What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-04 compared with 2020-08-06 · 62 added, 195 removed, 140 unchanged (65% of the section changed)

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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 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 COVID-19 pandemic, and health, safety and employee/labor issues in Company facilities around the world;

unexpected or greater than expected increases in costs of raw materials;

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

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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 continue to closely monitor the effects of the pandemic 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.

The pandemic had a material negative effect on our fiscal third quarter operations and affected our financial results to date.

However, the full financial effect 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 pandemic, 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.

To mitigate the negative financial impact of the pandemic, we have taken steps to maximize liquidity by limiting cash expenditures, including temporary furloughing of significant numbers of our employees, implementing temporary shutdowns of our manufacturing facilities or portions of our manufacturing facilities, implementing temporary salary reductions for our senior leadership team, deferring some capital expenditures, temporarily reducing fees for our Board of Directors and aggressively reducing general and administrative spending.

Some of these steps are continuing into the fourth quarter.

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 the pandemic 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 pandemic, including costs associated with voluntary emergency paid leave, 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.

The pandemic 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 August 6, 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 and partially reopened on March 15, 2020.

We continue to prioritize returning cash to our shareholders through our quarterly dividend, as we declared our quarterly dividend on July 28, 2020.

However, we have temporarily suspended our share repurchase program to provide additional financial flexibility.

We have experienced and expect to continue to experience a material slowdown in our end markets for the second half of our fiscal year, especially in residential construction, and our net sales decreased 16.7% in our third quarter as compared with the prior year period.

Our municipal market end users provide critical water, energy and public works infrastructure services and continue to operate during this crisis, but they have reduced and may continue to 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 addition to eliminating non-critical business expenses, we are evaluating further actions as changes in market demand evolve.

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

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Pipe and Anvil businesses in 2012 and 2017, respectively.

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.

Prior to the 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.

We continue to expect a slowdown in our end markets for the remainder of our fiscal year as a result of the economic effects of the pandemic, but residential construction has improved at a faster pace than anticipated.

In July 2020, Blue Chip Economic Indicators forecasted a 8% decrease in housing starts for calendar 2020 compared to the prior year primarily due to pandemic effects.

We estimate approximately 60-65% of our 2020 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 spending.

We expect the operating environment during our fiscal year 2021 to continue to be very challenging due to the uncertainty around the depth and duration of the pandemic.

We anticipate that growth in the residential construction end market will help offset anticipated challenges in the project-related portion of the municipal market.

In January 2021, Blue Chip Economic Indicators forecasted a 7% increase in housing starts for calendar 2021 compared to the prior year primarily due to the low interest rate environment in the United States.

We have continued to incur additional costs to address the pandemic as discussed herein, including costs associated with unfavorable volume variances, voluntary emergency paid leave, additional cleaning, disinfectants and sanitation materials for our employees and at our facilities.

We expect to continue to incur such costs, which may be significant, as we continue to implement operational changes in response to this pandemic.

All of our facilities are operational and our teams have worked effectively to address the few temporary closures we have experienced.

The pandemic also caused supply chain disruption that has resulted in higher costs in the manufacture of our products.

We expect these conditions to persist in the near term and may worsen until the pandemic abates.

Infrastructure

On December 3, 2018, we completed our acquisition of Krausz Development Ltd.

and subsidiaries (“Krausz”), a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel, for $140.7 million, net of cash acquired, including the assumption and simultaneous repayment of certain debt of $13.2 million.

In December 2018, we completed our acquisition of Krausz Development Ltd.

and subsidiaries (“Krausz”), a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel.

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

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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 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 fair value over the carrying value was not significant.

During the third quarter we assessed for impairment indicators of the Krausz reporting unit and determined that it was not more-likely-than-not that the goodwill was impaired as of June 30, 2020.

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 June 30, 2020 Compared to Three Months Ended June 30, 2019

Three months ended June 30, 2020

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

Three months ended December 31, 2020

Infrastructure Technologies Corporate Total

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Net income $ 16.7

Three months ended June 30, 2019

Three months ended December 31, 2019 (1)

Infrastructure Technologies Corporate Total

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Net income $ 10.3

(1) Net sales, gross profit, and SG&A expenses associated with certain products have been reclassified as Technologies segment items to conform to the current period presentation.

Consolidated Analysis

Net sales for the quarter ended June 30, 2020 decreased 16.7 percent or $45.8 million to $228.5 million from $274.3 million primarily due to reduced shipment volumes in both segments due to the effects of the pandemic, which were partially offset by higher pricing.

