What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-05-05 compared with 2020-02-05 · 207 added, 56 removed, 126 unchanged (68% of the section changed)

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This report contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements that address activities, events or developments that we intend, expect, plan, project, believe or anticipate will or may occur in the future are forward-looking statements.

Forward-looking statements are based on certain assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions and expected future developments.

Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including regional, national or global political, economic, business, competitive, market and regulatory conditions and the other factors described under the section entitled “RISK FACTORS” in Item 1A.

of our Annual Report on Form 10-K for the year ended September 30, 2019 and in this Quarterly Report on Form 10-Q.

All statements that address activities, events or developments that the Company intends, expects, plans, projects, believes or anticipates will or may occur in the future are forward-looking statements, including, without limitation, statements regarding outlooks, projections, forecasts, trend descriptions, the COVID-19 pandemic, go-to-market strategies, operational excellence, acceleration of new product development, end market performance, net sales performance, organic adjusted operating income and adjusted EBITDA performance, margins, capital expenditure plans, litigation outcomes, capital allocation and growth strategies, and future warranty charges.

Forward-looking statements are based on certain assumptions and assessments made by the Company in light of the Company’s experience and perception of historical trends, current conditions and expected future developments.

Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including the extent, duration and severity of the impact of the COVID-19 pandemic on the Company’s operations and results, including effects on the financial health of customers (including collections), the Company and the financial/capital markets, government-mandated facility closures, COVID-19 related facility closures and other manufacturing restrictions, logistical challenges and supply chain interruptions, potential litigation and claims emanating from the COVD-19 pandemic, and health, safety and employee/labor issues in Company facilities around the world;

regional, national or global political, economic, market and competitive conditions;

cyclical and changing demand in core markets such as municipal spending;

government monetary or fiscal policies;

residential and nonresidential construction, and natural gas distribution;

manufacturing and product performance;

expectations for changes in volumes, continued execution of cost productivity initiatives and improved pricing;

warranty exposures (including the adequacy of warranty reserves);

the Company’s ability to successfully resolve significant legal proceedings, claims, lawsuits or government investigations;

compliance with environmental, trade and anti-corruption laws and regulations;

changing regulatory, trade and tariff conditions;

failure to achieve expected cost savings, net sales expectations, profitability expectations and manufacturing efficiencies from our large capital projects in Chattanooga and Kimball, Tennessee and Decatur, Illinois;

the failure to integrate and/or realize any of the anticipated benefits of recent acquisitions or divestitures;

and other factors that are described in the section entitled “RISK FACTORS” in Item 1A of the Company’s most recently filed Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q (all of which risks may be amplified by the COVID-19 pandemic).

Forward-looking statements do not guarantee future performance and are only as of the date they are made.

The Company undertakes no duty to update its forward-looking statements except as required by law.

Undue reliance should not be placed on any forward-looking statements.

The Company does not have any intention or obligation to update forward-looking statements, except as required by law.

Unless the context indicates otherwise, whenever we refer to a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year.

We manage our businesses and report operations through two business segments, Infrastructure and Technologies, based largely on the products sold and the customers served.

You are advised to review any further disclosures the Company makes on related subjects in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S.

Securities and Exchange Commission.

COVID-19 Pandemic

On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide.

Since March 31, 2020, the COVID-19 pandemic has continued to spread and various state and local governments have issued or extended “shelter-in-place” orders which have impacted and restricted various aspects of our business.

We are closely monitoring the effects of COVID-19 on all aspects of our business, including how it will impact our employees, the municipalities and the residential and non-residential industries we serve, our communities, our customers and our suppliers.

While COVID-19 has not yet had a material negative effect on our fiscal 2020 operations and financial results to date, the full financial impact of the pandemic cannot be reasonably estimated at this time due to the uncertainties relating to the pandemic, its severity, and its duration.

These uncertainties include the severity of the virus, the duration of the outbreak, governmental, municipality, business or other actions in response to the pandemic, the effect on customer demand and our customers’ ability to pay for our products and services, and changes to our operations caused by the pandemic.

