CSW Industrials, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the quarter and six months ended September 30, 2015, compared with the corresponding 2014 periods. CSW Industrials became an independent, publicly traded company on September 30, 2015, following its spin-off from Capital Southwest. The statements are unaudited and present the historical combined businesses; management cautions they may not reflect all costs or results as a standalone public company.
The company operates in Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. Its products serve HVAC, plumbing, industrial, energy, rail, mining and other markets.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Three months ended Sept. 30, 2015 | Three months ended Sept. 30, 2014 | Six months ended Sept. 30, 2015 | Six months ended Sept. 30, 2014 |
|---|---|---|---|---|
| Revenue | $83.7 | $68.1 | $172.7 | $136.9 |
| Gross profit / margin | $40.8 / 48.8% | $33.2 / 48.7% | $81.3 / 47.1% | $67.0 / 48.9% |
| Operating income / margin | $20.8 / 24.8% | $11.7 / 17.3% | $35.1 / 20.3% | $25.9 / 18.9% |
| Net income | $13.0 | $8.2 | $21.6 | $18.0 |
| Diluted EPS | $0.83 | $0.52 | $1.38 | $1.14 |
- Quarterly revenue rose 23.0%, operating income 76.8% and net income 57.3%. Six-month revenue rose 26.1%, operating income 35.4% and net income 20.2%.
- Six-month operating cash flow was $21.6 million versus $19.9 million. Investing cash flow was $(67.5) million, principally reflecting the Strathmore acquisition; financing provided $80.2 million. Cash and equivalents ended at $53.9 million, with $7.0 million in bank time deposits.
- At September 30, total debt was $94.2 million, including $17.4 million current and $76.7 million long-term, versus $26.7 million at March 31. Current assets were $184.4 million and current liabilities $47.5 million.
- Capital expenditures were $3.2 million for the six months. The company reported total assets of $393.6 million and equity of $252.9 million at September 30.
Material changes and segment performance
- Strathmore, acquired effective April 1 for $68.8 million, drove much of the revenue increase. It contributed $30.4 million of six-month revenue. The deal included up to $16.5 million of additional contingent consideration; $2.0 million was recorded for the Strathmore earn-out at September 30.
- Quarterly segment revenue and operating income: Industrial Products, $36.2 million and $11.7 million; Coatings, Sealants and Adhesives, $28.0 million and $4.9 million; Specialty Chemicals, $19.8 million and $5.0 million. Coatings growth largely reflected Strathmore. Specialty Chemicals revenue fell 18.7%, mainly due to lower energy, mining and industrial demand.
- For the six-month period, Coatings revenue more than doubled with the acquisition, but its operating margin declined to 12.0% from 24.4%, reflecting Strathmore’s lower margins, operating costs and acquisition transaction costs. Industrial Products revenue rose 18.7%; Specialty Chemicals revenue declined 13.0%.
- Reported results include an $8.1 million pension curtailment benefit after the defined-benefit plan was frozen effective September 30. The benefit was allocated across operating expense lines. The freeze is expected to reduce future pension expense. Prior-year comparisons also include a $0.7 million impairment charge and gains on real estate sales that did not recur.
- Six-month gross margin fell to 47.1% from 48.9%, mainly due to Strathmore’s lower gross margin. Quarterly margin was broadly unchanged.
Outlook, risks and other notable items
- No formal revenue or earnings guidance was provided. Management expects recurring corporate overhead of about $1.5 million per quarter and anticipates integration costs and public-company expenses. It expects integration synergies to offset added costs over the longer term.
- Management estimates approximately $5 million of capital expenditures in each of fiscal 2016 and 2017 for manufacturing consolidation, with possible additional spending later. The company said cash, operating cash flow and borrowing availability should meet liquidity needs for at least 12 months.
- On November 3, the company received a commitment for a $200 million revolving credit facility, expected to replace subsidiary debt arrangements; management expected to execute the agreement before year-end. After quarter-end, on October 1, it acquired Deacon Industries for $12 million, funded with $11 million of borrowings and $1 million cash.
- Risks highlighted include weakness in energy and drilling markets and possible slowdowns in rail and other markets, global economic uncertainty, regulatory compliance, foreign-exchange exposure, variable-rate debt and the costs and execution of integration. The company had $47.5 million of debt covered by interest-rate swaps and $46.7 million of unhedged variable-rate debt after swaps.
- The tax matters agreement with Capital Southwest may impose tax liabilities if specified actions jeopardize the spin-off’s tax-free status. Management reported no pending legal matters expected to have a material impact, no material change in disclosed risk factors, and effective disclosure controls as of September 30.
Important facts for investors to verify
- How much of revenue and operating-income growth reflects acquired businesses versus organic growth, particularly Strathmore, and how its margins develop.
- The sustainability of earnings excluding the $8.1 million pension curtailment benefit, acquisition costs and other nonrecurring comparison items.
- Performance in energy, mining and rail markets, including whether Specialty Chemicals’ sales declines persist.
- Final terms, covenants and availability of the planned $200 million credit facility, and the effect of increased borrowing on interest expense and liquidity.
- Strathmore and SureSeal contingent consideration estimates, integration spending and expected manufacturing-consolidation savings.
- Standalone corporate costs: historical results may not include all costs of operating as a public company, and management’s overhead estimate is approximately $1.5 million quarterly.