Gross profit for the quarter ended June 30, 2020 decreased $21.5 million to $75.7 million from $97.2 million in the prior year period, primarily due to decreased shipment volumes, and $5.2 million of expenses related to the pandemic, including certain unfavorable volume variances treated as period costs, voluntary emergency paid leave for employees and additional sanitation and cleaning fees.

Cost of sales in the prior year quarter included $2.3 million of costs associated with the Krausz acquisition.

Gross margin was 33.1% for the quarter ended June 30, 2020 compared to 35.4% in the prior year period.

Selling, general and administrative expenses (“SG&A”) for the quarter ended June 30, 2020 decreased to $47.1 million from $47.5 million in the prior year period due primarily to temporary expense reductions related to the pandemic, including reduced travel, trade shows and events as well as temporary furloughs and pay reductions for employees.

These benefits were partially offset by increases in other personnel-related expenses and professional fees.

SG&A as a percentage of net sales was 20.6% and 17.3% in the quarters ended June 30, 2020 and 2019, respectively.

Strategic reorganization and other charges in the quarter ended June 30, 2020, were $8.6 million, which primarily relate to an accrual related to a potential settlement with Siemens, facility relocation expenses and senior executive severance costs, and were $2.5 million in the prior year period.

Interest expense, net increased $1.9 million in the quarter ended June 30, 2020 compared to the prior year period primarily due to decreased interest income and capitalized interest.

The components of interest expense, net are provided below.

Net sales for the three months ended December 31, 2020 increased 11.7 percent or $24.8 million to $237.4 million from $212.6 million primarily due to increased shipment volumes across most of our product lines and higher pricing.

Gross profit for the three months ended December 31, 2020 increased $5.8 million to $78.4 million from $72.6 million in the prior year period, primarily due to increased shipment volumes and higher pricing, which were offset by $1.5 million of expenses related to the pandemic, including certain unfavorable volume variances treated as period costs, voluntary emergency paid leave for employees and additional sanitation and cleaning fees, and higher costs associated with inflation.

Gross margin was 33.0% for the three months ended December 31, 2020 compared to 34.1% in the prior year period.

Selling, general and administrative expenses (“SG&A”) for the three months ended December 31, 2020 decreased to $49.2 million from $49.9 million in the prior year period due primarily to temporary expense reductions related to the pandemic, including reduced travel, trade shows and events.

These benefits were partially offset by increases in other personnel-related expenses.

SG&A as a percentage of net sales was 20.7% and 23.5% in the three months ended December 31, 2020 and 2019, respectively.

Strategic reorganization and other charges in the three months ended December 31, 2020 were $1.4 million, which primarily related to legal and professional service expenses, and were $2.4 million in the prior year period.

Interest expense, net declined $1.3 million in the three months ended December 31, 2020 compared to the prior year period primarily due to a non-cash adjustment to capitalized interest in the prior year.

The components of net interest expense are provided below.

Three months ended

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Capitalized interest (0.6) 1.3

Other interest cost (benefit) 0.1 (0.6)

Other interest cost 0.2 —

Interest income (0.2) (0.5)

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State income taxes, net of federal benefit 4.5 4.5

Excess tax benefits related to stock compensation — (0.3)

Tax credits (1.7) (1.2)

Global Intangible Low-taxed Income (0.1) 0.6

Foreign income taxes (0.5) —

Valuation allowance (0.3) —

Reversal of uncertain tax positions (1.6) (5.2)

Other 2.6 1.9

23.3 % 21.3 %

Walter Energy Accrual — (0.4) %

Effective income tax rate 23.3 % 20.9 %

Segment Analysis

Infrastructure

Net sales for the quarter ended June 30, 2020 decreased 16.1 percent to $209.9 million compared to $250.2 million in the prior year period due to decreased shipment volumes due to the effects of the pandemic, which were partially offset by higher pricing.

Gross profit for the quarter ended June 30, 2020 decreased to $73.5 million from $92.7 million in the prior year period primarily due to decreased shipment volumes and $4.5 million of expenses related to the pandemic, including certain unfavorable volume variances treated as period costs, voluntary emergency paid leave for employees and additional sanitation and cleaning fees.

The prior year period included $2.3 million of costs related to the Krausz acquisition.

Gross margin was 35.0% for the quarter ended June 30, 2020 compared to 37.1% in the prior year period.

