On March 15, 2012, we completed the sale of our Secured Notes at par.  In connection with the sale of the Secured Notes, we also entered into the ABL Facility.  We utilized the proceeds from the sale of the Secured Notes and the ABL Facility to repay all amounts outstanding under, and terminate, the Credit Agreement and certain other debt.  In our consolidated balance sheet as of February 29, 2012, we classified the components of debt refinanced on March 15, 2012 as long-term.

 

**Asset-Based Loan Facility**

 

*Original Terms*

 

As noted in the Refinancing section above, we entered into a new ABL Facility with M&T, as the issuing bank, a lender, the swing lender, the agent and the arranger. The ABL Facility provides for maximum borrowings on a revolving basis of up to $170.0 million from time to time for general corporate purposes, including working capital. The ABL Facility includes a $15.0 million letter of credit sub-facility and a $20.0 million swing line sub-facility for short-term borrowings. The ABL Facility will mature on March 15, 2017.

 

Borrowings under the ABL Facility are classified as long-term debt due to our ability to extend borrowings at the end of each borrowing period.

 

Borrowings under the ABL Facility (except swing line loans) bear interest at a rate per annum equal to, at the Company’s option to draw on a sub-facility, either (a) a base rate or (b) a LIBOR rate, in each case plus an applicable margin.  Swing line loans bear interest at the base rate plus the applicable margin. Pricing on the ABL Facility is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. LIBOR margins for the ABL Facility range from 2.50% to 3.50% and base rate margins range from 0.50% to 1.50%.  The ABL Facility also contains a commitment fee that is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. The commitment fee ranges from 0.25% to 0.63%.  From the commencement of the ABL Facility Agreement until September 7, 2012, which was the date of the amendment to the ABL Facility discussed below, the LIBOR margin was 2.75%, the base rate margin was 0.75% and the commitment fee was 0.50%.  The Company classified borrowings under the ABL Facility as long-term as a result of the March 15, 2017 maturity date and the revolving nature of the ABL Facility.

 

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Borrowings under the ABL Facility are guaranteed by the Company’s subsidiaries that guarantee the Secured Notes and Notes and are secured, subject to certain permitted liens, by first-priority liens on the ABL Priority Collateral and by second-priority liens on the collateral securing the Secured Notes on a first-priority basis, except for certain real property.

 

*Covenants*

 

The ABL Facility provides that if excess availability is less than the greater of (i) $25.0 million or (ii) 15% of the lesser of the commitments and the borrowing base, the Company must comply with a minimum fixed charge coverage ratio test of at least 1.0 to 1.0 for the immediately preceding four fiscal quarters or twelve consecutive months, as applicable. In addition, the ABL Facility includes customary affirmative and negative covenants that, subject to significant exceptions, limit the ability of the Company and the Guarantors 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) issuances of equity that have mandatory redemption or put rights prior to the maturity of the ABL Facility and (viii) providing negative pledges to third parties.  As of November 30, 2012 the Company was in compliance with these affirmative and negative covenants.

 

*Amendment of ABL Facility*

 

The ABL Facility contained a covenant that required the Company to deliver its fiscal year 2012 annual financial statements to the lender by May 29, 2012.  On September 7, 2012 the Company entered into the first amendment to the ABL Facility, and subsequent letters on September 28, 2012, November 9, 2012, December 7, 2012 and February 14, 2013 to change the required delivery date of the audited February 29, 2012 financial statements and the required delivery date of its first and second quarter results and financial statements to December 15, 2012, January 1, 2013, and February 28, 2013, respectively.

 

Availability under the ABL Facility is restricted to a borrowing base formula. As part of the first amendment entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio.  If the calculation of the Fixed Charge Coverage Ratio was less than 1.0 to 1.0, the borrowing base would be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.

 

The first amendment also allows M&T, in the event M&T is unable to reduce its final participation in the ABL Facility to no more than $75.0 million during the primary syndication of the ABL Facility by December 15, 2012, to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, and certain covenants and the interest and fees payable.  M&T has not syndicated the ABL Facility. However, there have been no further modifications of the terms of the ABL Facility.