The health of our workforce and our ability to manage our operations and other critical functions cannot be predicted and are vital to our operations.

Further, global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, as well as other unanticipated consequences, remain unknown.

For further information regarding the effects of COVID-19 on our business, please see item 1A.

Risk Factors in this report, which is incorporated herein by reference.

Additionally, we have incurred incremental costs to address the COVID-19 pandemic, including costs associated with additional cleaning, disinfectants and sanitation materials to help keep our employees safe and to protect the communities that we serve as well as costs associated with a closure of a manufacturing facility in China and inefficiencies in certain other facilities.

COVID-19 has also caused supply chain disruptions that have resulted in higher costs in the manufacture of our products.

We continue to operate as an essential business, providing products and services to our customers that they need to manage and maintain our nation’s critical water infrastructure.

We have implemented preparedness plans to keep our team safe while we work, including new physical distancing processes and procedures and the use of additional personal protective equipment.

All of our facilities are operational and able to fill orders at May 5, 2020, and our teams have worked effectively to address the few temporary closures we have experienced.

We continue to proactively monitor our supply chain and have not experienced any material supply chain issues since the temporary closure of our Jingmen facility, which is located near Wuhan in the Hubei Province.

We continue to prioritize returning cash to our shareholders through our quarterly dividend, as we recently approved our quarterly dividend payable in May.

However, we are temporarily suspending our share repurchase program to provide additional financial flexibility.

We expect a material slowdown in our end markets for the second half of our fiscal year, especially residential construction.

Our municipal market end users provide critical water, energy and public works infrastructure services and continue to operate during this crisis but may also reduce discretionary spending.

We are hopeful that our end markets will recover swiftly from the impact of the pandemic.

However, the timing and magnitude of any recovery remain highly uncertain.

We are reviewing all aspects of our business and taking action as needed, including adjusting our production capacity to preserve liquidity and cash flow during this difficult period.

In April, we began implementing temporary furloughs at some of our manufacturing plants as we adjust to market conditions and manage inventory.

We have also implemented furloughs for most salaried employees, salary reductions for our senior leadership team and reduced fees for our Board of Directors.

In addition to eliminating non-critical business expenses, we are evaluating further actions as the change in market demand evolves.

On October 3, 2005, Walter Energy, Inc (“Walter Energy”) acquired all outstanding shares of capital stock representing the Mueller Co.

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We estimate approximately 60-65% of our 2019 net sales were for repair and replacement directly related to municipal water infrastructure spending, approximately 25-30% were related to residential construction activity and less than 10% were related to natural gas utilities.

We expect our two primary end markets, repair and replacement of water infrastructure, driven by municipal spending, and new water infrastructure installation, driven by residential construction, to grow in the low single digits during 2020.

In January 2020, Blue Chip Economic Indicators forecasted a 4% increase in housing starts for calendar 2020 compared to the prior year.

Prior to the COVID-19 pandemic, we expected our two primary end markets, repair and replacement of water infrastructure, driven by municipal spending, and new water infrastructure installation, driven by residential construction, to grow in the low single digits during 2020.

However, we now expect a material slowdown in our end markets for the second half of our fiscal year as a result of the economic effects of COVID-19.

We expect that residential markets will experience a significant decrease in activity as new construction slows.

In April 2020, Blue Chip Economic Indicators forecasted a 10% decrease in housing starts for calendar 2020 compared to the prior year primarily due to COVID-19 impacts.

The COVID-19 pandemic continues to cause significant disruptions to the U.S.

and global economies.

While we do not believe these disruptions had a material effect on our financial position or operations through March 31, 2020, there is no assurance that the pandemic will not have a material effect on our future financial position, results of operations, cash flows, or liquidity.

Infrastructure

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We include financial results of Krausz in our consolidated financial statements on a one-month lag.

For the quarter ended December 31, 2018, the consolidated statements of operations and of cash flows exclude the results of Krausz’s operations.

On October 3, 2019, we acquired the noncontrolling interest of our previously existing joint venture operation for a negotiated purchase price of $5.4 million.

