CSW Industrials, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter and nine months ended December 31, 2015. CSW Industrials (CSWI) is a diversified industrial products company with Industrial Products, Coatings, Sealants and Adhesives, and Specialty Chemicals segments. It became an independent, publicly traded company on September 30, 2015, following its spin-off from Capital Southwest. Prior-period results are historical combined results of the contributed businesses and may not reflect costs of operating as a standalone public company.
Financial performance
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Revenue, 2015 | $70.9 million | $243.6 million |
| Revenue, 2014 | $60.9 million | $197.8 million |
| Gross margin, 2015 / 2014 | 45.3% / 47.1% | 46.6% / 48.4% |
| Operating income, 2015 / 2014 | $5.6 million / $9.7 million | $40.7 million / $35.6 million |
| Net income, 2015 / 2014 | $2.0 million / $6.4 million | $23.6 million / $24.4 million |
| Diluted EPS, 2015 / 2014 | $0.13 / $0.41 | $1.51 / $1.56 |
| Operating cash flow, 2015 / 2014 | Not presented for the quarter | $38.5 million / $32.1 million |
For the quarter, revenue rose 16.5%, but operating income fell 42.2% and net income fell 68.7%; operating margin contracted to 7.9% from 16.0%. For the nine months, revenue grew 23.2%, operating income rose 14.3%, while net income declined 3.1%. Nine-month operating margin was 16.7%, versus 18.0%.
At December 31, cash and cash equivalents were $51.1 million and bank time deposits were $5.5 million; total debt was $106.3 million, including $93.0 million under the new revolver. Current assets were $167.3 million and current liabilities $29.5 million. In February 2016, CSWI repaid $21.5 million of revolver borrowings. Nine-month investing cash outflow was $97.9 million, primarily reflecting acquisitions; financing cash inflow was $91.2 million.
Material changes and segment trends
- Acquisitions contributed materially to growth: Strathmore was acquired effective April 1, 2015; Deacon on October 1; and Leak Freeze on December 16. Management attributed $45.7 million of the nine-month revenue increase to acquisitions. The Coatings, Sealants and Adhesives segment’s revenue nearly doubled, largely due to acquisitions.
- Industrial Products revenue increased 14.4% for the quarter and 17.5% for nine months, supported by HVAC and architecturally specified building products demand.
- Coatings, Sealants and Adhesives revenue rose 98.3% for the quarter and 110.5% for nine months, primarily from acquired businesses; margins were lower, partly reflecting Strathmore’s product mix.
- Specialty Chemicals revenue fell 23.4% for the quarter and 16.7% for nine months, mainly because of weakness in energy, mining, and industrial markets. Segment operating income also declined.
Outlook, risks, and unusual items
- Management expected difficult energy-market conditions to persist through 2016, citing customer spending declines amid low oil, gas, and natural-resource prices. It reported stronger demand in HVAC and architecturally specified building products. The filing gives no specific revenue or earnings guidance.
- CSWI expected recurring corporate overhead of at least $1.5 million per quarter, additional public-company and integration costs, and potential longer-term offsets from synergies. Planned lubricant and grease manufacturing consolidation capital expenditures were estimated at approximately $7 million in fiscal 2016 and $3 million in fiscal 2017, with possible additional spending later.
- The nine-month results included an $8.1 million pension curtailment benefit after the defined-benefit plan was frozen, including $2.7 million recorded in cost of revenues. The Strathmore earn-out liability was reduced by $2.0 million to zero because performance was below initial expectations. Share-distribution start-up and organizational costs contributed to a $1.1 million tax-related discrete item; the quarterly effective tax rate was 58.6%, versus 34.5% a year earlier.
- The five-year $250 million revolving facility, with a $50 million accordion feature, is secured by substantially all company assets. CSWI reported compliance with its financial covenants at December 31, 2015. Interest-rate swaps covered $47.4 million of debt; unhedged variable-rate debt was $58.9 million. Management stated liquidity was adequate for at least the next 12 months.
- Management reported no pending legal matters expected to have a material effect and no material changes to previously disclosed risk factors. It identified global economic uncertainty, energy and mining weakness, regulatory compliance, acquisition performance, and integration and standalone costs among relevant business risks.
Important facts for investors to verify
- How much of revenue growth and future earnings is attributable to acquisitions versus organic performance, particularly given the different comparison basis after the spin-off.
- Whether energy and mining weakness continues and how it affects Specialty Chemicals and related industrial markets.
- Whether acquired businesses deliver expected results and whether earn-out estimates, including Leak Freeze purchase accounting, change materially.
- Whether gross and operating margins recover as integration, public-company, and acquisition-related costs evolve.
- Debt repayment, borrowing availability, covenant headroom, and cash requirements for facility consolidation and other capital expenditures.
- The sustainability of earnings excluding the pension curtailment benefit, acquisition-related items, and elevated spin-off-related tax costs.