CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2016; comparisons are with the corresponding 2015 periods. Amounts are in millions of dollars unless otherwise stated.
Business context
CSW Industrials is a diversified industrial company operating in Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. Its products serve HVAC, construction, rail, energy, mining and other industrial markets. The company became independent in September 2015, so prior-period results may not reflect all costs of operating as a standalone public company. Acquisitions of Deacon and Leak Freeze also affect comparability.
Financial results
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Revenue | $75.5 | $70.9 | $239.7 | $243.6 |
| Gross profit | $28.9 | $32.1 | $102.8 | $113.4 |
| Gross margin | 38.3% | 45.3% | 42.9% | 46.6% |
| Operating income | $3.4 | $5.6 | $17.8 | $40.7 |
| Operating margin | 4.5% | 7.9% | 7.4% | 16.7% |
| Net income | $0.4 | $2.0 | $8.3 | $23.6 |
| Diluted EPS | $0.03 | $0.13 | $0.53 | $1.51 |
For the nine-month period, operating cash flow was $32.7 million, down from $38.5 million. Capital expenditures were $7.0 million; operating cash flow less capital expenditures was $25.7 million, calculated from reported figures. Investing activities provided $4.8 million, while financing activities used $41.6 million, primarily reflecting debt repayments. Cash and cash equivalents were $20.4 million and bank time deposits were $1.8 million at December 31, 2016, compared with a combined $39.3 million at March 31, 2016.
Total debt was $46.8 million at December 31, 2016, versus $89.7 million at March 31, 2016. The company had $34.1 million outstanding under its $250 million revolving credit facility, plus a $12.7 million Whitmore term loan. Current liabilities were $36.8 million and current assets were $138.1 million. The company reported compliance with debt covenants and stated available cash, operating cash flow and facility availability should meet liquidity needs for at least 12 months.
Material changes and segment performance
- Quarterly revenue rose 6.5%, primarily on strength in construction and HVAC; nine-month revenue fell 1.6% as weakness in rail, energy, mining and industrial markets outweighed gains in construction and HVAC.
- Profitability weakened materially: nine-month operating income fell 56.4%. Management cited lower-margin sales mix, weaker rail and energy results, restructuring and integration costs, and the absence of prior-year pension curtailment benefits.
- Industrial Products revenue increased 11.3% in the quarter and 11.8% year to date. Quarterly operating income rose 16.2%, while nine-month operating income was down 1.2%.
- Coatings, Sealants and Adhesives revenue fell 1.9% in the quarter and 13.0% year to date. Operating income declined 80.5% and 91.7%, respectively, reflecting rail-market weakness, Strathmore restructuring and the nonrecurrence of a prior-year earn-out liability reversal.
- Specialty Chemicals revenue rose 10.0% in the quarter but fell 9.7% year to date. Operating income declined 68.8% for the quarter and 70.0% year to date, including JetLube integration and inventory-related costs.
Outlook, risks and unusual items
- Management said weakness tied to lower energy, mining and rail demand was expected to persist through the current fiscal year. It reported continued strength in HVAC and architecturally specified building products, supported by commercial construction.
- CSWI initiated a Strathmore restructuring in response to excess capacity and market contraction. Expected total charges were estimated at $5.7 million; management cautioned actual charges could vary. The company also recorded a $2.8 million non-cash impairment of the Strathmore trademark and reported other restructuring and manufacturing-footprint costs.
- The effective tax rate was unusually high: 87.7% for the quarter and 52.2% year to date. Discrete tax items, including tax-return adjustments, tax-rate changes and uncertain tax-position reserves, materially increased the period’s tax provision.
- Management estimated approximately $3–$4 million of capital expenditures during the fiscal year ending March 31, 2017 related to manufacturing consolidation and restructuring activities; additional spending may be required later. No specific revenue or earnings guidance was provided.
- Interest-rate swaps covered $44.0 million of $46.8 million total debt; the company reported $2.8 million of unhedged variable-rate debt. Foreign-currency translation reduced accumulated comprehensive income, while management said a 10% currency-rate change would have a negligible net-earnings effect under its stated assumptions.
- The filing reports ordinary-course lawsuits and claims, including insured product-liability matters, but management did not expect them to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective.
- The board authorized a $35 million, two-year share repurchase program; no shares had been repurchased under it through December 31. Shares shown as purchased in the quarterly table were employee shares tendered for tax withholding, not program repurchases.
Investor facts to verify
- Whether margins and operating income stabilize as Strathmore restructuring and JetLube integration proceed, and whether actual restructuring costs remain near the $5.7 million estimate.
- Whether rail, energy, mining and industrial demand improves or remains a drag, and whether construction and HVAC strength continues.
- How much of the year-to-date earnings decline reflects recurring operating pressures versus prior-year benefits and current-period one-time charges.
- Whether elevated tax rates and uncertain tax-position reserves materially affect future earnings and cash taxes.
- Debt repayment, liquidity, covenant compliance and planned manufacturing-related capital expenditures; also monitor whether the repurchase authorization is used.