This Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. Forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in the section entitled "Risk Factors" in the Annual Report, and factors discussed in the section entitled "Cautionary Note Regarding Forward-Looking Statements." This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated interim financial statements and the related notes and other information included in this report.
Overview
Summit's vision is to be the most socially responsible, integrated construction
materials solution provider, collaborating with stakeholders to deliver
differentiated innovations and solve our customers' challenges. Within our
markets, we strive to be a market leader by offering customers a single-source
provider for construction materials and related downstream products through our
vertical integration. Our materials include aggregates, which we supply across
We are organized into 10 operating companies that make up our three distinct
operating segments: West, East and Cement, which are also our reporting
segments. We operate in 21 U.S. states and in
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Table of Contents
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Business Trends and Conditions
The
Our revenue is derived from multiple end-use markets including public infrastructure construction and private residential and nonresidential construction. Public infrastructure includes spending by federal, state, provincial and local governments for roads, highways, bridges, airports and other infrastructure projects. Public infrastructure projects have historically been a relatively stable portion of state and federal budgets. Residential and nonresidential construction consists of new construction and repair and remodel markets. Any economic stagnation or decline, which could vary by local region and market, could affect our results of operations. Our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical changes in construction spending, especially in the private sector. From a macroeconomic view, we continue to see positive indicators for highway obligations. We are beginning to see the impact of rising interest rates
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Table of Contents and inflation on residential markets in our geographies. Rising interest rates and inflation may also impact our non-residential construction activity in the future as non-residential activity tends to lag behind residential activity by a year or so.
Transportation infrastructure projects, driven by both federal and state funding
programs, represent a significant share of the
In 2021, approximately 64% of our revenue was derived from the private construction market, and the remaining revenue from the public markets. We believe residential activity in our key markets will continue to be a driver for volumes in future periods. Funding for public infrastructure projects is expected to remain a high priority.
In addition to federal funding, state, county and local agencies provide highway
construction and maintenance funding. Our four largest states by revenue,
•The Texas Department of Transportation ("TXDOT") updated its fiscal year 2022
lettings estimate to
•The state of
•The state of
•The state of
Use and consumption of our products fluctuate due to seasonality. Nearly all of
the products used by us, and by our customers, in the private construction and
public infrastructure industries are used outdoors. Our highway operations and
production and distribution facilities are also located outdoors. Therefore,
seasonal changes and other weather-related conditions, in particular extended
rainy and cold weather in the spring and fall, as well as major weather events
such as hurricanes, tornadoes, tropical storms, heavy snows and flooding, can
adversely affect our business and operations through a decline in both the use
of our products and demand for our services. Further, low water levels on the
We are subject to commodity price risk with respect to price changes in liquid asphalt and energy, including fossil fuels and electricity for aggregates, cement, ready-mix concrete and asphalt paving mix production, natural gas for hot mix asphalt production and diesel fuel for distribution vehicles and production related mobile equipment. Liquid asphalt escalator provisions in most of our private and commercial contracts limit our exposure to price fluctuations in this commodity. We often obtain similar escalators on public infrastructure contracts. In addition, we enter into various firm purchase commitments, with terms generally less than one year, for certain raw materials, including diesel fuel.
Backlog
Our products are generally delivered upon receipt of orders or requests from customers, or shortly thereafter. Accordingly, the backlog associated with product sales is converted into revenue within a relatively short period of time. Inventory for products is generally maintained in sufficient quantities to meet rapid delivery requirements of customers. Therefore, a period-over-period increase or decrease of backlog does not necessarily result in an improvement or a deterioration of our business. Our backlog includes only those products and projects for which we have obtained a purchase order or a signed contract with the customer and does not include products purchased and sold or services awarded and provided within the period.
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Table of Contents Financial Highlights
The principal factors in evaluating our financial condition and operating
results as of and for the three and nine months ended
•Net revenue increased
•Our operating income increased
•In the three and nine months ended
•In the three and nine months ended
•In the nine months ended
•In the first nine months of 2022, the Company repurchased
Results of Operations
The following discussion of our results of operations is focused on the key financial measures we use to evaluate the performance of our business from both a consolidated and operating segment perspective. Operating income and margins are discussed in terms of changes in volume, pricing and mix of revenue source (i.e., type of product, sales or service revenue). We focus on operating margin, which we define as operating income as a percentage of net revenue, as a key metric when assessing the performance of the business, as we believe that analyzing changes in costs in relation to changes in revenue provides more meaningful insight into the results of operations than examining costs in isolation.
Operating income reflects our profit from operations after taking into consideration cost of revenue, general and administrative expenses, depreciation, depletion, amortization and accretion and gain on sale of property, plant and equipment. Cost of revenue generally increases ratably with revenue, as labor, transportation costs and subcontractor costs are recorded in cost of revenue. As organic volumes increase, we expect our general and administrative costs as a percentage of revenue to decrease. General and administrative expenses as a percentage of revenue vary throughout the year due to the seasonality of our business.
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