Item 1. Business
On March 13, 2015, through an indirect wholly owned subsidiary, Lone Star Fund IX (U.S.), L.P. (which is referred to, along with its affiliates and associates, but excluding us and other companies that it owns as a result of its investment activity, as Lone Star) acquired the building products business of HeidelbergCement AG, or HC, in the United States and Eastern Canada, or the Acquisition. Unless otherwise specified or where the context otherwise requires, references in this Annual Report on Form 10-K to “our,” “we,” “us,” the “Company” and “our business” refer to the operations of Forterra, Inc., together with its consolidated subsidiaries. We are a holding company incorporated in Delaware in 2016. We are controlled by Lone Star and have been operating as a stand-alone company since 2015.
Recent Developments
On February 19, 2021, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Quikrete Holdings, Inc., a Delaware corporation, or Quikrete, and Jordan Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Quikrete, or Merger Sub. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company, or the Merger, with us surviving the Merger as a wholly-owned subsidiary of Quikrete. At the effective time of the Merger, each issued and outstanding share of common stock of the Company (other than (i) any shares held in the treasury of the Company or owned, directly or indirectly, by Quikrete, Merger Sub or any wholly-owned subsidiary of the Company immediately prior to the Effective Time, (ii) shares that are subject to any vesting restrictions, or Company Restricted Shares granted under the Company’s stock incentive plans, (iii) any shares owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be automatically canceled and converted into the right to receive $24.00 in cash, without interest, or the Merger Consideration, subject to deduction for any required withholding tax. We and Quikrete are currently working with the United States Department of Justice, or DOJ, to obtain approval to consummate the Merger under the Hart-Scot-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, in the timeframe contemplated by the Merger Agreement.
In order to address some of the divestitures anticipated to be required by the DOJ, we have entered into two divestiture agreements. On November 24, 2021, we entered into an agreement with Eagle Corporation and Parent pursuant to which Eagle will purchase our 50% equity interest in Concrete Pipe & Precast, LLC, or CP&P, a 50/50 joint venture with Eagle, for a purchase price of $105 million, subject to certain adjustments as described in the purchase agreement. On December 13, 2021, we entered into an agreement with Hydro Conduit, LLC d/b/a Rinker Materials, an affiliate of Parent, and Foley Products Company, Inc. pursuant to which we and Rinker will each sell to Foley certain assets and liabilities associated with reinforced concrete pipe and precast plants for an aggregate purchase price of $95 million, subject to certain adjustments described in the asset purchase agreement. Consummation of these transactions is subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.
See Item 1A, Risk Factors, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in "Overview" for a more fulsome description of the Merger, the Merger Agreement, the risks related thereto and its terms and expected impact on our business.
General
We are a manufacturer of concrete pipe and precast products and ductile iron pipe in the United States and Eastern Canada for a variety of essential water-related infrastructure applications. Our products and services are used in the construction, maintenance, repair and replacement of water drainage, distribution and transmission systems.
We operate 80 active manufacturing facilities, and our manufacturing and distribution network allows us to serve most major markets in the United States and Eastern Canada.
We manufacture both water drainage pipe and precast structures (used primarily for storm water and drainage applications) and water transmission and distribution pipe (used primarily to transport potable water and as a component of wastewater systems) and believe our complementary product portfolio is well positioned to serve both (i) the storm water and wastewater infrastructure market and (ii) the potable water transmission and distribution market. We serve a diverse set of end markets, including infrastructure, residential, and non-residential construction, which allows us to benefit from both secular and cyclical growth across each of these end-markets. The infrastructure, residential, and non-residential end markets in the United States and Eastern Canada have different growth drivers and operating dynamics, and the cyclical performance of these markets has historically been staggered during different stages of the broader economic cycle serving to mitigate the cyclical impact of any one single market on our business. In addition, given the nature of water as a basic necessity, municipalities generally repair and replace their existing water and wastewater infrastructure.
Our operational strategy is focused on our five improvement pillars:
•Health and Safety — Prioritizing the health and safety of our employees above anything else; our most productive facilities should be our safest
•Plant-level Operational Discipline — Making daily improvements using our manufacturing/process know-how to drive efficiencies with disciplined financial investment
•Enhanced Commercial Capabilities—Investing in our sales force to expand capabilities and better inform our customers of our compelling value proposition
•Working Capital Efficiency—Having the right levels of inventory in the right places at the right times and aligning our accounts receivable and accounts payable cycles
•G&A Effectiveness—Delivering deeper information faster and at a lower cost so operators can make better business decisions
Our solid execution on these five pillars has produced, and we believe will continue to produce, the earnings and cash flows that have allowed us to reach our stated net leverage goal of 3.0x to 3.5x earnings during 2021 and we believe will allow us to continue reducing our leverage over time. Our organic growth strategy is focused on leveraging our operations, customer service and product innovation capabilities, as well as our product breadth and scale, to sell our products to existing customers, to increase penetration and project wins and to gain market share through new customers. Operationally, we continue to focus on efficiency and productivity improvements to reduce costs and drive unit margin improvements. We periodically evaluate our existing business and acquisition opportunities to complement our organic growth or enhance our scale, geographic footprint and product portfolio while simultaneously considering and making strategic divestitures or changes in our manufacturing footprint to optimize our portfolio. See Note 3 to our consolidated financial statements for a more detailed discussion of our recent acquisitions and divestitures.
Our Segments
Drainage Pipe & Products. We are the largest producer of concrete drainage pipe and precast products by sales volume in the United States and Eastern Canada. In addition, we also produce concrete pressure pipe in Eastern Canada. We operate 65 active manufacturing facilities across multiple states and two Canadian provinces. These facilities provide us with a local presence and the necessary proximity to our customers to minimize delivery times and distribution costs to the markets we serve. We believe our product offering creates value for our customers as it eliminates the need to engage multiple suppliers of storm water and wastewater-related products for a single project, enabling them to maximize efficiency and meet more aggressive timetables. We also have the ability to custom-build products to complex specifications and regulations.
Drainage pipe has residential, non-residential and infrastructure applications. It is primarily used for storm water applications, such as storm drains for roads and highways, and for residential and non-residential site developments. In addition, drainage pipe is used for sanitary sewers, low-pressure sewer force mains, tunneled systems, treatment plant piping and utility tunnels.
Water Pipe & Products. We are the largest producer of ductile iron pipe, or DIP, by sales volume in the United States. Utilizing the U.S. Pipe brand, we manufacture a number of products used for the transmission of potable water and wastewater in pipe diameters typically ranging from three to 64 inches. Our product breadth and depth and our technical service address a range of our customers' water transmission and distribution needs. Our 15 manufacturing facilities are located across the United States, with swing capacity available to support increased production levels as appropriate to satisfy increased demand.
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Key Segments | | Drainage Pipe & Products | | Water Pipe & Products |
Products | | | | |
Product Applications | | Storm water and wastewater infrastructure | | Potable and wastewater transmission and distribution |
| | | | |
Primary Market Channels | | - Direct to Contractors - Distributors | | - Distributors - Direct to Contractors, Municipalities and Utilities Waterworks |
# of Active Manufacturing Facilities | | 65 | | 15 |
Corporate and Other. Corporate, general and administrative expenses not allocated to our revenue-generating segments, such as certain shared services, executive and other administrative functions.
Our Industry and Core End Markets
We serve a range of infrastructure-related end markets. Based on the source of funding, we classify these construction markets into infrastructure/municipal, residential and non-residential.
Infrastructure
Infrastructure represents spending by federal, state, and local governments for the construction and repair of streets, highways, storm and sanitary sewers, as well as the construction and repair of water lines for the delivery of potable water, which are often supported by multi-year federal and state legislation and programs. It also includes local municipalities water infrastructure spending associated with the construction, repair and replacement of water transportation and distribution systems. Spending on these items is driven by federal, state and municipal funding for both new build and repair projects. In addition to availability of funding at the federal, state and municipal levels, these programs are impacted by other factors, including demographic and population shifts and the ability of contractors to obtain skilled labor.
A large proportion of U.S. water infrastructure is approaching, or has already reached, the end of its useful life. According to The American Society of Civil Engineers, or ASCE, many drinking water pipes in the U.S. were laid from 1900 to 1950. Today, aging pipelines contribute to the estimated 240,000 water main breaks per year in the U.S., wasting over two trillion gallons of treated drinking water. Additionally, lead pipes and fixtures, which were commonly installed through the mid-20th century, are still in service in some cities. The American Water Works Association estimated that the need for buried drinking water infrastructure in the U.S. through 2050 totals nearly $1.7 trillion, about 54% of which is needed for replacement of existing infrastructure and the balance being necessary to accommodate population growth and migration over that period. ASCE gave the U.S.
wastewater infrastructure a grade of D+ and, in 2017, estimated that 56 million new users would be connected to centralized treatment systems over the next 15 years requiring at least $271 billion to meet current and future demands and to upgrade existing infrastructure. Likewise, the ASCE grades the U.S. surface transportation (roads, bridges, and transit) infrastructure D/C+/D- and has identified over $1 trillion in additional spending needed to repair and upgrade existing structures as well as construction of new facilities to accommodate growth through 2025. As the leader in our respective markets serving the water related infrastructure industry, we believe we are well positioned to benefit from this much needed spending to repair and upgrade U.S. infrastructure.
Residential Construction
Residential construction includes single family homes and multi-family units such as apartments and condominiums. In this end market, our products are primarily used during the new lot development phase of construction. New residential housing starts provide a strong leading indicator of increased activity in the residential construction market for water transmission, wastewater and drainage systems. Demand for residential construction is influenced by demographic and population shifts, mortgage interest rates, and the ability of builders to obtain skilled labor. U.S. residential new construction peaked in 2006 before experiencing a downturn from 2007 to 2011. Since 2011, the recovery of residential new construction has translated into increased demand for our products and we believe we are well-positioned to capitalize as and to the extent this trend continues. Since 1974, annual additions to the housing supply exceeded household growth by an average of 30% to accommodate replacement of older units, demand for second homes, geographic shifts in the population, and a normal amount of vacancies. However, for most of the last decade, housing production has barely kept pace with household formation. We believe this indicates there is significant pent up demand for housing and that the market will see continued growth.
Non-residential Construction
Non-residential construction includes all privately financed construction other than residential structures. Revenues in this end-market are driven largely by new United States non-residential construction, for which demand is generally driven by job growth, vacancy rates, private infrastructure needs and demographic trends. Our products in this end market tend to be utilized primarily in shopping centers and similar types of suburban development as opposed to development of large office buildings, and we believe that the demand for suburban development should be stable to growing over the short to medium term. The supply of non-residential construction projects is also affected by the availability and cost of funding.
Our Products
Drainage Pipe & Products Segment
We manufacture drainage pipe and precast products in the United States and Eastern Canada and concrete pressure pipe products in Eastern Canada. Drainage pipe has residential, non-residential and infrastructure applications. It is primarily used for storm water applications, such as storm drains for roads and highways, and for residential and non-residential site developments. In addition, drainage pipe is used for sanitary sewers, low-pressure sewer force mains, tunneled systems, treatment plant piping and utility tunnels. Drainage pipe consists of concrete reinforced by a steel cage. It is manufactured by producing a steel mesh cage, enclosing it in a form or mold and then pouring concrete around it to produce the pipe. Drainage pipe is manufactured in round, elliptical and arch shapes ranging from 12 inches to 144 inches in diameter and in box sizes ranging from three feet to 20 feet in length and width.
We also manufacture a wide variety of precast concrete products, including box culverts, utility vaults, manholes, drainage inlets and pipe end sections. These precast concrete products are used for applications such as roadway drainage, airport drainage, storm water management, utility construction and water treatment and filtration systems. Our range of precast concrete products also includes products that fall under the general description of specialty precast, including products for which we hold patents that make us the exclusive manufacturer, or which are manufactured under license agreements with third parties. These specialty products include architectural panels for buildings, modular railroad crossings, retaining wall systems, highway noise
barriers, storm water treatment systems and concrete vaults, which are used to house either dry utilities (such as electrical, data or communications equipment) or wet utilities (such as valves, pumps or water meters).
We also manufacture structural precast products in the United States and a range of precast concrete bridge girders for highway projects in both the United States and Eastern Canada. We manufacture a variety of structural precast products primarily for infrastructure and non-residential applications, including hollow-core planks, prestressed bridge girders, beams, columns, wall panels, stairs, garage floors and architectural cladding. These products are used as structural and architectural elements in building structures such as parking garages and arched and modular bridges.
Precast concrete products are reinforced with steel, similar to pipe, and manufactured using either a dry cast or wet cast concrete mix, depending on the size of the piece and the number of identical pieces to be manufactured. In the dry cast method, a concrete mix with low water content, known as zero-slump concrete, is poured into a mold and then densely compacted around the steel reinforcement using a variety of manufacturing methods. The concrete structure is immediately removed from the mold and allowed to cure in a high humidity environment to ensure proper hydration of the concrete. This method allows multiple pieces to be produced from the same mold each day and is most suitable for high volume, repetitive manufacturing. In the wet cast method, a concrete mix with relatively high water content is poured into a mold and allowed to cure in the mold, which can take from four to 16 hours. Precast concrete products typically range in diameter from four to 12 feet for round products or in length and width from one foot to 12 feet for square or rectangular products.
We also regularly consider ways to innovate internally and expand our drainage pipe and precast product offerings by working to bring other products to market. Some of our product offerings include precast Duct Bank, Kenner Chainwall, and a number of storm water innovative technologies for storm water management marketed through our Bio Clean subsidiary. Duct Bank is a precast product that consolidates and protects underground electrical and communication cables and can be used in the construction of large buildings, including in data centers, as well as installing cabling underneath roads and areas with existing structures. Kenner Chainwall is a precast concrete foundation that provides a structurally sound, on-grade or elevated foundation to support prefabricated shelters or equipment buildings. One use is to elevate electrical equipment in flood zones such as those devastated by hurricanes. Each of these products is now commercially available.
In addition, for larger diameter applications, we manufacture concrete pressure pipe, prestressed concrete pipe and bar-wrapped concrete pipe in Eastern Canada. Our concrete pressure pipe is used for water transmission and distribution, power plant cooling water lines, sewage force mains for wastewater and storm water and other diverse applications involving the movement of large volumes of water. Concrete-lined pressure pipe ranges from fourteen to 144 inches in diameter. Prestressed concrete pipe consists of a concrete core, a steel cylinder and a high tensile strength wire that is wrapped, under measured tension and at uniform spacing, around the steel cylinder. This wire wrap places the steel cylinder and concrete core in compression, developing the pipe’s ability to withstand specified hydrostatic pressures and external loads. An outside coating of mortar protects the wires. Bar-wrapped concrete cylinder pipe combines the physical strength of steel with the structural and protective properties of high strength cement mortar. In this type of pipe, a round steel bar is helically wound around a welded steel cylinder and all surfaces are encased in cement mortar. This composite pipe reacts as a unit when resisting internal pressure and external loads. The inside of the cylinder is lined with centrifugally cast cement mortar. Our concrete pressure pipe is highly engineered and is built to order for technically demanding applications requiring various thresholds of working pressure, surge pressure and loads. Our engineers work closely with customers to design components and systems to meet specific regulatory and industrial demands.