In October 2019, we acquired the noncontrolling interest of our previously existing joint venture operation for a negotiated purchase price of $5.4 million.

The municipal market is the key end market for Technologies.

The businesses in Technologies are project-oriented and depend on customer adoption of their technology-based products and services.

Critical Accounting Policies and Estimates

Accounting for Goodwill

At March 31, 2020, in connection with pandemic-related disruptions on the overall market and our business, we performed a quantitative goodwill impairment assessment of our Krausz reporting unit.

The Krausz reporting unit had $85.9 million of goodwill at March 31, 2020.

We used a discounted cash flow model to determine the estimated fair value of the reporting unit.

We made estimates and assumptions regarding future revenue, cash flows, discount rates, and long-term growth rates to estimate the Krausz reporting unit’s fair value.

These assumptions represented our best estimates and we believe they were reasonable and appropriate.

However, they are forecasts in the midst of a complex and still-developing situation with the COVID-19 pandemic, and as such they involve a high degree of uncertainty.

• The discount rate in the model, which includes a forecast-risk factor, was 12.8 percent.

• Long-term growth of revenue in the model beyond 2025 was 3 percent.

• Long term growth of free cash flow in the model beyond 2025 growth was 5 percent.

The results of the quantitative impairment assessment indicated that the Krausz reporting unit’s fair value exceeded its carrying value.

However, the excess of the estimated fair value over the carrying value was not significant, the use of different key assumptions could result in a materially different outcome, and we cannot provide assurance that our estimates will be realized.

The continuation of pandemic-related effects on our business and the overall market could potentially materially change the key assumptions and lead to future impairment charges.

Results of Operations

Three Months Ended December 31, 2019 Compared to Three Months Ended December 31, 2018

Three months ended December 31, 2019

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Three months ended March 31, 2020

Infrastructure Technologies Corporate Total

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Net income $ 23.8

Three months ended December 31, 2018

Three months ended March 31, 2019

Infrastructure Technologies Corporate Total

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Walter Energy Accrual 0.5

Loss before income taxes (26.9)

Income tax benefit (5.9)

Income before income taxes 14.8

Income tax expense 3.9

Net loss $ 10.9

Consolidated Analysis

Net sales for the quarter ended December 31, 2019 increased 10.3% or $19.8 million to $212.6 million from $192.8 million primarily due to Krausz sales, as well as higher pricing and shipment volumes at Infrastructure.

Gross profit for the quarter ended December 31, 2019 increased $12.5 million to $72.6 million from $60.1 million in the prior year period, primarily due to higher pricing, product mix and the addition of Krausz, which was partially offset by higher costs associated with tariffs and inflation.

Gross margin was 34.1% for the quarter ended December 31, 2019 compared to 31.2% in the prior year period.

Selling, general and administrative expenses (“SG&A”) for the quarter ended December 31, 2019 increased to $49.9 million from $41.0 million in the prior year period due primarily to the inclusion of Krausz’s SG&A expenses as well as IT-related activities, personnel-related costs and professional fees.

SG&A as a percentage of net sales was 23.5% and 21.3% in the quarters ended December 31, 2019 and 2018, respectively.

Krausz related expenses accounted for approximately half of the increase.

Strategic reorganization and other charges were $2.4 million in the quarter ended December 31, 2019 and were $3.2 million in the prior year period.

Interest expense, net increased $1.9 million in the quarter ended December 31, 2019 compared to the prior year period primarily due to a non-cash adjustment to capitalized interest in the quarter and decreased interest income.

Net sales for the quarter ended March 31, 2020 increased 10.1% or $23.7 million to $257.7 million from $234.0 million primarily due to increased shipment volumes at Infrastructure as well as higher pricing.

Gross profit for the quarter ended March 31, 2020 increased $11.2 million to $86.0 million from $74.8 million in the prior year period, primarily due to increased shipment volumes and higher pricing, which were partially offset by manufacturing performances and higher costs associated with tariffs.