 

On December 7, 2012, the Company entered into the second amendment of the ABL Facility, and a subsequent letter dated February 14, 2013, to change the required January 14, 2013 delivery date of this third quarter Form 10-Q to April 1, 2013.  There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes and Secured Notes.

 

**Secured Notes due 2018**

 

Interest on the Secured Notes is initially payable at 13.0% per annum, semi-annually in arrears on March 15 and September 15, 2012. The Company will make each interest payment to the holders of record of the Secured Notes as of the immediately preceding March 1 and September 1. The Company 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, the Company may, at its 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

 

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the Secured Notes will be payable as PIK Interest.  At November 30, 2012, PIK interest was $17.1 million ($11.9 million was recorded as an increase to the Secured Notes and $5.2 million was recorded as a long-term obligation in Other liabilities).

 

The indenture for the Secured Notes contains restrictive covenants that limit our ability and the ability of our subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with affiliates.

 

In accordance with the indenture for the Secured Notes, the Company was required to file a registration statement with the Securities and Exchange Commission and consummate a registered offer to exchange the Secured Notes for new Secured Notes having terms substantially identical in all material respects to the Secured Notes by March 11, 2013.  We have not filed the registration statement or completed the exchange offer.  Due to the failure to consummate the exchange offer within the required time period, the interest rate on the Secured Notes will increase by 0.25% per annum for the first 90-day period following the default and by an additional 0.25% per annum with respect to each subsequent 90-day period, up to a maximum additional rate of 1.0% per annum until such exchange offer is completed or the Secured Notes are redeemed.

 

*Notices of Default*

 

On September 5, 2012, the Company received a notice of default from the trustee under the indenture for the Secured Notes, and on September 6, 2012, the Company received a notice of default from the trustee under the indenture for the Notes, each to the effect that the Company has failed to provide to the trustees its Annual Report on Form 10-K for the fiscal year ended February 29, 2012 and Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2012 in compliance with the indentures.  In accordance with the terms and conditions of indentures for the Secured Notes and Notes, the Company had 120 days from the date of those notices to cure such default by complying with its reporting requirements and related filings.  The Company filed its Annual Report on Form 10-K for the year ended February 29, 2012 and its Quarterly Report on Form 10-Q for the period ended May 31, 2012 within the 120 day period and therefore has cured such defaults under the indentures.

 

On January 14, 2013, the Company received a notice of default from the trustee under the indentures for the Secured Notes and Notes due to the Company’s  inability to provide its Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 in compliance with the indentures.  We filed our Quarterly Report on Form 10-Q for the second fiscal quarter ended August 31, 2012 within the 120 day period and therefore cured such default under the indentures.

 

This Quarterly Report on Form 10-Q for the third fiscal quarter ended November 30, 2012 was due on January 14, 2013. We have not received a notice of default from the trustee under the indentures for the Notes or Secured Notes.

 

**Notes due 2018**

 

In August 2010, the Company sold $250.0 million aggregate principal amount of Notes at par value.  Interest on the Notes is payable semi-annually in cash in arrears on March 1 and September 1 of each year.

 

The Notes are subject to redemption in whole or in part, at any time on or after September 1, 2014 at certain redemption prices specified in the indenture for the Notes. The Company may also at any time before September 1, 2013 at its option redeem up to 35% of the Notes with the net cash proceeds from certain equity offerings. The Company may also redeem some or all of the Notes at any time prior to September 1, 2014 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest on the existing notes plus a make-whole premium defined in the indenture for the Notes. In addition, the Company may be required to make an offer to purchase the Notes upon the sale of certain assets or upon a change of control. The Notes are senior unsecured notes guaranteed on a joint and several basis on a senior unsecured basis by each of the Company’s subsidiaries that guarantee payments of the Company’s indebtedness under the ABL Facility and the Secured Notes.

 

The indenture for the Notes contains restrictive covenants that limit the Company’s ability and the ability of its subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with its affiliates.

 

**Land and Equipment Obligations**

 

The Company has various notes, mortgages and other financing arrangements resulting from the purchase of principally land and equipment.  All loans provide for at least annual payments, which include interest ranging up to 10.0% per annum.  Principally all loans are secured by the land and equipment acquired.

