CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2020, the first quarter of fiscal 2021. Comparisons are with the three months ended June 30, 2019 unless stated otherwise. Amounts are in U.S. dollars.
Business context
CSW Industrials is a diversified industrial company operating in Industrial Products and Specialty Chemicals. Its products serve HVAC/R, building products, plumbing, energy, rail, mining and general industrial markets. The company reported that COVID-19 and volatile oil prices weakened demand across its end markets, although its operations continued without material disruption through the filing date.
Financial results and changes
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $91.0 million | $102.3 million |
| Gross profit / margin | $42.8 million / 47.0% | $47.2 million / 46.2% |
| Operating income / margin | $16.3 million / 17.9% | $20.3 million / 19.9% |
| Income from continuing operations | $12.0 million | $15.3 million |
| Net income | $12.0 million | $15.2 million |
| Diluted EPS | $0.81 | $1.00 |
| Operating cash flow | $14.1 million | $9.4 million |
| Capital expenditures | $1.8 million | $2.2 million |
- Revenue fell 11.1%; management attributed the decline mainly to lower sales volumes across general industrial, energy, rail, HVAC/R, plumbing and mining markets. Gross profit declined 9.5%, while gross margin improved 0.8 percentage points, partly because prior-year project costs in architecturally specified building products did not recur.
- Operating income declined 20.0%. SG&A decreased 1.5% to $26.5 million, but rose to 29.1% of revenue from 26.3% as revenue contracted. Lower travel costs were partly offset by $0.5 million of severance related to a former executive’s departure.
- Industrial Products revenue declined 3.3% to $61.2 million; operating income was $16.3 million and margin was 26.6%, compared with 26.9%. Specialty Chemicals revenue declined 23.7% to $29.7 million; operating income fell 40.4% to $3.9 million and margin fell to 13.3% from 17.0%.
- Cash and equivalents were $19.7 million at June 30, 2020, versus $18.3 million at March 31. Operating cash flow improved year over year; working capital used cash, principally from a $6.5 million inventory increase, partly offset by lower receivables.
- Total debt was $10.8 million, all under the Whitmore term loan; the $250 million revolver, with a $50 million accordion, had no outstanding balance. The company reported $300 million of available borrowing capacity and compliance with debt covenants. The term loan’s interest exposure was covered by a swap.
- Current assets were $153.4 million and current liabilities were $54.0 million at June 30. Management said cash, operating cash flow and revolver availability should meet liquidity needs, including capital expenditures, for at least 12 months.
Outlook, risks and other notable items
- Management expects COVID-19-related effects on the economy and demand to adversely affect results and financial condition through the duration of the pandemic. It could not estimate the magnitude or duration, citing uncertainty around the pandemic, customer demand, facilities, employees and supply availability.
- The company said the effect would vary across end markets. Its operations were considered essential; it implemented employee health and safety measures and reported no material operational disruption through the filing date.
- No specific revenue, earnings or margin guidance was provided. Management stated that results were expected to remain adversely affected but did not quantify the outlook.
- The company repurchased 115,151 shares under its authorization for $7.3 million during the quarter and paid $2.0 million in dividends. A $0.135-per-share dividend was announced for payment in August 2020.
- There were no legal matters management believed reasonably likely to have a material impact. An Illinois tax examination was ongoing for fiscal 2017 and 2018, with no potential adjustments reported. The filing disclosed no material changes to previously reported risk factors.
- Adoption of the expected credit loss standard on April 1, 2020 had no material impact. A prior-year acquisition of Petersen Metals contributed to the comparison period; the acquisition had been completed in April 2019.
Important facts for investors to verify
- Whether demand and revenue trends stabilize, especially in Specialty Chemicals and energy-related end markets, and how that affects segment margins.
- How COVID-19, oil-price volatility and supply-chain conditions evolve, given management’s inability to quantify the duration or financial impact.
- Whether inventory growth and other working-capital movements convert into cash in subsequent quarters.
- Debt and liquidity availability, term-loan and swap terms, and continued compliance with credit-facility covenants.
- The ongoing level of share repurchases and dividends relative to cash generation and the uncertain operating outlook.