Gross margin was 33.4% for the quarter ended March 31, 2020 compared to 32.0% in the prior year period.

Selling, general and administrative expenses (“SG&A”) for the quarter ended March 31, 2020 increased to $49.3 million from $45.7 million in the prior year period due primarily to personnel-related costs and IT-related activities, which were partially offset by lower travel expenses as a result of travel restrictions and shelter-in-place orders.

SG&A as a percentage of net sales was 19.1% and 19.5% in the quarters ended March 31, 2020 and 2019, respectively.

Strategic reorganization and other charges were $0.9 million in the quarter ended March 31, 2020 and were $6.9 million in the prior year period.

The change is primarily the $4.3 million in expenses related to the Aurora tragedy in the prior year period.

Interest expense, net increased $0.1 million in the quarter ended March 31, 2020 compared to the prior year period primarily due to decreased interest income.

The components of interest expense, net are provided below.

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Valuation allowance (0.6) —

Effective income tax rate 22.2 % 26.4 %

Segment Analysis

Infrastructure

Net sales for the quarter ended March 31, 2020 increased 12.2% to $240.3 million compared to $214.1 million in the prior year period due to increased shipment volumes and higher pricing.

The increased shipment volumes were driven by iron gate valves, hydrants, specialty valves and repair products.

Gross profit for the quarter ended March 31, 2020 increased to $84.2 million from $71.9 million in the prior year period primarily due to increased shipment volumes and higher sales pricing, which were partially offset by higher costs associated with tariffs, and manufacturing performance, which included $1.0 million in startup costs associated with our large casting foundry expansion in Chattanooga.

The prior year period included $2.2 million of costs related to the Krausz acquisition.

Gross margin was 35.0% for the quarter ended March 31, 2020 compared to 33.6% in the prior year period.

SG&A for the quarter ended March 31, 2020 increased to $33.4 million from $30.7 million in the prior year period.

This increase was primarily due to increased personnel related costs.

SG&A as a percentage of net sales was 13.9% and 14.3% for the quarters ended March 31, 2020 and 2019, respectively.

Net sales in the quarter ended March 31, 2020 decreased to $17.4 from $19.9 million in the prior year period, driven by lower shipment volumes at Metrology, partially offset by higher volumes at Echologics.

We experienced a decline in March 2020 as projects were delayed due to shelter-in-place restrictions.

Gross profit in the quarter ended March 31, 2020 was $1.8 million compared to $2.9 million in the prior year period.

SG&A remained flat at $6.5 million in both quarters ended March 31.

SG&A as a percentage of net sales was 37.4% and 32.7% for the quarters ended March 31, 2020 and 2019, respectively.

SG&A was $9.4 million in the quarter ended March 31, 2020 and was $8.5 million in the prior year period.

This increase was primarily due to IT-related activities, personnel-related costs and professional fees.

Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019

Six months ended March 31, 2020

Infrastructure Technologies Corporate Total

(in millions)

Net sales $ 433.1 $ 37.2 $ — $ 470.3

Gross profit 152.4 6.2 — $ 158.6

Operating expenses:

Selling, general and administrative

65.9 12.9 20.4 99.2

Strategic reorganization and other charges 0.4 — 2.9 3.3

66.3 12.9 23.3 102.5

Operating income (loss) $ 86.1 $ (6.7) $ (23.3) 56.1

Non-operating expenses:

Pension costs (benefits) other than service (1.5)

Interest expense, net 13.4

Walter Energy Accrual 0.2

Income before income taxes 44.0

Income tax expense 9.9

Net income $ 34.1

Six months ended March 31, 2019

Infrastructure Technologies Corporate Total

(in millions)

Net sales $ 386.1 $ 40.7 $ — $ 426.8

Gross profit 128.7 6.2 — $ 134.9

Operating expenses:

Selling, general and administrative

56.6 13.5 16.6 86.7

Strategic reorganization and other charges 1.1 — 9.0 10.1

57.7 13.5 25.6 96.8

Operating income (loss)

$ 71.0 $ (7.3) $ (25.6) 38.1

Pension costs (benefits) other than service 0.9

Interest expense, net 11.4

Walter Energy Accrual 37.9

Loss before income taxes (12.1)

Income tax benefit (2.0)

Net loss $ (10.1)

Consolidated Analysis

Net sales for the six months ended March 31, 2020 increased 10.2% or $43.5 million to $470.3 million from $426.8 million primarily due to increased shipment volumes at Infrastructure, Krausz sales, and higher pricing.

