CSW Industrials, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2021. The company is a diversified industrial products manufacturer serving HVAC/R, building products, plumbing, energy, rail, mining and general industrial markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Quarter ended Dec. 31, 2021 | Prior-year quarter | Nine months ended Dec. 31, 2021 | Prior-year nine months |
|---|
| Revenue | $136.3 | $89.9 | $453.1 | $285.8 |
| Gross profit | $50.0 | $39.3 | $181.7 | $130.8 |
| Gross margin | 36.7% | 43.7% | 40.1% | 45.8% |
| Operating income | $12.1 | $4.1 | $66.5 | $42.6 |
| Operating margin | 8.9% | 4.6% | 14.7% | 14.9% |
| Net income attributable to CSW Industrials | $8.3 | $2.3 | $46.4 | $30.7 |
| Diluted earnings per share | $0.52 | $0.16 | $2.93 | $2.06 |
- Quarterly revenue rose 51.5%; management attributed $26.8 million of growth to the TRUaire and Shoemaker acquisitions and $19.6 million to organic growth, supported by higher volumes and pricing.
- Nine-month revenue rose 58.5%, including $95.6 million from acquisitions and $71.7 million of organic growth.
- Gross margins declined year over year as acquisition mix, material and freight inflation, TRUaire purchase-accounting costs, Vietnam COVID-related production costs and lower-margin Engineered Building Solutions projects weighed on results. Pricing actions continued, but had not fully offset cost increases.
- Quarterly operating income increased sharply; nine-month operating margin was slightly lower year over year despite higher operating income.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $69.5 million, compared with $54.0 million a year earlier. Inventory growth used $33.3 million of cash; higher accounts payable and other current liabilities provided $12.0 million.
- Investing cash outflow was $44.8 million, including $36.4 million of acquisition cash payments and $8.4 million of capital expenditures. Financing cash outflow was $18.6 million.
- Cash was $16.2 million at December 31, 2021, compared with $10.1 million at March 31, 2021. Net working capital was affected by inventory rising to $127.4 million from $98.1 million.
- Total debt was $230.9 million, down from $242.3 million at March 31, 2021. The revolving facility balance was $221.0 million and the Whitmore term loan was $9.9 million. The amended $400 million revolver matures May 18, 2026; reported available capacity was $179.0 million. The company reported compliance with its debt covenants.
- Management said cash, operating cash generation and revolver availability should be sufficient for liquidity needs, including capital expenditures, for at least the next 12 months.
Segments and material changes
| Segment | Quarter revenue | Quarter operating income | Year-over-year change and context |
|---|
| Contractor Solutions | $82.5 million | $10.8 million | Revenue increased 85.6%, primarily reflecting TRUaire and Shoemaker, plus organic growth. Quarterly margin was 13.0%, versus 6.5%. |
| Engineered Building Solutions | $23.9 million | $3.2 million | Revenue declined 7.0% amid weaker multifamily demand; income fell 23.7% as sales shifted toward lower-margin projects. |
| Specialized Reliability Solutions | $31.4 million | $2.7 million | Revenue increased 57.9%, reflecting demand recovery, pricing and the Whitmore joint venture; income increased from $0.6 million. |
- CSW acquired Shoemaker Manufacturing on December 15, 2021, for an estimated aggregate purchase price of $44.0 million, including $39.0 million cash, 25,483 shares and up to $2.0 million contingent consideration. The purchase-price allocation remained preliminary.
- The April 2021 Whitmore joint venture with Shell is consolidated by CSW; Shell’s 50% interest is reported as redeemable noncontrolling interest. The JV generated $0.9 million of net income in the quarter and $2.0 million for the nine months.
- Segments were realigned effective April 1, 2021. Prior-period segment information was recast for comparability; consolidated results were unchanged.
Outlook, risks and unusual items
- The filing provides no numerical revenue, earnings or margin guidance. Management expected near-term material and freight cost volatility, supply-chain challenges and freight delays to continue, and said it was addressing them through inventory management and continued pricing initiatives.
- Vietnam operations faced government COVID-19 restrictions beginning in August 2021 and resumed normal production activities as restrictions eased in late November. The company cited uncertainty related to COVID-19, including potential Omicron impacts, demand, facilities, employees and supply chains.
- Management reported that material-cost increases moderated during the quarter, but freight costs and delays remained elevated. Labor shortages and recovering demand were among the factors affecting supply and cost conditions.
- Quarterly results included $0.5 million of Shoemaker transaction expenses. Nine-month gross profit was affected by $3.9 million of TRUaire purchase-accounting costs and $1.7 million of Vietnam COVID-related costs.
- Legal matters arising in the ordinary course were not believed by management to have a reasonably possible material impact. A subsidiary was under state tax examination for 2018–2020; no material adjustments had been reported. The filing said there were no material changes to previously disclosed risk factors.
- Interest-rate exposure included $221.0 million of variable-rate debt after the swap; a 0.25 percentage-point rate change would affect annual interest expense by about $0.6 million. The swap covered 4.3% of total debt. A 10% currency-rate change was estimated to have a negligible net earnings impact.
Important facts for investors to verify
- Whether pricing and productivity can catch up with material, freight and other inflation without materially affecting volumes or margins.
- The sustainability and mix of organic growth versus acquisition-driven revenue, including performance of Shoemaker and TRUaire and the final Shoemaker purchase-price allocation.
- Inventory levels, working-capital needs and cash conversion, given the substantial year-to-date inventory increase.
- Debt, revolver availability and covenant headroom as acquisition financing and interest rates change.
- Recovery and operating conditions in Vietnam, ongoing supply-chain and freight disruptions, and multifamily demand and project margins.
- Potential changes in the Whitmore JV’s redemption value and the tax examination or other contingencies.