In addition to our operations, we have a 50% equity interest in Concrete Pipe & Precast LLC, or CP&P, a joint venture with Eagle Corporation. CP&P operates 12 plants that serve the Mid-Atlantic and Southeastern United States. CP&P manufactures drainage pipe and precast concrete products and sells those products to similar types of customers as the ones to which we market. See Note 6 to our consolidated financial statements for additional information regarding CP&P. In November 2021 we entered into an agreement to sell our 50% equity interest in CP&P to Eagle, with the closing of this transaction subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.
Water Pipe & Products Segment
Utilizing the U.S. Pipe brand, we manufacture a number of products used for the transmission of potable water and wastewater in pipe diameters ranging from three to 64 inches.
We manufacture DIP in pipe diameters ranging from three to 64 inches in the United States. For each diameter of pipe, we offer a wide range of thicknesses with both standard and specialized linings and coatings. DIP is used for transmission and distribution of potable water and wastewater. DIP has residential and infrastructure repair replacement applications, including potable water distribution systems, small water system grids, major water transmission mains, wastewater collection systems, sewer force mains and water treatment plants. In addition to DIP, we also manufacture a full line of complementary joint restraints and fittings in Mexico, which are utilized for interlocking adjoining segments of pipe and are typically bundled with DIP. We also operate fabrication plants that modify our pipe to meet specific customer design requirements for above-ground applications.
DIP is manufactured using a process that consists of introducing molten iron into a rapidly-rotating steel mold and relying on centrifugal force to distribute the molten iron evenly around the inner surface of the mold to produce pipe of uniform size and dimensions. We also strive to innovate in our Water Pipe & Products segment, including by offering metallic zinc coating and TR-XTREME pipe. Metallic zinc coating is active corrosion protection for DIP. TR-XTREME pipe is DIP designed for areas of seismic activity and has joints that provide flexible extension capabilities.
Customers and Markets
Drainage Pipe & Products Segment
We typically sell our drainage pipe and precast products to contractors that perform construction work for various levels of government, residential and non-residential building owners, and developers in markets across the United States and Eastern Canada. Additionally, although they are not our direct customers, we view the owners and engineers who are customers of the contractors that purchase our products as our customers as well, because these owners and engineers often specify the types of products that our customers are required to use. We also sell our drainage pipe and precast products to utility companies. Several of our largest manufacturing facilities are located in close proximity to our markets. Our drainage pipe and precast products are typically shipped within a radius of 150 miles, but in some cases up to 350 miles, from our manufacturing facilities. Our concrete pressure pipe is used in projects for regional water authorities and districts, cities, counties, municipalities, port authorities, private companies and industrial clients, including power plants, and is typically shipped within a radius of 500 miles from our manufacturing facility.
Water Pipe & Products Segment
Our water transmission pipe products are sold to some of the largest waterworks distributors and contractors. Our Water Pipe & Products segment has significant sales through distributors, including Core & Main, a key customer that accounted for 18% and 16% of our consolidated net sales in 2021 and 2020, respectively. We also sell to utility contractors that work on new or replacement pipeline projects, primarily in the East, South and Midwest of the United States. DIP is typically shipped within a radius of 1,000 miles.
Competition
Drainage Pipe & Products Segment
Our competitors in our Drainage Pipe & Products Segment include Rinker Materials (a division of the QUIKRETE Companies) and Oldcastle Infrastructure (a unit of CRH plc), as well as numerous regional and local manufacturers servicing various geographies. Additionally, our drainage pipe products compete with high density polyethylene, or HDPE, and polypropylene pipe products where such materials would serve as an appropriate substitute for our product.
Within Canada, our concrete pressure pipe products compete with DECAST (formerly Munro Concrete Products, Ltd.) and several other American and Canadian competitors. Our concrete-lined pressure pipe also competes with pressure pipe made from other materials such as fiberglass, HDPE and PVC.
Water Pipe & Products Segment
Our two largest competitors in DIP manufacturing are McWane, Inc. and American Cast Iron Pipe Company. Our DIP products also compete with polyvinyl chloride, or PVC, and HDPE pipe and, when pricing achieves certain levels, we may also compete with foreign manufacturers of DIP. Our national network of fabrication products competes with regional and local providers of those products and services.
Sales, Marketing and Distribution
Our products are generally made to order, but certain of our Drainage concrete pipe and DIP products are made to inventory. We have established target levels of inventory for certain products that we attempt to keep available at our manufacturing facilities to meet customer demand. Inventories are held at manufacturing facilities and, to a lesser extent, at distribution yards.
Our structural precast products, most precast concrete products and concrete pressure pipe are customized products that are made to order. Our order backlog for precast concrete products is typically two to six months. Our order backlog for concrete pressure pipe and other precast offerings (bridge products) is approximately three to eighteen months depending on the demand in the geographic area for specific products.
We seek to attract and retain customers through customer service and technical expertise, as well as product quality, our product and service offerings and competitive pricing. Our market strategy for products with non-residential end users is centered on building and maintaining strong customer relationships rather than traditional advertising.
We maintain in-house technical sales, engineering and field service teams which provide customers technical expertise and support to assist them in finding the right product or solution for their specific need. Each of our operating segments has its own sales force. Overall, we employ approximately 275 sales and related support professionals. Our sales force and customer service functions are staffed by experienced professionals who have been trained in our product lines, processes and systems, and who maintain touch points with engineers, contractors, builders, and distributors. Additionally, we have a staff of more than 150 engineers that we employ to work in concert with our sales force to help develop effective product solutions for our customers.
We sell our DIP products and our fittings and fabricated products primarily through distributors. Our drainage pipe, concrete pressure pipe, and precast concrete products are mostly sold direct to customers who are installing such products for or are the end users of such products. Drainage pipe, concrete pressure pipe, and certain precast products are sold through a bidding process in which we seek to place the most competitive bid. We undertake marketing efforts through our participation in trade shows and through our website. We outsource many of our product deliveries by using a combination of dedicated carriers and other third-party carriers.
Raw Materials and Inputs
The primary material for our drainage pipe and precast concrete products and our concrete pressure pipe is concrete, which consists of water, cement and aggregates. Another key input for our products is steel, which is used to provide reinforcement within our drainage pipe and precast concrete products. Our DIP is largely made from iron melted from recycled scrap metals. Other key materials for our DIP include foundry coke and certain additives, such as alloys.
Most of our raw materials are widely available commodities. While we have experienced challenges in obtaining certain materials during 2021 as a result of a globally challenged supply chain environment, we have not experienced any significant shortages of raw materials. To the extent we do not produce any raw materials,
when and where possible, we try to purchase raw materials from the source, and because of their low value-to-weight ratios, we generally try to source our raw materials in the vicinity of our facilities. We usually purchase the raw materials we need in the spot market, except where we anticipate a significant need of materials for a specific project. Other than certain contracts for key materials, including cement and steel, we typically do not enter into long-term supply contracts with our suppliers that require us to purchase particular quantities or to pay particular prices.
We purchase our steel from a number of different suppliers, but most suppliers are based in the United States in order to comply with “Buy America” government contract requirements placed on our customers. We endeavor to purchase these steel supplies from the entity which is as close as possible to the manufacturer.
To manufacture DIP, fabricated products and fittings, we purchase scrap metal directly from qualified scrap sources near our foundry sites in the United States and Mexico. We utilize certain categories of scrap metal, primarily shredded automobile bodies, plate & structural, and cast iron. We purchase foundry coke from two merchant coke producers in the United States, both located in Birmingham, Alabama. Major alloys and additives are procured from both domestic and foreign sources based on a semiannual bid process.
Seasonality
The construction industry, and therefore demand for our products, is typically seasonal and dependent on weather conditions, with periods of snow or heavy rain negatively affecting construction activity. For a more detailed discussion, see the sections titled Item 1A., Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of the seasonality of our business.
Team Members
As of December 31, 2021, we had 4,824 team members, 1,434 of which were salaried and 3,390 of which were hourly. Of the total number of team members, 4,272 were located in the United States, 277 were located in Canada and 275 were located in Mexico. The number of hourly workers we employ varies to match our labor needs during periods of fluctuating demand and varies seasonally in certain regions. We also contract to hire temporary workers as needed to meet production goals.
As of December 31, 2021, approximately 33% of our workforce is covered by collective bargaining agreements, and approximately 46% of these team members are included in collective bargaining agreements that expire within one year of December 31, 2021. We have not had any recent union-organized work stoppages in the United States, Canada or Mexico. We believe that we have good relationships with our team members and with the unions representing our team members.
Health and Safety
We believe there is nothing more important than the health, safety and wellness of our team members; we believe this commitment is both a moral imperative and is fundamental to driving success in our business. We are committed to providing a safe and healthy working environment for our team members and are constantly looking for ways to improve our facilities and processes in order to better serve these goals. We also provide team members and their families with access to programs that promote their health and wellness, including wellness and disease prevention programs, employee assistance programs, and comprehensive health care benefits. In response to the COVID-19 pandemic, we implemented numerous policies and initiatives to assure that our team members, many of whom were essential infrastructure workers, could operate in an environment that promoted each individual’s health and safety, to provide paid leave and other benefits to employees directly impacted by the pandemic, and to allow those team members whose roles enabled them to work from home to do so. We have continued many of these policies and initiatives and are continuing to evaluate the need for such policies in the future.
Compensation and Benefits
In order to attract, retain, and engage our team members to drive our success, we provide compelling compensation and benefit programs that are competitive in our markets. Our programs include a combination of some or all of the following: competitive market-based pay, bonuses, stock awards, defined contribution retirement plans with Company matching contributions, healthcare and insurance benefits, health savings and flexible spending accounts, wellness programs, company-paid life insurance, paid time off, family leave, employee assistance programs, tuition assistance, flexibility to allow work from home in certain situations including in response to the COVID-19 pandemic, reimbursement for some health and fitness programs, and many others. These benefits can vary in our Canada and Mexico locations based on local availability and regulations. We are committed to ensuring equal pay for equal work regardless of gender, race or ethnicity.
Talent Development
We know that our continued success depends on our ability to engage with our team members and grow them into the future leaders our business needs. To that end, we have implemented robust learning management tools and training programs focused on developing our team members. Recent areas of focus have included implementation of a comprehensive program to develop skills for our sales professionals as well as development of a front-line leader training system for our plant-level supervisors. In addition, we periodically conduct a survey of our team members to determine where they are engaged and where we can improve.
Diversity and Inclusion
One of our core values is respect for people, and that includes providing a workplace that is committed to valuing diversity and inclusion of people of all backgrounds, regardless of race, ethnicity, gender, age, religious belief, disability, sexual orientation, gender identity, or cultural background. As of December 31, 2021, underrepresented minorities (defined as those individuals who identify as Black/African American, Hispanic/Latinx, Native American, Pacific Islander and/or two or more races) represented 49.43% of our team members, and women represented approximately 9.7% of our workforce.
Intellectual Property
We own various United States and foreign patents, registered trademarks, trade names and trade secrets and applications for, or licenses in respect of, the same, that relate to our various business lines including a number of innovative technologies relating to storm water management. The U.S. Pipe name has been a recognized manufacturer of DIP for more than 115 years. We also license intellectual property for use in certain of our products from unaffiliated third parties. We believe that our patents, trademarks, trade names and trade secrets are adequately protected and that any expiration or other loss of one or more of our patents or other intellectual property rights would not have a material adverse effect upon our business, financial condition or results of operations.
Environmental, Health and Safety Matters
We are subject to a broad range of federal, state, provincial, local and foreign laws and regulations governing health and safety or the protection of the environment and natural resources, including, for example:
•the federal Resource Conservation and Recovery Act, or RCRA, and comparable state laws that impose requirements for the generation, handling, transportation, treatment, storage, disposal and cleanup of waste from our operations;
•the federal Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, also known as “Superfund,” and comparable state laws that govern the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or locations which we have sent waste for disposal;
•the federal Clean Water Act, or CWA, and analogous state laws and regulations that can impose detailed permit requirements and strict controls on discharges of waste water from our facilities; and
•the federal Clean Air Act, or CAA, and comparable state laws and regulations that impose obligations related to air emissions, including federal and state laws and regulations to address greenhouse gas, or GHG, emissions.
Environmental pre-construction and operating permits are, or may be, required for certain of the Company’s operations, and such permits are subject to modification, renewal, and revocation. It is likely that we will be subject to increasingly stringent environmental standards in the future, particularly under air quality and water quality laws, as well as laws enacted to reduce climate change. It is also likely that we will be required to make additional expenditures, which could be significant, relating to environmental matters such as pollution controls and carbon emissions, on an ongoing basis. As our operations involve, and have involved, the handling, transport and distribution of materials that are, or could be classified as, toxic or hazardous or otherwise as pollutants, there is some risk of contamination and environmental damage inherent in our operations and the materials and products we handle and transport. Consequently, we are subject to environmental laws that impose liability for historical releases of hazardous substances. We are also subject to a variety of health and safety laws and regulations dealing with occupational health and safety. Manufacturing sites can be inherently dangerous workplaces. Our sites often put our employees and others in close proximity with large pieces of mechanized equipment, moving vehicles, and manufacturing processes, and highly regulated materials and there is inherent risk of related liabilities in our operations. See Item 1A. Risk Factors.
We regularly monitor and review our operations, procedures, and policies for compliance with existing laws and regulations, changes in interpretations of existing laws and enforcement policies, new laws that are adopted, and new laws that we anticipate will be adopted that could affect our operations. For health and safety regulations, the Occupational Safety and Health Administration, or OSHA, sets minimum standards; we have adopted programs internally that are intended to meet or exceed these requirements.
Despite our compliance efforts, risk of environmental, health and safety liability is inherent in the operation of our business, as it is with other companies engaged in similar businesses, and there can be no assurance that environmental, health and safety liabilities will not have a material adverse effect on us in the future.
Our consolidated financial statements include estimated liabilities for future costs arising from environmental issues relating to our properties and operations. As of December 31, 2021, the Company had accrued environmental liabilities of approximately $1.3 million. See Note 2 to the consolidated financial statements.
We have been named as a potentially responsible party, or PRP, at sites identified by the EPA or state regulatory agencies for investigation and remediation under CERCLA, or comparable state statutes, generally referred to as Superfund sites, including Sylacauga, AL, North Birmingham, AL, Portland, OR and Chattanooga, TN. With respect to these Superfund sites for which we have received PRP notices, we are entitled to contractual indemnity from a third party, subject to the terms of the indemnity provisions contained in the relevant agreement. Our estimates of current liabilities factor in these indemnification rights and our assessment of the likelihood that the indemnitor will fulfill its obligations with respect to liabilities relating to such sites. To date, the indemnifying party has been fulfilling its indemnification obligation with respect to those Superfund sites, and we have no reason to believe it will not continue to do so. However, in the future, we can provide no assurance that the indemnifying party will continue to honor its obligations, or that the existing indemnities will be sufficient to cover the liabilities for such matters.