 

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Obligations include three revenue bonds, as of November 30, 2012 to different industrial development authorities with counties in Pennsylvania with a total amount outstanding of $5.8 million. The Company prepaid $3.8 million of industrial development bonds during the first quarter of fiscal year 2012 with the proceeds from an unsecured borrowing which was subsequently refinanced on March 15, 2012.

 

**Changes in Future Contractual Obligations**

 

There were no material changes to the contractual obligations disclosed in our Annual Report on Form 10-K “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Debt and Contractual Obligations”.

 

**Off Balance Sheet Arrangements**

 

We utilize off-balance sheet arrangements in our outstanding letters of credit associated with our industrial development authority bonds totaling $7.6 million and $14.5 million at November 30, 2012 and February 29, 2012, respectively, which were not included in our Consolidated Balance Sheets.

 

**Critical Accounting Policies and Significant Judgments and Estimates**

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period.

 

In January 2013, we began the process of completing our annual goodwill impairment assessment.  During our initial review, we identified indications that there may be significant decreases in the fair values of our Traffic Safety Services and Equipment reporting unit with goodwill of $5.8 million and a reporting unit in our Construction Materials segment with goodwill of $68.4 million as of November 30, 2012.  As of the date of issuance of this Quarterly Report on Form 10-Q, we have not completed our annual impairment assessment and we currently do not expect an impairment charge.

 

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, inventories, product warranties, taxes and goodwill and intangible assets. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to Note 1 “Summary of Significant Accounting Policies” as reported in our notes to our financial statements for the fiscal year ended February 29, 2012 as filed as part of the Company’s Annual Report on Form 10-K and our financial statements herein.

 

***Recently Issued Accounting Standards***

 

Refer to Note 1, “Nature of Operations and Summary of Significant Accounting Policies” to the condensed consolidated financial statements for a discussion of recent accounting guidance and pronouncements.

 

***Forward-looking Statements***

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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 Quarterly Report on Form 10-Q.  Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

 

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·                  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 could 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 PennDOT, the Pennsylvania Turnpike Commission, the New York State Thruway 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 ability to amend, extend or enter into new financing arrangements to refinance our existing financing arrangements and to generate a sufficient amount of cash to service our existing indebtedness, the notes and fund our operations;

 

·                  the risk of default on our existing and future indebtedness which may or may not result in an acceleration of our indebtedness thereunder;

 

·                  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, which may result in a lower than anticipated income or incurrence of a loss on the contract;

 

·                  the weather and seasonality;

 

·                  our operation in a highly competitive industry within our local markets;

 

·                  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 integrate 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;

 

·                  the potential risks if we are unable to recruit additional management and other personnel and are not able 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;

 

·                  material weaknesses and significant deficiencies in our internal controls over financial reporting;

 

·                  cancellation of significant contracts or our disqualification from bidding for new contracts;

 

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·                  general business and economic conditions, particularly an economic downturn; and

 

·                  the other factors discussed under Item 1A-Risk Factors in our Annual Report on Form 10-K for our fiscal year ended February 29, 2012.

 

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 Quarterly Report on Form 10-Q 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.

 

**ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We have exposure to financial market risks, including changes in commodity prices, interest rates and other relevant market prices.

 

**Commodity Price Risk**

 

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. We attempt to limit our exposure to changes in commodity prices by putting sales price escalators in place for most public contracts, and we aggressively seek to obtain escalators on private and commercial contracts.

 

**Interest Rate Risk**

 

We are subject to interest rate risk in connection with borrowings under our indebtedness.  As of November 30, 2012, we have $35.7 million in indebtedness outstanding under our ABL Facility subject to variable interest rates.  Each change of 1.00% in interest rates would result in an approximate $0.4 million change in our annual interest expense in total on our ABL Facility.  Any debt we incur in the future could also bear interest at floating rates.

