CSW Industrials, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the quarter and nine months ended December 31, 2020 (CSW Industrials’ fiscal third quarter and year-to-date period). The company sells industrial products and specialty chemicals across HVAC/R, building products, energy, rail, mining and other markets. The statements are unaudited.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Prior-year quarter | Nine months ended Dec. 31, 2020 | Prior-year period |
|---|---|---|---|---|
| Revenue | $89.9 million | $83.7 million | $285.8 million | $287.4 million |
| Gross profit / margin | $39.3 million / 43.7% | $37.7 million / 45.0% | $130.8 million / 45.8% | $132.3 million / 46.0% |
| Operating income / margin | $4.1 million / 4.6% | $10.5 million / 12.5% | $42.6 million / 14.9% | $50.9 million / 17.7% |
| Net income | $2.3 million | $7.3 million | $30.7 million | $31.3 million |
| Diluted EPS | $0.16 | $0.48 | $2.06 | $2.06 |
- Quarterly revenue increased 7.4%, reflecting TRUaire’s contribution and stronger HVAC/R and architecturally specified building-products sales, partly offset by weakness in energy, rail, plumbing, general industrial and mining.
- Year-to-date revenue declined 0.5%. HVAC/R growth and the TRUaire acquisition were offset by weaker energy, general industrial, rail and mining demand.
- Quarterly operating expenses rose $8.0 million to $35.2 million, including $6.9 million of TRUaire transaction costs and $1.1 million of costs related to a proposed Specialty Chemicals joint venture. These costs materially reduced operating income.
- Industrial Products quarterly revenue was $58.8 million and operating income was $3.0 million, versus $48.7 million and $8.6 million a year earlier. Specialty Chemicals revenue was $31.1 million and operating income was $4.7 million, versus $35.0 million and $5.4 million.
- For the nine months, operating cash flow was $54.0 million, compared with $60.4 million. Investing cash outflow was $285.0 million, primarily reflecting the TRUaire acquisition; financing provided $229.3 million, largely from borrowings.
- At December 31, cash was $18.3 million, total debt was $255.5 million (including $245.0 million drawn on the revolving facility), and shareholders’ equity was $402.7 million. The revolver had $55.0 million of available capacity; the company reported compliance with its debt covenants.
Material changes, outlook and risks
- On December 15, 2020, CSW acquired all of T.A. Industries, known as TRUaire, for $288.1 million in cash and 849,852 treasury shares valued at $97.7 million at closing. TRUaire manufactures HVAC/R grilles, registers and diffusers and includes a Vietnam facility. The purchase-price allocation is preliminary; recorded goodwill is $129.2 million and is not tax deductible.
- The acquisition was funded with cash and revolver borrowings. The credit facility commitment was increased from $250 million to $300 million; it matures September 2022. Management said borrowing rates would increase 0.5% under the facility terms after reporting a leverage ratio above 2.00x.
- Management said the COVID-19 pandemic and the crude-oil price decline had adversely affected results, while HVAC/R demand was stronger and some other end markets showed signs of recovery. The company could not estimate the pandemic’s duration or financial impact; it reported no material operating disruptions through the filing date.
- Management believes cash, operating cash generation and revolver availability will meet liquidity needs, including capital expenditures, for at least the next 12 months. The filing provides no quantified earnings or revenue guidance.
- Risks include uncertain pandemic effects on demand, employees and supply chains; integration and realization of expected benefits from TRUaire; its Vietnam operations, trade-policy, cyber, labor and foreign-exchange exposures; and variable-rate debt. A 0.25 percentage-point interest-rate change would affect annual interest expense by approximately $0.6 million, according to the filing.
- Management reported no pending legal matters it believes could reasonably have a material impact. The company was under an IRS examination for a prior Whitmore Manufacturing tax return and had not been notified of material adjustments.
Important facts for investors to verify
- How much of future operating performance reflects TRUaire versus underlying demand, and whether integration delivers expected benefits.
- Completion and any revisions to TRUaire’s preliminary purchase-price allocation, including acquired intangibles, tax liabilities and goodwill.
- Debt leverage, borrowing costs, covenant headroom and refinancing plans ahead of the September 2022 revolver maturity.
- Whether margins recover as acquisition and joint-venture costs subside, and how Specialty Chemicals’ exposure to energy and industrial markets evolves.
- The continuing effects of COVID-19, supply-chain conditions and the company’s ability to sustain cash generation and liquidity.