CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended September 30, 2021; comparisons are with the three and six months ended September 30, 2020. Amounts are in U.S. dollars.
Business context and reporting period
CSW Industrials is a diversified industrial company serving HVAC/R, building products, plumbing, energy, rail, mining and other industrial markets. Effective April 1, 2021, it reported three segments: Contractor Solutions, Engineered Building Solutions and Specialized Reliability Solutions. Prior-period segment data was recast.
Results include TRUaire, acquired in December 2020, and the Whitmore joint venture, formed April 1, 2021. CSW consolidates the 50%-owned joint venture as the VIE’s primary beneficiary; Shell’s interest is reported as redeemable noncontrolling interest.
Key financial results
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $155.6 million; up 48.3% | $316.9 million; up 61.7% |
| Gross profit / margin | $63.1 million / 40.5% (prior year 46.4%) | $131.6 million / 41.5% (prior year 46.7%) |
| Operating income / margin | $25.9 million / 16.6% (prior year 21.1%) | $54.4 million / 17.2% (prior year 19.6%) |
| Net income attributable to CSW / diluted EPS | $18.0 million / $1.14 (prior year $16.4 million / $1.10) | $38.0 million / $2.41 (prior year $28.3 million / $1.91) |
| Net interest expense | $1.4 million (prior year $0.3 million) | $3.0 million (prior year $0.6 million) |
For the six-month period, operating cash flow was $42.8 million, versus $44.8 million a year earlier. Capital expenditures were $4.9 million. Cash and cash equivalents were $17.3 million at September 30, 2021, compared with $10.1 million at March 31, 2021.
Total debt was $214.1 million, down from $242.3 million at March 31, 2021. The revolving facility was amended to $400 million and matures May 18, 2026; the company reported $196 million of borrowing capacity and compliance with its covenants. Current liabilities were $85.7 million and current assets were $244.9 million.
Material changes and drivers
- Revenue growth reflected TRUaire, contributing $35.2 million in the quarter and $68.8 million for the six months, and organic growth. Management reported organic sales growth of 14.7% for the quarter and 26.6% for the six months, reflecting volume and pricing.
- Gross and operating margins declined year over year despite higher sales. Management cited material and freight inflation outpacing pricing, product mix, TRUaire’s lower margin profile, Vietnam production constraints and, for the six-month period, a $3.9 million purchase-accounting effect.
- Contractor Solutions drove much of the sales increase, while Engineered Building Solutions operating income declined as sales shifted to lower-margin projects and headcount increased. Specialized Reliability Solutions benefited from recovering end-market demand and the Whitmore JV.
- Operating cash flow was pressured by working-capital investment, including $16.8 million of higher inventories and $12.6 million of higher receivables, partly offset by increased payables and accrued liabilities.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or margin guidance. Management expects near-term supply-chain challenges, material and freight inflation, and freight delays to continue; pricing initiatives and vendor management are its stated responses.
- COVID-19’s direct operating impact was materially concentrated in Vietnam, where restrictions affected TRUaire operations. Management cautioned that demand and results may remain volatile and that the pandemic’s duration and ultimate effects cannot be estimated reliably.
- Interest-rate exposure remains: $204.0 million of variable-rate debt was outstanding after the stated swap consideration, and a 0.25 percentage-point rate change would affect annual interest expense by approximately $0.5 million. The swap covered 4.7% of total debt.
- The company reported no pending legal matters it believes have a reasonable possibility of materially affecting its business or financial results. The IRS was examining Whitmore’s 2015 short-period federal return; no material adjustments had been communicated. TRUaire tax indemnification assets of $7.5 million remained outstanding, with the arrangement expected to settle or expire by 2023.
- The board declared a $0.15-per-share quarterly dividend payable November 12, 2021. No shares were repurchased under the current $100 million buyback program as of September 30, 2021.
Most important facts for investors to verify
- Whether pricing can catch up with material, freight and other cost inflation without weakening demand or sales mix.
- The extent and duration of Vietnam-related operating constraints and broader supply-chain disruption.
- Organic growth and profitability trends apart from TRUaire and the Whitmore JV, including segment margins.
- Working-capital conversion, particularly inventory and receivables, and the company’s ability to sustain operating cash flow.
- Debt, interest-rate exposure, covenant headroom and the terms or eventual outcome of the Whitmore JV’s redeemable-interest put option.