 

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**ITEM 4 - CONTROLS AND PROCEDURES**

 

This report includes the certifications attached as Exhibits 31.1 and 31.2 of our CEO and CFO required by Rule 13a-14 of the Exchange Act.  This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

 

***Evaluation of Disclosure Controls and Procedures***

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2012.  Based upon that evaluation, our CEO and CFO concluded that, as of November 30, 2012, our disclosure controls and procedures were not effective as the result of the material weaknesses in internal control over financial reporting described below.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision of the Company’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). Internal control over financial reporting includes those policies and procedures that:

 

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

(ii) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and

 

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our financial statements for the year ended February 29, 2012, management identified certain material weaknesses in our internal control over financial reporting as of February 29, 2012. The material weaknesses are as follows:

 

·                  We did not maintain effective controls over the implementation of a new enterprise resource planning system (“ERP”).  Specifically, we did not implement appropriate logical security design and testing, perform sufficient data conversion testing, maintain appropriate system documentation, or provide sufficient end user training. This material weakness contributed to other deficiencies, some of which have resulted in additional material weaknesses, as further described below.

 

·                  We did not implement appropriate information technology controls related to change management, data integrity, access and segregation of duties. This material weakness resulted in both not having adequate automated and manual controls designed and in place and not achieving the intended operating effectiveness of controls to ensure accuracy of our financial reporting.

 

·                  We did not maintain effective controls over the recording of journal entries, both recurring and nonrecurring. Specifically, effective controls were not in place to ensure that journal entries were properly prepared, included sufficient supporting documentation, or were reviewed and approved to ensure the validity, accuracy and completeness of the journal entries. This material weakness resulted in additional procedures performed by management and contributed to other deficiencies, some of which have resulted in additional material weaknesses and adjustments during the fiscal 2012 year-end financial closing process, as further described below.

 

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·                  We did not maintain effective controls over the recording of intercompany transactions. Specifically, effective controls were not in place to ensure that intercompany balances were properly reconciled and eliminated on a timely basis. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls over accounting for contracts. Specifically, we did not design and maintain effective controls over the reconciliation of contract billings and accruals to the general ledger, or formally analyze the recognition of contract revenue, profit and loss. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls to ensure the completeness and accuracy of recorded revenue. Specifically, we did not design and maintain effective controls over pricing, billing practices and credit memos. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls to ensure the completeness, accuracy, cutoff and valuation of accounts receivable. Specifically, we did not timely reconcile accounts receivable balances and did not implement and maintain a formal review process. Further, we did not have a formal process in place to determine and appropriately assess the adequacy of accounts receivable valuation reserves. There also is no required formal approval process to determine and write off uncollectible account balances. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls over the completeness and accuracy of property, plant and equipment and related depreciation expense. Specifically, we did not design and maintain effective controls to ensure that assets are properly capitalized on the Company’s books. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls over the completeness and accuracy of our accounting estimates related to inventory reserves. Specifically, we did not design and maintain effective controls with respect to the review and analysis of excess and obsolete inventory and lower of cost or market considerations. This material weakness resulted in adjustments identified through additional procedures performed by management and audit adjustments recorded in 2012.

 

·                  We did not maintain effective controls over the completeness, accuracy and cutoff of our inventory counts.  Specifically, we did not design and maintain effective controls and policies with respect to physical inventory counting procedures, including the appropriate level of review. We also did not capitalize inventory variances for materials, labor, and overhead. This material weakness resulted in adjustments identified through additional procedures performed by management and audit adjustments recorded in 2012.

 

·                  We did not maintain effective controls to ensure the completeness and timely recording of accounts payable and accrued liabilities. Specifically, we did not timely reconcile accounts payable and accrued liabilities or properly accrue for invoices payable in the period. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not maintain effective controls over the completeness, accuracy and valuation of our deferred tax assets and liabilities. Specifically, we did not design and maintain effective controls with respect to accounting for the difference between the book and tax bases of the company’s property, plant and equipment and capital leases. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  We did not adequately segregate the duties of personnel within our Accounting Department, including those related to cash management, payroll processing, accounts payable processing, and accounts receivable and general ledger maintenance, due to an insufficient complement of staff.