Available Information
Our web site address is www.forterrabp.com. Information contained on our website or connected thereto does not constitute a part of this Annual Report on Form 10-K or any other filing we make with the Securities and Exchange Commission, or the SEC. We make available on this web site under the “Investor Relations” section, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-
K, and amendments to those reports, as soon as reasonably practicable after we electronically file those materials with, or furnish them to, the SEC. The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. We also make available free of charge on our website our Corporate Governance Guidelines, our Code of Ethics, and the Charters of our Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee of our Board of Directors.
Item 1A. RISK FACTORS
Our business, operations and financial condition are subject to various risks and uncertainties. We have described below significant factors that may adversely affect our business, operations, financial performance and condition or industry. Additionally, the COVID-19 pandemic has amplified many of the other risks discussed below to which we are subject and, given the unpredictable, unprecedented, and fluid nature of the pandemic, it may also materially and adversely affect our business, financial condition, and operating results in ways that are not currently anticipated by or known to us or that we do not currently consider to present material risk.
Additionally, the COVID-19 pandemic has amplified many of the other risks discussed below to which we are subject and, given the unpredictable, unprecedented, and fluid nature of the pandemic, it may also materially and adversely affect our business, financial condition, and operating results in ways that are not currently anticipated by or known to us or that we do not currently consider to present material risk. You should carefully consider these factors, together with all of the other information in this Annual Report on Form 10-K and in other documents that we file with the SEC, before making any investment decision about our securities. These risks and uncertainties are not the only ones we face. Additional risk and uncertainties presently unknown to us or currently deemed immaterial also may impair our business operations. Adverse developments or changes related to any of the factors listed below or others could materially and adversely affect our business, financial condition, results of operations, future prospects and growth.
Risk Factor Summary
This risk factor summary contains a high-level overview of certain of the principal factors and uncertainties that make an investment in our securities risky, including risks related to our industry and end markets; risks related to our business; production, supply chain and systems related risks; employee specific risks; miscellaneous business risk; indebtedness and liquidity related risks; risks related to the proposed merger; risks related to ownership of our common stock; and risks related to our tax receivable agreement. The following summary is not complete and should be read together with the more detailed discussion of these and the other factors and uncertainties that follows before making an investment decision regarding our securities. The principal factors and uncertainties that makes an investment in our securities risky include:
Risks Related to Our Industry and End Markets
•Our business is based in significant part on government-funded infrastructure projects and building activities, and any reductions or re-allocation of spending or related subsidies in these areas could have a material adverse effect on us.
•Residential and non-residential construction activity is cyclical and influenced by many factors, and any reduction in the activity in one or both of these markets could have a material adverse effect on us.
•We engage in a highly competitive business and any failure to effectively compete could have a material adverse effect on us.
•Changes in construction activity levels in Texas could have a material adverse effect on us.
Risks Related to Our Business
•Our business, results of operations, financial condition, cash flows and stock price have been and in the future may be adversely affected by the COVID-19 pandemic.
•Our dependence on key customers with whom we do not have long-term contracts and consolidation within our customers’ industries could have a material adverse effect on us.
•The seasonality of our business and its susceptibility to severe and prolonged periods of adverse weather and other conditions could have a material adverse effect on us.
Production, Supply Chain and Systems Related Risks
•Decreased availability or increases in the cost of raw materials could have a material adverse effect on us.
•A material disruption or capacity constraints at one or more of our manufacturing facilities or in our supply chain could have a material adverse effect on us.
•Delays in construction projects and any failure to manage our inventory could have a material adverse effect on us.
Employee Specific Risks
•Labor disruptions and other union activity could have a material adverse effect on us.
•We depend on the services of key executives and any inability to attract and retain key management personnel could have a material adverse effect on us.
•Any failure by us or the contractors with which we work to retain and attract necessary personnel or contract labor could have a material adverse effect on us.
Miscellaneous Business Risks
•Cybersecurity attacks may threaten our confidential information, disrupt operations and result in harm to our reputation and adversely impact our business and financial performance.
•We are subject to increasingly stringent environmental laws and regulations, and any failure to comply with any current or future laws or regulations could have a material adverse effect on us.
•Climate change and climate change legislation or regulations may adversely impact our business.
•Legal and regulatory claims and proceedings could have a material adverse effect on us.
•Any inability to successfully acquire businesses in the future could have a material adverse effect on us.
Indebtedness and Liquidity Related Risks
•The terms of our debt could have a material adverse effect on us.
•Our current indebtedness and any future indebtedness we may incur could have a material adverse effect on us.
•Credit and non-payment risks of our customers could have a material adverse effect on us.
Risks Related to the Proposed Merger
•We may not complete the proposed merger within the time frame we anticipate or at all, which could adversely affect our business.
•Our business is subject to restrictions while the merger is pending.
•The announcement and pendency of the merger may disrupt business relationships, lead to employee departures, or otherwise adversely affect our business.
Risks Related to Ownership of Our Common Stock
•The trading price of our common stock has been and may in the future be volatile and could decline substantially.
•The coverage of our business or our common stock by securities or industry analysts or the absence thereof could adversely affect our stock price and trading volume.
Risks Related to Our Tax Receivable Agreement
•We will be required to pay Lone Star for certain tax benefits, and these amounts are expected to be material.
•We will not be reimbursed for any payments made to Lone Star under the tax receivable agreement in the event that the tax benefits are disallowed.
Risks Related to Our Industry and End Markets
Our business is based in significant part on government-funded infrastructure projects and building activities, and any reductions or re-allocation of spending or related subsidies in these areas could have a material adverse effect on us.
Our business depends heavily on government spending for infrastructure and other similar building activities. As a result, demand for many of our products is heavily influenced by U.S. and Canadian federal government fiscal policies and tax incentives and other subsidies, as well as state and municipal funding of projects. The infrastructure projects in which we participate are typically funded directly by governments and/or privately-funded but are otherwise tied to or impacted by government policies and spending measures. Government infrastructure spending and governmental policies with respect thereto depend primarily on the availability of public funds, which is influenced by many factors, including governmental budgets, public debt levels, interest rates, existing and anticipated and actual federal, state, provincial and municipal tax revenues, government leadership and the general political climate, as well as other general macroeconomic and political factors. In addition, U.S. federal government funds may only be available based on states’ willingness to provide matching funding, and state funding may not be available, particularly in light of the negative impact of the COVID-19 pandemic on state budgets. Government spending is often approved only on a short-term basis and some of the projects in which our products are used require longer-term funding commitments. If government funding is not approved or funding is lowered, whether as a result of poor economic conditions, lower than expected revenues, competing spending priorities or other factors, it could limit infrastructure projects available, increase competition for projects, result in excess inventory and decrease sales, any of which could adversely affect the profitability of our business.
Additionally, certain regions or states may require or possess the means to finance only a limited number of large infrastructure projects and periods of high demand may be followed by years of little to no activity. There can be no assurances that governments will sustain or increase current infrastructure spending and tax incentive and other subsidy levels, and any reductions thereto or delays therein could have a material adverse effect on our business, financial condition and results of operations.
Residential and non-residential construction activity is cyclical and influenced by many factors, and any reduction in the activity in one or both of these markets could have a material adverse effect on us.
Historically, demand for our products has been closely tied to residential construction and non-residential construction in the United States and Eastern Canada. Our success and future growth prospects depend, to a significant extent, on conditions in these two markets and the degree to which these markets are strong in the future.
The construction industry and related markets are cyclical and have in the past been, and may in the future be, materially and adversely affected by general economic and global financial market conditions. These factors impact not only our business, but those of our customers and suppliers as well. This influence is true with respect to macroeconomic factors within North America, particularly within our geographic footprint in the United States and Eastern Canada. For example, in 2008, residential construction and non-residential construction activity dipped to historically low levels during the financial crisis. As a result, demand for many of our products dropped significantly. More recently, the COVID-19 pandemic has impacted global supply chains, including pricing and availability of many of the materials used in residential construction. Continued supply chain issues within the construction industry could adversely affect demand for our products.
The markets in the construction industry in which we operate are also subject to other more specific factors. Residential construction activity levels are influenced by and sensitive to a number of factors, including mortgage availability, the cost of financing a home (in particular, mortgage terms and interest rates), unemployment levels, household formation rates, gross domestic product, residential vacancy and foreclosure rates, demand for second homes, existing housing prices, rental prices, housing inventory levels, building mix between single- and multi-family homes, consumer confidence, seasonal weather factors, the available labor pool and government regulation, policy and incentives. Non-residential construction activity is primarily driven by levels of business investment, availability of credit and interest rates, as well as many of the factors that impact residential construction activity levels.
We cannot control the foregoing factors, we cannot be certain that residential and non-residential construction activity will remain at current levels, and there can be no assurances regarding whether any growth in these markets can be sustained. If construction activity in our markets, and more generally, does remain at current levels, or if there are future downturns, whether locally, regionally or nationally, it could have a material adverse effect on our business, financial condition and results of operations.
We engage in a highly competitive business and any failure to effectively compete could have a material adverse effect on us.
The markets in which we sell our products are highly competitive. We face significant competition from, depending on the segment or product, domestic and imported products produced by local, regional, national and international building product manufacturers, as well as privately owned single-site enterprises. Due in part to the costs associated with transporting our products to our customers, many of our sub-markets are relatively fragmented and include a number of regional competitors. Our competitors include Rinker Materials (a division of QUIKRETE) and Oldcastle Infrastructure (a division of CRH plc), as well as numerous regional and local competitors, in our Drainage Pipe & Products segment, and McWane, Inc. and American Cast Iron Pipe Company in our Water Pipe & Products segment.
Competition among manufacturers in our markets is based on many factors with significant emphasis on price. Our competitors may sell their products at lower prices because, among other things, they possess the ability to manufacture or supply similar products and services more efficiently or at a lower cost or have built a superior sales or distribution network. Some of our competitors may have access to greater financial or other resources than we do, which may afford them greater purchasing power, greater production efficiency, increased financial flexibility or more capital resources for expansion and improvement. In addition, some of our competitors are vertically integrated with suppliers or distributors and can leverage this structure to their advantage to offer better pricing to customers. Furthermore, our competitors’ actions, including restoring idled or expanding manufacturing capacity, or the entry of new competitors into one or more of our markets, particularly in the Drainage business where there are low barriers to entry, could cause us to lower prices in an effort to maintain our customer base. Certain of our products, including gravity pipe, are volume manufacturing products that are widely available from other manufacturers or distributors, with prices and volumes determined frequently based on participants’ perceptions of short-term supply and demand. Competitive factors, including industry overcapacity, could also lead to pricing pressures. For example, competitors may choose to pursue a volume policy to continue utilizing their manufacturing facilities or in attempt to gain market share, each to the detriment of maintaining prices. Excess product supply can result in significant declines in the market prices for these products, often within a short period of time. As a result, at times, to remain competitive, we may lower the price for any one or more of our products to or below our production costs, requiring us to sacrifice margins or incur losses. Alternatively, we may choose to forgo product sales or cease production at one or more of our manufacturing facilities. Conversely, at times when prices are maintained at higher levels, there is greater risk that foreign competitors may enter one or more of our markets, particularly with respect to DIP.
In addition to pricing, we also compete based on service, quality, range of products and product availability. Our competitors may be positioned to provide better service, including faster delivery time on products, and thereby establish stronger relationships with customers and suppliers. Our competitors may also sell preferred products, improve the design and performance of their products, develop a more comprehensive product portfolio, be better positioned to influence end-user product specifications or introduce new products with competitive
prices and performance characteristics. While the majority of our products are not subject to frequent or rapid stylistic changes, trends do evolve over time, and our competitors may do a better job of predicting market developments or adapt more quickly to new technologies or evolving customer requirements.
We also face competition from substitute and newly designed building products. For example, storm water pipe can be manufactured from concrete, steel, high-density polyethylene (HDPE), polypropylene (PP) or polyvinyl chloride (PVC) and potable water transmission infrastructure can be manufactured using HDPE or PVC. The market share of HDPE and PP pipe, which compete with gravity pipe and concrete pressure pipe for certain applications, and HDPE and PVC pipe, which compete with DIP for certain applications, have increased in recent years. Governments in the past have provided, and may continue in the future, to provide incentives that support or encourage, or in certain instances pass regulations that require, the consideration or use of substitute products with which we compete. Lower costs and pricing of substitute products may challenge our ability to achieve pricing for our products at a level that is consistent with our business plans. Some of the substitute products with which we compete may also offer longer warranties than our typical product warranty, and we may face competitive pressures to offer longer warranties on our products, which could increase our exposure to claims in future years or cause us to lose business. Additionally, new construction techniques and materials will likely be developed in the future. Increases in customer or market preferences for any of these products could lead to a reduction in demand for our products, limit our ability to raise prices or otherwise adversely impact our competitive position.
Any failure by us to compete on price or service, to develop successful products and strategies or to generally maintain and improve our competitive position could have a material adverse effect on our business, financial condition and results of operations.
Changes in construction activity levels in Texas could have a material adverse effect on us.
We currently conduct a significant portion of our business in Texas, which we estimate represented approximately 18% and 18% of our 2021 and 2020 net sales, respectively. Government-funded infrastructure spending, as well as residential and non-residential construction activity in each of these areas has declined from time to time, particularly as a result of slow economic growth, whether in the energy industry or otherwise. Local economic conditions depend on a variety of factors, including national economic conditions, local and state budgets, infrastructure spending and the impact of federal cutbacks. In addition, Texas is susceptible to severe weather and flooding, which can interrupt, delay or otherwise impact the timing of projects. Any decrease in construction activity in Texas could have a material adverse effect on our business, financial condition and results of operations.
A tightening of mortgage lending or mortgage financing requirements or other reductions in the availability of consumer credit or increases in its cost could have a material adverse effect on us.
We depend on net sales generated from residential construction activity. Most home sales in the U.S. and Eastern Canada are financed through mortgage loans, and a significant percentage of renovation and other home repair activity is financed either through mortgage loans or other available credit. To the extent that the economy experiences a cyclical downturn, the financial position of many consumers may be impacted and financial institutions may tighten their lending criteria, as occurred after the 2008 financial crisis, each of which can and did contribute to a significant reduction in the availability of consumer credit and result in a significant reduction in total new housing starts in the U.S. and consequently, a reduction in demand for our products in the residential sector. Similarly, the rate of interest payable on any mortgage or other form of credit will have an impact on the cost of borrowing. While base rates have remained relatively low in recent years, U.S. central bank authorities have indicated an intent to raise such rates in response to inflationary pressures on the economy during 2022, which would increase the cost of borrowing, making the purchase of a home less attractive, which could reduce the number of new housing starts in the U.S. and Eastern Canada. Any future tightening of mortgage lending or other reductions in the availability of consumer credit or increases in its cost, including as a result of rising interest rates and inflation, could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Business
Our business, results of operations, financial condition, cash flows and stock price have been and in the future may be adversely affected by the COVID-19 pandemic.
