CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2018. Amounts below are in millions of dollars unless stated otherwise. The company operates Industrial Products and Specialty Chemicals businesses.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Prior-year quarter | Nine months ended Dec. 31, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $77.5 | $69.0 | $258.7 | $242.8 |
| Gross profit / margin | $34.2 / 44.2% | $30.2 / 43.8% | $118.5 / 45.8% | $111.7 / 46.0% |
| Operating income / margin | $9.4 / 12.2% | $7.9 / 11.5% | $44.4 / 17.2% | $39.2 / 16.1% |
| Continuing-operations income | $6.0 | $2.6 | $32.4 | $22.1 |
| Net income (loss) | $5.0 | $(34.0) | $31.8 | $(18.2) |
| Diluted EPS, continuing operations | $0.39 | $0.17 | $2.07 | $1.41 |
Quarterly revenue rose 12.2%, with management citing higher volumes in HVAC, architecturally specified building products, general industrial and plumbing markets. Nine-month revenue increased 6.6%; growth across several markets was partly offset by lower mining sales. Quarterly gross margin improved on sales leverage, while the nine-month margin edged down as freight and other manufacturing costs outweighed leverage and asset-sale gains. Operating income increased in both periods.
Segments: In the quarter, Industrial Products revenue increased 15.2% to $43.7 million and operating income increased 10.1% to $8.1 million; its operating margin declined to 18.5% from 19.3%, partly reflecting performance compensation and ERP upgrade costs. Specialty Chemicals revenue rose 8.7% to $33.8 million and operating income rose 17.6% to $4.6 million; margin improved to 13.5% from 12.5%.
Cash flow, debt and liquidity
- Nine-month operating cash flow from continuing operations was $58.3 million, versus $47.1 million a year earlier. Including discontinued operations, operating cash flow was $49.9 million versus $38.8 million.
- Capital expenditures were $4.8 million. Cash and cash equivalents were $14.6 million at December 31, 2018, up from $11.7 million at March 31, 2018.
- Total debt was $11.6 million, down from $24.0 million at March 31; the revolving facility had no outstanding balance. The company reported $300 million of borrowing capacity including the accordion feature and compliance with all debt covenants.
- Financing activities used $54.2 million, principally reflecting share repurchases and net revolver repayments. The company completed its $35 million repurchase authorization and announced a new authorization of up to $75 million over two years.
- Management said cash, continuing-operations cash generation and revolver availability should be sufficient for liquidity needs, including capital expenditures, for at least the next 12 months.
Changes, outlook and notable items
- The prior-year quarter included a substantial impairment charge associated with the Coatings business, contributing to its $36.7 million discontinued-operations loss and the consolidated net loss. CSW sold the business’s assets in 2018; asset sales generated $6.9 million in proceeds and gains during the first half of the fiscal year. The current quarter recorded a $1.0 million discontinued-operations loss.
- Nine-month growth benefited from the absence of an estimated $2.6 million of prior-year lost sales related to Hurricanes Harvey and Irma. Management also cited $2.6 million of gains on property, plant and equipment sales and nonrecurring prior-year restructuring costs in its gross-profit comparison.
- Effective tax rates were 36.7% for the quarter and 27.0% for the nine months, compared with 66.1% and 42.4%, respectively, in the prior-year periods. Prior-year rates reflected the one-time repatriation tax. The current quarter included an additional $0.5 million expense as the deemed-repatriation calculation was finalized.
- The company adopted ASC 606 using the modified retrospective method, reducing opening retained earnings by $0.7 million; management said adoption had no material effect on current-year revenue. It also adopted other accounting standards, with no material reported effects on results from most adoptions.
- No numeric financial guidance is provided in the filing. Management noted tariffs on certain purchased and sold products, said it had taken pricing and other mitigating actions, and believed the financial impact was not material while continuing to monitor it. Other risks include demand and material-cost changes, foreign currency exposure and execution of business initiatives.
- Management reported no pending legal matters it believed reasonably likely to have a material effect, no material change to previously disclosed risk factors, and effective disclosure controls. A U.S. federal tax audit covers fiscal 2016 and 2017 returns; the company said it had received no notice of potential adjustments.
Important facts for investors to verify
- Whether revenue growth and operating-margin performance are sustained, particularly given the nine-month margin pressure from freight and manufacturing costs.
- How share repurchases under the new $75 million authorization affect cash, share count and capital available for investment.
- Whether working-capital movements, especially higher inventories, affect future operating cash conversion.
- The final outcome of the federal tax audits and any subsequent tax adjustments.
- Any subsequent effects from tariffs, foreign exchange movements, or other disclosed business risks; the filing provides no quantified forward guidance.