 

Despite the fact that we are not required to and have not completed an assessment of the effectiveness of the Company’s internal control over financial reporting, as a result of the foregoing material weaknesses, we believe we identified control deficiencies that individually and in aggregate also constituted material weaknesses in our internal control over financial reporting as of November 30, 2012, as described below:

 

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·                  We did not maintain an effective control environment primarily attributable to the following:

 

·                  We did not maintain an effective control environment that consistently emphasized adherence to GAAP. This control deficiency, in certain instances, led to adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·                  In certain areas (finance, tax, accounting and information technology departments), we did not maintain effective controls to ensure a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements.

 

·                  We did not maintain effective controls to ensure complete and accurate business documentation to support certain transactions and accounting records. The controls in these areas with respect to the creation, maintenance and retention of complete and accurate business records were not effective.

 

·                  We did not design or maintain effective controls relating to policies and procedures to adequately review and account for significant accounting transactions. Specifically, we did not maintain and communicate sufficient and consistent accounting policies, which limited our ability to make accounting decisions and to detect and correct accounting errors. This deficiency contributed to other control deficiencies, some of which have resulted in material weaknesses.

 

·                  We do not maintain an internal audit or similar function. This deficiency resulted in not having an adequate independent, objective body to assess, monitor, and evaluate the intended operating effectiveness of controls or to conduct operational audits for the identification of recommendations to improve operating effectiveness of the organization.

 

·                  We did not maintain effective monitoring of controls in certain areas, for example in areas related to period-end financial reporting process, revenue recognition, cash, contracts, inventory, property, plant and equipment and estimates in accruals. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

·                  We did not maintain effective controls over risk assessments. Specifically, we did not maintain processes to evaluate certain business and fraud risks. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

·                  We did not maintain effective control activities in certain areas, including period-end financial reporting process, revenue recognition, cash, contracts, inventory, property, plant and equipment and estimates in accruals. Specifically, we did not maintain formal policies and procedures in several of the major areas that would help to ensure that management directives are carried out appropriately. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

·                  We did not maintain effective controls over information and communication, specifically around reports and financial data, as we had several issues with our system implementation. Thus, we had issues in providing the identification, capture, and exchange of information in a form and time frame that enabled our employees to carry out their responsibilities.  Specifically, due to the system implementation, there were issues revolving around the actual information/reports provided, which proved to be a pervasive issue. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

Misstatements could result in substantially all of the accounts and disclosures associated with the material weaknesses described above and as a result a material misstatement in our annual or interim consolidated financial statements would not be prevented or detected in a timely manner. Management has performed procedures designed to ensure the reliability of our financial reporting and related financial statements and we believe the consolidated financial statements included in this report as of and for the period ended November 30, 2012, are fairly stated in all material respects.

 

***Plans for Remediation of Material Weaknesses***

 

With the oversight of our CEO and CFO we have begun efforts to improve our internal control over financial reporting and our disclosure controls and procedures. Specific initiatives to date have been focused on the following:

 

·                  We are instituting a formal code of ethics review annually to communicate, both internally and externally, our commitment to a strong effective control environment, high ethical standards and financial reporting integrity,

 

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·                  We are providing training to reinforce the importance of our control environment for Finance, Accounting, Information Technology Department personnel and all operations Managers across the Company,

 

·                  We are implementing policies and procedures to ensure that we maintain appropriate business and accounting records and formally document the application of generally accepted accounting principles for business transactions,

 

·                  We are performing a review of existing Accounting, Tax and Information Technology Department personnel with the goals of enhancing our complement of resources with a higher degree of accounting and internal control knowledge, experience, and training,

 

·                  We are documenting and formalizing our period end financial reporting processes, including the implementation of a monthly close checklist and formal policies and procedures concerning journal entries, account reconciliations, accrued expenses and estimates,

 

·                  We are implementing policies and procedures to ensure revenue is properly valued and recognized,

 

·                  We have hired a new information technology director that is responsible for overseeing the completion of the ERP implementation, and

 

·                  We are in the process of implementing a more formalized internal risk assessment process and evaluating the potential to add an in-house internal audit function as well.

