CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2019 (fiscal second quarter and first half). CSW Industrials supplies industrial products and specialty chemicals, including HVAC/R products, sealants, building products and lubricants. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Three months ended Sep. 30, 2019 | Three months ended Sep. 30, 2018 | Six months ended Sep. 30, 2019 | Six months ended Sep. 30, 2018 |
|---|---|---|---|---|
| Revenue | $101.3 | $91.6 | $203.7 | $181.2 |
| Gross profit / margin | $47.4 / 46.8% | $42.2 / 46.1% | $94.6 / 46.5% | $84.3 / 46.5% |
| Operating income / margin | $20.1 / 19.9% | $17.2 / 18.8% | $40.4 / 19.9% | $34.9 / 19.3% |
| Income from continuing operations | $8.8 | $12.4 | $24.2 | $26.4 |
| Net income | $8.8 | $15.2 | $24.0 | $26.8 |
| Diluted EPS, continuing operations / total | $0.58 / $0.58 | $0.79 / $0.97 | $1.59 / $1.58 | $1.67 / $1.70 |
- Quarterly revenue increased 10.6%; first-half revenue increased 12.4%. Management attributed growth to acquisitions and higher sales volumes, particularly in HVAC/R, architecturally specified building products and plumbing.
- First-half operating cash flow from continuing operations was $37.5 million, versus $32.5 million a year earlier. Total operating cash flow, including discontinued operations, was $37.1 million.
- First-half investing cash outflow was $15.3 million, including $11.8 million for the Petersen Metals acquisition and $4.6 million of capital expenditures. Financing cash outflow was $25.2 million, including $20.3 million of net debt repayments and $4.1 million of dividends.
- At September 30, cash was $23.7 million, down from $26.7 million at March 31. Total debt was $11.2 million, all under the Whitmore term loan; the revolving facility had no balance and $300 million of stated borrowing capacity, including the accordion feature. The company reported covenant compliance. Operating lease liabilities were an additional $15.0 million.
- Current assets were $149.3 million and current liabilities were $50.7 million. Total equity was $286.4 million.
Changes versus the prior comparable period
- Quarterly operating income rose 17.0%, while first-half operating income rose 15.7%. Operating margins expanded to 19.9% for the quarter and 19.9% year to date.
- Net income declined despite revenue and operating income growth. Other expense included a $7.0 million pension-plan termination charge ($5.4 million after tax). The prior-year quarter also included $2.7 million of after-tax income from discontinued operations, including gains on the sale of Coatings business assets.
- Industrial Products revenue rose 14.7% for the quarter and 16.1% for the first half; Specialty Chemicals revenue rose 4.5% and 6.8%, respectively. Both segments reported higher operating income.
- Gross margin was up 0.7 percentage points for the quarter and unchanged year to date. The current quarter benefited from a $0.8 million asset-sale gain; prior-year first-half results included $2.6 million of asset-sale gains that did not recur.
Outlook, commentary and risks
- Management said available cash, continuing-operations cash flows and revolver availability should be sufficient to meet liquidity needs, including capital expenditures, for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- The company acquired Petersen Metals in April 2019 for $11.8 million; its results are included in Industrial Products. The filing also reflects the earlier acquisition of MSD Research, completed in January 2019.
- CSW terminated its qualified U.S. pension plan effective September 30, 2019 after lump-sum payments and an annuity purchase. This generated the $7.0 million termination charge.
- The Coatings business was sold in 2018 and is reported as discontinued operations. Current-period discontinued operations recorded a $0.2 million net loss; residual assets and liabilities remained on the balance sheet.
- Management reported no pending legal matters it believed reasonably likely to have a material impact and no material changes to previously disclosed risk factors. The company was under U.S. federal tax audit for fiscal 2016 and 2017 and had received no notice of potential adjustments.
- Interest-rate exposure on the $11.2 million term loan was hedged by a swap covering 100% of outstanding debt; management estimated a quarterly-point rate change would have a negligible annual interest-expense impact. A 10% currency-rate movement was also estimated to have a negligible net-earnings effect.
Important facts for investors to verify
- How much of revenue and operating-income growth reflects organic demand versus acquisitions, and whether segment momentum continues.
- The recurring earnings and cash-flow effects after excluding the one-time pension termination charge and comparing against prior-year discontinued-operation gains and asset-sale gains.
- Integration and performance of Petersen and MSD, and whether acquisition-related costs or expected benefits change.
- Cash conversion, capital spending and dividend sustainability; also distinguish the $11.2 million of debt from $15.0 million of recognized operating lease liabilities.
- Resolution of the federal tax audits, residual Coatings-related obligations, and compliance with credit-facility covenants.