CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2017, compared with the three months ended June 30, 2016. This is the company’s first fiscal quarter of fiscal 2018 (fiscal year ends March 31). Unaudited figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and results
CSW Industrials sells products across Industrial Products; Coatings, Sealants & Adhesives; and Specialty Chemicals, serving HVAC, plumbing, industrial, rail, energy and other markets. Its February 2017 acquisition of Greco Aluminum Railings contributed to the current-quarter comparison.
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $98.0 | $84.1 | Up 16.6% |
| Gross profit | $42.4 | $38.2 | Up 10.9% |
| Gross margin | 43.2% | 45.4% | Down 2.2 percentage points |
| Operating income | $14.3 | $7.4 | Up 92.5% |
| Operating margin | 14.6% | 8.8% | Up 5.8 percentage points |
| Net income | $8.5 | $4.1 | More than doubled |
| Diluted EPS | $0.54 | $0.26 | Up $0.28 |
| Operating cash flow | $10.4 | $3.9 | Up $6.6 |
Net interest expense was $0.6 million versus $0.7 million. The effective tax rate declined to 36.1% from 43.1%; the prior-year rate was affected by $0.6 million of uncertain-tax-position reserves and tax-rate changes. Comprehensive income was $10.1 million versus $2.6 million.
Segments and material changes
- Industrial Products: Revenue rose 22.5% to $53.3 million; operating income increased 28.5% to $13.6 million. Greco contributed $4.7 million in revenue and $1.1 million in operating income. Organic growth was led by HVAC and plumbing; lower-margin architectural products partly offset improvement.
- Coatings, Sealants & Adhesives: Revenue was essentially flat at $23.4 million; operating income fell 39.9% to $1.0 million, with margin down to 4.2% from 7.0%. Management cited manufacturing inefficiencies during restructuring and realignment.
- Specialty Chemicals: Revenue increased 24.0% to $21.4 million and operating income rose 70.5% to $1.9 million. Growth included energy, mining and HVAC; the comparison also benefited from nonrecurrence of prior-year facility impairment costs.
Consolidated revenue growth reflected increases in HVAC, mining, plumbing and energy markets, plus $4.7 million of acquisition-related sales. Gross margin declined because of product mix and manufacturing-footprint restructuring costs. Operating income benefited from higher gross profit and lower operating expenses; the prior-year period included CFO transition/severance costs and a facility impairment that did not recur.
Cash, debt and liquidity
- At June 30, 2017, cash and cash equivalents were $25.9 million, with bank time deposits of $1.8 million. Cash and deposits together were $27.8 million, versus $24.9 million at March 31, 2017.
- Total debt was $67.2 million, down from $73.2 million at March 31, including $54.8 million drawn on the revolving facility and $12.4 million on the Whitmore term loan. The company repaid $5.9 million of revolving-facility borrowings during the quarter.
- The revolving facility had a $250 million commitment and a $50 million accordion; the filing reports $245.2 million of remaining borrowing capacity, inclusive of the accordion. The company was in compliance with its covenants at quarter-end.
- Operating cash flow was $10.4 million; investing cash use was $2.3 million, including $2.3 million of capital expenditures; financing cash use was $6.0 million, primarily debt repayments. Higher receivables used $7.3 million of cash, partly offset by a $4.7 million increase in accounts payable and other current liabilities.
- Management said cash, operating cash generation and available revolver capacity should meet liquidity needs, including capital expenditures, for at least 12 months. Capital spending is directed toward continuous improvement, automation and facility consolidation.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management expected energy-market conditions affecting customers to persist through the fiscal year and noted rail-market weakness as customers reacted to lower natural-resource prices. HVAC and plumbing demand benefited from commercial construction activity and increased product penetration.
- The company expects further costs over the next few years to integrate operations and consolidate manufacturing facilities, with anticipated sales and cost synergies. Restructuring charges recorded to date were $5.1 million; estimated total charges were $5.2 million, subject to change as the programs continue.
- On August 3, 2017, after quarter-end, the company agreed to eliminate a SureSeal contingent acquisition payment in exchange for a cash payment materially equivalent to the $6.39 million accrued at June 30; payment was expected during the quarter ending September 30, 2017.
- Market risks include floating interest rates and foreign currencies. Interest-rate swaps covered $42.2 million of $67.2 million debt; $25.0 million remained variable-rate after swaps. Management said a 0.25-percentage-point rate change would have a negligible annual interest-expense effect. Foreign-currency transaction losses were $0.3 million, while translation adjustments increased other comprehensive income by $1.7 million.
- Management reported no pending legal matters believed reasonably likely to have a material impact, no material changes to previously disclosed risk factors, and no material off-balance-sheet arrangements. Disclosure controls were deemed effective.
- The $35 million share-repurchase authorization remained unused for program purchases. The 274 shares shown as purchased in June were tendered by employees for tax withholding, not bought under the program.
Most important facts for investors to verify
- How much of reported growth and operating-income improvement is sustainable organic performance versus Greco acquisition contributions and nonrecurrence of prior-year costs.
- Whether gross-margin pressure and Coatings, Sealants & Adhesives manufacturing inefficiencies improve as restructuring and facility consolidation proceed.
- Whether receivables and other working-capital movements affect future operating cash conversion.
- The final restructuring costs and the timing and cash-flow effect of the $6.39 million SureSeal settlement.
- Continued covenant compliance, actual borrowing availability, and debt reduction while funding acquisitions, integration and capital expenditures.