CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2020 (fiscal 2021 second quarter). Filed October 30, 2020. CSWI operates in Industrial Products and Specialty Chemicals, serving HVAC/R, building products, plumbing, energy, rail, mining and general industrial markets.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $104.9 million, up 3.6% year over year | $195.9 million, down 3.8% |
| Gross profit / margin | $48.7 million / 46.4% (prior year 46.8%) | $91.5 million / 46.7% (prior year 46.5%) |
| Operating income / margin | $22.2 million / 21.1% (prior year 19.9%) | $38.4 million / 19.6% (prior year 19.9%) |
| Net income | $16.4 million; diluted EPS $1.10 (prior year $8.8 million; $0.58) | $28.3 million; diluted EPS $1.91 (prior year $24.0 million; $1.58) |
| Operating cash flow | $44.8 million for the six months, versus $37.5 million |
- Quarterly sales gains in HVAC/R and plumbing more than offset declines in energy, general industrial, rail and architecturally specified building products. For the six-month period, lower sales in energy and several industrial end markets outweighed HVAC/R growth.
- Industrial Products revenue rose 15.5% in the quarter and 6.0% for six months; Specialty Chemicals revenue fell 15.8% and 19.8%, respectively. Six-month segment operating income was $36.0 million for Industrial Products and $9.8 million for Specialty Chemicals.
- Six-month cash generation included favorable working-capital movements, notably lower receivables and inventories. Investing cash outflow was $4.4 million, including $4.4 million of capital expenditures. Financing cash outflow was $12.3 million, including $9.4 million of treasury-share purchases and $4.0 million of dividends.
- Cash and equivalents were $47.3 million at September 30, up from $18.3 million at March 31. Total debt was $10.6 million, including $0.6 million current; the company had no revolver borrowings and reported $300 million of availability including the accordion feature. It was in compliance with credit covenants.
Material changes and unusual items
- Quarterly operating income improved 10.2%, supported by higher revenue and lower SG&A, including reduced travel expense. Six-month operating income declined 5.0% as lower gross profit outweighed expense reductions.
- Net income comparisons benefited from the absence of the prior-year $7.0 million pension-plan termination expense recorded in other expense. That item materially affects year-over-year comparisons; the U.S. qualified pension plan was terminated in September 2019.
- Prior-year gross profit and segment comparisons also included a $0.8 million gain on sale of property, plant and equipment that did not recur.
- The company repurchased $7.3 million of shares during the six months under its repurchase program. No shares were repurchased under the public program during the reported quarter; the small quarterly share purchase shown was employee tax withholding.
Outlook, risks and contingencies
- Management expects COVID-19’s economic and demand effects to continue adversely affecting results through the duration of the pandemic, with mixed effects across end markets. It said the duration and magnitude cannot be reasonably estimated. Volatile oil prices and related demand weakness also affected results.
- Operations continued without material disruption through the filing date, with health and safety measures in place. Management stated that cash, operating cash flow and available revolver capacity should meet liquidity needs, including capital spending, for at least the next 12 months.
- No quantified earnings or revenue guidance was provided. Key uncertainties include pandemic duration and severity, customer demand, employee and facility effects, and material availability through supply channels.
- Market risks include foreign-currency exposure and variable-rate debt; the interest-rate swap covered 100% of the $10.6 million term loan. Management reported no material pending legal matter expected to affect results, and no material changes to previously disclosed risk factors.
Investor verification priorities
- Check whether HVAC/R strength continues and whether weakness in Specialty Chemicals and energy-related markets persists.
- Assess how much of the earnings improvement reflects operating performance versus the prior-year pension termination charge and other nonrecurring comparisons.
- Monitor operating cash flow, working-capital movements, share repurchases, and continued access to the revolver.
- Track COVID-19 demand and supply-chain effects, oil-market volatility, and the company’s ability to maintain margins as sales mix changes.
- Review the term-loan and interest-rate swap terms, covenant compliance, and any developments in the Illinois state tax examination; the filing reported no material adjustment notice.