CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2018 (fiscal second quarter and first half). CSW Industrials operates in Industrial Products and Specialty Chemicals; the Coatings business was reported as discontinued operations following its planned divestiture.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $91.6 million, up 8.5% from $84.4 million | $181.2 million, up 4.3% from $173.7 million |
| Gross profit / margin | $42.2 million / 46.1%, versus $39.7 million / 47.0% | $84.3 million / 46.5%, versus $81.5 million / 46.9% |
| Operating income / margin | $17.2 million / 18.8%, versus $14.6 million / 17.2% | $34.9 million / 19.3%, versus $31.2 million / 18.0% |
| Income from continuing operations | $12.4 million, versus $9.2 million | $26.4 million, versus $19.4 million |
| Net income | $15.2 million, versus $7.3 million | $26.8 million, versus $15.8 million |
| Diluted EPS | $0.97, versus $0.46 | $1.70, versus $0.99 |
Gross margin declined in both comparisons, as unfavorable product mix and higher freight and other manufacturing costs more than offset sales leverage. SG&A was $25.0 million for the quarter and $49.3 million for the half-year, down slightly from the prior-year periods; lower professional fees and nonrecurring prior-year restructuring costs contributed to the half-year decline.
Cash flow and liquidity: For the six months, operating cash flow was $24.9 million, including $32.5 million from continuing operations and $7.6 million used by discontinued operations. Continuing-operations investing activities provided $0.8 million, including asset-sale proceeds, while capital expenditures were $2.7 million. Financing activities used $33.3 million, largely reflecting $31.0 million of treasury-share purchases. Cash was $11.2 million at September 30, versus $11.7 million at March 31.
Debt: Total debt was $21.7 million ($10.0 million on the revolving facility and $11.7 million on the Whitmore term loan), down from $24.0 million at March 31. The company reported $290 million of remaining borrowing capacity including the accordion feature and compliance with all covenants. A swap hedged 54% of total debt; management said a 0.25-percentage-point rate change would have a negligible annual interest-expense effect.
Material changes and unusual items
- Quarterly revenue growth reflected strong HVAC sales during a hot summer and the absence of an estimated $2.6 million of prior-year hurricane-related lost sales. The same hurricane comparison also benefited first-half growth.
- Industrial Products revenue rose 12.9% for the quarter; Specialty Chemicals revenue rose 2.6%. Segment operating income increased in both segments. First-half Specialty Chemicals operating income included a $2.2 million gain on property, plant and equipment sales and benefited from prior-year restructuring costs that did not recur.
- The Coatings asset sale closed July 31, 2018. The company received $6.9 million during the quarter and recorded $6.9 million in disposal gains, reflecting prior-period write-downs. Discontinued operations contributed $2.7 million of quarterly income but only $0.4 million for the half-year; reported net income therefore includes a material disposal-related benefit.
- The company adopted ASC 606 on April 1, 2018 using the modified retrospective method. Adoption reduced opening retained earnings by $0.7 million and had no material impact on current-year revenue overall; the filing notes a $0.5 million first-half negative revenue impact in architecturally specified building products.
- The effective tax rate fell to 26.3% for the quarter and 24.4% for the half-year, from 36.8% and 36.4%, respectively, in the prior-year periods. The filing cites the Tax Act and prior-year state-tax adjustments and uncertain-tax-position reserves among the relevant factors.
- The company repurchased 572,160 shares for $30.8 million in the first half. By September 30, cumulative program repurchases were 598,704 shares for $32.0 million of the authorized $35.0 million.
Outlook, risks, and contingencies
No specific revenue, earnings, or margin guidance was provided. Management stated that cash, continuing-operations cash generation, and available revolver capacity should meet liquidity needs, including capital expenditures, for at least the next 12 months. It regularly evaluates acquisition opportunities.
Management cited uncertainty from U.S. and foreign tariffs and observed increases in certain commodity costs, which it believed may have been affected by tariff expectations. Other stated exposures include global economic conditions, regulatory compliance, material costs, foreign exchange, and interest rates. Management reported no pending legal matters it believed had a reasonable possibility of a material impact, no material change in disclosed risk factors, and no material off-balance-sheet arrangements. U.S. federal tax returns for fiscal 2016 and 2017 were under audit; the company had received no notice of potential adjustments.
Important facts for investors to verify
- How much of reported earnings growth is sustainable operating improvement versus the Coatings disposal gain, prior-year hurricane comparisons, and asset-sale or restructuring effects.
- Whether mix, freight, manufacturing costs, and commodity or tariff pressures continue to weigh on gross margin.
- Working-capital trends, particularly the first-half inventory and prepaid-asset increases, and the conversion of operating income into cash.
- Remaining share-repurchase authorization, execution, and the effect of buybacks on cash and share count.
- Final Tax Act and GILTI accounting, the outcome of the federal tax audits, and the balance-sheet effect of adopting the new lease standard.