Gross profit for the six months ended March 31, 2020 increased $23.7 million to $158.6 million from $134.9 million in the prior year period, primarily due to higher pricing, improved product mix and the addition of Krausz, which were partially offset by higher costs associated with tariffs and inflation.

The prior year period included $2.2 million of expenses related to the Krausz inventory step-up.

Gross margin was 33.7% for the quarter ended March 31, 2020 compared to 31.6% in the prior year period.

Selling, general and administrative expenses (“SG&A”) for the six months ended March 31, 2020 increased to $99.2 million from $86.7 million in the prior year period due primarily to the inclusion of Krausz’s SG&A expenses as well as IT-related activities, personnel-related costs and professional fees.

SG&A as a percentage of net sales was 21.1% and 20.3% in the six months ended March 31, 2020 and 2019, respectively.

Strategic reorganization and other charges were $3.3 million in the six months ended March 31, 2020 and were $10.1 million in the prior year period.

The change is primarily driven by $4.3 million in expenses related to the Aurora tragedy in the prior year period.

Interest expense, net increased $2.0 million in the six months ended March 31, 2020 compared to the prior year period primarily due to a non-cash adjustment to capitalized interest in the six month period and decreased interest income.

The components of interest expense, net are provided below.

Six months ended

(in millions)

Notes $ 12.4 $ 12.4

Deferred financing costs amortization 0.6 0.6

ABL Agreement 0.3 0.3

Capitalized interest, including adjustment 0.7 —

Other interest expense 0.2 0.3

Interest income $ (0.8) $ (2.2)

Interest expense, net $ 13.4 $ 11.4

The reconciliation between the U.S.

federal statutory income tax rate and the effective tax rate is presented below.

Six months ended

federal statutory income tax rate 21.0 % 21.0 %

Adjustments to reconcile to the effective tax rate:

State income taxes, net of federal benefit 4.5 1.8

Excess tax (benefits) related to stock compensation (0.8) 2.5

Tax credits (1.4) 2.6

Global Intangible Low-taxed Income — (1.1)

Foreign income taxes (0.6) —

Valuation allowance (0.6) —

Other 0.4 (1.9)

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Infrastructure

Net sales for the quarter ended December 31, 2019 increased 12.1% to $192.8 million compared to $172.0 million in the prior year period due to the inclusion of Krausz net sales as well as higher pricing and increased shipment volumes.

Gross profit for the quarter ended December 31, 2019 increased to $68.2 million from $56.8 million in the prior year period primarily due to the inclusion of Krausz gross profit and higher sales pricing.

Gross margin was 35.4% for the quarter ended December 31, 2019 compared to 33.0% in the prior year period.

SG&A for the quarter ended December 31, 2019 increased to $32.5 million from $25.9 million in the prior year period.

This increase was primarily due to the inclusion of Krausz’s SG&A expenses.

SG&A as a percentage of net sales was 16.9% and 15.1% for the quarters ended December 31, 2019 and 2018, respectively.

Net sales in the quarter ended December 31, 2019 decreased to $19.8 million from $20.8 million in the prior year period, driven by lower shipment volumes at Metrology, which were partially offset by higher volumes at Echologics.

Gross profit in the quarter ended December 31, 2019 increased to $4.4 million compared to $3.3 million in the prior year period.

SG&A decreased to $6.4 million in the quarter ended December 31, 2019 compared to $7.0 million in the prior year period due to reduced marketing and personnel-related expenses.

SG&A as a percentage of net sales was 32.3% and 33.7% for the quarters ended December 31, 2019 and 2018, respectively.

