Business context and reporting period
CSW Industrials, Inc. filed this unaudited Form 10-Q for the three months ended June 30, 2021, the first quarter of fiscal 2022 (despite the request metadata describing it as 2021 Q1). CSWI sells niche industrial products across HVAC/R, plumbing, engineered building products, and industrial reliability markets. The quarter’s comparisons reflect the December 2020 TRUaire acquisition and, beginning April 1, 2021, consolidation of the Whitmore joint venture with Shell. CSWI also realigned its reporting into Contractor Solutions, Engineered Building Solutions, and Specialized Reliability Solutions.
Financial performance
| Metric | Three months ended June 30, 2021 | Prior-year period |
|---|---|---|
| Revenue | $161.3 million | $91.0 million |
| Gross profit / margin | $68.6 million / 42.5% | $42.8 million / 47.0% |
| Operating income / margin | $28.5 million / 17.7% | $16.3 million / 17.9% |
| Net income attributable to CSWI | $20.0 million | $12.0 million |
| Diluted EPS attributable to CSWI | $1.27 | $0.81 |
| Operating cash flow | $18.9 million | $14.1 million |
Revenue increased 77.3%; management attributed $33.5 million of growth to TRUaire and $36.8 million to organic growth (40.5%). Gross profit rose 60.5%, while gross margin fell 4.5 percentage points. Operating income increased 75.2%, with operating margin down 0.2 percentage points. Net interest expense was $1.5 million, up from $0.3 million, primarily reflecting acquisition-related borrowing. The effective tax rate was 23.9%, versus 23.5%.
Cash and equivalents were $15.7 million at June 30, up from $10.1 million at March 31, 2021. Current assets were $242.7 million and current liabilities $91.7 million. Long-term debt was $230.6 million, plus $0.6 million current debt; total debt was $231.2 million, down from $242.3 million at March 31. Operating cash flow benefited from earnings but working capital absorbed cash, including $16.2 million for receivables and $11.0 million for inventory, partly offset by $10.9 million from payables and other current liabilities. Investing activities provided $0.3 million, including a $1.4 million TRUaire working-capital true-up; capital expenditures were $1.1 million. Financing used $13.7 million, including net debt repayments, dividends, and treasury-share purchases or withholding activity.
Material changes, outlook, and risks
- Margins and costs: Management said TRUaire, including a $3.9 million purchase-accounting effect, and material and freight cost increases that outpaced pricing initiatives drove the gross-margin decline. Pricing actions began in the prior quarter and continued to expand.
- Segments: Contractor Solutions revenue increased 121.0%, including TRUaire; operating margin declined to 26.8% from 31.9%. Engineered Building Solutions revenue rose 15.8%, while operating income fell 4.6% amid a shift toward lower-margin projects. Specialized Reliability Solutions revenue rose 33.9%, but operating income declined slightly as material and freight costs outpaced pricing.
- Strategic transactions: On April 1, CSWI contributed assets to the Whitmore JV and sold Shell a 50% interest for $13.4 million in cash and intangible assets. CSWI consolidates the JV as primary beneficiary; Shell’s redeemable noncontrolling interest was $13.7 million at quarter-end. The JV earned $0.6 million during the quarter.
- Debt and liquidity: A new $400 million revolving credit facility was entered into on May 18, 2021, maturing May 18, 2026; quarter-end borrowing capacity was $179 million. CSWI reported compliance with covenants and expects cash, operating flows, and facility availability to meet needs for at least 12 months. A maximum leverage covenant and minimum fixed-charge coverage covenant apply.
- Risks and contingencies: COVID-19-related demand and supply-chain uncertainty, inflation, and logistics costs may cause volatility; management said the pandemic’s duration and financial impact could not be reasonably estimated. The filing reports no pending matters believed reasonably likely to have a material effect and no material changes to previously disclosed risk factors. An IRS examination of Whitmore’s 2015 short-period federal return had produced no notice of material adjustments.
- Guidance: The filing provides no quantified revenue, earnings, or margin guidance. Management discussed demand recovery in some end markets and continued pricing actions, but cautioned about uncertainty and volatility.
Important facts for investors to verify
- How much revenue growth is sustainable organically versus attributable to TRUaire and the newly consolidated Whitmore JV.
- Whether pricing catches up with material and freight inflation and reverses gross-margin pressure.
- Cash conversion as receivables and inventories rise, and the pace of debt reduction under the new credit facility.
- The effects of TRUaire purchase accounting, including elevated amortization, and the valuation and redemption terms of Shell’s JV interest.
- Future demand, supply-chain conditions, and the sensitivity of interest expense to variable rates; CSWI estimated a 0.25-percentage-point rate change would alter annual interest expense by about $0.6 million.