CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2019, the company’s first quarter of fiscal 2020. Comparisons are with the three months ended June 30, 2018, unless otherwise noted. CSW Industrials sells industrial products and specialty chemicals through its Industrial Products and Specialty Chemicals segments.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $102.3 million | $89.6 million | Up 14.2% |
| Gross profit / margin | $47.2 million / 46.2% | $42.1 million / 47.0% | Profit up 12.2%; margin down 0.8 percentage points |
| Operating income / margin | $20.3 million / 19.9% | $17.7 million / 19.8% | Up 14.5% |
| Income from continuing operations | $15.3 million | $14.0 million | Up 9.5% |
| Net income | $15.2 million | $11.7 million | Up 30.2% |
| Diluted EPS | $1.00 | $0.73 | Up $0.27 |
| Operating cash flow | $9.4 million | $8.9 million | Continuing operations generated $9.7 million, versus $11.8 million |
Net income included losses from discontinued operations of $0.1 million in 2019 and $2.3 million in 2018. The Coatings business, sold in July 2018, generated no revenue in the current quarter versus $3.4 million in the prior-year quarter.
Revenue growth reflected higher HVAC/R sales (about $4.5 million) and recent acquisitions (about $4.1 million), along with smaller increases across several other end markets. Industrial Products revenue rose 17.6% to $63.4 million and operating income rose 22.7% to $17.0 million; its operating margin increased to 26.9% from 25.8%. Specialty Chemicals revenue rose 9.1% to $39.0 million, while operating income increased 2.3% to $6.6 million and segment margin declined to 17.0% from 18.1%.
Liquidity, debt and capital
- Cash and cash equivalents were $10.2 million at June 30, 2019, down from $26.7 million at March 31, 2019.
- Total debt was $21.8 million, down from $31.5 million at March 31. The revolving credit facility balance was $10.5 million; the company reported $289.5 million of remaining borrowing capacity, including the accordion feature, and compliance with all debt covenants.
- Operating cash flow was offset by $13.7 million of continuing-operations investing outflows, including $11.5 million paid for Petersen Metals and $2.2 million of capital expenditures. Financing outflows were $12.5 million, including $9.6 million of net debt repayments and $2.0 million of dividends.
- Management said available cash, operating cash flow and revolver availability should meet liquidity needs, including capital expenditures, for at least the next 12 months.
- The company began a quarterly dividend of $0.135 per share. A further $0.135 dividend was announced for payment in August 2019. No common shares were repurchased under the new repurchase program during the quarter; employee tax-withholding share tenders were reported separately.
Material changes, outlook and risks
- On April 2, 2019, CSW acquired Petersen Metals for $11.8 million, including a $0.3 million working-capital adjustment paid in July. The acquisition contributed $6.1 million of goodwill and is included in Industrial Products results from the acquisition date. The filing says pro forma information was omitted because the acquisition was immaterial.
- Gross margin declined year over year, primarily because $2.6 million of prior-year gains on property and equipment sales did not recur; increased sales leverage partly offset that comparison. Operating expenses rose 10.6%, including $0.7 million of acquisition-related costs, but declined as a percentage of revenue.
- Management provided no quantified revenue, earnings or margin guidance. It cited ongoing challenges including environmental and regulatory compliance and global economic uncertainty, and noted that actual results may differ materially from forward-looking statements.
- Interest expense rose to $0.5 million, partly due to acquisition-related borrowings and higher interest rates. An interest-rate swap covered 51.9% of total debt; the company reported that a 0.25 percentage-point rate change would have a negligible annual interest impact after the swap.
- Operating leases were recognized under the newly adopted lease standard: the company reported $15.0 million of operating lease right-of-use assets and $15.7 million of lease liabilities at June 30. Adoption reduced opening retained earnings by $0.4 million.
- Management reported no pending legal matters believed reasonably likely to have a material impact, no material changes to previously disclosed risk factors, and no material off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of revenue and profit growth reflects underlying volume and mix versus acquisitions, and whether Industrial Products and Specialty Chemicals margins are sustained.
- Whether cash conversion improves, given lower continuing-operations operating cash flow and cash use from receivables, inventory and lower payables.
- Actual performance and integration of Petersen Metals and MSD Research, including the preliminary purchase-price allocations and expected contribution.
- Debt, revolver availability and covenant compliance, along with interest-rate exposure and the terms and continuing declaration of dividends.
- Developments in the Coatings discontinued-operation liabilities and the adoption and future effects of lease and credit-loss accounting standards.