SG&A for the quarter ended June 30, 2020 decreased to $29.7 million from $32.1 million in the prior year period.

This decrease was primarily due to decreased personnel related costs from temporary cost savings initiatives related to the pandemic.

SG&A as a percentage of net sales was 14.1% and 12.8% for the quarters ended June 30, 2020 and 2019, respectively.

Net sales in the quarter ended June 30, 2020 decreased to $18.6 million from $24.1 million in the prior year period, due to lower shipment volumes.

We experienced a decline during the quarter as projects were delayed because of shelter-in-place restrictions.

Gross profit in the quarter ended June 30, 2020 was $2.2 million and was $4.5 million in the prior year period.

The decline in gross profit was primarily due to the decline in net sales.

Expenses related directly to the pandemic totaled $0.7 million.

SG&A decreased to $6.0 million from $6.7 million in the prior year period.

SG&A as a percentage of net sales was 32.3% and 27.8% for the quarters ended June 30, 2020 and 2019, respectively.

SG&A was $11.4 million in the quarter ended June 30, 2020 and was $8.7 million in the prior year period.

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

Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019

Nine months ended June 30, 2020

Infrastructure Technologies Corporate Total

(in millions)

Net sales $ 643.0 $ 55.8 $ — $ 698.8

Gross profit 225.9 8.4 — $ 234.3

Operating expenses:

Selling, general and administrative

95.6 18.9 31.8 146.3

Strategic reorganization and other charges 0.4 — 11.5 11.9

96.0 18.9 43.3 158.2

Operating income (loss) $ 129.9 $ (10.5) $ (43.3) 76.1

Non-operating expenses:

Pension benefit other than service (2.2)

Interest expense, net 19.5

Walter Energy Accrual 0.2

Income before income taxes 58.6

Income tax expense 13.3

Net income $ 45.3

Nine months ended June 30, 2019

Infrastructure Technologies Corporate Total

(in millions)

Net sales $ 636.3 $ 64.8 $ — $ 701.1

Gross profit 221.4 10.7 — $ 232.1

Operating expenses:

Selling, general and administrative

88.7 20.2 25.3 134.2

Strategic reorganization and other charges 1.1 — 11.5 12.6

89.8 20.2 36.8 146.8

Operating income (loss)

$ 131.6 $ (9.5) $ (36.8) 85.3

Pension costs other than service 0.8

Interest expense, net 15.6

Walter Energy Accrual 38.4

Loss before income taxes 30.5

Income tax benefit 6.9

Net income $ 23.6

Consolidated Analysis

Net sales for the nine months ended June 30, 2020 decreased 0.3% or $2.3 million to $698.8 million from $701.1 million in the prior year period primarily due to decreased shipment volumes in both segments due to the pandemic, which was offset by the addition of Krausz sales in the first quarter, and higher pricing.

Gross profit for the nine months ended June 30, 2020 increased $2.2 million to $234.3 million from $232.1 million in the prior year period, primarily due to higher pricing, improved product mix and the addition of Krausz, which was partially offset by decreased shipments and pandemic-related expenses.

The prior year period included $4.5 million of expenses related to the Krausz inventory step-up.

Gross margin was 33.5% for the nine months ended June 30, 2020 compared to 33.1% in the prior year period.

Selling, general and administrative expenses (“SG&A”) for the nine months ended June 30, 2020 increased to $146.3 million from $134.2 million in the prior year period due primarily to the inclusion of Krausz’s SG&A expenses in the first quarter as well as information technology related activities, personnel-related costs and professional fees.

SG&A as a percentage of net sales was 20.9% and 19.1% in the nine months ended June 30, 2020 and 2019, respectively.

Strategic reorganization and other charges were $11.9 million in the nine months ended June 30, 2020 and were $12.6 million in the prior year period.

Interest expense, net increased $3.9 million in the nine months ended June 30, 2020 compared to the prior year period primarily due to decreased interest income and a non-cash adjustment to capitalized interest in the first quarter of the current period.

The components of interest expense, net are provided below.

Nine months ended

(in millions)

Notes $ 18.6 $ 18.6

Deferred financing costs amortization 0.9 0.9

ABL Agreement 0.4 0.4

Capitalized interest, including adjustment 0.2 (1.2)

Other interest expense 0.3 (0.3)

Interest income $ (1.0) $ (2.8)

Interest expense, net $ 19.5 $ 15.6

The reconciliation between the U.S.