Our operations and business have been adversely affected and could in the future be materially and adversely affected, whether directly or indirectly, by the COVID-19 pandemic and the resulting weakening of economic conditions in the United States and eastern Canada. Local, state, provincial and federal governmental authorities initially responded to the pandemic by implementing increasingly stringent measures in geographies where we operate to help control the spread of the virus, including restrictions on movement such as quarantines, “shelter in place,” “stay at home” orders, and travel restrictions, as well as restricting or prohibiting outright some or all forms of commercial and business activity, and other restrictions, including closures of school and childcare facilities. Certain states also enacted regulations that authorize local officials to close businesses where there if a lack of safety precautions in place or signs that transmission of the virus at the workplace has occurred. Although we were and have continued to be categorized as “essential” and therefore permitted to operate our facilities consistent with applicable local, state, provincial and federal orders, any changes in these governmental orders, including the imposition of new orders, changes to the extent or the duration thereof, or any further, more severe, actions taken by governmental authorities or that we may choose to take whether required or not could have a material adverse effect on our operations.
Our customers have been and could continue to be negatively impacted by the COVID-19 pandemic, including as a result of project delays and other adverse impacts on demand, which could result in adverse impacts on our sales and have a material adverse effect on our business, results of operations and financial condition. Similarly, our suppliers and other parts of our supply chain have experienced and could continue to experience disruptions and other adverse impacts as a result of the pandemic that could cause us to be unable to obtain key raw materials and supplies on a timely or cost-effective basis, or in some cases, at all, any of which could result in our being unable to service our customers’ demands, and adversely affect our business and results of operations. For example, prices for certain of our raw material costs, including costs for scrap metal, steel, cement, as well as other key materials needed in smaller amounts to produce and sell our products, such as coke, nitrogen gas, rubber gaskets, and magnesium ferrosilicon, which have historically fluctuated depending on, among other things, overall market supply and demand and general business conditions, were negatively impacted by both global and industry-wide supply chain disruptions, resulting in increases to our costs of goods sold and disruption in supply for some materials in certain of our areas. We have also encountered issues regarding timely receipt and in some cases availability of certain of these raw materials.
The COVID-19 pandemic, including any actions we have taken in response, has disrupted our internal operations, including by heightening the risk that a significant portion of our workforce will suffer illness or otherwise not be permitted or be unable to work, and required that certain of our employees work remotely, which has heightened certain risks, including those related to cybersecurity and internal controls. For example, during the second quarter of 2020, a small number of employees tested positive for COVID-19, which required us to temporarily close a small number of our manufacturing facilities, and throughout 2021 we experienced increasing numbers of employees who tested positive for COVID-19 and were required to quarantine, which impacted our ability to operate our facilities efficiently. Additionally, we cannot predict whether these conditions and concerns will continue or whether we will experience more significant or frequent disruptions in the future, including the complete closure of one or more of our facilities, which could cause delays in our ability to produce and deliver products to our customers and cause us to suffer reputational harm and incur penalties and other types of damages if we are not able to meet contractual obligations. In addition, in the event demand for our products is significantly reduced as a result of the COVID-19 pandemic and related economic impacts, we may need to assess different corporate actions and cost-cutting measures, including reducing our workforce or closing one or more facilities, and these actions could cause us to incur costs and expose us to other risks and inefficiencies, including whether we would be able to rehire our workforce or recommence operations at a given facility if our business experiences a subsequent recovery. A prolonged period of generating lower cash from operations or other pressures on our liquidity could adversely affect our financial condition, the achievement of our strategic objectives or require us to seek additional capital, which may not be available on favorable terms or at all.
The COVID-19 pandemic also adversely affected economies worldwide and significantly disrupted financial and other capital markets, causing a significant deceleration of economic activity. The continuing impact of this outbreak on the U.S. and world economies is uncertain and, depending on the severity of future strains, the impact of responsive government measures and the efficacy of vaccines and vaccine roll-outs, these adverse impacts could worsen, impacting all segments of the global economy, and result in a significant recession or worse. Although we initially took certain precautionary measures to preserve liquidity, including borrowing under our ABL Facility and suspending non-essential capital expenditures, we have since ended these measures, repaid the amounts borrowed under the ABL Facility and caught up on capital projects that were initially delayed early in the pandemic.
Considerable uncertainty still surrounds the COVID-19 virus and the pandemic's potential effects, and the extent and effectiveness of responses taken on local, national and global levels. While we expect the pandemic and related events will continue to have a negative effect on us, the unpredictable and unprecedented nature and fluidity of current circumstances makes it impractical to identify all potential risks or estimate the full extent and scope of the impact on our business and industry, as well as national, regional and global markets and economies. However, our ability to conduct our business in the manner previously or currently expected could be materially and adversely affected, and any of the foregoing risks and uncertainties as well as those that have not yet manifested themselves or been identified could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Our dependence on key customers with whom we do not have long-term contracts and consolidation within our customers’ industries could have a material adverse effect on us.
Our business is dependent on certain key customers. In 2021 and 2020, Core & Main, our largest customer accounted for 18% and 16% of our net sales, respectively. As is customary in our industry, we do not enter into long-term contracts with many of our customers. As a result, our customers could stop purchasing our products, reduce their purchase levels or request reduced pricing structures at any time. We may therefore need to adapt our manufacturing, pricing and marketing strategies in response to a customer who may seek concessions in return for its continued or increased business. In addition, a macroeconomic downturn or any other cause of consolidation in the U.S. homebuilding industry or among our other customers, as occurred in the aftermath of the 2008 financial crisis when a number of smaller businesses went out of business or were acquired, can significantly increase the market share and bargaining power of a limited number of customers and give them significant additional leverage to negotiate more favorable terms and place greater demands on us. A loss of one or more customers or a meaningful reduction in their purchases from us or further consolidation within our end markets could have a material adverse effect on our business, financial condition and results of operations.
The seasonality of our business and its susceptibility to severe and prolonged periods of adverse weather and other conditions could have a material adverse effect on us.
Demand for our products in some markets is typically seasonal, with periods of snow or heavy rain negatively affecting construction activity. For example, sales of our products in Canada and the Northeast and Midwest regions of the United States are somewhat higher from spring through autumn when construction activity is greatest. Construction activity declines in these markets during the winter months in particular due to inclement weather, frozen ground and fewer hours of daylight. Construction activity can also be affected in any period by adverse weather conditions such as hurricanes, severe storms, torrential rains and floods, natural disasters such as fires and earthquakes and similar events, any of which could reduce demand for our products, push back existing orders to later dates or lead to cancellations. Furthermore, our ability to deliver products on time or at all to our customers can be significantly impeded by such conditions and events, such as those described above. Public holidays and vacation periods constitute an additional factor that may exacerbate certain seasonality effects, as building projects or industrial manufacturing processes may temporarily cease. These conditions, particularly when unanticipated, can leave both equipment and personnel underutilized. Additionally, the seasonal nature of our business has led to variation in our quarterly results in the past and may continue to do so in the future. This general seasonality of our business and any severe or prolonged adverse weather conditions or other similar events could have a material adverse effect on our business, financial condition and results of operations.
The use of our products is often affected by various laws and regulations in the markets in which we operate, any of which may have a material adverse effect on us.
The use of many of our products is subject to approvals by municipalities, state departments of transportation, engineers and developers. These approvals and specifications, including building codes, may affect the products our customers or their customers (the end users) are allowed or choose to use, and, consequently, failure to obtain or maintain such approvals or changes in building codes may affect the saleability of our products. Changes in applicable regulations governing the sale of some of our products or the failure of any of our products to comply with such requirements could increase our costs of doing business, reduce sales or otherwise have a material adverse effect on our business, financial condition and results of operations.
We are subject to increasingly stringent environmental laws and regulations, and any failure to comply with any current or future laws or regulations could have a material adverse effect on us.
We are subject to federal, state, provincial, local and foreign laws and regulations governing the protection of the environment and natural resources, including those governing air emissions, wastewater discharges and the use, storage, discharge, handling, disposal, transport and cleanup of solid and hazardous materials and wastes. We are required to obtain permits from governmental authorities for certain operations, and if we expand or modify our facilities or if environmental laws change, we could be required to obtain new or modified permits.
Environmental laws and regulations, including those related to energy use and climate change, tend to become more stringent over time, and any future laws and regulations could have a material impact on our operations or require us to incur material additional expenses to comply with any such future laws and regulations. Future environmental laws and regulations may cause us to modify how we manufacture and price our products or require that we make significant capital investments to comply. For example, our manufacturing processes use a significant amount of energy, and increased regulation of energy use to address the possible emission of greenhouse gases could materially increase our manufacturing costs or require us to install emissions control or other equipment at some or all of our manufacturing facilities.
If we fail to comply with any existing or future environmental laws, regulations or permits, we could incur fines, penalties or other sanctions and suffer reputational harm. In addition, we could be held responsible for costs and damages arising from claims or liabilities under environmental laws and regulations, including with respect to any exposure to or release of hazardous materials or contamination at our facilities, whether presently or previously leased, operated, or owned, or at third-party waste disposal sites. We could also be subject to third-party claims from individuals for property damage, personal injury or nuisance if any releases from our property were to cause contamination of the air, soil or groundwater of areas near our facilities. These laws and regulations may also require us to investigate and, in certain instances, remediate contamination. Some of our sites have a history of industrial use, and while we apply strict environmental operating standards and undertake extensive environmental due diligence in relation to our facilities and acquisitions, some soil and groundwater contamination has occurred in the past at a limited number of sites.
As of December 31, 2021, we had accrued approximately $1.3 million for environmental liabilities. Additionally, we cannot completely eliminate the risk of future contamination. Any costs or other damage related to existing or future environmental laws, regulations or permits or any violations thereof could expose us to significant financial losses as well as civil and criminal liabilities, any of which could have a material adverse effect on our business, financial condition and results of operations.
Climate change and climate change legislation or regulations may adversely impact our business.
Many of our products, particularly in our Drainage Pipe & Products segment, are made from or use concrete, which utilizes Portland cement as a raw material, a material whose manufacturing process involves the emission of carbon dioxide, a greenhouse gas that scientists have attributed as a cause of climate change. Our products are also heavy and require transportation from our facilities to the site where they are used, which consumes energy. A number of governmental bodies have finalized, proposed or are contemplating legislative
and regulatory changes in response to the potential effects of climate change, which could lead to additional legislative and regulatory changes in those countries, including by means of required reporting of greenhouse gas emissions, the use of alternative fuels, the use of carbon credits (including a "cap and trade" system) and/or a carbon tax. The U.S and Canada have agreed to the Paris Agreement, in connection with the United Nations Framework Convention on Climate Change, in which the signatories aim to reduce greenhouse gas emissions, or GHGs, as soon as possible and achieve a position of net zero GHGs by 2050. In the U.S., President Biden has stated his commitment to taking action to address climate change, including by rejoining the Paris Agreement, announcing goals to achieve a 50-52% reduction in GHGs from 2005 levels by 2030, a whole-of-government initiative supported by his National Climate Task Force, and by issuing various executive orders addressing climate change policy, including an executive order in December 2021 directing the federal government to achieve net-zero greenhouse gas emissions by 2050. Based on this focus, it is possible that environmental regulators and other agencies may use their rule-making authority and procurement decisions to further address climate change Although it is uncertain at this time precisely what actions various governmental bodies will take early to address the effects of climate change and to achieve the goals outlined in various agreements, including in what timeframe those actions would be implemented, it seems clear that changes to regulate carbon emissions are a key focus for the Biden Administration and other governmental entities, including California, which has had a cap and trade system in place since 2012. In light of the uncertainty around what regulations will be implemented, we cannot at this time reasonably predict what the costs of any future compliance requirements may be, but it is likely our costs will increase in relation to any climate change legislation and regulation concerning greenhouse gases, which could have an adverse effect on our future financial position, results of operations or cash flows.
Climate change may also have adverse physical or financial impacts on our business to the extent that it causes more severe or more frequent major storm events, flooding, drought-induced wildfires, or other shifts in weather patterns. Increases in the intensity and frequency of acute weather events have been linked to climate change, and this risk may increase to the extent global warming continues or is unabated. These types of extreme weather events may include disruptions to operations or production, disruptions to supply chains or damage to our physical plants, which could lead to reduced financial performance of our business.
In addition, regardless of whether governmental bodies enact legislation to address climate change and reduce GHGs, the public perception of carbon-intensive industries may change adversely over time and additional focus on environmental, social and governance issues by the public and/or investors may harm our business as it could damage our reputation, require us to expend resources in reducing our net carbon emissions, or reduce demand for our products, which could adversely impact our results of operations and cash flows.
We are subject to health and safety laws and regulations, and the costs to comply with, or any failure to comply with, any current or future laws or regulations could have a material adverse effect on us.
Manufacturing sites are inherently dangerous workplaces. Our sites often put our employees and others in close proximity with large pieces of mechanized equipment, moving vehicles, chemical and manufacturing processes, heavy products and items and highly regulated materials. As a result, we are subject to a variety of health and safety laws and regulations dealing with occupational health and safety. Unsafe work sites have the potential to increase employee turnover and raise our operating costs. Our safety record can also impact our reputation. We maintain functional groups whose primary purpose is to ensure we implement effective work procedures throughout our organization and take other steps to ensure the health and safety of our work force, but there can be no assurances these measures or other measures we may take in the future will be successful in preventing injuries, including severe injuries and fatalities, or violations of health and safety laws and regulations. Any failure to maintain safe work sites or violations of applicable law could expose us to significant financial losses and reputational harm, as well as civil and criminal liabilities, any of which could have a material adverse effect on our business, financial condition and results of operations.
Warranty and related claims could have a material adverse effect on us.
