Mueller Water Products, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that appear elsewhere in this report. 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 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, adjusted operating income and adjusted EBITDA performance, margins, capital expenditure plans, litigation outcomes, capital allocation and growth strategies, restructuring efficiencies and warranty charges. Forward-looking statements are based on certain assumptions and assessments made by the Company based on 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 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 and purchased components; 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 restructuring and consolidation activities and our large capital investments 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; as well as 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 pandemic). Forward-looking statements are only as of the date they are made and do not guarantee future performance. 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. You are advised to review any further disclosures the Company makes in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S. Securities and Exchange Commission. Overview Organization On October 3, 2005, Walter Energy, Inc (“Walter Energy”) acquired all outstanding shares of capital stock representing the Mueller Co. and Anvil businesses and contributed them to its U.S. Pipe business to form Mueller Water Products, Inc. (“Mueller” or the “Company”). In June 2006, we completed an initial public offering of 28,750,000 shares of Series A common stock and in December 2006, Walter Energy distributed to its shareholders all of its equity interests in Mueller, completing our spin-off. We subsequently sold our U.S. Pipe and Anvil businesses in 2012 and 2017, respectively. Business 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, which has accelerated and may continue to accelerate inflation and global supply chain disruptions. We anticipate that growth in the residential construction end market will continue to help offset anticipated challenges in the project-related portion of the municipal market. In April 2021, Blue Chip Economic Indicators forecasted a 12% increase in housing starts for calendar 2021 compared to the prior year primarily due to the low interest rate environment in the United States. 18 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 respond to the pandemic. All of our facilities are operational and our teams have worked effectively to address the few temporary closures we have experienced due to the pandemic. The last such closure was in August 2020. 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 In December 2018, we completed our acquisition of Krausz Industries Development Ltd. and subsidiaries (“Krausz”), a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel. During the three months ended March 31, 2021, we aligned the consolidation of Krausz in the consolidated financial statements which previously included results on a one-month reporting lag. The impact of the elimination of the reporting lag during the three and six months ended March 31, 2021 resulted in an increase of $6.0 million to net sales and $1.4 million in operating income. In October 2019, we acquired the noncontrolling interest of our previously existing joint venture operation for a negotiated purchase price of $5.4 million. Technologies The municipal market is the key end market for Technologies. Our Technologies segment is typically project-oriented and depends on our customers’ adoption of our technology-based products and services. 19 Results of Operations Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 Three months ended March 31, 2021 Infrastructure Technologies Corporate Total (in millions) Net sales $ 246.9 $ 20.6 $ — $ 267.5 Gross profit 86.3 2.1 — $ 88.4 Operating expenses: Selling, general and administrative 34.4 6.7 13.1 54.2 Strategic reorganization and other (credits) charges (0.7) — 1.5 0.8 Total operating expenses 33.7 6.7 14.6 55.0 Operating income (loss) $ 52.6 $ (4.6) $ (14.6) 33.4 Other expenses (income): Pension benefit other than service (0.8) Interest expense, net 6.1 Income before income taxes 28.1 Income tax expense 7.2 Net income $ 20.9 Three months ended March 31, 2020 Infrastructure Technologies Corporate Total (in millions) Net sales $ 239.9 $ 17.8 $ — $ 257.7 Gross profit 84.1 1.9 — $ 86.0 Operating expenses: Selling, general and administrative 33.4 6.5 9.4 49.3 Strategic reorganization and other (credits) charges 0.4 — 0.5 0.9 Total operating expenses 33.8 6.5 9.9 50.2 Operating income (loss) $ 50.3 $ (4.6) $ (9.9) 35.8 Other expenses (income): Pension benefit other than service (0.8) Interest expense, net 6.0 Income before income taxes 30.6 Income tax expense 6.8 Net income $ 23.8 Consolidated Analysis Net sales for the three months ended March 31, 2021 increased 3.8 percent or $9.8 million to $267.5 million from $257.7 million in the comparable prior year period. This increase was primarily a result of $6.0 million of Krausz sales recorded during the three months ended March 31, 2021 by eliminating the one-month reporting lag as well as higher pricing for our products and volume at Technologies. Gross profit for the three months ended March 31, 2021 increased $2.4 million to $88.4 million from $86.0 million in the prior year period. Gross profit increased primarily as a result of stronger manufacturing performance, increased pricing and the benefit from the elimination of the Krausz one-month reporting lag. Partially offsetting the increase in gross profit were higher manufacturing costs due to inflation, $2.4 million in Inventory write-downs as a result of the announced plant closures in Aurora, Illinois and Surrey, British Columbia, Canada and $1.2 million in higher Cost of sales as a result of the pandemic. Gross margin was 33.0% for the three months ended March 31, 2021 compared to 33.4% in the prior year period. 