CSW Industrials, Inc. — Q1 Fiscal 2019 10-Q
Reporting period: Three months ended June 30, 2018; unaudited. CSW Industrials operates in Industrial Products and Specialty Chemicals. Its Coatings business was reported as discontinued operations.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $89.6 million | $89.3 million | +0.3% |
| Gross profit / margin | $42.1 million / 47.0% | $41.9 million / 46.9% | +0.5%; margin +0.1 pts |
| Operating income / margin | $17.7 million / 19.8% | $16.7 million / 18.7% | +6.4%; margin +1.1 pts |
| Continuing-operations income | $14.0 million | $10.3 million | +36.2% |
| Net income, including discontinued operations | $11.7 million | $8.5 million | +37.1% |
| Diluted EPS | $0.73 | $0.53 | Continuing operations: $0.88 vs. $0.65 |
| Cash from continuing operating activities | $11.8 million | $14.0 million | Down $2.2 million |
Net income includes a $2.3 million after-tax loss from discontinued operations, versus a $1.8 million loss a year earlier. Total operating cash flow, including discontinued operations, was $8.9 million, down from $10.4 million. Capital expenditures were $1.5 million. Cash declined $0.7 million during the quarter to $11.0 million.
Segments and material changes
- Industrial Products: Revenue rose 1.1% to $53.9 million; operating income increased 1.7% to $13.9 million. HVAC and plumbing volumes improved, partly offset by lower architecturally specified building-product sales.
- Specialty Chemicals: Revenue declined 0.9% to $35.7 million; operating income rose 17.7% to $6.5 million. Lower HVAC and mining volumes were partly offset by energy and rail growth.
- Management cited a cooler spring, a slow start to the HVAC season, and distributor pre-season stocking in the prior quarter as factors moderating current-quarter revenue.
- Operating results benefited from approximately $2.6 million of gains on property, plant and equipment sales, largely offset in gross profit by negative product mix. Lower SG&A also supported operating income; prior-year restructuring-related costs did not recur.
- Net interest expense fell to $0.4 million from $0.6 million, mainly due to lower borrowings. Other income included a land-sale gain and increased foreign-currency transaction gains.
Liquidity, debt and capital allocation
- At June 30, cash was $11.0 million; total debt was $19.9 million, including $8.0 million drawn on the revolving facility and an $11.9 million Whitmore term loan. Current debt was $0.6 million.
- The company had $292 million of borrowing capacity under its $250 million revolving facility plus accordion feature, and was in compliance with debt covenants. Management said available cash, operating cash flow and facility availability should meet liquidity needs, including capital expenditures, for at least 12 months.
- Financing activities used $11.6 million, including $7.3 million for share repurchases and $4.1 million in line-of-credit repayments. The company repurchased 146,287 shares during the quarter under its $35 million authorization.
- Working-capital uses included higher receivables ($2.4 million) and inventory ($3.3 million); lower prepaid expenses provided a partial offset.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management noted that U.S. and foreign tariffs could affect costs and sales; it was assessing the potential impact and had observed increases in some commodity costs.
- On July 31, 2018, after quarter-end, the company completed the sale of its Coatings business. Sale terms were not disclosed. The business had recorded a $46.0 million impairment in the quarter ended December 31, 2017.
- Effective April 1, 2018, CSW adopted ASC 606 using the modified retrospective method. Adoption reduced opening retained earnings by $0.7 million and reduced current-quarter revenue by $0.5 million and gross profit by $0.2 million; management said the overall revenue-recognition methodology was not materially changed.
- The company recorded a $1.4 million reduction to opening retained earnings upon adopting guidance for tax effects of intra-entity asset transfers. Its Tax Act accounting remained partly provisional; GILTI and FDII affected the estimated tax rate.
- The effective tax rate declined to 22.6% from 35.9%. Federal tax audits for fiscal 2016 and 2017 had recently begun, with no potential adjustments communicated. Management reported no pending legal matters expected to have a material impact.
- Market risks include variable interest rates and foreign-currency movements. A swap hedged about 60% of total debt; management estimated a 0.25-point rate move would have a negligible annual interest impact. Commodity prices, global demand and regulatory compliance remain risks.
Important facts for investors to verify
- Whether the Coatings-business sale closed on the disclosed terms and what proceeds, taxes or other effects were recognized after quarter-end.
- How much of operating-income improvement reflects recurring operations versus property-sale gains, and whether negative product mix or tariff-related input costs persist.
- Whether HVAC demand and working-capital trends improve after the slower quarter, particularly inventory and receivables.
- Final Tax Act and GILTI accounting, the outcome of federal tax audits, and any resulting change to the effective tax rate or cash taxes.
- Future share repurchases, debt reduction and liquidity needs relative to the remaining repurchase authorization.