We generally provide warranties on our products against defects in materials and workmanship, the costs of which could be significant. Many of our products such as gravity pipe are buried underground and incorporated
into a larger infrastructure system, such as a city’s or municipality’s water transmission system, or built into the fabric of a building or dwelling. In most cases, it is difficult to access, repair, recall or replace these products. Additionally, some of our products, such as our pressure pipe, which is used in nuclear and coal-fired power generation factories, are used in applications where a product failure or construction defect could result in significant project delay, property damage, personal injury or death or could require significant remediation expenses. Because our products, including discontinued products, are long lasting, claims can also arise many years after their manufacture and sale. In certain cases, we may also offer warranties for longer periods now for certain products to compete with certain substitutes, which could increase the number, size, and frequency of warranty claims in the future. Product failures may also arise due to the quality of the raw materials we purchase from third-party suppliers or the quality of the work performed by our customers, including installation work, matters for which we have little to no control, but which may still subject us to a warranty claim. We may also assume product warranty or other similar obligations in acquisition transactions regarding the products sold by the acquired businesses prior to the transaction date for which we are not indemnified pursuant to the terms of the relevant transaction documentation. Our quality control systems and procedures and those of our suppliers and customers cannot test for all possible conditions of use or identify all defects in the design, engineering or specifications of one of our products or the raw materials we use before they are put to their intended purpose. Therefore, there can be no assurances that we will not supply defective or inferior products that cause product or system failure, which could give rise to potentially extensive warranty and other claims for damages, as well as negatively impact our reputation and the perception of our product quality and reliability. While we have established reserves for warranty and related claims that we believe to be reasonable, these claims may exceed our reserves and any such excess and any negative publicity and other issues related to such claims could have a material adverse effect on our business, financial condition and results of operations.
Sharing our brand name and logo could have a material adverse effect on us.
We share the “Forterra” brand with the operator of HeidelbergCement's former building products business in the United Kingdom, or Forterra UK, a public company listed on the London FTSE. Forterra UK is no longer affiliated with us and, to our knowledge, operates solely in the United Kingdom. We have no control over Forterra UK’s use of the “Forterra” name and logo in Europe. Any actions or negative publicity related to Forterra UK and its products could have a material adverse effect on our business, financial condition and results of operations.
Production, Supply Chain and Systems Related Risks
Decreased availability or increases in the cost of raw materials could have a material adverse effect on us.
Our ability to offer our products to our customers is dependent upon our ability to obtain adequate supplies of raw materials at reasonable costs, such as cement, aggregate, steel and scrap iron. Raw material prices for certain raw materials that are key to our products, such as steel and scrap metal, have been volatile in recent years, and the cost of some of our most critical raw materials was significantly increased in 2021 over prior years as the demand for such raw materials was significantly inflated. Increased demand for these materials could lead to the continued In addition, changes in trade policy can also impact the price and availability of raw materials. In particular, changes in U.S. trade policy, including the imposition of any tariffs by the U.S. or foreign governments, may negatively impact the availability and price of raw materials used in our production. In particular, in 2018 and 2019, the U.S. government imposed tariffs and quotas on certain imported steel articles, and other countries, such as Canada, have implemented retaliatory tariffs on certain U.S. imports, including steel. These actions resulted in increased prices for both U.S. and non-U.S. steel, one of our main raw material inputs, and the continued imposition of these tariffs, increases in tariff rates, additional tariffs on other goods, or further retaliatory actions from other governments may result in higher costs for us, and there can be no assurance we will be able to pass any of the increases in raw material costs directly resulting from the tariff to our customers. Such actions may also result in more difficulty or the inability to obtain needed materials.
Suppliers are also subject to their own viability concerns from economic, market and other pressures. In particular, many suppliers may decrease capacity during financial downturns or due to other market factors such as depressed prices. This decreased capacity, along with strong global demand for certain raw materials, has at
times caused and may continue to cause tighter supply and significant price increases. Factors such as adverse weather conditions and other natural disasters, as well as political and other social instability, have and will continue to disrupt raw material supplies and impact prices.
Although we have agreements with our raw material suppliers, these agreements are generally terminable by either party on limited notice or contain prices that are based upon the volume of our total purchases. To the extent agreements with any of our raw material suppliers are terminated or we need to purchase additional raw materials in the open market, there can be no assurance that we could timely find alternative sources in reasonable quantities or at reasonable prices. Furthermore, given the global issues with supply chains caused by the ongoing COVID-19 pandemic, certain raw materials may be difficult to acquire at all or may be delayed in their delivery, which may cause delays in our ability to meet production schedule for our customers and timely deliver our products. In addition, sudden or unanticipated changes in sources for certain raw materials, such as cement, may require us to engage in testing of our products for quality assurance, which also could cause delays in our ability to meet our production schedule and timely deliver products. Changes in U.S. trade policy and reactions of other governments to those changes could also negatively impact the availability of certain raw materials, such as steel, as the demand for U.S. steel could increase as a result of these changes. The inability to obtain any raw materials or unanticipated changes with respect to our suppliers could negatively impact our ability to manufacture or deliver our products and to meet customer demands.
We are susceptible to raw material price fluctuations. In recent years, prices of the raw materials we use have at times fluctuated and may be susceptible to significant price fluctuations in the future. For example, in 2021, according to industry average prices, the costs of our scrap steel, a major input in DIP, were on average at least 50% higher than in 2020 and much higher than the average price of each of the prior five years. Because of the volatility of these prices, we cannot predict whether the trend of inflation will continue during 2022 and beyond. We have hedged our positions with respect to certain raw materials in the past and may do so in the future, but we currently have no hedging in place regarding our raw material needs and are therefore more susceptible to any short-term price fluctuations. We generally attempt to pass increased costs, including higher raw material prices and government imposed costs, on to our customers, but the timing between acceptance of a customer order and the purchase of raw materials needed to fulfill such order, pricing pressure from our competitors, the market power of our customers or other pricing factors may limit our ability to pass on such price increases. If we cannot fully-offset increases in the cost of raw materials through other cost reductions, or recover these costs through price increases or otherwise, we could experience lower margins and profitability, which could have a material adverse effect on our business, financial condition and results of operations.
A material disruption or capacity constraints at one or more of our manufacturing facilities or in our supply chain could have a material adverse effect on us.
We own and operate manufacturing facilities of various ages and levels of automated control and rely on a number of third parties as part of our supply chain, including for the efficient distribution of products to our customers. Any disruption at one of our manufacturing facilities or within our supply chain could prevent us from meeting demand or require us to incur unplanned capital expenditures. Older facilities and equipment are generally less energy efficient and are at an increased risk of breakdown or equipment failure, resulting in unplanned downtime. Any unplanned downtime at our facilities may cause delays in meeting customer timelines, result in damages claims, including liquidated damages, or cause us to lose or harm customer relationships. Additionally, we require specialized equipment to manufacture certain products, and if any of our manufacturing equipment fails, the time required to repair or replace this equipment could be lengthy, which could result in extended downtime at the affected facility. Any unplanned repair or replacement work can also be very expensive. Moreover, manufacturing facilities can unexpectedly stop operating because of events unrelated to us or beyond our control, including fires and other industrial accidents, floods and other severe weather events, natural disasters, environmental incidents or other catastrophes, utility and transportation infrastructure disruptions, shortages of raw materials, and acts of war or terrorism. Work stoppages, whether union-organized or not, can also disrupt operations at manufacturing facilities. Furthermore, we are generally responsible for delivering products to the customer and, while we deliver a small percentage of our products directly to the customer using our own fleet, we outsource this function and depend on third parties to deliver the vast majority of our products, primarily by truck with some reliance on rail where possible. Any shortages in trucking or rail capacity or any
increase in the cost thereof, whether as a result of strikes, slowdowns, a shortage of drivers, other disruption to the highway or rail systems, or other unrelated transportation issues could limit our ability to deliver our products in a timely and cost-effective manner or at all. Any material disruption at one or more of our facilities or those of our customers or suppliers or otherwise within our supply chain, whether as a result of downtime, facility damage, an inability to deliver our products or otherwise, could prevent us from meeting demand, require us to incur unplanned capital expenditures or cause other material disruption to our operations, any of which could have a material adverse effect on our business, financial condition and results of operations.
Delays in construction projects and any failure to manage our inventory could have a material adverse effect on us.
Many of our products are used in water transmission and distribution projects and other large-scale construction projects which generally require a significant amount of planning and preparation before construction commences. However, construction projects can be delayed and rescheduled for a number of reasons, including unanticipated soil conditions, adverse weather or flooding, changes in project priorities, financing issues, difficulties in complying with environmental and other government regulations or obtaining permits and additional time required to acquire rights-of-way or property rights. These delays or reschedulings may occur with too little notice to allow us to replace those projects in our manufacturing schedules or to adjust production capacity accordingly, creating unplanned downtime, increased costs and inefficiencies in our operations and increased levels of excess or obsolete inventory. Additionally, we maintain an inventory of certain products that meet standard specifications and are ultimately purchased by a variety of end users. However, our demand forecasts are not always accurate and unexpected changes in demand for these products, whether project-driven, because of a change in preferences or otherwise, can lead to increased levels of excess or obsolete inventory. Any delays in construction projects and our customers’ orders or any inability to manage our inventory, which can lead to impairment charges, could have a material adverse effect on our business, financial condition and results of operations.
Increased costs of energy could have a material adverse effect on us.
We use significant amounts of energy, including electricity, natural gas and gasoline, in the manufacturing, transportation, distribution and sale of our products, and the related expense is significant. While we have benefited from the relatively low cost of electricity and natural gas in recent years, energy prices have been and may continue to be volatile and these reduced prices may not continue. Prices for such energy products may also increase due to global conflicts and actions taken in response to them. In addition, proposed or existing government policies, including those to address climate change by reducing greenhouse gas emissions or the effects of hydraulic fracturing could result in increased energy costs. In addition, factors such as international political and military instability, adverse weather conditions and other natural disasters may disrupt fuel supplies and increase prices in the future. Additionally, because we and other manufacturers in our industry are often responsible for delivering products to the customer, we are further exposed to increased energy prices as a component of our transportation costs. While we generally attempt to pass increased costs, including higher energy costs, on to our customers, pricing pressure from our competitors, the market power of our customers or other pricing factors may limit our ability to do so, and any increases in energy prices could have a material adverse effect on our business, financial condition and results of operations.
Our business and financial performance could be adversely impacted based on disruptions, delays, outages of our information technology systems and computer networks.
Our manufacturing facilities as well as our sales and service activities depend on the efficient and uninterrupted operation of complex and sophisticated information technology systems and computer networks, which are subject to failure and disruption. These and other problems may be caused by system updates, natural disasters, malicious attacks, human error, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins or other similar events. Additionally, because we have grown through various acquisitions, we have integrated and are integrating a number of disparate information technology systems across our organization, certain of which may be outdated and due for replacement, further increasing the likelihood of problems. We may in the future replace and integrate systems or
implement new technology systems, but these updates may not be successful, they may create new issues we currently do not face, or significantly exceed our cost estimates.
We outsource certain portions of the operations of our information technology systems to a third party. Any failure of us or of our third party provider to effectively operate such systems could cause a disruption in our information technology systems. Any disruption in our information technology systems could interrupt or damage our operations and our ability to meet customer needs as well as our ability to maintain effective controls. These events could damage our reputation and cause us to incur unanticipated liabilities, including financial losses from remedial actions, business interruptions, loss of business and other unanticipated costs which may not be covered by insurance. Despite the defensive measures we have taken to protect our data and information technology, our systems could be vulnerable to disruption and any such disruption and the resulting fallout could have a material adverse effect on our business, financial condition and results of operations.
Employee Specific Risks
Labor disruptions and other union activity could have a material adverse effect on us.
As of December 31, 2021, approximately 33% of our workforce was covered by collective bargaining agreements, and approximately 46% of these employees were included in collective bargaining agreements that are due to expire within one year. If negotiations to renew expiring collective bargaining agreements are not successful or become unproductive, the union could take actions such as strikes, work slowdowns or work stoppages. Such actions at any one of our facilities could lead to a plant shut down or a substantial modification to employment terms, thereby causing us to lose net sales or incur increased costs. We have not had any recent union-organized work stoppages in the United States, Canada or Mexico; however, we have experienced one union organizing effort directed at our non-union employees in the past ten years. There can be no assurances there will not be additional union organizing efforts, strikes, work slowdowns or work stoppages in the future. Any such disruption, or other issue related to union activity, could have a material adverse effect on our business, financial condition and results of operations.
We depend on the services of key executives and any inability to attract and retain key management personnel could have a material adverse effect on us.
Our key management personnel, including our Chief Executive Officer and Chief Financial Officer, are important to our success because they are instrumental in setting our strategic direction, operating our business and identifying expansion opportunities. Additionally, as our business grows, we may need to attract and hire additional management personnel. We have employment agreements with some members of senior management; however, we cannot prevent our executives from terminating their employment with us, and any replacements we hire may not be as effective. While we strive to mitigate the negative impact associated with changes our senior management team, there may be uncertainty among investors, employees, customers and others concerning our future direction and performance. Our ability to retain our key management personnel or to attract additional management personnel or suitable replacements when needed is dependent on a number of factors, including the competitive nature of the employment market. Any failure to retain key management personnel or to attract additional or suitable replacement personnel could have a material adverse effect on our business, financial condition and results of operations.
Any failure by us or the contractors with which we work to retain and attract necessary personnel or contract labor could have a material adverse effect on us.
Competition for hiring new and retaining existing qualified personnel is intense and our success depends in part on our ability to retain, attract and train necessary personnel, including engineering and other skilled technical personnel. Our experienced sales team has also developed a number of meaningful customer relationships that would be difficult to replace. We compete with other companies for many employees in hourly positions, which have historically had high turnover rates. Without a sufficient number of qualified employees in each of these areas, the productivity and profitability of our operations and manufacturing quality could suffer.
Additionally, our business relies on the ability of the contractors who install our products to obtain qualified employees, including experienced supervisors and foreman, and a shortage in the supply of these skilled personnel could cause delays in customer’s ability to take shipments of our products.
Labor shortages may impact our ability to hire skilled or unskilled workers with the necessary experience. For example, the reduction in demand for products in our industry during the financial crisis led to a number of both skilled and unskilled workers leaving our industry permanently, reducing an already limited pool of available and qualified personnel. In addition, the COVID-19 pandemic led to a decreased labor force size and participation rates, and we have observed an overall tightening and increasingly competitive labor market in many of our geographies, which causes increased costs to attract and retain qualified workers. Furthermore, if new or more restrictive immigration legislation is enacted at the federal level or in states in which we do business, or if existing regulations are interpreted or enforced differently, these changes could further tighten certain labor markets.
If we are unsuccessful in hiring and retaining the necessary workforce, we may incur additional costs to run our business. Many of these positions have historically had high turnover rates, which can lead to increased training and retention costs. Our ability to control labor costs is also subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governing wages, regulations governing payment of workers.
There can be no assurances the labor pool from which we or the contractors with whom we work hire will increase or remain stable, nor that we will be able to control labor costs. Any failure by us or the contractors with which we work to retain our existing personnel or attract and train additional qualified personnel at reasonable costs could have a material adverse effect on our business, financial condition and results of operations.
Miscellaneous Business Risks
Cybersecurity attacks may threaten our confidential information, disrupt operations and result in harm to our reputation and adversely impact our business and financial performance.
