CSW Industrials, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2017 (fiscal second quarter). CSW Industrials sells industrial products, coatings, sealants and adhesives, and specialty chemicals across HVAC, plumbing, industrial, rail, energy, mining, and building-products markets.
Financial performance
| Metric | Three months ended September 30, 2017 | Prior-year quarter | Six months ended September 30, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $90.4 million | $80.1 million | $188.4 million | $164.2 million |
| Gross profit / margin | $38.8 million / 43.0% | $35.7 million / 44.5% | $81.2 million / 43.1% | $73.9 million / 45.0% |
| Operating income / margin | $12.0 million / 13.3% | $7.0 million / 8.7% | $26.3 million / 13.9% | $14.4 million / 8.8% |
| Net income | $7.3 million | $3.8 million | $15.8 million | $7.9 million |
| Diluted EPS | $0.46 | $0.24 | $0.99 | $0.50 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $25.5 million | $19.0 million |
- Quarterly revenue increased 12.8%; six-month revenue increased 14.7%. Management attributed six-month growth to $14.1 million of organic growth and $10.1 million of Greco acquisition revenue.
- Gross margin fell year over year, principally due to manufacturing-footprint restructuring and realignment costs. Operating income rose substantially, helped by higher gross profit and the absence of prior-year impairment and other charges.
- Six-month investing cash outflow was $3.4 million, including $3.8 million of capital expenditures. Financing cash outflow was $20.1 million, mainly from revolver repayments. Cash and cash equivalents were $26.5 million at quarter-end; including bank time deposits, cash was $28.4 million.
- Total debt was $53.2 million, down from $73.2 million at March 31, 2017. The revolver balance was $40.9 million and the Whitmore term loan was $12.3 million. Reported revolver borrowing capacity, including the accordion feature, was $259.1 million. The company was in compliance with its debt covenants.
- Current assets were $153.7 million and current liabilities were $49.3 million at September 30, 2017.
Segments and material changes
- Industrial Products: Quarterly revenue was $48.5 million, up 15.8%, and operating income was $12.3 million, up 24.1%. Six-month revenue was $101.7 million, up 19.2%; Greco contributed $10.1 million of six-month revenue and $2.5 million of operating income.
- Coatings, Sealants & Adhesives: Quarterly revenue declined 7.1% to $21.4 million, while operating income improved to $0.3 million from a loss of $1.6 million. Six-month revenue declined 3.5% to $44.8 million. Restructuring-related manufacturing challenges and increased costs weighed on results.
- Specialty Chemicals: Quarterly revenue rose 34.6% to $20.5 million and operating income rose 78.6% to $2.2 million. Six-month revenue increased 28.9% to $41.9 million, primarily from energy-market improvement, with contributions from mining and HVAC.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance was provided. Management expected coatings lead times to improve during the remainder of the fiscal year, while rail-market customer spending declines were expected to persist. Management said available cash, operating cash flow, and revolver availability should meet liquidity needs, including capital expenditures, for at least 12 months.
- Hurricanes Harvey and Irma caused temporary facility and shipping disruptions. Management estimated $2.6 million of lost or delayed sales and $1.4 million of gross-profit impact. Facilities sustained no physical damage.
- Restructuring programs initiated in 2016 were described as substantially complete. Six-month 2017 restructuring and realignment costs affected gross profit; total expected restructuring charges were estimated at $5.2 million, subject to change.
- Other notable items included the February 2017 Greco acquisition, funded through the revolver, and settlement of the SureSeal contingent payment for $6.5 million, with a $0.1 million change in estimate.
- Management identified regulatory compliance, global economic uncertainty, material costs, demand changes, acquired-business performance, foreign exchange, and interest rates among relevant risks. It reported no pending legal matter expected to have a material impact and no material change to previously disclosed risk factors.
Investor facts to verify
- Whether gross-margin pressure and coatings manufacturing lead times improved as restructuring wound down.
- How persistent rail-market weakness and hurricane-related sales disruptions affected subsequent results.
- Greco’s contribution to organic growth, profitability, and debt reduction after acquisition.
- Cash conversion and working-capital movements, including the rise in accrued and other current liabilities.
- Current revolver availability, covenant headroom, and the effect of floating rates despite interest-rate hedges.