CSW Industrials, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended March 31, 2022. The filing also reports fourth-quarter results for the three months ended March 31, 2022. Amounts below are in U.S. dollars; financial statement amounts are converted to millions where appropriate.
Business context
CSWI is a diversified industrial products company operating in Contractor Solutions, Engineered Building Solutions and Specialized Reliability Solutions. Its products serve HVAC/R, plumbing, building safety and architectural construction, energy, rail, mining and general industrial markets. The company sells in more than 100 countries, with most revenue generated in the Americas.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net revenue | $626.4 million | $419.2 million |
| Gross profit / margin | $256.0 million / 40.9% | $184.6 million / 44.0% |
| Operating income / margin | $97.4 million / 15.5% | $59.2 million / 14.1% |
| Net income attributable to CSWI | $66.4 million | $40.1 million |
| Diluted EPS | $4.20 | $2.65 |
| Cash from continuing operating activities | $69.1 million | $66.3 million |
| Capital expenditures | $15.7 million | $8.8 million |
Revenue increased 49.4%, including $103.2 million from TRUaire and Shoemaker acquisitions and 24.8% organic growth, driven by higher volumes and pricing. Operating income rose 64.4%; however, gross margin declined as material and freight inflation outpaced pricing, the acquired businesses carried different margins, and TRUaire’s Vietnam operations incurred $1.7 million of COVID-related costs. Interest expense increased to $5.4 million from $2.4 million, mainly due to acquisition-related borrowing. The effective tax rate rose to 26.4% from 21.2%.
Cash and equivalents were $16.6 million at March 31, 2022. Total debt was $252.8 million, including $243.0 million drawn on the revolving facility; $157.0 million of borrowing capacity remained. The company was compliant with its financial covenants. Operating cash flow was partly absorbed by working-capital growth, including a $49.4 million increase in inventory and a $26.7 million increase in receivables. Operating cash flow less capital expenditures was approximately $53.4 million. The company paid $9.5 million in dividends and repurchased $14.4 million of shares.
Segments and material changes
- Contractor Solutions: Revenue was $416.5 million, up 69.6%; operating income was $96.1 million and margin was 23.1%, versus 24.0%. Growth reflected TRUaire and Shoemaker acquisitions, pricing and higher HVAC/R and plumbing volumes.
- Engineered Building Solutions: Revenue was $97.3 million, up 1.7%; operating income fell 21.1% to $11.1 million and margin declined to 11.4% from 14.7%, mainly due to a mix shift toward lower-margin projects and added sales staff.
- Specialized Reliability Solutions: Revenue was $116.0 million, up 48.1%; operating income was $9.0 million versus $0.6 million. Recovery in energy, mining, rail and industrial markets, pricing and the Whitmore joint venture contributed to improvement.
Fourth-quarter FY2022 revenue was $173.3 million, compared with $133.4 million in the year-earlier quarter; net income attributable to CSWI was $18.4 million versus $10.4 million, and diluted EPS was $1.17 versus $0.66.
Outlook, risks and unusual items
- Management expects a strong balance sheet and says cash, operating cash flow and revolver availability should meet liquidity needs for at least the next 12 months. It plans to prioritize organic growth, selective acquisitions, capital investment, dividends and potential repurchases. No numeric revenue or earnings guidance is provided.
- Management expects near-term volatility in materials and freight costs, supply-chain conditions and shipping delays, and is responding with inventory management and pricing actions. Vietnam COVID restrictions reduced production and raised costs during the year.
- Key risks include inflation and inability to recover cost increases through pricing, supply-chain and labor constraints, cyclicality and competition in served markets, acquisition integration and goodwill valuation, variable-rate debt and covenant requirements, foreign exchange, cybersecurity, and environmental and regulatory obligations.
- Following Russia’s invasion of Ukraine, the company indefinitely suspended business activity in Russia. It reported no material operations or sourcing in the affected countries and assessed the conflict’s direct business impact as not material at the filing date, while noting broader disruption could affect results.
- The company acquired Shoemaker for approximately $43.5 million in December 2021 and formed the Whitmore/Shell joint venture in April 2021; CSWI consolidates the venture and reports Shell’s interest as redeemable noncontrolling interest. The 2020 TRUaire acquisition also contributed substantially to growth and debt.
- In FY2022, CSWI changed certain domestic inventory accounting from LIFO to FIFO and retrospectively adjusted prior periods. The change increased FY2022 net income by $2.0 million and diluted EPS by $0.14 versus LIFO; prior-year comparisons in the filing are presented on the revised basis.
- The auditor issued an unqualified opinion on the financial statements and internal controls. The critical audit matter concerned valuation of Shoemaker’s $23.0 million customer-list intangible asset. Shoemaker was excluded from management’s internal-control assessment for the acquisition year.
- No pending legal matters were identified as reasonably likely to have a material impact. Goodwill was $224.7 million, with no impairment recorded in FY2022.
Important facts for investors to verify
- How much of the 24.8% organic revenue growth came from pricing versus volume, and whether price increases can continue to offset input and freight inflation.
- Whether gross margins recover as supply conditions normalize and the acquired businesses are integrated; monitor the lower Engineered Building Solutions margin and project mix.
- Working-capital conversion, particularly the substantial inventory and receivables increases, and the sustainability of operating cash flow.
- Debt levels, variable-rate exposure, remaining revolver capacity and covenant headroom as interest rates change; reported unhedged variable-rate debt was $243.0 million.
- Returns and integration progress from TRUaire and Shoemaker, the Whitmore joint venture’s contribution, and the valuation assumptions supporting goodwill and acquired customer-list assets.
- The effect of the retrospective LIFO-to-FIFO change when comparing reported results with prior filings or other companies.