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

Nine 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 5.6

Excess tax benefits related to stock compensation (0.6) (1.4)

Excess tax benefits related to stock-based compensation (0.6) (1.5)

Tax credits (1.4) (1.1)

Global Intangible Low-taxed Income 0.6 0.1

Foreign income taxes (0.6) —

Foreign income tax rate differential (0.9) (0.7)

Valuation allowance 1.5 (0.7)

Reversal of uncertain tax positions (0.5) (7.2)

Other 1.1 1.5

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Walter Energy accrual — (0.3) %

Transition tax benefit — (1.9)

Effective income tax rate 25.8 % 22.8 %

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Infrastructure

Net sales for the nine months ended June 30, 2020 increased 1.1% to $643.0 million compared to $636.3 million in the prior year period due to the inclusion of Krausz in the first quarter and higher pricing, partially offset by declines in volume associated with the pandemic.

Gross profit for the nine months ended June 30, 2020 increased to $225.9 million from $221.4 million in the prior year period primarily due to the inclusion of Krausz and higher sales pricing, partially offset by declines in volume and recognition of certain manufacturing variances as period costs and other expenses associated with the pandemic.

The prior year period included $4.5 million of expenses related to the Krausz inventory step-up.

Gross margin was 35.1% for the nine months ended June 30, 2020 compared to 34.8% in the prior year period.

SG&A for the nine months ended June 30, 2020 increased to $95.6 million from $88.7 million in the prior year period.

This increase was primarily due to the inclusion of Krausz, which was offset by cost reduction measures we have taken related to the pandemic.

SG&A as a percentage of net sales was 14.9% and 13.9% for the nine months ended June 30, 2020 and 2019, respectively.

Net sales in the nine months ended June 30, 2020 decreased to $55.8 million from $64.8 million in the prior year period, driven by lower shipment volumes from our metering products and reduced volume of leak-detection services performed due to the pandemic, which was offset by higher pricing.

Gross profit was $8.4 million compared to $10.7 million in the prior year period.

SG&A decreased to $18.9 million in the nine months ended June 30, 2020 compared to $20.2 million in the prior year period primarily due to reduced marketing and personnel-related expenses, including those cost reduction measures related to the pandemic.

SG&A as a percentage of net sales was 33.9% and 31.2% for the nine months ended June 30, 2020 and 2019, respectively.

SG&A was $31.8 million in the nine months ended June 30, 2020 and was $25.3 million in the prior year period.

This increase was primarily due to IT-related activities, personnel-related costs and professional fees, which were offset by cost reduction measures we have taken related to the pandemic.

Net sales for the three months ended December 31, 2020 increased 12.3 percent to $215.9 million compared to $192.3 million in the prior year period primarily due to higher shipment volumes across most of our product lines as well as higher pricing.

Gross profit for the three months ended December 31, 2020 increased to $73.7 million from $68.0 million in the prior year period primarily due to increased shipment volumes, partially offset by $1.4 million of expenses related to the pandemic, including certain unfavorable volume variances treated as period costs, and higher costs associated with inflation.

Gross margin was 34.1% for the three months ended December 31, 2020 and was 35.4% in the prior year period.

SG&A for the three months ended December 31, 2020 decreased to $32.0 million from $32.5 million in the prior year period.

This decrease was due primarily to temporary expense reductions of $1.4 million related to the pandemic, including reduced travel, trade shows and events, partially offset by increases in other personnel-related expenses.

SG&A as a percentage of net sales was 14.8% and 16.9% for the three months ended December 31, 2020 and 2019, respectively.

Net sales in the three months ended December 31, 2020 increased to $21.5 million from $20.3 million in the prior year period, primarily due to higher shipment volumes of our metering and leak detection-related products.

Gross profit in the three months ended December 31, 2020 was $4.7 million and was $4.6 million in the prior year period.

SG&A decreased to $6.2 million from $6.4 million in the prior year period primarily due to temporary expense reductions related to the pandemic, including reduced travel, trade shows and events.

SG&A as a percentage of net sales was 28.8% and 31.5% for the three months ended December 31, 2020 and 2019, respectively.

SG&A was $11.0 million in each of the three months ended December 31, 2020 and 2019.

Liquidity and Capital Resources

We had cash and cash equivalents of $170.7 million at June 30, 2020 and $116.1 million of additional borrowing capacity under our ABL Agreement based on June 30, 2020 data.

We had cash, cash equivalents and restricted cash on hand of $223.0 million at December 31, 2020 and $113.4 million of additional borrowing capacity under our ABL Agreement based on December 31, 2020 data.