SG&A was $11.0 million in the quarter ended December 31, 2019 and was $8.1 million in the prior year period.

Net sales for the six months ended March 31, 2020 increased 12.2% to $433.1 million compared to $386.1 million in the prior year period due increased shipment volume, the inclusion Krausz and higher pricing.

Gross profit for the six months ended March 31, 2020 increased to $152.4 million from $128.7 million in the prior year period primarily due to the inclusion of Krausz and higher sales pricing.

The prior year period included $2.2 million of expenses related to the Krausz inventory step-up.

Gross margin was 35.2% for the six months ended March 31, 2020 compared to 33.3% in the prior year period.

SG&A for the six months ended March 31, 2020 increased to $65.9 million from $56.6 million in the prior year period.

This increase was primarily due to the inclusion of Krausz.

SG&A as a percentage of net sales was 15.2% and 14.7% for the six months ended March 31, 2020 and 2019, respectively.

Net sales in the six months ended March 31, 2020 decreased to $37.2 million from $40.7 million in the prior year period, driven by lower shipment volumes at Metrology, which was offset by higher volumes at Echologics as well as higher pricing.

Gross profit was flat at $6.2 million in each six-month period ended March 31.

SG&A decreased to $12.9 million in the six months ended March 31, 2020 compared to $13.5 million in the prior year period primarily due to reduced marketing and personnel-related expenses.

SG&A as a percentage of net sales was 34.7% and 33.2% for the six months ended March 31, 2020 and 2019, respectively.

SG&A was $20.4 million in the six months ended March 31, 2020 and was $16.6 million in the prior year period.

This increase was primarily due to IT-related activities, personnel-related costs and professional fees.

Liquidity and Capital Resources

We had cash and cash equivalents of $136.8 million at December 31, 2019 and $122.0 million of additional borrowing capacity under our ABL Agreement based on December 31, 2019 data.

We had cash and cash equivalents of $111.3 million at March 31, 2020 and $159.0 million of additional borrowing capacity under our ABL Agreement based on March 31, 2020 data.

Undistributed earnings from our subsidiaries in Canada, China, and Israel are considered to be permanently invested outside the United States.

At December 31, 2019, cash and cash equivalents included $12.1 million, $4.3 million and $17.5 million in Canada, China and Israel, respectively.

We did not repurchase shares of our common stock during the quarter ended December 31, 2019 and have $150 million remaining on our share repurchase authorization.

At March 31, 2020, cash and cash equivalents included $9.2 million, $6.5 million and $18.0 million in Canada, China and Israel, respectively.

As of May 5, 2020, we have no plans to repatriate cash.

We declared a quarterly dividend of $0.525 per share as of April 23, 2020 and as of May 5, 2020 we have no plans to suspend our dividend payments.

We repurchased $5.0 million in shares of our common stock during the quarter ended March 31, 2020 and have $145 million remaining on our share repurchase authorization.

To enhance our liquidity position in response to the COVID-19 pandemic, we elected to temporarily suspend share repurchases under our existing share repurchase program.

The existing program remains authorized by the Board of Directors, and we may resume share repurchases in the future at any time, depending upon market conditions, our capital needs and other factors.

The ABL Agreement and Notes contain customary representations and warranties, covenants and provisions governing an event of default.

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Cash flows from operating activities are categorized below.

Three months ended

Six months ended

(in millions)

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Disbursements, other than interest and income taxes (424.8) (378.7)

Walter Tax accrual payment (22.2) —

Walter tax matter payment (22.2) —

Interest payments, net (12.2) (11.2)

Income tax payments, net (5.9) (14.9)

Cash (used in) provided by operating activities $ (12.4) $ 9.9

Collections from customers were higher during the three months ended December 31, 2019 compared to the prior year period primarily due to increased sales as well as collections of acquired Krausz receivables.

Increased disbursements, other than interest and income taxes, during the three months ended December 31, 2019 reflect increased expenses, differences in the timing of expenditures and payments of acquired Krausz payables.