Cybersecurity attacks across industries, including ours, are increasing in sophistication and frequency and may range from uncoordinated individual attempts to measures targeted specifically at us. These attacks include but are not limited to, malicious software or viruses, attempts to gain unauthorized access to, or otherwise disrupt, our information systems, attempts to gain unauthorized access to business, proprietary or other confidential information, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. Cybersecurity failures may be caused by employee error, malfeasance, system errors or vulnerabilities, including vulnerabilities of our vendors, suppliers, and their products. We have been subject to cybersecurity attacks in the past, including breaches of our IT systems that exposed certain confidential business information as well as ransomware attacks on non-critical business systems. Based on information known to date, past attacks have not had a material impact on our business, financial condition or results of operations. We may experience these and different types of attacks in the future, potentially with more frequency or sophistication.
Failures of our IT systems as a result of cybersecurity attacks or other disruptions could result in a breach of critical operational or financial controls and lead to a disruption of our operations, commercial activities or financial processes. Cybersecurity attacks or other disruptions impacting significant customers and/or suppliers could also lead to a disruption of our operations or commercial activities. Despite our attempts to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyberattacks or security breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could have a material adverse effect on our business, financial condition and results of operations.
Legal and regulatory claims and proceedings could have a material adverse effect on us.
We are subject to claims, litigation and regulatory proceedings in the normal course of business and could become subject to additional claims in the future, some of which could be material. For example, we have been, and may in the future be, subject to claims for product liability, construction defects, project delay, personal injury, property and other damages as well as allegations regarding compliance with mandated product specifications. Claims and proceedings, whether or not they have merit and regardless of the outcome, are typically expensive and can divert the attention of management and other personnel for significant periods of time. Additionally, claims and proceedings can impact customer confidence and the general public’s perception of our company and products, even if the underlying assertions are proven to be false.
We are also currently a defendant, together with several of our current and former officers and directors, in a shareholder derivative suit, and in the past have been a defendant in other similar suits, each filed by plaintiffs seeking damages against the Company for allegations of violations of United States laws regulating securities, as discussed in greater detail in Item 3, "Legal Proceedings," and Note 16 to our consolidated financial statements. Lawsuits involving us, or our current or former officers and directors, could result in significant expense and divert attention and resources of our management and other key employees. In addition to any damages we may be required to pay, we are generally obligated to indemnify our current and former directors and officers in connection with lawsuits and related settlement amounts. Such amounts could exceed the coverage provided under our insurance policies.
While we have established reserves we believe to be reasonable under the facts known, the outcomes of litigation and similar disputes are often difficult to reliably predict and may result in decisions or settlements that are contrary to, or in excess of, our expectations, and losses may exceed our reserves. In addition, various factors and developments could lead us to make changes in our current estimates of liabilities and related insurance receivables or make new or modified estimates as a result of a judicial ruling or judgment, settlement, regulatory development or change in applicable law. Any claims or proceedings, particularly those in which we are unsuccessful or for which we did not establish adequate reserves, could harm our reputation and could have a material adverse effect on our business, financial condition and results of operations.
Any inability to successfully acquire businesses in the future could have a material adverse effect on us.
Historically we have grown in large part as a result of acquisitions and our business plan continues to provide for growth in part through acquisitions and joint ventures. Although we expect to regularly consider additional strategic transactions in the future, there can be no assurances that we will identify suitable acquisition, joint venture or other investment opportunities or, if we do, that any transaction can be consummated on acceptable terms. Antitrust or other competition laws may also limit our ability to acquire, or work collaboratively with, certain businesses or to fully realize the benefits of a prospective acquisition or joint venture. Furthermore, changes in our business or the economy, an unexpected decrease in our cash flows or any restrictions imposed by our debt may limit our ability to obtain the necessary capital or otherwise impede our ability to complete a transaction. Regularly considering strategic transactions can also divert management’s attention and lead to significant due diligence and other expenses regardless of whether we pursue or consummate any transaction. Failure to identify suitable transaction partners and to consummate transactions on acceptable terms, as well as the commitment of time and resources in connection with such transactions, could have a material adverse effect on our business, financial condition and results of operations.
The consummation of an acquisition also exposes us to significant risks and additional costs. We may not accurately assess the value, strengths, weaknesses or potential profitability of an acquisition target. Furthermore, we may not be able to fully or successfully integrate an acquired business or realize the expected benefits and synergies following an acquisition. Business and operational overlaps may lead to hidden costs. These costs can include unforeseen pre-acquisition liabilities or the impairment of customer relationships or certain acquired assets such as inventory and goodwill. We may also incur costs and inefficiencies to the extent an acquisition expands the industries, markets or geographies in which we operate due to our limited exposure to and experience in a given industry, market or region. Significant acquisitions may also require that we incur additional debt to finance the transaction, which could be substantial and limit our flexibility in using our cash flow from operations for other purposes. Acquisitions can also involve post-transaction disputes with the counterparty regarding a number of matters, including a purchase price or other working capital adjustment or liabilities for
which we believe we were indemnified under the relevant transaction agreements, such as environmental liabilities or pension or benefit obligations retained by the seller, including certain environmental and benefit obligations in connection with our U.S. Pipe Acquisition and certain pension obligations we assumed pursuant to the Acquisition and our acquisition of Cretex. We are also engaged in other indemnification and other post-closing disputes with certain of our transaction counterparties. Our inability to realize the anticipated benefits of an acquisition as well as other transaction-related issues could have a material adverse effect on our business, financial condition and results of operations.
In July 2012, we entered into a joint venture agreement with Americast, Inc., now known as Eagle Corporation, to form Concrete Pipe & Precast LLC. From time to time, we may enter into additional joint ventures as part of our growth strategy. The nature of a joint venture requires us to share control with unaffiliated third parties. If our joint venture partners do not fulfill their contractual and other obligations, the affected joint venture may be unable to operate according to its business plan, and we may be required to increase our level of commitment. Differences in views among joint venture participants could also result in delays in business decisions or otherwise, failures to agree on major issues, operational inefficiencies and impasses, litigation or other issues. Third parties may also seek to hold us liable for the joint ventures’ liabilities. These issues or any other difficulties that cause a joint venture to deviate from its original business plan could have a material adverse effect on our business, financial condition and results of operations.
Any inability to protect our intellectual property or claims that we infringe on the intellectual property rights of others could have a material adverse effect on us.
We rely on a combination of patents, trademarks, trade names, confidentiality and nondisclosure clauses and agreements, and other unregistered rights to define and protect our rights to our brand and the intellectual property used in certain of our products, including the innovative technologies relating to storm water management acquired in the Bio Clean Acquisition. We also rely on product, industry, manufacturing and market “know-how” that cannot be registered and may not be subject to any confidentiality or nondisclosure clauses or agreements. However, we cannot guarantee that any of our registered or unregistered intellectual property rights or our know-how, or claims thereto, will now or in the future successfully protect our intellectual property , or that our rights will not be circumvented or successfully opposed or otherwise challenged. We also cannot guarantee that applications filed will be approved. To the extent that our intellectual property rights are not sufficient, third parties, including competitors, may be able to commercialize our innovations or products or use our know-how. Additionally, we have faced in the past and may in the future face claims that we are infringing the intellectual property rights of others, including with respect to both existing and new technologies we use. If any of our products are found to infringe the patents or other intellectual property rights of others, our manufacture and sale of such products could be significantly restricted or prohibited and we may be required to pay substantial damages or on-going licensing fees. Any inability to protect our intellectual property rights or any misappropriation of the intellectual property of others could have a material adverse effect on our business, financial condition and results of operations.
Our foreign operations could have a material adverse effect on us.
We operate production facilities in Canada and Mexico and we are therefore subject to a number of risks specific to these countries. These risks include social, political and economic instability, unexpected changes in regulatory requirements, tariffs and other trade barriers, currency exchange fluctuations, acts of war or terrorism and import/export requirements. In addition, we have a limited number of sales to other foreign jurisdictions, primarily concentrated in the Dominican Republic and Bolivia. Our consolidated financial statements are reported in U.S. dollars with international transactions being translated into U.S. dollars. If the U.S. dollar strengthens in relation to the Canadian dollar, our U.S. dollar reported net sales and income will decrease. Additionally, since we incur costs in foreign currencies, fluctuation in those currencies’ value can negatively impact manufacturing and selling costs. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.” There can be no assurances that any of these factors will not materially impact our production cost or otherwise have a material adverse effect on our business, financial condition and results of operations.
Changes in tax laws could adversely affect us.
We regularly assess our future ability to utilize tax benefits, including those in the form of net operating loss, tax credit and other tax carryforwards, that are recorded as deferred income tax assets on our balance sheets to determine whether a valuation allowance is necessary. A reduction in, or disallowance of, these tax benefits resulting from a legislative change or adverse determination by a taxing jurisdiction could have an adverse impact on our financial results and liquidity.
Changes in corporate tax rates, the realizability of the net deferred tax assets relating to our U.S. operations, the taxation of foreign earnings and the deductibility of expenses contained in the Tax Cuts and Jobs Act of 2017, or the TCJA, or other tax reform legislation, including the Coronavirus Aid, Relief, and Economic Security Act of 2020, (“CARES Act”), could have a material impact on the value of our deferred tax assets, could result in significant one-time charges and could increase our future U.S. tax expense. See Note 20 to our consolidated financial statements.
Significant judgment is required in determining our domestic and international provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible these positions may be contested or overturned by jurisdictional tax authorities, which may have a significant impact on our tax provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the laws are issued or applied.
Insufficient insurance coverage could have a material adverse effect on us.
We maintain property, business interruption, counterparty and liability insurance coverage that we believe is consistent with industry practice. However, our insurance program does not cover, or may not adequately cover, every potential risk associated with our business and the consequences thereof. In addition, market conditions or any significant claim or a number of claims made by or against us could cause our premiums and deductibles to increase substantially and, in some instances, our coverage may be reduced or become entirely unavailable. In the future, we may not be able to obtain meaningful coverage at reasonable rates for a variety of risks, including certain types of environmental hazards and ongoing regulatory compliance. In addition, we self-insure a portion of our exposure to certain matters, including employee health care claims of up to $500,000 per covered individual per year and wage-payment obligations for short-term disability. If our insurance coverage is insufficient, if we are not able to obtain sufficient coverage in the future, or if we are exposed to significant losses as a result of the risks for which we self-insure, any resulting costs or liabilities could have a material adverse effect on our business, financial condition and results of operations.
Our internal control over financial reporting may not be effective, and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a material adverse effect on our business and reputation.
As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our control over financial reporting. Our independent registered public accounting firm is also required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404.
Although we currently do not have any material weaknesses in our internal control over financial reporting, we have historically experienced such material weaknesses. To remediate our prior material weaknesses, we have needed to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff, and we may need to do so in the future to maintain the effectiveness of our internal control over financial reporting and other controls. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. If we identify material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the
effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.
We are a holding company and depend on the cash flow of our subsidiaries.
We are a holding company with no material assets other than the equity interests of our subsidiaries. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets and intellectual property. Consequently, our cash flow and our ability to meet our obligations and pay any future dividends to our stockholders depends upon the cash flow of our subsidiaries and their ability to make payments, directly or indirectly, to us in the form of dividends, distributions and other payments. Any inability on the part of our subsidiaries to make payments to us could have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to our Indebtedness and Liquidity
The terms of our debt could have a material adverse effect on us.
We have substantial debt and may incur additional debt. As of December 31, 2021, we had approximately $902.4 million of total debt. Our credit facility contains a number of significant restrictions and covenants that generally restrict our business and limit our ability to, among other things:
•dispose of certain assets;
•incur or guarantee additional indebtedness;
•enter into new lines of business;
•make investments, intercompany loans or certain payments in respect of indebtedness;
•incur or maintain certain liens;
•enter into transactions with affiliates;
•engage in certain sale and leaseback transactions;
•declare or pay dividends and make other restricted payments, including the repurchase or redemption of our stock; and
•engage in mergers, consolidations, liquidations and certain asset sales.
In addition, our ability to borrow under the Revolver is limited by the amount of the borrowing base applicable to U.S. dollar and Canadian dollar borrowings. Any negative impact on the elements of our borrowing base, such as eligible accounts receivable and inventory, will reduce our borrowing capacity under the Revolver. Moreover, the Revolver provides discretion to the agent bank acting on behalf of the lenders to impose additional requirements on what accounts receivable and inventory may be counted toward the borrowing base availability, and to impose other reserves, which could materially impair the amount of borrowings that would otherwise be available to us. The credit facility also requires us to maintain certain financial ratios. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding the terms of our credit facility and the indenture governing our senior secured notes dues due 2025. We are also party to a U.S. and a Canadian master lease under which we currently pay an aggregate of $17.1 million and $1.2 million (CAD) per annum, respectively, to lease certain properties through June 30, 2043. Each of these master lease agreements contain certain restrictions and covenants that limit, among other things, our use of and ability to sublease or discontinue use of the leased properties, our ability to consider strategic divestitures of properties that are leased and our ability to consolidate operations as may be appropriate in order to minimize operating costs. See Note 15 in our consolidated financial statements.
These and other similar provisions in these and other documents could have adverse consequences on our business and to our investors because they limit our ability to take these actions even if we believe that it would contribute to our future growth or improve our operating results. For example, these restrictions could limit our flexibility in planning for or reacting to changes in our business and our industry, thereby inhibiting our ability to
react to markets and potentially making us more vulnerable to downturns. These restrictions could also require that, based on our level of indebtedness, a significant portion of our cash flow from operations be used to make interest payments, thereby reducing the cash flow available for working capital, to fund capital expenditures or other corporate purposes and to generally grow our business. Furthermore, these restrictions could prevent us from pursuing a strategic transaction that we believe would benefit our company.
Our ability to comply with these provisions may be affected by events beyond our control. A breach of any of these provisions or any inability to comply with mandated financial ratios could result in a default, in which case the counterparties may have the right to declare all borrowings or other amounts due thereunder to be immediately due and payable. If we are unable to pay any amounts when due, whether periodic payments, at maturity or if declared due and payable following a default, the counterparties would have the right to proceed against the pledged collateral securing the indebtedness. Therefore, the restrictions under these agreements and any breach of the covenants or failure to otherwise comply with the terms thereof could have a material adverse effect on our business, financial condition and results of operations.
Our current indebtedness and any future indebtedness we may incur could have a material adverse effect on us.
We expect that we will depend primarily on cash generated by our operations to pay our expenses and any amounts due under our credit facility and any other indebtedness we may incur. However, our business may not generate sufficient cash flows from operations in the future and any anticipated growth in revenues and cash flows may not be realized, either or both of which could result in us being unable to repay indebtedness or our inability to fund other liquidity or strategic needs. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If we do not have sufficient liquidity, we may be required to refinance all or part of our then existing debt, sell assets or borrow more money.
If we incur additional indebtedness, the risks related to our indebtedness that we currently face could intensify. In addition to the risk of higher interest rates and fees, the non-economic terms of any additional indebtedness may contain covenants and other terms restricting our financial, operating and strategic flexibility to an equal or greater extent as those imposed by our credit facility, the indenture governing our senior secured notes dues due 2025 and the master leases. Additional indebtedness may also include cross-default provisions such that, if we breach a restrictive covenant with respect to any of our indebtedness, or an event of default occurs, lenders may be entitled to accelerate all amounts owing under other outstanding indebtedness.