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

At June 30, 2020, cash and cash equivalents included $8.3 million, $5.4 million and $17.6 million in Canada, China and Israel, respectively.

As of August 6, 2020, we have no plans to repatriate cash.

We declared a quarterly dividend of $0.0525 per share on July 28, 2020, payable on August 20, 2020, which will result in an estimated $8.3 million cash outlay.

We did not purchase any shares of our common stock during the quarter ended June 30, 2020 and have $145 million remaining on our share repurchase authorization.

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

The 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.

At December 31, 2020, cash and cash equivalents included $13.1 million, $6.7 million and $21.7 million in Canada, China and Israel, respectively.

We declared a quarterly dividend of $0.055 per share on January 28, 2021, payable on February 22, 2021, which will result in an estimated $8.7 million cash outlay.

We did not repurchase any shares of our outstanding common stock during the three months ended December 31, 2020 and had $145.0 million remaining on our share repurchase authorization.

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.

Nine months ended

Three months ended

(in millions)

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Disbursements, other than interest and income taxes (214.3) (231.4)

Walter tax matter payment (22.2) —

Walter Energy payment — (22.2)

Interest payments, net (12.4) (12.0)

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Cash provided by operating activities $ 34.1 $ (12.4)

Collections from customers were higher during the nine months ended June 30, 2020 compared to the prior year period primarily due to the inclusion of Krausz in our consolidated results.

Decreased disbursements, other than interest and income taxes, during the nine months ended June 30, 2020 primarily reflect the results of cost containment actions we have taken during the pandemic.

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

Capital expenditures were $51.2 million in the nine months ended June 30, 2020 compared to $52.9 million in the prior year period.

These expenditures were primarily in previously announced large capital projects.

For the full-year 2020, we have reduced our plans for capital expenditures and now expect spending to be between $71 million and $75 million as compared with our prior guidance range of between $80 million 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 June 30, 2021.

Collections from customers were higher during the three months ended December 31, 2020 compared to the prior year period primarily due to net sales growth.

Decreased disbursements, other than interest and income taxes, during the three months ended December 31, 2020 primarily reflect the results of improvements in working capital management.

Additionally, we disbursed $22.2 million related to the final settlement of the Walter tax matter in the prior year period.

Capital expenditures were $15.6 million in the three months ended December 31, 2020 and were $15.2 million in the prior year period.

These expenditures were primarily associated with previously-announced large capital projects.

For fiscal 2021, we have provided guidance that our capital expenditures are expected to be between $80.0 million and $90.0 million.

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

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ABL Agreement

At June 30, 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.

At December 31, 2020, the ABL Agreement consisted of a revolving credit facility for up to $175.0 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 $150.0 million in certain circumstances subject to adequate borrowing base availability.

We may borrow up to $25.0 million through swing line loans and may have up to $60.0 million of letters of credit outstanding.

At July 30, 2020, the maturity of the ABL Agreement was extended to July 29, 2025 and borrowings under the amended ABL Agreement bear interest at a floating rate equal to LIBOR, plus a margin ranging from 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from 100 to 125 basis points.

At July 31, 2020, the applicable LIBOR-based margin was 200 basis points.

In July 2020, the maturity of the ABL Agreement was extended to July 29, 2025 and borrowings under the amended ABL Agreement bear interest at a floating rate equal to LIBOR, plus an applicable margin ranging from 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from 100 to 125 basis points.

At December 31, 2020, the applicable LIBOR-based margin was 200 basis points.

The amended ABL agreement also calls for a commitment fee of 37.5 basis points, annually, on undrawn amounts.

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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 $460.1 million at June 30, 2020.

Based on quoted market prices, the outstanding Notes had a fair value of $466.3 million at December 31, 2020.

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

There are no financial maintenance covenants associated with the Indenture.

We believe we were compliant with these covenants at June 30, 2020.

We believe we were compliant with these covenants at December 31, 2020.

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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Our corporate credit rating and the credit rating for our debt are presented below.

These ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency.

These ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agencies.

Moody’s Standard & Poor’s

June 30, September 30, June 30, September 30,

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

2020 2020 2020 2020

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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 June 30, 2020 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases.

In addition, at December 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 June 30, 2020, we had $13.8 million of letters of credit and $37.7 million of surety bonds outstanding.

At December 31, 2020, we had $13.8 million of letters of credit and $42.7 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.

Net sales and operating income have historically been lowest in the three month 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