20 Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2021 increased $4.9 million to $54.2 million from $49.3 million in the prior year period primarily as a result of an increase in personnel-related expenses, partially offset by decreased expenditures for travel, trade shows and events as a result of the pandemic. SG&A as a percentage of net sales was 20.3% and 19.1% in the three months ended March 31, 2021 and 2020, respectively. Strategic reorganization and other charges for the three months ended March 31, 2021 were $0.8 million, which primarily consisted of termination benefits associated with the announced closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada, as well as legal and professional service expenses, partially offset by a one-time settlement gain in connection with an indemnification from a previously owned property. Strategic reorganization and other charges for the three months ended March 31, 2020 of $0.9 million included charges associated with the closure and consolidation of our Hammond, Indiana facility. Interest expense, net increased $0.1 million in the three months ended March 31, 2021 compared to the prior year period primarily due to decreasing interest rates on cash balances. The components of interest expense, net are provided below. Three months ended March 31, 2021 2020 (in millions) Notes $ 6.2 $ 6.2 Deferred financing costs amortization 0.3 0.3 ABL Agreement 0.2 0.1 Capitalized interest (0.6) (0.5) Other interest cost 0.1 0.2 6.2 6.3 Interest income (0.1) (0.3) Interest expense, net $ 6.1 $ 6.0 The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below. Three months ended March 31, 2021 2020 U.S. federal statutory income tax rate 21.0 % 21.0 % Adjustments to reconcile to the effective tax rate: State income taxes, net of federal benefit 4.2 4.5 Excess tax (benefits) related to stock-based compensation (0.3) (0.5) Tax credits (1.1) (1.5) Global Intangible Low-taxed Income 0.6 (0.2) Foreign income tax rate differential (0.3) (0.5) Valuation allowance (0.6) (0.6) Other 2.1 — Effective income tax rate 25.6 % 22.2 % Segment Analysis Infrastructure Net sales for the three months ended March 31, 2021 increased 2.9 percent to $246.9 million compared to $239.9 million in the prior year period. This increase was primarily a result of $6.0 million of Krausz sales recorded during the three months ended March 31, 2021 by eliminating the one-month reporting lag as well as higher pricing for our Infrastructure products. Gross profit for the three months ended March 31, 2021 increased to $86.3 million from $84.1 million in the prior year period primarily due to improved manufacturing performance, increased pricing and the benefit from the elimination of the Krausz one-month reporting lag, which were partially offset by inflation on our Cost of sales, $2.4 million in Inventory write-downs as a result of the announced plant closures of Aurora, Illinois and Surrey, British Columbia, Canada and $1.0 million in higher Cost of sales related to the pandemic. Gross margin was 35.0% for the three months ended March 31, 2021 and was 35.1% in the prior year period. 21 SG&A for the three months ended March 31, 2021 increased to $34.4 million from $33.4 million in the prior year period. This increase was primarily the result of personnel-related expenses, which were partially offset by temporary expense reductions related to the pandemic, including reduced travel, trade shows and events. SG&A as a percentage of net sales was 13.9% for both the three months ended March 31, 2021 and 2020. Technologies Net sales for the three months ended March 31, 2021 increased to $20.6 million from $17.8 million in the prior year period, primarily due to higher shipment volumes of our metering and leak detection-related products. Gross profit for the three months ended March 31, 2021 was $2.1 million compared to $1.9 million in the prior year period. Gross margin percentage was 10.2% and 10.7%, in the three months ended March 31, 2021 and 2020, respectively. SG&A increased to $6.7 million from $6.5 million in the prior year period primarily due to increased personnel-related expenses. SG&A as a percentage of net sales was 32.5% and 36.5% for the three months ended March 31, 2021 and 2020, respectively. Corporate SG&A was $13.1 million and $9.4 million in the three months ended March 31, 2021 and 2020, respectively. This increase was primarily the result of personnel-related expenses. 22 Six Months Ended March 31, 2021 Compared to Six Months Ended March 31, 2020 Six months ended March 31, 2021 Infrastructure Technologies Corporate Total (in millions) Net sales $ 462.8 $ 42.1 $ — $ 504.9 Gross profit 160.0 6.8 — $ 166.8 Operating expenses: Selling, general and administrative 66.4 12.9 24.1 103.4 Strategic reorganization and other (credits) charges (0.6) — 2.8 2.2 Total operating expenses 65.8 12.9 26.9 105.6 Operating income (loss) $ 94.2 $ (6.1) $ (26.9) 61.2 Other expenses (income): Pension benefit other than service (1.6) Interest expense, net 12.2 Income before income taxes 50.6 Income tax expense 13.0 Net income $ 37.6 Six months ended March 31, 2020 Infrastructure Technologies Corporate Total (in millions) Net sales $ 432.2 $ 38.1 $ — $ 470.3 Gross profit 152.1 6.5 — $ 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 Total operating expenses 66.3 12.9 23.3 102.5 Operating income (loss) $ 85.8 $ (6.4) $ (23.3) 56.1 Other expenses (income): Pension benefit 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 Consolidated