CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2019 (fiscal 2020 third quarter). The company sells industrial products and specialty chemicals, including HVAC/R, building-products, sealant and lubricant products. Dollar amounts below are in millions unless noted.
Financial results
| Metric | Quarter ended Dec. 31, 2019 | Quarter ended Dec. 31, 2018 | Nine months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Revenue | $83.7 | $77.5 | $287.4 | $258.7 |
| Gross profit / margin | $37.7 / 45.0% | $34.2 / 44.2% | $132.3 / 46.0% | $118.5 / 45.8% |
| Operating income / margin | $10.5 / 12.5% | $9.4 / 12.2% | $50.9 / 17.7% | $44.4 / 17.2% |
| Income from continuing operations | $7.3 | $6.0 | $31.4 | $32.4 |
| Net income | $7.3 | $5.0 | $31.3 | $31.8 |
| Diluted EPS | $0.48 | $0.32 | $2.06 | $2.03 |
- Quarterly revenue increased 8.0%; management attributed growth mainly to acquisitions and higher sales in plumbing, general industrial and HVAC/R. Nine-month revenue rose 11.1%, supported by acquisitions and broader end-market volume growth.
- Quarterly gross margin expanded 0.8 percentage point, reflecting acquisitions and sales leverage, partly offset by unfavorable product mix in architecturally specified building products. Nine-month operating income increased 14.8%.
- Quarterly continuing-operations income improved, helped by a lower effective tax rate (22.2% versus 36.7%). For nine months, continuing-operations income declined despite higher operating income, primarily because of other expense, including a pension-plan termination charge.
- Operating cash flow was $59.9 million, including $60.4 million from continuing operations, versus $49.9 million and $58.3 million, respectively, in the prior-year period. Investing activities used $18.2 million, including $11.8 million for the Petersen acquisition and $7.6 million of capital expenditures. Financing activities used $29.3 million.
Balance sheet and liquidity
- At December 31, 2019, cash was $39.9 million, total debt was $11.0 million, and equity was $293.0 million. The revolving credit facility had no balance outstanding; stated borrowing capacity, including the accordion feature, was $300 million. The company reported covenant compliance.
- Current assets were $158.6 million and current liabilities were $53.3 million. Management said cash, operating cash generation and available revolver capacity should meet liquidity needs, including capital expenditures, for at least 12 months.
- Cash increased from $26.7 million at March 31, 2019. The company repaid $20.4 million net under credit lines, paid $6.1 million in dividends and repurchased $0.8 million of shares during the nine months.
Material changes, outlook and risks
- The company acquired Petersen Metals for $11.8 million in April 2019; its results are included in Industrial Products. MSD Research, acquired in January 2019, also contributed to comparisons.
- The U.S. qualified pension plan was terminated in September 2019. Lump-sum payments totaled $17.0 million; the plan termination generated a $7.0 million pretax charge ($5.4 million after tax), recognized in other expense. Two operating leases were terminated, with a $0.5 million loss.
- No specific revenue, earnings or margin guidance is provided. Management regularly evaluates acquisition opportunities and stated that liquidity is expected to be adequate for at least the next 12 months.
- Management identified exposure to demand, materials costs, acquired-business performance, foreign currency and interest rates. The $11.0 million term loan was covered by an interest-rate swap; management characterized the resulting interest-rate sensitivity as negligible. No material pending legal matters or material changes to previously disclosed risk factors were reported. U.S. federal and state tax audits were ongoing; no potential adjustments had been notified.
Most important facts for investors to verify
- How much revenue and operating-income growth reflects organic demand versus acquisitions, and whether the margin improvement is sustainable.
- The underlying earnings trend excluding the $7.0 million pension termination charge and other unusual items, and the effect of the lower quarterly tax rate.
- Cash conversion, inventory growth, capital spending and the pace of debt repayment.
- Integration and performance of Petersen and MSD, plus end-market trends—particularly in architecturally specified products, energy and rail.
- Developments in tax audits and the terms and ongoing cost implications of pension termination and operating leases.