If we are required to refinance our indebtedness or otherwise incur additional indebtedness to fund strategic transactions or otherwise, any additional financing may not be available on terms favorable to us or at all. If, at such time, market conditions are materially different or our credit profile has deteriorated, the cost of refinancing our debt may be significantly higher than our indebtedness existing at that time, or we may not be able to refinance our debt at all. For example, our senior term loan matures in 2023 and, if interest rates continue to rise in the short- and longer-term, it could be more difficult and more expensive for us to refinance that debt as compared to the options that we would currently have. Any failure to meet any future debt service obligations or any inability to obtain any additional financing on terms acceptable to us or to comply therewith could have a material adverse effect on our business, financial condition and results of operations.
Credit and non-payment risks of our customers could have a material adverse effect on us.
As is customary in our industry, the majority of our sales are to customers on an open credit basis, with standard payment terms of 30 days. While we generally monitor the ability of our customers to pay these open credit arrangements and limit the credit we extend to what we believe is reasonable based on an evaluation of each customer’s financial condition and payment history, we may still experience losses because of a customer’s inability to pay. As a result, while we maintain what we believe to be a reasonable allowance for doubtful receivables for potential credit losses based upon our historical trends and other available information, there is a risk that our estimates may not be accurate, particularly in times of economic uncertainty and tight credit markets.
Any inability to collect customer receivables or inadequate provisions for doubtful receivables could have a material adverse effect on our business, financial condition and results of operations.
Our project-based business requires significant liquidity, and any inability to ensure adequate financing or guarantees for large projects in the future could have a material adverse effect on us.
The projects in which we participate, particularly in our pressure pipe business, can be capital-intensive and often require substantial liquidity levels. In line with industry practice, we receive prepayments from our customers as well as milestone payments. However, a change in prepayment patterns or our inability to obtain third-party guarantees in respect of such prepayments could force us to seek alternative financing sources, such as bank debt or in the capital markets, which we may not be able to do on terms acceptable to us or at all, any of which could have a material adverse effect on our business, financial condition and results of operations.
Certain of the contracts in our backlog may be adjusted, canceled or suspended by our customers and, therefore, our backlog is not necessarily indicative of our future revenues or earnings or a good indicator of our future margins, even if performed.
As of December 31, 2021, our backlog totaled approximately $882.9 million. In accordance with industry practice, many of our contracts are subject to cancellation, reduction, termination or suspension at the discretion of the customer in respect of work that has not yet been performed. In the event of a project cancellation, we would generally have no contractual right to the total revenue reflected in our backlog, but instead would collect revenues in respect of all work performed at the time of cancellation as well as all other costs and expenses incurred by us through such date. Projects can remain in backlog for extended periods of time because of the nature of the project, delays in execution of the project and the timing of the particular services required by the project. Additionally, the risk of contracts in backlog being canceled, terminated or suspended generally increases at times, including as a result of periods of widespread macroeconomic and industry slowdown, weather, seasonality and many of the other factors impacting our business. Many of the contracts in our backlog are subject to changes in the scope of services to be provided as well as adjustments to the costs relating to the contracts. The revenue for certain contracts included in backlog are based on estimates. Therefore, the timing of performance on our individual contracts can affect greatly our margins and hence, future profitability. There is no assurance that backlog will actually be realized as revenues in the amounts reported or, if realized, will result in any estimated profits.
As is customary in some of our markets, we provide our customers with performance guarantees and other guarantee instruments, such as surety bonds, that guarantee the timely completion of a project pursuant to defined contractual specifications. We also enter into contractual obligations to pay liquidated damages to our customers for project delays. We are required to make payments under these contracts, guarantees and instruments if we fail to meet any of the specifications. Some customers require the performance guarantees to be issued by a reputable and credit worthy financial institution in the form of a letter of credit, surety bond or other financial guarantee. Financial institutions consider our credit ratings and financial position in the guarantee approval process. Our credit ratings and financial position could make the process of obtaining guarantees from financial institutions more difficult and expensive. If we cannot obtain such guarantees from reputable and credit-worthy financial institutions on reasonable terms or at all, we could face higher financing costs or even be prevented from bidding on or obtaining new projects, and any of these or other related obstacles could have a material adverse effect on our business, financial condition and results of operations.
Our ability to raise capital in the future may be limited.
Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. However, any sale or perception of a possible sale by Lone Star, and any related decline in the market price of our common stock, could impair our ability to raise capital. Separately, additional financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay
dividends on our common stock. If we issue additional equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
The phase-out of LIBOR could increase our interest expense and have a material adverse effect on us.
LIBOR is the basic rate of interest used in lending between banks on the London interbank market.
Borrowings under our senior term loan and revolver use the London Interbank Offering Rate, or LIBOR, as a benchmark for establishing the applicable interest rate. The Financial Conduct Authority of the United Kingdom has announced that it plans to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate, or SOFR, calculated using short-term repurchase agreements backed by Treasury securities. Whether or not SOFR, or another alternative reference rate, attains market traction as a LIBOR replacement tool remains in question. Although our borrowing arrangements provide for alternative base rates, , those alternative base rates historically would often have led to increased interest rates, in some cases significantly higher, than those we paid based on LIBOR, and may similarly be higher in the future. Therefore, if LIBOR ceases to exist, we will likely need to agree upon a replacement index with our lenders, which would require an amendment to our borrowing arrangements, and the interest rate thereunder will likely change.
The consequences of the phase out of LIBOR cannot be entirely predicted at this time. For example, we may not be successful in amending our borrowing arrangements to provide for a replacement rate. If any new or alternative base rate for calculating interest with respect to our outstanding indebtedness may not be as favorable or perform in the same manner as LIBOR and could lead to an increase in our interest expense or could impact our ability to refinance some or all of our existing indebtedness. In addition, the transition process may involve, among other things, increased volatility or illiquidity in financial markets, which could also have an adverse effect on us whether or not any replacement rate applicable to our borrowings is affected. Any such effects of the transition away from LIBOR, as well as other unforeseen impacts, may result in increased interest expense and other expenses, difficulties, complications or delays in connection with future financing efforts or otherwise have a material adverse impact on our business, financial condition, and results of operations.
Risks Related to the Proposed Merger
We may not complete the proposed merger within the time frame we anticipate or at all, which could adversely affect our business.
Completion of the merger is subject to a number of closing conditions, including, among others, the expiration or termination of the waiting period under the Hart-Scot-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, including any agreement with the United States Department of Justice, or the DOJ, to delay the Merger, or the HSR Condition. The DOJ has indicated that it will require conditions on the proposed transaction, including requiring the disposition of certain assets held by us and/or Quikrete. We and Quikrete have each entered into definitive agreements with various third parties to dispose of certain assets in order to secure the DOJ's approval of the merger, or the Divestiture Agreements. There can be no assurances that the dispositions contemplated by the Divestiture Agreements will be acceptable to the DOJ or sufficient to obtain the DOJ's approval of the merger prior to the outside date contained in the merger agreement or by the outside dates contemplated in each of the Divestiture Agreements. Further, while the parties have agreed to use their respective reasonable best efforts to obtain the required regulatory approvals, Quikrete and its affiliates will not be required to take, or agree to take, certain actions with respect to assets, businesses or product lines of Quikrete or any of its subsidiaries, or the Company or any of its subsidiaries, accounting for more than $80 million of EBITDA for the 12 months ended December 31, 2020, as defined in and measured in accordance with the merger
agreement. Therefore, Quikrete may not be required to agree to additional divestitures the extent that the DOJ requires divestitures beyond those currently contemplated by the Divestiture Agreements.
Each party’s obligation to consummate the merger is also subject to the absence of any order issued by any court of competent jurisdiction, other legal restraint or prohibition or any law enacted or deemed applicable by a governmental entity that prohibits or makes illegal the consummation of the merger; subject to certain qualifications, the accuracy of representations and warranties of the other party set forth in the merger agreement; and the performance by the other party in all material respects of its obligations under the merger agreement. Quikrete’s obligation to consummate the merger is also conditioned on, among other things, the absence of any material adverse effect, as defined in the merger agreement. In addition, the merger agreement may be terminated under certain specified circumstances, including if the merger has not been consummated on or before March 22, 2022, or the Outside Date. There is currently no assurance that the HSR Condition will be satisfied by the Outside Date. As a result, we cannot assure you that the merger will be completed, or that, if completed, it will be exactly on the terms set forth in the merger agreement or within the expected time frame.
If the merger is not completed within the expected time frame or at all, we may be subject to a number of material risks and our business, financial condition and results of operations will be harmed. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the merger will be completed. We could be required to reimburse certain expenses of Quikrete or pay Quikrete a termination fee of $50.0 million if the merger agreement is terminated under specific circumstances described in the merger agreement. The failure to complete the merger may result in negative publicity and could negatively affect our relationship with our stockholders, employees, customers, suppliers and strategic partners. We may also be required to devote significant time and resources to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against us to perform our obligations under the merger agreement.
The merger agreement provides us with limited remedies in the event of a breach by Quikrete that results in termination of the merger agreement, including the right to a reverse termination fee payable under certain specified circumstances, as described in the merger agreement. We cannot assure you that a remedy will be available to us in the event of such a breach or that the damages we incur in connection with such breach will not exceed the amount of the reverse termination fee.
Our business is subject to restrictions while the merger is pending.
The merger agreement restricts the conduct of our business prior to the completion of the merger or termination of the merger agreement, generally requiring us to conduct our business in the ordinary course and subjecting us to a variety of specified limitations absent Quikrete’s prior written consent. The restrictions on our business activities include, among other things, restrictions on our ability to acquire other businesses and assets, dispose of our assets, make investments, enter into certain contracts, repurchase or issue securities, pay dividends, make capital expenditures above specified levels, amend our organizational documents and incur indebtedness above specified levels. These restrictions could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding in a timely and effective manner to competitive pressures and industry developments, any of which could adversely affect our business, and financial condition and results of operations.
The pendency of the merger may disrupt business relationships, lead to employee departures, or otherwise adversely affect our business.
The pendency of the merger and our efforts to complete the merger could create uncertainty surrounding and significantly disrupt our business. Uncertainty regarding our future could adversely affect our relationship with existing and potential customers, suppliers, vendors, strategic partners or others that deal with us. For example, clients and other counterparties may delay or defer decisions concerning entering into contracts or otherwise working with us, seek to change our existing business relationships or consider doing business with other companies rather than us. Competitors may also target our customers by highlighting potential uncertainties and other risks related to the merger. The pendency of the merger may also divert management’s attention and
resources towards completing the merger and preparing for integration actives and away from ongoing business and operations. Uncertainty as to whether the merger will be completed may also affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the merger is pending because employees may experience uncertainty about their roles following the merger. These risks and the resulting adverse effects on business, financial condition and results of operations could be exacerbated by any delays in completion of the merger or termination of the merger agreement.
We have incurred, and will continue to incur, significant costs as a result of the merger.
We have incurred, and will continue to incur, significant direct and indirect costs and expenses in connection with the merger. These costs and expenses include fees for financial, legal and accounting advisors, facilities and systems costs in anticipation of consolidation, severance other potential employment-related costs and other transaction costs. We must pay substantially all of these amounts regardless of whether the merger is completed. There are a number of factors beyond our control that could affect the total amount or the timing of these costs and expenses, including the length of time required to obtain the required regulatory approvals and satisfy the other conditions to closing the merger. If the merger is not completed, we will have incurred significant costs for which we will have received little or no benefit, which could adversely affect our business, financial condition and results of operations.
Merger-related legal proceedings could delay or prevent the completion of the merger or otherwise adversely affect us.
Litigation by purported stockholder plaintiffs and others is common in connection with public company acquisitions, regardless of the merits of these claims. While certain lawsuits with respect to the merger were previously filed by stockholder plaintiffs and subsequently dismissed, any additional legal proceedings filed in connection with the merger could delay or prevent the merger from becoming effective. For example, the conditions to closing the merger include the absence of any order, injunction or other judgment issued by any court of competent jurisdiction, other legal restraint or prohibition or any law enacted or deemed applicable by a governmental entity that prohibits or makes illegal the consummation of the merger and, if a settlement or other resolution is not reached in any merger-related lawsuit in which a claimant secures injunctive or other relief having the effect of making the merger illegal or otherwise prohibiting completion of the merger, then the merger may not be completed in a timely manner or at all. Moreover, any litigation could be time consuming and expensive and could divert management’s attention away from our regular business, any of which could adversely affect our business, financial condition and results of operations.
The merger agreement prohibits us from affirmatively seeking other acquisition proposals that may be superior to the merger.
The merger agreement prohibits us from engaging in any further discussions or solicitations regarding an alternative potential acquisition of the Company. This provision prevents us from affirmatively seeking offers from other possible acquirers that may be superior to the pending merger. Further, under the terms of the merger agreement, we may be required to pay Quikrete a termination fee of $50.0 million under specified conditions, including in the event Quikrete terminates the merger agreement for specified reasons and, within 12 months thereafter, we have consummated an acquisition proposal, as defined in the merger agreement, or entered into a definitive agreement regarding an acquisition proposal that is ultimately consummated. If the merger agreement is terminated under circumstances where the termination fee is potentially payable by the Company, this payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us, and could discourage a third party from making a competing acquisition proposal following the termination of the merger agreement.
Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been and may in the future be volatile and could decline substantially.
The market price of our common stock may be highly volatile and subject to wide fluctuations. Some of the factors that could negatively affect the market price of our common stock or result in significant fluctuations in price, regardless of our actual operating performance, include:
•actual or anticipated variations in our quarterly operating results;
•changes in market valuations of similar companies;
•changes in the markets in which we operate;
•additions or departures of key personnel;
•actions by stockholders, including the sale by Lone Star of any of its shares of our common stock;
•speculation in the press or investment community;
•general market, economic and political conditions, including an economic slowdown;
•uncertainty regarding economic events, including in Europe in connection with the United Kingdom’s departure from the European Union;
•changes in interest rates;
•our operating performance and the performance of other similar companies;
•our ability to accurately project future results and our ability to achieve those and other industry and analyst forecasts;
•new legislation or other regulatory developments that adversely affect us, our markets or our industry; and
•the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger agreement or delay in consummating the Merger.
Furthermore, at times, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry, and often occurs without regard to the operating performance of the affected companies. Therefore, factors that have little or nothing to do with us could cause the price of our common stock to fluctuate, and these fluctuations or any fluctuations related to our company could cause the market price of our common stock to decline materially.
The coverage of our business or our common stock by securities or industry analysts or the absence thereof could adversely affect our stock price and trading volume.