Analysis Net sales for the six months ended March 31, 2021 increased 7.4 percent or $34.6 million to $504.9 million from $470.3 million primarily due to increased shipment volumes across most of our product lines, higher pricing and a result of $6.0 million in Krausz sales recorded during the three months ended March 31, 2021 by eliminating the one-month reporting lag. Gross profit for the six months ended March 31, 2021 increased $8.2 million to $166.8 million from $158.6 million in the prior year period, primarily due to increased shipment volumes, higher pricing and the benefit from the elimination of the Krausz one-month reporting lag. These increases were partially offset by inflation and lesser expenditures associated with the pandemic, including voluntary emergency paid leave and other employee costs as well as additional sanitation and cleaning fees, and a $2.4 million inventory write-off associated with the announcement of our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada. Gross margin was 33.0% for the six months ended March 31, 2021 compared to 33.7% in the prior year period. 23 Selling, general and administrative expenses (“SG&A”) for the six months ended March 31, 2021 increased to $103.4 million from $99.2 million in the prior year period primarily due to increases in personnel-related expenses. The increase was partially offset by temporary expense reductions related to the pandemic, including reduced travel, trade shows and events. SG&A as a percentage of net sales was 20.5% and 21.1% in the six months ended March 31, 2021 and 2020, respectively. Strategic reorganization and other charges for the six months ended March 31, 2021 were $2.2 million, which primarily related to termination benefits associated with our announced plan closures in Aurora, Illinois and Surrey, British Columbia, Canada, as well as, legal and professional service expenses, partially offset by a one-time settlement gain in connection with an indemnification from a previously owned property. Strategic reorganization and other charges for the six months ended March 31, 2020 were $3.3 million primarily related to previously announced facility closures and legal and professional service expenses. Interest expense, net declined $1.2 million in the six months ended March 31, 2021 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. Six months ended March 31, 2021 2020 (in millions) Notes $ 12.4 $ 12.4 Deferred financing costs amortization 0.6 0.6 ABL Agreement 0.4 0.3 Capitalized interest (1.1) 0.7 Other interest cost 0.2 0.2 Interest expense 12.5 14.2 Interest income (0.3) (0.8) Interest expense, net 12.2 13.4 The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below. Six months ended March 31, 2021 2020 U.S. federal statutory income tax rate 21.0 % 21.0 % Adjustments to reconcile to the effective tax rate: State income taxes, net of federal benefit 4.2 4.5 Excess tax (benefits) related to stock-based compensation (0.2) (0.8) Tax credits (1.1) (1.4) Global Intangible Low-taxed Income 0.6 — Foreign income tax rate differential (0.3) (0.6) Valuation allowance (0.2) (0.6) Other 1.7 0.4 Effective income tax rate 25.7 % 22.5 % Segment Analysis Infrastructure Net sales for the six months ended March 31, 2021 increased 7.1 percent to $462.8 million compared to $432.2 million in the prior year period primarily due to higher shipment volumes across most of our product lines, higher pricing and the result of $6.0 million in Krausz sales recorded during the three months ended March 31, 2021 by eliminating the one-month reporting lag. 24 Gross profit for the six months ended March 31, 2021 increased $7.9 million to $160.0 million from $152.1 million in the prior year period primarily due to increased shipment volumes, higher pricing, improved manufacturing performance and the benefit from the elimination of the Krausz one-month reporting lag. These increases were partially offset by higher costs associated with inflation, a $2.4 million Inventory write-off associated with the announcement of the closure of our Aurora, Illinois and Surrey, British Columbia, Canada facilities and $2.4 million in expenses related to the pandemic, including voluntary emergency paid leave and other employee costs as well as additional sanitation and cleaning fees. Gross margin was 34.6% for the six months ended March 31, 2021 and was 35.2% in the prior year period. SG&A for the six months ended March 31, 2021 increased to $66.4 million from $65.9 million in the prior year period. This increase was primarily due to increases in personnel-related expenses, partially offset by temporary expense reductions of $2.9 million related to the pandemic, including reduced travel, trade shows and events. SG&A as a percentage of net sales was 14.3% and 15.2% for the six months ended March 31, 2021 and 2020, respectively. Technologies Net sales for the six months ended March 31, 2021 increased to $42.1 million from $38.1 million in the prior year period, primarily due to higher shipment volumes of our metering and leak detection-related products. Gross profit for the six months ended March 31, 2021 was $6.8 million and was $6.5 million in the prior year period. Gross margin percentage was 16.2% and 17.1% in the six months ended March 31, 2021 and 2020, respectively. SG&A was $12.9 million in both the current and prior year periods. SG&A as a percentage of net sales was 30.6% and 33.9% for the six months ended March 31, 2021 and 2020, respectively. Corporate SG&A was $24.1 million and $20.4 million in the six months ended March 31, 2021 and 2020, respectively. The increase was primarily as a result of higher personnel-related expenses. Liquidity and Capital Resources We had cash and cash equivalents on hand of $228.2 million