 

We believe the steps taken to date have improved the effectiveness of our internal control over financial reporting; however, we have not completed all of the corrective processes, procedures and related evaluation or remediation efforts identified herein that we believe are necessary.  As we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we will perform additional procedures prescribed by management, including the use of manual mitigating control procedures, to ensure that our financial statements continue to be fairly stated in all material respects.  We were not able to remediate all of the foregoing material weaknesses during our fiscal year ended February 28, 2013.

 

***Changes in Internal Control over Financial Reporting***

 

During the three months ended February 2012, we began the implementation of a new ERP at certain divisions.  The implementation materially affected our internal control over financial reporting and has contributed to the material weaknesses previously disclosed. After we fully address the implementation issues discussed above, we will further address our internal control over financial reporting. As a result, there was no change in our internal control over financial reporting during the fiscal quarter ended November 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1 - 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 proceedings 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 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.

 

**ITEM 1A - RISK FACTORS**

 

You should carefully consider the risks described in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012 (the “Form 10-K”), including those disclosed under the caption “Risk Factors,” which could materially affect our business, financial condition or future results.  Additional regulatory and other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.  If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.  Except as set forth below, the risks described in our Form 10-K have not materially changed.

 

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***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 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 an amount outside of the governmental entity’s estimate or including a bid item which the governmental 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 is secured, which could have a material adverse effect on our business and results of operations.

 

**ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

On December 28, 2012, each of Paul I. Detwiler, Jr. and Donald L. Detwiler exchanged 10,000 shares of Class A voting common stock of the Company for 11,180 shares of Class B non-voting common stock of the Company. The shares of the exchanged Class B non-voting common stock were then gifted by such individuals to their family members, each of whom is an existing shareholder. As a result of the exchange for Class B non-voting common stock, the gifting of such equity securities did not affect the voting control of the Company.

 

**ITEM 3 - DEFAULTS UPON SENIOR SECURITIES**

 

There are no other defaults upon senior securities except as described in the financial statements and accompanying notes herein and disclosed in the applicable Current Reports on Form 8-K filed with the Securities and Exchange Commission.

 

**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 Quarterly Report on Form 10-Q.

 

**ITEM 5 - OTHER INFORMATION**

 

None.

 

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**ITEM 6 - EXHIBITS**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                     |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                |
| 31.1*                |       | Certification of the Chief Executive Officer   Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities   Exchange Act, as amended. |
|                 |       |                                                                                                                                                |
| 31.2*                |       | Certification of the Chief Financial Officer   Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities   Exchange Act, as amended. |
|                 |       |                                                                                                                                                |
| 32.1**               |       | Certification of the Chief Executive Officer   Pursuant to 18 U.S.C. Section 1350.                                                             |
|                 |       |                                                                                                                                                |
| 32.2**               |       | Certification of the Chief Financial Officer   Pursuant to 18 U.S.C. Section 1350.                                                             |
|                 |       |                                                                                                                                                |
| 95                   |       | Mine Safety Disclosures                                                                                                                             |

 

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*                      Filed herewith.

**               Furnished herewith.

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                     | NEW ENTERPRISE STONE & LIME   CO., INC. |
|--------------------------|-------------------------------------------------------|
|                     |                                                  |
| Date: April 1, 2013 | By:                                                   | /s/ Albert L. Stone |
|                     |                                                  | Albert L. Stone |
|                     | * *                                              | *Senior Vice President and Chief Financial Officer* |

 

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**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                     |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                |
| 31.1*                |       | Certification of the Chief Executive Officer   Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities   Exchange Act, as amended. |
|                 |       |                                                                                                                                                |
| 31.2*           |       | Certification of the Chief Financial Officer   Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities   Exchange Act, as amended. |
|                 |       |                                                                                                                                                |
| 32.1**               |       | Certification of the Chief Executive Officer   Pursuant to 18 U.S.C. Section 1350.                                                             |
|                 |       |                                                                                                                                                |
| 32.2**               |       | Certification of the Chief Financial Officer   Pursuant to 18 U.S.C. Section 1350.                                                             |
|                 |       |                                                                                                                                                |
| 95                   |       | Mine Safety Disclosure.                                                                                                                             |

 

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*                      Filed herewith.

**               Furnished herewith.

 

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