CSW Industrials, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended March 31, 2021. The filing also reports fourth-quarter results for the three months ended March 31, 2021. CSWI is a diversified industrial company with Industrial Products and Specialty Chemicals segments, serving HVAC/R, building products, plumbing, energy, rail, mining and other industrial markets.
Financial performance and liquidity
FY2021, versus FY2020 (dollars in millions except per-share data):
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net revenue | $419.2 | $385.9 | +8.6% |
| Gross profit / margin | $184.8 / 44.1% | $177.1 / 45.9% | Profit +4.4%; margin -1.8 pts |
| Operating income / margin | $59.5 / 14.2% | $66.1 / 17.1% | -10.0%; margin -2.9 pts |
| Income from continuing operations | $40.3 | $44.8 | -10.1% |
| Diluted EPS, continuing operations | $2.66 | $2.95 | -9.8% |
| Operating cash flow, continuing operations | $66.3 | $71.4 | -$5.1 |
| Capital expenditures | $8.8 | $11.4 | -$2.6 |
FY2021 net income was $40.3 million, compared with $45.9 million in FY2020, which included $1.1 million from discontinued operations. Gross margin pressure reflected the TRUaire acquisition, including a $3.5 million inventory fair-value step-up, and higher freight and transportation costs late in the year. SG&A rose 12.9% to $125.3 million, including acquisition and joint-venture transaction costs.
Fourth quarter: Revenue was $133.4 million versus $98.6 million in Q4 FY2020; gross profit was $54.0 million versus $44.8 million; continuing income was $9.6 million versus $13.4 million; diluted EPS from continuing operations was $0.61 versus $0.88. Q4 FY2021 included transaction expenses and a $5.0 million tax indemnification expense related to TRUaire.
Segments: Industrial Products revenue increased 23.2% to $289.4 million, driven by TRUaire and organic growth; operating income was essentially flat at $55.6 million, and margin declined to 19.2% from 23.7%. Specialty Chemicals revenue fell 14.0% to $129.8 million and operating income fell 26.0% to $18.3 million, reflecting weakness in energy, general industrial and other end markets, plus joint-venture transaction costs.
Balance sheet at March 31, 2021: Cash was $10.1 million; working capital was $131.8 million; total debt was $242.3 million, versus $10.9 million a year earlier. Total assets were $875.0 million and equity was $412.0 million. The $232.0 million revolving-credit borrowing funded part of the TRUaire acquisition; $68.0 million of capacity remained under the then-current $300 million facility. The company reported covenant compliance. Operating cash flow was below the prior year, while investing cash use rose to $289.9 million, chiefly due to the acquisition.
Material changes and notable items
- CSWI acquired TRUaire on December 15, 2020, for total consideration of approximately $384.6 million, comprising $286.9 million cash and $97.7 million in shares. TRUaire contributed $33.8 million of revenue through year-end. Its preliminary allocation included $125.6 million of goodwill and substantial acquired customer-list and trade-name intangible assets.
- Organic revenue was approximately flat overall: HVAC/R and architecturally specified building products improved, offset by declines in general industrial, energy, rail and mining. HVAC/R represented about 42% of revenue, up from 31% in FY2020, partly reflecting TRUaire.
- On April 1, 2021, Whitmore completed a 50/50 joint venture with Shell, transferring certain operating assets for $13.7 million in cash and intangible assets.
- On May 18, 2021, after year-end, the company entered a new $400 million revolving credit agreement maturing May 18, 2026.
- Quarterly dividend payments continued; FY2021 dividends were $8.1 million. A $0.15 per-share quarterly dividend was announced after year-end. FY2021 share repurchases were $7.3 million; none occurred in the fourth quarter.
Outlook, risks and contingencies
Management expects a strong balance sheet in FY2022 and believes cash, operating cash flow and revolving-credit availability will meet liquidity needs for at least 12 months. It provided no specific revenue, earnings or margin guidance. Capital allocation priorities include organic investment, selective acquisitions, facility improvements, dividends and repurchases; management emphasized disciplined acquisition valuation and integration.
Management said COVID-19 adversely affected FY2021 results, especially in the first half, and that overall results could remain affected compared with pre-pandemic periods. Duration and magnitude were uncertain. The filing also highlights supply-chain disruption and raw-material cost risks, cyclical end markets, competitive and pricing pressures, reliance on distributors, foreign-exchange exposure, acquisition integration and goodwill/intangible valuation, environmental and chemical-processing risks, and debt covenant and variable-rate exposure. Approximately $232.0 million of debt was unhedged variable-rate debt at year-end; a 0.25-point rate change would affect annual interest expense by about $0.6 million.
No pending legal matters were identified as reasonably likely to have a material impact. The company recorded $13.2 million of tax reserves at year-end and disclosed ongoing tax examinations. The auditors issued unqualified opinions on the financial statements and internal control; however, TRUaire, representing about 59% of reported assets and 8% of revenue, was excluded from management’s and the auditor’s internal-control assessment for the acquisition year.
Key facts investors should verify
- How TRUaire performs after acquisition-related inventory charges, transaction costs and financing costs, and whether its preliminary purchase-price allocation changes.
- Whether Industrial Products margins recover and Specialty Chemicals revenue stabilizes as end markets and supply-chain conditions evolve.
- Debt reduction, cash conversion, covenant headroom and interest-rate exposure under the new credit agreement.
- Realized benefits, ongoing economics and accounting treatment of the Shell joint venture.
- Resolution of TRUaire-related tax positions and indemnification balances, and the effect of any further tax examination outcomes.
- Integration and internal-control progress at TRUaire, which was excluded from the FY2021 control assessment.