at March 31, 2021 and $154.4 million of additional borrowing capacity under our ABL Agreement based on March 31, 2021 data. Undistributed earnings from our subsidiaries in Canada, China, and Israel are considered to be permanently invested outside the United States. At March 31, 2021, cash and cash equivalents included $29.7 million, $8.5 million and $7.2 million in Israel, Canada and China, respectively. We declared a quarterly dividend of $0.0550 per share on April 23, 2021, payable on or about May 20, 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 and six months ended March 31, 2021 and had $145.0 million remaining under our share repurchase authorization. The ABL Agreement and Notes contain customary representations and warranties, covenants and provisions governing an event of default. The covenants restrict our ability to engage in certain specified activities, including but not limited to the payment of dividends and the redemption of our common stock. Cash flows from operating activities are categorized below. Six months ended March 31, 2021 2020 (in millions) Collections from customers $ 502.6 $ 462.1 Disbursements, other than interest and income taxes (422.7) (424.8) Walter Energy payment — (22.2) Interest payments, net (12.5) (12.2) Income tax payments, net (4.2) (5.9) Cash provided by (used in) operating activities $ 63.2 $ (3.0) Collections from customers were higher during the six months ended March 31, 2021 compared to the prior year period primarily due to net sales growth. 25 Decreased disbursements, other than interest and income taxes, during the six months ended March 31, 2021 primarily reflect improvements in working capital management. Additionally, we disbursed $22.0 million related to the final settlement of the Walter tax matter in the prior year period. Capital expenditures were $31.1 million in the six months ended March 31, 2021 and $37.3 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 $85.0 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 obligations as they become due through March 31, 2022. 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 in the future. ABL Agreement At March 31, 2021, the ABL Agreement consisted of a $175.0 million revolving credit facility that includes up to $25.0 million through swing line loans and may have up to $60.0 million of 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. Borrowings under the 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 an applicable margin ranging from 100 to 125 basis points. At March 31, 2021, the applicable rate was LIBOR plus 200 basis points. The ABL Agreement is subject to mandatory prepayments if total outstanding borrowings under the ABL Agreement are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in certain circumstances. The borrowing base under the ABL Agreement is equal to the sum of (a) 85% of the value of eligible accounts receivable and (b) the lesser of (i) 70% of the value of eligible inventories or (ii) 85% of the net orderly liquidation value of eligible inventories, less certain reserves. Prepayments may be made at any time with no penalty. Substantially all of our U.S. subsidiaries are borrowers under the ABL Agreement and are jointly and severally liable for any outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. inventories, accounts receivable, certain cash and other supporting obligations. The ABL Agreement terminates on July 29, 2025 and includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. receivables and inventories, certain cash and other supporting obligations. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million and 10% of the Loan Cap as defined in the ABL Agreement. Excess availability based on March 31, 2021 data was $154.4 million, as reduced by $13.8 million of outstanding letters of credit and $1.6 million of accrued fees and expenses. 5.5% Senior Unsecured Notes On June 12, 2018, we privately issued $450.0 million of Senior Unsecured Notes (“Notes”), which mature in June 2026 and bear interest at 5.5%, payable semi-annually on June 15 and December 15. Substantially all of our U.S. subsidiaries guarantee the Notes, which are subordinate to borrowings under the ABL Agreement. Based on quoted market prices, the outstanding Notes had a fair value of $465.8 million at March 31, 2021 and September 30, 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 make investments. There are no financial maintenance covenants associated with the Indenture. We believe we were in compliance with these covenants at 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). Additionally, we may redeem up to 40% of the aggregate principal amount of the Notes at any time or from time to time prior to June 15, 2021 with the net proceeds of specified equity offerings at specified redemption prices (as set forth in the 26 Indenture). Upon a change in control (as defined in the Indenture), we will be required to offer to purchase the Notes at a price equal to 101% of the outstanding principal amount of the Notes. 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 agencies. Moody’s Standard & Poor’s March 31, September 30, March 31, September 30, 2021 2020 2021 2020 Corporate credit rating Ba2 Ba2 BB BB ABL Agreement Not rated Not rated Not rated Not rated Notes Ba3 Ba3 BB BB Outlook Stable Stable Stable Stable Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, including 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 March 31, 2021 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 March 31, 2021, we had $13.8 million of letters of credit and $43.5 million of surety bonds outstanding. Seasonality Our business is seasonal as a result of cold weather conditions. 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.