The trading market for our common stock is influenced in part by the research and other reports that industry or securities analysts may publish about us or our business. We currently have, but may not be able to continue, research coverage by industry or financial analysts. If analysts do not continue coverage of us, the trading price and volume of our stock would likely be negatively impacted. Even if analyst coverage continues, if we fail to meet analyst expectations or one or more of the analysts who cover us downgrade our stock, or if analysts issue other unfavorable commentary or inaccurate research, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Lone Star may have conflicts of interest with other stockholders and may limit your ability to influence corporate matters.
Lone Star beneficially owns approximately 51.9% of our outstanding common stock. As a result of this concentration of stock ownership, Lone Star acting on its own has sufficient voting power to effectively control all matters submitted to our stockholders for approval, including director elections and proposed amendments to our bylaws or certificate of incorporation. Five of the nine members of our board of directors are employees or affiliates of Lone Star.
In addition, this concentration of ownership may delay or prevent a merger, consolidation or other business combination or change in control of our company and make some transactions that might otherwise give investors the opportunity to realize a premium over the then-prevailing market price of our common stock more difficult or impossible without the support of Lone Star. Because we have opted out of Section 203 of the Delaware General Corporation Law, or the DGCL, regulating certain business combinations with interested stockholders, Lone Star may transfer control of us to a third party by transferring its common stock without the approval of our board of directors or other stockholders, which may limit the price that investors are willing to pay in the future for shares of our common stock. The interests of Lone Star may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, Lone Star could cause us to enter into transactions or agreements of which investors would not approve or make decisions with which investors would disagree. This concentration of ownership may also adversely affect our share price.
Lone Star is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us, although it does not currently hold any such interests. Lone Star may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. In recognition that principals, members, directors, managers, partners, stockholders, officers, employees and other representatives of Lone Star and its affiliates and investment funds may serve as our directors or officers, our amended and restated certificate of incorporation provides, among other things, that none of Lone Star or any principal, member, director, manager, partner, stockholder, officer, employee or other representative of Lone Star has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business that we do. In the event that any of these persons or entities acquires knowledge of a potential transaction or matter which may be a corporate opportunity for itself and us, we will not have any expectancy in such corporate opportunity, and these persons and entities will not have any duty to communicate or offer such corporate opportunity to us and may pursue or acquire such corporate opportunity for themselves or direct such opportunity to another person. These potential conflicts of interest could have a material adverse effect on our business, financial condition and results of operations if, among other things, attractive corporate opportunities are allocated by Lone Star to themselves or their other affiliates.
Lone Star may also have conflicts of interest with the Company and other stockholders as a result of its status as a party to the tax receivable agreement. For example, the tax receivable agreement entered into with Lone Star at the time of our initial public offering gives us the right to terminate the tax receivable agreement with approval of a majority of our independent directors and with Lone Star’s consent by making a payment equal to the present value of future payments under the tax receivable agreement (based on certain assumptions and deemed events in the agreement, including those relating to our and our subsidiaries’ future taxable income). Lone Star may determine to withhold its consent to terminate the tax receivable agreement at a time when such a termination would be favorable to us and the other stockholders. Furthermore, the tax receivable agreement prohibits us from settling any tax audit without Lone Star’s consent (not to be unreasonably withheld, conditioned or delayed) if the outcome of the audit is reasonably expected to affect Lone Star’s rights under the tax receivable agreement. Therefore, Lone Star may determine to withhold consent to a settlement that reduces the payments Lone Star will receive under the tax receivable agreement, even though the settlement might be favorable to us and our stockholders.
We are a “controlled company” within the meaning of Nasdaq rules and, as a result, qualify for, and are relying on, exemptions from certain corporate governance requirements.
Lone Star controls a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the Nasdaq corporate governance standards. Under the relevant Nasdaq rules, a company of which more than 50% of the voting power is held by a person or group is a “controlled company” and need not comply with certain requirements, including the requirement that a majority of the board of directors consist of independent directors and the requirements that the compensation and nominating and corporate governance committees be composed entirely of independent directors. We are utilizing these exemptions and, for so long as Lone Star controls a majority of the voting power of our outstanding common stock, we intend to continue to utilize these exemptions. As a result, among other things, we do not have a majority of independent directors and our compensation and nominating and corporate governance committees
do not consist entirely of independent directors. Accordingly, investors will not have the same protections afforded to stockholders of companies that are subject to all of the applicable Nasdaq corporate governance requirements.
Future sales of our common stock in the public market could cause our stock price to fall.
Lone Star beneficially owns approximately 51.9% of our outstanding shares of common stock. The shares held by Lone Star and all shares held by our affiliates are eligible for resale in the public market, subject to applicable securities laws, including the Securities Act of 1933, as amended, or the Securities Act. In December 2019 we registered the shares of common stock beneficially owned by Lone Star pursuant to the terms of a registration rights agreement and these shares are now generally freely tradeable in the public market, subject to applicable securities laws. Unless the shares owned by any of our other affiliates are registered under the Securities Act, these shares may only be resold into the public markets in accordance with the requirements of an exemption from registration or safe harbor, including Rule 144 and the volume limitations, manner of sale requirements and notice requirements thereof. Any sale by Lone Star or other affiliates or any perception in the public markets that such a transaction may occur could cause the market price of our common stock to decline materially.
We have issued, and in the future we expect to issue, options, restricted stock and other forms of stock-based compensation, which have the potential to dilute stockholder value and cause the price of our common stock to decline.
We have issued, and in the future expect to issue, stock-based awards, including stock options, restricted stock and other forms of stock-based compensation to our independent directors, officers and employees. If any options that we have issued or may issue are exercised, or any restricted stock or other awards that we have issued or may issue vests, and the shares of common stock are sold into the public market, the market price of our common stock may decline. In addition, the availability of shares of common stock for award under our equity incentive plan, or the grant of stock options, restricted stock or other forms of stock-based compensation, may adversely affect the market price of our common stock.
We have no present intention to pay dividends on our common stock.
We have no present intention to pay dividends on our common stock. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our credit facility and agreements governing any other indebtedness we may enter into and other factors that our board of directors deems relevant. Accordingly, holders of our common stock may need to sell their shares to realize a return on their investment and may not be able to sell their shares at or above the price they paid.
Provisions of our amended and restated governing documents, Delaware law and other documents could discourage, delay or prevent a merger or acquisition at a premium price.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. For example, our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
•permit us to issue, without stockholder approval, preferred stock in one or more series and, with respect to each series, fix the number of shares constituting the series and the designation of the series, the voting powers, if any, of the shares of the series and the preferences and other special rights, if any, and any qualifications, limitations or restrictions, of the shares of the series;
•prevent stockholders from calling special meetings;
•restrict the ability of stockholders to act by written consent after such time as Lone Star owns less than a majority of our common stock;
•limit the ability of stockholders to amend our certificate of incorporation and bylaws;
•require advance notice for nominations for election to the board of directors and for stockholder proposals;
•do not permit cumulative voting in the election of our directors, which means that the holders of a majority of our common stock may elect all of the directors standing for election; and
•establish a classified board of directors with staggered three-year terms (which will be phased out over the next 3 annual meetings of stockholders).
These provisions may discourage, delay or prevent a merger or acquisition of our company, including a transaction in which the acquirer may offer a premium price for our common stock.
Our amended and restated certificate of incorporation includes an exclusive forum clause, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or to our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, or our certificate of incorporation or bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine, will be a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware); in all cases subject to such court having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. The exclusive forum clause may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. It is also possible that, notwithstanding such exclusive forum clause, a court could rule that such a provision is inapplicable or unenforceable.
Risks Related to Our Tax Receivable Agreement
We will be required to pay Lone Star for certain tax benefits, and these amounts are expected to be material.
We entered into a tax receivable agreement with Lone Star that provides for the payment by us to Lone Star of 85% of the amount of cash savings, if any, in U.S. federal, state, local and non-U.S. income tax that we and our subsidiaries realize (or in some circumstances are deemed to realize) as a result of the utilization of certain tax benefits, together with interest accrued at a rate of LIBOR plus 100 basis points from the date the applicable tax return is due (without extension) until paid. These tax benefits, which we collectively refer to as the Covered Tax Benefits, include: (i) all depreciation and amortization deductions, and any offset to taxable income and gain or increase to taxable loss, resulting from the tax basis that we have in our assets as of the time of the consummation of our initial public offering, (ii) the utilization of our and our subsidiaries’ net operating losses and tax credits, if any, attributable to periods prior to our initial public offering, (iii) deductions in respect of payments made, funded or reimbursed by an initial party to the tax receivable agreement (other than us or one of our subsidiaries) or an affiliate thereof to participants under the LSF9 Concrete Holdings Ltd Long Term Incentive Plan, or the LTIP, (iv) deductions in respect of transaction expenses attributable to the acquisition of U.S. Pipe and (v) certain other tax benefits attributable to payments made under the tax receivable agreement. The tax receivable agreement will remain in effect until all Covered Tax Benefits have been used or expired, unless the agreement is terminated early, as described below.
We expect that the payments we make under the tax receivable agreement could be substantial. For the years ended December 31, 2021 and December 31, 2020, we paid $8.3 million and $13.1 million, respectively, on our tax receivable agreement to Lone Star. Assuming no material changes in the relevant tax law, and that we and our subsidiaries earn sufficient income to realize the full tax benefits subject to the tax receivable agreement, we currently estimate that future payments under the agreement will aggregate to approximately $55.9 million. This amount excludes any payments that may be made to Lone Star under the tax receivable agreement as a
result of tax benefits recognized in connection with payments under the LTIP and, thus, the actual payments we ultimately are required to make under the tax receivable agreement could be greater, potentially materially greater, than these amounts. These payment obligations are our obligations and are not obligations of any of our subsidiaries. Furthermore, these payment obligations are not conditioned upon Lone Star maintaining a continued direct or indirect ownership interest in us. The actual utilization of Covered Tax Benefits as well as the timing of any payments under the tax receivable agreement will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future.
We will not be reimbursed for any payments made to Lone Star under the tax receivable agreement in the event that the tax benefits are disallowed.
Lone Star will not reimburse us for any payments previously made under the tax receivable agreement if such benefits are subsequently disallowed upon a successful challenge by the Internal Revenue Service, although future payments under the agreement would be adjusted to the extent possible to reflect the result of such disallowance. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of our cash tax savings if any, from the Covered Tax Benefits, and we may not be able to recoup those payments, which could adversely affect our liquidity.
In certain cases, payments made by us under the tax receivable agreement may be accelerated and/or significantly exceed the actual benefits we realize in respect of the Covered Tax Benefits.
The term of the tax receivable agreement will continue until all Covered Tax Benefits have been utilized or expired, unless we exercise our right to terminate the agreement with Lone Star’s consent, we breach any of our material obligations under the agreement or certain credit events occur with respect to us, in any of which cases we will be required to make an accelerated payment to Lone Star equal to the present value of future payments under the tax receivable agreement. Such payment would be based on certain assumptions, including, among others, that we and our subsidiaries would generate sufficient taxable income and tax liability to fully utilize all Covered Tax Benefits. The tax receivable agreement also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, our (or our successor’s) payments under the tax receivable agreement for each taxable year after any such event would be based on certain valuation assumptions, including the assumption that we and our subsidiaries have sufficient taxable income to fully utilize the Covered Tax Benefits. Accordingly, payments under the tax receivable agreement may be made years in advance of the actual realization, if any, of the anticipated future tax benefits and may be significantly greater than the benefits we realize in respect of the Covered Tax Benefits.
Even if the payments under the tax receivable agreement are not accelerated as described above, such payments may be significantly greater than the benefits we realize in respect of the Covered Tax Benefits, due to the manner in which payments are calculated under the tax receivable agreement. For example, for purposes of calculating the payments to be made to Lone Star:
•it is assumed that we will pay effective state and local taxes at a rate of 5%, even though our actual effective state and local tax rate may be materially lower;
•tax benefits existing at the time of our initial public offering are deemed to be utilized before any post-closing/after-acquired tax benefits and, as a result, we could be required to make payments to Lone Star for a particular tax year even if our tax liability for such year would have been materially reduced or eliminated by reason of our utilization of the post-initial public offering/after-acquired tax benefits;
•a non-taxable transfer of assets by us to a non-consolidated entity is treated under the tax receivable agreement as a taxable sale at fair market value and, as a result, we could be required to make payments to Lone Star even though such non-taxable transfer would not generate any actual tax benefits to us or our non-consolidated entity; and
•a taxable sale or other taxable transfer of subsidiary stock by us (in cases where the subsidiary’s tax basis in its assets exceeds our tax basis in the subsidiary’s stock) is treated under the tax receivable agreement as a taxable sale of the subsidiary’s assets and, as a result, we could be required to make payments to Lone Star that materially exceed the actual tax benefit we realize from such stock sale.
Because of the foregoing, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control.
Certain provisions of the tax receivable agreement limit our ability to incur additional indebtedness, which could adversely affect our business and growth strategy.
For so long as the tax receivable agreement remains outstanding, without the prior written consent of Lone Star (not to be unreasonably withheld, conditioned or delayed), we will be prohibited from (a) entering into any agreement that would be materially more restrictive with respect to our ability to make payments under the tax receivable agreement than the terms of our credit agreement and (b) incurring any indebtedness for borrowed money if, immediately after giving effect to such incurrence and the application of proceeds therefrom, our consolidated net leverage ratio - the ratio of consolidated funded indebtedness for borrowed money less unrestricted cash to consolidated EBITDA - would exceed a certain specified ratio, in each case as calculated pursuant to the tax receivable agreement, unless the incurrence of such indebtedness is permitted by the terms of our credit agreement or any replacement credit agreements to the extent the terms thereof are no less restrictive in this regard than the applicable credit agreement it replaced. These restrictions on the incurrence of debt could adversely affect our business, including by preventing us from pursuing an acquisition or other strategic transaction that we believe is in the best interests of our company and our stockholders, thereby impeding our growth strategy. Lone Star has no fiduciary duties to us when deciding whether to enforce these covenants under the tax receivable agreement. Furthermore, the provision in the tax receivable agreement that requires that we make an accelerated payment to Lone Star equal to the present value of all future payments due under the tax receivable agreement if we breach any of our material obligations under the agreement or certain credit events occur with respect to us might make it harder for us to obtain financing from third party lenders on favorable terms.
We would be required to make tax gross-up payments to Lone Star if we consummate a corporate inversion or similar transaction that causes payments under the tax receivable agreement to be subject to withholding taxes.
If we were to consummate a change of control transaction that causes us (or our successor) to become a non-U.S. person (e.g., a corporate inversion transaction), and such transaction causes payments under the tax receivable agreement to become subject to withholding taxes, we would be required under the tax receivable agreement to make tax gross-up payments to Lone Star in respect of such withholding taxes in amounts that may exceed the tax savings realized by the Company from the Covered Tax Benefits. Any such tax gross-up payments could have a negative impact on our liquidity and our ability to finance our growth.