CSW Industrials, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended March 31, 2020. The filing also reports the quarter ended March 31, 2020 (Q4). Amounts are in U.S. dollars.
Business context
CSWI is a diversified industrial company operating in Industrial Products and Specialty Chemicals. Its products serve HVAC/R, building products, plumbing, general industrial, energy, rail and mining markets. HVAC/R was its largest end market, representing approximately 31% of revenue, followed by architecturally specified building products at 29%. No customer represented 10% or more of annual revenue.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $385.9 million | $350.2 million | +10.2% |
| Gross profit / margin | $177.1 million / 45.9% | $161.4 million / 46.1% | +9.7%; margin down 0.2 points |
| Operating income / margin | $66.1 million / 17.1% | $60.4 million / 17.3% | +9.3%; margin down 0.2 points |
| Continuing-operations income | $44.8 million | $46.1 million | Down 2.7% |
| Diluted EPS, continuing operations | $2.95 | $2.96 | Down $0.01 |
| Operating cash flow, continuing operations | $71.4 million | $68.2 million | Up $3.2 million |
| Capital expenditures | $11.4 million | $7.5 million | Up $3.9 million |
FY2020 operating cash flow less capital expenditures was approximately $60.0 million. Net income was $45.9 million, including $1.1 million from discontinued operations; FY2019 net income was $45.6 million, including a $0.5 million discontinued-operations loss. The effective tax rate fell to 22.2% from 25.0%, partly reflecting releases of uncertain tax positions and other tax adjustments.
Segments
- Industrial Products: Revenue increased 14.1% to $234.9 million, driven by acquisitions and HVAC/R and plumbing volumes. Operating income rose 14.2% to $55.7 million; margin was 23.7%, unchanged.
- Specialty Chemicals: Revenue increased 4.7% to $151.0 million. Operating income rose 3.2% to $24.7 million; margin eased to 16.4% from 16.6%.
Q4 FY2020
Q4 revenue was $98.6 million versus $91.5 million a year earlier. Continuing-operations income was $13.4 million versus $13.6 million, and diluted continuing-operations EPS was $0.88 versus $0.90. Q4 net income of $14.6 million included a $1.2 million gain from discontinued operations, primarily related to the sale of the former Coatings business’s last property.
Liquidity, debt and capital allocation
- Cash was $18.3 million at March 31, 2020, down from $26.7 million a year earlier. Working capital was $90.9 million versus $102.1 million.
- Total debt was $10.9 million, down from $31.5 million; there were no borrowings under the revolving credit facility at year-end. The facility provided $300 million of borrowing capacity, inclusive of its accordion feature. The company reported compliance with all debt covenants.
- Financing cash outflows included $28.1 million of net line-of-credit repayments, $28.5 million of treasury-share purchases and $8.1 million of dividends. A $0.135-per-share quarterly dividend was declared in April 2020.
- Management said cash, operating cash flow and available revolver capacity should meet liquidity needs, including capital expenditures, for at least the next 12 months.
Material changes, outlook and risks
- Revenue growth reflected $15.1 million from recent acquisitions and higher sales in HVAC/R, plumbing and several other markets. Petersen was acquired in April 2019 for $11.8 million; MSD, acquired in January 2019, contributed to the prior-year comparison.
- Operating income growth was partly offset by higher SG&A. Gross and operating margins both declined modestly, primarily reflecting product mix and higher costs.
- A $6.5 million charge related to termination of the U.S. defined-benefit pension plan (approximately $5.0 million net of tax) weighed on FY2020 results. The company also recorded a $1.0 million trademark impairment and a $0.5 million lease termination cost.
- COVID-19 and the sharp fall and volatility in oil prices adversely affected Q4 revenue. Management expected pandemic-related economic and demand effects to negatively affect FY2021 results, but said the magnitude and duration could not be reasonably estimated. At filing, operations remained open as essential businesses and no material operational disruptions had been experienced; supply-chain and demand impacts remained uncertain.
- Principal risks include economic and end-market cyclicality, lower energy-sector demand, COVID-19 effects, raw-material and third-party supplier disruptions, competitive pressure, acquisition and integration execution, distributor dependence, and environmental, chemical-safety, currency and debt-covenant risks. Management reported no pending legal matter expected to have a material impact.
Most important facts for investors to verify
- Whether post-year-end COVID-19 conditions materially changed demand, operations, supply availability or FY2021 performance.
- How much of reported growth came from acquisitions versus organic volume, and whether the margin trends persist.
- Cash conversion, working-capital needs and the sustainability of the stated liquidity position and dividend/share-repurchase policy.
- The financial effect of the pension-plan termination, trademark impairment and discontinued-property sale, including which items are nonrecurring.
- Revolver availability, covenant headroom and the terms or renewal status of financing arrangements.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.