Additionally we disbursed $22.2 million related to the final settlement of Walter Tax.

Capital expenditures were $15.2 million in the three months ended December 31, 2019 compared to $15.9 million in the prior year period.

Cash (used in) operating activities $ (3.0) $ (29.1)

Collections from customers were higher during the six months ended March 31, 2020 compared to the prior year period primarily due to increased sales.

Increased disbursements, other than interest and income taxes, during the six months ended March 31, 2020 reflect increased expenses, differences in the timing of expenditures.

Additionally we disbursed $22.2 million related to the final settlement of the Walter tax matter.

Capital expenditures were $37.3 million in the six months ended March 31, 2020 compared to $30.5 million in the prior year period.

These expenditures were primarily investment in announced large capital projects.

We estimate 2020 capital expenditures will be between $80 and $90 million.

We anticipate that our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, income tax payments, capital expenditures and debt service obligations as they become due through December 31, 2020.

However, our ability to make these payments will depend partly upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.

For the full-year 2020, we have reduced our plans for capital expenditures, and now expect spending to be between $70 million and $75 million as compared with our prior guidance range of between $80 million and $90 million.

We believe that additional borrowings through various financing alternatives remain available if required.

The future effects of the pandemic cannot be predicted with certainty and may increase our borrowing costs and other costs of capital or otherwise adversely affect our financial condition and liquidity, and we cannot guarantee that we will have access to external financing at times and on terms we consider acceptable, or at all, or that we will not experience other liquidity issues going forward.

ABL Agreement

At December 31, 2019, the ABL Agreement consisted of a revolving credit facility for up to $175 million of revolving credit borrowings, swing line loans and letters of credit.

At March 31, 2020, the ABL Agreement consisted of a revolving credit facility for up to $175 million of revolving credit borrowings, swing line loans and letters of credit.

The ABL Agreement permits us to increase the size of the credit facility by an additional $150 million in certain circumstances subject to adequate borrowing base availability.

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Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR, plus a margin ranging from 125 to 150 basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from 25 to 50 basis points.

At December 31, 2019, the applicable LIBOR-based margin was 125 basis points.

At March 31, 2020, the applicable LIBOR-based margin was 125 basis points.

The ABL Agreement terminates on July 13, 2021.

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subsidiaries guarantee the Notes, which are subordinate to borrowings under the ABL.

Based on quoted market prices, the outstanding Notes had a fair value of $473.6 million at December 31, 2019.

Based on quoted market prices, the outstanding Notes had a fair value of $435.4 million at March 31, 2020.

Our Notes are not widely traded, but traded in excess of par in May 2020.

An indenture securing the Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur debt, pay dividends and make investments.

We believe we were compliant with these covenants at December 31, 2019 and expect to remain in compliance through December 31, 2020.

There are no financial maintenance covenants associated with the Indenture.

We believe we were compliant with these covenants at March 31, 2020 and expect to remain in compliance through March 31, 2021.

We may redeem some or all of the Notes at any time or from time to time prior to June 15, 2021 at certain “make-whole” redemption prices (as set forth in the Indenture) and on or after June 15, 2021 at specified redemption prices (as set forth in the Indenture).

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Moody’s Standard & Poor’s

December 31, September 30, December 31, September 30,

March 31, September 30, March 31, September 30,

2020 2019 2020 2019

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We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance ” or “special purpose ” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

In addition, at December 31, 2019 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases.

In addition, at March 31, 2020 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases.

Therefore, we were not exposed to any financing, liquidity, market or credit risk that could have arisen had we engaged in such relationships.

We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations.

At December 31, 2019, we had $13.8 million of letters of credit and $22.7 million of surety bonds outstanding.

Our business is dependent upon the construction industry, which is seasonal due to the impact of cold weather conditions.

At March 31, 2020, we had $13.8 million of letters of credit and $23.1 million of surety bonds outstanding.

Our business is seasonal due to the impact of cold weather conditions.

Net sales and operating income have historically been lowest in the quarterly periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis