CSW Industrials, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018; filed May 30, 2018. This is an annual report, not a standalone Q4 filing. The company is a diversified industrial manufacturer operating in Industrial Products and Specialty Chemicals, serving HVAC, construction, plumbing, energy, rail, mining and other markets.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $326.2 million | $287.5 million |
| Gross profit / margin | $147.9 million / 45.3% | $128.9 million / 44.9% |
| Operating income / margin | $50.7 million / 15.5% | $33.1 million / 11.5% |
| Income from continuing operations | $32.7 million; diluted EPS $2.09 | $17.8 million; diluted EPS $1.12 |
| Net income (loss) | $(11.9) million; diluted EPS $(0.76) | $11.1 million; diluted EPS $0.70 |
| Cash from continuing operating activities | $57.4 million | $39.4 million |
| Capital expenditures | $5.5 million | $6.9 million |
| Cash and cash equivalents | $11.7 million | $23.1 million |
| Total debt | $24.0 million | $73.2 million |
| Working capital | $82.7 million | $108.5 million |
Revenue increased 13.5%, including $16.5 million from the Greco acquisition. Higher HVAC and plumbing sales, thread sealants and firestopping products, and energy-market sales also contributed. Operating income rose 53.1%, supported by higher gross profit and lower restructuring costs. The net loss primarily reflects a $46.0 million impairment charge on the Coatings business classified as discontinued operations; discontinued operations recorded a $44.6 million after-tax loss for the year.
Segments: Industrial Products revenue was $186.5 million, up 17.5%, and operating income was $44.0 million, up 33.7%; margin increased to 23.6% from 20.7%. Specialty Chemicals revenue was $139.7 million, up 8.6%, and operating income was $18.4 million, up 36.4%; margin increased to 13.2% from 10.5%.
Material changes and unusual items
- In the third quarter, CSWI committed to divest Strathmore’s Coatings business, classified it as held for sale and reported it as discontinued operations. The related estimated impairment was approximately $46.0 million.
- The company realigned reporting from three segments to two: Industrial Products and Specialty Chemicals. Fiscal 2017 segment figures were retrospectively adjusted.
- Cash used in financing was $51.5 million, mainly reflecting $49.2 million of debt repayments. Debt fell by approximately $49.2 million year over year.
- The effective tax rate on continuing operations declined to 32.3% from 44.7%. FY2018 tax expense included a $1.9 million net repatriation tax charge; the company said it was still assessing certain Tax Cuts and Jobs Act effects.
- CSWI repurchased 26,544 shares for $1.2 million during FY2018. It does not currently pay a dividend.
Liquidity, outlook and risks
Management said cash, operating cash flow and available revolving-credit borrowings should meet liquidity needs, including capital expenditures, for at least 12 months. At March 31, 2018, debt was $24.0 million, comprising $12.0 million on the revolver and a $12.0 million term loan. The revolving facility had $288.0 million of borrowing capacity available, inclusive of its accordion feature. The company reported compliance with all credit covenants. FY2018 total operating cash flow, including discontinued operations, was $43.2 million.
Management described FY2019 as a transition year, expecting to complete the Coatings divestiture and focus on the remaining businesses. It anticipated revenue growth in key markets and planned capital expenditures of approximately $5–$7 million. HVAC and architecturally specified building products were expected to grow faster than U.S. GDP; industrial sales were expected to track GDP. Management anticipated continued challenges in rail and North American mining, and did not expect energy drilling activity to expand at the prior year’s pace. It intended to pursue disciplined bolt-on acquisitions.
Key disclosed risks include cyclical and weak end markets, competition and product substitution, raw-material cost increases and limited supplier availability, reliance on distributors and contract manufacturers, acquisition and integration execution, restructuring outcomes, environmental and chemical-process liabilities, regulatory changes, foreign exchange exposure, cybersecurity, and debt covenants. The filing reported no pending legal proceedings expected to have a material effect and no material off-balance-sheet arrangements. Grant Thornton issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Progress, timing and proceeds of the planned Coatings business sale, including whether final sale terms differ from the impairment assumptions.
- Whether continuing-operations growth and improved margins persist after the Greco contribution and restructuring-cost reductions.
- Cash conversion, working-capital requirements, and the basis for management’s liquidity assessment given lower year-end cash.
- Remaining tax effects of the Tax Cuts and Jobs Act, including the final repatriation-tax calculation and potential GILTI exposure.
- FY2019 performance in rail, mining and energy, and whether planned capital spending and acquisition activity remain consistent with outlook.